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| CVBF > SEC Filings for CVBF > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
Weaknesses in the local economy could adversely affect us through diminished
loan demand, credit quality deterioration, and increases in loan delinquencies
and defaults.
Over the past few years, we have been active in acquisitions and we will
continue to pursue acquisition targets which will enable us to meet our business
objectives and enhance shareholder value. Since 2000, we have acquired four
banks and a leasing company, and we have opened five de novo branches: Glendale,
Bakersfield, Fresno, Madera, and Stockton. In February 2008, we opened our first
Commercial Banking Center in Encino, California. In May 2008, we opened two
additional Commercial Banking Centers, one for the Inland Empire region and one
for Orange County. These centers will operate primarily as a sales office and
focus on business clients and their principals, professionals, and high
net-worth individuals.
Our net income increased to $50.8 million for the first nine months of 2008
compared with $47.2 million for the first nine months of 2007, an increase of
$3.6 million or 7.58%. Diluted earnings per share increased to $0.61 per share
for 2008, from $0.56 per share in 2007. The increase of $3.6 million is
primarily the result of the decrease in interest expense by $28.0 million offset
by a decrease in interest income of $6.1 million, increases in other operating
expenses of $9.9 million and an increase of $8.7 million in provision for credit
losses.
Net income increased to $17.5 million for the quarter ended September 30,
2008 compared with $16.1 million for the same period in 2007, an increase of
$1.3 million or 8.31%. Diluted earnings per share increased to $0.21 per share
for the third quarter of 2008, from $0.19 per share for the third quarter of
2007. The increase of $1.3 million is primarily the result of the decrease in
interest expense by $11.7 million offset by a decrease in interest income of
$4.4 million, increases in other operating expenses of $1.8 million and an
increase of $4.0 million in provision for credit losses.
Although our loans and investments for the first nine months of 2008 compared
with the first nine months of 2007 has grown, our interest income has decreased
slightly due to lower interest rates. The Bank has always had an excellent base
of interest free deposits primarily due to our specialization in businesses and
professionals as customers. This has allowed us to have a low cost of deposits,
currently 1.16% for the nine months of 2008.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are defined as those that are reflective of
significant judgments and uncertainties, and could potentially result in
materially different results under different assumptions and conditions. We
believe that our most critical accounting estimates upon which our financial
condition depends, and which involve the most complex or subjective decisions or
assessments are as follows:
Allowance for Credit Losses: Arriving at an appropriate level of allowance
for credit losses involves a high degree of judgment. Our allowance for credit
losses provides for probable losses based upon evaluations of known and inherent
risks in the loan portfolio. The determination of the balance in the allowance
for credit losses is based on an analysis of the loan and lease finance
receivables portfolio using a systematic methodology and reflects an amount
that, in our judgment, is adequate to provide for probable credit losses
inherent in the portfolio, after giving consideration to the character of the
loan portfolio, current economic conditions, past credit loss experience, and
such other factors as deserve current recognition in estimating inherent credit
losses. The provision for credit losses is charged to expense. For a full
discussion of our methodology of assessing the adequacy of the allowance for
credit losses, see the "Risk Management" section of this Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Investment Portfolio: The investment portfolio is an integral part of the
Company's financial performance. We invest primarily in fixed income securities.
Accounting estimates are used in the presentation of the investment portfolio
and these estimates do impact the presentation of our financial
condition and results of operations. Many of the securities included in the
investment portfolio are purchased at a premium or discount. The premiums or
discounts are amortized or accreted over the life of the security. For
mortgage-related securities (i.e., securities that are collateralized and
payments received from underlying mortgages), the amortization or accretion is
based on estimated average lives of the securities. The lives of these
securities can fluctuate based on the amount of prepayments received on the
underlying collateral of the securities. The amount of prepayments varies from
time to time based on the interest rate environment (i.e., lower interest rates
increase the likelihood of refinances) and the rate of turnover of the mortgages
(i.e., how often the underlying properties are sold and mortgages paid-off). We
use estimates for the average lives of these mortgage-related securities based
on information received from third parties whose business it is to compile
mortgage related data and develop a consensus of that data. We adjust the rate
of amortization or accretion regularly to reflect changes in the estimated
average lives of these securities.
