<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
PRE-EFFECTIVE AMENDMENT NO. 1
Registration Statement Under the Securities Act of 1933
CERRITOS VALLEY BANCORP
(Exact Name of Registrant as Specified in Its Charter)
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<CAPTION>
CALIFORNIA 6021 95-4216236
- --------------------------------- --------------------------- -------------------
<S> <C> <C>
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
12100 FIRESTONE BOULEVARD, NORWALK, CALIFORNIA 90650, (562) 868-3221
--------------------------------------------------------------------
(Address and Telephone Number of Principal Executive Offices)
12100 FIRESTONE BOULEVARD, NORWALK, CALIFORNIA 90650
----------------------------------------------------
(Address of Principal Place of Business)
JAMES N. KOURY, PRESIDENT & CEO
12100 FIRESTONE BOULEVARD, NORWALK, CALIFORNIA 90650, (562) 868-3221
--------------------------------------------------------------------
(Name, Address and Telephone of Agent for Service)
Copy to:
Laura Dean-Richardson, Esq., Gary Steven Findley & Associates
1470 North Hundley Street, Anaheim, California 92806, (714) 630-7136
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date.
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
<TABLE>
<CAPTION>
Title of each Class Proposed Maximum Proposed Maximum
of Securities to Amount to be Offering Price Aggregate Amount of
Be Registered Registered(a) Per Unit Offering Price Registration Fee
<S> <C> <C> <C> <C>
Common stock(1) 1,152,937 Not applicable Not applicable $9,141.13(2)
(No Par Value)
Warrants 86,000 $0.01 $860.00 $ .24
</TABLE>
(1) This Registration Statement relates to (i) 543,959 shares of common stock
of Registrant and 81,000 shares of common stock of Registrant that may be
acquired by exercise of warrants issuable to California Financial
Institutions Fund Limited Partnership (the "California Fund") and (ii)
527,978 shares of common stock of Registrant issuable to holders of
existing shares of common stock of Registrant, in the proposed merger of
Registrant with a subsidiary of the California Fund.
(2) Based upon the estimated maximum number of shares of Registrant's common
stock required to be issued to the California Fund and Registrant's
existing shareholders under the agreement providing for the merger.
Pursuant to Rule 457(f)(1) and (g), the registration fee was computed on
the basis of the sum of the merger price per share of $28.52 multiplied by
the number of shares of Registrant's common stock registered. $9,138.99 was
previously paid with the original filing.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant 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.
<PAGE>
___________, 1999
Dear Shareholders:
You are cordially invited to attend the annual meeting of shareholders
of Cerritos Valley Bancorp which we will hold at Cerritos Valley Bank's
principal office located at 12100 Firestone Boulevard, Norwalk, California on
Tuesday, August 17, 1999 at 4:00 p.m. At the meeting, we will ask the
shareholders to:
- - approve the merger between Cerritos Valley and the California Fund.
Upon completion of the merger, each outstanding share of Cerritos
Valley common stock will be converted into cash in the amount of
$13.4871 and 0.5271 shares of Cerritos Valley common stock. The last
sales price of Cerritos Valley common stock was $8.50, which reflects
a sale that occurred on September 30, 1998. In addition, upon
completion of the merger, Cerritos Valley will issue 543,959 shares of
Cerritos Valley common stock to the California Fund for a purchase
price of $23.53 per share and a warrant to acquire an additional 86,000
shares of Cerritos Valley common stock for a purchase price of $0.01
per share. Existing shareholders of Cerritos Valley will be taxed
on a portion of the proceeds of the merger as discussed in the enclosed
proxy statement/prospectus;
- - elect ten directors to serve until the next annual meeting of
shareholders; and
- - approve an increase in the range of the number of directors from 8 to
11, to 8 to 15.
The terms of the agreement are included in the enclosed proxy statement
and prospectus of Cerritos Valley, and in the agreement which is included as
Exhibit I to the proxy statement/prospectus. Please give the proxy
statement/prospectus your careful attention. Your Board of Directors has
unanimously approved the merger and recommends that you vote to approve it as
well.
Sincerely,
James N. Koury
President and CEO
THE SECURITIES ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE
PRINCIPAL INVESTED. FOR A DISCUSSION OF MATERIAL RISKS, SEE "RISK FACTORS" ON
PAGE __.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE MERGER DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS
OR THE CERRITOS VALLEY COMMON STOCK TO BE ISSUED IN THE MERGER, NOR HAVE THEY
DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this proxy statement/prospectus is
________, 1999 and is first being mailed to
shareholders on or about ________, 1999
<PAGE>
CERRITOS VALLEY BANCORP
12100 FIRESTONE BOULEVARD
NORWALK, CALIFORNIA 90650
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 17, 1999
To the Shareholders of Cerritos Valley Bancorp:
The annual meeting of shareholders of Cerritos Valley Bancorp will be
held at 4:00 p.m. on Tuesday, August 17, 1999, at the principal offices of
Cerritos Valley Bank located at 12100 Firestone Boulevard, Norwalk, California,
for the following purposes:
1. Approving the Agreement and Plan of Reorganization and Merger dated as
of February 12, 1999, between Belvedere Capital Partners, Inc.,
Cerritos Merger Co., Cerritos Valley and Cerritos Valley Bank. The
agreement provides for the merger of Cerritos Merger Co. with Cerritos
Valley and the conversion of each outstanding share of Cerritos Valley
common stock into $13.4871 and 0.5271 shares of Cerritos Valley common
stock;
2. Electing 10 people to Cerritos Valley's Board of Directors;
3. Approving an increase in the range of the number of directors from
eight to eleven, to eight to fifteen; and
4. Transacting other business that may properly come before the meeting or
any adjournment or postponement of the meeting.
You are entitled to notice of and to vote at the meeting and any
postponements or adjournments if you were listed in Cerritos Valley's records as
a holder of Cerritos Valley common stock at the close of business on June 30,
1999.
If the merger is completed and you comply with the requirements of
Chapter 13 of the California General Corporation Law, you may have dissenters'
rights giving you the right to receive from Cerritos Valley cash payment of the
fair market value of your shares determined in accordance with Chapter 13.
Belvedere Capital may terminate the merger if more than 10% of the shareholders
properly exercise dissenters' rights. See "Description of the Merger--Rights of
Dissenting Shareholders" in the attached proxy statement/prospectus for a
discussion of the availability of dissenters' rights and a description of the
procedures which you must follow to enforce those rights under Chapter 13. A
copy of Chapter 13 is included as Exhibit III in the attached proxy
statement/prospectus.
IT IS VERY IMPORTANT THAT EVERY SHAREHOLDER VOTES. WE URGE YOU TO MARK,
SIGN, DATE AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT
YOU PLAN TO ATTEND THE MEETING IN PERSON.
Dated: July 26, 1999 By Order of the Board of Directors,
Ellen Toma, Secretary
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers About the Merger........................................................................ 1
Summary....................................................................................................... 2
Risk Factors.................................................................................................. 10
Forward-Looking Statements.................................................................................... 13
The Meeting................................................................................................... 14
Matters to be Considered at the Shareholders' Meeting................................................ 14
Record Date.......................................................................................... 14
Outstanding Securities and Voting Rights............................................................. 14
Recommendations of the Board of Directors............................................................ 15
Revocability of Proxies.............................................................................. 15
Cost of Solicitation of Proxies...................................................................... 15
Beneficial Ownership of Principal Shareholders and Management........................................ 16
Description of the Merger..................................................................................... 18
General ............................................................................................ 18
Background and Reasons for the Merger................................................................ 18
Exchange of Shares and Options....................................................................... 19
Interests of Certain Persons in the Merger and
Material Contracts with Cerritos Valley and its Affiliates.................................. 22
The California Fund Warrants......................................................................... 23
Regulatory Approval and Completion of the Merger..................................................... 23
Conditions to the Merger............................................................................. 24
Waiver, Amendment, and Termination................................................................... 25
Liquidated Damages................................................................................... 26
Opinion of Financial Advisor......................................................................... 26
Federal and California Income Tax Consequences....................................................... 30
Rights of Dissenting Shareholders.................................................................... 32
Description of the Capital Stock of Cerritos Valley........................................................... 35
Cerritos Valley Following the Merger................................................................. 35
Market Prices................................................................................................. 36
Dividends..................................................................................................... 37
Pro Forma Financial Statements................................................................................ 38
Regulatory Capital Adequacy................................................................................... 45
</TABLE>
<PAGE>
TABLE OF CONTENTS
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PAGE
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<S> <C>
Description of Cerritos Valley................................................................................ 46
Business ............................................................................................ 46
Supervision and Regulation........................................................................... 48
Summary of Earnings.................................................................................. 51
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................... 53
Management........................................................................................... 83
Certain Transactions................................................................................. 87
Competition.......................................................................................... 88
Effect of Governmental Policies and Recent Legislation............................................... 88
Current Accounting Developments...................................................................... 89
Recent Legislation and Other Changes................................................................. 89
Pending Legislation and Regulations.................................................................. 91
Description of Belvedere Capital and the California Fund...................................................... 92
Description of Cerritos Valley Following the Merger........................................................... 94
Business ............................................................................................ 94
Management........................................................................................... 94
Limitation of Liability and Indemnification.......................................................... 94
Independent Public Accountants....................................................................... 95
Proposal 2:
Election of Directors................................................................................ 96
Nominees ............................................................................................ 96
Proposal 3:
Increase in the Range of the Number of Directors..................................................... 98
Experts ..................................................................................................... 99
Legal Matters................................................................................................. 99
Other Business.................................................................................................99
Index to Financial Statements................................................................................ 100
</TABLE>
Exhibit I Agreement and Plan of Reorganization and Merger by
and among Belvedere Capital Partners, Inc., as
General Partner and on behalf of the California
Financial Institutions Fund Limited Partnership,
Cerritos Merger Co., Cerritos Valley Bancorp and
Cerritos Valley Bank
Exhibit II Opinion of Gerry Findley Incorporated.
Exhibit III Sections 1300-1312 of the California General Corporation Law
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q1. What will happen to my shares of Cerritos Valley common stock in the
merger?
A. If the merger is approved, each outstanding share of Cerritos Valley
common stock will be converted into cash in the amount of $13.4871 and
0.5271 shares of Cerritos Valley common stock.
Q2. What do I need to do now? Should I send in my stock certificates now?
A. You need to read this proxy statement/prospectus, complete and sign
your proxy card and mail it to us in the enclosed return envelope as
soon as possible. You should not send your stock certificates in now.
If the merger is completed, Cerritos Valley will send you written
instructions for exchanging your shares of common stock.
Q3. How much cash will I receive if the merger is completed?
A. You will receive $13.4871 for each share of Cerritos Valley common
stock and you will receive cash for the fractional share of Cerritos
Valley common stock to be issued in the merger.
Q4. When do you expect the merger to be completed?
A. We expect the merger to be completed by August 31, 1999.
1
<PAGE>
SUMMARY
This summary highlights selected information from this document and does not
contain all of the information that is important. To understand the merger
fully and for a more complete description of the legal terms of the merger,
you should read this entire document and the documents to which we have
referred you. See also, "Who Can Help Answer Your Questions" on page _.
THE COMPANIES (PAGES __ AND __)
CERRITOS VALLEY BANCORP
12100 Firestone Boulevard
Norwalk, California 90650
(562) 868-3221
Cerritos Valley is headquartered in Norwalk, California and is the sole
shareholder of Cerritos Valley Bank which serves Los Angeles and Orange
Counties. At March 31, 1999, Cerritos Valley had assets of $128.3 million.
BELVEDERE CAPITAL PARTNERS LLC
One Maritime Plaza, Suite 825
San Francisco, California 94111
(415) 434-1236
Belvedere Capital is headquartered in San Francisco.
CALIFORNIA COMMUNITY FINANCIAL INSTITUTIONS FUND LIMITED PARTNERSHIP
One Maritime Plaza, Suite 825
San Francisco, California 94111
(415) 434-1236
The California Fund is headquartered in San Francisco, California. Following
the merger, the California Fund will be the majority shareholder of Cerritos
Valley, owning 55% of the outstanding shares of Cerritos Valley common stock.
The California Fund also owns a controlling interest in four other banks.
