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1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM N/A TO N/A . ------------ ------------- COMMISSION FILE NUMBER 1-10394 CVB FINANCIAL CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 95-3629339 STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION IDENTIFICATION NO.) 701 N. HAVEN AVENUE, SUITE 350 ONTARIO, CALIFORNIA 91764 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (909) 980-4030 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK AMERICAN STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of February 29, 2000, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $353,097,499. Number of shares of common stock of the registrant outstanding as of February 29, 2000: 24,998,053. The following documents are incorporated by reference herein: Definitive Proxy Statement for the Annual Meeting of Stockholders which will be filed within 120 days of the fiscal year ended December 31, 1999......................... Part III of Form 10-K - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 INTRODUCTION Certain matters discussed in this Annual Report may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "1933 Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "1934 Act"), and as such may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which CVB Financial Corp. and its subsidiaries operate, projections of future performance, perceived opportunities in the market and statements regarding the entities mission and vision. CVB Financial Corp. and its subsidiaries' actual results, performance, or achievements may differ significantly from the results, performance, or achievements expressed or implied in such forward-looking statements. For discussion of the factors that might cause such differences, see "Item 1. Business -- Risk Factors that May Affect Future Results." AVAILABLE INFORMATION Reports filed with the Securities and Exchange Commission (the "Commission") including proxy statements and other information can be inspected and copied at the public reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington D.C., 20549; 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and 7 World Trade Center, Suite 1300, New York, New York, 10048. Copies of such materials can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. The Commission maintains a Web Site that contains reports, proxy and information statements and other information. The address of the site is http://www.sec.gov. In addition, reports can be inspected at the office of the American Stock Exchange, 86 Trinity Place, New York, New York, 10006. PART I ITEM 1. BUSINESS CVB FINANCIAL CORP. CVB Financial Corp. (referred to herein on an unconsolidated basis as "CVB" and on a consolidated basis as the "Company") is a bank holding company incorporated in California on April 27, 1981 and registered under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). The Company commenced business on December 30, 1981 when, pursuant to a reorganization, it acquired all of the voting stock of Chino Valley Bank. On March 29, 1996, Chino Valley Bank changed its name to Citizens Business Bank (the "Bank"). The Bank is the Company's principal asset. The Company has two other operating subsidiaries, Community Trust Deed Services ("Community") and CVB Ventures, Inc. ("Ventures"). The Company has two other dormant subsidiaries, Chino Valley Bancorp. and Orange National Bancorp. CVB's principal business is to serve as a holding company for the Bank, Community, Ventures, and for other banking or banking related subsidiaries which the Company may establish or acquire. The Company has not engaged in any other activities to date. As a legal entity separate and distinct from its subsidiaries, CVB's principal source of funds is, and will continue to be, dividends paid by and other funds advanced from primarily the Bank. Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made by the Bank to CVB. See "Item 1. Business -- Supervision and Regulation -- Dividends and Other Transfers of Funds." At December 31, 1999, the Company had $2.0 billion in total consolidated assets, $935.8 million in consolidated net loans and $1.5 billion in total consolidated deposits. The principal executive offices of CVB and the Bank are located at 701 North Haven Avenue, Suite 350, Ontario, California. 1
3 CITIZENS BUSINESS BANK The Bank was incorporated under the laws of the State of California on December 26, 1973, was licensed by the California Department of Financial Institutions and commenced operations as a California state chartered bank on August 9, 1974. The Bank's deposit accounts are insured under the Federal Deposit Insurance Act up to applicable limits. The Bank is not a member of the Federal Reserve System. At December 31, 1999, the Bank had $2.0 billion in assets, $938.2 million in net loans and $1.5 billion in deposits. The Bank currently has 30 banking offices located in San Bernardino County, Riverside County, Orange County and the Eastern portion of Los Angeles County in Southern California. Of the 30 offices, the Bank opened nine as de novo branches and acquired the other twenty one in acquisition transactions. Since 1990, the Bank has added eighteen offices, two in 1990, two in 1993, two in 1994, one in 1995, four in 1996, and seven in 1999. On October 4, 1999, Orange National Bancorp merged with and into the Company in a transaction accounted for using the pooling-of-interests method of accounting. Orange National Bancorp had six branch offices, four branches located in Orange, one branch located in Laguna Hills, and one branch located in Laguna Beach. The merger added approximately $250.4 million deposits and $152.0 million in net loans. Through its network of banking offices, the Bank emphasizes personalized service combined with offering a full range of banking and trust services to businesses, professionals and individuals located in the service areas of its offices. Although the Bank focuses the marketing of its services to small-and medium-sized businesses, a full range of retail banking services are made available to the local consumer market. The Bank offers a wide range of deposit instruments. These include checking, savings, money market and time certificates of deposit for both business and personal accounts. The Bank also serves as a federal tax depository for its business customers. The Bank also provides a full complement of lending products, including commercial, agribusiness, installment and real estate loans. Commercial products include lines of credit and other working capital financing, accounts receivable lending and letters of credit. Financing products for individuals include automobile financing, lines of credit and home improvement and home equity lines of credit. Real estate loans include mortgage and construction loans. The Bank also offers a wide range of specialized services designed for the needs of its commercial accounts. These services include cash management systems for monitoring cash flow, a credit card program for merchants, courier pick-up and delivery, payroll services, electronic funds transfers by way of domestic and international wires and automated clearing house, and on-line account access. The Bank also makes available investment products to customers, including mutual funds, a full array of fixed income vehicles and a program to diversify its customers' funds in federally insured time certificates of deposit of other institutions. The Bank also offers a wide range of financial services and trust services through its Asset Management Department. These services include trust services, corporate trustee services, mutual funds, annuities, 401K plans and individual investment accounts. COMMUNITY TRUST DEED SERVICES The Company owns 100% of the voting stock of Community, which has one office. Community's services, which are provided to the Bank and non-affiliated persons, include preparing and filing notices of default, reconveyances and related documents and acting as a trustee under deeds of trust. At present, the assets, revenues and earnings of Community are not material in amount when compared to the Bank. CVB VENTURES, INC. The Company owns 100% of the voting stock of Ventures, which has one office. Ventures charges fees and collects commissions for acting as an intermediary for emerging growth companies in obtaining capital, loans, leases and other financing vehicles. At present, the assets, revenues, and earnings of Ventures are not material in amount when compared to the Bank. 2
4 COMPETITION The banking and financial services industry in California generally, and in the Bank's market areas specifically, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. The Bank competes for loans, deposits, and customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other nonbank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services than the Bank. In addition, recent federal legislation may have the effect of further increasing the pace of consolidation within the financial services industry. See "Item 1. Business -- Supervision and Regulation -- Financial Services Modernization Legislation." In order to compete with the other financial services providers, the Bank principally relies upon local promotional activities, personal relationships established by officers, directors, and employees with its customers, and specialized services tailored to meet needs of the communities served. In those instances where the Bank is unable to accommodate a customer's needs, the Bank may arrange for those services to be provided by its correspondents. The Bank has 30 offices located in the following counties: San Bernardino, Riverside, Orange, and Los Angeles. EMPLOYEES At December 31, 1999, the Company employed 545 persons 345 on a full-time and 200 on a part-time basis. The Company believes that its employee relations are satisfactory. ECONOMIC CONDITIONS, GOVERNMENT POLICIES, LEGISLATION, AND REGULATION The Company's profitability, like most financial institutions, is impacted by interest rate differentials. In general, the difference between the interest rates paid by the Bank on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Bank on its interest-earning assets, such as loans extended to its clients and securities held in its investment portfolio, comprise the major portion of the Company's earnings. These rates are highly sensitive to many factors that are beyond the control of the Company and the Bank, such as inflation, recession and unemployment, and the impact which future changes in domestic and foreign economic conditions might have on the Company and the Bank cannot be predicted. The business of the Company and the Bank is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Federal Reserve Board implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open-market operations in U.S. Government securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments, and deposits and also affect interest rates earned on interest-earning assets and paid on interest-bearing liabilities. The nature and impact on the Company and the Bank of any future changes in monetary and fiscal policies cannot be predicted. From time to time, legislative acts, as well as regulations, are enacted which have the effect of increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies, and other financial institutions and financial services providers are frequently made in the U.S. Congress, in the state legislatures, and before various regulatory agencies. See "Item 1. Business -- Supervision and Regulation." 3
5 SUPERVISION AND REGULATION General Bank holding companies and banks are extensively regulated under both federal and state law. This regulation is intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of shareholders of the Company. Set forth below is a summary description of the material laws and regulations which relate to the operations of the Company and the Bank. The description is qualified in its entirety by reference to the applicable laws and regulations. The Company The Company, as a registered bank holding company, is subject to regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company is required to file with the Federal Reserve Board quarterly, and annual reports and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may conduct examinations of the Company and its subsidiaries. The Federal Reserve Board may require that the Company terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the Federal Reserve Board believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, the Company must file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities. Under the Bank Holding Company Act and regulations adopted by the Federal Reserve Board, a bank holding company and its nonbanking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services. Further, the Company is required by the Federal Reserve Board to maintain certain levels of capital. See "Capital Standards." The Company is required to obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the Federal Reserve Board is also required for the merger or consolidation of the Company and another bank holding company. The Company is prohibited by the Bank Holding Company Act, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries. However, the Company, subject to the prior approval of the Federal Reserve Board, may engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Under Federal Reserve Board regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the Federal Reserve Board's policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board's regulations or both. 4
6 The Company is also a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the California Department of Financial Institutions. The Company's securities are registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As such, the Company is subject to the information, proxy solicitation, insider trading, and other requirements and restrictions of the Exchange Act. The Bank The Bank, as a California chartered bank, is subject to primary supervision, periodic examination, and regulation by the California Commissioner of Financial Institutions ("Commissioner") and the Federal Deposit Insurance Corporation ("FDIC"). To a lesser extent, the Bank is also subject to certain regulations promulgated by the Federal Reserve Board. If, as a result of an examination of the Bank, the FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank's operations are unsatisfactory or that the Bank or its management is violating or has violated any law or regulation, various remedies are available to the FDIC. Such remedies include the power to enjoin "unsafe or unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of the Bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the Bank's deposit insurance, which for a California chartered bank would result in a revocation of the Bank's charter. The Commissioner has many of the same remedial powers. Various requirements and restrictions under the laws of the State of California and the United States affect the operations of the Bank. State and federal statutes and regulations relate to many aspects of the Bank's operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, and capital requirements. Further, the Bank is required to maintain certain levels of capital. See "-- Capital Standards." Various requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal and California statutes and regulations relate to many aspects of the Bank's operations, including reserves against deposits, ownership of deposit accounts, interest rates payable on deposits, loans, investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, capital requirements and disclosure obligations to depositors and borrowers. Financial Services Modernization Legislation On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Financial Services Modernization Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. 5
7 Generally, the Financial Services Modernization Act: - Repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial service providers; - Provides a uniform framework for the functional regulation of the activities of banks, savings institutions, and their holding companies; - Broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies, and their financial subsidiaries; - Provides an enhanced framework for protecting the privacy of consumer information; - Adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system; - Modifies the laws governing the implementation of the Community Reinvestment Act ("CRA"); and - Addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions. In order for the Company to take advantage of the ability to affiliate with other financial services providers, the Company must become a "Financial Holding Company" as permitted under an amendment to the Bank Holding Company Act. To become a Financial Holding Company, the Company would file a declaration with the Federal Reserve Board, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because all of its insured depository institution subsidiaries are well-capitalized and well-managed. See "-- The Bank -- Capital Standards." In addition, the Federal Reserve Board must also determine that each insured depository institution subsidiary of the Company has at least a "satisfactory" CRA rating. See "-- The Bank -- Community Reinvestment Act and Fair Lending Developments." The Company currently meets the requirements to make an election to become a Financial Holding Company. Management of the Company has not determined at this time whether it will seek an election to become a Financial Holding Company. The Company is examining its strategic business plan to determine whether, based on market conditions, the relative financial conditions of the Company and its subsidiaries, regulatory capital requirements, general economic conditions, and other factors, the Company desires to utilize any of its expanded powers provided in the Financial Services Modernization Act. The Financial Services Modernization Act also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a Financial Holding Company. Financial activities include all activities permitted under new sections of the Bank Holding Company Act or permitted by regulation. A national bank seeking to have a financial subsidiary, and each of its depository institution affiliates, must be "well-capitalized" and "well-managed." The total assets of all financial subsidiaries may not exceed the lesser of 45% of a bank's total assets, or $50 billion. A national bank must exclude from its assets and equity all equity investments, including retained earnings, in a financial subsidiary. The assets of the subsidiary may not be consolidated with the bank's assets. The bank must also have policies and procedures to assess financial subsidiary risk and protect the bank from such risks and potential liabilities. The Financial Services Modernization Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because California permits commercial banks chartered by the state to engage in any activity permissible for national banks, the Bank will be permitted to form subsidiaries to engage in the activities authorized by the Financial Services Modernization Act, to the same extent as a national bank. In order to form a financial subsidiary, the Bank must be well-capitalized, and the Bank would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks. 6
8 The Company and the Bank do not believe that the Financial Services Modernization Act will have a material adverse effect on our operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Company and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Company and the Bank. Dividends and Other Transfers of Funds Dividends from the Bank constitute the principal source of income to the Company. The Company is a legal entity separate and distinct from the Bank. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Company. Under such restrictions, the amount available for payment of dividends to the Company by the Bank totaled $48.7 million at December 31, 1999. In addition, the California Department of Financial Institutions and the FDIC have the authority to prohibit the Bank from paying dividends, depending upon the Bank's financial condition, if such payment is deemed to constitute an unsafe or unsound practice. The FDIC and the Commissioner also have authority to prohibit the Bank from engaging in activities that, in the FDIC's and the Commissioner's opinion, constitute unsafe or unsound practices in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the FDIC and the Commissioner could assert that the payment of dividends or other payments might, under some circumstances, be such an unsafe or unsound practice. Further, the FDIC and the Federal Reserve Board have established guidelines with respect to the maintenance of appropriate levels of capital by banks or bank holding companies under their jurisdiction. Compliance with the standards set forth in such guidelines and the restrictions that are or may be imposed under the prompt corrective action provisions of federal law could limit the amount of dividends which the Bank or the Company may pay. An insured depository institution is prohibited from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions if after such transaction the institution would be undercapitalized. See "-- Prompt Corrective Regulatory Action and Other Enforcement Mechanisms" and "-- Capital Standards" for a discussion of these additional restrictions on capital distributions. The Bank is subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, the Company or other affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of assets of the Company or other affiliates. Such restrictions prevent the Company and such other affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and investments by the Bank to or in the Company or to or in any other affiliate are limited, individually, to 10.0% of the Bank's capital and surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate, to 20.0% of the Bank's capital and surplus (as defined by federal regulations). California law also imposes certain restrictions with respect to transactions involving the Company and other controlling persons of the Bank. Additional restrictions on transactions with affiliates may be imposed on the Bank under the prompt corrective action provisions of federal law. See "Item 1. Business -- Supervision and Regulation -- Prompt Corrective Action and Other Enforcement Mechanisms." Capital Standards The Federal Reserve Board and the FDIC have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by 7
9 one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as commercial loans. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risk-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. The following table presents the amounts of regulatory capital and the capital ratios for the Bank, compared to its minimum regulatory capital requirements as of December 31, 1999. AS OF DECEMBER 31, 1999 ------------------------------------------------------------ ACTUAL REQUIRED EXCESS ------------------ ----------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Leverage ratio............................ $145,313 7.6% $76,481 4.0% $68,832 3.6% Tier 1 risk-based ratio................... 145,313 12.3% 47,256 4.0% 98,057 8.3% Total risk-based ratio.................... 160,160 13.6% 94,212 8.0% 65,948 5.6% The following table presents the amounts of regulatory capital and the capital ratios for the Company, compared to its minimum regulatory capital requirements as of December 31, 1999. AS OF DECEMBER 31, 1999 ------------------------------------------------------- ACTUAL REQUIRED EXCESS ---------------- --------------- ---------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- ------- ----- -------- ----- (DOLLARS IN THOUSANDS) Leverage ratio............................. $148,710 7.7% $77,252 4.0% $ 71,458 3.7% Tier 1 risk-based ratio.................... 148,710 12.6% 47,210 4.0% 101,500 8.6% Total risk-based ratio..................... 163,579 13.9% 94,146 8.0% 69,433 5.9% Prompt Corrective Action and Other Enforcement Mechanisms Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including but not limited to those institutions that fall below one or more prescribed minimum capital ratios. Each federal banking agency has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At December 31, 1999, the Bank and the Company exceeded the required ratios for classification as "well/adequately capitalized." An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized unless its capital ratio actually warrants such treatment. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. 8
10 Safety and Soundness Standards The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation, fees and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. Under these standards, an insured depository institution should: (i) conduct periodic asset quality reviews to identify problem assets, (ii) estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses, (iii) compare problem asset totals to capital, (iv) take appropriate corrective action to resolve problem assets, (v) consider the size and potential risks of material asset concentrations, and (vi) provide periodic asset quality reports with adequate information for management and the board of directors to assess the level of asset risk. These new guidelines also set forth standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves. Premiums for Deposit Insurance The Bank's deposit accounts are insured by the Bank Insurance Fund ("BIF"), as administered by the FDIC, up to the maximum permitted by law. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the institution's primary regulator. The FDIC charges an annual assessment for the insurance of deposits, which as of December 31, 1999, ranged from 0 to 27 basis points per $100 of insured deposits, based on the risk a particular institution poses to its deposit insurance fund. The risk classification is based on an institution's capital group and supervisory subgroup assignment. Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Paperwork Reduction Act"), at January 1, 1997, the Bank began paying, in addition to its normal deposit insurance premium as a member of the BIF, an amount equal to approximately 1.3 basis points per $100 of insured deposits toward the retirement of the Financing Corporation bonds ("Fico Bonds") issued in the 1980s to assist in the recovery of the savings and loan industry. Members of the Savings Association Insurance Fund ("SAIF"), by contrast, pay, in addition to their normal deposit insurance premium, approximately 6.4 basis points. Under the Paperwork Reduction Act, the FDIC is not permitted to establish SAIF assessment rates that are lower than comparable BIF assessment rates. Effective January 1, 2000, the rate paid to retire the Fico Bonds will be equal for members of the BIF and the SAIF. The Paperwork Reduction Act also provided for the merging of the BIF and the SAIF by January 1, 1999 provided there were no financial institutions still chartered as savings associations at that time. However, as of January 1, 1999, there were still financial institutions chartered as savings associations. Interstate Banking and Branching The Bank Holding Company Act permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including certain nationwide-and state-imposed concentration limits. The Bank has the ability, subject to certain restrictions, to acquire by acquisition or merger branches outside its home state. The establishment of new interstate branches is also possible in those states with laws that expressly permit it. Interstate branches are subject to certain laws of the states in which they are located. Competition may increase further as banks branch across state lines and enter new markets. 9
