FORM 10-Q
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 March 31, 1996
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 March 31, 1996 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
or organization) No.)
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: 9,035,051 outstanding as of
May 9, 1996.
This Form 10-Q contains 23 pages. Exhibit index on page 21.
1
PART I - FINANCIAL INFORMATION
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
dollar amounts in thousands
MARCH 31, DECEMBER 31,
1996 1995
(UNAUDITED)
ASSETS
Investment securities held-to-maturity
(market values of $26,207 and $25,031) $ 25,817 $ 24,272
Investment securities available-for-sale 295,064 260,374
Federal funds sold and interest-bearing
deposits with other financial institutions 30,000 7,000
Loans and lease finance receivables, net 545,407 496,449
------------ -------------
Total earning assets 896,288 788,095
Cash and due from banks 82,281 104,886
Premises and equipment, net 23,575 17,219
Other real estate owned, net 7,537 8,253
Goodwill 11,986 8,508
Other assets 16,710 9,979
------------ -------------
$ 1,038,377 $ 936,940
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 331,532 $ 332,851
Interest-bearing 565,782 470,723
------------ -------------
897,314 803,574
Demand note issued to U.S. Treasury 7,069 6,738
Long-term capitalized lease 469 475
Repurchase Agreement 40,000 40,000
Other liabilities 14,689 7,893
------------ -------------
959,541 858,680
------------ -------------
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
9,035,051 and 8,926,707) 43,657 43,436
Retained earnings 36,554 34,520
Net unrealized losses on investment
securities available-for-sale (1,375) 304
------------ -------------
78,836 78,260
------------ -------------
$ 1,038,377 $ 936,940
=========== ==============
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
ENDED MARCH 31,
1996 1995
Interest income:
Loans, including fees $12,397 $12,360
Investment securities:
Taxable 3,769 3,251
Tax-advantaged 193 101
------- -------
3,962 3,352
Federal funds sold and interest bearing
deposits with other financial institutions 143 25
------- -------
16,502 15,737
Interest expense:
Deposits 4,214 3,153
Other borrowings 640 480
------- -------
4,854 3,633
------- -------
Net interest income 11,648 12,104
Provision for credit losses 1,213 1,225
------- -------
Net interest income after
provision for credit losses 10,435 10,879
Other operating income:
Service charges on deposit accounts 1,735 1,650
Gains on sale of other real estate owned 80 6
Other 2,777 442
------- -------
4,592 2,098
Other operating expenses:
Salaries and employee benefits 4,236 4,251
Deposit insurance premiums 1 397
Occupancy 772 790
Equipment 644 518
Provision for losses on other real estate owned 2,069 0
Other 2,545 2,664
------- -------
10,267 8,620
------- -------
Earnings before income taxes 4,760 4,357
Provision for income taxes 2,002 1,816
------- -------
Net earnings $ 2,758 $ 2,541
======= =======
Earnings per common share $ 0.30 $ 0.27
======= =======
Cash dividends per common share $ 0.08 $ 0.07
======= =======
See accompanying notes to the consolidated financial statements.
