Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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
ONTARIO, CALIFORNIA 91764
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (909) 980-4030
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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 29, 2000, the aggregate market value of the common stock
held by non-affiliates of the registrant was approximately $353,097,499.
Number of shares of common stock of the registrant outstanding as of
February 29, 2000: 24,998,053.
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, 1999......................... Part III of Form 10-K
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
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 "Bank Holding Company Act"). 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 two
other operating subsidiaries, Community Trust Deed Services ("Community") and
CVB Ventures, Inc. ("Ventures"). The Company has two other dormant subsidiaries,
Chino Valley Bancorp. and Orange National Bancorp.
CVB's principal business is to serve as a holding company for the Bank,
Community, Ventures, 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, 1999, the
Company had $2.0 billion in total consolidated assets, $935.8 million in
consolidated net loans and $1.5 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.
1
3
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 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, 1999, the Bank had $2.0 billion in
assets, $938.2 million in net loans and $1.5 billion in deposits.
The Bank currently has 30 banking offices located in San Bernardino County,
Riverside County, Orange County and the Eastern portion of Los Angeles County in
Southern California. Of the 30 offices, the Bank opened nine as de novo branches
and acquired the other twenty one in acquisition transactions. Since 1990, the
Bank has added eighteen offices, two in 1990, two in 1993, two in 1994, one in
1995, four in 1996, and seven in 1999.
On October 4, 1999, Orange National Bancorp merged with and into the
Company in a transaction accounted for using the pooling-of-interests method of
accounting. Orange National Bancorp had six branch offices, four branches
located in Orange, one branch located in Laguna Hills, and one branch located in
Laguna Beach. The merger added approximately $250.4 million deposits and $152.0
million in net loans.
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,
corporate trustee 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.
CVB VENTURES, INC.
The Company owns 100% of the voting stock of Ventures, which has one
office. Ventures charges fees and collects commissions for acting as an
intermediary for emerging growth companies in obtaining capital, loans, leases
and other financing vehicles. At present, the assets, revenues, and earnings of
Ventures are not material in amount when compared to the Bank.
2
4
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 addition, recent
federal legislation may have the effect of further increasing the pace of
consolidation within the financial services industry. See "Item 1.
Business -- Supervision and Regulation -- Financial Services Modernization
Legislation."
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 30 offices located in the following counties: San Bernardino, Riverside,
Orange, and Los Angeles.
EMPLOYEES
At December 31, 1999, the Company employed 545 persons 345 on a full-time
and 200 on a part-time basis. The Company believes that its employee relations
are satisfactory.
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION
The Company's profitability, like most financial institutions, is impacted
by 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 Company'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, and 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 and financial services providers are
frequently made in the U.S. Congress, in the state legislatures, and before
various regulatory agencies. See "Item 1. Business -- Supervision and
Regulation."
3
5
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
shareholders 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 is qualified in its entirety by reference to the
applicable laws and regulations.
The Company
The Company, as a registered bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company
is required to file with the Federal Reserve Board quarterly, and annual reports
and such additional information as the Federal Reserve Board may require
pursuant to the Bank Holding Company Act. 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 Bank Holding Company Act 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 Bank Holding Company Act, except in
certain statutorily prescribed instances, from acquiring direct or indirect
ownership or control of more than 5% of the outstanding voting shares of any
company that is not a bank or bank holding company and from engaging directly or
indirectly in activities other than those of banking, managing or controlling
banks, or furnishing services to its subsidiaries. However, the Company, subject
to the prior approval of the Federal Reserve Board, may engage in any, or
acquire shares of companies engaged in, activities that are deemed by the
Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board's
regulations or both.
4
6
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."
Various requirements and restrictions under the laws of the United States
and the State of California affect the operations of the Bank. Federal and
California 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, capital
requirements and disclosure obligations to depositors and borrowers.
Financial Services Modernization Legislation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The
Financial Services Modernization Act repeals the two affiliation provisions of
the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal
Reserve Member Banks with firms "engaged principally" in specified securities
activities; and Section 32, which restricts officer, director, or employee
interlocks between a member bank and any company or person "primarily engaged"
in specified securities activities. In addition, the Financial Services
Modernization Act also contains provisions that expressly preempt any state law
restricting the establishment of financial affiliations, primarily related to
insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the Bank Holding Company Act framework to permit a holding company
system to engage in a full range of financial activities through a new entity
known as a Financial Holding Company. "Financial activities" is broadly defined
to include not only banking, insurance, and securities activities, but also
merchant banking and additional activities that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
5
7
Generally, the Financial Services Modernization Act:
- Repeals historical restrictions on, and eliminates many federal and state
law barriers to, affiliations among banks, securities firms, insurance
companies, and other financial service providers;
- Provides a uniform framework for the functional regulation of the
activities of banks, savings institutions, and their holding companies;
- Broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies, and their financial subsidiaries;
- Provides an enhanced framework for protecting the privacy of consumer
information;
- Adopts a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the
Federal Home Loan Bank system;
- Modifies the laws governing the implementation of the Community
Reinvestment Act ("CRA"); and
- Addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
In order for the Company to take advantage of the ability to affiliate with
other financial services providers, the Company must become a "Financial Holding
Company" as permitted under an amendment to the Bank Holding Company Act. To
become a Financial Holding Company, the Company would file a declaration with
the Federal Reserve Board, electing to engage in activities permissible for
Financial Holding Companies and certifying that it is eligible to do so because
all of its insured depository institution subsidiaries are well-capitalized and
well-managed. See "-- The Bank -- Capital Standards." In addition, the Federal
Reserve Board must also determine that each insured depository institution
subsidiary of the Company has at least a "satisfactory" CRA rating. See "-- The
Bank -- Community Reinvestment Act and Fair Lending Developments." The Company
currently meets the requirements to make an election to become a Financial
Holding Company. Management of the Company has not determined at this time
whether it will seek an election to become a Financial Holding Company. The
Company is examining its strategic business plan to determine whether, based on
market conditions, the relative financial conditions of the Company and its
subsidiaries, regulatory capital requirements, general economic conditions, and
other factors, the Company desires to utilize any of its expanded powers
provided in the Financial Services Modernization Act.
The Financial Services Modernization Act also permits national banks to
engage in expanded activities through the formation of financial subsidiaries. A
national bank may have a subsidiary engaged in any activity authorized for
national banks directly or any financial activity, except for insurance
underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a
Financial Holding Company. Financial activities include all activities permitted
under new sections of the Bank Holding Company Act or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized" and
"well-managed." The total assets of all financial subsidiaries may not exceed
the lesser of 45% of a bank's total assets, or $50 billion. A national bank must
exclude from its assets and equity all equity investments, including retained
earnings, in a financial subsidiary. The assets of the subsidiary may not be
consolidated with the bank's assets. The bank must also have policies and
procedures to assess financial subsidiary risk and protect the bank from such
risks and potential liabilities.
The Financial Services Modernization Act also includes a new section of the
Federal Deposit Insurance Act governing subsidiaries of state banks that engage
in "activities as principal that would only be permissible" for a national bank
to conduct in a financial subsidiary. It expressly preserves the ability of a
state bank to retain all existing subsidiaries. Because California permits
commercial banks chartered by the state to engage in any activity permissible
for national banks, the Bank will be permitted to form subsidiaries to engage in
the activities authorized by the Financial Services Modernization Act, to the
same extent as a national bank. In order to form a financial subsidiary, the
Bank must be well-capitalized, and the Bank would be subject to the same capital
deduction, risk management and affiliate transaction rules as applicable to
national banks.
6
8
The Company and the Bank do not believe that the Financial Services
Modernization Act will have a material adverse effect on our operations in the
near-term. However, to the extent that it permits banks, securities firms, and
insurance companies to affiliate, the financial services industry may experience
further consolidation. The Financial Services Modernization Act is intended to
grant to community banks certain powers as a matter of right that larger
institutions have accumulated on an ad hoc basis. Nevertheless, this act may
have the result of increasing the amount of competition that the Company and the
Bank face from larger institutions and other types of companies offering
financial products, many of which may have substantially more financial
resources than the Company and the Bank.
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 $48.7 million at
December 31, 1999. In addition, the California Department of Financial
Institutions and the FDIC have the authority to prohibit the Bank from paying
dividends, depending upon the Bank's financial condition, if such payment is
deemed to constitute an unsafe or unsound practice.
The FDIC and the Commissioner also have authority to prohibit the Bank from
engaging in activities that, in the FDIC's and the Commissioner's opinion,
constitute unsafe or unsound practices in conducting its business. It is
possible, depending upon the financial condition of the bank in question and
other factors, that the FDIC and the Commissioner could assert that the payment
of dividends or other payments might, under some circumstances, be such an
unsafe or unsound practice. Further, the FDIC and the Federal Reserve Board have
established guidelines with respect to the maintenance of appropriate levels of
capital by banks or bank holding companies under their jurisdiction. Compliance
with the standards set forth in such guidelines and the restrictions that are or
may be imposed under the prompt corrective action provisions of federal law
could limit the amount of dividends which the Bank or the Company may pay. An
insured depository institution is prohibited from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions if after such transaction the institution would be
undercapitalized. See "-- Prompt Corrective Regulatory Action and Other
Enforcement Mechanisms" and "-- Capital Standards" for a discussion of these
additional restrictions on capital distributions.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of, or investments in,
stock or other securities thereof, the taking of such securities as collateral
for loans, and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliate are limited, individually, to 10.0% of
the Bank's capital and surplus (as defined by federal regulations), 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
7
9
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 risk-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets 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 Bank, compared to its minimum regulatory capital
requirements as of December 31, 1999.
AS OF DECEMBER 31, 1999
------------------------------------------------------------
ACTUAL REQUIRED EXCESS
------------------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Leverage ratio............................ $145,313 7.6% $76,481 4.0% $68,832 3.6%
Tier 1 risk-based ratio................... 145,313 12.3% 47,256 4.0% 98,057 8.3%
Total risk-based ratio.................... 160,160 13.6% 94,212 8.0% 65,948 5.6%
The following table presents the amounts of regulatory capital and the
capital ratios for the Company, compared to its minimum regulatory capital
requirements as of December 31, 1999.
AS OF DECEMBER 31, 1999
-------------------------------------------------------
ACTUAL REQUIRED EXCESS
---------------- --------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Leverage ratio............................. $148,710 7.7% $77,252 4.0% $ 71,458 3.7%
Tier 1 risk-based ratio.................... 148,710 12.6% 47,210 4.0% 101,500 8.6%
Total risk-based ratio..................... 163,579 13.9% 94,146 8.0% 69,433 5.9%
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, 1999, the
Bank and the Company exceeded the required ratios for classification as
"well/adequately 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.
8
10
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, 1999, 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 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. Effective 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.
Interstate Banking and Branching
The Bank Holding Company Act 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.
9
11
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 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 December 6, 1999 the Bank was
rated satisfactory in complying with its CRA obligations.
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, 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 a 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 rates may continue to increase should the Federal
Reserve Board continue to raise rates. 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 laws, 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.
10
12
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.
As of March 15, 2000, the Bank experienced no problems with respect to Year
2000 technology issues. This does not mean that some problems may not occur in
the future.
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 twenty one of its offices under leases
expiring at various dates from 1999 through 2027. The Bank owns the premises for
ten 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, 1999, was $6.0 million. Management
believes that its existing facilities are adequate for its present purposes.
However, management currently intends to increase the Bank's assets over the
next several years and anticipates that a substantial portion of this growth
will be accomplished through acquisition or de novo opening of additional
banking offices. For additional information concerning properties, see Notes 6
and 10 of the Notes to the Consolidated Financial Statements included in this
report. See "Item 8. Financial Statements and Supplemental Data."
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company and the Bank are parties 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 and 1999, the Bank accrued a liability
for a portion of the judgment discussed above. 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
1999.
11
13
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
As of February 15, 2000, 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 67
D. Linn Wiley.................... President and Chief Executive Officer of the Company and 61
the Bank
Frank Basirico................... Executive Vice President/Senior Loan Officer of the Bank 45
Edward J. Biebrich Jr............ Chief Financial Officer of the Company and Executive 56
Vice President and Chief Financial Officer of the Bank
Jay W. Coleman................... Executive Vice President of the Bank 57
Ed Pomplun....................... Executive Vice President of the Bank 53
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 and Chief Executive Officer designate on August 21, 1991. Prior
to that, Mr. Wiley served as an Executive Vice President of Wells Fargo Bank
from April 1, 1990 to August 20, 1991. From 1988 to April 1, 1990 Mr. Wiley
served as the President and Chief Administrative Officer of Central Pacific
Corporation, and from 1983 to 1990 he was the President and Chief Executive
Officer of American National Bank.
Mr. Basirico has served as Executive Vice President and Senior Loan Officer
of the Bank since October, 1996. From March, 1993 to October, 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 1991. Between 1985
and 1990 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 1972 as an 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.
12
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Shares of CVB Financial Corp. common stock price increased from an average
price of $16.09 per share for the first quarter of 1999 to an average per share
price of $20.19 for the fourth quarter of 1999. 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 5-for-4 stock split declared in 1999 which became effective January
14, 2000. The Company had approximately 1,452 shareholders of record as of
December 31, 1999.
