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 March 31, 1999
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 March 31, 1999 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: 16,563,771 outstanding as of
April 30, 1999.
This Form 10-Q contains 25 pages. Exhibit index on page 23.
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
dollar amounts in thousands
March 31, December 31,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS
Federal funds sold $ 25,000 $ 0
Investment securities held-to-maturity
(market values of $55,284 and $55,912) 53,503 53,859
Investment securities available-for-sale 665,356 676,162
Loans and lease finance receivables, net 679,463 675,668
----------- -----------
Total earning assets 1,423,322 1,405,689
Cash and due from banks 84,303 100,033
Premises and equipment, net 22,035 22,333
Other real estate owned, net 2,293 2,102
Goodwill and intangibles 9,339 9,635
Other assets 16,642 15,415
----------- -----------
TOTAL $ 1,557,934 $ 1,555,207
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 509,200 $ 538,808
Interest-bearing 700,996 676,497
----------- -----------
1,210,196 1,215,305
Demand note issued to U.S. Treasury 2,813 95
Federal Funds Purchased 0 5,000
Repurchase Agreement 205,000 195,000
Securities purchased not settled 1,640 5,000
Long-term capitalized lease 395 402
Other liabilities 20,420 18,698
----------- -----------
1,440,464 1,439,500
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
16,560,079 and 16,532,464) 94,684 94,529
Retained earnings 23,322 19,799
Accumulated other comprehensive (loss) income (536) 1,379
----------- -----------
117,470 115,707
----------- -----------
TOTAL $ 1,557,934 $ 1,555,207
=========== ===========
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
Ended March 31,
1999 1998
------- -------
<S> <C> <C>
Interest income:
Loans, including fees $15,191 $15,073
Investment securities:
Taxable 9,568 6,787
Tax-advantaged 1,247 906
------- -------
10,815 7,693
Federal funds sold and interest bearing
deposits with other financial institutions 11 82
------- -------
26,017 22,848
Interest expense:
Deposits 5,214 5,790
Other borrowings 3,035 1,226
------- -------
8,249 7,016
------- -------
Net interest income 17,768 15,832
Provision for credit losses 600 850
------- -------
Net interest income after
provision for credit losses 17,168 14,982
Other operating income:
Service charges on deposit accounts 2,153 1,742
Gains on sale of securities 0 18
Gains on sale of other real estate owned 0 15
Gains on sale of premises and equipment 0 513
Trust services 1,030 886
Other 614 822
------- -------
3,797 3,996
Other operating expenses:
Salaries and employee benefits 6,017 5,639
Deposit insurance premiums 32 30
Occupancy 1,002 1,083
Equipment 1,058 894
Provision for losses on other real estate owned 0 500
Other 4,039 3,215
------- -------
12,148 11,361
------- -------
Earnings before income taxes 8,817 7,617
Provision for income taxes 3,304 2,852
------- -------
Net earnings $ 5,513 $ 4,765
======= =======
Basic earnings per common share $ 0.33 $ 0.29
======= =======
Diluted earnings per common share $ 0.32 $ 0.28
======= =======
Cash dividends per common share $ 0.12 $ 0.09
======= =======
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(Loss) Stock
---------- ------------- ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Beginning balance, January 1, 1998 $ 102,084 $ 39,057 $ 772 $ 62,255
Comprehensive income
Net Income 20,787 $ 20,787 20,787
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see disclosure) 607 607 607
---------
Comprehensive income $ 21,394
=========
Common Stock issued 467 467
Repurchase of Common Stock (1,907) (1,527) (380)
10% stock dividend (32,187) 32,187
Tax benefit from exercise of stock options 172 172
Dividends declared on common stock (6,503) (6,503)
--------- --------- --------- ---------
Ending balance, December 31, 1998 $ 115,707 $ 19,799 $ 1,379 $ 94,529
--------- --------- --------- ---------
Comprehensive income
Net Income 5,513 $ 5,513 5,513
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see disclosure) (1,915) (1,915) (1,915)
---------
Comprehensive income $ 3,598
=========
Common Stock issued 155 155
Dividends declared on common stock (1,990) (1,990)
--------- --------- --------- ---------
Ending balance, March 31, 1999 $ 117,470 $ 23,322 $(536) $ 94,684
========= ========= ========= =========
Disclosure of reclassification amount
Unrealized holding gains arising during period,
net of tax effects of $596 $ 862
Less:
Reclassification adjustment for gains included in
net income, net of tax effects of $ 151 (255)
---------
Net unrealized gain on securities, December 31, 1998 $ 607
=========
Unrealized holding losses arising during period,
net of tax benefit of $1,405 $ (1,915)
--------
Net unrealized losses on securities, March 31, 1999 $ (1,915)
========
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 Three Months
Ended March 31,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 26,884 $ 23,288
Service charges and other fees received 3,798 3,978
Interest paid (8,388) (6,516)
Cash paid to suppliers and employees (14,861) (11,667)
Income taxes paid (1,000) 0
--------- ---------
Net cash provided by operating activities 6,433 9,083
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 0 18,286
Proceeds from maturities of securities available for sale 39,842 24,058
