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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 September 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 September 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 (I.R.S. Employer Identification No.)
of 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: 9,973,885 outstanding as of
November 4, 1997.
This Form 10-Q contains 30 pages. Exhibit index on page 26.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
dollar amounts in thousands
September 30, December 31,
1997 1996
--------------- ------------
(unaudited)
ASSETS
Investment securities held-to-maturity
(market values of $59,722 and $51,548) $ 58,464 $ 50,734
Investment securities available-for-sale 392,411 333,348
Loans and lease finance receivables, net 589,927 576,686
---------- -----------
Total earning assets 1,040,802 960,768
Cash and due from banks 86,651 142,502
Premises and equipment, net 23,246 24,235
Other real estate owned, net 9,135 6,196
Goodwill and intangibles 11,114 11,692
Other assets 14,313 15,028
---------- -----------
$1,185,261 $ 1,160,421
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $ 413,190 $ 431,183
605,347 559,413
----------- -----------
1,018,537 990,596
Demand note issued to U.S. Treasury 9,578 12,610
Federal Funds Purchased 5,000 16,000
Repurchase Agreement 40,000 40,000
Long-term capitalized lease 435 453
Other liabilities 14,062 11,675
----------- -----------
1,087,612 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
9,971,772 and 9,972,981 62,238 61,942
Retained earnings 34,875 27,341
Net unrealized gains(losses) on investment
securities available-for-sale 536 (196)
----------- ------------
97,649 89,087
----------- ------------
$ 1,185,261 $ 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 Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
-------- -------- --------- ---------
Interest income:
Loans, including fees $ 14,759 $ 14,078 $ 42,935 $ 40,294
Investment securities:
Taxable 6,160 4,899 17,146 13,521
Tax-advantaged 627 397 1,775 833
-------- -------- -------- --------
6,787 5,296 18,921 14,354
Federal funds sold and interest bearing
deposits with other financial institutions 126 171 219 438
-------- -------- -------- --------
21,672 19,545 62,075 55,086
Interest expense:
Deposits 5,427 4,846 15,139 13,748
Other borrowings 965 698 3,116 2,010
-------- -------- -------- --------
6,392 5,544 18,255 15,758
-------- -------- -------- --------
Net interest income 15,280 14,001 43,820 39,328
Provision for credit losses 915 515 1,970 2,158
-------- -------- -------- --------
Net interest income after
provision for credit losses 14,365 13,486 41,850 37,170
Other operating income:
Service charges on deposit accounts 1,839 1,814 5,469 5,329
Gains on sale of other real estate owned 32 3 86 107
Trust fees 782 725 2,349 1,539
Other 804 595 2,447 3,956
-------- -------- -------- --------
3,457 3,137 10,351 10,931
Other operating expenses:
Salaries and employee benefits 5,312 5,154 16,423 14,727
Deposit insurance premiums 28 1 85 2
Occupancy 884 814 2,570 2,417
Equipment 817 852 2,561 2,258
Provision for losses on
other real estate owned 480 350 1,675 3,084
Other 3,140 3,156 9,733 8,932
-------- -------- -------- --------
10,661 10,327 33,047 31,420
-------- -------- -------- --------
Earnings before income taxes 7,161 6,296 19,154 16,681
Provision for income taxes 2,376 2,640 7,269 6,970
-------- -------- -------- --------
Net earnings $ 4,785 $ 3,656 $ 11,885 $ 9,711
======== ======== ======== ========
Earnings per common share $ 0.46 $ 0.35 $ 1.15 $ 0.95
======== ======== ======== ========
Cash dividends per common share $ 0.10 $ 0.07 $ 0.30 $ 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,
1997 1996
---------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 59,538 $ 52,316
Service charges and other fees received 10,337 10,930
Interest paid (18,066) (15,297)
Cash paid to suppliers and employees (28,846) (29,201)
Income taxes paid (6,985) (6,443)
---------- ---------
Net cash provided by operating activities 15,978 12,305
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 24,462 4,054
Proceeds from maturities of securities available for sale 52,027 55,116
Proceeds from maturities of securities held to maturity 1,617 1,114
Purchases of securities available for sale (134,768) (75,529)
Purchases of securities held to maturity (8,195) (22,495)
Net decrease in loans (24,069) (9,195)
Loan origination fees received 2,091 2,097
