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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(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, 1998
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
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 February 16, 1999, the aggregate market value of the common stock
held by non-affiliates of the registrant was approximately $314,588,000.
Number of shares of common stock of the registrant outstanding as of
February 16, 1999: 16,557,313.
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, 1998 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 -- Risk 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, 1998, the
Company had $1.6 billion in total consolidated assets, $675.7 million in
consolidated net loans and $1.2 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 Department of Financial
Institutions and commenced operations as a California state
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chartered bank 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, 1998, the Bank had $1.6
billion in assets, $678.1 million in net loans and $1.2 billion in deposits.
The Bank currently has 24 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 24 offices, the Bank opened
eight as de novo branches and acquired the other sixteen in acquisition
transactions. Since 1990, the Bank has added twelve offices, two in 1990, two in
1993, two in 1994, one in 1995, four in 1996, and one on February 1, 1999.
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 $59.9 million in loans, and assumed approximately $111.7 million
in deposits. In addition, the Bank acquired a Trust Division that managed assets
of approximately $800.0 million which are not included on the balance sheet of
the Bank or Company. Concurrent with this 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.
The Bank also offers a wide range of financial services and trust services
through its Asset Management Department. These services include trust services,
mutual funds, annuities, 401K plans and individual investment accounts.
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 when
compared to the Bank.
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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 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 24 offices located
in the following counties: San Bernardino, Riverside, Orange, and Los Angeles.
Neither the deposits nor 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, 1998, the Company employed 427 persons -- 272 on a
full-time and 155 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 depository institutions, is
primarily dependent on interest rate differentials. In general, the difference
between the interest rates paid by the Bank on interest-bearing liabilities,
such as deposits and other borrowings, 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
Bank's earnings. These rates are highly sensitive to many factors that are
beyond the control of the Company and the Bank, such as inflation, recession and
unemployment. The impact which future changes in domestic and foreign economic
conditions might have on the Company and the Bank cannot be predicted.
The business of the Company and the Bank 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."
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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 the
material 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.
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 next 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 Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company
is required to file with the Federal Reserve Board quarterly and annual reports
and such additional information as the Federal Reserve Board may require
pursuant to the BHCA. The Federal Reserve Board may conduct examinations of the
Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
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
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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.
The Company's securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As such, the Company is subject to the information, proxy solicitation,
insider trading, and other requirements and restrictions of the Exchange 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.
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 $38.0 million at
December 31, 1998.
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. The Commissioner may impose similar limitations on the Bank.
See "-- Prompt Corrective Regulatory Action and
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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), 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 and the Bank, compared to its minimum regulatory
capital requirements as of December 31, 1998.
ACTUAL REQUIRED EXCESS
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AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- ------- -----
(DOLLARS IN THOUSANDS)
Leverage ratio
Company......................... $104,693 7.2% $58,163 4.0% $46,530 3.2%
Bank............................ 102,690 7.1% 57,854 4.0% 44,836 3.1%
Tier 1 risk-based ratio
Company......................... 104,693 12.2% 34,326 4.0% 70,367 8.2%
Bank............................ 102,690 12.0% 34,230 4.0% 68,460 8.0%
Total risk-based ratio
Company......................... 115,562 13.5% 68,481 8.0% 47,081 5.5%
Bank............................ 113,533 13.3% 68,291 8.0% 45,242 5.3%
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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, 1998, the
Bank and the Company exceeded 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.
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, 1998, 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 "Paperwork Reduction 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
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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 Paperwork Reduction 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 Paperwork Reduction Act also
provided for the merging of the BIF and the SAIF by January 1, 1999 provided
there were no financial institutions still chartered as savings associations at
that time. However, as of January 1, 1999, there were still financial
institutions chartered as savings associations. 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.
INTERSTATE BANKING AND BRANCHING
The BHCA 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 February 23, 1998, the Bank
was rated satisfactory in complying with its CRA obligations.
YEAR 2000 COMPLIANCE
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. If a
federal banking agency determines that the Bank is operating in an unsafe and
unsound manner, the Bank may be required to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action being taken, which may include a cease and desist order and
fines. In November 1998, the FDIC conducted a Year 2000 compliance exam. In
January 1999, the Federal Reserve Bank conducted a Year 2000 compliance exam.
9
10
RISK 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 San Bernardino County, Riverside County, the northern portion of
Orange County, and the eastern portion of Los Angeles County in Southern
California. As a result of this geographic concentration, the Company's results
depend largely upon economic conditions in these areas. A deterioration in
economic conditions in the Company's market areas could have material adverse
impact on the quality of the Company's loan portfolio, the demand for its
products and services and its financial condition and results of operations.
Interest Rates. The Company's earnings are impacted by changing interest
rates. Changes in interest rates impact the level of loans, deposits and
investments, the credit profile of existing loans and the rates received on
loans and securities and the rates paid on deposits and borrowings. The Company
anticipates that interest rate levels will remain generally constant in 1999.
However, significant fluctuations in interest rates may have an adverse affect
on the Company's financial condition and results of operations.
Government Regulation and Monetary Policy. The banking industry is subject
to extensive federal and state supervision and regulation. Significant new laws
or changes in existing loans, 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 and a material change in these
conditions could have a material adverse impact on the Company's financial
condition and results of operations.
Competition. The banking and financial services businesses 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. These policies and procedures, however, may not
prevent unexpected losses that could have a material adverse effect on the
Company's results.
YEAR 2000 COMPLIANCE
Most of the Company's operations are dependent on the efficient functioning
of the Company's computer systems and software. Computer system failures or
disruption could have a material adverse effect on the Company's financial
condition and results of operations.
Many computer programs were designed and developed utilizing only two
digits in date fields, thereby creating the inability to recognize the year 2000
or years thereafter. Beginning in the year 2000, these date codes will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. This year 2000 issue creates risks for the Company from unforeseen or
unanticipated problems in its internal computer systems as well as from computer
systems of the Federal Reserve Bank, correspondent banks, customers and
suppliers. Failures of these systems or untimely corrections could have a
material adverse effect on the Company's financial condition and results of
operations.
The Company's computer systems and programs are designed and supported by
companies specifically in the business of providing such products and services.
The Company's year 2000 plan includes evaluating existing hardware, software,
ATMs, vaults, alarm systems, communication systems and other electrical devices,
testing critical application programs and systems, both internally and
externally, establishing a
10
11
contingency plan and upgrading hardware and software as necessary. The initial
phases of the project were to become aware of pertinent year 2000 issues and to
assess and identify all systems, programs and business processes requiring
modification and to develop comprehensive renovation plans as needed. These
initial phases have been completed. The next phases were to execute those
renovation plans and begin testing systems by simulating year 2000 data
conditions. The renovation as it relates to "bank critical" systems and
processes is complete. The testing or validation phase as it relates to "bank
critical" systems and processes is 99% complete. Renovation and testing is
scheduled to be completed by March 31, 1999. Failure to be year 2000 compliant
or incurrence of significant costs to render the Company year 2000 compliant
could have a material adverse effect on the Company's financial condition and
results of operations.
The Company is evaluating its major customers and suppliers to determine if
they are year 2000 compliant. Failure of any material customer or supplier to be
year 2000 compliant could also have a material adverse effect on the Company.
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 North 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 seventeen of its offices under leases
expiring at various dates from 1999 through 2027. 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, 1998, was $3.8 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 Supplementary 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.
In May 1998, the Bank received an unfavorable jury judgment as a result of
the lawsuit filed against them by MRI Grand Terrace, Inc. ("MRI"). The award to
MRI and its joint venture partner, Tri-National Development Corp. was
approximately $4.9 million, which included approximately $2.1 million in
compensatory damages, $1.6 million in punitive damages, and $1.2 million in
pre-judgment interest. The lawsuit alleges that the Bank misled MRI in their
purchase of a commercial real estate property from the Bank. The Bank
subsequently made a motion to the trial judge to vacate the jury verdict, and on
August 14, 1998 the motion was denied. The Bank filed an appeal on August 19,
1998 and is proceeding with the appellate process, which could take an extended
period of time to complete. During 1998, the Bank has accrued a liability for
that portion of the judgment discussed above related to Tri-National Development
Corp. Management believes the ultimate outcome of this case will not have a
material effect on the Company's future 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
1998.
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ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
As of February 15, 1999, 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 66
D. Linn Wiley........................ President and Chief Executive Officer of the Company 60
and the Bank
Frank Basirico....................... Executive Vice President/Senior Loan Officer of the Bank 44
Edward J. Biebrich Jr................ Chief Financial Officer of the Company and Executive 55
Vice President and Chief Financial Officer of the Bank
Jay W. Coleman....................... Executive Vice President of the Bank 56
Ed Pomplun........................... Executive Vice President of the Bank 52
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. 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.
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.
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13
PART II
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Shares of CVB Financial Corp. common stock price decreased from an average
price of $23.321 per share for the first quarter of 1998 to an average per share
price of $21.711 for the fourth quarter of 1998. 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, to the ten percent stock dividend declared in
1998 and the three for two stock split declared in 1997. The Company had
approximately 1,072 shareholders of record as of December 31, 1998.
TWO YEAR SUMMARY OF COMMON STOCK PRICES
QUARTER
ENDED HIGH LOW DIVIDENDS
------- ------ ------ ---------
03/31/1997 $12.43 $10.84 $0.06 Cash Dividend
06/30/1997 $16.06 $11.14 $0.06 Cash Dividend
09/30/1997 $15.38 $12.20 $0.06 Cash Dividend
12/31/1997 $22.57 $15.30 $0.09 Cash Dividend
3-for-2 Stock Split
03/31/1998 $26.19 $18.75 $0.09 Cash Dividend
06/30/1998 $24.21 $19.32 $0.09 Cash Dividend
09/30/1998 $22.22 $17.05 $0.09 Cash Dividend
12/31/1998 $23.64 $19.21 $0.12 Cash Dividend
10% Stock Dividend
- -------------------------
The Company lists its common stock on the American Stock Exchange under the
symbol "CVB."
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ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
-------------- -------------- -------------- ------------ ------------
Net Interest Income............. $ 65,591,650 $ 59,680,144 $ 53,427,982 $ 48,140,875 $ 42,818,669
Provision for Credit Losses..... 2,500,000 2,670,000 2,887,821 2,575,000 350,000
Other Operating Income.......... 14,975,942 13,822,876 14,278,777 9,090,442 7,586,410
Other Operating Expenses........ 45,024,244 42,890,122 41,909,303 35,053,016 32,434,624
-------------- -------------- -------------- ------------ ------------
Earnings Before Income Taxes.... 33,043,348 27,942,898 22,909,635 19,603,301 17,620,455
Income Taxes.................... 12,255,941 10,573,111 9,576,299 8,145,842 7,185,679
-------------- -------------- -------------- ------------ ------------
NET EARNINGS.................... $ 20,787,407 $ 17,369,787 $ 13,333,336 $ 11,457,459 $ 10,434,776
============== ============== ============== ============ ============
Basic Earnings Per Common
Share(1)...................... $ 1.26 $ 1.05 $ 0.81 $ 0.71 $ 0.65
============== ============== ============== ============ ============
Diluted Earnings Per Common
Share(1)...................... $ 1.21 $ 1.01 $ 0.79 $ 0.68 $ 0.63
============== ============== ============== ============ ============
Stock Splits.................... 3-for-2
Stock Dividends................. 10% 10% 10% 10%
Cash Dividends Declared Per
Share(1)...................... $ 0.39 $ 0.27 $ 0.19 $ 0.15 $ 0.14
Dividend Pay-Out Ratio.......... 30.95% 25.86% 23.85% 23.21% 23.30%
FINANCIAL POSITION:
Assets........................ $1,555,206,734 $1,258,769,224 $1,160,420,694 $936,939,922 $836,095,349
Net Loans..................... 675,668,220 605,483,738 576,686,562 496,448,905 484,617,731
Deposits...................... 1,215,304,966 1,075,695,322 990,596,623 803,573,853 762,623,921
Stockholders' Equity.......... 115,707,064 102,084,970 89,087,071 78,260,216 61,939,928
Book Value Per Share(1)....... 7.00 6.20 5.41 4.83 3.85
Equity-to-Assets Ratio(2)..... 7.44% 8.11% 7.68% 8.35% 7.41%
FINANCIAL PERFORMANCE:
Return on:
Beginning Equity............ 20.36% 19.50% 17.04% 18.50% 17.40%
Average Equity.............. 18.66% 18.22% 16.09% 16.13% 16.84%
Return on Average Assets...... 1.52% 1.50% 1.31% 1.39% 1.40%
CREDIT QUALITY:
Allowance for Credit Losses... $ 13,364,649 $ 11,522,328 $ 12,238,816 $ 9,625,586 $ 9,470,736
Allowance/Total Loans......... 1.94% 1.87% 2.08% 1.90% 1.92%
Total Non Performing Loans.... $ 7,217,566 $ 6,471,063 $ 23,559,720 $ 26,847,307 $ 21,567,108
Non Performing Loans/Total
Loans....................... 1.05% 1.05% 4.00% 5.31% 4.37%
Allowance/Non Performing
Loans....................... 185.17% 178.06% 51.95% 35.85% 43.91%
Net Charge-Offs............... $ 657,679 $ 3,386,488 $ 985,920 $ 2,420,150 $ 853,363
Net Charge-Offs/Average
Loans....................... 0.10% 0.58% 0.18% 0.50% 0.18%
- ---------------
(1) All per share information has been retroactively adjusted to reflect the 10%
stock dividend declared December 16, 1998, as to holders of record on
December 31, 1998, and paid January 25, 1999 and the 3-for-2 stock split
declared in 1997, and 10% stock dividends declared in 1996, 1995 and 1994.
