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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM N/A TO N/A .
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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 February 29, 2000, the aggregate market value of the common stock
held by non-affiliates of the registrant was approximately $353,097,499.
Number of shares of common stock of the registrant outstanding as of
February 29, 2000: 24,998,053.
The following documents are incorporated by reference herein:
Definitive Proxy Statement for the Annual Meeting of
Stockholders which will be filed within 120 days of the
fiscal year ended December 31, 1999......................... Part III of Form 10-K
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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"). The Company has two other dormant subsidiaries,
Chino Valley Bancorp. and Orange National Bancorp.
CVB's principal business is to serve as a holding company for the Bank,
Community, Ventures, and for other banking or banking related subsidiaries which
the Company may establish or acquire. The Company has not engaged in any other
activities to date. As a legal entity separate and distinct from its
subsidiaries, CVB's principal source of funds is, and will continue to be,
dividends paid by and other funds advanced from primarily the Bank. Legal
limitations are imposed on the amount of dividends that may be paid and loans
that may be made by the Bank to CVB. See "Item 1. Business -- Supervision and
Regulation -- Dividends and Other Transfers of Funds." At December 31, 1999, the
Company had $2.0 billion in total consolidated assets, $935.8 million in
consolidated net loans and $1.5 billion in total consolidated deposits.
The principal executive offices of CVB and the Bank are located at 701
North Haven Avenue, Suite 350, Ontario, California.
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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, 1999, the Bank had $2.0 billion in
assets, $938.2 million in net loans and $1.5 billion in deposits.
The Bank currently has 30 banking offices located in San Bernardino County,
Riverside County, Orange County and the Eastern portion of Los Angeles County in
Southern California. Of the 30 offices, the Bank opened nine as de novo branches
and acquired the other twenty one in acquisition transactions. Since 1990, the
Bank has added eighteen offices, two in 1990, two in 1993, two in 1994, one in
1995, four in 1996, and seven in 1999.
On October 4, 1999, Orange National Bancorp merged with and into the
Company in a transaction accounted for using the pooling-of-interests method of
accounting. Orange National Bancorp had six branch offices, four branches
located in Orange, one branch located in Laguna Hills, and one branch located in
Laguna Beach. The merger added approximately $250.4 million deposits and $152.0
million in net loans.
Through its network of banking offices, the Bank emphasizes personalized
service combined with offering a full range of banking and trust services to
businesses, professionals and individuals located in the service areas of its
offices. Although the Bank focuses the marketing of its services to small-and
medium-sized businesses, a full range of retail banking services are made
available to the local consumer market.
The Bank offers a wide range of deposit instruments. These include
checking, savings, money market and time certificates of deposit for both
business and personal accounts. The Bank also serves as a federal tax depository
for its business customers.
The Bank also provides a full complement of lending products, including
commercial, agribusiness, installment and real estate loans. Commercial products
include lines of credit and other working capital financing, accounts receivable
lending and letters of credit. Financing products for individuals include
automobile financing, lines of credit and home improvement and home equity lines
of credit. Real estate loans include mortgage and construction loans.
The Bank also offers a wide range of specialized services designed for the
needs of its commercial accounts. These services include cash management systems
for monitoring cash flow, a credit card program for merchants, courier pick-up
and delivery, payroll services, electronic funds transfers by way of domestic
and international wires and automated clearing house, and on-line account
access. The Bank also makes available investment products to customers,
including mutual funds, a full array of fixed income vehicles and a program to
diversify its customers' funds in federally insured time certificates of deposit
of other institutions.
The Bank also offers a wide range of financial services and trust services
through its Asset Management Department. These services include trust services,
corporate trustee services, mutual funds, annuities, 401K plans and individual
investment accounts.
COMMUNITY TRUST DEED SERVICES
The Company owns 100% of the voting stock of Community, which has one
office. Community's services, which are provided to the Bank and non-affiliated
persons, include preparing and filing notices of default, reconveyances and
related documents and acting as a trustee under deeds of trust. At present, the
assets, revenues and earnings of Community are not material in amount when
compared to the Bank.
CVB VENTURES, INC.
The Company owns 100% of the voting stock of Ventures, which has one
office. Ventures charges fees and collects commissions for acting as an
intermediary for emerging growth companies in obtaining capital, loans, leases
and other financing vehicles. At present, the assets, revenues, and earnings of
Ventures are not material in amount when compared to the Bank.
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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.
EMPLOYEES
At December 31, 1999, the Company employed 545 persons 345 on a full-time
and 200 on a part-time basis. The Company believes that its employee relations
are satisfactory.
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION
The Company's profitability, like most financial institutions, is impacted
by interest rate differentials. In general, the difference between the interest
rates paid by the Bank on interest-bearing liabilities, such as deposits and
other borrowings, and the interest rates received by the Bank on its
interest-earning assets, such as loans extended to its clients and securities
held in its investment portfolio, comprise the major portion of the Company's
earnings. These rates are highly sensitive to many factors that are beyond the
control of the Company and the Bank, such as inflation, recession and
unemployment, and the impact which future changes in domestic and foreign
economic conditions might have on the Company and the Bank cannot be predicted.
The business of the Company and the Bank is also influenced by the monetary
and fiscal policies of the federal government and the policies of regulatory
agencies, particularly the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession)
through its open-market operations in U.S. Government securities by adjusting
the required level of reserves for depository institutions subject to its
reserve requirements, and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments,
and deposits and also affect interest rates earned on interest-earning assets
and paid on interest-bearing liabilities. The nature and impact on the Company
and the Bank of any future changes in monetary and fiscal policies cannot be
predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies, and other financial institutions and financial services providers are
frequently made in the U.S. Congress, in the state legislatures, and before
various regulatory agencies. See "Item 1. Business -- Supervision and
Regulation."
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SUPERVISION AND REGULATION
General
Bank holding companies and banks are extensively regulated under both
federal and state law. This regulation is intended primarily for the protection
of depositors and the deposit insurance fund and not for the benefit of
shareholders of the Company. Set forth below is a summary description of the
material laws and regulations which relate to the operations of the Company and
the Bank. The description is qualified in its entirety by reference to the
applicable laws and regulations.
The Company
The Company, as a registered bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company
is required to file with the Federal Reserve Board quarterly, and annual reports
and such additional information as the Federal Reserve Board may require
pursuant to the Bank Holding Company Act. The Federal Reserve Board may conduct
examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the Bank Holding Company Act and regulations adopted by the Federal
Reserve Board, a bank holding company and its nonbanking subsidiaries are
prohibited from requiring certain tie-in arrangements in connection with any
extension of credit, lease or sale of property, or furnishing of services.
Further, the Company is required by the Federal Reserve Board to maintain
certain levels of capital. See "Capital Standards."
The Company is required to obtain the prior approval of the Federal Reserve
Board for the acquisition of more than 5% of the outstanding shares of any class
of voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve Board is also required
for the merger or consolidation of the Company and another bank holding company.
The Company is prohibited by the Bank Holding Company Act, except in
certain statutorily prescribed instances, from acquiring direct or indirect
ownership or control of more than 5% of the outstanding voting shares of any
company that is not a bank or bank holding company and from engaging directly or
indirectly in activities other than those of banking, managing or controlling
banks, or furnishing services to its subsidiaries. However, the Company, subject
to the prior approval of the Federal Reserve Board, may engage in any, or
acquire shares of companies engaged in, activities that are deemed by the
Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board's
regulations or both.
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The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its subsidiaries
are subject to examination by, and may be required to file reports with, the
California Department of Financial Institutions.
The Company's securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As such, the Company is subject to the information, proxy solicitation,
insider trading, and other requirements and restrictions of the Exchange Act.
The Bank
The Bank, as a California chartered bank, is subject to primary
supervision, periodic examination, and regulation by the California Commissioner
of Financial Institutions ("Commissioner") and the Federal Deposit Insurance
Corporation ("FDIC"). To a lesser extent, the Bank is also subject to certain
regulations promulgated by the Federal Reserve Board. If, as a result of an
examination of the Bank, the FDIC should determine that the financial condition,
capital resources, asset quality, earnings prospects, management, liquidity, or
other aspects of the Bank's operations are unsatisfactory or that the Bank or
its management is violating or has violated any law or regulation, various
remedies are available to the FDIC. Such remedies include the power to enjoin
"unsafe or unsound" practices, to require affirmative action to correct any
conditions resulting from any violation or practice, to issue an administrative
order that can be judicially enforced, to direct an increase in capital, to
restrict the growth of the Bank, to assess civil monetary penalties, to remove
officers and directors, and ultimately to terminate the Bank's deposit
insurance, which for a California chartered bank would result in a revocation of
the Bank's charter. The Commissioner has many of the same remedial powers.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the Bank is required to maintain certain levels of
capital. See "-- Capital Standards."
Various requirements and restrictions under the laws of the United States
and the State of California affect the operations of the Bank. Federal and
California statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, capital
requirements and disclosure obligations to depositors and borrowers.
Financial Services Modernization Legislation
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The
Financial Services Modernization Act repeals the two affiliation provisions of
the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal
Reserve Member Banks with firms "engaged principally" in specified securities
activities; and Section 32, which restricts officer, director, or employee
interlocks between a member bank and any company or person "primarily engaged"
in specified securities activities. In addition, the Financial Services
Modernization Act also contains provisions that expressly preempt any state law
restricting the establishment of financial affiliations, primarily related to
insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the Bank Holding Company Act framework to permit a holding company
system to engage in a full range of financial activities through a new entity
known as a Financial Holding Company. "Financial activities" is broadly defined
to include not only banking, insurance, and securities activities, but also
merchant banking and additional activities that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines to be financial in
nature, incidental to such financial activities, or complementary activities
that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally.