Proceeds from maturities of securities held to maturity 355 354
Purchases of securities available for sale (33,038) (109,944)
Purchases of securities held to maturity (43) (114)
Net increase in loans (5,057) (2,606)
Proceeds from sale of premises and equipment 0 2,058
Purchase of premises and equipment (500) (851)
Other investing activities 504 946
--------- ---------
Net cash used in investing activities 2,063 (67,813)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in transaction deposits (11,073) 4,151
Net increase in time deposits 5,964 7,718
Net increase in short-term borrowings 7,718 35,752
Cash dividends on common stock (1,990) (1,512)
Proceeds from exercise of stock options 155 63
--------- ---------
Net cash provided by financing activities 774 46,172
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS 9,270 (12,558)
CASH AND CASH EQUIVALENTS, beginning of period 100,033 107,725
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 109,303 $ 95,167
========= =========
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 Three Months
Ended March 31,
1999 1998
-------- --------
<S> <C> <C>
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 5,513 $ 4,765
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums on investment securities 740 646
Provisions for loan and OREO losses 600 1,350
Depreciation and amortization 767 780
Change in accrued interest receivable 127 (206)
Change in accrued interest payable (139) 500
Change in other assets and liabilities (1,175) 1,248
-------- --------
Total adjustments 920 4,318
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 6,433 $ 9,083
======== ========
Supplemental Schedule of Noncash Investing and Financing Activities
Securities purchased and not settled $ 1,640 $ 17,235
</TABLE>
6
<PAGE>
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 1999 and 1998
1. Summary of Significant Accounting Policies. See Note 1 of the Notes to
Consolidated Financial Statements in CVB Financial Corp.'s 1998 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 Statement of
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 $8.5 million at March 31, 1999. These loans were
supported by collateral with a fair market value, net of prior liens, of
$12.0 million.
2. Certain reclassifications have been made in the 1998 financial information
to conform to the presentation used in 1999.
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 March 31, 1999, the
Company had entered into commitments with certain customers amounting to
$228.6 million compared to $209.1 million at December 31, 1998. Letters of
credit at March 31, 1999, and December 31, 1998, were $9.0 million and $8.9
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 March 31,
1999, 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 March 31, 1999, was 16,560,079.
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 1998 per share
information in the financial statements and in Management's Discussion and
Analysis has been restated to give retroactive effect to the 10% stock
dividend declared December 16, 1998. The table below presents the
reconciliation of earnings per share for the periods indicated.
7
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<TABLE>
<CAPTION>
Earnings Per Share Reconciliation
For the Three Months
Ended March 31,
1999 1998
------------------------------------------ --------------------------------------------
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 $ 5,512,845 16,555,686 $0.33 $ 4,765,224 16,535,388 $0.29
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 569,138 (0.01) 733,692 (0.01)
---------------------------------------- -------------------------------------------
DILUTED EPS
Income available to
common stockholders $ 5,512,845 17,124,824 $0.32 $ 4,765,224 17,269,080 $0.28
======================================== ============================================
</TABLE>
6. Supplemental cash flow information. During the three-month period ended
March 31, 1999, loans amounting to $662,000 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.
8
<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. 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 CVB Financial Corp.
and its operations, reference should be made to the financial statements
included in this report and in the Company's 1998 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. 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,
year 2000 data systems compliance, 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, 1998.
RESULTS OF OPERATIONS
The Company reported net earnings of $5.5 million for the three months
ended March 31, 1999. This represented an increase of $748,000, or 15.69%, over
net earnings of $4.8 million, for the three months ended March 31, 1998. Basic
earnings per share for the three month period increased to $0.33 per share for
1999, compared to $0.29 per share for 1998. Diluted earnings per share increased
to $0.32 per share for the first three months of 1999, compared to $0.28 per
share for the same three month period last year. The annualized return on
average assets was 1.43% for the first three months of 1999 compared to a return
on average assets of 1.52% for the three months ended March 31, 1998. The
annualized return on average equity was 18.42% for the three months ended March
31, 1999, compared to a return of 18.08% for the three months ended March 31,
1998.
