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.
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For the fiscal year ended
December 31, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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For the transition period
from N/A to N/A
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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
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(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
Ontario, California
(Address of Principal
Executive Offices)
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91764
(Zip Code)
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Registrants telephone number, including area code
(909) 980-4030
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
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Common Stock, no par value
Preferred Stock Purchase Rights
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NASDAQ Stock Market, LLC
NASDAQ Stock Market, LLC
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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 þ No o
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 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, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer þ Accelerated
Filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of June 30, 2006, the aggregate market value of the
common stock held by non-affiliates of the registrant was
approximately $899,009,320.
Number of shares of common stock of the registrant outstanding
as of February 22, 2007: 84,283,333.
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Documents Incorporated By Reference
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Part of
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Definitive Proxy Statement for the
Annual Meeting of Stockholders which will
be filed within 120 days of the fiscal year ended
December 31, 2006
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Part III of
Form 10-K
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CVB
FINANCIAL CORP.
2006
ANNUAL REPORT ON
FORM 10-K
TABLE OF
CONTENTS
1
INTRODUCTION
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 might cause such a difference include but are not limited
to economic conditions, competition in the geographic and
business areas in which we conduct our operations, fluctuations
in interest rates, credit quality and government regulation, and
failure to obtain appropriate governmental or shareholder
approval for the merger with First Coastal Bancshares or failure
of any other condition of consummation of the merger. For
additional information concerning these factors, see
Item 1A. Risk Factors And any additional
information as set forth in our periodic reports filed pursuant
to the Securities Exchange Act of 1934, as amended. 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 statement except as
required by laws.
PART I
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. In March 2006, we merged two of our operating
subsidiaries, Community Trust Deed Services and Golden West
Enterprises, Inc. into the Bank to increase the lending limit of
Golden Wests leasing operations and to improve efficiency.
The Company is also the common stockholder of CVB Statutory
Trust I, CVB Statutory Trust II and CVB
Statutory Trust III. CVB Statutory Trusts I and II were
created in December 2003 and CVB Statutory Trust III was
created in January 2006 to issue trust preferred securities in
order to raise capital for the Company.
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 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. 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, 2006, the Company had
$6.09 billion in total consolidated assets,
$3.07 billion in net loans and $3.41 billion in
deposits.
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.
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, 2006, the Bank had
$6.09 billion in assets, $3.07 billion in net loans
and $3.44 billion in deposits.
As of December 31, 2006, we had 39 Business Financial
Centers located in the Inland Empire, San Gabriel Valley,
Orange County, Los Angeles County, Madera County, Fresno County,
Tulare County, and Kern County
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areas of California. Of the 39 offices, we opened twelve as de
novo branches and acquired the other twenty-seven in acquisition
transactions. We added five offices in 2003 and an additional
three offices in 2005. During the second quarter of 2006, we
consolidated two of our business financial centers in Arcadia
and moved into a new location within the city.
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, 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 our Financial Advisory Services Group (formerly known as
Wealth Management Division). These services include fiduciary
services, mutual funds, annuities, 401K plans and individual
investment accounts.
Business
Segments
We are a community bank with Business Financial Centers
(branches) being the focal points for customer sales and
services. As such, these Business Financial Centers comprise the
biggest segment of the Company. The next largest business unit
is the Treasury Department. This department manages all of the
investments for the Company. As a result, we have two reportable
operating segments consisting of Business Financial Centers and
the Treasury Department. All administrative and other smaller
operating departments are combined into Other
category. See the sections captioned Results of Segment
Operations in Item 7. Managements Discussion
and Analysis of Financial Condition and Results of Operations
and Note 19 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.
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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 us on
interest-bearing liabilities, such as deposits and other
borrowings, and the interest rates received by us on our
interest-earning assets, such as loans 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 interest
paid on interest-bearing liabilities. The nature and impact on
us of any future changes in monetary and fiscal policies 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. We cannot predict whether or when
potential legislation will be enacted, and if enacted, the
effect that it, or any implementing regulations, would have on
our financial condition or results of operations. In addition,
the outcome of any investigations initiated by state authorities
or litigation raising issues such as whether state laws are
preempted by federal law may result in necessary changes in our
operations, additional regulation and increased compliance costs.
Supervision
and Regulation
General
We and our subsidiaries are extensively regulated under both
federal and certain state laws. This regulation and supervision
by the federal and state banking agencies is intended primarily
for the protection of depositors and the deposit insurance fund
and not for the benefit of stockholders. Set forth below is a
summary 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.
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). We are required to file
with the FRB periodic reports and such additional information as
the FRB may require.
The FRB may require us to terminate an activity or terminate
control of or liquidate or divest certain subsidiaries,
affiliates or investments if the FRB 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. The FRB also has the authority to
regulate provisions of certain bank holding company debt,
including the authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, we must
file written notice and obtain FRB approval prior to purchasing
or redeeming our equity securities. Further, we are required by
the FRB to maintain certain levels of capital. See Capital
Standards.
We are required to obtain prior FRB approval for the acquisition
of more than 5% of the outstanding shares of any class of voting
securities or substantially all of the assets of any bank or
bank holding company. Prior FRB approval is also required for
the merger or consolidation of a bank holding company with
another bank holding company. Similar state banking agency
approvals may also be required. Certain competitive, management,
financial and other factors are considered by the bank
regulatory agencies in granting these approvals.
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With certain exceptions, bank holding companies are prohibited
from acquiring direct or indirect ownership or control of more
than 5% of the outstanding voting shares of any company that is
not a bank or bank holding company and from engaging directly or
indirectly in activities other than those of banking, managing
or controlling banks, or furnishing services to subsidiaries.
However, subject to prior notice or FRB approval, 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.
It is the policy of the FRB that each bank holding company serve
as a source of financial and managerial strength to its
subsidiary bank or banks. 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 FRB to be
an unsafe and unsound banking practice or a violation of FRB
regulations or both. The FRBs bank holding company rating
system emphasizes risk management and evaluation of the
potential impact of nondepository entities on safety and
soundness.
We are 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).
As a California chartered bank, the Bank is subject to primary
supervision, periodic examination, and regulation by the DFI and
the Federal Deposit Insurance Corporation (FDIC), as
well as certain regulations promulgated by the FRB. If, as a
result of an examination, the FDIC determines that the financial
condition, capital resources, asset quality, earnings prospects,
management, liquidity, or other aspects of our banking
operations are unsatisfactory or that we are violating or have
violated any law or regulation, various remedies are available
to the FDIC, including the power to enjoin unsafe or
unsound practices; require affirmative action to correct
any conditions resulting from any violation or practice; issue
an administrative order that can be judicially enforced, to
direct an increase in capital, to restrict our growth; assess
civil monetary penalties; remove officers and directors; and
ultimately to terminate deposit insurance, which would result in
a revocation of the Banks charter. See Safety and
Soundness Standards.
The DFI also possesses broad powers to take corrective and other
supervisory actions to resolve the problems of California
state-chartered banks. These enforcement powers include cease
and desist orders, the imposition of fines, the ability to take
possession of the Bank and the ability to close and liquidate
the Bank.
Changes such as the following in federal or state banking laws
or the regulations, policies or guidance of the federal or state
banking agencies could have an adverse cost or competitive
impact on our bank operations:
(i) In December, 2006, the federal banking agencies issued
final guidance to reinforce sound risk management practices for
bank holding companies and banks in commercial real estate (CRE)
loans which establishes CRE concentration thresholds as criteria
for examiners to identify CRE concentration that may warrant
further analysis. The implementation of these guidelines could
result in increased reserves and capital costs for banks with
CRE concentration. The Banks CRE portfolio as
of December 31, 2006 would meet the definition of CRE
concentration as set forth in the guidelines. The Bank analyzes
this concentration on a quarterly basis and monitors same
through various reports it prepares. The Bank believes that it
complies with the analytical and monitoring expectations as set
forth in the aforementioned guidance. Furthermore, this
concentration is considered in the methodology for the Allowance
for Credit Losses.
(ii) In September, 2006, the federal banking agencies
issued final guidance on alternative residential mortgage
products that allow borrowers to defer repayment of principal
and sometimes interest, including interest-only
mortgage loans, and payment option adjustable rate
mortgages where a borrower has flexible payment options,
including payments that have the potential for negative
amortization. While acknowledging that innovations in mortgage
lending can benefit some consumers, the final guidance states
that management should (1) assess a borrowers ability
to repay the loan, including any principal balances added
through negative amortization, at the fully indexed rate that
would apply after the introductory period, (2) recognize
that certain nontraditional mortgages are untested in a stressed
environment and warrant strong risk
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management standards as well as appropriate capital and loan
loss reserves, and (3) ensure that borrowers have
sufficient information to clearly understand loan terms and
associated risks prior to making a product or payment choice.
The Bank believes its products and disclosures are in
conformance with the requirements of the guidance.
(iii) Pursuant to the Financial Services Regulatory Relief
Act of 2006, the Securities and Exchange Commission
(SEC) and the FRB have released, as
Regulation R, joint proposed rules expected to be finalized
by midyear to implement exceptions provided for in the
Gramm-Leach-Bliley Act (GLBA) for bank securities
activities which banks may conduct without registering with the
SEC as securities brokers or moving such activities to a
broker-dealer affiliate. The proposed Regulation R
push out rules exceptions would allow a bank,
subject to certain conditions, to continue to conduct securities
transactions for customers as part of the Banks trust and
fiduciary, custodial and deposit sweep functions,
and to refer customers to a securities broker-dealer pursuant to
a networking arrangement with the broker-dealer. The proposed
rules, if adopted, are not expected to have a material effect on
the current securities activities which the Bank now conducts
for customers.
Because California permits commercial banks chartered by the
state to engage in any activity permissible for national banks,
the Bank can form subsidiaries to engage in the many so-called
closely related to banking or nonbanking
activities commonly conducted by national banks in operating
subsidiaries, but also expanded financial activities to the same
extent as a national bank, subject to the state or FDIC
requirements. However, in order to form a financial subsidiary,
the Bank must be
well-capitalized;
well-managed
and in satisfactory compliance with the Community Reinvestment
Act. Further, the Bank must exclude from its assets and equity
all equity investments, including retained earnings, in a
financial subsidiary. The assets of the subsidiary may not be
consolidated with the Banks assets. The Bank must also
have policies and procedures to assess financial subsidiary risk
and protect the Bank from such risks and potential liabilities
and would be subject to the same capital deduction, risk
management and affiliate transaction rules as applicable to
national banks. Generally, a financial subsidiary is permitted
to engage in activities that are financial in nature
or incidental thereto, even though they are not permissible for
the national bank to conduct directly within the Bank. The
definition of financial in nature includes, among
other items, underwriting, dealing in or making a market in
securities, including, for example, distributing shares of
mutual funds. The subsidiary may not, however, under present law
engage as principal in underwriting insurance (other than credit
life insurance), issue annuities or engage in real estate
development or investment or merchant banking.
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Interstate
Banking and Branching
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Subject to certain size limitations under the Riegle-Neal
Interstate Banking Act, bank holding companies and banks have
the ability to acquire and merge with banks in other states;
and, subject to certain state restrictions, banks may also
acquire or establish new branches outside their home states.
Interstate branches are subject to certain laws of the states in
which they are located.
The Sarbanes-Oxley Act of 2002 addressed accounting oversight
and corporate governance matters and, among other things,
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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 on, and reporting of, insider trading; and
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increased penalties for financial crimes and forfeiture of
executive bonuses in certain circumstances.
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The legislation and its implementing regulations have resulted
in increased costs of compliance, including certain outside
professional costs. To date these costs have not had a material
impact on our operations.
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Dividends
and Other Transfers of Funds
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Dividends from the Bank constitute the principal source of
income to the Company. An FRB policy statement provides that a
bank holding company should pay cash dividends only to the
extent that the holding companys net income for the past
year is sufficient to cover both the cash dividends and a rate
of earnings retention that is consistent with the holding
companys capital needs, asset quality and overall
financial condition. The policy statement also provides that it
would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends.
Furthermore, under the federal prompt corrective action
regulations, the FRB may prohibit a bank holding company from
paying any dividends if the holding companys bank
subsidiary is classified as undercapitalized. See
Prompt Corrective Action and Other Enforcement
Mechanisms below.
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 $128.5 million at
December 31, 2006. In addition, the banking agencies have
the authority to prohibit the Bank from paying dividends,
depending upon the Banks financial condition, if such
payment is deemed to constitute an unsafe or unsound practice.
The federal banking agencies have adopted risk-based minimum
capital guidelines for bank holding companies and banks which
are intended to provide a measure of capital that reflects the
degree 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. Under the capital guidelines, a
banking organizations total capital is divided into tiers.
Tier I capital consists of (1) common
equity, (2) qualifying noncumulative perpetual preferred
stock, (3) a limited amount of qualifying cumulative
perpetual preferred stock and (4) minority interests in the
equity accounts of consolidated subsidiaries (including
trust-preferred securities), less goodwill and certain other
intangible assets. Qualifying Tier I capital may consist of
trust-preferred securities, subject to certain criteria and
quantitative limits for inclusion of restricted core capital
elements in Tier I capital. Tier II
capital consists of hybrid capital instruments, perpetual
debt, mandatory convertible debt securities, a limited amount of
subordinated debt, preferred stock and trust-preferred
securities that do not qualify as Tier I capital, 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 subordinated 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-adjusted assets of 8% and a
minimum ratio of Tier 1 capital to risk-adjusted assets of
4%. In addition to the risk-based guidelines, the federal bank
regulatory agencies require banking organizations to maintain a
minimum amount of Tier 1 capital to total assets, referred
to as the leverage ratio. For a banking organization rated in
the highest of the five categories used by regulators to rate
banking organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%.
The federal banking agencies possess broad power under the
Federal Deposit Insurance Act, or FDI Act, to take prompt
corrective action to resolve the problems of insured
depository institutions, including but not limited to those
institutions that fall within any undercapitalized category.
Each federal banking agency has promulgated regulations defining
the following five categories in which an insured depository
institution will be placed, based on its capital ratios:
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well capitalized;
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adequately capitalized;
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undercapitalized;
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significantly undercapitalized; and
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critically undercapitalized.
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7
The regulations use an institutions risk-based capital,
leverage capital and tangible capital ratios to determine the
institutions capital classification. An institution is
treated as well capitalized if its total capital to
risk-weighted assets ratio is 10.00% or more; its core capital
to risk-weighted assets ratio is 6.00% or more; and its core
capital to adjusted total assets ratio is 5.00% or more. The
regulatory capital guidelines as well as our actual
capitalization on a consolidated basis and for the Bank as of
December 31, 2006 are set forth below and confirm that both
the Bank and the Company capital ratios exceed the minimum
percentage of the federal bank regulatory agencies for being
deemed well capitalized.
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, 2006:
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As of December 31, 2006
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Actual
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Required
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Excess
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Amount
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Ratio
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Amount
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Ratio
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Amount
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Ratio
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(Amounts in thousands)
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Leverage ratio
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$
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469,960
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7.8
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%
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$
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240,389
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4.0
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%
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$
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229,571
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3.8
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%
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Tier 1 risk-based ratio
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$
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469,960
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12.3
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%
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$
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153,081
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4.0
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%
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$
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316,879
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8.3
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%
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Total risk-based ratio
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$
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499,430
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13.1
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%
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$
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306,164
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8.0
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%
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$
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193,266
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5.1
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%
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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, 2006:
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As of December 31, 2006
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Actual
|
|
|
Required
|
|
|
Excess
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(Amounts in thousands)
|
|
|
Leverage ratio
|
|
$
|
422,946
|
|
|
|
7.1
|
%
|
|
$
|
239,969
|
|
|
|
4.0
|
%
|
|
$
|
182,977
|
|
|
|
3.1
|
%
|
Tier 1 risk-based ratio
|
|
$
|
422,946
|
|
|
|
11.1
|
%
|
|
$
|
152,826
|
|
|
|
4.0
|
%
|
|
$
|
270,120
|
|
|
|
7.1
|
%
|
Total risk-based ratio
|
|
$
|
452,416
|
|
|
|
11.8
|
%
|
|
$
|
305,686
|
|
|
|
8.0
|
%
|
|
$
|
146,730
|
|
|
|
3.8
|
%
|
The current risk-based capital guidelines are based upon the
1988 capital accord of the International Basel Committee on
Banking Supervision. A new international accord, referred to as
Basel II, which emphasizes internal assessment of credit,
market and operational risk; supervisory assessment and market
discipline in determining minimum capital requirements,
currently becomes mandatory outside the U.S. in 2008. In
October 2006, the U.S. federal banking agencies issued a
notice of proposed rulemaking for comment to implement
Basel II for U.S. banks with certain differences from
the international Basel II framework and which would not be
fully in effect for U.S. banks until 2012. Further, the
U.S. banking agencies propose to retain the minimum
leverage requirement and prompt corrective action regulatory
standards. Additionally, in December 2006, the federal banking
agencies issued another notice of proposed rulemaking for
comment, referred to as Basel IA, which proposed alternative
capital requirements for smaller U.S. banks which may be
negatively impacted competitively by certain provisions of
Basel II. At this time the impact that proposed changes in
capital requirements may have on the cost and availability of
different types of credit and the compliance cost of
implementing Basel II or Basel IA, as applicable, are
uncertain.
|
|
|
Safety
and Soundness Standards
|
In addition to measures taken under the banking agencies
prompt corrective action authority and other capital guidelines,
commercial banking organizations may be subject to potential
enforcement actions by the federal
and/or state
banking agencies for unsafe or unsound practices in conducting
their businesses or for violations of any law, rule, regulation,
or any condition imposed in writing by the agency or any written
agreement with the agency. The federal banking agencies have
adopted guidelines designed to assist examiners in identifying
and addressing potential safety and soundness concerns before
capital becomes impaired. The guidelines set forth 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, and
(vi) compensation, fees and benefits.
8
|
|
|
Premiums
for Deposit Insurance
|
Through the Bank Insurance Fund (BIF), the FDIC insures our
customer deposits up to prescribed limits for each depositor.
The amount of FDIC assessments paid by each BIF member
institution is based on its relative risk of default as measured
by regulatory capital ratios and other supervisory factors. The
assessment rate currently ranges from zero to 27 cents per $100
of domestic deposits. The FDIC may increase or decrease the
assessment rate schedule on a semi-annual basis. Due principally
to continued growth in deposits, the BIF is nearing its minimum
ratio of 1.25% of insured deposits as mandated by law. The
enactment in February 2005 of the Federal Deposit Insurance
Reform Act of 2006, or FDIRA, provided, among other things, for
changes in the formula and factors to be considered by the FDIC
in calculating the FDIC reserve ratio, assessments and
dividends, and a one-time aggregate assessment credit for
depository institutions in existence on December 31, 1996
(or their successors) which paid assessments to recapitalize the
insurance funds after the banking crises of the late 1980s and
early 1990s. The FDIC issued final regulations, effective
January 1, 2007, implementing the provisions of FDIRA. The
Bank expects to receive a one-time assessment credit that is
expected to exceed any increase in assessments by the FDIC in
2007.
The FDIC is authorized to terminate a depository
institutions deposit insurance upon a finding by the FDIC
that the institutions financial condition is unsafe or
unsound or that the institution has engaged in unsafe or unsound
practices or has violated any applicable rule, regulation, order
or condition enacted or imposed by the institutions
regulatory agency. The termination of deposit insurance for a
subsidiary bank would generally have a material adverse effect
on the earnings of the Banks holding company.
All FDIC-insured depository institutions must also pay an annual
assessment to provide funds for the payment of interest on bonds
issued by the Financing Corporation, a federal corporation
chartered under the authority of the Federal Housing Finance
Board. The bonds, commonly referred to as FICO bonds, were
issued to capitalize the Federal Savings and Loan Insurance
Corporation. The FICO assessment rate for the fourth quarter of
fiscal 2006 was 1.24 basis points for each $100 of
assessable deposits. The FICO assessments are adjusted quarterly
to reflect changes in the assessment bases of the FDICs
insurance funds and do not vary depending on a depository
institutions capitalization or supervisory evaluations.
|
|
|
Loans-to-One
Borrower Limitations
|
With certain limited exceptions, the maximum amount of
obligations, secured and 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. At December 31, 2006, the
Banks largest single lending relationship had an
outstanding balance of $27.0 million, and consisted of a
loan partially secured by first trust deeds on single family
residences and commercial buildings in the Banks lending
area which was performing in accordance with its terms.
|
|
|
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 banks 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.
|
Loans and leases extended to any of the above persons must
comply with the
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) as, and follow credit-underwriting
procedures that are not less stringent than, those prevailing at
the time for comparable transactions with non-insiders, and must
not involve more than the normal risk of repayment or present
other unfavorable features. In addition, Regulation O
provides that the aggregate limit on extensions of credit to all
insiders of a bank as a group
9
cannot exceed the Banks unimpaired capital and unimpaired
surplus. Regulation O also prohibits a bank from paying an
overdraft on an account of an executive officer or director,
except pursuant to a written pre-authorized interest-bearing
extension of credit plan that specifies a method of repayment or
a written pre-authorized transfer of funds from another account
of the officer or director at the Bank.
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. Such
restrictions prevent any affiliates from borrowing from the Bank
unless the loans are secured by marketable obligations of
designated amounts. Further, such secured loans and investments
to or in any affiliate are limited, individually, to 10.0% of
the Banks capital and surplus (as defined by federal
regulations), and such secured loans and investments are
limited, in the aggregate, to 20.0% of capital and surplus. Some
of the entities included in the definition of an affiliate are
parent companies, sister banks, sponsored and advised companies,
investment companies whereby the Banks affiliate serves as
investment advisor, and financial subsidiaries. Additional
restrictions on transactions with affiliates may be imposed
under the FDI Act prompt corrective action provisions and the
supervisory authority of the federal and state banking agencies.
See Capital Standards and Safety and Soundness
Standards.
The USA PATRIOT Act of 2001 and its implementing regulations
significantly expanded the anti-money laundering and financial
transparency laws. Under the USA PATRIOT Act, financial
institutions are required to establish and maintain anti-money
laundering programs which include:
|
|
|
|
|
the establishment of a customer identification program;
|
|
|
|
the development of internal policies, procedures, and controls;
|
|
|
|
the designation of a compliance officer;
|
|
|
|
an ongoing employee training program; and
|
|
|
|
an independent audit function to test the programs.
|
We have 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.
|
|
|
Consumer
Protection Laws and Regulations
|
Examination and enforcement by the state and federal banking
agencies for non-compliance with consumer protection laws and
their implementing regulations have become more intense. The
Bank is subject to many federal consumer protection statutes and
regulations, some of which are discussed below.
The Home Ownership and Equal Protection Act of 1994, or HOEPA,
requires extra disclosures and consumer protections to borrowers
for certain lending practices. The term predatory
lending, much like the terms safety and
soundness and unfair and deceptive practices,
is far-reaching and covers a potentially broad range of
behavior. As such, it does not lend itself to a concise or a
comprehensive definition. Typically predatory lending involves
at least one, and perhaps all three, of the following elements:
|
|
|
|
|
making unaffordable loans based on the assets of the borrower
rather than on the borrowers ability to repay an
obligation (asset-based lending);
|
|
|
|
inducing a borrower to refinance a loan repeatedly in order to
charge high points and fees each time the loan is refinanced
(loan flipping); and/or
|
|
|
|
engaging in fraud or deception to conceal the true nature of the
loan obligation from an unsuspecting or unsophisticated borrower.
|
10
Federal Reserve regulations and OCC guidelines aimed at curbing
predatory lending significantly widen the pool of high cost home
secured loans covered by HOEPA. In addition, the regulations bar
certain refinances within a year with another loan subject to
HOEPA by the same lender or loan servicer. Lenders also will be
presumed to have violated the law which says loans
should not be made to people unable to repay them
unless they document that the borrower has the ability to repay.
Lenders that violate the rules face cancellation of loans and
penalties equal to the finance charges paid. We do not expect
these rules and potential state action in this area to have a
material impact on our financial condition or results of
operation.
Privacy policies are required by federal banking regulations
which limit the ability of banks and other financial
institutions to disclose non-public information about consumers
to nonaffiliated third parties. Pursuant to those rules,
financial institutions must provide:
|
|
|
|
|
initial notices to customers about their privacy policies,
describing the conditions under which they may disclose
nonpublic personal information to nonaffiliated third parties
and affiliates;
|
|
|
|
annual notices of their privacy policies to current
customers; and
|
|
|
|
a reasonable method for customers to opt out of
disclosures to nonaffiliated third parties.
|
These privacy protections affect how consumer information is
transmitted through diversified financial companies and conveyed
to outside vendors. In addition, state laws may impose more
restrictive limitations on the ability of financial institution
to disclose such information. California has adopted such a
privacy law that among other things generally provides that
customers must opt in before information may be
disclosed to certain nonaffiliated third parties.
The Fair Credit Reporting Act, as amended by the Fair and
Accurate Credit Transactions Act, or FACT Act, requires
financial firms to help deter identity theft, including
developing appropriate fraud response programs, and gives
consumers more control of their credit data. It also
reauthorizes a federal ban on state laws that interfere with
corporate credit granting and marketing practices. In connection
with FACT Act, the federal financial institution regulatory
agencies proposed rules that would prohibit an institution from
using certain information about a consumer it received from an
affiliate to make a solicitation to the consumer, unless the
consumer has been notified and given a chance to opt out of such
solicitations. A consumers election to opt out would be
applicable for at least five years. The agencies have also
proposed guidelines required by the FACT Act for financial
institutions and creditors which require financial institutions
to identify patterns, practices and specific forms of activity,
known as Red Flags, that indicate the possible
existence of identity theft and require financial institutions
to establish reasonable policies and procedures for implementing
these guidelines.
The Check Clearing for the 21st Century Act, or
Check 21, facilitates check truncation and electronic check
exchange by authorizing a new negotiable instrument called a
substitute check, which is the legal equivalent of
an original check. Check 21 does not require banks to create
substitute checks or accept checks electronically; however, it
does require banks to accept a legally equivalent substitute
check in place of an original. In addition to its issuance of
regulations governing substitute checks, the Federal Reserve has
issued final rules governing the treatment of remotely created
checks (sometimes referred to as demand drafts) and
electronic check conversion transactions (involving checks that
are converted to electronic transactions by merchants and other
payees).
The Equal Credit Opportunity Act, or ECOA, generally prohibits
discrimination in any credit transaction, whether for consumer
or business purposes, on the basis of race, color, religion,
national origin, sex, marital status, age (except in limited
circumstances), receipt of income from public assistance
programs, or good faith exercise of any rights under the
Consumer Credit Protection Act.
The Truth in Lending Act, or TILA, is designed to ensure that
credit terms are disclosed in a meaningful way so that consumers
may compare credit terms more readily and knowledgeably. As a
result of TILA, all creditors must use the same credit
terminology to express rates and payments, including the annual
percentage rate, the finance charge, the amount financed, the
total of payments and the payment schedule, among other things.
The Fair Housing Act, or FH Act, regulates many practices,
including making it unlawful for any lender to discriminate in
its housing-related lending activities against any person
because of race, color, religion, national
11
origin, sex, handicap or familial status. A number of lending
practices have been found by the courts to be, or may be
considered, illegal under the FH Act, including some that are
not specifically mentioned in the FH Act itself.
The Community Reinvestment Act, or CRA, is intended to encourage
insured depository institutions, while operating safely and
soundly, to help meet the credit needs of their communities. The
CRA specifically directs the federal regulatory agencies, in
examining insured depository institutions, to assess a
banks record of helping meet the credit needs of its
entire community, including low- and moderate-income
neighborhoods, consistent with safe and sound banking practices.
The CRA further requires the agencies to take a financial
institutions record of meeting its community credit needs
into account when evaluating applications for, among other
things, domestic branches, mergers or acquisitions, or holding
company formations. The agencies use the CRA assessment factors
in order to provide a rating to the financial institution. The
ratings range from a high of outstanding to a low of
substantial noncompliance. In its last examination
for CRA compliance, as of February 2005, the Bank was rated
satisfactory.
The Home Mortgage Disclosure Act, or HMDA, grew out of public
concern over credit shortages in certain urban neighborhoods and
provides public information that will help show whether
financial institutions are serving the housing credit needs of
the neighborhoods and communities in which they are located. The
HMDA also includes a fair lending aspect that
requires the collection and disclosure of data about applicant
and borrower characteristics as a way of identifying possible
discriminatory lending patterns and enforcing
anti-discrimination statutes. The Federal Reserve Board amended
regulations issued under HMDA to require the reporting of
certain pricing data with respect to higher priced mortgage
loans for review by the federal banking agencies from a fair
lending perspective. We do not expect that the HMDA data
reported by the Bank will raise material issues regarding the
Banks compliance with the fair lending laws.
The Real Estate Settlement Procedures Act, or RESPA, requires
lenders to provide borrowers with disclosures regarding the
nature and cost of real estate settlements. Also, RESPA
prohibits certain abusive practices, such as kickbacks, and
places limitations on the amount of escrow accounts. Penalties
under the above laws may include fines, reimbursements and other
penalties.
The National Flood Insurance Act, or NFIA, requires homes in
flood-prone areas with mortgages from a federally regulated
lender to have flood insurance. Hurricane Katrina focused
awareness on this requirement. Lenders are required to provide
notice to borrowers of special flood hazard areas and require
such coverage before making, increasing, extending or renewing
such loans. Financial institutions which demonstrate a pattern
and practice of lax compliance are subject to the issuance of
cease and desist orders and the imposition of per loan civil
money penalties, up to a maximum fine which currently is
$125,000. Fine payments are remitted to the Federal Emergency
Management Agency for deposit into the National Flood Mitigation
Fund.
Due to heightened regulatory concern related to compliance with
HOEPA, FACT, ECOA, TILA, FH Act, CRA, HMDA, RESPA and NFIA
generally, the Bank may incur additional compliance costs or be
required to expend additional funds for investments in its local
community.
|
|
|
Federal
Home Loan Bank (FHLB) System
|
The Bank is a member of the Federal Home Loan Bank of
San Francisco. Among other benefits, each FHLB serves as a
reserve or central bank for its members within its assigned
region. Each FHLB is financed primarily from the sale of
consolidated obligations of the FHLB system. Each FHLB makes
available loans or advances to its members in compliance with
the policies and procedures established by the Board of
Directors of the individual FHLB. FHLB members are required to
own a certain amount of capital stock in the FHLB.
The Federal Reserve Board requires all depository institutions
to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and
Super NOW checking accounts) and non-personal time deposits. At
December 31, 2006, we were in compliance with these
requirements.
12
The Companys non-bank subsidiaries also are subject to
regulation by the FRB and other applicable federal and state
agencies. Other non-bank subsidiaries of the Company are subject
to the laws and regulations of both the federal government and
the various states in which they conduct business.
At December 31, 2006, we employed 752 persons, 522 on a
full-time and 230 on a part-time basis. We believe that our
employee relations are satisfactory.
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 at the public reference facilities of the Commission on
file at 450 Fifth Street, N.W., Washington D.C., 20549. The
public may obtain information on the operation of the public
reference loans 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 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.
