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 September 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 September 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 incorporation (I.R.S. Employer
or organization) Identification 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: 9,059,514 outstanding as of
November 5, 1996.
This Form 10-Q contains 25 pages. Exhibit index on page 23.
PART I - FINANCIAL INFORMATION
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
dollar amounts in thousands
September 30, December 31,
1996 1995
(unaudited)
ASSETS
Investment securities held-to-maturity
(market values of $46,639 and $25,031) $ 46,373 $ 24,272
Investment securities available-for-sale 319,927 260,374
Federal funds sold and interest-bearing
deposits with other financial institutions 0 7,000
Loans and lease finance receivables, net 560,775 496,449
-------------- ------------
Total earning assets 927,075 788,095
Cash and due from banks 81,226 104,886
Premises and equipment, net 23,801 17,219
Other real estate owned, net 4,984 8,253
Goodwill and intangibles 12,028 8,508
Other assets 18,928 9,979
-------------- ------------
$ 1,068,042 $ 936,940
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 345,342 $ 332,851
Interest-bearing 561,604 470,723
-------------- ------------
906,946 803,574
Demand note issued to U.S. Treasury 13,319 6,738
Long-term capitalized lease 458 475
Repurchase Agreement 40,000 40,000
Federal Funds Purchased 8,000 0
Other liabilities 14,916 7,893
-------------- ------------
983,639 858,680
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
9,058,928 and 8,926,707) 44,062 43,436
Retained earnings 42,057 34,520
Net unrealized losses on investment
securities available-for-sale (1,716) 304
-------------- ------------
84,403 78,260
-------------- ------------
$ 1,068,042 $ 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 Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
Interest income:
Loans, including fees $ 14,078 $ 12,368 $ 40,294 $ 37,040
Investment securities:
Taxable 4,899 3,351 13,521 9,864
Tax-advantaged 397 167 833 369
----------- ----------- ----------- -----------
5,296 3,518 14,354 10,233
Federal funds sold and interest bearing
deposits with other financial institutions 171 98 438 145
----------- ----------- ----------- -----------
19,545 15,984 55,086 47,418
Interest expense:
Deposits 4,846 3,706 13,748 10,347
Other borrowings 698 408 2,010 1,454
----------- ----------- ----------- -----------
5,544 4,114 15,758 11,801
----------- ----------- ----------- -----------
Net interest income 14,001 11,870 39,328 35,617
Provision for credit losses 515 0 2,158 1,575
----------- ----------- ----------- -----------
Net interest income after
provision for credit losses 13,486 11,870 37,170 34,042
Other operating income:
Service charges on deposit accounts 1,814 1,704 5,329 5,043
Gains on sale of other real estate owned 3 92 107 117
Other 1,320 443 5,495 1,385
----------- ----------- ----------- -----------
3,137 2,239 10,931 6,545
Other operating expenses:
Salaries and employee benefits 5,154 4,065 14,727 12,360
Deposit insurance premiums 1 (49) 2 745
Occupancy 814 767 2,417 2,317
Equipment 852 591 2,258 1,666
Provision for losses on other real estate owned 350 1,125 3,084 1,375
Other 3,156 2,481 8,932 8,118
----------- ----------- ----------- -----------
10,327 8,980 31,420 26,581
----------- ----------- ----------- -----------
Earnings before income taxes 6,296 5,129 16,681 14,006
Provision for income taxes 2,640 2,145 6,970 5,833
----------- ----------- ----------- -----------
Net earnings $ 3,656 $ 2,984 $ 9,711 $ 8,173
=========== =========== =========== ===========
Earnings per common share $ 0.39 $ 0.32 $ 1.05 $ 0.87
=========== =========== =========== ===========
Cash dividends per common share $ 0.08 $ 0.07 $ 0.24 $ 0.22
=========== =========== =========== ===========
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 Nine Months
Ended September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 52,316 $ 46,338
Service charges and other fees received 10,930 6,544
Interest paid (15,297) (10,873)
Cash paid to suppliers and employees (29,201) (23,817)
Income taxes paid (6,443) (4,972)
----------- ------------
12,305 13,220
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 4,054 13,517
Proceeds from maturities of securities available for sale 55,116 17,908
Proceeds from maturities of securities held to maturity 1,114 1,255
Purchases of securities available for sale (75,529) (65,625)
Purchases of securities held to maturity (22,495) (6,691)
Net (increase)decrease in loans (9,195) 2,500
Loan origination fees received 2,097 1,101
Proceeds from sale of premises and equipment 36 586
Purchase of premises and equipment (2,074) (1,351)
Consideration paid in business combinations (18,322) 0
Other investing activities 2,211 7,453
----------- ------------
(62,987) (29,347)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in transaction deposits (22,596) (59,273)
Net increase in time deposits 14,231 35,166
Net increase in short-term borrowings 14,415 25,738
Dividends paid (2,176) (1,947)
Proceeds from exercise of stock options 626 374
----------- ------------
4,500 58
----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (46,182) (16,069)
CASH AND CASH EQUIVALENTS, beginning of year 111,886 109,829
----------- ------------
CASH AND CASH EQUIVALENTS BEFORE ACQUISITION 65,704 93,760
CASH AND CASH EQUIVALENTS RECEIVED IN THE PURCHASE OF
CITIZENS COMMERCIAL TRUST AND SAVINGS BANK OF PASADENA 15,522 0
----------- ------------
CASH AND CASH EQUIVALENTS, September 30, 81,226 $ 93,760
=========== ============
See accompanying notes to the consolidated financial statements.
