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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from N/A to N/A
----- -----
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 N. Haven Avenue, Suite 350
Ontario, California 91764
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (909) 980-4030
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of March 15, 1996, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $121,008,317.
Number of shares of common stock of the registrant outstanding as of
March 15, 1996: 8,963,579.
The following documents are incorporated by reference herein:
Definitive Proxy Statement Part III of Form 10-K
for the Annual Meeting of Stockholders
which will be filed within 120 days of
the fiscal year ended December 31, 1995
This report includes a total of 76 pages.
Exhibit Index on Page 71.
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PART I
ITEM 1. BUSINESS
CVB FINANCIAL CORP.
CVB Financial Corp. (referred to herein on an unconsolidated basis as "CVB"
and on a consolidated basis as the "Company") is a bank holding company
incorporated in California on April 27, 1981 and registered under the Bank
Holding Company Act of 1956, as amended. The Company commenced business on
December 30, 1981 when, pursuant to a reorganization, it acquired all of the
voting stock of Chino Valley Bank (the "Bank"), which is the Company's
principal asset. The Company has one other operating subsidiary,
Community Trust Deed Services ("Community").
The Company's principal business is to serve as a holding company for the
Bank and Community and for other banking or banking related subsidiaries which
the Company may establish or acquire. The Company has not engaged in any other
activities to date. As a legal entity separate and distinct from its
subsidiaries, CVB's principal source of funds is and will continue to be
dividends paid by and other funds advanced from primarily the Bank. Legal
limitations are imposed on the amount of dividends that may be paid and loans
that may be made by the Bank to CVB. See "Item 1. Business - Supervision and
Regulation - Restrictions on Transfers of Funds to CVB by the Bank." At December
31, 1995, the Company had $936.9 million in total consolidated assets, $496.4
million in total consolidated net loans and $803.6 million in total consolidated
deposits.
The principal executive offices of the Company and the Bank are located at
701 North Haven Avenue, Suite 350, Ontario, California.
CHINO VALLEY BANK
The Bank was incorporated under the laws of the State of California on
December 26, 1973, was licensed by the California State Banking Department and
commenced operations as a California state chartered bank on August 9, 1974. The
Bank's deposit accounts are insured under the Federal Deposit Insurance Act up
to applicable limits. Like many other state chartered banks in California, the
Bank is not a member of the Federal Reserve System. At December 31, 1995, the
Bank had $932.6 million in assets, $498.9 million in net loans and $804.5
million in deposits.
The Bank currently has 19 banking offices located in San Bernardino County,
Riverside County and the eastern portion of Los Angeles County in Southern
California. Of the 19 offices, the Bank opened seven as de novo branches and
acquired the other twelve in acquisition transactions. Since 1990, the Bank has
added seven offices, two in 1990, two in 1993, two in 1994 and one in 1995.
On March 5, 1993, the Company completed its acquisition of Fontana First
National Bank, a one-branch bank located in Fontana, California ("Fontana") for
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an aggregate cash purchase price of $5.0 million. As of December 31, 1992,
Fontana had total assets of $26.3 million, net loans of $18.5 million,
deposits of $22.8 million and shareholders' equity of $3.4 million.
On October 21, 1993, the Bank entered into an agreement with the Federal
Deposit Insurance Corporation(the "FDIC") for the purchase of certain assets and
the assumption of deposits and other liabilities of the failed Mid City Bank.
The agreement provided the Bank with the ability to re-price the deposits
assumed within specific time frames, regardless of the original terms of the
deposit. Net of the deposits that were re-priced and allowed to withdraw, the
Bank assumed approximately $20.0 million in deposits, $2.0 million in
investments, and $18.0 million in loans.
On June 24, 1994, the Company completed its acquisition of Western
Industrial National Bank, ("WIN") a two-branch bank located in El Monte,
California for an aggregate cash purchase price of $14.8 million. The Company
assumed approximately $43.5 million in deposits and acquired approximately $34.1
million in loans. On August 11,1995, and after regulatory approval, the Bank
closed the branch located at 10602 Rush Street, El Monte.
On July 8, 1994, the Bank entered into an Insured Deposit Purchase and
Assumption Agreement with the FDIC for the purchase of Pioneer Bank, Fullerton,
California ("Pioneer"). The Bank assumed an aggregate of approximately $52.7
million in deposits and certain assets of Pioneer Bank that included
approximately $12.3 million in loans and $8.2 million in investments and federal
funds sold.
On October 20,1995, the Bank completed its acquisition of the Victorville
office of Vineyard National Bank for an aggregate cash purchase price of
$200,000. The Bank assumed approximately $4.1 million in deposits and $952,000
in loans.
On November 1,1995, the Bank, CVB and Citizens Commercial Trust and Savings
Bank of Pasadena, California, ("Citizens Bank of Pasadena"), executed a
definitive agreement and plan of reorganization pursuant to which the Bank will
acquire Citizens Commercial Trust and Savings Bank by merger. The definitive
agreement provides that the shareholders of Citizens Bank of Pasadena will
receive $18,999,999, plus accrued net earnings, subject to adjustments, for the
period from October 1,1995 until the acquisition is consummated. The
transaction, which has been approved by the regulatory authorities and the
shareholders of Citizens Bank of Pasadena, is expected to be completed either at
the end of the first quarter of 1996 or during April of 1996 Citizens Bank of
Pasadena had total assets of $146.0 million, deposits of $127.0 million, loans
of $62.0 million and shareholders' equity of $15.7 million as of December 31,
1995. In addition, at December 31, 1995, Citizens Bank of Pasadena held trust
assets of approximately $800,000,000 that were not included on the balance sheet
of the bank. Upon consummation of the acquisition of Citizens Bank of Pasadena,
the Bank intends to change its name to Citizens Business Bank.
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Through its network of banking offices, the Bank emphasizes
personalized service combined with offering a full range of banking services to
businesses, professionals and individuals located in the service areas of its
offices. Although the Bank focuses the marketing of its services to small- and
medium-sized businesses, a full range of retail banking services are made
available to the local consumer market.
The Bank offers a wide range of deposit instruments. These include
checking, savings, money market and time certificates of deposit for both
business and personal accounts. The Bank also serves as a federal tax depository
for its business customers.
The Bank also provides a full complement of lending products, including
commercial, agribusiness, installment and real estate loans. Commercial
products include lines of credit and other working capital financing,
accounts receivable lending and letters of credit. Financing products for
individuals include automobile financing, lines of credit and home
improvement and home equity lines of credit. Real estate loans include
mortgage and construction loans.
The Bank also offers a wide range of specialized services designed for the
needs of its commercial accounts. These services include cash management systems
for monitoring cash flow, a credit card program for merchants, courier pick-up
and delivery, payroll services and electronic funds transfers by way of domestic
and international wires and automated clearing house. The Bank also makes
available investment products to customers, including a full array of fixed
income vehicles and a program pursuant to which it places its customers' funds
in federally insured time certificates of deposit of other institutions.
Although the Bank does not currently operate a trust department, it has, in
anticipation of the acquisition of Citizens Bank of Pasadena, applied for trust
powers and will provide full trust services following consumation of the
acquisition.
COMMUNITY TRUST DEED SERVICES
The Company owns 100% of the voting stock of Community, which has one
office. Community's services, which are provided to the Bank and non-affiliated
persons, include preparing and filing notices of default, reconveyances and
related documents and acting as a trustee under deeds of trust. At present, the
assets, revenues and earnings of Community are not material in amount as
compared to the Bank.
COMPETITION
The banking and financial services business in California generally, and in
the Bank's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. The Bank competes for loans
and deposits and customers for financial services with other commercial banks,
savings and loan associations, securities and brokerage companies, mortgage
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companies, insurance companies, finance companies, money market funds, credit
unions, and other nonbank financial service providers. Many of these competitors
are much larger in total assets and capitalization, have greater access to
capital markets, and offer a broader array of financial services than the Bank.
In order to compete with the other financial services providers, the Bank
principally relies upon local promotional activities, personal relationships
established by officers, directors and employees with its customers, and
specialized services tailored to meet its customers' needs. In those instances
where the Bank is unable to accommodate a customer's needs, the Bank will
arrange for those services to be provided by its correspondents. The Bank has 19
offices located in San Bernardino, Riverside, northern Orange and eastern Los
Angeles counties. Neither the deposits nor loans of the offices of the Bank
exceed 1% of the aggregate deposits or loans of all financial services companies
located in the counties in which the Bank operates.
EMPLOYEES
At December 31, 1995, the Company employed 345 persons -- 217 on a
full-time and 128 on a part-time basis. The Company believes that its employee
relations are satisfactory.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings and the interest rate received by the Bank on loans extended to
its customers and securities held in the Bank's portfolio comprise the major
portion of the Company's earnings. These rates are highly sensitive to many
factors that are beyond the control of the Bank. Accordingly, the earnings and
growth of the Company are subject to the influence of domestic and foreign
economic conditions, including inflation, recession and unemployment.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial institutions subject to its reserve
requirements and by varying the discount rates applicable to borrowings by
depository institutions. The actions of the Federal Reserve Board in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The nature and impact of
any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
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financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, in the California legislature and
before various bank regulatory and other professional agencies. The Financial
Services Modernization Act recently proposed in the House of Representatives
would generally permit banks to expand activities further into the areas of
securities and insurance, and would reduce the regulatory and paperwork burden
that currently affects banks. Additionally, the proposed legislation would force
the conversion of savings and loan holding companies into bank holding
companies, although unitary savings and loan holding companies authorized to
engage in activities as of January 1, 1995 would be exempted. Similar
legislation has also been proposed in the Senate. In addition, legislation was
recently introduced in Congress that would merge the deposit insurance funds
applicable to commercial banks and savings associations and impose a one-time
assessment on savings associations to recapitalize the deposit insurance fund
applicable to savings associations. The likelihood of any major legislative
changes and the impact such changes might have on the Company are impossible to
predict. See "Item 1. Business - Supervision and Regulation."
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain laws
which relate to the regulation of the Company and the Bank. The description does
not purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations.
THE COMPANY
The Company, as a registered bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company
is required to file with the Federal Reserve Board quarterly and annual reports
and such additional information as the Federal Reserve Board may require
pursuant to the BHCA. The Federal Reserve Board may conduct examinations of the
Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
6
Under the BHCA and regulations adopted by the Federal Reserve Board, a bank
holding company and its nonbanking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. Further, the Company is required by
the Federal Reserve Board to maintain certain levels of capital. See "Item 1.
Business - Supervision and Regulation - Capital Standards."
The Company is required to obtain the prior approval of the Federal Reserve
Board for the acquisition of more than 5% of the outstanding shares of any class
of voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve Board is also required
for the merger or consolidation of the Company and another bank holding company.
The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, the Company, subject to the prior
approval of the Federal Reserve Board, may engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making any such determination, the Federal Reserve
Board is required to consider whether the performance of such activities by the
Company or an affiliate can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve Board is also empowered to differentiate
between activities commenced de novo and activities commenced by acquisition, in
whole or in part, of a going concern.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner.In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board's
regulations or both. This doctrine has become known as the "source of strength"
doctrine. Although the United States Court of Appeals for the Fifth Circuit
found the Federal Reserve Board's source of strength doctrine invalid in 1990,
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stating that the Federal Reserve Board had no authority to assert the doctrine
under the BHCA, the decision, which is not binding on federal courts outside the
Fifth Circuit, was reversed by the United States Supreme Court on procedural
grounds. The validity of the source of strength doctrine is likely to continue
to be the subject of litigation until definitively resolved by the courts or by
Congress.
The Company is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by, and may be required to file reports
with, the California State Banking Department.
Finally, the Company is subject to the periodic reporting requirements of
the Securities Exchange Act of 1934, as amended, including but not limited to,
filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
THE BANK
The Bank, as a California state chartered bank, is subject to primary
supervision, periodic examination and regulation by the California
Superintendent of Banks ("Superintendent") and the FDIC. If, as a result of an
examination of a bank, the FDIC should determine that the financial condition,
capital resources, asset quality, earnings prospects, management, liquidity or
other aspects of the bank's operations are unsatisfactory or that the bank or
its management is violating or has violated any law or regulation, various
remedies are available to the FDIC. Such remedies include the power to enjoin
"unsafe or unsound" practices, to require affirmative action to correct any
conditions resulting from any violation or practice, to issue an administrative
order that can be judicially enforced, to direct an increase in capital, to
restrict the growth of the bank, to assess civil monetary penalties, to remove
officers and directors and ultimately to terminate a bank's deposit insurance,
which for a California state-chartered bank would result in a revocation of the
bank's charter. The Superintendent has many of the same remedial powers. The
Bank has never been the subject of any such actions by the FDIC or the
Superintendent.
The deposits of the Bank are insured by the FDIC in the manner and to the
extent provided by law. For this protection, the Bank pays a statutory
assessment. See "Item 1. Business - Supervision and Regulation - Premiums for
Deposit Insurance" Although the Bank is not a member of the Federal Reserve
System, it is nevertheless subject to certain regulations of the Federal Reserve
Board.
8
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, interest rates payable on
deposits, loans, investments, mergers and acquisitions, borrowings, dividends,
locations of branch offices and capital requirements. Further, the Bank is
required to maintain certain levels of capital. See "Item 1. Business -
Supervision and Regulation - Capital Standards."
RESTRICTIONS ON TRANSFERS OF FUNDS TO CVB BY THE BANK
CVB is a legal entity separate and distinct from the Bank. The Company's
ability to pay cash dividends is limited by state law.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to CVB by the Bank. California law restricts the amount
available for cash dividends by state chartered banks to the lesser of its
retained earnings or its net income for its last three fiscal years (less any
distributions to shareholders made during such period). Notwithstanding this
restriction, a bank may, with the prior approval of the Superintendent, pay a
cash dividend in an amount not exceeding the greater of the retained earnings of
the bank, net income for such bank's last preceding fiscal year, and the net
income of the bank for its current fiscal year.
The FDIC also has authority to prohibit the Bank from engaging in
activities that, in the FDIC's opinion, constitute unsafe or unsound practices
in conducting its business. It is possible, depending upon the financial
condition of the bank in question and other factors, that the FDIC could assert
that the payment of dividends or other payments might, under some circumstances,
be such an unsafe or unsound practice. Further, the FDIC and the Federal Reserve
Board have established guidelines with respect to the maintenance of appropriate
levels of capital by banks or bank holding companies under their jurisdiction.
Compliance with the standards set forth in such guidelines and the restrictions
that are or may be imposed under the prompt corrective action provisions of
federal law could limit the amount of dividends which the Bank or the Company
may pay. See "Item 1. Business - Supervision and Regulation - Prompt Corrective
Regulatory Action and Other Enforcement Mechanisms" and - "Capital Standards"
for a discussion of these additional restrictions on capital distributions.
At present, substantially all of CVB's revenues, including funds available
for the payment of dividends and other operating expenses, is, and will continue
to be, primarily dividends paid by the Bank. At December 31, 1995, the Bank had
3.3 million in retained earnings available for the payment of cash dividends.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, CVB or other affiliates, the purchase of or investments in stock or
other securities thereof, the taking of such securities as collateral for loans
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and the purchase of assets of CVB or other affiliates. Such restrictions
prevent CVB and such other affiliates from borrowing from the Bank unless the
loans are secured by marketable obligations of designated amounts. Further, such
secured loans and investments by the Bank to or in CVB or to or in any other
affiliate is limited to 10% of the Bank's capital and surplus (as defined by
federal regulations) and such secured loans and investments are limited, in the
aggregate, to 20% of the Bank's capital and surplus (as defined by federal
regulations). California law also imposes certain restrictions with respect to
transactions involving CVB and other controlling persons of the Bank. Additional
restrictions on transactions with affiliates may be imposed on the Bank under
the prompt corrective action provisions of federal law. See "Item 1. Business -
Supervision and Regulation - Prompt Corrective Regulatory Action and Other
Enforcement Mechanisms."
CAPITAL STANDARDS
The Federal Reserve Board and the FDIC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as commercial loans.
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk adjusted assets. The regulators measure
risk-adjusted assets, which includes off balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock,
retained earnings, noncumulative perpetual preferred stock (cumulative perpetual
preferred stock for bank holding companies) and minority interests in certain
subsidiaries, less most intangible assets. Tier 2 capital may consist of a
limited amount of the allowance for possible loan and lease losses, cumulative
preferred stock, long term preferred stock, eligible term subordinated debt and
certain other instruments with some characteristics of equity. The inclusion of
elements of Tier 2 capital is subject to certain other requirements and
limitations of the federal banking agencies. The federal banking agencies
require a minimum ratio of qualifying total capital to risk-adjusted assets of
8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%.
In addition to the risk-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
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3%. For all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or
4% to 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
In August 1995, the federal banking agencies adopted final regulations
specifying that the agencies will include, in their evaluations of a bank's
capital adequacy, an assessment of the exposure to declines in the economic
value of the bank's capital due to changes in interest rates. The final
regulations, however, do not include a measurement framework for assessing the
level of a bank's exposure to interest rate risk, which is the subject of a
proposed policy statement issued by the federal banking agencies concurrently
with the final regulations. The proposal would measure interest rate risk in
relation to the effect of a 200 basis point change in market interest rates on
the economic value of a bank. Banks with high levels of measured exposure or
weak management systems generally will be required to hold additional capital
for interest rate risk. The specific amount of capital that may be needed would
be determined on a case-by-case basis by the examiner and the appropriate
federal banking agency. Because this proposal has only recently been issued, the
Bank currently is unable to predict the impact of the proposal on the Bank if
the policy statement is adopted as proposed.
In January 1995, the federal banking agencies issued a final rule relating
to capital standards and the risks arising from the concentration of credit and
nontraditional activities. Institutions which have significant amounts of their
assets concentrated in high risk loans or nontraditional banking activities and
who fail to adequately manage these risks, will be required to set aside capital
in excess of the regulatory minimums. The federal banking agencies have not
imposed any quantitative assessment for determining when these risks are
significant, but have identified these issues as important factors they will
review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency policy
statement on the allowance for loan and lease losses which, among other things,
establishes certain benchmark ratios of loan loss reserves to classified assets.
