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, 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 June 30, 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: 16,579,244 outstanding as
of August 1, 1999.
This Form 10-Q contains 28 pages. Exhibit index on page 26.
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
dollar amounts in thousands
June 30, December 31,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS
Investment securities held-to-maturity
(market values of $54,620 and $55,912) $ 53,178 $ 53,859
Investment securities available-for-sale 679,268 676,162
Loans and lease finance receivables, net 701,914 675,668
-------------- ---------------
Total earning assets 1,434,360 1,405,689
Cash and due from banks 88,963 100,033
Premises and equipment, net 22,079 22,333
Other real estate owned, net 1,891 2,102
Goodwill and intangibles 9,043 9,635
Securities sold not settled 25,000 0
Other assets 21,250 15,415
-------------- ---------------
TOTAL $ 1,602,586 $ 1,555,207
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 517,798 $ 538,808
Interest-bearing 688,988 676,497
-------------- ---------------
1,206,786 1,215,305
Demand note issued to U.S. Treasury 11,816 95
Federal Funds Purchased 21,000 5,000
Repurchase Agreement 190,000 195,000
Securities purchased not settled 36,028 5,000
Long-term capitalized lease 388 402
Other liabilities 18,465 18,698
-------------- ---------------
1,484,483 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
16,568,121 and 16,532,464) 94,735 94,529
Retained earnings 27,392 19,799
Accumulated other comprehensive (loss) income (4,024) 1,379
-------------- ---------------
118,103 115,707
-------------- ---------------
TOTAL $ 1,602,586 $ 1,555,207
============== ===============
See accompanying notes to the consolidated financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
dollar amounts in thousands, except per share
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 15,693 $ 15,106 $ 30,884 $ 30,179
Investment securities:
Taxable 9,094 7,481 18,662 14,268
Tax-advantaged 1,365 1,113 2,613 2,019
-------------- -------------- ------------- -------------
10,459 8,594 21,275 16,287
Federal funds sold and interest bearing
deposits with other financial institutions 103 166 113 248
-------------- -------------- ------------- -------------
26,255 23,866 52,272 46,714
Interest expense:
Deposits 5,269 5,926 10,483 11,716
Other borrowings 2,711 1,718 5,746 2,944
-------------- -------------- ------------- -------------
7,980 7,644 16,229 14,660
-------------- -------------- ------------- -------------
Net interest income 18,275 16,222 36,043 32,054
Provision for credit losses 500 450 1,100 1,300
-------------- -------------- ------------- -------------
Net interest income after
provision for credit losses 17,775 15,772 34,943 30,754
Other operating income:
Service charges on deposit accounts 2,351 1,846 4,504 3,588
Gains on sale of other real estate owned 330 36 330 51
Gains on sale of premises and equipment 0 0 0 652
Trust services 894 886 1,925 1,772
Other 734 701 1,347 1,402
-------------- -------------- ------------- -------------
4,309 3,469 8,106 7,465
Other operating expenses:
Salaries and employee benefits 6,078 5,510 12,095 11,149
Deposit insurance premiums 33 31 65 61
Occupancy 925 890 1,926 1,973
Equipment 1,185 911 2,243 1,805
Provision for losses on other real estate owned 100 0 100 500
Other 4,227 3,861 8,267 7,076
-------------- -------------- ------------- -------------
12,548 11,203 24,696 22,564
-------------- -------------- ------------- -------------
Earnings before income taxes 9,536 8,038 18,353 15,655
Provision for income taxes 3,478 2,961 6,782 5,813
-------------- -------------- ------------- -------------
Net earnings $ 6,058 $ 5,077 $ 11,571 $ 9,842
============== ============== ============= =============
Basic earnings per common share $ 0.37 $ 0.31 $ 0.70 $ 0.59
============== ============== ============= =============
Diluted earnings per common share $ 0.35 $ 0.29 $ 0.67 $ 0.57
============== ============== ============= =============
Cash dividends per common share $ 0.12 $ 0.09 $ 0.24 $ 0.18
============== ============== ============= =============
See accompanying notes to the consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
