FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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, 1997 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: 9,952,958 outstanding as of
August 5, 1997.
This Form 10-Q contains 29 pages. Exhibit index on page 26.
PART I - FINANCIAL INFORMATION
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
dollar amounts in thousands
June 30, December 31,
1997 1996
(unaudited)
ASSETS
Investment securities held-to-maturity
(market values of $57,454 and $51,548) $ 56,809 $ 50,734
Investment securities available-for-sale 374,409 333,348
Loans and lease finance receivables, net 570,166 576,686
----------- ------------
Total earning assets 1,001,384 960,768
Cash and due from banks 90,676 142,502
Premises and equipment, net 23,485 24,235
Other real estate owned, net 10,738 6,196
Goodwill and intangibles 11,410 11,692
Other assets 14,938 15,028
----------- ------------
$ 1,152,631 $ 1,160,421
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 386,623 $ 431,183
Interest-bearing 576,107 559,413
----------- ------------
962,730 990,596
Demand note issued to U.S. Treasury 13,197 12,610
Federal Funds Purchased 0 16,000
Repurchase Agreement 70,000 40,000
Long-term capitalized lease 441 453
Other liabilities 13,492 11,675
----------- ------------
1,059,860 1,071,334
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
9,945,781 and 9,972,981) 61,797 61,942
Retained earnings 31,238 27,341
Net unrealized losses on investment
securities available-for-sale (264) (196)
------------ ------------
92,771 89,087
------------ ------------
$ 1,152,631 $ 1,160,421
============ ============
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,
1997 1996 1997 1996
Interest income:
Loans, including fees $ 14,177 $ 13,819 $ 28,176 $ 26,216
Investment securities:
Taxable 5,954 4,853 10,985 8,622
Tax-advantaged 594 243 1,149 436
-------- -------- --------- --------
6,548 5,096 12,134 9,058
Federal funds sold and interest bearing
deposits with other financial institutions 21 124 93 267
-------- -------- -------- --------
20,746 19,039 40,403 35,541
Interest expense:
Deposits 4,845 4,688 9,712 8,902
Other borrowings 1,438 672 2,151 1,312
-------- -------- -------- --------
6,283 5,360 11,863 10,214
-------- -------- -------- --------
Net interest income 14,463 13,679 28,540 25,327
Provision for credit losses 275 430 1,055 1,643
-------- -------- -------- --------
Net interest income after
provision for credit losses 14,188 13,249 27,485 23,684
Other operating income:
Service charges on deposit accounts 1,853 1,780 3,630 3,515
Gains on sale of other real estate owned 53 23 54 104
Trust fees 813 815 1,567 815
Other 896 583 1,643 3,360
-------- -------- -------- --------
3,615 3,201 6,894 7,794
Other operating expenses:
Salaries and employee benefits 5,612 5,337 11,111 9,573
Deposit insurance premiums 30 1 57 2
Occupancy 885 831 1,686 1,602
Equipment 917 762 1,745 1,406
Provision for losses on other real estate owned 880 665 1,195 2,734
Other 3,093 3,229 6,592 5,776
-------- -------- -------- --------
11,417 10,825 22,386 21,093
-------- -------- -------- --------
Earnings before income taxes 6,386 5,625 11,993 10,385
Provision for income taxes 2,636 2,328 4,893 4,330
-------- -------- -------- --------
Net earnings $ 3,750 $ 3,297 $ 7,100 $ 6,055
======== ======== ======== ========
Earnings per common share $ 0.36 $ 0.32 $ 0.68 $ 0.59
======== ======== ======== ========
Cash dividends per common share $ 0.10 $ 0.07 $ 0.20 $ 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,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 39,244 $ 34,016
Service charges and other fees received 6,897 7,794
Interest paid (11,640) (10,491)
Cash paid to suppliers and employees (20,443) (20,053)
Income taxes paid (3,700) (862)
--------- ---------
Net cash provided by operating activities 10,358 10,404
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 4,496 0
Proceeds from maturities of securities available for sale 33,591 42,098
Proceeds from maturities of securities held to maturity 841 782
Purchases of securities available for sale (79,644) (34,205)
Purchases of securities held to maturity (6,545) (12,125)
Net decrease in loans (3,734) (2,097)
Loan origination fees received 1,411 1,282
Proceeds from sale of premises and equipment 55 35
Purchase of premises and equipment (793) (1,377)
Consideration paid in business combinations 0 (18,322)
Other investing activities 4,765 (2,783)
--------- ---------
Net cash provided by investing activities (45,557) (26,712)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in transaction deposits (48,553) (31,501)
Net increase in time deposits 20,686 11,476
Net increase in short-term borrowings 14,587 5,347
Stock repurchase (1,718) 0
Cash dividends on common stock (2,009) (1,452)
Proceeds from exercise of stock options 380 339
--------- ---------
Net cash provided by financing activities (16,627) (15,791)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (51,826) (32,099)
CASH AND CASH EQUIVALENTS, beginning of period 142,502 111,886
--------- ---------
