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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, 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 September 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: 25,142,821 outstanding as of
October 31, 2000.
This Form 10-Q contains 27 pages. Exhibit index on page 26.
PART I - FINANCIAL INFORMATION
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
dollar amounts in thousands
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------- --------------------
(unaudited)
ASSETS
Investment securities available-for-sale $ 1,053,924 $ 877,332 $
Loans and lease finance receivables, net 985,918 935,791
---------------- --------------------
Total earning assets 2,039,842 1,813,123
Cash and due from banks 104,198 118,360
Premises and equipment, net 27,446 27,726
Other real estate owned, net 0 703
Goodwill and intangibles 7,706 8,452
Accrued interest receivable 14,431 11,454
Other assets 23,293 30,939
---------------- --------------------
TOTAL $ 2,216,916 $ 2,010,757 $
================ ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 623,997 $ 649,821 $
Interest-bearing 1,034,240 851,252
---------------- --------------------
1,658,237 1,501,073
Demand note issued to U.S. Treasury 14,584 16,951
Federal Funds Purchased 0 23,000
Repurchase Agreement 350,000 300,000
Other liabilities 27,089 28,963
---------------- --------------------
2,049,910 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
25,131,445 and 24,716,832) 107,508 105,304
Retained earnings 68,228 51,857
Accumulated other comprehensive loss (8,730) (16,391)
---------------- --------------------
167,006 140,770
---------------- --------------------
TOTAL $ 2,216,916 $ 2,010,757 $
================ ====================
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 September30, Ended September 30,
2000 1999 2000 1999
-------------- -------------- ------------- -------------
Interest income:
Loans, including fees $ 23,098 $ 19,757 $ 66,467 $ 57,461
Investment securities:
Taxable 12,484 10,520 36,665 30,970
Tax-advantaged 3,112 1,365 8,207 3,978
-------------- -------------- ------------- -------------
Total investment income 15,596 11,885 44,872 34,948
Federal funds sold and interest bearing
deposits with other financial institutions 53 561 55 1,551
-------------- -------------- ------------- -------------
Total interest income 38,747 32,203 111,394 93,960
Interest expense:
Deposits 8,630 6,772 23,016 19,328
Other borrowings 6,567 2,927 18,087 8,673
-------------- -------------- ------------- -------------
Total interest expense 15,197 9,699 41,103 28,001
-------------- -------------- ------------- -------------
Net interest income 23,550 22,504 70,291 65,959
Provision for credit losses 700 810 2,300 2,000
-------------- -------------- ------------- -------------
Net interest income after
provision for credit losses 22,850 21,694 67,991 63,959
Other operating income:
Service charges on deposit accounts 2,644 2,567 7,840 7,812
Loss on sale of securities (106) (77) (237) (77)
Gain on sale of other real estate owned 0 260 223 608
Trust services 1,001 907 3,011 2,831
Other 1,062 1,166 2,911 3,327
-------------- -------------- ------------- -------------
Total other income 4,601 4,823 13,748 14,501
Other operating expenses:
Salaries and employee benefits 7,512 7,349 22,365 22,476
Occupancy 1,325 1,253 3,992 3,817
Equipment 1,260 1,313 3,748 3,945
Professional services 437 1,465 2,297 4,471
Other 2,827 3,597 9,222 11,028
-------------- -------------- ------------- -------------
Total operating expenses 13,361 14,977 41,624 45,737
-------------- -------------- ------------- -------------
Earnings before income taxes 14,090 11,540 40,115 32,723
Provision for income taxes 4,952 4,337 14,674 12,230
-------------- -------------- ------------- -------------
Net earnings $ 9,138 $ 7,203 $ 25,441 $ 20,493
============== ============== ============= =============
Basic earnings per common share $ 0.37 $ 0.30 $ 1.02 $ 0.84
============== ============== ============= =============
Diluted earnings per common share $ 0.36 $ 0.28 $ 0.99 $ 0.80
============== ============== ============= =============
Cash dividends per common share $ 0.12 $ 0.09 $ 0.36 $ 0.27
============== ============== ============= =============
See accompanying notes to the consolidated financial statements.