11 Community Reinvestment Act and Fair Lending Developments The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low- and moderate-income neighborhoods. A bank may be subject to substantial penalties and corrective measures for a violation of certain fair lending laws. The federal banking agencies may take compliance with such laws and CRA obligations into account when regulating and supervising other activities. A bank's compliance with its CRA obligations is based on a performance-based evaluation system which bases CRA ratings on an institution's lending service and investment performance. When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve Board will review the assessment of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. Based on an examination conducted December 6, 1999 the Bank was rated satisfactory in complying with its CRA obligations. RISK FACTORS THAT MAY AFFECT FUTURE RESULTS The following discusses certain factors which may affect the Company's financial results and operations and should be considered in evaluating the Company. Economic Conditions and Geographic Concentration. The Company's operations are located San Bernardino County, Riverside County, Orange County, and the eastern portion of Los Angeles County in Southern California. As a result of this geographic concentration, the Company's results depend largely upon economic conditions in these areas. A deterioration in economic conditions in the Company's market areas could have a material adverse impact on the quality of the Company's loan portfolio, the demand for its products and services and its financial condition and results of operations. Interest Rates. The Company's earnings are impacted by changing interest rates. Changes in interest rates impact the level of loans, deposits and investments, the credit profile of existing loans and the rates received on loans and securities and the rates paid on deposits and borrowings. The Company anticipates that interest rates may continue to increase should the Federal Reserve Board continue to raise rates. However, significant fluctuations in interest rates may have an adverse affect on the Company's financial condition and results of operations. Government Regulation and Monetary Policy. The banking industry is subject to extensive federal and state supervision and regulation. Significant new laws or changes in existing laws, or repeals of existing laws may cause the Company's results to differ materially. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Company and a material change in these conditions could have a material adverse impact on the Company's financial condition and results of operations. Competition. The banking and financial services businesses in the Company's market areas are highly competitive. The increasingly competitive environment is a result of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. The results of the Company may differ if circumstances affecting the nature or level of competition change. Credit Quality. A significant source of risk arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. The Company has adopted underwriting and credit monitoring procedures and credit policies, including the establishment and review of the allowance for credit losses, that management believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying the Company's credit portfolio. These policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on the Company's results. 10
12 Year 2000 Compliance. Most of the Company's operations are dependent on the efficient functioning of the Company's computer systems and software. Computer system failures or disruption could have a material adverse effect on the Company's financial condition and results of operations. As of March 15, 2000, the Bank experienced no problems with respect to Year 2000 technology issues. This does not mean that some problems may not occur in the future. Other Risks. From time to time, the Company details other risks with respect to its business and/or financial results in its filings with the Commission. ITEM 2. PROPERTIES The principal executive offices of the Company and the Bank are located at 701 North Haven Avenue, Suite 350, Ontario, California. The office of Community is located at 125 East "H" Street, Colton, California. The Bank occupies the premises for twenty one of its offices under leases expiring at various dates from 1999 through 2027. The Bank owns the premises for ten of its offices, including its data center. The Company's total occupancy expense, exclusive of furniture and equipment expense, for the year ended December 31, 1999, was $6.0 million. Management believes that its existing facilities are adequate for its present purposes. However, management currently intends to increase the Bank's assets over the next several years and anticipates that a substantial portion of this growth will be accomplished through acquisition or de novo opening of additional banking offices. For additional information concerning properties, see Notes 6 and 10 of the Notes to the Consolidated Financial Statements included in this report. See "Item 8. Financial Statements and Supplemental Data." ITEM 3. LEGAL PROCEEDINGS From time to time the Company and the Bank are parties to claims and legal proceedings arising in the ordinary course of business. After taking into consideration information furnished by counsel to the Company and the Bank, management believes that the ultimate aggregate liability represented thereby, if any, will not have a material adverse effect on the Company's consolidated financial position or results of operations. In May 1998, the Bank received an unfavorable jury judgment as a result of the lawsuit filed against them by MRI Grand Terrace, Inc. ("MRI"). The award to MRI and its joint venture partner, Tri-National Development Corp., was approximately $4.9 million, which included approximately $2.1 million in compensatory damages, $1.6 million in punitive damages, and $1.2 million in pre-judgment interest. The lawsuit alleges that the Bank misled MRI in their purchase of a commercial real estate property from the Bank. The Bank subsequently made a motion to the trial judge to vacate the jury verdict, and on August 14, 1998 the motion was denied. The Bank filed an appeal on August 19, 1998 and is proceeding with the appellate process, which could take an extended period of time to complete. During 1998 and 1999, the Bank accrued a liability for a portion of the judgment discussed above. Management believes the ultimate outcome of this case will not have a material effect on the Company's future consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to shareholders during the fourth quarter of 1999. 11
13 ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT As of February 15, 2000, the principal executive officers of the Company and Bank are: NAME POSITION AGE ---- -------- --- George A. Borba.................. Chairman of the Board of the Company and the Bank 67 D. Linn Wiley.................... President and Chief Executive Officer of the Company and 61 the Bank Frank Basirico................... Executive Vice President/Senior Loan Officer of the Bank 45 Edward J. Biebrich Jr............ Chief Financial Officer of the Company and Executive 56 Vice President and Chief Financial Officer of the Bank Jay W. Coleman................... Executive Vice President of the Bank 57 Ed Pomplun....................... Executive Vice President of the Bank 53 Other than George A. Borba, who is the brother of John A. Borba, a director of the Company and the Bank, there is no family relationship among any of the above-named officers or any of the Company's directors. Mr. Borba has served as Chairman of the Board of the Company since its organization in April, 1981 and Chairman of the Board of the Bank since its organization in December, 1973. In addition, Mr. Borba is the owner of George Borba & Son Dairy. Mr. Wiley has served as President and Chief Executive Officer of the Company since October, 1991. Mr. Wiley joined the Company and Bank as a director and as President and Chief Executive Officer designate on August 21, 1991. Prior to that, Mr. Wiley served as an Executive Vice President of Wells Fargo Bank from April 1, 1990 to August 20, 1991. From 1988 to April 1, 1990 Mr. Wiley served as the President and Chief Administrative Officer of Central Pacific Corporation, and from 1983 to 1990 he was the President and Chief Executive Officer of American National Bank. Mr. Basirico has served as Executive Vice President and Senior Loan Officer of the Bank since October, 1996. From March, 1993 to October, 1996, he served as Credit Administrator of the Bank. Prior to that time he was Executive Vice President, senior loan officer at Fontana National Bank from 1991. Between 1985 and 1990 he served as Executive Vice President, senior loan officer at the Bank of Hemet. Mr. Biebrich assumed the position of Chief Financial Officer of the Company and Executive Vice President/Chief Financial Officer of the Bank on February 2, 1998. Mr. Biebrich began his career in 1972 as an accountant with Arthur Andersen & Co. In 1976, he joined Community First Bank as Executive Vice President of the Finance and Operations Division. For the period of 1983 to 1990, he served as Chief Financial Officer for Central Pacific Corporation and Executive Vice President, Chief Financial Officer and Manager of the Finance and Operations Division for American National Bank. From 1990 to 1992, he was Vice President of Operations for Systematics Financial Services Inc. From 1992 to 1998, he served as Senior Vice President, Chief Financial Officer of ARB, Inc. Mr. Coleman assumed the position of Executive Vice President of the Bank on December 5, 1988. Prior to that he served as President and Chief Executive Officer of Southland Bank, N.A. from March, 1983 to April, 1988. Mr. Pomplun has served as Executive Vice President and Division Manager of the Asset Management Division since March 29, 1996. From February, 1994 to March 29, 1996 he held that position for Citizens Bank of Pasadena. From June, 1988 through February, 1994, Mr. Pomplun served as Executive Vice President and Division Manager of the Trust Division for First National Bank in San Diego. Between 1984 and 1988, he served as Vice President for Bank of America's Trust Division. Between March, 1977 and June, 1984 he served as Trust Office Manager and Trust Marketing Head for San Diego Trust and Savings Bank. 12
14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Shares of CVB Financial Corp. common stock price increased from an average price of $16.09 per share for the first quarter of 1999 to an average per share price of $20.19 for the fourth quarter of 1999. The following table presents the high and low sales prices and dividend information for the Company's common stock during each quarter for the past two years. The share prices and cash dividend per share amounts presented for all periods have been restated to give retroactive effect, as applicable, to the ten percent stock dividend declared in 1998 and the 5-for-4 stock split declared in 1999 which became effective January 14, 2000. The Company had approximately 1,452 shareholders of record as of December 31, 1999. TWO YEAR SUMMARY OF COMMON STOCK PRICES QUARTER ENDED HIGH LOW DIVIDENDS ------------- ------ ------ ------------------- 03/31/1998................................... $20.95 $15.00 $0.09 Cash Dividend 06/30/1998................................... $19.37 $15.46 $0.07 Cash Dividend 09/30/1998................................... $17.78 $13.64 $0.07 Cash Dividend 12/31/1998................................... $18.91 $15.37 $0.09 Cash Dividend 10% Stock Dividend 03/31/1999................................... $18.10 $15.10 $0.09 Cash Dividend 06/30/1999................................... $20.80 $15.35 $0.09 Cash Dividend 09/30/1999................................... $23.70 $20.10 $0.09 Cash Dividend 12/31/1999................................... $21.70 $18.20 $0.12 Cash Dividend 5-for-4 Stock Split The Company lists its common stock on the American Stock Exchange under the symbol "CVB" ITEM 6. SELECTED FINANCIAL DATA 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Net Interest Income............... $ 90,012 $ 80,542 $ 73,184 $ 65,803 $ 61,571 Provision for Credit Losses....... 2,700 2,600 2,810 3,093 2,895 Other Operating Income............ 18,630 17,759 17,530 16,991 11,871 Other Operating Expenses.......... 64,737 57,181 54,666 53,456 47,240 ---------- ---------- ---------- ---------- ---------- Earnings Before Income Taxes...... 41,205 38,520 33,238 26,245 23,307 Income Taxes...................... 15,245 14,403 12,670 10,711 9,326 ---------- ---------- ---------- ---------- ---------- Net Earnings...................... $ 25,960 $ 24,117 $ 20,568 $ 15,534 $ 13,981 ========== ========== ========== ========== ========== Basic Earnings Per Common Share(1) $ 1.06 $ 0.99 $ 0.85 $ 0.64 $ 0.58 ========== ========== ========== ========== ========== Diluted Earnings Per Common Share(1)........................ $ 1.02 $ 0.95 $ 0.82 $ 0.62 $ 0.57 ========== ========== ========== ========== ========== Stock Splits...................... 5-for-4 3-for-2 Stock Dividends(2)................ 10% 10% 10%/5% Cash Dividends Declared Per Share........................... $ 0.39 $ 0.32 $ 0.22 $ 0.16 $ 0.13 Dividend Pay-Out Ratio............ 36.79% 32.41% 25.50% 24.85% 21.79% Financial Position: Assets.......................... $2,010,757 $1,841,069 $1,501,048 $1,379,266 $1,144,868 Net Loans....................... 935,791 817,296 736,673 695,677 609,173 Deposits........................ 1,501,073 1,475,639 1,294,487 1,188,961 992,565 Stockholders' Equity............ 140,770 139,430 123,671 108,043 95,522 Book Value Per Share(1)......... 5.70 5.71 5.09 4.46 4.00 Equity-to-Assets Ratio(3)....... 7.00% 7.57% 8.24% 7.83% 8.34% 13
15 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Financial Performance: Return on: Beginning Equity............. 18.62% 19.50% 19.04% 16.26% 18.22% Average Equity............... 17.90% 18.06% 17.81% 15.43% 16.04% Return on Average Assets........ 1.39% 1.49% 1.49% 1.26% 1.35% Credit Quality: Allowance for Credit Losses..... $ 16,761 $ 14,888 $ 13,103 $ 13,608 $ 11,139 Allowance/Total Loans........... 1.76% 1.79% 1.75% 1.92% 1.80% Total Non Performing Loans...... $ 1,194 $ 8,925 $ 9,545 $ 26,030 $ 29,935 Non Performing Loans/Total Loans........................ 0.13% 1.07% 1.27% 3.67% 4.83% Net Charge-Offs................. $ 827 $ 815 $ 3,315 $ 1,335 $ 2,692 Net Charge-Offs/Average Loans... 0.10% 0.11% 0.46% 0.20% 0.45% Regulatory Capital Ratios Leverage Ratio.................. 7.7% 7.4% 7.8% 7.4% 8.1% Tier 1 Capital.................. 12.6% 12.4% 12.2% 11.1% 11.7% Total Capital................... 13.9% 13.6% 13.4% 12.3% 12.9% - --------------- (1) All per share information has been retroactively adjusted to reflect the 5-for-4 stock split declared December 15, 1999, as to holders of record on January 14, 2000 and paid January 31, 2000, and the 3-for-2 stock split declared in 1997 and the 10% stock dividends declared in 1998, 1996, and 1995. (2) In 1995, the Company and Orange National Bancorp declared a 10% and 5% stock dividend, respectively. (3) Stockholders' equity divided by total assets. ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS. Management's discussion and analysis is written to provide greater detail of the results of operations and the financial condition of CVB Financial Corp. and its subsidiaries. This analysis should be read in conjunction with the audited financial statements contained within this report including the notes thereto. Certain statements under this caption constitute "forward-looking statements" under Section 27A of the 1934 Act and Section 21E of the 1934 Act which involve risk and uncertainties. The Company's actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include but are not limited to economic conditions, competition in the geographic and business areas in which the Company conducts its operations, fluctuations in interest rates, credit quality and government regulation. For additional information concerning these factors, see "Item 1. Business -- Factors that May Affect Future Results." CVB Financial Corp., ("CVB") is a bank holding company. Its primary subsidiary, Citizens Business Bank, ("Bank") is a state chartered bank with 30 branch offices located in San Bernardino, Riverside, Eastern Los Angeles, and Orange Counties. Community Trust Deed Services ("Community") is a nonbank subsidiary providing services to the Bank as well as nonaffiliated persons. CVB Ventures, Inc. ("Ventures") is a nonbank subsidiary providing financing and venture capital services to non affiliated persons. For purposes of this analysis, the consolidated entity is referred to as the "Company". Virtually all of the Company's activities are conducted within its market area, which includes the San Bernardino, Riverside, Eastern Los Angeles, and Orange Counties. For the year 1999, Southern California, has again become an international role model, having rebuilt on a base of rapidly growing entrepreneurial firms. The Inland Empire Region of San Bernardino and Riverside Counties is California's fastest growing region. Employment growth is accelerating based upon a host of industries. These sectors include international trade, film production and multimedia technology in Los Angeles County, logistics and manufacturing in the Inland Empire, and information and bio-technology in Orange County. While the Southern California 14
16 economies have exhibited recent positive economic and employment trends, there is no assurance that such trends will continue. On March 29, 1996, the Bank acquired Citizens Bank of Pasadena with deposits of approximately $111.7 million, and net loans of approximately $58.9 million. As a result of the acquisition, the Bank acquired four new banking offices (La Canada Flintridge, Pasadena, Colorado-Catalina (Pasadena), and San Marino). In addition to the commercial banking operation, the Bank acquired a trust operation with approximately $800.0 million in assets under management. These trust assets are not included on the balance sheet of the Bank or Company. The acquisition contributed significantly to the growth of the Company's deposits, loans and assets. On October 4, 1999, the Company acquired Orange National Bancorp and its subsidiary, Orange National Bank, with deposits of approximately $250.4 million and net loans of approximately $152.0 million in a transaction accounted for using the pooling-of-interests method of accounting. As a result of the transaction the Bank acquired six new banking offices: Katella, East Orange, Plaza, and Stadium, in Orange; Saddleback Valley in Laguna Hills; and Laguna Beach. The merger contributed significantly to the growth of the Company's deposits, loans, and assets. Since the acquisition of Orange National Bancorp was effected by the pooling-of-interests method of accounting, all financial statements have been restated to reflect the combined institutions as though they were combined for all the periods presented. ANALYSIS OF THE RESULTS OF OPERATIONS The Company reported net earnings of $26.0 million for the year ended December 31, 1999. This represented an increase of $1.8 million, or 7.64%, over net earnings of $24.1 million for the year ended December 31, 1998. Net earnings for 1998 increased $3.5 million, or 17.25%, over net earnings of $20.6 million for the year ended December 31, 1997. Diluted earnings per share were $1.02 in 1999, $0.95 in 1998, and $0.82 in 1997. Basic earnings per share were $1.06 in 1999, $0.99 in 1998, and $0.85 in 1997. Diluted and basic earnings per share have been adjusted for the effects of a 5-for-4 stock split which became effective January 14, 2000, a 3-for-2 stock split declared in 1997 and 10% stock dividends declared in 1998, 1996, and 1995. Net earnings for 1999 were affected by the pooling-of-interests method of accounting which requires that certain expenses incurred to effect the merger of the Company and Orange National Bancorp be treated as current charges against income. The Company charged to expense merger costs of approximately $3.0 million, net of taxes. The merger costs included accounting fees, investment banker fees, legal fees, severance expenses, and other expenses. The increase in net earnings for 1999 compared to 1998 was primarily the result of an increase in net interest income and an increase in other operating income after the effect of merger costs. The increase in earnings for 1998 compared to 1997 was the result of an increase in net interest income and an increase in other operating income. Increased net interest income for 1999 and 1998 reflected higher volumes of average earning assets for each year. The increases in net revenue for 1999 and 1998 were partially offset by increases in operating expenses. For 1999, the Company's return on average assets was 1.39%, compared to a return on average assets of 1.49% for 1998, and a return of 1.49% for 1997. The Company's return on average stockholders' equity was 17.90% for 1999, compared to a return of 18.06% for 1998, and 17.81% for 1997. 15
17 NET INTEREST INCOME Table 1 presents the average yield on each category of earning assets, the average rate paid for each category of interest bearing liabilities, and the resulting net interest spread and net interest margin for the years indicated. Rates for tax preferenced investments are provided on a taxable equivalent basis using the federal marginal tax rate of 35.00%. TABLE 1 -- DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIALS 1999 1998 1997 ---------------------------- ---------------------------- ----------------------------- AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ---------- -------- ---- ---------- -------- ---- ---------- -------- ----- (AMOUNTS IN THOUSANDS) ASSETS Investment Securities Taxable(1)..................... $ 686,076 $ 42,885 6.25% $ 539,408 $ 33,385 6.19% $ 402,985 $ 25,290 6.28% Tax preferenced(2)............. 122,280 5,663 6.50% 97,734 4,370 6.27% 54,098 2,553 7.02% Federal Funds Sold............... 32,726 1,545 4.72% 63,219 3,360 5.31% 34,129 1,848 5.41% Loans(3)(4)...................... 866,917 78,385 9.04% 772,331 74,840 9.69% 718,431 71,821 10.00% ---------- -------- ---- ---------- -------- ---- ---------- -------- ----- Total Earning Assets............. 1,707,999 128,478 7.66% 1,472,692 115,955 7.99% 1,209,643 101,512 8.49% Total Non Earning Assets......... 154,107 144,208 167,045 ---------- ---------- ---------- Total Assets..................... $1,862,106 $1,616,900 $1,376,688 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Demand Deposits.................. $ 593,789 $ 526,257 $ 464,353 Savings Deposits(5).............. 532,272 $ 11,109 2.09% 487,968 $ 12,050 2.47% 466,588 $ 11,572 2.48% Time Deposits.................... 334,245 15,158 4.53% 309,120 15,901 5.14% 244,439 12,832 5.25% ---------- -------- ---- ---------- -------- ---- ---------- -------- ----- Total Deposits................... 1,460,306 26,267 1.80% 1,323,345 27,951 2.11% 1,175,380 24,404 2.08% ---------- -------- ---- ---------- -------- ---- ---------- -------- ----- Other Borrowings................. 230,532 12,199 5.29% 136,189 7,462 5.48% 69,542 3,924 5.64% ---------- -------- ---- ---------- -------- ---- ---------- -------- ----- Interest Bearing Liabilities..... 1,097,049 38,466 3.51% 933,277 35,413 3.79% 780,569 28,328 3.63% ---------- ---------- ---------- Other Liabilities................ 26,239 23,795 16,298 Stockholders' Equity............. 145,029 133,571 115,468 ---------- ---------- ---------- Total Liabilities and Stockholders' Equity........... $1,862,106 $1,616,900 $1,376,688 ========== ========== ========== Net interest spread.............. 4.15% 4.20% 4.86% Net interest margin.............. 5.40% 5.59% 6.14% Net interest margin excluding loan fees...................... 5.18% 5.26% 5.73% - --------------- (1) Includes short term interest bearing deposits with other institutions (2) Yields are calculated on a taxable equivalent basis using a marginal tax rate of 35.00% (3) Loan fees are included in total interest income as follows, (000)s omitted: 1999, $3,795; 1998, $4,864; 1997, $4,888 (4) Non performing loans are included in net loans as follows, (000)s omitted: 1999, $1,194; 1998, $8,925; 1997, $9,545 (5) Includes interest bearing demand and money market accounts The Company's operating results depend primarily on net interest income, the difference between the interest and fees earned on loans and investments less the interest paid on deposit accounts and borrowed funds. Net interest income totaled $90.0 million for 1999. This represented an increase of $9.5 million, or 11.76%, over net interest income of $80.5 million for 1998. Net interest income for 1998 increased $7.4 million, or 10.05%, over net interest income of $73.2 million for 1997. The increases in net interest income for 1999 and 1998 were primarily the result of greater average balances of earning assets during each year. 16
