FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2006

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

For Quarter Ended March 31, 2006		Commission File Number: 0-10140

CVB FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

California (State or other jurisdiction of incorporation or organization)		95-3629339 (I.R.S. Employer Identification No.)
701 North Haven Ave, Suite 350, Ontario, California (Address of Principal Executive Offices)		91764 (Zip Code)
(Registrant’s telephone number, including area code)		(909) 980-4030

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

     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 Exchange Act).
Yes o No þ

Number of shares of common stock of the registrant: 76,495,148 outstanding as of May 4, 2006.

 

 

CVB FINANCIAL CORP.
2006 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION (UNAUDITED)

ITEM 1. FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

OVERVIEW

CRITICAL ACCOUNTING POLICIES

ANALYSIS OF THE RESULTS OF OPERATIONS

ANALYSIS OF FINANCIAL CONDITION

RISK MANAGEMENT

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS

SIGNATURES

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

Exhibit 32.2

PART I — FINANCIAL INFORMATION (UNAUDITED)

ITEM 1. FINANCIAL STATEMENTS
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
Dollar amounts in thousands

		March 31,				December 31,
		2006				2005
ASSETS
Investment securities available-for-sale		$	2,406,986			$	2,369,892
Interest-bearing balances due from depository institutions			1,784				1,883
Investment in stock of Federal Home Loan Bank (FHLB)			72,362				70,770
Loans and lease finance receivables			2,717,127				2,663,863
Allowance for credit losses			(23,584	)			(23,204	)
Total earning assets			5,174,675				5,083,204
Cash and due from banks			131,453				130,141
Premises and equipment, net			41,258				40,020
Intangibles			11,886				12,474
Goodwill			31,531				32,357
Cash value life insurance			72,633				71,811
Accrued interest receivable			25,825				24,147
Deferred tax asset			29,428				18,420
Other assets			9,225				10,397
TOTAL ASSETS		$	5,527,914			$	5,422,971
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing		$	1,362,022			$	1,490,613
Interest-bearing			2,114,059				1,933,433
Total deposits			3,476,081				3,424,046
Demand Note to U.S. Treasury			936				6,433
Short-term borrowings			1,245,000				916,000
Long-term borrowings			305,000				580,000
Accrued interest payable			12,189				15,047
Deferred compensation			8,679				7,102
Junior subordinated debentures			108,250				82,476
Other liabilities			32,214				48,990
TOTAL LIABILITIES			5,188,349				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 76,479,277 (2006) and 76,430,206 (2005))			253,302				252,717
Retained earnings			114,850				103,546
Accumulated other comprehensive loss, net of tax			(28,587	)			(13,386	)
Total stockholders’ equity			339,565				342,877
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	5,527,914			$	5,422,971

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
Dollar amounts in thousands, except per share

		For the Three Months
		Ended March 31,
		2006				2005
Interest income:
Loans, including fees		$	44,292			$	32,380
Investment securities:
Taxable			20,737				18,703
Tax-preferred			6,245				4,087
Total investment income			26,982				22,790
Dividends from FHLB stock			800				475
Federal funds sold			32				4
Interest bearing deposits with other institutions			26				34
Total interest income			72,132				55,683
Interest expense:
Deposits			13,201				5,061
Short-term borrowings			10,369				1,964
Long-term borrowings			3,169				6,724
Junior subordinated debentures			1,568				1,310
Total interest expense			28,307				15,059
Net interest income before provision for credit losses			43,825				40,624
Provision for credit losses			250				—
Net interest income after provision for credit losses			43,575				40,624
Other operating income:
Service charges on deposit accounts			3,291				3,042
Financial Advisory services			1,845				1,678
Bankcard services			558				604
BOLI income			822				342
Other			1,213				1,413
Total other operating income			7,729				7,079
Other operating expenses:
Salaries and employee benefits			12,720				12,833
Occupancy			2,029				1,998
Equipment			1,745				1,744
Stationary and supplies			1,586				1,195
Professional services			1,273				1,025
Promotion			1,507				1,796
Amortization of intangibles			588				296
Other			2,022				(503	)
Total other operating expenses			23,470				20,384
Earnings before income taxes			27,834				27,319
Income taxes			9,594				9,618
Net earnings		$	18,240			$	17,701
Basic earnings per common share		$	0.24			$	0.23
Diluted earnings per common share		$	0.24			$	0.23
Cash dividends per common share		$	0.09			$	0.11

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

														Accumulated
														Other
		Common												Comprehensive
		Shares				Common				Retained				Income (Loss),				Comprehensive
		Outstanding				Stock				Earnings				Net of Tax				Income (Loss)
		(amounts and shares in thousands)
Balance December 31, 2004			60,666			$	236,277			$	72,314			$	8,892
Issuance of common stock			460				1,789
5-for-4 stock split			15,284
Repurchase of common stock			(676	)			(863	)			(11,423	)
Shares issued for acquisition of Granite State Bank			696				13,427
Tax benefit from exercise of stock options							2,087
Cash dividends ($0.42 per share)											(27,963	)
Comprehensive income:
Net earnings											70,618							$	70,618
Other comprehensive loss:
Unrealized loss on securities available-for-sale, net															(22,278	)			(22,278	)
Comprehensive income																		$	48,340
Balance December 31, 2005			76,430				252,717				103,546				(13,386	)
Issuance of common stock			49				367
Tax benefit from exercise of stock options							82
Stock-based Compensation Expense							136
Cash dividends ($0.09 per share)											(6,936	)
Comprehensive income:
Net earnings											18,240							$	18,240
Other comprehensive loss:
Unrealized loss on securities available-for-sale, net of taxes $11,008															(15,201	)			(15,201	)
Comprehensive income																		$	3,039
Balance March 31, 2006			76,479			$	253,302			$	114,850			$	(28,587	)

