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 June 30, 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 June 30, 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 (I.R.S. Employer Identification No.)
incorporation or organization)
701 North Haven Ave, Suite 350, Ontario, California 91764
(Address of Principal Executive Offices) (Zip Code)
(Registrant's telephone number, including area code) (909) 980-4030
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Number of shares of common stock of the registrant: 9,037,259 outstanding as of
August 8, 1996.
This Form 10-Q contains 22 pages. Exhibit index on page 20.
PART I - FINANCIAL INFORMATION
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
dollar amounts in thousands
June 30, December 31,
1996 1995
(unaudited)
ASSETS
Investment securities held-to-maturity
(market values of $35,500 and $25,031 $ 35,649 $ 24,272
Investment securities available-for-sale 293,944 260,374
Federal funds sold and interest-bearing
deposits with other financial institutions 7,000 7,000
Loans and lease finance receivables, net 553,740 496,449
----------- -----------
Total earning assets 890,333 788,095
Cash and due from banks 88,309 104,886
Premises and equipment, net 23,829 17,219
Other real estate owned, net 6,284 8,253
Goodwill and intangibles 12,326 8,508
Other assets 21,573 9,979
----------- -----------
$ 1,042,654 $ 936,940
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 333,701 $ 332,851
Interest-bearing 561,585 470,723
----------- -----------
895,286 803,574
Demand note issued to U.S. Treasury 12,245 6,738
Long-term capitalized lease 464 475
Repurchase Agreement 40,000 40,000
Other liabilities 14,643 7,893
----------- -----------
962,638 858,680
Stockholders' Equity:
Preferred stock (authorized 20,000,000 shares
without par; none issued or outstanding 0 0
(authorized, 50,000,000 shares
without par; issued and outstanding
9,035,771 and 8,926,707 43,775 43,436
Retained earnings 39,125 34,520
Net unrealized losses on investment
securities available-for-sale (2,884) 304
----------- -----------
80,016 78,260
----------- -----------
$ 1,042,654 $ 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 For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
Interest income:
Loans, including fees $13,819 $12,312 $26,216 $24,672
Investment securities:
Taxable 4,853 3,261 8,622 6,512
Tax-advantaged 243 101 436 202
------- ------- ------- -------
5,096 3,362 9,058 6,714
Federal funds sold and interest bearing
deposits with other financial institutions 124 23 267 48
------- ------- ------- -------
19,039 15,697 35,541 31,434
Interest expense:
Deposits 4,688 3,488 8,902 6,641
Other borrowings 672 566 1,312 1,046
------- ------- ------- -------
5,360 4,054 10,214 7,687
------- ------- ------- -------
Net interest income 13,679 11,643 25,327 23,747
Provision for credit losses 430 350 1,643 1,575
------- ------- ------- -------
Net interest income after
provision for credit losses 13,249 11,293 23,684 22,172
Other operating income:
Service charges on deposit accounts 1,780 1,689 3,515 3,338
Gains on sale of other real estate owned 23 18 104 25
Other 1,398 501 4,175 943
------- ------- ------- -------
3,201 2,208 7,794 4,306
Other operating expenses:
Salaries and employee benefits 5,337 4,045 9,573 8,295
Deposit insurance premiums 1 397 2 795
Occupancy 831 759 1,602 1,549
Equipment 762 557 1,406 1,075
Provision for losses on other real estate owned 665 250 2,734 250
Other 3,229 2,973 5,776 5,637
------- ------- ------- -------
10,825 8,981 21,093 17,601
------- ------- ------- -------
Earnings before income taxes 5,625 4,520 10,385 8,877
Provision for income taxes 2,328 1,873 4,330 3,689
------- ------- ------- -------
Net earnings $ 3,297 $ 2,647 $ 6,055 $ 5,188
======= ======= ======= =======
Earnings per common share $ 0.35 $ 0.28 $ 0.65 $ 0.55
======= ======= ======= =======
Cash dividends per common share $ 0.08 $ 0.07 $ 0.16 $ 0.15
======= ======= ======= =======
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 Six Months
Ended June 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 34,016 $ 30,337
Service charges and other fees received 7,794 4,305
Interest paid (10,491) (7,214)
Cash paid to suppliers and employees (20,053) (16,861)
Income taxes paid (862) (2,311)
--------- ----------
10,404 8,256
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 0 13,517
Proceeds from maturities of securities available for sale 42,098 11,350
Proceeds from maturities of securities held to maturity 782 811
Purchases of securities available for sale (34,205) (38,948)
Purchases of securities held to maturity (12,125) (1,445)
