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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
For Quarter Ended September 30, 1998 Commission File Number: 1-10394
CVB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
California 95-3629339
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
701 North Haven Ave, Suite 350, Ontario, California 91764
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (909) 980-4030
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Number of shares of common stock of the registrant: 15,027,068 outstanding as of
October 31, 1998.
This Form 10-Q contains 31 pages. Exhibit index on page 29.
PART I - FINANCIAL INFORMATION
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
dollar amounts in thousands
September 30, December 31,
1998 1997
(unaudited)
ASSETS
Investment securities held-to-maturity
(market values of $59,021 and $59,658) $ 56,779 $ 58,044
Investment securities available-for-sale 639,798 434,106
Loans and lease finance receivables, net 621,999 605,484
---------- ----------
Total earning assets 1,318,576 1,097,634
Cash and due from banks 78,146 107,725
Premises and equipment, net 21,364 23,415
Other real estate owned, net 1,285 4,395
Goodwill and intangibles 9,931 10,818
Other assets 12,315 14,782
---------- ----------
TOTAL $1,441,617 $1,258,769
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 457,334 $ 469,841
Interest-bearing 666,481 605,854
---------- ----------
1,123,815 1,075,695
Demand note issued to U.S. Treasury 9,776 7,922
Federal Funds Purchased 40,000 4,000
Repurchase Agreement 135,000 45,000
Securities purchased not settled 1,625 10,300
Long-term capitalized lease 409 429
Other liabilities 16,390 13,339
---------- ----------
1,327,015 1,156,685
Stockholders' Equity:
Preferred stock (authorized, 20,000,000 shares
without par; none issued or outstanding) 0 0
Common stock (authorized, 50,000,000 shares
without par; issued and outstanding
15,025,100 and 14,974,732) 62,302 62,255
Retained earnings 48,155 39,057
Accumulated other comprehensive income 4,145 772
---------- ----------
114,602 102,084
---------- ----------
TOTAL $1,441,617 $1,258,769
========== ==========
See accompanying notes to the consolidated financial statements.
2
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
dollar amounts in thousands, except per share
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
------- ------- ------- -------
Interest income:
Loans, including fees $15,109 $14,759 $45,288 $42,935
Investment securities:
Taxable 8,354 6,160 22,621 17,146
Tax-advantaged 1,146 627 3,166 1,775
------- ------- ------- -------
9,500 6,787 25,787 18,921
Federal funds sold and interest bearing
deposits with other financial institutions 214 126 462 219
------- ------- ------- -------
24,823 21,672 71,537 62,075
Interest expense:
Deposits 6,260 5,427 17,976 15,139
Other borrowings 2,071 965 5,015 3,116
------- ------- ------- -------
8,331 6,392 22,991 18,255
------- ------- ------- -------
Net interest income 16,492 15,280 48,546 43,820
Provision for credit losses 600 915 1,900 1,970
------- ------- ------- -------
Net interest income after
provision for credit losses 15,892 14,365 46,646 41,850
Other operating income:
Service charges on deposit accounts 1,936 1,839 5,524 5,469
Gains on sale of securities 199 18 224 14
Gains on sale of other real estate owned 59 32 110 86
Gains on sale of premises and equipment 0 0 652 27
Trust services 831 782 2,603 2,349
Other 649 786 2,026 2,406
------- ------- ------- -------
3,674 3,457 11,139 10,351
Other operating expenses:
Salaries and employee benefits 5,645 5,312 16,795 16,423
Deposit insurance premiums 33 28 94 85
Occupancy 883 884 2,855 2,570
Equipment 1,063 817 2,868 2,561
Provision for losses on
other real estate owned 0 480 500 1,675
Other 3,593 3,140 10,669 9,733
------- ------- ------- -------
11,217 10,661 33,781 33,047
------- ------- ------- -------
Earnings before income taxes 8,349 7,161 24,004 19,154
Provision for income taxes 3,067 2,376 8,880 7,269
------- ------- ------- -------
Net earnings $ 5,282 $ 4,785 $15,124 $11,885
======= ======= ======= =======
Basic earnings per common share $ 0.35 $ 0.32 $ 1.00 $ 0.79
======= ======= ======= =======
Diluted earnings per common share $ 0.34 $ 0.31 $ 0.96 $ 0.76
======= ======= ======= =======
Cash dividends per common share $ 0.10 $ 0.07 $ 0.30 $ 0.20
======= ======= ======= =======
See accompanying notes to the consolidated financial statements.
3
CVB FINANCIAL CORP. AND SUBSIDIARIES
STATEMENT OF CHANGES IN EQUITY
(unaudited)
dollar amounts in thousands
Accumulated
Other
Comprehensive Retained Comprehensive Common
Total Income Earnings Income Stock
--------- ------------ ---------- -------------- --------
Beginning balance, January 1, 1997 $ 89,087 $27,341 ($ 196) $61,942
Comprehensive income
Net Income 17,370 $17,370 17,370
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see disclosure) 968 968 968
========
Comprehensive income $18,338
========
Common Stock issued 904 904
Repurchase of Common Stock (1,935) (1,344) (591)
Tax benefit from exercise of stock options 193 193
Dividends declared on common stock (4,503) (4,503)
--------- -------- ------- --------
Ending balance, December 31, 1997 $102,084 $39,057 $ 772 $62,255
--------- -------- ------- --------
Comprehensive income
Net Income 15,124 $15,124 15,124
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see disclosure) 3,373 3,373 3,373
========
Comprehensive income $18,497
========
Common Stock issued 423 423
Repurchase of Common Stock (1,884) (1,508) (376)
Dividends declared on common stock (4,518) (4,518)
========= ======== ======= ========
Ending balance, September 30, 1998 $114,602 $48,155 $ 4,145 $62,302
========= ======== ======= ========
Disclosure of reclassification amount
Unrealized holding gains arising during period,
net of tax effects of $711 $ 977
Less:
Reclassification adjustment for gains included in
net income, net of tax effects of $7 (9)
=========
Net unrealized gain on securities, December 31, 1997 $ 968
=========
Unrealized holding gains arising during period,
net of tax effects of $2,476 $ 3,503
Less:
Reclassification adjustment for gains included in
net income, net of tax effects of $94 (130)
=========
Net unrealized gains on securities, September 30, 1998 $ 3,373
=========
See accompanying notes to the consolidated financial statements.