Proceeds from sale of premises and equipment 55 36
Purchase of premises and equipment (1,297) (2,074)
Consideration paid in business combinations 0 (18,322)
Other investing activities 6,394 2,211
---------- ---------
Net cash used in investing activities (81,683) (62,987)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in transaction deposits (27,632) (22,596)
Net increase in time deposits 55,573 14,231
Net (decrease)increase in short-term borrowings (14,032) 14,415
Stock repurchase (1,935) 0
Cash dividends on common stock (3,007) (2,176)
Proceeds from exercise of stock options 887 626
---------- ---------
Net cash provided by financing activities 9,854 4,500
---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (55,851) (46,182)
CASH AND CASH EQUIVALENTS, beginning of period 142,502 111,886
---------- ---------
CASH AND CASH EQUIVALENTS BEFORE ACQUISITION 86,651 65,704
CASH AND CASH EQUIVALENTS RECEIVED IN THE PURCHASE OF
CITIZENS COMMERCIAL TRUST AND SAVINGS BANK OF PASADENA 0 15,522
---------- ---------
CASH AND CASH EQUIVALENTS, September 30, $ 86,651 $ 81,226
========== =========
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,
1997 1996
--------- ----------
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings $ 11,885 $ 9,711
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums on investment securities (653) (262)
Provisions for loan and OREO losses 3,645 5,242
Accretion of deferred loan fees and costs (1,871) (1,705)
Loan origination costs capitalized (1,409) (1,434)
Depreciation and amortization 2,249 1,964
Change in accrued interest receivable (13) (804)
Change in accrued interest payable 190 461
Change in other assets and liabilities 1,955 (868)
---------- ---------
Total adjustments 4,093 2,594
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 15,978 $ 12,305
========== =========
5
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 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
$7.7 million at September 30, 1997. Of this total, $4.8 million, or
62.77%, represented loans that were supported by collateral with a fair
market value, net of prior liens, of $11.2 million. At September 30, 1997,
$2.8 million, or 37.23%, of total impaired loans represented loans for
which repayment was projected to come from cash flows.
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 September 30,
1997, the Company had entered into commitments with certain customers
amounting to $128.4 million compared to $103.7 million at December 31,
1996. Letters of credit at September 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 September 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 September 30, 1997, was
9,971,772. 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
10,375,982 and 10,352,344 for the nine and three month periods ended
September 30, 1997 and 10,192,470 and 10,296,834 for the nine and three
month periods ended September 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 nine-month period ended
September 30, 1997, loans amounting to $10.0 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, 1997, amounted to $5.5 million.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 $4.8 million, or $0.46 per share, for
the quarter ended September 30, 1997, compared to net earnings of $3.7 million,
or $0.35 per share, for the quarter ended September 30, 1996. This represented
an increase of $1.1 million, or 30.86%. For the quarter ended September 30,
1997, the Company generated an annualized return on average assets of 1.64%,
compared to an annualized return on average assets of 1.39%, for the quarter
ended September 30, 1996. The Company's annualized return on average equity
increased to 19.91%, for the quarter ended September 30, 1997, compared to an
annualized return on average equity of 17.69%, for the quarter ended September
30, 1996.
Net earnings for the nine months ended September 30, 1997 totaled $11.9
million, or $1.15 per share. This represented an increase of $2.2 million, or
22.38%, over net earnings of $9.7 million, or $0.95 per share, for the nine
months ended September 30, 1996. For the nine months ended September 30, 1997,
the Company's annualized return on average assets was 1.39%, compared to an
annualized return of 1.30%, for the first nine months of 1996. The Company
generated an annualized return on average equity of 16.98%, for the nine months
ended September 30, 1997, compared to an annualized return on average equity of
15.89%, for the nine months ended September 30, 1996.
