<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1999
REGISTRATION NO.: 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CVB FINANCIAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 6712 95-3629339
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
701 NORTH HAVEN AVENUE
ONTARIO, CALIFORNIA 91764
(909) 980-4030
(ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
D. LINN WILEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CVB FINANCIAL CORP.
701 NORTH HAVEN AVENUE
ONTARIO, CALIFORNIA 91764
(909) 980-4030
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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WILLIAM T. QUICKSILVER, ESQ. J. MICHAEL SHEPHERD, ESQ.
MANATT, PHELPS & PHILLIPS LLP BROBECK, PHLEGER & HARRISON LLP
11355 WEST OLYMPIC BOULEVARD SPEAR STREET TOWER
LOS ANGELES, CALIFORNIA 90064 ONE MARKET
TELEPHONE: (310) 312-4000 SAN FRANCISCO, CALIFORNIA 94105
TELEPHONE: (415) 442-0900
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) UNIT PRICE(2) REGISTRATION FEE
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Common stock, no par value......... 3,356,431 N/A $74,342,499 $20,850
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(1) This amount is based on the number of shares of common stock to be issued
upon consummation of the merger contemplated in the Agreement and Plan of
Reorganization dated May 18, 1999 by and between CVB Financial Corp. and
Orange National Bancorp.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) and Rule 457(f)(1) of the
Securities Act of 1933, as amended, based on the product of the estimated
maximum number of shares of common stock of Orange National Bancorp to be
exchanged for the stock of CVB Financial Corp. (2,283,071) multiplied by the
average of the high and low prices of Orange National Bancorp's common stock
on June 4, 1999 ($32.5625).
CVB FINANCIAL CORP. HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL CVB FINANCIAL
CORP. SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS JOINT PROXY
STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
CVB FINANCIAL CORP. ORANGE NATIONAL BANCORP
JOINT PROXY STATEMENT/PROSPECTUS
MERGER PROPOSED
YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of CVB Financial Corp. and Orange National Bancorp
have unanimously approved an agreement to merge Orange National Bancorp with and
into CVB Financial Corp.
If we complete the merger, shareholders of Orange National Bancorp will
receive 1.5 shares of CVB Financial Corp. common stock for each share of Orange
National Bancorp common stock plus cash for any fractional shares. We estimate
that, upon completion of the merger, current Orange National Bancorp
shareholders will own approximately 16% of the outstanding CVB Financial Corp.
common stock.
This document gives you detailed information about the merger and includes
a copy of the merger agreement, and you should read it carefully. It is a joint
proxy statement that both companies are using to solicit proxies for use at our
special shareholder meetings. It is also a prospectus relating to CVB Financial
Corp.'s issuance of shares of CVB Financial Corp. in connection with the merger.
BEFORE YOU MAKE A DECISION ON HOW TO VOTE ON THE MERGER, YOU SHOULD CONSIDER THE
"RISK FACTORS" BEGINNING ON PAGE 17 OF THE ATTACHED JOINT PROXY
STATEMENT/PROSPECTUS.
We are enthusiastic about the merger and the strength and capabilities we
expect from the combined company. We join all the other members of each
company's Board of Directors in recommending that you vote in favor of the
merger.
D. Linn Wiley Kenneth J. Cosgrove
President and Chief Executive Officer President and Chief Executive Officer
CVB Financial Corp. Orange National Bancorp
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THE SECURITIES OFFERED THROUGH THIS DOCUMENT ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
The date of this Joint Proxy Statement/Prospectus is , 1999
and it is first being mailed to shareholders on or about , 1999.
<PAGE> 3
CVB FINANCIAL CORP.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1999 AT A.M.
PLACE .
PURPOSES:
- To vote on the proposed merger of Orange National Bancorp and CVB
Financial Corp. and related matters.
- To conduct other business if properly raised.
Only shareholders of CVB Financial Corp. as of the close of business on
, 1999, may vote at the special meeting.
In connection with the proposed merger, you may exercise dissenters' rights
as provided in the California general corporation law. If you meet all the
requirements of this law, and follow all of its required procedures, you may
receive cash in the amount equal to the fair market value, as determined by CVB
Financial Corp., or, if required, by a court of law, of your shares of CVB
Financial Corp. common stock as of May 17, 1999, the day immediately preceding
the announcement of the merger. For additional details about dissenters' rights,
please refer to "Dissenting Shareholder Rights" and Annex E in the accompanying
joint proxy statement/prospectus.
--------------------------------------
Donna Marchesi
Corporate Secretary
Ontario, California
, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, WE URGE YOU TO
DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE.
YOU MAY REVOKE YOUR PROXY PRIOR TO ITS EXERCISE IN THE MANNER PROVIDED IN THE
ACCOMPANYING DOCUMENT.
<PAGE> 4
ORANGE NATIONAL BANCORP
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON , 1999 AT A.M.
PLACE .
PURPOSES:
- To vote on the proposed merger of Orange National Bancorp and CVB
Financial Corp. and related matters.
- To conduct other business if properly raised.
Only shareholders of Orange National Bancorp as of the close of business on
, 1999, may vote at the Orange National Bancorp special meeting.
In connection with the proposed merger, you may exercise dissenters' rights
as provided by the California general corporation law. If you meet all the
requirements of this law, and follow all of its required procedures, you may
receive cash in the amount equal to the fair market value, as determined by
Orange National Bancorp, or, if required, by a court of law, of your shares of
Orange National Bancorp common stock as of May 17, 1999, the day immediately
preceding the announcement of the merger. For additional details about
dissenters' rights, please refer to "Dissenting Shareholder Rights" and Annex E
in the accompanying joint proxy statement/prospectus.
--------------------------------------
Robert W. Creighton
Corporate Secretary
Orange, California
, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, WE URGE YOU TO
DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE.
YOU MAY REVOKE YOUR PROXY PRIOR TO ITS EXERCISE IN THE MANNER PROVIDED IN THE
ACCOMPANYING DOCUMENT.
<PAGE> 5
TABLE OF CONTENTS
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PAGE
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QUESTIONS AND ANSWERS ABOUT THE
MERGER............................ 1
SUMMARY............................. 4
General............................. 4
The Companies....................... 4
The Orange National Special
Meeting........................... 4
The CVB Financial Special Meeting... 4
Record Date; Voting Power........... 5
Vote Required....................... 5
Share Ownership of Orange National
Management........................ 5
Share Ownership of CVB Financial
Management........................ 5
Recommendation of Board of
Directors......................... 5
Opinion of The Bank Advisory Group,
Financial Advisors to CVB
Financial......................... 6
Opinion of First Security Van
Kasper, Financial Advisors to
Orange National................... 6
Terms of the Merger Agreement....... 6
Stock Option Agreement.............. 7
Interests of Certain Directors and
Executive Officers of Orange
National in the Merger............ 8
Directors of CVB Financial and
Citizens Business Bank Following
the Mergers....................... 8
Material Federal Income Tax
Consequences...................... 8
Accounting Treatment................ 8
Resales of CVB Financial Common
Stock............................. 8
Regulatory Approvals................ 9
Orange National Dissenters'
Rights............................ 9
CVB Financial Dissenters' Rights.... 9
Differences in the Rights of
Shareholders...................... 9
MARKET PRICE AND DIVIDEND
INFORMATION....................... 10
Comparative Market Price
Information....................... 10
Historical Market Prices and
Dividend Information.............. 10
SELECTED FINANCIAL DATA............. 12
Comparative Per Share Data.......... 16
RISK FACTORS........................ 17
A WARNING ABOUT FORWARD-LOOKING
INFORMATION....................... 19
THE ORANGE NATIONAL SPECIAL
MEETING........................... 21
</TABLE>
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PAGE
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General............................. 21
Information about the Special
Meeting........................... 21
THE CVB FINANCIAL SPECIAL MEETING... 24
General............................. 24
Information about the Special
Meeting........................... 24
THE MERGER.......................... 27
Structure of the Merger............. 27
Background of and Reasons for the
Merger............................ 28
Effects of the Merger and
Recommendations of the Boards of
Directors......................... 33
Opinion of Orange National's
Financial Advisor................. 35
Opinion of CVB Financial's Financial
Advisor........................... 41
Interests of Directors and Executive
Officers of Orange National in the
Merger............................ 52
American Stock Exchange Listing..... 54
Material Federal Income Tax
Consequences...................... 54
Accounting Treatment of the
Merger............................ 56
Exchange of Orange National Common
Stock for CVB Financial Common
Stock............................. 56
THE MERGER AGREEMENT................ 57
Conditions to the Merger............ 57
Nonsolicitation..................... 58
Expenses............................ 58
Treatment of Options................ 58
Termination......................... 59
Covenants; Conduct of Business Prior
to Completion of the Merger....... 59
Amendment and Waiver of the Merger
Agreement......................... 62
STOCK OPTION AGREEMENT.............. 62
AGREEMENTS WITH THE DIRECTORS OF
ORANGE NATIONAL AND CVB
FINANCIAL......................... 64
RESALES OF CVB FINANCIAL COMMON
STOCK BY ORANGE NATIONAL
SHAREHOLDERS...................... 65
REGULATORY APPROVALS FOR THE
MERGERS........................... 65
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PAGE
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DISSENTING SHAREHOLDERS' RIGHTS..... 68
Demand for Purchase................. 69
DESCRIPTION OF CVB FINANCIAL COMMON
STOCK AND ORANGE NATIONAL COMMON
STOCK............................. 72
Stock Description................... 72
Material Differences Between Holders
of CVB Financial Stock and Orange
National Stock.................... 74
EXPERTS............................. 74
LEGAL MATTERS....................... 74
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION.... 75
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL
STATEMENTS........................ 83
WHERE YOU CAN FIND MORE
INFORMATION....................... 84
PART II............................. II-1
ANNEXES
ANNEX A
AGREEMENT AND PLAN OF
REORGANIZATION
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PAGE
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ANNEX B
STOCK OPTION AGREEMENT
ANNEX C
OPINION OF THE BANK ADVISORY
GROUP, INC
ANNEX D
OPINION OF FIRST SECURITY VAN
KASPER
ANNEX E
CHAPTER 13 OF THE CALIFORNIA
GENERAL CORPORATION LAW ON
DISSENTERS' RIGHTS
ANNEX F
ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED DECEMBER 31,
1998 FOR ORANGE NATIONAL
BANCORP
ANNEX G
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH
31, 1999 FOR ORANGE NATIONAL
BANCORP
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ii
<PAGE> 7
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What will I receive in the merger?
A: For each outstanding share of Orange National you own before the merger, you
will receive 1.5 shares of CVB Financial common stock.
CVB Financial will not issue fractional shares in the merger. Instead, you will
receive a check, equal to the amount of any fractional share of CVB Financial
common stock that you would otherwise be entitled to receive based upon the
average market value of a share of CVB Financial common stock before the merger.
For each outstanding share of CVB Financial you own before the merger, you will
continue to own one share of CVB Financial common stock following the merger.
After the merger, Orange National's former shareholders will own approximately
16% of CVB Financial's outstanding shares of common stock and current CVB
Financial shareholders will own approximately 84% of CVB Financial's outstanding
shares of common stock.
Q: What risks should I consider before I vote on the merger?
A: You should review "Risk Factors" beginning on page 17.
Q: What happens as the market price of CVB Financial common stock fluctuates?
A: The value of the merger consideration will fluctuate. We have fixed the
merger consideration at 1.5 shares of CVB Financial common stock for each share
of Orange National common stock. However, since the market value of CVB
Financial common stock will fluctuate before and after the closing of the
merger, the value of the CVB Financial common stock that Orange National
shareholders will receive in the merger could increase or decrease. You should
obtain current market prices for shares of CVB Financial common stock and Orange
National common stock.
Q: When is the merger expected to be completed?
A: We are working to complete the merger at the end of the third quarter of 1999
or the beginning of the fourth quarter of 1999. We must first obtain the
necessary regulatory approvals and the approvals of our shareholders at the
special meetings. We cannot assure you as to when or if all the conditions to
the merger will be met, and it is possible we will not complete the merger.
Q: What are the tax consequences of the merger to me?
A: We expect that the exchange of shares by Orange National shareholders
generally will be tax-free to Orange National shareholders for U.S. federal
income tax purposes. Shareholders will, however, have to pay taxes on cash
received for fractional shares or, if you follow the proper procedures, any cash
you may receive as a dissenting shareholder.
There will be no tax consequences to shareholders of CVB Financial unless they
follow the proper procedures to dissent in the merger and subsequently receive
cash as a dissenting shareholder.
Your tax consequences will depend on your personal situation. You should consult
your tax advisor for a full understanding of the tax consequences of the merger
to you.
Q: How do the directors plan to vote?
A: All of your directors have committed that they will vote their shares in
favor of the merger. The Orange National directors currently collectively hold
657,281 shares or approximately 30% of the outstanding Orange National common
stock. The CVB Financial directors currently collectively hold 5,451,848 shares
or approximately 33% of the outstanding CVB Financial common stock.
Q: What will I get if I dissent?
A: If you vote against the merger and follow the specific steps to perfect your
dissenters'
1
<PAGE> 8
rights, you will have the right to receive a cash amount as determined under
California law. For Orange National shareholders, the amount of cash may be less
than the value of CVB Financial common stock offered in the merger. For CVB
Financial shareholders, the amount of cash may be more or less than the market
value of CVB Financial common stock at the time of the merger.
Q: What should I do now?
A: Just indicate on your proxy card how you want to vote, and sign and mail your
proxy card in the enclosed envelope as soon as possible so that your shares will
be represented at your special meeting.
If you sign and send in your proxy and do not indicate how you want to vote,
your proxy will be voted in favor of the proposal to approve and adopt the
merger agreement. If you do not sign and send in your proxy or you abstain, it
will have the effect of a vote against the merger.
The special meeting for Orange National shareholders will take place at :
.m. on , 1999. The special meeting for CVB Financial shareholders
will take place at : .m. on , 1999. You may attend the meeting
and vote your shares in person, rather than voting by proxy. In addition, you
may withdraw your proxy up to and including the day of the meeting by following
the directions on either page 22 or 25 and either change your vote or attend the
meeting and vote in person.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: No. Your broker will vote your shares of Orange National common stock or CVB
Financial common stock only if you provide instructions on how to vote. You
should instruct your broker how to vote your shares, following the directions
your broker provides. If you do not provide instructions to your broker, your
broker will not be able to vote your shares and this will have the effect of
voting against the merger.
Q: If I'm an Orange National shareholder, should I send in my stock certificates
now?
A: No. After the merger is completed ChaseMellon Shareholder Services will send
Orange National shareholders written instructions for exchanging their stock for
shares of CVB Financial. CVB Financial shareholders will keep their existing
stock certificates.
2
<PAGE> 9
WHO CAN HELP ANSWER YOUR QUESTIONS
If you want additional copies of this document, or if you want to ask any
questions about the merger, you should contact:
For CVB Financial shareholders:
Edward J. Biebrich, Jr.
CVB Financial Corp.
701 N. Haven Avenue
Ontario, California 91764
Telephone: (909) 980-4030
For Orange National shareholders:
Robert W. Creighton
Orange National Bancorp
1201 East Katella Avenue
Orange, California 92867
Telephone: (714) 771-4000
Please see "WHERE YOU CAN FIND MORE INFORMATION" on page 84 where you can
find more important information about CVB Financial and Orange National.
3
<PAGE> 10
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the merger and for a more complete description of the legal
terms of the merger, you should read this entire document carefully, as well as
the additional documents we refer you to, including the merger agreement which
we have attached as Annex A. See "Where You Can Find More Information" (page
84).
GENERAL (PAGE 27)
We are proposing a merger between Orange National and CVB Financial. The
merger will combine Orange National with CVB Financial and will create
opportunities for the combined company to realize enhanced revenues through
asset growth and a combination of operating efficiencies.
In the merger, each Orange National shareholder will receive 1.5 shares of
CVB Financial common stock for each share of Orange National common stock.
THE COMPANIES (PAGE 84)
CVB FINANCIAL
701 North Haven Avenue
Ontario, California 91764
(909) 980-4030
CVB Financial is a bank holding company operating Citizens Business Bank,
which currently has 24 banking offices. Citizens Business Bank is CVB
Financial's principal asset. CVB Financial has one other operating subsidiary,
Community Trust Deed Services. At March 31, 1999, CVB Financial had $1.56
billion in total assets, $1.21 billion in total deposits, $693.4 million in
total loans and shareholders' equity of $117.5 million.
Through Citizens Business Bank, CVB Financial serves clients throughout San
Bernardino County, Riverside County, the northern portion of Orange County and
the eastern portion of Los Angeles County in Southern California.
CVB Financial provides a wide range of commercial banking, financial
services and trust services to small and medium-sized businesses, business
executives, professionals and other individuals.
ORANGE NATIONAL
1201 East Katella Avenue
Orange, California 92867
(714) 771-4000
Orange National is a bank holding company operating Orange National Bank,
which currently has six branches. Orange National Bank is Orange National's
principal asset. At March 31, 1999, Orange National had $279 million in total
assets, $253 million in total deposits, $145 million in total loans and
shareholders' equity of $24.2 million.
Through Orange National Bank, Orange National serves primarily clients
located throughout Orange County in Southern California. Orange National
provides a wide range of commercial banking and financial services to small and
medium-sized businesses, business executives, professionals and other
individuals.
THE ORANGE NATIONAL SPECIAL MEETING (PAGE 21)
The Orange National special shareholders' meeting will be held at
, at : .m., local time, on ,
1999. At the meeting, Orange National shareholders will vote upon a proposal to
approve the merger.
THE CVB FINANCIAL SPECIAL MEETING (PAGE 24)
The CVB Financial special shareholders' meeting will be held at
, at : .m., local time, on , 1999. At the
meeting, CVB Financial shareholders will vote upon a proposal to approve the
merger.
4
<PAGE> 11
RECORD DATE; VOTING POWER (PAGES 21 AND 24)
Orange National
You are entitled to vote at the Orange National special meeting if you
owned shares of Orange National on , 1999, the Orange National
record date. As of that date, there were 2,000,171 shares of Orange National
common stock issued and outstanding held by approximately 450 holders of record.
Each holder of Orange National common stock will be entitled to one vote per
share on any matter that may properly come before the meeting.
CVB Financial
You are entitled to vote at the CVB Financial special meeting if you owned
shares of CVB Financial on , 1999, the CVB Financial record date.
As of that date, there were shares of CVB Financial common stock issued
and outstanding held by approximately holders of record. Each holder of CVB
Financial common stock will be entitled to one vote per share on any matter that
may properly come before the meeting.
VOTE REQUIRED (PAGES 21 AND 24)
Approval by the Orange National shareholders of the proposal to approve and
adopt the merger agreement requires the affirmative vote of a majority of the
outstanding shares of Orange National common stock.
Approval by the CVB Financial shareholders of the proposal to approve and
adopt the merger agreement requires the affirmative vote of a majority of the
outstanding shares of CVB Financial common stock.
SHARE OWNERSHIP OF ORANGE NATIONAL MANAGEMENT (PAGE 22)
On the Orange National record date, the executive officers and directors of
Orange National, including their affiliates, had voting power with respect to an
aggregate of 657,281 shares of Orange National common stock, or approximately
30% of the shares of the common stock then outstanding.
We expect that such directors and executive officers of Orange National
will vote the shares of Orange National common stock owned by them FOR the
proposal to approve the merger and the transactions contemplated thereby.
SHARE OWNERSHIP OF CVB FINANCIAL MANAGEMENT (PAGE 25)
On the CVB Financial record date, the executive officers and directors of
CVB Financial, including their affiliates, had voting power with respect to an
aggregate of 5,517,428 shares of CVB Financial common stock, or approximately
33.4% of the shares of the common stock then outstanding.
We expect that such directors and executive officers of CVB Financial will
vote the shares of CVB Financial common stock owned by them FOR the proposal to
approve the merger and the transactions contemplated thereby.
RECOMMENDATION OF BOARDS OF DIRECTORS (PAGE 33)
To Orange National Shareholders
The Orange National Board has unanimously approved and adopted the merger
agreement, and recommends a vote FOR approval of the merger agreement and the
transactions contemplated thereby. You also should refer to the reasons that the
Orange National Board considered in determining whether to approve and adopt the
merger agreement on pages 31 through 32.
To CVB Financial Shareholders
The CVB Financial Board has unanimously approved and adopted the merger
agreement, and recommends a vote FOR approval of the merger agreement and the
transactions contemplated thereby. You also should refer to the reasons that the
CVB Financial Board consid-
5
<PAGE> 12
ered in determining whether to approve and adopt the merger agreement on pages
32 through 33.
OPINION OF THE BANK ADVISORY GROUP, FINANCIAL ADVISORS TO CVB FINANCIAL (PAGE
41)
The Bank Advisory Group, Inc., financial advisor to CVB Financial, rendered
a preliminary fairness opinion dated as of May 18, 1999 to the CVB Financial
Board that as of such date, the merger consideration to be paid was fair to the
CVB Financial shareholders from a financial point of view. Bank Advisory Group
subsequently confirmed its May 18, 1999 opinion by delivery to the CVB Financial
Board of a written fairness opinion dated as of , 1999. A copy of the
fairness opinion, setting forth the information reviewed, assumptions made and
matters considered by Bank Advisory Group, is attached to this document as Annex
C. CVB Financial shareholders should read the fairness opinion in its entirety.
OPINION OF FIRST SECURITY VAN KASPER, FINANCIAL ADVISORS TO ORANGE NATIONAL
(PAGE 35)
First Security Van Kasper, financial advisor to Orange National, rendered
an opinion dated as of May 17, 1999 to the Orange National Board that as of such
date, the merger consideration was fair to the Orange National shareholders from
a financial point of view. First Security Van Kasper subsequently confirmed its
May 17, 1999 opinion by delivery to the Orange National Board of Directors of a
written opinion dated as of , 1999. A copy of the fairness opinion, setting
forth the information reviewed, assumptions made and matters considered by First
Security Van Kasper, is attached to this document as Annex D. Orange National
shareholders should read the fairness opinion in its entirety.
TERMS OF THE MERGER AGREEMENT (PAGE 57)
The merger agreement is attached to this document as Annex A. We encourage
you to read the merger agreement in its entirety. It is the legal document that
governs the merger. We also encourage you to read the Risk Factors beginning on
page 17.
General. The merger agreement provides that Orange National will merge with
and into CVB Financial, with CVB Financial as the surviving corporation.
Immediately after this merger, Orange National Bank will merge with and into
Citizens Business Bank with Citizens Business Bank as the surviving corporation.
Merger Consideration. For each outstanding share of Orange National common
stock, Orange National shareholders will receive 1.5 shares of CVB Financial
common stock. CVB Financial will not issue fractional shares. Instead, Orange
National shareholders will receive a check equal to the amount of any fractional
share based on the average closing price of CVB Financial common stock over a
period of time before the merger.
Completion of the Merger. The merger will become effective when we file an
agreement of merger with the Secretary of State of California. The merger
agreement provides that we will file an agreement of merger as soon as
practicable following the satisfaction or waiver of the conditions to the
merger.
Conditions to the Merger. The completion of the merger depends upon the
satisfaction of a number of conditions, including:
- approval of the merger agreement by both the Orange National and CVB
Financial shareholders;
- receipt of listing approval from the American Stock Exchange for the CVB
Financial common stock we will issue in the merger;
- receipt of all necessary authorizations, orders and consents of
governmental authorities and the expiration of any regulatory waiting
periods;
- effectiveness of the registration statement of CVB Financial relating to
the shares of CVB Financial common stock to be
6
<PAGE> 13
issued to Orange National shareholders in the merger, of which this
document forms a part;
- receipt from Deloitte & Touche LLP of a letter confirming that the merger
and the bank merger qualifies for pooling of interests accounting
treatment, and receipt of a letter from McGladrey & Pullen LLP that
Orange National and Orange National Bank qualify for pooling of interests
accounting treatment;
- receipt of an opinion of CVB Financial's counsel that the merger and the
bank merger will be treated for U.S. federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code.
Unless prohibited by law, either CVB Financial or Orange National could
elect to waive a condition that has not been satisfied and complete the merger
anyway.
Fees and Expenses. CVB Financial and Orange National will pay their own
fees, costs and expenses incurred in connection with the merger except that
printing costs associated with this document will be shared. In addition, Orange
National and CVB Financial have agreed that if the merger agreement is
terminated under certain circumstances, including the withdrawal by the Orange
National Board of its recommendation to the Orange National shareholders with
respect to the merger or the failure of the Orange National shareholders to
approve the merger agreement, then, depending upon the reason for termination,
either Orange National or CVB Financial, as applicable, will reimburse all
out-of-pocket expenses and fees of the other party relating to the transactions
contemplated by the merger agreement. Reimbursement under these circumstances,
however, will be limited to $300,000 in the case of reimbursement to CVB
Financial and $225,000 in the case of reimbursement to Orange National.
Termination. Either Orange National or CVB Financial may call off the
merger under certain circumstances, including if:
- we both consent in writing;
- the merger is not completed before March 31, 2000;
- we are not able to obtain required governmental approvals;
- the Orange National or CVB Financial shareholders do not approve the
merger agreement;
- the other party breaches in a material manner any of the representations
or warranties or any covenant or agreement it has made under the merger
agreement; or
- any condition to such party's obligations under the merger agreement has
not been met or waived.
In addition, CVB Financial may call off the merger if the Orange National
Board of Directors approves, recommends or causes Orange National to enter into
any merger or other form of corporate reorganization agreement with a party
other than CVB Financial.
STOCK OPTION AGREEMENT (PAGE 62)
Orange National has signed a stock option agreement granting CVB Financial
an option to purchase up to 399,834 shares of Orange National common stock, or
an amount equal to 19.9 percent of the shares of Orange National common stock
outstanding on the date of exercise. The option is exercisable for $27.00 per
share, subject to adjustment in certain circumstances. CVB Financial can
exercise the option if the merger does not occur because:
- The Board of Directors of Orange National has approved a merger or other
type of corporate reorganization with a party other than CVB Financial,
or a tender offer or exchange offer to purchase Orange National common
stock;
7
<PAGE> 14
- Orange National has entered into an agreement with a party other than CVB
Financial to effect a merger or other type of corporate reorganization;
or
- Any person has acquired more than 20% of the outstanding shares of Orange
National common stock.
The purpose of the option agreement is to increase the likelihood that we
will complete the merger and to protect CVB Financial if a third party prevents
the acquisition. The right to purchase common stock of Orange National is
subject to compliance with applicable law, including receipt of any necessary
approvals under the Bank Holding Company Act. The option agreement could have
the effect of discouraging companies other than CVB Financial from acquiring
Orange National.
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS OF ORANGE NATIONAL IN THE MERGER
(PAGE 52)
When you consider the Orange National Board's recommendation, you should be
aware that a number of directors and executive officers of Orange National have
interests in the merger as employees and/or directors that are different from,
and may conflict with, the interests of Orange National shareholders. The Orange
National Board recognized these interests and determined that they did not
affect the benefits of the merger to the Orange National shareholders.
DIRECTORS OF CVB FINANCIAL AND CITIZENS BUSINESS BANK FOLLOWING THE MERGERS
(PAGE 27)
Upon completion of the merger, the current directors of CVB Financial will
remain directors of CVB Financial. Upon completion of the bank merger, the
current directors of Citizens Business Bank will remain directors of Citizens
Business Bank. In addition, and subject to the approval of the CVB Financial and
Citizens Business Bank Board of Directors, Mr. San Vaccaro, Chairman of the
Board of Orange National and Orange National Bank, will be added to the Board of
Directors of both CVB Financial and Citizens Business Bank.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (PAGE 54)
CVB Financial's legal counsel has delivered to CVB Financial and Orange
National a legal opinion stating that neither CVB Financial nor Orange National
will recognize gain or loss for federal income tax purposes as a result of the
merger. The opinion also concludes that shareholders of Orange National will not
recognize gain or loss upon the exchange of their Orange National common stock
for CVB Financial common stock in the merger. If, however, shareholders receive
cash instead of fractional shares or as a result of their exercise of
dissenters' rights, that cash would be taxable.
ACCOUNTING TREATMENT (PAGE 56)
We expect the merger to be accounted for as a pooling of interests, which
means that we will treat CVB Financial and Orange National as if they had always
been combined for accounting and financial reporting purposes.
RESALES OF CVB FINANCIAL COMMON STOCK (PAGE 65)
Shares of CVB Financial common stock which Orange National shareholders
receive in the merger will be freely transferable by the holders, except for
those shares held by holders who may be "affiliates." Affiliates generally
include directors, certain executive officers and holders of 10% or more of
Orange National common stock, under applicable federal securities laws. Orange
National has provided to CVB Financial the written agreement of each of its
"affiliates" that such "affiliate" will not dispose of its shares of Orange
National common stock and, to the extent applicable, CVB Financial common stock,
except in compliance with the Securities Act of 1933 and applicable accounting
rules governing pooling of interests.
8
<PAGE> 15
REGULATORY APPROVALS (PAGE 65)
We must make certain filings with or obtain approvals from certain
regulatory authorities to effect the merger and the bank merger. These include,
without limitation, the approval of or notice to the Federal Reserve Board, the
Federal Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, and the California Department of Financial Institutions. In addition,
CVB Financial must list the common stock offered to Orange National shareholders
with the American Stock Exchange.
We will file the applications with the governmental regulators as soon as
practicable.
We cannot predict whether or when we will obtain all required regulatory
approvals.
ORANGE NATIONAL DISSENTERS' RIGHTS (PAGE 68)
Shareholders of Orange National will have dissenters' rights under
California law. This means that Orange National shareholders who vote against
the merger may make a written demand to Orange National for payment in cash of
the "fair market value" of their shares. Orange National must receive the demand
no later than the Orange National shareholders' meeting. The Orange National
Board of Directors has determined that the "fair market value" of one share of
Orange National for this purpose is $27.81. That amount represents the final bid
price for Orange National common stock on May 17, 1999, the day before the
public announcement of the merger. You may disagree with the Board of Directors'
determination on the fair market value. The procedure for exercising your
dissenters' rights is summarized under the heading "Dissenting Shareholders'
Rights." The relevant provisions of California Law on dissenters' rights are
attached to this document as Annex E.
CVB FINANCIAL DISSENTERS' RIGHTS (PAGE 68)
Shareholders of CVB Financial will have dissenters' rights under California
law. This means that shareholders who vote against the merger may vote against
the merger and make a written demand to CVB Financial for payment in cash of the
"fair market value" of their shares. CVB Financial must receive the demand no
later than the CVB special shareholders' meeting. The CVB Financial Board of
Directors has determined that the "fair market value" of one share of CVB
Financial for this purpose is $23.72. That amount represents the average of the
high and low price for CVB Financial common stock on May 17, 1999, the day
before the public announcement of the merger. You may disagree with the CVB
Financial Board of Directors' determination on the fair market value. The
procedure for exercising your dissenters' rights is summarized under the heading
"Dissenting Shareholders' Rights." The relevant provisions of California Law on
dissenters' rights are attached to this document as Annex E.
DIFFERENCES IN THE RIGHTS OF SHAREHOLDERS (PAGE 74)
There will be no significant differences in the rights of shareholders of
Orange National once they become shareholders of CVB Financial. Both CVB
Financial and Orange National are California corporations. Orange National
shareholders, upon completion of the merger, will become CVB Financial
shareholders, and their rights will continue to be governed by California law
and CVB Financial's articles of incorporation and bylaws.
9
<PAGE> 16
MARKET PRICE AND DIVIDEND INFORMATION
COMPARATIVE MARKET PRICE INFORMATION
The following table presents trading information for CVB Financial common
stock on the American Stock Exchange and Orange National common stock on the
Nasdaq National Market System on May 17, 1999 and June , 1999. May 17, 1999
was the last day prior to our announcement of the signing of the merger
agreement. June , 1999 was the last practicable trading day for which
information was available prior to the date of this document.
<TABLE>
<CAPTION>
CVB FINANCIAL COMMON STOCK ORANGE NATIONAL COMMON STOCK
(DOLLARS PER SHARE) (DOLLARS PER SHARE)
-------------------------- -----------------------------
HIGH LOW CLOSE HIGH LOW CLOSE
------ ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
May 17, 1999........... $24.44 $23.00 $24.44 $28.00 $27.81 $27.81
June , 1999..........
</TABLE>
Also set forth below for each of the closing prices of CVB Financial common
stock on May 17, 1999 and June , 1999 is the equivalent pro forma price of
Orange National stock, which we determined by multiplying the applicable price
of CVB Financial common stock by the number of shares of CVB Financial common
stock (1.5) we are issuing for each share of Orange National common stock.
<TABLE>
<CAPTION>
ORANGE NATIONAL EQUIVALENT
PRO FORMA
--------------------------
<S> <C>
Closing price on May 17, 1999........................... $36.66
Closing price on June , 1999.......................... $
</TABLE>
We urge you to obtain current market quotations for CVB Financial common
stock and Orange National common stock. We expect that the market price of CVB
Financial common stock will fluctuate between the date of this document and the
date on which the merger is completed and thereafter. Because the market price
of CVB Financial common stock is subject to fluctuation, the value of the shares
of CVB Financial common stock that Orange National shareholders will receive in
the merger may increase or decrease prior to and after the merger.
In addition, as a result of this fluctuation, the amount of cash Orange
National Bancorp shareholders will receive instead of CVB Financial's fractional
shares will also fluctuate.
HISTORICAL MARKET PRICES AND DIVIDEND INFORMATION
CVB Financial. CVB Financial common stock is listed on the American Stock
Exchange under the symbol "CVB." On the CVB Financial record date there were
approximately 1,072 shareholders of record of CVB Financial common stock. The
following table sets forth for the calendar quarter indicated the high and low
sales prices per share of CVB Financial common stock as reported on the American
Stock Exchange, and the dividends per share of CVB Financial common stock. The
prices per share of CVB Financial common stock set forth below have been
adjusted to reflect a three-for-two stock
10
<PAGE> 17
split declared in December 1997 and completed in January 1998 and a 10% stock
dividend declared in December 1998 and completed in January 1999.
<TABLE>
<CAPTION>
DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
------------- ------ ------ -------------------
<S> <C> <C> <C>
1997:
First quarter................................ $12.43 $10.84 $0.06 cash dividend
Second quarter............................... $16.06 $11.14 $0.06 cash dividend
Third quarter................................ $15.38 $12.20 $0.06 cash dividend
Fourth quarter............................... $22.57 $15.30 $0.09 cash dividend
3-for-2 Stock Split
1998:
First quarter................................ $26.19 $18.75 $0.09 cash dividend
Second quarter............................... $24.21 $19.32 $0.09 cash dividend
Third quarter................................ $22.22 $17.05 $0.09 cash dividend
Fourth quarter............................... $23.64 $19.21 $0.12 cash dividend
10% Stock Dividend
1999:
First quarter................................ $22.63 $18.88 $0.12 cash dividend
Second quarter (through June , 1999).......
</TABLE>
Orange National. Orange National common stock is traded on the Nasdaq
National Market System under the symbol "OGNB." On the Orange National record
date, there were approximately holders of record of Orange
National common stock. The following table sets forth for the calendar quarter
indicated the high and low bid prices per share of Orange National common stock
as reported on the Nasdaq National Market System, and the dividends per share of
Orange National common stock.
<TABLE>
<CAPTION>
DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
------------- ------- ------- -------------------
<S> <C> <C> <C>
1997:
First quarter.............................. $15.125 $13.125 $0.22 cash dividend
Second quarter............................. $18.000 $13.750 --
Third quarter.............................. $21.125 $17.500 $0.10 cash dividend
Fourth quarter............................. $24.250 $19.750 $0.10 cash dividend
1998:
First quarter.............................. $25.750 $23.750 $0.35 cash dividend
Second quarter............................. $31.250 $25.125 $0.10 cash dividend
Third quarter.............................. $30.000 $17.000 $0.10 cash dividend
Fourth quarter............................. $27.750 $19.000 $0.15 cash dividend
1999:
First quarter.............................. $27.750 $25.500 $0.15 cash dividend
Second quarter (through June , 1999).....
</TABLE>
11
<PAGE> 18
SELECTED FINANCIAL DATA
We are providing the following information to aid you in your analysis of
the financial aspects of the merger. The following tables show financial results
actually achieved by each of CVB Financial and Orange National (the "historical"
figures). The tables also show results as if the companies had been combined for
the periods presented (the "pro forma combined" figures). Pro forma combined
figures are simply arithmetical combinations of CVB Financial's and Orange
National's separate financial results except that the balance sheet for March
31, 1999 reflects the estimated merger related charges of $3.7 million, after
income taxes and assuming a 41% effective tax rate. You should not assume that
CVB Financial and Orange National would have achieved the pro forma combined
results if they had actually been combined during the periods presented. These
pro forma presentations treat our companies as if they had always been combined
for accounting and financial reporting purposes, a method known as pooling of
interests accounting, which is how we plan to account for the merger and the
bank merger. When you read this information, you should also read the
information under the heading "Unaudited Pro Forma Condensed Combined Financial
Information" (page 75).
CVB Financial's annual historical figures are derived from financial
statements audited by Deloitte & Touche LLP, independent auditors of CVB
Financial. Orange National's annual historical figures are derived from
financial statements audited by McGladrey & Pullen LLP, independent public
accountants of Orange National. The annual historical information presented
below should be read together with the audited consolidated financial statements
and related notes of CVB Financial as of December 31, 1998 and 1997 and for the
three years in the period ended December 31, 1998, incorporated in this document
by reference, and of Orange National as of December 31, 1998 and 1997 and for
the three years in the period ended December 31, 1998, incorporated in this
document by reference or attached to this document. Historical consolidated
financial data presented at and for the three months ended March 31, 1999 and
1998 are unaudited. Other annual historical consolidated financial data
presented was derived from previously audited financial statements not
incorporated by reference. To find this information, see "Where You Can Find
More Information" (page 84). We have retroactively adjusted all per share
information to reflect stock dividends and stock splits. In addition, we have
annualized information on net loan charge-off amounts and return on beginning
equity, return on average equity and return on average assets for March 31, 1999
and March 31, 1998.
We expect to incur restructuring and merger-related expenses as a result of
combining our companies. We also anticipate that the merger will provide the
combined company with financial benefits such as reduced operating expenses and
the opportunity to earn additional revenue. However, none of these anticipated
expenses or benefits has been factored into the pro forma combined income
statement information. For that reason, the pro forma combined information,
while helpful in illustrating the financial attributes of the combined company
under one set of assumptions, does not attempt to predict or suggest future
results.
12
<PAGE> 19
CVB FINANCIAL CORP. HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT AND FOR THE
THREE MONTHS ENDED AT AND FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
------------------------- ------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Net Interest Income.......... $ 17,768 $ 15,832 $ 65,592 $ 59,680 $ 53,428 $ 48,141 $ 42,819
Provision for Credit
Losses..................... 600 850 2,500 2,670 2,888 2,575 350
Other Operating Income....... 3,797 3,996 14,975 13,823 14,278 9,090 7,586
Other Operating Expenses..... 12,148 11,361 45,024 42,890 41,909 35,053 32,435
---------- ---------- ---------- ---------- ---------- -------- --------
Earnings Before Income
Taxes...................... $ 8,817 $ 7,617 $ 33,043 $ 27,943 $ 22,909 $ 19,603 $ 17,620
Income Taxes................. 3,304 2,852 12,256 10,573 9,576 8,146 7,185
---------- ---------- ---------- ---------- ---------- -------- --------
NET EARNINGS................... $ 5,513 $ 4,765 $ 20,787 $ 17,370 $ 13,333 $ 11,457 $ 10,435
========== ========== ========== ========== ========== ======== ========
Basic Earnings Per Common
Share...................... $ 0.33 $ 0.29 $ 1.26 $ 1.05 $ 0.81 $ 0.71 $ 0.65
========== ========== ========== ========== ========== ======== ========
Diluted Earnings Per Common
Share...................... $ 0.32 $ 0.28 $ 1.21 $ 1.01 $ 0.79 $ 0.68 $ 0.63
========== ========== ========== ========== ========== ======== ========
Stock Splits................. -- -- -- 3-for-2 -- -- --
Stock Dividends.............. -- -- 10% -- 10% 10% 10%
Cash Dividends Declared Per
Share...................... $ 0.12 $ 0.09 $ 0.39 $ 0.27 $ 0.19 $ 0.15 $ 0.14
Dividend Pay-Out Ratio....... 36.36% 31.03% 30.95% 25.86% 23.85% 23.21% 23.30%
FINANCIAL POSITION:
Assets....................... $1,557,934 $1,317,834 $1,555,207 $1,258,769 $1,160,421 $936,940 $836,095
Net Loans.................... 679,463 606,210 675,668 605,484 576,687 496,449 484,618
Deposits..................... 1,210,196 1,087,565 1,215,305 1,075,695 990,597 803,574 762,624
Stockholders' Equity......... 117,470 105,088 115,707 102,085 89,087 78,260 61,940
Book Value Per Share......... 7.09 6.36 7.00 6.20 5.41 4.83 3.85
Equity-to-Assets Ratio....... 7.54% 7.97% 7.44% 8.11% 7.68% 8.35% 7.41%
FINANCIAL PERFORMANCE:
Return on:
Beginning Equity........... 19.06% 18.67% 20.36% 19.50% 17.04% 18.50% 17.40%
Average Equity............. 18.42% 18.08% 18.66% 18.22% 16.09% 16.13% 16.84%
Return on Average Assets..... 1.43% 1.52% 1.52% 1.50% 1.31% 1.39% 1.40%
CREDIT QUALITY:
Allowance for Credit
Losses..................... $ 13,939 $ 12,432 $ 13,365 $ 11,522 $ 12,239 $ 9,626 $ 9,471
Allowance/Total Loans........ 2.01% 2.01% 1.94% 1.87% 2.08% 1.90% 1.92%
Total Non-Performing Loans... $ 6,404 $ 6,532 $ 7,218 $ 6,471 $ 23,560 $ 26,847 $ 21,567
Non-Performing Loans/Total
Loans...................... 0.92% 1.06% 1.05% 1.05% 4.00% 5.31% 4.37%
Allowance/Non-Performing
Loans...................... 217.66% 190.32% 185.17% 178.06% 51.95% 35.85% 43.91%
Net Charge-Offs.............. $ 25 $ (60) $ 658 $ 3,386 $ 985 $ 2,420 $ 853
Net Charge-Offs/Average
Loans...................... 0.01% (0.04)% 0.10% 0.58% 0.18% 0.50% 0.18%
REGULATORY CAPITAL RATIOS
Leverage Ratio............... 7.1% 7.6% 7.2% 7.6% 7.2% 8.1% 7.5%
Tier 1 Capital............... 12.6% 12.3% 12.2% 12.1% 11.0% 11.8% 10.8%
Total Capital................ 13.9% 13.6% 13.5% 13.4% 12.3% 13.1% 12.1%
</TABLE>
13
<PAGE> 20
ORANGE NATIONAL HISTORICAL CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT AND FOR THE
THREE MONTHS
ENDED AT AND FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
--------------------- ------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Net Interest Income.................... $ 3,631 $ 3,278 $ 14,951 $ 13,504 $ 12,375 $ 13,430 $ 11,400
Provision for Credit Losses............ 70 0 100 140 205 320 298
Other Operating Income................. 706 871 2,783 3,707 2,713 2,781 2,612
Other Operating Expenses............... 3,031 3,093 12,157 11,776 11,547 12,187 11,962
-------- -------- -------- -------- -------- -------- --------
Earnings Before Income Taxes........... $ 1,236 $ 1,056 $ 5,477 $ 5,295 $ 3,336 $ 3,704 $ 1,752
Income Taxes from Continuing
Operations........................... 484 396 2,147 2,097 1,135 1,180 692
Loss from discontinued mortgage banking
operations, net of taxes............. -- -- -- -- -- -- (225)
-------- -------- -------- -------- -------- -------- --------
NET EARNINGS............................. $ 752 $ 660 $ 3,330 $ 3,198 $ 2,201 $ 2,524 $ 835
======== ======== ======== ======== ======== ======== ========
Basic Earnings Per Common Share........ $ 0.38 $ 0.33 $ 1.67 $ 1.63 $ 1.13 $ 1.31 $ 0.43
======== ======== ======== ======== ======== ======== ========
Diluted Earnings Per Common Share...... $ 0.37 $ 0.32 $ 1.64 $ 1.60 $ 1.13 $ 1.30 $ 0.43
======== ======== ======== ======== ======== ======== ========
Stock Splits........................... -- -- -- -- -- -- --
Stock Dividends........................ -- -- -- -- -- 5% --
Cash Dividends Declared Per Share...... $ 0.15 $ 0.35 $ 0.70 $ 0.42 $ 0.37 $ 0.25 $ 0.05
Dividend Pay-Out Ratio................. 39.89% 104.85% 41.74% 25.73% 32.60% 19.23% 11.00%
FINANCIAL POSITION:
Assets................................. $279,054 $240,535 $285,862 $242,279 $218,845 $207,928 $206,510
Net Loans.............................. 143,112 138,376 140,140 131,189 118,991 112,724 112,703
Deposits............................... 252,960 216,828 260,334 218,792 198,364 188,991 190,406
Stockholders' Equity................... 24,155 21,664 23,723 21,586 18,956 17,262 14,782
Book Value Per Share................... 12.08 10.90 11.88 10.96 9.71 8.93 7.65
Equity-to-Assets Ratio................. 8.66% 9.01% 8.30% 8.91% 8.66% 8.30% 7.16%
FINANCIAL PERFORMANCE:
Return on:
Beginning Equity..................... 12.68% 12.23% 15.43% 16.87% 12.75% 17.07% 5.74%
Average Equity....................... 12.56% 12.21% 15.24% 16.32% 12.38% 15.68% 5.75%
Return on Average Assets............... 1.11% 1.14% 1.32% 1.45% 1.02% 1.22% 0.43%
CREDIT QUALITY:
Allowance for Credit Losses............ $ 1,596 $ 1,553 $ 1,524 $ 1,581 $ 1,369 $ 1,513 $ 1,465
Allowance/Total Loans.................. 1.10% 1.11% 1.08% 1.19% 1.14% 1.32% 1.28%
Total Non-Performing Loans............. $ 1,866 $ 2,643 $ 1,707 $ 3,107 $ 2,471 $ 3,088 $ 3,321
Non-Performing Loans/Total Loans....... 1.29% 1.89% 1.20% 2.34% 2.05% 2.70% 2.91%
Allowance/Non-Performing Loans......... 85.53% 58.76% 89.28% 50.89% 55.40% 49.00% 44.11%
Net Charge-Offs........................ $ 2 $ (28) $ 157 $ (72) $ 349 $ 272 $ 357
Net Charge-Offs/Average Loans.......... 0.01% (0.08)% 0.11% (0.05)% 0.32% 0.24% 0.31%
REGULATORY CAPITAL RATIOS
Leverage Ratio......................... 9.0% 9.4% 8.7% 9.2% 8.6% 8.4% 7.9%
Tier 1 Capital......................... 13.5% 12.9% 13.3% 13.4% 12.7% 12.1% 11.1%
Total Capital.......................... 14.4% 13.9% 14.2% 14.3% 13.6% 13.2% 12.2%
</TABLE>
14
<PAGE> 21
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AT AND FOR THE
THREE MONTHS ENDED AT AND FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
------------------------- ----------------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Net Interest Income...... $ 21,399 $ 19,110 $ 80,542 $ 73,184 $ 65,803 $ 61,571 $ 54,219
Provision for Credit
Losses................. 670 850 2,600 2,810 3,093 2,895 648
Other Operating Income... 4,503 4,867 17,759 17,530 16,991 11,871 10,198
Other Operating
Expenses............... 15,179 14,454 57,181 54,666 53,456 47,240 44,397
---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings Before Income
Taxes.................. $ 10,053 $ 8,673 $ 38,520 $ 33,238 $ 26,245 $ 23,307 $ 19,372
Income Taxes from
continuing
operations............. 3,788 3,248 14,403 12,670 10,711 9,326 7,877
Loss from discontinued
mortgage banking
operations, net of
taxes.................. -- -- -- -- -- -- (225)
---------- ---------- ---------- ---------- ---------- ---------- ----------
NET EARNINGS............... $ 6,265 $ 5,425 $ 24,117 $ 20,568 $ 15,534 $ 13,981 $ 11,270
========== ========== ========== ========== ========== ========== ==========
Basic Earnings Per Common
Share.................. $ 0.32 $ 0.28 $ 1.23 $ 1.06 $ 0.80 $ 0.73 $ 0.60
========== ========== ========== ========== ========== ========== ==========
Diluted Earnings Per
Common Share........... $ 0.31 $ 0.27 $ 1.19 $ 1.02 $ 0.78 $ 0.71 $ 0.58
========== ========== ========== ========== ========== ========== ==========
Stock Splits............. -- -- -- 3-for-2 -- -- --
Stock Dividends(1)....... -- -- 10% -- 10% 10%/5% 10%
Cash Dividends Declared
Per Share.............. $ 0.12 $ 0.11 $ 0.40 $ 0.27 $ 0.20 $ 0.16 $ 0.13
Dividend Pay-Out Ratio... 37.45% 39.54% 32.41% 25.50% 24.85% 21.79% 21.84%
FINANCIAL POSITION:
Assets................... $1,838,516 $1,558,369 $1,841,069 $1,501,048 $1,379,266 1,144,868 $1,042,605
Net Loans................ 822,575 744,586 815,808 736,673 695,678 609,173 597,321
Deposits................. 1,463,156 1,304,393 1,475,639 1,294,487 1,188,961 992,565 953,030
Stockholders' Equity..... 139,426 126,752 139,430 123,671 108,043 95,522 76,722
Book Value Per Share..... 7.13 6.50 7.14 6.37 5.57 5.00 4.04
Equity-to-Assets Ratio... 7.59% 8.13% 7.57% 8.24% 7.83% 8.34% 7.36%
FINANCIAL PERFORMANCE:
Return on:
Beginning Equity....... 17.97% 17.55% 19.50% 19.04% 16.26% 18.22% 15.08%
Average Equity......... 17.44% 17.08% 18.10% 17.89% 15.43% 16.04% 14.73%
Return on Average
Assets................. 1.39% 1.46% 1.49% 1.49% 1.26% 1.35% 1.20%
CREDIT QUALITY:
Allowance for Credit
Losses................. $ 15,535 $ 13,985 $ 14,889 $ 13,103 $ 13,608 $ 11,139 $ 10,936
Allowance/Total Loans.... 1.85% 1.84% 1.79% 1.75% 1.92% 1.80% 1.80%
Total Non-Performing
Loans.................. $ 8,270 $ 9,175 $ 8,925 $ 9,578 $ 26,031 $ 29,935 $ 24,888
Non-Performing
Loans/Total Loans...... 0.99% 1.21% 1.07% 1.28% 3.67% 4.83% 4.09%
Allowance/Non-Performing
Loans.................. 187.85% 152.43% 166.82% 136.80% 52.28% 37.21% 43.94%
Net Charge-Offs.......... $ 27 $ (88) $ 815 $ 3,314 $ 1,335 $ 2,692 $ 1,210
Net Charge-Offs/Average
Loans.................. 0.01% (0.05)% 0.11% 0.46% 0.20% 0.45% 0.21%
REGULATORY CAPITAL RATIOS
Leverage Ratio........... 7.4% 7.8% 7.4% 7.8% 7.4% 8.1% 7.6%
Tier 1 Capital........... 12.6% 12.3% 12.3% 12.2% 11.1% 11.7% 10.8%
Total Capital............ 13.8% 13.5% 13.4% 13.4% 12.3% 12.9% 12.0%
</TABLE>
- -------------------------
(1) These are stock dividend percentages CVB Financial paid, except for the 5%
stock dividend Orange National paid in 1995.
15
<PAGE> 22
COMPARATIVE PER SHARE DATA
The table below shows the earnings, book value and dividends per share for
CVB Financial and Orange National both on an historical and a pro forma basis.
We derived the CVB Financial pro forma data by combining historical consolidated
financial information of CVB Financial and Orange National using the pooling of
interests method of accounting for business combinations, all on the basis we
describe under "Unaudited Pro Forma Condensed Combined Financial Data" on page
75. We derived the Orange National equivalent pro forma data by multiplying the
CVB Financial pro forma data by the number of shares of CVB Financial common
stock we will issue for each share of Orange National common stock.
You should read the respective audited and unaudited historical
consolidated financial statements and related notes of CVB Financial and Orange
National incorporated by reference into this joint proxy statement/prospectus.
See "Where You Can Find More Information" on page 84.
<TABLE>
<CAPTION>
AT OR FOR
THREE MONTHS
ENDED AT OR FOR FISCAL YEAR
MARCH 31, ENDED DECEMBER 31,
---------------- -------------------------
1999 1998 1998 1997 1996
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
CVB FINANCIAL HISTORICAL
Earnings per share:
Basic........................... $ 0.33 $ 0.29 $ 1.26 $ 1.05 $0.81
Diluted......................... 0.32 0.28 1.21 1.01 0.79
Book value per share.............. 7.09 6.36 7.00 6.20 5.41
Dividends per share............... 0.12 0.09 0.39 0.27 0.19
ORANGE NATIONAL HISTORICAL
Earnings per share:
Basic........................... $ 0.38 $ 0.33 $ 1.67 $ 1.63 $1.13
Diluted......................... 0.37 0.32 1.64 1.60 1.13
Book value per share.............. 12.08 10.90 11.88 10.96 9.71
Dividends per share............... 0.15 0.35 0.70 0.42 0.37
CVB FINANCIAL UNAUDITED PRO FORMA
Earnings per share:
Basic........................... $ 0.32 $ 0.28 $ 1.23 $ 1.06 $0.80
Diluted......................... 0.31 0.27 1.19 1.02 0.78
Book value per share.............. 7.24 6.50 7.14 6.37 5.57
Dividends per share............... 0.12 0.11 0.40 0.27 0.20
ORANGE NATIONAL EQUIVALENT PRO
FORMA
Earnings per share:
Basic........................... $ 0.48 $ 0.42 $ 1.85 $ 1.59 $1.21
Diluted......................... 0.47 0.41 1.78 1.53 1.17
Book value per share.............. 10.86 9.74 10.71 9.55 8.36
Dividends per share............... 0.18 0.17 0.61 0.41 0.29
</TABLE>
16
<PAGE> 23
RISK FACTORS
In addition to the other information included in this document, including
the matters addressed in "A Warning about Forward-looking Information", you
should consider the matters described below carefully in determining whether to
approve the merger agreement. Where "we" and "our" is used in this section, it
is meant to refer to both CVB Financial before the merger and to CVB Financial
following its proposed acquisition of Orange National and Orange National Bank.
THE MERGER CONSIDERATION IS FIXED DESPITE POTENTIAL CHANGE IN RELATIVE
STOCK PRICES. This means Orange National shareholders will not know the value of
the CVB Financial common stock they are receiving in the merger until the date
we consummate the merger. For each outstanding share of Orange National stock,
shareholders of Orange National will receive 1.5 shares of CVB Financial common
stock. This amount will not be adjusted for any increase or decrease in the
market prices of Orange National common stock or CVB Financial common stock.
The market prices of Orange National common stock and CVB Financial common
stock before the merger takes place may vary from their prices at the date of
this document and at the date of the special meetings. Such variations in the
market prices of CVB Financial common stock and Orange National common stock may
result from changes in the business, operations or prospects of CVB Financial or
the combined company, market assessments of the likelihood that the merger will
be consummated and the timing thereof, regulatory considerations, general market
and economic conditions and other factors. We urge you to obtain current market
quotations for CVB Financial common stock and Orange National common stock.
THERE ARE UNCERTAINTIES IN INTEGRATING OUR BUSINESS OPERATIONS AND
REALIZING ENHANCED EARNINGS. If we are unable to integrate our businesses
successfully, this could hurt our business. The merger and the bank merger
involve the integration of companies that have previously operated
independently. Successful integration of Orange National's consolidated
operations will depend primarily on CVB Financial's ability to consolidate
operations, systems and procedures and to eliminate redundancies and costs. No
assurance can be given that CVB Financial and Orange National will be able to
integrate their operations without encountering difficulties including, without
limitation, the loss of key employees and customers, the disruption of their
respective ongoing businesses or possible inconsistencies in standards,
controls, procedures and policies.
AN ECONOMIC SLOWDOWN IN SOUTHERN CALIFORNIA COULD HURT OUR BUSINESS. We
focus our business in Southern California in San Bernardino, Los Angeles, Orange
and Riverside counties. An economic slowdown in Southern California could have
the following consequences, any of which could hurt our business:
- Loan delinquencies may increase;
- Problem assets and foreclosures may increase;
- Demand for Citizens Business Bank's products and services may decline;
- Collateral for loans made by Citizens Business Bank, especially real
estate, may decline in value, in turn reducing customers' borrowing
power, and reducing the value of assets and collateral associated with
Citizens Business Bank's existing loans.
17
<PAGE> 24
A DOWNTURN IN THE REAL ESTATE MARKET COULD HURT OUR BUSINESS BECAUSE MOST
OF OUR LOANS ARE SECURED BY REAL ESTATE. Citizens Business Bank's ability to
recover on defaulted loans by selling the real estate collateral would then be
diminished, and we would be more likely to suffer losses on defaulted loans. As
of March 31, 1999, approximately 77.2 percent of the value of Citizens Business
Bank's loan portfolio and 65.3 percent of the value of Orange National Bank's
loan portfolio consisted of loans secured by various types of real estate. Most
of Citizens Business Bank's and Orange National Bank's real property collateral
is located in Southern California. If there is a significant decline in real
estate values, especially in Southern California, the collateral for our loans
will provide less security.
CHANGES IN INTEREST RATES AFFECT OUR PROFITABILITY. Changes in prevailing
rates may hurt our business. We derive our income mainly from the difference or
"spread" between the interest earned on loans, securities and other
interest-earning assets, and interest paid on deposits, borrowings and other
interest-bearing liabilities. In general, the wider the spread, the more we
earn. When market rates of interest change, the interest we receive on our
assets and the interest we pay on our liabilities will fluctuate. This can cause
decreases on our spread and can greatly affect our income. In addition, interest
rates affect how much money we can lend. For example, when interest rates rise,
loan originations tend to decrease.
WE HAVE YEAR 2000 RISKS BECAUSE OF OUR DEPENDENCE AND OUR VENDORS' AND
CUSTOMERS' DEPENDENCE ON TECHNOLOGY. If we, our vendors, customers or other
third parties with whom we do business suffer a computer or systems failure, it
could hurt our business. After completion of the mergers, we will rely on the
data processing systems, hardware and software of Citizens Business Bank to
conduct our operations. Citizens Business Bank and Orange National Bank have
taken steps to make its own information and environmental systems Year 2000
compliant by the third quarter of 1999. Each has also developed contingency
plans to reduce the impact of any failures which may occur. However, each also
relies heavily on the information systems of vendors, customers and other third
parties. These third parties may not become Year 2000 compliant soon enough.
Moreover, the contingency and remediation efforts may not succeed.
WE FACE STRONG COMPETITION FROM FINANCIAL SERVICE COMPANIES AND OTHER
COMPANIES THAT OFFER BANKING SERVICES WHICH CAN HURT OUR BUSINESS. After the
merger, we will conduct our banking operations primarily in Los Angeles, San
Bernardino, Orange and Riverside counties. Increased competition in our market
may result in reduced loans and deposits. Ultimately, we may not be able to
compete successfully against current and future competitors. Many competitors
offer the banking services that we offer in our service area. These competitors
include national banks, regional banks and other community banks. We also face
competition from many other types of financial institutions, including, without
limitation, savings and loans, finance companies, brokerage firms, insurance
companies, credit unions, mortgage banks and other financial intermediaries.
18
<PAGE> 25
A WARNING ABOUT FORWARD-LOOKING INFORMATION
CVB Financial and Orange National have each made forward-looking statements
in this document, and in certain documents that we refer to in this document,
that are subject to risks and uncertainties. These statements are based on the
beliefs and assumptions of each respective company's management, and on
information currently available to such management. Forward-looking statements
include the information concerning possible or assumed future results of
operations of CVB Financial and/or Orange National set forth under "Questions
and Answers About the Merger," "Summary," "The Merger -- Background of and
Reasons for the Merger," and "Unaudited Pro Forma Condensed Combined Financial
Statements," and statements preceded by, followed by or that include the words
"will," "believes," "expects," "anticipates," "intends," "plans," "estimates" or
similar expressions.
In particular, we have made statements in this document regarding expected
cost savings from the merger, the anticipated effect of the merger and CVB
Financial's anticipated performance in future periods. With respect to estimated
cost savings, CVB Financial has made certain assumptions regarding, among other
things, the extent of operational overlap between CVB Financial and Orange
National, the amount of general and administrative expense consolidation, costs
relating to converting Orange National's bank operations and data processing to
CVB Financial's systems, the size of anticipated reductions in fixed labor
costs, the amount of severance expenses, and the costs related to the merger.
The realization of cost savings are subject to the risk that the foregoing
assumptions are not accurate.
Moreover, any statements in this document regarding the anticipated effect
of the merger and CVB Financial's anticipated performance in future periods are
subject to risks relating to, among other things, the following:
- CVB Financial may not realize expected cost savings from the merger
within the expected time frame;
- CVB Financial's revenues following the merger may be lower than expected,
or deposit attrition, operating costs or customer loss and business
disruption following the merger may be greater than expected;
- competitive pressures among depository and other financial institutions
may increase significantly;
- CVB Financial may experience greater than expected costs of difficulties
relating to the integration of the businesses of CVB Financial and Orange
National;
- changes in the interest rate environment may reduce profits;
- there may be less than favorable general economic or business conditions,
either nationally or in California, resulting in, among other things, a
deterioration in credit quality or a reduced demand for credit; and
- competitors of CVB Financial and Orange National may have greater
financial resources and develop products that enable such competitors to
compete more successfully than CVB Financial and Orange National.
19
<PAGE> 26
Management of CVB Financial and Orange National believe these
forward-looking statements are reasonable; however, you should not place undue
reliance on such forward-looking statements, which are based on current
expectations.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and shareholder values
of CVB Financial following completion of the merger may differ materially from
those expressed in these forward-looking statements. Many of the factors that
will determine these results and values are beyond CVB Financial's and Orange
National's ability to control or predict. For those statements, CVB Financial
and Orange National claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
20
<PAGE> 27
THE ORANGE NATIONAL SPECIAL MEETING
GENERAL
We are furnishing this document to shareholders of Orange National in
connection with the solicitation of proxies by the Orange National Board of
Directors for use at the special meeting of Orange National shareholders
including any meeting adjournments or postponements, to be held on
, 1999.
The purpose of the special meeting is for you to consider and vote upon the
Agreement and Plan of Reorganization, dated as of May 18, 1999, providing for
the merger of Orange National into CVB Financial. The merger agreement is
attached to this document as Annex A and is incorporated in this document by
this reference. For a description of the merger agreement, see "The Merger" and
"The Merger Agreement on pages 27 and 57."
The merger agreement provides that Orange National will merge with and into
CVB Financial. In the merger, for each outstanding share of Orange National
common stock, you will receive 1.5 shares of common stock of CVB Financial. CVB
Financial will pay cash in lieu of any fractional shares.
INFORMATION ABOUT THE SPECIAL MEETING
General. Orange National will hold its special meeting on ,
1999 at : .m., local time, at . At the special meeting, you
will vote upon a proposal to approve the merger agreement. Orange National
shareholders may also vote upon a proposal to adjourn or postpone the Orange
National special meeting for the purpose of, among other things, allowing
additional time for the solicitation of proxies from Orange National
shareholders to approve the merger agreement.
Record Date; Voting Power. If you were an Orange National shareholder at
the close of business on , 1999, you may vote at the meeting. As of
, 1999, there were 2,000,171 issued and outstanding shares of
Orange National common stock held by approximately shareholders. These
shareholders have one vote per share on any matter that may properly come before
the special meeting. Brokers who hold shares of Orange National common stock as
nominees will not have discretionary authority to vote these shares without
instructions from the beneficial owners. Any shares of Orange National common
stock for which a broker has submitted an executed proxy but for which the
beneficial owner has not given instructions on voting to such broker are
referred to as "broker non-votes."
Vote Required. The presence in person or by proxy of the holders of a
majority of the shares of Orange National common stock outstanding on the record
date will constitute a quorum for the transaction of business at the special
meeting. Orange National will count abstentions and broker non-votes for
purposes of establishing the presence of a quorum at the meeting. The approval
of the proposal to approve the merger agreement requires the affirmative vote of
a majority of the shares of Orange National common stock outstanding on the
Orange National record date. Because broker non-votes and abstentions are not
affirmative votes, they will have the effect of a vote against the proposal to
approve the merger agreement.
21
<PAGE> 28
On the Orange National record date, the executive officers and directors of
Orange National, including their affiliates, had voting power with respect to an
aggregate of 657,281 shares of Orange National common stock or approximately 30%
of the shares of Orange National common stock then outstanding. We currently
expect that such directors and officers will vote all of their shares in favor
of the proposal to approve the merger agreement. In addition, on the record
date, the directors and executive officers of CVB Financial did not beneficially
own any shares of Orange National common stock.
Recommendation of the Orange National Board. The Orange National Board has
unanimously approved and adopted the merger agreement and the transactions
contemplated thereby. The Orange National Board believes that the merger is fair
to and in the best interests of Orange National and the Orange National
shareholders and unanimously recommends that you vote FOR approval of the merger
agreement and the transactions contemplated thereby.
Solicitation and Revocation of Proxies. We have enclosed a form of proxy
with this document. Shares represented by a proxy will be voted at the special
meeting as specified in the proxy. Proxies that are properly signed and dated
but which do not have voting instructions will be voted by the proxy holders FOR
the merger and in the discretion of the proxy holder as to any other matter
which may properly come before the special meeting.
ORANGE NATIONAL ASKS YOU TO VOTE BY COMPLETING, DATING AND SIGNING THE
ACCOMPANYING ORANGE NATIONAL PROXY CARD AND RETURNING IT PROMPTLY TO ORANGE
NATIONAL IN THE ENCLOSED, POSTAGE-PAID ENVELOPE. ORANGE NATIONAL SHAREHOLDERS
SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
If you are an Orange National shareholder who delivers a properly executed
proxy, you may revoke such proxy at any time before its exercise. You may revoke
your proxy by
- filing with the Secretary of Orange National prior to the special
meeting, at Orange National's principal executive offices, either a
written revocation of such proxy or a duly executed proxy bearing a later
date or
- attending the special meeting and voting in person. Presence at the
special meeting will not revoke your proxy unless you vote in person. If
your shares are held in the name of your broker, bank or other nominee,
and you wish to vote in person, you must bring an account statement and
authorization from your nominee so that you can vote your shares.
Orange National is soliciting proxies for use at its special meeting.
Orange National will bear the cost of solicitation of proxies from its own
shareholders. Orange National and CVB Financial will share equally the cost of
printing and mailing this document. In addition to solicitation by mail, Orange
National directors, officers and employees may solicit proxies from shareholders
by telephone, in person or through other means. These persons will not receive
additional compensation, but they will be reimbursed for the reasonable
out-of-pocket expenses they incur in connection with this solicitation. Orange
National will also make arrangements with brokerage firms, fiduciaries and other
custodians who hold shares of record to forward solicitation materials to the
beneficial owner of these shares. Orange National will reimburse these brokerage
firms, fiduciaries and other custodians for their reasonable out-of-pocket
expenses in connection with this solicitation.
22
<PAGE> 29
Other Matters. Orange National is unaware of any matter to be presented at
the special meeting other than the proposal to approve the merger agreement. If
other matters are properly presented at the special meeting, the persons named
in the proxy will have authority to vote all properly executed proxies in
accordance with their judgment on any such matter, including, without
limitation, any proposal to adjourn or postpone the special meeting. Proxies
that have been designated to vote against approval of the merger agreement will
not be voted in favor of any proposal to adjourn or postpone the special meeting
for the purpose of soliciting additional proxies to approve the merger
agreement.
23
<PAGE> 30
THE CVB FINANCIAL SPECIAL MEETING
GENERAL
We are furnishing this document to shareholders of CVB Financial in
connection with the solicitation of proxies by the CVB Financial Board of
Directors for use at the special meeting of CVB Financial shareholders,
including any meeting adjournments or postponements, to be held on
, 1999.
The purpose of the CVB Financial special meeting is for you to consider and
vote upon the Agreement and Plan of Reorganization, dated as of May 18, 1999,
providing for the merger of Orange National into CVB Financial. The merger
agreement is attached to this document as Annex A and is incorporated in this
document by this reference. For a description of the merger agreement, see "The
Merger" and "The Merger Agreement" on pages 27 and 57.
The merger agreement provides that Orange National will merge with and into
CVB Financial. In the merger, for each outstanding share of common stock of
Orange National, Orange National shareholders will receive 1.5 shares of CVB
Financial common stock. CVB Financial will pay cash in lieu of fractional
shares.
INFORMATION ABOUT THE SPECIAL MEETING
General. CVB Financial will hold its special meeting on , 1999
at : .m., local time, at . At the special meeting, you will
vote upon a proposal to approve the merger agreement. CVB Financial shareholders
may also vote upon a proposal to adjourn or postpone the CVB Financial special
meeting for the purpose of, among other things, allowing additional time for the
solicitation of proxies from CVB Financial shareholders to approve the merger
agreement.
Record Date; Voting Power. If you were a CVB Financial shareholders at the
close of business on , 1999, you may vote at the CVB Financial
special meeting. As of , 1999, there were 16,567,871 issued and
outstanding shares of CVB Financial common stock held by approximately 1,072
shareholders of record. These shareholders have one vote per share on any matter
that may properly come before the special meeting. Brokers who hold shares of
CVB Financial common stock as nominees will not have discretionary authority to
vote such shares without instructions from the beneficial owners. Any shares of
CVB Financial common stock for which a broker has submitted an executed proxy
but for which the beneficial owner has not given instructions on voting to such
broker are referred to as "broker non-votes."
Vote Required. The presence in person or by proxy of the holders of a
majority of the shares of CVB Financial common stock outstanding on the CVB
Financial record date will constitute a quorum for the transaction of business
at the special meeting. CVB Financial will count abstentions and broker
non-votes will be counted for purposes of establishing the presence of a quorum
at the special meeting. The approval of the proposal to approve the merger
agreement requires the affirmative vote of a majority of the shares of CVB
Financial common stock outstanding on the CVB record date. Broker non-votes and
abstentions are not affirmative votes. They will have the effect of a vote
against the proposal to approve the merger agreement.
24
<PAGE> 31
On the CVB Financial record date, the executive officers and directors of
CVB Financial, including their affiliates, had voting power with respect to an
aggregate of 5,517,428 shares of CVB Financial or approximately 33.4% of the
shares of the CVB Financial common stock then outstanding. We currently expect
that the CVB Financial directors and officers will vote all of such shares in
favor of the proposal to approve the merger agreement. In addition, on the
record date, the directors and executive officers of Orange National did not
beneficially own any shares of CVB Financial common stock.
Recommendation of the CVB Financial Board. The CVB Financial Board has
unanimously approved and adopted the merger agreement. The CVB Financial Board
believes that the merger is fair to and in the best interests of CVB Financial
and the CVB Financial shareholders and unanimously recommends that you vote FOR
approval of the merger agreement and the transactions contemplated thereby.
Solicitation and Revocation of Proxies. We have enclosed a form of proxy
with this document. Proxies that are properly signed and dated but which do not
have voting instructions will be voted FOR the merger and in the discretion of
the proxy holder as to any other matter which may properly come before the
special meeting.
CVB FINANCIAL ASKS YOU TO VOTE BY COMPLETING, DATING AND SIGNING THE
ACCOMPANYING CVB FINANCIAL PROXY CARD AND RETURNING IT PROMPTLY TO CVB FINANCIAL
IN THE ENCLOSED, POSTAGE-PAID ENVELOPE.
If you are a CVB Financial shareholder who delivers a properly executed
proxy, you may revoke such proxy at any time before its exercise. You may revoke
your proxy by
- filing with the Secretary of CVB Financial prior to the special meeting,
at CVB Financial's principal executive offices, either a written
revocation of such proxy or a duly executed proxy bearing a later date or
- attending the special meeting and voting in person. Presence at the
special meeting will not revoke your proxy unless you vote in person. If
your shares are held in the name of your broker, bank or other nominee,
and you wish to vote in person, you must bring an account statement and
authorization from your nominee so that you can vote your shares.
CVB Financial's Board of Directors is soliciting proxies for use at its
special meeting. CVB Financial will bear the cost of solicitation of proxies
from its own shareholders. Orange National and CVB Financial will share equally
the cost of printing and mailing this document. In addition to solicitation by
mail, CVB Financial directors, officers and employees may solicit proxies from
shareholders by telephone, in person or through other means. These persons will
not receive additional compensation, but they will be reimbursed for the
reasonable out-of-pocket expenses they incur in connection with this
solicitation. CVB Financial will also make arrangements with brokerage firms,
fiduciaries and other custodians who hold shares of record to forward
solicitation materials to the beneficial owner of these shares. CVB Financial
will reimburse these brokerage firms, fiduciaries and other custodians for their
reasonable out-of-pocket expenses in connection with this solicitation.
Other Matters. CVB Financial is unaware of any matter to be presented at
the special meeting other than the proposal to approve the merger agreement. If
other matters are properly presented at the special meeting, the proxyholders
will have authority to vote
25
<PAGE> 32
all properly executed proxies in accordance with their judgment on any matter,
including, without limitation, any proposal to adjourn or postpone the special
meeting. Proxies that are voted against approval of the merger agreement will
not be voted in favor of any proposal to adjourn or postpone the meeting for the
purpose of soliciting additional proxies to approve the merger agreement.
26
<PAGE> 33
THE MERGER
The detailed terms of the merger are contained in the merger agreement
attached as Annex A to this document. The following discussion and the
discussion under "The Merger Agreement" beginning on page 57 describe the more
important aspects of the merger and all of the material terms of the merger
agreement. These descriptions are qualified by reference to the merger
agreement, which is attached as Annex A. We encourage you to read the merger
agreement carefully.
STRUCTURE OF THE MERGER
General. The merger agreement provides that, after approval by the Orange
National shareholders and the CVB Financial shareholders and the satisfaction or
waiver of the other conditions to the merger, Orange National will merge with
and into CVB Financial. Immediately after the merger, Orange National Bank will
merge with and into Citizens Business Bank, with Citizens Business Bank as a
wholly owned subsidiary of CVB Financial. The Articles of Incorporation and
Bylaws of CVB Financial, as in effect immediately prior to the merger, will be
the Articles of Incorporation and Bylaws of CVB Financial after the merger. The
directors and officers of CVB Financial immediately prior to the merger will be
the directors and officers of CVB Financial after the merger until they resign
or until their respective successors are duly elected and qualified, except that
Mr. San Vaccaro, Chairman of the Board of Orange National and Orange National
Bank, will join the Board of Directors of CVB Financial and Citizens Business
Bank immediately following the mergers, subject to approval of the Board of
Directors of CVB Financial and Citizens Business Bank.
Timing of Closing. The closing of the merger will occur on the first
Friday, or such other day mutually agreed to by CVB Financial and Orange
National, following the satisfaction or waiver of all conditions to the merger
agreement and after all regulatory approvals have been obtained; provided,
however, that if the closing has not occurred by December 15, 1999, CVB
Financial has the discretion to delay the closing until after January 15, 2000.
Conversion of Shares. At the completion of the merger, each issued and
outstanding share of Orange National common stock, other than shares held by
dissenters, will convert into the right to receive 1.5 shares of CVB Financial
common stock. CVB Financial will pay cash instead of fractional shares of CVB
Financial common stock in an amount equal to such fraction multiplied by the
applicable average closing sale price of CVB Financial common stock. The
applicable average closing sale price is the average price of CVB Financial
common stock on the American Stock Exchange for the 15 consecutive trading days
ending on the fifth trading day immediately prior to the merger. Assuming that
the holders of Orange National stock options exercise their options before the
merger, CVB Financial will issue approximately 3,345,000 shares of CVB Financial
common stock in the merger, and the current shareholders of Orange National will
own approximately 16% of CVB Financial after the merger.
If CVB Financial changes the number of outstanding shares of CVB Financial
common stock before the merger through any stock split or other combination, or
if CVB Financial declares a stock dividend, then CVB Financial will adjust the
ratio of CVB Financial shares Orange National shareholders will receive
appropriately.
27
<PAGE> 34
Orange National and CVB Financial shareholders may obtain current market
quotations for CVB Financial common stock and Orange National common stock. We
expect that the market price of CVB Financial common stock will fluctuate
between the date of this document and the date of the merger and thereafter.
Because the number of shares of CVB Financial common stock Orange National
shareholders will receive in the merger is fixed and the market price of CVB
Financial common stock fluctuates, the value of the shares of CVB Financial
common stock that Orange National shareholders receive in the merger may
increase or decrease prior to and after the merger.