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 $9.4 million for the three months ended March 31, 1999. This represented
an increase of $483,000, or 5.41%, compared to operating earnings of $8.9
million for the first three months of 1998.
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 three months ended March 31, 1999, net interest income was $17.8
million. This represented an increase of $1.9 million, or 12.23%, over net
interest income of $15.8 million for the three months ended March 31, 1998.
Although net interest income increased, the net interest margin decreased to
5.14% for the three months ended March 31, 1999, compared to 5.68% for the three
months ended March 31, 1998. In addition, the net interest spread decreased to
3.86% for the three months ended March 31, 1999, compared to a spread of 4.22%
for the three months ended March 31, 1998.
The increase in net interest income for the most recent three month period
was the result of an increased volume of average earning assets. Earning assets
averaged $1.4 billion for the first three months of 1999. This represented an
increase of $281.8 million, or 24.71%, compared to average earning assets of
$1.1 billion for the first three months of 1998. The decrease in the net
interest margin for the three months ended March 31, 1999 compared to the first
three months of 1998 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 greater than the decrease in the cost of interest bearing
liabilities.
The Company reported total interest income of $26.0 million for the three
months ended March 31, 1999. This represented an increase of $3.2 million, or
13.87%, over total interest income of $22.8 million for the three months ended
March 31, 1998. The increase reflected the greater volume of earning assets
noted above. The yield on average earning assets decreased to 7.46% for the
three months ended March 31, 1999, from a yield of 8.14% for the three months
ended March 31, 1998.
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 8.77%
for the three months ended March 31, 1999, from a yield of 9.73% for the first
three months of 1998. The 96 basis point decrease in average loan yields
primarily reflected increased price competition for loans and a lower interest
rate environment. 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 three months ended March
31, 1999, net loans represented 48.20% of average earning assets, compared to
53.88% for the three months ended March 31, 1998.
The increase in total interest income was partially offset by an increase
in interest expense for the three months ended March 31, 1999 when compared to
the same periods for 1998. Interest expense totaled $8.2 million for the three
months ended March 31, 1999. This represented an increase of $1.2 million, or
17.57%, over total interest expense of $7.0 million for the three months ended
March 31, 1998.
The increase in interest expense reflected an increase in the average
volume of interest bearing liabilities. Average interest bearing liabilities
were $916.2 million for the first three months of 1999. This represented an
increase of $200.1 million, or 27.95%, from average interest bearing liabilities
of $716.1 million for the first three months of 1998.
Average interest bearing deposits totaled $682.4 million for the three
months ended March 31, 1999. This represented an increase of $54.3 million, or
8.64%, over average interest bearing deposits of $628.1 million for the three
months ended March 31, 1998.
Other borrowed funds averaged $233.8 million for the three months ended
March 31, 1999. This represented an increase of $145.9 million, or 165.84%, over
average other borrowed funds of $88.0 million for the three months ended March
31, 1998.
The cost of average interest bearing liabilities decreased to 3.60% for the
three months ended March 31, 1999, compared to a cost of 3.92% for the first
three months of 1998. The decrease in the cost of interest bearing liabilities
was primarily the result of a decrease in the interest rate environment. The
cost of average interest bearing deposits was 3.06% for the first three months
of 1999 as compared to 3.69% for the first three months of 1998. The cost of
other borrowed funds decreased to 5.19% for the three months ended March 31,
1999, compared to a cost of 5.58% for the three months ended March 31, 1998.
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, 1999, and 1998. Rates for tax-preferenced
investments are shown on a taxable equivalent basis using a 35.0% tax rate.
9
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<TABLE>
<CAPTION>
TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest
Differentials
(dollars in thousands)
Three-month periods ended March 31,
1999 1998
-------------------------------- --------------------------------
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
-------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Securities
Taxable $ 618,023 9,568 6.19% $ 431,480 6,787 6.29%
Tax-advantaged (1) 111,076 1,247 6.30% 83,251 906 6.11%
Federal Funds Sold & Interest-bearing
deposits with other financial institutions 644 11 6.83% 5,989 82 5.48%
Loans (2) (3) 692,572 15,191 8.77% 619,780 15,073 9.73%
-------------------------------- -----------------------------
Total Earning Assets 1,422,315 26,017 7.46% 1,140,500 22,848 8.14%
Total Non-earning Assets 115,881 115,474
------------ ----------
Total Assets $ 1,538,196 $1,255,974
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits $ 480,012 $ 411,697
Savings Deposits (4) 387,640 1,833 1.89% 359,117 2,249 2.51%
Time Deposits 294,771 3,381 4.59% 269,004 3,541 5.26%
--------------------------------- ----------------------------
Total Deposits 1,162,423 5,214 1.79% 1,039,818 5,790 2.23%
--------------------------------- ----------------------------
Other Borrowings 233,818 3,035 5.19% 87,953 1,226 5.58%
--------------------------------- ----------------------------
Total Interest-Bearing Liabilities 916,229 8,249 3.60% 716,074 7,016 3.92%
------------ ----------
Other Liabilities 22,242 22,791
Stockholders' Equity 119,713 105,412
------------ ----------
Total Liabilities and
Stockholders' Equity $ 1,538,196 $1,255,974
============ ==========
Net interest spread 3.86% 4.22%
Net interest margin 5.14% 5.68%
<FN>
</FN>
(1) Yields are calculated on a taxable equivalent basis.