3
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
dollar amounts in thousands
FOR THE THREE MONTHS
ENDED MARCH 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 15,767 $ 14,969
Service charges and other fees received 4,592 2,098
Interest paid (4,630) (3,440)
Cash paid to suppliers and employees (8,758) (7,627)
Income taxes paid (265) (205)
---------- ----------
6,706 5,795
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 24,537 5,906
Proceeds from maturities of securities held to maturity 395 373
Purchases of securities available for sale (9,662) (28,322)
Purchases of securities held to maturity (7,408) (112)
Net decrease in loans 6,749 7,777
Loan origination fees received 514 448
Proceeds from sale of premises and equipment 15 20
Purchase of premises and equipment (439) (216)
Consideration paid in business combinations (18,322) 0
Other investing activities (38) 729
---------- ----------
(3,659) (13,397)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in transaction deposits (24,506) (72,828)
Net increase in time deposits 6,510 10,794
Net increase in short-term borrowings 326 30,167
Dividends paid (725) (652)
Proceeds from exercise of stock options 221 63
---------- ----------
(18,174) (32,456)
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (15,127) (40,058)
CASH AND CASH EQUIVALENTS, beginning of year 111,886 109,829
---------- ----------
CASH AND CASH EQUIVALENTS BEFORE ACQUISITION 96,759 69,771
CASH AND CASH EQUIVALENTS RECEIVED IN THE PURCHASE OF
CITIZENS COMMERCIAL TRUST AND SAVINGS BANK OF PASADENA 15,522 0
---------- ----------
CASH AND CASH EQUIVALENTS, March 31, $ 112,281 $ 69,771
========== ==========
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 THREE MONTHS
ENDED MARCH 31,
1996 1995
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 2,758 $ 2,541
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums (accretion of discount)
on investment securities 146 (25)
Provisions for loan and OREO losses 3,282 1,225
Accretion of deferred loan fees and costs (378) (449)
Loan origination costs capitalized (331) (379)
Depreciation and amortization 576 466
Change in accrued interest receivable (502) (294)
Change in accrued interest payable 224 193
Change in other assets and liabilities 931 2,517
---------- ----------
3,948 3,254
---------- ----------
$ 6,706 $ 5,795
========== ==========
Supplemental Schedule of Noncash Investing and Financing Activities
Purchase of Citizens Commercial Trust and Savings Bank:
Cash and cash equivalents acquired $ 15,522
Fair value of other assets acquired 98,350
Fair value of liabilities assumed (117,512)
Intangibles 3,640
----------
Consideration (received) paid $ 0
==========
5
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 1996 and 1995
1. Summary of Significant Accounting Policies. See note 1 of the Notes to
Consolidated Financial Statements in CVB Financial Corp.'s 1995 Annual
Report. Goodwill resulting from purchase accounting treatment of acquired
banks is amortized on a straight line basis over 15 years.
On January 1, 1995, the Bank adopted 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." The adoption of this
statement did not have a material affect on the results of operations or
the financial position of the Bank taken as a whole. At March 31, 1996, the
Bank had classified $4.2 million of its loans as impaired and recorded a
specific reserve of approximately $4.0 million on such loans. At March 31,
1996, the Bank also classified $25.7 million of its loans as impaired,
however, these loans are collateral dependent and, because the estimated
fair value of the collateral exceeds the book value of the related loans at
the date of measurement, no specific loss reserve was recorded on these
loans in accordance with SFAS No. 114 at that date.
2. Certain reclassifications have been made in the 1995 financial information
to conform to the presentation used in 1996.
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 March 31, 1996, the
Company had entered into commitments with certain customers amounting to
$101.7 million compared to $79.4 million at December 31, 1995. Letters of
credit at March 31, 1996 and December 31, 1995 were $8.5 million and $8.9
million, respectively.
4. The interim consolidated financial statements are unaudited and reflect all
adjustments and reclassifications which, in the opinion of management, are
necessary for a fair statement of the results of operations and financial
condition for the interim period. All adjustments and reclassifications are
of a normal and recurring nature. Results for the period ending March 31,
1996 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 March 31, 1996 was 9,035,051.
Earnings per share are calculated on the basis of the weighted average
number of shares outstanding during the quarter plus shares issuable upon
the assumed exercise of outstanding common stock options. The number of
shares used in the calculation of earnings per share was 9,226,083 at March
31, 1996 and 9,243,988 at March 31, 1995. All 1995 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
on December 20, 1995.
6
6. Supplemental cash flow information. During the three-month period ended
March 31, 1996, loans amounting to $2.1 million were transferred to Other
Real Estate Owned ("OREO") as a result of foreclosure on the real
properties held as collateral. OREO sold during the three-month period
ended March 31, 1996, amounted to $795,000.
7
CVB FINANCIAL CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis is written to provide greater insight
into the results of operations and the financial condition of CVB Financial
Corp. and its subsidiaries. For a more complete understanding of CVB Financial
Corp. and its operations, reference should be made to the financial statements
included in this report and in the Company's 1995 annual report.
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.