CASH AND CASH EQUIVALENTS BEFORE ACQUISITION 90,676 79,787
CASH AND CASH EQUIVALENTS RECEIVED IN THE PURCHASE OF
CITIZENS COMMERCIAL TRUST AND SAVINGS BANK OF PASADENA 0 15,522
--------- ---------
CASH AND CASH EQUIVALENTS, June 30, $ 90,676 $ 95,309
========= =========
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,
1997 1996
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 7,100 $ 6,055
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums on investment securities 2 130
Provisions for loan and OREO losses 2,250 4,377
Accretion of deferred loan fees and costs (1,171) (1,017)
Loan origination costs capitalized (936) (854)
Depreciation and amortization 1,503 1,239
Change in accrued interest receivable 10 (637)
Change in accrued interest payable 223 (278)
Change in other assets and liabilities 1,377 1,389
--------- ----------
Total adjustments 3,258 4,349
--------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 10,358 $ 10,404
========= ==========
5
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 1997 and 1996
1. Summary of Significant Accounting Policies. See Note 1 of the Notes to
Consolidated Financial Statements in CVB Financial Corp.'s 1996 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
$9.9 million at June 30, 1997. Of this total, $7.1 million, or 71.38%,
represented loans that were supported by collateral with a fair market
value, net of prior liens, of $21.1 million. At June 30, 1997, $2.8
million, or 28.62%, of total impaired loans represented loans for which
repayment was projected to come from cash flows.
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 1996 financial information
to conform to the presentation used in 1997.
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, 1997, the
Company had entered into commitments with certain customers amounting to
$122.4 million compared to $103.7 million at December 31, 1996. Letters of
credit at June 30, 1997 and December 31, 1996, were $8.8 million and $8.5
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,
1997, 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, 1997, was 9,945,781.
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 10,384,610 and
10,370,622 for the six and three month periods ended June 30, 1997 and
10,197,837 and 10,254,892 for the six and three month periods ended June
30, 1996. All 1996 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 18, 1996.
6. Supplemental cash flow information. During the six-month period ended June
30, 1997, loans amounting to $9.9 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,
1997, amounted to $3.9 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. 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 1996 Annual Report on Form 10-K.
Certain statements in this Report on Form 10-Q constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 which
involve risk and uncertainties. The Company's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include but are not limited to
economic conditions, competition in the geographic and business areas in which
the Company conducts operations, fluctuations in interest rates, credit quality
and government regulations. For additional information concerning these factors,
see "Item 1. Business - Factors that May Affect Results" contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
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.
RESULTS OF OPERATIONS
The Company reported net earnings of $7.1 million for the six months ended
June 30, 1997. This represented an increase of $1.0 million, or 17.26%, over net
earning of $6.1 million, for the six months ended June 30, 1996. Earnings per
share for the six month period increased to $0.68 per share for 1997, compared
to $0.59 per share for 1996. The annualized return on average assets remained a
constant 1.26% for the first half of 1997 and 1996. The annualized return on
average equity was 15.45% for the six months ended June 30, 1997, compared to a
return on average equity of 14.98%, for the six months ended June 30, 1996.
For the second quarter of 1997, the Company generated net earnings of $3.7
million. This represented an increase of $453,000, or 13.73%, over earnings of
$3.3 million, for the second quarter of 1996. Earnings per share increased to
$0.36 per share for the most recent quarter, compared to $0.32 per share for the
second quarter of last year. The annualized return on average assets was 1.31%
for the second quarter of 1997, compared to a return of 1.28% for the second
quarter of 1996. The annualized return on average equity was 16.37%, for the
second quarter of this year, compared to a return of 16.21%, for the same period
last year.
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 $14.2 million for the six
months ended June 30, 1997. This represented an increase of $1.6 million, or
13.01%, compared to operating earnings of $12.6 million for the first half of
1996. For the second quarter of 1997, pre-tax operating earnings totaled $7.5
million. This represented an increase of $791,000, or 11.82%, over pre-tax
operating earnings of $6.7 million for the second quarter of 1996.