BACKGROUND OF AND REASONS FOR THE MERGER
Background of the Merger -- CVB Financial. CVB Financial's assets have
increased from $687.4 million at December 31, 1993 to $1.56 billion at March 31,
1999. During this period, CVB Financial has pursued a strategy of both internal
growth and external acquisitions. CVB Financial engages in acquisitions to
provide
- geographic expansion;
- growth in customer base and overall market share; and
- increased earnings capacity.
CVB Financial has a strategic objective of increasing its assets and
earnings, and intends to achieve these objectives through internal growth and,
where appropriate, acquisitions. CVB Financial has completed the acquisition of
five banks and one branch during the last six years. Over the past year, CVB
Financial analyzed four potential candidates for acquisitions and received
inquiries on several more.
At the end of October 1998, CVB Financial was approached by First Security
Van Kasper, the investment banker for Orange National. At this time, CVB
Financial began to consider the possibility of a business combination with
Orange National. CVB Financial signed a confidentiality agreement with Orange
National on October 26, 1998. CVB Financial management made presentations to the
Boards of CVB Financial and Citizens Business Bank on November 18, 1998 and
December 16, 1998 at the regularly scheduled board meetings, regarding the
prospect of acquiring Orange National. Numerous conversations took place between
CVB Financial and First Security Van Kasper over the next few weeks. This
resulted in the first meeting of principal executive officers of CVB Financial
and Orange National on January 11, 1999.
CVB Financial submitted a written nonbinding expression of interest to
Orange National on February 19, 1999. The letter outlined proposed terms of CVB
Financial's offer to acquire Orange National. CVB Financial and Orange National
began independent due diligence of each other on March 27, 1999. This on-site
process involved analyzing the assets and liabilities of Orange National and CVB
Financial, respectively.
D. Linn Wiley, President and Chief Executive Officer of both CVB Financial
and Citizens Business Bank, held discussions with Kenneth J. Cosgrove, President
and Chief Executive Officer of Orange National and Orange National Bank,
regarding the merger on March 27, 1999. They reviewed the benefits of merging
both organizations from the perspective of shareholders, employees and
communities.
On March 24, 1999, CVB Financial engaged its investment banker, Bank
Advisory Group, to begin a preliminary analysis of the proposed merger. Bank
Advisory Group
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<PAGE> 35
delivered a preliminary analysis to CVB Financial on April 19, 1999. This
analysis indicated that the transaction would be beneficial to the shareholders
of CVB Financial on a going forward basis despite a potential reduction of the
earnings per share of CVB Financial in the year of the acquisition as a result
of acquisition costs.
Representatives of Deloitte & Touche L.L.P., CVB Financial's accountants,
and Manatt, Phelps & Phillips L.L.P., CVB Financial's attorneys, met with the
Boards of Directors of CVB Financial and Citizens Business Bank on May 7, 1999
to review the first complete draft of the merger agreement between CVB Financial
and Orange National. In addition, Deloitte & Touche reviewed pooling of
interests accounting issues with the Boards of Directors.
On May 17, 1999, the Boards of Directors of CVB Financial and Citizens
Business Bank met with representatives of Bank Advisory Group, Deloitte & Touche
L.L.P., and Manatt, Phelps & Phillips L.L.P. These representatives presented to
the Boards their assessment of the proposed merger and reviewed the legal and
accounting implications. Bank Advisory Group presented its oral preliminary
opinion on the fairness of the merger to the shareholders of CVB Financial from
a financial point of view. Bank Advisory Group reviewed financial projections,
potential costs and savings associated with the merger, and historical and
projected earnings with the CVB Financial Board in the context of presenting its
oral fairness opinion.
On May 18, 1999, Bank Advisory Group delivered to the Board of Directors of
CVB Financial its written preliminary fairness opinion indicating that the
merger would be beneficial to the shareholders of CVB Financial from a financial
point of view. The Board of Directors of CVB Financial subsequently approved the
merger on May 18, 1999. On May 18, 1999, CVB Financial executed the merger
agreement.
Background of the Merger -- Orange National
On October 16, 1998, Orange National retained First Security Van Kasper to
advise it about ways to enhance stockholder value and improve the performance of
Orange National. First Security Van Kasper initiated discussions from time to
time with certain institutions to explore various strategic options, including a
possible merger or other business combination by another institution with Orange
National and Orange National Bank.
To enhance Orange National's strength in such discussions and to continue
to enhance shareholder value, the Orange National Board of Directors reviewed
potential strategic alternatives for improving the performance of Orange
National Bank. Orange National pursued a strategic course seeking:
- to strengthen Orange National's position in the communities it served;
- growth and increased profitability; and
- the achievement of greater operating efficiencies.
Orange National took numerous steps in an effort to achieve these
objectives, including increasing Orange National Bank's local promotional
activities, encouraging personal contact by Orange National Bank's officers,
directors and stockholders, and implementing programs offering extended hours
and specialized services. For customers whose loan demands exceeded Orange
National Bank's lending limit, Orange National
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<PAGE> 36
Bank attempted to arrange for such loans on a participation basis with other
banks. Orange National Bank also assisted customers requiring other services not
offered by Orange National Bank in obtaining such services from its
correspondent banks.
As Orange National continued to implement programs aimed at growth and
increased profitability of Orange National Bank, the Board of Directors of
Orange National from time to time considered possible strategies for enhancing
Orange National's ability to achieve those strategic objectives. In that
connection, Orange National considered the possibility of affiliating with a
larger, more diversified bank holding company with a similar strategic focus,
with financial advice from First Security Van Kasper. At Orange National's
direction, First Security Van Kasper approached institutions that Orange
National and First Security Van Kasper considered to be interested in pursuing a
merger or other business combination with Orange National
- on terms and conditions, including price, that would offer significant
value to Orange National shareholders;
- that would pursue a business strategy and conduct operations compatible
with those in place at Orange National; and
- which, in combination with Orange National's business, would build a
stronger, more valuable banking franchise.
In the course of their explorations of various ways to increase shareholder
value, the Orange National Board explored a number of alternatives, including a
business combination with another institution in which the combined institution
would continue to operate separate subsidiary banks. The Orange National Board
considered the complexities of this transactional structure, including the
difficulties of execution, the lower possibilities for cost savings and the
value to the Orange National shareholders of the proposal presented by the
institution.
The Orange National Board also received indications of interest in pursuing
a business combination from a multibank holding company which had recently
completed its initial public offering. In considering pursuing a transaction
with this company, the Orange National Board evaluated the compatibility of
management and business plans pursued by the two institutions, the value to the
Orange National shareholders of the proposal presented by the institution, and
the uncertainty as to future performance of the company's stock. On October 26,
1998, Orange National received a signed confidentiality agreement from CVB
Financial.
The first meeting of principal executive officers, including Mr. Wiley, Mr.
Cosgrove, Mr. Biebrich and Mr. Creighton of CVB Financial and Orange National
took place on January 11, 1999. At this meeting, these executive officers, along
with First Security Van Kasper, discussed issues relating to the merger,
including merger related costs.
After various discussions and negotiations among certain directors,
officers and financial and legal advisors, Orange National received a nonbinding
expression of interest letter from CVB Financial on February 19, 1999. On March
27, 1999, Mr. Cosgrove met with Mr. Wiley regarding a potential merger of the
companies. Each party then conducted due diligence examination of the other. Mr.
Cosgrove and Mr. Wiley subsequently met to explore the potential transaction
structure and value of a merger between Orange National and CVB Financial Corp.
Upon completion of such due diligence examinations and after certain additional
discussions and negotiations, the Board of Directors of Orange National
30
<PAGE> 37
held meetings to discuss and evaluate the proposed transaction on May 12, 1999.
Representatives of First Security Van Kasper and Orange National's legal counsel
met with the Boards of Directors of Orange National and Orange National Bank on
May 17, 1999 to review the draft of the merger document. In addition, McGladrey
and Pullen had previously discussed certain pooling of interests issues with the
Board of Directors.
On May 17, 1999, the Orange National Board received an oral opinion from
its financial advisor to the effect that the consideration to be received in the
merger was fair to its shareholders, from a financial point of view. After
further discussion and evaluation, the Orange National Board approved the merger
agreement. On May 18, 1999, Orange National executed the merger agreement.
Reasons for the Merger -- Orange National. The Orange National Board
believes that the merger agreement and the merger are in the best interest of
Orange National and the Orange National shareholders. Accordingly, the Orange
National Board has unanimously approved and adopted the merger agreement and
recommends approval of the merger agreement by the Orange National shareholders.
In reaching its decision, the Board consulted with Orange National's management,
legal counsel and First Security Van Kasper, Orange National's financial
advisor. The Orange National Board considered a number of factors, to which
relative weights were not assigned, including the following:
- the Orange National Board's familiarity with and review of Orange
National Bank's business, operations, financial condition and earnings;
- the Orange National Board's familiarity with and review of Orange
National Bank's prospects, and factors which might affect Orange National
Bank's ability to enhance revenues and obtain revenue source
diversification on a stand-alone basis, including:
- the effect on Orange National Bank's operating margins in a higher
interest rate environment in light of the highly competitive banking
business in Southern California and the market areas served by Orange
National Bank;
- the dominance in the Southern California market by a relatively small
number of major banks with many offices operating over a wide geographic
area;
- the competition for loans and deposits by Orange National Bank with
other commercial banks, including many which are much larger than Orange
National Bank, as well as with savings and loan associations, finance
companies, credit unions, brokerage houses and other financial
institutions; and
- the ability of larger commercial banks to offer larger loans based on
substantially higher lending limits due to a larger capital base;
- the current and prospective economic, regulatory and competitive
environment facing financial institutions, including Orange National and
Orange National Bank;
- the review by the Board of Directors of Orange National, based in part on
the advice of First Security Van Kasper, of alternatives to the merger
with CVB Financial, the range of possible values to Orange National's
stockholders that might be obtained in the future if those were chosen
and the timing and likelihood of actually receiving such values. This
review included consideration of the alternatives of remaining
independent or engaging in a merger or a similar transaction with a bank
holding company other than CVB Financial Corp;
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<PAGE> 38
- the review by the Board of Directors of Orange National, based in part on
the advice of First Security Van Kasper and reports from management, of
(a) the business, operations, earnings, and financial condition of Orange
National on both an historical and a prospective basis and (b) the
historical market price and potential future value of Orange National
common stock;
- the anticipated cost savings and operating efficiencies available to the
combined institution from the merger;
- the belief of the Board of Directors of Orange National that the terms of
the Merger Agreement are attractive in that the agreement allows Orange
National shareholders to become shareholders in a combined institution
with more assets, a larger geographic base and a more liquid security;
- the financial presentations of First Security Van Kasper and the May 17,
1999 opinion of First Security Van Kasper as to the fairness of the
merger consideration from a financial point of view;
- the expectation that the merger will generally be a tax-free transaction
to Orange National and its shareholders;
- the terms of the merger agreement and certain other information regarding
the merger, including the terms and structure of the merger, the proposed
arrangements with respect to the Boards of Directors of CVB Financial
Corp. and Citizens Business Bank, the management structure following the
merger; and
- the effect of the merger on Orange National's and Orange National Bank's
other constituencies, including its management, employees and the
communities it serves.
The foregoing discussion of the information and factors considered by the
Orange National Board is not intended to be exhaustive but is believed to
include all material factors considered by the Orange National Board. In
reaching its determination to approve the merger, the Orange National Board did
not assign any relative or specific weights to the foregoing factors, and
individual directors may have given differing weights to different factors.
Reasons for the Merger -- CVB Financial. The CVB Financial Board believes
that the terms of the merger agreement and the merger are fair from a financial
point of view to, and are in the best interests of, CVB Financial and the CVB
Financial shareholders. Accordingly, the CVB Financial Board has unanimously
approved and adopted the merger agreement and recommends approval of the merger
agreement by the CVB Financial shareholders. In reaching its decision, the CVB
Financial Board consulted with CVB Financial's management, legal counsel and
Bank Advisory Group, CVB Financial's financial advisor, and considered a number
of factors, to which the CVB Financial Board did not assign relative weights,
including the following:
The CVB Financial Board's review of:
- the business, operations, financial condition and earnings of CVB
Financial on an historical and a prospective basis and of the combined
company on a pro forma basis;
- the anticipated cost savings, operating efficiencies and opportunities
for revenue enhancement available to the combined company as a result of
the merger;
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<PAGE> 39
- The historical and prospective stock price performance of CVB Financial
common stock, including the anticipated impact of the merger on the
earnings per share and the price of CVB Financial common stock over the
short term and the long term;
- the compatibility of the respective businesses, operating philosophies
and strategic objectives of CVB Financial and Orange National, including
their respective decentralized management structures, the growth of their
respective fee-based businesses and the superior credit quality of their
respective loan portfolios;
- review of the combined earnings of CVB Financial and Orange National,
including anticipated cost savings;
- the current and prospective economic and competitive environment facing
the financial services industry generally, and CVB Financial in
particular, including the continued pace of consolidation in the industry
and the perceived importance of operational scale in enhancing efficiency
and profitability and remaining competitive over the long term;
- the CVB Financial Board's familiarity with and review of Orange
National's business, operations, financial condition and earnings on an
historical and a prospective basis;
- the April 19, 1999 preliminary analysis, the oral presentation of Bank
Advisory Group to the CVB Financial Board on May 17, 1999, and the
preliminary fairness opinion of Bank Advisory Group rendered on May 18,
1999, as confirmed on , 1999 that, as of such date, the
merger was fair from a financial point of view to the holders of CVB
Financial common stock;
- the expectation that the merger will generally be tax-free, for federal
income tax purposes to CVB Financial and will qualify as a pooling of
interests for accounting and financial reporting purposes; and
- the generally favorable impact that the merger could be expected to have
on the constituencies served by CVB Financial, including its customers,
employees and communities.
There are numerous factors other than the merger that could cause CVB
Financial's results of operations, including, among other things, earnings per
share, to increase or decrease after the merger. Therefore, we cannot assure you
that the anticipated benefits of the merger discussed in the previous paragraphs
will happen. You should read "Risk Factors" on page 17 for a discussion of the
factors that could affect CVB Financial's future operations and financial
condition.
The foregoing discussion of the information and factors considered by the
CVB Financial Board is not intended to be exhaustive but is believed to include
all material factors considered by the CVB Financial Board.
EFFECTS OF THE MERGER AND RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
Among the Orange National and CVB Financial's reasons for recommending
approval of the merger is their belief that, over the long-term, the merger will
be beneficial to CVB Financial shareholders, including Orange National
shareholders who will become CVB Financial shareholders if the merger is
completed. CVB Financial believes that one of the
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<PAGE> 40
potential benefits of the merger is that the cost savings which may be realized
by combining the two companies will enhance CVB Financial's earnings.
CVB Financial currently expects to reduce expenses by eliminating external
data-processing costs and by combining accounting, data processing, retail and
lending support and other functions after the merger, which will enable CVB
Financial to eventually eliminate duplicative positions. Promptly following the
completion of the merger, which is expected to occur at the end of the third
quarter or early in the fourth quarter of 1999, CVB Financial plans to begin the
process of eliminating redundant functions, such as external data processing,
and identifying and eliminating duplicative personnel.
Because CVB Financial believes that this process will take the remainder of
1999 to complete, it has not attempted to quantify what cost savings might be
achieved during 1999. The amount of any cost savings CVB Financial may realize
in 1999 will depend upon how quickly and efficiently CVB Financial is able to
implement the processes outlined above during the year.
CVB Financial believes that it will achieve cost savings based on the
assumption that it will be able to:
- reduce compensation and benefits costs;
- reduce external data processing costs;
- achieve economies of scale in advertising and marketing budgets;
- reduce regulatory and examination fees;
- reduce directors' fees; and
- achieve other savings through reduction or elimination of miscellaneous
items such as insurance premiums, travel and automobile expense, and
investor relations expenses.
CVB Financial has based these assumptions on its present assessment of
where savings could be realized based upon the present independent operations of
the two companies. Actual savings in some or all of these areas could be higher
or lower than we currently expect.
The companies have prepared financial statements which show the combined
operations and financial condition of the two companies as if the merger had
occurred on March 31, 1999. These are known as "pro forma" financial statements.
The pro forma financial statements are set forth beginning on page 75. The pro
forma financial statements do not reflect the following anticipated effects of
the merger:
- Under Securities and Exchange Commission rules, we are not permitted to
show the effect of any anticipated cost savings because those potential
savings are based on management's estimates and we cannot assure you that
we will achieve them.
- CVB Financial expects to recognize one-time, merger-related charges of
approximately $3.7 million (pre-tax) in the quarter in which the merger
is completed. These charges are explained in greater detail in Note 3 to
the pro forma financial statements on page 83.
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<PAGE> 41
- CVB Financial also believes the merger will create significant
opportunities for increasing its revenues through mortgage, commercial
and consumer loan growth. CVB Financial has not quantified the increase
in revenues which it hopes to achieve and so we cannot predict what
effect it will have on our post-merger results of operations if we
achieve the increase.
The pro forma financial statements show that the merger would have caused a
"dilution" (reduction) in CVB Financial's earnings per share. This dilution is
reflected in the pro forma financial statements and can be seen in the table
under "Comparative Per Share Data" on page 16 by comparing the section labeled
"CVB Financial Historical" with the selection labeled "CVB Financial Unaudited
Pro Forma."
Each of the CVB Financial Board and Orange National Board of Directors
believes the merger to be in the best interests of their respective
institutions, shareholders and banking customers. Each Board believes that the
merger will position CVB Financial, on a consolidated basis, to achieve its
strategic objective of becoming a preeminent independent financial services
provider in Southern California and strengthen CVB Financial, on a consolidated
basis, in terms of management, growth opportunities and profitability.
Furthermore, each Board of Directors believes that CVB Financial, as a larger
independent financial institution, will be better able to compete with major
banks in its service communities. The parties also anticipate that the merger
will present significant revenue enhancement opportunities for the combined
entity. These opportunities result from, among other factors:
- an increased ability to offer a wider variety of banking products and
services;
- the ability to generate increased loan and fee income from Citizens
Business Bank customers as a result of the higher lending limits
available to the combined entity; and
- the potential to increase overall market share in the communities
presently served by Citizens Business Bank and Orange National Bank as a
result of the wider range of products and services to be offered through
the combined entity.
OPINION OF ORANGE NATIONAL'S FINANCIAL ADVISOR
Orange National engaged First Security Van Kasper to act as its exclusive
financial advisor in connection with the merger. First Security Van Kasper
agreed to assist Orange National in analyzing, structuring, negotiating and
effecting a transaction with another bank holding company. Orange National
selected First Security Van Kasper because First Security Van Kasper is a
nationally recognized investment-banking firm with substantial experience in
transactions similar to the merger and is familiar with Orange National and its
business. As part of its investment banking business, First Security Van Kasper
is continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions.
Representatives of First Security Van Kasper attended the meeting of the
Orange National Board of Directors held on May 17, 1999 at which the Orange
National Board considered and approved the Agreement. At the May 17, 1999
meeting, First Security Van Kasper rendered an oral opinion that, as of that
date, the exchange ratio was fair to Orange National and its shareholders from a
financial point of view. That opinion was reconfirmed in writing as of the date
of this joint proxy statement/prospectus.
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<PAGE> 42
The full text of First Security Van Kasper's written opinion dated the date
of this Proxy Statement/Prospectus is attached as Annex D to this joint proxy
statement/prospectus and is incorporated herein by reference.
Orange National shareholders are urged to read the opinion in its entirety
for a description of the procedures followed, assumptions made, matters
considered, and qualifications and limitations on the review undertaken by First
Security Van Kasper.
First Security Van Kasper's opinion is directed to the Orange National
Board of Directors and addresses only the conversion ratio of 1.5 shares of CVB
Financial common stock for each share of Orange National common stock. It does
not address the underlying business decision to proceed with the merger and does
not constitute a recommendation to any shareholder as to how the shareholder
should vote at the special meeting with respect to the merger or any related
matter.
In rendering its opinion, First Security Van Kasper:
- reviewed, among other things;
- the merger agreement;
- Annual Reports to shareholders and Annual Reports on Form 10-K of Orange
National and CVB Financial;
- Quarterly Reports on Form 10-Q of Orange National and CVB Financial;
- certain internal financial analyses and forecasts for Orange National
and CVB Financial prepared by their respective managements;
- held discussions with members of senior management of Orange National and
CVB Financial regarding their respective
- past and current business operations;
- regulatory relationships;
- financial condition; and
- future prospects of the respective companies;
- compared certain financial and stock market information for CVB Financial
and Orange National with similar information for certain other companies
with publicly traded securities;
- reviewed the financial terms of certain recent business combinations in
the banking industry; and
- performed other studies and analyses that it considered appropriate.
In conducting its review and arriving at its opinion, First Security Van
Kasper relied upon and assumed the accuracy and completeness of all of the
financial and other information provided to it or publicly available. First
Security Van Kasper did not attempt to verify such information independently.
First Security Van Kasper relied upon the management of CVB Financial and Orange
National as to the reasonableness and achievability of the financial and
operating forecasts and projections (and assumptions and bases therefor)
provided to First Security Van Kasper. First Security Van Kasper assumed
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<PAGE> 43
that those forecasts and projections reflected the best available estimates and
judgments of Orange National management. First Security Van Kasper also assumed,
without independent verification, that the aggregate allowances for loan losses
for CVB Financial and Orange National are adequate to cover those losses. First
Security Van Kasper did not make or obtain any evaluations or appraisals of the
property of CVB Financial or Orange National, and First Security Van Kasper did
not examine any individual credit files.
The projections furnished to First Security Van Kasper and used by it in
certain of its analyses were prepared by the senior managements of Orange
National and CVB Financial. Neither Orange National nor CVB Financial publicly
discloses internal management projections of the type provided to First Security
Van Kasper in connection with its review of the merger. As a result, such
projections were not prepared with a view towards public disclosure. The
projections were based on numerous variables and assumptions which are
inherently uncertain, including factors related to general economic and
competitive conditions. ACCORDINGLY, ACTUAL RESULTS COULD VARY SIGNIFICANTLY
FROM THOSE SET FORTH IN THE PROJECTIONS.
The following is a summary of the material analyses performed by First
Security Van Kasper related to the oral opinion rendered to Orange National's
Board on May 17, 1999:
TRANSACTION SUMMARY
First Security Van Kasper calculated the merger consideration to be paid
pursuant to the exchange ratio as a multiple of Orange National's book value,
and 1998 actual and 1999 estimated earnings. This computation was based on
Orange National's earnings per share of $1.64 in 1998 and Orange National's
estimated earnings per share of $1.72 in 1999, and an exchange ratio of 1.5 CVB
Financial shares for each Orange National share. Based on those assumptions and
a ten day average closing CVB Financial stock price of $23.125, this analysis
indicated that Orange National shareholders would receive shares of CVB
Financial common stock worth $34.69 for each share of Orange National Common
Stock held, and that this amount would represent a multiple of 3.09 times book
value per share, and 20.17 times estimated 1999 earnings per share.
DISCOUNTED CASH FLOW ANALYSIS
First Security Van Kasper estimated the present value of future cash flows
that would accrue to a holder of a share of Orange National Common Stock
assuming that the shareholder held the stock for five years and then sold it.
The analysis was based on earnings forecasts prepared by management on a
stand-alone, independent basis for the year 1999 and annual net income growth
rates from 10.0% to 14.0% for the years 2000 through 2003. A 35% dividend payout
ratio was assumed for Orange National through the year 2003. An estimated year
2003 year end stock price was estimated by multiplying the projected annual
earnings by earnings multiples ranging from 12 to 18 times. The estimated stock
price for each year and the estimated dividends were discounted at rates from
14% to 18%. These rates were selected because, in First Security Van Kasper's
experience, they represent the risk-adjusted rates of return that investors in
securities such as the common stock of Orange National would require. On the
basis of these assumptions, First Security Van Kasper calculated a range of
present values ranging from $15.51 to $29.96. These values were compared to the
offer from CVB Financial which, at May 14, 1999, represented a value of $34.69.
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<PAGE> 44
The discounted cash flow present value analysis is a widely used valuation
methodology that relies on numerous assumptions, including asset and earnings
growth rates, terminal values and discount rates. The analysis did not purport
to be indicative of the actual values or expected values of Orange National
common stock.
SELECTED TRANSACTION ANALYSIS
First Security Van Kasper reviewed certain financial data related to a set
of comparable nationwide bank transactions with announced values between $50
million and $100 million since December 31, 1997.
First Security Van Kasper compared multiples of price to various factors
for the CVB Financial-Orange National Merger to the same multiples for the
comparable group's mergers at the time those mergers were announced. The results
were as follows:
<TABLE>
<CAPTION>
MULTIPLE OF PRICE TO FACTOR
--------------------------------
CVB
FINANCIAL --
COMPARABLE ORANGE
FACTOR CONSIDERED GROUP AVERAGE NATIONAL MERGER
----------------- ------------- ---------------
<S> <C> <C>
Trailing 12 Months Earnings...................... 23.12x 21.15x
------ ------
Estimated Tangible Book Value.................... 3.26x 3.09x
------ ------
Tangible Book Premium To Core Deposits Value..... 26.56x 19.96x
------ ------
</TABLE>
No company or transaction used as a comparison in the above analysis is
identical to CVB Financial, Orange National or the merger. Accordingly, an
analysis of these results is not mathematical. Rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the public
trading value of the companies to which they are being compared.
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<PAGE> 45
SELECTED PEER GROUP ANALYSIS
First Security Van Kasper compared the financial performance and market
performance of CVB Financial to those of a group of comparable banks and bank
holding companies. The companies in the peer group were western regional banks
that had total assets ranging from $100 million to $500 million. The comparisons
were based on various financial measures, including
- earnings performance,
- operating efficiency,
- capital adequacy, and
- asset quality; and
- various measures of market performance, including
- market/book values,
- price to earnings, and
- dividend yields.
To perform this analysis, First Security Van Kasper used the financial
information as of and for the 12 months ended December 31, 1998 and market price
information as of May 14, 1999.
First Security Van Kasper's analysis showed the following concerning CVB
Financial's financial performance.
<TABLE>
<CAPTION>
PERFORMANCE MEASURE CVB PEER GROUP
------------------- ------ ----------
<S> <C> <C>
Return on Equity.......................................... 18.66% 15.62%
------ ------
Return on Assets.......................................... 1.52% 1.35%
------ ------
Net Interest Margin....................................... 5.38% 5.12%
------ ------
Efficiency Ratio.......................................... 52.94% 53.55%
------ ------
Leverage Ratio............................................ 7.18% 8.64%
------ ------
Non-Performing Assets to Total Assets..................... 0.60% 0.65%
Loan Loss Reserve to Nonperforming Assets................. 143.40% 308.69%
------ ------
</TABLE>
First Security Van Kasper's analysis showed the following concerning CVB's
market performance:
<TABLE>
<CAPTION>
PERFORMANCE MEASURE CVB PEER GROUP
------------------- ----- ----------
<S> <C> <C>
Price to Earnings Multiple, based on 1998 estimated
earnings................................................. 19.11x 15.82x
----- -----
Price to Earnings Multiple, based on 1999 estimated
earnings................................................. 15.63x 13.69x
----- -----
Price to Tangible Book Multiple............................ 3.54x 2.51x
----- -----
Dividend Yield............................................. 2.01% 1.14%
----- -----
</TABLE>
For purposes of the above calculations, all earnings estimates are based
upon First Security Van Kasper estimates for CVB Financial.
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<PAGE> 46
CONTRIBUTION ANALYSIS
First Security Van Kasper analyzed the relative contribution of each of CVB
Financial and Orange National to certain pro forma balance sheet and income
statement items of the combined entity. The contribution analysis showed:
<TABLE>
<S> <C>
Orange National Contribution To:
Combined Common Equity.................................... 17.01%
-----
Combined 1999 Estimated Net Income without Cost Savings... 12.97%
-----
Combined Total Assets..................................... 15.53%
-----
Orange National Estimated Pro Forma Ownership............... 16.00%
-----
</TABLE>
First Security Van Kasper compared the relative contribution of the balance
sheet and income statement items with the estimated pro forma ownership for
Orange National shareholders based on a conversion ratio of 1.50.
OTHER ANALYSES
First Security Van Kasper reviewed the relative financial and market
performance of Orange National and CVB Financial to a variety of relevant
industry peer groups and indices. First Security Van Kasper also reviewed
earnings estimates, balance sheet composition, historical stock performance and
other financial data for CVB Financial.
In connection with its opinion dated as of the date of this joint proxy
statement/ prospectus, First Security Van Kasper performed procedures to update,
as necessary, certain of the analyses described above. First Security Van Kasper
reviewed the assumptions on which the analyses described above were based and
the factors considered in connection therewith. First Security Van Kasper did
not perform any analyses in addition to those described above in updating its
May 17, 1999 oral opinion.
FIRST SECURITY VAN KASPER
The Orange National Board of Directors has retained First Security Van
Kasper as an independent contractor to act as financial adviser to Orange
National regarding the merger. As part of its investment banking business, First
Security Van Kasper is continually engaged in the valuation of banking
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. First Security Van Kasper has experience in, and
knowledge of, the valuation of banking enterprises. In the ordinary course of
its business as a broker-dealer, First Security Van Kasper may, from time to
time, purchase securities from, and sell securities to, Orange National and CVB
Financial. As a market maker in securities First Security Van Kasper may from
time to time have a long or short position in, and buy or sell, debt or equity
securities of Orange National and CVB Financial for First Security Van Kasper's
own account and for the accounts of its customers.
Orange National and First Security Van Kasper have entered into an
agreement relating to the services to be provided by First Security Van Kasper
in connection with the merger, Orange National has agreed to pay First Security
Van Kasper, at the time of closing, a cash fee equal to 0.85% of the market
value of the aggregate consideration offered in exchange for the outstanding
shares of common stock of Orange National in the
40
<PAGE> 47
merger. Pursuant to the First Security Van Kasper engagement agreement, Orange
National also agreed to reimburse First Security Van Kasper for reasonable
out-of-pocket expenses and disbursements incurred in connection with its
retention and to indemnify First Security Van Kasper against certain
liabilities, including liabilities under the federal securities laws.
OPINION OF CVB FINANCIAL'S ADVISOR
The Bank Advisory Group, Inc. is a recognized investment banking firm
regularly engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions, and in valuations for
estate, corporate and other business purposes.
CVB Financial engaged Bank Advisory Group to act as an independent
financial advisor to the CVB Financial Board of Directors in connection with the
merger of Orange National with and into CVB Financial and to issue a fairness
opinion letter for disclosure to shareholders of CVB Financial that addresses
the fairness of the merger of Orange National with and into CVB Financial.
Specifically, based on Bank Advisory Group's reputation and qualifications in
evaluating financial institutions, the CVB Financial Board of Directors
requested that Bank Advisory Group render advice and analysis in connection with
the merger of Orange National with and into CVB Financial, and to provide an
opinion with regard to the fairness, from the perspective of the shareholders of
CVB Financial common stock, of the financial terms of the merger of Orange
National with and into CVB Financial.
Based on all factors that Bank Advisory Group deemed relevant and assuming
the accuracy and completeness of the information and data provided, Bank
Advisory Group rendered a written preliminary fairness opinion, dated May 18,
1999, as confirmed by the opinion dated , 1999, to the effect
that the terms of the merger of Orange National with and into CVB Financial,
including, without limitation, the issuance of 1.5 shares of CVB Financial
common stock for each outstanding share of Orange National common stock, and the
consequential pro forma ownership in CVB Financial on a post-merger basis of the
shareholders of CVB Financial common stock, are fair, from a financial point of
view, to the shareholders of CVB Financial common stock.
No limitations were imposed by the CVB Financial Board of Directors upon
Bank Advisory Group with respect to the investigations made or procedures
followed in rendering the May 18, 1999 preliminary fairness opinion, as
confirmed by the , 1999 opinion; nor were any limitations imposed
by the CVB Financial Board of Directors upon Bank Advisory Group with respect to
the investigations made or procedures followed in rendering any analysis,
conclusions or opinions prior to Bank Advisory Group's issuance of the
, 1999 fairness opinion. Bank Advisory Group does not, and its
officers, directors and shareholders do not, own any shares of CVB Financial
common stock or Orange National common stock; nor does Bank Advisory Group make
a market in the stock of CVB, Orange National, or any other publicly-traded
security, financial or otherwise.
The full text of the , 1999 confirming fairness
opinion -- which sets forth certain assumptions made, matters considered, and
limits on the review undertaken by Bank Advisory Group -- is attached hereto as
Annex C. CVB Financial shareholders are urged to read the , 1999
fairness opinion in its entirety. The ,
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<PAGE> 48
1999 fairness opinion, addressed to the CVB Financial Board of Directors, covers
only the fairness of the financial terms of the merger of Orange National with
and into CVB Financial, from a financial point of view, to the shareholders of
CVB Financial. The financial terms include, but are not limited to, the exchange
of 1.5 shares of CVB Financial common stock for each share of Orange National
common stock and the consequential pro forma ownership in CVB Financial on a
post-merger basis of the shareholders of CVB Financial. The ,
1999 fairness opinion does not constitute an endorsement of the merger of Orange
National with and into CVB Financial; and it does not represent a recommendation
to any CVB Financial shareholder as to how such shareholder should vote
regarding the merger of Orange National with and into CVB Financial. Bank
Advisory Group was not asked to consider, and the , 1999 fairness
opinion does not address, the relative merits of the proposed merger of Orange
National with and into CVB Financial as compared to alternative business
strategies that might exist for CVB Financial or the effect of any other
transaction(s) in which CVB Financial might engage. The summary of the
procedures and analysis performed and assumptions used by Bank Advisory Group
set forth in the joint proxy statement/ prospectus is qualified in its entirety
by reference to the text of the , 1999 fairness opinion, which is
attached as Annex C and incorporated herein by reference, and does not
constitute a recommendation to any shareholder of CVB Financial as to how such
shareholder should vote at the special meeting.
SUMMARY OF PRELIMINARY ANALYSES
As it relates to Orange National, CVB Financial contacted Bank Advisory
Group during March 1999 with the request that Bank Advisory Group prepare a
preliminary merger analysis reflecting Orange National merging with and into CVB
Financial assuming the exchange of each share of Orange National common stock
issued and outstanding into 1.50 shares of CVB common stock. Specifically, Bank
Advisory Group developed stand-alone financial projections for both CVB
Financial and Orange National, then derived a preliminary pro forma impact
analysis that analyzed the changes in the amount of earnings, book value and
indicated dividends attributable to one share of CVB Financial common stock
before the proposed merger to those attributable to CVB Financial common stock
as a result of the proposed merger at the 1.5:1 exchange ratio.
The preliminary merger analysis, for the purpose of computing the
preliminary pro forma impact analysis, assumed one-time merger-related
transactions costs together with ongoing merger-related operating costs savings
estimated, with consultation from Bank Advisory Group, by the management of CVB
Financial. By way of a letter dated April 19, 1999, Bank Advisory Group provided
the preliminary merger analysis to CVB Financial, along with explanatory
comments and a summary of conclusions derived from the preliminary pro forma
impact analysis.
The preliminary merger analysis, and the corresponding preliminary pro
forma impact analysis, suggested that for 1999, the projected year of closing,
CVB Financial's earnings per share would be impacted downward by 8.09%,
primarily reflective of the one-time transaction costs associated with
consummating the merger of Orange National and into CVB Financial; thereafter,
however, CVB Financial's earnings per share reflected annual appreciation
ranging between 4.85% and 2.84% during the period 2000-2010. Furthermore, the
preliminary pro forma impact analysis suggested that CVB's book value per share
would reflect appreciation ranging between 0.93% and 3.69% during the period
2000-2010. The preliminary pro forma impact analysis further assumed no change
in CVB Financial's
42
<PAGE> 49
dividends per share on a post-merger basis. The table below summarizes the
preliminary pro forma impact analysis.
<TABLE>
<CAPTION>
% CHANGE IN CVB FINANCIAL EARNINGS &
EQUITY PER SHARE RESULTING FROM
MERGER WITH ORANGE NATIONAL
ASSUMING 1.5 SHARES OF CVB FINANCIAL
FOR EACH SHARE OF ORANGE NATIONAL
- ---------------------------------------------------------
EARNINGS EQUITY
-------- ------
<S> <C> <C>
1999............................... -8.09% 0.10%
2000............................... 4.85% 0.93%
2001............................... 4.66% 1.60%
2002............................... 4.44% 2.14%
2003............................... 4.22% 2.56%
2004............................... 4.01% 2.89%
2005............................... 3.80% 3.14%
2006............................... 3.60% 3.34%
2007............................... 3.40% 3.49%
2008............................... 3.21% 3.59%
2009............................... 3.02% 3.66%
2010............................... 2.84% 3.69%
</TABLE>
The findings of the preliminary merger analysis, and a recap of the April
19, 1999 letter, were presented orally to the CVB Financial Board of Directors
by Bank Advisory Group on May 17, 1999, at which time the Board of Directors was
orally advised of the fairness of the merger, from a financial point of view, to
the shareholders of CVB Financial common stock. On May 18, 1999, Bank Advisory
Group delivered to the CVB Financial Board of Directors its written preliminary
fairness opinion that, based on all factors deemed relevant and assuming the
accuracy and completeness of the information and data provided to Bank Advisory
Group, and subject to Bank Advisory Group's onsite due diligence investigation
at Orange National, the terms of the merger of Orange National with and into CVB
Financial, including, without limitation, the issuance of 1.5 shares of CVB
Financial common stock for each share of Orange National common stock, and the
consequential pro forma ownership in CVB Financial of the existing shareholders
of CVB Financial common stock, are fair, from a financial point of view, to the
common shareholders of CVB Financial. The CVB Financial Board of Directors
subsequently approved the merger.
SUMMARY OF PROCEDURES & ANALYSIS RELATED TO FAIRNESS OPINION
Bank Advisory Group, in connection with the issuance of its oral and
written fairness opinions, reviewed, among other things, the following CVB
Financial information:
- audited consolidated financial statements, on Form 10-K, for the years
ended December 31, 1998, 1997, and 1996;
- quarterly financial statements, on Form 10-Q, for the 1998 and 1997
calendar quarters, and for the first calendar quarter of 1999;
- consolidated financial statements, on Form F.R. Y-9C, for the years ended
December 31, 1998, 1997, and 1996, and for the three-month period ended
March 31, 1999, as filed with the Federal Reserve System;
43
<PAGE> 50
- in the case of its , 1999 confirming opinion, financial
statements for the -month period ending , 1999;
- selected equity research reports regarding CVB Financial prepared by
various analysts who cover the financial institutions sector for market
makers of CVB Financial common stock;
- certain internal financial analyses and forecasts for CVB Financial
prepared by the management of CVB Financial, including projections of
future performance;
- certain other summary materials and analyses with respect to CVB
Financial's loan portfolio, securities portfolio, deposit base, fixed
assets, and operations including, but not limited to:
- schedules of loans and other assets identified by management as
deserving special attention or monitoring given the characteristics of
the loan/asset and the local economy,
- schedules of "other real estate owned," including current carrying
values and recent appraisals, and
- schedules of securities, detailing book values, market values, and
lengths to maturity;
- certain publicly-available information concerning the trading of, and the
trading market for, CVB Financial common stock;
- the condition of the commercial banking industry, as indicated in
financial reports filed with various Federal bank regulatory authorities
by all federally-insured commercial banks; and,
- such other information, including financial studies, analyses,
investigations, and economic and market criteria, that Bank Advisory
Group deemed relevant.
In addition, Bank Advisory Group reviewed the following Orange National
information:
- audited consolidated financial statements, on Form 10-K, for the years
ended December 31, 1998, 1997, and 1996;
- quarterly financial statements, on Form 10-Q, for the 1998 and 1997
calendar quarters, and for the first calendar quarter of 1999;
- consolidated financial statements, on form F.R. Y-9C, for the years ended
December 31, 1998, 1997, and 1996, and for the three-month period ended
March 31, 1999, as filed with the Federal Reserve System;
- in the case of its , 1999 confirming opinion, internally
generated financial statements for the month period ending
, 1999;
- selected equity research reports regarding Orange National prepared by
various analysts who cover the financial institutions sector for market
makers of Orange National Stock;
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<PAGE> 51
- certain internal financial analyses and forecasts for Orange National
prepared individually and collectively by the management of CVB and
Orange National, including projections of future performance;
- certain other summary materials and analyses with respect to Orange
National's loan portfolio, securities portfolio, deposit base, fixed
assets, and operations including, but not limited to:
- schedules of loans and other assets identified by management as
deserving special attention or monitoring given the characteristics of
the loan/asset and the local economy,
- schedules of "other real estate owned," including current carrying
values and recent appraisals, and
- schedules of securities, detailing book values, market values, and
lengths to maturity;
- certain publicly-available information concerning the trading of, and the
trading market for, Orange National common stock;
- the condition of the commercial banking industry, as indicated in
financial reports filed with various Federal bank regulatory authorities
by all federally-insured commercial banks; and,
- such other information, including financial studies, analyses,
investigations, and economic and market criteria, that Bank Advisory
Group deemed relevant.
Additionally, the oral and written opinions were based upon, among other
things, a review of:
- the merger agreement, which sets forth, among other items, the terms,
conditions to closing, pending litigation against both CVB and Orange
National, and representations and warranties of CVB Financial and Orange
National with respect to the proposed merger of Orange National with and
into CVB Financial;
- in the case of the , 1999 opinion, this joint proxy
statement prospectus, in draft form;
- the financial terms and price levels, to the extent publicly-available,
of selected recent business combinations of companies in the banking
industry that Bank Advisory Group deems comparable, either in whole or in
part, to the proposed merger of Orange National with and into CVB
Financial -- together with the financial performance and condition of
such banking organizations;
- the price-to-equity multiples, price-to-earnings multiples and trading
volumes of banking organizations based in the United States, and
specifically in California, that have publicly-traded common stocks,
together with the financial performance and condition of such banking
organizations, compared with the price-to-equity multiples,
price-to-earnings multiples, price to assets and trading volumes for both
CVB Financial common stock and Orange National common stock; and,
- such other information, including financial studies, analyses,
investigations, and economic and market criteria, that Bank Advisory
Group deemed relevant.
45
<PAGE> 52
In connection with its review, Bank Advisory Group has relied upon the
information provided by the management of both CVB Financial and Orange
National, or otherwise publicly-available and reviewed by Bank Advisory Group,
as being complete and accurate in all material respects. Bank Advisory Group met
with the management of both CVB Financial and Orange National for the purpose of
discussing the relevant information that has been provided to Bank Advisory
Group.
Bank Advisory Group has not verified, through independent inspection or
direct examination, the specific assets or liabilities of CVB Financial, Orange
National or their subsidiary banks. Bank Advisory Group has assumed that there
has been no material changes in the assets, financial condition, results of
operations, or business prospects of CVB Financial and Orange National since the
date of the last financial statements made available to Bank Advisory Group.
Bank Advisory Group has also assumed that there are no material off-balance
sheet assets or liabilities for CVB Financial or Orange National that are not
otherwise disclosed in the financial information provided to Bank Advisory Group
Bank Advisory Group is not an expert in the evaluation of loan portfolios
for purposes of assessing the adequacy of the allowances for losses with respect
thereto, and Bank Advisory Group assumed, with CVB Financial's consent, that
such allowances for each of CVB Financial and Orange National are in the
aggregate adequate to cover such losses. In addition, Bank Advisory Group did
not assume responsibility for reviewing any individual credit files, or for
making an independent evaluation, appraisal or physical inspection of any of the
assets or liabilities (contingent or otherwise) of CVB Financial or Orange
National, nor was Bank Advisory Group furnished with any such appraisals.
Finally, Bank Advisory Group's opinion was based on economic, monetary and
market and other conditions in effect as of the date of the fairness opinions.
Accordingly, although subsequent developments may affect Bank Advisory Group's
opinion, Bank Advisory Group has not assumed any obligation to update, revise or
reaffirm such opinion.
Bank Advisory Group relied on the advice of legal counsel to CVB Financial
as to all legal matters with respect to CVB Financial, Orange National, the
merger of Orange National with and into CVB Financial and the Agreement. Bank
Advisory Group did not discuss with the independent accountants for either CVB
Financial or Orange National any financial reporting matters with respect to CVB
Financial , Orange National, the merger of Orange National with and into CVB
Financial or the Agreement. CVB Financial informed Bank Advisory Group, and Bank
Advisory Group assumed, that the merger of Orange National with and into CVB
would be recorded as a "pooling of interests" under generally accepted
accounting principles. Bank Advisory Group assumed that the merger of Orange
National with and into CVB Financial would be consummated in a manner that
complies in all respects with the applicable provisions of the Securities Act,
the Exchange Act and all other applicable federal and state statutes, rules and
regulations.
With respect to the financial forecasts for CVB provided to Bank Advisory
Group by CVB Financial's management, the financial forecasts for Orange National
derived by CVB Financial, with consultation from Bank Advisory Group and
management of Orange National, and the forecasts regarding the impact of cost
savings on CVB on a post-merger basis, Bank Advisory Group assumed for purposes
of its opinion, and with CVB's consent, that the forecasts were reasonably
prepared on bases reflecting the best available estimates at the time of
preparation as to the future financial performance of CVB, Orange National and
CVB on a post-merger basis, and that they provided a reasonable basis upon which
Bank Advisory Group could form its opinion.
46
<PAGE> 53
Set forth below is a brief summary of the analyses used by Bank Advisory
Group in drawing conclusions in connection with its written preliminary fairness
opinion to the CVB Financial Board of Directors on May 18, 1999. Bank Advisory
Group utilized substantially the same types of financial analyses in connection
with providing its confirming opinion dated , 1999, except
that Bank Advisory Group's analysis of selected merger transactions was
performed only in connection with the confirming opinion.
Contribution Analysis. Based upon CVB Financial issuing 1.5 shares of
common stock for each share of Orange National common stock and the resulting
issuance of approximately 3,000,300 additional shares of CVB common stock,
current holders of Orange National Stock would own approximately 16% of CVB on a
post-merger basis, without giving effect to the exercise of the Orange National
stock options or the CVB Financial stock options. Bank Advisory Group analyzed
the contribution of each of CVB Financial and Orange National to, among other
things, total tangible common equity, assets, latest 12 months' net income,
gross loans and core deposits of the pro forma combined companies at or for the
period ended March 31, 1999. This analysis reveals that Orange National's
approximate contributions to CVB Financial on a post-merger basis are as
follows:
<TABLE>
<S> <C>
Assets...................................................... 15.19%
Loans....................................................... 17.40%
Deposits.................................................... 17.29%
Equity...................................................... 17.06%
Tangible Equity............................................. 18.15%
Last 12-Month earnings...................................... 13.71%
1999 estimated earnings (excluding one-time merger costs)... 12.76%
</TABLE>
Pro Forma Impact Analysis. In connection with the , 1999
confirming opinion, Bank Advisory Group prepared a pro forma impact analysis
reflecting the impact of issuing 1.5 shares of CVB Financial common stock for
each share of Orange National common stock and the current estimate of one-time
merger-related transactions costs together with ongoing merger-related operating
costs savings, as provided by CVB, that are projected to result from the merger
of Orange National with and into CVB Financial. This pro forma impact analysis
suggests that for 1999, the projected year of closing, CVB Financial's earnings
per share will be impacted downward by %, reflective of the one-time
transaction costs associated with consummating the merger of Orange National
with and into CVB Financial; thereafter, however, CVB Financial's earnings per
share reflect annual appreciation ranging between % and % during the
period 2000-2010. Furthermore, the pro forma impact analysis suggests that CVB
Financial's book value per share will reflect appreciation ranging between
% and % during the period 2000-
47
<PAGE> 54
2010. The pro forma impact analysis assumes no change in CVB Financial's
dividends per share on a post-merger basis. The table below summarizes the pro
forma impact analysis.
<TABLE>
<CAPTION>
% CHANGE IN CVB FINANCIAL EARNINGS
& EQUITY PER SHARE RESULTING FROM
MERGER WITH ORANGE NATIONAL
ASSUMING 1.5 SHARES OF CVB FINANCIAL
FOR EACH SHARE OF ORANGE NATIONAL
- --------------------------------------------------------
EARNINGS EQUITY
-------- ------
<S> <C> <C>
1999................................ % %
2000................................ % %
2001................................ % %
2002................................ % %
2003................................ % %
2004................................ % %
2005................................ % %
2006................................ % %
2007................................ % %
2008................................ % %
2009................................ % %
2010................................ % %
</TABLE>
Analysis of Selected Merger Transactions. Bank Advisory Group maintains a
sizable database of information pertaining to the prices paid for U.S. banks.
The database includes transactions involving banking organizations throughout
the United States, and provides comparable pricing and financial performance
data for banking organizations acquired in the United States since 1989. Bank
Advisory Group has the capability of sorting the records by year or combinations
of years to yield transactions involving similar banks. Similarities might
include banks within a specific asset size range, banks within a specific state
or geographic region, banks that generate a level of earnings as a percent of
average assets ("return on average assets" or "ROA") within a specified range,
banks that have an equity-to-assets ratio within a certain range, or banks that
sold for a specific form of consideration, either cash or stock. The ability to
produce specific groups of comparable banks facilitates making a valid
comparative purchase price analysis.
In deriving the comparable pricing analyses, as described below, which was
used in connection with the , 1999 confirming opinion, it should be
recognized that no other single company or transaction is identical to Orange
National or the merger of Orange National with and into CVB Financial.
Accordingly, an examination of the results of the following comparative analysis
is not mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies as well as other factors that could affect the public trading value
and the announced acquisition prices of the companies to which Orange National
and the merger of Orange National with and into CVB Financial are being
compared.
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<PAGE> 55
Price Multiples and Price Indices. Bank Advisory Group considered the
transaction values for profitable banking organizations with total assets
between $100 million and $500 million acquired in the State of California during
1998 and thus far in 1999, with 100% common stock as the form of consideration,
and for which both price data and related financial information are
publicly-available. This California Peer Group is detailed below:
<TABLE>
<CAPTION>
TOTAL ASSETS
SELLING ORGANIZATION ($ MILLIONS) BUYING ORGANIZATION
-------------------- ------------ -------------------
<S> <C> <C>
Bank of Santa Maria $344 Mid-State Bank, Arroyo Grande
Bank of Los Angeles $278 Western Bancorp, Laguna Niguel
PNB Financial Group, Newport $267 Western Bancorp, New Port Beach
Beach
Bank of Hemet, Riverside $245 Pacific Community Banking Group,
Laguna Hills
Regency Bancorp, Inc., Fresno $232 Zions Bancorporation, Salt Lake
City, UT
Antelope Valley Bank, Lancaster $201 Eldorado Bancshares, Inc., Tustin
Bay Area Bank, Redwood City $155 Greater Bay Bancorp, Palo Alto
City Commerce Bank, Santa Barbara $154 Mid-State Bancshares, Inc.,
Arroyo Grande
Bay Bank of Commerce, San Leandro $144 Greater Bay Bancorp, Palo Alto
Rancho Vista National Bank, Vista $123 Bank of Commerce, San Diego
Golden State Bank, Palo Alto $107 Pacific Rim Bancorp, San
Francisco
</TABLE>
Bank Advisory Group compared the average of the transaction values for the
California Peer Group, and the corresponding average of the financial
characteristics for the California Peer Group, in relation to the transaction
value attributable to Orange National in connection with the merger of Orange
National with and into CVB. The comparative analysis revealed that the merger of
Orange National with and into CVB yields a transaction value for Orange National
that results in a purchase price as a percent of total assets (price-equity
index) of 25.28, a level 8.1% lower than the 27.50 average for the California
Peer Group. Likewise, the purchase price as a percent of average assets
(price-earnings index) for Orange National equals 27.17, a level 8.0% lower than
the 29.54 average for the California Peer Group.
The equity ratio for Orange National, as measured by the equity-to-assets
ratio, as of March 31, 1999 equals 8.66%, a ratio 109 basis points and 11.2%
lower than the average equity ratio of 9.75% for the California Peer Group.
Furthermore, the 12-month trailing return on average assets for Orange National
equals 1.31%, a ratio that is 5 basis points and 3.7% lower than the average
return on average assets of 1.36% for the California Peer Group; and, the
12-month trailing return on average equity for Orange National equals 12.57%, a
ratio that is 143 basis points and 10.21% lower than the average return on
average equity of 14.00% for the California Peer Group.
When giving consideration to the better condition and performance in terms
of equity-to-assets ratio, return on average assets, and return on average
equity, of the California Peer Group in relation to Orange National, the
analysis suggests that the transaction value for Orange National, as measured by
the price indices described above, is reasonable and defensible when compared
with the price indices for the California Peer Group. The table
49
<PAGE> 56
set forth below summarizes this comparative analysis, and highlights the Orange
National transaction.
<TABLE>
<CAPTION>
EQUITY- TOTAL PRICE MULTIPLES PRICE INDICES
# OF ASSETS TO- PRICE ----------------- -----------------
BANKS $(MM) ASSETS ROA ROE $(MM) EQUITY EARNINGS EQUITY EARNINGS
----- ------ ------- ---- ----- ----- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ORANGE NATIONAL*......... 1 $279 8.66% 1.31% 12.57% $70.5 2.92X 20.74X 25.28 27.17
California Peer Group.... 11 $205 9.75% 1.36% 14.00% $56.3 2.82x 21.79x 27.50 29.54
</TABLE>
- -------------------------
* Total price for Orange National based on the issuance of 3,000,300 shares of
CVB Financial common stock, and a $23.50 closing price per share for CVB
Financial common stock, as of May 25, 1999. Financial data for Orange National
is as of March 31, 1999, with earnings based on 12-month trailing earnings.
Common Stock Indexed Price Multiples. Bank Advisory Group also considered
the transaction values for profitable banking organizations with total assets
between $100 million and $500 million acquired in the United States since 1997,
with 100% common stock as the form of consideration, and for which both price
data and related financial information are publicly-available which is referred
to as "National Peer Group" below; however, in order to derive indexed price
multiples for the National Peer Group, Bank Advisory Group compared the price
multiples calculated for each transaction value at the date of announcement
relative to the market price multiples for the common stock of the relevant
acquiror at the month-end prior to announcement date. Bank Advisory Group then
compared the average of the indexed price multiples for the National Peer Group,
segmented by year of announcement, in relation to the indexed price multiples
computed for the transaction value attributable to Orange National, using the
market price multiple for CVB Stock, in connection with the merger of Orange
National with and into CVB.
This comparative analysis reveals that the merger of Orange National with
and into CVB Financial yields a transaction value for Orange National that
results in a price-to-equity multiple of 2.92x, versus a 2.97x average for the
National Peer Group as of 1999, and a 3.15x average for the
National Peer Group in 1998. However, when the 2.92x price-to-equity transaction
multiple for the merger of Orange National with and into CVB Financial is
compared relative to the 3.31x price-to-equity multiple for CVB common stock,
the transaction value equates to an indexed price multiple of 88.22, versus a
113.88 average for the National Peer Group as of , 1999 in 1999,
and a 112.94 average for the National Peer Group in 1998. The comparative
analysis also reveals that the merger of Orange National with and into CVB
Financial yields a transaction value for Orange National that results in a
price-to-earnings multiple of 20.74x, versus a 20.28x average for the National
Peer Group thus far in 1999, and a 22.53x average for the National Peer Group in
1997. When the 20.74x price-to-earnings transaction multiple for the merger of
Orange National with and into CVB Financial is compared relative to the 18.80x
price-to-earnings multiple for CVB common stock, the transaction value equates
to an indexed price multiple of 110.32, compared with a 102.71 average for the
National Peer Group as of , 1999 in 1999, and a 106.43 average
for the National Peer Group in 1998.
When giving consideration to the fact that Orange National's financial
condition and performance, in terms of equity-to-assets ratio and return on
average assets, virtually matches that of the National Peer Group in 1998, and
is only slightly lower than the financial condition and performance of the
National Peer Group in 1999, the analysis
50
<PAGE> 57
suggests that the transaction value for Orange National is reasonable and
defensible when viewed in terms of the indexed price multiples.
The table set forth below summarizes the indexed price multiples analysis,
and highlights the Orange National transaction.
<TABLE>
<CAPTION>
TRANSACTION
PRICE ACQUIROR STOCK INDEXED PRICE
EQUITY- MULTIPLES MULTIPLES MULTIPLES**
# OF ASSETS TO- ----------------- ----------------- -----------------
BANKS $(MM) ASSETS ROA EQUITY EARNINGS EQUITY EARNINGS EQUITY EARNINGS
----- ------ ------- ---- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ORANGE NATIONAL*............. 1 $279 8.66% 1.31% 2.92X 20.74X 3.31 18.80 88.22 110.32
National Peer
Group -- 1999.............. 15 $198 9.02% 1.43% 2.97x 20.28x 2.61x 19.75x 113.88 102.71
National Peer
Group -- 1998.............. 92 $190 8.96% 1.33% 3.15x 22.53x 2.79x 21.17x 112.94 106.43
National Peer
Group -- 1997.............. 63 $216 8.62% 1.18% 2.60x 20.19x 2.51x 17.75x 103.59 113.76
</TABLE>
- -------------------------
* Total price for Orange National based on the issuance of 3,000,300 shares of
CVB Financial common stock, and a $23.50 closing price per share for CVB
Financial common stock as of May 25, 1999. Financial data for Orange National
is as of March 31, 1999, with earnings based on 12-month trailing earnings.
** Transaction Price Multiples as % of Acquiror Stock Multiples.
The summary set forth above does not purport to be a complete description
of the analyses performed by Bank Advisory Group. Bank Advisory Group believes
that its analyses and the summary set forth above must be considered as a whole
and that selecting a portion of its analyses and factors, without considering
all analyses and factors, would create an incomplete view of the process
underlying the analyses used by Bank Advisory Group.
In addition, Bank Advisory Group may have given various analyses more or
less weight than other analyses, and may have deemed various assumptions more or
less probable than other assumptions, so that the ranges of valuations resulting
from any particular analysis described above should not be taken to be Bank
Advisory Group's view of the actual value of Orange National or of CVB Financial
on a post-merger basis. The fact that any specific analysis has been referred to
in the summary above is not meant to indicate that such analysis was given
greater weight than any other analysis.
In performing its analyses, Bank Advisory Group made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of both CVB Financial
and Orange National. The analyses performed by Bank Advisory Group are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses. Such
analyses were prepared in connection with Bank Advisory Group's determination of
the fairness of the financial terms of the merger of Orange National with and
into CVB Financial, from a financial point of view, to the shareholders of CVB
Financial common stock. The analyses do not purport to be appraisals or to
reflect the prices at which a company might actually be sold or the prices at
which any securities may trade at the present time or any time in the future.
The forecasts utilized by Bank Advisory Group in certain of its analyses are
based on numerous variables and assumptions which are inherently unpredictable
and, therefore, not certain to become reality. Accordingly, actual results could
vary significantly from those contemplated in such forecasts.
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Bank Advisory Group is of the belief that its review of, among other
things, the aforementioned items, provides a reasonable basis for the issuance
of both the May 18, 1999 preliminary fairness opinion and the ,
1999 confirming fairness opinion, recognizing that Bank Advisory Group is
issuing informed professional opinions -- not certifications of value.
PROFESSIONAL FEES PAID TO BANK ADVISORY GROUP
Since August 1990, and prior to its retention for this specific assignment,
Bank Advisory Group has provided financial advisory services to CVB Financial in
various capacities; however, the revenues derived from the delivery of such
services are insignificant when compared to Bank Advisory Group's total gross
revenues.
For Bank Advisory Group's services as an independent financial analyst and
advisor to CVB Financial in connection with the merger of Orange National with
and into CVB Financial, CVB Financial has agreed to pay Bank Advisory Group a
professional fee totaling $90,000. Additionally, CVB Financial also has agreed
to reimburse Bank Advisory Group for reasonable out-of-pocket expenses.
Furthermore, in connection with the merger of Orange National with and into CVB
Financial, CVB Financial has agreed to indemnify Bank Advisory Group, the
officers, directors, employees, and shareholders of Bank Advisory Group and
assigns, heirs, beneficiaries and legal representatives of each indemnified
entity and person. No portion of Bank Advisory Group's fee is contingent upon
the conclusion reached in either the May 18, 1999 preliminary fairness opinion
or the , 1999 confirming fairness opinion.
Bank Advisory Group has not previously provided any services to Orange
National and, thus, has never received any professional fees from Orange
National.
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS
OF ORANGE NATIONAL IN THE MERGER
When considering the recommendations of the Orange National Board of
Directors, you should be aware that some of the employees of Orange National and
Orange National Bank and members of the Orange National Board of Directors and
management have interests that are different from, or in conflict with, your
interests. The Board of Directors was aware of these interests when they
approved the merger and the merger agreement. Except as described below, to the
knowledge of Orange National, the executive officers and directors of Orange
National do not have any material interest in the merger apart from their
interests as shareholders.
Accelerated Vesting of Stock Options
Outstanding but unvested options under Orange National's stock option
plans, including options held by directors and executive officers, will
automatically vest according to their terms. As of the date hereof there are
228,900 options outstanding to purchase to Orange National common stock. In
addition, CVB Financial has agreed to convert the Orange National stock options
which are not exercised by the completion of the merger into options to acquire
CVB Financial common stock by adopting the Orange National stock option plans.
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Employment Contracts and Deferred Compensation Plans
The following executive officers of Orange National and Orange National
Bank have rights under employment agreements which are affected by the merger:
Kenneth J. Cosgrove, the President and Chief Executive Officer of Orange
National and Orange National Bank; Robert W. Creighton, the Executive Vice
President and Chief Financial Officer of Orange National and Orange National
Bank, and Frank A. DelGiorgio, the Senior Vice President and Chief Credit
Officer of Orange National Bank. In connection with the merger, each of these
contracts have provisions which will result in payouts to these executive
officers.
Mr. Cosgrove will receive a payment equivalent to 2 years salary ($320,000)
upon consummation of the merger, payable monthly after consummation of the
merger. Furthermore, Mr. Cosgrove has deferred certain amounts of his salary
that he previously earned. These deferred amounts, which total $150,000, earn
interest at 9.5% per year and will be payable upon completion of the merger. In
addition, Mr. Cosgrove has accepted continued employment with Citizens Business
Bank in the capacity of Regional Manager and Senior Vice President. In this
position, he is entitled to a base salary of $140,000, with increases of $10,000
per year for the first two years thereafter, and a bonus determined under the
Citizens Business Bank Performance Compensation Plan. Mr. Cosgrove will have the
use of a bank automobile for two years and will be entitled to participate in
the Citizens Business Bank health and welfare plan and 401(k) and Profit Sharing
Plan. Mr. Cosgrove will also receive options to purchase 5,000 shares of CVB
Financial common stock. CVB Financial also agrees to continue Mr. Cosgrove'
salary continuation plan which, following his retirement, will entitle him to an
amount equal to $2.3 million payable over a 15-year period subject to reduction
under the Internal Revenue Code.
Under the terms of his pre-existing employment contract with Orange
National, Mr. Creighton, who is not expected to remain with the combined
company, will be entitled to an amount equal to the remaining portion due on his
employment contract on completion of the merger. This amount is $61,000 assuming
a September 30, 1999 closing for the merger. Mr. Creighton will also have the
use of a bank automobile and will participate in the Citizens Business Bank
health benefit plans for the remaining portion of his employment contract. In
addition, Mr. Creighton has a salary continuation contract with Orange National
which will accelerate upon the merger, and will entitle him to payments of
$5,000 a month for the 15 years following the merger, partially offset against
the remaining portion due on his employment contract.
Mr. DelGiorgio, will be entitled to an amount equal to the remaining
portion due on his employment contract on completion of the merger. This amount
is $52,800 assuming a September 30, 1999 closing for the merger. Mr. DelGiorgio
will also have the use of a bank automobile and will participate in the Citizens
Business Bank health benefit plans for the remaining portion of his employment
contract. In addition, Mr. DelGiorgio may be offered employment with Citizens
Business Bank following the merger. Mr. DelGiorgio would then be entitled to
participate in the employee plans, including the bonus plan of Citizens Business
Bank.
Board of Directors Deferred Fees
The following members of the Board of Directors of Orange National
previously earned but elected to defer a portion of their board fees: Messrs.
Vaccaro, Cosgrove, Creighton, Foulger, Mahoney and Holte. These deferred fees
earn interest of 9.5% per year
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and will be payable upon completion of the merger. We estimate these deferred
fees will total $275,000 on completion of the merger.
Special Arrangement for Orange National's Former President
and Chief Executive Officer
Mr. Wayne Miller, a current director of Orange National and Orange National
Bank, and the former president and chief executive officer of Orange National
and Orange National Bank, previously entered into a separation and consulting
agreement and a deferred compensation agreement which will be assumed by CVB
Financial upon completion of the merger. Pursuant to these arrangements, Mr.
Miller will receive $4,166 per month for 78 months under the separation
agreement and $50,000 per year for approximately five years under the deferred
compensation agreement following the merger.
Appointment of Mr. Vaccaro to CVB Financial and Citizens
Business Bank Board.
Subject to approval of the CVB Financial and Citizens Business Bank boards,
Mr. Vaccaro will become a member of the Board of Directors of CVB Financial and
Citizens Business Bank upon completion of the merger. As a director of CVB
Financial and Citizens Business Bank, Mr. Vaccaro will be entitled to directors'
fees in the amount of $3,220 per month and options to purchase shares of CVB
Financial common stock pursuant to the terms of CVB Financial's stock option
plan which provides for a fixed option grant to nonemployee directors over the
first five years of service.
Director Emeritus Plans
Orange National has a director emeritus plan which pays former directors of
Orange National and Orange National Bank a percentage of the board fees they
previously earned when they were directors. The directors emeritus plan will
terminate on the merger. We estimate the total amount payable under the director
emeritus plan on completion of the merger will be $75,000. Directors emeriti of
Orange National hold 104,264 shares, or 5.21% of Orange National Common Stock.
AMERICAN STOCK EXCHANGE LISTING
CVB Financial will make an application to list the shares of CVB Financial
common stock to be issued in the merger on the American Stock Exchange. The
stock must be authorized for listing on the American Stock Exchange for the
merger to proceed.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
CVB Financial and Orange National have obtained the opinion of Manatt,
Phelps & Phillips LLP that, for federal income tax purposes, the merger is a
tax-deferred reorganization within the meaning of Section 368(a)(1)(A) of the
Internal Revenue Code and will not result in gain or loss for federal income tax
purposes to CVB Financial or Orange National. In addition, the opinion states
that the issuance of CVB Financial's common stock in the merger will not result
in the recognition of gain or loss by the holders of Orange National common
stock who receive CVB Financial common stock in the merger.
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Based upon this opinion, the additional federal income tax consequences to
the merger include the following:
- Orange National will not recognize any gain or loss on the transfer of
its assets to CVB Financial solely in exchange for CVB Financial common
stock and the assumption of Orange National's liabilities;
- CVB Financial will not recognize any gain or loss on receiving the assets
of Orange National in exchange for CVB Financial common stock;
- the shareholders of Orange National will not recognize any gain or loss
on the transfer of their Orange National common stock solely in exchange
for CVB Financial common stock;
- Orange National and CVB Financial dissenters, if any will recognize gain
or loss in connection with the merger;
- Orange National shareholders who receive cash in lieu of fractional
shares of CVB Financial will recognize gain or loss as a result of
receipt of such cash;
- the basis of CVB Financial common stock received by the Orange National
shareholders in the merger will be the same as the basis of their Orange
National common stock surrendered in the merger;
- the holding period of the CVB Financial common stock the Orange National
shareholders receive in the merger will include the holding period of the
Orange National common stock surrendered in the merger so long as their
Orange National common stock is held as a capital asset;
- the holding period of the assets of Orange National in the hands of CVB
Financial will include the period during which such assets were held by
Orange National;
- the basis of Orange National assets in the hands of CVB Financial will be
the same as the basis of such assets in the hands of Orange National
immediately prior to the merger;
- because stock options to purchase Orange National common stock and
options to purchase CVB Financial common stock into which they will
convert do not have a readily ascertainable fair market value because
they are not publicly traded, and therefore conversion of the Orange
National options into CVB Financial options will not result in income,
gain or loss to the holders of such stock options; and
- Orange National and CVB Financial will not recognize gain or loss on the
issuance of CVB Financial common stock to an optionee pursuant to the
optionee's exercise of a stock option issued by Orange National and
converted into an option to acquire CVB Financial common stock.
This discussion is based on current law and is for general information
only. In addition, each shareholder is urged to consult with his or her own tax
advisor concerning the specific tax consequences of the merger to the
shareholder, including the applicability and effect of foreign, state, local or
other tax laws and of any future changes in the Internal Revenue Code, the
Treasury Regulations, tax rulings or court decisions or other laws concerning
taxes.
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ACCOUNTING TREATMENT OF THE MERGER
The merger is expected to qualify as a pooling of interests for accounting
and financial reporting purposes. Accordingly, after the merger, the assets,
liabilities and stockholders' equity of Orange National will be added to the
corresponding balance sheet categories of CVB Financial at their recorded book
values, subject to any adjustments required to conform the accounting policies
and financial statement classifications of the two companies. In future
financial statements, the results of operations of CVB Financial will include
the results of both Orange National and CVB Financial for the entire fiscal year
in which the merger occurs and all prior fiscal periods presented therein. CVB
Financial must treat certain expenses incurred to effect the merger as current
charges against income rather than as adjustments to its balance sheet.
The unaudited pro forma condensed combined financial information contained
in this document has been prepared using the pooling of interests accounting
method to account for the merger. See "Selected Unaudited Pro Forma Combined
Financial Data" and "Unaudited Pro Forma Condensed Combined Financial
Information" on pages 15 and 75.
EXCHANGE OF ORANGE NATIONAL COMMON STOCK FOR CVB FINANCIAL COMMON STOCK
Promptly after the completion of the merger, CVB Financial will instruct
ChaseMellon Shareholder Services, LLC to send to each holder of Orange National
common stock transmittal materials for use in exchanging all of their
certificates representing shares of Orange National common stock for a
certificate or certificates representing shares of CVB Financial common stock
and a check for any fractional share interest. The transmittal materials will
contain information and instructions with respect to the surrender of
certificates of shares of Orange National common stock in exchange for
certificates representing shares of CVB Financial common stock.
ORANGE NATIONAL SHAREHOLDERS SHOULD NOT SEND IN THEIR SHARE CERTIFICATES
UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS.
Following the completion of the merger and upon surrender of all of the
certificates representing shares of Orange National common stock registered in
the name of Orange National common stock shareholders, or a satisfactory
indemnity if any of such certificates are lost, stolen or destroyed, together
with a properly completed letter of transmittal, ChaseMellon will mail to each
holder a certificate or certificates for the number of shares of CVB Financial
common stock they are entitled, together with all undelivered dividends or
distributions, less the amount of any withholding taxes which may be required
for the shares and, where applicable, a check in the amount of any cash to be
paid in lieu of fractional shares. We will pay no interest on any cash.
Declaration of dividends by CVB Financial after the completion of the
merger will include dividends on all CVB Financial common stock issued in the
merger, but no dividend or other distribution payable to the holders of record
of CVB Financial common stock at or as of any time after the completion of the
merger will be paid to holders of Orange National common stock until they
physically surrender all certificates as described above. After the completion
of the merger, the stock transfer books of Orange National will close and there
will be no transfers on the transfer books of Orange National.
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THE MERGER AGREEMENT
CONDITIONS TO THE MERGER
The obligation of CVB Financial and Orange National to consummate the
merger is subject to the satisfaction or waiver on or before the completion of
the merger of many conditions, including the following:
- the merger agreement must receive all required approvals of governmental
authorities, and the shareholders and Boards of Directors of CVB
Financial and Orange National;
- no judgment, decree, injunction, order or proceeding will be outstanding
or threatened by any governmental authority which prohibits or restricts
or threatens to invalidate or set aside the merger;
- CVB Financial will have received all state securities permits and other
authorizations necessary to issue the CVB Financial common stock to
Orange National shareholders;
- the CVB Financial common stock issuable to Orange National shareholders
shall be listed on the American Stock Exchange;
- CVB Financial and Orange National will have received an opinion from
Manatt, Phelps & Phillips LLP that the merger will not result in the
recognition of gain or loss for federal income tax purposes, and that the
issuance of CVB Financial common stock will not result in the recognition
of gain or loss to Orange National shareholders who receive CVB Financial
common stock in the merger; and
- Deloitte & Touche LLP will have confirmed that the merger will qualify
for pooling of interests accounting treatment.
The obligation of CVB Financial to consummate the merger is also subject to
fulfillment of other conditions, including the following:
- between May 18, 1999 and the completion of the merger, there will be no
material adverse change in Orange National's business, financial
condition, results of operations or prospects on a consolidated basis;
- the cash payable to CVB Financial and Orange National shareholders who
dissent and follow the proper procedures to perfect dissenters' rights
under California law, when combined with all the other cash payable in
the merger, will not disqualify the transaction from pooling of interests
accounting treatment;
- CVB Financial will receive the opinion of Bank Advisory Group that the
exchange ratio is fair from a financial point of view to the CVB
Financial shareholders; and
- Orange National employee benefit plans will be merged with, assumed by
CVB Financial or terminated by Orange National at the discretion of CVB
Financial.
The obligations of Orange National to consummate the merger are also
subject to the fulfillment of certain other conditions, including the following:
- between May 18, 1999 and the completion of the merger, there will be no
material adverse change in CVB Financial's business, financial condition,
results of operations or prospects on a consolidated basis; and
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- Orange National will receive the fairness opinion of First Security Van
Kasper that the exchange ratio is fair from a financial point of view to
the shareholders of Orange National.
Additionally, the completion of the merger is subject to the performance of
covenants, the delivery of documents, the accuracy of representations and
warranties and the receipt of legal opinions, third-party consents, officers'
certificates and other documents.
If these and other conditions are not satisfied or waived, CVB Financial or
Orange National may terminate the merger agreement.
NONSOLICITATION
Under the terms of the merger agreement, Orange National has agreed not to
solicit, initiate or encourage any competing transaction. In addition, Orange
National has agreed not to participate in any negotiations, or furnish any
information in connection with, any effort or attempts to effect any competing
transaction with or involving any person other than CVB Financial, unless Orange
National receives a bona fide offer from a person other than CVB Financial and
the Orange National Board of Directors has a fiduciary duty to examine it.
Orange National has agreed to promptly notify CVB Financial of the terms of any
competing transaction. The term "competing transaction" means any of the
following involving Orange National: a merger or other business combination; a
sale lease or transfer or other disposition of assets representing 10% or more
of Orange National's assets; a sale of shares of capital stock representing 10%
or more of the voting power of Orange National; a tender offer or exchange offer
for at least 10% of the outstanding shares of Orange National; a solicitation of
proxies in opposition to approval of the merger by Orange National's
shareholders; or a public announcement of an unsolicited bona fide proposal,
plan or intention to do any of the foregoing.
EXPENSES
If Orange National terminates the merger agreement because CVB Financial
fails to satisfy certain of its obligations, CVB Financial has to pay all of
Orange National's expenses up to $225,000.
If CVB Financial terminates the merger agreement because Orange National's
shareholders fail to approve the merger, or because Orange National fails to
satisfy certain of its obligations, Orange National has to pay all of CVB
Financial's expenses up to $300,000.
TREATMENT OF OPTIONS
Each option to purchase Orange National common stock issued and outstanding
immediately prior to the completion of the merger and all obligations of Orange
National under the Orange National stock option plans will, after the completion
of the merger, be assumed by and be deemed to be options granted by CVB
Financial to purchase that number of shares of CVB Financial common stock equal
to 1.5 times the number of shares of Orange National common stock subject to the
option. As of June , 1999, 228,900 options to purchase Orange National common
stock were outstanding. The per share exercise price for the shares of CVB
Financial common stock issuable upon exercise of such Orange National option
will be determined by dividing the exercise price
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immediately prior to the completion of the merger by 1.5. CVB Financial intends
to assume the 1993 and 1997 Orange National Stock Option Plans for this purpose.
TERMINATION
The merger agreement may be terminated at any time prior to the completion
of the merger:
- by mutual consent of CVB Financial and Orange National in writing;
- by Orange National or CVB Financial immediately on the failure of the
shareholders of Orange National or CVB Financial to approve the merger
agreement;
- by CVB Financial or Orange National if any material breach or default by
the other party is not cured within 30 days after notice thereof;
- by CVB Financial or Orange National if any governmental or regulatory
authority denies or refuses to grant any approval, consent or
authorization required to be obtained to consummate the transactions
contemplated by the merger agreement unless, within 30 days after such
denial or refusal, all parties agree to resubmit the application to the
regulatory authority that has denied or refused to grant the approval,
consent or qualification requested;
- by Orange National or CVB Financial if the mutual conditions set forth in
the merger agreement are not satisfied by March 31, 2000;
- by Orange National if any of the conditions to its obligations in the
merger agreement shall not have been met, or by CVB Financial if any of
the conditions to its obligations in the merger agreement are not
satisfied by March 31, 2000, or such earlier time as it becomes apparent
that such conditions shall not be met;
- by CVB Financial if Orange National engages in a competing transaction;
or
- by CVB Financial if CVB Financial determines that the estimated cost of
any environmental remediation on any of the Orange National properties
for which Orange National would be responsible is in excess of $250,000.
