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 September 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 September 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: 19,629,984 outstanding as of
October 31, 1999.
This Form 10-Q contains 28 pages. Exhibit index on page 26.
<PAGE>
PART I - FINANCIAL INFORMATION
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
dollar amounts in thousands
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
<S> <C> <C>
ASSETS
Investment securities held-to-maturity
(market values of $62,980 and $55,912) $ 62,282 $ 53,859
Investment securities available-for-sale 683,670 676,162
Loans and lease finance receivables, net 716,061 675,668
------------------ ----------------------
Total earning assets 1,462,013 1,405,689
Cash and due from banks 103,902 100,033
Premises and equipment, net 22,198 22,333
Other real estate owned, net 1,881 2,102
Goodwill and intangibles 8,747 9,635
Other assets 27,722 15,415
------------------ ----------------------
TOTAL $ 1,626,463 $ 1,555,207
================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 526,110 $ 538,808
Interest-bearing 719,832 676,497
------------------ ----------------------
1,245,942 1,215,305
Demand note issued to U.S. Treasury 11,399 95
Federal Funds Purchased 20,000 5,000
Repurchase Agreement 215,000 195,000
Securities purchased not settled 0 5,000
Long-term capitalized lease 381 402
Other liabilities 18,983 18,698
------------------ ----------------------
1,511,705 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
16,611,227 and 16,532,464) 95,068 94,529
Retained earnings 31,750 19,799
Accumulated other comprehensive (loss) income (12,060) 1,379
------------------ ----------------------
114,758 115,707
------------------ ----------------------
TOTAL $ 1,626,463 $ 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 For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 16,269 $ 15,109 $ 47,153 $ 45,288
Investment securities:
Taxable 9,712 8,354 28,374 22,621
Tax-advantaged 1,365 1,146 3,978 3,166
--------------- ---------------- --------------- ---------------
11,077 9,500 32,352 25,787
Federal funds sold and interest bearing
deposits with other financial institutions 74 214 188 462
--------------- ---------------- --------------- ---------------
27,420 24,823 79,693 71,537
Interest expense:
Deposits 5,689 6,260 16,172 17,976
Other borrowings 2,927 2,071 8,673 5,015
--------------- ---------------- --------------- ---------------
8,616 8,331 24,845 22,991
--------------- ---------------- --------------- ---------------
Net interest income 18,804 16,492 54,848 48,546
Provision for credit losses 800 600 1,900 1,900
--------------- ---------------- --------------- ---------------
Net interest income after
provision for credit losses 18,004 15,892 52,948 46,646
Other operating income:
Service charges on deposit accounts 2,232 1,936 6,736 5,524
(Losses)Gains on sale of securities (77) 199 (77) 224
Gains on sale of other real estate owned 279 59 608 110
Gains on sale of premises and equipment 5 0 5 652
Trust services 907 831 2,831 2,603
Other 825 649 2,174 2,026
--------------- ---------------- --------------- ---------------
4,171 3,674 12,277 11,139
Other operating expenses:
Salaries and employee benefits 6,013 5,645 18,107 16,795
Deposit insurance premiums 33 33 98 94
Occupancy 907 883 2,834 2,855
Equipment 1,140 1,063 3,384 2,868
Provision for losses on other real estate owned 0 0 100 500
Other 3,985 3,593 12,252 10,669
--------------- ---------------- --------------- ---------------
12,078 11,217 36,775 33,781
--------------- ---------------- --------------- ---------------
Earnings before income taxes 10,097 8,349 28,450 24,004
Provision for income taxes 3,745 3,067 10,528 8,880
--------------- ---------------- --------------- ---------------
Net earnings $ 6,352 $ 5,282 $ 17,922 $ 15,124
=============== ================ =============== ===============
Basic earnings per common share $ 0.38 $ 0.32 $ 1.08 $ 0.91
=============== ================ =============== ===============
Diluted earnings per common share $ 0.37 $ 0.31 $ 1.04 $ 0.87
=============== ================ =============== ===============
Cash dividends per common share $ 0.12 $ 0.09 $ 0.36 $ 0.27
=============== ================ =============== ===============
See accompanying notes to the consolidated financial statements.