3
CVB FINANCIAL CORP. AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
dollar amounts in thousands
Accumulated
Other
Comprehensive Retained Comprehensive Common
Total Income Earnings Income Stock
------------ ------------ ------------- -------------- -------------
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 (see (17,739) (17,739) (17,739)
disclosure)
------------
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 25,441 $25,441 25,441
Other comprehensive income, net of tax
Unrealized loss on securities, net of
reclassification adjustment (see 7,661 7,661 7,661
disclosure)
------------
Comprehensive income $33,102
============
Common Stock issued 2,204 2,204
Dividends declared on common stock (9,070) (9,070)
------------ ------------- -------------- -------------
Ending balance, September 30, 2000 $167,006 $68,228 ($8,730) $107,508
============ ============= ============== =============
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 $6,300 $ 7,585
Less:
Reclassification adjustment for losses included in
net income, net of tax effects of $55 76
--------------
Net unrealized losses on securities, September 30, 2000 $ 7,661
==============
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,
2000 1999
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 112,503 $ 97,893
Service charges and other fees received 13,985 14,579
Interest paid (39,186) (28,640)
Cash paid to suppliers and employees (37,388) (41,180)
Income taxes paid (16,582) (12,692)
--------------- ---------------
Net cash provided by operating activities 33,332 29,960
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 43,736 21,225
Proceeds from maturities of securities available for sale 86,813 110,174
Purchases of securities available for sale (200,349) (177,168)
Net decrease (increase) in fed funds sold (97,000) 31,585
Net decrease (increase) in loans (52,427) (66,307)
Purchase of premises and equipment (3,211) (2,338)
Other investing activities 13 (1,768)
--------------- ---------------
Net cash used in investing activities (222,425) (84,597)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in transaction deposits 95,951 (15,155)
Net increase in time deposits 61,213 32,178
Net increase in short-term borrowings 24,633 46,305
Cash dividends on common stock (9,070) (6,767)
Proceeds from exercise of stock options 2,204 539
--------------- ---------------
Net cash provided by financing activities 174,931 57,100
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (14,162) 2,463
CASH AND CASH EQUIVALENTS, beginning of period 118,360 117,573
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 104,198 $ 120,036
=============== ===============
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,
2000 1999
--------------- ---------------
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 25,441 $ 20,493
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Loss on sale of investment securities 237 77
Amortization of premiums on investment securities 4,086 4,737
Provisions for loan and OREO losses 2,300 2,000
Depreciation and amortization 3,473 2,439
Change in accrued interest receivable (2,978) (803)
Change in accrued interest payable 1,918 (638)
Change in other assets and liabilities (1,145) 1,655
--------------- ---------------
Total adjustments 7,891 9,467
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 33,332 $ 29,960
=============== ===============
Supplemental Schedule of Noncash Investing and Financing Activities
Securities purchased and not settled $ 740 $ 0
Real estate acquired through foreclosure $ 0 $ 1,701
6
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 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 straightline basis over 15 years.
Cash and Cash Equivalents includes Cash and Due from banks.
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 $3.2 million at September 30, 2000.
These loans were supported by collateral with a fair market value, net of prior liens, of $4.9 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 September 30, 2000, the Company
had entered into commitments with certain customers amounting to $448.2 million compared to $250.8 million at December 31,
1999. Letters of credit at September 30, 2000, and December 31, 1999, were $14.5 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 September 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 September 30, 2000 was 25,131,445. 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
Earnings Per Share Reconciliation
(Dollars and shares in thousands, except per share amounts)
For the Three Months
Ended September 30,
2000 1999
------------------------------------------------ ---------------------------------------------------
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 $ 9,138 24,721 $0.37 $ 7,203 24,481 $0.30
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 463 (0.01) 1,099 (0.02)
------------------------------------------------ ------------------------------------------------
DILUTED EPS
Income available to
common stockholders $ 9,138 25,184 $0.36 $ 7,203 25,580 $0.28
================================================ ===================================================
Earnings Per Share Reconciliation
For the Nine Months
Ended September 30,
2000 1999
------------------------------------------------ ---------------------------------------------------
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 $ 25,441 25,054 $1.02 $ 20,493 24,460 $0.84
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 541 (0.03) 1,065 (0.04)
---------------------------------------------- ------------------------------------------------
DILUTED EPS
Income available to
common stockholders $ 25,441 25,595 $0.99 $ 20,493 25,525 $0.80
================================================ ===================================================
6. Supplemental Cash Flow Information - During the nine-month period ended September 30, 1999, loans amounting to $1.9 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 nine-month period ended September 30, 2000.
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. 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, 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 $25.4 million for the nine months ended September 30, 2000. This represented an
increase of $4.9 million, or 24.15%, over net earnings of $20.5 million, for the nine months ended September 30, 1999. Basic
earnings per share for the nine month period increased to $1.02 per share for 2000, compared to $0.84 per share for 1999.
Diluted earnings per share increased to $0.99 per share for the first nine months of 2000, compared to $0.80 per share for the
same nine month period last year. The annualized return on average assets was 1.66% for the first nine months of 2000 compared to
a return on average assets of 1.49% for the nine months ended September 30, 1999. The annualized return on average equity was 22.24%
for the nine months ended September 30, 2000, compared to a return of 18.85% for the nine months ended September 30, 1999.
