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27
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
For Quarter Ended June 30, 2001 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 incorporation (I.R.S. Employer Identification No.)
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: 27,803,897 outstanding as of July 3, 2001.
This Form 10-Q contains 26 pages.
PART I - FINANCIAL INFORMATION
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
dollar amounts in thousands
June 30, December 31,
2001 2000
---------------- --------------------
(unaudited)
ASSETS
Federal funds sold $ 0 $ 10,000 $
Investment securities available-for-sale 1,120,769 1,070,074
Loans and lease finance receivables, net 1,046,931 1,032,341
--------------- ------------------
Total earning assets 2,167,700 2,112,415
Cash and due from banks 96,398 130,315
Premises and equipment, net 27,921 27,206
Other real estate owned, net 0 359
Deferred taxes 1,878 4,148
Goodwill and intangibles 6,913 7,403
Cash value life insurance 7,506 7,434
Accrued interest receivable 15,040 14,625
Other assets 4,316 4,091
--------------- ------------------
TOTAL ASSETS $ 2,327,672 $ 2,307,996 $
=============== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 652,661 $ 665,290 $
Interest-bearing 1,001,061 929,740
--------------- ------------------
Total Deposits 1,653,722 1,595,030
Short-term borrowings 136,354 396,234
Long-term borrowings. 304,323 101,341
Accrued interest payable 7,797 6,742
Other liabilities 22,452 20,019
--------------- ------------------
TOTAL LIABILITIES 2,124,648 2,119,366 $
--------------- ------------------
Stockholders' Equity:
Preferred stock (authorized, 20,000,000 shares
without par; none issued or outstanding)
Common stock -authorized, 50,000,000 shares
without par; issued and outstanding
27,802,827 (2001) and 27,659,452 (2000) 145,967 145,648
Retained earnings 46,857 36,179
Accumulated other comprehensive income 10,200 6,803
--------------- ------------------
Total stockholders' equity 203,024 188,630
--------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,327,672 $ 2,307,996 $
=============== ==================
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 Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
-------------- -------------- ------------- -------------
Interest Income:
Loans, including fees $ 22,876 $ 22,112 $ 46,052 $ 43,369
Investment securities:
Taxable 12,246 12,379 25,187 24,180
Tax-advantaged 4,064 2,831 7,817 5,095
------------ ----------- ------------- -------------
Total investment income 16,310 15,210 33,004 29,275
Federal funds sold 34 0 102 2
------------ ----------- ------------- -------------
Total interest income 39,220 37,322 79,158 72,646
Interest Expense:
Deposits 8,275 7,522 17,578 14,386
Borrowings 5,299 6,270 11,941 11,520
------------ ----------- ------------- -------------
Total interest expense 13,574 13,792 29,519 25,906
------------ ----------- ------------- -------------
Net interest income before provision for credit losses 25,646 23,530 49,639 46,740
Provision for credit losses 750 700 1,500 1,600
------------ ----------- ------------- -------------
Net interest income after
provision for credit losses 24,896 22,830 48,139 45,140
Other Operating Income:
Service charges on deposit accounts 3,169 2,550 6,315 5,196
Gain(Loss) on sale of securities 519 (57) (86) (131)
Gain on sale of other real estate owned 126 0 126 224
Trust services 897 969 2,007 2,010
Other 1,062 971 3,081 1,848
------------ ----------- ------------- -------------
Total other operating income 5,773 4,433 11,443 9,147
Other operating expenses:
Salaries and employee benefits 7,893 7,339 15,826 14,853
Occupancy 1,393 1,292 2,780 2,667
Equipment 1,345 1,217 2,569 2,488
Professional services 1,072 739 2,327 1,860
Other 2,894 3,331 6,186 6,395
------------ ----------- ------------- -------------
Total other operating expenses 14,597 13,918 29,688 28,263
------------ ----------- ------------- -------------
Earnings before income taxes 16,072 13,345 29,894 26,024
Income taxes 6,428 4,898 11,441 9,721
-------------- -------------- ------------- -------------
Net earnings $ 9,644 $ 8,447 $ 18,453 $ 16,303
============== ============== ============= =============
Basic earnings per common share $ 0.35 $ 0.31 $ 0.67 $ 0.59
============== ============== ============= =============
Diluted earnings per common share $ 0.34 $ 0.30 $ 0.65 $ 0.58
============== ============== ============= =============
Cash dividends per common share $ 0.14 $ 0.12 $ 0.28 $ 0.24
============== ============== ============= =============
See accompanying notes to the consolidated financial statements.
3
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
(Dollars and shares in thousands)
Accumulated
Other
Common Comprehensive
Shares Common Retained Income Comprehensive
Outstanding Stock Earnings Net of Tax Income
-------------- -------------- ------------- ------------------- ----------------
Balance January 1, 2000 24,717 $ 105,304 $ 51,857 $ (16,391)
Issuance of common stock 428 2,347
10% stock dividend 2,514 37,997 (37,997)
Tax benefit from exercise of stock options 26
Cash dividends (12,390)
Comprehensive income:
Net earnings 34,683 34,683
Other comprehensive income:
Unrealized gains on securities
available-for-sale, net 23,194 23,194
----------------
Comprehensive income $ 57,877
-------------- ----------- ----------- ---------------- ================
Balance December 31, 2000 27,659 145,648 36,179 6,803
Issuance of common stock 144 319
Cash dividends (7,775)
Comprehensive income:
Net earnings 18,453 $ 18,453
Other comprehensive income:
Unrealized gains on securities
available-for-sale, net 3,397 3,397
-------------------
Comprehensive income $ 21,850
-------------- -------------- ------------- ------------------- ===================
Balance June 30, 2001 27,803 $ 145,967 $ 46,857 $ 10,200
============== ============== ============= ===================
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 Six Months
Ended June 30,
2001 2000
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 67,210 $ 74,239
Service charges and other fees received 11,530 9,278
Interest paid (28,465) (24,040)
Cash paid to suppliers and employees (26,379) (20,374)
Income taxes (paid) refunded 7,250 (10,432)
------------- -------------
Net cash provided by operating activities 31,146 28,671
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available-for-sale 253,347 22,146
Proceeds from maturities of securities available-for-sale 45,041 60,785
Purchases of securities available-for-sale (334,075) (159,792)
Net decrease in loans (14,114) (39,008)
Proceeds from sales of premises and equipment 56 38
Proceeds from sale of other real estate owned 536 405
Purchase of premises and equipment (3,058) (1,998)
Other investing activities (17,153) (5,851)
------------- -------------
Net cash provided by (used in) investing activities (69,420) (123,275)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease) in transaction deposits 18,707 (44,502)
Net increase in time deposits 39,986 21,213
Net increase (decrease) in borrowings (56,880) 106,801
Cash dividends on common stock (7,775) (6,054)
Proceeds from exercise of stock options 319 2,166
------------- -------------
Net cash (used in) provided by financing activities (5,643) 79,624
------------- -------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (43,917) (14,980)
CASH AND CASH EQUIVALENTS, beginning of period 140,315 118,360
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 96,398 $ 103,380
============= =============
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 Six Months
Ended June 30,
2001 2000
---------------- ---------------
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 18,453 $ 16,303
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Gain on sale of investment securities (1,527) (17)
Loss on sale of investment securities 1,613 148
Loss(gain) on sale of premises and equipment 56 0
Gain on sale of other real estate owned (126) (224)
Increase in cash value of life insurance 72 43
Amortization of premiums on investment securities (9,237) 3,869
Provisions for credit and OREO losses 1,449 1,600
Depreciation and amortization 2,343 2,284
Change in accrued interest receivable (414) (2,276)
Change in accrued interest payable 1,054 1,866
Change in other assets and liabilities 17,410 5,075
--------------- ---------------
Total adjustments 12,693 12,368
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 31,146 $ 28,671
=============== ===============
Supplemental Schedule of Noncash Investing and Financing Activities
Securities purchased and not settled $ 0 $ 5,610
6
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2001 and 2000
1. Summary of Significant Accounting Policies. See Note 1 of the Notes to Consolidated Financial
Statements in CVB Financial Corp.'s 2000 Annual Report on Form 10-K.