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 borrowed funds. When net
interest income is expressed as a percentage of average earning assets, the
result is the net interest margin. The net interest spread is the yield on
average earning assets minus the average cost of interest-bearing deposits and
borrowed funds.
For the six months ended June 30, 1997, net interest income was $28.5
million. This represented and increase of $3.2 million, or 12.68%, over net
interest income of $25.3 million for the six months ended June 30, 1996. Despite
the increase in net interest income, the net interest margin decreased to 5.90%
for the six months ended June 30, 1997, compared to 6.05% for the six months
ended June 30, 1996. In addition, the net interest spread decreased to 4.63% for
the six months ended June 30, 1997, compared to a spread of 4.84% for the six
months ended June 30, 1996.
The increase in net interest income for the most recent six months period
was the result of an increased volume of average earning assets. Earning assets
averaged $983.4 million for the first six months of 1997. This represented an
increase of $139.8 million, or 16.57%, compared to average earning assets of
$843.7 million for the first six months of 1996. The decrease in the net
interest margin was the result of a lower yield on average earning assets. The
decrease in the net interest spread resulted as the yield on average earning
assets decreased and the cost of interest bearing liabilities increased.
Similarly, net interest income increased for the second quarter of 1997,
compared to the second quarter of 1996. For the second quarter of 1997, net
interest income totaled $14.5 million. This represented an increase of $784,000,
or 5.73%, over net interest income of $13.7 million for the second quarter of
1996. The increase in net interest income for the second quarter of this year
also resulted from an increased volume in average earning assets. For the second
quarter of 1997, earning assets averaged $1.0 billion. This represented an
increase of $106.7 million, or 11.86%, over average earning assets of $899.6
million for the second quarter of 1996. The net interest margin decreased to
5.84% for the second quarter of 1997, compared to a net interest margin of 6.13%
for the second quarter of 1996. Again, the decrease in the net interest margin
was the result of a lower yield on average earning assets. The net interest
spread decreased to 4.54% for the second quarter of 1997, compared to a spread
of 4.96% for the second quarter of 1996.
8
The Company reported total interest income of $40.4 million for the six
months ended June 30, 1997. This represented an increase of $4.9 million, or
13.68%, over total interest income of $35.5 million for the six months ended
June 30, 1996. The increase reflected the greater volume of earning assets noted
above. The yield on average total earning assets decreased to 8.31% for the six
months ended June 30, 1997, from a yield of 8.47% for the six months ended June
30, 1996.
The decrease in the yield on average earning assets resulted from lower
yields on average loans, and a greater concentration of earning assets as
investments as opposed to loans. The yield on average loans decreased to 9.73%
for the six months ended June 30, 1997, from a yield of 9.86% for the first six
months of 1996. The 13 basis point decrease in average loan yields primarily
reflected increased price competition for loans. Loans typically generate higher
yields than investments. Accordingly, as the percent of earning assets allocated
to loans increases relative to investments, the greater the potential yield on
total earning assets. For the six months ended June 30, 1997, average loans
represented 58.89% of average earning assets, compared to 63.06% for the six
months ended June 30, 1996.
Similar trends were evident when comparing the second quarter of 1997 with
the second quarter of 1996. Total interest income was $1.7 million, or 8.97%
greater for the second quarter of 1997 compared to the second quarter of 1996.
The yield on average loans decreased to 9.83% for the second quarter of 1997,
compared to a 9.87% yield of the second quarter of 1996. Average loans as a
percent of average earning assets decreased to 57.34% for the three months ended
June 30, 1997, compared to 62.28% for the same period last year.
Total interest expense was $11.9 million for the six months ended June 30,
1997. This represented an increase of $1.6 million, or 16.14%, over total
interest expense of $10.2 million for the six months ended June 30, 1996. The
increase reflected the increased volume of interest paying liabilities. Average
interest bearing deposits were $565.6 million for the first six months of 1997.
This represented an increase of $51.7 million, or 10.05%, from total interest
bearing deposits of $514.0 million for the first six months of 1996. Other
borrowed funds averaged $78.4 million for the six months ended June 30, 1997.
This represented an increase of $29.0 million, or 58.74%, over average other
borrowed funds of $49.4 million for the six months ended June 30, 1996. The
increase in other borrowed funds reflected greater reliance on funds borrowed
from the Federal Home Loan Bank to fund increases in earning assets.