4
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
dollar amounts in thousands
For the Nine Months
Ended September 30,
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 70,392 $ 59,538
Service charges and other fees received 10,915 10,337
Interest paid (21,339) (18,066)
Cash paid to suppliers and employees (29,852) (28,846)
Income taxes paid (8,555) (6,985)
------------- -------------
Net cash provided by operating activities 21,561 15,978
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 52,243 24,462
Proceeds from maturities of securities available for sale 94,244 52,027
Proceeds from maturities of securities held to maturity 1,217 1,617
Purchases of securities available for sale (354,243) (134,768)
Purchases of securities held to maturity (186) (8,195)
Net increase in loans (20,960) (24,069)
Proceeds from sale of premises and equipment 2,181 55
Purchase of premises and equipment (1,815) (1,297)
Other investing activities 6,185 8,485
------------- -------------
Net cash used in investing activities (221,134) (81,683)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in transaction deposits 24,492 (27,632)
Net increase in time deposits 23,628 55,573
Net increase (decrease) in short-term borrowings 127,854 (14,032)
Cash dividends on common stock (4,519) (3,007)
Stock repurchase (1,884) (1,935)
Proceeds from exercise of stock options 423 887
----------- -----------
Net cash provided by financing activities 169,994 9,854
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (29,579) (55,851)
CASH AND CASH EQUIVALENTS, beginning of period 107,725 142,502
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 78,146 $ 86,651
============= =============
See accompanying notes to the consolidated financial statements.
5
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
dollar amounts in thousands
For the Nine Months
Ended September 30
1998 1997
---------- ----------
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 15,124 $ 11,885
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Accretion of discount on investment securities (303) (653)
Provisions for loan and OREO losses 2,400 3,645
Depreciation and amortization 2,336 2,249
Change in accrued interest receivable (842) (13)
Change in accrued interest payable 1,652 190
Change in other assets and liabilities 1,194 (1,325)
---------- ----------
Total adjustments 6,437 4,093
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 21,561 $ 15,978
========== ==========
6
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 1998, and 1997
1. Summary of Significant Accounting Policies. See Note 1 of the Notes to
Consolidated Financial Statements in CVB Financial Corp.'s 1997 Annual
Report.
Goodwill resulting from purchase accounting treatment of acquired banks is
amortized on a straight line basis over 15 years.
The Bank accounts for impaired loans in accordance with Financial
Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures." Impaired
loans totaled $4.3 million at September 30, 1998. Of this total, $4.2
million, or 97.55%, represented loans that were supported by collateral
with a fair market value, net of prior liens, of $8.5 million. At September
30, 1998, $106,000, or 2.45%, of total impaired loans represented loans for
which repayment was projected to come from cash flows.
2. Certain reclassifications have been made in the 1997 financial
information to conform to the presentation used in 1998.
3. In the ordinary course of business, the Company enters into commitments
to extend credit to its customers. These commitments are not reflected in
the accompanying consolidated financial statements. As of September 30,
1998, the Company had entered into commitments with certain customers
amounting to $209.6 million compared to $153.7 million at December 31,
1997. Letters of credit at September 30, 1998, and December 31, 1997, were
$8.2 million and $7.9 million, respectively.
4. The interim consolidated financial statements are unaudited and reflect
all adjustments and reclassifications which, in the opinion of management,
are necessary for a fair statement of the results of operations and
financial condition for the interim period. All adjustments and
reclassifications are of a normal and recurring nature. Results for the
period ending September 30, 1998, are not necessarily indicative of results
which may be expected for any other interim period or for the year as a
whole.
5. The actual number of shares outstanding at September 30, 1998, was
15,025,100. Basic earnings per share are calculated on the basis of the
weighted average number of shares outstanding during the period. Diluted
earnings per share are calculated on the basis of the weighted average
number of shares outstanding during the period plus shares issuable upon
the assumed exercise of outstanding common stock options. All 1997 per
share information in the financial statements and in Management's
Discussion and Analysis has been restated to give retroactive effect to the
3-for-2 stock split which was effective January 2, 1998. The tables below
present the reconciliation of earnings per share for the periods indicated.
7
Earnings Per Share Reconciliation
For the Three Months
Ended September 30,
1998 1997
--------------------------------------- -----------------------------------------
Weighted Weighted
Income Average Shares Per Share Income Average Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
BASIC EPS
Income available to
common stockholders $ 5,282,244 15,043,788 $ 0.35 $ 4,785,482 14,962,445 $ 0.32
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 577,305 (0.01) 586,254 (0.01)
--------------------------------------- -----------------------------------------
DILUTED EPS
Income available to
common stockholders $ 5,282,244 15,621,093 $ 0.34 $ 4,785,482 15,548,699 $ 0.31
======================================= ========================================
Earnings Per Share Reconciliation
For the Nine Months
Ended September 30,
1998 1997
--------------------------------------- -----------------------------------------
Weighted Weighted
Income Average Shares Per Share Income Average Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
BASIC EPS
Income available to
common stockholders $15,123,940 15,051,511 $ 1.00 $11,885,005 14,982,129 $ 0.79
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 622,842 (0.04) 581,844 (0.03)
--------------------------------------- -----------------------------------------
DILUTED EPS
Income available to common
stockholders $15,123,940 15,674,353 $ 0.96 $11,885,005 15,563,973 $ 0.76
======================================= =========================================
6. Supplemental cash flow information. During the nine-month period ended
September 30, 1998, loans amounting to $2.5 million were transferred to
Other Real Estate Owned ("OREO") as a result of foreclosure on the real
properties held as collateral.
7. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years
beginning after June 15, 1999. This Statement establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. The Company does not believe that the adoption of SFAS No.
133 will have a material impact on its operations and financial
position.
8
CVB FINANCIAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis is written to provide greater insight
into the results of operations and the financial condition of CVB Financial
Corp. and its subsidiaries. For a more complete understanding of CVB Financial
Corp. and its operations, reference should be made to the financial statements
included in this report and in the Company's 1997 Annual Report on Form 10-K.
Certain statements in this Report on Form 10-Q constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 which
involve 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
and government regulations. For additional information concerning these factors,
see "Item 1. Business - Factors That May Affect Results" contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
Throughout this discussion, "Company" refers to CVB Financial Corp. and its
subsidiaries as a consolidated entity. "CVB" refers to CVB Financial Corp. as
the unconsolidated parent company, and "Bank" refers to Citizens Business Bank.
RESULTS OF OPERATIONS
The Company reported net earnings of $15.1 million for the nine months
ended September 30, 1998. This represented an increase of $3.2 million, or
27.25%, over net earnings of $11.9 million, for the nine months ended September
30, 1997. Basic earnings per share for the nine month period increased to $1.00
per share for 1998, compared to $0.79 per share for 1997. Diluted earnings per
share increased to $0.96 per share for the first nine months of 1998, compared
to $0.76 per share for the same nine month period last year. The annualized
return on average assets was 1.52% for the first nine months of 1998 compared to
a return on average assets of 1.39% for the nine months ended September 30,
1997. The annualized return on average equity was 18.50% for the nine months
ended September 30, 1998, compared to a return of 16.98% for the nine months
ended September 30, 1997.
For the third quarter of 1998, the Company generated net earnings of $5.3
million. This represented an increase of $497,000, or 10.38%, over earnings of
$4.8 million, for the third quarter of 1997. Basic earnings per share increased
to $0.35 per share for the most recent quarter, compared to $0.32 per share for
the third quarter of last year. Diluted earnings per share increased to $0.34
per share for the third quarter of 1998, compared to $0.31 per share for the
same three month period for 1997. The annualized return on average assets was
1.51% for the third quarter of 1998, compared to a return of 1.64% for the third
quarter of 1997. The annualized return on average equity was 18.72%, for the
third quarter of this year, compared to a return of 19.91%, for the same period
last year.
9
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 $26.1 million for the nine months ended September 30, 1998. This
represented an increase of $3.4 million, or 14.85%, compared to operating
earnings of $22.7 million for the first nine months of 1997. For the third
quarter of 1998, pre-tax operating earnings totaled $8.7 million. This
represented an increase of $185,000, or 2.17%, over pre-tax operating earnings
of $8.5 million for the third quarter of 1997.
Net Interest Income/Net Interest Margin
The principal component of the Company's earnings is net interest income,
which is the difference between the interest and fees earned on loans and
investments and the interest paid on deposits and other borrowed funds. When net
interest income is expressed as a percentage of average earning assets, the
result is the net interest margin. The net interest spread is the yield on
average earning assets minus the average cost of interest-bearing deposits and
borrowed funds.
For the nine months ended September 30, 1998, net interest income was $48.5
million. This represented an increase of $4.7 million, or 10.79%, over net
interest income of $43.8 million for the nine months ended September 30, 1997.
Although net interest income increased, the net interest margin decreased to
5.47% for the nine months ended September 30, 1998, compared to 5.93% for the
nine months ended September 30, 1997. In addition, the net interest spread
decreased to 3.99% for the nine months ended September 30, 1998, compared to a
spread of 4.61% for the nine months ended September 30, 1997.
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 $1.2 billion for the first nine months of 1998. This represented an
increase of $214.1 million, or 21.39%, compared to average earning assets of
$1.0 billion for the first nine months of 1997. The decrease in the net interest
margin for the nine months ended September 30, 1998 compared to the first nine
months of 1997 was the result of a lower yield on average earning assets. The
decrease in the net interest spread resulted as the yield on average earning
assets decreased and the cost of interest bearing liabilities increased.
Similarly, net interest income increased for the third quarter of 1998,
compared to the third quarter of 1997. For the third quarter of 1998, net
interest income totaled $16.5 million. This represented an increase of $1.2
million, or 7.93%, over net interest income of $15.3 million for the third
quarter of 1997. The increase in net interest income for the third quarter of
this year also resulted from an increased volume in average earning assets. For
the third quarter of 1998, earning assets, averaged $1.28 billion. This
represented an increase of $247.2 million, or 23.82%, over average earning
assets of $1.04 billion for the third quarter of 1997. The net interest margin
decreased to 5.28% for the third quarter of 1998, compared to a net interest
margin of 5.99% for the third quarter of 1997. Again, the decrease in the net
interest margin was the result of a lower yield on average earning assets. The
net interest spread decreased to 3.78% for the third quarter of 1998, compared
to a spread of 4.58% for the third quarter of 1997.
10
The Company reported total interest income of $71.5 million for the nine
months ended September 30, 1998. This represented an increase of $9.4 million,
or 15.24%, over total interest income of $62.1 million for the nine months ended
September 30, 1997. The increase reflected the greater volume of earning assets
noted above. The yield on average total earning assets decreased to 7.99% for
the nine months ended September 30, 1998, from a yield of 8.36% for the nine
months ended September 30, 1997.
