FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] 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 June 30, 1998 Commission File Number: 1-10394
CVB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
California 95-3629339
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
701 North Haven Ave, Suite 350, Ontario, California 91764
(Address of Principal Executive Offices) (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 X NO
Number of shares of common stock of the registrant:15,048,760 outstanding as of
August 5, 1998.
This Form 10-Q contains 33 pages. Exhibit index on page 31.
<PAGE>
PART I - FINANCIAL INFORMATION
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
dollar amounts in thousands
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(unaudited)
<S> <C> <C>
ASSETS
Investment securities held-to-maturity
(market values of $58,840 and $59,658) $ 57,327 $ 58,044
Investment securities available-for-sale 560,847 434,106
Federal funds sold 12,000 0
Loans and lease finance receivables, net 623,723 605,484
------------ -----------
Total earning assets 1,253,897 1,097,634
Cash and due from banks 76,313 107,725
Premises and equipment, net 21,669 23,415
Other real estate owned, net 4,767 4,395
Goodwill and intangibles 10,227 10,818
Other assets 14,444 14,782
------------ -----------
TOTAL $ 1,381,317 $ 1,258,769
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 458,888 $ 469,841
Interest-bearing 645,572 605,854
------------ -----------
1,104,460 1,075,695
Demand note issued to U.S. Treasury 16,017 7,922
Federal Funds Purchased 0 4,000
Repurchase Agreement 135,000 45,000
Securities purchased not settled 0 10,300
Long-term capitalized lease 416 429
Other liabilities 16,234 13,339
------------ -----------
1,272,127 1,156,685
Stockholders' Equity:
Preferred stock (authorized, 20,000,000 shares
without par; none issued or outstanding) 0 0
Common stock (authorized, 50,000,000 shares
without par; issued and outstanding
15,036,681 and 14,974,732) 62,404 62,255
Retained earnings 45,883 39,057
Accumulated other comprehensive income 903 772
------------ -----------
109,190 102,084
------------ -----------
TOTAL $ 1,381,317 $ 1,258,769
============ ===========
See accompanying notes to the consolidated financial statements.
</TABLE>
2
<PAGE>
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
dollar amounts in thousands, except per share
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 15,106 $ 14,177 $ 30,179 $ 28,176
Investment securities:
Taxable 7,481 5,954 14,268 10,985
Tax-advantaged 1,113 594 2,019 1,149
--------- ---------- ---------- ----------
8,594 6,548 16,287 12,134
Federal funds sold and interest bearing
deposits with other financial institutions 166 21 248 93
--------- ---------- ---------- ----------
23,866 20,746 46,714 40,403
Interest expense:
Deposits 5,926 4,845 11,716 9,712
Other borrowings 1,718 1,438 2,944 2,151
--------- ---------- ---------- ----------
7,644 6,283 14,660 11,863
--------- ---------- ---------- ----------
Net interest income 16,222 14,463 32,054 28,540
Provision for credit losses 450 275 1,300 1,055
--------- ---------- ---------- ----------
Net interest income after
provision for credit losses 15,772 14,188 30,754 27,485
Other operating income:
Service charges on deposit accounts 1,846 1,853 3,588 3,630
Gains on sale of other real estate owned 36 53 51 54
Trust services 886 813 1,772 1,567
Gain on sale of premises and equipment 0 10 652 27
Other 701 886 1,402 1,616
--------- ---------- ---------- ----------
3,469 3,615 7,465 6,894
Other operating expenses:
Salaries and employee benefits 5,510 5,612 11,149 11,111
Deposit insurance premiums 31 30 61 57
Occupancy 890 885 1,973 1,686
Equipment 911 917 1,805 1,745
Provision for losses on other real estate owned 0 880 500 1,195
Other 3,861 3,093 7,076 6,592
--------- ---------- ---------- ----------
11,203 11,417 22,564 22,386
--------- ---------- ---------- ----------
Earnings before income taxes 8,038 6,386 15,655 11,993
Provision for income taxes 2,961 2,636 5,813 4,893
--------- ---------- ---------- ----------
Net earnings $ 5,077 $ 3,750 $ 9,842 $ 7,100
Basic earnings per common share $ 0.34 $ 0.25 $ 0.65 $ 0.47
========= ========== ========== ==========
Diluted earnings per common share $ 0.32 $ 0.24 $ 0.63 $ 0.45
========= ========== ========== ==========
Cash dividends per common share $ 0.10 $ 0.07 $ 0.20 $ 0.13
========= ========== ========== ==========
See accompanying notes to the consolidated financial statements.
</TABLE>
3
<PAGE>
CVB FINANCIAL CORP. AND SUBSIDIARIES
STATEMENT OF CHANGES IN EQUITY
(unaudited)
dollar amounts in thousands
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Retained Comprehensive Common
Total Income Earnings Income Stock
<S> <C> <C> <C> <C> <C>
Beginning balance, January 1, 1997 $ 89,087 $27,341 ($196) $61,942
Comprehensive income
Net Income 17,370 $17,370 17,370
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see disclosure) 968 968 968
-------
Comprehensive income $18,338
=======
Common Stock issued 904 904
Repurchase of Common Stock (1,935) (1,344) (591)
Tax benefit from exercise of stock options 193 193
Dividends declared on common stock (4,503) (4,503)
--------- -------- ------ --------
Ending balance, December 31, 1997 $102,084 $39,057 $772 $62,255
--------- -------- ------ --------
Comprehensive income
Net Income 9,842 $ 9,842 9,842
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see disclosure) 131 131 131
-------
Comprehensive income $ 9,973
=======
Common Stock issued 149 149
Dividends declared on common stock (3,016) (3,016)
========= ======== ====== ========
Ending balance, June 30, 1998 $109,190 $45,883 $903 $62,404
========= ======== ====== ========
Disclosure of reclassification amount
Unrealized holding gains arising during period,
net of tax effects of $711 $ 977
Less:
Reclassification adjustment for gains included in
net income, net of tax effects of $7 (9)
--------
Net unrealized gain on securities, December 31, 1997 $ 968
========
Unrealized holding gains arising during period,
net of tax effects of $96 $ 145
Less:
Reclassification adjustment for gains included in
net income, net of tax effects of $10 (14)
--------
Net unrealized gains on securities, June 30, 1998 $ 131
========
See accompanying notes to the consolidated financial statements.