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Generally, the Financial Services Modernization Act:
- Repeals historical restrictions on, and eliminates many federal and state
law barriers to, affiliations among banks, securities firms, insurance
companies, and other financial service providers;
- Provides a uniform framework for the functional regulation of the
activities of banks, savings institutions, and their holding companies;
- Broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies, and their financial subsidiaries;
- Provides an enhanced framework for protecting the privacy of consumer
information;
- Adopts a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the
Federal Home Loan Bank system;
- Modifies the laws governing the implementation of the Community
Reinvestment Act ("CRA"); and
- Addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
In order for the Company to take advantage of the ability to affiliate with
other financial services providers, the Company must become a "Financial Holding
Company" as permitted under an amendment to the Bank Holding Company Act. To
become a Financial Holding Company, the Company would file a declaration with
the Federal Reserve Board, electing to engage in activities permissible for
Financial Holding Companies and certifying that it is eligible to do so because
all of its insured depository institution subsidiaries are well-capitalized and
well-managed. See "-- The Bank -- Capital Standards." In addition, the Federal
Reserve Board must also determine that each insured depository institution
subsidiary of the Company has at least a "satisfactory" CRA rating. See "-- The
Bank -- Community Reinvestment Act and Fair Lending Developments." The Company
currently meets the requirements to make an election to become a Financial
Holding Company. Management of the Company has not determined at this time
whether it will seek an election to become a Financial Holding Company. The
Company is examining its strategic business plan to determine whether, based on
market conditions, the relative financial conditions of the Company and its
subsidiaries, regulatory capital requirements, general economic conditions, and
other factors, the Company desires to utilize any of its expanded powers
provided in the Financial Services Modernization Act.
The Financial Services Modernization Act also permits national banks to
engage in expanded activities through the formation of financial subsidiaries. A
national bank may have a subsidiary engaged in any activity authorized for
national banks directly or any financial activity, except for insurance
underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a
Financial Holding Company. Financial activities include all activities permitted
under new sections of the Bank Holding Company Act or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized" and
"well-managed." The total assets of all financial subsidiaries may not exceed
the lesser of 45% of a bank's total assets, or $50 billion. A national bank must
exclude from its assets and equity all equity investments, including retained
earnings, in a financial subsidiary. The assets of the subsidiary may not be
consolidated with the bank's assets. The bank must also have policies and
procedures to assess financial subsidiary risk and protect the bank from such
risks and potential liabilities.
The Financial Services Modernization Act also includes a new section of the
Federal Deposit Insurance Act governing subsidiaries of state banks that engage
in "activities as principal that would only be permissible" for a national bank
to conduct in a financial subsidiary. It expressly preserves the ability of a
state bank to retain all existing subsidiaries. Because California permits
commercial banks chartered by the state to engage in any activity permissible
for national banks, the Bank will be permitted to form subsidiaries to engage in
the activities authorized by the Financial Services Modernization Act, to the
same extent as a national bank. In order to form a financial subsidiary, the
Bank must be well-capitalized, and the Bank would be subject to the same capital
deduction, risk management and affiliate transaction rules as applicable to
national banks.
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The Company and the Bank do not believe that the Financial Services
Modernization Act will have a material adverse effect on our operations in the
near-term. However, to the extent that it permits banks, securities firms, and
insurance companies to affiliate, the financial services industry may experience
further consolidation. The Financial Services Modernization Act is intended to
grant to community banks certain powers as a matter of right that larger
institutions have accumulated on an ad hoc basis. Nevertheless, this act may
have the result of increasing the amount of competition that the Company and the
Bank face from larger institutions and other types of companies offering
financial products, many of which may have substantially more financial
resources than the Company and the Bank.
Dividends and Other Transfers of Funds
Dividends from the Bank constitute the principal source of income to the
Company. The Company is a legal entity separate and distinct from the Bank. The
Bank is subject to various statutory and regulatory restrictions on its ability
to pay dividends to the Company. Under such restrictions, the amount available
for payment of dividends to the Company by the Bank totaled $48.7 million at
December 31, 1999. In addition, the California Department of Financial
Institutions and the FDIC have the authority to prohibit the Bank from paying
dividends, depending upon the Bank's financial condition, if such payment is
deemed to constitute an unsafe or unsound practice.
The FDIC and the Commissioner also have authority to prohibit the Bank from
engaging in activities that, in the FDIC's and the Commissioner's opinion,
constitute unsafe or unsound practices in conducting its business. It is
possible, depending upon the financial condition of the bank in question and
other factors, that the FDIC and the Commissioner could assert that the payment
of dividends or other payments might, under some circumstances, be such an
unsafe or unsound practice. Further, the FDIC and the Federal Reserve Board have
established guidelines with respect to the maintenance of appropriate levels of
capital by banks or bank holding companies under their jurisdiction. Compliance
with the standards set forth in such guidelines and the restrictions that are or
may be imposed under the prompt corrective action provisions of federal law
could limit the amount of dividends which the Bank or the Company may pay. An
insured depository institution is prohibited from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions if after such transaction the institution would be
undercapitalized. See "-- Prompt Corrective Regulatory Action and Other
Enforcement Mechanisms" and "-- Capital Standards" for a discussion of these
additional restrictions on capital distributions.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of, or investments in,
stock or other securities thereof, the taking of such securities as collateral
for loans, and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliate are limited, individually, to 10.0% of
the Bank's capital and surplus (as defined by federal regulations), and such
secured loans and investments are limited, in the aggregate, to 20.0% of the
Bank's capital and surplus (as defined by federal regulations). California law
also imposes certain restrictions with respect to transactions involving the
Company and other controlling persons of the Bank. Additional restrictions on
transactions with affiliates may be imposed on the Bank under the prompt
corrective action provisions of federal law. See "Item 1.
Business -- Supervision and Regulation -- Prompt Corrective Action and Other
Enforcement Mechanisms."
Capital Standards
The Federal Reserve Board and the FDIC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by
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one of several risk adjustment percentages, which range from 0% for assets with
low credit risk, such as certain U.S. Treasury securities, to 100% for assets
with relatively high credit risk, such as commercial loans.
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets must be 3%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
The following table presents the amounts of regulatory capital and the
capital ratios for the Bank, compared to its minimum regulatory capital
requirements as of December 31, 1999.
AS OF DECEMBER 31, 1999
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ACTUAL REQUIRED EXCESS
------------------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Leverage ratio............................ $145,313 7.6% $76,481 4.0% $68,832 3.6%
Tier 1 risk-based ratio................... 145,313 12.3% 47,256 4.0% 98,057 8.3%
Total risk-based ratio.................... 160,160 13.6% 94,212 8.0% 65,948 5.6%
The following table presents the amounts of regulatory capital and the
capital ratios for the Company, compared to its minimum regulatory capital
requirements as of December 31, 1999.
AS OF DECEMBER 31, 1999
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ACTUAL REQUIRED EXCESS
---------------- --------------- ----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Leverage ratio............................. $148,710 7.7% $77,252 4.0% $ 71,458 3.7%
Tier 1 risk-based ratio.................... 148,710 12.6% 47,210 4.0% 101,500 8.6%
Total risk-based ratio..................... 163,579 13.9% 94,146 8.0% 69,433 5.9%
Prompt Corrective Action and Other Enforcement Mechanisms
Federal banking agencies possess broad powers to take corrective and other
supervisory action to resolve the problems of insured depository institutions,
including but not limited to those institutions that fall below one or more
prescribed minimum capital ratios. Each federal banking agency has promulgated
regulations defining the following five categories in which an insured
depository institution will be placed, based on its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. At December 31, 1999, the
Bank and the Company exceeded the required ratios for classification as
"well/adequately capitalized."
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation, or
any condition imposed in writing by the agency or any written agreement with the
agency.
8
10
Safety and Soundness Standards
The federal banking agencies have adopted guidelines designed to assist the
federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to: (i) internal controls,
information systems and internal audit systems, (ii) loan documentation, (iii)
credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation,
fees and benefits. In addition, the federal banking agencies have also adopted
safety and soundness guidelines with respect to asset quality and earnings
standards. These guidelines provide six standards for establishing and
maintaining a system to identify problem assets and prevent those assets from
deteriorating. Under these standards, an insured depository institution should:
(i) conduct periodic asset quality reviews to identify problem assets, (ii)
estimate the inherent losses in problem assets and establish reserves that are
sufficient to absorb estimated losses, (iii) compare problem asset totals to
capital, (iv) take appropriate corrective action to resolve problem assets, (v)
consider the size and potential risks of material asset concentrations, and (vi)
provide periodic asset quality reports with adequate information for management
and the board of directors to assess the level of asset risk. These new
guidelines also set forth standards for evaluating and monitoring earnings and
for ensuring that earnings are sufficient for the maintenance of adequate
capital and reserves.