CVB FINANCIAL CORP. AND SUBSIDIARIES
STATEMENT OF CHANGES IN EQUITY
(unaudited)
dollar amounts in thousands
Accumulated
Other
Comprehensive Retained Comprehensive Common
Total Income Earnings Income 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 11,571 $11,571 11,571
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see disclosure) (5,403) (5,403) (5,403)
-------------
Comprehensive income $6,168
=============
Common Stock issued 206 206
Dividends declared on common stock (3,978) (3,978)
---------- ----------- ---------------- ----------
Ending balance, June 30, 1999 $118,103 $27,392 ($4,024) $94,735
========== =========== ================ ==========
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 $3,967 $ (5,403)
=============
Net unrealized losses on securities, June 30, 1999 $ (5,403)
=============
See accompanying notes to the consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
dollar amounts in thousands
For the Six Months
Ended June 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 53,323 $ 45,133
Service charges and other fees received 8,107 7,440
Interest paid (16,442) (13,449)
Cash paid to suppliers and employees (22,260) (20,684)
Income taxes paid (7,220) (3,905)
------------ ------------
Net cash provided by operating activities 15,508 14,535
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 105 20,043
Proceeds from maturities of securities available for sale 53,676 58,288
Proceeds from maturities of securities held to maturity 677 746
Purchases of securities available for sale (61,489) (214,226)
Purchases of securities held to maturity (95) (171)
Net increase in loans (29,046) (22,084)
Proceeds from sale of premises and equipment 0 2,174
Purchase of premises and equipment (1,361) (1,328)
Other investing activities 524 2,618
------------ ------------
Net cash used in investing activities (37,009) (153,940)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease)increase in transaction deposits (8,037) 13,359
Net (decrease)increase in time deposits (481) 15,406
Net increase in short-term borrowings 22,721 94,095
Cash dividends on common stock (3,978) (3,016)
Proceeds from exercise of stock options 206 149
------------ ------------
Net cash provided by financing activities 10,431 119,993
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (11,070) (19,412)
CASH AND CASH EQUIVALENTS, beginning of period 100,033 107,725
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 88,963 $ 88,313
============ ============
See accompanying notes to the consolidated financial statements.
</TABLE>
5
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<TABLE>
<CAPTION>
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
dollar amounts in thousands
For the Six Months
Ended June 30,
1999 1998
<S> <C> <C>
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 11,571 $ 9,842
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums(accretion of discount) on investment securities 1,360 (753)
Provisions for loan and OREO losses 1,200 1,800
Depreciation and amortization 1,582 1,552
Change in accrued interest receivable (309) (828)
Change in accrued interest payable (213) 1,211
Change in other assets and liabilities 317 1,711
----------- -----------
Total adjustments 3,937 4,693
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 15,508 $ 14,535
=========== ===========
Supplemental Schedule of Noncash Investing and Financing Activities
Securities sold and not settled $ 25,000 $ 0
Securities purchased and not settled 36,028 0
Real estate acquired through foreclosure 1,701 2,545
</TABLE>
6
<PAGE>
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 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 $6.7 million at June 30, 1999. These loans were
supported by collateral with a fair market value, net of prior liens, of
$10.5 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 June 30, 1999, the
Company had entered into commitments with certain customers amounting to
$237.3 million compared to $209.1 million at December 31, 1998. Letters of
credit at June 30, 1999, and December 31, 1998, were $9.3 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 June 30,
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 June 30, 1999, was 16,568,121.