On March 29, 1996, the Bank acquired through merger Citizens Commercial
Trust and Savings Bank of Pasadena ("Citizens"). As a result of the merger, the
Bank acquired assets with a market value of approximately $117.5 million, net
loans with a market value of approximately $58.9 million, and deposits with a
market value of approximately $111.7 million. In addition, at December 31, 1995
Citizens held trust assets of approximately $800 million that were not included
on the balance sheet of the Bank. As the merger was effective on the evening of
the final business day of the quarter, there was no impact to the Bank or
Company's earnings for the quarter ended March 31, 1996. However, as a result
of the acquisition, revenues and expenses will be higher during subsequent
quarters of 1996. The assets acquired and liabilities assumed are included in
the Company's March 31, 1996 consolidated balance sheet. Coincidental with the
merger, the Bank changed its name to Citizens Business Bank from Chino Valley
Bank.
RESULTS OF OPERATIONS
The Company reported net earnings of $2,758,000, or $0.30 per share, for
the quarter ended March 31, 1996, compared to $2,541,000, or $0.27 per share,
for the quarter ended March 31, 1995. This represented an increase in earnings
of $217,000, or 8.53%. For the quarter ended March 31, 1996, the annualized
return on average assets was 1.23%, and the annualized return on average
equity was 13.73%. For the quarter ended March 31, 1995, the annualized
return on average assets was 1.26%, and the annualized return on average equity
was 16.02%.
Pre-tax operating earnings, which excludes the impact of gains or losses on
sale of securities and OREO, the provisions for credit and OREO losses, and the
settlement of litigation, totaled $5,862,000 for the quarter ended March 31,
1996. This represented an increase of $286,000 or 5.13%, over pre-tax operating
income of $5,576,000 for the quarter ended March 31, 1995.
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 for deposits and borrowed funds. The net
interest margin is net interest income expressed as a percentage of average
earning assets. The net interest spread is the yield on average earning assets
minus the cost of average interest-bearing deposits and borrowed funds.
8
The net interest margin was 6.03% for the quarter ended March 31, 1996,
compared to a net interest margin of 6.96% for the quarter ended March 31, 1995.
The decrease in the net interest margin resulted as net interest income declined
and average earning assets increased. Net interest income totaled $11.6 million
for the quarter ended March 31, 1996. This represented a decrease of $456,000,
or 3.77%, from net interest income of $12.1 million for the quarter ended March
31, 1995. Earning assets averaged $778.2 million for the quarter ended March 31,
1996. This represented an increase of $80.7 million, or 11.57%, over average
earning assets of $697.5 million for the quarter ended March 31, 1995.
The decrease in net interest income was the result of a decrease in the net
interest spread. The net interest spread decreased to 4.81% for the quarter
ended March 31, 1996, from 6.00% for the quarter ended March 31, 1995. The
decrease in the net interest spread resulted from a decrease in the yield on
average earning assets coupled with an increase in the cost of average deposits
and other borrowings. The yield on average earning assets decreased to 8.52% for
the quarter ended March 31, 1996, from 9.05% for the quarter ended March 31,
1995. The cost of average interest bearing liabilities increased to 3.71% for
the quarter ended March 31, 1996, compared to 3.05% for the quarter ended March
31, 1995.
For the quarter ended March 31, 1996, the Company earned interest and fees
of $12.4 million on average loans of $503.8 million, representing an annualized
yield of 9.84%. For the quarter ended March 31, 1995, the Company earned
interest and fees of $12.3 million on average loans of $489.7 million, for an
annualized yield of 10.10%. For the quarter ended March 31, 1996, investment
income totaled $4.1 million, on average investments of $283.9 million,
representing an annualized yield of 5.78%. This compared to investment income of
$3.4 million, on average investments of $216.9 million, for an annualized yield
of 6.23% for the quarter ended March 31, 1995. The decrease in yields on loans
and investments for the first quarter of 1996, compared to the first quarter of
1995, reflected lower interest rates between the two periods.