Premiums for Deposit Insurance
The Bank's deposit accounts are insured by the Bank Insurance Fund ("BIF"),
as administered by the FDIC, up to the maximum permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC or the institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits, which
as of December 31, 1999, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the risk a particular institution poses to its deposit
insurance fund. The risk classification is based on an institution's capital
group and supervisory subgroup assignment. Pursuant to the Economic Growth and
Paperwork Reduction Act of 1996 (the "Paperwork Reduction Act"), at January 1,
1997, the Bank began paying, in addition to its normal deposit insurance premium
as a member of the BIF, an amount equal to approximately 1.3 basis points per
$100 of insured deposits toward the retirement of the Financing Corporation
bonds ("Fico Bonds") issued in the 1980s to assist in the recovery of the
savings and loan industry. Members of the Savings Association Insurance Fund
("SAIF"), by contrast, pay, in addition to their normal deposit insurance
premium, approximately 6.4 basis points. Under the Paperwork Reduction Act, the
FDIC is not permitted to establish SAIF assessment rates that are lower than
comparable BIF assessment rates. Effective January 1, 2000, the rate paid to
retire the Fico Bonds will be equal for members of the BIF and the SAIF. The
Paperwork Reduction Act also provided for the merging of the BIF and the SAIF by
January 1, 1999 provided there were no financial institutions still chartered as
savings associations at that time. However, as of January 1, 1999, there were
still financial institutions chartered as savings associations.
Interstate Banking and Branching
The Bank Holding Company Act permits bank holding companies from any state
to acquire banks and bank holding companies located in any other state, subject
to certain conditions, including certain nationwide-and state-imposed
concentration limits. The Bank has the ability, subject to certain restrictions,
to acquire by acquisition or merger branches outside its home state. The
establishment of new interstate branches is also possible in those states with
laws that expressly permit it. Interstate branches are subject to certain laws
of the states in which they are located. Competition may increase further as
banks branch across state lines and enter new markets.
9
11
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act activities. The CRA generally requires the federal banking
agencies to evaluate the record of a financial institution in meeting the credit
needs of its local communities, including low- and moderate-income
neighborhoods. A bank may be subject to substantial penalties and corrective
measures for a violation of certain fair lending laws. The federal banking
agencies may take compliance with such laws and CRA obligations into account
when regulating and supervising other activities.
A bank's compliance with its CRA obligations is based on a
performance-based evaluation system which bases CRA ratings on an institution's
lending service and investment performance. When a bank holding company applies
for approval to acquire a bank or other bank holding company, the Federal
Reserve Board will review the assessment of each subsidiary bank of the
applicant bank holding company, and such records may be the basis for denying
the application. Based on an examination conducted December 6, 1999 the Bank was
rated satisfactory in complying with its CRA obligations.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discusses certain factors which may affect the Company's
financial results and operations and should be considered in evaluating the
Company.
Economic Conditions and Geographic Concentration. The Company's operations
are located San Bernardino County, Riverside County, Orange County, and the
eastern portion of Los Angeles County in Southern California. As a result of
this geographic concentration, the Company's results depend largely upon
economic conditions in these areas. A deterioration in economic conditions in
the Company's market areas could have a material adverse impact on the quality
of the Company's loan portfolio, the demand for its products and services and
its financial condition and results of operations.
Interest Rates. The Company's earnings are impacted by changing interest
rates. Changes in interest rates impact the level of loans, deposits and
investments, the credit profile of existing loans and the rates received on
loans and securities and the rates paid on deposits and borrowings. The Company
anticipates that interest rates may continue to increase should the Federal
Reserve Board continue to raise rates. However, significant fluctuations in
interest rates may have an adverse affect on the Company's financial condition
and results of operations.
Government Regulation and Monetary Policy. The banking industry is subject
to extensive federal and state supervision and regulation. Significant new laws
or changes in existing laws, or repeals of existing laws may cause the Company's
results to differ materially. Further, federal monetary policy, particularly as
implemented through the Federal Reserve System, significantly affects credit
conditions for the Company and a material change in these conditions could have
a material adverse impact on the Company's financial condition and results of
operations.
Competition. The banking and financial services businesses in the Company's
market areas are highly competitive. The increasingly competitive environment is
a result of changes in regulation, changes in technology and product delivery
systems, and the accelerating pace of consolidation among financial services
providers. The results of the Company may differ if circumstances affecting the
nature or level of competition change.
Credit Quality. A significant source of risk arises from the possibility
that losses will be sustained because borrowers, guarantors and related parties
may fail to perform in accordance with the terms of their loans. The Company has
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for credit losses, that
management believes are appropriate to minimize this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying the
Company's credit portfolio. These policies and procedures, however, may not
prevent unexpected losses that could have a material adverse effect on the
Company's results.
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12
Year 2000 Compliance. Most of the Company's operations are dependent on the
efficient functioning of the Company's computer systems and software. Computer
system failures or disruption could have a material adverse effect on the
Company's financial condition and results of operations.
As of March 15, 2000, the Bank experienced no problems with respect to Year
2000 technology issues. This does not mean that some problems may not occur in
the future.
Other Risks. From time to time, the Company details other risks with
respect to its business and/or financial results in its filings with the
Commission.
ITEM 2. PROPERTIES
The principal executive offices of the Company and the Bank are located at
701 North Haven Avenue, Suite 350, Ontario, California. The office of Community
is located at 125 East "H" Street, Colton, California.
The Bank occupies the premises for twenty one of its offices under leases
expiring at various dates from 1999 through 2027. The Bank owns the premises for
ten of its offices, including its data center.
The Company's total occupancy expense, exclusive of furniture and equipment
expense, for the year ended December 31, 1999, was $6.0 million. Management
believes that its existing facilities are adequate for its present purposes.
However, management currently intends to increase the Bank's assets over the
next several years and anticipates that a substantial portion of this growth
will be accomplished through acquisition or de novo opening of additional
banking offices. For additional information concerning properties, see Notes 6
and 10 of the Notes to the Consolidated Financial Statements included in this
report. See "Item 8. Financial Statements and Supplemental Data."
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company and the Bank are parties to claims and legal
proceedings arising in the ordinary course of business. After taking into
consideration information furnished by counsel to the Company and the Bank,
management believes that the ultimate aggregate liability represented thereby,
if any, will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
In May 1998, the Bank received an unfavorable jury judgment as a result of
the lawsuit filed against them by MRI Grand Terrace, Inc. ("MRI"). The award to
MRI and its joint venture partner, Tri-National Development Corp., was
approximately $4.9 million, which included approximately $2.1 million in
compensatory damages, $1.6 million in punitive damages, and $1.2 million in
pre-judgment interest. The lawsuit alleges that the Bank misled MRI in their
purchase of a commercial real estate property from the Bank. The Bank
subsequently made a motion to the trial judge to vacate the jury verdict, and on
August 14, 1998 the motion was denied. The Bank filed an appeal on August 19,
1998 and is proceeding with the appellate process, which could take an extended
period of time to complete. During 1998 and 1999, the Bank accrued a liability
for a portion of the judgment discussed above. Management believes the ultimate
outcome of this case will not have a material effect on the Company's future
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of
1999.
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ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
As of February 15, 2000, the principal executive officers of the Company
and Bank are:
NAME POSITION AGE
---- -------- ---
George A. Borba.................. Chairman of the Board of the Company and the Bank 67
D. Linn Wiley.................... President and Chief Executive Officer of the Company and 61
the Bank
Frank Basirico................... Executive Vice President/Senior Loan Officer of the Bank 45
Edward J. Biebrich Jr............ Chief Financial Officer of the Company and Executive 56
Vice President and Chief Financial Officer of the Bank
Jay W. Coleman................... Executive Vice President of the Bank 57
Ed Pomplun....................... Executive Vice President of the Bank 53
Other than George A. Borba, who is the brother of John A. Borba, a director
of the Company and the Bank, there is no family relationship among any of the
above-named officers or any of the Company's directors.
Mr. Borba has served as Chairman of the Board of the Company since its
organization in April, 1981 and Chairman of the Board of the Bank since its
organization in December, 1973. In addition, Mr. Borba is the owner of George
Borba & Son Dairy.
Mr. Wiley has served as President and Chief Executive Officer of the
Company since October, 1991. Mr. Wiley joined the Company and Bank as a director
and as President and Chief Executive Officer designate on August 21, 1991. Prior
to that, Mr. Wiley served as an Executive Vice President of Wells Fargo Bank
from April 1, 1990 to August 20, 1991. From 1988 to April 1, 1990 Mr. Wiley
served as the President and Chief Administrative Officer of Central Pacific
Corporation, and from 1983 to 1990 he was the President and Chief Executive
Officer of American National Bank.
Mr. Basirico has served as Executive Vice President and Senior Loan Officer
of the Bank since October, 1996. From March, 1993 to October, 1996, he served as
Credit Administrator of the Bank. Prior to that time he was Executive Vice
President, senior loan officer at Fontana National Bank from 1991. Between 1985
and 1990 he served as Executive Vice President, senior loan officer at the Bank
of Hemet.
Mr. Biebrich assumed the position of Chief Financial Officer of the Company
and Executive Vice President/Chief Financial Officer of the Bank on February 2,
1998. Mr. Biebrich began his career in 1972 as an accountant with Arthur
Andersen & Co. In 1976, he joined Community First Bank as Executive Vice
President of the Finance and Operations Division. For the period of 1983 to
1990, he served as Chief Financial Officer for Central Pacific Corporation and
Executive Vice President, Chief Financial Officer and Manager of the Finance and
Operations Division for American National Bank. From 1990 to 1992, he was Vice
President of Operations for Systematics Financial Services Inc. From 1992 to
1998, he served as Senior Vice President, Chief Financial Officer of ARB, Inc.
Mr. Coleman assumed the position of Executive Vice President of the Bank on
December 5, 1988. Prior to that he served as President and Chief Executive
Officer of Southland Bank, N.A. from March, 1983 to April, 1988.