(2) Stockholders' equity divided by total assets.
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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 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
24 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".
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 year 1998, 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
1998 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.
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 (La Canada Flintridge, Pasadena, Colorado-Catalina(Pasadena), and San
Marino). 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.
The acquisition contributed significantly to the growth of the Company's
deposits, loans and assets.
ANALYSIS OF THE RESULTS OF OPERATIONS
The Company reported net earnings of $20.8 million for the year ended
December 31, 1998. This represented an increase of $3.4 million, or 19.68%, over
net earnings of $17.4 million for the year ended December 31, 1997. Net earnings
for 1997 increased $4.1 million, or 30.27%, over net earnings of $13.3 million
for the year ended December 31, 1996. Diluted earnings per share were $1.21 in
1998, $1.01 in 1997, and $0.79 in 1996. Basic earnings per share were $1.26 in
1998, $1.05 in 1997, and $0.81 in 1996. 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 1998 and 1996.
The increase in net earnings for 1998 compared to 1997 was primarily the
result of an increase in net interest income and an increase in other operating
income. The increase in earnings for 1997 compared to 1996 was the result of an
increase in net interest income. Increased net interest income for 1998 and 1997
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 1998 and 1997 were
partially offset by increases in operating expenses.
For 1998, the Company's return on average assets was 1.52%, compared to a
return on average assets of 1.50% for 1997, and a return of 1.31% for 1996. The
Company's return on average stockholders' equity was 18.66% for 1998, compared
to a return of 18.22% for 1997, and 16.09% for 1996.
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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)
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
ASSETS
Investment Securities Taxable (1).... $ 511,708 $31,784 6.21% $ 376,851 $23,718 6.29% $ 303,086 $18,613 6.14%
Tax preferenced (2).............. 97,734 4,370 6.27% 54,098 2,552 6.62% 26,330 1,318 7.02%
Federal Funds Sold................... 9,041 479 5.30% 4,767 250 5.24% 9,893 512 5.18%
Loans (3) (4)........................ 632,809 60,207 9.51% 587,353 58,135 9.90% 552,393 54,451 9.86%
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total Earning Assets......... 1,251,292 96,840 7.88% 1,023,069 84,655 8.38% 891,702 74,894 8.46%
Total Non Earning Assets..... 113,740 132,942 124,928
---------- ---------- ----------
Total Assets................. $1,365,032 $1,156,011 $1,016,630
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand Deposits...................... $ 441,918 $ 388,250 $ 327,789
Savings Deposits (5)................. 372,640 $ 9,288 2.49% 363,171 $ 9,186 2.53% 353,190 $ 8,901 2.52%
Time Deposits........................ 281,031 14,498 5.16% 225,016 11,865 5.27% 188,319 9,839 5.22%
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Total Deposits............... 1,095,589 23,786 2.17% 976,437 21,051 2.16% 869,298 18,740 2.16%
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Other Borrowings..................... 136,189 7,462 5.48% 69,542 3,924 5.64% 51,185 2,726 5.33%
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Interest Bearing Liabilities......... 789,860 31,248 3.96% 657,729 24,975 3.80% 592,694 21,466 3.62%
---------- ---------- ----------
Other Liabilities.................... 21,876 14,683 13,276
Stockholders' Equity................. 111,378 95,349 82,871
---------- ---------- ----------
Total Liabilities and
Stockholders' Equity....... $1,365,032 $1,156,011 $1,016,630
========== ========== ==========
Net interest spread.................. 3.92% 4.58% 4.84%
Net interest margin.................. 5.38% 5.93% 6.05%
Net interest margin excluding loan
fees............................... 5.09% 5.57% 5.69%
- ---------------
(1) Includes certificates of deposit purchased from other institutions.
(2) Yields 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:
1998, $3,711; 1997, $3,767; 1996, $3,203.
(4) Non performing loans are included in net loans as follows, (000)s omitted:
1998, $7,218; 1997, $6,471; 1996, $23,559.
(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 and fees earned on loans and investments
less the interest paid on deposit accounts and borrowed funds. Net interest
income totaled $65.6 million for 1998. This represented an increase of $5.9
million, or 9.91%, over net interest income of $59.7 million for 1997. Net
interest income for 1997 increased $6.3 million, or 11.70%, over net interest
income of $53.4 million for 1996. The increases in net interest income for 1998
and 1997 were primarily 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
16
17
bearing liabilities. The Company's net interest margin was 5.38% for 1998,
compared to 5.93% for 1997, and 6.05% for 1996. 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 1998 and
1997.
In the last quarter of 1998, Prime Rate decreased. This had the effect of
reducing the yield on loans. The decrease in Prime Rate was the effect of a
decrease in the overnight Federal Funds Rate and the Discount Rate by the
Federal Reserve Board. This had the effect of not only reducing Prime Rate, but
also the rates in the bond market and, to some extent the rates on deposits.
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 3.92% for 1998, compared to 4.58% for
1997, and 4.84% for 1996. The decrease in the net interest spread for 1998 and
1997 resulted from decreases in the yield on earning assets and an increase in
the cost of average interest bearing liabilities.
The yield on earnings assets decreased to 7.88% for 1998, from 8.38% for
1997, and 8.46% for 1996. The decrease in the yield on earning assets for 1998
was the result of lower yields on investment securities, loans, and a less
profitable asset mix. The decrease in the yield on earning assets for 1997
reflects lower yields on tax preferred investment securities and a less
profitable asset mix. The yield on average loans decreased to 9.51% for 1998,
compared to 9.90% for 1997, which represented a decrease from a yield of 9.86%
for 1996. The decrease in the yields on loans for 1998 was the result of a
lowering interest rate environment and increased price competition for loans
compared to 1997. The decrease in the yields on loans for 1997 was the result of
increased price competition for loans compared to 1996. Loans typically have
higher yields than investments and federal funds sold. Total loans, measured as
a percentage of average earning assets, decreased to 50.57% for 1998, compared
with 57.41% in 1997, and 61.95% in 1996. Conversely, average investment
securities, including federal funds sold, increased to 49.43% of average earning
assets for 1998, compared with 42.59% for 1997, and 38.05% for 1996.
The cost of average interest bearing liabilities increased to 3.96% for
1998, compared to 3.80% for 1997, and 3.62% for 1996. For the most part, the
increase in the cost of average interest bearing liabilities for 1998 and 1997
reflected increases in comparable interest rates, a shift to time deposits from
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
40.34% for 1998, compared to 39.76% for 1997, and 37.71% for 1996. 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 in 1998, 1997 and 1996. The increases were the result of
increased balances of average earning assets. Interest income totaled $96.8
million for 1998. This represented an increase of $12.1 million, or 14.39%,
compared to total interest of $84.7 million for 1997. For 1997, total interest
income increased $9.8 million, or 13.03%, from total interest income of $74.9
million for 1996.
Interest expense totaled $31.2 million for 1998. This represented an
increase of $6.2 million, or 25.11%, over total interest expense of $25.0
million for 1997. For 1997, total interest expense increased $3.5 million, or
16.35%, over total interest expense of $21.5 million for 1996. For both 1998 and
1997, 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.
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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.
TABLE 2 -- RATE AND VOLUME ANALYSIS FOR CHANGES IN INTEREST INCOME, INTEREST
EXPENSE, AND NET INTEREST INCOME
(AMOUNT IN THOUSANDS)
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
---------------------------------- -------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------ ------- ------ ------ ------ ---- ------ ------
Interest Income:
Taxable investment securities.......... $8,487 $ (310) $(111) $8,066 $4,530 $463 $112 $5,105
Tax preferenced securities............. 2,059 (133) (108) 1,818 1,390 (76) (80) 1,234
Federal funds.......................... 224 3 2 229 (265) 7 (4) (262)
Loans.................................. 4,499 (2,253) (174) 2,072 3,446 223 15 3,684
------ ------- ----- ------ ------ ---- ---- ------
Total earning assets..................... 15,269 (2,693) (391) 12,185 9,101 617 43 9,761
------ ------- ----- ------ ------ ---- ---- ------
Interest Expense:
Savings deposits....................... 240 (135) (3) 102 252 32 1 285
Time deposits.......................... 2,954 (257) (64) 2,633 1,917 92 17 2,026
Other borrowings....................... 3,761 (114) (109) 3,538 978 162 58 1,198
------ ------- ----- ------ ------ ---- ---- ------
Total interest bearing liabilities....... 6,955 (506) (176) 6,273 3,147 286 76 3,509
------ ------- ----- ------ ------ ---- ---- ------
Net Interest Income...................... $8,314 $(2,187) $(215) $5,912 $ 5,954 $331 $(33) $6,252
------ ------- ----- ------ ------ ---- ---- ------
Interest and fees on loans, the Company's primary source of revenue,
totaled $60.2 million for 1998. This represented an increase of $2.1 million, or
3.56%, over interest and fees on loans of $58.1 million for 1997. For 1997,
interest and fees on loans increased $3.6 million, or 6.77%, over interest and
fees on loans of $54.5 million for 1996. The increase in interest and fee on
loans for 1998 and 1997 reflected increases in the average balance of loans, and
for 1997, an increase in average yield on loans. The yield on loans decreased to
9.51% for 1998, compared to 9.90% for 1997. The yield on loans for 1996 was
9.86%. The decrease in loan yields for 1998 compared to 1997 reflected the lower
interest rate environment and increased price competition for loans. Deferred
loan origination fees, net of costs, totaled $2.3 million at December 31, 1998.
This represented a decrease of $262,893, or 10.18%, from deferred loan
origination fees, net of costs, of $2.6 million at December 31, 1997.
In general, the Company stops accruing interest on a nonperforming loan
after its principal or interest become 90 days or more past due, charging to
earnings all interest previously accrued but not collected. There was no
interest income that was accrued and not reversed on nonperforming loans at
December 31, 1998 and December 31, 1996. There was interest income of
approximately $12,000 that was accrued and not reversed on a nonperforming loan
at December 31, 1997. 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 $103,000 greater for 1998, $66,000 greater for
1997, and $253,000 greater for 1996. Accordingly, yields on loans would have
increased by 0.02% for 1998, 0.01% for 1997, and 0.05% for 1996.
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 deducted from 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. The Company recognized loan fee income of
$3.7 million for 1998, $3.7 million for 1997 and $3.2 million for 1996.
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Table 3 summarizes loan fee activity for the Bank for the years indicated.
TABLE 3 -- LOAN FEE ACTIVITY
(AMOUNTS IN THOUSANDS)
1998 1997 1996
------- ------- -------
Fees Collected.............................................. $ 3,449 $ 3,071 $ 2,861
Fees and costs deferred..................................... (2,286) (2,147) (1,959)
Accretion of deferred fees and costs........................ 2,548 2,843 2,301
------- ------- -------
Total fee income reported......................... $ 3,711 $ 3,767 $ 3,203
======= ======= =======
Deferred net loan origination fees acquired................. 0 0 1,158
======= ======= =======
Deferred net loan origination fees at end of year........... $ 2,321 $ 2,583 $ 3,279
======= ======= =======
PROVISION FOR CREDIT LOSSES
The provision for credit losses totaled $2.5 million for 1998. This
represented a decrease of $170,000, or 6.37%, from the provision for credit
losses of $2.7 million for 1997. For 1997, the provision for credit losses
decreased $218,000, or 7.54%, from the provision for credit losses of $2.9
million for 1996. 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 $657,679 for 1998. This represented an
decrease of $2.7 million, or 80.58%, from net loan losses charged to the
allowance of $3.4 million for 1997. For 1997, net loan losses charged to the
allowance for credit losses increased $2.4 million, or 243.49%, from net loans
charged to the allowance of $1.0 million for 1996. 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;
it also includes 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 $15.0 million for 1998. This represents an
increase of $1.2 million, or 8.34%, from other operating income of $13.8 million
for 1997. During 1997, other operating income decreased $456,000, or 3.19%, over
other operating income of $14.3 million for 1996. A $2.1 million settlement of
litigation paid to the Bank in March 1996 was included as other operating income
for 1996. The settlement related to a suit filed by the Bank against a former
officer and director for violation of an employment termination agreement. If
this settlement was not included in 1996 income, other operating income would
have increased $1.6 million, or 13.49% for 1997. The increase in other operating
income in 1998 is due in part to the fee income originated by the Bank's Asset
Management Division, (trust services) which generated fees totaling $3.5
million, $3.2 million, and $2.3 million for 1998, 1997 and 1996, respectively.
Investment Services which provides mutual funds, certificate of deposit and
other non-incurred investment products, generated fees totaling $603,000,
$405,000 and $292,000 for 1998, 1997 and 1996, respectively. The sale of
securities generated income totaling $407,000, $16,000 and $3,000 for 1998, 1997
and 1996, respectively while the sale of fixed assets added income totaling
$675,000, $21,000 and $17,000 for 1998, 1997 and 1996, respectively.
Other operating income also includes revenue from Community, a subsidiary
of the Company. Total revenue from Community was approximately $222,000,
$367,000, and $247,000, for 1998, 1997, and 1996, respectively.
OTHER OPERATING EXPENSES
Other operating expenses totaled $45.0 million for 1998 and $42.9 million
for 1997, representing an increase of $2.1 million, or 4.98%, from 1997. Other
operating expenses increased $1.0 million, or 2.34%, over total operating
expenses of $41.9 million for 1996.