For the quarter ended September 30, 2000, the Company generated net earnings of $9.1 million. This represented an increase
of $1.9 million, or 26.86%, over net earnings of $7.2 million for the third quarter of 1999. Basic earnings per share increased to
$0.37 for the third quarter of 2000 compared to $0.30 per share for the third quarter of 1999. Diluted earnings per share increased
to $0.36 per share compared to $0.28 per share for the third quarter of 2000 and 1999, respectively. The annualized return on
average assets was 1.74% for the third quarter of 2000 compared to 1.53% for the same period last year. The annualized return on
average equity was 22.96% for the third quarter of 2000 and 19.65% for the third 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 $42.4 million for the nine months ended September 30, 2000. This represented an
increase of $8.1 million, or 23.73 %, compared to pre-tax operating earnings of $34.3 million for the first nine months of 1999.
For the third quarter of 2000, pre-tax operating earnings totaled $14.9 million. This represented an increase of $2.7 million, or
22.44%, from pre-tax operating earnings of $12.2 million for the third quarter of 1999.
9
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 nine months ended September 30, 2000, net interest income was $70.3 million. This represented an increase of $4.3
million, or 6.57%, over net interest income of $66.0 million for the nine months ended September 30, 1999. Although net
interest income increased, the net interest margin decreased to 5.19% for the nine months ended September 30, 2000, compared to
5.33% for the nine months ended September 30, 1999. Also, the net interest spread decreased to 3.75% for the nine months ended
September 30, 2000, compared to a spread of 4.09% for the nine months ended September 30, 1999. The increase in net interest
income for the most recent nine 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 $2.0 billion for the first nine months of 2000. This
represented an increase of $200.4 million, or 11.86%, compared to average earning assets of $1.7 billion for the first nine months
of 1999. The decrease of 34 basis points in net interest spread from 4.09% for the nine months ended September 30, 1999 to 3.75%
for the nine months ended September 30, 2000 was the result of the yield on interest earning assets increasing 55 basis
points, while the cost paid on interest bearing liabilities increased 89 basis points.
The cost of interest bearing liabilities was 4.34% for the first nine months of 2000 compared to 3.45% for the same period
last year. The yield on earning assets was 8.09% for the first nine months of 2000 compared to 7.54% for the same period last
year.
For the third quarter of 2000, net interest income was $23.6 million. This represented an increase of $1.0 million, or
4.65%, compared to $22.5 million for the third quarter of 1999. The net interest margin was 5.10% during the third quarter of 2000
compared to 5.34% for the same period last year. The net interest spread was 3.55% during the third quarter of 2000 compared to
4.07% for the third 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 $111.4 million for the nine months ended September 30, 2000. This
represented an increase of $17.4 million, or 18.55%, over total interest income of $94.0 million for the nine months ended
September 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 9.16% for the nine months ended September 30, 2000, from a yield of 8.94% for the first
nine months of 1999. The tax effective (TE) yield on average investments increased to 6.79% for the first nine months of 2000,
from a (TE) yield of 6.16% for the first nine 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 nine months
ended September 30, 2000, average net loans represented 50.73% of average net earning assets, compared to 50.28% for the nine
months ended September 30, 1999.
10
The Company reported total interest income of $38.7 million for the three months ended September 30, 2000. This represented
an increase of $6.5 million, or 20.32%, compared to $32.2 million for the third quarter of 1999.
For the three months ending September 30, 2000, the increase in the yield on average earning assets resulted from higher
yields on loans and investments. The yield on average loans increased to 9.29% for the three months ended September 30, 2000, from a
yield of 9.00% for the same period of 1999. The (TE) yield on average investments increased to 7.12% for the three months ended
September 30, 2000, from a yield of 6.20% for the same period of 1999. For the three months ended September 30, 2000, average net
loans represented 50.66% of average net earning assets, compared to 50.42% for the three months ended September 30, 1999.
The interest expense for the nine months ended September 30, 2000 increased when compared to the same periods for
1999. Interest expense totaled $41.1 million for the nine months ended September 30, 2000. This represented an increase of
$13.1 million, or 46.79%, over total interest expense of $28.0 million for the nine months ended September 30, 1999.
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 $1.3 billion for the first nine months of 2000. This
represented an increase of $181.4 million, or 16.79%, from average interest-bearing liabilities of $1.1 billion for the first nine
months of 1999.