</TABLE>
4
<PAGE>
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
dollar amounts in thousands
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 45,133 $ 39,244
Service charges and other fees received 7,440 6,897
Interest paid (13,449) (11,640)
Cash paid to suppliers and employees (20,684) (20,443)
Income taxes paid (3,905) (3,700)
------------- ------------
Net cash provided by operating activities 14,535 10,358
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 20,043 4,496
Proceeds from maturities of securities available for sale 58,288 33,591
Proceeds from maturities of securities held to maturity 746 841
Purchases of securities available for sale (214,226) (79,644)
Purchases of securities held to maturity (171) (6,545)
Net increase in loans (22,084) (3,734)
Proceeds from sale of premises and equipment 2,174 55
Purchase of premises and equipment (1,328) (793)
Other investing activities 2,618 6,176
------------- -------------
Net cash used in investing activities (153,940) (45,557)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in transaction deposits 13,359 (48,553)
Net increase in time deposits 15,406 20,686
Net increase in short-term borrowings 94,095 14,587
Cash dividends on common stock (3,016) (2,009)
Stock repurchase 0 (1,718)
Proceeds from exercise of stock options 149 380
------------- -------------
Net cash provided by (used in) financing activities 119,993 (16,627)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (19,412) (51,826)
CASH AND CASH EQUIVALENTS, beginning of period 107,725 142,502
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 88,313 $ 90,676
============ =============
See accompanying notes to the consolidated financial statements.
</TABLE>
5
<PAGE>
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
dollar amounts in thousands
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
1998 1997
<S> <C> <C>
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 9,842 $ 7,100
Adjustments to reconcile net earnings to net cash
provided by operating activities:
(Accretion of discount) amortization of premiums on investment (753) 2
securities
Provisions for loan and OREO losses 1,800 2,250
Depreciation and amortization 1,552 1,503
Change in accrued interest receivable (828) 10
Change in accrued interest payable 1,211 223
Change in other assets and liabilities 1,711 (730)
----------- -----------
Total adjustments 4,693 3,258
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 14,535 $ 10,358
=========== ===========
</TABLE>
6
<PAGE>
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 1998, and 1997
1. Summary of Significant Accounting Policies. See Note 1 of the Notes to
Consolidated Financial Statements in CVB Financial Corp.'s 1997 Annual
Report.
Goodwill resulting from purchase accounting treatment of acquired banks is
amortized on a straight line basis over 15 years.
The Bank accounts for impaired loans in accordance with Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan,"as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures." Impaired
loans totaled $6.7 million at June 30, 1998. Of this total, $6.0 million,
for 89.66%, represented loans that were supported by collateral with a fair
market value, net of prior liens, of $11.0 million. At June 30, 1998,
$693,000, or 10.34%, of total impaired loans represented loans for which
repayment was projected to come from cash flows.
2. Certain reclassifications have been made in the 1997 financial information
to conform to the presentation used in 1998.
3. 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 June 30, 1998, the
Company had entered into commitments with certain customers amounting to
$187.2 million compared to $153.7 million at December 31, 1997. Letters of
credit at June 30, 1998, and December 31, 1997, were $8.3 million and $7.9
million, respectively.
4. The interim consolidated financial statements are unaudited and reflect all
adjustments and reclassifications which, in the opinion of management, are
necessary for a fair statement of the results of operations and financial
condition for the interim period. All adjustments and reclassifications are
of a normal and recurring nature. Results for the period ending June 30,
1998, are not necessarily indicative of results which may be expected for
any other interim period or for the year as a whole.
5. The actual number of shares outstanding at June 30, 1998, was 15,036,681.
Basic earnings per share are calculated on the basis of the weighted
average number of shares outstanding during the period. Diluted earnings
per share are calculated on the basis of the weighted average number of
shares outstanding during the period plus shares issuable upon the assumed
exercise of outstanding common stock options. All 1997 per share
information in the financial statements and in Management's Discussion and
Analysis has been restated to give retroactive effect to the 3-for-2 stock
split declared on December 17, 1997. The tables below present the
reconciliation of earnings per share for the periods indicated.
7
<PAGE>
Earnings Per Share Reconciliation
For the Three Months
Ended June 30,
<TABLE>
<CAPTION>
1998 1997
Weighted Weighted
Income Average Shares Per Share Income Average Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to
common stockholders $ 5,076,472 15,033,352 $0.34 $ 3,749,798 14,977,942 $0.25
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 624,915 (0.02) 590,753 (0.01)
------------------------------------- --------------------------------------
DILUTED EPS
Income available to
common stockholders $ 5,076,472 15,658,267 $0.32 $ 3,749,798 15,568,695 $0.24
===================================== ======================================
</TABLE>
Earnings Per Share Reconciliation
For the Six Months
Ended June 30,
<TABLE>
<CAPTION>
1998 1997
Weighted Weighted
Income Average Shares Per Share Income Average Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to
common stockholders $ 9,841,696 15,044,207 $0.65 $ 7,099,523 14,999,493 $0.47
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 644,440 (0.02) 577,422 (0.02)
------------------------------------- --------------------------------------
DILUTED EPS
Income available to common
stockholders $ 9,841,696 15,688,647 $0.63 $ 7,099,523 15,576,915 $0.45
===================================== ======================================
</TABLE>
8
<PAGE>
6. Supplemental cash flow information. During the six-month period ended June
30, 1998, loans amounting to $2.5 million were transferred to Other Real
Estate Owned ("OREO") as a result of foreclosure on the real properties
held as collateral.
7. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning
after June 15, 1999. This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
Company does not believe that the adoption of SFAS No. 133 will have a
material impact on its operations and financial position.
9
<PAGE>
CVB FINANCIAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
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. For a more complete understanding of CVB Financial
Corp. and its operations, reference should be made to the financial statements
included in this report and in the Company's 1997 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 risk and uncertainties. The Company's 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
the Company conducts operations, fluctuations in interest rates, credit quality
and government regulations. For additional information concerning these factors,
see "Item 1. Business - Factors that May Affect Results" contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
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.
RESULTS OF OPERATIONS
The Company reported net earnings of $9.8 million for the six months ended
June 30, 1998. This represented an increase of $2.7 million, or 38.62%, over net
earnings of $7.1 million, for the six months ended June 30, 1997. Basic earnings
per share for the six month period increased to $0.65 per share for 1998,
compared to $0.47 per share for 1997. Diluted earnings per share increased to
$0.63 per share for the first six months of 1998, compared to $0.45 per share
for the same six month period last year. The annualized return on average assets
increased to 1.52% for the first half of 1998 compared to a return on average
assets of 1.26% for the six months ended June 30, 1997. The annualized return on
average equity was 18.39% for the six months ended June 30, 1998, compared to a
return of 15.45% for the six months ended June 30, 1997.