4
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
dollar amounts in thousands
For the Nine Months
Ended September 30,
1996 1995
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 9,711 $ 8,173
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums (accretion of discount) on investment securities (262) (20)
Provisions for loan and OREO losses 5,242 2,950
Accretion of deferred loan fees and costs (1,705) (934)
Loan origination costs capitalized (1,434) (927)
Depreciation and amortization 1,964 1,414
Change in accrued interest receivable (804) (126)
Change in accrued interest payable 461 928
Change in other assets and liabilities (868) 1,762
----------- -----------
2,594 5,047
----------- -----------
$ 12,305 $ 13,220
=========== ===========
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 nine months ended September 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
$38.3 million at September 30, 1996. Of this total, $27.0 million, or
70.50%, represented loans that were supported by collateral with a fair
market value, net of prior liens, of $40.8 million. At September 30, 1996,
$11.3 million, or 29.50%, of total impaired loans represented loans for
which repayment was projected to come from cash flows. The impairment
amount on these loans was $5.0 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 September 30, 1996,
the Company had entered into commitments with certain customers amounting
to $112.4 million compared to $79.4 million at December 31, 1995. Letters
of credit at September 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 September
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 September 30, 1996 was
9,058,928. 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
9,265,882 and 9,360,758 for the nine and three month periods ended
September 30, 1996 and 9,370,107 and 9,356,005 for the nine and three month
periods ended September 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
6. Supplemental cash flow information. During the nine-month period ended
September 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 nine-month period ended
September 30, 1996, amounted to $3.1 million.
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. 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 $800,000,000 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 and third
quarters 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 $3.7 million, or $0.39 per share, for
the quarter ended September 30, 1996, compared to net earnings of $3.0 million,
or $0.32 per share, for the quarter ended September 30, 1995. This represented
an increase of $672,000, or 22.53%. For the quarter ended September 30, 1996,
the Company generated an annualized return on average assets of 1.39%, compared
to an annualized return on average assets of 1.46%, for the quarter ended
September 30, 1995. The Company's annualized return on average equity increased
to 17.69%, for the quarter ended September 30, 1996, compared to an annualized
return on average equity of 15.99%, for the quarter ended September 30, 1995.
Net earnings for the nine months ended September 30, 1996 totaled $9.7
million, or $1.05 per share. This represented an increase of $1.5 million, or
18.83%, over net earnings of $8.2 million, or $0.87 per share, for the nine
months ended September 30, 1995. For the nine months ended September 30, 1996,
the Company's annualized return on average assets was 1.30%, compared to an
annualized return of 1.35%, for the first nine months of 1995. The Company
generated an annualized return on average equity of 15.89%, for the nine months
ended September 30, 1996, compared to an annualized return on average equity of
15.77%, for the nine months ended September 30, 1995.
8
The Company's return on average assets for 1996 was affected by a lower net
yield on earning assets. However, the assets acquired as a result of the
Citizens merger resulted in a decrease in the ratio of average equity to average
assets for 1996. The increase in the ratio of average assets to equity, resulted
in the increase in the return on average equity for 1996, compared to 1995.
Pre-tax operating earnings, which 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, were $19.7 million for the nine
months ended September 30, 1996. This compared to operating earnings of $16.8
million, for the nine months ended September 30, 1995, representing an increase
of $2.8 million, or 17.08%.
