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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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
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COMMON STOCK AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 21, 2001, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $420,446,300.
Number of shares of common stock of the registrant outstanding as of March
21, 2001: 27,752,231.
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, 2000.....Part III
of Form 10-K
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INTRODUCTION
Certain matters discussed in this Annual Report may constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "1933 Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and as such may involve risks
and uncertainties. These forward-looking statements relate to, among other
things, expectations of the business environment in which CVB Financial Corp.
and its subsidiaries operate, projections of future performance, perceived
opportunities in the market and statements regarding the entities mission and
vision. CVB Financial Corp. and its subsidiaries' actual results, performance,
or achievements may differ significantly from the results, performance, or
achievements expressed or implied in such forward-looking statements. For
discussion of the factors that might cause such differences, see "Item 1.
Business -- Risk Factors that May Affect Future Results."
AVAILABLE INFORMATION
Reports filed with the Securities and Exchange Commission (the
"Commission") including proxy statements and other information can be inspected
and copied at the public reference facilities of the Commission at Room 1024,
450 Fifth Street, N.W., Washington D.C., 20549; 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and 7 World Trade Center, Suite 1300, New
York, New York, 10048. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington D.C.
20549, at prescribed rates. The Commission maintains a Web Site that contains
reports, proxy and information statements and other information. The address of
the site is http://www.sec.gov. In addition, reports can be inspected at the
office of the American Stock Exchange, 86 Trinity Place, New York, New York,
10006.
PART I
ITEM 1. BUSINESS
CVB FINANCIAL CORP.
CVB Financial Corp. (referred to herein on an unconsolidated basis as "CVB"
and on a consolidated basis as the "Company") is a bank holding company
incorporated in California on April 27, 1981 and registered under the Bank
Holding Company Act of 1956, as amended (the "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").
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, 2000, the
Company had $2.3 billion in total consolidated assets, $1.03 billion in
consolidated net loans and $1.6 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.
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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, 2000, the Bank had $2.3 billion in
assets, $1.03 billion in net loans and $1.6 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 the
beginning of 1995, the Bank has added twelve offices, one in 1995, four in 1996,
and seven in 1999.
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 clearinghouse, 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.
EMPLOYEES
At December 31, 2000, the Company employed 555 persons 340 on a full-time
and 215 on a part-time basis. The Company believes that its employee relations
are satisfactory.
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COMPETITION
The banking and financial services industry in California generally, and in
the Bank's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. The Bank competes for loans,
deposits, and customers with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market funds, credit unions, and other
nonbank financial service providers. Many of these competitors are much larger
in total assets and capitalization, have greater access to capital markets and
offer a broader range of financial services than the Bank. In 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.
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION
The Bank'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."
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
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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.
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.
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
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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
General. 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 BHCA 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.
The law also:
- 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; and
- Addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
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
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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.
Financial Holding Companies. Bank holding companies that elect to become a
financial holding company may affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature or are
incidental or complementary to activities that are financial in nature.
"Financial in nature" activities include:
- securities underwriting,
- dealing and market making,
- sponsoring mutual funds and investment companies,
- insurance underwriting and agency,
- merchant banking, and
- activities that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines from time to time to be so closely
related to banking or managing or controlling banks as to be a proper
incident thereto.
A bank holding company must meet three requirements before becoming a
financial holding company:
- all of the bank holding company's depository institution subsidiaries
must be well capitalized, well managed, and, except in limited
circumstances, in compliance with the Community Reinvestment Act; and
- the Bank holding company must file with the Federal Reserve a declaration
of its election to become a financial holding company, including a
certification that its depository institution subsidiaries meet the prior
two criteria.
Failure to comply with the financial holding company requirements could
lead to divestiture of subsidiary banks or require all activities of such
company to conform to those permissible for a bank holding company. No Federal
Reserve Board approval is required for a financial holding company to acquire a
company (other than a bank holding company, bank or savings association) engaged
in activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the Federal Reserve Board.
A bank holding company that is not also a financial holding company can
only engage in banking and such other activities determined by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
In December 2000, the Federal Reserve Board approved an interim rule
defining the three categories of activities financial in nature or incidental to
a financial activity:
- lending, exchanging, transferring, investing for others, or safeguarding
financial assets other than money or securities;
- providing any devise or other instrumentality for transferring money or
other financial assets; or
- arranging, effecting or facilitating financial transactions for the
account of third parties.
The interim rule also establishes a mechanism through which financial holding
companies or other interested parties may request that the Federal Reserve Board
find that a particular activity falls within one of these three categories. For
example, the Federal Reserve Board has recently issued a proposed rule that
would grant financial holding companies the right to act as real estate brokers
and managers.
The Company is not currently 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.
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Merchant Banking Restrictions. In March 2000, the Federal Reserve Board and
the Treasury adopted a final rule governing merchant banking or venture capital
investments made by financial holding companies. Generally, the interim rule:
- defines the types of venture ownership interests that may be acquired;
- limits control of assets to a portfolio company (a company engaged in
activities not permissible under the Bank Holding Company Act);
- requires the financial holding company to conduct activities unless it
controls a securities affiliate or an issuance affiliate with a
registered investment advisor;
- prohibits the financial holding company from routinely managing or
operating the portfolio company unless intervention is necessary to
address a material risk to the value or operation of the portfolio
company;
- established a 10-year holding period before divestiture, except that an
investment in or held through a private equity fund may be held for the
duration of the fund;
- applies an aggregate limit on the carrying value of all merchant banking
investments without prior Federal Reserve Board approval to the lesser of
(i) 30 percent of Tier 1 capital or $6 billion or (ii) the lesser of 20
percent of Tier 1 capital or $4 billion excluding interests in private
equity funds;
- requires prior approval to exceed the 10-year holding period limit; and
- applies cross-marketing restrictions to merchant banking investments and
the financial holding company's subsidiary depository institutions.
In January 2001, the federal regulators adopted a final rule on the topic.
The final rule:
- expands the definition of "securities affiliate" to include a department
or division of a bank registered as a municipal securities dealer;
- clarifies the circumstances under which a financial holding company may
routinely manage and operate a portfolio company, and extends the period
of time that a financial holding company may routinely manage or operate
a portfolio company without providing notice to the Federal Reserve
Board;
- streamlines the rule's reporting and record-keeping requirements;
- removes the $6 billion cap on investments;
- broadens the definition of "private equity" funds and clarifies how the
holding period and management and operations restrictions of the rule
apply to such funds; and
- adopts several safe-harbors to the presumptions in the rule governing the
definition of affiliate for purposes of transactions with affiliates.
The final rule includes a sunset provision to the requirement of the
interim rule that requires a financial holding company to receive Federal
Reserve Board approval prior to using its merchant banking authority to make
investments above certain levels. The sunset is tied to final adoption of a
capital rule governing merchant banking investments.
In January 2001, federal regulators proposed new capital requirements for
merchant banking activities. The proposal would employ a sliding scale based on
each banking organization's aggregate equity investments and Tier 1 capital. It
would require them to hold 8 cents for every $1 of equity investments up to 15%
of Tier 1 capital. The proposal would then require banks to hold 12 cents for
every $1 of investments for the next 10%. For investments exceeding 25%, banks
would have to hold 25 cents for every $1.
The proposed rule would exempt the first 15% of investments that banking
companies make through small-business investment corporation subsidiaries.
However, the proposed rule's sliding scale would apply for any such investments
over 15%.
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Until a final capital rule is adopted, the Federal Reserve Board must
review the merchant banking activities of a financial holding company if: a bank
holding company's merchant banking investments (i) in the aggregate exceed 30%
of its Tier 1 capital, or (ii) other than investments in private equity funds in
the aggregate exceed 20% of its Tier 1 capital. The rule clarifies that the
review thresholds apply to the investment made by a financial holding company in
a private equity fund, but do not apply to the fund itself or to investments in
the fund made by unaffiliated third parties. The thresholds also do not restrict
the ability of such company to make additional investments in a fiduciary
capacity on behalf of its trust customers.
Expanded Bank Activities. 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 BHCA or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized," "well-managed"
and in compliance with the Community Reinvestment Act. 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 national bank's
assets. The national bank must also have policies and procedures to assess
financial subsidiary risk and protect the national 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.
Privacy. Under the Financial Services Modernization Act, federal banking
regulators are required to adopt rules that will limit the ability of banks and
other financial institutions to disclose non-public information about consumers
to nonaffiliated third parties. These limitations will require disclosure of
privacy policies to consumers and, in some circumstances, will allow consumers
to prevent disclosure of certain personal information to a nonaffiliated third
party. Federal banking regulators issued final rules on May 10, 2000. Pursuant
to these rules, financial institutions must provide:
- initial notices to customers about their privacy policies, describing the
conditions under which they may disclose nonpublic personal information
to nonaffiliated third parties and affiliates;
- annual notices of their privacy policies to current customers; and
- a reasonable method for customers to "opt out" of disclosures to
nonaffiliated third parties.
The rules were effective November 13, 2000, but compliance is optional until
July 1, 2001. These privacy provisions will affect how consumer information is
transmitted through diversified financial companies and conveyed to outside
vendors. It is not possible at this time to assess the impact of the privacy
provisions on the Company's financial condition or results of operations.
Consumer Protection Rules - Sale of Insurance Products. In December 2000
pursuant to the requirements of the Financial Services Modernization Act, the
federal bank and thrift regulatory agencies adopted consumer protection rules
for the sale of insurance products by depository institutions. The rule is
effective on April 1, 2001. The final rule applies to any depository institution
or any person selling, soliciting, advertising, or offering insurance products
or annuities to a consumer at an office of the institution or on behalf of the
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institution. Before an institution can complete the sale of an insurance product
or annuity, the regulation requires oral and written disclosure that such
product:
- is not a deposit or other obligation of, or guaranteed by, the depository
institution or its affiliate;
- is not insured by the FDIC or any other agency of the United States, the
depository institution or its affiliate; and
- has certain risks in investment, including the possible loss of value.
Finally, the depository institution may not condition an extension of
credit:
- on the consumer's purchase of an insurance product or annuity from the
depository institution or from any of its affiliates, or
- on the consumer's agreement not to obtain, or a prohibition on the
consumer from obtaining, an insurance product or annuity from an
unaffiliated entity.
The rule also requires formal acknowledgement from the consumer that
disclosures were received.
In addition, to the extent practicable, a depository institution must keep
insurance and annuity sales activities physically segregated from the areas
where retail deposits are routinely accepted from the general public.
Safeguarding Confidential Customer Information. In January 2000, the
banking agencies adopted guidelines requiring financial institutions to
establish an information security program to:
- identify and assess the risks that may threaten customer information;
- develop a written plan containing policies and procedures to manage and
control these risks;
- implement and test the plan; and
- adjust the plan on a continuing basis to account for changes in
technology, the sensitivity of customer information, and internal or
external threats to information security.
Each institution may implement a security program appropriate to its size and
complexity and the nature and scope of its operations.
The guidelines outline specific security measures that institutions should
consider in implementing a security program. A financial institution must adopt
those security measures determined to be appropriate. The guidelines require the
board of directors to oversee an institution's efforts to develop, implement,
and maintain an effective information security program and approve written
information security policies and programs. The guidelines are effective July 1,
2001.
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 $62.0 million at
December 31, 2000. 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
9
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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 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.
The guidelines 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 Company, compared to its minimum regulatory capital
requirements as of December 31, 2000.
AS OF DECEMBER 31, 2000
--------------------------------------------------------------
ACTUAL REQUIRED EXCESS
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Leverage ratio.......................... $174,426 8.5% $ 82,083 4.0% $ 92,343 4.5%
Tier 1 risk-based ratio................. 174,426 13.2% 52,856 4.0% 121,570 9.2%
Total risk-based ratio.................. 191,098 14.4% 106,165 8.0% 84,933 6.4%
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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, 2000.
AS OF DECEMBER 31, 2000
-----------------------------------------------------------
ACTUAL REQUIRED EXCESS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Leverage ratio...................... $174,774 8.5% $ 82,247 4.0% $ 92,527 4.5%
Tier 1 risk-based ratio............. 174,774 13.2% 52,962 4.0% 121,812 9.2%
Total risk-based ratio.............. 191,429 14.5% 105,615 8.0% 85,814 6.5%
The federal banking regulators may set capital requirements higher than the
minimums described above for holding companies whose circumstances warrant it.
For example, a financial institution experiencing or anticipating significant
growth may be expected to maintain capital positions substantially above the
minimum supervisory levels without significant reliance on intangible assets.
The Federal Reserve Board has also indicated that it will consider a "tangible
Tier 1 capital leverage ratio" (deducting all intangibles) and other indications
of capital strength when evaluating proposals for expansion or new activities.
Proposed Capital Requirements for Community Institutions
In November 2000 the federal bank and thrift regulatory agencies requested
public comment on an advance notice of proposed rulemaking that considers the
establishment of a simplified regulatory capital framework for non-complex
institutions.
In the proposal, the agencies suggested criteria that could be used to
determine eligibility for a simplified capital framework, such as the nature of
a bank's activities, its asset size and its risk profile. In the advance notice,
the agencies seek comment on possible minimum regulatory capital requirements
for non-complex institutions, including a simplified risk-based ratio, a simple
leverage ratio, or a leverage ratio modified to incorporate certain off-balance
sheet exposures.
The advance notice solicits public comment on the agencies' preliminary
views. Comments are due on the proposal on February 1, 2001. Given the
preliminary nature of the proposal, it is not possible to predict its impact on
the Bank at this time.
