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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM N/A TO N/A .
COMMISSION FILE NUMBER 1-10394
CVB FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-3629339
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
701 N. HAVEN AVENUE, SUITE 350
ONTARIO, CALIFORNIA 91764
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (909) 980-4030
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 21, 2001, the aggregate market value of the common stock held
by non-affiliates of the registrant was approximately $420,446,300.
Number of shares of common stock of the registrant outstanding as of March
21, 2001: 27,752,231.
The following documents are incorporated by reference herein:
Definitive Proxy Statement for the Annual Meeting of Stockholders which will
be filed within 120 days of the fiscal year ended December 31, 2000.....Part III
of Form 10-K
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INTRODUCTION
Certain matters discussed in this Annual Report may constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "1933 Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and as such may involve risks
and uncertainties. These forward-looking statements relate to, among other
things, expectations of the business environment in which CVB Financial Corp.
and its subsidiaries operate, projections of future performance, perceived
opportunities in the market and statements regarding the entities mission and
vision. CVB Financial Corp. and its subsidiaries' actual results, performance,
or achievements may differ significantly from the results, performance, or
achievements expressed or implied in such forward-looking statements. For
discussion of the factors that might cause such differences, see "Item 1.
Business -- Risk Factors that May Affect Future Results."
AVAILABLE INFORMATION
Reports filed with the Securities and Exchange Commission (the
"Commission") including proxy statements and other information can be inspected
and copied at the public reference facilities of the Commission at Room 1024,
450 Fifth Street, N.W., Washington D.C., 20549; 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and 7 World Trade Center, Suite 1300, New
York, New York, 10048. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington D.C.
20549, at prescribed rates. The Commission maintains a Web Site that contains
reports, proxy and information statements and other information. The address of
the site is http://www.sec.gov. In addition, reports can be inspected at the
office of the American Stock Exchange, 86 Trinity Place, New York, New York,
10006.
PART I
ITEM 1. BUSINESS
CVB FINANCIAL CORP.
CVB Financial Corp. (referred to herein on an unconsolidated basis as "CVB"
and on a consolidated basis as the "Company") is a bank holding company
incorporated in California on April 27, 1981 and registered under the Bank
Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). The
Company commenced business on December 30, 1981 when, pursuant to a
reorganization, it acquired all of the voting stock of Chino Valley Bank. On
March 29, 1996, Chino Valley Bank changed its name to Citizens Business Bank
(the "Bank"). The Bank is the Company's principal asset. The Company has two
other operating subsidiaries, Community Trust Deed Services ("Community") and
CVB Ventures, Inc. ("Ventures").
CVB's principal business is to serve as a holding company for the Bank,
Community, Ventures, and for other banking or banking related subsidiaries which
the Company may establish or acquire. The Company has not engaged in any other
activities to date. As a legal entity separate and distinct from its
subsidiaries, CVB's principal source of funds is, and will continue to be,
dividends paid by and other funds advanced from primarily the Bank. Legal
limitations are imposed on the amount of dividends that may be paid and loans
that may be made by the Bank to CVB. See "Item 1. Business -- Supervision and
Regulation -- Dividends and Other Transfers of Funds." At December 31, 2000, the
Company had $2.3 billion in total consolidated assets, $1.03 billion in
consolidated net loans and $1.6 billion in total consolidated deposits.
The principal executive offices of CVB and the Bank are located at 701
North Haven Avenue, Suite 350, Ontario, California.
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CITIZENS BUSINESS BANK
The Bank was incorporated under the laws of the State of California on
December 26, 1973, was licensed by the California Department of Financial
Institutions and commenced operations as a California state chartered bank on
August 9, 1974. The Bank's deposit accounts are insured under the Federal
Deposit Insurance Act up to applicable limits. The Bank is not a member of the
Federal Reserve System. At December 31, 2000, the Bank had $2.3 billion in
assets, $1.03 billion in net loans and $1.6 billion in deposits.
The Bank currently has 30 banking offices located in San Bernardino County,
Riverside County, Orange County and the Eastern portion of Los Angeles County in
Southern California. Of the 30 offices, the Bank opened nine as de novo branches
and acquired the other twenty-one in acquisition transactions. Since the
beginning of 1995, the Bank has added twelve offices, one in 1995, four in 1996,
and seven in 1999.
Through its network of banking offices, the Bank emphasizes personalized
service combined with offering a full range of banking and trust services to
businesses, professionals and individuals located in the service areas of its
offices. Although the Bank focuses the marketing of its services to small-and
medium-sized businesses, a full range of retail banking services are made
available to the local consumer market.
The Bank offers a wide range of deposit instruments. These include
checking, savings, money market and time certificates of deposit for both
business and personal accounts. The Bank also serves as a federal tax depository
for its business customers.
The Bank also provides a full complement of lending products, including
commercial, agribusiness, installment and real estate loans. Commercial products
include lines of credit and other working capital financing, accounts receivable
lending and letters of credit. Financing products for individuals include
automobile financing, lines of credit and home improvement and home equity lines
of credit. Real estate loans include mortgage and construction loans.
The Bank also offers a wide range of specialized services designed for the
needs of its commercial accounts. These services include cash management systems
for monitoring cash flow, a credit card program for merchants, courier pick-up
and delivery, payroll services, electronic funds transfers by way of domestic
and international wires and automated clearinghouse, and on-line account access.
The Bank also makes available investment products to customers, including mutual
funds, a full array of fixed income vehicles and a program to diversify its
customers' funds in federally insured time certificates of deposit of other
institutions.
The Bank also offers a wide range of financial services and trust services
through its Asset Management Department. These services include trust services,
corporate trustee services, mutual funds, annuities, 401K plans and individual
investment accounts.
COMMUNITY TRUST DEED SERVICES
The Company owns 100% of the voting stock of Community, which has one
office. Community's services, which are provided to the Bank and non-affiliated
persons, include preparing and filing notices of default, reconveyances and
related documents and acting as a trustee under deeds of trust. At present, the
assets, revenues and earnings of Community are not material in amount when
compared to the Bank.
CVB VENTURES, INC.
The Company owns 100% of the voting stock of Ventures, which has one
office. Ventures charges fees and collects commissions for acting as an
intermediary for emerging growth companies in obtaining capital, loans, leases
and other financing vehicles. At present, the assets, revenues, and earnings of
Ventures are not material in amount when compared to the Bank.
EMPLOYEES
At December 31, 2000, the Company employed 555 persons 340 on a full-time
and 215 on a part-time basis. The Company believes that its employee relations
are satisfactory.
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COMPETITION
The banking and financial services industry in California generally, and in
the Bank's market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. The Bank competes for loans,
deposits, and customers with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies, insurance
companies, finance companies, money market funds, credit unions, and other
nonbank financial service providers. Many of these competitors are much larger
in total assets and capitalization, have greater access to capital markets and
offer a broader range of financial services than the Bank. In addition, recent
federal legislation may have the effect of further increasing the pace of
consolidation within the financial services industry. See "Item 1.
Business -- Supervision and Regulation -- Financial Services Modernization
Legislation."
In order to compete with the other financial services providers, the Bank
principally relies upon local promotional activities, personal relationships
established by officers, directors, and employees with its customers, and
specialized services tailored to meet needs of the communities served. In those
instances where the Bank is unable to accommodate a customer's needs, the Bank
may arrange for those services to be provided by its correspondents. The Bank
has 30 offices located in the following counties: San Bernardino, Riverside,
Orange, and Los Angeles.
ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION
The Bank's profitability, like most financial institutions, is impacted by
interest rate differentials. In general, the difference between the interest
rates paid by the Bank on interest-bearing liabilities, such as deposits and
other borrowings, and the interest rates received by the Bank on its
interest-earning assets, such as loans extended to its clients and securities
held in its investment portfolio, comprise the major portion of the Company's
earnings. These rates are highly sensitive to many factors that are beyond the
control of the Company and the Bank, such as inflation, recession and
unemployment, and the impact which future changes in domestic and foreign
economic conditions might have on the Company and the Bank cannot be predicted.
The business of the Company and the Bank is also influenced by the monetary
and fiscal policies of the federal government and the policies of regulatory
agencies, particularly the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession)
through its open-market operations in U.S. Government securities by adjusting
the required level of reserves for depository institutions subject to its
reserve requirements, and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments,
and deposits and also affect interest rates earned on interest-earning assets
and paid on interest-bearing liabilities. The nature and impact on the Company
and the Bank of any future changes in monetary and fiscal policies cannot be
predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies, and other financial institutions and financial services providers are
frequently made in the U.S. Congress, in the state legislatures, and before
various regulatory agencies. See "Item 1. Business -- Supervision and
Regulation."
SUPERVISION AND REGULATION
General
Bank holding companies and banks are extensively regulated under both
federal and state law. This regulation is intended primarily for the protection
of depositors and the deposit insurance fund and not for the benefit of
shareholders of the Company. Set forth below is a summary description of the
material laws and
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regulations which relate to the operations of the Company and the Bank. The
description is qualified in its entirety by reference to the applicable laws and
regulations.
The Company
The Company, as a registered bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company
is required to file with the Federal Reserve Board quarterly, and annual reports
and such additional information as the Federal Reserve Board may require
pursuant to the Bank Holding Company Act. The Federal Reserve Board may conduct
examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Further, the Company is required by the Federal Reserve Board to maintain
certain levels of capital. See "-- Capital Standards."
The Company is required to obtain the prior approval of the Federal Reserve
Board for the acquisition of more than 5% of the outstanding shares of any class
of voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve Board is also required
for the merger or consolidation of the Company and another bank holding company.
The Company is prohibited by the Bank Holding Company Act, except in
certain statutorily prescribed instances, from acquiring direct or indirect
ownership or control of more than 5% of the outstanding voting shares of any
company that is not a bank or bank holding company and from engaging directly or
indirectly in activities other than those of banking, managing or controlling
banks, or furnishing services to its subsidiaries. However, the Company, subject
to the prior approval of the Federal Reserve Board, may engage in any, or
acquire shares of companies engaged in, activities that are deemed by the
Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiary
banks and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve Board's policy that in serving as a source
of strength to its subsidiary banks, a bank holding company should stand ready
to use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Federal Reserve Board to be an unsafe and
unsound banking practice or a violation of the Federal Reserve Board's
regulations or both.