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 quarter ended September 30, 1996, net interest income increased to
$14.0 million, compared to $11.9 million for the quarter ended September 30,
1995. This represented an increase of $2.1 million, or 17.95%. For the nine
months ended September 30, 1996, net interest income totaled $39.3 million. This
represented an increase of $3.7 million, or 10.42%, over net interest income of
$35.6 million for the first nine months of 1995.
The increases in the Company's net interest income for both the three month
and nine month periods ended September 30, 1996, resulted as increases in the
volume of average earning assets were sufficient to off-set decreases in the
Company's net interest margin. Earning assets averaged $859.8 million for the
first nine months of 1996, compared to an average of $699.2 million for 1995.
This represented an increase of $160.6 million, or 22.97%. The net interest
margin decreased to 6.21% for the quarter ended September 30, 1996, from 6.76%,
for the quarter ended September 30, 1995. For the nine months ended September
30,1996, the Company's net interest margin was 6.15%, compared to a margin of
6.82%, for the same period last year.
The increase in the volume of average earning assets for 1996 compared to
1995, was primarily the result of the acquisition of Citizens. The decrease in
the net interest margin for 1996, compared to 1995, reflected both a lower yield
on average earning assets and an increased cost of average interest bearing
liabilities.
Interest income represents interest and fees that the Company earns from
loans and interest on investments. For the quarter ended September 30, 1996,
interest income totaled $19.5 million. This represented an increase of $3.6
million, or 22.29%, over interest income of $16.0 million, for the quarter
ended September 30, 1995. The Company earned interest income of $55.1 million
for the nine months ended September 30, 1996. This represented an increase of
$7.7 million, or 16.17%, from interest income of $47.4 million, for the nine
months ended September 30, 1995.
9
For both the three month and nine month periods ended September 30, 1996,
the increase in interest income reflected the increase in the volume of average
earning assets. The yield on earning assets decreased to 8.64%, for the quarter
ended September 30, 1996, from a yield of 9.09%, for the quarter ended September
30, 1995. Similarly, total yield on earning assets decreased to 8.59%, from
9.07%, for the nine months ended September 30, 1996, and 1995, respectively. The
lower yields on average earning assets reflected generally lower prevailing
market interest rates for 1996 compared to 1995.
Interest expense totaled $5.5 million, for the quarter ended September 30,
1996. This represented an increase of $1.4 million, or 34.76%, compared to total
interest expense of $4.1 million, for the quarter ended September 30, 1995. For
the nine months ended September 30, 1996, interest expense totaled $15.8
million. This represented an increase of $4.0 million, or 33.53%, over total
interest expense of $11.8 million for the nine months ended September 30, 1995.
The increases in interest expense for both the three month and nine month
periods ended September 30, 1996, reflected an increase in the volume of
interest paying liabilities, and an increase in the cost of average interest
bearing liabilities, compared to the same periods last year. For the first nine
months of 1996, interest bearing liabilities averaged $581.5 million. This
represented an increase of $111.0 million, or 23.60%, over average interest
bearing liabilities of $470.5 million for 1995. The cost of average interest
bearing liabilities increased to 3.59% for the quarter ended September 30, 1996,
compared to an average cost of 3.53% for the same period last year. For the nine
months ended September 30, 1996, the cost of average interest bearing
liabilities increased to 3.61%, compared to 3.34%, for the same nine month
period for 1995. The increased cost of interest bearing liabilities primarily
reflected increased regional competition for deposits in 1996.
Table 1 shows the average balances of assets, liabilities, and
stockholders' equity and the related interest income, expense, and rates for the
nine month periods ended September 30, 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).
The net interest spread and the net interest margin can be affected by the
Company's ability to reprice assets and liabilities as interest rates change. At
September 30, 1996, the Bank's 90 days or less maturity/repricing gap was a
negative $235.3 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 interest rates fall and a lower net interest margin and
net interest spread when interest 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.