Mr. Pomplun has served as Executive Vice President and Division Manager of
the Asset Management Division since March 29, 1996. From February, 1994 to March
29, 1996 he held that position for Citizens Bank of Pasadena. From June, 1988
through February, 1994, Mr. Pomplun served as Executive Vice President and
Division Manager of the Trust Division for First National Bank in San Diego.
Between 1984 and 1988, he served as Vice President for Bank of America's Trust
Division. Between March, 1977 and June, 1984 he served as Trust Office Manager
and Trust Marketing Head for San Diego Trust and Savings Bank.
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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 $16.09 per share for the first quarter of 1999 to an average per share
price of $20.19 for the fourth quarter of 1999. The following table presents the
high and low sales prices and dividend information for the Company's common
stock during each quarter for the past two years. The share prices and cash
dividend per share amounts presented for all periods have been restated to give
retroactive effect, as applicable, to the ten percent stock dividend declared in
1998 and the 5-for-4 stock split declared in 1999 which became effective January
14, 2000. The Company had approximately 1,452 shareholders of record as of
December 31, 1999.
TWO YEAR SUMMARY OF COMMON STOCK PRICES
QUARTER ENDED HIGH LOW DIVIDENDS
------------- ------ ------ -------------------
03/31/1998................................... $20.95 $15.00 $0.09 Cash Dividend
06/30/1998................................... $19.37 $15.46 $0.07 Cash Dividend
09/30/1998................................... $17.78 $13.64 $0.07 Cash Dividend
12/31/1998................................... $18.91 $15.37 $0.09 Cash Dividend
10% Stock Dividend
03/31/1999................................... $18.10 $15.10 $0.09 Cash Dividend
06/30/1999................................... $20.80 $15.35 $0.09 Cash Dividend
09/30/1999................................... $23.70 $20.10 $0.09 Cash Dividend
12/31/1999................................... $21.70 $18.20 $0.12 Cash Dividend
5-for-4 Stock Split
The Company lists its common stock on the American Stock Exchange under the
symbol "CVB"
ITEM 6. SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net Interest Income............... $ 90,012 $ 80,542 $ 73,184 $ 65,803 $ 61,571
Provision for Credit Losses....... 2,700 2,600 2,810 3,093 2,895
Other Operating Income............ 18,630 17,759 17,530 16,991 11,871
Other Operating Expenses.......... 64,737 57,181 54,666 53,456 47,240
---------- ---------- ---------- ---------- ----------
Earnings Before Income Taxes...... 41,205 38,520 33,238 26,245 23,307
Income Taxes...................... 15,245 14,403 12,670 10,711 9,326
---------- ---------- ---------- ---------- ----------
Net Earnings...................... $ 25,960 $ 24,117 $ 20,568 $ 15,534 $ 13,981
========== ========== ========== ========== ==========
Basic Earnings Per Common Share(1) $ 1.06 $ 0.99 $ 0.85 $ 0.64 $ 0.58
========== ========== ========== ========== ==========
Diluted Earnings Per Common
Share(1)........................ $ 1.02 $ 0.95 $ 0.82 $ 0.62 $ 0.57
========== ========== ========== ========== ==========
Stock Splits...................... 5-for-4 3-for-2
Stock Dividends(2)................ 10% 10% 10%/5%
Cash Dividends Declared Per
Share........................... $ 0.39 $ 0.32 $ 0.22 $ 0.16 $ 0.13
Dividend Pay-Out Ratio............ 36.79% 32.41% 25.50% 24.85% 21.79%
Financial Position:
Assets.......................... $2,010,757 $1,841,069 $1,501,048 $1,379,266 $1,144,868
Net Loans....................... 935,791 817,296 736,673 695,677 609,173
Deposits........................ 1,501,073 1,475,639 1,294,487 1,188,961 992,565
Stockholders' Equity............ 140,770 139,430 123,671 108,043 95,522
Book Value Per Share(1)......... 5.70 5.71 5.09 4.46 4.00
Equity-to-Assets Ratio(3)....... 7.00% 7.57% 8.24% 7.83% 8.34%
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1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Financial Performance:
Return on:
Beginning Equity............. 18.62% 19.50% 19.04% 16.26% 18.22%
Average Equity............... 17.90% 18.06% 17.81% 15.43% 16.04%
Return on Average Assets........ 1.39% 1.49% 1.49% 1.26% 1.35%
Credit Quality:
Allowance for Credit Losses..... $ 16,761 $ 14,888 $ 13,103 $ 13,608 $ 11,139
Allowance/Total Loans........... 1.76% 1.79% 1.75% 1.92% 1.80%
Total Non Performing Loans...... $ 1,194 $ 8,925 $ 9,545 $ 26,030 $ 29,935
Non Performing Loans/Total
Loans........................ 0.13% 1.07% 1.27% 3.67% 4.83%
Net Charge-Offs................. $ 827 $ 815 $ 3,315 $ 1,335 $ 2,692
Net Charge-Offs/Average Loans... 0.10% 0.11% 0.46% 0.20% 0.45%
Regulatory Capital Ratios
Leverage Ratio.................. 7.7% 7.4% 7.8% 7.4% 8.1%
Tier 1 Capital.................. 12.6% 12.4% 12.2% 11.1% 11.7%
Total Capital................... 13.9% 13.6% 13.4% 12.3% 12.9%
- ---------------
(1) All per share information has been retroactively adjusted to reflect the
5-for-4 stock split declared December 15, 1999, as to holders of record on
January 14, 2000 and paid January 31, 2000, and the 3-for-2 stock split
declared in 1997 and the 10% stock dividends declared in 1998, 1996, and
1995.
(2) In 1995, the Company and Orange National Bancorp declared a 10% and 5% stock
dividend, respectively.
(3) Stockholders' equity divided by total assets.
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE
RESULTS OF OPERATIONS.
Management's discussion and analysis is written to provide greater detail
of the results of operations and the financial condition of CVB Financial Corp.
and its subsidiaries. This analysis should be read in conjunction with the
audited financial statements contained within this report including the notes
thereto. Certain statements under this caption constitute "forward-looking
statements" under Section 27A of the 1934 Act and Section 21E of the 1934 Act
which involve risk and uncertainties. The Company's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include but are not limited to
economic conditions, competition in the geographic and business areas in which
the Company conducts its operations, fluctuations in interest rates, credit
quality and government regulation. For additional information concerning these
factors, see "Item 1. Business -- Factors that May Affect Future Results."
CVB Financial Corp., ("CVB") is a bank holding company. Its primary
subsidiary, Citizens Business Bank, ("Bank") is a state chartered bank with 30
branch offices located in San Bernardino, Riverside, Eastern Los Angeles, and
Orange Counties. Community Trust Deed Services ("Community") is a nonbank
subsidiary providing services to the Bank as well as nonaffiliated persons. CVB
Ventures, Inc. ("Ventures") is a nonbank subsidiary providing financing and
venture capital services to non affiliated persons. For purposes of this
analysis, the consolidated entity is referred to as the "Company".
Virtually all of the Company's activities are conducted within its market
area, which includes the San Bernardino, Riverside, Eastern Los Angeles, and
Orange Counties. For the year 1999, Southern California, has again become an
international role model, having rebuilt on a base of rapidly growing
entrepreneurial firms. The Inland Empire Region of San Bernardino and Riverside
Counties is California's fastest growing region. Employment growth is
accelerating based upon a host of industries. These sectors include
international trade, film production and multimedia technology in Los Angeles
County, logistics and manufacturing in the Inland Empire, and information and
bio-technology in Orange County. While the Southern California
14
16
economies have exhibited recent positive economic and employment trends, there
is no assurance that such trends will continue.
On March 29, 1996, the Bank acquired Citizens Bank of Pasadena with
deposits of approximately $111.7 million, and net loans of approximately $58.9
million. As a result of the acquisition, the Bank acquired four new banking
offices (La Canada Flintridge, Pasadena, Colorado-Catalina (Pasadena), and San
Marino). In addition to the commercial banking operation, the Bank acquired a
trust operation with approximately $800.0 million in assets under management.
These trust assets are not included on the balance sheet of the Bank or Company.
The acquisition contributed significantly to the growth of the Company's
deposits, loans and assets.
On October 4, 1999, the Company acquired Orange National Bancorp and its
subsidiary, Orange National Bank, with deposits of approximately $250.4 million
and net loans of approximately $152.0 million in a transaction accounted for
using the pooling-of-interests method of accounting. As a result of the
transaction the Bank acquired six new banking offices: Katella, East Orange,
Plaza, and Stadium, in Orange; Saddleback Valley in Laguna Hills; and Laguna
Beach. The merger contributed significantly to the growth of the Company's
deposits, loans, and assets.
Since the acquisition of Orange National Bancorp was effected by the
pooling-of-interests method of accounting, all financial statements have been
restated to reflect the combined institutions as though they were combined for
all the periods presented.
ANALYSIS OF THE RESULTS OF OPERATIONS
The Company reported net earnings of $26.0 million for the year ended
December 31, 1999. This represented an increase of $1.8 million, or 7.64%, over
net earnings of $24.1 million for the year ended December 31, 1998. Net earnings
for 1998 increased $3.5 million, or 17.25%, over net earnings of $20.6 million
for the year ended December 31, 1997. Diluted earnings per share were $1.02 in
1999, $0.95 in 1998, and $0.82 in 1997. Basic earnings per share were $1.06 in
1999, $0.99 in 1998, and $0.85 in 1997. Diluted and basic earnings per share
have been adjusted for the effects of a 5-for-4 stock split which became
effective January 14, 2000, a 3-for-2 stock split declared in 1997 and 10% stock
dividends declared in 1998, 1996, and 1995.