The cost of average interest bearing liabilities was 3.68% for the first
six months of 1997, compared to an average cost of 3.63%, for the same period
last year. The increase in the cost of interest bearing liabilities was the
result of an increase in the cost of other borrowed funds. The cost of interest
bearing deposits decreased to 3.43% for the first half of this year, compared to
a cost of 3.46% for the same period last year. The cost of other borrowed funds
increased to 5.49% for the six months ended June 30, 1997, compared to a cost of
5.32% for the six months ended June 30, 1996.
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, 1997, and 1996. 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 privided with respect to changes attributable to (1)
changes in volume (change in volume multiplied by initial rate), (2) changes in
rate (change in rate mulitplied 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)
Six-month periods ended June 30,
1997 1996
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
Investment Securities
Taxable $ 353,894 10,985 6.21% $ 284,350 8,622 6.06%
Tax-advantaged (F1) 46,799 1,149 6.89% 17,351 436 7.05%
Federal Funds Sold & Interest-bearing
deposits with other financial institutions 3,602 93 5.16% 9,942 267 5.37%
Loans (F2)(F3) 579,128 28,176 9.73% 532,010 26,216 9.86%
---------------------------- ----------------------------
Total Earning Assets 983,423 40,403 8.31% 843,653 35,541 8.47%
Total Non-earning Assets 139,671 117,478
---------- ----------
Total Assets $1,123,094 $ 961,131
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand Deposits $ 373,833 $ 306,211
Savings Deposits (F4) 363,819 4,501 2.47% 332,657 4,124 2.48%
Time Deposits 201,816 5,211 5.16% 181,311 4,778 5.27%
---------------------------- ----------------------------
Total Deposits 939,468 9,712 2.07% 820,179 8,902 2.17%
---------------------------- ----------------------------
Other Borrowings 78,364 2,151 5.49% 49,365 1,312 5.32%
---------------------------- ----------------------------
Total Interest-Bearing Liabilities 643,999 11,863 3.68% 563,333 10,214 3.63%
---------- ----------
Other Liabilities 13,354 10,751
Stockholders' Equity 91,908 80,836
---------- ----------
Total Liabilities and
Stockholders' Equity $1,123,094 $ 961,131
========== ==========
Net interest spread 4.63% 4.84%
Net interest margin 5.90% 6.05%
<FN>
(F1) Yields are calculated on a taxable equivalent basis.
(F2) Loan fees are included in total interest income as follows: 1997, $1,647; 1996, $1,444.
(F3) Nonperforming loans are included in net loans as follows: 1997, $7,303; 1996, $16,037.
(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 six-month period
ended June 30, 1997 and 1996
Increase (decrease) in interest income or expense
due to changes in
Rate/
Volume Rate Volume Total
Interest Income:
Taxable investment securities $ 2,109 $ 204 $ 50 $ 2,363
Tax-advantaged securities 740 (10) (17) 713
Fed funds sold & interest bearing
deposits with other institutions (170) (10) 6 (174)
Loans 2,320 (331) (29) 1,960
--------------------------------------------
Total earning assets 4,999 (147) 10 4,862
--------------------------------------------
Interest Expense:
Savings deposits 387 (9) (1) 377
Time deposits 540 (96) (11) 433
Other borrowings 769 44 26 839
--------------------------------------------
Total interest-bearing liabilities 1,696 (61) 14 1,649
--------------------------------------------
Net Interest Income $ 3,303 $ (86) $ (4) $ 3,213
============================================
11
Interest rate risk is the risk to earnings from movements in interest
rates. Interest rate risk arises from differences between the timing of rate
changes and the timing of cash flows (repricing risk); from changing rate
relationships among different yield curves affecting bank activities (basis
risk); from changing rate relationships across the spectrum of maturities (yield
curve risk); and from interest-related options embedded in bank investments
(options risk). The Company uses models to measure the probable impact to its
net interest income and net interest margin under different interest rate
scenarios. The models indicate that the Company's net interest income could
decrease slightly if interest rates decrease. The models also indicate that an
increase in interest rates would probably have little impact on the Company's
net interest income.
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.
The allowance for credit losses is also increased by recoveries on loans
previously charged off, and reduced by actual loan losses charged to the
allowance. The provision for credit losses was $1.1 million for the six months
ended June 30, 1997. This represented a decrease of $588,000, or 35.79% from the
provision for credit losses of $1.6 million for the six months ended June 30,
1996. For the second quarter of 1997, the provision for credit losses was
$275,000. This represented a decrease of $155,000, or 36.05%, from the provision
for credit losses of $430,000 for the second quarter of 1996.