The benchmark set forth by such policy statement is the sum of (a) assets
classified loss; (b) 50 percent of assets classified doubtful; (c) 15 percent of
assets classified substandard; and (d) estimated credit losses on other assets
over the upcoming 12 months.
Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with SFAS No. 109. The federal
banking agencies issued final rules governing banks and bank holding companies,
which become effective April 1, 1995, which limit the amount of deferred tax
assets that are allowable in computing an institutions regulatory
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capital. The standard has been in effect on an interim basis since March 1993.
Deferred tax assets that can be realized for taxes paid in prior carryback years
and from future reversals of existing taxable temporary differences are
generally not limited. Deferred tax assets that can only be realized through
future taxable earnings are limited for regulatory capital purposes to the
lesser of (i) the amount that can be realized within one year of the quarter-end
report date, or (ii) 10% of Tier 1 capital. The amount of any deferred tax in
excess of this limit would be excluded from Tier 1 capital and total assets and
regulatory capital calculations.
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Bank to grow and could restrict the amount of profits,
if any, available for the payment of dividends.
As of December 31, 1995, the Company and the Bank had total risk-based
capital ratios of 13.06% and 12.39%, Tier 1 risk-based capital ratios of 11.79%
and 11.12% and leverage ratios of 8.05% and 7.56%, respectively.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt corrective
action to resolve the problems of insured depository institutions, including but
not limited to those that fall below one or more prescribed minimum capital
ratios. The law required each federal banking agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal law.
An insured depository institution generally will be classified in the following
categories based on capital measures indicated below:
"Well capitalized" "Adequately capitalized"
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; Tier 1 risk-based capital of 4% and
Leverage ratio of 5%. and Leverage ratio of 4%.
"Undercapitalized" "Significantly undercapitalized"
Total risk-based capital less than 8%; Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 4%; Tier 1 risk-based capital less than 3%;
or Leverage ratio less than 4%. or Leverage ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets less than 2%.
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An institution that, based upon its capital levels, is classified as "well
capitalized" "adequately capitalized" or "undercapitalized" may be treated
as though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
The law prohibits insured depository institutions from paying management
fees to any controlling persons or, with certain limited exceptions, making
capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately
capitalized, (ii) is based on realistic assumptions and (iii) is likely to
succeed in restoring the depository institution's capital. In addition, each
company controlling an undercapitalized depository institution must guarantee
that the institution will comply with the capital plan until the depository
institution has been adequately capitalized on an average basis during each of
four consecutive calendar quarters and must otherwise provide adequate
assurances of performance. The aggregate liability of such guarantee is limited
to the lesser of (a) an amount equal to 5% of the depository institution's total
assets at the time the institution became undercapitalized or (b) the amount
which is necessary to bring the institution into compliance with all capital
standards applicable to such institution as of the time the institution fails to
comply with its capital restoration plan. Finally, the appropriate federal
banking agency may impose any of the additional restrictions or sanctions that
it may impose on significantly undercapitalized institutions if it determines
that such action will further the purpose of the prompt corrective action
provisions.
An insured depository institution that is significantly undercapitalized,
or is undercapitalized and fails to submit, or in a material respect to
implement, an acceptable capital restoration plan, is subject to additional
restrictions and sanctions. These include, among other things: (i) a forced sale
of voting shares to raise capital or, if grounds exist for appointment of a
receiver or conservator, a forced merger; (ii) restrictions on transactions with
affiliates; (iii) further limitations on interest rates paid on deposits; (iv)
further restrictions on growth or required shrinkage; (v) modification or
termination of specified activities; (vi) replacement of directors or senior
executive officers; (vii) prohibitions on the receipt of deposits from
correspondent institutions; (viii) restrictions on capital distributions by the
holding companies of such institutions; (ix) required divestiture of
13
subsidiaries by the institution; or (x) other restrictions as determined by the
appropriate federal banking agency. Although the appropriate federal banking
agency has discretion to determine which of the foregoing restrictions or
sanctions it will seek to impose, it is required to force a sale of voting
shares or merger, impose restrictions on affiliate transactions and impose
restrictions on rates paid on deposits unless it determines that such actions
would not further the purpose of the prompt corrective action provisions. In
addition, without the prior written approval of the appropriate federal banking
agency, a significantly undercapitalized institution may not pay any bonus to
its senior executive officers or provide compensation to any of them at a rate
that exceeds such officer's average rate of base compensation during the 12
calendar months preceding the month in which the institution became
undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are critically undercapitalized. For example, a
critically undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. See "Item 1. Business - Supervision and Regulation -- Potential
Enforcement Actions."
SAFETY AND SOUNDNESS STANDARDS
In July 1995, the federal banking agencies adopted final safety and
soundness guidelines for all insured depository institutions. The guidelines set
forth operational and managerial standards relating to internal controls,
information systems, internal audit systems, loan underwriting and
documentation, compensation and interest rate exposure. In general, the
guidelines are designed to assist the federal banking agencies in identifying
and addressing problems at insured depository institutions before capital
becomes impaired. If an institution fails to meet these guidelines, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
14
proceedings. Additional guidelines on earnings and classified assets are
expected to be issued in the near future.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective on March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan to value limits that do
not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
PREMIUMS FOR DEPOSIT INSURANCE
Federal law has established several mechanisms to increase funds to protect
deposits insured by the Bank Insurance Fund ("BIF") administered by the FDIC.
The FDIC is authorized to borrow up to $30 billion from the United States
Treasury; up to 90% of the fair market value of assets of institutions acquired
by the FDIC as receiver from the Federal Financing Bank; and from depository
institutions that are members of the BIF. Any borrowings not repaid by asset
sales are to be repaid through insurance premiums assessed to member
institutions. Such premiums must be sufficient to repay any borrowed funds
within 15 years and provide insurance fund reserves of $1.25 for each $100 of
insured deposits. The result of these provisions is that the assessment rate on
deposits of BIF members could increase in the future. The FDIC also has
authority to impose special assessments against insured deposits.
The FDIC implemented a final risk-based assessment system, effective
January 1,1994, under which an institution's premium assessment is based on the
probability that the deposit insurance fund will incur a loss with respect to
the institution, the likely amount of any such loss, and the revenue needs of
the deposit insurance fund. As long as BIF's reserve ratio is less than a
specified "designated reserve ratio," 1.25%, the total amount raised from BIF
members by the risk-based assessment system may not be less than the amount that
would be raised if the assessment rate for all BIF members were .023% of
15
deposits. On August 8, 1995, the FDIC announced that the designated reserve
ratio had been achieved and, accordingly, issued final regulations adopting an
assessment rate schedule for BIF members of 4 to 31 basis points effective on
June 1, 1995. On November 14, 1995, the FDIC further reduced deposit insurance
premiums to a range of 0 to 27 basis points effective for the semi-annual period
beginning January 1, 1996.
Under the risk-based assessment system, a BIF member institution such as
the Bank is categorized into one of three capital categories (well capitalized,
adequately capitalized, and undercapitalized) and one of three categories based
on supervisory evaluations by its primary federal regulator (in the Bank's case,
the FDIC). The three supervisory categories are: financially sound with only a
few minor weaknesses (Group A), demonstrates weaknesses that could result in
significant deterioration (Group B), and poses a substantial probability of loss
(Group C). The capital ratios used by the FDIC to define well-capitalized,
adequately capitalized and undercapitalized are the same in the FDIC's prompt
corrective action regulations. The BIF assessment rates are summarized below;
assessment figures are expressed in terms of cents per $100 in deposits.
Assessment Rates Effective January 1, 1996
Group A Group B Group C
Well Capitalized 0* 3 17
Adequately Capitalized 3 10 24
Undercapitalized 10 24 27
*Subject to a statutory minimum assessment of $1,000 per semi-annual period
(which also applies to all other assessment risk classifications).
A number of proposals have recently been introduced in Congress to address
the disparity in bank and thrift deposit insurance premiums. On September 19,
1995, legislation was introduced and referred to the House Banking Committee
that would, among other things: (i) impose a requirement on all SAIF member
institutions to fully recapitalize the SAIF by paying a one-time special
assessment of approximately 85 basis points on all assessable deposits as of
March 31, 1995, which assessment would be due as of January 1, 1996; (ii) spread
the responsibility for FICO interest payments across all FDIC-insured
institutions on a pro-rata basis, subject to certain exceptions; (iii) require
that deposit insurance premium assessment rates applicable to SAIF member
institutions be no less than deposit insurance premium assessment rates
applicable to BIF member institutions; (iv) provide for a merger of the BIF and
SAIF as of January 1, 1998; (v) require savings associations to convert to state
of national bank charters by January 1, 1998; (vi) require savings associations
to divest any activities not permissible for commercial banks within five years;
(vii) eliminate the bad-debt reserve deduction for savings associations,
although savings associations would not be required to recapture into income
their accumulated bad-debt reserves; (viii) provide for the conversion of
savings and loan holding companies into bank holding companies as of January 1,
16
1998, although unitary savings and loan holding companies authorized to engage
in activities as of September 13, 1995 would have such authority grandfathered
(subject to certain limitations); and (ix) abolish the OTS and transfer the OTS'
regulatory authority to the other federal banking agencies. The legislation
would also provide that any savings association that would become
undercapitalized under the prompt corrective action regulations as a result of
the special deposit premium assessment could be exempted from payment of the
assessment, provided that the institution would continue to be subject to the
payment of semiannual assessments under the current rate schedule following the
recapitalization of the SAIF. The legislation was considered and passed by the
House Banking Committee's Subcommittee on Financial Institutions on September
27, 1995, and has not yet been acted on by the full House Banking Committee.
On September 20, 1995, similar legislation was introduced in the Senate,
although the Senate bill does not include a comprehensive approach for merging
the savings association and commercial bank charters. The Senate bill remains
pending before the Senate Banking Committee.
The future of both these bills is linked with that of pending budget
reconciliation legislation since some of the major features of the bills are
included in the Seven-Year Balanced Budget Reconciliation Act. The budget bill,
which was passed by both the House and Senate on November 17, 1995 and vetoed by
the President on December 6, 1995, would: (i) recapitalize the SAIF through a
special assessment of between 70 and 80 basis points on deposits held by
institutions as of March 31, 1995; (ii) provide an exemption to this rule for
weak institutions, and a 20% reduction in the SAIF-assessable deposits of so-
called ``akar banks''; (iii) expand the assessment base for FICO payments to
include all FDIC-insured institutions; (iv) merge the BIF and SAIF on January 1,
1998, only if no insured depository institution is a savings association on that
date; (v) establish a special reserve for the SAIF on January 1, 1998; and (vi)
prohibit the FDIC from setting semiannual assessments in excess of the amount
needed to maintain the reserve ratio of any fund at the designated reserve
ratio. The bill does not include a provision to merge the charters of savings
associations and commercial banks.
In light of ongoing debate over the content and fate of the budget bill,
the different proposals currently under consideration and the uncertainty of the
Congressional budget and legislative processes in general, management cannot
predict whether any or all of the proposed legislation will be passed, or in
what form. Accordingly, the effect of any such legislation on the Bank cannot be
determined.
INTERSTATE BANKING AND BRANCHING
In September 1994, the Riegel-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") became law. Under the Interstate
Act, beginning one year after the date of enactment, a bank holding company that
is adequately capitalized and managed may obtain approval under the BHCA to
17
acquire an existing bank located in another state without regard to state law. A
bank holding company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of deposits
of insured depository institutions in the United States or (b) 30% or more of
the deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank or
bank holding company if application of such limitation does not discriminate
against out-of-state banks. An out-of-state bank holding company may not acquire
a state bank in existence for less than a minimum length of time that may be
prescribed by state law except that a state may not impose more than a five year
existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of insured
banks located in different states and conversion of the branches of the acquired
bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirements and conditions as for a merger
transaction.
In October 1995, California adopted "opt in" legislation under the
Interstate Act that permits out-of-state banks to acquire California banks that
satisfy a five-year minimum age requirement (subject to exceptions for
supervisory transactions) by means of merger or purchases of assets, although
entry through acquisition of individual branches of California institutions and
de novo branching into California are not permitted. The Interstate Act and the
California branching statute will likely increase competition from out-of-state
banks in the markets in which the Company operates, although it is difficult to
assess the impact that such increased competition may have on the Company's
operations.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institution's actual lending service and
18
investment performance rather than the extent to which the institution conducts
needs assessments, documents community outreach or complies with other
procedural requirements.
In March 1994, the federal Interagency Task Force on Fair Lending issued a
policy statement on discrimination in lending. The policy statement describes
the three methods that federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment and evidence of
disparate impact.
POTENTIAL ENFORCEMENT ACTIONS
Commercial banking organizations, such as the Bank, and their institution-
affiliated parties, which include the Company, may be subject to potential
enforcement actions by the Federal Reserve Board, the FDIC and the
Superintendent for unsafe or unsound practices in conducting their businesses or
for violations of any law, rule, regulation or any condition imposed in writing
by the agency or any written agreement with the agency. Enforcement actions may
include the imposition of a conservator or receiver, the issuance of a cease-
and-desist order that can be judicially enforced, the termination of insurance
of deposits (in the case of the Bank), the imposition of civil money penalties,
the issuance of directives to increase capital, the issuance of formal and
informal agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the imposition of restrictions and sanctions
under the prompt corrective action provisions of the FDIC Improvement Act.
Additionally, a holding company's inability to serve as a source of strength to
its subsidiary banking organizations could serve as an additional basis for a
regulatory action against the holding company. Neither the Company nor the Bank
have been subject to any such enforcement actions.
ITEM 2. PROPERTIES
The principal executive offices of the Company and the Bank are located at
701 N. Haven Avenue, Suite 350, Ontario, California. The office of Community is
located at 125 East "H" Street, Colton, California.
The Bank occupies the premises for fourteen of its offices under leases
expiring at various dates from 1995 through 2014. The Bank owns the premises for
its six other offices.
The Company's total occupancy expense, exclusive of furniture and equipment
expense, for the year ended December 31, 1994, was $3.2 million. Management
believes that its existing facilities are adequate for its present purposes.
However, management currently intends to increase the Bank's assets over the
next several years and anticipates that a substantial portion of this growth
will be accomplished through acquisition or de novo opening of additional
banking offices. For additional information concerning properties, see Notes 6
and 10 of the Notes to the Consolidated Financial Statements included in this
report. See "Item 8. Financial Statements and Supplemental Data."
19
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company and the Bank are party to claims and legal
proceedings arising in the ordinary course of business. After taking into
consideration information furnished by counsel to the Company and the Bank
management believes that the ultimate aggregate liability represented thereby,
if any, will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to shareholders during the fourth quarter of
1995.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 15, 1995, the principal excutive officers of the Company and
Chino are:
Name Position Age
George A. Borba Chairman of the Board of 63
the Company and the Bank
D. Linn Wiley President and Chief Executive 57
Officer of the Company and the Bank
Vincent T. Breitenberger Executive Vice President/Senior 62
Loan Officer of the Bank
Jay W. Coleman Executive Vice President of the Bank 53
Robert J. Schurheck Chief Financial Officer of 63
the Company and Executive Vice
President and Chief Financial Officer
of the Bank
Other than George A. Borba, who is the brother of John A. Borba, a director
of the Company and the Bank, there is no family relationship among any of the
above-named officers or any of the Company's directors.
Mr. Borba has served as Chairman of the Board of the Company since its
organization in April 1981 and Chairman of the Board of the Bank since its
organization in December 1973. In addition, Mr. Borba is the owner of George
Borba Dairy.
Mr. Wiley has served as President and Chief Executive Officer of the
Company since October 4, 1991. Mr. Wiley joined the Company and Bank as a
director and as President and Chief Executive Officer designate on August 21,
1991. Prior to that, Mr. Wiley served as an Executive Vice President of Wells
Fargo Bank from April 1, 1990 to August 20, 1991. From 1988 to April 1, 1990 Mr.
Wiley served as the President and Chief Administrative Officer of Central
Pacific Corporation, and from 1983 to 1990 he was the President and Chief
Executive Officer of American National Bank.
20
Mr. Breitenberger has served as Executive Vice President of the Bank since
April 1982, and prior to that time was Senior Vice President of the Bank from
November 1980 to March 1982. He has been the Senior Loan Officer of the Bank
since November 1980.
Mr. Coleman assumed the position of Executive Vice President of the Bank on
December 5, 1988. Prior to that he served as President and Chief Executive
Officer of Southland Bank, N.A. from March 1983 to April 1988.
Mr. Schurheck assumed the position of Chief Financial Officer of the
Company and Executive Vice President/Chief Financial Officer of the Bank on
March 1, 1990. He served as Senior Vice President of the Bank from September 11,
1989 to February 28, 1990. Prior to that he served as Senior Vice President of
General Bank from June 1988 to September 1989. From July 1987 to June 1988 Mr.
Schurheck was a self-employed consultant; from December 1973 to June 1987 he was
Senior Vice President of Operations and Finance of State Bank in Lake Havasu
City, Arizona.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Shares of CVB Financial Corp. common stock price decreased from an average
price of $13.01 per share for the first quarter of 1995 to an average per share
price of $12.80 for the fourth quarter of 1995. Fears regarding the economy,
weak California real estate prices, and bank capital levels continued to
dominate investors' perceptions of bank stocks in the region, regardless of the
performance of CVB Financial Corp. The average per share price for the fourth
quarter of 1995 represented a multiple of book value of approximately 1.46. The
following table presents the high and low sales prices for the Company's common
stock during each quarter for the past three years. The share prices and cash
dividend per share amounts presented for all periods have been restated to give
retroactive effect, as applicable, of the ten percent stock dividend declared on
December 20, 1995 and stock dividends declared in 1994 and 1993. The Company
had approximately 1,032 shareholders of record as of December 31, 1995.
