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, 2000
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, 2000 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: 25,125,509 outstanding as
of June 30, 2000.
This Form 10-Q contains 30 pages. Exhibit index on page 28.
<PAGE>
PART I - FINANCIAL INFORMATION
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
dollar amounts in thousands
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------- --------------------
(unaudited)
<S> <C> <C>
ASSETS
Investment securities available-for-sale $ 955,586 $ 877,332
Loans and lease finance receivables, net 973,199 935,791
---------------- --------------------
Total earning assets 1,928,785 1,813,123
Cash and due from banks 103,380 118,360
Premises and equipment, net 27,335 27,726
Other real estate owned, net 519 703
Goodwill and intangibles 8,010 8,452
Accrued interest receivable 13,730 11,454
Other assets 29,112 30,939
---------------- --------------------
TOTAL $ 2,110,871 $ 2,010,757
================ ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 624,895 $ 649,821
Interest-bearing 852,889 851,252
---------------- --------------------
1,477,784 1,501,073
Demand note issued to U.S. Treasury 8,752 16,951
Federal Funds Purchased 48,000 23,000
Repurchase Agreement 390,000 300,000
Other liabilities 33,276 28,963
---------------- --------------------
1,957,812 1,869,987
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
25,125,509 and 24,716,832) 107,470 105,304
Retained earnings 62,106 51,857
Accumulated other comprehensive loss (16,517) (16,391)
---------------- --------------------
153,059 140,770
---------------- --------------------
TOTAL $ 2,110,871 $ 2,010,757
================ ====================
See accompanying notes to the consolidated financial statements.
</TABLE>
2
<PAGE>
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
dollar amounts in thousands, except per share
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 22,112 $ 19,185 $ 43,369 $ 37,704
Investment securities:
Taxable 12,379 10,003 24,180 20,450
Tax-advantaged 2,831 1,365 5,095 2,613
-------------- -------------- ------------- -------------
Total investment income 15,210 11,368 29,275 23,063
Federal funds sold and interest bearing
deposits with other financial institutions 0 523 2 990
-------------- -------------- ------------- -------------
Total interest income 37,322 31,076 72,646 61,757
Interest expense:
Deposits 7,522 6,308 14,386 12,556
Other borrowings 6,270 2,712 11,520 5,746
-------------- -------------- ------------- -------------
Total interest expense 13,792 9,020 25,906 18,302
-------------- -------------- ------------- -------------
Net interest income 23,530 22,056 46,740 43,455
Provision for credit losses 700 520 1,600 1,190
-------------- -------------- ------------- -------------
Net interest income after
provision for credit losses 22,830 21,536 45,140 42,265
Other operating income:
Service charges on deposit accounts 2,550 2,729 5,196 5,245
Loss on sale of securities (57) 0 (131) (1)
Gain on sale of other real estate owned 0 348 224 348
Trust services 969 894 2,010 1,925
Other 971 1,205 1,848 2,162
-------------- -------------- ------------- -------------
Total other income 4,433 5,176 9,147 9,679
Other operating expenses:
Salaries and employee benefits 7,339 7,584 14,853 15,127
Occupancy 1,292 1,247 2,667 2,564
Equipment 1,217 1,378 2,488 2,632
Professional services 739 1,653 1,860 3,006
Other 3,331 3,721 6,395 7,433
-------------- -------------- ------------- -------------
Total operating expenses 13,918 15,583 28,263 30,762
-------------- -------------- ------------- -------------
Earnings before income taxes 13,345 11,129 26,024 21,182
Provision for income taxes 4,898 4,104 9,721 7,892
-------------- -------------- ------------- -------------
Net earnings $ 8,447 $ 7,025 $ 16,303 $ 13,290
============== ============== ============= =============
Basic earnings per common share $ 0.34 $ 0.29 $ 0.65 $ 0.54
============== ============== ============= =============
Diluted earnings per common share $ 0.33 $ 0.28 $ 0.64 $ 0.52
============== ============== ============= =============
Cash dividends per common share $ 0.12 $ 0.09 $ 0.24 $ 0.18
============== ============== ============= =============
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, 1999 $139,430 $35,517 $1,348 $102,565
Comprehensive income
Net Income 25,960 $25,960 25,960
Other comprehensive income, net of tax
Unrealized loss on securities, net of
reclassification adjustment (17,739) (17,739) (17,739)
--------------
Comprehensive income $8,221
==============
Common Stock issued 2,739 2,739
Tax benefit from exercise of stock options 221 221
Dividends declared on common stock (9,841) (9,841)
----------- ------------- --------------- -------------
Ending balance, December 31, 1999 140,770 51,857 (16,391) 105,304
----------- ------------- --------------- -------------
Comprehensive income
Net Income 16,303 $16,303 16,303
Other comprehensive income, net of tax
Unrealized loss on securities, net of
reclassification adjustment (126) (126) (126)
--------------
Comprehensive income $16,177
==============
Common Stock issued 2,166 2,166
Dividends declared on common stock (6,054) (6,054)
----------- ------------- --------------- -------------
Ending balance, June 30, 2000 $153,059 $62,106 ($16,517) $107,470
=========== ============= =============== =============
Disclosure of reclassification amount
Unrealized holding losses arising during period,
net of tax effects of $13,058 $ (17,790)
Less:
Reclassification adjustment for losses included in
net income, net of tax effects of $29 51
----------------
Net unrealized loss on securities, December 31, 1999 $ (17,739)
================
Unrealized holding losses arising during period,
net of tax effects of $92 $ (202)
Less:
Reclassification adjustment for losses included in
net income, net of tax effects of $55 76
----------------
Net unrealized losses on securities, June 30, 2000 $ (126)
================
See accompanying notes to the consolidated financial statements.