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, 2000, 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.
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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
Through the Bank Insurance Fund (BIF), the FDIC insures the deposits of the
Company's depository institution subsidiaries up to prescribed limits for each
depositor. The amount of FDIC assessments paid by each BIF member institution is
based on its relative risk of default as measured by regulatory capital ratios
and other factors. Specifically, the assessment rate is based on the
institution's capitalization risk category and supervisory subgroup category. An
institution's capitalization risk category is based on the FDIC's determination
of whether the institution is well capitalized, adequately capitalized or less
than adequately capitalized. An institution's supervisory subgroup category is
based on the FDIC's assessment of the financial condition of the institution and
the probability that FDIC intervention or other corrective action will be
required.
FDIC-insured depository institutions pay an assessment rate equal to the
rate assessed on deposits insured by the Savings Association Insurance Fund
("SAIF").
The assessment rate currently ranges from zero to 27 cents per $100 of
domestic deposits. The FDIC may increase or decrease the assessment rate
schedule on a semi-annual basis. An increase in the assessment rate could have a
material adverse effect on the Company's earnings, depending on the amount of
the increase. The FDIC is authorized to terminate a depository institution's
deposit insurance upon a finding by the FDIC that the institution's financial
condition is unsafe or unsound or that the institution has engaged in unsafe or
unsound practices or has violated any applicable rule, regulation, order or
condition enacted or imposed by the institution's regulatory agency. The
termination of deposit insurance for one or more of the Company's subsidiary
depository institutions could have a material adverse effect on the Company's
earnings, depending on the collective size of the particular institutions
involved.
All FDIC-insured depository institutions must pay an annual assessment to
provide funds for the payment of interest on bonds issued by the Financing
Corporation, a federal corporation chartered under the authority of the Federal
Housing Finance Board. The bonds, commonly referred to as FICO bonds, were
issued to capitalize the Federal Savings and Loan Insurance Corporation. The
FDIC established the FICO assessment rates effective for the third quarter of
2000 at approximately $.021 per $100 annually for assessable deposits. The FICO
assessments are adjusted quarterly to reflect changes in the assessment bases of
the FDIC's insurance funds and do not vary depending on a depository
institution's capitalization or supervisory evaluations.
Interstate Banking and Branching
The BHCA permits bank holding companies from any state to acquire banks and
bank holding companies located in any other state, subject to certain
conditions, including certain nationwide- and state-imposed concentration
limits. The Bank has the ability, subject to certain restrictions, to acquire by
acquisition or merger branches outside its home state. The establishment of new
interstate branches is also possible in those states with
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laws that expressly permit it. Interstate branches are subject to certain laws
of the states in which they are located. Competition may increase further as
banks branch across state lines and enter new markets.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act 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. In December 2000, the federal
banking agencies established annual reporting and public disclosure requirements
for certain written agreements that are entered into between insured depository
institutions or their affiliates and nongovernmental entities or persons that
are made pursuant to, or in connection with, the fulfillment of the CRA.
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.
Nonbank Subsidiaries
Many of the Company's nonbank subsidiaries also are subject to regulation
by the Federal Reserve Board and other applicable federal and state agencies.
Other nonbank subsidiaries of the Company are subject to the laws and
regulations of both the federal government and the various states in which they
conduct business.
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.
Our Southern California business focus and economic conditions in Southern
California could adversely affect our operations. 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.
Changes in interest rates could adversely affect our earnings. 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 decrease should the Federal Reserve Board continue to lower rates.
However, significant fluctuations in interest rates may have an adverse affect
on the Company's financial condition and results of operations. Furthermore, the
financial weakness of California's three primary energy providers, and shortages
in electrical generation capacities may further weaken the California economy
and businesses operating in Southern California.
We are subject to government regulations that could limit or restrict our
activities, which in turn could adversely impact our operations. 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.
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Competition may adversely affect our performance. 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.
If a significant number of borrowers, guarantors and related parties fail
to perform as required by the terms of their loans, we will sustain losses. 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.
We may face 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 office of Ventures is
located at 16 North Marengo, Pasadena, California.
The Bank occupies the premises for twenty-one of its offices under leases
expiring at various dates from 2001 through 2014, at which time the Company can
exercise options that could extend certain leases 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, 2000, was $5.4 million. Management
believes that its existing facilities are adequate for its present purposes. 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 $4,900,000, 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. The Court of Appeal has vacated the judgement and remanded the case for
retrial. In addition, the Court of Appeal has awarded the Bank the costs of
Appeal. MRI petitioned the Supreme Court of the State of California, who refused
to hear the case. The Company is awaiting a new trial on all of the issues.
Management believes that the ultimate outcome of this case will not have a
material adverse affect 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
2000.
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ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
As of February 28, 2001, the executive officers of the Company and Bank
are:
NAME POSITION AGE
---- -------- ---
George A. Borba...................... Chairman of the Board of the Company and the Bank 68
D. Linn Wiley........................ President and Chief Executive Officer of the Company 62
and the Bank
Frank Basirico....................... Executive Vice President/Credit Management Division of 46
the Bank
Edward J. Biebrich Jr. .............. Chief Financial Officer of the Company and Executive 57
Vice President and Chief Financial Officer of the Bank
Jay W. Coleman....................... Executive Vice President/Sales and Service Division of 58
the Bank
Ed Pomplun........................... Executive Vice President/Asset Management Division of 54
the Bank
Other than George A. Borba, who is the brother of John A. Borba, a director
of the Company and the Bank, there is no family relationship among any of the
above-named officers or any of the Company's directors.
Mr. Borba has served as Chairman of the Board of the Company since its
organization in April, 1981 and Chairman of the Board of the Bank since its
organization in December, 1973. In addition, Mr. Borba is the owner of George
Borba & Son Dairy.
Mr. Wiley has served as President and Chief Executive Officer of the
Company since October, 1991. Mr. Wiley joined the Company and Bank as a director
and as President & Chief Executive Officer designate on August 21, 1991. Prior
to that, Mr. Wiley served as an Executive Vice President of Wells Fargo Bank
from April 1, 1990 to August 20, 1991. From 1988 to April 1, 1990 Mr. Wiley
served as the President and Chief Administrative Officer of Central Pacific
Corporation, and from 1983 to 1990 he was the President and Chief Executive
Officer of American National Bank.
Mr. Basirico has served as Executive Vice President and Senior Loan Officer
of the Bank since 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. From 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.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Shares of CVB Financial Corp. common stock price increased from an average
price of $14.84 per share for the first quarter of 2000 to an average per share
price of $15.15 for the fourth quarter of 2000. 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
December 2000, which was paid in January 2001, and the 5-for-4 stock split
declared in December 1999, which became effective January 14, 2000. The Company
had approximately 1,348 shareholders of record as of December 31, 2000.
TWO YEAR SUMMARY OF COMMON STOCK PRICES
QUARTER ENDED HIGH LOW DIVIDENDS
------------- ------ ------ -------------------
03/31/1999................................... $16.45 $13.73 $0.09 Cash Dividend
06/30/1999................................... $18.91 $13.95 $0.09 Cash Dividend
09/30/1999................................... $21.55 $18.27 $0.09 Cash Dividend
12/31/1999................................... $19.73 $16.55 $0.12 Cash Dividend
5-for-4 Stock Split
03/31/2000................................... $18.09 $12.27 $0.12 Cash Dividend
06/30/2000................................... $14.72 $12.56 $0.12 Cash Dividend
09/30/2000................................... $15.34 $13.64 $0.12 Cash Dividend
12/31/2000................................... $16.31 $14.66 $0.12 Cash Dividend
10% Stock Dividend
The Company lists its common stock on the American Stock Exchange under the
symbol "CVB."
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ITEM 6. SELECTED FINANCIAL DATA.
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net Interest Income.............. $ 94,107 $ 90,012 $ 80,542 $ 73,184 $ 65,803
Provision for Credit Losses...... 2,800 2,700 2,600 2,810 3,093
Other Operating Income........... 19,023 18,630 17,759 17,530 16,991
Other Operating Expenses......... 56,345 64,737 57,181 54,666 53,456
---------- ---------- ---------- ---------- ----------
Earnings Before Income Taxes..... 53,985 41,205 38,520 33,238 26,245
Income Taxes..................... 19,302 15,245 14,403 12,670 10,711
Net Earnings..................... $ 34,683 $ 25,960 $ 24,117 $ 20,568 $ 15,534
========== ========== ========== ========== ==========
Basic Earnings Per Common
Share(1)....................... $ 1.26 $ 0.96 $ 0.90 $ 0.77 $ 0.58
========== ========== ========== ========== ==========
Diluted Earnings Per Common
Share(1)....................... $ 1.23 $ 0.93 $ 0.87 $ 0.75 $ 0.56
========== ========== ========== ========== ==========
Cash Dividends Declared Per
Share(1)....................... $ 0.45 $ 0.39 $ 0.32 $ 0.22 $ 0.16
Dividend Pay-Out Ratio........... 35.71% 40.63% 32.41% 25.50% 24.85%
FINANCIAL POSITION:
Assets......................... $2,307,996 $2,010,757 $1,841,069 $1,501,048 $1,379,266
Net Loans...................... 1,032,341 935,791 817,296 736,673 695,677
Deposits....................... 1,595,030 1,501,073 1,475,639 1,294,487 1,188,961
Stockholders' Equity........... 188,630 140,770 139,430 123,671 108,043
Book Value Per Share(1)........ 6.82 5.18 5.19 4.63 4.05
Equity-to-Assets Ratio(2)...... 8.17% 7.00% 7.57% 8.24% 7.83%
FINANCIAL PERFORMANCE:
Return on:
Beginning Equity............ 24.64% 18.62% 19.50% 19.04% 16.26%
Average Equity.............. 21.96% 17.90% 18.06% 17.81% 15.43%
Return on Average Assets....... 1.67% 1.39% 1.49% 1.49% 1.26%
CREDIT QUALITY:
Allowance for Credit Losses.... $ 19,152 $ 16,761 $ 14,888 $ 13,103 $ 13,608
Allowance/Total Loans.......... 1.82% 1.76% 1.79% 1.75% 1.92%
Total Non Performing Loans..... $ 966 $ 1,194 $ 8,925 $ 9,545 $ 26,030
Non Performing Loans/Total
Loans....................... 0.09% 0.13% 1.07% 1.27% 3.67%
Allowance/Non Performing
Loans....................... 1982.61% 1403.77% 166.81% 137.28% 52.28%
Net Charge-Offs................ $ 409 $ 827 $ 815 $ 3,315 $ 1,335
Net Charge-Offs/Average
Loans....................... 0.04% 0.10% 0.11% 0.46% 0.20%
REGULATORY CAPITAL RATIOS
Leverage Ratio................. 8.5% 7.7% 7.4% 7.8% 7.4%
Tier 1 Capital................. 13.2% 12.6% 12.4% 12.2% 11.1%
Total Capital.................. 14.4% 13.9% 13.6% 13.4% 12.3%
- ---------------
(1) All per share information has been retroactively adjusted to reflect the the
10% stock dividend declared December 20, 2000, as to holders of record on
January 5, 2001 and paid January 26, 2001, the 5-for-4 stock split declared
December 15, 1999, which became effective January 14, 2000, the 3-for-2
stock split declared in December 1997 which became effective in January
1998, and the 10% stock dividends paid in 1999, and 1997.
(2) Stockholders' equity divided by total assets.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE
RESULTS OF OPERATIONS.
Management's discussion and analysis is written to provide greater detail
of the results of operations and the financial condition of CVB Financial Corp.
and its subsidiaries. This analysis should be read in conjunction with the
audited financial statements contained within this report including the notes
thereto. Certain statements under this caption constitute "forward-looking
statements" under Section 27A of the 1934 Act and Section 21E of the 1934 Act
which involve risk and uncertainties. The Company's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include but are not limited to
economic conditions, competition in the geographic and business areas in which
the Company conducts its operations, fluctuations in interest rates, credit
quality and government regulation. For additional information concerning these
factors, see "Item 1. Business -- Factors that May Affect Future Results."
CVB Financial Corp. (referred to herein on an unconsolidated basis as "CVB"
and on a consolidated basis as the "Company") 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.
RECENT ACQUISITIONS
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 $34.7 million for the year ended
December 31, 2000. This represented an increase of $8.7 million, or 33.60%, over
net earnings of $26.0 million for the year ended December 31, 1999. Net earnings
for 1999 increased $1.8 million, or 7.64%, over net earnings of $24.1 million
for the year ended December 31, 1998. Diluted earnings per share were $1.23 in
2000, $0.93 in 1999, and $0.87 in 1998. Basic earnings per share were $1.26 in
2000, $0.96 in 1999, and $0.90 in 1998. 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, and 10% stock dividends paid in January 2001 and
January 1999.
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 2000 compared to 1999 was primarily the
result of an increase in net interest income and a decrease in other operating
expenses. The increase in earnings for 1999 compared to 1998 was the result of
an increase in net interest income and in other operating income. This increase
was partially offset by the increase in other operating expenses. Increased net
interest income for 2000 and 1999 reflected higher volumes of average earning
assets for each year.
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20
For 2000, the Company's return on average assets was 1.67%, compared to a
return on average assets of 1.39% for 1999, and of 1.49% for 1998. The Company's
return on average stockholders' equity was 21.96% for 2000, compared to a return
of 17.90% for 1999, and of 18.06% for 1998.
NET INTEREST INCOME
Table 1 presents information concerning the net interest income of the
Company.