For the second quarter of 1998, the Company generated net earnings of $5.1
million. This represented an increase of $1.3 million, or 35.38%, over earnings
of $3.8 million, for the second quarter of 1997. Basic earnings per share
increased to $0.34 per share for the most recent quarter, compared to $0.25 per
share for the second quarter of last year. Diluted earnings per share increased
to $0.32 per share for the second quarter of 1998, compared to $0.24 per share
for the same three month period for 1997. The annualized return on average
assets was 1.52% for the second quarter of 1998, compared to a return of 1.31%
for the second quarter of 1997. The annualized return on average equity was
18.69%, for the second quarter of this year, compared to a return of 16.37%, for
the same period last year.
10
<PAGE>
Pre-tax operating earnings, which exclude the impact of gains or losses on
sale of securities and OREO, and the provisions for credit and OREO losses,
totaled $17.4 million for the six months ended June 30, 1998, This represented
an increase of $3.2 million, or 22.45%, compared to operating earnings of $14.2
million for the first half of 1997. For the second quarter of 1998, pre-tax
operating earnings totaled $8.4 million. This represented an increase of
$957,000, or 12.78%, over pre-tax operating earnings of $7.5 million for the
second quarter of 1997.
Net Interest Income/Net Interest Margin
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 and the interest paid on deposits and other borrowed funds. 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 average cost of interest-bearing deposits and
borrowed funds.
For the six months ended June 30, 1998, net interest income was $32.1
million. This represented an increase of $3.5 million, or 12.31%, over net
interest income of $28.5 million for the six months ended June 30, 1997.
Although net interest income increased, the net interest margin decreased to
5.57% for the six months ended June 30, 1998, compared to 5.90% for the six
months ended June 30, 1997. In addition, the net interest spread decreased to
4.10% for the six months ended June 30, 1998, compared to a spread of 4.63% for
the six months ended June 30, 1997.
The increase in net interest income for the most recent six months period
was the result of an increased volume of average earning assets. Earning assets
averaged $1.2 billion for the first six months of 1998. This represented an
increase of $196.7 million, or 20.00%, compared to average earning assets of
$983.4 million for the first six months of 1997. The decrease in the net
interest margin for the six months ended June 30, 1998 compared to the first six
months of 1997 was the result of a lower yield on average earning assets. The
decrease in the net interest spread resulted as the yield on average earning
assets decreased and the cost of interest bearing liabilities increased.
Similarly, net interest income increased for the second quarter of 1998,
compared to the second quarter of 1997. For the second quarter of 1998, net
interest income totaled $16.2 million. This represented an increase of $1.8
million, or 12.16%, over net interest income of $14.5 million for the second
quarter of 1997. The increases in net interest income for the second quarter of
this year also resulted from an increased volume in average earning assets. For
the second quarter of 1997, earning assets, averaged $1.2 billion. This
represented an increase of $213.0 million, or 21.17%, over average earning
assets of $1.0 billion for the second quarter of 1997. The net interest margin
decreased to 5.47% for the second quarter of 1998, compared to a net interest
margin of 5.84% for the second quarter of 1997. Again, the decrease in the net
interest margin was the result of a lower yield on average earning assets. The
net interest spread decreased to 4.00% for the second quarter of 1998, compared
to a spread of 4.54% for the second quarter of 1997.
11
<PAGE>
The Company reported total interest income of $46.7 million for the six
months ended June 30, 1998. This represented an increase of $6.3 million, or
15.62%, over total interest income of $40.4 million for the six months ended
June 30, 1997. The increase reflected the greater volume of earning assets noted
above. The yield on average total earning assets decreased to 8.05% for the six
months ended June 30, 1998, from a yield of 8.31% for the six months ended June
30, 1997.
The decrease in the yield on average earning assets resulted from lower
yields on average loans and a greater concentration of earning assets in
investments as opposed to loans. The yield on average loans decreased to 9.70%
for the six months ended June 30, 1998, from a yield of 9.73% for the first six
months of 1997. The 3 basis point decrease in average loan yields primarily
reflected increased price competition for loans. Loans typically generate higher
yields than investments. Accordingly, the higher the loan portfolio is as a
percentage of earning assets, the higher will be the yield on earning assets.
For the six months ended June 30, 1998, loans represented 52.73% of average
earning assets, compared to 58.89% for the six months ended June 30, 1997.
Similar trends were evident when comparing the second quarter of 1998 with
the second quarter of 1997. Total interest income was $23.9 million for the
second quarter of 1998. This represented an increase of $3.1 million, or 15.04%
over total interest income of $20.7 million for the second quarter of 1997. The
yield on average loans decreased to 9.67% for the second quarter of 1998,
compared to a 9.83% yield for the second quarter of 1997. Average loans as a
percent of average earning assets decreased to 51.24% for the three months ended
June 30, 1998, compared to 57.34% for the same period last year.
The increase in total interest income was partially offset by an increase
in interest expense for both the six months and the quarter ended June 30, 1998
when compared to the same periods for 1997. Interest expense totaled $14.7
million for the six months ended June 30, 1998. This represented an increase of
$2.8 million, or 23.58%, over total interest expense of $11.9 million for the
six months ended June 30, 1997. For the three months ended June 30, 1998,
interest expense totaled $7.6 million. This represented an increase of $1.4
million, or 21.66% compared to the same period last year.
The increase reflected an increase in both the average volume and cost of
interest bearing liabilities. Average interest bearing liabilities were $742.4
million for the first six months of 1998. This represented an increase of $98.4
million, or 15.28%, from average interest bearing liabilities of $644.0 million
for the first six months of 1997.
The cost of average interest bearing liabilities increased to 3.95% for the
six months ended June 30, 1998, compared to a cost of 3.68% for the first half
of 1997. The increase in the cost of interest bearing liabilities was primarily
the result of an increase in average time deposits and other borrowed funds.
Average time deposits totaled $272.1 million for the six months ended June 30,
1998. This represented an increase of $70.3 million, or 34.85%, over average
time deposits of $201.8 million for the six months ended June 30, 1997. The cost
of average time deposits increased to 5.24% for the first six months of 1998,
compared to an average cost of 5.16% for the same period last year.
12
<PAGE>
Other borrowed funds averaged $107.7 million for the six months ended June
30, 1998. This represented an increase of $29.3 million, or 37.41%, over average
other borrowed funds of $78.4 million for the six months ended June 30, 1997.
The cost of other borrowed funds decreased to 5.47% for the six months ended
June 30, 1998, compared to a cost of 5.49% for the six months ended June 30,
1997.