</TABLE>
4
<PAGE>
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
dollar amounts in thousands
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
2000 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 74,239 $ 62,645
Service charges and other fees received 9,278 9,369
Interest paid (24,040) (18,526)
Cash paid to suppliers and employees (20,374) (28,109)
Income taxes paid (10,432) (8,002)
--------------- ---------------
Net cash provided by operating activities 28,671 17,377
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 22,146 105
Proceeds from maturities of securities available for sale 60,785 66,762
Proceeds from maturities of securities held to maturity 0 4,898
Purchases of securities available for sale (159,792) (82,668)
Purchases of securities held to maturity 0 (95)
Net increase in loans (39,008) (34,510)
Purchase of premises and equipment (1,960) (1,616)
Other investing activities (5,446) 618
--------------- ---------------
Net cash used in investing activities (123,275) (46,506)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in transaction deposits (44,502) (9,388)
Net increase (decrease) in time deposits 21,213 (472)
Net increase in short-term borrowings 106,801 22,721
Cash dividends on common stock (6,054) (4,578)
Proceeds from exercise of stock options 2,166 251
------------- -------------
Net cash provided by financing activities 79,624 8,534
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (14,980) (20,595)
CASH AND CASH EQUIVALENTS, beginning of period 118,360 174,963
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 103,380 $ 154,368
=============== ===============
See accompanying notes to the consolidated financial statements.
</TABLE>
5
<PAGE>
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
dollar amounts in thousands
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
2000 1999
--------------- ---------------
<S> <C> <C>
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 16,303 $ 13,290
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loss on sale of investment securities 131 (1)
Amortization of premiums on investment securities. 3,869 1,353
Provisions for loan and OREO losses 1,600 1,290
Depreciation and amortization 2,284 1,890
Change in accrued interest receivable (2,276) (472)
Change in accrued interest payable 1,866 (225)
Change in other assets and liabilities 4,894 252
--------------- ---------------
Total adjustments 12,368 4,087
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 28,671 $ 17,377
=============== ===============
Supplemental Schedule of Noncash Investing and Financing Activities
Securities sold and not settled $ 0 $ 25,000
Securities purchased and not settled $ 5,610 $ 36,028
Real estate acquired through foreclosure $ 0 $ 1,795
</TABLE>
6
<PAGE>
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2000 and 1999
1. Summary of Significant Accounting Policies. See Note 1 of the Notes to
Consolidated Financial Statements in CVB Financial Corp.'s 1999 Annual
Report on Form 10-K.
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 $2.7 million at June 30, 2000. These
loans were supported by collateral with a fair market value, net of prior
liens, of $3.4 million.
2. Certain reclassifications have been made in the 1999 financial
information to conform to the presentation used in 2000.
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, 2000,
the Company had entered into commitments with certain customers amounting
to $344.7 million compared to $250.8 million at December 31, 1999.
Letters of credit at June 30, 2000, and December 31, 1999, were $15.6
million and $13.3 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, 2000 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, 2000 was 25,125,509.
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 1999 per share
information in the financial statements and in Management's Discussion
and Analysis has been restated to give retroactive effect to the 5-for-4
stock split declared December 15, 1999 and which was effective on January
14, 2000. The table below presents the reconciliation of earnings per
share for the periods indicated.
7
<PAGE>
Earnings Per Share Reconciliation
(Dollars and shares in thousands, except per share amounts)
For the Three Months
Ended June 30,
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------ ------------------------------------------------
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 $ 8,447 25,070 $0.34 $ 7,025 24,456 $0.29
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 518 (0.01) 958 (0.01)
----------------------------------------------- ------------------------------------------------
DILUTED EPS
Income available to
common stockholders $ 8,447 25,588 $0.33 $ 7,025 25,414 $0.28
================================================ ================================================
</TABLE>
Earnings Per Share Reconciliation
For the Six Months
Ended June 30,
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------- ------------------------------------------------
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 $ 16,303 25,004 $0.65 $ 13,290 24,451 $0.54
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 580 (0.01) 874 (0.02)
--------------------------------------------- -------------------------------------------------
DILUTED EPS
Income available to
common stockholders $ 16,303 25,584 $0.64 $ 13,290 25,325 $0.52
=============================================== =================================================
</TABLE>
6. Supplemental Cash Flow Information - During the six-month period ended
June 30, 1999, loans amounting to $1.8 million were transferred to Other
Real Estate Owned ("OREO") as a result of foreclosure on the real
properties held as collateral. No loans were transferred to OREO during
the six-month period ended June 30, 2000.
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 1999 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, 1999.
RESULTS OF OPERATIONS
The Company reported net earnings of $16.3 million for the six months
ended June 30, 2000. This represented an increase of $3.0 million, or 22.67%,
over net earnings of $13.3 million, for the six months ended June 30, 1999.
Basic earnings per share for the six month period increased to $0.65 per share
for 2000, compared to $0.54 per share for 1999. Diluted earnings per share
increased to $0.64 per share for the first six months of 2000, compared to $0.52
per share for the same six month period last year. The annualized return on
average assets was 1.61% for the first six months of 2000 compared to a return
on average assets of 1.46% for the six months ended June 30, 1999. The
annualized return on average equity was 21.85% for the six months ended June 30,
2000, compared to a return of 18.44% for the six months ended June 30, 1999.