Goodwill resulting from purchase accounting treatment of acquired banks is amortized on a straight-line
basis over 15 years.
The Bank accounts for impaired loans in accordance with Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." Impaired
loans totaled $14.6 million at June 30, 2001. These loans were supported by collateral with a fair
market value, net of prior liens, of $13.2 million.
In June 2001, the Financial Accounting Standards Board ("FASB") issued a Statement of Financial Accounting
Standards ("SFAS") No. 142, "Accounting for Goodwill and Other Intangible Assets," effective starting with
fiscal years beginning after December 15, 2001. This standard establishes new accounting standards for
goodwill and continues to require the recognition of goodwill as an asset but does not permit amortization
of goodwill as previously required by the Accounting Principles Board Opinion ("APB") Opinion No. 17. The
standard also establishes a new method of testing goodwill for impairment. It requires goodwill to be
separately tested for impairment at a reporting unit level. The amount of goodwill determined to be
impaired would be expensed to current operations. Management believes that the adoption of the statement
will not have a material effect on the Company's financial statements.
2. Certain reclassifications have been made in the 2000 financial information to conform to the
presentation used in 2001.
3. In the ordinary course of business, the Company enters into commitments to extend credit to its
customers. These commitments are not reflected in the accompanying consolidated financial statements. As
of June 30, 2001, the Company had entered into commitments with certain customers amounting to $375.8
million compared to $339.1 million at December 31, 2000. Letters of credit at June 30, 2001, and
December 31, 2000, were $11.4 million and $10.9 million, respectively.
7
4. The interim consolidated financial statements are unaudited and reflect all adjustments and
reclassifications which, in the opinion of management, are necessary for a fair statement of the results
of operations and financial condition for the interim period. All adjustments and reclassifications are
of a normal and recurring nature. Results for the period ending June 30, 2001 are not necessarily
indicative of results which may be expected for any other interim period or for the year as a whole.
5. The actual number of shares outstanding at June 30, 2001 was 27,802,827. 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 2000 per share information in the financial statements and in Management's Discussion and Analysis
has been restated to give retroactive effect to the 10% stock dividend declared December 20, 2000, and
which was paid on January 26, 2001. The table below presents the reconciliation of earnings per share
for the periods indicated.
Earnings Per Share Reconciliation
(Dollars and shares in thousands, except per share amounts)
For the Three Months
Ended June 30,
2001 2000
---------------------------------------------- ---------------------------------------------
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 $ 9,644 27,783 $0.35 $ 8,447 27,577 $0.31
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 474 (0.01) 570 (0.01)
---------------------------------------------- ------------------------------------------
DILUTED EPS
Income available to
common stockholders $ 9,644 28,257 $0.34 $ 8,447 28,147 $0.30
============================================== =============================================
Earnings Per Share Reconciliation
For the Six Months
Ended June 30,
2001 2000
---------------------------------------------- ---------------------------------------------
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 $ 18,453 27,751 $0.67 $ 16,303 27,504 $0.59
EFFECT OF DILUTIVE
SECURITIES
Incremental shares
from assumed exercise
of outstanding options 489 (0.02) 638 (0.01)
-------------------------------------------- ------------------------------------------
DILUTED EPS
Income available to
common stockholders $ 18,453 28,240 $0.65 $ 16,303 28,142 $0.58
============================================== =============================================
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 the Company and its operations, reference should be made to the financial statements
included in this report and in the Company's 2000 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, 2000.
RESULTS OF OPERATIONS
The Company reported net earnings of $18.5 million for the six months ended June 30, 2001. This
represented an increase of $2.2 million, or 13.19%, over net earnings of $16.3 million for the six months ended
June 30, 2000. Basic earnings per share for the six-month period increased to $0.67 per share for 2001, compared
to $0.59 per share for 2000. Diluted earnings per share increased to $0.65 per share for the first six months of
2001, compared to $0.58 per share for the same six-month period last year. The annualized return on average
assets was 1.63% for both six-month periods ending June 30, 2001 and 2000. The annualized return on average
equity was 18.65% for the six months ended June 30, 2001, compared to a return of 21.85% for the six months ended
June 30, 2000. The return on average equity was higher in 2000 due to the lower average equity in the first six
months of 2000. This was due to changes in accumulated other comprehensive income which averaged for the six
months ending June 30, 2001, $9.6 million compared to $(17.7) million for the same period in 2000. Accumulated
other comprehensive income consists of unrealized gains and losses in investment securities. For the six months
ended June 30, 2001, the Company has declared dividends in the amount of $0.28 per share. This represents an
increase of $0.04 per share or 16.67%, compared to dividends declared through June 30, 2000.
For the quarter ended June 30, 2001, the Company generated net earnings of $9.6 million. This
represented an increase of $1.2 million, or 14.17%, over the net earnings of $8.4 million for the second quarter
of 2000. Basic earnings per share increased to $0.35 for the second quarter of 2001 compared to $0.31 per share
for the second quarter of 2000. Diluted earnings per share increased to $0.34 per share compared to $0.30 per
share for the second quarter of 2001 and 2000, respectively. The annualized return on average assets was 1.71%
for the second quarter of 2001 compared to 1.67% for the same period last year. The annualized return on average
equity was 19.12% for the second quarter of 2001 and 22.72% for the second quarter of 2000. For the second
quarter ended June 30, 2001, the Company has declared dividends in the amount of $0.14 per share. This represents
an increase of $0.02 per share or 16.67%, compared to dividends declared in the second quarter ended June 30,
2000.