The merger agreement will also terminate if we have not completed the
merger by March 31, 2000.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO COMPLETION OF THE MERGER
The merger agreement provides that, during the period from the date of the
merger agreement to the completion of the merger, Orange National will conduct
its business only in the normal and customary manner and in accordance with
sound banking practices and will not, without the prior written consent of CVB
Financial, which consent may not be unreasonably withheld, take any of the
following actions, or cause Orange National Bank to take any of the following
actions:
- issue any securities except pursuant to the exercise of options
outstanding as of the date of the merger agreement;
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- declare, set aside or pay any dividend, other than a quarterly regular
cash dividend commencing with the quarter beginning July 1, 1999, not to
exceed $0.15 per share, or make any other distribution upon, or purchase
or redeem any shares of its stock;
- amend its articles of incorporation, articles of association or bylaws
except as may be required to complete the merger,
- grant any general or uniform increase in the rate of pay of employees or
employee benefits except in the ordinary course of business and
consistent with past practice;
- grant any increase in salary, incentive compensation or employee benefits
or pay any bonus to any person except any increases in the ordinary
course of business and consistent with past practice;
- make any capital expenditure in excess of $25,000, except for ordinary
repairs, renewals and replacements;
- compromise, settle or adjust any assertion or claim of a deficiency in
taxes, or interest thereon or penalties in connection therewith, extend
the statute of limitations with any tax authority or file any pleading in
court on any tax litigation or any appeal from an asserted deficiency, or
file or amend any federal, foreign, state or local tax return, or make
any tax election;
- grant, renew or commit to grant or renew any extension of credit if the
amount of credit outstanding to any person that would exceed the greater
of $100,000 or the individual Orange National Bank branch manager's
lending authority;
- close or open any offices at which business is conducted;
- adopt or amend any employment agreement or employee benefit or other
benefit plan or arrangement of any type except such amendments as are
required by law;
- make any material change to any policies and practices with respect to
liquidity management and cash flow planning, credit, lending, personnel
practices, accounting or any other material aspect of business or
operations, except such changes as may be required in the opinion of
management to respond to economic or market conditions or as may be
required by generally accepted accounting principles or by applicable
governmental authorities;
- grant any person a power of attorney;
- make any investment by purchase of stock or securities, contributions to
capital, property transfers or otherwise in any other person, except for
investments in United States or municipal securities obligations;
- amend, modify or terminate, except in accordance with its terms, any
material contract or enter into any material agreement or contract;
- create or incur or suffer to exist any mortgage, lien, pledge, security
interest, charge, encumbrance or restraint of any kind against or in any
property or right of the respective party;
- make any special payments to any person in an amount in excess of
$10,000;
- take title to any property without conducting an environmental
investigation;
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- sell, lease or otherwise dispose of any assets or release any claims,
except in the ordinary course of business consistent with past practice;
or
- settle any claim or proceeding involving any material liability;
- incur any indebtedness; or
- except as required by law, knowingly take or cause to be taken any action
which would prevent the transactions contemplated by the merger agreement
from qualifying as tax-free reorganizations under Section 368 of the Code
or prevent CVB Financial from accounting for the business combination to
be effected by the merger as a pooling of interests.
The merger agreement also provides that each party will
- use its best efforts to take, or cause to be taken, all actions and to
do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate the transactions
contemplated by the merger agreement as promptly as practical and to
qualify the merger and for pooling of interests accounting treatment;
- obtain the consent of the other before it issues any press release or
makes any public statement with respect to the merger agreement or the
transactions contemplated thereby; and
- prepare, in CVB Financial's discretion, one or more environmental
investigations with respect to real property owned or leased by Orange
National.
The merger agreement also provides that Orange National will:
- use its best efforts to keep in full force and effect all material
licenses and permits;
- use its best efforts to maintain insurance coverage substantially the
same as in effect as of the date of the merger agreement;
- perform its material contractual obligations;
- duly and timely file all required governmental reports;
- periodically furnish to the other certain information, loan reports and
updates of information previously provided;
- promptly notify the other of certain communications from tax authorities,
material litigation and any event which has had or may reasonably be
expected to have a materially adverse effect on the financial condition,
operations, business or prospects on a consolidated basis;
- provide access to the other of certain information; and
- use its commercially reasonable efforts between the date of merger
agreement and the completion of the merger to take all actions necessary
or desirable, including the filing of any regulatory applications.
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AMENDMENT AND WAIVER OF THE MERGER AGREEMENT
Subject to applicable law, any provision of the merger agreement may be
amended or waived by CVB Financial or Orange National prior to closing if the
parties mutually agree to the amendment. In addition, either CVB Financial or
Orange National may waive the other party's performance of covenants or
conditions to the merger agreement.
STOCK OPTION AGREEMENT
We believe this summary describes all material terms of the stock option
agreement that CVB Financial and Orange National entered into in connection with
the Merger in order to reinforce their commitment to the Merger. However, we
recommend that you read carefully the complete text of the stock option
agreement for its precise legal terms and other information that may be
important to you. The stock option agreement is included in this joint proxy
statement/prospectus as Annex B.
In connection with the merger agreement, Orange National granted to CVB
Financial an option to purchase up to 399,834 shares of Orange National common
stock, representing approximately 19.9 percent of the shares of Orange National
outstanding, at a price of $27.00 per share.
The option is intended to increase the likelihood that we will complete the
merger in accordance with the terms of the merger agreement. Some aspects of the
stock option agreement may have the effect of discouraging persons who might,
prior to the time the merger is completed, be interested in acquiring Orange
National or a significant interest in Orange National from considering or
proposing such an acquisition, even if they were prepared to pay a higher price
per share for Orange National common stock than the price per share implicit in
the exchange ratio used in the merger agreement.
Attempts to acquire Orange National or a significant interest in Orange
National could cause the option to become exercisable and give CVB Financial the
right to receive a portion of any premium offered to Orange National
shareholders. This right would significantly increase the cost of a proposed
transaction to a potential acquiror when compared to the cost if the stock
option agreement did not exist. This increased cost might discourage a potential
acquiror from proposing a transaction with Orange National because the premium
due to CVB Financial as a result of the stock option would require such an
acquiror to pay a higher price than it might otherwise have been willing to pay.
In addition, the management of Orange National believes that exercise of the
option is likely to prohibit any reasonably foreseeable acquiror of Orange
National, other than CVB Financial, from accounting for any acquisition of
Orange National under the pooling of interests accounting method, thereby
further diminishing Orange National's attractiveness to such an acquiror.
Finally, because CVB Financial would be a 19.9% shareholder of Orange National
after it exercises the option, exercise of the option would increase the ability
of CVB Financial to obtain the approval of Orange National's shareholders to
consummate the merger with CVB Financial and adversely affect the ability of a
third party to obtain Orange National shareholder approval for an alternative
transaction.
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CVB Financial may exercise the option only following the occurrence of a
"purchase event," as defined below. The option terminates, however, on the
earliest of
- the completion of the merger;
- fifteen months after the first occurrence of a "purchase event;"
- fifteen months after (a) the termination of the merger agreement on or
following the occurrence of a "preliminary purchase event," as defined
below or "purchase event" or (b) termination of the merger agreement by
CVB Financial because of a material breach of the merger agreement by
Orange National or because Orange National engages, solicits or lends
assistance to a business combination transaction with an entity other
than CVB Financial; or
- any other termination of the Reorganization Agreement prior to the
occurrence of a purchase event or preliminary purchase event.
A "purchase event" includes the following:
- The Board of Directors of Orange National approves or recommends that its
shareholders approve, or Orange National enters into an agreement to
enter into a merger or other form of business combination with an entity
other than CVB Financial, or a tender offer or exchange offer with an
entity other than CVB Financial; or
- any third party acquires ownership of more than 20% of Orange National
common stock.
A "preliminary purchase event" includes the following:
- any third party acquires ownership of 10% or more of Orange National
common stock;
- any third party makes a tender or exchange offer for more than 10% of
Orange National common stock;
- any third party files an application with a government agency to enter
into a merger or other business combination with Orange National; or
- the Orange National shareholders fail to approve the merger agreement, or
the Orange National shareholders meeting is not held, or the Orange
National Board of Directors shall have withdrawn or modified its
recommendation to approve the merger agreement, in each case following an
announcement by a third party of its intention to engage in a business
combination or commence a tender offer or exchange offer for Orange
National common stock.
Repurchase Obligation.
In connection with consummation of a merger or other business combination
with a third party or the acquisition of the majority of Orange National common
stock, the stock option agreement provides that CVB Financial may require Orange
National to repurchase the option and any option shares already acquired for
cash. The repurchase price is equal to the amount paid for any option shares CVB
Financial has already acquired plus the excess of (A) the applicable price, as
defined below, for each option share over the (B) purchase price per option
share multiplied by the number of option shares with
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respect to which the option has not been exercised, plus the excess of (A) the
applicable price for each option share over the (B) purchase price per option
share multiplied by the number of option shares with respect to which the option
has been exercised.
The "applicable price" means the highest price of
- Orange National common stock at which a third party has made a tender
offer or exchange offer for those shares;
- the trading price of Orange National common stock on the Nasdaq National
Market during the sixty days preceding the date CVB Financial exercises
the option; or
- the price per share received by Orange National shareholders in any
merger or other business combination with a party other than CVB
Financial.
Listing and Registration Rights
The stock option agreement provides that Orange National has agreed to list
the option shares on the Nasdaq National Market System and to grant CVB
Financial customary rights to require registration by Orange National of option
shares for sale by CVB Financial under the securities laws.
Substitute Option
The stock option agreement provides that if Orange National agrees to be
acquired through merger or other business combination then, the agreement
governing that transaction shall provide that this option shall, upon
consummation of any stock transaction, be converted into an option to acquire
securities of the acquiror of Orange National.
Profit Limitation
The stock option agreement provides that CVB Financial's total profit with
respect to the option may not exceed $3.2 million.
AGREEMENTS WITH THE DIRECTORS OF ORANGE NATIONAL AND CVB FINANCIAL
Orange National has entered into shareholder's agreements with each
director of Orange National. These directors have agreed to vote all shares of
Orange National common stock which they own or hold in trust in favor of the
approval of the merger agreement, thereby increasing the likelihood that the
Orange National shareholders will approve the merger agreement.
In addition, the directors of CVB Financial have also agreed to vote all
the shares they own or hold in trust in favor of the merger agreement thereby
increasing the likelihood that the CVB Financial shareholders will approve the
merger agreement.
CVB Financial has also entered into noncompetition agreements with each of
the Orange National directors, pursuant to which these directors have agreed,
among other things, not to participate or engage in any business which is
competitive with CVB Financial or Orange National for a period of two years
after the completion of the merger
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and not to solicit any employees or business of Orange National or Orange
National Bank for two years after completion of the merger.
RESALES OF CVB FINANCIAL COMMON STOCK BY ORANGE NATIONAL SHAREHOLDERS
The shares of CVB Financial common stock to be issued to Orange National
shareholders in the merger will be registered under the Securities Act. These
shares may be traded freely and without restriction by those shareholders not
deemed to be "affiliates" of Orange National. An affiliate of a corporation, as
defined by the Securities Act, is a person who directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, that corporation. Any subsequent transfer by an affiliate of
Orange National must be one permitted by the resale provisions of Rule 145
promulgated under the Securities Act or as otherwise permitted under the
Securities Act.
Commission guidelines regarding qualifying for the pooling of interests
method of accounting also limit sales of shares of the acquiring company and
acquired company by affiliates of either company in a business combination such
as the merger. These guidelines indicate that the pooling of interests method of
accounting will generally not be challenged on the basis of sales by such
affiliates if these persons do not dispose of any of the shares of the
corporation they own or any shares of the corporation they receive in connection
with a merger during the period beginning 30 days prior to the merger and ending
after financial results covering at least 30 days of post-merger operations of
the combined entity have been published.
Orange National has delivered to CVB Financial an agreement by each
affiliate of Orange National that such person will not dispose of:
- any CVB Financial common stock in violation of the Securities Act; or
- any Orange National common stock or CVB Financial common stock during the
pooling restricted period.
REGULATORY APPROVALS FOR THE MERGERS
Under the merger agreement, CVB Financial and Orange National have agreed
to use their commercially reasonable efforts to obtain all necessary actions or
nonactions, extensions, waivers, consents and approvals from any governmental
authority necessary, proper or advisable to consummate the transactions
contemplated by the merger agreement. Such approvals include notices to, and/or
the approvals of the Federal Deposit Insurance Corporation, the Federal Reserve
Board, the Office of the Comptroller of the Currency and the California
Department of Financial Institutions.
The closing of the merger is conditioned upon the receipt of all approvals
of regulatory authorities required for the merger without the imposition of any
conditions or requirements that would materially and adversely impact the
economic or business benefits to CVB Financial or Orange National of the
transactions contemplated by the merger agreement.
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Federal Deposit Insurance Corporation. The merger of Orange National Bank
into Citizens Business Bank is subject to prior approval by the Federal Deposit
Insurance Corporation under Section 18(c) of the Federal Deposit Insurance Act.
Section 18(c) requires the Federal Deposit Insurance Corporation, when
considering a transaction such as the bank merger, to take into consideration
the financial and managerial resources, including the competence, experience and
integrity of the officers, directors and principal stockholders, and the future
prospects of the existing and proposed institutions and the effect of the
transaction on the convenience and needs of the communities to be served. In
considering financial resources and future prospects, the Federal Deposit
Insurance Corporation will, among other things, evaluate the adequacy of the
capital levels of the parties to a proposed transaction and of the resulting
institutions. In considering financial and managerial factors, the Federal
Deposit Insurance Corporation will also assess the degree to which Citizens
Business Bank and Orange National Bank are taking appropriate steps to ensure
that electronic data processing systems and those of their vendors can safely
accommodate the upcoming change to the new millennium and plans for ensuring
Year 2000 readiness of the resulting organization.
The Federal Deposit Insurance Act prohibits the FDIC from approving a
merger if it would result in a monopoly or be in furtherance of any combination
or conspiracy to monopolize or to attempt to monopolize the business of banking
in any part of the United States or it would effect in any section of the
country would be substantially to lessen competition or to tend to create a
monopoly, or if it would in any other respect result in a restraint of trade,
unless the Federal Deposit Insurance Corporation finds that the anti-
competitive effects of the merger are clearly outweighed by the probable effect
of the transaction in meeting the convenience and needs of the communities to be
served.
In addition, under the Community Reinvestment Act of 1977, the Federal
Deposit Insurance Corporation must take into account the record of performance
of Citizens Business Bank and Orange National Bank in meeting the credit needs
of the communities served by such institutions, including low- and
moderate-income neighborhoods.
The application filed with the Federal Deposit Insurance Corporation
pursuant to the Federal Deposit Insurance Act was filed on , 1999.
The bank merger may not be completed until the 30th day, or, with governmental
consent, the 15th day, following the date of the Federal Deposit Insurance
Corporation approval, during which period the United States Department of
Justice may comment adversely on the merger or challenge the merger on antitrust
grounds. The commencement of an antitrust action would stay the effectiveness of
such an approval unless a court specifically orders otherwise.
Federal Reserve Board. The merger of Orange National and CVB Financial is
subject to prior notice to the Federal Reserve Board under Section 3 of the Bank
Holding Company Act.
Department of Financial Institutions. The bank merger is subject to
approval of the California Department of Financial Institutions. In determining
whether to approve the bank merger, the Department of Financial Institutions
will consider factors such as:
- the effects of the bank merger on competition;
- the effects of the bank merger on the convenience and needs of the
communities to be served;
- the financial condition of CVB Financial and Citizens Business Bank;
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- whether the merger and the bank merger are fair, just and equitable to
the depositors, creditors and shareholders of Orange National and Orange
National Bank;
- the competence, experience and integrity of Citizens Business Bank's
management; and
Office of the Comptroller of the Currency. The bank merger is subject to
prior notice to the Office of the Comptroller of the Currency. However, because
Citizens Business Bank, which survives the bank merger, is not a national bank,
the approval of the Office of the Comptroller of the Currency is not required to
complete the bank merger.
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DISSENTING SHAREHOLDERS' RIGHTS
You are entitled to dissenters' rights in connection with the merger. The
procedures for you to obtain dissenters' rights are set forth in Chapter 13 of
the California General Corporation Law. The information set forth below is a
general summary of Chapter 13 dissenters' rights as they apply to you. This
summary is not a complete discussion of Chapter 13 and is qualified in its
entirety by reference to Chapter 13, which is attached as Annex E. If you wish
to exercise dissenters' rights or wish to preserve the right to do so you should
carefully read Annex E. YOU MUST FOLLOW EXACTLY THE REQUIRED PROCEDURES SET
FORTH IN CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW OR YOUR
DISSENTERS' RIGHTS MAY BE LOST.
If the merger is consummated, and you elect to exercise your dissenters'
rights and you comply with the procedures set forth in Chapter 13, you will be
entitled to receive an amount equal to the fair market value of your shares.
Chapter 13 provides the fair market value shall be determined as of May 17,
1999, the day before the public announcement of the merger. Orange National
believes the fair market value of its stock is equal to $27.81 as of May 17,
1999, which is the closing bid price for Orange National Common Stock as of such
date. CVB Financial believes the fair market value of its stock is $23.72 as of
May 17, 1999 which is the average of the high and low price of CVB Financial
common stock as of such date.
You must satisfy each of the following requirements for your shares to be
considered dissenting shares under Chapter 13. Shares of Orange National common
stock must be purchased by Orange National, and shares of CVB Financial must be
purchased by CVB Financial, from a dissenting shareholder if all applicable
requirements are complied with, but only if:
- For Orange National shareholders, demands are made for payment with
respect to 5% or more of the outstanding shares of Orange National common
stock.
- For CVB Financial shareholders, demands are made for payment with respect
to 5% or more of the outstanding shares of CVB Financial common stock.
This 5% limitation does not apply to shares which are subject to a
restriction on transfer imposed by Orange National or CVB Financial,
respectively, or by any law or regulation. Orange National and CVB Financial are
not aware of any restriction on transfer of any of their respective shares of
common stock except restrictions which may be imposed upon shareholders who are
deemed to be "affiliates" of CVB Financial or Orange National as that term is
used in the Securities Act. Those shareholders who believe there is some
restriction affecting their shares should consult with their own counsel as to
the nature and extent of any dissenters' rights they may have. In addition, CVB
Financial or Orange National are required to purchase dissenting shares only if:
- You have shares of Orange National common stock or CVB Financial common
stock, as the case may be, outstanding as of the record date of the
shareholder's meeting at which you may vote the shares;
- You vote the shares against the merger. It is not sufficient to abstain
from voting. However, you may abstain as to part of your shares or vote
part of those shares for the merger without losing the right to have
purchased those shares which were voted against the merger; and
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- If you voted against the merger and you wish to have purchased shares
that were voted against the merger, you must make a written demand to
have Orange National purchase those shares of Orange National for cash at
their fair market value or, in case of CVB Financial common stock, must
make written demand to have CVB Financial purchase those shares of CVB
Financial common stock for cash at their fair market value. The demand
must include the information specified below and must be received by
Orange National or its transfer agent, or CVB Financial or its transfer
agent in case of shares of CVB Financial, no later than the date of the
shareholders' meeting at which you may vote the shares.
IF YOU RETURN A PROXY WITHOUT VOTING INSTRUCTIONS OR WITH INSTRUCTIONS TO
VOTE FOR THE PROPOSAL TO APPROVE THE PRINCIPAL TERMS OF THE MERGER AGREEMENT,
YOUR SHARES WILL AUTOMATICALLY BE VOTED IN FAVOR OF THE MERGER AND YOU WILL LOSE
YOUR DISSENTERS' RIGHTS.
If the merger is approved by the Orange National shareholders, Orange
National will have 10 days after the approval to mail those shareholders who did
not vote in favor of the merger and made a timely demand for purchase, assuming
more than 5% of the Orange National shareholders made such demand, written
notice of the approval along with a copy of Sections 1300 through 1304 of
Chapter 13. In the notice of approval, Orange National must state the price it
determines represents the fair market value of the dissenting shares. This price
constitutes an offer by Orange National to purchase the dissenting shares at the
price stated. Additionally, Orange National must set forth in the approval
notice a brief description of the procedures a shareholder must follow if he or
she desires to exercise dissenters' rights.
If the merger is approved by the CVB Financial shareholders, CVB Financial
will have 10 days after the approval to mail those shareholders who did not vote
in favor of the merger and who made a timely demand for purchase, assuming more
than 5% of the CVB Financial Shareholders made such demand, written notice of
the approval along with a copy of Sections 1300 through 1304 of Chapter 13. In
the notice of approval, CVB Financial must state the price it determines
represents the fair market value of the dissenting shares. This price
constitutes an offer by CVB Financial to purchase the dissenting shares at the
price stated. Additionally, CVB Financial must set forth in the approval notice
a brief description of the procedures a shareholder must follow if he or she
desires to exercise dissenters' rights.
DEMAND FOR PURCHASE
A written demand is essential for dissenters' rights. In the written
demand, Chapter 13 requires you to specify the number shares you hold of record
which they are demanding Orange National or CVB Financial to purchase. In the
written demand, you must also include a statement of the figure they claim to be
the fair market value of those shares as of the day before the terms of the
merger were first announced, excluding any appreciation or depreciation because
of the proposed merger. It is Orange National's and CVB Financial's position
that this day is May 17, 1999. You may take the position in the written demand
that a different date is applicable. This price constitutes an offer by you to
sell the dissenting shares at the price stated.
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In addition, it is recommended that you comply with the following
conditions to ensure that the demand is properly executed and delivered:
- The demand should be sent by registered or certified mail, return receipt
requested;
- The demand should be signed by the shareholder of record, or his or her
duly authorized representative, exactly as his or her name appears on the
stock certificates evidencing the shares.
- A demand for the purchase of the shares jointly owned by more than one
person should identify and be signed by all such holders.
- Any person signing a demand for purchase in any representative capacity,
such as attorney-in-fact, executor, administrator, trustee or guardian,
should indicate his or her title, and, if Orange National so requests,
or, for CVB Financial shareholders, if CVB Financial so requests, furnish
written proof of his or her capacity and authority to sign the demand.
- A shareholder may not withdraw a demand for payment without the consent
of Orange National or CVB Financial, as the case may be.
Under California law, a demand by a shareholder is not effective for any
purpose unless it is received by Orange National, for Orange National
shareholders, or CVB Financial, for CVB Financial shareholders, or their
respective transfer agent, no later than the date of the shareholders' meeting
at which such shares are entitled to be voted.
For Orange National shareholders, within 30 days after the date on which
Orange National mails the notice of the approval of the merger, dissenting
shareholders must also submit the certificates representing the dissenting
shares to Orange National at the office it designates in the notice of approval.
Orange National will stamp or endorse the certificates with a statement that the
shares are dissenting shares or Orange National will exchange the certificates
with certificates of appropriate denomination that are so stamped or endorsed.
If a shareholder transfers any shares of Orange National common stock before
submitting the shares for endorsement, then such shares will lose their status
as dissenting shares.
For CVB Financial shareholders, within 30 days after the date on which
Orange National mails the notice of the approval of the merger, dissenting
shareholders must also submit the certificates representing the dissenting
shares to CVB Financial at the office it designates in the notice of approval.
CVB Financial will stamp or endorse the certificates with a statement that the
shares are dissenting shares or CVB Financial will exchange the certificates
with certificates of appropriate denomination that are so stamped or endorsed.
If a shareholder transfers any shares of CVB Financial common stock before
submitting the shares for endorsement, then such shares will lose their status
as dissenting shares.
If Orange National or CVB Financial and you agree that the surrendered
shares are dissenting shares and agree upon the price of the shares, you are
entitled to receive the agreed price together with interest at the legal rate on
judgments from the date of the agreement between Orange National or CVB
Financial and you. Orange National and CVB Financial will pay the fair value of
the respective dissenting shares within 30 days after Orange National or CVB
Financial and you agree upon the price of the shares or within 30 days after any
statutory or contractual conditions to the merger have been satisfied, whichever
is later. Orange National's and CVB Financial's duty to pay is subject to you
surrendering the certificates and is also subject to the restrictions imposed
under
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California law on the ability of Orange National and CVB Financial to purchase
its outstanding shares.
If Orange National or CVB Financial denies that the shares surrendered are
dissenting shares or Orange National or CVB Financial and you fail to agree upon
the fair market value of such shares, then you may, within six months after the
notice of approval is mailed, file a complaint in the Superior Court of the
proper county requesting the court to make such determinations. In the
alternative, you may intervene in any pending action brought by any other
dissenting shareholder. If you fail to file such a complaint or fails to
intervene in a pending action within the specified six-month period, your
dissenting rights are lost. If the fair market value of the dissenting shares is
at issue, the court will determine, or will appoint one or more impartial
appraisers to determine, such fair market value. The costs of the action will be
assessed or apportioned as the court considers equitable, but if the fair market
value is determined to exceed 125% of the price offered to the shareholder,
Orange National or CVB Financial will be required to pay such costs.
This summary has already described certain situations where shareholders of
Orange National or CVB Financial will cease to have dissenters' appraisal
rights. In addition to the situations described above, you will cease to have
dissenters' appraisal rights if:
- CVB Financial or Orange National abandons the merger, in which case
Orange National or CVB Financial will pay any dissenting shareholder who
has filed a complaint, as described above, all necessary expenses and
reasonable attorneys' fees incurred in such proceedings;
- you surrender your shares for conversion into shares of another class; or
- you withdraw your demand for the purchase of the dissenting shares with
the consent of Orange National or CVB Financial, as the case may be.
In addition, one condition to CVB Financial and Orange National completing
the merger is that the total cash payable to both CVB Financial and Orange
National dissenting shareholders, when combined with all other cash payable in
the merger, should not disqualify the merger from pooling of interests
accounting treatment.
For Orange National shareholders, any demands, notices, certificates or
other documents required to be delivered to Orange National may be sent to:
Robert W. Creighton, Corporate Secretary
Orange National Bancorp
1201 East Katella Avenue
Orange, California 92867
For CVB Financial shareholders, any demands, notices, certificates or other
documents required to be delivered to CVB Financial may be sent to:
Donna Marchesi, Corporate Secretary
CVB Financial Corp.
701 North Haven Avenue
Ontario, California 91764
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DESCRIPTION OF CVB FINANCIAL COMMON STOCK
AND ORANGE NATIONAL COMMON STOCK
In the merger, Orange National shareholders will exchange their shares of
Orange National common stock for shares of CVB Financial common stock. Both CVB
Financial and Orange National are California corporations subject to the
provisions of the California General Corporation Law. On consummation of the
merger, Orange National shareholders will become CVB Financial shareholders. The
articles of incorporation and bylaws of CVB Financial, in addition to the
California general corporation law, will govern their rights as CVB Financial
shareholders.
Set forth below is a summary of the material features of the CVB Financial
common stock and the Orange National common stock. Also set forth below is a
summary of the material differences between the rights of a holder of CVB
Financial common stock and a holder of Orange National common stock. This
summary is not a complete discussion of the charter documents and other
instruments of CVB Financial and Orange National that create the rights of the
security holders.
STOCK DESCRIPTION
CVB Financial. CVB Financial has authority to issue 50,000,000 shares of
CVB Financial common stock and 20,000,000 shares of preferred stock, without par
value. On the CVB Financial record date, there were 16,567,871 shares of CVB
Financial common stock outstanding. There are no shares of preferred stock
outstanding. On any matter submitted to a vote of the shareholders, holders of
CVB Financial common stock are entitled to one vote, in person or by proxy, for
each share of CVB Financial common stock held of record in the shareholder's
name on the CVB Financial books as of the record date. In connection with the
election of directors, the shares may be voted cumulatively. Each share of CVB
Financial common stock has the same rights, privileges and preferences as every
other share and will share equally in CVB Financial's net assets upon
liquidation or dissolution. CVB Financial common stock has no preemptive,
conversion or redemption rights, or sinking fund provisions.
The CVB Financial Board of Directors, without shareholder approval, may
authorize one or more classes of serial preferred stock with preferences or
voting rights that may adversely affect the rights of holders of CVB Financial
common stock. Although it is not possible to state the actual effect any
issuance of preferred stock might have upon the rights of holders of the CVB
Financial common stock, the issuance of preferred stock might
- restrict dividends on CVB Financial common stock if preferred stock
dividends have not been paid;
- dilute the voting power and equity interest of holders of CVB Financial
common stock to the extent that any preferred stock series has voting
rights or is convertible into CVB Financial common stock; or
- prevent current holders of CVB Financial common stock from participating
in CVB Financial's assets upon liquidation until any liquidation
preferences granted to the holders of the preferred stock are satisfied.
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In addition, CVB Financial's issuance of preferred stock, may, under
certain circumstances, have the effect of discouraging an attempt to change
control of CVB Financial.
CVB Financial's articles of incorporation provide that the liability of CVB
Financial Board of Directors for monetary damages shall be eliminated to the
fullest extent permissible under California law. Additionally, CVB Financial has
authority to provide for the indemnification of CVB Financial agents, as defined
in the California General Corporation Law, in excess of that expressly permitted
by Section 317 for breach of duty to the corporation and its shareholders. CVB
Financial is allowed to provide this indemnification to the extent not
prohibited by applicable sections of California law.
Shareholders are entitled to dividends when declared by the CVB Financial
Board of Directors, after satisfaction of the prior rights of holders of
outstanding preferred stock, if any, subject to certain restrictions on payment
of dividends imposed by California law.
The transfer agent and registrar for CVB Financial common stock is
ChaseMellon Shareholder Services, LLC.
Orange National. Orange National has authority to issue 20,000,000 shares
of common stock. At the record date, there were 2,000,171 shares of Orange
National common stock issued and outstanding. On any matter submitted to a vote
of the shareholders, holders of Orange National common stock are entitled to one
vote in person or by proxy, for each share of Orange National common stock held
of record in the shareholder's name on the Orange National books as of the
record date. In connection with the election of directors, the shares may be
voted cumulatively. Each share of Orange National common stock has the same
rights, privileges and preferences as every other share and will share equally
in Orange National net assets upon liquidation or dissolution. The Orange
National common stock has no preemptive, conversion or redemption rights, or
sinking fund provisions.
Orange National's articles of incorporation provide that the liability of
the Orange National board of directors shall be eliminated to the fullest extent
permissible under California law. Additionally, Orange National has authority to
provide for indemnification of Orange National agents, as defined in Section 317
of the California General Corporation Law, to the fullest extent permissible
under California law.
Orange National shall, to the maximum extent permitted under the California
General Corporation Law, advance expenses to and indemnify each of its directors
and agents against monetary damages.
Shareholders are entitled to dividends when declared by the Orange National
Board of Directors subject to certain restrictions on payment of dividends
imposed by the California law.
The transfer agent and registrar for Orange National common stock is U.S.
Stock Transfer Corporation.
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MATERIAL DIFFERENCES BETWEEN HOLDERS OF CVB FINANCIAL STOCK AND ORANGE NATIONAL
STOCK
Nomination of Directors
CVB Financial. CVB Financial shareholders must deliver notice of their
intent to nominate directors to the president of CVB Financial at least 10 days
before any shareholder meeting called for the election of directors. However,
CVB Financial shareholders may not mail or deliver their written notice more
than 60 days before such a meeting. If CVB Financial gives shareholders less
than 10 days' notice about such a meeting, then shareholders may deliver or mail
their written intent to nominate directors during the 10-day period after CVB
Financial mailed the meeting notice. Shareholders must mail or deliver the
written intent by the close of business on the tenth day. However, if CVB
Financial mails the meeting notice by third-class mail, then shareholders do not
have to notify CVB Financial of their intent to nominate directors.
Orange National. Orange National shareholders must deliver notice of their
intent to nominate directors to the president of Orange National Shareholders
must deliver or mail written notice of their intent by the later of 21 days
before any shareholder meeting called for the election of directors or 10 days
after Orange National mails the meeting notice.
EXPERTS
The consolidated financial statements of CVB Financial incorporated into
this joint proxy statement/prospectus by reference from CVB Financial's Annual
Report on Form 10-K for the year ended December 31, 1998, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
The audited consolidated financial statements of Orange National,
incorporated by reference and attached to this joint proxy statement/prospectus,
have been audited by McGladrey & Pullen LLP, independent auditors, as indicated
in their report, and are included herein upon the authority of said firm as
experts in accounting and auditing.
Representatives of Deloitte & Touche LLP are expected to be present at the
CVB Financial special meeting. Such representatives will have the opportunity to
make a statement if they desire to do so and are expected to be available to
respond to appropriate questions.
Representatives of McGladrey & Pullen LLP are expected to be present at the
Orange National special meeting. Such representatives will have the opportunity
to make a statement if they desire to do so and are expected to be available to
respond to appropriate questions.
LEGAL MATTERS
The validity of the shares of CVB Financial common stock to be issued
pursuant to the terms of the merger agreement will be passed upon for CVB
Financial by Manatt, Phelps & Phillips LLP, Los Angeles, California. The
material federal income tax consequences of the merger will be passed upon for
CVB Financial by Manatt, Phelps & Phillips LLP, Los Angeles, California.
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UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Condensed Balance Sheet as of
March 31, 1999 and December 31, 1998, combines the historical consolidated
balance sheets of CVB Financial and Orange National as if the merger had been
effective on March 31, 1999 and December 31, 1998. The Unaudited Pro Forma
Combined Condensed Statements of Income for the quarter ended March 31, 1999 and
March 31, 1998 and for the years ended December 31, 1998, 1997 and 1996 present
the combined results of operations of CVB Financial and Orange National as if
the merger had been effective at the beginning of each period. Dollars are in
thousands except for per share data.
The Unaudited Pro Forma Combined Condensed Financial Information and
accompanying notes reflect the application of the pooling of interests method of
accounting for the merger. Under this method of accounting, the recorded assets,
liabilities, shareholders' equity, income and expenses of CVB Financial and
Orange National are combined and reflected at their historical amounts except
that the balance sheet for March 31, 1999 reflects the estimated merger related
charges of $3.7 million, after income taxes and assuming a 41% effective tax
rate. The pro forma combined figures shown in the Unaudited Pro Forma Combined
Condensed Financial Information are simply arithmetical combinations of CVB
Financial's and Orange National's separate financial results; you should not
assume that CVB Financial and Orange National would have achieved the pro forma
combined results if they had actually been combined during the periods
presented.
The combined company expects to achieve merger benefits in the form of
operating cost savings. The pro forma earnings, which do not reflect any merger
costs or potential savings which are expected to result from the consolidation
of the operations of CVB Financial and Orange National, are not indicative of
the results of future operations. No assurances can be given with respect to the
ultimate level of expense savings. See "A Warning About Forward-Looking
Information" and "Risk Factors -- Uncertainties in Integrating Business
Operations and Realizing Enhanced Earnings."
For purposes of preparing these financial statements, we used the audited
consolidated financial statements which CVB Financial and Orange National
previously filed with the Securities and Exchange Commission for the years ended
December 31, 1998, 1997 and 1996 on Form 10-K. In addition, we used the
unaudited consolidated financial statements of CVB Financial and Orange National
previously filed with the Securities and Exchange Commission for the quarter
ended March 31, 1999 on Forms 10-Q to prepare the financial statements as of and
for the three-month period ended March 31, 1999.
CVB Financial and Orange National consolidated financial statements are
prepared in conformity with generally accepted accounting principles. In the
opinion of CVB Financial and Orange National, the unaudited pro forma condensed
combined financial statements include all adjustments necessary to present
fairly the results of the periods presented.
75
<PAGE> 82
UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
MARCH 31, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CVB FINANCIAL AND
PRO FORMA ORANGE NATIONAL
CVB FINANCIAL ORANGE NATIONAL ADJUSTMENTS COMBINED
------------- --------------- ----------- -----------------
<S> <C> <C> <C> <C>
ASSETS:
Federal Funds sold........... $ 25,000 $ 41,100 $ $ 66,100
Investment securities held to
maturity................... 53,503 15,901 69,404
Investment securities
available for sale......... 665,356 52,270 717,626
Loans and lease finance
receivables, net........... 679,463 143,112 822,575
---------- -------- -------- ----------
Total earning
assets............. 1,423,322 252,383 1,675,705
Cash and due from banks...... 84,303 13,886 98,189
Premises and equipment,
net........................ 22,035 5,503 27,538
Other real estate owned,
net........................ 2,293 94 2,387
Goodwill and intangibles..... 9,339 0 9,339
Other assets................. 16,642 7,188 1,528 25,358
---------- -------- -------- ----------
TOTAL................. $1,557,934 $279,054 $ 1,528 $1,838,516
========== ======== ======== ==========
LIABILITIES:
Deposits:
Noninterest-bearing........ $ 509,200 $ 94,936 $ $ 604,136
Interest-bearing........... 700,996 158,024 859,020
---------- -------- -------- ----------
Total deposits........ 1,210,196 252,960 1,463,156
Demand note issued to U.S.
Treasury................... 2,813 0 2,813
Repurchase Agreement......... 205,000 0 205,000
Securities purchased not
settled.................... 1,640 0 1,640
Other liabilities............ 20,815 1,939 3,727 26,481
---------- -------- -------- ----------
Total liabilities..... 1,440,464 254,899 3,727 1,699,090
STOCKHOLDERS' EQUITY
Common Stock............... 94,684 8,081 102,765
Retained Earnings.......... 23,322 16,170 (2,199) 37,293
Accumulated other
comprehensive income
(losses)................ (536) (96) (632)
---------- -------- -------- ----------
Total Stockholders'
equity............. 117,470 24,155 (2,199) 139,426
---------- -------- -------- ----------
TOTAL................. $1,557,934 $279,054 $ 1,528 $1,838,516
========== ======== ======== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial data.
76
<PAGE> 83
UNAUDITED PRO FORMA
COMBINED BALANCE SHEET
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CVB FINANCIAL AND
ORANGE NATIONAL
CVB FINANCIAL ORANGE NATIONAL COMBINED
------------- --------------- -----------------
<S> <C> <C> <C>
ASSETS:
Federal Funds sold................. $ 0 $ 57,390 $ 57,390
Investment securities held to
maturity......................... 53,859 17,640 71,499
Investment securities available for
sale............................. 676,162 40,649 716,811
Loans and lease finance
receivables, net................. 675,668 140,140 815,808
---------- -------- ----------
Total earning assets........ 1,405,689 255,819 1,661,508
Cash and due from banks............ 100,033 17,541 117,574
Premises and equipment, net........ 22,333 5,438 27,771
Other real estate owned, net....... 2,102 0 2,102
Goodwill and intangibles........... 9,635 0 9,635
Other Assets....................... 15,415 7,064 22,479
---------- -------- ----------
TOTAL....................... $1,555,207 $285,862 $1,841,069
========== ======== ==========
LIABILITIES:
Deposits:
Noninterest-bearing........... $ 538,808 $ 99,875 $ 638,683
Interest-bearing.............. 676,497 160,459 836,956
---------- -------- ----------
Total deposits.............. 1,215,305 260,334 1,475,639
Demand note issued to U.S.
Treasury......................... 95 0 95
Repurchase Agreement............... 200,000 0 200,000
Securities purchased not settled... 5,000 0 5,000
Other liabilities.................. 19,100 1,805 20,905
---------- -------- ----------
Total liabilities........... 1,439,500 262,139 1,701,639
STOCKHOLDERS' EQUITY
Common Stock....................... 94,529 8,036 102,565
Retained Earnings.................. 19,799 15,718 35,517
Accumulated other comprehensive
income (losses).................. 1,379 (31) 1,348
---------- -------- ----------
Total Stockholders'
equity................... 115,707 23,723 139,430
---------- -------- ----------
TOTAL....................... $1,555,207 $285,862 $1,841,069
========== ======== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial data.
77
<PAGE> 84
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF EARNINGS
FOR THE QUARTER ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CVB FINANCIAL AND
ORANGE NATIONAL
CVB FINANCIAL ORANGE NATIONAL COMBINED
------------- --------------- -----------------
<S> <C> <C> <C>
Interest Income:
Loans, including fees............. $15,191 $3,297 $18,488
Investment securities
Taxable........................ 9,568 910 10,478
Tax-advantaged................. 1,247 0 1,247
------- ------ -------
10,815 910 11,725
Federal funds sold and interest
bearing deposits with other
financial institutions......... 11 457 468
------- ------ -------
Total interest income..... 26,017 4,664 30,681
Interest Expense:
Deposits.......................... 5,214 1,033 6,247
Other borrowings.................. 3,035 0 3,035
------- ------ -------
8,249 1,033 9,282
------- ------ -------
Net interest income.......... 17,768 3,631 21,399
Provision for credit losses......... 600 70 670
------- ------ -------
Net interest income after
provision for credit losses.... 17,168 3,561 20,729
Other Operating Income:
Service charges on deposit
accounts....................... 2,153 363 2,516
Trust services.................... 1,030 0 1,030
Other............................. 614 343 957
------- ------ -------
3,797 706 4,503
Other Operating Expenses:
Salaries, wages and employee
benefits....................... 6,017 1,526 7,543
Occupancy......................... 1,002 315 1,317
Equipment......................... 1,058 196 1,254
Stationery and supplies........... 712 166 878
Professional services............. 1,156 196 1,352
Promotion......................... 745 128 873
Data processing................... 273 249 522
Other real estate owned expense... 145 0 145
Other............................. 1,040 255 1,295
------- ------ -------
12,148 3,031 15,179
------- ------ -------
Earnings before income taxes........ 8,817 1,236 10,053
Income taxes........................ 3,304 484 3,788
------- ------ -------
Net earnings................. $ 5,513 $ 752 $ 6,265
======= ====== =======
Basic earnings per common share..... $ 0.33 $ 0.38 $ 0.32
======= ====== =======
Diluted earnings per common share... $ 0.32 $ 0.37 $ 0.31
======= ====== =======
Weighted Average Shares Outstanding
Basic............................. 16,556 1,999 19,555
Diluted........................... 17,125 2,040 20,185
</TABLE>
See accompanying notes to unaudited pro forma combined financial data.
78
<PAGE> 85
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF EARNINGS
FOR THE YEAR QUARTER ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CVB FINANCIAL AND
ORANGE NATIONAL
CVB FINANCIAL ORANGE NATIONAL COMBINED
------------- --------------- -----------------
<S> <C> <C> <C>
Interest Income:
Loans, including fees............. $15,073 $3,345 $18,418
Investment securities:
Taxable........................ 6,787 245 7,032
Tax-advantaged................. 906 0 906
------- ------ -------
7,693 245 7,938
Federal funds sold and interest
bearing deposits with other
financial institutions......... 82 569 651
------- ------ -------
Total interest income........ 22,848 4,159 27,007
Interest expense:
Deposits.......................... 5,790 881 6,671
Other borrowings.................. 1,226 0 1,226
------- ------ -------
7,016 881 7,897
------- ------ -------
Net interest income............ 15,832 3,278 19,110
Provision for credit losses......... 850 0 850
------- ------ -------
Net interest income after
provision for credit losses.... 14,982 3,278 18,260
Other Operating Income:
Service charges on deposit
accounts....................... 1,742 384 2,126
Trust services.................... 886 0 886
Other............................. 1,368 487 1,855
------- ------ -------
3,996 871 4,867
Other Operating Expenses:
Salaries, wages and employee
benefits....................... 5,639 1,520 7,159
Occupancy......................... 1,083 345 1,428
Equipment......................... 894 172 1,066
Stationery and supplies........... 638 194 832
Professional services............. 707 233 940
Promotion......................... 538 185 723
Data processing................... 239 230 469
Other real estate owned expense... 678 6 684
Other............................. 945 208 1,153
------- ------ -------
11,361 3,093 14,454
------- ------ -------
Earnings before income taxes........ 7,617 1,056 8,673
Income taxes........................ 2,852 396 3,248
------- ------ -------
Net earnings................. $ 4,765 $ 660 $ 5,425
======= ====== =======
Basic earnings per common share..... $ 0.29 $ 0.33 $ 0.28
======= ====== =======
Diluted earnings per common share... $ 0.28 $ 0.32 $ 0.27
======= ====== =======
Weighted Average Shares Outstanding:
Basic............................. 16,535 1,976 19,499
Diluted........................... 17,269 2,043 20,334
</TABLE>
See accompanying notes to unaudited pro forma combined financial data.
79
<PAGE> 86
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CVB FINANCIAL AND
ORANGE NATIONAL
CVB FINANCIAL ORANGE NATIONAL COMBINED
------------- --------------- -----------------
<S> <C> <C> <C>
Interest Income:
Loans, including fees..................... $60,207 $14,633 $ 74,840
Investment securities:
Taxable................................ 31,783 1,602 33,385
Tax-advantaged......................... 4,370 0 4,370
------- ------- --------
36,153 1,602 37,755
Federal funds sold and interest bearing
deposits with other financial
institutions........................... 479 2,881 3,360
------- ------- --------
Total interest income............. 96,839 19,116 115,955
Interest Expense:
Deposits.................................. 23,786 4,165 27,951
Other borrowings.......................... 7,462 0 7,462
------- ------- --------
31,248 4,165 35,413
------- ------- --------
Net interest income.................. 65,591 14,951 80,542
Provision for credit losses................. 2,500 100 2,600
------- ------- --------
Net interest income after provision for
credit losses.......................... 63,091 14,851 77,942
Other Operating Income:
Service charges on deposit accounts....... 7,616 1,194 8,810
Trust services............................ 3,472 0 3,472
Other..................................... 3,888 1,589 5,477
------- ------- --------
14,976 2,783 17,759
Other Operating Expenses:
Salaries, wages and employee benefits..... 22,700 6,138 28,838
Occupancy................................. 3,779 1,330 5,109
Equipment................................. 3,891 754 4,645
Stationery and supplies................... 2,703 671 3,374
Professional services..................... 3,802 603 4,405
Promotion................................. 2,012 485 2,497
Data processing........................... 951 977 1,928
Deposit insurance premiums................ 123 97 220
Other real estate owned expense........... 1,194 17 1,211
Other..................................... 3,869 1,085 4,954
------- ------- --------
45,024 12,157 57,181
------- ------- --------
Earnings before income taxes................ 33,043 5,477 38,520
Income taxes................................ 12,256 2,147 14,403
------- ------- --------
Net earnings......................... $20,787 $ 3,330 $ 24,117
======= ======= ========
Basic earnings per common share............. $ 1.26 $ 1.67 $ 1.23
======= ======= ========
Diluted earnings per common share........... $ 1.21 $ 1.64 $ 1.19
======= ======= ========
Weighted Average Shares Outstanding:
Basic..................................... 16,556 1,989 19,540
Diluted................................... 17,221 2,036 20,275
</TABLE>
See accompanying notes to unaudited pro forma combined financial data.
80
<PAGE> 87
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CVB FINANCIAL AND
ORANGE NATIONAL
CVB FINANCIAL ORANGE NATIONAL COMBINED
------------- --------------- -----------------
<S> <C> <C> <C>
Interest Income:
Loans, including fees...................... $58,135 $13,686 $ 71,821
Investment securities:
Taxable................................. 23,717 1,573 25,290
Tax-advantaged.......................... 2,553 0 2,553
------- ------- --------
26,270 1,573 27,843
Federal funds sold and interest bearing
deposits with other financial
institutions............................ 250 1,598 1,848
------- ------- --------
Total interest income.............. 84,655 16,857 101,512
Interest Expense:
Deposits................................... 21,051 3,353 24,404
Other borrowings........................... 3,924 0 3,924
------- ------- --------
24,975 3,353 28,328
------- ------- --------
Net Interest Income................ 59,680 13,504 73,184
Provision for credit losses.................. 2,670 140 2,810
------- ------- --------
Net interest income after provision for
credit
losses.................................. 57,010 13,364 70,374
Other Operating Income:
Service charges on deposit accounts........ 7,350 1,262 8,612
Trust services............................. 3,161 0 3,161
Other...................................... 3,312 2,445 5,757
------- ------- --------
13,823 3,707 17,530
Other Operating Expenses:
Salaries, wages and employee Benefits...... 21,654 6,259 27,913
Occupancy.................................. 3,435 1,134 4,569
Equipment.................................. 3,364 704 4,068
Stationery and supplies.................... 2,622 621 3,243
Professional services...................... 2,296 518 2,814
Promotion.................................. 2,092 459 2,551
Data processing............................ 889 888 1,777
Deposit insurance premiums................. 113 88 201
Other real estate owned expense............ 2,689 94 2,783
Other...................................... 3,736 1,011 4,747
------- ------- --------
42,890 11,776 54,666
------- ------- --------
Earnings before income taxes................. 27,943 5,295 33,238
Income taxes................................. 10,573 2,097 12,670
------- ------- --------
Net earnings.......................... $17,370 $ 3,198 $ 20,568
======= ======= ========
Basic earnings per common share.............. $ 1.05 $ 1.63 $ 1.06
======= ======= ========
Diluted earnings per common share............ $ 1.01 $ 1.60 $ 1.02
======= ======= ========
Weighted Average Shares Outstanding:
Basic...................................... 16,485 1,961 19,427
Diluted.................................... 17,148 2,000 20,148
</TABLE>
See accompanying notes to unaudited pro forma combined financial data.
81
<PAGE> 88
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CVB FINANCIAL AND
ORANGE NATIONAL
CVB FINANCIAL ORANGE NATIONAL COMBINED
------------- --------------- -----------------
<S> <C> <C> <C>
Interest Income:
Loans, including fees..................... $54,452 $11,712 $66,164
Investment securities:
Taxable................................ 18,613 2,627 21,240
Tax-advantaged......................... 1,318 0 1,318
------- ------- -------
19,931 2,627 22,558
Federal funds sold and interest bearing
deposits with other financial
institutions........................... 512 1,555 2,067
------- ------- -------
Total interest income............. 74,895 15,894 90,789
Interest Expense:
Deposits.................................. 18,740 3,519 22,259
Other borrowings.......................... 2,727 0 2,727
------- ------- -------
21,467 3,519 24,986
------- ------- -------
Net interest income.................. 53,428 12,375 65,803
Provision for credit losses................. 2,888 205 3,093
------- ------- -------
Net interest income after provision for
credit losses.......................... 50,540 12,170 62,710
Other Operating Income:
Service charges on deposit accounts....... 7,177 1,169 8,346
Trust services............................ 2,327 0 2,327
Litigation settlement..................... 2,100 0 2,100
Other..................................... 2,674 1,544 4,218
------- ------- -------
14,278 2,713 16,991
Other Operating Expenses:
Salaries, wages and employee benefits..... 20,013 6,098 26,111
Occupancy................................. 3,217 1,153 4,370
Equipment................................. 3,111 633 3,744
Stationery and supplies................... 2,438 632 3,070
Professional services..................... 1,985 627 2,612
Promotion................................. 2,159 429 2,588
Data processing........................... 903 928 1,831
Deposit insurance premiums................ 2 68 70
Other real estate owned expense........... 4,706 217 4,923
Other..................................... 3,375 762 4,137
------- ------- -------
41,909 11,547 53,456
------- ------- -------
Earnings before income taxes................ 22,909 3,336 26,245
Income taxes................................ 9,576 1,135 10,711
------- ------- -------
Net earnings......................... $13,333 $ 2,201 $15,534
======= ======= =======
Basic earnings per common share............. $ 0.81 $ 1.13 $ 0.80
======= ======= =======
Diluted earnings per common share........... $ 0.79 $ 1.13 $ 0.78
======= ======= =======
Weighted Average Shares Outstanding:
Basic..................................... 16,382 1,944 19,298
Diluted................................... 16,961 1,951 19,888
</TABLE>
See accompanying notes to unaudited pro forma combined financial data.
82
<PAGE> 89
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
CVB Financial has agreed to acquire Orange National for a fixed exchange
ratio of 1.5 CVB Financial shares of common stock for each Orange National share
of common stock. Since these are pro forma statements, we cannot assure that the
amounts reflected in these financial statements would have been representative
of the actual amounts earned had the companies been combined at that time.
Certain information presented in the historical information on Orange
National may have been reclassified to aid in the proper presentation of these
pro forma condensed combined financial statements.
2. PRO FORMA ADJUSTMENTS
Shareholders' equity -- We have adjusted the number of shares outstanding
for the issuance of 1.5 shares of CVB Financial common stock for each 1 share of
Orange National common stock. In addition, the merger calls for the stock
options of Orange National to be converted into the stock options of CVB
Financial at the same ratio of 1.5 CVB Financial common stock option for 1
Orange National common stock option. We have adjusted the shares outstanding for
each period presented to reflect this same exchange ratio in the past.
We have based the pro forma combined net income per share on net income and
the weighted average number of outstanding common shares. Net income per common
share dilution includes the dilutive effect of stock options. We have adjusted
the weighted average number of outstanding common shares to reflect the
conversion of each share of Orange National common stock into 1.5 shares of CVB
Financial common stock.
3. MERGER RELATED CHARGES
While we cannot accurately determine the total merger related charges at
this time, we estimate that we will incur the following charges:
<TABLE>
<S> <C>
Employee Costs............................................. $1,642,000
Investment Bankers......................................... 740,000
Professional Fees.......................................... 745,000
Data Processing............................................ 600,000
----------
$3,727,000
</TABLE>
We will expense costs as incurred, some of which will be prior to the
merger, and some of which will be after the merger.
Our cost estimates are forward-looking. While the costs represent our
supportable current estimate of merger costs we will incur, the ultimate level
and timing of recognition of such costs will be based on the final merger and
integration plan.
83
<PAGE> 90
WHERE YOU CAN FIND MORE INFORMATION
CVB Financial and Orange National file annual, quarterly and current
reports, proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements or other information
that the companies file at the Commission's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the
Commission at 1-800-SEC-0330 for further information on the public reference
rooms. CVB Financial and Orange National public filings are also available to
the public from commercial document retrieval services and at the Internet World
Wide Web site maintained by the Commission at "http:// www.sec.gov."
CVB Financial has filed the Registration Statement to register with the
Securities and Exchange Commission the shares of CVB Financial common stock to
be issued to Orange National shareholders in the merger. This document is a part
of the Registration Statement and constitutes a prospectus of CVB Financial and
a joint proxy statement of Orange National and CVB Financial for their special
meetings.
As allowed by Commission rules, this document does not contain all the
information that shareholders can find in the Registration Statement or the
exhibits to the Registration Statement. The Commission allows CVB Financial and
Orange National to "incorporate by reference" certain information into this
document, which means that the company can disclose important information to you
by referring you to another document filed separately with the Commission. The
information incorporated by reference is deemed to be a part of this document,
except for any information which contradicts information contained directly in
this document. This document incorporates by reference the documents set forth
below that CVB Financial and Orange National have previously filed with the
Commission. These documents contain important business information about CVB
Financial and Orange National and their respective financial condition that is
not included or delivered with this document.
<TABLE>
<CAPTION>
CVB FINANCIAL
COMMISSION FILINGS (FILE NO. 1-10394) PERIOD
------------------------------------- ------
<S> <C>
Annual Report on Form 10-K....................... Year ended December 31, 1998.
Quarterly Report on Form 10-Q.................... Period ended March 31, 1999.
Proxy statement for 1999 Annual Meeting of
Shareholders................................... 1999
Current Report on Form 8-K....................... May 18, 1999
</TABLE>
<TABLE>
<CAPTION>
ORANGE NATIONAL
COMMISSION FILINGS (FILE NO. 33-8743)
-------------------------------------
<S> <C>
Annual Report on Form 10-K....................... Year ended December 31, 1998
This report is attached as
Annex F.
Quarterly Report on Form 10-Q.................... Period ended March 31, 1999.
This report is attached as
Annex G.
Proxy Statement for 1999 Annual Meeting of
Shareholders................................... 1999
Current Report on Form 8-K....................... May 18, 1999
</TABLE>
CVB Financial incorporates by reference additional documents that it may
file with the Commission between the date of this document and the date of the
special shareholder
84
<PAGE> 91
meeting. These include periodic reports, such as Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K.
CVB Financial has supplied all information contained or incorporated by
reference in this document relating to CVB Financial, and Orange National has
supplied all information contained or incorporated by reference in this document
information relating to Orange National.
Shareholders of CVB Financial or Orange National may obtain documents
incorporated by reference through CVB Financial or Orange National or the
Commission or the Commission's Internet World Wide Web site described above.
Documents incorporated by reference are available from CVB Financial or Orange
National without charge, excluding all exhibits, unless specifically
incorporated by reference as an exhibit to this document. You may obtain
documents incorporated by reference in this document by requesting them in
writing or by telephone at the following:
CVB FINANCIAL
701 North Haven Avenue
Ontario, California 91764
Telephone: (909) 980-4030
Attention: Donna Marchesi
ORANGE NATIONAL
1201 East Katella Avenue
Orange, California 92867
Telephone: (714) 771-4000
Attention: Robert W. Creighton
IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM CVB FINANCIAL OR ORANGE
NATIONAL, PLEASE DO SO AT LEAST FIVE BUSINESS DAYS BEFORE THE DATE OF YOUR
SHAREHOLDERS' MEETING IN ORDER TO RECEIVE TIMELY DELIVERY OF SUCH DOCUMENTS
PRIOR TO YOUR SHAREHOLDERS' MEETING.
You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the CVB Financial special
meeting or the Orange National special meeting. CVB Financial and Orange
National have not authorized anyone to provide you with information that is
different from what is contained in this document. This document is dated June
, 1999. You should not assume that the information contained in this document
is accurate as of any date other than that date, and neither the mailing of this
document to shareholders nor the issuance of CVB Financial common stock in the
merger creates any implication to the contrary.
85
<PAGE> 92
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
CVB FINANCIAL CORP.
AND
ORANGE NATIONAL BANCORP
MAY 18, 1999
<PAGE> 93
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
AGREEMENT AND PLAN OF REORGANIZATION................................... A-1
ARTICLE 1. DEFINITIONS................................................ A-1
ARTICLE 2. TERMS OF MERGER AND BANK MERGER............................ A-7
2.1 Effect of Merger and Surviving Corporation.................. A-7
2.2 Stock of ONB................................................ A-7
2.2.1 Conversion of ONB Stock.............................. A-7
2.2.2 ONB Perfected Dissenting Shares...................... A-7
2.2.3 Shares Held by CVB or CBB............................ A-7
2.2.4 Dividends, Splits Etc. .............................. A-7
2.3 Effect on CVB Stock......................................... A-8
2.4 Fractional Shares........................................... A-8
2.5 Exchange Procedures......................................... A-8
2.6 Directors of Surviving Corporation.......................... A-10
2.7 Executive Officers of Surviving Corporation................. A-10
2.8 Effect of Bank Merger and Surviving Bank.................... A-10
2.9 Directors of Surviving Bank................................. A-10
2.10 Executive Officers of Surviving Bank........................ A-10
ARTICLE 3. THE CLOSING................................................ A-11
3.1 Closing Date................................................ A-11
3.2 Execution of Agreements..................................... A-11
3.3 Further Assurances.......................................... A-11
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF ONB...................... A-11
4.1 Incorporation, Standing and Power........................... A-11
4.2 Capitalization.............................................. A-12
4.3 Subsidiaries................................................ A-12
4.4 Financial Statements........................................ A-12
4.5 Reports and Filings......................................... A-13
4.6 Authority of ONB............................................ A-13
4.7 Insurance................................................... A-14
4.8 Personal Property........................................... A-14
4.9 Real Estate................................................. A-14
4.10 Litigation.................................................. A-15
4.11 Taxes....................................................... A-15
4.12 Compliance with Laws and Regulations........................ A-17
4.13 Performance of Obligations.................................. A-18
4.14 Employees................................................... A-19
4.15 Brokers and Finders......................................... A-19
4.16 Material Contracts.......................................... A-19
4.17 Certain Material Changes.................................... A-21
4.18 Licenses and Permits........................................ A-21
4.19 Undisclosed Liabilities..................................... A-21
4.20 Employee Benefit Plans...................................... A-22
4.21 Corporate Records........................................... A-24
4.22 Accounting Records.......................................... A-24
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
4.23 Offices and ATMs............................................ A-24
4.24 Operating Losses............................................ A-25
4.25 Loan Portfolio.............................................. A-25
4.26 Investment Securities....................................... A-25
4.27 Power of Attorney........................................... A-25
4.28 Facts Affecting Regulatory Approvals........................ A-25
4.29 Accounting and Tax Matters.................................. A-25
4.30 Indemnification............................................. A-26
4.31 Community Reinvestment Act.................................. A-26
4.32 Derivative Transactions..................................... A-26
4.33 Trust Administration........................................ A-26
4.34 Disclosure Documents and Applications....................... A-26
4.35 Intellectual Property....................................... A-27
4.36 Year 2000................................................... A-27
4.37 Insider Loans; Other Transactions........................... A-27
4.38 Registration Obligation..................................... A-27
4.40 Accuracy and Currentness of Information Furnished........... A-27
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF CVB...................... A-28
5.1 Incorporation, Standing and Power........................... A-28
5.2 Capitalization.............................................. A-28
5.3 Financial Statements........................................ A-28
5.4 Reports and Filings......................................... A-28
5.5 Authority................................................... A-29
5.6 Subsidiaries................................................ A-30
5.7 Brokers and Finders......................................... A-30
5.8 Insurance................................................... A-30
5.9 Certain Material Changes.................................... A-30
5.10 Licenses and Permits........................................ A-30
5.11 Compliance with Laws and Regulations........................ A-31
5.12 Corporate Records........................................... A-31
5.13 Accounting Records.......................................... A-31
5.14 Facts Affecting Regulatory Approvals........................ A-31
5.15 Accounting and Tax Matters.................................. A-31
5.16 Disclosure Documents and Applications....................... A-31
5.17 AMEX Listing................................................ A-32
5.18 Employees................................................... A-32
5.19 Year 2000................................................... A-32
5.20 Litigation.................................................. A-32
5.21 Taxes....................................................... A-32
5.22 Performance of Obligations.................................. A-33
5.23 Employee Benefit Plans...................................... A-33
5.24 Community Reinvestment Act.................................. A-33
5.25 Derivative Transactions..................................... A-34
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
5.26 Intellectual Property....................................... A-34
5.27 Accuracy and Currentness of Information Furnished........... A-34
ARTICLE 6. COVENANTS OF ONB PENDING EFFECTIVE TIME OF THE MERGER......
A-34
6.1 Limitation on Conduct Prior to Effective Time of the A-34
Merger......................................................
6.2 Affirmative Conduct Prior to Effective Time of the Merger... A-38
6.3 Access to Information....................................... A-39
6.4 Review by Accountants....................................... A-40
6.5 Filings..................................................... A-40
6.6 Notices; Reports............................................ A-40
6.7 ONB Shareholders' Meeting................................... A-40
6.8 Certain Loans and Other Extensions of Credit................ A-41
6.9 Applications................................................ A-41
6.10 Affiliate Agreements........................................ A-41
6.11 Coordination of Dividends................................... A-42
6.12 Bank Merger................................................. A-42
6.13 Mortgage Brokerage.......................................... A-42
ARTICLE 7. COVENANTS OF CVB PENDING EFFECTIVE TIME OF THE MERGER......
A-42
7.1 Limitation on Conduct Prior to Effective Time of the A-42
Merger......................................................
7.2 Affirmative Conduct of CVB and Subsidiaries Prior to A-43
Effective Time of the Merger................................
7.3 Access to Information....................................... A-43
7.4 Filings..................................................... A-43
7.5 Applications................................................ A-44
7.6 Blue Sky.................................................... A-44
7.7 Notices; Reports............................................ A-44
7.8 Removal of Conditions....................................... A-44
7.9 Stock Options............................................... A-44
7.10 Reservation, Issuance and Registration of CVB Stock......... A-45
7.11 AMEX Listing................................................ A-45
7.12 CVB Shareholders' Meeting................................... A-45
ARTICLE 8. ADDITIONAL COVENANTS....................................... A-46
8.1 Best Efforts................................................ A-46
8.2 Public Announcements........................................ A-46
8.3 Environmental Assessment and Remediation.................... A-46
8.4 Execution of Stock Option Agreement......................... A-47
ARTICLE 9. CONDITIONS PRECEDENT TO THE MERGER......................... A-47
9.1 Shareholder Approval........................................ A-47
9.2 No Judgments or Orders...................................... A-47
9.3 Regulatory Approvals........................................ A-47
9.4 Securities Laws............................................. A-47
9.5 Listing..................................................... A-47
9.6 Tax Opinions................................................ A-47
9.7 Pooling of Interests........................................ A-48
</TABLE>
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<TABLE>
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<C> <S> <C>
ARTICLE 10. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ONB............ A-48
10.1 Legal Opinion............................................... A-48
10.2 Representations and Warranties; Performance of Covenants.... A-48
10.3 Authorization of Merger..................................... A-48
10.4 Absence of Certain Changes.................................. A-49
10.5 Officers' Certificate....................................... A-49
10.6 Fairness Opinion............................................ A-49
ARTICLE 11. CONDITIONS PRECEDENT TO OBLIGATIONS OF CVB................ A-49
11.1 Legal Opinion............................................... A-49
11.2 Representations and Warranties; Performance of Covenants.... A-49
11.3 Authorization of Mergers.................................... A-50
11.4 Third-Party Consents........................................ A-50
11.5 Absence of Certain Changes.................................. A-50
11.6 Officers' Certificate....................................... A-50
11.7 Fairness Opinion............................................ A-50
11.8 Shareholder's Agreements.................................... A-50
11.9 Agreements Not to Compete................................... A-50
11.10 Affiliates Agreements....................................... A-50
11.11 Employee Benefit Plans...................................... A-50
11.12 Dissenting Shares........................................... A-51
11.13 Resignations................................................ A-51
ARTICLE 12. EMPLOYEE BENEFITS......................................... A-51
12.1 Employee Benefits........................................... A-51
ARTICLE 13. TERMINATION............................................... A-51
13.1 Termination................................................. A-51
13.2 Termination Date............................................ A-52
13.3 Effect of Termination....................................... A-52
13.4 Force Majeure............................................... A-52
ARTICLE 14. MISCELLANEOUS............................................. A-53
14.1 Expenses.................................................... A-53
14.2 Notices..................................................... A-53
14.3 Successors and Assigns...................................... A-54
14.4 Counterparts................................................ A-54
14.5 Effect of Representations and Warranties.................... A-54
14.6 Third Parties............................................... A-54
14.7 Lists; Exhibits; Integration................................ A-54
14.8 Knowledge................................................... A-54
14.9 Governing Law............................................... A-55
14.10 Captions.................................................... A-55
14.11 Severability................................................ A-55
14.12 Waiver and Modification; Amendment.......................... A-55
14.13 Attorneys' Fees............................................. A-55
EXHIBIT LIST........................................................... A-57
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made and entered
into as of the 18th day of May 1999, by and between CVB FINANCIAL CORP., a
California corporation ("CVB"), and ORANGE NATIONAL BANCORP, a California
corporation ("ONB").
WHEREAS, the Boards of Directors of CVB and ONB deem advisable and in the
best interests of their respective shareholders the merger of ONB with and into
CVB (the "Merger") upon the terms and conditions set forth herein and in
accordance with the California General Corporation Law (the "CGCL") (CVB,
following the effectiveness of the Merger, being hereinafter sometimes referred
to as the "Surviving Corporation");
WHEREAS, the Boards of Directors of CVB and ONB have approved the Merger
pursuant to this Agreement and the Agreement of Merger by and between CVB and
ONB (the "Agreement of Merger"), in substantially the form of Exhibit A attached
hereto, pursuant to which ONB will merge with and into CVB and each outstanding
share of ONB common stock, no par value ("ONB Stock"), excluding any ONB
Perfected Dissenting Shares (as defined below), will be converted into the right
to receive a specified amount of CVB common stock, no par value ("CVB Stock"),
upon the terms and subject to the conditions set forth herein; and
WHEREAS, the Boards of Directors of CVB and ONB deem advisable and in the
best interests of their respective shareholders that immediately following the
Merger, upon the terms and conditions set forth in the Agreement of Bank Merger,
substantially in the form of Exhibit B attached hereto, and in accordance with
the CGCL and the California Financial Code (the "CFC"), that Orange National
Bank, a national banking association ("Orange"), be merged (the "Bank Merger")
with, and into, Citizens Business Bank, a California banking corporation ("CBB")
(Citizens Business Bank, following the effectiveness of the Bank Merger, being
hereinafter sometimes referred to as the "Surviving Bank");
WHEREAS, the Merger and the Bank Merger are each intended to qualify as a
tax-free reorganization within the meaning of the provisions of Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, on the basis of the foregoing recitals and in consideration
of the mutual covenants, agreements, representations and warranties contained
herein, the parties hereto do covenant and agree as follows:
ARTICLE 1.
DEFINITIONS
Except as otherwise expressly provided for in this Agreement, or unless the
context otherwise requires, as used throughout this Agreement the following
terms shall have the respective meanings specified below:
"Affiliate" of, or a person "Affiliated" with, a specific person(s) is a
person that directly or indirectly, through one or more intermediaries,
controls, or is controlled by, or is under common control with, the person(s)
specified.
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"Affiliated Group" means, with respect to any entity, a group of entities
required or permitted to file consolidated, combined or unitary Tax Returns (as
defined herein).
"Agreement of Merger" has the meaning set forth in the second recital of
this Agreement.
"Agreement of Bank Merger" has the meaning set forth in the third recital
of this Agreement.
"AMEX" means the American Stock Exchange or any successor thereto.
"Average Closing Price" means the average of the daily closing price of a
share of CVB Stock reported on the American Stock Exchange during the 15
consecutive trading days ending at the end of the fifth trading day immediately
preceding the Effective Time of the Merger (as defined herein).
"Bank Merger" means the merger of Orange with and into CBB.
"Benefit Arrangements" has the meaning set forth in Section 4.20.2.
"BHC Act" means the Bank Holding Company Act of 1956, as amended.
"Business Day" means any day other than a Saturday, Sunday or day on which
a bank chartered under the laws of the State of California is closed.
"CBB" means Citizens Business Bank, a wholly owned subsidiary of CVB.
"CFC" means California Financial Code.
"CGCL" has the meaning set forth in the second recital of this Agreement.
"CVB" means CVB Financial Corp.
"Certificates" has the meaning set forth in Section 2.5.2.
"Classified Credits" has the meaning set forth in Section 6.8.
"Closing" means the consummation of the Merger and the Bank Merger provided
for in Article 2 of this Agreement on the Closing Date (as defined herein) at
the offices of Manatt, Phelps & Phillips, LLP, 11355 West Olympic Boulevard, Los
Angeles, California 90064, or at such other place as the parties may agree upon.
"Closing Date" means the date which is the first Friday, or such other day
mutually agreed to by the parties hereto, which follows the last to occur of (i)
the approval of this Agreement and the transactions contemplated hereby by the
shareholders of ONB and CVB, as necessary, (ii) the receipt of all permits,
authorizations, approvals and consents specified in Section 9.3 hereof, and
(iii) the expiration of all applicable notice and waiting periods under the law;
provided, however, that if the Closing shall not have occurred by December 15,
1999, CVB shall have the discretion to delay the Closing until the first Friday
after January 15, 2000 following the last to occur of (i), (ii) and (iii) above.
"Code" shall have the meaning set forth in the fourth recital of this
Agreement.
"Commissioner" means the Commissioner of the Department of Financial
Institutions of the State of California.
"Competing Transaction" has the meaning set forth in Section 6.1.14.
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"Comptroller" means the Comptroller of the Currency.
"Conversion Ratio" has the meaning set forth in Section 2.2.1.
"Covered Person" has the meaning set forth in Section 4.30.
"CVB 401(k) Plan" means the CVB Financial Corp. 401(k) Profit Sharing Plan.
"CVB Conflicts and Consents List" has the meaning set forth in Section 5.5.
"CVB Derivatives List" has the meaning set forth in Section 5.25.
"CVB Dissenting Shares" means any shares of CVB Stock held by "dissenting
shareholders" within the meaning of Chapter 13 of the CGCL.
"CVB Filings" has the meaning set forth in Section 5.4.
"CVB Intellectual Property List" has the meaning set forth in Section 5.26.
"CVB Litigation List" has the meaning set forth in Section 5.20.
"CVB Perfected Dissenting Shares" means any CVB Dissenting Shares which the
holders thereof have not withdrawn or caused to lose their status as CVB
Dissenting Shares.
"CVB Shareholders Meeting" means the meeting of CVB's shareholders referred
to in 7.12.
"CVB Stock" has the meaning set forth in the second recital of this
Agreement.
"CVB Stock Option Plan" means the CVB Financial Corp. 1991 Stock Option
Plan, as amended.
"CVB Supplied Information" has the meaning set forth in Section 5.16.
"CVB Tax List" has the meaning set forth in Section 5.21.
"Deloitte & Touche" means Deloitte & Touche, LLP, CVB's independent
accountants.
"DFI" means the Department of Financial Institutions of the State of
California.
"Effective Time of the Merger" means the date upon which the Merger is
consummated and the Agreement of Merger is filed with the Secretary of State of
the State of California.
"Effective Time of the Bank Merger" means the date upon which the Bank
Merger is consummated and the Agreement of Bank Merger, bearing the
certification of the California Secretary of State, is filed with the
Commissioner of Financial Institutions.
"Employee Plans" has the meaning set forth in Section 4.20.1.
"Encumbrance" shall mean any option, pledge, security interest, lien,
charge, encumbrance or restriction (whether on voting or disposition or
otherwise), whether imposed by agreement, understanding, law or otherwise.
"Environmental Regulations" has the meaning set forth in Section 4.12.2.
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"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliates" has the meaning set forth in Section 4.20.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means ChaseMellon Shareholder Services, LLC or such other
agent(s) designated by CVB.
"Exchange Fund" has the meaning set forth in Section 2.5.1 hereof.
"FDIC" means the Federal Deposit Insurance Corporation.
"Financial Statements of CVB" means (i) the audited consolidated financial
statements of CVB consisting of the consolidated balance sheets as of December
31, 1995, 1996, 1997 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years then ended and the
related notes thereto and related opinions thereon for the years then ended, and
(ii) the unaudited consolidated balance sheet as of March 31, 1999, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the period then ended, and the related notes thereto.
"Financial Statements of ONB" means (i) the audited consolidated financial
statements of ONB consisting of the consolidated statements of condition as of
December 31, 1995, 1996, 1997 and 1998, and the related statements of
operations, stockholders' equity and cash flows for the years then ended and the
related notes thereto and related opinions thereon for the periods then ended;
and (ii) the unaudited consolidated balance sheet as of March 31, 1999, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the period then ended, and the related notes thereto.
"FRB" means the Board of Governors of the Federal Reserve System.
"Governmental Entity" shall mean any court or tribunal with jurisdiction
over the relevant party or any United States federal, state, municipal,
domestic, foreign or other administrative authority or instrumentality.
"Hazardous Materials" has the meaning set forth in Section 4.12.2.
"Immediate Family" means a person's spouse, parents, in-laws, children and
siblings.
"Investment Security" means any equity security or debt security as defined
in Statement of Financial Accounting Standards No. 115.
"IRS" means the Internal Revenue Service.
"M&P" means McGladry and Pullen, LLP, ONB's independent accountants.
"Mortgage Brokerage" means ONB Mortgage Corporation, a California
corporation and wholly owned subsidiary of ONB.
"OCC" means the Office of the Comptroller of the Currency.
"ONB 401(k) Plan" means the Orange National Bancorp 401(k) Plan.
"ONB Conflicts and Consents List" has the meaning set forth in Section 4.6.
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"ONB Contract List" has the meaning set forth in Section 4.16.
"ONB Derivatives List" has the meaning set forth in Section 4.32.
"ONB Dissenting Shares" means any shares of ONB Stock held by "dissenting
shareholders" within the meaning of Chapter 13 of the CGCL.
"ONB Employee Plan List" has the meaning set forth in Section 4.20.
"ONB Environmental Compliance List" has the meaning set forth in Section
4.12.2.
"ONB Filings" has the meaning set forth in Section 4.5.
"ONB Filings List" has the meaning set forth in Section 4.5.
"ONB Indemnification List" has the meaning set forth in Section 4.30.
"ONB Insurance List" has the meaning set forth in Section 4.7.
"ONB Intellectual Property List" has the set forth in Section 4.35.
"ONB Investment Securities List" has the meaning set forth in Section 4.26.
"ONB List" means any list required to be furnished by ONB to CVB herewith.
"ONB Litigation List" has the meaning set forth in Section 4.10.
"ONB Loan List" has the meaning set forth in Section 4.25.
"ONB Offices List" has the meaning set forth in Section 4.23.
"ONB Operating Losses List" has the meaning set forth in Section 4.24.
"ONB Perfected Dissenting Shares" means ONB Dissenting Shares which the
holders thereof have not withdrawn or caused to lose their status as ONB
Dissenting Shares.
"ONB Personal Property List" has the meaning set forth in Section 4.8.
"ONB Real Property List" has the meaning set forth in Section 4.9.
"ONB Shareholders' Meeting" means the meeting of ONB's shareholders
referred to in Section 6.7.