(2) Loan fees are included in total interest income as follows: 1999, $623;
1998, $1,186. (3) Nonperforming loans are included in net loans as follows:
1999, $6,404; 1998, $6,532.
(4) Includes interest-bearing demand and money market accounts.
</TABLE>
10
<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).
TABLE 2 - Rate and Volume Analysis for Changes in Interest Income, Interest
Expense and Net Interest Income
(amounts in thousands)
<TABLE>
<CAPTION>
Comparison of three-month period
ended March 31, 1999 and 1998
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 $ 2,934 $ (107) $ (46) $ 2,781
Tax-advantaged securities 303 29 9 341
Fed funds sold & interest bearing
deposits with other institutions (73) 18 (16) (71)
Loans 1,771 (1,479) (174) 118
---------------------------------------------
Total earning assets 4,935 (1,539) (227) 3,169
---------------------------------------------
Interest Expense:
Savings deposits 179 (551) (44) (416)
Time deposits 338 (455) (43) (160)
Other borrowings 2,034 (84) (141) 1,809
---------------------------------------------
Total interest-bearing liabilities 2,551 (1,090) (228) 1,233
---------------------------------------------
Net Interest Income $ 2,384 $ (449) $ 1 $ 1,936
=============================================
</TABLE>
11
<PAGE>
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 March 31, 1999.
Estimated Net
Simulated Interest Income
Rate Changes Sensitivity
+200 basis points (1.33%)
-200 basis points (1.09%)
The table indicates that net interest income would decrease by
approximately 1.33% over a 12 month period if there was a sustained, parallel
and pro rata 200 basis point upward shift in interest rates. Net interest income
would decrease approximately 1.09% over a 12 month period if there was a
sustained, parallel and pro rata 200 basis point downward shift in interest
rates.
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 $600,000 for the three months
ended March 31, 1999. This represented a decrease of $250,000, or 29.41% from
the provision for credit losses of $850,000 for the three months ended March 31,
1998.
The allowance for credit losses at March 31, 1999 was $13.9 million. This
represented an increase of $1.5 million, or 12.12%, from the allowance for
credit losses of $12.4 million at March 31, 1998. The allowance for credit
losses was 2.01% of average gross loans for the first three months of 1999 and
1998. For the three months ended March 31, 1999, loans charged to the allowance
for credit losses, net of recoveries ("net loan charge offs") totaled $25,000,
compared to net recoveries of $60,000 for the first three months of 1998.
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 $8.7 million at March 31, 1999. This represented a decrease of
$623,000, or 6.68%, from nonperforming assets of $9.3 million at December 31,
1998. Nonperforming loans, which include nonaccrual loans, loans past due 90 or
more days and still accruing, and restructured loans were $6.4 million at March
31, 1999. This represented a decrease of $814,000, or 11.28%, from the level of
nonperforming loans at December 31, 1998. Table 6 presents nonperforming assets
as of March 31, 1999, and December 31, 1998. 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 March 31, 1999, 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.
12
<PAGE>
TABLE 3 - Summary of Credit Loss Experience
(amounts in thousands)
<TABLE>
<CAPTION>
Three-months
ended March 31,
----------------------
1999 1998
<S> <C> <C>
Amount of Total Loans at End of Period $ 693,402 $ 618,642
========= =========
Average Total Loans Outstanding $ 692,572 $ 619,780
========= =========
Allowance for Credit Losses at Beginning of Period $ 13,364 $ 11,522
Loans Charged-Off:
Real Estate Loans 0 6
Commercial and Industrial 115 99
Consumer Loans 0 5
--------- ---------
Total Loans Charged-Off 115 110
--------- ---------
Recoveries:
Real Estate Loans 0 155
Commercial and Industrial 90 4
Consumer Loans 0 11
--------- ---------
Total Loans Recovered 90 170
--------- ---------
Net Loans Charged-Off 25 (60)
--------- ---------
Provision Charged to Operating Expense 600 850
--------- ---------
Allowance for Credit Losses at End of period $ 13,939 $ 12,432
========= =========
Net Loans Charged-Off to Average Total Loans* 0.01% -0.04%
Net Loans Charged-Off to Total Loans at End of Period* 0.01% -0.04%
Allowance for Credit Losses to Average Total Loans 2.01% 2.01%
Allowance for Credit Lossess to Total Loans at End of Period 2.01% 2.01%
Net Loans Charged-Off to Allowance for Credit Losses* 0.72% -1.93%
Net Loans Charged-Off to Provision for Credit Losses 4.17% -7.06%
* Net Loan Charge-Off amounts are annualized.