TWO YEAR SUMMARY OF COMMON STOCK PRICES
QUARTER ENDED HIGH LOW DIVIDENDS
------------- ------ ------ -------------------
03/31/1998................................... $20.95 $15.00 $0.09 Cash Dividend
06/30/1998................................... $19.37 $15.46 $0.07 Cash Dividend
09/30/1998................................... $17.78 $13.64 $0.07 Cash Dividend
12/31/1998................................... $18.91 $15.37 $0.09 Cash Dividend
10% Stock Dividend
03/31/1999................................... $18.10 $15.10 $0.09 Cash Dividend
06/30/1999................................... $20.80 $15.35 $0.09 Cash Dividend
09/30/1999................................... $23.70 $20.10 $0.09 Cash Dividend
12/31/1999................................... $21.70 $18.20 $0.12 Cash Dividend
5-for-4 Stock Split
The Company lists its common stock on the American Stock Exchange under the
symbol "CVB"
ITEM 6. SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net Interest Income............... $ 90,012 $ 80,542 $ 73,184 $ 65,803 $ 61,571
Provision for Credit Losses....... 2,700 2,600 2,810 3,093 2,895
Other Operating Income............ 18,630 17,759 17,530 16,991 11,871
Other Operating Expenses.......... 64,737 57,181 54,666 53,456 47,240
---------- ---------- ---------- ---------- ----------
Earnings Before Income Taxes...... 41,205 38,520 33,238 26,245 23,307
Income Taxes...................... 15,245 14,403 12,670 10,711 9,326
---------- ---------- ---------- ---------- ----------
Net Earnings...................... $ 25,960 $ 24,117 $ 20,568 $ 15,534 $ 13,981
========== ========== ========== ========== ==========
Basic Earnings Per Common Share(1) $ 1.06 $ 0.99 $ 0.85 $ 0.64 $ 0.58
========== ========== ========== ========== ==========
Diluted Earnings Per Common
Share(1)........................ $ 1.02 $ 0.95 $ 0.82 $ 0.62 $ 0.57
========== ========== ========== ========== ==========
Stock Splits...................... 5-for-4 3-for-2
Stock Dividends(2)................ 10% 10% 10%/5%
Cash Dividends Declared Per
Share........................... $ 0.39 $ 0.32 $ 0.22 $ 0.16 $ 0.13
Dividend Pay-Out Ratio............ 36.79% 32.41% 25.50% 24.85% 21.79%
Financial Position:
Assets.......................... $2,010,757 $1,841,069 $1,501,048 $1,379,266 $1,144,868
Net Loans....................... 935,791 817,296 736,673 695,677 609,173
Deposits........................ 1,501,073 1,475,639 1,294,487 1,188,961 992,565
Stockholders' Equity............ 140,770 139,430 123,671 108,043 95,522
Book Value Per Share(1)......... 5.70 5.71 5.09 4.46 4.00
Equity-to-Assets Ratio(3)....... 7.00% 7.57% 8.24% 7.83% 8.34%
13
15
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Financial Performance:
Return on:
Beginning Equity............. 18.62% 19.50% 19.04% 16.26% 18.22%
Average Equity............... 17.90% 18.06% 17.81% 15.43% 16.04%
Return on Average Assets........ 1.39% 1.49% 1.49% 1.26% 1.35%
Credit Quality:
Allowance for Credit Losses..... $ 16,761 $ 14,888 $ 13,103 $ 13,608 $ 11,139
Allowance/Total Loans........... 1.76% 1.79% 1.75% 1.92% 1.80%
Total Non Performing Loans...... $ 1,194 $ 8,925 $ 9,545 $ 26,030 $ 29,935
Non Performing Loans/Total
Loans........................ 0.13% 1.07% 1.27% 3.67% 4.83%
Net Charge-Offs................. $ 827 $ 815 $ 3,315 $ 1,335 $ 2,692
Net Charge-Offs/Average Loans... 0.10% 0.11% 0.46% 0.20% 0.45%
Regulatory Capital Ratios
Leverage Ratio.................. 7.7% 7.4% 7.8% 7.4% 8.1%
Tier 1 Capital.................. 12.6% 12.4% 12.2% 11.1% 11.7%
Total Capital................... 13.9% 13.6% 13.4% 12.3% 12.9%
- ---------------
(1) All per share information has been retroactively adjusted to reflect the
5-for-4 stock split declared December 15, 1999, as to holders of record on
January 14, 2000 and paid January 31, 2000, and the 3-for-2 stock split
declared in 1997 and the 10% stock dividends declared in 1998, 1996, and
1995.
(2) In 1995, the Company and Orange National Bancorp declared a 10% and 5% stock
dividend, respectively.
(3) Stockholders' equity divided by total assets.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE
RESULTS OF OPERATIONS.
Management's discussion and analysis is written to provide greater detail
of the results of operations and the financial condition of CVB Financial Corp.
and its subsidiaries. This analysis should be read in conjunction with the
audited financial statements contained within this report including the notes
thereto. Certain statements under this caption constitute "forward-looking
statements" under Section 27A of the 1934 Act and Section 21E of the 1934 Act
which involve risk and uncertainties. The Company's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include but are not limited to
economic conditions, competition in the geographic and business 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, ("Bank") is a state chartered bank with 30
branch offices located in San Bernardino, Riverside, Eastern Los Angeles, and
Orange Counties. Community Trust Deed Services ("Community") is a nonbank
subsidiary providing services to the Bank as well as nonaffiliated persons. CVB
Ventures, Inc. ("Ventures") is a nonbank subsidiary providing financing and
venture capital services to non affiliated 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 San Bernardino, Riverside, Eastern Los Angeles, and
Orange Counties. For the year 1999, Southern California, has again become an
international role model, having rebuilt on a base of rapidly growing
entrepreneurial firms. The Inland Empire Region of San Bernardino and Riverside
Counties is California's fastest growing region. Employment growth is
accelerating based upon a host of industries. These sectors include
international trade, film production and multimedia technology in Los Angeles
County, logistics and manufacturing in the Inland Empire, and information and
bio-technology in Orange County. While the Southern California
14
16
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 net 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.
On October 4, 1999, the Company acquired Orange National Bancorp and its
subsidiary, Orange National Bank, with deposits of approximately $250.4 million
and net loans of approximately $152.0 million in a transaction accounted for
using the pooling-of-interests method of accounting. As a result of the
transaction the Bank acquired six new banking offices: Katella, East Orange,
Plaza, and Stadium, in Orange; Saddleback Valley in Laguna Hills; and Laguna
Beach. The merger contributed significantly to the growth of the Company's
deposits, loans, and assets.
Since the acquisition of Orange National Bancorp was effected by the
pooling-of-interests method of accounting, all financial statements have been
restated to reflect the combined institutions as though they were combined for
all the periods presented.
ANALYSIS OF THE RESULTS OF OPERATIONS
The Company reported net earnings of $26.0 million for the year ended
December 31, 1999. This represented an increase of $1.8 million, or 7.64%, over
net earnings of $24.1 million for the year ended December 31, 1998. Net earnings
for 1998 increased $3.5 million, or 17.25%, over net earnings of $20.6 million
for the year ended December 31, 1997. Diluted earnings per share were $1.02 in
1999, $0.95 in 1998, and $0.82 in 1997. Basic earnings per share were $1.06 in
1999, $0.99 in 1998, and $0.85 in 1997. Diluted and basic earnings per share
have been adjusted for the effects of a 5-for-4 stock split which became
effective January 14, 2000, a 3-for-2 stock split declared in 1997 and 10% stock
dividends declared in 1998, 1996, and 1995.
Net earnings for 1999 were affected by the pooling-of-interests method of
accounting which requires that certain expenses incurred to effect the merger of
the Company and Orange National Bancorp be treated as current charges against
income. The Company charged to expense merger costs of approximately $3.0
million, net of taxes. The merger costs included accounting fees, investment
banker fees, legal fees, severance expenses, and other expenses.
The increase in net earnings for 1999 compared to 1998 was primarily the
result of an increase in net interest income and an increase in other operating
income after the effect of merger costs. The increase in earnings for 1998
compared to 1997 was the result of an increase in net interest income and an
increase in other operating income. Increased net interest income for 1999 and
1998 reflected higher volumes of average earning assets for each year. The
increases in net revenue for 1999 and 1998 were partially offset by increases in
operating expenses.
For 1999, the Company's return on average assets was 1.39%, compared to a
return on average assets of 1.49% for 1998, and a return of 1.49% for 1997. The
Company's return on average stockholders' equity was 17.90% for 1999, compared
to a return of 18.06% for 1998, and 17.81% for 1997.
15
17
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
1999 1998 1997
---------------------------- ---------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
(AMOUNTS IN THOUSANDS)
ASSETS
Investment Securities
Taxable(1)..................... $ 686,076 $ 42,885 6.25% $ 539,408 $ 33,385 6.19% $ 402,985 $ 25,290 6.28%
Tax preferenced(2)............. 122,280 5,663 6.50% 97,734 4,370 6.27% 54,098 2,553 7.02%
Federal Funds Sold............... 32,726 1,545 4.72% 63,219 3,360 5.31% 34,129 1,848 5.41%
Loans(3)(4)...................... 866,917 78,385 9.04% 772,331 74,840 9.69% 718,431 71,821 10.00%
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Total Earning Assets............. 1,707,999 128,478 7.66% 1,472,692 115,955 7.99% 1,209,643 101,512 8.49%
Total Non Earning Assets......... 154,107 144,208 167,045
---------- ---------- ----------
Total Assets..................... $1,862,106 $1,616,900 $1,376,688
========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Demand Deposits.................. $ 593,789 $ 526,257 $ 464,353
Savings Deposits(5).............. 532,272 $ 11,109 2.09% 487,968 $ 12,050 2.47% 466,588 $ 11,572 2.48%
Time Deposits.................... 334,245 15,158 4.53% 309,120 15,901 5.14% 244,439 12,832 5.25%
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Total Deposits................... 1,460,306 26,267 1.80% 1,323,345 27,951 2.11% 1,175,380 24,404 2.08%
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Other Borrowings................. 230,532 12,199 5.29% 136,189 7,462 5.48% 69,542 3,924 5.64%
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Interest Bearing Liabilities..... 1,097,049 38,466 3.51% 933,277 35,413 3.79% 780,569 28,328 3.63%
---------- ---------- ----------
Other Liabilities................ 26,239 23,795 16,298
Stockholders' Equity............. 145,029 133,571 115,468
---------- ---------- ----------
Total Liabilities and
Stockholders' Equity........... $1,862,106 $1,616,900 $1,376,688
========== ========== ==========
Net interest spread.............. 4.15% 4.20% 4.86%
Net interest margin.............. 5.40% 5.59% 6.14%
Net interest margin excluding
loan fees...................... 5.18% 5.26% 5.73%
- ---------------
(1) Includes short term interest bearing deposits with 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:
1999, $3,795; 1998, $4,864; 1997, $4,888
(4) Non performing loans are included in net loans as follows, (000)s omitted:
1999, $1,194; 1998, $8,925; 1997, $9,545
(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 $90.0 million for 1999. This represented an increase of $9.5
million, or 11.76%, over net interest income of $80.5 million for 1998. Net
interest income for 1998 increased $7.4 million, or 10.05%, over net interest
income of $73.2 million for 1997. The increases in net interest income for 1999
and 1998 were primarily the result of greater average balances of earning assets
during each year.
16
18
The net interest margin measures net interest income as a percentage of
average earning assets. The net interest margin can be affected by changes in
the yield on earning assets and the cost of interest bearing liabilities, as
well as changes in the level of interest bearing liabilities in proportion to
earning assets. The net interest margin can also be affected by changes in the
mix of earning assets as well as the mix of interest bearing liabilities. The
Company's net interest margin was 5.40% for 1999, compared to 5.59% for 1998,
and 6.14% for 1997. A lower yield on average earning assets, coupled with a
smaller decrease in the cost of average interest bearing liabilities,
contributed to the decrease in the net interest margin for 1999. 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.
In 1999, the prime rate increased from 7.75% in June to 8.50% in November.
However, the Bank's average prime rate for 1999 was 8.00% compared to 7.96% in
1998. In 1998, the prime rate decreased from 8.50% to 7.75%. This interest rate
environment had an effect of increasing rates in the bond market, but reducing
rates in the loan portfolio and deposits (primarily due to competition).
In the last quarter of 1998, the prime rate decreased. This had the effect
of reducing the yield on loans. The decrease in prime rate had 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 the 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 4.15% for 1999, compared to 4.20% for
1998, and 4.86% for 1997. The decrease in the net interest spread for 1999
resulted from decreases in the yield on earning assets and a smaller decrease in
the cost of average interest bearing liabilities. The decrease in the net
interest spread for 1998 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 7.66% for 1999, from 7.99% for
1998, and 8.49% for 1997. The decrease in the yield on earning assets for 1999
was the result of lower yields on loans. The decrease in the yield on earning
assets for 1998 reflects lower yields on investment securities, loans, and a
less profitable asset mix. The yield on average loans decreased to 9.04% for
1999, compared to 9.69% for 1998, and 10.00% for 1997. The decrease in the
yields on loans for 1999 was the result increased price competition for loans
compared to 1998. 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. Loans typically have higher yields than investments and
federal funds sold. Total average loans, measured as a percentage of average
earning assets, decreased to 50.76% for 1999, compared with 52.44% in 1998, and
59.39% in 1997. Conversely, average investment securities, including federal
funds sold, increased to 49.24% of average earning assets for 1999, compared
with 47.56% for 1998, and 40.61% for 1997.
The cost of average interest bearing liabilities decreased to 3.51% for
1999, compared to 3.79% for 1998, and 3.63% for 1997. For the most part, the
decrease in the cost of average interest bearing liabilities for 1999 reflected
increased usage of other borrowed funds. The Company has been able to obtain 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 40.66% for 1999, compared to 39.77% for 1998, and
39.51% for 1997. 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 1999, 1998 and 1997. The increases were the result of
increased balances of average earning assets. Interest income totaled $128.5
million for 1999. This represented an increase of $12.5 million, or 10.80%,
compared to total interest of $116.0 million for 1998. For 1998, total interest
income increased $14.4 million, or 14.23%, from total interest income of $101.5
million for 1997.
Interest expense totaled $38.5 million for 1999. This represented an
increase of $3.1 million, or 8.62%, over total interest expense of $35.4 million
for 1998. For 1998, total interest expense increased $7.1 million, or
17
19
25.01%, over total interest expense of $28.3 million for 1997. For both 1999 and
1998, the increase in interest expense was the combined result of greater levels
of average interest bearing liabilities.
Table 2 presents a comparison of interest income and interest expense
resulting from changes in the volumes and rates on average earning assets and
average interest bearing liabilities for the years indicated. Changes in
interest income or expense attributable to volume changes are calculated by
multiplying the change in volume by the initial average interest rate. The
change in interest income or expense attributable to changes in interest rates
are calculated by multiplying the change in interest rate by the initial volume.