The following tables set forth certain information regarding our
Executive Officers as of February 28, 2007:
Executive
Officers:
|
|
|
|
|
|
|
Name
|
|
Position
|
|
Age
|
|
Christopher D. Myers
|
|
President and Chief Executive
Officer of the Company and the Bank
|
|
|
44
|
|
Edward J. Biebrich Jr.
|
|
Chief Financial Officer of the
Company and Executive Vice President and Chief Financial Officer
of the Bank
|
|
|
63
|
|
Jay W. Coleman
|
|
Executive Vice President/Sales and
Service Division of the Bank
|
|
|
64
|
|
Edward J. Mylett, Jr.
|
|
Executive Vice President/Credit
Management Division of the Bank
|
|
|
58
|
|
Anthony Q. Evans
|
|
Executive Vice President/Service
Division of the Bank
|
|
|
56
|
|
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. From
1983 to 1990, he served as Chief Financial Officer for Central
Pacific Corporation and Executive Vice President, Chief
Financial Officer and Manager of the Finance and Operations
Division for American National Bank. From 1990 to 1992, he was
Vice President of Operations for Systematics Financial Services
Inc. From 1992 to 1998, he served as Senior Vice President,
Chief Financial Officer of ARB, Inc.
Mr. Coleman assumed the position of Executive Vice
President of the Bank on December 5, 1988. Prior to that,
he served as President and Chief Executive Officer of Southland
Bank, N.A. from March 1983 to April 1988.
Mr. Mylett assumed the position of Executive Vice President
and Senior Loan Officer of the Bank on March 1, 2006. Prior
to that, he served as Senior Vice President Regional Manager of
the Bank from July 2003 to March 2006 and the Burbank Business
Financial Center Manager from June 2002 to July 2003. Prior to
that, Mr. Mylett served
13
as Executive Vice President, Chief Operating Officer and Senior
Credit Officer for Western Security Bank from 1992 to June 2002.
Mr. Evans assumed the position of Executive Vice President
and Service Division Manager of the Bank on
December 29, 2006. Prior to that, he served as Executive
Vice President and Chief Operations Officer for Mellon First
Business Bank from 2005 to 2006. From 1998 to 2005,
Mr. Evans served as Senior Vice President and Director of
Operations for Community Bank of Pasadena.
Risk Factors That May Affect Future Results
In addition to the other information contained in this annual
report, the following risks may affect us. If any of these risks
occurs, our business, financial condition, operating results and
prospects could be adversely affected.
Our Southern and Central California business focus and
economic conditions in Southern and Central California could
adversely affect our operations Our operations
are concentrated in Southern and Central California, and in
particular in San Bernardino County, Riverside County,
Orange County, Madera County, Fresno County, Tulare County, Kern
County, and the eastern portion of Los Angeles County in
Southern California. As a result of this geographic
concentration, our business is directly affected by factors such
as economic, political and market conditions, broad trends in
industry and finance, legislative and regulatory changes,
changes in government monetary and fiscal policies and
inflation, all of which are beyond our control. Deterioration in
economic conditions could result in the following consequences,
any of which could have a material adverse effect on our
business, financial condition, results of operations and
prospects:
|
|
|
|
|
problem assets and foreclosures may increase,
|
|
|
|
demand for our products and services may decline,
|
|
|
|
low cost or non-interest bearing deposits may decrease, and
|
|
|
|
collateral for loans made by us, especially real estate, may
decline in value, in turn reducing customers borrowing
power, and reducing the value of assets and collateral
associated with our existing loans.
|
In view of the concentration of our operations and the
collateral securing our loan portfolio in Southern and Central
California, we may be particularly susceptible to the adverse
effects of any of these consequences, any of which could have a
material adverse effect on our business, financial condition,
results of operations and prospects.
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. Our success depends to a significant degree upon our
ability to attract and retain qualified management, credit
quality, 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
our executive officers. The loss of the services of any one of
our key executives or other executives or our inability to find
suitable replacements could have a material adverse effect on
our business, financial condition, results of operations and
prospects.
Our business is subject to interest rate risk and variations
in interest rates may negatively affect our financial
performance Our earnings are impacted by
changing interest rates. Changes in interest rates impact the
level of loans, deposits and investments, the credit profile of
existing loans and the rates received on loans and securities
and the rates paid on deposits and borrowings. Significant
fluctuations in interest rates may have a material adverse
affect on our financial condition and results of operations.
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
14
earned on interest-earning assets and interest paid on
interest-bearing liabilities. At December 31, 2006 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, loan
origination volume, business, financial condition, results of
operations and prospects.
The types of loans in our portfolio have a higher degree of
risk and a downturn in our real estate markets could hurt our
business A 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. If real estate prices decline, particularly
in California, the value of real estate collateral securing our
loans could be 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. As of December 31, 2006,
approximately 42.75% of the book value of our loan portfolio
consisted of loans collateralized or secured by various types of
real estate. Substantially all of our real estate collateral is
located in California. If there is a significant decline in real
estate values, especially in California, the collateral for our
loans will provide less security. Real estate values could also
be affected by, among other things, earthquakes and national
disasters particular to California. Any such downturn could have
a material adverse effect on our business, financial condition,
results of operations and prospects.
We are subject to extensive government regulation. These
regulations may hamper our ability to increase our assets and
earnings Our operations and those of the Bank
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 and regulations
applicable to us are subject to regular modification and change.
We cannot assure you that these proposed laws, rules and
regulations or any other laws, rules or regulations will not be
adopted in the future, which could make compliance much more
difficult or expensive, restrict our ability to originate,
broker or sell loans, further limit or restrict the amount of
commissions, interest or other charges earned on loans
originated or sold by us or otherwise adversely affect our
business, financial condition, results of operations or cash
flows.
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.
If we cannot attract deposits, our growth may be
inhibited Our ability to increase our asset base
depends in large part on our ability to attract additional
deposits at favorable rates. We intend to seek additional
deposits by offering deposit products that are competitive with
those offered by other financial institutions in our markets and
by establishing personal relationships with our customers. We
cannot assure you that these efforts will be successful. Our
inability to attract additional deposits at competitive rates
could have a material adverse effect on our business, financial
condition, results of operations and prospects.
15
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 condition, results of operations and cash
flows. Unexpected losses may arise from a wide variety of
specific or systemic factors, many of which are beyond our
ability to predict, influence, or control.
Like all financial institutions, we maintain an allowance for
credit losses to provide for loan and lease defaults and
non-performance Our allowance for credit losses
may not be adequate to cover actual loan and lease losses, and
future provisions for credit losses could materially and
adversely affect our business, financial condition, results of
operations and cash flows. The allowance for credit losses
reflects our estimate of the probable losses in our loan and
lease portfolio at the relevant balance sheet date. Our
allowance for credit losses is based on prior experience, as
well as an evaluation of the known risks in the current
portfolio, composition and growth of the loan and lease
portfolio and economic factors. The determination of an
appropriate level of the allowance for credit losses is an
inherently difficult process and is based on numerous
assumptions. The amount of future losses is susceptible to
changes in economic, operating and other conditions, including
changes in interest rates, that may be beyond our control and
these losses may exceed current estimates. Federal and state
regulatory agencies, as an integral part of their examination
process, review our loans and leases and allowance for credit
losses. While we believe that our allowance for credit losses is
adequate to cover current 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.
Either of these occurrences could have a material adverse affect
on our business, financial condition, results of operations and
prospects.
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
that may result in lost business and we may not be able to
obtain substitute providers on terms that are as favorable if
our relationships with our existing service providers are
interrupted We rely on third-party service
providers for much of our communications, information, operating
and financial control systems technology. Any failure or
interruption or breach 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. We cannot assure you that such failures or
interruptions will not occur or, if they do occur, that they
will be adequately addressed by us or the third parties on which
we rely. The occurrence of any failures or interruptions could
have a material adverse effect on our business, financial
condition, results of operations and cash flows. If any of our
third-party service providers experience financial, operational
or technological difficulties, or if there is any other
disruption in our relationships with them, we may be required to
locate 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. Any of these circumstances
could have a material adverse effect on our business, financial
condition, results of operations, and prospects.
We face strong competition from financial services companies
and other companies that offer banking services which could hurt
our business We conduct our operations
exclusively in California. Increased competition in our markets
may result in reduced loans and deposits. Ultimately, we may not
be able to compete successfully against current and future
competitors. Many competitors offer the banking services that we
offer in our service areas. 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. Additionally, banks and
other financial institutions with larger capitalization and
financial intermediaries not subject to bank regulatory
restrictions may have larger lending limits which would allow
them to serve the credit needs of larger customers. 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. Technological
innovation continues to contribute to greater competition
16
in domestic and international financial services markets as
technological advances enable more companies to provide
financial services. We also face competition from
out-of-state
financial intermediaries that have opened loan production
offices or that solicit deposits in our market areas. If we are
unable to attract and retain banking customers, we may be unable
to continue our loan growth and level of deposits and our
business, financial condition, results of operations and
prospects may be adversely affected.
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 could delay or prevent a
third-party from acquiring us, even if doing so might be
beneficial to our shareholders. These provisions provide for,
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.
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 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.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None
The principal executive offices of the Company and the Bank are
located at 701 North Haven Avenue, Suite 350, Ontario,
California, which is owned by the Company.
At December 31, 2006, the Bank occupied the premises for
thirty-three of its offices under leases expiring at various
dates from 2007 through 2020, at which time we can exercise
options that could extend certain leases through 2026. We own
the premises for eleven of our offices, including our data
center, located in Ontario, California.
|
|
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.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to shareholders during the fourth
quarter of 2006.
17
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 National Market under
the symbol CVBF. The following table presents the
high and low closing sales prices and dividend information for
our common stock during each quarter for the past two years. The
share prices for all periods have been restated to give
retroactive effect, as applicable, to the ten percent stock
dividend declared in December 2006 and paid January 19,
2007, the
5-for-4
stock split declared in December 2005, which became effective
January 10, 2006, and the
5-for-4
stock split declared in December 2004, which became effective
December 29, 2004. Cash dividends per share are not
adjusted for these stock dividends and splits. The Company had
approximately 1,944 shareholders of record as of
January 5, 2007.
Two Year
Summary of Common Stock Prices
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
Ended
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
3/31/2005
|
|
$
|
15.49
|
|
|
$
|
12.80
|
|
|
$0.11 Cash Dividend
|
6/30/2005
|
|
$
|
14.63
|
|
|
$
|
12.36
|
|
|
$0.11 Cash Dividend
|
9/30/2005
|
|
$
|
15.93
|
|
|
$
|
13.12
|
|
|
$0.11 Cash Dividend
|
12/31/2005
|
|
$
|
15.20
|
|
|
$
|
12.63
|
|
|
$0.09 Cash Dividend
|
|
|
|
|
|
|
|
|
|
|
5-for-4 Stock Split
|
3/31/2006
|
|
$
|
15.60
|
|
|
$
|
14.71
|
|
|
$0.09 Cash Dividend
|
6/30/2006
|
|
$
|
15.59
|
|
|
$
|
13.25
|
|
|
$0.09 Cash Dividend
|
9/30/2006
|
|
$
|
14.24
|
|
|
$
|
12.83
|
|
|
$0.09 Cash Dividend
|
12/31/2006
|
|
$
|
14.13
|
|
|
$
|
12.83
|
|
|
$0.085 Cash Dividend
10% Stock Dividend
|
For information on the ability of the Bank to pay dividends and
make loans to the Company, see Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity Risk.
Issuer
Purchases of Equity Securities
In October 2001, the Companys Board of Directors
authorized the repurchase of up to 2.0 million shares
(without adjustment for stock dividends and splits) of our
common stock. There were no repurchases made in 2006. During
2005 and 2004, we repurchased 676,033 shares and
99,504 shares of common stock under this repurchase plan,
for the total price of $12.3 million and $2.0 million,
respectively. As of December 31, 2006, 875,163 shares
are available to be repurchased in the future under this
repurchase plan.
18
Performance
Graph
The following Performance Graph and related information shall
not be deemed soliciting material or to 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
January 1, 2002, and reinvestment of dividends through
December 31, 2006. 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. On June 11, 2001, CVB Financial
Corps common stock ceased trading on the American Stock
Exchange and began trading on the Nasdaq National Market System
on the following business day.
COMPARE
5-YEAR
CUMULATIVE TOTAL RETURN
AMONG CVB FINANCIAL CORP.,
NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX
ASSUMES $100 INVESTED ON JAN. 01, 2002
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
CVB FINANCIAL CORP.
|
|
|
|
100.00
|
|
|
|
|
138.20
|
|
|
|
|
148.84
|
|
|
|
|
209.33
|
|
|
|
|
203.64
|
|
|
|
|
185.42
|
|
HEMSCOTT GROUP INDEX
|
|
|
|
100.00
|
|
|
|
|
97.03
|
|
|
|
|
146.95
|
|
|
|
|
179.40
|
|
|
|
|
187.88
|
|
|
|
|
196.02
|
|
NASDAQ MARKET INDEX
|
|
|
|
100.00
|
|
|
|
|
69.75
|
|
|
|
|
104.88
|
|
|
|
|
113.70
|
|
|
|
|
116.19
|
|
|
|
|
128.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
( Amounts and numbers in thousands except per share
amounts)
|
|
|
Interest Income
|
|
$
|
316,660
|
|
|
$
|
246,948
|
|
|
$
|
197,702
|
|
|
$
|
166,346
|
|
|
$
|
154,323
|
|
Interest Expense
|
|
|
147,464
|
|
|
|
77,436
|
|
|
|
46,517
|
|
|
|
37,053
|
|
|
|
40,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
169,196
|
|
|
|
169,512
|
|
|
|
151,185
|
|
|
|
129,293
|
|
|
|
113,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Credit Losses
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Income
|
|
|
33,258
|
|
|
|
27,505
|
|
|
|
27,907
|
|
|
|
29,989
|
|
|
|
29,018
|
|
Other Operating Expenses
|
|
|
95,824
|
|
|
|
90,053
|
|
|
|
89,722
|
|
|
|
77,794
|
|
|
|
66,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes
|
|
|
103,630
|
|
|
|
106,964
|
|
|
|
89,370
|
|
|
|
81,488
|
|
|
|
76,846
|
|
Income Taxes
|
|
|
31,724
|
|
|
|
36,346
|
|
|
|
27,884
|
|
|
|
28,656
|
|
|
|
27,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
71,906
|
|
|
$
|
70,618
|
|
|
$
|
61,486
|
|
|
$
|
52,832
|
|
|
$
|
49,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Common Share(1)
|
|
$
|
0.85
|
|
|
$
|
0.84
|
|
|
$
|
0.74
|
|
|
$
|
0.64
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share(1)
|
|
$
|
0.85
|
|
|
$
|
0.83
|
|
|
$
|
0.73
|
|
|
$
|
0.63
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Declared Per Common
Share
|
|
$
|
0.355
|
|
|
$
|
0.420
|
|
|
$
|
0.480
|
|
|
$
|
0.480
|
|
|
$
|
0.540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends paid
|
|
|
27,876
|
|
|
|
27,963
|
|
|
|
23,821
|
|
|
|
21,638
|
|
|
|
20,800
|
|
Dividend Pay-Out Ratio(3)
|
|
|
38.77
|
%
|
|
|
39.60
|
%
|
|
|
38.74
|
%
|
|
|
40.96
|
%
|
|
|
41.81
|
%
|
Weighted Average Common Shares(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
84,154,216
|
|
|
|
84,139,254
|
|
|
|
83,221,496
|
|
|
|
82,813,541
|
|
|
|
82,475,422
|
|
Diluted
|
|
|
84,813,875
|
|
|
|
84,911,893
|
|
|
|
84,258,933
|
|
|
|
84,408,373
|
|
|
|
84,280,226
|
|
Common Stock Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding at year
end(1)
|
|
|
84,281,722
|
|
|
|
84,073,227
|
|
|
|
83,416,193
|
|
|
|
82,997,315
|
|
|
|
82,304,822
|
|
Book Value Per Share(1)
|
|
$
|
4.62
|
|
|
$
|
4.08
|
|
|
$
|
3.81
|
|
|
$
|
3.45
|
|
|
$
|
3.16
|
|
Financial Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
6,094,262
|
|
|
$
|
5,422,971
|
|
|
$
|
4,511,011
|
|
|
$
|
3,854,349
|
|
|
$
|
3,123,411
|
|
Investment Securities
available-for-sale
|
|
|
2,582,902
|
|
|
|
2,369,892
|
|
|
|
2,085,014
|
|
|
|
1,865,782
|
|
|
|
1,430,599
|
|
Net Loans
|
|
|
3,042,459
|
|
|
|
2,640,659
|
|
|
|
2,117,580
|
|
|
|
1,738,659
|
|
|
|
1,424,343
|
|
Deposits
|
|
|
3,406,808
|
|
|
|
3,424,046
|
|
|
|
2,875,039
|
|
|
|
2,660,510
|
|
|
|
2,309,964
|
|
Borrowings
|
|
|
1,189,250
|
|
|
|
1,496,000
|
|
|
|
1,186,000
|
|
|
|
786,500
|
|
|
|
468,000
|
|
Junior Subordinated debentures
|
|
|
16,156
|
|
|
|
82,476
|
|
|
|
82,746
|
|
|
|
82,476
|
|
|
|
|
|
Stockholders Equity
|
|
|
36,477
|
|
|
|
342,877
|
|
|
|
317,483
|
|
|
|
286,721
|
|
|
|
259,821
|
|
Equity-to-Assets
Ratio(2)
|
|
|
0.59
|
%
|
|
|
6.32
|
%
|
|
|
7.04
|
%
|
|
|
7.44
|
%
|
|
|
8.32
|
%
|
Financial Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Equity
|
|
|
20.97
|
%
|
|
|
22.24
|
%
|
|
|
21.44
|
%
|
|
|
20.33
|
%
|
|
|
22.53
|
%
|
Average Equity
|
|
|
19.75
|
%
|
|
|
20.87
|
%
|
|
|
20.33
|
%
|
|
|
19.17
|
%
|
|
|
20.45
|
%
|
Average Assets
|
|
|
1.25
|
%
|
|
|
1.45
|
%
|
|
|
1.47
|
%
|
|
|
1.54
|
%
|
|
|
1.83
|
%
|
Net Interest Margin (TE)
|
|
|
3.31
|
%
|
|
|
3.86
|
%
|
|
|
3.99
|
%
|
|
|
4.18
|
%
|
|
|
4.66
|
%
|
Efficiency Ratio
|
|
|
48.04
|
%
|
|
|
45.71
|
%
|
|
|
50.10
|
%
|
|
|
48.84
|
%
|
|
|
46.22
|
%
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
( Amounts and numbers in thousands except per share
amounts)
|
|
|
Credit Quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses
|
|
$
|
27,737
|
|
|
$
|
23,204
|
|
|
$
|
22,494
|
|
|
$
|
21,282
|
|
|
$
|
21,666
|
|
Allowance/Total Loans
|
|
|
0.90
|
%
|
|
|
0.87
|
%
|
|
|
1.05
|
%
|
|
|
1.21
|
%
|
|
|
1.50
|
%
|
Total Non Performing Loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
548
|
|
|
$
|
824
|
|
Non Performing Loans/Total Loans
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.03
|
%
|
|
|
0.06
|
%
|
Allowance/Non Performing Loans
|
|
|
|
|
|
|
|
|
|
|
1,124,698
|
%
|
|
|
3,884
|
%
|
|
|
2,629
|
%
|
Net (Recoveries)/Charge-offs
|
|
$
|
(1,533
|
)
|
|
$
|
46
|
|
|
$
|
(1,212
|
)
|
|
$
|
1,418
|
|
|
$
|
1,128
|
|
Net
(Recoveries)/Charge-Offs/Average Loans
|
|
|
-0.05
|
%
|
|
|
0.00
|
%
|
|
|
−0.06
|
%
|
|
|
0.09
|
%
|
|
|
0.09
|
%
|
Regulatory Capital
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
7.8
|
%
|
|
|
7.7
|
%
|
|
|
8.3
|
%
|
|
|
8.6
|
%
|
|
|
7.6
|
%
|
Tier 1 Capital
|
|
|
12.3
|
%
|
|
|
11.3
|
%
|
|
|
12.6
|
%
|
|
|
13.2
|
%
|
|
|
10.2
|
%
|
Total Capital
|
|
|
13.1
|
%
|
|
|
12.0
|
%
|
|
|
13.4
|
%
|
|
|
14.5
|
%
|
|
|
11.2
|
%
|
For the Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
|
7.1
|
%
|
|
|
7.3
|
%
|
|
|
7.8
|
%
|
|
|
8.6
|
%
|
|
|
7.6
|
%
|
Tier 1 Capital
|
|
|
11.1
|
%
|
|
|
10.8
|
%
|
|
|
11.9
|
%
|
|
|
13.2
|
%
|
|
|
10.2
|
%
|
Total Capital
|
|
|
11.8
|
%
|
|
|
11.5
|
%
|
|
|
12.7
|
%
|
|
|
14.2
|
%
|
|
|
11.3
|
%
|
|
|
|
(1) |
|
All earnings per share information has been retroactively
adjusted to reflect the 10% stock dividend declared
December 20, 2006 and paid January 19, 2007, the
5-for-4
stock split declared on December 21, 2005, which became
effective January 10, 2006, the
5-for-4
stock split declared December 15, 2004, which became
effective December 29, 2004, the 10% stock dividend
declared December 17, 2003 and paid January 2, 2004,
and the
5-for-4
stock split declared December 18, 2002, which became
effective January 3, 2003. 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 divided by net earnings. |
|
|
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. In March
2006, we merged two of our operating subsidiaries, Community
Trust Deed Services and Golden West Enterprises, Inc. into
the Bank to increase the lending limit of Golden Wests
leasing operations and to improve efficiency. We are also the
common stockholder of CVB Statutory Trust I, CVB Statutory
Trust II and CVB Statutory Trust III. CVB Statutory
Trust I and II were created in December 2003 and CVB
Statutory Trust III was created in January 2006 to issue
$84.0 million and $25.0 million, respectively, in
trust preferred securities in order to increase the capital of
the Company. We are based in Ontario, California in what is
known as the Inland Empire. Our geographical market
area encompasses the City of Madera (the middle of the Central
Valley) in the center of California to the City of Laguna Beach
(in Orange County) in the southern portion of California. Our
mission is to offer the finest financial products and services
to professionals and businesses in our market area. As
opportunities present themselves, we
21
will continue to pursue acquisition opportunities and other
opportunities for growth which will enable us to meet our
business objectives and enhance shareholder value.
Our primary source of income is from the interest earned on our
loans and investments and our primary area of expense is the
interest paid on deposits, borrowings, salaries and benefits. As
such our net income is subject to fluctuations in interest rates
and their impact on our income statement. The flat interest rate
environment has compressed our net interest margin. 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 housing slow down and this has had an
impact on us by means of the slower growth in construction loans
and the decrease in deposit balances from escrow companies.
Unemployment remains low, but job growth is slowing.
Over the past few years, we have been active in acquisitions and
we will continue to pursue acquisition targets which will enable
us to meet our business objectives and enhance shareholder
value. Since 2000, we have acquired four banks and a leasing
company, and we have opened four de novo branches; Glendale,
Bakersfield, Fresno and Madera. While we have been active in
acquisitions, our desire is also to grow organically.
Our growth in loans and investments during 2006 compared with
2005 has allowed our interest income to grow. The Bank has
always had an excellent base of interest free deposits primarily
due to our specialization in businesses and professionals as
customers. This has allowed us to have a low cost of deposits,
currently 1.91% for the year ended December 31, 2006.
However, the rise in interest expense resulting primarily from
an increase in average interest-bearing liabilities and an
increase in the cost of these liabilities has caused our net
interest margin to decline to 3.14% for 2006, compared to 3.73%
for 2005.
Our total occupancy expense, exclusive of furniture and
equipment expense, for the year ended December 31, 2006,
was $8.6 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 6
and 11 of the Notes to the Consolidated Financial Statements
included in this report. See Item 8. Financial
Statements and Supplemental Data.
Our net income increased to $71.9 million in 2006 compared
with $70.6 million in 2005, an increase of
$1.3 million or 1.83%. Diluted earnings per share, when
restated for the ten percent stock dividend declared in December
2006, increased $0.02, from $0.83 in 2005 to $0.85 in 2006.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, and could
potentially result in materially different results under
different assumptions and conditions. We believe that our most
critical accounting policies upon which our financial condition
depends, and which involve the most complex or subjective
decisions or assessment, are as follows:
Allowance for Credit Losses: Arriving at an
appropriate level of allowance for credit losses involve 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 loan losses, see Risk Management in
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operation.
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. Many of the securities included in
the investment portfolio are purchased at a premium or discount.
The premiums or discounts
22
are amortized or accreted over the life of the security. 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 amount of prepayments varies from time to
time based on the interest rate environment (i.e., lower
interest rates increase the likelihood of refinances) and the
rate of turn over of the mortgages (i.e., how often the
underlying properties are sold and mortgages are paid-off). We
use estimates for the average lives of these mortgage backed
securities based on information received from third parties
whose business it is to compile mortgage related data and
develop a consensus of that data. We adjust the rate of
amortization or accretion regularly to reflect changes in the
estimated average lives of these securities.
We classify securities as
held-to-maturity
those debt securities that we have the positive intent and
ability to hold to maturity. Securities classified as trading
are those securities that are bought and held principally for
the purpose of selling them in the near term. All other debt and
equity securities are classified as
available-for-sale.
Securities
held-to-maturity
are accounted for at cost and adjusted for amortization of
premiums and accretion of discounts. Trading securities are
accounted for at fair value with the unrealized holding gains
and losses being included in current earnings. Securities
available-for-sale
are accounted for at fair value, with the net unrealized gains
and losses, net of income tax effects, presented as a separate
component of stockholders equity. At each reporting date,
available-for-sale
securities are assessed to determine whether there is an
other-than-temporary
impairment. Such impairment, if any, is required to be
recognized in current earnings rather than as a separate
component of stockholders equity. Realized gains and
losses on sales of securities are recognized in earnings at the
time of sale and are determined on a specific-identification
basis. Purchase premiums and discounts are recognized in
interest income using the interest method over the terms of the
securities. Our investment in Federal Home Loan Bank
(FHLB) stock is carried at cost.
Income Taxes: We account for income taxes by
deferring income taxes based on estimated future tax effects of
temporary 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 on our balance sheets. We must also assess
the likelihood that any deferred tax assets will be recovered
from future taxable income and establish a valuation allowance
for those assets determined to not likely be recoverable. Our
judgment is required in determining the amount and timing of
recognition of the resulting deferred tax assets and
liabilities, including projections of future taxable income.
Although we have determined a valuation allowance is not
required for all deferred tax assets, there is no guarantee that
these assets are 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.
23
ANALYSIS
OF THE RESULTS OF OPERATIONS
The following table summarizes net earnings, earnings per common
share, and key financial ratios for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Net earnings
|
|
$
|
71,906
|
|
|
$
|
70,618
|
|
|
$
|
61,486
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(1)
|
|
$
|
0.85
|
|
|
$
|
0.84
|
|
|
$
|
0.74
|
|
Diluted(1)
|
|
$
|
0.85
|
|
|
$
|
0.83
|
|
|
$
|
0.73
|
|
Return on average assets
|
|
|
1.25
|
%
|
|
|
1.45
|
%
|
|
|
1.47
|
%
|
Return on average
shareholders equity
|
|
|
19.75
|
%
|
|
|
20.87
|
%
|
|
|
20.33
|
%
|
|
|
|
(1) |
|
All earnings per share information has been retroactively
adjusted to reflect the 10% stock dividend declared
December 20, 2006 and paid January 19, 2007, the
5-for-4
stock split declared on December 21, 2005, which became
effective January 10, 2006, and the
5-for-4
stock split declared December 15, 2004, which became
effective December 29, 2004. |
Earnings
We reported net earnings of $71.9 million for the year
ended December 31, 2006. This represented an increase of
$1.3 million, or 1.83%, over net earnings of
$70.6 million for the year ended December 31, 2005.
Net earnings for 2005 increased $9.1 million to
$70.6 million, or 14.85%, over net earnings of
$61.5 million for the year ended December 31, 2004.
Diluted earnings per share were $0.85 in 2006, as compared to
$0.83 in 2005, and $0.73 in 2004. Basic earnings per share were
$0.85 in 2006, as compared to $0.84 in 2005, and $0.74 in 2004.
Diluted and basic earnings per share have been adjusted for the
effects of a ten percent dividend declared December 20,
2006 and paid on January 19, 2007, a
5-for-4
stock split declared December 21, 2005, which became
effective January 10, 2006, and a
5-for-4
stock split declared December 15, 2004, which became
effective December 29, 2004.
The increase in net earnings for 2006 compared to 2005 was
primarily the result of an increase in other operating income,
offset by a decrease in net interest margin and increase in
other operating expenses. Our financial results and operations
have been affected by competition which has manifested itself
with increased pricing pressures for loans and deposits, thus
compressing our net interest margin. Because of the pressure on
the net interest margin, other operating income has become a
more important element in the total revenue of the Company. The
increase in net earnings for 2005 compared to 2004 was also the
result of an increase in net interest income offset by an
increase in other operating expenses and a decrease in other
operating income.
For 2006, our return on average assets was 1.25%, compared to
1.45% for 2005, and 1.47% for 2004. Our return on average
stockholders equity was 19.75% for 2006, compared to a
return of 20.87% for 2005, and 20.33% for 2004.
Net
Interest Income
The principal component of our earnings is net interest income,
which is the difference between the interest and fees earned on
loans and investments (earning assets) and the interest paid on
deposits and borrowed funds (interest-bearing liabilities). Net
interest margin is the taxable-equivalent of net interest income
as a percentage of average earning assets for the period. The
level of interest rates and the volume and mix of earning assets
and interest-bearing liabilities impact net interest income and
net interest margin. The net interest spread is the yield on
average earning assets minus the cost of average
interest-bearing liabilities. Our net interest income, interest
spread, and net interest margin are sensitive to general
business and economic conditions. These conditions include
short-term and long-term interest rates, inflation, monetary
supply, and the strength of the economy, in general, and the
local economies in which we conduct business. Our ability to
manage the net interest income during changing interest rate
environments will have a significant impact on its overall
performance. Our balance sheet is currently
24
liability-sensitive; meaning interest-bearing liabilities will
generally reprice more quickly than earning assets. Therefore,
our net interest margin is likely to decrease in sustained
periods of rising interest rates and increase in sustained
periods of declining interest rates. We manage net interest
income 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.
Our net interest income, after provision for credit losses
totaled $166.2 million for 2006. This represented a
decrease of $3.3 million, or 1.96%, from net interest
income of $169.5 million for 2005. Net interest income for
2005 increased $18.3 million, or 12.12%, over net interest
income of $151.2 million for 2004. The decrease in net
interest income of $3.3 million for 2006 resulted from an
increase of $69.7 million in interest income offset by an
increase of $70.0 million in interest expense and
$3.0 million increase in provision for credit losses. The
increase in interest income of $69.7 million resulted from
the $847.5 million increase in average earning assets and
the increase in yield on earning assets to 6.05% in 2006 from
5.56% in 2005. The increase of $70.0 million in interest
expense resulted from the increase in the average rate paid on
interest-bearing liabilities to 3.70% in 2006 from 2.48% in
2005, and an increase of $877.8 million in average
interest-bearing liabilities.