Net (increase)decrease in loans (2,097) 11,768
Loan origination fees received 1,282 1,101
Proceeds from sale of premises and equipment 35 598
Purchase of premises and equipment (1,377) (865)
Consideration paid in business combinations (18,322) 0
Other investing activities (2,783) 2,704
--------- ----------
(26,712) 591
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in transaction deposits (31,501) (76,085)
Net increase in time deposits 11,476 19,464
Net increase in short-term borrowings 5,347 20,925
Dividends paid (1,452) (1,299)
Proceeds from exercise of stock options 339 200
--------- ----------
(15,791) (36,795)
--------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (32,099) (27,948)
CASH AND CASH EQUIVALENTS, beginning of year 111,886 109,829
--------- ----------
CASH AND CASH EQUIVALENTS BEFORE ACQUISITION 79,787 81,881
CASH AND CASH EQUIVALENTS RECEIVED IN THE PURCHASE OF
CITIZENS COMMERCIAL TRUST AND SAVINGS BANK OF PASADENA 15,522 0
--------- ----------
CASH AND CASH EQUIVALENTS, June 30, $ 95,309 $ 81,881
========= ==========
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,
1996 1995
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 6,055 $ 5,188
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums (accretion of discount) on investment securities 130 (20)
Provisions for loan and OREO losses 4,377 1,825
Accretion of deferred loan fees and costs (1,017) (935)
Loan origination costs capitalized (854) (927)
Depreciation and amortization 1,239 920
Change in accrued interest receivable (637) (143)
Change in accrued interest payable (278) 473
Change in other assets and liabilities 1,389 1,875
--------- ---------
4,349 3,068
--------- ---------
$ 10,404 $ 8,256
========= =========
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 97,746
---------
Total 113,268
---------
Fair value of deposits acquired 111,736
Fair value of other liabilities 5,776
---------
Total 117,512
---------
Goodwill and intangibles $ 4,244
=========
5
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 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 effect on the results of operations or
the financial position of the Bank taken as a whole. Impaired loans totaled
$27.5 million at June 30, 1996. Of this total, $17.1 million, or 62.18%,
represented loans that were supported by collateral with a fair market
value, net of prior liens, of $33.9 million. At June 30, 1996, $10.4
million , or 37.82%, of total impaired loans represented loans for which
repayment was projected to come from cash flows. The impairment amount on
these loans was $3.8 million.
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 June 30, 1996,
the Company had entered into commitments with certain customers amounting
to $113.3 million compared to $79.4 million at December 31, 1995. Letters
of credit at June 30, 1996 and December 31, 1995 were $7.8 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 June 30, 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 June 30, 1996 was 9,035,771.
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 9,270,761 and
9,322,629 for the six and three month periods ended June 30, 1996 and
9,377,275 and 9,509,096 for the six and three month periods ended June 30,
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. Supplemental cash flow information. During the six-month period ended
June 30, 1996, loans amounting to $2.7 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 six-month period ended
June 30, 1996, amounted to $2.1 million.
6
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. Reference should be made to the financial statements
included in this report and in the Company's 1995 annual report for a more
complete understanding of CVB Financial Corp. and its operations.
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 Citizens.
As the merger was effective on the evening of the final business day of the
first quarter of 1996, the Bank and Company's earnings for the second quarter of
1996 were impacted by the acquisition, while earnings for the first quarter of
1996 were not. 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 $3.3 million, or $0.35 per share for
the quarter ended June 30, 1996, compared to net earnings of $2.6 million, or
$0.28 per share, for the quarter ended June 30, 1995. This represented an
increase of $650,000, or 24.56%. Net earnings for the six months ended June 30,
1996 totaled $6.0 million, or $0.65 per share. This represented an increase of
$867,000, or 16.70%, over net earnings of $5.2 million, or $0.55 per share, for
the six months ended June 30, 1995.