														Accumulated
														Other
		Common												Comprehensive
		Shares				Common				Retained				Income (Loss),				Comprehensive
		Outstanding				Stock				Earnings				Net of Tax				Income (Loss)
		(amounts and shares in thousands)
Balance December 31, 2004			60,666				236,277				72,314				8,892
Issuance of common stock			305				895
Shares issued for acquisition of Granite State Bank			696				13,427
Tax benefit from exercise of stock options							1,401
Cash dividends ($0.11 per share)											(7,637	)
Comprehensive income:
Net earnings											17,701							$	17,701
Other comprehensive loss:
Unrealized loss on securities available-for-sale, net of taxes $13,787															(19,039	)			(19,039	)
Comprehensive loss																		$	(1,338	)
Balance March 31, 2005			61,667			$	252,000			$	82,378			$	(10,147	)

		At March 31,
		2006				2005
		(amounts and shares in thousands)
Disclosure of reclassification amount
Unrealized losses on securities arising during the period		$	(26,209	)		$	(32,826	)
Tax benefit			11,008				13,787
Net unrealized loss on securities		$	(15,201	)		$	(19,039	)

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

		For the Three Months
		Ended March 31,
		2006				2005
		(Dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received		$	71,825			$	55,483
Service charges and other fees received			7,724				7,079
Interest paid			(31,165	)			(15,358	)
Cash paid to suppliers and employees			(24,128	)			(19,935	)
Income taxes paid			(950	)			—
Net cash provided by operating activities			23,306				27,269
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayment of MBS			82,866				96,223
Proceeds from repayment of investment securities available-for-sale			—				67
Proceeds from maturity of investment securities			599				297
Purchases of investment securities available-for-sale			(98,858	)			(52,716	)
Purchases of MBS			(70,120	)			(260,941	)
Purchases of FHLB stock			(1,592	)			(4,527	)
Net (increase) decrease in loans			(51,208	)			24,443
Proceeds from sales of premises and equipment			5				—
Purchase of premises and equipment			(2,738	)			(2,650	)
Cash acquired from purchase of Granite State Bank, net of cash paid			—				12,232
Investment in common stock of CVB Statutory Trust III			(774	)			—
Net cash used in investing activities			(141,820	)			(187,572	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in transaction deposits			(56,165	)			29,078
Net increase in time deposits			108,202				9,997
Advances from Federal Home Loan Bank			—				120,000
Repayment of advances from Federal Home Loan Bank			(65,000	)			—
Net increase in short-term borrowings			113,502				50,683
Cash dividends on common stock			(6,936	)			(7,637	)
Issuance of junior subordinated debentures			25,774				—
Proceeds from exercise of stock options			367				895
Tax benefit related to exercise of stock options			82				—
Net cash provided by financing activities			119,826				203,016
NET INCREASE IN CASH AND CASH EQUIVALENTS			1,312				42,713
CASH AND CASH EQUIVALENTS, beginning of period			130,141				84,400
CASH AND CASH EQUIVALENTS, end of period		$	131,453			$	127,113

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)

		For the Three Months
		Ended March 31,
		2006				2005
		(Dollar amounts in thousands)
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net earnings		$	18,240			$	17,701
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on sale of premises and equipment			45				—
Increase in cash value of life insurance			(822	)			(954	)
Net amortization of premiums on investment securities			2,549				3,146
Provisions for credit losses			250				—
Stock-based compensation			136				—
Depreciation and amortization			2,863				1,812
Change in accrued interest receivable			(1,679	)			(2,463	)
Change in accrued interest payable			(2,857	)			(299	)
Change in other assets and liabilities			4,581				8,326
Total adjustments			5,066				9,568
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	23,306			$	27,269
Supplemental Schedule of Noncash Investing and Financing Activities
Purchase of Granite State Bank:
Assets acquired						$	85,898
Goodwill							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		$	6,103			$	—

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the three months ended March 31, 2006 and 2005

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accompanying condensed consolidated unaudited financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America for interim financial reporting. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 filed with the Securities and Exchange Commission. In the opinion of management, the accompanying condensed consolidated unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.

     Principles of Consolidation - The consolidated financial statements include the accounts of CVB Financial Corp. (the “Company”) and its wholly owned 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 are not included in the consolidated financial statements.

     Nature of Operations - The Company’s 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 Division and Business Financial Centers (branch offices). The Bank’s 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 40 Business Financial Centers with its headquarters located in the city of Ontario.

     The Company’s 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 it’s customers. The other segment is Treasury Department, which manages the investment portfolio of the Company.

     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 life of the security. For mortgage-related securities (i.e., securities that are collateralized and payments received from underlying mortgage) the amortization or accretion is based on the estimated average lives of the securities. The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost. At March 31, 2006, all of the Company’s investment securities are classified as available-for-sale.