The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its subsidiaries
are subject to examination by, and may be required to file reports with, the
California Department of Financial Institutions.
The Company's securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). As such, the Company is subject to the information, proxy solicitation,
insider trading, and other requirements and restrictions of the Exchange Act.
The Bank
The Bank, as a California chartered bank, is subject to primary
supervision, periodic examination, and regulation by the California Commissioner
of Financial Institutions ("Commissioner") and the Federal
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Deposit Insurance Corporation ("FDIC"). To a lesser extent, the Bank is also
subject to certain regulations promulgated by the Federal Reserve Board. If, as
a result of an examination of the Bank, the FDIC should determine that the
financial condition, capital resources, asset quality, earnings prospects,
management, liquidity, or other aspects of the Bank's operations are
unsatisfactory or that the Bank or its management is violating or has violated
any law or regulation, various remedies are available to the FDIC. Such remedies
include the power to enjoin "unsafe or unsound" practices, to require
affirmative action to correct any conditions resulting from any violation or
practice, to issue an administrative order that can be judicially enforced, to
direct an increase in capital, to restrict the growth of the Bank, to assess
civil monetary penalties, to remove officers and directors, and ultimately to
terminate the Bank's deposit insurance, which for a California chartered bank
would result in a revocation of the Bank's charter. The Commissioner has many of
the same remedial powers.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the Bank is required to maintain certain levels of
capital. See "-- Capital Standards."
Various requirements and restrictions under the laws of the United States
and the State of California affect the operations of the Bank. Federal and
California statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, capital
requirements and disclosure obligations to depositors and borrowers.
Financial Services Modernization Legislation
General. On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The
Financial Services Modernization Act repeals the two affiliation provisions of
the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal
Reserve Member Banks with firms "engaged principally" in specified securities
activities; and Section 32, which restricts officer, director, or employee
interlocks between a member bank and any company or person "primarily engaged"
in specified securities activities. In addition, the Financial Services
Modernization Act also contains provisions that expressly preempt any state law
restricting the establishment of financial affiliations, primarily related to
insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms, and other financial service providers by revising and
expanding the BHCA framework to permit a holding company system to engage in a
full range of financial activities through a new entity known as a Financial
Holding Company.
The law also:
- Broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies, and their financial subsidiaries;
- Provides an enhanced framework for protecting the privacy of consumer
information;
- Adopts a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the
Federal Home Loan Bank system;
- Modifies the laws governing the implementation of the Community
Reinvestment Act; and
- Addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
The Company and the Bank do not believe that the Financial Services
Modernization Act will have a material adverse effect on our operations in the
near-term. However, to the extent that it permits banks, securities firms, and
insurance companies to affiliate, the financial services industry may experience
further
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consolidation. The Financial Services Modernization Act is intended to grant to
community banks certain powers as a matter of right that larger institutions
have accumulated on an ad hoc basis. Nevertheless, this act may have the result
of increasing the amount of competition that the Company and the Bank face from
larger institutions and other types of companies offering financial products,
many of which may have substantially more financial resources than the Company
and the Bank.
Financial Holding Companies. Bank holding companies that elect to become a
financial holding company may affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature or are
incidental or complementary to activities that are financial in nature.
"Financial in nature" activities include:
- securities underwriting,
- dealing and market making,
- sponsoring mutual funds and investment companies,
- insurance underwriting and agency,
- merchant banking, and
- activities that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines from time to time to be so closely
related to banking or managing or controlling banks as to be a proper
incident thereto.
A bank holding company must meet three requirements before becoming a
financial holding company:
- all of the bank holding company's depository institution subsidiaries
must be well capitalized, well managed, and, except in limited
circumstances, in compliance with the Community Reinvestment Act; and
- the Bank holding company must file with the Federal Reserve a declaration
of its election to become a financial holding company, including a
certification that its depository institution subsidiaries meet the prior
two criteria.
Failure to comply with the financial holding company requirements could
lead to divestiture of subsidiary banks or require all activities of such
company to conform to those permissible for a bank holding company. No Federal
Reserve Board approval is required for a financial holding company to acquire a
company (other than a bank holding company, bank or savings association) engaged
in activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the Federal Reserve Board.
A bank holding company that is not also a financial holding company can
only engage in banking and such other activities determined by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
In December 2000, the Federal Reserve Board approved an interim rule
defining the three categories of activities financial in nature or incidental to
a financial activity:
- lending, exchanging, transferring, investing for others, or safeguarding
financial assets other than money or securities;
- providing any devise or other instrumentality for transferring money or
other financial assets; or
- arranging, effecting or facilitating financial transactions for the
account of third parties.
The interim rule also establishes a mechanism through which financial holding
companies or other interested parties may request that the Federal Reserve Board
find that a particular activity falls within one of these three categories. For
example, the Federal Reserve Board has recently issued a proposed rule that
would grant financial holding companies the right to act as real estate brokers
and managers.
The Company is not currently a Financial Holding Company. Management of the
Company has not determined at this time whether it will seek an election to
become a Financial Holding Company.
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Merchant Banking Restrictions. In March 2000, the Federal Reserve Board and
the Treasury adopted a final rule governing merchant banking or venture capital
investments made by financial holding companies. Generally, the interim rule:
- defines the types of venture ownership interests that may be acquired;
- limits control of assets to a portfolio company (a company engaged in
activities not permissible under the Bank Holding Company Act);
- requires the financial holding company to conduct activities unless it
controls a securities affiliate or an issuance affiliate with a
registered investment advisor;
- prohibits the financial holding company from routinely managing or
operating the portfolio company unless intervention is necessary to
address a material risk to the value or operation of the portfolio
company;
- established a 10-year holding period before divestiture, except that an
investment in or held through a private equity fund may be held for the
duration of the fund;
- applies an aggregate limit on the carrying value of all merchant banking
investments without prior Federal Reserve Board approval to the lesser of
(i) 30 percent of Tier 1 capital or $6 billion or (ii) the lesser of 20
percent of Tier 1 capital or $4 billion excluding interests in private
equity funds;
- requires prior approval to exceed the 10-year holding period limit; and
- applies cross-marketing restrictions to merchant banking investments and
the financial holding company's subsidiary depository institutions.
In January 2001, the federal regulators adopted a final rule on the topic.
The final rule:
- expands the definition of "securities affiliate" to include a department
or division of a bank registered as a municipal securities dealer;
- clarifies the circumstances under which a financial holding company may
routinely manage and operate a portfolio company, and extends the period
of time that a financial holding company may routinely manage or operate
a portfolio company without providing notice to the Federal Reserve
Board;
- streamlines the rule's reporting and record-keeping requirements;
- removes the $6 billion cap on investments;
- broadens the definition of "private equity" funds and clarifies how the
holding period and management and operations restrictions of the rule
apply to such funds; and
- adopts several safe-harbors to the presumptions in the rule governing the
definition of affiliate for purposes of transactions with affiliates.
The final rule includes a sunset provision to the requirement of the
interim rule that requires a financial holding company to receive Federal
Reserve Board approval prior to using its merchant banking authority to make
investments above certain levels. The sunset is tied to final adoption of a
capital rule governing merchant banking investments.
In January 2001, federal regulators proposed new capital requirements for
merchant banking activities. The proposal would employ a sliding scale based on
each banking organization's aggregate equity investments and Tier 1 capital. It
would require them to hold 8 cents for every $1 of equity investments up to 15%
of Tier 1 capital. The proposal would then require banks to hold 12 cents for
every $1 of investments for the next 10%. For investments exceeding 25%, banks
would have to hold 25 cents for every $1.
The proposed rule would exempt the first 15% of investments that banking
companies make through small-business investment corporation subsidiaries.
However, the proposed rule's sliding scale would apply for any such investments
over 15%.
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Until a final capital rule is adopted, the Federal Reserve Board must
review the merchant banking activities of a financial holding company if: a bank
holding company's merchant banking investments (i) in the aggregate exceed 30%
of its Tier 1 capital, or (ii) other than investments in private equity funds in
the aggregate exceed 20% of its Tier 1 capital. The rule clarifies that the
review thresholds apply to the investment made by a financial holding company in
a private equity fund, but do not apply to the fund itself or to investments in
the fund made by unaffiliated third parties. The thresholds also do not restrict
the ability of such company to make additional investments in a fiduciary
capacity on behalf of its trust customers.
Expanded Bank Activities. The Financial Services Modernization Act also
permits national banks to engage in expanded activities through the formation of
financial subsidiaries. A national bank may have a subsidiary engaged in any
activity authorized for national banks directly or any financial activity,
except for insurance underwriting, insurance investments, real estate investment
or development, or merchant banking, which may only be conducted through a
subsidiary of a financial holding company. Financial activities include all
activities permitted under new sections of the BHCA or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized," "well-managed"
and in compliance with the Community Reinvestment Act. The total assets of all
financial subsidiaries may not exceed the lesser of 45% of a bank's total
assets, or $50 billion. A national bank must exclude from its assets and equity
all equity investments, including retained earnings, in a financial subsidiary.
The assets of the subsidiary may not be consolidated with the national bank's
assets. The national bank must also have policies and procedures to assess
financial subsidiary risk and protect the national bank from such risks and
potential liabilities.
The Financial Services Modernization Act also includes a new section of the
Federal Deposit Insurance Act governing subsidiaries of state banks that engage
in "activities as principal that would only be permissible" for a national bank
to conduct in a financial subsidiary. It expressly preserves the ability of a
state bank to retain all existing subsidiaries. Because, California permits
commercial banks chartered by the state to engage in any activity permissible
for national banks, the Bank will be permitted to form subsidiaries to engage in
the activities authorized by the Financial Services Modernization Act, to the
same extent as a national bank. In order to form a financial subsidiary, the
Bank must be well-capitalized, and the Bank would be subject to the same capital
deduction, risk management and affiliate transaction rules as applicable to
national banks.