"ONB Stock" has the meaning set forth in the second recital of this
Agreement.
"ONB Stock Option" means any option issued pursuant to the ONB Stock Option
Plans.
"ONB Stock Option Plans" means the Orange National Bancorp 1993 and 1997
Stock Option Plans, as amended.
"ONB Supplied Information" has the meaning set forth in Section 4.34.
"ONB Tax List" has the meaning set forth in Section 4.11.
"ONB Undisclosed Liabilities List" has the meaning set forth in Section
4.19.
"Operating Loss" has the meaning set forth in Section 4.24.
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"Person" means any individual, corporation, association, partnership,
limited liability company, trust, joint venture, other entity, unincorporated
body, government or governmental department or agency.
"Proxy Statement and Prospectus" means the Joint Proxy Statement and
Prospectus that is included as part of the Registration Statement on Form S-4
(as defined herein) and used to solicit proxies for the ONB Shareholders'
Meeting and the CVB Shareholder's Meeting, as necessary, and to offer and sell
the shares of CVB Stock to be issued in connection with the Merger.
"Related Group of Persons" means Affiliates, members of an Immediate Family
or Persons the obligations of whom would be attributed to another Person
pursuant to the regulations promulgated by the SEC (as defined herein).
"Registration Statement on Form S-4" means the Registration Statement on
Form S-4, and such amendments thereto, that is filed with the SEC to register
the shares of CVB Stock to be issued in the Merger under the Securities Act and
includes the Proxy Statement and Prospectus in connection with the ONB
Shareholders' Meeting and CVB Shareholder's Meeting, as necessary, pursuant to
the regulations promulgated under the Exchange Act.
"Scheduled Contracts" has the meaning set forth in Section 4.16.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Surviving Bank" has the meaning set forth in the fourth recital of this
Agreement.
"Surviving Corporation" has the meaning set forth in the second recital of
this Agreement.
"Tanks" has the meaning set forth in Section 4.12.2.
"Tax Returns" means all returns, declarations, reports, estimates,
information returns and statements required to be filed in respect of any Taxes.
"Taxes" means (i) all federal, state, local or foreign taxes, charges,
fees, imposts, levies or other assessments, including, without limitation, all
net income, gross receipts, capital, sales, use, ad valorem, value added,
transfer, franchise, profits, inventory, capital stock, license, withholding,
payroll, employment, social security, unemployment, excise, severance, stamp,
occupation, property, corporation and estimated taxes, custom duties, fees,
assessments and charges of any kind whatsoever; (ii) all interest, penalties,
fines, additions to tax or additional amounts imposed by any taxing authority in
connection with any item described in clause (i); and (iii) any transferred
liability in respect of any items described in clauses (i) and/or (ii).
"Understanding" means any contract, agreement, understanding, commitment or
offer, whether oral or written, which may become a binding obligation if
accepted by another Person.
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ARTICLE 2.
TERMS OF MERGER AND BANK MERGER
2.1 Effect of Merger and Surviving Corporation. At the Effective Time of
the Merger, ONB will be merged with and into CVB pursuant to the terms,
conditions and provisions of the Agreement of Merger and in accordance with the
applicable provisions of the CGCL. By virtue of the Merger, all the rights,
privileges, powers and franchises and all property and assets of every kind and
description of ONB and CVB shall be vested in and be held and enjoyed by the
Surviving Corporation, without further act or deed, and all the interests of
every kind of ONB and CVB, including all debts due to either of them on whatever
account, shall be the property of the Surviving Corporation as they were of ONB
and CVB and the title to any interest in real property and any interest in
personal property vested by deed or otherwise in either ONB or CVB shall not
revert or be in any way impaired by reason of the Merger; and all rights of
creditors and liens upon any property of ONB and CVB shall be preserved
unimpaired and all debts, liabilities and duties of ONB and CVB shall be debts,
liabilities and duties of the Surviving Corporation and may be enforced against
it to the same extent as if said debts, liabilities and duties had been incurred
or contracted by it.
2.2 Stock of ONB. Subject to Section 2.4, each share of ONB Stock issued
and outstanding immediately prior to the Effective Time of the Merger shall,
without any further action on the part of ONB or the holders of such shares, be
treated on the basis set forth herein.
2.2.1 Conversion of ONB Stock. At the Effective Time of the Merger,
pursuant to the Agreement of Merger, each outstanding share of ONB Stock
excluding any ONB Perfected Dissenting Shares or shares of ONB Stock held by CVB
or CBB (other than those held in a fiduciary capacity or as a result of debts
previously contracted) shall, without any further action on the part of ONB or
the holders of any such shares, be automatically cancelled and cease to be an
issued and outstanding share of ONB Stock and be converted into one and one-half
(1 1/2) shares of CVB Stock (the "Conversion Ratio").
2.2.2 ONB Perfected Dissenting Shares. ONB Perfected Dissenting Shares
shall not be converted into shares of CVB Stock, but shall, after the Effective
Time of the Merger, be entitled only to such rights as are granted them by
Chapter 13 of the CGCL. Each dissenting shareholder who is entitled to payment
for his shares of ONB Stock shall receive such payment in an amount as
determined pursuant to Chapter 13 of the CGCL.
2.2.3 Shares Held by CVB or CBB. Shares of ONB Stock held by CVB or CBB,
if any (other than those held in a fiduciary capacity or as a result of debts
previously contracted), shall be canceled and no consideration shall be issued
in exchange therefor.
2.2.4 Dividends, Splits Etc. If, prior to the Effective Time of the
Merger, CVB shall declare a stock dividend or stock distribution upon or
subdivide, split up, reclassify or combine the CVB Stock, or make a distribution
on the CVB Stock in any security convertible into CVB Stock, with a record date
prior to the Effective Time of the Merger, the Conversion Ratio will be adjusted
so that the shareholders of ONB will own the same percentage of the Surviving
Corporation that they would have owned if no such event had occurred.
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2.3 Effect on CVB Stock. On the Effective Time of the Merger, each
outstanding share of CVB Stock, excluding any CVB Perfected Dissenting Shares,
shall remain an outstanding share of CVB Stock and shall not be converted or
otherwise affected by the Merger.
CVB Perfected Dissenting Shares shall, after the Effective Time of the
Merger, be entitled only to such rights as are granted them by Chapter 13 of the
CGCL. Each dissenting shareholder who is entitled to payment for his shares of
CVB Stock shall receive such payment in an amount as determined pursuant to
Chapter 13 of the CGCL.
2.4 Fractional Shares. No fractional shares of CVB Stock shall be issued
in the Merger. In lieu thereof, each holder of ONB Stock who would otherwise be
entitled to receive a fractional share shall receive an amount in cash equal to
the product (calculated to the nearest hundredth) obtained by multiplying (a)
the Average Closing Price times (b) the fraction of the share of CVB Stock to
which such holder would otherwise be entitled. No such holder shall be entitled
to dividends or other rights in respect of any such fraction.
2.5 Exchange Procedures.
2.5.1 As of the Effective Time of the Merger, CVB shall have deposited
with the Exchange Agent for the benefit of the holders of shares of ONB Stock,
for exchange in accordance with this Section 2.5 through the Exchange Agent,
certificates representing the shares of CVB Stock issuable pursuant to Section
2.2 in exchange for shares of ONB Stock outstanding immediately prior to the
Effective Time of the Merger, and funds in an amount not less than the amount of
cash payable in lieu of fractional shares of CVB Stock which would otherwise be
issuable in connection with Section 2.2 hereof but for the operation of Section
2.4 of this Agreement (collectively, the "Exchange Fund").
2.5.2 CVB shall use its best efforts to ensure the Exchange Agent will
mail, promptly after the Effective Time of the Merger, to each holder of record
of a certificate or certificates which immediately prior to the Effective Time
of the Merger represented outstanding shares of ONB Stock (the "Certificates")
whose shares were converted into the right to receive shares of CVB Stock
pursuant to Section 2.2 hereof, (i) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent and
shall be in such form and have such other provisions as CVB and ONB may
reasonably specify), and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for certificates representing shares of CVB Stock.
Upon surrender of a Certificate for cancellation to the Exchange Agent, together
with such letter of transmittal, duly executed, the holder of such Certificate
shall be entitled to receive in exchange therefor a certificate representing
that number of whole shares of CVB Stock and cash in lieu of fractional shares
which such holder has the right to receive pursuant to Sections 2.2 and 2.4
hereof, and the Certificate so surrendered shall forthwith be canceled. In the
event a certificate is surrendered representing ONB Stock, the transfer of
ownership of which is not registered in the transfer records of ONB, a
certificate representing the proper number of shares of CVB Stock may be issued
to a transferee if the Certificate representing such ONB Stock is presented to
the Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 2.5, each Certificate
shall be deemed at any time after the Effective Time of the Merger to represent
only the right to receive upon such surrender the certificate representing
shares of CVB Stock and cash in
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lieu of any fractional shares of stock as contemplated by this Section 2.5.
Notwithstanding anything to the contrary set forth herein, if any holder of
shares of ONB should be unable to surrender the Certificates for such shares,
because they have been lost or destroyed, such holder may deliver in lieu
thereof such bond in form and substance and with surety reasonably satisfactory
to CVB and shall be entitled to receive the certificate representing the proper
number of shares of CVB Stock and cash in lieu of fractional shares in
accordance with Sections 2.2 and 2.4 hereof.
2.5.3 No dividends or other distributions declared or made with respect to
CVB Stock with a record date after the Effective Time of the Merger shall be
paid to the holder of any unsurrendered Certificate with respect to the shares
of CVB Stock represented thereby and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to Section 2.4 until the holder
of record of such Certificate shall surrender such Certificate. Subject to the
effect of applicable laws, following surrender of any such Certificate, there
shall be paid to the record holder of the certificates representing whole shares
of CVB Common Stock issued in exchange thereof, without interest, (i) at the
time of such surrender, the amount of any cash payable in lieu of a fractional
share of CVB Stock to which such holder is entitled pursuant to Section 2.4 and
the amount of dividends or other distributions with a record date after the
Effective Time of the Merger theretofore paid with respect to such whole shares
of CVB Stock, and (ii) at the appropriate payment date, the amount of dividends
or other distributions with a record date after the Effective Time of the Merger
but prior to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of CVB Stock.
2.5.4 All shares of CVB Stock issued upon the surrender for exchange of
ONB Stock in accordance with the terms hereof (including any cash paid pursuant
to Section 2.4) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of ONB Stock, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of ONB Stock which were outstanding immediately prior
to the Effective Time of the Merger. If, after the Effective Time of the Merger,
Certificates are presented to CVB for any reason, they shall be canceled and
exchanged as provided in this Agreement.
2.5.5 Any portion of the Exchange Fund which remains undistributed to the
shareholders of ONB following the passage of six months after the Effective Time
of the Merger shall be delivered to CVB, upon demand, and any shareholders of
ONB who have not theretofore complied with this Section 2.5 shall thereafter
look only to CVB for payment of their claim for CVB Stock, any cash in lieu of
fractional shares of CVB Stock and any dividends or distributions with respect
to CVB Stock.
2.5.6 Neither CVB nor ONB shall be liable to any holder of shares of ONB
Stock for such shares (or dividends or distributions with respect thereto) or
cash from the Exchange Fund delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
2.5.7 The Exchange Agent shall not be entitled to vote or exercise any
rights of ownership with respect to the shares of CVB Stock held by it from time
to time hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect to such shares of CVB Stock for
the account of the Persons entitled thereto.
2.5.8 Certificates surrendered for exchange by any Person constituting an
"Affiliate"
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of ONB for purposes of Rule 144(a) under the Securities Act shall not be
exchanged for certificates representing whole shares of CVB Stock until CVB has
received a written agreement from such person as provided in Section 6.10.
2.6 Directors of Surviving Corporation. Immediately after the Effective
Time of the Merger, the Board of Directors of the Surviving Corporation shall be
comprised of the persons serving as directors of CVB immediately prior to the
Effective Time of the Merger and, subject to the approval of the Board of
Directors of CVB, Mr. San Vaccaro. Such persons shall serve until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified.
2.7 Executive Officers of Surviving Corporation. Immediately after the
Effective Time of the Merger, the executive officers of the Surviving
Corporation shall be comprised of the persons serving as executive officers of
CVB immediately prior to the Effective Time of the Merger. Such persons shall
serve until the earlier of their resignation or termination.
2.8 Effect of Bank Merger and Surviving Bank. At the Effective Time of the
Bank Merger, Orange will be merged with and into CBB pursuant to the terms,
conditions and provisions of the Agreement of Bank Merger and in accordance with
the applicable provisions of the CGCL and the CFC. By virtue of the Bank Merger,
all the rights, privileges, powers and franchises and all property and assets of
every kind and description of Orange and CBB shall be vested in and be held by
the Surviving Bank, without further act or deed, and all the interests of every
kind of Orange and CBB, including all debts due to either of them on whatever
account, shall be the property of the Surviving Bank as they were of Orange and
CBB and the title to any interest in real property and any interest in personal
property vested by deed or otherwise in Orange and CBB shall not revert or be in
any way impaired by reason of the Bank Merger; and all rights of creditors and
liens upon any property of Orange and CBB shall be preserved unimpaired and all
debts, liabilities and duties of Orange and CBB shall be preserved unimpaired
and all debts, liabilities and duties of Orange and CBB shall be debts,
liabilities and duties of the Surviving Bank and may be enforced against it to
the same extent as if said debts, liabilities and duties had been incurred or
contracted by it.
2.9 Directors of Surviving Bank. Immediately after the Effective Time of
the Bank Merger, the Board of Directors of the Surviving Bank shall be comprised
of the persons serving as directors of CBB immediately prior to the Effective
Time of the Bank Merger, and, subject to the approval of the Board of Directors
of CBB, Mr. San Vaccaro. Such persons shall serve until the earlier of their
expiration or removal or until their successors are duly elected and qualified.
2.10 Executive Officers of Surviving Bank. Immediately after the Effective
Time of the Bank Merger, the executive officers of the Surviving Bank shall be
comprised of the persons serving as executive officers of CBB immediately prior
to the Effective Time of the Bank Merger. Such persons shall serve until the
earlier of their resignation or termination.
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ARTICLE 3.
THE CLOSING
3.1 Closing Date. The Closing shall take place on the Closing Date.
3.2 Execution of Agreements. As soon as practicable after execution of
this Agreement, the Agreement of Merger and the Agreement of Bank Merger
together with all other agreements necessary to consummate the transactions
described herein shall be executed by the parties thereto. On the Closing Date,
the Agreement of Merger, together with all requisite certificates, shall be duly
filed with the Secretary of State of the State of California as required by
applicable law and regulations. On the Closing Date, the Agreement of Bank
Merger, together with all requisite certificates, shall be duly filed with the
California Secretary of State and the Commissioner, as required by applicable
law and regulations.
3.3 Further Assurances. At the Closing, the parties hereto shall deliver,
or cause to be delivered, such documents or certificates as may be necessary in
the reasonable opinion of counsel for any of the parties, to effectuate the
transactions contemplated by this Agreement. From and after the Effective Time
of the Merger, each of the parties hereto covenants and agrees, without the
necessity of any further consideration whatsoever, to execute, acknowledge and
deliver any and all other documents and instruments and take any and all such
other action as may be reasonably necessary or desirable to more effectively
carry out the intent and purpose of this Agreement, the Agreement of Merger and
the Agreement of Bank Merger.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF ONB
ONB represents and warrants to CVB as follows:
4.1 Incorporation, Standing and Power. ONB has been duly organized, is
validly existing and in good standing as a corporation under the laws of the
State of California and is registered as a bank holding company under the BHC
Act. Orange is a national bank duly organized, validly existing and in good
standing under the laws of the United States and is authorized by the OCC to
conduct a general banking business. Mortgage Brokerage has been duly organized,
is validly existing and in good standing as a corporation under the laws of the
State of California. Orange's deposits are insured by the FDIC in the manner and
to the fullest extent provided by law. Each of ONB, Orange and Mortgage
Brokerage has all requisite corporate power and authority to own, lease and
operate its respective properties and assets and to carry on its business as
presently conducted. Neither the scope of the business of ONB, Orange or
Mortgage Brokerage nor the location of any of their respective properties
requires that either ONB, Orange or Mortgage Brokerage be licensed to do
business in any jurisdiction other than the State of California where the
failure to be so licensed would, individually or in the aggregate, have a
material adverse effect on the business, financial condition, results of
operations or prospects of ONB on a consolidated basis. ONB has delivered to CVB
true and correct copies of its, Orange's and Mortgage Brokerage's Articles of
Incorporation, Articles of Association, and Bylaws, as amended, and in effect as
of the date hereof.
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4.2 Capitalization.
4.2.1 As of the date of this Agreement, the authorized capital stock of
ONB consists of 20,000,000 shares of ONB Stock, of which 2,000,171 shares are
outstanding. All of the outstanding shares of ONB Stock are duly authorized,
validly issued, fully paid and nonassessable. Except for ONB Options covering
232,283 shares of ONB Stock granted pursuant to the ONB Stock Option Plans,
there are no outstanding options, warrants or other rights in or with respect to
the unissued shares of ONB Stock nor any securities convertible into such stock,
and ONB is not obligated to issue any additional shares of its common stock or
any additional options, warrants or other rights in or with respect to the
unissued shares of such stock or any other securities convertible into such
stock. ONB has furnished CVB a list (the "ONB Option List") setting forth the
name of each holder of a ONB Option, the number of shares of ONB Stock covered
by each such option, the vesting schedule of such option, the exercise price per
share and the expiration date of each such option.
4.2.2 As of the date of this Agreement, the authorized capital stock of
Orange consists of 1,325,000 shares of common stock, $1.25 par value, of which
1,002,920 shares are outstanding and all of which are owned of record and
beneficially by ONB. All of the outstanding shares of such common stock are duly
authorized, validly issued, fully paid, nonassessable and free and clear of all
Encumbrances. There are no outstanding options, warrants or other rights in or
with respect to the unissued shares of such common stock or any other securities
convertible into such stock, and Orange is not obligated to issue any additional
shares of its common stock or any options, warrants or other rights in or with
respect to the unissued shares of its common stock or any other securities
convertible into such stock.
4.2.3 As of the date of this Agreement, the authorized capital stock of
Mortgage Brokerage consists of 100,000 shares of common stock, of which 10,000
shares are outstanding and all of which are owned of record and beneficially by
ONB, and there are no shares of preferred stock outstanding. All of the
outstanding shares of such common stock are duly authorized, validly issued,
fully paid, nonassessable and free and clear of all Encumbrances. There are no
outstanding options, warrants or other rights in or with respect to the unissued
shares of such common stock or any other securities convertible into such stock,
and Mortgage Brokerage is not obligated to issue any additional shares of its
common stock or any options, warrants or other rights in or with respect to the
unissued shares of its common stock or any other securities convertible into
such stock.
4.3 Subsidiaries. Other than Orange and Mortgage Brokerage, ONB does not
own, directly or indirectly, the outstanding stock or equity or other voting
interest in any Person. Orange does not own, directly or indirectly, the
outstanding stock or equity or other voting interest in any Person. The
operations of Mortgage Brokerage are not material to the business or financial
condition of ONB, on a consolidated basis.
4.4 Financial Statements. ONB has previously furnished to CVB a copy of
the Financial Statements of ONB. The Financial Statements of ONB: (a) present
fairly the consolidated financial condition of ONB as of the respective dates
indicated and its consolidated results of operations and statements of cash
flows, for the respective periods then ended, subject, in the case of the
unaudited interim financial statements, to normal recurring adjustments; (b)
have been prepared in accordance with generally accepted accounting principles
and/or applicable regulatory accounting principles or banking
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regulations consistently applied (except as otherwise indicated therein); and
(c) are based upon the books and records of ONB.
4.5 Reports and Filings. Except as set forth in a list (the "ONB Filings
List"), since January 1, 1996, each of ONB, Orange and Mortgage Brokerage has
filed all reports, returns, registrations and statements (such reports and
filings referred to as "ONB Filings"), together with any amendments required to
be made with respect thereto, that were required to be filed with (a) the FDIC,
(b) the OCC, (c) the FRB, (d) the SEC and (e) any other applicable Governmental
Entity, including taxing authorities, except where the failure to file such
reports, returns, registrations or statements has not had and is not reasonably
expected to have a material adverse effect on the business, financial condition,
results of operations or prospects of ONB on a consolidated basis. No
administrative actions have been taken or orders issued in connection with such
ONB Filings. As of their respective dates, each of such ONB Filings (y) complied
in all material respects with all laws and regulations enforced or promulgated
by the Governmental Entity with which it was filed (or was amended so as to be
in compliance promptly following discovery of any such noncompliance); and (z)
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Any financial statement contained in any of such ONB Filings fairly
presented the financial position of ONB on a consolidated basis, ONB alone and
Orange alone, as the case may be, and was prepared in accordance with generally
accepted accounting principles or banking regulations consistently applied,
except as stated therein, during the periods involved, and except (other than
for those financial statements filed with the SEC) where any misstatement or
omission would not make the statements therein, in light of the circumstances
under which they were made, misleading. ONB has furnished CVB with true and
correct copies of all ONB Filings filed by ONB since January 1, 1996.
4.6 Authority of ONB. The execution and delivery by ONB of this Agreement
and the Agreement of Merger and by Orange of the Agreement of Bank Merger,
subject to the requisite approval of the shareholders of ONB of this Agreement
and the transactions contemplated thereby and by ONB of the Agreement of Bank
Merger, the consummation of the transactions contemplated hereby and thereby
have been duly and validly authorized by all necessary corporate action on the
part of ONB and Orange. This Agreement is, and the Agreement of Merger and
Agreement of Bank Merger will be, upon due execution and delivery by the
respective parties thereto, a valid and binding obligation of ONB and Orange, as
the case may be, enforceable in accordance with their respective terms, except
as the enforceability thereof may be limited by bankruptcy, liquidation,
receivership, conservatorship, insolvency, moratorium or other similar laws
affecting the rights of creditors generally and by general equitable principles.
Except as set forth in a list furnished by ONB to CVB (the "ONB Conflicts and
Consents List"), neither the execution and delivery by ONB of this Agreement and
the Agreement of Merger, nor by Orange of the Agreement of Bank Merger, the
consummation of the transactions contemplated herein or therein, nor compliance
by ONB or Orange with any of the provisions hereof or thereof, will: (a)
conflict with or result in a breach of any provision of its or Orange's Articles
of Incorporation, as amended, Articles of Association, as amended, or Bylaws, as
amended of Orange and ONB; (b) constitute a breach of or result in a default (or
give rise to any rights of termination, cancellation or acceleration, or any
right to acquire any securities or assets) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, franchise, license, permit,
agreement or other instrument
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or obligation to which ONB or Orange is a party, or by which ONB or Orange or
any of their respective properties or assets are bound; (c) result in the
creation or imposition of any Encumbrance on any of the properties or assets of
ONB or Orange; or (d) violate any order, writ, injunction, decree, statute, rule
or regulation applicable to ONB or Orange or any of their respective properties
or assets. Except as set forth in the ONB Conflicts and Consents List, no
consent of, approval of, notice to or filing with any Governmental Entity having
jurisdiction over any aspect of the business or assets of ONB or Orange, and no
consent of, approval of or notice to any other Person, is required in connection
with the execution and delivery by ONB of this Agreement and the Agreement of
Merger, and by Orange of the Agreement of Bank Merger, or the consummation by
ONB of the Merger and by Orange of the Bank Merger or the transactions
contemplated hereby or thereby, except (i) the approval of this Agreement and
the Agreement of Merger and the transactions contemplated hereby and thereby by
the shareholders of ONB and of the Agreement of Bank Merger by ONB; (ii) such
approvals as may be required by the FRB, the FDIC and the DFI; (iii) the filing
and the effectiveness of the Proxy Statement and Prospectus and Registration
Statement on Form S-4 with the SEC; and (iv) the filing and acceptance of the
Agreement of Merger with the Secretary of State and the Agreement of Bank Merger
with the Secretary of State and the DFI.
4.7 Insurance. Each of ONB, Orange and Mortgage Brokerage has policies of
insurance and bonds with respect to its assets and business against such
casualties and contingencies and in such amounts, types and forms as are
customarily appropriate for its business, operations, properties and assets. All
such insurance policies and bonds are in full force and effect. Except as set
forth in a list furnished by ONB to CVB (the "ONB Insurance List"), no insurer
under any such policy or bond has canceled or indicated an intention to cancel
or not to renew any such policy or bond or generally disclaimed liability
thereunder. Except as set forth in the ONB Insurance List, neither ONB, Orange
or Mortgage Brokerage is in default under any such policy or bond and all
material claims thereunder have been filed in a timely fashion. Set forth in the
ONB Insurance List is a list of all policies of insurance carried and owned by
ONB, Orange or Mortgage Brokerage showing the name of the insurance company, the
nature of the coverage, the policy limit, the annual premiums and the expiration
dates. There has been delivered to CVB a copy of each such policy of insurance.
4.8 Personal Property. Each of ONB, Orange and Mortgage Brokerage has good
and marketable title to all its material properties and assets, other than real
property, owned or stated to be owned by ONB, Orange or Mortgage Brokerage, free
and clear of all Encumbrances except: (a) as set forth in the Financial
Statements of ONB; (b) for Encumbrances for current taxes not yet due; (c) for
Encumbrances incurred in the ordinary course of business; (d) for Encumbrances
that are not substantial in character, amount or extent and that do not
materially detract from the value, or interfere with present use, of the
property subject thereto or affected thereby, or otherwise materially impair the
conduct of business of ONB, Orange or Mortgage Brokerage; or (e) as set forth in
a list furnished by ONB to CVB (the "ONB Personal Property List").
4.9 Real Estate. ONB has furnished CVB a list of real property, including
leaseholds and all other interests in real property (other than security
interests), owned by ONB, Orange and Mortgage Brokerage (the "ONB Real Property
List"). Each of ONB, Orange and Mortgage Brokerage has duly recorded or caused
to be recorded, in the appropriate county, all recordable interests in the real
property described in the ONB Real Property List. ONB, Orange and Mortgage
Brokerage have good and marketable title to
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their respective real property, and valid leasehold interests in the leaseholds,
described in the ONB Real Property List, free and clear of all Encumbrances,
except (a) for rights of lessors, co-lessees or sublessees in such matters that
are reflected in the lease; (b) for current taxes not yet due and payable; (c)
for such Encumbrances, if any, as do not materially detract from the value of or
materially interfere with the present use of such property; and (d) as described
in the ONB Real Property List. ONB has furnished CVB with true and correct
copies of all leases included in the ONB Real Property List, all title insurance
policies and all documents evidencing recordation of all recordable interests in
real property included in the ONB Real Property List.
4.10 Litigation. Except as set forth in a list furnished by ONB to CVB
(the "ONB Litigation List"), there is no private or governmental suit, claim,
action or proceeding pending, nor to ONB's knowledge threatened, against ONB,
Orange or Mortgage Brokerage or against any of their respective directors,
officers or employees relating to the performance of their duties in such
capacities or against or affecting any properties of ONB, Orange or Mortgage
Brokerage which, if adversely determined, would have, individually or in the
aggregate, a material adverse effect upon the business, financial condition or
results of operations of ONB on a consolidated basis, or the transactions
contemplated hereby, or which may involve a judgment against ONB, Orange or
Mortgage Brokerage in excess of $25,000. Also, except as disclosed in the ONB
Litigation List, there are no material judgments, decrees, stipulations or
orders against ONB, Orange or Mortgage Brokerage or enjoining their respective
directors, officers or employees in respect of, or the effect of which is to
prohibit, any business practice or the acquisition of any property or the
conduct of business in any area.
4.11 Taxes.
(a) Except as set forth in a list furnished by ONB to CVB (the "ONB Tax
List"), (A) all material Tax Returns required to be filed by or on behalf of
ONB, Orange or any of their subsidiaries or the Affiliated Group(s) of which any
of them is or was a member have been duly and timely filed with the appropriate
taxing authorities in all jurisdictions in which such Tax Returns are required
to be filed (after giving effect to any valid extensions of time in which to
make such filings), and all such Tax Returns were true, complete and correct in
all material respects; (B) all Taxes due and payable by or on behalf of ONB,
Orange or any of their subsidiaries, either directly, as part of an Affiliated
Group Tax Return, or otherwise, have been fully and timely paid, except to the
extent adequately reserved therefor in accordance with generally accepted
accounting principles and/or applicable regulatory accounting principles or
banking regulations consistently applied on the ONB balance sheet, and adequate
reserves or accruals for Taxes have been provided in the ONB balance sheet with
respect to any period through the date thereof for which Tax Returns have not
yet been filed or for which Taxes are not yet due and owing; and (C) no
agreement, waiver or other document or arrangement extending or having the
effect of extending the period for assessment or collection of Taxes (including,
but not limited to, any applicable statute of limitation) has been executed or
filed with any taxing authority by or on behalf of ONB, Orange or any of their
subsidiaries, or any Affiliated Group(s) of which any of them is or was a
member.
(b) ONB, Orange and Mortgage Brokerage have complied in all material
respects with all applicable laws, rules and regulations relating to the payment
and withholding of Taxes and have duly and timely withheld from employee
salaries, wages and other compensation and have paid over to the appropriate
taxing authorities all amounts required to be so withheld and paid over for all
periods under all applicable laws.
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(c) CVB has received complete copies of (i) all material income or
franchise Tax Returns of ONB and Orange relating to the taxable periods since
January 1, 1996 and (ii) any audit report issued within the last three years
relating to any material Taxes due from or with respect to ONB and Orange with
respect to their respective income, assets or operations.
(d) Except as set forth in the ONB Tax List, no claim has been made by a
taxing authority in a jurisdiction where ONB or Orange do not file an income or
franchise Tax Return such that ONB and Orange are or may be subject to taxation
by that jurisdiction.
(e) Except as set forth in the ONB Tax List: (i) all deficiencies asserted
or assessments made as a result of any examinations by any taxing authority of
the Tax Returns of or covering or including ONB and Orange have been fully paid,
and there are no other audits or investigations by any taxing authority in
progress, nor have ONB and Orange received any notice from any taxing authority
that it intends to conduct such an audit or investigation; (ii) no requests for
a ruling or a determination letter are pending with any taxing authority; and
(iii) no issue has been raised in writing by any taxing authority in any current
or prior examination which, by application of the same or similar principles,
could reasonably be expected to result in a proposed deficiency against ONB or
Orange for any subsequent taxable period that could be material.
(f) Except as set forth in the ONB Tax List, neither ONB, Orange nor any
other Person on behalf of ONB or Orange has (i) filed a consent pursuant to
Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply
to any disposition of a subsection (f) asset (as such term is defined in Section
341(f)(4) of the Code) owned by ONB, Orange or any of their subsidiaries (ii)
agreed to or is required to make any adjustments pursuant to Section 481(a) of
the Code or any similar provision of state, local or foreign law by reason of a
change in accounting method initiated by ONB, Orange or any of their
subsidiaries or has any knowledge that the Internal Revenue Service has proposed
any such adjustment or change in accounting method, or has any application
pending with any taxing authority requesting permission for any changes in
accounting methods that relate to the business or operations of ONB, Orange or
any of their subsidiaries or (iii) executed or entered into a closing agreement
pursuant to Section 7121 of the Code or any predecessor provision thereof or any
similar provision of state, local or foreign law with respect to ONB, Orange or
any of their subsidiaries.
(g) Except as set forth in the ONB Tax List, no property owned by ONB or
Orange is (i) property required to be treated as being owned by another Person
pursuant to provisions of Section 168(f)(8) of the Internal Revenue Code of
1954, as amended and in effect immediately prior to the enactment of the Tax
Reform Act of 1986, (ii) constitutes "tax-exempt use property" within the
meaning of Section 168(h)(1) of the Code or (iii) is "tax-exempt bond financed
property" within the meaning of Section 168(g) of the Code.
(h) Neither ONB (except with Orange) nor Orange (except with ONB) is a
party to any Tax Sharing Agreement or similar agreement or arrangement (whether
written or not written) pursuant to which it will have any obligation to make
any payments after the Closing.
(i) Except as set forth in the ONB Tax List, there is no contract,
agreement, plan or arrangement covering any Person that, individually or
collectively, could give rise to the payment of any amount that would not be
deductible by ONB, Orange or any of their
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subsidiaries or their respective affiliates by reason of Section 280G of the
Code, or would constitute compensation in excess of the limitation set forth in
Section 162(m) of the Code.
(j) There are no liens as a result of any unpaid Taxes upon any of the
assets of ONB or Orange.
(k) Except as set forth in the ONB Tax List, ONB, Orange or any of their
subsidiaries have no elections in effect for federal income tax purposes under
Sections 108, 168, 338, 441, 472, 1017, 1033, or 4977 of the Code.
(l) Except as set forth in the ONB Tax list, none of the members of ONB's
Affiliated Group has any net operating loss carryovers.
(m) ONB agrees, and agrees to cause Orange, to cooperate with tax counsel
in furnishing reasonable and customary written tax representations to tax
counsel for purposes of supporting tax counsel's opinion that each of the Merger
and the Bank Merger qualify as a tax-deferred reorganization within the meaning
of Section 368(a) of the Code as contemplated in Section 9.6 hereof.
4.12 Compliance with Laws and Regulations.
4.12.1 Neither ONB, Orange or Mortgage Brokerage is in default under or in
breach or violation of (i) any provision of its respective Articles of
Incorporation, as amended, Articles of Association, as amended, or Bylaws, as
amended, or (ii) law, ordinance, rule or regulation promulgated by any
Governmental Entity, except, with respect to this clause (ii), for such
defaults, breaches or violations as would not have, individually or in the
aggregate, a material adverse effect on the business, financial condition,
results of operations or prospects of ONB on a consolidated basis.
4.12.2 Except as set forth on a list furnished by ONB to CVB (the "ONB
Environmental Compliance List"), to the best of ONB's knowledge (i) each of ONB,
Orange and Mortgage Brokerage is in compliance with all Environmental
Regulations; (ii) there are no Tanks on or about ONB Property; (iii) there are
no Hazardous Materials on, below or above the surface of, or migrating to or
from ONB Property in concentrations above de minimis levels that would require
remedial action; (iv) neither ONB, Orange or Mortgage Brokerage has loans
outstanding secured by real property that is not in compliance with
Environmental Regulations or which has a leaking Tank or upon which there are
Hazardous Materials on or migrating to or from, in concentrations above de
minimis levels that would require remedial action, ONB Property; and (v) without
limiting Section 4.10 or the foregoing representations and warranties contained
in clauses (i) through (iv), as of the date of this Agreement, there is no
written claim, action, suit, or proceeding or notice thereof before any
Governmental Entity pending against ONB or Orange or Mortgage Brokerage or
concerning property securing ONB or Orange or Mortgage Brokerage loans and there
is no outstanding judgment, order, writ, injunction, decree, or award against or
affecting ONB Property or property securing ONB or Orange loans, relating to the
foregoing representations (i) -- (iv), in each case the noncompliance with
which, or the presence of which would have a material adverse effect on the
business, financial condition, results of operations or prospects of ONB on a
consolidated basis. For purposes of this Section 4.12.2, the term "Environmental
Regulations" shall mean all applicable statutes, regulations, rules, and
ordinances of all Governmental Entities and all applicable judicial,
administrative, and regulatory decrees, judgments, and orders relating to the
protection of human health or the environment, including, without limitation:
all
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requirements, including, but not limited to those pertaining to reporting,
licensing, permitting, investigation, and remediation of emissions, discharges,
releases, or threatened releases of Hazardous Materials, into the air, surface
water, groundwater, or land, or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
Hazardous Materials whether solid, liquid, or gaseous in nature and all
requirements pertaining to the protection of the health and safety of employees
or the public. "ONB Property" shall mean real estate currently owned, or leased,
or in which ONB, Orange or Mortgage Brokerage has an investment or security
interest (by mortgage, deed of trust, sale or lease-back), including, without
limitation, properties under foreclosure and properties held by ONB or Orange in
its capacity as a trustee. "Tank" shall mean treatment or storage tanks, whether
above ground or below ground, gas or oil wells and associated piping
transportation devices. "Hazardous Materials" shall mean any substance which is
defined as a hazardous waste, hazardous substance, hazardous material, used oil,
pollutant or contaminant under any federal, state or local statute, regulation,
rule or ordinance or amendments thereto including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
Section 9601, et seq.); the Resource Conservation and Recovery Act (42 U.S.C.
Section 6901, et seq.); the Clean Air Act, as amended (42 U.S.C. Section 7401,
et seq.); the Federal Water Pollution Control Act, as amended (33 U.S.C. Section
1251, et seq.); the Toxic Substances Control Act, as amended (15 U.S.C. Section
9601, et seq.); the Occupational Safety and Health Act, as amended (29 U.S.C.
Section 651; the Emergency Planning and Community Right-to-Know Act of 1986 (42
U.S.C. Section 11001, et seq.); the Safe Drinking Water Act (42 U.S.C. Section
300f, et seq.); and all comparable state and local laws, including without
limitation, the Carpenter-Presley-Tanner Hazardous Substance Account Act (State
Superfund), the Porter-Cologne Water Quality Control Act, Section 25140,
25501(j) and (k), 25501.1, 25281 and 25250.1 of the California Health and Safety
Code and/or Article I of Title 22 of the California Code of Regulations,
Division 4, Chapter 30; laws of other jurisdictions or orders and regulations;
or the presence of which causes or threatens to cause a nuisance, trespass or
other common law tort upon real property or adjacent properties or poses or
threatens to pose a hazard to the health or safety of persons or including
without limitation, gasoline, diesel fuel or other petroleum hydrocarbons;
polychlorinated biphenyls (PCBs), asbestos or urea formaldehyde foam insulation.
4.12.3 ONB has provided to CVB phase I environmental assessments with
respect to each interest in real property set forth on the ONB Real Property
List as to which such a phase I environmental investigation has been prepared by
or on behalf of ONB or Orange. The ONB Real Property list shall disclose each
such property as to which such an assessment has not been prepared on behalf of
ONB or Orange.
4.13 Performance of Obligations. Each of ONB, Orange and Mortgage
Brokerage has performed in all material respects all of the obligations required
to be performed by it to date and is not in default under or in breach of any
term or provision of any covenant, contract, lease, indenture or any other
covenant to which it is a party, is subject or is otherwise bound, and no event
has occurred that, with the giving of notice or the passage of time or both,
would constitute such default or breach, where such default or breach would
have, individually or in the aggregate, a material adverse effect on the
business, financial condition, results of operations or prospects of ONB on a
consolidated basis. Except for loans and leases made by ONB, Orange or Mortgage
Brokerage in the ordinary course of business, to ONB's knowledge, no party is in
breach of a material agreement with ONB, Orange or Mortgage Brokerage which
breach has had or reasonably should be
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expected to have a material adverse effect on the business, financial condition,
results of operations or prospects of ONB, Orange or Mortgage Brokerage.
4.14 Employees. There are no controversies pending or threatened between
either ONB, Orange or Mortgage Brokerage and any of its employees that are
likely to have a material adverse effect on the business, financial condition,
results of operations or prospects of ONB on a consolidated basis. Neither ONB,
Orange nor Mortgage Brokerage is a party to any collective bargaining agreement
with respect to any of its employees or any labor organization to which its
employees or any of them belong.
4.15 Brokers and Finders. Except for the obligation to First
Security -- Van Kasper, pursuant to a letter dated October 16, 1998, a copy of
which has been furnished to CVB, neither ONB, Orange or Mortgage Brokerage is a
party to or obligated under any agreement with any broker or finder relating to
the transactions contemplated hereby, and neither the execution of this
Agreement nor the consummation of the transactions provided for herein will
result in any liability to any broker or finder.
4.16 Material Contracts. Except as set forth in a list furnished by ONB to
CVB (the "ONB Contract List") hereto (all items listed or required to be listed
in such ONB Contract List being referred to herein as "Scheduled Contracts"),
neither ONB, Orange or Mortgage Brokerage is a party or otherwise subject to:
4.16.1 any employment, deferred compensation, bonus or consulting
contract that (i) has a remaining term, as of the date of this Agreement,
of more than one year in length of obligation on the part of ONB, Orange or
Mortgage Brokerage and is not terminable by ONB or Orange or Mortgage
Brokerage within one year without penalty or (ii) requires payment by ONB
or Orange of $25,000 or more per annum;
4.16.2 any advertising, brokerage, licensing, dealership,
representative or agency relationship or contract requiring payment by ONB,
Orange or Mortgage Brokerage of $25,000 or more per annum;
4.16.3 any contract or agreement that restricts ONB, Orange or
Mortgage Brokerage (or would restrict any Affiliate of ONB or Orange or the
Surviving Corporation or the Surviving Bank (including CVB and its
subsidiaries) after the Effective Time of the Merger and Effective Time of
the Bank Merger) from competing in any line of business with any Person or
using or employing the services of any Person;
4.16.4 any lease of real or personal property providing for annual
lease payments by or to ONB, Orange or Mortgage Brokerage in excess of
$25,000 per annum other than (A) financing leases entered into in the
ordinary course of business in which ONB, Orange or Mortgage Brokerage is
lessor and (B) leases of real property presently used by Orange, Mortgage
Brokerage as banking offices;
4.16.5 any mortgage, pledge, conditional sales contract, security
agreement, option, or any other similar agreement with respect to any
interest of ONB, Orange or Mortgage Brokerage (other than as mortgagor or
pledgor in the ordinary course of its banking business or as mortgagee,
secured party or deed of trust beneficiary in the ordinary course of its
business) in personal property having a value of $25,000 or more;
4.16.6 other than as described in the ONB Filings or as set forth in
the ONB Employee Plan List, any stock purchase, stock option, stock bonus,
stock ownership,
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profit sharing, group insurance, bonus, deferred compensation, severance
pay, pension, retirement, savings or other incentive, welfare or employment
plan or material agreement providing benefits to any present or former
employees, officers or directors of ONB, Orange or Mortgage Brokerage;
4.16.7 any agreement to acquire equipment or any commitment to make
capital expenditures of $25,000 or more;
4.16.8 other than agreements entered into in the ordinary course of
business, including sales of other real estate owned, any agreement for the
sale of any property or assets in which ONB, Orange or Mortgage Brokerage
has an ownership interest or for the grant of any preferential right to
purchase any such property or asset;
4.16.9 any agreement for the borrowing of any money (other than
liabilities or interbank borrowings made in the ordinary course of its
banking business and reflected in the financial records of ONB or Orange);
4.16.10 any restrictive covenant contained in any deed to or lease of
real property owned or leased by ONB, Orange or Mortgage Brokerage (as
lessee) that materially restricts the use, transferability or value of such
property;
4.16.11 any guarantee or indemnification which involves the sum of
$25,000 or more, other than letters of credit or loan commitments issued in
the normal course of business;
4.16.12 any supply, maintenance or landscape contracts not terminable
by ONB, Orange or Mortgage Brokerage without penalty on 30 days' or less
notice and which provides for payments in excess of $25,000 per annum;
4.16.13 other than as disclosed with reference to Section 4.16.11 of
this Section 4.16, any material agreement which would be terminable other
than by ONB, Orange or Mortgage Brokerage as a result of the consummation
of the transactions contemplated by this Agreement;
4.16.14 any contract of participation with any other bank in any loan
in excess of $25,000 or any sales of assets of ONB, Orange or Mortgage
Brokerage with recourse of any kind to ONB, Orange or Mortgage Brokerage
except the sale of mortgage loans, servicing rights, repurchase or reverse
repurchase agreements, securities or other financial transactions in the
ordinary course of business;
4.16.15 any agreement providing for the sale or servicing of any loan
or other asset which constitutes a "recourse arrangement" under applicable
regulation or policy promulgated by a Governmental Entity (except for
agreements for the sale of guaranteed portions of loans guaranteed in part
by the U. S. Small Business Administration and related servicing
agreements);
4.16.16 any contract relating to the provision of data processing
services to ONB or Orange; or
4.16.17 any other agreement of any other kind which involves future
payments or receipts or performances of services or delivery of items
requiring payment of $25,000 or more to or by ONB, Orange or Mortgage
Brokerage other than payments
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made under or pursuant to loan agreements, participation agreements and
other agreements for the extension of credit in the ordinary course of
their business.
True copies of all Scheduled Contracts, including all amendments and
supplements thereto, have been delivered to CVB.
4.17 Certain Material Changes. Except as specifically required, permitted
or effected by this Agreement, since December 31, 1998, there has not been,
occurred or arisen any of the following (whether or not in the ordinary course
of business unless otherwise indicated):
4.17.1 Any change in any of the assets, liabilities, permits, methods
of accounting or accounting practices, business, or manner of conducting
business, of ONB, Orange or Mortgage Brokerage or any other event or
development that has had or may reasonably be expected to have,
individually or in the aggregate, a material adverse effect on the assets,
liabilities, permits, business, financial condition, results of operations
or prospects of ONB on a consolidated basis;
4.17.2 Any damage, destruction or other casualty loss (whether or not
covered by insurance) that has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, business, financial
condition, results of operations or prospects of ONB on a consolidated
basis or that may involve a loss of more than $25,000 in excess of
applicable insurance coverage;
4.17.3 Any amendment, modification or termination of any existing, or
entry into any new, material contract or permit that has had or may
reasonably be expected to have a material adverse effect on the assets,
liabilities, business, financial condition, results of operations or
prospects of ONB on a consolidated basis;
4.17.4 Any disposition by ONB, Orange or Mortgage Brokerage of an
asset the lack of which has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, business, financial
condition, results of operations or prospects of ONB on a consolidated
basis; or
4.17.5 Any direct or indirect redemption, purchase or other
acquisition by ONB, Orange or Mortgage Brokerage of any equity securities
or any declaration, setting aside or payment of any dividend (except, in
the case of the declaration, setting aside or payment of a cash dividend,
as disclosed in the Financial Statements of ONB) or other distribution on
or in respect of ONB Stock whether consisting of money, other personal
property, real property or other things of value.
4.18 Licenses and Permits. Each of ONB, Orange and Mortgage Brokerage has
all material licenses and permits that are necessary for the conduct of its
respective business, and such licenses are in full force and effect, except for
any failure to be in full force and effect that would not, individually or in
the aggregate, have a material adverse effect on the business, financial
condition, results of operations or prospects of ONB on a consolidated basis.
The respective properties, assets, operations and businesses of ONB and Orange
are and have been maintained and conducted, in all material respects, in
compliance with all applicable licenses and permits. The respective properties
and operations of ONB and Orange are and have been maintained and conducted, in
all material respects, in compliance with all applicable laws and regulations.
4.19 Undisclosed Liabilities. Neither ONB, Orange or Mortgage Brokerage
has any liabilities or obligations, either accrued or contingent, that are
material to ONB and that
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have not been: (a) reflected or disclosed in the Financial Statements of ONB;
(b) incurred subsequent to December 31, 1998 in the ordinary course of business
consistent with past practices; or (c) disclosed in a list furnished by ONB to
CVB (the "Undisclosed Liabilities List") or on any other ONB List. ONB does not
know of any basis for the assertion against it or Orange of any liability,
obligation or claim (including, without limitation, that of any regulatory
authority) that is likely to result in or cause a material adverse change in the
business, financial condition, results of operations or prospects of ONB on a
consolidated basis that is not fairly reflected in the Financial Statements of
ONB or otherwise disclosed in this Agreement.
4.20 Employee Benefit Plans.
4.20.1 ONB has previously made available to CVB copies of each "employee
benefit plan," as defined in Section 3(3) of ERISA, of which ONB or any member
of the same controlled group of corporations, trades or businesses as ONB within
the meaning of Section 4001(a)(14) of ERISA ("ERISA Affiliates") is a sponsor or
participating employer or as to which ONB or any of its ERISA Affiliates makes
contributions or is required to make contributions and which is subject to any
provision of ERISA and covers any employee, whether active or retired, of ONB or
any of its ERISA Affiliates, together with all amendments thereto, all currently
effective and related summary plan descriptions (to the extent one is required
by law), the determination letter from the IRS, the annual reports for the most
recent three years (Form 5500 including, if applicable, Schedule B thereto) and
the summary of material modifications prepared in connection with any such plan.
Such plans are hereinafter referred to collectively as the "Employee Plans." ONB
does not participate in an employee benefit pension plan that is a
"multiemployer plan" within the meaning of Section 3(37) of ERISA that would
subject ONB or any of its ERISA Affiliates to a material amount of liability
with respect to any such plan. No event has occurred that will subject such
Employee Plans to a material amount of tax under Section 511 of the Code. All
amendments required to bring each Employee Plan into conformity with all of the
applicable provisions of ERISA, the Code and all other applicable laws have been
made, other than the requirement to make amendments for which the regulatory
remedial amendment period has not expired. As disclosed in a list furnished by
ONB to CVB of all of ONB's Employee Plans, (the "ONB Employee Plan List"), all
Employee Plans were in effect for substantially all of 1998, and there has been
no material amendment thereof (other than amendments required to comply with
applicable law) or material increase in the cost thereof or benefits thereunder
on or after January 1, 1998.
4.20.2 ONB has previously made available to CVB copies or descriptions of
each plan or arrangement maintained or otherwise contributed to by ONB or any of
its ERISA Affiliates which is not an Employee Plan and which (exclusive of base
salary and base wages) provides for any form of current or deferred
compensation, bonus, stock option, stock awards, stock-based compensation or
other forms of incentive compensation or post-termination insurance, profit
sharing, retirement, group health or insurance, disability, workers'
compensation, welfare or similar plan or arrangement for the benefit of any
employee or class of employees, whether active or retired, of ONB or any of its
ERISA Affiliates (such plans and arrangements being collectively referred to
herein as "Benefit Arrangements"). As disclosed in the ONB Employee Plan List
hereto, which includes a list of all Benefit Arrangements, all Benefit
Arrangements which are in effect were in effect for substantially all of 1998
and there has been no material amendment thereof or material increase in the
cost thereof or benefits payable thereunder since January 1, 1998.
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Except as set forth in the ONB Employee Plan List, there has been no material
increase in the compensation of or benefits payable to any senior executive
employee of ONB since December 31, 1998, nor any employment, severance or
similar contract entered into with any such employee, nor any material amendment
to any such contract, since December 31, 1998. There is no contract, agreement
or benefit arrangement covering any employee of ONB which individually or
collectively could give rise to the payment of any amount which would constitute
an "excess parachute payment," as such term is defined in Section 280G of the
Code, or would constitute compensation that is not deductible by reason of the
limitation set forth in Section 162(m) of the Code.
4.20.3 With respect to all Employee Plans and Benefit Arrangements, ONB
and its ERISA Affiliates are in material compliance with their terms (other than
noncompliance the cost or liability for which is not material) with the
requirements prescribed by any and all statutes, governmental or court orders,
or governmental rules or regulations currently in effect, including but not
limited to ERISA and the Code, applicable to such plans or arrangements. All
material government reports and filings required by law have been properly and
timely filed and all information required to be distributed to participants or
beneficiaries has been distributed with respect to each Employee Plan. ONB and
its ERISA Affiliates have performed all of their obligations under all such
Employee Plans and Benefit Arrangements in all material aspects. There is no
pending or, to the knowledge of ONB, threatened legal action, proceeding or
investigation against or involving any Employee Plan or Benefit Arrangement
which could result in a material amount of liability of ONB or an ERISA
Affiliate to such Employee Plan. No condition exists that could constitute
grounds for the termination of any Employee Plan under Section 4042 of ERISA; no
"prohibited transaction," as defined in Section 406 of ERISA and Section 4975 of
the Code, has occurred with respect to any Employee Plan, or any other employee
benefit plan maintained by ONB or any of its ERISA Affiliates which is covered
by Title I of ERISA, which could subject ONB directly or indirectly responsible
to a material amount of liability under Title I of ERISA or to the imposition of
a material amount of tax under Section 4975 of the Code which could have a
material adverse effect on the business, assets, financial condition, results of
operations or prospects of ONB on a consolidated basis; nor has any Employee
Plan subject to Part III of Subtitle B of Title I of ERISA or Section 412 of the
Code, or both, incurred any "accumulated funding deficiency," as defined in
Section 412 of the Code, whether or not waived, nor has ONB failed to make any
material contribution or pay any material amount due and owing as required by
the terms of any Employee Plan or Benefit Arrangement. No "reportable event" as
defined in ERISA, except reportable events for which the 30-day notice
requirement has been waived, has occurred with respect to any of the Employee
Plans. Neither ONB nor any of its ERISA Affiliates has not incurred nor expects
to incur, directly or indirectly, a material amount of liability under Title IV
or ERISA arising in connection with the termination of, or a complete or partial
withdrawal from, any plan covered or previously covered by Title IV of ERISA
which could constitute a liability of CVB or of any of its Affiliates (including
ONB and Orange) at or after the Effective Time of the Merger.
4.20.4 Neither ONB nor any of its ERISA Affiliates has provided or is
required to provide security to any Employee Plan pursuant to Section 401(a)(29)
of the Code. Each of the Employee Plans which is intended to be a qualified plan
under Section 401(a) of the Code has received a favorable determination letter
from the Internal Revenue Service and neither ONB nor Orange knows of any fact
which could adversely affect the qualified status of any such Employee Plan
other than the requirement to make amendments for
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which the regulatory remedial amendment period has not expired. The Financial
Statements of ONB properly reflect all amounts required to be accrued as
liabilities to date under each of the Employee Plans.
4.20.5 Except for Scheduled Contracts set forth in the ONB Contract List
or as set forth in the ONB Employee Plan List, as the case may be, each Employee
Plan or Benefit Arrangement and each personal services contract, fringe benefit,
consulting contract or similar arrangement with or for the benefit of any
officer, director, employee or other person can be terminated by ONB within a
period of 30 days following the Effective Time of the Merger, without payment of
any amount as a penalty, bonus, premium, severance pay or other compensation for
such termination.
4.20.6 All group health plans of ONB have been operated in compliance with
the group health plan continuation coverage requirements of Section 4980B of the
Code in all material respects.
4.20.7 Neither ONB nor Orange utilizes or has utilized the services of
workers (including workers provided by third parties, independent contractors
and temporary employees) who might reasonably be classified as employees (or
permanent employees) of either, such that, were such employees so reclassified,
it could reasonably be expected to result in the disqualification of any of the
Employee Plans or result in the imposition of material penalties or excise taxes
by the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation or
any other Governmental Entity. Neither ONB nor Orange utilized or has utilized
the services of leased employees under circumstances that might reasonably
result in such a disqualification or imposition of material penalties or excise
taxes.
4.20.8 Except as set forth in the ONB Employee Plan List, with respect to
each Employee Plan that is funded wholly or partially through an insurance
policy, neither ONB or Orange has been notified that there will be liability of
ONB or Orange, as of the Closing Date, under any such insurance policy or
ancillary agreement with respect to such insurance policy in the nature of a
retroactive rate adjustment, loss sharing arrangement or other actual or
contingent liability arising wholly or partially out of events occurring prior
to the Closing Date.
4.21 Corporate Records. The minute books of each of ONB, Orange and
Mortgage Brokerage accurately reflect all material actions taken by the
respective shareholders, board of directors and committees of each of ONB,
Orange and Mortgage Brokerage.
4.22 Accounting Records. Each of ONB, Orange and Mortgage Brokerage
maintain accounting records which fairly and validly reflect, in all material
respects, its transactions and accounting controls exist sufficient to provide
reasonable assurances that such transactions are, in all material respects, (i)
executed in accordance with its management's general or specific authorization,
and (ii) recorded as necessary to permit the preparation of financial statements
in conformity with generally accepted accounting procedures. Such records, to
the extent they contain important information pertaining to ONB, Orange and
Mortgage Brokerage which is not easily and readily available elsewhere, have
been duplicated, and such duplicates are stored safely and securely.
4.23 Offices and ATMs. ONB has furnished to CVB a list (the "ONB Offices
List") setting forth the headquarters of each of ONB, Orange and Mortgage
Brokerage (identified as such) and each of the offices and automated teller
machines ("ATMs") maintained and operated by ONB or Orange (including, without
limitation, representative
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and loan production offices and operations centers) and the location thereof.
Except as set forth on the ONB Offices List, neither ONB, Orange or Mortgage
Brokerage maintains any other office or ATM or conducts business at any other
location, and neither ONB, Orange or Mortgage Brokerage has applied for or
received permission to open any additional branch or operate at any other
location.
4.24 Operating Losses. ONB has furnished to CVB a list (the "ONB Operating
Losses List") setting forth any Operating Loss (as herein defined) which has
occurred at ONB during the period after December 31, 1998 to the date of the
Agreement. No action has been taken or omitted to be taken by any employee of
ONB that has resulted in the incurrence by ONB of an Operating Loss or that
might reasonably be expected to result in the incurrence of any individual
Operating Loss which, net of any insurance proceeds payable in respect thereof,
would exceed $25,000 on an individual basis or in the aggregate. For purposes of
this section "Operating Loss" means any loss resulting from cash shortages, lost
or misposted items, disputed clerical and accounting errors, forged checks,
payment of checks over stop payment orders, counterfeit money, wire transfers
made in error, theft, robberies, defalcations, check kiting, fraudulent use of
credit cards or ATMs, civil money penalties, fines, litigation or claims.
4.25 Loan Portfolio. ONB has furnished to CVB a list (the "ONB Loan List")
that sets forth as of April 30, 1999, a description of, (a) by type and
classification, if any, each loan, lease, other extension of credit or
commitment to extend credit by ONB, Orange or Mortgage Brokerage; (b) by type
and classification, all loans, leases, other extensions and commitments to
extend credit of ONB, Orange or Mortgage Brokerage that have been classified by
its bank examiners or auditors (external or internal) as "Watch List,"
"Substandard," "Doubtful," "Loss" or any comparable classification; and (c) all
consumer loans due to ONB, Orange or Mortgage Brokerage as to which any payment
of principal, interest or any other amount is 90 days or more past due.
4.26 Investment Securities. ONB has furnished to CVB a list (the "ONB
Investment Securities List") setting forth a description of each Investment
Security held by ONB, Orange or Mortgage Brokerage on April 30, 1999. The ONB
Investment Securities List sets forth, with respect to each such Investment
Security: (i) the issuer thereof; (ii) the outstanding balance or number of
shares; (iii) the maturity, if applicable; (iv) the title of issue; and (v) the
classification under SFAS No. 115. Neither ONB nor Orange has any Investment
Security classified as trading.
4.27 Power of Attorney. Neither ONB, Orange or Mortgage Brokerage has
granted any Person a power of attorney or similar authorization that is
presently in effect or outstanding.
4.28 Facts Affecting Regulatory Approvals. To the best knowledge of ONB,
there is no fact, event or condition applicable to ONB, Orange or Mortgage
Brokerage which will, or reasonably could be expected to, adversely affect the
likelihood of securing the requisite approvals or consents of any Governmental
Entity to the Merger, the Bank Merger and the transactions contemplated by this
Agreement.
4.29 Accounting and Tax Matters. Neither ONB, Orange or Mortgage Brokerage
has through the date hereof taken or agreed to take any action that would
prevent CVB from accounting for the business combination to be effected by the
Merger and the Bank Merger as a pooling-of-interests or would prevent the Merger
and the Bank Merger from qualifying as a tax-free reorganization under the Code.
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4.30 Indemnification. Other than pursuant to the provisions of their
respective Articles of Incorporation or Bylaws, neither ONB, Orange or Mortgage
Brokerage is a party to any indemnification agreement with any of its present
officers, directors, employees, agents or other persons who serve or served in
any other capacity with any other enterprise at the request of ONB or Orange (a
"Covered Person"), and to the best knowledge of ONB, there are no claims for
which any Covered Person would be entitled to indemnification by ONB, Orange or
Mortgage Brokerage if such provisions were deemed in effect, except as set forth
in a list furnished by ONB to CVB (the "ONB Indemnification List").
4.31 Community Reinvestment Act. Orange has received a rating of
"Satisfactory" in its most recent Community Reinvestment Act examination. Orange
has not been advised of any supervisory concerns regarding its or ONB's
compliance with the Community Reinvestment Act.
4.32 Derivative Transactions. Except as set forth in a list furnished by
ONB to CVB (the "ONB Derivatives List"), neither ONB, Orange or Mortgage
Brokerage is a party to or has agreed to enter into an exchange traded or
over-the-counter equity, interest rate, foreign exchange or other swap, forward,
future, option, cap, floor or collar or any other contract that is not included
on the balance sheet and is a derivative contract (including various
combinations thereof) or owns securities that are referred to generically as
"structured notes," "high risk mortgage derivatives," "capped floating rate
notes," or "capped floating rate mortgage derivatives."
4.33 Trust Administration. Orange does not presently exercise trust
powers, including, but not limited to, trust administration, and neither it nor
any predecessor has exercised such trust powers for a period of at least three
years prior to the date hereof. The term "trusts" as used in this Section 4.33
includes (i) any and all common law or other trusts between an individual,
corporation or other entities and Orange or a predecessor, as trustee or
co-trustee, including, without limitation, pension or other qualified or
nonqualified employee benefit plans, compensation, testamentary, inter vivos,
and charitable trust indentures; (ii) any and all decedents' estates where
Orange or a predecessor is serving or has served as a co-executor or sole
executor, personal representative or administrator, administrator de bonis non,
administrator de bonis non with will annexed, or in any similar fiduciary
capacity; (iii) any and all guardianships, conservatorships or similar positions
where Orange or a predecessor is serving or has served as a co-grantor or a sole
grantor or a conservator or co-conservator of the estate, or any similar
fiduciary capacity; and (iv) any and all agency and/or custodial accounts and/or
similar arrangements, including plan administrator for employee benefit
accounts, under which Orange or a predecessor is serving or has served as an
agent or custodian for the owner or other party establishing the account with or
without investment authority.
4.34 Disclosure Documents and Applications. None of the information
supplied or to be supplied by or on behalf of ONB ("ONB Supplied Information")
for inclusion in (a) the Registration Statement on Form S-4 and the Proxy
Statement and Prospectus to be mailed to the shareholders of ONB and CVB in
connection with obtaining the approval of the shareholders of ONB and CVB of
this Agreement, as required and (b) any other documents to be filed with the
SEC, the FRB, the FDIC, the DFI or any other Governmental Entity in connection
with the transactions contemplated in this Agreement, will, at the respective
times such documents are filed or become effective, or with respect to the Proxy
Statement and Prospectus when mailed, contain any untrue statement of a material
fact, or omit to state any material fact required to be stated therein or
necessary
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in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
4.35 Intellectual Property. Except as set forth in a list furnished by ONB
to CVB (the "ONB Intellectual Property List"), ONB, Orange and Mortgage
Brokerage own or possess valid and binding licenses and other rights to use
without payment all material patents, copyrights, trade secrets, trade names,
service marks and trademarks used in their respective businesses; and neither
ONB, Orange or Mortgage Brokerage has received any notice with respect thereto
that asserts the rights of others. ONB, Orange and Mortgage Brokerage have in
all material respects performed all the obligations required to be performed by
them, and are not in default in any material respect under any license,
contract, agreement, arrangement or commitment relating to any of the foregoing.
4.36 Year 2000. The mission critical computer software operated by ONB and
Orange is currently capable of providing, or is being adapted to provide,
uninterrupted millennium functionality to record, store, process and present
calendar dates falling on or after January 1, 2000 in substantially the same
manner and with the same functionality as such mission critical software
records, stores, processes and presents such calendar dates falling on or before
December 31, 1999. The costs of the adaptations referred to in this clause will
not have a material adverse effect on the business, financial condition, results
of operations or prospects of ONB on a consolidated basis. Neither ONB nor
Orange has received, or reasonably expects to receive, a "Year 2000 Deficiency
Notification Letter" (as such term is employed by the FDIC). ONB has disclosed
to CVB a complete and accurate copy of its plan, including an estimate of the
anticipated associated costs, for addressing the issues set forth in all Federal
Financial Institutions Examination Council Interagency Statements as such issues
affect ONB and Orange. Between the date of this Agreement and the Effective
Time, ONB shall use commercially practicable efforts to implement such plan.
4.37 Insider Loans; Other Transactions. ONB has previously provided CVB
with a listing, current as of April 30, 1999, of all extensions of credit made
by ONB, Orange and Mortgage Brokerage to each of its executive officers and
directors and their related interests (all as defined under Federal Reserve
Board Regulation O), all of which have been made in compliance with Regulation
O, and Section 23B under the Federal Reserve Act which listing is true, correct
and complete in all material respects. Neither ONB, Orange or Mortgage Brokerage
owes any amount to, or has any contract or lease with or commitment to, any of
the present executive officers or directors of ONB, Orange or Mortgage Brokerage
(other than for compensation for current services not yet due and payable,
reimbursement of expenses arising in the ordinary course of business, options or
awards available under the ONB Stock Option Plan or any amounts due pursuant to
ONB's Employee Plans).
4.38 Registration Obligation. Neither ONB, Orange or Mortgage Brokerage is
under any obligation, contingent or otherwise, to register any of their
respective securities under the Securities Act or rules and regulation of the
OCC.
4.39 SBA Lending. Orange is a [certified preferred lender] with respect to
the Small Business Administration and maintains a program for lending with the
Small Business Administration.
4.40 Accuracy and Currentness of Information Furnished. The
representations and warranties made by ONB hereby or in the ONB Lists or
schedules hereto do not contain
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any untrue statement of a material fact or omit to state any material fact which
is necessary under the circumstances under which they were made to prevent the
statements contained herein or in such schedules from being misleading.
ARTICLE 5.
REPRESENTATIONS AND WARRANTIES OF CVB
CVB represents and warrants to ONB as follows:
5.1 Incorporation, Standing and Power. CVB has been duly organized, is
validly existing and in good standing as a corporation under the laws of the
State of California and is registered as a bank holding company under the BHC
Act. CBB is a California state chartered bank duly organized, validly existing
and in good standing under the laws of the State of California and is authorized
by the DFI to conduct a general banking business. CBB's deposits are insured by
the FDIC in the manner and to the fullest extent provided by law. Each of CVB
and CBB has all requisite corporate power and authority to own, lease and
operate their respective properties and assets and to carry on their businesses
as presently conducted. CVB and CBB are duly qualified and in good standing as
foreign corporations, and are authorized to do business, in all states or other
jurisdictions in which such qualification or authorization is necessary, except
where the failure to be so qualified or authorized would not, individually or in
the aggregate, have a material adverse effect on the business, financial
condition, results of operations or prospects of CVB and CBB on a consolidated
basis. True and correct copies of the Articles of Incorporation and Bylaws of
CVB and CBB have been delivered to ONB. Such Articles of Incorporation and
Bylaws are in full force and effect as of the date hereof.
5.2 Capitalization. As of the date of this Agreement, the authorized
capital stock of CVB consists of 50,000,000 shares of common stock, no par
value, of which 16,563,771 shares are outstanding and 20,000,000 shares of
preferred stock, no par value, of which no shares are outstanding. All of the
outstanding shares of CVB Stock are duly authorized, validly issued, fully paid
and nonassessable. The CVB Stock to be used in the Merger will be duly
authorized, validly issued, fully paid and nonassessable.
5.3 Financial Statements. CVB has previously furnished to ONB a copy of
the Financial Statements of CVB. The Financial Statements of CVB: (a) present
fairly the consolidated financial condition of CVB as of the respective dates
indicated and its consolidated results of operations and statements of cash
flows, as applicable, for the respective periods then ended, subject, in the
case of the unaudited consolidated interim financial statements, to normal
recurring adjustments; (b) have been prepared in accordance with generally
accepted accounting principles and/or applicable regulatory accounting
principles or banking regulations consistently applied (except as otherwise
indicated therein); and (c) are based upon the books and records of CVB and its
subsidiaries.
5.4 Reports and Filings. Since January 1, 1996, CVB has filed all reports,
returns, registrations and statements (such reports and filings referred to as
"CVB Filings"), together with any amendments required to be made with respect
thereto, that were required to be filed with (a) the SEC, (b) the FRB, and (c)
any other applicable Governmental Entity, including taxing authorities, except
where the failure to file such reports, returns, registrations or statements has
not had and is not reasonably expected to have a material adverse effect on the
business, financial condition, results of operations or
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prospects of CVB on a consolidated basis. No administrative actions have been
taken or orders issued in connection with such CVB Filings. As of their
respective dates, each of such CVB Filings (y) complied in all material respects
with all laws and regulations enforced or promulgated by the Governmental Entity
with which it was filed (or was amended so as to be in such compliance promptly
following discovery of any such noncompliance); and (z) did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Any financial
statement contained in any of such CVB Filings that was intended to present the
financial position of CVB on a consolidated basis fairly presented the financial
position of CVB on a consolidated basis and was prepared in accordance with
generally accepted accounting principles or banking regulations consistently
applied, except as stated therein, during the periods involved and except (other
than for those financial statements filed with the SEC), where any misstatement
or omission would not make the statements therein, in light of the circumstances
under which they were made, misleading.
5.5 Authority. The execution and delivery by CVB of this Agreement and the
Agreement of Merger and by CBB of the Agreement of Bank Merger, subject to the
required approval of the shareholders of CVB of this Agreement and the
transactions contemplated hereby, and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary corporate action on the part of CVB and CBB, as appropriate. This
Agreement is, and the Agreement of Merger and the Agreement of Bank Merger will
be, upon due execution and delivery by the respective parties thereto, valid and
binding obligations of CVB and CBB, as the case may be, enforceable in
accordance with their respective terms, except as the enforceability thereof may
be limited by bankruptcy, liquidation, receivership, conservatorship,
insolvency, moratorium or other similar laws affecting the rights of creditors
generally and by general equitable principles. Except as set forth in a list
furnished by CVB to ONB (the "CVB Conflicts and Consents List"), neither the
execution and delivery by CVB of this Agreement or the Agreement of Merger or by
CBB of the Agreement of Bank Merger, the consummation of the transactions
contemplated herein, nor compliance by CVB or CBB with any of the provisions
hereof or thereof, will: (a) conflict with or result in a breach of any
provision of their respective Articles of Incorporation, as amended, or Bylaws,
as amended; (b) constitute a breach of or result in a default (or give rise to
any rights of termination, cancellation or acceleration, or any right to acquire
any securities or assets) under any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, franchise, license, permit, agreement or
other instrument or obligation to which CVB or any subsidiary of CVB is a party,
or by which CVB or any subsidiary of CVB or any of their respective properties
or assets is bound; (c) result in the creation or imposition of any Encumbrance
on any of the properties or assets of CVB or any subsidiary; or (d) violate any
order, writ, injunction, decree, statute, rule or regulation applicable to CVB
or any subsidiary of CVB or any of their respective properties or assets. Except
as set forth in the "CVB Conflicts and Consents List," no consent of, approval
of, notice to or filing with any Governmental Entity having jurisdiction over
any aspect of the business or assets of CVB or CBB, and no consent of, approval
of or notice to any other Person, is required in connection with the execution
and delivery by CVB of this Agreement or the Agreement of Merger, or the
consummation by CVB of the Merger or the transactions contemplated hereby or
thereby, or by CBB of the Agreement of Bank Merger and the transactions
contemplated thereby, except (i) such approvals as may be required by the SEC,
the FRB, FDIC and the DFI; (ii) the approval of the shareholders of CVB, if
required; (iii) filing of the Agreement of Merger with the Secretary of State of
the State of
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California and the Agreement of Bank Merger with the Secretary of State and the
Commissioner; and (iv) such approvals as may be required to approve for
inclusion on AMEX of the CVB Stock to be issued in the Merger.
5.6 Subsidiaries. As of the date of this Agreement, CVB owns all of the
outstanding stock of CBB. As of the date of this Agreement, and except for its
investments in CBB, Chino Valley Bancorp, Community Trust Deed Services, and CVB
Ventures, Inc., CVB does not own, directly or indirectly (except as a pledgee
pursuant to loans or upon acquisition in satisfaction of debt previously
contracted), the outstanding stock or equity or other voting interest in any
other Person. CBB is the only subsidiary material to the business or financial
condition of CVB on a consolidated basis.
5.7 Brokers and Finders. CVB is not a party to or obligated under any
agreement with any broker or finder relating to the transactions contemplated
hereby, and neither the execution of this Agreement nor the consummation of the
transactions provided for herein will result in any liability to any broker or
finder.
5.8 Insurance. Each of CVB and CBB have policies of insurance and bonds
with respect to their respective assets and business against such casualties and
contingencies and in such amounts, types and forms as are customarily
appropriate. All such insurance policies and bonds are in full force and effect.
5.9 Certain Material Changes. Except as specifically required, permitted
or effected by this Agreement or as disclosed in any CVB Filings, since December
31, 1998, there has not been, occurred or arisen any of the following (whether
or not in the ordinary course of business unless otherwise indicated):
5.9.1 Any change in any of the assets, liabilities, permits, methods
of accounting or accounting practices, business, or manner or conducting
business, of CVB or its subsidiaries or any other event or development that
has had or may reasonably be expected to have a material adverse effect on
the assets, liabilities, permits, business, financial condition, results of
operations or prospects of CVB on a consolidated basis;
5.9.2 Any damage, destruction or other casualty loss (whether or not
covered by insurance) that has had or may reasonably be expected to have a
material adverse effect on the assets, liabilities, permits, business,
financial condition, results of operations or prospects of CVB on a
consolidated basis;
5.9.3 Any amendment, modification or termination of any existing, or
entry into any new, material contract or permit that has had or may
reasonably be expected to have a material adverse effect on the assets,
liabilities, permits, business, financial condition, results of operations
or prospects of CVB on a consolidated basis; or
5.9.4 Any disposition by CVB of an asset the lack of which has had or
may reasonably be expected to have a material adverse effect on the assets,
liabilities, permits, business, financial condition, results of operations
or prospects of CVB on a consolidated basis.
5.10 Licenses and Permits. CVB and CBB have all material licenses and
permits that are necessary for the conduct of their respective businesses, and
such licenses are in full force and effect, except for any failure to be in full
force and effect that would not, individually or in the aggregate, have a
material adverse effect on the business, financial condition, results of
operations or prospects of CVB on a consolidated basis. The properties, assets,
operations and businesses of CVB and CBB are and have been
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maintained and conducted, in all material respects, in compliance with all
applicable licenses and permits. The properties and operations of CVB and CBB
are and have been maintained and conducted, in all material respects, in
compliance with all applicable laws and regulations.
5.11 Compliance with Laws and Regulations. Neither CVB or CBB is in
default under or in breach or violation of (i) any provision of its respective
Articles or Incorporation, as amended, or Bylaws, as amended, or (ii) law, rule
or regulation promulgated by any Governmental Entity, except, with respect to
clause (ii) for such defaults, breaches or violations as would not have,
individually or in the aggregate, a material adverse effect on the business,
financial condition, results of operations or prospects of CVB on a consolidated
basis.
5.12 Corporate Records. The minute books of CVB and CBB reflect all
material actions taken to this date by its respective shareholders, boards of
directors and committees.
5.13 Accounting Records. CVB and CBB maintain accounting records which
fairly and validly reflect, in all material respects, their transactions and
accounting controls exist sufficient to provide reasonable assurances that such
transactions are, in all material respects, (i) executed in accordance with
their management's general or specific authorization, and (ii) recorded as
necessary to permit the preparation of financial statements in conformity with
generally accepted accounting procedures. Such records, to the extent they
contain important information pertaining to CVB and CBB. which is not easily and
readily available elsewhere, have been duplicated, and such duplicates are
stored safely and securely.
5.14 Facts Affecting Regulatory Approvals. To the best knowledge of CVB,
there is no fact, event or condition applicable to CVB or any of its
subsidiaries which will, or reasonably could be expected to, adversely affect
the likelihood of securing the requisite approvals or consents of any
Governmental Entity to the Merger, the Bank Merger and the transactions
contemplated by this Agreement.
5.15 Accounting and Tax Matters. CVB and CBB have not through the date
hereof taken or agreed to take any action that would prevent it from accounting
for the business combination to be effected by the Merger and the Bank Merger as
a pooling-of-interests or would prevent the Merger and the Bank Merger from
qualifying as a tax-free reorganization under the Code.
5.16 Disclosure Documents and Applications. None of the information
supplied or to be supplied by or on behalf of CVB or any of its subsidiaries
("CVB Supplied Information") for inclusion in (a) the Registration Statement on
Form S-4 and the Proxy Statement and Prospectus to be mailed to the shareholders
of ONB and CVB in connection with obtaining the approval of the shareholders of
ONB and CVB of this Agreement, the Merger and the other transactions
contemplated hereby, and (b) any other documents to be filed with the SEC, the
FRB, the FDIC, the DFI or any other Governmental Entity in connection with the
transactions contemplated in this Agreement, will, at the respective times such
documents are filed or become effective, or with respect to the Proxy Statement
and Prospectus when mailed, contain any untrue statement of a material fact, or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
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5.17 AMEX Listing. As of the date hereof, CVB Stock is listed on the
American Stock Exchange. CVB has taken no action to delist CVB Stock and, to the
best of CVB's knowledge, there are no existing orders nor pending investigations
by a Governmental Entity or any stock exchange which might lead to the delisting
of CVB Stock.