The Company generated an annualized return on average assets of 1.28%, for
the quarter ended June 30, 1996. This compared to an annualized return on
average assets of 1.32%, for the quarter ended June 30, 1995. For the six months
ended June 30, 1996, the Company's annualized return on average assets was
1.26%, compared to an annualized return of 1.29%, for the first six months of
1995. The Company generated an annualized return on average equity of 16.21%,
for the quarter ended June 30, 1996, compared to an annualized return on average
equity of 15.48%, for the quarter ended June 30, 1995. For the six months ended
June 30, 1996, the annualized return on average equity was 14.98%, compared to a
return on average equity of 15.73% for the six months ended June 30, 1995.
Both the return on average assets and the return on average equity were
affected by a lower net yield on earning assets for 1996, compared to 1995. The
Company's greater average equity to average asset ratio for the first six months
of 1996, contributed to the decrease in the return on average equity for the six
month period. The assets acquired decreased the Company's average equity to
average asset ratio for the quarter ended June 30, 1996, contributing to the
increase in the return on average equity.
Pre-tax operating earnings, exclude the impact of gains or losses on sale
of securities and OREO, the provisions for credit and OREO losses, and the
amount received as settlement for litigation. Pre-tax operating earnings totaled
$12.6 million for the six months ended June 30, 1996, compared to operating
earnings of $10.7 million, for the six months ended June 30, 1995, representing
an increase of $1.9 million, or 17.63%.
7
Net Interest Income/Net Interest Margin
The principal component of the Company's earnings is net interest income,
which is the difference between the interest and fees earned on loans and
investments, and the interest paid on deposits and other borrowings. When net
interest income is expressed as a percentage of average earning assets, the
result is the net interest margin. The net interest spread is the yield on
average earning assets minus the average cost of interest-bearing deposits and
borrowed funds.
For the six months ended June 30, 1996, net interest income was $25.3
million. This represented an increase of $1.6 million, or 6.65%, over net
interest income of $23.7 million for the first six months of 1995. Net interest
income increased for both the three month and six month periods ended June 30,
1996, compared to their respective periods for 1995. The increases were the
result of increases in average earning assets.
Interest income totaled $35.5 million for the six months ended June 30,
1996. This represented an increase of $4.1 million, or 13.06%, over total
interest income of $31.4 million for the six months ended June 30, 1995. The
increase was the result of a $46.2 million increase in average loans, and a
$84.4 million increase in average investments, for the six months ended June 30,
1996, compared to the averages for the six months ended June 30, 1995.
The yield on average earning assets was 8.57% for the six months ended June
30, 1996, 49 basis points lower than a yield of 9.06% for the six months ended
June 30, 1995. The decrease in yields generally reflects the re-pricing
sensitivity of the Bank's loan and investment portfolios in a falling interest
rate environment.
Interest expense totaled $10.2 million for the six months ended June 30,
1996. This represented an increase of $2.5 million, or 32.86%, from total
interest expense of $7.7 million for the six months ended June 30, 1995. The
increase in interest expense was due in part to an increase in average interest
bearing liabilities of $90.2 million, for the six months ended June 30, 1996,
compared to the same period for 1995. The increase in interest expense was also
the result of an increase in the average cost of interest bearing liabilities to
3.63%, for the six months ended June 30, 1996, from 3.25%, for the six month
period ended June 30, 1995. The increase in the cost of interest bearing
liabilities reflected increased price competition for deposits.
The decrease in the yield on average earning assets, coupled with the
increase in cost of average interest bearing liabilities, resulted in a decrease
in the Bank's net interest spread to 4.94% for the six months ended June 30,
1996, from a spread of 5.81% for the six months ended June 30, 1995. The
increase in average earning assets was proportionately greater than the increase
in net interest income, resulting in a decrease in the net interest margin to
6.12% for the six months ended June 30, 1996, from a margin of 6.85%, for the
six months ended June 30, 1995.