THE MERGER (PAGE __)
The merger is solely a change in ownership of Cerritos Valley. The businesses of
Cerritos Valley and Cerritos Valley Bank will continue after the merger with the
same names and will continue to serve Los Angeles and Orange Counties.
Cerritos Valley shareholders will, after completion of the merger, receive for
each share of Cerritos Valley common stock, cash and stock of Cerritos Valley.
If the merger is completed, the existing shareholders of Cerritos Valley will
own approximately 45% of Cerritos Valley, and the California Fund will become
the largest single shareholder of Cerritos Valley and will own approximately 55%
of the outstanding shares of Cerritos Valley common stock. However, this
2
<PAGE>
percentage will decrease to 51% in the event that James N. Koury exercises
one-half of his option to purchase 150,000 shares of Cerritos Valley common
stock.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE __)
Certain members of the Board of Directors of Cerritos Valley may have a
substantial interest in the merger. Cerritos Valley has agreed to purchase
75,000 shares of Cerritos Valley common stock from James N. Koury at the cash
price of $28.52 per share after completion of the merger. Each director of
Cerritos Valley has entered into an agreement with Belvedere Capital that the
director will recommend that the shareholders of Cerritos Valley approve the
agreement and the director will vote all shares of Cerritos Valley common
stock as to which the director has voting power in favor of the agreement.
Each director of Cerritos Valley also delivered an irrevocable proxy to
Belvedere Capital in connection with the agreement.
The Boards of Directors of Cerritos Valley and Cerritos Valley Bank have also
agreed to cause two nominees to be selected by Belvedere Capital to be appointed
to the Boards of Directors of Cerritos Valley and Cerritos Valley Bank.
FINANCIAL ADVISOR ISSUES OPINION THAT MERGER CONSIDERATION IS FAIR (PAGES _____)
Gerry Findley Incorporated has issued a fairness opinion that states that the
terms of the agreement are fair, from a financial point of view, to the
shareholders of Cerritos Valley. Cerritos Valley paid Gerry Findley Inc.
$10,000 for its opinion. Gerry Findley, principal of Gerry Findley Inc. is
the father of Gary Steven Findley. Gary Steven Findley & Associates is
counsel to Cerritos Valley. Cerritos Valley was aware of Mr. Gerry Findley's
relationship with Mr. Gary Findley and does not believe there is a conflict.
Mr. Gerry Findley did not participate in the negotiations for the merger.
Gerry Findley Inc. is a well known investment banking firm and has provided
fairness opinions in similar transactions.
We encourage you to read this opinion carefully.
THE BOARD EXPECTS THE MERGER TO BE TAXABLE TO SHAREHOLDERS (PAGES _____)
For federal and California income tax purposes, existing shareholders of
Cerritos Valley will be treated as engaging in two transactions. First, a
portion of the shares will be deemed sold to the California Fund in a sale
transaction. Second, the shareholders will be treated as transferring the
balance of their shares to Cerritos Valley in exchange for new Cerritos Valley
shares plus the cash supplied by Cerritos Valley in a recapitalization
transaction. A shareholder's gain or loss recognized from the sale transaction
will equal the difference between the amount of cash deemed received by such
shareholder in the sale transaction and the tax basis of the stock deemed sold
in the sale transaction. The gain recognized to the shareholder in the
recapitalization transaction will equal the lower of the gain realized from such
transaction or the cash deemed received by the shareholder from Cerritos Valley.
See also, "Description of the Merger--Federal and California Income Tax
Consequences."
3
<PAGE>
REQUIREMENTS TO BE MET IN THE MERGER (PAGES _____)
There are a number of requirements which must be met before the merger is
completed. Among these requirements are the following:
- - shareholder approvals of the agreement must be obtained;
- - all necessary banking regulatory agency approvals must be obtained;
- - opinions of counsel of the parties must be issued stating that the
merger has been properly approved by the party for whom the opinion is
issued and that there is no known violation of law in connection with
the completion of the merger;
- - no lawsuit or threatened lawsuit regarding the merger shall be
pending; and
- - the holders of no more than 10% of the outstanding shares of Cerritos
Valley common stock shall have exercised dissenters' rights in the
merger.
MERGER TO BE ACCOUNTED FOR AS A RECAPITALIZATION (PAGE __)
Cerritos Valley will account for the merger as an issuance of shares of
Cerritos Valley common stock and a redemption of shares from, and a deemed
dividend to, its existing shareholders. This transaction will be taxable to
the shareholders of Cerritos Valley. See also, "Description of the
Merger--Federal and California Income Tax Consequences."
APPRAISAL RIGHTS IN THE MERGER (PAGES _______ AND EXHIBIT III)
Shareholders of Cerritos Valley may dissent from the merger and demand payment
in cash equal to the fair value of their shares. You may dissent by voting
against, abstaining or not voting in favor of the merger. You must also write a
letter to Cerritos Valley requesting the purchase of your dissenting shares and
send the letter so that it is received within 30 days of the date of a notice
that we will send to you announcing the approval by shareholders of the merger.
RECOMMENDATIONS TO SHAREHOLDERS (PAGE __)
Cerritos Valley's Board of Directors unanimously recommends a vote "FOR"
approval of the merger.
THE MEETING
The meeting will be held at 12100 Firestone Boulevard, Norwalk, California, at
4:00 p.m., on Tuesday, August 17, 1999.
RECORD DATE, VOTING POWER AND VOTE REQUIRED (PAGE 24)
On June 30, 1999, the record date for the meeting, there were 1,001,667 shares
of Cerritos Valley common stock outstanding. As of the date of the agreement,
there were 991,667 shares of Cerritos Valley common stock outstanding. The
10,000 share difference results from the
4
<PAGE>
exercise of an option for 10,000 shares by Mr. Thomas Yott, a former
executive officer of Cerritos Valley, in May of 1999. Approval of the merger
requires the affirmative vote of the holders of a majority of the outstanding
shares of Cerritos Valley common stock and approval by the California Fund as
sole shareholder of Cerritos Merger Co. In the election of directors, the ten
nominees for directors receiving the most votes will be elected directors.
The approval of an increase in the range of the number of directors also
requires the affirmative vote of the holders of a majority of the outstanding
shares of Cerritos Valley common stock.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the merger you should contact James N. Koury,
President and Chief Executive Officer of Cerritos Valley at Cerritos Valley
Bancorp, 12100 Firestone Boulevard, Norwalk, California 90650, telephone number
(562) 868-3221.
ORGANIZATIONAL CHART
Companies before the merger:
-------------- --------------
Cerritos The
Valley California
Bancorp Fund
-------------- --------------
-------------- --------------
Cerritos Cerritos
Valley Merger
Bank Co.
-------------- --------------
Companies after the merger is completed:
--------------
The
California
Fund
--------------
--------------
Cerritos
Valley
Bancorp
--------------
--------------
Cerritos
Valley
Bank
--------------
5
<PAGE>
SUMMARY OF FINANCIAL INFORMATION
The following table shows selected consolidated financial and other data of
Cerritos Valley as of and for each of the years in the five years ended December
31, 1998, and as of and for the three months ended March 31, 1999 and 1998. In
management's opinion, the unaudited consolidated financial statements reflect
all adjustments, consisting only of normally recurring adjustments, necessary
for a fair statement of the results for the three month periods. Results for the
three months ended March 31, 1999 do not necessarily represent the results that
will be achieved for the entire year.
The financial information presented includes the following sections:
- - Summary of Earnings - This section shows the significant components of
earnings.
- - Financial Position - This section shows significant assets,
liabilities and shareholders' equity.
- - Per Share Data - This section shows net earnings and shareholders'
equity on a per share basis.
- - Basic earnings per share reflects net earnings divided by the
weighted-average shares of common stock outstanding during the period.
Diluted earnings per share reflects the potential reduction in income
per share that could occur if stock options currently outstanding were
exercised and resulted in the issuance of stock that also shared in net
earnings.
- - Book value is determined by dividing total shareholders' equity by the
number of shares outstanding at the end of the period presented.
- - Selected Financial Ratios - This section includes ratios showing the
return on average assets and return on average shareholders' equity,
which are commonly used to evaluate the performance of companies.
- - In the pro forma financial data table, pro forma book value per share
is determined by dividing the pro forma total shareholders' equity by
the number of shares outstanding following the completion of the
merger.
This summary should be read with the Financial Statements and notes to the
Financial Statements included at the end of this proxy statement/prospectus.
6
<PAGE>
COMPARATIVE HISTORICAL FINANCIAL
DATA FOR CERRITOS VALLEY
<TABLE>
<CAPTION>
(Dollars in thousands, Three
except per share numbers) Months Ended Year Ended
March 31, December 31,
------------------- -------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF EARNINGS:
Net interest income $ 1,501 $ 1,403 $ 5,946 $ 5,316 $ 5,012 $ 5,264 $ 4,939
Provision for credit losses 85 75 310 750 604 2,208 217
Noninterest income 384 335 1,563 1,515 2,337 1,704 905
Noninterest expense 1,204 1,070 4,707 4,310 5,117 4,980 5,026
Net earnings $ 352 $ 366 $ 1,538 $ 1,509 $ 1,015 $ (113) $ 351
FINANCIAL POSITION
(at end of period):
Total assets $128,276 $107,272 $ 125,834 $101,539 $90,571 $91,769 $ 97,376
Total net loans and leases 63,796 53,085 61,119 50,123 40,690 45,077 55,238
Total deposits 100,399 92,412 98,732 86,680 79,307 81,984 87,465
Total shareholders' equity $ 12,545 $ 11,344 $ 12,417 $ 10,975 $ 9,377 $ 8,494 $ 8,543
PER SHARE DATA:
Net earnings-basic $ 0.35 $ 0.37 $ 1.54 $ 1.51 $ 1.01 $ (0.11) $ 0.43
Net earnings-diluted 0.32 0.34 1.41 1.42 0.99 (0.11) 0.43
Book value per share $ 12.65 $ 11.34 $ 12.52 $ 10.98 $ 9.38 $ 8.49 $ 8.54
SELECTED FINANCIAL RATIOS:
Return on average assets 1.11% 1.42% 1.37% 1.59% 1.12% (0.13%) 0.37%
Return on average
shareholders' equity 11.27% 13.07% 13.09% 15.34% 11.62% (1.21%) 4.13%
</TABLE>
7
<PAGE>
The following table summarizes the pro forma financial information shown at "Pro
Forma Financial Statements" as if the merger had taken place as of January 1,
1998. The management of Cerritos Valley and the management of the California
Fund believe its merger expenses will be approximately $200,000 and $125,000,
respectively. This pro forma information is not necessarily representative of
Cerritos Valley's financial position and results of operations had the merger
been completed as of January 1, 1998.
PRO FORMA FINANCIAL DATA
CERRITOS VALLEY AND CERRITOS MERGER CO.
<TABLE>
<CAPTION>
(Dollars in thousands, Three
except per share numbers) Months Ended Year Ended
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
PER SHARE DATA:
Net earnings-basic $0.35 $1.39
Net earnings-diluted $0.29 $1.16
Book value per share $9.56 $9.43
</TABLE>
8
<PAGE>
MARKET PRICE OF CERRITOS VALLEY COMMON STOCK
Cerritos Valley common stock is not listed on any stock exchange, nor is it
listed with NASDAQ. Cerritos Valley common stock does not have an active trading
market, and there is no established public market for Cerritos Valley common
stock. The following table shows the average of the last reported bid and asked
price per share for Cerritos Valley common stock on February 16, 1999, the
trading day prior to the public announcement of the merger and equivalent pro
forma market value per share of Cerritos Valley common stock following the
merger. The equivalent pro forma market value per share has been calculated by
adding $13.4871, which will be paid to the shareholders in cash, plus $15.0329
which represents the fair market value of 0.5271 shares of Cerritos Valley
common stock. Cerritos Valley and Belvedere Capital agreed that the merger
consideration for a whole share of Cerritos Valley common stock would be $28.52.