Table 1 shows the average balances of assets, liabilities, and
stockholders' equity and the related interest income, expense, and rates for the
six month periods ended June 30, 1998, and 1997. Rates for tax-preferenced
investments are shown on a taxable equivalent basis using a 35.0% tax rate.
13
<PAGE>
TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differentials
(dollars in thousands)
<TABLE>
<CAPTION>
Six-month periods ended June 30,
1998 1997
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Investment Securities
Taxable $ 457,840 14,268 6.23% $ 353,894 10,985 6.21%
Tax-advantaged (F1) 90,830 2,019 6.24% 46,799 1,149 6.89%
Federal Funds Sold & Interest-bearing
deposits with other financial institutions 9,188 248 5.40% 3,602 93 5.16%
Loans (F2) (F3) 622,264 30,179 9.70% 579,128 28,176 9.73%
------------------------------ -----------------------------
Total Earning Assets 1,180,122 46,714 8.05% 983,423 40,403 8.31%
Total Non-earning Assets 117,035 139,671
------------ ------------
Total Assets $ 1,297,157 $ 1,123,094
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits $ 424,516 $ 373,833
Savings Deposits (F4) 362,567 4,587 2.53% 363,819 4,501 2.47%
Time Deposits 272,142 7,129 5.24% 201,816 5,211 5.16%
------------------------------- ------------------------------
Total Deposits 1,059,225 11,716 2.21% 939,468 9,712 2.07%
------------------------------- ------------------------------
Other Borrowings 107,683 2,944 5.47% 78,364 2,151 5.49%
------------------------------- -----------------------------
Total Interest-Bearing Liabilities 742,392 14,660 3.95% 643,999 11,863 3.68%
------------- ------------
Other Liabilities 23,225 13,354
Stockholders' Equity 107,024 91,908
------------- ------------
Total Liabilities and
Stockholders' Equity $ 1,297,157 $ 1,123,094
============= ============
Net interest spread 4.10% 4.63%
Net interest margin 5.57% 5.90%
<FN>
(F1) Yields are calculated on a taxable equivalent basis.
(F2) Loan fees are included in total interest income as follows: 1998, $2,179; 1997, $1,647.
(F3) Nonperforming loans are included in net loans as follows: 1998, $4,828; 1997, $7,303.
(F4) Includes interest-bearing demand and money market accounts.
</FN>
</TABLE>
14
<PAGE>
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 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).
During periods of changing interest rates, the ability to reprice interest
earning assets and interest bearing liabilities can influence net interest
income, net interest margin, and consequently, the Company's earnings. Interest
rate risk is managed by attempting to control the spread between rates earned on
interest-earning assets and the rates paid on interest-bearing liabilities
within the constraints imposed by market competition in the Bank's service area.
Short term repricing risk is minimized by controlling the level of floating rate
loans and maintaining a downward sloping ladder of bond payments and maturities.
Basis risk is managed by the timing and magnitude of changes to interest-bearing
deposits rates. Yield curve risk is reduced by keeping the duration of the loan
and bond portfolios relatively short. Options risk in the bond portfolio is
monitored monthly and actions are recommended when appropriate.
Both the net interest spread and the net interest margin are largely
affected by the Company's ability to reprice assets and liabilities as interest
rates change. The Company's management utilizes the results of a dynamic
simulation model to quantify the estimated exposure of net interest income to
sustained changes in interest rates. The sensitivity of the Company's net
interest income is measured over a rolling two year horizon. The simulation
model estimates the impact of changing interest rates on the net interest income
from all interest earning assets and interest expense paid on all interest
bearing liabilities reflected on the Company's balance sheet. The sensitivity
analysis is compared to policy limits which specify a maximum tolerance level
for net interest income exposure over a one year time horizon assuming no
balance sheet growth, given both a 200 basis point upward and downward shift in
interest rates. A parallel and pro rata shift in interest rates over a 12 month
period is assumed. The following reflects the Company's net interest income
sensitivity over a one year horizon as of June 30, 1998.
Estimated Net
Simulated Interest Income
Rate Changes Sensitivity
+200 basis points -1.17%
-200 basis points -0.80%
The table indicates that net interest income would decrease by
approximately 1.17% over a 12 month period if there was a sustained, parallel
and pro rata 200 basis point downward shift in interest rates. Net interest
income would decrease approximately 0.80% over a 12 month period if there was a
sustained, parallel and pro rata 200 basis point upward shift in interest rates.
15
<PAGE>
TABLE 2 - Rate and Volume Analysis for Changes in Interest Income, Interest
Expense and Net Interest Income
(amounts in thousands)
<TABLE>
<CAPTION>
Comparison of six-month period
ended June 30, 1998 and 1997
Increase (decrease) in interest income or expense
due to changes in
Rate/
Volume Rate Volume Total
<S> <C> <C> <C> <C>
Interest Income:
Taxable investment securities $ 3,226 $ 44 $ 13 $ 3,283
Tax-advantaged investment securities 1,080 (108) (102) 870
Federal funds sold and interest bearing
deposits with other institutions 145 4 6 155
Loans 2,100 (90) (7) 2,003
-------------------------------------------
Total earning assets 6,551 (150) (90) 6,311
-------------------------------------------
Interest Expense:
Savings deposits (15) 101 (0) 86
Time deposits 1,815 76 27 1,918
Other borrowings 806 (9) (4) 793
--------------------------------------------
Total interest-bearing liabilities 2,606 168 23 2,797
--------------------------------------------
Net Interest Income $ 3,945 $ (318) $ (113) $ 3,514
============================================
</TABLE>
16
<PAGE>
Credit Loss Experience
The Company maintains an allowance for potential credit losses that is
increased by a provision for credit losses charged against operating results.
The allowance for credit losses is also increased by recoveries on loans
previously charged off and reduced by actual loan losses charged to the
allowance. The provision for credit losses was $1.3 million for the six months
ended June 30, 1998. This represented an increase of $245,000, or 23.22% from
the provision for credit losses of $1.1 million for the six months ended June
30, 1997. For the second quarter of 1998, the provision for credit losses was
$450,000. This represented an increase of $175,000, or 63.64%, from the
provision for credit losses of $275,000 for the second quarter of 1997.
The allowance for credit losses at June 30, 1997 was $12.8 million. This
represented an increase of $2.6 million, or 26.05%, from the allowance for
credit losses of $10.2 million at June 30, 1997. The allowance for credit losses
increased to 2.06% of average gross loans for the first half of 1998, compared
to 1.75% of average gross loans for the same period last year. For the six
months ended June 30, 1998, loans charged to the allowance for credit losses,
net of recoveries ("net loan charge offs") totaled $12,000, compared to net
loans charge offs of $3.1 million for the first six months of 1997.