Similar to the six month periods, net interest income increased to $13.7
million for the quarter ended June 30, 1996, from $11.6 million for the quarter
ended June 30, 1995, representing an increase of $2.0 million, or 17.49%. The
increase in income was the result of a $194.3 million increase in average
earning assets for the quarter ended June 30, 1996, compared to the same three
months of 1995. A decrease in the yield on earning assets to 8.62%, from 9.07%,
and an increase in the cost of funds to 3.55%, from 3.45%, resulted in a
decrease in the net interest spread to 5.07% for the quarter ended June 30,
1996, from a spread of 5.62% for the quarter ended June 30, 1995. The net
interest margin decreased to 6.20%, for the quarter ended June 30, 1996, from
6.74%, for the quarter ended June 30, 1995.
Table 1 shows the average balances of assets, liabilities, and
stockholders' equity and the related interest income, expense, and rates for the
six month periods ended June 30, 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).
8
TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differentials (dollars in thousands)
Six-month periods ended June 30,
1996 1995
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
Taxable $ 284,350 8,622 6.06% $ 209,186 6,512 6.23%
Tax-advantaged (F1) 17,351 436 7.05% 8,163 202 6.93%
Federal Funds Sold & Interest-bearing
deposits with other financial institutions 9,942 267 5.37% 1,668 48 5.76%
Net Loans (F2) (F3) 521,526 26,216 10.05% 476,647 24,672 10.35%
--------------------------------------- -----------------------------------
Total Earning Assets 833,169 35,541 8.57% 695,664 31,434 9.06%
Total Non-earning Assets 127,962 110,152
-------------- --------------
Total Assets $ 961,131 $ 805,816
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand Deposits $ 306,211 $ 261,145
Savings Deposits (F4) 332,657 4,124 2.48% 306,794 3,455 2.25%
Time Deposits 181,311 4,778 5.27% 130,468 3,186 4.88%
--------------------------------------- -----------------------------------
Total Deposits 820,179 8,902 2.17% 698,407 6,641 1.90%
--------------------------------------- -----------------------------------
Other Borrowings 49,365 1,312 5.32% 35,903 1,046 5.83%
--------------------------------------- -----------------------------------
Total Interest-Bearing Liabilities 563,333 10,214 3.63% 473,165 7,687 3.25%
-------------- --------------
Other Liabilities 10,751 5,527
Stockholders' Equity 80,836 65,979
-------------- --------------
Total Liabilities and
Stockholders' Equity $ 961,131 $ 805,816
============== ==============
Net interest spread 4.94% 5.81%
Net interest margin 6.12% 6.85%
<FN>
<F1>Yields are calculated on a taxable equivalent basis.
<F2>Loan fees are included in total interest income as follows: 1996, $1,444; 1995, $1,108.
<F3>Nonperforming loans are included in net loans as follows: 1996, $16,037; 1995, $25,968.
<F4>Includes interest-bearing demand and money market accounts.
</FN>
9
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, 1996 and 1995
Increase (decrease) in interest income or expense
due to changes in
Rate/
Volume Rate Volume Total
Interest Income:
Taxable investment securities $ 2,341 $ (170) $ (61) $ 2,110
Tax-advantaged securities 227 3 4 234
Fed funds sold & interest bearing
deposits with other institutions 236 (3) (14) 219
Loans 2,323 (712) (67) 1,544
----------------------------------------------------------
Total earning assets 5,127 (882) (138) 4,107
----------------------------------------------------------
Interest Expense:
Savings deposits 291 349 29 669
Time deposits 1,243 251 98 1,592
Other borrowings 393 (92) (35) 266
----------------------------------------------------------
Total interest-bearing liabilities 1,927 508 92 2,527
----------------------------------------------------------
Net Interest Income $ 3,200 $ (1,390) $ (230) $ 1,580
==========================================================
10
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 June 30, 1996, the Bank's 90 days or less maturity/repricing gap was
a negative $149.8 million, compared to a gap of a negative $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 for
different asset and liability products offered by the Bank respond differently
to changes in 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 that is
increased by a provision for credit losses charged against operating results and
recoveries on loans previously charged off, and reduced by actual loan losses
charged to the allowance. The provision for credit losses was $1.6 million for
the six months ended June 30, 1996, an increase of $68,000, or 4.32%, from the
provision for credit losses for the six months ended June 30, 1995.
The allowance for credit losses at June 30, 1996, was $11.5 million. This
represented an increase of $1.9 million, or 19.95%, over the allowance for
credit losses of $9.6 million at December 31, 1995. The allowance for credit
losses was equal to 2.04% of gross loans at June 30, 1996, compared to an
allowance for credit losses equal to 1.90% of gross loans at December 31, 1995.