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 $31.4 million for the six months ended June 30, 2001.
This represented an increase of $3.8 million, or 13.89 %, compared to operating earnings of $27.5 million for the
first six months of 2000. For the second quarter of 2001, pre-tax operating earnings totaled $16.2 million. This
represented an increase of $2.1 million, or 14.71%, from pre-tax operating earnings of $14.1 million for the
second quarter of 2000.
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 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 economies in which the Company conducts business.
For the six months ended June 30, 2001, net interest income before the provision for credit losses
was $49.6 million. This represented an increase of $2.9 million, or 6.20%, over net interest income of $46.7
million for the six months ended June 30, 2000. The increase in net interest income for the first six months of
2001 compared to 2000 was primarily the result of greater average balances of earning assets, which was partially
offset by a decrease in interest rates. Net earning assets averaged $2.1 billion for the first six months of
2001. This represented an increase of $271.3 million, or 14.71%, compared to net average earning assets of $1.8
billion for the first six months of 2000.
The net interest margin measures net interest income as a percentage of average earning assets. The net
interest margin can be affected by changes in the yield on earning assets and the cost of interest-bearing
liabilities, as well as changes in the level of interest-bearing liabilities in proportion to earning assets. The
net interest margin can also be affected by changes in the mix of earning assets as well as the mix of
interest-bearing liabilities. The Company's tax effected (TE) net interest margin was 4.95% for the first six
months ended June 30, 2001, compared to 5.23% for the same period of 2000. A lower yield on average earning
assets, and a higher cost of average funding (deposits and borrowings), contributed to the decrease in the net
interest margin. A change in the mix of earning assets was another contributor to the decrease in the net
interest margin. Average gross loans as a percentage of average gross earning assets for the first six months of
2001 decreased from 51.23% to 49.21% compared to the same period last year. Loans typically generate higher
yields than investments. Also, a change in the mix of average interest-bearing liabilities toward higher costing
funds was another element contributing to the decrease in the net interest margin. Average borrowed funds as a
percent of average funding (total deposits plus borrowing) increased from 20.56% as of December 31, 2000 to
21.61% as of June 30, 2001.
The net interest spread is the difference between the yield on average earning assets less the cost of
average interest-bearing liabilities. The Company's net interest spread (TE) decreased to 3.56% for the first six
months of 2001 ending June 30, compared to 3.84% for the same period of 2000. The decrease in the net interest
spread for 2001 resulted from decreases in the yield on earning assets. The yield on earning assets decreased 29
basis points, and the cost of interest-bearing liabilities decreased 1 basis point for the first six months of
2001 compared to 2000.
The decrease in the yield on average earning assets resulted from decreased yields on average loans and
average investments. The yield on average loans decreased to 8.84% for the six months ended June 30, 2001, from
a yield of 9.12% for the first six months of 2000. The decrease in the yields on loans for 2001 was primarily the
result of a decreasing interest rate environment. The tax effective (TE) yield on average investments decreased
to 6.67% at June 30, 2001 compared to 6.86% at June 30, 2000. The decrease was due to the declining interest
rate environment.
10
The cost of average interest-bearing liabilities decreased to 4.17% for the six months ended June 30,
2001, compared to a cost of 4.18% for the first six months of 2000. The decrease in the cost of interest-bearing
liabilities was primarily the result of a change in the mix of interest-bearing liabilities and competitive
market forces. As stated above, average borrowed funds as a percent of average funding (total deposits plus
borrowing) increased from 20.56% to 21.61% between December 31, 2000 and June 31, 2001. Also, average time
deposits as a percentage of interest-bearing deposits increased to 44.70% from 39.33%. The cost of average
interest-bearing deposits was 3.60% for the first six months of 2001 as compared to 3.37% for the first six
months of 2000. The cost of borrowed funds decreased to 5.44% for the six months ended June 30, 2001, compared to
a cost of 5.96% for the six months ended June 30, 2000. The cost of time deposits increased to 5.21% for the six
months ended June 30, 2001, compared to a cost of 4.96% for the six months ended June 30, 2000.
For the second quarter of 2001, net interest income before the provision for credit losses was $25.6
million. This represented an increase of $2.1 million, or 8.99%, over net interest income of $23.5 million for
the second quarter of 2000. The increase in net interest income for the second quarter of 2001 compared to 2000
was primarily the result of greater average balances of earning assets, which was partially off set by a decrease
in interest rates. Net earning assets averaged $2.1 billion for the second quarter of 2001. This represented an
increase of $262.7 million, or 14.02%, compared to net average earning assets of $1.9 billion for the second
quarter of 2000.
The Company's tax effected (TE) net interest margin was 5.09% for the second quarter of 2001, compared
to 5.26% for the same period of 2000. A lower yield on average earning assets contributed to the decrease in the
net interest margin. A change in the mix of earning assets was another contributor to the decrease in the net
interest margin. Average gross loans as a percentage of average gross earning assets for the second quarter of
2001 decreased from 50.92% to 49.06% compared to the same period last year. Loans typically generate higher
yields than investments. Also, a change in the mix of average interest-bearing liabilities toward higher costing
funds was another element contributing to the decrease in the net interest margin. Average borrowed funds as a
percent of average funding (total deposits plus borrowing) increased from 20.56% as of December 31, 2000 to
20.81% for the second quarter of 2001.
The Company's net interest spread (TE) decreased to 3.79% for the second quarter of 2001, compared to
3.83% for the same period of 2000. The decrease in the net interest spread for the second quarter resulted from
decreases in the yield on earning assets. The yield on earning assets decreased 57 basis points, and the cost of
interest-bearing liabilities decreased 53 basis points for the second quarter of 2001 compared to 2000.
For the second quarter of 2001, the decrease in the yield on average earning assets resulted from
decreased yields on average loans. The yield on average loans decreased to 8.77% for the second quarter of 2001,
from a yield of 9.31% for the second quarter of 2000. The decrease in the yields on loans for the second quarter
was primarily the result of a decreasing interest rate environment. The tax effective (TE) yield on average
investments decreased to 6.55% for the second quarter of 2001 compared to 7.04% for the same period last year.
For the second quarter of 2001, the cost of average interest-bearing liabilities decreased to 3.85%,
compared to a cost of 4.38% for the same period last year. The decrease in the cost of interest-bearing
liabilities was primarily the result of a change in the mix of interest-bearing liabilities and competitive
market forces. As stated above, average borrowed funds as a percent of average funding (total deposits plus
borrowing) increased from 20.56% to 21.61% between June 30, 2001 and December 31, 2000. Also, average time
deposits as a percentage of interest bearing deposits increased to 44.64% from 39.81%. The cost of average
interest-bearing deposits was 3.32% for the second quarter of 2001, as compared to 3.50% for the second quarter
of 2000. The cost of borrowed funds decreased to 4.94% for the second quarter of 2001, compared to a cost of
6.08% for the same period last year. The cost of time deposits decreased to 4.87% for the second quarter of 2001,
compared to a cost of 5.27% for the second quarter of 2000.