Privacy. Under the Financial Services Modernization Act, federal banking
regulators are required to adopt rules that will limit the ability of banks and
other financial institutions to disclose non-public information about consumers
to nonaffiliated third parties. These limitations will require disclosure of
privacy policies to consumers and, in some circumstances, will allow consumers
to prevent disclosure of certain personal information to a nonaffiliated third
party. Federal banking regulators issued final rules on May 10, 2000. Pursuant
to these rules, financial institutions must provide:
- initial notices to customers about their privacy policies, describing the
conditions under which they may disclose nonpublic personal information
to nonaffiliated third parties and affiliates;
- annual notices of their privacy policies to current customers; and
- a reasonable method for customers to "opt out" of disclosures to
nonaffiliated third parties.
The rules were effective November 13, 2000, but compliance is optional until
July 1, 2001. These privacy provisions will affect how consumer information is
transmitted through diversified financial companies and conveyed to outside
vendors. It is not possible at this time to assess the impact of the privacy
provisions on the Company's financial condition or results of operations.
Consumer Protection Rules - Sale of Insurance Products. In December 2000
pursuant to the requirements of the Financial Services Modernization Act, the
federal bank and thrift regulatory agencies adopted consumer protection rules
for the sale of insurance products by depository institutions. The rule is
effective on April 1, 2001. The final rule applies to any depository institution
or any person selling, soliciting, advertising, or offering insurance products
or annuities to a consumer at an office of the institution or on behalf of the
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institution. Before an institution can complete the sale of an insurance product
or annuity, the regulation requires oral and written disclosure that such
product:
- is not a deposit or other obligation of, or guaranteed by, the depository
institution or its affiliate;
- is not insured by the FDIC or any other agency of the United States, the
depository institution or its affiliate; and
- has certain risks in investment, including the possible loss of value.
Finally, the depository institution may not condition an extension of
credit:
- on the consumer's purchase of an insurance product or annuity from the
depository institution or from any of its affiliates, or
- on the consumer's agreement not to obtain, or a prohibition on the
consumer from obtaining, an insurance product or annuity from an
unaffiliated entity.
The rule also requires formal acknowledgement from the consumer that
disclosures were received.
In addition, to the extent practicable, a depository institution must keep
insurance and annuity sales activities physically segregated from the areas
where retail deposits are routinely accepted from the general public.
Safeguarding Confidential Customer Information. In January 2000, the
banking agencies adopted guidelines requiring financial institutions to
establish an information security program to:
- identify and assess the risks that may threaten customer information;
- develop a written plan containing policies and procedures to manage and
control these risks;
- implement and test the plan; and
- adjust the plan on a continuing basis to account for changes in
technology, the sensitivity of customer information, and internal or
external threats to information security.
Each institution may implement a security program appropriate to its size and
complexity and the nature and scope of its operations.
The guidelines outline specific security measures that institutions should
consider in implementing a security program. A financial institution must adopt
those security measures determined to be appropriate. The guidelines require the
board of directors to oversee an institution's efforts to develop, implement,
and maintain an effective information security program and approve written
information security policies and programs. The guidelines are effective July 1,
2001.
Dividends and Other Transfers of Funds
Dividends from the Bank constitute the principal source of income to the
Company. The Company is a legal entity separate and distinct from the Bank. The
Bank is subject to various statutory and regulatory restrictions on its ability
to pay dividends to the Company. Under such restrictions, the amount available
for payment of dividends to the Company by the Bank totaled $62.0 million at
December 31, 2000. In addition, the California Department of Financial
Institutions and the FDIC have the authority to prohibit the Bank from paying
dividends, depending upon the Bank's financial condition, if such payment is
deemed to constitute an unsafe or unsound practice.
The FDIC and the Commissioner also have authority to prohibit the Bank from
engaging in activities that, in the FDIC's and the Commissioner's opinion,
constitute unsafe or unsound practices in conducting its business. It is
possible, depending upon the financial condition of the bank in question and
other factors, that the FDIC and the Commissioner could assert that the payment
of dividends or other payments might, under some circumstances, be such an
unsafe or unsound practice. Further, the FDIC and the Federal Reserve Board have
established guidelines with respect to the maintenance of appropriate levels of
capital by banks or
9
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bank holding companies under their jurisdiction. Compliance with the standards
set forth in such guidelines and the restrictions that are or may be imposed
under the prompt corrective action provisions of federal law could limit the
amount of dividends which the Bank or the Company may pay. An insured depository
institution is prohibited from paying management fees to any controlling persons
or, with certain limited exceptions, making capital distributions if after such
transaction the institution would be undercapitalized. See "-- Prompt Corrective
Regulatory Action and Other Enforcement Mechanisms" and "-- Capital Standards"
for a discussion of these additional restrictions on capital distributions.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of, or investments in,
stock or other securities thereof, the taking of such securities as collateral
for loans, and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliate are limited, individually, to 10.0% of
the Bank's capital and surplus (as defined by federal regulations), and such
secured loans and investments are limited, in the aggregate, to 20.0% of the
Bank's capital and surplus (as defined by federal regulations). California law
also imposes certain restrictions with respect to transactions involving the
Company and other controlling persons of the Bank. Additional restrictions on
transactions with affiliates may be imposed on the Bank under the prompt
corrective action provisions of federal law. See "Item 1.
Business -- Supervision and Regulation -- Prompt Corrective Action and Other
Enforcement Mechanisms."
Capital Standards
The Federal Reserve Board and the FDIC have adopted risk-based minimum
capital guidelines intended to provide a measure of capital that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off-balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off-balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk.
The guidelines require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal
banking regulators require banking organizations to maintain a minimum amount of
Tier 1 capital to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets must be 3%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
The following table presents the amounts of regulatory capital and the
capital ratios for the Company, compared to its minimum regulatory capital
requirements as of December 31, 2000.
AS OF DECEMBER 31, 2000
--------------------------------------------------------------
ACTUAL REQUIRED EXCESS
------------------ ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Leverage ratio.......................... $174,426 8.5% $ 82,083 4.0% $ 92,343 4.5%
Tier 1 risk-based ratio................. 174,426 13.2% 52,856 4.0% 121,570 9.2%
Total risk-based ratio.................. 191,098 14.4% 106,165 8.0% 84,933 6.4%
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The following table presents the amounts of regulatory capital and the
capital ratios for the Bank, compared to its minimum regulatory capital
requirements as of December 31, 2000.
AS OF DECEMBER 31, 2000
-----------------------------------------------------------
ACTUAL REQUIRED EXCESS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Leverage ratio...................... $174,774 8.5% $ 82,247 4.0% $ 92,527 4.5%
Tier 1 risk-based ratio............. 174,774 13.2% 52,962 4.0% 121,812 9.2%
Total risk-based ratio.............. 191,429 14.5% 105,615 8.0% 85,814 6.5%
The federal banking regulators may set capital requirements higher than the
minimums described above for holding companies whose circumstances warrant it.
For example, a financial institution experiencing or anticipating significant
growth may be expected to maintain capital positions substantially above the
minimum supervisory levels without significant reliance on intangible assets.
The Federal Reserve Board has also indicated that it will consider a "tangible
Tier 1 capital leverage ratio" (deducting all intangibles) and other indications
of capital strength when evaluating proposals for expansion or new activities.
Proposed Capital Requirements for Community Institutions
In November 2000 the federal bank and thrift regulatory agencies requested
public comment on an advance notice of proposed rulemaking that considers the
establishment of a simplified regulatory capital framework for non-complex
institutions.
In the proposal, the agencies suggested criteria that could be used to
determine eligibility for a simplified capital framework, such as the nature of
a bank's activities, its asset size and its risk profile. In the advance notice,
the agencies seek comment on possible minimum regulatory capital requirements
for non-complex institutions, including a simplified risk-based ratio, a simple
leverage ratio, or a leverage ratio modified to incorporate certain off-balance
sheet exposures.
The advance notice solicits public comment on the agencies' preliminary
views. Comments are due on the proposal on February 1, 2001. Given the
preliminary nature of the proposal, it is not possible to predict its impact on
the Bank at this time.
Prompt Corrective Action and Other Enforcement Mechanisms
Federal banking agencies possess broad powers to take corrective and other
supervisory action to resolve the problems of insured depository institutions,
including but not limited to those institutions that fall below one or more
prescribed minimum capital ratios. Each federal banking agency has promulgated
regulations defining the following five categories in which an insured
depository institution will be placed, based on its capital ratios:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. At December 31, 2000, the
Bank and the Company exceeded the required ratios for classification as
"well/adequately capitalized."
An institution that, based upon its capital levels, is classified as
well-capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation, or
any condition imposed in writing by the agency or any written agreement with the
agency.
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Safety and Soundness Standards
The federal banking agencies have adopted guidelines designed to assist the
federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to: (i) internal controls,
information systems and internal audit systems, (ii) loan documentation, (iii)
credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation,
fees and benefits. In addition, the federal banking agencies have also adopted
safety and soundness guidelines with respect to asset quality and earnings
standards. These guidelines provide six standards for establishing and
maintaining a system to identify problem assets and prevent those assets from
deteriorating. Under these standards, an insured depository institution should:
(i) conduct periodic asset quality reviews to identify problem assets, (ii)
estimate the inherent losses in problem assets and establish reserves that are
sufficient to absorb estimated losses, (iii) compare problem asset totals to
capital, (iv) take appropriate corrective action to resolve problem assets, (v)
consider the size and potential risks of material asset concentrations, and (vi)
provide periodic asset quality reports with adequate information for management
and the board of directors to assess the level of asset risk. These new
guidelines also set forth standards for evaluating and monitoring earnings and
for ensuring that earnings are sufficient for the maintenance of adequate
capital and reserves.