Net earnings for 1999 were affected by the pooling-of-interests method of
accounting which requires that certain expenses incurred to effect the merger of
the Company and Orange National Bancorp be treated as current charges against
income. The Company charged to expense merger costs of approximately $3.0
million, net of taxes. The merger costs included accounting fees, investment
banker fees, legal fees, severance expenses, and other expenses.
The increase in net earnings for 1999 compared to 1998 was primarily the
result of an increase in net interest income and an increase in other operating
income after the effect of merger costs. The increase in earnings for 1998
compared to 1997 was the result of an increase in net interest income and an
increase in other operating income. Increased net interest income for 1999 and
1998 reflected higher volumes of average earning assets for each year. The
increases in net revenue for 1999 and 1998 were partially offset by increases in
operating expenses.
For 1999, the Company's return on average assets was 1.39%, compared to a
return on average assets of 1.49% for 1998, and a return of 1.49% for 1997. The
Company's return on average stockholders' equity was 17.90% for 1999, compared
to a return of 18.06% for 1998, and 17.81% for 1997.
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17
NET INTEREST INCOME
Table 1 presents the average yield on each category of earning assets, the
average rate paid for each category of interest bearing liabilities, and the
resulting net interest spread and net interest margin for the years indicated.
Rates for tax preferenced investments are provided on a taxable equivalent basis
using the federal marginal tax rate of 35.00%.
TABLE 1 -- DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES, AND
STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIALS
1999 1998 1997
---------------------------- ---------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
(AMOUNTS IN THOUSANDS)
ASSETS
Investment Securities
Taxable(1)..................... $ 686,076 $ 42,885 6.25% $ 539,408 $ 33,385 6.19% $ 402,985 $ 25,290 6.28%
Tax preferenced(2)............. 122,280 5,663 6.50% 97,734 4,370 6.27% 54,098 2,553 7.02%
Federal Funds Sold............... 32,726 1,545 4.72% 63,219 3,360 5.31% 34,129 1,848 5.41%
Loans(3)(4)...................... 866,917 78,385 9.04% 772,331 74,840 9.69% 718,431 71,821 10.00%
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Total Earning Assets............. 1,707,999 128,478 7.66% 1,472,692 115,955 7.99% 1,209,643 101,512 8.49%
Total Non Earning Assets......... 154,107 144,208 167,045
---------- ---------- ----------
Total Assets..................... $1,862,106 $1,616,900 $1,376,688
========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Demand Deposits.................. $ 593,789 $ 526,257 $ 464,353
Savings Deposits(5).............. 532,272 $ 11,109 2.09% 487,968 $ 12,050 2.47% 466,588 $ 11,572 2.48%
Time Deposits.................... 334,245 15,158 4.53% 309,120 15,901 5.14% 244,439 12,832 5.25%
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Total Deposits................... 1,460,306 26,267 1.80% 1,323,345 27,951 2.11% 1,175,380 24,404 2.08%
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Other Borrowings................. 230,532 12,199 5.29% 136,189 7,462 5.48% 69,542 3,924 5.64%
---------- -------- ---- ---------- -------- ---- ---------- -------- -----
Interest Bearing Liabilities..... 1,097,049 38,466 3.51% 933,277 35,413 3.79% 780,569 28,328 3.63%
---------- ---------- ----------
Other Liabilities................ 26,239 23,795 16,298
Stockholders' Equity............. 145,029 133,571 115,468
---------- ---------- ----------
Total Liabilities and
Stockholders' Equity........... $1,862,106 $1,616,900 $1,376,688
========== ========== ==========
Net interest spread.............. 4.15% 4.20% 4.86%
Net interest margin.............. 5.40% 5.59% 6.14%
Net interest margin excluding
loan fees...................... 5.18% 5.26% 5.73%
- ---------------
(1) Includes short term interest bearing deposits with other institutions
(2) Yields are calculated on a taxable equivalent basis using a marginal tax
rate of 35.00%
(3) Loan fees are included in total interest income as follows, (000)s omitted:
1999, $3,795; 1998, $4,864; 1997, $4,888
(4) Non performing loans are included in net loans as follows, (000)s omitted:
1999, $1,194; 1998, $8,925; 1997, $9,545
(5) Includes interest bearing demand and money market accounts
The Company's operating results depend primarily on net interest income,
the difference between the interest and fees earned on loans and investments
less the interest paid on deposit accounts and borrowed funds. Net interest
income totaled $90.0 million for 1999. This represented an increase of $9.5
million, or 11.76%, over net interest income of $80.5 million for 1998. Net
interest income for 1998 increased $7.4 million, or 10.05%, over net interest
income of $73.2 million for 1997. The increases in net interest income for 1999
and 1998 were primarily the result of greater average balances of earning assets
during each year.
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18
The net interest margin measures net interest income as a percentage of
average earning assets. The net interest margin can be affected by changes in
the yield on earning assets and the cost of interest bearing liabilities, as
well as changes in the level of interest bearing liabilities in proportion to
earning assets. The net interest margin can also be affected by changes in the
mix of earning assets as well as the mix of interest bearing liabilities. The
Company's net interest margin was 5.40% for 1999, compared to 5.59% for 1998,
and 6.14% for 1997. A lower yield on average earning assets, coupled with a
smaller decrease in the cost of average interest bearing liabilities,
contributed to the decrease in the net interest margin for 1999. A lower yield
on average earning assets, coupled with an increase in the cost of average
interest bearing liabilities, contributed to the decrease in the net interest
margin for 1998.
In 1999, the prime rate increased from 7.75% in June to 8.50% in November.
However, the Bank's average prime rate for 1999 was 8.00% compared to 7.96% in
1998. In 1998, the prime rate decreased from 8.50% to 7.75%. This interest rate
environment had an effect of increasing rates in the bond market, but reducing
rates in the loan portfolio and deposits (primarily due to competition).
In the last quarter of 1998, the prime rate decreased. This had the effect
of reducing the yield on loans. The decrease in prime rate had the effect of a
decrease in the overnight federal funds rate and the discount rate by the
Federal Reserve Board. This had the effect of not only reducing the prime rate,
but also the rates in the bond market and, to some extent the rates on deposits.
The net interest spread is the difference between the yield on average
earning assets less the cost of average interest bearing liabilities. The
Company's net interest spread decreased to 4.15% for 1999, compared to 4.20% for
1998, and 4.86% for 1997. The decrease in the net interest spread for 1999
resulted from decreases in the yield on earning assets and a smaller decrease in
the cost of average interest bearing liabilities. The decrease in the net
interest spread for 1998 resulted from decreases in the yield on earning assets,
and an increase in the cost of average interest bearing liabilities.
The yield on earnings assets decreased to 7.66% for 1999, from 7.99% for
1998, and 8.49% for 1997. The decrease in the yield on earning assets for 1999
was the result of lower yields on loans. The decrease in the yield on earning
assets for 1998 reflects lower yields on investment securities, loans, and a
less profitable asset mix. The yield on average loans decreased to 9.04% for
1999, compared to 9.69% for 1998, and 10.00% for 1997. The decrease in the
yields on loans for 1999 was the result increased price competition for loans
compared to 1998. The decrease in the yields on loans for 1998 was the result of
a lowering interest rate environment and increased price competition for loans
compared to 1997. Loans typically have higher yields than investments and
federal funds sold. Total average loans, measured as a percentage of average
earning assets, decreased to 50.76% for 1999, compared with 52.44% in 1998, and
59.39% in 1997. Conversely, average investment securities, including federal
funds sold, increased to 49.24% of average earning assets for 1999, compared
with 47.56% for 1998, and 40.61% for 1997.
The cost of average interest bearing liabilities decreased to 3.51% for
1999, compared to 3.79% for 1998, and 3.63% for 1997. For the most part, the
decrease in the cost of average interest bearing liabilities for 1999 reflected
increased usage of other borrowed funds. The Company has been able to obtain a
greater portion of its total average deposits from noninterest bearing demand
deposits. As a percentage of total average deposits, average noninterest bearing
demand deposits increased to 40.66% for 1999, compared to 39.77% for 1998, and
39.51% for 1997. The FDIC has approved the payment of interest on certain demand
deposit accounts. This could have a negative impact on the Company's net
interest margin, net interest spread, and net earnings.
Despite the decrease in the yield on average earning assets, total interest
income increased in 1999, 1998 and 1997. The increases were the result of
increased balances of average earning assets. Interest income totaled $128.5
million for 1999. This represented an increase of $12.5 million, or 10.80%,
compared to total interest of $116.0 million for 1998. For 1998, total interest
income increased $14.4 million, or 14.23%, from total interest income of $101.5
million for 1997.
Interest expense totaled $38.5 million for 1999. This represented an
increase of $3.1 million, or 8.62%, over total interest expense of $35.4 million
for 1998. For 1998, total interest expense increased $7.1 million, or
17
19
25.01%, over total interest expense of $28.3 million for 1997. For both 1999 and
1998, the increase in interest expense was the combined result of greater levels
of average interest bearing liabilities.
Table 2 presents a comparison of interest income and interest expense
resulting from changes in the volumes and rates on average earning assets and
average interest bearing liabilities for the years indicated. Changes in
interest income or expense attributable to volume changes are calculated by
multiplying the change in volume by the initial average interest rate. The
change in interest income or expense attributable to changes in interest rates
are calculated by multiplying the change in interest rate by the initial volume.