2000 1999 1998
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
(AMOUNTS IN THOUSANDS)
ASSETS
Investment Securities
Taxable(1)..................... $ 721,681 $ 48,903 6.78% $ 686,076 $42,885 6.25% $ 539,408 $ 33,385 6.19%
Tax preferenced(2)............. 208,781 11,369 7.35% 122,280 5,663 6.50% 97,734 4,370 6.27%
Federal Funds Sold............... 2,850 195 6.84% 32,726 1,545 4.72% 63,219 3,360 5.31%
Loans (3) (4).................... 981,045 90,400 9.21% 866,917 78,385 9.04% 772,331 74,840 9.69%
---------- -------- ----- ---------- ------- ----- ---------- -------- -----
Total Earning Assets............. 1,914,357 150,867 8.09% 1,707,999 128,478 7.66% 1,472,692 115,955 7.99%
Total Non Earning Assets......... 157,198 154,107 144,208
---------- ---------- ----------
Total Assets..................... $2,071,555 $1,862,106 $1,616,900
========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Demand Deposits.................. $ 610,826 $ 593,789 $ 526,257
Savings Deposits(5).............. 526,019 $ 13,216 2.51% 532,272 $11,109 2.09% 487,968 $ 12,050 2.47%
Time Deposits.................... 361,172 19,478 5.39% 334,245 15,158 4.53% 309,120 15,901 5.14%
---------- -------- ----- ---------- ------- ----- ---------- -------- -----
Total Deposits................... 1,498,017 32,694 2.18% 1,460,306 26,267 1.80% 1,323,345 27,951 2.11%
---------- -------- ----- ---------- ------- ----- ---------- -------- -----
Other Borrowings................. 387,622 24,066 6.21% 230,532 12,199 5.29% 136,189 7,462 5.48%
---------- -------- ----- ---------- ------- ----- ---------- -------- -----
Interest Bearing Liabilities..... 1,274,813 56,760 4.45% 1,097,049 38,466 3.51% 933,277 35,413 3.79%
---------- ---------- ----------
Other Liabilities................ 28,001 26,239 23,795
Stockholders' Equity............. 157,915 145,029 133,571
---------- ---------- ----------
Total Liabilities and
Stockholders' Equity........... $2,071,555 $1,862,106 $1,616,900
========== ========== ==========
Net interest spread.............. 3.64% 4.15% 4.20%
Net interest margin.............. 5.12% 5.40% 5.57%
Net interest margin excluding
loan fees...................... 4.93% 5.18% 5.26%
- ---------------
(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:
2000, $3,794; 1999, $3,795; 1998, $4,864.
(4) Non performing loans are included in net loans as follows, (000)s omitted:
2000, $966; 1999, $1,194; 1998, $8,925.
(5) Includes interest bearing demand and money market accounts.
The Company's net interest income totaled $94.1 million for 2000. This
represented an increase of $4.1 million, or 4.55%, over net interest income of
$90.0 million for 1999. Net interest income for 1999 increased $9.5 million, or
11.76%, over net interest income of $80.5 million for 1998. The increases in net
interest income for 2000 and 1999 were primarily the result of greater average
balances of earning assets during each year.
The net interest margin measures net interest income as a percentage of
average earning assets. The net interest margin can be affected by changes in
the yield on earning assets and the cost of interest-bearing liabilities, as
well as changes in the level of interest-bearing liabilities in proportion to
earning assets. The net interest margin can also be affected by changes in the
mix of earning assets as well as the mix of interest-bearing liabilities. The
Company's tax effected (TE) net interest margin was 5.12% for 2000, compared to
5.40% for 1999, and 5.57% for 1998. A higher yield on average earning assets,
offset by a higher increase in the
19
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cost of average interest-bearing liabilities, contributed to the decrease in the
net interest margin for 2000. Also for 2000, a change in the mix of
interest-bearing liabilities toward higher costing funds was another element
contributing to the decrease in the net interest margin. Other borrowed funds as
a percent of interest-bearing liabilities increased from 21.01% to 30.41%. 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.
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 (TE) decreased to 3.64% for 2000, compared to
4.15% for 1999, and 4.20% for 1998. The decrease in the net interest spread for
2000 resulted from increases in the yield on earning assets offset by a larger
increase in the cost of average interest-bearing liabilities. 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 Company's net interest margin and net interest spread have been
decreasing which primarily reflects higher levels of investments, which have a
lower yield than loans, and a reduction in the net difference between loans and
deposits rates.
The yield (TE) on earnings assets increased to 8.09% for 2000, from 7.66%
for 1999, and 7.99% for 1998. The increase in the yield on earning assets for
2000 was the result of higher yields on both loans and investments. The decrease
in the yield on earning assets for 1999 reflects lower yields on loans. The
yield on average loans increased to 9.21% for 2000, compared to 9.04% for 1999.
The yield on loans for 1999 decreased compared to 9.69% for 1998. The increase
in the yields on loans for 2000 was primarily the result of an increased
interest rate environment partially offset by increased price competition for
loans compared to 1999. The decrease in the yields on loans for 1999 was the
result of increased price competition for loans compared to 1998. Loans
typically have higher yields than investments and federal funds sold. Total
average loans, measured as a percentage of average earning assets, increased to
51.25% for 2000, compared with 50.76% in 1999, and decreased compared to 52.44%
in 1998.
The cost of average interest-bearing liabilities increased to 4.45% for
2000, compared to 3.51% for 1999, and 3.79% for 1998. For the most part, the
increase in the cost of average interest-bearing liabilities for 2000 reflected
a higher interest rate environment and increased usage of other borrowed funds.
As a percentage of total average deposits, average non-interest-bearing (demand)
deposits increased to 40.78% for 2000, compared to 40.66% for 1999, and 39.77%
for 1998. 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.
Total interest income increased in 2000, 1999 and 1998. The increases were
primarily the result of increased balances of average earning assets. Interest
income totaled $150.9 million for 2000. This represented an increase of $22.4
million, or 17.43%, compared to total interest of $128.5 million for 1999. For
1999, total interest income increased $12.5 million, or 10.80%, from total
interest income of $116.0 million for 1998.
Interest expense totaled $56.76 million for 2000. This represented an
increase of $18.3 million, or 47.56%, over total interest expense of $38.5
million for 1999. For 1999, total interest expense increased $3.1 million, or
8.62%, over total interest expense of $35.4 million for 1998. For both 2000 and
1999, the increase in interest expense was the combined result of greater levels
of average interest-bearing liabilities and change in the mix toward higher
costing source of funds.
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22
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
2000 COMPARED TO 1999 1999 COMPARED TO 1998
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................... $2,336 $3,582 $ 196 $ 6,114 $ 9,079 $ 331 $ 90 $ 9,500
Tax preferenced securities..... 4,006 995 704 5,705 1,098 156 39 1,293
Federal funds.................. (1,505) 723 (663) (1,445) (1,621) (375) 181 (1,815)
Loans.......................... 10,320 1,498 197 12,015 9,166 (5,008) (613) 3,545
------- ------ ------- ------- ------- ------- ----- -------
Total earning assets..... 15,157 6,798 434 22,389 17,722 (4,896) (303) 12,523
------- ------ ------- ------- ------- ------- ----- -------
Interest Expense:
Savings deposits............... (131) 2,265 (27) 2,107 1,093 (1,865) (169) (941)
Time deposits.................. 1,221 2,868 231 4,320 1,293 (1,883) (153) (743)
Other borrowings............... 8,313 2,114 1,440 11,867 5,169 (255) (177) 4,737
------- ------ ------- ------- ------- ------- ----- -------
Total interest bearing
liabilities............ 9,403 7,247 1,644 18,294 7,555 (4,003) (499) 3,053
------- ------ ------- ------- ------- ------- ----- -------
Net Interest Income.............. $5,754 $ (449) $(1,210) $ 4,095 $10,167 $ (893) $ 196 $ 9,470
======= ====== ======= ======= ======= ======= ===== =======
Interest and fees on loans, the Company's primary source of revenue,
totaled $90.4 million for 2000. This represented an increase of $12.0 million,
or 15.33%, over interest and fees on loans of $78.4 million for 1999. For 1999,
interest and fees on loans increased $3.5 million, or 4.74%, over interest and
fees on loans of $74.8 million for 1998. The increase in interest and fees on
loans for 2000 and 1999 reflected increases in the average balance of loans and
for 2000, reflected a higher interest rate environment. The yield on loans
increased to 9.21% for 2000, compared to 9.04% for 1999 and decreased compared
to 9.69% for 1998. Deferred loan origination fees, net of costs, totaled $3.3
million at December 31, 2000. This represented a decrease of $260,000, or 7.29%,
from deferred loan origination fees, net of costs, of $3.6 million at December
31, 1999.
In general, the Company stops accruing interest on a non-performing loan
after its principal or interest becomes 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 non-performing loans at
December 31, 2000, 1999, and 1998. Had non-performing loans for which interest
was no longer accruing complied with the original terms and conditions of their
notes, interest income would have been $99,000 greater for 2000, $274,000
greater 1999, and $485,000 greater for 1998. Accordingly, yields on loans would
have increased by 0.01% for 2000, 0.03% for 1999, and 0.06% for 1998.
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 2000, $3.8 million for 1999 and $4.9 million for 1998.
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Table 3 summarizes loan fee activity for the Bank for the years indicated.
TABLE 3 -- LOAN FEE ACTIVITY
2000 1999 1998
------- ------- -------
(AMOUNTS IN THOUSANDS)
Fees Collected........................................ $ 3,535 $ 3,943 $ 4,808
Fees and costs deferred............................... (2,039) (2,984) (4,019)
Accretion of deferred fees and costs.................. 2,298 2,836 4,075
------- ------- -------
Total fee income reported................... $ 3,794 $ 3,795 $ 4,864
======= ======= =======
Deferred net loan origination fees at end of year..... $ 3,307 $ 3,566 $ 3,418
======= ======= =======
PROVISION FOR CREDIT LOSSES
The provision for credit losses totaled $2.8 million for 2000. This
represented an increase of $100,000, or 3.70%, from the provision for credit
losses of $2.7 million for 1999. For 1999, the provision for credit losses
increased $100,000, or 3.85%, from the provision for credit losses of $2.6
million for 1998. The increase in the provision for credit losses was primarily
due to the inherent risk and size of the Company's loan portfolio and the change
in the composition of the real estate mortgage, commercial and industrial and
agribusiness loans. See "Risk Management -- Credit Risk" herein.
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 banking, and other business
services. Also included in other operating income is 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 Ventures; and other revenues not included as interest
on earning assets.
Other operating income totaled $19.0 million for 2000. This represents an
increase of $393,000, or 2.11%, from other operating income of $18.6 million for
1999. During 1999, other operating income increased $871,000, or 4.9%, over
other operating income of $17.8 million for 1998. Service charges on deposit
accounts, which totaled $10.6 million, in 2000 and 1999, and $8.8 million in
1998. Contributing in part to the increase in other operating income in each
year was fee income from the Bank's Asset Management Division, (trust services)
which generated fees totaling $4.0 million in 2000, $3.7 million in 1999, and
$3.5 million in 1998. Investment Services which provides mutual funds,
certificate of deposit and other non-insured investment products, generated fees
totaling $1,316,000 in 2000, $921,000 in 1999, and $631,000 in 1998. The sale of
securities generated income (loss) totaling $(218,000) in 2000, $(80,000) in
1999, and $407,000 in 1998, while the sale of fixed assets added income (loss)
totaling $(19,000) in 2000, $(10,000) in 1999, and $684,000 in 1998.
Other operating income also includes revenue from Community, a subsidiary
of the Company. Total revenue from Community was approximately $107,000 in 2000,
$158,000 in 1999, and $222,000 in 1998. Ventures, a subsidiary of the Company,
had revenues of $41,000 in 2000 and reported no revenues in 1999, its year of
inception.
OTHER OPERATING EXPENSES
Other operating expenses for the Company includes expenses for salaries and
benefits, occupancy, equipment, stationary and supplies, professional services,
promotion, data processing, deposit insurance, other real estate owned, and
other expenses. Other operating expenses totaled $56.3 million for 2000. This
represents a decrease of $8.4 million, or 12.96%, from other operating expenses
of $64.7 million for 1999. Approximately, $3.6 million of the decrease in other
operating expenses in 2000 (including salaries and
22
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benefits and data processing expenses) is attributable to efficiencies derived
from economies of scale as a result of the merger with Orange National Bancorp.
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 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 the most part, other operating expenses reflect the direct expenses and
related administrative expenses associated with staffing, maintaining,
promoting, and operating branch facilities. 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 2.72% for 2000, compared
to a ratio of 3.48% for 1999, and 3.54% for 1998. 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, an indication of operating efficiency.
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 2000, other operating expenses, as a
percentage of total revenue was 49.81%, compared to a ratio of 59.59% for 1999
and a ratio of 58.17% for 1998. 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 indicates that a proportionately smaller amount of net
revenue was being allocated to operating expenses, an additional indication of
operating efficiency.
Salaries and related expenses comprise the greatest portion of other
operating expenses. Salaries and related expenses totaled $30.2 million for
2000. This represented an increase of $1.1 million, or 3.77%, over salaries and
related expenses of $29.1 million for 1999. Salary and related expenses
increased $303,000, or 1.05%, over salaries and related expenses of $28.8
million for 1998. The increases for both 2000 and 1999 primarily resulted from
increased staffing levels. Salaries and related expenses as a percent of average
assets decreased to 1.46% for 2000, compared to 1.56% for 1999, and 1.78% for
1998.