The changes attributable to interest rate and volume changes are calculated by
multiplying the change in rate times the change in volume.
TABLE 2 -- RATE AND VOLUME ANALYSIS FOR CHANGES IN
INTEREST INCOME, INTEREST EXPENSE, AND NET INTEREST INCOME
1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------------------- ---------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------- ------- ------ ------- ------- ------- ------ -------
(AMOUNTS IN THOUSANDS)
Interest Income:
Taxable investment
securities.................. $ 9,079 $ 331 $ 90 $ 9,500 $ 8,562 $ (349) $(118) $ 8,095
Tax preferenced securities.... 1,098 156 39 1,293 2,059 (134) (108) 1,817
Federal funds................. (1,621) (375) 181 (1,815) 1,575 (34) (29) 1,512
Loans......................... 9,166 (5,008) (613) 3,545 5,388 (2,204) (165) 3,019
------- ------- ----- ------- ------- ------- ----- -------
Total earning assets.... 17,722 (4,896) (303) 12,523 17,584 (2,721) (420) 14,443
------- ------- ----- ------- ------- ------- ----- -------
Interest Expense:
Savings deposits.............. 1,093 (1,865) (169) (941) 530 (51) (1) 478
Time deposits................. 1,293 (1,883) (153) (743) 3,396 (258) (69) 3,069
Other borrowings.............. 5,169 (255) (177) 4,737 3,761 (114) (109) 3,538
------- ------- ----- ------- ------- ------- ----- -------
Total interest bearing
liabilities................... 7,555 (4,003) (499) 3,053 7,687 (423) (179) 7,085
------- ------- ----- ------- ------- ------- ----- -------
Net Interest Income............. $10,167 $ (893) $ 196 $ 9,470 $ 9,897 $(2,298) $(241) $ 7,358
======= ======= ===== ======= ======= ======= ===== =======
Interest and fees on loans, the Company's primary source of revenue,
totaled $78.4 million for 1999. This represented an increase of $3.5 million, or
4.74%, over interest and fees on loans of $74.8 million for 1998. For 1998,
interest and fees on loans increased $3.0 million, or 4.20%, over interest and
fees on loans of $71.8 million for 1997. The increase in interest and fee on
loans for 1999 and 1998 reflected increases in the average balance of loans. The
yield on loans decreased to 9.04% for 1999, compared to 9.69% for 1998. The
yield on loans for 1997 was 10.00%. The decrease in loan yields for 1999
compared to 1998 reflected an increased price competition for loans. Deferred
loan origination fees, net of costs, totaled $3.6 million at December 31, 1999.
This represented an increase of $148,000, or 4.33%, from deferred loan
origination fees, net of costs, of $3.4 million at December 31, 1998.
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, 1999 and December 31, 1998. 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 $274,000 greater for 1999, $485,000 greater for
1998, and $391,000 greater for 1997. Accordingly, yields on loans would have
increased by 0.03% for 1999, 0.06% for 1998, and 0.05% for 1997.
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
$3.8 million for 1999, $4.9 million for 1998 and $4.9 million for 1997.
18
20
Table 3 summarizes loan fee activity for the Bank for the years indicated.
TABLE 3 -- LOAN FEE ACTIVITY
1999 1998 1997
------- ------- -------
(AMOUNTS IN THOUSANDS)
Fees Collected........................................ $ 3,943 $ 4,808 $ 4,246
Fees and costs deferred............................... (2,984) (4,019) (4,229)
Accretion of deferred fees and costs.................. 2,836 4,075 4,871
------- ------- -------
Total fee income reported................... $ 3,795 $ 4,864 $ 4,888
======= ======= =======
Deferred net loan origination fees at end of year..... $ 3,566 $ 3,418 $ 3,474
======= ======= =======
PROVISION FOR CREDIT LOSSES
The provision for credit losses totaled $2.7 million for 1999. This
represented an increase of $100,000, or 3.85%, from the provision for credit
losses of $2.6 million for 1998. For 1998, the provision for credit losses
decreased $210,000, or 7.47%, from the provision for credit losses of $2.8
million for 1997. Net loans charged to the allowance for credit losses totaled
$827,000 for 1999. This represented an increase of $12,000, or 1.47%, from net
loan losses charged to the allowance of $815,000 for 1998. For 1998, net loan
losses charged to the allowance for credit losses decreased $2.5 million, or
75.41%, from net loans charged to the allowance of $3.3 million for 1997. 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 and 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 $18.6 million for 1999. This represents an
increase of $871,000, or 4.90%, from other operating income of $17.8 million for
1998. During 1998, other operating income increased $229,000, or 1.31%, over
other operating income of $17.5 million for 1997. The increase in other
operating income in 1999 is due in part to an increase in service charges on
deposit accounts which totaled $10.6 million, $8.8 million, and $8.6 million for
1999, 1998, and 1997, respectively, and fee income originated by the Bank's
Asset Management Division, (trust services) which generated fees totaling $3.7
million, $3.5 million, and $3.2 million for 1999, 1998 and 1997, respectively.
Investment Services which provides mutual funds, certificate of deposit and
other non-insured investment products, generated fees totaling $921,000,
$631,000 and $406,000 for 1999, 1998 and 1997, respectively. The sale of
securities generated income (loss) totaling $(80,000), $407,000 and $7,000 for
1999, 1998 and 1997, respectively, while the sale of fixed assets added income
(loss) totaling $(10,000), $684,000 and $26,000 for 1999, 1998 and 1997,
respectively.
Other operating income also includes revenue from Community, a subsidiary
of the Company. Total revenue from Community was approximately $158,000,
$222,000, and $367,000, for 1999, 1998, and 1997, respectively. Ventures had no
income for the year since it started late in the fourth quarter. The expenses of
approximately $4,300 were included in the respective expense categories of the
consolidated financial statements.
OTHER OPERATING EXPENSES
Other operating expenses totaled $64.7 million for 1999 and $57.2 million
for 1998, representing an increase of $7.6 million, or 13.21%. In 1999, due to
the merger with Orange National Bancorp, other operating expense was affected by
the pooling-of-interest method of accounting which requires that certain
expenses incurred to effect the merger be treated as current charges. The
Company charged to other operating expense merger costs of approximately $4.9
million. The merger costs included accounting fees, investment banker
19
21
fees, legal fees, and severance expense. Without the merger costs, other
operating expense would have totaled $59.9 million, representing an increase of
$2.7 million or 4.72% over operating expense of $57.2 million for 1998. For 1998
other operating expenses increased $2.5 million, or 4.60%, over total operating
expenses of $54.7 million for 1997.
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 3.48% for 1999, compared to a ratio of
3.54% for 1998, and 3.97% for 1997. Without the merger costs, operating expense
measured as a percentage of average assets would have been 3.22% for 1999. 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 1999, other operating expenses as a
percentage of total revenue was 59.59%, compared to a ratio of 58.17% for 1998,
and a ratio of 60.26% for 1997. Without the merger costs, other operating
expense as a percentage of total revenue would have been 55.12% for 1999. The
decrease in the ratio 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 $29.1 million for
1999. This represented an increase of $303,000, or 1.05%, over salaries and
related expenses of $28.8 million for 1998. Salary and related expenses for 1998
were $925,000, or 3.31%, greater than salaries and related expenses of $27.9
million for 1997. The increases for both 1999 and 1998 primarily resulted from
increased staffing levels. Salaries and related expenses as a percent of average
assets decreased to 1.56% for 1999, compared to 1.78% for 1998, and 2.03% for
1997.
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 $4.8 million for 1999. This represented a
decrease of $284,000, or 5.56%, over occupancy expense of $5.1 million for 1998.
Occupancy expense for 1998 increased $540,000, or 11.82%, from an expense level
of $4.6 million for 1997. Equipment expense totaled $4.7 million for 1999. This
represented an increase of $85,000, or 1.83%, over the $4.6 million expense for
1998. For 1998, equipment expense increased $577,000, or 14.18%, from an expense
of $4.1 million for 1997. Equipment expense in 1998 increased as a result of a
$226,000 increase in computer maintenance and replacement costs and associated
depreciation.
Stationary and supplies expense totaled $3.6 million for 1999. This
represented an increase of $273,000, or 8.09%, over the expense of $3.4 million
for 1998. Stationary and supplies expense for 1998 increased $131,000, or 4.04%,
over the expense of $3.2 million for 1997.
Professional services totaled $3.4 million for 1999. This represented an
increase of $86,000 or 2.60%, over an expense of $3.3 million for 1998. For
1998, professional services expense increased $491,000, or 17.45%, from an
expense of $2.8 million for 1997.
Promotion expense totaled $2.9 million for 1999. This represented an
increase of $372,000, or 14.90%, from an expense of $2.5 million for 1998.
Promotion expense decreased for 1998 by $54,000, or 2.12%, over an expense of
$2.6 million for 1997.
Data processing expense totaled $2.4 million for 1999. This represented an
increase of $424,000, or 21.99%, from an expense of $1.9 million for 1998. Data
processing expense increased for 1998 by $151,000, or 8.50%, over an expense of
$1.8 million for 1997. The increase for 1999 was partially the result of costs
associated with external processing and correspondent bank fees.
20
22
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 $647,000 for 1999. This represented a decrease of
$564,000, or 46.57%, from an expense level of $1.2 million for 1998. For 1998,
other real estate owned expense decreased $1.6 million, or 56.49%, over an
expense level of $2.8 million for 1997. The decrease in the expense for 1999 and
1998 compared to 1997 reflected the lower average balance of other real estate
owned for the most recent year. As stated elsewhere in this report, in 1999 due
to the merger with Orange National Bancorp, other operating expense was affected
by the pooling-of-interests method of accounting which requires that certain
expenses incurred to effect the merger be treated as current charges. The
Company charged to acquisition costs merger expenses of approximately $4.9
million. The merger expenses included accounting fees, investment banker fees,
legal fees, and severance expense.
Other expenses include the amortization of goodwill and intangibles. The
amortization expense of goodwill and intangibles totaled $1.2 million for 1999,
1998, and 1997.
YEAR 2000
The financial institutions industry, as with other industries, was faced
with year 2000 issues. These issues centered around computer programs that do
not recognize a year which begins with "20" instead of "19", or uses only 2
digits for the year.
All Year 2000 statements are designated as Year 2000 Readiness Disclosures
under the Year 2000 Information and Readiness Disclosures Act of 1998.
The Company uses third party software and systems exclusively. During 1999,
all of the software was analyzed in conjunction with the Company's third party
vendors. Several systems were replaced during 1999. The Company also updated its
contingency plan to include Year 2000 issues. All of the software and systems
were tested throughout the year. The contingency plan was also tested, using
remote data processing hot sites.
The Bank surveyed, on several occasions, its large depositors and borrowing
customers. This was done to ascertain their preparation for Year 2000. No major
issues arose from these surveys.
Throughout the year, the Company expended $655,000 in conjunction with Year
2000 issues. Of this amount, $600,000 was spent to replace the Bank's teller
terminal system. This amount was capitalized and will be depreciated over five
years. The Company spent $55,000 on testing software and systems and installing
other, small PC related software. In addition, the Company allocated $1 million
of its allowance for loan and lease losses to potential year 2000 problems.
As of December 31, 1999, all phases of Year 2000 Plan were complete. As of
March 15, 2000, the Company experienced no problems with Year 2000 issues. The
Company will continue to monitor critical dates, such as the close of the first
quarter, throughout the Year 2000. It is not anticipated that there will be any
problems from Year 2000 issues.
INCOME TAXES
The Company's effective tax rate for 1999 was 37.0%. This compares to
effective tax rates of 37.4% for 1998, and 38.1% for 1997. These rates are below
the nominal combined Federal and State tax rates as a result of tax preferenced
income for each period.
ANALYSIS OF FINANCIAL CONDITION
The Company reported total assets of $2.0 billion at December 31, 1999.
This represented an increase of $169.7 million, or 9.22%, from total assets of
$1.8 billion at December 31, 1998. For 1998, total assets increased $340.0
million, or 22.65%, from total assets of $1.5 billion at December 31, 1997.
21
23
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, 1999 and 1998. At December
31, 1999, the Company reported total investment securities of $877.3 million.
This represents an increase of $90.5 million, or 11.50%, over total investment
securities of $786.8 million at December 31, 1998. For 1998, investment
securities increased $276.5 million, or 54.18%, greater than total investment
securities of $510.3 million at December 31, 1997.
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, 1999, securities held as available for sale had a fair market
value of $877.3 million, representing 100.00% of total investment securities
with an amortized cost of $905.8 million. At December 31, 1999, the net
unrealized holding loss on securities available for sale was $28.4 million, and
the unrealized loss on investments available for sale, net of deferred taxes was
$16.4 million.
In connection with the merger with Orange National Bancorp and the
Company's adoption of SFAS No. 133 "Accounting for derivative instruments and
hedging activities", the Company reclassified investment securities from held to
maturity to available for sale. The amortized cost at the date of transfer was
$71.6 million and the fair value was $72.3 million. The unrealized gain was
recorded in stockholders' equity, net of taxes.
LOANS
At December 31, 1999, the Company reported total loans, net of deferred
loan fees, of $952.6 million. This represents an increase of $120.4 million, or
14.46%, over total loans of $832.2 million at December 31, 1998. For 1998, total
loans increased $82.4 million, or 10.99%, over total loans, net of deferred loan
fees of $749.8 million at December 31, 1997.
Table 4 presents the distribution of the Company's loan portfolio at the
dates indicated.