5.18 Employees. There are no controversies pending or threatened between
either CVB or CBB and any of its employees that are likely to have a material
adverse effect on the business, financial condition, results of operations or
prospects of CVB on a consolidated basis. Neither CVB nor CBB is a party to any
collective bargaining agreement with respect to any of its employees or any
labor organization to which its employees or any of them belong.
5.19 Year 2000. The mission-critical computer software operated by CVB and
CBB is currently capable of providing, or is being adapted to provide,
uninterrupted millennium functionality to record, store, process and present
calendar dates falling on or after January 1, 2000 in substantially the same
manner and with the same functionality as such mission critical software
records, stores, processes and presents such calendar dates falling on or before
December 31, 1999. The costs of the adaptations referred to in this clause will
not have a material adverse effect on the business, financial condition, results
of operations or prospects of CVB on a consolidated basis. CVB has not received,
and reasonably expects that it will not receive, a "Year 2000 Deficiency
Notification Letter" (as such term is employed by the FDIC).
5.20 Litigation. Except as set forth in a list furnished by CVB to ONB
(the "CVB Litigation List") there is no private or governmental suit, claim,
action or proceeding pending, nor to CVB's knowledge threatened, against CVB or
CBB or against any of their respective directors, officers or employees relating
to the performance of their duties in such capacities or against or affecting
any properties of CVB or CBB which, if adversely determined, would have,
individually or in the aggregate, a material adverse effect upon the business,
financial condition or results of operations of CVB on a consolidated basis, or
which may involve a judgment against CVB or CBB in excess of $250,000. Also,
except as disclosed in the CVB Litigation List, there are no material judgments,
decrees, stipulations or orders against CVB or CBB in respect of, or the effect
of which is to prohibit, any business practice or the acquisition of any
property or the conduct of business in any area.
5.21 Taxes. Except as set forth in a list furnished by CVB to ONB (the
"CVB Tax List"), (A) all material Tax Returns required to be filed by or on
behalf of CVB or CBB, have been duly and timely filed with the appropriate
taxing authorities in all jurisdictions in which such Tax Returns are required
to be filed (after giving effect to any valid extensions of time in which to
make such filings), and all such Tax Returns were true, complete and correct in
all material respects; (B) all Taxes due and payable by or on behalf of CVB, CBB
or any of their subsidiaries, either directly, as part of an Affiliated Group
Tax Return, or otherwise, have been fully and timely paid, except to the extent
adequately reserved therefor in accordance with generally accepted accounting
principles and/or applicable regulatory accounting principles or banking
regulations consistently applied on the CVB balance sheet, and adequate reserves
or accruals for Taxes have been provided in the CVB balance sheet with respect
to any period through the date thereof for which Tax Returns have not yet been
filed or for which Taxes are not yet due and owing; and (C) no agreement, waiver
or other document or arrangement extending or having the effect of extending the
period for assessment or collection of Taxes (including, but not limited to, any
applicable statute of limitation) has been executed or filed with any taxing
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authority by or on behalf of CVB, CBB or any of their subsidiaries, or any
Affiliated Group(s) of which any of them is or was a member.
5.22 Performance of Obligations. Each of CVB and CBB has performed in all
material respects all of the obligations required to be performed by it to date
and is not in default under or in breach of any term or provision of any
covenant, contract, lease, indenture or any other covenant to which it is a
party, is subject or is otherwise bound, and no event has occurred that, with
the giving of notice or the passage of time or both, would constitute such
default or breach, where such default or breach would have, individually or in
the aggregate, a material adverse effect on the business, financial condition,
results of operations or prospects of CVB on a consolidated basis.
5.23 Employee Benefit Plans. CVB has previously made available to ONB
copies of each "employee benefit plan," as defined in Section 3(3) of ERISA, of
which CVB or any member of the same controlled group of corporations, trades or
businesses as CVB within the meaning of Section 4001(a)(14) of ERISA ("ERISA
Affiliates") is a sponsor or participating employer or as to which CVB or any of
its ERISA Affiliates makes contributions or is required to make contributions
and which is subject to any provision of ERISA and covers any employee, whether
active or retired, of CVB or any of its ERISA Affiliates, together with all
amendments thereto, all currently effective and related summary plan description
(to the extent one is required by law), the determination letter from the IRS,
the annual reports for the most recent three years (Form 5500 including, if
applicable, Schedule B thereto) and the summary of material modifications
prepared in connection with any such plan. Such plans are hereinafter referred
to collectively as the "Employee Plans." CVB does not participate in an employee
benefit pension plan that is a "multiemployer plan" within the meaning of
Section 3(37) of ERISA that would subject CVB or any of its ERISA Affiliates to
a material amount of withdrawal liability upon withdrawal from any such plan. No
event has occurred that will subject such Employee Plans to a material amount of
tax under Section 511 of the Code. All amendments required to bring each
Employee Plan into conformity with all of the applicable provisions of ERISA,
the Code and all other applicable laws have been made other than to make
amendments for which the regulatory remedial amendment period has not expired.
As disclosed in a list furnished by CVB to ONB (the "CVB Employee Plan List"),
all Employee Plans were in effect for substantially all of 1998, and there has
been no material amendment thereof (other than amendments required to comply
with applicable law) or material increase in the cost thereof or benefits
thereunder on or after January 1, 1998.
With respect to all Employee Plans and Benefit Arrangements, CVB and its
ERISA Affiliates are in material compliance with their terms and (other than
noncompliance the cost or liability of which is not material) with the
requirements prescribed by any and all statutes, governmental or court orders,
or governmental rules or regulations currently in effect, including but not
limited to ERISA and the Code, applicable to such plans or arrangements. Each of
the Employee Plans which is intended to be a qualified plan under Section 401(a)
of the Code has received a favorable determination letter from the Internal
Revenue Service and neither CVB nor CBB knows of any fact which could adversely
affect the qualified status of any such Employee Plan other than the requirement
to make amendments for which the regulatory remedial amendment period has not
expired.
5.24 Community Reinvestment Act. CBB has received a rating of
"Satisfactory" in its most recent examination with respect to the Community
Reinvestment Act. CBB has not been advised of any supervisory concerns regarding
CBB's compliance with the Community Reinvestment Act.
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5.25 Derivative Transactions. Except as set forth in a list furnished by
CVB to ONB (the "CVB Derivatives List"), neither CVB or CBB is a party to or has
agreed to enter into an exchange traded or over-the-counter equity, interest
rate foreign exchange or other swap, forward, future, option, cap, floor or
collar or any other contract that is not included on the balance sheet and is a
derivative contract (including various combinations thereof) or owns securities
that are referred to generically as "structured notes," "high risk mortgage
derivatives," "capped floating rate notes," or "capped floating rate mortgage
derivatives."
5.26 Intellectual Property. Except as set forth in a list furnished by CVB
to ONB (the "CVB Intellectual Property List"), CVB and CBB own or possess valid
and binding licenses and other rights to use without payment all material
patents, copyrights, trade secrets, trade names, service marks and trademarks
used in their respective businesses, and neither CVB nor CBB has received any
notice with respect thereto that asserts the rights of others. CVB and CBB have
in all material respects performed all the obligations required to be performed
by them, and are not in default in any material respect under any license,
contract, agreement, arrangement or commitment relating to any of the foregoing.
5.27 Accuracy and Currentness of Information Furnished. The
representations and warranties made by CVB hereby or in the CVB Lists or
Schedules hereto do not contain any untrue statement of material fact or omit to
state any material fact which is necessary under the circumstances under which
they were made to prevent the statements contained herein or in such schedules
from being misleading.
ARTICLE 6.
COVENANTS OF ONB PENDING EFFECTIVE TIME OF THE MERGER
ONB covenants and agrees with CVB as follows:
6.1 Limitation on Conduct Prior to Effective Time of the Merger. Between
the date hereof and the Effective Time of the Merger, except as contemplated by
this Agreement and subject to requirements of law and regulation, ONB agrees to
conduct its business (and to cause Orange and Mortgage Brokerage to conduct
their respective businesses) in the ordinary course in substantially the manner
heretofore conducted and in accordance with sound banking practices, and ONB,
Orange and Mortgage Brokerage shall not, without the prior written consent of
CVB, which consent shall not be unreasonably withheld:
6.1.1 issue, sell or grant any ONB Stock (except pursuant to the
exercise of ONB Options outstanding as of the date hereof), any other
securities (including long-term debt) of ONB, Orange or Mortgage Brokerage,
or any rights, stock appreciation rights, options or securities to acquire
any ONB Stock, or any other securities (including long-term debt) of ONB,
Orange or Mortgage Brokerage;;
6.1.2 declare, set aside or pay any dividend or make any other
distribution upon or split, combine or reclassify any shares of capital
stock or other securities of ONB, Orange or Mortgage Brokerage, provided,
however, that subject to Section 6.11, ONB may pay to its shareholders
between the date hereof and the Effective Time of Merger one cash dividend
for each fiscal quarter commencing with the quarter beginning July 1, 1999
in an amount which shall not exceed $0.15 per share and in a manner and
with a record date and payment date consistent with past practices;
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6.1.3 purchase, redeem or otherwise acquire any capital stock or
other securities of ONB, Orange or Mortgage Brokerage or any rights,
options, or securities to acquire any capital stock or other securities of
ONB, Orange or Mortgage Brokerage;
6.1.4 except as may be required to effect the transactions
contemplated herein, amend its Articles of Incorporation, Articles of
Association or Bylaws;
6.1.5 grant any general or uniform increase in the rate of pay of
employees or employee benefits, except in the ordinary course of business
consistent with past practice, provided, however, that nothing herein shall
be construed to prevent the payment in cash, and in a manner and amount
consistent with past practice, of directors' fees for services provided in
the normal and ordinary course of business;
6.1.6 grant any increase in salary, incentive compensation or
employee benefits or pay any bonus to any Person except in the ordinary
course of business consistent with past practice, and pursuant to any
written contractual obligations as of the date hereof, or voluntarily
accelerate the vesting of any employee benefits, and except as provided in
Article XII of this Agreement;
6.1.7 make any capital expenditure or commitments with respect
thereto in excess of $25,000 in the aggregate, except for ordinary repairs,
renewals and replacements;
6.1.8 compromise or otherwise settle or adjust any assertion or claim
of a deficiency in taxes (or interest thereon or penalties in connection
therewith), extend the statute of limitations with any tax authority or
file any pleading in court in any tax litigation or any appeal from an
asserted deficiency, or file or amend any federal, foreign, state or local
tax return, or make any tax election;
6.1.9 grant, renew or commit to grant or renew any extension of
credit if such extension of credit, together with all other credit then
outstanding to the same Person and all Affiliated Persons, would exceed the
greater of $100,000 or Orange's individual branch manager's lending limit
(consent shall be deemed granted if within one business day of written
notice delivered to CVB's Chief Lending Officer, notice of objection is not
received by ONB);
6.1.10 change its tax or accounting policies and procedures or any
method or period of accounting unless required by generally accepted
accounting principles or a Governmental Entity;
6.1.11 grant or commit to grant any extension of credit or amend the
terms of any such credit outstanding on the date hereof to any executive
officer, director or holder of 10% or more of the outstanding ONB Stock, or
any Affiliate of such Person, if such credit would exceed $100,000 (consent
shall be deemed granted if within one business day of written notice
delivered to CVB's Chief Lending Officer, notice of objection is not
received by ONB);
6.1.12 close any offices at which business is conducted or open any
new offices;
6.1.13 adopt or enter into any new employment agreement or other
employee benefit plan or arrangement or amend or modify any employment
agreement or employee benefit plan or arrangement of any such type except
for such amendments as are required by law;
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6.1.14 initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action intended to
facilitate, any inquiries or the making of any proposal which constitutes,
or may reasonably be expected to lead to, any Competing Transaction (as
such term is defined below), or negotiate with any person in furtherance of
such inquiries or to obtain a Competing Transaction, or agree to or endorse
any Competing Transaction, or authorize or permit any of its or Orange's
officers, directors or employees or any investment banker, financial
advisor, attorney, accountant or any other representative retained by it or
any of its Affiliates to take any such action, and ONB shall promptly
notify CVB (orally and in writing) of all of the relevant details relating
to all inquiries and proposals which it may receive relating to any of such
matters. For purposes of this Agreement, "Competing Transaction" shall mean
any of the following involving ONB or Orange: any merger, consolidation,
share exchange or other business combination; a sale, lease, exchange,
mortgage, pledge, transfer or other disposition of assets of ONB or Orange
representing 10% or more of the consolidated assets of ONB; a sale of
shares of capital stock (or securities convertible or exchangeable into or
otherwise evidencing, or any agreement or instrument evidencing, the right
to acquire capital stock), representing 10% or more of the voting power of
ONB or Orange; a tender offer or exchange offer for at least 10% of the
outstanding shares; a solicitation of proxies in opposition to approval of
the Merger by ONB's shareholders; or a public announcement of an
unsolicited bona fide proposal, plan, or intention to do any of the
foregoing. Notwithstanding any other provision in this Section 6.1.14 or
elsewhere in this Agreement, (a) nothing herein shall prevent ONB's Board
of Directors from disclosing to ONB's shareholders a position with respect
to a tender offer pursuant to Rule 14d-9 and 14e-2 promulgated under the
Exchange Act and (b) this Agreement shall not restrict ONB from taking any
action if the Board of Directors of ONB concludes in good faith based upon
consultation with its outside legal counsel, that such action is required
in order for the Board of Directors of ONB to avoid a substantial risk of
liability with respect to its fiduciary obligations to the ONB shareholders
under applicable law; provided, however, that nothing herein shall prohibit
CVB from terminating this Agreement pursuant to Section 13.1.8 hereof.
6.1.15 make any material change in any basic policies and practices
with respect to liquidity management and cash flow planning, marketing,
deposit origination, lending, budgeting, profit and tax planning, personnel
practices or any other material aspect of ONB's or Orange's business or
operations, except such changes as may be required in the opinion of ONB's
or Orange's management to respond to economic or market conditions or as
may be required by any Governmental Entity;
6.1.16 grant any Person a power of attorney or similar authority;
6.1.17 make any investment by purchase of stock or securities
(including an Investment Security), contributions to capital, property
transfers or otherwise in any other Person, except for federal funds or
obligations of the United States Treasury or an agency of the United States
Government the obligations of which are entitled to or implied to have the
full faith and credit of the United States government and which have an
original maturity not in excess of one year, or bank qualified investment
grade municipal bonds, in any case, in the ordinary course of business
consistent with past practices and which are not designated as trading;
6.1.18 amend or modify any Scheduled Contract or enter into any
agreement or contract that would be a Scheduled Contract under Section
4.16;
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6.1.19 sell, transfer, mortgage, encumber or otherwise dispose of any
assets or release or waive any claim, except in the ordinary course of
business and consistent with past practices;
6.1.20 take any action which would or is reasonably likely to (i)
adversely affect the ability of CVB, CBB, ONB or Orange to obtain any
necessary approval of any Governmental Entity required for the transactions
contemplated hereby; (ii) adversely affect ONB's ability to perform its
covenants and agreements under this Agreement; or (iii) result in any of
the conditions to the performance of CVB's or ONB's obligations hereunder,
as set forth in Articles 9 or 10 herein not being satisfied;
6.1.21 make any special or extraordinary payments to any Person in an
aggregate amount to that Person which is excess of $10,000, provided,
however, payments pursuant to this Section 6.1.21 may not be made to any
employee of ONB or Orange;
6.1.22 reclassify any Investment Security from hold-to-maturity or
available for sale to trading;
6.1.23 sell any security other than in the ordinary course of
business, or engage in gains trading;
6.1.24 take title to any real property without conducting prior
thereto an environmental investigation, which investigation shall disclose
the absence of any suspected environmental contamination;
6.1.25 take or cause to be taken any action which would disqualify
either the Merger or the Bank Merger as a "reorganization" within the
meaning of Section 368 of the Code or prevent CVB from accounting for the
business combination to be effected by the Merger and the Bank Merger as a
pooling-of-interests;
6.1.26 settle any claim, action or proceeding involving any material
liability for monetary damages or enter into any settlement agreement
containing material obligations;
6.1.27 make, acquire a participation in, or reacquire an interest in
a participation sold of, any loan that is not in compliance with its normal
credit underwriting standards, policies and procedures as in effect on
December 31, 1998; or renew, extend the maturity of, or alter any of the
material terms of any such loan for a period of greater than six months;
6.1.28 incur any indebtedness for borrowed money or assume, guaranty,
endorse or otherwise as an accommodation become responsible for the
obligations of any other person, except for (i) in connection with banking
transactions with banking customers in the ordinary course of business, or
(ii) short-term borrowings made at prevailing market rates and terms; or
6.1.29 agree or make any commitment to take any actions prohibited by
this Section 6.1.
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6.2 Affirmative Conduct Prior to Effective Time of the Merger. Between the
date hereof and the Effective Time of the Merger, ONB shall (and shall cause
Orange and Mortgage Brokerage to):
6.2.1 use its commercially reasonable efforts consistent with this
Agreement to maintain and preserve intact its present business organization
and to maintain and preserve its relationships and goodwill with account
holders, borrowers, employees and others having business relationships with
ONB, Orange or Mortgage Brokerage;
6.2.2 use its commercially reasonable efforts to keep in full force
and effect all of the existing material permits and licenses of ONB, Orange
and Mortgage Brokerage;
6.2.3 use its commercially reasonable efforts to maintain insurance
coverage at least equal to that now in effect on all properties for which
it is responsible and on its business operations;
6.2.4 perform its material contractual obligations and not become in
material default on any such obligations;
6.2.5 duly observe and conform in all material respects to all lawful
requirements applicable to its business;
6.2.6 maintain its assets and properties in good condition and
repair, normal wear and tear excepted;
6.2.7 promptly upon learning of such information, advise CVB in
writing of any event or any other transaction within its knowledge whereby
any Person or Related Group of Persons acquires, directly or indirectly,
record or beneficial ownership or control (as defined in Rule 13d-3
promulgated by the SEC under the Exchange Act) of 5% or more of the
outstanding ONB Stock prior to the record date fixed for the ONB
Shareholders' Meeting or any adjourned meeting thereof to approve this
Agreement and the transactions contemplated herein;
6.2.8 promptly notify CVB regarding receipt from any tax authority of
any notification of the commencement of an audit, any request to extend the
statute of limitations, any statutory notice of deficiency, any revenue
agent's report, any notice of proposed assessment, or any other similar
notification of potential adjustments to the tax liabilities of ONB, or any
actual or threatened collection enforcement activity by any tax authority
with respect to tax liabilities of ONB;
6.2.9 make available to CVB monthly unaudited balance sheets and
income statements of ONB within 25 days after the close of each calendar
month;
6.2.10 not later than the 30th day of each calendar month, amend or
supplement the ONB Lists prepared and delivered pursuant to Article 4 to
ensure that the information set forth in the ONB Lists accurately reflects
the then-current status of ONB and Orange. ONB shall further amend or
supplement the ONB Lists as of the Closing Date if necessary to reflect any
additional information that needs to be included in the ONB Lists;
6.2.11 use its commercially reasonable efforts to obtain any
third-party consent with respect to any contract, agreement, lease,
license, arrangement, permit or release
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that is material to the business of ONB or Orange or that is contemplated
in this Agreement as required in connection with the Merger or the Bank
Merger;
6.2.12 maintain an allowance for loan and lease losses consistent
with practices and methodology as in effect on the date of the execution of
this Agreement;
6.2.13 furnish to Manatt, Phelps & Phillips, LLP promptly upon its
written request written representations and certificates as deemed
reasonably necessary or appropriate for purposes of enabling Manatt, Phelps
& Phillips, LLP to render the tax opinion referred to in Section 9.6
hereof.
6.3 Access to Information.
6.3.1 ONB will afford, upon reasonable request, to CVB and its
representatives, counsel, accountants, agents and employees reasonable access
during normal business hours to all of their business, operations, properties,
books, files and records and will do everything reasonably necessary to enable
CVB and its representatives, counsel, accountants, agents and employees to make
a complete examination of the financial statements, business, assets and
properties of ONB and Orange and the condition thereof and to update such
examination at such intervals as CVB shall deem appropriate. Such examination
shall be conducted in cooperation with the officers of ONB and Orange and in
such a manner as to minimize any disruption of, or interference with, the normal
business operations of ONB and Orange. Upon the request of CVB, ONB will request
M&P to provide reasonable access to representatives of Deloitte & Touche working
on behalf of CVB to auditors' work papers with respect to the business and
properties of ONB and Orange, including tax accrual work papers prepared for ONB
and Orange during the preceding 60 months, other than (a) books, records and
documents covered by the attorney-client privilege, or that are attorneys' work
product, and (b) books, records and documents that ONB or Orange is legally
obligated to keep confidential. No examination or review conducted under this
section shall constitute a waiver or relinquishment on the part of CVB of the
right to rely upon the representations and warranties made by ONB herein;
provided, that CVB shall disclose to ONB any fact or circumstance it may
discover which CVB believes renders any representation or warranty made by ONB
hereunder incorrect in any respect. CVB covenants and agrees that it, its
subsidiaries, and their respective representatives, counsel, accountants, agents
and employees will hold in strict confidence all documents and information
concerning ONB and Orange so obtained from any of them (except to the extent
that such documents or information are a matter of public record or require
disclosure in the Proxy Statement and Prospectus or any of the public
information of any applications required to be filed with any Governmental
Entity to obtain the approvals and consents required to effect the transactions
contemplated hereby), and if the transactions contemplated herein are not
consummated, such confidence shall be maintained and all such documents shall be
returned to ONB.
6.3.2 A representative of CVB, selected by CVB in its sole discretion,
shall be authorized and permitted to review each loan, lease, or other credit
funded or renewed by ONB or Orange after the date hereof, and all information
associated with such loan, lease or other credit within three Business Days of
such funding or renewal, such review to take place, if possible, on ONB's
premises.
6.3.3 A representative of CVB, selected by CVB in its sole discretion,
shall be permitted by ONB and Orange to attend all regular and special Board of
Directors' and committee meetings of ONB and Orange from the date hereof until
the Effective Time of
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the Merger; provided, however, that the attendance of such representative shall
not be permitted at any meeting, or portion thereof, for the purpose of
discussing the transactions contemplated or affected by this Agreement or the
obligations of ONB under this Agreement.
6.4 Review by Accountants. Promptly upon request of CVB, ONB will request
M&P to permit representatives of Deloitte & Touche working on behalf of CVB to
review and examine the work papers of M&P relating to ONB and Orange and the
Financial Statements of ONB and to review and examine the work papers of M&P
relating to any future completed audits or completed reviews of ONB and Orange.
6.5 Filings. ONB agrees that through the Effective Time of the Merger,
each of ONB's or Orange's reports, registrations, statements and other filings
required to be filed with any applicable Governmental Entity will comply in all
material respects with all the applicable statutes, rules and regulations
enforced or promulgated by the Governmental Entity with which it will be filed
and none will contain any untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Any financial statement contained in any such report, registration,
statement or other filing that is intended to present the financial position of
the entity to which it relates will fairly present the financial position of
such entity and will be prepared in accordance with generally accepted
accounting principles or applicable banking regulations consistently applied
during the periods involved, except where any misstatement or omission (other
than for financial statements filed with the SEC) would not make the statements
therein, in light of the circumstances under which they were made, misleading.
6.6 Notices; Reports. ONB will promptly notify CVB of any event of which
ONB obtains knowledge which has had or may reasonably be expected to have a
material adverse effect on the financial condition, operations, business or
prospects of ONB on a consolidated basis, or in the event that ONB determines
that it is unable to fulfill any of the conditions to the performance of CVB's
obligations hereunder, as set forth in Articles 9 or 11 herein, and ONB will
furnish CVB (i) as soon as available, and in any event within one Business Day
after it is mailed or delivered to the Board of Directors of ONB or Orange or
committees thereof, any report by ONB or Orange for submission to the Board of
Directors of ONB or Orange or committees thereof, provided, however, that ONB
need not furnish to CVB communications of ONB's legal counsel regarding ONB's
rights and obligations under this Agreement or the transactions contemplated
hereby, or books, records and documents covered by confidentiality agreements or
the attorney-client privilege, or which are attorneys' work product, (ii) as
soon as available, all proxy statements, information statements, financial
statements, reports, letters and communications sent by ONB to its shareholders
or other security holders, and all reports filed by ONB or Orange with the FRB,
the FDIC, the OCC or the DFI, and (iii) such other existing reports as CVB may
reasonably request relating to ONB or Orange.
6.7 ONB Shareholders' Meeting. Promptly after the execution of this
Agreement, ONB will take action necessary in accordance with applicable law and
its Articles of Incorporation and Bylaws to convene a meeting of its
shareholders to consider and vote upon this Agreement and the transactions
contemplated hereby so as to permit the consummation of the transactions
contemplated hereby. The Board of Directors of ONB shall, subject to its
fiduciary duties, recommend that its shareholders approve this Agreement and the
transactions contemplated hereby, and the Board of Directors of ONB shall,
subject to its fiduciary duties, use its best efforts to obtain the affirmative
vote of the
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holders of the largest possible percentage of the outstanding ONB Stock to
approve this Agreement and the transactions contemplated hereby.
6.8 Certain Loans and Other Extensions of Credit. ONB will promptly inform
CVB of the amounts and categories of any loans, leases or other extensions of
credit that have been classified by any bank regulatory authority or by any unit
of ONB or Orange or by any other Person as "Criticized," "Specially Mentioned,"
"Substandard," "Doubtful," "Loss" or any comparable classification ("Classified
Credits"). ONB will furnish CVB, as soon as practicable, and in any event within
20 days after the end of each calendar month, schedules including the following:
(a) Classified Credits (including with respect to each credit its classification
category and the originating unit); (b) nonaccrual credits (including the
originating unit); (c) accrual exception credits that are delinquent 90 or more
days and have not been placed on nonaccrual status (including its originating
unit); (d) credits delinquent as to payment of principal or interest (including
its originating unit), including an aging into current-to-29, 30 - 59, 60 - 89,
and 90+ day categories; (e) participating loans and leases, stating, with
respect to each, whether it is purchased or sold and the originating unit; (f)
loans or leases (including any commitments) by ONB or Orange to any ONB or
Orange director, officer at or above the senior vice president level, or
shareholder holding 10% or more of the capital stock of ONB, including with
respect to each such loan or lease the identity and, to the knowledge of ONB,
the relation of the borrower to ONB or Orange, and the outstanding and undrawn
amounts; (g) letters of credit (including the originating unit); (h) loans or
leases wholly or partially charged off during the previous month (including with
respect to each loan or lease, the originating amount, the write-off amount and
its originating unit); and (i) other real estate or assets acquired in
satisfaction of debt.
6.9 Applications. Subject to Section 7.5, ONB will promptly prepare or
cause to be prepared the portions of the Proxy Statement and Prospectus as it
pertains to ONB or Orange and any other applications necessary to consummate the
transactions contemplated hereby, and further agrees to provide any information
requested by CVB for the preparation of any applications necessary to consummate
the transactions contemplated hereby. ONB shall afford CVB a reasonable
opportunity to review the portions of the Proxy Statement and Prospectus
pertaining to ONB or Orange and all such applications and all amendments and
supplements thereto before the filing thereof. ONB covenants and agrees that,
with respect to the information relating to ONB or Orange, the Proxy Statement
and Prospectus will comply in all material respects with the provisions of
applicable law, and will not contain any untrue statement of material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements contained therein, in light of the circumstances under which
they were made, not misleading. ONB will use its commercially reasonable efforts
to obtain all regulatory approvals or consents necessary to effect the Merger
and the transactions contemplated herein.
6.10 Affiliate Agreements. Concurrently with the execution of this
Agreement, (a) ONB shall deliver to CVB a letter identifying all persons who are
then "affiliates" of ONB for purposes of Rule 145 under the Securities Act and
(b) ONB shall advise the persons identified in such letter of the resale
restrictions imposed by applicable securities laws and shall use reasonable
efforts to obtain from each person identified in such letter a written agreement
substantially in the form attached hereto as Exhibit C. ONB shall use reasonable
efforts to obtain from any person who becomes an affiliate of ONB after ONB's
delivery of the letter referred to above, and on or prior to the date of the ONB
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Shareholders' Meeting to approve this Agreement, a written agreement
substantially in the form attached as Exhibit C hereto as soon as practicable
after obtaining such status.
6.11 Coordination of Dividends. ONB shall coordinate with CVB the
declaration of any dividends that may be allowed pursuant to Section 6.1.2
hereof, and the record date and the payment dates relating thereto, it being the
intention of the parties that holders of ONB Stock shall not receive two
dividends, or fail to receive one dividend, for any applicable dividend period
with respect to their shares of ONB Stock and any shares of CVB Stock any such
holder will receive in exchange therefor in the Merger.
6.12 Bank Merger. ONB and Orange shall, at the request of CVB, (i) take
all necessary corporate and other action, to adopt and approve the Bank Merger,
(ii) execute, deliver, and, where appropriate, file any and all documents
necessary or desirable to permit the Bank Merger immediately following the
Merger, and (iii) take and cause to be taken any other action to permit the
consummation of transactions contemplated in connection with the Bank Merger.
Neither ONB nor Orange shall take any action that would prevent performance.
6.13 Mortgage Brokerage. At the request of CVB, ONB shall promptly take
all action necessary to merge Mortgage Brokerage into Orange or dissolve
Mortgage Brokerage as a corporation.
ARTICLE 7.
COVENANTS OF CVB PENDING EFFECTIVE TIME OF THE MERGER
CVB covenants and agrees with ONB as follows:
7.1 Limitation on Conduct Prior to Effective Time of the Merger. Between
the date hereof and the Effective Time of the Merger, except as contemplated by
this Agreement and subject to requirements of law and regulation generally
applicable to bank holding companies and banks, each of CVB and its subsidiaries
shall not, without the prior written consent of ONB, which consent shall not be
unreasonably withheld:
7.1.1 take any action which would or is reasonably likely to (i)
adversely affect the ability of CVB to obtain any necessary approvals of
any Governmental Entity required for the transactions contemplated hereby;
(ii) adversely affect CVB's ability to perform its covenants and agreements
under this Agreement; or (iii) result in any of the conditions to the
performance of CVB's obligations hereunder, as set forth in Articles 9 or
11 herein not being satisfied;
7.1.2 take or cause to be taken any action which would disqualify the
Merger as a "reorganization" within the meaning of Section 368 of the Code
or prevent CVB from accounting for the business combination to be effected
by the Merger as a pooling-of-interests;
7.1.3 amend its articles of incorporation in any respect which would
materially and adversely affect the rights and privileges attendant to the
CVB Stock; or
7.1.4 agree or make any commitment to take any actions prohibited by
this Section 7.1.
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7.2 Affirmative Conduct of CVB and Subsidiaries Prior to Effective Time of
the Merger. Between the date hereof and the Effective Time of the Merger, CVB
shall:
7.2.1 duly observe and conform in all material respects to all lawful
requirements applicable to the business of CVB or any subsidiary of CVB;
7.2.2 use its commercially reasonable efforts to obtain any third
party consent with respect to any contract, agreement, lease, license,
arrangement, permit or release that is material to the business of CVB on a
consolidated basis and that is contemplated in this Agreement as required
in connection with the Merger; and
7.2.3 not later than the 20th day of each calendar month, amend or
supplement the CVB Lists prepared and delivered pursuant to Article 5 to
ensure that the information set forth in the CVB Lists accurately reflects
the then-current status of CVB and its subsidiaries. CVB shall further
amend or supplement the CVB Lists as of the Closing Date if necessary to
reflect any additional information that needs to be included in the CVB
Lists.
7.3 Access to Information. Upon reasonable request by ONB, CVB shall (i)
make its Chief Operating Officer/Chief Financial Officer and Controller
available to discuss with ONB and its representatives CVB's operations; and (ii)
shall provide ONB with written information which is (a) similar to the written
information that ONB reviewed in connection with this Agreement, and (b) related
to CVB's business condition, operations and prospects on a consolidated basis.
No examination or review conducted under this section shall constitute a waiver
or relinquishment on the part of ONB of the right to rely upon the
representations and warranties made by CVB herein; provided, that ONB shall
disclose to CVB any fact or circumstance it may discover which ONB believes
renders any representation or warranty made by CVB hereunder incorrect in any
respect. ONB covenants and agrees that it and its representatives, counsel,
accountants, agents and employees will hold in strict confidence all documents
and information concerning CVB so obtained (except to the extent that such
documents or information are a matter of public record or require disclosure in
the Proxy Statement and Prospectus or any of the public information of any
applications required to be filed with any Governmental Entity to obtain the
approvals and consents required to effect the transactions contemplated hereby),
and if the transactions contemplated herein are not consummated, such confidence
shall be maintained and all such documents shall be returned to CVB. CVB shall
promptly provide ONB with copies of as soon as available, of all proxy
statements, information statements, financial statements, reports, letters and
communications sent by CVB to its shareholders or other security holders, and
all public reports filed by CVB or CBB with the FRB, FDIC, OCC or the DFI.
7.4 Filings. CVB agrees that through the Effective Time of the Merger,
each of its reports, registrations, statements and other filings required to be
filed with any applicable Governmental Entity will comply in all material
respects with all the applicable statutes, rules and regulations enforced or
promulgated by the Governmental Entity with which it will be filed and none will
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Any
financial statement contained in any such report, registration, statement or
other filing that is intended to present the financial position of the entities
or entity to which it relates will fairly present the financial position of such
entities or entity and will be prepared in accordance with generally accepted
accounting principles or applicable banking regulations
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consistently applied during the periods involved except where any misstatement
or omission (other than for those filed financial statements with the SEC) would
not make the statements therein, in light of the circumstances under which they
were made, misleading.
The Board of Directors of the Surviving Corporation shall reasonably
consider the filing of a Form 8-K as soon as practicable following 30 days of
combined results of operations of the Surviving Corporation.
7.5 Applications. CVB will promptly prepare and file or cause to be
prepared and filed (i) an application for approval of the Merger with the FDIC,
FRB and the DFI; (ii) an application for approval of the Bank Merger with the
FDIC and the DFI; (iii) in conjunction with and using its best efforts to
cooperate with, ONB, the Registration Statement on Form S-4 and the Proxy
Statement and Prospectus as it pertains to CVB; and (iv) any other applications
necessary to consummate the transactions contemplated hereby. CVB shall afford
ONB a reasonable opportunity to review the Proxy Statement and Prospectus and
all such applications and all amendments and supplements thereto before the
filing thereof. CVB covenants and agrees that the Registration Statement on Form
S-4 and the Proxy Statement and Prospectus and all applications to the
appropriate regulatory agencies for approval or consent to the Merger, with
respect to information relating to CVB or its subsidiaries, will comply in all
material respects with the provisions of applicable law, and will not contain
any untrue statement of material fact or omit to state any material fact
required to be stated therein or necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading. CVB will use its commercially reasonable efforts to obtain all
regulatory approvals or consents necessary to effect the Merger and the Bank
Merger.
7.6 Blue Sky. CVB agrees to use commercially reasonable efforts to have
the shares of CVB Stock to be issued in connection with the Merger qualified or
registered for offer and sale, to the extent required, under the securities laws
of each jurisdiction in which shareholders of ONB reside.
7.7 Notices; Reports. CVB will promptly notify ONB of any event of which
CVB obtains knowledge which has had or may have a material adverse affect on the
financial condition, operations, business or prospects of CVB on a consolidated
basis or in the event that CVB determines that it is unable to fulfill any of
the conditions to the performance of ONB's obligations hereunder, as set forth
in Articles 9 or 10 herein.
7.8 Removal of Conditions. In the event of the imposition of a condition
to any regulatory approvals which CVB deems to materially adversely affect it or
to be materially burdensome, CVB shall use its commercially reasonable efforts
for purposes of obtaining the removal of such condition.
7.9 Stock Options.
7.9.1 At and as of the Effective Time of the Merger, CVB shall assume each
and every outstanding option to purchase shares of ONB Stock ("ONB Stock
Option") and all obligations of ONB under the ONB Stock Option Plans. Each and
every ONB Stock Option so assumed by CVB under this Agreement shall continue to
have, and be subject to, the same terms and conditions set forth in the ONB
Stock Option Plans and in the other documents governing such ONB Stock Option
immediately prior to the Effective Time of the Merger, except that: (i) such ONB
Stock Option shall be exercisable for that number of whole shares of CVB Stock
equal to the product of (A) the number of shares of ONB Stock that were
purchasable under such ONB Stock Option immediately prior to
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the Effective Time of the Merger multiplied by (B) the Conversion Ratio, rounded
down to the nearest whole number of shares of CVB Stock; and (ii) the per share
exercise price for the shares of CVB Stock issuable upon exercise of such ONB
Stock Option shall be equal to the quotient determined by dividing (A) the
exercise price per share of ONB Stock at which such ONB Stock Option was
exercisable immediately prior to the Effective Time of the Merger by (B) the
Conversion Ratio. Prior to the Effective Time of the Merger, CVB shall issue to
each holder of an outstanding ONB Stock Option a document evidencing the
assumption of such ONB Stock Option by CVB pursuant to this Section 7.9.
7.9.2 CVB shall comply with the terms of the ONB Stock Option Plan and use
its reasonable best efforts so that, to the extent required by, and subject to
the provisions of, such Plans, ONB Stock Options which qualify as incentive
stock options prior to the Effective Time of the Merger qualify as incentive
stock options of CVB after the Effective Time of the Merger.
7.9.3 At or prior to the Effective Time of the Merger, CVB shall take all
corporate action necessary to reserve for issuance a sufficient number of shares
of CVB Stock for delivery upon exercise of CVB Stock Options assumed by it in
accordance with this Section 7.9. At the Effective Time, or as soon as
practicable thereafter, CVB shall, if necessary, file a registration statement
on Form S-8, as the case may be (or any successor or other appropriate forms);
or another appropriate form with respect to the shares of CVB Common Stock
subject to such options and shall use all reasonable efforts to maintain the
effectiveness of such registration statement (and maintain the current status of
the prospectus or prospectuses contained therein) for so long as such options
remain outstanding.
7.10 Reservation, Issuance and Registration of CVB Stock. CVB shall
reserve and make available for issuance in connection with the Merger and in
accordance with the terms and conditions of this Agreement such number of shares
of CVB Stock to be issued to the shareholders of ONB in the Merger pursuant to
Article 2 hereof.
7.11 AMEX Listing. CVB shall use its commercially reasonable efforts to
cause the shares of CVB Stock to be issued in the Merger to be approved for
listing on the American Stock Exchange, subject to official notice of issuance,
prior to the Effective Time of the Merger.
7.12 CVB Shareholders' Meeting. Promptly after the execution of this
Agreement, CVB will take action necessary in accordance with applicable law and
its Articles of Incorporation and Bylaws to convene a meeting of its
shareholders, if required by applicable law, to consider and vote upon the
Agreement and the transactions contemplated hereby so as to permit the
consummation of the transactions contemplated hereby. The Board of Directors of
CVB shall, subject to its fiduciary duties, recommend that its shareholders
approve this Agreement and the transactions contemplated hereby. The Board of
Directors of CVB shall further execute shareholders' agreements within 15
business days of the date hereof agreeing to vote their shares in favor of the
Merger.
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ARTICLE 8.
ADDITIONAL COVENANTS
The parties hereto hereby mutually covenant and agree with each other as
follows:
8.1 Best Efforts. Subject to the terms and conditions of this Agreement,
each party will use its best efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate the transactions contemplated by
this Agreement as promptly as practical, including cooperation in preparation of
the Applications identified in Section 7.5 of this Agreement and including using
their respective best efforts to qualify the Merger and the Bank Merger for
pooling of interests accounting treatment. Each party will use its best efforts
to resolve and correct all typographical or other administrative errors which
may arise in or relating to this Agreement or in the other documents prepared or
executed in connection herewith.
8.2 Public Announcements. No press release or other public disclosure of
matters related to this Agreement or any of the transactions contemplated hereby
shall be made by CVB or ONB unless the other party shall have provided its prior
consent to the form and substance thereof; provided, however, that nothing
herein shall be deemed to prohibit any party hereto, following notice to the
other party, from making any disclosure which its counsel deems necessary or
advisable in order to fulfill such party's disclosure obligations imposed by
law.
8.3 Environmental Assessment and Remediation. CVB may cause to be prepared
at CVB's sole cost and expense within 45 days of the date of this Agreement one
or more phase I environmental investigations with respect to the Real Property
set forth on the ONB Real Property List. In the event any such phase I
environmental investigation report, or any such report which ONB or Orange has
already obtained on any of the Real Property set forth on ONB's Real Property
List, discloses facts which, in the sole discretion of CVB, warrant further
investigation, CVB shall provide written notice to ONB, and ONB shall be
required to cause to be completed within 60 days of such written notice, at the
sole cost and expense of CVB, a phase II environmental investigation and report
with respect to such property. The consultant engaged by ONB to conduct such
investigation and provide such report shall be acceptable to CVB. CVB shall have
10 days from the receipt of such investigation report to object thereto, which
objection shall be by written notice. In the event of any such objection, CVB
shall engage an environmental consultant satisfactory to ONB who shall provide
an estimate of the cost of taking any remedial action recommended or suggested
in such phase II environmental investigation report, or which is required by
law, or which is determined to be prudent by CVB, in its sole discretion, and,
unless the estimated cost of such Remediation for which an independent
third-party consultant, jointly selected by ONB and CVB, would determine ONB or
Orange would be responsible for paying is in excess of $250,000 (and written
notice thereof provided by ONB to CVB) ONB shall immediately commence such
Remediation, all at the sole cost and expense of ONB. In the event such
environmental consultant determines that the estimated cost of such remediation
for which an independent third party consultant, jointly selected by ONB and CVB
would determine ONB or Orange would be responsible for paying is in excess of
$250,000, CVB shall have the right to terminate the Agreement pursuant to
Section 13.1.9 hereof before the expiration of 21 days from the date of such
written notice.
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CVB agrees to keep confidential and not to disclose any nonpublic
information obtained in the course of such environmental investigation relating
to environmental contamination or suspected contamination of any property on the
ONB Real Property List, except as required by law.
8.4 Execution of Stock Option Agreement. Simultaneously with the execution
of this Agreement and as a condition thereto, ONB and CVB shall have executed
and delivered a stock option agreement which grants CVB an option to acquire up
to 19.9% of the issued and outstanding shares of ONB stock upon the occurrence
of certain circumstances, substantially in the form attached hereto as Exhibit
D.
ARTICLE 9.
CONDITIONS PRECEDENT TO THE MERGER
The obligations of each of the parties hereto to consummate the transactions
contemplated herein are subject to the satisfaction, on or before the Closing
Date, of the following conditions:
9.1 Shareholder Approval. The Agreement and the transactions contemplated
hereby shall have received all requisite approvals of the shareholders of ONB
and CVB.
9.2 No Judgments or Orders. No judgment, decree, injunction, order or
proceeding shall be outstanding or threatened by any Governmental Entity which
prohibits or restricts the effectuation of, or threatens to invalidate or set
aside, the Merger or the Bank Merger substantially in the form contemplated by
this Agreement, unless counsel to the party against whom such action or
proceeding was instituted or threatened renders to the other parties hereto an
opinion that such judgment, decree, injunction, order or proceeding is without
merit.
9.3 Regulatory Approvals. To the extent required by applicable law or
regulation, all approvals or consents of any Governmental Entity, including,
without limitation, those of the FRB, the FDIC and the DFI shall have been
obtained or granted for the Merger and the Bank Merger and the transactions
contemplated hereby and the applicable waiting period under all laws shall have
expired. All other statutory or regulatory requirements for the valid completion
of the transactions contemplated hereby shall have been satisfied.
9.4 Securities Laws. The Registration Statement on Form S-4 shall have
been declared effective by the SEC and shall not be the subject of any stop
order or proceedings seeking or threatening a stop order. CVB shall have
received all state securities or "Blue Sky" permits and other authorizations
necessary to issue the CVB Stock to consummate the Merger.
9.5 Listing. The CVB Stock issuable in the Merger shall have been included
for listing on AMEX.
9.6 Tax Opinions. CVB and ONB shall have received from Manatt, Phelps &
Phillips, LLP an opinion reasonably satisfactory to CVB and ONB to the effect
that the Merger and the Bank Merger shall not result in the recognition of gain
or loss for federal income tax purposes to CVB, CBB, ONB or Orange, nor shall
the issuance of the CVB Stock result in the recognition of gain or loss by the
holders of ONB Stock who receive such stock in connection with the Merger, dated
prior to the date the Proxy Statement and
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Prospectus is first mailed to the shareholders of ONB and CVB and such opinions
shall not have been withdrawn or modified in any material respect.
9.7 Pooling of Interests. Immediately prior to the Effective Time of the
Merger, CVB shall have received from Deloitte & Touche a written confirmation
that the Merger and the Bank Merger will qualify for pooling-of-interests
accounting treatment. In making its determination that the Merger and the Bank
Merger will qualify for such treatment, Deloitte & Touche shall be entitled to
assume that cash will be paid with respect to all shares held of record by any
holder of ONB and CVB Dissenting Shares. Immediately prior to the Effective Time
of the Merger, CVB and Deloitte & Touche shall have received from McGladry &
Pullen a written confirmation that ONB and Orange qualify for pooling of
interests accounting treatment in the Merger and Bank Merger.
ARTICLE 10.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF ONB
All of the obligations of ONB to effect the transactions contemplated hereby
shall be subject to the satisfaction, on or before the Closing Date, of the
following conditions, any of which may be waived in writing by ONB:
10.1 Legal Opinion. ONB shall have received the opinion of Manatt, Phelps
& Phillips, LLP, dated as of the Closing Date, and in form and substance
satisfactory to the counsel of ONB and Orange, to the effect that: (i) CVB is a
corporation validly existing under the laws of the State of California with full
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby; (ii) all corporate proceedings on the part of
CVB necessary to be taken in connection with the Merger in order to make the
same effective have been duly and validly taken; (iii) this Agreement and the
Agreement of Merger have been duly and validly authorized, executed and
delivered on behalf of CVB and constitute (subject to standard exceptions of
enforceability arising from the bankruptcy laws and rules of equity) valid and
binding agreements of CVB; and (iv) the shares of CVB Stock to be issued in the
Merger will, when issued, be duly authorized, validly issued, fully paid and
nonassessable.
10.2 Representations and Warranties; Performance of Covenants. All the
covenants, terms and conditions of this Agreement to be complied with and
performed by CVB on or before the Closing Date shall have been complied with and
performed in all material respects. Each of the representations and warranties
of CVB contained in Article 5 hereof shall have been true and correct in all
material respects (except that where any statement in a representation or
warranty expressly includes a standard of materiality, such statement shall be
true and correct in all respects) on and as of the date of this Agreement and
(except to the extent such representations and warranties speak as of an earlier
date or for changes expressly contemplated by this Agreement) on and as of the
Closing Date, with the same effect as though such representations and warranties
had been made on and as of the Closing Date. It is understood and acknowledged
that the representations being made on and as of the Closing Date shall be made
without giving effect to any update with respect to the CVB Lists in accordance
with Section 7.2.3.
10.3 Authorization of Merger. All actions necessary to authorize the
execution, delivery and performance of this Agreement and the Agreement of
Merger by CVB and the consummation of the transactions contemplated hereby and
thereby shall have been
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duly and validly taken by the Board of Directors of CVB, as required by
applicable law, and CVB shall have full power and right to merge pursuant to the
Agreement of Merger.
10.4 Absence of Certain Changes. Between the date of this Agreement and
the Effective Time of the Merger, there shall not have occurred any event that
has had or could reasonably be expected to have a material adverse effect on the
business, financial condition, results of operations or prospects of CVB on a
consolidated basis, whether or not such event, change or effect is reflected in
the CVB Lists as amended or supplemented after the date of this Agreement.
10.5 Officers' Certificate. There shall have been delivered to ONB on the
Closing Date a certificate executed by the Chief Executive Officer and the Chief
Financial Officer of CVB certifying, to the best of their knowledge, compliance
with all of the provisions of Sections 10.2, 10.3 and 10.4.
10.6 Fairness Opinion. ONB shall have received a letter from First
Security -- Van Kasper, or such other nationally recognized advisory firm
reasonably selected by ONB, dated as of a date within five Business Days of the
mailing of the Proxy Statement and Prospectus to the shareholders of ONB, to the
effect that the transactions contemplated by this Agreement are fair from a
financial point of view to the shareholders of ONB.
ARTICLE 11.
CONDITIONS PRECEDENT TO OBLIGATIONS OF CVB
All of the obligations of CVB to effect the transactions contemplated hereby
shall be subject to the satisfaction, on or before the Closing Date, of the
following conditions, any of which may be waived in writing by CVB:
11.1 Legal Opinion. CVB shall have received the opinion of Brobeck,
Phleger & Harrison, LLP, attorneys for ONB, and in form and substance
satisfactory to the counsel of CVB, to the effect that: (i) ONB is a corporation
duly incorporated and validly existing under the laws of the State of California
with full corporate power and authority to enter into this Agreement and the
Agreement of Merger and to consummate the transactions contemplated hereby and
thereby; (ii) Orange is a national association duly incorporated and validly
existing under the laws of the United States with full corporate power and
authority to enter into the Agreement of Bank Merger and to consummate the
transactions contemplated thereby; (iii) all corporate proceedings on the part
of ONB necessary to be taken in connection with the Merger and by Orange in
connection with the Bank Merger in order to make the same effective have been
duly and validly taken; and (iv) this Agreement and the Agreement of Merger and
the Agreement of Bank Merger have been duly and validly authorized, executed and
delivered on behalf of ONB and Orange, and constitute (subject to standard
exceptions of enforceability arising from the bankruptcy laws and rules of
equity) valid and binding agreements of ONB and Orange, as applicable.
11.2 Representations and Warranties; Performance of Covenants. All the
covenants, terms and conditions of this Agreement to be complied with and
performed by ONB at or before the Closing Date shall have been complied with and
performed in all material respects. Each of the representations and warranties
of ONB contained in Article 4 hereof shall have been true and correct in all
material respects (except that where any statement in a representation or
warranty expressly includes a standard of materiality, such statement shall be
true and correct in all respects) on and as of the date of this Agreement and
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(except to the extent such representations and warranties speak as of an earlier
date or for changes expressly contemplated by this Agreement) on and as of the
Closing Date, with the same effect as though such representations and warranties
had been made on and as of the Closing Date. It is understood and acknowledged
that the representations being made on and as of the Closing Date shall be made
without giving effect to any update with respect to the ONB Lists in accordance
with Section 6.2.10.
11.3 Authorization of Mergers. All actions necessary to authorize the
execution, delivery and performance of this Agreement and the Agreement of
Merger by ONB and of the Agreement of Bank Merger by Orange, and the
consummation of the transactions contemplated hereby and thereby shall have been
duly and validly taken by the Board of Directors and shareholders of ONB and
Orange, and ONB and Orange shall have full power and right to merge pursuant to
the Agreement of Merger and the Agreement of Bank Merger, respectively.
11.4 Third-Party Consents. ONB, Orange and Mortgage Brokerage shall have
obtained all consents of other parties to their respective mortgages, notes,
leases, franchises, agreements, licenses and permits as may be necessary to
permit the Merger and the Bank Merger and the transactions contemplated herein
to be consummated without a material default, acceleration, breach or loss of
rights or benefits thereunder.
11.5 Absence of Certain Changes. Between the date of this Agreement and
the Effective Time of the Merger, there shall not have occurred any event that
has had or could reasonably be expected to have a material adverse effect on the
business, financial condition, results of operations or prospects of ONB on a
consolidated basis whether or not such event, change or effect is reflected in
the ONB Lists as amended or supplemented after the date of this Agreement.
11.6 Officers' Certificate. There shall have been delivered to CVB on the
Closing Date a certificate executed by the Chief Executive Officer and the Chief
Financial Officer of ONB certifying, to the best of their knowledge, compliance
with all of the provisions of Sections 11.2, 11.3, 11.4 and 11.5.
11.7 Fairness Opinion. CVB shall have received a letter from Bank Advisory
Group, Inc., or such other nationally recognized advisory firm reasonably
selected by CVB, dated as of a date within five Business Days of the mailing of
the Proxy Statement and Prospectus to the shareholders of CVB, to the effect
that the transactions contemplated by this Agreement are fair from a financial
point of view to the shareholders of CVB.
11.8 Shareholder's Agreements. Concurrently with the execution of this
Agreement, each director of ONB and Orange shall have executed and delivered to
CVB agreements substantially in the form of Exhibit E hereto.
11.9 Agreements Not to Compete. Concurrently with the execution of this
Agreement, the directors of ONB and Orange shall have executed and delivered to
CVB agreements substantially in the form of Exhibit F hereto.
11.10 Affiliates Agreements. Concurrently with the execution of this
Agreement, CVB shall have received from each person named in the letter or
otherwise referred to in Section 6.10 an executed copy of an agreement
substantially in the form of Exhibit C hereto.
11.11 Employee Benefit Plans. CVB shall have received satisfactory
evidence that ONB has cooperated with CVB and taken such action as CVB shall
reasonably request
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with respect to all the ONB's employee benefit plans, programs and arrangements,
including, without limitation, the ONB 401(k) Plan, as provided in Article 12 of
this Agreement.
11.12 Dissenting Shares. The number of shares of ONB Stock and CVB Stock
for which demand is made to be ONB Perfected Dissenting Shares and CVB Perfected
Dissenting Shares shall not exceed an amount which, when combined with other
amounts payable in connection with the Merger and the Bank Merger, would result
in the Merger and the Bank Merger being disqualified from pooling of interests
accounting treatment.
11.13 Resignations. At the request of CVB, ONB shall use its best efforts
to deliver resignations of all the directors and executive officers of ONB and
Mortgage Brokerage, effective as of the Effective Time of the Merger and, if
requested by CVB, ONB shall use its best efforts to deliver the resignations of
all of the directors and executive officers of Orange effective as of the
Effective Time of the Bank Merger. In the event ONB is not able to deliver the
resignations of all of the directors and executive officers of ONB, Mortgage
Brokerage or Orange, ONB shall take such other action as CVB shall request.
ARTICLE 12.
EMPLOYEE BENEFITS
12.1 Employee Benefits.
Except as otherwise provided in this Agreement or pursuant to the terms of
such Employee Plans, all Employee Plans of ONB and Orange will be discontinued
or merged into CVB plans, in the discretion of CVB, and employees of ONB and
Orange shall become eligible for the employee benefit plans of CVB on the same
terms as such plans and benefits are generally offered from time to time to
employees of CVB and its subsidiaries in comparable positions with CVB or its
subsidiaries. For purposes of determining such employment eligibility and
vesting under the employee benefit plans of CVB (other than for the CVB 401(k)
and Profit Sharing Plan), CVB shall recognize such employees' years of service
with ONB or Orange beginning on the date such employees commenced employment
with ONB or Orange through the Effective Time of the Merger.
The parties hereto further agree that certain other matters respecting
employee benefits shall be dealt with in a letter, dated the date hereof,
between the parties and hereby incorporated by reference and made a part hereof.
ARTICLE 13.
TERMINATION
13.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time of the Merger upon the occurrence of any of the following:
13.1.1 By mutual agreement of the parties, in writing;
13.1.2 By ONB (unless ONB's Board of Directors shall have withdrawn
or modified in a manner adverse to CVB in any respect its recommendation of
the Merger to the holders of ONB Stock) or CVB immediately upon the failure
of the shareholders of ONB or CVB to give the requisite approval of this
Agreement;
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13.1.3 By ONB immediately upon expiration of 30 days from delivery of
written notice by ONB to CVB of CVB's breach of or failure to satisfy any
covenant or agreement contained herein resulting in a material impairment
of the benefit reasonably expected to be derived by ONB from the
performance or satisfaction of such covenant or agreement (provided that
such breach has not been waived by ONB or cured by CVB prior to expiration
of such 30-day period);
13.1.4 By CVB immediately upon expiration of 30 days from delivery of
written notice by CVB to ONB of ONB's breach of or failure to satisfy any
covenant or agreement contained herein resulting in a material impairment
of the benefit reasonably expected to be derived by CVB from the
performance or satisfaction of such covenant or agreement (provided that
such breach has not been waived by CVB or cured by ONB prior to expiration
of such 30-day period);
13.1.5 By ONB or CVB upon the expiration of 30 days after any
Governmental Entity denies or refuses to grant any approval, consent or
authorization required to be obtained in order to consummate the
transactions contemplated by this Agreement unless, within said 30-day
period after such denial or refusal, all parties hereto agree to submit the
application to the regulatory authority that has denied, or refused to
grant the approval, consent or qualification requested;
13.1.6 By ONB or CVB if any conditions set forth in Article 9 shall
not have been met by March 31, 2000; provided, however, that this Agreement
shall not be terminated pursuant to this Section 13.1.6 if the relevant
condition shall have failed to occur as a result of any act or omission of
the party seeking to terminate.
13.1.7 By ONB if any of the conditions set forth in Article 10 shall
not have been met, or by CVB if any of the conditions set forth in Article
11 shall not have been met, by March 31, 2000, or such earlier time as it
becomes apparent that such condition shall not be met, provided, however,
that this Agreement shall not be terminated pursuant to this Section 13.1.7
if the relevant condition shall have failed to occur as a result of any act
or omission of the party seeking to terminate;
13.1.8 By CVB if ONB shall have breached Section 6.1.14; or
13.1.9 By CVB under the circumstances set forth in Section 8.3.
13.2 Termination Date. This Agreement shall be terminated if the Closing
Date shall not have occurred by March 31, 2000, unless extended in writing by
the parties, provided, however, that this Agreement shall not terminate by
operation of this Section 13.2 as a result of any act or omission of the party
seeking to terminate.
13.3 Effect of Termination. In the event of termination of this Agreement
by either ONB or CVB as provided in Section 13.1, neither ONB nor CVB shall have
any further obligation or liability to the other party except (a) with respect
to the last sentences of each of Section 6.3.1, Section 7.3 and Section 8.3, (b)
with respect to Sections 14.1 and 14.2, (c) to the extent such termination
results from a party's willful and material breach of the warranties and
representations made by it, or willful and material failure in performance of
any of its covenants, agreements or obligations hereunder; and (d) as provided
in the Stock Option Agreement, attached hereto as Exhibit A, which is governed
by its own terms as to termination.
13.4 Force Majeure. ONB and CVB agree that, notwithstanding anything to
the contrary in this Agreement, in the event this Agreement is terminated as a
result of a
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failure of a condition, which failure is due to a natural disaster or other act
of God, or an act of war, and provided neither party has materially failed to
observe the obligations of such party under this Agreement, neither party shall
be obligated to pay to the other party to this Agreement any expenses or
otherwise be liable hereunder.
ARTICLE 14.
MISCELLANEOUS
14.1 Expenses.
14.1.1 CVB hereby agrees that if this Agreement is terminated by ONB
pursuant to Section 13.1.3, CVB shall promptly and in any event within 10 days
after such termination pay ONB all Expenses (as defined in Section 14.1.4 below)
of ONB, but not to exceed $225,000.
14.1.2 ONB hereby agrees that if the Agreement is terminated by CVB or ONB
pursuant to Section 13.1.2 with respect to the failure of ONB shareholders to
approve the Agreement and the transactions contemplated hereby, or by CVB
pursuant to Section 13.1.4, Section 13.1.8 or Section 13.1.9, ONB shall promptly
and in any event within 10 days after such termination pay CVB all Expenses of
CVB, but not to exceed $300,000.
14.1.3 Except as otherwise provided herein, all Expenses incurred by CVB
and ONB in connection with or related to the authorization, preparation and
execution of this Agreement, the solicitation of shareholder approvals and all
other matters related to the closing of the transactions contemplated hereby,
including, without limitation of the generality of the foregoing, all fees and
expenses of agents, representatives, counsel and accountants employed by either
such party or its affiliates, shall be borne solely and entirely by the party
which has incurred the same. Notwithstanding the foregoing, CVB and ONB shall
share equally the cost of printing the Proxy Statement and Prospectus.
14.1.4 "Expenses" as used in this Agreement shall include all reasonable
out-of-pocket expenses (including all fees and expenses of attorneys,
accountants, investment bankers, experts and consultants to the party and its
affiliates) incurred by the party or on its behalf in connection with the
consummation of the transactions contemplated by this Agreement.
14.2 Notices. Any notice, request, instruction or other document to be
given hereunder by any party hereto to another shall be in writing and delivered
personally or by confirmed facsimile transmission or sent by registered or
certified mail, postage prepaid, with return receipt requested, addressed as
follows:
To CVB: CVB Financial Corp.
701 North Haven Avenue
Ontario, California 91764
Attention: D. Linn Wiley
Facsimile Number: (909) 481-2130
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With a copy to: Manatt, Phelps & Phillips, LLP
11355 West Olympic Boulevard
Los Angeles, California 90064
Attention: William T. Quicksilver, Esq.
Facsimile Number: (310) 312-4224
To ONB: Orange National Bancorp
1201 East Katella Avenue
Orange, California 92867
Attention: Kenneth J. Cosgrove
Facsimile Number: (714) 289-2310
With a copy to: Brobeck, Phleger & Harrison, LLP
Spear Street Tower
One Market
Attention: J. Michael Shepherd, Esq.
Facsimile Number: (415) 442-1010
Any such notice, request, instruction or other document shall be deemed
received (i) on the date delivered personally or delivered by confirmed
facsimile transmission, (ii) on the next Business Day after it was sent by
overnight courier, postage prepaid; or (iii) on the third Business Day after it
was sent by registered or certified mail, postage prepaid. Any of the persons
shown above may change its address for purposes of this section by giving notice
in accordance herewith.
14.3 Successors and Assigns. All terms and conditions of this Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective transferees, successors and assigns; provided, however, that
this Agreement and all rights, privileges, duties and obligations of the parties
hereto may not be assigned or delegated by any party hereto and any such
attempted assignment or delegation shall be null and void.
14.4 Counterparts. This Agreement and any exhibit hereto may be executed
in one or more counterparts, all of which, taken together, shall constitute one
original document and shall become effective when one or more counterparts have
been signed by the appropriate parties and delivered to each party hereto.
14.5 Effect of Representations and Warranties. The representations and
warranties contained in this Agreement or in any List shall terminate
immediately after the Effective Time of the Merger.
14.6 Third Parties. Each party hereto intends that this Agreement shall
not benefit or create any right or cause of action to any person other than
parties hereto. As used in this Agreement the term "parties" shall refer only to
CVB and ONB as the context may require.
14.7 Lists; Exhibits; Integration. Each List, exhibit and letter delivered
pursuant to this Agreement shall be in writing and shall constitute a part of
the Agreement, although Lists and letters need not be attached to each copy of
this Agreement. This Agreement, together with such Lists, exhibits and letters,
constitutes the entire agreement between the parties pertaining to the subject
matter hereof and supersedes all prior agreements and understandings of the
parties in connection therewith.
14.8 Knowledge. Whenever any statement herein or in any list, certificate
or other document delivered to any party pursuant to this Agreement is made "to
the knowledge"
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or "to the best knowledge" of any party or another Person, such party or other
Person shall make such statement only after conducting an investigation
reasonable under the circumstances of the subject matter thereof, and each such
statement shall constitute a representation that such investigation has been
conducted.
14.9 Governing Law. This Agreement is made and entered into in the State
of California, except to the extent that the provisions of federal law are
mandatorily applicable, and the laws of the State of California shall govern the
validity and interpretation hereof and the performance of the parties hereto of
their respective duties and obligations hereunder.
14.10 Captions. The captions contained in this Agreement are for
convenience of reference only and do not form a part of this Agreement and shall
not affect the interpretation hereof.
14.11 Severability. If any portion of this Agreement shall be deemed by a
court of competent jurisdiction to be unenforceable, the remaining portions
shall be valid and enforceable only if, after excluding the portion deemed to be
unenforceable, the remaining terms hereof shall provide for the consummation of
the transactions contemplated herein in substantially the same manner as
originally set forth at the date this Agreement was executed.
14.12 Waiver and Modification; Amendment. No waiver of any term, provision
or condition of this Agreement and the Agreement of Bank Merger, whether by
conduct or otherwise, in any one or more instances, shall be deemed to be or
construed as a further or continuing waiver of any such term, provision or
condition of this Agreement. Except as otherwise required by law, this Agreement
and the Agreement of Merger and the Agreement of Bank Merger, when executed and
delivered, may be modified or amended by action of the Boards of Directors of
CVB and ONB, and by CBB and Orange, respectively, without action by their
respective shareholders. This Agreement may be modified or amended only by an
instrument of equal formality signed by the parties or their duly authorized
agents.
14.13 Attorneys' Fees. If any legal action or any arbitration upon mutual
agreement is brought for the enforcement of this Agreement or because of an
alleged dispute, controversy, breach, or default in connection with this
Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs and expenses incurred in that action or
proceeding, in addition to any other relief to which it may be entitled.
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IN WITNESS WHEREOF, the parties to this Agreement have duly executed this
Agreement as of the day and year first above written.
<TABLE>
<S> <C>
ATTEST: CVB FINANCIAL CORP.
/s/ EDWARD J. BIEBRICH By: /s/ D. LINN WILEY
- ------------------------------------------------
Executive Vice President -----------------------------------------------
D. Linn Wiley
President and Chief Executive Officer
ATTEST: ORANGE NATIONAL BANCORP
/s/ ROBERT CREIGHTON By: /s/ KENNETH COSGROVE
- ------------------------------------------------
Executive Vice President -----------------------------------------------
Kenneth Cosgrove
President and Chief Executive Officer
</TABLE>
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ANNEX B
THE TRANSFER OF THIS AGREEMENT IS
SUBJECT TO CERTAIN PROVISIONS CONTAINED
HEREIN AND TO RESALE RESTRICTIONS UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND
APPLICABLE STATE SECURITIES LAWS
STOCK OPTION AGREEMENT
This Stock Option Agreement, dated as of May 18, 1999 (the "Agreement"), is
made by and between Orange National Bancorp, a California corporation
("Issuer"), and CVB Financial Corp., a California corporation ("Grantee").
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Reorganization dated May 18, 1999 (the "Reorganization Agreement"), providing
for, among other things, the merger of Issuer with and into Grantee (the
"Merger"), with Grantee being the surviving corporation; and
WHEREAS, as a condition and inducement to Grantee's execution of the
Reorganization Agreement, Issuer has agreed to grant to Grantee the Option (as
defined below).
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Reorganization Agreement, and intending to be legally bound hereby, Issuer
and Grantee agree as follows:
1. Defined Terms. Capitalized terms which are used but not defined herein
shall have the meanings ascribed to such terms in the Reorganization Agreement.
As used in this Agreement, the following terms shall have the meanings
indicated:
(a) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(b) "Federal Reserve Board" means the Board of Governors of the
Federal Reserve System.
(c) "Holder" means Grantee and, to the extent Grantee has assigned its
rights and obligations under this Agreement as permitted herein, any
subsidiary or direct or indirect transferee of Grantee.
(d) "Person" shall have the meaning specified in Sections 3(a)(9) and
13(d)(3) of the Exchange Act and the rules and regulations thereunder.
(e) "Securities Act" means the Securities Act of 1933, as amended.
2. Grant of Option. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an irrevocable option (the "Option") to purchase
up to 399,834 shares (the "Option Shares") of Common Stock, no par value
("Issuer Common Stock"), of Issuer at a purchase price per Option Share of $
27.00 (the "Purchase Price"), but in no event shall the number of Option Shares
exceed 19.9% of the issued and outstanding shares of Issuer Common Stock. The
Purchase Price and the number of Option Shares
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that may be received upon the exercise of the Option are subject to adjustment
as set forth below.
3. Exercise of Option.
(a) The Holder may exercise the Option, in whole or in part, at any time
and from time to time but only following the occurrence of a Purchase Event (as
defined below); provided that the Option shall terminate and be of no further
force and effect upon the earliest to occur of (such earliest date the
"Expiration Date"):
(i) the Effective Time of the Merger; or
(ii) 15 months after the first occurrence of a Purchase Event; or
(iii) 15 months after the termination of the Reorganization Agreement
on or following the occurrence of a Preliminary Purchase Event (as defined
below) or Purchase Event or a termination by Grantee pursuant to Section
13.1.4 or 13.1.8 of the Reorganization Agreement; or
(iv) termination of the Reorganization Agreement in accordance with
the terms thereof prior to the occurrence of a Purchase Event or a
Preliminary Purchase Event other than a termination by Grantee pursuant to
Section 13.1.4 or 13.1.8 of the Reorganization Agreement.
Notwithstanding anything to the contrary contained herein, any purchase of
shares upon exercise of the Option shall be subject to compliance with
applicable law, including, without limitation, the Bank Holding Company Act of
1956, as amended.
(b) As used herein, a "Purchase Event" means any of the following events:
(i) The Board of Directors of Issuer shall have approved, or
recommended to the Issuer's shareholders that they approve, a proposal
received by Issuer from a person (other than Grantee or any subsidiary of
Grantee) to effect an Acquisition Transaction (as defined below), Tender
Offer (as defined below) or Exchange Offer (as defined below); or
(ii) Issuer, without having received Grantee's prior written consent,
shall have entered into an agreement with any person (other than Grantee or
any subsidiary of Grantee) to effect an Acquisition Transaction; or
(iii) any person (other than Grantee or any subsidiary of Grantee)
shall have acquired beneficial ownership (as such term is defined in Rule
13d-3 promulgated under the Exchange Act) of or the right to acquire
beneficial ownership of, or any "group" (as such term is defined under the
Exchange Act and the rules and regulations promulgated thereunder) shall
have been formed which beneficially owns or has the right to acquire
beneficial ownership of twenty percent (20%) or more of the then
outstanding shares of Issuer Common Stock.
As used herein, the term "Acquisition Transaction" shall mean (A) a merger,
consolidation or similar transaction involving Issuer or any of its subsidiaries
(other than internal mergers, reorganizations, consolidations or dissolutions
involving only Issuer and/or existing subsidiaries and other than a merger,
consolidation or similar transaction in which the common shareholders of Issuer
immediately prior thereto in the aggregate own at least seventy-five percent
(75%) of the common stock of the surviving or successor corporation immediately
after the consummation thereof), (B) the disposition, by sale, lease, exchange
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or otherwise, of twenty (20%) or more of the consolidated assets or deposit
liabilities of Issuer and its subsidiaries, or (C) a purchase or other
acquisition (including by way of merger, consolidation, share exchange or any
similar transaction), other than by Issuer or its subsidiaries, of securities
representing twenty percent (20%) or more of the voting power of Issuer or any
of its subsidiaries.
(c) As used herein, a "Preliminary Purchase Event" means any of the
following events:
(i) any person (other than Grantee or any subsidiary of Grantee) shall
have acquired beneficial ownership of, or the right to acquire beneficial
ownership of, or any "group" (as defined under the Exchange Act and the
rules and regulations thereunder) shall have been formed which beneficially
owns or has the right to acquire beneficial ownership of, ten percent (10%)
or more of the then outstanding shares of Issuer Common Stock; or
(ii) any person (other than Grantee or any subsidiary of Grantee)
shall have commenced (as such term is defined in Rule 14d-2 under the
Exchange Act), or shall have filed a registration statement under the
Securities Act with respect to, a tender offer or exchange offer to
purchase any shares of Issuer Common Stock such that, upon consummation of
such offer, such person would own or control ten percent (10%) or more of
the then outstanding shares of Issuer Common Stock (such an offer being
referred to herein as a "Tender Offer" or an "Exchange Offer",
respectively); or
(iii) Issuer, without having received Grantee's prior written consent,
shall have entered into an agreement with any person (other than Grantee or
any subsidiary of Grantee) with respect to, or the Board of Directors of
Issuer shall have recommended that the shareholders of Issuer approve or
accept, a purchase or other acquisition (including by way of merger,
consolidation, share exchange or any similar transaction), other than by
Issuer or its subsidiaries, representing ten percent (10%) or more of the
voting power of Issuer or any of its subsidiaries; or
(iv) any person (other than Grantee or any subsidiary of Grantee)
shall have filed an application or notice with the Federal Reserve Board or
other federal or state regulatory authority, which application or notice
has been accepted for processing, for approval to engage in an Acquisition
Transaction; or
(v) the holders of Issuer Common Stock shall not have approved the
Reorganization Agreement at the meeting of such shareholders held for the
purpose of voting on the Reorganization Agreement, such meeting shall not
have been held or shall have been canceled prior to termination of the
Reorganization Agreement, or Issuer's Board of Directors shall have
withdrawn or modified in a manner adverse to Grantee the recommendation of
Issuer's Board of Directors with respect to the Reorganization Agreement,
in each case after it shall have been publicly announced that any person
(other than Grantee or any subsidiary of Grantee) shall have (A) made or
disclosed an intention to make a proposal to engage in an Acquisition
Transaction or (B) commenced a Tender Offer or filed a registration
statement under the Securities Act with respect to an Exchange Offer.
(d) Issuer shall notify Grantee promptly in writing of the occurrence of
any Purchase Event or Preliminary Purchase Event; provided, however, such notice
shall not be a condition to the right of the Holder to exercise the Option.
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(e) In the event Holder wishes to exercise the Option, it shall send to
Issuer a written notice (dated the date on which it is sent to Issuer, which
date is referred to as the "Notice Date") specifying (i) the total number of
Option Shares it intends to purchase pursuant to such exercise and (ii) a date
not earlier than three (3) business days nor later than fifteen (15) business
days from the Notice Date for the closing (the "Closing") of such purchase (the
"Closing Date"). The Closing shall be held at the Issuer's principal office or
at such other place as Issuer and Holder may agree. If prior notification to or
approval of the Federal Reserve Board or any other regulatory authority is
required as a condition precedent to such purchase, then (A) Holder shall
promptly file and process the required notice or application for approval; (B)
Issuer shall cooperate with Holder in the filing of the required notice or
application for approval and the obtaining of any such approval; and (C) the
Closing Date shall be subject to extension for such period of time, not to
exceed six (6) months, as may be necessary to permit the Holder to submit such
filing to, and, if necessary, to obtain such approval from, the Federal Reserve
Board or other applicable regulatory authority; provided, however, that the
notice of Option exercise and such governmental filing must be made, and the
Notice Date must be, no later than the date on which the Option would otherwise
terminate. Any exercise of the Option shall be deemed to have occurred on the
Notice Date.
4. Payment and Delivery of Certificates.
(a) On each Closing Date, Holder shall (i) pay to Issuer, in immediately
available funds by wire transfer to a bank account designated by Issuer, an
amount equal to the Purchase Price multiplied by the number of Option Shares to
be purchased on such Closing Date and (ii) present and surrender this Agreement
to the Issuer at the address of the Issuer specified in Section 12(g) hereof.
(b) At each Closing, simultaneously with the delivery of immediately
available funds and surrender of this Agreement as provided in Section 4(a), (i)
Issuer shall deliver to Holder (A) a certificate or certificates representing
the Option Shares to be purchased at such Closing, which Option Shares shall be
free and clear of all liens, claims, charges and encumbrances of any kind
whatsoever, and (B) if the Option is exercised in part only, an executed new
agreement with the same terms as this Agreement evidencing the right to purchase
the balance of the shares of Issuer Common Stock purchasable hereunder; and (ii)
Holder shall deliver to Issuer a letter agreeing that Holder shall not offer to
sell or otherwise dispose of such Option Shares in violation of the provisions
of this Agreement or applicable state and federal securities laws.
(c) Certificates for the Option Shares delivered at each Closing shall be
endorsed with a restrictive legend which shall read substantially as follows:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR QUALIFIED OR
REGISTERED UNDER THE SECURITIES LAWS OF ANY STATE. THEY MAY NOT BE SOLD OR
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT AND UNTIL THEY HAVE BEEN QUALIFIED OR REGISTERED UNDER APPLICABLE
STATE SECURITIES LAWS, UNLESS THE ISSUER RECEIVES AN OPINION OF COUNSEL FOR
THE HOLDER OF THESE SECURITIES, REASONABLY SATISFACTORY TO THE ISSUER,
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIRE-
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MENTS OF THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF
THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS ALSO SUBJECT TO RESALE
RESTRICTIONS ARISING UNDER THE TERMS OF A STOCK OPTION AGREEMENT DATED AS
OF MAY 18, 1999, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICE
OF THE SECRETARY OF THE ISSUER.
It is understood and agreed that the above legend shall be removed by delivery
of substitute certificate(s) without such legend if Holder shall have delivered
to Issuer a copy of a letter from the staff of the SEC, or an opinion of counsel
in form and substance reasonably satisfactory to Issuer and its counsel, to the
effect that such legend is not required for purposes of the Securities Act or
applicable state securities laws.
5. Representations and Warranties and Covenants of Issuer. Issuer hereby
represents and warrants to Grantee as follows:
(a) Due Authorization. Issuer has all requisite corporate power and
authority to enter into this Agreement and, subject to any approvals
referred to herein, to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Issuer. This Agreement has been duly
executed and delivered by Issuer and constitutes a binding agreement of
Issuer enforceable against Issuer in accordance with its terms, except as
the enforceability hereof may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting the rights of creditors
generally or by equitable principles, whether such enforcement is sought in
law or equity.