For the six months ended June 30, 1996, net loans charged to the allowance for
credit losses totaled $435,000, compared to net loans charged to the reserve of
$2.2 million for the first six months of 1995.
Nonperforming assets, which includes loans on nonaccrual, restructured
loans, and other real estate owned, decreased to $29.1 million at June 30, 1996,
from $35.1 million at December 31, 1995, a decrease of $6.0 million, or 17.16%.
The decrease is a result of a reduction in restructured loans and OREO.
Nonaccrual loans were greater at June 30, 1996. Table 6 presents nonperforming
assets (nonaccrual loans, loans 90 days or more past due, restructured loans,
and other real estate owned) as of June 30, 1996, and December 31, 1995.
The Company has adopted the methods prescribed by Financial Accounting
Standard No. 114 for calculating the fair value of specific loans determined for
which the eventual collection of all principal and interest is impaired.
Impaired loans totaled $27.5 million at June 30, 1996. Of this total, $17.1
million, or 62.18%, represented loans that were supported by collateral with a
fair market value, net of prior liens, of $33.9 million. At June 30, 1996, $10.4
million, or 37.82%, of total impaired loans represented loans for which
repayment was projected to come from cash flows. The impairment amount on these
loans was $3.8 million.
While management believes that the allowance was adequate at June 30, 1996
to absorb losses from 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.
11
TABLE 3 - Summary of Credit Loss Experience Six-months
(dollars in thousands) ended June 30,
1996 1995
Amount of Total Loans at End of Period $565,286 $475,993
======== ========
Average Total Loans Outstanding $532,010 $485,766
======== ========
Allowance for Credit Losses at Beginning of Period $ 9,626 $ 9,471
Loans Charged-Off:
Real Estate Loans 400 2,107
Commercial and Industrial 175 121
Consumer Loans 43 20
-------- --------
Total Loans Charged-Off 618 2,248
-------- --------
Recoveries:
Real Estate Loans 85 0
Commercial and Industrial 90 66
Consumer Loans 8 16
-------- --------
Total Loans Recovered 183 82
-------- --------
Net Loans Charged-Off 435 2,166
-------- --------
Provision Charged to Operating Expense 1,643 1,575
-------- --------
Adjustment Incident to Mergers 712 0
-------- --------
Allowance for Credit Losses at End of period $ 11,546 $ 8,880
======== ========
Net Loans Charged-Off to Average Total Loans* 0.16% 0.89%
Net Loans Charged-Off to Total Loans at End of Period* 0.15% 0.91%
Allowance for Credit Losses to Average Total Loans 2.17% 1.83%
Allowance for Credit Lossess to Total Loans at End of Period 2.04% 1.87%
Net Loans Charged-Off to allowance for Credit Losses* 7.54% 48.78%
Net Loans Charged-Off to Provision for Credit Losses 26.48% 137.52%
<FN>
* Net Loan Charge-Off amounts are annualized.
</FN>
12
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, service charges and fees from trust services, other fee oriented
products and services, gains on sale of securities, gains on the sale of other
real estate owned, gross revenue from Community Trust Deed Services, and for the
six months ended June 30, 1996, settlement of pending litigation.
Other operating income increased to $7.8 million for the six months ended
June 30, 1996. This represented an increase of $3.5 million, or 81.00%, over
other operating income of $4.3 million for the six months ended June 30, 1995.
Included as other operating income for 1996 was a $2.1 million settlement of
litigation paid to the Bank in March of this year. Net of this settlement,
other operating income increased $1.4 million, or 32.23%, for the six months
ended June 30, 1996, compared to the same period for 1995.
For the quarter ended June 30, 1996, other operating income was 3.2
million. This represented an increase of $993,000, or 44.97%, over other
operating income of $2.2 million for the quarter ended June 30, 1995.
Contributing to the increase in other operating income for the quarter ended
June 30, 1996, was $815,000 in fee income associated with the operation of a
full service trust department acquired through the merger with Citizens in March
of this year.
Other Operating Expenses
Other operating expenses increased to $21.1 million for the six months
ended June 30, 1996, from $17.6 million for the six months ended June 30, 1995.