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 $5.4 million for 2000. This represented an
increase of $525,000, or 10.89%, over occupancy expense of $4.8 million for
1999. Occupancy expense for 1999 decreased $284,000, or 5.56%, from an expense
level of $5.1 million for 1998. Equipment expense totaled $5.0 million for 2000.
This represented an increase of $252,000, or 5.32%, over the $4.7 million
expense for 1999. For 1999, equipment expense increased $85,000, or 1.83%, from
an expense of $4.6 million for 1998.
Stationary and supplies expense totaled $3.7 million for 2000. This
represented an increase of $58,000, or 1.60%, over the expense of $3.6 million
for 1999. Stationary and supplies expense for 1999 increased $273,000, or 8.09%,
over the expense of $3.4 million for 1998.
Professional services totaled $3.0 million for 2000. This represented a
decrease of $332,000 or 10.85%, over an expense of $3.4 million for 1999. For
1999, professional services increased $86,000, or 2.60%, from an expense of $3.3
million for 1998.
Promotion expense totaled $2.7 million for 2000. This represented a
decrease of $167,000, or 5.81%, from an expense of $2.9 million for 1999.
Promotion expense increased for 1999 by $372,000, or 14.90%, over an expense of
$2.5 million for 1998.
Data processing expense totaled $1.4 million for 2000. This represented a
decrease of $929,000, or 39.47%, from an expense of $2.4 million for 1999 which
is attributable to efficiencies derived from economies
23
25
of scale as a result of the merger with Orange National Bancorp. Data processing
expense increased for 1999 by $424,000, or 21.99%, over an expense of $1.9
million for 1998. The increase for 1999 was partially the result of costs
associated with external processing and correspondent bank fees.
Other real estate owned (property foreclosed on and owned by the Company)
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 $90,000 for 2000.
This represented a decrease of $557,000, or 86.08%, from an expense level of
$647,000 for 1999. For 1999, other real estate owned expense decreased $564,000,
or 46.57%, over an expense level of $1.2 million for 1998. The decrease in the
expense for 2000 and 1999 compared to 1998 reflected the lower average balance
of other real estate owned for the most recent year.
Other expenses include the amortization of goodwill and intangibles. The
amortization expense of goodwill and intangibles totaled $1.2 million for 2000,
1999, and 1998.
INCOME TAXES
The Company's effective tax rate for 2000 was 35.8%. This compares to
effective tax rates of 37.0% for 1999, and 37.4% for 1998. 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 $2.3 billion at December 31, 2000.
This represented an increase of $297.2 million, or 14.78%, from total assets of
$2.0 billion at December 31, 1999. For 1999, total assets increased $169.7
million, or 9.22%, from total assets of $1.8 billion at December 31, 1998.
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, 2000 and 1999. At December
31, 2000, the Company reported total investment securities of $1.07 billion.
This represents an increase of $192.7 million, or 21.97%, over total investment
securities of $877.3 million at December 31, 1999. For 1999, investment
securities increased $90.5 million, or 11.50%, greater than total investment
securities of $786.8 million at December 31, 1998.
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, 2000, securities held as available-for-sale had a fair market
value of $1.07 billion, representing 100.00% of total investment securities with
an amortized cost of $1.06 billion. At December 31, 2000, the net unrealized
holding gain on securities available-for-sale was $11.7 million, and the
unrealized gain on investments available-for-sale, net of deferred taxes was
$6.8 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.
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LOANS
At December 31, 2000, the Company reported total loans, net of deferred
loan fees, of $1.05 billion. This represents an increase of $98.9 million, or
10.39%, over total loans of $952.6 million at December 31, 1999. For 1999, total
loans increased $120.4 million, or 14.46%, over total loans, net of deferred
loan fees of $832.2 million at December 31, 1998.
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,
------------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Commercial and Industrial.................. $ 425,130 $392,094 $287,518 $303,410 $285,547
Real Estate
Construction............................. 58,373 48,078 34,489 19,937 38,337
Mortgage................................. 401,408 375,387 385,393 308,460 284,374
Consumer, net of unearned discount......... 22,642 24,731 28,996 28,031 29,832
Municipal Lease Finance Receivables........ 23,633 21,268 22,923 24,008 19,825
Agribusiness(1)............................ 123,614 94,560 76,283 69,404 55,486
---------- -------- -------- -------- --------
Gross Loans.............................. 1,054,800 956,118 835,602 753,250 713,401
---------- -------- -------- -------- --------
Less:
Allowance for Credit Losses.............. 19,152 16,761 14,888 13,103 13,608
Deferred Loan Fees....................... 3,307 3,566 3,418 3,474 4,116
---------- -------- -------- -------- --------
Total Net Loans.................. $1,032,341 $935,791 $817,296 $736,673 $695,677
========== ======== ======== ======== ========
- ---------------
(1) Included as Commercial and Industrial and Real Estate Mortgage loans above
are loans totaling $59.1 million for 2000, $42.9 million for 1999, $34.6
million for 1998, $27.9 million for 1997, $22.7 million for 1996, that
represent loans to agricultural concerns for commercial or real estate
purposes.
Commercial and industrial loans are loans to commercial entities to finance
capital purchases or improvements, or to provide cash flow for operations. Real
estate loans are loans secured by conforming first trust deeds on real property,
including property under construction, commercial property and single family and
multifamily residences. Consumer loans include installment loans to consumers as
well as home equity loans 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.
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Table 5 provides the maturity distribution for commercial and industrial
loans, real estate construction loans and agribusiness loans as of December 31,
2000. 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, 2000
AFTER ONE
BUT
WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- --------
(AMOUNTS IN THOUSANDS)
Types of Loans:
Commercial and industrial(1)........................ $126,737 $194,928 $480,266 $801,931
Construction........................................ 56,756 0 1,692 58,448
Agribusiness........................................ 117,045 6,569 0 123,614
-------- -------- -------- --------
$300,538 $201,497 $481,958 $983,993
======== ======== ======== ========
Amount of Loans based upon:
Fixed Rates......................................... $ 46,689 $149,163 $364,017 $559,869
Floating or adjustable rates........................ 253,849 52,334 117,941 424,124
-------- -------- -------- --------
$300,538 $201,497 $481,958 $983,993
======== ======== ======== ========
- ---------------
(1) Includes approximately $375.0 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, 2000, 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.
NON-PERFORMING ASSETS
At December 31, 2000, non-performing assets, which included non-performing
loans (nonaccrual loans, loans 90 days or more past due and still accruing
interest, and restructured loans) (see CREDIT RISK) and other real estate owned,
totaled $1.3 million. This represented a decrease of $572,000, or 30.15%,
compared to non-performing assets of $1.9 million at December 31, 1999. For
1999, total non-performing assets decreased $9.1 million, or 82.80%, from total
non-performing assets of $11.0 million at December 31, 1998. The decrease in
non-performing assets for 2000 compared to 1999 resulted as balances of other
real estate owned and nonaccrual loans decreased during the year. The decrease
in non-performing assets for 1999 reflected the decrease in nonaccrual loans and
other real estate owned.
At December 31, 2000, the Company had loans on which interest was no longer
accruing (nonaccrual) totaling $966,000. This represented a decrease of
$225,000, or 18.89%, from total nonaccrual loans of $1.2 million at December 31,
1999. For 1999, total nonaccrual loans decreased $7.7 million, or 86.54%, over
total nonaccrual loans of $8.8 million at December 31, 1998. The Bank has
allocated specific reserves included in the allowance for credit losses for
potential losses on these loans.
26
28
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, 2000, and 1999 the Company had no loans
that were classified as restructured.
Although management believes that non-performing 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 non-performing loans and other real
estate owned at the dates indicated.
TABLE 6 -- NON-PERFORMING ASSETS
DECEMBER 31,
---------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------- ------- -------
(AMOUNTS IN THOUSANDS)
Nonaccrual loans................................... $ 966 $1,191 $ 8,849 $ 6,402 $20,028
Loans past due 90 days or more..................... 0 3 76 1,051 628
Restructured loans................................. 0 0 0 2,092 5,374
Other real estate owned (OREO)..................... 359 703 2,102 4,521 8,642
------ ------ ------- ------- -------
Total nonperforming assets............... $1,325 $1,897 $11,027 $14,066 $34,672
====== ====== ======= ======= =======
Percentage of nonperforming assets to total loans
outstanding & OREO............................... 0.13% 0.20% 1.32% 1.86% 4.85%
====== ====== ======= ======= =======
Percentage of nonperforming assets to total
assets........................................... 0.06% 0.09% 0.60% 0.94% 2.51%
====== ====== ======= ======= =======
Except for non-performing loans as set forth in Table 6 and loans disclosed
as impaired, (see "Risk Management - Credit Risk" herein) the Bank's management
is not aware of any loans as of December 31, 2000 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 non-performing 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, 2000, the net book value of the properties held, as other
real estate owned totaled $359,000. This represented a decrease of $344,000, or
48.93%, from other real estate owned of $703,000 at December 31, 1999. 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, 2000, no
assurances can be given that further charges to earnings may not occur if real
estate values decrease or the Bank cannot promptly dispose of the properties
held.
DEPOSITS
The Company reported total deposits of $1.60 billion at December 31, 2000.
This represented an increase of $94.0 million, or 6.26%, over total deposits of
$1.50 billion at December 31, 1999. During 1999, total deposits increased $25.4
million, or 1.72%, over total deposits of $1.48 billion at December 31, 1998.
Non-interest-bearing demand deposits totaled $665.3 million at December 31,
2000. This represented an increase of $15.5 million, or 2.38%, over total
non-interest-bearing demand deposits of $649.8 million at December 31, 1999. For
1999, total non-interest-bearing demand deposits increased $11.1 million, or
1.74%, over non-interest-bearing demand deposits of $638.7 million at December
31, 1998. Non-interest-bearing deposits represented 41.71% of total deposits as
of December 31, 2000 and 43.29% of total deposits as of December 31, 1999.
27
29
Table 7 provides the remaining maturities of large denomination ($100,000
or more) time deposits, including public funds, at December 31, 2000.
TABLE 7 -- MATURITY DISTRIBUTION OF LARGE DENOMINATION TIME DEPOSITS
(AMOUNTS IN THOUSANDS)
3 months or less........................................... $213,708
Over 3 months through 6 months............................. 70,496
Over 6 months through 12 months............................ 23,004
Over 12 months............................................. 3,216
--------
Total............................................ $310,424
========
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, 2000, borrowed funds totaled $486 million. This represented
an increase of $163 million, or 50.46%, from total borrowed funds of $323
million at December 31, 1999. For 1999, total borrowed funds increased $123
million, or 61.50%, from a balance of $200 million at December 31, 1998. The
maximum outstanding at any month-end was $486 million during 2000, $323 million
during 1999, and $200 million during 1998.
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 $188.6 million at December 31, 2000. This
represented an increase of $47.9 million, or 34.00%, over total stockholders'
equity of $140.8 million at December 31, 1999. For 1999, total stockholders'
equity increased $1.3 million, or 0.96%, over total stockholders' equity of
$139.4 million at December 31, 1998.
Tier 1 capital, stockholders' equity less intangible assets, was $174.4
million at December 31, 2000. This represented an increase of $25.7 million, or
17.29%, over total Tier 1 capital of $148.7 million at December 31, 1999. For
1999, Tier 1 capital increased $20.3 million, or 15.78%, over Tier 1 capital of
$128.4 million at December 31, 1998. Total adjusted capital, Tier 1 capital plus
the lesser of the allowance for credit losses or 1.25% of risk-weighted assets,
was $191.1 million at December 31, 2000. This represented an increase of $27.5
million, or 16.82%, over adjusted capital of $163.6 million at December 31,
1999. For 1999, adjusted capital increased $22.7 million, or 16.15%, over total
adjusted capital of $140.8 million at December 31, 1998.
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.
28
30
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, 2000, and 1999, the Company exceeded all of the minimum
capital ratios required to be considered well-capitalized. At December 31, 2000,
the Company's total risk-based capital ratio was 14.4%, compared to a ratio of
13.9% at December 31, 1999. The ratio of Tier 1 capital to risk-weighted assets
was 13.2% at December 31, 2000, compared to a ratio of 12.6% at December 31,
1999. At December 31, 2000, the Company's leverage ratio was 8.5%, compared to a
ratio of 7.7% at December 31, 1999. (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, 2000, the Company
had an unrealized gain on investment securities net of taxes of $6.8 million,
compared to a loss net of taxes of $16.4 million at December 31, 1999.
During 1998, the Company announced its intention to re-purchase some of its
outstanding common stock. The Company re-purchased 126,100 in 1998, as adjusted
for a stock split and dividend in 1998, 1999, and 2000, of its outstanding
shares at average price of $15.131 per share for an aggregate cost of $1.9
million.
During 2000, the Board of Directors of the Company declared quarterly cash
dividends that totaled $0.45 per share for the full year after retroactive
adjustment of a 10% stock dividend declared on December 20, 2000. 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. Credit risk arises through the
extension of loans and leases, certain securities, and letters of credit.
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 quality of the bond.
Limitations on industry concentration, aggregate customer borrowings, geographic
boundaries and standards on loan quality also are designed to reduce loan credit
risk. 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.
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, and unused
commitments to provide financing, including commitments under commercial and
standby letters of credit.