The $28.52 merger consideration was determined by adding $12,800,000 to be
contributed by the California Fund, plus the then proposed dividend of
$2,500,000 from Cerritos Valley, plus $212,500 for options, and dividing that
amount by the sum of 991,667 shares outstanding plus 75,000 shares to be issued
to Mr. Koury upon the exercise of his right to purchase shares, and multiplying
that total by 0.51. The $212,500 amount for options was determined by starting
with $450,000 to be delivered to Cerritos Valley by Mr. Koury upon the exercise
of Mr. Koury's right to purchase 75,000 shares at $6.00 per share, and
subtracting from that amount $237,500 to be paid by Cerritos Valley to the
option holders for the cancellation of one-half of their outstanding options to
purchase 22,000 shares of Cerritos Valley common stock. Of the 11,000 options to
be canceled, options for 6,000 shares would be paid out at $22.50 per share for
a total of $135,000 and options for 5,000 shares would be paid out at $20.50 per
share for a total of $102,500. The formula is as follows:
<TABLE>
<CAPTION>
$12,800,000 + $2,500,000 + [$450,000 - ($135,000 + $102,500)] = $15,512,500 = $28.52
------------------------------------------------------------- -----------
<S> <C> <C>
(991,667 + 75,000) X 0.51 544,000
</TABLE>
See also, "The Meeting--Outstanding Securities and Voting Rights" and
"Description of the Merger--Exchange of Shares and Options. "
<TABLE>
<CAPTION>
Historical Equivalent Pro Forma
Market Value Per Share Market Value
---------------------- ---------------------
<S> <C> <C>
February 16, 1999 $8.50 $28.52
</TABLE>
9
<PAGE>
RISK FACTORS
THE CALIFORNIA FUND WILL OWN A MAJORITY INTEREST IN CERRITOS VALLEY AND WILL
BE IN A POSITION TO CONTROL CERRITOS VALLEY AFTER THE MERGER. The California
Fund will own a minimum of 51% of the outstanding shares of Cerritos Valley
common stock following the merger. The California Fund will then be able to
control, govern and manage Cerritos Valley, will be in a position to elect a
majority of the directors, will have the power to cause a change in control
of Cerritos Valley and could take other actions that might be favorable to
the California Fund but may not be favorable to the other shareholders. In
addition, the California Fund will have the power to prevent a change in
control of Cerritos Valley, even at a premium price, if it chooses to oppose
it.
DETERIORATION OF LOCAL ECONOMIC CONDITIONS COULD HURT PROFITABILITY OF
CERRITOS VALLEY BANK. The operations of Cerritos Valley are primarily located
in Southern California and are concentrated in the cities of Norwalk,
Artesia, Huntington Park and Glendale and the surrounding cities. As a result
of this geographic concentration, Cerritos Valley's results depend largely
upon economic conditions in these cities. Adverse local economic conditions
in these cities may have a material adverse effect on the financial condition
and results of operations of Cerritos Valley.
FINANCIAL SERVICES BUSINESS IS HIGHLY COMPETITIVE WHICH COULD ADVERSELY
AFFECT CERRITOS VALLEY BANK'S EARNINGS AND PROFITABILITY AND STOCK PRICE OF
CERRITOS VALLEY. The banking and financial services business in California
generally, and Cerritos Valley's market areas specifically, is highly
competitive. Cerritos Valley competes for loans, deposits and customers for
financial services with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions and
other nonbank financial service providers. Many of these competitors are much
larger in total assets and capitalization, have greater access to capital
markets and offer a broader array of financial services than Cerritos Valley.
There can be no assurance that Cerritos Valley will be able to compete
effectively in its market, and the results of operations of Cerritos Valley
could be materially and adversely affected if circumstances affecting the
nature or level of competition change. See "Description of Cerritos
Valley--Competition."
LOAN LOSSES COULD HURT BANK'S OPERATING RESULTS. A significant source of risk
for financial institutions like Cerritos Valley arises from the possibility
that losses will be sustained because borrowers, guarantors and related
parties fail to perform in accordance with the terms of their loans. Cerritos
Valley's loan portfolio consists primarily of commercial and real estate
secured loans. These types of loans are susceptible to losses for Cerritos
Valley if the borrower's economic condition declines sharply. Cerritos Valley
can incur losses in the real estate portfolio if the Southern California real
estate market softens and real estate market values fall drastically.
Cerritos Valley has adopted underwriting and credit monitoring procedures and
credit policies, including the establishment and review of the allowance for
credit losses, that management believes are appropriate to minimize this risk
by assessing the likelihood of nonperformance, tracking loan performance and
diversifying the respective credit portfolios. These policies and procedures,
however, may not prevent unexpected losses which could materially adversely
affect Cerritos Valley's results of operations. For information about
Cerritos Valley's loan loss
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<PAGE>
experience, see "Description of Cerritos Valley--Management's Discussion
and Analysis of Financial Condition and Results of Operations--Summary of
Loan Loss Experience."
INTEREST RATE FLUCTUATIONS COULD HURT OPERATING RESULTS. The income of
Cerritos Valley depends to a great extent on "interest rate differentials"
and the resulting net interest margins, that is, the difference between the
interest rates earned on interest-earning assets such as loans and investment
securities, and the interest rates paid on interest-bearing liabilities such
as deposits and borrowings. These rates are highly sensitive to many factors
which are beyond its control, including general economic conditions and the
policies of various governmental and regulatory agencies, in particular, the
Federal Reserve. Generally, Cerritos Valley is adversely affected by
declining interest rates because Cerritos Valley Bank maintains a positive
gap position within a one year time frame. This means that more interest
sensitive assets in relation to interest sensitive liabilities are repriced
within a one year time frame. Therefore, if interest rates decline, net
interest rate margin will decrease and if interest rates increase, net
interest rate margin will increase. In addition, changes in monetary policy,
including changes in interest rates, influence the origination of loans, the
purchase of investments and the generation of deposits and affect the rates
received on loans and investment securities and paid on deposits, which could
have a material adverse effect on Cerritos Valley's business, financial
condition and results of operations. For a discussion of Cerritos Valley's
interest rate sensitivity, see "Description of Cerritos Valley--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Regulatory Matters--Quantitative and Qualitative Disclosures
About Market Risk."
GOVERNMENT REGULATION AND LEGISLATION COULD HURT BUSINESS AND PROSPECTS OF
CERRITOS VALLEY BANK. Cerritos Valley is subject to extensive state and
federal regulation, supervision and legislation which govern almost all
aspects of its operations. Its business is particularly susceptible to being
affected by the enactment of federal and state legislation which may have the
effect of increasing or decreasing the cost of doing business, modifying
permissible activities or enhancing the competitive position of other
financial institutions. These laws are subject to change from time to time
and are primarily intended for the protection of consumers, depositors and
the deposit insurance funds and not for the protection of shareholders of
Cerritos Valley. Cerritos Valley cannot predict what effect any presently
contemplated or future changes in the laws or regulations or their
interpretations would have on its business and prospects, but it could be
material and adverse. For information about supervision and regulation of
banks, bank holding companies and legislation, see "Description of Cerritos
Valley--Supervision and Regulation."
LOSS OF KEY EMPLOYEES COULD HURT PERFORMANCE OF CERRITOS VALLEY BANK.
Cerritos Valley is dependent upon the continued services of its key
employees. The loss of the services of any such employee, or the failure of
Cerritos Valley to attract and retain other qualified personnel, could have a
material adverse effect on Cerritos Valley's business, financial condition
and results of operations. Cerritos Valley maintains life insurance for its
benefit with respect to its President and Chief Executive Officer. For
information about Cerritos Valley's key employees, see "Description of
Cerritos Valley--Management."
ENVIRONMENTAL LIABILITY ASSOCIATED WITH COMMERCIAL LENDING COULD RESULT IN
LOSSES. In the course of business, Cerritos Valley has acquired, and may in
the future acquire, through foreclosure, properties securing loans they have
originated or purchased which are in default. In
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<PAGE>
commercial real estate lending, there is a risk that hazardous substances
could be discovered on these properties after acquisition by Cerritos Valley.
In this event, Cerritos Valley might be required to remove these substances
from the affected properties at its sole cost and expense. The cost of this
removal could substantially exceed the value of affected properties. Cerritos
Valley may not have adequate remedies against the prior owner or other
responsible parties or could find it difficult or impossible to sell the
affected properties, the occurrence of any of which could have a material
adverse effect on Cerritos Valley's business, financial condition and
operating results.
CERRITOS VALLEY BANK RELIES HEAVILY ON TECHNOLOGY AND COMPUTER SYSTEMS AND
COMPUTER FAILURE COULD RESULT IN LOSS OF BUSINESS AND ADVERSELY AFFECT THE
STOCK PRICE OF CERRITOS VALLEY. Advances and changes in technology can
significantly impact the business and operations of Cerritos Valley. Cerritos
Valley faces many challenges including the increased demand for providing
computer access to bank accounts and the systems to perform banking
transactions electronically. Cerritos Valley's ability to compete depends on
its ability to continue to adapt its technology on a timely and
cost-effective basis to meet these demands. In addition, its business and
operations are susceptible to negative impacts from computer system failures,
communication and energy disruption and unethical individuals with the
technological ability to cause disruptions or failures of its data processing
systems.
Many computer programs were designed and developed utilizing only two digits
in the date field, which means those computers are unable to recognize the
year 2000 and the following years. This year 2000 issue creates risks for
Cerritos Valley from unforseen or unanticipated problems in its internal
computer systems as well as from computer systems of the Federal Reserve Bank
of San Francisco, correspondent banks, customers and vendors. Failures of
these systems or untimely corrections could have a material adverse impact on
Cerritos Valley's ability to conduct its business and on its results of
operations. For a discussion of Cerritos Valley's Year 2000 readiness, see
"Description of Cerritos Valley--Management's Discussion and Analysis of
Financial Condition and Results of Operations--Regulatory Matters--Year 2000
Compliance."
LIMITED TRADING MARKET FOR CERRITOS VALLEY COMMON STOCK COULD MAKE IT
DIFFICULT TO SELL SHARES AFTER THE MERGER. There has been a limited trading
market for Cerritos Valley common stock and no assurances can be given that
an active trading market for the stock will develop subsequent to the merger.
Cerritos Valley common stock is not listed on any stock exchange and is not
included for quotation by NASDAQ. The limited trading market for Cerritos
Valley common stock may make the sale of shares of Cerritos Valley common
stock issued in the merger difficult. For information about the trading
history of Cerritos Valley common stock, see "Description of the Capital
Stock of Cerritos Valley."
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<PAGE>
FORWARD-LOOKING STATEMENTS
WE HAVE MADE FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT/PROSPECTUS,
INCLUDING STATEMENTS CONTAINING THE WORDS "BELIEVES," "ANTICIPATES,"
"INTENDS," "EXPECTS," "CONSIDERS" AND WORDS OF SIMILAR IMPORT.
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS OF CERRITOS VALLEY OR THE
MERGER TO BE MATERIALLY DIFFERENT FROM THE FUTURE RESULTS EXPRESSED OR
IMPLIED BY FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, AMONG OTHERS,
THE FACTORS DISCUSSED IN THE SECTION ENTITLED "RISK FACTORS" ON PAGE __ OF
THIS PROXY STATEMENT/PROSPECTUS.
ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING
STATEMENTS ARE REASONABLE, WE CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. SHAREHOLDERS SHOULD NOT RELY HEAVILY ON
THE FORWARD-LOOKING STATEMENTS.
------------------------
The information contained in this proxy statement/prospectus concerning Cerritos
Valley has been furnished by Cerritos Valley. The information contained in this
proxy statement/prospectus concerning Belvedere Capital and the California Fund
has been furnished by Belvedere Capital.
------------------------
You should rely only on the information in this proxy statement/prospectus or
other information referred to in this document. None of Cerritos Valley,
Belvedere Capital and the California Fund has authorized anyone to provide you
with other or different information. This proxy statement/prospectus is dated
July 26, 1999. You should not assume that the information contained in this
proxy statement/prospectus is accurate as of any date other than that date, and
neither the mailing of this proxy statement/prospectus to shareholders nor the
issuance of shares of Cerritos Valley common stock in the merger shall create
any implication to the contrary.
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<PAGE>
THE MEETING
We are sending you this proxy statement/prospectus for the solicitation of
proxies by the Board of Directors of Cerritos Valley for use at its meeting
of shareholders for the purpose of considering and voting upon the matters
set forth in the notice of meeting.