The major reason for the decrease in net interest income was the
flattening of the yield curve and its affect on our liabilities.
Our interest-bearing liabilities are comprised of customer
deposits and borrowings from primarily the FHLB or other
correspondent banks. The borrowings are at market rates and have
reset upwards as rates have risen. Our rates on customer
deposits have risen also, but slower than rates on borrowings.
These increases in rates have continued even though the Federal
Reserve Bank has not raised the Fed Funds Target Rate since June
2006. Our deposit rates have continued to rise due to increased
competition.
The increase in net interest income of $18.3 million for
2005 as compared to 2004 resulted from an increase of
$49.2 million in interest income offset by a
$30.9 million increase in interest expense. This increase
in interest income of $49.2 million resulted from the
$628.3 million increase in average earning assets and the
increase in yield on earning assets to 5.56% in 2005 from 5.17%
in 2004. The increase of $30.9 million in interest expense
was the result of an increase in the average rate paid on
interest-bearing liabilities to 2.48% in 2005 from 1.76% in
2004, and an increase of $474.7 million in average
interest-bearing liabilities.
Interest income totaled $316.7 million for 2006. This
represented an increase of $69.7 million, or 28.23%,
compared to total interest income of $246.9 million for
2005. For 2005, total interest income increased
$49.2 million, or 24.91%, from total interest income of
$197.7 million for 2004. The increase in total interest
income was primarily due to an increase in volume of interest
earning assets and increase in interest rates in 2006, 2005, and
2004.
Interest expense totaled $147.5 million for 2006. This
represented an increase of $70.0 million, or 90.43%, over
total interest expense of $77.4 million for 2005. For 2005,
total interest expense increased $30.9 million, or 66.47%,
over total interest expense of $46.5 million for 2004.
25
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:
TABLE
1 Distribution of Average Assets, Liabilities, and
Stockholders Equity;
Interest Rates and Interest Differentials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
ASSETS
|
Investment Securities Taxable(1)
|
|
$
|
1,907,713
|
|
|
$
|
91,029
|
|
|
|
4.80
|
%
|
|
$
|
1,774,842
|
|
|
$
|
76,573
|
|
|
|
4.32
|
%
|
|
$
|
1,631,431
|
|
|
$
|
66,109
|
|
|
|
4.07
|
%
|
Tax preferenced(2)
|
|
|
604,222
|
|
|
|
26,545
|
|
|
|
5.90
|
%
|
|
|
425,877
|
|
|
|
19,078
|
|
|
|
5.99
|
%
|
|
|
339,452
|
|
|
|
15,087
|
|
|
|
5.87
|
%
|
Investment in FHLB stock
|
|
|
74,368
|
|
|
|
4,290
|
|
|
|
5.77
|
%
|
|
|
64,144
|
|
|
|
2,623
|
|
|
|
4.09
|
%
|
|
|
46,443
|
|
|
|
1,960
|
|
|
|
4.22
|
%
|
Federal Funds Sold &
Interest Bearing Deposits with other institutions
|
|
|
1,843
|
|
|
|
92
|
|
|
|
4.99
|
%
|
|
|
8,908
|
|
|
|
253
|
|
|
|
2.84
|
%
|
|
|
311
|
|
|
|
3
|
|
|
|
0.96
|
%
|
Loans(3)(4)
|
|
|
2,811,782
|
|
|
|
194,704
|
|
|
|
6.92
|
%
|
|
|
2,277,304
|
|
|
|
148,421
|
|
|
|
6.52
|
%
|
|
|
1,905,145
|
|
|
|
114,543
|
|
|
|
6.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Earning Assets
|
|
|
5,399,928
|
|
|
|
316,660
|
|
|
|
6.05
|
%
|
|
|
4,551,075
|
|
|
|
246,948
|
|
|
|
5.56
|
%
|
|
|
3,922,782
|
|
|
|
197,702
|
|
|
|
5.17
|
%
|
Total Non Earning Assets
|
|
|
365,017
|
|
|
|
|
|
|
|
|
|
|
|
318,077
|
|
|
|
|
|
|
|
|
|
|
|
269,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
5,764,945
|
|
|
|
|
|
|
|
|
|
|
$
|
4,869,152
|
|
|
|
|
|
|
|
|
|
|
$
|
4,192,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Savings Deposits(5)
|
|
$
|
1,220,441
|
|
|
$
|
26,637
|
|
|
|
2.18
|
%
|
|
$
|
1,140,703
|
|
|
$
|
13,907
|
|
|
|
1.22
|
%
|
|
$
|
1,042,447
|
|
|
$
|
7,708
|
|
|
|
0.74
|
%
|
Time Deposits
|
|
|
940,634
|
|
|
|
40,543
|
|
|
|
4.31
|
%
|
|
|
539,433
|
|
|
|
15,001
|
|
|
|
2.78
|
%
|
|
|
505,102
|
|
|
|
7,800
|
|
|
|
1.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
|
2,161,075
|
|
|
|
67,180
|
|
|
|
3.11
|
%
|
|
|
1,680,136
|
|
|
|
28,908
|
|
|
|
1.72
|
%
|
|
|
1,547,549
|
|
|
|
15,508
|
|
|
|
1.00
|
%
|
Other Borrowings
|
|
|
1,826,532
|
|
|
|
80,284
|
|
|
|
4.40
|
%
|
|
|
1,429,632
|
|
|
|
48,528
|
|
|
|
3.39
|
%
|
|
|
1,087,534
|
|
|
|
31,009
|
|
|
|
2.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Bearing Liabilities
|
|
|
3,987,607
|
|
|
|
147,464
|
|
|
|
3.70
|
%
|
|
|
3,109,768
|
|
|
|
77,436
|
|
|
|
2.48
|
%
|
|
|
2,635,083
|
|
|
|
46,517
|
|
|
|
1.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
1,354,014
|
|
|
|
|
|
|
|
|
|
|
|
1,382,968
|
|
|
|
|
|
|
|
|
|
|
|
1,213,884
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
59,296
|
|
|
|
|
|
|
|
|
|
|
|
38,057
|
|
|
|
|
|
|
|
|
|
|
|
41,201
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
364,028
|
|
|
|
|
|
|
|
|
|
|
|
338,359
|
|
|
|
|
|
|
|
|
|
|
|
302,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Stockholders Equity
|
|
$
|
5,764,945
|
|
|
|
|
|
|
|
|
|
|
$
|
4,869,152
|
|
|
|
|
|
|
|
|
|
|
$
|
4,192,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
169,196
|
|
|
|
|
|
|
|
|
|
|
$
|
169,512
|
|
|
|
|
|
|
|
|
|
|
$
|
151,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread tax
equivalent
|
|
|
|
|
|
|
|
|
|
|
2.35
|
%
|
|
|
|
|
|
|
|
|
|
|
3.08
|
%
|
|
|
|
|
|
|
|
|
|
|
3.41
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.14
|
%
|
|
|
|
|
|
|
|
|
|
|
3.73
|
%
|
|
|
|
|
|
|
|
|
|
|
3.86
|
%
|
Net interest margin tax
equivalent
|
|
|
|
|
|
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
|
|
|
3.86
|
%
|
|
|
|
|
|
|
|
|
|
|
3.99
|
%
|
Net interest margin excluding loan
fees
|
|
|
|
|
|
|
|
|
|
|
3.04
|
%
|
|
|
|
|
|
|
|
|
|
|
3.52
|
%
|
|
|
|
|
|
|
|
|
|
|
3.67
|
%
|
Net interest margin excluding loan
fees tax equivalent
|
|
|
|
|
|
|
|
|
|
|
3.20
|
%
|
|
|
|
|
|
|
|
|
|
|
3.65
|
%
|
|
|
|
|
|
|
|
|
|
|
3.80
|
%
|
|
|
|
(1) |
|
Includes short-term interest bearing deposits with other
institutions. |
|
(2) |
|
Non tax equivalent rate for 2006 was 4.44%, 2005 was 4.54%, and
2004 was 4.51% |
|
(3) |
|
Loan fees are included in total interest income as follows,
(000)s omitted: 2006, $5,818, 2005, $8,003, and 2004, $7,353. |
|
(4) |
|
Non performing loans are included in net loans as follows,
(000)s omitted: 2006, $0; 2005, $0; and 2004, $2. |
|
(5) |
|
Includes interest bearing demand and money market accounts |
26
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 3.31% for 2006, compared
to 3.86% for 2005, and 3.99% for 2004. The decreases in the net
interest margin over the last three years are the result of the
increasing interest rate environment, which impacted interest
earned and interest paid as a percent of earning assets.
Although the yield on earning assets increased, this was offset
by higher interest paid on interest-bearing liabilities.
It is difficult to attribute the net interest margin changes to
any one factor. However, the banking and financial services
businesses in our market areas are highly competitive. This
competition has an influence on the strategies we employ. In
addition, the general increase in interest rates had an impact
on interest earned and interest paid as a percent of earning
assets. Although the yield on earning assets increased, this was
offset by higher interest paid on interest-bearing liabilities.
We did not grow our non-interest-bearing deposits in 2006 as we
have in the past. This was due primarily to the competition for
these types of deposits. As a result, we needed to borrow more
funds, increasing our costs and decreasing our net interest
income.
The decline in net interest margin is due to the cost of
interest-bearing liabilities rising faster than the increase in
yields on earning assets. This decline in net interest margin
has been mitigated by the strong growth in the balance sheet.
Average earning assets increased from $3.9 billion in 2004,
to 4.6 billion in 2005, and to $5.4 billion in 2006.
This represents an 18.65% increase in 2006 from 2005 and a
16.02% increase in 2005 from 2004. In addition, the Company has
approximately $1.36 billion, or 40.02%, of its deposits in
interest free demand deposits.
The net interest spread is the difference between the yield on
average earning assets less the cost of average interest-bearing
liabilities. The net interest spread is an indication of our
ability to manage interest rates received on loans and
investments and paid on deposits and borrowings in a competitive
and changing interest rate environment. Our net interest spread
(TE) was 2.35% for 2006, 3.08% for 2005, and 3.41% for 2004. The
decrease in the net interest spread for 2006 as compared to 2005
resulted from a 49 basis point increase in the yield on earning
assets offset by a 122 basis point increase in the cost of
interest-bearing liabilities, thus generating a 73 basis point
decrease in the net interest spread. The decrease in the net
interest spread for 2005 resulted from a 39 basis point
increase in the yield on earning assets and a 72 basis
point increase in the cost of interest-bearing liabilities, thus
generating a 33 basis point decrease in the net interest
spread.
The yield (TE) on earning assets increased to 6.05% for 2006,
from 5.56% for 2005, and reflects an increasing interest rate
environment and a change in the mix of earning assets.
Investments as a percent of earning assets decreased to 46.52%
in 2006 from 48.36% in 2005. The yield on loans for 2006
increased to 6.92% as compared to 6.52% for 2005 primarily as a
result of the increasing interest rate environment. The yield on
investments for 2006 increased to 5.06% as compared to 4.64% in
2005. The yield on loans for 2005 increased to 6.52% as compared
to 6.01% for 2004. The yield on investments increased to 4.64%
in 2005 as compared to 4.38% in 2004. The increase in the yield
on earning assets for 2006 and 2005 was the result of higher
yields on loans and investments.
The cost of average interest-bearing liabilities increased to
3.70% for 2006 as compared to 2.48% for 2005, and increased to
2.48% for 2004 as compared to 1.76% for 2004. These variations
reflected a change in the mix of interest-bearing liabilities
and an increasing interest rate environment in 2006 and 2005.
Borrowings as a percent of interest-bearing liabilities
increased to 45.81% for 2006 as compared to 45.97% for 2005 and
41.27% for 2004. Borrowings typically have a higher cost than
interest-bearing deposits. The cost of interest-bearing deposits
for 2006 increased to 3.11% as compared to 1.72% for 2005 and
1.00% for 2004, reflecting an increasing interest rate
environment in 2005 and 2006. The cost of borrowings for 2006
increased to 4.40% as compared to 3.39% for 2005, and 2.85% for
2004, also reflecting the same increasing interest rate
environment. The FDIC has approved the payment of interest on
certain demand deposit accounts. This could have a negative
impact on our net interest margin, net interest spread, and net
earnings, should 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
27
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 Years Ended December 31,
|
|
|
|
2006 Compared to 2005
|
|
|
2005 Compared to 2004
|
|
|
|
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
|
|
$
|
6,211
|
|
|
$
|
8,467
|
|
|
$
|
(222
|
)
|
|
$
|
14,456
|
|
|
$
|
6,109
|
|
|
$
|
4,062
|
|
|
$
|
293
|
|
|
$
|
10,464
|
|
Tax-advantaged securities
|
|
|
10,299
|
|
|
|
(383
|
)
|
|
|
(2,449
|
)
|
|
|
7,467
|
|
|
|
5,383
|
|
|
|
407
|
|
|
|
(1,799
|
)
|
|
|
3,991
|
|
Fed funds sold &
interest-bearing deposits with other institutions
|
|
|
(201
|
)
|
|
|
192
|
|
|
|
(152
|
)
|
|
|
(161
|
)
|
|
|
83
|
|
|
|
6
|
|
|
|
161
|
|
|
|
250
|
|
Investment in FHLB stock
|
|
|
418
|
|
|
|
1,078
|
|
|
|
171
|
|
|
|
1,667
|
|
|
|
747
|
|
|
|
(60
|
)
|
|
|
(24
|
)
|
|
|
663
|
|
Loans
|
|
|
34,848
|
|
|
|
9,109
|
|
|
|
2,326
|
|
|
|
46,283
|
|
|
|
22,367
|
|
|
|
9,716
|
|
|
|
1,795
|
|
|
|
33,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest on earning assets
|
|
|
51,575
|
|
|
|
18,463
|
|
|
|
(326
|
)
|
|
|
69,712
|
|
|
|
34,689
|
|
|
|
14,131
|
|
|
|
426
|
|
|
|
49,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
|
973
|
|
|
|
10,951
|
|
|
|
821
|
|
|
|
12,745
|
|
|
|
727
|
|
|
|
5,004
|
|
|
|
468
|
|
|
|
6,199
|
|
Time deposits
|
|
|
11,153
|
|
|
|
8,253
|
|
|
|
6,121
|
|
|
|
25,527
|
|
|
|
529
|
|
|
|
6,263
|
|
|
|
409
|
|
|
|
7,201
|
|
Other borrowings
|
|
|
13,642
|
|
|
|
14,640
|
|
|
|
3,474
|
|
|
|
31,756
|
|
|
|
9,885
|
|
|
|
5,954
|
|
|
|
1,680
|
|
|
|
17,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest on interest-bearing
liabilities
|
|
|
25,768
|
|
|
|
33,844
|
|
|
|
10,416
|
|
|
|
70,028
|
|
|
|
11,141
|
|
|
|
17,221
|
|
|
|
2,557
|
|
|
|
30,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
$
|
25,807
|
|
|
$
|
(15,381
|
)
|
|
$
|
(10,742
|
)
|
|
$
|
(316
|
)
|
|
$
|
23,548
|
|
|
$
|
(3,090
|
)
|
|
$
|
(2,131
|
)
|
|
$
|
18,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and Fees on Loans
Our major source of revenue is interest and fees on loans, which
totaled $194.7 million for 2006. This represented an
increase of $46.3 million, or 31.18%, over interest and
fees on loans of $148.4 million for 2005. For 2005,
interest and fees on loans increased $33.9 million, or
29.58%, over interest and fees on loans of $114.5 million
for 2004. The increase in interest and fees on loans for 2006
and 2005 reflects increases in the average balance of loans and
increases in interest rates. The yield on loans increased to
6.92% for 2006, compared to 6.52% for 2005 and 6.01% 2004.
Deferred loan origination fees, net of costs, totaled
$10.6 million at December 31, 2006. This represented a
decrease of $863,000 million, or 7.51%, from deferred loan
origination fees, net of costs, of $11.5 million at
December 31, 2005.
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-performing loans at December 31, 2006, 2005, and 2004.
For 2006 and 2005 we had no non-performing loans. For 2004, our
non-performing loans were less than $2,000. As a result, the
interest which would have been collected was de minimus.
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
28
recognized in interest income over the term of the loan in a
manner that approximates the level-yield method. We recognized
loan fee income of $5.8 million for 2006, $8.0 million
for 2005 and $7.4 million for 2004.
Table 3 summarizes loan fee activity for the Bank for the years
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Fees Collected
|
|
$
|
5,261
|
|
|
$
|
10,634
|
|
|
$
|
14,513
|
|
Fees and costs deferred
|
|
|
(2,376
|
)
|
|
|
(7,342
|
)
|
|
|
(11,224
|
)
|
Accretion of deferred fees and
costs
|
|
|
2,933
|
|
|
|
4,711
|
|
|
|
4,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income reported
|
|
$
|
5,818
|
|
|
$
|
8,003
|
|
|
$
|
7,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred net loan origination fees
at end of year
|
|
$
|
10,624
|
|
|
$
|
10,766
|
|
|
$
|
9,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on Investments
The second most important component of interest income is
interest on investments, which totaled $117.6 million for
2006. This represented an increase of $21.9 million, or
22.92%, over interest on investments of $95.7 million for
2005. For 2005, interest on investments increased
$14.5 million, or 17.80%, over interest on investments of
$81.2 million for 2004. The increase in interest on
investments for 2006 and 2005 reflected increases in the average
balance of investments and an increase in interest rates. The
interest rate environment and the investment strategies we
employ directly affect the yield on the investment portfolio. We
continually adjust our investment strategies in response to the
changing interest rate 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 5.06% for 2006,
compared to 4.64% for 2005 and 4.38% for 2004.
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
probable credit losses after net charge-offs have been deduced
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. As such, we
made a provision for credit losses of $3.0 million in 2006.
We did not make a provision for credit losses during 2005 and
2004. We believe the allowance is appropriate. The ratio of the
allowance for credit losses to total loans as of
December 31, 2006 and 2005 was 0.90% and 0.87%,
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 nature of this process requires
considerable judgment. The net recoveries totaled
$1.5 million in 2006, net charge-offs totaled $46,000 in
2005, and net recoveries totaled $1.2 million in 2004. See
Risk Management Credit Risk herein.
29
Other
Operating Income
The components of other operating income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Service charges on deposit accounts
|
|
$
|
13,080
|
|
|
$
|
13,251
|
|
|
$
|
13,663
|
|
Financial Advisory services
|
|
|
7,385
|
|
|
|
6,652
|
|
|
|
6,054
|
|
Bankcard services
|
|
|
2,486
|
|
|
|
2,453
|
|
|
|
1,781
|
|
BOLI Income
|
|
|
3,051
|
|
|
|
2,797
|
|
|
|
2,432
|
|
Other
|
|
|
6,199
|
|
|
|
4,668
|
|
|
|
5,058
|
|
Gain/(Loss) on sale of securities,
net
|
|
|
1,057
|
|
|
|
(46
|
)
|
|
|
5,219
|
|
Impairment charge on investment
securities
|
|
|
|
|
|
|
(2,270
|
)
|
|
|
(6,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income
|
|
$
|
33,258
|
|
|
$
|
27,505
|
|
|
$
|
27,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income, including realized gains on the sales of
investment securities, totaled $33.3 million for 2006. This
represents an increase of $5.8 million, or 20.91%, over
other operating income, including loss on the sales of
investment securities, of $27.5 million for 2005. During
2005, other operating income, including realized losses on the
sales of investment securities, decreased $402,000 or 1.44%,
from other operating income, including realized gains on the
sales of investment securities and real estate, of
$27.9 million for 2004.
Other operating income as a percent of net revenues (net
interest income before loan loss provision plus other operating
income) was 16.67% for 2006, as compared to 13.96% for 2005 and
15.58% for 2004.
Service charges on deposit accounts totaled $13.1 million
in 2006. This represented a decrease of $171,000 or 1.29% from
service charges on deposit accounts of $13.3 million in
2005. Service charges for demand deposit (checking) accounts for
business customers are generally charged based on an analysis of
their activity and include an earnings allowance based on their
average balances. Contributing to the decrease in service
charges on deposit accounts in 2006 was the higher average
demand deposit balances that resulted in a higher account
earnings allowance, which offsets services charges and the
implementation of a revised service charge schedule. Service
charges on deposit accounts in 2005 decreased $412,000, or 3.02%
from service charges on deposit accounts of $13.7 million
in 2004. Service charges on deposit accounts represented 39.33%
of other operating income in 2006, as compared to 48.18% in 2005
and 48.96% in 2004.
Financial Advisory Services Group consists of
Trust Services and Investment Services. 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. Financial Advisory Services
Group generated fees of $7.4 million in 2006. This
represents an increase of $733,000, or 11.02% over fees
generated of $6.7 million in 2005. The increase is
primarily due to an increase in assets under administration of
$3.1 billion. Fees generated by Financial Advisory Services
Group represented 22.20% of other operating income in 2006, as
compared to 24.19% in 2005 and 21.69% in 2004.
Bankcard Services, which provides merchant bankcard services,
generated fees totaling $2.5 million in 2006. This
represented an increase of $33,000, or 1.34% over fees generated
of $2.5 million in 2005. Bankcard fees in 2005 increased by
$672,000, or 37.73% over fees generated of $1.8 million in
2004. The increases are primarily due to growth of the
transaction volumes with our customer base and the controlling
of costs in processing these transactions. Fees generated by
Bankcard represented 7.48% of other operating income in 2006, as
compared to 8.92% in 2005 and 6.38% in 2004.
Bank Owned Life Insurance (BOLI) income totaled
$3.1 million in 2006. This represents an increase of
$254,000, or 9.08%, over BOLI income generated of
$2.8 million for 2005. BOLI income in 2005 increased
$365,000, or 14.99% over BOLI income generated of
$2.4 million for 2004. The increase in BOLI income in 2006
compared with 2005 was due to the purchase of $25.0 million
in BOLI in September 2006.
30
Other fees and income, which includes wire fees, other business
services, international banking fees, check sale, ATM fees,
miscellaneous income, etc, generated fees totaling
$6.2 million in 2006. This represented an increase of
$1.5 million, or 32.80% over other fees and income
generated of $4.7 million in 2005. The increase in 2006 is
primarily due to the gain on sale of the Arcadia and former Data
Center buildings of $726,000 and a legal settlement of $750,000.
Other fees and income in 2005 decreased by $390,000, or 7.72%
from fees generated of $5.1 million in 2004. This decrease
is primarily due to decrease of volume in other banking service
fees.
The impairment charge on investment securities was
$2.3 million in 2005 and $6.3 million in 2004. These
charges were due to two issues of Federal Home Loan Mortgage
Corporation (Freddie Mac) preferred stock which were
determined to be
other-than-temporarily
impaired. These securities pay dividends based on LIBOR and
perform like a bond. Since there was a loss of value that was
deemed to be
other-than-temporary,
we charged $6.3 million against the earnings in the first
quarter of 2004 to adjust for the impairment of the two issues
of preferred stock.
We wrote these same securities down by an additional
$2.3 million at December 31, 2005. Although these
securities reset with LIBOR (one issue resets to the
3-month
LIBOR rate every three months and the other resets to the
12-month
LIBOR every twelve months), the market value of the Freddie Mac
preferred stock has not recovered accordingly.
During the third quarter of 2006, we sold all of our shares of
Freddie Mac Preferred Stock at a net gain of $1.1 million
based on our book values after write downs of $8.6 million
in prior periods.
The sales of securities generated a realized gain of
$1.1 million in 2006 and a realized loss of $46,000 in 2005
and a realized gain of $5.2 million in 2004. The
gains/losses on sales of securities in prior years were
primarily due to repositioning of the investment portfolio to
take advantage of the current interest rate cycle.
Other
Operating Expenses
The components of other operating expenses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Salaries and employee benefits
|
|
$
|
50,509
|
|
|
$
|
51,535
|
|
|
$
|
47,292
|
|
Occupancy
|
|
|
8,572
|
|
|
|
8,327
|
|
|
|
7,891
|
|
Equipment
|
|
|
7,025
|
|
|
|
7,578
|
|
|
|
8,003
|
|
Stationery and supplies
|
|
|
6,492
|
|
|
|
5,569
|
|
|
|
4,987
|
|
Professional services
|
|
|
5,896
|
|
|
|
4,268
|
|
|
|
4,776
|
|
Promotion
|
|
|
6,251
|
|
|
|
5,835
|
|
|
|
5,148
|
|
Amortization of Intangibles
|
|
|
2,353
|
|
|
|
2,061
|
|
|
|
1,185
|
|
Other
|
|
|
8,726
|
|
|
|
4,880
|
|
|
|
10,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
$
|
95,824
|
|
|
$
|
90,053
|
|
|
$
|
89,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses totaled $95.8 million for 2006.
This represents an increase of $5.8 million, or 6.41%, over
other operating expenses of $90.1 million for 2005. During
2005, other operating expenses increased $330,000, or 0.37%,
over other operating expenses of $89.7 million for 2004.
For the most part, other operating expenses reflect the direct
expenses and related administrative expenses associated with
staffing, maintaining, promoting, and operating branch
facilities. Our ability to control other operating expenses in
relation to asset growth can be measured in terms of other
operating expenses as a percentage of average assets. Operating
expenses measured as a percentage of average assets decreased to
1.66% for 2006, compared to 1.85% for 2005, and 2.14% for 2004.
The decrease in the ratio indicates that management is
controlling greater levels of assets with proportionately
smaller operating expenses, an indication of operating
efficiency.
31
Our ability to control other operating expenses in relation to
the level of net revenue (net interest income plus other
operating income) is measured by the efficiency ratio and
indicates the percentage of net revenue that is used to cover
expenses. For 2006, the efficiency ratio was 48.04%, compared to
45.71% for 2005 and 50.10% for 2004.
Salaries and related expenses comprise the greatest portion of
other operating expenses. Salaries and related expenses totaled
$50.5 million for 2006. This represented a decrease of
$1.0 million, or 1.99%, from salaries and related expenses
of $51.5 million for 2005. Salary and related expenses
increased $4.2 million, or 8.97%, over salaries and related
expenses of $47.3 million for 2004. At December 31,
2006, we employed 752 persons, 522 on a full-time and 230 on a
part-time basis, this compares to 719 persons, 493 on a
full-time and 226 on a part-time basis at December 31,
2005, and 674 persons, 472 on a full-time and 202 on a part-time
basis at December 31, 2004. The increases primarily
resulted from increased staffing levels as a result the overall
growth of the Company. Salaries and related expenses as a
percent of average assets decreased to 0.88% for 2006, compared
to 1.23% for 2005, and 1.13% for 2004. The decrease in 2006 was
primarily due to higher deferred loan origination costs. The
Company adopted the provisions of SFAS 123R on January 1,
2006. For further information, see Notes 1 and 15 of the
Notes to the Consolidated Financial Statements included in this
report.
Stationery and supplies expense totaled $6.5 million for
2006, compared to $5.6 million in 2005 and
$5.0 million in 2004. The increase was primarily due to the
overall internal growth of the business.
Professional services totaled $5.8 million for 2006. This
represented an increase of $1.6 million or 38.13%, over
expense of $4.3 million for 2005. The increase was
primarily due to professional expenses incurred for recruitment
of new associates and legal fees due to outstanding litigation.
For 2005, professional services decreased $507,000, or 10.62%,
from expense of $4.8 million for 2004.
Promotion expense totaled $6.3 million for 2006. This
represented an increase of $416,000, or 7.14%, over expense of
$5.8 million for 2005. Promotion expense increased in 2005
by $687,000, or 13.34%, over expense of $5.1 million for
2004. The increase in promotional expenses was primarily
associated with increases in advertising expense as we expand
our market area.
Other operating expenses totaled $8.7 million for 2006.
This represented an increase of $3.8 million, or 78.81%,
over expense of $4.9 million for 2005. The increase in 2006
was primarily due to the reversal of our prior accrual for the
settlement of a robbery loss of $2.6 in first quarter of 2005
and increases in third-party data processing and loan expenses
during 2006. Other operating expenses decreased for 2005 by
$5.6 million, or 53.26%, from an expense of
$10.4 million for 2004. The decrease in 2005 was primarily
due to the estimated robbery loss of $2.3 million in 2004
and the income from the settlement of robbery loss of $2.6 in
first quarter of 2005.
Results
of Segment Operations
The following table summarizes consolidated pre-tax income by
segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Business Financial Centers
|
|
$
|
135,072
|
|
|
$
|
105,434
|
|
|
$
|
73,565
|
|
Treasury
|
|
|
6,103
|
|
|
|
19,306
|
|
|
|
41,690
|
|
Other
|
|
|
(37,545
|
)
|
|
|
(17,776
|
)
|
|
|
(25,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Pre-tax Income
|
|
$
|
103,630
|
|
|
$
|
106,964
|
|
|
$
|
89,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
Financial Centers
The Business Financial Centers reported pre-tax income of
$135.1 million for the year ended December 31, 2006.
This represented an increase of 29.6 million, or 28.11%,
over pre-tax income of $105.4 million for the year ended
December 31, 2005. Pre-tax income for 2005 increased
$28.9 million to $105.4 million, or 37.71%, over
pre-tax income of $76.6 million for 2004.
32
Treasury
The Treasury department reported pre-tax income of
$6.1 million for the year ended December 31, 2006.
This represented a decrease $13.2 million, or 68.4%, from
pre-tax income of $19.3 million for the year ended
December 31, 2005. Pre-tax income for 2005 decreased
$22.4 million to $19.3 million, or 53.69%, from
pre-tax income of $41.7 million for 2004.
Other
The Companys administration and other operating department
reported pre-tax loss of $37.5 million for the year ended
December 31, 2006. This represented an increase of
$19.8 million, or 111.2%, over pre-tax loss of
$17.8 million for the year ended December 31, 2005.
Pre-tax loss for 2005 decreased $8.1 million to
$17.8 million, or 31.3%, from pre-tax loss of
$25.9 million for 2004.
Income
Taxes
Our effective tax rate for 2006 was 30.61%, compared to 33.98%
for 2005, and 31.20% for 2004. The effective tax rates are below
the statutory combined Federal and State tax rate of 42.0% as a
result of tax preference income from certain investments for
each period. The majority of tax preference income is derived
from municipal securities and leases.
Subsequent
Event
On February 8, 2007, we announced the execution of a
definitive merger agreement to acquire First Coastal Bancshares
and First Coastal Bank (First Coastal). First Coastal is
headquartered in Manhattan Beach, California and has four
offices. These offices will become offices of Citizens Business
Bank following completion of the merger. As of December 31,
2006, First Coastal has $238 million in assets,
$157 million in loans, and $190 million in deposits.
The purchase price is $35 million. One half of the purchase
price is payable in cash and the balance will be paid through
the issuance of CVB common stock.
