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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
701 N. HAVEN AVENUE, SUITE 350 91764
ONTARIO, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (909) 980-4030
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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. [ ]
As of March 6, 1998, the aggregate market value of the common stock held by
non-affiliates of the registrant was approximately $380,209,628.
Number of shares of common stock of the registrant outstanding as of March
6, 1998: 15,020,924.
The following documents are incorporated by reference herein:
Definitive Proxy Statement for the Annual Meeting of
Stockholders which
will be filed within 120 days of the fiscal year ended
December 31, 1997 Part III of Form 10-K
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INTRODUCTION
Certain matters discussed in this Annual Report may constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "1933 Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and as such may involve risks
and uncertainties. These forward-looking statements relate to, among other
things, expectations of the business environment in which CVB Financial Corp.
and its subsidiaries operate, projections of future performance, perceived
opportunities in the market and statements regarding the entities mission and
vision. CVB Financial Corp. and its subsidiaries' actual results, performance,
or achievements may differ significantly from the results, performance, or
achievements expressed or implied in such forward-looking statements. For
discussion of the factors that might cause such differences, see "Item 1.
Business -- Factors that May Affect Future Results."
AVAILABLE INFORMATION
Reports filed with the Securities and Exchange Commission (the
"Commission") including proxy statements and other information can be inspected
and copied at the public reference facilities of the Commission at Room 1024,
450 Fifth Street, N.W., Washington D.C., 20549; 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and 7 World Trade Center, Suite 1300, New
York, New York, 10048. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington D.C.
20549, at prescribed rates. The Commission maintains a Web Site that contains
reports, proxy and information statements and other information. The address of
the site is http://www.sec.gov. In addition, reports can be inspected at the
office of the American Stock Exchange, 86 Trinity Place, New York, New York,
10006.
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. On March 29, 1996, Chino Valley Bank changed
its name to Citizens Business Bank (the "Bank"). The Bank is the Company's
principal asset. The Company has one other operating subsidiary, Community Trust
Deed Services ("Community").
CVB'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 -- Dividends and Other Transfers of Funds." At December 31, 1997, the
Company had $1.3 billion in total consolidated assets, $605.5 million in
consolidated net loans and $1.1 billion in total consolidated deposits.
The principal executive offices of CVB and the Bank are located at 701
North Haven Avenue, Suite 350, Ontario, California.
CITIZENS BUSINESS 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
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on August 9, 1974. The Bank's deposit accounts are insured under the Federal
Deposit Insurance Act up to applicable limits. The Bank is not a member of the
Federal Reserve System. At December 31, 1997, the Bank had $1.3 billion in
assets, $608.0 million in net loans and $1.1 billion in deposits.
The Bank currently has 23 banking offices located in San Bernardino County,
Riverside County, the northern portion of Orange County and the eastern portion
of Los Angeles County in Southern California. Of the 23 offices, the Bank opened
seven as de novo branches and acquired the other sixteen in acquisition
transactions. Since 1990, the Bank has added eleven offices, two in 1990, two in
1993, two in 1994, one in 1995, and four in 1996.
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 March 29, 1996, the Bank acquired Citizens Commercial Trust and Savings
Bank of Pasadena, California, ("Citizens Bank of Pasadena"). Citizens Bank of
Pasadena had four branch offices, two branches located in Pasadena, one branch
located in La Canada and one branch located in San Marino. The Bank acquired
approximately $58.9 million in loans, and assumed approximately $111.7 million
in deposits. In addition, the Bank acquired a Trust Division that managed assets
of approximately $800 million that are not included on the balance sheet of the
Bank or Company. Concurrent with the acquisition, the Bank changed its name from
Chino Valley Bank to "Citizens Business Bank."
Through its network of banking offices, the Bank emphasizes personalized
service combined with offering a full range of banking and trust 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, electronic funds transfers by way of domestic
and international wires and automated clearing house, and on-line account
access. The Bank also makes available investment products to customers,
including mutual funds, a full array of fixed income vehicles and a program to
diversify its customers' funds in federally insured time certificates of deposit
of other institutions.
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 industry 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,
deposits, and customers with other
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commercial banks, savings and loan associations, securities and brokerage
companies, mortgage 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 range
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 needs of
the communities served. In those instances where the Bank is unable to
accommodate a customer's needs, the Bank may arrange for those services to be
provided by its correspondents. The Bank has 23 offices located in San
Bernardino, Riverside, Orange, and Los Angeles counties. Neither the deposits
nor the loans of the offices of the Bank exceed 1.0% of all financial services
companies located in the counties in which the Bank operates.
EMPLOYEES
At December 31, 1997, the Company employed 420 persons -- 253 on a
full-time and 167 on a part-time basis. The Company believes that its employee
relations are satisfactory.
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION AND REGULATION
The Company's profitability, like most financial institutions, is primarily
dependent on interest rate differentials. In general, the difference between the
interest rates paid by the Bank on deposits and other interest-bearing
liabilities and the interest rates received by the Bank on its interest-earning
assets, such as loans extended to its clients and securities held in its
investment 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 Company, such as inflation, recession and unemployment, and the impact which
future changes in domestic and foreign economic conditions might have on the
Company cannot be predicted.
The business of the Company is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). The Federal Reserve Board implements national monetary policies
(with objectives such as curbing inflation and combating recession) through its
open-market operations in U.S. Government securities by adjusting the required
level of reserves for depository institutions subject to its reserve
requirements and by varying the target federal funds and 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 earned on interest-earning assets and
paid on interest-bearing liabilities. The nature and impact on the Company and
the Bank of any future changes in monetary and fiscal policies cannot be
predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial services providers. 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 the U.S.
Congress, in the state legislatures and before various bank regulatory agencies.
See "Item 1. Business -- Supervision and Regulation."
SUPERVISION AND REGULATION
GENERAL
Bank holding companies and banks are extensively regulated under both
federal and state law. This regulation is intended primarily for the protection
of depositors and the deposit insurance fund and not for the benefit of
stockholders of the Company. Set forth below is a summary description of certain
laws and regulations which relate to the operations 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.
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In recent years, significant legislative proposals and reforms affecting
the financial services industry have been discussed and evaluated by Congress.
Such proposals include legislation to revise the Glass-Steagall Act and the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and to expand permissible
activities for banks, principally to facilitate the convergence of commercial
and investment banking. Certain proposals also sought to expand insurance
activities of banks. It is unclear whether any of these proposals, or any form
of them, will be introduced in the current Congress and become law.
Consequently, it is not possible to determine what effect, if any, they may have
on the Company and the Bank.
THE COMPANY
The Company, as a registered bank holding company, is subject to regulation
under 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.
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 "-- 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.
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.
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 Department of Financial Institutions.
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The Company's securities are registered with the Commission under the 1934
Act. As such, the Company is subject to the information, proxy solicitation,
insider trading, and other requirements and restrictions of the 1934 Act.
THE BANK
The Bank, as a California chartered bank, is subject to primary
supervision, periodic examination, and regulation by the California Commissioner
of Financial Institutions ("Commissioner") and the Federal Deposit Insurance
Corporation ("FDIC"). To a lesser extent, the Bank is also subject to certain
regulations promulgated by the Federal Reserve Board. If, as a result of an
examination of the 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 the Bank's deposit insurance,
which for a California chartered bank would result in a revocation of the Bank's
charter. The Commissioner has many of the same remedial powers. The Bank has
never been subject to any enforcement actions.
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, ownership of deposit accounts,
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 "-- Capital Standards."
DIVIDENDS AND OTHER TRANSFERS OF FUNDS
Dividends from the Bank constitute the principal source of income to the
Company. The Company is a legal entity separate and distinct from the Bank. The
Bank is subject to various statutory and regulatory restrictions on its ability
to pay dividends to the Company. Under such restrictions, the amount available
for payment of dividends to the Company by the Bank totaled $33.0 million at
December 31, 1997.
The FDIC and the Commissioner also have authority to prohibit the Bank from
engaging in activities that, in the FDIC's and the Commissioner'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 and the Commissioner 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. An
insured depository institution is prohibited 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. See "-- Prompt Corrective Regulatory Action and Other
Enforcement Mechanisms" and "-- Capital Standards" for a discussion of these
additional restrictions on capital distributions.
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, the Company or other affiliates, the purchase of, or investments in,
stock or other securities thereof, the taking of such securities as collateral
for loans, and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company 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 the
Company or to or in any other affiliate are limited, individually, to 10.0% of
the Bank's capital and surplus (as defined by federal regulations),
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and such secured loans and investments are limited, in the aggregate, to 20.0%
of the Bank's capital and surplus (as defined by federal regulations).
California law also imposes certain restrictions with respect to transactions
involving the Company 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 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.
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 risked-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 must be 3%. 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.
The following table presents the amounts of regulatory capital and the
capital ratios for the Company, compared to its minimum regulatory capital
requirements as of December 31, 1997.
AS OF DECEMBER 31, 1997
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ACTUAL REQUIRED EXCESS
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AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
Leverage ratio................ $ 90,495 7.6% $47,629 4.0% $42,866 3.6%
Tier 1 risk-ratio............. 90,495 12.1% 29,916 4.0 60,579 8.1%
Total risk-based.............. 100,005 13.4% 59,704 8.0 40,301 5.4%
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal banking agencies possess broad powers to take corrective and other
supervisory action to resolve the problems of insured depository institutions,
including but not limited to those institutions that fall below one or more
prescribed minimum capital ratios. Each federal banking agency has promulgated
regulations defining the following five categories in which an insured
depository institution will be placed, based on its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. At December 31, 1997, the
Bank and the Company exceeded all of the required ratios for classification as
"well capitalized."
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 a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
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A bank may fall into the critically undercapitalized category if its
"tangible equity" does not exceed two-percent of the bank's total assets.
Federal guidelines generally define "tangible equity" as a bank's tangible
assets less liabilities. Federal regulators may, among other alternatives,
require the appointment of a conservator or a receiver for a critically
undercapitalized bank. In California, the Commissioner may require the
appointment of a conservator or receiver for a state-chartered bank if its
tangible equity does not exceed three percent of the bank's total assets or $1
million.
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.
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have adopted guidelines designed to assist the
federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to: (i) internal controls,
information systems and internal audit systems, (ii) loan documentation, (iii)
credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation,
fees and benefits. In addition, the federal banking agencies have also adopted
safety and soundness guidelines with respect to asset quality and earnings
standards. These guidelines provide six standards for establishing and
maintaining a system to identify problem assets and prevent those assets from
deteriorating. Under these standards, an insured depository institution should:
(i) conduct periodic asset quality reviews to identify problem assets, (ii)
estimate the inherent losses in problem assets and establish reserves that are
sufficient to absorb estimated losses, (iii) compare problem asset totals to
capital, (iv) take appropriate corrective action to resolve problem assets, (v)
consider the size and potential risks of material asset concentrations, and (vi)
provide periodic asset quality reports with adequate information for management
and the board of directors to assess the level of asset risk. These new
guidelines also set forth standards for evaluating and monitoring earnings and
for ensuring that earnings are sufficient for the maintenance of adequate
capital and reserves.
PREMIUMS FOR DEPOSIT INSURANCE
The Bank's deposit accounts are insured by the Bank Insurance Fund ("BIF"),
as administered by the FDIC, up to the maximum permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits, which
as of December 31, 1997, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the risk a particular institution poses to its deposit
insurance fund. The risk classification is based on an institution's capital
group and supervisory subgroup assignment. Pursuant to the Economic Growth and
Paperwork Reduction Act of 1996 (the "Act"), at January 1, 1997, the Bank began
paying, in addition to its normal deposit insurance premium as a member of the
BIF, an amount equal to approximately 1.3 basis points per $100 of insured
deposits toward the retirement of the Financing Corporation bonds ("Fico Bonds")
issued in the 1980s to assist in the recovery of the savings and loan industry.
Members of the Savings Association Insurance Fund ("SAIF"), by contrast, pay, in
addition to their normal deposit insurance premium, approximately 6.4 basis
points. Under the Act, the FDIC is not permitted to establish SAIF assessment
rates that are lower than comparable BIF assessment rates. Beginning no later
than January 1, 2000, the rate paid to retire the Fico Bonds will be equal for
members of the BIF and the SAIF. The Act also provides for the merging of the
BIF and the SAIF by January 1, 1999 provided there are no financial institutions
still chartered as savings associations at that time. Should the insurance funds
be merged before January 1, 2000, the rate paid by all members of this new fund
to retire the Fico Bonds would be equal.
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INTERSTATE BANKING AND BRANCHING
The BHCA currently permits bank holding companies from any state to acquire
banks and bank holding companies located in any other state, subject to certain
conditions, including certain nationwide- and state-imposed concentration
limits. The Bank has the ability, subject to certain restrictions, to acquire by
acquisition or merger branches outside its home state. The establishment of new
interstate branches is also possible in those states with laws that expressly
permit it. Interstate branches are subject to certain laws of the states in
which they are located. Competition may increase further as banks branch across
state lines and enter new markets.
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 its local communities, including low -- and
moderate -- income neighborhoods. A bank may be subject to substantial penalties
and corrective measures for a violation of certain fair lending laws. The
federal banking agencies may take compliance with such laws and CRA obligations
into account when regulating and supervising other activities.
A bank's compliance with its CRA obligations is based on a
performance-based evaluation system which bases CRA ratings on an institution's
lending service and investment performance. When a bank holding company applies
for approval to acquire a bank or other bank holding company, the Federal
Reserve Board will review the assessment of each subsidiary bank of the
applicant bank holding company, and such records may be the basis for denying
the application. Based on an examination conducted in the third quarter of 1995,
the Bank was rated satisfactory in complying with its CRA obligations.
YEAR 2000 COMPLIANCE
In May 1997, the Federal Financial Institutions Examination Council issued
an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding Year 2000 project management
awareness. It is expected that unless financial institutions address the
technology issues relating to the coming of the year 2000, there will be major
disruptions in the operations of financial institutions. The statement provides
guidance to financial institutions, providers of data services, and all
examining personnel of the federal banking agencies regarding the year 2000
problem. The federal banking agencies intend to conduct year 2000 compliance
examinations, and the failure to implement a year 2000 program may be seen by
the federal banking agencies as an unsafe and unsound banking practice. In
addition, federal banking agencies will be taking into account year 2000
compliance programs when analyzing applications and may deny an application
based on year 2000 related issues.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discusses certain factors which may affect the Company's
financial results and operations and should be considered in evaluating the
Company.
Economic Conditions and Geographic Concentration. The Company's operations
are located in Southern California and concentrated primarily in the area known
as the Inland Empire and the San Gabriel Valley. As a result of the geographic
concentration, the Company's results depend largely upon economic conditions in
these areas, which have been relatively volatile over the last several years.
While the Southern California, Inland Empire and San Gabriel economies recently
have exhibited positive economic and employment trends, there is no assurance
that such trends will continue. A deterioration in economic conditions could
have material adverse impact on the quality of the Company's loan portfolio and
the demand for its products and services.
Interest Rates. The Company anticipates that interest rate levels will
remain generally constant in 1998, but if interest rates vary substantially from
present levels, the Company's results may differ materially from
8
10
the results currently anticipated. Changes in interest rates will influence the
growth of loans, investments and deposits and affect the rates received on loans
and investment securities and paid on deposits.
Government Regulation and Monetary Policy. The banking industry is subject
to extensive federal and state supervision and regulation. Significant new laws
or changes in, or repeals of, existing laws may cause the Company's results to
differ materially. Further, federal monetary policy, particularly as implemented
through the Federal Reserve System, significantly affects credit conditions for
the Company, primarily through open market operations in United States
government securities, the discount rate for bank borrowings and bank reserve
requirements, and a material change in these conditions would be likely to have
a material impact on the Company's results.
Competition. The banking and financial services business in the Company's
market areas are highly competitive. The increasingly competitive environment is
a result of changes in regulation, changes in technology and product delivery
systems, and the accelerating pace of consolidation among financial services
providers. The results of the Company may differ if circumstances affecting the
nature or level of competition change.
Credit Quality. A significant source of risk arises from the possibility
that losses will be sustained because borrowers, guarantors and related parties
may fail to perform in accordance with the terms of their loans. The Company has
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for credit losses, that
management believes are appropriate to minimize this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying the
Company's credit portfolio. Such policies and procedures, however, may not
prevent unexpected losses that could have a material adverse effect on the
Company's results.
Other Risks. From time to time, the Company details other risks with
respect to its business and/or financial results in its filings with the
Commission.
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 sixteen of its offices under leases
expiring at various dates from 1998 through 2014. The Bank owns the premises for
eight of its offices, including its data center.
The Company's total occupancy expense, exclusive of furniture and equipment
expense, for the year ended December 31, 1997, was $3.4 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."
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
1997.
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ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 15, 1998, the principal executive officers of the Company and
Bank are:
NAME POSITION AGE
---- -------- ---
George A. Borba Chairman of the Board of the Company and the
Bank 65
D. Linn Wiley President and Chief Executive Officer of the
Company and the Bank 59
Frank Basirico Executive Vice President/Senior Loan Officer of
the Bank 43
Jay W. Coleman Executive Vice President of the Bank 55
Ed Pomplun Executive Vice President of the Bank 51
Edward J. Biebrich Jr. Chief Financial Officer of the Company and
Executive Vice President and Chief Financial
Officer of the Bank 54
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 & Son Dairy.
Mr. Wiley has served as President and Chief Executive Officer of the
Company since October, 1991. Mr. Wiley joined the Company and Bank as a director
and as President & 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.
Mr. Basirico has served as Executive Vice President and Senior Loan Officer
of the Bank since November, 1996. From March, 1993 to November, 1996, he served
as Credit Administrator of the Bank. Prior to that time he was Executive Vice
President, senior loan officer at Fontana National Bank from 1981. Between 1976
and 1981 he served as Executive Vice President, senior loan officer at the Bank
of Hemet.