Although interest rates in general were lower for first quarter of 1996
compared to the first quarter of 1995, the cost of deposits increased. The
increase in the cost of deposits reflected increased competition for funds. For
the quarter ended March 31, 1996, the Bank paid total interest expense of $4.9
million on average interest bearing liabilities of $523.2 million, representing
an annualized cost of 3.71%. This compared to total interest expense of $3.6
million, on average interest bearing liabilities of $476.9 million, for an
annualized cost of 3.05% for the quarter ended March 31, 1995.
Table 1 shows the average balances of assets, liabilities, and
stockholders' equity and the related interest income, expense, and rates for the
three month periods ended March 31, 1996 and 1995. Rates for tax-preferenced
investments are shown on a taxable equivalent basis using a 34.0% tax rate.
Table 2 summarizes the changes in interest income and interest expense based on
changes in average asset and liability balances (volume) and changes in average
rates (rate). For each category of earning assets and interest-bearing
liabilities, information is provided with respect to changes attributable to (1)
changes in volume (change in volume multiplied by initial rate), (2) changes in
rate (change in rate multiplied by initial volume) and (3) changes in
rate/volume (change in rate multiplied by change in volume).
9
TABLE 1 - DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIALS
(dollars in thousands)
THREE-MONTH PERIODS ENDED MARCH 31,
1996 1995
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
Investment Securities
Taxable $ 257,921 3,769 5.85% $ 207,015 3,251 6.28%
Tax advantaged (F1) 15,201 193 6.93% 8,161 101 6.93%
Federal Funds Sold & Interest-bearing
deposits with other financial institutions 10,808 143 5.29% 1,761 25 5.68%
Net Loans (F2) (F3) 494,265 12,397 10.03% 480,569 12,360 10.29%
--------------------------- ---------------------------
Total Earnings Assets 778,195 16,502 8.52% 697,506 15,737 9.05%
Total Non-earning Assets 116,321 110,654
--------- ---------
Total Assets $ 894,516 $ 808,160
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand Deposits $ 283,029 $ 262,968
Savings Deposits (F4) 302,032 1,874 2.48% 313,913 1,688 2.15%
Time Deposits 174,161 2,340 5.37% 128,684 1,465 4.55%
--------------------------- ---------------------------
Total Deposits 759,222 4,214 2.22% 705,565 3,153 1.79%
--------------------------- ---------------------------
Other Borrowings 47,020 640 5.44% 34,349 480 5.59%
--------------------------- ---------------------------
Total Interest-Bearing Liabilities 523,213 4,854 3.71% 476,946 3,633 3.05%
--------- ---------
Other Liabilities 7,954 4,787
Stockholders' Equity 80,320 63,459
--------- ---------
Total Liabilities and
Stockholders' Equity $ 894,516 $ 808,160
========= =========
Net interest spread 4.81% 6.00%
Net interest margin 6.03% 6.96%
<FN>
(F1) Yields are calculated on a taxable equivalent basis.
(F2) Loan fees are included in total interest income as follows: 1996, $561; 1995, $517.
(F3) Nonperforming loans are included in net loans as follows: 1996, $12,907; 1995, $11,290.
(F4) Includes interest-bearing demand and money market accounts.
</FN>
10
TABLE 2 - RATE AND VOLUME ANALYSIS FOR CHANGES IN INTEREST INCOME,
INTEREST EXPENSE AND NET INTEREST INCOME
(amounts in thousands)
Comparison of three-month period
ended March 31, 1996 and 1995
Increase (decrease) in interest income or expense
due to changes in
Rate/
Volume Rate Volume Total
Interest Income:
Taxable investment securities $ 799 $ (226) $ (55) $ 518
Tax advantaged securities 87 3 2 92
Fed funds sold & interest bearing
deposits with other institutions 129 (2) (9) 118
Loans 352 (306) (9) 37
--------------------------------------------------
Total earning assets 1,367 (531) (71) 765
--------------------------------------------------
Interest Expense:
Savings deposits (64) 261 (10) 187
Time deposits 518 263 93 874
Other borrowings 178 (13) (5) 160
--------------------------------------------------
Total interest-bearing liabilities 632 511 78 1,221
--------------------------------------------------
Net Interest Income $ 735 $(1,042) $ (149) $ (456)
===================================================
11
The net interest spread and the net interest margin are largely
affected by the Company's ability to reprice assets and liabilities as interest
rates change. At March 31, 1996, the Bank's 90 days or less maturity/repricing
gap was a negative $81.3 million, compared to a negative gap of $61.9 million at
December 31, 1995. Generally, a negative gap produces a higher net interest
margin and net interest spread when rates fall and a lower net interest margin
and net interest spread when rates rise. However, as interest rates earned on
different asset products and interest rates paid for different liability
products offered by the Bank respond differently to changes in market interest
rates, gap analysis is only a general indicator of interest rate sensitivity.