11
The Company reported total interest income of $79.2 million for the six months ended June 30, 2001. This
represented an increase of $6.5 million, or 8.96%, over total interest income of $72.6 million for the six months
ended June 30, 2000. Total interest income of $39.2 million was reported for the second quarter of 2001. This
represented an increase of $1.9 million, or 5.08%, over total interest income of $37.3 million for the second
quarter of 2000.
Interest expense totaled $29.5 million for the six months ended June 30, 2001. This represented an
increase of $3.6 million, or 13.94%, over total interest expense of $25.9 million for the six months ended June
30, 2000. Interest expense totaled $13.6 million for the second quarter of 2001. This represented a decrease of
$219,000, or 1.59%, over total interest expense of $13.8 million for the second quarter of 2000.
Table 1 shows the average balances of assets, liabilities, and stockholders' equity and the related
interest income, expense, and rates for the six-month and three-month periods ended June 30, 2001, and 2000.
Yields for tax-advantaged investments are shown on a taxable equivalent basis using a 35% tax rate.
TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differentials
(dollars in thousands)
Six-month periods ended June 30,
2001 2000
--------------------------------------- ------------------------------------
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------------ ------------ ----------- ------------ ----------- ---------
Investment Securities:
Taxable $ 786,822 $ 25,187 6.46% $ 717,888 $ 24,180 6.75%
Tax-advantaged (TE) (1) 293,940 7,817 7.24% 190,139 5,095 7.25%
Federal Funds Sold Interest-bearing
deposits with other financial institutions 3,917 102 5.25% 77 3 7.81%
Loans (2) 1,050,957 46,052 8.84% 953,788 43,369 9.12%
------------ ------------ ----------- ------------ ----------- ---------
Total Earning Assets 2,135,636 $ 79,158 7.73% 1,861,892 $ 72,647 8.02%
Total Non-earning Assets 140,864 158,523
------------ ------------
Total Assets $ 2,276,500 $ 2,020,415
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing deposits $ 622,047 $ 598,709
Savings Deposits (3) 544,384 $ 6,212 2.30% 518,894 $ 6,074 2.35%
Time Deposits 440,103 11,366 5.21% 336,364 8,312 4.96%
------------ ------------ ----------- ------------ ----------- ---------
Total Deposits 1,606,534 17,578 2.21% 1,453,967 14,386 1.98%
------------ ------------ ----------- ------------ ----------- ---------
Borrowings 442,853 11,941 5.44% 387,917 11,520 5.96%
------------ ------------ ----------- ------------ ----------- ---------
Total Interest-Bearing Liabilities 1,427,340 $ 29,519 4.17% 1,243,175 $ 25,906 4.18%
------------ ------------
Other Liabilities 27,561 29,292
Stockholders' Equity 199,552 149,239
------------ ------------
Total Liabilities and
Stockholders' Equity $ 2,276,500 $ 2,020,415
============ ============
Net interest spread 3.56% 3.84%
Net interest margin 4.95% 5.23%
- ----------------------------------------------------
(1) Includes tax-exempt municipal securities, preferred stock, and qualified zone academy bonds.
(2) Loan fees are included in total interest income as follows: 2001, $1,976; 2000, $1.879.
(3) Includes interest-bearing demand and money market accounts.
12
Three-month periods ended June 30,
2001 2000
-------------------------------------- --------------------------------------
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
-------------- ----------- --------- -------------- ---------- ----------
Investment Securities
Taxable $ 787,924 12,246 6.30% $ 717,800 12,379 6.99%
Tax-advantaged (TE) (1) 308,324 4,064 7.22% 210,973 2,831 7.35%
Federal Funds Sold Interest-bearing
deposits with other financial institutions 2,852 34 4.83% 0 0 0.00%
Loans (2) 1,058,380 22,876 8.77% 963,509 22,112 9.31%
-------------- ----------- --------- -------------- ---------- ----------
Total Earning Assets 2,157,480 39,220 7.64% 1,892,282 37,322 8.21%
Total Non-earning Assets 135,674 159,194
-------------- --------------
Total Assets $ 2,293,154 $ 2,051,476
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing deposits $ 634,249 $ 600,834
Savings Deposits (3) 551,329 2,931 2.16% 517,149 3,080 2.42%
Time Deposits 444,626 5,344 4.87% 342,081 4,442 5.27%
-------------- ----------- --------- -------------- ---------- ----------
Total Deposits 1,630,204 8,275 2.06% 1,460,064 7,522 2.09%
-------------- ----------- --------- -------------- ---------- ----------
Other Borrowings 435,360 5,299 4.94% 418,518 6,270 6.08%
-------------- ----------- --------- -------------- ---------- ----------
Total Interest-Bearing Liabilities 1,431,315 13,574 3.85% 1,277,748 13,792 4.38%
-------------- --------------
Other Liabilities 22,992 22,110
Stockholders' Equity 204,598 150,784
-------------- --------------
Total Liabilities and
Stockholders' Equity $ 2,293,154 $ 2,051,476
============== ==============
Net interest spread 3.79% 3.83%
Net interest margin 5.09% 5.26%
- --------------------------------------------
(1) Includes tax-exempt municipal securities, preferred stock, and qualified zone academy bonds.
(2) Loan fees are included in total interest income as follows: 2001, $1,078; 2000, $962.
(3) Includes interest-bearing demand and money market accounts.
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).
13
TABLE 2 - Rate and Volume Analysis for Changes in Interest Income, Interest Expense
and Net Interest Income
(amounts in thousands)
Comparison of six-month period
ended June 30, 2001 and 2000
Increase (decrease) in interest income or expense
due to changes in:
Rate/
Volume Rate Volume Total
------------ ------------ ------------ -------------
Interest Income:
Taxable investment securities $ 4,354 $ (2,836) $ (511) $ 1,007
Tax-advantaged securities 1,144 1,289 289 2,722
Fed funds sold interest-bearing
deposits with other institutions 138 (1) (37) 100
Loans 4,418 (1,575) (160) 2,683
------------ ------------ ------------ -------------
Total earning assets 10,054 (3,123) (419) 6,512
------------ ------------ ------------ -------------
Interest Expense:
Savings deposits 298 (152) (7) 139
Time deposits 2,563 375 115 3,053
Other borrowings 1,633 (1,062) (150) 421
------------ ------------ ------------ -------------
Total interest-bearing liabilities 4,494 (839) (42) 3,613
------------ ------------ ------------ -------------
Net Interest Income $ 5,560 $ (2,284) $ (377) $ 2,899
============ ============ ============ =============
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 bond 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 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 interest rate changes
in the market place and the Company's ability to reprice assets and liabilities as these interest rates change.