For the third quarter of 2000, interest expense totaled $15.2 million. This represented an increase of $5.5 million, or
56.68% over interest expense of $9.7 million for the same period last year. The increase in interest expense reflected an increase
in the average volume of interest-bearing liabilities and in the cost of funds.
Average interest-bearing deposits totaled $867.5 million for the nine months ended September 30, 2000. This represented an
increase of $8.0 million, or 0.93%, over average interest-bearing deposits of $859.5 million for the nine months ended September 30,
1999.
Other borrowed funds averaged $394.7 million for the nine months ended September 30, 2000. This represented an increase of
$173.4 million, or 78.39%, over average other borrowed funds of $221.2 million for the nine months ended September 30, 1999.
Average interest-bearing deposits totaled $891.6 million for the three months ended September 30, 2000. This represented
an increase of $11.6 million, or 1.32%, over average interest-bearing deposits of $880.0 million for the three months ended
September 30, 1999.
Other borrowed funds averaged $408.0 million for the three months ended September 30, 2000. This represented an increase of
$186.7 million, or 84.38%, over average other borrowed funds of $221.3 million for the three months ended September 30, 1999.
The cost of average interest-bearing liabilities increased to 4.34% for the nine months ended September 30, 2000, compared
to a cost of 3.45% for the first nine 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 3.54% for the first
nine months of 2000 as compared to 3.00% for the first nine months of 1999. The cost of other borrowed funds increased to
6.11% for the nine months ended September 30, 2000, compared to a cost of 5.23% for the nine months ended September 30, 1999.
The cost of average interest-bearing liabilities increased to 4.68% for the three months ended September 30, 2000, compared
to a cost of 3.52% for the same period of 1999. The cost of average interest-bearing deposits increased to 3.87% for the three
months ended September 30, 2000, compared to 3.08% for the same period of 1999. The cost of other borrowed funds increased to 6.44%
for the three months ended September 30, 2000, compared to 5.29% for the same period of 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.
11
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, 2000, and 1999. Rates for tax-preferenced investments are shown
on a taxable equivalent basis using a 40.3% tax rate.
TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differentials
(dollars in thousands)
NINE-month periods ended September 30,
2000 1999
----------------------------------------------------------------------------
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
--------------------------------------- -----------------------------------
Investment Securities
Taxable $ 720,182 36,665 6.79% $ 670,861 30,970 6.16%
Tax-advantaged (1) 200,993 8,207 7.64% 117,327 3,978 6.34%
Federal Funds Sold & Interest-bearing
deposits with other financial institutions 1,051 55 6.98% 43,855 1,551 4.72%
Loans (2) (3) 967,297 66,467 9.16% 857,090 57,461 8.94%
--------------------------------------- -----------------------------------
Total Earning Assets 1,889,523 111,394 8.09% 1,689,133 93,960 7.54%
Total Non-earning Assets 157,960 149,130
--------------- ---------------
Total Assets $ 2,047,483 $ 1,838,263
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits $ 603,985 $ 587,312
Savings Deposits (4) 520,134 9,451 2.42% 528,561 8,075 2.04%
Time Deposits 347,344 13,565 5.21% 330,912 11,253 4.53%
--------------------------------------- -----------------------------------
Total Deposits 1,471,463 23,016 2.09% 1,446,785 19,328 1.78%
--------------------------------------- -----------------------------------
Other Borrowings 394,660 18,087 6.11% 221,229 8,673 5.23%
--------------------------------------- -----------------------------------
Total Interest-Bearing Liabilities 1,262,138 41,103 4.34% 1,080,702 28,001 3.45%
--------------- ---------------
Other Liabilities 28,845 25,294
Stockholders' Equity 152,515 144,955
--------------- ---------------
Total Liabilities and
Stockholders' Equity $ 2,047,483 $ 1,838,263
=============== ===============
Net interest spread 3.75% 4.09%
Net interest margin 5.19% 5.33%
- --------------------------------------------------------
(1) Yields are calculated on a taxable equivalent basis.
(2) Loan fees are included in total interest income as follows: 2000, $2,727; 1999, $2,519.
(3) Nonperforming loans are included in loans as follows: 2000, $1,180; 1999, $1,194.
(4) Includes interest-bearing demand and money market accounts.