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, totaled $8.5 million for the
quarter ended September 30, 1997. This represented an increase of $1.3 million,
or 18.86%, over operating earnings of $7.2 million, for the quarter ended
September 30, 1996. For the nine months ended September 30, 1997, operating
earnings totaled $22.7 million. This represented an increase of $3.0 million, or
15.13%, over operating earnings of $19.7 million for the first nine months of
1996.
Net Interest Income/Net Interest Margin
7
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 quarter ended September 30, 1997, net interest income totaled $15.3
million. This represented an increase of $1.3 million, or 9.14%, over net
interest income of $14.0 million for the quarter ended September 30, 1996. The
increase in net interest income for the third quarter of 1997 resulted as
increased revenue from a greater average volume of earning assets offset a
decrease in both the net interest margin and net interest spread.
Earning assets averaged $1.0 billion for the quarter ended September 30,
1997. This represented an increase of $113.7 million, or 12.31%, over average
earnings assets of $923.9 million for the quarter ended September 30, 1996. The
net interest margin was 5.99% for the quarter ended September 30, 1997, compared
to a net interest margin of 6.13% for the same three month period last year. For
the quarter ended September 30, 1997, the net interest spread was 4.58%,
compared to a net interest spread of 4.94% for the third quarter of 1996.
The decrease in the net interest margin and the net interest spread was the
result of a lower yield on total earning assets, and an increase in the average
cost of interest bearing liabilities. The yield on total earning assets averaged
8.45% for the quarter ended September 30, 1997, compared to a yield of 8.53% for
the quarter ended September 30, 1996. Although the yield on loans and
investments increased for the most recent quarter, the decreased yield on
average earning assets resulted as average investments increased significantly
as a percent of average assets.
For the quarter ended September 30, 1997, the yield on average loans
increased to 10.01%, from a yield of 9.95%, for the quarter ended September 30,
1996. The yield on investments increased to 6.19%, for the quarter ended
September 30, 1997, from an average yield of 6.13% for the third quarter of
1996. For the quarter ended September 30, 1997, average investments were 42.29%,
compared to 37.40% of earning assets for the third quarter of 1996.
The cost of average interest bearing liabilities increased to 3.87% for the
quarter ended September 30, 1997, compared to an average cost of 3.59% for the
quarter ended September 30, 1996. The increase in the cost of average interest
bearing liabilities in the most recent quarter resulted as both the cost of
average interest bearing deposits and the cost of other borrowed funds
increased. For the quarter ended September 30, 1997, the cost of average
interest bearing deposits increased to 3.66%, compared to an average cost of
3.44% for the quarter ended September 30, 1996. The cost of other borrowed funds
increased to 5.85% for the third quarter of 1997, compared to an average cost of
5.25% for the same period last year.
For the nine months ended September 30, 1997, net interest income totaled
$43.8 million. This represented an increase of $4.5 million, or 11.42%, over net
interest income of $39.3 million for the nine months ended September 30, 1996.
The increase was the result of an increased balance of average earning assets.
Average earning assets were $1.0 billion for the nine months ended September 30,
1997. This represented an increase of $130.7 million, or 15.01%, over average
earnings assets of $870.6 million for the nine months ended September 30, 1996.
The net interest margin decreased to 5.93% for the nine months ended
September 30, 1997, from an average of 6.07% for the nine months ended September
30, 1996. The decrease was due in part to a decrease in the yield on average
earning assets to 8.36% for the nine months ended September 30, 1997, from a
yield of 8.49% for the nine months ended September 30, 1996. The decrease in the
net interest margin was also affected by an increase in the cost of interest
bearing liabilities. The cost of average interest bearing liabilities increased
to 3.75%, for the nine months ended September 30, 1997, from a cost of 3.61% for
the nine months ended September 30, 1996. Similar to the third quarter
comparison, the decrease in the yield on average earning assets was a result of
the increase in average investments as a percent of total earning assets,
despite increases in the yield on loans and investments.
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, 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 provided with respect to changes attributable to (1)
changes in volume (change in volume multiplied by initial rate), (2) changes in
rate (change in rate multiplied by initial volume) and (3) changes in
rate/volume (change in rate multiplied by change in volume).