Premiums for Deposit Insurance
Through the Bank Insurance Fund (BIF), the FDIC insures the deposits of the
Company's depository institution subsidiaries up to prescribed limits for each
depositor. The amount of FDIC assessments paid by each BIF member institution is
based on its relative risk of default as measured by regulatory capital ratios
and other factors. Specifically, the assessment rate is based on the
institution's capitalization risk category and supervisory subgroup category. An
institution's capitalization risk category is based on the FDIC's determination
of whether the institution is well capitalized, adequately capitalized or less
than adequately capitalized. An institution's supervisory subgroup category is
based on the FDIC's assessment of the financial condition of the institution and
the probability that FDIC intervention or other corrective action will be
required.
FDIC-insured depository institutions pay an assessment rate equal to the
rate assessed on deposits insured by the Savings Association Insurance Fund
("SAIF").
The assessment rate currently ranges from zero to 27 cents per $100 of
domestic deposits. The FDIC may increase or decrease the assessment rate
schedule on a semi-annual basis. An increase in the assessment rate could have a
material adverse effect on the Company's earnings, depending on the amount of
the increase. The FDIC is authorized to terminate a depository institution's
deposit insurance upon a finding by the FDIC that the institution's financial
condition is unsafe or unsound or that the institution has engaged in unsafe or
unsound practices or has violated any applicable rule, regulation, order or
condition enacted or imposed by the institution's regulatory agency. The
termination of deposit insurance for one or more of the Company's subsidiary
depository institutions could have a material adverse effect on the Company's
earnings, depending on the collective size of the particular institutions
involved.
All FDIC-insured depository institutions must pay an annual assessment to
provide funds for the payment of interest on bonds issued by the Financing
Corporation, a federal corporation chartered under the authority of the Federal
Housing Finance Board. The bonds, commonly referred to as FICO bonds, were
issued to capitalize the Federal Savings and Loan Insurance Corporation. The
FDIC established the FICO assessment rates effective for the third quarter of
2000 at approximately $.021 per $100 annually for assessable deposits. The FICO
assessments are adjusted quarterly to reflect changes in the assessment bases of
the FDIC's insurance funds and do not vary depending on a depository
institution's capitalization or supervisory evaluations.
Interstate Banking and Branching
The BHCA permits bank holding companies from any state to acquire banks and
bank holding companies located in any other state, subject to certain
conditions, including certain nationwide- and state-imposed concentration
limits. The Bank has the ability, subject to certain restrictions, to acquire by
acquisition or merger branches outside its home state. The establishment of new
interstate branches is also possible in those states with
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laws that expressly permit it. Interstate branches are subject to certain laws
of the states in which they are located. Competition may increase further as
banks branch across state lines and enter new markets.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act activities. The CRA generally requires the federal banking
agencies to evaluate the record of a financial institution in meeting the credit
needs of its local communities, including low- and moderate-income
neighborhoods. A bank may be subject to substantial penalties and corrective
measures for a violation of certain fair lending laws. The federal banking
agencies may take compliance with such laws and CRA obligations into account
when regulating and supervising other activities. In December 2000, the federal
banking agencies established annual reporting and public disclosure requirements
for certain written agreements that are entered into between insured depository
institutions or their affiliates and nongovernmental entities or persons that
are made pursuant to, or in connection with, the fulfillment of the CRA.
A bank's compliance with its CRA obligations is based on a
performance-based evaluation system which bases CRA ratings on an institution's
lending service and investment performance. When a bank holding company applies
for approval to acquire a bank or other bank holding company, the Federal
Reserve Board will review the assessment of each subsidiary bank of the
applicant bank holding company, and such records may be the basis for denying
the application. Based on an examination conducted December 6, 1999 the Bank was
rated satisfactory in complying with its CRA obligations.
Nonbank Subsidiaries
Many of the Company's nonbank subsidiaries also are subject to regulation
by the Federal Reserve Board and other applicable federal and state agencies.
Other nonbank subsidiaries of the Company are subject to the laws and
regulations of both the federal government and the various states in which they
conduct business.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The following discusses certain factors which may affect the Company's
financial results and operations and should be considered in evaluating the
Company.
Our Southern California business focus and economic conditions in Southern
California could adversely affect our operations. The Company's operations are
located San Bernardino County, Riverside County, Orange County, and the eastern
portion of Los Angeles County in Southern California. As a result of this
geographic concentration, the Company's results depend largely upon economic
conditions in these areas. A deterioration in economic conditions in the
Company's market areas could have a material adverse impact on the quality of
the Company's loan portfolio, the demand for its products and services and its
financial condition and results of operations.
Changes in interest rates could adversely affect our earnings. The
Company's earnings are impacted by changing interest rates. Changes in interest
rates impact the level of loans, deposits and investments, the credit profile of
existing loans and the rates received on loans and securities and the rates paid
on deposits and borrowings. The Company anticipates that interest rates may
continue to decrease should the Federal Reserve Board continue to lower rates.
However, significant fluctuations in interest rates may have an adverse affect
on the Company's financial condition and results of operations. Furthermore, the
financial weakness of California's three primary energy providers, and shortages
in electrical generation capacities may further weaken the California economy
and businesses operating in Southern California.
We are subject to government regulations that could limit or restrict our
activities, which in turn could adversely impact our operations. The banking
industry is subject to extensive federal and state supervision and regulation.
Significant new laws or changes in existing laws, or repeals of existing laws
may cause the Company's results to differ materially. Further, federal monetary
policy, particularly as implemented through the Federal Reserve System,
significantly affects credit conditions for the Company and a material change in
these conditions could have a material adverse impact on the Company's financial
condition and results of operations.
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Competition may adversely affect our performance. The banking and financial
services businesses in the Company's market areas are highly competitive. The
increasingly competitive environment is a result of changes in regulation,
changes in technology and product delivery systems, and the accelerating pace of
consolidation among financial services providers. The results of the Company may
differ if circumstances affecting the nature or level of competition change.
If a significant number of borrowers, guarantors and related parties fail
to perform as required by the terms of their loans, we will sustain losses. A
significant source of risk arises from the possibility that losses will be
sustained because borrowers, guarantors and related parties may fail to perform
in accordance with the terms of their loans. The Company has adopted
underwriting and credit monitoring procedures and credit policies, including the
establishment and review of the allowance for credit losses, that management
believes are appropriate to minimize this risk by assessing the likelihood of
nonperformance, tracking loan performance and diversifying the Company's credit
portfolio. These policies and procedures, however, may not prevent unexpected
losses that could have a material adverse effect on the Company's results.
We may face other risks. From time to time, the Company details other risks
with respect to its business and/or financial results in its filings with the
Commission.
ITEM 2. PROPERTIES
The principal executive offices of the Company and the Bank are located at
701 North Haven Avenue, Suite 350, Ontario, California. The office of Community
is located at 125 East "H" Street, Colton, California. The office of Ventures is
located at 16 North Marengo, Pasadena, California.
The Bank occupies the premises for twenty-one of its offices under leases
expiring at various dates from 2001 through 2014, at which time the Company can
exercise options that could extend certain leases through 2027. The Bank owns
the premises for ten of its offices, including its data center.
The Company's total occupancy expense, exclusive of furniture and equipment
expense, for the year ended December 31, 2000, was $5.4 million. Management
believes that its existing facilities are adequate for its present purposes. For
additional information concerning properties, see Notes 6 and 10 of the Notes to
the Consolidated Financial Statements included in this report. See "Item 8.
Financial Statements and Supplemental Data."
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company and the Bank are parties to claims and legal
proceedings arising in the ordinary course of business. After taking into
consideration information furnished by counsel to the Company and the Bank,
management believes that the ultimate aggregate liability represented thereby,
if any, will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
In May 1998, the Bank received an unfavorable jury judgment as a result of
the lawsuit filed against them by MRI Grand Terrace, Inc. ("MRI"). The award to
MRI and its joint venture partner, Tri-National Development Corp. was
approximately $4,900,000, which included approximately $2,100,000 in
compensatory damages, $1,600,000 in punitive damages, and $1,200,000 in
prejudgment interest. The lawsuit alleges that the Bank misled MRI in its
purchase of a commercial real estate property from the Bank. The Bank
subsequently made a motion to the trial judge to vacate the jury verdict, and on
August 14, 1998, the motion was denied. The Bank filed an appeal on August 19,
1998. The Court of Appeal has vacated the judgement and remanded the case for
retrial. In addition, the Court of Appeal has awarded the Bank the costs of
Appeal. MRI petitioned the Supreme Court of the State of California, who refused
to hear the case. The Company is awaiting a new trial on all of the issues.
Management believes that the ultimate outcome of this case will not have a
material adverse affect on the Company's future consolidated financial position
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of
2000.
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ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
As of February 28, 2001, the executive officers of the Company and Bank
are:
NAME POSITION AGE
---- -------- ---
George A. Borba...................... Chairman of the Board of the Company and the Bank 68
D. Linn Wiley........................ President and Chief Executive Officer of the Company 62
and the Bank
Frank Basirico....................... Executive Vice President/Credit Management Division of 46
the Bank
Edward J. Biebrich Jr. .............. Chief Financial Officer of the Company and Executive 57
Vice President and Chief Financial Officer of the Bank
Jay W. Coleman....................... Executive Vice President/Sales and Service Division of 58
the Bank
Ed Pomplun........................... Executive Vice President/Asset Management Division of 54
the Bank
Other than George A. Borba, who is the brother of John A. Borba, a director
of the Company and the Bank, there is no family relationship among any of the
above-named officers or any of the Company's directors.
Mr. Borba has served as Chairman of the Board of the Company since its
organization in April, 1981 and Chairman of the Board of the Bank since its
organization in December, 1973. In addition, Mr. Borba is the owner of George
Borba & Son Dairy.