(b) Authorized Stock. Issuer has taken all necessary corporate action
to authorize and reserve and to permit it to issue, and, at all times from
the date hereof until the obligation to deliver Issuer Common Stock upon
the exercise of the Option terminates, will have reserved for issuance,
upon exercise of the Option, shares of Issuer Common Stock necessary for
Holder to exercise the Option, and Issuer will take all necessary corporate
action to authorize and reserve for issuance all additional shares of
Issuer Common Stock or other securities which may be issued pursuant to
Section 7 upon exercise of the Option. The shares of Issuer Common Stock to
be issued upon due exercise of the Option, including all additional shares
of Issuer Common Stock or other securities which may be issuable pursuant
to Section 7, upon issuance pursuant hereto, shall be duly and validly
issued, fully paid and nonassessable, and shall be delivered free and clear
of all liens, claims, charges and encumbrances of any kind or nature
whatsoever, including any preemptive rights of any stockholder of Issuer.
(c) No Conflict. The execution and delivery by Issuer of this
Agreement and the consummation of the transactions contemplated hereby do
not and will not violate or conflict with Issuer's Articles of
Incorporation or Bylaws, or any statute, regulation, judgment, order, writ,
decree or injunction applicable to Issuer (other than as may be effected by
Grantee's ownership of Issuer Common Stock exceeding certain limits set
forth by statute or regulation) or its properties or assets and do not and
will not violate, conflict with, result in a breach of, constitute a
default (or an event which with due notice and/or lapse of time would
constitute a default) under, result in a termination of, accelerate the
performance required by, or result in the creation of any lien, pledge,
security interest, charge or other encumbrance upon any of the properties
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or assets of Issuer under the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, or loan agreement or other
agreement, instrument or obligation to which Issuer is a party, or by which
Issuer or any of its properties or assets may be bound or affected.
(d) Observance of Covenants. Issuer agrees that it will not, by
amendment of its Articles of Incorporation or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other
voluntary act, avoid, or seek to avoid the observance or performance of any
of the covenants, stipulations or conditions to be observed or performed
hereunder by Issuer.
(e) Compliance. Issuer shall promptly take all action as may from time
to time be required (including, complying with all premerger notification,
reporting and waiting period requirements of any federal or state
regulatory authority, as necessary, before the Option may be exercised, and
cooperating fully with Holder in preparing such applications or notices and
providing such information to the Federal Reserve Board, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation, the
Department of Financial Institutions or any other regulatory authority as
they may require) in order to permit Grantee to exercise the Option and
Issuer duly and effectively to issue shares of Common Stock pursuant
hereto, and to protect the rights of Grantee against dilution.
6. Representations and Warranties of Grantee. Grantee hereby represents and
warrants to Issuer that:
Purchase Not for Distribution. This Option is not being, and any
Option Shares or other securities acquired by Grantee upon exercise of the
Option will not be, acquired with a view to the public distribution thereof
and will not be transferred or otherwise disposed of except in a
transaction registered or exempt from registration under the Securities Act
and applicable state securities laws.
7. Adjustment Upon Changes in Capitalization, etc.
(a) In the event of any change in Issuer Common Stock by reason of a stock
dividend, stock split, split-up, recapitalization, combination, exchange of
shares or similar transaction, the type and number of shares or securities
subject to the Option, and the Purchase Price therefor, shall be adjusted
appropriately, and proper provision shall be made in the documentation
pertaining to such transaction so that Holder shall receive, upon exercise of
the Option, the number and class of shares or other securities or property that
Holder would have received in respect of Issuer Common Stock if the Option had
been exercised immediately prior to such event, or the record date therefor, as
applicable. If any additional shares of Issuer Common Stock are issued after the
date of this Agreement (whether upon exercise of stock options or otherwise but
excluding any issuance pursuant to an event described in the first sentence of
this Section 7(a)), the number of shares of Issuer Common Stock subject to the
Option shall be adjusted so that, after such issuance, such number of shares,
together with any shares of Issuer Common Stock previously issued pursuant
hereto, equals nineteen and nine-tenths percent (19.9%) of the number of shares
of Issuer Common Stock then issued and outstanding, without giving effect to any
shares subject to or issued pursuant to the Option (with any fractional share
being rounded up to the next full share). Issuer agrees that in no event shall
the number of shares of Issuer Common Stock issued after the date of this
Agreement pursuant to the preceding sentence, together with the number of shares
of Issuer Common
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Stock subject to the Option, adjusted as aforesaid, exceed the number of
available authorized but unissued and unreserved shares of Issuer Common Stock.
Nothing contained in this Section 7(a) or elsewhere in this Agreement shall be
deemed to authorize Issuer to issue shares in breach of any provision of the
Reorganization Agreement.
(b) In the event that Issuer shall, prior to the occurrence of an event set
forth in Section 3(a) terminating the Holder's right to exercise the Option,
enter into an agreement (i) to consolidate with or merge into any person, other
than Grantee or one of its subsidiaries, and shall not be the continuing or
surviving corporation of such consolidation or merger, (ii) to permit any
person, other than Grantee or one of its subsidiaries, to merge into Issuer and
Issuer shall be the continuing or surviving corporation, but, in connection with
such merger, the then outstanding shares of Issuer Common Stock shall be changed
into or exchanged for stock or other securities of Issuer or any other person or
cash or any other property or the outstanding shares of Issuer Common Stock
immediately prior to such merger shall after such merger represent less than
fifty percent (50%) of the outstanding shares and share equivalents of the
merged company, or (iii) to sell or otherwise transfer all or substantially all
of its consolidated assets or deposit liabilities to any person other than
Grantee or one of its subsidiaries, then, and in each such case, the agreement
governing such transaction shall make proper provisions so that the Option
shall, upon the consummation of any such transaction and upon the terms and
conditions set forth herein, be converted into, or exchanged for, an option (the
"Substitute Option"), at the, election of Grantee, of either (A) the Acquiring
Corporation (as defined below), (B) any person that controls the Acquiring
Corporation, (such person being referred to as the "Substitute Option Issuer"),
or (C) in the case of a merger described in clause (ii), Issuer.
(c) The Substitute Option shall have the same terms as the Option, provided
that if the terms of the Substitute Option cannot, for legal reasons, be the
same as the Option, such terms shall be as similar as possible and in no event
less advantageous to Grantee. The Substitute Option Issuer shall also enter into
an agreement with the then holder or holders of the Substitute Option in
substantially the same form as this Agreement (after giving effect for such
purposes to the provisions of this Agreement), which shall be applicable to the
Substitute Option.
(d) The Substitute Option shall be exercisable for such number of shares of
the Substitute Common Stock (as is hereinafter defined) as is equal to the
Assigned Value (as is hereinafter defined) multiplied by the number of shares of
the Issuer Common Stock for which the Option was theretofore exercisable,
divided by the Average Price (as is hereinafter defined). The exercise price of
the Substitute Option per share of the Substitute Common Stock (the "Substitute
Purchase Price") shall then be equal to the Purchase Price multiplied by a
fraction in which the numerator is the number of shares of the Issuer Common
Stock for which the Option was theretofore exercisable and the denominator is
the number of shares of the Substitute Common Stock for which the Substitute
Option is exercisable.
(e) As used herein, the following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (A) the continuing or surviving
corporation of a consolidation or merger with Issuer (if other than
Issuer), (B) Issuer in a merger in which Issuer is the continuing or
surviving person, and (C) the
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transferee of all or any substantial part of the Issuer's assets (or the
assets of its subsidiaries).
(ii) "Substitute Common Stock" shall mean the common stock issued by
the Substitute Option Issuer upon exercise of the Substitute Option.
(iii) "Assigned Value" shall mean the highest of (A) the price per
share of the Issuer Common Stock at which a Tender Offer or Exchange Offer
therefor has been made by any person (other than Grantee or a subsidiary of
Grantee), (B) the price per share of the Issuer Common Stock to be paid by
any person (other than Grantee or a subsidiary of Grantee) pursuant to an
agreement with Issuer, and (C) the highest closing price per share of
Issuer Common Stock as quoted on the Nasdaq National Market (or if Common
Stock is not quoted on the Nasdaq National Market, the highest bid price
per share on any day as quoted on the principal trading market or
securities exchange on which such shares are traded as reported by a
recognized source chosen by Grantee and reasonably acceptable to Issuer)
within the six-month period immediately preceding the agreement governing
the transaction described in Section 7(b) which gave rise to the Substitute
Option; provided, however, that in the event of a sale of less than all of
Issuer's consolidated assets or deposit liabilities, the Assigned Value
shall be the sum of the price paid in such sale for such assets or deposit
liabilities and the current market value of the remaining consolidated net
assets of Issuer as determined by a nationally recognized investment
banking firm selected by the Holder (or by a majority in interest of the
Holders if there shall be more than one Holder (a "Holder Majority")) and
reasonably acceptable to Issuer, divided by the number of shares of the
Issuer Common Stock outstanding at the time of such sale. In the event that
an exchange offer is made for the Issuer Common Stock or an agreement is
entered into for a merger or consolidation involving consideration other
than cash, the value of the securities or other property issuable or
deliverable in exchange for the Issuer Common Stock shall be determined by
a nationally recognized investment banking firm selected by Holder (or a
Holder Majority) and reasonably acceptable to Issuer.
(iv) "Average Price" shall mean the average closing price of the
Substitute Common Stock for the one year immediately preceding the
effective date of the consolidation, merger or sale in question, but in no
event higher than the closing price of the shares of the Substitute Common
Stock on the day preceding such consolidation, merger or sale; provided
that if Issuer is the issuer of the Substitute Option, the Average Price
shall be computed with respect to a share of common stock issued by Issuer,
the person merging into Issuer or by any company which controls or is
controlled by such merging person, as Holder may elect.
(f) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than nineteen and nine-tenths percent
(19.9%) of the aggregate of the shares of the Substitute Common Stock
outstanding prior to exercise of the Substitute Option (with any fractional
share being rounded up to the next full share). In the event that the Substitute
Option would be exercisable for more than 19.9% of the aggregate of the shares
of the Substitute Common Stock but for this clause (f), the Substitute Option
Issuer shall make a cash payment to Grantee equal to the excess of (i) the value
of the Substitute Option without giving effect to the limitation in this clause
(f) over (ii) the value of the Substitute Option after giving effect to the
limitation in this clause (f). The difference in value shall be determined by a
nationally recognized
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investment banking firm selected by Grantee and reasonably acceptable to the
Substitute Option Issuer, whose determination shall be conclusive and binding on
the parties.
(g) Issuer shall not enter into any transaction described in subsection (b)
of this Section 7 unless the Acquiring Corporation and any person that controls
the Acquiring Corporation assume in writing all the obligations of Issuer
hereunder and take all other actions that may be necessary so that the
provisions of this Section 7 are given full force and effect (including, without
limitation, any action that may be necessary so that the shares of Substitute
Common Stock are in no way distinguishable from or have lesser economic value
than other shares of common stock issued by the Substitute Option Issuer).
(h) At the written request of Holder delivered to the Substitute Option
Issuer prior to the occurrence of an event set forth in Section 3(a) above
terminating the Substitute Option, the Substitute Option Issuer shall repurchase
from Holder (i) the Substitute Option and/or (ii) all Substitute Common Stock
theretofore purchased by Holder pursuant hereto with respect to which Holder
then has beneficial ownership. The date on which Holder exercises its rights
under this Section 7(h) is referred to as the "Substitute Option Request Date."
Such repurchase shall be at an aggregate price (the "Substitute Option
Repurchase Consideration") equal to the sum of (A) the excess, if any, of (1)
the Highest Closing Price (as defined below) for each share of Substitute Common
Stock over (2) the Substitute Purchase Price per share of Substitute Common
Stock, multiplied by the number of shares of Substitute Common Stock for which
the Substitute Option may then be exercised and as to which Holder has exercised
its repurchase right hereunder, plus (B) the Highest Closing Price for each
share of Substitute Common Stock, multiplied by the number of shares of
Substitute Common Stock previously acquired by Holder upon exercise of the
Option or Substitute Option and as to which Holder has exercised its repurchase
right hereunder. The term "Highest Closing Price" shall mean the highest closing
price per share of Substitute Common Stock on the Nasdaq National Market (or, if
Substitute Common Stock is not quoted on the Nasdaq National Market, the highest
bid price per share on any day as quoted on the principal trading market or
securities exchange on which such shares are traded as reported by a recognized
source chosen by Grantee and reasonably acceptable to Issuer) or, if such shares
are not traded in a trading market or listed on an exchange, as quoted by the
brokerage firms acting as market makers for the Substitute Common Stock prior to
the trading or listing of the Substitute Common Stock on any national securities
exchange and thereafter as reported by the principal trading market or
securities exchange on which such shares are traded, during the sixty (60)
business days preceding the Substitute Option Request Date.
(i) The provisions of Sections 8(b), 8(c), 11 and 12 shall apply, with
appropriate adjustments, to any securities for which the Option becomes
exercisable pursuant to this Section 7 and as applicable, references in such
sections to "Issuer", "Option", "Purchase Price", "Issuer Common Stock",
"Repurchase Consideration", and "Request Date" shall be deemed to be references
to "Substitute Option Issuer", "Substitute Option", "Substitute Purchase Price",
"Substitute Common Stock", "Substitute Option Repurchase Consideration", and
"Substitute Option Request Date", respectively.
8. Repurchase at the Option of Grantee.
(a) At any time after the first occurrence of a Repurchase Event (as
defined in Section 8(e) below), at the written request of Holder delivered to
Issuer prior to the occurrence of an event set forth in Section 3(a) above
terminating the Option, Issuer shall
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repurchase from Holder (i) the Option and (ii) all Option Shares theretofore
purchased by Holder pursuant hereto with respect to which Holder then has
beneficial ownership. The date on which Holder exercises its rights under this
Section 8 is referred to as the "Request Date." Such repurchase shall be at an
aggregate price (the "Repurchase Consideration") equal to the sum of:
(i) the aggregate Purchase Price paid by Holder for any Option Shares
acquired pursuant to the Option with respect to which Holder then has
beneficial ownership;
(ii) the excess, if any, of (A) the Applicable Price (as defined
below) for each Option Share over (B) the Purchase Price per Option Share
(subject to adjustment pursuant to Section 7(a)), multiplied by the number
of Option Shares with respect to which the Option has not been exercised;
and
(iii) the excess, if any, of the Applicable Price over the Purchase
Price (subject to adjustment pursuant to Section 7(a)) paid (or, in the
case of Option Shares with respect to which the Option has been exercised
but the Closing Date has not occurred, payable) by Holder for each Option
Share with respect to which the Option has been exercised and with respect
to which Holder then has beneficial ownership, multiplied by the number of
such shares.
(b) If Holder exercises its rights under this Section 8, Issuer shall,
within ten (10) business days after the Request Date, pay the Repurchase
Consideration to Holder in immediately available funds, and Holder shall
surrender to Issuer the Option and the certificates evidencing the Option Shares
purchased thereunder with respect to which Holder then has beneficial ownership
and has designated to be repurchased, and Holder shall warrant that it has sole
record and beneficial ownership of such shares and that the same are then free
and clear of all liens, claims, charges and encumbrances of any kind whatsoever.
(c) Notwithstanding the provisions hereof to the contrary, to the extent
that Issuer is prohibited under applicable law, regulation or administrative
policy from repurchasing all or any portion of the Option or Option Shares, then
(i) Issuer shall promptly give notice of such fact to Holder; (ii) Issuer shall,
from time to time subject to the last sentence of this Section 8(c), deliver to
Holder that portion of the Repurchase Consideration that it is not then so
prohibited from paying; (iii) at Holder's request, Issuer shall promptly file
any required notice or application for approval and expeditiously process the
same. After Holder's receipt of such notice from Issuer, Issuer shall not be in
breach of its repurchase obligation hereunder to the extent it is or remains,
despite reasonable efforts to obtain any required approvals, legally prohibited
from repurchasing the Option or Option Shares. Holder shall have the right (A)
to revoke its request for repurchase with respect to the portion of the Option
or Option Shares that Issuer is prohibited from repurchasing, (B) to require
Issuer to deliver to Holder the Option and/or Option Shares Issuer is prohibited
from repurchasing, and (C) to exercise the Option as to the number of Option
Shares for which the Option was exercisable at the Request Date less the number
of such Option Shares in respect of which the Repurchase Consideration has been
lawfully paid. Notwithstanding anything herein to the contrary, Issuer shall not
be obligated to repurchase all or any part of the Option or Option Shares
pursuant to more than one written request from Holder, except that Issuer shall
be obligated to repurchase, pursuant to more than one written request, any
Option or Option Shares in the event that Holder (1) has revoked its request for
repurchase in accordance with the provisions of this Section 8 prior to the
occurrence of an event set forth in Section 3(a) terminating the
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Holder's right to exercise the Option and (2) has delivered, prior to such
event, a new written notice requesting a repurchase. If an event set forth in
Section 3(a) terminating the Holder's right to exercise the Option occurs prior
to, or is scheduled to occur within, sixty (60) days after the date of the
notice by Issuer described in clause 8(c)(i) above, then, notwithstanding the
occurrence of such terminating event, Holder shall have the right to receive the
Repurchase Consideration to the extent Issuer is or becomes, within a sixty (60)
day period from the date of such notice by Issuer, legally permitted to
repurchase. Except as set forth in the preceding sentence, Holder's repurchase
rights under this Agreement shall terminate concurrently with the termination of
Holder's right to exercise the Option, pursuant to Section 3(a).
(d) For purposes of this Agreement, the "Applicable Price" means the
highest of (i) the highest price per share of Issuer Common Stock paid for any
such share by the person or groups described in Section 8(e)(i), (ii) the price
per share of Issuer Common Stock received by holders of Issuer Common Stock in
connection with any merger or other business combination transaction described
in Section 7(b)(i), 7(b)(ii) or 7(b)(iii), or (iii) the highest bid price per
share of Issuer Common Stock on the Nasdaq National Market or other principal
trading market or securities exchange on which such shares are traded as
reported by a recognized source selected by Holder during the sixty (60)
business days preceding the Request Date; provided, however, that in the event
of a sale of less than all of Issuer's assets, the Applicable Price shall be the
sum of the price paid in such sale for such assets or deposit liabilities and
the current market value of the remaining consolidated net assets of Issuer as
determined by a nationally recognized investment banking firm selected by Holder
(or the Holder Majority) and reasonably acceptable to Issuer, divided by the
number of shares of the Issuer Common Stock outstanding at the time of such
sale. If the consideration to be offered, paid or received pursuant to either of
the foregoing clauses (i) or (ii) shall be other than in cash, the value of such
consideration shall be determined in good faith by an independent nationally
recognized investment banking firm selected by Holder (or the Holder Majority)
and reasonably acceptable to Issuer, which determination shall be conclusive for
all purposes of this Agreement.
(e) As used herein, a "Repurchase Event" shall occur if (i) any person
(other than Grantee or any subsidiary of Grantee) shall have acquired beneficial
ownership of (as such term is defined in Rule 13d-3 promulgated under the
Exchange Act) or the right to acquire beneficial ownership of, or any "group"
(as such term is defined under the Exchange Act and the rules and regulations
promulgated thereunder) shall have been formed which beneficially owns, or has
the right to acquire beneficial ownership of, fifty percent (50%) or more of the
then outstanding shares of Issuer Common Stock or (ii) any of the transactions
described in Section 7(b)(i), 7(b)(ii) or 7(b)(iii) shall be consummated.
9. Registration Rights.
(a) Demand Registration Rights. Issuer shall, subject to the conditions of
Section 9(c) below, if requested by any Holder, including Grantee and any
permitted transferee ("Selling Shareholder"), after exercise of the Option and
prior to an Expiration Date, expeditiously prepare and file, a registration
statement under the Securities Act if such registration is necessary in order to
permit the sale or other disposition of any or all shares of Issuer Common Stock
or other securities that have been acquired by or are issuable to the Selling
Shareholder upon exercise of the Option in accordance with the intended method
of sale or other disposition stated by the Selling Shareholder in such
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request, including without limitation a "shelf" registration statement under
Rule 415 under the Securities Act or any successor provision, and Issuer shall
use its best efforts to qualify such shares or other securities for sale under
any applicable state securities laws.
(b) Additional Registration Rights. If Issuer at any time after the
exercise of the Option proposes to register any shares of Issuer Common Stock
under the Securities Act in connection with an underwritten public offering of
such Issuer Common Stock, Issuer will promptly give written notice to the
Holders of its intention to do so and, upon the written request of any Holder
given within thirty (30) days after receipt of any such notice (which request
shall specify the number of shares of Issuer Common intended to be included in
such underwritten public offering by the Holder), Issuer will cause all such
shares for which a Holder requests participation in such registration, to be so
registered and included in such underwritten public offering; provided, however,
that Issuer may elect to not cause any such shares to be so registered (i) if
the underwriters in good faith object for valid business reasons, or (ii) in the
case of a registration solely to implement an employee benefit plan or a
registration filed on Form S-4 of the Securities Act or any successor form,
provided, further, however, that such election pursuant to (i) may be only made
one time. If some but not all the shares of Issuer Common Stock, with respect to
which Issuer shall have received requests for registration pursuant to this
Section 9(b), shall be excluded from such registration, Issuer shall make
appropriate allocation of shares to be registered among the Holders desiring to
register their shares pro rata in the proportion that the number of shares
requested to be registered by each such Holder bears to the total number of
shares requested to be registered by all such Holders then desiring to have
Issuer Common Stock registered for sale.
(c) Conditions to Required Registration. Issuer shall use all reasonable
efforts to cause each registration statement referred to in Section 9(a) above
to become effective and to obtain all consents or waivers of other parties which
are required therefor and to keep such registration statement effective;
provided, however, that Issuer may delay any registration of Option Shares
required pursuant to Section 9(a) above for a period not exceeding 90 days if
Issuer determines, in the good faith exercise of its reasonable business
judgment, that such registration and offering could adversely effect or
interfere with bona fide financing plans of Issuer or would require disclosure
of information, the premature disclosure of which could adversely affect Issuer
or any transaction under active consideration by Issuer. Notwithstanding
anything to the contrary stated herein, Issuer shall not be required to register
Option Shares under the Securities Act pursuant to Section 9(a) above:
(i) on more than one occasion during any calendar year;
(ii) within 90 days after the effective date of a registration
referred to in Section 9(b) above pursuant to which the Holders concerned
were afforded the opportunity to register or qualify such shares under the
Securities Act and such shares were registered or qualified as requested,
and
(iii) unless a request therefor is made to Issuer by Holders that hold
at least 25% or more of the aggregate number of Option Shares (including
shares of Issuer Common Stock issuable upon exercise of the Option) then
outstanding.
In addition to the foregoing, Issuer shall not be required to maintain the
effectiveness of any registration statement after the expiration of nine (9)
months from the effective date of such registration statement. Issuer shall use
all reasonable efforts to make any filings,
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and take all steps, under all applicable state securities laws to the extent
necessary to permit the sale or other disposition of the Option Shares so
registered in accordance with the intended method of distribution for such
shares; provided, however, that Issuer shall not be required to consent to the
general jurisdiction or qualify to do business in any state where it is not
otherwise required to so consent to such jurisdiction or to so qualify to do
business.
(d) Expenses. Except where applicable state law prohibits such payments,
Issuer will pay the costs of such registration or qualification expenses,
including without limitation registration fees, qualification fees, blue sky
fees and expenses, Issuer's legal expenses, costs of special audits or "cold
comfort" letters, expenses of underwriters, excluding discounts and commissions,
and the reasonable fees and expenses of any necessary special experts in
connection with each registration pursuant to Section 9(a) or (b) above
(including the related offerings and sales by holders of Option Shares) and all
other qualifications, notifications, or exemptions pursuant to Section 9(a) or
9(b) above.
(e) Indemnification. In connection with any registration under Section 9(a)
or 9(b) above, Issuer hereby indemnifies the Selling Shareholders, and each
underwriter thereof, including each person, if any, who controls such holder or
underwriter within the meaning of Section 15 of the Securities Act, against all
expenses, losses, claims, damages and liabilities caused by any untrue, or
alleged untrue, statement of a material fact contained in any registration
statement or prospectus or notification or offering circular (including any
amendments or supplements thereto) or any preliminary prospectus, or caused by
any omission, or alleged omission, to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as such expenses, losses, claims, damages or liabilities of such
indemnified party are caused by any untrue statement or alleged untrue statement
that was included by Issuer in any such registration statement or prospectus or
notification or offering circular (including any amendments or supplements
thereto) in reliance upon, and in conformity with, information furnished in
writing to Issuer by such indemnified party or any underwriter expressly for use
therein, and Issuer and each officer, director and controlling person of Issuer
shall be indemnified by such Selling Shareholders, or by such underwriter, as
the case may be, for all such expenses, losses, claims, damages and liabilities
caused by any untrue, or alleged untrue, statement, that was included by Issuer
in any such registration statement or prospectus or notification or offering
circular (including any amendments or supplements thereto) in reliance upon, and
in conformity with, information furnished in writing to Issuer by such holder or
such underwriter, as the case may be, expressly for such use.
Promptly upon receipt by a party indemnified under this Section 9(e) of
notice of the commencement of any action against such indemnified party in
respect of which indemnity or reimbursement may be sought against any
indemnifying party under this Section 9(e), such indemnified party shall notify
the indemnifying party in writing of the commencement of such action, but the
failure so to notify the indemnifying party shall not relieve it of any
liability which it may otherwise have to any indemnified party under this
Section 9(e). In case notice of commencement of any such action shall be given
to the indemnifying party as above provided, the indemnifying party shall be
entitled to participate in and, to the extent it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and satisfactory to such
indemnified party. The indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel (other than reasonable costs of investigation)
shall be paid by the
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indemnified party unless (i) the indemnifying party either agrees to pay the
same, (ii) the indemnifying party fails to assume the defense of such action
with counsel reasonably satisfactory to the indemnified party, or (iii) the
indemnified party has been advised by counsel that one or more legal defenses
may be available to the indemnified party that may be contrary to the interest
of the indemnifying party. No indemnifying party shall be liable for any
settlement entered into without its consent, which consent may not be
unreasonably withheld.
If the indemnification provided for in this Section 9(e) is unavailable to
a party otherwise entitled to be indemnified in respect of any expenses, losses,
claims, damages or liabilities referred to herein, then the indemnifying party,
in lieu of indemnifying such party otherwise entitled to be indemnified, shall
contribute to the amount paid or payable by such party to be indemnified as a
result of such expenses, losses, claims, damages or liabilities in such
proportion as is appropriate to reflect the relative benefits received by
Issuer, the Selling Shareholders and the underwriters from the offering of the
securities and also the relative fault of Issuer, the Selling Shareholders and
the underwriters in connection with the statements or omissions which resulted
in such expenses, losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The amount paid or payable by a party as a
result of the expenses, losses, claims, damages and liabilities referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim, provided, however, that in no case shall any Selling Shareholder be
responsible, in the aggregate, for any amount in excess of the net offering
proceeds attributable to its Option Shares included in the offering. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. Any obligation by any holder to
indemnify shall be several and not joint with other holders.
In connection with any registration pursuant to Section 9(a) or 9(b) above,
Issuer and each Selling Shareholder (other than Grantee) shall enter into an
agreement containing the indemnification provisions of this Section 9(e).
(f) Miscellaneous Reporting. Issuer shall comply with all reporting
requirements and will do all such other things as may be necessary to permit the
expeditious sale at any time of any Option Shares by the Selling Shareholders
thereof in accordance with and to the extent permitted by any rule or regulation
promulgated by the SEC from time to time. Issuer shall at its expense provide
the Selling Shareholders with any information necessary in connection with the
completion and filing of any reports or forms required to be filed by them under
the Securities Act or the Exchange Act, or required pursuant to any state
securities laws or the rules of any stock exchange.
10. Listing. If Issuer Common Stock or any other securities to be acquired
upon exercise of the Option are not then authorized for quotation on the Nasdaq
National Market or any securities exchange, Issuer, upon the request of Holder,
will promptly file an application to authorize for quotation the shares of
Issuer Common Stock or other securities to be acquired upon exercise of the
Option on the Nasdaq National Market and will use its best efforts to obtain
approval of such listing as soon as practicable.
11. Division of Option. This Agreement (and the Option granted hereby) are
exchangeable, without expense, at the option of Holder, upon presentation and
surrender of this Agreement at the principal office of Issuer for other
agreements providing for other options of different denominations entitling the
holder thereof to purchase in the aggregate
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the same number of shares of Issuer Common Stock purchasable hereunder. The
terms "other agreements" and "other options" as used in the preceding sentence
mean any other agreements and related options for which this Agreement (and the
Option granted hereby) may be exchanged. Upon receipt by Issuer of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
12. Limitation on Total Profit and Notional Total Profit.
(a) Notwithstanding anything to the contrary contained herein, in no event
shall Grantee's Total Profit (as defined below in Section 12(c) hereof) exceed
$3.2 million and, if it otherwise would exceed such amount, Grantee, at its sole
election, shall either (i) reduce the number of shares of Issuer common stock
subject to the Option, (ii) pay cash to Issuer, or (iii) any combination
thereof, so that Grantee's actually realized Total Profit shall not exceed $3.2
million after taking into account the foregoing actions.
(b) Notwithstanding anything to the contrary contained herein, the Option
may not be exercised for a number of shares as would, as of the date of
exercise, result in a Notional Total Profit (as defined below in Section 12(d)
hereof) of more than $3.2 million; provided, that nothing in this sentence shall
restrict any exercise of the Option permitted hereby on any subsequent date on
which the Notional Total Profit would be less than $3.2 million.
(c) As used herein, the term "Total Profit" shall mean the aggregate amount
(before taxes) of the following: (i) the amount received by Grantee pursuant to
Issuer's repurchase of the Option (or any portion thereof) pursuant to Section 8
hereof, (ii) (x) the amount received by Grantee or any affiliate of Grantee
pursuant to Issuer's repurchase of Option Shares pursuant to Section 8 hereof,
less (y) Grantee's or any affiliate of Grantee's purchase price for such Option
Shares, (iii) (x) the net cash amounts received by Grantee or any affiliate of
Grantee pursuant to the sale of Option Shares (or any other securities into
which such Option Shares shall be converted or exchanged) to any unaffiliated
party, less (y) Grantee's or any affiliate of Grantee's purchase price of such
Option Shares, and (iv) any equivalent amounts with respect to the Substitute
Option.
(d) As used herein, the term "Notional Total Profit" with respect to any
number of shares as to which Grantee or any affiliate of Grantee may propose to
exercise the Option shall be the Total Profit determined as of the date of such
proposed exercise assuming that the Option were exercised on such date for such
number of shares and assuming that such shares, together with all other Option
Shares held by Grantee or any affiliate of Grantee as of such date, were sold
for cash at the closing market price for the Issuer Common Stock as of the close
of business on the preceding trading day (less customary brokerage commissions).
(e) Grantee agrees, promptly following any exercise of all or any portion
of the Option, and subject to its rights under Section 8 hereof, to use and
cause any wholly owned Subsidiary of Grantee to use commercially reasonable
efforts promptly to maximize the value of Option Shares purchased taking into
account market conditions, the number
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of Option Shares, the potential negative impact of substantial sales on the
market price for Issuer Common stock, and the availability of an effective
registration statement to permit public sale of Option Shares.
13. Miscellaneous.
(a) Expenses. Except as otherwise provided in Section 9, each of the
parties hereto and any Holder shall bear and pay all costs and expenses incurred
by it or on its behalf in connection with the transactions contemplated
hereunder, including, without limitation, fees and expenses of its own financial
consultants, investment bankers, accountants and counsel.
(b) Waiver and Amendment. Any provision of this Agreement may be waived at
any time by the party that is entitled to the benefits of such provision. This
Agreement may not be modified, amended, altered or supplemented except upon the
execution and delivery of a written agreement executed by the parties hereto.
(c) Entire Agreement; No Third-Party Beneficiary. This Agreement, together
with the Reorganization Agreement and the other documents and instruments
referred to herein and therein (i) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof and (ii) is not
intended to confer upon any person other than the parties hereto, and their
respective successors and assigns, any rights or remedies hereunder, except as
expressly provided in this Agreement.
(d) Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court or a federal or state regulatory authority of
competent jurisdiction to be invalid, void or unenforceable, such invalid, void
or unenforceable term, provision, covenant or restriction shall, if it is so
susceptible, be deemed modified to the minimum extent necessary to render the
same valid and enforceable and, in all events, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
Without limiting the foregoing, if for any reason such court or regulatory
authority determines that Holder may not legally acquire, or Issuer may not
legally repurchase, the full number of shares of Issuer Common Stock as provided
in Sections 3 and 8 (as adjusted pursuant to Section 7), it is the express
intention of Issuer to allow Holder to acquire or to require Issuer to
repurchase the maximum number of shares as may be legally permissible without
any amendment or modification hereof.
(e) Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of California without regard to any
applicable conflicts of law rules.
(f) Descriptive Headings. The descriptive headings contained herein are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
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(g) Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be given (and
shall be deemed to have been duly received if so given) by personal delivery, by
telecopy (provided that copy is concurrently sent by first class U.S. mail,
postage prepaid), or by mail (registered or certified mail, postage prepaid,
return receipt requested) to the parties as follows:
If to Issuer:
Orange National Bancorp
1201 E. Katella Avenue
Orange, California 92867
Attn: Kenneth Cosgrove, President
Fax No.: (714) 289-2310
With a copy to:
Brobeck, Phleger & Harrison, LLP
One Market Plaza
San Francisco, California 94105
Attn: J. Michael Shepherd
Fax No.: (415) 442-1010
If to Grantee:
CVB Financial Corp.
701 N. Haven Avenue
Ontario, California 91423
Attn: D. Linn Wiley, President
Fax No.: (909) 481-2130
With a copy to:
Manatt, Phelps & Phillips
11355 West Olympic Boulevard
Los Angeles, California 90064
Attn: William T. Quicksilver
Fax No.: (310) 312-4224
or to such other address as a party may have furnished to the others in writing
in accordance with this paragraph, except that notices of change of address
shall only be effective upon receipt. Any notice, demand or other communication
given pursuant to the provisions of this Section 11(g) shall be deemed to have
been given on the date actually delivered or on the third day following the date
mailed, whichever first occurs.
(h) Counterparts. This Agreement and any amendments hereto may be executed
in two counterparts, each of which shall be considered one and the same
agreement and shall become effective when both counterparts have been signed, it
being understood that both parties need not sign the same counterpart.
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(i) Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder or under the Option shall be assigned by any of the
parties hereto without the prior written consent of the other party, except that
Grantee may assign this Agreement to a wholly-owned subsidiary of Grantee and at
any time after a Purchase Event occurs, Holder may assign or transfer its rights
and obligations hereunder, in whole or in part, to any Person or Persons,
subject to compliance with applicable laws. In order to effectuate the
foregoing, Grantee shall be entitled to surrender this Agreement to Issuer in
exchange for two or more Agreements entitling the holders thereof to purchase in
the aggregate the same number of shares of Common Stock as may be purchasable
hereunder. Subject to the preceding sentence, this Agreement shall be binding
upon, inure to the benefit of, and be enforceable by the parties and their
respective successors and permitted assigns.
(j) Further Assurances. In the event of any exercise of the Option by
Holder, Issuer and Holder shall execute and deliver all other documents and
instruments and take all other action that may be reasonably necessary in order
to consummate the transactions provided for by such exercise.
(k) Specific Performance. The parties hereto agree that this Agreement may
be enforced by either party through specific performance, injunctive relief and
other equitable relief. Both parties further agree to waive any requirement for
the securing or posting of any bond in connection with the obtaining of any such
equitable relief and that this provision is without prejudice to any other
rights that the parties hereto may have for any failure to perform this
Agreement.
IN WITNESS WHEREOF, Issuer and Grantee have caused this Stock Option
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the day and year first written above.
<TABLE>
<S> <C>
CVB FINANCIAL CORP. ORANGE NATIONAL BANCORP
By /s/ D. LINN WILEY By /s/ KENNETH COSGROVE
-------------------------------------------- --------------------------------------------
D. Linn Wiley Kenneth Cosgrove
President President
</TABLE>
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ANNEX C
, 1999
Board of Directors
CVB Financial Corp.
Ontario, California 91764
Gentlemen:
You have requested that The Bank Advisory Group, Inc. act as an independent
financial analyst and advisor to CVB Financial Corp., a California corporation
("CVB"). Specifically, we have been asked to render advice and analysis in
connection with the proposed merger of Orange National Bancorp, Orange,
California, a California corporation ("ONB"), with and into CVB. In our role as
an independent financial advisor, you have requested our opinion with regard to
the fairness -- from the perspective of the common shareholders of CVB -- of the
financial terms of the merger of ONB with and into CVB, pursuant to the
provisions of the Agreement and Plan of Reorganization dated May 18, 1999, by
and between CVB and ONB.
In conjunction with our review of the Agreement and Plan of Reorganization,
our understanding is that CVB and ONB propose to consummate the merger of ONB
with and into CVB pursuant to the following financial terms:
- On the date on which the merger of ONB with and into CVB is consummated,
holders of ONB's, no par value per share, common stock ("ONB stock"),
other than the shares held by any holders who have duly exercised and
perfected their dissenters' rights, shall receive, for each share of ONB
Stock, 1.5 shares (the "Conversion Ratio") of CVB's, no par value per
share, common stock ("CVB stock").
- No fractional shares of CVB Stock will be issued in the merger of ONB
with and into CVB and, in lieu thereof, holders of shares of ONB stock
who would otherwise be entitled to a fractional share interest will be
paid an amount in cash equal to the product of such fractional share
interest and the average of the daily closing price of a share of CVB
stock reported on the American Stock Exchange during the 15 consecutive
trading days ending at the end of the fifth trading day immediately
preceding the date on which the merger of ONB with and into CVB is
consummated.
- All outstanding options to acquire ONB stock shall be converted into
options to acquire CVB stock, with the number of shares and exercise
price subject to adjustment for the Conversion Ratio.
- On and after the date on which the merger of ONB with and into CVB is
consummated, each share of CVB Stock issued and outstanding immediately
prior to the closing date of the merger of ONB with and into CVB shall
remain an issued and outstanding share of CVB stock.
The Bank Advisory Group, Inc., as part of its line of professional
services, specializes in rendering valuation opinions of banks and bank holding
companies in connection with mergers and acquisitions nationwide. Prior to our
retention for this assignment, The Bank Advisory Group provided financial
advisory services to CVB in various capacities; however,
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the revenues derived from the delivery of such services are insignificant when
compared to The Bank Advisory Group's total gross revenues.
For our services as an independent financial analyst and advisor to CVB in
connection with the merger of ONB with and into CVB, CVB has agreed to pay The
Bank Advisory Group a professional fee totaling $90,000. CVB also has agreed to
provide reimbursement for reasonable out-of-pocket expenses. CVB has agreed to
indemnify The Bank Advisory Group, the officers, directors, employees, and
shareholders of The Bank Advisory Group and assigns, heirs, beneficiaries and
legal representatives of each indemnified entity and person.
No portion of the professional fee is contingent upon the conclusion
reached herein. And, no limitations were imposed by the CVB Board of Directors
with respect to the investigations made or procedures followed in rendering this
opinion.
We have not provided any services to ONB and, thus, have received no
professional fees from ONB.
The Bank Advisory Group does not, and its officers directors and
shareholders do not, own any shares of CVB Stock or ONB Stock; nor does The Bank
Advisory Group make a market in the stock of CVB, ONB, or any other
publicly-traded security, financial or otherwise.
In connection with this opinion and with respect to CVB, we have reviewed,
among other things:
1. Audited consolidated financial statements, on Form 10-K, for the years
ended December 31, 1998, 1997, and 1996;
2. Quarterly financial statements, on Form 10-Q, for the 1998 and 1997
calendar quarters, and for the first calendar quarter of 1999;
3. Consolidated financial statements, on form F.R. Y-9C, for the years
ended December 31, 1998, 1997, and 1996, and for the three-month period
ended March 31, 1999, as filed with the Federal Reserve System;
4. Internally-generated financial statements for the -month
period ending , 1999;
5. Selected equity research reports regarding CVB prepared by various
analysts who cover the financial institutions sector for market makers
of CVB Stock;
6. Certain internal financial analyses and forecasts for CVB prepared by
the management of CVB, including projections of future performance;
7. Certain other summary materials and analyses with respect to CVB's loan
portfolio, securities portfolio, deposit base, fixed assets, and
operations including, but not limited to: (i) schedules of loans and
other assets identified by management as deserving special attention or
monitoring given the characteristics of the loan/asset and the local
economy, (ii) analyses concerning the adequacy of the loan loss
reserve, (iii) schedules of "other real estate owned," including
current carrying values and recent appraisals, and (iv) schedules of
securities, detailing book values, market values, and lengths to
maturity;
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8. Certain publicly-available information concerning the trading of, and
the trading market for, CVB Stock;
9. The condition of the commercial banking industry, as indicated in
financial reports filed with various Federal bank regulatory
authorities by all federally-insured commercial banks; and
10. Such other information -- including financial studies, analyses,
investigations, and economic and market criteria -- that we deem
relevant to this assignment.
In connection with this opinion and with respect to ONB, we have reviewed,
among other things:
1. Audited consolidated financial statements, on Form 10-K, for the years
ended December 31, 1998, 1997, and 1996;
2. Quarterly financial statements, on Form 10-Q, for the 1998 and 1997
calendar quarters, and for the first calendar quarter of 1999;
3. Consolidated financial statements, on form F.R. Y-9C, for the years
ended December 31, 1998, 1997, and 1996, and for the three-month period
ended March 31, 1999, as filed with the Federal Reserve System;
4. Internally-generated financial statements for the -month
period ending , 1999;
5. Selected equity research reports regarding ONB prepared by various
analysts who cover the financial institutions sector for market makers
of ONB Stock;
6. Certain internal financial analyses and forecasts for ONB prepared
individually and collectively by the management of CVB and ONB,
including projections of future performance;
7. Certain other summary materials and analyses with respect to ONB's loan
portfolio, securities portfolio, deposit base, fixed assets, and
operations including, but not limited to: (i) schedules of loans and
other assets identified by management as deserving special attention or
monitoring given the characteristics of the loan/asset and the local
economy, (ii) analyses concerning the adequacy of the loan loss
reserve, (iii) schedules of "other real estate owned," including
current carrying values and recent appraisals, and (iv) schedules of
securities, detailing book values, market values, and lengths to
maturity;
8. Certain publicly-available information concerning the trading of, and
the trading market for, ONB Stock;
9. The condition of the commercial banking industry, as indicated in
financial reports filed with various Federal bank regulatory
authorities by all federally-insured commercial banks; and
10. Such other information -- including financial studies, analyses,
investigations, and economic and market criteria -- that we deem
relevant to this assignment.
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In connection with this opinion and with respect to the proposed merger of
ONB with and into CVB, we have reviewed, among other things:
1. The Agreement and Plan of Reorganization, and any amendments thereto,
that sets forth, among other items, the terms, conditions to closing,
pending litigation against both CVB and ONB, and representations and
warranties of CVB and ONB with respect to the proposed merger of ONB
with and into CVB;
2. The Joint Proxy Statement/Prospectus to which this opinion is appended,
and will be furnished to the shareholders of both CVB and ONB in
connection with the proposed merger of ONB with and into CVB;
3. The financial terms and price levels, to the extent publicly-available,
of selected recent business combinations of companies in the banking
industry that we deem comparable, either in whole or in part, to the
merger of ONB with and into CVB -- together with the financial
performance and condition of such banking organizations;
4. The price-to-equity multiples, price-to-earnings multiples and trading
volumes of banking organizations based in the United States -- and
specifically in California -- that have publicly-traded common stocks,
together with the financial performance and condition of such banking
organizations, compared with the price-to-equity multiples,
price-to-earnings multiples and trading volumes for both CVB Stock and
ONB Stock; and
5. Such other information -- including financial studies, analyses,
investigations, and economic and market criteria -- that we deem
relevant to this assignment.
Based on our experience, we believe our review of, among other things, the
aforementioned items provides a reasonable basis for our opinion, recognizing
that we are expressing an informed professional opinion -- not a certification
of value.
We have relied upon the information provided by the management of both CVB
and ONB, or otherwise reviewed by us, as being complete and accurate in all
material respects. Furthermore, we have not verified through independent
inspection or examination the specific assets or liabilities of CVB and ONB or
their subsidiary banks. We have also assumed that there has been no material
change in the assets, financial condition, results of operations, or business
prospects of CVB and ONB since the date of the last financial statements made
available to us. We have met with the management of both CVB and ONB for the
purpose of discussing the relevant information that has been provided to us.
Our opinion is limited to the fairness of the financial terms of the merger
of ONB with and into CVB, from a financial point of view, to the shareholders of
CVB Stock. The financial terms include, but are not limited to, the Conversion
Ratio and the consequential pro forma ownership in CVB on a post-merger basis of
the shareholders of CVB Stock. We were not asked to consider and our opinion
does not address the relative merits of the proposed merger of ONB with and into
CVB as compared to alternative business strategies that might exist for CVB or
the effect of any other transaction in which CVB might engage. Our opinion is
directed to the Board of Directors of CVB, and it does not constitute a
recommendation to any shareholder of CVB Stock as to how such shareholder should
vote with respect to the merger of ONB with and into CVB.
BASED ON ALL FACTORS THAT WE DEEM RELEVANT AND ASSUMING THE ACCURACY AND
COMPLETENESS OF THE INFORMATION AND DATA PROVIDED TO US, IT IS OUR OPINION THAT
THE TERMS
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OF THE PROPOSED MERGER OF ONB WITH AND INTO CVB, INCLUDING, WITHOUT LIMITATION,
THE CONVERSION RATIO AND THE CONSEQUENTIAL PRO FORMA OWNERSHIP IN CVB ON A
POST-MERGER BASIS OF THE SHAREHOLDERS OF CVB STOCK, ARE FAIR, FROM A FINANCIAL
POINT OF VIEW, TO THE SHAREHOLDERS OF CVB STOCK.
This opinion is available for disclosure to the shareholders of CVB.
Accordingly, we hereby consent to the inclusion of our opinion as an appendix to
the Joint Proxy Statement/Prospectus relating to the proposed merger of ONB with
and into CVB, and to the reference of our firm in the Joint Proxy
Statement/Prospectus.
Respectfully submitted,
THE BANK ADVISORY GROUP, INC.
By:
--------------------------------------
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ANNEX D
May 17, 1999
Members of the Board of Directors
ONB National Bancorp
1201 East Katella Avenue
ONB, CA 92867
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the shareholders of Orange National Bancorp
("ONB") of the Conversion Ratio as defined in Section 2.2.1 of the Agreement and
Plan of Reorganization dated as of May 18, 1999 (the "Agreement"), in the
proposed merger (the "Merger") of CVB Financial Corp ("CVB") and ONB. On the
Effective Date (as such term is defined in the Agreement), each share of ONB
Common Stock will be converted into the right to receive 1.50 shares of CVB
Common Stock subject to adjustment as defined in the Agreement.
In arriving at our opinion, we have reviewed and analyzed, among other
things, the following: (i) the Agreement; (ii) certain publicly available
financial and other data with respect to CVB and ONB, including consolidated
financial statements for recent years and interim periods to March 31, 1999;
(iii) certain other publicly available financial and other information
concerning CVB and ONB and the trading markets for the publicly traded
securities of CVB and ONB; (iv) publicly available information concerning other
banks and bank holding companies, the trading markets for their securities and
the nature and terms of certain other merger transactions we believed relevant
to our inquiry; and (v) evaluations and analyses prepared and presented to the
Board of Directors of ONB or a committee thereof in connection with the Merger.
We have held discussions with senior management of CVB and ONB concerning the
companies' past and current operations, financial condition and prospects.
We have reviewed with the senior management of ONB earnings projections for
ONB as a stand-alone entity, assuming the Merger does not occur. We have also
reviewed earnings projections for CVB as a stand-alone entity, assuming the
Merger does not occur as well as securities industry consensus estimates of
projected earnings per share from published sources for CVB as a stand-alone
entity. Certain financial projections for the combined companies and for ONB and
CVB as stand-alone entities were derived by us based partially upon the
projections and information described above, as well as our own assessment of
general economic, market and financial conditions.
In conducting our review and in arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the financial and other
information provided to us or publicly available, and we have not assumed any
responsibility for independent verification of the same. We have relied on
advice of counsel and independent accountants as to all legal and financial
reporting matters with respect to CVB, ONB, the Merger and the Agreement. We
have relied upon the managements of ONB and CVB as to the reasonableness of the
financial and operating forecasts, projections and projected operating cost
savings (and the assumptions and bases therefor) provided to us, and we have
assumed that such forecasts, projections and projected operating cost savings
reflect the best currently available estimates and judgments of the applicable
managements. We have also assumed, without assuming any responsibility for the
independent verification of same, that the aggregate allowances for loan losses
for ONB and CVB are adequate to cover
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ONB National Bancorp
May 17, 1999
page 2
such losses. We have not made or obtained any evaluations or appraisals of the
property of ONB or CVB, nor have we examined any individual loan credit files.
For purposes of this opinion, we have assumed that the Merger will have the tax,
accounting and legal effects (including, without limitation, that the Merger
will be accounted for as a pooling of interests) described in the Merger
Agreement. Our opinion as expressed herein is limited to the fairness, from a
financial point of view, to the holders of the Common Stock of ONB of the
Conversion Ratio in the Merger and does not address ONB's underlying business
decision to proceed with the Merger.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including among others the following: (i)
the historical and current financial position and results of operations of ONB
and CVB, including interest income, interest expense, net interest income, net
interest margin, provision for loan losses, non-interest income, non-interest
expense, earnings, dividends, internal capital generation, book value,
intangible assets, return on assets, return on shareholders' equity,
capitalization, the amount and type of non-performing assets, loan losses and
the reserve for loan losses, all as set forth in the financial statements for
ONB and for CVB; (ii) the assets and liabilities of ONB and CVB, including the
loan, investment and mortgage portfolios, deposits, other liabilities,
historical and current liability sources and costs and liquidity; and (iii) the
nature and terms of certain other merger transactions involving banks and bank
holding companies. We have also taken into account our assessment of general
economic, market and financial conditions and our experience in other
transactions, as well as our experience in securities valuation and our
knowledge of the banking industry generally. Our opinion is necessarily based
upon conditions as they exist and can be evaluated on the date hereof and the
information made available to us through the date hereof.
It is understood that this letter is for the information of the Board of
Directors of ONB. This letter does not constitute a recommendation to the Board
of Directors or to any shareholder of ONB with respect to any approval of the
Merger.
Based upon and subject to the foregoing, we are of the opinion as
investment bankers that, as of the date hereof, the Conversion Ratio in the
Merger is fair, from a financial point of view, to the holders of the Common
Stock of ONB.
Very truly yours,
First Security Van Kasper
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ANNEX E
CHAPTER 13
DISSENTERS' RIGHTS
Right to require purchase -- "Dissenting shares" and "dissenting shareholder"
defined. sec. 1300.
Demand for purchase. sec. 1301.
Endorsement of shares. sec. 1302.
Agreed price -- Time for payment. sec. 1303.
Dissenter's action to enforce payment. sec. 1304.
Appraisers' report -- Payment -- Costs. sec. 1305.
Dissenting shareholder's status as creditor. sec. 1306.
Dividends paid as credit against payment. sec. 1307.
Continuing rights and privileges of dissenting shareholders. sec. 1308.
Termination of dissenting shareholder status. sec. 1309.
Suspension of proceedings for payment pending litigation. sec. 1310.
Exempt shares. sec. 1311.
Attacking validity of reorganization or merger. sec. 1312.
SEC. 1300. RIGHT TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b)or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
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(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
SEC. 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
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SEC. 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares. LEG.H. 1975 ch. 682, effective
January 1, 1977, 1986 ch. 766.
SEC. 1303. AGREED PRICE -- TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SEC. 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
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SEC. 1305. APPRAISERS' REPORT -- PAYMENT -- COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SEC. 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SEC. 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SEC. 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of
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their shares is agreed upon or determined. A dissenting shareholder may not
withdraw a demand for payment unless the corporation consents thereto.
SEC. 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SEC. 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Section 1304 and 1305 shall be suspended until final determination of such
litigation.
SEC. 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
SEC. 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to
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subdivision (b) of Section 1202, is entitled to payment in accordance with the
terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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ANNEX F
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NO. 33-8743
ORANGE NATIONAL BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
1201 EAST KATELLA AVENUE
ORANGE, CALIFORNIA 92867
CALIFORNIA (714) 771-4000 33-0190684
(STATE OF INCORPORATION) (ADDRESS AND TELEPHONE NUMBER (I.R.S. EMPLOYER
OF PRINCIPAL EXECUTIVE OFFICES) IDENTIFICATION NO.)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK
(TITLE OF CLASS)
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 periods 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. [ ]
The aggregate market value of the voting shares held by nonaffiliates of
the Registrant was $37,097,336 as of February 28,1999. The aggregate market
value of the voting shares held by nonaffiliates includes all stockholders
except officers and directors and was computed based on a market price of $27.63
per share.
2,000,171 Shares of Common Stock were outstanding at February 28, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference portions of the Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Annual Meeting of Shareholders to be held on May 17, 1999.
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ORANGE NATIONAL BANCORP
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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<S> <C> <C>
PART I
Item 1. Business.................................................... F-3
Item 2. Properties.................................................. F-19
Item 3. Legal Proceedings........................................... F-20
Item 4. Submissions of Matters to a Vote of Security Holders........ F-20
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... F-20
Item 6. Selected Financial Data..................................... F-22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... F-23
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk........................................................ F-30
Item 8. Financial Statements and Supplementary Data................. F-31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... F-31
PART III
Item 10. Directors and Executive Officers of the Registrant.......... F-31
Item 11. Executive Compensation...................................... F-32
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. F-32
Item 13. Certain Relationships and Related Transactions.............. F-32
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... F-32
Signatures.................................................. F-33
Index to Exhibits........................................... F-35
</TABLE>
F-2
<PAGE> 186
PART I
ITEM 1. BUSINESS
GENERAL
Orange National Bancorp ("Bancorp" or "Company") was organized and
incorporated as a bank holding company under the laws of the State of California
on July 28, 1986. The Company acquired all the outstanding capital stock of
Orange National Bank ("Bank") in a one-bank holding company organization at the
direction of the Board of Directors of the Bank. The Company commenced
operations as a bank holding company within the definition of the Bank Holding
Company Act of 1956, as amended, and is subject to the supervision and
regulation of the Board of Governors of the Federal Reserve System. The Bank
became a wholly-owned subsidiary of the Bancorp on January 16, 1987, with the
approval of the Office of the Comptroller of the Currency ("OCC") and the
Federal Reserve Board ("FRB"). The Bank was organized and chartered as a
national banking association on October 31, 1979 and opened for business on that
date.
Substantially all consolidated operating earnings and net earnings are
presently derived from banking related activities. Such banking related
activities would continue to represent the Company's primary source of operating
earnings and net earnings for the foreseeable future. The Bank currently has six
branch offices located throughout Orange County, California.
NARRATIVE DESCRIPTION OF BUSINESS
The Company is engaged in the ownership of one commercial bank. The Company
does not consider its business to be seasonal nor to be dependent upon a single
customer or a few customers. Thus, the loss of any one customer would not have a
material adverse effect upon the Company or its subsidiary. Neither the Company
nor its subsidiary operate outside the United States nor derive revenues from
customers located outside of the United States.
The Bank offers a full range of commercial banking services, including the
acceptance of demand, money-market, savings and time deposits; and the
origination of commercial, real estate, Small Business Administration, personal,
equity, home improvement, automobile, installment and term loans; and letters
and lines of credit. The Bank also offers travelers' checks, safe deposit boxes,
notary public, international banking and other customary bank services to its
customers, except trust services. The lobby of each branch is open from 9:00
a.m. to 5:00 p.m., Monday through Thursday and 9:00 a.m. through 6:00 p.m. on
Friday. Selected branches are open on Saturday. Each branch has an automated
teller machine ("ATM") that is included on several national ATM networks. In
addition, drive-up services are available at three branch offices. The Federal
Deposit Insurance Corporation ("FDIC") insures the deposits of the Bank up to a
maximum of $100,000, subject to certain limitations. The Bank is a member of the
Federal Reserve System.
The Bank currently does not issue MasterCard or VISA credit cards, but
honors merchant drafts under both types of cards.
The principal sources of the Bank's income are interest income and fees
from the Bank's loan portfolio, interest income on the Bank's investments and
gains on sales of
F-3
<PAGE> 187
loans. These sources comprised 66.8%, 20.5% and 3.0%, respectively, of the
Bank's total income for 1998. Other sources of income include fees on deposit
accounts and other customer services.
DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY
The following schedule presents the average balances of the Company's
asset, liability, and stockholders' equity accounts and the distribution
percentage of each item based on total average assets. Average balances were
computed using the average daily balances for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks........... $ 19,665 7.8% $ 23,212 10.5% $ 20,415 9.4%
Securities........................ 27,700 11.0 26,134 11.8 44,937 20.7
Federal funds sold................ 54,177 21.5 29,362 13.3 29,725 13.7
Loans............................. 139,521 55.4 131,077 59.4 109,802 50.7
Less allowance for credit
losses.......................... (1,580) (0.6) (1,488) (0.7) (1,487) (0.7)
Net loans....................... 137,941 54.8 129,589 58.7 108,315 50.0
Premises and equipment, net....... 5,510 2.2 5,187 2.4 5,382 2.5
Other assets...................... 6,875 2.7 7,193 3.3 7,998 3.7
-------- ----- -------- ----- -------- -----
Total assets.................. $251,868 100.0% $220,677 100.0% $216,772 100.0%
======== ===== ======== ===== ======== =====
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities
Deposits:
Noninterest-bearing demand.... $ 84,499 33.5% $ 76,444 34.6% $ 67,662 31.2%
Money market demand and NOW... 103,142 41.0 91,931 41.7 101,562 46.9
Savings....................... 12,186 4.8 11,485 5.2 12,420 5.7
Time.......................... 28,088 11.2 19,423 8.8 15,969 7.4
-------- ----- -------- ----- -------- -----
Total deposits.............. 227,915 90.5 199,283 90.3 197,613 91.2
Other liabilities............... 2,097 0.8 1,793 0.8 1,381 0.6
-------- ----- -------- ----- -------- -----
Total liabilities........... 230,012 91.3 201,076 91.1 198,994 91.8
Stockholders' equity:
Common stock.................... 7,950 3.2 7,770 3.5 7,594 3.5
Retained earnings............... 13,906 5.5 11,831 5.4 10,184 4.7
-------- ----- -------- ----- -------- -----
Total stockholders'
equity................... 21,856 8.7 19,601 8.9 17,778 8.2
-------- ----- -------- ----- -------- -----
Total liabilities and
stockholders' equity..... $251,868 100.0% $220,677 100.0% $216,772 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
F-4
<PAGE> 188
INTEREST INCOME RATES
Average interest-earning assets, their yields and amounts earned by
category are presented in the following chart for the years ended December 31.
Amounts outstanding are the average daily balances for the respective years,
including nonaccrual loans. Yields and amounts earned include loan origination
fees. The Company does not have tax-exempt income bonds or notes in its
securities portfolio.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Securities:
Average outstanding......................... $ 27,700 $ 26,134 $ 44,937
Average yield............................... 5.78% 6.02% 5.85%
Amount of interest earned................... $ 1,602 $ 1,573 $ 2,627
Federal funds sold:
Average outstanding......................... $ 54,177 $ 29,362 $ 29,725
Average yield............................... 5.32% 5.44% 5.23%
Amount of interest earned................... $ 2,881 $ 1,598 $ 1,555
Loans:
Average outstanding......................... $139,521 $131,077 $109,802
Average yield............................... 10.49% 10.44% 10.67%
Amount of interest and fees earned.......... $ 14,633 $ 13,686 $ 11,712
Total interest-earning assets:
Average outstanding......................... $221,398 $186,573 $184,464
Average yield............................... 8.63% 9.04% 8.62%
Amount of interest earned................... $ 19,116 $ 16,857 $ 15,894
</TABLE>
INTEREST EXPENSE RATES
The following table presents the Company's average interest-bearing
deposits, the average rate paid on such deposits and the amounts paid or accrued
for the years indicated. Amounts outstanding are the average daily balances
outstanding for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
NOW and money market(1):
Average outstanding......................... $103,142 $ 91,931 $101,562
Average rate paid........................... 2.44% 2.34% 2.47%
Amount of interest paid or accrued.......... $ 2,517 $ 2,154 $ 2,510
Savings:
Average outstanding......................... $ 12,186 $ 11,485 $ 12,420
Average rate paid........................... 2.01% 2.02% 2.00%
Amount of interest paid or accrued.......... $ 245 $ 232 $ 249
Time:
Average outstanding......................... $ 28,088 $ 19,423 $ 15,969
Average rate paid........................... 5.00% 4.98% 4.76%
Amount of interest paid or accrued.......... $ 1,403 $ 967 $ 760
</TABLE>
F-5
<PAGE> 189
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total interest-bearing liabilities:
Average outstanding......................... $143,416 $122,839 $129,951
Average rate paid........................... 2.90% 2.73% 2.71%
Amount of interest paid or accrued.......... $ 4,165 $ 3,353 $ 3,519
Net yield on interest-earning assets.......... 6.75% 7.24% 6.71%
</TABLE>
- -------------------------
(1) NOW and money markets include only interest-bearing transaction accounts.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following table presents the cause and amounts of change in interest
income and expense for the years ended December 31:
<TABLE>
<CAPTION>
1998 OVER 1997(1) 1997 OVER 1996(1)
------------------------- ---------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ----- ------ ------- ----- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN:
Interest income:
Investment securities.............. $ 94 $ (65) $ 29 $(1,099) $ 45 $(1,054)
Federal funds sold................. 1,351 (68) 1,283 (19) 62 43
Loans.............................. 882 65 947 2,269 (295) 1,974
------ ----- ------ ------- ----- -------
Total interest income............ $2,327 $ (68) $2,259 $ 1,151 $(188) $ 963
====== ===== ====== ======= ===== =======
INTEREST EXPENSE:
Money market deposits.............. $ 263 $ 100 $ 363 $ (238) $(118) $ (356)
Savings deposits................... 14 (1) 13 (19) 2 (17)
Time deposits...................... 431 5 436 164 43 207
------ ----- ------ ------- ----- -------
Total interest expense........... $ 708 $ 104 $ 812 $ (93) $ (73) $ (166)
====== ===== ====== ======= ===== =======
Net interest income.............. $1,619 $(172) $1,447 $ 1,244 $(115) $ 1,129
====== ===== ====== ======= ===== =======
</TABLE>
- -------------------------
(1) The variance not solely due to rate or volume is allocated to the rate
variance. Nonaccrual loans have been included in this analysis. Loan fees of
$1.0 million, $1.1 million and $1.0 million for 1998, 1997, and 1996,
respectively, have been included in this analysis. The Company does not have
tax-exempt income bonds or notes in its securities portfolio.
SECURITIES
The Bank's Board of Directors reviews all securities transactions on a
monthly basis. There are no securities from a single issuer other than
securities of the U.S. Government, Agencies and corporations whose aggregate
market value is greater than 10% of stockholders' equity. The Bank does not
invest in derivative financial instruments. The Bank purchases mortgage-backed
securities of investment grade only. The following
F-6
<PAGE> 190
schedule summarizes the amounts and the distribution of the Bank's
held-to-maturity securities as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ -------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST(1) VALUE COST(1) VALUE COST(1) VALUE
--------- ------- --------- ------ --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities........... $17,640 $17,691 $9,037 $8,972 $10,937 $10,844
======= ======= ====== ====== ======= =======
</TABLE>
- -------------------------
(1) Held-to-maturity securities are stated at amortized cost (i.e., cost
adjusted for amortization of premium and accretion of discount).
The following schedule summarizes the available-for-sale securities as of
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ -------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST(2) VALUE COST(2) VALUE COST(2) VALUE
--------- ------- --------- ------ --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
Corporations....................... $14,503 $14,512 $8,992 $8,976 $28,992 $28,899
Mortgage-backed securities........... 25,241 25,226 -- -- -- --
Other................................ 911 911 170 170 174 174
------- ------- ------ ------ ------- -------
Total available-for-sale
securities..................... $40,655 $40,649 $9,162 $9,146 $29,166 $29,073
======= ======= ====== ====== ======= =======
</TABLE>
- -------------------------
(2) Available-for-sale securities are stated at fair value with unrealized gains
and losses being reported as an adjustment to stockholders' equity net of
the related tax effect.
MATURITY OF SECURITIES
The following table summarizes the maturities of the Company's securities
and their weighted average yield as of December 31, 1998:
<TABLE>
<CAPTION>
CARRYING MARKET AVERAGE
AMOUNT(1) VALUE YIELD(2)
--------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed securities(3).................. $42,866 $42,917 5.85%
U.S. Treasury Securities and obligations of
U.S. Government Agencies and corporations:
Due within one year....................... 9,000 9,000 5.31%
Due after one year but within five
years................................... 5,512 5,512 5.75%
Other.......................................... 911 911 6.00%
------- ------- ----
Total securities........................ $58,289 $58,340 5.67%
======= ======= ====
</TABLE>
- -------------------------
(1) Held-to-maturity securities are stated at amortized cost (i.e., cost
adjusted for amortization of premiums and accretion of discounts).
Available-for-sale securities are recorded at fair value.
(2) Weighted average yield is the computed using the investment yield and the
amortized cost of securities.
(3) Mortgage-backed securities are not scheduled for maturities due to the
periodic principal payments received and unknown amount of expected
prepayments.
F-7
<PAGE> 191
LOAN PORTFOLIO
A major part of the Bank's objective is serving the credit needs of
customers in Orange County and surrounding areas. Credit decisions are based
upon the judgement of the Bank's lending personnel and Loan Committee. The legal
lending limit to each customer is restricted to a percentage of the Bank's total
capital, the exact percentage depends on the nature of the particular loan and
the collateral involved. Credit risk is inherent to any loan portfolio and it is
the management of this risk, which defines the quality of the portfolio. The
Bank has a policy to obtain collateral for loans under most circumstances. The
Bank has a highly diversified portfolio, a solid underwriting process, a loan
review program and an active loan service function which management believes
serves to minimize the possibility of material loss in the loan portfolio.
The three general areas in which the Bank has directed virtually all of its
lending activities are (a) real estate loans, (b) commercial loans, and (c)
loans to individuals. These three categories accounted for 63.8%, 28.2%, and
7.8%, respectively, of the Bank's loan portfolio as of December 31, 1998.
Commercial real estate loans are originated for terms of up to 25 years.
Commercial loans are primarily funded to small- and medium-sized businesses for
terms ranging from 30 days to 5 years. Consumer installment loans are for a
maximum term of 48 months on unsecured loans and for a term of the depreciable
life of tangible property used as collateral on secured loans.
Variable interest rate loans comprise 64% of the loan portfolio as of
December 31, 1998.
The Bank had standby letters of credit of $0.5 million and commitments to
extend credit of $23.9 million as of December 31, 1998. The Bank presently has
sufficient liquidity to fund all loan commitments.
The Bank originates loan commitments that are unsecured. The Bank had
funded unsecured loans to companies or individuals of $1.9 million with unfunded
unsecured commitments of $3.9 million as of December 31, 1998. The Bank has a
lending policy to obtain collateral whenever available or desirable, subject to
the degree of risk the Bank is willing to undertake.
The allowance for credit losses is established through a provision for
credit losses charged to expense. Loans are charged against the allowance for
credit losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb estimated losses on existing loans that may become uncollectible,
based on evaluation of the collectibility of loans and prior loan loss
experience. This evaluation also takes into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic or other
conditions. In addition, the OCC periodically reviews the Company's allowance
for credit losses as an integral part of their normal recurring examination
process, and may require the Company to make additions to the allowance based on
their judgment about information available to them at the time of their
examinations.
A loan is impaired when it is probable the creditor will be unable to
collect all contractual principal and interest payments due in accordance with
terms of the loan
F-8
<PAGE> 192
agreement. Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. The amount of impairment, if
any, and any subsequent changes are included in the allowance for credit losses.
LOAN PORTFOLIO COMPOSITION
The composition of the Bank's loan portfolio (all domestic) as of December
31 is presented in the following table:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DOLLARS
Real estate:
Commercial................... $ 86,049 $ 78,534 $ 64,611 $ 61,891 $ 61,881
Construction................. 5,074 118 1,412 242 2,286
Commercial and industrial...... 40,217 44,301 44,766 41,361 40,976
Loans to individuals........... 11,180 10,586 10,256 10,343 9,384
Other.......................... 241 122 152 1,207 177
-------- -------- -------- -------- --------
Total loans............... 142,761 133,661 121,197 115,044 114,704
Unearned net loan fees and
premiums..................... (1,097) (891) (837) (807) (536)
Allowance for credit losses.... (1,524) (1,581) (1,369) (1,513) (1,465)
-------- -------- -------- -------- --------
Total, net................ $140,140 $131,189 $118,991 $112,724 $112,703
======== ======== ======== ======== ========
Unsecured loans, included in
table above.................. $ 1,901 $ 3,910 $ 2,836 $ 4,753 $ 3,743
======== ======== ======== ======== ========
PERCENTAGES
Real estate:
Commercial................... 60.2% 58.8% 53.3% 53.8% 53.9%
Construction................. 3.6 0.1 1.2 0.2 2.0
Commercial and industrial...... 28.2 33.1 36.9 36.0 35.7
Loans to individuals........... 7.8 7.9 8.5 9.0 8.2
Other.......................... 0.2 0.1 0.1 1.0 0.2
-------- -------- -------- -------- --------
Total loans............... 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== ========
</TABLE>
F-9
<PAGE> 193
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The following table presents the repricing and maturities of the Bank's
loan portfolio by category as of December 31, 1998. In addition, the table
presents the distribution between those loans with predetermined (fixed)
interest rates and those with variable (floating) interest rates maturing after
one year. Floating rate loans generally fluctuate with changes in the prime
interest rate. The table excludes unearned net loan fees and premiums of
$1,097,000.
<TABLE>
<CAPTION>
AFTER
ONE BUT
WITHIN ONE WITHIN FIVE AFTER
YEAR(1) YEARS FIVE YEARS TOTAL
---------- ----------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate:
Commercial...................... $47,267 $11,443 $27,339 $ 86,049
Construction.................... 5,074 -- -- 5,074
Commercial and industrial......... 36,044 3,752 421 40,217
Loans to individuals.............. 10,039 1,141 -- 11,180
Other............................. 241 -- -- 241
------- ------- ------- --------
$98,665 $16,336 $27,760 $142,761
======= ======= ======= ========
</TABLE>
Distribution between fixed and floating interest rates after one year:
<TABLE>
<S> <C> <C> <C>
Fixed interest rates............................ $14,602 $27,760 $ 42,362
Floating interest rates......................... 1,734 -- 1,734
------- ------- --------
$16,336 $27,760 $ 44,096
======= ======= ========
</TABLE>
- -------------------------
(1) Demand loans and overdrafts are included in the "within one year" column
with scheduled repayments reported in the periods in which the final
payments are due.
CREDIT RISK MANAGEMENT
The Bank manages its loan portfolio through a process designed to assure
acceptable quality of loans entering the portfolio and to bring any potential
losses or potential defaults in existing loans to the attention of the
appropriate management personnel. Each lending officer has primary
responsibility to conduct credit and documentation reviews of the loans for
which he is assigned. The Bank's Senior Vice President and Senior Credit Officer
are responsible for general supervision of the loan portfolio and adherence by
the loan officers to the loan policies of the Bank. The Bank currently engages
an outside consulting firm to periodically review the loan portfolio to provide
suggested risk rating of selected loans. Bank management reviews the suggested
ratings along with all other available information to properly monitor the loan
portfolio, including all loan evaluations made during periodic examinations by
the OCC.
In accordance with the Bank's loan policies, management presents a written
report to the Bank's Board of Directors at its monthly meeting. The Directors
review the delinquency report listing of all loans 30 days or more past due and
the watch list report including loans having increased credit risk, both
delinquency and other factors, over the rest of the portfolio. Additionally, the
Directors review a monthly report including all loans originated the prior
month.
F-10
<PAGE> 194
As previously noted, the Bank maintains an allowance for credit losses to
provide for potential losses in the loan portfolio. Additions to the allowance
for credit losses are charged to operations in the form of a provision for
possible credit losses. All loans that are judged to be uncollectible are
charged against the allowance while any recoveries are credited to the
allowance. The allowance for credit losses is maintained at a level determined
by management to be adequate, based on the performance of loans in the Bank's
portfolio, evaluation of collateral for such loans, the prospects or worth of
the prospective borrowers or guarantors, and such other factors which, in the
Bank's judgement, deserve consideration in the estimation of possible losses.
The allowance for credit losses is established and maintained after analyzing
loans identified by management with certain unfavorable features affixing a risk
of loss attributable to each loan. An inherent risk of loss in accordance with
industry standards and economic conditions is then allocated to specific loan
pools and to the remainder of the portfolio on an aggregate basis.
The following table presents information with respect to loans that were
accounted for on a nonaccrual basis or contractually past due 90 days or more as
to interest or principal payments, or restructured as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans on non-accrual basis....... $1,631 $2,447 $2,464 $3,055 $3,163
Loans past due 90 days or more
and still accruing interest.... 76 660 7 33 158
Troubled debt restructuring, not
included above................. -- -- -- -- --
------ ------ ------ ------ ------
Total....................... $1,707 $3,107 $2,471 $3,088 $3,321
====== ====== ====== ====== ======
</TABLE>
If all such loans had been current in accordance with their original terms
during the year ended December 31, 1998, the gross interest income would have
been approximately $382,000. The amount of interest income included in earnings
on these nonaccrual loans was $203,000 in 1998.
Loans are generally placed on nonaccrual status when principal or interest
payments are past due 90 days or more. Certain loans are placed on nonaccrual
status earlier if there is reasonable doubt as to the collectibility of interest
or principal. Loans that are in the renewal process, have sufficient collateral,
or are in the process of collection continue to accrue interest.
Management has no knowledge of any additional loans not disclosed in this
section on nonaccrual, past due, or troubled debt restructuring that may be
potential problem loans. The Bank has no loans to foreign borrowers. The Company
has quantified its impaired loans in Note 4 of the Notes to the Consolidated
Financial Statements. Loans on nonaccrual status are greater than the total
impaired loans because the collateral value of certain nonaccrual loans are
large enough that management believes all principal and interest will be
collected on those loans and therefore do not meet the definition of impaired. A
loan is impaired when it is probable the creditor will be unable to collect all
contractual principal and interest payments due in accordance with the terms of
the loan agreement. Impaired loans are valued primarily at the fair value of the
underlying collateral.
F-11
<PAGE> 195
There were no loan concentrations exceeding 10% of the total loan portfolio
and no other interest-bearing assets that would be required to be in the
paragraphs above, if such assets were classified as loans as of December 31,
1998, 1997, 1996, 1995 and 1994.
The following table presents loans outstanding, charge-offs, recoveries on
loans previously charged-off, the allowance for credit losses, and pertinent
ratios during the years ended and as of December 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average gross loans................. $139,521 $131,077 $109,802 $114,820 $114,718
======== ======== ======== ======== ========
Total gross loans at end of
period............................ $142,761 $133,661 $120,360 $114,237 $114,168
======== ======== ======== ======== ========
ALLOWANCE FOR LOAN LOSSES:
Balance, beginning of period........ $ 1,581 $ 1,369 $ 1,513 $ 1,465 $ 1,524
Charge-offs:
Commercial and industrial......... 78 14 252 302 459
Real estate construction.......... -- -- -- -- --
Commercial real estate............ 121 44 125 70 25
Installment....................... -- 8 10 16 4
-------- -------- -------- -------- --------
199 66 387 388 488
-------- -------- -------- -------- --------
Recoveries:
Commercial and industrial......... 41 122 30 63 129
Leases............................ -- -- -- 45 --
Commercial real estate............ 1 9 8 8 --
Installment....................... -- 7 -- -- 2
-------- -------- -------- -------- --------
42 138 38 116 131
-------- -------- -------- -------- --------
Net charge-offs (recoveries)........ 157 (72) 349 272 357
Additions charged to operations..... 100 140 205 320 298
-------- -------- -------- -------- --------
Balance, end of period.............. $ 1,524 $ 1,581 $ 1,369 $ 1,513 $ 1,465
======== ======== ======== ======== ========
Net charge-offs (recoveries) during
the period to average gross loans
outstanding during year........... 0.11% (0.05)% 0.32% 0.24% 0.31%
======== ======== ======== ======== ========
</TABLE>
The Bank has allocated the allowance for credit losses to provide for the
possibility of losses being incurred within loan categories as of December 31
are set forth in the table below:
<TABLE>
<CAPTION>
1998 1997 1996 1995
-------------------- -------------------- -------------------- --------
PERCENT PERCENT PERCENT PERCENT
OF LOAN OF LOAN OF LOAN OF LOAN
CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
-------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate:
Commercial........... 60.2% $1,296 58.8% $1,265 53.3% $ 959 53.8%
Construction......... 3.6 -- 0.1 -- 1.2 9 0.2
Commercial and
industrial........... 28.2 217 33.1 298 36.9 343 36.0
Loans to individuals... 7.8 11 7.9 18 8.5 58 9.0
Other.................. 0.2 -- 0.1 -- 0.1 -- 1.0
----- ------ ----- ------ ----- ------ -----
100.0% $1,524 100.0% $1,581 100.0% $1,369 100.0%
===== ====== ===== ====== ===== ====== =====
<CAPTION>
1995 1994
--------- --------------------
PERCENT
OF LOAN
ALLOWANCE CATEGORY ALLOWANCE
--------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real estate:
Commercial........... $ 594 53.9% $ 468
Construction......... 3 2.0 124
Commercial and
industrial........... 831 35.7 744
Loans to individuals... 62 8.2 108
Other.................. 23 0.2 21
------ ----- ------
$1,513 100.0% $1,465
====== ===== ======
</TABLE>
F-12
<PAGE> 196
Included in the Bank's allocation of its allowance for credit losses are
specific reserves on certain identified loans and general reserves for unknown
potential losses. Management classifies loans through its internal loan review
system that uses an independent third party reviewer and review of loans from
its regulators. None of these classifications indicate trends or uncertainties,
which will materially impact future operating results, liquidity, or capital
resources. The allowance provides for the potential adverse effects of current
economic conditions. However, the full effects of the economy on the loan
portfolio cannot be predicted with any certainty. See discussion in Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations. Any loans which management doubts the ability of borrowers to comply
with loan repayment terms are provided for in the allowance.