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 June 30,
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 $ 6,058,010 16,565,327 $0.37 $ 5,076,472 16,536,687 $0.31
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 595,598 (0.02) 687,407 (0.02)
--------------------------------------------- --------------------------------------------
DILUTED EPS
Income available to
common stockholders $ 6,058,010 17,160,925 $0.35 $ 5,076,472 17,224,094 $0.29
============================================= ============================================
Earnings Per Share Reconciliation
For the Six Months
Ended June 30,
1999 1998
---------------------------------------------- --------------------------------------------
Weighted Weighted
Income Average Shares Per Share Income Average Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------------------- --------------------------------------------
BASIC EPS
Income available to
common stockholders $ 11,570,855 16,560,533 $0.70 $ 9,841,696 16,548,628 $0.59
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 581,692 (0.03) 708,884 (0.02)
-------------------------------------------- --------------------------------------------
DILUTED EPS
Income available to common
stockholders $ 11,570,855 17,142,225 $0.67 $ 9,841,696 17,257,512 $0.57
============================================== ============================================
</TABLE>
6. Supplemental Cash Flow Information - During the six-month period ended
June 30, 1999, loans amounting to $1.7 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.
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 $11.6 million for the six months ended
June 30, 1999. This represented an increase of $1.7 million, or 17.57%, over net
earnings of $9.8 million, for the six months ended June 30, 1998. Basic earnings
per share for the six month period increased to $0.70 per share for 1999,
compared to $0.59 per share for 1998. Diluted earnings per share increased to
$0.67 per share for the first six months of 1999, compared to $0.57 per share
for the same six month period last year. The annualized return on average assets
was 1.50% for the first six months of 1999 compared to a return on average
assets of 1.52% for the six months ended June 30, 1998. The annualized return on
average equity was 19.17% for the six months ended June 30, 1999, compared to a
return of 18.39% for the six months ended June 30, 1998.
For the quarter ended June 30, 1999, the Company generated net earnings of
$6.1 million. This represented an increase of $981,000 or 19.32% over net
earnings of $5.1 million for the second quarter of 1998. Basic earnings per
share increased to $0.37 for the second quarter of 1999 compared to $0.31 per
share for the second quarter of 1998. Diluted earnings per share increased to
$0.35 per share compared to $0.29 per share for the second quarter of 1999 and
1998, respectively. The annualized return on average assets was 1.57% for the
second quarter of 1999 compared to 1.52% for the same period last year. The
annualized return on average equity was 19.92% for the second quarter of 1999
and 18.69% for the second quarter of 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 $19.2 million for the six months ended June 30, 1999. This represented
an increase of $1.8 million, or 10.61%, compared to operating earnings of $17.4
million for the first six months of 1998. For the second quarter of 1999,
pre-tax operating earnings totaled $9.8 million. This represented an increase of
$1.4 million or 16.11% from pre-tax operating earnings of $8.4 million for the
second quarter of 1998.
9
<PAGE>
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, 1999, net interest income was $36.0
million. This represented an increase of $3.9 million, or 12.44%, over net
interest income of $32.1 million for the six months ended June 30, 1998.
Although net interest income increased, the net interest margin decreased to
5.21% for the six months ended June 30, 1999, compared to 5.57% for the six
months ended June 30, 1998. In addition, the net interest spread decreased to
3.94% for the six months ended June 30, 1999, compared to a spread of 4.10% for
the six months ended June 30, 1998.
The increase in net interest income for the most recent six month period
was the result of an increased volume of average earning assets. Earning assets
averaged $1.4 billion for the first six months of 1999. This represented an
increase of $244.6 million, or 20.72%, compared to average earning assets of
$1.2 billion for the first six months of 1998. The decrease in the net interest
margin for the six months ended June 30, 1999 compared to the first six 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.
For the second quarter of 1999, net interest income was $18.3 million. This
represented an increase of $2.1 million, or 12.66% compared to $16.2 million for
the second quarter of 1998. The net interest margin was 5.28% during the second
quarter of 1999 compared to 5.47% for the same period last year. The net
interest spread remained relatively the same at 4.01% and 4.00% for the second
quarter of 1999 and 1998, respectively.
The increase in net interest income for the second quarter of 1999 was the
result of an increase in average earning assets. Earning assets averaged $1.4
billion for the quarter ended June 30, 1999, compared to $1.2 billion for the
same period last year. The decrease in net interest margin resulted from a
decline in loan yields. Loan yield for the second quarter of 1999 was 8.88%
compared to 9.67% for the second quarter of 1998. As a percent of average
earning assets, average loans decreased to 49.54% for the second quarter of 1999
compared to 51.24% for the second quarter of 1998.