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20
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 3.30% for 1998, compared to a ratio of
3.71% for 1997, and 4.12% for 1996. 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.
This is known as the Efficiency Ratio and indicates the percentage of revenue
that is used to cover expenses. For 1998, other operating expenses as a
percentage of total revenue decreased to 55.88%, compared to a ratio of 58.35%
for 1997, and a ratio of 61.90% for 1996. The decrease in the ratio for 1998 and
1997, indicated that a proportionately smaller amount of net revenue was being
allocated to operating expenses.
Salaries and related expenses comprise the greatest portion of other
operating expenses. Salaries and related expenses totaled $22.7 million for
1998. This represented an increase of $1.0 million, or 4.83%, over salaries and
related expenses of $21.7 million for 1997. Salary and related expenses for 1997
were $1.7 million, or 8.20%, greater than salaries and related expenses of $20.0
million for 1996. The increases for both 1998 and 1997 primarily resulted from
increased staffing levels. Expenses for 1997 included the first full year of
operations of the four branch offices and the Asset Management Division acquired
in March of 1996 from Citizens Bank of Pasadena. Despite these increases,
salaries and related expenses as a percent of average assets decreased to 1.66%
for 1998, compared to 1.87% for 1997, and 1.97% for 1996.
Occupancy and equipment expenses represent the cost of operating and
maintaining branch and administrative facilities, including the purchase and
maintenance of furniture, fixtures, office and equipment and data processing
equipment. Occupancy expense totaled $3.8 million for 1998. This represented an
increase of $344,000, or 10.01%, over occupancy expense of $3.4 million for
1997. Occupancy expense for 1997 increased $218,000, or 6.77%, from an expense
level of $3.2 million for 1996. In 1998 occupancy expense increased as a result
of a decrease of $100,000 in lease income. Equipment expense totaled $3.9
million for 1998. This represented an increase of $528,000, or 15.69%, over the
$3.4 million expense for 1997. For 1997, equipment expense increased $252,000,
or 8.10%, from an expense of $3.1 million for 1996. Equipment expense in 1998
increased as a result of a $226,000 increase in computer maintenance and
replacement costs and associated depreciation. The addition of four new branch
offices contributed to increases in both occupancy and equipment expenses for
1997.
Stationary and supplies expense totaled $2.7 million for 1998. This
represented an increase of $81,000, or 3.09%, over the expense of $2.6 million
for 1997. Stationary and supplies expense for 1997 increased $184,000, or 7.53%,
over the expense of $2.4 million for 1996. Contributing to the increase for 1997
was the cost of changing preprinted forms and stationary as a result of the
Bank's name change in 1996.
Professional services totaled $3.8 million for 1998. This represented an
increase of $1.5 million or 65.59%, over an expense of $2.3 million for 1997.
For 1997, professional services expense increased $311,000, or 15.65%, from an
expense of $2.0 million for 1996. The increase for 1998 was the result of
increased expenses associated with a lawsuit against the Bank.
Promotion expense totaled $2.0 million for 1998. This represented a
decrease of $81,000, or 3.86%, from an expense of $2.1 million for 1997.
Promotion expense decreased for 1997 by $66,000, or 3.07%, over an expense of
$2.2 million for 1996.
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 $1.2 million for 1998. This represented a decrease of $1.5
million, or 55.60%, from an expense level of
20
21
$2.7 million for 1997. For 1997, other real estate owned expense decreased $2.0
million, or 42.86%, over an expense level of $4.7 million for 1996. The decrease
in the expense for 1998 and 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 1998
and 1997. The amortization expense for 1997 increased $170,000, or 16.58% over
the expense of $1.0 million for 1996. The increase for 1997 compared to 1996 is
a result of the increase in goodwill and intangibles associated with the
acquisition of Citizens Bank of Pasadena.
YEAR 2000
The financial institutions industry, as with other industries, is faced
with year 2000 issues. These issues center around computer programs that do not
recognize a year which begins with "20" instead of "19", or uses only 2 digits
for the year. Certain statements in this section on the Year 2000 constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995 which involve risk and uncertainties. The Company's actual results may
differ significantly from the results discussed in these forward-looking
statements. Such factors include but are not limited to the estimated costs of
remediation, the preparedness of third party vendors, timetables for
implementation of future remediation and testing, contingency plans, and
estimated future costs due to business disruption caused by affected third
parties.
These statements are designated as Year 2000 Readiness Disclosures under
the Year 2000 Information and Readiness Disclosures Act of 1998.
The Company has been working on these issues for the last 24 months. A
committee, known at Team 2000, was established to analyze the issues and
determine compliance with the requirements for Year 2000. To facilitate a
thorough and complete Year 2000 assessment and response to identified issues, a
phased management procedural approach has been adopted as follows:
AWARENESS PHASE -- Team 2000 coordinators and supporting staff were
appointed and empowered to receive external training as necessary, and
immediately review all pertinent regulatory and industry issuances regarding
Year 2000 issues. The Team 2000 coordinators developed a process and overall
strategy to cover in-house systems, service bureaus for systems that are
outsourced, vendors, customers, and suppliers.
ASSESSMENT PHASE -- Team 2000 coordinators will prepare a report regarding
the size of the problem and complexity of Year 2000 issues, as well as the level
of work and resources necessary to address them. The report includes issues
relating to hardware, software, networks, ATM's, processing platforms, and other
equipment (copier, fax, phone exchange, etc.) customer systems, vendors, and
environmental systems (security systems, elevators, vaults, etc.).
RENOVATION PHASE -- Team 2000 coordinators supervise the project including
enhancements, hardware and software upgrades, systems replacements and vendor
certification as "Year 2000 Compliant". Work is prioritized depending on the
applications impact. Insights may also be provided from "critical assessments"
performed as part of the disaster recovery business resumption assessment.
VALIDATION PHASE -- After programming codes by outside vendors have been
modified or systems upgraded, they are tested, when possible, in incremental
states to assess full correction of the Year 2000 issues. Team 2000 coordinators
establish time control check-off points to ensure timely completion of
modifications or replacement activities.
IMPLEMENTATION PHASE -- Once modifications are completed, replacements or
upgrades are in place, and/or other changes have occurred to address Year 2000
problematic areas, the Year 2000 plan will be in full compliance.
To date the Awareness Phase and the Assessment Phase have been completed.
All in-house bank critical applications have been tested Year 2000 compliant.
The Renovation Phase as it relates to "bank critical" systems/processes is 100%
complete. The Validation Phase as it relates to "bank critical" testing system/
processes is 99% complete. Both the Renovation and the Validation Phases are
scheduled to be completed by March 31, 1999.
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22
As of December 31, 1998, for approximately 20% of the external
systems/processes deemed as "bank critical", the Bank has not been able to
identify specific timelines to validate Year 2000 compliance due to dependencies
on external parties (e.g., vendors, agencies, etc.,) who are not required by
regulation to be Year 2000 compliant until a later date. Contingency and
follow-up plans have been developed.
The third party vendor of the Bank's teller terminal system has indicated
that their hardware is not compliant and will not be made compliant. It is of an
older generation of technology. The Bank is in the process of replacing this
system, which is anticipated to be completed by August 31, 1999.
The Bank has notified its customers by means of statement stuffers of Year
2000 issues. It is also in the process of contacting each of its major borrowing
and depository customers to make them aware of the issues and to seek
information regarding it customers' preparedness for the Year 2000.
The Board of Directors of CVB and the Bank have approved a Year 2000 Policy
and budget. The Board has approved a budget of $1.8 million for the anticipated
costs of Year 2000 issues. The Board has allocated $1.0 million of the Bank's
allowance for loan and lease losses to cover potential losses from customers due
to their Year 2000 problems. In addition, it is anticipated that the replacement
of the teller system will cost $600,000. The remaining $200,000 is budgeted for
miscellaneous and contingency items. To date, the Company has expended
approximately $55,000 for the testing of software and hardware.
Of the $1.8 million budget to cover anticipated costs of year 2000 issues,
the $1.0 million allocation from the allowance for loan and lease losses has
already been provided through the income statement. The Company believes that
costs which could be as much as $600,000 to replace the teller system, which
will be capitalized as these costs relate to the purchase of new equipment.
Therefore, these costs will only impact the earnings of the Company as it is
depreciated. The Company anticipates that the remaining $145,000 will be
reflected in the income statement over the next three quarters. Funds used to
address Year 2000 issues will come from operating cash funds.
In addition, the Board of Directors of CVB and the Bank have engaged an
outside CPA consulting firm to perform an internal audit related to the Bank's
efforts associated with the Year 2000. The Bank received a "Satisfactory" rating
for its Year 2000 plan and efforts in achieving the plan to date.
The Company has an existing Disaster Recovery Plan or Contingency Plan in
the event a disaster should occur and affect the Company. This Plan encompasses
the restoration of all or part of the Company's systems should that be
necessary. This Plan is being augmented to cover contingencies arising from Year
2000. The Plan has been tested in the past and the augmented Plan was most
recently tested in the fourth quarter of 1998.
INCOME TAXES
The Company's effective tax rate for 1998 was 37.1%. This compares to
effective tax rates of 37.8% for 1997, and 41.8% for 1996. 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 $1.6 billion at December 31, 1998.
This represented an increase of $296.4 million, or 23.55%, from total assets of
$1.3 billion at December 31, 1997. For 1997, total assets increased $98.3
million, or 8.48%, from total assets of $1.2 billion at December 31, 1996.
In the ordinary course of business, the Bank receives short term seasonal
agricultural deposits of approximately $50.0 million during the final days of
each year. These short term deposits are reflected in the level of demand
deposits and cash and due from banks on December 31, 1998 and 1997.
22
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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, 1998 and 1997. At December
31, 1998, the Company reported total investment securities of $730.0 million.
This represents an increase of $237.9 million, or 48.33%, over total investment
securities of $492.1 million at December 31, 1997. For 1997, investment
securities increased $108.0 million, or 28.14%, greater than the 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, 1998, securities held as available for sale had a fair market
value of $676.2 million, representing 92.62% of total investment securities with
a value of $730.0 million using book value. At December 31, 1998, the net
unrealized holding gain on securities available for sale was $2.5 million, and
the unrealized gain on investments available for sale, net of deferred taxes was
$1.4 million.
LOANS
At December 31, 1998, the Company reported total loans, net of deferred
loan fees, of $689.0 million. This represents an increase of $72.0 million, or
11.67%, over total loans of $617.0 million at December 31, 1997. For 1997, total
loans increased $28.1 million, or 4.77%, over total loans, net of deferred loan
fees of $588.9 million at December 31, 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,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Commercial and Industrial........... $247,060 $258,987 $240,629 $234,709 $262,494
Real Estate
Construction...................... 29,415 19,819 36,925 23,805 26,302
Mortgage.......................... 297,856 229,926 219,763 149,039 116,077
Consumer, net of unearned
discount.......................... 17,816 17,445 19,576 15,876 15,553
Municipal Lease Finance
Receivables....................... 22,923 24,008 19,825 21,529 23,246
Agribusiness (1).................... 76,283 69,404 55,486 63,580 52,920
-------- -------- -------- -------- --------
Gross Loans....................... 691,353 619,589 592,204 508,538 496,592
-------- -------- -------- -------- --------
Less:
Allowance for Credit Losses....... 13,364 11,522 12,239 9,626 9,471
Deferred Loan Fees................ 2,321 2,583 3,279 2,463 2,503
-------- -------- -------- -------- --------
Total Net Loans..................... $675,668 $605,484 $576,686 $496,449 $484,618
======== ======== ======== ======== ========
- ---------------
(1) Included as Commercial and Industrial and Real Estate Mortgage loans above
are loans totaling $34.6 million for 1998, $27.9 million for 1997, $22.7
million for 1996, $8.8 million for 1995, $7.7 million for 1994, 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 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
23
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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, real estate construction loans and agribusiness loans as of December 31,
1998. The loan amounts are based on contractual maturities although the
borrowers have the ability to prepay the loans. Amounts are also classified
according to repricing opportunities or rate sensitivity.
TABLE 5 -- LOAN MATURITIES AND INTEREST RATE CATEGORY AT DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
AFTER ONE
WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- --------
Types of Loans:
Commercial and industrial(1)................. $130,125 $173,530 $214,852 $518,507
Construction................................. 29,415 0 0 29,415
Agribusiness................................. 76,136 147 0 76,283
-------- -------- -------- --------
$235,676 $173,677 $214,852 $624,205
======== ======== ======== ========
Amount of Loans based upon:
Fixed Rates.................................. $ 59,236 $131,642 $197,928 $388,806
Floating or adjustable rates................. 176,440 42,035 16,924 235,399
-------- -------- -------- --------
$235,676 $173,677 $214,852 $624,205
======== ======== ======== ========
- ---------------
(1) Includes approximately $271.4 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, 1998, 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, 1998, nonperforming assets, which included nonperforming
loans (see CREDIT RISK) and other real estate owned, totaled $9.3 million. This
represented a decrease of $1.5 million, or 14.23%, compared to nonperforming
assets of $10.9 million at December 31, 1997. For 1997, total nonperforming
assets decreased $18.9 million, or 63.48%, from total nonperforming assets of
$29.8 million at December 31, 1996. The decrease in nonperforming assets for
1998 compared to 1997 resulted as balances of restructured loans, and other real
estate owned decreased during the year, which was partially offset by an
increase in nonaccrual loans. The decrease in nonperforming assets for 1997,
reflected the decrease in nonaccrual loans, restructured loans and other real
estate owned.