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. Pomplun has served as Executive Vice President and Division Manager of
the Asset Management Division since March 29, 1996. From February, 1994 to March
29, 1996 he held that position for Citizens Bank of Pasadena. From June, 1988
through February, 1994, Mr. Pomplun served as Executive Vice President and
Division Manager of the Trust Division for First National Bank in San Diego.
Between 1984 and 1988, he served as Vice President for Bank of America's Trust
Division. Between March, 1977 and June, 1984 he served as Trust Office Manager
and Trust Marketing Head for San Diego Trust and Savings Bank.
Mr. Biebrich assumed the position of Chief Financial Officer of the Company
and Executive Vice President/Chief Financial Officer of the Bank on February 2,
1998. Mr. Biebrich began his career in 1974 as a senior accountant with Arthur
Andersen & Co. In 1976, he joined Community First Bank as Executive Vice
President of the Finance and Operations Division. For the period of 1983 to
1990, he served as Chief Financial Officer for Central Pacific Corporation and
Executive Vice President, Chief Financial Officer and Manager of the Finance and
Operations Division for American National Bank. From 1990 to 1992, he was Vice
President of Operations for Systematics Financial Services Inc. From 1992 to
1998, he served as Senior Vice President, Chief Financial Officer of ARB, Inc.
10
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Shares of CVB Financial Corp. common stock price increased from an average
price of $12.629 per share for the first quarter of 1997 to an average per share
price of $19.580 for the fourth quarter of 1997. The following table presents
the high and low sales prices and dividend information for the Company's common
stock during each quarter for the past two 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 three for two stock split declared on
December 17, 1997, and ten percent stock dividends declared in 1996 and in 1995.
The Company had approximately 1,036 shareholders of record as of December 31,
1997.
TWO YEAR SUMMARY OF COMMON STOCK PRICES
QUARTER ENDED HIGH LOW DIVIDENDS
------------- ------ ------ ---------
3/31/96............................. $ 8.33 $ 7.80 $0.049 Cash Dividend
6/30/96............................. $10.15 $ 8.11 $0.049 Cash Dividend
9/30/96............................. $10.91 $ 9.70 $0.049 Cash Dividend
12/31/96............................ $12.65 $ 9.55 $0.061 Cash Dividend
10% Stock Dividend
3/31/97............................. $13.67 $11.92 $0.066 Cash Dividend
6/30/97............................. $17.67 $12.25 $0.066 Cash Dividend
9/30/97............................. $16.92 $13.42 $0.066 Cash Dividend
12/31/97............................ $24.83 $16.83 $0.10 Cash Dividend
3-for-2 Stock Split
The Company lists its common stock on the American Stock Exchange under the
symbol "CVB."
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ITEM 6. SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
-------------- -------------- ------------ ------------ ------------
Net Interest Income............... $ 59,680,144 $ 53,427,982 $ 48,140,875 $ 42,818,669 $ 35,891,367
Provision for Credit Losses....... 2,670,000 2,887,821 2,575,000 350,000 1,720,000
Other Operating Income............ 13,822,876 14,278,777 9,090,442 7,586,410 10,744,921
Other Operating Expenses.......... 42,890,122 41,909,303 35,053,016 32,434,624 29,353,759
-------------- -------------- ------------ ------------ ------------
Earnings Before Income Taxes...... 27,942,898 22,909,635 19,603,301 17,620,455 15,562,529
Income Taxes...................... 10,573,111 9,576,299 8,145,842 7,185,679 6,040,178
-------------- -------------- ------------ ------------ ------------
NET EARNINGS...................... $ 17,369,787 $ 13,333,336 $ 11,457,459 $ 10,434,776 $ 9,522,351
============== ============== ============ ============ ============
Basic Earnings Per Common
Share(1)........................ $ 1.16 $ 0.90 $ 0.78 $ 0.72 $ 0.66
============== ============== ============ ============ ============
Diluted Earnings Per Common
Share(1)........................ $ 1.11 $ 0.87 $ 0.75 $ 0.69 $ 0.63
============== ============== ============ ============ ============
Stock Splits...................... 3-FOR-2
Stock Dividends................... 10% 10% 10% 10%
Cash Dividends Declared Per
Share(1)........................ $ 0.30 $ 0.21 $ 0.17 $ 0.16 $ 0.15
Dividend Pay-Out Ratio............ 25.86% 23.85% 23.21% 23.30% 23.16%
FINANCIAL POSITION:
Assets.......................... $1,258,769,224 $1,160,420,694 $936,939,922 $836,095,349 $687,407,957
Net Loans....................... 605,483,738 576,686,562 496,448,905 484,617,731 442,083,848
Deposits........................ 1,075,695,322 990,596,623 803,573,853 762,623,921 595,956,301
Stockholders' Equity............ 102,084,970 89,087,071 78,260,216 61,939,928 59,957,532
Book Value Per Share(1)......... 6.82 5.95 5.31 4.23 4.13
Equity-to-Assets Ratio(2)....... 8.11% 7.68% 8.35% 7.41% 8.72%
FINANCIAL PERFORMANCE:
Return on:
Beginning Equity.............. 19.50% 17.04% 18.50% 17.40% 18.30%
Average Equity................ 18.22% 16.09% 16.13% 16.84% 17.46%
Return on Average Assets........ 1.50% 1.31% 1.39% 1.40% 1.52%
CREDIT QUALITY:
Allowance for Credit Losses..... $ 11,522,328 $ 12,238,816 $ 9,625,586 $ 9,470,736 $ 8,849,442
Allowance/Total Loans........... 1.87% 2.08% 1.90% 1.92% 1.96%
Total Non Performing Loans...... $ 6,471,063 $ 23,559,720 $ 26,847,307 $ 21,567,108 $ 13,262,357
Non Performing Loans/Total
Loans......................... 1.05% 4.00% 5.31% 4.37% 2.94%
Allowance/Non Performing
Loans......................... 178.06% 51.95% 35.85% 43.91% 66.73%
Net Charge-Offs................. $ 3,386,488 $ 985,920 $ 2,420,150 $ 853,363 $ 918,898
Net Charge-Offs/Average Loans... 0.58% 0.18% 0.50% 0.18% 0.22%
- - ---------------
(1) All per share information has been retroactively adjusted to reflect the
3-for-2 stock split declared December 17, 1997, as to holders of record on
January 2, 1998, and paid January 20, 1998, and 10% stock dividends paid in
1997, 1996, 1995, and 1994.
(2) 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. Certain statements under this caption constitute "forward-looking
statements" under Section 27A of the 1934 Act and Section 21E of the 1934 Act
which involve risk and uncertainties. The Company's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include but are not limited to
economic conditions, competition in the geographic and business
12
14
areas in which the Company conducts its operations, fluctuations in interest
rates, credit quality and government regulation. For additional information
concerning these factors, see "Item 1. Business Factors that May Affect Future
Results."
CVB Financial Corp., ("CVB") is a bank holding company. Its primary
subsidiary, Citizens Business Bank, (the "Bank") is a state chartered bank with
23 branch offices located in San Bernardino, Riverside, east Los Angeles, and
north Orange Counties. Community Trust Deed Services ("Community") is a nonbank
subsidiary providing services to the Bank as well as nonaffiliated persons. For
purposes of this analysis, the consolidated entity is referred to as the
"Company".
On March 29, 1996, the Bank acquired Citizens Bank of Pasadena with
deposits of approximately $111.7 million, and loans of approximately $58.9
million. As a result of the acquisition, the Bank acquired four new banking
offices. In addition to the commercial banking operation, the Bank acquired a
trust operation with approximately $800.0 million in assets under management.
These trust assets are not included on the balance sheet of the Bank or Company.
On October 20, 1995, the Bank purchased a branch office located in Victorville,
California from Vineyard National Bank with deposits of $4.1 million and loans
of $952,000. The acquisitions and mergers during 1995 and 1996 have provided the
Bank with five new banking offices and contributed significantly to the growth
of the Company's deposits, loans and assets.
Virtually all of the Company's activities are conducted within its market
area, which includes the Inland Empire, San Gabriel Valley and other areas of
Southern California. For the years 1995 and 1996, Southern California, and
specifically the Inland Empire and the San Gabriel Valley, continued to recover
from a severe recession. The recession resulted from declines in the defense
industry, corporate relocations and general weakness in the real estate market.
During 1997 confidence improved among small businesses and consumers. Many
industries grew at a satisfactory rate. While the Southern California economies
have exhibited recent positive economic and employment trends, there is no
assurance that such trends will continue.
ANALYSIS OF THE RESULTS OF OPERATIONS
The Company reported net earnings of $17.4 million for the year ended
December 31, 1997. This represented an increase of $4.1 million, or 30.27%, over
net earnings of $13.3 million for the year ended December 31, 1996. Net earnings
for 1996 increased $1.9 million, or 16.37%, over earnings of $11.5 million for
the year ended December 31, 1995. Diluted earnings per share were $1.11, $0.87,
and $0.75 per share for 1997, 1996, and 1995, respectively. Basic earnings per
share were $1.16, $0.90, and $0.78 per share for 1997, 1996, and 1995
respectively. Diluted and basic earnings per share have been adjusted for the
effects of a three for two stock split declared in 1997, and 10% stock dividends
declared in 1996 and 1995.
The increase in net earnings for 1997 compared to 1996 was primarily the
result of an increase in net interest income. The increase in earnings for 1996
compared to 1995 was the result of an increase in net interest income and an
increase in other operating income. Increased net interest income for 1997 and
1996 reflected higher volumes of average earning assets for each year. The
collection of a $2.1 million settlement of litigation contributed to the
increase in other operating income for 1996. The increases in net revenue for
1997 and 1996 were partially offset by increases in operating expenses.
For 1997, the Company's return on average assets was 1.50%, compared to a
return on average assets of 1.31% for 1996, and a return of 1.39% for 1995. The
Company's return on average stockholders' equity was 18.22% for 1997, compared
to a return of 16.09% for 1996, and 16.13% for 1995.
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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%.
TABLE 1 -- DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES, AND STOCKHOLDERS'
EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIALS (DOLLARS IN THOUSANDS)
1997 1996 1995
---------------------------- ---------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ---- ---------- -------- ---- -------- -------- -----
ASSETS
Investment Securities Taxable(1)...... $ 376,851 $23,718 6.29% $ 303,086 $18,613 6.14% $220,427 $13,736 6.23%
Tax preferenced(2).................... 54,098 2,552 6.62% 26,330 1,318 7.02% 11,012 553 7.04%
Federal Funds Sold.................... 4,767 250 5.24% 9,893 512 5.18% 4,285 248 5.79%
Loans(3)(4)........................... 587,353 58,135 9.90% 552,393 54,451 9.86% 486,504 50,158 10.31%
---------- ------- ---- ---------- ------- ---- -------- ------- -----
Total Earning Assets.................. 1,023,069 84,655 8.38% 891,702 74,894 8.46% 722,228 64,695 8.99%
Total Non Earning Assets.............. 132,942 124,928 103,322
---------- ---------- --------
Total Assets.......................... $1,156,011 $1,016,630 $825,550
========== ========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand Deposits....................... $ 388,250 $ 327,789 $268,709
Savings Deposits(5)................... 363,171 $ 9,186 2.53% 353,190 $ 8,901 2.52% 303,092 $ 7,199 2.38%
Time Deposits......................... 225,016 11,865 5.27% 188,319 9,839 5.22% 140,366 7,339 5.23%
---------- ------- ---- ---------- ------- ---- -------- ------- -----
Total Deposits........................ 976,437 21,051 2.16% 869,298 18,740 2.16% 712,167 14,538 2.04%
---------- ------- ---- ---------- ------- ---- -------- ------- -----
Other Borrowings...................... 69,542 3,924 5.64% 51,185 2,726 5.33% 35,232 2,016 5.72%
---------- ------- ---- ---------- ------- ---- -------- ------- -----
Interest Bearing Liabilities.......... 657,729 24,975 3.80% 592,694 21,466 3.62% 478,690 16,554 3.46%
---------- ---------- --------
Other Liabilities..................... 14,683 13,276 7,103
Stockholders' Equity.................. 95,349 82,871 71,048
---------- ---------- --------
Total Liabilities and Stockholders'
Equity.............................. $1,156,011 $1,016,630 $825,550
========== ========== ========
Net interest spread................... 4.58% 4.84% 5.53%
Net interest margin................... 5.93% 6.05% 6.70%
Net interest margin excluding loan
fees................................ 5.57% 5.69% 6.33%
- - ---------------
(1) Includes certificates of deposit purchased from other institutions
(2) Rates are calculated on a taxable equivalent basis using a marginal tax rate
of 35.00%.
(3) Loan fees are included in total interest income as follows, (000)s omitted:
1997, $3,767; 1996, $3,203; 1995, $2,662
(4) Nonperforming loans are included in net loans as follows, (000)s omitted:
1997, $6,471; 1996, $23,559, 1995, $26,847
(5) 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
totaled $59.7 million for 1997. This represented an increase of $6.3 million, or
11.70%, over net interest income of $53.4 million for 1996. Net interest income
for 1996 increased $5.3 million, or 10.98%, over net interest income of $48.1
million for 1995. The increases in net interest income for 1997 and 1996 were
the result of greater average balances of earning assets during each year.
The net interest margin measures net interest income 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 net interest margin can also be affected by changes in the
mix of earning assets as well as the mix of interest bearing liabilities. The
Company's net interest margin was 5.93% for 1997, compared to 6.05% for 1996,
and
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6.70% for 1995. A lower yield on average earning assets, coupled with an
increase in the cost of average interest bearing liabilities, contributed to the
decrease in the net interest margin for 1997 and 1996.
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 decreased to 4.58% for 1997, compared to 4.84% for
1996, and 5.53% for 1995. The decrease in the net interest spread for 1997 and
1996 resulted from decreases in the yield on earning assets and an increase in
the cost of average interest bearing liabilities.
The yield on earning assets decreased to 8.38% for 1997, from 8.46% for
1996, and 8.99% for 1995. The decrease in the yield on earning assets for 1997
was the result of lower yields on tax preferenced investment securities and a
less profitable asset mix. The decrease in the yield on earning assets for 1996
reflects lower yields on loans coupled with a less profitable asset mix. The
yield on average loans increased to 9.90% for 1997, compared to 9.86% for 1996,
which represented a decrease from a yield of 10.31% for 1995. The decrease in
the yields on loans for 1997 and 1996 compared to 1995 was primarily the result
of increased price competition for loans. Loans typically have higher yields
than investments and federal funds sold. Total loans, measured as a percentage
of average earning assets, decreased to 57.41% for 1997, compared with 61.95% in
1996, and 67.36% in 1995. Conversely, average investment securities, including
federal funds sold, increased to 42.59% of average earning assets for 1997,
compared with 38.05% for 1996, and 32.64% for 1995.
The cost of average interest bearing liabilities increased to 3.80% for
1997, compared to 3.62% for 1996, and 3.46% for 1995. For the most part, the
increase in the cost of average interest bearing liabilities for 1997 and 1996
reflected increases in comparable interest rates, increased reliance on time
deposits as opposed to money market and savings accounts, and increased usage of
other borrowed funds. The Company has been able to offset, in part, the impact
of the increased cost of interest bearing liabilities by obtaining a greater
portion of its total average deposits from noninterest bearing demand deposits.
As a percentage of total average deposits, average noninterest bearing demand
deposits increased to 39.76% for 1997, compared to 37.71% for 1996, and 37.73%
for 1995. The FDIC has approved the payment of interest on certain demand
deposit accounts. This could have a negative impact on the Company's net
interest margin, net interest spread, and net earnings.
Despite the decrease in the yield on average earning assets, total interest
income increased for both 1997 and 1996. The increases were the result of
increased balances of average earning assets. Interest income totaled $84.7
million for 1997. This represented an increase of $9.8 million, or 13.03%,
compared to total interest of $74.9 million for 1996. For 1996, total interest
income increased $10.2 million, or 15.76%, from total interest income of $64.7
million for 1995.
Interest expense totaled $25.0 million for 1997. This represented an
increase of $3.5 million, or 16.35%, over total interest expense of $21.5
million for 1996. For 1996, total interest expense increased $4.9 million, or
29.67%, over total interest expense of $16.6 million for 1995. For both 1997 and
1996, the increase in interest expense was the combined result of greater levels
of average interest bearing liabilities and an increase in the cost of average
interest bearing liabilities.
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.
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TABLE 2 -- RATE AND VOLUME ANALYSIS FOR CHANGES IN INTEREST INCOME, INTEREST
EXPENSE, AND NET INTEREST INCOME (AMOUNT IN THOUSANDS)
1997 COMPARED TO 1996
INCREASE (DECREASE) DUE TO
---------------------------------------
RATE/
VOLUME RATE VOLUME TOTAL
------- ------- ------ -------
Interest Income:
Taxable investment securities...................... $ 4,530 $ 463 $ 112 $ 5,105
Tax preferenced securities........................... 1,390 (76) (80) 1,234
Federal funds........................................ (265) 7 (4) (262)
Loans................................................ 3,446 223 15 3,684
------- ------- ----- -------
Total earning assets....................... 9,101 617 43 9,761
------- ------- ----- -------
Interest Expense:
Savings deposits..................................... 252 32 1 285
Time deposits........................................ 1,917 92 17 2,026
Other borrowings..................................... 978 162 58 1,198
------- ------- ----- -------
Total interest bearing liabilities......... 3,147 286 76 3,509
------- ------- ----- -------
Net Interest Income................................ $ 5,954 $ 331 $ (33) $ 6,252
======= ======= ===== =======
1996 COMPARED TO 1995
INCREASE (DECREASE) DUE TO
---------------------------------------
RATE/
VOLUME RATE VOLUME TOTAL
------- ------- ------ -------
Interest Income:
Taxable investment securities...................... $ 5,152 $ (200) $ (75) $ 4,877
Tax preferenced securities........................... 769 (2) (2) 765
Federal funds........................................ 324 (26) (34) 264
Loans................................................ 6,794 (2,203) (298) 4,293
------- ------- ----- -------
Total earning assets....................... 13,039 (2,431) (409) 10,199
------- ------- ----- -------
Interest Expense:
Savings deposits..................................... 1,191 438 73 1,702
Time deposits........................................ 2,508 (6) (2) 2,500
Other borrowings..................................... 912 (139) (63) 710
------- ------- ----- -------
Total interest bearing liabilities......... 4,611 293 8 4,912
------- ------- ----- -------
Net Interest Income................................ $ 8,428 $(2,724) $(417) $ 5,287
======= ======= ===== =======
Interest and fees on loans, the Company's primary source of revenue,
totaled $58.1 million for 1997. This represented an increase of $3.6 million, or
6.77%, over interest and fees on loans of $54.5 million for 1996. For 1996,
interest and fees on loans increased $4.3 million, or 8.56%, over interest and
fees on loans of $50.2 million for 1995. The increase in interest and fee on
loans for 1997 and 1996 reflected increases in the average balance of loans, and
for 1997, an increase in average yield on loans. The yield on loans increased to
9.90% for 1997, compared to 9.86% for 1996. The yield on loans for 1995 was
10.31%. The decrease in loan yields for 1996 compared to 1995 reflected
increased price competition for loans. Deferred loan origination fees, net of
costs totaled $2.6 million at December 31, 1997. This represented a decrease of
$696,000, or 21.22%, from deferred loan origination fees, net of costs of $3.3
million at December 31, 1996.