8
TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differentials
(amounts in thousands)
Nine-month periods ended September 30,
1997 1996
------------------------------ ------------------------------
Average Average
ASSETS Balance Interest Rate Balance Interest Rate
------------------------------ ------------------------------
Investment Securities
Taxable $ 364,320 17,146 6.28% $ 294,307 13,521 6.13%
Tax-advantaged (F1) 48,793 1,775 6.81% 22,106 833 7.05%
Federal Funds Sold & Interest-bearing
deposits with other financial institutions 5,436 219 5.37% 10,681 438 5.47%
Loans (F2) (F3) 582,699 42,935 9.82% 543,496 40,294 9.89%
------------------------------ ------------------------------
Total Earning Assets 1,001,248 62,075 8.36% 870,590 55,086 8.49%
Total Non-earning Assets 136,789 121,881
----------- ----------
Total Assets $ 1,138,037 $ 992,471
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand Deposits $ 381,834 $ 316,805
Savings Deposits (F4) 362,742 6,800 2.50% 345,490 6,479 2.50%
Time Deposits 212,403 8,339 5.23% 185,357 7,269 5.23%
------------------------------ ------------------------------
Total Deposits 956,979 15,139 2.11% 847,652 13,748 2.16%
------------------------------ ------------------------------
Other Borrowings 74,188 3,116 5.60% 50,640 2,010 5.29%
------------------------------ ------------------------------
Total Interest-Bearing Liabilities 649,333 18,255 3.75% 581,487 15,758 3.61%
----------- ----------
Other Liabilities 13,529 12,711
Stockholders' Equity 93,341 81,468
----------- ----------
Total Liabilities and
Stockholders' Equity $ 1,138,037 $ 992,471
=========== ==========
Net interest spread 4.61% 4.88%
Net interest margin 5.93% 6.07%
(F1) Yields are calculated on a taxable equivalent basis.
(F2) Loan fees are included in total interest income as follows: 1997, $2,554; 1996, $2,368.
(F3) Nonperforming loans are included in net loans as follows: 1997, $6,523; 1996, $23,458.
(F4) Includes interest-bearing demand and money market accounts.
9
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 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 $ 3,218 $ 329 $ 78 $ 3,625
Tax-advantaged securities 1,006 (29) (35) 942
Fed funds sold & interest bearing
deposits with other institutions (216) (7) 4 (219)
Loans 2,907 (248) (18) 2,641
-----------------------------------------
Total earning assets 6,915 45 29 6,989
-----------------------------------------
Interest Expense:
Savings deposits 322 (1) 0 321
Time deposits 1,062 7 1 1,070
Other borrowings 935 117 54 1,106
-----------------------------------------
Total interest-bearing liabilities 2,319 123 55 2,497
-----------------------------------------
Net Interest Income $ 4,596 $ (78) $ (26) $ 4,492
=========================================
10
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 $915,000 for the quarter ended
September 30, 1997. This represented an increase of $400,000, or 77.67%, over
the provision for credit losses of $515,000 for the quarter ended September 30,
1996. For the nine months ended September 30, 1997, the provision for credit
losses totaled $2.0 million. This represented a decrease of $188,000, or 8.71%,
from a provision of credit losses of $2.2 million for the nine months ended
September 30, 1996.
The allowance for credit losses at September 30, 1997, was $10.6 million.
This represented a decrease of $808,000, or 7.06%, from the allowance for credit
losses of $11.4 million at September 30, 1996. The allowance for credit losses
decreased to 1.77% of gross loans at September 30, 1997, compared to 2.00% of
gross loans at September 30, 1996. For the nine months ended September 30, 1997,
loans charged to the allowance for credit losses, net of recoveries ("net loans
charged off") totaled $3.6 million, compared to net loans charged off of $1.1
million for the nine months ended September 30, 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 $15.7 million at September 30, 1997. This represented a decrease of
$14.1 million, or 47.37%, from nonperforming assets of $29.8 million at December
31, 1996. Nonperforming loans, which include nonaccrual loans, loans past due 90
or more days and still accruing, and restructured loans were $6.5 million at
September 30, 1997. This represented a decrease of $17.0 million, or 72.31%,
from the level of nonperforming loans at December 31, 1996. Table 6 presents
nonperforming assets as of September 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 September 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.