The allowance for credit losses at June 30, 1997 was $10.2 million. This
represented a decrease of $1.4 million, or 11.99%, from the allowance for credit
losses of $11.5 million at June 30, 1996. The allowance for credit losses
decreased to 1.75% of average gross loans for the first half of 1997, compared
to 2.17% of average gross loans for the same period last year. For the six
months ended June 30, 1997, loans charged to the allowance for credit losses,
net of recoveries ("net loan charge offs") totaled $3.1 million, compared to net
loan charge offs of $435,000 for the first six months of 1996.
Nonperforming assets, which includes nonaccrual loans, loans past due 90 or
more days and still accruing, restructured loans, and other real estate owned,
decreased to $20.1 million at June 30, 1997. This represented a decrease of $9.6
million, or 32.40%, from nonperforming assets of $29.8 million at December 31,
1997. Nonperforming loans, which include nonaccrual loans, loans past due 90 or
more days and still accruing, and restructured loans were $9.4 million at June
30, 1997. This represented a decrease of $14.2 million, or 60.20%, from the
level of nonperforming loans at December 31, 1996. Table 6 presents
nonperforming assets as of June 30 1997, and December 31, 1996. 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 at June 30, 1997, 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.
12
TABLE 3 - Summary of Credit Loss Experience
(amounts in thousands)
Six-months
ended June 30,
1997 1996
Amount of Total Loans at End of Period $ 580,328 $ 565,286
========= =========
Average Total Loans Outstanding $ 579,128 $ 532,010
========= =========
Allowance for Credit Losses at Beginning of Period $ 12,239 $ 9,626
Loans Charged-Off:
Real Estate Loans 3,066 400
Commercial and Industrial 153 175
Consumer Loans 59 43
--------- ---------
Total Loans Charged-Off 3,278 618
--------- ---------
Recoveries:
Real Estate Loans 21 85
Commercial and Industrial 119 90
Consumer Loans 6 8
--------- ---------
Total Loans Recovered 146 183
--------- ---------
Net Loans Charged-Off 3,132 435
--------- ---------
Provision Charged to Operating Expense 1,055 1,643
--------- ---------
Adjustment Incident to Mergers 0 712
--------- ---------
Allowance for Credit Losses at End of period $ 10,162 $ 11,546
========= =========
Net Loans Charged-Off to Average Total Loans* 1.08% 0.16%
Net Loans Charged-Off to Total Loans at End of Period* 1.08% 0.15%
Allowance for Credit Losses to Average Total Loans 1.75% 2.17%
Allowance for Credit Losses to Total Loans at End of Period 1.75% 2.04%
Net Loans Charged-Off to allowance for Credit Losses* 61.64% 7.54%
Net Loans Charged-Off to Provision for Credit Losses 296.87% 26.48%
* Net Loan Charge-Off amounts are annualized.
13
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 totaled $6.9 million for the six months ended June
30, 1997. This represented a decrease of $900,000, or 11.55%, from other
operating income of $7.8 million for the six months ended June 30, 1996.
Included as other operating income for 1996 was a $2.1 million settlement of
litigation paid to the Bank in March of last year. Net of this settlement, other
operating income increased $1.2 million, or 21.07%, for the six months ended
June 30, 1997, compared to the same period for 1996.
The increase in other operating income, net of the legal settlement, was
primarily the result of fee income generated by the introduction of a trust
division in March of 1996. Trust income totaled $1.6 million for the six months
ended June 30, 1997. This represented an increase of $752,000, or 92.27%, over
trust income of $815,000 for the six months ended June 30, 1996.
Other operating income totaled $3.6 million for the second quarter of 1997.
This represented an increase of $414,000, or 12.93%, over other operating income
of $3.2 million for the second quarter of 1996.
Other Operating Expenses
Other operating expenses totaled $22.4 million for the six months ended
June 30, 1997. This represented an increase of $1.3 million, or 6.13%, over
other operating expenses of $21.1 million for the six months ended June 30,
1996. For the most part, the increase in operating expenses for the six month
periods was a result of the acquisition of Citizens Bank of Pasadena on March
29, 1996. The acquisition resulted in addition of four new banking offices and a
full service trust division. For the first six months of 1996, the additional
operating expenses resulting from the acquisition are only reflected for the
second quarter, as opposed to the entire six month period for 1997. For the
second quarter of 1997, other operating expenses totaled $11.4 million,
representing an increase of $592,000, or 5.47%, over total operating expenses of
$10.8 million for the second quarter of 1996.