</TABLE>
3
<PAGE>
CVB FINANCIAL CORP. AND SUBSIDIARIES
STATEMENT OF CHANGES IN EQUITY
(unaudited)
dollar amounts in thousands
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Retained Comprehensive Common
Total Income Earnings Income Stock
<S> <C> <C> <C> <C> <C>
Beginning balance, January 1, 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 17,922 $17,922 17,922
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see disclosure) (13,439) (13,439) (13,439)
============
Comprehensive income $4,483
============
Common Stock issued 539 539
Dividends declared on common stock (5,971) (5,971)
-------------- --------- ------------- ----------
Ending balance, September 30, 1999 $114,758 $31,750 ($12,060) $95,068
============== ========= ============= ==========
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 $9,901 $ (13,484)
Less:
Reclassification adjustment for losses included in
net income, net of tax benefit of $32 45
============
Net unrealized losses on securities, September 30, 1999 $ (13,439)
============
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 Nine Months
Ended September 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 83,787 $ 70,392
Service charges and other fees received 12,355 10,915
Interest paid (25,522) (21,339)
Cash paid to suppliers and employees (32,558) (29,852)
Income taxes paid (10,920) (8,555)
--------------- ---------------
Net cash provided by operating activities 27,142 21,561
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 17,927 52,243
Proceeds from maturities of securities available for sale 109,159 94,244
Proceeds from maturities of securities held to maturity 1,030 1,217
Purchases of securities available for sale (167,516) (354,243)
Purchases of securities held to maturity (9,652) (186)
Net increase in loans (43,993) (20,960)
Proceeds from sale of premises and equipment 7 2,181
Purchase of premises and equipment (2,338) (1,815)
Other investing activities 594 6,185
--------------- ---------------
Net cash used in investing activities (94,782) (221,134)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in transaction deposits 9,797 24,492
Net increase in time deposits 20,839 23,628
Net increase in short-term borrowings 46,305 127,854
Cash dividends on common stock (5,971) (4,519)
Stock repurchase 0 (1,884)
Proceeds from exercise of stock options 539 423
--------------- ---------------
Net cash provided by financing activities 71,509 169,994
--------------- ---------------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 3,869 (29,579)
CASH AND CASH EQUIVALENTS, beginning of period 100,033 107,725
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 103,902 $ 78,146
=============== ===============
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 Nine Months
Ended September 30,
1999 1998
<S> <C> <C>
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 17,922 $ 15,124
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums(accretion of discount) on investment securities 4,737 (303)
Provisions for loan and OREO losses 2,000 2,400
Depreciation and amortization 2,439 2,336
Change in accrued interest receivable (641) (842)
Change in accrued interest payable (677) 1,652
Change in other assets and liabilities 1,362 1,194
--------------- ---------------
Total adjustments 9,220 6,437
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 27,142 $ 21,561
=============== ===============
Supplemental Schedule of Noncash Investing and Financing Activities
</TABLE>
6
<PAGE>
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 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 $2.3 million at September 30, 1999. These loans were
supported by collateral with a fair market value, net of prior liens, of
$2.8 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 September 30, 1999,
the Company had entered into commitments with certain customers amounting
to $258.7 million compared to $209.1 million at December 31, 1998. Letters
of credit at September 30, 1999, and December 31, 1998, were $13.4 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 September
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 September 30, 1999, was
16,611,227. 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
<PAGE>
Earnings Per Share Reconciliation
For the Three Months
Ended September 30,
<TABLE>
<CAPTION>
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 $ 6,351,727 16,581,896 $0.38 $ 5,282,244 16,548,167 $0.32
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 625,860 (0.01) 635,036 (0.01)
----------------------------------------- --------------------------------------
DILUTED EPS
Income available to
common stockholders $ 6,351,727 17,207,756 $0.37 $ 5,282,244 17,183,203 $0.31
========================================= ======================================
</TABLE>
Earnings Per Share Reconciliation
For the Nine Months
Ended September 30,
<TABLE>
<CAPTION>
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 $17,922,582 16,567,732 $1.08 $15,123,940 16,556,662 $0.91
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 597,722 (0.04) 685,126 (0.04)
----------------------------------------- --------------------------------------
DILUTED EPS
Income available to common
stockholders $17,922,582 17,165,454 $1.04 $15,123,940 17,241,788 $0.87
========================================= ======================================
</TABLE>
6. Supplemental Cash Flow Information - During the nine-month period ended
September 30, 1999, and September 30, 1998, loans amounting to $1.7 million
and $2.5 million, respectively, 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," amended by SFAS No. 137, effective
for fiscal years beginning after June 15, 2000. 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.
