SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FROM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
March 29, 1996
CVB Financial Corp.
(Exact name of registrant as specified in its charter)
CALIFORNIA
(State or other jurisdiction of incorporation)
1-10394
(Commission File Number)
95-3629339
(IRS Employer Identification No.)
701 North Haven Avenue, Suite 350, Ontario, California 91764
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(909) 980-4030
Not Applicable
(Former name or former address, if changed since last report)
THIS REPORT INCLUDES A TOTAL OF 32 PAGES
EXHIBIT INDEX ON PAGE 30
1
Item 1. Changes in Control of Registrant.
None.
Item 2. Acquisition or Disposition of Assets.
On March 29, 1996, CVB Financial Corp. (the
"Company"), acquired Citizens Commercial Trust and
Savings Bank of Pasadena, by merger into Chino
Valley Bank, the Company's wholly owned subsidiary
pursuant to the Agreement and Plan of Reorganization
(the "Agreement"), dated as of November 1, 1995, among
Chino Valley Bank, CVB Financial Corp. and Citizens
Commercial Trust and Savings Bank of Pasadena. Pursuant
to the Agreement, the purchase price was $18,322,106.03,
and the funds used to consummate the acquisition were
derived from cash on hand.
Item 3. Bankruptcy or Receivership.
None.
Item 4. Changes in Registrant's Certifying Accountant.
None.
Item 5. Other Events.
None.
Item 6. Resignations of Registrant's Directors.
None.
2
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
Index to Financial Statements Page
Independent Auditors' Report 4
Balance Sheets December 31, 1995 and 1994 5
Statements of Income
Years Ended December 31, 1995 and 1994 6
Statement of Shareholders' Equity
Years Ended December 31, 1995 and 1994 7
Statements of Cash Flows
Years Ended December 31, 1995 and 1994 8
Notes to Financial Statements 9
3
Independent Auditor's Report
To the Board of Directors
Citizens Commercial Trust and
Savings Bank of Pasadena
Pasadena, California
We have audited the accompanying balance sheets of Citizens Commercial Trust
and Savings Bank of Pasadena as of December 31, 1995 and 1994, and the related
statements of income, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Citizens Commercial Trust and
Savings Bank of Pasadena as of December 31, 1995 and 1994, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The stockholders of the Bank have entered into an agreement to sell the Bank to
Chino Valley Bank. See Note 16.
/S/McGladrey & Pullen, LLP
- --------------------------
McGladrey & Pullen, LLP
Pasadena, California
January 12, 1996
4
CITIZENS COMMERCIAL TRUST AND SAVINGS BANK OF PASADENA
BALANCE SHEETS
December 31, 1995 and 1994
ASSETS 1995 1994
Cash and due from banks (Note 2) $ 13,800,381 $ 8,517,255
Federal funds sold 16,120,000 3,550,000
-----------------------------
Total cash and cash equivalents 29,920,381 12,067,255
Securities (Note 3):
Held to maturity 10,458,535 47,071,729
Available for sale 37,382,433 8,937,501
Loans, net (Notes 4, 5 and 11) 61,354,370 63,270,813
Property and equipment, net (Note 6) 2,782,312 2,974,037
Accrued interest receivable 1,298,394 1,267,134
Other assets (Note 9) 3,094,727 2,843,714
-----------------------------
$ 146,291,152 $ 138,432,183
=============================
Liabilities and Stockholders' EQUITY
Liabilities:
Deposits (Note 7):
Demand $ 55,635,066 $ 41,637,449
Savings and NOW 59,606,499 70,254,874
Other time 12,112,742 9,812,632
-----------------------------
Total deposits 127,354,307 121,704,955
Deferred compensation (Note 8) 2,350,973 2,239,825
Accrued interest payable and other liabilities 839,550 527,087
-----------------------------
130,544,830 124,471,867
-----------------------------
Commitments and Contingencies (Notes 8, 10 and 16)
Stockholders' equity (Notes 13 and 16):
Common stock, no par value; authorized 100,000 shares;
issued 9,000 shares 900,000 900,000
Surplus 567,800 567,800
Retained earnings 14,223,772 12,615,134
Unrealized gain (loss) on securities available for sale,
net (Note 3) 54,750 (122,618)
-----------------------------
15,746,322 13,960,316
-----------------------------
$ 146,291,152 $ 138,432,183
=============================
See Notes to Financial Statements.