21
Three Year Summary of Common Stock Prices
Quarter
Ended High Low Dividends
3/31/93 $10.14 $7.05 $.060 Cash Dividend
6/30/93 $9.44 $8.26 $.060 Cash Dividend
9/30/93 $11.08 $9.02 $.060 Cash Dividend
12/31/93 $11.17 $9.67 $.060 Cash Dividend
10% Stock Dividend
3/31/94 $10.95 $9.40 $.066 Cash Dividend
6/30/94 $11.98 $9.71 $.066 Cash Dividend
9/30/94 $13.23 $11.67 $.066 Cash Dividend
12/31/94 $13.23 $11.15 $.066 Cash Dividend
10% Stock Dividend
3/31/95 $14.09 $12.05 $.073 Cash Dividend
6/30/95 $12.73 $11.48 $.073 Cash Dividend
9/30/95 $11.93 $11.48 $.073 Cash Dividend
12/31/95 $13.75 $11.76 $.073 Cash Dividend
10% Stock Dividend
The Company lists its common stock on the American
Stock Exchange under the symbol "CVB."
22
ITEM 6. SELECTED FINANCIAL DATA
1995 1994 1993 1992 1991
Net Interest Income $ 48,140,875 $ 42,818,669 $ 35,891,367 $ 32,020,207 $ 29,460,946
Provision for Credit Losses 2,575,000 350,000 1,720,000 1,772,109 604,000
Other Operating Income 9,090,442 7,586,410 10,744,921 7,897,796 7,038,897
Other Operating Expenses 35,053,016 32,434,624 29,353,759 23,419,389 22,709,783
------------- ------------- ------------ ------------- -------------
Earnings Before Income Taxes 19,603,301 17,620,455 15,562,529 14,726,505 13,186,060
Income Taxes 8,145,842 7,185,679 6,040,178 5,711,445 5,217,380
------------- ------------- ------------ ------------- -------------
NET EARNINGS $ 11,457,459 $ 10,434,776 9,522,351 9,015,060 7,968,680
============= ============= ============ ============= =============
Net Earnings Per Common Share(F1) $ 1.22 $ 1.13 $ 1.05 $ 1.02 $ 0.91
============= ============= ============ ============= =============
Stock Dividends 10% 10% 10% 10% ---
Cash Dividends Declared Per Share(F1)$ 0.29 $ 0.26 0.24 0.22 0.20
Dividend Pay-Out Ratio 23.77% 23.01% 22.86% 21.57% 21.98%
FINANCIAL POSITION:
Assets $ 936,939,922 $ 836,095,349 $ 687,407,957 $ 592,097,857 $ 560,324,296
Net Loans 496,448,905 484,617,731 442,083,848 374,661,538 365,573,877
Deposits 803,573,853 762,623,921 595,956,301 526,923,421 499,807,113
Stockholders' Equity 78,260,216 61,939,928 59,957,532 52,038,215 44,188,978
Book Value Per Share(F1) 8.77 6.99 6.81 5.95 5.16
Equity-to-Assets Ratio(F2) 8.35% 7.41% 8.72% 8.79% 7.89%
FINANCIAL PERFORMANCE:
Return on:
Beginning Equity 18.50% 17.40% 18.30% 20.40% 20.77%
Average Equity 16.13% 16.84% 17.46% 18.72% 19.45%
Return on Average Assets 1.39% 1.40% 1.52% 1.62% 1.54%
CREDIT QUALITY:
Allowance for Credit Losses $ 9,625,586 $ 9,470,736 $ 8,849,442 $ 6,461,345 $ 5,262,614
Allowance/Total Loans 1.90% 1.92% 1.96% 1.70% 1.42%
Total Non Performing Loans $ 26,847,307 $ 21,567,108 13,262,357 10,204,442 5,847,393
Non Performing Loans/Total Loans 5.31% 4.37% 2.94% 2.68% 1.58%
Allowance/Non Performing Loans 35.85% 43.91% 66.73% 63.32% 90.00%
Net Charge-Offs $ 2,420,150 $ 853,363 918,898 573,378 433,065
Net Charge-Offs/Average Loans 0.50% 0.18% 0.22% 0.16% 0.12%
All per share information has been retroactively adjusted to reflect the 10%
stock dividend declared December 20, 1995, as to holders of record on January 8,
1996, and paid January 23, 1996, and 10% stock dividends paid in 1995, 1994 and 1993.
Stockholders' equity divided by total assets.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE
RESULTS OF OPERATIONS.
Management's discussion and analysis is written to provide greater detail
of the results of operations and the financial condition of CVB Financial Corp.
and its subsidiaries. This analysis should be read in conjunction with the
audited financial statements contained within this report including the notes
thereto. CVB Financial Corp., (CVB) is a bank holding company. Its primary
subsidiary, Chino Valley Bank, (the Bank) is a state chartered bank with 19
branch offices located in San Bernardino, Riverside, east Los Angeles, and north
Orange Counties. Community Trust Deed Services (CTD) is a nonbank subsidiary
providing services to the Bank as well as nonaffiliated persons. For purposes of
23
this analysis, the consolidated entities are referred to as the "Company".
During 1994 and 1993, the Company acquired two banks through merger and the
Bank purchased assets and assumed deposits of two failed banks from the FDIC, as
receiver of these banks. These acquisitions and mergers provided the Bank with
four new branch offices and contributed significantly to the growth of the
Company's deposits, loans, and assets during 1994 and 1993. On March 8, 1993,
the Company acquired through merger Fontana First National Bank with deposits of
approximately $23.7 million and loans of approximately $18.3 million. On October
21, 1993, the Bank assumed approximately $30.6 million in deposits and purchased
$20.8 million in loans and $4.6 million in investments of the former Mid City
Bank, N.A. from the FDIC.
On June 24, 1994, the Company acquired through merger Western Industrial
National Bank ("WIN") with deposits of approximately $43.5 million, and loans of
approximately $34.1 million. On July 8, 1994, the Bank entered into an Insured
Deposit Purchase and Assumption Agreement with the FDIC in its capacity as
receiver for Pioneer Bank ("Pioneer"), assuming approximately $52.7 million in
deposits and purchasing approximately $12.3 million in loans, and $8.2 million
in investments and federal funds sold.
On October 21, 1995, the Bank purchased a branch office from Vineyard
National Bank with deposits of $4.1 million and loans of $952,000. In addition,
on November 1, 1995, the Company and the Bank entered into a definitive
agreement to acquire through merger Citizens Commercial Trust & Savings Bank of
Pasadena ("Citizens Bank of Pasadena"). Citizens Bank of Pasadena has four
banking offices and at December 31, 1995 had total assets of approximately
$146.0 million, total deposits of approximately $127.0 million, total loans of
approximately $62.0 million, and total shareholders' equity of approximately
$15.7 million. At December 31, 1995, Citizens Bank of Pasadena held trust assets
of approximately $800.0 million that are not included on the balance sheet of
the bank. Pursuant to the definitive agreement, the Bank will pay $18 million
plus an amount equal to the adjusted earnings of Citizens Bank of Pasadena
between October 31, 1995 and the date of the consummation of the transaction to
acquire Citizens Bank of Pasadena. The acquisition is subject to obtaining the
necessary regulatory approvals and the approval of the shareholders of Citizens
Bank of Pasadena. The acquisition is anticipated to close during April of 1996.
If consummated, the acquisition of Citizens Bank of Pasadena will be accounted
for under the purchase method of accounting and will provide significant growth
in assets and liabilities and result in increases in the revenues and the
expenses of the Company.
ANALYSIS OF THE RESULTS OF OPERATIONS
The Company reported net earnings of $11.5 million for the year ended
December 31, 1995. This represented an increase of $1,023,000, or 9.80%, over
earnings of $10.4 million for the year ended December 31, 1994. For the year
ended December 31, 1993, the Company reported earnings of $9.5 million. Earnings
24
per share, adjusted for the effects of a 10% stock dividend declared each year,
were $1.22, $1.13, and $1.05 per share for 1995, 1994, and 1993, respectively.
The increase in earnings for 1995 compared to 1994 resulted primarily from
the increase in net interest income and, to a lesser extent, the increase in
other operating income. Increased net interest income for 1995 generally
reflected the higher volume of average earning assets coupled with higher yields
on these assets. The increases were partially offset by a higher provision for
credit losses and increased other operating expenses.
The increase in earnings for 1994 compared to 1993 was also the result of
an increase in net interest income due primarily to an increase in the volume of
average earning assets and a lower cost of average deposits. A lower provision
for credit losses also contributed to the increase in earnings for 1994 compared
to the previous year. The lower provision for credit losses for 1994 compared to
1993 reflected nominal internal loan growth, net of acquired loans, and lower
net charge offs for the year. Earnings for 1993 included a $3.7 million gain on
the sale of investment securities that resulted from a restructure of the
investment portfolio in anticipation of the adoption of SFAS No. 115.
For the year ended December 31, 1995, the Company's return on average
assets was 1.39%, compared to a return on average assets of 1.40% for the year
ended December 31, 1994, and 1.52% for the year ended December 1993. The
decrease in the return on average assets for the last two years is primarily the
result of decreases in the level of average earning assets in relation to
average total assets. Increases in other real estate owned and goodwill
contributed to the increase in nonearning assets. The Company's return on
average stockholders' equity was 16.13% for the year ended December 31, 1995,
compared to 16.84% for the year ended December 31, 1994, and 17.46% for the year
ended December 31, 1993.
NET INTEREST INCOME
Table 1 presents the average yield on each category of earning assets, the
average rate paid for each category of interest bearing liabilities, and the
resulting net interest spread and net interest margin for the years indicated.
Rates for tax preferenced investments are provided on a taxable equivalent basis
using the federal marginal tax rate of 35.00%.
25
TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differentials
(dollars in thousands)
1995 1994 1993
Average Average Average
ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate
Investment Securities
Taxable (F1) $ 220,427 $ 13,736 6.23% $ 171,806 $ 10,084 5.87% $ 120,288 $ 8,188 6.81%
Tax preferenced (F2) 11,012 553 7.04% 7,695 376 6.85% 3,142 131 5.87%
Federal Funds Sold 4,285 248 5.79% 10,297 432 4.20% 14,135 414 2.93%
Net Loans (F3) (F4) 477,588 50,158 10.50% 457,273 43,156 9.44% 410,097 37,036 9.03%
--------------------------- -------------------------- --------------------------
Total Earning Assets 713,312 64,695 9.10% 647,071 54,048 8.38% 547,662 45,769 8.37%
Total Non Earning Assets 112,238 98,086 79,537
--------- --------- ---------
Total Assets $ 825,550 $ 745,157 $ 627,199
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand Deposits $ 268,709 $ 236,945 $ 178,539
Savings Deposits (F5) 303,092 $ 7,199 2.38% 321,631 $ 6,834 2.12% 287,044 $ 6,478 2.26%
Time Deposits 140,366 7,339 5.23% 108,515 3,939 3.63% 92,472 3,180 3.44%
--------------------------- -------------------------- --------------------------
Total Deposits 712,167 14,538 2.04% 667,091 10,773 1.61% 558,055 9,658 1.73%
--------------------------- -------------------------- --------------------------
Other Borrowings 35,232 2,016 5.72% 9,877 456 4.62% 8,440 220 2.61%
--------------------------- -------------------------- --------------------------
Interest Bearing Liabilities 478,690 16,554 3.46% 440,023 11,229 2.55% 387,956 9,878 2.55%
--------- --------- ---------
Other Liabilities 7,103 6,216 6,172
Stockholders' Equity 71,048 61,973 54,532
Total Liabilities and
Stockholders' Equity $ 825,550 $ 745,157 $ 627,199
========= ========= =========
Net interest spread 5.64% 5.83% 5.82%
Net interest margin 6.78% 6.64% 6.56%
Net interest margin excluding loan fees 6.41% 6.31% 6.07%
Includes certificates of deposit purchased from other institutions
Yields are calculated on a taxable equivalent basis
Loan fees are included in total interest income as follows: 1995, $2,662; 1994, $2,138; 1993, $2,694
Non performing loans are included in net loans as follows: 1995, $26,847; 1994, $21,567; 1993, $13,262
Includes interest bearing demand and money market accounts
The Company's operating results depend primarily on net interest income,
the difference between the interest earned on loans and investments less the
interest paid on deposit accounts and borrowed funds. Net interest income was
$48.1 million for 1995, an increase of $5.3 million, or 12.4%, over net interest
income of $42.8 million for 1994. Net interest income increased $6.9 million, or
19.30%, for 1994, from a total of $35.9 million for 1993. The increase in net
interest income for 1995 was the result of higher yields on larger average
balances of earning assets.
The net interest margin is net interest income measured as a percentage
of average earning assets. The net interest margin can be affected by changes in
the yield on earning assets and the cost of interest bearing liabilities, as
well as changes in the level of interest bearing liabilities in proportion to
earning assets. The Company's net interest margin was 6.78% for 1995, compared
to 6.64% for 1994, and 6.56% for 1993. The ability to fund higher levels of
earning assets with noninterest bearing demand deposits contributed to the
increases in the net interest margin for each of the last three years. Average
noninterest bearing deposits as a percentage of earning assets increased to
32.9% for 1995, from 32.37% for 1994, and 29.9% for 1993.
26
The net interest spread is the difference between the yield on average
earning assets less the cost of average interest bearing liabilities. The
Company's net interest spread was 5.64% for 1995. This represented a decrease
from a net interest spread of 5.83% for 1994 and 5.82% for 1993. The decrease in
the net interest spread for 1995 resulted from the cost of interest bearing
liabilities increasing faster than the yield on earning assets.
The Company earned total interest income of $64.7 million for 1995. This
represented an increase of $10.6 million, or 19.70%, from interest income of
$54.0 million for 1994. Interest income totaled $45.8 million for 1993. The
increases in interest income for 1995 compared to 1994 was the result of the
combined effects of an increase in the level of average earning assets and a
higher yield earned on these assets. The increase in interest income for 1994
compared to 1993 was primarily due to an increase in the level of average
earning assets.
The Company paid total interest expense on deposits and other borrowed
funds of $16.6 million for 1995. This represented an increase of $5.3 million,
or 47.43%, over total interest expense of $11.2 million for 1994. For 1994,
interest expense increased $1.3 million, or 13.68%, from $9.9 million for 1993.
Greater levels of average interest bearing liabilities contributed to the
increase for both years. For 1995, an increase in the cost of average interest
bearing liabilities also contributed to the increase in interest expense.
The cost of average interest bearing deposits was 3.28% for 1995, compared
to an average cost of 2.50% for 1994, and 2.54% for 1993. The increase for 1995
generally reflected higher interest rates paid for money market and time deposit
accounts in response to increases in the market rates of interest. The Company's
cost of average total deposits was 2.04% for 1995, compared to 1.61% for 1994,
and 1.73% for 1993. The Company was able to offset, in part, the impact of the
increased cost of interest bearing deposits in 1995 by obtaining a greater
portion of its deposits from noninterest bearing demand deposits. As a
percentage of total average deposits, average demand deposits were 37.73% for
1995, compared to 35.52% for 1994, and 31.99% for 1993.
Table 2 presents a comparison of interest income and interest expense
resulting from changes in the volumes and rates on average earning assets and
average interest bearing liabilities for the years indicated. Changes in
interest income or expense attributable to volume changes are calculated by
multiplying the change in volume by the initial average interest rate. The
change in interest income or expense attributable to changes in interest rates
are calculated by multiplying the change in interest rate by the initial volume.
The changes attributable to interest rate and volume changes are calculated by
multiplying the change in rate times the change in volume.
27
TABLE 2 - Rate and Volume Analysis for Changes in Interest Income, Interest
Expense, and Net Interest Income
(amount in thousands)
1995 Compared to 1994 1994 Compared to 1993
Increase (decrease) due to Increase (decrease) due to
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
Interest Income:
Taxable investment securities $ 2,854 $ 622 $ 176 $ 3,652 $ 3,506 $ (1,127) $ (483) $ 1,896
Tax preferenced securities 161 11 5 177 191 22 32 245
Fed funds (252) 164 (96) (184) (112) 179 (49) 18
Loans 1,918 4,868 216 7,002 4,260 1,668 192 6,120
----------------------------------- ----------------------------------
Total earning assets 4,681 5,665 301 10,647 7,845 742 (308) 8,279
----------------------------------- ----------------------------------
Interest Expense:
Savings deposits (394) 805 (46) 365 780 (378) (46) 356
Time deposits 1,156 1,735 509 3,400 552 176 31 759
Other borrowings 1,170 109 281 1,560 38 169 29 236
----------------------------------- ----------------------------------
Total interest bearing liabilities 1,932 2,649 744 5,325 1,370 (33) 14 1,351
----------------------------------- ----------------------------------
Net Interest Income $ 2,749 $ 3,016 $ (443) $ 5,322 $ 6,475 $ 775 $ (322) $ 6,928
=================================== ==================================
Interest and fees on loans, the Company's primary source of revenue, totaled
$50.2 million for 1995. This represented an increase of $7.0 million, or 16.23%,
from $43.2 million for 1994. For 1994, interest and fees on loans increased $6.1
million, or 16.52%, from $37.0 million for 1993.
In general, the Company stops accruing interest on a nonperforming loan
after its principal or interest become 90 days or more past due, charging to
earnings all interest previously accrued but not collected. There was no
interest income that was accrued and not reversed on any nonperforming loan at
December 31, 1995, 1994, or 1993. Had nonperforming loans for which interest was
no longer accruing complied with the original terms and conditions of their
notes, interest income would have been $988,000 higher in 1995, $1,363,000
higher in 1994, and $1,186,000 higher in 1993. Accordingly, yields on loans
would have increased by 0.20%, 0.29%, and 0.28%, for 1995, 1994, and 1993,
respectively.
Included in Other Real Estate Owned at December 31, 1994, were two loans
totaling $1.2 million which, although performing according to their original
terms, were accounted for as other real estate owned as required under SFAS No.
66. As principal and interest payments on these loans were current at December
31, 1994, the average balance of the loans were included in total loans, and the
yield on total loans was adjusted accordingly.
Fees collected on loans are an integral part of the loan pricing decision.