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 interest
income of approximately $12,000 that was accrued and not reversed on a
nonperforming loan at December 31, 1997. There was no interest income that was
accrued and not reversed on nonperforming loans at December 31, 1996, and 1995.
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 $66,000 greater for
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1997, $253,000 greater for 1996, and $988,000 greater for 1995. Accordingly,
yields on loans would have increased by 0.01%, 0.05%, and 0.20%, for 1997, 1996,
and 1995, respectively.
Fees collected on loans are an integral part of the loan pricing decision.
Loan fees and the direct costs associated with the 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 1997, the Company recognized loan fee
income of $3.7 million. This represented an increase of $564,000, or 17.59%,
over fee income recognized for 1996 of $3.2 million. For 1996, fee income
recognized increased $541,000, or 20.32% over loan fee income of $2.7 million
recognized in 1995.
Table 3 summarizes loan fee activity for the Bank for the years indicated.
TABLE 3 -- LOAN FEE ACTIVITY (AMOUNTS IN THOUSANDS)
1997 1996 1995
------- ------- -------
Fees Collected.............................................. $ 3,071 $ 2,861 $ 2,622
Fees and costs deferred..................................... (2,147) (1,959) (1,098)
Accretion of deferred fees and costs........................ 2,843 2,301 1,138
------- ------- -------
Total fee income reported......................... $ 3,767 $ 3,203 $ 2,662
======= ======= =======
Deferred net loan origination fees acquired................. 0 1,158 0
======= ======= =======
Deferred net loan origination fees at end of year........... $ 2,583 $ 3,279 $ 2,463
======= ======= =======
PROVISION FOR CREDIT LOSSES
The provision for credit losses totaled $2.7 million for 1997. This
represented a decrease of $218,000, or 7.54%, from the provision for credit
losses of $2.9 million for 1996. For 1996, the provision for credit losses
increased $313,000, or 12.15%, from the provision for credit losses of $2.6
million for 1995. Loans acquired through merger in 1996 included an adjustment
to the allowance for credit losses of $711,000. Net loans charged to the
allowance for credit losses totaled $3.4 million for 1997. This represented an
increase of $2.4 million, or 243.51%, from net loan losses charged to the
allowance of $1.0 million for 1996. For 1996, net loan losses charged to the
allowance for credit losses decreased $1.4 million, or 59.26%, from net loans
charged to the allowance of $2.4 million for 1995. See "Risk
Management -- Credit Risk."
OTHER OPERATING INCOME
Other operating income for the Company includes income derived from special
services offered by the Bank, such as asset management (trust services),
merchant card, investment services, international, and other business services;
in addition to service charges and fees (primarily from deposit accounts); gains
(net of losses) from the sale of investment securities, other real estate owned,
and fixed assets; the gross revenue from Community; and other revenues not
included as interest on earning assets.
Other operating income totaled $13.8 million for 1997. This represents a
decrease of $456,000, or 3.19%, from other operating income of $14.3 million for
1996. For 1996, other operating income increased $5.2 million, or 57.07%, over
other operating income of $9.1 million for 1995. Included as other operating
income for 1996, was a $2.1 million settlement of litigation paid to the Bank in
March 1996. The settlement related to a suit filed by the Bank against a former
officer and director for violation of an employment termination agreement. Net
of the settlement paid to the Bank in 1996, other operating income would have
increased $1.6 million, or 13.49% for 1997, and $3.1 million, or 33.97% for
1996. The increases in other operating income, net of the settlement, are due in
part to the fee income originated by the Bank's Asset Management Division, which
was acquired with the acquisition of Citizens Bank of Pasadena in March 1996.
Gross revenue generated from the Asset Management Division totaled $3.2 million
for 1997, and $2.3 million for 1996.
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Other operating income also includes revenue from Community, a subsidiary
of the Company. Total revenue from Community was approximately $367,000,
$247,000, and $256,000, for 1997, 1996, and 1995, respectively.
OTHER OPERATING EXPENSES
Other operating expenses totaled $42.9 million for 1997. This represented
an increase of $1.0 million, or 2.34%, over other operating expenses of $41.9
million for 1996. For 1996, other operating expenses increased $6.9 million, or
19.56%, over total operating expenses of $35.1 million for 1995.
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 other operating
expenses in relation to asset growth can be measured in terms of other operating
expenses as a percentage of average assets. Operating expenses measured as a
percentage of average assets decreased to 3.71% for 1997, compared to a ratio of
4.12% for 1996, and 4.25% for 1995. The decrease in the ratio indicates that
management is controlling greater levels of assets with proportionately smaller
operating expenses.
Management's ability to control other operating expenses in relation to the
level of net revenue (net interest income plus other operating income) can be
measured in terms of other operating expenses as a percentage of net revenue.
For 1997, other operating expenses as a percentage of total revenue decreased to
58.35%, compared to a ratio of 61.90% for 1996, and a ratio of 61.25% for 1995.
The decrease in the ratio for 1997, indicated that a proportionately smaller
amount of net revenue was being allocated to operating expenses. The increase in
the ratio for 1996 compared to 1995 resulted from expenses associated with the
maintenance and sale of OREO and the name change of the Bank.
Salaries and related expenses comprise the greatest portion of other
operating expenses. Salaries and related expenses totaled $21.7 million for
1997. This represented an increase of $1.7 million, or 8.20%, over salaries and
related expenses of $20.0 million for 1996. Salary and related expenses for 1996
were $3.5 million, or 21.33%, greater than salaries and related expenses of
$16.5 million for 1995. The increases for both 1997 and 1996 primarily resulted
from increased staffing levels, including the addition of four branch offices
and the Asset Management Division introduced in 1996 from the acquisition of
Citizens Bank of Pasadena. Despite the increases in salaries and related
expenses, salaries and related expenses as a percent of average assets decreased
to 1.87% for 1997, compared to 1.97% for 1996, and 2.00% for 1995.
Occupancy and equipment expenses primarily represent the cost of operating
and maintaining branch and administrative facilities, including the purchase and
maintenance of furniture, fixtures and equipment, and data processing equipment.
Occupancy expense totaled $3.4 million for 1997. This represented an increase of
$218,000, or 6.77%, over occupancy expense of $3.2 million for 1996. Occupancy
expense for 1996 increased $233,000, or 7.81%, from an expense level of $3.0
million for 1995. Equipment expense totaled $3.4 million for 1997. This
represented an increase of $252,000, or 8.10%, over the $3.1 million expense for
1996. For 1996, equipment expense increased $833,000, or 36.55%, from an expense
of $2.3 million for 1995. The addition of four new branch offices contributed to
increases in both occupancy and equipment expenses for 1997 and 1996.
Stationery and supplies expense totaled $2.6 million for 1997. This
represented an increase of $184,000, or 7.53%, over the expense of $2.4 million
for 1996. Stationery and supplies expense for 1996 increased $605,000, or
33.02%, over the expense of $1.8 million for 1995. Contributing to the increase
for 1997 and 1996 was the cost of changing preprinted forms and stationery as a
result of the Bank's name change in 1996.
Professional services totaled $2.3 million for 1997. This represented an
increase of $311,000, or 15.65%, over an expense of $2.0 million for 1996. For
1996, professional services expense decreased $875,000, or 30.60%, from an
expense of $2.9 million for 1995. The decrease for 1996 compared to 1995
reflected a reduction in legal expenses relating to the settlement of the
lawsuit against the former officer and director in that year.
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Promotion expense totaled $2.1 million for 1997. This represented a
decrease of $66,000, or 3.07%, from an expense of $2.2 million for 1996.
Promotion expense increased for 1996 by $710,000, or 48.99%, over an expense of
$1.4 million for 1995.
The increase for 1997 and 1996 primarily reflected increased advertising
and promotion as a result of the acquisition of Citizens Bank of Pasadena and
the Bank's name change.
Other real estate owned expense represents the cost of acquiring,
maintaining, and liquidating real property obtained by the Bank as a result of
foreclosure. Included as an expense is a provision charged to earnings for
potential decreases in the value of other real estate owned. Other real estate
owned expense totaled $2.7 million for 1997. This represented a decrease of $2.0
million, or 42.85%, from an expense level of $4.7 million for 1996. For 1996,
other real estate owned expense increased $1.4 million, or 44.34%, over an
expense level of $3.3 million for 1995. The decrease in the expense for 1997
compared to 1996 reflected the lower average balance of other real estate owned
for the most recent year.
Other expenses include the amortization of goodwill and intangibles. The
amortization expense of goodwill and intangibles totaled $1.2 million for 1997.
This represented an increase of $170,000, or 16.58%, over the expense of $1.0
million for 1996. The amortization expense for 1996 increased $383,000, or
59.71% over the expense of $643,000 for 1995. The increase for 1997 and 1996
compared to 1995 is a result of the increase in goodwill and intangibles
associated with the acquisition of Citizens Bank of Pasadena.
The Company relies on outside vendors to provide the software used in the
day to day operation of the Company. Consequently, the Company's efforts at
addressing the technology issues relating to the coming of the year 2000 are
concentrated on vendor and borrower capabilities to become year 2000 compliant.
Management has developed a Year 2000 plan that has prioritized vendors and
software suppliers by the degree of dependence on the products, services or
software that they provide. All identified providers have been sent written
notices requesting attestation of their capabilities to operate effectively in
the year 2000 and beyond. Testing of those applications determined to be
essential for the operation of the Company began in 1997 and are projected to be
completed by September of 1998. In addition, all borrowers of the Company have
been notified in writing of the potential problems that relate to the
millennium. A review of borrower vulnerability to technology problems has been
incorporated into the credit review process. The Company's primary software
provider is already compliant with the year 2000 issues. Accordingly, the
projected cost to the Company to remediate year 2000 issues is anticipated to be
limited to internal costs, and those costs over the next two years are not
anticipated to exceed $250,000. The Company's management does not believe that
the estimated cost to the Company to remediate year 2000 issues will have a
material impact to the Company's business, operations or financial condition.
Further, the Company's management does not anticipate that these expenditures
will have a material impact on the Company's results of operation, liquidity, or
capital resources.
INCOME TAXES
The Company's effective tax rate for 1997 was 37.80%. This compares to
effective tax rates of 41.80% for 1996, and 41.50% for 1995. These rates are
below the nominal combined Federal and State tax rates as a result of tax
preferenced income for each period. The decrease in the effective tax rate for
1997 reflects an increase in tax preferenced income, and the tax benefit
associated with the disqualifying disposition of stock options exercised. See
"Note 7 of the Consolidated Financial Statements."
ANALYSIS OF FINANCIAL CONDITION
The Company reported total assets of $1.3 billion at December 31, 1997.
This represented an increase of $98.3 million, or 8.48%, from total assets of
$1.2 billion at December 31, 1996. For 1996, total assets increased $223.5
million, or 23.85%, from total assets of $936.9 million at December 31, 1995.
In the ordinary course of business, the Bank receives short term seasonal
agricultural deposits of approximately $50.0 million on the final days of each
year. These short term deposits are reflected in the level
19
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of demand deposits and cash and due from banks on December 31, 1997 and 1996.
The growth rates for assets, loans and deposits for 1996 were affected by the
acquisition of Citizens Bank of Pasadena.
INVESTMENT SECURITIES
The Company maintains a portfolio of investment securities to provide
interest income and to 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, 1997 and 1996. At December
31, 1997, the Company reported total investment securities of $492.1 million.
This represents an increase of $108.0 million, or 28.14%, over total investment
securities of $384.1 million at December 31, 1996. For 1996, investment
securities increased $99.4 million, or 34.93%, greater than the total investment
securities of $284.6 million at December 31, 1995.
The Company has adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." 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, 1997, securities held as available for sale had a fair market
value of $434.1 million, representing 88.21% of total investment securities with
a value of $492.1 million using book value. At December 31, 1997, the net
unrealized holding gain on securities available for sale was $1.5 million, and
the unrealized gain on investments available for sale, net of deferred taxes was
$772,000.
LOANS
At December 31, 1997, the Company reported total loans, net of deferred
loan fees, of $617.0 million. This represents an increase of $28.1 million, or
4.77%, over gross loans of $588.9 million at December 31, 1996. For 1996, gross
loans increased $82.9 million, or 16.37%, over gross loans, net of deferred loan
fees of $506.1 million at December 31, 1995. Total loans acquired as a result of
the acquisition of Citizens Bank of Pasadena were approximately $59.9 million,
representing 72.3% of the increase in loans for 1996.
Table 4 presents the distribution of the Company's loan portfolio at the
dates indicated.
TABLE 4 -- DISTRIBUTION OF LOAN PORTFOLIO BY TYPE (AMOUNTS IN THOUSANDS)
DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Commercial and Industrial........... $258,987 $240,629 $234,709 $262,494 $249,648
Real Estate
Construction...................... 19,819 36,925 23,805 26,302 56,358
Mortgage.......................... 229,926 219,763 149,039 116,077 79,929
Consumer, net of unearned
discount.......................... 17,445 19,576 15,876 15,553 12,517
Municipal Lease Finance
Receivables....................... 24,008 19,825 21,529 23,246 21,556
Agribusiness(1)..................... 69,404 55,486 63,580 52,920 32,529
-------- -------- -------- -------- --------
Gross Loans.................... 619,589 592,204 508,538 496,592 452,537
-------- -------- -------- -------- --------
Less:
Allowance for Credit Losses....... 11,522 12,239 9,626 9,471 8,849
Deferred Loan Fees................ 2,583 3,279 2,463 2,503 1,604
-------- -------- -------- -------- --------
Total Net Loans..................... $605,484 $576,686 $496,449 $484,618 $442,084
======== ======== ======== ======== ========
- - ---------------
(1) Included as Commercial and Industrial and Real Estate Mortgage loans above
are loans totaling $27.9 million for 1997, $22.7 million for 1996, $8.8
million for 1995, $7.7 million for 1994, and $3.2 million for 1993, that
represent loans to agricultural concerns for commercial or real estate
purposes.
Commercial and industrial loans are loans to commercial entities to finance
capital purchases or improvements, or to provide cash flow for operations. Real
estate loans are loans secured by conforming first
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trust deeds on real property, including property under construction, commercial
property and single family and multifamily residences. Consumer loans include
installment loans to consumers as well as home equity loans and other loans
secured by junior liens on real property. Municipal lease finance receivables
are leases to municipalities. Agribusiness loans are loans to finance the
operating needs of wholesale dairy farm operations, cattle feeders, livestock
raisers, and farmers.
Table 5 provides the maturity distribution for commercial and industrial
loans as well as real estate construction loans as of December 31, 1997. Amounts
are also classified according to repricing opportunities or rate sensitivity.
TABLE 5 -- LOAN MATURITIES AND INTEREST RATE CATEGORY AT DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
DECEMBER 31, 1997
AFTER ONE
BUT
WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- --------
Types of Loans:
Commercial and industrial(1)........ $186,920 $192,260 $101,551 $480,731
Construction........................ 19,819 0 0 19,819
Agribusiness........................ 69,404 0 0 69,404
-------- -------- -------- --------
$276,143 $192,260 $101,551 $569,954
======== ======== ======== ========
Amount of Loans based upon:
Fixed Rates......................... $100,256 $151,735 $101,551 $353,542
Floating or adjustable rates........ 175,887 40,525 216,412
-------- -------- -------- --------
$276,143 $192,260 $101,551 $569,954
======== ======== ======== ========
- - ---------------
(1) Includes approximately $221.7 million in fixed rate commercial real estate
loans. These loans are classified as real estate mortgage loans for the
financial statements, but are accounted for as commercial and industrial
loans on the Company's books.
As a normal practice in extending credit for commercial and industrial
purposes, the Bank may accept trust deeds on real property as collateral. In
some cases, when the primary source of repayment for the loan is anticipated to
come from the cash flow from normal operations of the borrower, the requirement
of real property as collateral is not the primary source of repayment but an
abundance of caution. In these cases, the real property is considered a
secondary source of repayment for the loan. Since the Bank lends primarily in
Southern California, its real estate loan collateral is concentrated in this
region. At December 31, 1997, substantially all of the Bank's loans secured by
real estate were collateralized by properties located in Southern California.
This concentration is considered when determining the adequacy of the Company's
allowance for credit losses.
NONPERFORMING ASSETS
At December 31, 1997, nonperforming assets, which included nonperforming
loans and other real estate owned, totaled $10.9 million. See "Credit Risk".