The decrease in the yield on average earning assets resulted from lower
yields on average loans and a greater concentration of earning assets in
investments as opposed to loans. The yield on average loans decreased to 9.64%
for the nine months ended September 30, 1998, from a yield of 9.82% for the
first nine months of 1997. The 18 basis point decrease in average loan yields
primarily reflected increased price competition for loans. Loans typically
generate higher yields than investments. Accordingly, the higher the loan
portfolio is as a percentage of earning assets, the higher will be the yield on
earning assets. For the nine months ended September 30, 1998, loans represented
51.52% of average earning assets, compared to 58.20% for the nine months ended
September 30, 1997.
Similar trends were evident when comparing the third quarter of 1998 with
the third quarter of 1997. Total interest income was $24.8 million for the third
quarter of 1998. This represented an increase of $3.1 million, or 14.54% over
total interest income of $21.7 million for the third quarter of 1997. The yield
on average loans decreased to 9.53% for the third quarter of 1998, compared to a
10.00% yield for the third quarter of 1997. Average loans as a percent of
average earning assets decreased to 49.35% for the three months ended September
30, 1998, compared to 56.84% for the same period last year.
The increase in total interest income was partially offset by an increase
in interest expense for both the nine months and the quarter ended September 30,
1998 when compared to the same periods for 1997. Interest expense totaled $23.0
million for the nine months ended September 30, 1998. This represented an
increase of $4.7 million, or 25.94%, over total interest expense of $18.3
million for the nine months ended September 30, 1997. For the three months ended
September 30, 1998, interest expense totaled $8.3 million. This represented an
increase of $1.9 million, or 30.35% compared to the same period last year.
The increase reflected an increase in both the average volume and cost of
interest bearing liabilities. Average interest bearing liabilities were $766.6
million for the first nine months of 1998. This represented an increase of
$117.3 million, or 18.06%, from average interest bearing liabilities of $649.3
million for the first nine months of 1997.
The cost of average interest bearing liabilities increased to 4.00% for the
nine months ended September 30, 1998, compared to a cost of 3.75% for the first
nine months of 1997. The increase in the cost of interest bearing liabilities
was primarily the result of an increase in average time deposits and other
borrowed funds. Average time deposits totaled $277.1 million for the nine months
ended September 30, 1998. This represented an increase of $64.7 million, or
30.44%, over average time deposits of $212.4 million for the nine months ended
September 30, 1997. The cost of average time deposits was 5.23% for the first
nine months of 1998 and 1997.
11
Other borrowed funds averaged $121.1 million for the nine months ended
September 30, 1998. This represented an increase of $46.9 million, or 63.21%,
over average other borrowed funds of $74.2 million for the nine months ended
September 30, 1997. The cost of other borrowed funds decreased to 5.52% for the
nine months ended September 30, 1998, compared to a cost of 5.60% for the nine
months ended September 30, 1997.
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, 1998, and 1997. Rates for tax-preferenced
investments are shown on a taxable equivalent basis using a 35.0% tax rate.
12
TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differentials
(dollars in thousands)
Nine-month periods ended September 30,
1998 1997
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
Investment Securities
Taxable $ 483,222 22,621 6.24% $ 364,320 17,146 6.28%
Tax-advantaged (F1) 94,580 3,166 6.26% 48,793 1,775 6.81%
Federal Funds Sold & Interest-bearing
deposits with other financial institutions 11,370 462 5.42% 5,436 219 5.37%
Loans (F2) (F3) 626,225 45,288 9.64% 582,699 42,935 9.82%
------------------------------ ----------------------------
Total Earning Assets 1,215,397 71,537 7.99% 1,001,248 62,075 8.36%
Total Non-earning Assets 114,719 136,789
---------- ----------
Total Assets $1,330,116 $1,138,037
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits $ 431,994 $ 381,834
Savings Deposits (4) 368,487 7,101 2.57% 362,742 6,800 2.50%
Time Deposits 277,066 10,875 5.23% 212,403 8,339 5.23%
------------------------------ ----------------------------
Total Deposits 1,077,547 17,976 2.22% 956,979 15,139 2.11%
------------------------------ ----------------------------
Other Borrowings 121,083 5,015 5.52% 74,188 3,116 5.60%
------------------------------ ----------------------------
Total Interest-Bearing Liabilities 766,636 22,991 4.00% 649,333 18,255 3.75%
---------- ----------
Other Liabilities 22,497 13,529
Stockholders' Equity 108,989 93,341
---------- ----------
Total Liabilities and
Stockholders' Equity $1,330,116 $1,138,037
========== ==========
Net interest spread 3.99% 4.61%
Net interest margin 5.47% 5.93%
<FN>
(F1) Yields are calculated on a taxable equivalent basis.
(F2) Loan fees are included in total interest income as follows: 1998, $2,997; 1997, $2,554.
(F3) Nonperforming loans are included in net loans as follows: 1998, $4,315; 1997, $6,523.
(F4) Includes interest-bearing demand and money market accounts.
</FN>
13
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)
Comparison of nine-month period ended
September 30, 1998 and 1997
Increase (decrease) in interest income or expense
due to changes in
Rate/
Volume Rate Volume Total
----------------------------------
Interest Income:
Taxable investment securities $ 5,595 $ (90) $ (30) $ 5,475
Tax-advantaged investment securities 1,666 (142) (133) 1,391
Federal funds sold and interest bearing
deposits with other institutions 239 2 2 243
Loans 3,207 (795) (59) 2,353
------------------------------------
Total earning assets 10,707 (1,025) (220) 9,462
------------------------------------
Interest Expense:
Savings deposits 108 190 3 301
Time deposits 2,538 (2) (0) 2,536
Other borrowings 1,969 (43) (27) 1,899
------------------------------------
Total interest-bearing liabilities 4,615 145 (24) 4,736
------------------------------------
Net Interest Income $ 6,092 $(1,170) $ (196) $ 4,726
====================================
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, 1998.