On February 21, 2007, the Board of Directors of the Company
approved the repurchase of an additional 2.0 million shares
of the Company common stock. The Company has 775,163 shares
left to be repurchased from its October 2001 authorization. The
total number of shares to be repurchased as of February 21,
2007 was 2,775,163 shares.
ANALYSIS
OF FINANCIAL CONDITION
The Company reported total assets of $6.1 billion at
December 31, 2006. This represented an increase of
$671.3 million, or 12.38%, over total assets of
$5.4 billion at December 31, 2005.
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, 2006, 2005, and 2004,
and the maturity distribution of the investment securities
portfolio at December 31, 2006. At December 31, 2006,
we reported total investment securities of $2.58 billion.
This represents an increase of $213.0 million, or 8.99%,
over total investment securities of $2.37 billion at
December 31, 2005.
Under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, securities held
as
available-for-sale
are reported at current market value for financial reporting
purposes. The related unrealized gain or loss, net of income
taxes, is recorded in stockholders equity. At
December 31, 2006, securities held as
available-for-sale
had a fair market value of $2.58 billion, representing
100.00% of total investment securities with an amortized cost of
$2.61 billion. At December 31, 2006, the net
unrealized holding loss on securities
available-for-sale
was $22.8 million that resulted in accumulated other
comprehensive loss of $13.2 million (net of
$9.6 million in deferred taxes).
33
The composition of the investment portfolio at December 31,
2006 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
|
|
|
2006
|
|
|
Yield
|
|
|
Total
|
|
|
U.S. Treasury Obligations
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
970
|
|
|
|
4.83
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
|
$
|
970
|
|
|
|
4.83
|
%
|
|
|
0.04
|
%
|
Government agency and
government-sponsored enterprises
|
|
|
9,032
|
|
|
|
3.14
|
%
|
|
|
59,268
|
|
|
|
4.90
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
$
|
68,300
|
|
|
|
4.67
|
%
|
|
|
2.65
|
%
|
Mortgage-backed securities
|
|
|
1,115
|
|
|
|
4.91
|
%
|
|
|
893,881
|
|
|
|
4.40
|
%
|
|
|
182,374
|
|
|
|
5.24
|
%
|
|
|
480
|
|
|
|
5.81
|
%
|
|
$
|
1,077,850
|
|
|
|
4.54
|
%
|
|
|
41.77
|
%
|
CMO/REMICs
|
|
|
14,591
|
|
|
|
2.46
|
%
|
|
|
754,910
|
|
|
|
4.82
|
%
|
|
|
17,770
|
|
|
|
5.50
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
$
|
787,271
|
|
|
|
4.79
|
%
|
|
|
30.51
|
%
|
Municipal bonds(1)
|
|
|
8,771
|
|
|
|
4.38
|
%
|
|
|
187,521
|
|
|
|
5.26
|
%
|
|
|
207,782
|
|
|
|
4.23
|
%
|
|
|
241,711
|
|
|
|
4.13
|
%
|
|
$
|
645,785
|
|
|
|
4.48
|
%
|
|
|
25.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
33,509
|
|
|
|
3.22
|
%
|
|
$
|
1,896,550
|
|
|
|
4.66
|
%
|
|
$
|
407,926
|
|
|
|
4.74
|
%
|
|
$
|
242,191
|
|
|
|
4.13
|
%
|
|
$
|
2,580,176
|
|
|
|
4.61
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The weighted average yield is not tax-equivalent. The
tax-equivalent yield is 5.90%. |
The above table excludes securities without stated maturities.
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 mortgages-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.
The weighted-average yield (TE) on the investment portfolio at
December 31, 2006 was 4.61% with a weighted-average life of
4.7 years. This compares to a yield of 4.46% at
December 31, 2005 with a weighted-average life of
4.0 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.
Composition
of the Fair Value of Securities
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Amounts in thousands)
|
|
|
U.S. Treasury Obligations
|
|
$
|
970
|
|
|
|
0.04
|
%
|
|
$
|
497
|
|
|
|
0.02
|
%
|
|
$
|
496
|
|
|
|
0.02
|
%
|
Government agency and government-
sponsored enterprises
|
|
|
68,300
|
|
|
|
2.64
|
%
|
|
|
54,089
|
|
|
|
2.28
|
%
|
|
|
18,757
|
|
|
|
0.90
|
%
|
Mortgage-backed securities
|
|
|
1,077,851
|
|
|
|
41.73
|
%
|
|
|
1,184,608
|
|
|
|
49.99
|
%
|
|
|
1,360,334
|
|
|
|
65.25
|
%
|
CMO/REMICs
|
|
|
787,270
|
|
|
|
30.48
|
%
|
|
|
609,912
|
|
|
|
25.74
|
%
|
|
|
345,627
|
|
|
|
16.58
|
%
|
Municipal bonds
|
|
|
645,785
|
|
|
|
25.00
|
%
|
|
|
463,900
|
|
|
|
19.57
|
%
|
|
|
306,577
|
|
|
|
14.70
|
%
|
FHLMC Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
56,070
|
|
|
|
2.37
|
%
|
|
|
52,705
|
|
|
|
2.53
|
%
|
Other securities
|
|
|
2,726
|
|
|
|
0.11
|
%
|
|
|
816
|
|
|
|
0.03
|
%
|
|
|
518
|
|
|
|
0.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$
|
2,582,902
|
|
|
|
100.00
|
%
|
|
$
|
2,369,892
|
|
|
|
100.00
|
%
|
|
$
|
2,085,014
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 97.09% of securities issued by the
U.S. government or U.S. government agencies guarantee
payment of principal and interest.
34
Composition
of the Fair Value and Gross Unrealized Losses of Securities
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Holding
|
|
|
|
|
|
Holding
|
|
|
|
|
|
Holding
|
|
Description of Securities
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(Amounts in thousands)
|
|
|
U.S. Treasury Obligations
|
|
$
|
970
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
970
|
|
|
$
|
1
|
|
Government agency &
government- sponsored enterprises
|
|
|
12,040
|
|
|
|
45
|
|
|
|
41,101
|
|
|
|
457
|
|
|
|
53,141
|
|
|
|
502
|
|
Mortgage-backed securities
|
|
|
74,274
|
|
|
|
388
|
|
|
|
880,162
|
|
|
|
27,175
|
|
|
|
954,436
|
|
|
|
27,563
|
|
CMO/REMICs
|
|
|
53,681
|
|
|
|
241
|
|
|
|
454,693
|
|
|
|
6,386
|
|
|
|
508,374
|
|
|
|
6,627
|
|
Municipal bonds
|
|
|
276,512
|
|
|
|
3,474
|
|
|
|
60,065
|
|
|
|
1,382
|
|
|
|
336,577
|
|
|
|
4,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
417,477
|
|
|
$
|
4,149
|
|
|
$
|
1,436,021
|
|
|
$
|
35,400
|
|
|
$
|
1,853,498
|
|
|
$
|
39,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Holding
|
|
|
|
|
|
Holding
|
|
|
|
|
|
Holding
|
|
Description of Securities
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(Amounts in thousands)
|
|
|
U.S. Treasury Obligations
|
|
$
|
497
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
497
|
|
|
$
|
1
|
|
Government agency &
government- sponsored enterprises
|
|
|
2,972
|
|
|
|
28
|
|
|
|
18,463
|
|
|
|
560
|
|
|
|
21,435
|
|
|
|
588
|
|
Mortgage-backed securities
|
|
|
459,242
|
|
|
|
8,385
|
|
|
|
634,731
|
|
|
|
20,850
|
|
|
|
1,093,973
|
|
|
|
29,235
|
|
CMO/REMICs
|
|
|
444,431
|
|
|
|
5,198
|
|
|
|
119,603
|
|
|
|
2,158
|
|
|
|
564,034
|
|
|
|
7,356
|
|
Municipal bonds
|
|
|
162,193
|
|
|
|
3,624
|
|
|
|
8,737
|
|
|
|
374
|
|
|
|
170,930
|
|
|
|
3,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,069,335
|
|
|
$
|
17,236
|
|
|
$
|
781,534
|
|
|
$
|
23,942
|
|
|
$
|
1,850,869
|
|
|
$
|
41,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above shows 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, 2006 and 2005. We have reviewed individual
securities classified as
available-for-sale
to determine whether a decline in fair value below the amortized
cost basis is
other-than-temporary.
If it is probable that we will be unable to collect all amounts
due according to the contractual terms of a debt security not
impaired at acquisition, an
other-than-temporary
impairment shall be considered to have occurred. If an
other-than-temporary
impairment occurs the cost basis of the security would be
written down to its fair value as a new cost basis and the write
down would be accounted for as a realized loss. A summary of our
analysis of these securities and the unrealized losses is
described more fully in Note 2 Investment
Securities in the notes to the consolidated financial statements.
Loans
At December 31, 2006, the Company reported total loans, net
of deferred loan fees, of $3.07 billion. This represents an
increase of $406.3 million, or 15.25%, over total loans of
$2.66 billion at December 31, 2005.
Table 4 presents the distribution of our loan portfolio at the
dates indicated.
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Amounts in thousands)
|
|
|
Commercial and Industrial(1)
|
|
$
|
1,050,189
|
|
|
$
|
980,602
|
|
|
$
|
905,139
|
|
|
$
|
856,373
|
|
|
$
|
667,316
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
299,112
|
|
|
|
270,436
|
|
|
|
235,849
|
|
|
|
156,287
|
|
|
|
105,486
|
|
Mortgage(1)
|
|
|
1,141,322
|
|
|
|
877,481
|
|
|
|
553,078
|
|
|
|
388,626
|
|
|
|
396,707
|
|
Consumer, net of unearned discount
|
|
|
54,125
|
|
|
|
59,801
|
|
|
|
51,187
|
|
|
|
44,645
|
|
|
|
26,750
|
|
Municipal Lease Finance Receivables
|
|
|
126,393
|
|
|
|
108,832
|
|
|
|
71,675
|
|
|
|
37,866
|
|
|
|
17,852
|
|
Auto and equipment leases
|
|
|
51,420
|
|
|
|
39,442
|
|
|
|
34,753
|
|
|
|
28,497
|
|
|
|
21,193
|
|
Dairy and Livestock
|
|
|
358,259
|
|
|
|
338,035
|
|
|
|
297,659
|
|
|
|
255,039
|
|
|
|
214,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans
|
|
|
3,080,820
|
|
|
|
2,674,629
|
|
|
|
2,149,340
|
|
|
|
1,767,333
|
|
|
|
1,450,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses
|
|
|
27,737
|
|
|
|
23,204
|
|
|
|
22,494
|
|
|
|
21,282
|
|
|
|
21,666
|
|
Deferred Loan Fees
|
|
|
10,624
|
|
|
|
10,765
|
|
|
|
9,266
|
|
|
|
7,392
|
|
|
|
4,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Loans
|
|
$
|
3,042,459
|
|
|
$
|
2,640,660
|
|
|
$
|
2,117,580
|
|
|
$
|
1,738,659
|
|
|
$
|
1,424,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in Commercial and Industrial and Real Estate Mortgage
loans are loans totaling $115.0 million for 2006,
$102.5 million for 2005, $94.9 million for 2004,
$79.8 million for 2003, and $70.9 million for 2002
that represent loans to agricultural concerns for commercial or
real estate purposes. |
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, commercial property and single
family and multifamily residences. Consumer loans include
installment loans to consumers as well as home equity loans and
other loans secured by junior liens on real property. Municipal
lease finance receivables are leases to municipalities.
Agribusiness loans are loans to finance the operating needs of
wholesale dairy farm operations, cattle feeders, livestock
raisers, and farmers.
Table 5 provides the maturity distribution for commercial and
industrial loans, real estate construction loans and
agribusiness loans as of December 31, 2006. 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.
36
TABLE
5 Loan Maturities and Interest Rate Category at
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One
|
|
|
|
|
|
|
|
|
|
|
|
|
But
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Within
|
|
|
After
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
|
Types of Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial(1)
|
|
$
|
202,643
|
|
|
$
|
323,555
|
|
|
$
|
1,364,776
|
|
|
$
|
1,890,974
|
|
Construction
|
|
|
273,695
|
|
|
|
3,307
|
|
|
|
22,110
|
|
|
|
299,112
|
|
Agribusiness
|
|
|
240,028
|
|
|
|
117,974
|
|
|
|
257
|
|
|
|
358,259
|
|
Other
|
|
|
10,604
|
|
|
|
90,567
|
|
|
|
431,304
|
|
|
|
532,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
726,970
|
|
|
$
|
535,403
|
|
|
$
|
1,818,447
|
|
|
$
|
3,080,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loans based upon:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rates
|
|
$
|
23,702
|
|
|
$
|
206,207
|
|
|
$
|
956,395
|
|
|
$
|
1,186,304
|
|
Floating or adjustable rates
|
|
|
703,268
|
|
|
|
329,196
|
|
|
|
862,052
|
|
|
|
1,894,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
726,970
|
|
|
$
|
535,403
|
|
|
$
|
1,818,447
|
|
|
$
|
3,080,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes approximately $840.8 million in fixed rate
commercial real estate loans. These loans are classified as real
estate mortgage loans for the financial statements, but are
accounted for as commercial and industrial loans on the
Companys books. |
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 California, our real
estate loan collateral is concentrated in this region. At
December 31, 2006, substantially all of our loans secured
by real estate were collateralized by properties located in
Southern California. This concentration is considered when
determining the adequacy of our allowance for credit losses.
Non-performing
Assets
Non-performing assets include non-performing loans, nonaccrual
loans, loans 90 days or more past due and still accruing
interest, and restructured loans (see Risk
Management Credit Risk herein). We had no
non-performing loans at December 31, 2006 and 2005. In
addition, there were no loans classified as impaired at
December 31, 2006 and 2005. 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, 2006 and 2005, we had no loans on which
interest was no longer accruing (nonaccrual). Loans are put on
nonaccrual after 90 days of non-performance. They can also
be put on nonaccrual if, in the judgment of management, the
collectability is doubtful. All accrued and unpaid interest is
reversed out. The Bank allocates specific reserves which are
included in the allowance for credit losses for potential losses
on nonaccrual loans.
A restructured loan is a loan on which terms or conditions have
been modified due to the deterioration of the borrowers
financial condition. At December 31, 2006, and 2005 we had
no loans that were classified as restructured.
Table 6 provides information on non-performing loans and other
real estate owned at the dates indicated.
37
TABLE
6 Non-Performing Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Amounts in thousands)
|
|
|
Nonaccrual loans
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
548
|
|
|
$
|
190
|
|
Loans past due 90 days or more
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
634
|
|
Restructured loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned (OREO)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2
|
|
|
$
|
548
|
|
|
$
|
824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of nonperforming assets
to total loans outstanding & OREO
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.03
|
%
|
|
|
0.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of nonperforming assets
to total assets
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.01
|
%
|
|
|
0.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Except for non-performing loans as set forth in Table 6 and
loans disclosed as impaired, (see Risk
Management Credit Risk herein) we are not
aware of any loans as of December 31, 2006 for which known
credit problems of the borrower would cause serious doubts as to
the ability of such borrowers to comply with their present loan
repayment terms, or any known events that would result in the
loan being designated as non-performing at some future date. We
cannot, however, predict the extent to which the deterioration
in general economic conditions, real estate values, increase in
general rates of interest, change in the financial conditions or
business of a borrower may adversely affect a borrowers
ability to pay.
At December 31, 2006, and 2005 the Company held no
properties as other real estate owned.
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 $3.41 billion at
December 31, 2006. This represented a decrease of
$17.2 million, or 0.50%, from total deposits of
$3.42 billion at December 31, 2005.
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 40.02% of
total deposits as of December 31, 2006 and 43.53% of total
deposits as of December 31, 2005. Non-interest-bearing
demand deposits totaled $1.36 billion at December 31,
2006. This represented a decrease of $127.2 million, or
8.53%, from total non-interest-bearing demand deposits of
$1.49 billion at December 31, 2005.
Table 7 provides the remaining maturities of large denomination
($100,000 or more) time deposits, including public funds, at
December 31, 2006.
Table
7 Maturity Distribution of Large Denomination Time
Deposits
|
|
|
|
|
|
|
(Amount in thousands)
|
|
|
3 months or less
|
|
$
|
557,091
|
|
Over 3 months through
6 months
|
|
|
139,924
|
|
Over 6 months through
12 months
|
|
|
11,012
|
|
Over 12 months
|
|
|
25,628
|
|
|
|
|
|
|
Total
|
|
$
|
733,655
|
|
|
|
|
|
|
38
Other
Borrowed Funds
To achieve the desired growth in earning assets we fund that
growth through generating a source 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 38.65% at December 31, 2006, as compared to
30.50% at December 31, 2005.
During 2006, 2005 and 2004, we entered into short-term borrowing
agreements with the Federal Home Loan Bank (FHLB). We had
outstanding balances of $887.9 million, $830.0 million
and $226.0 million under these agreements at
December 31, 2006, 2005 and 2004, respectively. FHLB held
certain investment securities of the Bank as collateral for
those borrowings. On December 31, 2006, 2005 and 2004, we
entered into an overnight agreement with certain financial
institutions and our customers to borrow an aggregate of
$301.4 million, $86.0 million and $130.0 million,
respectively. We maintained cash deposits with the financial
institutions as collateral for these borrowings. The increase
was primarily due to funding for the growth of earning assets.
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. 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, 2006, total funds borrowed
under these agreements were $344.4 million. These amounts
are included in short-term borrowings on the Companys
consolidated balance sheet.
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,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount outstanding
|
|
$
|
301,350
|
|
|
$
|
887,900
|
|
|
$
|
1,189,250
|
|
Weighted-average interest rate
|
|
|
5.08
|
%
|
|
|
4.28
|
%
|
|
|
4.49
|
%
|
For the year ended
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Highest amount at month-end
|
|
$
|
301,350
|
|
|
$
|
1,677,000
|
|
|
$
|
1,978,350
|
|
Daily-average amount outstanding
|
|
$
|
101,756
|
|
|
$
|
1,295,704
|
|
|
$
|
1,397,460
|
|
Weighted-average interest rate
|
|
|
5.06
|
%
|
|
|
3.90
|
%
|
|
|
3.99
|
%
|
At December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount outstanding
|
|
$
|
86,000
|
|
|
$
|
830,000
|
|
|
$
|
916,000
|
|
Weighted-average interest rate
|
|
|
4.14
|
%
|
|
|
3.35
|
%
|
|
|
3.42
|
%
|
For the year ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Highest amount at month-end
|
|
$
|
107,000
|
|
|
$
|
830,000
|
|
|
$
|
937,000
|
|
Daily-average amount outstanding
|
|
$
|
71,484
|
|
|
$
|
778,137
|
|
|
$
|
849,621
|
|
Weighted-average interest rate
|
|
|
3.21
|
%
|
|
|
2.97
|
%
|
|
|
2.99
|
%
|
At December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount outstanding
|
|
$
|
130,000
|
|
|
$
|
226,000
|
|
|
$
|
356,000
|
|
Weighted-average interest rate
|
|
|
2.27
|
%
|
|
|
2.14
|
%
|
|
|
2.19
|
%
|
For the year ended
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Highest amount at month-end
|
|
$
|
130,000
|
|
|
$
|
447,000
|
|
|
$
|
577,000
|
|
Daily-average amount outstanding
|
|
$
|
84,586
|
|
|
$
|
328,156
|
|
|
$
|
412,742
|
|
Weighted-average interest rate
|
|
|
1.35
|
%
|
|
|
1.75
|
%
|
|
|
1.67
|
%
|
During 2006 and 2005, we entered into long-term borrowing
agreements with the FHLB. We had outstanding balances of
$950.0 million and $580.0 million under these
agreements at December 31, 2006 and 2005, with
weighted-average interest rates of 5.3% and 3.6% in 2006 and
2005 respectively. We had an average outstanding
39
balance of $319.0 million and $493.5 million as of
December 31, 2006 and 2005, respectively. The FHLB held
certain investment securities of the Bank as collateral for
those borrowings.
At December 31, 2006, borrowed funds totaled
$2.1 billion. This represented an increase of
$644.1 million, or 42.87%, over total borrowed funds of
$1.50 billion at December 31, 2005. For 2005, total
borrowed funds increased $310.0 million, or 26.14%, over a
balance of $1.19 billion at December 31, 2004. The
maximum outstanding at any month-end was $2.08 billion
during 2006, $1.50 billion during 2005, and
$1.19 billion during 2004.
At December 31, 2006, junior subordinated debentures
totaled $108.3 million, an increase of $25.8 million,
or 31.25%, over junior subordinated debentures of
$82.5 million at December 31, 2005. The increase was
due to the issuance of an additional $25.8 million in
junior subordinated debentures in 2006.
Aggregate
Contractual Obligations
The following table summarizes the aggregate contractual
obligations as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity by Period
|
|
|
|
|
|
|
Less Than
|
|
|
One Year
|
|
|
Four Year
|
|
|
After
|
|
|
|
|
|
|
One
|
|
|
to Three
|
|
|
to Five
|
|
|
Five
|
|
|
|
Total
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
|
(Amounts in thousands)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
3,406,808
|
|
|
$
|
3,375,399
|
|
|
$
|
18,411
|
|
|
$
|
9,545
|
|
|
$
|
3,453
|
|
FHLB and Other Borrowings
|
|
|
2,139,250
|
|
|
|
1,189,250
|
|
|
|
850,000
|
|
|
|
100,000
|
|
|
|
|
|
Junior Subordinated Debentures
|
|
|
108,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,250
|
|
Deferred Compensation
|
|
|
7,946
|
|
|
|
751
|
|
|
|
1,582
|
|
|
|
1,606
|
|
|
|
4,007
|
|
Operating Leases
|
|
|
18,489
|
|
|
|
4,580
|
|
|
|
6,303
|
|
|
|
2,985
|
|
|
|
4,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,680,730
|
|
|
$
|
4,569,967
|
|
|
$
|
876,296
|
|
|
$
|
114,136
|
|
|
$
|
120,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits represent non-interest bearing, money market, savings,
NOW, certificates of deposits, brokered and all other deposits
held by the Company.
FHLB and Other 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, Treasury, Tax and Loan
amounts.
Junior subordinated debentures represent the amounts that are
due from the Company to CVB Statutory Trust I, CVB
Statutory Trust II & CVB Statutory Trust III.
The debentures have the same maturity as the
Trust Preferred Securities. CVB Statutory Trust I and
II, which mature in 2033 and become callable in whole or in part
in 2008. CVB Statutory Trust III which matures in 2036 and
becomes callable in whole or in part in 2011.
Deferred compensation represents the amounts that are due to
former employees salary continuation agreements as a
result of acquisitions.
Operating leases represent the total minimum lease payments
under noncancelable operating leases.
Off-Balance
Sheet Arrangements
At December 31, 2006, we had commitments to extend credit
of approximately $680.6 million, obligations under letters
of credit of $64.8 million and available lines of credit
totaling $1.31 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 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 it does for on-balance
sheet instruments, which consist of evaluating customers
creditworthiness individually.
40
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, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity by Period
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Four Year
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
to Three
|
|
|
to Five
|
|
|
After Five
|
|
|
|
Total
|
|
|
One Year
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
|
(Amounts in thousands)
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitment to extend credit
|
|
|
680,575
|
|
|
|
244,383
|
|
|
|
38,243
|
|
|
|
51,512
|
|
|
|
346,437
|
|
Obligations under letters of credit
|
|
|
64,810
|
|
|
|
47,776
|
|
|
|
17,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
745,385
|
|
|
$
|
292,159
|
|
|
$
|
55,277
|
|
|
$
|
51,512
|
|
|
$
|
346,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
2006, the Banks loan to deposit ratio averaged 79.99%,
compared to an average ratio of 74.35% for 2005 and 68.99% for
2004.
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. At December 31, 2006,
approximately $128.5 million of the Banks equity was
unrestricted and available to be paid as dividends to CVB.
Management of CVB believes that such restrictions will not have
an impact on the ability of CVB to meet its ongoing cash
obligations. As of December 31, 2006, 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
$70.9 million for 2006, $89.1 million for 2005, and
$75.7 million for 2004. The decrease in 2006 compared to
2005 was primarily the result of the decrease in net interest
income as a result of the higher yields on interest-bearing
deposits and borrowings.
Cash used in investing activities totaled $680.7 million
for 2006, compared to $761.4 million for 2005 and
$695.4 million for 2004. The funds used for investing
activities primarily represented increases in investments and
loans for each year reported. Funds obtained from investing
activities for each year were obtained primarily from the sale
and maturity of investment securities.
Funds provided by financing activities totaled
$626.0 million for 2006, compared to $718.0 million
for 2005 and $592.1 million for 2004. The decrease in 2006
compared to 2005 was primarily the result of a decrease in
transaction deposits and repayment of borrowings, offset by
advances from FHLB, issuance of junior subordinated debt, and
repurchase agreements.
At December 31, 2006, cash and cash equivalents totaled
$146.4 million. This represented an increase of $16.3, or
12.50%, over a total of $130.1 million at December 31,
2005.
41
Capital
Resources
Historically, the primary source of capital for the Company 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.
Total stockholders equity was $389.3 million at
December 31, 2006. This represented an increase of
$46.5 million, or 13.55%, over total stockholders
equity of $342.9 million at December 31, 2005. For
2005, total stockholders equity increased
$25.4 million, or 8.0%, over total stockholders
equity of $317.5 million at December 31, 2005.
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, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Actual
|
|
|
Required
|
|
|
Excess
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(Amounts in thousands)
|
|
|
Leverage ratio
|
|
$
|
469,960
|
|
|
|
7.8
|
%
|
|
$
|
240,389
|
|
|
|
4.0
|
%
|
|
$
|
229,571
|
|
|
|
3.8
|
%
|
Tier 1 risk-based ratio
|
|
|
469,960
|
|
|
|
12.3
|
%
|
|
|
153,081
|
|
|
|
4.0
|
%
|
|
|
316,879
|
|
|
|
8.3
|
%
|
Total risk-based ratio
|
|
|
499,430
|
|
|
|
13.1
|
%
|
|
|
306,164
|
|
|
|
8.0
|
%
|
|
|
193,266
|
|
|
|
5.1
|
%
|
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, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Actual
|
|
|
Required
|
|
|
Excess
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio
|
|
$
|
422,946
|
|
|
|
7.1
|
%
|
|
$
|
239,969
|
|
|
|
4.0
|
%
|
|
$
|
182,977
|
|
|
|
3.1
|
%
|
Tier 1 risk-based ratio
|
|
|
422,946
|
|
|
|
11.1
|
%
|
|
|
152,826
|
|
|
|
4.0
|
%
|
|
|
270,120
|
|
|
|
7.1
|
%
|
Total risk-based ratio
|
|
|
452,416
|
|
|
|
11.8
|
%
|
|
|
305,686
|
|
|
|
8.0
|
%
|
|
|
146,730
|
|
|
|
3.8
|
%
|
For purposes of calculating capital ratios, bank regulators have
excluded adjustments to stockholders equity that result
from
mark-to-market
adjustments of
available-for-sale
investment securities. At December 31, 2006, we had an
unrealized loss on investment securities net of taxes of
$13.2 million, compared to an unrealized loss net of taxes
of $13.4 million at December 31, 2005.
Bank regulators have established minimum capital adequacy
guidelines requiring that qualifying capital be at least 8.0% of
risk-based assets, of which at least 4.0% must be Tier I
capital (primarily stockholders equity). These ratios
represent minimum capital standards. Under Prompt Corrective
Action rules, certain levels of capital adequacy have been
established for financial institutions. Depending on an
institutions capital ratios, the established levels can
result in restrictions or limits on permissible activities. In
addition to the aforementioned requirements, the Company and
Bank must also meet minimum leverage ratio standards. The
leverage ratio is calculated as Tier I capital divided by
the most recent quarters average total assets.
The highest level for capital adequacy under Prompt Corrective
Action is Well Capitalized. To qualify for this
level of capital adequacy an institution must maintain a total
risk-based capital ratio of at least 10.00% and a Tier I
risk-based capital ratio of at least 6.00%.
During 2006, the Board of Directors of the Company declared
quarterly cash dividends that totaled $0.355 per share for
the full year. We do not believe that the continued payment of
cash dividends will impact the ability of the Company to
continue to exceed the current minimum capital standards.
In October 2001, the Companys Board of Directors
authorized the repurchase of up to 2.0 million shares
(without adjustment to reflect stock dividends and splits) of
our common stock. During 2006, we did not repurchase any shares
of common stock. During 2005 and 2004, we repurchased 676,033
and 99,504, shares of common stock, for the total price of
$12.3 million and $2.0 million, respectively. As of
December 31, 2006, 875,163 shares are available to be
repurchased in the future under this repurchase plan.
42
RISK
MANAGEMENT
We have adopted a Risk Management Plan and a Risk Management
Committee of the Board 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 the Company
may expose the Bank to one or more of these risks.
Credit
Risk
Credit risk is defined as the risk to earnings or capital
arising from an obligors failure to meet the terms of any
contract or otherwise fail to perform as agreed. Credit risk is
found in all activities where success depends on counter party,
issuer, or borrower performance. Credit risk arises through the
extension of loans and leases, certain securities, and letters
of credit.
Credit risk in the investment portfolio and correspondent bank
accounts is addressed through defined limits in our policy
statements. In addition, certain securities carry insurance to
enhance credit quality of the bond. Limitations on industry
concentration, aggregate customer borrowings, geographic
boundaries and standards on loan quality also are designed to
reduce loan credit risk. Senior Management, Directors
Committees, and the Board of Directors are provided with
information to appropriately identify, measure, control and
monitor the credit risk of the Bank.
Implicit in lending activities is the risk that losses will
occur and that the amount of such losses will vary over time.
Consequently, we maintain an allowance for credit losses by
charging a provision for credit losses to earnings. Loans
determined to be losses are charged against the allowance for
credit losses. Our allowance for credit losses is maintained at
a level considered by us to be adequate to provide for estimated
probable losses inherent in the existing portfolio, and unused
commitments to provide financing, including commitments under
commercial and standby letters of credit.
The allowance for credit losses is based upon estimates of
probable losses inherent in the loan and lease portfolio. The
nature of the process by which we determine the appropriate
allowance for credit losses requires the exercise of
considerable judgment. The amount actually observed in respect
of these losses can vary significantly from the estimated
amounts. We employ a systematic methodology that is intended to
reduce the differences between estimated and actual losses.
Our methodology for assessing the appropriateness of the
allowance is conducted on a regular basis and considers all
loans. The systematic methodology consists of two major elements.
The first major element includes a detailed analysis of the loan
portfolio in two phases. The first phase is conducted in
accordance with SFAS No. 114, Accounting by
Creditors for the Impairment of a Loan, as amended by
SFAS No. 118, Accounting by Creditors for
Impairment of a Loan Income Recognition and
Disclosures. Individual loans are reviewed to identify
loans for impairment. A loan is impaired when principal and
interest are deemed uncollectible in accordance with the
original contractual terms of the loan. Impairment is measured
as either the expected future cash flows discounted at each
loans effective interest rate, the fair value of the
loans collateral if the loan is collateral dependent, or
an observable market price of the loan (if one exists). Upon
measuring the impairment, we will ensure an appropriate level of
allowance is present or established.