The allowance for credit losses is based upon estimates of probable losses
inherent in the loan and lease portfolio. The nature of the process by which the
Company determines the appropriate allowance for credit
29
31
losses requires the exercise of considerable judgment. The amount actually
observed in respect of these losses can vary significantly from the estimated
amounts. The Company's methodology includes two major elements, which are
intended to reduce the differences between estimated and actual losses.
The Company's methodology for assessing the appropriateness of the
allowance consists of two key elements. The first element is the allocated
portion of the allowance, which includes specific allowances for identified
problem loans, and a loan portfolio formula allowance. The second element is the
unallocated allowance, which supplements the allocated portion. The unallocated
allowance includes management's judgmental determination of the amounts
necessary for concentrations, economic uncertainties and other subjective
factors; correspondingly, the relationship of the unallocated allowance to the
total allowance may fluctuate from period to period.
In the case of the portfolio formula allowance, homogeneous portfolios,
such as small business lending, consumer loans, and real estate loans, are
aggregated or pooled in determining the appropriate allowance. The risk
assessment process in this case emphasizes trends in the different portfolios
for delinquency, loss, and other behavioral characteristics of the subject
portfolios.
Central to the Company's credit risk management is its loan risk rating
system. The originating credit officer assigns borrowers an initial risk rating,
which is based primarily on a thorough analysis of each borrower's financial
capacity in conjunction with industry and economic trends. Approvals are made
based upon the amount of inherent credit risk specific to the transaction and
are reviewed for appropriateness by senior line and credit administration
personnel. Credits are monitored by line and credit administration personnel for
deterioration in a borrower's financial condition, which would impact the
ability of the borrower to perform under the contract. Risk ratings are adjusted
as necessary.
Based on the risk rating system 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 portfolio 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 non-performing loans expected
to result from existing conditions),
- collateral values,
- loan volumes and concentrations,
- seasoning of the loan portfolio,
- specific industry conditions within portfolio segments,
- recent loss experience in particular segments of the portfolio,
30
32
- 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. Management may add certain adjustments
to ensure that a prudent amount of conservatism is present. Although management
has allocated a portion of the allowance to specific loan categories, the
adequacy of the allowance must be considered in its entirety.
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, 2000, the Company reported an allowance for credit losses
of $19.2 million. This represented an increase of $2.4 million or 14.26%, from
the allowance for credit losses of $16.8 million at December 31, 1999. For 1999,
the allowance for credit losses increased $1.9 million or 12.58%, from a balance
of $14.9 million at December 31, 1998.
At December 31, 2000, the Company had loans classified as impaired (see
"Risk Management") totaling $15.2 million. This represents an increase of $11.9
million, or 368.2% compared to loans classified impaired of $3.2 million at
December 31, 1999.
Of the total $19.2 million reserve for credit losses at December 31, 2000,
$14.1 million, or 73.75%, represented the allocated allowance and $5.0 million
or 26.25% represented the unallocated portion. As of December 31, 1999 these
amounts were $10.4, or 61.99% in allocated and $6.4, or 38.01% in unallocated.
At December 31, 2000, the Company had loans classified as impaired totaling
$15.2 million. This represents an increase of $11.9 million, or 368.2% compared
to loans classified impaired of $3.2 million at December 31, 1999. For 1999,
impaired loans decreased $7.8 million, or 70.52% from impaired loans of $11.0
million at December 1998. Impaired loans, measured as a percent of gross loans
equaled 1.44%, 0.34%, and 1.32%, at December 31, 2000, 1999, and 1998
respectively.
Non-performing loans totaled $966,000 at December 31, 2000. This
represented a decrease of $228,000 or 19.10%, from non-performing loans of $1.2
million at December 31, 1999. For 1999, non-performing loans decreased $7.7
million, or 86.62%, from non-performing loans of $8.9 million at December 31,
1998. Non-performing loans, measured as a percent of gross loans, equaled 0.09%,
0.13%, and 1.07%, at December 31, 2000, 1999, and 1998, respectively.
The decrease in non-performing loans for 2000 was the result of a decrease
in nonaccrual loans. Nonaccrual loans decreased $225,000, or 18.89%, to $966,000
at December 31, 2000, from $1.2 million at December 31, 1999. The decrease in
non-performing loans between December 31, 1999 and 1998 was the result of a $7.7
million, or 86.54%, reduction in nonaccrual loans.
For 2000, the Company charged $409,000 of loans net of recoveries to the
allowance for credit losses. This represented a decrease of $418,000, or 50.54%
from 1999, in which the Company charged $827,000 of
31
33
loans net of recoveries to the allowance for credit losses. This represented an
increase of $12,000, or 1.47%, from net charges to the allowance for credit
losses of $815,000 for 1998.
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
AS OF AND FOR YEARS ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Amount of Total Loans at End of
Period(1)......................... $1,051,493 $952,552 $832,184 $749,776 $709,285
========== ======== ======== ======== ========
Average Total Loans
Outstanding(1).................... $ 981,045 $866,917 $772,331 $718,431 $662,195
========== ======== ======== ======== ========
Allowance for Credit Losses at
Beginning of Period............... $ 16,761 $ 14,888 $ 13,103 $ 13,608 $ 11,139
Loans Charged-Off:
Real Estate....................... 559 483 707 3,158 1,559
Commercial, Financial and
Industrial..................... 193 522 373 371 452
Agribusiness...................... 0 0 0 0 0
Municipal Lease Finance
Receivables.................... 0 0 0 0 0
Consumer Loans.................... 22 18 61 143 125
---------- -------- -------- -------- --------
Total Loans Charged-Off... 774 1,023 1,141 3,672 2,136
---------- -------- -------- -------- --------
Recoveries:
Real Estate Loans................. 139 6 161 44 572
Commercial, Financial and
Industrial..................... 221 184 150 295 210
Agribusiness...................... 0 0 0 0 0
Municipal Lease Finance
Receivables.................... 0 0 0 0 0
Consumer Loans.................... 5 6 15 18 19
---------- -------- -------- -------- --------
Total Loans Recovered..... 365 196 326 357 801
---------- -------- -------- -------- --------
Net Loans Charged-Off............... 409 827 815 3,315 1,335
---------- -------- -------- -------- --------
Provision Charged to Operating
Expense........................... 2,800 2,700 2,600 2,810 3,093
---------- -------- -------- -------- --------
Adjustments Incident to Mergers..... 0 0 0 0 711
---------- -------- -------- -------- --------
Allowance for Credit Losses at End
of period......................... $ 19,152 $ 16,761 $ 14,888 $ 13,103 $ 13,608
========== ======== ======== ======== ========
Net Loans Charged-Off to Average
Total Loans....................... 0.04% 0.10% 0.11% 0.46% 0.20%
Net Loans Charged-Off to Total Loans
at End of Period.................. 0.04% 0.09% 0.10% 0.44% 0.19%
Allowance for Credit Losses to
Average Total Loans............... 1.95% 1.93% 1.93% 1.82% 2.05%
Allowance for Credit Losses to Total
Loans at End of Period............ 1.82% 1.76% 1.79% 1.75% 1.92%
Net Loans Charged-Off to Allowance
for Credit Losses................. 2.14% 4.93% 5.47% 25.30% 9.81%
Net Loans Charged-Off to Provision
for Credit Losses................. 14.61% 30.63% 31.35% 117.97% 43.16%
- ---------------
(1) Net of deferred loan origination fees.
The Company's management believes that the allowance for credit losses at
December 31, 2000 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, non-performing loans
32
34
or net loan charge-offs that would increase the provision for credit losses and
thereby adversely affect the results of operations. There is no precise method
of predicting specific losses that ultimately may be charged against the
allowance for credit losses.
Table 9 provides a summary of the allocation of the allowance for credit
losses for specific loan categories at the dates indicated. The allocations
presented should not be interpreted as an indication that loans charged to the
allowance for credit losses will occur in these amounts or proportions, or that
the portion of the allowance allocated to each loan category represents the
total amount available for future losses that may occur within these categories.
TABLE 9 -- ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- ---------------------
ALLOWANCE ALLOWANCE ALLOWANCE
FOR % OF FOR % OF FOR % OF
CREDIT TOTAL CREDIT TOTAL CREDIT TOTAL
LOSSES ALLOWANCE LOSSES ALLOWANCE LOSSES ALLOWANCE
--------- --------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS)
Real Estate.......... $10,037 52.4% $ 466 2.8% $ 1,942 13.0%
Commercial and
Industrial......... 4,021 21.0% 9,794 58.4% 6,867 46.2%
Consumer............. 67 0.4% 130 0.8% 155 1.0%
Unallocated.......... 5,027 26.2% 6,371 38.0% 5,924 39.8%
------- ----- ------- ----- ------- -----
Total........ $19,152 100.0% $16,761 100.0% $14,888 100.0%
======= ===== ======= ===== ======= =====
DECEMBER 31,
---------------------------------------------
1997 1996
--------------------- ---------------------
ALLOWANCE ALLOWANCE
FOR % OF FOR % OF
CREDIT TOTAL CREDIT TOTAL
LOSSES ALLOWANCE LOSSES ALLOWANCE
--------- --------- --------- ---------
(AMOUNTS IN THOUSANDS)
Real Estate.......... $ 1,563 11.9% $ 1,363 10.0%
Commercial and
Industrial......... 6,405 48.9% 8,137 59.8%
Consumer............. 139 1.1% 184 1.4%
Unallocated.......... 4,996 38.1% 3,924 28.8%
------- ----- ------- -----
Total........ $13,103 100.0% $13,608 100.0%
======= ===== ======= =====
MARKET RISK
In the normal course of its business activities, the Company is exposed to
market risks including price and liquidity risk. Market risk is the potential of
loss from adverse changes in market rates and prices, such as interest rates
(interest rate risk). Liquidity risk arises from the possibility that the
Company may not be able to satisfy current or future commitments or that the
Company may be more reliant on alternative funding sources such as long-term
debt. Financial products that expose the Company to market risk includes
securities, loans, deposits, debt, and derivative financial instruments.
33
35
The table below provides the actual balances as of December 31, 2000 of
interest-earning assets (net of deferred loan fees and allowance for credit
losses) and interest-bearing liabilities, including the average rate earned or
paid for 2000, 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
---------------------------------------------------------------------------
FIVE YEARS ESTIMATED
BALANCE AVERAGE AND FAIR
DECEMBER 31, RATE ONE YEAR TWO YEARS THREE YEARS FOUR YEARS BEYOND VALUE
------------ ------- ---------- --------- ----------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
2000
Interest-Earning Assets
Investment securities
available-for-sale..... $1,070,074 6.49% $ 32,274 $ 1,010 $ 8,857 $21,449 $1,006,484 $1,070,074
Loans and lease finance
receivables, net....... 1,032,341 9.23% 303,142 36,256 46,858 42,003 604,082 1,036,548
---------- ---------- ------- ------- ------- ---------- ----------
Total interest
earning
assets......... $2,102,415 $ 335,416 $37,266 $55,715 $63,452 $1,610,566 $2,106,622
========== ========== ======= ======= ======= ========== ==========
Interest-Bearing
Liabilities
Interest-bearing
deposits............... $ 929,740 3.69% $ 921,636 $ 5,869 $ 951 $ 519 $ 765 $ 929,448
Demand note to U.S.
Treasury............... 11,234 4.49% 11,234 11,234
Short-term borrowings.... 486,000 6.26% 461,000 25,000 0 486,000
---------- ---------- ------- ------- ------- ---------- ----------
Total interest-
bearing
liabilities.... $1,426,974 $1,393,870 $30,869 $ 951 $ 519 $ 765 $1,426,682
========== ========== ======= ======= ======= ========== ==========
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.
34
36
Table 10 provides the Bank's maturity/repricing gap analysis at December
31, 2000, and 1999. The Bank had a negative cumulative 180 day gap of $812.0
million at December 31, 2000. This represented an increase of $257.3 million, or
46.38%, over the 180 day cumulative negative gap of $554.7 million at December
31, 1999. In theory, this would indicate that at December 31, 2000, $812.0
million more in liabilities than assets would re-price if there was a change in
interest rates over the next 180 days. If interest rates increase, the negative
gap would tend to result in a lower net interest margin. If interest rates
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)
2000
Earning Assets:
Investment Securities at carrying
value................................. $ 56,427 $ 18,270 $ 44,850 $ 950,527
Total Loans.............................. 414,907 38,707 80,981 520,205
---------- --------- --------- ----------
Total............................ $ 471,334 $ 56,977 $ 125,831 $1,470,732
Interest Bearing Liabilities
Savings Deposits......................... $ 519,994 $ 0 $ 0 $ 0
Time Deposits............................ 260,931 98,363 42,368 8,083
Other Borrowings......................... 436,000 25,000 0 25,000
---------- --------- --------- ----------
Total............................ 1,216,925 123,363 42,368 33,083
---------- --------- --------- ----------
Period GAP................................. $ (745,591) $ (66,386) $ 83,463 $1,437,649
========== ========= ========= ==========
Cumulative GAP............................. $ (745,591) $(811,977) $(728,514) $ 709,135
========== ========= ========= ==========
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
========== ========= ========= ==========
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, 2000 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 $728.6 million or 68.84% of the total investment portfolio at
December 31, 2000 consisted of securities backed by mortgages. The final
maturity of these securities can be affected by the speed at which the
underlying mortgages repay. Mortgages tend to repay faster as interest rates
fall, and slower as interest rates rise. As a result, the Bank may be subject to
a "prepayment risk" resulting from greater funds available for reinvestment at a
time when available yields are lower. Conversely, the Bank may be subject to
"extension
35
37
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, 2000:
ESTIMATED NET
SIMULATED INTEREST INCOME
RATE CHANGES SENSITIVITY
------------ ---------------
+200 basis points...................................... (3.52%)
- -200 basis points...................................... 4.71%
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.