For the quarter ended June 30, 2000, the Company generated net earnings
of $8.4 million. This represented an increase of $1.4 million, or 20.25%, over
net earnings of $6.3 million for the second quarter of 1999. Basic earnings per
share increased to $0.34 for the second quarter of 2000 compared to $0.29 per
share for the second quarter of 1999. Diluted earnings per share increased to
$0.33 per share compared to $0.28 per share for the second quarter of 2000 and
1999, respectively. The annualized return on average assets was 1.65% for the
second quarter of 2000 compared to 1.54% for the same period last year. The
annualized return on average equity was 22.41% for the second quarter of 2000
and 19.34% for the second quarter of 1999.
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 $27.5 million for the six months ended June 30, 2000. This represented
an increase of $5.4 million, or 24.33 %, compared to pre-tax operating earnings
of $22.1 million for the first six months of 1999. For the second quarter of
2000, pre-tax operating earnings totaled $14.1 million. This represented an
increase of $2.7 million, or 23.49%, from pre-tax operating earnings of $11.4
million for the second quarter of 1999.
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. The Company's net interest income, interest spread, and net
interest margin are sensitive to general business and economic conditions. These
conditions include short-term and long-term interest rates, inflation, monetary
supply, and the strength of the economy, in general, and the local economics in
which the Company conducts business.
For the six months ended June 30, 2000, net interest income was $46.7
million. This represented an increase of $3.3 million, or 7.56%, over net
interest income of $43.5 million for the six months ended June 30, 1999.
Although net interest income increased, the net interest margin decreased to
5.27% for the six months ended June 30, 2000, compared to 5.33% for the six
months ended June 30, 1999. Also, the net interest spread decreased to 3.85% for
the six months ended June 30, 2000, compared to a spread of 4.10% for the six
months ended June 30, 1999. The increase in net interest income for the most
recent six month period was primarily the result of an increased volume of
average earning assets and an increase in the yield on earning assets. Gross
earning assets averaged $1.9 billion for the first six months of 2000. This
represented an increase of $191.7 million, or 11.48%, compared to average
earning assets of $1.7 billion for the first six months of 1999. The decrease in
net interest spread from 4.10% for the six months ended June 30, 1999 to 3.85%
for the six months ended June 30, 2000 was the result of interest earning assets
increasing 50 basis points, while interest bearing liabilities increased 75
basis points.
The cost of interest bearing liabilities was 4.17% for the first six
months of 2000 compared to 3.42% for the same period last year, an increase of
75 basis points. The yield on earning assets was 8.02% for the first six months
of 2000 compared to 7.52% for the same period last year, an increase of 50 basis
points.
For the second quarter of 2000, net interest income was $23.5 million.
This represented an increase of $1.5 million, or 6.68%, compared to $22.1
million for the second quarter of 1999. The net interest margin was 5.22% during
the second quarter of 2000 compared to 5.39% for the same period last year. The
net interest spread was 3.79% during the second quarter of 2000 compared to
4.17% for the second quarter of 1999. The decrease in the net interest margin
and net interest spread resulted as the yield on average earning assets
increased less than the increase in the cost of interest-bearing liabilities.
The Company reported total interest income of $72.6 million for the six
months ended June 30, 2000. This represented an increase of $10.9 million, or
17.63%, over total interest income of $61.8 million for the six months ended
June 30, 1999. The increase reflected the greater volume of earning assets and
an increase in yield noted above.
The increase in the yield on average earning assets resulted from
higher yields on average loans and investments. The yield on average loans
increased to 9.09% for the six months ended June 30, 2000, from a yield of 8.91%
for the first six months of 1999. The yield (FTE) on average investments
increased to 6.90% for the first six months of 2000, from a yield (FTE) of 6.18%
for the first six months of 1999. Loans typically generate higher yields than
investments. Accordingly, the higher the loan portfolio is as a percentage of
earning assets, the higher the yield on earning assets. For the six months ended
June 30, 2000, average loans represented 51.23% of average earning assets,
compared to 50.66% for the six months ended June 30, 1999.
The interest expense for the six months ended June 30, 2000 increased
when compared to the same periods for 1999. Interest expense totaled $25.9
million for the six months ended June 30, 2000. This represented an increase of
$7.6 million, or 41.55%, over total interest expense of $18.3 million for the
six months ended June 30, 1999.
10
<PAGE>
The increase in interest expense reflected an increase in the average
volume of interest-bearing liabilities and an increase in the cost of funds.
Average interest-bearing liabilities were $1.2 billion for the first six months
of 2000. This represented an increase of $172.9 million, or 16.16%, from average
interest-bearing liabilities of $1.1 billion for the first six months of 1999.
For the three months ended June 30, 2000, interest expense totaled
$13.8 million. This represented an increase of $4.8 million, or 52.91% over
interest expense of $9.0 million for the same period last year. The increase in
interest expense reflected an increase in the cost of funds.
Average interest-bearing deposits totaled $855.3 million for the six
months ended June 30, 2000. This represented an increase of $6.2 million, or
0.73%, over average interest-bearing deposits of $849.0 million for the six
months ended June 30, 1999.
Other borrowed funds averaged $375.4 million for the six months ended
June 30, 2000. This represented an increase of $160.9 million, or 75.03%, over
average other borrowed funds of $214.5 million for the six months ended June 30,
1999.
Average interest-bearing deposits totaled $859.2 million for the three
months ended June 30, 2000. This represented a decrease of $1.3 million, or
0.15%, over average interest-bearing deposits of $860.5 million for the three
months ended June 30, 1999.