On October 4, 1999, Orange National Bancorp merged with and into CVB
Financial Corp. and Orange National Bank merged with and into Citizens Business
Bank. The shareholders of Orange National Bancorp received one and one-half
shares of CVB Financial Corp. stock for each share of Orange National Bancorp
stock. The merger was accounted for as a pooling of interests. As of October 4,
1999, Orange National Bancorp had total assets of $277.7 million, net loans of
$152.0 million, and deposits of $250.4 million that are not included on the
balance sheet or results of operations of the Company on this Form 10-Q. For
additional information regarding the merger, please see "Item 2. - Acquisition
or Disposition of Assets" and "Item 7. - Financial Statements and Exhibits"
contained in the Company's Current Report on Form 8-K dated October 4, 1999.
RESULTS OF OPERATIONS
The Company reported net earnings of $17.9 million for the nine months
ended September 30, 1999. This represented an increase of $2.8 million, or
18.50%, over net earnings of $15.1 million, for the nine months ended September
30, 1998. Basic earnings per share for the nine month period increased to $1.08
per share for 1999, compared to $0.91 per share for 1998. Diluted earnings per
share increased to $1.04 per share for the first nine months of 1999, compared
to $0.87 per share for the same nine month period last year. The annualized
return on average assets was 1.53% for the first nine months of 1999 compared to
a return on average assets of 1.52% for the nine months ended September 30,
1998. The annualized return on average equity was 19.70% for the nine months
ended September 30, 1999, compared to a return of 18.50% for the nine months
ended September 30, 1998.
For the quarter ended September 30, 1999, the Company generated net
earnings of $6.4 million. This represented an increase of $1.1 million, or
20.26%, over net earnings of $5.3 million for the third quarter of 1998. Basic
earnings per share increased to $0.38 for the third quarter of 1999 compared to
$0.32 per share for the third quarter of 1998. Diluted earnings per share
increased to $0.37 per share compared to $0.31 per share for the third
quarter of 1999 and 1998, respectively. The annualized return on average
assets was 1.59% for the third quarter of 1999 compared to 1.51% for the same
period last year. The annualized return on average equity was 20.74% for the
third quarter of 1999 and 18.72% for the third 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 $29.9 million for the nine months ended September 30, 1999. This
represented an increase of $3.8 million, or 14.76%, compared to operating
earnings of $26.1 million for the first nine months of 1998. For the third
quarter of 1999, pre-tax operating earnings totaled $10.7 million. This
represented an increase of $2.0 million or 23.07% from pre-tax operating
earnings of $8.7 million for the third 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 nine months ended September 30, 1999, net interest income was $54.8
million. This represented an increase of $6.3 million, or 12.98%, over net
interest income of $48.5 million for the nine months ended September 30, 1998.
Although net interest income increased, the net interest margin decreased to
5.22% for the nine months ended September 30, 1999, compared to 5.47% for the
nine months ended September 30, 1998. In addition, the net interest spread
decreased to 3.93% for the nine months ended September 30, 1999, compared to a
spread of 3.99% for the nine months ended September 30, 1998.