Central to the first phase and our credit risk management is the
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.
43
Loans are risk rated into the following categories: Impaired,
Doubtful, Substandard, Special Mention and Pass. Each of these
groups is assessed for the appropriate amount to be used in
determining the adequacy of our allowance for losses. While each
loan is looked at annually to determine its proper
classification, the Impaired and Doubtful loans are analyzed on
an individual basis for allowance amounts. The other categories
have formulae used to determine the needed allowance amount.
The Bank began a credit review function engaging an outside
party to review our loans. This was done in the last quarter of
2006 and will be performed quarterly in the upcoming year. The
purpose of this review, amoung others, 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 management has identified significant
conditions or circumstances related to a credit that we believe
indicates the probability that a loss has been incurred. We
perform a detailed analysis of these loans, including, but not
limited to, cash flows, appraisals of the collateral, conditions
of the marketplace for liquidating the collateral and assessment
of the guarantors. We then determine the inherent loss potential
and allocate a portion of the allowance for losses as a specific
allowance for each of these credits.
The second phase is conducted by evaluating or segmenting the
remainder of the loan portfolio into groups or pools of loans
with similar characteristics in accordance with
SFAS No. 5, Accounting for Contingencies.
In this second phase, groups or pools of homogeneous loans are
reviewed to determine a portfolio formula allowance. In the case
of the portfolio formula allowance, homogeneous portfolios, such
as small business loans, consumer loans, agricultural loans, and
real estate loans, are aggregated or pooled in determining the
appropriate allowance. The risk assessment process in this case
emphasizes trends in the different portfolios for delinquency,
loss, and other-behavioral characteristics of the subject
portfolios.
The second major element in our methodology for assessing the
appropriateness of the allowance consists of our consideration
of all known relevant internal and external factors that may
affect a loans collectibility. This includes our estimates
of the amounts necessary for concentrations, economic
uncertainties, the volatility of the market value of collateral,
and other relevant factors. The relationship of the two major
elements of the allowance to the total allowance may fluctuate
from period to period.
In the second major element of the analysis which considers all
known relevant internal and external factors that may affect a
loans collectibility is based upon our evaluation of
various conditions, the effects of which are not directly
measured in the determination of the formula and specific
allowances. The evaluation of the inherent loss with respect to
these conditions is subject to a higher degree of uncertainty
because they are not identified with specific problem credits or
portfolio segments. The conditions evaluated in connection with
the second element of the analysis of the allowance include, but
are not limited to the following conditions that existed as of
the balance sheet date:
|
|
|
|
|
then-existing general economic and business conditions affecting
the key lending areas of the Company,
|
|
|
|
then-existing economic and business conditions of areas outside
the lending areas, such as other sections of the United States,
Asia and Latin America,
|
|
|
|
credit quality trends (including trends in non-performing loans
expected to result from existing conditions),
|
|
|
|
collateral values,
|
|
|
|
loan volumes and concentrations,
|
|
|
|
seasoning of the loan portfolio,
|
|
|
|
specific industry conditions within portfolio segments,
|
|
|
|
recent loss experience in particular segments of the portfolio,
|
|
|
|
duration of the current business cycle,
|
|
|
|
bank regulatory examination results and
|
|
|
|
findings of our internal credit examiners.
|
44
We review these conditions in discussion with our senior credit
officers. To the extent that any of these conditions is
evidenced by a specifically identifiable problem credit or
portfolio segment as of the evaluation date, our estimate of the
effect of such condition may be reflected as a specific
allowance applicable to such credit or portfolio segment. Where
any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the
evaluation date, our evaluation of the inherent loss related to
such condition is reflected in the second major element of the
allowance. Although we have allocated a portion of the allowance
to specific loan categories, the adequacy of the allowance must
be considered in its entirety.
We maintain an allowance for inherent credit losses that is
recorded as a provision for credit losses and 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 $3.0 million provision for credit losses for
2006. We did not record a provision for credit losses for 2005
and 2004.
At December 31, 2006, we reported an allowance for credit
losses of $27.7 million. This represents an increase of
$4.5 million, or 19.54%, over the allowance for credit
losses of $23.2 million at December 31, 2005. During
2006, we recorded a provision for credit losses of
$3.0 million and net recoveries of $1.5 million. At
December 31, 2005, we reported an allowance for credit
losses of $23.2 million. This represented an increase of
$710,000, or 3.16%, over the allowance for credit losses of
$22.5 million at December 31, 2004. During the year
2005, we did not make a provision for credit losses. The
increase of $710,000 was due to the allowance for credit losses
in the acquisition of Granite State Bank of $756,000, offset by
net charge-offs of $46,000. (See Table 8 Summary of
Credit Loss Experience.)
At December 31, 2006 and 2005, we had no impaired or
non-performing loans.
For 2006, total loans charged-off were $200,000, offset by the
recoveries of loans previous charged-off of $1.7 million
resulting in net recoveries of $1.5 million. For 2005,
total loans charge-off were $1.4 million, offset by the
recoveries of loans previously charged-off of $1.3 million
resulting in net charge-offs of $46,000.
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.
TABLE
8 Summary of Credit Loss Experience
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Amounts in thousands)
|
|
|
Amount of Total Loans at End of
Period(1)
|
|
$
|
3,070,196
|
|
|
$
|
2,663,863
|
|
|
$
|
2,140,074
|
|
|
$
|
1,759,941
|
|
|
$
|
1,446,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Total Loans Outstanding(1)
|
|
$
|
2,811,782
|
|
|
$
|
2,277,304
|
|
|
$
|
1,905,145
|
|
|
$
|
1,529,944
|
|
|
$
|
1,247,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses at
Beginning of Period
|
|
$
|
23,204
|
|
|
$
|
22,494
|
|
|
$
|
21,282
|
|
|
$
|
21,666
|
|
|
$
|
20,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Charged-Off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
780
|
|
|
|
1,002
|
|
|
|
982
|
|
|
|
41
|
|
Commercial and Industrial
|
|
|
90
|
|
|
|
243
|
|
|
|
943
|
|
|
|
1,507
|
|
|
|
2,048
|
|
Lease Finance Receivables
|
|
|
79
|
|
|
|
91
|
|
|
|
110
|
|
|
|
396
|
|
|
|
|
|
Consumer Loans
|
|
|
31
|
|
|
|
266
|
|
|
|
265
|
|
|
|
132
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans Charged-Off
|
|
|
200
|
|
|
|
1,380
|
|
|
|
2,320
|
|
|
|
3,017
|
|
|
|
2,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Amounts in thousands)
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Loans
|
|
|
1,140
|
|
|
|
572
|
|
|
|
775
|
|
|
|
336
|
|
|
|
1,062
|
|
Commercial and Industrial
|
|
|
400
|
|
|
|
543
|
|
|
|
2,558
|
|
|
|
889
|
|
|
|
176
|
|
Lease Finance Receivables
|
|
|
82
|
|
|
|
101
|
|
|
|
86
|
|
|
|
262
|
|
|
|
|
|
Consumer Loans
|
|
|
111
|
|
|
|
118
|
|
|
|
113
|
|
|
|
112
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans Recovered
|
|
|
1,733
|
|
|
|
1,334
|
|
|
|
3,532
|
|
|
|
1,599
|
|
|
|
1,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans Charged-Off (Recovered)
|
|
|
(1,533
|
)
|
|
|
46
|
|
|
|
(1,212
|
)
|
|
|
1,418
|
|
|
|
1,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision Charged to Operating
Expense
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments Incident to Mergers
and reclassifications
|
|
|
|
|
|
|
756
|
|
|
|
|
|
|
|
1,034
|
|
|
|
2,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses at End
of period
|
|
$
|
27,737
|
|
|
$
|
23,204
|
|
|
$
|
22,494
|
|
|
$
|
21,282
|
|
|
$
|
21,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans Charged-Off (Recovered)
to Average Total Loans
|
|
|
−0.05
|
%
|
|
|
0.00
|
%
|
|
|
−0.06
|
%
|
|
|
0.09
|
%
|
|
|
0.09
|
%
|
Net Loans Charged-Off (Recovered)
to Total Loans at End of Period
|
|
|
−0.05
|
%
|
|
|
0.00
|
%
|
|
|
−0.06
|
%
|
|
|
0.08
|
%
|
|
|
0.08
|
%
|
Allowance for Credit Losses to
Average Total Loans
|
|
|
0.99
|
%
|
|
|
1.02
|
%
|
|
|
1.18
|
%
|
|
|
1.39
|
%
|
|
|
1.74
|
%
|
Allowance for Credit Losses to
Total Loans at End of Period
|
|
|
0.90
|
%
|
|
|
0.87
|
%
|
|
|
1.05
|
%
|
|
|
1.21
|
%
|
|
|
1.50
|
%
|
Net Loans Charged-Off (Recovered)
to Allowance for Credit Losses
|
|
|
−5.53
|
%
|
|
|
0.20
|
%
|
|
|
−5.39
|
%
|
|
|
6.66
|
%
|
|
|
5.21
|
%
|
Net Loans Recovered to Provision
for Credit Losses
|
|
|
−51.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of deferred loan origination fees. |
While we believe that the allowance at December 31, 2006,
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. 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.
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
% of Loans
|
|
|
|
|
|
% of Loans
|
|
|
|
|
|
% of Loans
|
|
|
|
|
|
% of Loans
|
|
|
|
|
|
% of Loans
|
|
|
|
|
|
|
to Total
|
|
|
|
|
|
to Total
|
|
|
|
|
|
to Total
|
|
|
|
|
|
to Total
|
|
|
|
|
|
to Total
|
|
|
|
Allowance
|
|
|
Loans in
|
|
|
Allowance
|
|
|
Loans in
|
|
|
Allowance
|
|
|
Loans in
|
|
|
Allowance
|
|
|
Loans in
|
|
|
Allowance
|
|
|
Loans in
|
|
|
|
for Credit
|
|
|
Each
|
|
|
for Credit
|
|
|
Each
|
|
|
for Credit
|
|
|
Each
|
|
|
for Credit
|
|
|
Each
|
|
|
for Credit
|
|
|
Each
|
|
|
|
Losses
|
|
|
Category
|
|
|
Losses
|
|
|
Category
|
|
|
Losses
|
|
|
Category
|
|
|
Losses
|
|
|
Category
|
|
|
Losses
|
|
|
Category
|
|
|
|
(Amounts in thousands)
|
|
|
Real Estate
|
|
$
|
9,905
|
|
|
|
46.8
|
%
|
|
$
|
10,536
|
|
|
|
42.7
|
%
|
|
$
|
7,214
|
|
|
|
36.6
|
%
|
|
$
|
3,892
|
|
|
|
30.8
|
%
|
|
$
|
4,158
|
|
|
|
34.6
|
%
|
Commercial and Industrial
|
|
|
17,215
|
|
|
|
51.5
|
%
|
|
|
15,408
|
|
|
|
49.2
|
%
|
|
|
16,232
|
|
|
|
55.8
|
%
|
|
|
15,508
|
|
|
|
62.9
|
%
|
|
|
16,020
|
|
|
|
60.9
|
%
|
Consumer
|
|
|
297
|
|
|
|
1.7
|
%
|
|
|
224
|
|
|
|
8.1
|
%
|
|
|
126
|
|
|
|
7.6
|
%
|
|
|
149
|
|
|
|
6.3
|
%
|
|
|
202
|
|
|
|
4.5
|
%
|
Unallocated
|
|
|
320
|
|
|
|
|
|
|
|
(2,964
|
)
|
|
|
|
|
|
|
(1,078
|
)
|
|
|
|
|
|
|
1,733
|
|
|
|
|
|
|
|
1,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,737
|
|
|
|
100.0
|
%
|
|
$
|
23,204
|
|
|
|
100.0
|
%
|
|
$
|
22,494
|
|
|
|
100.0
|
%
|
|
$
|
21,282
|
|
|
|
100.0
|
%
|
|
$
|
21,666
|
|
|
|
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.
The table below provides the actual balances as of
December 31, 2006 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 2006, 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
|
|
|
|
Balance
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years
|
|
|
Estimated
|
|
|
|
December 31,
|
|
|
Rate
|
|
|
One Year
|
|
|
Two Years
|
|
|
Three Years
|
|
|
Four Years
|
|
|
and Beyond
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for
sale(1)
|
|
$
|
2,580,176
|
|
|
|
4.61
|
%
|
|
$
|
20,127
|
|
|
$
|
104,982
|
|
|
$
|
824,102
|
|
|
$
|
564,818
|
|
|
$
|
1,066,147
|
|
|
$
|
2,580,176
|
|
Loans and lease finance
receivables, net
|
|
|
3,042,459
|
|
|
|
6.92
|
%
|
|
|
726,970
|
|
|
|
210,938
|
|
|
|
104,330
|
|
|
|
101,835
|
|
|
|
1,898,386
|
|
|
|
3,041,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
$
|
5,622,635
|
|
|
|
|
|
|
$
|
747,097
|
|
|
$
|
315,920
|
|
|
$
|
928,432
|
|
|
$
|
666,653
|
|
|
$
|
2,964,533
|
|
|
$
|
5,621,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
$
|
2,043,397
|
|
|
|
3.11
|
%
|
|
$
|
2,011,988
|
|
|
$
|
17,439
|
|
|
$
|
972
|
|
|
$
|
9,332
|
|
|
$
|
3,666
|
|
|
|
2,041,416
|
|
Demand note to U.S. Treasury
|
|
|
7,245
|
|
|
|
4.34
|
%
|
|
|
7,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,245
|
|
Borrowings
|
|
|
2,139,250
|
|
|
|
4.27
|
%
|
|
|
1,189,250
|
|
|
|
850,000
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
2,137,099
|
|
Junior subordinated debentures
|
|
|
108,250
|
|
|
|
6.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,250
|
|
|
|
132,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
4,298,142
|
|
|
|
|
|
|
$
|
3,208,483
|
|
|
$
|
867,439
|
|
|
$
|
972
|
|
|
$
|
9,332
|
|
|
$
|
211,916
|
|
|
$
|
4,318,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes securities with no maturity dates. |
47
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. Basis risk is managed by the timing and
magnitude of changes to interest-bearing deposit rates. Yield
curve risk is reduced by keeping the duration of the loan and
bond portfolios 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.
48
TABLE 10 Asset
and Liability Maturity/Repricing Gap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over
|
|
|
Over
|
|
|
|
|
|
|
|
|
|
90 Days
|
|
|
90 Days to
|
|
|
180 Days to
|
|
|
Over
|
|
|
|
|
|
|
or Less
|
|
|
180 Days
|
|
|
365 Days
|
|
|
365 Days
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities at carrying
value
|
|
$
|
140,153
|
|
|
$
|
152,523
|
|
|
$
|
214,686
|
|
|
$
|
2,075,540
|
|
|
$
|
2,582,902
|
|
Total Loans
|
|
|
1,003,580
|
|
|
$
|
157,742
|
|
|
$
|
281,823
|
|
|
$
|
1,599,314
|
|
|
|
3,042,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,143,733
|
|
|
$
|
310,265
|
|
|
$
|
496,509
|
|
|
$
|
3,674,854
|
|
|
$
|
5,625,361
|
|
Interest Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Deposits
|
|
$
|
780,720
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
434,699
|
|
|
$
|
1,215,419
|
|
Time Deposits
|
|
|
596,882
|
|
|
$
|
128,776
|
|
|
$
|
71,080
|
|
|
$
|
31,240
|
|
|
|
827,978
|
|
Demand Note to U.S. Treasury
|
|
|
7,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,245
|
|
Other Borrowings
|
|
|
1,234,250
|
|
|
$
|
85,000
|
|
|
$
|
120,000
|
|
|
$
|
700,000
|
|
|
|
2,139,250
|
|
Junior subordinated debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,250
|
|
|
|
108,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,619,097
|
|
|
|
213,776
|
|
|
|
191,080
|
|
|
|
1,274,189
|
|
|
|
4,298,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period GAP
|
|
$
|
(1,475,364
|
)
|
|
$
|
96,489
|
|
|
$
|
305,429
|
|
|
$
|
2,400,665
|
|
|
$
|
1,327,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
(1,475,364
|
)
|
|
$
|
(1,378,875
|
)
|
|
$
|
(1,073,446
|
)
|
|
$
|
1,327,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with
other institution
|
|
$
|
1,883
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,883
|
|
Investment Securities at carrying
value
|
|
|
109,526
|
|
|
|
104,448
|
|
|
|
230,582
|
|
|
|
1,925,336
|
|
|
|
2,369,892
|
|
Total Loans
|
|
|
828,783
|
|
|
|
157,485
|
|
|
|
281,538
|
|
|
|
1,372,853
|
|
|
|
2,640,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
940,192
|
|
|
$
|
261,933
|
|
|
$
|
512,120
|
|
|
$
|
3,298,189
|
|
|
$
|
5,012,434
|
|
Interest Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Deposits
|
|
$
|
717,585
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
432,671
|
|
|
$
|
1,150,256
|
|
Time Deposits
|
|
|
477,617
|
|
|
|
106,864
|
|
|
|
160,746
|
|
|
|
37,950
|
|
|
|
783,177
|
|
Demand Note to U.S. Treasury
|
|
|
6,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,433
|
|
Other Borrowings
|
|
|
361,000
|
|
|
|
35,000
|
|
|
|
520,000
|
|
|
|
580,000
|
|
|
|
1,496,000
|
|
Junior subordinated debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,476
|
|
|
|
82,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,562,635
|
|
|
|
141,864
|
|
|
|
680,746
|
|
|
|
1,133,097
|
|
|
|
3,518,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period GAP
|
|
$
|
(622,443
|
)
|
|
$
|
120,069
|
|
|
$
|
(168,626
|
)
|
|
$
|
2,165,092
|
|
|
$
|
1,494,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
(622,443
|
)
|
|
$
|
(502,374
|
)
|
|
$
|
(671,000
|
)
|
|
$
|
1,494,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table 10 provides the Banks maturity/re-pricing gap
analysis at December 31, 2006, and 2005. We had a negative
cumulative
180-day gap
of $1.38 billion and a negative cumulative
365-days gap
of $1.07 billion at December 31, 2006. This
represented an increase of $876.5 million, or 174 times,
over the
180-day
cumulative negative gap of $502.4 million at
December 31, 2005. In theory, this would indicate that at
December 31, 2006, $1.38 billion more in assets than
liabilities 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
49
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, 2006 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 $1.87 billion, or 72.21%, of the total
investment portfolio at December 31, 2006 consisted of
securities backed by mortgages. The final maturity of these
securities can be affected by the speed at which the underlying
mortgages repay. Mortgages tend to repay faster as interest
rates fall, and slower as interest rates rise. As a result, we
may be subject to a prepayment risk resulting from
greater funds available for reinvestment at a time when
available yields are lower. Conversely, we may be subject to
extension risk resulting, 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 200 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, 2006:
|
|
|
Simulated
|
|
Estimated Net Interest
|
Rate Changes
|
|
Income Sensitivity
|
|
+ 200 basis points
|
|
(3.41% )
|
− 200 basis points
|
|
6.70%
|
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. See NOTE 19
of the Notes to the Consolidated Financial Statements.
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
50
also serve as a contingent source of funds. Increases in deposit
rates are considered a last resort as a means of raising funds
to increase liquidity.
Transaction
Risk
Transaction risk is the risk to earnings or capital arising from
problems in service or product delivery. This risk is
significant within any bank and is interconnected with other
risk categories in most activities throughout the Bank.
Transaction risk is a function of internal controls, information
systems, associate integrity, and operating processes. It arises
daily throughout the Bank as transactions are processed. It
pervades all divisions, departments and branches and is inherent
in all products and services 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.
Our Compliance Management Policy and Program and the Code of
Ethical Conduct are the cornerstone for controlling compliance
risk. An integral part of controlling this risk is the proper
training of associates. The Compliance Officer is responsible
for developing and executing a comprehensive compliance training
program. The Compliance Officer will ensure that each associate
receives adequate training with regard to their position to
ensure that laws and regulations are not violated. All
associates who deal in compliance high risk areas are trained to
be knowledgeable about the level and severity of exposure in
those areas and the policies and procedures in place to control
such exposure.
Our Compliance Management Policy and Program includes an audit
program aimed at identifying problems and ensuring that problems
are corrected. The audit program includes two levels of review.
One is in-depth audits performed by an external firm and the
other is periodic monitoring performed by the Compliance Officer.
The Bank utilizes an external firm to conduct compliance audits
as a means of identifying weaknesses in the compliance program
itself. The external firms audit plan includes a periodic
review of each branch and department of the Bank.
The branch or department that is the subject of an audit is
required to respond to the audit and correct any violations
noted. The Compliance Officer will review audit findings and the
response provided by the branch or department to identify areas
which pose a significant compliance risk to the Bank.
The Compliance Officer 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 Compliance Officer will notify the appropriate
department head and the Compliance Committee of any violations
noted. The branch or
51
department that is the subject of the review will be required to
respond to the findings and correct any noted violations.
The Bank recognizes that customer complaints can often identify
weaknesses in the Banks compliance program which could
expose the Bank to risk. Therefore, all complaints are given
prompt attention. The Banks Compliance Management Policy
and Program includes provisions on how customer complaints are
to be addressed. The Compliance Officer reviews all complaints
to determine if a significant compliance risk exists and
communicates those findings to Senior Management.
Strategic
Risk
Strategic risk is the risk to earnings or capital arising from
adverse decisions or improper implementation of strategic
decisions. This risk is a function of the compatibility between
an organizations goals, the resources deployed against
those goals and the quality of implementation.
Strategic risks are identified as part of the strategic planning
process. Offsite strategic planning sessions are held annually.
The strategic review consists of an economic assessment,
competitive analysis, industry outlook and legislative and
regulatory review.
A primary measurement of strategic risk is peer group analysis.
Key performance ratios are compared to three separate peer
groups to identify any sign of weakness and potential
opportunities. The peer group consists of:
1. All banks of comparable size
2. High performing banks
3. A list of specific banks
Another measure is the comparison of the actual results of
previous strategic initiatives against the expected results
established prior to implementation of each strategy.
The corporate strategic plan is formally presented to all branch
managers and department managers at an annual leadership
conference.
Reputation
Risk
Reputation risk is the risk to capital and earnings arising from
negative public opinion. This affects 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
52
different interest rate scenarios, revealing the level or price
risk of the Banks interest sensitive asset and liability
portfolios.
Recent
Accounting Pronouncements
See Note 1, Summary of Significant Accounting Policies,
Recent Accounting Pronouncements, in the accompanying notes to
the consolidated financial statements.
|
|
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.
53
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
CVB
FINANCIAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
|
|
Page
|
|
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
61
|
|
|
|
|
62
|
|
|
|
|
63
|
|
|
|
|
64
|
|
|
|
|
66
|
|
|
|
|
95
|
|
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 McGladrey & Pullen, 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.
As of December 31, 2006, 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 Commission
(COSO). Based on this assessment, management has determined that
the Companys internal control over financial reporting as
of December 31, 2006 is effective.
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. Managements assessment of the
effectiveness of the firms internal control over financial
reporting as of December 31, 2006 has been audited by
McGladrey & Pullen, LLP, an independent registered
public accounting firm, as stated in their report appearing at
9A(2) below.
54
2) Auditor attestation
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
CVB Financial Corp.
Ontario, California
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that CVB Financial Corp. and subsidiaries
(the Company) maintained effective internal control over
financial reporting as of December 31, 2006, 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. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of 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, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and 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, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2006, is fairly stated, in all material
respects, based on criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Also in
our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements of the Company, and our report
dated February 28, 2007 expressed an unqualified opinion.
|
|
|
|
/s/ McGladrey &
Pullen, LLP
|
|
McGladrey & Pullen, LLP
Pasadena, California
February 28, 2007
55
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.
During the fiscal quarter ended December 31, 2006, 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.
56
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governace
|
Except as hereinafter noted, the information concerning
directors and executive officers of the Company 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 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 directors and
executive officers of the Company, see Item 1 of
part I Business Executive Officers and
Directors.
The Company has adopted a Code of Ethics that applies to all of
the Companys employees, including the Companys
principal executive officers, 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.
|
|
Item 11.
|
Executive
Compensation
|
Information concerning management remuneration and transactions
is incorporated by reference from the section entitled
Executive Compensation 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
December 31, 2006 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
|
|
|
|
Number of Securities to
|
|
|
|
|
|
Remaining Available for
|
|
|
|
be Issued Upon Exercise
|
|
|
Weighted-average
|
|
|
Future Issuance Under
|
|
|
|
of Outstanding Options,
|
|
|
Exercise Price of
|
|
|
Equity Compensation Plans
|
|
|
|
Warrants and
|
|
|
Outstanding Options,
|
|
|
( excluding securities
|
|
Plan Category
|
|
Rights (a)
|
|
|
Warrants and Rights (b)
|
|
|
reflected in column (a)) ( c )
|
|
|
Equity compensation plans approved
by security holders
|
|
|
2,398,359
|
|
|
$
|
9.91
|
|
|
|
3,970,618
|
|
Equity compensation plans not
approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,398,359
|
|
|
$
|
9.91
|
|
|
|
3,970,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
57
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independce
|
Information concerning certain relationships and related
transactions with management and others 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.
58
PART IV
|
|
Item 15.
|
Exhibits and
Financial Statement Schedules
|
Financial
Statements
Reference is made to the Index to Financial Statements at
page 54 for a list of financial statements filed as part of
this Report.
Exhibits
See Index to Exhibits at Page 96 of this
Form 10-K.
59
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 28th day of February 2007.
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
|
|
February 28, 2007
|
|
|
|
|
|
/s/ John
A. Borba
John
A. Borba
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ Ronald
O. Kruse
Ronald
O. Kruse
|
|
Vice Chairman
|
|
February 28, 2007
|
|
|
|
|
|
/s/ Robert
M. Jacoby
Robert
M. Jacoby
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ James
C. Seley
James
C. Seley
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ San E.
Vaccaro
San E.
Vaccaro
|
|
Director
|
|
February 28, 2007
|
|
|
|
|
|
/s/ D.
Linn Wiley
D.
Linn Wiley
|
|
Vice Chairman
|
|
February 28, 2007
|
|
|
|
|
|
/s/ Christopher
D. Myers
Christopher
D. Myers
|
|
Director, President and Chief
Executive Officer (Principal Executive Officer)
|
|
February 28, 2007
|
|
|
|
|
|
/s/ Edward
J.
Biebrich, Jr.