The mailing of this proxy statement/prospectus commenced on or about July 26,
1999.
MATTERS TO BE CONSIDERED AT THE SHAREHOLDERS' MEETING
The meeting has been called so the shareholders of Cerritos Valley can vote
upon the agreement, elect directors and vote upon the increase in the range
of the number of directors. After the merger, the California Fund will own
approximately 55% of the outstanding shares of Cerritos Valley common stock
and the current shareholders of Cerritos Valley will own approximately 45% of
the outstanding shares of Cerritos Valley common stock. Cerritos Valley will
then be a majority owned subsidiary of the California Fund.
RECORD DATE
The close of business on June 30, 1999, has been fixed as the record date for
the determination of Cerritos Valley shareholders entitled to notice of, and
to vote at, the meeting.
OUTSTANDING SECURITIES AND VOTING RIGHTS
There were 1,001,667 shares of Cerritos Valley common stock outstanding as of
the record date held by approximately 210 record holders. As of the date of
the agreement, there were 991,667 shares of Cerritos Valley common stock
outstanding. The 10,000 share difference results from the exercise of an
option for 10,000 shares by Mr. Thomas Yott, a former executive officer of
Cerritos Valley, in May of 1999.
Each holder of Cerritos Valley common stock can cast one vote for each share
of Cerritos Valley common stock held as of the record date on any matter
presented for a vote of the shareholders at the meeting. Approval of the
agreement and the increase in the range of the number of directors, requires
the affirmative vote of the holders of a majority of the outstanding shares
of Cerritos Valley common stock. With respect to the election of directors,
the ten nominees for directors receiving the most votes will be elected
directors.
As of the record date, the directors and executive officers of Cerritos
Valley held approximately 44.8% of the outstanding shares of Cerritos Valley
common stock entitled to vote at the meeting and directors holding
approximately 44.8% of the outstanding shares have entered into director's
agreements providing that they will each vote "FOR" approval of the
agreement. As a result, holders of only 50,930 additional shares of Cerritos
Valley common stock are needed to approve the agreement. See "Description of
the Merger--Interests of Certain Persons in the Merger and Material Contracts
with Cerritos Valley and its Affiliates."
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<PAGE>
The effect of broker nonvotes is that these votes are not counted as being
voted; however these votes are counted for purposes of determining a quorum.
The effect of a vote of abstention on any matter is that the vote is not
counted as a vote for or against the matter, but is counted as an abstention.
RECOMMENDATIONS OF THE BOARD OF DIRECTORS
The Board of Directors of Cerritos Valley has unanimously voted in favor of
the merger, and the individual members of Cerritos Valley's Board of
Directors have indicated that they will vote all shares of Cerritos Valley
common stock as to which they have voting power "FOR" approval of the
agreement. The Board of Directors of Cerritos Valley recommends that the
shareholders also vote "FOR" approval of the agreement, "FOR" each of the
nominees for election as directors and "FOR" approval of the increase in the
range of the number of directors. See "The Meeting--Beneficial Ownership of
Principal Shareholders and Management."
REVOCABILITY OF PROXIES
A proxy for use at the meeting is enclosed. A shareholder executing and
returning a proxy may revoke it at any time before the vote is taken by
filing with the Secretary of Cerritos Valley an instrument revoking it or a
duly executed proxy bearing a later date. In addition, the powers of the
proxyholders will be suspended if the person executing the proxy is present
at the meeting and elects to vote in person by advising the chairman of the
meeting of his or her election to vote in person, and voting in person at the
meeting. Subject to revocation or suspension, all shares represented by a
properly executed proxy received in time for the meeting will be voted by the
proxyholders in accordance with the instructions specified on the proxy. If
no directions are given to the contrary on the proxy, the shares of Cerritos
Valley common stock represented by the proxy will be voted "FOR" approval of
the agreement, "FOR" each of the nominees for directors of Cerritos Valley
and "FOR" approval of the increase in the range of the number of directors.
Management of Cerritos Valley does not anticipate that any matters will be
presented at the meeting other than those matters listed in the notice of the
meeting. If, however, other matters are properly presented at the meeting,
the proxy will be voted in accordance with the best judgment and discretion
of the proxyholders.
COST OF SOLICITATION OF PROXIES
Cerritos Valley shall bear the expenses of preparing, assembling, printing
and mailing this proxy statement/prospectus and the material used in this
solicitation of proxies. Management of Cerritos Valley contemplates that
proxies will be solicited through the mail, but officers, directors and
regular employees of Cerritos Valley and Cerritos Valley Bank may solicit
proxies for the meeting personally. Although there is no formal agreement to
do so, Cerritos Valley may reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries for their reasonable expenses in
forwarding these proxy materials to their principals. In addition, Cerritos
Valley may pay for and utilize the services of individuals or companies not
regularly employed by it in the solicitation of proxies for the meeting if
the Board of Directors of Cerritos Valley determines that this is advisable.
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<PAGE>
BENEFICIAL OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following tables show the beneficial ownership of shares of Cerritos
Valley common stock held by the principal shareholders and management of
Cerritos Valley. The beneficial owner of a security is a person who, directly
or indirectly, through any contract arrangement, understanding, relationship,
or otherwise has or shares:
- - voting power which includes the power to vote, or to direct the
voting of, the security; or
- - investment power which includes the power to dispose, or to direct
the disposition, of the security.
The beneficial owner of a security is also a person who, directly or
indirectly, creates or uses a trust, proxy, power of attorney, pooling
arrangement or any other contract, arrangement, or device with the purpose or
effect of divesting himself of beneficial ownership of a security or
preventing the vesting of beneficial ownership. Shares subject to options
presently exercisable or exercisable within 60 days of June 30, 1999 are
deemed to be beneficially owned by the holder but are not treated as
outstanding for computing the beneficial ownership of any other person.
Cerritos Valley's Board of Directors knows of no person who owns beneficially
more than 5% of the outstanding shares of Cerritos Valley common stock as of
June 30, 1999 except for the persons in the following table:
<TABLE>
<CAPTION>
Cerritos Valley Common Stock
Beneficially Owned
----------------------------
Relationship Number of Percent
Name and Address with Cerritos Valley Shares of Class
- ---------------------------- ---------------------------- ---------- ----------
<S> <C> <C> <C>
James N. Koury(1) Chairman, President & CEO 332,447 29.1
Pricilla F. Koury(1) Director 196,162 19.8
Rose Finance Company Ltd(2) Shareholder 90,000 9.1
JoAnn San Paolo(1) Director 49,725 5.0
Ellen Toma(1) Director 100,929 10.2
Michelle Toma(3) Shareholder 52,493 5.3
- -------------------
</TABLE>
(1) Mr. and Mrs. Koury's, Mrs. San Paolo's and Mrs. Toma's address is
c/o Cerritos Valley Bancorp, 12100 Firestone Boulevard, Norwalk,
California 90650.
(2) Rose Finance Company Limited's address is P.O. Box 707, West Bay
Road, Grand Cayman, Cayman Islands.
(3) Ms. Toma's address is 34300 Lantern Bay Drive, #70, Dana Point,
California 92629.
The following table shows as of June 30, 1999, the number of shares of
Cerritos Valley common stock beneficially owned by each director and named
executive officer of Cerritos Valley and by all Cerritos Valley directors and
executive officers as a group.
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<PAGE>
<TABLE>
<CAPTION>
Cerritos Valley Common Stock Percent
Beneficial Owner Beneficially Owned Of Class(1)
- ---------------- ---------------------------- -----------
<S> <C> <C>
Directors and Named Executive Officers:
- --------------------------------------
Gary R. Einstein 4,895 *
Shibley H. Horaney 0 *
James N. Koury 332,447(2) 29.1
Pricilla F. Koury 196,162(3) 19.8
James M. McGinley 44,407 4.5
Seymour J. Melnik, M.D. 29,949 3.0
Garo V. Minassian 11,546 1.2
Richard J. Romero 7,291 *
JoAnn San Paolo 49,725(4) 5.0
Ellen Toma 100,929(5) 10.2
All Directors and Executive 600,474 52.3
Officers as a Group (12 in all)
</TABLE>
- ----------------------
* Less than 1%.
(1) Includes shares subject to options held by Mr. Koury and the
executive officers that are exercisable within 60 days of June 30,
1999. These are treated as issued and outstanding for the purpose of
computing the percentages of Mr. Koury and the directors and
executive officers as a group, but not for the purpose of computing
the percentage of class of any other person.
(2) Mr. Koury has shared voting and investment powers as to 182,477 of
these shares with his wife, Pricilla F. Koury. The amount includes
150,000 shares acquirable by exercise of stock options. Mr. Koury's
address is c/o Cerritos Valley Bancorp, 12100 Firestone Boulevard,
Norwalk, California 90650.
(3) Mrs. Koury has shared voting and investment powers as to 182,477 of
these shares with her husband, James N. Koury. Mrs. Koury's address
is c/o Cerritos Valley Bancorp, 12100 Firestone Boulevard, Norwalk,
California 90650.
(4) Mrs. San Paolo has shared voting and investment powers as to all of
these shares. Mrs. San Paolo's address is c/o Cerritos Valley
Bancorp, 12100 Firestone Boulevard, Norwalk, California 90650.
(5) Mrs. Toma's address is c/o Cerritos Valley Bancorp, 12100 Firestone
Boulevard, Norwalk, California 90650.
PRINCIPAL SHAREHOLDERS OF CERRITOS VALLEY FOLLOWING THE MERGER. If the
merger is completed, the California Fund, James N. and Pricilla F. Koury, and
Ellen Toma each will own beneficially more than 5% of Cerritos Valley common
stock. See "Description of the Merger--Exchange of Shares and Options."
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<PAGE>
DESCRIPTION OF THE MERGER
GENERAL
This section of the proxy statement/prospectus contains information furnished
by the Board of Director of Cerritos Valley in its solicitation of proxies for
the meeting to approve the agreement. The agreement sets out the terms of the
merger.
The Board of Directors of Cerritos Valley is asking its shareholders to vote
upon the agreement. Under the terms of the agreement, Cerritos Valley shall be
the surviving corporation of the merger. Upon completion of the merger, each
share of Cerritos Valley common stock, other than shares held by shareholders
who exercise and perfect dissenters' rights, shall be converted into the right
to receive cash in the amount of $13.4871 and 0.5271 shares of Cerritos Valley
common stock. See "Description of the Merger--Exchange of Shares and Options."
As a result of the merger, Cerritos Valley will be a majority-owned subsidiary
of the California Fund.
A copy of the agreement is attached to this proxy statement/prospectus as
Exhibit I and incorporated in this proxy statement/prospectus by this reference.
BACKGROUND AND REASONS FOR THE MERGER
During the past few years Cerritos Valley Bank has been expanding its services
to the businesses and residents of southeastern Los Angeles County through its
branch operations. Cerritos Valley Bank has looked at potential acquisition
opportunities, but has not had the capital necessary to effect a cash
acquisition or had sufficient liquidity in the shares of Cerritos Valley common
stock to effect a stock transaction with other financial institutions operating
in nearby areas.
In addition, over the last couple of years, shares of Cerritos Valley common
stock, while traded over the counter, have had very limited activity and the
shares have been trading at or close to book value. This lack of marketability
required Cerritos Valley's management to consider various alternatives,
including the sale of the entire institution, combining with other financial
institutions or obtaining a strong financial partner that would permit future
expansion of Cerritos Valley Bank's operations through acquisitions,
establishment of branches and development of services and products.
In November, 1998, Mr. James Koury, President and Chief Executive Officer of
Cerritos Valley had discussions with representatives of Belvedere Capital
concerning a potential capital infusion into Cerritos Valley by the California
Fund. Mr. Koury was familiar with Belvedere Capital and its recent acquisitions
of The Bank of Orange County, Fountain Valley, California and Downey National
Bank, Downey, California. Representatives of Belvedere Capital expressed
interest in the California Fund acquiring 51% of the outstanding shares of
Cerritos Valley common stock allowing shareholders of Cerritos Valley to receive
certain cash payments, but at the same time looking for shareholders of Cerritos
Valley to continue on with the surviving entity.