     Loans and Lease Finance Receivables - Loans and lease finance receivables are reported at the principal amount outstanding, less deferred net loan origination fees. Interest on loans and lease finance receivables is credited to income based on the principal amount outstanding. Interest income is not recognized on loans and lease finance receivables when collection of interest is deemed by management to be doubtful. In the ordinary course of business, the Company enters into commitments to extend credit to its customers. These commitments are not reflected in the accompanying consolidated financial statements. As of March 31, 2006, the Company had entered into commitments with certain customers amounting to $972.5 million compared to $895.8 million at December 31, 2005. Letters of credit at March 31, 2006, and December 31, 2005, were $67.5 million and $68.9 million, respectively.

     The Bank receives collateral to support loans, lease finance receivables, and commitments to extend credit for which collateral is deemed necessary. The most significant categories of collateral are real estate, principally commercial and industrial income-producing properties, real estate mortgages, and assets utilized in agribusiness.

     Nonrefundable fees and direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. The deferred net loan fees and costs are recognized in interest income over the loan term 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 management’s 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. During the first quarter of 2006, the Company recorded $250,000 provision for credit losses. The allowance for credit losses was $23.6 million as of March 31, 2006. This represents an increase of $380,000 when compared with an allowance for credit losses of $23.2 million as of December 31, 2005. The increase was primarily due to the provision for credit losses of $250,000 and the loan recoveries of $150,000, offset by the charge-off loans of $20,000 during the first quarter of 2006.

     A loan for which collection of principal and interest according to its original terms is not probable is considered to be impaired. The Company’s 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.

     There were no loans classified as impaired at March 31, 2006 and December 31, 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.

     Premises and Equipment - Premises and equipment are stated at cost, less accumulated depreciation, which is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. Properties under capital lease and leasehold improvements are amortized over the shorter of estimated economic lives of 15 years or the initial terms of the leases. Estimated lives are 3 to 5 years for computer and equipment, 5 to 7 years for furniture, fixtures and equipment, and 15 to 40 years for buildings and improvements. Long-lived assets are reviewed periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment is calculated as the difference between the expected undiscounted future cash flows of a long-lived asset, if lower, and its carrying value. The impairment loss, if any, would be recorded in noninterest expense.

     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. There is no other real estate owned at March 31, 2006 and December 31, 2005.

     Business Combinations and Intangible Assets – The Company has engaged in the acquisition of financial institutions and the assumption of deposits and purchase of assets from other financial institutions in its market area. The Company has paid premiums on certain transactions, and such premiums are recorded as intangible assets, in the form of goodwill or other intangible assets. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, goodwill is not being amortized whereas identifiable intangible assets with finite lives are amortized over their useful lives. On an annual basis, the Company tests goodwill and intangible assets for impairment.

     Additionally, as required by SFAS No. 142, the Company completed its annual impairment test as of June 30, 2005 and did not record any impairment of goodwill. At March 31, 2006 goodwill was $31.5 million (net of amortization of $5.4 million recorded prior to the adoption of SFAS No. 142). As of March 31, 2006, intangible assets that continue to be subject to amortization include core deposits of $11.9 million (net of $7.8 million of accumulated amortization). During the first quarter of 2006, the Company finalized the goodwill analysis for the Granite State Bank acquisition and adjusted goodwill in the amount of $826,000 to record additional purchase price adjustment related to the acquisition. Amortization expense for such intangible assets was $588,000 for the three months ended March 31, 2006. Estimated amortization expense, for the remainder of 2006 is expected to be $1.76 million. Estimated amortization expense, for the succeeding five fiscal years is $2.35 million for year one and year two, $1.75 million for year three, $1.70 million for year four and $1.60 million for year five. The weighted average remaining life of intangible assets is approximately 4.8 years.

     Income Taxes - Deferred income taxes are recognized for the tax consequences in future years of 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 period. The computation of diluted earnings per common share considers the number of shares issuable upon the assumed exercise of outstanding common stock options. Share and per share amounts have been retroactively restated to give effect to all stock dividends and splits. The actual number of shares outstanding at March 31, 2006 was 76,479,277. The table below presents the reconciliation of earnings per share for the periods indicated.

		Earnings Per Share Reconciliation
		(Dollars and shares in thousands, except per share amounts)
		For the Three Months
		Ended March 31,
		2006												2005
						Weighted												Weighted
		Income				Average Shares				Per Share				Income				Average Shares				Per Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
BASIC EPS
Income available to common stockholders		$	18,240				76,460			$	0.24			$	17,701				76,393			$	0.23
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of outstanding options							621				0.00								770				0.00
DILUTED EPS
Income available to common stockholders		$	18,240				77,081			$	0.24			$	17,701				77,163			$	0.23

     Stock-Based Compensation - At March 31, 2006, the Company has three stock-based employee compensation plans, which are described more fully in Note 15 in the Company’s Annual Report on Form 10-K.

     The Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), 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.

     As a result of adopting SFAS 123R on January 1, 2006, the net income for the three months ended March 31, 2006, was $118,000 lower than if the Company had continued to account for stock-based compensation under APB Opinion No. 25. There was no impact on earnings per share.

     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 $82,000 of excess tax benefit resulting from disqualified position classified as financing activities in the Consolidated Statements of Cash Flows for the three months ended March 31, 2006.