The increase in net interest income for the most recent nine month period
was the result of an increased volume of average earning assets. Earning assets
averaged $1.4 billion for the first nine months of 1999. This represented an
increase of $226.3 million, or 18.62%, compared to average earning assets of
$1.2 billion for the first nine months of 1998. The decrease in the net interest
margin for the nine months ended September 30, 1999 compared to the first nine
months of 1998 was primarily the result of a lower yield on loans. The decrease
in the net interest spread resulted as the yield on average earning assets
decreased greater than the decrease in the cost of average interest-bearing
liabilities.
For the third quarter of 1999, net interest income was $18.8 million. This
represented an increase of $2.3 million, or 14.02%, compared to $16.5 million
for the third quarter of 1998. The net interest margin was 5.25% during the
third quarter of 1999 compared to 5.28% for the same period last year.
The net interest spread was 3.91% during the third quarter of 1999 compared to
3.78% for the third quarter of 1998. The increase in the net interest spread
resulted as the yield on average earning assets decreased less than the decrease
in the cost of average interest-bearing liabilities.
The increase in net interest income for the third quarter of 1999 was the
result of an increase in average earning assets. Earning assets averaged $1.5
billion for the quarter ended September 30, 1999, compared to $1.3 billion for
the same period last year. The decrease in net interest margin resulted from a
decline in loan yields. Loan yield for the third quarter of 1999 was 8.98%
compared to 9.53% for the third quarter of 1998.
The Company reported total interest income of $79.7 million for the nine
months ended September 30, 1999. This represented an increase of $8.2 million,
or 11.40%, over total interest income of $71.5 million for the nine months ended
September 30, 1998. The increase reflected the greater volume of earning assets
noted above. The yield on average earning assets decreased to 7.52% for the nine
months ended September 30, 1999, from a yield of 7.99% for the nine months ended
September 30, 1998.
The decrease in the yield on average earning assets resulted from lower
yields on average loans. The yield on average loans decreased to 8.88% for the
nine months ended September 30, 1999, from a yield of 9.64% for the first nine
months of 1998. The 76 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 nine months ended
September 30, 1999, average loans represented 49.13% of average earning
assets, compared to 51.52% for the nine months ended September 30, 1998.
10
<PAGE>
The interest expense for the quarter and nine months ended September 30,
1999 increased when compared to the same periods for 1998. Interest expense
totaled $24.8 million for the nine months ended September 30, 1999. This
represented an increase of $1.9 million, or 8.06%, over total interest expense
of $23.0 million for the nine months ended September 30, 1998. For the three
months ended Septemebr 30, 1999, interest expense totaled $8.6 million. This
represented an increase of $285,000, or 3.42% over interest expense of $8.3
million for the same period last year.
The increase in interest expense reflected an increase in the average
volume of interest-bearing liabilities. Average interest-bearing liabilities
were $922.0 million for the first nine months of 1999. This represented an
increase of $155.4 million, or 20.27%, from average interest-bearing liabilities
of $766.6 million for the first nine months of 1998. For the third quarter of
1999, interest-bearing liabilities averaged $939.7 million, an increase of
$125.4 million or 15.40% over the same quarter last year.
Average interest-bearing deposits totaled $700.8 million for the nine
months ended September 30, 1999. This represented an increase of $55.3 million,
or 8.56%, over average interest-bearing deposits of $645.6 million for the nine
months ended September 30, 1998.
Other borrowed funds averaged $221.2 million for the nine months ended
September 30, 1999. This represented an increase of $100.1 million, or 82.71%,
over average other borrowed funds of $121.1 million for the nine months ended
September 30, 1998.
The cost of average interest-bearing liabilities decreased to 3.59% for the
nine months ended September 30, 1999, compared to a cost of 4.00% for the first
nine 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 3.08% for the first nine months of
1999 as compared to 3.71% for the first nine months of 1998. The cost of other
borrowed funds decreased to 5.23% for the nine months ended September 30, 1999,
compared to a cost of 5.52% for the nine months ended September 30, 1998.