The Company's management utilizes the results of a dynamic simulation model to quantify the estimated exposure of
net interest income to sustained changes in interest rates. The sensitivity of the Company's net interest income
is measured over a rolling two year horizon. The simulation model estimates the impact of changing interest rates
on the net interest income from all interest-earning assets and interest expense paid on all interest-bearing
liabilities reflected on the Company's balance sheet. The sensitivity analysis is compared to policy limits
which specify a maximum tolerance level for net interest income exposure over a one year time horizon assuming no
balance sheet growth, given both a 200 basis point upward and downward shift in interest rates. A parallel and
pro rata shift in interest rates over a 12-month period is assumed. The following reflects the Company's net
interest income sensitivity over a one year horizon as of June 30, 2001.
14
Estimated Net
Simulated Interest Income
Rate Changes Sensitivity
------------ -----------
+200 basis points (0.59%)
-200 basis points 0.16%
The table indicates that net interest income would decrease by approximately 0.59% over a 12-month
period if there were a sustained, parallel and pro rata 200 basis point upward shift in interest rates. Net
interest income would increase approximately 0.16% over a 12-month period if there were a sustained, parallel and
pro rata 200 basis point downward shift in interest rates.
Credit Loss Experience
The allowance for credit losses is based upon estimates of probable losses inherent in the loan and
lease portfolio. The nature of the process by which the Company determines the appropriate allowance for credit
losses requires the exercise of considerable judgment. The amount actually observed in respect of these losses
can vary significantly from the estimated amounts. The Company's methodology includes two major elements, which
are intended to reduce the differences between estimated and actual losses.
The Company's methodology for assessing the appropriateness of the allowance is conducted on a regular basis
and considers all loans and consists of two key elements. The first element includes a detailed analysis of the loan
portfolio in two phases. The first phase is conducted in accordance with SFAS No. 114, "Accounting by Creditors for
the Impairment of a Loan.", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures." In this first phase, individual loans are reviewed to identify loans, which are
impaired. A loan is impaired when principal and interest are deemed uncollectable according to the original contractual
terms of the loan. Impairment is measured as either the expected future cash flows discounted at each loan's
effective interest rate, the fair value of the loan's collateral if the loan is collateral dependent, or an observable
market price of the loan (if one exists). The second phase is conducted in accordance with SFAS No. 5, "Accounting
for Contingencies", where an estimated loss from a loss contingency should accrue when, based on information available
prior to the issuance of the financial statements, it is probable that a loan has been impaired and the loss can be
reasonably estimated. In this second phase, homogeneous portfolios of loans are reviewed to determine a portfolio
formula allowance. In the case of the portfolio formula allowance, homogeneous portfolios, such as small business
lending, consumer loans, agricultural loans and real estate loans, are aggregated or pooled in determining the
appropriate allowance. The risk assessment process in this case emphasizes trends in the different portfolios for
delinquency, loss, and other behavioral characteristics of the subject portfolios.
The second element, in the Company's methodology for assessing the appropriateness of the allowance is also
conducted in accordance with SFAS No. 5, "Accounting for Contingencies". In this element of the analysis, management
considers all known relevant internal and external factors that may affect a loan's collectibility. This includes
management's judgmental determination of the amounts necessary for concentrations, economic uncertainties, the
volatility of the market value of collateral, and other subjective factors. Therefore, the relationship of each
element of the allowance to the total allowance may fluctuate from period to period.
Central to the Company's credit risk management is its loan risk rating system. The originating credit
officer assigns borrowers an initial risk rating, which is based primarily on a thorough analysis of each
borrower's financial capacity in conjunction with industry and economic trends. Approvals are made based upon the
amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line
and credit administration personnel. Credits are monitored by line and credit administration personnel for
deterioration in a borrower's financial condition, which would impact the ability of the borrower to perform
under the contract. Risk ratings are adjusted as necessary.
Based on the risk rating system 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 portfolio
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 inherent loss potential and allocates a portion of the allowance for
losses as a specific allowance for each of these credits.
15
The second element of the analysis which considers all known relevant internal and external factors that may
affect a loan's collectibility 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
second element of the analysis of the allowance include the following conditions that existed as of the balance
sheet date:
- then-existing general economic and business conditions affecting the key lending areas of the
Company,
- then-existing economic and business conditions of areas outside the lending areas, such as
other sections of the United States, Asia and Latin America,
- credit quality trends (including trends in non-performing loans expected to result from
existing conditions),
- collateral values,
- loan volumes and concentrations,
- seasoning of the loan portfolio,
- specific industry conditions within portfolio segments,
- recent loss experience in particular segments of the portfolio,
- duration of the current business cycle,
- bank regulatory examination results and
- 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 in
the first element of the analysis 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 inherent loss related to such condition is reflected
in the second element of the analysis. Although management has allocated a portion of the allowance to
specific loan categories, the adequacy of the allowance must be considered in its entirety.
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 $1.5 million for the six months ended June 30, 2001, as compared to $1.6 million for the same
period of 2000, a decrease of $100,000, or 6.25%.
The allowance for credit losses at June 30, 2001 was $20.7 million. This represented an increase of $1.6
million or 8.26%, from the allowance for credit losses of $19.2 million at December 31, 2000. The allowance for
credit losses was 1.97% of average gross loans for the first six months of 2001 and 1.91% of average gross loans
for the first six months of 2000.
Non-performing loans, which include non-accrual loans, loans past due 90 or more days and still
accruing, and restructured loans were $754,000 at June 30, 2001. This represented a decrease of $212,000, or
21.95%, from the level of non-performing loans at December 31, 2000. Non-performing assets, which include
non-performing loans plus other real estate owned (foreclosed property) decreased to 754,000 at June 30, 2001,
compared to $1.3 million at December 31, 2000. Table 6 presents non-performing assets as of June 30, 2001, and
December 31, 2000. At June 30, 2001, the Company had loans classified as impaired totaling $14.6 million. This
represents a decrease of $570,000, or 3.75% compared to loans classified as impaired of $15.2 million at
December 31, 2000. The Company applies the methods prescribed by Statement of Financial Accounting Standards No.
114 for determining the fair value of specific loans for which the eventual collection of all principal and
interest is considered impaired.
While management believes that the allowance at June 30, 2001, was adequate to absorb losses from any
known or inherent risks in the portfolio, no assurance can be given that economic conditions which adversely
affect the Company's service areas or other circumstances will not be reflected in increased provisions or credit
losses in the future. Table 3 shows comparative information on net credit losses, provisions for credit losses,
and the allowance for credit losses for the periods indicated.