     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 three months ended March 31, 2005:

		For the three months ended
		March 31, 2005
		(dollars in thousands)
Net income, as reported		$	17,701
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			218
Pro forma net income		$	17,483
Earnings per share:
Basic — as reported		$	0.23
Basic — pro forma		$	0.23
Diluted — as reported		$	0.23
Diluted — pro forma		$	0.23

     The estimated fair value of the options granted during 2006 and prior years was calculated using the Black-Scholes option pricing model. There were 32,000 options granted during the first three months of 2006. No options were granted during the same period in 2005. The fair value of each stock option granted in 2006 was estimated on the date of grant using the following weighted-average assumptions:

		March 31,
		2006
Dividend Yield			1.7	%
Volatility			40.1	%
Risk-free interest rate			4.8	%
Expected life		6.7 years

     Option activity under the Company’s stock option plan as of March 31, 2006 and changes during the three months ended March 31, 2006 and 2005 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			1,869			$	9.34
Granted			32			$	17.01
Exercised			49			$	7.49
Forfeited or expired			83			$	12.15
Outstanding at March 31, 2006			1,769			$	9.40				5.82			$	13,621
Unvested shares at March 31, 2006			635			$	13.23				8.00			$	2,457
Exercisable at March 31, 2006			1,134			$	7.26				4.60			$	11,164

		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, 2005			2,416			$	7.74
Granted			—			$	0.00
Exercised			407			$	3.22
Forfeited or expired			1			$	8.47
Outstanding at March 31, 2005			2,008			$	8.65				5.73			$	11,762
Unvested shares at March 31, 2005			923			$	11.09				6.87			$	3,156
Exercisable at March 31, 2005			1,084			$	6.57				4.76			$	8,606

     The weighted-average grant-date fair value of options granted during the three months ended March 31, 2006 was $6.93. There were no options granted during the three months ended March 31, 2005. The total intrinsic value of options exercised during the three months ended March 31, 2006 and 2005 was $442,000 and $4.97 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.

     A summary of the status of the Company’s nonvested shares as of March 31, 2006 and 2005, and changes during the three months ended March 31, 2006 and 2005, is presented below:

		2006								2005
						Weighted								Weighted
		Shares				Average Fair				Shares				Average Fair
Nonvested Shares		(000)				Value				(000)				Value
Nonvested at January 1, 2006			764			$	4.54				1,013			$	3.81
Granted			32			$	6.93				—			$	0.00
Vested			(78	)		$	2.40				(89	)		$	1.96
Forfeited			(83	)		$	4.25				(1	)		$	1.96
Nonvested at March 31, 2006			635			$	4.71				923			$	3.76

     As of March 31, 2006, there was $1.64 million of total unrecognized compensation cost related to nonvested shares-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of approximately 4.5 years. The total fair value of shares vested during the three months ended March 31, 2006 and 2005 was $187,000 and $174,000, respectively.

     As of March 31, 2006 and 2005, the Company has 4,111,767 and 4,160,900, respectively, shares of common stock available for granting of future options under the May 2000 Plan.

     Statement of Cash Flows - Cash and cash equivalents as reported in the statements of cash flows include cash and due from banks and fed funds sold. Cash flows from loans and deposits are reported net.

     Trust Services - 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.

     Recent Accounting Pronouncements - In March 2006, the Financial Accounting Standards Board (“FASB”) staff issued SFAS No. 156, “Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS No. 156”). SFAS No. 156 requires all separately recognized servicing assets and liabilities to be initially measured at fair value. In addition, entities are permitted to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings, or amortize servicing rights in proportion to and over the estimated net servicing income or loss and assess the rights for impairment. Beginning with the fiscal year in which an entity adopts SFAS No. 156, it may elect to subsequently measure a class of servicing assets and liabilities at fair value. Post adoption, an entity may make this election as of the beginning of any fiscal year. An entity that elects to subsequently measure a class of servicing assets and liabilities at fair value should apply that election to all new and existing recognized servicing assets and liabilities within that class. The effect of remeasuring an existing class of servicing assets and liabilities at fair value is to be reported as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The statement also requires additional disclosures. The Company does not expect the adoption of SFAS No. 156 to have a material effect on the Company’s consolidated financial position or results of operations.

     Reclassification - Certain amounts in the prior periods’ financial statements and related footnote disclosures have been reclassified to conform to the current presentation.

     During the first quarter of 2006, we reclassified the consolidated statements of earnings for the three months ended March 31, 2005 by reducing $313,000 from “Loans, including fees” and reducing the same amount from “Salaries and employee benefits”. This reclassification did not have any impact to our net earnings; however, it reduced our net interest income by $313,000 for the three months ended March 31, 2005. As a result, our “net interest margin – tax equivalent” for the first three months ended March 31, 2005 reduced from 3.99% as reported previously to 3.96% as restated in this current report.

     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 the Company’s Series A Participating Preferred Stock at an initial exercise price of $50.00 (subject to adjustment as described in the terms of the plan) upon the occurrence of certain triggering events. For additional information concerning this plan, see Note 11 to Consolidated Financial Statements, “Commitments and Contingencies” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

     Other Contingencies - In the ordinary course of business, the Company becomes involved in litigation. Based upon the Company’s internal records and discussions with legal counsel, the Company records reserves for estimates of the probable outcome of all cases brought against them.

     Business Segments - The Company is a community bank with our 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.