The Company reported total interest income of $52.3 million for the six
months ended June 30, 1999. This represented an increase of $5.6 million, or
11.90%, over total interest income of $46.7 million for the six months ended
June 30, 1998. The increase reflected the greater volume of earning assets noted
above. The yield on average earning assets decreased to 7.49% for the six months
ended June 30, 1999, from a yield of 8.05% for the six months ended June 30,
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 8.83%
for the six months ended June 30, 1999, from a yield of 9.70% for the first six
months of 1998. The 87 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 six months ended June
30, 1999, net loans represented 49.12% of average earning assets, compared to
52.73% for the six months ended June 30, 1998.
The increase in total interest income was partially offset by an increase
in interest expense for the three and six months ended June 30, 1999 when
compared to the same periods for 1998. Interest expense totaled 16.2 million for
the six months ended June 30, 1999. This represented an increase of $1.5
million, or 10.70%, over total interest expense of $14.7 million for the six
months ended June 30, 1998. For the three months ended June 30, 1999, interest
expense totaled $8.0 million. This represented and increase of $336,000, or
4.40% over interest expense of $7.6 million for the same period last year.
10
<PAGE>
The increase in interest expense reflected an increase in the average
volume of interest-bearing liabilities. Average interest-bearing liabilities
were $913.0 million for the first six months of 1999. This represented an
increase of $170.6 million, or 22.99%, from average interest-bearing liabilities
of $742.4 million for the first six months of 1998. For the second quarter of
1999, interest-bearing liabilities averaged $909.9 million, an increase of
$141.5 or 18.41% over the same quarter last year.
Average interest-bearing deposits totaled $691.8 million for the six months
ended June 30, 1999. This represented an increase of $57.1 million, or 9.00%,
over average interest-bearing deposits of $634.7 million for the six months
ended June 30, 1998.
Other borrowed funds averaged $221.2 million for the six months ended June
30, 1999. This represented an increase of $113.5 million, or 105.42%, over
average other borrowed funds of $107.7 million for the six months ended June 30,
1998.
The cost of average interest-bearing liabilities decreased to 3.55% for the
six months ended June 30, 1999, compared to a cost of 3.95% for the first six
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 3.03% for the first six months of 1999 as
compared to 3.69% for the first six months of 1998. The cost of other borrowed
funds decreased to 5.20% for the six months ended June 30, 1999, compared to a
cost of 5.47% for the six months ended June 30, 1998.
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, 1999, and 1998. Rates for tax-preferenced
investments are shown on a taxable equivalent basis using a 35.0% tax rate.
11
<PAGE>
<TABLE>
<CAPTION>
TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differentials
(dollars in thousands)
Six-month periods ended June 30,
1999 1998
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Investment Securities
Taxable $ 604,403 18,662 6.18% $ 457,840 14,268 6.23%
Tax-advantaged (1) 115,672 2,613 6.34% 90,830 2,019 6.24%
Federal Funds Sold & Interest-bearing
deposits with other financial 4,795 113 4.71% 9,188 248 5.40%
institutions
Loans (2) (3) 699,829 30,884 8.83% 622,264 30,179 9.70%
------------------------------- ------------------------------
Total Earning Assets 1,424,699 52,272 7.49% 1,180,122 46,714 8.05%
Total Non-earning Assets 118,349 117,035
------------- -------------
Total Assets $ 1,543,048 $ 1,297,157
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits $ 488,497 $ 424,516
Savings Deposits (4) 398,265 3,829 1.92% 362,567 4,587 2.53%
Time Deposits 293,584 6,654 4.53% 272,142 7,129 5.24%
------------------------------ ------------------------------
Total Deposits 1,180,346 10,483 1.78% 1,059,225 11,716 2.21%
------------------------------- ------------------------------
Other Borrowings 221,199 5,746 5.20% 107,683 2,944 5.47%
------------------------------ ------------------------------
Total Interest-Bearing Liabilities 913,048 16,229 3.55% 742,392 14,660 3.95%
------------- -------------
Other Liabilities 20,805 23,225
Stockholders' Equity 120,698 107,024
------------- -------------
Total Liabilities and
Stockholders' Equity $ 1,543,048 $ 1,297,157
============= =============
Net interest spread 3.94% 4.10%
Net interest margin 5.21% 5.57%
<FN>
(1) Yields are calculated on a taxable equivalent basis.