The increase in operating expenses was primarily the result of salaries and
employee benefits which totaled $11.1 million for the six months ended June 30,
1997. This represented an increase of $1.5 million, or 16.07%, over salaries and
other employee benefits of $9.6 million for the six months ended June 30, 1996.
Again, the increase in salaries and other employee benefits reflected the
acquisition of Citizens Bank of Pasadena in 1996. Salaries and employee benefits
for the quarter ended June 30, 1997 totaled $5.6 million. This represented an
increase of $275,000, or 5.15%, over salaries and other employee benefits of
$5.3 million for the quarter ended June 30, 1996.
14
The Company maintains an allowance for potential losses on other real
estate owned. The allowance is increased by a provision for losses on other real
estate owned, and reduced by losses on the sale of other real estate owned
charged directly to the allowance. The allowance was established to provide for
declining Southern California real estate values over the past several years.
For the six months ended June 30, 1997, the provision for other real estate
owned was $1.2 million. This represented a decrease of $1.5 million, or 56.29%,
from a provision of $2.7 million for the six months ended June 30, 1996. The
decrease in the provision for 1997 reflects firmer real estate values for this
year.
As a percent of average assets, other operating expenses decreased to 3.99%
for the six months ended June 30, 1997, compared to a ratio of 4.39% for the six
months ended June 30, 1996. The decrease in the ratio indicates that the Company
is managing a greater level of assets with proportionately lower levels of
operating expenses. The Company's efficiency ratio decreased to 63.18% for the
six months ended June 30, 1997, compared to a ratio of 63.68% for the six months
ended June 30, 1996. The decrease in the efficiency ratio indicates that the
Company is allocating a lower percentage of net revenue to operating expenses.
BALANCE SHEET ANALYSIS
The Company reported total assets of $1.15 billion at June 30, 1997. This
represented a decrease of $7.8 million, or 0.67%, over total assets of $1.16
billion at December 31, 1996. Gross loans totaled $580.3 million at June 30,
1997. This represented an decrease of $8.6 million, or 1.46%, over gross loans
of $588.9 million at December 31, 1996. Total deposits decreased $27.9 million,
or 2.81%, to $962.7 million at June 30, 1997, from $990.6 million at December
31, 1996. The Company typically receives seasonal increases in loans and
deposits resulting from its agricultural customers at each year end. It is not
unusual for the Company's total loans and deposits to be lower at subsequent
quarter endings.
Investment Securities and Debt Securities Available-for-Sale
The Company reported total investment securities of $431.2 million at June
30, 1997. This represented an increase of $47.1 million, or 12.27%, over total
investment securities of $384.1 million at December 31, 1996.
Table 4 sets forth investment securities held-to-maturity and
available-for-sale, at June 30, 1997 and December 31, 1996.
At June 30, 1997, the unrealized losses on securities available for sale
totaled $457,000. The Company recorded an adjustment decreasing equity capital
by $264,000, and an adjustment to deferred taxes of $194,000. At December 31,
1996, the unrealized losses on securities available for sale totaled $339,000.
The Company recorded an adjustment decreasing equity capital by $196,000, and an
adjustment to deferred taxes of $144,000. Note 2 of the Notes to the
Consolidated Financial Statements in the Company's 1996 Annual Report on Form
10-K discusses in detail the Company's policy for accounting for investment
securities.
15
Table 4 - Composition of Securities Portfolio
(dollars in thousands)
June 30, 1997 December 31, 1996
Net Net
Amortized Market Unrealized Yield Amortized Market Unrealized Yield
Cost Value Gain/(Loss) Cost Value Gain/(Loss)
U.S. Treasury securities
Available for Sale $ 61,368 $ 61,583 $ 215 6.06% $ 55,355 $ 55,621 $ 266 5.99%
FHLMC, FNMA CMO's, REMIC's
and mortgage-backed pass-through securities
Available for Sale 240,759 240,324 (435) 6.35% 215,351 214,939 (412) 6.28%
Held to Maturity 5,584 5,713 129 5.74% 6,188 6,384 196 5.74%
Other Government Agency Securities
Available for Sale 59,648 59,642 (6) 6.30% 51,105 51,198 93 5.63%
GNMA mortgage-backed pass-through
securities
Held to Maturity 1,049 1,128 79 9.36% 1,210 1,311 101 9.42%
Tax-exempt Municipal Securities
Held to Maturity 48,912 49,349 437 4.83% 42,145 42,662 517 4.89%
Other securities
Available for Sale 12,860 12,860 0 0.00% 11,574 11,590 16 6.17%
Held to Maturity 1,264 1,264 0 6.36% 1,191 1,191 0 6.43%
------------------------------------- ----------------------------------------
$431,444 $431,863 $ 419 5.94% $ 384,119 $ 384,896 $ 777 6.00%
===================================== ========================================
16
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
June 30, December 31,
1997 1996
Commercial and Industrial (F1) $192,453 $215,791
Real Estate:
Construction 34,453 36,925
Mortgage 261,112 244,601
Consumer 18,011 19,576
Lease finance receivables 25,586 19,825
Agribusiness 51,757 55,486
-------- --------
Gross Loans $583,372 $592,204
Less:
Allowance for credit losses 10,162 12,239
Deferred net loan fees 3,044 3,279
-------- --------
Net loans $570,166 $576,686
======== ========
<FN>
(F1) Includes $41.1 million and $72.0 million of loans for which the Company
holds real property as collateral at June 30, 1997 and December 31, 1996,
respectively.