Loan fees and the direct costs associated with origination of loans are deferred
and netted against the loan balance. Deferred net loan fees are recognized in
interest income over the term of the loan in a manner that approximates the
level-yield method. For the year ended December 31, 1995, the Company recognized
$2.7 million in loan fee income. This represented an increase of $524,000, or
24.51%, over loan fees of $2.1 million recognized for 1994. For 1993, the
28
Company recognized $2.7 million in loan fee income. The decrease in loan fee
income recognized for 1994 compared to 1993 was the result of the recognition of
lower direct costs associated with loan origination.
Table 3 summarizes loan fee activity for the Bank for the years indicated.
TABLE 3 - Loan Fee Activity
(amounts in thousands)
1995 1994 1993
Fees Collected $ 2,622 $ 2,857 $ 2,394
Fees and costs deferred (1,098) (2,624) (1,328)
Accretion of deferred fees and costs 1,138 1,905 1,628
----------------------------
Total fee income reported $ 2,662 $ 2,138 $ 2,694
----------------------------
Deferred net loan origination fees acquired 0 180 64
Deferred net loan origination fees ----------------------------
at end of year $ 2,463 $ 2,503 $ 1,604
----------------------------
During periods of changing interest rates, the ability to reprice interest
earning assets and interest bearing liabilities can influence net interest
income, the net interest margin, and consequently, the Company's earnings. The
Bank's management monitors the interest rate "sensitivity" for potential changes
in interest rates using a maturity/repricing gap analysis. This analysis
measures, for specific time intervals, the differences between earning assets
and interest bearing liabilities for which repricing opportunities will occur. A
positive difference, or gap, indicates that earning assets will reprice faster
than interest bearing liabilities. This will generally produce a greater net
interest margin during periods of rising interest rates, and a lower net
interest margin during periods of declining interest rates. Conversely, a
negative gap will generally produce a lower net interest margin during periods
of rising interest rates and a greater net interest margin during periods of
decreasing interest rates.
Table 4 provides the Bank's maturity/repricing gap analysis at December 31,
1995, and 1994. The Bank had a negative one year cumulative gap of $116.3
million at December 31, 1995, compared to a negative one year cumulative gap of
$27.0 million at December 31, 1994. The increased negative gap for 1995 compared
to 1994 was primarily the result of a lower volume of loans repricing within one
year, a greater level of time deposits maturing within one year, and an increase
in short term borrowings for 1995 compared to 1994.
29
TABLE 4 - Asset and Liability Maturity/Repricing Gap
(amounts in thousands)
Over 90 Over 180
90 days days to days to Over
or less 180 days 365 days 365 days
1995
Earning Assets:
Fed Funds $ 7,000 $ 0 $ 0 $ 0
Investment Securities and
debt securities held for sale 23,766 9,715 20,823 230,342
Deposits with other financial institutions 0 0 0 0
Total Loans 296,031 14,795 13,377 181,874
--------- --------- ---------- --------
Total $ 326,797 $ 24,510 $ 34,200 $412,216
========= ========= ========= ========
Interest Bearing Liabilities
Savings Deposits 304,158 0 0 0
Time Deposits 84,581 36,573 36,500 8,910
Other Borrowings 0 0 40,000 0
--------- --------- --------- --------
Total 388,739 36,573 76,500 8,910
--------- --------- --------- --------
Period GAP $(61,942) $(12,063) $ (42,300) $403,306
========== ========== ========== ========
Cumulative GAP $(61,942) $(74,005) $(116,305) $287,001
========== ========== ========== ========
1994
Earning Assets:
Fed Funds $ 15,000 $ 0 $ 0 $ 0
Investment Securities and
debt securities held for sale 6,864 6,504 $ 16,989 $161,909
Deposits with other financial institutions 99 100 0 0
Total Loans 333,447 16,965 15,479 128,197
--------- --------- --------- --------
Total 355,410 23,569 32,468 290,106
========= ========= ========= ========
Interest Bearing Liabilities
Savings Deposits 317,401 0 0 0
Time Deposits 62,182 26,960 21,697 6,576
Other Borrowings 10,248 0 0 0
--------- --------- -------- --------
Total 389,831 26,960 21,697 6,576
--------- --------- -------- --------
Period GAP $ (34,421) $ (3,391) $ 10,771 $283,530
========== ========== ======== ========
Cumulative GAP $ (34,421) $ (37,812) $(27,041) $256,489
========== ========== ========= ========
The interest rates paid on deposit accounts do not always move in unison
with the rates charged on loans. In addition, the magnitude of changes in the
rates charged on loans is not always proportionate to the magnitude of changes
in the rate paid for deposits. Consequently, changes in interest rates do not
necessarily result in an increase or decrease in the net interest margin solely
as a result of the differences between repricing opportunities of earning
assets or interest bearing liabilities. The fact that the Bank reported a
negative gap at December 31, 1995, does not necessarily indicate that if
interest rates decreased net interest income would increase, or if interest
rates increased net interest income would decrease.
30
CREDIT RISK
Implicit in lending activities is the risk that losses will be experienced
and that the amount of such losses will vary over time. Consequently, the
Company maintains an allowance for credit losses by charging a provision for
credit losses to earnings. Loans determined to be losses are charged against the
allowance for credit losses. The Company's allowance for credit losses is
maintained at a level considered by the Bank's management to be adequate to
provide for estimated losses inherent in the existing portfolio, including
commitments under commercial and standby letters of credit.
In evaluating the adequacy of the allowance for credit losses, the Bank's
management estimates the amount of potential loss for each loan that has been
identified as having greater than standard credit risk, including loans
identified as nonperforming. Loss estimates also consider the borrowers'
financial data and the current valuation of collateral when appropriate. In
addition to the allowance for specific problem credits, an allowance is further
allocated for all loans in the portfolio based on the risk characteristics of
particular categories of loans including historical loss experience in the
portfolio. Additional allowance is allocated on the basis of credit risk
concentrations in the portfolio and contingent obligations under off-balance
sheet commercial and standby letters of credit.
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for the Impairment of a Loan.", as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." The statements prescribe that a loan is impaired when principal
and interest are deemed uncollectable according to the original contractual
terms of the loan. Impairment is to be measured as either the expected future
cash flows discounted at each loan's effective interest rate, the fair value of
the loan's collateral, or an observable market price of the loan (if one
exists). The amount of impairment is to be reported as a part of the Company's
allowance for credit losses.
At December 31, 1995, the Company reported an allowance for credit losses
of $9.6 million. Of this total, $3.0 million represented reserves for specific
problem loans, $415,093 represented reserves for specific impaired loans, and
$6.0 million represented that portion allocated to provide for general risks
inherent in the loan portfolio.
Nonperforming loans totaled $26.8 million, or 5.30% of gross loans at
December 31, 1995. Nonperforming loans totaled $21.6 million, or 4.37% of gross
loans at December 31, 1994, and $13.3 million, or 2.94% of gross loans at
December 31, 1993. Nonperforming loans include loans for which interest is no
longer accruing. In addition, nonperforming loans include loans that have been
renegotiated from their original contractual terms, even if the loan is paying
as agreed under the renegotiated terms. The increase in nonperforming loans in
1995 was due to a $4.6 million increase in restructured loans and a $676,000
increase in nonaccrual loans. The increase in nonperforming loans for 1994 was
the result of increases in restructured loans. All restructured loans were
31
paying in accordance with the renegotiated terms at December 31, 1995. See Table
9 - Nonperforming Assets for additional information concerning nonperforming
loans. While management believes that the allowance was adequate to provide for
both recognized potential losses and estimated inherent losses in the portfolio,
no assurances can be given that future events may not result in increases in the
provision for credit losses.
Table 5 presents a comparison of net credit losses, the provision for
credit losses (including adjustments incidental to mergers), and the resulting
allowance for credit losses for each of the years indicated.
TABLE 5 - Summary of Credit Loss Experience
(amounts in thousands)
1995 1994 1993 1992 1991
Amount of Total Loans at End of Period $ 506,074 $ 494,088 $ 450,933 $ 381,123 $ 370,837
=================================================
Average Total Loans Outstanding $ 486,504 $ 466,514 $ 416,984 $ 368,452 $ 362,457
=================================================
Allowance for Credit Losses at Beginning of Period $ 9,471 $ 8,849 $ 6,461 $ 5,263 $ 5,092
Loans Charged-Off:
Real Estate Loans 2,167 402 530 120 154
Commercial and Industrial 290 496 334 452 282
Consumer Loans 162 123 154 115 42
-------------------------------------------------
Total Loans Charged-Off 2,619 1,021 1,018 687 478
-------------------------------------------------
Recoveries:
Real Estate Loans 55 47 0 0 0
Commercial and Industrial 100 92 57 94 15
Consumer Loans 44 29 42 19 30
-------------------------------------------------
Total Loans Recovered 199 168 99 113 45
-------------------------------------------------
Net Loans Charged-Off 2,420 853 919 574 433
-------------------------------------------------
Provision Charged to Operating Expense 2,575 350 1,720 1,772 604
-------------------------------------------------
Adjustments Incident to Mergers 0 1,125 1,587 0 0
-------------------------------------------------
Allowance for Credit Losses at End of period $ 9,626 $ 9,471 $ 8,849 $ 6,461 $ 5,263
=================================================
Net Loans Charged-Off to Average Total Loans 0.50% 0.18% 0.22% 0.16% 0.12%
Net Loans Charged-Off to Total Loans at End of Period 0.48% 0.17% 0.20% 0.15% 0.12%
Allowance for Credit Losses to Average Total Loans 1.98% 2.03% 2.12% 1.75% 1.45%
Allowance for Credit Losses to Total Loans at End of period 1.90% 1.92% 1.96% 1.70% 1.42%
Net Loans Charged-Off to Allowance for Credit Losses 25.14% 9.01% 10.39% 8.88% 8.23%
Net Loans Charged-Off to Provision for Credit Losses 93.98% 243.71% 53.43% 32.39% 71.69%
At December 31, 1995, the allowance for credit losses was $9.6 million.
This represented an increase of $154,850, or 1.6%, over the allowance for credit
losses of $9.5 million at December 31, 1994. For 1994, the allowance for credit
losses increased $621,294, or 7.02%, from $8.8 million at December 31, 1993. The
allowance for credit losses increased for 1995 as net loans charged to the
allowance of $2.4 million were lower than the provision for credit losses of
$2.6 million. Similarly, the allowance for credit losses increased for 1994 as
net loan losses of $853,000 charged to the allowance were lower than the
provision of $350,000, when combined with adjustments incident to mergers of
$1.1 million. As a percentage of total loans at the end of each period, the
allowance for loan losses declined to 1.90% at December 31, 1995, from 1.92% at
December 31, 1994, and 1.96% at December 31, 1993.
32
The provision for credit losses totaled $2.6 million for 1995, compared to
$350,000 for 1994, and $1.7 million for 1993. The increased provision for credit
losses for 1995 compared to 1994 was the result of increased loans charged to
the allowance for credit losses. Net loans charged to the allowance for credit
losses during 1995 included $2.1 million in real estate loans, compared to
$355,000 in real estate loans charged to the allowance for credit losses during
1994. The increase reflects the continued soft Southern California economy and
declining real estate values. The lower provision for credit losses for 1994,
reflected a slower growth rate in loans net of acquisitions for that year. Loans
acquired through merger for 1994 included an adjustment to the allowance for
credit losses incidental to the merger of $1.1 million.
While the Company's management believes that the allowance was adequate to
provide for both recognized potential losses and estimated inherent losses in
the portfolio, no assurances can be given that future events may not result in
increases in the provision for credit losses. There is no precise method of
predicting specific losses that ultimately may be charged against the allowance
for credit losses. As such, the Company's management is unable to reasonably
estimate the full amount of loans to be charged to the reserve in future
periods.
Table 6 provides a summary of the allocation of the allowance for credit
losses for specific loan categories at the dates indicated. The allocations
presented should not be interpreted as an indication that loans charged to the
allowance for credit losses will occur in these amounts or proportions, or that
the portion of the allowance allocated to each loan category represents the
total amount available for future losses that may occur within these categories.
There is a large unallocated portion of the allowance for credit losses and the
total allowance is applicable to the entire loan portfolio.
TABLE 6 - Allocation of Allowance for Credit Losses
(amounts in thousands)
December 31,
1995 1994 1993 1992 1991
Allow- % of Allow- % of Allow- % of Allow- % of Allow- % of
ance for Category ance for Category ance for Category ance for Category ance for Category
Credit to Total Credit to Total Credit to Total Credit to Total Credit to Total
Losses Loans Losses Loans Losses Loans Losses Loans Losses Loans
Real Estate $ 155 34.0% $ 88 28.7% $ 43 30.1% $ 113 27.5% $ 77 29.5%
Commercial and Industrial 5,534 58.7% 4,182 63.5% 3,911 62.4% 2,422 68.0% $ 2,587 66.8%
Consumer 42 3.1% 43 3.1% 41 2.8% $ 164 3.0% $ 100 3.5%
Unallocated 3,895 N/A 5,158 N/A 4,854 N/A $ 3,762 N/A $ 2,499 N/A
----------------- ----------------- ----------------- ----------------- -----------------
Total $ 9,626 95.8% $ 9,471 95.3% $ 8,849 95.2% $ 6,461 98.5% $ 5,263 99.8%
----------------- ----------------- ----------------- ----------------- -----------------
OTHER OPERATING INCOME
Other operating income for the Company includes service charges and fees
(primarily from deposit accounts), gains (net of losses) from the sale of
investment securities, gains (net of losses) from the sale of other real estate
owned, gains (net of losses) from the sale of fixed assets; gross revenue from
CTD; and other revenues not included as interest on earning assets. Other
operating income totaled $9.1 million for 1995. This represented an increase of
33
$1.5 million, or 19.83%, over other operating income of $7.6 million for 1994.
The increase was primarily due from increased service charges and fee income for
1995 compared to 1994.
For 1994, other operating income decreased $3.2 million, or 29.40%, from
$10.7 million for 1993. The decrease was the result of gains on the sale of
investment securities of $3.7 million in 1993 compared to a loss from the sale
of investment securities of $128,000 for 1994. The gain for 1993 resulted from
restructuring the investment portfolio in anticipation of adopting SFAS No. 115.
Other income also includes revenue from CTD, a subsidiary of the Company.
Total revenue from CTD was approximately $256,000, $274,000, and $271,000 for
1995, 1994, and 1993, respectively.
OTHER OPERATING EXPENSES
Other operating expenses totaled $35.1 million for 1995. This represented
an increase of $2.6 million, or 8.07%, from total other operating expenses of
$32.4 million for 1994. For 1994, other operating expenses increased $3.1
million, or 10.50%, from other operating expenses of $29.4 million for the year
ended December 31, 1993.
For the most part, other operating expenses reflect the direct expenses and
related administrative expenses associated with staffing, maintaining,
promoting, and operating branch facilities. Consequently, other operating
expenses have increased as the asset size of the Company and the number of
branch offices have increased. Management's ability to control costs in relation
to asset growth can be measured in terms of other operating expenses as a
percentage of average assets. For 1995, operating expenses as a percentage of
average assets totaled 4.25%, compared to 4.35% for 1994, and 4.68% for 1993.
Management's ability to control costs in relation to the level of revenue can be
measured in terms of operating expenses as a percentage of total revenue. For
1995, operating expenses as a percentage of total revenue declined to 47.51%,
compared to 52.61% for 1994, and 51.94% for 1993. The decline in the percentage
for 1995 reflects the ability to generate greater levels of revenue with
proportionately lower levels of operating expenses.
Salaries and related expenses comprise the greatest portion of other
operating expenses. For 1995, salaries and related expenses totaled $16.5
million. This represented an increase of $1.3 million, or 8.22%, over salaries
and related expenses of $15.2 million for 1994. Salaries and related expenses
totaled $14.4 million for 1993. The increase primarily reflects an increase in
average staffing levels during the year. Despite the increase in average
staffing levels, at year end, full time equivalent employees decreased to 297 at
December 31, 1995, compared to 321 at December 31, 1994, and 302 at December 31,
1993. As a percentage of average assets, salaries and related expenses totaled
2.00% for 1995, a decrease from 2.05% for 1994, and 2.30% for 1993.
34
Equipment expense totaled $2.3 million for 1995, an increase of $309,000,
or 15.70%, from $2.0 million for 1994. Equipment expense increased $443,000, or
29.02%, in 1994 from $1.5 million for 1993. Stationary and supplies totaled $1.8
million for 1995, an increase of $276,000, or 17.75%, from $1.6 million for
1994. Stationary and supplies increased $488,000, or 45.65% in 1994, from $1.1
million for 1993. The increases reflected the greater number of branch offices
in 1994 and 1995. Professional expenses totaled $2.9 million for 1995, an
increase of $1.0 million, or 54.62%, from total professional expenses of $1.9
million for 1994. Professional expenses increased $136,000, or 7.94%, in 1994,
from $1.7 million for 1993. The increase in professional expenses for 1995
reflects increased litigation expense.
Included as other operating expenses is a provision charged to earnings for
potential losses from the sale of other real estate owned. This provision
totaled $1.9 million, $2.4 million, and $2.8 million, for the years ended
December 31, 1995, 1994, and 1993, respectively. These charges contributed to
the increase in other operating expenses for each year. Additional expenses
associated with the foreclosure, maintenance and disposition of other real
estate owned totaled $1,360,000 for 1995, $908,000 for 1994, and $1,004,000 for
1993. Other real estate owned is property acquired by the Bank through
foreclosure (See LOANS). Primarily as a result of the current economic climate
in Southern California, real estate values have decreased significantly over the
last three years. In anticipation of a possible continuation of this declining
trend in both commercial and residential real estate values, the Bank's
management has provided an allowance for potential declining values of real
estate .
Other operating expenses for 1995 were affected by a decrease in insurance
premiums paid by the Company to the FDIC for the Bank Insurance Fund (the BIF).
For 1995, the Company paid a total premium of $811,000, compared to a premium of
$1.3 million for 1994, and $1.2 million for 1993. The decrease for 1995 reflects
the reduction in premiums as the BIF attained target reserve levels.