5
CITIZENS COMMERCIAL TRUST AND SAVINGS BANK OF PASADENA
STATEMENTS OF INCOME
Years Ended December 31, 1995 and 1994
1995 1994
Interest and fees on loans $ 6,612,236 $ 5,884,919
Interest on investment securities and deposits in other
financial institutions 2,769,776 2,710,234
Interest on federal funds sold 173,346 237,659
------------------------
9,555,358 8,832,812
Interest expense on deposits 1,658,951 1,622,135
------------------------
Net interest income 7,896,407 7,210,677
Provision for loan losses (Note 5) 35,000 75,250
------------------------
Net interest income after provision for loan losses 7,861,407 7,135,427
------------------------
Other income:
Trust income 3,028,628 3,006,707
Service fees 911,735 835,817
Gain on sale of loans 589,776 16,702
Securities (losses) (Note 3) (81,162) (46,869)
Other 431,921 109,907
------------------------
4,880,898 3,922,264
Other expenses:
Compensation and benefits (Note 12) 5,567,771 5,560,445
Occupancy expenses (Note 10) 748,964 761,885
Other operating expenses 3,490,932 3,398,480
------------------------
9,807,667 9,720,810
------------------------
Income before income taxes 2,934,638 1,336,881
Provision for income taxes (Note 9) 1,200,000 600,000
------------------------
Net income $ 1,734,638 $ 736,881
========================
Net income per common share $ 192.74 $ 81.97
========================
See Notes to Financial Statements.
6
CITIZENS COMMERCIAL TRUST AND SAVINGS BANK OF PASADENA
STATEMENTS OF STOCKHOLDERS' EQUITY
December 31, 1995 and 1994
Unrealized
Gain(Loss)
On Securities
Common Retained Available Treasury
Stock Surplus Earnings for Sale Stock Total
Balance,
December 31, 1993 $ 900,000 $ 567,800 $ 11,950,173 $ - $ (10,000) $ 13,407,973
Net income - - 736,881 - - 736,881
Cash dividend, $8 per
share - - (71,920) - - (71,920)
Net change in
unrealized (loss) on
securities available
for sale (Note 3) - - - (122,618) - (122,618)
Sale of treasury stock - - - - 10,000 10,000
-----------------------------------------------------------------------
Balance,
December 31, 1994 900,000 567,800 12,615,134 (122,618) - 13,960,316
Net income - - 1,734,638 - - 1,734,638
Cash dividend, $14 per
share - - (126,000) - - (126,000)
Net change in
unrealized gain on
securities available
for sale (Note 3) - - - 177,368 - 177,368
----------------------------------------------------------------------
Balance,
December 31, 1995 $ 900,000 $ 567,800 $ 14,223,772 $ 54,750 $ - $ 15,746,322
=======================================================================
See Notes to Financial Statements.
7
CITIZENS COMMERCIAL TRUST AND SAVINGS BANK OF PASADENA
STATEMENTS OF CASH FLOWS
December 31, 1995 and 1994
1995 1994
Cash Flows from Operating Activities
Net income $ 1,734,638 $ 736,881
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 329,034 279,165
Amortization of discounts and premiums 83,058 457,504
Gain on sale of loans (589,776) (16,702)
Loss on sale of securities 81,162 46,869
Deferred taxes (145,017) (139,449)
Provision for possible loan losses 35,000 75,250
Proceeds from loan sales 7,975,013 324,103
(Gain) loss on disposition of equipment 13,319 (7,047)
(Increase) in interest receivable and other assets (877,341) (494,826)
(Gain) on sale of other real estate owned (48,799) -
Origination of loans held for sale (7,385,237) (307,401)
Increase (decrease) in deferred compensation 111,148 (113,290)
Increase in accrued interest and other liabilities 271,744 168,582
--------------------------
Net cash provided by operating activities 1,587,946 1,009,639
--------------------------
Cash Flows from Investing Activities
Securities available for sale:
Proceeds from sales 12,930,836 9,974,553
Proceeds from maturities or redemptions 3,500,000 11,000,000
Purchases (22,683,426) (18,210,342)
Proceeds from principal reduction of mortgage-backed securities 338,476 377,693
Securities held to maturity:
Proceeds from maturities or redemptions 20,198,043 29,699,670
Purchases (6,251,193) (30,095,188)
Proceeds from principal reduction of mortgage-backed securities 289,376 193,320
Net (increase) decrease in loans to customers 2,208,986 (4,617,942)
Purchase from sale of equipment (297,069) (505,419)
Proceeds from sale of equipment 63,000 24,900
Proceeds from the sale of other real estate 444,799 -
--------------------------
Net cash provided by (used in) investing activities 10,741,828 (2,158,755)
Cash Flows from Financing Activities
Net increase (decrease) in deposits 5,649,352 (8,159,905)
Dividends paid (126,000) (71,920)
Sale of treasury stock - 10,000
--------------------------
Net cash provided by (used in) financing activities 5,523,352 (8,221,825)
--------------------------
Net increase (decrease) in cash and cash equivalents 17,853,126 (9,370,941)
Cash and Cash Equivalents
Beginning 12,067,255 21,438,196
--------------------------
Ending $ 29,920,381 $ 12,067,255
==========================
See Notes to Financial Statements
8
Note 1. Nature of Banking Activities and Significant Accounting Policies
Nature of business
Citizens Commercial Trust and Savings Bank of Pasadena (the Bank) is a
California state chartered bank formed in 1912. The Bank grants commercial, real
estate and installment loans to customers primarily in the greater Pasadena
area, with offices in Pasadena, San Marino and La Canada. In addition, the Bank
offers trust services.