11
TABLE 3 - Summary of Credit Loss Experience
(amounts in thousands)
Nine-months
ended September 30,
------------------------
1997 1996
Amount of Total Loans at End of Period $ 600,561 $ 572,217
========== ===========
Average Total Loans Outstanding $ 582,699 $ 543,496
========== ===========
Allowance for Credit Losses at Beginning of Period $ 12,239 $ 9,626
Loans Charged-Off:
Real Estate Loans 3,414 1,293
Commercial and Industrial 286 187
Consumer Loans 71 65
---------- -----------
Total Loans Charged-Off 3,771 1,545
---------- -----------
Recoveries:
Real Estate Loans 22 312
Commercial and Industrial 167 168
Consumer Loans 7 11
---------- -----------
Total Loans Recovered 196 491
---------- -----------
Net Loans Charged-Off 3,575 1,054
---------- -----------
Provision Charged to Operating Expense 1,970 2,158
---------- -----------
Adjustment Incident to Mergers 0 712
---------- -----------
Allowance for Credit Losses at End of period $ 10,634 $ 11,442
========== ===========
Net Loans Charged-Off to Average Total Loans* 0.82% 0.26%
Net Loans Charged-Off to Total Loans at End of Period* 0.79% 0.25%
Allowance for Credit Losses to Average Total Loans 1.82% 2.11%
Allowance for Credit Lossess to Total Loans at End of Period 1.77% 2.00%
Net Loans Charged-Off to Allowance for Credit Losses* 44.82% 12.28%
Net Loans Charged-Off to Provision for Credit Losses 181.47% 48.84%
Net Loan Charge-Off amounts are annualized.
12
Other Operating Income
Other operating income includes revenues earned from sources other than
interest income. These sources include: service charges and fees on deposit
accounts, service charges and fees from trust services, other fee oriented
products and services, gains on sale of securities, gains on the sale of other
real estate owned, gross revenue from Community Trust Deed Services, and for the
nine months ended September 30, 1996, settlement of pending litigation.
Other operating income totaled $10.4 million for the nine months ended
September 30, 1997. This represented a decrease of $580,000, or 5.31%, from
other operating income of $10.9 million for the nine months ended September 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 $1.5 million, or 17.21%, for the nine months
ended September 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 $2.3 million for the nine months
ended September 30, 1997. This represented an increase of $810,000, or 52.63%,
over trust income of $1.5 million for the nine months ended September 30, 1996.
Other operating income totaled $3.5 million for the third quarter of 1997.
This represented an increase of $320,000, or 10.20%, over other operating income
of $3.1 million for the third quarter of 1996.
Other Operating Expenses
Other operating expenses totaled $33.0 million for the nine months ended
September 30, 1997. This represented an increase of $1.6 million, or 5.18%, over
other operating expenses of $31.4 million for the nine months ended September
30, 1996. For the most part, the increase in operating expenses for the nine
month period was a result of the acquisition of Citizens Bank of Pasadena on
March 29, 1996. The acquisition resulted in the addition of four new banking
offices and a full service trust division. For the first nine months of 1996,
the additional operating expenses resulting from the acquisition are only
reflected for the second and third quarters, as opposed to the entire nine month
period for 1997. For the third quarter of 1997, other operating expenses totaled
$10.7 million, representing an increase of $334,000, or 3.23%, over total other
operating expenses of $10.3 million for the third quarter of 1996.
The increase in other operating expenses was primarily the result of
salaries and employee benefits which totaled $16.4 million for the nine months
ended September 30, 1997. This represented an increase of $1.7 million, or
11.52%, over salaries and other employee benefits of $14.7 million for the nine
months ended September 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 September 30, 1997
totaled $5.3 million. This represented an increase of $158,000, or 3.07%, over
salaries and other employee benefits of $5.2 million for the quarter ended
September 30, 1996.