(2) Loan fees are included in total interest income as follows: 1999, $1,422; 1998, $2,179.
(3) Nonperforming loans are included in net loans as follows: 1999, $4,648; 1998, $4,828.
(4) Includes interest-bearing demand and money market accounts.
</FN>
</TABLE>
12
<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>
<CAPTION>
TABLE 2 - Rate and Volume Analysis for Changes in Interest Income, Interest Expense
and Net Interest Income
(amounts in thousands)
Comparison of six-month periods
ended June 30, 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 $ 4,568 $ (132) $ (42) $ 4,394
Tax-advantaged securities 553 32 9 594
Fed funds sold & interest bearing
deposits with other institutions (119) (31) 15 (135)
Loans 3,761 (2,717) (339) 705
------------------------------------------
Total earning assets 8,763 (2,848) (357) 5,558
------------------------------------------
Interest Expense:
Savings deposits 451 (1,101) (108) (758)
Time deposits 562 (961) (76) (475)
Other borrowings 3,104 (147) (155) 2,802
------------------------------------------
Total interest-bearing liabilities 4,117 (2,209) (339) 1,569
------------------------------------------
Net Interest Income $ 4,646 $ (639) $ (18) $ 3,989
==========================================
</TABLE>
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, 1999.
Estimated Net
Simulated Interest Income
Rate Changes Sensitivity
+200 basis points (2.19%)
-200 basis points 0.98%
13
<PAGE>
The table indicates that net interest income would decrease by
approximately 2.19% 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 increase approximately 0.98% 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 $1.1 million for the six months
ended June 30, 1999. This represented a decrease of $200,000, or 15.38%, from
the provision for credit losses of $1.3 million for the six months ended June
30, 1998.
The allowance for credit losses at June 30, 1999 was $14.4 million. This
represented an increase of $1.6 million, or 12.45%, from the allowance for
credit losses of $12.8 million at June 30, 1998. The allowance for credit losses
was 2.06% of average gross loans for the first six months of 1999 and 1998. For
the six months ended June 30, 1999, net loan charge offs totaled $59,000,
compared to net loan charge offs of $12,000 for the first six 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 $6.5 million at June 30, 1999. This represented a decrease of $2.8
million, or 29.84%, 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 $4.6 million at June
30, 1999. This represented a decrease of $2.6 million, or 35.61%, from the level
of nonperforming loans at December 31, 1998. Table 6 presents nonperforming
assets as of June 30, 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 June 30, 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.
14
<PAGE>
<TABLE>
<CAPTION>
TABLE 3 - Summary of Credit Loss Experience Six-months
(amounts in thousands) ended June 30,
--------------------------
1999 1998
<S> <C> <C>
Amount of Total Loans at End of Period $ 716,319 $ 636,533
============ ============
Average Total Loans Outstanding $ 699,829 $ 622,264
============ ============
Allowance for Credit Losses at Beginning of Period $ 13,364 $ 11,522
Loans Charged-Off:
Real Estate Loans 40 52
Commercial and Industrial 115 114
Consumer Loans 5 26
------------ ------------
Total Loans Charged-Off 160 192
------------ ------------
Recoveries:
Real Estate Loans 0 155
Commercial and Industrial 101 14
Consumer Loans 0 11
------------ ------------
Total Loans Recovered 101 180
------------ ------------
Net Loans Charged-Off 59 12
------------ ------------
Provision Charged to Operating Expense 1,100 1,300
------------ ------------
Allowance for Credit Losses at End of period $ 14,405 $ 12,810
============ ============
Net Loans Charged-Off to Average Total Loans* 0.02% 0.00%
Net Loans Charged-Off to Total Loans at End of Period* 0.02% 0.00%
Allowance for Credit Losses to Average Total Loans 2.06% 2.06%
Allowance for Credit Losses to Total Loans at End of Period 2.01% 2.01%
Net Loans Charged-Off to Allowance for Credit Losses* 0.82% 0.19%
Net Loans Charged-Off to Provision for Credit Losses 5.36% 0.92%
* Net Loan Charge-Off amounts are annualized.