TABLE 4 -- DISTRIBUTION OF LOAN PORTFOLIO BY TYPE
DECEMBER 31
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Commercial and Industrial................... $392,094 $287,518 $303,410 $285,547 $277,603
Real Estate
Construction.............................. 48,078 34,489 19,937 38,337 24,048
Mortgage.................................. 375,387 385,393 308,460 284,374 210,603
Consumer, net of unearned discount.......... 24,731 28,996 28,031 29,832 26,219
Municipal Lease Finance Receivables......... 21,268 22,923 24,008 19,825 21,529
Agribusiness(1)............................. 94,560 76,283 69,404 55,486 63,580
-------- -------- -------- -------- --------
Gross Loans............................... 956,118 835,602 753,250 713,401 623,582
-------- -------- -------- -------- --------
Less:
Allowance for Credit Losses............... 16,761 14,888 13,103 13,608 11,139
Deferred Loan Fees........................ 3,566 3,418 3,474 4,116 3,270
-------- -------- -------- -------- --------
Total Net Loans................... $935,791 $817,296 $736,673 $695,677 $609,173
======== ======== ======== ======== ========
- ---------------
(1) Included as Commercial and Industrial and Real Estate Mortgage loans above
are loans totaling $42.9 million for 1999, $34.6 million for 1998, $27.9
million for 1997, $22.7 million for 1996, $8.8 million for 1995, that
represent loans to agricultural concerns for commercial or real estate
purposes.
22
24
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 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,
1999. 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, 1999
AFTER ONE
BUT
WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- --------
(AMOUNTS IN THOUSANDS)
Types of Loans:
Commercial and industrial(1)........................ $140,787 $197,032 $403,246 $741,065
Construction........................................ 43,067 1,524 3,487 48,078
Agribusiness........................................ 84,645 7,514 2,401 94,560
-------- -------- -------- --------
$268,499 $206,070 $409,134 $883,703
======== ======== ======== ========
Amount of Loans based upon:
Fixed Rates......................................... $ 57,021 $151,575 $310,129 $518,725
Floating or adjustable Rates........................ 211,478 54,495 99,005 364,978
-------- -------- -------- --------
$268,499 $206,070 $409,134 $883,703
======== ======== ======== ========
- ---------------
(1) Includes approximately $349.0 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, 1999, 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, 1999, nonperforming assets, which included nonperforming
loans (see CREDIT RISK) and other real estate owned, totaled $1.9 million. This
represented a decrease of $9.1 million, or 82.80%, compared to nonperforming
assets of $11.0 million at December 31, 1998. For 1998, total nonperforming
assets decreased $3.0 million, or 21.61%, from total nonperforming assets of
$14.1 million at December 31, 1997. The decrease in nonperforming assets for
1999 compared to 1998 resulted as balances of other real estate owned and
nonaccrual loans decreased during the year. The decrease in nonperforming assets
for 1998, reflected the decrease in restructured loans and other real estate
owned, which was partially offset by an increase in nonaccrual loans.
23
25
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
DECEMBER 31
----------------------------------------------
1999 1998 1997 1996 1995
------ ------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
Nonaccrual loans.................................. $1,191 $ 8,849 $ 6,402 $20,028 $16,344
Loans past due 90 days or more.................... 3 76 1,051 628 33
Restructured loans................................ 0 0 2,092 5,374 13,558
Other real estate owned (OREO).................... 703 2,102 4,521 8,642 12,037
------ ------- ------- ------- -------
Total nonperforming assets.............. $1,897 $11,027 $14,066 $34,672 $41,972
====== ======= ======= ======= =======
Percentage of nonperforming assets to total loans
outstanding & OREO.............................. 0.20% 1.32% 1.86% 4.83% 6.64%
====== ======= ======= ======= =======
Percentage of nonperforming assets to total
assets.......................................... 0.09% 0.60% 0.94% 2.51% 3.67%
====== ======= ======= ======= =======
At December 31, 1999, the Company had loans on which interest was no longer
accruing totaling $1.2 million. This represented a decrease of $7.7 million, or
86.54%, from total nonaccrual loans of $8.8 million at December 31, 1998. For
1998, total nonaccrual loans increased $2.4 million, or 38.22%, over total
nonaccrual loans of $6.4 million at December 31, 1997. Approximately 45.45% of
the number of nonaccrual loans at December 31, 1999, and 51.63% 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, 1999, ranged between approximately 1.60% to
110.76%. 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, 1999, and 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,
1999 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, change in the
financial conditions or business of a borrower may adversely affect a borrower's
ability to pay.
At December 31, 1999, the net book value of the properties held as other
real estate owned totaled $703,000. This represented a decrease of $1.4 million,
or 66.56%, from other real estate owned of $2.1 million at December 31, 1998.
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, 1999, 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.
24
26
DEPOSITS
The Company reported total deposits of $1.50 billion at December 31, 1999.
This represented an increase of $25.4 million, or 1.72%, over total deposits of
$1.48 billion at December 31, 1998. During 1998, total deposits increased $181.2
million, or 13.99%, over total deposits of $1.3 billion at December 31, 1997.
Noninterest bearing demand deposits totaled $649.8 million at December 31,
1999. This represented an increase of $11.1 million, or 1.74%, over total
noninterest bearing demand deposits of $638.7 million at December 31, 1998. For
1998, total noninterest bearing demand deposits increased $75.7 million, or
13.44%, over noninterest bearing demand deposits of $563.0 million at December
31, 1997. Noninterest bearing deposits represented 43.29% of total deposits as
of December 31, 1999 and 43.28% of total deposits as of December 31, 1998.
Table 7 provides the remaining maturities of large denomination ($100,000
or more) time deposits, including public funds, at December 31, 1999.
TABLE 7 -- MATURITY DISTRIBUTION OF LARGE DENOMINATION TIME DEPOSITS
(AMOUNTS IN THOUSANDS)
----------------------
3 months or less........................................... $123,892
Over 3 months through 6 months............................. 73,680
Over 6 months through 12 months............................ 33,852
Over 12 months............................................. 2,183
--------
Total............................................ $233,607
========
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, 1999, borrowed funds totaled $323,000. This represented an
increase of $123,000, or 61.50%, from total borrowed funds of $200.0 million at
December 31, 1998. For 1998, total borrowed funds increased $151.0 million, or
308.16%, from a balance of $49.0 million at December 31, 1997. The maximum
outstanding at any month-end was $323.0 million during 1999, $200.0 million
during 1998, and $123.0 million during 1997.
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 $140.8 million at December 31, 1999. This
represented an increase of $1.3 million, or 0.96%, over total stockholders'
equity of $139.4 million at December 31, 1998. For 1998, total stockholders'
equity increased $15.8 million, or 12.74%, over total stockholders' equity of
$123.7 million at December 31, 1997.
Tier 1 capital, stockholders' equity less intangible assets, was $148.7
million at December 31, 1999. This represented an increase of $20.3 million, or
15.78%, over total Tier 1 capital of $128.4 million at December 31, 1998. For
1998, Tier 1 capital increased $16.3 million, or 14.54%, over Tier 1 capital of
$112.1 million at December 31, 1997. Total adjusted capital, Tier 1 capital plus
the lesser of the allowance for credit losses or 1.25% of risk weighted assets,
was $163.6 million at December 31, 1999. This represented an increase of
25
27
$22.7 million, or 16.15%, over adjusted capital of $140.8 million at December
31, 1998. For 1998, adjusted capital increased $17.6 million, or 14.29%, over
total adjusted capital of $123.2 million at December 31, 1997.
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, 1999, and 1998, the Company exceeded all of the minimum
capital ratios required to be considered well capitalized. At December 31, 1999,
the Company's total risk-based capital ratio was 13.9%, compared to a ratio of
13.6% at December 31, 1998. The ratio of Tier 1 capital to risk weighted assets
was 12.6% at December 31, 1999, compared to a ratio of 12.4% at December 31,
1998. At December 31, 1999, the Company's leverage ratio was 7.7%, compared to a
ratio of 7.4% at December 31, 1998. 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, 1999, the Company
had an unrealized loss on investment securities net of taxes of $16.4 million,
compared to a gain net of taxes of $1.3 million at December 31, 1998.
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 1999, the Board of Directors of the Company declared quarterly cash
dividends that totaled $0.39 per share for the full year after retroactive
adjustment of a 5-for-4 stock split declared on December 15, 1999. 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 its loan risk rating
system. Limitations on industry concentration, aggregate customer borrowings and
geographic boundaries also are designed to reduce loan credit risk. Credit risk
in the investment portfolio and correspondent bank accounts is addressed through
defined limits in the Bank's policy statements. In addition, certain securities
carry insurance to enhance credit
26
28
quality of the bond. Senior Management, Directors' Committees, and the Board of
Directors are provided with 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, 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 customers are impacted by trade in the Pacific
Rim and in Latin America, especially Mexico. 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 affect 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 indicates 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,
27
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, 1999, the Company reported an allowance for credit losses
of $16.8 million. This represented a increase of $1.9 million or 12.58%, from
the allowance for credit losses of $14.9 million at December 31, 1998. For 1998,
the allowance for credit losses increased $1.8 million or 13.62%, from a balance
of $13.1 million at December 31, 1997.
Of the total $16.8 million reserve for credit losses at December 31, 1999,
$10.4 million, or 61.99%, represented reserves for specific problem loans,
including impaired loans, and $6.4 million, or 38.01%, represented that portion
allocated to provide for general risks inherent in the loan portfolio. As of
December 31, 1998 these amounts were $9.0 in allocated and $5.9 in unallocated.
Nonperforming loans totaled $1.2 million at December 31, 1999. This
represented a decrease of $7.7 million or 86.62%, from nonperforming loans of
$8.9 million at December 31, 1998. For 1998, nonperforming loans decreased
$620,000, or 6.50%, from nonperforming loans of $9.5 million at December 31,
1997. Nonperforming loans, measured as a percent of gross loans, equaled 0.13%,
1.07%, and 1.27%, at December 31, 1999, 1998, and 1997, respectively.
Nonperforming loans included loans for which interest is no longer
accruing. In addition, nonperforming loans include loans that have been
renegotiated from their original contractual terms, even if the loan is paying
as agreed under the renegotiated terms. The decrease in nonperforming loans for
1999 was the result of a decrease in nonaccrual loans. Nonaccrual loans
decreased $7.7 million, or 86.54%, to $1.2 million at December 31, 1999, from
$8.8 million at December 31, 1998. The decrease in nonperforming loans between
December 31, 1998 and 1997 was the result of a $2.1 million, or 100.00%,
reduction in restructured loans and a decrease in past due loans of $975,000 or
92.77% which was partially offset by an increase in nonaccrual loans of $2.4
million or 38.22%.
For 1999, the Company charged $827,000 of loans net of recoveries to the
allowance for credit losses. This represented an increase of $12,000, or 1.47%.
For 1998, the Company charged $815,000 of loans net of recoveries to the
allowance for credit losses. This represented a decrease of $2.5 million, or
75.41%, from net
28
30
charges to the allowance for credit losses of $3.3 million for 1997.
Contributing to the decrease in nonperforming loans at December 31, 1998 was an
increase in the balance of loans charged to the allowance for credit losses for
1998 compared to 1997.
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
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Amount of Total Loans at End of Period(1)... $952,552 $832,184 $749,776 $709,285 $620,312
======== ======== ======== ======== ========
Average Total Loans Outstanding(1).......... $866,917 $772,331 $718,431 $662,195 $601,324
======== ======== ======== ======== ========
Allowance for Credit Losses at Beginning of
Period.................................... $ 14,888 $ 13,103 $ 13,608 $ 11,139 $ 10,936
Loans Charged-Off:
Real Estate............................... 483 707 3,158 1,559 2,237
Commercial, Financial and Industrial...... 522 373 371 452 592
Agribusiness.............................. 0 0 0 0 0
Municipal Lease Finance Receivables....... 0 0 0 0 0
Consumer Loans............................ 18 61 143 125 178
-------- -------- -------- -------- --------
Total Loans Charged-Off........... 1,023 1,141 3,672 2,136 3,007
-------- -------- -------- -------- --------
Recoveries:
Real Estate Loans......................... 6 161 44 572 63
Commercial, Financial and Industrial...... 184 150 295 210 208
Agribusiness.............................. 0 0 0 0 0
Municipal Lease Finance Receivables....... 0 0 0 0 0
Consumer Loans............................ 6 15 18 19 44
-------- -------- -------- -------- --------
Total Loans Recovered............. 196 326 357 801 315
-------- -------- -------- -------- --------
Net Loans Charged-Off....................... 827 815 3,315 1,335 2,692
-------- -------- -------- -------- --------
Provision Charged to Operating Expense...... 2,700 2,600 2,810 3,093 2,895
-------- -------- -------- -------- --------
Adjustments Incident to Mergers............. 0 0 0 711 0
-------- -------- -------- -------- --------
Allowance for Credit Losses at End of
period.................................... $ 16,761 $ 14,888 $ 13,103 $ 13,608 $ 11,139
======== ======== ======== ======== ========
Net Loans Charged-Off to Average Total
Loans..................................... 0.10% 0.11% 0.46% 0.20% 0.45%
Net Loans Charged-Off to Total Loans at End
of Period................................. 0.09% 0.10% 0.44% 0.19% 0.43%
Allowance for Credit Losses to Average Total
Loans..................................... 1.93% 1.93% 1.82% 2.05% 1.85%
Allowance for Credit Losses to Total Loans
at End of Period.......................... 1.76% 1.79% 1.75% 1.92% 1.80%
Net Loans Charged-Off to Allowance for
Credit Losses............................. 4.93% 5.47% 25.30% 9.81% 24.17%
Net Loans Charged-Off to Provision for
Credit Losses............................. 30.63% 31.35% 117.97% 43.16% 92.99%
- ---------------
(1) Net of deferred loan origination fees.