14
Estimated Net
Simulated Interest Income
Rate Changes Sensitivity
+200 basis points -2.34%
-200 basis points 1.34%
The table indicates that net interest income would decrease by
approximately 2.34% 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 1.34% 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, 1998. This represented a decrease of $70,000, or 3.55% from
the provision for credit losses of $2.0 million for the nine months ended
September 30, 1997. For the third quarter of 1998, the provision for credit
losses was $600,000. This represented a decrease of $315,000, or 34.43%, from
the provision for credit losses of $915,000 for the third quarter of 1997.
The allowance for credit losses at September 30, 1998 was $13.4 million.
This represented an increase of $2.8 million, or 25.66%, from the allowance for
credit losses of $10.6 million at September 30, 1997. The allowance for credit
losses increased to 2.13% of average gross loans for the first nine months of
1998, compared to 1.82% of average gross loans for the same period last year.
For the nine months ended September 30, 1998, loans charged to the allowance for
credit losses, net of recoveries ("net loan charge offs") totaled $60,000,
compared to net loans charge offs of $3.6 million for the first nine months of
1997.
Nonperforming assets, which includes nonaccrual loans, loans past due 90 or
more days and still accruing, restructured loans, and other real estate owned,
decreased to $5.6 million at September 30, 1998. This represented a decrease of
$5.3 million, or 48.46%, from nonperforming assets of $10.9 million at December
31, 1997. Nonperforming loans, which include nonaccrual loans, loans past due 90
or more days and still accruing, and restructured loans were $4.3 million at
September 30, 1998. This represented a decrease of $2.2 million, or 33.35%, from
the level of nonperforming loans at December 31, 1997. Table 6 presents
nonperforming assets as of September 30 1998, and December 31, 1997. The Company
applies the methods prescribed by Statement of Financial Accounting Standards
No. 114 for determining the fair value of specific loans for which the eventual
collection of all principal and interest is considered impaired.
While management believes that the allowance at September 30, 1998, was
adequate to absorb losses from any known or inherent risks in the portfolio, no
assurance can be given that economic conditions which adversely affect the
Company's service areas or other circumstances will not be reflected in
increased provisions or credit losses in the future. Table 3 shows comparative
information on net credit losses, provisions for credit losses, and the
allowance for credit losses for the periods indicated.
15
TABLE 3 - Summary of Credit Loss Experience Nine-months
(amounts in thousands) ended September 30,
1998 1997
Amount of Total Loans at End of Period $ 635,361 $ 600,561
=========== ============
Average Total Loans Outstanding $ 626,225 $ 582,699
=========== ============
Allowance for Credit Losses at Beginning of Period $ 11,522 $ 12,239
Loans Charged-Off:
Real Estate Loans 86 3,414
Commercial and Industrial 216 286
Consumer Loans 27 71
----------- ------------
Total Loans Charged-Off 329 3,771
----------- ------------
Recoveries:
Real Estate Loans 155 22
Commercial and Industrial 101 167
Consumer Loans 13 7
----------- ------------
Total Loans Recovered 269 196
----------- ------------
Net Loans Charged-Off 60 3,575
----------- ------------
Provision Charged to Operating Expense 1,900 1,970
----------- ------------
Allowance for Credit Losses at End of period $ 13,362 $ 10,634
=========== ============
Net Loans Charged-Off to Average Total Loans* 0.01% 0.82%
Net Loans Charged-Off to Total Loans at End of Period* 0.01% 0.79%
Allowance for Credit Losses to Average Total Loans 2.13% 1.82%
Allowance for Credit Lossess to Total Loans at End of Period 2.10% 1.77%
Net Loans Charged-Off to Allowance for Credit Losses* 0.60% 44.82%
Net Loans Charged-Off to Provision for Credit Losses 3.16% 181.47%
* Net Loan Charge-Off amounts are annualized.
16
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 $11.1 million for the nine months ended
September 30, 1998. This represented an increase of $788,000, or 7.61%, from
other operating income of $10.4 million for the nine months ended September 30,
1997.
Trust income totaled $2.6 million for the nine months ended September 30,
1998. This represented an increase of $254,000, or 10.81%, over trust income of
$2.3 million for the nine months ended September 30, 1997. In March of 1998, the
Bank sold an office building used as its Brea office. The Bank realized a gain
on the sale of approximately $450,000 which is included in the $652,000 gain on
sale of premises and equipment for the first nine months of 1998. During the
first nine months of 1997, gains on sale of premises and equipment totaled
$27,000.
Other operating income totaled $3.7 million for the third quarter of 1998.
This represented an increase of $217,000, or 6.27%, over other operating income
of $3.5 million for the third quarter of 1997.
Other Operating Expenses
Other operating expenses totaled $33.8 million for the nine months ended
September 30, 1998. This represented an increase of $734,000, or 2.22%, over
other operating expenses of $33.0 million for the nine months ended September
30, 1997. For the third quarter of 1998, other operating expenses totaled $11.2
million, representing an increase of $556,000, or 5.21%, over operating expenses
of $10.7 million for the third quarter of 1997.
The Company maintains an allowance for potential losses on other real
estate owned. The allowance is increased by a provision for losses on other real
estate owned, and reduced by losses on the sale of other real estate owned
charged directly to the allowance. The allowance was established to provide for
declining Southern California real estate values over the past several years.