The loans are expected to be repaid from cash flows or proceeds from the sale of
selected assets of the borrowers. The Bank's policy requires that collateral be
obtained on substantially all loans.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and cash equivalents
For purposes of reporting cash flows, cash and due from banks includes cash on
hand, amounts due from banks (including cash items in the process of clearing)
and federal funds sold. Cash flows from loans originated by the Bank and
deposits are reported net. The Bank maintains amounts due from banks which at
times may exceed federally insured limits. In addition, the Bank has uninsured
federal funds sold with three financial institutions. The Bank has not
experienced any losses in such accounts.
Held-to-maturity securities
Securities classified as held to maturity are those debt securities the Bank has
both the intent and ability to hold to maturity regardless of changes in market
conditions, liquidity needs or changes in general economic conditions. These
securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over their contractual
lives. The sale of a security within three months of its maturity date or after
at least 85% of the principal outstanding has been collected is considered a
maturity for purposes of classification and disclosure.
9
Available-for-sale securities
Securities classified as available for sale are those debt securities that the
Bank intends to hold for an indefinite period of time but not necessarily to
maturity. Any decision to sell a security classified as available for sale would
be based on various factors, including significant movements in interest rates,
changes in the maturity mix of the Bank's assets and liabilities, liquidity
needs, regulatory capital considerations and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains or losses, net of
the related deferred tax effect, are reported as increases or decreases in
stockholders' equity. Realized gains or losses, determined on the basis of the
cost of specific securities sold, are included in earnings.
Transfers
Transfers of debt securities into the held-to-maturity classification from the
available-for-sale classification are made at fair value on the date of
transfer. The unrealized holding gains or losses on the date of transfer are
retained as a separate component of stockholders' equity and in the carrying
value of the held-to-maturity securities. Such amounts are amortized over the
remaining contractual lives of the securities by the interest method.
Loans
Loans are stated at the amount of unpaid principal, reduced by unearned fees and
an allowance for loan losses.
The allowance for loan losses is maintained at a level considered adequate to
provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net
charge-offs. The Bank makes continuous credit reviews of the loan portfolio
and considers current economic conditions, historical loan loss experience,
review of specific problem loans and other factors in determining the
adequacy of the allowance. Management believes that the allowance for loan
losses is adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, review the allowance for loan
losses. These agencies may require additions to the allowance based on their
judgment about information available at the time of their examination.
Impaired loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
10
probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement.
Interest and fees on loans
Interest on loans is accrued daily on the outstanding balances. Accrual of
interest on impaired loans is discontinued when, in management's opinion, the
borrower may be unable to meet payments as they become due. When interest
accrual is discontinued, all unpaid accrued interest is reversed. Interest
income is subsequently recognized only to the extent cash payments are received.
Loan origination fees and certain direct loan origination costs are being
deferred with the net amount amortized as an adjustment of the related loan's
yield. The Bank is generally amortizing these amounts over the contractual life
of the loan.
Sale of loans
From time to time, the Bank sells the guaranteed portion of Small Business loans
in the secondary market to provide funds for additional lending and to generate
servicing income. Under such agreements, the Bank continues to service the loans
and the buyer receives the principal collected together with interest.
Gains and losses on sales of loans are calculated on a predetermined formula in
compliance with Emerging Issues Task Force 88-11, based on the difference
between the selling price and the book value of the loans sold. A portion is
recognized approximately 90 days after the sale (after the expiration of a
guarantee period) and the remainder is deferred and recognized over the term of
the loan. Any inherent risk of loss on loans sold is transferred to the buyer at
the date of sale on the portion of the loan sold. However, the Bank maintains
the risk on the portion maintained.
The Bank has issued various representations and warranties associated with the
sale of loans. These representations and warranties may require the Bank to
repurchase loans for a period of 90 days after the date of sale as defined per
the applicable sales agreement. The Bank experienced no losses during the years
ended December 31, 1995 and 1994 regarding these representations and warranties.
Trust assets
Assets of the Trust Department, other than cash on deposit at the Bank, are not
included in these financial statements because they are not assets of the Bank.
11
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation of equipment is computed on the straight-line method over the
estimated useful lives of the assets.
Years
Buildings 30 - 50
Building improvements 10 - 25
Furniture and fixtures 5 - 20
Improvements to leased property are amortized over the lesser of the useful life
of the improvements or the life of the lease.
Income taxes
Deferred taxes are provided on an asset and liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards. Deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Financial instruments
In the ordinary course of business, the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit, commercial
letters of credit and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded.
Current accounting developments
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-lived Assets and for Long-lived Assets to be Disposed of. Statement
No. 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. Statement No. 121 will first be required for the
Bank's year ending December 31, 1996. Based on its preliminary analysis, the
12
Bank does not anticipate that the adoption of Statement No. 121 will have a
material impact on the financial statements as of the date of adoption.
Fair Value of Financial Instruments
Effective January 1, 1995, the Bank adopted FASB Statement No. 107, Disclosures
about Fair Value of Financial Instruments, which requires disclosure of fair
value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value.