Mr. Wiley has served as President and Chief Executive Officer of the
Company since October, 1991. Mr. Wiley joined the Company and Bank as a director
and as President & Chief Executive Officer designate on August 21, 1991. Prior
to that, Mr. Wiley served as an Executive Vice President of Wells Fargo Bank
from April 1, 1990 to August 20, 1991. From 1988 to April 1, 1990 Mr. Wiley
served as the President and Chief Administrative Officer of Central Pacific
Corporation, and from 1983 to 1990 he was the President and Chief Executive
Officer of American National Bank.
Mr. Basirico has served as Executive Vice President and Senior Loan Officer
of the Bank since October, 1996. From March, 1993 to October, 1996, he served as
Credit Administrator of the Bank. Prior to that time he was Executive Vice
President, senior loan officer at Fontana National Bank from 1991. Between 1985
and 1990 he served as Executive Vice President, senior loan officer at the Bank
of Hemet.
Mr. Biebrich assumed the position of Chief Financial Officer of the Company
and Executive Vice President/Chief Financial Officer of the Bank on February 2,
1998. From 1983 to 1990, he served as Chief Financial Officer for Central
Pacific Corporation and Executive Vice President, Chief Financial Officer and
Manager of the Finance and Operations Division for American National Bank. From
1990 to 1992, he was Vice President of Operations for Systematics Financial
Services Inc. From 1992 to 1998, he served as Senior Vice President, Chief
Financial Officer of ARB, Inc.
Mr. Coleman assumed the position of Executive Vice President of the Bank on
December 5, 1988. Prior to that he served as President and Chief Executive
Officer of Southland Bank, N.A. from March, 1983 to April, 1988.
Mr. Pomplun has served as Executive Vice President and Division Manager of
the Asset Management Division since March 29, 1996. From February, 1994 to March
29, 1996 he held that position for Citizens Bank of Pasadena. From June, 1988
through February, 1994, Mr. Pomplun served as Executive Vice President and
Division Manager of the Trust Division for First National Bank in San Diego.
Between 1984 and 1988, he served as Vice President for Bank of America's Trust
Division.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Shares of CVB Financial Corp. common stock price increased from an average
price of $14.84 per share for the first quarter of 2000 to an average per share
price of $15.15 for the fourth quarter of 2000. The following table presents the
high and low sales prices and dividend information for the Company's common
stock during each quarter for the past two years. The share prices and cash
dividend per share amounts presented for all periods have been restated to give
retroactive effect, as applicable, to the ten percent stock dividend declared in
December 2000, which was paid in January 2001, and the 5-for-4 stock split
declared in December 1999, which became effective January 14, 2000. The Company
had approximately 1,348 shareholders of record as of December 31, 2000.
TWO YEAR SUMMARY OF COMMON STOCK PRICES
QUARTER ENDED HIGH LOW DIVIDENDS
------------- ------ ------ -------------------
03/31/1999................................... $16.45 $13.73 $0.09 Cash Dividend
06/30/1999................................... $18.91 $13.95 $0.09 Cash Dividend
09/30/1999................................... $21.55 $18.27 $0.09 Cash Dividend
12/31/1999................................... $19.73 $16.55 $0.12 Cash Dividend
5-for-4 Stock Split
03/31/2000................................... $18.09 $12.27 $0.12 Cash Dividend
06/30/2000................................... $14.72 $12.56 $0.12 Cash Dividend
09/30/2000................................... $15.34 $13.64 $0.12 Cash Dividend
12/31/2000................................... $16.31 $14.66 $0.12 Cash Dividend
10% Stock Dividend
The Company lists its common stock on the American Stock Exchange under the
symbol "CVB."
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ITEM 6. SELECTED FINANCIAL DATA.
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net Interest Income.............. $ 94,107 $ 90,012 $ 80,542 $ 73,184 $ 65,803
Provision for Credit Losses...... 2,800 2,700 2,600 2,810 3,093
Other Operating Income........... 19,023 18,630 17,759 17,530 16,991
Other Operating Expenses......... 56,345 64,737 57,181 54,666 53,456
---------- ---------- ---------- ---------- ----------
Earnings Before Income Taxes..... 53,985 41,205 38,520 33,238 26,245
Income Taxes..................... 19,302 15,245 14,403 12,670 10,711
Net Earnings..................... $ 34,683 $ 25,960 $ 24,117 $ 20,568 $ 15,534
========== ========== ========== ========== ==========
Basic Earnings Per Common
Share(1)....................... $ 1.26 $ 0.96 $ 0.90 $ 0.77 $ 0.58
========== ========== ========== ========== ==========
Diluted Earnings Per Common
Share(1)....................... $ 1.23 $ 0.93 $ 0.87 $ 0.75 $ 0.56
========== ========== ========== ========== ==========
Cash Dividends Declared Per
Share(1)....................... $ 0.45 $ 0.39 $ 0.32 $ 0.22 $ 0.16
Dividend Pay-Out Ratio........... 35.71% 40.63% 32.41% 25.50% 24.85%
FINANCIAL POSITION:
Assets......................... $2,307,996 $2,010,757 $1,841,069 $1,501,048 $1,379,266
Net Loans...................... 1,032,341 935,791 817,296 736,673 695,677
Deposits....................... 1,595,030 1,501,073 1,475,639 1,294,487 1,188,961
Stockholders' Equity........... 188,630 140,770 139,430 123,671 108,043
Book Value Per Share(1)........ 6.82 5.18 5.19 4.63 4.05
Equity-to-Assets Ratio(2)...... 8.17% 7.00% 7.57% 8.24% 7.83%
FINANCIAL PERFORMANCE:
Return on:
Beginning Equity............ 24.64% 18.62% 19.50% 19.04% 16.26%
Average Equity.............. 21.96% 17.90% 18.06% 17.81% 15.43%
Return on Average Assets....... 1.67% 1.39% 1.49% 1.49% 1.26%
CREDIT QUALITY:
Allowance for Credit Losses.... $ 19,152 $ 16,761 $ 14,888 $ 13,103 $ 13,608
Allowance/Total Loans.......... 1.82% 1.76% 1.79% 1.75% 1.92%
Total Non Performing Loans..... $ 966 $ 1,194 $ 8,925 $ 9,545 $ 26,030
Non Performing Loans/Total
Loans....................... 0.09% 0.13% 1.07% 1.27% 3.67%
Allowance/Non Performing
Loans....................... 1982.61% 1403.77% 166.81% 137.28% 52.28%
Net Charge-Offs................ $ 409 $ 827 $ 815 $ 3,315 $ 1,335
Net Charge-Offs/Average
Loans....................... 0.04% 0.10% 0.11% 0.46% 0.20%
REGULATORY CAPITAL RATIOS
Leverage Ratio................. 8.5% 7.7% 7.4% 7.8% 7.4%
Tier 1 Capital................. 13.2% 12.6% 12.4% 12.2% 11.1%
Total Capital.................. 14.4% 13.9% 13.6% 13.4% 12.3%
- ---------------
(1) All per share information has been retroactively adjusted to reflect the the
10% stock dividend declared December 20, 2000, as to holders of record on
January 5, 2001 and paid January 26, 2001, the 5-for-4 stock split declared
December 15, 1999, which became effective January 14, 2000, the 3-for-2
stock split declared in December 1997 which became effective in January
1998, and the 10% stock dividends paid in 1999, and 1997.
(2) Stockholders' equity divided by total assets.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE
RESULTS OF OPERATIONS.
Management's discussion and analysis is written to provide greater detail
of the results of operations and the financial condition of CVB Financial Corp.
and its subsidiaries. This analysis should be read in conjunction with the
audited financial statements contained within this report including the notes
thereto. Certain statements under this caption constitute "forward-looking
statements" under Section 27A of the 1934 Act and Section 21E of the 1934 Act
which involve risk and uncertainties. The Company's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include but are not limited to
economic conditions, competition in the geographic and business areas in which
the Company conducts its operations, fluctuations in interest rates, credit
quality and government regulation. For additional information concerning these
factors, see "Item 1. Business -- Factors that May Affect Future Results."
CVB Financial Corp. (referred to herein on an unconsolidated basis as "CVB"
and on a consolidated basis as the "Company") is a bank holding company. Its
primary subsidiary, Citizens Business Bank, ("Bank") is a state chartered bank
with 30 branch offices located in San Bernardino, Riverside, Eastern Los
Angeles, and Orange Counties. Community Trust Deed Services ("Community") is a
nonbank subsidiary providing services to the Bank as well as nonaffiliated
persons. CVB Ventures, Inc. ("Ventures") is a nonbank subsidiary providing
financing and venture capital services to non-affiliated persons.
RECENT ACQUISITIONS
On October 4, 1999, the Company acquired Orange National Bancorp and its
subsidiary, Orange National Bank, with deposits of approximately $250.4 million
and net loans of approximately $152.0 million in a transaction accounted for
using the pooling-of-interests method of accounting. As a result of the
transaction the Bank acquired six new banking offices: Katella, East Orange,
Plaza, and Stadium, in Orange; Saddleback Valley in Laguna Hills; and Laguna
Beach. The merger contributed significantly to the growth of the Company's
deposits, loans, and assets.
Since the acquisition of Orange National Bancorp was effected by the
pooling-of-interests method of accounting, all financial statements have been
restated to reflect the combined institutions as though they were combined for
all the periods presented.
ANALYSIS OF THE RESULTS OF OPERATIONS
The Company reported net earnings of $34.7 million for the year ended
December 31, 2000. This represented an increase of $8.7 million, or 33.60%, over
net earnings of $26.0 million for the year ended December 31, 1999. Net earnings
for 1999 increased $1.8 million, or 7.64%, over net earnings of $24.1 million
for the year ended December 31, 1998. Diluted earnings per share were $1.23 in
2000, $0.93 in 1999, and $0.87 in 1998. Basic earnings per share were $1.26 in
2000, $0.96 in 1999, and $0.90 in 1998. Diluted and basic earnings per share
have been adjusted for the effects of a 5-for-4 stock split which became
effective January 14, 2000, and 10% stock dividends paid in January 2001 and
January 1999.