For the nine months ended September 30, 1998, the provision for other real
estate owned was $500,000. This represented a decrease of $1.2 million, or
70.15%, from a provision of $1.7 million for the nine months ended September 30,
1997. This decrease reflects the improvement in the loan portfolio and the
reduction of other real estate owned from $4.4 million at December 31, 1997 to
$1.3 million at September 30, 1998.
As a percent of average assets, annualized other operating expenses
decreased to 3.39% for the nine months ended September 30, 1998, compared to a
ratio of 3.87% for the nine months ended September 30, 1997. The decrease in the
ratio indicates that the Company is managing a greater level of assets with
proportionately lower levels of operating expenses. The Company's efficiency
ratio decreased to 56.60% for the nine months ended September 30, 1998, compared
to a ratio of 61.01% for the nine months ended September 30, 1997. The decrease
in the efficiency ratio indicates that the Company is allocating a lower
percentage of net revenue to operating expenses.
17
BALANCE SHEET ANALYSIS
The Company reported total assets of $1.44 billion at September 30, 1998.
This represented an increase of $182.8 million, or 14.53%, over total assets of
$1.26 billion at December 31, 1997. Gross loans totaled $635.4 million at
September 30, 1998. This represented an increase of $18.4 million, or 2.97%,
over gross loans of $617.0 million at December 31, 1997. Total deposits
increased $48.1 million, or 4.47%, to $1.12 billion at September 30, 1998, from
$1.08 billion at December 31, 1997.
Investment Securities and Debt Securities Available-for-Sale
The Company reported total investment securities of $696.6 million at
September 30, 1998. This represented an increase of $204.4 million, or 41.54%,
over total investment securities of $492.2 million at December 31, 1997.
At September 30, 1998, the Company's net unrealized gain on securities
available-for-sale totaled $7.2 million. The Company recorded an adjustment
increasing accumulated other comprehensive income to $4.1 million, and an
adjustment to increase deferred tax assets to $3.1 million. At December 31,
1997, the Company reported a net unrealized gain on investment securities
available for sale of $1.3 million, with an adjustment to equity capital of
$772,000 and deferred taxes of $567,000. Note 2 of the Notes to the Consolidated
Financial Statements in the Company's 1997 Annual Report on 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, 1998 and December 31, 1997.
18
Table 4 - Composition of Securities Portfolio
(dollars in thousands)
September 30, 1998 December 31, 1997
Net Net
Amortized Market Unrealized Amortized Market Unrealized
Cost Value Gain(Loss) Yield Cost Value Gain/(Loss) Yield
U.S. Treasury securities
Available for Sale $ 3,010 $ 3,037 $ 27 6.02% $ 51,238 $ 51,525 287 5.71%
FHLMC, FNMA CMO's, REMIC's
and mortgage-backed pass-through securities
Available for Sale 464,340 469,820 5,480 6.36% 279,835 280,920 1,085 6.41%
Held to Maturity 4,039 4,147 108 5.74% 4,969 5,068 99 6.49%
Other Government Agency Securities
Available for Sale 24,746 24,868 122 6.59% 53,052 53,018 (34) 6.52%
GNMA mortgage-backed pass-through
securities
Available for Sale 66,016 66,593 577 6.64% 9,854 9,878 24 6.61%
Held to Maturity 759 823 64 9.42% 964 1,046 82 6.53%
Tax-exempt Municipal Securities
Available for Sale 56,005 57,076 1,071 4.49% 25,364 25,509 145 4.56%
Held to Maturity 50,489 52,559 2,070 4.81% 50,789 52,222 1,433 4.52%
Other securities
Available for Sale 18,404 18,404 0 0.00% 13,256 13,256 0 0.00%
Held to Maturity 1,492 1,492 0 6.89% 1,322 1,322 0 6.37%
-------------------------------------- --------------------------------------------
$ 689,300 $698,819 $ 9,519 5.96% $ 490,643 $ 493,764 3,121 5.89%
====================================== ============================================
19
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
September 30, December 31,
1998 1997
-------- --------
Commercial and Industrial $237,934 $258,987
Real Estate:
Construction 25,631 19,819
Mortgage 273,783 229,926
Consumer 18,544 17,445
Lease finance receivables 22,030 24,008
Agribusiness 59,692 69,404
-------- --------
Gross Loans $637,614 $619,589
Less:
Allowance for credit losses 13,362 11,522
Deferred net loan fees 2,253 2,583
-------- --------
Net loans $621,999 $605,484
======== ========
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 $5.6 million at September 30, 1998. This represented
a decrease of $5.3 million, or 48.46%, from nonperforming assets of $10.9
million at December 31, 1997. As a percent of total assets, nonperforming assets
decreased to 0.39% at September 30, 1998, from 0.86% at December 31, 1997.
Although management believes that nonperforming assets are generally well
secured and that potential losses are reflected in the allowance for credit
losses, there can be no assurance that a general deterioration of economic
conditions or collateral values would not result in future credit losses.
20
Table 6 - Nonperforming Assets (dollar amounts in thousands)
September 30, 1998 December 31, 1997
Nonaccrual loans $4,315 $ 3,955
Loans past due 90 days or more
and still accruing interest 0 424
Restructured loans 0 2,092
Other real estate owned (OREO), net 1,285 4,395
------ -------
Total nonperforming assets $5,600 $10,866
====== =======
Percentage of nonperforming assets
to total loans outstanding and OREO 0.88% 1.75%
Percentage of nonperforming
assets to total assets 0.39% 0.86%
The decrease in nonperforming assets was the result of a decrease in other
real estate owned and restructured loans. Other real estate owned totaled $1.3
million at September 30, 1998. This represented a decrease of $3.1 million, or
70.76%, from total real estate owned of $4.4 million at December 31, 1997.