Management uses its best judgment in estimating the fair value of the Bank's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates presented herein are not necessarily indicative of the amounts
the Bank could have realized in a sales transaction at December 31, 1995. The
estimated fair value amounts for 1995 have been measured as of the year end and
have not been reevaluated or updated for purposes of these financial statements
subsequent to that date. As such, the estimated fair values of these financial
instruments subsequent to the reporting date may be different than the amounts
reported at year end.
The information in Note 15 should not be interpreted as an estimate of the fair
value of the entire Bank since a fair value calculation is only required for a
limited portion of the Bank's assets.
Due to the wide range of valuation techniques and the degree of subjectivity
used in making the estimate, comparisons between the Bank's disclosures and
those of other banks may not be meaningful.
The following methods and assumptions were used by the Bank in estimating the
fair value of its financial instruments:
Cash and short-term instruments
The carrying amounts reported in the balance sheets for cash and due from banks
and federal funds sold approximate their fair values.
Securities
Fair values for securities are based on quoted market prices.
Loans
For variable rate loans that reprice frequently and have experienced no
significant change in credit risk, fair values are based on carrying values. At
13
December 31, 1995, variable rate loans comprised approximately 49% of the loan
portfolio. Fair values for all other loans are estimated based on discounted
cash flows, using interest rates currently being offered for loans with similar
terms to borrowers with similar credit quality. Prepayments prior to the
repricing date are not expected to be significant. Loans are expected to be held
to maturity and any unrealized gains or losses are not expected to be realized.
Loans held for sale
Fair values are based on quoted market prices of similar loans sold on the
secondary market.
Off-balance-sheet instruments
Fair values for off-balance-sheet instruments (guarantees, letters of credit and
lending commitments) are based on quoted fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing.
Deposit liabilities
Fair values disclosed for demand deposits equal their carrying amounts which
represents the amount payable on demand. The carrying amounts for variable rate
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregate expected
monthly maturities on time deposits. Early withdrawals of fixed rate
certificates of deposit are not expected to be significant.
Accrued interest receivable and payable
The fair values of both accrued interest receivable and payable approximate
their carrying amounts.
Net income per common share
Net income per common share is calculated on the weighted average number of
shares outstanding during the year. The weighted number of shares outstanding
was 9,000 and 8,990 for 1995 and 1994, respectively.
Other off-balance-sheet instruments
In the ordinary course of business, the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit, commercial
letters of credit and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related fees are
incurred or received.
14
Note 2. Restrictions on Cash and Due from Banks
The Bank is required to maintain reserve balances in cash or on deposit with
Federal Reserve banks. The total of those reserve balances was approximately
$1,480,000 as of December 31, 1995.
Note 3. Securities
Carrying amounts and fair values of securities being held to maturity as of
December 31, 1995 and 1994 are summarized as follows:
1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Corporate notes and bonds $ 4,604,010 $ 70,365 $ - $ 4,674,375
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies 5,009,078 26,552 - 5,035,630
Obligations of state and
political subdivisions 845,447 32,958 (898) 877,507
---------------------------------------------------
$ 10,458,535 $ 129,875 $ (898) $ 10,587,512
===================================================
1994
Gross Gross
Amortized Unrealiz Unrealized Fair
Cost Gains Losses Value
Corporate notes and bonds $ 2,458,057 $ - $ (58,442) $ 2,399,615
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies 40,223,664 - (886,723) 39,336,941
Obligations of state and
political subdivisions 856,262 21,569 - 877,831
Mortgage-backed
securities 3,533,746 - (192,826) 3,340,920
---------------------------------------------------
$ 47,071,729 $ 21,569 $(1,137,991) $ 45,955,307
===================================================
The Bank's securities held to maturity which have a market value of $5,035,630
and $10,074,943 at December 31, 1995 and 1994, respectively, were pledged as
collateral to secure public deposits, trust requirements and for other purposes
as required or permitted by law.
15
Carrying amounts and fair values of available-for-sale securities as of December
31, 1995 and 1994 are summarized as follows:
1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $ 30,772,487 $ 94,060 $ (32,926) $ 30,833,621
Mortgage-backed
securities 3,251,241 32,878 (3,251) 3,280,868
SBA loan pools 3,267,455 17,164 (16,675) 3,267,944
---------------------------------------------------
$ 37,291,183 $ 144,102 $ (52,852) $ 37,382,433
===================================================
1994
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $ 9,141,864 $ - $ (204,363) $ 8,937,501
===================================================
The amortized cost and fair value of investment securities as of December 31,
1995 by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers have the right to call or prepay
obligations with or without call or prepayment penalties.