</TABLE>
15
<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 $8.1 million for the six months ended June
30, 1999. This represented an increase of $641,000, or 8.59%, from other
operating income of $7.5 million for the six months ended June 30, 1998. For the
three months ended June 30, 1999, other operating income totaled $4.3 million,
an increase of $840,000, or 24.21%, from $3.5 million for the same three month
period ended June 30, 1998. The increase was primarily the result of higher
service charge income and gains on sale of other real estate owned.
Service charge income totaled $4.5 million for the first six months ended
June 30, 1999. This represents an increase of $916,000 or 25.53% over service
charge income of $3.6 million for the six months ended June 30, 1998.
Trust income totaled $1.9 million for the six months ended June 30, 1999.
This represented an increase of $153,000, or 8.63%, over trust income of $1.8
million for the six months ended June 30, 1998.
Other Operating Expenses
Other operating expenses totaled $24.7 million for the six months ended
June 30, 1999. This represented an increase of $2.1 million, or 9.45%, over
other operating expenses of $22.6 million for the six months ended June 30,
1998. For the three months ended June 30, 1999, other operating expenses totaled
$12.5 million. This compares with $11.2 million for the same period last year,
an increase of $1.3 million, or 12.01%.
Salaries and employee benefits totaled $12.1 million for the first six
months of 1999. This represented and increase of $946,000, or 8.49%, from
salaries and employee benefits of $11.1 million for the same period last year.
Equipment expense totaled $2.2 million for the six months ended June 30, 1999.
This represents an increase of $438,000, or 24.27%, over equipment expense of
$1.8 million for the six months ended June 30, 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 $8.3 million for the
first six months ended June 30, 1999. This represents an increase of $1.2
million, or 16.83%, over other expense of $7.1 million for the six months ended
June 30, 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
future losses. For the six months ended June 30, 1999, the provision for other
real estate owned totaled $100,000. For the six months ended June 30, 1998, the
provision for other real estate owned was $500,000. This decrease reflects the
reduction of other real estate owned from $4.8 million at June 30, 1998 to $1.9
million at June 30, 1999.
As a percent of average assets, annualized other operating expenses
decreased to 3.20% for the six months ended June 30, 1999, compared to a ratio
of 3.48% for the six months ended June 30, 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 55.94% for the six months ended June 30, 1999, compared to a
ratio of 57.10% for the six months ended June 30, 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 $1.60 billion at June 30, 1999. This
represented an increase of $47.4 million, or 3.05%, over total assets of $1.55
billion at December 31, 1998. Gross loans totaled $716.3 million at June 30,
1999. This represented an increase of $27.3 million, or 3.96%, over gross loans
of $689.0 million at December 31, 1998. Total deposits decreased $8.5 million,
or 0.70%, to $1.21 billion at June 30, 1999, from $1.22 billion at December 31,
1998.
Investment Securities and Debt Securities Available-for-Sale
The Company reported total investment securities of $732.4 million at June
30, 1999. This represented an increase of $2.4 million, or 0.33%, over total
investment securities of $730.0 million at December 31, 1998.
At June 30, 1999, the Company's net unrealized loss on securities
available-for-sale totaled $7.0 million. Accumulated other comprehensive loss
totaled $4.0 million, and deferred tax assets totaled $3.0 million. 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 June 30, 1999 and December 31, 1998.