10
TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differentials (dollars in thousands)
Nine-month periods ended September 30,
1996 1995
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
Investment Securities
Taxable $294,307 13,521 6.13% 210,707 9,864 6.24%
Tax-advantaged (F1) 22,106 833 7.05% 9,848 369 7.00%
Federal Funds Sold & Interest-bearing
deposits with other financial institutions 10,681 438 5.47% 3,370 145 5.74%
Net Loans (F2) (F3) 532,666 40,294 10.09% 475,260 37,040 10.39%
----------------------------- ----------------------------
Total Earning Assets 859,760 55,086 8.59% 699,185 47,418 9.07%
Total Non-earning Assets 132,711 110,043
--------
Total Assets $992,471 $809,228
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand Deposits $316,805 $263,507
Savings Deposits (F4) 345,490 6,479 2.50% 303,604 5,250 2.31%
Time Deposits 185,357 7,269 5.23% 133,133 5,097 5.10%
------------------------------ -----------------------------
Total Deposits 847,652 13,748 2.16% 700,244 10,347 1.97%
------------------------------ -----------------------------
Other Borrowings 50,640 2,010 5.29% 33,738 1,454 5.75%
------------------------------ -----------------------------
Total Interest-Bearing Liabilities 581,487 15,758 3.61% 470,475 11,801 3.34%
------------------------------ -----------------------------
Other Liabilities 12,711 6,143
Stockholders' Equity 81,468 69,103
-------- --------
Total Liabilities and
Stockholders' Equity $992,471 $809,228
======== ========
Net interest spread 4.98% 5.73%
Net interest margin 6.15% 6.82%
<FN>
(F1) Yields are calculated on a taxable equivalent basis.
(F2) Loan fees are included in total interest income as follows: 1996, $2,368; 1995, $1,644.
(F3) Nonperforming loans are included in net loans as follows: 1996, $23,458; 1995, $26,882.
(F4) Includes interest-bearing demand and money market accounts.
</FN>
11
TABLE 2 - Rate and Volume Analysis for Changes in Interest Income, Interest
Expense and Net Interest Income (amounts in thousands)
Comparison of nine-month period
ended September, 1996 and 1995
Increase (decrease) in interest income or expense
due to changes in
Rate/
Volume Rate Volume Total
Interest Income:
Taxable investment securities $ 3,914 $ (184) $ (73) $ 3,657
Tax-advantaged securities 459 2 3 464
Fed funds sold & interest bearing
deposits with other institutions 316 (7) (16) 293
Loans 4,473 1,088) (131) 3,254
---------------------------------------
Total earning assets 9,162 (1,277) (217) 7,668
---------------------------------------
Interest Expense:
Savings deposits 724 444 61 1,229
Time deposits 1,999 124 49 2,172
Other borrowings 729 (115) (58) 556
---------------------------------------
Total interest-bearing liabilities 3,452 453 52 3,957
---------------------------------------
Net Interest Income $ 5,710 $ (1,730) $ (269) $ 3,711
=======================================
12
Credit Loss Experience
The Company maintains an allowance for potential credit losses to provide
for potential specific or general loan losses. The allowance is increased by a
provision for credit losses charged against operating results and recoveries on
loans previously charged to the reserve. The allowance is reduced by loan losses
charged to the allowance. The allowance for credit losses totaled $11.4 million
at September 30, 1996. This represented an increase of $1.8 million, or 18.87%,
over the allowance for credit losses of $9.6 million at December 31, 1995. As a
percent of gross loans, the allowance for credit losses increased to 2.0%, at
September 30, 1996, compared to a ratio of 1.9%, at December 31, 1995.
For the quarter ended September 30, 1996, the provision for loan losses was
$515,000. There was no provision for credit losses for the quarter ended
September 30, 1995. For the nine months ended September 30, 1996, the provision
for loan losses totaled $2.2 million. This represented an increase of $583,000,
or 37.02%, over the provision for credit losses of $1.6 million, for the nine
months ended September 30, 1995.
For the quarter ended September 30, 1996, net loans charged to the
allowance were $619,000. This represented an increase of $315,000, or 103.6%,
over net loans charged to the allowance of $304,000 for the quarter ended
September 30, 1995. For the nine months ended September 30, 1996, loans charged
to the allowance for credit losses, net of recoveries totaled $1.1 million,
compared to net loans charged to the allowance for credit losses of $2.5 million
for the nine months ended September 30, 1995.
Nonperforming assets, which includes loans on nonaccrual, restructured
loans, and other real estate owned, decreased to $28.4 million at September 30,
1996. This represented a decrease of $6.7 million, or 18.97%, from nonperforming
assets of $35.1 million at December 31, 1995. The decrease is a result of a
reduction in restructured loans and OREO. Nonaccrual loans totaled $16.5 million
at September 30, 1996. This represented an increase $3.2 million, or 23.8%, over
total nonaccrual loans of $13.3 million at December 31, 1995.