</FN>
17
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
$20.1 million at June 30, 1997. This represented a decrease of $9.6 million, or
32.40%, from nonperforming assets of $29.8 million at December 31, 1996. As a
percent of total assets, nonperforming assets decreased to 1.75% at June 30,
1997, from 2.56% at December 31, 1996.
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.
Table 6 - Nonperforming Assets
June 30, 1997 December 31, 1996
Nonaccrual loans $ 7,303 $17,564
Loans past due 90 days or more
and still accruing interest 55 621
Restructured loans 2,018 5,374
Other real estate owned (OREO), net 10,738 6,196
------ -------
Total nonperforming assets $20,114 $29,755
======= =======
Percentage of nonperforming assets
to total loans outstanding & OREO 3.40% 5.00%
Percentage of nonperforming
assets to total assets 1.75% 2.56%
18
The decrease in nonperforming assets was primarily the result of a decrease
in non-accrual loans. Nonaccrual loans totaled $7.3 million at June 30, 1997.
This represented a decrease of $10.3 million, or 58.42%, from total nonaccrual
loans of $17.6 million at December 31, 1996. In addition, restructured loans
decreased to $2.0 million at June 30, 1997. This represented a decrease of $3.3
million , or 62.45%, from total restructured loans of $5.4 million at December
31, 1996. The decrease in nonaccrual and restructured loans is reflected in the
increase in loans charged off against the reserve for the six months ended June
30, 1997, and the reduction of the allowance for credit losses at June 30, 1997.
To some extent, the reduction in nonperforming loans is also reflected in
the increase in other real estate owned. Other real estate owned totaled $10.7
million at June 30, 1997. This represented an increase of $4.5 million, or
73.31%, from total real estate owned of $6.2 million at December 31, 1996.
The Bank has allocated specific reserves to provide for any potential loss
on non-performing loans. Management cannot, however, predict the extent to which
the current economic environment may persist or worsen or the full impact such
environment may have on the Company's loan portfolio.
Deposits and Other Borrowings
At June 30, 1997, total deposits were $962.7 million. This represented a
decrease of $27.9 million, or 2.81%, from total deposits of $990.6 million at
December 31, 1996. Demand deposits totaled $386.6 million at June 30, 1997,
representing a decrease of $44.6 million, or 10.33%, from total demand deposits
of $431.2 million at December 31, 1996. The decrease in demand deposits from the
year end total reflects normal seasonal fluctuations relating to agricultural
depositors. Average demand deposits for the second quarter of 1997 were $381.3
million. This represented an increase of $51.9 million, or 15.76%, from average
demand deposits of $329.4 million for the second quarter of 1996. The comparison
of average balances for the second quarters of 1997 and 1996, is more
representative of the Company's growth in deposits as it excludes the seasonal
peak in deposits at year end.
Time deposits totaled $218.9 million at June 30, 1997. This represented an
increase of $20.7 million, or 10.44%, over total time deposits of $198.2 million
at December 31, 1996. Time deposits are not affected by the Company's seasonal
fluctuation in demand deposits.
Other borrowed funds totaled $83.6 million at June 30, 1997. This
represented an increase of $14.6 million, or 21.10%, over other borrowed funds
of $69.1 million at December 31, 1996. Other borrowed funds include demand notes
issued to the U.S. Treasury (relating to customer tax deposits), overnight
federal funds purchased, capitalized leases, and secured loans from the Federal
Home Loan Bank. Funds obtained from secured loans borrowed from the Federal Home
Loan Bank are used to purchase securities at a positive spread. The primary
objective of the borrowing is to increase the Company's leverage to generate a
greater return on average equity in relationship to the Company's return on
average assets. The maturities of the borrowed funds and the resulting
investments are structured to reduce the level of the Company's liability
sensitivity.