17
<PAGE>
<TABLE>
<CAPTION>
Table 4 - Composition of Securities Portfolio
(dollars in thousands)
June 30, 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 $ 1,000 $ 1,004 $ 4 6.01% $ 3,005 $ 3,023 $ 18 6.02%
FHLMC, FNMA CMO's, REMIC's
and mortgage-backed pass-through securities
Available for Sale 531,515 525,670 (5,845) 6.33% 528,701 530,035 1,334 6.37%
Held to Maturity 3,141 3,170 29 5.74% 3,699 3,773 74 5.74%
Other Government Agency Securities
Available for Sale 9,935 9,944 9 5.71% 19,161 19,230 69 6.63%
GNMA mortgage-backed pass-through
securities
Available for Sale 42,131 41,624 (507) 6.54% 42,771 42,950 179 6.68%
Held to Maturity 624 678 54 9.45% 710 772 62 9.44%
Tax-exempt Municipal Securities
Available for Sale 76,426 75,821 (605) 4.45% 58,483 59,340 857 4.43%
Held to Maturity 47,839 49,198 1,359 4.88% 47,962 49,879 1,917 4.88%
Other securities
Available for Sale 25,205 25,205 0 0.00% 21,584 21,584 0 0.00%
Held to Maturity 1,574 1,574 0 8.24% 1,488 1,488 0 7.13%
----------------------------------------- ------------------------------------------
$739,390 $733,888 $ (5,502) 6.04% $727,564 $ 732,074 $ 4,510 6.13%
========================================= ==========================================
</TABLE>
18
<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
June 30, December 31,
1999 1998
------------ -------------
<S> <C> <C>
Commercial and Industrial $263,788 $247,060
Real Estate:
Construction 40,493 29,415
Mortgage 316,535 297,856
Consumer 17,709 17,816
Municipal lease finance receivables 22,995 22,923
Agribusiness 57,257 76,283
------- --------
Gross Loans $718,777 $691,353
Less:
Allowance for credit losses 14,405 13,364
Deferred net loan fees 2,458 2,321
------- --------
Net loans $701,914 $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 $6.5 million at June 30, 1999. This represented a
decrease of $2.8 million, or 29.84%, from nonperforming assets of $9.3 million
at December 31, 1998. As a percent of total assets, nonperforming assets
decreased to 0.41% at June 30, 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.
19
<PAGE>
<TABLE>
<CAPTION>
Table 6 - Nonperforming Assets (dollar amounts in thousands)
June 30, 1999 December 31, 1998
<S> <C> <C>
Nonaccrual loans $4,648 $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 1,891 2,102
------ ------
Total nonperforming assets $6,539 $9,320
====== ======
Percentage of nonperforming assets
to total loans outstanding and OREO 0.91% 1.35%
Percentage of nonperforming
assets to total assets 0.41% 0.60%
</TABLE>
The decrease in nonperforming assets was primarily the result of a decrease
in nonaccrual loans. Nonaccrual loans totaled $4.6 million at June 30, 1999.
This represented a decrease of $2.6 million, or 35.61%, from total nonaccrual
loans of $7.2 million at December 31, 1998.
At June 30, 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
47% to 99%.
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, 1999, total deposits were $1.21 billion. This represented a
decrease of $8.5 million, or 0.70%, from total deposits of $1.22 billion at
December 31, 1998. Demand deposits totaled $517.8 million at June 30, 1999,
representing a decrease of $21.0 million, or 3.90%, 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 six months of 1999
were $488.5 million. This represented an increase of $64.0 million, or 15.07%,
from average demand deposits of $424.5 million for the first six months of 1998.
The comparison of average balances for the first six months 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 $289.7 million at June 30, 1999. This represented a
decrease of $481,000, or 0.17%, 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 $211.0 million at June 30, 1999. This
represented an increase of $11.0 million, or 5.5% over other borrowed funds of
$200.0 million at December 31, 1998. The increase in other borrowed funds during
the first six months of 1999 was primarily the result of an increase federal
funds purchased.
20
<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 $15.5 million for the
first six months of 1999, compared to net cash provided by operating activities
of $14.5 million for the same period last year. The increase was primarily the
result of an increase in interest received.