This represented an increase of $3.5 million, or 19.84%. The increase was
primarily the result of salaries and employee benefits which increased $1.3
million, or 15.41%, and the provision for potential losses on other real estate
owned by the Bank, which was $2.5 million greater for the first six months of
1996 compared to the same period for 1995.
For the most part, the increase in salaries and other employee benefits was
the result of the acquisition of Citizens on March 29, 1996. Salaries and
employee benefits for the quarter ended June 30, 1996 totaled $5.3 million. This
represented an increase of $1.3 million, or 31.94%, over salaries and employee
benefits of $4.0 million for the quarter ended June 30, 1995.
Deposit insurance premiums totaled $2,000 for the six months ended June 30,
1996. This represented a decrease of $793,000, or 99.75%, from deposit insurance
premiums of $795,000 for the first six months of 1995. The decrease in deposit
insurance premiums resulted as the Bank Insurance Fund had achieved required
reserve targets late in 1995.
As a percent of average assets, other operating expenses increased to 4.39%
for the six months ended June 30, 1996, compared to a ratio of 4.37%, for the
six months ended June 30, 1995. For the most part, the 2 basis point increase
was the result of the increased provision for potential losses on the sale of
other real estate owned. For the quarter ended June 30, 1996, other operating
expenses were 4.21% of average assets, down from a ratio of 4.47% for the
quarter ended June 30, 1995.
13
BALANCE SHEET ANALYSIS
The Company reported total assets of $1.04 billion at June 30, 1996. This
represented an increase of $105.7 million, or 11.28%, over total assets of
$936.9 million at December 31, 1995. Gross loans totaled $565.3 million at June
30, 1996, an increase of $59.2 million, or 11.70%, from gross loans of $506.1
million at December 31, 1995. Total deposits increased $91.7 million, or 11.41%,
to $895.3 million at June 30, 1996, from $803.6 million at December 31, 1995.
The acquisition of Citizens in March of this year, contributed significantly to
the increases in assets, loans and deposits for 1996.
Investment Securities and Debt Securities Available-for-Sale
The Company reported total investment securities of $329.6 million at June
30, 1996. This represented an increase of $44.9 million, or 15.79%, over total
investment securities of $284.6 million at December 31, 1995. Federal funds sold
totaled $7.0 million at June 30, 1996, equal to total federal funds sold at
December 31, 1995.
The Company has adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS
115"). Under the standard, securities "available for sale" are carried at their
market values and changes in the securities' market values, net of taxes, are
recorded as a separate component of stockholders' equity. Securities "held to
maturity" are carried at amortized cost.
At June 30, 1996, unrealized losses on securities available for sale
totaled $5.0 million. The Company recorded a decrease in equity capital of $2.9
million net of $2.1 million of applicable income taxes at June 30, 1996. At
December 31, 1995, the Company reported net unrealized gains on investment
securities available for sale of $304,000. Note 1 to the financial statements in
the Company's 1995 Annual Report discusses in detail the Company's policy for
accounting for investment securities.
Table 4 sets forth investment securities held-to-maturity and
available-for-sale, at June 30, 1996 and December 31, 1995.