Nonperforming assets, which includes nonaccrual loans, loans past due 90 or
more days and still accruing, restructured loans, and other real estate owned,
decreased to $9.6 million at June 30, 1998. This represented a decrease of $1.3
million, or 11.66%, from nonperforming assets of $10.9 million at December 31,
1997. Nonperforming loans, which include nonaccrual loans, loans past due 90 or
more days and still accruing, and restructured loans were $4.8 million at June
30, 1998. This represented a decrease of $1.6 million, or 25.33%, from the level
of nonperforming loans at December 31, 1997. Table 6 presents nonperforming
assets as of June 30 1998, and December 31, 1997. The Company applies the
methods prescribed by Statement of Financial Accounting Standards No. 114 for
determining the fair value of specific loans for which the eventual collection
of all principal and interest is considered impaired.
While management believes that the allowance at June 30, 1998, was adequate
to absorb losses from any known or inherent risks in the portfolio, no assurance
can be given that economic conditions which adversely affect the Company's
service areas or other circumstances will not be reflected in increased
provisions or credit losses in the future. Table 3 shows comparative information
on net credit losses, provisions for credit losses, and the allowance for credit
losses for the periods indicated.
17
<PAGE>
TABLE 3 - Summary of Credit Loss Experience
(amounts in thousands)
<TABLE>
<CAPTION>
Six-months
ended June 30,
1998 1997
<S> <C> <C>
Amount of Total Loans at End of Period $ 636,533 $ 580,328
=========== ============
Average Total Loans Outstanding $ 622,264 $ 579,128
=========== ============
Allowance for Credit Losses at Beginning of Period $ 11,522 $ 12,239
Loans Charged-Off:
Real Estate Loans 52 3,066
Commercial and Industrial 114 153
Consumer Loans 26 59
----------- ------------
Total Loans Charged-Off 192 3,278
----------- ------------
Recoveries:
Real Estate Loans 155 21
Commercial and Industrial 14 119
Consumer Loans 11 6
----------- ------------
Total Loans Recovered 180 146
----------- ------------
Net Loans Charged-Off 12 3,132
----------- ------------
Provision Charged to Operating Expense 1,300 1,055
----------- ------------
Allowance for Credit Losses at End of period $ 12,810 $ 10,162
=========== ============
Net Loans Charged-Off to Average Total Loans* 0.00% 1.08%
Net Loans Charged-Off to Total Loans at End of Period* 0.00% 1.08%
Allowance for Credit Losses to Average Total Loans 2.06% 1.75%
Allowance for Credit Losses to Total Loans at End of Period 2.01% 1.75%
Net Loans Charged-Off to Allowance for Credit Losses* 0.19% 61.64%
Net Loans Charged-Off to Provision for Credit Losses 0.92% 296.87%
* Net Loan Charge-Off amounts are annualized.
</TABLE>
18
<PAGE>
Other Operating Income
Other operating income includes revenues earned from sources other than
interest income. These sources include: service charges and fees on deposit
accounts, fee income from the Asset Management Division, other fee oriented
products and services, gain (or loss) on sale of securities or other real estate
owned and gross revenue from Community Trust Deed Services (the Company's
nonbank subsidiary).
Other operating income totaled $7.5 million for the six months ended June
30, 1998. This represented an increase of $571,000, or 8.28%, from other
operating income of $6.9 million for the six months ended June 30, 1997.
Trust income totaled $1.8 million for the six months ended June 30, 1998.
This represented an increase of $205,000, or 13.08%, over trust income of $1.6
million for the six months ended June 30, 1997. In March of 1998, the Bank sold
an office building used as its Brea office. The Bank realized a gain on the sale
of approximately $450,000 which is included in the $652,000 gain on sale of
premises and equipment for the first six months of 1998. During the first six
months of 1997, gains on sale of premises and equipment totaled $27,000.
Other operating income totaled $3.5 million for the second quarter of 1998.
This represented a decrease of $146,000, or 4.04%, over other operating income
of $3.6 million for the second quarter of 1997.
Other Operating Expenses
Other operating expenses totaled $22.6 million for the six months ended
June 30, 1998. This represented an increase of $178,000, or 0.80%, over other
operating expenses of $22.4 million for the six months ended June 30, 1997. For
the second quarter of 1998, other operating expenses totaled $11.2 million,
representing a decrease of $214,000, or 1.87%, over operating expenses of $11.4
million for the second quarter of 1997.
The Company maintains an allowance for potential losses on other real
estate owned. The allowance is increased by a provision for losses on other real
estate owned, and reduced by losses on the sale of other real estate owned
charged directly to the allowance. The allowance was established to provide for
declining Southern California real estate values over the past several years.
For the six months ended June 30, 1998, the provision for other real estate
owned was $500,000. This represented a decrease of $695,000, or 58.16%, from a
provision of $1.2 million for the six months ended June 30, 1997. The decrease
in the provision for 1998 reflects firmer real estate values for this year.
As a percent of average assets, annualized other operating expenses
decreased to 3.48% for the six months ended June 30, 1998, compared to a ratio
of 3.99% for the six months ended June 30, 1997. The decrease in the ratio
indicates that the Company is managing a greater level of assets with
proportionately lower levels of operating expenses. The Company's efficiency
ratio decreased to 57.10% for the six months ended June 30, 1998, compared to a
ratio of 63.18% for the six months ended June 30, 1997. The decrease in the
efficiency ratio indicates that the Company is allocating a lower percentage of
net revenue to operating expenses.
19
<PAGE>
BALANCE SHEET ANALYSIS
The Company reported total assets of $1.38 billion at June 30, 1998. This
represented an increase of $122.5 million, or 9.74%, over total assets of $1.26
billion at December 31, 1997. Gross loans totaled $636.5 million at June 30,
1998. This represented an increase of $19.5 million, or 3.16%, over gross loans
of $617.0 million at December 31, 1997. Total deposits increased $28.8 million,
or 2.67%, to $1.10 billion at June 30, 1998, from $1.08 billion at December 31,
1997.
Investment Securities and Debt Securities Available-for-Sale
The Company reported total investment securities of $618.2 million at June
30, 1998. This represented an increase of $126.0 million, or 25.61%, over total
investment securities of $492.2 million at December 31, 1997.
At June 30, 1998, the Company's net unrealized gain on securities
available-for-sale totaled $1.6 million. The Company recorded an adjustment
increasing accumulated other comprehensive income to $903,000, and an adjustment
to increase deferred tax assets to $663,000. At December 31, 1997, the Company
reported a net unrealized gain on investment securities available for sale of
$1.3 million, with an adjustment to equity capital of $772,000 and deferred
taxes of $567,000. Note 2 of the Notes to the Consolidated Financial Statements
in the Company's 1997 Annual Report on discusses it current accounting policy as
it pertains to recognition of market values for investment securities held as
available-for-sale.