Net cash used by investing activities totaled $37.0 million for the first
six months of 1999, compared to net cash used for investing activities of $153.9
million for the same period last year. The decrease in net cash used by
investing activities was primarily the result of a reduction in purchases of
investment securities. Financing activities provided net cash flows of $10.4
million for the six months ended June 30, 1999. This compares to $120.0 million
in net cash provided for the six months ended June 30, 1998. A net decrease in
transaction deposits of $8.0 million for the six months ended June 30, 1999,
compared to a net increase in deposits of $13.4 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 only $22.7 million for the first six months of 1999 compared
to an increase of $94.1 million for the first six months of 1998. At
June 30, 1999, cash and cash equivalents totaled $89.0 million compared to
$88.3 million at June 30, 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 six months of 1999, the Bank's loan to deposit ratio averaged 59.44%,
compared to an average ratio of 58.95% for the first six 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 June 30,
1999, approximately $40.9 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 June 30, 1999, neither the Bank nor CVB had any material
commitments for capital expenditures.
21
<PAGE>
Capital Resources
The Company's equity capital was $118.1 million at June 30, 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 June 30, 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 June 30, 1999, and December 31, 1998.
<TABLE>
<CAPTION>
Table 7 - Regulatory Capital Ratios
Required
Minimum June 30, 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% 12.40% 12.26% 12.20% 11.99%
Total 8.00% 13.67% 13.52% 13.46% 13.26%
Leverage ratio 4.00% 7.35% 7.26% 7.18% 7.05%
</TABLE>
On May 18, 1999, the Company signed a definitive agreement and plan for
reorganization with Orange National Bancorp. The agreement provides for Orange
National Bancorp to merge with and into CVB Financial Corp., and for Orange
National Bank to merge with and into Citizens Business Bank. The definitive
agreement provides that the shareholders of Orange National Bancorp will receive
one and one-half shares of CVB Financial Corp. stock for each share or Orange
National Bancorp stock. The transaction is subject to shareholder and regulatory
approval. The transaction is expected to be completed in the third quarter or
early in the fourth quarter of 1999. The Company also terminated its stock
repurchase program on May 18, 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.
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.
22
<PAGE>
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 June 30, 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 August 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 2000. Failure of
any major customer to be Year 2000 compliant could have a material adverse
effect on the Company.
23
<PAGE>
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 replicated 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, two, and three are completed. Phase four is ongoing throughout
1999.
24
<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, 1999. At the meeting, the following individuals
were elected to serve as the Company's Board of Directors
until the 2000 Annual Meeting of Shareholders and until their
successors are elected and have qualified.
Broker
For Against Abstained Non-Votes
George A. Borba 16,465,147 94,932 -0- -0-
John A. Borba 16,465,540 94,539 -0- -0-
Ronald O. Kruse 16,465,877 94,202 -0- -0-
John J. LoPorto 16,464,700 95,379 -0- -0-
Charles M. Magistro 16,465,651 94,428 -0- -0-
James C. Seley 16,465,988 94,091 -0- -0-
D. Linn Wiley 16,464,497 95,582 -0- -0-
The appointment of Deloitte & Touche LLP as independent public
accountants of the Company for the year ended December 31,
1999 was ratified at the 1999 Annual Meeting of Shareholders
by the following:
Against or Broker
For Withheld Abstained Non-Votes
16,516,121 2,896 41,062 -0-
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
On May 21, 1999, the Company filed a Current Report
on Form 8-K. The Company entered into an Agreement
and Plan of Reorganization providing for the merger
of Orange National Bancorp into CVB Financial Corp.
The merger will be immediately followed by the merger
of Orange National Bank into Citizens Business Bank,
a subsidiary of CVB Financial Corp.
25
<PAGE>
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 28
26
<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 6, 1999 /s/ Edward J. Biebrich Jr.
---------------------------
Edward J. Biebrich Jr.
Chief Financial Officer
27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1999, CONSOLIDATED BALANCE SHEET, AND THE JUNE 30, 1999, CONSOLIDATED STATEMENT
OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
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