     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 on the summary of significant accounting policies. The income numbers represent the actual income and expenses of each business unit. In addition, each segment has allocated income and expenses based on management’s internal reporting system, which allows management to determine the performance of each of its business units. Loan fees are the actual loan fees paid to the Company by its customers and these fees are not deferred as they are 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 Company’s 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 three months ended March 31, 2006 and 2005:

		Three Month Ended March 31, 2006
		Business
		Financial
		Centers				Treasury				Other				Total
Interest income		$	33,552			$	27,840			$	10,740			$	72,132
Credit for funds provided			16,532				0				1,146				17,678
Total interest income			50,084				27,840				11,886				89,810
Interest expense			9,721				16,564				2,022				28,307
Charge for funds used			1,590				7,065				9,023				17,678
Total interest expense			11,311				23,629				11,045				45,985
Net interest income		$	38,773			$	4,211			$	841			$	43,825
Non-interest income			3,700				12				4,017				7,729
Non-interest expense			10,012				244				13,464				23,720
Segment pretax profit		$	32,461			$	3,979			-$	8,606			$	27,834
Segment assets as of March 31, 2006		$	3,211,345			$	1,822,703			$	493,866			$	5,527,914

		Three Month Ended March 31, 2005
		Business
		Financial
		Centers				Treasury				Other				Total
Interest income		$	25,518			$	23,303			$	6,862			$	55,683
Credit for funds provided			7,457				0				234				7,691
Total interest income			32,975				23,303				7,096				63,374
Interest expense			3,823				9,965				1,271				15,059
Charge for funds used			685				5,029				1,977				7,691
Total interest expense			4,508				14,994				3,248				22,750
Net interest income		$	28,467			$	8,309			$	3,848			$	40,624
Non-interest income			2,685				17				4,377				7,079
Non-interest expense			8,889				297				11,198				20,384
Segment pretax profit		$	22,263			$	8,029			-$	2,973			$	27,319
Segment assets as of March 31, 2005		$	2,859,149			$	1,570,302			$	402,542			$	4,831,993

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

     Management’s discussion and analysis is written to provide greater insight into the results of operations and the financial condition of CVB Financial Corp. and its subsidiaries. Throughout this discussion, “Company” refers to CVB Financial Corp. and its subsidiaries as a consolidated entity. “CVB” refers to CVB Financial Corp. as the unconsolidated parent company and “Bank” refers to Citizens Business Bank. For a more complete understanding of the Company and its operations, reference should be made to the financial statements included in this report and in the Company’s 2005 Annual Report on Form 10-K. Certain statements in this Report on Form 10-Q constitute “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, economic conditions, competition in the geographic and business areas in which we conduct operations, natural disasters, fluctuations in interest rates, credit quality, and government regulations. For additional information concerning these factors, see the periodic filings the Company makes with the Securities and Exchange Commission, and in particular “Item 1A. Risk Factors contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The Company does not undertake, and specifically disclaims, any obligation to update any forward looking statements to reflect the occurrence of events or circumstances after the date of such statements. Additionally, our financial results and operations may be 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.

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 West’s 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 $25 million 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 Madera (the middle of the Central Valley) in the center of California to Laguna Beach (in Orange County) in the southern portion of California. Our mission is to offer the finest financial products and services to professionals and businesses in our market area.

     Our primary source of income is from the interest earned on our loans and investments and our primary area of expense is the interest paid on deposits, borrowings, salaries and benefits. As such our net income is subject to fluctuations in interest rates and their impact on our income statement. We believe the recent rise in interest rates may relieve some of the pressure on 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. See the Risk Management section of this Item 2.

     Economic conditions in our California service area impact our business. The economy of this area has not experienced the decline that other areas of the state and country have witnessed during the past few years. The job market continues to strengthen in the Central Valley and Inland Empire. However, we

are still subject to any changes in the economy in our market area. We benefit from construction growth in Southern California since we provide construction loans to builders. Southern California is experiencing growth in construction on single-family residences and commercial buildings, and our balance sheet at March 31, 2006 reflects that growth from December 31, 2005.

     Our growth in loans and investments compared with the first quarter of 2005 has allowed our interest income to grow. The Bank has always had an excellent base of interest free deposits due primarily to the fact that we specialize in businesses and professionals as customers. This has allowed us to have a low cost of deposits, currently 1.55% for the first quarter of 2006.

CRITICAL ACCOUNTING POLICIES

     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 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. During the first quarter of 2006, we recorded $250,000 provision for credit losses. 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 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, 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 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 all deferred tax assets, there is no guarantee that these assets are realizable.

      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 purchase price is allocated to the assets and liabilities, resulting in identifiable intangibles. 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 $18.2 million for the three months ended March 31, 2006. This represented an increase of $539,000 or 3.05%, over net earnings of $17.7 million, for the three months ended March 31, 2005. Basic and diluted earnings per share for the three-month period increased to $0.24 per share for 2006, compared to $0.23 per share for 2005. The annualized return on average assets was 1.35% for the first three months of 2006 compared to a return on average assets of 1.58% for the three months ended March 31, 2005. The annualized return on average equity was 20.82% for the three months ended March 31, 2006, compared to a return of 21.86% for the three months ended March 31, 2005.

      During the three months ended March 31, 2006 and 2005, the Company had no net gains or losses on sales of securities or sales of other real estate owned.

      During the first quarter of 2005, we recorded income of $2.6 million from the settlement of the robbery loss which occurred in early 2004. See Item 3 “Legal Proceedings” of PART I in our Annual Report on Form 10-K for year ended December 31, 2005 for more information. Net earnings, excluding the settlement of the robbery, totaled $16.0 million for the three months ended March 31, 2005. Net earnings of $18.2 million for the first quarter of 2006 represents an increase of $2.2 million or 13.89% when compared to the $16.0 million the first quarter 2005.