The Company's management believes that the allowance for credit losses at
December 31, 1999 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
29
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 ALLOWANCE FOR CREDIT LOSSES
DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
(AMOUNTS IN THOUSANDS)
------------------------------------------------------------------
ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF
FOR CATEGORY FOR CATEGORY FOR CATEGORY
CREDIT TO TOTAL CREDIT TO TOTAL CREDIT TO TOTAL
LOSSES LOANS LOSSES LOANS LOSSES LOANS
--------- -------- --------- -------- --------- --------
Real Estate.......... 466 44.5% $ 1,942 50.5% $ 1,563 43.8%
Commercial and
Industrial......... 9,794 51.1% 6,867 43.7% 6,405 49.7%
Consumer............. 130 2.6% 155 3.5% 139 3.7%
Unallocated.......... 6,371 N/A 5,924 N/A 4,996 N/A
------ ------- -------
Total........ 16,761 $14,888 $13,103
====== ======= =======
DECEMBER 31,
-------------------------------------------
1996 1995
-------------------- --------------------
(AMOUNTS IN THOUSANDS)
-------------------------------------------
ALLOWANCE % OF ALLOWANCE % OF
FOR CATEGORY FOR CATEGORY
CREDIT TO TOTAL CREDIT TO TOTAL
LOSSES LOANS LOSSES LOANS
--------- -------- --------- --------
Real Estate.......... $ 1,363 49.0% $ 752 37.8%
Commercial and
Industrial......... 8,137 44.6% 6,365 54.8%
Consumer............. 184 4.2% 104 4.2%
Unallocated.......... 3,924 N/A 3,918 N/A
------- -------
Total........ $13,608 $11,139
======= =======
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.
30
32
Table 10 provides the Bank's maturity/repricing gap analysis at December
31, 1999, and 1998. The Bank had a negative cumulative 180 day gap of $554.7
million at December 31, 1999. This represented an increase of $167.6 million, or
43.31%, over the 180 day cumulative negative gap of $387.1 million at December
31, 1998. In theory, this would indicate that at December 31, 1999, $554.7
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
decrease, the negative gap would tend to result in an increase in the net
interest margin.
TABLE 10 -- ASSET AND LIABILITY MATURITY/REPRICING GAP
OVER 90 OVER 180
90 DAYS DAYS TO DAYS TO OVER
OR LESS 180 DAYS 365 DAYS 365 DAYS
--------- --------- --------- ----------
(AMOUNTS IN THOUSANDS)
1999
Earning Assets:
Investment Securities at carrying
value................................. $ 82,058 $ 18,464 $ 41,037 $ 735,773
Total Loans.............................. 354,718 21,511 39,983 539,906
--------- --------- --------- ----------
Total............................ $ 436,776 $ 39,975 $ 81,020 $1,275,679
Interest Bearing Liabilities
Savings Deposits......................... $ 520,963 $ 0 $ 0 $ 0
Time Deposits............................ 172,250 100,260 49,973 7,806
Other Borrowings......................... 163,000 75,000 40,000 45,000
--------- --------- --------- ----------
Total............................ 856,213 175,260 89,973 52,806
--------- --------- --------- ----------
Period GAP................................. $(419,437) $(135,285) $ (8,953) $1,222,873
========= ========= ========= ==========
Cumulative GAP............................. $(419,437) $(554,722) $(563,675) $ 659,198
========= ========= ========= ==========
1998
Earning Assets:
Fed Funds................................ $ 57,390 $ 0 $ 0 $ 0
Investment Securities at carrying
value................................. 78,334 32,761 71,354 604,373
Total Loans.............................. 351,642 23,937 33,703 426,320
--------- --------- --------- ----------
Total............................ $ 487,366 $ 56,698 $ 105,057 $1,030,693
Interest Bearing Liabilities
Savings Deposits......................... $ 513,451 $ 0 $ 0 $ 0
Time Deposits............................ 189,260 88,438 38,746 7,061
Other Borrowings......................... 85,000 55,000 10,000 50,000
--------- --------- --------- ----------
Total............................ 787,711 143,438 48,746 57,061
--------- --------- --------- ----------
Period GAP................................. $(300,345) $ (86,740) $ 56,311 $ 973,632
========= ========= ========= ==========
Cumulative GAP............................. $(300,345) $(387,085) $(330,774) $ 642,858
========= ========= ========= ==========
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, 1999 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 $642.2 million, or 73.20% of the total investment portfolio
at December 31, 1999 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
31
33
available for reinvestment at a time when available yields are lower.
Conversely, the Bank may be subject to "extension risk" resulting as lesser
amounts would be available for reinvestment at a time when available yields are
higher. Prepayment risk includes the risk associated with the payment of an
investment's principal faster than originally intended. Extension risk is the
risk associated with the payment of an investment's principal over a longer time
period than originally anticipated. In addition, there can be greater risk of
price volatility for mortgage backed securities as a result of anticipated
prepayment or extension risk.
The Company's management also utilizes the results of a dynamic simulation
model to quantify the estimated exposure of net interest income to sustained
interest rate changes. The sensitivity of the Company's net interest income is
measured over a rolling two-year horizon.
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, 1999:
ESTIMATED NET
SIMULATED INTEREST INCOME
RATE CHANGES SENSITIVITY
------------ ---------------
+200 basis points...................................... (2.02%)
- -200 basis points...................................... 2.57%
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 -- of the Notes to the Consolidated Financial Statements.
The table below provides the actual balances as of December 31, 1999 of
interest earning assets and interest-bearing liabilities, including the average
rate earned or paid for 1999, the projected contractual maturities over the next
five years, and the estimated fair value of each category determined using
available market information and appropriate valuation methodologies.
MATURING
---------------------------------------------------------------------------
BALANCE FIVE YEARS ESTIMATED
DECEMBER 31, RATE ONE YEAR TWO YEARS THREE YEARS FOUR YEARS AND BEYOND FAIR VALUE
------------ ---- ---------- --------- ----------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
1999
Interest-Earning Assets
Investment securities
available for sale..... $ 877,332 6.63% $ 141,559 $100,002 $ 95,116 $ 75,149 $465,506 $ 877,332
Loans and lease finance
receivables, net....... 935,791 9.21% 416,212 49,156 78,973 101,649 289,801 934,465
---------- ---------- -------- -------- -------- -------- ----------
Total interest earning
assets................. $1,813,123 $ 557,771 $149,158 $174,089 $176,798 $755,307 $1,811,797
========== ========== ======== ======== ======== ======== ==========
Interest-Bearing
Liabilities
Interest-bearing
deposits............... $ 851,252 3.03% $ 843,446 $ 5,566 $ 1,125 $ 550 $ 565 $ 851,229
Demand note to U.S.
Treasury............... 16,951 4.63% 16,951 16,951
Short-term borrowings.... 323,000 5.31% 278,000 20,000 25,000 323,000
---------- ---------- -------- -------- -------- -------- ----------
Total interest-bearing
liabilities............ $1,191,203 $1,138,397 $ 25,566 $ 26,125 $ 550 $ 565 $1,191,180
========== ========== ======== ======== ======== ======== ==========
32
34
LIQUIDITY RISK
Liquidity risk is the risk to earnings or capital resulting from the Bank's
inability to meet its obligations when they come due without incurring
unacceptable losses. It includes the ability to manage unplanned decreases or
changes in funding sources and to recognize or address changes in market
conditions that affect the Bank's ability to liquidate assets quickly and with
minimum loss of value. Factors considered in liquidity risk management are
stability of the deposit base; marketability, maturity, and pledging of
investments; and the demand for credit.
In general, liquidity risk is managed daily by controlling the level of Fed
funds and the use of funds provided by the cash flow from the investment
portfolio. To meet unexpected demands, lines of credit are maintained with
correspondent banks, the Federal Home Loan Bank and the Federal Reserve 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 $40.8 million for 1999,
$32.4 million for 1998, and $29.1 million for 1997. The increase for 1999
compared to 1998 and 1997 was primarily the result of the increase in net income
during each year.
Cash used for investing activities totaled $255.6 million for 1999,
compared to $361.4 million for 1998, and $116.5 million for 1997. The funds used
for investing activities primarily represented increases in investments and
loans for each year reported. 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 $158.2 million for 1999,
compared to $315.2 million for 1998, and $87.3 million for 1997. For 1999, cash
flows from financing activities resulted from increased short term borrowing and
to a lesser extent from noninterest-bearing deposits, money market, savings
deposits and time deposits. For 1998, cash flows from financing activities
resulted from increased noninterest bearing demand deposits and short term
borrowings.
At December 31, 1999, cash and cash equivalents totaled $118.4 million.
This represented a decrease of $56.6 million, or 32.35%, from a total of $175.0
million at December 31, 1998.
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
1999, the Bank's loan to deposit ratio averaged 59.45%, compared to an average
ratio of 58.51% for 1998, and a ratio of 61.29% for 1997.
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, 1999, approximately $48.7 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, 1999,
neither the Bank nor CVB had any material commitments for capital expenditures.
33
35
Accounting Changes
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 was to be effective for fiscal
years beginning after June 15, 1999. However, in June 1999, the FASB issued SFAS
No. 137 "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" which
deferred the effective date of SFAS No. 133 until fiscal years beginning after
June 15, 2000. The Company has adopted SFAS No. 133 and it did not have a
material impact on the Company's results of operations or financial position.
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. The adoption of
SFAS No. 134 did not have a material impact on the Company's results of
operations or financial position when adopted.
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
Operations -- 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, 1999 and 1998... 38
Consolidated Statements of Earnings Years Ended December 31,
1999, 1998 and 1997....................................... 39
Consolidated Statements of Stockholders' Equity Year Ended
December 31, 1999, 1998 and 1997.......................... 40
Consolidated Statements of Cash Flows Years Ended December
31, 1999, 1998 and 1997................................... 42
Notes to Consolidated Financial Statements.................. 43
Independent Auditors' Report................................ 63
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
34
36
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 1999" of the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A within 120 days after the end of the last fiscal
year. For information concerning executive officers of the Company, see "Item
4(A). Executive Officers of the Registrant" above.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning management remuneration and transactions is
incorporated by reference from the section entitled "Executive Compensation" of
the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated by reference from the sections entitled "Stock
Ownership" of the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with
management and others is incorporated by reference from the section entitled
"Executive Compensation -- Certain Relationships and Related Transactions" of
the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
35
37
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 34 for a
list of financial statements filed as part of this Report.
EXHIBITS
See Index to Exhibits at Page 64 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: 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.
REPORTS ON FORM 8-K
On October 19, 1999 the Company filed a report on Form 8-K reporting under
Item 2 and Item 7 concerning the acquisition of Orange National Bancorp. The
Company filed certain historical financial statements of Orange National Bancorp
and pro-forma financial statements.
On November 9, 1999 the Company filed a report on Form 8-K reporting under
Item 5 regarding the results of operations for the first 30 days of post merger
operations for the Company following the acquisition of Orange National Bancorp.
36
38
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 15th day of
March, 2000.
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 15, 2000
- --------------------------------------------------------
George A. Borba
/s/ JOHN A. BORBA Director March 15, 2000
- --------------------------------------------------------
John A. Borba
/s/ RONALD O. KRUSE Director March 15, 2000
- --------------------------------------------------------
Ronald O. Kruse
/s/ JOHN J. LOPORTO Director March 15, 2000
- --------------------------------------------------------
John J. LoPorto
/s/ JAMES C. SELEY Director March 15, 2000
- --------------------------------------------------------
James C. Seley
/s/ SAN E. VACCARO Director March 15, 2000
- --------------------------------------------------------
San E. Vaccaro
/s/ EDWARD J. BIEBRICH, JR. Chief Financial Officer March 15, 2000
- -------------------------------------------------------- (Principal Financial and
Edward J. Biebrich, Jr. Accounting Officer)
/s/ D. LINN WILEY Director, President and March 15, 2000
- -------------------------------------------------------- Chief Executive Officer
D. Linn Wiley (Principal Executive Officer)
37
39
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
ASSETS
1999 1998
---------- ----------
Federal funds sold.......................................... $ -- $ 57,390
Investment securities held to maturity (Note 2)........... -- 70,011
Investment securities available for sale (Note 2)......... 877,332 716,811
Loans and lease finance receivables, net (Notes 3, 4, and
5)..................................................... 935,791 817,296
---------- ----------
Total earning assets.............................. 1,813,123 1,661,508
Cash and due from banks................................... 118,360 117,574
Premises and equipment, net (Note 6)...................... 27,726 27,771
Other real estate owned, net (Note 5)..................... 703 2,102
Deferred taxes (Note 7)................................... 20,941 4,666
Goodwill.................................................. 8,452 9,635
Cash value of life insurance.............................. 6,793 6,509
Accrued interest receivable............................... 11,454 9,358
Other assets.............................................. 3,205 1,946
---------- ----------
Total............................................. $2,010,757 $1,841,069
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 8):
Noninterest-bearing.................................... $ 649,821 $ 638,683
Interest-bearing....................................... 851,252 836,956
---------- ----------
Total deposits.................................... 1,501,073 1,475,639
Demand note to U.S. Treasury.............................. 16,951 95
Short-term borrowings (Note 9)............................ 323,000 200,000
Securities purchased not settled.......................... -- 5,000
Accrued interest payable.................................. 5,341 4,674
Other liabilities (Notes 7, 11, and 19)................... 23,622 16,231
---------- ----------
Total liabilities................................. 1,869,987 1,701,639
---------- ----------
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, 24,716,832 (1999) and
19,527,646 (1998)...................................... 105,304 102,565
Retained earnings......................................... 51,857 35,517
Accumulated other comprehensive (loss) income, net of tax
(Note 2)............................................... (16,391) 1,348
---------- ----------
Total stockholders' equity........................ 140,770 139,430
---------- ----------
Total............................................. $2,010,757 $1,841,069
========== ==========
See accompanying notes to consolidated financial statements.