This represented a decrease of $18.9 million, or 63.48%, compared to
nonperforming assets of $29.8 million at December 31, 1996. For 1996, total
nonperforming assets decreased $5.3 million, or 15.23%, from total nonperforming
assets of $35.1 million at December 31, 1995. The decrease in nonperforming
assets for 1997 compared to 1996 resulted as balances of nonaccrual loans,
restructured loans, and other real estate owned all decreased during the year.
The decrease in nonperforming assets for 1996, reflected the decrease in
restructured loans and other real estate owned, partially offset by an increase
in nonaccrual loans.
Although management believes that nonperforming loans are generally well
secured and that potential losses are provided for in the Company's allowance
for credit losses, there can be no assurance that future
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deterioration in economic conditions or collateral values will not result in
future credit losses. Table 6 provides information on nonperforming loans and
other real estate owned at the dates indicated.
TABLE 6 -- NON-PERFORMING ASSETS (AMOUNTS IN THOUSANDS)
DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Nonaccrual loans............................. $ 3,955 $17,564 $13,289 $12,613 $12,492
Loans past due 90 days or more............... 424 621 0 0 0
Restructured loans........................... 2,092 5,374 13,558 8,954 770
Other real estate owned (OREO)............... 4,395 6,196 8,253 9,860 9,768
------- ------- ------- ------- -------
Total nonperforming assets................... $10,866 $29,755 $35,100 $31,427 $23,030
======= ======= ======= ======= =======
Percentage of nonperforming assets to total
loans outstanding & OREO................... 1.75% 5.00% 6.82% 6.24% 5.00%
Percentage of nonperforming assets to total
assets..................................... 0.86% 2.56% 3.75% 3.76% 3.35%
At December 31, 1997, the Company had loans on which interest was no longer
accruing totaling $4.0 million. This represented a decrease of $13.6 million, or
77.48%, from total nonaccrual loans of $17.6 million at December 31, 1996. For
1996, total nonaccrual loans increased $4.3 million, or 32.17%, over total
nonaccrual loans of $13.3 million at December 31, 1995. Approximately 75.00% of
the number of nonaccrual loans, and 96.60% of the dollar volume of these
nonaccrual loans were secured by real property which had a current appraisal
that was less than one year old. The estimated ratio of the outstanding loan
balances to the fair values of the related collateral for nonaccrual loans at
December 31, 1997, ranged between approximately 17.00% to 158.00%. The Bank has
allocated specific reserves included in the allowance for credit losses for
potential losses on these loans.
A restructured loan is a loan on which the Bank has reduced the rate of
interest to a lower rate, forgiven all or a part of the interest income, or
forgiven part of the principal balance of the loan, due to the borrower's
financial condition. At December 31, 1997, the Company had a total of $2.1
million in loans that were classified as restructured. This represented a
decrease of $3.3 million, or 61.07%, from restructured loans of $5.4 million at
December 31, 1996.
Except for nonperforming loans as set forth in Table 6, and loans disclosed
as impaired, the Bank's management is not aware of any loans as of December 31,
1997 for which known credit problems of the borrower would cause serious doubts
as to the ability of such borrowers to comply with their present loan repayment
terms, or any known events that would result in the loan being designated as
nonperforming at some future date. The Bank's management cannot, however,
predict the extent to which the deterioration in general economic conditions,
real estate values, increase in general rates of interest, or change in the
financial conditions or business of a borrower may adversely affect a borrower's
ability to pay.
At December 31, 1997, the net book value of the six properties held as
other real estate owned totaled $4.4 million. This represented a decrease of
$1.8 million, or 29.07%, from other real estate owned of $6.2 million at
December 31, 1996. Although the Bank is actively marketing these properties, the
Bank's management cannot predict when these properties will be sold or what the
terms of sale will be when they are sold. Although there are recent appraisals
on each property that support the carrying costs of these properties at December
31, 1997, no assurances can be given that further charges to earnings may not
occur if real estate values decrease, or the Bank cannot promptly dispose of the
properties held.
DEPOSITS
The Company reported total deposits of $1.1 billion at December 31, 1997.
This represented an increase of $85.1 million, or 8.59%, over total deposits of
$990.6 million at December 31, 1996. During 1996, total deposits increased
$187.0 million, or 23.27%, over total deposits of $803.6 million at December 31,
1995. The increase in total deposits for the year ended December 31, 1996
included approximately $111.7 million in deposits assumed as a result of the
acquisition of Citizens Bank of Pasadena.
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Noninterest bearing demand deposits totaled $469.8 million at December 31,
1997. This represented an increase of $38.7 million, or 8.97%, over total
noninterest bearing demand deposits of $431.2 million at December 31, 1996. For
1996, total noninterest bearing demand deposits increased $98.3 million, or
29.54%, over noninterest bearing demand deposits of $332.9 million at December
31, 1995.
Table 7 provides the remaining maturities of large denomination ($100,000
or more) time deposits, including public funds, at December 31, 1997.
TABLE 7 -- MATURITY DISTRIBUTION OF LARGE DENOMINATION TIME DEPOSITS AMOUNTS IN
THOUSANDS)
DECEMBER 31, 1997
3 months or less.......................................... $127,475
Over 3 months through 6 months............................ 37,130
Over 6 months through 12 months........................... 19,618
Over 12 months............................................ 2,042
--------
Total........................................... $186,265
========
OTHER BORROWED FUNDS
As opportunities exist, the Bank borrows short term funds and invests the
proceeds at a positive spread. By purposely mismatching the maturities of the
borrowed funds and the resulting investments, management can offset a portion of
the Bank's interest rate risk. In addition, the positive spread contributes to
the Bank's and Company's earnings. As the interest rate paid on borrowed funds
is normally greater than the interest rate paid for deposits, the increase in
other borrowed funds contributed to the decrease in the Company's net interest
margin and net interest spread.
At December 31, 1997, borrowed funds totaled $56.9 million. This
represented a decrease of $11.7 million, or 17.03%, from total borrowed funds of
$68.6 million at December 31, 1996. For 1996, total borrowed funds increased
$21.9 million, or 46.80%, from a balance of $46.7 million at December 31, 1995.
CAPITAL RESOURCES
Historically, the primary source of capital for the Company has been the
retention of operating earnings. In order to ensure adequate levels of capital,
the Company conducts an ongoing assessment of projected sources and uses of
capital in conjunction with projected increases in assets and the level of risk.
Total stockholders' equity was $102.1 million at December 31, 1997. This
represented an increase of $13.0 million, or 14.59%, over total stockholders'
equity of $89.1 million at December 31, 1996. For 1996, total stockholders'
equity increased $10.8 million, or 13.83%, over total stockholders' equity of
$78.3 million at December 31, 1995.
Tier 1 capital, stockholders' equity less intangible assets, was $90.5
million at December 31, 1997. This represented an increase of $12.9 million, or
16.63%, over total Tier 1 capital of $77.6 million at December 31, 1996. For
1996, Tier 1 capital increased $8.1 million, or 11.73%, over Tier 1 capital of
$69.4 million at December 31, 1995. Total adjusted capital, Tier 1 capital plus
the lesser of the allowance for credit losses or 1.25% of risk weighted assets,
was $100.0 million at December 31, 1997. This represented an increase of $13.4
million, or 15.53%, over adjusted capital of $86.6 million at December 31, 1996.
For 1996, adjusted capital increased $9.6 million, or 12.52%, over total
adjusted capital of $76.9 million at December 31, 1995.
Bank regulators have established minimum capital adequacy guidelines
requiring that qualifying capital be at least 8.0% of risk-based assets, of
which at least 4.0% must be Tier 1 capital (primarily stockholders' equity).
These ratios represent minimum capital standards. Under Prompt Corrective Action
rules, certain levels of capital adequacy have been established for financial
institutions. Depending on an institution's capital ratios, the established
levels can result in restrictions or limits on permissible activities. In
addition to the aforementioned requirements, the Company and Bank must also meet
minimum leverage ratio standards. The leverage ratio is calculated as Tier 1
capital divided by the most recent quarter's average total assets.
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The highest level for capital adequacy under Prompt Corrective Action is
"Well Capitalized". To qualify for this level of capital adequacy an institution
must maintain a total risk-based capital ratio of at least 10.00% and a Tier 1
risk-based capital ratio of at least 6.00%.
At December 31, 1997, and 1996, the Company exceeded all of the minimum
capital ratios required to be considered well capitalized. At December 31, 1997,
the Company's total risk-based capital ratio was 13.35%, compared to a ratio of
12.30% at December 31, 1996. The ratio of Tier 1 capital to risk weighted assets
was 12.08% at December 31, 1997, compared to a ratio of 11.03% at December 31,
1996. At December 31, 1997, the Company's leverage ratio was 7.56%, compared to
a ratio of 7.21% at December 31, 1996. See NOTE 15 of the Notes to the
Consolidated Financial Statements and "Capital Standards" -- Part I, Item 1.
For purposes of calculating capital ratios, bank regulators have excluded
adjustments to stockholders' equity that result from mark to market adjustments
of available for sale investment securities. At December 31, 1997, the Company
had an unrealized gain on investment securities net of taxes of $772,000,
compared to a loss net of taxes of $196,000 at December 31, 1996.
During 1997, the Company announced its intention to re-purchase some of its
outstanding common stock. The Company re-purchased approximately 95,000 of its
outstanding shares at average price of $20.332 per share for an aggregate cost
of $1.9 million.
During 1997, the Board of Directors of the Company declared quarterly cash
dividends that totaled 45 cents per share for the full year (0.30 cents per
share after retroactive adjustment of the three for two stock split declared on
December 17, 1997). After retroactive adjustment, cash dividends declared during
1997 were $0.09 greater than paid for 1996. Management does not believe that the
continued payment of cash dividends will impact the ability of the Company to
continue to exceed the current minimum capital standards.
RISK MANAGEMENT
The Company's management has adopted a Risk Management Plan to ensure the
proper control and management of all risk factors inherent in the operation of
the Company and Bank. Specifically, credit risk, interest rate risk, and
liquidity risk can all affect the market risk exposure of the Company. These
specific risk factors are not mutually exclusive. It is recognized that any
product or service offered by the Company may expose the Bank to one or more of
these risks.
CREDIT RISK
Credit risk is defined as the risk to earnings or capital arising from an
obligor's failure to meet the terms of any contract or otherwise fail to perform
as agreed. Credit risk is found in all activities where success depends on
counterparty, issuer, or borrower performance.
Central to the Company's credit risk management is a proven loan risk
rating system. Limitations on industry concentration, aggregate customer
borrowings and geographic boundaries also reduce loan credit risk. Credit risk
in the investment portfolio and correspondent bank accounts is minimized through
clearly defined limits in the Bank's policy statements. Senior Management,
Directors' Committees, and the Board of Directors are provided with timely and
accurate information to appropriately identify, measure, control and monitor the
credit risk of the Bank.
Implicit in lending activities is the risk that losses will occur 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
24
26
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.
The Company has 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 measured as either the expected future cash flows discounted at
each loan's effective interest rate, the fair value of the loan's collateral if
the loan is collateral dependent, or an observable market price of the loan (if
one exists). The amount of impairment is included as a part of the Company's
allowance for credit losses. See Note 5 of the Notes to the Consolidated
Financial Statements for additional information concerning impaired loans.
At December 31, 1997, the Company reported an allowance for credit losses
of $11.5 million. This represented a decrease of $716,000, or 5.85%, from the
allowance for credit losses of $12.2 million at December 31, 1996. For 1996, the
allowance for credit losses increased $2.6 million, or 27.15%, from a balance of
$9.6 million at December 31, 1995.
Of the total $11.5 million reserve for credit losses at December 31, 1997,
$1.0 million, or 8.70%, represented reserves for specific problem loans,
including impaired loans, and $10.5 million, or 91.30%, represented that portion
allocated to provide for general risks inherent in the loan portfolio.
Nonperforming loans totaled $6.5 million at December 31, 1997. This
represented a decrease of $17.1 million, or 72.53%, from nonperforming loans of
$23.6 million at December 31, 1996. For 1996, nonperforming loans decreased $3.3
million, or 12.25%, from nonperforming loans of $26.8 million at December 31,
1995. Nonperforming loans, measured as a percent of gross loans, equaled 1.05%,
4.00%, and 5.31%, at December 31, 1997, 1996, and 1995, respectively.
Nonperforming loans included 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 decrease in nonperforming loans for
1997 was the result of a decrease in both nonaccrual loans and restructured
loans. Non accrual loans decreased $13.6 million, or 77.48%, to $4.0 million at
December 31, 1997, from $17.6 million at December 31, 1996. Restructured loans
decreased $3.3 million, or 61.07%, to $2.1 million at December 31, 1997. The
decrease in nonperforming loans between December 31, 1996 and 1995 was the
result of a $8.2 million, or 60.36%, reduction in renegotiated loans. This
decrease was partially offset by a $4.3 million, or 32.17% increase in
nonaccrual loans.
Contributing to the decrease in nonperforming loans at December 31, 1997
was an increase in the balance of loans charged to the allowance for credit
losses for 1997 compared to 1996. For 1997, the Company charged $3.4 million of
loans net of recoveries to the allowance for credit losses. This represented an
increase of $2.4 million, or 243.51%, from net charges to the allowance for
credit losses of $1.0 million for 1996.
Table 8 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.
25
27
TABLE 8 -- SUMMARY OF CREDIT LOSS EXPERIENCE (AMOUNTS IN THOUSANDS)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Amount of Total Loans at End of
Period(1)............................. $617,006 $588,925 $506,074 $494,088 $450,933
======== ======== ======== ======== ========
Average Total Loans Outstanding(1)...... $587,353 $552,393 $486,504 $466,514 $416,984
======== ======== ======== ======== ========
Allowance for Credit Losses at Beginning
of Period............................. $ 12,239 $ 9,626 $ 9,471 $ 8,849 $ 6,461
Loans Charged-Off:
Real Estate........................... 3,114 1,434 2,167 402 530
Commercial, Financial and
Industrial......................... 371 200 290 496 334
Agribusiness.......................... 0 0 0 0 0
Municipal Lease Finance Receivables... 0 0 0 0 0
Consumer Loans........................ 121 115 162 123 154
-------- -------- -------- -------- --------
Total Loans Charged-Off....... 3,606 1,749 2,619 1,021 1,018
-------- -------- -------- -------- --------
Recoveries:
Real Estate Loans..................... 35 564 55 47 0
Commercial, Financial and
Industrial......................... 176 180 100 92 57
Agribusiness.......................... 0 0 0 0 0
Municipal Lease Finance Receivables... 0 0 0 0 0
Consumer Loans........................ 8 19 44 29 42
-------- -------- -------- -------- --------
Total Loans Recovered......... 219 763 199 168 99
-------- -------- -------- -------- --------
Net Loans Charged-Off................... 3,387 986 2,420 853 919
-------- -------- -------- -------- --------
Provision Charged to Operating
Expense............................... 2,670 2,888 2,575 350 1,720
-------- -------- -------- -------- --------
Adjustments Incident to Mergers......... 0 711 0 1,125 1,587
-------- -------- -------- -------- --------
Allowance for Credit Losses at End of
period................................ $ 11,522 $ 12,239 $ 9,626 $ 9,471 $ 8,849
======== ======== ======== ======== ========
Net Loans Charged-Off to Average Total
Loans................................. 0.58% 0.18% 0.50% 0.18% 0.22%
Net Loans Charged-Off to Total Loans at
End of Period......................... 0.55% 0.17% 0.48% 0.17% 0.20%
Allowance for Credit Losses to Average
Total Loans........................... 1.96% 2.22% 1.98% 2.03% 2.12%
Allowance for Credit Losses to Total
Loans at End of Period................ 1.87% 2.08% 1.90% 1.92% 1.96%
Net Loans Charged-Off to Allowance for
Credit Losses......................... 29.40% 8.06% 25.14% 9.01% 10.39%
Net Loans Charged-Off to Provision for
Credit Losses......................... 126.85% 34.14% 93.98% 243.71% 53.43%
- - ---------------
(1) Net of deferred loan origination fees.
The Company's management believes that the allowance for credit losses at
December 31, 1997 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 delinquencies, nonperforming loans
or net loan charge offs that would increase the provision for credit losses and
thereby adversely affect the results of operations. There is no precise method
of predicting specific losses that ultimately may be charged against the
allowance for credit losses.
Table 9 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.
26
28
TABLE 9 -- ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES (AMOUNTS IN THOUSANDS)
DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994
--------------------- --------------------- --------------------- ---------------------
% OF % OF % OF % OF
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
FOR CREDIT TO TOTAL FOR CREDIT TO TOTAL FOR CREDIT TO TOTAL FOR CREDIT TO TOTAL
LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS
---------- -------- ---------- -------- ---------- -------- ---------- --------
Real Estate............ $ 298 40.5% $ 395 47.8% $ 155 34.0% $ 88 28.7%
Commercial and
Industrial........... 6,107 53.2% 7,794 46.1% 5,534 58.7% 4,182 63.5%
Consumer............... 121 2.8% 126 3.3% 42 3.1% 43 3.1%
Unallocated............ 4,996 N/A 3,924 N/A 3,895 N/A 5,158 N/A
------- ------- ------ ------
Total.................. $11,522 $12,239 $9,626 $9,471
======= ======= ====== ======
DECEMBER 31,
---------------------
1993
---------------------
% OF
ALLOWANCE CATEGORY
FOR CREDIT TO TOTAL
LOSSES LOANS
---------- --------
Real Estate............ $ 43 30.1%
Commercial and
Industrial........... 3,911 62.4%
Consumer............... 41 2.8%
Unallocated............ 4,854 N/A
------
Total.................. $8,849
======
INTEREST RATE RISK
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.
Interest rate risk is managed by attempting to control the spread between rates
earned on interest-earning assets and the rates paid on interest-bearing
liabilities within the constraints imposed by market competition in the Bank's
service area. Short term repricing risk is minimized by controlling the level of
floating rate loans and maintaining a downward sloping ladder of bond payments
and maturities. Basis risk is managed by the timing and magnitude of changes to
interest-bearing deposit rates. Yield curve risk is reduced by keeping the
duration of the loan and bond portfolios relatively short. Options risk in the
bond portfolio is monitored monthly and actions are recommended when
appropriate.