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Although management believes that nonperforming loans are generally well
secured and that potential losses are provided for in the Company's allowance
for credit losses, there can be no assurance that future deterioration in
economic conditions or collateral values will not result in future credit
losses. Table 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,
--------------------------------------------------
1998 1997 1996 1995 1994
------ ------- ------- ------- -------
Nonaccrual loans.......................... $7,218 $ 3,955 $17,564 $13,289 $12,613
Loans past due 90 days or more............ 0 424 621 0 0
Restructured loans........................ 0 2,092 5,374 13,558 8,954
Other real estate owned (OREO)............ 2,102 4,395 6,196 8,253 9,860
------ ------- ------- ------- -------
Total nonperforming assets................ $9,320 $10,866 $29,755 $35,100 $31,427
====== ======= ======= ======= =======
Percentage of nonperforming assets to
total loans outstanding & OREO.......... 1.35% 1.75% 5.00% 6.82% 6.24%
Percentage of nonperforming assets to
total assets............................ 0.60% 0.86% 2.56% 3.75% 3.76%
At December 31, 1998, the Company had loans on which interest was no longer
accruing totaling $7.2 million. This represented a increase of $3.3 million, or
82.50%, from total nonaccrual loans of $4.0 million at December 31, 1997. For
1997, total nonaccrual loans decreased $13.6 million, or 77.48%, over total
nonaccrual loans of $17.6 million at December 31, 1996. Approximately 40.00% of
the number of nonaccrual loans at December 31, 1998, and 80.70% 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, 1998, ranged between approximately 5.00% to
108.00%. 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, 1998, the Company had no loans that were
classified as restructured. This represented a decrease of $2.1 million, or
100.00%, from restructured loans of $2.1 million at December 31, 1997.
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,
1998 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, Year 2000
preparedness or change in the financial conditions or business of a borrower may
adversely affect a borrower's ability to pay.
At December 31, 1998, the net book value of the properties held as other
real estate owned totaled $2.1 million. This represented a decrease of $2.3
million, or 52.17%, from other real estate owned of $4.4 million at December 31,
1997. 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,
1998, 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.
25
26
DEPOSITS
The Company reported total deposits of $1.2 billion at December 31, 1998.
This represented an increase of $139.6 million, or 12.98%, over total deposits
of $1.1 billion at December 31, 1997. During 1997, total deposits increased
$85.1 million, or 8.59%, over total deposits of $990.6 million at December 31,
1996.
Noninterest bearing demand deposits totaled $538.8 million at December 31,
1998. This represented an increase of $69.0 million, or 14.68%, over total
noninterest bearing demand deposits of $469.8 million at December 31, 1997. For
1997, total noninterest bearing demand deposits increased $38.7 million, or
8.97%, over noninterest bearing demand deposits of $431.2 million at December
31, 1996. Noninterest bearing deposits represented 44.34% of total deposits as
of December 31, 1998 and 43.68% of total deposits as of December 31, 1997.
Table 7 provides the remaining maturities of large denomination ($100,000
or more) time deposits, including public funds, at December 31, 1998.
TABLE 7 -- MATURITY DISTRIBUTION OF LARGE DENOMINATION TIME DEPOSITS
(AMOUNTS IN THOUSANDS)
3 months or less.................................. $125,424
Over 3 months through 6 months.................... 57,104
Over 6 months through 12 months................... 19,045
Over 12 months.................................... 1,522
--------
Total................................... $203,095
========
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, 1998, borrowed funds totaled $200.1 million. This
represented a increase of $143.2 million, or 251.52%, from total borrowed funds
of $56.9 million at December 31, 1997. For 1997, total borrowed funds decreased
$11.7 million, or 17.03%, from a balance 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. The maximum outstanding at any
month-end was $200.1 million during 1998, $123.0 million during 1997, and $56.0
million during 1996.
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 $115.7 million at December 31, 1998. This
represented an increase of $13.6 million, or 13.34%, over total stockholders'
equity of $102.1 million at December 31, 1997. For 1997, total stockholders'
equity increased $13.0 million, or 14.59%, over total stockholders' equity of
$89.1 million at December 31, 1996.
Tier 1 capital, stockholders' equity less intangible assets, was $104.7
million at December 31, 1998. This represented an increase of $14.2 million, or
15.69%, over total Tier 1 capital of $90.5 million at December 31, 1997. For
1997, Tier 1 capital increased $12.9 million, or 16.63%, over Tier 1 capital of
$77.6 million at December 31, 1996. Total adjusted capital, Tier 1 capital plus
the lesser of the allowance for credit losses or 1.25% of risk weighted assets,
was $115.6 million at December 31, 1998. This represented an increase of $15.6
26
27
million, or 15.56%, over adjusted capital of $100.0 million at December 31,
1997. For 1997, adjusted capital increased $13.4 million, or 15.53%, over total
adjusted capital of $86.6 million at December 31, 1996.
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.
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, 1998, and 1997, the Company exceeded all of the minimum
capital ratios required to be considered well capitalized. At December 31, 1998,
the Company's total risk-based capital ratio was 13.46%, compared to a ratio of
13.35% at December 31, 1997. The ratio of Tier 1 capital to risk weighted assets
was 12.20% at December 31, 1998, compared to a ratio of 12.08% at December 31,
1997. At December 31, 1998, the Company's leverage ratio was 7.18%, compared to
a ratio of 7.56% at December 31, 1997. See NOTE 15 of the Notes to the
Consolidated Financial Statements.
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, 1998, the Company
had an unrealized gain on investment securities net of taxes of $1.4 million,
compared to a gain net of taxes of $772,000 at December 31, 1997.
During 1998 and 1997, the Company announced its intention to re-purchase
some of its outstanding common stock. The Company re-purchased 91,700 in 1998
and 95,182 in 1997 of its outstanding shares at average price of $20.805 per
share in 1998 and $20.332 per share in 1997 for an aggregate cost of $1.9
million in 1998 and $1.9 million in 1997.
During 1998, the Board of Directors of the Company declared quarterly cash
dividends that totaled 42 cents per share for the full year (0.39 cents per
share after retroactive adjustment of a 10% stock dividend declared on December
16, 1998). After retroactive adjustment, cash dividends declared during 1998
were $0.12 greater than paid for 1997. 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 the Bank. Specifically, credit risk, interest rate risk,
liquidity risk , transaction risk, compliance risk, strategic risk, reputation
risk, price risk and foreign exchange 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
27
28
Directors are provided with timely and accurate information to appropriately
identify, measure, control and monitor the credit risk of the Bank.
The allowance for credit losses is based upon estimates of probable losses
inherent in the loan and lease portfolio. The amount actually observed in
respect of these losses can vary significantly from the estimated amounts. The
Company's methodology includes several features which are intended to reduce the
differences between estimated and actual losses.
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, unused
commitments to provide financing including commitments under commercial and
standby letters of credit.
The Company does not have any cross-border outstandings. However, the
Company's International Department does issue international letters of credit in
support of its customer's cross-border business. The Company is positioned on
the Pacific Rim and many of its customer's are impacted by trade in the Pacific
Rim and in Latin America, especially Mexico. The impact of the Asian crisis
appears to be spreading to other global markets, including Latin America. The
Company's exposure in all affected countries continues to be short-term in
nature and related to the finance of trade and the impact of the general
Southern California economy.
While the Bank has no direct exposure to these areas, the associative
effects of the downturn in Asia and Latin America could effect the Company's
market place in Southern California.
The Company's methodology for assessing the appropriateness of the
allowance consists of several key elements, which include the formula allowance,
specific allowances for identified problem loans and portfolio segments and the
unallocated allowance. In addition, the allowance incorporates the results of
measuring impaired loans as provided in Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 118, "Accounting by Creditors for impairment of a Loan -- Income
Recognition and Disclosures." These accounting standards prescribe the
measurement methods, income recognition and disclosures related to impaired
loans.
Specific allowances are established in cases where management has
identified significant conditions or circumstances related to a credit that
management believes indicate the probability that a loss has been incurred in
excess of the amount determined by the application of the formula allowance.
Management performs a detailed analysis of these loans, including, but not
limited to, appraisals of the collateral, conditions of the marketplace for
liquidating the collateral and assessment of the guarantors. Management then
determines the loss potential and allocates a portion of the allowance for
losses as a specific allowance for each of these credits.
The unallocated allowance is based upon management's evaluation of various
conditions, the effects of which are not directly measured in the determination
of the formula and specific allowances. The evaluation of the inherent loss with
respect to these conditions is subject to a higher degree of uncertainty because
they are not identified with specific problem credits or portfolio segments. The
conditions evaluated in connection with the unallocated allowance include the
following conditions that existed as of the balance sheet date:
- then-existing general economic and business conditions affecting the key
lending areas of the Company,
- then-existing economic and business conditions of areas outside the
lending areas, such as other sections of the United States, Asia and
Latin America,
- credit quality trends (including trends in nonperforming loans expected
to result from existing conditions),
- collateral values,
28
29
- loan volumes and concentrations,
- seasoning of the loan portfolio,
- specific industry conditions within portfolio segments,
- recent loss experience in particular segments of the portfolio,
- duration of the current business cycle,
- bank regulatory examination results and
- findings of the Company's internal credit examiners.
Management reviews these conditions in discussion with the Company's senior
credit officers. To the extent that any of these conditions is evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's estimate of the effect of such condition may be
reflected as a specific allowance applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management's evaluation of the probable loss related to such condition is
reflected in the unallocated allowance.
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, 1998, the Company reported an allowance for credit losses
of $13.4 million. This represented a increase of $1.9 million or 15.99%, from
the allowance for credit losses of $11.5 million at December 31, 1997. For 1997,
the allowance for credit losses decreased $716,000, or 5.85%, from a balance of
$12.2 million at December 31, 1996.
Of the total $13.4 million reserve for credit losses at December 31, 1998,
$1.4 million, or 7.46%, represented reserves for specific problem loans,
including impaired loans, and $12.0 million, or 92.54%, represented that portion
allocated to provide for general risks inherent in the loan portfolio.
Nonperforming loans totaled $7.2 million at December 31, 1998. This
represented a increase of $747,000, or 11.54%, from nonperforming loans of $6.5
million at December 31, 1997. For 1997, nonperforming loans decreased $17.1
million, or 72.53%, from nonperforming loans of $23.6 million at December 31,
1996. Nonperforming loans, measured as a percent of gross loans, equaled 1.04%,
1.05%, and 4.00%, at December 31, 1998, 1997, and 1996, 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 increase in nonperforming loans for
1998 was the result of an increase in nonaccrual loans, partially offset by a
decrease in restructured loans. Nonaccrual loans increased $3.3 million, or
82.50%, to $7.2 million at December 31, 1998, from $4.0 million at December 31,
1997. Restructured loans decreased $2.1 million, or 100.00%, at December 31,
1998. The decrease in nonperforming loans between December 31, 1997 and 1996 was
the result of a $13.6 million, or 77.48%, reduction in nonaccrual loans an a
decrease of $3.3 million, or 61.07% in restructured loans.
For 1998, the Company charged $658,000 of loans net of recoveries to the
allowance for credit losses. This represented a decrease of $2.7 million, or
80.58%. 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
29
30
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.
TABLE 8 -- SUMMARY OF CREDIT LOSS EXPERIENCE
(AMOUNTS IN THOUSANDS)
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Amount of Total Loans at End of
Period(1)......................... $689,033 $617,006 $588,925 $506,074 $494,088
======== ======== ======== ======== ========
Average Total Loans
Outstanding(1).................... $632,809 $587,353 $552,393 $486,504 $466,514
======== ======== ======== ======== ========
Allowance for Credit Losses at
Beginning of Period............... $ 11,522 $ 12,239 $ 9,626 $ 9,471 $ 8,849
Loans Charged-Off:
Real Estate....................... 586 3,114 1,434 2,167 402
Commercial, Financial and
Industrial..................... 320 371 200 290 496
Agribusiness...................... 0 0 0 0 0
Municipal Lease Finance
Receivables.................... 0 0 0 0 0
Consumer Loans.................... 36 121 115 162 123
-------- -------- -------- -------- --------
Total Loans Charged-Off........ 942 3,606 1,749 2,619 1,021
-------- -------- -------- -------- --------
Recoveries:
Real Estate Loans................. 160 35 564 55 47
Commercial, Financial and
Industrial..................... 110 176 180 100 92
Agribusiness...................... 0 0 0 0 0
Municipal Lease Finance
Receivables.................... 0 0 0 0 0
Consumer Loans.................... 14 8 19 44 29
-------- -------- -------- -------- --------
Total Loans Recovered.......... 284 219 763 199 168
-------- -------- -------- -------- --------
Net Loans Charged-Off............... 658 3,387 986 2,420 853
-------- -------- -------- -------- --------
Provision Charged to Operating
Expense........................... 2,500 2,670 2,888 2,575 350
-------- -------- -------- -------- --------
Adjustments Incident to Mergers..... 0 0 711 0 1,125
-------- -------- -------- -------- --------
Allowance for Credit Losses at End
of period......................... $ 13,364 $ 11,522 $ 12,239 $ 9,626 $ 9,471
======== ======== ======== ======== ========
Net Loans Charged-Off to Average
Total Loans....................... 0.10% 0.58% 0.18% 0.50% 0.18%
Net Loans Charged-Off to Total Loans
at End of Period.................. 0.10% 0.55% 0.17% 0.48% 0.17%
Allowance for Credit Losses to
Average Total Loans............... 2.11% 1.96% 2.22% 1.98% 2.03%
Allowance for Credit Losses to Total
Loans at End of Period............ 1.94% 1.87% 2.08% 1.90% 1.92%
Net Loans Charged-Off to Allowance
for Credit Losses................. 4.92% 29.40% 8.06% 25.14% 9.01%
Net Loans Charged-Off to Provision
for Credit Losses................. 26.32% 126.85% 34.14% 93.98% 243.71%
- ---------------
(1) Net of deferred loan origination fees.