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 $42.8 million for 2000,
$40.8 million for 1999, and $32.4 million for 1998. The increase for 2000
compared to 1999 and 1998 was primarily the result of the increase in net income
during each year.
Cash used for investing activities totaled $262.0 million for 2000,
compared to $255.6 million for 1999, and $361.4 million for 1998. The funds used
for investing activities primarily represented increases in
36
38
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 $241.2 million for 2000,
compared to $158.2 million for 1999, and $315.2 million for 1998. For 2000, cash
flows from financing activities resulted from increased short-term borrowing and
to a lesser extent from money market, savings deposits and time deposits. For
1999, cash flows from financing activities resulted from increased
non-interest-bearing demand deposits and short-term borrowings.
At December 31, 2000, cash and cash equivalents totaled $140.3 million.
This represented an increase of $22.0 million, or 18.55%, from a total of $118.4
million at December 31, 1999.
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 loans to deposit ratio the less liquid are the Bank's assets. For
2000, the Bank's loan to deposit ratio averaged 65.49%, compared to an average
ratio of 59.37% for 1999, and a ratio of 58.51% for 1998.
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, 2000, approximately $62.0 million of the
Bank's equity was unrestricted and available to be paid as dividends to CVB.
Management of CVB believes that such restrictions will not have an impact on the
ability of CVB to meet its ongoing cash obligations. As of December 31, 2000,
neither the Bank nor CVB had any material commitments for capital expenditures.
Accounting Changes
In September 2000, the Financial Accounting Standards Board ("FASB") issued
a Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,"
effective for transfers of financial assets commencing April 1, 2001 and for
disclosures relating to securitization transaction and collateral for fiscal
years ending after December 15, 2000. The standards are based on consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. Management believes that the
adoption of this statement will not have a material impact on the Company's
consolidated financial statement.
In June 1999, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for financial statements for
periods beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement was adopted
during the year ended December 31, 1999, with an immaterial impact on the
Company's consolidated financial statements.
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.
37
39
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, 2000 and
1999................................................... 42
Consolidated Statements of Earnings Years Ended December
31, 2000, 1999 and 1998................................ 43
Consolidated Statements of Stockholders' Equity Year Ended
December 31, 2000, 1999 and 1998....................... 44
Consolidated Statements of Cash Flows Years Ended December
31, 2000, 1999 and 1998................................ 46
Notes to Consolidated Financial Statements................ 47
Independent Auditors' Report................................ 65
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
38
40
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 2000" 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.
39
41
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 54 for a
list of financial statements filed as part of this Report.
EXHIBITS
See Index to Exhibits at Page 80 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 as management contracts or compensatory plans: 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; 2000 Stock Option Plan, Exhibit 10.18;
Severance Compensation Agreement dated March 21, 2001 with Edwin J. Pomplun,
Exhibit 10.29; Severance Compensation Agreement dated March 21, 2001 with Frank
Basirico, Exhibit 10.30; Severance Compensation Agreement dated March 21, 2001
with Jay Coleman, Exhibit 10.31, and Severance Compensation Agreement dated
March 21, 2001 with Edward Biebrich, Exhibit 10.35.
REPORTS ON FORM 8-K
None
40
42
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 21st day of
March, 2001.
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 21, 2001
- -----------------------------------------------------
George A. Borba
/s/ JOHN A. BORBA Director March 21, 2001
- -----------------------------------------------------
John A. Borba
/s/ RONALD O. KRUSE Director March 21, 2001
- -----------------------------------------------------
Ronald O. Kruse
Director March 21, 2001
- -----------------------------------------------------
John J. LoPorto
/s/ JAMES C. SELEY Director March 21, 2001
- -----------------------------------------------------
James C. Seley
/s/ SAN E. VACCARO Director March 21, 2001
- -----------------------------------------------------
San E. Vaccaro
/s/ EDWARD J. BIEBRICH, JR. Chief Financial Officer March 21, 2001
- ----------------------------------------------------- (Principal Financial and
Edward J. Biebrich, Jr. Accounting Officer)
/s/ D. LINN WILEY Director, President and March 21, 2001
- ----------------------------------------------------- Chief Executive Officer
D. Linn Wiley (Principal Executive
Officer)
41
43
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
ASSETS
2000 1999
---------- ----------
Federal funds sold.......................................... $ 10,000 $
Investment securities available for sale (Note 2)......... 1,070,074 877,332
Loans and lease finance receivables, net (Notes 3, 4, and
5)..................................................... 1,032,341 935,791
---------- ----------
Total earning assets.............................. 2,112,415 1,813,123
Cash and due from banks................................... 130,315 118,360
Premises and equipment, net (Note 6)...................... 27,206 27,726
Other real estate owned, net (Note 5)..................... 359 703
Deferred taxes (Note 7)................................... 4,148 20,941
Goodwill.................................................. 7,403 8,452
Cash value of life insurance.............................. 7,434 6,793
Accrued interest receivable............................... 14,625 11,454
Other assets.............................................. 4,091 3,205
---------- ----------
Total............................................. $2,307,996 $2,010,757
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 8):
Noninterest-bearing.................................... $ 665,290 $ 649,821
Interest-bearing....................................... 929,740 851,252
---------- ----------
Total deposits.................................... 1,595,030 1,501,073
Demand note to U.S. Treasury.............................. 11,234 16,951
Short-term borrowings (Note 9)............................ 486,000 323,000
Accrued interest payable.................................. 6,742 5,341
Other liabilities (Notes 7, 11, and 19)................... 20,360 23,622
---------- ----------
Total liabilities................................. 2,119,366 1,869,987
---------- ----------
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, 27,659,452 (2000) and
24,716,832 (1999)...................................... 145,648 105,304
Retained earnings......................................... 36,179 51,857
Accumulated other comprehensive income (loss), net of tax
(Note 2)............................................... 6,803 (16,391)
---------- ----------
Total stockholders' equity........................ 188,630 140,770
---------- ----------
Total............................................. $2,307,996 $2,010,757
========== ==========
See accompanying notes to consolidated financial statements.
42
44
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE YEARS ENDED DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
2000 1999 1998
-------- -------- --------
Interest Income:
Loans, including fees.................................... $ 90,400 $ 78,385 $ 74,840
-------- -------- --------
Investment securities:
Taxable............................................... 48,901 42,885 33,385
Tax-advantaged........................................ 11,369 5,663 4,370
-------- -------- --------
60,270 48,548 37,755
-------- -------- --------
Federal funds sold....................................... 197 1,545 3,360
-------- -------- --------
Total interest income............................ 150,867 128,478 115,955
-------- -------- --------
Interest Expense:
Deposits (Note 8)........................................ 32,694 26,267 27,951
Other borrowings......................................... 24,066 12,199 7,462
-------- -------- --------
Total interest expense........................... 56,760 38,466 35,413
-------- -------- --------
Net interest income before provision for credit losses..... 94,107 90,012 80,542
Provision for credit losses (Note 5)....................... 2,800 2,700 2,600
-------- -------- --------
Net interest income after provision for credit losses...... 91,307 87,312 77,942
-------- -------- --------
Other Operating Income:
Service charges on deposit accounts...................... 10,573 10,558 8,810
Trust services........................................... 4,038 3,748 3,472
Other.................................................... 4,412 4,324 5,477
-------- -------- --------
Total other operating income..................... 19,023 18,630 17,759
-------- -------- --------
Other Operating Expenses:
Salaries, wages, and employee benefits (Notes 11, 12, and
14)................................................... $ 30,239 $ 29,141 $ 28,838
Occupancy (Note 10)...................................... 5,350 4,825 5,109
Equipment................................................ 4,981 4,730 4,645
Stationery and supplies.................................. 3,705 3,647 3,374
Professional services.................................... 3,059 3,391 3,305
Promotion................................................ 2,702 2,869 2,497
Data processing.......................................... 1,424 2,352 1,928
Deposit insurance premiums............................... 318 210 220
Other real estate owned expense (Note 5)................. 90 647 1,211
Acquisition costs (Note 19).............................. 4,856
Other.................................................... 4,477 8,069 6,054
-------- -------- --------
Total other operating expenses................... 56,345 64,737 57,181
-------- -------- --------
Earnings before income taxes............................... 53,985 41,205 38,520
Income taxes (Note 7)...................................... 19,302 15,245 14,403
-------- -------- --------
Net earnings............................................... $ 34,683 $ 25,960 $ 24,117
======== ======== ========
Basic earnings per common share (Note 13).................. $ 1.26 $ 0.96 $ 0.90
======== ======== ========
Diluted earnings per common share (Note 13)................ $ 1.23 $ 0.93 $ 0.87
======== ======== ========
See accompanying notes to consolidated financial statements.
43
45
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 2000
(DOLLARS AND SHARES IN THOUSANDS)
ACCUMULATED
OTHER
COMMON COMPREHENSIVE
SHARES COMMON RETAINED INCOME (LOSS), COMPREHENSIVE
OUTSTANDING STOCK EARNINGS NET OF TAX INCOME
----------- -------- -------- -------------- -------------
BALANCE, JANUARY 1, 1998............. 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)
Issuance of common stock........... 428 2,347
10% stock dividend................. 2,514 37,997 (37,997)
Tax benefit from exercise of stock
options......................... 26
Cash dividends..................... (12,390)
Comprehensive income:
Net earnings.................... 34,683 $ 34,683
Other comprehensive income --
Unrealized gains on securities
available for sale, net.... 23,194 23,194
--------
Comprehensive income....... $ 57,877
------ -------- -------- -------- ========
BALANCE, DECEMBER 31, 2000........... 27,659 $145,648 $ 36,179 $ 6,803
====== ======== ======== ========
See accompanying notes to consolidated financial statements.
44
46
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
2000 1999 1998
-------- -------- ------
DISCLOSURE OF RECLASSIFICATION AMOUNT:
Unrealized holding gains (losses) on securities arising
during the period......................................... $ 40,157 $(30,848) $1,468
Tax (expense) benefit....................................... (17,103) 13,058 (600)
Less:
Reclassification adjustment for losses (gains) on
securities included in net income...................... 217 80 (407)
Reclassification adjustment for losses included in net
earnings for securities transferred.................... 35
Add --
Tax (benefit) expense on reclassification adjustments..... (77) (29) 135
-------- -------- ------
Net unrealized gain (loss) on securities.................... $ 23,194 $(17,739) $ 631
======== ======== ======
See accompanying notes to consolidated financial statements.
45
47
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received........................................... $ 152,898 $ 133,128 $ 110,980
Service charges and other fees received..................... 18,795 19,121 21,320
Interest paid............................................... (55,359) (37,799) (34,228)
Cash paid to suppliers and employees........................ (50,805) (56,307) (51,230)
Income taxes paid........................................... (22,762) (17,301) (14,468)
--------- --------- ---------
Net cash provided by operating activities........... 42,767 40,842 32,374
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale........ 139,040 30,249 96,187
Proceeds from maturities of securities available for sale... 102,649 165,126 154,837
Proceeds from maturities of securities held to maturity..... 1,018 7,487
Purchases of securities available for sale.................. (399,696) (320,357) (524,817)
Purchases of securities held to maturity.................... (9,550) (14,317)
Net increase in loans....................................... (99,760) (122,990) (85,329)
Proceeds from sale of other real estate owned............... 994 2,262 5,401
Proceeds from sale of premises and equipment................ 32 67 2,204
Purchases of premises and equipment......................... (4,201) (4,066) (4,507)
Other investing activities.................................. (1,067) 2,607 1,408
--------- --------- ---------
Net cash used in investing activities............... (262,009) (255,634) (361,446)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits and money
market and savings accounts............................... 14,500 18,650 144,777
Net increase in time certificates of deposit................ 79,457 6,784 36,375
Net increase in short-term borrowings....................... 157,283 139,856 143,172
Cash dividends on common stock.............................. (12,390) (9,841) (7,892)
Repurchase of common stock.................................. (1,907)
Proceeds from exercise of stock options..................... 2,347 2,739 639
--------- --------- ---------
Net cash provided by financing activities........... 241,197 158,188 315,164
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ 21,955 (56,604) (13,908)
Cash and cash equivalents, beginning of year................ 118,360 174,964 188,872
--------- --------- ---------
Cash and cash equivalents, end of year...................... $ 140,315 $ 118,360 $ 174,964
========= ========= =========
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings................................................ $ 34,683 $ 25,960 $ 24,117
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Gain on sales of investment securities.................... (480) (60) (451)
Loss on sales of investment securities.................... 697 140 44
Loss (gain) on sale of premises and equipment............. 19 10 (684)
Gain on sale of other real estate owned................... (223) (631) (116)
Gain on sale of loans..................................... (182) (655)
Increase in cash value of life insurance.................. (641) (199) (213)
Amortization of premiums (accretion of discounts) on
investment securities................................... 5,204 7,156 (1,185)
Provision for credit losses............................... 2,800 2,700 2,600
Provision for losses on other real estate owned........... (17) 300 500
Proceeds from loan sales.................................. 4,830 10,553
Origination of loans held for sale........................ (4,648) (9,898)
Depreciation and amortization............................. 4,670 4,035 3,679
Change in accrued interest receivable..................... (3,171) (2,096) (1,275)
Change in accrued interest payable........................ 1,401 667 1,184
Deferred tax benefit (provision).......................... (460) (2,967) (1,208)
Change in other assets and liabilities.................... (1,715) 5,827 5,382
--------- --------- ---------
Total adjustments................................... 8,084 14,882 8,257
--------- --------- ---------
Net cash provided by operating activities........... $ 42,767 $ 40,842 $ 32,374
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Real estate acquired through foreclosure.................... $ 410 $ 1,795 $ 3,560
Loans to facilitate the sale of other real estate owned..... 1,235 200
Securities purchased not settled............................ 5,000
See accompanying notes to consolidated financial statements.