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 nine months ended September 30, 1997, the provision for other real
estate owned was $1.7 million. This represented a decrease of $1.4 million, or
45.69%, from a provision of $3.1 million for the nine months ended September 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 3.87%
for the nine months ended September 30, 1997, compared to a ratio of 4.22% for
the nine months ended September 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
61.01% for the nine months ended September 30, 1997, compared to a ratio of
62.52% for the nine months ended September 30, 1996. The decrease in the
efficiency ratio indicates that the Company is allocating a lower percentage of
net revenue to operating expenses.
13
BALANCE SHEET ANALYSIS
The Company reported total assets of $1.19 billion at September 30, 1997.
This represented an increase of $24.8 million, or 2.14%, over total assets of
$1.16 billion at December 31, 1996. Gross loans totaled $600.6 million at
September 30, 1997. This represented an increase of $11.6 million, or 1.98%,
over gross loans of $588.9 million at December 31, 1996. Total deposits
increased $27.9 million, or 2.82%, to $1.02 billion at September 30, 1997, from
$990.6 million at December 31, 1996.
Investment Securities and Debt Securities Available-for-Sale
The Company reported total investment securities of $450.9 million at
September 30, 1997. This represented an increase of $66.8 million, or 17.39%,
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 September 30, 1997 and December 31, 1996.
At September 30, 1997, unrealized gains on securities available for sale
totaled $929,000. The Company recorded an adjustment increasing equity
capital by $536,000, and an adjustment to deferred taxes of $393,000. 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.
14
Table 4 - Composition of Securities Portfolio
(dollars in thousands)
September 30, 1997 December 31, 1996
---------------------------------------- ---------------------------------------
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 $ 53,293 $ 53,619 $ 326 6.21% $ 55,355 $ 55,621 $ 266 5.99%
FHLMC, FNMA CMO's, REMIC's
and mortgage-backed pass-through securities
Available for Sale 254,681 255,361 680 6.46% 215,351 214,939 (412) 6.28%
Held to Maturity 5,247 5,369 122 5.74% 6,188 6,384 196 5.74%
Other Government Agency Securities
Available for Sale 59,798 59,886 88 6.20% 51,105 51,198 93 5.63%
GNMA mortgage-backed pass-through
securities
Held to Maturity 1,016 1,101 85 9.38% 1,210 1,311 101 9.42%
Tax-exempt Municipal Securities
Held to Maturity 50,894 51,945 1,051 4.80% 42,145 42,662 517 4.89%
Available for Sale 10,467 10,499 32 4.41% 11,574 11,590 16 6.17%
Other securities
Available for Sale 13,046 13,046 0 0.00% 11,574 11,590 16 6.17%
Held to Maturity 1,307 1,307 0 6.03% 1,191 1,191 0 6.43%
---------------------------------------- --------------------- ----------------
$ 449,749 $ 452,133 $ 2,384 6.15% $ 395,693 $396,486 $ 793 5.82%
========================================== ======================================
15
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,
1997 1996
-------- --------
Commercial and Industrial (1) $208,418 $215,791
Real Estate:
Construction 29,316 36,925
Mortgage 268,217 244,601
Consumer 16,856 19,576
Lease finance receivables 25,307 19,825
Agribusiness 55,264 55,486
-------- --------
Gross Loans $603,378 $592,204
Less:
Allowance for credit losses 10,634 12,239
Deferred net loan fees 2,817 3,279
-------- --------
Net loans $589,927 $576,686
======== ========
(1) Includes $39.9 million and $72.0 million of loans for which the Company
holds real property as collateral at September 30, 1997 and December 31, 1996,
respectively.
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
$15.7 million at September 30, 1997. This represented a decrease of $14.1
million, or 47.37%, from nonperforming assets of $29.8 million at December 31,
1996. As a percent of total assets, nonperforming assets decreased to 1.32% at
September 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.