The Company's management believes that the allowance for credit losses at
December 31, 1998 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
30
31
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.
TABLE 9 -- ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
(AMOUNTS IN THOUSANDS)
DECEMBER 31,
-------------------------------------------------------------------------------------
1998 1997 1996 1995
------------------- ------------------- ------------------- -------------------
ALLOW- % OF ALLOW- % OF ALLOW- % OF ALLOW- % OF
ANCE FOR CATEGORY ANCE FOR CATEGORY ANCE FOR CATEGORY ANCE FOR CATEGORY
CREDIT TO TOTAL CREDIT TO TOTAL CREDIT TO TOTAL CREDIT TO TOTAL
LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS
-------- -------- -------- -------- -------- -------- -------- --------
Real Estate................... $ 646 47.5% $ 298 40.5% $ 395 47.8% $ 155 34.0%
Commercial and Industrial..... 6,650 46.9% 6,107 53.2% 7,794 46.1% 5,534 58.7%
Consumer...................... 144 2.6% 121 2.8% 126 3.3% 42 3.1%
Unallocated................... 5,924 N/A 4,996 N/A 3,924 N/A 3,895 N/A
------- ------- ------- ------
Total..................... $13,364 $11,522 $12,239 $9,626
======= ======= ======= ======
DECEMBER 31,
-------------------
1994
-------------------
ALLOW- % OF
ANCE FOR CATEGORY
CREDIT TO TOTAL
LOSSES LOANS
-------- --------
Real Estate................... $ 88 28.7%
Commercial and Industrial..... 4,182 63.5%
Consumer...................... 43 3.1%
Unallocated................... 5,158 N/A
------
Total..................... $9,471
======
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, 1998, and 1997. The Bank had a negative cumulative 180 day gap of $411.1
million at December 31, 1998. This represented an increase of $114.1 million, or
38.43%, over the 180 day cumulative negative gap of $297.0 million at December
31, 1997. In theory, this would indicate that at December 31, 1998, $411.1
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.
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32
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
--------- --------- --------- --------
1998
Earning Assets:
Investment Securities at carrying value.... $ 54,568 $ 32,761 $ 61,737 $580,955
Total Loans................................ 256,443 20,410 33,703 380,797
--------- --------- --------- --------
Total.............................. $ 311,011 $ 53,171 $ 95,440 $961,752
Interest Bearing Liabilities
Savings Deposits........................... $ 386,290 $ 0 $ 0 $ 0
Time Deposits.............................. 164,405 84,568 35,579 5,655
Other Borrowings........................... 85,000 55,000 10,000 50,000
--------- --------- --------- --------
Total.............................. 635,695 139,568 45,579 55,655
--------- --------- --------- --------
Period GAP................................... $(324,684) $ (86,397) $ 49,861 $906,097
========= ========= ========= ========
Cumulative GAP............................... $(324,684) $(411,081) $(361,220) $544,877
========= ========= ========= ========
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
========= ========= ========= ========
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, 1998 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 $596.8 million, or 81.75% of the total investment portfolio
at December 31, 1998 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.
32
33
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.
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, 1998:
ESTIMATED NET
SIMULATED INTEREST INCOME
RATE CHANGES SENSITIVITY
- ----------------- ---------------
+200 basis
points......... (1.43)%
- -200 basis
points......... (0.91)%
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, and replacement of asset and liability cashflows. 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 as of December 31, 1998 of
interest earning assets and interest-bearing liabilities, including the average
rate earned or paid for 1998, 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.
ASSET AND LIABILITY MATURITY/FAIR VALUE
(AMOUNTS IN THOUSANDS)
MATURING
-------------------------------------------------------------------------
FIVE YEARS
BALANCE AND ESTIMATED
DECEMBER 31, 1998 RATE ONE YEAR TWO YEARS THREE YEARS FOUR YEARS BEYOND FAIR VALUE
----------------- ----- -------- --------- ----------- ---------- ---------- ----------
Interest-Earning Assets
Investment securities held
to maturity............. $ 53,859 7.12% $ 5,175 $ 1,867 $ 1,778 $ 4,698 $ 40,341 $ 55,912
Investment securities
available for sale...... 676,162 6.43% 143,891 46,470 73,067 81,789 330,945 676,162
Loans and lease finance
receivables, net........ 675,668 9.51% 310,556 32,965 45,954 70,571 215,622 674,181
---------- -------- ------- -------- -------- -------- ----------
Total interest
earning assets.... $1,405,689 $459,622 $81,302 $120,799 $157,058 $586,908 $1,406,255
========== ======== ======= ======== ======== ======== ==========
Interest-Bearing
Liabilities
Interest-bearing
deposits................ $ 676,497 3.64% $670,842 $ 3,941 $ 1,229 $ 292 $ 193 $ 676,362
Demand note to U.S.
Treasury................ 95 4.96% 95 95
Short-term borrowings..... 200,000 5.52% 150,000 50,000 200,000
---------- -------- ------- -------- -------- -------- ----------
Total
interest-bearing
liabilities....... $ 876,592 $820,937 $ 3,941 $ 1,229 $ 292 $ 50,193 $ 876,457
========== ======== ======= ======== ======== ======== ==========
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.
33
34
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 Bank.
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.
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 $29.0 million for 1998,
$24.8 million for 1997, and $21.6 million for 1996. The increase for 1998
compared to 1997 and 1996 was primarily the result of the increase in net income
during each year.
Cash used for investing activities totaled $311.5 million for 1998,
compared to $127.1 million for 1997, and $100.4 million for 1996. 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 primarily from
the sale and maturity of investment securities and from the sale of other real
estate owned.
Funds provided from financing activities totaled $274.8 million for 1998,
compared to $67.5 million for 1997, and $93.9 million for 1996. For 1998, cash
flows from financing activities resulted from increased noninterest-bearing
deposits, money market, savings deposits, time deposits and short-term
borrowings. 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 decreased in other borrowed funds.
At December 31, 1998, cash and cash equivalents totaled $100.0 million.
This represented a decrease of $7.7 million, or 7.14%, from a total of $107.7
million at December 31, 1997.
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
1998, the Bank's loan to deposit ratio averaged 57.94%, compared to an average
ratio of 60.37% for 1997, and a ratio of 63.76% for 1996. This decline is due to
the Bank's ability to acquire deposits at a rate higher than the industry
average.
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. The remaining cashflow is from rents paid by
third parties on office space in the Company's corporate headquarters. There are
statutory and regulatory provisions that could limit the ability of the Bank to
pay dividends to CVB. At December 31, 1998, approximately $38.0 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, 1998,
neither the Bank nor CVB had any material commitments for capital expenditures.
ACCOUNTING CHANGES
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. A transfer of
financial assets in which the transferor surrenders control over those assets is
accounted for as a sale to the extent that consideration other than beneficial
interests in the transferred assets is received in the exchange. This statement
requires that liabilities and derivative securities incurred or obtained by
transferors as part of a transfer of financial assets be initially valued at
fair value, if practicable. It also requires that servicing rights and other
retained
34
35
interests in the transferred assets be measured by allocating the previous
carrying amount between the assets sold, if any, and retained interests, if any,
based on their relative fair values at the date of transfer. Furthermore, SFAS
No. 125 requires that debtors reclassify financial assets pledged as collateral,
and that secured parties recognize those assets and their obligation to return
them in certain circumstances in which the secured party has taken control of
those assets. Finally, SFAS No. 125 requires that a liability be eliminated if
either: (a) the debtor pays the creditor and is relieved of its obligation for
the liability, or (b) the debtor is legally released from being the primary
obligor under the liability, either judicially or by the creditor. Accordingly,
a liability is not considered extinguished by an in-substance defeasance. SFAS
No. 125 supersedes SFAS No. 122, "Accounting for Mortgage Servicing Rights,"
which management of the Company determined had no material impact on the
Company's results of operations or financial position. In December 1996, the
FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125." SFAS No. 127 defers for one year the effective date
of SFAS No. 125 as it relates to transactions involving secured borrowings and
collateral and transfers and servicing of financial assets. This Statement also
provides additional guidance on these types of transactions. The statement did
not have a material impact on the Company's results of operations when adopted.
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. The statement did not have a material impact on the
company's results of operation.
In August 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This statement establishes standards for disclosing
information about capital structure, including pertinent rights and privileges
of various securities outstanding. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. The statement did not
have a material impact on the Company's results of operations when adopted.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and displaying of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997. This
statement was adopted for the year ended December 31, 1998, and is reflected in
the Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes standards for
the way that public business enterprises report information about operating
segments in both annual financial statements and interim financial reports
issued to shareholders. The statement also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This Statement supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information about
major customers. It amends SFAS No. 94, "Consolidation of All Majority-Owned
Subsidiaries," to remove the special disclosure requirements for previously
unconsolidated subsidiaries. SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997. As none of the Company's other
operating segments outside of banking operations meet the threshold requirements
under this statement, no additional segment disclosures are provided.
In February 1998, the FASB issued SFAS No. 132, "Statement on Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132
revises employers' disclosures about pension and
35
36
other postretirement benefit plans. SFAS No. 132 does not change the measurement
or recognition of those plans and is effective for fiscal years beginning after
December 15, 1997. The statement did not have a material impact on the Bank's
results of operations or financial position when adopted.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. The key criterion for hedge accounting is that
the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Management of the Bank does not believe that this
statement will have a material impact on the Bank's consolidated financial
statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities," which establishes
accounting and reporting standards for certain activities of mortgage banking
enterprises and other enterprises that conduct operations that are substantially
similar. SFAS No. 134 requires that after the securitization of mortgage loans
held for sale, the resulting mortgage-backed securities and other retained
interests should be classified in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," based on the company's
ability and intent to sell or hold those investments. SFAS No. 134 is effective
for the first fiscal quarter beginning after December 15, 1998. Management of
the Bank does not believe that the adoption of SFAS No. 134 will have a material
impact on the Bank's results of operations or financial position when adopted,
since the Bank does not have a mortgage banking operation.
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.
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, 1998 and 1997... 40
Consolidated Statements of Earnings Years Ended December 31,
1998, 1997 and 1996....................................... 41
Consolidated Statements of Stockholders' Equity Year Ended
December 31, 1998, 1997 and 1996.......................... 42
Consolidated Statements of Cash Flows Years Ended December
31, 1998, 1997 and 1996................................... 43
Notes to Consolidated Financial Statements.................. 45
Independent Auditors' Report................................ 66
All schedules are omitted because they are not applicable, not material or
because the information is included in the financial statements or the notes
thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
36
37
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 1998" 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 "How Much
Stock Do The Company's Directors and Officers Own?" 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.
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 36 for a
list of financial statements filed as part of this Report.
EXHIBITS
See Index to Exhibits at page 67 of this Form 10-K.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following compensation plans and arrangements were filed as exhibits to
this Form 10-K or are incorporated by reference: 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 27, 1996 with Tony Ellis, Exhibit 10.33;
Severance Compensation Agreement dated May 30, 1997 with Nancy Sinclair, Exhibit
10.34, and Severance Compensation Agreement dated February 1, 1998 with Edward
Biebrich, Exhibit 10.35.
37
38
REPORTS ON FORM 8-K
On August 19, 1998, the Company filed a report of Form 8-K, reporting under
Item 5. The Company filed Exhibit 99.1, Press Release dated August 19, 1998 with
the Form 8-K.
38
39
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 17th day of
March, 1999.