18 The net interest margin measures net interest income as a percentage of average earning assets. The net interest margin can be affected by changes in the yield on earning assets and the cost of interest bearing liabilities, as well as changes in the level of interest bearing liabilities in proportion to earning assets. The net interest margin can also be affected by changes in the mix of earning assets as well as the mix of interest bearing liabilities. The Company's net interest margin was 5.40% for 1999, compared to 5.59% for 1998, and 6.14% for 1997. A lower yield on average earning assets, coupled with a smaller decrease in the cost of average interest bearing liabilities, contributed to the decrease in the net interest margin for 1999. A lower yield on average earning assets, coupled with an increase in the cost of average interest bearing liabilities, contributed to the decrease in the net interest margin for 1998. In 1999, the prime rate increased from 7.75% in June to 8.50% in November. However, the Bank's average prime rate for 1999 was 8.00% compared to 7.96% in 1998. In 1998, the prime rate decreased from 8.50% to 7.75%. This interest rate environment had an effect of increasing rates in the bond market, but reducing rates in the loan portfolio and deposits (primarily due to competition). In the last quarter of 1998, the prime rate decreased. This had the effect of reducing the yield on loans. The decrease in prime rate had the effect of a decrease in the overnight federal funds rate and the discount rate by the Federal Reserve Board. This had the effect of not only reducing the prime rate, but also the rates in the bond market and, to some extent the rates on deposits. The net interest spread is the difference between the yield on average earning assets less the cost of average interest bearing liabilities. The Company's net interest spread decreased to 4.15% for 1999, compared to 4.20% for 1998, and 4.86% for 1997. The decrease in the net interest spread for 1999 resulted from decreases in the yield on earning assets and a smaller decrease in the cost of average interest bearing liabilities. The decrease in the net interest spread for 1998 resulted from decreases in the yield on earning assets, and an increase in the cost of average interest bearing liabilities. The yield on earnings assets decreased to 7.66% for 1999, from 7.99% for 1998, and 8.49% for 1997. The decrease in the yield on earning assets for 1999 was the result of lower yields on loans. The decrease in the yield on earning assets for 1998 reflects lower yields on investment securities, loans, and a less profitable asset mix. The yield on average loans decreased to 9.04% for 1999, compared to 9.69% for 1998, and 10.00% for 1997. The decrease in the yields on loans for 1999 was the result increased price competition for loans compared to 1998. The decrease in the yields on loans for 1998 was the result of a lowering interest rate environment and increased price competition for loans compared to 1997. Loans typically have higher yields than investments and federal funds sold. Total average loans, measured as a percentage of average earning assets, decreased to 50.76% for 1999, compared with 52.44% in 1998, and 59.39% in 1997. Conversely, average investment securities, including federal funds sold, increased to 49.24% of average earning assets for 1999, compared with 47.56% for 1998, and 40.61% for 1997. The cost of average interest bearing liabilities decreased to 3.51% for 1999, compared to 3.79% for 1998, and 3.63% for 1997. For the most part, the decrease in the cost of average interest bearing liabilities for 1999 reflected increased usage of other borrowed funds. The Company has been able to obtain a greater portion of its total average deposits from noninterest bearing demand deposits. As a percentage of total average deposits, average noninterest bearing demand deposits increased to 40.66% for 1999, compared to 39.77% for 1998, and 39.51% for 1997. The FDIC has approved the payment of interest on certain demand deposit accounts. This could have a negative impact on the Company's net interest margin, net interest spread, and net earnings. Despite the decrease in the yield on average earning assets, total interest income increased in 1999, 1998 and 1997. The increases were the result of increased balances of average earning assets. Interest income totaled $128.5 million for 1999. This represented an increase of $12.5 million, or 10.80%, compared to total interest of $116.0 million for 1998. For 1998, total interest income increased $14.4 million, or 14.23%, from total interest income of $101.5 million for 1997. Interest expense totaled $38.5 million for 1999. This represented an increase of $3.1 million, or 8.62%, over total interest expense of $35.4 million for 1998. For 1998, total interest expense increased $7.1 million, or 17
19 25.01%, over total interest expense of $28.3 million for 1997. For both 1999 and 1998, the increase in interest expense was the combined result of greater levels of average interest bearing liabilities. Table 2 presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average earning assets and average interest bearing liabilities for the years indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates are calculated by multiplying the change in interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume. TABLE 2 -- RATE AND VOLUME ANALYSIS FOR CHANGES IN INTEREST INCOME, INTEREST EXPENSE, AND NET INTEREST INCOME 1999 COMPARED TO 1998 1998 COMPARED TO 1997 INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO --------------------------------------- --------------------------------------- RATE/ RATE/ VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL ------- ------- ------ ------- ------- ------- ------ ------- (AMOUNTS IN THOUSANDS) Interest Income: Taxable investment securities.................. $ 9,079 $ 331 $ 90 $ 9,500 $ 8,562 $ (349) $(118) $ 8,095 Tax preferenced securities.... 1,098 156 39 1,293 2,059 (134) (108) 1,817 Federal funds................. (1,621) (375) 181 (1,815) 1,575 (34) (29) 1,512 Loans......................... 9,166 (5,008) (613) 3,545 5,388 (2,204) (165) 3,019 ------- ------- ----- ------- ------- ------- ----- ------- Total earning assets.... 17,722 (4,896) (303) 12,523 17,584 (2,721) (420) 14,443 ------- ------- ----- ------- ------- ------- ----- ------- Interest Expense: Savings deposits.............. 1,093 (1,865) (169) (941) 530 (51) (1) 478 Time deposits................. 1,293 (1,883) (153) (743) 3,396 (258) (69) 3,069 Other borrowings.............. 5,169 (255) (177) 4,737 3,761 (114) (109) 3,538 ------- ------- ----- ------- ------- ------- ----- ------- Total interest bearing liabilities................... 7,555 (4,003) (499) 3,053 7,687 (423) (179) 7,085 ------- ------- ----- ------- ------- ------- ----- ------- Net Interest Income............. $10,167 $ (893) $ 196 $ 9,470 $ 9,897 $(2,298) $(241) $ 7,358 ======= ======= ===== ======= ======= ======= ===== ======= Interest and fees on loans, the Company's primary source of revenue, totaled $78.4 million for 1999. This represented an increase of $3.5 million, or 4.74%, over interest and fees on loans of $74.8 million for 1998. For 1998, interest and fees on loans increased $3.0 million, or 4.20%, over interest and fees on loans of $71.8 million for 1997. The increase in interest and fee on loans for 1999 and 1998 reflected increases in the average balance of loans. The yield on loans decreased to 9.04% for 1999, compared to 9.69% for 1998. The yield on loans for 1997 was 10.00%. The decrease in loan yields for 1999 compared to 1998 reflected an increased price competition for loans. Deferred loan origination fees, net of costs, totaled $3.6 million at December 31, 1999. This represented an increase of $148,000, or 4.33%, from deferred loan origination fees, net of costs, of $3.4 million at December 31, 1998. In general, the Company stops accruing interest on a nonperforming loan after its principal or interest become 90 days or more past due, charging to earnings all interest previously accrued but not collected. There was no interest income that was accrued and not reversed on nonperforming loans at December 31, 1999 and December 31, 1998. There was interest income of approximately $12,000 that was accrued and not reversed on a nonperforming loan at December 31, 1997. Had nonperforming loans for which interest was no longer accruing complied with the original terms and conditions of their notes, interest income would have been $274,000 greater for 1999, $485,000 greater for 1998, and $391,000 greater for 1997. Accordingly, yields on loans would have increased by 0.03% for 1999, 0.06% for 1998, and 0.05% for 1997. Fees collected on loans are an integral part of the loan pricing decision. Loan fees and the direct costs associated with the origination of loans are deferred and deducted from the loan balance. Deferred net loan fees are recognized in interest income over the term of the loan in a manner that approximates the level-yield method. The Company recognized loan fee income of $3.8 million for 1999, $4.9 million for 1998 and $4.9 million for 1997. 18
20 Table 3 summarizes loan fee activity for the Bank for the years indicated. TABLE 3 -- LOAN FEE ACTIVITY 1999 1998 1997 ------- ------- ------- (AMOUNTS IN THOUSANDS) Fees Collected........................................ $ 3,943 $ 4,808 $ 4,246 Fees and costs deferred............................... (2,984) (4,019) (4,229) Accretion of deferred fees and costs.................. 2,836 4,075 4,871 ------- ------- ------- Total fee income reported................... $ 3,795 $ 4,864 $ 4,888 ======= ======= ======= Deferred net loan origination fees at end of year..... $ 3,566 $ 3,418 $ 3,474 ======= ======= ======= PROVISION FOR CREDIT LOSSES The provision for credit losses totaled $2.7 million for 1999. This represented an increase of $100,000, or 3.85%, from the provision for credit losses of $2.6 million for 1998. For 1998, the provision for credit losses decreased $210,000, or 7.47%, from the provision for credit losses of $2.8 million for 1997. Net loans charged to the allowance for credit losses totaled $827,000 for 1999. This represented an increase of $12,000, or 1.47%, from net loan losses charged to the allowance of $815,000 for 1998. For 1998, net loan losses charged to the allowance for credit losses decreased $2.5 million, or 75.41%, from net loans charged to the allowance of $3.3 million for 1997. See "Risk Management -- Credit Risk". OTHER OPERATING INCOME Other operating income for the Company includes income derived from special services offered by the Bank, such as asset management and trust services, merchant card, investment services, international, and other business services; it also includes service charges and fees, primarily from deposit accounts; gains (net of losses) from the sale of investment securities, other real estate owned, and fixed assets; the gross revenue from Community; and other revenues not included as interest on earning assets. Other operating income totaled $18.6 million for 1999. This represents an increase of $871,000, or 4.90%, from other operating income of $17.8 million for 1998. During 1998, other operating income increased $229,000, or 1.31%, over other operating income of $17.5 million for 1997. The increase in other operating income in 1999 is due in part to an increase in service charges on deposit accounts which totaled $10.6 million, $8.8 million, and $8.6 million for 1999, 1998, and 1997, respectively, and fee income originated by the Bank's Asset Management Division, (trust services) which generated fees totaling $3.7 million, $3.5 million, and $3.2 million for 1999, 1998 and 1997, respectively. Investment Services which provides mutual funds, certificate of deposit and other non-insured investment products, generated fees totaling $921,000, $631,000 and $406,000 for 1999, 1998 and 1997, respectively. The sale of securities generated income (loss) totaling $(80,000), $407,000 and $7,000 for 1999, 1998 and 1997, respectively, while the sale of fixed assets added income (loss) totaling $(10,000), $684,000 and $26,000 for 1999, 1998 and 1997, respectively. Other operating income also includes revenue from Community, a subsidiary of the Company. Total revenue from Community was approximately $158,000, $222,000, and $367,000, for 1999, 1998, and 1997, respectively. Ventures had no income for the year since it started late in the fourth quarter. The expenses of approximately $4,300 were included in the respective expense categories of the consolidated financial statements. OTHER OPERATING EXPENSES Other operating expenses totaled $64.7 million for 1999 and $57.2 million for 1998, representing an increase of $7.6 million, or 13.21%. In 1999, due to the merger with Orange National Bancorp, other operating expense was affected by the pooling-of-interest method of accounting which requires that certain expenses incurred to effect the merger be treated as current charges. The Company charged to other operating expense merger costs of approximately $4.9 million. The merger costs included accounting fees, investment banker 19
21 fees, legal fees, and severance expense. Without the merger costs, other operating expense would have totaled $59.9 million, representing an increase of $2.7 million or 4.72% over operating expense of $57.2 million for 1998. For 1998 other operating expenses increased $2.5 million, or 4.60%, over total operating expenses of $54.7 million for 1997. For the most part, other operating expenses reflect the direct expenses and related administrative expenses associated with staffing, maintaining, promoting, and operating branch facilities. Consequently, other operating expenses have increased as the asset size of the Company and the number of branch offices have increased. Management's ability to control other operating expenses in relation to asset growth can be measured in terms of other operating expenses as a percentage of average assets. Operating expenses measured as a percentage of average assets decreased to 3.48% for 1999, compared to a ratio of 3.54% for 1998, and 3.97% for 1997. Without the merger costs, operating expense measured as a percentage of average assets would have been 3.22% for 1999. The decrease in the ratio indicates that management is controlling greater levels of assets with proportionately smaller operating expenses. Management's ability to control other operating expenses in relation to the level of net revenue (net interest income plus other operating income) can be measured in terms of other operating expenses as a percentage of net revenue. This is known as the efficiency ratio and indicates the percentage of revenue that is used to cover expenses. For 1999, other operating expenses as a percentage of total revenue was 59.59%, compared to a ratio of 58.17% for 1998, and a ratio of 60.26% for 1997. Without the merger costs, other operating expense as a percentage of total revenue would have been 55.12% for 1999. The decrease in the ratio indicated that a proportionately smaller amount of net revenue was being allocated to operating expenses. Salaries and related expenses comprise the greatest portion of other operating expenses. Salaries and related expenses totaled $29.1 million for 1999. This represented an increase of $303,000, or 1.05%, over salaries and related expenses of $28.8 million for 1998. Salary and related expenses for 1998 were $925,000, or 3.31%, greater than salaries and related expenses of $27.9 million for 1997. The increases for both 1999 and 1998 primarily resulted from increased staffing levels. Salaries and related expenses as a percent of average assets decreased to 1.56% for 1999, compared to 1.78% for 1998, and 2.03% for 1997. Occupancy and equipment expenses represent the cost of operating and maintaining branch and administrative facilities, including the purchase and maintenance of furniture, fixtures, office and equipment and data processing equipment. Occupancy expense totaled $4.8 million for 1999. This represented a decrease of $284,000, or 5.56%, over occupancy expense of $5.1 million for 1998. Occupancy expense for 1998 increased $540,000, or 11.82%, from an expense level of $4.6 million for 1997. Equipment expense totaled $4.7 million for 1999. This represented an increase of $85,000, or 1.83%, over the $4.6 million expense for 1998. For 1998, equipment expense increased $577,000, or 14.18%, from an expense of $4.1 million for 1997. Equipment expense in 1998 increased as a result of a $226,000 increase in computer maintenance and replacement costs and associated depreciation. Stationary and supplies expense totaled $3.6 million for 1999. This represented an increase of $273,000, or 8.09%, over the expense of $3.4 million for 1998. Stationary and supplies expense for 1998 increased $131,000, or 4.04%, over the expense of $3.2 million for 1997. Professional services totaled $3.4 million for 1999. This represented an increase of $86,000 or 2.60%, over an expense of $3.3 million for 1998. For 1998, professional services expense increased $491,000, or 17.45%, from an expense of $2.8 million for 1997. Promotion expense totaled $2.9 million for 1999. This represented an increase of $372,000, or 14.90%, from an expense of $2.5 million for 1998. Promotion expense decreased for 1998 by $54,000, or 2.12%, over an expense of $2.6 million for 1997. Data processing expense totaled $2.4 million for 1999. This represented an increase of $424,000, or 21.99%, from an expense of $1.9 million for 1998. Data processing expense increased for 1998 by $151,000, or 8.50%, over an expense of $1.8 million for 1997. The increase for 1999 was partially the result of costs associated with external processing and correspondent bank fees. 20
22 Other real estate owned expense represents the cost of acquiring, maintaining, and liquidating real property obtained by the Bank as a result of foreclosure. Included as an expense is a provision charged to earnings for potential decreases in the value of other real estate owned. Other real estate owned expense totaled $647,000 for 1999. This represented a decrease of $564,000, or 46.57%, from an expense level of $1.2 million for 1998. For 1998, other real estate owned expense decreased $1.6 million, or 56.49%, over an expense level of $2.8 million for 1997. The decrease in the expense for 1999 and 1998 compared to 1997 reflected the lower average balance of other real estate owned for the most recent year. As stated elsewhere in this report, in 1999 due to the merger with Orange National Bancorp, other operating expense was affected by the pooling-of-interests method of accounting which requires that certain expenses incurred to effect the merger be treated as current charges. The Company charged to acquisition costs merger expenses of approximately $4.9 million. The merger expenses included accounting fees, investment banker fees, legal fees, and severance expense. Other expenses include the amortization of goodwill and intangibles. The amortization expense of goodwill and intangibles totaled $1.2 million for 1999, 1998, and 1997. YEAR 2000 The financial institutions industry, as with other industries, was faced with year 2000 issues. These issues centered around computer programs that do not recognize a year which begins with "20" instead of "19", or uses only 2 digits for the year. All Year 2000 statements are designated as Year 2000 Readiness Disclosures under the Year 2000 Information and Readiness Disclosures Act of 1998. The Company uses third party software and systems exclusively. During 1999, all of the software was analyzed in conjunction with the Company's third party vendors. Several systems were replaced during 1999. The Company also updated its contingency plan to include Year 2000 issues. All of the software and systems were tested throughout the year. The contingency plan was also tested, using remote data processing hot sites. The Bank surveyed, on several occasions, its large depositors and borrowing customers. This was done to ascertain their preparation for Year 2000. No major issues arose from these surveys. Throughout the year, the Company expended $655,000 in conjunction with Year 2000 issues. Of this amount, $600,000 was spent to replace the Bank's teller terminal system. This amount was capitalized and will be depreciated over five years. The Company spent $55,000 on testing software and systems and installing other, small PC related software. In addition, the Company allocated $1 million of its allowance for loan and lease losses to potential year 2000 problems. As of December 31, 1999, all phases of Year 2000 Plan were complete. As of March 15, 2000, the Company experienced no problems with Year 2000 issues. The Company will continue to monitor critical dates, such as the close of the first quarter, throughout the Year 2000. It is not anticipated that there will be any problems from Year 2000 issues. INCOME TAXES The Company's effective tax rate for 1999 was 37.0%. This compares to effective tax rates of 37.4% for 1998, and 38.1% for 1997. These rates are below the nominal combined Federal and State tax rates as a result of tax preferenced income for each period. ANALYSIS OF FINANCIAL CONDITION The Company reported total assets of $2.0 billion at December 31, 1999. This represented an increase of $169.7 million, or 9.22%, from total assets of $1.8 billion at December 31, 1998. For 1998, total assets increased $340.0 million, or 22.65%, from total assets of $1.5 billion at December 31, 1997. 21
23 INVESTMENT SECURITIES The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. Note 2 of the Notes to the Consolidated Financial Statements sets forth information concerning the composition and the maturity distribution of the investment securities portfolio at December 31, 1999 and 1998. At December 31, 1999, the Company reported total investment securities of $877.3 million. This represents an increase of $90.5 million, or 11.50%, over total investment securities of $786.8 million at December 31, 1998. For 1998, investment securities increased $276.5 million, or 54.18%, greater than total investment securities of $510.3 million at December 31, 1997. The Company has adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Under this standard, securities held as "available for sale" are reported at current market value for financial reporting purposes. The market value, less the amortized cost of investment securities, net of income taxes, is adjusted directly to stockholders' equity. At December 31, 1999, securities held as available for sale had a fair market value of $877.3 million, representing 100.00% of total investment securities with an amortized cost of $905.8 million. At December 31, 1999, the net unrealized holding loss on securities available for sale was $28.4 million, and the unrealized loss on investments available for sale, net of deferred taxes was $16.4 million. In connection with the merger with Orange National Bancorp and the Company's adoption of SFAS No. 133 "Accounting for derivative instruments and hedging activities", the Company reclassified investment securities from held to maturity to available for sale. The amortized cost at the date of transfer was $71.6 million and the fair value was $72.3 million. The unrealized gain was recorded in stockholders' equity, net of taxes. LOANS At December 31, 1999, the Company reported total loans, net of deferred loan fees, of $952.6 million. This represents an increase of $120.4 million, or 14.46%, over total loans of $832.2 million at December 31, 1998. For 1998, total loans increased $82.4 million, or 10.99%, over total loans, net of deferred loan fees of $749.8 million at December 31, 1997. Table 4 presents the distribution of the Company's loan portfolio at the dates indicated. TABLE 4 -- DISTRIBUTION OF LOAN PORTFOLIO BY TYPE DECEMBER 31 ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Commercial and Industrial................... $392,094 $287,518 $303,410 $285,547 $277,603 Real Estate Construction.............................. 48,078 34,489 19,937 38,337 24,048 Mortgage.................................. 375,387 385,393 308,460 284,374 210,603 Consumer, net of unearned discount.......... 24,731 28,996 28,031 29,832 26,219 Municipal Lease Finance Receivables......... 21,268 22,923 24,008 19,825 21,529 Agribusiness(1)............................. 94,560 76,283 69,404 55,486 63,580 -------- -------- -------- -------- -------- Gross Loans............................... 956,118 835,602 753,250 713,401 623,582 -------- -------- -------- -------- -------- Less: Allowance for Credit Losses............... 16,761 14,888 13,103 13,608 11,139 Deferred Loan Fees........................ 3,566 3,418 3,474 4,116 3,270 -------- -------- -------- -------- -------- Total Net Loans................... $935,791 $817,296 $736,673 $695,677 $609,173 ======== ======== ======== ======== ======== - --------------- (1) Included as Commercial and Industrial and Real Estate Mortgage loans above are loans totaling $42.9 million for 1999, $34.6 million for 1998, $27.9 million for 1997, $22.7 million for 1996, $8.8 million for 1995, that represent loans to agricultural concerns for commercial or real estate purposes. 22
24 Commercial and industrial loans are loans to commercial entities to finance capital purchases or improvements, or to provide cash flow for operations. Real estate loans are loans secured by conforming first trust deeds on real property, including property under construction, commercial property and single family and multifamily residences. Consumer loans include installment loans to consumers as well as home equity loans and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers, and farmers. Table 5 provides the maturity distribution for commercial and industrial loans, real estate construction loans and agribusiness loans as of December 31, 1999. The loan amounts are based on contractual maturities although the borrowers have the ability to prepay the loans. Amounts are also classified according to repricing opportunities or rate sensitivity. TABLE 5 -- LOAN MATURITIES AND INTEREST RATE CATEGORY AT DECEMBER 31, 1999 AFTER ONE BUT WITHIN WITHIN AFTER ONE YEAR FIVE YEARS FIVE YEARS TOTAL -------- ---------- ---------- -------- (AMOUNTS IN THOUSANDS) Types of Loans: Commercial and industrial(1)........................ $140,787 $197,032 $403,246 $741,065 Construction........................................ 43,067 1,524 3,487 48,078 Agribusiness........................................ 84,645 7,514 2,401 94,560 -------- -------- -------- -------- $268,499 $206,070 $409,134 $883,703 ======== ======== ======== ======== Amount of Loans based upon: Fixed Rates......................................... $ 57,021 $151,575 $310,129 $518,725 Floating or adjustable Rates........................ 211,478 54,495 99,005 364,978 -------- -------- -------- -------- $268,499 $206,070 $409,134 $883,703 ======== ======== ======== ======== - --------------- (1) Includes approximately $349.0 million in fixed rate commercial real estate loans. These loans are classified as real estate mortgage loans for the financial statements, but are accounted for as commercial and industrial loans on the Company's books. As a normal practice in extending credit for commercial and industrial purposes, the Bank may accept trust deeds on real property as collateral. In some cases, when the primary source of repayment for the loan is anticipated to come from the cash flow from normal operations of the borrower, the requirement of real property as collateral is not the primary source of repayment but an abundance of caution. In these cases, the real property is considered a secondary source of repayment for the loan. Since the Bank lends primarily in Southern California, its real estate loan collateral is concentrated in this region. At December 31, 1999, substantially all of the Bank's loans secured by real estate were collateralized by properties located in Southern California. This concentration is considered when determining the adequacy of the Company's allowance for credit losses. NONPERFORMING ASSETS At December 31, 1999, nonperforming assets, which included nonperforming loans (see CREDIT RISK) and other real estate owned, totaled $1.9 million. This represented a decrease of $9.1 million, or 82.80%, compared to nonperforming assets of $11.0 million at December 31, 1998. For 1998, total nonperforming assets decreased $3.0 million, or 21.61%, from total nonperforming assets of $14.1 million at December 31, 1997. The decrease in nonperforming assets for 1999 compared to 1998 resulted as balances of other real estate owned and nonaccrual loans decreased during the year. The decrease in nonperforming assets for 1998, reflected the decrease in restructured loans and other real estate owned, which was partially offset by an increase in nonaccrual loans. 23