14
Table 4 - Composition of Securities Portfolio
(dollars in thousands)
June 30, 1996 December 31, 1996
Amortized Market Value Net Yield Amortized Market Value Net Yield
Cost Unrealized Cost Unrealized
Gain/(Loss) Gain/(Loss)
U.S. Treasury securities
Available for Sale $ 44,491 $ 44,420 $ (71) 6.01% $ 60,612 $ 31,028 $ 416 6.24%
FHLMC, FNMA CMO's, REMIC's
and mortgage-backed pass-through securities
Available for Sale 201,904 197,421 (4,483) 6.18% 180,485 180,925 440 5.97%
Held to Maturity 6,750 6,874 124 5.74% 7,358 7,679 321 5.73%
Other Government Agency Securities
Available for Sale 40,785 40,739 (46) 5.94% 41,659 41,789 130 6.51%
GNMA mortgage-backed pass-through securities
Held to Maturity 1,305 1,396 91 9.43% 1,402 1,511 109 9.21%
Tax-exempt Municipal Securities
Held to Maturity 26,477 26,114 (363) 5.02% 14,465 14,793 328 5.23%
Other securities
Available for Sale 6,772 6,772 0 N/A 6,632 6,632 0 N/A
Held to Maturity 1,117 1,117 0 6.49% 1,048 1,048 0 6.80%
Corporate Bonds
Available for Sale 4,614 4,592 (22) 6.16% 0 0 0 0.00%
-----------------------------------------------------------------------------------------
$ 334,215 $329,445 $ (4,770) 5.92% $ 283,661 $ 285,405 1,741 5.92%
=========================================================================================
15
Loan Composition and Nonperforming Assets
Table 5 sets forth the distribution of the loan portfolio by type as
of the dates indicated (dollars in thousands):
Table 5 - Distribution of Loan Portfolio by Type
June 30, December 31,
1996 1995
Commercial and Industrial (F1) $245,274 $234,709
Real Estate:
Construction 26,429 23,805
Mortgage 194,745 149,039
Consumer 22,043 15,876
Lease finance receivables 20,873 21,529
Agribusiness 59,381 63,580
-------- --------
Gross Loans 568,745 508,538
-------- --------
Less:
Allowance for credit losses 11,546 9,626
Deferred net loan fees 3,459 2,463
-------- --------
Net loans $553,740 $496,449
======== ========
<FN>
<F1>Includes $111.8 million and $142.0 million of loans for which the Company
holds real property as collateral at June 30, 1996 and December 31, 1995,
respectively.
</FN>
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
$29.1 million at June 30, 1996. This represented a decrease of $6.0 million, or
17.16%, from nonperforming assets of $35.1 million at December 31, 1995. As a
percent of total assets, nonperforming assets decreased to 2.79% at June 30,
1996, from 3.75% at December 31, 1995. Although management believes that
nonperforming assets are generally well secured and that potential losses are
reflected in the allowance for credit losses, there can be no assurance that a
general deterioration of economic conditions or collateral values would not
result in future credit losses.
16
Table 6 - Nonperforming Assets
(dollars in thousands)
June 30, 1996 December 31, 1995
Nonaccrual loans $16,037 $13,289
Loans past due 90 days or more
and still accruing interest 2 -0-
Restructured loans 6,755 13,558
Other real estate owned (OREO), net 6,284 8,253
------- -------
Total nonperforming assets $29,078 $35,100
======= =======
Percentage of nonperforming assets
to total loans outstanding & OREO 5.09% 6.82%
Percentage of nonperforming
assets to total assets 2.79% 3.75%
The decrease in nonperforming assets was a result of a decrease in
restructured loans and other real estate owned. Restructured loans decreased to
$6.8 million at June 30, 1996, from $13.5 million at December 31, 1995. This
represented a decrease of $6.8 million, or 50.18%. Other real estate owned
decreased to $6.3 million at June 30, 1996. This represented a decrease of $1.9
million, or 23.86%, from other real estate owned of $8.3 million at December 31,
1995. At June 30, 1996, nonaccrual loans were $16.0 million, an increase of $2.7
million, or 20.68%, from nonaccrual loans of $13.3 million at December 31, 1995.
The majority of nonaccrual loans were collateralized by real property at June
30, 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 25% to 90%.
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 persist or worsen or the full impact such
environment may have on the Company's loan portfolio.
Deposits and Other Borrowings
Total deposits increased to $895.3 million at June 30, 1996. This
represented an increase of $91.7 million, or 11.41%, over total deposits of
$803.6 million at December 31, 1995. Deposit relationships assumed as a result
of the acquisition of Citizens contributed to the increase.
Most of the increase in total deposits was the result of increases in
interest bearing deposits. Noninterest bearing deposits increased only $850,000,
or 0.26%, to $333.7 million at June 30, 1996, from $332.9 million at December
31, 1995. Interest bearing deposits increased $90.9 million, or 19.30%, to
$561.6 million at June 30, 1996, from $470.7 million at December 31, 1995. As a
result of this increase, interest bearing deposits increased to 62.73% of total
deposits at June 30, 1996. This compared to a ratio of interest bearing deposits
to total deposits of 58.58% at December 31, 1995.