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 17, 1999
- --------------------------------------------------------
George A. Borba
/s/ JOHN A. BORBA Director March 17, 1999
- --------------------------------------------------------
John A. Borba
/s/ RONALD O. KRUSE Director March 17, 1999
- --------------------------------------------------------
Ronald O. Kruse
/s/ JOHN J. LOPORTO Director March 17, 1999
- --------------------------------------------------------
John J. LoPorto
/s/ CHARLES M. MAGISTRO Director March 17, 1999
- --------------------------------------------------------
Charles M. Magistro
/s/ JAMES C. SELEY Director March 17, 1999
- --------------------------------------------------------
James C. Seley
/s/ EDWARD J. BIEBRICH JR. Chief Financial Officer March 17, 1999
- -------------------------------------------------------- (Principal Financial and
Edward J. Biebrich Jr. Accounting Officer)
/s/ D. LINN WILEY Director, President and March 17, 1999
- -------------------------------------------------------- Chief Executive Officer
D. Linn Wiley (Principal Executive
Officer)
39
40
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
-------------- --------------
Investment securities held to maturity (Note 2)........... $ 53,859,110 $ 58,043,631
Investment securities available for sale (Note 2)......... 676,161,968 434,106,380
Loans and lease finance receivables, net (Notes 3, 4 and
5)..................................................... 675,668,220 605,483,738
-------------- --------------
Total earning assets.............................. 1,405,689,298 1,097,633,749
Cash and due from banks................................... 100,032,606 107,724,671
Premises and equipment, net (Note 6)...................... 22,332,764 23,415,048
Other real estate owned, net (Note 5)..................... 2,102,264 4,395,026
Deferred taxes (Note 7)................................... 4,356,087 3,504,935
Goodwill.................................................. 9,634,999 10,818,485
Other assets.............................................. 11,058,716 11,277,310
-------------- --------------
TOTAL............................................. $1,555,206,734 $1,258,769,224
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 8):
Noninterest-bearing.................................... $ 538,807,684 $ 469,841,191
Interest-bearing....................................... 676,497,282 605,854,131
-------------- --------------
Total deposits.................................... 1,215,304,966 1,075,695,322
Demand note to U.S. Treasury.............................. 94,564 7,922,323
Short-term borrowings (Note 9)............................ 200,000,000 49,000,000
Securities purchased not settled.......................... 5,000,000 10,300,000
Other liabilities (Note 7)................................ 19,100,140 13,766,609
-------------- --------------
Total liabilities................................. 1,439,499,670 1,156,684,254
-------------- --------------
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, 16,532,464 (1998) and
14,974,732 (1997)...................................... 94,529,292 62,255,157
Retained earnings......................................... 19,799,016 39,057,372
Accumulated other comprehensive income (Note 2)........... 1,378,756 772,441
-------------- --------------
Total stockholders' equity........................ 115,707,064 102,084,970
-------------- --------------
TOTAL............................................. $1,555,206,734 $1,258,769,224
============== ==============
See accompanying notes to consolidated financial statements.
40
41
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE YEARS ENDED DECEMBER 31, 1998
1998 1997 1996
----------- ----------- -----------
INTEREST INCOME:
Loans, including fees..................................... $60,207,232 $58,135,345 $54,451,505
----------- ----------- -----------
Investment securities:
Taxable................................................. 31,783,465 23,717,636 18,612,561
Tax-advantaged.......................................... 4,370,106 2,552,588 1,317,992
----------- ----------- -----------
36,153,571 26,270,224 19,930,553
----------- ----------- -----------
Federal funds sold........................................ 478,827 250,127 512,393
----------- ----------- -----------
Total interest income.............................. 96,839,630 84,655,696 74,894,451
----------- ----------- -----------
INTEREST EXPENSE:
Deposits (Note 8)......................................... 23,786,120 21,051,355 18,740,044
Other borrowings.......................................... 7,461,860 3,924,197 2,726,425
----------- ----------- -----------
Total interest expense............................. 31,247,980 24,975,552 21,466,469
----------- ----------- -----------
NET INTEREST INCOME BEFORE PROVISION FOR CREDIT LOSSES...... 65,591,650 59,680,144 53,427,982
PROVISION FOR CREDIT LOSSES (Note 5)........................ 2,500,000 2,670,000 2,887,821
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES....... 63,091,650 57,010,144 50,540,161
----------- ----------- -----------
OTHER OPERATING INCOME:
Service charges on deposit accounts....................... 7,616,046 7,350,224 7,176,956
Trust services............................................ 3,472,145 3,161,132 2,326,831
Litigation settlement (Note 10)........................... 2,100,000
Other..................................................... 3,887,751 3,311,520 2,674,990
----------- ----------- -----------
Total other operating income....................... 14,975,942 13,822,876 14,278,777
----------- ----------- -----------
OTHER OPERATING EXPENSES:
Salaries, wages and employee benefits (Notes 11, 12 and
14)..................................................... $22,700,039 $21,654,043 $20,013,237
Occupancy (Note 10)....................................... 3,779,339 3,435,356 3,217,380
Equipment................................................. 3,891,184 3,363,562 3,111,464
Stationery and supplies................................... 2,702,702 2,621,776 2,438,084
Professional services..................................... 3,802,079 2,296,112 1,985,331
Promotion................................................. 2,011,728 2,092,421 2,158,638
Data processing........................................... 951,179 889,412 902,962
Deposit insurance premiums................................ 123,446 113,012 2,000
Other real estate owned expense (Note 5).................. 1,193,917 2,688,805 4,705,382
Other..................................................... 3,868,631 3,735,623 3,374,825
----------- ----------- -----------
Total other operating expenses..................... 45,024,244 42,890,122 41,909,303
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES................................ 33,043,348 27,942,898 22,909,635
INCOME TAXES (Note 7)....................................... 12,255,941 10,573,111 9,576,299
----------- ----------- -----------
NET EARNINGS................................................ $20,787,407 $17,369,787 $13,333,336
=========== =========== ===========
BASIC EARNINGS PER COMMON SHARE (Note 13)................... $ 1.26 $ 1.05 $ 0.81
=========== =========== ===========
DILUTED EARNINGS PER COMMON
SHARE (Note 13)........................................... $ 1.21 $ 1.01 $ 0.79
=========== =========== ===========
See accompanying notes to consolidated financial statements.
41
42
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
ACCUMULATED
COMMON OTHER
SHARES COMMON RETAINED COMPREHENSIVE COMPREHENSIVE
OUTSTANDING STOCK EARNINGS INCOME INCOME
----------- ----------- ------------ ------------- -------------
BALANCE, JANUARY 1, 1996............. 8,926,707 $43,436,317 $ 34,520,110 $ 303,789
Issuance of common stock........... 136,601 653,317
10% stock dividend................. 909,673 17,852,333 (17,852,333)
Tax benefit from exercise of stock
options.......................... 422,499
Cash dividends..................... (3,082,777)
Comprehensive income:
Net earnings..................... 13,333,336 $13,333,336
Other comprehensive income --
Unrealized losses on securities
available for sale, net..... (499,520) (499,520)
-----------
Comprehensive income........ $12,833,816
---------- ----------- ------------ ---------- ===========
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)
Issuance of common stock........... 96,086 904,270
3-for-2 stock split................ 5,000,847
Tax benefit from exercise of stock
options.......................... 193,720
Cash dividends..................... (4,502,811)
Comprehensive income:
Net earnings..................... 17,369,787 $17,369,787
Other comprehensive income --
Unrealized gains on securities
available for sale, net..... 968,172 968,172
-----------
Comprehensive income........ $18,337,959
---------- ----------- ------------ ---------- ===========
BALANCE, DECEMBER 31, 1997........... 14,974,732 62,255,157 39,057,372 772,441
Repurchase of common stock......... (91,700) (380,555) (1,527,234)
Issuance of common stock........... 146,888 467,380
10% stock dividend................. 1,502,544 32,187,310 (32,187,310)
Tax benefit from exercise of stock
options.......................... 171,856
Cash dividends..................... (6,503,075)
Comprehensive income:
Net earnings..................... 20,787,407 $20,787,407
Other comprehensive income --
Unrealized gains on securities
available for sale, net..... 606,315 606,315
-----------
Comprehensive income........ $21,393,722
---------- ----------- ------------ ---------- ===========
BALANCE, DECEMBER 31, 1998........... 16,532,464 $94,529,292 $ 19,799,016 $1,378,756
========== =========== ============ ==========
1998 1997 1996
---------- ---------- ---------
DISCLOSURE OF RECLASSIFICATION AMOUNT:
Unrealized holding gains (losses) on securities arising
during the
period.................................................. $1,458,367 $1,694,817 $(853,555)
Tax (expense) benefit..................................... (596,114) (716,872) 355,775
Less --
Reclassification adjustment for gains on securities
included in net income................................ (406,832) (15,711) (2,991)
Add --
Tax expense............................................. 150,894 5,938 1,251
---------- ---------- ---------
Net unrealized gain on securities......................... $ 606,315 $ 968,172 $(499,520)
========== ========== =========
See accompanying notes to consolidated financial statements.
42
43
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1998
1998 1997 1996
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received......................... $ 92,090,791 $ 80,544,355 $ 70,894,714
Service charges and other fees received... 19,404,779 18,796,930 18,536,322
Interest paid............................. (30,086,251) (24,553,903) (21,342,531)
Cash paid to suppliers and employees...... (40,261,165) (39,539,189) (36,795,937)
Income taxes paid......................... (12,155,000) (10,400,000) (9,643,766)
------------- ------------- -------------
Net cash provided by operating
activities...................... 28,993,154 24,848,193 21,648,802
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities
available for sale..................... 96,187,401 39,577,820 18,528,445
Proceeds from maturities of securities
available for sale..................... 131,170,491 80,660,969 66,919,013
Proceeds from maturities of securities
held to maturity....................... 1,958,279 2,015,748 1,697,771
Purchases of securities available for
sale................................... (469,691,873) (206,509,803) (112,617,197)
Purchases of securities held to
maturity............................... (185,697) (10,690,624) (27,055,000)
Net increase in loans..................... (76,244,708) (43,019,894) (30,442,838)
Proceeds from sale of other real estate
owned.................................. 5,243,247 11,568,676 4,704,182
Proceeds from sale of premises and
equipment.............................. 2,204,352 55,390 55,490
Purchases of premises and equipment....... (3,573,694) (2,228,075) (3,267,172)
Consideration paid in business
combinations........................... (18,322,106)
Other investing activities................ 1,408,582 1,439,770 (623,112)
------------- ------------- -------------
Net cash used in investing
activities...................... (311,523,620) (127,130,023) (100,422,524)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing
deposits and money market and savings
accounts............................... 113,813,571 18,853,754 56,288,172
Net increase in time certificates of
deposit................................ 25,796,073 66,244,945 18,998,252
Net increase (decrease) in short-term
borrowings............................. 143,172,241 (11,687,543) 21,247,889
Cash dividends on common stock............ (6,503,075) (4,502,811) (3,082,777)
Repurchase of common stock................ (1,907,789) (1,935,239)
Proceeds from exercise of stock options... 467,380 531,840 415,402
------------- ------------- -------------
Net cash provided by financing
activities...................... 274,838,401 67,504,946 93,866,938
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS............................... $ (7,692,065) $ (34,776,884) $ 15,093,216
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR...................................... 107,724,671 142,501,555 111,886,440
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR,
BEFORE ACQUISITIONS....................... 100,032,606 107,724,671 126,979,656
CASH AND CASH EQUIVALENTS RECEIVED IN
ACQUISITIONS.............................. 15,521,899
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR...... $ 100,032,606 $ 107,724,671 $ 142,501,555
============= ============= =============
See accompanying notes to consolidated financial statements.
43
44
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net earnings.............................. $ 20,787,407 $ 17,369,787 $ 13,333,336
------------- ------------- -------------
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Gain on sale of investment securities..... (451,414) (93,789) (139,702)
Loss on sale of investment securities..... 44,582 78,078 136,711
Gain on sale of premises and equipment.... (674,633) (20,523) (16,736)
Gain on sale of other real estate owned... (109,741) (109,714) (135,824)
(Accretion of discounts) amortization of
premiums on investment securities...... (1,151,301) (1,127,868) (616,984)
Provision for credit losses............... 2,500,000 2,670,000 2,887,821
Provision for losses on other real estate
owned.................................. 500,000 1,675,000 3,449,178
Depreciation and amortization............. 3,126,259 3,013,541 2,708,109
Change in accrued interest receivable..... (1,048,256) (140,764) (1,081,484)
Change in accrued interest payable........ 1,161,729 421,649 123,938
Deferred income tax provision (benefit)... (1,296,373) 264,207 (1,015,728)
Change in other assets and other
liabilities............................ 5,604,895 848,589 2,016,167
------------- ------------- -------------
Total adjustments................. 8,205,747 7,478,406 8,315,466
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES... $ 28,993,154 $ 24,848,193 $ 21,648,802
============= ============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Real estate acquired through
foreclosure............................ $ 3,560,226 $ 11,552,718 $ 6,231,881
Loans to facilitate the sale of other real
estate owned........................... $ 200,000 $ 4,518,500 $ 753,550
Securities purchased not settled.......... $ 5,000,000 $ 10,300,000
See accompanying notes to consolidated financial statements.
44
45
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
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 asset management division and
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 24 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. The Company's investment in Federal Home
Loan Bank ("FHLB") stock is classified as available for sale but is carried at
cost, which approximates fair value.
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
45
46
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
estimated service lives using the straight-line method. Properties under capital
lease and leasehold improvements are amortized over the shorter of their
economic lives or the initial term of the lease.
OTHER REAL ESTATE OWNED -- Other real estate owned 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 -- 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 considers the number of shares issuable upon the assumed
exercise of outstanding common stock options. 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.
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.
CURRENT ACCOUNTING PRONOUNCEMENTS -- In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," effective for the fiscal
years beginning after December 15, 1997. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This statement further
requires that an entity display an amount representing total comprehensive
income for the period in that financial statement. This statement also requires
that an entity classify items or other comprehensive income by their nature in a
financial statement. For example, other comprehensive income may include foreign
currency items, minimum pension liability adjustments, and unrealized gains and
46
47
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
losses on certain investments in debt and equity securities. Reclassification of
financial statements for earlier periods, provided for comparative purposes, is
required. This statement was adopted for the year ended December 31, 1998, and
is reflected in the Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for financial statements for
periods beginning after December 15, 1997. This statement establishes standards
for reporting information about operating segments in annual financial
statements and requires that enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. As none of the Company's other operating
segments outside of the banking operations meet the threshold requirements under
this statement, no additional segment disclosures are provided.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for financial statements for
periods beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. Adoption of this statement is not expected to have a material
impact on the Company's consolidated financial statements.