25 Although management believes that nonperforming loans are generally well secured and that potential losses are provided for in the Company's allowance for credit losses, there can be no assurance that future deterioration in economic conditions or collateral values will not result in future credit losses. Table 6 provides information on nonperforming loans and other real estate owned at the dates indicated. TABLE 6 -- NON-PERFORMING ASSETS DECEMBER 31 ---------------------------------------------- 1999 1998 1997 1996 1995 ------ ------- ------- ------- ------- (AMOUNTS IN THOUSANDS) Nonaccrual loans.................................. $1,191 $ 8,849 $ 6,402 $20,028 $16,344 Loans past due 90 days or more.................... 3 76 1,051 628 33 Restructured loans................................ 0 0 2,092 5,374 13,558 Other real estate owned (OREO).................... 703 2,102 4,521 8,642 12,037 ------ ------- ------- ------- ------- Total nonperforming assets.............. $1,897 $11,027 $14,066 $34,672 $41,972 ====== ======= ======= ======= ======= Percentage of nonperforming assets to total loans outstanding & OREO.............................. 0.20% 1.32% 1.86% 4.83% 6.64% ====== ======= ======= ======= ======= Percentage of nonperforming assets to total assets.......................................... 0.09% 0.60% 0.94% 2.51% 3.67% ====== ======= ======= ======= ======= At December 31, 1999, the Company had loans on which interest was no longer accruing totaling $1.2 million. This represented a decrease of $7.7 million, or 86.54%, from total nonaccrual loans of $8.8 million at December 31, 1998. For 1998, total nonaccrual loans increased $2.4 million, or 38.22%, over total nonaccrual loans of $6.4 million at December 31, 1997. Approximately 45.45% of the number of nonaccrual loans at December 31, 1999, and 51.63% of the dollar volume of these nonaccrual loans were secured by real property which had a current appraisal that was less than one year old. The estimated ratio of the outstanding loan balances to the fair values of the related collateral for nonaccrual loans at December 31, 1999, ranged between approximately 1.60% to 110.76%. The Bank has allocated specific reserves included in the allowance for credit losses for potential losses on these loans. A restructured loan is a loan on which the Bank has reduced the rate of interest to a lower rate, forgiven all or a part of the interest income, or forgiven part of the principal balance of the loan due to the borrower's financial condition. At December 31, 1999, and 1998 the Company had no loans that were classified as restructured. This represented a decrease of $2.1 million, or 100.00%, from restructured loans of $2.1 million at December 31, 1997. Except for nonperforming loans as set forth in Table 6 and loans disclosed as impaired, the Bank's management is not aware of any loans as of December 31, 1999 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan repayment terms, or any known events that would result in the loan being designated as nonperforming at some future date. The Bank's management cannot, however, predict the extent to which the deterioration in general economic conditions, real estate values, increase in general rates of interest, change in the financial conditions or business of a borrower may adversely affect a borrower's ability to pay. At December 31, 1999, the net book value of the properties held as other real estate owned totaled $703,000. This represented a decrease of $1.4 million, or 66.56%, from other real estate owned of $2.1 million at December 31, 1998. Although the Bank is actively marketing these properties, the Bank's management cannot predict when these properties will be sold or what the terms of sale will be when they are sold. Although there are recent appraisals on each property that support the carrying costs of these properties at December 31, 1999, no assurances can be given that further charges to earnings may not occur if real estate values decrease or the Bank cannot promptly dispose of the properties held. 24
26 DEPOSITS The Company reported total deposits of $1.50 billion at December 31, 1999. This represented an increase of $25.4 million, or 1.72%, over total deposits of $1.48 billion at December 31, 1998. During 1998, total deposits increased $181.2 million, or 13.99%, over total deposits of $1.3 billion at December 31, 1997. Noninterest bearing demand deposits totaled $649.8 million at December 31, 1999. This represented an increase of $11.1 million, or 1.74%, over total noninterest bearing demand deposits of $638.7 million at December 31, 1998. For 1998, total noninterest bearing demand deposits increased $75.7 million, or 13.44%, over noninterest bearing demand deposits of $563.0 million at December 31, 1997. Noninterest bearing deposits represented 43.29% of total deposits as of December 31, 1999 and 43.28% of total deposits as of December 31, 1998. Table 7 provides the remaining maturities of large denomination ($100,000 or more) time deposits, including public funds, at December 31, 1999. TABLE 7 -- MATURITY DISTRIBUTION OF LARGE DENOMINATION TIME DEPOSITS (AMOUNTS IN THOUSANDS) ---------------------- 3 months or less........................................... $123,892 Over 3 months through 6 months............................. 73,680 Over 6 months through 12 months............................ 33,852 Over 12 months............................................. 2,183 -------- Total............................................ $233,607 ======== OTHER BORROWED FUNDS As opportunities exist, the Bank borrows short term funds and invests the proceeds at a positive spread. By purposely mismatching the maturities of the borrowed funds and the resulting investments, management can offset a portion of the Bank's interest rate risk. In addition, the positive spread contributes to the Bank's and Company's earnings. As the interest rate paid on borrowed funds is normally greater than the interest rate paid for deposits, the increase in other borrowed funds contributed to the decrease in the Company's net interest margin and net interest spread. At December 31, 1999, borrowed funds totaled $323,000. This represented an increase of $123,000, or 61.50%, from total borrowed funds of $200.0 million at December 31, 1998. For 1998, total borrowed funds increased $151.0 million, or 308.16%, from a balance of $49.0 million at December 31, 1997. The maximum outstanding at any month-end was $323.0 million during 1999, $200.0 million during 1998, and $123.0 million during 1997. CAPITAL RESOURCES Historically, the primary source of capital for the Company has been the retention of operating earnings. In order to ensure adequate levels of capital, the Company conducts an ongoing assessment of projected sources and uses of capital in conjunction with projected increases in assets and the level of risk. Total stockholders' equity was $140.8 million at December 31, 1999. This represented an increase of $1.3 million, or 0.96%, over total stockholders' equity of $139.4 million at December 31, 1998. For 1998, total stockholders' equity increased $15.8 million, or 12.74%, over total stockholders' equity of $123.7 million at December 31, 1997. Tier 1 capital, stockholders' equity less intangible assets, was $148.7 million at December 31, 1999. This represented an increase of $20.3 million, or 15.78%, over total Tier 1 capital of $128.4 million at December 31, 1998. For 1998, Tier 1 capital increased $16.3 million, or 14.54%, over Tier 1 capital of $112.1 million at December 31, 1997. Total adjusted capital, Tier 1 capital plus the lesser of the allowance for credit losses or 1.25% of risk weighted assets, was $163.6 million at December 31, 1999. This represented an increase of 25
27 $22.7 million, or 16.15%, over adjusted capital of $140.8 million at December 31, 1998. For 1998, adjusted capital increased $17.6 million, or 14.29%, over total adjusted capital of $123.2 million at December 31, 1997. Bank regulators have established minimum capital adequacy guidelines requiring that qualifying capital be at least 8.0% of risk-based assets, of which at least 4.0% must be Tier 1 capital (primarily stockholders' equity). These ratios represent minimum capital standards. Under Prompt Corrective Action rules, certain levels of capital adequacy have been established for financial institutions. Depending on an institution's capital ratios, the established levels can result in restrictions or limits on permissible activities. In addition to the aforementioned requirements, the Company and Bank must also meet minimum leverage ratio standards. The leverage ratio is calculated as Tier 1 capital divided by the most recent quarter's average total assets. The highest level for capital adequacy under Prompt Corrective Action is "Well Capitalized". To qualify for this level of capital adequacy an institution must maintain a total risk-based capital ratio of at least 10.00% and a Tier 1 risk-based capital ratio of at least 6.00%. At December 31, 1999, and 1998, the Company exceeded all of the minimum capital ratios required to be considered well capitalized. At December 31, 1999, the Company's total risk-based capital ratio was 13.9%, compared to a ratio of 13.6% at December 31, 1998. The ratio of Tier 1 capital to risk weighted assets was 12.6% at December 31, 1999, compared to a ratio of 12.4% at December 31, 1998. At December 31, 1999, the Company's leverage ratio was 7.7%, compared to a ratio of 7.4% at December 31, 1998. See NOTE 15 of the Notes to the Consolidated Financial Statements. For purposes of calculating capital ratios, bank regulators have excluded adjustments to stockholders' equity that result from mark to market adjustments of available for sale investment securities. At December 31, 1999, the Company had an unrealized loss on investment securities net of taxes of $16.4 million, compared to a gain net of taxes of $1.3 million at December 31, 1998. During 1998 and 1997, the Company announced its intention to re-purchase some of its outstanding common stock. The Company re-purchased 91,700 in 1998 and 95,182 in 1997 of its outstanding shares at average price of $20.805 per share in 1998 and $20.332 per share in 1997 for an aggregate cost of $1.9 million in 1998 and $1.9 million in 1997. During 1999, the Board of Directors of the Company declared quarterly cash dividends that totaled $0.39 per share for the full year after retroactive adjustment of a 5-for-4 stock split declared on December 15, 1999. Management does not believe that the continued payment of cash dividends will impact the ability of the Company to continue to exceed the current minimum capital standards. RISK MANAGEMENT The Company's management has adopted a Risk Management Plan to ensure the proper control and management of all risk factors inherent in the operation of the Company and the Bank. Specifically, credit risk, interest rate risk, liquidity risk, transaction risk, compliance risk, strategic risk, reputation risk, price risk and foreign exchange risk, can all affect the market risk exposure of the Company. These specific risk factors are not mutually exclusive. It is recognized that any product or service offered by the Company may expose the Bank to one or more of these risks. CREDIT RISK Credit risk is defined as the risk to earnings or capital arising from an obligor's failure to meet the terms of any contract or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer, or borrower performance. Central to the Company's credit risk management is its loan risk rating system. Limitations on industry concentration, aggregate customer borrowings and geographic boundaries also are designed to reduce loan credit risk. Credit risk in the investment portfolio and correspondent bank accounts is addressed through defined limits in the Bank's policy statements. In addition, certain securities carry insurance to enhance credit 26
28 quality of the bond. Senior Management, Directors' Committees, and the Board of Directors are provided with information to appropriately identify, measure, control and monitor the credit risk of the Bank. The allowance for credit losses is based upon estimates of probable losses inherent in the loan and lease portfolio. The amount actually observed in respect of these losses can vary significantly from the estimated amounts. The Company's methodology includes several features which are intended to reduce the differences between estimated and actual losses. Implicit in lending activities is the risk that losses will occur and that the amount of such losses will vary over time. Consequently, the Company maintains an allowance for credit losses by charging a provision for credit losses to earnings. Loans determined to be losses are charged against the allowance for credit losses. The Company's allowance for credit losses is maintained at a level considered by the Bank's management to be adequate to provide for estimated losses inherent in the existing portfolio, including commitments under commercial and standby letters of credit. The Company does not have any cross-border outstandings. However, the Company's International Department does issue international letters of credit in support of its customer's cross-border business. The Company is positioned on the Pacific Rim and many of its customers are impacted by trade in the Pacific Rim and in Latin America, especially Mexico. The Company's exposure in all affected countries continues to be short-term in nature and related to the finance of trade and the impact of the general Southern California economy. While the Bank has no direct exposure to these areas, the associative effects of the downturn in Asia and Latin America could affect the Company's market place in Southern California. The Company's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances for identified problem loans and portfolio segments and the unallocated allowance. In addition, the allowance incorporates the results of measuring impaired loans as provided in Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for impairment of a Loan -- Income Recognition and Disclosures." These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicates the probability that a loss has been incurred in excess of the amount determined by the application of the formula allowance. Management performs a detailed analysis of these loans, including, but not limited to, appraisals of the collateral, conditions of the marketplace for liquidating the collateral and assessment of the guarantors. Management then determines the loss potential and allocates a portion of the allowance for losses as a specific allowance for each of these credits. The unallocated allowance is based upon management's evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance include the following conditions that existed as of the balance sheet date: - then-existing general economic and business conditions affecting the key lending areas of the Company, - then-existing economic and business conditions of areas outside the lending areas, such as other sections of the United States, Asia and Latin America, - credit quality trends (including trends in nonperforming loans expected to result from existing conditions), - collateral values, 27
29 - loan volumes and concentrations, - seasoning of the loan portfolio, - specific industry conditions within portfolio segments, - recent loss experience in particular segments of the portfolio, - duration of the current business cycle, - bank regulatory examination results, and - findings of the Company's internal credit examiners. Management reviews these conditions in discussion with the Company's senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's evaluation of the probable loss related to such condition is reflected in the unallocated allowance. The Company has adopted SFAS No. 114, "Accounting by Creditors for the Impairment of a Loan.", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." The statements prescribe that a loan is impaired when principal and interest are deemed uncollectable according to the original contractual terms of the loan. Impairment is measured as either the expected future cash flows discounted at each loan's effective interest rate, the fair value of the loan's collateral if the loan is collateral dependent, or an observable market price of the loan (if one exists). The amount of impairment is included as a part of the Company's allowance for credit losses. See Note 5 of the Notes to the Consolidated Financial Statements for additional information concerning impaired loans. At December 31, 1999, the Company reported an allowance for credit losses of $16.8 million. This represented a increase of $1.9 million or 12.58%, from the allowance for credit losses of $14.9 million at December 31, 1998. For 1998, the allowance for credit losses increased $1.8 million or 13.62%, from a balance of $13.1 million at December 31, 1997. Of the total $16.8 million reserve for credit losses at December 31, 1999, $10.4 million, or 61.99%, represented reserves for specific problem loans, including impaired loans, and $6.4 million, or 38.01%, represented that portion allocated to provide for general risks inherent in the loan portfolio. As of December 31, 1998 these amounts were $9.0 in allocated and $5.9 in unallocated. Nonperforming loans totaled $1.2 million at December 31, 1999. This represented a decrease of $7.7 million or 86.62%, from nonperforming loans of $8.9 million at December 31, 1998. For 1998, nonperforming loans decreased $620,000, or 6.50%, from nonperforming loans of $9.5 million at December 31, 1997. Nonperforming loans, measured as a percent of gross loans, equaled 0.13%, 1.07%, and 1.27%, at December 31, 1999, 1998, and 1997, respectively. Nonperforming loans included loans for which interest is no longer accruing. In addition, nonperforming loans include loans that have been renegotiated from their original contractual terms, even if the loan is paying as agreed under the renegotiated terms. The decrease in nonperforming loans for 1999 was the result of a decrease in nonaccrual loans. Nonaccrual loans decreased $7.7 million, or 86.54%, to $1.2 million at December 31, 1999, from $8.8 million at December 31, 1998. The decrease in nonperforming loans between December 31, 1998 and 1997 was the result of a $2.1 million, or 100.00%, reduction in restructured loans and a decrease in past due loans of $975,000 or 92.77% which was partially offset by an increase in nonaccrual loans of $2.4 million or 38.22%. For 1999, the Company charged $827,000 of loans net of recoveries to the allowance for credit losses. This represented an increase of $12,000, or 1.47%. For 1998, the Company charged $815,000 of loans net of recoveries to the allowance for credit losses. This represented a decrease of $2.5 million, or 75.41%, from net 28
30 charges to the allowance for credit losses of $3.3 million for 1997. Contributing to the decrease in nonperforming loans at December 31, 1998 was an increase in the balance of loans charged to the allowance for credit losses for 1998 compared to 1997. Table 8 presents a comparison of net credit losses, the provision for credit losses (including adjustments incidental to mergers), and the resulting allowance for credit losses for each of the years indicated. TABLE 8 -- SUMMARY OF CREDIT LOSS EXPERIENCE 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Amount of Total Loans at End of Period(1)... $952,552 $832,184 $749,776 $709,285 $620,312 ======== ======== ======== ======== ======== Average Total Loans Outstanding(1).......... $866,917 $772,331 $718,431 $662,195 $601,324 ======== ======== ======== ======== ======== Allowance for Credit Losses at Beginning of Period.................................... $ 14,888 $ 13,103 $ 13,608 $ 11,139 $ 10,936 Loans Charged-Off: Real Estate............................... 483 707 3,158 1,559 2,237 Commercial, Financial and Industrial...... 522 373 371 452 592 Agribusiness.............................. 0 0 0 0 0 Municipal Lease Finance Receivables....... 0 0 0 0 0 Consumer Loans............................ 18 61 143 125 178 -------- -------- -------- -------- -------- Total Loans Charged-Off........... 1,023 1,141 3,672 2,136 3,007 -------- -------- -------- -------- -------- Recoveries: Real Estate Loans......................... 6 161 44 572 63 Commercial, Financial and Industrial...... 184 150 295 210 208 Agribusiness.............................. 0 0 0 0 0 Municipal Lease Finance Receivables....... 0 0 0 0 0 Consumer Loans............................ 6 15 18 19 44 -------- -------- -------- -------- -------- Total Loans Recovered............. 196 326 357 801 315 -------- -------- -------- -------- -------- Net Loans Charged-Off....................... 827 815 3,315 1,335 2,692 -------- -------- -------- -------- -------- Provision Charged to Operating Expense...... 2,700 2,600 2,810 3,093 2,895 -------- -------- -------- -------- -------- Adjustments Incident to Mergers............. 0 0 0 711 0 -------- -------- -------- -------- -------- Allowance for Credit Losses at End of period.................................... $ 16,761 $ 14,888 $ 13,103 $ 13,608 $ 11,139 ======== ======== ======== ======== ======== Net Loans Charged-Off to Average Total Loans..................................... 0.10% 0.11% 0.46% 0.20% 0.45% Net Loans Charged-Off to Total Loans at End of Period................................. 0.09% 0.10% 0.44% 0.19% 0.43% Allowance for Credit Losses to Average Total Loans..................................... 1.93% 1.93% 1.82% 2.05% 1.85% Allowance for Credit Losses to Total Loans at End of Period.......................... 1.76% 1.79% 1.75% 1.92% 1.80% Net Loans Charged-Off to Allowance for Credit Losses............................. 4.93% 5.47% 25.30% 9.81% 24.17% Net Loans Charged-Off to Provision for Credit Losses............................. 30.63% 31.35% 117.97% 43.16% 92.99% - --------------- (1) Net of deferred loan origination fees. The Company's management believes that the allowance for credit losses at December 31, 1999 was adequate to provide for both recognized potential losses and estimated inherent losses in the portfolio. No assurances can be given that future events may not result in increases in delinquencies, nonperforming loans or net loan charge offs that would increase the provision for credit losses and thereby adversely affect the results 29
31 of operations. There is no precise method of predicting specific losses that ultimately may be charged against the allowance for credit losses. Table 9 provides a summary of the allocation of the allowance for credit losses for specific loan categories at the dates indicated. The allocations presented should not be interpreted as an indication that loans charged to the allowance for credit losses will occur in these amounts or proportions, or that the portion of the allowance allocated to each loan category represents the total amount available for future losses that may occur within these categories. There is a large unallocated portion of the allowance for credit losses and the total allowance is applicable to the entire loan portfolio. TABLE 9 -- ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES DECEMBER 31, ------------------------------------------------------------------ 1999 1998 1997 -------------------- -------------------- -------------------- (AMOUNTS IN THOUSANDS) ------------------------------------------------------------------ ALLOWANCE % OF ALLOWANCE % OF ALLOWANCE % OF FOR CATEGORY FOR CATEGORY FOR CATEGORY CREDIT TO TOTAL CREDIT TO TOTAL CREDIT TO TOTAL LOSSES LOANS LOSSES LOANS LOSSES LOANS --------- -------- --------- -------- --------- -------- Real Estate.......... 466 44.5% $ 1,942 50.5% $ 1,563 43.8% Commercial and Industrial......... 9,794 51.1% 6,867 43.7% 6,405 49.7% Consumer............. 130 2.6% 155 3.5% 139 3.7% Unallocated.......... 6,371 N/A 5,924 N/A 4,996 N/A ------ ------- ------- Total........ 16,761 $14,888 $13,103 ====== ======= ======= DECEMBER 31, ------------------------------------------- 1996 1995 -------------------- -------------------- (AMOUNTS IN THOUSANDS) ------------------------------------------- ALLOWANCE % OF ALLOWANCE % OF FOR CATEGORY FOR CATEGORY CREDIT TO TOTAL CREDIT TO TOTAL LOSSES LOANS LOSSES LOANS --------- -------- --------- -------- Real Estate.......... $ 1,363 49.0% $ 752 37.8% Commercial and Industrial......... 8,137 44.6% 6,365 54.8% Consumer............. 184 4.2% 104 4.2% Unallocated.......... 3,924 N/A 3,918 N/A ------- ------- Total........ $13,608 $11,139 ======= ======= INTEREST RATE RISK During periods of changing interest rates, the ability to reprice interest earning assets and interest bearing liabilities can influence net interest income, the net interest margin, and consequently, the Company's earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in the Bank's service area. Short term repricing risk is minimized by controlling the level of floating rate loans and maintaining a downward sloping ladder of bond payments and maturities. Basis risk is managed by the timing and magnitude of changes to interest-bearing deposit rates. Yield curve risk is reduced by keeping the duration of the loan and bond portfolios relatively short. Options risk in the bond portfolio is monitored monthly and actions are recommended when appropriate. The Bank's management monitors the interest rate "sensitivity" risk to earnings from potential changes in interest rates using various methods, including a maturity/repricing gap analysis. This analysis measures, at specific time intervals, the differences between earning assets and interest bearing liabilities for which repricing opportunities will occur. A positive difference, or gap, indicates that earning assets will reprice faster than interest bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates, and a lower net interest margin during periods of declining interest rates. Conversely, a negative gap will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates. 30