Held to Maturity Available for Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
Due in one year or less $ 1,399,305 $ 1,403,615 $ 6,108,703 $ 6,104,658
Due after one through
five years 8,944,230 9,064,451 27,473,317 27,563,583
Due after five through
ten years 115,000 119,446 582,963 586,942
Due after ten years - - 3,126,200 3,127,250
----------------------------------------------------
$ 10,458,535 $ 10,587,512 $ 37,291,183 $ 37,382,433
====================================================
16
Gross realized gains and losses from the sale of available-for-sale securities
for the years ended December 31, 1995 and 1994 are as follows:
1995 1994
Realized gains $ 98,444 $ 3,339
======================
Realized (losses) $ (179,606) $ (50,208)
======================
On December 1, 1995, the Bank reassessed the appropriateness of the
classification of all securities in accordance with the issuance of Financial
Accounting Standards Board Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities. As a result,
on December 1, 1995 the Bank transferred $22,365,027 (fair value) of securities
previously classified as held to maturity into available-for-sale securities and
recorded an unrealized holding gain of $56,949 accordingly.
Note 4. Loans
The composition of net loans is as follows:
December 31,
1995 1994
Commercial, including $1,255,000 loans held for sale in 1995 $ 13,439,473 $ 13,306,884
Real Estate 42,347,321 44,218,942
Installment 6,530,268 6,698,485
--------------------------
62,317,062 64,224,311
Deduct:
Allowance for loan losses 660,625 673,888
Deferred loan fees 302,067 279,610
--------------------------
$ 61,354,370 $ 63,270,813
=========================
On January 1, 1995, the Bank adopted FASB Statement No. 114, Accounting by
Creditors for Impairment of a Loan, as amended by FASB Statement No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. There was no effect on the Bank's financial statements for this
change. At December 31, 1995 and January 1, 1995, the Bank has classified
$97,000 and $23,000 of its loans as impaired with specific loss reserves of
$49,000 and $11,700, respectively. There were no impaired loans without a
specific reserve.
As of December 31, 1995 and 1994, the Bank had loans in the amount of $350,732
and $651,251, respectively, for which income was not currently being accrued
due to the delinquent status. Interest income which would have been earned on
these nonaccrual loans was approximately $4,900 and $45,700 for the years ended
December 31, 1995 and 1994, respectively.
17
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
SBA loans serviced
The Bank serviced approximately $1,787,000 and $1,825,000 of loans for the SBA
as of December 31, 1995 and 1994, respectively, which are not included in the
accompanying balance sheets.
Note 5. Allowances for Loan Losses
Changes in the allowance for loan losses are as follows:
December 31,
1995 1994
Balance, beginning $ 673,888 $ 632,915
Provision charged to operating expenses 35,000 75,250
Recoveries of amounts charged off 165,065 3,383
Amounts charged off (213,328) (37,660)
-------------------------
Balance, ending $ 660,625 $ 673,888
=========================
Note 6. Property and Equipment
Property and equipment and the total accumulated depreciation are as follows:
December 31,
1995 1994
Land $ 786,040 $ 861,040
Buildings 954,666 954,666
Building improvements 971,411 980,780
Furniture and equipment 4,008,634 3,922,974
Construction in progress - 11,162
-------------------------
6,720,751 6,730,622
Less accumulated depreciation 3,938,439 3,756,585
-------------------------
$ 2,782,312 $ 2,974,037
=========================
Note 7. Deposits
The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of $100,000, was approximately $3,312,000 and $3,175,000 in
1995 and 1994, respectively. Substantially all of these certificates of deposit
mature within three months.
The Bank has a deposit concentration with one customer totaling approximately
$16,900,000 at December 31, 1995.
Note 8. Deferred Compensation Plans
The Bank has deferred compensation and salary continuation agreements with key
employees calling for periodic payments totaling $2,700,000 at the retirement or
18
death of the employees. The normal retirement dates occur through the year 2021.
The liability has been accrued each year using the present value method with
interest factors of 7%. The accrued liability at December 31, 1995 and 1994
amounted to $2,053,458 and $1,914,664, respectively. The Bank has purchased life
insurance policies which it intends to use to fund this liability. Benefits paid
to retirees amounted to approximately $169,500 for each of the years ended
December 31, 1995 and 1994.
The Bank also has a death benefit program for certain key employees where the
Bank will provide death benefits to the employee in the event of death: 1) while
employed by the Bank; 2) after termination of employment for total and permanent
disability; 3) after retirement, if retirement occurred after age 65. Payments
are to be paid to the employee's beneficiaries over a ten-year period in equal
installments. The Bank has purchased life insurance policies to fund any future
liability. The accrued liability at December 31, 1995 and 1994 for known death
benefits amounted to $250,819 and $275,318, respectively. The liability has been
accrued using the present value method with an interest factor of 7%. Amounts
paid for the benefit of retirees amounted to $51,488 for each of the years ended
December 31, 1995 and 1994.