Restructured loans declined $2.1 million for the first nine months of 1998.
At September 30, 1998, the majority of nonaccrual loans were collateralized
by real property. The estimated loan balances to the fair value of related
collateral (loan-to-value ratio) for nonaccrual loans ranged from approximately
14% to 115%.
The Bank has allocated specific reserves to provide for any potential loss
on non-performing loans. Management cannot, however, predict the extent to which
the current economic environment may persist or worsen or the full impact such
environment may have on the Company's loan portfolio.
Deposits and Other Borrowings
At September 30, 1998, total deposits were $1.12 billion. This represented
an increase of $48.1 million, or 4.47%, from total deposits of $1.08 billion at
December 31, 1997. Demand deposits totaled $457.3 million at September 30, 1998,
representing a decrease of $12.5 million, or 2.66%, from total demand deposits
of $469.8 million at December 31, 1997. The decrease in demand deposits from the
year end total reflects normal seasonal fluctuations relating to agricultural
and other depositors. Average demand deposits for the third quarter of 1998 were
$446.7 million. This represented an increase of $49.2 million, or 12.36%, from
average demand deposits of $397.5 million for the third quarter of 1997. The
comparison of average balances for the third quarters of 1998 and 1997, is more
representative of the Company's growth in deposits as it excludes the seasonal
peak in deposits at year end.
21
Time deposits totaled $288.0 million at September 30, 1998. This
represented an increase of $23.6 million, or 8.94%, over total time deposits of
$264.4 million at December 31, 1997. Time deposits are not affected by the
Company's seasonal fluctuation in demand deposits.
Other borrowed funds totaled $175.0 million at September 30, 1998. This
represented and increase of $126.0 million, or 257.14% over other borrowed funds
of $49.0 million at December 31, 1997. The increase in other borrowed funds
during the first nine months of 1998 was primarily the result of an increase in
a secured short term loan from the Federal Home Loan Bank. The funds were used
to purchase investment securities at a positive net interest spread.
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 $21.6 million for the
first nine months of 1998, compared to net cash provided by operating activities
of $16.0 million for the same period last year. The increase was primarily the
result of increased interest received on loans and investment securities.
Net cash used for investing activities totaled $221.1 million for the first
nine months of 1998, compared to net cash used for investing activities of $81.7
million for the same period last year. The increase in net cash used for
investing activities was primarily from the purchase of additional investment
securities. Financing activities provided net cash flows of $170.0 million for
the nine months ended September 30, 1998. This compares to $9.9 million in net
cash provided for the nine months ended September 30, 1997. A net increase in
deposits of $48.1 million for the nine months ended September 30, 1998, compared
to a net increase in deposits of $27.9 million for the same period last year
contributed to the change. In addition, net cash flows provided by financing
activities was impacted by an increase in short term borrowings of $127.9
million for the first nine months of 1998 compared to a decrease of $14.0
million for the first nine months of 1997. At September 30, 1998, cash and cash
equivalents totaled $78.1 million. This represented a decrease of $8.6 million,
or 9.82%, from a total of $86.7 million at September 30, 1997.
22
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 1998, the Bank's loan to deposit ratio averaged 58.12%,
compared to an average ratio of 60.89% for the first nine months of 1997.
CVB is a company separate and apart from the Bank that must provide for its
own liquidity. Substantially all of CVB's revenues are obtained from dividends
declared and paid by the Bank. There are statutory and regulatory provisions
that could limit the ability of the Bank to pay dividends to CVB. At September
30, 1998, approximately $37.4 million of the Bank's equity was unrestricted and
available to be paid as dividends to CVB. Management of CVB believes that such
restrictions will not have an impact on the ability of CVB to meet its ongoing
cash obligations. At September 30, 1998, CVB had no material commitments for
capital expenditures. The Bank, as part of its year 2000 program, is
anticipating the purchase of a new teller system in an approximate amount of
$600,000.
Capital Resources
The Company's equity capital was $114.6 million at September 30, 1998. The
primary source of capital for the Company continues to be the retention of net
after tax earnings. The Company's 1997 annual report (management's discussion
and analysis and note 15 of the accompanying financial statements) describes the
regulatory capital requirements of the Company and the Bank.
The Bank and the Company are required to meet risk-based capital standards
set by the respective regulatory authorities. The risk-based capital standards
require the achievement of a minimum ratio of total capital to risk-weighted
assets of 8.0% (of which at least 4.0% must be Tier 1 capital). In addition, the
regulatory authorities require the highest rated institutions to maintain a
minimum leverage ratio of 3.0%. At September 30, 1998, the Bank and the Company
exceeded the minimum risk-based capital ratio and leverage ratio required to be
considered "Well Capitalized".
Table 7 below presents the Company's and the Bank's risk-based and leverage
capital ratios as of September 30, 1998, and December 31, 1997.
23
Table 7 - Regulatory Capital Ratios
Required
Minimum September 30, 1998 December 31, 1997
Capital Ratios Ratios Company Bank Company Bank
Risk-based captial ratios
Tier 1 4.00% 12.71% 12.41% 12.08% 11.84%
Total 8.00% 13.98% 13.68% 13.35% 13.11%
Leverage ratio 4.00% 7.26% 7.08% 7.56% 7.40%
On August 19, 1998, the Board of Directors of the Company reauthorized and
superseded the April 16, 1997 repurchase of shares of its common stock, from
time to time, at the discretion of the Company, through open market purchases or
in private transactions in an aggregate amount of up to $9.0 million, or 500,000
shares. As of December 31, 1997, the Company had purchased 142,772 shares for an
average price of $13.56 per share. The Company repurchased 90,600 shares of
common stock at an average price of $20.80 per share during the third quarter
and first nine months of 1998.