32 Table 10 provides the Bank's maturity/repricing gap analysis at December 31, 1999, and 1998. The Bank had a negative cumulative 180 day gap of $554.7 million at December 31, 1999. This represented an increase of $167.6 million, or 43.31%, over the 180 day cumulative negative gap of $387.1 million at December 31, 1998. In theory, this would indicate that at December 31, 1999, $554.7 million more in liabilities than assets would re-price if there was a change in interest rates over the next 180 days. If interest rates increase, the negative gap would tend to result in a lower net interest margin. If interest rates decrease, the negative gap would tend to result in an increase in the net interest margin. TABLE 10 -- ASSET AND LIABILITY MATURITY/REPRICING GAP OVER 90 OVER 180 90 DAYS DAYS TO DAYS TO OVER OR LESS 180 DAYS 365 DAYS 365 DAYS --------- --------- --------- ---------- (AMOUNTS IN THOUSANDS) 1999 Earning Assets: Investment Securities at carrying value................................. $ 82,058 $ 18,464 $ 41,037 $ 735,773 Total Loans.............................. 354,718 21,511 39,983 539,906 --------- --------- --------- ---------- Total............................ $ 436,776 $ 39,975 $ 81,020 $1,275,679 Interest Bearing Liabilities Savings Deposits......................... $ 520,963 $ 0 $ 0 $ 0 Time Deposits............................ 172,250 100,260 49,973 7,806 Other Borrowings......................... 163,000 75,000 40,000 45,000 --------- --------- --------- ---------- Total............................ 856,213 175,260 89,973 52,806 --------- --------- --------- ---------- Period GAP................................. $(419,437) $(135,285) $ (8,953) $1,222,873 ========= ========= ========= ========== Cumulative GAP............................. $(419,437) $(554,722) $(563,675) $ 659,198 ========= ========= ========= ========== 1998 Earning Assets: Fed Funds................................ $ 57,390 $ 0 $ 0 $ 0 Investment Securities at carrying value................................. 78,334 32,761 71,354 604,373 Total Loans.............................. 351,642 23,937 33,703 426,320 --------- --------- --------- ---------- Total............................ $ 487,366 $ 56,698 $ 105,057 $1,030,693 Interest Bearing Liabilities Savings Deposits......................... $ 513,451 $ 0 $ 0 $ 0 Time Deposits............................ 189,260 88,438 38,746 7,061 Other Borrowings......................... 85,000 55,000 10,000 50,000 --------- --------- --------- ---------- Total............................ 787,711 143,438 48,746 57,061 --------- --------- --------- ---------- Period GAP................................. $(300,345) $ (86,740) $ 56,311 $ 973,632 ========= ========= ========= ========== Cumulative GAP............................. $(300,345) $(387,085) $(330,774) $ 642,858 ========= ========= ========= ========== The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans. In addition, the magnitude of changes in the rates charged on loans is not always proportionate to the magnitude of changes in the rate paid for deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease in the net interest margin solely as a result of the differences between repricing opportunities of earning assets or interest bearing liabilities. The fact that the Bank reported a negative gap at December 31, 1999 does not necessarily indicate that, if interest rates decreased, net interest income would increase, or if interest rates increased, net interest income would decrease. Approximately $642.2 million, or 73.20% of the total investment portfolio at December 31, 1999 consisted of securities backed by mortgages. The final maturity of these securities can be affected by the speed at which the underlying mortgages repay. Mortgages tend to repay faster as interest rates fall, and slower as interest rates rise. As a result, the Bank may be subject to a "prepayment risk" resulting from greater funds 31
33 available for reinvestment at a time when available yields are lower. Conversely, the Bank may be subject to "extension risk" resulting as lesser amounts would be available for reinvestment at a time when available yields are higher. Prepayment risk includes the risk associated with the payment of an investment's principal faster than originally intended. Extension risk is the risk associated with the payment of an investment's principal over a longer time period than originally anticipated. In addition, there can be greater risk of price volatility for mortgage backed securities as a result of anticipated prepayment or extension risk. The Company's management also utilizes the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of the Company's net interest income is measured over a rolling two-year horizon. The simulation model estimates the impact of changing interest rates on the interest income from all interest earning assets and the interest expense paid on all interest bearing liabilities reflected on the Company's balance sheet. This sensitivity analysis is compared to policy limits which specify a maximum tolerance level for net interest income exposure over a one year horizon assuming no balance sheet growth, given both a 200 basis point upward and downward shift in interest rates. A parallel and pro rata shift in rates over a 12 month period is assumed. The following reflects the Company's net interest income sensitivity analysis as of December 31, 1999: ESTIMATED NET SIMULATED INTEREST INCOME RATE CHANGES SENSITIVITY ------------ --------------- +200 basis points...................................... (2.02%) - -200 basis points...................................... 2.57% The estimated sensitivity does not necessarily represent a Company forecast and the results may not be indicative of actual changes to the Company's net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cashflows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change. See NOTE 18 -- of the Notes to the Consolidated Financial Statements. The table below provides the actual balances as of December 31, 1999 of interest earning assets and interest-bearing liabilities, including the average rate earned or paid for 1999, the projected contractual maturities over the next five years, and the estimated fair value of each category determined using available market information and appropriate valuation methodologies. MATURING --------------------------------------------------------------------------- BALANCE FIVE YEARS ESTIMATED DECEMBER 31, RATE ONE YEAR TWO YEARS THREE YEARS FOUR YEARS AND BEYOND FAIR VALUE ------------ ---- ---------- --------- ----------- ---------- ---------- ---------- (AMOUNTS IN THOUSANDS) 1999 Interest-Earning Assets Investment securities available for sale..... $ 877,332 6.63% $ 141,559 $100,002 $ 95,116 $ 75,149 $465,506 $ 877,332 Loans and lease finance receivables, net....... 935,791 9.21% 416,212 49,156 78,973 101,649 289,801 934,465 ---------- ---------- -------- -------- -------- -------- ---------- Total interest earning assets................. $1,813,123 $ 557,771 $149,158 $174,089 $176,798 $755,307 $1,811,797 ========== ========== ======== ======== ======== ======== ========== Interest-Bearing Liabilities Interest-bearing deposits............... $ 851,252 3.03% $ 843,446 $ 5,566 $ 1,125 $ 550 $ 565 $ 851,229 Demand note to U.S. Treasury............... 16,951 4.63% 16,951 16,951 Short-term borrowings.... 323,000 5.31% 278,000 20,000 25,000 323,000 ---------- ---------- -------- -------- -------- -------- ---------- Total interest-bearing liabilities............ $1,191,203 $1,138,397 $ 25,566 $ 26,125 $ 550 $ 565 $1,191,180 ========== ========== ======== ======== ======== ======== ========== 32
34 LIQUIDITY RISK Liquidity risk is the risk to earnings or capital resulting from the Bank's inability to meet its obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect the Bank's ability to liquidate assets quickly and with minimum loss of value. Factors considered in liquidity risk management are stability of the deposit base; marketability, maturity, and pledging of investments; and the demand for credit. In general, liquidity risk is managed daily by controlling the level of Fed funds and the use of funds provided by the cash flow from the investment portfolio. To meet unexpected demands, lines of credit are maintained with correspondent banks, the Federal Home Loan Bank and the Federal Reserve Bank. The sale of bonds maturing in the near future can also serve as a contingent source of funds. Increases in deposit rates are considered a last resort as a means of raising funds to increase liquidity. For the Bank, sources of funds normally include principal payments on loans and investments, other borrowed funds, and growth in deposits. Uses of funds include withdrawal of deposits, interest paid on deposits, increased loan balances, purchases, and other operating expenses. Net cash provided by operating activities totaled $40.8 million for 1999, $32.4 million for 1998, and $29.1 million for 1997. The increase for 1999 compared to 1998 and 1997 was primarily the result of the increase in net income during each year. Cash used for investing activities totaled $255.6 million for 1999, compared to $361.4 million for 1998, and $116.5 million for 1997. The funds used for investing activities primarily represented increases in investments and loans for each year reported. Funds obtained from investing activities for each year were obtained primarily from the sale and maturity of investment securities and from the sale of other real estate owned. Funds provided from financing activities totaled $158.2 million for 1999, compared to $315.2 million for 1998, and $87.3 million for 1997. For 1999, cash flows from financing activities resulted from increased short term borrowing and to a lesser extent from noninterest-bearing deposits, money market, savings deposits and time deposits. For 1998, cash flows from financing activities resulted from increased noninterest bearing demand deposits and short term borrowings. At December 31, 1999, cash and cash equivalents totaled $118.4 million. This represented a decrease of $56.6 million, or 32.35%, from a total of $175.0 million at December 31, 1998. Since the primary sources and uses of funds for the Bank are loans and deposits, the relationship between gross loans and total deposits provides a useful measure of the Bank's liquidity. Typically, the closer the ratio of loans to deposits is to 100%, the more reliant the Bank is on its loan portfolio to provide for short term liquidity needs. Since repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loan to deposit ratio the less liquid are the Bank's assets. For 1999, the Bank's loan to deposit ratio averaged 59.45%, compared to an average ratio of 58.51% for 1998, and a ratio of 61.29% for 1997. CVB is a company separate and apart from the Bank that must provide for its own liquidity. Substantially all of CVB's revenues are obtained from dividends declared and paid by the Bank. The remaining cashflow is from rents paid by third parties on office space in the Company's corporate headquarters. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. At December 31, 1999, approximately $48.7 million of the Bank's equity was unrestricted and available to be paid as dividends to CVB. Management of CVB believes that such restrictions will not have an impact on the ability of CVB to meet its ongoing cash obligations. As of December 31, 1999, neither the Bank nor CVB had any material commitments for capital expenditures. 33
35 Accounting Changes In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. SFAS No. 133 was to be effective for fiscal years beginning after June 15, 1999. However, in June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133" which deferred the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. The Company has adopted SFAS No. 133 and it did not have a material impact on the Company's results of operations or financial position. In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities," which establishes accounting and reporting standards for certain activities of mortgage banking enterprises and other enterprises that conduct operations that are substantially similar. SFAS No. 134 requires that after the securitization of mortgage loans held for sale, the resulting mortgage-backed securities and other retained interests should be classified in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," based on the company's ability and intent to sell or hold those investments. SFAS No. 134 is effective for the first fiscal quarter beginning after December 15, 1998. The adoption of SFAS No. 134 did not have a material impact on the Company's results of operations or financial position when adopted. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in the market prices and interest rates. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. The Company currently does not enter into futures, forwards, or option contracts. For greater discussion on the risk management of the Company, see Item 7. Management's Discussion and Analysis of Financial Condition and the Results of Operations -- Risk Management. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CVB FINANCIAL CORP. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES PAGE ---- Consolidated Financial Statements Consolidated Balance Sheets -- December 31, 1999 and 1998... 38 Consolidated Statements of Earnings Years Ended December 31, 1999, 1998 and 1997....................................... 39 Consolidated Statements of Stockholders' Equity Year Ended December 31, 1999, 1998 and 1997.......................... 40 Consolidated Statements of Cash Flows Years Ended December 31, 1999, 1998 and 1997................................... 42 Notes to Consolidated Financial Statements.................. 43 Independent Auditors' Report................................ 63 All schedules are omitted because they are not applicable, not material or because the information is included in the financial statements or the notes thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 34
36 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except as hereinafter noted, the information concerning directors and executive officers of the Company is incorporated by reference from the section entitled "Discussion of Proposals recommended by the Board -- Proposal 1: Election of Directors" and "Beneficial Ownership Reporting Compliance Requirement in 1999" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. For information concerning executive officers of the Company, see "Item 4(A). Executive Officers of the Registrant" above. ITEM 11. EXECUTIVE COMPENSATION Information concerning management remuneration and transactions is incorporated by reference from the section entitled "Executive Compensation" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management is incorporated by reference from the sections entitled "Stock Ownership" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions with management and others is incorporated by reference from the section entitled "Executive Compensation -- Certain Relationships and Related Transactions" of the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. 35
37 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS Reference is made to the Index to Financial Statements at page 34 for a list of financial statements filed as part of this Report. EXHIBITS See Index to Exhibits at Page 64 of this Form 10-K. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS The following compensation plans and arrangements were filed as exhibits to this Form 10-K: Agreement by and among D. Linn Wiley, CVB Financial Corp. and Chino Valley Bank dated August 8, 1991, Exhibit 10.2; Chino Valley Bank Profit Sharing Plan, Exhibit 10.3; 1991 Stock Option Plan, Exhibit 10.17; Severance Compensation Agreement dated September 30, 1996 with Edwin J. Pomplun, Exhibit 10.29; Severance Compensation Agreement dated September 20, 1996 with Frank Basirico, Exhibit 10.30; Severance Compensation Agreement dated September 27, 1996 with Jay Coleman, Exhibit 10.31; Severance Compensation Agreement dated September 27, 1996 with Tony Ellis, Exhibit 10.33; Severance Compensation Agreement dated May 30, 1997 with Nancy Sinclair, Exhibit 10.34, and Severance Compensation Agreement dated February 1, 1998 with Edward Biebrich, Exhibit 10.35. REPORTS ON FORM 8-K On October 19, 1999 the Company filed a report on Form 8-K reporting under Item 2 and Item 7 concerning the acquisition of Orange National Bancorp. The Company filed certain historical financial statements of Orange National Bancorp and pro-forma financial statements. On November 9, 1999 the Company filed a report on Form 8-K reporting under Item 5 regarding the results of operations for the first 30 days of post merger operations for the Company following the acquisition of Orange National Bancorp. 36
38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of March, 2000. CVB FINANCIAL CORP. By: /s/ D. LINN WILEY -------------------------------------- D. Linn Wiley President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ GEORGE A. BORBA Chairman of the Board March 15, 2000 - -------------------------------------------------------- George A. Borba /s/ JOHN A. BORBA Director March 15, 2000 - -------------------------------------------------------- John A. Borba /s/ RONALD O. KRUSE Director March 15, 2000 - -------------------------------------------------------- Ronald O. Kruse /s/ JOHN J. LOPORTO Director March 15, 2000 - -------------------------------------------------------- John J. LoPorto /s/ JAMES C. SELEY Director March 15, 2000 - -------------------------------------------------------- James C. Seley /s/ SAN E. VACCARO Director March 15, 2000 - -------------------------------------------------------- San E. Vaccaro /s/ EDWARD J. BIEBRICH, JR. Chief Financial Officer March 15, 2000 - -------------------------------------------------------- (Principal Financial and Edward J. Biebrich, Jr. Accounting Officer) /s/ D. LINN WILEY Director, President and March 15, 2000 - -------------------------------------------------------- Chief Executive Officer D. Linn Wiley (Principal Executive Officer) 37
39 CVB FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (DOLLARS IN THOUSANDS) ASSETS 1999 1998 ---------- ---------- Federal funds sold.......................................... $ -- $ 57,390 Investment securities held to maturity (Note 2)........... -- 70,011 Investment securities available for sale (Note 2)......... 877,332 716,811 Loans and lease finance receivables, net (Notes 3, 4, and 5)..................................................... 935,791 817,296 ---------- ---------- Total earning assets.............................. 1,813,123 1,661,508 Cash and due from banks................................... 118,360 117,574 Premises and equipment, net (Note 6)...................... 27,726 27,771 Other real estate owned, net (Note 5)..................... 703 2,102 Deferred taxes (Note 7)................................... 20,941 4,666 Goodwill.................................................. 8,452 9,635 Cash value of life insurance.............................. 6,793 6,509 Accrued interest receivable............................... 11,454 9,358 Other assets.............................................. 3,205 1,946 ---------- ---------- Total............................................. $2,010,757 $1,841,069 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits (Note 8): Noninterest-bearing.................................... $ 649,821 $ 638,683 Interest-bearing....................................... 851,252 836,956 ---------- ---------- Total deposits.................................... 1,501,073 1,475,639 Demand note to U.S. Treasury.............................. 16,951 95 Short-term borrowings (Note 9)............................ 323,000 200,000 Securities purchased not settled.......................... -- 5,000 Accrued interest payable.................................. 5,341 4,674 Other liabilities (Notes 7, 11, and 19)................... 23,622 16,231 ---------- ---------- Total liabilities................................. 1,869,987 1,701,639 ---------- ---------- Commitments and Contingencies (Note 10) Stockholders' Equity (Notes 14 and 15) Preferred stock -- authorized, 20,000,000 shares without par value; no shares issued or outstanding Common stock -- authorized, 50,000,000 shares without par value; issued and outstanding, 24,716,832 (1999) and 19,527,646 (1998)...................................... 105,304 102,565 Retained earnings......................................... 51,857 35,517 Accumulated other comprehensive (loss) income, net of tax (Note 2)............................................... (16,391) 1,348 ---------- ---------- Total stockholders' equity........................ 140,770 139,430 ---------- ---------- Total............................................. $2,010,757 $1,841,069 ========== ========== See accompanying notes to consolidated financial statements. 38
40 CVB FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS THREE YEARS ENDED DECEMBER 31, 1999 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1997 -------- -------- -------- Interest Income: Loans, including fees.................................... $ 78,385 $ 74,840 $ 71,821 -------- -------- -------- Investment securities: Taxable............................................... 42,885 33,385 25,290 Tax-advantaged........................................ 5,663 4,370 2,553 -------- -------- -------- 48,548 37,755 27,843 -------- -------- -------- Federal funds sold.................................... 1,545 3,360 1,848 -------- -------- -------- Total interest income............................ 128,478 115,955 101,512 -------- -------- -------- Interest Expense: Deposits (Note 8)........................................ 26,267 27,951 24,404 Other borrowings......................................... 12,199 7,462 3,924 -------- -------- -------- Total interest expense........................... 38,466 35,413 28,328 -------- -------- -------- Net Interest Income Before Provision for Credit Losses..... 90,012 80,542 73,184 Provision for Credit Losses (Note 5)....................... 2,700 2,600 2,810 -------- -------- -------- Net Interest Income After Provision for Credit Losses...... 87,312 77,942 70,374 -------- -------- -------- Other Operating Income: Service charges on deposit accounts...................... 10,558 8,810 8,612 Trust services........................................... 3,748 3,472 3,161 Other.................................................... 4,324 5,477 5,757 -------- -------- -------- Total other operating income..................... 18,630 17,759 17,530 -------- -------- -------- Other Operating Expenses: Salaries, wages, and employee benefits (Notes 11, 12, and 14)................................................... 29,141 28,838 27,913 Occupancy (Note 10)...................................... 4,825 5,109 4,569 Equipment................................................ 4,730 4,645 4,068 Stationery and supplies.................................. 3,647 3,374 3,243 Professional services.................................... 3,391 3,305 2,814 Promotion................................................ 2,869 2,497 2,551 Data processing.......................................... 2,352 1,928 1,777 Deposit insurance premiums............................... 210 220 201 Other real estate owned expense (Note 5)................. 647 1,211 2,783 Acquisition costs (Note 19).............................. 4,856 -- -- Other.................................................... 8,069 6,054 4,747 -------- -------- -------- Total other operating expenses................... 64,737 57,181 54,666 -------- -------- -------- Earnings Before Income Taxes............................... 41,205 38,520 33,238 Income Taxes (Note 7)...................................... 15,245 14,403 12,670 -------- -------- -------- Net Earnings............................................... $ 25,960 $ 24,117 $ 20,568 ======== ======== ======== Basic Earnings Per Common Share (Note 13).................. $ 1.06 $ 0.99 $ 0.85 ======== ======== ======== Diluted Earnings Per Common Share (Note 13)................ $ 1.02 $ 0.95 $ 0.82 ======== ======== ======== See accompanying notes to consolidated financial statements 39
41 CVB FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY THREE YEARS ENDED DECEMBER 31, 1999 (DOLLARS AND SHARES IN THOUSANDS) ACCUMULATED OTHER COMMON COMPREHENSIVE SHARES COMMON RETAINED INCOME, COMPREHENSIVE OUTSTANDING STOCK EARNINGS NET OF TAX INCOME ----------- -------- ---------- ------------- ------------- BALANCE, JANUARY 1, 1997.............. 12,902 $ 69,617 $ 38,744 $ (318) Repurchase of common stock.......... (95) (591) (1,344) Issuance of common stock............ 122 1,093 3-for-2 stock split................. 5,001 Tax benefit from exercise of stock options.......................... 194 Cash dividends...................... (5,327) Comprehensive income: Net earnings..................... 20,568 $ 20,568 Other comprehensive income -- Unrealized gains on securities available for sale, net..... 1,035 1,035 -------- Comprehensive income........ $ 21,603 ------ -------- -------- -------- ======== BALANCE, DECEMBER 31, 1997............ 17,930 70,119 52,835 717 Repurchase of common stock.......... (92) (380) (1,527) Issuance of common stock............ 187 639 10% stock dividend.................. 1,503 32,187 (32,187) Tax benefit from exercise of stock options.......................... 171 Cash dividends...................... (7,892) Comprehensive income: Net earnings..................... 24,117 $ 24,117 Other comprehensive income -- Unrealized gains on securities available for sale, net..... 631 631 -------- Comprehensive income........ $ 24,748 ------ -------- -------- -------- ======== BALANCE, DECEMBER 31, 1998............ 19,528 102,565 35,517 1,348 Issuance of common stock............ 246 2,739 5-for-4 stock split................. 4,943 Tax benefit from exercise of stock options.......................... 221 Cash dividends...................... (9,841) Comprehensive income: Net earnings..................... 25,960 $ 25,960 Other comprehensive income -- Unrealized losses on securities available for sale, net..... (17,739) (17,739) -------- Comprehensive income........ $ 8,221 ------ -------- -------- -------- ======== BALANCE, DECEMBER 31, 1999............ 24,717 $105,304 $ 51,857 $(16,391) ====== ======== ======== ======== See accompanying notes to consolidated financial statements. 40
42 CVB FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 (DOLLARS IN THOUSANDS) 1999 1998 1997 -------- ------ ------ DISCLOSURE OF RECLASSIFICATION AMOUNT: Unrealized holding (losses) gains on securities arising during the period......................................... $(30,848) $1,468 $1,762 Tax benefit (expense)....................................... 13,058 (600) (746) Less: Reclassification adjustment for losses (gains) on securities included in net income...................... 80 (407) (7) Reclassification adjustment for losses included in net earnings for securities transferred.................... 35 40 Add -- Tax (benefit) expense..................................... (29) 135 (14) -------- ------ ------ Net unrealized (loss) gain on securities.................... $(17,739) $ 631 $1,035 ======== ====== ====== See accompanying notes to consolidated financial statements. 41