12
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)
Comparison of nine-month period
ended September 30, 2000 and 1999
Increase (decrease) in interest income or expense
due to changes in
-----------------------------------------------------------
Rate/
Volume Rate Volume Total
-----------------------------------------------------------
Interest Income:
Taxable investment securities $ 2,277 $ 3,184 $ 234 $ 5,695
Tax-advantaged securities 2,836 813 580 4,229
Fed funds sold & interest bearing
deposits with other institutions (1,514) 748 (730) (1,496)
Loans 7,389 1,433 184 9,006
-------------------------------------------------------------
Total earning assets 10,988 6,178 268 17,434
-------------------------------------------------------------
Interest Expense:
Savings deposits (128) 1,529 (24) 1,377
Time deposits 559 1,669 83 2,311
Other borrowings 6,799 1,466 1,149 9,414
-------------------------------------------------------------
Total interest-bearing liabilities 7,230 4,664 1,208 13,102
-------------------------------------------------------------
Net Interest Income $ 3,758 $ 1,514 $ (940) $ 4,332
=============================================================
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
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 September 30, 2000.
Estimated Net
Simulated Interest Income
Rate Changes Sensitivity
------------ ------------
+200 basis points (2.43%)
-200 basis points 3.95%
The table indicates that net interest income would decrease by approximately 2.43% over a 12 month period if there
was a sustained, parallel and pro rata 200 basis point upward shift in interest rates with no change in the composition of the
balance sheet. Net interest income would increase approximately 3.95% 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 at
the time the estimate is made. 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
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 inherent in the portfolio related to
such condition is reflected in the unallocated allowance.
The Company maintains an allowance for inherent 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 $2.3 million for the
nine months ended September 30, 2000, as compared to $2.0 million for the same period of 1999, an increase of $300,000, or 15.00%.
The allowance for credit losses at September 30, 2000 was $19.1 million. This represented an increase of $2.8 million, or
16.88%, from the allowance for credit losses of $16.3 million at September 30, 1999. The allowance for credit losses was 1.97%
of average gross loans for the first nine months of 2000 and 1.91% of average gross loans for the first nine months of 1999. For
the nine months ended September 30, 2000, net loan charge offs totaled $(32,000), compared to net loan charge offs of $552,000 for
the first nine months of 1999.
15
Non-performing loans, which include non-accrual loans, loans past due 90 or more days and still accruing, and restructured
loans were $1.2 million at September 30, 2000. This represented a decrease of $14,000, or 1.17%, 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 $1.2 million at September 30, 2000. This represented a decrease of $717,000, or 37.80%,
from non-performing assets of $1.9 million at December 31, 1999. Table 6 presents non-performing assets as of September 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 September 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.
TABLE 3 - Summary of Credit Loss Experience NINE-months
(amounts in thousands) ended September 30,
----------------------------------
2000 1999
Amount of Total Loans at End of Period $ 1,005,012 $ 894,751
============== ==============
Average Total Loans Outstanding $ 967,297 $ 857,090
============== ==============
Allowance for Credit Losses at Beginning of Period $ 16,761 $ 14,888
Loans Charged-Off:
Real Estate Loans 186 480
Commercial and Industrial 79 202
Consumer Loans 9 7
-------------- --------------
Total Loans Charged-Off 274 689
-------------- --------------
Recoveries:
Real Estate Loans 139 6
Commercial and Industrial 166 126
Consumer Loans 1 5
-------------- --------------
Total Loans Recovered 306 137
-------------- --------------
Net Loans Charged-Off (32) 552
-------------- --------------
Provision Charged to Operating Expense 2,300 2,000
-------------- --------------
Allowance for Credit Losses at End of period $ 19,093 $ 16,336
============== ==============
Net Loans Charged-Off to Average Total Loans* 0.00% 0.09%
Net Loans Charged-Off to Total Loans at End of Period* 0.00% 0.08%
Allowance for Credit Losses to Average Total Loans 1.97% 1.91%
Allowance for Credit Losses to Total Loans at End of Period 1.90% 1.83%
Net Loans Charged-Off to Allowance for Credit Losses* -0.22% 4.51%
Net Loans Charged-Off to Provision for Credit Losses -1.39% 27.60%
* 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 and CVB
Ventures, Inc. (the Company's nonbank subsidiaries).
Other operating income totaled $13.7 million for the nine months ended September 30, 2000. This represented a decrease of
$753,700, or 5.20%, from other operating income of $14.5 million for the nine months ended September 30, 1999. The decrease was
primarily the result of lower other fees and charges, increased loss on the sale of securities, and lower gain on the sale of other
real estate owned. For the three months ended September 30, 2000, other operating income totaled $4.6 million, a decrease of
$222,000, or 4.60%, from $4.8 million for the same three month period ended September 30, 1999. The decrease was primarily the
result of lower other fees and charges, lower gain on the sale of other real estate owned, and increased loss on the sale of
securities.