SUMMARY OF DEPOSITS
Deposits are currently the Bank's sole source of funds. The Bank can obtain
additional funds when needed to meet occasional declines in deposits or other
short-term liquidity needs, through the overnight purchase of federal funds.
However, the Bank does not currently use these sources of funds. Generally, the
Bank has funds in excess of the needs for its deposit withdrawals or short-term
liquidity needs and it, therefore, sells federal funds to other financial
institutions or invests in short-term securities.
The Bank's deposits are attracted primarily from individuals and commercial
enterprises. The Bank also attracts some deposits from municipalities and other
government agencies. The Bank does not have foreign deposits, brokered deposits
or variable rate fixed-term deposits. The Bank does not expect to obtain future
deposits through the use of brokered deposits. The Bank had noninterest-bearing
demand deposits of $99.9 million, interest-bearing NOW and money market accounts
of $113.9 million, time deposits for individuals and corporations of $33.3
million, and savings of $13.3 million as of December 31, 1998.
The Company had interest-bearing deposits of 61.6% and 57.4% of total
deposits as of December 31, 1998 and 1997, respectively. While the Bank does not
experience material repeated seasonal fluctuations in deposit levels, the Bank's
relative growth in deposits and loans may be affected by seasonal and economic
changes, which, in turn, may impact liquidity. The Bank has a deposit
concentration from five customers of $43,048,000 as of December 31, 1998.
Management believes it has sufficient liquidity to meet loan commitments and
deposit demands.
F-13
<PAGE> 197
The following table sets forth information regarding the Bank's average
balances of deposits, as a percentage of average total deposits and average
interest paid by category for the years ended December 31:
<TABLE>
<CAPTION>
MMDA TOTAL
DEMAND AND NOW SAVINGS TIME DEPOSITS
------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1998
Average balance.............. $84,499 $103,142 $12,186 $28,088 $227,915
Percent of total............. 37.1% 45.3% 5.3% 12.3% 100.0%
Average interest rate paid... 0.0% 2.4% 2.0% 5.0% 1.8%
1997
Average balance.............. $76,444 $91,931 $11,485 $19,423 $199,283
Percent of total............. 38.4% 46.1% 5.8% 9.7% 100.0%
Average interest rate paid... 0.0% 2.3% 2.0% 5.0% 1.7%
1996
Average balance.............. $67,662 $101,562 $12,420 $15,969 $197,613
Percent of total............. 34.2% 51.4% 6.3% 8.1% 100.0%
Average interest rate paid... 0.0% 2.5% 2.0% 4.8% 1.8%
</TABLE>
The following table indicates the amount and maturity of the Bank's time
certificates of deposit over $100,000 as of December 31, 1998:
<TABLE>
<CAPTION>
PERCENT OF
BALANCE TOTAL
---------------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Less than three months............................ $16,217 84.9%
Three months through six months................... 936 4.9
Six months through twelve months.................. 1,728 9.1
Over twelve months................................ 211 1.1
------- -----
Total time certificates of deposit over
$100,000..................................... $19,092 100.0%
======= =====
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table indicates the key financial ratios of the Company for
the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Profitability ratios:
Rate of return on average total assets............... 1.32% 1.45% 1.02%
Rate of return on average stockholders' equity....... 15.24% 16.32% 12.38%
Capital ratios:
Cash dividend payment ratio to net earnings.......... 41.74% 25.73% 32.60%
Average stockholders' equity to average total
assets............................................ 8.68% 8.88% 8.20%
</TABLE>
COMPETITION
The banking business in southern California and the market areas served by
the Bank are highly competitive with respect to both loans and deposits and are
dominated by a relatively small number of major banks with many offices
operating over a wide geographic area. The Bank is one of several locally owned
independent banks located in the Bank's primary service area. The Bank also
competes for loans and deposits with other
F-14
<PAGE> 198
commercial banks, including many which are much larger than the Bank, as well as
with savings and loan associations, finance companies, credit unions, brokerage
houses and other financial institutions. Larger commercial banks offer certain
services (such as trust and investment services) which the Bank does not offer
directly (but some of which it offers indirectly through correspondent
institutions). Such banks also have substantially higher lending limits than the
Bank has or will have due to their larger capital base. The growth of money
market funds and quasi-financial institutions, such as certain activities of
retailers and other which are not subject to the same regulatory controls, also
presents a source of competition for the Bank. With the decline in interest
rates, depositors have been seeking alternative investments to earn higher
yields than the Bank is currently paying.
In order to compete with the other financial institutions in its primary
service area, the Bank relies principally upon local promotional activities,
personal contact by its officers, directors, employees, and stockholders,
extended hours, and specialized services. For customers whose loan demands
exceed the Bank's lending limit, the Bank has attempted and will continue in the
future to attempt to arrange for such loans on a participation basis with other
banks. The Bank also assists customers requiring other services not offered by
the Bank in obtaining such services from its correspondent banks.
SUPERVISION AND REGULATION
The Company is subject to the regulation of the Federal Reserve Bank
Holding Company Act of 1956, as amended, and the Board of Governors of the
Federal Reserve System. The Bank is subject to the regulation of the FDIC and
the OCC. Among other regulations, the OCC establishes minimum capital
requirements, which the Bank exceeds as of December 31, 1998.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks and other financial institutions are
frequently made in Congress, in the California legislature and before various
bank regulatory agencies. The likelihood of any major changes and the impact
such changes might have on the Bancorp and the Bank is impossible to predict.
Certain of the potentially significant changes, which have been enacted recently
by Congress and others, which are currently under consideration by Congress or
various regulatory or professional agencies are discussed below.
On October 1, 1998, the FDIC adopted two new rules governing minimum
capital levels that FDIC-supervised banks must maintain against the risks to
which they are exposed. The first rule makes risk-based capital standards
consistent for two types of credit enhancements (i.e., recourse arrangements and
direct credit substitutes) and requires different amounts of capital for
different risk positions in asset securitization transactions. The second rule
permits limited amounts of unrealized gains on equity securities to be
recognized for risk-based capital purposes. The Bank may apply these rules on
September 1, 1998.
In August 1997, Governor Wilson of California signed Assembly Bill 1432
("AB1432") which provides for certain changes in the banking laws of California.
Effective January 1, 1998 AB1432 eliminates the provisions regarding impairment
of contributed capital and the assessment of shares when there is an impairment
of capital. AB1432 now allows the DFI to close a bank, if the DFI finds that the
bank's tangible
F-15
<PAGE> 199
shareholders' equity is less than 3% of the bank's total assets or $1 million.
AB1432 also moved administration of the Local Agency Program from the California
Department of Financial Institutions to the California State Treasurer's office.
The Economic Growth and Regulatory Paperwork Reduction Act (the "1996 Act")
as part of the Omnibus Appropriations Bill was enacted on September 30, 1996 and
includes many banking related provisions. The most important banking provision
is the recapitalization of the Savings Association Insurance Fund ("SAIF"). The
1996 Act provides for a one time assessment, payable on November 30, 1996, of
approximately 65 basis points per $100 of deposits of SAIF insured deposits
including SAIF insured deposits which were assumed by banks in acquisitions of
savings associations. For the years 1997 through 1999 the banking industry will
assist in the payment of interest on Financing Corporation ("FICO") bonds that
were issued to help pay for the clean up of the savings and loan industry. Banks
will pay approximately 1.3 cents per $100 of deposits for this special
assessment, and after the Year 2000, banks will pay approximately 2.4 cents per
$100 of deposits until the FICO bonds mature in 2017. There is a three-year
moratorium on conversions of SAIF deposits to Bank Insurance Fund ("BIF")
deposits. The 1996 Act also has certain regulatory relief provisions for the
banking industry. Lender liability under the Superfund is eliminated for lenders
who foreclose on property that is contaminated provided that the lenders were
not involved with the management of the entity that contributed to the
contamination. There is a five-year sunset provision for the elimination of
civil liability under the Truth in Savings Act. The FRB and Department of
Housing and Urban Development are to develop a single format for Real Estate
Settlement Procedures Act and Truth in Lending Act ("TILA") disclosures. TILA
disclosures for adjustable mortgage loans are to be simplified. Significant
revisions are made to the Fair Credit Reporting Act ("FCRA") including requiring
that entities which provide information to credit bureaus conduct an
investigation if a consumer claims the information to be in error. Regulatory
agencies may not examine for FCRA compliance unless there is a consumer
complaint investigation that reveals a violation or where the agency otherwise
finds a violation. In the area of the Equal Credit Opportunity Act, banks that
self-test for compliance with fair lending laws will be protected from the
results of the test provided that appropriate corrective action is taken when
violations are found.
During 1996, new federal legislation amended the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and the
underground storage tank provisions of the Resource Conversation and Recovery
Act to provide lenders and fiduciaries with greater protections from
environmental liability. In June 1997, the U.S. Environmental Protection Agency
("EPA") issued its official policy with regard to the liability of lenders under
CERCLA as a result of the enactment of the Asset Conservation, Lender Liability
and Deposit Insurance Protection Act of 1996. California law provides that,
subject to numerous exceptions, a lender acting in the capacity of a lender
shall not be liable under any state or local statute, regulation or ordinance,
other than the California Hazardous Waste Control Law, to undertake a cleanup,
pay damages, penalties or fines, or forfeit property as a result of the release
of hazardous materials at or from the property.
In 1997, California adopted the Environmental Responsibility Acceptance Act
(the "Act") (Cal. Civil Code sec.sec. 850 - 855) to facilitate (i) the
notification of government agencies and potentially responsible parties (e.g.,
for cleanup) of the existence of contamination and (ii) the cleanup or other
remediation of contamination by the potentially responsible parties. The Act
requires, among other things, that owners of sites who have actual awareness of
a release of a hazardous material that exceeds a specified
F-16
<PAGE> 200
notification threshold to take all reasonable steps to identify the potentially
responsible parties and to send a notice of potential liability to the parties
and the appropriate oversight agency.
On September 28, 1995, Assembly Bill 1482 (known as the Caldera, Weggeland,
and Killea California Interstate Banking and Branching Act of 1995 and referred
to herein as "CIBBA") was enacted which allows for early interstate branching in
California. Under the federally enacted Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("IBBEA"), discussed in more detail below,
individual states could "opt-out" of the federal law that would allow banks on
an interstate basis to engage in interstate branching by merging out-of-state
banks with host state banks after June 1, 1997. In addition under IBBEA,
individual states could also "opt-in" and allow out-of-state banks to merge with
host state banks prior to June 1, 1997. The host-state is allowed under IBBEA to
impose certain nondiscriminatory conditions on the resulting depository
institution until June 1, 1997. California, in enacting CIBBA, authorizes
out-of-state banks to enter California by the acquisition of or merger with a
California bank that has been in existence for at least five years.
Section 3824 of the California Financial Code ("Section 3824") as added by
CIBBA provides for the election of California to "opt-in" under IBBEA allowing
interstate bank merger transactions prior to July 1, 1997 of an out-of-state
bank with a California bank that has been in existence for at least five years.
The early "opt in" has the reciprocal effect of allowing California banks to
merge with out-of-state banks where the states of such out-of-state banks have
also "opted in" under IBBEA. The five-year age limitation is not required when
the California bank is in danger of failing or in certain other emergency
situations.
Under IBBEA, California may also allow interstate branching through the
acquisition of a branch in California without the acquisition of an entire
California bank. Section 3824 provides an express prohibition against interstate
branching through the acquisition of a branch in California without the
acquisition of the entire California bank. IBBEA also has a provision allowing
states to "opt-in" with respect to permitting interstate branching through the
establishment of de novo or new branches by out-of-state banks. Section 3824
provides that California expressly prohibits interstate branching through the
establishment of de novo branches of out-of-state banks in California, or in
other words, California did not "opt-in" this aspect of IBBEA. CIBBA also amends
the California Financial Code to include agency provisions to allow California
banks to establish affiliated insured depository institution agencies
out-of-state as allowed under IBBEA.
Other provisions of CIBBA amend the intrastate branching laws, govern the
use of shared ATM's, and amend intrastate branch acquisition and bank merger
laws. Another banking bill enacted in California in 1995 was Senate Bill 855
(known as the State Bank Parity Act and is referred to herein as the "SBPA").
SBPA went into effect on January 1, 1996, and its purpose is to allow a
California state bank to be on a level playing field with a national bank by the
elimination of certain disparities and allowing the DFI authority to implement
certain changes in California banking law which are parallel to changes in
national banking law such as closer conformance of California's version of
Regulation O to the FRB's version of Regulation O and certain other changes
including allowing the repurchase of stock with the prior written consent of the
DFI.
On September 29, 1994, IBBEA was enacted which has eliminated many of the
current restrictions to interstate banking and branching. IBBEA permits full
nationwide
F-17
<PAGE> 201
interstate banking to adequately capitalized and adequately managed bank holding
companies beginning September 29, 1995 without regard to whether such
transaction is expressly prohibited under the laws of any state. IBBEA's
branching provisions permit full nationwide interstate bank merger transactions
to adequately capitalized and adequately managed banks beginning June 1, 1997.
However, states retain the right to completely opt out of interstate bank
mergers and to continue to require that out-of-state banks comply with the
states' rules governing entry.
The states that opt out must enact a law after September 29, 1994 and
before June 1, 1997 that (i) applies equally to all out-of-state banks and (ii)
expressly prohibits merger transactions with out-of-state banks. States that opt
out of allowing interstate bank merger transactions will preclude the mergers of
banks in the opting out state with banks located in other states. In addition,
banks located in states that opt out are not permitted to have interstate
branches. States can also "opt in" which means states can permit interstate
branching earlier than June 1, 1997.
The laws governing interstate banking and interstate bank mergers provide
that transactions, which result in the bank holding company or bank controlling
or holding in excess of ten percent of the total deposits nationwide or thirty
percent of the total deposits statewide, will not be permitted except under
certain specified conditions. However, any state may waive the thirty- percent
provision for such state. In addition, a state may impose a cap of less than
thirty percent of the total amount of deposits held by a bank holding company or
bank provided such cap is not discriminatory to out-of-state bank holding
companies or banks.
On September 23, 1994, the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "1994 Act") was enacted which covers a wide range
of topics including small business and commercial real estate loan
securitization, money laundering, flood insurance, consumer home equity loan
disclosure and protection as well as the funding of community development
projects and regulatory relief.
The major items of regulatory relief contained in the 1994 Act include an
examination schedule that has been eased for the top rated banks and will be
every 18 months for CAMEL 1 banks with less than $250 million in total assets
and CAMEL 2 banks with less than $100 million in total assets (the $100 million
amount was amended to $250 million by the 1996 Act discussed above). The 1994
Act amends Federal Deposit Insurance Corporation Improvement Act of 1991 with
respect to the Section 124, the mandate to the federal banking agencies to issue
safety and soundness regulations, including regulations concerning executive
compensation allowing the federal banking regulatory agencies to issue
guidelines instead of regulations.
Further regulatory relief is provided in the 1994 Act, as each of the
federal regulatory banking agencies, including the National Credit Union
Administration Board, is required to establish an internal regulatory appeals
process for insured depository institutions within 6 months. In addition, the
Department of Justice 30 day waiting period for mergers and acquisitions is
reduced by the 1994 Act to 15 days for certain acquisitions and mergers.
In the area of currency transaction reports, the 1994 Act requires the
Secretary of the Treasury to allow financial institutions to file such reports
electronically. The 1994 Act also requires the Secretary of the Treasury to
publish written rulings concerning the Bank Secrecy Act, and staff commentary on
Bank Secrecy Act regulations must also be published on an annual basis.
F-18
<PAGE> 202
The procedures for forming a bank holding company have also been
simplified. The formal application process for many holding company formations
is now a simplified 30-day notice procedure. In addition, the Securities Act of
1933 has been amended by the 1994 Act to further simplify the securities
issuance in connection with a bank holding company formation.
PENDING LEGISLATION AND REGULATIONS
There are pending legislative proposals to reform the Glass-Steagall Act to
allow affiliations between banks and other firms engaged in "financial
activities," including insurance companies and securities firms. Certain other
pending legislative proposals include bills to let banks pay interest on
business checking accounts, to cap consumer liability for stolen debit cards,
and to give judges the authority to force high-income borrowers to repay their
debts rather than cancel them through bankruptcy.
It is impossible to predict what effect the enactment of the
above-mentioned legislation will have on the Bancorp, the Bank and on the
financial institutions industry in general. Moreover, it is likely that other
bills affecting the business of banks may be introduced in the future by the
United States Congress or California legislature.
TAXATION
The Company reports its income and expenses using the accrual method of
accounting and uses the calendar year as its tax year for both federal income
and state franchise tax purposes. The Company is subject to the federal income
tax, under existing provisions of the Internal Revenue Code of 1986, as amended,
in generally the same manner as other corporations.
The Internal Revenue Service has examined through the Company's 1995
federal income tax return. The 1995 examination did not result in a material
adjustment to the tax return or a material adverse affect on the financial
statements.
EMPLOYEES
The Bank had 117 full-time and 6 part-time employees, including 46
principal officers as of February 28, 1999. The Bank's employees are not
represented by a union or covered by a collective bargaining agreement. The
management of the Bank believes that, in general, its employee relations are
good.
ITEM 2. PROPERTIES
The Bank and the Company's head office, including a branch office, is
located in a two-story building located at 1201 East Katella Avenue, Orange,
California. The Bank owns both the land and the building. This building is
approximately 16,000 square feet of interior and exterior floor space and is
located on a lot of approximately 55,000 square feet. The facility is in good
condition and adequate for the Bank's present operations with adequate parking,
an automated teller machine and drive-up teller stations.
F-19
<PAGE> 203
The Bank leases the premises at its five full-service branch offices. Each
branch has an automated teller machine. Drive-up teller banking is available at
two leased branches. The Bank also leases premises for administrative functions.
The principal terms relating to premises currently leased by the Bank and the
net book value of leasehold improvements as of December 31, 1998 are detailed
below. None of the leases contain any unusual terms and all are "net" or "triple
net" leases.
<TABLE>
<CAPTION>
EXPIRATION SQUARE MONTHLY RENEWAL NET BOOK
OFFICE LOCATION DATE FEET RENTAL OPTIONS VALUE
--------------- ---------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BRANCHES
77 Plaza Square, Orange................. 04/30/08 9,443 $8,860 4 @ 5 yrs. $ 681,768
1800 West Katella Avenue, Orange........ 12/31/07 5,266 8,057 2 @ 5 yrs. 245,380
7510 East Chapman Avenue, Orange........ 09/30/04 3,300 10,599 2 @ 5 yrs. 115,733
800 Glenneyre, Laguna Beach............. 08/31/07 5,894 9,933 1 @ 5 yrs. 147,709
25255 Cabot Road, Laguna Hills.......... 01/01/04 6,737 8,203 3 @ 5 yrs. 220,214
ADMINISTRATION
115 North Glassell Street, Orange....... 12/31/00 1,600 640 1 @ 5 yrs. 17,092
1249 East Katella Avenue, Orange........ 01/06/03 13,845 11,429 2 @ 5 yrs. 159,191
-------- ------- ------ ---------- ----------
$1,587,087
==========
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
To the best of management's knowledge, there are no pending or threatened
legal proceedings to which the Bank or the Company is or may become a party,
which may have a materially adverse effect upon the Bank, the Company or their
property. However, in the normal course of business, the Bank, or the Company
may initiate actions to protect their interests and may occasionally be made a
party to actions relating thereto seeking to recover damages from the Bank, or
the Company.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK MARKET INFORMATION
Shares of Company's common stock are traded on the National Association of
Securities Dealers Automated Quotation system (NASDAQ), under the ticker symbol
OGNB. Active traders for the stock are Everen Securities, 620 Newport Center
Drive, Suite 1300, Newport Beach, California 92660 and Smith Barney, 650 Town
Center Drive, Suite 100, Costa Mesa, California 92626.
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<PAGE> 204
The following table summarizes the approximate high and low prices for the
Company's common stock since the first quarter of 1996.
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ----------------
CALENDAR QUARTER HIGH LOW HIGH LOW HIGH LOW
---------------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
1st quarter................... $25.750 $23.750 $15.125 $13.125 $12.50 $10.50
2nd quarter................... 31.250 25.125 18.000 13.750 15.00 11.75
3rd quarter................... 30.000 17.000 21.125 17.500 14.50 13.25
4th quarter................... 27.750 19.000 24.250 19.750 13.75 12.75
</TABLE>
HISTORY OF CASH AND STOCK DIVIDENDS AND STOCK SPLITS
The Company has a history of paying cash dividends to its stockholders. In
recent years, the Company has paid dividends quarterly. The following table
summarizes the cash dividend history of the Company:
<TABLE>
<CAPTION>
CASH DIVIDENDS PAID
-----------------------
YEAR PER SHARE TOTAL
---- --------- ----------
<S> <C> <C>
1984.................................................... $0.09 $ 143,568
1985.................................................... 0.10 166,320
1986.................................................... 0.12 200,584
1987.................................................... 0.16 250,730
1988.................................................... 0.13 202,734
1989.................................................... 0.17 267,329
1990.................................................... 0.18 290,008
1991.................................................... -- --
1992.................................................... 0.30 485,130
1993.................................................... -- --
1994.................................................... 0.05 91,956
1995.................................................... 0.25 473,947
1996.................................................... 0.37 718,417
1997.................................................... 0.42 823,974
1998.................................................... 0.70 1,389,986
</TABLE>
For comparative purposes, dividends per share for all years are computed
after the effects of stock splits and stock dividends. The Company declared a
three-for-two stock split on October 15, 1985, a 5% stock dividend on November
16, 1988, a three-for-two stock split on November 20, 1989, and a 5% stock
dividend on July 31, 1995.
The Company's ability to pay dividends is dependent upon the dividend
payment it receives from its subsidiary Bank. Future dividend payments will
depend on future profitability, meeting regulatory requirements and the outlook
of economic conditions.
The Company declared a $0.15 per common share quarterly dividend on January
20, 1999 to the stockholders of record as of February 11, 1999, paid on March 1,
1999.
The Company had approximately 451 stockholders of record as of February 28,
1999.
TRANSFER AGENT AND REGISTRAR
U.S Stock Transfer Corporation
1745 Gardena Avenue
Glendale, CA 91204-2991
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<PAGE> 205
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of and for the years ended
December 31 is derived from and should be read in conjunction with the
consolidated financial statements and the notes thereto of the Company which
have been audited by McGladrey & Pullen, LLP, independent certified public
accountants. The consolidated financial statements as of December 31, 1998 and
1997 and for the three years in the period ended December 31, 1998 and the
report thereon of McGladrey & Pullen, LLP are included with Item 14 of this Form
10-K.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION
Total assets................................ $285,862 $242,279 $218,845 $207,928 $206,510
Loans, net.................................. 140,140 131,189 118,991 112,724 112,703
Deposits.................................... 260,334 218,792 198,364 188,991 190,406
Stockholders' equity........................ 23,723 21,586 18,956 17,262 14,782
RESULTS OF OPERATIONS
Interest income............................. $ 19,116 $ 16,857 $ 15,894 $ 16,571 $ 13,908
Net interest income......................... 14,951 13,504 12,375 13,430 11,400
Provisions for possible credit losses....... 100 140 205 320 298
Other income................................ 2,783 3,707 2,713 2,781 2,612
Other expense............................... 12,157 11,776 11,547 12,187 11,962
Income from continuing operations........... 5,477 5,295 3,336 3,703 1,060
Loss from discontinued operations........... -- -- -- -- (225)
Net earnings................................ 3,330 3,198 2,201 2,524 835
Basic earnings per share.................... $ 1.67 $ 1.63 $ 1.13 $ 1.31 $ 0.43
Dilutive earnings per share................. 1.64 1.60 1.13 1.30 0.43
Cash dividends per share.................... 0.70 0.42 0.37 0.25 0.05
Weighted average number of common shares
outstanding (in thousands)................ 1,989 1,961 1,944 1,932 1,931
</TABLE>
Earnings per share from continuing operations in 1994 were $0.58. Earnings
per share prior to 1995 are restated to reflect 5% stock dividends in 1995.
F-22
<PAGE> 206
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements in this filing, including without limitation statements
containing the words "believes," "anticipates," "intends," "expects," "pro
forma," and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic conditions in the
Company's market areas; variances in interest rates; changes in or amendments to
regulatory authorities' capital requirements or other regulations applicable to
the Company; increased competition for loans and deposits; and other factors
referred to elsewhere in this filing. Given these uncertainties, shareholders
are cautioned not to place undue reliance on forward-looking statements. The
Company disclaims any obligation to update such factors which are not considered
to be material or to publicly announce the result of any revisions to any of the
forward-looking statements included herein which are not considered to be
material to reflect future events or developments.
RESULTS OF OPERATIONS
Total interest income was $19.1 million in 1998, an increase of $2.2
million or 13.4% from the $16.9 million in 1997. Total interest income in 1997
increased $1.0 million or 6.1% from the $15.9 million in 1996. The average
interest-earning assets were $221.4 million in 1998, an increase of $34.8
million, or 18.7% from the $186.6 million in 1997. The average interest-earning
assets in 1997 increased $2.1 million or 1.1% from the $184.5 million in 1996.
The average yield decreased in 1998 by 0.4% from 1997 and increased in 1997 by
0.4% from 1996. The increase in interest income in 1998 resulted from a larger
average of interest-earning assets and partially offset by a lower general
interest rate environment. A higher general interest rate environment existed in
1997.
Interest income on loans was $14.6 million in 1998, an increase of $0.9
million or 6.9% from the $13.7 million in 1997. Total interest income on loans
in 1997 increased $2.0 million or 16.9% from the $11.7 million in 1996. The
increase in 1998 resulted from the increase in the average loan portfolio during
1998 in spite of lower long-term interest rates as compared to 1997 and interest
collected on nonaccrual loans. The average loan portfolio was $139.5 million in
1998, an increase of $8.4 million or 6.4% from the $131.1 million in 1997. The
yield on the loan portfolio was 10.5% in 1998, an increase of 0.1% from the
10.4% in 1997. The average loan portfolio in 1997 increased $21.3 million or
19.4% from the $109.8 million in 1996. The increase in the average loan
portfolio resulted from continued loan demand during 1998 and 1997. The yield on
loans changes with the movements in the prime rate as approximately 64% of the
loan portfolio are based on variable rates.
Interest income on securities was $1.6 million in both 1998 and 1997.
Interest income on securities in 1997 decreased $1.0 million or 40.1% from the
$2.6 million in 1996. Interest income on securities in 1998 remained unchanged
from 1997 although the average size of the investment securities portfolio
increased and interest rates were slightly lower. The average balance of
securities was $27.7 million in 1998, an increase of $1.6 million or 6.0% from
the $26.1 million in 1997. The yield on securities was 5.8% in 1998, a decrease
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of 0.2% from the 6.0% in 1997. The decrease in interest income from securities
in 1997 resulted from the decrease in the average balance of securities and
slightly higher yields. The average balance of securities in 1997 decreased
$18.8 million or 41.8% from the $44.9 million in 1996. The yield on securities
increased 0.2% in 1997 from 1996.
Interest income on federal funds sold was $2.9 million in 1998, an increase
of $1.3 million or 80.3% from the $1.6 million in 1997. Interest income on
federal funds sold in 1997 remained unchanged at $1.6 million from 1996. The
average balance in federal funds sold was $54.2 million in 1998, an increase of
$24.8 million or 84.5% from the $29.4 million in 1997. The yield on federal
funds sold was 5.3% in 1998, a decrease of 0.1% from the 5.4% in 1997. The
interest income on federal funds sold remaining constant in 1997 and 1996
although the average balance of federal funds sold decreased and the yield
increased slightly in 1997. The average balance in federal funds sold was $29.4
million in 1997, a decrease of $0.4 million or 1.2% from the $29.7 million in
1996. The yield on federal funds sold was 5.4% in 1997, an increase of 0.2% from
the 5.2% in 1996.
Interest expense was $4.2 million in 1998, an increase of $0.8 million or
24.2% from the $3.4 million in 1997. The increase resulted from an increase in
interest-bearing deposits and a slight increase in deposit rates. The average
interest-bearing deposits were $143.4 million in 1998, an increase of $20.6
million or 16.8% from the $122.8 million in 1997. The average rate paid on such
deposits was 2.9% in 1998, an increase of 0.2% from the 2.7% in 1997. Interest
expense was $3.4 million in 1997, a decrease of $0.1 million or 4.7% from the
$3.5 million in 1996. The 1997 decrease resulted from a decrease in the average
interest-bearing deposits and a very slight increase in deposit rates. The rate
increase in 1997 was 0.02% over the 2.7% in 1996. The average interest-bearing
deposits in 1997 decreased $7.2 million or 5.5% from the $130.0 million in 1996.
The provision for credit losses was $100,000, $140,000 and $205,000 in
1998, 1997 and 1996, respectively. The decreased provision in 1998 from 1997 and
1996 reflect a higher quality loan portfolio resulting from an improved local
economy in Orange County. The Company also experienced recoveries in 1998 and
1997 on amounts previously charged-off. These recoveries offset the need for
additional provision. Management believes that the current allowance for credit
losses is adequate to provide for potential losses in the portfolio. The current
local economic outlook for 1999 is promising. However, assurance cannot be made
and, accordingly, future provisions for credit losses cannot be estimated at
this time. See Note 1 in the Notes to Consolidated Financial Statements.
Other income was $2.8 million in 1998, a decrease of $0.9 million or 24.9%
from the $3.7 million in 1997. The decrease in 1998 resulted from decreased
gains on the sale of SBA loans and decreased service charges on deposits. Other
income in 1997 increased $1.0 million or 36.6% from the $2.7 million in 1996.
The increase in 1997 resulted from the increase in gains on the sale of SBA
loans.
Other expenses were $12.2 million in 1998, an increase of $0.4 million or
3.2% from the $11.8 million in 1997. The increase in other expenses in 1998
resulted from nonrecurring costs associated with the relocation of several
offices. Other expenses in 1997 increased $0.3 million or 2.0% from the $11.5
million in 1996. The 1997 increase resulted from overall expense increases.
Provision for income taxes was $2.1 million in both 1998 and 1997. The
income tax provision in 1998 was computed at the full tax rate on higher pretax
earnings, less certain permanent tax differences. The pretax earnings were $5.5
million in 1998, an increase of
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<PAGE> 208
$0.2 million or 3.4% from the $5.3 million in 1997. The provision for income
taxes in 1997 increased $1.0 million or 84.8% from the $1.1 million in 1996. A
reduction of the valuation allowance on the deferred tax asset lowered the
taxable expense by $0.2 million in 1996. The increase in 1997 resulted from
higher pretax earnings and no reduction of a valuation allowance on the deferred
tax asset. Through 1996, management determined that portions of the valuation
allowance were no longer necessary as the deferred tax assets are considered to
be more likely than not to be realized. Accordingly, the provision for income
taxes is less than the amount computed at the federal statutory rate in 1996.
See Note 8 in the Notes to Consolidated Financial Statements. The provisions in
FASB Statement No. 109 and the effect of alternative minimum tax have the
potential for producing, under certain conditions, significant distortions in
future income tax provisions and the effective tax rate.
Net earnings were $3.3 million in 1998, an increase of $0.1 million or 4.1%
from the $3.2 million in 1997. The increase in 1998 resulted from increased net
interest income of $1.4 million, and offset by decreased other income of $0.9
million and increased other expenses of $0.4 million. Net earnings increased
$1.0 million or 45.3% from the $2.2 million in 1996. The increase in 1997
resulted from increased interest income of $1.0 million, increase gains on sale
of SBA loans of $0.8 million, and offset by lower tax of $1.0 million. While
management is optimistic about the future, the effects of future economic
conditions on the collectibility of loans cannot be predicted with absolute
certainty and its effects on future profitability cannot be determined.
FINANCIAL CONDITION
The Company experienced continued asset growth in 1998. Total assets were
$285.9 million as of December 31, 1998, an increase of $43.6 million or 18.0%
from the $242.3 million as of December 31, 1997. Total assets increased $23.5
million or 10.7% in 1997.
Total interest-earning assets were $255.7 million as of December 31, 1998,
an increase of $55.7 million or 27.9% from the $200.0 million as of December 31,
1997. Total interest-earning assets increased $15.3 million or 8.3% in 1997. The
Company continues to focus its efforts on originating quality loans. The
increases in the loan and investment securities portfolios were funded from the
increase in deposits.
The investment securities portfolio was $58.3 million as of December 31,
1998, an increase of $40.1 million or 220.6% from the $18.2 million as of
December 31, 1997. The investment securities portfolio decreased $21.8 million
or 54.6% in 1997. The increase in 1998 resulted from the large number of
investment security purchases. The Company did not purchase investment
securities in 1997 and early 1998 due to the flat yield curve. The Company
believes securities are the best available investment after its liquidity needs
are met through cash, cash due from banks and federal funds sold. Generally,
mortgage backed securities are classified as either held-to-maturity or
available-for-sale and U.S. Treasury and Agency securities are classified as
available-for-sale. The market values increased slightly in 1998 resulting from
lower short-term and long-term interest rates.
The loan portfolio was $140.1 million as of December 31, 1998, an increase
of $8.9 million or 6.8% from the $131.2 million as of December 31, 1997. The
loan portfolio increased $12.2 million or 10.3% in 1997. The increase in 1998
resulted from continued loan demand, primarily SBA lending on commercial real
estate. The quality of the loan portfolio continues to improve resulting from a
healthier Orange County economy.
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<PAGE> 209
Total deposits were $260.3 million as of December 31, 1998, an increase of
$41.5 million or 19.0% from the $218.8 million as of December 31, 1997. Total
deposits increased $20.4 million or 10.3% in 1997. The deposit increase between
years reflects a general increase in balances maintained by large depositors.
CREDIT RISK MANAGEMENT
As previously noted, the Bank maintains an allowance for credit losses to
provide for potential losses in the loan portfolio. Additions to the allowance
for credit losses are charged to operations in the form of a provision for
possible credit losses. All loans that are judged to be uncollectible are
charged against the allowance while any recoveries are credited to the
allowance. The allowance for credit losses is maintained at a level determined
by management to be adequate, based on the performance of loans in the Bank's
portfolio, evaluation of collateral for such loans, the prospects or worth of
the prospective borrowers or guarantors, and such other factors which, in the
Bank's judgement, deserve consideration in the estimation of possible losses.
The allowance for credit losses is established and maintained after analyzing
loans identified by management with certain unfavorable features affixing a risk
of loss attributable to each loan. An inherent risk of loss in accordance with
industry standards and economic conditions is then allocated to specific loan
pools and to the remainder of the portfolio on an aggregate basis.
LIQUIDITY
The Company maintains substantial liquid and other short-term assets to
meet the funding of loan demand, deposit withdrawals and maturities, and
operating costs. The Company currently meets its funding needs from its deposit
base, and cash flow from operations, loan sales, and loan principal reductions.
The loan-to-deposit ratio was 53.8% and 60.0% as of December 31, 1998 and
1997, respectively. The decrease of the loan-to-deposit ratio resulted from
deposit growth exceeding loan demand. The ratio of liquid assets (cash, cash due
from banks, interest-bearing deposits at financial institutions, federal funds
sold, and investments with maturities of one year or less) to demand deposits
was 39.3% and 44.5% as of December 31, 1998 and 1997, respectively. The decrease
of the liquid asset ratio resulted from the increase in deposits being invested
into loans and investment securities with maturities longer than one year.
The Company has a relatively stable and significant base of core deposits.
Thus, the Company has not used brokered deposits and avoids using other
wholesale, highly rate-sensitive, short-term funds. The Company had five
customers with an aggregate deposit of $43.0 million as of December 31, 1998.
Other funding sources available to the Company include reduction of its
federal funds sold, sale of its available-for-sale securities, increasing
deposits, and borrowing on its established credit resources. The Company may
borrow funds under securities sold with agreements to repurchase such securities
that have not been pledged. The Company had unpledged securities of $52.3
million as of December 31, 1998. Liquidity needs may also be met through federal
funds purchased from correspondent banks and/or direct borrowings from the
Federal Reserve Bank. The Company has established Federal Funds borrowing lines
with various banks up to $8.0 million. The Company has also established a
borrowing capacity of $14.5 million with the FHLB. The Company would need to
pledge
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<PAGE> 210
certain defined collateral, consisting of loans and/or securities prior to
borrowing from the FHLB. The Company has yet to use these facilities.
Management believes the Bank has sufficient liquidity to meet its loan
commitments, deposit withdrawals and operating costs.
CAPITAL MANAGEMENT
Capital management requires that sufficient capital be maintained for
anticipated growth and to provide depositors assurance that their funds are on
deposit with a solvent institution. The Bank is subject to various regulatory
capital requirements. The Bank must meet specific capital guidelines that
involve qualitative measures of the Bank's assets and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors. Tier I capital
for the Bank under the regulations is defined as stockholders' equity before any
unrealized gains or losses on its available-for-sale securities portfolio. Total
capital is defined as Tier I capital plus the allowance for credit losses,
subject to certain limitations. The table below sets forth the Bank's actual
capital ratios, the minimum capital required for adequacy purposes and to be
categorized as "well capitalized" for the capital ratios of total risk-based,
Tier I risk-based and Tier I leverage. The Bank's capital ratios exceeded the
"well capitalized" threshold prescribed in the rules of its principal federal
regulator as of December 31, 1998.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Total capital (to risk-weighted
assets)................................ $24,484 13.7% $14,314 8.0% $17,893 10.0%
Tier I capital (to risk-weighted
assets)................................ 22,960 12.8% 7,157 4.0% 10,736 6.0%
Tier I capital (to average assets)....... 22,960 8.4% 10,942 4.0% 13,678 5.0%
DECEMBER 31, 1997
Total capital (to risk-weighted
assets)................................ $22,563 13.9% $12,962 8.0% $16,202 10.0%
Tier I capital (to risk-weighted
assets)................................ 20,982 13.0% 6,481 4.0% 9,721 6.0%
Tier I capital (to average assets)....... 20,982 9.0% 9,368 4.0% 11,710 5.0%
</TABLE>
Management believes that the Bank is properly and adequately capitalized,
as evidenced by these ratios as of December 31, 1998. The most recent
notification from the Office of the Comptroller of the Currency categorized the
Bank as "well capitalized" as of June 30, 1997 under the regulatory framework
for prompt corrective action.
OFF-BALANCE SHEET ANALYSIS
The contractual amounts associated with certain financial transactions are
not recorded as assets or liabilities on the balance sheet. Off-balance sheet
treatment is generally considered appropriate either where exchange of the
underlying asset or liability has not occurred or is not assured, or where
contractual amounts are used solely to determine cash flows to be exchanged.
The Company's off-balance sheet financial instruments consist of
commitments to extend credit and standby letters of credit. A majority of these
commitments are with
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<PAGE> 211
variable interest rates. Additional information about off-balance sheet
financial instruments is provided in Note 10 of Notes to Consolidated Financial
Statements.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services. In the current interest rate environment, the liquidity
and the maturity structure of the Company's assets and liabilities are critical
to the maintenance of acceptable performance levels.
YEAR 2000 ISSUE
The "Year 2000 issue" results from the fact that many computer programs use
only two digits to represent a year, such as "98" to represent "1998," which
means that in the Year 2000 such programs could incorrectly treat the Year 2000
as the year 1900. This issue has grown in importance as the use of computers and
microchips has become more pervasive throughout the economy, and
interdependencies between systems have multiplied. The issue must be recognized
as a business problem, rather than simply a computer problem, because of the way
its effects could ripple through the economy. The Year 2000 issue could
materially and adversely affect the Company either directly or indirectly. This
could happen if any of its critical computer systems or equipment containing
embedded logic fail, if the local infrastructure (electric power, phone system,
or water system) fails, if its significant vendors are adversely impacted, or if
its borrowers or depositors are adversely impacted by their internal systems or
those of their customers or suppliers. Failure of the Company to complete
testing and renovation of its critical systems on a timely basis could have a
material adverse effect on the Company's financial condition and results of
operations, as could Year 2000 problems faced by others with whom the Company
does business.
Federal banking regulators have responsibility for supervision and
examination of banks to determine whether each institution has an effective plan
for identifying, renovating, testing and implementing solutions for Year 2000
processing and coordinating Year 2000 processing capabilities with its
customers, vendors and payment system partners. Bank examiners are also required
to assess the soundness of a bank's internal controls and to identify whether
further corrective action may be necessary to assure an appropriate level of
attention to Year 2000 processing capabilities.
The Company has a written plan to address its risks associated with the
impact of the Year 2000. The plan directs the Company's Year 2000 compliance
efforts under the framework of a five-step program mandated by the Federal
Financial Institutions Examination Council ("FFIEC"). The FFIEC's five-step
program consists of five phases: awareness, assessment, renovation, validation
and implementation. In the awareness phase, which the Company has completed, the
Year 2000 problem is defined and executive level support for the necessary
resources to prepare the Company for Year 2000 compliance is
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<PAGE> 212
obtained. In the assessment phase, which the Company has also completed, the
size and complexity of the problem and details of the effort necessary to
address the Year 2000 issues are assessed. Although the awareness and assessment
phases are completed, the Company continues to evaluate new issues as they
arise. In the renovation phase, which the Company has substantially completed,
the required incremental changes to hardware and software components are
installed. In the validation phase, which the Company has also substantially
completed the initial phase, the hardware and software components are tested. In
the implementation phase, changes to hardware and components are brought on line
and re-testing of such changes are completed. The implementation phase is
currently 60% complete, with an expected completion in April 1999.
The Company is using both internal and external resources to identify,
correct or reprogram, and test its systems for Year 2000 compliance. The Company
has identified 25 vendor or software applications which management believes are
material to its operations. Based on information received from its vendors and
testing results, the Company believes that substantially all material
applications of its operations are Year 2000 compliant as of December 31, 1998.
The Company has not identified any material applications that the Company does
not believe are fully Year 2000 compliant as of December 31, 1998.
The Company is also making efforts to ensure that its customers,
particularly its significant customers, are aware of the Year 2000 problem. The
Company has either sent Year 2000 correspondence to, or met personally with its
significant deposit and loan customers. A customer of the Company is deemed
significant if the customer possesses either of the following characteristics:
(1) total indebtedness to the Company of $500,000 or more, or (2) an average
ledger deposit balance greater than $500,000.
The Company has amended its credit authorization documentation to include
consideration of the Year 2000 problem. The Bancorp assesses its significant
customer's Year 2000 readiness and assigns the customer an assessment of "low,"
"medium" or "high" risk. Risk evaluation of the Company's significant customers
was completed in September 1998. The Company evaluates any depositor or lending
customer determined to have a high or medium risk on an ongoing basis.
Currently, 2% of loan customers are considered high risk and are being monitored
closely for progress. Substantially all deposit customers are either low risk or
compliant, the exception being those loan customers considered high risk.
It is impossible to quantify the total potential cost of Year 2000 problems
or to determine the Company's worst-case scenario in the event the Company's
Year 2000 remediation efforts or the efforts of those with whom it does business
are not successful, due to the wide range of possible issues and large number of
variables involved. In order to deal with the uncertainty associated with the
Year 2000 problem, the Company has developed a contingency plan to address the
possibility that efforts to mitigate the Year 2000 risk are not successful
either in whole or part. These plans include but are not limited to manual
processing of information for critical information technology systems and having
increased cash on hand. The contingency plan will be validated, after which the
appropriate implementation training will be scheduled.
The Company incurred and expensed $0.1 million of Year 2000 costs through
December 31, 1998. These Year 2000-related costs have been funded from the
continuing operations of the Company. These costs were approximately 7% of the
Company's 1998 information systems budget. The Company currently estimates its
costs to complete its Year 2000 compliance at approximately $0.3 million. This
estimate includes the cost of
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<PAGE> 213
purchasing hardware and software licenses, the cost of the time of internal
staff and the cost of consultants. Testing is not expected to add significant
incremental costs.
CURRENT ACCOUNTING DEVELOPMENTS
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company does not
invest in derivative instruments nor engage in hedging activities.
Management does not believe the application of the Statement to
transactions of the Bank that have been typical in the past will materially
affect the Bank's financial position and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company uses asset liability management on its balance sheet to
minimize the exposure of interest rate movements on its net interest income. The
principal function of asset liability management is to manage the interest rate
risk in the balance sheet by maintaining a proper balance, match and mix between
rate-sensitive interest-earning assets and rate-sensitive interest-bearing
liabilities. The term "rate-sensitive" refers to those assets and liabilities
that are "sensitive" to fluctuations in interest rates. When interest rates
fluctuate, earnings may be affected in many ways as the interest rates of assets
and liabilities change at different times or by different amounts.
The Company minimizes its interest rate risk in the balance sheet by
emphasizing the origination of variable interest rate loans that have the
ability to reprice overnight and maintaining a high volume of federal funds sold
to offset the deposits that may potentially reprice overnight.
A repricing gap is the difference between total interest-earning assets and
total interest-bearing liabilities available for repricing during a given time
interval. A positive repricing gap exists when total interest-earning assets
exceed total interest-bearing liabilities within a repricing period and a
negative repricing gap exists when total interest-bearing liabilities are in
excess of interest-earning assets within a repricing period.
Generally, a positive repricing gap increases net interest income in a
rising rate environment and decreases net interest income in a falling rate
environment. A positive repricing gap may increase net interest income in a
falling rate environment depending on the amount of the excess repricing gap and
extent of the drop in interest rates. A negative repricing gap tends to increase
net interest income in a falling rate environment and decrease net interest
income in a rising rate environment. The net interest income of the Company will
benefit from a rising rate environment based on the positive repricing gap.
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<PAGE> 214
The following table displays the repricing period for interest-earning
assets and interest-bearing liabilities and the related repricing gap as of
December 31, 1998:
<TABLE>
<CAPTION>
AFTER ONE
DUE WITHIN DUE WITHIN BUT WITHIN AFTER
0-3 MONTHS 4-12 MONTHS FIVE YEARS FIVE YEARS
---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest-earning assets(1)....... $159,162 $6,500 $20,927 $69,124
Interest-bearing liabilities..... 152,016 7,037 1,404 2
-------- ------ ------- -------
Repricing gap.................... 7,146 (537) 19,523 69,122
-------- ------ ------- -------
Cumulative repricing gap......... $ 7,146 $6,608 $26,131 $95,253
======== ====== ======= =======
Cumulative gap as a percent of
earning assets................. 2.8% 2.6% 10.2% 37.3%
======== ====== ======= =======
</TABLE>
- -------------------------
(1) Includes collateralized mortgage obligations in the one-year to five-year
maturities based on the average expected lives.
The Company had available-for-sale securities of $40.6 million recorded at
market value as of December 31, 1998. The available-for-sale securities consist
of collateralized mortgage obligations and medium-term government agency notes.
The Company also had held-to-maturity securities of $17.6 million recorded at
amortized cost as of December 31, 1998. The held-to-maturity securities are
collateralized mortgage obligations that may be repaid without penalties. The
value of these securities is subject to fluctuation based upon current long-term
interest rates.
The Company had $144.4 million of interest-earning assets and $127.2
million of interest-bearing demand and savings deposits as of December 31, 1998
that are able to reprice overnight.
The estimated effect on net interest income for a 10% decrease from
prevailing interest rates over a one-year period would be a decline of
approximately $0.9 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company follow on pages F-1 to
F-25. The Independent Auditor's Report is set forth on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning the directors and executive officers of the
Bancorp, see "Election of Directors" included in the Bancorp's definitive proxy
statement ("Proxy Statement"), which information is incorporated by reference.
The Proxy Statement will be filed with the SEC within the time period specified
by General Instruction G to Form 10-K.
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<PAGE> 215
ITEM 11. EXECUTIVE COMPENSATION
For information concerning management remuneration, see "Executive
Compensation" included in the Proxy Statement, which information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning security ownership of beneficial owners and
management, see "Stock Ownership of Certain Beneficial Owners and Management"
included in the Proxy Statement, which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning related party transactions, see "Certain
Transactions" included in the Proxy Statement, which information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following financial statements of the Company and subsidiary are
included in this Form 10-K. Page number references follow:
<TABLE>
<S> <C>
Independent auditor's report................................ F-37
Consolidated balance sheets as of December 31, 1998 and
1997...................................................... F-38
Consolidated statements of earnings for the years ended
December 31, 1998, 1997 and 1996.......................... F-39
Consolidated statements of comprehensive income for the
years ended December 31, 1998, 1997 and 1996.............. F-40
Consolidated statements of stockholders' equity for the
years ended December 31, 1998, 1997 and 1996.............. F-41
Consolidated statements of cash flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-42
Notes to consolidated financial statements.................. F-43 to F-63
</TABLE>
SCHEDULES
All schedules are omitted as the information is not required, is not
material, or is otherwise furnished.
EXHIBITS
See Index to exhibits at Page 33 of this Form 10-K.
REPORTS ON FORM 8-K
The Company did not file reports on Form 8-K during the quarter ended
December 31, 1998.
F-32
<PAGE> 216
SIGNATURES
Pursuant to the requirements of Section 13 or 25(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.
ORANGE NATIONAL BANCORP
<TABLE>
<S> <C>
By: /s/ KENNETH J. COSGROVE Date: MARCH 17, 1999
----------------------------------------------- --------------------------------------
Kenneth J. Cosgrove, President
and Chief Executive Officer
By: /s/ ROBERT W. CREIGHTON Date: MARCH 17, 1999
----------------------------------------------- --------------------------------------
Robert W. Creighton, Secretary
and Chief Financial Officer
By: /s/ JERRO M. OTSUKI Date: MARCH 17, 1999
----------------------------------------------- --------------------------------------
Jerro M. Otsuki, Vice President
and Controller
</TABLE>
F-33
<PAGE> 217
SIGNATURES
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.
ORANGE NATIONAL BANCORP
<TABLE>
<S> <C>
/s/ MICHAEL W. ABDALLA Date: MARCH 17, 1999
- ------------------------------------------------
Michael W. Abdalla --------------------------------------
Director
/s/ MICHAEL J. CHRISTIANSON Date: MARCH 17, 1999
- ------------------------------------------------
Michael J. Christianson --------------------------------------
Director
/s/ KENNETH J. COSGROVE Date: MARCH 17, 1999
- ------------------------------------------------
Kenneth J. Cosgrove --------------------------------------
Director
/s/ ROBERT W. CREIGHTON Date: MARCH 17, 1999
- ------------------------------------------------
Robert W. Creighton --------------------------------------
Director
Date:
- ------------------------------------------------
Charles R. Foulger --------------------------------------
Director
/s/ GERALD R. HOLTE Date: MARCH 17, 1999
- ------------------------------------------------
Gerald R. Holte --------------------------------------
Director
/s/ JAMES E. MAHONEY Date: MARCH 17, 1999
- ------------------------------------------------
James E. Mahoney --------------------------------------
Director
/s/ WAYNE F. MILLER Date: MARCH 17, 1999
- ------------------------------------------------
Wayne F. Miller --------------------------------------
Director
/s/ SAN E. VACCARO Date: MARCH 17, 1999
- ------------------------------------------------
San E. Vaccaro --------------------------------------
Director
</TABLE>
F-34
<PAGE> 218
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<C> <S>
3.1 Registrant's Articles of Incorporation -- filed as exhibit 3
to the Registrant's Registration Statement on Form S-4, File
No. 33-8743, and are hereby incorporated by reference.
3.2 Registrant's Bylaws -- filed as exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, File No.
33-13162, are hereby incorporated by reference.
10.1 Material contracts of the Bank were each filed as exhibits
10, 10.1, 10.3, 10.4, and 10.5 to the Registrant's
Registration Statement on Form S-4, File No. 33-8743, and
are hereby incorporated by reference. Material contracts of
the Bank were each filed as exhibits 10.6 through 10.22 to
the Registrant's 1997 Annual Report on Form 10-K, File No.
33-8743, and are hereby incorporated by reference.
21 Subsidiary of the Registrant -- Orange National Bank, a
National Banking Association.
23 Consent of Independent Accountants, page 34.
27 Financial Data Schedule, page 21.
</TABLE>
F-35
<PAGE> 219
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
Orange National Bancorp
Orange, California
We hereby consent to the incorporation of our report dated January 22,
1999, except for the last paragraph of Note 10, as to which the date is February
11, 1999, included in this Form 10-K in the previously filed Registration
Statement of Orange National Bancorp on Form S-8 (No. 333-44741 and No.
0-15365).
McGLADREY & PULLEN, LLP
Anaheim, California
March 17, 1999
F-36
<PAGE> 220
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Orange National Bancorp
Orange, California
We have audited the accompanying consolidated balance sheets of Orange
National Bancorp and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, comprehensive income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 Orange
National Bancorp and subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
McGLADREY & PULLEN, LLP
Anaheim, California
January 22, 1999, except for the last paragraph of Note 10 as to which the date
is February 11, 1999.
F-37
<PAGE> 221
ORANGE NATIONAL BANCORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 2)....................... $ 74,931 $ 81,147
Securities (Note 3):
Held-to-maturity securities (fair value of $17,691 in
1998 and $8,972 in 1997)............................ 17,640 9,037
Available-for-sale securities.......................... 40,649 9,146
Loans, net of allowance for credit losses of $1,524 in
1998 and $1,581 in 1997 (Notes 4, 5 and 12)............ 140,140 131,189
Premises and equipment, net (Note 6)..................... 5,438 5,057
Other real estate owned, net (Note 5).................... -- 126
Accrued interest receivable.............................. 1,212 985
Cash value of life insurance............................. 5,021 4,808
Other assets (Note 8).................................... 831 784
-------- --------
Total assets...................................... $285,862 $242,279
======== ========
LIABILITIES
Deposits (Note 7)........................................ $260,334 $218,792
Accrued interest payable and other liabilities........... 1,805 1,901
-------- --------
Total liabilities................................. 262,139 220,693
-------- --------
Commitments and Contingencies (Notes 10 and 11).......... -- --
STOCKHOLDERS' EQUITY (Notes 10, 11 and 13)
Common stock, no par value or stated value; authorized
20,000,000 shares; issued and outstanding 1,996,788
in 1998 and 1,970,046 in 1997....................... 8,036 7,864
Retained earnings...................................... 15,718 13,778
Accumulated other comprehensive income (loss).......... (31) (56)
-------- --------
Total stockholders' equity........................ 23,723 21,586
-------- --------
Total liabilities and stockholders' equity........ $285,862 $242,279
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-38
<PAGE> 222
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Interest Income:
Loans.............................................. $14,633 $13,686 $11,712
Securities......................................... 1,602 1,573 2,627
Federal funds sold................................. 2,881 1,598 1,555
------- ------- -------
Total interest income........................... 19,116 16,857 15,894
Interest Expense, deposits........................... 4,165 3,353 3,519
------- ------- -------
Net interest income............................. 14,951 13,504 12,375
Provision for Credit Losses (Note 5)................. 100 140 205
------- ------- -------
Net interest income after provision for credit
losses........................................ 14,851 13,364 12,170
Other Income (Note 9)................................ 2,783 3,707 2,713
Other Expenses (Notes 9 and 10)...................... 12,157 11,776 11,547
------- ------- -------
Earnings before income taxes.................... 5,477 5,295 3,336
Provision for Income Taxes (Note 8).................. 2,147 2,097 1,135
------- ------- -------
NET EARNINGS (Note 11).......................... $ 3,330 $ 3,198 $ 2,201
======= ======= =======
Basic earnings per share............................. $ 1.67 $ 1.63 $ 1.13
======= ======= =======
Weighted average number of common shares outstanding
(in thousands)..................................... 1,989 1,961 1,944
======= ======= =======
Diluted earnings per share........................... $ 1.64 $ 1.60 $ 1.13
======= ======= =======
Weighted average number of common shares and diluted
potential common shares (in thousands)............. 2,036 2,000 1,951
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-39
<PAGE> 223
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net earnings............................................ $3,330 $3,198 $2,201
------ ------ ------
Other comprehensive income:
Unrealized gains (losses) on available-for-sale
securities......................................... 10 68 (21)
Reclassification adjustment for losses included in net
earnings........................................... -- 9 24
Reclassification adjustment for losses included in net
earnings for securities transferred................ 35 40 73
------ ------ ------
Other comprehensive income before income taxes..... 45 117 76
Provision for income taxes............................ 20 50 30
------ ------ ------
Other comprehensive income......................... 25 67 46
------ ------ ------
Comprehensive income.................................... $3,355 $3,265 $2,247
====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
F-40
<PAGE> 224
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK COMPREHENSIVE
---------------- RETAINED INCOME
SHARES AMOUNT EARNINGS (LOSS) TOTAL
------ ------ -------- ------------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995............. 1,934 $7,510 $ 9,920 $(169) $17,261
Net earnings........................... -- -- 2,201 -- 2,201
Cash dividend paid ($.37 per share).... -- -- (718) -- (718)
Exercise of stock options.............. 19 166 -- -- 166
Other comprehensive income............. -- -- -- 46 46
----- ------ ------- ----- -------
BALANCE, DECEMBER 31, 1996............. 1,953 7,676 11,403 (123) 18,956
Net earnings........................... -- -- 3,198 -- 3,198
Cash dividend paid ($.42 per share).... -- -- (823) -- (823)
Exercise of stock options.............. 17 188 -- -- 188
Other comprehensive income............. -- -- -- 67 67
----- ------ ------- ----- -------
BALANCE, DECEMBER 31, 1997............. 1,970 7,864 13,778 (56) 21,586
Net earnings........................... -- -- 3,330 -- 3,330
Cash dividend paid ($.70 per share).... -- -- (1,390) -- (1,390)
Exercise of stock options.............. 27 172 -- -- 172
Other comprehensive income............. -- -- -- 25 25
----- ------ ------- ----- -------
BALANCE, DECEMBER 31, 1998............. 1,997 $8,036 $15,718 $ (31) $23,723
===== ====== ======= ===== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-41
<PAGE> 225
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings.................................... $ 3,330 $ 3,198 $ 2,201
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization.............. 553 504 537
Provision for credit losses................ 100 140 205
Deferred income taxes (benefits)........... 88 (111) (78)
(Gain) on sale of loans.................... (654) (1,374) (560)
Provision for losses on other real estate
owned................................... -- 11 160
Proceeds from loan sales................... 10,553 19,264 5,984
Origination of loans held for sale......... (9,898) (17,890) (5,424)
(Increase) decrease in other assets........ (382) 374 (615)
Gain on cash value of life insurance....... (213) (219) (183)
Increase (decrease) in other liabilities... (96) 376 435
-------- -------- --------
Net cash provided by operating
activities........................... 3,381 4,273 2,662
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of held-to-maturity
securities................................... 5,529 1,909 1,542
Purchase of held-to-maturity securities......... (14,132) -- --
Proceeds from sales and maturities of
available-for-sale securities................ 23,667 19,986 36,565
Purchase of available-for-sale securities....... (55,125) -- (38,482)
Net increase in loans made to customers......... (9,084) (11,460) (7,274)
Purchase of life insurance policies............. -- (872) --
Proceeds from sale of other real estate owned... 158 1,431 1,396
Purchases of bank premises and equipment........ (934) (349) (223)
-------- -------- --------
Net cash provided by (used in) investing
activities........................... (49,921) 10,645 (6,476)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits........................ 41,542 20,428 9,372
Proceeds from exercise of stock options......... 172 188 166
Dividends paid.................................. (1,390) (823) (718)
-------- -------- --------
Net cash provided by financing
activities........................... 40,324 19,793 8,820
-------- -------- --------
Increase (decrease) in cash and cash
equivalents.......................... (6,216) 34,711 5,006
Cash and cash equivalents at beginning of year.... 81,147 46,436 41,430
-------- -------- --------
Cash and cash equivalents at end of year.......... $ 74,931 $ 81,147 $ 46,436
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-42
<PAGE> 226
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation and basis of presentation
The consolidated financial statements include the accounts of Orange
National Bancorp and its wholly-owned subsidiary Orange National Bank ("Bank").
These entities are collectively referred to herein as the Company. The Bank
provides a full range of banking services to its commercial and consumer
customers through six branches located in Orange County, California. All
significant intercompany balances and transactions have been eliminated in
consolidation.
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.
Cash and cash equivalents
The Company includes cash on hand, cash due from banks, time deposits and
federal funds sold in its definition of cash and cash equivalents for purposes
of balance sheet presentation and reporting the statement of cash flows.
Held-to-maturity securities
Securities classified as held-to-maturity are those debt securities the
Company has both the intent and ability to hold to maturity regardless of
changes in market conditions, liquidity needs or changes in general economic
conditions. These securities are carried at cost adjusted for amortization of
premiums and accretion of discounts, computed using the interest method over
their contractual lives. The sale of a security within three months of its
maturity date or after at least 85% of the principal outstanding has been
collected is considered a maturity for purposes of classification and
disclosure.
Available-for-sale securities
Securities classified as available-for-sale are those debt securities that
the Company intends to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security classified as
available-for-sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Company's assets
and liabilities, liquidity needs, regulatory capital considerations, and other
similar factors. Securities available-for-sale are carried at fair value.
Unrealized gains or losses, net of the related deferred tax effect, are reported
as comprehensive income. Realized gains or losses, computed using the cost of
the specific securities sold, are included in earnings.
F-43
<PAGE> 227
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Securities transfers
Transfers of debt securities into the held-to-maturity classification from
the available-for-sale classification are made at fair value on the date of
transfer. The unrealized holding gains or losses on the date of transfer are
retained as a separate component of stockholders' equity and in the carrying
value of the held-to-maturity securities. Such amounts are amortized over the
remaining contractual lives of the securities using the interest method.
Loans
Loans are stated at the amount of unpaid principal reduced by undisbursed
loan funds, unearned loan fees and allowance for credit losses. Interest on
loans is accrued as earned using the simple-interest method on principal amounts
outstanding, only if deemed collectible. Loan origination and commitment fees
together with certain direct loan origination costs are deferred, and the net
deferral amount is amortized as an adjustment to the yield on loans over their
contractual lives. Collateral is obtained on substantially all loans. Such
collateral is primarily first trust deeds on property.
The accrual of interest on loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due,
generally at 90 days past due. When an interest accrual is discontinued, all
unpaid accrued interest is reversed. Generally, interest income is not
subsequently recognized until all principal and interest amounts are received,
and future principal and interest payments are expected to be collected.
A loan is considered impaired when, in management's opinion, it is probable
the creditor will be unable to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement. Impaired loans
are measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. The amount of impairment, if any, and any subsequent
changes are included in the allowance for credit losses.
Allowance for credit losses
The allowance for credit losses is established through a provision for
credit losses charged to expense. Loans are charged against the allowance for
credit losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb estimated losses on existing loans that may become uncollectible,
based on evaluation of the collectibility of loans and prior loan loss
experience. This evaluation also takes into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic or other
conditions. In addition, the Office of the Comptroller of the
F-44
<PAGE> 228
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Currency, as an integral part of their examination process, periodically reviews
the Company's allowance for credit losses, and may require the Company to make
additions to the allowance based on their judgment about information available
to them at the time of their examinations.
Sale of loans
The Company sells the guaranteed portion of small business administration
loans in the secondary market to provide funds for additional lending and to
generate servicing income. Under such agreements, the Company continues to
service the loans and the buyer receives the principal collected together with
interest. Loans held for sale are valued at the lower of cost or market value.
Gains and losses on sales of loans are calculated on a predetermined
formula in compliance with Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" ("SFAS 125") based on the difference between the selling price
and the cost of the loans sold. Any inherent risk of loss on loans is
transferred to the buyer at the date of sale on the portion of the loan sold.
However, the Company maintains the risk on the portion retained.
The Company has issued various representations and warranties associated
with the sale of loans. These representations and warranties may require the
Company to repurchase loans for a period of 90 days after the date of sale as
defined per the applicable sales agreement. The Company did not experience
losses during the years ended December 31, 1998, 1997 and 1996 regarding these
representations and warranties.
Premises and equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
following estimated useful lives: Buildings and leasehold improvements -- 4 to
28 years; furniture and equipment -- 3 to 10 years. Improvements to leased
property are amortized over the lesser of the term of the lease or life of the
improvements.
Other real estate owned
Other real estate owned ("OREO") represents properties acquired through
foreclosure or other proceedings. OREO is held for sale and is recorded at the
lower of the carrying amounts of the related loans or the estimated fair value
of the properties less estimated costs of disposal. Any write-down to estimated
fair value less cost to sell at the time of transfer to OREO is charged to the
allowance for credit losses. Properties are evaluated regularly by management
with any further reductions of the carrying amount to the estimated fair value
less estimated costs to dispose charged to the reserve for OREO losses as
necessary. Depreciation is recorded on each OREO after such properties have been
F-45
<PAGE> 229
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
owned for one year. Depreciation and additions to or reductions from valuation
allowances are recorded in income.
Income taxes
Deferred taxes are provided on an asset and liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards, and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when management
determines that it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Stock-based compensation
The Company has adopted Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 establishes
financial accounting and reporting standards for stock-based compensation plans.
The Company has elected to continue accounting for stock-based employee
compensation plans in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB No. 25") and related
Interpretations, as SFAS 123 permits, and to follow the pro forma net earnings,
pro forma earnings per share, and stock-based compensation plan disclosure
requirements set forth in SFAS 123.
Earnings per share
The Company is required to present basic and diluted earnings per share
amounts. Diluted per share amounts assume the conversion, exercise or issuance
of all potential common instruments unless the effect is to reduce a loss or
increase the earnings per common share from continuing operations. The
weighted-average shares outstanding used to compute dilutive earnings per share
include incremental shares from stock options of 46,708; 38,365; and 7,658; for
the years ended December 31, 1998, 1997 and 1996, respectively.
Current accounting development
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company does not
invest in derivative instruments nor engage in hedging activities.
F-46
<PAGE> 230
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash on hand............................................... $ 1,264 $ 1,827
Cash due from banks........................................ 16,277 27,820
Federal funds sold......................................... 57,390 51,500
------- -------
$74,931 $81,147
======= =======
</TABLE>
The Company maintains amounts due from banks that exceed federally insured
limits. The Company has not experienced any losses in such accounts. In
addition, federal funds sold were placed with two financial institutions.
The Company is required to maintain a reserve balance in cash or on deposit
with the Federal Reserve Bank. The required and actual reserve balances
maintained were $742,000 and $1,248,000 as of December 31, 1998, respectively.
NOTE 3. SECURITIES
Carrying amounts and fair values of held-to-maturity securities are
summarized as follows as of December 31:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
Mortgage-backed securities.............. $17,640 $76 $(25) $17,691
======= === ==== =======
1997
Mortgage-backed securities.............. $ 9,037 $-- $(65) $ 8,972
======= === ==== =======
</TABLE>
Securities pledged as collateral on public deposits and treasury, tax and
loan payments had a carrying amount of $5,999,000 and $5,748,000 at December 31,
1998 and 1997, respectively.
F-47
<PAGE> 231
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Carrying amounts and fair values of available-for-sale securities are
summarized as follows as of December 31:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
U.S. Treasury securities and obligations
of other U.S. Government corporations
and agencies.......................... $14,503 $12 $ (3) $14,512
Mortgage-backed securities.............. 25,241 48 (63) 25,226
Other................................... 911 -- -- 911
------- --- ---- -------
$40,655 $60 $(66) $40,649
======= === ==== =======
1997
U.S. Treasury securities and obligations
of other U.S. Government corporations
and agencies.......................... $ 8,992 $11 $(27) $ 8,976
Other................................... 170 -- -- 170
------- --- ---- -------
$ 9,162 $11 $(27) $ 9,146
======= === ==== =======
</TABLE>
The amortized cost and fair value of investment securities by contractual
maturities as of December 31, 1998 are shown below. Maturities may differ from
contractual maturities in mortgage-backed securities because the mortgages
underlying the securities may be called or prepaid without any penalties.
Therefore, maturity dates for these securities are not included in the following
maturity summary:
<TABLE>
<CAPTION>
HELD-TO-MATURITY AVAILABLE-FOR-SALE
------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less................... $ -- $ -- $ 9,003 $ 9,000
Due after one year through five years..... -- -- 5,500 5,512
Mortgage-backed securities................ 17,640 17,691 25,241 25,226
Other..................................... -- -- 911 911
------- ------- ------- -------
$17,640 $17,691 $40,655 $40,649
======= ======= ======= =======
</TABLE>
Available-for-sale securities of $14,002,000 and $20,999,000 were sold
resulting in gross realized (losses) of $(9,000) and $(24,000) in 1997 and 1996,
respectively. The Company did not sell available-for-sale securities in 1998.
F-48
<PAGE> 232
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 4. LOANS
The Company's loan portfolio consisted of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate loans
Construction........................................... $ 5,074 $ 118
Commercial............................................. 86,049 78,534
-------- --------
91,123 78,652
Commercial and industrial loans.......................... 40,217 44,301
Loans to individuals..................................... 11,180 10,586
Other.................................................... 241 122
-------- --------
142,761 133,661
Deduct
Unearned net loan fees and premiums.................... (1,097) (891)
Allowance for credit losses............................ (1,524) (1,581)
-------- --------
$140,140 $131,189
======== ========
</TABLE>
Impaired loans
Information about impaired loans is as follows as of and for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Impaired loans requiring a related allowance for credit
losses................................................... $ 877 $1,067
Impaired loans not requiring a related allowance for credit
losses................................................... 554 249
------ ------
Total impaired loans..................................... $1,431 $1,316
====== ======
Related allowance for loan losses.......................... $ 224 $ 278
====== ======
Average balance (based on month-end balances).............. $1,644 $1,201
====== ======
Interest income recognized................................. $ 161 $ 125
====== ======
</TABLE>
The Company is not committed to lend additional funds to debtors whose
loans have been modified due to impairment.
The Company had nonaccrual loans of $1,631,000 and $2,447,000 as of
December 31, 1998 and 1997, respectively. Interest income that would have been
earned on such nonaccrual loans had such loans performed according to their loan
terms would have been $382,000, $325,000, and $492,000 (earnings per share
effect of $0.19, $0.17, and $0.25) in 1998, 1997 and 1996, respectively.
Management estimates that certain nonaccrual loans, which are not classified as
impaired, will ultimately be collected in full in accordance with the original
terms.
F-49
<PAGE> 233
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Loans serviced
The Company services loans for others totaling $57,875,000 and $64,764,000
as of December 31, 1998 and 1997, respectively, which are not included in the
accompanying consolidated balance sheets.
Loan concentration
The Company grants commercial, residential and consumer loans to customers,
substantially all of whom are middle-market businesses or residents. The
Company's business is concentrated primarily in Orange County, California, and
its loan portfolio includes a significant credit exposure to the real estate
industry and local economy of this area. Real estate loans accounted for
approximately 64% of total loans as of December 31, 1998. Substantially all of
these loans are secured by first liens with an initial loan to value ratio of
generally less than 75%.
NOTE 5. ALLOWANCE FOR CREDIT LOSSES AND RESERVE FOR OTHER REAL ESTATE OWNED
Activity of the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning...................................... $1,581 $1,369 $1,513
Provision for credit losses........................... 100 140 205
Recoveries of amounts charged off..................... 42 138 38
Amounts charged off................................... (199) (66) (387)
------ ------ ------
Balance, ending......................................... $1,524 $1,581 $1,369
====== ====== ======
</TABLE>
Activity of the reserve for other real estate owned is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning...................................... $ 17 $ 252 $ 301
Provision for losses on other real estate owned....... -- 11 160
Disposal of other real estate owned................... (17) (246) (209)
---- ----- -----
Balance, ending......................................... $ -- $ 17 $ 252
==== ===== =====
</TABLE>
F-50
<PAGE> 234
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 6. PREMISES AND EQUIPMENT, NET
Premises and equipment are summarized as follows as of December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land............................................... $1,100 $1,100
Buildings and leasehold improvements............... 4,982 4,531
Furniture and equipment............................ 3,904 3,449
------ ------
9,986 9,080
Less accumulated depreciation and amortization..... 4,548 4,023
------ ------
$5,438 $5,057
====== ======
</TABLE>
NOTE 7. DEPOSITS
Deposits are summarized as follows as of December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Noninterest-bearing demand......................... $ 99,875 $ 93,169
Interest-bearing:
Demand........................................... 113,895 91,282
Savings.......................................... 13,266 11,622
Time certificates of deposit of $100,000 or
more.......................................... 19,092 12,087
Other time....................................... 14,206 10,632
-------- --------
Total deposits................................ $260,334 $218,792
======== ========
</TABLE>
Substantially all certificates of deposit as of December 31, 1998 mature
within one year. The Company had five customers with an aggregate deposit of
$43,048,000 as of December 31, 1998.
F-51
<PAGE> 235
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 8. INCOME TAXES
The cumulative tax effects of the primary temporary differences are
summarized as follows as of December 31:
<TABLE>
<CAPTION>
1998 1997
------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Credit loss allowances.................................... $ 386 $ 407
Deferred compensation accruals............................ 346 278
Interest accruals......................................... 24 95
Acquired net operating loss carryforward.................. 80 85
Unrealized loss on available-for-sale securities.......... 18 38
Other real estate allowance............................... -- 7
State income taxes........................................ 187 204
------ ------
Total deferred tax assets.............................. 1,041 1,114
Deferred tax liability, premises and equipment.............. 731 696
------ ------
Net deferred tax assets................................ $ 310 $ 418
====== ======
</TABLE>
The Company did not record a valuation allowance on deferred tax assets in
excess of deferred tax liabilities at December 31, 1998 and 1997, as management
believes that the net deferred tax assets, as of December 31, 1998 and 1997, are
more likely than not to be realized.
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense................................. $2,059 $2,208 $1,213
Deferred tax expense (benefit)...................... 88 (111) (78)
------ ------ ------
$2,147 $2,097 $1,135
====== ====== ======
</TABLE>
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense..................... $1,917 $1,853 $1,168
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit.... 378 397 249
Change in valuation allowance..................... -- -- (165)
Cash value of life insurance...................... (82) (97) (85)
Other............................................. (66) (56) (32)
------ ------ ------
$2,147 $2,097 $1,135
====== ====== ======
</TABLE>
F-52
<PAGE> 236
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 9. OTHER INCOME AND EXPENSE
Other income consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service charges on deposit accounts..................... $1,194 $1,262 $1,169
Fees for other customer services........................ 367 593 616
Gain on sale of loans................................... 654 1,374 560
Increase in cash value of life insurance................ 254 219 183
Other (Note 3).......................................... 314 259 185
------ ------ ------
$2,783 $3,707 $2,713
====== ====== ======
</TABLE>
Other expense consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries, wages and employee benefits................ $ 6,138 $ 6,259 $ 6,098
Occupancy expense (Note 10).......................... 1,330 1,134 1,153
Data processing expense (Note 10).................... 977 888 928
Furniture and equipment expense...................... 754 704 633
Promotion expense.................................... 485 459 429
Legal and professional services...................... 603 518 627
Insurance............................................ 260 241 182
Stationery and supplies.............................. 266 216 249
Telephone and postage................................ 405 405 383
Other real estate owned (Note 5)..................... 17 94 217
Other................................................ 922 858 648
------- ------- -------
$12,157 $11,776 $11,547
======= ======= =======
</TABLE>
NOTE 10. COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENT
Litigation
In the normal course of business, the Company is involved with various
legal proceedings. In the opinion of management, any liability resulting from
such proceedings would not have a material adverse effect on the consolidated
financial statements.
Financial instruments with off-balance sheet risk
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. They involve, to varying degrees, elements of credit risk in
addition to the amounts recognized on the consolidated balance sheets. Such
financial instruments are recorded on the consolidated balance sheet upon
funding.