43 CVB FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 1999 (DOLLARS IN THOUSANDS) 1999 1998 1997 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Interest received........................................... $ 133,128 $ 110,980 $ 97,768 Service charges and other fees received..................... 19,121 21,320 20,911 Interest paid............................................... (37,799) (34,228) (27,872) Cash paid to suppliers and employees........................ (56,307) (51,230) (49,176) Income taxes paid........................................... (17,301) (14,468) (12,510) --------- --------- --------- Net cash provided by operating activities........... 40,842 32,374 29,121 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale........ 30,249 96,187 53,689 Proceeds from maturities of securities available for sale... 165,126 154,837 86,536 Proceeds from maturities of securities held to maturity..... 1,018 7,487 3,925 Purchases of securities available for sale.................. (320,357) (524,817) (206,510) Purchases of securities held to maturity.................... (9,550) (14,317) (10,691) Net increase in loans....................................... (122,990) (85,329) (54,480) Proceeds from sale of other real estate owned............... 2,262 5,401 13,000 Proceeds from sale of premises and equipment................ 67 2,204 55 Purchases of premises and equipment......................... (4,066) (4,507) (2,577) Other investing activities.................................. 2,607 1,408 569 --------- --------- --------- Net cash used in investing activities............... (255,634) (361,446) (116,484) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in noninterest-bearing deposits and money market and savings accounts............................... 18,650 144,777 33,987 Net increase in time certificates of deposit................ 6,784 36,375 71,540 Net increase (decrease) in short-term borrowings............ 139,856 143,172 (11,688) Cash dividends on common stock.............................. (9,841) (7,892) (5,327) Repurchase of common stock.................................. (1,907) (1,935) Proceeds from exercise of stock options..................... 2,739 639 720 --------- --------- --------- Net cash provided by financing activities........... 158,188 315,164 87,297 --------- --------- --------- Net Decrease in Cash and Cash Equivalents................... (56,604) (13,908) (66) Cash and Cash Equivalents, Beginning of Year................ 174,964 188,872 188,938 --------- --------- --------- Cash and Cash Equivalents, End of Year...................... $ 118,360 $ 174,964 $ 188,872 ========= ========= ========= RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net earnings................................................ $ 25,960 $ 24,117 $ 20,568 Adjustments to reconcile net earnings to net cash provided by operating activities: Gain on sales of investment securities.................... (60) (451) (95) Loss on sales of investment securities.................... 140 44 88 Loss (gain) on sale of premises and equipment............. 10 (684) (26) Gain on sale of other real estate owned................... (631) (116) (204) Gain on sale of loans..................................... (182) (655) (1,374) Gain on cash value of life insurance...................... (199) (213) (219) Amortization of premiums (accretion of discounts) on investment securities................................... 7,156 (1,185) (1,138) Provision for credit losses............................... 2,700 2,600 2,810 Provision for losses on other real estate owned........... 300 500 1,686 Proceeds from loan sales.................................. 4,830 10,553 19,264 Origination of loans held for sale........................ (4,648) (9,898) (17,890) Depreciation and amortization............................. 4,035 3,679 3,518 Change in accrued interest receivable..................... (2,096) (1,275) 226 Change in accrued interest payable........................ 667 1,184 457 Deferred tax benefit (provision).......................... (2,967) (1,208) 153 Change in other assets and liabilities.................... 5,827 5,382 1,297 --------- --------- --------- Total adjustments................................... 14,882 8,257 8,553 --------- --------- --------- Net Cash Provided by Operating Activities................... $ 40,842 $ 32,374 $ 29,121 ========= ========= ========= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Real estate acquired through foreclosure.................. $ 1,795 $ 3,560 $ 11,553 Loans to facilitate the sale of other real estate owned... $ 1,235 $ 200 $ 4,519 Securities purchased not settled.......................... $ -- $ 5,000 $ 10,300 See accompanying notes to consolidated financial statements. 42
44 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE YEARS ENDED DECEMBER 31, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of CVB Financial Corp. and subsidiaries are in accordance with generally accepted accounting principles and conform to practices within the banking industry. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows. Principles of Consolidation -- The consolidated financial statements include the accounts of CVB Financial Corp. (the "Company") and its wholly owned subsidiaries, Citizens Business Bank (the "Bank"), Community Trust Deed Services, CVB Ventures, Inc., and Chino Valley Bancorp, after elimination of all material intercompany transactions and balances. Nature of Operations -- The Company's primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust services to customers through its asset management division and branch offices. The Bank's customers consist primarily of small to mid-sized businesses and individuals located in the Inland Empire, San Gabriel Valley, and Orange County areas of Southern California. The Bank operates 30 branches with the headquarters located in the city of Ontario. Investment Securities -- The Company classifies as held to maturity those debt securities that it has the positive intent and ability to hold to maturity. All other debt and equity securities are classified as available for sale. Securities held to maturity are accounted for at cost and adjusted for amortization of premiums and accretion of discounts. Securities available for sale are accounted for at fair value, with the net unrealized gains and losses (unless other than temporary), net of income tax effects, presented as a separate component of stockholders' equity. Realized gains and losses on sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. The Company's investment in Federal Home Loan Bank ("FHLB") stock is classified as available for sale but is carried at cost, which approximates fair value. Loans and Lease Finance Receivables -- Loans and lease finance receivables are reported at the principal amount outstanding, less deferred net loan origination fees and the allowance for credit losses. Interest on loans and lease finance receivables is credited to income based on the principal amount outstanding. Interest income is not recognized on loans and lease finance receivables when collection of interest is deemed by management to be doubtful. The Bank receives collateral to support loans, lease finance receivables, and commitments to extend credit for which collateral is deemed necessary. The most significant categories of collateral are real estate, principally commercial and industrial income-producing properties, real estate mortgages, and assets utilized in agribusiness. Nonrefundable fees and direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. The deferred net loan fees and costs are recognized in interest income over the loan term in a manner that approximates the level-yield method. Provision and Allowance for Credit Losses -- The determination of the balance in the allowance for credit losses is based on an analysis of the loan and lease finance receivables portfolio and reflects an amount that, in management's judgment, is adequate to provide for potential credit losses after giving consideration to the character of the loan portfolio, current economic conditions, past credit loss experience, and such other factors as deserve current recognition in estimating credit losses. The provision for credit losses is charged to expense. Premises and Equipment -- Premises and equipment are stated at cost, less accumulated depreciation, which is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their 43
45 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 estimated service lives using the straight-line method. Properties under capital lease and leasehold improvements are amortized over the shorter of their economic lives or the initial terms of the leases. Other Real Estate Owned -- Other real estate owned represents real estate acquired through foreclosure in satisfaction of commercial and real estate loans and is stated at fair value, minus estimated costs to sell (fair value at time of foreclosure). Loan balances in excess of fair value of the real estate acquired at the date of acquisition are charged against the allowance for credit losses. Any subsequent operating expenses or income, reduction in estimated values, and gains or losses on disposition of such properties are charged to current operations. Business Combinations and Intangible Assets -- The Company has engaged in the acquisition of financial institutions and the assumption of deposits and purchase of assets from other financial institutions in its market area. The Company has paid premiums on certain transactions, and such premiums are recorded as intangible assets, in the form of goodwill. These intangible assets are being amortized over a 15-year period on the straight-line basis. Income Taxes -- Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Earnings per Common Share -- Basic earnings per share are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during each year. The computation of diluted earnings per share considers the number of shares issuable upon the assumed exercise of outstanding common stock options. Earnings per common share and stock option amounts have been retroactively restated to give effect to all stock splits and dividends. A reconciliation of the numerator and the denominator used in the computation of basic and diluted earnings per common share is included in Note 13. Statement of Cash Flows -- Cash and cash equivalents as reported in the statements of cash flows include cash and due from banks and federal funds sold. Trust Services -- The Company maintains funds in trust for customers. The amount of these funds and the related liability have not been recorded in the accompanying consolidated balance sheets, as they are not assets or liabilities of the Bank or Company, with the exception of any funds held on deposit with the Bank. Trust fees are recorded on an accrual basis. Use of Estimates in the Preparation of Financial Statements -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Current Accounting Pronouncements -- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for financial statements for periods beginning after June 15, 1999. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement was adopted during the year ended December 31, 1999, with an immaterial impact on the Company's consolidated financial statements. Reclassifications -- Certain amounts in the prior years' financial statements and related footnote disclosures have been reclassified to conform to the current year's presentation. In addition, all prior years' 44
46 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 amounts have been restated to account for the acquisition of Orange National Bancorp ("ONB") under the pooling-of-interests method of accounting. 2. INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities are shown below. All securities held are publicly traded, and the estimated fair values were obtained from an independent pricing service. 1999 ------------------------------------------------ GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE ---------- ---------- -------- -------- (IN THOUSANDS) Investment securities available for sale: U.S. Treasury securities...................... $ 999 $ (8) $ 991 Mortgage-backed securities.................... 231,233 $ 74 (5,800) 225,507 CMO/REMICs.................................... 434,680 2 (17,952) 416,730 Government agency............................. 35,392 (510) 34,882 Municipal bonds............................... 165,137 472 (4,663) 160,946 Other debt securities......................... 9,536 (43) 9,493 CRA Investment................................ 820 820 FHLB stock.................................... 27,963 27,963 -------- ------ -------- -------- $905,760 $ 548 $(28,976) $877,332 ======== ====== ======== ======== 1998 ------------------------------------------------ GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE ---------- ---------- -------- -------- (IN THOUSANDS) Investment securities held to maturity: Mortgage-backed securities.................... $ 4,409 $ 136 $ 4,545 CMO/REMICS.................................... 17,640 77 $ (25) 17,692 Municipal bonds............................... 47,962 1,917 49,879 -------- ------ -------- -------- $ 70,011 $2,130 $ (25) $ 72,116 ======== ====== ======== ======== Investment securities available for sale: U.S. Treasury securities...................... $ 3,005 $ 18 $ 3,023 Mortgage-backed securities.................... 150,588 1,157 $ (185) 151,560 CMO/REMICs.................................... 444,119 1,279 (753) 444,645 Government agency............................. 35,670 90 (13) 35,747 Municipal bonds............................... 58,483 941 (84) 59,340 CRA Investment................................ 820 820 FRB stock..................................... 170 170 FHLB stock.................................... 21,506 21,506 -------- ------ -------- -------- $714,361 $3,485 $ (1,035) $716,811 ======== ====== ======== ======== The CMO/REMIC securities noted above represent collateralized mortgage obligations and real estate mortgage investment conduits. Approximately 95 percent of such securities are U.S. government agencies that guarantee payment of principal and interest of the underlying mortgages. The remaining collateralized 45
47 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 mortgage obligations are backed by agency-pooled collateral or whole loan collateral. All non-agency issues held are currently rated "AAA" by either Standard & Poor's or Moody's. At December 31, 1999 and 1998, investment securities having an amortized cost of approximately $507,695,000 and $390,308,000, respectively, were pledged to secure public deposits, short-term borrowings, and for other purposes as required or permitted by law. As discussed in Note 1, the Company adopted SFAS No. 133 during the year ended December 31, 1999. As permitted by SFAS No. 133, the Company reclassified investment securities from held to maturity to available for sale. The amortized cost at the date of transfer was $71,609,000 and the fair value was $72,283,000. The unrealized gain was recorded in stockholders' equity, net of income taxes. The amortized cost and fair value of debt securities at December 31, 1999, by contractual maturity, are shown below. Although mortgage-backed securities and CMO/REMICs have contractual maturities through 2030, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. AVAILABLE FOR SALE ---------------------------------- WEIGHTED- AMORTIZED FAIR AVERAGE COST VALUE YIELD --------- -------- --------- (DOLLARS IN THOUSANDS) Due in one year or less............................. $ 13,464 $ 13,385 5.46% Due after one year through five years............... 45,835 45,429 6.61% Due after five years through ten years.............. 58,472 57,051 6.82% Due after ten years................................. 94,113 91,267 7.76% -------- -------- 211,884 207,132 7.11% FHLB stock.......................................... 27,963 27,963 Mortgage-backed securities and CMO/REMICs........... 665,913 642,237 6.47% -------- -------- $905,760 $877,332 6.63% ======== ======== Net realized gains on sales of investment securities available for sale are as follows: 1999 1998 1997 ----- ---- ---- (IN THOUSANDS) Gross realized gains........................................ $ 60 $451 $ 95 Gross realized losses....................................... (140) (44) (88) 46
48 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 3. LOANS AND LEASE FINANCE RECEIVABLES The following is a summary of the components of loan and lease finance receivables at December 31: 1999 1998 -------- -------- (IN THOUSANDS) Commercial, financial, and industrial.................. $392,094 $287,518 Real estate: Mortgage............................................. 375,387 385,393 Construction......................................... 48,078 34,489 Consumer............................................... 24,731 28,996 Municipal lease finance receivables.................... 21,268 22,923 Agribusiness........................................... 94,560 76,283 -------- -------- 956,118 835,602 Allowance for credit losses (Note 5)................... (16,761) (14,888) Deferred loan origination fees, net.................... (3,566) (3,418) -------- -------- $935,791 $817,296 ======== ======== At December 31, 1999, the Bank held approximately $428,642,000 of fixed rate loans. These fixed rate loans bear interest at rates ranging from 5 to 17 percent and have contractual maturities between 1 and 25 years. 4. TRANSACTIONS INVOLVING DIRECTORS AND SHAREHOLDERS In the ordinary course of business, the Bank has granted loans to certain directors, executive officers, and the businesses with which they are associated. All such loans and commitments to lend were made under terms that are consistent with the Bank's normal lending policies. The following is an analysis of the activity of all such loans: 1999 1998 ------ ------- (IN THOUSANDS) Outstanding balance, beginning of year.................... $6,458 $ 6,636 Credit granted, including renewals........................ 259 3,016 Repayments................................................ (610) (3,194) Changes in officer/director loans due to merger........... (611) ------ ------- Outstanding balance, end of year.......................... $5,496 $ 6,458 ====== ======= 5. ALLOWANCE FOR CREDIT AND OTHER REAL ESTATE OWNED LOSSES Activity in the allowance for credit losses was as follows: 1999 1998 1997 ------- ------- ------- (IN THOUSANDS) Balance, beginning of year............................ $14,888 $13,103 $13,608 Provision charged to operations....................... 2,700 2,600 2,810 Loans charged off..................................... (1,023) (1,141) (3,672) Recoveries on loans previously charged off............ 196 326 357 ------- ------- ------- Balance, end of year.................................. $16,761 $14,888 $13,103 ======= ======= ======= 47
49 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 The Bank measures an impaired loan by using the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. If the calculated measurement of an impaired loan is less than the recorded investment in the loan, a portion of the Bank's general reserve is allocated as an impairment reserve. At December 31, 1999 and 1998, the Bank had classified as impaired, loan amounts totaling $3,240,000 and $10,991,000, respectively. All of these loans require specific reserves, and accordingly, the Bank has recorded specific reserves of $405,000 and $1,208,000 on such loans, respectively. The average recorded investment in impaired loans during the years ended December 31, 1999, 1998, and 1997 was approximately $7,161,000, $8,800,000, and $13,693,000, respectively. Interest income of $459,000, $986,000, and $1,238,000 was recognized on impaired loans during the years ended December 31, 1999, 1998, and 1997, respectively. The accrual of interest on impaired loans is discontinued when the loan becomes 90 days past due, or when the full collection of principal and interest is in doubt. When an asset is placed on nonaccrual status, previously accrued but unpaid interest is reversed against income. Subsequent collections of cash may be applied as reductions to the principal balance, or recorded as income, depending on management's assessment of the ultimate collectibility of the asset. Nonaccrual assets may be restored to accrual status when principal and interest become current and full payment of principal and interest is expected. At December 31, 1999, loans on nonaccrual status totaled $1,191,000, all of which are included in the impaired loans discussed above, compared to $8,849,000 at December 31, 1998. Activity in the allowance for other real estate owned losses was as follows: 1999 1998 1997 ----- ----- ------- (IN THOUSANDS) Balance, beginning of year............................... $ 553 $ 416 $ 2,184 Provision charged to operations.......................... 300 500 1,686 Charge-offs of other real estate owned................... (739) (363) (3,454) ----- ----- ------- Balance, end of year..................................... $ 114 $ 553 $ 416 ===== ===== ======= The Company incurred additional expenses of $347,000 (1999), $711,000 (1998), and $1,097,000 (1997) related to the holding and disposition of other real estate owned. 6. PREMISES AND EQUIPMENT Premises and equipment consist of: 1999 1998 -------- -------- (IN THOUSANDS) Land................................................... $ 5,717 $ 5,717 Bank premises.......................................... 22,156 21,076 Furniture and equipment................................ 25,608 22,936 Leased property under capital lease.................... 649 649 -------- -------- 54,130 50,378 Accumulated depreciation and amortization.............. (26,404) (22,607) -------- -------- $ 27,726 $ 27,771 ======== ======== 48
50 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 7. INCOME TAXES Income tax expense comprised the following: 1999 1998 1997 ------- ------- ------- (IN THOUSANDS) Current provision: Federal............................................. $13,175 $11,403 $ 9,090 State............................................... 5,037 4,208 3,427 ------- ------- ------- 18,212 15,611 12,517 ------- ------- ------- Deferred (benefit) provision: Federal............................................. (2,373) (972) 154 State............................................... (594) (236) (1) ------- ------- ------- (2,967) (1,208) 153 ------- ------- ------- $15,245 $14,403 $12,670 ======= ======= ======= Income tax (asset) liability comprised the following: 1999 1998 -------- ------- (IN THOUSANDS) Current: Federal............................................... $ 1,659 $ 1,202 State................................................. 777 330 -------- ------- 2,436 1,532 -------- ------- Deferred: Federal............................................... (17,111) (3,596) State................................................. (3,830) (1,070) -------- ------- (20,941) (4,666) -------- ------- $(18,505) $(3,134) ======== ======= 49
51 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 The components of the net deferred tax asset are as follows: 1999 1998 ------- ------- (IN THOUSANDS) FEDERAL Deferred tax liabilities: Depreciation.............................................. $ 2,428 $ 2,608 Valuation of trust assets................................. 499 543 Core deposit premium...................................... 145 268 Leases.................................................... 82 85 Deferred income........................................... 84 ------- ------- Gross deferred tax liability................................ 3,238 3,504 ------- ------- Deferred tax assets: California franchise tax.................................. 1,162 1,106 Bad debt and credit loss deduction........................ 5,648 4,421 Other real estate owned reserves.......................... 187 290 Deferred compensation..................................... 977 1,270 Self-insurance reserves................................... 427 298 Unrealized loss (gain) on investment securities, net...... 10,040 (1,102) Other, net................................................ 1,908 817 ------- ------- Gross deferred tax asset.................................... 20,349 7,100 ------- ------- Net deferred tax asset -- federal........................... $17,111 $ 3,596 ======= ======= STATE Deferred tax liabilities: Depreciation.............................................. $ 567 $ 588 Valuation of trust assets................................. 154 168 Core deposit premium...................................... 45 80 Deferred income........................................... 145 ------- ------- Gross deferred tax liability................................ 911 836 ------- ------- Deferred tax assets: Bad debt and credit loss deduction........................ 1,600 1,303 Other real estate owned reserves.......................... 58 90 Deferred compensation..................................... 303 400 Self-insurance reserves................................... 132 92 Other accrued expense..................................... 574 Unrealized loss (gain) on investment securities, net...... 1,997 (169) Other, net................................................ 77 190 ------- ------- Gross deferred tax asset.................................... 4,741 1,906 ------- ------- Net deferred tax asset -- state............................. $ 3,830 $ 1,070 ======= ======= 50
52 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 A reconciliation of the statutory income tax rate to the consolidated effective income tax rate follows: 1999 1998 1997 ----------------- ----------------- ----------------- AMOUNT AMOUNT AMOUNT (000S) PERCENT (000S) PERCENT (000S) PERCENT ------- ------- ------- ------- ------- ------- Federal income tax at statutory rate....... $14,422 35.0% $13,482 35.0% $11,633 35.0% State franchise taxes, net of federal benefit.................................. 2,903 7.1 2,714 7.1 2,342 7.1 Tax-exempt interest........................ (2,241) (5.4) (1,917) (5.0) (1,425) (4.3) Other, net................................. 161 0.3 124 0.3 120 0.3 ------- ----- ------- ----- ------- ----- $15,245 37.0% $14,403 37.4% $12,670 38.1% ======= ===== ======= ===== ======= ===== 8. DEPOSITS Time certificates of deposit with balances of $100,000 or more amounted to approximately $233,607,000 and $222,187,000 at December 31, 1999 and 1998, respectively. Interest expense on such deposits amounted to approximately $10,728,000 (1999), $11,166,000 (1998), and $8,516,000 (1997). At December 31, 1999, the scheduled maturities of time certificates of deposit are as follows: 2000........................................................ $322,483,000 2001........................................................ 5,566,000 2002........................................................ 1,125,000 2003........................................................ 550,000 2004 and thereafter......................................... 565,000 ------------ $330,289,000 ============ 9. SHORT-TERM BORROWINGS During 1999 and 1998, the Bank entered into short-term borrowing agreements with FHLB. The Bank had outstanding balances of $280,000,000 and $195,000,000 under these agreements at December 31, 1999 and 1998, respectively, with weighted-average interest rates of 5.6 percent and 5.3 percent, respectively. In addition, on December 31, 1999 and 1998, the Bank entered into an overnight agreement with FHLB to borrow $20,000,000 and $5,000,000 at 5.5 percent and 4.8 percent annual interest, respectively. FHLB is holding certain investment securities of the Bank as collateral for these borrowings. On December 31, 1999, the Bank entered into an overnight agreement with a financial institution to borrow $23,000,000 at 5.0 percent annual interest. The Bank maintained cash deposits with the financial institution as collateral for these borrowings. 51