19
Liquidity
The 1996 Annual Report on Form 10-K 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 June 30, 1997, the Company's loan to
deposit ratio was 60.28% compared to a ratio of 59.45% at December 31, 1996.
Another method used to measure liquidity is the liquidity ratio. This ratio
is calculated by dividing the difference between short-term liquid assets and
marketable securities by deposits and borrowed funds. At June 30, 1997, the
liquidity ratio was 46.23%. Conceptually, this shows that the Company had liquid
assets or marketable securities equal to 46.23% of its total deposits and
borrowed funds at June 30, 1997.
Cash flows provided by operating activities, primarily interest received,
totaled $10.4 million for both the six months ended June 30, 1997 and 1996. Net
cash used in investing activities, primarily purchases of investments, was $45.6
million for the six months ended June 30, 1997, compared to $26.7 million for
the six months ended June 30, 1996. Net cash used for financing activities
totaled $16.6 million for the six months ended June 30, 1996, compared to $15.8
million for the same period last year. The funds used for both years were
primarily the result of decreases in transaction deposits, partially offset by
increases in time deposits and other borrowed funds.
Capital Resources
The Company's equity capital was $92.8 million at June 30, 1997. The
primary source of capital for the Company continues to be the retention of
operating earnings. The Company's 1996 Annual Report on Form 10-K (management's
discussion and analysis and Note 14 of the Notes to the Consolidated Financial
Statements) describes the regulatory capital requirements of the Company and the
Bank.
The Bank and the Company are required to meet risk-based capital standards
set by 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 4.0%. At June 30, 1997, the Bank and the Company
exceeded the minimum risk-based capital ratio and leverage ratio required to be
considered "Well Capitalized".
20
Table 7 below presents the Company's and the Bank's risk-based and leverage
capital ratios as of June 30, 1997 and December 31, 1996:
Table 7 - Regulatory Capital Ratios
Required
Minimum June 30, 1997 December 31, 1996
Capital Ratios Ratios Company Bank Company Bank
Risk-based Capital
Ratios:
Tier I 4.00% 11.74% 11.51% 11.00% 10.70%
Total 8.00% 13.01% 12.78% 12.30% 11.90%
Leverage Ratio 4.00% 7.19% 7.04% 7.20% 7.00%
On April 16, 1997, the board of directors of the Company authorized the
repurchase of shares of its common stock, from time to time, at the discretion
of the Company, through open market purchases or in private transactions in an
aggregate amount of up to $9.0 million, or 500,000 shares. As of June 30, 1997,
the Company had purchased 84,518 shares for an average price of $20.328 per
share, resulting in a $1.7 million reduction in the shareholders' equity for the
Company.
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 The annual
Meeting of Shareholders of CVB Financial Corp. was held May
21, 1997. At the meeting, the following individuals were
elected to serve as the Company's Board of Directors until the
1998 Annual Meeting of Shareholders and until their successors
are elected and have qualified.
Against or Broker
For Withheld Abstained Non-votes
George A. Borba 9,998,716 19,818 -0- -0-
John A. Borba 9,998,716 19,818 -0- -0-
Ronald O. Kruse 9,998,716 19,818 -0- -0-
John J. LoPorto 9,998,716 19,818 -0- -0-
Charles M. Magistro 9,998,716 19,818 -0- -0-
James C. Seley 9,998,716 19,818 -0- -0-
D. Linn Wiley 9,998,716 19,818 -0- -0-
The appointment of Deloitte & Touche LLP as independent public
accountants of the Company for the year ended December 31, 1997
was ratified at the 1997 Annual Meeting of Shareholders by the
following:
9,979,899 shares voted for
1,236 shares voted against
37,399 shares abstained
-0- broker non-votes
The amendment of the 1991 Stock Option Plan was ratified so that
among other things, stock options awarded under the 1991 Stock
Option Plan can qualify for exclusion under Section 162(m) of the
Internal Revenue Code of 1986 as performance-based compensation.
9,854,300 shares voted for
22,702 shares voted against
141,532 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
Not Applicable
22
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 28
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: August 13, 1997 /s/ Robert J. Schurheck
------------------------
Robert J. Schurheck
Chief Financial Officer
24