Other borrowed funds averaged $397.9 million for the three months ended
June 30, 2000. This represented an increase of $196.5 million, or 97.52%, over
average other borrowed funds of $201.5 million for the three months ended June
30, 1999.
The cost of average interest-bearing liabilities increased to 4.17% for
the six months ended June 30, 2000, compared to a cost of 3.42% for the first
six months of 1999. The increase in the cost of interest-bearing liabilities was
primarily the result of an increase in the interest rate environment. The cost
of average interest bearing deposits was 3.36% for the first six months of 2000
as compared to 2.96% for the first six months of 1999. The cost of other
borrowed funds increased to 5.94% for the six months ended June 30, 2000,
compared to a cost of 5.20% for the six months ended June 30, 1999.
A higher interest rate environment would increase the Company's cost to
borrow funds and increase the rate paid on deposits, which more than offset, in
the net interest margin and interest spread, the increase in rates earned by the
Company on new or floating rate loans or investments.
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, 2000, and 1999. Rates for tax-preferenced
investments are shown on a taxable equivalent basis using a 40.3% tax rate.
11
<PAGE>
TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differentials
(dollars in thousands)
<TABLE>
<CAPTION>
Six-month periods ended June 30,
2000 1999
---------------------------------------------------------------------------
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
---------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Securities
Taxable $ 719,336 $ 24,180 6.72% $ 665,119 $ 20,450 6.15%
Tax-advantaged (1) 188,691 5,095 7.42% 115,672 2,613 6.34%
Federal Funds Sold & Interest-bearing
deposits with other financial institutions 77 2 5.19% 43,249 990 4.58%
Loans (2) (3) 953,788 43,369 9.09% 846,166 37,704 8.91%
---------------------------------------- ---------------------------------
Total Earning Assets 1,861,892 $ 72,646 8.01% 1,670,206 $ 61,757 7.52%
============= ==========
Total Non-earning Assets 158,523 146,894
-------------- --------------
Total Assets $ 2,020,415 $ 1,817,100
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits $ 598,709 $ 579,787
Savings Deposits (4) 518,894 6,074 2.34% 522,687 5,179 1.98%
Time Deposits 336,364 8,312 4.94% 326,358 7,377 4.52%
-------------------------------------- -----------------------------------
Total Deposits 1,453,967 14,386 1.98% 1,428,832 12,556 1.76%
-------------------------------------- -----------------------------------
Other Borrowings 387,916 11,520 5.94% 221,199 5,746 5.20%
-------------------------------------- -----------------------------------
Total Interest-Bearing Liabilities 1,243,174 $ 25,906 4.17% 1,070,244 $ 18,302 3.42%
------------ ============= -------------- ==========
Other Liabilities 29,293 22,962
Stockholders' Equity 149,239 144,107
------------ --------------
Total Liabilities and
Stockholders' Equity $ 2,020,415 $ 1,817,100
============ ==============
Net interest spread 3.84% 4.10%
Net interest margin 5.23% 5.33%
<FN>
(1) Yields are calculated on a taxable equivalent basis.
(2) Loan fees are included in total interest income as follows: 2000, $1,879;
1999, $1,637.
(3) Nonperforming loans are included in loans as follows: 2000, $1,022; 1999,
$6,095.
(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 interest earning assets and
interest-bearing liabilities, information is provided with respect to changes
attributable to (1) changes in volume (change in volume multiplied by initial
rate), (2) changes in rate (change in rate multiplied by initial volume) and (3)
changes in rate/volume (change in rate multiplied by change in volume).
TABLE 2 - Rate and Volume Analysis for Changes in Interest Income, Interest
Expense and Net Interest Income
(amounts in thousands)
<TABLE>
<CAPTION>
Comparison of six-month period
ended June 30, 2000 and 1999
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 $ 1,667 $ 1,908 $ 155 $ 3,730
Tax-advantaged securities 1,649 510 323 2,482
Fed funds sold & interest bearing
deposits with other institutions (989) 547 (546) (988)
Loans 4,796 771 98 5,665
-------------------------------------------------------------
Total earning assets 7,123 3,736 30 10,889
-------------------------------------------------------------
Interest Expense:
Savings deposits (37) 939 (7) 895
Time deposits 226 688 21 935
Other borrowings 4,331 823 620 5,774
-------------------------------------------------------------
Total interest-bearing liabilities 4,520 2,450 634 7,604
-------------------------------------------------------------
Net Interest Income $ 2,603 $ 1,286 $ (604) $ 3,285
=============================================================
</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 investment payments and maturities which are
scheduled in approximately equal increments over time. 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 investment
portfolios relatively short. Options risk in the investment portfolio is
monitored monthly and actions are recommended when appropriate.
13
<PAGE>
Both the net interest spread and the net interest margin are largely
affected by interest rate changes in the market place and the Company's ability
to reprice assets and liabilities as these 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,
2000.
Estimated Net
Simulated Interest Income
Rate Changes Sensitivity
+200 basis points (2.26%)
-200 basis points 4.05%
The table indicates that net interest income would decrease by
approximately 2.26% 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 4.05% over a 12 month period if there was a
sustained, parallel and pro rata 200 basis point downward shift in interest
rates. The ability to reprice assets and liabilities as interest rates change is
effected by the mix between fixed rate and floating rate assets and liabilities.
In addition, the maturity schedule of fixed rate assets and liabilities also
impacts the ability to reprice.