Net earnings for 1999 were affected by the pooling-of-interests method of
accounting which requires that certain expenses incurred to effect the merger of
the Company and Orange National Bancorp be treated as current charges against
income. The Company charged to expense merger costs of approximately $3.0
million, net of taxes. The merger costs included accounting fees, investment
banker fees, legal fees, severance expenses, and other expenses.
The increase in net earnings for 2000 compared to 1999 was primarily the
result of an increase in net interest income and a decrease in other operating
expenses. The increase in earnings for 1999 compared to 1998 was the result of
an increase in net interest income and in other operating income. This increase
was partially offset by the increase in other operating expenses. Increased net
interest income for 2000 and 1999 reflected higher volumes of average earning
assets for each year.
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20
For 2000, the Company's return on average assets was 1.67%, compared to a
return on average assets of 1.39% for 1999, and of 1.49% for 1998. The Company's
return on average stockholders' equity was 21.96% for 2000, compared to a return
of 17.90% for 1999, and of 18.06% for 1998.
NET INTEREST INCOME
Table 1 presents information concerning the net interest income of the
Company.
2000 1999 1998
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- -------- ----- ---------- -------- ----- ---------- -------- -----
(AMOUNTS IN THOUSANDS)
ASSETS
Investment Securities
Taxable(1)..................... $ 721,681 $ 48,903 6.78% $ 686,076 $42,885 6.25% $ 539,408 $ 33,385 6.19%
Tax preferenced(2)............. 208,781 11,369 7.35% 122,280 5,663 6.50% 97,734 4,370 6.27%
Federal Funds Sold............... 2,850 195 6.84% 32,726 1,545 4.72% 63,219 3,360 5.31%
Loans (3) (4).................... 981,045 90,400 9.21% 866,917 78,385 9.04% 772,331 74,840 9.69%
---------- -------- ----- ---------- ------- ----- ---------- -------- -----
Total Earning Assets............. 1,914,357 150,867 8.09% 1,707,999 128,478 7.66% 1,472,692 115,955 7.99%
Total Non Earning Assets......... 157,198 154,107 144,208
---------- ---------- ----------
Total Assets..................... $2,071,555 $1,862,106 $1,616,900
========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Demand Deposits.................. $ 610,826 $ 593,789 $ 526,257
Savings Deposits(5).............. 526,019 $ 13,216 2.51% 532,272 $11,109 2.09% 487,968 $ 12,050 2.47%
Time Deposits.................... 361,172 19,478 5.39% 334,245 15,158 4.53% 309,120 15,901 5.14%
---------- -------- ----- ---------- ------- ----- ---------- -------- -----
Total Deposits................... 1,498,017 32,694 2.18% 1,460,306 26,267 1.80% 1,323,345 27,951 2.11%
---------- -------- ----- ---------- ------- ----- ---------- -------- -----
Other Borrowings................. 387,622 24,066 6.21% 230,532 12,199 5.29% 136,189 7,462 5.48%
---------- -------- ----- ---------- ------- ----- ---------- -------- -----
Interest Bearing Liabilities..... 1,274,813 56,760 4.45% 1,097,049 38,466 3.51% 933,277 35,413 3.79%
---------- ---------- ----------
Other Liabilities................ 28,001 26,239 23,795
Stockholders' Equity............. 157,915 145,029 133,571
---------- ---------- ----------
Total Liabilities and
Stockholders' Equity........... $2,071,555 $1,862,106 $1,616,900
========== ========== ==========
Net interest spread.............. 3.64% 4.15% 4.20%
Net interest margin.............. 5.12% 5.40% 5.57%
Net interest margin excluding
loan fees...................... 4.93% 5.18% 5.26%
- ---------------
(1) Includes short-term interest bearing deposits with other institutions.
(2) Yields are calculated on a taxable equivalent basis using a marginal tax
rate of 35.00%.
(3) Loan fees are included in total interest income as follows, (000)s omitted:
2000, $3,794; 1999, $3,795; 1998, $4,864.
(4) Non performing loans are included in net loans as follows, (000)s omitted:
2000, $966; 1999, $1,194; 1998, $8,925.
(5) Includes interest bearing demand and money market accounts.
The Company's net interest income totaled $94.1 million for 2000. This
represented an increase of $4.1 million, or 4.55%, over net interest income of
$90.0 million for 1999. Net interest income for 1999 increased $9.5 million, or
11.76%, over net interest income of $80.5 million for 1998. The increases in net
interest income for 2000 and 1999 were primarily the result of greater average
balances of earning assets during each year.
The net interest margin measures net interest income as a percentage of
average earning assets. The net interest margin can be affected by changes in
the yield on earning assets and the cost of interest-bearing liabilities, as
well as changes in the level of interest-bearing liabilities in proportion to
earning assets. The net interest margin can also be affected by changes in the
mix of earning assets as well as the mix of interest-bearing liabilities. The
Company's tax effected (TE) net interest margin was 5.12% for 2000, compared to
5.40% for 1999, and 5.57% for 1998. A higher yield on average earning assets,
offset by a higher increase in the
19
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cost of average interest-bearing liabilities, contributed to the decrease in the
net interest margin for 2000. Also for 2000, a change in the mix of
interest-bearing liabilities toward higher costing funds was another element
contributing to the decrease in the net interest margin. Other borrowed funds as
a percent of interest-bearing liabilities increased from 21.01% to 30.41%. A
lower yield on average earning assets, coupled with a smaller decrease in the
cost of average interest-bearing liabilities, contributed to the decrease in the
net interest margin for 1999.
The net interest spread is the difference between the yield on average
earning assets less the cost of average interest-bearing liabilities. The
Company's net interest spread (TE) decreased to 3.64% for 2000, compared to
4.15% for 1999, and 4.20% for 1998. The decrease in the net interest spread for
2000 resulted from increases in the yield on earning assets offset by a larger
increase in the cost of average interest-bearing liabilities. The decrease in
the net interest spread for 1999 resulted from decreases in the yield on earning
assets, and a smaller decrease in the cost of average interest-bearing
liabilities.
The Company's net interest margin and net interest spread have been
decreasing which primarily reflects higher levels of investments, which have a
lower yield than loans, and a reduction in the net difference between loans and
deposits rates.
The yield (TE) on earnings assets increased to 8.09% for 2000, from 7.66%
for 1999, and 7.99% for 1998. The increase in the yield on earning assets for
2000 was the result of higher yields on both loans and investments. The decrease
in the yield on earning assets for 1999 reflects lower yields on loans. The
yield on average loans increased to 9.21% for 2000, compared to 9.04% for 1999.
The yield on loans for 1999 decreased compared to 9.69% for 1998. The increase
in the yields on loans for 2000 was primarily the result of an increased
interest rate environment partially offset by increased price competition for
loans compared to 1999. The decrease in the yields on loans for 1999 was the
result of increased price competition for loans compared to 1998. Loans
typically have higher yields than investments and federal funds sold. Total
average loans, measured as a percentage of average earning assets, increased to
51.25% for 2000, compared with 50.76% in 1999, and decreased compared to 52.44%
in 1998.
The cost of average interest-bearing liabilities increased to 4.45% for
2000, compared to 3.51% for 1999, and 3.79% for 1998. For the most part, the
increase in the cost of average interest-bearing liabilities for 2000 reflected
a higher interest rate environment and increased usage of other borrowed funds.
As a percentage of total average deposits, average non-interest-bearing (demand)
deposits increased to 40.78% for 2000, compared to 40.66% for 1999, and 39.77%
for 1998. The FDIC has approved the payment of interest on certain demand
deposit accounts. This could have a negative impact on the Company's net
interest margin, net interest spread, and net earnings.
Total interest income increased in 2000, 1999 and 1998. The increases were
primarily the result of increased balances of average earning assets. Interest
income totaled $150.9 million for 2000. This represented an increase of $22.4
million, or 17.43%, compared to total interest of $128.5 million for 1999. For
1999, total interest income increased $12.5 million, or 10.80%, from total
interest income of $116.0 million for 1998.
Interest expense totaled $56.76 million for 2000. This represented an
increase of $18.3 million, or 47.56%, over total interest expense of $38.5
million for 1999. For 1999, total interest expense increased $3.1 million, or
8.62%, over total interest expense of $35.4 million for 1998. For both 2000 and
1999, the increase in interest expense was the combined result of greater levels
of average interest-bearing liabilities and change in the mix toward higher
costing source of funds.
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22
Table 2 presents a comparison of interest income and interest expense
resulting from changes in the volumes and rates on average earning assets and
average interest-bearing liabilities for the years indicated. Changes in
interest income or expense attributable to volume changes are calculated by
multiplying the change in volume by the initial average interest rate. The
change in interest income or expense attributable to changes in interest rates
are calculated by multiplying the change in interest rate by the initial volume.
The changes attributable to interest rate and volume changes are calculated by
multiplying the change in rate times the change in volume.