F-53
<PAGE> 237
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Company's exposure to credit loss in the event of nonperformance by the
other parties to the financial instrument for these commitments is represented
by the contractual amounts of those instruments. The Company uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance sheet instruments.
The Company's exposure to off-balance sheet risk as of December 31 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commitments to extend credit..................... $23,928 $25,087
Standby letters of credit........................ 472 347
------- -------
$24,400 $25,434
======= =======
</TABLE>
Commitments to extend credit
Commitments to extend credit are agreements to lend to a customer provided
that all conditions established in the contract have been met. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. If deemed necessary upon extension of
credit, the amount of collateral obtained is based on management's credit
evaluation of the counterparty. Collateral held varies, but may include accounts
receivable, inventory, property and equipment, and income-producing commercial
properties. The Company had undisbursed loan funds of $19,006,000 and
$20,516,000 as of December 31, 1998 and 1997, respectively.
Standby letters of credit
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and 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. Collateral held varies
as specified above and is required in instances that the Company deems
necessary. Substantially all of the standby letters of credit were
collateralized at December 31, 1998.
F-54
<PAGE> 238
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Lease commitments
The Company leases certain branch facilities and equipment from
nonaffiliates under operating leases expiring at various dates through December
2007. The following is a schedule of future minimum rental payments under these
leases:
<TABLE>
<CAPTION>
AMOUNT
------
(DOLLARS IN THOUSANDS)
<S> <C>
1999.......................................... $ 688
2000.......................................... 697
2001.......................................... 704
2002.......................................... 718
2003.......................................... 612
Thereafter.................................... 1,684
------
$5,103
======
</TABLE>
Rent expense under these leases and other month-to-month leases for the
years ended December 31, 1998, 1997 and 1996, was $915,000, $824,000 and
$790,000, respectively.
Data processing commitment
The Company has an existing contract with a data processing center to
provide computer services through March 2001. The Company is subject to a
penalty amount equal to 25% of the amounts that would have been paid to the
center for the remainder of the contract term, should the Company terminate the
contract prior to the expiration date. The expense under this contract for the
years ended December 31, 1998, 1997 and 1996 was $977,000, $888,000 and
$927,000, respectively.
Subsequent event
In January 1999, the Company declared a $0.15 per share dividend to
stockholders of record as of the close of business on February 11, 1999, payable
on March 1, 1999.
F-55
<PAGE> 239
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 11. EMPLOYEE BENEFIT PLANS
Stock Option Plans
The Company maintains two compensatory incentive stock option plans in
which options to purchase shares of the Company's common stock are granted at
the Board of Directors' discretion to directors, certain management and other
key personnel. The 1993 and 1997 Plans are authorized to grant a maximum of
193,106 shares and 414,250 shares of the Company's common stock, respectively.
Purchase prices associated with the options are based on the fair market value
of the Company's stock at the time the option is granted. The options, if not
exercised, will expire 5 to 10 years from the date they were granted. Other
pertinent information relating to the Plans follow:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Under option, beginning of year............... 207,625 48,500 62,600
Granted..................................... 45,900 176,500 5,000
Exercised................................... (26,742) (17,375) (19,100)
-------- -------- --------
Under option, end of year..................... 226,783 207,625 48,500
======== ======== ========
Options exercisable, end of year.............. 200,967 174,775 48,500
Available to grant, end of year............... 314,856 360,756 123,006
Weighted average price under option, end of
year........................................ $ 19.69 $ 16.25 $ 6.32
Weighted average price of options exercisable,
end of year................................. $ 19.31 $ 16.12 $ 6.32
Weighted average price of options granted,
during the year............................. $ 27.50 $ 17.96 $ 9.92
Weighted average price of options exercised,
during the year............................. $ 6.43 $ 5.87 $ 8.67
</TABLE>
Additional option information by Plan at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE RANGE OUTSTANDING EXERCISABLE PRICE
--------------- ----------- ----------- --------
<S> <C> <C> <C> <C>
1993 Plan.................. $ 5.79 1,050 -- $ 5.79
1993 Plan.................. $ 9.92 - $13.75 8,833 7,000 $11.58
1997 Plan.................. $17.72 - $23.50 171,000 162,667 $18.10
1997 Plan.................. $24.12 - $29.00 45,900 31,300 $27.50
------- -------
226,783 200,967
======= =======
</TABLE>
F-56
<PAGE> 240
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Company applies APB No. 25 and related Interpretations in accounting
for its Plans. Accordingly, no compensation cost has been recognized. The
Company has not issued any options to nonemployees. The Company's reported and
pro forma net earnings and earnings per share are presented below. The pro forma
amounts deduct the estimated compensation cost for the Company's stock option
Plan based on the fair value at the grant dates for awards under this Plan and
with the provisions of SFAS 123:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net earnings
As reported....................................... $3,330 $3,198 $2,201
Pro forma......................................... 3,165 2,691 2,195
Basic earnings per share
As reported....................................... $ 1.67 $ 1.63 $ 1.13
Pro forma......................................... 1.59 1.37 1.12
Diluted earnings per share
As reported....................................... $ 1.64 $ 1.60 $ 1.13
Pro forma......................................... 1.55 1.35 1.12
</TABLE>
The pro forma compensation cost for the fair value of the stock options
granted was estimated using the Black-Scholes model. The assumptions used in the
model by year are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected volatility........................ 12% to 31% 15% to 20% 12% to 15%
Dividends as a percentage of stock price... 2.6% 1.8% 2.8%
Expected lives in years.................... 4 4 4
Risk-free interest rates................... 4.5% 5.5% 5.4%
Weighted average fair value per share of
stock options granted.................... $ 4.65 $ 4.69 $ 2.13
</TABLE>
Salary deferral 401(k) plan
The Company has a salary deferral 401(k) plan for all employees who have
completed one year of service. The Bank contributed discretionary matching funds
of $102,000 to the Plan in 1998, 1997 and 1996, respectively.
Contingency contract
The Company has contingency contracts with its Chief Executive Officer and
Chief Financial Officer. The contract provides for a monthly payment of $13,000
over 179 months in the event that the Company experiences a merger, acquisition,
or other act wherein they are not retained in similar positions with the
surviving Company.
F-57
<PAGE> 241
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 12. LOANS AND OTHER TRANSACTIONS WITH RELATED PARTIES
Stockholders of the Company, and officers and directors, including their
families and companies of whom they are principal owners, are considered to be
related parties. These related parties were loan customers of, and had other
transactions with, the Company in the ordinary course of business. In
management's opinion, these loans and transactions were on the same terms as
those for comparable loans and transactions with nonrelated parties. The
activity in such loans is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance, beginning............................... $ 2,479 $ 2,906
New loans...................................... 850 774
Repayments..................................... (1,126) (1,201)
------- -------
Balance, ending.................................. $ 2,203 $ 2,479
======= =======
</TABLE>
None of these loans are classified, past due, nonaccrual, or restructured
to provide a reduction or deferral of interest or principal because of
deterioration in the financial position of the borrower.
NOTE 13. REGULATORY CAPITAL REQUIREMENTS
The subsidiary Bank is subject to various regulatory capital requirements
administered by the federal banking 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 Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve qualitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Quantitative measures
established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios (set forth in the table below) of total and
Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital to average assets (as defined). Management
believes that the Bank meets all capital adequacy requirements to which it is
subject as of December 31, 1998.
As of June 30, 1997, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
Tier I leverage ratios as set forth in the table. There are no conditions or
events occurring since that management believes have changed
F-58
<PAGE> 242
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
the institution's category. The Bank's actual capital amounts and ratios are
presented in the following table:
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
--------------- --------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted
Assets).................. $24,484 13.7% $14,314 8.0% $17,893 10.0%
Tier I Capital
(to Risk Weighted
Assets).................. 22,960 12.8% 7,157 4.0% 10,736 6.0%
Tier I Capital
(to Average Assets)...... 22,960 8.4% 10,942 4.0% 13,678 5.0%
As of December 31, 1997:
Total Capital
(to Risk Weighted
Assets).................. $22,563 13.9% $12,962 8.0% $16,202 10.0%
Tier I Capital
(to Risk Weighted
Assets).................. 20,982 13.0% 6,481 4.0% 9,721 6.0%
Tier I Capital
(to Average Assets)...... 20,982 9.0% 9,368 4.0% 11,710 5.0%
</TABLE>
The Company's capital amounts and ratios are substantially the same as the
amounts presented above.
NOTE 14. CONSOLIDATED STATEMENTS OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Supplemental Cash Flow Information
Cash payments for
Interest....................................... $4,142 $3,318 $3,573
====== ====== ======
Income taxes................................... $2,484 $2,113 $1,100
====== ====== ======
Non-cash investing activities
Loans originated by the Company to finance the
sale of other real estate owned................ $ -- $1,023 $ 100
====== ====== ======
Loans foreclosed on by the Company............. $ 32 $ 145 $ 902
====== ====== ======
</TABLE>
F-59
<PAGE> 243
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments are as follows as of
December 31:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents....... $ 74,931 $ 74,931 $ 81,147 $ 81,147
Securities...................... 58,289 58,340 18,183 18,118
Loans, net...................... 140,140 141,453 131,189 130,711
Accrued interest receivable..... 1,212 1,212 985 985
Financial Liabilities, deposits... 260,334 260,222 218,792 218,700
</TABLE>
Management uses its best judgment in estimating the fair value of the
Company's financial instruments; however, there are inherent weaknesses in any
estimation technique. Therefore, for substantially all financial instruments,
the fair value estimates presented herein are not necessarily indicative of the
amounts the Company could have realized in a sales transaction at either
December 31, 1998 or 1997. The estimated fair value amounts for 1998 and 1997
have been measured as of their respective year ends, and have not been
reevaluated or updated for purposes of these consolidated financial statements
subsequent to those respective dates. As such, the estimated fair values of
these financial instruments subsequent to the respective reporting dates may be
different than the amounts reported at each year-end.
The information in this Note should not be interpreted as an estimate of
the fair value of the entire Company since a fair value calculation is only
required for a limited portion of the Company's assets and liabilities. This
disclosure of fair value amounts does not include the fair values of any
intangibles, including core deposit intangibles or mortgage servicing rights.
Due to the wide range of valuation techniques, assumptions used and the degree
of subjectivity used in making the estimate, comparisons between the Company's
disclosures and those of other banks may not be meaningful.
The Company used the following methods and assumptions in estimating the
fair value of its financial instruments:
Cash and cash equivalents
The carrying amounts for cash held, due from banks, interest bearing
deposits and federal funds sold approximate their fair values.
Securities
Fair values for securities are based on quoted market prices when
available. For certain mortgage-backed securities, the Company utilizes a broker
to determine fair value.
F-60
<PAGE> 244
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
This broker obtains estimates of fair value from up to three pricing services
that estimate fair value through a mapping process to other mortgage pools
adjusted for interest rate, maturity, etc. There is no guarantee that the prices
obtained for these methods can be realized upon ultimate sale of such
securities.
Loans
The carrying values of variable-rate loans that reprice frequently and that
have not experienced significant changes in credit risk approximate their fair
values. At December 31, 1998 and 1997, variable rate loans comprised
approximately 64% and 72%, respectively, of the loan portfolio. Fair values for
all other loans are estimated based on discounted cash flows, using interest
rates currently being offered for loans with similar terms to borrowers with
similar credit quality. Prepayments prior to the repricing date are not expected
to be significant. Loans are expected to be held-to-maturity and any unrealized
gains or losses are not expected to be realized.
Off-balance sheet instruments
Fair values for off-balance sheet instruments (guarantees, letters of
credit and lending commitments) are based on quoted fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
Deposit liabilities
Fair values for savings and demand deposits equal their carrying amounts.
The carrying amounts for variable-rate money market accounts approximate their
fair values. Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregate expected monthly
maturities on time deposits. Early withdrawals of fixed-rate certificates of
deposit are not expected to be significant.
Accrued interest receivable and payable
The fair values of both accrued interest receivable and payable approximate
their carrying amounts.
Commitments
The estimated fair value of fee income on letters of credit at December 31,
1998 and 1997 is insignificant.
Interest rate risk
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, fair
value of the Company's
F-61
<PAGE> 245
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
financial instruments will change when interest rate levels change and that
change may be either favorable or unfavorable to the Company. Management
attempts to match maturities of assets and liabilities to the extent believed
necessary to minimize interest rate risk. However, borrowers with fixed rate
obligations are less likely to prepay in a rising rate environment and more
likely to prepay in a falling rate environment. Conversely, depositors who are
receiving fixed rates are more likely to withdraw funds before maturity in a
rising rate environment and less likely to do so in a falling rate environment.
Management monitors rates and maturities of assets and liabilities and attempts
to minimize interest rate risk by adjusting terms of new loans and deposits and
by investing in securities with terms that mitigate the Company's overall
interest rate risk.
NOTE 16. PARENT COMPANY ONLY CONDENSED STATEMENTS
Condensed Balance Sheets
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets
Cash................................................... $ 616 $ 482
Investment in subsidiary............................... 22,929 20,926
Other assets........................................... 178 178
------- -------
$23,723 $21,586
======= =======
Stockholders' Equity..................................... $23,723 $21,586
======= =======
</TABLE>
Condensed Statements of Earnings and Comprehensive Income
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating income, dividends from subsidiary....... $1,390 $ 823 $ 718
Expenses, professional fees..................... (38) (39) (40)
------ ------ ------
Earnings before equity in undistributed
earnings of subsidiary..................... 1,352 784 678
Equity in undistributed earnings of subsidiary.... 1,978 2,414 1,523
------ ------ ------
Net earnings................................. 3,330 3,198 2,201
Other comprehensive income from subsidiary........ 25 67 46
------ ------ ------
Comprehensive income......................... $3,355 $3,265 $2,247
====== ====== ======
</TABLE>
F-62
<PAGE> 246
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Condensed Statements of Cash Flows
<TABLE>
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net earnings................................. $ 3,330 $ 3,198 $ 2,201
------- ------- -------
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed earnings of
subsidiary.............................. (1,978) (2,414) (1,523)
------- ------- -------
Net cash provided by operating
activities.............................. 1,352 784 678
------- ------- -------
Cash Flows from Financing Activities
Proceeds from exercise of stock options...... 172 188 166
Dividends paid............................... (1,390) (823) (718)
------- ------- -------
Net cash (used in) financing activities... (1,218) (635) (552)
------- ------- -------
Increase in cash and cash equivalents..... 134 149 126
Cash and cash equivalents
Beginning.................................... 482 333 207
------- ------- -------
Ending....................................... $ 616 $ 482 $ 333
======= ======= =======
</TABLE>
F-63
<PAGE> 247
ANNEX G
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NO. 33-8743
------------------------
ORANGE NATIONAL BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
1201 EAST KATELLA AVENUE
ORANGE, CALIFORNIA 92867
(714)771-4000 33-0190684
CALIFORNIA (ADDRESS AND TELEPHONE NUMBER (I.R.S. EMPLOYER
(STATE OF INCORPORATION) OF PRINCIPAL EXECUTIVE OFFICES) IDENTIFICATION NO.)
</TABLE>
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 periods 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The Registrant had 2,000,171 shares of common stock outstanding as of April
28, 1999.
G-1
<PAGE> 248
ORANGE NATIONAL BANCORP
QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL STATEMENTS
Item 1. Financial statements
Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998....................................... G-3
Consolidated Statements of Earnings for the Three Months
Ended March 31, 1999 and 1998 (unaudited)................... G-4
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 1999 and 1998 (unaudited)...... G-5
Consolidated Statements of Stockholders' Equity for the
Three Months Ended March 31, 1999 and 1998 (unaudited)...... G-6
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (unaudited)................... G-7
Notes to Consolidated Financial Statements.................. G-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... G-9
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ G-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... G-21
Item 2. Changes in Securities....................................... G-21
Item 3. Defaults Upon Senior Securities............................. G-21
Item 4. Submissions of Matters to a Vote of Security Holders........ G-21
Item 5. Other Information........................................... G-21
Item 6. Exhibits and Reports on Form 8-K............................
SIGNATURES............................................................. G-22
</TABLE>
G-2
<PAGE> 249
ORANGE NATIONAL BANCORP
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED) (AUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 54,986 $ 74,931
Securities
Held-to-maturity securities (fair value of $15,933
in 1999 and $17,691 in 1998).................... 15,901 17,640
Available-for-sale securities...................... 52,270 40,649
Loans, net of allowance for credit losses of $1,596
in 1999 and $1,524 in 1998......................... 143,112 140,140
Premises and equipment, net.......................... 5,503 5,438
Other real estate owned, net......................... 94 --
Accrued interest receivable.......................... 1,099 1,212
Cash value of life insurance......................... 5,071 5,021
Other assets......................................... 1,018 831
-------- --------
$279,054 $285,862
======== ========
LIABILITIES
Deposits............................................. $252,960 $260,334
Accrued interest payable and other liabilities....... 1,939 1,805
-------- --------
Total liabilities............................... 254,899 262,139
Commitments and Contingencies........................ -- --
STOCKHOLDERS' EQUITY
Common stock, no par value or stated value;
authorized 20,000,000 shares; issued and
outstanding 2,000,171 in 1999 and 1,996,788 in
1998............................................ 8,081 8,036
Retained earnings.................................. 16,170 15,718
Unrealized (loss) on available-for-sale securities,
net............................................. (96) (31)
-------- --------
Total stockholders' equity...................... 24,155 23,723
-------- --------
$279,054 $285,862
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
G-3
<PAGE> 250
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Interest Income
Loans.................................................... $3,297 $3,345
Securities............................................... 910 245
Federal funds sold....................................... 457 569
------ ------
Total interest income................................. 4,664 4,159
Interest Expense, deposits................................. 1,033 881
------ ------
Net interest income................................... 3,631 3,278
Provision for Credit Losses................................ 70 --
------ ------
Net interest income after provision for credit
losses.............................................. 3,561 3,278
Other Income............................................... 706 871
Other Expenses............................................. 3,031 3,093
------ ------
Earnings before income taxes.......................... 1,236 1,056
Provision for Income Taxes................................. 484 396
------ ------
Net earnings.......................................... $ 752 $ 660
====== ======
Basic earnings per share................................... $ 0.38 $ 0.33
====== ======
Weighted average number of common shares outstanding (in
thousands)............................................... 1,999 1,976
====== ======
Diluted earnings per share................................. $ 0.37 $ 0.32
====== ======
Weighted average number of common shares outstanding and
diluted potential common shares (in thousands)........... 2,040 2,043
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
G-4
<PAGE> 251
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----- ----
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Net earnings................................................ $ 752 $660
Other comprehensive income:
Unrealized gains (losses) on available-for-sale
securities............................................. (120) (1)
Reclassification adjustment for losses included in net
earnings............................................... -- --
Reclassification adjustment for losses included in net
earnings for securities transferred.................... 8 8
----- ----
Other comprehensive income (loss) before income
taxes................................................. (112) 7
Provision for income taxes................................ 47 (3)
----- ----
Other comprehensive income (loss)...................... (65) 4
----- ----
COMPREHENSIVE INCOME................................... $ 687 $664
===== ====
</TABLE>
See Notes to Consolidated Financial Statements.
G-5
<PAGE> 252
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK COMPREHENSIVE
--------------- RETAINED INCOME
SHARES AMOUNT EARNINGS (LOSS) TOTAL
------ ------ -------- ------------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997........ 1,970 $7,864 $13,778 $(56) $21,586
Net earnings...................... -- -- 660 -- 660
Cash dividend paid ($.35 per
share).......................... -- -- (692) -- (692)
Exercise of stock options......... 18 106 -- -- 106
Other comprehensive income........ -- -- -- 4 4
----- ------ ------- ---- -------
BALANCE, MARCH 31, 1998........... 1,988 $7,970 $13,746 $(52) $21,664
===== ====== ======= ==== =======
BALANCE, DECEMBER 31, 1998........ 1,997 $8,036 $15,718 $(31) $23,723
Net earnings...................... -- -- 752 -- 752
Cash dividend paid ($.15 per
share).......................... -- -- (300) -- (300)
Exercise of stock options......... 3 45 -- -- 45
Other comprehensive income........ -- -- -- (65) (65)
----- ------ ------- ---- -------
BALANCE, MARCH 31, 1999........... 2,000 $8,081 $16,170 $(96) $24,155
===== ====== ======= ==== =======
</TABLE>
See Notes to Consolidated Financial Statements.
G-6
<PAGE> 253
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings............................................ $ 752 $ 660
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization........................ 154 114
Provision for credit losses.......................... 70 --
(Gain) on sale of loans.............................. (50) (174)
Proceeds from loan sales............................. 1,033 2,571
Origination of loans held for sale................... (983) (2,397)
(Increase) decrease in other assets.................. (14) 28
Gain on cash value of life insurance................. (60) (59)
Increase in other liabilities........................ 140 141
-------- -------
Net cash provided by operating activities.......... 1,042 884
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of held-to-maturity
securities........................................... 1,739 1,386
Proceeds from maturities of available-for-sale
securities........................................... 9,303 3,001
Purchases of available-for-sale securities.............. (21,045) --
Net increase in loans made to customers................. (3,137) (7,188)
Proceeds from sale of other real estate owned........... -- 126
Purchases of bank premises and equipment................ (218) (459)
-------- -------
Net cash (used in) investing activities............ (13,358) (3,134)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) in deposits.............................. (7,374) (1,964)
Proceeds from exercise of stock options................. 45 106
Dividends paid.......................................... (300) (692)
-------- -------
Net cash (used in) financing activities............ (7,629) (2,550)
-------- -------
(Decrease) in cash and cash equivalents............ (19,945) (4,800)
Cash and cash equivalents at beginning of period.......... 74,931 81,147
-------- -------
Cash and cash equivalents at end of period................ $ 54,986 $76,347
======== =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for:
Interest............................................. $ 1,048 $ 875
======== =======
Income taxes......................................... $ -- $ 150
======== =======
Non-cash investing activities:
Loans to finance the sale of other real estate
owned.............................................. $ -- $ --
======== =======
Loans foreclosed on by the Company................... $ 94 $ --
======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
G-7
<PAGE> 254
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Orange
National Bancorp ("Company") and its wholly-owned subsidiary, Orange National
Bank ("Bank").
The consolidated balance sheet (unaudited) as of March 31, 1999, and the
related consolidated statements (unaudited) of earnings, comprehensive income,
stockholders' equity and cash flows for the three months ended March 31, 1999
and 1998, have been prepared in accordance with generally accepted accounting
principles and the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary have been made to present fairly the
financial position, results of operations and cash flows as of and for the three
months ended March 31, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's December 31, 1998, annual report on Form 10-K.
The operating results for the three months ended March 31, 1999, are not
necessarily indicative of the operating results for all of 1999.
NOTE 2. OTHER INCOME AND EXPENSE
Other income for the three months ended March 31 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ----
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Service charges on deposit accounts..................... $363 $384
Fees for other customer services........................ 194 199
Gain on sale of loans................................... 50 174
Increase in cash value of life insurance................ 60 59
Other................................................... 39 55
---- ----
$706 $871
==== ====
</TABLE>
Other expense for the three months ended March 31 consisted of the
following:
<TABLE>
<S> <C> <C>
Salaries, wages and employee benefits................ $1,526 $1,520
Occupancy expense.................................... 315 345
Data processing expense.............................. 249 230
Furniture and equipment expense...................... 196 172
Promotion expense.................................... 128 185
Legal and professional services...................... 196 233
Stationery and supplies.............................. 51 68
Telephone and postage................................ 115 126
Other real estate owned.............................. -- 6
Other................................................ 255 208
------ ------
$3,031 $3,093
====== ======
</TABLE>
G-8
<PAGE> 255
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements in this filing, including without limitation statements
containing the words "believes," "anticipates," "intends," "expects,"
"proforma," and words of similar import, constitute forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among other, the following: general economic conditions in the
Company's market areas; variances in interest rates; changes in or amendments to
regulatory authorities' capital requirements or other regulations applicable to
the Company; increased competition for loans and deposits; and other factors
referred to elsewhere in this filing. Given these uncertainties, shareholders
are cautioned not to place undue reliance on forward-looking statements. The
Company disclaims any obligation to update such factors which are not considered
to be material or to publicly announce the result of any revisions to any of the
forward-looking statements included herein which are not considered to be
material to reflect future events or developments.
RESULTS OF OPERATIONS
Total interest income was $4.7 million in the three months ended March 31,
1999, an increase of $0.5 million or 12.1% from the $4.2 million in three months
ended March 31, 1998. The average interest-earning assets were $241.3 million in
the first quarter of 1999, an increase of $44.9 million, or 22.9% from the
$196.4 million in the first quarter of 1998. The average yield was 7.7% in the
first quarter of 1999, a decrease of 0.8% from the 8.5% in the first quarter of
1998. The increase in interest income in the first quarter of 1999 resulted from
a higher level of interest-earning assets in spite of slightly lower interest
rates.
Interest income on loans was $3.3 million in both the three months ended
March 31, 1999 and 1998. This resulted although the average size of the loan
portfolio increased and long-term interest rates decreased during the first
quarter of 1999 as compared to the first quarter of 1998. The average loan
portfolio was $142.3 million in the first quarter of 1999, an increase of $4.8
million or 3.5% from the $137.5 million in the first quarter of 1998. The yield
on the loan portfolio was 9.3% in first quarter of 1999, a decrease of 0.4% from
the 9.7% in the first quarter of 1998. The increase in the average size of the
loan portfolio resulted from increased loan fundings throughout 1998 and into
the first quarter of 1999. The yield on loans moves with changes in the prime
rate as approximately 65% of the loan portfolio are based on variable rates.
Interest income on securities was $0.9 million in the three months ended
March 31, 1999, an increase of $0.7 million or 271.4% from the $0.2 million in
the three months ended March 31, 1998. The increase in interest income on
securities in the first quarter of 1999 resulted from the sharp increase in the
average size of the investment securities portfolio. The average balance of
securities was $59.3 million in the first quarter of 1999, an increase of $42.4
million or 251.2% from the $16.9 million in the first quarter of 1998. The yield
on securities was 6.1% in the first quarter of 1999, an increase of 0.3% from
the 5.8% in the first quarter of 1998. The increase in the size and yield of the
investment
G-9
<PAGE> 256
securities portfolio resulted from the purchase of several higher yielding bonds
throughout the latter half of 1998 and into the first quarter of 1999.
Interest income on federal funds sold was $0.5 million in the three months
ended March 31, 1999, a decrease of $0.1 million or 19.7% from the $0.6 million
in the three months ended March 31, 1998. The decrease in interest income on
federal funds sold resulted from a decrease in the average size of federal funds
sold and a lower yield in the first quarter of 1999. The average balance of
federal funds sold was $39.8 million in the first quarter of 1999, a decrease of
$2.2 million or 5.4% from the $42.0 million in the first quarter of 1998. The
yield on federal funds sold was 4.6% in the first quarter of 1999, a decrease of
0.8% from the 5.4% in the first quarter of 1998. The decrease in the federal
funds sold resulted from excess funds being invested in investment securities
throughout the latter half of 1998 and into the first quarter of 1999.
Interest expense was $1.0 million in the three months ended March 31, 1999,
an increase of $0.1 million or 17.3% from the $0.9 million in the three months
ended March 31, 1998. The increase in interest expense resulted from a larger
average interest-bearing deposit base and a slight increase in deposit rates.
The average interest-bearing deposits were $155.0 million in the first quarter
of 1999, an increase of $29.7 million or 23.7% from the $125.3 million in the
first quarter of 1998. The average rate paid on interest-bearing deposits was
2.7% in the first quarter of 1999, a decrease of 0.1% from the 2.8% in the first
quarter of 1998. The increase in the deposit base reflects an increase in the
overall prosperity of the customer base.
The provision for credit losses was $70,000 for the three months ended
March 31, 1999. A provision for credit losses was not deemed necessary in the
three months ended March 31, 1998. The increased provision for credit losses in
the first quarter of 1999 from the first quarter of 1998 reflects a larger loan
portfolio with a higher quality resulting from an improved local economy in
Orange County. The Company continued to experience recoveries in the first
quarter of 1999 on amounts previously charged-off. These recoveries offset the
need for additional provision. Management believes that the current allowance
for credit losses is adequate to provide for potential losses in the portfolio.
The current local economic outlook for the remainder of 1999 is promising.
However, an assurance cannot be made as to its realization and, accordingly,
future provisions for credit losses cannot be estimated at this time. While
management is optimistic about the future, the effects of current economic
conditions on the collectibility of loans cannot be predicted with absolute
certainty and its effects on future profitability cannot be determined.
Other income was $0.7 million in the three months ended March 31, 1999, a
decrease of $0.2 million or 19.0% from the $0.9 million in the three months
ended March 31, 1998. The decrease in other income in the first quarter of 1999
resulted from decreased gains on lower sales volume of SBA loans as compared to
the first quarter of 1998. The gain on sale of SBA loans was $0.1 million in the
first quarter of 1999, a decrease of $0.1 million from the $0.2 million in the
first quarter of 1998.
Other expenses were $3.0 million in the three months ended March 31, 1999,
a decrease of $0.1 million or 2.0% from the $3.1 million in the three months
ended March 31, 1998. The decrease in other expense in the first quarter of 1999
resulted from lower promotional and professional costs incurred.
Provision for income taxes was $0.5 million in the three months ended March
31, 1999, an increase of $0.1 million or 22.2% from the $0.4 million in the
three months ended
G-10
<PAGE> 257
March 31, 1998. The increase results from higher pretax earnings in the first
quarter of 1999 as compared to the first quarter of 1998.
Net earnings were $752,000 in the three months ended March 31, 1999, an
increase of $92,000 or 13.9% from the $660,000 in the three months ended March
31, 1998.
FINANCIAL CONDITION
The Company experienced a slight decrease in assets during the three months
ended March 31, 1999. Total assets were $279.1 million as of March 31, 1999, a
decrease of $6.8 million or 2.4% from the $285.9 million as of December 31,
1998.
Total interest-earning assets were $252.2 million as of March 31, 1999, a
decrease of $3.5 million or 1.8% from the $255.7 million as of December 31,
1998. The decrease resulted from an outflow of federal funds sold for deposit
withdrawals. The Company purchased investment securities due to favorable
interest rate conditions. The Company also continues to focus its efforts on
originating quality loans.
The investment securities portfolio was $68.2 million as of March 31, 1999,
an increase of $9.9 million or 17.0% from the $58.3 million as of December 31,
1998. The increase in the first quarter of 1999 resulted from the continued
purchasing of investment securities that began during the second quarter of
1998. The Company believes securities are the best available investment after
its liquidity needs are met through cash, cash due from banks and federal funds
sold. The market values decreased slightly in the first quarter of 1999
resulting from a slight increase in short-term and long-term interest rates.
The loan portfolio was $144.7 million as of March 31, 1999, an increase of
$3.0 million or 2.2% from the $141.7 million as of December 31, 1998. The
increase in the first quarter of 1999 resulted from increased loan demand,
primarily SBA lending on commercial real estate. The quality of the loan
portfolio continues to improve resulting from a healthier Orange County economy.
Total deposits were $253.0 million as of March 31, 1999, a decrease of $7.3
million or 2.8% from the $260.3 million as of December 31, 1998. The decrease in
deposits in the first quarter of 1999 reflects a historical cycle of slightly
lower first quarter balances maintained by large depositors.
LIQUIDITY
The Company maintains substantial liquid and other short-term assets to
meet the funding of loan demand, deposit withdrawals and maturities, and
operating costs. The Company currently meets its funding needs from its deposit
base, and cash flow from operations, loan sales, maturities of investment
securities and loan principal reductions.
The loan-to-deposit ratio was 56.6% and 53.8% as of March 31, 1999 and
December 31, 1998, respectively. The increase in this ratio resulted from the
increase in loans and the decrease in the deposit base. The ratio of liquid
assets (cash, cash due from banks, federal funds sold, and investment securities
with maturities of one year or less) to demand deposits was 29.9% and 39.1% as
of March 31, 1999 and December 31, 1998, respectively. The decrease of the
liquid asset ratio resulted from a larger decrease in liquid assets, primarily
to fund the purchase of investment securities, than the decrease in demand
deposits.
G-11
<PAGE> 258
The Company has a relatively stable and significant base of core deposits.
Thus, the Company has not used brokered deposits and avoids using other
wholesale, highly rate-sensitive, short-term funds. Other funding sources
available to the Company include reduction of its federal funds sold, sale of
its available for sale securities, increasing deposits, and borrowing from its
established credit resources. The Company may borrow funds under securities sold
with agreements to repurchase such securities that have not been pledged. The
Company had unpledged securities of $61.4 million as of March 31, 1999.
Liquidity can also be obtained through federal funds purchased from
correspondent banks and/or direct borrowings from the Federal Reserve Bank. The
Company has a Federal Funds borrowing line of $10.0 million. The Company has a
borrowing capacity of $14.5 million with the FHLB.
Management believes the Bank has sufficient liquidity to meet its loan
commitments, deposit withdrawals and operating costs.
INVESTMENT SECURITIES PORTFOLIO
There are no securities from a single issuer, other than securities of the
U.S. Government, Agencies and corporations, whose aggregate market value is
greater than 10% of stockholders' equity. The Bank does not invest in derivative
financial instruments. The Bank purchases mortgage-backed securities of
investment grade only. The following schedule presents the Bank's investment
securities portfolio:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- ------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
Mortgage-backed securities.......... $15,901 $15,933 $17,640 $17,691
======= ======= ======= =======
AVAILABLE-FOR-SALE
U.S. Government Agency Securities... $25,050 $25,031 $14,503 $14,512
Mortgage-backed securities.......... 26,426 26,318 25,241 25,226
Other............................... 921 921 911 911
------- ------- ------- -------
$52,397 $52,270 $40,655 $40,649
======= ======= ======= =======
Total............................. $68,298 $68,203 $58,295 $58,340
======= ======= ======= =======
</TABLE>
LOAN PORTFOLIO
A major part of the Bank's objective is serving the credit needs of
customers in Orange County and surrounding areas. Credit decisions are based
upon the judgement of the Bank's lending personnel and Loan Committee. The legal
lending limit to each customer is restricted to a percentage of the Bank's total
capital, the exact percentage depends on the nature of the particular loan and
the collateral involved. Credit risk is inherent to any loan portfolio and it is
the management of this risk, which defines the quality of the portfolio. The
Bank has a policy to obtain collateral for loans under most circumstances. The
Bank has a highly diversified portfolio, a solid underwriting process, a loan
review program and an active loan service function which management believes
serves to minimize the possibility of material loss in the loan portfolio.
G-12
<PAGE> 259
The three general areas in which the Bank has directed virtually all of its
lending activities are (a) real estate loans, (b) commercial loans, and (c)
loans to individuals. These three categories accounted for 65.3%, 26.9%, and
7.7%, respectively, of the Bank's loan portfolio as of March 31, 1999. The
Bank's commercial loans are primarily funded to small- and medium-sized
businesses for terms ranging from 30 days to 5 years. Consumer installment loans
are for a maximum term of 48 months on unsecured loans and for a term of the
depreciable life of tangible property used as collateral on secured loans.
Commercial real estate loans are originated for terms of up to 25 years.
Variable interest rate loans comprise 65% of the loan portfolio as of March
31, 1999.
The Bank had standby letters of credit of $0.5 million and commitments to
extend credit of $24.3 million as of March 31, 1999. The Bank presently has
sufficient liquidity to fund all loan commitments.
A loan is impaired when it is probable the creditor will be unable to
collect all contractual principal and interest payments due in accordance with
terms of the loan agreement. Impaired loans are measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in the allowance for
credit losses.
LOAN PORTFOLIO COMPOSITION
The composition of the Bank's loan portfolio (all domestic) is presented in
the following table:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
DOLLARS
Real estate
Commercial................................... $ 89,660 $ 86,049
Construction................................. 5,512 5,074
Commercial and industrial...................... 39,129 40,217
Loans to individuals........................... 11,178 11,180
Other.......................................... 201 241
-------- --------
Total.......................................... 145,680 142,761
Unearned net loan fees and premiums............ (972) (1,097)
Allowance for credit losses.................... (1,596) (1,524)
-------- --------
Total, net..................................... $143,112 $140,140
======== ========
PERCENTAGES
Real estate
Commercial................................... 61.5% 60.3%
Construction................................. 3.8 3.6
Commercial and industrial...................... 26.9 28.2
Loans to individuals........................... 7.7 7.8
Other.......................................... 0.1 0.1
-------- --------
Total.......................................... 100.0% 100.0%
======== ========
</TABLE>
G-13
<PAGE> 260
CREDIT RISK MANAGEMENT
The Bank manages its loan portfolio through a process designed to assure
acceptable quality of loans entering the portfolio and to bring any potential
losses or potential defaults in existing loans to the attention of the
appropriate management personnel. Each lending officer has primary
responsibility to conduct credit and documentation reviews of the loans for
which he is assigned. The Bank's Senior Vice President and Senior Credit Officer
are responsible for general supervision of the loan portfolio and adherence by
the loan officers to the loan policies of the Bank. The Bank currently engages
an outside consulting firm to periodically review the loan portfolio to provide
suggested risk rating of selected loans. Bank management reviews the suggested
ratings along with all other available information to properly monitor the loan
portfolio, including all loan evaluations made during periodic examinations by
the OCC.
In accordance with the Bank's loan policies, management presents a written
report to the Bank's Board of Directors at its monthly meeting. The Directors
review the delinquency report listing of all loans 30 days or more past due and
the watch list report including loans having increased credit risk, both
delinquency and other factors, over the rest of the portfolio. Additionally, the
Directors review a monthly report including all loans originated during the
prior month.
The Bank maintains an allowance for credit losses to provide for potential
losses in the loan portfolio. Additions to the allowance for credit losses are
either charged to operations in the form of a provision for possible credit
losses, or recovered from loan previously charged-off. All loans that are judged
to be uncollectible are charged against the allowance. The allowance for credit
losses is maintained at a level determined by management to be adequate, based
on the performance of loans in the Bank's portfolio, evaluation of collateral
for such loans, the prospects or worth of the prospective borrowers or
guarantors, and such other factors which, in the Bank's judgement, deserve
consideration in the estimation of possible losses. The allowance for credit
losses is established and maintained after analyzing loans identified by
management with certain unfavorable features affixing a risk of loss
attributable to each loan. An inherent risk of loss in accordance with industry
standards and economic conditions is then allocated to specific loan pools and
to the remainder of the portfolio on an aggregate basis. While management uses
the best information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic or other
conditions. In addition, the OCC periodically reviews the Company's allowance
for credit losses as an integral part of their normal recurring examination
process, and may require the Company to make additions to the allowance based on
their judgment about information available to them at the time of their
examinations.
The following table presents loans on nonaccrual status or contractually
past due 90 days or more as to interest or principal payments and still accruing
interest:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Loans on nonaccrual status..................... $1,827 $1,631
Loans past due 90 days or more and still
accruing interest............................ 39 76
------ ------
Total..................................... $1,866 $1,707
====== ======
</TABLE>
G-14
<PAGE> 261
Loans are generally placed on nonaccrual status when principal or interest
payments are past due 90 days or more. Certain loans are placed on nonaccrual
status earlier if there is reasonable doubt as to the collectibility of interest
or principal. Loans that are in the renewal process, have sufficient collateral,
or are in the process of collection continue to accrue interest.
Had the loans on nonaccrual status paid according to their original terms,
the gross interest income to date on such loans would have been approximately
$857,000.
Management does not have knowledge of any additional loans not disclosed in
this section as nonaccrual, past due, or troubled debt restructuring that may be
potential problem loans. The Bank has no loans to foreign borrowers. The
collateral value of certain nonaccrual loans are large enough that management
believes all principal and interest will be collected on those loans and
therefore do not meet the definition of impaired. A loan is impaired when it is
probable the creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement.
Impaired loans are valued primarily at the fair value of the underlying
collateral.
There were no loan concentrations to individual borrowers exceeding 10% of
the total loan portfolio and no other interest-bearing assets that would be
required to be in the paragraphs above, if such assets were classified as loans
as of March 31, 1999 and December 31, 1998.
The following table presents loans outstanding, the activity of the
allowance for credit losses, and pertinent ratios during the three months ended
and as of March 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Average gross loans.............................. $143,307 $138,391
======== ========
Total gross loans at end of period............... $145,680 $140,925
======== ========
ALLOWANCE FOR CREDIT LOSSES:
Balance, beginning of period..................... $ 1,524 $ 1,581
Charge-offs...................................... (2) (40)
Recoveries....................................... 4 12
-------- --------
Net (charge-offs) recoveries..................... 2 (28)
Provisions charged to operations................. 70 --
-------- --------
Balance, end of period........................... $ 1,596 $ 1,553
======== ========
Net (charge-offs) recoveries during the period to
average gross loans outstanding during year.... 0.01% (0.02)%
======== ========
</TABLE>
Included in the Bank's allocation of its allowance for credit losses are
specific reserves on certain identified loans and general reserves for unknown
potential losses. Management classifies loans through its internal loan review
system that is supplemented by an independent third party reviewer and review of
loans from its regulators. None of these classifications indicate trends or
uncertainties, which will materially impact future operating results, liquidity,
or capital resources. The allowance provides for the potential adverse effects
of current economic conditions. However, the full effects of the economy on the
loan portfolio cannot be predicted with any certainty. Any loans which
management doubts the ability of borrowers to comply with loan repayment terms
are provided for in the allowance.
G-15
<PAGE> 262
SUMMARY OF DEPOSITS
Deposits are currently the Bank's sole source of funds. The Bank can obtain
additional funds when needed to meet occasional declines in deposits or other
short-term liquidity needs, through the overnight purchase of federal funds.
However, the Bank does not currently use these sources of funds. Generally, the
Bank has funds in excess of its needs for deposit withdrawals and other
short-term liquidity. The Bank sells such excess funds as federal funds sold to
other financial institutions.
The Bank's deposits are attracted primarily from individuals and commercial
enterprises. The Bank also attracts some deposits from municipalities and other
government agencies. The Bank does not have foreign deposits, brokered deposits
or variable rate fixed-term deposits. The Bank does not expect to obtain future
deposits through the use of brokered deposits. The Bank had noninterest-bearing
demand deposits of $94.3 million, interest-bearing NOW and money market deposit
accounts of $113.2 million, time deposits of $33.1 million, and savings accounts
of $12.4 million as of March 31, 1999.
The Company had interest-bearing deposits of 62.7% and 61.7% of total
deposits as of March 31, 1999 and December 31, 1998, respectively. While the
Bank does not experience material repeated seasonal fluctuations in deposit
levels, the Bank's relative growth in deposits and loans may be affected by
seasonal and economic changes, which, in turn, may impact liquidity. Management
believes it has sufficient liquidity to meet loan commitments and deposit
demands.
The following table presents the Bank's average balances of deposits, as a
percentage of average total deposits and average interest paid by category for
the three months ended March 31 and for the year ended December 31:
<TABLE>
<CAPTION>
MMDA TOTAL
DEMAND AND NOW SAVINGS TIME DEPOSITS
------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MARCH 31, 1999
Average balance....................... $90,374 $109,125 $12,731 $33,180 $245,410
Percent of total...................... 36.8% 44.5% 5.2% 13.5% 100.0%
Average interest rate paid............ 0.0% 2.2% 2.0% 4.4% 1.7%
DECEMBER 31, 1998
Average balance....................... $84,499 $103,142 $12,186 $28,088 $227,915
Percent of total...................... 37.1% 45.3% 5.3% 12.3% 100.0%
Average interest rate paid............ 0.0% 2.4% 2.0% 5.0% 1.8%
</TABLE>
CAPITAL MANAGEMENT
Capital management requires that sufficient capital be maintained for
anticipated growth and to provide depositors assurance that their funds are on
deposit with a solvent institution. The Bank is subject to various regulatory
capital requirements. The Bank must meet specific capital guidelines that
involve certain measurements of the Bank's assets and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank's capital
amounts and classification of these assets and certain off-balance sheet items
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors. Tier 1 capital for the Bank under the
regulations is defined as stockholders' equity before any unrealized gains or
losses on its available-for-sale debt securities portfolio. Total capital is
defined as Tier 1 capital plus the allowance for credit
G-16
<PAGE> 263
losses, subject to certain limitations. The table below presents the Bank's
actual capital ratios, the minimum capital required for adequacy purposes and to
be categorized as "well capitalized" for the capital ratios of total risk-based,
Tier 1 risk-based and Tier 1 leverage. The Bank's capital ratios exceeded the
"well capitalized" threshold prescribed in the rules of its principal federal
regulator as of March 31, 1999.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
---------------- ---------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
MARCH 31, 1999
Total capital (to risk-weighted
assets)............................ $25,017 13.9% $14,400 8.0% $18,000 10.0%
Tier 1 capital (to risk-weighted
assets)............................ 23,421 13.0% 7,200 4.0% 10,800 6.0%
Tier 1 capital (to average assets)... 23,421 8.7% 11,186 4.0% 13,983 5.0%
DECEMBER 31, 1998
Total capital (to risk-weighted
assets)............................ $24,484 13.7% $14,314 8.0% $17,893 10.0%
Tier 1 capital (to risk-weighted
assets)............................ 22,960 12.8% 7,157 4.0% 10,736 6.0%
Tier 1 capital (to average assets)... 22,960 8.4% 10,942 4.0% 13,678 5.0%
</TABLE>
Management believes that the Bank is properly and adequately capitalized,
as evidenced by these ratios as of March 31, 1999. The most recent notification
from the Office of the Comptroller of the Currency categorized the Bank as "well
capitalized" as of June 30, 1997 under the regulatory framework for prompt
corrective action.
OFF-BALANCE SHEET ANALYSIS
The contractual amounts associated with certain financial transactions are
not recorded as assets or liabilities on the balance sheet. Off-balance sheet
treatment is generally considered appropriate either where exchange of the
underlying asset or liability has not occurred or is not assured, or where
contractual amounts are used solely to determine cash flows to be exchanged. The
Company's off-balance sheet financial instruments consist of commitments to
extend credit and standby letters of credit. A majority of these commitments are
written with variable interest rates.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. Unlike most industrial companies, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates have a more significant impact on a
financial institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the price of goods and services. In the current interest
rate environment, the liquidity and the maturity structure of the Company's
assets and liabilities are critical to the maintenance of acceptable performance
levels.
G-17
<PAGE> 264
YEAR 2000 ISSUE
The "Year 2000 issue" results from the fact that many computer programs use
only two digits to represent a year, such as "98" to represent "1998," which
means that in the Year 2000 such programs could incorrectly treat the Year 2000
as the year 1900. This issue has grown in importance as the use of computers and
microchips has become more pervasive throughout the economy, and
interdependencies between systems have multiplied. The issue must be recognized
as a business problem, rather than simply a computer problem, because of the way
its effects could ripple through the economy. The Year 2000 issue could
materially and adversely affect the Company either directly or indirectly. This
could happen if any of its critical computer systems or equipment containing
embedded logic fail, if the local infrastructure (electric power, phone system,
or water system) fails, if its significant vendors are adversely impacted, or if
its borrowers or depositors are adversely impacted by their internal systems or
those of their customers or suppliers. Failure of the Company to complete
testing and renovation of its critical systems on a timely basis could have a
material adverse effect on the Company's financial condition and results of
operations, as could Year 2000 problems faced by others with whom the Company
does business.
Federal banking regulators have responsibility for supervision and
examination of banks to determine whether each institution has an effective plan
for identifying, renovating, testing and implementing solutions for Year 2000
processing and coordinating Year 2000 processing capabilities with its
customers, vendors and payment system partners. Bank examiners are also required
to assess the soundness of a bank's internal controls and to identify whether
further corrective action may be necessary to assure an appropriate level of
attention to Year 2000 processing capabilities.
The Company has a written plan to address its risks associated with the
impact of the Year 2000. The plan directs the Company's Year 2000 compliance
efforts under the framework of a five-step program mandated by the Federal
Financial Institutions Examination Council ("FFIEC"). The FFIEC's five-step
program consists of five phases: awareness, assessment, renovation, validation
and implementation. In the awareness phase, which the Company has completed, the
Year 2000 problem is defined and executive level support for the necessary
resources to prepare the Company for Year 2000 compliance is obtained. In the
assessment phase, which the Company has also completed, the size and complexity
of the problem and details of the effort necessary to address the Year 2000
issues are assessed. Although the awareness and assessment phases are completed,
the Company continues to evaluate new issues as they arise. In the renovation
phase, which the Company has substantially completed, the required incremental
changes to hardware and software components are installed. In the validation
phase, which the Company has also substantially completed the initial phase, the
hardware and software components are tested. In the implementation phase,
changes to hardware and components are brought on line and re-testing of such
changes are completed. The implementation phase is currently 80% complete, with
an expected completion in April 1999.
The Company is using both internal and external resources to identify,
correct or reprogram, and test its systems for Year 2000 compliance. The Company
has identified 25 vendor or software applications which management believes are
material to its operations. Based on information received from its vendors and
testing results, the Company believes that substantially all material
applications of its operations are Year 2000 compliant as of March 31, 1999. The
Company has not identified any material applications that the Company does not
believe are fully Year 2000 compliant as of March 31, 1999.
G-18
<PAGE> 265
The Company is also making efforts to ensure that its customers,
particularly its significant customers, are aware of the Year 2000 problem. The
Company has either sent Year 2000 correspondence to, or met personally with its
significant deposit and loan customers. A customer of the Company is deemed
significant if the customer possesses either of the following characteristics:
(1) total indebtedness to the Company of $500,000 or more, or (2) an average
ledger deposit balance greater than $500,000.
The Company has amended its credit authorization documentation to include
consideration of the Year 2000 problem. The Company assesses its significant
customer's Year 2000 readiness and assigns the customer an assessment of "low,"
"medium" or "high" risk. Risk evaluation of the Company's significant customers
was completed in September 1998. The Company evaluates any depositor or lending
customer determined to have a high or medium risk on an ongoing basis.
Currently, 2% of loan customers are considered high risk and are being monitored
closely for progress. Substantially all deposit customers are either low risk or
compliant, the exception being those loan customers considered high risk.
It is impossible to quantify the total potential cost of Year 2000 problems
or to determine the Company's worst-case scenario in the event the Company's
Year 2000 remediation efforts or the efforts of those with whom it does business
are not successful, due to the wide range of possible issues and large number of
variables involved. In order to deal with the uncertainty associated with the
Year 2000 problem, the Company has developed a contingency plan to address the
possibility that efforts to mitigate the Year 2000 risk are not successful
either in whole or part. These plans include but are not limited to manual
processing of information for critical information technology systems and having
increased cash on hand. The contingency plan will be validated, after which the
appropriate implementation training will be scheduled.
The Company incurred and expensed $0.1 million of Year 2000 costs through
March 31, 1999. These Year 2000-related costs have been funded from the
continuing operations of the Company. These costs were approximately 7% of the
Company's information systems budget. The Company currently estimates its costs
to complete its Year 2000 compliance at approximately $0.3 million. This
estimate includes the cost of purchasing hardware and software licenses, the
cost of the time of internal staff and the cost of consultants. Testing is not
expected to add significant incremental costs.
CURRENT ACCOUNTING DEVELOPMENTS
In June 1998, FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company does not
invest in derivative instruments nor engage in hedging activities.
Management does not believe the application of the Statement to
transactions of the Bank that have been typical in the past will materially
affect the Bank's financial position and results of operations.
G-19
<PAGE> 266
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company uses asset liability management on its balance sheet to
minimize the exposure of interest rate movements on its net interest income. The
principal function of asset liability management is to manage the interest rate
risk in the balance sheet by maintaining a proper balance, match and mix between
rate-sensitive interest-earning assets and rate-sensitive interest-bearing
liabilities. The term "rate-sensitive" refers to those assets and liabilities
that are "sensitive" to fluctuations in interest rates. When interest rates
fluctuate, earnings may be affected in many ways as the interest rates of assets
and liabilities change at different times or by different amounts.
The Company minimizes its interest rate risk in the balance sheet by
emphasizing the origination of variable interest rate loans that have the
ability to reprice overnight and maintaining a high balance of federal funds
sold to offset the deposits that may potentially reprice overnight.
A repricing gap is the difference between total interest-earning assets and
total interest-bearing liabilities available for repricing during a given time
interval. A positive repricing gap exists when total interest-earning assets
exceed total interest-bearing liabilities within a repricing period and a
negative repricing gap exists when total interest-bearing liabilities are in
excess of interest-earning assets within a repricing period.
Generally, a positive repricing gap increases net interest income in a
rising rate environment and decreases net interest income in a falling rate
environment. A positive repricing gap may increase net interest income in a
falling rate environment depending on the amount of the excess repricing gap and
extent of the drop in interest rates. A negative repricing gap tends to increase
net interest income in a falling rate environment and decrease net interest
income in a rising rate environment. The net interest income of the Company will
benefit from a rising rate environment based on the positive repricing gap.
The following table presents the repricing periods for interest-earning
assets and interest-bearing liabilities and the related repricing gaps as of
March 31, 1999:
<TABLE>
<CAPTION>
AFTER ONE
DUE WITHIN DUE WITHIN BUT WITHIN AFTER
0-3 MONTHS 4-12 MONTHS FIVE YEARS FIVE YEARS
---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest-earning assets(1)....... $133,978 $22,197 $65,987 $31,818
Interest-bearing liabilities..... 149,048 8,315 1,374 --
-------- ------- ------- -------
Repricing gap.................... (15,070) 13,882 64,613 31,818
-------- ------- ------- -------
Cumulative repricing gap......... $(15,070) $(1,188) $63,425 $95,243
======== ======= ======= =======
Cumulative gap as a percent of
earning assets................. (5.9)% (0.5)% 25.0% 37.5%
======== ======= ======= =======
</TABLE>
- -------------------------
(1) Includes collateralized mortgage obligations in the one-year to five-year
maturities based on the average expected lives.
The Company had $130.0 million of interest-earning assets and $125.7
million of interest-bearing demand and savings deposits as of March 31, 1999
that are able to reprice overnight.
G-20
<PAGE> 267
The estimated effect on net interest income for a 10% decrease from
prevailing interest rates over a one-year period would be a decline of
approximately $0.9 million.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS FOR VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
G-21
<PAGE> 268
SIGNATURES
Pursuant to the requirements of Section 13 or 25(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.
ORANGE NATIONAL BANCORP
<TABLE>
<S> <C>
By: /s/ KENNETH J. COSGROVE Date: APRIL 28, 1999
----------------------------------------------- --------------------------------------
Kenneth J. Cosgrove, President
and Chief Executive Officer
By: /s/ ROBERT W. CREIGHTON Date: APRIL 28, 1999
----------------------------------------------- --------------------------------------
Robert W. Creighton, Secretary
and Chief Financial Officer
By: /s/ JERRO M. OTSUKI Date: APRIL 28, 1999
----------------------------------------------- --------------------------------------
Jerro M. Otsuki, Vice President
and Controller
</TABLE>
G-22
<PAGE> 269
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Five of CVB Financial's articles of incorporation provides that CVB
Financial shall eliminate the liability of its directors for monetary damages to
the fullest extent permissible under California law. Article Five also provides
that CVB Financial is authorized to provide indemnification for its agents. If
agents of CVB Financial breach a duty to CVB Financial and its shareholders,
then Article Five authorizes CVB Financial, to the extent permissible under
California Law, to indemnify such agents in excess of the indemnification
expressly permitted by Section 317 of the California general corporation law.
Section 317 sets forth the provisions pertaining to the indemnification of
corporate "agents." For purposes of this law, an agent is any person who is or
was a director, officer, employee or other agent of a corporation, or is or was
serving at the request of CVB Financial in such capacity with respect to any
other corporation, partnership, joint venture, trust or other enterprise.
Section 317 mandates CVB Financial's indemnification of agents where the agent's
defense is successful on the merits. In other cases, Section 317 allows CVB
Financial to indemnify agents for expenses, including amounts paid to defend,
settle or otherwise dispose of a threatened or pending action, if the
indemnification is authorized by (1) a majority vote of a quorum of CVB
Financial's Board of Directors consisting of directors who are not party to the
proceedings; (2) approval of the shareholders, with the shares owned by the
person to be indemnified not being entitled to vote thereon; or (3) the court in
which the proceeding is or was pending upon application by designated parties.
Under certain circumstances, CVB Financial can indemnify an agent even when the
agent is found liable. Section 317 also allows CVB Financial to advance expenses
to its agents for certain actions upon receiving an undertaking by the agent
that he or she will reimburse CVB Financial if the agent is found liable.
To the extent that indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
CVB Financial, pursuant to the foregoing provisions or otherwise, CVB Financial
understands that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. If a claim for indemnification against such liabilities (other
than the payment by CVB Financial of expenses incurred or paid by a director,
officer or controlling person of CVB Financial in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, CVB Financial will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against a public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-1
<PAGE> 270
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <S>
2.1 Agreement and Plan of Reorganization by and between CVB
Financial Corp. and Orange National Bancorp dated May 18,
1999.(1)
5.1 Opinion of Manatt, Phelps & Phillips LLP.
8.1 Opinion of Manatt, Phelps & Phillips LLP as to certain
federal income tax matters.
10.1 Stock Option Agreement with Orange National Bancorp, dated
May 18, 1999.(1)
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of McGladrey & Pullen LLP.
23.3 Consent of Manatt, Phelps & Phillips LLP (included in
Exhibits 5.1 and 8.1).
24.1 A power of attorney is set forth on the signature page of
the Registration Statement.
99.1 Form of CVB Financial proxy.
99.2 Form of Orange National proxy.
</TABLE>
- -------------------------
(1) Incorporated by reference from CVB Financial Corp.'s Form 8-K filed with the
SEC on May 21, 1999.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(b) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the Calculation of Registration Fee table in the
effective registration statement; and
(c) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-2
<PAGE> 271
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
(5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to this
Registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(6) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions of this Item 22, or otherwise,
the registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of such registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(7) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first-class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
II-3
<PAGE> 272
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Ontario, California, on
June 11, 1999.
CVB FINANCIAL
By: /s/ D. LINN WILEY
-----------------------------------
D. Linn Wiley,
President and Chief Executive
Officer
II-4
<PAGE> 273
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints D. Linn
Wiley and Edward Biebrich, and each of them, as his true and lawful
attorneys-in-fact and agents, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all Amendments (including Post-Effective
Amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ D. LINN WILEY President and Chief June 11, 1999
- --------------------------------------------- Executive Officer (Principal
D. Linn Wiley Executive Officer)
/s/ EDWARD J. BIEBRICH Executive Vice President, June 11, 1999
- --------------------------------------------- and Chief Financial Officer
Edward J. Biebrich, Jr. (Principal Financial and
Accounting Officer)
/s/ GEORGE A. BORBA Chairman of the Board June 11, 1999
- ---------------------------------------------
George A. Borba
/s/ JOHN A. BORBA Director June 11, 1999
- ---------------------------------------------
John A. Borba
/s/ RONALD O. KRUSE Director June 11, 1999
- ---------------------------------------------
Ronald O. Kruse
/s/ JOHN J. LOPORTO Director June 11, 1999
- ---------------------------------------------
John J. LoPorto
/s/ CHARLES M. MAGISTRO Director June 11, 1999
- ---------------------------------------------
Charles M. Magistro
</TABLE>
II-5
<PAGE> 274
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <S>
2.1 Agreement and Plan of Reorganization by and between CVB
Financial Corp. and Orange National Bancorp dated May 18,
1999.(1)
5.1 Opinion of Manatt, Phelps & Phillips LLP.
8.1 Opinion of Manatt, Phelps & Phillips LLP as to certain
federal income tax matters.
10.1 Stock Option Agreement with Orange National Bancorp, dated
May 18, 1999(1).
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of McGladrey & Pullen LLP.
23.3 Consent of Manatt, Phelps & Phillips LLP (included in
Exhibits 5.1 and 8.1).
24.1 A power of attorney is set forth on the signature page of
the Registration Statement.
99.1 Form of CVB Financial proxy.
99.2 Form of Orange National proxy.
</TABLE>
- -------------------------
(1) Incorporated by reference from CVB Financial Corp.'s Form 8-K filed with the
SEC on May 21, 1999.
<PAGE> 1
[Manatt, Phelps & Phillips, LLP Letterhead]
Exhibit 5.1
June 8, 1999
CVB Financial Corp
701 North Haven Avenue
Ontario, California 91764
RE: CVB Financial Corp.
Ladies and Gentlemen:
As special counsel for CVB Financial Corp., a California
corporation ("CVB"), in connection with CVB's Registration Statement on Form S-4
(the "Registration Statement"), registering a maximum of 3,356,431 shares of
CVB's common stock, no par value ("CVB Stock"), to be issued in connection with
CVB's acquisition of Orange National Bancorp ("ONB"), a California corporation,
through the Merger (the "Merger") of ONB with and into CVB, we have been
requested to render this opinion.
We have examined and reviewed only such questions of law as we
have deemed necessary or appropriate for the purpose of rendering the opinion
set forth herein.
For the purpose of rendering the opinion set forth herein, we
have been furnished with and examined only the following documents:
1. The Articles of Incorporation of CVB, as amended and
presently in effect;
2. The Bylaws of CVB, as amended and presently in
effect;
3. The Registration Statement;
4. Records of the meetings of the Board of Directors of
CVB pertaining to the Merger; and
<PAGE> 2
5. The Agreement and Plan of Reorganization by and between CVB
Financial Corp. and Orange National Bancorp, dated as of May 18, 1999 (the
"Reorganization Agreement).
With respect to all of the foregoing documents, we have
assumed, without investigation, the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
originals of all documents submitted to us as certified or reproduced copies. We
also have obtained from the officers of CVB such advice as to such factual
matters as we consider necessary for the purpose of this opinion, and insofar as
this opinion is based on such matters of fact, we have relied on such advice.
Based on the foregoing, we are of the opinion that the shares
of CVB Stock to be issued on consummation of the Merger in accordance with the
terms of the Reorganization Agreement, will be duly authorized, validly issued,
fully paid and nonassessable.
Our opinion expressed herein is limited to those matters
expressly set forth herein, and no opinion may be implied or inferred beyond the
matters expressly stated herein. We hereby disclaim any obligation to notify any
person or entity after the date hereof if any change in fact or law should
change our opinion with respect to any matter set forth in this letter.
This opinion is limited to the current laws of the State of
California and the United States of America, to present judicial interpretations
thereof and to facts as they presently exist. In rendering this opinion, we have
no obligation to revise or supplement it should the current laws of the State of
California or the United States of America be changed by legislative action,
judicial decision or otherwise.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the reference to us under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
Very truly yours,
/s/ Manatt, Phelps & Phillips, LLP
Manatt, Phelps & Phillips, LLP
<PAGE> 1
[MANATT, PHELPS & PHILLIPS, LLP LETTERHEAD]
June 8, 1999 EXHIBIT 8.1
Board of Directors
CVB Financial Corp.
701 North Haven Avenue
Ontario, California 91764
Board of Directors
Orange National Bancorp
1201 East Katella Avenue
Orange, California 92867
RE: MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER OF ORANGE
NATIONAL BANCORP WITH AND INTO CVB FINANCIAL CORP. AND THE MERGER
OF ORANGE NATIONAL BANK WITH AND INTO CITIZENS BUSINESS BANK
Ladies and Gentlemen:
In accordance with your request, we provide the following analysis and
opinions relating to the material federal income tax consequences of the
transaction (the "Merger") whereby Orange National Bancorp ("ONB") will merge
with and into CVB Financial Corp. ("CVB") pursuant to that certain Agreement and
Plan of Reorganization dated as of May 18, 1999 (the "Agreement"). Immediately
after the Merger, Orange National Bank ("Orange"), a wholly-owned subsidiary of
ONB, shall merge with and into Citizens Business Bank ("CBB"), a wholly-owned
subsidiary of CVB, pursuant to an Agreement of Bank Merger (the "Bank Merger").
Terms used herein have the same meaning as in the Agreement.
In the Merger, ONB shall be merged with and into CVB in a statutory
merger pursuant to the Agreement and in accordance with the California General
Corporation Law and the separate corporate existence of ONB shall cease. CVB
shall be the surviving entity. CVB shall succeed, without other transfer, to all
the rights and property of ONB and shall be subject to all the debts and
liabilities of ONB in the same manner as if CVB had itself incurred them. Each
share of CVB Stock (other than CVB Perfected Dissenting Shares, if any) issued
and outstanding immediately prior to the Effective Time of the Merger shall
remain an issued and outstanding
<PAGE> 2
MANATT, PHELPS & PHILLIPS, LLP
Board of Directors
June 8, 1999
Page 2
share of common stock of CVB and shall not be converted or otherwise affected by
the Merger. CVB Perfected Dissenting Shares shall, after the Effective Time of
the Merger, be entitled to only such rights as are granted to them by Chapter 13
of the California General Corporation Law.
Subject to the provisions of the Agreement, each share of ONB Stock
issued and outstanding immediately prior to the Effective Time of the Merger
(other than ONB Perfected Dissenting Shares and ONB Stock held by CVB or CBB, if
any) shall, on and after the Effective Time of the Merger, be automatically
canceled and cease to be an issued and outstanding share of ONB Stock and shall
be converted into the right to receive one and one-half (1-1/2) shares of CVB
Stock (the "Conversion Ratio"). ONB Perfected Dissenting Shares shall not be
converted into shares of CVB Stock in accordance with the Conversion Ratio, but
shall, after the Effective Time of the Merger, be entitled to only such rights
as are granted to them by Chapter 13 of the California General Corporation Law.
Shares of ONB Stock held by CVB or CBB, if any (other than those held in a
fiduciary capacity or as a result of debts previously contracted), shall be
canceled and no consideration shall be issued in exchange therefor.
No fractional shares of CVB Stock shall be issued in the Merger. In lieu
thereof, each holder of ONB Stock who would otherwise be entitled to receive a
fractional share shall receive an amount in cash, rounded to the nearest
hundredth, equal to the product obtained by multiplying (a) the Average Closing
Price times (b) the fraction of the share of CVB Stock to which such holder
would otherwise be entitled. No such holder shall be entitled to dividends or
other rights in respect to any such fraction.
At and on the Effective Time of the Bank Merger, Orange shall be merged
with and into CBB in accordance with the terms of the Agreement of Bank Merger
and in accordance with the applicable provisions of the California General
Corporation Law and the California Financial Code and the separate corporate
existence of Orange shall cease. CBB shall be the surviving entity. CBB shall
succeed, without other transfer, to all the rights and property of Orange and
shall be subject to all the debts and liabilities of Orange in the same manner
as if CBB had itself incurred them. Each share of CBB Stock issued and
outstanding immediately prior to the Effective Time of the Bank Merger shall
remain an issued and outstanding share of common stock of CBB and shall not be
converted or otherwise affected by the Bank Merger. Each share of Orange Stock
issued and outstanding immediately prior to the Effective Time of the Bank
Merger shall, on and after the Effective Time of the Bank Merger, be
automatically canceled and cease to be an issued and outstanding share of Orange
Stock.
Our analysis and the opinions set forth herein are based upon the facts
as set forth in that certain Agreement and that certain Agreement of Bank Merger
referred to above, including the exhibits thereto. Our analysis and opinions are
also based on certain representations in the Agreement and certain written
representations to us from CVB and ONB
<PAGE> 3
MANATT, PHELPS & PHILLIPS, LLP
Board of Directors
June 8, 1999
Page 3
in letters of even date herewith. Our analysis and opinions are further based on
that certain Registration Statement on Form S-4 filed with the Securities and
Exchange Commission to register the shares of CVB Stock to be issued in the
Merger under the Securities Act of 1933, as amended, including the Proxy
Statement and Prospectus in connection with the ONB Shareholders' Meeting and
the CVB Shareholders' Meeting (the "Form S-4"). The facts contained in the
above-referenced documents are incorporated herein by reference as the operative
facts underlying the tax opinions set forth herein. One of our key assumptions
for purposes of this letter is that the facts set forth in those documents are
accurate on the date of this analysis and remain accurate to the date of the
closing of the Merger and the Bank Merger and are otherwise true, complete, and
correct. Any change or inaccuracy in such facts may adversely affect our
opinions.
We have acted as special counsel to CVB in connection with the Merger
and are rendering these opinions to CVB and to ONB at their request. In
rendering these opinions, we have examined such documents, laws, regulations and
other legal matters as we have considered necessary or appropriate for purposes
of the opinions expressed herein. We have not made any independent investigation
in rendering these opinions other than as described herein.
Our opinions are based upon the Internal Revenue Code of 1986, as
amended (the "Code"), as of the date hereof and currently applicable Treasury
Regulations promulgated under the Code (including proposed Treasury
Regulations), published administrative positions of the Internal Revenue Service
in revenue rulings and revenue procedures, and judicial decisions. Such legal
authorities are all subject to change, either prospectively or retroactively. No
assurance can be provided as to the effect of any such change upon our opinions.
We have undertaken no obligation to update our opinions expressed herein.
The opinions set forth herein have no binding effect on the Internal
Revenue Service or the courts. No assurance can be given that, if contested, a
court would agree with the opinions set forth herein. The opinions set forth
herein represent rather our best legal judgment as to the likely outcome of the
issues addressed herein if such issues were litigated and all appeals exhausted.
In the case of transactions as complex as the Merger and the Bank
Merger, many federal, state and local income and other tax consequences arise.
We have been asked only to address the issues specifically set forth below. No
opinion is expressed regarding any other issues.
This letter is being issued solely for the benefit of CVB and ONB and
for the benefit of the CVB and ONB shareholders as of the date of the Merger. It
may not be relied upon by any other person without our prior written consent.
<PAGE> 4
MANATT, PHELPS & PHILLIPS, LLP
Board of Directors
June 8, 1999
Page 4
Subject to the foregoing, it is our opinion that the Merger will be a
tax-deferred reorganization within the meaning of Section 368(a)(1)(A) of the
Code and shall not result in the recognition of gain or loss for federal income
tax purposes to CVB or ONB, nor shall the issuance of the CVB Stock in the
Merger in exchange for shares of ONB Stock result in the recognition of gain or
loss by the holders of ONB Stock who receive such stock in connection with the
Merger; provided, however, that holders of ONB Stock may be taxable as a result
of the receipt of cash in lieu of fractional shares. The Bank Merger shall not
result in the recognition of gain or loss for federal income tax purposes to
CVB, CBB, ONB, or Orange. The section titled "Material Federal Income Tax
Consequences" in the Form S-4 accurately summarizes the material federal income
tax consequences of the Merger and the Bank Merger.
We hereby consent to the filing of a form of this opinion with the
Securities and Exchange Commission as an exhibit to the Form S-4 to be filed in
connection with the Merger and the Bank Merger.
Very truly yours,
/s/ Manatt, Phelps & Phillips, LLP
DJF/abb
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
CVB Financial Corp. on Form S-4 of our report, dated January 29, 1999, on the
consolidated balance sheets of CVB Financial Corp. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998 appearing in the Annual Report on Form 10-K of CVB
Financial Corp. for the year ended December 31, 1998, incorporated by reference
in the Proxy Statement-Prospectus, which is part of this Registration Statement,
and to the reference to us under the headings "Selected Financial Data" and
"Experts" in such Proxy Statement-Prospectus.
/s/ Deloitte & Touche LLP
June 10, 1999
Los Angeles, California
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 filed on
or about June 8, 1999 of our report dated January 22, 1999, except for the last
paragraph of Note 10 as to which the date is February 11, 1999, relating to the
consolidated financial statements of Orange National Bancorp and subsidiary. We
also consent to the reference to our Firm under the caption "Experts" in the
Prospectus.
/s/ McGladrey & Pullen, LLP
Anaheim, California
June 8, 1999
<PAGE> 1
EXHIBIT 99.1
CVB FINANCIAL CORP.
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ________, 1999
THE BOARD OF DIRECTORS OF CVB FINANCIAL IS SOLICITING THIS PROXY
I/we hereby nominate, constitute and appoint George Borba and
James C. Seley and each of them, their attorneys, agents and proxies, with full
powers of substitution to each, to attend and act as proxy or proxies at the
1999 Special Meeting of Shareholders of CVB FINANCIAL CORP. which will be held
at ______________, on ________, 1999 at ___: a.m, and at any and all
adjournments thereof, and to vote as I/we have indicated the number of shares
which I/we, if personally present, would be entitled to vote.
PURPOSES:
1. MERGER WITH ORANGE NATIONAL BANCORP.
To approve the Agreement and Plan of Reorganization between
Orange National Bancorp and CVB Financial Corp. Under this merger agreement,
Orange National Bancorp will merge into CVB Financial Corp. and Orange National
Bank will merge into Citizens Business Bank.
FOR [ ]
AGAINST [ ]
ABSTAIN [ ]
2. OTHER BUSINESS. In their discretion, the Proxies are
authorized to vote upon such other business as may properly come before the
Special Meeting and at any and all adjournments thereof. IF ANY OTHER MATTER IS
PRESENTED, YOUR PROXY WILL VOTE IN ACCORDANCE WITH THE RECOMMENDATION OF THE
BOARD OF DIRECTORS, OR, IF THE BOARD OF DIRECTORS GIVES NO RECOMMENDATION, IN
THEIR OWN DISCRETION. The Board of Directors at present knows of no other
business to be presented at the Special Meeting.
PLEASE SIGN AND DATE ON REVERSE SIDE
<PAGE> 2
PLEASE SIGN AND DATE BELOW
I/we hereby ratify and confirm all that said attorneys and
proxies, or any of them, or their substitutes, shall lawfully do or cause to be
done because of this proxy, and hereby revoke any and all proxies I/we have
given before to vote at the meeting. I/we acknowledge receipt of the notice of
Special Meeting and the Proxy Statement which accompanies the notice. Dated:
_________________, 1999.
Signed: ______________________________
Signed: ______________________________
Please date this Proxy and sign above as your name(s) appear(s)
on this card. Joint owners should each sign personally. Corporate proxies should
be signed by an authorized officer. Executors, administrators, trustees, etc.,
should give their full titles. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE APPROVAL OF THE MERGER AGREEMENT WITH ORANGE NATIONAL BANCORP. THE PROXY,
WHEN PROPERLY EXECUTED ,WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS MADE, IT
WILL BE VOTED "FOR" THE APPROVAL OF THE MERGER AGREEMENT WITH ORANGE NATIONAL
BANCORP.
<PAGE> 1
PROXY EXHIBIT 99.2
ORANGE NATIONAL BANCORP
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD _________, 1999
THE BOARD OF DIRECTORS OF
ORANGE NATIONAL BANCORP IS SOLICITING THIS PROXY
I/we hereby nominate, constitute and appoint Gerald R. Holte and Wayne F.
Miller and each of them, their attorneys, agents and proxies, with full powers
of substitution to each, to attend and act as proxy or proxies at the 1999
Special Meeting of Shareholders of ORANGE NATIONAL BANCORP which will be held
at _____________, on _______, 1999 at _____: a.m., and at any and all
adjournments thereof, and to vote as I/we have indicated the number of shares
which I/we, if personally present, would be entitled to vote.
PLEASE SIGN AND DATE ON REVERSE SIDE
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE> 2
Please mark [X]
your votes as
indicated in
this example.
PURPOSES:
1. MERGER WITH CVB FINANCIAL CORP. To approve the Agreement and Plan of
Reorganization between Orange National Bancorp and CVB Financial Corp.
Under this merger agreement, Orange National Bancorp will merge into CVB
Financial Corp. and Orange National Bank will merge into Citizens Business
Bank.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. OTHER BUSINESS. In their discretion, the Proxies are authorized to vote
upon such other business as may properly come before the Special Meeting
and at any and all adjournments thereof. IF ANY OTHER MATTER IS PRESENTED,
YOUR PROXY WILL VOTE IN ACCORDANCE WITH THE RECOMMENDATION OF THE BOARD OF
DIRECTORS, OR, IF THE BOARD OF DIRECTORS GIVES NO RECOMMENDATION, IN THEIR
OWN DISCRETION. The Board of Directors at present knows of no other
business to be presented at the Special Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE MERGER
AGREEMENT WITH CVB FINANCIAL CORP. THE PROXY, WHEN PROPERLY EXECUTED, WILL BE
VOTED AS DIRECTED, IF NO DIRECTION IS MADE, IT WILL BE VOTED "FOR" THE APPROVAL
OF THE MERGER AGREEMENT WITH CVB FINANCIAL CORP.
PLEASE SIGN AND DATE BELOW
I/we hereby ratify and confirm all that said attorneys and proxies, or any of
them, or their substitutes, shall lawfully do or cause to be done because of
this proxy, and hereby revoke any and all proxies I/we have given before to
vote at the meeting. I/we acknowledge receipt of the notice of Special Meeting
and the Proxy Statement which accompanies the notice.
Signed: ____________________ Signed: ____________________ Dated: ________, 1999
Please date this Proxy and sign above as your name(s) appear(s) on this card.
Joint owners should each sign personally. Corporate proxies should be signed by
an authorized officer. Executors, administrators, trustees, etc., should give
their full titles.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