On December 2, 1998, Belvedere Capital, on behalf of the California Fund,
presented a letter to Cerritos Valley indicating an interest to purchase 51%
of the outstanding shares of Cerritos Valley common stock for $12.8 million
in cash. Cerritos Valley Bank would then dividend an additional $2.5 million
to Cerritos Valley with the total funds to be distributed to the
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<PAGE>
shareholders of Cerritos Valley for 51% ownership interest. Over the next
several weeks discussions were held between representatives of Belvedere
Capital and Mr. Koury concerning the pricing formula. In addition, due
diligence was conducted by Belvedere Capital on Cerritos Valley Bank and
Cerritos Valley in order to proceed with the transaction.
On January 12, 1999, Belvedere Capital committed to a modification in the
pricing formula, whereby the California Fund would pay $12.8 million, Cerritos
Valley Bank would dividend to Cerritos Valley $2,950,000 and existing
shareholders of Cerritos Valley would be entitled to receive for each share
outstanding $13.4871 cash and 0.5271 shares of Cerritos Valley common stock
after completion of the transaction. The parties intended that the California
Fund would own 51% of Cerritos Valley after completion of the transaction taking
into consideration the exercise of all outstanding options.
On January 19, 1999, the Board of Directors reviewed the pricing formula and
received an oral opinion from Gerry Findley Inc. that the financial terms of the
transaction were fair from a financial point of view to the shareholders of
Cerritos Valley. Following the January 19, 1999 meeting, the agreement was
negotiated between Belvedere Capital and Cerritos Valley, whereby Cerritos
Valley will be merged with Cerritos Merger Co. and each outstanding share of
Cerritos Valley common stock will be converted into $13.4871 cash and 0.5271
shares of Cerritos Valley common stock and the 543,959 outstanding shares of
Cerritos Merger Co. will be converted into an equal number of shares of Cerritos
Valley common stock. In addition, the California Fund will receive warrants to
acquire up to 86,000 additional shares of Cerritos Valley common stock for $0.01
per share in order to preserve its 51% ownership position. These warrants may
only be exercised on a share for share basis upon the exercise of outstanding
stock options held by optionees; however, the warrant is not exercisable upon
the exercise by James N. Koury to acquire the first one-half of his option to
acquire 150,000 shares of Cerritos Valley common stock. As part of the
transaction, the Board of Directors of Cerritos Valley were required to execute
an agreement agreeing to vote their shares in favor of the transaction. In early
February, 1999, copies of the definitive agreement were distributed to each of
the members of the Board of Directors of Cerritos Valley. On February 8, 1999,
the Board of Directors of Cerritos Valley approved the agreement and each member
of the Board entered into the director's agreement with Belvedere Capital. On
February 12, 1999 the agreement was executed on behalf of Cerritos Valley and
the California Fund. Also on February 12, 1999, Gerry Findley Inc. delivered its
written opinion to Cerritos Valley's Board of Directors to the effect that as of
the date of the opinion the transaction as set forth in the agreement and the
consideration to be received by Cerritos Valley shareholders is fair from a
financial point of view to the holders of Cerritos Valley common stock.
EXCHANGE OF SHARES AND OPTIONS
Each share of Cerritos Valley common stock which is outstanding
immediately prior to the merger, other than shares to which its holders have
exercised and perfected dissenters' rights, will automatically be canceled
and will be converted into the right to receive cash in the amount of
$13.4871 and 0.5271 shares of Cerritos Valley common stock.
The Boards of Directors of Cerritos Valley and Belvedere Capital determined the
conversion rate in an arms length negotiation.
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<PAGE>
Assuming each share of Cerritos Valley is converted into the right to receive
cash in the amount of $13.4871 and 0.5271 shares of Cerritos Valley common
stock, there would be approximately 1,071,937 shares of Cerritos Valley common
stock outstanding immediately following the completion of the merger, consisting
of 543,959 shares of Cerritos Valley common stock to be issued to the California
Fund in the merger and approximately 527,978 shares of Cerritos Valley common
stock to be issued to the existing shareholders as a result of the merger. In
addition, immediately following the completion of the merger, Cerritos Valley
will purchase 75,000 shares of its outstanding common stock from James N. Koury
pursuant to the stock purchase rights amendment agreement as discussed below.
After this purchase there will be 996,937 shares of Cerritos Valley common
stock outstanding.
No fractional shares of Cerritos Valley common stock will be issued in the
merger. Instead, shareholders of Cerritos Valley will receive an amount in cash
equal to the product, rounded to the nearest hundredth, obtained by multiplying
$28.52 by the fraction of a share of Cerritos Valley common stock to which the
holder would otherwise be entitled.
EXCHANGE PROCEDURE. Each holder of a certificate representing shares of Cerritos
Valley common stock shall surrender the certificate, duly endorsed as Cerritos
Valley may require, to U.S. Stock Transfer Corporation as the exchange agent.
Each holder shall then receive from Cerritos Valley in exchange for the old
certificate:
- - a new certificate representing the number of whole shares of Cerritos
Valley common stock to which the holder shall have become entitled based
upon the conversion rate, and
- - a check for $13.4871 multiplied by the number of shares indicated on the
old certificate plus the amount for any fractional share.
Upon surrender for cancellation to the exchange agent of one or more old
certificates for shares of Cerritos Valley common stock, accompanied by the
transmittal letter which will be sent to the shareholders promptly after the
merger, the exchange agent shall deliver to each holder of surrendered old
certificates new certificates representing the appropriate number of shares of
Cerritos Valley common stock and checks for $13.4871 multiplied by the number of
shares indicated on the old certificate plus the amount for any fractional
shares.
Until old certificates have been surrendered and exchanged, each
outstanding old certificate shall be deemed for all corporate purposes to
represent the number of shares of Cerritos Valley common stock into which the
number of shares of Cerritos Valley common stock shown on the old certificate
have been converted. No dividends or other distributions which are declared
on Cerritos Valley common stock will be paid to persons entitled to receive
them until the old certificates have been surrendered in exchange for new
certificates, but upon the surrender, the dividends or other distributions,
from and after the completion of the merger, will be paid to those persons.
In no event shall the persons entitled to receive the dividends or other
distributions be entitled to receive interest on the dividends or other
distributions.
No shareholder will be liable for any transfer taxes unless a new certificate is
to be issued in a name other than the shareholder's. If a shareholder requests
that a new certificate be issued in another name, the shareholder must properly
endorse the old certificates and pay to Cerritos Valley or the exchange agent
any transfer taxes owed for that transfer or for any prior transfer or
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establish to the satisfaction of Cerritos Valley or the exchange agent that the
taxes have been paid or are not payable.
If any holder of an old certificate is unable to surrender his or her old
certificates because the certificates have been lost or destroyed, the holder
may instead deliver an affidavit and indemnity undertaking in form and substance
and, if required, with insurance satisfactory to the exchange agent and Cerritos
Valley.
EXCHANGE OF OUTSTANDING STOCK OPTIONS FOR SHARES OF CERRITOS VALLEY COMMON
STOCK. Cerritos Valley granted options to purchase 12,000 shares of Cerritos
Valley Common stock to two option holders. In addition, Cerritos Valley granted
James N. Koury a right to purchase 150,000 shares of Cerritos Valley common
stock for cash at the price of $6.00 per share under a stock purchase agreement.
As a condition to the merger, each holder of options or rights to purchase
shares of Cerritos Valley common stock has entered into an option termination
agreement or a stock purchase rights amendment agreement.
The option termination agreements provide that each holder of a Cerritos Valley
stock option in consideration for agreeing
- - not to exercise any options to purchase Cerritos Valley common stock prior
to completion of the merger; and
- - to the cancellation of one-half of the options held immediately prior to
completion of the merger;
shall receive a cash payment from Cerritos Valley in the amount of one-half of
the options held immediately prior to completion of the merger at a price equal
to the difference between the exercise price of the option and $28.52 per share.
The aggregate cash consideration to be paid to the two Cerritos Valley option
holders under the option termination agreements is $125,120.
In the stock purchase rights amendment agreement, Cerritos Valley agreed to
purchase 75,000 of Mr. Koury's shares of Cerritos Valley common stock,
immediately after completion of the merger, at the cash price of $28.52 per
share for a total consideration of $2,139,000.
Mr. Koury agreed in the stock purchase rights amendment agreement, in
consideration for not exercising any rights to purchase Cerritos Valley common
stock prior to the completion of the merger, as follows:
- - the right to purchase the first 75,000 shares of Cerritos Valley common
stock must be exercised by no later than the latest of one year after
Mr. Koury's death or twenty months after completion of the merger;
- - if the first 75,000 shares are not purchased within that period, the right
to purchase those shares terminates; and
- - the option to acquire the remaining 75,000 shares continues to be
exercisable under its original terms.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER AND
MATERIAL CONTRACTS WITH CERRITOS VALLEY AND ITS AFFILIATES
In considering the recommendations of the Board of Directors of Cerritos Valley
for approval of the merger, the shareholders of Cerritos Valley should be aware
that certain members of the Board of Directors of Cerritos Valley may have a
substantial interest in the merger as described below.
As stated above, James N. Koury, the President and Chief Executive Officer of
Cerritos Valley, has entered into the stock purchase rights amendment agreement.
Under the terms of the stock purchase rights amendment agreement, Cerritos
Valley has agreed to purchase 75,000 shares of Cerritos Valley common stock
owned by Mr. Koury at the cash price of $28.52 per share for a total of
$2,139,000 immediately after completion of the merger, and Mr. Koury's right to
purchase his option for 150,000 shares of Cerritos Valley common stock has been
amended as described above.
As soon as practicable following the merger, the Boards of Directors of
Cerritos Valley and Cerritos Valley Bank shall take action to cause two
nominees to be selected by Belvedere Capital to be appointed to the Boards of
Directors of Cerritos Valley and Cerritos Valley Bank. Once those nominees
have been appointed to the Boards, the nominating committee of Cerritos
Valley shall nominate and recommend for approval the nominees selected by
Belvedere Capital for one year terms at the annual meetings of Cerritos
Valley for the years 2000, 2001 and 2002. Management of Cerritos Valley
presently anticipates that Ronald W. Bachli and J. Thomas Byrom will be
appointed as directors of Cerritos Valley. In addition, in the event the
nominees selected by Belvedere Capital determine to withdraw from the Boards,
or in the event that the nominees selected by Belvedere Capital are removed
from the Boards, then Cerritos Valley and Cerritos Valley Bank shall enter
into, at no cost to Cerritos Valley or Cerritos Valley Bank, a financial
advisory contract with Belvedere Capital. The financial advisory contract
will provide Belvedere Capital full access to the records and management of
Cerritos Valley and Cerritos Valley Bank to the full extent provided to
directors of Cerritos Valley and Cerritos Valley Bank.
In addition, each director of Cerritos Valley has entered into a director's
agreement with Belvedere Capital which provides that the director agrees:
- - to recommend that the shareholders of Cerritos Valley approve the
agreement;
- - to advise Cerritos Valley's shareholders to reject any subsequent proposal
or offer received by Cerritos Valley relating to any purchase, sale,
acquisition, merger or other form of business combination involving
Cerritos Valley or any of its assets, equity securities or debt securities
and to proceed with the transactions contemplated by the agreement, unless
Cerritos Valley's Board of Directors has been advised by outside legal
counsel that a director of Cerritos Valley should not take that action;
- - not to take any action that will alter or affect in any way the right
to vote the shares of Cerritos Valley common stock, except:
with the prior written consent of the California Fund; or
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to change the right from that of a shared right of the director to
vote the shares of Cerritos Valley common stock to a sole right of
the director to vote the shares of Cerritos Valley common stock; and
- - to vote all shares of Cerritos Valley common stock as to which the
director has voting power in favor of the agreement.
Each director of Cerritos Valley also delivered an irrevocable proxy to
Belvedere Capital in connection with the director's agreement. The director's
agreements also provide that the directors shall not for a period of three years
after the completion of the merger, directly or indirectly, without the prior
written consent of the California Fund, own more than 5% of, organize, manage,
operate, finance or participate in the ownership, management, operation or
financing of, or be connected as an officer, director, employee, principal,
agent or consultant to any financial institution whose deposits are insured by
the FDIC that has its head office or a branch office within 30 miles of the head
office of Cerritos Valley.