Credit Loss Experience
The allowance for credit losses is based upon estimates of probable
losses inherent in the loan and lease portfolio. The amount of credit losses
actually incurred can vary significantly from the estimated amounts. The
Company's methodology includes several features which are intended to reduce the
differences between estimated and actual losses.
Implicit in lending activities is the risk that losses will occur and
that the amount of such losses will vary over time. Consequently, the Company
maintains an allowance for credit losses by charging a provision for credit
losses to earnings. Loans determined to be losses are charged against the
allowance for credit losses. The Company's allowance for credit losses is
maintained at a level considered by the Bank's management to be adequate to
provide for estimated losses inherent in the existing portfolio, including
commitments under commercial and standby letters of credit.
The Company's methodology for assessing the appropriateness of the
allowance consists of several key elements, which include the formula allowance,
specific allowances for identified problem loans and portfolio segments, and the
unallocated allowance. In addition, the allowance incorporates the results of
measuring impaired loans as provided in Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." These accounting standards prescribe the
measurement methods, income recognition and disclosures related to impaired
loans.
14
<PAGE>
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a credit that
management believes indicates the probability that a loss has been incurred in
excess of the amount determined by the application of the formula allowance.
Management performs a detailed analysis of these loans, including, but
not limited to, appraisals of the collateral, conditions of the marketplace for
liquidating the collateral and assessment of the guarantors. Management then
determines the loss potential and allocates a portion of the allowance for
losses as a specific allowance for each of these credits.
The unallocated allowance is based upon management's evaluation of
various conditions, the effects of which are not directly measured in the
determination of the formula and specific allowances. The evaluation of the
inherent loss with respect to these conditions is subject to a higher degree of
uncertainty because they are not identified with specific problem credits or
portfolio segments. The conditions evaluated in connection with the unallocated
allowance include the following conditions that existed as of the balance sheet
date:
o then-existing general economic and business conditions affecting the
key lending areas of the Company,
o then-existing economic and business conditions of areas outside the
lending areas, such as other sections of the United States, Asia and
Latin America,
o credit quality trends (including trends in non-performing loans expected
to result from existing conditions),
o collateral values,
o loan volumes and concentrations,
o seasoning of the loan portfolio,
o specific industry conditions within portfolio segments,
o recent loss experience in particular segments of the portfolio,
o duration of the current business cycle,
o bank regulatory examination results, and
o findings of the Company's internal credit examiners.
Management reviews these conditions in discussion with the Company's
senior credit officers. To the extent that any of these conditions is evidenced
by a specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's estimate of the effect of such condition may be
reflected as a specific allowance applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the probable loss related to such condition is
reflected in the unallocated allowance.
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 $1.6 million for the six months
ended June 30, 2000, as compared to $1.2 million for the same period of 1999, an
increase of $410,000, or 34.45%.
15
<PAGE>
The allowance for credit losses at June 30, 2000 was $18.2 million. This
represented an increase of $2.2 million, or 13.72%, from the allowance for
credit losses of $16.0 million at June 30, 1999. The allowance for credit losses
was 1.91% of average gross loans for the first six months of 2000 and 1.89% of
average gross loans for the first six months of 1999. For the six months ended
June 30, 2000, net loan charge offs totaled $174,000, compared to net loan
charge offs of $53,000 for the first six months of 1999.
Non-performing loans, which include non-accrual loans, loans past due
90 or more days and still accruing, and restructured loans were $1.0 million at
June 30, 2000. This represented a decrease of $172,000, or 14.41%, from the
level of non-performing loans at December 31, 1999. Non-performing assets, which
include non-performing loans plus other real estate owned (foreclosed property)
totaled $1.5 million at June 30, 2000. This represented a decrease of $356,000,
or 18.77%, from non-performing assets of $1.9 million at December 31, 1999.
Table 6 presents non-performing assets as of June 30, 2000, and December 31,
1999. 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, 2000 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.
16
<PAGE>
TABLE 3 - Summary of Credit Loss Experience
(amounts in thousands)
<TABLE>
<CAPTION>
Six-months
ended June 30,
----------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Amount of Total Loans at End of Period $ 991,386 $ 864,932
============== ==============
Average Total Loans Outstanding $ 953,788 $ 846,166
============== ==============
Allowance for Credit Losses at Beginning of Period $ 16,761 $ 14,888
Loans Charged-Off:
Real Estate Loans 186 40
Commercial and Industrial 73 118
Consumer Loans 4 7
-------------- --------------
Total Loans Charged-Off 263 165
-------------- --------------
Recoveries:
Real Estate Loans 6 2
Commercial and Industrial 83 107
Consumer Loans 0 3
-------------- --------------
Total Loans Recovered 89 112
-------------- --------------
Net Loans Charged-Off 174 53
-------------- --------------
Provision Charged to Operating Expense 1,600 1,190
-------------- --------------
Allowance for Credit Losses at End of period $ 18,187 $ 16,025
============== ==============
Net Loans Charged-Off to Average Total Loans* 0.04% 0.01%
Net Loans Charged-Off to Total Loans at End of Period* 0.04% 0.01%
Allowance for Credit Losses to Average Total Loans 1.91% 1.89%
Allowance for Credit Losses to Total Loans at End of Period 1.83% 1.85%
Net Loans Charged-Off to Allowance for Credit Losses* 1.91% 0.66%
Net Loans Charged-Off to Provision for Credit Losses 10.88% 4.45%
* Net Loan Charge-Off amounts are annualized.