Service charge income totaled $7.8 million for the first nine months ended September 30, 2000. This represents an
increase of $28,000, or 0.36%, over service charge income of $7.8 million for the nine months ended September 30, 1999. For the
three months ended September 30, 2000, service charge income totaled $2.6 million, an increase of $76,000, or 2.98%, from $2.6
million for the same three month period ended September 30, 1999. The increase in service charge income for the three months ended
September 30, 2000, resulted from a combination of increased volume and the implementation of a new fee schedule for the Orange
County Offices.
Trust income totaled $3.0 million for the nine months ended September 30, 2000. This represented an increase of $180,000,
or 6.34%, over trust income of $2.8 million for the nine months ended September 30, 1999. For the three months ended September 30,
2000, trust income totaled $1,000,000, an increase of $94,000, or 10.37%, from $907,000 for the same three month period ended
September 30, 1999. The increase in trust income for the nine and three months ended September 30, 2000, resulted from settlement
fees on the closing of estates. The number of trust customers has remained constant, however, the dollar size of customer's estates
being managed has increased.
Other fees and charges totaled $5.9 million for the first nine months ended September 30, 2000. This represents a decrease
of $237,000 or 3.84%, over other fees and charges of $6.2 million for the nine months ended September 30, 1999. For the three months
ended September 30, 2000, other fees and charges totaled $2.1 million, a decrease of $8,000, or 0.38%, from $2.1 million for the same
three month period ended September 30, 1999. The decrease in other fees and charges for the nine and three months ended September
30, 2000, resulted primarily from increased waiver of fees due to competitive pressure and from a decrease in the volume of charges
on overdrawn checking accounts.
Gain on the sale of other real estate owned totaled $223,000 for the nine months ended September 30, 2000. This represents
a decrease of $385,000 or 63.27%, over the gain on the sale of other real estate owned of $608,000 for the nine months ended
September 30, 1999. For the three months ending September 30, 2000, there was no gain/loss on the sale of other real estate owned.
For the three months ending September 30, 1999, the gain on the sale of other real estate owned totaled $261,000.
Other Operating Expenses
Other operating expenses totaled $41.6 million for the nine months ended September 30, 2000. This represented a decrease
of $4.1 million, or 8.99%, over other operating expenses of $45.7 million for the nine months ended September 30, 1999. For the
three months ended September 30, 2000, other operating expenses totaled $13.4 million. This compares with $15.0 million for the same
period last year, a decrease of $1.6 million, or 10.78%. The reduction in other operating expenses resulted from economies of scale
derived from the merger with Orange National Bank (the consolidation of duplicate expenses.)
17
Salaries and employee benefits totaled $22.4 million for the first nine months of 2000. This represented a decrease of
$111,000, or 0.49%, from salaries and employee benefits of $22.5 million for the same period last year. The reduction in salaries
and employee benefits resulted from the elemination of redundancies created from the merger with Orange National Bank. Equipment
expense totaled $3.7 million for the nine months ended September 30, 2000. This represents a decrease of $197,000, or 4.99%,
over equipment expense of $3.9 million for the nine months ended September 30, 1999. Occupancy expense totaled $4.0 million
for the nine months ended September 30, 2000. This represents an increase of $175,000, or 4.58%, over occupancy expense of
$3.8 million for the same period last year. Professional expense, which includes legal and accounting expenses totaled $2.3 million
for the first nine months ended September 30, 2000. This represents a decrease of $2.2 million, or 48.63%, over professional
expense of $4.5 million for the nine months ended September 30, 1999. Other expense, which includes data processing, supplies,
promotional, and other expenses, totaled $9.0 million for the first nine months ended September 30, 2000. This represents a
decrease of $1.9 million, or 17.09%, over other expense of $10.9 million for the first nine 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 September 30, 2000, salary expenses totaled $7.5 million. This compares with $7.3 million for
the same period last year, an increase of $163,000, or 2.22%. Equipment expense totaled $1.3 million for the three months ended
September 30, 2000. This represents a decrease of $53,000, or 4.02%, over equipment expense of $1.3 million for the three months
ended September 30, 1999. Occupancy expense totaled $1.3 million for the three months ended September 30, 2000. This represents an
increase of $72,000, or 5.76%, over occupancy expense of $1.3 million for the same period last year. Professional expense, which
includes legal and accounting expenses totaled $437,000 for the three months ended September 30, 2000. This represents a decrease of
$1.0 million, or 70.18%, over professional expense of $1.5 million for the three months ended September 30, 1999. Other expense,
which includes data processing, supplies, promotional, and other expenses, totaled $2.8 million for the three months ended September
30, 2000. This represents a decrease of $781,000, or 22.08%, over other expense of $3.5 million for the three months ending
September 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 inherent 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 inherent losses. For the nine months ended September 30,
2000, there was no additional provision made for other real estate owned. At September 30, 2000 the Company had no other real
estate owned and did not have an allowance for inherent losses on other real estate owned.