46
48
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of CVB Financial Corp. and
subsidiaries are in accordance with accounting principles generally accepted in
the United States of America 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.
A loan for which collection of principal and interest according to its
original terms is not probable is considered to be impaired. The Company's
policy is to record a specific valuation allowance, which is included
47
49
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
in the allowance for credit losses, or charge off that portion of an impaired
loan that exceeds its fair value. Fair value is usually based on the value of
underlying collateral.
Premises and Equipment -- Premises and equipment are stated at cost, less
accumulated depreciation, which is provided for in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated service lives
using the straight-line method. Properties under capital lease and leasehold
improvements are amortized over the shorter of their economic lives or the
initial 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 fed 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 accounting principles
generally accepted in the United States of America 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.
Recent Accounting Pronouncements -- In June 1999, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities.
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.
48
50
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
This statement was adopted during the year ended December 31, 1999, with an
immaterial impact on the Company's consolidated financial statements.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities," effective
for transfers of financial assets commencing April 1, 2001 and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. The standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. Management believes that the adoption of this statement will
not have a material impact on the Company's consolidated financial statement.
Reclassifications -- All 1998 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, except FHLB stock, are publicly traded, and
the estimated fair values were obtained from an independent pricing service.
FHLB stock is carried at cost.
2000
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Investment securities available-for-sale:
U.S. Treasury securities................... $ 999 $ 11 $ 1,010
Mortgage-backed securities................. 336,978 2,123 $(1,568) 337,533
CMO/REMICs................................. 391,634 2,306 (2,895) 391,045
Government agency.......................... 18,765 (54) 18,711
Municipal bonds............................ 254,852 10,149 (375) 264,626
Other debt securities...................... 21,299 384 21,683
CRA Investment............................. 12,295 1,649 13,944
FHLB stock................................. 21,522 21,522
---------- ------- ------- ----------
$1,058,344 $16,622 $(4,892) $1,070,074
========== ======= ======= ==========
49
51
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
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
======== ==== ======== ========
The CMO/REMIC securities noted above represent collateralized mortgage
obligations and real estate mortgage investment conduits. Approximately 73
percent of such securities are issued by U.S. government agencies that guarantee
payment of principal and interest of the underlying mortgages. The remaining
collateralized mortgage obligations are backed by agency-pooled collateral or
whole loan collateral. All non-agency issues held are currently rated "A" or
better by either Standard & Poor's or Moody's.
At December 31, 2000 and 1999, investment securities having an amortized
cost of approximately $669,358,000 and $507,695,000, 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 when SFAS No.
133 was adopted. The amortized cost at the date of reclassification was
$71,609,000 and the fair value was $72,283,000. The unrealized gain was recorded
in accumulated other comprehensive income, net of income taxes.
The amortized cost and fair value of debt securities at December 31, 2000,
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.......................... $ 11,431 $ 11,408 6.67%
Due after one year through five years............ 34,183 34,707 7.64%
Due after five years through ten years........... 43,094 43,775 7.79%
Due after ten years.............................. 219,502 230,084 8.53%
---------- ----------
308,210 319,974 8.26%
FHLB stock....................................... 21,522 21,522
Mortgage-backed securities and CMO/REMICs........ 728,612 728,578 6.59%
---------- ----------
$1,058,344 $1,070,074 7.09%
========== ==========
50
52
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
Net realized gains on sales of investment securities available-for-sale are
as follows:
2000 1999 1998
----- ----- ----
(IN THOUSANDS)
Gross realized gains........................................ $ 480 $ 60 $451
Gross realized losses....................................... (697) (140) (44)
3. LOANS AND LEASE FINANCE RECEIVABLES
The following is a summary of the components of loan and lease finance
receivables at December 31:
2000 1999
---------- --------
(IN THOUSANDS)
Commercial, financial, and industrial................ $ 425,130 $392,094
Real estate:
Mortgage........................................... 401,408 375,387
Construction....................................... 58,373 48,078
Consumer............................................. 22,642 24,731
Municipal lease finance receivables.................. 23,633 21,268
Agribusiness......................................... 123,614 94,560
---------- --------
1,054,800 956,118
Allowance for credit losses (Note 5)................. (19,152) (16,761)
Deferred loan origination fees, net.................. (3,307) (3,566)
---------- --------
$1,032,341 $935,791
========== ========
At December 31, 2000, the Bank held approximately $559,869,000 of fixed
rate loans. These fixed rate loans bear interest at rates ranging from 4 to 18
percent and have contractual maturities between 1 and 21 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:
2000 1999
------ ------
(IN THOUSANDS)
Outstanding balance, beginning of year..................... $5,585 $6,458
Credit granted, including renewals......................... 3,621 348
Repayments................................................. (4,861) (610)
Changes in officer/director loans due to merger............ (611)
------ ------
Outstanding balance, end of year........................... $4,345 $5,585
====== ======
51
53
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
5. ALLOWANCE FOR CREDIT AND OTHER REAL ESTATE OWNED LOSSES
Activity in the allowance for credit losses was as follows:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Balance, beginning of year............................ $16,761 $14,888 $13,103
Provision charged to operations....................... 2,800 2,700 2,600
Loans charged off..................................... (774) (1,023) (1,141)
Recoveries on loans previously charged off............ 365 196 326
------- ------- -------
Balance, end of year.................................. $19,152 $16,761 $14,888
======= ======= =======
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, 2000 and 1999, the Bank had classified as impaired, loan
amounts totaling $15,170,000 and $3,240,000, respectively. All of these loans
require specific reserves, and accordingly, the Bank has recorded specific
reserves of $9,191,000 and $405,000 on such loans, respectively. Included in
impaired loans for 2000 is one loan in the amount of $8,376,000, which is
secured by real estate having a loan to collateral ratio of 70% and a specific
reserve of $5,629,000. The average recorded investment in impaired loans during
the years ended December 31, 2000, 1999, and 1998 was approximately $5,944,000,
$7,161,000, and $8,800,000, respectively. Interest income of $1,456,000,
$459,000, and $986,000 was recognized on impaired loans during the years ended
December 31, 2000, 1999, and 1998, 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, 2000 and 1999, loans on nonaccrual status totaled $966,000
and $1,191,000, all of which are included in the impaired loans discussed above.
Activity in the allowance for other real estate owned losses was as
follows:
2000 1999 1998
---- ----- -----
(IN THOUSANDS)
Balance, beginning of year.................................. $114 $ 553 $ 416
Provision charged (credited) to operations.................. (17) 300 500
Charge-offs of other real estate owned...................... (46) (739) (363)
---- ----- -----
Balance, end of year........................................ $ 51 $ 114 $ 553
==== ===== =====
The Company incurred additional expenses of $90,000 (2000), $347,000
(1999), and $711,000 (1998) related to the holding and disposition of other real
estate owned.
52
54
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
6. PREMISES AND EQUIPMENT
Premises and equipment consist of:
2000 1999
-------- --------
(IN THOUSANDS)
Land................................................... $ 5,717 $ 5,717
Bank premises.......................................... 23,522 22,156
Furniture and equipment................................ 26,208 25,608
Leased property under capital lease.................... 649 649
-------- --------
56,096 54,130
Accumulated depreciation and amortization.............. (28,890) (26,404)
-------- --------
$ 27,206 $ 27,726
======== ========
7. INCOME TAXES
Income tax expense comprised the following:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Current provision:
Federal..................................... $13,898 $13,175 $11,403
State....................................... 5,864 5,037 4,208
------- ------- -------
19,762 18,212 15,611
------- ------- -------
Deferred (benefit) provision:
Federal..................................... (434) (2,373) (972)
State....................................... (26) (594) (236)
------- ------- -------
(460) (2,967) (1,208)
------- ------- -------
$19,302 $15,245 $14,403
======= ======= =======
Income tax (asset) liability comprised the following:
2000 1999
------- --------
(IN THOUSANDS)
Current:
Federal............................................... $ 323 $ 1,659
State................................................. (791) 777
------- --------
(468) 2,436
Deferred:
Federal............................................... (3,176) (17,111)
State................................................. (972) (3,830)
------- --------
(4,148) (20,941)
------- --------
$(4,616) $(18,505)
======= ========
53
55
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
The components of the net deferred tax asset are as follows:
2000 1999
------- -------
(IN THOUSANDS)
FEDERAL
Deferred tax liabilities:
Depreciation.............................................. $ 2,013 $ 2,428
Valuation of trust assets................................. 454 499
Core deposit premium...................................... 21 145
Leases.................................................... 78 82
Deferred income........................................... 365 84
Unrealized gain on investment securities net.............. 4,329
------- -------
Gross deferred tax liability................................ 7,260 3,238
------- -------
Deferred tax assets:
California franchise tax.................................. 1,402 1,162
Bad debt and credit loss deduction........................ 6,534 5,648
Other real estate owned reserves.......................... 20 187
Deferred compensation..................................... 871 977
Self-insurance reserves................................... 524 427
Unrealized loss on investment securities, net............. 10,040
Other, net................................................ 1,085 1,908
------- -------
Gross deferred tax asset.................................... 10,436 20,349
------- -------
Net deferred tax asset -- federal........................... $ 3,176 $17,111
======= =======
STATE
Deferred tax liabilities:
Depreciation.............................................. $ 553 $ 567
Valuation of trust assets................................. 141 154
Core deposit premium...................................... 6 45
Deferred income........................................... 390 145
Unrealized gain on investment securities net.............. 887
------- -------
Gross deferred tax liability................................ 1,977 911
------- -------
Deferred tax assets:
Bad debt and credit loss deduction........................ 1,871 1,600
Other real estate owned reserves.......................... 6 58
Deferred compensation..................................... 270 303
Self-insurance reserves................................... 163 132
Other accrued expense..................................... 574 574
Unrealized loss on investment securities, net............. 1,997
Other, net................................................ 65 77
------- -------
Gross deferred tax asset.................................... 2,949 4,741
------- -------
Net deferred tax asset -- state............................. $ 972 $ 3,830
======= =======
54
56
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
A reconciliation of the statutory income tax rate to the consolidated
effective income tax rate follows:
2000 1999 1998
----------------- ----------------- -----------------
AMOUNT AMOUNT AMOUNT
(000S) PERCENT (000S) PERCENT (000S) PERCENT
------- ------- ------- ------- ------- -------
Federal income tax at statutory rate......... $18,895 35.0% $14,422 35.0% $13,482 35.0%
State franchise taxes, net of federal
benefit.................................... 3,804 7.1 2,903 7.1 2,714 7.1
Tax-exempt interest.......................... (4,091) (7.6) (2,241) (5.4) (1,917) (5.0)
Other, net................................... 694 1.3 161 0.3 124 0.3
------- ---- ------- ---- ------- ----
$19,302 35.8% $15,245 37.0% $14,403 37.4%
======= ==== ======= ==== ======= ====
8. DEPOSITS
Time certificates of deposit with balances of $100,000 or more amounted to
approximately $313,288,000 and $233,607,000 at December 31, 2000 and 1999,
respectively. Interest expense on such deposits amounted to approximately
$14,622,000 (2000), $10,728,000 (1999), and $11,166,000 (1998).
At December 31, 2000, the scheduled maturities of time certificates of
deposit are as follows (000s):
2001........................................................ $401,642
2002........................................................ 5,869
2003........................................................ 951
2004........................................................ 519
2005 and thereafter......................................... 765
--------
$409,746
========
At December 31, 2000, the Company had a single depositor with balances of
approximately $101,000,000.
9. SHORT-TERM BORROWINGS
During 2000 and 1999, the Bank entered into short-term borrowing agreements
with FHLB. The Bank had outstanding balances of $410,000,000 and $280,000,000
under these agreements at December 31, 2000 and 1999, respectively, with
weighted-average interest rates of 6.4 percent and 5.6 percent, respectively. In
addition, on December 31, 1999, the Bank entered into an overnight agreement
with the FHLB to borrow $20,000,000 at 5.5 percent annual interest. FHLB held
certain investment securities of the Bank as collateral for those borrowings. On
December 31, 2000 and 1999, the Bank entered into an overnight agreement with
certain financial institutions to borrow an aggregate of $76,000,000 and
$23,000,000 at a weighted average annual interest rate of 6.8 percent and 5.0
percent. The Bank maintained cash deposits with the financial institutions as
collateral for these borrowings.
55
57
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
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, 2000, excluding property taxes
and insurance, are approximately as follows (000s):
2001........................................................ $ 2,411
2002........................................................ 2,295
2003........................................................ 1,924
2004........................................................ 1,564
2005........................................................ 1,192
Succeeding years............................................ 1,925
-------
Total minimum payments required................... $11,311
=======
Total rental expense for the Company was approximately $2,577,000 (2000),
$2,497,000 (1999), and $2,494,000 (1998).
At December 31, 2000, the Bank had commitments to extend credit of
approximately $339,127,000 and obligations under letters of credit of
$10,874,000. 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 $230,000,000 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. The Court of Appeal vacated the judgement and remanded the case for
retrial. In addition, the Court of Appeal has awarded the Bank the costs of
appeal. MRI petitioned the Supreme Court of the State of California, which
refused to hear the case. The Company is awaiting a new trial on all of the
issues.