Table 4 sets forth investment securities held-to-maturity and
available-for-sale, at June 30, 1998 and December 31, 1997.
20
<PAGE>
Table 4 - Composition of Securities Portfolio
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
Amortized Market Net Yield Amortized Market Net Yield
Cost Value Unrealized Cost Value Unrealized
Gain/(Loss) Gain/(Loss)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities
Available for Sale $ 36,140 $ 36,354 $ 214 6.30% $ 51,238 $ 51,525 $ 287 5.71%
FHLMC, FNMA CMO's, REMIC's
and mortgage-backed pass-through securities
Available for Sale 355,339 356,862 1,523 6.43% 279,835 280,920 1,085 6.41%
Held to Maturity 4,371 4,466 95 6.06% 4,969 5,068 99 6.49%
Other Government Agency Securities
Available for Sale 37,777 37,875 98 6.54% 53,052 53,018 (34) 6.52%
GNMA mortgage-backed pass-through
securities
Available for Sale 64,430 64,257 (173) 6.77% 9,854 9,878 24 6.61%
Held to Maturity 868 943 75 6.46% 964 1,046 82 6.53%
Tax-exempt Municipal Securities
Available for Sale 48,124 48,142 18 4.46% 25,364 25,509 145 4.56%
Held to Maturity 50,602 51,945 1,343 4.80% 50,789 52,222 1,433 4.52%
Other securities
Available for Sale 17,357 17,357 0 0.00% 13,256 13,256 0 0.00%
Held to Maturity 1,486 1,486 0 6.51% 1,322 1,322 0 6.37%
-------------------------------------- -----------------------------------------
$616,494 $619,687 $ 3,193 5.99% $ 490,643 $ 493,764 $ 3,121 5.89%
====================================== =========================================
</TABLE>
21
<PAGE>
Loan Composition and Nonperforming Assets
Table 5 sets forth the distribution of the loan portfolio by type as of the
dates indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
Commercial and Industrial $244,316 $258,987
Real Estate:
Construction 28,440 19,819
Mortgage 260,835 229,926
Consumer 18,313 17,445
Lease finance receivables 21,039 24,008
Agribusiness 65,915 69,404
-------- --------
Gross Loans $638,858 $619,589
Less:
Allowance for credit losses 12,810 11,522
Deferred net loan fees 2,325 2,583
-------- --------
Net loans $623,723 $605,484
======== ========
</TABLE>
As set forth in Table 6, nonperforming assets (nonaccrual loans, loans 90
days or more past due and still accruing interest, restructured loans, and other
real estate owned) totaled $9.6 million at June 30, 1998. This represented a
decrease of $1.3 million, or 11.66%, from nonperforming assets of $10.9 million
at December 31, 1997. As a percent of total assets, nonperforming assets
decreased to 0.69% at June 30, 1998, from 0.86% at December 31, 1997.
Although management believes that nonperforming assets are generally well
secured and that potential losses are reflected in the allowance for credit
losses, there can be no assurance that a general deterioration of economic
conditions or collateral values would not result in future credit losses.
Table 6 - Nonperforming Assets
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
<S> <C> <C>
Nonaccrual loans $4,828 $ 3,955
Loans past due 90 days or more
and still accruing interest 4 424
Restructured loans 0 2,092
Other real estate owned (OREO), net 4,767 4,395
------ -------
Total nonperforming assets $9,599 $10,866
====== =======
Percentage of nonperforming assets
to total loans outstanding and OREO 1.50% 1.75%
Percentage of nonperforming
assets to total assets 0.69% 0.86%
</TABLE>
22
<PAGE>
The decrease in nonperforming assets was primarily the result of a decrease
in restructured loans. Restructured loans declined $2.1 million for the first
six months of 1998. At June 30, 1998, the majority of nonaccrual loans were
collateralized by real property. The estimated loan balances to the fair value
of related collateral (loan-to-value ratio) for nonaccrual loans ranged from
approximately 16% to 131%.
Other real estate owned totaled $4.8 million at June 30, 1998. This
represented an increase of $372,000, or 8.46%, from total real estate owned of
$4.4 million at December 31, 1997.
The Bank has allocated specific reserves to provide for any potential loss
on non-performing loans. Management cannot, however, predict the extent to which
the current economic environment may persist or worsen or the full impact such
environment may have on the Company's loan portfolio.
Deposits and Other Borrowings
At June 30, 1998, total deposits were $1.1 billion. This represented an
increase of $28.8 million, or 2.67%, from total deposits of $1.08 billion at
December 31, 1997. Demand deposits totaled $458.9 million at June 30, 1998,
representing a decrease of $10.9 million, or 2.33%, from total demand deposits
of $469.8 million at December 31, 1997. The decrease in demand deposits from the
year end total reflects normal seasonal fluctuations relating to agricultural
and other depositors. Average demand deposits for the second quarter of 1998
were $437.2 million. This represented an increase of $55.9 million, or 14.67%,
from average demand deposits of $381.3 million for the second quarter of 1997.
The comparison of average balances for the second quarters of 1998 and 1997, is
more representative of the Company's growth in deposits as it excludes the
seasonal peak in deposits at year end.
Time deposits totaled $279.8 million at June 30, 1998. This represented an
increase of $15.4 million, or 5.83%, over total time deposits of $264.4 million
at December 31, 1997. Time deposits are not affected by the Company's seasonal
fluctuation in demand deposits.
23
<PAGE>
Liquidity
Liquidity risk is the risk to earnings or capital resulting from the Bank's
inability to meet its obligations when they come due without incurring
unacceptable losses. It includes the ability to manage unplanned changes in
funding sources and to recognize or address changes in market conditions that
affect the Bank's ability to liquidate assets quickly and with minimum loss of
value. Factors considered in liquidity risk management are stability of the
deposit base; marketability, maturity, and pledging of investments; and the
demand for credit.
In general, liquidity risk is managed daily by controlling the level of Fed
funds and the use of funds provided by the cash flow from the investment
portfolio. To meet unexpected demands, lines of credit are maintained with
correspondent banks, the Federal Home Loan Bank and the Federal Reserve Bank.
The sale of bonds maturing in the near future can also serve as a contingent
source of funds. Increases in deposit rates are considered a last resort as a
means of raising funds to increase liquidity.