16
TABLE 3 - Summary of Credit Loss Experience
(amounts in thousands)
Six-months ended June 30,
2001 2000
------------ ------------
Amount of Total Loans at End of Period (1) $ 1,067,666 $ 991,386
============ ============
Average Total Loans Outstanding (1) $ 1,050,957 $ 953,788
============ ============
Allowance for Credit Losses at Beginning of Period $ 19,152 $ 16,761
Loans Charged-Off:
Real Estate Loans 87 186
Commercial and Industrial 0 73
Consumer Loans 8 4
------------ ------------
Total Loans Charged-Off 95 263
------------ ------------
Recoveries:
Real Estate Loans 60 6
Commercial and Industrial 109 83
Consumer Loans 9 0
------------ ------------
Total Loans Recovered 178 89
Net Loans Charged-Off (83) 174
------------ ------------
Provision Charged to Operating Expense 1,500 1,600
------------ ------------
Allowance for Credit Losses at End of period $ 20,735 $ 18,187
============ ============
--------
(1) Net of deferred loan fees
Net Loans Charged-Off to Average Total Loans* -0.02% 0.04%
Net Loans Charged-Off to Total Loans at End of Period* -0.02% 0.04%
Allowance for Credit Losses to Average Total Loans 1.97% 1.91%
Allowance for Credit Losses to Total Loans at End of Period 1.94% 1.83%
Net Loans Charged-Off to Allowance for Credit Losses* -0.80% 1.91%
Net Loans Charged-Off to Provision for Credit Losses -5.53% 10.88%
* Net Loan Charge-Off amounts are annualized.
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 trust services, other fee oriented
products and services, other income, gain or loss on sale of securities or other real estate owned, rental
income, and gross revenue from Community Trust Deed Services and CVB Ventures (the Company's nonbank
subsidiaries).
Other operating income totaled $11.4 million for the six months ended June 30, 2001. This represented an
increase of $2.3 million, or 25.11%, from other operating income of $9.1 million for the six months ended June
30, 2000. The increase was primarily the result of higher service charge income, other income, bankcard income,
and rental income. For the second quarter of 2001, other operating income totaled $5.8 million. This represented
an increase of $1.3 million or 30.23%, from other operating income of $4.4 million for the second quarter of
2000. As in the year to date numbers, the increase was primarily the result of higher service charge income,
other income, bankcard income, and rental income.
17
Service charge income totaled $6.3 million for the first six months ended June 30, 2001. This represents
an increase of $1.1 million, or 21.54%, over service charge income of $5.2 million for the six months ended June
30, 2000. For the second quarter of 2001, service charge income totaled $3.2 million. This represents an
increase of $619,000, or 24.29%, over service charge income of $2.6 million for the second quarter of 2000.
Trust income totaled $2.0 million for the six months ended June 30, 2001, which is the same amount as
for the six months ended June 30, 2000. For the second quarter of 2001, Trust income totaled $897,000. This
represented a decrease of $72,000, or 7.38%, over trust income of $969,000 for the second quarter of 2000. This
decrease was due to the decline in the stock market resulting in a decline in the value of the trust assets.
This caused a decline in the fees for trust services.
Other fee-oriented products (which include investment services fees, business services fees, bankcard
fees, international fees, and other fees) generated fees totaling $1.6 million for the six months ended June 30,
2001. This represented an increase of $181,000, or 12.53%, over fees of $1.4 million for the six months ended
June 30, 2000. For the second quarter of 2001, other fee-oriented products generated fees totaling $850,000. This
represented an increase of $92,000, or 12.08%, over fees of $758,000 for the second quarter of 2000.
Other Operating Expenses
Other operating expenses for the Company includes expenses for salaries and benefits, occupancy,
equipment, professional services, promotion and other expenses (data processing, stationary and supplies, deposit
insurance, promotional, other real estate owned, and misc. expenses). Other operating expenses totaled $29.7
million for the six months ended June 30, 2001. This represented an increase of $1.4 million, or 5.04%, over
other operating expenses of $28.3 million for the six months ended June 30, 2000. For the second quarter of 2001,
other operating expenses totaled $14.6 million. This represented an increase of $679,000, or 4.88%, over other
operating expenses of $13.9 million for the second quarter of 2000.
For the most part, other operating expenses reflect the direct expenses and related administrative
expenses associated with staffing, maintaining, promoting, and operating branch facilities. Management's ability
to control other operating expenses in relation to asset growth can be measured in terms of other operating
expenses as a percentage of average assets. Operating expenses measured as a percentage of average assets
decreased to 2.63% for the first six months of 2001, compared to a ratio of 2.81% for the same period last year.
The decrease in the ratio indicates that management is controlling greater levels of assets with proportionately
smaller operating expenses, an indication of operating efficiency.
Management's ability to control other operating expenses in relation to the level of net revenue (net
interest income plus other operating income) can be measured in terms of other operating expenses as a percentage
of net revenue. This is known as the efficiency ratio and indicates the percentage of revenue that is used to
cover expenses. For the first six months of 2001, the efficiency ratio was 48.60%, compared to a ratio of 50.57%
for the same period last year. The decrease in the ratio indicates that a proportionately smaller amount of net
revenue was being allocated to operating expenses, an additional indication of operating efficiency.
Salaries and employee benefits totaled $15.8 million for the first six months of 2001. This represented
an increase of $973,000, or 6.55%, from salaries and employee benefits of $14.9 million for the same period last
year. Equipment expense totaled $2.6 million for the six months ended June 30, 2001. This represents an increase
of $81,000, or 3.25%, over equipment expense of $2.5 million for the six months ended June 30, 2000. Occupancy
expense totaled $2.8 million for the six months ended June 30, 2001. This represents an increase of $113,000, or
4.24%, over occupancy expense of $2.7 million for the same period last year. Professional expense, which includes
legal and accounting expenses totaled $2.3 million for the first six months, ended June 30, 2001. This represents
an increase of $468,000, or 25.14%, over professional expense of $1.9 million for the six months ended June 30,
2000. Other expense, which includes data processing, supplies, promotional, and other expenses, totaled $6.2
million for the six months ended June 30, 2001. This represents a decrease of $209,000, or 3.27%, over other
expense of $6.4 million for the first six months of 2000.
18
For the second quarter of 2001, salaries and employee benefits totaled $7.9 million. This represented an
increase of $554,000, or 7.55%, from salaries and employee benefits of $7.3 million for the same period last
year. Equipment expense totaled $1.3 million for the second quarter of 2001. This represents an increase of
$128,000, or 10.51%, over equipment expense of $1.2 million for the second quarter of 2000. Occupancy expense
totaled $1.4 million for the second quarter of 2001. This represents an increase of $101,000, or 7.80%, over
occupancy expense of $1.3 million for the same period last year. Professional expense, which includes legal and
accounting expenses, totaled $1.1 million for the second quarter of 2001. This represents an increase of
$334,000, or 45.17%, over professional expense of $739,000 for the same period last year. Other expense, which
includes data processing, supplies, promotional, and miscellaneous expenses, totaled $2.9 million for the
second quarter of 2001. This represents a decrease of $437,000, or 13.12%, over other expense of $3.3 million
for the second quarter of 2000.
