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| CVBF > SEC Filings for CVBF > Form 10-Q on 5-Nov-2009 | All Recent SEC Filings |
5-Nov-2009
Quarterly Report
portion of California. Our mission is to offer the finest financial products and
services to professionals and businesses in our market area.
Our primary source of income is from the interest earned on our loans and
investments and our primary area of expense is the interest paid on deposits,
borrowings, and salaries and benefits. As such our net income is subject to
fluctuations in interest rates and their impact on our income statement. We are
also subject to competition from other financial institutions, which may affect
our pricing of products and services, and the fees and interest rates we can
charge on them.
Economic conditions in our California service area impact our business. We
have seen a significant decline in the housing market resulting in slower growth
in construction loans. Unemployment is high and the Inland Empire and other
areas of our marketplace have been significantly impacted as economic
conditions, both nationally and in California, continue to deteriorate.
Approximately 22% of our total loan portfolio of $3.6 billion is located in the
Inland Empire region of California. The balance of the portfolio is from outside
of this region. Our provision for credit losses for the first nine months of
2009, which was significantly higher than our provision for credit losses for
the first nine months of 2008, reflects an increase in our classified loans, as
we continue to see the impact of deteriorating economic conditions on our loan
portfolio. Continued weaknesses in the local and state 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 consider acquisition targets, including FDIC-assisted acquisitions,
which will enable us to meet our business objectives and enhance shareholder
value along with organic growth. Since 2000, we have acquired four banks and a
leasing company, and we have opened four de novo branches: Bakersfield, Fresno,
Madera, and Stockton, California. We also have five Commercial Banking Centers.
Although able to take deposits, these centers operate primarily as sales offices
and focus on business clients and their principals, professionals, and high
net-worth individuals. One of these centers is located in the San Fernando
Valley. The other four centers are located within a Business Financial Center in
San Bernardino, Los Angeles and Orange counties. For a discussion of our recent
acquisition of San Joaquin Bank, see "Recent Developments" below.
The full impact of the decreases in interest rates on deposits during 2008
was realized during the first nine months of 2009. Our net interest income
before provision for credit losses of $164.2 million, increased by $22.6 million
or 15.93%, compared to net interest income before provision for credit losses of
$141.6 million for the same period in 2008. The Bank has always had an excellent
base of interest free deposits primarily due to our specialization in businesses
and professionals as customers. As of September 30, 2009, 35.07% of our deposits
are interest-free. This has allowed us to have a low cost of deposits, currently
0.66% for the first nine months of 2009, which contributed to a substantial
reduction in interest expense for the first nine months of 2009 compared to the
same period last year.
Our net income decreased to $48.4 million for the first nine months of 2009
compared with $50.8 million for the first nine months of 2008, a decrease of
$2.4 million or 4.82%. The decrease of $2.4 million is primarily the result of
the increase in provision for credit losses of $46.3 million and an increase in
non-interest expense of $6.4 million, offset by an increase in net interest
income before provision for credit losses of $22.6 million and gain on sale of
securities of $28.4 million. Diluted earnings per common share decreased to
$0.40 per share for 2009, from $0.61 per share in 2008. A substantial portion of
the decrease in diluted earnings per share is associated with dividends paid and
amortization of the discount on our preferred stock which was repaid in the
current quarter.
Our net income increased to $19.3 million for the quarter ended September 30,
2009 compared with $17.5 million for the same period in 2008, an increase of
$1.8 million or 10.66%. The increase of $1.8 million is primarily the result of
the gain of sale of securities of $6.9 million and an increase in net interest
income of $5.8 million, offset by an increase in provision for credit losses of
$9.0 million.
Diluted earnings per common share decreased to $0.10 per share for the third
quarter of 2009 from $0.21 per share for the third quarter of 2008. Due to the
repurchase of preferred stock, current-quarter diluted earnings per common share
reflected a one-time, non-cash reduction in net income applicable to common
stockholders of $7.6 million, or $.07 per share.
RECENT DEVELOPMENTS
On October 16, 2009, the Bank acquired substantially all of the assets and
assumed substantially all of the liabilities of San Joaquin Bank ("SJB")
headquartered in Bakersfield, California from the FDIC as receiver for SJB,
including all five SJB branches. Based upon a preliminary closing with the FDIC
as of October 16, 2009, the Bank acquired (a) an estimated $690 million in
loans, (b) $24 million in investment securities, and (c) $18 million in cash and
other assets, and assumed (a) an estimated $530 million in deposits, (b)
$121 million in borrowings, and (c) $1 million in other liabilities. The
foregoing amounts represent SJB's book value and do not reflect fair value.
These amounts are estimates and, accordingly, are subject to adjustment based
upon final settlement with the FDIC. The Company is currently in the process of
determining fair value amounts.
On October 28, 2009, the Company repurchased the warrant issued to the U.S.
Treasury as part of the U.S. Treasury's Capital Purchase Program. The repurchase
price of $1,307,000 was recorded in additional paid-in-capital on the balance
sheet. The warrant to purchase 1,669,521 shares of the Company's voting common
stock at an exercise price of $11.68 was reduced in half to 834,761 shares, upon
completion of the Company's common stock offering on July 27, 2009.