Table 1 shows the average balances of assets, liabilities, and
stockholders' equity and the related interest income, expense, and rates for the
nine month periods ended September 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 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differentials
(dollars in thousands)
<TABLE>
<CAPTION>
Nine-month periods ended September 30,
1999 1998
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
Investment Securities
Taxable $ 611,043 28,374 6.19% $ 483,222 22,621 6.24%
Tax-advantaged (1) 117,327 3,978 6.34% 94,580 3,166 6.26%
Federal Funds Sold & Interest-bearing
deposits with other financial institutions 5,056 188 4.96% 11,370 462 5.42%
Loans (2) (3) 708,301 47,153 8.88% 626,225 45,288 9.64%
--------------------------------------- -----------------------------------
Total Earning Assets 1,441,727 79,693 7.52% 1,215,397 71,537 7.99%
Total Non-earning Assets 120,308 114,719
--------------- --------------
Total Assets $ 1,562,035 $ 1,330,116
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits $ 495,746 $ 431,994
Savings Deposits (4) 404,817 6,112 2.01% 368,487 7,101 2.57%
Time Deposits 295,988 10,060 4.53% 277,066 10,875 5.23%
--------------------------------------- -----------------------------------
Total Deposits 1,196,551 16,172 1.80% 1,077,547 17,976 2.22%
--------------------------------------- -----------------------------------
Other Borrowings 221,229 8,673 5.23% 121,083 5,015 5.52%
--------------------------------------- -----------------------------------
Total Interest-Bearing Liabilities 922,034 24,845 3.59% 766,636 22,991 4.00%
--------------- --------------
Other Liabilities 22,959 22,497
Stockholders' Equity 121,296 108,989
--------------- --------------
Total Liabilities and
Stockholders' Equity $ 1,562,035 $ 1,330,116
=============== ==============
Net interest spread 3.93% 3.99%
Net interest margin 5.22% 5.47%
<FN>
- - -------------------------------------------------------
(1) Yields are calculated on a taxable equivalent basis.
(2) Loan fees are included in total interest income as follows: 1999, $2,192; 1998, $2,997.
(3) Nonperforming loans are included in loans as follows: 1999, $219; 1998, $4,315.
(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 2 - Rate and Volume Analysis for Changes in Interest Income, Interest
Expense and Net Interest Income
(amounts in thousands)
<TABLE>
<CAPTION>
Comparison of nine-month periods ended
September 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 $ 5,984 $ (183) $ (48) $ 5,753
Tax-advantaged securities 761 41 10 812
Fed funds sold & interest bearing
deposits with other institutions (256) (40) 22 (274)
Loans 5,936 (3,599) (472) 1,865
---------------------------------------------------------
Total earning assets 12,425 (3,781) (488) 8,156
---------------------------------------------------------
Interest Expense:
Savings deposits 700 (1,537) (152) (989)
Time deposits 743 (1,458) (100) (815)
Other borrowings 4,148 (268) (222) 3,658
---------------------------------------------------------
Total interest-bearing liabilities 5,591 (3,263) (474) 1,854
---------------------------------------------------------
Net Interest Income $ 6,834 $ (518) $ (14) $ 6,302
=========================================================
</TABLE>
13
<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 September 30, 1999.
Estimated Net
Simulated Interest Income
Rate Changes Sensitivity
+200 basis points (2.43%)
-200 basis points (1.87%)
The table indicates that net interest income would decrease by
approximately 2.43% 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 1.87% 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 $1.9 million for the nine months
ended September 30, 1999, and September 30, 1998.
The allowance for credit losses at September 30, 1999 was $14.7 million.