The Bank's management monitors the interest rate "sensitivity" risk to
earnings from potential changes in interest rates using various methods,
including a maturity/repricing gap analysis.
This analysis measures, at 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 10 provides the Bank's maturity/repricing gap analysis at December
31, 1997, and 1996. The Bank had a negative cumulative 180 day gap of $297.0
million at December 31, 1997. This represented an increase of $84.4 million, or
39.691%, over the 180 day cumulative negative gap of $212.6 million at December
31, 1996. In theory, this would indicate that at December 31, 1997, $297.0
million more in liabilities than assets would re-price if there was a change in
interest rates over the next 180 days. If interest rates increase, the negative
gap would tend to result in a lower net interest margin. If interest rates
decreased, the negative gap would tend to result in an increase in the net
interest margin.
27
29
TABLE 10 -- 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
--------- --------- --------- ---------
1997
Earning Assets:
Investment Securities at carrying value... $ 36,670 $ 15,265 $ 35,955 $ 404,260
Total Loans............................... 247,936 14,629 29,969 327,055
--------- --------- --------- ---------
Total............................. $ 284,606 $ 29,894 $ 65,924 $ 731,315
Interest Bearing Liabilities
Savings Deposits.......................... $ 341,443 $ 0 $ 0 $ 0
Time Deposits............................. 160,717 60,309 35,995 7,389
Other Borrowings.......................... 19,000 30,000 0 0
--------- --------- --------- ---------
Total............................. 521,160 90,309 35,995 7,389
--------- --------- --------- ---------
Period GAP.................................. $(236,554) $ (60,415) $ 29,929 $ 723,926
========= ========= ========= =========
Cumulative GAP.............................. $(236,554) $(296,969) $(267,040) $ 456,886
========= ========= ========= =========
1996
Earning Assets:
Investment Securities at carrying value... $ 19,359 $ 16,396 $ 43,047 $ 305,279
Total Loans............................... 293,359 11,422 23,111 264,312
--------- --------- --------- ---------
Total............................. $ 312,718 $ 27,818 $ 66,158 $ 569,591
Interest Bearing Liabilities
Savings Deposits.......................... $ 361,248 $ 0 $ 0 $ 0
Time Deposits............................. 107,564 48,313 33,720 8,569
Other Borrowings.......................... 26,000 10,000 20,000 0
--------- --------- --------- ---------
Total............................. 494,812 58,313 53,720 8,569
--------- --------- --------- ---------
Period GAP.................................. $(182,094) $ (30,495) $ 12,438 $ 561,022
========= ========= ========= =========
Cumulative GAP.............................. $(182,094) $(212,589) $(200,151) $ 360,871
========= ========= ========= =========
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, 1997, does not necessarily indicate that if interest rates
decreased net interest income would increase, or if interest rates increased net
interest income would decrease.
Approximately $333.9 million, or 67.85% of the total investment portfolio
at December 31, 1997 consisted of securities backed by mortgages. The final
maturity of these securities can be affected by the speed at which the
underlying mortgages repay. Mortgages tend to repay faster as interest rates
fall, and slower as interest rates rise. As a result, the Bank may be subject to
a "prepayment risk" resulting from greater funds available for reinvestment at a
time when available yields are lower. Conversely, the Bank may be subject to
"extension risk" resulting as lesser amounts would be available for reinvestment
at a time when available yields are higher. Prepayment risk includes the risk
associated with the payment of an investment's principal faster than originally
intended. Extension risk is the risk associated with the payment of an
investment's principal over a longer time period than originally anticipated. In
addition, there can be greater risk of price volatility for mortgage backed
securities as a result of anticipated prepayment or extension risk.
The Company's management also utilizes the results of a dynamic simulation
model to quantify the estimated exposure of net interest income to sustained
interest rate changes. The sensitivity of the Company's net interest income is
measured over a rolling two-year horizon.
28
30
The simulation model estimates the impact of changing interest rates on the
interest income from all interest earning assets and the interest expense paid
on all interest bearing liabilities reflected on the Company's balance sheet.
This sensitivity analysis is compared to policy limits which specify a maximum
tolerance level for net interest income exposure over a one year horizon
assuming no balance sheet growth, given both a 200 basis point upward and
downward shift in interest rates. A parallel and pro rata shift in rates over a
12 month period is assumed.
The following reflects the Company's net interest income sensitivity
analysis as of December 31, 1997:
ESTIMATED NET
SIMULATED INTEREST INCOME
RATE CHANGES SENSITIVITY
- - ------------------ ---------------
+200 basis points 0.83%
-200 basis points (12.67%)
The estimated sensitivity does not necessarily represent a Company forecast
and the results may not be indicative of actual changes to the Company's net
interest income. These estimates are based upon a number of assumptions
including: the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, pricing strategies on loans and
deposits, replacement of asset and liability cashflows, and other assumptions.
While the assumptions used are based on current economic and local market
conditions, there is no assurance as to the predictive nature of these
conditions including how customer preferences or competitor influences might
change. See Note 18 -- Fair Value Information, of the Notes to the Consolidated
Financial Statements.
The table below provides the actual balances at of December 31, 1997 of
interest earning assets and interest-bearing liabilities, including the average
rate earned or paid for 1997, the projected contractual maturities over the next
five years, and the estimated fair value of each category determined using
available market information and appropriate valuation methodologies.
MATURING
--------------------------------------------------------------------------
BALANCE FIVE YEARS ESTIMATED
1997 DECEMBER 31, RATE ONE YEAR TWO YEARS THREE YEARS FOUR YEARS AND BEYOND FAIR VALUE
---- ------------ ----- -------- --------- ----------- ---------- ----------- ----------
(AMOUNTS IN THOUSANDS)
Interest-Earning Assets
Investment securities held to
maturity...................... 58,044 4.97% 3,060 6,111 1,941 3,975 42,957 59,658
Investment securities
available for sale.......... 434,106 6.19% 84,830 71,957 50,108 50,769 176,442 434,106
Loans and lease finance
receivables, net............ 605,484 9.90% 292,534 50,190 35,868 50,199 176,693 594,315
--------- ------- ------- ------ ------- ------- ---------
Total interest earning
assets.................. 1,097,634 380,424 128,258 87,917 104,943 396,092 1,088,079
========= ======= ======= ====== ======= ======= =========
Interest-Bearing Liabilities
Interest-bearing deposits..... 605,854 2.16% 598,464 5,957 970 219 244 605,865
Demand note to U.S.
Treasury.................... 7,922 4.91% 7,922 7,922
Short-term borrowings......... 49,000 5.75% 49,000 49,000
--------- ------- ------- ------ ------- ------- ---------
Total interest-bearing
liabilities............. 662,776 655,386 5,957 970 219 244 662,787
========= ======= ======= ====== ======= ======= =========
LIQUIDITY RISK
Liquidity risk is the risk to earnings or capital resulting from the Bank's
inability to meet its obligations when they come due without incurring
unacceptable losses. It includes the ability to manage unplanned decreases or
changes in funding sources and to recognize or address changes in market
conditions that affect the Bank's ability to liquidate assets quickly and with
minimum loss of value. Factors considered in liquidity risk management are
stability of the deposit base; marketability, maturity, and pledging of
investments; and the demand for credit.
In general, liquidity risk is managed daily by controlling the level of Fed
funds and the use of funds provided by the cash flow from the investment
portfolio. To meet unexpected demands, lines of credit are maintained with
correspondent banks, the Federal Home Loan Bank and the Federal Reserve. The
sale of bonds maturing in the near future can also serve as a contingent source
of funds. Increases in deposit rates are considered a last resort as a means of
raising funds to increase liquidity.
29
31
For the Bank, sources of funds normally include principal payments on loans
and investments, other borrowed funds, and growth in deposits. Uses of funds
include withdrawal of deposits, interest paid on deposits, increased loan
balances, purchases, and other operating expenses.
Net cash provided by operating activities totaled $24.8 million for 1997,
$21.6 million for 1996, and $20.4 million for 1995. The increase for 1997
compared to 1996 and 1995 was the result of an increase in interest received and
an increase in interest paid and cash paid to suppliers and employees.
Cash used for investing activities totaled $127.1 million for 1997,
compared to $100.4 million for 1996, and $93.3 million for 1995. The funds used
for investing activities primarily represented increases in investments and
loans for each year reported. Investing activities for 1996 were also affected
by the $18.3 million purchase price paid for Citizens Bank of Pasadena. Funds
obtained from investing activities for each year were obtained from the sale and
maturity of investment securities and from the sale of other real estate owned.
Funds provided from financing activities totaled $67.5 million for 1997,
compared to $93.9 million for 1996, and $74.9 million for 1995. For 1997, cash
flows from financing activities resulted from increased time deposits, and to a
lesser extent, noninterest bearing demand deposits, partially offset by a
decrease in other borrowed funds. For 1996, cash flows from financing activities
were primarily from noninterest bearing demand deposits, increases in short term
borrowing, and increases in time deposits.
At December 31, 1997, cash and cash equivalents totaled $107.7 million.
This represented a decrease of $34.8 million, or 24.40%, from a total of $142.5
million at December 31, 1996.
Since the primary sources and uses of funds for the Bank are loans and
deposits, the relationship between gross loans and total deposits provides a
useful measure of the Bank's liquidity. Typically, the closer the ratio of loans
to deposits is to 100%, the more reliant the Bank is on its loan portfolio to
provide for short term liquidity needs. Since repayment of loans tends to be
less predictable than the maturity of investments and other liquid resources,
the higher the loan to deposit ratio the less liquid are the Bank's assets. For
1997, the Bank's loan to deposit ratio averaged 60.15%, compared to an average
ratio of 63.54% for 1996, and a ratio of 68.31% for 1995.
CVB is a company separate and apart from the Bank that must provide for its
own liquidity. Substantially all of CVB's revenues are obtained from dividends
declared and paid by the Bank. There are statutory and regulatory provisions
that could limit the ability of the Bank to pay dividends to CVB. At December
31, 1997, approximately $33.0 million of the Bank's equity was unrestricted and
available to be paid as dividends to CVB. Management of CVB believes that such
restrictions will not have an impact on the ability of CVB to meet its ongoing
cash obligations. As of December 31, 1997, neither the Bank nor CVB had any
material commitments for capital expenditures.
ACCOUNTING CHANGES
In August 1997, the FASB issued SFAS No. 128, "Earnings Per Share." This
statement replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. The statement also requires dual
presentation of basic and diluted earnings per share by entities with complex
capital structures and requires a reconciliation of the numerators and
denominators between the two calculations. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in the market prices
and interest rates. The Company's market risk arises primarily from interest
rate risk inherent in its lending and deposit taking activities. The Company
currently does not enter into futures, forwards, or option contracts. For
greater discussion on the risk management of the Company, see Item 7.
Management's Discussion and Analysis of Financial Condition and the Results of
Operation -- Risk Management.
30
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CVB FINANCIAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
----
Consolidated Financial Statements
Consolidated Balance Sheets -- December 31, 1997 and 1996... 34
Consolidated Statements of Earnings Years Ended December 31,
1997, 1996 and 1995....................................... 35
Consolidated Statements of Stockholders' Equity Years Ended
December 31, 1997, 1996 and 1995.......................... 36
Consolidated Statements of Cash Flows Years Ended December
31, 1997, 1996 and 1995................................... 37
Notes to Consolidated Financial Statements.................. 38
Independent Auditors' Report................................ 56
All schedules are omitted because they are not applicable, not material or
because the information is included in the financial statements or the notes
thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as hereinafter noted, the information concerning directors and
executive officers of the Company is incorporated by reference from the section
entitled "Discussion of Proposals recommended by the Board -- Proposal 1:
Election of Directors" and "Beneficial Ownership Reporting Compliance
Requirement in 1997" of the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A within 120 days after the end of the last fiscal
year. For information concerning executive officers of the Company, see Item
4(A), "Executive Officers of the Registrant" above.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning management remuneration and transactions is
incorporated by reference from the section entitled "Executive Compensation" of
the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated by reference from the sections entitled "Stock
Ownership" of the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
management and others is incorporated by reference from the section entitled
"Executive Compensation -- Certain Relationships and Related Transactions" of
the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
31
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
Reference is made to the Index to Financial Statements at page 31 for a
list of financial statements filed as part of this Report.
EXHIBITS
See Index to Exhibits at Page 57 of this Form 10-K.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following compensation plans and arrangements are filed as exhibits to
this Form 10-K: Agreement by and among D. Linn Wiley, CVB Financial Corp. and
Chino Valley Bank dated August 8, 1991, Exhibit 10.2; Chino Valley Bank Profit
Sharing Plan, Exhibit 10.3; 1991 Stock Option Plan, Exhibit 10.17; Severance
Compensation Agreement dated September 30, 1996 with Edwin J. Pomplun, Exhibit
10.29; Severance Compensation Agreement dated September 20, 1996 with Frank
Basirico, Exhibit 10.30; Severance Compensation Agreement dated September 27,
1996 with Jay Coleman, Exhibit 10.31; Severance Compensation Agreement dated
September 20, 1996 with Michael L. Thompson, Exhibit 10.32; Severance
Compensation Agreement dated September 27, 1996 with Tony Ellis, Exhibit 10.33;
Severance Compensation Agreement dated May 30, 1997 with Nancy Sinclair, 10.34;
Severance Compensation Agreement dated February 1, 1998 with Edward Biebrich,
10:35.
REPORTS ON FORM 8-K
None
32
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 18th day of
March, 1998.
CVB FINANCIAL CORP.
By: /s/ D. LINN WILEY
------------------------------------
D. Linn Wiley
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GEORGE A. BORBA Chairman of the Board March 18, 1998
- - --------------------------------------------------------
George A. Borba
/s/ JOHN A. BORBA Director March 18, 1998
- - --------------------------------------------------------
John A. Borba
/s/ RONALD O. KRUSE Director March 18, 1998
- - --------------------------------------------------------
Ronald O. Kruse
/s/ JOHN J. LOPORTO Director March 18, 1998
- - --------------------------------------------------------
John J. LoPorto
/s/ CHARLES M. MAGISTRO Director March 18, 1998
- - --------------------------------------------------------
Charles M. Magistro
/s/ JAMES C. SELEY Director March 18, 1998
- - --------------------------------------------------------
James C. Seley
/s/ EDWARD J. BIEBRICH JR. Chief Financial Officer March 18, 1998
- - -------------------------------------------------------- (Principal Financial and
Edward J. Biebrich Jr. Accounting Officer)
/s/ D. LINN WILEY Director, President and March 18, 1998
- - -------------------------------------------------------- Chief Executive Officer
D. Linn Wiley (Principal Executive Officer)
33
35
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
-------------- --------------
Investment securities held to maturity (Note 2)............. $ 58,043,631 $ 50,733,695
Investment securities available for sale (Note 2)........... 434,106,380 333,347,741
Loans and lease finance receivables, net (Notes 3, 4 and
5)........................................................ 605,483,738 576,686,562
-------------- --------------
Total earning assets.............................. 1,097,633,749 960,767,998
Cash and due from banks..................................... 107,724,671 142,501,555
Premises and equipment, net (Note 6)........................ 23,415,048 24,235,381
Other real estate owned, net (Note 5)....................... 4,395,026 6,195,698
Deferred taxes (Note 7)..................................... 3,504,935 4,479,662
Goodwill.................................................... 10,818,485 11,692,367
Other assets................................................ 11,277,310 10,548,033
-------------- --------------
TOTAL............................................. $1,258,769,224 $1,160,420,694
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 8):
Noninterest-bearing.................................... $ 469,841,191 $ 431,183,256
Interest-bearing....................................... 605,854,131 559,413,367
-------------- --------------
Total deposits.................................... 1,075,695,322 990,596,623
Demand note to U.S. Treasury.............................. 7,922,323 12,609,866
Short-term borrowings (Note 9)............................ 49,000,000 56,000,000
Securities purchased not settled.......................... 10,300,000
Other liabilities......................................... 13,766,609 12,127,134
-------------- --------------
Total liabilities................................. 1,156,684,254 1,071,333,623
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY (Notes 14 and 15):
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, 14,974,732 (1997) and
9,972,981 (1996)....................................... 62,255,157 61,941,967
Retained earnings......................................... 39,057,372 27,340,835
Unrealized gain (loss) on investment securities available
for sale, net of tax (Note 2).......................... 772,441 (195,731)
-------------- --------------
Total stockholders' equity........................ 102,084,970 89,087,071
-------------- --------------
TOTAL............................................. $1,258,769,224 $1,160,420,694
============== ==============
See accompanying notes to consolidated financial statements.