INCOME TAXES
The Company's effective tax rate for 1995 was 41.55%, compared to an
effective tax rate of 40.80% for 1994, and 38.80% for 1993. These rates are
below the nominal combined Federal and State tax rates as a result of tax
preferenced income for each period. The increases in the combined effective tax
rates each year resulted from increases in the Federal tax rate for revenues in
excess of $10.0 million, and increases in the State tax rate.
ANALYSIS OF FINANCIAL CONDITION
The Company reported total assets of $936.9 million at December 31, 1995.
This represented an increase of $100.8 million, or 12.06%, from total assets of
$836.1 million at December 31, 1994. During 1994, total assets increased $148.7
million, or 21.63%, from total assets of $687.4 million at December 31, 1993.
The level of assets at December 31, 1995, and 1994, included short term deposits
of approximately $48.0 million and $40.0 million, respectively. These funds were
35
reflected in the level of demand deposits and cash and due from banks at
December 31, 1995, and 1994. Asset and deposit growth for 1994 was affected
significantly by the acquisitions of Western Industrial National Bank and
Pioneer Bank.
A greater portion of the increase in assets for 1995 was allocated to
investment securities. The increase in assets for 1994 was allocated
approximately equally between loans and investment securities. Increases in
assets for 1995 were funded by both increases in deposits and other borrowed
funds. Increases in assets for 1994 were primarily funded by increased
deposits.
INVESTMENT SECURITIES
The Company maintains a portfolio of investment securities to provide
income and serve as a source of liquidity for its ongoing operations. Note 2 of
the Notes to the Consolidated Financial Statements sets forth information
concerning the composition and the maturity distribution of the investment
securities portfolio at December 31, 1995, and 1994. At December 31, 1995, the
Company reported total investment securities of $284.6 million. This represented
an increase of $92.4 million, or 48.05%, over total investment securities of
$192.3 million at December 31, 1994. In addition, at December 31, 1995, federal
funds sold totaled $7.0 million, compared to $15.0 million at December 31, 1994.
The Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" effective January 1, 1994. Under this standard,
securities held as "available for sale" are reported at current market value for
financial reporting purposes. The market value, less the amortized cost of
investment securities, net of income taxes, is adjusted directly to
stockholders' equity. At December 31, 1995, securities held as available for
sale totaled $260.4 million, representing 91.47% of total investment securities
of $284.6 million at December 31, 1995. At December 31, 1995, net unrealized
gains on investment securities available for sale totaled $303,789, which
includes the unamoritized loss on an investment security that was transferred
from available for sale to held to maturity.
LOANS
At December 31, 1995, the Company reported net loans of $496.4 million.
This represented an increase of $11.8 million, or 2.44%, from net loans of
$484.6 million at December 31, 1994. During 1994, net loans increased $42.5
million, or 9.62%, from $442.1 million at year ended December 31, 1993. Gross
loans acquired through acquisitions totaled approximately $46.4 million for
1994, and approximately $39.1 million for 1993.
36
Table 7 presents the distribution of the Company's loan portfolio at the
dates indicated.
TABLE 7 - Distribution of Loan Portfolio by Type
(amounts in thousands)
December 31,
1995 1994 1993 1992 1991 1990
Commercial and Industrial $ 234,709 $ 262,494 $ 249,648 $ 260,322 $ 248,168 $ 238,533
Real Estate
Construction 23,805 26,302 56,358 43,879 40,788 39,775
Mortgage 149,039 116,077 79,929 61,619 68,753 75,006
Consumer, net of unearned discount 15,876 15,553 12,517 11,642 13,067 13,948
Municipal Lease Finance Receivables 21,529 23,246 21,556 5,501 779 1,014
Agribusiness 63,580 52,920 32,529 0 0 0
----------------------------------------------------------------
Gross Loans 508,538 496,592 452,537 382,963 371,555 368,276
----------------------------------------------------------------
Less:
Allowance for Credit Losses 9,626 9,471 8,849 6,461 5,263 5,092
Deferred Loan Fees 2,463 2,503 1,604 1,840 718 426
----------------------------------------------------------------
Total Net Loans $ 496,449 $ 484,618 $ 442,084 $ 374,662 $ 365,574 $ 362,758
================================================================
Table 8 provides the maturity distribution for commercial and industrial
loans as well as real estate construction loans as of December 31, 1995. Amounts
are also classified according to repricing opportunities or rate sensitivity.
TABLE 8 - Loan Maturities and Interest Rate Sensitivity
(amounts in thousands)
December 31, 1995
After One
But
Within Within After
One Year Five Years Five Years Total
Types of Loans:
Commercial and industrial (1) $ 229,401 $ 93,078 $ 51,904 $ 374,383
Construction 23,805 0 0 23,805
Agribusiness 55,121 3,144 5,315 63,580
-------------------------------------------
$ 308,327 $ 96,222 $ 57,219 $ 461,768
===========================================
Amount of Loans based upon:
Fixed Rates $ 61,103 $ 93,078 $ 51,904 $ 206,085
Floating or adjustable rates 247,224 3,144 5,315 255,683
-------------------------------------------
$ 308,327 $ 96,222 $ 57,219 $ 461,768
===========================================
Includes approximately $125.6 million in fixed rate commercial real estate loans.
These loans are classified as real estate mortgage loans for the financial
statements, but are accounted for as commercial and industrial loans on the
Company's books.
As a normal practice in extending credit for commercial and industrial
purposes, the Bank may accept trust deeds on real property as collateral. In
some cases, when the primary source of repayment for the loan is anticipated
to come from cash flow from normal operations of the borrower, the requirement
of real property as collateral is not the primary source of repayment but an
abundance of caution. In these cases, the real property is considered a
secondary source of repayment for the loan. Since the Bank lends primarily in
37
Southern California, its real estate loan collateral is concentrated in this
region. At December 31, 1995, approximately 97.00% of the Bank's loans secured
by real estate were collateralized by properties located in Southern California.
This concentration is considered when determining the adequacy of the Company's
allowance for credit losses.
At December 31, 1995, nonperforming assets, which included nonperforming
loans (see CREDIT RISK) and other real estate owned, totaled $35.1 million. This
represented an increase of $3.7 million, or 11.69%, from total nonperforming
assets of $31.4 million at December 31, 1994. The increase in nonperforming
assets for 1995 was the result of increased nonperforming loans. Other real
estate owned declined 16.30%, to $8.3 million at December 31, 1995, compared to
$9.9 million at December 31, 1994.
Although management believes that nonperforming loans are generally well
secured and that potential losses are provided for in the Company's allowance
for credit losses, there can be no assurance that future deterioration in
economic conditions or collateral values will not result in future credit
losses. Table 9 provides information on nonperforming loans and other real
estate owned at the dates indicated.
TABLE 9 - Non-Performing Assets
(amounts in thousands)
December 31,
1995 1994 1993 1992 1991
Non accrual loans $ 13,289 $ 12,613 $ 12,492 $ 6,642 $ 3,684
Loans past due 90 days or more 0 0 0 272 85
Restructured loans 13,558 8,954 770 3,291 2,078
Other real estate owned (OREO) 8,253 9,860 9,768 8,797 3 586
------------------------------------------------
Total non performing assets $ 35,100 $ 31,427 $ 23,030 $ 19,002 $ 9,433
================================================
Percentage of non performing assets
to total loans outstanding & OREO 6.82% 6.24% 5.00% 4.87% 2.52%
================================================
Percentage of non performing assets
to total assets 3.75% 3.76% 3.35% 3.21% 1.68%
================================================
At December 31, 1995, the Company had loans for which interest was no
longer accruing totaling $13.3 million. Approximately 40.00% of these nonaccrual
loans were secured by real property which had a current appraisal that was less
than one year old. The estimated ratio of the outstanding loan balances to the
fair values of the related collateral for nonaccrual loans at December 31, 1995,
ranged between approximately 26.00% to 103.00%. The Bank has allocated specific
reserves included in the allowance for credit losses for potential losses on
these loans.
A restructured loan is a loan for which the Bank has reduced the rate of
interest to a lower rate, forgiven all or a part of the interest income, or
forgiven part of the principal balance of the loan, due to the borrower's
financial condition. At December 31, 1995, the Company had a total of $13.6
million in loans that were classified as restructured.
38
Except for nonperforming loans as set forth in Table 9, and loans disclosed
as impaired, the Bank's management is not aware of any loans as of December 31,
1995, for which known credit problems of the borrower would cause serious doubts
as to the ability of such borrowers to comply with their present loan repayment
terms, or any known events that would result in the loan being designated as
nonperforming at some future date. The Bank's management cannot, however,
predict the extent to which the current economic environment may persist or
worsen or the full impact the current economic environment may have on the loan
portfolio.
At December 31, 1995, the net book value of the 17 properties held as other
real estate owned totaled $8.3 million. The Bank is actively marketing these
properties. The Bank's management cannot predict when these properties will be
sold or what the terms of sale will be when they are sold. While the Bank's
management recognizes that the Southern California real estate market continues
to remain weak, the Bank has recent appraisals on each property that support the
carrying costs of these properties at December 31, 1995. No assurances can be
given that further charges to earnings may not occur if Southern California real
estate values continue to decrease, and the Bank cannot promptly dispose of the
properties held.
DEPOSITS
The Company reported total deposits of $803.6 million at December 31, 1995.
This represented an increase of $40.9 million, or 5.37%, from total deposits of
$762.6 million at December 31, 1994. Total deposits included approximately $48.0
million in short term demand deposits at December 31, 1995, and $40.0 million in
short term demand deposits at December 31, 1994. At December 31, 1993, total
deposits were $596.0 million. During 1994, deposits assumed through acquisitions
totaled approximately $96.2 million. This represented 57.75% of the $166.7
million increase in deposits for that year.
Average noninterest bearing demand deposits totaled $268.7 million for the
year ended December 31, 1995. This represented an increase of $31.7 million, or
13.41%, over average noninterest bearing demand deposits of $236.9 million for
the year ended December 31, 1994. Noninterest bearing demand deposits averaged
$178.5 million for the year ended December 31, 1993. The ability to fund greater
portions of average assets with noninterest bearing demand deposits has
contributed significantly to increases in the Company's net interest margin for
each of the last three years.
Table 10 provides the remaining maturities of large denomination ($100,000
or more) time deposits, including public funds, at December 31, 1995.
39
TABLE 10 - Maturity Distribution of Large Denomination Time Deposits
(amounts in thousands)
DECEMBER 31, 1995
3 months or less $ 61,940
Over 3 months through 6 months 18,778
Over 6 months through 12 months 23,705
Over 12 months 4,617
---------
Total $ 109,040
=========
LIQUIDITY
Liquidity is actively managed to ensure sufficient funds are available to
meet the ongoing needs of both the Bank and CVB. Liquidity management includes
projections of future sources and uses of funds to insure the availability of
sufficient liquid reserves to provide for unanticipated circumstances.
For the Bank, sources of funds normally include principal payments on loans
and investments, other borrowed funds, and growth in deposits. Uses of funds
include withdrawal of deposits, interest paid on deposits, increased loan
balances, purchases, and other operating expenses. The Bank maintains funds as
overnight federal funds sold and other short term investment securities to
provide for short term liquidity needs. In addition, the Bank maintains short
term unsecured lines of credit with correspondent banks to provide for
contingent liquidity needs.
Other borrowed funds averaged $35.2 million for the year ended December 31,
1995. This represented an increase of $26.5 million over average borrowed funds
of $8.7 million for the year ended December 31, 1994. The increased borrowing
for 1995 is primarily the result of a secured short term loan from the Federal
Home Loan Bank. Borrowed funds were used to purchase investment securities at a
positive net interest spread.
Net cash provided by operating activities, primarily representing net
interest income, totaled $18.2 million for 1995, $9.5 million for 1994, and
$10.6 million for 1993. Financing activities were primarily comprised of
increased time certificates of deposits of $47.8 million, short term borrowed
funds of $40.3 million, and a decrease in noninterest bearing deposits and money
market and savings accounts of $11.0 million. Net cash provided by financing
activities was $60.4 million for 1994, and $18.1 million for 1993. Cash and cash
equivalents received as a result of acquisitions totaled $126,000 for 1995,
$22.6 million for 1994 and $13.3 million for 1993. Net cash used in investing
activities, primarily representing purchases of investments and to a lesser
extent increases in loans, totaled $91.1 million for 1995, $43.6 million for
1994, and $52.4 million for 1993.
40
At December 31, 1995, the Bank reported liquid assets, including cash,
federal funds sold, and unpledged investment securities of $280.1 million.
Liquid assets represented 29.90% of total assets at December 31, 1995.
Since the primary sources and uses of funds for the Bank are loans and
deposits, the relationship between gross loans and total deposits provides a
useful measure of the Bank's liquidity. Typically, the closer the ratio of loans
to deposits is to 100%, the more reliant the Bank is on its loan portfolio to
provide for short term liquidity needs. Since repayment of loans tends to be
less predictable than the maturity of investments and other liquid resources,
the higher the loan to deposit ratio the less liquid are the Bank's assets. For
1995, the Bank's loan to deposit ratio averaged 68.31%, compared to an average
of 69.93% for 1994 and an average of 74.72% for 1993.
The liquidity ratio provides another measure of the Bank's liquidity. This
ratio is calculated by dividing the difference between short term liquid assets
less short term volatile liabilities by the sum of loans and long term
investments. This ratio measures the percentage of illiquid long term assets
that are being funded by short term volatile liabilities. At December 31, 1995,
this ratio was 13.44%, compared to 4.48% at December 31, 1994, and 2.72%, at
December 31, 1993.
CVB is a company separate and apart from the Bank that must provide for its
own liquidity. Substantially all of CVB's revenues are obtained from dividends
declared and paid by the Bank. There are statutory and regulatory provisions
that could limit the ability of the Bank to pay dividends to CVB. At December
31, 1995, approximately $3.3 million of the Bank's equity was unrestricted and
available to be paid as dividends to CVB. Management of CVB believes that such
restrictions will not have an impact on the ability of CVB to meet its ongoing
cash obligations. As of December 31, 1995, neither the Bank nor CVB had any
material commitments for capital expenditures. The purchase of Citizens Bank of
Pasadena will require approximately $18.0 million in cash from the Bank.
Investment securities maturing in the first quarter of 1996, coupled with the
projected cash and cash equivalents to be purchased from Citizens Bank of
Pasadena will provide sufficient funds to provide for the required cash purchase
price.
CAPITAL RESOURCES
Historically, the primary source of capital for the Company has been the
retention of operating earnings. In order to insure adequate levels of capital,
the Company conducts an ongoing assessment of projected sources and uses of
capital in conjunction with projected increases and mixes of assets.
Tier 1 capital, stockholders' equity less intangible assets, was $69.4
million at December 31, 1995. This represented an increase of $10.0 million, or
16.86%, over Tier 1 capital of $59.4 million at December 31, 1994. Total
adjusted capital, Tier 1 capital plus the lesser of the reserve for credit
losses or 1.25% of risk weighted assets, totaled $76.9 million at December 31,
41
1995. This represented an increase of $10.6 million, or 15.97%, over total
adjusted capital of $66.3 million at December 31, 1994.
Bank regulators have established minimum capital adequacy guidelines
requiring that qualifying capital be at least 8.0% of risk-based assets, of
which at least 4.0% must be Tier 1 capital (primarily stockholders' equity).
These ratios represent minimum capital standards. Under Prompt Corrective Action
rules, certain levels of capital adequacy have been established for financial
institutions. Depending on an institution's capital ratios, the established
levels can result in restrictions or limits on permissible activities. In
addition to the aforementioned requirements, the Company and Bank must also meet
minimum leverage ratio standards. The leverage ratio is calculated as Tier 1
capital divided by the most recent quarterly period's average total assets.
The highest level for capital adequacy under Prompt Corrective Action is
"Well Capitalized". To qualify for this level of capital adequacy an institution
must maintain a total risk-based capital ratio of at least 10.00% and a Tier 1
risk-based capital ratio of at least 6.00%.
For purposes of calculating capital ratios, Federal bank regulators have
excluded adjustments to stockholders' equity that result from mark to market
adjustments of available for sale investment securities. At December 31, 1995,
the Company had an unrealized gain on investment securities net of taxes of
$304,000, compared to a loss net of taxes of $6.6 million at December 31, 1994.
At December 31, 1995, and 1994, the Company exceeded all of the minimum capital
ratios required to be considered well capitalized.
At December 31, 1995, the Company's total risk-based capital ratio was
13.06%, compared to a ratio of 12.06% at December 31, 1994. The ratio of Tier 1
capital to risk weighted assets was 11.79%, compared to a ratio of 10.81% at
December 31, 1994. At December 31, 1995, the Company's leverage ratio was 8.05%,
compared to a ratio of 7.53% at December 31, 1994. (See NOTE 13 of the Notes to
the Consolidated Financial Statements.)
Management has prepared calculations of the resulting capital ratios based
on projected asset size and additional goodwill that will result from the
purchase of Citizens Bank of Pasadena. Projected increases in goodwill were
based on estimates of the market values of the assets to be purchased and
liabilities assumed. Based on these projections, it is anticipated that the
Company will continue to exceed all of the minimum capital ratios required to be
considered well capitalized
During 1995, the Board of Directors of the Company declared quarterly cash
dividends that totaled 32 cents per share for the full year (29 cents per share
after retroactive adjustment of the ten percent stock dividend declared on
December 20, 1995). After retroactive adjustment, cash dividends declared during
1995 were the same as paid for 1994. Management does not believe that the
42
continued payment of cash dividends will impact the ability of the Company to
exceed the current minimum capital standards.
In October of 1995, the Financial Standards Accounting Board issued the
SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 does not
rescind or interpret the existing accounting rules for stock-based arrangements.
The Company currently accounts for stock-based compensation under APB Opinion
No. 25. The Company has unequivocally elected not to adopt SFAS No. 123 and
continue to account for stock-based compensation as provided under APB Opinion
No. 25.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CVB Financial Corp.