The changes attributable to interest rate and volume changes are calculated by
multiplying the change in rate times the change in volume.
TABLE 2 -- RATE AND VOLUME ANALYSIS FOR CHANGES IN
INTEREST INCOME, INTEREST EXPENSE, AND NET INTEREST INCOME
1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------------------- ---------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------- ------- ------ ------- ------- ------- ------ -------
(AMOUNTS IN THOUSANDS)
Interest Income:
Taxable investment
securities.................. $ 9,079 $ 331 $ 90 $ 9,500 $ 8,562 $ (349) $(118) $ 8,095
Tax preferenced securities.... 1,098 156 39 1,293 2,059 (134) (108) 1,817
Federal funds................. (1,621) (375) 181 (1,815) 1,575 (34) (29) 1,512
Loans......................... 9,166 (5,008) (613) 3,545 5,388 (2,204) (165) 3,019
------- ------- ----- ------- ------- ------- ----- -------
Total earning assets.... 17,722 (4,896) (303) 12,523 17,584 (2,721) (420) 14,443
------- ------- ----- ------- ------- ------- ----- -------
Interest Expense:
Savings deposits.............. 1,093 (1,865) (169) (941) 530 (51) (1) 478
Time deposits................. 1,293 (1,883) (153) (743) 3,396 (258) (69) 3,069
Other borrowings.............. 5,169 (255) (177) 4,737 3,761 (114) (109) 3,538
------- ------- ----- ------- ------- ------- ----- -------
Total interest bearing
liabilities................... 7,555 (4,003) (499) 3,053 7,687 (423) (179) 7,085
------- ------- ----- ------- ------- ------- ----- -------
Net Interest Income............. $10,167 $ (893) $ 196 $ 9,470 $ 9,897 $(2,298) $(241) $ 7,358
======= ======= ===== ======= ======= ======= ===== =======
Interest and fees on loans, the Company's primary source of revenue,
totaled $78.4 million for 1999. This represented an increase of $3.5 million, or
4.74%, over interest and fees on loans of $74.8 million for 1998. For 1998,
interest and fees on loans increased $3.0 million, or 4.20%, over interest and
fees on loans of $71.8 million for 1997. The increase in interest and fee on
loans for 1999 and 1998 reflected increases in the average balance of loans. The
yield on loans decreased to 9.04% for 1999, compared to 9.69% for 1998. The
yield on loans for 1997 was 10.00%. The decrease in loan yields for 1999
compared to 1998 reflected an increased price competition for loans. Deferred
loan origination fees, net of costs, totaled $3.6 million at December 31, 1999.
This represented an increase of $148,000, or 4.33%, from deferred loan
origination fees, net of costs, of $3.4 million at December 31, 1998.
In general, the Company stops accruing interest on a nonperforming loan
after its principal or interest become 90 days or more past due, charging to
earnings all interest previously accrued but not collected. There was no
interest income that was accrued and not reversed on nonperforming loans at
December 31, 1999 and December 31, 1998. There was interest income of
approximately $12,000 that was accrued and not reversed on a nonperforming loan
at December 31, 1997. Had nonperforming loans for which interest was no longer
accruing complied with the original terms and conditions of their notes,
interest income would have been $274,000 greater for 1999, $485,000 greater for
1998, and $391,000 greater for 1997. Accordingly, yields on loans would have
increased by 0.03% for 1999, 0.06% for 1998, and 0.05% for 1997.
Fees collected on loans are an integral part of the loan pricing decision.
Loan fees and the direct costs associated with the origination of loans are
deferred and deducted from the loan balance. Deferred net loan fees are
recognized in interest income over the term of the loan in a manner that
approximates the level-yield method. The Company recognized loan fee income of
$3.8 million for 1999, $4.9 million for 1998 and $4.9 million for 1997.
18
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Table 3 summarizes loan fee activity for the Bank for the years indicated.
TABLE 3 -- LOAN FEE ACTIVITY
1999 1998 1997
------- ------- -------
(AMOUNTS IN THOUSANDS)
Fees Collected........................................ $ 3,943 $ 4,808 $ 4,246
Fees and costs deferred............................... (2,984) (4,019) (4,229)
Accretion of deferred fees and costs.................. 2,836 4,075 4,871
------- ------- -------
Total fee income reported................... $ 3,795 $ 4,864 $ 4,888
======= ======= =======
Deferred net loan origination fees at end of year..... $ 3,566 $ 3,418 $ 3,474
======= ======= =======
PROVISION FOR CREDIT LOSSES
The provision for credit losses totaled $2.7 million for 1999. This
represented an increase of $100,000, or 3.85%, from the provision for credit
losses of $2.6 million for 1998. For 1998, the provision for credit losses
decreased $210,000, or 7.47%, from the provision for credit losses of $2.8
million for 1997. Net loans charged to the allowance for credit losses totaled
$827,000 for 1999. This represented an increase of $12,000, or 1.47%, from net
loan losses charged to the allowance of $815,000 for 1998. For 1998, net loan
losses charged to the allowance for credit losses decreased $2.5 million, or
75.41%, from net loans charged to the allowance of $3.3 million for 1997. See
"Risk Management -- Credit Risk".
OTHER OPERATING INCOME
Other operating income for the Company includes income derived from special
services offered by the Bank, such as asset management and trust services,
merchant card, investment services, international, and other business services;
it also includes service charges and fees, primarily from deposit accounts;
gains (net of losses) from the sale of investment securities, other real estate
owned, and fixed assets; the gross revenue from Community; and other revenues
not included as interest on earning assets.
Other operating income totaled $18.6 million for 1999. This represents an
increase of $871,000, or 4.90%, from other operating income of $17.8 million for
1998. During 1998, other operating income increased $229,000, or 1.31%, over
other operating income of $17.5 million for 1997. The increase in other
operating income in 1999 is due in part to an increase in service charges on
deposit accounts which totaled $10.6 million, $8.8 million, and $8.6 million for
1999, 1998, and 1997, respectively, and fee income originated by the Bank's
Asset Management Division, (trust services) which generated fees totaling $3.7
million, $3.5 million, and $3.2 million for 1999, 1998 and 1997, respectively.
Investment Services which provides mutual funds, certificate of deposit and
other non-insured investment products, generated fees totaling $921,000,
$631,000 and $406,000 for 1999, 1998 and 1997, respectively. The sale of
securities generated income (loss) totaling $(80,000), $407,000 and $7,000 for
1999, 1998 and 1997, respectively, while the sale of fixed assets added income
(loss) totaling $(10,000), $684,000 and $26,000 for 1999, 1998 and 1997,
respectively.
Other operating income also includes revenue from Community, a subsidiary
of the Company. Total revenue from Community was approximately $158,000,
$222,000, and $367,000, for 1999, 1998, and 1997, respectively. Ventures had no
income for the year since it started late in the fourth quarter. The expenses of
approximately $4,300 were included in the respective expense categories of the
consolidated financial statements.
OTHER OPERATING EXPENSES
Other operating expenses totaled $64.7 million for 1999 and $57.2 million
for 1998, representing an increase of $7.6 million, or 13.21%. In 1999, due to
the merger with Orange National Bancorp, other operating expense was affected by
the pooling-of-interest method of accounting which requires that certain
expenses incurred to effect the merger be treated as current charges. The
Company charged to other operating expense merger costs of approximately $4.9
million. The merger costs included accounting fees, investment banker
19
21
fees, legal fees, and severance expense. Without the merger costs, other
operating expense would have totaled $59.9 million, representing an increase of
$2.7 million or 4.72% over operating expense of $57.2 million for 1998. For 1998
other operating expenses increased $2.5 million, or 4.60%, over total operating
expenses of $54.7 million for 1997.
For the most part, other operating expenses reflect the direct expenses and
related administrative expenses associated with staffing, maintaining,
promoting, and operating branch facilities. Consequently, other operating
expenses have increased as the asset size of the Company and the number of
branch offices have increased. Management's ability to control other operating
expenses in relation to asset growth can be measured in terms of other operating
expenses as a percentage of average assets. Operating expenses measured as a
percentage of average assets decreased to 3.48% for 1999, compared to a ratio of
3.54% for 1998, and 3.97% for 1997. Without the merger costs, operating expense
measured as a percentage of average assets would have been 3.22% for 1999. The
decrease in the ratio indicates that management is controlling greater levels of
assets with proportionately smaller operating expenses.
Management's ability to control other operating expenses in relation to the
level of net revenue (net interest income plus other operating income) can be
measured in terms of other operating expenses as a percentage of net revenue.
This is known as the efficiency ratio and indicates the percentage of revenue
that is used to cover expenses. For 1999, other operating expenses as a
percentage of total revenue was 59.59%, compared to a ratio of 58.17% for 1998,
and a ratio of 60.26% for 1997. Without the merger costs, other operating
expense as a percentage of total revenue would have been 55.12% for 1999. The
decrease in the ratio indicated that a proportionately smaller amount of net
revenue was being allocated to operating expenses.
Salaries and related expenses comprise the greatest portion of other
operating expenses. Salaries and related expenses totaled $29.1 million for
1999. This represented an increase of $303,000, or 1.05%, over salaries and
related expenses of $28.8 million for 1998. Salary and related expenses for 1998
were $925,000, or 3.31%, greater than salaries and related expenses of $27.9
million for 1997. The increases for both 1999 and 1998 primarily resulted from
increased staffing levels. Salaries and related expenses as a percent of average
assets decreased to 1.56% for 1999, compared to 1.78% for 1998, and 2.03% for
1997.