Table 6 presents nonperforming assets (nonaccrual loans, loans 90 days or
more past due, restructured loans, and other real estate owned) as of September
30, 1996, and December 31, 1995.
The Company has adopted the methods prescribed by Statement of Financial
Accounting Standards (SFAS) No. 114 for calculating the fair value of specific
loans for which the eventual collection of all principal and interest is
determined to be impaired. At September 30, 1996, impaired loans totaled $38.3
million. Of this total, $27.0 million, or 70.50%, were considered collateral
dependent, with collateral values of approximately $40.8 million. At September
30, 1996, $11.3 million, or 29.50%, of total impaired loans represented loans
for which repayment was projected to come from cash flows. The impairment amount
on these loans was $5.0 million.
While management believes that the allowance 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.
13
TABLE 3 - Summary of Credit Loss Experience
(dollars in thousands
Nine-months
ended September 30,
1996 1995
Amount of Total Loans at End of Period $ 572,217 $ 484,957
============== ==============
Average Total Loans Outstanding $ 543,496 $ 484,226
============== ==============
Allowance for Credit Losses at Beginning of Period $ 9,626 $ 9,471
Loans Charged-Off:
Real Estate Loans 1,293 2,167
Commercial and Industrial 187 280
Consumer Loans 65 152
-------------- --------------
Total Loans Charged-Off 1,545 2,599
-------------- --------------
Recoveries:
Real Estate Loans 312 0
Commercial and Industrial 168 88
Consumer Loans 11 41
-------------- --------------
Total Loans Recovered 491 129
-------------- --------------
Net Loans Charged-Off 1,054 2,470
-------------- --------------
Provision Charged to Operating Expense 2,158 1,575
-------------- --------------
Adjustment Incident to Mergers 712 0
-------------- --------------
Allowance for Credit Losses at End of period $ 11,442 $ 8,576
============== ==============
Net Loans Charged-Off to Average Total Loans* 0.26% 0.68%
Net Loans Charged-Off to Total Loans at End of Period* 0.25% 0.68%
Allowance for Credit Losses to Average Total Loans 2.11% 1.77%
Allowance for Credit Lossess to Total Loans at End of Period 2.00% 1.77%
Net Loans Charged-Off to Allowance for Credit Losses* 12.28% 38.40%
Net Loans Charged-Off to Provision for Credit Losses 48.84% 156.83%
* Net Loan Charge-Off amounts are annualized.
14
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
nine months ended September 30, 1996, settlement of litigation.
For the quarter ended September 30, 1996, other operating income totaled
$3.1 million. This represented an increase of $898,000, or 40.11%, over other
operating income of $2.2 million for the quarter ended September 30, 1995.
Contributing to the increase for the quarter ended September 30, 1996, were
service charges and fee income generated by the Bank's new trust division which
was purchased with the acquisition of Citizens.
For the nine months ended September 30, 1996, other operating income
totaled $10.9 million. This represented an increase of $4.4 million, or 67.02%,
over other operating income of $6.5 million for the nine months ended September
30, 1995. Included as other operating income for 1996 was a $2.1 million
settlement of litigation paid to the Bank in March of 1996. Net of this
settlement, other operating income increased $2.3 million or 34.93%. The
settlement arose from a suit filed by the Bank against a former officer and
director for violation of an agreement not to compete. The litigation, which was
settled in the first quarter of this year, resulted in the $2.1 million payment
to the Bank, from the defendant.
Other Operating Expenses
Other operating expenses increased to $10.3 million, for the quarter ended
September 30, 1996. This represented an increase of $1.3 million, or 15.00%,
over other operating expenses of $9.0 million, for the quarter ended September
30, 1995. Increases in other operating expenses for the third quarter of 1996
primarily reflected the increased operating expenses associated with the
addition of four new branch offices and the new trust division, resulting from
the acquisition of Citizens. As a percent of average assets, other operating
expenses decreased to 3.92%, for the quarter ended September 30, 1996, compared
to a ratio of 4.40% for the quarter ended September 30, 1995. As a percent of
net revenue, operating expenses decreased to 60.26% for the quarter ended
September 30, 1996, compared to a ratio of 63.65%, for the same period last
year.
For the nine months ended September 30, 1996, other operating expenses
totaled $31.4 million. This represented an increase of $4.8 million, or 18.20%,
over other operating expenses of $26.6 million for the nine months ended
September 30, 1995.