Note 9. Income Tax Matters
The provision for income taxes consisted of:
December 31,
1995 1994
Current:
Federal $ 994,114 $ 475,015
State 350,904 182,067
--------------------------
1,345,018 657,082
--------------------------
Deferred:
Federal (131,113) (38,015)
State (13,905) (19,067)
--------------------------
(145,018) (57,082)
--------------------------
$ 1,200,000 $ 600,000
==========================
19
The provision for income taxes is different from that which would be obtained by
applying the statutory federal income tax rate (35%) to income before taxes due
to the following:
December 31,
1995 1994
Tax based on the federal statutory rate $ 1,027,124 $ 467,908
Nontaxable interest income (19,813) (18,879)
Life insurance expense 36,206 47,700
State franchise tax expense net of federal tax benefit 222,420 99,671
Other, net (65,937) 3,600
-----------------------
$ 1,200,000 $ 600,000
=======================
Net deferred tax assets consist of the following at December 31:
1995 1994
Deferred tax assets:
Capitalization costs $ 137,000 $ -
Allowance for loan losses 213,000 201,100
Deferred compensation 983,000 1,009,600
Unrealized loss on securities available for sale - 81,745
Other - 3,529
State taxes 120,000 60,820
------------------------
Total deferred tax assets 1,453,000 1,356,794
------------------------
Deferred tax liabilities:
Property and equipment (55,713) (22,780)
Unrealized gain on securities available for sale (36,501) -
------------------------
Total deferred tax liabilities (92,214) (22,780)
------------------------
Net deferred tax assets $ 1,360,786 $ 1,334,014
========================
At December 31, 1995, no valuation reserve was considered necessary as
management believes it is more likely than not the deferred tax assets will be
realized. The amount of deferred tax asset considered realizable, however, could
be reduced in the near term if estimates of future taxable income are reduced.
These temporary differences reverse through the year 2001. Realization of
deferred tax assets is dependent upon sufficient future taxable income during
the period that deductible temporary differences are expected to be available to
reduce taxable income.
20
Note 10. Commitments and Contingencies
Financial instruments with off-balance-sheet risk
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. They involve, to varying degrees, elements of credit risk in excess
of amounts recognized on the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by other
parties to the financial instrument for these commitments is represented by the
contractual amounts of those instruments. The Bank uses the same credit policies
in making commitments and conditional obligations as it does for on-balance-
sheet instruments. The Bank does not anticipate any material losses as a result
of these commitments.
A summary of the contract amount of the Bank's exposure to off-balance-sheet
risk as of December 31 is as follows:
1995 1994
Finalcial instruments whose contract amounts represent
credit risk:
Commitments to extend credit $ 14,497,923 $ 13,230,148
Standby letters of credit 198,315 716,715
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the counter party. Collateral held represents real estate
and business assets.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support private borrowing arrangements, including commercial
paper and similar transactions. Most guarantees are short term. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Bank holds U.S. Treasury notes
and certificates of deposit as collateral supporting those commitments for which
collateral is deemed necessary. Of those outstanding commitments, 54% are
collateralized as of December 31, 1995.
21
Lease commitments and rent expenses
The Bank leases one of its branch offices under a non-cancelable operating lease
which expires in 2004. The Bank also has an operating lease on its trust
software system. The software lease agreement expires in 1998.
The total minimum rental commitment at December 31, 1995, under the leases
described previously, is due as follows:
Years Ending Amount
1996 $ 137,688
1997 137,688
1998 126,940
1999 73,200
2000 73,200
Thereafter 122,000
---------
$ 670,716
=========
Total rent expense included in the statements of income is approximately
$137,688 and $124,400 for the years ended December 31, 1995 and 1994,
respectively.
Litigation
Due to the nature of its business, the Bank sometimes becomes a party to
litigation. In the opinion of management and legal counsel, any pending or
threatened litigation involving the Bank will not have a material effect on the
financial condition of the Bank.
Note 11. Transactions with Directors and Officers
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties) on the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others. These persons and firms had
approximately $1,188,000 and $1,296,000 in outstanding loans as of December
31, 1995 and 1994, respectively.
None of these loans are past due, nonaccrual or restructured to provide a
reduction or deferral of interest or principal because of deterioration in the
financial position of the borrower. There were no loans to a related party that
were considered classified loans at December 31, 1995 and 1994.
22
Note 12. Profit Sharing Plan
The Bank has a profit sharing plan essentially covering all employees having six
months of service. The Bank's contribution, which is at the discretion of the
Board of Directors, is based on the participant's salary and bonus and is
limited to the maximum allowable tax deduction. Participants' interests are
fully vested in seven years and may be withdrawn upon retirement or employment
termination. The Bank's contribution to the plan amounted to approximately
$180,000 and $170,000 for 1995 and 1994, respectively.
Note 13. Regulatory Capital Requirements
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework from prompt corrective action, the Bank must meet specific
capital guidelines that involve qualitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1995, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1995, the Bank was categorized as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-
based, Tier I leverage ratios as set forth in the table. There are no conditions
or events since that management believes have changed the institution's
category.
23
The Bank's actual capital amounts and ratios are presented in the following
table:
To be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk
weighted assets) $ 16,352,000 18.67% > $ 3,316,000 > 4.0% > $ 4,974,000 > 6.0 %
- - - -
Tier I Capital (to risk
weighted assets) 15,691,000 18.93 > 6,632,000 > 8.0 > 8,290,000 > 10.0
- - - -
Total capital (to
average assets) 15,691,000 12.78 > 2,487,000 > 4.0 > 4,145,000 > 5.0
- - - -
Dividends
The Bank is restricted as to the amount of dividends which can be paid.