CREDIT LOSS EXPERIENCE
The Company maintains an allowance for potential credit losses. The
allowance is increased by a provision for credit losses charged against
operating results and from recoveries on loans previously charged off. The
allowance is reduced by loan losses charged to the allowance. The allowance for
credit losses was $11.5 million at March 31, 1996. This represented an increase
of $1.8 million, or 19.2%, over the allowance for credit losses of $9.6 million
at December 31, 1995. At March 31, 1996, the allowance for credit losses was
equal to 2.06% of gross loans, representing an increase from an allowance for
credit losses that was equal to 1.90% of gross loans at December 31, 1995.
For the quarter ended March 31, 1996, the provision for credit losses was
$1,213,000, representing a decrease of $12,000, or 1.0%, from a provision for
credit losses of $1,225,000 for the quarter ended March 31, 1995. In addition,
for the quarter ended March 31, 1996, the allowance for credit losses was
increased by $1,020,000 as a result of adjustments incident to the Citizens
merger. Loans charged to the allowance for credit losses, net of recoveries,
totaled $387,000 for the quarter ended March 31, 1996, compared to net loans
charged to the allowance for credit losses of $1,503,000 for the quarter ended
March 31, 1995.
Nonaccrual loans declined to $12.9 million at March 31, 1996, compared to
$13.3 million at December 31, 1995. This represented a decrease of $382,000, or
2.9%. Table 6 presents nonperforming assets (nonaccrual loans, loans 90 days or
more past due, restructured loans, and other real estate owned) as of March 31,
1996, and December 31, 1995. The Company has adopted 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 was adequate at March 31,
1996 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.
12
TABLE 3 - SUMMARY OF CREDIT LOSS EXPERIENCE Three-months
(amounts in thousands) ended March 31,
1996 1995
Amount of Total Loans at End of Period $ 556,879 $ 483,329
========= =========
Average Total Loans Outstanding $ 503,800 $ 489,660
========= =========
Allowance for Credit Losses at Beginning of Period $ 9,626 $ 9,471
Loans Charged-Off:
Real Estate Loans 300 1,447
Commercial and Industrial 152 116
Consumer Loans 23 8
--------- ---------
Total Loans Charged-Off 475 1,571
--------- ---------
Recoveries:
Real Estate Loans 84 18
Commercial and Industrial 2 44
Consumer Loans 2 6
--------- ---------
Total Loans Recovered 88 68
--------- ---------
Net Loans Charged-Off 387 1,503
--------- ---------
Provision Charged to Operating Expense 1,213 1,225
--------- ---------
Adjustment Incident to Mergers 1,020 0
--------- ---------
Allowance for Credit Losses at End of period $ 11,472 $ 9,193
========= =========
Net Loans Charged-Off to Average Total Loans* 0.31% 1.23%
Net Loans Charged-Off to Total Loans at End of Period* 0.28% 1.24%
Allowance for Credit Losses to Average Total Loans 2.28% 1.88%
Allowance for Credit Losses to Total Loans at End of Period 2.06% 1.90%
Net Loans Charged-Off to allowance for Credit Losses* 13.49% 65.40%
Net Loans Charged-Off to Provision for Credit Losses 31.90% 122.69%
* Net Loan Charge-Off amounts are annualized.
13
OTHER OPERATING INCOME
Other operating income includes service charges on deposit accounts, gain
on sale of securities, gross revenue from Community Trust Deed Services (the
Company's non-bank subsidiary), and other revenues not derived from interest on
earning assets. Other operating income for the quarter ended March 31, 1996 was
$4.6 million. This represented an increase of $2.5 million, or 118.9%, over
other operating income of $2.1 million for the quarter ended March 31, 1995.