Miscellaneous expenses include the amortization of goodwill and intangibles. The amortization
expense of goodwill and intangibles totaled $490,000 for the first six months of 2001 and $600,000 for the same
period last year. The decrease was due to the completion of the amortization of core deposit intangibles in the
first quarter of 2001. Amortization expense of goodwill and intangibles totaled $214,000 for the second
quarter of 2001 and $303,789 for the same period last year.
BALANCE SHEET ANALYSIS
The Company reported total assets of $2.33 billion at June 30, 2001. This represented a slight increase
of $19.7 million, or 0.85%, over total assets of $2.31 billion at December 31, 2000. Gross loans, net of deferred
loan fees, totaled $1.07 billion at June 30, 2001. This represented an increase of $16.0 million, or 1.54%, over
gross loans of $1.05 billion at December 31, 2000. Total deposits increased $58.7 million, or 3.68%, to $1.65
billion at June 30, 2001, from $1.60 billion at December 31, 2000. Borrowings decreased $56.9 million, or 11.44%,
to $440.7 million at June 30, 2001, from $497.6 million at December 31, 2000.
Investment Securities and Debt Securities Available-for-Sale
The Company reported total investment securities of $1.12 billion at June 30, 2001. This represented
an increase of $50.7 million, or 4.74%, over total investment securities of $1.07 billion at December 31, 2000.
At June 30, 2001, the Company's net unrealized gain on securities available-for-sale totaled $17.8
million. Accumulated other comprehensive income totaled $10.2 million (net of deferred taxes of $7.6 million).
At December 31, 2000, the Company reported a net unrealized gain on investment securities available-for-sale of
$11.7 million. Accumulated other comprehensive income totaled $6.8 million (net of deferred taxes of $4.9
million). Note 2 of the Notes to the Consolidated Financial Statements in the Company's 2000 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.
19
Table 4 sets forth investment securities held-to-maturity and available-for-sale, at June 30, 2001 and
December 31, 2000.
Table 4 - Composition of Investment Securities
(dollars in thousands)
June 30, 2001 December 31, 2000
------------------------------------------------------------- -----------------------------------------------------------
Amortized Market Net Unrealized Year-to- Amortized Market Net Unrealized Year-to-
Cost Value Gain/(Loss) Date Yield Cost Value Gain/(Loss) Date Yield
(TE) (TE)
------------ ------------- ------------------ ------------ ------------ ----------- ------------------ ------------
Investment Securities Available-for-Sale:
U.S. Treasury securities $ 1,000 1,023 $ 23 5.78% $ 999 $ 1,010 $ 11 5.95%
Mortgage-backed securities 378,591 380,858 2,267 6.47% 336,978 337,533 555 6.82%
CMO's / REMIC's 340,586 342,856 2,270 6.54% 391,634 391,045 (589) 6.78%
Other government agency securities 3,924 3,931 7 6.23% 18,765 18,711 (54) 6.12%
Tax-advantaged securities 295,353 307,508 12,155 7.28% 266,327 277,750 11,423 7.47%
Corporate bonds 60,660 61,524 864 6.69% 21,299 21,683 384 7.23%
Other securities 23,069 23,069 0 6.47% 22,342 22,342 0 7.11%
------------ ------------- ------------------ ------------ ------------ ----------- ------------------ ------------
Total Investment Securities $ 1,103,183 1,120,769 $ 17,586 6.72% $ 1,058,344 $ 1,070,074 $ 11,730 6.95%
============ ============= ================== ============ ============ =========== ================== ============
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
June 30, 2001 December 31, 2000
-------------------- --------------------------
Commercial and Industrial $ 374,629 $ 425,130
Real Estate:
Construction 76,901 58,373
Mortgage 477,080 401,408
Consumer 23,742 22,642
Municipal lease finance receivables 23,642 23,633
Agribusiness 95,165 123,614
----------------- -----------------------
Gross Loans 1,071,159 1,054,800
Less:
Allowance for credit losses (20,735) (19,152)
Deferred net loan fees (3,493) (3,307)
-------------------- --------------------------
Net Loans $ 1,046,931 $ 1,032,341
==================== ==========================
As set forth in Table 6, non-performing assets, which include non-performing loans plus other real
estate owned (foreclosed property) decreased to $754,000 at June 30, 2001 from $1.3 million at December 31, 2000.
Non-performing loans, which include non-accrual loans, loans past due 90 or more days and still accruing, and
restructured loans were $754,000 at June 30, 2001. This represented a decrease of $212,000, or 21.95% from the
level of non-performing loans at December 31, 2000. In addition, the Company had loans classified as impaired at
June 30, 2001 totaling $14.6 million. This represents an increase of $11.9 million, or 446.82% compared to loans
classified as impaired of $2.7 million at June 30, 2000.
20
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.
TABLE 6 - Non-performing Assets (dollar amount in thousands)
June 30, 2001 December 31, 2000
------------- -----------------
Non-accrual loans $754 $966
Loans past due 90 days or more
and still accruing interest 0 0
Restructured loans 0 0
Other real estate owned (OREO), net 0 359
----------------- -----------------
Total non-performing assets $754 $1,325
================= =================
Percentage of non-performing assets
to total loans outstanding and OREO 0.07% 0.13%
Percentage of non-performing
assets to total assets 0.03% 0.06%
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.
Deposits and Borrowings
At June 30, 2001, total deposits were $1.65 billion. This represented an increase of $58.7 million, or
3.68%, from total deposits of $1.60 billion at December 31, 2000. Average total deposits for the first six months
of 2001 were $1.61 billion. This represented an increase of $152.6 million, or 10.49%, from average total
deposits of $1.45 billion for the six months ended June 30, 2000. The comparison of average balances for the
first six months of 2001 with the average balances of the first six months of 2000 is more representative of the
Company's growth in deposits as it excludes the seasonal peak in deposits at year-end.
Demand deposits totaled $652.7 million at June 30, 2001, representing a decrease of $12.6 million, or
1.90%, from total demand deposits of $665.3 million at December 31, 2000. The decrease in demand deposits from
the year-end total reflects normal seasonal fluctuations relating to agricultural and other depositors. Average
demand deposits for the first six months of 2001 were $622.0 million. This represented an increase of $23.3
million, or 3.90%, from average demand deposits of $598.7 million for the six months ended June 30, 2000. At June
30, 2001, demand deposits represented 39.47% of total deposits, compared to 41.71% at December 31, 2000.