34
36
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE YEARS ENDED DECEMBER 31, 1997
1997 1996 1995
----------- ----------- -----------
INTEREST INCOME:
Loans, including fees............................. $58,135,345 $54,451,505 $50,158,139
----------- ----------- -----------
Investment securities:
Taxable........................................ 23,717,636 18,612,561 13,736,369
Tax-advantaged................................. 2,552,588 1,317,992 552,926
----------- ----------- -----------
26,270,224 19,930,553 14,289,295
----------- ----------- -----------
Federal funds sold................................ 250,127 512,393 247,966
----------- ----------- -----------
Total interest income..................... 84,655,696 74,894,451 64,695,400
=========== =========== ===========
INTEREST EXPENSE:
Deposits (Note 8)................................. 21,051,355 18,740,044 14,538,843
Other borrowings.................................. 3,924,197 2,726,425 2,015,682
----------- ----------- -----------
Total interest expense.................... 24,975,552 21,466,469 16,554,525
=========== =========== ===========
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT
LOSSES............................................ 59,680,144 53,427,982 48,140,875
PROVISION FOR CREDIT LOSSES (Note 5)................ 2,670,000 2,887,821 2,575,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES............................................ 57,010,144 50,540,161 45,565,875
----------- ----------- -----------
OTHER OPERATING INCOME:
Service charges on deposit accounts............... 7,350,224 7,176,956 6,727,166
Trust services.................................... 3,161,132 2,326,831
Litigation settlement (Note 10)................... 2,100,000
Other............................................. 3,311,520 2,674,990 2,363,276
----------- ----------- -----------
Total other operating income.............. 13,822,876 14,278,777 9,090,442
=========== =========== ===========
OTHER OPERATING EXPENSES:
Salaries, wages and employee benefits (Notes 11,
12
and 14)........................................ $21,654,043 $20,013,237 $16,494,846
Occupancy (Note 10)............................... 3,435,356 3,217,380 2,984,170
Equipment......................................... 3,363,562 3,111,464 2,278,699
Stationery and supplies........................... 2,621,776 2,438,084 1,832,810
Professional services............................. 2,296,112 1,985,331 2,860,529
Promotion......................................... 2,092,421 2,158,638 1,448,851
Data processing................................... 889,412 902,962 659,252
Deposit insurance premiums........................ 113,012 2,000 810,969
Other real estate owned expense (Note 5).......... 2,688,805 4,705,382 3,259,884
Other............................................. 3,735,623 3,374,825 2,423,006
----------- ----------- -----------
Total other operating expenses............ 42,890,122 41,909,303 35,053,016
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES........................ 27,942,898 22,909,635 19,603,301
INCOME TAXES (Note 7)............................... 10,573,111 9,576,299 8,145,842
----------- ----------- -----------
NET EARNINGS........................................ $17,369,787 $13,333,336 $11,457,459
=========== =========== ===========
BASIC EARNINGS PER COMMON SHARE (Note 13)........... $ 1.16 $ 0.90 $ 0.78
=========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE
(Note 13)......................................... $ 1.11 $ 0.87 $ 0.75
=========== =========== ===========
See accompanying notes to consolidated financial statements.
35
37
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
UNREALIZED
GAIN (LOSS)
COMMON ON SECURITIES
SHARES COMMON RETAINED AVAILABLE
OUTSTANDING STOCK EARNINGS FOR SALE
----------- ----------- ----------- -------------
BALANCE, JANUARY 1, 1995............... 8,056,774 $32,437,767 $36,128,068 $(6,625,907)
Common stock issued under stock
option plan and deferred
compensation agreements........... 58,843 454,380
10% stock dividend, declared on
December 20, 1995 and distributed
on January 23, 1996............... 811,090 10,544,170 (10,544,170)
Tax benefit from exercise of certain
stock options..................... 75,825
Cash dividends....................... (2,597,072)
Net earnings......................... 11,457,459
Unrealized gains on securities
available for sale, net of tax.... 6,929,696
---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995............. 8,926,707 43,436,317 34,520,110 303,789
Common stock issued under stock
option plan and deferred
compensation agreements........... 136,601 653,317
10% stock dividend, declared on
December 18, 1996 and distributed
on January 21, 1997............... 909,673 17,852,333 (17,852,333)
Tax benefit from exercise of certain
stock options..................... 422,499
Cash dividends....................... (3,082,777)
Net earnings......................... 13,333,336
Unrealized losses on securities
available for sale, net of tax.... (499,520)
---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996............. 9,972,981 61,941,967 27,340,835 (195,731)
Repurchase of common stock........... (95,182) $ (591,080) $(1,344,159)
Common stock issued under stock
option plan and deferred
compensation agreements........... 96,086 904,270
3-for-2 stock split, declared on
December 17, 1997 and distributed
on January 20, 1998............... 5,000,847
Tax benefit from exercise of certain
stock options..................... 193,720
Cash dividends....................... (4,502,811)
Net earnings......................... 17,369,787
Unrealized gains on securities
available for sale, net of tax.... $ 968,172
---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997............. 14,974,732 $62,255,157 $39,057,372 $ 772,441
========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
36
38
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1997
1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received.......................................... $ 80,544,355 $ 70,894,714 $ 62,860,948
Service charges and other fees received.................... 18,796,930 18,536,322 11,325,474
Interest paid.............................................. (24,553,903) (21,342,531) (14,960,400)
Cash paid to suppliers and employees....................... (39,539,189) (36,795,937) (31,269,910)
Income taxes paid.......................................... (10,400,000) (9,643,766) (7,557,407)
------------- ------------- -------------
Net cash provided by operating activities............ 24,848,193 21,648,802 20,398,705
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale....... 39,577,820 18,528,445 13,516,987
Proceeds from maturities of securities available for
sale..................................................... 80,660,969 66,919,013 28,692,902
Proceeds from maturities of securities held to maturity.... 2,015,748 1,697,771 1,667,623
Purchases of securities available for sale................. (206,509,803) (112,617,197) (117,966,851)
Purchases of securities held to maturity................... (10,690,624) (27,055,000) (6,767,297)
Net increase in loans...................................... (43,019,894) (30,442,838) (19,800,040)
Proceeds from sale of other real estate owned.............. 11,568,676 4,704,182 5,775,784
Proceeds from sale of premises and equipment............... 55,390 55,490 586,858
Purchases of premises and equipment........................ (2,228,075) (3,267,172) (6,828,719)
Consideration (paid) received in business combinations..... (18,322,106) (2,822,309)
Other investing activities................................. 1,439,770 (623,112) 4,974,883
------------- ------------- -------------
Net cash used in investing activities................ (127,130,023) (100,422,524) (93,325,561)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing deposits and
money market and savings accounts........................ 18,853,754 56,288,172 (10,948,901)
Net increase in time certificates of deposit............... 66,244,945 18,998,252 47,832,612
Net (decrease) increase in short-term borrowings........... (11,687,543) 21,247,889 40,288,754
Cash dividends on common stock............................. (4,502,811) (3,082,777) (2,597,072)
Repurchase of common stock................................. (1,935,239)
Proceeds from exercise of stock options.................... 531,840 415,402 283,014
------------- ------------- -------------
Net cash provided by financing activities............ 67,504,946 93,866,938 74,858,407
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ $ (34,776,884) $ 15,093,216 $ 1,931,551
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 142,501,555 111,886,440 109,828,593
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR, BEFORE
ACQUISITIONS............................................... 107,724,671 126,979,656 111,760,144
CASH AND CASH EQUIVALENTS RECEIVED IN ACQUISITIONS.......... 15,521,899 126,296
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 107,724,671 $ 142,501,555 $ 111,886,440
============= ============= =============
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings............................................... $ 17,369,787 $ 13,333,336 $ 11,457,459
------------- ------------- -------------
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Gain on sale of investment securities.................... (93,789) (139,702) (184,430)
Loss on sale of investment securities.................... 78,078 136,711 184,061
Gain on sale of premises and equipment................... (20,523) (16,736) (3,960)
Gain on sale of other real estate owned.................. (109,714) (135,824) (277,608)
(Accretion of discounts) amortization of premiums on
investment securities.................................. (1,127,868) (616,984) 274,095
Provision for credit losses.............................. 2,670,000 2,887,821 2,575,000
Provision for losses on other real estate owned.......... 1,675,000 3,449,178 1,900,000
Depreciation and amortization............................ 3,013,541 2,708,109 1,881,702
Change in accrued interest receivable.................... (140,764) (1,081,484) (970,821)
Change in accrued interest payable....................... 421,649 123,938 1,594,125
Deferred income tax provision (benefit).................. 264,207 (1,015,728) (1,382,537)
Change in other assets and other liabilities............. 848,589 2,016,167 3,351,619
------------- ------------- -------------
Total adjustments.................................... 7,478,406 8,315,466 8,941,246
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 24,848,193 $ 21,648,802 $ 20,398,705
============= ============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Real estate acquired through foreclosure................... $ 11,552,718 $ 6,231,881 $ 6,345,927
Loans to facilitate the sale of other real estate owned.... $ 4,518,500 $ 753,550 $ 2,487,251
Securities purchased not settled........................... $ 10,300,000
See accompanying notes to consolidated financial statements.
37
39
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of CVB Financial Corp. and
subsidiaries are in accordance with generally accepted accounting principles and
conform to practices within the banking industry. A summary of the significant
accounting policies consistently applied in the preparation of the accompanying
consolidated financial statements follows.
Principles of Consolidation -- The consolidated financial statements
include the accounts of CVB Financial Corp. (the "Company") and its wholly owned
subsidiaries, Citizens Business Bank (the "Bank"), Community Trust Deed
Services, and Chino Valley Bancorp., after elimination of all material
intercompany transactions and balances.
Nature of Operations -- The Company's primary operations are related to
traditional banking activities, including the acceptance of deposits and the
lending and investing of money through the operations of the Bank. The Bank also
provides trust services to customers through its branch offices. The Bank's
customers consist primarily of small to mid-sized businesses and individuals
located in the Inland Empire, San Gabriel Valley and Orange County. The Bank
operates 23 branches, with the headquarters located in the city of Ontario.
Investment Securities -- The Company classifies as held to maturity those
debt securities that it has the positive intent and ability to hold to maturity.
All other debt and equity securities are classified as available for sale.
Securities held to maturity are accounted for at cost and adjusted for
amortization of premiums and accretion of discounts. Securities available for
sale are accounted for at fair value, with the net unrealized gains and losses
(unless other than temporary), net of income tax effects, presented as a
separate component of stockholders' equity. Realized gains and losses on sales
of securities are recognized in earnings at the time of sale and are determined
on a specific identification basis.
Loans and Lease Finance Receivables -- Loans and lease finance receivables
are reported at the principal amount outstanding, less deferred net loan
origination fees and the allowance for credit losses. Interest on loans and
lease finance receivables is credited to income based on the principal amount
outstanding. Interest income is not recognized on loans and lease finance
receivables when collection of interest is deemed by management to be doubtful.
The Bank receives collateral to support loans, lease finance receivables
and commitments to extend credit for which collateral is deemed necessary. The
most significant categories of collateral are real estate, principally
commercial and industrial income-producing properties, real estate mortgages,
and assets utilized in agribusiness.
Nonrefundable fees and direct costs associated with the origination or
purchase of loans are deferred and netted against outstanding loan balances. The
deferred net loan fees and costs are recognized in interest income over the loan
term in a manner that approximates the level-yield method.
Provision and Allowance for Credit Losses -- The determination of the
balance in the allowance for credit losses is based on an analysis of the loan
and lease finance receivables portfolio and reflects an amount that, in
management's judgment, is adequate to provide for potential credit losses after
giving consideration to the character of the loan portfolio, current economic
conditions, past credit loss experience and such other factors as deserve
current recognition in estimating credit losses. The provision for credit losses
is charged to expense.
Premises and Equipment -- Premises and equipment are stated at cost less
accumulated depreciation, which is provided for in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated service lives
using the straight-line method. Properties under capital lease and leasehold
improvements are amortized over the shorter of their economic lives or the
initial term of the lease.
38
40
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Other Real Estate Owned -- Other real estate owned, shown net of an
allowance for losses of $398,649 and $1,931,682 at December 31, 1997 and 1996,
respectively, represents real estate acquired through foreclosure in
satisfaction of commercial and real estate loans and is stated at fair value,
minus estimated costs to sell (fair value at time of foreclosure). Loan balances
in excess of fair value of the real estate acquired at the date of acquisition
are charged against the allowance for credit losses. Any subsequent operating
expenses or income, reduction in estimated values, and gains or losses on
disposition of such properties are charged to current operations.
Business Combinations and Intangible Assets -- The Company has engaged in
the acquisition of financial institutions and the assumption of deposits and
purchase of assets from other financial institutions in its market area. The
Company has paid premiums on the transactions, and such premiums are recorded as
intangible assets, in the form of goodwill. These intangible assets are being
amortized over a 15-year period on the straight-line basis.
Income Taxes -- Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end, based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income.
Earnings Per Common Share -- Effective December 31, 1997 the Bank adopted
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." Accordingly, basic earnings per share are computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during each year. The computation of diluted earnings per share also
considers the number of shares issuable upon the assumed exercise of outstanding
common stock options. All earnings per common share amounts presented have been
restated in accordance with the provisions of this statement. Additionally,
earnings per common share and stock option amounts have been retroactively
restated to give effect to all stock splits and dividends. A reconciliation of
the numerator and the denominator used in the computation of basic and diluted
earnings per common share is included in Note 13.
Statement of Cash Flows -- Cash and cash equivalents as reported in the
statements of cash flows include cash and due from banks and federal funds sold.
Trust Services -- The Company maintains funds in trust for customers. The
amount of these funds and the related liability have not been recorded in the
accompanying consolidated balance sheets, as they are not assets or liabilities
of the Bank or Company, with the exception of any funds held on deposit with the
Bank. Trust fees are recorded on an accrual basis.
Use of Estimates in the Preparation of Financial Statements -- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications -- Certain amounts in the prior years' financial
statements and related footnote disclosures have been reclassified to conform to
the current year presentation.
39
41
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are
shown below. All securities held are publicly traded, and the estimated fair
values were obtained from an independent pricing service.
1997
----------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
Investment securities held to
maturity:
Mortgage-backed securities.......... $ 5,932,436 $ 249,359 $ (67,556) $ 6,114,239
Municipal bonds..................... 50,788,743 1,432,678 52,221,421
Other debt securities............... 1,322,452 1,322,452
------------ ---------- --------- ------------
Total....................... $ 58,043,631 $1,682,037 $ (67,556) $ 59,658,112
============ ========== ========= ============
Investment securities available for
sale:
U.S. Treasury securities............ $ 51,238,220 $ 288,650 $ (2,050) $ 51,524,820
Mortgage-backed securities.......... 78,261,159 179,803 (54,471) 78,386,491
CMO/REMICs.......................... 211,427,644 1,159,095 (175,534) 212,411,205
Government agency................... 53,052,488 95,820 (129,922) 53,018,386
Municipal bonds..................... 25,363,703 181,486 (36,011) 25,509,178
FHLB stock.......................... 13,256,300 13,256,300
------------ ---------- --------- ------------
Total....................... $432,599,514 $1,904,854 $(397,988) $434,106,380
============ ========== ========= ============
1996
---------------------------------------------------------
GROSS
UNREALIZED GROSS
AMORTIZED HOLDING HOLDING UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------ ---------- ----------- ------------
Investment securities held to
maturity:
Mortgage-backed securities......... $ 7,398,151 $ 402,845 $ (105,578) $ 7,695,418
Municipal bonds.................... 42,144,804 582,924 (66,037) 42,661,691
Other debt securities.............. 1,190,740 1,190,740
------------ ---------- ----------- ------------
Total...................... $ 50,733,695 $ 985,769 $ (171,615) $ 51,547,849
============ ========== =========== ============
Investment securities available for
sale:
U.S. Treasury securities........... $ 55,355,558 $ 286,512 $ (20,680) $ 55,621,390
Mortgage-backed securities......... 15,394,600 44,299 (56,988) 15,381,911
CMO/REMICs......................... 199,955,848 547,961 (947,136) 199,556,673
Government agency.................. 51,105,163 131,829 (39,040) 51,197,952
FHLB stock......................... 6,982,900 6,982,900
Other debt securities.............. 4,591,013 15,902 4,606,915
------------ ---------- ----------- ------------
Total...................... $333,385,082 $1,026,503 $(1,063,844) $333,347,741
============ ========== =========== ============
The CMO/REMIC securities noted above represent collateralized mortgage
obligations and real estate mortgage investment conduits. All are issues of U.S.
government agencies that guarantee payment of principal and interest of the
underlying mortgages.
At December 31, 1997 and 1996, investment securities having an amortized
cost of approximately $245,647,000 and $123,914,000, respectively, were pledged
to secure public deposits, short-term borrowings, and for other purposes as
required or permitted by law.
40
42
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amortized cost and fair value of debt securities at December 31, 1997,
by contractual maturity, are shown below. Although mortgage-backed securities
and CMO/REMICs have contractual maturities through 2022, expected maturities
will differ from contractual maturities because borrowers may have the right to
prepay such obligations without penalty.
HELD TO MATURITY AVAILABLE FOR SALE
------------------------------------ --------------------------------------
WEIGHTED WEIGHTED
AMORTIZED FAIR AVERAGE AMORTIZED FAIR AVERAGE
COST VALUE YIELD COST VALUE YIELD
----------- ----------- -------- ------------ ------------ --------
Due in one year or
less................... $ 2,552,966 $ 2,556,616 3.84% $ 36,065,745 $ 36,181,040 6.17%
Due after one year
through five years..... 11,425,094 11,630,737 4.44% 60,512,048 60,739,279 5.77%
Due after five years
through ten years...... 20,848,957 21,502,577 4.86% 27,265,090 27,289,990 4.42%
Due after ten years...... 17,284,178 17,853,943 5.24% 5,811,528 5,842,075 4.35%
----------- ----------- ----- ------------ ------------ -----
52,111,195 53,543,873 4.84% 129,654,411 130,052,384 5.54%
FHLB stock............... 13,256,300 13,256,300
Mortgage-backed
securities and
CMO/REMICs............. 5,932,436 6,114,239 6.31% 289,688,803 290,797,696 6.48%
----------- ----------- ----- ------------ ------------ -----
$58,043,631 $59,658,112 4.97% $432,599,514 $434,106,380 6.19%
=========== =========== ===== ============ ============ =====
Net realized gains on sales of investment securities available for sale are
as follows:
1997 1996 1995
-------- --------- ---------
Gross realized gains..................... $ 93,789 $ 139,702 $ 184,430
Gross realized losses.................... (78,078) (136,711) (184,061)
-------- --------- ---------
$ 15,711 $ 2,991 $ 369
======== ========= =========
3. LOANS AND LEASE FINANCE RECEIVABLES
The Bank grants loans to customers throughout its primary market in the
Inland Empire, San Gabriel Valley and Orange County areas of Southern
California, which have in the past experienced adverse economic conditions,
including declining real estate values. These factors have adversely affected
certain borrowers' ability to repay loans. Although management believes the
level of the allowance for credit losses is adequate to absorb losses inherent
in the loan portfolio, additional declines in the local economy and/or increases
in the interest rate charged on adjustable rate loans may result in increasing
loan losses that cannot be reasonably predicted at December 31, 1997.