</TABLE>
17
<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 $9.1 million for the six months ended
June 30, 2000. This represented a decrease of $600,000, or 5.50%, from other
operating income of $9.7 million for the six months ended June 30, 1999. The
decrease was primarily the result of lower other fees and charges, increased
loss on the sale of securities, lower gain on the sale of other real estate
owned, and lower service charges. For the three months ended June 30, 2000,
other operating income totaled $4.4 million, a decrease of $800,000, or 14.36%,
from $5.2 million for the same three month period ended June 30, 1999. The
decrease was primarily the result of lower service charge income, lower other
fees and charges, and lower gain on the sale of other real estate owned.
Service charge income totaled $5.2 million for the first six months
ended June 30, 2000. This represents a decrease of $48,000, or 0.92%, over
service charge income of $5.2 million for the six months ended June 30, 1999.
For the three months ended June 30, 1999, service charge income totaled $2.6
million, a decrease of $179,000, or 6.55%, from $2.7 million for the same three
month period ended June 30, 1999.
Trust income totaled $2.0 million for the six months ended June 30,
2000. This represented an increase of $86,000, or 4.45%, over trust income of
$1.9 million for the six months ended June 30, 1999. For the three months ended
June 30, 2000, trust income totaled $969,000, an increase of $75,000, or 8.44%,
from $894,000 for the same three month period ended June 30, 1999.
Other fees and charges totaled $3.9 million for the first six months
ended June 30, 2000. This represents a decrease of $229,000 or 5.60%, over other
fees and charges of $4.1 million for the six months ended June 30, 1999. For the
three months ended June 30, 2000, other fees and charges totaled $1.9 million, a
decrease of $160,000, or 7.61%, from $2.1 million for the same three month
period ended June 30, 1999.
Gain on the sale of other real estate owned totaled $223,000 for the
six months ended June 30, 2000. This represents a decrease of $125,000 or
35.78%, over the gain on the sale of other real estate owned of $348,000 for the
six months ended June 30, 1999. For the three months ending June 30, 2000, there
was no gain/loss on the sale of other real estate owned. For the three months
ending June 30, 1999, the gain on the sale of other real estate owned totaled
$348,000.
18
<PAGE>
Other Operating Expenses
Other operating expenses totaled $28.3 million for the six months ended
June 30, 2000. This represented a decrease of $2.5 million, or 8.12%, over other
operating expenses of $30.8 million for the six months ended June 30, 1999. For
the three months ended June 30, 2000, other operating expenses totaled $13.9
million. This compares with $15.6 million for the same period last year, a
decrease of $1.7 million, or 10.69%.
Salaries and employee benefits totaled $14.9 million for the first six
months of 2000. This represented a decrease of $274,000, or 1.81%, from salaries
and employee benefits of $15.1 million for the same period last year. Equipment
expense totaled $2.5 million for the six months ended June 30, 2000. This
represents a decrease of $144,000, or 5.47%, over equipment expense of $2.6
million for the six months ended June 30, 1999. Occupancy expense totaled $2.7
million for the six months ended June 30, 2000. This represents an increase of
$103,000, or 4.00%, over occupancy expense of $2.6 million for the same period
last year. Professional expense, which includes legal and accounting expenses
totaled $1.9 million for the first six months ended June 30, 2000. This
represents a decrease of $1.1 million, or 38.12%, over professional expense of
$3.0 million for the six months ended June 30, 1999. Other expense, which
includes data processing, supplies, promotional, and other expenses, totaled
$6.2 million for the first six months ended June 30, 2000. This represents a
decrease of $1.1 million, or 14.67%, over other expense of $7.3 million for the
first six months of 1999. The reduction in other operating expense resulted from
economies of scale derived from the merger with Orange National Bancorp.
For the three months ended June 30, 2000, salary expenses totaled $7.3
million. This compares with $7.6 million for the same period last year, a
decrease of $300,000, or 3.22%. Equipment expense totaled $1.2 million for the
three months ended June 30, 2000. This represents a decrease of $161,000, or
11.67%, over equipment expense of $1.4 million for the three months ended June
30, 1999. Occupancy expense totaled $1.3 million for the three months ended June
30, 2000. This represents an increase of $45,000, or 3.60%, over occupancy
expense of $1.2 million for the same period last year. Professional expense,
which includes legal and accounting expenses totaled $739,000 for the three
months ended June 30, 2000. This represents a decrease of $914,000, or 55.31%,
over professional expense of $1.7 million for the three months ended June 30,
1999. Other expense, which includes data processing, supplies, promotional, and
other expenses, totaled $3.3 million for the three months ended June 30, 2000.
This represents a decrease of $404,000, or 11.04%, over other expense of $3.7
million for the three months ending June 30, 1999. The reduction in other
operating expenses resulted from economies of scale derived from the merger with
Orange National Bancorp.
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, 2000, there was no additional
provision made for other real estate owned. At June 30, 2000 the allowance for
potential losses on other real estate owned was $116,000, or 18.20%, of the
$635,000 in other real estate owned.
As a percent of average assets, annualized other operating expenses
decreased to 2.80% for the six months ended June 30, 2000, compared to a ratio
of 3.39% for the six months ended June 30, 1999. 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 50.57% for the six months ended June 30, 2000, compared to a
ratio of 57.90% for the six months ended June 30, 1999. The decrease in the
efficiency ratio indicates that the Company is allocating a lower percentage of
net revenue to operating expenses.
19
<PAGE>
BALANCE SHEET ANALYSIS
The Company reported total assets of $2.11 billion at June 30, 2000.