This represented an increase of $1.3 million, or 10.03%, from the allowance for
credit losses of $13.4 million at September 30, 1998. The allowance for credit
losses was 2.08% of average gross loans for the first nine months of 1999 and
2.13% of average gross loans for the first nine months of 1998. For the nine
months ended September 30, 1999, net loan charge offs totaled $562,000, compared
to net loan charge offs of $60,000 for the first nine 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 $2.2 million at September 30, 1999. This represented a decrease of
$7.2 million, or 76.81%, 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 $280,000 at
September 30, 1999. This represented a decrease of $6.9 million, or 96.12%, from
the level of nonperforming loans at December 31, 1998. Table 6 presents
nonperforming assets as of September 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 September 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 3 - Summary of Credit Loss Experience
(amounts in thousands)
<TABLE>
<CAPTION>
Nine-months
ended September 30,
1999 1998
<S> <C> <C>
Amount of Total Loans at End of Period $ 730,763 $ 635,361
============== ==============
Average Total Loans Outstanding $ 708,301 $ 626,225
============== ==============
Allowance for Credit Losses at Beginning of Period $ 13,364 $ 11,522
Loans Charged-Off:
Real Estate Loans 477 86
Commercial and Industrial 202 216
Consumer Loans 5 27
-------------- --------------
Total Loans Charged-Off 684 329
-------------- --------------
Recoveries:
Real Estate Loans 4 155
Commercial and Industrial 116 101
Consumer Loans 2 13
-------------- --------------
Total Loans Recovered 122 269
-------------- --------------
Net Loans Charged-Off 562 60
-------------- --------------
Provision Charged to Operating Expense 1,900 1,900
-------------- --------------
Allowance for Credit Losses at End of period $ 14,702 $ 13,362
============== ==============
Net Loans Charged-Off to Average Total Loans* 0.11% 0.01%
Net Loans Charged-Off to Total Loans at End of Period* 0.10% 0.01%
Allowance for Credit Losses to Average Total Loans 2.08% 2.13%
Allowance for Credit Losses to Total Loans at End of Period 2.01% 2.10%
Net Loans Charged-Off to Allowance for Credit Losses* 5.10% 0.60%
Net Loans Charged-Off to Provision for Credit Losses 29.58% 3.16%
* 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 $12.3 million for the nine months ended
September 30, 1999. This represented an increase of $1.1 million, or 10.22%,
from other operating income of $11.1 million for the nine months ended September
30, 1998. For the three months ended September 30, 1999, other operating income
totaled $4.2 million, an increase of $497,000, or 13.53%, from $3.7 million for
the same three month period ended September 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 $6.7 million for the first nine months ended
September 30, 1999. This represents an increase of $1.2 million or 21.94% over
service charge income of $5.5 million for the nine months ended September 30,
1998.
Trust income totaled $2.8 million for the nine months ended September 30,
1999. This represented an increase of $228,000, or 8.76% over trust income of
$2.6 million for the nine months ended September 30, 1998.
Other Operating Expenses
Other operating expenses totaled $36.8 million for the nine months ended
September 30, 1999. This represented an increase of $3.0 million, or 8.86%, over
other operating expenses of $33.8 million for the nine months ended September
30, 1998. For the three months ended September 30, 1999, other operating
expenses totaled $12.1 million. This compares with $11.2 million for the same
period last year, an increase of $861,000, or 7.68%.
Salaries and employee benefits totaled $18.1 million for the first nine
months of 1999. This represented an increase of $1.3 million, or 7.81%, from
salaries and employee benefits of $16.8 million for the same period last year.
Equipment expense totaled $3.4 million for the nine months ended September 30,
1999. This represents an increase of $516,000, or 17.99%, over equipment expense
of $2.9 million for the nine months ended September 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 $12.3 million for the
first nine months ended September 30, 1999. This represents an increase of $1.6
million, or 14.84%, over other expense of $10.7 million for the nine months
ended September 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 nine months ended September 30, 1999, the provision for
other real estate owned totaled $100,000. For the nine months ended September
30, 1998, the provision for other real estate owned was $500,000.
As a percent of average assets, annualized other operating expenses
decreased to 3.14% for the nine months ended September 30, 1999, compared to a
ratio of 3.39% for the nine months ended September 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 54.79% for the nine months ended September 30, 1999, compared
to a ratio of 56.60% for the nine months ended September 30, 1998. The decrease
in the efficiency ratio indicates that the Company is allocating a lower
percentage of net revenue to operating expenses.