The Bank makes loans to borrowers in a number of different industries. No
industry had aggregate loan balances exceeding 10% of the December 31, 1997 or
1996 loan and lease finance receivables balance, with the exception of loans
made to the agribusiness industry, which represented 11% of net loans
outstanding at December 31, 1997. At December 31, 1997, the Bank's loan
portfolio included approximately $245,806,000 of loans to borrowers involved in
several industries which are secured by commercial and residential real
properties.
At December 31, 1997 the Bank held approximately $389,839,000 of fixed rate
loans. These fixed rate loans bear interest at rates ranging from 5% to 18% and
have contractual maturities between 1 and 20 years.
41
43
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the components of loan and lease finance
receivables:
1997 1996
------------ ------------
Commercial, financial and industrial............ $258,987,377 $240,628,690
Real estate:
Construction.................................. 19,819,454 36,925,453
Mortgage...................................... 229,925,777 219,763,361
Loans to individuals for household, family and
other consumer expenditures................... 17,444,514 19,575,820
Municipal lease finance receivables............. 24,007,988 19,824,796
Agribusiness.................................... 69,404,310 55,486,266
------------ ------------
619,589,420 592,204,386
Allowance for credit losses (Note 5)............ (11,522,328) (12,238,816)
Deferred loan origination fees, net............. (2,583,354) (3,279,008)
------------ ------------
$605,483,738 $576,686,562
============ ============
4. TRANSACTIONS INVOLVING DIRECTORS AND SHAREHOLDERS
In the ordinary course of business, the Bank has granted loans to certain
directors, executive officers and the businesses with which they are associated.
All such loans and commitments to lend were made under terms that are consistent
with the Bank's normal lending policies.
The following is an analysis of the activity of all such loans:
1997 1996
---------- ----------
Outstanding balance, beginning of year.............. $3,040,000 $3,055,000
Credit granted, including renewals.................. 2,280,000 173,000
Repayments.......................................... (1,163,000) (188,000)
---------- ----------
Outstanding balance, end of year.................... $4,157,000 $3,040,000
========== ==========
5. ALLOWANCE FOR CREDIT AND OTHER REAL ESTATE OWNED LOSSES
Activity in the allowance for credit losses was as follows:
1997 1996 1995
----------- ----------- -----------
Balance, beginning of year.......... $12,238,816 $ 9,625,586 $ 9,470,736
Provision charged to operations..... 2,670,000 2,887,821 2,575,000
Additions to allowance resulting
from acquisitions................. 711,329
Loans charged off................... (3,606,118) (1,749,004) (2,619,620)
Recoveries on loans previously
charged off....................... 219,630 763,084 199,470
----------- ----------- -----------
Balance, end of year................ $11,522,328 $12,238,816 $ 9,625,586
=========== =========== ===========
The Bank accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." In accordance with this
statement, the Bank measures an impaired loan by using the present value of the
expected future cash flows discounted at the loan's effective interest rate or
the fair value of the collateral if the loan is collateral dependent. If the
calculated measurement of an impaired loan is less
42
44
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
than the recorded investment in the loan, a portion of the Bank's general
reserve is allocated as an impairment reserve.
At December 31, 1997 and 1996 the Bank had classified as impaired loan
amounts totaling $7,831,426 and $22,938,557, respectively. Of these loans, the
Bank has determined that, as of December 31, 1997 and 1996, $7,831,426 and
$16,892,056, respectively, of such loans required specific reserves, and
accordingly, the Bank has recorded specific reserves of $1,002,236 and
$3,466,565 on such loans. At December 31, 1996, the Bank has determined that
$6,046,501 of impaired loans do not require specific reserves in accordance with
SFAS No. 114 because the estimated present value of discounted future cash flows
or the fair value of the collateral, in the case of collateral-dependent loans,
exceeds the book value of the related loans at the date of measurement. At
December 31, 1997, the Bank had no such impaired loans without specific loss
reserves. Additional valuation allowances, however, may exist on such loans
based on management's judgment. The average recorded investment in impaired
loans during the years ended December 31, 1997, 1996 and 1995 was approximately
$12,492,000, $31,195,000 and $30,459,000, respectively. Interest income of
$1,112,962, $1,248,136 and $2,267,300 was recognized on impaired loans during
the years ended December 31, 1997, 1996 and 1995, respectively.
The accrual of interest on impaired loans is discontinued when the loan
becomes 90 days past due, or when the full collection of principal and interest
is in doubt. When an asset is placed on nonaccrual status, previously accrued
but unpaid interest is reversed against income. Subsequent collections of cash
may be applied as reductions to the principal balance, or recorded as income,
depending on management's assessment of the ultimate collectibility of the
asset. Nonaccrual assets may be restored to accrual status when principal and
interest become current and full payment of principal and interest is expected.
At December 31, 1997, loans on nonaccrual status totaled $3,955,390, all of
which are included in the impaired loans discussed above, compared to
$17,564,126 at December 31, 1996.
Due to financial difficulties encountered by certain borrowers, the Bank
has restructured the terms of certain loans to facilitate loan payments. As of
December 31, 1997 and 1996, loans with these restructured terms totaled
$2,091,602 and $5,374,431, respectively. The balance of impaired loans disclosed
above includes all troubled debt restructured loans that, as of December 31,
1997 and 1996, are considered impaired.
Interest foregone on nonaccrual and restructured loans outstanding during
the years ended December 31, 1997, 1996 and 1995 amounted to approximately
$66,000, $253,000 and $988,000, respectively.
Activity in the allowance for other real estate owned losses was as
follows:
1997 1996 1995
----------- ----------- -----------
Balance, beginning of year.......... $ 1,931,682 $ 1,195,843 $ 1,180,090
Provision charged to operations..... 1,675,000 3,449,178 1,900,000
Charge-offs of real estate owned.... (3,208,033) (2,713,339) (1,884,247)
----------- ----------- -----------
Balance, end of year................ $ 398,649 $ 1,931,682 $ 1,195,843
=========== =========== ===========
The Company incurred additional expenses of $1,013,805 (1997), $1,256,204
(1996) and $1,359,884 (1995) related to the holding and disposition of other
real estate owned.
43
45
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PREMISES AND EQUIPMENT
Premises and equipment consist of:
1997 1996
------------ ------------
Land............................................ $ 5,322,304 $ 5,322,304
Bank premises................................... 14,001,861 13,907,780
Furniture and equipment......................... 18,683,061 18,814,726
Leased property under capital lease............. 649,330 649,330
------------ ------------
38,656,556 38,694,140
Accumulated depreciation and amortization....... (15,241,508) (14,458,759)
------------ ------------
$ 23,415,048 $ 24,235,381
============ ============
7. INCOME TAXES
Income tax expense comprised the following:
1997 1996 1995
----------- ----------- -----------
Current provision:
Federal........................... $ 7,257,216 $ 7,662,723 $ 7,141,463
State............................. 3,051,688 2,929,304 2,386,916
----------- ----------- -----------
10,308,904 10,592,027 9,528,379
----------- ----------- -----------
Deferred provision (benefit):
Federal........................... 245,859 (751,898) (1,144,867)
State............................. 18,348 (263,830) (237,670)
----------- ----------- -----------
264,207 (1,015,728) (1,382,537)
----------- ----------- -----------
$10,573,111 $ 9,576,299 $ 8,145,842
=========== =========== ===========
Income tax liability (asset) comprised the following:
1997 1996
----------- -----------
Current:
Federal......................................... $ 57,122 $ 20,306
State........................................... 178,000 (36,146)
----------- -----------
235,122 (15,840)
----------- -----------
Deferred:
Federal......................................... (2,779,435) (3,614,523)
State........................................... (725,500) (865,139)
----------- -----------
(3,504,935) (4,479,662)
----------- -----------
$(3,269,813) $(4,495,502)
=========== ===========
44
46
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the net deferred tax asset are as follows:
1997 1996
FEDERAL ---------- ----------
Deferred tax liabilities:
Depreciation...................................... $1,935,812 $1,778,312
Valuation of trust assets......................... 587,417 631,750
Core deposit premium.............................. 392,237 516,102
Leases............................................ 88,074 91,279
Unrealized gain on investment securities.......... 470,534
Other............................................. 14,870 36,572
---------- ----------
Gross deferred tax liability........................ 3,488,944 3,054,015
---------- ----------
Deferred tax assets:
California franchise tax.......................... 772,222 699,521
Bad debt and credit loss deduction................ 3,408,617 2,888,135
Other real estate owned reserves.................. 674,365 1,369,386
Deferred compensation............................. 1,075,919 1,169,904
Self-insurance reserves........................... 176,752 147,485
Unrealized loss on investment securities.......... 118,694
Other............................................. 160,504 275,413
---------- ----------
Gross deferred tax asset............................ 6,268,379 6,668,538
---------- ----------
Net deferred tax asset -- federal................... $2,779,435 $3,614,523
========== ==========
STATE
Deferred tax liabilities:
Depreciation...................................... $ 507,255 $ 540,081
Valuation of trust assets......................... 181,931 203,965
Core deposit premium.............................. 121,481 166,627
Unrealized gain on investment securities.......... 96,375
Other............................................. 6,586
---------- ----------
Gross deferred tax liability........................ 907,042 917,259
---------- ----------
Deferred tax assets:
Bad debt and credit loss deduction................ 943,553 756,914
Other real estate owned reserves.................. 208,860 442,116
Deferred compensation............................. 333,227 377,704
Self-insurance reserves........................... 54,743 47,617
Unrealized loss on investment securities.......... 24,916
Other............................................. 92,159 133,131
---------- ----------
Gross deferred tax asset............................ 1,632,542 1,782,398
---------- ----------
Net deferred tax asset -- state..................... $ 725,500 $ 865,139
========== ==========
45
47
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the statutory income tax rate to the consolidated
effective income tax rate follows:
1997 1996 1995
--------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ---------- ------- ---------- -------
Federal income tax at statutory
rate........................... $ 9,780,014 35.0% $8,018,372 35.0% $6,861,155 35.0%
State franchise taxes, net of
federal benefit................ 1,968,857 7.1 1,732,558 7.6 1,397,010 7.1
Tax-exempt interest.............. (1,359,357) (4.9) (848,998) (3.7) (627,409) (3.2)
Other, net....................... 183,597 0.6 674,367 2.9 515,086 2.6
----------- ---- ---------- ---- ---------- ----
$10,573,111 37.8% $9,576,299 41.8% $8,145,842 41.5%
=========== ==== ========== ==== ========== ====
8. DEPOSITS
Time certificates of deposit with balances of $100,000 or more amounted to
approximately $186,265,000 and $125,612,000 at December 31, 1997 and 1996,
respectively. Interest expense on such deposits amounted to approximately
$8,016,000 (1997), $6,496,000 (1996) and $4,924,000 (1995).
At December 31, 1997, the scheduled maturities of time certificates of
deposit are as follows:
1998........................... $257,021,687
1999........................... 5,956,795
2000........................... 969,513
2001........................... 218,644
2002 and thereafter............ 243,910
------------
$264,410,549
============
9. SHORT-TERM BORROWINGS
During 1997 and 1996, the Bank entered into short-term borrowing agreements
with the Federal Home Loan Bank (the "FHLB"). The Bank had outstanding balances
of $45,000,000 and $40,000,000 under these agreements at December 31, 1997 and
1996, with weighted average interest rates of 5.8% and 5.5%, respectively. The
FHLB is holding certain investment securities of the Bank as collateral for
these borrowings. In addition, on December 31, 1997 and 1996, the Bank entered
into overnight agreements with a financial institution to borrow $4,000,000 at
6.3% annual interest and $16,000,000 at 8.0% annual interest, respectively. The
Bank maintains cash deposits with the financial institution as collateral for
these borrowings.
10. COMMITMENTS AND CONTINGENCIES
The Company leases land and buildings under operating leases for varying
periods extending to 2014, at which time the Company can exercise options that
could extend certain leases through 2026. The future minimum annual rental
payments required for leases, which have initial or remaining noncancelable
lease terms in excess of one year as of December 31, 1997, excluding property
taxes and insurance, are approximately as follows:
1998............................. $1,359,000
1999............................. 1,373,000
2000............................. 1,173,000
2001............................. 732,000
2002............................. 576,000
Succeeding years................. 1,495,000
----------
Total minimum payments
required....................... $6,708,000
==========
46
48
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Total rental expense for the Company was approximately $1,565,000 (1997),
$1,401,000 (1996) and $1,785,000 (1995).
At December 31, 1997, the Bank had commitments to extend credit of
approximately $153,653,000 and obligations under letters of credit of
$7,915,000. Commitments to extend credit are agreements to lend to customers,
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Commitments are generally variable rate, and
many of these commitments are expected to expire without being drawn upon. As
such, the total commitment amounts do not necessarily represent future cash
requirements. The Bank uses the same credit underwriting policies in granting or
accepting such commitments or contingent obligations as it does for
on-balance-sheet instruments, which consist of evaluating customers'
creditworthiness individually.
Standby letters of credit written are conditional commitments issued by the
Bank to guarantee the financial performance of a customer to a third party.
Those guarantees are primarily issued to support private borrowing arrangements.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. When deemed necessary,
the Bank holds appropriate collateral supporting those commitments. Management
does not anticipate any material losses as a result of these transactions.
The Bank has available lines of credit totaling $70,000,000 from certain
financial institutions.
In the ordinary course of business, the Company becomes involved in
litigation. In the opinion of management and based upon discussions with legal
counsel, except as discussed below, the disposition of such litigation will not
have a material effect on the Company's consolidated financial position or
results of operations. During 1996 the Company received $2,100,000 in settlement
of litigation with a former employee of the Company.
11. DEFERRED COMPENSATION PLANS
As a result of the acquisition of Citizens Commercial Trust and Savings
Bank of Pasadena ("CCT&SB"), the Bank assumed deferred compensation and salary
continuation agreements with several former employees of CCT&SB. These
agreements call for periodic payments at the retirement of such employees who
have normal retirement dates through 2021. In connection with these agreements,
the Bank assumed life insurance policies which it intends to use to fund the
related liability. Benefits paid to retirees amounted to approximately $54,000
and $51,000 for the years ended December 31, 1997 and 1996, respectively.
The Bank also assumed a death benefit program for certain former employees
of CCT&SB under which the Bank will provide benefits to the former employees
beneficiary 1) in the event of death while employed by the Bank; 2) after
termination of employment for total and permanent disability; 3) after
retirement, if retirement occurs after age 65. Amounts are to be paid to the
former employee's beneficiaries over a ten-year period in equal installments.
Further, the Bank assumed life insurance policies to fund any future liability
related to this program. Amounts paid for the benefit of retirees amounted to
approximately $221,000 and $170,000 for the years ended December 31, 1997 and
1996, respectively.
12. 401(K) AND PROFIT-SHARING PLAN
The Bank sponsors a 401(k) and profit-sharing plan for the benefit of its
employees. Employees are eligible to participate in the plan after 12 months of
consecutive service, provided they have completed 1,000 service hours in the
plan year. Employees may make contributions to the plan under the plan's 401(k)
component, and the Bank may make contributions under the plan's profit-sharing
component, subject to certain limitations. The Bank's contributions are
determined by the Board of Directors and amounted to approximately $1,021,000
(1997), $888,000 (1996) and $780,000 (1995).
47
49
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EARNINGS PER SHARE RECONCILIATION
WEIGHTED
INCOME AVERAGE SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- -------------- ---------
DECEMBER 31, 1997
BASIC EPS
Income available to common stockholders....... $17,369,787 14,986,220 $ 1.16
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of
outstanding options......................... 602,864 (0.05)
----------- ---------- ------
DILUTED EPS
Income available to common stockholders....... $17,369,787 15,589,084 $ 1.11
=========== ========== ======
DECEMBER 31, 1996
BASIC EPS
Income available to common stockholders....... $13,333,336 14,892,732 $ 0.90
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of
outstanding options......................... 526,370 (0.03)
----------- ---------- ------
DILUTED EPS
Income available to common stockholders....... $13,333,336 15,419,102 $ 0.87
=========== ========== ======
DECEMBER 31, 1995
BASIC EPS
Income available to common stockholders....... $11,457,459 14,675,755 $ 0.78
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of
outstanding options......................... 610,304 (0.03)
----------- ---------- ------
DILUTED EPS
Income available to common stockholders....... $11,457,459 15,286,059 $ 0.75
=========== ========== ======
14. STOCK OPTION PLANS
The Company has granted options to purchase shares of the Company's common
stock to certain officers and directors under plans established in 1981 and
1991. The 1981 plan had 84,795 options outstanding at December 31, 1995, all of
which were exercised during 1996, and no more options can be granted under this
plan. The 1991 plan authorizes the issuance of up to 2,053,400 shares. Option
prices under the plan are to be determined at the fair market value of such
shares on the date of grant, and options are exercisable in such installments as
determined by the Board of Directors. Each option shall expire no later than ten
years from the grant date.
At December 31, 1997, options for the purchase of 930,002 shares of the
Company's common stock were outstanding under the plan, of which options to
purchase 756,132 shares were exercisable at prices ranging from $3.42 to $10.00;
812,843 shares of common stock were available for the granting of future options
under
48
50
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the 1991 plan. The following table presents the status of all optioned shares
and per share amounts after giving effect to the 3-for-2 stock split:
SHARES PRICE RANGE
---------- --------------
Outstanding at January 1, 1995.................. 1,075,608 $1.21 - $ 7.06
Granted....................................... 203,945 7.71 - 8.18
Exercised..................................... (82,642) 3.42 - 6.60
Canceled...................................... (23,301) 3.42 - 3.42
----------
Outstanding at December 31, 1995................ 1,173,610 1.21 - 8.18
Granted....................................... 63,525 8.87 - 10.00
Exercised..................................... (201,232) 1.21 - 7.72
Canceled...................................... (6,892) 3.42 - 7.72
----------
Outstanding at December 31, 1996................ 1,029,011 3.42 - 10.00
Granted....................................... 44,921 3.42 - 15.75
Exercised..................................... (125,679) 3.42 - 8.87
Canceled...................................... (18,251) 3.42 - 8.87
----------
Outstanding at December 31, 1997................ 930,002 $3.42 - $15.75
==========
16,105 (1997), 14,641 (1996) and 13,310 (1995) shares of the Company's
common stock have been granted to a key executive in accordance with his
compensation agreement. This agreement does not require the granting of
additional shares to this executive through the remaining term of the agreement.