For the Bank, sources of funds normally include principal payments on loans
and investments, other borrowed funds, and growth in deposits. Uses of funds
include withdrawal of deposits, interest paid on deposits, increased loan
balances, purchases, and other operating expenses.
Net cash provided by operating activities totaled $14.5 million for the
first six months of 1998, compared to net cash provided by operating activities
of $10.4 million for the same period last year. The increase was primarily the
result of increased interest received on loans and investment securities.
Net cash used for investing activities totaled $153.9 million for the first
six months of 1998, compared to net cash used for investing activities of $45.6
million for the same period last year. The increase in net cash used for
investing activities was primarily from the purchase of additional investment
securities. Financing activities provided net cash flows of $120.0 million for
the six months ended June 30, 1998. This compares to a use of cash of $16.6
million for the six months ended June 30, 1997. A net increase in deposits of
$13.4 million for the six months ended June 30, 1998, compared to a net decrease
in deposits of $48.6 million for the same period last year contributed to the
change. In addition, net cash flows provided by financing activities was
impacted by an increase in short term borrowings of $94.1 million for the first
six months of 1998 compared to $14.6 million for the first six months of 1997.
At June 30, 1998, cash and cash equivalents totaled $88.3 million. This
represented a decrease of $2.4 million, or 2.6%, from a total of $90.7 million
at June 30, 1997.
24
<PAGE>
Since the primary sources and uses of funds for the Bank are loans and
deposits, the relationship between gross loans and total deposits provides a
useful measure of the Bank's liquidity. Typically, the closer the ratio of loans
to deposits is to 100%, the more reliant the Bank is on its loan portfolio to
provide for short term liquidity needs. Since repayment of loans tends to be
less predictable than the maturity of investments and other liquid resources,
the higher the loan to deposit ratio the less liquid are the Bank's assets. For
the first six months of 1998, the Bank's loan to deposit ratio averaged 58.75%,
compared to an average ratio of 61.64% for the first six months of 1997.
CVB is a company separate and apart from the Bank that must provide for its
own liquidity. Substantially all of CVB's revenues are obtained from dividends
declared and paid by the Bank. There are statutory and regulatory provisions
that could limit the ability of the Bank to pay dividends to CVB. At June 30,
1998, approximately $36.1 million of the Bank's equity was unrestricted and
available to be paid as dividends to CVB. Management of CVB believes that such
restrictions will not have an impact on the ability of CVB to meet its ongoing
cash obligations. At June 30, 1998, neither the Bank nor CVB had any material
commitments for capital expenditures.
Capital Resources
The Company's equity capital was $109.2 million at June 30, 1998. The
primary source of capital for the Company continues to be the retention of net
after tax earnings. The Company's 1997 annual report (management's discussion
and analysis and note 15 of the accompanying financial statements) describes the
regulatory capital requirements of the Company and the Bank.
The Bank and the Company are required to meet risk-based capital standards
set by the respective regulatory authorities. The risk-based capital standards
require the achievement of a minimum ratio of total capital to risk-weighted
assets of 8.0% (of which at least 4.0% must be Tier 1 capital). In addition, the
regulatory authorities require the highest rated institutions to maintain a
minimum leverage ratio of 3.0%. At June 30, 1998, the Bank and the Company
exceeded the minimum risk-based capital ratio and leverage ratio required to be
considered "Well Capitalized".
Table 7 below presents the Company's and the Bank's risk-based and leverage
capital ratios as of June 30, 1998, and December 31, 1997.
Table 7 - Regulatory Capital Ratios
<TABLE>
<CAPTION>
Required
Minimum June 30, 1998 December 31, 1997
Capital Ratios Ratios Company Bank Company Bank
<S> <C> <C> <C> <C> <C>
Risk-based capital ratios
Tier 1 4.00% 12.62% 12.42% 12.08% 11.84%
Total 8.00% 13.89% 13.69% 13.35% 13.11%
Leverage Ratio 4.00% 7.39% 7.26% 7.56% 7.40%
</TABLE>
25
<PAGE>
On April 16, 1997, the board of directors of the Company authorized the
repurchase of shares of its common stock, from time to time, at the discretion
of the Company, through open market purchases or in private transactions in an
aggregate amount of up to $9.0 million, or 750,000 shares. As of December 31,
1997, the Company had purchased 142,772 shares for an average price of $13.56
per share. The Company has not repurchased any of its outstanding shares of
common stock during the first six months of 1998.
Risk Management
The Company's management has adopted a Risk Management Policy to ensure the
proper control and management of all risk factors inherent in the operation of
the Company and the Bank. The policy is designed to address specific risk
factors defined by federal bank regulators. These risk factors are not mutually
exclusive. It is recognized that any product or service offered may expose the
Bank to one or more of these risks. The Risk Management Policy identifies the
significant risks as: credit risk, interest rate risk, liquidity risk,
transaction risk, compliance risk, strategic risk, and price risk.
Year 2000
The financial institutions industry, as with other industries, is faced
with year 2000 issues. These issues center around computer programs that do not
recognize a year which begins with "20" instead of "19", or uses only 2 digits
for the year. Certain statements in this section on the Year 2000 constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995 which involve risk and uncertainties. The Company's actual results may
differ significantly from the results discussed in these forward-looking
statements. Such factors include but are not limited to the costs of remediation
and the preparedness of third party vendors.
The Company has been working on these issues for the last 18 months. A
committee, known as Team 2000, was established to analyze the issues and
determine compliance with the requirements for year 2000. To date all of the
Company's systems have been analyzed. The Company relies on third party vendors
for all of its hardware and software.
The third party vendor for the main applications (loans, deposits,
investments and accounting) which the Company uses has indicated that their
software is compliant. The Company has tested this software and found it to be
compliant. However, periodic testing will continue to determine that new
releases to the software are compliant.
The Company uses personal computers extensively throughout the Bank. These
are all compliant. However, the third party vendor of the Bank's teller terminal
system has indicated that their hardware is not compliant and will not be made
compliant. It is of an older generation of technology. The Bank is in the
process of replacing this system, which is anticipated to be completed by March
31, 1999.
There are other systems which are provided by third party vendors. These
vendors have indicated that they will be compliant by the end of this year. The
Company has no evidence that these vendors will not be compliant within that
timeframe. However, the Company has written contingency plans for each of these
systems and will prepare to convert to other vendors if needed.
26
<PAGE>
The Bank has notified its customers by means of statement stuffers of year
2000 issues. It is also in the process of contacting each of its major borrowing
customers to make them aware of the issues and to seek information regarding its
customers' preparedness for the year 2000.