16
<PAGE>
BALANCE SHEET ANALYSIS
The Company reported total assets of $1.63 billion at September 30, 1999.
This represented an increase of $71.3 million, or 4.58%, over total assets of
$1.55 billion at December 31, 1998. Gross loans, net of deferred loan fees,
totaled $730.8 million at September 30, 1999. This represented an increase of
$41.7 million, or 6.06%, over gross loans of $689.0 million at December 31,
1998. Total deposits increased $30.6 million, or 2.52%, to $1.25 billion at
September 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 $746.0 million at
September 30, 1999. This represented an increase of $15.9 million, or 2.18%,
over total investment securities of $730.0 million at December 31, 1998.
At September 30, 1999, the Company's net unrealized loss on securities
available-for-sale totaled $20.9 million. Accumulated other comprehensive loss
totaled $12.1 million, and deferred tax assets totaled $8.8 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 September 30, 1999 and December 31, 1998.
17
<PAGE>
Table 4 - Composition of Securities Portfolio
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
Net Net
Amortized Market Unrealized Yield Amortized Market Unrealized Yield
Cost Value Gain/(Loss) Cost Value Gain/(Loss)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities
Available for Sale $ 1,000 $ 1,001 $ 1 6.01% $ 3,005 $ 3,023 $ 18 6.02%
FHLMC, FNMA CMO's, REMIC's
and mortgage-backed pass-through securities
Available for Sale 559,748 543,027 (16,721) 6.39% 528,701 530,035 1,334 6.37%
Held to Maturity 2,875 2,872 (3) 5.74% 3,699 3,773 74 5.74%
Other Government Agency Securities
Available for Sale 7,342 7,272 (70) 6.40% 19,161 19,230 69 6.63%
GNMA mortgage-backed pass-through
securities
Available for Sale 45,105 43,783 (1,322) 6.75% 42,771 42,950 179 6.68%
Held to Maturity 564 608 44 9.53% 710 772 62 9.44%
Tax-exempt Municipal Securities
Available for Sale 67,186 64,407 (2,779) 4.59% 58,483 59,340 857 4.43%
Held to Maturity 47,732 48,320 588 4.88% 47,962 49,879 1,917 4.88%
Corporate Bond
Held to Maturity 9,535 9,604 69 7.05% 0 0 0 0.00%
Other securities
Available for Sale 24,180 24,180 0 0.00% 21,584 21,584 0 0.00%
Held to Maturity 1,576 1,576 0 8.25% 1,488 1,488 0 7.13%
----------------------------------------- ------------------------------------------
$766,843 $746,650 $ (20,193) 6.16% $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 5 - Distribution of Loan Portfolio by Type
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
Commercial and Industrial $274,700 $247,060
Real Estate:
Construction 45,125 29,415
Mortgage 318,606 297,856
Consumer 17,344 17,816
Municipal lease finance receivables 22,432 22,923
Agribusiness 55,069 76,283
-------- --------
Gross Loans $733,276 $691,353
Less:
Allowance for credit losses 14,702 13,364
Deferred net loan fees 2,513 2,321
-------- --------
Net loans $716,061 $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 $2.2 million at September 30, 1999. This represented
a decrease of $7.2 million, or 76.81%, from nonperforming assets of $9.3 million
at December 31, 1998. As a percent of total assets, nonperforming assets
decreased to 0.13% at September 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 6 - Nonperforming Assets (dollar amounts in thousands)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
<S> <C> <C>
Nonaccrual loans $ 219 $7,218
Loans past due 90 days or more
and still accruing interest 61 0
Restructured loans 0 0
Other real estate owned (OREO), net 1,881 2,102
------ ------
Total nonperforming assets $2,161 $9,320
====== ======
Percentage of nonperforming assets
to total loans outstanding and OREO 0.29% 1.35%
Percentage of nonperforming
assets to total assets 0.13% 0.60%
</TABLE>
The decrease in nonperforming assets was primarily the result of a decrease
in nonaccrual loans. Nonaccrual loans totaled $219,000 at September 30, 1999.