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 2000 and 1999, the Company has accrued a
56
58
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
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.
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 $452,000
(2000), $445,000 (1999), and $453,000 (1998).
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 2000, 1999, and 1998.
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 $420,000 and $162,000 in 2000 and 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 $1,349,000
(2000), $1,182,000 (1999), and $1,047,000 (1998).
57
59
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
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, 2000
-----------------------------------------
BASIC EPS
Income available to common stockholders........ $34,683 27,590 $ 1.26
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of
outstanding options.......................... 576 (0.03)
------- ------ ------
DILUTED EPS
Income available to common stockholders........ $34,683 28,166 $ 1.23
======= ====== ======
DECEMBER 31, 1999
-----------------------------------------
BASIC EPS
Income available to common stockholders........ $25,960 26,990 $ 0.96
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of
outstanding options.......................... 1,022 (0.03)
------- ------ ------
DILUTED EPS
Income available to common stockholders........ $25,960 28,012 $ 0.93
======= ====== ======
DECEMBER 31, 1998
-----------------------------------------
BASIC EPS
Income available to common stockholders........ $24,117 26,866 $ 0.90
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of
outstanding options.......................... 1,011 (0.03)
------- ------ ------
DILUTED EPS
Income available to common stockholders........ $24,117 27,877 $ 0.87
======= ====== ======
14. STOCK OPTION PLANS
In May 2000, the Company approved a new stock option plan that authorizes
the issuance of up to 2,200,000 shares of the Company's stock and expires in
March 2010. The Company also has a stock option plan approved in 1991 that
authorizes the issuance of up to 2,823,425 shares and expires in February 2001.
Under both plans options prices are to be determined at the fair market value of
such shares on the date of grant, and options exercisable in such installments
as determined by the Board of Directors.
As a result of the merger with Orange National Bank, the Company maintains
two compensatory incentive stock option plans in which options to purchase
shares of the Company's common stock were granted. At December 31, 2000, options
for the purchase of 71,775 shares were outstanding and exercisable. There are no
further shares available for granting under these plans.
At December 31, 2000, options for the purchase of 1,255,156 shares of the
Company's common stock were outstanding under the above plans, of which options
to purchase 858,447 shares were exercisable at prices ranging from $2.26 to
$19.36; 2,991,833 shares of common stock were available for the granting of
future options under the plans.
58
60
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
The following table presents the status of all optioned shares and per
share amounts after giving effect to the 10% stock dividend declared in 2000:
SHARES PRICE RANGE
--------- ---------------
Outstanding at January 1, 1998........................... 1,834,855 $ 2.26 - $11.40
Granted.................................................. 268,656 $11.69 - $16.69
Exercised................................................ (315,580) $ 2.26 - $10.42
Canceled................................................. (27,869) $ 5.10 - $15.54
---------
Outstanding at December 31, 1998......................... 1,760,062 $ 2.26 - $16.69
Granted.................................................. 39,928 $13.15 - $19.36
Exercised................................................ (339,052) $ 2.26 - $15.54
Canceled................................................. (1,821) $ 5.10 - $15.54
---------
Outstanding at December 31, 1999......................... 1,459,117 $ 2.26 - $19.36
Granted.................................................. 306,700 $12.67 - $15.34
Exercised................................................ (497,091) $ 2.26 - $15.54
Canceled................................................. (13,570) $ 5.86 - $19.36
---------
Outstanding at December 31, 2000......................... 1,255,156 $ 2.26 - $19.36
=========
At December 31, 2000, 858,447 options are exercisable at a weighted average
exercise price of $6.54. The remaining weighted-average contractual life of the
1,255,156 options outstanding at December 31, 2000 is 5.6 years.
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.
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":
2000 1999 1998
------- ------ ------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Reduction in net income.................................... $1,541 $ 239 $ 356
Reduction in basic earnings per common share............... $ 0.06 $0.01 $0.01
Reduction in diluted earnings per common share............. $ 0.05 $0.01 $0.01
The fair value of the options granted was estimated using the Black-Scholes
option-pricing model with the following assumptions:
2000 1999 1998
--------- --------- ---------
Dividend yield..................................... 2.8% 2.2% 2.4%
Volatility......................................... 34.0% 32.4% 27.5%
Risk-free interest rate............................ 5.1% 5.5% 5.0%
Expected life...................................... 7.5 years 7.0 years 6.9 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
59
61
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
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, 2000,
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 2000, 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.
The actual capital ratios of the Company and the Bank at December 31 are as
follows:
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES:
----------------- --------------------------------------------------------------
AMOUNT AMOUNT
(000S) RATIO (000S) RATIO
-------- ----- -------- --------------------------------------------------
As of December 31, 2000:
Total Capital (to Risk-
Weighted Assets)
Company.................. $191,098 14.4% $106,165 [greater than or equal to] 8.0%
Bank..................... 191,429 14.5% 105,615 [greater than or equal to] 8.0%
Tier I Capital (to Risk-
Weighted Assets)
Company.................. 174,426 13.2% 52,856 [greater than] 4.0%
Bank..................... 174,774 13.2% 52,962 [greater than] 4.0%
Tier I Capital (to Average
Assets) Company.......... 174,426 8.5% 82,083 [greater than or equal to] 4.0%
Bank..................... 174,774 8.5% 82,247 [greater than or equal to] 4.0%
As of December 31, 1999:
Total Capital (to Risk-
Weighted Assets)
Company.................. 163,579 13.9% 94,146 [greater than or equal to] 8.0%
Bank..................... 160,160 13.6% 94,212 [greater than or equal to] 8.0%
Tier I Capital (to Risk-
Weighted Assets)
Company.................. 148,710 12.6% 47,210 [greater than] 4.0%
Bank..................... 145,313 12.3% 47,256 [greater than] 4.0%
Tier I Capital (to Average
Assets)
Company.................. 148,710 7.7% 77,252 [greater than or equal to] 4.0%
Bank..................... 145,313 7.6% 76,481 [greater than or equal to] 4.0%
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS:
----------------------------------------------------
AMOUNT
(000S) RATIO
-------- ----------------------------------------
As of December 31, 2000:
Total Capital (to Risk-
Weighted Assets)
Company.................. N/A
Bank..................... $132,019 [greater than or equal to] 10.0%
Tier I Capital (to Risk-
Weighted Assets)
Company.................. N/A
Bank..................... 79,443 [greater than] 6.0%
Tier I Capital (to Average
Assets) Company.......... N/A
Bank..................... 102,808 [greater than or equal to] 5.0%
As of December 31, 1999:
Total Capital (to Risk-
Weighted Assets)
Company.................. N/A
Bank..................... 117,765 [greater than or equal to] 10.0%
Tier I Capital (to Risk-
Weighted Assets)
Company.................. N/A
Bank..................... 70,884 [greater than] 6.0%
Tier I Capital (to Average
Assets)
Company.................. N/A
Bank..................... 95,601 [greater than or equal to] 5.0%
60
62
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
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, 2000, declare and pay additional dividends of
approximately $62,004,000.
Banking regulations require that all banks maintain a percentage of their
deposits as reserves at the Federal Reserve Bank. On December 31, 2000, this
reserve requirement was approximately $58,000.
16. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEETS
(IN THOUSANDS)
2000 1999
-------- --------
Assets:
Investment in Citizens Business Bank...................... $188,980 $137,373
Other assets, net......................................... 7,697 11,895
-------- --------
Total assets...................................... $196,677 $149,268
======== ========
Liabilities................................................. $ 8,047 $ 8,498
Stockholders' equity........................................ 188,630 140,770
-------- --------
Total liabilities and stockholders' equity........ $196,677 $149,268
======== ========
STATEMENTS OF EARNINGS
(IN THOUSANDS)
2000 1999 1998
------- ------- -------
Equity in earnings of Citizens Business Bank................ $34,963 $29,179 $24,441
Acquisition costs........................................... (4,856)
Other (expense) income, net................................. (280) 1,637 (324)
------- ------- -------
Net earnings................................................ $34,683 $25,960 $24,117
======= ======= =======
61
63
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................. $ 34,683 $ 25,960 $ 24,117
Adjustments to reconcile net earnings to cash (used in)
provided by operating activities:
Earnings of Citizens Business Bank.................... (34,963) (29,179) (24,441)
Other operating activities, net....................... 1,870 2,273 1,365
-------- -------- --------
Total adjustments................................ (33,093) (26,906) (23,076)
-------- -------- --------
Net cash provided by (used in) operating
activities..................................... 1,590 (946) 1,041
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends received from Citizens Business Bank........... 6,550 10,700 9,329
-------- -------- --------
Net cash provided by investing activities........ 6,550 10,700 9,329
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends on common stock........................... (12,390) (9,841) (7,892)
Proceeds from exercise of stock options.................. 2,347 2,739 639
Stock repurchase......................................... (1,907)
-------- -------- --------
Net cash used in financing activities............ (10,043) (7,102) (9,160)
-------- -------- --------
Net (Decrease) Increase in Cash and Cash Equivalents....... (1,903) 2,652 1,210
Cash and Cash Equivalents, Beginning of Year............... 5,597 2,945 1,735
-------- -------- --------
Cash and Cash Equivalents, End of Year..................... $ 3,694 $ 5,597 $ 2,945
======== ======== ========
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)
2000
Net interest income........................... $23,210 $23,530 $23,550 $23,817
Provision for credit losses................... 900 700 700 500
Net earnings.................................. 7,856 8,447 9,138 9,242
Basic earnings per common share............... 0.29 0.31 0.32 0.34
Diluted earnings per common share............. 0.28 0.30 0.32 0.33
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............... 0.23 0.26 0.27 0.20
Diluted earnings per common share............. 0.23 0.25 0.26 0.19
62
64
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
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, 2000
and 1999. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
2000 1999
------------------------ ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- -------- ----------
(IN THOUSANDS) (IN THOUSANDS)
ASSETS
Cash and cash equivalents.................... $ 140,315 $ 140,315 $118,360 $118,360
Investment securities available for sale..... 1,070,074 1,070,074 877,332 877,332
Loans and lease finance receivables, net..... 1,032,341 1,036,548 935,791 934,465
Accrued interest receivable.................. 14,625 14,625 11,454 11,454
LIABILITIES
Deposits:
Noninterest-bearing........................ $ 665,290 $ 665,290 $649,821 $649,821
Interest-bearing........................... 929,740 929,448 851,252 851,229
Demand note to U.S. Treasury................. 11,234 11,234 16,951 16,951
Short-term borrowings........................ 486,000 486,000 323,000 323,000
Accrued interest payable..................... 6,742 6,742 5,341 5,341
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.
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
63
65
CVB FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 2000
such loans. As such, the estimated fair value of total loans at December
31, 2000 and 1999 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, 2000 or 1999, 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, 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, 2000 and 1999. 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.
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 merger costs of
approximately $3.0 million, after tax. The merger costs included accounting
fees, investment banker fees, legal fees, and severance expenses. Merger related
employee costs were $2,282,000. At December 31, 1999, the Company had remaining
merger-related accruals included in other liabilities of $2,228,000.
64
66
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
CVB Financial Corp.
Ontario, California:
We have audited the accompanying consolidated balance sheets of CVB
Financial Corp. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, 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, 2001
65
67
INDEX TO EXHIBITS
EXHIBIT
NUMBER PAGE
- ------- ----
3.1 Articles of Incorporation of the Company, as amended.(1)....
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).......................... *
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).................................. *
66
68
EXHIBIT
NUMBER PAGE
- ------- ----
10.17 1991 Stock Option Plan, as amended.(8)...................... *
10.18 2000 Stock Option Plan.(9).................................. *
10.19 Form of Option Agreement under 2000 Stock Option Plan
incorporated from S-8.(9)................................... *
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.(10)................................................. *
10.21 Office Lease by and between Mulberry Properties and Chino
Valley Bank dated October 12, 1992.(10)..................... *
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.(11).... *
10.26 Lease by and between RCI Loring and CVB Financial Corp.
dated March 11, 1993, for the Riverside Office.(11)......... *
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.(12)...................... *
10.28 Reserved. .................................................. *
10.29 Severance Compensation Agreement dated March 21, 2001 with
Edwin J. Pomplun. .......................................... *
10.30 Severance Compensation Agreement dated March 21, 2001 with
Frank Basirico. ............................................ *
10.31 Severance Compensation Agreement dated March 21, 2001 with
Jay Coleman. ............................................... *
10.32 Reserved. .................................................. *
10.33 Reserved. .................................................. *
10.34 Reserved. .................................................. *
10.35 Severance Compensation Agreement dated March 21, 2001 with
Edward Biebrich. ........................................... *
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)......................... *
12 Statement regarding computation of ratios (included in Form
10-K). ..................................................... *
21 Subsidiaries of Company. ................................... *
23 Consent of Independent Certified Public Accountants. ....... *
- ---------------
* Not applicable.
(1) Filed as Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, Commission file number 1-10394, which
are 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.
(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 10.5, 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.
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69
(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 10.14 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 10.17 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998, Commission file number 1-10394, which is
incorporated herein by this reference.
(9) Filed as Exhibit 10.18 and 10.19 respectively to Registrant's Statement on
Form S-8 on July 12, 2000, Commission file number 333-41198, which is
incorporated herein by this reference.
(10) 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.
(11) 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.
(12) 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.
(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.
68