Included as other income for the quarter ended March 31, 1996, was a $2.1
million settlement paid to the Bank resulting from litigation with a former
officer of the Bank and Company.
OTHER OPERATING EXPENSES
Other operating expenses totaled $10.3 million for the quarter ended March
31, 1996. This represented an increase of $1.6 million, or 19.1%, over other
operating expenses of $8.6 million for the quarter ended March 31, 1995. Other
operating expenses for the quarter ended March 31, 1996, were affected by a $2.1
million provision for potential losses from the sale of other real estate owned.
Recent appraisals valuing specific real estate acquired by the Bank through
foreclosure indicated that real estate values in the Bank's market territory
continued to decline. The $2.1 million provision for potential losses adjusted
the book values of all of the Bank's other real estate owned to reflect these
most recent valuations. There was no provision for potential losses on other
real estate owned for the quarter ended March 31, 1995.
Net of the provision for potential losses from the sale of other real
estate owned, operating expenses totaled $8.2 million for the quarter ended
March 31, 1996. This represented a decrease of $422,000, or 4.90%, from
operating expenses of $8.6 million for the quarter ended March 31, 1995.
Salaries and employee benefit expense totaled $4.2 million for the quarter ended
March 31, 1996. This represented a decrease of $15,000, or 0.35%, over salaries
and employee benefit expense of $4.3 million for the quarter ended March 31,
1995. Annualized, and measured as a percent of average assets, salaries and
employee benefit expense decreased to 1.89% for the quarter ended March 31,
1996, compared to 2.10% for the quarter ended March 31, 1995. Deposit insurance
premiums totaled $1,000 for the quarter ended March 31, 1996, compared to a
premium of $397,000, for the quarter ended March 31, 1995. The decrease
reflected a lower assessment from the Bank Insurance Fund. Professional services
totaled $479,497 for the quarter ended March 31, 1996. This represented a
decrease of $301,673, or 38.62%, from total professional services of $781,170,
for the quarter ended March 31, 1995. The decrease was the result of lower legal
costs related to litigation.
BALANCE SHEET ANALYSIS
At March 31, 1996 total assets were $1.04 billion, representing an increase
of $101.4 million, or 10.83%, from total assets of $936.9 million at December
31, 1995. Total deposits of $897.3 million at March 31, 1996, increased $93.7
million, or 11.67%, from $803.6 million at December 31, 1995. Net loans
increased $49.0 million, or 9.86%, from $496.4 million at December 31, 1995, to
$545.4 million at March 31, 1996. For the most part, the increase in assets,
loans, and deposits, for the first quarter of 1996 was the result of the merger
with Citizens.
INVESTMENT SECURITIES AND DEBT SECURITIES AVAILABLE-FOR-SALE
At March 31, 1996, investment securities (including federal funds sold)
totaled $350.9 million. This represented an increase of $59.2 million, or
20.31%, over total investments of $291.6 million at December 31, 1995. Table 4
sets forth investment securities classified as held-to-maturity and available-
for-sale at March 31, 1996 and December 31, 1995.