Occupancy and equipment expenses represent the cost of operating and
maintaining branch and administrative facilities, including the purchase and
maintenance of furniture, fixtures, office and equipment and data processing
equipment. Occupancy expense totaled $4.8 million for 1999. This represented a
decrease of $284,000, or 5.56%, over occupancy expense of $5.1 million for 1998.
Occupancy expense for 1998 increased $540,000, or 11.82%, from an expense level
of $4.6 million for 1997. Equipment expense totaled $4.7 million for 1999. This
represented an increase of $85,000, or 1.83%, over the $4.6 million expense for
1998. For 1998, equipment expense increased $577,000, or 14.18%, from an expense
of $4.1 million for 1997. Equipment expense in 1998 increased as a result of a
$226,000 increase in computer maintenance and replacement costs and associated
depreciation.
Stationary and supplies expense totaled $3.6 million for 1999. This
represented an increase of $273,000, or 8.09%, over the expense of $3.4 million
for 1998. Stationary and supplies expense for 1998 increased $131,000, or 4.04%,
over the expense of $3.2 million for 1997.
Professional services totaled $3.4 million for 1999. This represented an
increase of $86,000 or 2.60%, over an expense of $3.3 million for 1998. For
1998, professional services expense increased $491,000, or 17.45%, from an
expense of $2.8 million for 1997.
Promotion expense totaled $2.9 million for 1999. This represented an
increase of $372,000, or 14.90%, from an expense of $2.5 million for 1998.
Promotion expense decreased for 1998 by $54,000, or 2.12%, over an expense of
$2.6 million for 1997.
Data processing expense totaled $2.4 million for 1999. This represented an
increase of $424,000, or 21.99%, from an expense of $1.9 million for 1998. Data
processing expense increased for 1998 by $151,000, or 8.50%, over an expense of
$1.8 million for 1997. The increase for 1999 was partially the result of costs
associated with external processing and correspondent bank fees.
20
22
Other real estate owned expense represents the cost of acquiring,
maintaining, and liquidating real property obtained by the Bank as a result of
foreclosure. Included as an expense is a provision charged to earnings for
potential decreases in the value of other real estate owned. Other real estate
owned expense totaled $647,000 for 1999. This represented a decrease of
$564,000, or 46.57%, from an expense level of $1.2 million for 1998. For 1998,
other real estate owned expense decreased $1.6 million, or 56.49%, over an
expense level of $2.8 million for 1997. The decrease in the expense for 1999 and
1998 compared to 1997 reflected the lower average balance of other real estate
owned for the most recent year. As stated elsewhere in this report, in 1999 due
to the merger with Orange National Bancorp, other operating expense was affected
by the pooling-of-interests method of accounting which requires that certain
expenses incurred to effect the merger be treated as current charges. The
Company charged to acquisition costs merger expenses of approximately $4.9
million. The merger expenses included accounting fees, investment banker fees,
legal fees, and severance expense.
Other expenses include the amortization of goodwill and intangibles. The
amortization expense of goodwill and intangibles totaled $1.2 million for 1999,
1998, and 1997.
YEAR 2000
The financial institutions industry, as with other industries, was faced
with year 2000 issues. These issues centered around computer programs that do
not recognize a year which begins with "20" instead of "19", or uses only 2
digits for the year.
All Year 2000 statements are designated as Year 2000 Readiness Disclosures
under the Year 2000 Information and Readiness Disclosures Act of 1998.
The Company uses third party software and systems exclusively. During 1999,
all of the software was analyzed in conjunction with the Company's third party
vendors. Several systems were replaced during 1999. The Company also updated its
contingency plan to include Year 2000 issues. All of the software and systems
were tested throughout the year. The contingency plan was also tested, using
remote data processing hot sites.
The Bank surveyed, on several occasions, its large depositors and borrowing
customers. This was done to ascertain their preparation for Year 2000. No major
issues arose from these surveys.
Throughout the year, the Company expended $655,000 in conjunction with Year
2000 issues. Of this amount, $600,000 was spent to replace the Bank's teller
terminal system. This amount was capitalized and will be depreciated over five
years. The Company spent $55,000 on testing software and systems and installing
other, small PC related software. In addition, the Company allocated $1 million
of its allowance for loan and lease losses to potential year 2000 problems.
As of December 31, 1999, all phases of Year 2000 Plan were complete. As of
March 15, 2000, the Company experienced no problems with Year 2000 issues. The
Company will continue to monitor critical dates, such as the close of the first
quarter, throughout the Year 2000. It is not anticipated that there will be any
problems from Year 2000 issues.
INCOME TAXES
The Company's effective tax rate for 1999 was 37.0%. This compares to
effective tax rates of 37.4% for 1998, and 38.1% for 1997. These rates are below
the nominal combined Federal and State tax rates as a result of tax preferenced
income for each period.
ANALYSIS OF FINANCIAL CONDITION
The Company reported total assets of $2.0 billion at December 31, 1999.
This represented an increase of $169.7 million, or 9.22%, from total assets of
$1.8 billion at December 31, 1998. For 1998, total assets increased $340.0
million, or 22.65%, from total assets of $1.5 billion at December 31, 1997.
21
23
INVESTMENT SECURITIES
The Company maintains a portfolio of investment securities to provide
interest income and to serve as a source of liquidity for its ongoing
operations. Note 2 of the Notes to the Consolidated Financial Statements sets
forth information concerning the composition and the maturity distribution of
the investment securities portfolio at December 31, 1999 and 1998. At December
31, 1999, the Company reported total investment securities of $877.3 million.
This represents an increase of $90.5 million, or 11.50%, over total investment
securities of $786.8 million at December 31, 1998. For 1998, investment
securities increased $276.5 million, or 54.18%, greater than total investment
securities of $510.3 million at December 31, 1997.
The Company has adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". Under this standard, securities held as
"available for sale" are reported at current market value for financial
reporting purposes. The market value, less the amortized cost of investment
securities, net of income taxes, is adjusted directly to stockholders' equity.
At December 31, 1999, securities held as available for sale had a fair market
value of $877.3 million, representing 100.00% of total investment securities
with an amortized cost of $905.8 million. At December 31, 1999, the net
unrealized holding loss on securities available for sale was $28.4 million, and
the unrealized loss on investments available for sale, net of deferred taxes was
$16.4 million.
In connection with the merger with Orange National Bancorp and the
Company's adoption of SFAS No. 133 "Accounting for derivative instruments and
hedging activities", the Company reclassified investment securities from held to
maturity to available for sale. The amortized cost at the date of transfer was
$71.6 million and the fair value was $72.3 million. The unrealized gain was
recorded in stockholders' equity, net of taxes.
LOANS
At December 31, 1999, the Company reported total loans, net of deferred
loan fees, of $952.6 million. This represents an increase of $120.4 million, or
14.46%, over total loans of $832.2 million at December 31, 1998. For 1998, total
loans increased $82.4 million, or 10.99%, over total loans, net of deferred loan
fees of $749.8 million at December 31, 1997.
Table 4 presents the distribution of the Company's loan portfolio at the
dates indicated.
TABLE 4 -- DISTRIBUTION OF LOAN PORTFOLIO BY TYPE
DECEMBER 31
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Commercial and Industrial................... $392,094 $287,518 $303,410 $285,547 $277,603
Real Estate
Construction.............................. 48,078 34,489 19,937 38,337 24,048
Mortgage.................................. 375,387 385,393 308,460 284,374 210,603
Consumer, net of unearned discount.......... 24,731 28,996 28,031 29,832 26,219
Municipal Lease Finance Receivables......... 21,268 22,923 24,008 19,825 21,529
Agribusiness(1)............................. 94,560 76,283 69,404 55,486 63,580
-------- -------- -------- -------- --------
Gross Loans............................... 956,118 835,602 753,250 713,401 623,582
-------- -------- -------- -------- --------
Less:
Allowance for Credit Losses............... 16,761 14,888 13,103 13,608 11,139
Deferred Loan Fees........................ 3,566 3,418 3,474 4,116 3,270
-------- -------- -------- -------- --------
Total Net Loans................... $935,791 $817,296 $736,673 $695,677 $609,173
======== ======== ======== ======== ========
- ---------------
(1) Included as Commercial and Industrial and Real Estate Mortgage loans above
are loans totaling $42.9 million for 1999, $34.6 million for 1998, $27.9
million for 1997, $22.7 million for 1996, $8.8 million for 1995, that
represent loans to agricultural concerns for commercial or real estate
purposes.
22
24
Commercial and industrial loans are loans to commercial entities to finance
capital purchases or improvements, or to provide cash flow for operations. Real
estate loans are loans secured by conforming first trust deeds on real property,
including property under construction, commercial property and single family and
multifamily residences. Consumer loans include installment loans to consumers as
well as home equity loans and other loans secured by junior liens on real
property. Municipal lease finance receivables are leases to municipalities.
Agribusiness loans are loans to finance the operating needs of wholesale dairy
farm operations, cattle feeders, livestock raisers, and farmers.
Table 5 provides the maturity distribution for commercial and industrial
loans, real estate construction loans and agribusiness loans as of December 31,
1999. The loan amounts are based on contractual maturities although the
borrowers have the ability to prepay the loans. Amounts are also classified
according to repricing opportunities or rate sensitivity.