We classify as held-to-maturity those debt securities that we have the
positive intent and ability to hold to maturity. Securities classified as
trading are those securities that are bought and held principally for the
purpose of selling them in the near term. All other debt and equity securities
are classified as available-for-sale. Securities held-to-maturity are accounted
for at cost and adjusted for amortization of premiums and accretion of
discounts. Trading securities are accounted for at fair value with the
unrealized holding gains and losses being included in current earnings.
Securities available-for-sale are accounted for at fair value, with the net
unrealized gains and losses, net of income tax effects, presented as a separate
component of stockholders' equity. At each reporting date, securities are
assessed to determine whether there is an other-than-temporary impairment. Such
impairment, if any, is required to be recognized in current earnings rather than
as a separate component of stockholders' equity. Realized gains and losses on
sales of securities are recognized in earnings at the time of sale and are
determined on a specific-identification basis. Purchase premiums and discounts
are recognized in interest income using the interest method over the terms of
the securities, except for mortgage-related securities as discussed in the
previous paragraph. Our investment in Federal Home Loan Bank ("FHLB") stock is
carried at cost.
Income Taxes: We account for income taxes using the asset and liability
method by deferring income taxes based on estimated future tax effects of
differences between the tax and book basis of assets and liabilities considering
the provisions of enacted tax laws. These differences result in deferred tax
assets and liabilities, which are included in our balance sheets. We must also
assess the likelihood that any deferred tax assets will be recovered from future
taxable income and establish a valuation allowance for those assets determined
to not likely be recoverable. Our judgment is required in determining the amount
and timing of recognition of the resulting deferred tax assets and liabilities,
including projections of future taxable income. Although we have determined a
valuation allowance is not required for any of our deferred tax assets, there is
no guarantee that these assets are recoverable.
Goodwill and Intangible Assets: We have acquired entire banks and branches of
banks. Those acquisitions accounted for under the purchase method of accounting
have given rise to goodwill and intangible assets. We record the assets acquired
and liabilities assumed at their fair value. These fair values are determined
through the use of internal and external valuation techniques. The purchase
price is allocated to assets and liabilities, including identified intangibles.
The identified intangibles are amortized over the estimated lives of the assets
or liabilities. Any excess purchase price after this allocation results in
goodwill. Goodwill is tested on an annual basis for impairment.
RECENT DEVELOPMENTS
There have been significant disruptions in the U.S. and international
financial system during the period covered by this report. As a result,
available credit has been reduced or ceased to exist. The reduction in
availability of credit, loss of confidence in the entire financial sector, and
volatility in financial markets adversely affects the Company and the Bank.
Although we do not actively lend in the home mortgage market, we have
experienced a decline in fair value of some of our investment securities as a
result of the disruptions in the financial markets. Continued disruptions in the
financial system are
likely to have an ongoing adverse impact on all institutions in the U.S. banking
and financial industries. The U.S. government, the governments of other
countries, and multinational institutions have provided vast amounts of
liquidity and capital into the banking system.
In response to the financial crises affecting the overall banking system and
financial markets in the United States, on October 3, 2008, the Emergency
Economic Stabilization Act of 2008 ("EESA") was enacted. Under that act, the
United States Treasury Department ("Treasury") has authority, among other
things, to purchase mortgages, mortgage backed securities and certain other
financial instruments from financial institutions for the purpose of stabilizing
and providing liquidity to the U.S. financial markets.
On October 3, 2008, the Troubled Asset Relief Program ("TARP") was signed
into law. TARP gave the Treasury authority to deploy up to $750 billion into the
financial system with an objective of improving liquidity in capital markets. On
October 24, 2008, Treasury announced plans to direct $250 billion of this
authority into preferred stock investments in banks. The general terms of this
preferred stock program include:
• dividends on the Treasury's preferred stock at a rate of 5% for the first
five years and 9% dividends thereafter;
• stock splits are prohibited, but common stock dividends are allowed;
• common stock dividends cannot be increased for three years while Treasury is an investor unless preferred stock is redeemed or consent from Treasury is received;
• the Treasury preferred stock cannot be redeemed for three years unless the participating institution raises qualifying private capital;
• Treasury must consent to any buy back of other stock (common or other preferred);
• Treasury receives warrants equal to 15% of Treasury's total investment in the participating institution;
• participating institution's executives must agree to certain compensation restrictions, and
• restrictions on the amount of executive compensation which is tax deductible.