</TABLE>
13
<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 $3.8 million for the three months ended
March 31, 1999. This represented a decrease of $199,000, or 4.98%, from other
operating income of $4.0 million for the three months ended March 31, 1998.
The decrease in other operating income was primarily the result of a
decrease in the gain on the sale of premises and equipment. 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 $513,000
gain on sale of premises and equipment for the first three months of 1998.
During the first three months of 1999, there were no gains or losses on the sale
of premises and equipment.
Service charge income totaled $2.2 million for the first three months ended
March 31, 1999. This represents an increase of $411,000 or 23.62% over service
charge income of $1.7 million for the three months ended March 31, 1998.
Trust income totaled $1.0 million for the three months ended March 31,
1999. This represented an increase of $144,000, or 16.25%, over trust income of
$886,000 for the three months ended March 31, 1998.
Other Operating Expenses
Other operating expenses totaled $12.1 million for the three months ended
March 31, 1999. This represented an increase of $787,000, or 6.93%, over other
operating expenses of $11.4 million for the three months ended March 31, 1998.
Equipment expense totaled $1.1 million for the three months ended March 31,
1999. This represents an increase of $164,000 or 18.32% over equipment expense
of $894,000 for the three months ended March 31, 1998. The increase was
primarily the result of increases in furniture and equipment expense and service
and maintenance expense. Other expense, which includes Professional, Data
Processing, Supplies, and Promotional expenses totaled $4.0 million for the
first three months ended March 31, 1999. This represents an increase of $824,000
or 25.63% over other expense of $3.2 million for the three months ended March
31, 1998. The increase was primarily the result of increases in Professional
and Promotional expenses.
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 three months ended March 31, 1999, no provision was made for other real
estate owned. For the three months ended March 31, 1998, the provision for other
real estate owned was $500,000. This decrease reflects the improvement in the
loan portfolio and the reduction of other real estate owned from $4.9 million at
March 31, 1998 to $2.3 million at March 31, 1999.
As a percent of average assets, annualized other operating expenses
decreased to 3.16% for the three months ended March 31, 1999, compared to a
ratio of 3.62% for the three months ended March 31, 1998. 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 56.33% for the three months ended March 31, 1999, compared to
a ratio of 57.30% for the three months ended March 31, 1998. The decrease in the
efficiency ratio indicates that the Company is allocating a lower percentage of
net revenue to operating expenses.
BALANCE SHEET ANALYSIS
The Company reported total assets of $1.56 billion at March 31, 1999. This
represented an increase of $2.7 million, or 0.18%, over total assets of $1.55
billion at December 31, 1998. Gross loans totaled $693.4 million at March 31,
1999. This represented an increase of $4.4 million, or 0.63%, over gross loans
of $689.0 million at December 31, 1998. Total deposits decreased $5.1 million,
or 0.42%, to $1.21 billion at March 31, 1999, from $1.22 billion at December 31,
1998.
14
<PAGE>
Investment Securities and Debt Securities Available-for-Sale
The Company reported total investment securities of $718.9 million at March
31, 1999. This represented a decrease of $11.2 million, or 1.53%, over total
investment securities of $730.0 million at December 31, 1998.
At March 31, 1999, the Company's net unrealized loss on securities
available-for-sale totaled $929,000. The Company recorded an adjustment
decreasing accumulated other comprehensive income to $536,000, and an adjustment
to decrease deferred tax assets to $393,000. At December 31, 1998, the Company
reported a net unrealized gain on investment securities available for sale of
$2.4 million, with an adjustment to equity capital of $1.4 million and deferred
taxes of $1.0 million. Note 2 of the Notes to the Consolidated Financial
Statements in the Company's 1998 Annual Report on Form 10-K discusses its
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 March 31, 1999 and December 31, 1998.