Dividends declared by banks that exceed the net income (as defined) for the
current year plus retained net income for the preceding two years must be
approved by the State Banking Department. The Bank may not pay dividends that
would result in its capital levels being reduced below the minimum requirements
shown above.
Note 14. Statement of Cash Flows
Year Ended December 31,
1995 1994
Supplemental Disclosures of Cash Flow Information:
Cash payments for interest $ 1,587,305 $ 1,612,253
=========================
Cash payments for income taxes $ 1,134,000 $ 545,547
=========================
Supplemental Schedule of Noncash Investing and Financing
Activities:
Held-to-maturity securities transferred to available for
sale (Note 3) $ 22,365,027 $ -
=========================
Net change in unrealized gain (loss) on available-for-sale
securities (Note 3) $ 177,368 $ (122,618)
=========================
Other real estate transferred from property and equipment $ 83,441 $ -
=========================
Financing provided in sale of other real estate $ 350,000 $ -
=========================
24
Note 15. Fair Value of Financial Instruments
The fair values of the Bank's financial instruments are as follows:
December 31, 1995
Carrying
Amount Fair Value
Financial assets:
Cash and short-term investments $ 29,920,000 $ 29,920,000
Securities 47,841,000 47,970,000
Loans, net 61,354,000 60,553,000
Accrued interest receivable 1,298,000 1,298,000
Financial liabilities:
Deposits 127,354,000 127,021,000
Accrued interest payable and other borrowings 840,000 840,000
Fair value of commitments
The estimated fair value of fee income on letters of credit at December 31, 1995
is insignificant. Loan commitments on which the committed interest rate is less
than the current market rate are also insignificant at December 31, 1995.
Note 16. Merger
On November 1, 1995, the Bank entered into an Agreement and Plan of
Reorganization with Chino Valley Bank, whereby the Bank will merge with Chino
Valley Bank. In consideration for the merger, each stockholder is expected to
receive cash of $2,000 for each share of the Bank's common stock and an amount
approximately equal to the proportional sum of the earnings of the Bank between
October 1, 1995 and the close of business on the last day of the month ended
prior to the closing date, less cash dividends declared between October 1, 1995
and the closing date. The closing date is expected to be approximately April 12,
1996.
25
(b) Pro Forma Financial Information
Index to Pro Forma Financial Information Page
Pro Forma Consolidated Balance Sheets
December 31, 1995 27
Pro Forma Consolidated Statements of Income
Year ended December 31, 1995 29
On March 29, 1996, the Company acquired Citizens by merger into Chino
Valley Bank, the Company's wholly-owned subsidiary, pursuant to the Agreement.
Pursuant to the Agreement, the purchase price was $18,322,106.03.
The following Unaudited Pro Forma Consolidated Balance Sheet as of December
31, 1995 combines the historical consolidated balance sheets of the Company and
Citizens as if the acquisition had been effective on December 31, 1995, after
giving effect to the purchase accounting adjustments described in the
explanatory notes. The Unaudited Pro Forma Consolidated Statements of Income
present the combined results of operations of the Company and Citizens for the
year ended December 31, 1995, as if the acquisition had been effective on
January 1, 1995, after giving effect to the purchase accounting adjustments
described in the explanatory notes. The weighted average number of shares used
in the calculation of earnings per share was 9,322,681.
The total purchase price, for purposes of the Unaudited Pro Forma
Consolidated Balance Sheet is allocated to the individual assets of Citizens
based upon Citizens' historical cost with adjustments for estimated fair value.
The tax basis of an asset or liability has been considered in determining its
fair value. The pro forma adjustments, subject to later adjustment, include only
items that are directly attributable to the acquisition and are factually
supportable. The Unaudited Pro Forma Consolidated Statements of Income do not
include anticipated economies from the consolidation of branch and
administrative operations, or other anticipated opportunities provided by the
acquisition.
The unaudited pro forma combined financial statements are intended for
informational purposes only and are not necessarily indicative of the future
financial position or results of operations of the Company, or of the financial
position or the results of operations of the Company that would have actually
occurred had the acquisition been in effect as of December 31, 1995, or for the
year then ended.