16
Table 6 - Nonperforming Assets
September 30, 1997 December 31, 1996
Nonaccrual loans $ 4,480 $17,564
Loans past due 90 days or more
and still accruing interest 31 621
Restructured loans 2,012 5,374
Other real estate owned (OREO), net 9,135 6,196
------- -------
Total nonperforming assets $15,658 $29,755
======= =======
Percentage of nonperforming assets
to total loans outstanding & OREO 2.57% 5.00%
Percentage of nonperforming
assets to total assets 1.32% 2.56%
The decrease in nonperforming assets was primarily the result of a decrease
in non-accrual loans. Nonaccrual loans totaled $4.5 million at September 30,
1997. This represented a decrease of $13.1 million, or 74.49%, from total
nonaccrual loans of $17.6 million at December 31, 1996. In addition,
restructured loans decreased to $2.0 million at September 30, 1997. This
represented a decrease of $3.4 million , or 62.56%, 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 nine months ended September 30, 1997, and the reduction of the
allowance for credit losses at September 30, 1997.
The remaining reduction in nonperforming loans is also attributable to
the increase in other real estate owned. Other real estate owned totaled $9.1
million at September 30, 1997. This represented an increase of $2.9 million, or
47.43%, 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 September 30, 1997, total deposits were $1.02 billion. This represented
an increase of $27.9 million, or 2.82%, from total deposits of $990.6 million at
December 31, 1996. Demand deposits totaled $413.2 million at September 30, 1997,
representing a decrease of $18.0 million, or 4.17%, 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 third quarter of 1997 were $397.5
million. This represented an increase of $59.8 million, or 17.70%, from average
demand deposits of $337.8 million for the third quarter of 1996. The comparison
of average balances for the third 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 $253.7 million at September 30, 1997. This
represented an increase of $55.6 million, or 28.04%, 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 $55.0 million at September 30, 1997. This
represented a decrease of $14.0 million, or 20.34%, 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.
17
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 September 30, 1997, the Company's loan to
deposit ratio was 58.96% 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 September 30, 1997, the
liquidity ratio was 46.55%. Conceptually, this shows that the Company had liquid
assets or marketable securities equal to 46.55% of its total deposits and
borrowed funds at September 30, 1997.
Cash flows provided by operating activities, primarily interest received,
totaled $16.0 million and $12.3 million for the nine months ended September 30,
1997 and 1996. Net cash used in investing activities, primarily purchases of
investments, was $81.7 million for the nine months ended September 30, 1997,
compared to $63.0 million for the nine months ended September 30, 1996. Net cash
provided by financing activities totaled $9.9 million for the nine months ended
September 30, 1997, compared to $4.5 million for the same period last year. The
funds provided for in both years were primarily the result of decreases in
transaction deposits and partially offset by increases in time deposits.
Capital Resources
The Company's equity capital was $97.6 million at September 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 September 30, 1997, the Bank and the Company
exceeded the minimum risk-based capital ratio and leverage ratio required to be
considered "Well Capitalized".
18
Table 7 below presents the Company's and the Bank's risk-based and leverage
capital ratios as of September 30, 1997 and December 31, 1996:
Table 7 - Regulatory Capital Ratios
Required
Minimum September 30, 1997 December 31, 1996
------------------ -----------------
Capital Ratios Ratios Company Bank Company Bank
Risk-based Capital
Ratios:
Tier I 4.00% 11.94% 11.66% 11.00% 10.70%
Total 8.00% 13.21% 12.93% 12.30% 11.90%
Leverage Ratio 4.00% 7.44% 7.26% 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 September 30,
1997, the Company had purchased 95,182 shares for an average price of $20.332
per share, resulting in a $1.9 million reduction in the shareholders' equity for
the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
19
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Not Applicable
Item 2 - Changes in Securities
Not Applicable
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 - Other Information
Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Not Applicable
20
Exhibit Index
Exhibit No. Description Page
27 Financial Data Schedule 29
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CVB FINANCIAL CORP.
(Registrant)
Date: November 13, 1997 /s/ Robert J. Schurheck
------------------------
Robert J. Schurheck
Chief Financial Officer
22
9 9-MOS DEC-31-1997 SEP-30-1997 86,651 0 0 0 392,411 58,464 59,722 600,561 10,634 1,185,261 1,018,537 45,000 23,640 435 0 0 62,238 35,411 1,185,261 42,935 18,921 219 62,075 15,139 18,255 43,820 1,970 14 33,047 19,154 11,885 0 0 11,885 1.15 1.15 5.93 4,480 31 2,012 0 12,239 3,771 196 10,634 7,664 0 2,970