TABLE 2 -- RATE AND VOLUME ANALYSIS FOR CHANGES IN INTEREST INCOME,
INTEREST EXPENSE, AND NET INTEREST INCOME
2000 COMPARED TO 1999 1999 COMPARED TO 1998
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------------------- ---------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------- ------ ------- ------- ------- ------- ------ -------
(AMOUNTS IN THOUSANDS)
Interest Income:
Taxable investment
securities................... $2,336 $3,582 $ 196 $ 6,114 $ 9,079 $ 331 $ 90 $ 9,500
Tax preferenced securities..... 4,006 995 704 5,705 1,098 156 39 1,293
Federal funds.................. (1,505) 723 (663) (1,445) (1,621) (375) 181 (1,815)
Loans.......................... 10,320 1,498 197 12,015 9,166 (5,008) (613) 3,545
------- ------ ------- ------- ------- ------- ----- -------
Total earning assets..... 15,157 6,798 434 22,389 17,722 (4,896) (303) 12,523
------- ------ ------- ------- ------- ------- ----- -------
Interest Expense:
Savings deposits............... (131) 2,265 (27) 2,107 1,093 (1,865) (169) (941)
Time deposits.................. 1,221 2,868 231 4,320 1,293 (1,883) (153) (743)
Other borrowings............... 8,313 2,114 1,440 11,867 5,169 (255) (177) 4,737
------- ------ ------- ------- ------- ------- ----- -------
Total interest bearing
liabilities............ 9,403 7,247 1,644 18,294 7,555 (4,003) (499) 3,053
------- ------ ------- ------- ------- ------- ----- -------
Net Interest Income.............. $5,754 $ (449) $(1,210) $ 4,095 $10,167 $ (893) $ 196 $ 9,470
======= ====== ======= ======= ======= ======= ===== =======
Interest and fees on loans, the Company's primary source of revenue,
totaled $90.4 million for 2000. This represented an increase of $12.0 million,
or 15.33%, over interest and fees on loans of $78.4 million for 1999. For 1999,
interest and fees on loans increased $3.5 million, or 4.74%, over interest and
fees on loans of $74.8 million for 1998. The increase in interest and fees on
loans for 2000 and 1999 reflected increases in the average balance of loans and
for 2000, reflected a higher interest rate environment. The yield on loans
increased to 9.21% for 2000, compared to 9.04% for 1999 and decreased compared
to 9.69% for 1998. Deferred loan origination fees, net of costs, totaled $3.3
million at December 31, 2000. This represented a decrease of $260,000, or 7.29%,
from deferred loan origination fees, net of costs, of $3.6 million at December
31, 1999.
In general, the Company stops accruing interest on a non-performing loan
after its principal or interest becomes 90 days or more past due, charging to
earnings all interest previously accrued but not collected. There was no
interest income that was accrued and not reversed on non-performing loans at
December 31, 2000, 1999, and 1998. Had non-performing loans for which interest
was no longer accruing complied with the original terms and conditions of their
notes, interest income would have been $99,000 greater for 2000, $274,000
greater 1999, and $485,000 greater for 1998. Accordingly, yields on loans would
have increased by 0.01% for 2000, 0.03% for 1999, and 0.06% for 1998.
Fees collected on loans are an integral part of the loan pricing decision.
Loan fees and the direct costs associated with the origination of loans are
deferred and deducted from the loan balance. Deferred net loan fees are
recognized in interest income over the term of the loan in a manner that
approximates the level-yield method. The Company recognized loan fee income of
$3.8 million for 2000, $3.8 million for 1999 and $4.9 million for 1998.
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Table 3 summarizes loan fee activity for the Bank for the years indicated.
TABLE 3 -- LOAN FEE ACTIVITY
2000 1999 1998
------- ------- -------
(AMOUNTS IN THOUSANDS)
Fees Collected........................................ $ 3,535 $ 3,943 $ 4,808
Fees and costs deferred............................... (2,039) (2,984) (4,019)
Accretion of deferred fees and costs.................. 2,298 2,836 4,075
------- ------- -------
Total fee income reported................... $ 3,794 $ 3,795 $ 4,864
======= ======= =======
Deferred net loan origination fees at end of year..... $ 3,307 $ 3,566 $ 3,418
======= ======= =======
PROVISION FOR CREDIT LOSSES
The provision for credit losses totaled $2.8 million for 2000. This
represented an increase of $100,000, or 3.70%, from the provision for credit
losses of $2.7 million for 1999. For 1999, the provision for credit losses
increased $100,000, or 3.85%, from the provision for credit losses of $2.6
million for 1998. The increase in the provision for credit losses was primarily
due to the inherent risk and size of the Company's loan portfolio and the change
in the composition of the real estate mortgage, commercial and industrial and
agribusiness loans. See "Risk Management -- Credit Risk" herein.
OTHER OPERATING INCOME
Other operating income for the Company includes income derived from special
services offered by the Bank, such as asset management and trust services,
merchant card, investment services, international banking, and other business
services. Also included in other operating income is service charges and fees,
primarily from deposit accounts; gains (net of losses) from the sale of
investment securities, other real estate owned, and fixed assets; the gross
revenue from Community and Ventures; and other revenues not included as interest
on earning assets.
Other operating income totaled $19.0 million for 2000. This represents an
increase of $393,000, or 2.11%, from other operating income of $18.6 million for
1999. During 1999, other operating income increased $871,000, or 4.9%, over
other operating income of $17.8 million for 1998. Service charges on deposit
accounts, which totaled $10.6 million, in 2000 and 1999, and $8.8 million in
1998. Contributing in part to the increase in other operating income in each
year was fee income from the Bank's Asset Management Division, (trust services)
which generated fees totaling $4.0 million in 2000, $3.7 million in 1999, and
$3.5 million in 1998. Investment Services which provides mutual funds,
certificate of deposit and other non-insured investment products, generated fees
totaling $1,316,000 in 2000, $921,000 in 1999, and $631,000 in 1998. The sale of
securities generated income (loss) totaling $(218,000) in 2000, $(80,000) in
1999, and $407,000 in 1998, while the sale of fixed assets added income (loss)
totaling $(19,000) in 2000, $(10,000) in 1999, and $684,000 in 1998.
Other operating income also includes revenue from Community, a subsidiary
of the Company. Total revenue from Community was approximately $107,000 in 2000,
$158,000 in 1999, and $222,000 in 1998. Ventures, a subsidiary of the Company,
had revenues of $41,000 in 2000 and reported no revenues in 1999, its year of
inception.
OTHER OPERATING EXPENSES
Other operating expenses for the Company includes expenses for salaries and
benefits, occupancy, equipment, stationary and supplies, professional services,
promotion, data processing, deposit insurance, other real estate owned, and
other expenses. Other operating expenses totaled $56.3 million for 2000. This
represents a decrease of $8.4 million, or 12.96%, from other operating expenses
of $64.7 million for 1999. Approximately, $3.6 million of the decrease in other
operating expenses in 2000 (including salaries and
22
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benefits and data processing expenses) is attributable to efficiencies derived
from economies of scale as a result of the merger with Orange National Bancorp.
In 1999, due to the merger with Orange National Bancorp, other operating
expense was affected by the pooling-of-interest method of accounting which
requires that certain expenses incurred to effect the merger be treated as
current charges. The Company charged to other operating expense merger costs of
approximately $4.9 million. The merger costs included accounting fees,
investment banker fees, legal fees, and severance expense. Without the merger
costs, other operating expense would have totaled $59.9 million, representing an
increase of $2.7 million or 4.72% over operating expense of $57.2 million for
1998.
For the most part, other operating expenses reflect the direct expenses and
related administrative expenses associated with staffing, maintaining,
promoting, and operating branch facilities. Management's ability to control
other operating expenses in relation to asset growth can be measured in terms of
other operating expenses as a percentage of average assets. Operating expenses
measured as a percentage of average assets decreased to 2.72% for 2000, compared
to a ratio of 3.48% for 1999, and 3.54% for 1998. Without the merger costs,
operating expense measured as a percentage of average assets would have been
3.22% for 1999. The decrease in the ratio indicates that management is
controlling greater levels of assets with proportionately smaller operating
expenses, an indication of operating efficiency.
Management's ability to control other operating expenses in relation to the
level of net revenue (net interest income plus other operating income) can be
measured in terms of other operating expenses as a percentage of net revenue.
This is known as the efficiency ratio and indicates the percentage of revenue
that is used to cover expenses. For 2000, other operating expenses, as a
percentage of total revenue was 49.81%, compared to a ratio of 59.59% for 1999
and a ratio of 58.17% for 1998. Without the merger costs, other operating
expense as a percentage of total revenue would have been 55.12% for 1999. The
decrease in the ratio indicates that a proportionately smaller amount of net
revenue was being allocated to operating expenses, an additional indication of
operating efficiency.
Salaries and related expenses comprise the greatest portion of other
operating expenses. Salaries and related expenses totaled $30.2 million for
2000. This represented an increase of $1.1 million, or 3.77%, over salaries and
related expenses of $29.1 million for 1999. Salary and related expenses
increased $303,000, or 1.05%, over salaries and related expenses of $28.8
million for 1998. The increases for both 2000 and 1999 primarily resulted from
increased staffing levels. Salaries and related expenses as a percent of average
assets decreased to 1.46% for 2000, compared to 1.56% for 1999, and 1.78% for
1998.
Occupancy and equipment expenses represent the cost of operating and
maintaining branch and administrative facilities, including the purchase and
maintenance of furniture, fixtures, office and equipment and data processing
equipment. Occupancy expense totaled $5.4 million for 2000. This represented an
increase of $525,000, or 10.89%, over occupancy expense of $4.8 million for
1999. Occupancy expense for 1999 decreased $284,000, or 5.56%, from an expense
level of $5.1 million for 1998. Equipment expense totaled $5.0 million for 2000.
This represented an increase of $252,000, or 5.32%, over the $4.7 million
expense for 1999. For 1999, equipment expense increased $85,000, or 1.83%, from
an expense of $4.6 million for 1998.
Stationary and supplies expense totaled $3.7 million for 2000. This
represented an increase of $58,000, or 1.60%, over the expense of $3.6 million
for 1999. Stationary and supplies expense for 1999 increased $273,000, or 8.09%,
over the expense of $3.4 million for 1998.
Professional services totaled $3.0 million for 2000. This represented a
decrease of $332,000 or 10.85%, over an expense of $3.4 million for 1999. For
1999, professional services increased $86,000, or 2.60%, from an expense of $3.3
million for 1998.
Promotion expense totaled $2.7 million for 2000. This represented a
decrease of $167,000, or 5.81%, from an expense of $2.9 million for 1999.
Promotion expense increased for 1999 by $372,000, or 14.90%, over an expense of
$2.5 million for 1998.
Data processing expense totaled $1.4 million for 2000. This represented a
decrease of $929,000, or 39.47%, from an expense of $2.4 million for 1999 which
is attributable to efficiencies derived from economies
23
25
of scale as a result of the merger with Orange National Bancorp. Data processing
expense increased for 1999 by $424,000, or 21.99%, over an expense of $1.9
million for 1998. The increase for 1999 was partially the result of costs
associated with external processing and correspondent bank fees.