15
<PAGE>
Table 4 - Composition of Securities Portfolio
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
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 $ 3,001 $ 3,008 $ 7 6.02% $ 3,005 $ 3,023 $ 18 6.02%
FHLMC, FNMA CMO's, REMIC's
and mortgage-backed pass-through securities
Available for Sale 511,953 511,045 (908) 6.36% 528,701 530,035 1,334 6.37%
Held to Maturity 3,396 3,448 52 5.74% 3,699 3,773 74 5.74%
Other Government Agency Securities
Available for Sale 15,002 15,016 14 6.83% 19,161 19,230 69 6.63%
GNMA mortgage-backed pass-through
securities
Available for Sale 40,696 40,571 (125) 6.63% 42,771 42,950 179 6.68%
Held to Maturity 679 740 61 9.49% 710 772 62 9.44%
Tax-exempt Municipal Securities
Available for Sale 70,682 70,810 128 4.45% 58,483 59,340 857 4.43%
Held to Maturity 47,902 49,570 1,668 4.88% 47,962 49,879 1,917 4.88%
Other securities
Available for Sale 24,906 24,906 0 0.00% 21,584 21,584 0 0.00%
Held to Maturity 1,526 1,526 0 8.26% 1,488 1,488 0 7.13%
-------------------------------------- -----------------------------------------
$ 719,743 $720,640 $ 897 6.09% $727,564 $732,074 4,510 6.13%
======================================= =========================================
</TABLE>
16
<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>
Table 5 - Distribution of Loan Portfolio by Type
March 31, December 31,
1999 1998
-------- ---------
<S> <C> <C>
Commercial and Industrial $252,927 $247,060
Real Estate:
Construction 35,609 29,415
Mortgage 306,044 297,856
Consumer 17,575 17,816
Municipal lease finance receivables 22,354 22,923
Agribusiness 61,221 76,283
-------- --------
Gross Loans $695,730 $691,353
Less:
Allowance for credit losses 13,939 13,364
Deferred net loan fees 2,328 2,321
-------- --------
Net loans $679,463 $675,668
======== ========
</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 $8.7 million at March 31, 1999. This represented a
decrease of $623,000, or 6.68%, from nonperforming assets of $9.3 million at
December 31, 1998. As a percent of total assets, nonperforming assets decreased
to 0.56% at March 31, 1999, from 0.60% at December 31, 1998.
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.
17
<PAGE>
<TABLE>
<CAPTION>
Table 6 - Nonperforming Assets (dollar amounts in thousands)
March 31, 1999 December 31, 1998
<S> <C> <C>
Nonaccrual loans $6,404 $7,218
Loans past due 90 days or more
and still accruing interest 0 0
Restructured loans 0 0
Other real estate owned (OREO), net 2,293 2,102
------ ------
Total nonperforming assets $8,697 $9,320
====== ======
Percentage of nonperforming assets
to total loans outstanding and OREO 1.25% 1.35%
Percentage of nonperforming
assets to total assets 0.56% 0.60%
</TABLE>
The decrease in nonperforming assets was the result of a decrease in
nonaccrual loans. Nonaccrual loans totaled $6.4 million at March 31, 1999. This
represented a decrease of $814,000, or 11.28%, from total nonaccrual loans of
$7.2 million at December 31, 1998.
At March 31, 1999, 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
14% to 115%.
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 March 31, 1999, total deposits were $1.21 billion. This represented a
decrease of $5.1 million, or 0.42%, from total deposits of $1.22 billion at
December 31, 1998. Demand deposits totaled $509.2 million at March 31, 1999,
representing a decrease of $29.6 million, or 5.50%, from total demand deposits
of $538.8 million at December 31, 1998. 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 first quarter of 1999 were
$480.0 million. This represented an increase of $68.3 million, or 16.59%, from
average demand deposits of $411.7 million for the first quarter of 1998. The
comparison of average balances for the first quarters of 1999 and 1998 is more
representative of the Company's growth in deposits as it excludes the seasonal
peak in deposits at year end.
Time deposits totaled $296.2 million at March 31, 1999. This represented an
increase of $6.0 million, or 2.06%, over total time deposits of $290.2 million
at December 31, 1998. Time deposits are not affected by the Company's seasonal
fluctuation in demand deposits.
Other borrowed funds totaled $205.0 million at March 31, 1999. This
represented an increase of $5.0 million, or 2.50% over other borrowed funds of
$200.0 million at December 31, 1998. The increase in other borrowed funds during
the first three months of 1999 was primarily the result of an increase in a
secured short term loan from the Federal Home Loan Bank. The funds were used to
purchase investment securities at a positive net interest spread.
18
<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 $6.4 million for the
first three months of 1999, compared to net cash provided by operating
activities of $9.1 million for the same period last year. The decrease was
primarily the result of an increase in cash paid to suppliers and employees and
interest paid.