Risk Management
The Company's management has adopted a Risk Management Policy to ensure the
proper control and management of all risk factors inherent in the operation of
the Company and the Bank. The policy is designed to address specific risk
factors defined by federal bank regulators. These risk factors are not mutually
exclusive. It is recognized that any product or service offered may expose the
Bank to one or more of these risks. The Risk Management Policy identifies the
significant risks as: credit risk, interest rate risk, liquidity risk,
transaction risk, compliance risk, strategic risk, and price risk.
Year 2000
The financial institutions industry, as with other industries, is faced
with year 2000 issues. These issues center around computer programs that do not
recognize a year which begins with "20" instead of "19", or uses only 2 digits
for the year. Certain statements in this section on the Year 2000 constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995 which involve risk and uncertainties. The Company's actual results may
differ significantly from the results discussed in these forward-looking
statements. Such factors include but are not limited to the 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.
The Company has been working on these issues for the last 21 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:
24
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 will develop 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 will as the level
of work and resources necessary to address them. The report will include 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 will supervise the project
including enhancements, hardware and software upgrades, systems replacements and
vendor certification as "Year 2000 Compliant". Work will be prioritized
depending on the applications impact. Insights may also be provided from
"critical assessments" performed as part of the disaster recovery business
resumption assessment.
Validation Phase - After programming codes by outside venders have been
modified or systems upgraded, each will be tested in incremental states to
assess full correction of the Year 2000 issues. Team 2000 coordinators will
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 core applications have been certified Year 2000 compliant. The Renovation
Phase as it relates to "bank critical" systems/processes is 80% complete. The
Validation Phase as it relates to "bank critical" system/processes is 78%
complete. Both the Renovation and the Validation Phases are scheduled to be
completed by March 31, 1999.
As of September 30, 1998, for approximately 20% of the systems/processes
deemed "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 initiated to cover those 20%.
The third party vendor of the Bank's teller terminal system has indicated
that their hardware is not compliant and will not be made compliant. It is of an
older generation of technology. The Bank is in the process of replacing this
system, which is anticipated to be completed by March 31, 1999.
The Bank has notified its customers by means of statement stuffers of Year
2000 issues. It is also in the process of contacting each of its major borrowing
and depository customers to make them aware of the issues and to seek
information regarding its customers' preparedness for the Year 2000.
25
The Boards of Directors of CVB and the Bank have approved a Year 2000
Policy and budget. The Board has approved a budget of $1.3 million for the
anticipated costs of Year 2000 issues. The Board has allocated $500,000 of the
Bank's allowance for loan and lease losses to cover potential losses from
customers due to their Year 2000 problems. In addition, it is anticipated that
the replacement of the teller system will cost $600,000. The remaining $200,000
is budgeted for miscellaneous and contingency items. To date, the Company has
expended approximately $55,000 for the testing of software and hardware.
Of the $1.3 million, the $500,000 allocation from the allowance for loan
and lease losses has already been provided through the income statement. The
Company believes that costs to replace the teller system which could be as much
as $600,000 will be capitalized as these costs relate to the purchase of new
equipment and, therefore, will only impact the earnings of the Company as it is
depreciated. The Company anticipates that the remaining $145,000 will be
reflected in the income statement over the next three quarters. The source of
funds to address Year 2000 issues will be operating cash funds.
In addition, the Boards 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 is being augmented to cover contingencies arising from Year
2000. The Plan has been tested in the past and the augmented Plan will be tested
in the fourth quarter of 1998.
Business Segments
On March 29, 1996, the Bank acquired Citizens Commercial Trust and Savings
Bank of Pasadena ("Citizens"). At the time of the acquisition, Citizens had a
trust division with managed assets of approximately $800.0 million. The acquired
division, now called the Asset Management division, managed assets of $887.7
million at September 30, 1998.
The Asset Management division has served as a significant and growing
source of noninterest income for the Company. The division offers a number of
trust and asset management services to the Bank's branch operations that were
not available prior to the acquisition. For purposes of business segmentation,
table 8 provides a summary of the sources of revenue and expenses for the Asset
Management division and the other divisions of the Company.
26
Table 8 - Business Segments
Amounts in Thousands
(Unaudited)
For the Nine Months Ended
September 30, 1998
Banking Asset
Operations Management Company
Net interest income $48,546 $ $48,546
Less: Provision for credit losses 1,900 1,900
Other operating income 8,536 2,603 11,139
------- ------- -------
Net revenue $55,182 $ 2,603 $57,785
Other operating expenses
Salaries and employee benefits 15,696 1,099 16,795
Occupancy and equipment 5,427 296 5,723
Other 10,811 452 11,263
------- ------- -------
31,934 1,847 33,781
Earnings before taxes $23,248 $ 756 $24,004
======= ======= =======
Amounts in Thousands
(Unaudited)
For the Nine Months Ended
September 30, 1998
Banking Asset
Operations Management Company
Net interest income $43,820 $ $43,820
Less: Provision for credit losses 1,970 1,970
Other operating income 8,002 2,349 10,351
------- ------- -------
Net revenue $49,852 $ 2,349 $52,201
Other operating expenses
Salaries and employee benefits 15,362 1,061 16,423
Occupancy and equipment 4,897 234 5,131
Other 10,942 551 11,493
------- ------- -------
31,201 1,846 33,047
Earnings before taxes $18,651 $ 503 $19,154
======= ======= =======
27
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
On August 19, 1998, the Company filed a Report on
Form 8-K, reporting under Item 5. The Company filed
Exhibit 99.1, Press Release of August 19, 1998.
28
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 31
29
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 12, 1998 /s/ Edward J. Biebrich Jr.
---------------------------
Edward J. Biebrich Jr.
Chief Financial Officer
30