38
40
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE YEARS ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997
-------- -------- --------
Interest Income:
Loans, including fees.................................... $ 78,385 $ 74,840 $ 71,821
-------- -------- --------
Investment securities:
Taxable............................................... 42,885 33,385 25,290
Tax-advantaged........................................ 5,663 4,370 2,553
-------- -------- --------
48,548 37,755 27,843
-------- -------- --------
Federal funds sold.................................... 1,545 3,360 1,848
-------- -------- --------
Total interest income............................ 128,478 115,955 101,512
-------- -------- --------
Interest Expense:
Deposits (Note 8)........................................ 26,267 27,951 24,404
Other borrowings......................................... 12,199 7,462 3,924
-------- -------- --------
Total interest expense........................... 38,466 35,413 28,328
-------- -------- --------
Net Interest Income Before Provision for Credit Losses..... 90,012 80,542 73,184
Provision for Credit Losses (Note 5)....................... 2,700 2,600 2,810
-------- -------- --------
Net Interest Income After Provision for Credit Losses...... 87,312 77,942 70,374
-------- -------- --------
Other Operating Income:
Service charges on deposit accounts...................... 10,558 8,810 8,612
Trust services........................................... 3,748 3,472 3,161
Other.................................................... 4,324 5,477 5,757
-------- -------- --------
Total other operating income..................... 18,630 17,759 17,530
-------- -------- --------
Other Operating Expenses:
Salaries, wages, and employee benefits (Notes 11, 12, and
14)................................................... 29,141 28,838 27,913
Occupancy (Note 10)...................................... 4,825 5,109 4,569
Equipment................................................ 4,730 4,645 4,068
Stationery and supplies.................................. 3,647 3,374 3,243
Professional services.................................... 3,391 3,305 2,814
Promotion................................................ 2,869 2,497 2,551
Data processing.......................................... 2,352 1,928 1,777
Deposit insurance premiums............................... 210 220 201
Other real estate owned expense (Note 5)................. 647 1,211 2,783
Acquisition costs (Note 19).............................. 4,856 -- --
Other.................................................... 8,069 6,054 4,747
-------- -------- --------
Total other operating expenses................... 64,737 57,181 54,666
-------- -------- --------
Earnings Before Income Taxes............................... 41,205 38,520 33,238
Income Taxes (Note 7)...................................... 15,245 14,403 12,670
-------- -------- --------
Net Earnings............................................... $ 25,960 $ 24,117 $ 20,568
======== ======== ========
Basic Earnings Per Common Share (Note 13).................. $ 1.06 $ 0.99 $ 0.85
======== ======== ========
Diluted Earnings Per Common Share (Note 13)................ $ 1.02 $ 0.95 $ 0.82
======== ======== ========
See accompanying notes to consolidated financial statements
39
41
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1999
(DOLLARS AND SHARES IN THOUSANDS)
ACCUMULATED
OTHER
COMMON COMPREHENSIVE
SHARES COMMON RETAINED INCOME, COMPREHENSIVE
OUTSTANDING STOCK EARNINGS NET OF TAX INCOME
----------- -------- ---------- ------------- -------------
BALANCE, JANUARY 1, 1997.............. 12,902 $ 69,617 $ 38,744 $ (318)
Repurchase of common stock.......... (95) (591) (1,344)
Issuance of common stock............ 122 1,093
3-for-2 stock split................. 5,001
Tax benefit from exercise of stock
options.......................... 194
Cash dividends...................... (5,327)
Comprehensive income:
Net earnings..................... 20,568 $ 20,568
Other comprehensive income --
Unrealized gains on securities
available for sale, net..... 1,035 1,035
--------
Comprehensive income........ $ 21,603
------ -------- -------- -------- ========
BALANCE, DECEMBER 31, 1997............ 17,930 70,119 52,835 717
Repurchase of common stock.......... (92) (380) (1,527)
Issuance of common stock............ 187 639
10% stock dividend.................. 1,503 32,187 (32,187)
Tax benefit from exercise of stock
options.......................... 171
Cash dividends...................... (7,892)
Comprehensive income:
Net earnings..................... 24,117 $ 24,117
Other comprehensive income --
Unrealized gains on securities
available for sale, net..... 631 631
--------
Comprehensive income........ $ 24,748
------ -------- -------- -------- ========
BALANCE, DECEMBER 31, 1998............ 19,528 102,565 35,517 1,348
Issuance of common stock............ 246 2,739
5-for-4 stock split................. 4,943
Tax benefit from exercise of stock
options.......................... 221
Cash dividends...................... (9,841)
Comprehensive income:
Net earnings..................... 25,960 $ 25,960
Other comprehensive income --
Unrealized losses on securities
available for sale, net..... (17,739) (17,739)
--------
Comprehensive income........ $ 8,221
------ -------- -------- -------- ========
BALANCE, DECEMBER 31, 1999............ 24,717 $105,304 $ 51,857 $(16,391)
====== ======== ======== ========
See accompanying notes to consolidated financial statements.
40
42
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
1999 1998 1997
-------- ------ ------
DISCLOSURE OF RECLASSIFICATION AMOUNT:
Unrealized holding (losses) gains on securities arising
during the period......................................... $(30,848) $1,468 $1,762
Tax benefit (expense)....................................... 13,058 (600) (746)
Less:
Reclassification adjustment for losses (gains) on
securities included in net income...................... 80 (407) (7)
Reclassification adjustment for losses included in net
earnings for securities transferred.................... 35 40
Add --
Tax (benefit) expense..................................... (29) 135 (14)
-------- ------ ------
Net unrealized (loss) gain on securities.................... $(17,739) $ 631 $1,035
======== ====== ======
See accompanying notes to consolidated financial statements.
41
43
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received........................................... $ 133,128 $ 110,980 $ 97,768
Service charges and other fees received..................... 19,121 21,320 20,911
Interest paid............................................... (37,799) (34,228) (27,872)
Cash paid to suppliers and employees........................ (56,307) (51,230) (49,176)
Income taxes paid........................................... (17,301) (14,468) (12,510)
--------- --------- ---------
Net cash provided by operating activities........... 40,842 32,374 29,121
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale........ 30,249 96,187 53,689
Proceeds from maturities of securities available for sale... 165,126 154,837 86,536
Proceeds from maturities of securities held to maturity..... 1,018 7,487 3,925
Purchases of securities available for sale.................. (320,357) (524,817) (206,510)
Purchases of securities held to maturity.................... (9,550) (14,317) (10,691)
Net increase in loans....................................... (122,990) (85,329) (54,480)
Proceeds from sale of other real estate owned............... 2,262 5,401 13,000
Proceeds from sale of premises and equipment................ 67 2,204 55
Purchases of premises and equipment......................... (4,066) (4,507) (2,577)
Other investing activities.................................. 2,607 1,408 569
--------- --------- ---------
Net cash used in investing activities............... (255,634) (361,446) (116,484)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits and money
market and savings accounts............................... 18,650 144,777 33,987
Net increase in time certificates of deposit................ 6,784 36,375 71,540
Net increase (decrease) in short-term borrowings............ 139,856 143,172 (11,688)
Cash dividends on common stock.............................. (9,841) (7,892) (5,327)
Repurchase of common stock.................................. (1,907) (1,935)
Proceeds from exercise of stock options..................... 2,739 639 720
--------- --------- ---------
Net cash provided by financing activities........... 158,188 315,164 87,297
--------- --------- ---------
Net Decrease in Cash and Cash Equivalents................... (56,604) (13,908) (66)
Cash and Cash Equivalents, Beginning of Year................ 174,964 188,872 188,938
--------- --------- ---------
Cash and Cash Equivalents, End of Year...................... $ 118,360 $ 174,964 $ 188,872
========= ========= =========
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings................................................ $ 25,960 $ 24,117 $ 20,568
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Gain on sales of investment securities.................... (60) (451) (95)
Loss on sales of investment securities.................... 140 44 88
Loss (gain) on sale of premises and equipment............. 10 (684) (26)
Gain on sale of other real estate owned................... (631) (116) (204)
Gain on sale of loans..................................... (182) (655) (1,374)
Gain on cash value of life insurance...................... (199) (213) (219)
Amortization of premiums (accretion of discounts) on
investment securities................................... 7,156 (1,185) (1,138)
Provision for credit losses............................... 2,700 2,600 2,810
Provision for losses on other real estate owned........... 300 500 1,686
Proceeds from loan sales.................................. 4,830 10,553 19,264
Origination of loans held for sale........................ (4,648) (9,898) (17,890)
Depreciation and amortization............................. 4,035 3,679 3,518
Change in accrued interest receivable..................... (2,096) (1,275) 226
Change in accrued interest payable........................ 667 1,184 457
Deferred tax benefit (provision).......................... (2,967) (1,208) 153
Change in other assets and liabilities.................... 5,827 5,382 1,297
--------- --------- ---------
Total adjustments................................... 14,882 8,257 8,553
--------- --------- ---------
Net Cash Provided by Operating Activities................... $ 40,842 $ 32,374 $ 29,121
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Real estate acquired through foreclosure.................. $ 1,795 $ 3,560 $ 11,553
Loans to facilitate the sale of other real estate owned... $ 1,235 $ 200 $ 4,519
Securities purchased not settled.......................... $ -- $ 5,000 $ 10,300
See accompanying notes to consolidated financial statements.
42
44
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1999
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, CVB Ventures, Inc., 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 areas of Southern California. The Bank operates 30 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
43
45
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
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 terms of the leases.
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 certain 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 and federal funds sold.
Trust Services -- The Company maintains funds in trust for customers. The
amount of these funds and the related liability have not been recorded in the
accompanying consolidated balance sheets, as they are not assets or liabilities
of the Bank or Company, with the exception of any funds held on deposit with the
Bank. Trust fees are recorded on an accrual basis.
Use of Estimates in the Preparation of Financial Statements -- The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Current Accounting Pronouncements -- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("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. This statement was adopted during the year ended December 31,
1999, with an immaterial 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's presentation. In addition, all prior years'
44
46
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
amounts have been restated to account for the acquisition of Orange National
Bancorp ("ONB") under the pooling-of-interests method of accounting.
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.
1999
------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
---------- ---------- -------- --------
(IN THOUSANDS)
Investment securities available for sale:
U.S. Treasury securities...................... $ 999 $ (8) $ 991
Mortgage-backed securities.................... 231,233 $ 74 (5,800) 225,507
CMO/REMICs.................................... 434,680 2 (17,952) 416,730
Government agency............................. 35,392 (510) 34,882
Municipal bonds............................... 165,137 472 (4,663) 160,946
Other debt securities......................... 9,536 (43) 9,493
CRA Investment................................ 820 820
FHLB stock.................................... 27,963 27,963
-------- ------ -------- --------
$905,760 $ 548 $(28,976) $877,332
======== ====== ======== ========
1998
------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
---------- ---------- -------- --------
(IN THOUSANDS)
Investment securities held to maturity:
Mortgage-backed securities.................... $ 4,409 $ 136 $ 4,545
CMO/REMICS.................................... 17,640 77 $ (25) 17,692
Municipal bonds............................... 47,962 1,917 49,879
-------- ------ -------- --------
$ 70,011 $2,130 $ (25) $ 72,116
======== ====== ======== ========
Investment securities available for sale:
U.S. Treasury securities...................... $ 3,005 $ 18 $ 3,023
Mortgage-backed securities.................... 150,588 1,157 $ (185) 151,560
CMO/REMICs.................................... 444,119 1,279 (753) 444,645
Government agency............................. 35,670 90 (13) 35,747
Municipal bonds............................... 58,483 941 (84) 59,340
CRA Investment................................ 820 820
FRB stock..................................... 170 170
FHLB stock.................................... 21,506 21,506
-------- ------ -------- --------
$714,361 $3,485 $ (1,035) $716,811
======== ====== ======== ========
The CMO/REMIC securities noted above represent collateralized mortgage
obligations and real estate mortgage investment conduits. Approximately 95
percent of such securities are U.S. government agencies that guarantee payment
of principal and interest of the underlying mortgages. The remaining
collateralized
45
47
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
mortgage obligations are 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, 1999 and 1998, investment securities having an amortized
cost of approximately $507,695,000 and $390,308,000, respectively, were pledged
to secure public deposits, short-term borrowings, and for other purposes as
required or permitted by law.
As discussed in Note 1, the Company adopted SFAS No. 133 during the year
ended December 31, 1999. As permitted by SFAS No. 133, the Company reclassified
investment securities from held to maturity to available for sale. The amortized
cost at the date of transfer was $71,609,000 and the fair value was $72,283,000.
The unrealized gain was recorded in stockholders' equity, net of income taxes.
The amortized cost and fair value of debt securities at December 31, 1999,
by contractual maturity, are shown below. Although mortgage-backed securities
and CMO/REMICs have contractual maturities through 2030, expected maturities
will differ from contractual maturities because borrowers may have the right to
prepay such obligations without penalty.
AVAILABLE FOR SALE
----------------------------------
WEIGHTED-
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
--------- -------- ---------
(DOLLARS IN THOUSANDS)
Due in one year or less............................. $ 13,464 $ 13,385 5.46%
Due after one year through five years............... 45,835 45,429 6.61%
Due after five years through ten years.............. 58,472 57,051 6.82%
Due after ten years................................. 94,113 91,267 7.76%
-------- --------
211,884 207,132 7.11%
FHLB stock.......................................... 27,963 27,963
Mortgage-backed securities and CMO/REMICs........... 665,913 642,237 6.47%
-------- --------
$905,760 $877,332 6.63%
======== ========
Net realized gains on sales of investment securities available for sale are
as follows:
1999 1998 1997
----- ---- ----
(IN THOUSANDS)
Gross realized gains........................................ $ 60 $451 $ 95
Gross realized losses....................................... (140) (44) (88)
46
48
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
3. LOANS AND LEASE FINANCE RECEIVABLES
The following is a summary of the components of loan and lease finance
receivables at December 31:
1999 1998
-------- --------
(IN THOUSANDS)
Commercial, financial, and industrial.................. $392,094 $287,518
Real estate:
Mortgage............................................. 375,387 385,393
Construction......................................... 48,078 34,489
Consumer............................................... 24,731 28,996
Municipal lease finance receivables.................... 21,268 22,923
Agribusiness........................................... 94,560 76,283
-------- --------
956,118 835,602
Allowance for credit losses (Note 5)................... (16,761) (14,888)
Deferred loan origination fees, net.................... (3,566) (3,418)
-------- --------
$935,791 $817,296
======== ========
At December 31, 1999, the Bank held approximately $428,642,000 of fixed
rate loans. These fixed rate loans bear interest at rates ranging from 5 to 17
percent and have contractual maturities between 1 and 25 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:
1999 1998
------ -------
(IN THOUSANDS)
Outstanding balance, beginning of year.................... $6,458 $ 6,636
Credit granted, including renewals........................ 259 3,016
Repayments................................................ (610) (3,194)
Changes in officer/director loans due to merger........... (611)
------ -------
Outstanding balance, end of year.......................... $5,496 $ 6,458
====== =======
5. ALLOWANCE FOR CREDIT AND OTHER REAL ESTATE OWNED LOSSES
Activity in the allowance for credit losses was as follows:
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Balance, beginning of year............................ $14,888 $13,103 $13,608
Provision charged to operations....................... 2,700 2,600 2,810
Loans charged off..................................... (1,023) (1,141) (3,672)
Recoveries on loans previously charged off............ 196 326 357
------- ------- -------
Balance, end of year.................................. $16,761 $14,888 $13,103
======= ======= =======
47
49
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
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, 1999 and 1998, the Bank had classified as impaired, loan
amounts totaling $3,240,000 and $10,991,000, respectively. All of these loans
require specific reserves, and accordingly, the Bank has recorded specific
reserves of $405,000 and $1,208,000 on such loans, respectively. The average
recorded investment in impaired loans during the years ended December 31, 1999,
1998, and 1997 was approximately $7,161,000, $8,800,000, and $13,693,000,
respectively. Interest income of $459,000, $986,000, and $1,238,000 was
recognized on impaired loans during the years ended December 31, 1999, 1998, and
1997, 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, 1999, loans on nonaccrual status totaled $1,191,000, all of
which are included in the impaired loans discussed above, compared to $8,849,000
at December 31, 1998.