Index to consolidated Financial Statements
and Financial Statement Schedules
Consolidated Financial Statements
Page
Consolidated Balance Sheets --
December 31, 1995 and 1994 44
Consolidated Statements of Earnings
Year Ended December 31, 1995,
1994 and 1993 45
Consolidated Statements of
Stockholders' Equity Year Ended
December 31, 1995, 1994 and 1993 46
Consolidated Statements of Cash Flows
for the Year Ended December 31,
1995, 1994 and 1993 47
Notes to Consolidated Financial Statements 48
Independent Auditors' Report 66
All schedules are omitted because they are not applicable, not material or
because the information is included in the financial statements or the notes
thereto.
43
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
Federal funds sold $ 7,000,000 $ 15,000,000
Investment securities held to maturity (Note 2) 24,272,507 19,018,218
Investment securities available for sale (Note 2) 260,373,597 173,248,095
Loans and lease finance receivables, net
(Notes 3,4 and 5) 496,448,905 484,617,731
------------- -------------
Total earning assets 788,095,009 691,884,044
Cash and due from banks 104,886,440 94,828,593
Premises and equipment, net (Note 6) 17,219,247 12,801,481
Other real estate owned, net (Note 5) 8,253,002 9,860,467
Deferred taxes (Note 7) 4,472,177 7,956,906
Goodwill 8,508,237 9,139,391
Other assets 5,505,810 9,624,467
------------- -------------
TOTAL $ 936,939,922 $ 836,095,349
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 8):
Noninterest-bearing $ 332,851,336 $ 327,807,389
Interest-bearing 470,722,517 434,816,532
------------- -------------
803,573,853 762,623,921
Demand note to U.S. Treasury 6,738,465 6,429,970
Short-term borrowings (Note 9) 40,000,000
Other liabilities 8,367,388 5,101,530
------------- -------------
Total liabilities 858,679,706 774,155,421
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Notes 12 and 13):
Preferred stock - authorized, 20,000,000 shares without par value;
no shares issued or outstanding
Common stock - authorized, 50,000,000 shares without par value:
issued and outstanding, 8,926,707 (1995) and 8,056,774 (1994) 43,436,317 32,437,767
Retained earnings 34,520,110 36,128,068
Unrealized gain (loss) on investment securities available for sale,
net of tax (Note 2) 303,789 (6,625,907)
------------- --------------
Total stockholders' equity 78,260,216 61,939,928
------------- --------------
TOTAL $ 936,939,922 $ 836,095,349
============= ==============
See accompanying notes to consolidated financial statements.
44
CONSOLIDATED STATEMENTS OF EARNINGS
THREE YEARS ENDED DECEMBER 31, 1995
1995 1994 1993
INTEREST INCOME:
Loans, including fees $ 50,158,139 $ 43,155,882 $ 37,036,068
------------ ------------ ------------
Investment securities:
Taxable 13,736,369 10,084,324 8,187,804
Tax-advantaged 552,926 375,525 131,424
------------ ------------ ------------
14,289,295 10,459,849 8,319,228
------------ ------------ ------------
Federal funds sold 247,966 431,699 413,834
------------ ------------ ------------
Total interest income 64,695,400 54,047,430 45,769,130
------------ ------------ ------------
INTEREST EXPENSE:
Deposits (Note 8) 14,538,843 10,773,128 9,657,636
Other borrowings 2,015,682 455,633 220,127
------------ ------------ ------------
Total interest expense 16,554,525 11,228,761 9,877,763
------------ ------------ ------------
NET INTEREST INCOME BEFORE PROVISION
FOR CREDIT LOSSES 48,140,875 42,818,669 35,891,367
PROVISION FOR CREDIT LOSSES (Note 5) 2,575,000 350,000 1,720,000
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 45,565,875 42,468,669 34,171,367
------------ ------------ ------------
OTHER OPERATING INCOME:
Service charges on deposit accounts 6,727,166 5,970,972 5,214,765
Gain (loss) on sale of investment 369 (127,815) 3,721,041
securities, net (Note 2)
Other 2,362,907 1,743,253 1,809,115
------------ ------------ ------------
Total other operating income 9,090,442 7,586,410 10,744,921
------------ ------------ ------------
OTHER OPERATING EXPENSES:
Salaries, wages and employee
benefits (Notes 11 and 12) $ 16,494,846 $ 15,241,684 $ 14,439,434
Occupancy (Note 10) 2,984,170 2,805,380 2,169,864
Equipment 2,278,699 1,969,544 1,526,519
Deposit insurance premiums 810,969 1,342,976 1,175,710
Stationery and supplies 1,832,810 1,556,527 1,068,657
Professional services 2,860,529 1,850,000 1,713,993
Data processing 659,252 831,049 877,542
Promotion 1,448,851 1,494,757 1,115,182
Other real estate owned expense
(Note 5) 3,259,884 3,308,133 3,834,015
Other 2,423,006 2,034,574 1,432,843
------------ ------------ -----------
Total other operating expenses 35,053,016 32,434,624 29,353,759
------------ ------------ -----------
EARNINGS BEFORE INCOME TAXES 19,603,301 17,620,455 15,562,529
INCOME TAXES (Note 7) 8,145,842 7,185,679 6,040,178
------------ ------------ -----------
NET EARNINGS $ 11,457,459 $ 10,434,776 $ 9,522,351
============ ============ ===========
NET EARNINGS PER COMMON SHARE $ 1.22 $ 1.13 $ 1.05
============ ============ ===========
See accompanying notes to consolidated financial statements.
(Concluded)
45
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1995
UNREALIZED
GAIN/(LOSS)
COMMON ON SECURITIES
SHARES COMMON RETAINED AVAILABLE
OUTSTANDING STOCK EARNINGS FOR SALE
BALANCE, JANUARY 1, 1993 6,577,865 $ 11,866,467 $ 40,171,748
Common stock issued under stock option
and deferred compensation agreements 35,753 490,922
10% stock dividend, declared on
December 15, 1993 and distributed
on January 17, 1994 660,964 8,262,050 (8,262,050)
Tax benefit from exercise of certain
stock options 17,485
Cash dividends (2,111,441)
Net earnings 9,522,351
--------- ----------- ------------
BALANCE, DECEMBER 31, 1993 7,274,582 20,619,439 39,338,093
Common stock issued under stock
option plan and deferred compensation
agreements 50,084 470,654
10% stock dividend, declared on
December 21, 1994 and distributed
on January 24, 1995 732,108 11,347,674 (11,347,674)
Tax benefit from exercise of certain
stock options 46,415
Cash dividends (2,343,542)
Net earnings 10,434,776
Unrealized losses on securities available
for sale, net of tax $(6,625,907)
--------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1994 8,056,774 32,437,767 36,128,068 (6,625,907)
Common stock issued under stock
option plan and deferred compensation
agreements 58,843 454,380
10% stock dividend, declared on
December 20, 1995 and distributed
on January 23, 1996 811,090 10,544,170 (10,544,170)
Tax benefit from exercise of certain
stock options 75,825
Cash dividends (2,597,072)
Net earnings 11,457,459
Unrealized gains on securities available
for sale, net of tax 6,929,696
--------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1995 8,926,707 $ 43,436,317 $34,520,110 $ 303,789
========= ============ ============ ===========
See accompanying notes to consolidated financial statements.
46
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1995
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 62,860,948 $ 51,205,480 $ 45,518,868
Service charges and other fees received 9,090,073 7,714,225 7,023,880
Interest paid (14,960,400) (10,663,359) (10,246,921)
Cash paid to suppliers and employees (31,269,910) (31,894,127) (25,509,643)
Income taxes paid (7,557,407) (6,818,811) (6,145,842)
-------------- -------------- --------------
Net cash provided by operating activities 18,163,304 9,543,408 10,640,342
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available
for sale 13,516,987 53,296,643 63,864,087
Proceeds from maturities of securities available
for sale 28,692,902 62,480,377
Proceeds from maturities of securities held to
maturity 1,667,623 1,119,772 42,248,230
Purchases of securities available for sale (117,966,851) (163,500,011)
Purchases of securities held to maturity (6,767,297) (2,366,781) (117,560,921)
Net increase in loans (20,186,658) (1,448,189) (35,577,319)
Loan origination fees received 2,622,019 2,857,475 2,394,180
Proceeds from sale of other real estate owned 5,775,784 4,423,508 2,374,291
Proceeds from sale of premises and equipment 586,858 56,728 24,212
Purchases of premises and equipment (6,828,719) (5,324,476) (2,324,386)
Consideration received (paid) in business
combinations 2,822,309 13,324,176 (5,043,323)
Other investing activities 4,974,883 (8,496,214) (2,843,235)
-------------- -------------- --------------
Net cash used in investing activities (91,090,160) (43,576,992) (52,444,184)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in noninterest-bearing
deposits and money market and savings
accounts (10,948,901) 53,601,842 28,949,459
Net increase (decrease) in time certificates of
deposit 47,832,612 16,821,858 (14,064,629)
Net increase (decrease) in short-term borrowings 40,288,754 (7,792,948) 5,246,056
Cash dividends on common stock (2,597,072) (2,343,542) (2,111,441)
Proceeds from exercise of stock options 283,014 128,829 106,173
-------------- ------------- ---------------
Net cash provided by financing activities 74,858,407 60,416,039 18,125,618
-------------- ------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 1,931,551 $ 26,382,455 $ (23,678,224)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 109,828,593 60,852,849 71,229,035
------------- ------------- --------------
CASH AND CASH EQUIVALENTS, END OF
YEAR, BEFORE ACQUISITIONS 111,760,144 87,235,304 47,550,811
CASH AND CASH EQUIVALENTS RECEIVED
IN ACQUISITIONS 126,296 22,593,289 13,302,038
------------- ------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 111,886,440 $ 109,828,593 $ 60,852,849
============= ============= ==============
RECONCILIATION OF NET EARNINGS TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net earnings $ 11,457,459 $ 10,434,776 $ 9,522,351
------------- ------------- --------------
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Gain on sales of investment securities (184,430) (3,333) (3,724,956)
Loss on sales of investment securities 184,061 131,148 3,915
Gain on sale of premises and equipment (3,960) (16,789)
Gain on sale of other real estate owned (277,608) (6,563) (5,967)
Amortization of premiums on investment
securities 274,095 336,308 710,718
Provision for credit losses 2,575,000 350,000 1,720,000
Provision for losses on other real estate owned 1,900,000 2,400,000 2,830,000
Accretion of deferred loan fees and costs (1,137,727) (1,905,470) (1,628,527)
Loan fees and costs deferred (1,097,674) (2,624,409) (1,328,458)
Depreciation and amortization 1,881,702 1,549,006 1,097,152
Change in accrued interest receivable (970,821) (1,272,788) 667,547
Change in accrued interest payable 1,594,125 565,402 (369,158)
Deferred tax (benefit) provision (1,382,537) 308,734 (944,053)
Change in other assets and liabilities 3,351,619 (702,614) 2,089,778
-------------- ------------- -------------
Total adjustments 6,705,845 (891,368) 1,117,991
-------------- ------------- -------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 18,163,304 $ 9,543,408 $ 10,640,342
============== ============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES -
Real estate acquired through foreclosure $ 6,345,927 $ 6,598,432 $ 5,204,093
============== ============= ==============
See accompanying notes to consolidated financial statements.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of CVB Financial Corp. and
subsidiaries are in accordance with generally accepted accounting principles
and conform to practices within the banking industry. A summary of the
significant accounting policies consistently applied in the preparation of
the accompanying consolidated financial statements follows:
Principles of Consolidation - The consolidated financial statements include
the accounts of CVB Financial Corp. (the "Company") and its wholly owned
subsidiaries, Chino Valley Bank (the "Bank") and Community Trust Deed
Services, after elimination of all material intercompany transactions and
balances.
Nature of Operations - The Company's primary operations are related to
traditional banking activities, including the acceptance of deposits and the
lending and investing of money through the operations of the Bank. The
Bank's customers consist of small to mid-sized businesses and individuals
located in the Inland Empire, San Gabriel Valley and Orange County. The Bank
operates 19 branches with the headquarters located in the City of Ontario.
Investment Securities - The Company classifies as held to maturity those
debt securities that it has the positive intent and ability to hold to
maturity. All other debt and equity securities are classified as available
for sale. Securities held to maturity are accounted for at cost, adjusted
for amortization of premiums and accretion of discounts. Securities
available for sale are accounted for at fair value, with the net unrealized
gains and losses (unless other than temporary), net of income tax effects,
presented as a separate component of stockholders' equity. Realized gains
and losses on sales of securities available for sale are recognized in
earnings at the time of sale and are determined on a specific identification
basis.
Loans and Lease Finance Receivables - Loans and lease finance receivables
are reported at the principal amount outstanding, less deferred net loan
origination fees and the allowance for credit losses. Interest on loans and
lease finance receivables is credited to income based on the principal
amount outstanding. Interest income is not recognized on loans and lease
finance receivables when collection of interest is deemed by management to
be doubtful.
The Bank receives collateral to support loans, lease finance receivables and
commitments to extend credit for which collateral is deemed necessary. The
most significant category of collateral is real estate, principally
48
commercial and industrial income-producing properties.
Nonrefundable fees and direct costs associated with the origination or
purchase of loans are deferred and netted against outstanding loan balances.
The deferred net loan fees and costs are recognized in interest income over
the loan term in a manner that approximates the level-yield method.
Provision and Allowance for Credit Losses - The determination of the balance
in the allowance for credit losses is based on an analysis of the loan and
lease finance receivables portfolio and reflects an amount that, in
management's judgment, is adequate to provide for potential credit losses
after giving consideration to the character of the loan portfolio, current
economic conditions, past credit loss experience and such other factors as
deserve current recognition in estimating credit losses. The provision for
credit losses is charged to expense.
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." This statement prescribes
that a loan is impaired when it is probable that a creditor will be unable
to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement and provides guidance concerning the
measurement of impairment on such loans and the recording of the related
reserves. The adoption of this statement did not have a material affect on
the results of operations or the financial position of the Bank taken as a
whole.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation, which is provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
service lives using the straight-line method. Properties under capital lease
and leasehold improvements are amortized over the shorter of their economic
lives or the initial term of the lease.
Other Real Estate Owned - Other real estate owned, shown net of an allowance
for losses of $1,195,843 and $1,180,090 at December 31, 1995 and 1994,
respectively, represents real estate acquired through foreclosure in
satisfaction of commercial and real estate loans and is stated at fair
value, minus estimated costs to sell (fair value at time of foreclosure).
Loan balances in excess of fair value of the real estate acquired at the
date of acquisition are charged against the allowance for credit losses. Any
subsequent operating expenses or income, reduction in estimated values, and
gains or losses on disposition of such properties are charged to current
operations.
Business Combinations and Intangible Assets - The Company has engaged in the
acquisition of financial institutions and the assumption of deposits and
purchase of assets from other financial institutions in its market area. The
49
Company has paid a premium on each transaction that has been determined to
be an intangible asset, in the form of goodwill. These intangible assets are
being amortized over a 15-year period on a straight-line basis.
Income Taxes - Deferred income taxes are recognized for the tax consequences
in future years of differences between the tax basis of assets and
liabilities and their financial reporting amounts at each year-end, based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income.
Earnings per Common Share - Earnings per common share are computed on the
basis of the weighted average number of common shares outstanding during the
year, plus shares issuable upon the assumed exercise of outstanding common
stock options (common stock equivalents). The weighted average number of
common shares outstanding and common stock equivalents was 9,322,681 (1995),
9,211,154 (1994) and 9,089,379 (1993). Earnings per common share and stock
option amounts have been retroactively restated to give effect to all stock
splits and dividends.
Statement of Cash Flows- Cash and cash equivalents as reported in the
statements of cash flows include cash and due from banks and federal funds
sold.
Recent Accounting Pronouncements - In 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective for fiscal years beginning after December
15, 1995 and encourages companies to account for stock compensation awards
based on their fair value at the date the awards are granted. This statement
does not require the application of the fair value method and allows the
continuance of the current accounting method, which requires accounting for
stock compensation awards based on their intrinsic value as of the grant
date. The Company has chosen not to adopt the fair value provisions of SFAS
No. 123 and will continue accounting for stock compensation awards at their
intrinsic value at the date of grant.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications - Certain amounts in previous years' financial statements
and related footnote disclosures were reclassified to conform to the current
year presentation.
50
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are
shown below. All securities held are publicly traded, and estimated fair
value was obtained from an independent pricing service.
1995
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
Investment securities held to
maturity:
Mortgage-backed securities $ 8,759,019 $ 576,366 $ (145,242) $ 9,190,143
Municipal bonds 14,465,144 380,424 (52,922) 14,792,646
Other debt securities 1,048,344 1,048,344
------------- ----------- ----------- -------------
$ 24,272,507 $ 956,790 $ (198,164) $ 25,031,133
============= =========== =========== =============
Investment securities available
for sale:
U.S. Treasury securities $ 30,612,310 $ 445,285 $ (29,615) $ 31,027,980
Mortgage-backed securitie 15,259,068 27,893 (58,265) 15,228,696
CMO/REMIC's 165,226,252 934,042 (464,368) 165,695,926
Government agency 41,659,418 182,579 (53,002) 41,788,995
FHLB stock 6,632,000 6,632,000
------------- ----------- ----------- -------------
$ 259,389,048 $ 1,589,799 $ (605,250) $ 260,373,597
============= =========== =========== =============
1994
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
Investment securities held to
maturity:
Mortgage-backed securities $ 10,171,946 $ 60,732 $ (397,368) $ 9,835,310
Municipal bonds 8,213,760 (608,227) 7,605,533
Other debt securities 632,512 632,512
------------- ----------- ------------- ------------
$ 19,018,218 $ 60,732 $ (1,005,595) $ 18,073,355
============= =========== ============= ============
Investment securities available
for sale:
U.S. Treasury securities $ 59,294,064 $ 59,331 $ (1,228,499) $ 58,124,896
Mortgage-backed securities 15,848,051 (1,034,674) 14,813,377
CMO/REMIC's 97,556,299 99,626 (7,949,330) 89,706,595
Government agency 10,632,860 (554,733) 10,078,127
FHLB stock 525,100 525,100
------------- ----------- ------------- ------------
$ 183,856,374 $ 158,957 $(10,767,236) $173,248,095
============= =========== ============= ============
51
A mortgage-backed security classified as held to maturity at December 31,
1995 and 1994 was transferred from the available for sale portfolio in June
1994. The unrealized loss on this security was approximately $467,000 and
$672,000, net of accretion, at December 31, 1995 and 1994, respectively.