14
TABLE 4 - COMPOSITION OF SECURITIES PORTFOLIO
(amounts in thousands)
March 31, 1996 December 31, 1995
Amortized Market Net Yield Amortized Market Net Yield
Cost Value Unrealized Cost Value Unrealized
Gain/(Loss) Gain/(Loss)
U.S. Treasury securities
Available for Sale $ 52,552 $ 52,755 $ 203 5.95% $ 30,612 $ 31,028 $ 416 6.24%
FHLMC, FNMA CMO's, REMIC's
and mortgage-backed pass-through securities
Available for Sale 196,362 194,165 (2,197) 6.15% 180,485 180,925 440 5.97%
Held to Maturity 7,079 7,267 188 5.74% 7,358 7,679 5.73%
Other Government Agency Securities
Available for Sale 36,807 36,838 31 5.99% 41,659 41,789 130 6.51%
GNMA mortgage-backed pass-through
securities
Held to Maturity 1,354 1,468 114 9.41% 1,402 1,511 109 9.21%
Tax-exempt Municipal Securities
Held to Maturity 16,334 16,422 88 5.20% 14,465 14,793 328 5.23%
Other securities
Available for Sale 6,681 6,681 0 0.00% 6,632 6,632 0
Held to Maturity 1,050 1,050 0 6.67% 1,048 1,048 0 6.80%
Corporate Bonds
Available for Sale 4,625 4,625 0 6.71% 0 0 0
-------------------------------------- ----------------------------------------
$ 322,844 $321,271 $ (1,573) 5.94% $ 283,661 $285,405 $ 1,423 5.92%
====================================== ========================================
15
At March 31, 1996, the Company's unrealized losses on securities-
available-for-sale totaled $2.4 million. The Company recorded a decrease in
equity captial of $1.7 million net of $1.2 million of applicable income taxes
at the quarter ended March 31, 1996. At December 31, 1995, the Company
reported a net unrealized gain on investment securities available for sale of
$304,000. Note 1 to the financial statements in the Company's 1995 Annual
Report discusses its current accounting policy as it pertains to recognition
of market values for investment securities held as available for sale.
Loan Composition and Nonperforming Assets
Table 5 sets forth the distribution of the loan portfolio by type as of
the dates indicated (dollar amounts in thousands):
TABLE 5 - DISTRIBUTION OF LOAN PORTFOLIO BY TYPE
March 31, December 31,
1996 1995
Commercial and Industrial (F1) $ 241,697 $ 234,709
Real Estate:
Construction 23,751 23,805
Mortgage 182,179 149,039
Consumer 35,333 15,876
Lease finance receivables 21,014 21,529
Agribusiness 56,482 63,580
--------- ---------
Gross Loans $ 560,456 $ 508,538
Less:
Allowance for credit losses 11,472 9,626
Deferred net loan fees 3,577 2,463
--------- ---------
Net Loans $ 545,407 $ 496,449
========= =========
<FN>
(F1) Includes $146.7 million and $142.0 million of loans for which the Company
holds real property as collateral at March 31, 1996 and December 31, 1995, respectively,
16
As set forth in Table 6, nonperforming assets (nonaccrual loans, loans 90
days or more past due, restructured loans, and other real estate owned) totaled
$31.8 million, or 3.06% of total assets, at March 31, 1996. This compared to
nonperforming assets of $35.1 million, or 3.75% of total assets, at December 31,
1995. Nonperforming assets decreased $3.3 million, or 9.42%, between March 31,
1996 and December 31,1995.
Although management believes that nonperforming loans are generally well
secured and that potential losses are provided for in the allowance for credit
losses, there can be no assurance that a deterioration in economic conditions,
or collateral values, will not result in future credit losses.
TABLE 6 - NONPERFORMING ASSETS
MARCH 31, 1996 DECEMBER 31, 1995
Nonaccrual loans $ 12,907 $ 13,289
Loans past due 90 days or more
and still accruing interest 8 -0-
Restructured loans 11,341 13,558
Other real estate owned (OREO), net 7,537 8,253
-------- --------
Total nonperforming assets $ 31,793 $ 35,100
======== ========
Percentage of nonperforming assets
to total loans outstanding & OREO 5.63% 6.82%
Percentage of nonperforming
assets to total assets 3.06% 3.75%
At March 31, 1996, nonaccrual loans were $12.9 million. This represented a
decrease of $382,000, or 2.87%, from nonaccrual loans of $13.3 million at
December 31, 1995. The majority of nonaccrual loans were collateralized by real
property at March 31, 1996. The estimated ratio of the outstanding loan balances
to the fair values of related collateral (loan-to-value ratio) for nonaccrual
loans at that date ranged from approximately 46% to 126%. The Bank has allocated
specific reserves to provide for any potential loss on these loans. Management
cannot, however, predict the extent to which the current economic environment
may worsen or the full impact such an environment may have on the Company's loan
portfolio.