26
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
Dollar amounts in thousands
Company Citizens Adjustments Pro Forma
Assets
Federal funds sold $ 7,000 $ 16,120 $ $ 23,120
Investment securities held to maturity 24,272 10,459 (37) (F1) 34,694
Investment securities available for sale 260,374 37,382 (133) (F1) 297,623
Loans and lease finance receivables, net 496,449 61,354 (836) (F2) 556,967
--------- --------- ----------- -----------
Total earning assets 788,095 125,315 (1,006) 912,404
Cash and due from banks 104,886 13,800 (18,480) (F3) 100,206
Premises and equipment, net 17,219 2,782 3,384 (F4) 23,385
Other real estate owned 8,253 83 319 (F4) 8,655
Deferred Taxes 4,472 4,472
Other assets 14,014 4,311 3,129 (F5) 21,454
--------- --------- ----------- -----------
TOTAL $ 936,939 $ 146,291 $ (12,654) $ 1,070,576
========= ========= =========== ===========
Liabilities AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing $ 332,851 $ 55,635 $ 388,486
Interest-bearing 470,723 71,719 542,442
--------- --------- ----------- -----------
803,574 127,354 930,928
Demand note to U.S. Treasury 6,738 6,738
Short term borrowings 40,000 40,000
Other liabilities 8,367 3,191 3,092 (F6) 14,650
--------- --------- ----------- -----------
Total Liabilities 858,679 130,545 3,092 992,316
Stockholders' Equity
Preferred stock-authorized, 20,000,000 shares
without par value; no shares issued or outstanding
Common stock-authorized, 50,000,000 shares
without par value; issued and outstanding
8,926,707 (Company) 43,436 1,468 (1,468)(F7) 43,436
Retained earnings 34,520 14,224 (14,224)(F7) 34,520
Unrealized gain on investment securities
available-for-sale, net of tax 304 54 (54)(F7) 304
--------- --------- ----------- -----------
Total stockholders' equity 78,260 15,746 (15,746) 78,260
--------- --------- ----------- -----------
TOTAL $ 936,939 $ 146,291 $ (12,654) $1,070,576
========= ========= =========== ===========
27
Explanatory notes to Unaudited Pro Forma Consolidated Balance Sheets
(1) Discount to reflect estimated market value of securities
(2) Discount to reflect estimated market value of loans
(3) Purchase price at December 31, 1995
(4) Increased real property values over book value
(5) Net increase in intangibles and other assets
(6) Increased deferred compensation and tax liabitilites
(7) Elimination of Citizens' equity
28
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
December 31, 1995
Dollar amounts in thousands, except per share
Company Citizens Adjustments Pro forma
Interest income:
Loans, including fees $ 50,158 $ 6,613 $ 200 (F1) $ 56,970
Investment securities:
Taxable 13,737 2,713 16,450
Tax-advantaged 553 57 610
--------- --------- ------------ ---------
14,290 2,770 17,060
Federal funds sold 248 173 421
--------- --------- ------------ ---------
64,696 9,556 200 74,451
Interest expense:
Deposits 14,539 1,659 16,198
Other borrowings 2,016 0 2,016
--------- --------- ------------ --------
Total interest expense 16,555 1,659 0 18,214
--------- --------- ------------ --------
Net interest income before provision 48,141 7,897 200 56,237
for credit losses
Provision for credit losses 2,575 35 2,610
--------- --------- ------------ --------
Net interest income after provision
for credit losses 45,566 7,862 200 53,627
Other operating income:
Service charges on deposit accounts 6,727 912 7,639
Investment securities gain(loss), net 0 (81) (81)
Other 2,363 4,050 6,413
--------- --------- ------------ --------
Total other operating income 9,090 4,881 0 13,971
Other operating expenses:
Salaries, wages and employee benefits 16,495 5,568 (900) (F2) 21,163
Occupancy 2,984 238 225 (F3) 3,447
Equipment 2,279 511 2,790
Deposit insurance premiums 811 132 943
Stationery and supplies 1,833 368 2,201
Professional services 2,861 897 (500) (F4) 3,258
Data processing 659 943 (700) (F5) 902
Promotion 1,449 228 1,677
Other real estate owned expense 3,260 53 3,313
Other 2,422 869 300 (F6) 3,591
--------- --------- ------------ --------
Total other operating expense 35,053 9,807 (1,575) 43,285
--------- --------- ------------ --------
Earnings before income taxes 19,603 2,936 1,775 24,313
Income taxes 8,146 1,200 738 (F7) 10,084
--------- --------- ------------ --------
Net earnings $ 11,457 $ 1,736 $ 1,037 $ 14,229
========= ======== ============ ========
Earnings per common share $ 1.22 $ 192.74 $ 0.00 $ 1.53
========= ======== ============ ========
Explanatory notes
(F1) Estimated accretion of purchased discount on loans purchased
(F2) Decrease in salaries & related expenses
(F3) Increase in depreciation expense
(F4) Decrease in acquisition costs and other expenses
(F5) Reduced data processing costs
(F6) Amortization of intangibles and other expenses
(F7) Tax effect of reduced expenses
29
(c) Exhibits Page
23 Consent of Independent Auditors 32
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has dully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CVB Financial Corp.
(Registrant)
Date: April 12, 1996 /S/ Robert J. Schurheck
-----------------------
Robert J. Schurheck
Chief Financial Officer
31
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors
Citizens Commercial Trust and Savings Bank of Pasadena
Pasadena, California
We hereby consent to the inclusion of our report, dated January 12, 1996, on the
financial statements of Citizens Commercial Trust and Savings Bank of Pasadena
as of and for the years ended December 31, 1995 and 1994, which appears in Item
7 of CVB Financial Corp.'s Form 8-K dated March 29, 1996.
/S/McGladrey & Pullen, LLP
- --------------------------
McGladrey & Pullen, LLP
Pasadena, California
April 10, 1996
32