As a percent of average assets, annualized other operating expenses decreased to 2.71% for the nine months ended
September 30, 2000, compared to a ratio of 3.31% for the nine months ended September 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 49.53% for the nine months ended September 30, 2000, compared to a ratio of 56.84% for the
nine months ended September 30, 1999. The decrease in the efficiency ratio indicates that the Company is allocating a lower
percentage of net revenue to operating expenses.
18
BALANCE SHEET ANALYSIS
The Company reported total assets of $2.22 billion at September 30, 2000. This represented an increase of $206.2
million, or 10.25%, over total assets of $2.01 billion at December 31, 1999. Gross loans, net of deferred loan fees, totaled
$1.01 billion at September 30, 2000. This represented an increase of $52.5 million, or 5.51%, over gross loans of $952.6 million
at December 31, 1999. Total deposits increased $157.2 million, or 10.47%, to $1.66 billion at September 30, 2000, from $1.50
billion at December 31, 1999. Investment Securities and Debt Securities Available-for-Sale totaled $1.05 billion at September
30, 2000. This represented an increase of $176.6 million, or 20.13%, over total investment securities of $877.3 million at December
31, 1999. At September 30, 2000, the Company's net unrealized loss on securities available-for-sale totaled $15.0 million.
Accumulated other comprehensive loss totaled $8.7 million, and deferred tax assets totaled $6.3 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 September 30, 2000 and
December 31, 1999.
Table 4 - Composition of Securities Portfolio
(dollars in thousands)
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------------------------------------- -------------------------------------------------------
Amortized Cost Market Value Net Yield Amortized Cost Market Value Net Yield
Unrealized (TEY) Unrealized (TEY)
Gain/(Loss) Gain/(Loss)
------------------------------------------------------------------------------------------------------------------
Overnight Fed Funds Sold $ 17,000 $ 17,000 $ 0 6.42% $ $ $
Overnight Reverse Repo 80,000 80,000 0 6.95%
U.S. Treasury securities
Available for Sale 999 997 (2) 5.91% 999 991 (8) 5.91%
FHLMC, FNMA CMO's, REMIC's
and mortgage-backed pass-through securities
Available for Sale 612,038 595,729 (16,309) 6.57% 608,007 586,036 (21,971) 6.45%
Other Government Agency Securities
Available for Sale 21,181 20,877 (304) 6.21% 35,392 34,882 (510) 6.02%
GNMA mortgage-backed pass-through
securities
Available for Sale 54,432 53,522 (910) 6.90% 57,907 56,201 (1,706) 6.68%
Tax-exempt Municipal Securities
Available for Sale 242,821 245,214 2,393 8.27% 165,137 160,946 (4,191) 7.70%
Corporate Bond
Available for Sale 18,231 18,311 80 7.29% 9,536 9,493 (43) 7.05%
Other securities
Available for Sale 22,274 22,274 0 0.00% 28,783 28,783 0 0.00%
---------------------------------------------------- -----------------------------------------------------
$ 1,068,976 $ 1,053,924 $ (15,052) 7.01% $ 905,761 $ 877,332 $ (28,429) 6.69%
====================================================== =======================================================
19
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
SEPTEMBER 30, 2000 December 31, 1999
------------------ -----------------
Commercial and Industrial $409,604 $392,094
Real Estate:
Construction 54,325 48,078
Mortgage 412,246 375,387
Consumer 25,484 24,731
Municipal lease finance receivables 25,271 21,268
Agribusiness 81,565 94,560
------------------------ -----------------------
Gross Loans $1,008,495 $956,118
Less:
Allowance for credit losses 19,093 16,761
Deferred net loan fees 3,484 3,566
------------------------ -----------------------
Net Loans $985,918 $935,791
======================== =======================
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 $1.2 million at September 30, 2000. This represented a
decrease of $717,000, or 37.80%, from non-performing assets of $1.9 million at December 31, 1999. As a percent of total assets,
non-performing assets were decreased to 0.05% on September 30, 2000 from 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.
20
TABLE 6 - Non-performing Assets (dollar amount in thousands)
SEPTEMBER 30, 2000 December 31, 1999
------------------ -----------------
Non-accrual loans $1,022 $1,191
Loans past due 90 days or more
and still accruing interest 158 3
Restructured loans 0 0
Other real estate owned (OREO), net 0 703
------------------------- -------------------------
Total non-performing assets $1,180 $1,897
========================= =========================
Percentage of non-performing assets
to total loans outstanding and OREO 0.12% 0.20%
Percentage of non-performing
assets to total assets 0.05% 0.09%
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 $1.0 million at September 30, 2000. This represented a decrease of $169,000, or 14.19%, from total non-accrual loans of $1.2
million at December 31, 1999.