Other real estate owned (property foreclosed on and owned by the Company)
expense represents the cost of acquiring, maintaining, and liquidating real
property obtained by the Bank as a result of foreclosure. Included as an expense
is a provision charged to earnings for potential decreases in the value of other
real estate owned. Other real estate owned expense totaled $90,000 for 2000.
This represented a decrease of $557,000, or 86.08%, from an expense level of
$647,000 for 1999. For 1999, other real estate owned expense decreased $564,000,
or 46.57%, over an expense level of $1.2 million for 1998. The decrease in the
expense for 2000 and 1999 compared to 1998 reflected the lower average balance
of other real estate owned for the most recent year.
Other expenses include the amortization of goodwill and intangibles. The
amortization expense of goodwill and intangibles totaled $1.2 million for 2000,
1999, and 1998.
INCOME TAXES
The Company's effective tax rate for 2000 was 35.8%. This compares to
effective tax rates of 37.0% for 1999, and 37.4% for 1998. These rates are below
the nominal combined Federal and State tax rates as a result of tax preferenced
income for each period.
ANALYSIS OF FINANCIAL CONDITION
The Company reported total assets of $2.3 billion at December 31, 2000.
This represented an increase of $297.2 million, or 14.78%, from total assets of
$2.0 billion at December 31, 1999. For 1999, total assets increased $169.7
million, or 9.22%, from total assets of $1.8 billion at December 31, 1998.
INVESTMENT SECURITIES
The Company maintains a portfolio of investment securities to provide
interest income and to serve as a source of liquidity for its ongoing
operations. Note 2 of the Notes to the Consolidated Financial Statements sets
forth information concerning the composition and the maturity distribution of
the investment securities portfolio at December 31, 2000 and 1999. At December
31, 2000, the Company reported total investment securities of $1.07 billion.
This represents an increase of $192.7 million, or 21.97%, over total investment
securities of $877.3 million at December 31, 1999. For 1999, investment
securities increased $90.5 million, or 11.50%, greater than total investment
securities of $786.8 million at December 31, 1998.
The Company has adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". Under this standard, securities held as
"available-for-sale" are reported at current market value for financial
reporting purposes. The market value, less the amortized cost of investment
securities, net of income taxes, is adjusted directly to stockholders' equity.
At December 31, 2000, securities held as available-for-sale had a fair market
value of $1.07 billion, representing 100.00% of total investment securities with
an amortized cost of $1.06 billion. At December 31, 2000, the net unrealized
holding gain on securities available-for-sale was $11.7 million, and the
unrealized gain on investments available-for-sale, net of deferred taxes was
$6.8 million.
In connection with the merger with Orange National Bancorp and the
Company's adoption of SFAS No. 133 "Accounting for derivative instruments and
hedging activities", the Company reclassified investment securities from
held-to-maturity to available-for-sale. The amortized cost at the date of
transfer was $71.6 million and the fair value was $72.3 million. The unrealized
gain was recorded in stockholders' equity, net of taxes.
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LOANS
At December 31, 2000, the Company reported total loans, net of deferred
loan fees, of $1.05 billion. This represents an increase of $98.9 million, or
10.39%, over total loans of $952.6 million at December 31, 1999. For 1999, total
loans increased $120.4 million, or 14.46%, over total loans, net of deferred
loan fees of $832.2 million at December 31, 1998.
Table 4 presents the distribution of the Company's loan portfolio at the
dates indicated.
TABLE 4 -- DISTRIBUTION OF LOAN PORTFOLIO BY TYPE
DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Commercial and Industrial.................. $ 425,130 $392,094 $287,518 $303,410 $285,547
Real Estate
Construction............................. 58,373 48,078 34,489 19,937 38,337
Mortgage................................. 401,408 375,387 385,393 308,460 284,374
Consumer, net of unearned discount......... 22,642 24,731 28,996 28,031 29,832
Municipal Lease Finance Receivables........ 23,633 21,268 22,923 24,008 19,825
Agribusiness(1)............................ 123,614 94,560 76,283 69,404 55,486
---------- -------- -------- -------- --------
Gross Loans.............................. 1,054,800 956,118 835,602 753,250 713,401
---------- -------- -------- -------- --------
Less:
Allowance for Credit Losses.............. 19,152 16,761 14,888 13,103 13,608
Deferred Loan Fees....................... 3,307 3,566 3,418 3,474 4,116
---------- -------- -------- -------- --------
Total Net Loans.................. $1,032,341 $935,791 $817,296 $736,673 $695,677
========== ======== ======== ======== ========
- ---------------
(1) Included as Commercial and Industrial and Real Estate Mortgage loans above
are loans totaling $59.1 million for 2000, $42.9 million for 1999, $34.6
million for 1998, $27.9 million for 1997, $22.7 million for 1996, that
represent loans to agricultural concerns for commercial or real estate
purposes.
Commercial and industrial loans are loans to commercial entities to finance
capital purchases or improvements, or to provide cash flow for operations. Real
estate loans are loans secured by conforming first trust deeds on real property,
including property under construction, commercial property and single family and
multifamily residences. Consumer loans include installment loans to consumers as
well as home equity loans and other loans secured by junior liens on real
property. Municipal lease finance receivables are leases to municipalities.
Agribusiness loans are loans to finance the operating needs of wholesale dairy
farm operations, cattle feeders, livestock raisers, and farmers.
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Table 5 provides the maturity distribution for commercial and industrial
loans, real estate construction loans and agribusiness loans as of December 31,
2000. The loan amounts are based on contractual maturities although the
borrowers have the ability to prepay the loans. Amounts are also classified
according to repricing opportunities or rate sensitivity.
TABLE 5 -- LOAN MATURITIES AND INTEREST RATE CATEGORY AT DECEMBER 31, 2000
AFTER ONE
BUT
WITHIN WITHIN AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- --------
(AMOUNTS IN THOUSANDS)
Types of Loans:
Commercial and industrial(1)........................ $126,737 $194,928 $480,266 $801,931
Construction........................................ 56,756 0 1,692 58,448
Agribusiness........................................ 117,045 6,569 0 123,614
-------- -------- -------- --------
$300,538 $201,497 $481,958 $983,993
======== ======== ======== ========
Amount of Loans based upon:
Fixed Rates......................................... $ 46,689 $149,163 $364,017 $559,869
Floating or adjustable rates........................ 253,849 52,334 117,941 424,124
-------- -------- -------- --------
$300,538 $201,497 $481,958 $983,993
======== ======== ======== ========
- ---------------
(1) Includes approximately $375.0 million in fixed rate commercial real estate
loans. These loans are classified as real estate mortgage loans for the
financial statements, but are accounted for as commercial and industrial
loans on the Company's books.
As a normal practice in extending credit for commercial and industrial
purposes, the Bank may accept trust deeds on real property as collateral. In
some cases, when the primary source of repayment for the loan is anticipated to
come from the cash flow from normal operations of the borrower, the requirement
of real property as collateral is not the primary source of repayment but an
abundance of caution. In these cases, the real property is considered a
secondary source of repayment for the loan. Since the Bank lends primarily in
Southern California, its real estate loan collateral is concentrated in this
region. At December 31, 2000, substantially all of the Bank's loans secured by
real estate were collateralized by properties located in Southern California.
This concentration is considered when determining the adequacy of the Company's
allowance for credit losses.
NON-PERFORMING ASSETS
At December 31, 2000, non-performing assets, which included non-performing
loans (nonaccrual loans, loans 90 days or more past due and still accruing
interest, and restructured loans) (see CREDIT RISK) and other real estate owned,
totaled $1.3 million. This represented a decrease of $572,000, or 30.15%,
compared to non-performing assets of $1.9 million at December 31, 1999. For
1999, total non-performing assets decreased $9.1 million, or 82.80%, from total
non-performing assets of $11.0 million at December 31, 1998. The decrease in
non-performing assets for 2000 compared to 1999 resulted as balances of other
real estate owned and nonaccrual loans decreased during the year. The decrease
in non-performing assets for 1999 reflected the decrease in nonaccrual loans and
other real estate owned.
At December 31, 2000, the Company had loans on which interest was no longer
accruing (nonaccrual) totaling $966,000. This represented a decrease of
$225,000, or 18.89%, from total nonaccrual loans of $1.2 million at December 31,
1999. For 1999, total nonaccrual loans decreased $7.7 million, or 86.54%, over
total nonaccrual loans of $8.8 million at December 31, 1998. The Bank has
allocated specific reserves included in the allowance for credit losses for
potential losses on these loans.
26
28
A restructured loan is a loan on which the Bank has reduced the rate of
interest to a lower rate, forgiven all or a part of the interest income, or
forgiven part of the principal balance of the loan due to the borrower's
financial condition. At December 31, 2000, and 1999 the Company had no loans
that were classified as restructured.
Although management believes that non-performing loans are generally well
secured and that potential losses are provided for in the Company's allowance
for credit losses, there can be no assurance that future deterioration in
economic conditions or collateral values will not result in future credit
losses. Table 6 provides information on non-performing loans and other real
estate owned at the dates indicated.
TABLE 6 -- NON-PERFORMING ASSETS
DECEMBER 31,
---------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------- ------- -------
(AMOUNTS IN THOUSANDS)
Nonaccrual loans................................... $ 966 $1,191 $ 8,849 $ 6,402 $20,028
Loans past due 90 days or more..................... 0 3 76 1,051 628
Restructured loans................................. 0 0 0 2,092 5,374
Other real estate owned (OREO)..................... 359 703 2,102 4,521 8,642
------ ------ ------- ------- -------
Total nonperforming assets............... $1,325 $1,897 $11,027 $14,066 $34,672
====== ====== ======= ======= =======
Percentage of nonperforming assets to total loans
outstanding & OREO............................... 0.13% 0.20% 1.32% 1.86%