THE CALIFORNIA FUND WARRANTS
Another condition to the merger is the issuance of warrants to the
California Fund which would allow the California Fund to maintain its
ownership of over 50% of the outstanding shares of Cerritos Valley common
stock. The California Fund and Cerritos Valley have agreed to enter into a
warrant agreement which will only become effective upon the completion of the
merger. The warrant agreement grants warrants to the California Fund to
purchase up to 86,000 shares of Cerritos Valley common stock at a purchase
price of $0.01 per share. The warrant agreement will allow the California
Fund to exercise warrants on a one-for-one basis only upon the exercise of
options outstanding under either Cerritos Valley's stock option plan or
Cerritos Valley's stock purchase plan, however, the warrant is not
exercisable upon the exercise by James N. Koury to acquire the first one-half
of his right to acquire 150,000 shares of Cerritos Valley common stock.
REGULATORY APPROVAL AND COMPLETION OF THE MERGER
The merger was approved by the Department of Financial Institutions (the "DFI")
on June 29, 1999 and the application of the California Fund to acquire a
majority interest in Cerritos Valley was approved by the Board of Governors of
the Federal Reserve System (the "FRB") on May 24, 1999. THE APPROVAL OF THE
MERGER BY THE DFI AND THE APPROVAL OF THE CALIFORNIA FUND'S ACQUISITION OF
CERRITOS VALLEY BY THE FRB IS NOT A RECOMMENDATION OR ENDORSEMENT OF THE MERGER
OR ACQUISITION BY THE DFI OR THE FRB, RESPECTIVELY. The completion of the merger
is anticipated to take place on a day which shall not, however, be later than
fifteen business days after:
- - the receipt of the last required regulatory approval and expiration of
all applicable waiting periods, and
- - satisfaction of the conditions precedent to the obligations of each of
Cerritos Valley and the California Fund or the written waiver of the
conditions by Cerritos Valley or the California Fund, as applicable.
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Management of Cerritos Valley presently anticipates that the merger will be
completed during the third quarter of this year.
CONDITIONS TO THE MERGER
The agreement provides that the completion of the merger is subject to
various conditions which must be satisfied before the completion of the
merger, including the following:
- - The agreement and the merger shall have been approved by the vote of
the holders of a majority of the outstanding stock of Cerritos
Valley;
- - There shall not be any action taken, or any law, regulation or order
enacted, enforced or deemed applicable to the merger, by any
government entity which restrains or prohibits the proposed
transaction;
- - All approvals or permits required to be obtained, and all waiting
periods required to expire, for the merger shall have been obtained
or expired, without the imposition of any materially burdensome
condition on the California Fund or Cerritos Valley as determined by
Belvedere Capital;
- - The Cerritos Valley Registration Statement shall be effective under
the Securities Act, and no proceeding shall be pending by the SEC to
suspend the effectiveness of the Registration Statement, and Cerritos
Valley shall have received all state securities permits or other
authorizations, or confirmations as to the availability of an
exemption from the registration or qualification requirements as may
be necessary;
- - The representations and warranties of each of Cerritos Valley and
Belvedere Capital and the California Fund stated in the agreement
shall be true in all material respects as of the date of completion
of the merger; each of Cerritos Valley and Belvedere Capital shall
have duly performed and complied in all material respects with all
agreements required by the agreement;
- - Cerritos Valley and the California Fund shall have received
certificates of officers of the other party stating that the
representations and warranties as set forth in the agreement are true
and correct, and opinions of counsel for the other party;
- - The holders of no more than 10% of the outstanding shares of Cerritos
Valley common stock shall have exercised dissenters' rights;
- - There shall not have been any change in the financial condition,
results of operation or prospects of Cerritos Valley and Cerritos
Valley Bank since December 31, 1998, which individually is or in the
aggregate is materially adverse to Cerritos Valley or Cerritos Valley
Bank;
- - There shall not have been any damage, destruction, loss or event
materially and adversely affecting the properties, business or
prospects of Cerritos Valley or Cerritos Valley Bank;
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- - Cerritos Valley shall have issued to the California Fund warrants to
acquire up to 86,000 shares of Cerritos Valley common stock;
- - Cerritos Valley Bank shall have declared and paid a $2,950,000 dividend
to Cerritos Valley;
- - Cerritos Valley shall have reimbursed all of Cerritos Merger Co.'s
expenses in the merger, not to exceed $125,000; and
- - Cerritos Valley shall have received a fairness opinion confirming the
fairness of the terms of the merger to Cerritos Valley and its
shareholders from a financial perspective, and this opinion shall not
have been withdrawn prior to the date of completion of the merger.
On May 24, 1999, the FRB approved the acquisition by the California Fund, and on
June 29, 1999, the Department of Financial Institutions approved the merger
subject to approval of the shareholders of Cerritos Valley. In addition, on
February 12, 1999, Gerry Findley Inc. rendered its written opinion to Cerritos
Valley's Board of Directors that the terms of the merger are fair, from a
financial point of view, to the shareholders of Cerritos Valley, and on
____________, 1999 Gerry Findley Inc. affirmed its written opinion.
WAIVER, AMENDMENT, AND TERMINATION
Any term or provision of the agreement, other than regulatory approval or any of
the provisions required by law, may be waived in writing at any time by the
party which is, or whose shareholders are, entitled to the benefits of the term
or provision.
The agreement provides that it may be terminated prior to the completion of the
merger:
- - By mutual consent of the Boards of Directors of Cerritos Valley and
Belvedere Capital;
- - By Cerritos Valley or Belvedere Capital immediately upon the
expiration of 30 days from the date that Cerritos Valley or Belvedere
Capital, as applicable, has given notice to the other party of a
material breach or default by the other party in the performance of
any covenant, agreement, representation, warranty, duty or obligation
of the agreement. However, no termination shall be effective if,
within the 30-day period, the breaching or defaulting party shall
have corrected and cured the grounds for the termination;
- - By Cerritos Valley or Belvedere Capital if any governmental authority
denies or refuses to grant its approval required to be obtained in
order to complete the merger;
- - By Cerritos Valley or Belvedere Capital if the shareholders of
Cerritos Valley do not approve the agreement;
- - By Belvedere Capital if the Board of Directors of Cerritos Valley
approves a transaction where there would be a change of control of
five percent or more of the outstanding shares of Cerritos Valley
common stock; or
- - By Cerritos Valley or Belvedere Capital upon the failure of any of
the conditions specified in the agreement to have been satisfied
prior to September 30, 1999.
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LIQUIDATED DAMAGES
If the agreement is terminated by either party because of a material breach or
default by the other party, or by Belvedere Capital because Cerritos Valley's
Board of Directors approves a change of control of five percent or more of the
outstanding shares of Cerritos Valley common stock, then the terminating party
is entitled to liquidated damages in the amount of $300,000 in cash from the
other party.
OPINION OF FINANCIAL ADVISOR
GENERAL. Pursuant to oral discussions in early December 1998 and
confirmed in writing by an engagement letter executed on January 12, 1999,
Cerritos Valley engaged Gerry Findley Inc. to advise Cerritos Valley
regarding the consideration to be paid by the California Fund. Gerry Findley
Inc. is a nationally recognized investment banking firm and, as part of its
investment banking activities, is regularly engaged in the valuation of
businesses and their securities in merger transactions and other types of
acquisitions, negotiated underwritings, private placements and valuations for
corporate and other purposes. Cerritos Valley selected Gerry Findley Inc. as
its financial advisor on the basis of its experience in transactions similar
to the proposed transaction and its reputation in the banking and investment
communities. Gerry Findley Inc. did not determine the consideration to be
paid by the California Fund in the transaction. Cerritos Valley, through the
negotiations with the California Fund, determined the consideration. Gerry
Findley Inc. assumed that the consideration equaled $28.52 as he was advised
by the Board of Directors of Cerritos Valley of the calculation it utilized
and the price which was determined by the calculation.
Cerritos Valley's Chairman James Koury handled Cerritos Valley's negotiations
for the transaction. At the January 19, 1999 meeting of Cerritos Valley's Board
of Directors, Gerry Findley Inc. delivered its oral opinion, subsequently
confirmed in its written opinion dated February 12, 1999, that the terms of the
proposed merger are fair to the shareholders of Cerritos Valley from a financial
standpoint as of the date of the opinion. By action taken January 19, 1999,
Cerritos Valley's Board of Directors approved the essential terms of the
transaction. On ____________, 1999, Gerry Findley Inc. affirmed its written
opinion of February 12, 1999 that, subject to the assumptions and limitations
described in its opinion, the terms of the proposed merger are fair to the
shareholders of Cerritos Valley from a financial standpoint as of that date.
No limitations were imposed by Cerritos Valley on Gerry Findley Inc. in the
investigations made or procedures followed in rendering its opinion. Gerry
Findley Inc.'s opinion is addressed to Cerritos Valley's Board of Directors and
does not constitute a recommendation to any shareholder of Cerritos Valley as to
how the shareholder should vote at the meeting.
Prior to issuing its opinion, Gerry Findley Inc., among other things:
- - reviewed certain publicly available financial and other data of Cerritos
Valley, including the financial statements for recent years and certain
other relevant financial and operating data relating to Cerritos Valley
made available to Gerry Findley Inc. from published sources and from the
internal records of Cerritos Valley;
- - reviewed the agreement;
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- - reviewed certain historical market prices and trading volumes of shares
of Cerritos Valley common stock;
- - compared Cerritos Valley from a financial point of view with certain
other companies that Gerry Findley Inc. deemed to be relevant;
- - considered the publicly available financial terms of selected recent
business combinations of companies that Gerry Findley Inc. deemed to be
comparable, in whole or in part, to the merger;
- - reviewed and discussed with representatives of the management of
Cerritos Valley certain information of a business and financial nature
regarding Cerritos Valley furnished to Gerry Findley Inc. by Cerritos
Valley, including financial forecasts for 1999;
- - made inquiries regarding and discussed the merger and the agreement and
other matters related thereto with Cerritos Valley; and
- - performed other analyses and examinations as Gerry Findley, Inc. deemed
appropriate.
Gerry Findley Inc. did not independently verify any of the foregoing
information, and relied on the information and assumed the information was
complete and accurate in all material respects. Gerry Findley Inc. assumed
for purposes of its opinion that the 1999 financial forecasts for Cerritos
Valley provided to Gerry Findley Inc. by Cerritos Valley, was reasonably
prepared on bases reflecting the best available estimates and judgment of the
Cerritos Valley management at the time of preparation as to the future
financial performance of Cerritos Valley and that the forecasts provided a
reasonable basis upon which Gerry Findley Inc. could form its opinion. Gerry
Findley Inc. also assumed that there were no material changes in Cerritos
Valley's assets, financial condition, results of operations, business, or
prospects since the dates of the last financial statements made available to
Gerry Findley Inc. Gerry Findley Inc. assumed the accuracy of the disclosures
contained in the agreement and relied on advice of counsel to Cerritos Valley
as to the tax, accounting and legal effects described in the agreement with
respect to cerritos valley, the merger, the proxy statement/prospectus and
the agreement. In addition, Gerry Findley Inc. is not expert in the
evaluation of loan portfolios for purposes of assessing the adequacy of the
allowances for losses with respect thereto and assumed, with the consent of
Cerritos Valley, that the allowances for Cerritos Valley were in the
aggregate adequate to cover the losses. In addition, Gerry Findley Inc. did
not make an independent evaluation, appraisal, or physical inspection of the
assets or individual properties of Cerritos Valley and was not furnished with
any appraisals. Further, Gerry Findley Inc.'s opinion was based on economic,
monetary, and general market and other conditions existing as of the date of
the opinion and on the assumption that the agreement will be completed in
accordance with its terms, without any amendments to it, and without waiver
by Cerritos Valley of any of the conditions to its obligations.
The following is a brief summary of the report presented by Gerry Findley Inc.
to Cerritos Valley's Board of Directors which confirmed its earlier oral
opinion.