Edward
J. Biebrich, Jr.
|
|
Chief Financial Officer (Principal
Financial and Accounting Officer)
|
|
February 28, 2007
|
60
CVB
FINANCIAL CORP. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
ASSETS
|
Investment securities
available-for-sale
|
|
$
|
2,582,902
|
|
|
$
|
2,369,892
|
|
Interest-bearing balances due from
depository institutions
|
|
|
|
|
|
|
1,883
|
|
Investment in stock of Federal
Home Loan Bank (FHLB)
|
|
|
78,866
|
|
|
|
70,770
|
|
Loans and lease finance receivables
|
|
|
3,070,196
|
|
|
|
2,663,864
|
|
Allowance for credit losses
|
|
|
(27,737
|
)
|
|
|
(23,204
|
)
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
5,704,227
|
|
|
|
5,083,205
|
|
Cash and due from banks
|
|
|
146,411
|
|
|
|
130,141
|
|
Premises and equipment, net
|
|
|
44,963
|
|
|
|
40,020
|
|
Intangibles
|
|
|
10,121
|
|
|
|
12,474
|
|
Goodwill
|
|
|
31,531
|
|
|
|
32,357
|
|
Cash value life insurance
|
|
|
99,861
|
|
|
|
71,811
|
|
Accrued interest receivable
|
|
|
30,225
|
|
|
|
24,147
|
|
Deferred tax asset
|
|
|
18,434
|
|
|
|
18,420
|
|
Other assets
|
|
|
8,489
|
|
|
|
10,396
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
6,094,262
|
|
|
$
|
5,422,971
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
1,363,411
|
|
|
$
|
1,490,613
|
|
Interest-bearing
|
|
|
2,043,397
|
|
|
|
1,933,432
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
3,406,808
|
|
|
|
3,424,045
|
|
Demand Note to U.S. Treasury
|
|
|
7,245
|
|
|
|
6,433
|
|
Repurchase agreements
|
|
|
344,350
|
|
|
|
|
|
Short-term borrowings
|
|
|
844,900
|
|
|
|
916,000
|
|
Long-term borrowings
|
|
|
950,000
|
|
|
|
580,000
|
|
Accrued interest payable
|
|
|
16,156
|
|
|
|
15,047
|
|
Deferred compensation
|
|
|
7,946
|
|
|
|
7,102
|
|
Junior subordinated debentures
|
|
|
108,250
|
|
|
|
82,476
|
|
Other liabilities
|
|
|
19,268
|
|
|
|
48,991
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
5,704,923
|
|
|
|
5,080,094
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock (authorized,
20,000,000 shares without par; none issued or outstanding)
|
|
|
|
|
|
|
|
|
Common stock (authorized,
122,070,312 shares without par; issued and outstanding
84,281,722 (2006) and 84,073,227 (2005)
|
|
|
366,082
|
|
|
|
252,717
|
|
Retained earnings
|
|
|
36,478
|
|
|
|
103,546
|
|
Accumulated other comprehensive
income (loss), net of tax
|
|
|
(13,221
|
)
|
|
|
(13,386
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY
|
|
|
389,339
|
|
|
|
342,877
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
$
|
6,094,262
|
|
|
$
|
5,422,971
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
61
CVB
FINANCIAL CORP. AND SUBSIDIARIES
Three
Years Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands,
|
|
|
|
except earnings per share)
|
|
|
INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
194,704
|
|
|
$
|
148,421
|
|
|
$
|
114,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
91,029
|
|
|
|
76,573
|
|
|
|
66,109
|
|
Tax-advantaged
|
|
|
26,545
|
|
|
|
19,078
|
|
|
|
15,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,574
|
|
|
|
95,651
|
|
|
|
81,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from FHLB
|
|
|
4,290
|
|
|
|
2,623
|
|
|
|
1,960
|
|
Federal funds sold
|
|
|
32
|
|
|
|
2
|
|
|
|
3
|
|
Interest-bearing deposits with
other institutions
|
|
|
60
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
316,660
|
|
|
|
246,948
|
|
|
|
197,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
67,180
|
|
|
|
28,908
|
|
|
|
15,508
|
|
Short-term borrowings
|
|
|
55,859
|
|
|
|
25,487
|
|
|
|
6,930
|
|
Long-term borrowings
|
|
|
17,520
|
|
|
|
17,701
|
|
|
|
18,731
|
|
Junior subordinated debentures
|
|
|
6,905
|
|
|
|
5,340
|
|
|
|
5,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
147,464
|
|
|
|
77,436
|
|
|
|
46,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME BEFORE
PROVISION FOR CREDIT LOSSES
|
|
|
169,196
|
|
|
|
169,512
|
|
|
|
151,185
|
|
PROVISION FOR CREDIT LOSSES
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES
|
|
|
166,196
|
|
|
|
169,512
|
|
|
|
151,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER OPERATING INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
13,080
|
|
|
|
13,251
|
|
|
|
13,663
|
|
Financial Advisory services
|
|
|
7,385
|
|
|
|
6,652
|
|
|
|
6,054
|
|
Bankcard services
|
|
|
2,486
|
|
|
|
2,453
|
|
|
|
1,781
|
|
BOLI Income
|
|
|
3,051
|
|
|
|
2,797
|
|
|
|
2,432
|
|
Other
|
|
|
6,199
|
|
|
|
4,668
|
|
|
|
5,058
|
|
Gain/(Loss) on sale of securities,
net
|
|
|
1,057
|
|
|
|
(46
|
)
|
|
|
5,219
|
|
Impairment charge on investment
securities
|
|
|
|
|
|
|
(2,270
|
)
|
|
|
(6,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating income
|
|
|
33,258
|
|
|
|
27,505
|
|
|
|
27,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
50,509
|
|
|
|
51,535
|
|
|
|
47,292
|
|
Occupancy
|
|
|
8,572
|
|
|
|
8,327
|
|
|
|
7,891
|
|
Equipment
|
|
|
7,025
|
|
|
|
7,578
|
|
|
|
8,003
|
|
Stationery and supplies
|
|
|
6,492
|
|
|
|
5,569
|
|
|
|
4,987
|
|
Professional services
|
|
|
5,896
|
|
|
|
4,268
|
|
|
|
4,776
|
|
Promotion
|
|
|
6,251
|
|
|
|
5,835
|
|
|
|
5,148
|
|
Amortization of Intangibles
|
|
|
2,353
|
|
|
|
2,061
|
|
|
|
1,185
|
|
Other
|
|
|
8,726
|
|
|
|
4,880
|
|
|
|
10,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
95,824
|
|
|
|
90,053
|
|
|
|
89,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES
|
|
|
103,630
|
|
|
|
106,964
|
|
|
|
89,370
|
|
INCOME TAXES
|
|
|
31,724
|
|
|
|
36,346
|
|
|
|
27,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
71,906
|
|
|
$
|
70,618
|
|
|
$
|
61,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS)
|
|
$
|
72,071
|
|
|
$
|
48,340
|
|
|
$
|
53,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER COMMON SHARE
|
|
$
|
0.85
|
|
|
$
|
0.84
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER COMMON SHARE
|
|
$
|
0.85
|
|
|
$
|
0.83
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH DIVIDENDS PER COMMON SHARE
|
|
$
|
0.355
|
|
|
$
|
0.420
|
|
|
$
|
0.480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
62
CVB
FINANCIAL CORP. AND SUBSIDIARIES
Three
Years Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Common
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Earnings
|
|
|
Income/(Loss)
|
|
|
Income
|
|
|
Total
|
|
|
|
|
|
|
(Amounts and shares in thousands)
|
|
|
|
|
|
Balance January 1,
2004
|
|
|
48,289
|
|
|
$
|
232,959
|
|
|
$
|
36,482
|
|
|
$
|
17,280
|
|
|
|
|
|
|
$
|
286,721
|
|
|
|
|
|
Issuance of common stock
|
|
|
345
|
|
|
|
1,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,281
|
|
|
|
|
|
5-for-4
stock split
|
|
|
12,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(100
|
)
|
|
|
(159
|
)
|
|
|
(1,833
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,992
|
)
|
|
|
|
|
Tax benefit from exercise of stock
options
|
|
|
|
|
|
|
2,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,196
|
|
|
|
|
|
Cash dividends ($0.48 per
share)
|
|
|
|
|
|
|
|
|
|
|
(23,821
|
)
|
|
|
|
|
|
|
|
|
|
|
(23,821
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
61,486
|
|
|
|
|
|
|
|
61,486
|
|
|
|
61,486
|
|
|
|
|
|
Other comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities
available-for-sale,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,388
|
)
|
|
|
(8,388
|
)
|
|
|
(8,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31,
2004
|
|
|
60,666
|
|
|
|
236,277
|
|
|
|
72,314
|
|
|
|
8,892
|
|
|
|
|
|
|
|
317,483
|
|
|
|
|
|
Issuance of common stock
|
|
|
460
|
|
|
|
1,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,789
|
|
|
|
|
|
5-for-4
stock split
|
|
|
15,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(676
|
)
|
|
|
(863
|
)
|
|
|
(11,423
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,286
|
)
|
|
|
|
|
Shares issued for acquisition of
Granite State Bank
|
|
|
696
|
|
|
|
13,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,427
|
|
|
|
|
|
Tax benefit from exercise of stock
options
|
|
|
|
|
|
|
2,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,087
|
|
|
|
|
|
Cash dividends ($0.42 per
share)
|
|
|
|
|
|
|
|
|
|
|
(27,963
|
)
|
|
|
|
|
|
|
|
|
|
|
(27,963
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
70,618
|
|
|
|
|
|
|
|
70,618
|
|
|
|
70,618
|
|
|
|
|
|
Other comprehensive income(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities
available-for-sale,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,278
|
)
|
|
|
(22,278
|
)
|
|
|
(22,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31,
2005
|
|
|
76,430
|
|
|
$
|
252,717
|
|
|
$
|
103,546
|
|
|
$
|
(13,386
|
)
|
|
|
|
|
|
$
|
342,877
|
|
|
|
|
|
Issuance of common stock
|
|
|
190
|
|
|
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
983
|
|
|
|
|
|
10% Stock Dividend
|
|
|
7,662
|
|
|
|
111,098
|
|
|
|
(111,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of stock
options
|
|
|
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331
|
|
|
|
|
|
Stock-based Compensation Expense
|
|
|
|
|
|
|
953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
953
|
|
|
|
|
|
Cash dividends ($0.36 per
share)
|
|
|
|
|
|
|
|
|
|
|
(27,876
|
)
|
|
|
|
|
|
|
|
|
|
|
(27,876
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
71,906
|
|
|
|
|
|
|
$
|
71,906
|
|
|
|
71,906
|
|
|
|
|
|
Other comprehensive income(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities
available-for-sale,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165
|
|
|
|
165
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31,
2006
|
|
|
84,282
|
|
|
$
|
366,082
|
|
|
$
|
36,478
|
|
|
$
|
(13,221
|
)
|
|
|
|
|
|
$
|
389,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Disclosure of reclassification
amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (losses)gains
on securities arising during the period
|
|
|
1,341
|
|
|
|
(40,679
|
)
|
|
|
(15,453
|
)
|
Tax benefit (expense)
|
|
|
(563
|
)
|
|
|
17,058
|
|
|
|
6,438
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for
(gain)/loss on securities included in net income
|
|
|
(1,057
|
)
|
|
|
2,316
|
|
|
|
1,081
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense on reclassification
adjustments
|
|
|
444
|
|
|
|
(973
|
)
|
|
|
(454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (loss) gain on
securities
|
|
$
|
165
|
|
|
|
(22,278
|
)
|
|
$
|
(8,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
63
CVB
FINANCIAL CORP. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollar amounts in thousands)
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest received
|
|
$
|
310,651
|
|
|
$
|
250,202
|
|
|
$
|
204,471
|
|
Service charges and other fees
received
|
|
|
31,426
|
|
|
|
29,779
|
|
|
|
28,526
|
|
Interest paid
|
|
|
(146,355
|
)
|
|
|
(71,290
|
)
|
|
|
(42,967
|
)
|
Cash paid to suppliers and employees
|
|
|
(93,786
|
)
|
|
|
(88,507
|
)
|
|
|
(84,184
|
)
|
Income taxes paid
|
|
|
(31,050
|
)
|
|
|
(31,100
|
)
|
|
|
(30,196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
70,886
|
|
|
|
89,084
|
|
|
|
75,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of investment
securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
84,777
|
|
Proceeds from sales of MBS
|
|
|
57,127
|
|
|
|
126,598
|
|
|
|
|
|
Proceeds from repayment of MBS
|
|
|
416,723
|
|
|
|
414,804
|
|
|
|
433,365
|
|
Proceeds from repayment of
investment securities
available-for-sale
|
|
|
55
|
|
|
|
122
|
|
|
|
|
|
Proceeds from maturity of
investment securities
|
|
|
7,608
|
|
|
|
18,598
|
|
|
|
36,006
|
|
Purchases of investment securities
available-for-sale
|
|
|
(234,841
|
)
|
|
|
(177,415
|
)
|
|
|
(115,351
|
)
|
Purchases of MBS
|
|
|
(489,488
|
)
|
|
|
(677,451
|
)
|
|
|
(687,538
|
)
|
Purchases of FHLB stock
|
|
|
(8,096
|
)
|
|
|
(17,205
|
)
|
|
|
(15,935
|
)
|
Net increase in loans
|
|
|
(394,603
|
)
|
|
|
(449,842
|
)
|
|
|
(372,431
|
)
|
Proceeds from sales of premises and
equipment
|
|
|
2,253
|
|
|
|
73
|
|
|
|
4,392
|
|
Purchase of premises and equipment
|
|
|
(11,617
|
)
|
|
|
(11,881
|
)
|
|
|
(11,376
|
)
|
Cash acquired from purchase of
Granite State Bank, net of cash paid
|
|
|
|
|
|
|
12,232
|
|
|
|
|
|
Purchase of Bank Owned Life
Insurance
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
(50,000
|
)
|
Investment in common stock of CVB
Statutory Trust III
|
|
|
(774
|
)
|
|
|
|
|
|
|
|
|
Other investing activities
|
|
|
|
|
|
|
|
|
|
|
(1,282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(680,653
|
)
|
|
|
(761,367
|
)
|
|
|
(695,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in
transaction deposits
|
|
|
(62,038
|
)
|
|
|
163,718
|
|
|
|
292,521
|
|
Net increase (decrease) in time
deposits
|
|
|
44,802
|
|
|
|
282,786
|
|
|
|
(77,992
|
)
|
Advances from Federal Home
Loan Bank
|
|
|
850,000
|
|
|
|
370,000
|
|
|
|
500,000
|
|
Repayment of advances from Federal
Home Loan Bank
|
|
|
(620,000
|
)
|
|
|
(106,000
|
)
|
|
|
(68,000
|
)
|
Net (decrease) increase in
short-term borrowings
|
|
|
319,711
|
|
|
|
45,980
|
|
|
|
(29,882
|
)
|
Net increase in repurchase
agreements
|
|
|
94,350
|
|
|
|
|
|
|
|
|
|
Cash dividends on common stock
|
|
|
(27,876
|
)
|
|
|
(27,963
|
)
|
|
|
(23,821
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
(12,286
|
)
|
|
|
(1,992
|
)
|
Issuance of junior subordinated
debentures
|
|
|
25,774
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
983
|
|
|
|
1,789
|
|
|
|
1,281
|
|
Tax benefit related to exercise of
stock options
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
626,037
|
|
|
|
718,024
|
|
|
|
592,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS
|
|
|
16,270
|
|
|
|
45,741
|
|
|
|
(27,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS,
beginning of period
|
|
|
130,141
|
|
|
|
84,400
|
|
|
|
112,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of
period
|
|
$
|
146,411
|
|
|
$
|
130,141
|
|
|
$
|
84,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
64
CVB
FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollar amounts in thousands)
|
|
|
RECONCILIATION OF NET EARNINGS TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
71,906
|
|
|
$
|
70,618
|
|
|
$
|
61,486
|
|
Adjustments to reconcile net
earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain)/loss on sale of investment
securities
|
|
|
(1,057
|
)
|
|
|
46
|
|
|
|
(5,219
|
)
|
Gain on sale of premises and
equipment
|
|
|
(436
|
)
|
|
|
34
|
|
|
|
140
|
|
Impairment charge on investment
securities
|
|
|
|
|
|
|
2,270
|
|
|
|
6,300
|
|
Increase in cash value of life
insurance
|
|
|
(3,051
|
)
|
|
|
(2,253
|
)
|
|
|
(2,432
|
)
|
Net amortization of premiums on
investment securities
|
|
|
7,061
|
|
|
|
13,195
|
|
|
|
14,302
|
|
Provisions for credit losses
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
953
|
|
|
|
|
|
|
|
|
|
Tax benefit from exercise of stock
options
|
|
|
(331
|
)
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
8,036
|
|
|
|
8,435
|
|
|
|
7,125
|
|
Change in accrued interest
receivable
|
|
|
(7,712
|
)
|
|
|
(5,471
|
)
|
|
|
(2,667
|
)
|
Change in accrued interest payable
|
|
|
1,109
|
|
|
|
6,147
|
|
|
|
3,550
|
|
Deferred tax provision
|
|
|
4,813
|
|
|
|
(585
|
)
|
|
|
(3,537
|
)
|
Change in other assets and
liabilities
|
|
|
(13,405
|
)
|
|
|
(3,352
|
)
|
|
|
(3,398
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(1,020
|
)
|
|
|
18,466
|
|
|
|
14,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING
ACTIVITIES
|
|
$
|
70,886
|
|
|
$
|
89,084
|
|
|
$
|
75,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Noncash
Investing and Financing Activities Purchase of Granite State
Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired
|
|
$
|
826
|
|
|
$
|
85,898
|
|
|
|
|
|
Goodwill
|
|
|
(826
|
)
|
|
|
12,777
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
8,399
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
|
|
(105,879
|
)
|
|
|
|
|
Stock issued
|
|
|
|
|
|
|
(13,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price of acquisition, net
of cash received
|
|
$
|
|
|
|
$
|
(12,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities purchased and not
settled
|
|
$
|
|
|
|
$
|
25,854
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
65
CVB
FINANCIAL CORP. AND SUBSIDIARIES
Three
Years Ended December 31, 2006
|
|
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); CVB Ventures,
Inc.; Chino Valley Bancorp; and ONB Bancorp after elimination of
all intercompany transactions and balances. The Company is also
the common stockholder of CVB Statutory Trust I, CVB
Statutory Trust II and CVB Statutory Trust III. CVB
Statutory Trusts I and II were created in December 2003 and CVB
Statutory Trust III was created in January 2006 to issue
trust preferred securities in order to raise capital for the
Company. In accordance with Financial Accounting Standards Board
Interpretation No. 46R Consolidation of Variable
Interest Entities (FIN No. 46R),
these trusts do not meet the criteria for consolidation.
Nature of Operations The Companys
primary operations are related to traditional banking
activities, including the acceptance of deposits and the lending
and investing of money through the operations of the Bank. The
Bank also provides automobile and equipment leasing, and brokers
mortgage loans to customers through its Golden West Financial
Division and trust services to customers through its Financial
Advisory Services Group and Business Financial Centers (branch
offices). The Banks customers consist primarily of small
to mid-sized businesses and individuals located in
San Bernardino County, Riverside County, Orange County,
Madera County, Fresno County, Tulare County, Kern County, and
the eastern portion of Los Angeles County in Southern
California. The Bank operates 39 Business Financial Centers with
its headquarters located in the city of Ontario.
The Companys operating business units have been combined
into two main segments: Business Financial Centers and Treasury.
Business Financial Centers (branches) comprise the loans,
deposits, products and services the Bank offers to the majority
of its customers. The other segment is Treasury Department,
which manages the investment portfolio of the Company. The
Companys remaining centralized functions and eliminations
of inter-segment amounts have been aggregated and included in
Other.
The internal reporting of the Company considers all business
units. Funds are allocated to each business unit based on its
need to fund assets (use of funds) or its need to invest funds
(source of funds). Net income is determined based on the actual
net income of the business unit plus the allocated income or
expense based on the sources and uses of funds for each business
unit. Non-interest income and non-interest expense are those
items directly attributable to a business unit.
Investment Securities The Company classifies
as
held-to-maturity
those debt securities that the Company has the positive intent
and ability to hold to maturity. Securities classified as
trading are those securities that are bought and held
principally for the purpose of selling them in the near term.
All other debt and equity securities are classified as
available-for-sale.
Securities
held-to-maturity
are accounted for at cost and adjusted for amortization of
premiums and accretion of discounts. Trading securities are
accounted for at fair value with the unrealized holding gains
and losses being included in current earnings.
Available-for-sale
securities are accounted for at fair value, with the net
unrealized gains and losses, net of income tax effects,
presented as a separate component of stockholders equity.
At each reporting date,
available-for-sale
securities are assessed to determine whether there is an
other-than-temporary
impairment. Such impairment, if any, is required to be
recognized in current earnings rather than as a separate
component of stockholders equity. Realized gains and
losses on sales of securities are recognized in earnings at the
time of sale and are determined on a specific-identification
basis. Purchase premiums and discounts are recognized in
interest income using the interest method over the 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
66
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
collateral of the securities. The Companys investment in
Federal Home Loan Bank (FHLB) stock is carried at
cost.
Loans and Lease Finance Receivables Loans and
lease finance receivables are reported at the principal amount
outstanding, less deferred net loan origination fees 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 in a manner
that approximates the level-yield method.
Provision and Allowance for Credit Losses The
determination of the balance in the allowance for credit losses
is based on an analysis of the loan and lease finance
receivables portfolio using a systematic methodology and
reflects an amount that, in managements judgment, is
adequate to provide for probable credit losses inherent in the
portfolio, after giving consideration to the character of the
loan portfolio, current economic conditions, past credit loss
experience, and such other factors as deserve current
recognition in estimating inherent credit losses. The estimate
is reviewed periodically by management and various regulatory
entities and, as adjustments become necessary, they are reported
in earnings in the periods in which they become known. The
provision for credit losses is charged to expense.
A loan for which collection of principal and interest according
to its original terms is not probable is considered to be
impaired. The Companys policy is to record a specific
valuation allowance, which is included in the allowance for
credit losses, or charge off that portion of an impaired loan
that exceeds its fair value. Fair value is usually based on the
value of underlying collateral.
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.
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 Company has paid premiums
on certain transactions, and such premiums are recorded as
intangible assets, in the form of goodwill or other intangible
assets. In accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 142,
Goodwill and 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 for impairment. The Company
completed its annual impairment test as of June 30, 2006;
there was no impairment of goodwill.
67
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 theses policies, as well as insurance proceeds
received, are recorded in other non-interest income and are not
subject to income tax.
Income Taxes Deferred income taxes are
recognized for the tax consequences in future years of the
Companys differences between the tax bases of assets and
liabilities and their financial reporting amounts at each
year-end, based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected
to affect taxable income.
Earnings per Common Share Basic earnings per
share are computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding during each year. The computation of diluted
earnings per share considers the number of tax-effected shares
issuable upon the assumed exercise of outstanding common stock
options. Earnings per common share and stock option amounts have
been retroactively restated to give effect to all stock splits
and dividends. A reconciliation of the numerator and the
denominator used in the computation of basic and diluted
earnings per common share is included in Note 14.
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,
2006, the Company has three stock-based employee compensation
plans, which are described more fully in Note 15.
The Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment
(SFAS No. 123R) on January 1, 2006,
using the modified prospective method. Under this
method, awards that are granted, modified, or settled after
December 31, 2005, are measured and accounted for in
accordance with SFAS No. 123R. Also under this method,
unvested stock awards as of December 31, 2005 are
recognized over the remaining service period with no change in
historical reported earnings. Prior to the adoption of
SFAS No. 123R, the Company accounted for stock
compensation under the intrinsic value method permitted by
Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB No. 25) and
related interpretations. Accordingly, the Company previously
recognized no compensation cost for employee stock options that
were granted with an exercise price equal to the market value of
the underlying common stock on the date of grant. The Company
provided pro forma disclosure amounts in accordance with
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure
(SFAS No. 148), as if the fair value method defined by
SFAS No. 123 had been applied to its stock-based
compensation.
Prior to the adoption of SFAS 123R, the Company presented
all tax benefits of deductions resulting from the exercise of
stock options as operating cash flows in the Consolidated
Statements of Cash Flows. SFAS 123R requires the tax
benefits resulting from deductions in excess of the compensation
cost recognized for those options (excess tax
benefits) to be classified as financing cash flows. The
Company has $331,000 of excess tax benefit resulting from
disqualified dispositions classified as financing activities in
the Consolidated Statements of Cash Flows for the year ended
December 31, 2006.
68
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the effect on net income and
earnings per share had the Company accounted for stock-based
compensation in accordance with SFAS 123R for the years
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Net income, as reported
|
|
$
|
70,618
|
|
|
$
|
61,486
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value based method
for all awards, net of related tax effects
|
|
|
1,114
|
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
69,504
|
|
|
$
|
60,336
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
0.84
|
|
|
$
|
0.74
|
|
Basic pro forma
|
|
$
|
0.83
|
|
|
$
|
0.73
|
|
Diluted as reported
|
|
$
|
0.83
|
|
|
$
|
0.73
|
|
Diluted pro forma
|
|
$
|
0.82
|
|
|
$
|
0.72
|
|
Financial Advisory Services Group The Company
maintains funds in trust for customers. The amount of these
funds and the related liability have not been recorded in the
accompanying consolidated balance sheets because they are not
assets or liabilities of the Bank or Company, with the exception
of any funds held on deposit with the Bank.
Use of Estimates in the Preparation of Financial
Statements The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. A
material estimate that is particularly susceptible to
significant change in the near term relates to the determination
of the allowance for credit losses. Other significant estimates
which may be subject to change include fair value disclosures,
impairment of investments and goodwill, and valuation of
deferred tax assets and other intangibles.
Recent Accounting Pronouncements In July
2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return, and provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. This
Interpretation is effective for fiscal years beginning after
December 15, 2006. The Company is currently assessing the
impact of the Interpretation on its consolidated financial
statements.
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement No. 157, Fair
Value Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosure of
fair value measurements. SFAS No. 157 applies under
other accounting pronouncements that require or permit fair
value measurements and accordingly, does not require any new
fair value measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007. Management is currently evaluating the
effect of adoption of SFAS No. 157, but does not
expect the adoption to have a material effect on the
Companys consolidated financial condition or results of
operations.
In September 2006, the Emerging Issues Task Force
(EITF) reached a final consensus on Issue
06-4,
Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements (EITF
06-4).
EITF 06-4
requires that for a split-dollar life insurance arrangement, an
employer should recognize a liability for future benefits in
accordance with SFAS 106, Employers Accounting
for Postretirement Benefits Other Than Pensions or APB
Opinion No. 12, Omnibus Opinion
1967. Under the
69
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
guidance, the purchase of an endorsement type policy does not
constitute a settlement since the policy does not qualify as
nonparticipating because the policyholders are subject to the
favorable and unfavorable experience of the insurance company.
EITF 06-4 is
effective for fiscal years beginning after December 15,
2007. The Company is currently assessing the impact of the
adoption of EITF
06-4 on its
consolidated financial statements.
In September 2006, the EITF reached a final consensus on Issue
06-5,
Accounting for Purchases of Life Insurance
(EITF
06-05).
EITF 06-5
provides guidance on FASB Technical
Bulletin No. 85-4,
Accounting for Purchases of Life Insurance. Under
the guidance, the policyholder should consider any additional
amounts included in the contractual terms of the policy in
determining the amount that could be realized under the
insurance contract. In addition, the policyholder should also
determine the amount that could be realized under the life
insurance contract assuming the surrender of an individual-life
by individual-life policy. EITF
06-5 is
effective for fiscal years beginning after December 15,
2006. The Company does not expect the adoption of EITF
06-5 to have
a material effect on the Companys consolidated financial
position or results of operations.
In September 2006, the Securities and Exchange Commission
(SEC) issued Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB 108). SAB 108 provides guidance on
how to evaluate prior period financial statement misstatements
for purposes of assessing their materiality in the current
period, including both the carryover and reversing effects of
prior year misstatements, using both a rollover and
iron curtain approach. If the prior period effect is
material to the current period, then the prior period is
required to be corrected. Correcting prior year financial
statements would not require an amendment of prior year
financial statements, but such corrections would be made the
next time the company files the prior year financial statements.
Upon adoption, SAB 108 allows a one-time transitional
cumulative effect adjustment to retained earnings for
corrections of prior period misstatements required under this
statement. SAB 108 is effective for fiscal years beginning
after November 15, 2006. The Company does not expect the
adoption of SAB 108 to have a material effect on the
Companys consolidated financial position or results of
operations.
In February 2007, the FASB issued SFAS 159, The Fair Value
Option for Financial Assets and Financial Liabilities-Including
an Amendment of FASB Statement No. 115. SFAS 159
permits an entity to choose to measure many financial
instruments and certain other items at fair value. Most of the
provisions of SFAS 159 are elective, however, the amendment
to SFAS 115, Accounting for Certain Investments in Debt and
Equity Securities, applies to all entities with available for
sale or trading securities. For financial instruments elected to
be accounted for at fair value, an entity will report the
unrealized gains and losses in earnings. SFAS 159 is
effective as of the beginning of an entitys first fiscal
year that begins after November 15, 2007. SFAS 159 was
recently issued and the Company is currently assessing the
financial impact this Statement will have on our financial
statements.
Reclassifications Certain amounts in the
prior years financial statements and related footnote
disclosures have been reclassified to conform to the
current-year presentation with no impact on previously reported
net income or stockholders equity.
70
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Holding
|
|
|
Fair
|
|
|
Total
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Percent
|
|
|
|
(Amounts in thousands)
|
|
|
Investment Securities
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Obligations
|
|
$
|
971
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
970
|
|
|
|
0.04
|
%
|
Government agency &
government-sponsored enterprises
|
|
|
68,679
|
|
|
|
124
|
|
|
|
(503
|
)
|
|
|
68,300
|
|
|
|
2.64
|
%
|
Mortgage-backed securities
|
|
|
1,103,664
|
|
|
|
1,793
|
|
|
|
(27,606
|
)
|
|
|
1,077,851
|
|
|
|
41.73
|
%
|
CMOs / REMICs
|
|
|
791,265
|
|
|
|
2,589
|
|
|
|
(6,584
|
)
|
|
|
787,270
|
|
|
|
30.48
|
%
|
Municipal bonds
|
|
|
638,391
|
|
|
|
12,249
|
|
|
|
(4,855
|
)
|
|
|
645,785
|
|
|
|
25.00
|
%
|
Other securities
|
|
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
2,726
|
|
|
|
0.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
|
|
$
|
2,605,696
|
|
|
$
|
16,755
|
|
|
$
|
(39,549
|
)
|
|
$
|
2,582,902
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Holding
|
|
|
Holding
|
|
|
Fair
|
|
|
Total
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
Percent
|
|
|
|
(Amounts in thousands)
|
|
|
Investment Securities
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
498
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
497
|
|
|
|
0.02
|
%
|
Government agency &
government-sponsored enterprises
|
|
|
54,608
|
|
|
|
69
|
|
|
|
(588
|
)
|
|
|
54,089
|
|
|
|
2.28
|
%
|
Mortgage-backed securities
|
|
|
1,211,869
|
|
|
|
1,974
|
|
|
|
(29,235
|
)
|
|
|
1,184,608
|
|
|
|
49.99
|
%
|
CMOs / REMICs
|
|
|
617,031
|
|
|
|
237
|
|
|
|
(7,356
|
)
|
|
|
609,912
|
|
|
|
25.74
|
%
|
Municipal bonds
|
|
|
452,080
|
|
|
|
15,818
|
|
|
|
(3,998
|
)
|
|
|
463,900
|
|
|
|
19.57
|
%
|
FHLMC preferred stock
|
|
|
56,070
|
|
|
|
|
|
|
|
|
|
|
|
56,070
|
|
|
|
2.37
|
%
|
Other securities
|
|
|
816
|
|
|
|
|
|
|
|
|
|
|
|
816
|
|
|
|
0.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities
|
|
$
|
2,392,972
|
|
|
$
|
18,098
|
|
|
$
|
(41,178
|
)
|
|
$
|
2,369,892
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, approximately 97% of the
mortgage-backed securities and CMO/REMICs (which represent
collateralized mortgage obligations and real estate mortgage
investment conduits) securities are issued by
U.S. government agencies that guarantee payment of
principal and interest of the underlying mortgages.
Gross realized gains were $1.73 million,
$1.38 million, and $5.59 million for years ended
December 31, 2006, 2005, and 2004, respectively. Gross
realized losses were $670,000, $1.42 million, and $374,000
for years ended December 31, 2006, 2005, and 2004,
respectively.
The remaining CMO/REMICs are backed by agency-pooled collateral
or whole loan collateral. All non-agency CMO/REMICs issues held
are rated A or better by either Standard &
Poors or Moodys, as of December 31, 2006.
71
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Holding
|
|
|
|
|
|
Holding
|
|
|
Fair
|
|
|
Holding
|
|
Description of Securities
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
U.S. Treasury Obligations
|
|
$
|
970
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
970
|
|
|
$
|
1
|
|
Government agency &
government- sponsored enterprises
|
|
|
12,040
|
|
|
|
45
|
|
|
|
41,101
|
|
|
|
458
|
|
|
|
53,141
|
|
|
|
503
|
|
Mortgage-backed securities
|
|
|
74,274
|
|
|
|
388
|
|
|
|
880,162
|
|
|
|
27,218
|
|
|
|
954,436
|
|
|
|
27,606
|
|
CMO/REMICs
|
|
|
53,681
|
|
|
|
241
|
|
|
|
454,693
|
|
|
|
6,343
|
|
|
|
508,374
|
|
|
|
6,584
|
|
Municipal bonds
|
|
|
276,512
|
|
|
|
3,474
|
|
|
|
60,065
|
|
|
|
1,381
|
|
|
|
336,577
|
|
|
|
4,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
417,477
|
|
|
$
|
4,149
|
|
|
$
|
1,436,021
|
|
|
$
|
35,400
|
|
|
$
|
1,853,498
|
|
|
$
|
39,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Holding
|
|
|
|
|
|
Holding
|
|
|
Fair
|
|
|
Holding
|
|
Description of Securities
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(Amounts in thousands)
|
|
|
U.S. Treasury Obligations
|
|
$
|
497
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
497
|
|
|
$
|
1
|
|
Government agency &
government- sponsored enterprises
|
|
|
2,972
|
|
|
|
28
|
|
|
|
18,463
|
|
|
|
560
|
|
|
|
21,435
|
|
|
|
588
|
|
Mortgage-backed securities
|
|
|
459,242
|
|
|
|
8,385
|
|
|
|
634,731
|
|
|
|
20,850
|
|
|
|
1,093,973
|
|
|
|
29,235
|
|
CMO/REMICs
|
|
|
444,431
|
|
|
|
5,198
|
|
|
|
119,603
|
|
|
|
2,158
|
|
|
|
564,034
|
|
|
|
7,356
|
|
Municipal bonds
|
|
|
162,193
|
|
|
|
3,624
|
|
|
|
8,737
|
|
|
|
374
|
|
|
|
170,930
|
|
|
|
3,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,069,335
|
|
|
$
|
17,236
|
|
|
$
|
781,534
|
|
|
$
|
23,942
|
|
|
$
|
1,850,869
|
|
|
$
|
41,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2006 and 2005. The Company has reviewed
individual securities classified as
available-for-sale
to determine whether a decline in fair value below the amortized
cost basis is
other-than-temporary.