The CMO/REMIC securities noted above represent collateralized mortgage
obligations and real estate mortgage investment conduits. All are issues of
U.S. government agencies that guarantee payment of principal and interest of
the underlying mortgages.
At December 31, 1995 and 1994, investment securities having an amortized
cost of approximately $116,056,000 and $114,669,000, respectively, were
pledged to secure public deposits, short-term borrowings, and for other
purposes as required or permitted by law.
The amortized cost and fair value of debt securities at December 31, 1995,
by contractual maturity, are shown below. Although mortgage-backed
securities and CMO/REMIC's have contractual maturities through 2022,
expected maturities will differ from contractual maturities because
borrowers may have the right to prepay such obligations without penalty.
HELD TO MATURITY AVAILABLE FOR SALE
WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
Due in one year
or less $ 37,434,086 $ 37,564,705 6.48%
Due after one year
through five years $ 333,486 $ 339,388 4.40 % 34,837,642 35,252,270 5.91%
Due after five years
through ten years 4,770,474 4,771,939 4.78 %
Due after ten years 10,409,528 10,729,663 5.48 %
------------ ------------ ------ ------------- ------------- -----
15,513,488 15,840,990 4.89 % 72,271,728 72,816,975 6.19%
FHLB stock 6,632,000 6,632,000
Mortgage-backed
securities and
CMO/REMICs 8,759,019 9,190,143 6.26 % 180,485,320 180,924,622 6.10%
------------ ------------ ------ ------------- ------------- -----
$ 24,272,507 $ 25,031,133 5.42 % $ 259,389,048 $ 260,373,597 6.13%
============ ============ ====== ============= ============= =====
Net realized gains and losses on sales of investment securities are as
follows:
1995 1994 1993
Gross realized gains $ 184,430 $ 3,333 $ 3,724,956
Gross realized losses (184,061) (131,148) (3,915)
------------- ------------ ------------
$ 369 $ (127,815) $ 3,721,041
============= ============ ============
52
3. LOANS AND LEASE FINANCE RECEIVABLES
The Bank grants loans to its customers throughout its primary market in the
San Gabriel Valley, Inland Empire and Orange County areas of Southern
California, which have recently experienced adverse economic conditions,
including declining real estate values. These factors have adversely
affected certain borrowers' ability to repay loans. Although management
believes the level of allowances for credit losses is adequate to absorb
losses inherent in the loan portfolio, additional declines in the local
economy and/or increases in the interest rate charged on adjustable rate
loans may result in increasing loan losses that cannot be reasonably
predicted at December 31, 1995.
The Bank makes loans to borrowers in a number of different industries. No
industry had aggregate loan balances exceeding 10% of the December 31, 1995
or 1994 loan and lease finance receivables balance, with the exception of
loans made to the agribusiness industry, which represents 13% and 11% of net
loans outstanding at December 31, 1995 and 1994, respectively. At December
31, 1995, the Bank's loan portfolio included approximately $326.7 million of
loans secured by commercial and residential real estate properties where the
borrowers are involved in several industries.
At December 31, 1995 the Bank held approximately $247.6 million of fixed
rate loans.
The following is a summary of the components of loan and lease finance
receivables:
1995 1994
Commercial, financial and industrial $234,708,614 $262,494,137
Real estate:
Construction 23,804,890 26,301,562
Mortgage 149,037,733 116,076,598
Loans to individuals for household, family and
other consumer expenditures 15,876,904 15,552,790
Municipal lease finance receivables 21,528,868 23,246,272
Agribusiness 63,580,122 52,919,802
------------- -------------
508,537,131 496,591,161
Allowance for credit losses (Note 5) (9,625,586) (9,470,736)
Deferred loan origination fees, net (2,462,640) (2,502,694)
------------- -------------
$496,448,905 $484,617,731
============= =============
4. TRANSACTIONS INVOLVING DIRECTORS AND SHAREHOLDERS
In the ordinary course of business, the Bank has granted loans to certain
directors, executive officers and the businesses with which they are
associated. All such loans and commitments to lend were made under terms
53
that are consistent with the Bank's normal lending policies.
The following is an analysis of the activity of all such loans:
1995 1994
Outstanding balance, beginning of year $ 3,343,000 $ 3,073,000
Credit granted, including renewals 270,000 486,000
Repayments (558,000) (216,000)
------------ ------------
Outstanding balance, end of year $ 3,055,000 $ 3,343,000
============ ============
5. ALLOWANCE FOR CREDIT AND OTHER REAL ESTATE OWNED LOSSES
Activity in the allowance for credit losses was as follows:
1995 1994 1993
Balance, beginning of year $ 9,470,736 $ 8,849,442 $ 6,461,345
Provision charged to operations 2,575,000 350,000 1,720,000
Additions to allowance resulting from
acquisitions 1,124,657 1,586,995
Loans charged off (2,619,620) (1,021,230) (1,018,370)
Recoveries on loans previously charged off 199,470 167,867 99,472
------------ ------------ ------------
Balance, end of year $ 9,625,586 $ 9,470,736 $ 8,849,442
============ ============ ============
At December 31, 1995, the Bank had classified $559,233 of its loans as
impaired and recorded a specific reserve of approximately $415,093 on such
loans. At December 31, 1995, the Bank also classified $29,676,000 of its
loans impaired, however, these loans are collateral dependent and, because
the estimated fair value of the collateral exceeds the book value of the
related loans at the date of measurement, no specific loss reserve was
recorded on these loans in accordance with SFAS No. 114 at that date. The
average recorded investment in impaired loans during the year ended December
31, 1995, was approximately $30,459,000. Interest income of $2,267,300 was
recognized on impaired loans during the year ended December 31, 1995.
At December 31, 1995, loans on nonaccrual status totaled $13,289,000, all of
which are included in the impaired loans discussed above, compared to
$12,613,000 at December 31, 1994.
Due to financial difficulties encountered by certain borrowers, the Bank has
restructured the terms of certain loans to facilitate loan payments. As of
December 31, 1995 and 1994, loans with these restructured terms totaled
$13,558,000 and $8,954,000, respectively. The balance of impaired loans
disclosed above includes all troubled debt restructured loans that, as of
December 31, 1995, are considered impaired.
54
Interest foregone on nonaccrual and restructured loans outstanding during
the years ended December 31, 1995, 1994 and 1993 amounted to approximately
$988,000, $1,363,000, and $1,186,000, respectively.
Activity in the allowance for other real estate owned losses was as follows:
1995 1994 1993
Balance, beginning of year $ 1,180,090 $ 1,650,903 $ 100,000
Provision charged to operations 1,900,000 2,400,000 2,830,000
Charge-offs of real estate owned (1,884,247) (2,870,813) (1,279,097)
------------- ------------- -------------
Balance, end of year $ 1,195,843 $ 1,180,090 $ 1,650,903
============= ============= =============
The Company incurred additional expenses of $1,359,884 (1995), $908,133
(1994) and $1,004,015 (1993) related to the holding and disposition of other
real estate owned.
6. PREMISES AND EQUIPMENT
Premises and equipment consist of:
1995 1994
Land $ 2,613,493 $ 1,205,845
Bank premises 8,819,086 6,060,974
Furniture and equipment 17,073,983 15,607,727
Leased property under capital lease 649,330 649,330
-------------- --------------
29,155,892 23,523,876
Accumulated depreciation and amortization (11,936,645) (10,722,395)
-------------- -------------
$ 17,219,247 $ 12,801,481
============== =============
55
7. INCOME TAXES
Income tax expense (benefit) comprised the following:
1995 1994 1993
Current provision:
Federal $ 7,141,463 $ 4,995,206 $ 5,088,401
State 2,386,916 1,881,739 1,895,830
----------- ----------- -----------
9,528,379 6,876,945 6,984,231
----------- ----------- -----------
Deferred (benefit) provision:
Federal (1,144,867) 165,756 (728,828)
State (237,670) 142,978 (215,225)
------------ ----------- ------------
(1,382,537) 308,734 (944,053)
------------ ----------- ------------
$ 8,145,842 $ 7,185,679 $ 6,040,178
============ =========== ============
Income tax liability (asset) comprised the following:
1995 1994
Current:
Federal $ 1,868,265 $ 7,577
State 248,461 46,938
------------ ------------
2,116,726 54,515
------------ ------------
Deferred:
Federal (3,563,446) (6,547,639)
State (908,731) (1,409,267)
------------ ------------
(4,472,177) (7,956,906)
------------ ------------
$(2,355,451) $(7,902,391)
============ ============
56
The components of the net deferred tax asset are as follows:
FEDERAL 1995 1994
Deferred tax liabilities:
Depreciation $ 400,038 $ 389,835
Leases 183,558 204,023
Unrealized gains on securities 181,000
Other 75,608 65,748
----------- -----------
Gross deferred tax liability 840,204 659,606
----------- -----------
Deferred tax assets:
California franchise tax 437,663 382,938
Bad debt and credit loss deduction 2,965,394 2,390,997
Other real estate owned reserves 940,153 413,032
Unrealized loss on securities 3,948,060
Other 60,440 72,218
----------- -----------
Gross deferred tax asset 4,403,650 7,207,245
----------- -----------
Net deferred tax asset - federal $ 3,563,446 $ 6,547,639
=========== ===========
STATE 1995 1994
Deferred tax liabilities:
Depreciation $ 164,420 $ 153,601
Unrealized gain on securities 32,000
Other 17,674 13,823
----------- -----------
Gross deferred tax liability 214,094 167,424
----------- -----------
Deferred tax assets:
Bad debt and credit loss deduction 756,110 673,418
Other real estate owned reserves 303,535 131,073
Unrealized loss on securities 706,205
Other 63,180 65,995
----------- -----------
Gross deferred tax asset 1,122,825 1,576,691
----------- -----------
Net deferred tax asset - state $ 908,731 $ 1,409,267
=========== ===========
57
A reconciliation of the statutory income tax rate to the consolidated
effective income tax rate follows:
1995 1994
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
Federal income
tax at
statutory rate $ 6,861,155 35.0 % $ 6,167,159 35.0% $ 5,342,369 34.3%
State franchise
taxes, net of
federal benefit 1,397,010 7.1 1,316,067 7.5 1,140,830 7.3
Tax-exempt interest (627,409) (3.2) (561,837) (3.2) (335,131) (2.2)
Other, net 515,086 2.6 264,290 1.5 (107,890) (0.6)
------------ ----- ------------ ----- ------------ -----
$ 8,145,842 41.5 % $ 7,185,679 40.8% $ 6,040,178 38.8%
============ ====== ============ ===== ============ =====
8. DEPOSITS
Time certificates of deposit with balances of $100,000 or more amounted to
approximately $109,040,000 and $68,089,000 at December 31, 1995 and 1994,
respectively. Interest expense on such deposits amounted to approximately
$4,924,000 (1995), $2,471,000 (1994) and $1,804,000 (1993).
9. SHORT-TERM BORROWINGS
On November 29, 1995, the Bank entered into a short-term borrowing agreement
with the Federal Home Loan Bank ("FHLB") maturing on November 29, 1996. At
December 31, 1995, the Bank had borrowed $40,000,000 at 5.5% annual
interest. The FHLB is holding certain investment securities of the Bank as
collateral for the borrowings.
10. COMMITMENTS AND CONTINGENCIES
The Company leases land and buildings under operating leases for varying
periods extending to 2014, at which time the Company can exercise options
that could extend the leases to 2031. The future minimum annual rental
payments required, which have initial or remaining noncancelable lease terms
in excess of one year as of December 31, 1995, excluding property taxes and
insurance, are approximately as follows:
1996 $ 1,198,000
1997 1,178,000
1998 1,062,000
1999 1,086,000
2000 1,060,000
Succeeding years 3,117,000
-----------
Total minimum payments required $ 8,701,000
===========
Total rental expense for the Company was approximately $1,785,000 (1995),
$1,670,000 (1994) and $1,449,000 (1993).
58
At December 31, 1995, the Bank had commitments to extend credit of
approximately $79,373,000 and obligations under letters of credit of
$8,871,000. Commitments to extend credit are agreements to lend to
customers, provided there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Commitments are
generally variable rate, and many of these commitments are expected to
expire without being drawn upon. As such, the total commitment amounts do
not necessarily represent future cash requirements. The Company uses the
same credit underwriting policies in granting or accepting such commitments
or contingent obligations as it does for on-balance-sheet instruments, which
consist of evaluating customers' creditworthiness individually.
Standby letters of credit written are conditional commitments issued by the
Company to guarantee the financial performance of a customer to a third
party. Those guarantees are primarily issued to support private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. When deemed necessary, the Company holds appropriate collateral
supporting those commitments. Management does not anticipate any material
losses as a result of these transactions.
In the ordinary course of business, the Company becomes involved in
litigation. In the opinion of management and based upon discussions with
legal counsel, the disposition of such litigation will not have a material
effect on the Company's consolidated financial position or results of
operations.
11. EMPLOYEE PROFIT SHARING PLAN
The Bank sponsors a 401(k) and profit-sharing plan for the benefit of its
employees. Employees are eligible to participate in the plan after 12 months
of consecutive service, provided they have completed 1,000 service hours in
the plan year. Employees may make contributions to the plan under the plan's
401(k) component, and the Bank may make contributions under the plan's
profit-sharing component, subject to certain limitations. The Bank's
contributions are determined by the Board of Directors, and amounted to
approximately $780,000 (1995), $715,000 (1994) and $680,000 (1993).
12. STOCK OPTION PLANS
The Company has 1981 and 1991 plans under which options to purchase shares
of the Company's common stock have been or may be granted to certain
officers and directors. Under the 1981 plan, which expired in 1994, there
are 84,795 options outstanding. No further grants can be made under this
plan. Although no more options can be granted under this plan, the options
granted thereunder will remain outstanding until they are exercised or
canceled pursuant to their terms. The 1991 plan authorizes the issuance of
59
up to 1,244,485 shares. Option prices under both plans are to be determined
at the fair market value of such shares on the date of grant, and options
are exercisable in such installments as determined by the Board of
Directors. Each option shall expire no later than ten years from the grant
date.
At December 31, 1995, options for the purchase of 711,271 shares of the
Company's common stock were outstanding under both plans, of which options
to purchase 538,528 shares were exercisable at prices ranging from $2.00 to
$12.81; 545,452 shares of common stock were available for the granting of
future options under the 1991 plan. The status of all optioned shares is as
follows:
SHARES PRICE RANGE
Outstanding at January 1, 1993 605,130 $ 2.00 - $ 9.48
Granted 74,197 $ 8.17 - $ 10.89
Exercised (18,305) $ 5.63 - $ 8.79
Canceled (18,741) $ 5.63 - $ 8.80
---------
Outstanding at December 31, 1993 642,281 $ 2.00 - $ 10.89
Granted 54,813 $ 9.80 - $ 12.81
Exercised (31,320) $ 2.91 - $ 6.82
Canceled (13,891) $ 5.64 - $ 10.89
---------
Outstanding at December 31, 1994 651,883 $ 2.00 - $ 12.81
Granted 123,603 $ 12.73 - $ 13.49
Exercised (50,093) $ 5.64 - $ 10.89
Canceled (14,122) $ 5.64 - $ 5.64
---------
Outstanding at December 31, 1995 711,271 $ 2.00 - $ 13.49
========
In 1995, 1994 and 1993, the Company granted to a key executive 13,310,
24,200, and 22,000 shares, respectively, of the Company's common stock in
accordance with his compensation agreement. The agreement also provides for
the granting of an additional 29,282 shares through 1996, for which the
executive is entitled to receive stock and cash dividends.
13. REGULATORY MATTERS
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Under capital adequacy
guidelines, the Company must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors. Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios of total
and Tier I capital (primarily common stock and retained earnings less
goodwill) to risk-weighted assets, and of Tier I capital to average assets.
60
The Company meets all capital adequacy requirements to which it is subject
as of December 31, 1995. The Company is considered well capitalized. To be
categorized as well capitalized, the Company must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage (tangible Tier 1 capital
divided by average total assets) ratios.
The Company's actual capital ratios at December 31 are as follows:
WELL
CAPITALIZED ACTUAL
REQUIREMENT 1995 1994
Total Capital (to Risk Weighted Assets) 10.0 % 13.0 % 12.0 %
Tier I Capital (to Risk Weighted Assets) 6.0 % 11.8 % 10.8 %
Tier I Capital (to Average Assets) 5.0 % 8.0 % 7.5 %
In addition, California Banking Law limits the amount of dividends a bank
can pay without obtaining prior approval from bank regulators. Under this
law, the Bank could, as of December 31, 1995, declare and pay additional
dividends of approximately $3,278,000.
Banking regulations require that all banks maintain a percentage of their
deposits as reserves at the Federal Reserve Bank. On December 31, 1995, this
reserve requirement was approximately $16,684,000.
14. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEETS
(IN THOUSANDS)
1995 1994
Assets:
Investment in Chino Valley Bank $ 73,832 $ 59,566
Other assets, net 7,736 3,083
-------- --------
Total assets $ 81,568 $ 62,649
======== ========
Liabilities $ 3,308 $ 709
Stockholders' equity 78,260 61,940
-------- --------
Total liabilities and stockholders' equity $ 81,568 $ 62,649
======== ========
STATEMENTS OF EARNINGS
(IN THOUSANDS)
1995 1994 1993
Equity in earnings of Chino Valley Bank $ 11,632 $ 10,724 $ 9,935
Other expense, net (175) (289) (413)
--------- --------- ---------
Net earnings $ 11,457 $ 10,435 $ 9,522
========= ========= =========
61
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 11,457 $ 10,435 $ 9,522
-------- -------- ---------
Adjustments to reconcile net earnings to cash
(used in) provided by operating activities
Earnings of Chino Valley Bank (11,632) (10,724) (9,935)
Other operating activities, net (1,839) (1,088) 1,405
--------- -------- ---------
Total adjustments (13,471) (11,812) (8,530)
--------- -------- ---------
Net cash (used in) provided by operating
activities (2,014) (1,377) 992
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends received from Chino Valley Bank 4,296 18,619 6,098
Investment in subsidiaries (14,797) (4,693)
--------- -------- ---------
Net cash provided by operating activities 4,296 3,822 1,405
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends on common stock (2,597) (2,344) (2,111)
Proceeds from exercise of stock options 283 129 106
--------- -------- ---------
Net cash used in financing activities (2,314) (2,215) (2,005)
--------- -------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (32) 230 392
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 792 562 170
--------- -------- ---------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 760 $ 792 $ 562
========= ======== =========
62
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data follows:
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
1995 (IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
Net interest income $ 12,104 $ 11,643 $ 11,870 $ 12,524
Provision for credit losses 1,225 350 1,000
Net earnings 2,541 2,647 2,985 3,284
Earnings per common share 0.27 0.28 0.32 0.35
1994
Net interest income $ 9,424 $ 9,923 $ 11,644 $ 11,828
Provision for credit losses 50 100 200
Loss on sale of investment securities, net 128
Net earnings 2,221 2,430 2,899 2,885
Earnings per common share 0.24 0.26 0.32 0.31
16. FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to develop the estimates of fair value. Accordingly,
the estimates presented below are not necessarily indicative of the amounts
the Company could have realized in a current market exchange as of December
31, 1995 and 1994. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.
1995
CARRYING ESTIMATED
ASSETS AMOUNT FAIR VALUE
Cash and due from banks $ 104,886,440 $ 104,886,400
Federal funds sold 7,000,000 7,000,000
Investment securities held to maturity 24,272,507 25,031,133
Investment securities available for sale 260,373,597 260,373,597
Loans and lease finance receivables, net 496,448,905 496,956,000
LIABILITIES
Deposits:
Noninterest-bearing 332,851,336 332,851,336
Interest-bearing 470,722,517 471,475,000
Demand note to U.S. Treasury 6,738,465 6,738,465
Short-term borrowings 40,000,000 40,000,000
63
1994
CARRYING ESTIMATED
ASSETS AMOUNT FAIR VALUE
Cash and due from banks $ 94,828,593 $ 94,828,593
Federal funds sold 15,000,000 15,000,000
Investment securities held to maturity 19,018,218 18,073,355
Investment securities available for sale 173,248,095 173,248,095
Loans and lease finance receivables, net 484,617,731 466,828,000
LIABILITIES
Deposits:
Noninterest-bearing 327,807,389 327,807,389
Interest-bearing 434,816,532 434,034,000
Demand note to U.S. Treasury 6,429,970 6,429,970
The methods and assumptions used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value are
explained below:
For federal funds sold and cash and due from banks the carrying amount is
considered to be a reasonable estimate of fair value. For investment
securities, fair values are based on quoted market prices, dealer quotes
and prices obtained from an independent pricing service.
The carrying amount of loans and lease financing receivables is their
contractual amounts outstanding, reduced by deferred net loan origination
fees, and the allocable portion of the allowance for credit losses.
Variable rate loans are composed primarily of loans whose interest rates
float with changes in the prime interest rate. The carrying amount of
variable rate loans, other than such loans in nonaccrual status, is
considered to be their estimated fair value.
The fair value of fixed rate loans, other than such loans in nonaccrual
status, was estimated by discounting the remaining contractual cash flows
using the estimated current rate at which similar loans would be made to
borrowers with similar credit risk characteristics and for the same
remaining maturities, reduced by deferred net loan origination fees and
the allocable portion of the allowance for credit losses.
Accordingly, in determining the estimated current rate for discounting
purposes, no adjustment has been made for any change in borrowers' credit
risks since the origination of such loans. Rather, the allocable portion
of the allowance for credit losses is considered to provide for such
changes in estimating fair value.
The fair value of loans on nonaccrual status has not been specifically
estimated because it is not practicable to reasonably assess the credit
risk adjustment that would be applied in the market place for such loans.
As such, the estimated fair value of total loans at December 31, 1995 and
64
1994 includes the carrying amount of nonaccrual loans at each respective
date.
The amounts payable to depositors for demand, savings, money market
accounts, the demand note to the U.S. Treasury, and short-term borrowings
with the FHLB are considered to be stated at fair value. The fair value
of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1995 and 1994. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and,
therefore, current estimates of fair value may differ significantly from the
amounts presented above.
17. BUSINESS ACQUISITIONS
On November 3, 1995, the Board of Directors of the Company and Citizens
Commercial Trust and Savings Bank of Pasadena ("Citizens"), announced the
execution of a definitive agreement regarding the acquisition of Citizens by
the Bank.
The transaction is subject to appropriate regulatory approvals and approval
by the shareholders of Citizens. It is anticipated that the transaction will
close during the second quarter of 1996, with Citizens being merged into the
Bank.
On October 20, 1995, the Bank purchased the Victorville branch of Vineyard
National Bank ("VNB"). On June 24, 1994, the Company purchased Western
Industrial National Bank ("WINB") and contributed the assets and liabilities
of WINB to the Bank. In addition, the Bank assumed deposits and purchased
certain assets of a failed institution, Pioneer Bank ("PB"), as of July 8,
1994, from the Federal Deposit Insurance Corporation. The results of
operations since the dates of these acquisitions are included in the
accompanying consolidated statements of earnings. A summary of the
significant components of these transactions are as follows:
1995 1994
VNB WINB PB
Cash and cash equivalents $ 126,296 $ 16,594,750 $ 5,998,539
Fair value of other assets 1,155,703 36,375,489 17,505,877
Fair value of liabilities assumed (4,104,308) (44,150,079) (52,925,330)
Goodwill 5,976,578 1,300,000
------------- ------------- -------------
Consideration (received) paid $ (2,822,309) $ 14,796,738 $(28,120,914)
============= ============ =============
65
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CVB Financial Corp.
Ontario, California:
We have audited the accompanying consolidated balance sheets of CVB Financial
Corp. and subsidiaries, as of December 31, 1995 and 1994, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of CVB Financial
Corp.'s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CVB Financial Corp. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/S/Deloitte & Touche LLP
Deloitte & Touche LLP
January 26, 1996
Los Angeles, California
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as hereinafter noted, the information concerning directors and
executive officers of the Company is incorporated by reference from the section
entitled "DIRECTORS AND EXECUTIVE OFFICERS - Election of Directors" and
"COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934" of the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year. For information
concerning executive officers of the Company, see "Item 4(A). EXECUTIVE OFFICERS
OF THE REGISTRANT" above.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning management remuneration and transactions is
incorporated by reference from the section entitled "DIRECTORS AND EXECUTIVE
OFFICERS -Compensation of Executive Officers and Directors - Executive
Compensation, - Employment Agreements and Termination of Employment
Arrangements, - Stock Options, - Option Exercises and Holdings and -
Compensation Committee Interlocks and Insider Participation" of the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated by reference from the sections entitled "INTRODUCTION
- -Principal Shareholders" and "DIRECTORS AND EXECUTIVE OFFICERS - Election of
Directors" of the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
management and others is incorporated by reference from the section entitled
"DIRECTORS AND EXECUTIVE OFFICERS--Certain Transactions" of the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the end of the last fiscal year.
67
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
Financial Statements
Reference is made to the Index to Financial Statements at page 43 for a
list of financial statements filed as part of this Report.
Exhibits
See Index to Exhibits at Page 71 of this Form 10-K.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following compensation plans and arrangements are filed as exhibits to this
Form 10-K: 1981 Stock Option Plan, Exhibit 10.1; Agreement by and among D. Linn
Wiley, CVB Financial Corp. and Chino Valley Bank dated August 8, 1991, Exhibit
10.2; Chino Valley Bank Profit Sharing Plan, Exhibit 10.3; 1991 Stock Option
Plan, Exhibit 10.17; Severance Agreement between John Cavallucci, Chino Valley
Bank and CVB Financial Corp. dated March 26, 1991 and Waiver Agreement dated
October 4, 1991, Exhibit 10.18; Key Employee Stock Grant Plan, Exhibit 10.19.
See Index to Exhibits at Page 71 to this Form 10-K.
REPORTS ON FORM 8-K
None
UNDERTAKING FOR REGISTRATION STATEMENT ON FORM S-8
For the purpose of complying with the amendments to the rules governing Form S-8
(effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statement on Form S-8 No. 2-76121
(filed February 18, 1982): Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
68
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 27th day of March,
1996.
CVB FINANCIAL CORP.
(Registrant)
By
/S/D.Linn Wiley
D. LINN WILEY
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
Signature Title Date
/S/George A. Borba Chairman of the Board March 27, 1996
George A. Borba
/S/John A. Borba Director March 27, 1996
John A. Borba
/S/Ronald O. Kruse Director March 27, 1996
Ronald O. Kruse
/S/John J. LoPorto Director March 27, 1996
John J. LoPorto
/S/Charles M. Magistro Director March 27, 1996
Charles M. Magistro
/S/John Vander Schaaf Director March 27, 1996
John Vander Schaaf
/S/Robert J. Schurheck Chief Financial Officer March 27, 1996
Robert J. Schurheck (Principal Financial
and Accounting Officer)
/S/D. Linn Wiley Director, President and March 27, 1996
D. Linn Wiley Chief Executive Officer
(Principal Executive Officer)
70
INDEX TO EXHIBITS
Exhibit No. Page
3.1 Articles of Company, as amended.(1) *
3.2 Bylaws of Company, as amended.(2) *
10.1 1981 Stock Option Plan, as amended.(1) *
10.2 Agreement by and among D. Linn Wiley, CVB
Financial Corp. and Chino Valley Bank dated
August 8, 1991.(2) *
10.3 Chino Valley Bank Profit Sharing Plan, as amended.(3) *
10.4 Definitive Agreement by and between CVB Financial
Corp. and Huntington Bank dated January 6, 1987.(4) *
10.5 Transam One Shopping Center Lease dated May 20, 1986,
by and between Transam One and Chino Valley Bank for
the East Chino Office.(4) *
10.6 Sublease dated November 1, 1986, by and between
Eldorado Bank and Chino Valley Bank for the East
Highland Office.(4) *
10.7 Lease Assignment, Acceptance and Assumption and
Consent dated December 23, 1986, executed by the
FDIC, Receiver of Independent National Bank, Covina,
California, as Assignor, Chino Valley Bank, as
Assignee, and INB Bancorp, as Landlord under that
certain Ground Lease dated September 30, 1983 by and
between INB Bancorp and Independent National Bank for
the Covina Office.(4) *
10.8 Lease Assignment dated May 15, 1987 and Consent of
Lessor dated April 21, 1987 executed by Huntington
Bank, as Assignor, Chino Valley Bank as Assignee and
Gerald G. Myers and Lynn H. Myers as Lessors under
that certain lease dated March 1, 1979 between
Lessors and Huntington Bank for the Arcadia Office.(5) *
10.9 Lease Assignment dated May 15, 1987 and Consent of
Lessor dated March 18, 1987 executed by Huntington
Bank, as Assignor, Chino Valley Bank as Assignee and
George R. Meeker as Lessor under that certain
Memorandum of Lease dated May 1, 1982 between Lessor
and Huntington Bank for the South Arcadia Office.(5) *
10.10 Lease Assignment dated May 15, 1987 and Consent of
Lessor dated March 17, 1987 executed by Huntington
Bank, as Assignor, Chino Valley Bank as Assignee
and William R. Hayden and Marie Virginia Hayden as
Lessor under that Certain Lease and Sublease, dated
March 1, 1983, as amended, between Lessors and
Huntington Bank for the San Gabriel Office.(5) *
71
10.11 Lease Assignment dated May 15, 1987 executed by
Huntington Bank as Assignor and Chino Valley
Bank as Assignee under that certain Shopping
Center Lease dated June 1, 1982, between Anita
Associates, a limited partnership and Huntington
Bank for the Santa Anita ATM Branch.(5) *
10.12 Office Building Lease between Havenpointe Partners
Ltd. and CVB Financial Corp. dated April 14, 1987
for the Ontario Airport Office.(5) *
10.13 Form of Indemnification Agreement.(7) *
10.14 Office Building Lease between Chicago Financial
Association I, a California Limited Partnership and
CVB Financial Corp. dated October 17, 1989, as
amended, for the Riverside Branch.(1) *
10.15 Office Building Lease between Lobel Financial
Corporation and Chino Valley Bank dated June 12,
1990, for the Premier Results data processing center.(3) *
10.16 Office Space Lease between Rancon Realty Fund IV
and Chino Valley Bank dated September 6, 1990, for
the Tri-City Business Center Branch.(3) *
10.17 1991 Stock Option Plan.(6) *
10.18 Severance Agreement between John Cavallucci, Chino Valley
Bank and CVB Financial Corp. dated March 26, 1991 and
Waiver Agreement dated October 4, 1991.(2) *
10.19 Key Employee Stock Grant Plan.(8) *
10.20 Lease by and between Allan G. Millew and William F.
Kragness and Chino Valley Bank dated March 5, 1993
for the Fontana Office. (9) *
10.21 Office Lease by and between Mulberry Properties
and Chino Valley Bank dated October 12, 1992. (9) *
10.22 First Amended and Restated Agreement and Plan of
Reorganization by and between CVB Financial Corp.,
Chino Valley Bank and Fontana First National Bank,
dated October 8, 1992 (11) *
10.23 Purchase and Assumption Agreement among FDIC
receiver of Mid City Bank, National Association, FDIC
and Chino Valley Bank, dated October 21, 1993 (10) *
10.24 Agreement and Plan of Reorganization by and between
CVB Financial Corp., Chino Valley Bank and Western
Industrial National Bank, dated November 16, 1993 (11) *
72
10.24.1 Amendment No. 1 to Agreement and Plan of Reorganization
by and between CVB Financial Corp., Chino Valley Bank
and Western Industrial National Bank dated
February 14, 1994. (12) *
10.24.2 Amendment No. 2 to Agreement and Plan of Reorganization
by and between CVB Financial Corp., Chino Valley Bank
and Western Industrial National Bank dated June 23,
1994.(12) *
10.25 Lease by and between Bank of America and Chino Valley
Bank dated October 15, 1993, for the West Arcadia
Office.(11) *
10.26 Lease be and between RCI Loring and CVB Financial Corp
dated March 11, 1993, for the Riverside Office. (11) *
10.27 Lease by and between 110 Wilshire Building Partners, a
California Partnership and Chino Valley Bank dated
October 21, 1994 for the Fullerton Office (13) *
10.28 Agreement and Plan of Reorganization between
Chino Valley Bank, CVB Financial Corp. and Citizens
Commercial Trust & Savings Bank of Pasadena,
dated November 1, 1995. (14) *
22 Subsidiaries of Company. (9) *
23 Consent of Independent Certified Public Accountants. 75
27 Financial Data Schedule 76
*Not applicable.
(1) Filed as Exhibits 3.1, 10.1 and 10.14 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1989,
Commission file number 1-10394, which are incorporated herein by
this reference.
(2) Filed as Exhibits 3.2, 10.2 and 10.18 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991, Commission file number 1-10394, which are
incorporated herein by this reference.
(3) Filed as Exhibits 10.3, 10.15 and 10.16 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1990, Commission file number 1-10394, which are
incorporated herein by this reference.
(4) Filed as Exhibits 10.4, 10.5, 10.6 and 10.7 to Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1986, Commission file number 1-10394, which
are incorporated herein by this reference.
73
(5) Filed as Exhibits 10.8, 10.9, 10.10, 10.11 and 10.12 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1987, Commission file number 1-
10394, which are incorporated herein by this reference.
(6) Filed as Exhibit 4.1 to Registrant's Registration Statement on
Form S-8 (33-41318) filed with the Commission on June 21,
1991, which is incorporated herein by this reference.
(7) Filed as Exhibit 10.13 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988,
Commission file number 1-10394, which is incorporated
herein by this reference.
(8) Filed as Exhibit 4.1 to Registrant's Registration Statement on
Form S-8 (33-50442) filed with the Commission on August 1,
1992, which is incorporated herein by this reference.
(9) Filed as Exhibit 10.20, 10.21 and 22 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1992, Commission file number 1-10394, which are incorporated
herein by this reference.
(10) Filed as Exhibit 99 to the Registrant's Current Report on
Form 8-K filed with the Commission on November 4, 1993,
which is incorporated herein by this reference.
(11) Filed as Exhibit 10.22, 10.24, 10.25 and 10.26 to Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1993, Commission file number 1-10394, which are incorporated
herein by this reference.
(12) Filed as Exhibit 10.24.1 and 10.24.2 to the Registrant's
current report on Form 8-K filed with the Commission on
July 8, 1994, which are incorporated herein by this reference.
(13) Filed as Exhibit 10.27 to the Registrants Annual Report on Form 10-K
for the fiscal year ended December 31, 1994, Commission file number 1-
10394, which is incorporated herein by this reference.
(14) Filed as Exhibit 10.28 to the Registrants Quarterly report on Form
10-Q filed with the Commission on November 13, 1995 which is
incorporated herein by this reference.
74
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the 1981 Stock Option Plan
Registration Statement No. 2-76121 on Form S-8, the 1991 Stock Option Plan
Registration Statement No. 33-41318 on Form S-8 and the Key Employee Stock Grant
Plan Registration Statement No. 33-50442 on Form S-8 of our report dated January
26, 1996, appearing on page 66 in this Annual Report on Form 10-K of CVB
Financial Corp. for the fiscal year ended December 31, 1995.
/S/Deloitte & Touche LLP
Deloitte & Touche LLP
March 27, 1996
Los Angeles, California
75