The term of this Treasury preferred stock program could reduce investment
returns to participating banks' shareholders by restricting dividends to common
shareholders, diluting existing shareholders' interests, and restricting capital
management practices. The Company and the Bank meet all applicable regulatory
capital requirements and remain well capitalized. We currently expect to
participate in the TARP capital purchase program and have made an application
for the sale of shares of its preferred stock.
Federal and state governments could pass additional legislation responsive to
current credit conditions. As a result, we could experience higher credit losses
because of federal or state legislation or regulatory action that reduces the
principal amount or interest rate under existing loan contracts. Also, we could
experience higher credit losses because of federal or state legislation or
regulatory action that limits the Bank's ability to foreclose on property or
other collateral or makes foreclosure less economically feasible.
The Federal Deposit Insurance Corporation ("FDIC") insures deposits at FDIC
insured financial institutions up to certain limits. The FDIC charges insured
financial institutions premiums to maintain the Deposit Insurance Fund. Current
economic conditions have increased expectations for bank failures, in which
case, the FDIC would take control of failed banks and ensure payment of deposits
up to insured limits using the resources of the Deposit Insurance Fund. In such
case, the FDIC may increase premium assessments to maintain adequate funding of
the Deposit Insurance Fund, including requiring riskier institutions to pay a
larger share of the premiums. An increase in premium assessments would increase
the Company's expenses. The EESA included a provision for an increase in the
amount of deposits insured by FDIC to $250,000 until December 2009. On
October 14, 2008, the FDIC announced a new program - the Temporary Liquidity
Guarantee Program that provides unlimited deposit insurance on funds in
noninterest-bearing transaction deposit accounts not otherwise covered by the
existing deposit insurance
limit of $250,000. All eligible institutions will be covered under the program
for the first 30 days without incurring any costs. After the initial period,
participating institutions will be assessed an annualized 10 basis point
surcharge on the additional insured deposits. The behavior of depositors in
regard to the level of FDIC insurance could cause the Bank's existing customers
to reduce the amount of deposits held at the Bank, or could cause new customers
to open deposit accounts at the Bank. We have decided to remain in this program
for the benefit of our customer base. The level and composition of our deposit
portfolio directly impacts our funding cost and net interest margin. As a result
of these measures, it is likely that the premiums we pay for FDIC insurance will
increase, which would adversely affect net income. The impact of such measures
cannot be assessed at this time.
The actions described above, together with additional actions announced by
the Treasury and other regulatory agencies continue to develop. It is not clear
at this time what impact, EESA, TARP, other liquidity and funding initiatives of
the Treasury and other bank regulatory agencies that have been previously
announced, and any additional programs that may be initiated in the future will
have on the financial markets and the financial services industry. The extreme
levels of volatility and limited credit availability, currently being
experienced, could continue to affect the U.S. banking industry and the broader
U.S. and global economies, which will have an affect on all financial
institutions, including the Company.
ANALYSIS OF THE RESULTS OF OPERATIONS
Earnings
We reported net earnings of $50.8 million for the nine months ended
September 30, 2008. This represented an increase of $3.6 million or 7.58%, over
net earnings of $47.2 million for the nine months ended September 30, 2007.
Basic and diluted earnings per share for the nine-month period increased to
$0.61 per share for 2008, compared to $0.56 per share for 2007. The annualized
return on average assets was 1.07% for the nine months of 2008 compared to an
annualized return on average assets of 1.04% for the nine months of 2007. The
annualized return on average equity was 15.10% for the nine months ended
September 30, 2008, compared to an annualized return of 15.82% for the nine
months ended September 30, 2007. The decrease in annualized return on average
equity for the nine month period is attributed to a higher average equity
balance in 2008, as a result of unrealized gains recorded in other comprehensive
income during the first three months of 2008 and earnings in excess of
dividends.
For the quarter ended September 30, 2008, our net earnings were
$17.5 million. This represented an increase of $1.3 million or 8.31%, over net
earnings of $16.1 million, for the third quarter of 2007. Basic and diluted
earnings per share increased to $0.21 per share for the third quarter of 2008
compared to $0.19 per share for the third quarter of 2007. The annualized return
on average assets was 1.08% for the third quarter of 2008 and 1.04% for the
third quarter of 2007. The annualized return on average equity was 15.55% for
the third quarter of 2008 compared to an annualized return on average equity of
15.99% for the third quarter of 2007.