Net cash provided by investing activities totaled $2.1 million for the
first three months of 1999, compared to net cash used for investing activities
of $67.8 million for the same period last year. The increase in net cash
provided by investing activities was primarily from the reduction in purchases
of investment securities. Financing activities provided net cash flows of
$774,000 for the three months ended March 31, 1999. This compares to $46.2
million in net cash provided for the three months ended March 31, 1998. A net
decrease in deposits of $5.1 million for the three months ended March 31, 1999,
compared to a net increase in deposits of $11.9 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
$7.7 million for the first three months of 1999 compared to an increase of $35.8
million for the first three months of 1998. At March 31, 1999, cash and cash
equivalents totaled $109.3 million. This represented an increase of $14.1
million, or 14.85%, from a total of $95.2 million at March 31, 1998.
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 three months of 1999, the Bank's loan to deposit ratio averaged
59.71%, compared to an average ratio of 59.81% for the first three months of
1998.
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 March 31,
1999, approximately $40.4 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. As of March 31, 1999, neither the Bank nor CVB had any
material commitments for capital expenditures.
19
<PAGE>
Capital Resources
The Company's equity capital was $117.5 million at March 31, 1999. The
primary source of capital for the Company continues to be the retention of net
after tax earnings. The Company's 1998 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 4.0%. At March 31, 1999, 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 March 31, 1999, and December 31, 1998.
<TABLE>
<CAPTION>
Table 7 - Regulatory Capital Ratios
Required
Minimum March 31, 1999 December 31, 1998
Capital Ratios Ratios Company Bank Company Bank
<S> <C> <C> <C> <C> <C>
Risk-based capital ratios
Tier I 4.00% 12.63% 12.51% 12.20% 11.99%
Total 8.00% 13.89% 13.77% 13.46% 13.26%
Leverage Ratio 4.00% 7.11% 7.03% 7.18% 7.05%
</TABLE>
On August 19, 1998, the Board of Directors of the Company reauthorized and
superseded the April 16, 1997 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 550,000
shares. As of December 31, 1998, the Company had purchased 91,700 shares for an
average price of $20.80 per share. The Company did not repurchased any shares of
common stock during the first quarter of 1999.
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, reputation risk, price risk,
and foreign exchange risk.
20
<PAGE>
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 estimated costs of
remediation, the preparedness of third party vendors, timetables for
implementation of future remediation and testing, contingency plans, and
estimated future costs due to business disruption caused by affected third
parties.
These statements are designated as Year 2000 Readiness Disclosures under
the Year 2000 Information and Readiness Disclosures Act of 1998.
The Company has been working on these issues for the last 27 months. A
committee, known as Team 2000, was established to analyze the issues and
determine compliance with the requirements for Year 2000. To facilitate a
thorough and complete Year 2000 assessment and response to identified issues, a
phased management procedural approach has been adopted as follows:
Awareness Phase - Team 2000 coordinators and supporting staff are appointed
and empowered to receive external training as necessary, and immediately review
all pertinent regulatory and industry issuance's regarding Year 2000 issues. The
team 2000 coordinators developed a process and overall strategy to cover
in-house systems, service bureaus for systems that are outsourced, vendors,
customers, and suppliers.
Assessment Phase - Team 2000 coordinators will prepare a report regarding
the size of the problem and complexity of Year 2000 issues, as well as the level
of work and resources necessary to address them. The report will includes issues
relating to hardware, software, networks, ATM's, processing platforms, and other
equipment (copier, fax, phone exchange, etc.) customer systems, vendors, and
environmental systems (security systems, elevators, vaults, etc.)
Renovation Phase - Team 2000 coordinators supervise the project including
enhancements, hardware and software upgrades, systems replacements and vendor
certification as "Year 2000 Compliant". Work is prioritized depending on the
applications impact. Insights may also be provided from "critical assessments"
performed as part of the disaster recovery business resumption assessment.
Validation Phase - After programming codes by outside venders have been
modified or systems upgraded, they are tested, when possible, in incremental
states to assess full correction of the Year 2000 issues. Team 2000 coordinators
establish time control check-off points to ensure timely completion of
modifications or replacement activities.
Implementation Phase - Once modifications are completed, replacements or
upgrades are in place, and/or other changes have occurred to address Year 2000
problematic areas, the Year 2000 plan will be in full compliance.
To date the Awareness Phase and the Assessment Phase have been completed.
All in-house bank critical applications have been tested Year 2000 complaint.
The Renovation Phase as it relates to "bank critical" systems/processes is 100%
complete. The Validation Phase as it relates to "bank critical" system/processes
is 100% complete.