This represented an increase of $100.1 million, or 4.98%, over total assets of
$2.01 billion at December 31, 1999. Gross loans, net of deferred loan fees,
totaled $991.4 million at June 30, 2000. This represented an increase of $38.8
million, or 4.08%, over gross loans of $952.6 million at December 31, 1999.
Total deposits decreased $23.3 million, or 1.55%, to $1.48 billion at June 30,
2000, from $1.50 billion at December 31, 1999. Investment Securities and Debt
Securities Available-for-Sale totaled $955.6 million at June 30, 2000. This
represented an increase of $78.3 million, or 8.92%, over total investment
securities of $877.3 million at December 31, 1999. At June 30, 2000, the
Company's net unrealized loss on securities available-for-sale totaled $28.6
million. Accumulated other comprehensive loss totaled $16.5 million, and
deferred tax assets totaled $12.1 million. At December 31, 1999, the Company
reported a net unrealized loss on investment securities available for sale of
$28.4 million, with accumulated other comprehensive loss of $16.4 million and
deferred taxes of $12.0 million. Note 2 of the Notes to the Consolidated
Financial Statements in the Company's 1999 Annual Report on Form 10-K discusses
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 available-for-sale, at June
30, 2000 and December 31, 1999.
Table 4 - Composition of Securities Portfolio
(dollars in thousands)
<TABLE>
<CAPTION>
----------------------------------------- ------------------------------------------
June 30, 2000 December 31, 1999
----------------------------------------- ------------------------------------------
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 $ 999 $ 988 $ (11) 5.91% $ 999 $ 991 $ (8) 5.91%
FHLMC, FNMA CMO's, REMIC's
and mortgage-backed pass-through securities
Available for Sale 630,345 605,557 (24,788) 6.55% 608,007 586,036 (21,971) 6.45%
Other Government Agency Securities
Available for Sale 23,684 23,248 (436) 6.11% 35,392 34,882 (510) 6.02%
GNMA mortgage-backed pass-through
securities
Available for Sale 56,498 54,917 (1,581) 6.81% 57,907 56,201 (1,706) 6.68%
Tax-exempt Municipal Securities
Available for Sale 241,333 239,625 (1,708) 5.57% 165,137 160,946 (4,191) 5.21%
Corporate Bond
Available for Sale 9,538 9,417 (121) 7.05% 9,536 9,493 (43) 7.05%
Other securities
Available for Sale 21,834 21,834 0 0.00% 28,783 28,783 0 0.00%
------------------------------------------- ----------------------------------------
$984,231 $ 955,586 $ (28,645) 6.31% $905,761 $877,332 $(28,429) 6.22%
=========================================== ========================================
</TABLE>
20
<PAGE>
Loan Composition and Non-performing 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>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Commercial and Industrial $395,364 $392,094
Real Estate:
Construction 49,109 48,078
Mortgage 404,672 375,387
Consumer 24,343 24,731
Municipal lease finance receivales 26,004 21,268
Agribusiness 95,382 94,560
----------------- ----------------
Gross Loans $994,874 $956,118
Less:
Allowance for credit losses 18,187 16,761
Deferred net loan fees 3,488 3,566
----------------- ----------------
Net Loans $973,199 $935,791
================= ================
</TABLE>
As set forth in Table 6, non-performing assets (non-accrual loans,
loans 90 days or more past due and still accruing interest, restructured loans,
and other real estate owned) totaled $1.5 million at June 30, 2000. This
represented a decrease of $356,000, or 18.77%, from non-performing assets of
$1.9 million at December 31, 1999. As a percent of total assets, non-performing
assets were unchanged at 0.09% on June 30, 2000, and 0.09% on December 31, 1999.
Although management believes that non-performing 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.
21
<PAGE>
TABLE 6 - Non-performing Assets (dollar amount in thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
<S> <C> <C>
Non-accrual loans $611 $1,191
Loans past due 90 days or more
and still accruing interest 411 3
Restructured loans 0 0
Other real estate owned (OREO), net 519 703
------------- ------------
Total non-performing assets $1,541 $1,897
============= ===========
Percentage of non-performing assets
to total loans outstanding and OREO 0.16% 0.20%
Percentage of non-performing
assets to total assets 0.07% 0.09%
</TABLE>
The decrease in non-performing assets was primarily the result of a
decrease in non-accrual loans and other real estate owned (OREO) which was
partially offset by an increase in loans 90 days or more and still accruing
interest. Non-accrual loans totaled $611,000 at June 30, 2000. This represented
a decrease of $580,000, or 48.70%, from total non-accrual loans of $1.2 million
at December 31, 1999.
At June 30, 2000, the majority of non-accrual loans were collateralized
by real property. The estimated loan balances to the fair value of related
collateral (loan-to-value ratio) for non-accrual loans ranged from approximately
14% to 93%.
Loans 90 days or more and still accruing interest totaled $411,000 at
June 30, 2000. This represents an increase of $408,000 or 136.00%, over loans 90
days or more past due and still accruing interest of $3 at December 31, 1999.
Other real estate owned (OREO) totaled $519,000 at June 30, 2000. This
represents a decrease of $184,000 or 26.17%, from OREO of $703,000 at December
31, 2000.
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.
22
<PAGE>
Deposits and Other Borrowings
At June 30, 2000, total deposits were $1.48 billion. This represented a
decrease of $23.3 million, or 1.55%, from total deposits of $1.50 billion at
December 31, 1999. Demand deposits totaled $624.9 million at June 30, 2000,
representing a decrease of $24.9 million, or 3.84%, from total demand deposits
of $649.8 million at December 31, 1999. 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 2000
were $598.7 million. This represented an increase of $18.9 million, or 3.26%,
from average demand deposits of $579.8 million for the first six months of 1999.