Historically, at each year end, the Bank's deposits mix is impacted by
short term increases in agricultural related seasonal deposits. Total demand
deposits at December 31, 1995, included approximately $45.0 million of these
agriculture related deposits which normally are withdrawn within the first 60
days of the new year.
Liquidity
The 1995 annual report describes in detail the Company's principal
sources of liquidity, liquidity management policy objectives, and methods
used to measure liquidity.
17
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 June 30, 1996, the Company's
loan-to-deposit ratio was 63.14% 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 large
liabilities (time deposits over $100,000 maturing within one year, federal funds
purchased, and other borrowed funds) by the sum of loans and long-term
investments. As of June 30, 1996 the ratio was a negative 12.01% as compared to
a negative 13.44% at December 31, 1995. Conceptually, this shows that the
Company was funding a modest 12.01% and 13.44% of its long-term, illiquid assets
with large liabilities at these dates, respectively.
Cash flows provided by operating activities, primarily interest received,
totaled $10.4 million for the six months ended June 30, 1996 compared to $8.3
million for the six months ended June 30, 1995. Net cash used in investing
activities, primarily purchases of investment securities and consideration paid
in business combinations, totaled $26.7 million for the six months ended June
30, 1996, compared to a source of funds of $591,000 for the six months ended
June 30, 1995. Net cash used for financing activities totaled $15.8 million for
the six months ended June 30, 1996, compared to $36.8 million for the same
period last year. The decrease is primarily the result of a lower decrease in
transaction deposits for 1996.
Capital Resources
The Company's equity capital was $80.0 million at June 30, 1996. The
primary source of capital for the Company continues to be the retention of
operating earnings. The Company's 1995 annual report (management's discussion
and analysis and note 13 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 the 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 institutions require the highest rated institutions to
maintain a minimum leverage ratio of 3.0%. At June 30, 1996 the Bank and the
Company met the minimum risk-based capital ratio and leverage ratio
requirements.
Table 7 below presents the Company's and the Bank's risk-based and leverage
capital ratios as of June 30, 1996, and December 31, 1995:
Table 7 - Regulatory Capital Ratios
Required
Minimum June 30, 1996 December 31, 1995
Capital Ratios Ratios Company Bank Company Bank
Risk-based Capital
Ratios:
Tier I 4.00% 10.6% 10.1% 11.8% 11.1%
Total 8.00% 11.8% 11.4% 13.0% 12.4%
Leverage Ratio 3.00% 6.9% 6.7% 8.0% 7.6%
18
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 of CVB Financial Corp. was held May 15,
1996. At the meeting, the following individuals were elected to
serve as the Company's Board of Directors until the 1997 Annual
Meeting of Shareholders and until their successors are elected
and have qualified.
Against or Broker
For Withheld Abstained Non-votes
George A. Borba 7,482,496 -0- -0- -0-
John A. Borba 7,482,496 -0- -0- -0-
Ronald O. Kruse 7,482,496 -0- -0- -0-
John J. LoPorto 7,482,496 -0- -0- -0-
Charles M. Magistro 7,482,496 -0- -0- -0-
John Vander Schaaf 7,482,496 -0- -0- -0-
D. Linn Wiley 7,482,496 -0- -0- -0-
The appointment of Deloitte & Touche LLP as independent public
accountants of the Company for the year ended December 31, 1996
was ratified at the 1996 Annual Meeting of Shareholders by the
following:
7,394,476 shares voted for
2,568 shares voted against
85,452 shares abstained
-0- broker non-votes
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
On April 12, 1996, the Company filed a Report on Form
8-K, reporting under Item 2, and Item 7. The Company
filed Citizens Commercial Trust and Savings Bank of
Pasadena Balance Sheets as of December 31, 1995 and
1994; Statements of Income for the years ended
December 31, 1995 and 1994; Statements of
Shareholders' Equity for the years ended December 31,
1995 and 1994; Statements of Cash Flows for the years
ended December 31, 1995 and 1994; Notes to Financial
Statements and Independent Auditors' Report. Also,
included Pro-Forma Financial Statements relating to
the acquisition.
19
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 22
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CVB FINANCIAL CORP.
(Registrant)
Date: August 13, 1996 /s/ Robert J. Schurheck
------------------------
Robert J. Schurheck
Chief Financial Officer
21