Savings deposits, which includes savings, interest-bearing demand, and money market accounts, totaled
$551.3 million at June 30, 2001, representing an increase of $31.3 million, or 6.03%, from savings deposits of
$520.0 million at December 31, 2000. Savings deposits are less affected by the Company's seasonal fluctuation in
demand deposits.
21
Time deposits totaled $449.7 million at June 30, 2001. This represented an increase of $40.0 million, or
9.76%, over total time deposits of $409.7 million at December 31, 2000. Time deposits are not affected by the
Company's seasonal fluctuation in demand deposits.
Borrowed funds include both short and long-term funds. Short-term borrowed funds include demand notes to
the U.S. Treasury, federal funds purchased from other financial institutions, and borrowings from the Federal
Reserve Bank and the Federal Home Loan Bank. Long-term funds include borrowings from the Federal Home Loan
Bank. For the six months ended June 30, 2001 borrowed funds averaged $442.9 million. Short-term borrowed
funds totaled $136.4 million at June 30, 2001. This represented a decrease of $259.9 million, or 65.59% over
short-term borrowed funds of $396.2 million at December 31, 2000. Long-term borrowed funds totaled $304.3 million
at June 30, 2001. This represented an increase of $203.0 million, or 200.30% over long-term borrowed funds
of $101.3 million at December 31, 2000. Total borrowed funds at June 30, 2001 total $440.7 million. This
represented a decrease of $56.9 million, or 11.44% over total borrowed funds of $497.6 million at December 31, 2000.
The decrease in borrowed funds during the first six months of 2001 was primarily the result of a decrease in
Federal Home Loan Bank borrowing. While total borrowing decreased, there was a shift out of short-term
borrowing into long-term borrowing in order to capture a lower interest rate environment.
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, 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 $31.1 million for the first six months of 2001,
compared to net cash provided by operating activities of $28.7 million for the same period last year. The
increase was primarily the result of an income tax refund and an increase in service charges and other fees
received, which was partially offset by a decrease in interest received, an increase in interest paid, and an
increase in cash paid to suppliers and employees.
Net cash used in investing activities totaled $69.4 million for the first six months of 2001, compared
to net cash used in investing activities of $123.3 million for the same period last year. The decrease in net
cash used in investing activities was primarily the result of an increase in the proceeds from the sale of
securities, which was partially offset by the increase in the purchase of securities.
Financing activities used net cash flows of $5.6 million for the six months ended June 30, 2001. This
compares to $79.6 million in net cash provided for the six months ended June 30, 2000. The increase in net cash
used by financing activities was primarily the result of a decrease in borrowings.
22
Cash and cash equivalents totaled $96.4 million for the period ending June 30, 2001 compared to $103.4
million for the same period ending June 30, 2000.
Since the primary sources and uses of funds for the Bank are loans and deposits, the relationship
between gross loans and total deposits provides a useful measure of the Bank's liquidity. Typically, the closer
the ratio of loans to deposits is to 100%, the more reliant the Bank is on its loan portfolio to provide for
short-term liquidity needs. Since repayment of loans tends to be less predictable than the maturity of
investments and other liquid resources, the higher the loan to deposit ratio the less liquid are the Bank's
assets. For the first six months of 2001, the Bank's net loan to deposit ratio averaged 65.42%, compared to an
average ratio of 65.60% for the first six months of 2000.
CVB is a company separate and apart from the Bank that must provide for its own liquidity. Substantially
all of CVB's revenues are obtained from dividends declared and paid by the Bank. There are statutory and
regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. At June 30, 2001,
approximately $67.3 million of the Bank's equity was unrestricted and available to be paid as dividends to CVB.
Management of CVB believes that such restrictions will not have an impact on the ability of CVB to meet its
ongoing cash obligations. As of June 30, 2001, neither the Bank nor CVB had any material commitments for capital
expenditures.
Capital Resources
The Company's equity capital was $203.0 million at June 30, 2001. The primary source of capital for the
Company continues to be the retention of net after tax earnings. The Company's 2000 Annual Report on Form 10-K
(Management's Discussion and Analysis and Note 15 of the accompanying financial statements) describes the
regulatory capital requirements of the Company and the Bank.
The Bank and the Company are required to meet risk-based capital standards set by their respective
regulatory authorities. The risk-based capital standards require the achievement of a minimum ratio of total
capital to risk-weighted assets of 8.0% (of which at least 4.0% must be Tier 1 capital). In addition, the
regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. At
June 30, 2001, the Bank and the Company exceeded the minimum risk-based capital ratio and leverage ratio required
to be considered "Well Capitalized".
Table 7 below presents the Company's and the Bank's risk-based and leverage capital ratios as of
June 30, 2001, and December 31, 2000.
Table 7 - Regulatory Capital Ratios
Required June 30, 2001 December 31, 2000
Minimum -------------------------- --------------------------
Capital Ratios Ratios Company Bank Company Bank
- -------------- ------ ------- ---- ------- ----
Risk-based capital ratios
Tier I 4.00% 13.30% 13.35% 12.60% 12.33%
Total 8.00% 14.56% 14.61% 13.86% 13.59%
Leverage ratio 4.00% 8.19% 8.22% 7.73% 7.56%
23
Risk Management
The Company's management has adopted a Risk Management Plan to ensure the proper control and management
of all risk factors inherent in the operation of the Company and the Bank. Specifically, credit risk, interest
rate risk, liquidity risk, transaction risk, compliance risk, strategic risk, reputation risk, price risk and
foreign exchange risk, can all affect the market risk exposure of the Company. These specific risk factors are
not mutually exclusive. It is recognized that any product or service offered by the Company may expose the Bank
to one or more of these risks.
24
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held May 16, 2001. At the meeting, the following
individuals were elected to serve as the Company's Board of Directors until the 2002
Annual Meeting of Shareholders and until their successors are elected and have qualified:
Against or Broker
For Withheld Abstained Non-Votes
------------ -------------- ------------- ------------
George A. Borba 24,296,807 120,710 -0- -0-
John A. Borba 24,296,807 120,710 -0- -0-
Ronald O. Kruse 24,413,425 4,092 -0- -0-
John J. LoPorto 24,413,403 4,114 -0- -0-
James C. Seley 24,413,425 4,092 -0- -0-
San Vaccaro 24,296,807 120,710 -0- -0-
D. Linn Wiley 24,296,829 120,688 -0- -0-
The appointment of Deloitte Touche, LLP as independent public accountants of the Company
for the year ended December 31, 2001 was ratified at the 2001 Annual Meeting of Shareholders
by the following:
Against or Broker
For Withheld Abstained Non-Votes
------------ -------------- ------------- ------------
24,205,019 196,550 15,948 -0-
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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: July 23 , 2001 /s/ Edward J. Biebrich Jr.
--------------------------
Edward J. Biebrich Jr.
Chief Financial Officer
26