Back to GetFilings.com
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.
1
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
2
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.
3
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
4
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
5
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,
7
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
9
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
10
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
11
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%.
12
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
------------------------------------------