At September 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
92%.
Loans 90 days or more and still accruing interest totaled $158,000 at September 30, 2000. This represents an increase of
$155,000 or 5,166.67%, over loans 90 days or more past due and still accruing interest of $3 at December 31, 1999.
The Company did not have any other real estate owned (OREO) at September 30, 2000. This represents a decrease of $703,000
or 100.00%, from OREO of $703,000 at December 31, 1999.
The Bank has allocated specific reserves to provide for any inherent 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.
21
Deposits and Other Borrowings
At September 30, 2000, total deposits were $1.66 billion. This represented an increase of $157.2 million, or 10.47%, from
total deposits of $1.50 billion at December 31, 1999. Demand deposits totaled $624.0 million at September 30, 2000, representing
a decrease of $25.8 million, or 3.97%, 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 nine months of 2000 were $604.0 million. This represented an increase of $16.7 million, or 2.84%,
from average demand deposits of $587.3 million for the first nine months of 1999. The comparison of average balances for the
first nine 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 $624.7 million at September 30, 2000. This represents an increase of $121.8 million, or 23.37%,
from savings deposits of $521.0 million at December 31, 1999.
Time deposits totaled $391.5 million at September 30, 2000. This represented an increase of $61.2 million, or
18.53%, over total time deposits of $330.3 million at December 31, 1999.
Other borrowed funds totaled $364.9 million at September 30, 2000. This represented an increase of $24.6 million, or
7.23% over other borrowed funds of $340.3 million at December 31, 1999. The increase in other borrowed funds during the first nine
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.
Net cash provided by operating activities totaled $33.3 million for the first nine months of 2000, compared to net
cash provided by operating activities of $30.0 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 $125.4 million for the first nine months of 2000, compared to net cash
used for investing activities of $116.2 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.
22
Financing activities provided net cash flows of $174.9 million for the nine months ended September 30, 2000. This
compares to $57.1 million in net cash provided by financing activities for the nine months ended September 30, 1999. The increase in
net cash provided by financing activities was primarily the result of additional short-term borrowings. At September 30, 2000,
cash and cash equivalents totaled $104.2 million compared to $120.0 million at December 31, 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 nine months of 2000, the Bank's average net loan to deposit ratio averaged
64.52%, compared to an average ratio of 58.16% for the first nine 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
cashflows 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, 2000, approximately $61.0 million of the Bank's
equity was unrestricted and available to be paid as dividends to CVB. Management of CVB believes that such restrictions will not
have an impact on the ability of CVB to meet its ongoing cash obligations. As of September 30, 2000, neither the Bank nor CVB had
any material commitments for capital expenditures.
Capital Resources
The Company's equity capital was $167.0 million at September 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 September 30, 2000, 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, 2000, and
December 31, 1999.
Table 7 - Regulatory Capital Ratios
Required
Minimum SEPTEMBER 30, 2000 December 31, 1999
Capital Ratios Ratios Company Bank Company Bank
- -------------- ------ ------- ---- ------- ----
Risk-based capital ratios
Tier I 4.00% 13.22% 13.26% 12.60% 12.33%
Total 8.00% 14.48% 14.52% 13.86% 13.59%
Leverage ratio 4.00% 8.48% 8.25% 7.73% 7.56%
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.
23
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The California Appellate Court has rendered its final ruling and has reversed and remanded the MRI Grand Terrace,
Inc. ("MRI") litigation to the lower court for re-trial. 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
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
None
24
Exhibit Index
-------------
Exhibit No. Description Page
- ----------- ----------- ----
27 Financial Data Schedule 27
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
CVB FINANCIAL CORP.
-------------------
(Registrant)
Date: November 8, 2000 /s/ Edward J. Biebrich, Jr.
---------------------------
Edward J. Biebrich, Jr.
Chief Financial Officer
26
9 1,000 3-MOS DEC-31-2000 SEP-30-2000 104,198 0 97,000 0 956,924 0 0 1,005,012 19,093 2,216,916 1,658,237 350,000 41,324 349 0 0 107,508 59,498 2,216,916 66,467 44,872 55 111,394 23,016 41,103 70,291 2,300 (237) 41,624 40,115 25,441 0 0 25,441 1.02 0.99 5.19 1,022 158 0 1,180 16,761 274 306 19,093 9,978 0 9,115