If it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of a debt
security not impaired at acquisition, an
other-than-temporary
impairment shall be considered to have occurred. If an
other-than-temporary
impairment occurs, the cost basis of the security would be
written down to its fair value as a new cost basis and the write
down accounted for as a realized loss.
The following summarizes our analysis of these securities and
the unrealized losses. This assessment was based on the
following factors: i) the length of the time and the extent
to which the market value has been less than cost; ii) the
financial condition and near-term prospects of the issuer;
iii) the intent and ability of the Company to retain its
investment in a security for a period of time sufficient to
allow for any anticipated recovery in market value; and
iv) general market conditions which reflect prospects for
the economy as a whole, including interest rates and sector
credit spreads.
U.S. Treasury Obligations and Government
Agency & Government-Sponsored Enterprises
(GSE) The U.S. Treasury Obligations and
Government-Agency securities are backed by the full faith and
credit of the U.S. Treasury and Agencies of the U.S.
Government. All GSE debt is sponsored by the federal government.
Debt
72
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
securities issued by GSEs are considered to be of high credit
quality. The senior debt of the GSEs is rated AAA/Aaa. These
securities are bullet securities, that is, they have a defined
maturity date on which the principal is paid. The contractual
term of these investments provides that the Bank will receive
the face value of the bond at maturity which will equal the
amortized cost of the bond. Interest is received throughout the
life of the security. The unrealized loss greater than
12 months of $457,000 is comprised of ten issues: three
Fannie Mae, four Freddie Mac and three Federal Home
Loan Bank securities. These securities have maturities from
1.5 months to 3.9 years. The agency securities are
rated As. Because the decline in market value is
attributable to the changes in interest rates and not credit
quality, and the Bank has the ability and intent to hold these
investments until recovery of fair value, which may be at
maturity, the Bank considers these securities only temporarily
impaired, the Bank does not consider these investments to be
classified
other-than-temporarily
impaired (as defined by EITF
03-1) at
December 31, 2006.
Mortgage-Backed Securities and CMO/REMICs The
mortgage-backed and CMO/REMICs securities are issued and
guaranteed by the government sponsored enterprise such as Ginnie
Mae, Fannie Mae and Freddie Mac. These securities are
collateralized or backed by the underlying mortgages. All
mortgage-backed securities are rated AAA with average life from
0.61 years to 6.61 years. The contractual cash flows
of these investments are guaranteed by agencies of the
U.S. government or private insurance companies.
Accordingly, it is expected the securities would not be settled
at a price less than the amortized cost of the bond. The
unrealized loss greater then 12 months on these securities
at December 31, 2006 is $33.6 million. This loss is
comprised of three main blocks of securities: FNMAs with a
loss of $17.2 million, Freddie Mac with a loss of
$14.7 million, Ginnie Mae with a loss of $184,000 and non
government sponsored enterprises such a financial institution
with a loss of $1.4 million. This loss is caused by the
increase in interest rates over the last 2.5 years. Because
the decline in market value is attributable to the changes in
interest rates and not credit quality, and the Bank has the
ability and intent to hold these securities until recovery of
fair value, which may be at maturity, the Bank considers these
securities only temporarily impaired, the Bank does not consider
these investments to be classified
other-than-temporarily
impaired (as defined by EITF
03-1) at
December 31, 2006.
Municipal Bonds The municipal bonds in the
Banks portfolio are all rated AAA and they are insured by
the largest bond insurance companies with maturities from
1 month to 19 years. The unrealized loss greater than
12 months on these securities at December 31, 2006 is
$1.4 million. As with the other securities in the
portfolio, this loss is due to the rising rate environment not
the credit risk of these securities. The Bank diversifies its
holdings by owning selections of securities from different
issuers and by holding securities from geographically
diversified municipal issuers, thus reducing the Banks
exposure to any single adverse event. Because the decline in
market value is attributable to the changes in interest rates
and not credit quality, and the Bank has the ability and intent
to hold these securities until recovery of fair value, which may
be at maturity, the Bank considers these securities only
temporarily impaired, the Bank does not consider these
investments to be classified
other-than-temporarily
impaired (as defined by EITF
03-1) at
December 31, 2006.
At December 31, 2006 and 2005, investment securities having
an amortized cost of approximately $2.44 billion and
$2.04 billion, respectively, were pledged to secure public
deposits, short and long-term borrowings, and for other purposes
as required or permitted by law.
The amortized cost and fair value of debt securities at
December 31, 2006, by contractual maturity, are shown
below. Although mortgage-backed securities and CMO/REMICs have
contractual maturities through 2027, 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.
73
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Amortized
|
|
|
|
|
|
Average
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Yield
|
|
|
|
(Amounts in thousands)
|
|
|
Due in one year or less
|
|
$
|
33,609
|
|
|
$
|
33,509
|
|
|
|
3.22
|
%
|
Due after one year through five
years
|
|
|
1,917,314
|
|
|
|
1,896,550
|
|
|
|
4.66
|
%
|
Due after five years through ten
years
|
|
|
407,910
|
|
|
|
407,926
|
|
|
|
4.74
|
%
|
Due after ten years
|
|
|
244,137
|
|
|
|
242,191
|
|
|
|
4.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,602,970
|
|
|
$
|
2,580,176
|
|
|
|
4.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above table excludes securities without stated maturities.
|
|
3.
|
Loan and
Lease Finance Receivables
|
The following is a summary of the components of loan and lease
finance receivables at December 31:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Commercial and Industrial
|
|
$
|
1,050,189
|
|
|
$
|
980,602
|
|
Real Estate:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
299,112
|
|
|
|
270,436
|
|
Mortgage
|
|
|
1,141,322
|
|
|
|
877,481
|
|
Consumer
|
|
|
54,125
|
|
|
|
59,801
|
|
Municipal lease finance receivables
|
|
|
126,393
|
|
|
|
108,832
|
|
Auto and equipment leases
|
|
|
51,420
|
|
|
|
39,442
|
|
Dairy and Livestock
|
|
|
358,259
|
|
|
|
338,035
|
|
|
|
|
|
|
|
|
|
|
Gross Loans
|
|
|
3,080,820
|
|
|
|
2,674,629
|
|
Less:
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
|
(27,737
|
)
|
|
|
(23,204
|
)
|
Deferred net loan fees
|
|
|
(10,624
|
)
|
|
|
(10,765
|
)
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
$
|
3,042,459
|
|
|
$
|
2,640,660
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, the Company held approximately
$1.2 billion of fixed rate loans. These fixed rate loans
bear interest at rates ranging from 3 to 12 percent and
have contractual maturities between 1 and 30 years.
Substantially all of the Companys real estate loans are
secured by real properties located in California. Declines in
the California economy and in real estate values could have a
significant effect on the collectibility of the Companys
loans and on the level of allowance for loan losses required.
|
|
4.
|
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,
2006 and 2005.
74
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is an analysis of the activity of all such loans:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Outstanding balance, beginning of
year
|
|
$
|
7,303
|
|
|
$
|
5,251
|
|
Credit granted, including renewals
|
|
|
3,128
|
|
|
|
3,930
|
|
Repayments
|
|
|
(1,552
|
)
|
|
|
(1,878
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding balance, end of year
|
|
$
|
8,879
|
|
|
$
|
7,303
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Allowance
for Credit Losses and Other Real Estate Owned
|
Activity in the allowance for credit losses was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Balance, beginning of year
|
|
$
|
23,204
|
|
|
$
|
22,494
|
|
|
$
|
21,282
|
|
Provision charged to operations
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
Acquisition of Granite State Bank
|
|
|
|
|
|
|
756
|
|
|
|
|
|
Loans charged off
|
|
|
(200
|
)
|
|
|
(1,380
|
)
|
|
|
(2,320
|
)
|
Recoveries on loans previously
charged off
|
|
|
1,733
|
|
|
|
1,334
|
|
|
|
3,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
27,737
|
|
|
$
|
23,204
|
|
|
$
|
22,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 reserve is allocated
as an impairment reserve.
At December 31, 2006 and 2005, the Bank had no loans
classified as impaired. The average recorded investment in
impaired loans during the years ended December 31, 2006,
2005, and 2004 was approximately $177,000, $3,000, and $744,000,
respectively. No interest income was recognized, based on cash
receipts, on impaired loans during the years ended
December 31, 2006 and 2005. Interest income of $1,000 was
recognized during the year ended December 31, 2004.
The accrual of interest on impaired 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 nonaccrual 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 collectibility of the asset. Nonaccrual assets may
be restored to accrual status when principal and interest become
current and full payment of principal and interest is expected.
For 2006 and 2005, there were no non-performing or non-accrual
loans.
The Company has no other real estate owned or allowance for
other real estate owned losses at December 31, 2006 or
2005. There were no expenses incurred in 2006, 2005, and 2004
related to holding and disposition of OREO.
75
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Premises
and Equipment
|
Premises and equipment consist of:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Land
|
|
$
|
7,231
|
|
|
$
|
8,263
|
|
Bank premises
|
|
|
38,371
|
|
|
|
29,084
|
|
Furniture and equipment
|
|
|
39,636
|
|
|
|
42,169
|
|
Leased property under capital lease
|
|
|
649
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,887
|
|
|
|
80,165
|
|
Accumulated depreciation and
amortization
|
|
|
(40,924
|
)
|
|
|
(40,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,963
|
|
|
$
|
40,020
|
|
|
|
|
|
|
|
|
|
|
In 2006, the Bank sold its old data center building and recorded
a gain of $494,000. The cost of the new data center was
$7.05 million
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
17,402
|
|
|
$
|
25,874
|
|
|
$
|
21,707
|
|
State
|
|
|
9,509
|
|
|
|
11,057
|
|
|
|
9,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,911
|
|
|
|
36,931
|
|
|
|
31,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision(benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,701
|
|
|
|
(585
|
)
|
|
|
(2,759
|
)
|
State
|
|
|
1,112
|
|
|
|
|
|
|
|
(778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,813
|
|
|
|
(585
|
)
|
|
|
(3,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,724
|
|
|
$
|
36,346
|
|
|
$
|
27,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income tax asset (liability) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
9,408
|
|
|
$
|
2,722
|
|
State
|
|
|
(2,432
|
)
|
|
|
(1,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
6,976
|
|
|
|
872
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
10,771
|
|
|
|
14,572
|
|
State
|
|
|
2,716
|
|
|
|
3,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,487
|
|
|
|
18,420
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,463
|
|
|
$
|
19,292
|
|
|
|
|
|
|
|
|
|
|
The components of the net deferred tax (liability) asset are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Federal
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
5,243
|
|
|
$
|
2,704
|
|
Other Intangibles
|
|
|
158
|
|
|
|
199
|
|
Intangible Western
Security Bank
|
|
|
596
|
|
|
|
875
|
|
Intangible Kaweah
National Bank
|
|
|
1,122
|
|
|
|
1,339
|
|
Intangible Granite
State Bank
|
|
|
2,322
|
|
|
|
2,381
|
|
Leases
|
|
|
56
|
|
|
|
38
|
|
Deferred income
|
|
|
7,242
|
|
|
|
5,222
|
|
Other, net
|
|
|
197
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liability
|
|
|
16,936
|
|
|
|
13,042
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
California franchise tax
|
|
|
2,928
|
|
|
|
3,103
|
|
Bad debt and credit loss deduction
|
|
|
10,288
|
|
|
|
8,684
|
|
Net operating loss carryforward
|
|
|
1,470
|
|
|
|
1,587
|
|
Deferred compensation
|
|
|
2,756
|
|
|
|
3,162
|
|
Other-than-temporary
impaired securities
|
|
|
|
|
|
|
3,000
|
|
Unrealized loss on investment
securities, net
|
|
|
7,978
|
|
|
|
8,078
|
|
Capital loss carryforward
|
|
|
2,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax asset
|
|
|
27,707
|
|
|
|
27,614
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax (liability)
asset federal
|
|
$
|
10,771
|
|
|
$
|
14,572
|
|
|
|
|
|
|
|
|
|
|
77
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
State
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
$
|
736
|
|
|
$
|
|
|
Other Intangibles
|
|
|
49
|
|
|
|
61
|
|
Intangibles Western
Security Bank
|
|
|
184
|
|
|
|
271
|
|
Intangibles Kaweah
National Bank
|
|
|
347
|
|
|
|
415
|
|
Intangibles Granite
State Bank
|
|
|
719
|
|
|
|
780
|
|
Leases
|
|
|
16
|
|
|
|
6
|
|
Deferred income
|
|
|
2,244
|
|
|
|
1,618
|
|
Other, net
|
|
|
56
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liability
|
|
|
4,351
|
|
|
|
3,239
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
5
|
|
Bad debt and credit loss deduction
|
|
|
3,195
|
|
|
|
2,707
|
|
Net operating loss carryforward
|
|
|
793
|
|
|
|
793
|
|
Deferred compensation
|
|
|
775
|
|
|
|
1,037
|
|
Other-than-temporary
impaired securities
|
|
|
|
|
|
|
929
|
|
Unrealized loss on investment
securities, net
|
|
|
1,596
|
|
|
|
1,616
|
|
Capital loss carryforward
|
|
|
708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax asset
|
|
|
7,067
|
|
|
|
7,087
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax (liability)
asset state
|
|
$
|
2,716
|
|
|
$
|
3,848
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory income tax rate to the
consolidated effective income tax rate follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Amounts in thousands)
|
|
|
Federal income tax at statutory
rate
|
|
$
|
36,271
|
|
|
|
35.0
|
%
|
|
$
|
37,437
|
|
|
|
35.0
|
%
|
|
$
|
31,280
|
|
|
|
35.0
|
%
|
State franchise taxes, net of
federal benefit
|
|
|
7,358
|
|
|
|
7.1
|
%
|
|
|
7,595
|
|
|
|
7.1
|
%
|
|
|
6,345
|
|
|
|
7.1
|
%
|
Tax-exempt income
|
|
|
(10,470
|
)
|
|
|
(10.1
|
)%
|
|
|
(7,251
|
)
|
|
|
(6.8
|
)%
|
|
|
(6,339
|
)
|
|
|
(7.1
|
)%
|
Tax credits
|
|
|
(1,435
|
)
|
|
|
(1.4
|
)%
|
|
|
(1,435
|
)
|
|
|
(1.3
|
)%
|
|
|
(1,435
|
)
|
|
|
(1.6
|
)%
|
Resolution of tax contingencies
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
(1,967
|
)
|
|
|
(2.2
|
)%
|
Other, net
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,724
|
|
|
|
30.6
|
%
|
|
$
|
36,346
|
|
|
|
34.0
|
%
|
|
$
|
27,884
|
|
|
|
31.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The composition of deposits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
(Amounts in thousands)
|
|
|
Non-interest bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
$
|
1,363,411
|
|
|
|
40.0
|
%
|
|
$
|
1,490,613
|
|
|
|
43.5
|
%
|
Interest bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Deposits
|
|
|
1,215,419
|
|
|
|
35.7
|
%
|
|
|
1,150,256
|
|
|
|
33.6
|
%
|
Time deposits
|
|
|
827,978
|
|
|
|
24.3
|
%
|
|
|
783,176
|
|
|
|
22.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
3,406,808
|
|
|
|
100.0
|
%
|
|
$
|
3,424,045
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time certificates of deposit with balances of $100,000 or more
amounted to approximately $733.7 million and
$591.0 million at December 31, 2006 and 2005,
respectively. Interest expense on such deposits amounted to
approximately $31.6 million (2006), $11.1 million
(2005), and $4.8 million (2004).
At December 31, 2006, the scheduled maturities of time
certificates of deposit are as follows (000s omitted):
|
|
|
|
|
2007
|
|
$
|
796,569
|
|
2008
|
|
|
17,439
|
|
2009
|
|
|
972
|
|
2010
|
|
|
9,332
|
|
2011 and thereafter
|
|
|
3,666
|
|
|
|
|
|
|
|
|
$
|
827,978
|
|
|
|
|
|
|
At December 31, 2006, the Company had a single depositor
with certificates of deposit balances of approximately
$140.9 million.
The Company has $0 and $95.4 million of brokered
certificates of deposits with the individual balances of under
$100,000 at December 31, 2006 and 2005, respectively.
During 2006 and 2005, the Bank entered into short-term borrowing
agreements with the FHLB. The Bank had outstanding balances of
$887.9 million and $830.0 million under these
agreements at December 31, 2006 and 2005, respectively,
with weighted-average interest rates of 4.28% and 3.35%,
respectively. FHLB held certain investment securities of the
Bank as collateral for those borrowings. The average outstanding
balance of short-term borrowings for 2006 and 2005 was
$1.3 billion and $778.1 million, respectively. The
maximum outstanding at any month-end was $1.7 billion
during 2006 and $830.0 million during 2005. On
December 31, 2006 and 2005, the Bank entered into an
overnight agreements with certain financial institutions and
customers to borrow an aggregate of $301.4 million and
$86.0 million, respectively, at a weighted average annual
interest rate of 5.08% and 3.21%, respectively. The Bank
maintained cash deposits with the financial institutions as
collateral for these borrowings.
In June 2006, the Company purchased securities totaling
$250.0 million. This purchase was funded by a repurchase
agreement of $250.0 million with a double cap embedded in the
repurchase agreement. The interest rate on this agreement is
tied to three-month LIBOR and reset quarterly. The Company
entered into this arrangement to protect itself from continued
rising rates while benefiting from declining rates. The amount
of the repurchase agreement is carried in borrowed funds on the
balance sheet. 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, 2006, total funds borrowed
79
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
under these agreements were $94.4 million. These amounts
are included in short-term borrowings on the Companys
consolidated balance sheet.
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, 2006 and 2005, the
amounts held by the Bank in the TT&L Note Option
Program were $7.2 million and $6.4 million
respectively, collateralized by securities. Amounts are payable
on demand. The Bank borrows at a variable rate of 75 and
43 basis points less than the average weekly federal funds
rate, which was 5.08% and 3.21% at December 31, 2006 and
2005, respectively. The average amounts held in 2006 and 2005
were $3.9 million and $4.1 million, respectively.
During 2006 and 2005, the Bank entered into long-term borrowing
agreements with the FHLB. The Bank had outstanding balances of
$950.0 million and $580.0 million under these
agreements at December 31, 2006 and 2005, respectively,
with weighted-average interest rates of 5.26% and 3.62% in 2006
and 2005 respectively. FHLB held certain investment securities
of the Bank as collateral for those borrowings. The maturity
dates of the outstanding balances at December 31, 2006 are
as follows: $850.0 million in 2008 and $100.0 million
in 2011.
|
|
10.
|
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, represent 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, but become callable in part or
in total on December 17, 2008 by CVB Statutory
Trust I. The Trust Preferred Securities have a fixed
interest rate of 6.51% during the first five years, after which
the interest rate will float and reset quarterly at the
three-month Libor rate plus 2.85%.
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, represent 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 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 15, 2033, but become callable in part or
in total on December 15, 2008 by CVB Statutory
Trust II. The Trust Preferred Securities have a fixed
interest rate of 6.46% during the first five years, after which
the interest rate will float and reset quarterly at the
three-month Libor rate plus 2.85%.
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 $25,744,000 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, represent the sole revenues of CVB Statutory
Trust III and the sole source of dividend
80
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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). As of December 31, 2006, the
six-month LIBOR was 5.37%.
|
|
11.
|
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, 2006, excluding
property taxes and insurance, are as follows (000s
omitted):
|
|
|
|
|
2007
|
|
$
|
4,580
|
|
2008
|
|
|
3,747
|
|
2009
|
|
|
2,556
|
|
2010
|
|
|
1,816
|
|
2011
|
|
|
1,169
|
|
Succeeding years
|
|
|
4,621
|
|
|
|
|
|
|
Total minimum payments required
|
|
$
|
18,489
|
|
|
|
|
|
|
Total rental expense for the Company was approximately
$4.2 million (2006), $4.0 million (2005), and
$3.4 million (2004).
Commitments
At December 31, 2006, the Company had commitments to extend
credit of approximately $680.6 million and obligations
under letters of credit of $64.8 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.
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
$1.31 billion from certain financial institutions of which
$978.0 million were secured by pledged securities and loans.
81
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
|
|
12.
|
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 2006, $108,000 in 2005, and $109,000 in 2004.
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 $87,000 in 2006, $135,000 in 2005, and $170,000 in
each of 2004.
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
82
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2006, 2005, and 2004.
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 the
employees were not retained in similar positions with the
surviving company. Amounts paid under these agreements totaled
approximately $498,000 in each of 2006, 2005 and 2004.
In 2003, the acquired Kaweah National Bank (KNB) 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. Amounts paid under
these agreements totaled approximately $48,750 in 2006.
In February 2006, the acquired Granite State Bank
(GSB) 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. No amount
was paid under this agreement in 2006.
The total expense recorded under these deferred compensation
agreements was $349,000 in 2006, $462,000 in 2005, and $873,000
in 2004.
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 shall become
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.
|
|
13.
|
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 after 12 months of consecutive service,
provided they have completed 1,000 service hours in the plan
year. 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 $2.7 million in 2006, $2.6 million in
2005 and $2.5 million in 2004.
|
|
14.
|
Earnings
Per Share Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Income
|
|
|
Average Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
|
|
|
|
(Amount and share in thousands,
|
|
|
|
except per share amount)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
Income available to common stockholders
|
|
$
|
71,906
|
|
|
|
84,154
|
|
|
$
|
0.85
|
|
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options
|
|
|
|
|
|
|
660
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
Income available to common stockholders
|
|
$
|
71,906
|
|
|
|
84,814
|
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Income
|
|
|
Average Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
|
|
|
|
(Amount and share in thousands,
|
|
|
|
except per share amount)
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
Income available to common stockholders
|
|
$
|
70,618
|
|
|
|
84,139
|
|
|
$
|
0.84
|
|
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options
|
|
|
|
|
|
|
773
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
Income available to common stockholders
|
|
$
|
70,618
|
|
|
|
84,912
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
Income available to common stockholders
|
|
$
|
61,486
|
|
|
|
83,221
|
|
|
$
|
0.74
|
|
Effect of Dilutive Securities
Incremental shares from assumed exercise of outstanding options
|
|
|
|
|
|
|
1,038
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
Income available to common stockholders
|
|
$
|
61,486
|
|
|
|
84,259
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Stock
Option Plans and Restricted Stock Grants
|
In May 2000, the Company approved a stock option plan that
authorizes the issuance of up to 6,499,024 shares (all
share amounts have been adjusted to reflect stock dividends and
splits) of our stock, and expires in March 2010. The Company
also has a stock option plan approved in 1991 that authorized
the issuance of up to 3,882,209 shares and expired in
February 2001. The stock option plans were established to help
the Company retain and motivate key employees and to compensate
outside directors for their service to the Company. Under both
plans option prices are determined at the fair market value of
such shares on the date of grant; those options generally vest
based on 5 years of continuous service, which is the
requisite service period, and have
10-year
contractual terms.
As a result of adopting SFAS 123R on January 1, 2006,
the Company expensed $953,000 for the year ended
December 31, 2006. This had the effect of reducing net
income by $760,000 compared with the income that would have been
recorded had the Company continued to account for stock-based
compensation under APB Opinion No. 25. As a result, basic
earnings per share decreased by one cent per share.
The estimated fair value of the options granted during 2006 and
prior years was calculated using the Black-Scholes options
pricing model. There were 604,946, 141,625, and 643,075 options
granted during 2006, 2005, and 2004 respectively. The fair value
of each stock option granted in 2006, 2005 and 2004 was
estimated on the date of grant using the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Dividend Yield
|
|
|
2.2
|
%
|
|
|
1.8
|
%
|
|
|
1.8
|
%
|
Volatility
|
|
|
40.0
|
%
|
|
|
40.4
|
%
|
|
|
36.2
|
%
|
Risk-free interest rate
|
|
|
5.1
|
%
|
|
|
4.4
|
%
|
|
|
3.6
|
%
|
Expected life
|
|
|
7.4 years
|
|
|
|
6.9 years
|
|
|
|
7.3 years
|
|
Fair Value
|
|
$
|
5.67
|
|
|
$
|
5.54
|
|
|
$
|
4.17
|
|
84
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 plan as of
December 31, 2006 and changes for the year ended
December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Stock
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
Options
|
|
(000)
|
|
|
Price
|
|
|
Term (in Years)
|
|
|
($000)
|
|
|
Outstanding at January 1, 2006
|
|
|
2,060
|
|
|
$
|
8.50
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
605
|
|
|
$
|
14.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(154
|
)
|
|
$
|
6.40
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(113
|
)
|
|
$
|
11.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
2,398
|
|
|
$
|
9.91
|
|
|
|
6.14
|
|
|
$
|
8,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
December 31, 2006
|
|
|
1,273
|
|
|
$
|
7.25
|
|
|
|
4.23
|
|
|
$
|
7,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
1,331
|
|
|
$
|
7.25
|
|
|
|
4.23
|
|
|
$
|
7,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted
was $5.67, $5.54 and $4.17 for 2006, 2005, and 2004,
respectively. The total intrinsic value of options exercised
during the year ended 2006, 2005 and 2004 was $1.2 million,
$7.0 million and $6.49 million, respectively.
SFAS 123R requires an estimate of forfeitures be used in
the calculation. The Company estimates its forfeiture rates
based on its historical experience. The forfeiture rate for 2006
was 4.37%.
As of December 31, 2006, there was $3.7 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
4.2 years. The total fair value of options vested was
$1.1 million during 2006 and 2005 and $567,000 during 2004.
As of December 31, 2006, 2005 and 2004, the Company had
3,970,618, 4,463,003, and 4,575,797 shares of common stock,
respectively, available for granting of future options under the
2000 Stock Option Plan.
At December 31, 2006, options for the purchase of
2,398,359 shares of Company common stock were outstanding
under the above plans, of which options to purchase
1,331,104 shares were exercisable at prices ranging from
$1.55 to $15.53; 3,970,618 shares of common stock were
available for the granting of future options under the May 2000
plan.
On August 1, 2006, we granted 50,000 (55,000 after the 10%
stock dividend) shares of restricted stock at $13.02 per
share to our new President and Chief Executive Officer,
Christopher D. Myers. The fair values of nonvested shares is
determined based on the closing trading price of the
Companys stock on the grant date. The stock will vest, in
equal installments, over a five-year period. As of
December 31, 2006, no shares were vested. Compensation cost
is recognized over the requisite service period, which is five
years, and amounted to $60,000 during the year ended
December 31, 2006. Total unrecognized compensation cost
related to shares was $656,000 at December 31, 2006.
85
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the status of the Companys
nonvested shares as of December 31, 2006 and changes
during the year ended December 31, 2006, is presented below:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Average
|
|
Nonvested Shares
|
|
(000)
|
|
|
Fair Value
|
|
|
Nonvested at January 1,
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
55
|
|
|
$
|
13.02
|
|
Vested
|
|
|
|
|
|
$
|
|
|
Forfeited
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31,
|
|
|
55
|
|
|
$
|
13.02
|
|
|
|
|
|
|
|
|
|
|
All per share prices and number of shares have been
retroactively adjusted to reflect the 10% stock dividend
declared December 20, 2006 and paid January 19, 2007,
the 5-for-4
stock split declared on December 21, 2005, which became
effective January 10, 2006, and the
5-for-4
stock split declared December 15, 2004, which became
effective December 29, 2004.
The Company has a policy of issuing new shares to satisfy share
option exercises.
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 mandatory
and possibly additional discretionary actions 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 (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, 2006 and 2005, the Company and the
Bank meet all capital adequacy requirements to which they are
subject.
As of December 31, 2006 and 2005, 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.
86
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has issued $108.3 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
|
|
|
Capitalized under
|
|
|
|
|
|
|
For Capital Adequacy
|
|
|
Prompt Corrective
|
|
|
|
Actual
|
|
|
Purposes:
|
|
|
Action Provisions:
|
|
|
|
Amount
|
|
|
|
|
|
Amount
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
(000s)
|
|
|
Ratio
|
|
|
(000s)
|
|
|
Ratio
|
|
|
(000s)
|
|
|
Ratio
|
|
|
As of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk- Weighted
Assets) Company
|
|
$
|
499,430
|
|
|
|
13.1
|
%
|
|
$
|
306,164
|
|
|
|
³8.0
|
%
|
|
|
|
|
|
|
N/A
|
|
Bank
|
|
$
|
452,416
|
|
|
|
11.8
|
%
|
|
$
|
305,686
|
|
|
|
³8.0
|
%
|
|
$
|
382,108
|
|
|
|
³10.0%
|
|
Tier I Capital (to
Risk-Weighted Assets) Company
|
|
$
|
469,960
|
|
|
|
12.3
|
%
|
|
$
|
153,081
|
|
|
|
³4.0
|
%
|
|
|
|
|
|
|
N/A
|
|
Bank
|
|
$
|
422,946
|
|
|
|
11.1
|
%
|
|
$
|
152,826
|
|
|
|
³4.0
|
%
|
|
$
|
229,239
|
|
|
|
³6.0%
|
|
Tier I Capital (to
Average-Assets) Company
|
|
$
|
469,960
|
|
|
|
7.8
|
%
|
|
$
|
240,389
|
|
|
|
³4.0
|
%
|
|
|
|
|
|
|
N/A
|
|
Bank
|
|
$
|
422,946
|
|
|
|
7.1
|
%
|
|
$
|
239,969
|
|
|
|
³4.0
|
%
|
|
$
|
299,962
|
|
|
|
³5.0%
|
|
As of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk- Weighted
Assets) Company
|
|
$
|
419,554
|
|
|
|
12.0
|
%
|
|
$
|
279,702
|
|
|
|
³8.0
|
%
|
|
|
|
|
|
|
N/A
|
|
Bank
|
|
$
|
402,464
|
|
|
|
11.5
|
%
|
|
$
|
279,245
|
|
|
|
³8.0
|
%
|
|
$
|
349,058
|
|
|
|
³10.0%
|
|
Tier I Capital (to
Risk-Weighted Assets) Company
|
|
$
|
394,617
|
|
|
|
11.3
|
%
|
|
$
|
139,811
|
|
|
|
³4.0
|
%
|
|
|
|
|
|
|
N/A
|
|
Bank
|
|
$
|
377,527
|
|
|
|
10.8
|
%
|
|
$
|
139,566
|
|
|
|
³4.0
|
%
|
|
$
|
209,350
|
|
|
|
³6.0%
|
|
Tier I Capital (to
Average-Assets) Company
|
|
$
|
394,617
|
|
|
|
7.7
|
%
|
|
$
|
206,066
|
|
|
|
³4.0
|
%
|
|
|
|
|
|
|
N/A
|
|
Bank
|
|
$
|
377,527
|
|
|
|
7.3
|
%
|
|
$
|
205,737
|
|
|
|
³4.0
|
%
|
|
$
|
257,171
|
|
|
|
³5.0%
|
|
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, 2006, declare and pay additional dividends of
approximately $128,454,000.