Activity in the allowance for other real estate owned losses was as
follows:
1999 1998 1997
----- ----- -------
(IN THOUSANDS)
Balance, beginning of year............................... $ 553 $ 416 $ 2,184
Provision charged to operations.......................... 300 500 1,686
Charge-offs of other real estate owned................... (739) (363) (3,454)
----- ----- -------
Balance, end of year..................................... $ 114 $ 553 $ 416
===== ===== =======
The Company incurred additional expenses of $347,000 (1999), $711,000
(1998), and $1,097,000 (1997) related to the holding and disposition of other
real estate owned.
6. PREMISES AND EQUIPMENT
Premises and equipment consist of:
1999 1998
-------- --------
(IN THOUSANDS)
Land................................................... $ 5,717 $ 5,717
Bank premises.......................................... 22,156 21,076
Furniture and equipment................................ 25,608 22,936
Leased property under capital lease.................... 649 649
-------- --------
54,130 50,378
Accumulated depreciation and amortization.............. (26,404) (22,607)
-------- --------
$ 27,726 $ 27,771
======== ========
48
50
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
7. INCOME TAXES
Income tax expense comprised the following:
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Current provision:
Federal............................................. $13,175 $11,403 $ 9,090
State............................................... 5,037 4,208 3,427
------- ------- -------
18,212 15,611 12,517
------- ------- -------
Deferred (benefit) provision:
Federal............................................. (2,373) (972) 154
State............................................... (594) (236) (1)
------- ------- -------
(2,967) (1,208) 153
------- ------- -------
$15,245 $14,403 $12,670
======= ======= =======
Income tax (asset) liability comprised the following:
1999 1998
-------- -------
(IN THOUSANDS)
Current:
Federal............................................... $ 1,659 $ 1,202
State................................................. 777 330
-------- -------
2,436 1,532
-------- -------
Deferred:
Federal............................................... (17,111) (3,596)
State................................................. (3,830) (1,070)
-------- -------
(20,941) (4,666)
-------- -------
$(18,505) $(3,134)
======== =======
49
51
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
The components of the net deferred tax asset are as follows:
1999 1998
------- -------
(IN THOUSANDS)
FEDERAL
Deferred tax liabilities:
Depreciation.............................................. $ 2,428 $ 2,608
Valuation of trust assets................................. 499 543
Core deposit premium...................................... 145 268
Leases.................................................... 82 85
Deferred income........................................... 84
------- -------
Gross deferred tax liability................................ 3,238 3,504
------- -------
Deferred tax assets:
California franchise tax.................................. 1,162 1,106
Bad debt and credit loss deduction........................ 5,648 4,421
Other real estate owned reserves.......................... 187 290
Deferred compensation..................................... 977 1,270
Self-insurance reserves................................... 427 298
Unrealized loss (gain) on investment securities, net...... 10,040 (1,102)
Other, net................................................ 1,908 817
------- -------
Gross deferred tax asset.................................... 20,349 7,100
------- -------
Net deferred tax asset -- federal........................... $17,111 $ 3,596
======= =======
STATE
Deferred tax liabilities:
Depreciation.............................................. $ 567 $ 588
Valuation of trust assets................................. 154 168
Core deposit premium...................................... 45 80
Deferred income........................................... 145
------- -------
Gross deferred tax liability................................ 911 836
------- -------
Deferred tax assets:
Bad debt and credit loss deduction........................ 1,600 1,303
Other real estate owned reserves.......................... 58 90
Deferred compensation..................................... 303 400
Self-insurance reserves................................... 132 92
Other accrued expense..................................... 574
Unrealized loss (gain) on investment securities, net...... 1,997 (169)
Other, net................................................ 77 190
------- -------
Gross deferred tax asset.................................... 4,741 1,906
------- -------
Net deferred tax asset -- state............................. $ 3,830 $ 1,070
======= =======
50
52
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
A reconciliation of the statutory income tax rate to the consolidated
effective income tax rate follows:
1999 1998 1997
----------------- ----------------- -----------------
AMOUNT AMOUNT AMOUNT
(000S) PERCENT (000S) PERCENT (000S) PERCENT
------- ------- ------- ------- ------- -------
Federal income tax at statutory rate....... $14,422 35.0% $13,482 35.0% $11,633 35.0%
State franchise taxes, net of federal
benefit.................................. 2,903 7.1 2,714 7.1 2,342 7.1
Tax-exempt interest........................ (2,241) (5.4) (1,917) (5.0) (1,425) (4.3)
Other, net................................. 161 0.3 124 0.3 120 0.3
------- ----- ------- ----- ------- -----
$15,245 37.0% $14,403 37.4% $12,670 38.1%
======= ===== ======= ===== ======= =====
8. DEPOSITS
Time certificates of deposit with balances of $100,000 or more amounted to
approximately $233,607,000 and $222,187,000 at December 31, 1999 and 1998,
respectively. Interest expense on such deposits amounted to approximately
$10,728,000 (1999), $11,166,000 (1998), and $8,516,000 (1997).
At December 31, 1999, the scheduled maturities of time certificates of
deposit are as follows:
2000........................................................ $322,483,000
2001........................................................ 5,566,000
2002........................................................ 1,125,000
2003........................................................ 550,000
2004 and thereafter......................................... 565,000
------------
$330,289,000
============
9. SHORT-TERM BORROWINGS
During 1999 and 1998, the Bank entered into short-term borrowing agreements
with FHLB. The Bank had outstanding balances of $280,000,000 and $195,000,000
under these agreements at December 31, 1999 and 1998, respectively, with
weighted-average interest rates of 5.6 percent and 5.3 percent, respectively. In
addition, on December 31, 1999 and 1998, the Bank entered into an overnight
agreement with FHLB to borrow $20,000,000 and $5,000,000 at 5.5 percent and 4.8
percent annual interest, respectively. FHLB is holding certain investment
securities of the Bank as collateral for these borrowings. On December 31, 1999,
the Bank entered into an overnight agreement with a financial institution to
borrow $23,000,000 at 5.0 percent annual interest. The Bank maintained cash
deposits with the financial institution as collateral for these borrowings.
51
53
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
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 in excess of one year as of December 31, 1999, excluding property taxes
and insurance, are approximately as follows:
2000........................................................ $ 2,235,000
2001........................................................ 1,806,000
2002........................................................ 1,687,000
2003........................................................ 1,390,000
2004........................................................ 947,000
Succeeding years............................................ 2,738,000
-----------
Total minimum payments required................... $10,803,000
===========
Total rental expense for the Company was approximately $2,497,000 (1999),
$2,494,000 (1998), and $2,389,000 (1997).
At December 31, 1999, the Bank had commitments to extend credit of
approximately $249,500,000 and obligations under letters of credit of
$13,199,000. 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 $140,000,000 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 its
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 1999 and 1998, the Company has accrued a
liability for a portion of the judgment discussed above. 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.
52
54
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
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, which it intends to use to fund the
related liability. Benefits paid to retirees amounted to approximately $50,000
(1999), $59,000 (1998), and $54,000 (1997).
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 for 1999, 1998, and 1997.
The Company assumed certain deferred compensation and salary continuation
agreements as a result of the merger with ONB. These agreements called for
periodic payments over 179 months in the event that ONB experienced a merger,
acquisition, or other act wherein the employees were not retained in similar
positions with the surviving company. Amounts paid under these agreements
totaled approximately $162,000 in 1999.
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 $1,182,000
(1999), $1,047,000 (1998), and $1,021,000 (1997).
ONB had a salary deferral 401(k) plan for all employees who had completed
one year of service. ONB contributed discretionary matching funds of $71,000 to
the plan in 1999 and $102,000 in 1998 and 1997. The plan was terminated upon
completion of the merger.
53
55
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
13. EARNINGS PER SHARE RECONCILIATION (Dollars and shares in thousands, except
per share amounts)
WEIGHTED-
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
DECEMBER 31, 1999
----------------------------------------
BASIC EPS
Income available to common stockholders........ $25,960 24,536 $ 1.06
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of
outstanding options.......................... 930 (0.04)
------- ------ ------
DILUTED EPS
Income available to common stockholders........ $25,960 25,466 $ 1.02
======= ====== ======
DECEMBER 31, 1998
----------------------------------------
BASIC EPS
Income available to common stockholders........ $24,117 24,424 $ 0.99
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of
outstanding options.......................... 919 (0.04)
------- ------ ------
DILUTED EPS
Income available to common stockholders........ $24,117 25,343 $ 0.95
======= ====== ======
DECEMBER 31, 1997
----------------------------------------
BASIC EPS
Income available to common stockholders........ $20,568 24,283 $ 0.85
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of
outstanding options.......................... 902 (0.03)
------- ------ ------
DILUTED EPS
Income available to common stockholders........ $20,568 25,185 $ 0.82
======= ====== ======
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 2,823,425 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, 1999, options for the purchase of 1,091,060 shares of the
Company's common stock were outstanding under the plan, of which options to
purchase 893,112 shares were exercisable at prices ranging from $2.49 to $20.50;
984,683 shares of common stock were available for the granting of future options
under the plan.
As a result of the merger with ONB, the Company assumed two compensatory
incentive stock option plans in which options to purchase shares of ONB's common
stock were granted to certain management and key personnel. Options to purchase
shares of ONB's common stock have been converted to options to purchase the
Company's common stock. At December 31, 1999, options for the purchase of
237,065 shares
54
56
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
were outstanding and exercisable at prices ranging from $9.46 to $15.47. There
are no further options available for grant under these plans.
The following table presents the status of all optioned shares and per
share amounts after giving effect to the 5-for-4 stock split declared in 1999:
SHARES PRICE RANGE
--------- ---------------
Outstanding at January 1, 1997........................... 1,505,828 $ 2.49 - $ 7.33
Granted.................................................. 392,703 $ 2.49 - $12.53
Exercised................................................ (205,386) $ 2.49 - $12.27
Canceled................................................. (25,095) $ 2.49 - $ 6.45
---------
Outstanding at December 31, 1997......................... 1,668,050 $ 2.49 - $12.53
Granted.................................................. 244,233 $12.86 - $18.36
Exercised................................................ (286,891) $ 2.49 - $11.46
Canceled................................................. (25,335) $ 5.61 - $17.09
---------
Outstanding at December 31, 1998......................... 1,600,057 $ 2.49 - $18.36
Granted.................................................. 36,297 $14.46 - $21.30
Exercised................................................ (308,229) $ 2.49 - $17.09
---------
Outstanding at December 31, 1999......................... 1,328,125 $ 2.49 - $21.30
=========
At December 31, 1999, 1,130,177 options are exercisable at an average
exercise price of $6.23. The remaining weighted-average contractual life of the
1,328,125 options outstanding at December 31, 1999 is 5.1 years.
In accordance with the compensation agreement of a key executive, 16,105
shares of the Company's common stock were granted to him in 1997. 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 the intrinsic value method as described in 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 effects on net income and related earnings
per share if compensation costs related to the stock option plans were measured
using the fair value method as prescribed under SFAS No. 123, "Accounting for
Stock-Based Compensation":
1999 1998 1997
------ ------ ------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Reduction in net income..................................... $ 239 $ 356 $ 656
Reduction in basic earnings per common share................ $0.01 $0.01 $0.03
Reduction in diluted earnings per common share.............. $0.01 $0.01 $0.03
55
57
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
The fair value of the options granted was estimated using the Black-Scholes
option-pricing model with the following assumptions:
1999 1998 1997
--------- --------- ---------
Dividend yield..................................... 2.2% 2.4% 1.5%
Volatility......................................... 32.4% 27.5% 23.7%
Risk-free interest rate............................ 5.5% 5.0% 6.0%
Expected life...................................... 7.0 years 6.9 years 8.8 years
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, 1999,
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1999, 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.
56
58
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
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, 1999:
Total Capital (to Risk-Weighted
Assets)
Company....................... $163,579 13.9% $94,146 >/=8.0% N/A
Bank.......................... 160,160 13.6% 94,212 >/=8.0% $117,765 >/=10.0%
Tier I Capital (to Risk-Weighted
Assets)
Company....................... 148,710 12.6% 47,210 >4.0% N/A
Bank.......................... 145,313 12.3% 47,256 >4.0% 70,884 > 6.0%
Tier I Capital (to Average
Assets)
Company....................... 148,710 7.7% 77,252 >/=4.0% N/A
Bank.......................... 145,313 7.6% 76,481 >/=4.0% 95,601 >/=5.0%
As of December 31, 1998:
Total Capital (to Risk-Weighted
Assets)
Company....................... 140,840 13.6% 82,847 >/=8.0% N/A
Bank.......................... 138,017 13.3% 83,018 >/=8.0% 103,772 >/=10.0%
Tier I Capital (to Risk-Weighted
Assets)
Company....................... 128,447 12.4% 41,435 >4.0% N/A
Bank.......................... 125,650 12.1% 41,537 >4.0% 62,306 > 6.0%
Tier I Capital (to Average
Assets)
Company....................... 128,447 7.4% 69,431 >/=4.0% N/A
Bank.......................... 125,650 7.3% 68,849 >/=4.0% 86,062 >/= 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, 1999, declare and pay additional dividends of
approximately $48,672,000.