For the nine months ended September 30, 1996, salaries and related expenses
totaled $14.7 million. This represented an increase of $2.4 million, or 19.14%,
over salaries and related expenses of $12.4 million for the nine months ended
September 30, 1995. The increase was a primarily a result of increased number of
associates for the additional branches and trust division acquired through the
Citizens' merger.
Occupancy and equipment expenses totaled $4.7 million for the nine months
ended September 30, 1996. This represented an increase of $692,000, or 17.37%,
from total occupancy and equipment expenses of $4.0 million, for the nine months
ended September 30, 1995. The increase was a primarily a result of additional
branch facilities acquired through the Citizens' merger.
15
Other expenses increased to $8.9 million for the nine months ended
September 30, 1996. This represented an increase of $814,000, or 10.03%, over
other expenses of $8.1 million for the nine months ended September 30, 1995.
Contributing to the increase in other expenses was the amortization of goodwill
and intangibles resulting from the Citizens acquisition which totaled $254,000
for the nine months ended September 30, 1996. For the nine months ended
September 30, 1996, the provision for potential losses on other real estate
owned was $3.1 million. This represented an increase of $1.7 million, or
124.29%, over a provision for losses on other real estate owned of $1.4 million
for the nine months ended September 30, 1995.
BALANCE SHEET ANALYSIS
The Company reported total assets of $1.07 billion at September 30, 1996.
This represented an increase of $131.1 million, or 13.99%, from total assets of
$936.9 million at December 31, 1995. Gross loans totaled $572.2 million at
September 30, 1996, an increase of $66.1 million, or 13.07%, for gross loans of
$506.1 million at December 31, 1995. Total deposits increased to $906.9 million
at September 30, 1996. This represented an increase of $103.4 million, or
12.86%, over total deposits of $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 $366.3 million at
September 30, 1996. This represented an increase of $81.7 million, or 28.69%,
over total investment securities of $284.6 million at December 31, 1995. The
Bank reported no federal funds sold at September 30, 1996, compared to federal
funds sold of $7.0 million at December 31, 1995.
The Company has adopted SFAS No. 115 "Accounting for Certain Investments in
Debt and Equity Securities". 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 to equity capital. Securities "held to maturity" are
carried at amortized cost.
At September 30, 1996, the unrealized losses on securities available for
sale totaled $2.6 million. This compared to unrealized gains of $517,000, at
December 31, 1995. 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.
Approximately 60.00% of the Bank's investment portfolio consists of
mortgage backed securities. The average life of these securities can be affected
by changes in interest rates. Underlying mortgages tend to pay-off slower as
interest rates increase, subjecting the portfolio to extension risk. Conversely,
underlying mortgages tend to pay-off faster as interest rates decrease,
subjecting to portfolio to pre-payment risk. Prepayment and extension risk can
affect the yield to maturity on existing securities. In addition, prepayment and
extension risk can affect future yields on the Bank's investment portfolio as
lower yields are generally available when underlying mortgages prepay and higher
yields are generally available when underlying mortgages extend.
Table 4 sets forth investment securities held-to-maturity and
available-for-sale, at September 30, 1996 and December 31, 1995.