Banking regulations require that all banks maintain a percentage
of their deposits as reserves at the Federal Reserve Board
(FRB). On December 31, 2006, this reserve
requirement was approximately $200,000.
87
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
17.
|
Fair
Value Information
|
The following disclosure of the estimated fair value of
financial instruments is made in accordance with the
requirements of SFAS No. 107, Disclosures about
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, 2006 and 2005. The use of different market
assumptions
and/or
estimation methodologies may have a material effect on the
estimated fair value amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
Assets
|
Cash and cash equivalents
|
|
$
|
146,411
|
|
|
$
|
146,411
|
|
|
$
|
130,141
|
|
|
$
|
130,141
|
|
Interest-bearing balances due from
depository institutions
|
|
|
|
|
|
|
|
|
|
|
1,883
|
|
|
|
1,883
|
|
FHLB Stock
|
|
|
78,866
|
|
|
|
78,866
|
|
|
|
70,770
|
|
|
|
70,770
|
|
Investment securities available
for sale
|
|
|
2,582,902
|
|
|
|
2,582,902
|
|
|
|
2,369,892
|
|
|
|
2,369,892
|
|
Loans and lease finance
receivables, net
|
|
|
3,042,459
|
|
|
|
3,041,813
|
|
|
|
2,640,660
|
|
|
|
2,648,921
|
|
Accrued interest receivable
|
|
|
30,225
|
|
|
|
30,225
|
|
|
|
24,147
|
|
|
|
24,147
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
1,363,411
|
|
|
$
|
1,363,411
|
|
|
$
|
1,490,613
|
|
|
$
|
1,490,613
|
|
Interest-bearing
|
|
|
2,043,397
|
|
|
|
2,041,416
|
|
|
|
1,933,433
|
|
|
|
1,930,887
|
|
Demand note to U.S. Treasury
|
|
|
7,245
|
|
|
|
7,245
|
|
|
|
6,433
|
|
|
|
6,433
|
|
Short-term borrowings
|
|
|
1,189,250
|
|
|
|
1,189,250
|
|
|
|
916,000
|
|
|
|
916,000
|
|
Long-term borrowings
|
|
|
950,000
|
|
|
|
947,849
|
|
|
|
580,000
|
|
|
|
569,396
|
|
Junior subordinated debentures
|
|
|
108,250
|
|
|
|
132,293
|
|
|
|
82,476
|
|
|
|
74,593
|
|
Accrued interest payable
|
|
|
16,156
|
|
|
|
16,156
|
|
|
|
15,047
|
|
|
|
15,047
|
|
Funds due on security purchase
|
|
|
|
|
|
|
|
|
|
|
25,854
|
|
|
|
25,854
|
|
The methods and assumptions used to estimate the fair value of
each class of financial instruments for which it is practicable
to estimate that value are explained below:
The carrying amount of cash and cash equivalents is considered
to be a reasonable estimate of fair value. For investment
securities, fair values are based on quoted market prices,
dealer quotes, and prices obtained from an independent pricing
service.
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. Variable rate loans are composed primarily of
loans whose interest rates float with changes in the prime
interest rate. The carrying amount of variable rate loans, other
than such loans on nonaccrual status, is considered to be their
estimated fair value.
The fair value of fixed rate loans, other than such loans on
nonaccrual 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
88
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
The fair value of loans on nonaccrual status has not been
specifically estimated because it is not practicable to
reasonably assess the credit risk adjustment that would be
applied in the marketplace for such loans. As such, the
estimated fair value of total loans at December 31, 2006
and 2005 includes the carrying amount of nonaccrual loans at
each respective date.
The fair value of commitments to extend credit and standby
letters of credit were not significant at either
December 31, 2006 or 2005, as these instruments
predominantly have adjustable terms and are of a short-term
nature.
The amounts of accrued interest receivable on loans and lease
finance receivables and investments are considered to be stated
at fair value.
The amounts payable to depositors for demand, savings, money
market accounts, the demand note to the U.S. Treasury,
short-term borrowings, and the related accrued interest payable
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.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 2006
and 2005. 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.
|
|
18.
|
Goodwill
and Intangible Assets
|
In February 2005, the Bank acquired GSB. At the date of
acquisition, GSB had $62.8 million in loans,
$103.1 million in deposits, and $111.4 million in
total assets. The Company issued 696,049 common shares and paid
$13.3 million in cash in connection with the purchase of
GSB. This transaction gave rise to $8.4 million in
amortizable intangibles and $12.8 million in goodwill. The
weighted average amortization period was 7 years. The
initial allocation of the purchase price was based on
preliminary data. Upon final valuation of certain assets the
goodwill was adjusted to $12.0 million.
During 2003, the Company acquired KNB and recorded an intangible
asset classified as core deposit intangible in the amount of
$3.1 million. The weighted average amortization period was
8 years.
89
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of amortizable intangible assets,
which consist of core deposit intangibles, at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
(Amounts in thousands)
|
|
|
Amortizing intangible
assets
|
|
$
|
19,636
|
|
|
$
|
(9,515
|
)
|
|
$
|
19,636
|
|
|
$
|
(7,162
|
)
|
Aggregate Amortization
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For year ended December 31,
|
|
$
|
2,353
|
|
|
|
|
|
|
$
|
2,061
|
|
|
|
|
|
Estimated Amortization
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended 2007
|
|
$
|
2,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended 2008
|
|
$
|
2,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended 2009
|
|
$
|
1,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended 2010
|
|
$
|
1,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended 2011
|
|
$
|
1,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 the weighted average remaining life of
intangible assets is approximately 4.6 years.
The change in the carrying amount of goodwill for the years
ended December 31, 2006 and 2005, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Balance as of January 1
|
|
$
|
32,357
|
|
|
$
|
19,580
|
|
Goodwill acquired during the year
|
|
|
|
|
|
|
12,777
|
|
Purchase price adjustment related
to acquisition of Granite State Bank
|
|
|
(826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
31,531
|
|
|
$
|
32,357
|
|
|
|
|
|
|
|
|
|
|
The Companys subsidiary bank has 39 Business Financial
Centers (branches) 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 Banks branches are considered
operating segments and have been aggregated for segment
reporting purposes because the products and services are similar
and are sold to similar types of customers, have similar
production and distribution processes, and have similar economic
characteristics. The Company has identified two principal
operating segments for purposes of management reporting:
Business Financial Centers and the Treasury Department. The
Treasury Departments primary focus is managing the
Banks investments, liquidity, and interest risk.
Information related to the Companys remaining operating
segments which include construction lending, dairy and livestock
lending, SBA lending and leasing, centralized functions and
eliminations of intersegment amounts 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.
90
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table represents the selected financial
information for these two business segments. Accounting
principles generally accepted in the United States of America do
not have an authoritative body of knowledge regarding the
management accounting used in presenting these numbers. The
accounting policies for each of the business units is the same
as those policies identified for the consolidated Company and
identified in the footnote included in the summary of
significant accounting policies. The income numbers represent
the actual income and expenses of each business unit. In
addition, each segment has allocated income and expenses based
on managements internal reporting system, which allows
management to determine the performance of each of its business
units. Loan fees, included in the Business Financial
Centers category are the actual loan fees paid to the
Company by its customers. These fees are eliminated and deferred
in the Other category, resulting in deferred loan
fees for the consolidated financial statements. All income and
expense items not directly associated with the two business
segments are grouped in the Other category. Future
changes in the Companys management structure or reporting
methodologies may result in changes in the measurement of
operating segment results.
The following tables present the operating results and other key
financial measures for the individual operating segments for the
year ended December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
Centers
|
|
|
Treasury
|
|
|
Other
|
|
|
Total
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, including loan
fees
|
|
$
|
148,595
|
|
|
$
|
122,007
|
|
|
$
|
46,058
|
|
|
$
|
316,660
|
|
Credit for funds provided(1)
|
|
|
71,068
|
|
|
|
|
|
|
|
6,821
|
|
|
|
77,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
219,663
|
|
|
|
122,007
|
|
|
|
52,879
|
|
|
|
394,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
50,762
|
|
|
|
87,821
|
|
|
|
8,881
|
|
|
|
147,464
|
|
Charge for funds used(1)
|
|
|
7,707
|
|
|
|
28,018
|
|
|
|
42,164
|
|
|
|
77,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
58,469
|
|
|
|
115,839
|
|
|
|
51,045
|
|
|
|
225,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
161,194
|
|
|
|
6,168
|
|
|
|
1,834
|
|
|
|
169,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for credit losses
|
|
$
|
161,194
|
|
|
$
|
6,168
|
|
|
$
|
(1,166
|
)
|
|
$
|
166,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
15,136
|
|
|
|
1,058
|
|
|
|
17,064
|
|
|
|
33,258
|
|
Non-interest expense
|
|
|
41,258
|
|
|
|
1,123
|
|
|
|
53,443
|
|
|
|
95,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit (loss)
|
|
$
|
135,072
|
|
|
$
|
6,103
|
|
|
$
|
(37,545
|
)
|
|
$
|
103,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets as of
December 31, 2006
|
|
$
|
3,354,892
|
|
|
$
|
2,271,341
|
|
|
$
|
468,029
|
|
|
$
|
6,094,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
Centers
|
|
|
Treasury
|
|
|
Other
|
|
|
Total
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, including loan
fees
|
|
$
|
115,102
|
|
|
$
|
98,588
|
|
|
$
|
33,258
|
|
|
$
|
246,948
|
|
Credit for funds provided(1)
|
|
|
42,372
|
|
|
|
|
|
|
|
2,232
|
|
|
|
44,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
157,474
|
|
|
|
98,588
|
|
|
|
35,490
|
|
|
|
291,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
22,041
|
|
|
|
49,687
|
|
|
|
5,708
|
|
|
|
77,436
|
|
Charge for funds used(1)
|
|
|
4,191
|
|
|
|
26,059
|
|
|
|
14,354
|
|
|
|
44,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
26,232
|
|
|
|
75,746
|
|
|
|
20,062
|
|
|
|
122,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
131,242
|
|
|
|
22,842
|
|
|
|
15,428
|
|
|
|
169,512
|
|
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for credit losses
|
|
$
|
131,242
|
|
|
$
|
22,842
|
|
|
$
|
15,428
|
|
|
$
|
169,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
12,256
|
|
|
|
2
|
|
|
|
15,247
|
|
|
|
27,505
|
|
Non-interest expense
|
|
|
38,064
|
|
|
|
3,538
|
|
|
|
48,451
|
|
|
|
90,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit (loss)
|
|
$
|
105,434
|
|
|
$
|
19,306
|
|
|
$
|
(17,776
|
)
|
|
$
|
106,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets as of
December 31, 2005
|
|
$
|
3,164,269
|
|
|
$
|
1,856,453
|
|
|
$
|
402,249
|
|
|
$
|
5,422,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, including loan
fees
|
|
$
|
90,080
|
|
|
$
|
83,228
|
|
|
$
|
24,394
|
|
|
$
|
197,702
|
|
Credit for funds provided(1)
|
|
|
15,274
|
|
|
|
|
|
|
|
1,806
|
|
|
|
17,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
105,354
|
|
|
|
83,228
|
|
|
|
26,200
|
|
|
|
214,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
11,800
|
|
|
|
29,205
|
|
|
|
5,512
|
|
|
|
46,517
|
|
Charge for funds used(1)
|
|
|
1,088
|
|
|
|
9,828
|
|
|
|
6,164
|
|
|
|
17,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
12,888
|
|
|
|
39,033
|
|
|
|
11,676
|
|
|
|
63,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
92,466
|
|
|
|
44,195
|
|
|
|
14,524
|
|
|
|
151,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for credit losses
|
|
$
|
92,466
|
|
|
$
|
44,195
|
|
|
$
|
14,524
|
|
|
$
|
151,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
15,630
|
|
|
|
(1,079
|
)
|
|
|
13,356
|
|
|
|
27,907
|
|
Non-interest expense
|
|
|
34,531
|
|
|
|
1,426
|
|
|
|
53,765
|
|
|
|
89,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment pretax profit (loss)
|
|
$
|
73,565
|
|
|
$
|
41,690
|
|
|
$
|
(25,885
|
)
|
|
|
89,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets as of
December 31, 2004
|
|
$
|
2,733,645
|
|
|
$
|
1,464,386
|
|
|
$
|
312,979
|
|
|
$
|
4,511,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Credit for funds provided and charge for funds used is
eliminated in the consolidated presentation. |
92
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
20.
|
Condensed
Financial Information of Parent Company
|
BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
$
|
451,377
|
|
|
$
|
409,033
|
|
Other assets, net
|
|
|
54,942
|
|
|
|
24,629
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
506,319
|
|
|
$
|
433,662
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
$
|
116,980
|
|
|
$
|
90,786
|
|
Stockholders equity
|
|
|
389,339
|
|
|
|
342,876
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
506,319
|
|
|
$
|
433,662
|
|
|
|
|
|
|
|
|
|
|
STATEMENTS
OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Excess in net earnings of
subsidiaries
|
|
$
|
42,229
|
|
|
$
|
38,483
|
|
|
$
|
27,143
|
|
Dividends from the Bank
|
|
|
34,560
|
|
|
|
35,150
|
|
|
|
38,050
|
|
Other expense, net
|
|
|
(4,883
|
)
|
|
|
(3,015
|
)
|
|
|
(3,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
71,906
|
|
|
$
|
70,618
|
|
|
$
|
61,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
71,906
|
|
|
$
|
70,618
|
|
|
$
|
61,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net
earnings to cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of subsidiaries
|
|
|
(76,789
|
)
|
|
|
(73,633
|
)
|
|
|
(65,193
|
)
|
Other operating activities, net
|
|
|
(2,182
|
)
|
|
|
(984
|
)
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(78,971
|
)
|
|
|
(74,617
|
)
|
|
|
(64,999
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) operating
activities
|
|
|
(7,065
|
)
|
|
|
(3,999
|
)
|
|
|
(3,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in CVB Statutory
Trust III
|
|
|
(774
|
)
|
|
|
|
|
|
|
|
|
Dividends received from the Bank
|
|
|
34,560
|
|
|
|
35,150
|
|
|
|
38,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing
activities
|
|
|
33,786
|
|
|
|
35,150
|
|
|
|
38,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
CVB
FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends on common stock
|
|
|
(27,876
|
)
|
|
|
(27,963
|
)
|
|
|
(23,821
|
)
|
Proceeds from exercise of stock
options
|
|
|
983
|
|
|
|
1,789
|
|
|
|
1,281
|
|
Tax benefit from exercise of stock
options
|
|
|
331
|
|
|
|
|
|
|
|
|
|
Repayment of advance from the Bank
|
|
|
|
|
|
|
(2,336
|
)
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(12,286
|
)
|
|
|
(1,992
|
)
|
Issuance of junior subordinated
debentures
|
|
|
25,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing
activities
|
|
|
(788
|
)
|
|
|
(40,796
|
)
|
|
|
(24,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
|
|
|
25,933
|
|
|
|
(9,645
|
)
|
|
|
10,005
|
|
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR
|
|
|
9,026
|
|
|
|
18,671
|
|
|
|
8,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF
YEAR
|
|
|
34,959
|
|
|
$
|
9,026
|
|
|
$
|
18,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.
|
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)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
43,826
|
|
|
$
|
43,161
|
|
|
$
|
41,972
|
|
|
$
|
40,237
|
|
Provision for credit losses
|
|
|
250
|
|
|
|
900
|
|
|
|
1,250
|
|
|
|
600
|
|
Net earnings
|
|
|
18,240
|
|
|
|
18,917
|
|
|
|
18,455
|
|
|
|
16,294
|
|
Basic earnings per common share
|
|
|
0.22
|
|
|
|
0.22
|
|
|
|
0.22
|
|
|
|
0.19
|
|
Diluted earning per common share
|
|
|
0.22
|
|
|
|
0.22
|
|
|
|
0.22
|
|
|
|
0.19
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
40,624
|
|
|
$
|
41,886
|
|
|
$
|
42,584
|
|
|
$
|
44,418
|
|
Provision for credit losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
17,701
|
|
|
|
17,478
|
|
|
|
18,267
|
|
|
|
17,172
|
|
Basic earnings per common share
|
|
|
0.21
|
|
|
|
0.21
|
|
|
|
0.22
|
|
|
|
0.20
|
|
Diluted earning per common share
|
|
|
0.21
|
|
|
|
0.21
|
|
|
|
0.21
|
|
|
|
0.20
|
|
On February 8, 2007, we announced the execution of a
definitive merger agreement to acquire First Coastal Bancshares
and First Coastal Bank (First Coastal). First Coastal is
headquartered in Manhattan Beach, California and has four
offices. These offices will become offices of Citizens Business
Bank following completion of the merger. As of December 31,
2006, First Coastal has $238 million in assets,
$157 million in loans, and $190 million in deposits.
The purchase price is $35 million. One half of the purchase
price is payable in cash and the balance will be paid through
the issuance of CVB common stock.
On February 21, 2007, the Board of Directors of the Company
approved the repurchase of an additional 2.0 million shares
of the Company common stock. The Company has 775,163 shares
left to be repurchased from its October 2001 authorization. The
total number of shares to be repurchased as of February 21,
2007 was 2,775,163 shares.
* * * * * *
94
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
CVB Financial Corp.
Ontario, California
We have audited the consolidated balance sheets of CVB Financial
Corp. and subsidiaries as of December 31, 2006 and 2005,
and the related consolidated statements of earnings,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2006. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these 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, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standard No. 123 (revised 2004), Share-Based
Payment in 2006 and changed its method of accounting for
stock-based compensation.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of CVB Financial Corp. and subsidiaries
internal control over financial reporting as of
December 31, 2006, 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 February 28, 2007 expressed an
unqualified opinion on managements assessment of the
effectiveness of CVB Financial Corp.s internal control
over financial reporting and an unqualified opinion on the
effectiveness of CVB Financial Corp.s internal control
over financial reporting.
|
|
|
|
/s/ McGladrey &
Pullen, LLP
|
|
McGladrey & Pullen, LLP
Pasadena, California
February 28, 2007
95
INDEX TO
EXHIBITS
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
No.
|
|
|
|
Page
|
|
|
3
|
.1
|
|
Articles of Incorporation of the
Company, as amended.(1)
|
|
*
|
|
3
|
.2
|
|
Bylaws of Company, as amended.(2)
|
|
*
|
|
3
|
.3
|
|
Reserved.
|
|
*
|
|
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., including the
Certificate of Determination, the form of Rights Certificate and
the Summary of Rights.(4)
|
|
*
|
|
4
|
.3
|
|
Certificate of Determination of
Participating Preferred Stock of Registrant(5)
|
|
*
|
|
4
|
.4
|
|
Form of Rights Certificate(6)
|
|
*
|
|
4
|
.5
|
|
Summary of Rights(7)
|
|
*
|
|
4
|
.6
|
|
CVB Statutory Trust I Junior
Subordinated Indenture dated December 17, 2003 entered into
between CVB Financial Corp. and U.S. Bank National
Association, as Trustee(8)
|
|
*
|
|
4
|
.7
|
|
CVB Statutory Trust I Form of
Junior Subordinated Deferrable Interest Debenture (included as
an exhibit to Exhibit 4.6)(8)
|
|
*
|
|
4
|
.8
|
|
Amended and Restated Declaration
of CVB Statutory Trust I(8)
|
|
*
|
|
4
|
.9
|
|
CVB Statutory Trust I Form of
Capital Security Certificate (included as an exhibit to
Exhibit 4.8)(8)
|
|
*
|
|
4
|
.10
|
|
CVB Statutory Trust I Form of
Common Security Certificate (included as an exhibit to
Exhibit 4.8)(8)
|
|
*
|
|
4
|
.11
|
|
CVB Statutory Trust I
Guarantee Agreement between CVB Financial Corp. and
U.S. Bank National Association(8)
|
|
*
|
|
4
|
.12
|
|
CVB Statutory Trust II Junior
Subordinated Indenture dated December 15, 2003 entered into
between CVB Financial Corp. and Wells Fargo Bank, National
Association, as Trustee(8)
|
|
*
|
|
4
|
.13
|
|
CVB Statutory Trust II Form
of Junior Subordinated Deferrable Interest Debenture (included
as an exhibit to Exhibit 4.12)(8)
|
|
*
|
|
4
|
.14
|
|
Amended and Restated Declaration
of CVB Statutory Trust II(8)
|
|
*
|
|
4
|
.15
|
|
CVB Statutory Trust II Form
of Capital Security Certificate (included as an exhibit to
Exhibit 4.14)(8)
|
|
*
|
|
4
|
.16
|
|
CVB Statutory Trust II Form
of Common Security Certificate (included as an exhibit to
Exhibit 4.14)(8)
|
|
*
|
|
4
|
.17
|
|
CVB Statutory Trust II
Guarantee Agreement between CVB Financial Corp. and Wells Fargo
Bank, National Association(8)
|
|
*
|
|
4
|
.18
|
|
CVB Statutory Trust III
Junior Subordinated Indenture dated January 31, 2006
entered into between CVB Financial Corp. and U.S. Bank,
National Association, as Trustee(9)
|
|
*
|
|
4
|
.19
|
|
CVB Statutory Trust III Form
of Junior Subordinated Deferrable Interest Debenture (included
as an exhibit to Exhibit 4.20)(9)
|
|
*
|
|
4
|
.20
|
|
Amended and Restated Declaration
of CVB Statutory Trust III(9)
|
|
*
|
|
4
|
.21
|
|
CVB Statutory Trust III Form
of Capital Security Certificate (included as an exhibit to
Exhibit 4.20)(9)
|
|
*
|
|
4
|
.22
|
|
CVB Statutory Trust III Form
of Common Security Certificate (included as an exhibit to
Exhibit 4.20)(9)
|
|
*
|
|
4
|
.23
|
|
CVB Statutory Trust III
Guarantee Agreement between CVB Financial Corp. and Wells Fargo
Bank, National Association(9)
|
|
*
|
|
10
|
.1
|
|
Reserved
|
|
|
|
10
|
.2
|
|
Agreement by and among Christopher
D. Myers, CVB Financial Corp. and Citizens Business and dated
June 1, 2006. (10)
|
|
*
|
|
10
|
.3
|
|
Chino Valley Bank Profit Sharing
Plan, as amended. (11)
|
|
*
|
|
10
|
.4
|
|
Form of Indemnification Agreement.
(12)
|
|
*
|
|
10
|
.5
|
|
1991 Stock Option Plan, as
amended. (13)
|
|
*
|
|
10
|
.6
|
|
2000 Stock Option Plan. (14)
|
|
*
|
|
10
|
.7
|
|
Form of Option Agreement under
2000 Stock Option, as amended (15)
|
|
*
|
96
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
No.
|
|
|
|
Page
|
|
|
10
|
.10
|
|
Severance Compensation Agreement
dated April 1, 2004 with Jay Coleman (16)
|
|
*
|
|
10
|
.11
|
|
Severance Compensation Agreement
dated April 1, 2004 with Edward J. Biebrich (17)
|
|
*
|
|
10
|
.12
|
|
Severance Compensation Agreement
dated April 1, 2004 with D. Linn Wiley (18)
|
|
*
|
|
10
|
.13
|
|
Severance Compensation Agreement
dated June 14, 2005 with R. Scott Racusin (19)
|
|
*
|
|
10
|
.14
|
|
Severance Compensation Agreement
dated August 31, 2005 with Edward J. Mylett (20)
|
|
*
|
|
10
|
.15
|
|
Schedule of Director Fees (21)
|
|
*
|
|
10
|
.16
|
|
Salaries for Named Executive
Officers (22)
|
|
*
|
|
10
|
.17
|
|
Discretionary Performance
Compensation Plan 2006 (23)
|
|
*
|
|
10
|
.18
|
|
Amendment to Severance
Compensation Agreement for D. Linn Wiley, dated March 15,
2006 (24)
|
|
*
|
|
10
|
.19
|
|
Amendment to Severance
Compensation Agreement for Edward J. Biebrich, dated
March 15, 2006 (25)
|
|
*
|
|
10
|
.20
|
|
Amendment to Severance
Compensation Agreement for Jay W. Coleman, dated March 15,
2006 (26)
|
|
*
|
|
10
|
.21
|
|
Amendment to Severance
Compensation Agreement for Edward J. Mylett, dated
March 15, 2006 (27)
|
|
*
|
|
10
|
.22
|
|
Amendment to Severance
Compensation Agreement for R. Scott Racusin, dated
March 15, 2006 (28)
|
|
*
|
|
10
|
.23
|
|
Deferred Compensation Plan dated
December 22, 2006 for Christopher D. Myers
|
|
|
|
10
|
.24
|
|
Restricted stock agreement by and
between CVB Financial Corp. and Christopher D. Myers dated
June 1, 2006 (29)
|
|
*
|
|
10
|
.25
|
|
Severance Compensation Agreement
for Anthony Q. Evans, dated January 10, 2007, 2006
|
|
|
|
10
|
.26
|
|
Deferred Compensation Plan dated
February 21, 2007 for Directors and Executive Officers
|
|
|
|
12
|
|
|
Statement regarding computation of
ratios (included in
Form 10-K)
|
|
|
|
21
|
|
|
Subsidiaries of Company.
|
|
|
|
23
|
.1
|
|
Consent of McGladrey &
Pullen, 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
|
|
Definitive Merger Agreement
between CVB Financial Corp. and First Coastal Bancshares dated
February 8, 2007.
|
|
|
|
|
|
* |
|
Not applicable. |
|
(1) |
|
Filed as Exhibit 3.1 to Registrants statement on
Form 8-A12G
on January 13, 2006, Commission file number
0-10140,
which is incorporated herein by this reference. |
|
(2) |
|
Filed as Exhibit 3.1 to Registrants statement on
Form 8-A12G
on June 26, 2006, Commission file number
0-10140,
which is incorporated herein by this reference. |
|
(3) |
|
Filed as Exhibit 4.1 to Registrants Statement on
Form 8-A12G
on June 11, 2001, Commission file number
0-10140,
which is incorporated herein by this reference. |
|
(4) |
|
Filed as Exhibit 4.2 to Registrants Statement on
Form 8-A12G
on June 11, 2001, Commission file number
0-10140,
which is incorporated herein by this reference. |
|
(5) |
|
Filed as Exhibit 4.3 to Registrants Statement on
Form 8-A12G
on June 11, 2001, Commission file number
0-10140,
which is incorporated herein by this reference. |
|
(6) |
|
Filed as Exhibit 4.4 to Registrants Statement on
Form 8-A12G
on June 11, 2001, Commission file number
0-10140,
which are incorporated herein by this reference. |
|
(7) |
|
Filed as Exhibit 4.5 to Registrants Statement on
Form 8-A12G
on June 11, 2001, Commission file number
0-10140,
which is incorporated herein by this reference. |
|
(8) |
|
Filed as Exhibits 4.6 thru 4.17 to Registrants
Statement on Form 10K on March 15, 2004, Commission
file number 1-10140, which are incorporated herein by this
reference. |
97
|
|
|
(9) |
|
Filed as Exhibits 4.1 thru 4.6 to Registrants
Statement on
Form 8-A12G
on February 2, 2006, Commission file number 0-10140, which
are incorporated herein by this reference. |
|
|
|
(10) |
|
Filed as Exhibit 10.1 to Registrants Statement on
Form 8-A12G
on June 7, 2006, Commission file number 0-10140, which is
incorporated herein by this reference. |
|
(11) |
|
Filed as Exhibits 10.3 to Registrants Annual Report
on
Form 10-K
for the fiscal year ended December 31, 1990, Commission
file number 1-10394, which is incorporated herein by this
reference. |
|
(12) |
|
Filed as Exhibit 10.13 to Registrants Annual Report
on
Form 10-K
for the fiscal year ended December 31, 1988, Commission
file number 1-10394, which is incorporated herein by this
reference. |
|
(13) |
|
Filed as Exhibit 10.17 to Registrants Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 1998, Commission file
number 1-10394, which is incorporated herein by this reference. |
|
(14) |
|
Filed as Exhibit 10.18 and 10.19 respectively to
Registrants Statement on
Form S-8
on July 12, 2000, Commission file
number 333-41198,
which is incorporated herein by this reference. |
|
(15) |
|
Filed as Exhibit 10.1 to Registrants statement on
Form 8-A12G
on June 26, 2006, Commission file number
0-10140,
which is incorporated herein by this reference. |
|
(16) |
|
Filed as Exhibit 10.4 to Registrants Quarterly Report
on Form 10Q for the quarter ended March 31, 2004,
Commission file number 1-10394, which is incorporated herein by
reference. |
|
(17) |
|
Filed as Exhibit 10.2 to Registrants Quarterly Report
on Form 10Q for the quarter ended March 31, 2004,
Commission file number 1-10394, which is incorporated herein by
reference. |
|
(18) |
|
Filed as Exhibit 10.5 to Registrants Quarterly Report
on Form 10Q for the quarter ended March 31, 2004,
Commission file number 1-10394, which is incorporated herein by
reference. |
|
(19) |
|
Filed as Exhibit 10.2 to Registrants statement on
Form 8-A12G
on June 17, 2006, Commission file number
0-10140,
which is incorporated herein by this reference. |
|
(20) |
|
Filed as Exhibit 10.1 to Registrants statement on
Form 8-A12G
on March 3, 2006, Commission file number
0-10140,
which is incorporated herein by this reference. |
|
(21) |
|
Filed as Exhibit 10.15 to Registrants Statement on
Form 10K on March 14, 2005, Commission file number
1-10140,
which are incorporated herein by this reference. |
|
(22) |
|
Filed as Exhibit 10.1 to Registrants statement on
Form 8-A12G
on March 21, 2006, Commission file number 0-10140, which is
incorporated herein by this reference. |
|
(23) |
|
Filed as Exhibit 10.2 to Registrants statement on
Form 8-A12G
on March 21, 2006, Commission file number 0-10140, which is
incorporated herein by this reference. |
|
(24) |
|
Filed as Exhibit 10.2 to Registrants statement on
Form 8-A12G
on March 21, 2006, Commission file number 0-10140, which is
incorporated herein by this reference. |
|
(25) |
|
Filed as Exhibit 10.3 to Registrants statement on
Form 8-A12G
on March 21, 2006, Commission file number 0-10140, which is
incorporated herein by this reference. |
|
(26) |
|
Filed as Exhibit 10.4 to Registrants statement on
Form 8-A12G
on March 21, 2006, Commission file number 0-10140, which is
incorporated herein by this reference. |
|
(27) |
|
Filed as Exhibit 10.5 to Registrants statement on
Form 8-A12G
on March 21, 2006, Commission file number 0-10140, which is
incorporated herein by this reference. |
|
(28) |
|
Filed as Exhibit 10.6 to Registrants statement on
Form 8-A12G
on March 21, 2006, Commission file number 0-10140, which is
incorporated herein by this reference. |
|
(29) |
|
Filed as Exhibit 10.2 to Registrants statement on
Form 8-A12G
on June 7, 2006, Commission file number 0-10140, which is
incorporated herein by this reference. |
98