However, the Board of Directors may grant additional shares to this executive at
its discretion.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans other than for those options issued in accordance
with the employment agreement discussed above. The following table presents the
compensation cost for the Company's other stock option plans and the related
impact on the results of operations if such cost had been determined based upon
the fair value at the grant date for awards under the plan consistent with the
methodology prescribed under SFAS No. 123, "Accounting for Stock-Based
Compensation":
1997 1996
-------- -------
Reduction in net income................................. $148,571 $43,024
Reduction in basic earnings per common share............ $ 0.01 $ 0.01
Reduction in diluted earnings per common share.......... $ 0.01 $ 0.01
The fair value of the options granted was estimated using the Black-Scholes
option-pricing model with the following assumptions:
1997 1996
-------- --------
Dividend yield.......................................... 1.4% 0.2%
Volatility.............................................. 26.2% 23.8%
Risk-free interest rate................................. 6.0% 6.5%
Expected life........................................... 10 years 10 years
49
51
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking regulatory 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 Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgment by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (primarily common stock
and retained earnings less goodwill) to risk-weighted assets, and of Tier I
capital to average assets. Management believes, as of December 31, 1997, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1997 and 1996, the most recent notification from the
FDIC categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the minimum
total risk-based, Tier I risk-based, and Tier I leverage (tangible Tier I
capital divided by average total assets) ratios as set forth in the table below
must be maintained.
There are no conditions or events since that notification which management
believes have changed the institutions' category.
50
52
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The actual capital ratios of the Company and the Bank at December 31 are as
follows:
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES: ACTION PROVISIONS:
---------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- ------- -----
(000S) (000S) (000S)
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets)
greater
than or
equal
Company.............................. $100,005 13.4% $59,704 to 8.0% N/A
greater greater
than or than or
equal equal
Bank................................. 97,855 13.1% 59,759 to 8.0% $74,698 to 10.0%
Tier I Capital (to Risk-Weighted Assets)
greater
Company.............................. 90,495 12.1% 29,916 than 4.0% N/A
greater greater
Bank................................. 88,374 11.8% 29,957 than 4.0% 44,936 than 6.0%
Tier I Capital (to Average Assets)
greater
than or
equal
Company.............................. 90,495 7.6% 47,629 to 4.0% N/A
greater greater
than or than or
equal equal
Bank................................. 88,374 7.4% 47,770 to 4.0% 59,712 to 5.0%
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets)
greater
than or
equal
Company.............................. 86,561 12.3% 56,300 to 8.0% N/A
greater greater
than or than or
equal equal
Bank................................. 83,769 11.9% 56,315 to 8.0% 70,394 to 10.0%
Tier I Capital (to Risk-Weighted Assets)
greater
Company.............................. 77,591 11.0% 28,215 than 4.0% N/A
greater greater
Bank................................. 74,832 10.7% 27,975 than 4.0% 41,962 than 6.0%
Tier I Capital (to Average Assets)
greater
than or
equal
Company.............................. 77,591 7.2% 43,173 to 4.0% N/A
greater greater
than or than or
equal equal
Bank................................. 74,832 7.0% 42,761 to 4.0% 53,451 to 5.0%
In addition, California Banking Law limits the amount of dividends a bank
can pay without obtaining prior approval from bank regulators. Under this law,
the Bank could, as of December 31, 1997, declare and pay additional dividends of
approximately $33,000,000.
Banking regulations require that all banks maintain a percentage of their
deposits as reserves at the Federal Reserve Bank. On December 31, 1997, this
reserve requirement was approximately $697,000.
51
53
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEETS
(IN THOUSANDS)
1997 1996
-------- --------
Assets:
Investment in Citizens Business Bank................. $ 99,964 $ 86,328
Other assets, net.................................... 6,133 6,319
-------- --------
Total assets................................. $106,097 $ 92,647
======== ========
Liabilities............................................ $ 4,012 $ 3,560
Stockholders' equity................................... 102,085 89,087
-------- --------
Total liabilities and stockholders' equity... $106,097 $ 92,647
======== ========
STATEMENTS OF EARNINGS
(IN THOUSANDS)
1997 1996 1995
------- ------- -------
Equity in earnings of Citizens Business
Bank........................................ $17,568 $13,596 $11,632
Other expense, net............................ (198) (263) (175)
------- ------- -------
Net earnings.................................. $17,370 $13,333 $11,457
======= ======= =======
52
54
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
1997 1996 1995
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings..................................... $ 17,370 $ 13,333 $ 11,457
-------- -------- --------
Adjustments to reconcile net earnings to cash
provided by (used in) operating activities:
Earnings of Citizens Business Bank............ (17,568) (13,596) (11,632)
Other operating activities, net............... 1,272 1,028 (1,839)
-------- -------- --------
Total adjustments........................ (16,296) (12,568) (13,471)
-------- -------- --------
Net cash provided by (used in) operating
activities............................... 1,074 765 (2,014)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends received from Citizens Business Bank... 4,900 600 4,296
Dividends received from Community Trust Deed
Services...................................... 140
Sale of premises and land........................ 1,588
-------- -------- --------
Net cash provided by investing activities... 5,040 2,188 4,296
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends on common stock................... (4,503) (3,083) (2,597)
Proceeds from exercise of stock options.......... 532 415 283
Stock repurchase................................. (1,935)
-------- -------- --------
Net cash used in financing activities....... (5,906) (2,668) (2,314)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents...................................... 208 285 (32)
Cash and Cash Equivalents, Beginning of Year....... 1,045 760 792
-------- -------- --------
Cash and Cash Equivalents, End of Year............. $ 1,253 $ 1,045 $ 760
======== ======== ========
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data follows:
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997
Net interest income......................... $14,077 $14,463 $15,280 $15,860
Provision for credit losses................. 780 275 915 700
Net earnings................................ 3,350 3,750 4,785 5,485
Basic earnings per common share............. 0.22 0.25 0.32 0.37
Diluted earnings per common share........... 0.21 0.24 0.31 0.35
1996
Net interest income......................... $11,648 $13,679 $14,001 $14,100
Provision for credit losses................. 1,213 430 515 730
Net earnings................................ 2,758 3,297 3,656 3,622
Basic earnings per common share............. 0.19 0.22 0.24 0.24
Diluted earnings per common share........... 0.18 0.22 0.24 0.23
53
55
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to develop the estimates of fair value. Accordingly, the
estimates presented below are not necessarily indicative of the amounts the
Company could have realized in a current market exchange as of December 31, 1997
and 1996. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
1997 1996
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
ASSETS
Cash and due from banks......... $107,724,671 $107,724,671 $142,501,555 $142,501,555
Investment securities held to
maturity...................... 58,043,631 59,658,112 50,733,695 51,547,849
Investment securities available
for sale...................... 434,106,380 434,106,380 333,347,741 333,347,741
Loans and lease finance
receivables, net.............. 605,483,738 594,315,000 576,686,562 578,756,000
Accrued interest receivable..... 7,098,454 7,098,454 6,957,690 6,957,690
LIABILITIES
Deposits:
Noninterest-bearing........... 469,841,191 469,841,191 431,183,256 431,183,256
Interest-bearing.............. 605,854,131 605,865,000 559,413,367 559,670,000
Demand note to U.S. Treasury.... 7,922,323 7,922,323 12,609,866 12,609,866
Short-term borrowings........... 49,000,000 49,000,000 56,000,000 56,000,000
Securities purchased not
settled....................... 10,300,000 10,300,000
Acrued interest payable......... 3,279,124 3,279,124 2,857,475 2,857,475
The methods and assumptions used to estimate the fair value of each class
of financial instruments for which it is practicable to estimate that value are
explained below:
The carrying amount of cash and due from banks is considered to be a
reasonable estimate of fair value. For investment securities, fair values
are based on quoted market prices, dealer quotes and prices obtained from
an independent pricing service.
The carrying amount of loans and lease financing receivables is their
contractual amounts outstanding, reduced by deferred net loan origination
fees, and the allocable portion of the allowance for credit losses.
Variable rate loans are composed primarily of loans whose interest rates
float with changes in the prime interest rate. The carrying amount of
variable rate loans, other than such loans on nonaccrual status, is
considered to be their estimated fair value.
The fair value of fixed rate loans, other than such loans on
nonaccrual status, was estimated by discounting the remaining contractual
cash flows using the estimated current rate at which similar loans would be
made to borrowers with similar credit risk characteristics and for the same
remaining maturities, reduced by deferred net loan origination fees and the
allocable portion of the allowance for credit losses. Accordingly, in
determining the estimated current rate for discounting purposes, no
adjustment has been made for any change in borrowers' credit risks since
the origination of such loans.
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56
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Rather, the allocable portion of the allowance for credit losses is
considered to provide for such changes in estimating fair value.
The fair value of loans on nonaccrual status has not been specifically
estimated because it is not practicable to reasonably assess the credit
risk adjustment that would be applied in the market place for such loans.
As such, the estimated fair value of total loans at December 31, 1997 and
1996 includes the carrying amount of nonaccrual loans at each respective
date.
The fair value of commitments to extend credit and standby letters of
credit were not significant at either December 31, 1997 or 1996, as these
instruments predominantly have adjustable terms and are of a short-term
nature.
The amounts of accrued interest receivable on loans and lease finance
receivables and investments are considered to be stated at fair value.
The amounts payable to depositors for demand, savings, money market
accounts, the demand note to the U.S. Treasury, short-term borrowings,
securities purchased not settled and the related accrued interest payable
are considered to be stated at fair value. The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1997 and 1996. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
therefore, current estimates of fair value may differ significantly from the
amounts presented above.
19. BUSINESS ACQUISITIONS
On March 29, 1996, the Bank acquired by merger CCT&SB. A summary of the
significant components of the acquisition, which was accounted for as a
purchase, is as follows:
Cash and cash equivalents............................. $ 15,521,899
Fair value of investments acquired.................... 47,144,936
Fair value of loans acquired, net..................... 58,914,520
Fair value of other assets acquired................... 7,965,550
Fair value of deposits assumed........................ (111,736,346)
Fair value of other liabilities assumed, net of
expenses incurred in connection with the
acquisition......................................... (4,021,775)
Goodwill and other intangibles........................ 4,533,322
-------------
Consideration paid.................................... $ 18,322,106
=============
The results of operations since the date of the acquisition are included in
the accompanying consolidated statements of earnings.
55
57
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CVB Financial Corp.
Ontario, California:
We have audited the accompanying consolidated balance sheets of CVB
Financial Corp. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of CVB Financial
Corp.'s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CVB Financial Corp. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- - ---------------------------------------------------
Deloitte & Touche LLP
Los Angeles, California
January 23, 1998
56
58
INDEX TO EXHIBITS
EXHIBIT NO. PAGE
----------- ----
3.1 Articles of Company, as amended............................. *
3.2 Bylaws of Company, as amended(1)............................ *
3.3 Amendment to Articles of Company............................
10.1 Reserved.................................................... *
10.2 Agreement by and among D. Linn Wiley, CVB Financial Corp.
and Chino Valley Bank dated August 8, 1991(1)............... *
10.3 Chino Valley Bank Profit Sharing Plan, as amended(2)........ *
10.4 Definitive Agreement by and between CVB Financial Corp. and
Huntington Bank dated January 6, 1987(3).................... *
10.5 Transam One Shopping Center Lease dated May 20, 1986, by and
between Transam One and Chino Valley Bank for the East Chino
Office(3)................................................... *
10.6 Sublease dated November 1, 1986, by and between Eldorado
Bank and Chino Valley Bank for the East Highland
Office(3)................................................... *
10.7 Lease Assignment, Acceptance and Assumption and Consent
dated December 23, 1986, executed by the FDIC, Receiver of
Independent National Bank, Covina, California, as Assignor,
Chino Valley Bank, as Assignee, and INB Bancorp, as Landlord
under that certain Ground Lease dated September 30, 1983 by
and between INB Bancorp and Independent National Bank for
the Covina Office(3)........................................ *
10.8 Lease Assignment dated May 15, 1987 and Consent of Lessor
dated April 21, 1987 executed by Huntington Bank, as
Assignor, Chino Valley Bank as Assignee and Gerald G. Myers
and Lynn H. Myers as Lessors under that certain lease dated
March 1, 1979 between Lessors and Huntington Bank for the
Arcadia Office(4)........................................... *
10.9 Lease Assignment dated May 15, 1987 and Consent of Lessor
dated March 18, 1987 executed by Huntington Bank, as
Assignor, Chino Valley Bank as Assignee and George R. Meeker
as Lessor under that certain Memorandum of Lease dated May
1, 1982 between Lessor and Huntington Bank for the South
Arcadia Office(4)........................................... *
10.10 Lease Assignment dated May 15, 1987 and Consent of Lessor
dated March 17, 1987 executed by Huntington Bank, as
Assignor, Chino Valley Bank as Assignee and William R.
Hayden and Marie Virginia Hayden as Lessor under that
Certain Lease and Sublease, dated March 1, 1983, as amended,
between Lessors and Huntington Bank for the San Gabriel
Office(4)................................................... *
10.11 Lease Assignment dated May 15, 1987 executed by Huntington
Bank as Assignor and Chino Valley Bank as Assignee under
that certain Shopping Center Lease dated June 1, 1982,
between Anita Associates, a limited partnership and
Huntington Bank for the Santa Anita ATM Branch(4)........... *
10.12 Office Building Lease between Havenpointe Partners Ltd. and
CVB Financial Corp. dated April 14, 1987 for the Ontario
Airport Office(4) .......................................... *
10.13 Form of Indemnification Agreement(5)........................ *
10.14 Office Building Lease between Chicago Financial Association
I, a California Limited Partnership and CVB Financial Corp.
dated October 17, 1989, as amended, for the Riverside
Branch(6)................................................... *
10.15 Office Building Lease between Lobel Financial Corporation
and Chino Valley Bank dated June 12, 1990, for the Premier
Results data processing center(2)........................... *
10.16 Office Space Lease between Rancon Realty Fund IV and Chino
Valley Bank dated September 6, 1990, for the Tri-City
Business Center Branch(2)................................... *
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59
EXHIBIT NO. PAGE
----------- ----
10.17 1991 Stock Option Plan......................................
10.18 Reserved.................................................... *
10.19 Reserved.................................................... *
10.20 Lease by and between Allan G. Millew and William F. Kragness
and Chino Valley Bank dated March 5, 1993 for the Fontana
Office(7)................................................... *
10.21 Office Lease by and between Mulberry Properties and Chino
Valley Bank dated October 12, 1992(7)....................... *
10.22 Reserved.................................................... *
10.23 Reserved.................................................... *
10.24 Reserved.................................................... *
10.25 Lease by and between Bank of America and Chino Valley Bank
dated October 15, 1993, for the West Arcadia Office(8)...... *
10.26 Lease by and between RCI Loring and CVB Financial Corp dated
March 11, 1993, for the Riverside Office(8)................. *
10.27 Lease by and between 110 Wilshire Building Partners, a
California Partnership and Chino Valley Bank dated October
21, 1994 for the Fullerton Office(9)........................ *
10.28 Reserved.................................................... *
10.29 Severance Compensation Agreement dated September 30, 1996
with Edwin J. Pomplun.......................................
10.30 Severance Compensation Agreement dated September 20, 1996
with Frank Basirico.........................................
10.31 Severance Compensation Agreement dated September 27, 1996
with Jay Coleman............................................
10.32 Severance Compensation Agreement dated September 20, 1996
with Michael L. Thompson....................................
10.33 Severance Compensation Agreement dated September 27, 1996
with Tony Ellis.............................................
10.34 Severance Compensation Agreement dated May 30, 1997 with
Nancy Sinclair..............................................
10.35 Severance Compensation Agreement dated February 1, 1998 with
Edward Biebrich.............................................
22 Subsidiaries of Company(7).................................. *
23 Consent of Independent Certified Public Accountants.........
27 Financial Data Schedule.....................................
- - ---------------
* Not applicable.
(1) Filed as Exhibits 3.2, 10.2 and 10.18 to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1991, Commission file number
1-10394, which are incorporated herein by this reference.
(2) Filed as Exhibits 10.3, 10.15 and 10.16 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990, Commission file
number 1-10394, which are incorporated herein by this reference.
(3) Filed as Exhibits 10.4, 10.5, 10.6 and 10.7 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1986, Commission file
number 1-10394, which are incorporated herein by this reference.
(4) Filed as Exhibits 10.8, 10.9, 10.10, 10.11 and 10.12 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987, Commission
file number 1-10394, which are incorporated herein by this reference.
(5) Filed as Exhibit 10.13 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1988, Commission file number 1-10394, which
is incorporated herein by this reference.
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60
(6) Filed as Exhibits 3.1, 10.1 and 10.14 to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1989, Commission file number
1-10394, which are incorporated herein by this reference.
(7) Filed as Exhibit 10.20, 10.21 and 22 to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1992, Commission file number
1-10394, which are incorporated herein by this reference.
(8) Filed as Exhibit 10.22, 10.24, 10.25 and 10.26 to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1993, Commission file
number 1-10394, which are incorporated herein by this reference.
(9) Filed as Exhibit 10.27 to the Registrants Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, Commission file number 1-10394, which
is incorporated herein by this reference.
59