RECLASSIFICATIONS -- Certain amounts in the prior years' financial
statements and related footnote disclosures have been reclassified to conform to
the current-year presentation.
47
48
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
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.
1998
--------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
Investment securities
held to maturity:
Mortgage-backed
securities......... $ 4,409,070 $ 136,165 $ -- $ 4,545,235
Municipal bonds....... 47,962,333 1,917,026 49,879,359
Other debt
securities......... 1,487,707 1,487,707
------------ ---------- --------- ------------
53,859,110 2,053,191 55,912,301
------------ ---------- --------- ------------
Investment securities
available for sale:
U.S. Treasury
securities......... 3,004,827 18,611 3,023,438
Mortgage-backed
securities......... 143,780,499 1,143,316 (184,568) 144,739,247
CMO/REMICs............ 427,692,037 1,244,792 (690,987) 428,245,842
Government agency..... 19,160,891 78,399 (9,397) 19,229,893
Municipal bonds....... 58,482,700 941,072 (84,324) 59,339,448
CRA Investment........ 820,000 820,000
FHLB stock............ 20,764,100 20,764,100
------------ ---------- --------- ------------
673,705,054 3,426,190 (969,276) 676,161,968
------------ ---------- --------- ------------
TOTAL......... $727,564,164 $5,479,381 $(969,276) $732,074,269
============ ========== ========= ============
48
49
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
1997
--------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COSTS 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
------------ ---------- --------- ------------
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
------------ ---------- --------- ------------
432,599,514 1,904,854 (397,988) 434,106,380
------------ ---------- --------- ------------
TOTAL......................... $490,643,145 $3,586,891 $(465,544) $493,764,492
============ ========== ========= ============
The CMO/REMIC securities noted above represent collateralized mortgage
obligations and real estate mortgage investment conduits. Approximately 98% of
such securities are U.S. government agencies that guarantee payment of principal
and interest of the underlying mortgages. The remaining 2% are readily
marketable collateralized mortgage obligations backed by agency-pooled
collateral or whole loan collateral. All non-agency issues held are currently
rated "AAA" by either Standard & Poor's or Moody's.
At December 31, 1998 and 1997, investment securities having an amortized
cost of approximately $384,321,000 and $245,647,000, respectively, were pledged
to secure public deposits, short-term borrowings, and for other purposes as
required or permitted by law.
The amortized cost and fair value of debt securities at December 31, 1998,
by contractual maturity, are shown below. Although mortgage-backed securities
and CMO/REMICs have contractual maturities through 2028, 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... $ 1,049,128 $ 1,059,691 7.65% $ 6,784,600 $ 6,807,016 6.20%
Due after one year through
five years.............. 13,255,426 13,620,086 6.93% 21,960,782 22,133,015 6.65%
Due after five years
through ten years....... 18,773,827 19,651,383 6.92% 28,257,836 23,644,843 6.65%
Due after ten years....... 16,371,659 17,035,906 7.69% 24,465,200 29,827,905 6.85%
----------- ----------- ------------ ------------
49,450,040 51,367,066 7.22% 81,468,418 82,412,779 6.67%
FHLB stock................ 20,764,100 20,764,100
Mortgage-backed securities
and CMO/REMICs.......... 4,409,070 4,545,235 6.33% 571,472,536 572,985,089 6.40%
----------- ----------- ------------ ------------
$53,859,110 $55,912,301 7.12% $673,705,054 $676,161,968 6.43%
=========== =========== ============ ============
49
50
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
Net realized gains on sales of investment securities available for sale are
as follows:
1998 1997 1996
-------- -------- ---------
Gross realized gains...................... $451,414 $ 93,789 $ 139,702
Gross realized losses..................... (44,582) (78,078) (136,711)
-------- -------- ---------
$406,832 $ 15,711 $ 2,991
======== ======== =========
3. LOANS AND LEASE FINANCE RECEIVABLES
The following is a summary of the components of loan and lease finance
receivables at December 31:
1998 1997
------------ ------------
Commercial, financial and industrial............ $247,059,862 $258,987,377
Real estate:
Construction.................................. 29,414,961 19,819,454
Mortgage...................................... 297,856,571 229,925,777
Loans to individuals for household, family and
other consumer expenditures................... 17,816,110 17,444,514
Municipal lease finance receivables............. 22,922,696 24,007,988
Agribusiness.................................... 76,283,130 69,404,310
------------ ------------
691,353,330 619,589,420
Allowance for credit losses (Note 5)............ (13,364,649) (11,522,328)
Deferred loan origination fees, net............. (2,320,461) (2,583,354)
------------ ------------
$675,668,220 $605,483,738
============ ============
At December 31, 1998 the Bank held approximately $389,193,000 of fixed rate
loans. These fixed rate loans bear interest at rates ranging from 5% to 18% and
have contractual maturities between 1 and 17 years.
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:
1998 1997
----------- -----------
Outstanding balance, beginning of year............ $ 4,157,000 $ 3,040,000
Credit granted, including renewals................ 2,166,000 2,280,000
Repayments........................................ (2,068,000) (1,163,000)
----------- -----------
Outstanding balance, end of year.................. $ 4,255,000 $ 4,157,000
=========== ===========
50
51
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
5. ALLOWANCE FOR CREDIT AND OTHER REAL ESTATE OWNED LOSSES
Activity in the allowance for credit losses was as follows:
1998 1997 1996
----------- ----------- -----------
Balance, beginning of year.......... $11,522,328 $12,238,816 $ 9,625,586
Provision charged to operations..... 2,500,000 2,670,000 2,887,821
Additions to allowance resulting
from acquisitions................. 711,329
Loans charged off................... (941,569) (3,606,118) (1,749,004)
Recoveries on loans previously
charged off....................... 283,890 219,630 763,084
----------- ----------- -----------
Balance, end of year................ $13,364,649 $11,522,328 $12,238,816
=========== =========== ===========
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 than the recorded investment
in the loan, a portion of the Bank's general reserve is allocated as an
impairment reserve.
At December 31, 1998 and 1997 the Bank had classified as impaired loan
amounts totaling $9,559,909 and $7,831,426, respectively. All of these loans
require specific reserves, and accordingly, the Bank has recorded specific
reserves of $984,243 and $1,002,236 on such loans, respectively. The average
recorded investment in impaired loans during the years ended December 31, 1998,
1997 and 1996 was approximately $7,156,000, $12,492,000 and $31,195,000,
respectively. Interest income of $825,589, $1,112,962 and $1,248,136 was
recognized on impaired loans during the years ended December 31, 1998, 1997 and
1996, 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, 1998, loans on nonaccrual status totaled $7,217,566, all of
which are included in the impaired loans discussed above, compared to $3,955,390
at December 31, 1997.
Activity in the allowance for other real estate owned losses was as
follows:
1998 1997 1996
---------- ----------- -----------
Balance, beginning of year........... $ 398,649 $ 1,931,682 $ 1,195,843
Provision charged to operations...... 500,000 1,675,000 3,449,178
Charge-offs of other real estate
owned.............................. (346,320) (3,208,033) (2,713,339)
---------- ----------- -----------
Balance, end of year................. $ 552,329 $ 398,649 $ 1,931,682
========== =========== ===========
The Company incurred additional expenses of $693,917 (1998), $1,013,805
(1997) and $1,256,204 (1996) related to the holding and disposition of other
real estate owned.
51
52
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
6. PREMISES AND EQUIPMENT
Premises and equipment consist of:
1998 1997
------------ ------------
Land............................................ $ 4,617,304 $ 5,322,304
Bank premises................................... 13,682,867 14,001,861
Furniture and equipment......................... 21,442,767 18,683,061
Leased property under capital lease............. 649,330 649,330
------------ ------------
40,392,268 38,656,556
Accumulated depreciation and amortization....... (18,059,504) (15,241,508)
------------ ------------
$ 22,332,764 $ 23,415,048
============ ============
7. INCOME TAXES
Income tax expense comprised the following:
1998 1997 1996
----------- ----------- -----------
Current provision:
Federal........................... $ 9,694,101 $ 7,257,216 $ 7,662,723
State............................. 3,858,213 3,051,688 2,929,304
----------- ----------- -----------
13,552,314 10,308,904 10,592,027
----------- ----------- -----------
Deferred provision (benefit):
Federal........................... (1,044,883) 245,859 (751,898)
State............................. (251,490) 18,348 (263,830)
----------- ----------- -----------
(1,296,373) 264,207 (1,015,728)
----------- ----------- -----------
$12,255,941 $10,573,111 $ 9,576,299
=========== =========== ===========
Income tax (asset) liability comprised the following:
1998 1997
----------- -----------
Current:
Federal......................................... $ 1,127,715 $ 57,122
State........................................... 311,000 178,000
----------- -----------
1,438,715 235,122
----------- -----------
Deferred:
Federal......................................... (3,454,785) (2,779,435)
State........................................... (901,302) (725,500)
----------- -----------
(4,356,087) (3,504,935)
----------- -----------
$(2,917,372) $(3,269,813)
=========== ===========
52
53
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
The components of the net deferred tax asset are as follows:
1998 1997
---------- ----------
FEDERAL
Deferred tax liabilities:
Depreciation...................................... $1,928,046 $1,935,812
Valuation of trust assets......................... 543,083 587,417
Core deposit premium.............................. 268,373 392,237
Leases............................................ 84,877 88,074
Unrealized gain on investment securities.......... 840,067 470,534
Other............................................. 13,568 14,870
---------- ----------
Gross deferred tax liability........................ 3,678,014 3,488,944
---------- ----------
Deferred tax assets:
California franchise tax.......................... 974,697 772,222
Bad debt and credit loss deduction................ 4,129,980 3,408,617
Other real estate owned reserves.................. 289,915 674,365
Deferred compensation............................. 986,795 1,075,919
Self-insurance reserves........................... 298,296 176,752
Other............................................. 453,116 160,504
---------- ----------
Gross deferred tax asset............................ 7,132,799 6,268,379
---------- ----------
Net deferred tax asset -- federal................... $3,454,785 $2,779,435
========== ==========
1998 1997
---------- ----------
STATE
Deferred tax liabilities:
Depreciation...................................... $ 504,850 $ 507,255
Valuation of trust assets......................... 168,201 181,931
Core deposit premium.............................. 83,119 121,481
Unrealized gain on investment securities.......... 172,062 96,375
---------- ----------
Gross deferred tax liability........................ 928,232 907,042
---------- ----------
Deferred tax assets:
Bad debt and credit loss deduction................ 1,158,947 943,553
Other real estate owned reserves.................. 89,791 208,860
Deferred compensation............................. 305,625 333,227
Self-insurance reserves........................... 92,387 54,743
Other............................................. 182,784 92,159
---------- ----------
Gross deferred tax asset............................ 1,829,534 1,632,542
---------- ----------
Net deferred tax asset -- state..................... $ 901,302 $ 725,500
========== ==========
53
54
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
A reconciliation of the statutory income tax rate to the consolidated
effective income tax rate follows:
1998 1997 1996
--------------------- --------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ------- ----------- ------- ---------- -------
Federal income tax at
statutory rate........... $11,565,172 35.0% $ 9,780,014 35.0% $8,018,372 35.0%
State franchise taxes, net
of federal benefit....... 2,328,235 7.1 1,968,857 7.1 1,732,558 7.6
Tax-exempt interest........ (1,847,617) (5.6) (1,359,357) (4.9) (848,998) (3.7)
Other, net................. 210,151 0.6 183,597 0.6 674,367 2.9
----------- ---- ----------- ---- ---------- ----
$12,255,941 37.1% $10,573,111 37.8% $9,576,299 41.8%
=========== ==== =========== ==== ========== ====
8. DEPOSITS
Time certificates of deposit with balances of $100,000 or more amounted to
approximately $203,095,000 and $186,265,000 at December 31, 1998 and 1997,
respectively. Interest expense on such deposits amounted to approximately
$10,339,000 (1998), $8,016,000 (1997) and $6,496,000 (1996).
At December 31, 1998, the scheduled maturities of time certificates of
deposit are as follows:
1999........................................... $284,551,498
2000........................................... 3,940,647
2001........................................... 1,228,902
2002........................................... 292,086
2003 and thereafter............................ 193,489
------------
$290,206,622
============
9. SHORT-TERM BORROWINGS
During 1998 and 1997, the Bank entered into short-term borrowing
agreements with the Federal Home Loan Bank (the "FHLB"). The Bank had
outstanding balances of $195,000,000 and $45,000,000 under these agreements
at December 31, 1998 and 1997, respectively, with weighted-average interest
rates of 5.3% and 5.8%, respectively. In addition, on December 31, 1998,
the Bank entered into an overnight agreement with the FHLB to borrow
$5,000,000 at 4.8% annual interest. The FHLB is holding certain investment
securities of the Bank as collateral for these borrowings. On December 31,
1997, the Bank entered into an overnight agreement with a financial
institution to borrow $4,000,000 at 6.3% annual interest. The Bank
maintained 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 2027. The future minimum annual rental
payments required for leases that have initial or remaining noncancelable lease
terms
54
55
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
in excess of one year as of December 31, 1998, excluding property taxes and
insurance, are approximately as follows:
1999............................................. $1,749,000
2000............................................. 1,774,000
2001............................................. 1,582,000
2002............................................. 1,147,000
2003............................................. 851,000
Succeeding years................................. 1,666,000
----------
Total minimum payments required.................. $8,769,000
==========
Total rental expense for the Company was approximately $1,579,000 (1998),
$1,565,000 (1997) and $1,401,000 (1996).