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 valuation of the investment portfolio and
these estimates do impact the presentation of our financial condition and
results of operations. 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. Realized gains and losses on sales
of securities are recognized in earnings at the time of sale and are determined
on a specific-identification basis. Purchase premiums and discounts are
recognized in interest income using the effective-yield method over the terms of
the securities. Our investment in Federal Home Loan Bank ("FHLB") stock is
carried at cost.
At each reporting date, securities are assessed to determine whether there is
an other-than-temporary impairment. Other-than-temporary impairment on
investment securities is recognized in earnings when there are credit losses on
a debt security for which management does not intend to sell and for which it is
more-likely-than-not that the Company will not have to sell prior to recovery of
the noncredit impairment. In those situations, the portion of the total
impairment that is attributable to the credit loss would be recognized in
earnings, and the remaining difference between the debt security's amortized
cost basis and its fair value would be included in other comprehensive income.
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.
ANALYSIS OF THE RESULTS OF OPERATIONS
Earnings
We reported net earnings of $48.4 million for the nine months ended
September 30, 2009. This represented a decrease of $2.4 million or 4.82%, from
net earnings of $50.8 million for the nine months ended September 30, 2008
primarily due to an increase in loan loss provision of $46.3 million and an
increase in non-interest expense of $6.4 million, offset by gains on sales of
securities of $28.4 million and an increase in our net interest income of
$22.6 million year over year. Basic and diluted earnings per common share for
the nine-month period decreased to $0.40 per share for 2009, compared to $0.61
earnings per common share for 2008. The annualized return on average assets was
0.99% for the nine months of 2009 compared to an annualized return on average
assets of 1.07% for the nine months of 2008. The annualized return on average
equity was 10.01% for the nine months ended September 30, 2009, compared to an
annualized return of 15.10% for the nine months ended September 30, 2008. The
decrease in annualized return on average equity for the nine-month period is
attributed to an increase in our average equity balance as a result of the
preferred stock we issued to the U.S. Treasury in December 2008 as a result of
our participation in the Treasury's Capital Purchase Program. During the third
quarter, we raised $132.5 million in gross proceeds from common stock issuance
and repurchased all of the preferred stock issued to the U.S. Treasury.
For the quarter ended September 30, 2009, our net earnings were
$19.3 million. This represented an increase of $1.8 million or 10.66%, from net
earnings of $17.5 million, for the third quarter of 2008. Basic and diluted
earnings per common share decreased to $0.10 per share for the third quarter of
2009
compared to $0.21 per share for the third quarter of 2008. The annualized return
on average assets was 1.17% and 1.08% for the third quarter of 2009 and 2008,
respectively. The annualized return on average equity was 11.33% and 15.55% for
the third quarter of 2009 and 2008, respectively.
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, before the provision for credit losses, totaled
$164.2 million for the nine months ended September 30, 2009. This represented an
increase of $22.6 million, or 15.93%, over net interest income, before provision
for credit losses, of $141.6 million for the same period in 2008. The increase
in net interest income of $22.6 million resulted from a $41.6 million decrease
in interest expense, offset by an $19.0 million decrease in interest income.
Interest income totaled $230.7 million for the first nine months of 2009.
This represented a decrease of $19.0 million, or 7.63%, compared to total
interest income of $249.7 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 5.18% for the nine months of 2009 from 5.75% for the same
period of 2008, or 57 basis points. Average earning assets increased by
$164.9 million, or 2.74%, from $6.01 billion to $6.18 billion.
Interest expense totaled $66.5 million for the first nine months of 2009.
This represented a decrease of $41.6 million, or 38.50%, from total interest
expense of $108.1 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 1.98% for the first nine months of 2009 from
3.10% for the same period in 2008, or 112 basis points. The decrease in rates
paid on deposits and borrowings was offset by an increase in average
interest-bearing deposits of $460.6 million, or 23.09%, from $1.99 billion to
$2.46 billion.
For the third quarter ended September 30, 2009, our net interest income,
before provision for credit losses, totaled $54.8 million. This represented an
increase of $5.8 million, or 11.82%, over net interest income of $49.0 million
for the same period in 2008. The increase in net interest income of $5.8 million
resulted from a decrease of $13.4 million in interest expense, offset by a
$7.6 million decrease in interest income.
Interest income totaled $75.9 million for the third quarter of 2009. This
represented a decrease of $7.6 million, or 9.09%, compared to total interest
income of $83.5 million for the same period last year. The decrease in interest
income for the third quarter ending September 30, 2009 as compared to the third
quarter ending September 30, 2008 was primarily the result of the decrease in
average yield on earning assets to 5.11% for the third quarter of 2009 from
5.65% for the same period of 2008, or 54 basis points. Average earning assets
increased by $54.6 million, or 0.90%, from $6.09 billion to $6.14 billion.
Interest expense totaled $21.1 million for the third quarter of 2009. This
represented a decrease of $13.4 million or 38.79%, from total interest expense
of $34.5 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 1.89% for the third quarter ending September 30,
2009 from 2.91% for the same period in 2008, or 102 basis points. The decrease
in yields was offset by an increase in average interest-bearing deposits of
$658.8 million, or 34.03%, from $1.94 billion to $2.59 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, 2009 and 2008. Yields for
tax-preferenced investments are shown on a taxable equivalent basis using a 35%
tax rate.
TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differentials
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