This represented a decrease of $7.0 million, or 96.97%, from total nonaccrual
loans of $7.2 million at December 31, 1998.
At September 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
3% to 118%.
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 September 30, 1999, total deposits were $1.25 billion. This represented
an increase of $30.6 million, or 2.52%, from total deposits of $1.22 billion at
December 31, 1998. Demand deposits totaled $526.1 million at September 30, 1999,
representing a decrease of $12.7 million, or 2.36%, 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 nine months of 1999
were $495.7 million. This represented an increase of $63.8 million, or 14.76%,
from average demand deposits of $432.0 million for the first nine months of
1998. The comparison of average balances for the first nine 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 $311.0 million at September 30, 1999. This
represented a increase of $20.8 million, or 7.18%, 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 $235.0 million at September 30, 1999. This
represented an increase of $35.0 million, or 17.50% over other borrowed funds of
$200.0 million at December 31, 1998. The increase in other borrowed funds during
the first nine months of 1999 was primarily the result of an increase Federal
Home Loan Bank borrowing.
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 $27.1 million for the
first nine months of 1999, compared to net cash provided by operating activities
of $21.6 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 $94.8 million for the first
nine months of 1999, compared to net cash used for investing activities of
$221.1 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 $71.5
million for the nine months ended September 30, 1999. This compares to $170.0
million in net cash provided for the nine months ended September 30, 1998. An
increase in net short-term borrowings of $46.3 million for the nine months ended
September 30, 1999, compared to a net increase of $127.9 million for the same
period last year contributed to the change. At September 30, 1999, cash and cash
equivalents totaled $103.9 million compared to $78.1 million at September 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 nine months of 1999, the Bank's loan to deposit ratio averaged 59.34%,
compared to an average ratio of 58.31% for the first nine 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 September
30, 1999, approximately $41.6 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 September 30, 1999, neither the Bank nor CVB had any
material commitments for capital expenditures.
21
<PAGE>
Capital Resources
The Company's equity capital was $114.8 million at September 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 September 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 September 30, 1999, and December 31, 1998.
Table 7 - Regulatory Capital Ratios
<TABLE>
<CAPTION>
Required
Minimum September 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% 12.86% 12.70% 12.20% 11.99%
Total 8.00% 14.13% 13.96% 13.46% 13.26%
Leverage ratio 4.00% 7.42% 7.32% 7.18% 7.05%
</TABLE>
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 30 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 vendors 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 September 30, 1999, for approximately 3% 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 Bank has notified its customers by means of statement stuffers of Year
2000 issues. The Bank has contacted 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, the replacement of the Bank's teller
system cost $600,000. The remaining $200,000 is budgeted for miscellaneous and
contingency items. To date, the Company has expended approximately $75,000 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 cost of $600,000 to
replace the teller system was 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
$125,000 will be reflected in the income statement over the next quarter. 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 third 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 Special Meeting of Shareholders was held August 25, 1999.
The number of shares cast for and against a resolution
approving the merger with Orange National Bancorp was as
follows:
Broker
For Against Abstained Non-Votes
15,823,399 162,733 581,989 -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
None
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: November 8, 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 SEPTEMBER
30, 1999, CONSOLIDATED BALANCE SHEET, AND THE SEPTEMBER 30, 1999, CONSOLIDATED
STATEMENT OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 103,902
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 683,670
<INVESTMENTS-CARRYING> 62,282
<INVESTMENTS-MARKET> 62,980
<LOANS> 730,763
<ALLOWANCE> 14,702
<TOTAL-ASSETS> 1,626,463
<DEPOSITS> 1,245,942
<SHORT-TERM> 235,000
<LIABILITIES-OTHER> 30,382
<LONG-TERM> 381
0
0
<COMMON> 95,068
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<INTEREST-INVEST> 32,352
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<LOAN-LOSSES> 1,900
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