At December 31, 1998, the Bank had commitments to extend credit of
approximately $209,064,000 and obligations under letters of credit of
$8,925,000. 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 May 1998, the Bank received an unfavorable jury judgment as a result of
the lawsuit filed against them by MRI Grand Terrace, Inc. ("MRI"). The award to
MRI and its joint venture partner, Tri-National Development Corp. was
approximately $4,900,000, which included approximately $2,100,000 in
compensatory damages, $1,600,000 in punitive damages and $1,200,000 in
prejudgment interest. The lawsuit alleges that the Bank misled MRI in their
purchase of a commercial real estate property from the Bank. The Bank
subsequently made a motion to the trial judge to vacate the jury verdict, and on
August 14, 1998 the motion was denied. The Bank filed an appeal on August 19,
1998 and is proceeding with the appellate process, which could take an extended
period of time to complete.
In the ordinary course of business, the Company becomes involved in
litigation. Based upon the Company's internal records and discussions with legal
counsel, the Company records reserves for estimates of the probable outcome of
all cases brought against them. During 1998, the Company has accrued a liability
for that portion of the judgment discussed above related to Tri-National
Development Corp. Management believes the ultimate outcome of this case will not
have a material effect on the Company's future 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.
55
56
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
11. DEFERRED COMPENSATION PLANS
As a result of the acquisition of Citizens Commercial Trust and Savings
Bank of Pasadena ("CCT&SB") in 1996, 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 that it intends to use to fund the
related liability. Benefits paid to retirees amounted to approximately $59,000
(1998), $54,000 (1997) and $51,000 (1996).
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'
beneficiaries: 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 employees' beneficiaries over a 10-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 totaled
approximately $221,000 (1998 and 1997) and $170,000 (1996).
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 $1,047,000
(1998), $1,021,000 (1997) and $888,000 (1996).
13. EARNINGS PER SHARE RECONCILIATION
DECEMBER 31, 1998
----------------------------------------
WEIGHTED-
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EPS
Income available to common
stockholders.......................... $20,787,407 16,555,750 $1.26
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise
of outstanding options................ 664,843 (0.05)
----------- ---------- -----
DILUTED EPS
Income available to common
stockholders.......................... $20,787,407 17,220,593 $1.21
=========== ========== =====
56
57
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
DECEMBER 31, 1997
---------------------------------------
WEIGHTED-
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EPS
Income available to common stockholders... $17,369,787 16,484,842 $1.05
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise
of outstanding options.................. 663,150 (0.04)
----------- ---------- -----
DILUTED EPS
Income available to common stockholders... $17,369,787 17,147,992 $1.01
=========== ========== =====
DECEMBER 31, 1996
---------------------------------------
WEIGHTED-
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
BASIC EPS
Income available to common stockholders... $13,333,336 16,382,005 $0.81
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise
of outstanding options.................. 579,007 (0.02)
----------- ---------- -----
DILUTED EPS
Income available to common stockholders... $13,333,336 16,961,012 $0.79
=========== ========== =====
14. STOCK OPTION PLANS
The Company has granted options to purchase shares of the Company's common
stock to certain officers and Directors under a plan established in 1991. The
plan authorizes the issuance of up to 2,258,740 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 10 years from the
grant date.
At December 31, 1998, options for the purchase of 939,871 shares of the
Company's common stock were outstanding under the plan, of which options to
purchase 725,243 shares were exercisable at prices ranging from $3.11 to $22.05;
787,852 shares of common stock were available for the granting of future options
under
57
58
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
the plan. The following table presents the status of all optioned shares and per
share amounts after giving effect to the 10% stock dividend during 1998:
SHARES PRICE RANGE
--------- -----------------
Outstanding at January 1, 1996................... 1,290,971 $ 1.10 - $ 7.44
Granted.......................................... 69,877 $ 8.06 - $ 9.09
Exercised........................................ (221,355) $ 1.10 - $ 7.02
Canceled......................................... (7,581) $ 3.11 - $ 7.02
---------
Outstanding at December 31, 1996................. 1,131,912 $ 3.11 - $ 9.09
Granted.......................................... 49,413 $ 3.11 - $14.32
Exercised........................................ (138,247) $ 3.11 - $ 8.06
Canceled......................................... (20,076) $ 3.11 - $ 8.06
---------
Outstanding at December 31, 1997................. 1,023,002 $ 3.11 - $14.32
Granted.......................................... 126,537 $18.35 - $22.95
Exercised........................................ (189,400) $ 3.11 - $14.32
Canceled......................................... (20,268) $ 7.01 - $21.36
---------
Outstanding at December 31, 1998................. 939,871 $ 3.11 - $22.95
=========
In accordance with the compensation agreement of a key executive, 16,105
(1997) and 14,641 (1996) shares of the Company's common stock have been granted
to him. 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":
1998 1997 1996
-------- -------- -------
Reduction in net income......................... $191,347 $148,571 $43,024
Reduction in basic earnings per common share.... $ 0.01 $ 0.01 $ 0.01
Reduction in diluted earnings per common
share......................................... $ 0.01 $ 0.01 $ 0.01
The fair value of the options granted was estimated using the Black-Scholes
option-pricing model with the following assumptions:
1998 1997 1996
--------- ---------- ----------
Dividend yield....................... 2.4% 1.4% 0.2%
Volatility........................... 33.0% 26.2% 23.8%
Risk-free interest rate.............. 5.0% 6.0% 6.5%
Expected life........................ 7.6 years 10.0 years 10.0 years
58
59
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
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 that, as of December 31, 1998,
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1998, 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 said notification
that management believes have changed the institution's category.
59
60
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
The actual capital ratios of the Company and the Bank at December 31 are as
follows:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
----------------- ------------------- -------------------
AMOUNT AMOUNT AMOUNT
(000S) RATIO (000S) RATIO (000S) RATIO
-------- ----- -------- ------- -------- -------
As of December 31, 1998:
Total Capital (to Risk-
Weighted Assets)
Company.............. $115,562 13.5% $68,481 >|=8.0% N/A
Bank................. 113,533 13.3% 68,291 >|=8.0% $85,363 >|=10.0%
Tier I Capital (to Risk-
Weighted Assets)
Company.............. 104,693 12.2% 34,326 >4.0% N/A
Bank................. 102,690 12.0% 34,230 >4.0% 51,345 > 6.0%
Tier I Capital (to
Average Assets)
Company.............. 104,693 7.2% 58,163 >|=4.0% N/A
Bank................. 102,690 7.1% 57,854 >|=4.0% 72,317 >|= 5.0%
As of December 31, 1997:
Total Capital (to Risk-
Weighted Assets)
Company.............. 100,005 13.4% 59,704 >|=8.0% N/A
Bank................. 97,855 13.1% 59,759 >|=8.0% 74,698 >|=10.0%
Tier I Capital (to Risk-
Weighted Assets)
Company.............. 90,495 12.1% 29,916 >4.0% N/A
Bank................. 88,374 11.8% 29,957 >4.0% 44,936 > 6.0%
Tier I Capital (to
Average Assets)
Company.............. 90,495 7.6% 47,629 >|=4.0% N/A
Bank................. 88,374 7.4% 47,770 >|=4.0% 59,712 >|= 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, 1998, declare and pay additional dividends of
approximately $38,000,000.
Banking regulations require that all banks maintain a percentage of their
deposits as reserves at the Federal Reserve Bank. On December 31, 1998, this
reserve requirement was approximately $1,517,000.
60
61
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
16. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEETS
(IN THOUSANDS)
1998 1997
-------- --------
Assets:
Investment in Citizens Business Bank................. $113,704 $ 99,964
Other assets, net.................................... 6,997 6,133
-------- --------
Total assets........................................... $120,701 $106,097
======== ========
Liabilities............................................ $ 4,994 $ 4,012
Stockholders' equity................................... 115,707 102,085
-------- --------
Total liabilities and stockholders' equity............. $120,701 $106,097
======== ========
STATEMENTS OF EARNINGS
(IN THOUSANDS)
1998 1997 1996
------- ------- -------
Equity in earnings of Citizens Business
Bank........................................ $21,074 $17,568 $13,596
Other expense, net............................ (287) (198) (263)
------- ------- -------
Net earnings.................................. $20,787 $17,370 $13,333
======= ======= =======
61
62
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings..................................... $ 20,787 $ 17,370 $ 13,333
-------- -------- --------
Adjustments to reconcile net earnings to cash
provided by (used in) operating activities:
Earnings of Citizens Business Bank............ (21,074) (17,568) (13,596)
Other operating activities, net............... 1,367 1,272 1,028
-------- -------- --------
Total adjustments........................ (19,707) (16,296) (12,568)
-------- -------- --------
Net cash provided by operating
activities............................. 1,080 1,074 765
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends received from Citizens Business Bank... 7,940 4,900 600
Dividends received from Community Trust Deed
Services...................................... 140
Sale of premises and land........................ 1,588
-------- -------- --------
Net cash provided by investing
activities............................. 7,940 5,040 2,188
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends on common stock................... (6,503) (4,503) (3,083)
Proceeds from exercise of stock options.......... 467 532 415
Stock repurchase................................. (1,908) (1,935)
-------- -------- --------
Net cash used in financing activities.... (7,944) (5,906) (2,668)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 1,076 208 285
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....... 1,253 1,045 760
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR............. $ 2,329 $ 1,253 $ 1,045
======== ======== ========
62
63
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
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)
1998
Net interest income................... $15,832 $16,222 $16,492 $17,045
Provision for credit losses........... 850 450 600 600
Net earnings.......................... 4,765 5,077 5,282 5,663
Basic earnings per common share....... 0.29 0.31 0.32 0.34
Diluted earnings per common share..... 0.28 0.29 0.31 0.33
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....... 0.20 0.23 0.29 0.33
Diluted earnings per common share..... 0.19 0.22 0.28 0.32
63
64
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
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, 1998
and 1997. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
1998 1997
---------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
ASSETS
Cash and due from banks... $100,032,606 $100,032,606 $107,724,671 $107,724,671
Investment securities held
to maturity............. 53,859,110 55,912,301 58,043,631 59,658,112
Investment securities
available for sale...... 676,161,968 676,161,968 434,106,380 434,106,380
Loans and lease finance
receivables, net........ 675,668,220 674,181,000 605,483,738 594,315,000
Accrued interest
receivable.............. 8,146,710 8,146,710 7,098,454 7,098,454
LIABILITIES
Deposits:
Noninterest-bearing..... 538,807,684 538,807,684 469,841,191 469,841,191
Interest-bearing........ 676,497,282 676,362,000 605,854,131 605,865,000
Demand note to U.S.
Treasury................ 94,564 94,564 7,922,323 7,922,323
Short-term borrowings..... 200,000,000 200,000,000 49,000,000 49,000,000
Securities purchased not
settled................. 5,000,000 5,000,000 10,300,000 10,300,000
Accrued interest
payable................. 4,440,853 4,440,853 3,279,124 3,279,124
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
64
65
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
credit losses. Accordingly, in determining the estimated current rate for
discounting purposes, no adjustment has been made for any change in
borrowers' credit risks since the origination of such loans. Rather, the
allocable portion of the allowance for credit losses is considered to
provide for such changes in estimating fair value.
The fair value of loans on nonaccrual status has not been specifically
estimated because it is not practicable to reasonably assess the credit
risk adjustment that would be applied in the market place for such loans.
As such, the estimated fair value of total loans at December 31, 1998 and
1997 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, 1998 or 1997, 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, 1998 and 1997. 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.
65
66
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, 1998 and 1997, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. 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 audits 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CVB
Financial Corp. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
- --------------------------------------
Deloitte & Touche LLP
January 29, 1999
Los Angeles, California
66
67
INDEX TO EXHIBITS
EXHIBIT NO. PAGE
- ----------- ----
3.1 Articles of Incorporation of Company, as amended............
3.2 Bylaws of Company, as amended(1)............................ *
3.3 Reserved.................................................... *
10.1 Reserves.................................................... *
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 Reserved.................................................... *
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)................................... *
10.17 1991 Stock Option Plan(11).................................. *
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EXHIBIT NO. PAGE
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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)................................... *
10.30 Severance Compensation Agreement dated September 20, 1996
with Frank Basirico(10)..................................... *
10.31 Severance Compensation Agreement dated September 27, 1996
with Jay Coleman(10)........................................ *
10.32 Reserved.................................................... *
10.33 Severance Compensation Agreement dated September 27, 1996
with Tony Ellis(10)......................................... *
10.34 Severance Compensation Agreement dated May 30, 1997 with
Nancy Sinclair(10).......................................... *
10.35 Severance Compensation Agreement dated February 1, 1998 with
Edward Biebrich(10)......................................... *
11 Statement regarding computation of per share earnings
(included in Form 10-K)..................................... *
12 Statement regarding computation of ratios (included in Form
10-K)....................................................... *
22 Subsidiaries of Company(7).................................. *
23 Consent of Independent Certified Public Accountants.........
27 Financial Data Schedule.....................................
- ---------------
* Not applicable.
(1) Filed as Exhibits 3.2 and 10.2 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.
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69
(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.
(6) Filed as Exhibits 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 10.25 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.
(10) Filed as Exhibits 10.29, 10.30, 10.31, 10.33, 10.34 and 10.35 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, Commission File No. 1-10394, which are incorporated herein by
reference.
(11) Filed as Exhibit 10.36 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, Commission File No. 1-10394, which is
incorporated herein by this reference.
69