     The following table reconciles the differences in net earnings with and without the settlement of robbery loss in conformity with accounting principles generally accepted in the United States of America:

		Net Earnings Reconciliation
		For the Three Months
		Ended March 31,
		2006												2005
		Before Income				Income								Before Income
		Taxes				Taxes				Net Earnings				Taxes				Income Taxes				Net Earnings
		( amounts in thousands )
Net earnings without the settlement of robbery loss		$	27,834			$	9,594			$	18,240			$	24,719			$	8,703			$	16,016
Settlement of robbery loss			—				—				—				2,600				915				1,685
Net Earnings as reported		$	27,834			$	9,594			$	18,240			$	27,319			$	9,618			$	17,701

     We have presented net earnings without the settlement of robbery loss to show shareholders that the earnings from operations are unaffected by the impact of this item. We believe this presentation allows the reader to more easily assess the results of the Company’s core operations and business.

Net Interest Income

     The principal component of the Company’s 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). When net interest income is expressed as a percentage of average earning assets, the result is the 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. 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.

     The Company’s net interest income after provision for credit losses totaled $43.6 million for the three months ended March 31, 2006. This represented an increase of $3.0 million, or 7.26%, over net interest income of $40.6 million for the same period in 2005. The increase in net interest income of $3.0 million resulted from a $16.4 million increase in interest income, offset by a $13.2 million increase in interest expense and $250,000 provision of credit losses recorded in the first quarter of 2006. The $16.4 million increase in interest income resulted from the $831.5 million increase in average earning assets and an increase in average yield on earning assets to 5.86% for the first three months of 2006 from 5.37% for the same period in 2005. The $13.2 million increase in interest expense resulted from an $800.7 million increase in average interest-bearing liabilities and an increase in the average rate paid on interest-bearing liabilities to 3.10% for the first three months of 2006 from 2.11% for the same period in 2005.

     Interest income totaled $72.1 million for the first three months of 2006. This represented an increase of $16.4 million, or 29.54%, compared to total interest income of $55.7 million for the same period last year. The increase in interest income was primarily the result of the increase in average earning assets from $4.29 billion in the first three months of 2005 to $5.12 billion in the same period in 2006. This represents a 19.40% increase for the first three months of 2006 over the same period last year and an increase in the average yield on earning assets by 49 basis points.

     Interest expense totaled $28.3 million for the first three months of 2006. This represented an increase of $13.2 million, or 87.98%, over total interest expense of $15.1 million for the same period last year. The increase in interest expense was primarily the result of an increase in average interest-bearing liabilities and an increase in the cost of these liabilities by 99 basis points.

     Table 1 shows the average balances of assets, liabilities, and stockholders’ equity and the related interest income, expense, and rates for the three-month periods ended March 31, 2006, and 2005. 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

		Three Months Ended March 31,
		2006												2005
		Average								Average				Average								Average
		Balance				Interest				Rate (5)				Balance				Interest				Rate (5)
		(amounts in thousands)
ASSETS
Investment Securities
Taxable		$	1,822,602			$	20,737				4.56	%		$	1,743,110			$	18,703				4.29	%
Tax preferenced (1)			567,438				6,245				5.95	%			383,741				4,087				5.75	%
Investment in FHLB stock			71,299				800				4.49	%			55,245				475				3.44	%
Federal Funds Sold & Interest Bearing
Deposits with other institutions			4,667				58				4.97	%			5,614				38				2.71	%
Loans (2) (3)			2,652,493				44,292				6.77	%			2,099,313				32,380				6.26	%
Total Earning Assets			5,118,499				72,132				5.86	%			4,287,023				55,683				5.37	%
Total Non Earning Assets			348,613												262,681
Total Assets		$	5,467,112											$	4,549,704
LIABILITIES AND STOCKHOLDERS’ EQUITY
Savings Deposits (4)		$	1,231,002			$	5,376				1.77	%		$	1,094,458			$	2,554				0.95	%
Time Deposits			829,970				7,825				3.82	%			496,630				2,507				2.05	%
Total Deposits			2,060,972				13,201				2.60	%			1,591,088				5,061				1.29	%
Other Borrowings			1,610,620				15,106				3.75	%			1,279,765				9,998				3.12	%
Interest Bearing Liabilities			3,671,592				28,307				3.10	%			2,870,853				15,059				2.11	%
Non-interest bearing deposits			1,386,972												1,336,937
Other Liabilities			53,177												13,495
Stockholders’ Equity			355,371												328,419
Total Liabilities and Stockholders’ Equity		$	5,467,112											$	4,549,704
Net interest income						$	43,825											$	40,624
Net interest spread — tax equivalent											2.76	%											3.26	%
Net interest margin											3.58	%											3.93	%
Net interest margin — tax equivalent											3.62	%											3.96	%
Net interest margin excluding loan fees											3.46	%											3.76	%
Net interest margin excluding loan fees — tax equivalent											3.50	%											3.79	%

     As stated above, the net interest margin measures net interest income as a percentage of average earning assets. The net interest margin is an indication of how effectively the Company generates its source of funds and employs its earning assets. The Company’s tax effected (TE) net interest margin declined from 3.96% for the first three months of 2005 to 3.62% for the first three months of 2006. The decrease in the net interest margin compared to the same period last year was a 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 by 49 basis points for the first quarter of 2006 compared to the same period in 2005, the yield on interest-bearing liabilities increased by 99 basis points for the first quarter of 2006 compared to the same period in 2005. The higher increase in cost of interest-bearing liabilities is due to the short-term liability sensitivity of the Company. In addition, our net interest margin is affected by the strategies we employ in regards to competition in our market areas.