Net Interest Income
The principal component of our earnings is net interest income, which is the
difference between the interest and fees earned on loans and investments
(earning assets) and the interest paid on deposits and borrowed funds
(interest-bearing liabilities). Net interest margin is the taxable-equivalent of
net interest income as a percentage of average earning assets for the period.
The level of interest rates and the volume and mix of earning assets and
interest-bearing liabilities impact net interest income and net interest margin.
The net interest spread is the yield on average earning assets minus the cost of
average interest-bearing liabilities. Our net interest income, interest spread,
and net interest margin are sensitive to general business and economic
conditions. These conditions include short-term and long-term interest rates,
inflation, monetary supply, and the strength of the economy, in general, and the
local economies in which we conduct business. Our ability to manage the net
interest income during changing interest rate environments will have a
significant impact on our overall performance. Our balance sheet is currently
liability-sensitive; meaning interest-bearing liabilities will generally reprice
more quickly than earning assets. Therefore, our net interest margin is likely
to decrease in sustained periods of rising interest rates and increase in
sustained periods of declining interest rates. We manage net interest income by
affecting changes in the mix of earning assets as well as the mix of
interest-bearing liabilities, changes in the level of interest-bearing
liabilities in proportion to earning assets, and in the growth of earning
assets.
Our net interest income, after the provision for credit losses, totaled
$132.9 million for the nine months ended September 30, 2008. This represented an
increase of $13.2 million, or 11.00%, over net interest income, after provision
for credit losses, of $119.8 million for the same period in 2007. The increase
in net interest income of $13.2 million resulted from a $28.0 million decrease
in interest expense, offset by a $6.1 million decrease in interest income and
$8.7 million provision for credit losses recorded in the first nine months of
2008.
Interest income totaled $249.7 million for the first nine months of 2008.
This represented a decrease of $6.1 million, or 2.38%, compared to total
interest income of $255.8 million for the same period last year. The decrease in
interest income was primarily the result of the decrease in average yield on
earning assets to 5.75% for the nine months of 2008 from 6.20% for the same
period of 2007, or 45 basis points. Average earning assets increased by
$342.3 million, or 6.04%, from $5.67 billion to $6.01 billion.
Interest expense totaled $108.1 million for the first nine months of 2008.
This represented a decrease of $28.0 million, or 20.56%, from total interest
expense of $136.0 million for the same period last year. The decrease in
interest expense was primarily the result of a decrease in the average rate paid
on interest-bearing liabilities to 3.10% for the first nine months of 2008 from
4.18% for the same period in 2007, or 108 basis points. The decrease in yields
and deposits was offset by an increase in average borrowings of $431.3 million,
or 19.83%, from $2.17 billion to $2.61 billion.
For the third quarter ended September 30, 2008, the Company's net interest
income, after provision for credit losses, totaled $45.0 million. This
represented an increase of $3.3 million, or 7.92%, over net interest income of
$41.7 million for the same period in 2007. The increase in net interest income
of $3.3 million for the third quarter of 2008 resulted from a decrease of $11.7
million in interest expense, offset by a $4.4 million decrease in interest
income and $4.0 million provision of credit losses recorded in the third quarter
of 2008.
Interest income totaled $83.5 million for the third quarter of 2008. This
represented a decrease of $4.4 million, or 4.98%, compared to total interest
income of $87.9 million for the same period last year. The decrease in interest
income for the third quarter ending September 30, 2008 as compared to the third
quarter ending September 30, 2007 was primarily the result of the decrease in
average yield on earning assets to 5.65% for the third quarter of 2008 from
6.28% for the same period of 2007, or 63 basis points. Average earning assets
increased by $360.3 million, or 6.29%, from $5.73 billion to $6.09 billion.
Interest expense totaled $34.5 million for the third quarter of 2008. This
represented a decrease of $11.7 million or 25.29%, from total interest expense
of $46.2 million for the same period last year. The decrease in interest expense
was primarily the result of a decrease in the average rate paid on
interest-bearing liabilities to 2.91% for the third quarter ending September 30,
2008 from 4.16% for the same period in 2007, or 125 basis points. The decrease
in yields was offset by an increase in average borrowings of $549.9 million, or
25.39%, from $2.17 billion to $2.72 billion.
Table 1 shows the average balances of assets, liabilities, and stockholders'
equity and the related interest income, expense, and yields/rates for the
nine-month and three-month period ended September 30, 2008 and 2007. Yields for
tax-preferenced investments are shown on a taxable equivalent basis using a 35%
tax rate.
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