ANALYSIS OF SELECTED BANK MERGER TRANSACTIONS. Gerry Findley Inc. reviewed
the consideration paid in recently completed transactions whereby certain
banks were acquired. Specifically,
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Gerry Findley Inc. reviewed over 90 recent transactions involving
acquisitions of selected banks in California completed since January 1996
(the "California Acquisitions"). For each bank acquired in those
transactions, Gerry Findley Inc. compiled figures illustrating, among other
things, the ratio of the premium, i.e., purchase price in excess of tangible
book value, to deposits, purchase price to book value, and purchase price to
previous year's earnings.
The figures for banks acquired or to be acquired in the California Acquisitions
produced:
- - a median percentage of premium to deposits of 6.50%;
- - a median multiple of purchase price to book value of 1.68; and
- - a median multiple of purchase price to previous year's earnings of 16.95.
In comparison, assuming that the consideration to be paid in the merger equals
$28.52 which is $13.4871 cash and 0.5271 shares of common stock, Gerry Findley
Inc. determined that the consideration to be paid by the California Fund in the
merger represented a percentage of premium to deposits of 15.77%, a multiple of
purchase price to book value of 2.24 and a multiple of purchase price to
previous year's earnings of 18.9.
The following table is a summary of the valuation results.
<TABLE>
<CAPTION>
Summary of Valuation Results(1)
-------------------------------
At $28.52 Per Share California
Market Value(2) Acquisition Median
------------------- ------------------
<S> <C> <C>
Premium to Deposits 15.77% 6.50%
Price to Book Value 2.24 1.68
Price to Previous
Years Earnings 18.9 16.95
</TABLE>
- ---------------
(1) Based upon 991,667 shares of Cerritos Valley common stock outstanding
and 1,163,667 fully diluted shares for all stock options.
(2) Based upon the 1998 earnings per share for Cerritos Valley of $1.51.
(3) Based upon the December 31, 1998 book value per share for Cerritos
Valley of $12.71.
No other company or transaction used in the above analysis as a comparison is
identical to Cerritos Valley or the merger. Accordingly, an analysis of the
results of the foregoing 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 Cerritos Valley and the merger are being
compared.
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DISCOUNTED CASH FLOW METHOD. Gerry Findley Inc. examined the results of a
preliminary discounted cash flow analysis to compare the value of the
transaction of $28.52 with the present value that would be attained if
Cerritos Valley remained independent through 2001 and then was acquired by a
larger financial institution. The discounted cash flow analysis also assumed
that Cerritos Valley, on a stand alone basis, would achieve Cerritos Valley's
Management's estimated earnings per share of $1.42 for 1999, and Gerry
Findley Inc. assumed earnings would increase 10 percent per year for years
2000 to 2001.
The discount rates used ranged from 10 percent to 14 percent. For the Cerritos
Valley stand alone analysis, the terminal price multiples applied to the 2001
estimated earnings per share ranged from 12.0 to 20.0. The lower levels of the
price to earnings multiples range reflected an estimated future trading range of
Cerritos Valley, while the higher levels of the price to earnings multiples
range were more indicative of a future sale of Cerritos Valley.
For the Cerritos Valley stand alone analysis, the cash flows were comprised of
no cash dividends in years 1999 through 2001 plus the terminal value of Cerritos
Valley at the year end 2001, calculated by applying each one of the assumed
terminal price to earnings multiples as stated above to the 2001 projected
Cerritos Valley earnings per share. The discount rates described above were then
applied to these cash flows to obtain the present values per share of Cerritos
Valley common stock.
Assuming Cerritos Valley remains independent through 2001 and the projected
earnings are achieved, a holder of one share of Cerritos Valley common stock
would receive cash flows with a present value between $12.29 and $23.63.
Assuming the merger is completed, Cerritos Valley's shareholders will be
receiving cash and stock valued at $28.52.
CONSIDERATION OF OTHER METHODS. Normally in a merger transaction Gerry Findley
Inc. also analyzes a contribution analysis, dilution analysis and comparable
company analysis. To determine the fairness to the fact that the merger
transaction does not combine Cerritos Valley with any other financial
institution and is solely a restructure of ownership, Gerry Findley Inc.
determined that a contribution analysis, dilution analysis and comparable
company analysis were not relevant methods for consideration. Under the terms of
the merger, Cerritos Valley will continue as a separate operating banking
institution.
The preparation of a fairness opinion is not necessarily susceptible to partial
analysis or summary description. Gerry Findley Inc. 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 the factors considered, without considering all
analyses and factors, would create an incomplete view of the process underlying
the analyses set forth in its presentation to Cerritos Valley's Board of
Directors. In addition, Gerry Findley Inc. may have given certain 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
Gerry Findley Inc.'s view of the actual value of Cerritos Valley. The fact that
any specific analysis has been referred to in the summary above is not meant to
indicate that that analysis was given greater weight than any other analysis.
In performing its analyses, Gerry Findley Inc. made numerous assumptions about
industry performance, general business and economic conditions and other
matters, many of which are
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beyond the control of Cerritos Valley. The analyses performed by Gerry Findley
Inc. are not necessarily indicative of actual values or actual future
results, which may be significantly more or less favorable than suggested by
those analyses. The analyses were prepared solely as part of Gerry Findley
Inc.'s analysis of the fairness of the terms of the proposed merger to
Cerritos Valley's shareholders from a financial standpoint and were provided
to Cerritos Valley's Board of Directors with the delivery of Gerry Findley
Inc.'s opinion. The analyses do not purport to be appraisals or to reflect
the prices at which any securities may trade at the present time or at any
time in the future. Gerry Findley Inc. used in its analyses various
projections of future performance prepared by the management of Cerritos
Valley. The projections are based on numerous variables and assumptions which
are inherently unpredictable and must be considered not certain of occurrence
as projected. Accordingly, actual results could vary significantly from those
set forth in the projections.
As described above, Gerry Findley Inc.'s opinion and presentation to Cerritos
Valley's Board of Directors were among the many factors taken into consideration
by Cerritos Valley's Board of Directors in making its determination to approve
the agreement.
Cerritos Valley paid Gerry Findley Inc. $10,000 for its opinion. Cerritos
Valley has not paid Gerry Findley Inc. any other sums during the past two
years. Gerry Findley Inc. is owned by Gerry Findley, the father of Gary
Findley, counsel to Cerritos Valley.
FEDERAL AND CALIFORNIA INCOME TAX CONSEQUENCES
The following is a description of the material federal and California income tax
consequences of the merger. The following is not a complete description of all
tax consequences of the merger. Each shareholder's individual circumstances may
affect the tax consequences of the merger to him or her. In addition, the
following description does not address the tax consequences of the merger under
applicable state or local laws, other than California law. CONSEQUENTLY, EACH
SHAREHOLDER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE SPECIFIC
TAX CONSEQUENCES OF THE MERGER TO HIM OR HER.
The merger will be disregarded and will be treated in part as a taxable sale and
in part a taxable recapitalization for tax purposes, as described below.
Cerritos Valley and the California Fund will recognize no gain or loss as a
result of the sale and recapitalization transactions.
As discussed previously in "Description of the Merger--Exchange of Shares and
Options," upon completion of the merger, each share of Cerritos Valley common
stock which is outstanding immediately prior to the merger, other than shares
held by shareholders who exercise and perfect dissenters' rights, will
automatically be canceled and will be converted into the right to receive cash
in the amount of $13.4871 and 0.5271 shares of Cerritos Valley common stock.
Those shareholders who properly and timely exercise their dissenters' rights
will receive solely cash for each share of Cerritos Valley common stock they
currently hold.
To the extent the source of the total cash received by Cerritos Valley
shareholders is from the California Fund, shareholders of Cerritos Valley will
be treated as if they sold a proportionate amount of their shares of Cerritos
Valley common stock to the California Fund in the sale transaction. All new
shares of Cerritos Valley common stock received by the Cerritos Valley
shareholders will be issued by Cerritos Valley. Therefore, the Cerritos Valley
shareholders will
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be treated as engaging in a recapitalization transaction with Cerritos Valley
where the shareholders exchange a portion of their existing shares for new
Cerritos Valley shares plus the cash supplied by Cerritos Valley.
In general, a Cerritos Valley shareholder's gain or loss recognized from the
sale transaction will equal the difference between the amount of cash deemed
received by the shareholder in the sale transaction and the tax basis of the
stock deemed sold in that transaction. This gain or loss will qualify for
capital gain or loss treatment.
In the recapitalization transaction, the gain recognized by the Cerritos Valley
shareholder will equal the lower of the gain realized from the transaction or
the cash received by the Cerritos Valley shareholder from Cerritos Valley. In
general, the recognized gain will qualify for capital gain treatment if one of
the following requirements is met:
- - the recapitalization is not essentially equivalent to a dividend;
- - the recapitalization is a complete termination of the shareholder's
ownership of Cerritos Valley common stock; or
- - the recapitalization is substantially disproportionate with respect to
the shareholder.
To be substantially disproportionate, the recapitalization must meet all of the
following requirements:
- - the shareholder's percentage of the total outstanding voting stock owned
immediately after the Recapitalization is less than 80% of the
shareholder's percentage of the stock owned immediately before the
recapitalization;
- - the shareholder's percentage of the total outstanding common stock, voting
or nonvoting, owned immediately after the recapitalization is less than
80% of the shareholder's percentage of the stock owned immediately before
the recapitalization; and
- - immediately after the recapitalization, the shareholder owns less than
50% of the total combined voting power of all classes of stock entitled to
vote.
If the gain recognized from the recapitalization transaction does not satisfy
any of the requirements described above, the gain will be treated as a dividend
distribution to the shareholder to the extent that Cerritos Valley has
accumulated earnings and profits that exceed the amount of the distribution.
Management of Cerritos Valley believes its aggregate earnings and profits
exceeds the aggregate amount of any distributions that may be treated as
dividend income to Cerritos Valley shareholders.
For the recapitalization tests, the computation of the stock of the corporation
owned by the shareholder immediately before the recapitalization must be made
before any part of the sale and recapitalization transactions occur. Similarly,
the computation of the stock of the corporation owned by the shareholder
immediately after the recapitalization must be made after the sale and
recapitalization transactions are consummated.
31
<PAGE>
Also for the recapitalization tests, shareholders must take into account various
attribution or constructive ownership rules. These rules generally provide that
a shareholder is considered to own not only the shares he or she owns directly,
but also shares owned by his or her spouse, other family members, and related
entities, including partnerships, corporations, trusts and estates. Furthermore,
those related entities are generally considered to own shares that are owned by
their partners, shareholders or beneficiaries. In some instances, waiver of the
family attribution rules is permitted.
If a noncorporate shareholder's gain, if any, is considered capital gain and the
shares of Cerritos Valley common stock tendered have a holding period that
exceeds one year as of the date of the sale and recapitalization transactions,
the shareholder's capital gain will be eligible for a maximum federal long-term
capital gain tax rate of 20 percent. Although California has conformed to the
federal treatment of this transaction, California's income tax rates do not
distinguish between capital gain and ordinary income.
This discussion is derived from an analysis of the current Internal Revenue
Code, the California Revenue and Taxation Code, the Regulations that are part of
THESE Codes, current case law and published rulings. The foregoing is subject to
change, and any change may be retroactively effective. If so, the discussion
above may be affected and may not be relied upon. Cerritos Valley assumes no
responsibility for the discussion after the date of the sale and
recapitalization transactions because of any change to the foregoing Codes, case
law or published rulings.
RIGHTS OF DISSENTING SHAREHOLDERS
Shareholders who do not vote in favor of the merger either by voting against the
agreement or by abstaining from voting are entitled to certain rights under
Chapter 13 of the California General Corporation Law ("Chapter 13"). Chapter 13
is reprinted in Exhibit III to this proxy statement/prospectus. Please note that
all references in Chapter 13 and in this section to a "shareholder" are to the
record holder of dissenting shares. A person having a beneficial interest in
shares of Cerritos Valley common stock held of record in the name of another
person, like a broker or nominee, and wishing to exercise his or her dissenter's
rights should act promptly to cause the shareholder of record to follow the
steps summarized below properly and in a timely manner to perfect his or her
dissenter's rights.
The following discussion is not a complete statement of the law relating to
dissenters' rights and is qualified in its entirety by Exhibit III. This
discussion and Exhibit III should be reviewed carefully by any shareholders who
wish to exercise dissenters' rights or who wish to preserve the right to do so
since failure to comply with the procedures set forth in Chapter 13 will result
in the loss of dissenters' rights.