     It is difficult to attribute the net interest margin changes to any one factor. However, the banking and financial service businesses in our market areas are highly competitive. This competition has an influence on the strategies we employ.

     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 2.76% for the first three months of 2006 and 3.26% for the same period last year. The decrease in the net interest spread for the three months ended March 31, 2006 resulted from a 49 basis point increase in the yield on earning assets offset by a 99 basis point increase in the cost of interest-bearing liabilities, thus generating a 50 basis point decrease in the net interest spread over the same period last year.

     The yield (TE) on earning assets increased to 5.86% for the first three months of 2006, from 5.37% for the same period last year, and reflects an increasing interest rate environment and a change in the mix of earning assets. Average loans as a percent of earning assets increased to 51.82% in the first three months of 2006 from 48.97% for the same period in 2005. Average investments as a percent of earning assets decreased to 46.69% in the first three months of 2006 from 49.61% for the same period in 2005. Average federal funds sold as a percent of earning assets was 0.06% for the first three months in 2006. There were no federal funds invested in 2005. As a result of the Granite State Bank acquisition, which was completed in February 2005, we inherited the investment in interest-bearing deposits with other financial institutions. The average interest-bearing deposits with other financial institutions as a percent of earning assets decreased to 0.03% for the first three months in 2006 from 0.13% for the same period in 2005. Investments and federal funds sold typically have a lower yield than loans. The yield on loans for the first three months of 2006 increased to 6.77% as compared to 6.26% for the same period in 2005 as a result of the growth in average loans, the increasing interest rate environment and competition for quality loans. The yield (TE) on investments for the first three months of 2006 increased to 4.89% compared to 4.55% for the same period in 2005 as a result of an increase in average investment balances and an increase in interest rates. The increase in the yield on earning assets for the first three months of 2006 was the result of higher yields on loans and investments.

     The cost of average interest-bearing liabilities increased to 3.10% for the first three months of 2006 as compared to 2.11% for the same period in 2005, reflecting the continued increase in interest rates and a change in the mix of interest-bearing liabilities. Average borrowings as a percent of average interest-bearing liabilities decreased slightly to 43.87% during the first three months of 2006 as compared to 44.58% for the same period in 2005. The cost of borrowings for the first three months of 2006 increased to 3.75% as compared to 3.12% for the same period in 2005, reflecting the continued increase in interest rates. Borrowings typically have a higher cost than interest-bearing deposits. The cost of interest-bearing deposits for the first three months of 2006 increased to 2.60% as compared to 1.29% for the same period in 2005, also reflecting the continued increase in interest rates and the competition for interest-bearing deposits. The FDIC has approved the payment of interest on certain demand deposit accounts. This could have a negative impact on our net interest margin, net interest spread, and net earnings, should this be implemented fully. Currently, we pay interest on NOW and Money Market Accounts.

     Table 2 summarizes the changes in interest income and interest expense based on changes in average asset and liability balances (volume) and changes in average rates (rate). For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in volume (change in volume multiplied by initial rate), (2) changes in rate (change in rate multiplied by initial volume) and (3) changes in rate/volume (change in rate multiplied by change in volume).

TABLE 2 — Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income

		Comparison of three months ended March 31,
		2006 Compared to 2005
		Increase (Decrease) Due to
										Rate/
		Volume				Rate				Volume				Total
		( amounts in thousands )
Interest Income:
Taxable investment securities		$	1,018			$	1,166			$	(150	)		$	2,034
Tax-advantaged securities			2,804				192				(838	)			2,158
Fed funds sold & interest-bearing deposits with other institutions			(6	)			32				(6	)			20
Investment in FHLB stock			138				145				42				325
Loans			8,539				2,640				733				11,912
Total interest on earning assets			12,493				4,175				(219	)			16,449
Interest Expense:
Savings deposits			320				2,213				300				2,833
Time deposits			1,685				2,167				1,455				5,307
Other borrowings			2,581				2,016				511				5,108
Total interest on interest-bearing liabilities			4,586				6,396				2,266				13,248
Net Interest Income		$	7,907			$	(2,221	)		$	(2,485	)		$	3,201

     Interest and Fees on Loans

     Our major source of revenue and primary component of interest income is interest and fees on loans. Interest and fees on loans totaled $44.3 million for the first three months of 2006. This represented an increase of $11.9 million, or 36.79%, over interest and fees on loans of $32.4 million for the same period in 2005. The increase in interest and fees on loans for the first three months of 2006 reflects increases in the average balance of loans and the increase in interest rates. The yield on loans increased to 6.77 % for the first three months of 2006, compared to 6.26% for the same period in 2005. Average loans increased 26.35% from $2.10 billion for the first three months of 2005 to $2.65 billion for the first three months of 2006. Deferred loan origination fees, net of costs, totaled $10.9 million at March 31, 2006. This represented an increase of $1.1 million, or 11.75%, over deferred loan origination fees, net of costs, of $9.8 million at March 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 nonaccrual, all interest previously accrued but not collected is charged against earnings. There was no interest income that was accrued and not reversed on non-performing loans at March 31, 2006 and 2005.

     Fees collected on loans are an integral part of the loan pricing decision. Loan fees and the direct costs associated with the origination of loans are deferred and deducted from the loan balance. Deferred net loan fees are recognized in interest income over the term of the loan in a manner that approximates the level-yield method. We recognized loan fee income of $1.5 million for the first three months of 2006, as compared to $1.8 million for the same period in 2005, a decrease of $244,000, or 13.86%.