As of March 31, 1999, for approximately 6% of the external
systems/processes deemed as "bank critical", the Bank has not been able to
identify specific timelines to validate Year 2000 compliance due to dependencies
on external parties (e.g., vendors, agencies, etc.,) who are not required by
regulation to be Year 2000 compliant until a later date. Contingency and
follow-up plans have been developed.
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 July 31, 1999.
The Bank has notified its customers by means of statement stuffers of Year
2000 issues. The Bank is also in the process of contacting each of its major
borrowing and depository customers to make them aware of the issues and to seek
information regarding its customers' preparedness for the Year . Failure of any
major customer to be Year 2000 compliant could have a material adverse effect
on the Company.
The Board of Directors of CVB and the Bank have approved a Year 2000 Policy
and budget. The Board has approved a budget of $1.8 million for the anticipated
costs of Year 2000 issues. The Board has allocated $1.0 million 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 will cost $600,000. The remaining $200,000 is budgeted for
miscellaneous and contingency items. To date, the Company has expended
approximately $55,000 for the testing of software and hardware.
Of the $1.8 million budget to cover anticipated costs of year 2000 issues,
the $1.0 million allocation from the allowance for loan and lease losses has
already been provided through the income statement. The Company believes that
costs which could be as much as $600,000 to replace the teller system, which
will be capitalized as these costs relate to the purchase of new equipment.
Therefore, these costs will only impact the earnings of the Company as it is
depreciated. The Company anticipates that the remaining $145,000 will be
reflected in the income statement over the next two quarters. Funds to address
Year 2000 issues will come from operating cash funds.
In addition, the Board of Directors of CVB and the Bank have engaged an
outside CPA consulting firm to perform an internal audit related to the Bank's
efforts associated with the Year 2000. The Bank received a "Satisfactory" rating
for its Year 2000 plan and efforts in achieving the plan to date.
The Company has an existing Disaster Recovery Plan or Contingency Plan in
the event a disaster should occur and affect the Company. This Plan encompasses
the restoration of all or part of the Company's systems should that be
necessary. This Plan has been augmented to cover contingencies arising from the
Year 2000. The Plan has been tested in the past and the augmented Plan was most
recently tested in the fourth quarter of 1998. In addition, the Company used a
full day system outage simulation at its off-site recovery location in the first
quarter of 1999 as an opportunity to test its Year 2000 Contingency Plan. The
Company plans to replicate the testing performed at the off-site recovery
location as well as other scenarios in the second quarter of 1999. The Year 2000
Contingency Plan involves the following four phases:
1. Organizational Planning
2. Business Impact Analysis
3. Business resumption contingency plan
4. Validating the business resumption contingency plan
Phases one and two are completed. Phase three will be completed in the
second quarter of 1999. Phase four is ongoing throughout 1999.
21
<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
Not Applicable
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Not Applicable
22
<PAGE>
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 25
23
<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: May 12, 1999 /s/ Edward J. Biebrich Jr.
-----------------------
Edward J. Biebrich Jr.
Chief Financial Officer
24
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31,
1999, CONSOLIDATED BALANCE SHEET, AND THE MARCH 31, 1999, CONSOLIDATED STATEMENT
OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 84,303
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 25,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 665,356
<INVESTMENTS-CARRYING> 53,503
<INVESTMENTS-MARKET> 55,284
<LOANS> 693,402
<ALLOWANCE> 13,939
<TOTAL-ASSETS> 1,557,934
<DEPOSITS> 1,210,196
<SHORT-TERM> 205,000
<LIABILITIES-OTHER> 24,873
<LONG-TERM> 395
0
0
<COMMON> 94,684
<OTHER-SE> 22,786
<TOTAL-LIABILITIES-AND-EQUITY> 1,557,934
<INTEREST-LOAN> 15,191
<INTEREST-INVEST> 10,815
<INTEREST-OTHER> 11
<INTEREST-TOTAL> 26,017
<INTEREST-DEPOSIT> 5,214
<INTEREST-EXPENSE> 8,249
<INTEREST-INCOME-NET> 17,768
<LOAN-LOSSES> 600
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,148
<INCOME-PRETAX> 8,817
<INCOME-PRE-EXTRAORDINARY> 5,513
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,513
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.32
<YIELD-ACTUAL> 5.14
<LOANS-NON> 6,404
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,073
<ALLOWANCE-OPEN> 13,364
<CHARGE-OFFS> 115
<RECOVERIES> 90
<ALLOWANCE-CLOSE> 13,939
<ALLOWANCE-DOMESTIC> 10,428
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,511
</TABLE>