Banking regulations require that all banks maintain a percentage of their
deposits as reserves at the Federal Reserve Bank. On December 31, 1999, this
reserve requirement was approximately $737,000.
57
59
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
16. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEETS
(IN THOUSANDS)
1999 1998
-------- --------
Assets:
Investment in Citizens Business Bank...................... $137,373 $136,633
Other assets, net......................................... 11,895 7,791
-------- --------
Total assets...................................... $149,268 $144,424
======== ========
Liabilities................................................. $ 8,498 $ 4,994
Stockholders' equity........................................ 140,770 139,430
-------- --------
Total liabilities and stockholders' equity........ $149,268 $144,424
======== ========
STATEMENTS OF EARNINGS
(IN THOUSANDS)
1999 1998 1997
------- ------- -------
Equity in earnings of Citizens Business Bank................ $29,179 $24,441 $20,806
Acquisition costs........................................... (4,856)
Other income (expense), net................................. 1,637 (324) (238)
------- ------- -------
Net earnings................................................ $25,960 $24,117 $20,568
======= ======= =======
58
60
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................. $ 25,960 $ 24,117 $ 20,568
Adjustments to reconcile net earnings to cash (used in)
provided by operating activities:
Earnings of Citizens Business Bank.................... (29,179) (24,441) (20,806)
Other operating activities, net....................... 2,273 1,365 1,273
-------- -------- --------
Total adjustments................................ (26,906) (23,076) (19,533)
-------- -------- --------
Net cash (used in) provided by operating
activities..................................... (946) 1,041 1,035
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends received from Citizens Business Bank........... 10,700 9,329 5,724
Dividends received from Community Trust Deed Services.... 140
-------- -------- --------
Net cash provided by investing activities........ 10,700 9,329 5,864
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends on common stock........................... (9,841) (7,892) (5,327)
Proceeds from exercise of stock options.................. 2,739 639 720
Stock repurchase......................................... (1,907) (1,935)
-------- -------- --------
Net cash used in financing activities............ (7,102) (9,160) (6,542)
-------- -------- --------
Net Increase in Cash and Cash Equivalents.................. 2,652 1,210 357
Cash and Cash Equivalents, Beginning of Year............... 2,945 1,735 1,378
-------- -------- --------
Cash and Cash Equivalents, End of Year..................... $ 5,597 $ 2,945 $ 1,735
======== ======== ========
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)
1999
Net interest income........................... $21,399 $22,057 $22,502 $24,054
Provision for credit losses................... 670 520 810 700
Net earnings.................................. 6,265 7,025 7,203 5,467
Basic earnings per common share............... 0.26 0.29 0.29 0.22
Diluted earnings per common share............. 0.25 0.28 0.28 0.21
1998
Net interest income........................... $19,110 $19,792 $20,213 $21,427
Provision for credit losses................... 850 470 640 640
Net earnings.................................. 5,425 5,938 6,171 6,583
Basic earnings per common share............... 0.22 0.24 0.26 0.27
Diluted earnings per common share............. 0.22 0.23 0.24 0.26
59
61
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
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, 1999
and 1998. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
1999 1998
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS) (IN THOUSANDS)
ASSETS
Cash and cash equivalents....................... $118,360 $118,360 $174,964 $174,964
Investment securities held to maturity.......... 70,011 72,116
Investment securities available for sale........ 877,332 877,332 716,811 716,811
Loans and lease finance receivables, net........ 935,791 934,465 817,296 817,122
Accrued interest receivable..................... 11,454 11,454 9,358 9,358
LIABILITIES
Deposits:
Noninterest-bearing........................... $649,821 $649,821 $638,683 $638,683
Interest-bearing.............................. 851,252 851,229 836,956 836,709
Demand note to U.S. Treasury.................... 16,951 16,951 95 95
Short-term borrowings........................... 323,000 323,000 200,000 200,000
Securities purchased not settled................ 5,000 5,000
Accrued interest payable........................ 5,341 5,341 4,674 4,674
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 cash equivalents is considered to be a
reasonable estimate of fair value. For investment securities, fair values
are based on quoted market prices, dealer quotes, and prices obtained from
an independent pricing service.
The carrying amount of loans and lease financing receivables is their
contractual amounts outstanding, reduced by deferred net loan origination
fees and the allocable portion of the allowance for credit losses. Variable
rate loans are composed primarily of loans whose interest rates float with
changes in the prime interest rate. The carrying amount of variable rate
loans, other than such loans on nonaccrual status, is considered to be
their estimated fair value.
The fair value of fixed rate loans, other than such loans on
nonaccrual status, was estimated by discounting the remaining contractual
cash flows using the estimated current rate at which similar loans would be
made to borrowers with similar credit risk characteristics and for the same
remaining maturities, reduced by deferred net loan origination fees and the
allocable portion of the allowance for credit losses. Accordingly, in
determining the estimated current rate for discounting purposes, no
adjustment has been made for any change in borrowers' credit risks since
the origination of such loans. Rather, the allocable portion of the
allowance for credit losses is considered to provide for such changes in
estimating fair value.
60
62
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
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 marketplace for such loans. As
such, the estimated fair value of total loans at December 31, 1999 and 1998
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, 1999 or 1998, 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, 1999 and 1998.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
that date, and therefore, current estimates of fair value may differ
significantly from the amounts presented above.
19. ACQUISITION
On October 4, 1999, ONB merged with and into the Company in a transaction
accounted for using the pooling-of-interests method of accounting. In the
merger, 3,003,007 shares of the Company's common stock were issued to holders of
common stock of ONB based on an exchange ratio of 1.5 shares of CVB Financial
Corp.'s common stock for each share issued and outstanding of ONB. All of the
outstanding shares of common stock of ONB were canceled upon the merger. The
financial information for all periods presented has been restated to present the
combined consolidated financial condition and results of operations of the
Company and ONB as if the merger had been in effect for all periods presented.
SEPARATE COMPANY INFORMATION FOR POOLING-OF-INTERESTS ACQUISITION -- The
following table presents certain financial data reported separately by each
company and on a combined basis for the period ended October 3, 1999 and the
years ended December 31, 1998 and 1997:
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
Net interest income:
CVB................................................. $55,609 $65,591 $59,680
ONB................................................. 11,197 14,951 13,504
------- ------- -------
Combined............................................ $66,806 $80,542 $73,184
======= ======= =======
Net income:
CVB................................................. $18,207 $20,787 $17,370
ONB................................................. 2,664 3,330 3,198
------- ------- -------
Combined............................................ $20,871 $24,117 $20,568
======= ======= =======
MERGER RELATED COSTS -- The pooling-of-interests method of accounting
requires that certain expenses incurred to effect the merger be treated as
current charges against income. The Company charged to expense
61
63
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1999
merger costs of approximately $3.0 million, after tax. The merger costs included
accounting fees, investment banker fees, legal fees, and severance expenses.
The following table sets forth the one-time merger costs and the remaining
accrual included in other liabilities at December 31, 1999 (amounts in
thousands):
REMAINING
MERGER- ACCRUAL AT
RELATED DECEMBER 31,
COSTS 1999
------- ------------
Employee costs......................................... $2,282 $1,660
Investment banker fees................................. 880
Professional fees...................................... 841 235
Data processing........................................ 627 218
Other.................................................. 226 125
------ ------
Total merger costs........................... $4,856 $2,238
====== ======
62
64
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, 1999 and 1998, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States of America. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
- ---------------------------------------------------------
Deloitte & Touche LLP
Los Angeles, California
February 2, 2000
63
65
INDEX TO EXHIBITS
EXHIBIT
NUMBER PAGE
- ------- ----
2.1 Agreement and Plan of Reorganization by and between CVB
Financial Corp. and Orange National Bancorp dated May 18,
1999(1)..................................................... *
3.1 Articles of Company, as amended............................. 67
3.2 Bylaws of Company, as amended(2)............................ *
3.3 Reserved.................................................... *
10.1 Reserved.................................................... *
10.2 Agreement by and among D. Linn Wiley, CVB Financial Corp.
and Chino Valley Bank dated August 8, 1991.(2).............. *
10.3 Chino Valley Bank Profit Sharing Plan, as amended.(3)....... *
10.4 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.(4).................................................. *
10.6 Sublease dated November 1, 1986, by and between Eldorado
Bank and Chino Valley Bank for the East Highland
Office.(4).................................................. *
10.7 Lease Assignment, Acceptance and Assumption and Consent
dated December 23, 1986, executed by the FDIC, Receiver of
Independent National Bank, Covina, California, as Assignor,
Chino Valley Bank, as Assignee, and INB Bancorp, as Landlord
under that certain Ground Lease dated September 30, 1983 by
and between INB Bancorp and Independent National Bank for
the Covina Office.(4)....................................... *
10.8 Lease Assignment dated May 15, 1987 and Consent of Lessor
dated April 21, 1987 executed by Huntington Bank, as
Assignor, Chino Valley Bank as Assignee and Gerald G. Myers
and Lynn H. Myers as Lessors under that certain lease dated
March 1, 1979 between Lessors and Huntington Bank for the
Arcadia Office.(5).......................................... *
10.9 Lease Assignment dated May 15, 1987 and Consent of Lessor
dated March 18, 1987 executed by Huntington Bank, as
Assignor, Chino Valley Bank as Assignee and George R. Meeker
as Lessor under that certain Memorandum of Lease dated May
1, 1982 between Lessor and Huntington Bank for the South
Arcadia Office.(5).......................................... *
10.10 Lease Assignment dated May 15, 1987 and Consent of Lessor
dated March 17, 1987 executed by Huntington Bank, as
Assignor, Chino Valley Bank as Assignee and William R.
Hayden and Marie Virginia Hayden as Lessor under that
Certain Lease and Sublease, dated March 1, 1983, as amended,
between Lessors and Huntington Bank for the San Gabriel
Office.(5).................................................. *
10.11 Lease Assignment dated May 15, 1987 executed by Huntington
Bank as Assignor and Chino Valley Bank as Assignee under
that certain Shopping Center Lease dated June 1, 1982,
between Anita Associates, a limited partnership and
Huntington Bank for the Santa Anita ATM Branch.(5).......... *
10.12 Office Building Lease between Havenpointe Partners Ltd. and
CVB Financial Corp. dated April 14, 1987 for the Ontario
Airport Office.(5).......................................... *
10.13 Form of Indemnification Agreement.(6)....................... *
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.(7).................................................. *
10.15 Office Building Lease between Lobel Financial Corporation
and Chino Valley Bank dated June 12, 1990, for the Premier
Results data processing center.(3).......................... *
64
66
EXHIBIT
NUMBER PAGE
- ------- ----
10.16 Office Space Lease between Rancon Realty Fund IV and Chino
Valley Bank dated September 6, 1990, for the Tri-City
Business Center Branch.(3).................................. *
10.17 1991 Stock Option Plan, as amended.(12)..................... *
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.(8).................................................. *
10.21 Office Lease by and between Mulberry Properties and Chino
Valley Bank dated October 12, 1992.(8)...................... *
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.(9)..... *
10.26 Lease by and between RCI Loring and CVB Financial Corp.
dated March 11, 1993, for the Riverside Office.(9).......... *
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.(10)...................... *
10.28 Reserved.................................................... *
10.29 Severance Compensation Agreement dated September 30, 1996
with Edwin J. Pomplun.(11).................................. *
10.30 Severance Compensation Agreement dated September 20, 1996
with Frank Basirico.(11).................................... *
10.31 Severance Compensation Agreement dated September 27, 1996
with Jay Coleman.(11)....................................... *
10.32 Reserved.................................................... *
10.33 Severance Compensation Agreement dated September 27, 1996
with Tony Ellis.(11)........................................ *
10.34 Severance Compensation Agreement dated May 30, 1997 with
Nancy Sinclair.(11)......................................... *
10.35 Severance Compensation Agreement dated February 1, 1998 with
Edward Biebrich.(11)........................................ *
10.36 Reserved.................................................... *
10.37 CVB Financial Corp. 1999 Orange National Bancorp 1993
Continuation Stock Option Plan(13).......................... *
10.38 CVB Financial Corp. 1999 Orange National Bancorp 1997
Continuation Stock Option Plan(14).......................... *
11 Statement regarding computation of per share earnings
(included in Form 10-K)..................................... *
12 Statement regarding computation of ratios (included in Form
10-K)....................................................... *
21 Subsidiaries of Company..................................... 77
23 Consent of Independent Certified Public Accountants......... 78
27 Financial Data Schedule..................................... 79
- ---------------
* Not applicable.
(1) Filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K on May 21,
1999, Commission File No. 1-10394, which is incorporated herein by this
reference.
(2) 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.
65
67
(3) Filed as Exhibits 10.3, 10.15 and 10.16 to Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990, Commission file
number 1-10394, which are incorporated herein by this reference.
(4) Filed as Exhibits 10.4, 10.5, 10.6 and 10.7 to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1986, Commission file
number 1-10394, which are incorporated herein by this reference.
(5) Filed as Exhibits 10.8, 10.9, 10.10, 10.11 and 10.12 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1987, Commission
file number 1-10394, which are incorporated herein by this reference.
(6) Filed as Exhibit 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.
(7) 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.
(8) Filed as Exhibit 10.20, 10.21 and 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) Filed as Exhibit 99.1 to Registrant's Registration Statement on Form S-8 on
October 6, 1999, Registration No. 333-88519, which is incorporated herein
by this reference.
(14) Filed as Exhibit 99.2 to Registrant's Registration Statement on Form S-8 on
October 6, 1999, Registration No. 333-88519, which is incorporated herein
by this reference.
66