The comparison of average balances for the first six months of 2000 and 1999 is
more representative of the Company's growth in deposits as it excludes the
seasonal peak in deposits at year end.
Savings deposits totaled $501.4 million at June 30, 2000. This
represents a decrease of $19.6 million, or 3.76%, from savings deposits of
$521.0 million at December 31, 1999.
Time deposits totaled $351.5 million at June 30, 2000. This represented
an increase of $21.2 million, or 6.42%, over total time deposits of $330.3
million at December 31, 1999. Time deposits are not affected by the Company's
seasonal fluctuation in demand deposits.
Other borrowed funds totaled $438.0 million at June 30, 2000. This
represented an increase of $115.0 million, or 35.60% over other borrowed funds
of $323.0 million at December 31, 1999. The increase in other borrowed funds
during the first six months of 2000 was primarily the result of an increase
Federal Home Loan Bank borrowing.
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 investments 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, purchase of assets, and other operating expenses.
23
<PAGE>
Net cash provided by operating activities totaled $28.7 million for the
first six months of 2000, compared to net cash provided by operating activities
of $17.4 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 $123.3 million for the
first six months of 2000, compared to net cash used for investing activities of
$46.5 million for the same period last year. The increase in net cash used by
investing activities was primarily the result of additional purchases of
investment securities. Financing activities provided net cash flows of $79.6
million for the six months ended June 30, 2000. This compares to $8.5 million in
net cash provided by financing activities for the six months ended June 30,
1999. The increase in net cash provided by financing activities was primarily
the result of additional short-term borrowings. At June 30, 2000, cash and cash
equivalents totaled $103.4 million compared to $154.4 million at June 30, 1999.
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 2000, the Bank's average net loan to deposit ratio
averaged 64.40%, compared to an average ratio of 58.14% for the first six months
of 1999.
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, 2000, approximately $58.7 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, 2000, neither the Bank nor CVB had any
material commitments for capital expenditures.
Capital Resources
The Company's equity capital was $153.1 million at June 30, 2000. The
primary source of capital for the Company continues to be the retention of net
after tax earnings. The Company's 1999 Annual Report on Form 10-K (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 their 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, 2000, the Bank and the
Company exceeded the minimum risk-based capital ratio and leverage ratio
required to be considered "Well Capitalized".
24
<PAGE>
Table 7 below presents the Company's and the Bank's risk-based and
leverage capital ratios as of June 30, 2000, and December 31, 1999.
Table 7 - Regulatory Capital Ratios
<TABLE>
<CAPTION>
Required
Minimum June 30, 2000 December 31, 1999
Capital Ratios Ratios Company Bank Company Bank
-------------- ------ ------- ---- ------- ----
<S> <C> <C> <C> <C> <C>
Risk-based capital ratios
Tier I 4.00% 13.10% 13.12% 12.60% 12.33%
Total 8.00% 14.36% 14.38% 13.86% 13.59%
Leverage ratio 4.00% 7.91% 7.91% 7.73% 7.56%
</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, was
faced with year 2000 issues. These issues centered around computer programs that
do not recognize a year which begins with "20" instead of "19", or uses only 2
digits for the year.
As of December 31, 1999, all phases of Year 2000 Plan were complete. As
of June 30, 2000, the Company experienced no problems with Year 2000 issues. The
Company will continue to monitor critical dates throughout the Year 2000. It is
not anticipated that there will be any problems from Year 2000 issues.
25
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
CVB Financial has received a tentative opinion on the
disposition of the MRI Grand Terrace, Inc. ("MRI") litigation
from the California Appellate Court indicating that the
verdict of the lower court should be reversed and remanded to
the lower court for re-trial. At this time, the appellate
court is preparing to hear oral arguments before it renders
its final decision. Until a decision is final, the funds
placed in reserve for this case will not be released. If the
case goes to a new trial, final resolution could take several
years.
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 was held May 17, 2000. At
the meeting, the following individuals were elected to serve
as the Company's Board of Directors until the 2001 Annual
Meeting of Shareholders and until their successors are elected
and have qualified:
Against or Broker
For Withheld Abstained Non-Votes
George A. Borba 20,556,528 170,164 -0- -0-
John A. Borba 20,662,113 64,579 -0- -0-
Ronald O. Kruse 20,662,545 64,147 -0- -0-
John J. LoPorto 20,661,337 65,355 -0- -0-
James C. Seley 20,662,545 64,147 -0- -0-
San Vaccaro 20,662,525 64,167 -0- -0-
D. Linn Wiley 20,556,548 70,144 -0- -0-
26
<PAGE>
The appointment of Deloitte & Touche LLP as independent public
accountants of the Company for the year ended December 31,
2000 was ratified at the 2000 Annual Meeting of Shareholders
by the following:
Against or Broker
For Withheld Abstained Non-Votes
20,551,815 5,744 169,133 -0-
The approval of CVB Financial Corp. 2000 Stock Option Plan was
ratified at the 2000 Annual Meeting of Shareholders by the
following:
Against or Broker
For Withheld Abstained Non-Votes
15,418,680 1,188,848 323,462 3,708,472
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
27
<PAGE>
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 30
28
<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 9, 2000 /s/ Edward J. Biebrich, Jr.
---------------------------
Edward J. Biebrich, Jr.
Chief Financial Officer
29
<PAGE>