TABLE 5 -- LOAN MATURITIES AND INTEREST RATE CATEGORY AT DECEMBER 31, 1999
AFTER ONE
BUT
WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- --------
(AMOUNTS IN THOUSANDS)
Types of Loans:
Commercial and industrial(1)........................ $140,787 $197,032 $403,246 $741,065
Construction........................................ 43,067 1,524 3,487 48,078
Agribusiness........................................ 84,645 7,514 2,401 94,560
-------- -------- -------- --------
$268,499 $206,070 $409,134 $883,703
======== ======== ======== ========
Amount of Loans based upon:
Fixed Rates......................................... $ 57,021 $151,575 $310,129 $518,725
Floating or adjustable Rates........................ 211,478 54,495 99,005 364,978
-------- -------- -------- --------
$268,499 $206,070 $409,134 $883,703
======== ======== ======== ========
- ---------------
(1) Includes approximately $349.0 million in fixed rate commercial real estate
loans. These loans are classified as real estate mortgage loans for the
financial statements, but are accounted for as commercial and industrial
loans on the Company's books.
As a normal practice in extending credit for commercial and industrial
purposes, the Bank may accept trust deeds on real property as collateral. In
some cases, when the primary source of repayment for the loan is anticipated to
come from the cash flow from normal operations of the borrower, the requirement
of real property as collateral is not the primary source of repayment but an
abundance of caution. In these cases, the real property is considered a
secondary source of repayment for the loan. Since the Bank lends primarily in
Southern California, its real estate loan collateral is concentrated in this
region. At December 31, 1999, substantially all of the Bank's loans secured by
real estate were collateralized by properties located in Southern California.
This concentration is considered when determining the adequacy of the Company's
allowance for credit losses.
NONPERFORMING ASSETS
At December 31, 1999, nonperforming assets, which included nonperforming
loans (see CREDIT RISK) and other real estate owned, totaled $1.9 million. This
represented a decrease of $9.1 million, or 82.80%, compared to nonperforming
assets of $11.0 million at December 31, 1998. For 1998, total nonperforming
assets decreased $3.0 million, or 21.61%, from total nonperforming assets of
$14.1 million at December 31, 1997. The decrease in nonperforming assets for
1999 compared to 1998 resulted as balances of other real estate owned and
nonaccrual loans decreased during the year. The decrease in nonperforming assets
for 1998, reflected the decrease in restructured loans and other real estate
owned, which was partially offset by an increase in nonaccrual loans.
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25
Although management believes that nonperforming loans are generally well
secured and that potential losses are provided for in the Company's allowance
for credit losses, there can be no assurance that future deterioration in
economic conditions or collateral values will not result in future credit
losses. Table 6 provides information on nonperforming loans and other real
estate owned at the dates indicated.
TABLE 6 -- NON-PERFORMING ASSETS
DECEMBER 31
----------------------------------------------
1999 1998 1997 1996 1995
------ ------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
Nonaccrual loans.................................. $1,191 $ 8,849 $ 6,402 $20,028 $16,344
Loans past due 90 days or more.................... 3 76 1,051 628 33
Restructured loans................................ 0 0 2,092 5,374 13,558
Other real estate owned (OREO).................... 703 2,102 4,521 8,642 12,037
------ ------- ------- ------- -------
Total nonperforming assets.............. $1,897 $11,027 $14,066 $34,672 $41,972
====== ======= ======= ======= =======
Percentage of nonperforming assets to total loans
outstanding & OREO.............................. 0.20% 1.32% 1.86% 4.83% 6.64%
====== ======= ======= ======= =======
Percentage of nonperforming assets to total
assets.......................................... 0.09% 0.60% 0.94% 2.51% 3.67%
====== ======= ======= ======= =======
At December 31, 1999, the Company had loans on which interest was no longer
accruing totaling $1.2 million. This represented a decrease of $7.7 million, or
86.54%, from total nonaccrual loans of $8.8 million at December 31, 1998. For
1998, total nonaccrual loans increased $2.4 million, or 38.22%, over total
nonaccrual loans of $6.4 million at December 31, 1997. Approximately 45.45% of
the number of nonaccrual loans at December 31, 1999, and 51.63% of the dollar
volume of these nonaccrual loans were secured by real property which had a
current appraisal that was less than one year old. The estimated ratio of the
outstanding loan balances to the fair values of the related collateral for
nonaccrual loans at December 31, 1999, ranged between approximately 1.60% to
110.76%. The Bank has allocated specific reserves included in the allowance for
credit losses for potential losses on these loans.
A restructured loan is a loan on which the Bank has reduced the rate of
interest to a lower rate, forgiven all or a part of the interest income, or
forgiven part of the principal balance of the loan due to the borrower's
financial condition. At December 31, 1999, and 1998 the Company had no loans
that were classified as restructured. This represented a decrease of $2.1
million, or 100.00%, from restructured loans of $2.1 million at December 31,
1997.
Except for nonperforming loans as set forth in Table 6 and loans disclosed
as impaired, the Bank's management is not aware of any loans as of December 31,
1999 for which known credit problems of the borrower would cause serious doubts
as to the ability of such borrowers to comply with their present loan repayment
terms, or any known events that would result in the loan being designated as
nonperforming at some future date. The Bank's management cannot, however,
predict the extent to which the deterioration in general economic conditions,
real estate values, increase in general rates of interest, change in the
financial conditions or business of a borrower may adversely affect a borrower's
ability to pay.
At December 31, 1999, the net book value of the properties held as other
real estate owned totaled $703,000. This represented a decrease of $1.4 million,
or 66.56%, from other real estate owned of $2.1 million at December 31, 1998.
Although the Bank is actively marketing these properties, the Bank's management
cannot predict when these properties will be sold or what the terms of sale will
be when they are sold. Although there are recent appraisals on each property
that support the carrying costs of these properties at December 31, 1999, no
assurances can be given that further charges to earnings may not occur if real
estate values decrease or the Bank cannot promptly dispose of the properties
held.
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DEPOSITS
The Company reported total deposits of $1.50 billion at December 31, 1999.
This represented an increase of $25.4 million, or 1.72%, over total deposits of
$1.48 billion at December 31, 1998. During 1998, total deposits increased $181.2
million, or 13.99%, over total deposits of $1.3 billion at December 31, 1997.
Noninterest bearing demand deposits totaled $649.8 million at December 31,
1999. This represented an increase of $11.1 million, or 1.74%, over total
noninterest bearing demand deposits of $638.7 million at December 31, 1998. For
1998, total noninterest bearing demand deposits increased $75.7 million, or
13.44%, over noninterest bearing demand deposits of $563.0 million at December
31, 1997. Noninterest bearing deposits represented 43.29% of total deposits as
of December 31, 1999 and 43.28% of total deposits as of December 31, 1998.
Table 7 provides the remaining maturities of large denomination ($100,000
or more) time deposits, including public funds, at December 31, 1999.
TABLE 7 -- MATURITY DISTRIBUTION OF LARGE DENOMINATION TIME DEPOSITS
(AMOUNTS IN THOUSANDS)
----------------------
3 months or less........................................... $123,892
Over 3 months through 6 months............................. 73,680
Over 6 months through 12 months............................ 33,852
Over 12 months............................................. 2,183
--------
Total............................................ $233,607
========
OTHER BORROWED FUNDS
As opportunities exist, the Bank borrows short term funds and invests the
proceeds at a positive spread. By purposely mismatching the maturities of the
borrowed funds and the resulting investments, management can offset a portion of
the Bank's interest rate risk. In addition, the positive spread contributes to
the Bank's and Company's earnings. As the interest rate paid on borrowed funds
is normally greater than the interest rate paid for deposits, the increase in
other borrowed funds contributed to the decrease in the Company's net interest
margin and net interest spread.
At December 31, 1999, borrowed funds totaled $323,000. This represented an
increase of $123,000, or 61.50%, from total borrowed funds of $200.0 million at
December 31, 1998. For 1998, total borrowed funds increased $151.0 million, or
308.16%, from a balance of $49.0 million at December 31, 1997. The maximum
outstanding at any month-end was $323.0 million during 1999, $200.0 million
during 1998, and $123.0 million during 1997.
CAPITAL RESOURCES
Historically, the primary source of capital for the Company has been the
retention of operating earnings. In order to ensure adequate levels of capital,
the Company conducts an ongoing assessment of projected sources and uses of
capital in conjunction with projected increases in assets and the level of risk.
Total stockholders' equity was $140.8 million at December 31, 1999. This
represented an increase of $1.3 million, or 0.96%, over total stockholders'
equity of $139.4 million at December 31, 1998. For 1998, total stockholders'
equity increased $15.8 million, or 12.74%, over total stockholders' equity of
$123.7 million at December 31, 1997.
Tier 1 capital, stockholders' equity less intangible assets, was $148.7
million at December 31, 1999. This represented an increase of $20.3 million, or
15.78%, over total Tier 1 capital of $128.4 million at December 31, 1998. For
1998, Tier 1 capital increased $16.3 million, or 14.54%, over Tier 1 capital of
$112.1 million at December 31, 1997. Total adjusted capital, Tier 1 capital plus
the lesser of the allowance for credit losses or 1.25% of risk weighted assets,
was $163.6 million at December 31, 1999. This represented an increase of
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$22.7 million, or 16.15%, over adjusted capital of $140.8 million at December
31, 1998. For 1998, adjusted capital increased $17.6 million, or 14.29%, over
total adjusted capital of $123.2 million at December 31, 1997.
Bank regulators have established minimum capital adequacy guidelines
requiring that qualifying capital be at least 8.0% of risk-based assets, of
which at least 4.0% must be Tier 1 capital (primarily stockholders' equity).
These ratios represent minimum capital standards. Under Prompt Corrective Action
rules, certain levels of capital adequacy have been established f