Interest on Investments

     The second most important component of interest income is interest on investments, which totaled $27.0 million for the first three months of 2006. This represented an increase of $4.2 million, or 18.39%, over interest on investments of $22.8 million for the same period in 2005. The increase in interest on

investments for the first three months of 2006 over the same period last year reflected increases in the average balance of investments and the 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 environment in order to maximize the rate of total return consistent within prudent risk parameters, and to minimize the overall interest rate risk of the Company. The weighted-average yield (TE) on investments increased to 4.89% for the first three months of 2006, compared to 4.55% for the same period in 2005 as a result of the increase in interest rates.

Provision for Credit Losses

     The Company maintains an allowance for inherent credit losses that is increased by a provision for credit losses charged against operating results. We made a provision for credit losses of $250,000 during the first three months of 2006. No provision was made during the same period in 2005. We believe the allowance is appropriate. No assurance can be given that economic conditions which adversely affect the Company’s 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. See “Risk Management — Credit Risk” herein.

Other Operating Income

     Other operating income for the Company includes income derived from special services offered by the Bank, such as Financial Advisory Services, merchant card, international banking, and other business services. Also included in other operating income are service charges and fees, primarily from deposit accounts; gains (net of losses) from the sale of investment securities, other real estate owned, and fixed assets; and other revenues not included as interest on earning assets.

     Other operating income totaled $7.7 million for the first three months of 2006. This represents an increase of $650,000, or 9.19%, over other operating income of $7.1 million for the same period in 2005. Other operating income as a percent of net revenues (net interest income before loan loss provision plus other operating income) was 15.06% for the first three months of 2006, as compared to 14.84% for the same period in 2005.

     There were no sales of investment securities generated during the first quarter of 2006 and 2005. Therefore, no gains or losses on sales of securities were recorded for the first three months ended 2006 and 2005.

     Service charges on deposit accounts totaled $3.3 million in the first three months of 2006. This represented an increase of $250,000 or 8.21% over service charges on deposit accounts of $3.0 million for the same period in 2005. Service charges for demand deposits (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 increase in service charges on deposit accounts in 2006 was the lower average demand deposit balances that resulted in a lower account earnings allowance, which offsets services charges and the implementation of a revised service charge schedule. Service charges on deposit accounts represented 42.59% of other operating income in the first three months of 2006, as compared to 42.97% in the same period in 2005.

     Financial Advisory Services 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 generated fees of $1.8 million in the first three months of 2006. This represents an increase of $167,000, or 9.95% over fees generated of $1.7 million in

the first three months of 2005. The increase is primarily due to an increase in assets under administration of $805.3 million. Fees generated by Financial Advisory Services represented 23.87% of other operating income in the first three months of 2006, as compared to 23.70% for the same period in 2005.

     Bankcard, which provides merchant bankcard services (credit card processing, merchant terminals, and customer support), generated fees totaling $558,000 in the first three months of 2006. This represented a decrease of $46,000, or 7.57%, from fees generated of $604,000 for the same period in 2005. Fees generated by Bankcard represented 7.22% of other operating income in the first three months of 2006, as compared to 8.53% for the same period in 2005.

     Bank Owned Life Insurance (“BOLI”) income totaled $822,000 in the first three months of 2006. This represented an increase of $481,000, or 140.63%, over the BOLI income generated of $342,000 for the same period in 2005.

     Other fees and income, which includes wire fees, other business services, international banking fees, check sales, ATM fees, miscellaneous income, etc., generated fees totaling $1.2 million in the first three months of 2006. This represented a decrease of $201,000, or 14.25%, from other fees and income generated of $1.4 million for the same period in 2005.

Other Operating Expenses

     Other operating expenses for the Company include expenses for salaries and benefits, occupancy, equipment, stationary and supplies, professional services, promotion, amortization of intangibles, and other expenses. Other operating expenses totaled $23.5 million for the first three months of 2006. This represents an increase of $3.1 million, or 15.14% over other operating expenses of $20.4 million for the same period in 2005. The increase is partially due to the reversal of $2.6 million in estimated robbery loss in the first three months of 2005.

     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 1.74% for the first three months of 2006, compared to a ratio of 1.82% for the same period in 2005. The decrease in percentage was primarily due to the increase in total average assets for the three months ended March 31, 2006 as compared to the same period in 2005.

     Our ability to control other operating expenses in relation to the level of net revenue (net interest income plus other operating income) is measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. For the first three months of 2006, the efficiency ratio was 45.75%, compared to a ratio of 42.73% for the same period in 2005. The increase was primarily due to the reversal of $2.6 million estimated robbery loss as a result of the settlement in the first three months of 2005. Without the settlement of robbery loss, the efficiency ratio would have been 48.18% in 2005.

     The following table reconciles the differences in operating efficiency ratio with and without the settlement of robbery loss:

		Operating Efficiency Ratio Reconciliation
		For the Three Months
		Ended March 31,
		2006				2005
		Reported				Without settlement				Settlement of				Reported
		amount				of robbery loss				robbery loss				amount
		( amounts in thousands )
Other Operating Expense		$	23,470			$	22,984			$	(2,600	)		$	20,384
Net Revenues		$	51,304			$	47,703			$	—			$	47,703
Operating Efficiency Ratio			45.75	%			48.18	%							42.73	%