53 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 10. COMMITMENTS AND CONTINGENCIES The Company leases land and buildings under operating leases for varying periods extending to 2014, at which time the Company can exercise options that could extend certain leases through 2027. The future minimum annual rental payments required for leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1999, excluding property taxes and insurance, are approximately as follows: 2000........................................................ $ 2,235,000 2001........................................................ 1,806,000 2002........................................................ 1,687,000 2003........................................................ 1,390,000 2004........................................................ 947,000 Succeeding years............................................ 2,738,000 ----------- Total minimum payments required................... $10,803,000 =========== Total rental expense for the Company was approximately $2,497,000 (1999), $2,494,000 (1998), and $2,389,000 (1997). At December 31, 1999, the Bank had commitments to extend credit of approximately $249,500,000 and obligations under letters of credit of $13,199,000. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. The Bank uses the same credit underwriting policies in granting or accepting such commitments or contingent obligations as it does for on-balance-sheet instruments, which consist of evaluating customers' creditworthiness individually. Standby letters of credit written are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, the Bank holds appropriate collateral supporting those commitments. Management does not anticipate any material losses as a result of these transactions. The Bank has available lines of credit totaling $140,000,000 from certain financial institutions. In May 1998, the Bank received an unfavorable jury judgment as a result of the lawsuit filed against them by MRI Grand Terrace, Inc. ("MRI"). The award to MRI and its joint venture partner, Tri-National Development Corp. was approximately $4,900,000, which included approximately $2,100,000 in compensatory damages, $1,600,000 in punitive damages, and $1,200,000 in prejudgment interest. The lawsuit alleges that the Bank misled MRI in its purchase of a commercial real estate property from the Bank. The Bank subsequently made a motion to the trial judge to vacate the jury verdict, and on August 14, 1998, the motion was denied. The Bank filed an appeal on August 19, 1998 and is proceeding with the appellate process, which could take an extended period of time to complete. In the ordinary course of business, the Company becomes involved in litigation. Based upon the Company's internal records and discussions with legal counsel, the Company records reserves for estimates of the probable outcome of all cases brought against them. During 1999 and 1998, the Company has accrued a liability for a portion of the judgment discussed above. Management believes the ultimate outcome of this case will not have a material effect on the Company's future consolidated financial position or results of operations. 52
54 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 11. DEFERRED COMPENSATION PLANS As a result of the acquisition of Citizens Commercial Trust and Savings Bank of Pasadena ("CCT&SB") in 1996, the Bank assumed deferred compensation and salary continuation agreements with several former employees of CCT&SB. These agreements call for periodic payments at the retirement of such employees who have normal retirement dates through 2021. In connection with these agreements, the Bank assumed life insurance policies, which it intends to use to fund the related liability. Benefits paid to retirees amounted to approximately $50,000 (1999), $59,000 (1998), and $54,000 (1997). The Bank also assumed a death benefit program for certain former employees of CCT&SB, under which the Bank will provide benefits to the former employees' beneficiaries: 1) in the event of death while employed by the Bank; 2) after termination of employment for total and permanent disability; 3) after retirement, if retirement occurs after age 65. Amounts are to be paid to the former employees' beneficiaries over a 10-year period in equal installments. Further, the Bank assumed life insurance policies to fund any future liability related to this program. Amounts paid for the benefit of retirees totaled approximately $221,000 for 1999, 1998, and 1997. The Company assumed certain deferred compensation and salary continuation agreements as a result of the merger with ONB. These agreements called for periodic payments over 179 months in the event that ONB experienced a merger, acquisition, or other act wherein the employees were not retained in similar positions with the surviving company. Amounts paid under these agreements totaled approximately $162,000 in 1999. 12. 401(k) AND PROFIT-SHARING PLAN The Bank sponsors a 401(k) and profit-sharing plan for the benefit of its employees. Employees are eligible to participate in the plan after 12 months of consecutive service, provided they have completed 1,000 service hours in the plan year. Employees may make contributions to the plan under the plan's 401(k) component, and the Bank may make contributions under the plan's profit-sharing component, subject to certain limitations. The Bank's contributions are determined by the Board of Directors and amounted to approximately $1,182,000 (1999), $1,047,000 (1998), and $1,021,000 (1997). ONB had a salary deferral 401(k) plan for all employees who had completed one year of service. ONB contributed discretionary matching funds of $71,000 to the plan in 1999 and $102,000 in 1998 and 1997. The plan was terminated upon completion of the merger. 53
55 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 13. EARNINGS PER SHARE RECONCILIATION (Dollars and shares in thousands, except per share amounts) WEIGHTED- AVERAGE INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- DECEMBER 31, 1999 ---------------------------------------- BASIC EPS Income available to common stockholders........ $25,960 24,536 $ 1.06 EFFECT OF DILUTIVE SECURITIES Incremental shares from assumed exercise of outstanding options.......................... 930 (0.04) ------- ------ ------ DILUTED EPS Income available to common stockholders........ $25,960 25,466 $ 1.02 ======= ====== ====== DECEMBER 31, 1998 ---------------------------------------- BASIC EPS Income available to common stockholders........ $24,117 24,424 $ 0.99 EFFECT OF DILUTIVE SECURITIES Incremental shares from assumed exercise of outstanding options.......................... 919 (0.04) ------- ------ ------ DILUTED EPS Income available to common stockholders........ $24,117 25,343 $ 0.95 ======= ====== ====== DECEMBER 31, 1997 ---------------------------------------- BASIC EPS Income available to common stockholders........ $20,568 24,283 $ 0.85 EFFECT OF DILUTIVE SECURITIES Incremental shares from assumed exercise of outstanding options.......................... 902 (0.03) ------- ------ ------ DILUTED EPS Income available to common stockholders........ $20,568 25,185 $ 0.82 ======= ====== ====== 14. STOCK OPTION PLANS The Company has granted options to purchase shares of the Company's common stock to certain officers and Directors under a plan established in 1991. The plan authorizes the issuance of up to 2,823,425 shares. Option prices under the plan are to be determined at the fair market value of such shares on the date of grant, and options are exercisable in such installments as determined by the Board of Directors. Each option shall expire no later than 10 years from the grant date. At December 31, 1999, options for the purchase of 1,091,060 shares of the Company's common stock were outstanding under the plan, of which options to purchase 893,112 shares were exercisable at prices ranging from $2.49 to $20.50; 984,683 shares of common stock were available for the granting of future options under the plan. As a result of the merger with ONB, the Company assumed two compensatory incentive stock option plans in which options to purchase shares of ONB's common stock were granted to certain management and key personnel. Options to purchase shares of ONB's common stock have been converted to options to purchase the Company's common stock. At December 31, 1999, options for the purchase of 237,065 shares 54
56 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 were outstanding and exercisable at prices ranging from $9.46 to $15.47. There are no further options available for grant under these plans. The following table presents the status of all optioned shares and per share amounts after giving effect to the 5-for-4 stock split declared in 1999: SHARES PRICE RANGE --------- --------------- Outstanding at January 1, 1997........................... 1,505,828 $ 2.49 - $ 7.33 Granted.................................................. 392,703 $ 2.49 - $12.53 Exercised................................................ (205,386) $ 2.49 - $12.27 Canceled................................................. (25,095) $ 2.49 - $ 6.45 --------- Outstanding at December 31, 1997......................... 1,668,050 $ 2.49 - $12.53 Granted.................................................. 244,233 $12.86 - $18.36 Exercised................................................ (286,891) $ 2.49 - $11.46 Canceled................................................. (25,335) $ 5.61 - $17.09 --------- Outstanding at December 31, 1998......................... 1,600,057 $ 2.49 - $18.36 Granted.................................................. 36,297 $14.46 - $21.30 Exercised................................................ (308,229) $ 2.49 - $17.09 --------- Outstanding at December 31, 1999......................... 1,328,125 $ 2.49 - $21.30 ========= At December 31, 1999, 1,130,177 options are exercisable at an average exercise price of $6.23. The remaining weighted-average contractual life of the 1,328,125 options outstanding at December 31, 1999 is 5.1 years. In accordance with the compensation agreement of a key executive, 16,105 shares of the Company's common stock were granted to him in 1997. This agreement does not require the granting of additional shares to this executive through the remaining term of the agreement. However, the Board of Directors may grant additional shares to this executive at its discretion. The Company applies the intrinsic value method as described in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than for those options issued in accordance with the employment agreement discussed above. The following table presents the effects on net income and related earnings per share if compensation costs related to the stock option plans were measured using the fair value method as prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation": 1999 1998 1997 ------ ------ ------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Reduction in net income..................................... $ 239 $ 356 $ 656 Reduction in basic earnings per common share................ $0.01 $0.01 $0.03 Reduction in diluted earnings per common share.............. $0.01 $0.01 $0.03 55
57 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 The fair value of the options granted was estimated using the Black-Scholes option-pricing model with the following assumptions: 1999 1998 1997 --------- --------- --------- Dividend yield..................................... 2.2% 2.4% 1.5% Volatility......................................... 32.4% 27.5% 23.7% Risk-free interest rate............................ 5.5% 5.0% 6.0% Expected life...................................... 7.0 years 6.9 years 8.8 years 15. REGULATORY MATTERS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct, material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (primarily common stock and retained earnings, less goodwill) to risk-weighted assets, and of Tier I capital to average assets. Management believes that, as of December 31, 1999, the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1999, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the minimum total risk-based, Tier I risk-based, and Tier I leverage (tangible Tier I capital divided by average total assets) ratios as set forth in the table below must be maintained. There are no conditions or events since said notification that management believes have changed the institution's category. 56
58 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 The actual capital ratios of the Company and the Bank at December 31 are as follows: TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS: ----------------- ------------------ ------------------ AMOUNT AMOUNT AMOUNT (000S) RATIO (000S) RATIO (000S) RATIO -------- ----- -------- ------ -------- ------ As of December 31, 1999: Total Capital (to Risk-Weighted Assets) Company....................... $163,579 13.9% $94,146 >/=8.0% N/A Bank.......................... 160,160 13.6% 94,212 >/=8.0% $117,765 >/=10.0% Tier I Capital (to Risk-Weighted Assets) Company....................... 148,710 12.6% 47,210 >4.0% N/A Bank.......................... 145,313 12.3% 47,256 >4.0% 70,884 > 6.0% Tier I Capital (to Average Assets) Company....................... 148,710 7.7% 77,252 >/=4.0% N/A Bank.......................... 145,313 7.6% 76,481 >/=4.0% 95,601 >/=5.0% As of December 31, 1998: Total Capital (to Risk-Weighted Assets) Company....................... 140,840 13.6% 82,847 >/=8.0% N/A Bank.......................... 138,017 13.3% 83,018 >/=8.0% 103,772 >/=10.0% Tier I Capital (to Risk-Weighted Assets) Company....................... 128,447 12.4% 41,435 >4.0% N/A Bank.......................... 125,650 12.1% 41,537 >4.0% 62,306 > 6.0% Tier I Capital (to Average Assets) Company....................... 128,447 7.4% 69,431 >/=4.0% N/A Bank.......................... 125,650 7.3% 68,849 >/=4.0% 86,062 >/= 5.0% In addition, California Banking Law limits the amount of dividends a bank can pay without obtaining prior approval from bank regulators. Under this law, the Bank could, as of December 31, 1999, declare and pay additional dividends of approximately $48,672,000. Banking regulations require that all banks maintain a percentage of their deposits as reserves at the Federal Reserve Bank. On December 31, 1999, this reserve requirement was approximately $737,000. 57
59 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 16. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY BALANCE SHEETS (IN THOUSANDS) 1999 1998 -------- -------- Assets: Investment in Citizens Business Bank...................... $137,373 $136,633 Other assets, net......................................... 11,895 7,791 -------- -------- Total assets...................................... $149,268 $144,424 ======== ======== Liabilities................................................. $ 8,498 $ 4,994 Stockholders' equity........................................ 140,770 139,430 -------- -------- Total liabilities and stockholders' equity........ $149,268 $144,424 ======== ======== STATEMENTS OF EARNINGS (IN THOUSANDS) 1999 1998 1997 ------- ------- ------- Equity in earnings of Citizens Business Bank................ $29,179 $24,441 $20,806 Acquisition costs........................................... (4,856) Other income (expense), net................................. 1,637 (324) (238) ------- ------- ------- Net earnings................................................ $25,960 $24,117 $20,568 ======= ======= ======= 58
60 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 STATEMENTS OF CASH FLOWS (IN THOUSANDS) 1999 1998 1997 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings............................................. $ 25,960 $ 24,117 $ 20,568 Adjustments to reconcile net earnings to cash (used in) provided by operating activities: Earnings of Citizens Business Bank.................... (29,179) (24,441) (20,806) Other operating activities, net....................... 2,273 1,365 1,273 -------- -------- -------- Total adjustments................................ (26,906) (23,076) (19,533) -------- -------- -------- Net cash (used in) provided by operating activities..................................... (946) 1,041 1,035 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Dividends received from Citizens Business Bank........... 10,700 9,329 5,724 Dividends received from Community Trust Deed Services.... 140 -------- -------- -------- Net cash provided by investing activities........ 10,700 9,329 5,864 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends on common stock........................... (9,841) (7,892) (5,327) Proceeds from exercise of stock options.................. 2,739 639 720 Stock repurchase......................................... (1,907) (1,935) -------- -------- -------- Net cash used in financing activities............ (7,102) (9,160) (6,542) -------- -------- -------- Net Increase in Cash and Cash Equivalents.................. 2,652 1,210 357 Cash and Cash Equivalents, Beginning of Year............... 2,945 1,735 1,378 -------- -------- -------- Cash and Cash Equivalents, End of Year..................... $ 5,597 $ 2,945 $ 1,735 ======== ======== ======== 17. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data follows: THREE MONTHS ENDED -------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 Net interest income........................... $21,399 $22,057 $22,502 $24,054 Provision for credit losses................... 670 520 810 700 Net earnings.................................. 6,265 7,025 7,203 5,467 Basic earnings per common share............... 0.26 0.29 0.29 0.22 Diluted earnings per common share............. 0.25 0.28 0.28 0.21 1998 Net interest income........................... $19,110 $19,792 $20,213 $21,427 Provision for credit losses................... 850 470 640 640 Net earnings.................................. 5,425 5,938 6,171 6,583 Basic earnings per common share............... 0.22 0.24 0.26 0.27 Diluted earnings per common share............. 0.22 0.23 0.24 0.26 59
61 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 18. FAIR VALUE INFORMATION The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company could have realized in a current market exchange as of December 31, 1999 and 1998. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. 1999 1998 ---------------------- ---------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- (IN THOUSANDS) (IN THOUSANDS) ASSETS Cash and cash equivalents....................... $118,360 $118,360 $174,964 $174,964 Investment securities held to maturity.......... 70,011 72,116 Investment securities available for sale........ 877,332 877,332 716,811 716,811 Loans and lease finance receivables, net........ 935,791 934,465 817,296 817,122 Accrued interest receivable..................... 11,454 11,454 9,358 9,358 LIABILITIES Deposits: Noninterest-bearing........................... $649,821 $649,821 $638,683 $638,683 Interest-bearing.............................. 851,252 851,229 836,956 836,709 Demand note to U.S. Treasury.................... 16,951 16,951 95 95 Short-term borrowings........................... 323,000 323,000 200,000 200,000 Securities purchased not settled................ 5,000 5,000 Accrued interest payable........................ 5,341 5,341 4,674 4,674 The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value are explained below: The carrying amount of cash and cash equivalents is considered to be a reasonable estimate of fair value. For investment securities, fair values are based on quoted market prices, dealer quotes, and prices obtained from an independent pricing service. The carrying amount of loans and lease financing receivables is their contractual amounts outstanding, reduced by deferred net loan origination fees and the allocable portion of the allowance for credit losses. Variable rate loans are composed primarily of loans whose interest rates float with changes in the prime interest rate. The carrying amount of variable rate loans, other than such loans on nonaccrual status, is considered to be their estimated fair value. The fair value of fixed rate loans, other than such loans on nonaccrual status, was estimated by discounting the remaining contractual cash flows using the estimated current rate at which similar loans would be made to borrowers with similar credit risk characteristics and for the same remaining maturities, reduced by deferred net loan origination fees and the allocable portion of the allowance for credit losses. Accordingly, in determining the estimated current rate for discounting purposes, no adjustment has been made for any change in borrowers' credit risks since the origination of such loans. Rather, the allocable portion of the allowance for credit losses is considered to provide for such changes in estimating fair value. 60
62 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 The fair value of loans on nonaccrual status has not been specifically estimated because it is not practicable to reasonably assess the credit risk adjustment that would be applied in the marketplace for such loans. As such, the estimated fair value of total loans at December 31, 1999 and 1998 includes the carrying amount of nonaccrual loans at each respective date. The fair value of commitments to extend credit and standby letters of credit were not significant at either December 31, 1999 or 1998, as these instruments predominantly have adjustable terms and are of a short-term nature. The amounts of accrued interest receivable on loans and lease finance receivables and investments are considered to be stated at fair value. The amounts payable to depositors for demand, savings, money market accounts, the demand note to the U.S. Treasury, short-term borrowings, securities purchased not settled, and the related accrued interest payable are considered to be stated at fair value. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1999 and 1998. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above. 19. ACQUISITION On October 4, 1999, ONB merged with and into the Company in a transaction accounted for using the pooling-of-interests method of accounting. In the merger, 3,003,007 shares of the Company's common stock were issued to holders of common stock of ONB based on an exchange ratio of 1.5 shares of CVB Financial Corp.'s common stock for each share issued and outstanding of ONB. All of the outstanding shares of common stock of ONB were canceled upon the merger. The financial information for all periods presented has been restated to present the combined consolidated financial condition and results of operations of the Company and ONB as if the merger had been in effect for all periods presented. SEPARATE COMPANY INFORMATION FOR POOLING-OF-INTERESTS ACQUISITION -- The following table presents certain financial data reported separately by each company and on a combined basis for the period ended October 3, 1999 and the years ended December 31, 1998 and 1997: 1999 1998 1997 ------- ------- ------- (DOLLARS IN THOUSANDS) Net interest income: CVB................................................. $55,609 $65,591 $59,680 ONB................................................. 11,197 14,951 13,504 ------- ------- ------- Combined............................................ $66,806 $80,542 $73,184 ======= ======= ======= Net income: CVB................................................. $18,207 $20,787 $17,370 ONB................................................. 2,664 3,330 3,198 ------- ------- ------- Combined............................................ $20,871 $24,117 $20,568 ======= ======= ======= MERGER RELATED COSTS -- The pooling-of-interests method of accounting requires that certain expenses incurred to effect the merger be treated as current charges against income. The Company charged to expense 61
63 CVB FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) THREE YEARS ENDED DECEMBER 31, 1999 merger costs of approximately $3.0 million, after tax. The merger costs included accounting fees, investment banker fees, legal fees, and severance expenses. The following table sets forth the one-time merger costs and the remaining accrual included in other liabilities at December 31, 1999 (amounts in thousands): REMAINING MERGER- ACCRUAL AT RELATED DECEMBER 31, COSTS 1999 ------- ------------ Employee costs......................................... $2,282 $1,660 Investment banker fees................................. 880 Professional fees...................................... 841 235 Data processing........................................ 627 218 Other.................................................. 226 125 ------ ------ Total merger costs........................... $4,856 $2,238 ====== ====== 62
64 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of CVB Financial Corp. Ontario, California: We have audited the accompanying consolidated balance sheets of CVB Financial Corp. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of CVB Financial Corp.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CVB Financial Corp. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP - --------------------------------------------------------- Deloitte & Touche LLP Los Angeles, California February 2, 2000 63
65 INDEX TO EXHIBITS EXHIBIT NUMBER PAGE - ------- ---- 2.1 Agreement and Plan of Reorganization by and between CVB Financial Corp. and Orange National Bancorp dated May 18, 1999(1)..................................................... * 3.1 Articles of Company, as amended............................. 67 3.2 Bylaws of Company, as amended(2)............................ * 3.3 Reserved.................................................... * 10.1 Reserved.................................................... * 10.2 Agreement by and among D. Linn Wiley, CVB Financial Corp. and Chino Valley Bank dated August 8, 1991.(2).............. * 10.3 Chino Valley Bank Profit Sharing Plan, as amended.(3)....... * 10.4 Reserved.................................................... * 10.5 Transam One Shopping Center Lease dated May 20, 1986, by and between Transam One and Chino Valley Bank for the East Chino Office.(4).................................................. * 10.6 Sublease dated November 1, 1986, by and between Eldorado Bank and Chino Valley Bank for the East Highland Office.(4).................................................. * 10.7 Lease Assignment, Acceptance and Assumption and Consent dated December 23, 1986, executed by the FDIC, Receiver of Independent National Bank, Covina, California, as Assignor, Chino Valley Bank, as Assignee, and INB Bancorp, as Landlord under that certain Ground Lease dated September 30, 1983 by and between INB Bancorp and Independent National Bank for the Covina Office.(4)....................................... * 10.8 Lease Assignment dated May 15, 1987 and Consent of Lessor dated April 21, 1987 executed by Huntington Bank, as Assignor, Chino Valley Bank as Assignee and Gerald G. Myers and Lynn H. Myers as Lessors under that certain lease dated March 1, 1979 between Lessors and Huntington Bank for the Arcadia Office.(5).......................................... * 10.9 Lease Assignment dated May 15, 1987 and Consent of Lessor dated March 18, 1987 executed by Huntington Bank, as Assignor, Chino Valley Bank as Assignee and George R. Meeker as Lessor under that certain Memorandum of Lease dated May 1, 1982 between Lessor and Huntington Bank for the South Arcadia Office.(5).......................................... * 10.10 Lease Assignment dated May 15, 1987 and Consent of Lessor dated March 17, 1987 executed by Huntington Bank, as Assignor, Chino Valley Bank as Assignee and William R. Hayden and Marie Virginia Hayden as Lessor under that Certain Lease and Sublease, dated March 1, 1983, as amended, between Lessors and Huntington Bank for the San Gabriel Office.(5).................................................. * 10.11 Lease Assignment dated May 15, 1987 executed by Huntington Bank as Assignor and Chino Valley Bank as Assignee under that certain Shopping Center Lease dated June 1, 1982, between Anita Associates, a limited partnership and Huntington Bank for the Santa Anita ATM Branch.(5).......... * 10.12 Office Building Lease between Havenpointe Partners Ltd. and CVB Financial Corp. dated April 14, 1987 for the Ontario Airport Office.(5).......................................... * 10.13 Form of Indemnification Agreement.(6)....................... * 10.14 Office Building Lease between Chicago Financial Association I, a California Limited Partnership and CVB Financial Corp. dated October 17, 1989, as amended, for the Riverside Branch.(7).................................................. * 10.15 Office Building Lease between Lobel Financial Corporation and Chino Valley Bank dated June 12, 1990, for the Premier Results data processing center.(3).......................... * 64