DEPOSITS AND OTHER BORROWINGS
At March 31, 1996, deposits totaled $897.3 million. This represented an
increase of $93.7 million, or 11.67%, over total deposits of $803.6 million at
December 31, 1995. The increase included approximately $111.7 million in
deposits assumed in the merger with Citizens. Seasonal fluctuations in
agricultural deposits normally result in large short term balances at the end of
December, contributing to a decrease in deposits between December and March of
each year.
17
Non interest bearing demand deposits totaled $331.5 million at March 31,
1996. This represented a decrease of $1.3 million, or 0.40%, from non interest
bearing demand deposits of $332.9 million at December 31, 1995. The decrease was
despite a $38.0 million increase in non interest bearing demand deposits that
resulted from the Citizens merger. Again, seasonal fluctuations in agricultural
deposits normally result in a decrease in the Bank's non interest bearing demand
deposits between December and March of each year.
LIQUIDITY
The 1995 annual report describes the Company's principal sources of
liquidity, management's liquidity objectives, and the methods used to measure
performance to these objectives.
There are several accepted methods of measuring liquidity. Since the
balance between loans and deposits is integral to liquidity, the Company
monitors its loan-to-deposit ratio (gross loans divided by total deposits) as an
important part of its liquidity management. In general, the closer this ratio is
to 100%, the more reliant an institution becomes on its illiquid loan portfolio
to absorb fluctuations in deposits. At March 31, 1996, the Company's loan-to-
deposit ratio was 62.06%, compared to a ratio of 62.98% at December 31, 1995.
Another method used to measure liquidity is the liquidity ratio. This ratio
is calculated by dividing the difference between short-term liquid assets
(federal funds sold and investments maturing within one year) and longer term
less liquid liabilities (time deposits over $100,000 maturing within one year,
federal funds purchased, and other borrowed funds), by the sum of gross loans
and long-term investments. As of March 31, 1996, the ratio was a negative
10.07%, compared to a negative 13.44% ratio at December 31, 1995. Conceptually,
this shows that the Company was funding a modest 10.07%, and 13.44% of its long-
term, illiquid assets with large liabilities at these dates, respectively.
Cash flows from operating activities totaled $6.7 million for the quarter
ended March 31, 1996, compared to a cash flow from operating activities of $5.8
million for the quarter ended March 31, 1995. Net cash used for investing
activities totaled $3.7 million for the quarter ended March 31, 1996, and $13.4
million for the quarter ended March 31, 1995. Cash used for financing activities
totaled $18.2 million for the quarter ended March 31, 1996 compared to $32.5
million for the quarter ended March 31, 1995. The increase in cash provided from
operating activities resulted from higher interest and fees received for the
quarter ended March 31, 1996. Cash used for investing activities for the
quarter ended March 31, 1996, included the cash purchase price of Citizens.
CAPITAL RESOURCES
The Company's equity capital was $78.8 million at March 31, 1996. The
primary source of capital for the Company continues to be the retention of net
after tax earnings. The Company's 1995 annual report (management's discussion
and analysis and note 13 of such accompanying financial statements) describes
the regulatory capital requirements of the Company and the Bank.
18
The Bank and the Company are required to meet risk-based capital standards
set by the respective regulatory authorities. The risk-based capital standards
require the achievement of a minimum ratio of total capital to risk-weighted
assets of 8.0% (of which at least 4.0% must be Tier 1 capital). In addition, the
regulatory authorities require the highest rated institutions to maintain a
minimum leverage ratio of 3.0%. At March 31, 1996, 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 March 31, 1996, and December 31, 1995:
TABLE 7 - REGULATORY CAPITAL RATIOS
REQUIRED
MINIMUM MARCH 31, 1996 DECEMBER 31, 1995
CAPITAL RATIOS RATIOS COMPANY BANK COMPANY BANK
Risk-based
Capital
Ratios:
Tier I 4.00% 10.3% 9.8% 11.8% 11.1%
Total 8.00% 11.6% 11.1% 13.0% 12.4%
Leverage Ratio 3.00% 7.7% 7.3% 8.0% 7.6%
19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Not Applicable
20
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 23
21
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: May 14, 1996 /s/ Robert J. Schurheck
Robert J. Schurheck
Chief Financial Officer
22