The Board of Directors of CVB and the Bank have approved a Year 2000 Policy
and budget. The Board has approved a budget of $1.3 million for the anticipated
costs of year 2000 issues. The Board has allocated $500,000 of the Bank's
allowance for loan and lease losses to cover potential losses from customers due
to their year 2000 problems. In addition, it is anticipated that the replacement
of the teller system hardware will cost $450,000. The remaining $350,000 is
budgeted for software needs although the specifics are not completely known.
Approximately $200,000 could be used in relation to the teller terminal system
replacement. To date, the Company has expended approximately $20,000 for the
testing of software and hardware.
Of the $1.3 million, the $500,000 allocation from the allowance for loan
and lease losses has already been provided through the income statement. The
Company believes that costs to replace the teller system which could be as much
as $650,000 will be capitalized as these costs relate to the purchase of new
equipment and, therefore, will only impact the earnings of the Company as it is
depreciated. The Company anticipates that the remaining $150,000 will be
reflected in the income statement over the next six quarters.
Business Segments
On March 29, 1996, the Bank acquired Citizens Commercial Trust and Savings
Bank of Pasadena ("Citizens"). At the time of the acquisition, Citizens had a
trust division with managed assets of approximately $800.0 million. The acquired
division, now called the Asset Management division, managed assets of $990.1
million at June 30, 1998.
The Asset Management division has served as a significant and growing
source of noninterest income for the Company. The division offers a number of
trust and asset management services to the Bank's branch operations that were
not available prior to the acquisition. For purposes of business segmentation,
table 8 provides a summary of the sources of revenue and expenses for the
Asset Management division and the other divisions of the Company.
27
<PAGE>
Table 8 - Business Segments
<TABLE>
<CAPTION>
Amounts in Thousands
(Unaudited)
For the Six Months Ended
June 30, 1998 June 30, 1997
Banking Asset Banking Asset
Operations Management Company Operations Management Company
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 32,054 $ $ 32,054 $ 28,540 $ $ 28,540
Less: Provision for credit losses 1,300 1,300 1,055 1,055
Other operating income 5,693 1,772 7,465 5,327 1,567 6,894
---------- --------- -------- --------- -------- ---------
Net revenue $ 36,447 $ 1,772 $ 38,219 $ 32,812 $ 1,567 $ 34,379
Other operating expenses
Salaries and employee benefits 10,427 722 11,149 10,397 714 11,111
Occupancy and equipment 3,584 194 3,778 3,274 157 3,431
Other 7,316 321 7,637 7,485 359 7,844
---------- --------- -------- ---------- -------- ---------
21,327 1,237 22,564 21,156 1,230 22,386
Earnings before taxes $ 15,120 $ 535 $ 15,655 $ 11,656 $ 337 $ 11,993
========== ========= ======== ========== ======== =========
</TABLE>
28
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
The annual Meeting of Shareholders of CVB Financial Corp. was
held May 20, 1998. At the meeting, the following individuals
were elected to serve as the Company's Board of Directors
until the 1999 Annual Meeting of Shareholders and until their
successors are elected and have qualified.
Against or Broker
For Withheld Abstained Non-votes
George A. Borba 15,015,474 1,484 -0- -0-
John A. Borba 15,015,474 1,484 -0- -0-
Ronald O. Kruse 15,015,474 1,484 -0- -0-
John J. LoPorto 15,015,474 1,484 -0- -0-
Charles M. Magistro 15,015,474 1,484 -0- -0-
James C. Seley 15,015,474 1,484 -0- -0-
D. Linn Wiley 15,015,474 1,484 -0- -0-
The appointment of Deloitte & Touche LLP as independent public
accountants of the Company for the year ended December 31, 1998
was ratified at the 1998 Annual Meeting of Shareholders by the
following:
14,990,296 shares voted for
4,021 shares voted against
22,641 shares abstained
-0- broker non-votes
Item 5 - Other Information The proxy materials for the 1998 Annual Meeting
of Shareholders held on May 20, 1998 were mailed to shareholders
of the Company on April 13, 1998. Shareholders wishing to submit a
proposal for consideration at the Company's 1999 Annual Meeting of
Shareholders may do so by following the procedures prescribed in
the Securities Exchange Act of 1934, as amended. To be eligible
for inclusion, the Company's Corporate Secretary must receive the
proposal no later than December 14, 1998. In addition, in the
event a shareholder proposal is not submitted to the Company prior
to February 28, 1999, the proxy to be solicited by the Board of
Directors for the 1999 Annual Meeting of Shareholders will confer
authority on the holders of the proxy to vote the shares in
accordance with their best judgment and discretion if the proposal
is presented at the 1999 Annual Meeting of Shareholders without
any discussion of the proposal in the proxy statement for such
meeting.
29
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Not Applicable
30
<PAGE>
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 33
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CVB FINANCIAL CORP.
(Registrant)
Date: August 13, 1998 /s/ Edward J. Biebrich Jr.
--------------------------
Edward J. Biebrich Jr.
Chief Financial Officer
32
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1998, CONSOLIDATED BALANCE SHEET, AND THE JUNE 30, 1998, CONSOLIDATED STATEMENT
OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 76,313
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 560,847
<INVESTMENTS-CARRYING> 57,327
<INVESTMENTS-MARKET> 58,840
<LOANS> 636,533
<ALLOWANCE> 12,810
<TOTAL-ASSETS> 1,381,317
<DEPOSITS> 1,104,460
<SHORT-TERM> 135,000
<LIABILITIES-OTHER> 32,251
<LONG-TERM> 416
0
0
<COMMON> 62,404
<OTHER-SE> 46,786
<TOTAL-LIABILITIES-AND-EQUITY> 1,381,317
<INTEREST-LOAN> 30,179
<INTEREST-INVEST> 16,287
<INTEREST-OTHER> 248
<INTEREST-TOTAL> 46,714
<INTEREST-DEPOSIT> 11,716
<INTEREST-EXPENSE> 14,660
<INTEREST-INCOME-NET> 32,054
<LOAN-LOSSES> 1,300
<SECURITIES-GAINS> 25
<EXPENSE-OTHER> 22,564
<INCOME-PRETAX> 15,655
<INCOME-PRE-EXTRAORDINARY> 9,842
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,842
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.63
<YIELD-ACTUAL> 5.57
<LOANS-NON> 4,828
<LOANS-PAST> 4
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,874
<ALLOWANCE-OPEN> 11,522
<CHARGE-OFFS> 192
<RECOVERIES> 180
<ALLOWANCE-CLOSE> 12,810
<ALLOWANCE-DOMESTIC> 8,862
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,948
</TABLE>