66 EXHIBIT NUMBER PAGE - ------- ---- 10.16 Office Space Lease between Rancon Realty Fund IV and Chino Valley Bank dated September 6, 1990, for the Tri-City Business Center Branch.(3).................................. * 10.17 1991 Stock Option Plan, as amended.(12)..................... * 10.18 Reserved.................................................... * 10.19 Reserved.................................................... * 10.20 Lease by and between Allan G. Millew and William F. Kragness and Chino Valley Bank dated March 5, 1993 for the Fontana Office.(8).................................................. * 10.21 Office Lease by and between Mulberry Properties and Chino Valley Bank dated October 12, 1992.(8)...................... * 10.22 Reserved.................................................... * 10.23 Reserved.................................................... * 10.24 Reserved.................................................... * 10.25 Lease by and between Bank of America and Chino Valley Bank dated October 15, 1993, for the West Arcadia Office.(9)..... * 10.26 Lease by and between RCI Loring and CVB Financial Corp. dated March 11, 1993, for the Riverside Office.(9).......... * 10.27 Lease by and between 110 Wilshire Building Partners, a California Partnership and Chino Valley Bank dated October 21, 1994 for the Fullerton Office.(10)...................... * 10.28 Reserved.................................................... * 10.29 Severance Compensation Agreement dated September 30, 1996 with Edwin J. Pomplun.(11).................................. * 10.30 Severance Compensation Agreement dated September 20, 1996 with Frank Basirico.(11).................................... * 10.31 Severance Compensation Agreement dated September 27, 1996 with Jay Coleman.(11)....................................... * 10.32 Reserved.................................................... * 10.33 Severance Compensation Agreement dated September 27, 1996 with Tony Ellis.(11)........................................ * 10.34 Severance Compensation Agreement dated May 30, 1997 with Nancy Sinclair.(11)......................................... * 10.35 Severance Compensation Agreement dated February 1, 1998 with Edward Biebrich.(11)........................................ * 10.36 Reserved.................................................... * 10.37 CVB Financial Corp. 1999 Orange National Bancorp 1993 Continuation Stock Option Plan(13).......................... * 10.38 CVB Financial Corp. 1999 Orange National Bancorp 1997 Continuation Stock Option Plan(14).......................... * 11 Statement regarding computation of per share earnings (included in Form 10-K)..................................... * 12 Statement regarding computation of ratios (included in Form 10-K)....................................................... * 21 Subsidiaries of Company..................................... 77 23 Consent of Independent Certified Public Accountants......... 78 27 Financial Data Schedule..................................... 79 - --------------- * Not applicable. (1) Filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K on May 21, 1999, Commission File No. 1-10394, which is incorporated herein by this reference. (2) Filed as Exhibits 3.2 and 10.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Commission file number 1-10394, which are incorporated herein by this reference. 65
67 (3) Filed as Exhibits 10.3, 10.15 and 10.16 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, Commission file number 1-10394, which are incorporated herein by this reference. (4) Filed as Exhibits 10.4, 10.5, 10.6 and 10.7 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, Commission file number 1-10394, which are incorporated herein by this reference. (5) Filed as Exhibits 10.8, 10.9, 10.10, 10.11 and 10.12 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, Commission file number 1-10394, which are incorporated herein by this reference. (6) Filed as Exhibit 10.13 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, Commission file number 1-10394, which is incorporated herein by this reference. (7) Filed as Exhibits 10.1 and 10.14 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, Commission file number 1-10394, which are incorporated herein by this reference. (8) Filed as Exhibit 10.20, 10.21 and to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, Commission file number 1-10394, which are incorporated herein by this reference. (9) Filed as Exhibit 10.25 and 10.26 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, Commission file number 1-10394, which are incorporated herein by this reference. (10) Filed as Exhibit 10.27 to the Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 1994, Commission file number 1-10394, which is incorporated herein by this reference. (11) Filed as Exhibits 10.29, 10.30, 10.31, 10.33, 10.34 and 10.35 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, Commission File No. 1-10394, which are incorporated herein by reference. (12) Filed as Exhibit 10.36 to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, Commission File No. 1-10394, which is incorporated herein by this reference. (13) Filed as Exhibit 99.1 to Registrant's Registration Statement on Form S-8 on October 6, 1999, Registration No. 333-88519, which is incorporated herein by this reference. (14) Filed as Exhibit 99.2 to Registrant's Registration Statement on Form S-8 on October 6, 1999, Registration No. 333-88519, which is incorporated herein by this reference. 66
1 EXHIBIT 3.1 ARTICLES OF INCORPORATION OF CVB FINANCIAL CORP. The undersigned Incorporator hereby executes, acknowledges and files the following Articles of Incorporation for the purpose of forming a corporation under the General Corporation Law of the State of California: One: The name of the Corporation shall be: CVB FINANCIAL CORP. Two: The purpose of the Cooperation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. Three: The name and address in this state of the Corporation's initial agent for service of process in accordance with subdivision (b) of Section 1502 of the General Corporation Law is: BARNET REITNER Manatt, Phelps, Rothenberg & Tunney 1888 Century Park East, 21st Floor Los Angeles, California 90067 Four: The Corporation is authorized to issue only one class of shares, and the total number of shares which the Corporation is authorized to issue is 20,000,000. In WITNESS WHEREOF, the undersigned Incorporator has executed the foregoing Articles of Incorporation on April 24, 1981. /S/Barnet Reitner Barnet Reitner, Incorporator The undersigned declares that he is the person who executed the foregoing Articles of Incorporation and that such instrument is the act and deed of the undersigned. /S/Barnet Reitner Barnet Reitner
2 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF CVB FINANCIAL CORP. John Cavalucci and Christina Schaefer certify: 1. That they are the President/Chief Executive Officer and Secretary, respectively, of CVB Financial Corp., a California corporation. 2. That Article Four of the Corporation's Articles of Incorporation is amended to read as follows: "Four: The Corporation is authorized to issue only one class of shares, and the total number of shares which the Corporation is authorized to issue is 25,000,000. Upon the amendment of this Article to read as herein set forth each four outstanding shares are split up and converted into five shares." 3. That the foregoing amendment of the Corporation's Articles of Incorporation has been duly approved by the Board of Directors. 4. That the foregoing amendment was one which the Board of Directors alone may adopt without approval of the outstanding shares pursuant to Section 902(c) of the California Corporations Code, since only one class of shares is outstanding. /S/John Cavallucci John Cavallucci President and Chief Executive Officer /S/Christina Schaefer Christina Schaefer Secretary Each of the undersigned declares, under penalty of perjury that the matters set forth in the foregoing Certificate are true of their own knowledge. Executed at Chino, California on January 21, 1986. /S/John Cavallucci John Cavallucci /S/Christina Schaefer Christina Schaefer
3 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF CVB FINANCIAL CORP. The undersigned, John Cavallucci and Christina Schaefer, do hereby certify: 1. That they are and have been, at all times mentioned herein, respectively, the duly acting President, the Chief Executive Officer and Secretary of CVB Financial Corp. (the "Company"), a California corporation; and 2. That the following is a true and correct copy of a resolution of the Company adopted by the holders of the majority of the outstanding shares of the Company's Common Stock entitled to vote pursuant to a Written Consent of Shareholders. BE IT HEREBY RESOLVED, that Article Four of the Company's Articles of Incorporation, which currently provides as follows: "Four. The Corporation is authorized to issue only one class of shares, and the total number of shares which the Corporation is authorized to issue is 25,000,000. Upon the amendment of this Article to read as herein set forth each four outstanding shares are split up and converted into five shares." be, and it hereby is amended in full to read as follows: "Four. This Corporation is authorized to issue two (2) classes of shares of stock: one class of shares to be called "Common Stock"; the second class of shares to be called "Serial Preferred Stock." The total number of shares of stock which the Corporation shall have authority to issue is Forty-five million (45,000,000), of which Twenty-Five Million (25,000,000) shall be Common Stock and Twenty Million (20,000,000) shall be Serial Preferred Stock. At the time the amendment to this Article to read as herein set forth becomes effective, each outstanding share of capital stock of this Corporation shall be reclassified as one share of Common Stock of the Corporation. The designations and the powers, preferences and rights and the qualifications, limitations or restrictions thereof, of each class of stock of the Corporation shall be as follows: (a) Serial Preferred Stock. The Serial Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of preferred shares, and the number of shares constituting any such series and a designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. (b) Common Stock (1) After the requirements with respect to preferential dividends upon all classes and series of stock entitled thereto shall have been paid or declared and set
4 apart for payment and after the Corporation shall have complied with all requirements, if any, with respect to the setting aside of sums as a sinking fund or for a redemption account on any class of stock, then and not otherwise, the holders of Common Stock shall be entitled to receive, subject to the applicable provisions of the Corporations Code of the State of California, such dividends as may be declared from time to time by the Board of Directors. (2) After distribution in full of the preferential amounts to be distributed to the holders of all classes and series of stock entitled thereto in the event of a voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, as provided for in the Corporations Code of the State of California, the holders of the Common Stock shall be entitled to receive all the remaining assets of the Corporation. (3) Each holder of Common Stock shall have one (1) vote in respect of each share of stock held by him, subject, however, to such special voting rights by class as are or may be granted to holders of Serial Preferred Stock. 3. That the foregoing Amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the California Corporations Code. The total number of outstanding shares of the Corporation is 1,216,573. The number of shares voting in favor of the Amendment equaled or exceeded the vote required. The percentage vote required was more than fifty percent (50%). 4. That the foregoing Amendment of Articles of Incorporation has been duly approved and adopted with the necessary quorum present at a duly held meeting of the Board of Directors of the Company held on June 18, 1986. IN WITNESS WHEREOF, the undersigned have executed this Certificate on September 30, 1986. /S/John Cavallucci John Cavallucci, President and Chief Executive Officer /S/Christina Schaefer Christina Schaefer, Secretary Each of the undersigned declares under penalty of perjury that the matters set forth in the foregoing Certificate are true and correct. Executed this 30th day of September, 1986, in Chino, California. /S/John Cavallucci John Cavallucci, President and Chief Executive Officer /S/Christina Schaefer Christina Schaefer, Secretary
5 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION John Cavalluci and Tina Schaefer certify that: 1. They are the President/Chief Executive Officer and the Secretary, respectively, of CVB Financial Corp., a California corporation. 2. The Articles of Incorporation of this corporation are amended to include an Article Five that reads as follows: "Five: Section 1. Elimination of Directors' Liability. The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Section 2. Indemnification of Corporate Agents. This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders. Section 3. Insurance from a Subsidiary. This corporation is authorized to purchase and maintain insurance on behalf of its agents against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such from a company, the shares of which are owned in whole or in part by this corporation, provided that any policy issued by such company is limited to the extent required by applicable law. Section 4. Repeal or Modification. Any repeal or modification of the foregoing provisions of this Article Five by the shareholders of this corporation shall not adversely affect any right or protection of an agent of this corporation existing at the time of that repeal or modification." 3. The foregoing Amendment of Articles of Incorporation was duly approved by the Board of Directors at its meeting held on February 22, 1988, at which a quorum was present and acting throughout. 4. The foregoing Amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the California General Corporation Law, at a meeting held on May 18, 1988. The corporation has no shares of preferred stock outstanding. The total number of shares of Common Stock outstanding at the record date for determining shareholders entitled to vote was 2,281,068. The number of shares of Common Stock voting in favor of the amendment equaled or exceeded the vote required, which was more than 50 percent of the Common Stock. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in the foregoing Certificate are true and correct of our own knowledge. Dated 5-20-88 /S/John Cavallucci John Cavallucci, President and Chief Executive Officer
6 /S/Tina Schaefer Tina Schaefer, Secretary
7 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF CVB FINANCIAL CORP. John Cavallucci and Tina Schaefer certify: 1. That they are the President and Secretary, respectively, of CVB Financial Corp., a California corporation. 2. That Article FOUR of the Corporation's Articles of Incorporation is amended to read as follows: "Four. This Corporation is authorized to issue two (2) classes of shares of stock: one class of shares to be called "Common Stock"; the second class of shares to be called "Serial Preferred Stock." The total numbers of shares of stock which the Corporation shall have authority to issue is Seventy Million (70,000,000), of which Fifty Million (50,000,000) shall be Common Stock and Twenty Million (20,000,000) shall be Serial Preferred Stock. Upon the amendment of this Article to read as herein set forth each one outstanding share of Common Stock is split up and converted into two shares of Common Stock. The designation and powers, preferences and rights and the qualifications, limitations or restrictions thereof, of each class of stock of the Corporation shall be as follows: (a) Serial Preferred Stock. The Serial Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of preferred shares, and the number of shares constituting any such series and a designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. (b) Common Stock (1) After the requirements with respect to preferential dividends upon all classes and series of stock entitled thereto shall have been paid or declared and set apart for payment and after the Corporation shall have complied with all requirements, if any, with respect to the setting aside of sums as a sinking fund or for a redemption account on any class of stock, then and not otherwise, the holders of Common Stock shall be entitled to receive, subject to the applicable provisions of the Corporations Code of the State of California, such dividends as may be declared from time to time by the Board of Directors. (2) After distribution in full of the preferential amounts to be distributed to the holders of all classes and series of stock entitled thereto in the event of a voluntary or involuntary liquidation, dissolution, or winding up of the Corporation, as provided for in the Corporations Code of the State of California, the holders of the Common Stock shall be entitled to receive all the remaining assets of the Corporation.
8 (3) Each holder of Common Stock shall have one (1) vote in respect of each share of stock held by him, subject, however, to such special voting rights by class as are or may be granted to holders of Serial Preferred Stock. 3. That the foregoing amendment of the Corporation's Articles of Incorporation has been duly approved by the Board of Directors at their regular meeting held on September 20, 1989. 4. That the foregoing amendment was one which the Board of Directors alone may adopt without approval of the outstanding shares pursuant to Section 902(c) of the California Corporations Code, since only one class of shares are outstanding. /S/John Cavallucci John Cavallucci, President /S/Tina Schaefer Tina Schaefer, Secretary Each of the undersigned declares, under penalty of perjury that the matters set forth in the foregoing Certificate are true of their own knowledge. Executed at Ontario, California on September 20, 1989 /S/John Cavallucci John Cavallucci /S/Tina Schaefer Tina Schaefer
9 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF CVB FINANCIAL CORP. The undersigned, D. Linn Wiley and Donna Marchesi, do hereby certify: 1. That they are and have been at all times herein mentioned the duly elected and acting President and the Secretary, respectively, of CVB Financial Corp., a California corporation (the "Company"). 2. That the Board of Directors of the Company adopted the following resolutions on December 17, 1997: NOW, THEREFORE, BE IT RESOLVED that the first paragraph of article Four of the Company's Articles of Incorporation is amended to read as follows: "Four. This Corporation is authorized to issue two (2) classes of shares of stock: one class of shares to be called "Common Stock"; the second class of shares to be called "Serial Preferred Stock." The total number of shares of stock which the corporation shall have authority to issue is Seventy Million (70,000,000), of which Fifty Million(50,000,000) shall be Common Stock and Twenty Million (20,000,000) shall be Serial Preferred Stock. Upon the amendment of this Article to read as herein set forth each two (2) outstanding shares of Common Stock are split up and converted into three (3) shares of Common Stock.: 3. Approval of the foregoing Amendment of the Articles of Incorporation ("Amendment") by the shareholders is not required pursuant to 902(c) of the California Corporations Code. 4. This Amendment shall become effective on January 2, 1998. IN WITNESS WHEREOF, the undersigned have executed the Certificate on December 23, 1997. /S/D. Linn Wiley D. Linn Wiley, President /S/Donna Marchesi Donna Marchesi, Secretary Each if the undersigned declares under penalty of perjury that the matters set forth in the foregoing Certificate are true and correct of our own knowledge. Executed this 23rd day of December, 1997 in Ontario, California. /S/D. Linn Wiley D. Linn Wiley, President /S/Donna Marchesi Donna Marchesi, Secretary
10 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF CVB FINANCIAL CORP. The undersigned, D. Linn Wiley and Donna Marchesi, do hereby certify: 1. That they are and have been at all times herein mentioned the duly elected and acting President and the Secretary, respectively, of CVB Financial Corp., a California corporation (the "Company"). 2. That the Board of Directors of the Company adopted the following resolutions on December 15, 1999: NOW, THEREFORE, BE IT RESOLVED that the first paragraph of article Four of the Company's Articles of Incorporation is amended to read as follows: "Four. This Corporation is authorized to issue two (2) classes of shares of stock: one class of shares to be called "Common Stock"; the second class of shares to be called "Serial Preferred Stock." The total number of shares of stock which the corporation shall have authority to issue is Seventy Million (70,000,000), of which Fifty Million(50,000,000) shall be Common Stock and Twenty Million (20,000,000) shall be Serial Preferred Stock. Upon the amendment of this Article to read as herein set forth each four (4) outstanding shares of Common Stock are split up and converted into five (5) shares of Common Stock.: 3. Approval of the foregoing Amendment of the Articles of Incorporation ("Amendment") by the shareholders is not required pursuant to 902(c) of the California Corporations Code. 4. This Amendment shall become effective at 5:00 p.m. California time on January 14, 2000. IN WITNESS WHEREOF, the undersigned have executed the Certificate on December 31, 1999. /S/D. Linn Wiley D. Linn Wiley, President /S/Donna Marchesi Donna Marchesi, Secretary Each if the undersigned declares under penalty of perjury that the matters set forth in the foregoing Certificate are true and correct of our own knowledge. Executed this 31st day of December, 1999 in Ontario, California. /S/D. Linn Wiley D. Linn Wiley, President /S/Donna Marchesi Donna Marchesi, Secretary
1 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY Citizens Business Bank, a California corporation Community Trust Deed Services, a California corporation Chino Valley Bancorp., a California corporation CVB Ventures, Inc., a California corporation Orange National Bancorp, formerly ONB Mortgage Corporation, a California corporation.
1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the CVB Financial Corp. 1999 Orange National Bancorp 1999 Continuation Stock Option Plan and the CVB Financial Corp. 1999 Orange National Bancorp 1993 Continuation Stock Option Plan Registration Statement No. 333-88519 on Form S-8, the 1991 Stock Option Plan Registration Statement No. 33-41318 on Form S-8, and the Key Employee Stock Grant Plan Registration Statement No. 33-50442 on Form S-8 of our report, dated February 2, 2000, on the consolidated balance sheets of CVB Financial Corp. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999, appearing in the Annual Report on Form 10-K of CVB Financial Corp. for the year ended December 31, 1999. /S/Deloitte & Touche LLP - ---------------------------- Deloitte & Touche LLP March 27, 2000 Los Angeles, California
9 1,000 YEAR DEC-31-1999 DEC-31-1999 118,360 0 0 0 877,332 0 0 952,552 16,761 2,010,757 1,501,073 323,000 45,541 373 0 0 105,304 35,466 2,010,757 78,385 48,548 1,545 128,478 26,267 38,466 90,012 2,700 (80) 64,737 41,205 25,960 0 0 25,960 1.06 1.02 5.40 1,191 3 0 2,049 14,888 1,023 196 16,761 10,390 0 6,371
9 1,000 YEAR DEC-31-1998 DEC-31-1998 117,574 0 57,390 0 716,811 70,011 72,116 832,184 14,888 1,841,069 1,475,639 200,000 25,598 402 0 0 102,565 36,865 1,841,069 74,840 37,755 3,360 115,955 27,951 35,413 80,542 2,600 407 57,181 38,520 24,117 0 0 24,117 0.99 0.95 5.59 8,849 76 0 2,524 13,103 1,141 326 14,888 8,964 0 5,924
9 1,000 YEAR DEC-31-1997 DEC-31-1997 137,372 0 51,500 0 443,252 67,081 68,630 749,776 13,103 1,501,048 1,294,487 49,000 33,461 429 0 0 70,119 53,552 1,501,048 71,821 27,843 1,848 101,512 24,404 28,328 73,184 2,810 7 54,666 33,238 20,568 0 0 20,568 0.85 0.82 6.14 6,402 1,051 2,092 3,028 13,608 3,672 357 13,103 8,107 0 4,996
9 1,000 3-MOS 6-MOS 9-MOS DEC-31-1999 DEC-31-1999 DEC-31-1999 MAR-31-1999 JUN-30-1999 SEP-30-1999 98,188 105,068 120,036 0 0 0 66,100 49,300 25,805 0 0 0 717,626 727,352 738,727 69,404 66,596 73,342 71,217 66,883 74,093 838,110 863,358 883,639 15,535 16,025 16,336 1,836,988 1,888,222 1,900,388 1,463,156 1,465,777 1,492,662 205,000 211,000 235,000 26,812 68,443 32,497 395 388 381 0 0 0 0 0 0 102,765 102,817 103,194 38,860 39,797 36,654 1,836,988 1,888,222 1,900,388 18,488 37,641 57,283 11,725 23,126 35,126 468 990 1,551 30,681 61,757 93,960 6,248 12,556 19,328 9,282 18,302 28,002 21,399 43,455 65,958 670 1,190 2,000 0 0 (77) 15,178 30,762 45,737 10,053 21,183 32,723 6,265 13,290 20,493 0 0 0 0 0 0 6,265 13,290 20,493 0.26 0.55 0.84 0.25 0.53 0.81 5.27 5.33 5.33 8,231 5,866 1,223 39 75 191 153 154 0 2,654 2,496 2,117 14,888 14,888 14,888 117 165 689 94 112 137 15,535 16,025 16,336 12,024 14,859 14,383 0 0 0 3,511 1,166 1,953
9 1,000 3-MOS 6-MOS 9-MOS DEC-31-1998 DEC-31-1998 DEC-31-1998 MAR-31-1998 JUN-30-1998 SEP-30-1998 111,109 99,205 94,472 0 0 0 60,405 75,060 49,725 0 0 0 513,698 567,747 681,684 65,373 63,607 61,950 66,814 65,085 64,200 758,571 775,460 776,070 13,985 14,377 14,946 1,558,369 1,630,399 1,706,353 1,304,393 1,329,449 1,363,535 85,000 135,000 175,000 41,802 33,956 29,665 422 416 409 0 0 0 0 0 0 70,288 70,416 70,320 56,464 61,162 67,424 1,558,369 1,630,399 1,706,353 18,418 37,141 55,806 7,938 16,728 26,608 651 1,607 2,738 27,007 55,476 85,152 6,671 13,631 21,022 7,897 16,575 26,037 19,110 38,901 59,115 850 1,320 1,960 18 25 224 14,454 28,661 42,995 8,673 18,145 27,960 5,425 11,363 17,534 0 0 0 0 0 0 5,425 11,363 17,534 0.22 0.46 0.72 0.22 0.45 0.69 5.83 5.73 5.63 7,169 6,402 6,086 7 25 0 2,720 395 621 1,926 2,882 479 13,103 13,103 13,103 150 248 420 182 202 303 13,985 14,377 14,946 10,240 10,429 10,109 0 0 0 3,745 3,948 4,837