16
Table 4 - Composition of Securities Portfolio
(dollars in thousands)
September 30, 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 $ 50,449 $ 50,530 $ 81 6.07% $ 30,612 $ 31,028 $ 416 6.24%
FHLMC, FNMA CMO's, REMIC's
and mortgage-backed pass-through securities
Available for Sale 213,515 210,806 (2,709) 6.24% 180,485 180,925 440 5.97%
Held to Maturity 6,451 6,614 163 5.74% 7,358 7,679 321 5.73%
Other Government Agency Securities
Available for Sale 47,124 47,116 (8) 5.94% 41,659 41,789 130 6.51%
GNMA mortgage-backed pass-through
securities
Held to Maturity 1,264 1,357 93 9.43% 1,402 1,511 109 9.21%
Tax-exempt Municipal Securities
Held to Maturity 37,544 37,554 10 4.97% 14,465 14,793 328 5.23%
Other securities
Available for Sale 6,874 6,874 0 N/A 6,632 6,632 0 N/A
Held to Maturity 1,114 1,114 0 6.47% 1,048 1,048 0 6.80%
Corporate Bonds
Available for Sale 4,602 4,601 (1) 6.17% 0 0 0 0.00%
------------------------------------------ ----------------------------------------
$ 368,937 $ 366,566 $ (2,371) 5.93% $ 283,661 $ 285,405 $ 1,744 5.92%
========================================== ========================================
17
Loan Composition and Nonperforming Assets
Table 5 sets forth the distribution of the loan portfolio by type as of the
dates indicated (dollar amounts in thousands):
Table 5 - Distribution of Loan Portfolio by Type
September 30, December 31,
1996 1995
Commercial and Industrial (F1) $ 236,261 $ 234,709
Real Estate:
Construction 31,552 23,805
Mortgage 211,317 149,039
Consumer 19,956 15,876
Lease finance receivables 21,063 21,529
Agribusiness 55,418 63,580
--------- ---------
Gross Loans $ 575,567 $ 508,538
Less:
Allowance for credit losses 11,442 9,626
Deferred net loan fees 3,350 2,463
--------- ---------
Net loans $ 560,775 $ 496,449
========= =========
<FN>
(F1) Includes $97.7 million and $142.0 million of loans for which the
Company holds real property as collateral at September 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
$28.4 million at September 30, 1996. This represented a decrease of $6.7
million, or 18.97%, from nonperforming assets of $35.1 million at December 31,
1995. As a percent of total assets, nonperforming assets decreased to 2.66% at
September 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.
18
Table 6 - Nonperforming Assets
September 30, 1996 December 31, 1995
Nonaccrual loans $ 16,452 $ 13,289
Loans past due 90 days or more
and still accruing interest 379 0
Restructured loans 6,627 13,558
Other real estate owned (OREO), net 4,984 8,253
-------- --------
Total nonperforming assets $ 28,442 $ 35,100
========= ========
Percentage of nonperforming assets
to total loans outstanding & OREO 4.93% 6.82%
Percentage of nonperforming
assets to total assets 2.66% 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
$6.6 million at September 30, 1996, from $13.5 million at December 31, 1995.
This represented a decrease of $6.9 million, or 51.12%. Other real estate owned
decreased to $5.0 million at September 30, 1996. This represented a decrease of
$3.3 million, or 39.61%, from other real estate owned of $8.3 million at
December 31, 1995. At September 30, 1996, nonaccrual loans were $16.5 million,
an increase of $3.2 million, or 23.80%, from nonaccrual loans of $13.3 million
at December 31, 1995. The majority of nonaccrual loans were collateralized by
real property at September 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 $906.9 million at September 30, 1996. This
represented an increase of $103.4 million, or 12.86%, 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 $12.5 million,
or 3.75%, to $345.3 million at September 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 September 30, 1996, from $470.7 million at December 31,
1995. Interest bearing deposits totaled 61.92% of total deposits at September
30, 1996. This compared to a ratio of interest bearing deposits to total
deposits of 58.58% at December 31, 1995.
19
Historically, at each year end, the Bank's deposit 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.
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 September 30, 1996, the Company's
loan-to-deposit ratio was 63.09%, 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. At of September 30, 1996 the liquidity ratio was a negative 13.85%,
compared to a ratio of a negative 13.44% at December 31, 1995. Conceptually,
this shows that the Company was funding 13.85% 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 $12.3 million for the nine months ended September 30, 1996 compared to
$13.2 million for the nine months ended September 30, 1995. Net cash used in
investing activities, primarily purchases of investment securities and
consideration paid in business combinations, totaled $62.9 million for the nine
months ended September 30, 1996, compared to $29.3 million for the nine months
ended September 30, 1995. Cash flows from financing activities totaled $4.5
million for the nine months ended September 30, 1996, compared to $58,000 for
the same period last year.
Capital Resources
The Company's equity capital was $84.4 million at September 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.
20
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 September 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 September 30, 1996 and December 31, 1995:
Table 7 - Regulatory Capital Ratios
Required
Minimum September 30, 1996 December 31, 1995
Capital Ratios Ratios Company Bank Company Bank
Risk-based Capital
Ratios:
Tier I 4.00% 11.1% 10.7% 11.8% 11.1%
Total 8.00% 12.3% 12.0% 13.0% 12.4%
Leverage Ratio 3.00% 7.1% 6.9% 8.1% 7.6%
21
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
22
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 25
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CVB FINANCIAL CORP.
(Registrant)
Date: November 14, 1996 /s/ Robert J. Schurheck
Robert J. Schurheck
Chief Financial Officer
24