If the merger is completed, those shareholders who elect to exercise their
dissenters' rights and who properly and timely perfect such rights will be
entitled to receive the "fair market value", in cash, of their shares. "Fair
market value" would be determined as of February 16, 1999, the day before the
first announcement of the terms of the merger, excluding any appreciation caused
by the merger. See "Market Prices."
If the agreement is approved at the meeting, Cerritos Valley will within 10 days
of the approval mail a notice to the holders of record of shares of Cerritos
Valley common stock which were not
32
<PAGE>
voted in favor of the agreement stating that the required shareholder
approval of the merger was obtained. The notice of approval will set forth
the price determined by Cerritos Valley to represent the "fair market value"
of any dissenting shares, and will set forth the procedures, which are also
described below, to be followed by dissenting shareholders who wish to
exercise their legal rights. The procedures include a timely written demand
that must be made to Cerritos Valley in order to perfect the right to dissent
and submission of share certificates. The notice of approval will include a
copy of Sections 1300 through 1304 of the California General Corporation Law.
Under Section 1301(a) of the California General Corporation Law, the statement
in the notice of approval of the determination of the fair market value of
Cerritos Valley common stock will constitute an offer by Cerritos Valley to
purchase from the shareholders any dissenting shares at the price stated,
assuming the merger is completed. However, the determination by Cerritos Valley
of fair market value is not binding on its shareholders, and if a dissenting
shareholder chooses not to accept that offer, he or she has the right during a
period of six months following the mailing of the notice of approval to commence
a lawsuit to have the fair market value determined by a court. The fair market
value as determined by the court in those circumstances could be higher or lower
than the amount offered by Cerritos Valley in the notice of approval and any
such determination would be binding on both the dissenting shareholder or
shareholders involved in the lawsuit and Cerritos Valley.
ANY HOLDER OF RECORD OF CERRITOS VALLEY COMMON STOCK WHO WISHES TO EXERCISE
DISSENTERS' RIGHTS, OR TO PRESERVE THE RIGHT TO DO SO, MUST MAKE A WRITTEN
DEMAND UPON CERRITOS VALLEY THAT CERRITOS VALLEY PAY THE SHAREHOLDER IN CASH THE
FAIR MARKET VALUE OF HIS OR HER DISSENTING SHARES, AS DEFINED ABOVE.
The demand by holders of Cerritos Valley common stock should be sent to Cerritos
Valley Bancorp, 12100 Firestone Boulevard, Norwalk, California 90650, Attention:
President. The written demand must state the number of shares held of record by
the shareholder and the number of shares which the shareholder demands that
Cerritos Valley purchase for cash and must also contain a statement of the
amount which the shareholder claims to be the fair market value of the
dissenting shares, as of the day before the announcement of the proposed merger.
That statement will constitute an offer by the shareholder to sell his or her
dissenting shares to Cerritos Valley at that price. The certificates for shares
of Cerritos Valley common stock must also be included with the written demand.
A proxy card directing a vote against the merger is not sufficient to meet
the requirements for a written demand. THE WRITTEN DEMAND AND THE DISSENTING
SHAREHOLDER'S SHARE CERTIFICATE(S) MUST BE RECEIVED BY CERRITOS VALLEY WITHIN
THIRTY (30) DAYS AFTER THE DATE ON WHICH THE NOTICE OF APPROVAL WAS MAILED TO
THE SHAREHOLDER. The certificate(s) will be stamped or endorsed with a
statement that the shares are dissenting shares and returned to the
dissenting shareholder.
IN ADDITION, THOSE SHAREHOLDERS MAY NOT HAVE VOTED IN FAVOR OF APPROVAL OF THE
AGREEMENT, EITHER IN PERSON OR BY PROXY. A shareholder may vote in favor of
approval of the agreement as to part of his or her shares without jeopardizing
the dissenting status of those shares not voted in favor of approval of the
agreement. However, a shareholder should clearly specify the number of shares
not voted in favor of approval of the agreement.
33
<PAGE>
If the shareholder votes in favor of approval of the agreement, either in person
or by proxy, or if Cerritos Valley does not receive his or her written demand
within thirty (30) days after the notice of approval was mailed to the
shareholder, or if the shareholder otherwise fails to comply in a timely manner
with the procedures of Chapter 13 as described in this section or contained in
Exhibit III, that shareholder shall be bound by the terms of the agreement and
shall lose the right to receive the fair market value of his or her shares in
cash.
Dissenting shares may lose their status as such if any of the following occurs:
the merger is abandoned; the shares are transferred before being submitted to
Cerritos Valley for endorsement; the shareholder withdraws his or her demand
with the consent of Cerritos Valley in the absence of an agreement between the
shareholder and Cerritos Valley as to the price of his or her shares; or the
shareholder fails to file suit against Cerritos Valley or otherwise fails to
become a party to the suit within six months following the mailing of the notice
of approval.
Cerritos Valley will pay the fair market value of dissenting shares at the later
of 30 days following an agreement as to the amount to be paid or within 30 days
after all statutory and contractual conditions to the merger are satisfied;
provided that in the event that the payment cannot be made because
- - Cerritos Valley does not have retained earnings which equals or exceeds
the amount to paid for the dissenting shares; or
- - the sum of Cerritos Valley's assets is not equal to at least 1-1/4 times
its liabilities and/or its current assets are not equal to at least its
current liabilities; or the average of the earnings of Cerritos Valley
before taxes on income and before interest expense for the two preceding
fiscal years was less than the average of its interest expense for those
fiscal years, and its current assets do not equal at least 1-1/4 times its
current liabilities,
then those shareholders holding dissenting shares shall become creditors of
Cerritos Valley and their claims will be payable as soon as permissible under
the provisions. See "Description of the Capital Stock of Cerritos Valley" and
"Market Prices."
The foregoing summarizes certain provisions of Chapter 13 of the California
General Corporation Law, but shareholders of Cerritos Valley considering the
exercise of their rights under those sections should read in full Chapter 13,
which is reproduced in Exhibit III and should consult their own legal
advisors. The receipt of cash payment for dissenting shares will result in
recognition of gain or loss for federal income tax purposes by the dissenting
shareholders. See "Description of the Merger--Federal and California Income
Tax Consequences," above.
34
<PAGE>
DESCRIPTION OF THE CAPITAL STOCK OF CERRITOS VALLEY
The authorized capital stock of Cerritos Valley consists of 20,000,000 shares of
Cerritos Valley common stock, no par value per share, of which 1,001,667 shares
of Cerritos Valley common stock were outstanding as of June 30, 1999. In
addition, 162,000 shares of Cerritos Valley common stock were reserved for
issuance pursuant to stock option and other employee stock plans. Each share has
the same rights, privileges and preferences as every other share and would share
equally in Cerritos Valley's net assets upon liquidation or dissolution. The
shares of Cerritos Valley common stock have no preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions. Each share is entitled to one vote, except that in the election of
directors, Cerritos Valley shareholders may vote their shares cumulatively. All
of the outstanding shares of Cerritos Valley common stock are fully paid and
nonassessable and each participates equally in dividends, which are payable when
and as declared by Cerritos Valley's Board of Directors out of funds legally
available for the payment of dividends.
CERRITOS VALLEY FOLLOWING THE MERGER
The articles of incorporation and bylaws of Cerritos Valley will continue as the
articles of incorporation and bylaws of Cerritos Valley following the merger.
The authorized capital stock of Cerritos Valley following the merger will
consist of 20,000,000 shares of Cerritos Valley common stock. The rights,
preferences and privileges of Cerritos Valley common stock following the merger
will be the same as those described above for Cerritos Valley common stock.
35
<PAGE>
MARKET PRICES
Cerritos Valley common stock is not listed on any stock exchange, nor is it
listed with NASDAQ. Cerritos Valley is considering listing its shares with
NASDAQ following the merger. Cerritos Valley common stock does not have an
active trading market, and there is no established public market for Cerritos
Valley common stock. Management of Cerritos Valley is aware that CEDE, Smith
Barney, Paine Webber and Merrill Lynch handle trades in Cerritos Valley common
stock.
The following table shows the high and low bid quotations for Cerritos Valley
common stock, as reported by the above brokers during the first quarter of 1999
and the calendar quarters for the years 1998 and 1997. These quotations reflect
the price that would be received by the seller, without retail mark-up,
mark-down or commissions and may not have represented actual transactions:
<TABLE>
<CAPTION>
Bid Prices
-----------------
Quarter High Low Volumes
- ---------------- ----- ----- -------
<S> <C> <C> <C>
1st Quarter 1999 $8.50 $8.50 62
4th Quarter 1998 N/A N/A 0
3rd Quarter 1998 $9.00 $8.50 27,859
2nd Quarter 1998 $9.00 $8.50 5,644
1st Quarter 1998 $6.50 $6.50 45,595
4th Quarter 1997 $6.50 $6.00 1,499
3rd Quarter 1997 $6.50 $6.00 6,085
2nd Quarter 1997 $6.50 $6.00 18,666
1st Quarter 1997 $6.50 $6.00 40,800
</TABLE>
The last sales price of Cerritos Valley common stock on or before February 16,
1999, the day prior to the date of the first public announcement of the proposed
merger, was $8.50, which reflects a sale that occurred on September 30, 1998.
The last sales price of Cerritos Valley common stock on or before __________,
1999, the last practicable date before printing of this proxy
statement/prospectus, was $_____, which reflects a sale that occurred on
__________, 1999. The "bid" and "asked" prices of Cerritos Valley common stock
on __________, 1999 were $_____ and $_____, respectively.
If the merger is completed, no assurance can be given that the trading market
for Cerritos Valley common stock will be more active than that which currently
exists for Cerritos Valley common stock.
As of June 30, 1999, the outstanding shares of Cerritos Valley common stock were
held by approximately 210 record holders.
36
<PAGE>
DIVIDENDS
Cerritos Valley shareholders are entitled to receive dividends when and as
declared by its board of directors, out of funds legally available for the
payment of dividends. Cerritos Valley may make a distribution to its
shareholders if its retained earnings immediately prior to the dividend
payout at least equal to the amount of the proposed distribution. In the
event that sufficient retained earnings are not available for the proposed
distribution, Cerritos Valley may, nevertheless, make a distribution if it
meets both the "quantitative solvency" and the "liquidity" tests. In general,
the quantitative solvency test requires that the sum of Cerritos Valley's
assets equal at least 1-1/4 times its liabilities. The liquidity test
generally requires Cerritos Valley have current assets at least equal to
current liabilities, or, if the average of its earnings before taxes on
income and before interest expense for the two preceding fiscal years was
less than the average of its interest expense for those fiscal years, then
current assets must equal at least 1-1/4 times current liabilities.
Cerritos Valley has not paid any cash or stock dividends to its shareholders
during 1999, 1998, 1997 and 1996.
The amount and payment of dividends by Cerritos Valley are set by Cerritos
Valley's Board of Directors with numerous factors involved including Cerritos
Valley's earnings, financial condition and the need for capital for expanded
growth and general economic conditions. While Cerritos Valley may, in the
future, declare dividends based upon the decisions of its Board of Directors,
there can be no assurance that such dividends will be declared. Under the
agreement, Cerritos Valley has agreed that it will not declare or pay any cash
dividend on the shares of Cerritos Valley common stock, except as consistent
with past practices. This restriction would no longer be applicable in the event
the merger is not approved by the shareholders, and will not restrict Cerritos
Valley's ability to pay dividends following the merger. The payment of dividends
will depend, in any event, upon Cerritos Valley's earnings, financial condition,
the need for capital for expanded growth and general economic conditions.
37
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
CERTAIN MATTERS DISCUSSED OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS
AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DESCRIBED BELOW. THEREFORE, THE
INFORMATION SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS SHOULD BE CAREFULLY
CONSIDERED WHEN EVALUATING THE BUSINESS PROSPECTS OF CERRITOS VALLEY ON AN
INDIVIDUAL AND CONSOLIDATED BASIS.
The following pro forma financial statements as of March 31, 1999 reflect the
financial position of Cerritos Valley as if the merger had taken place at that
date. The merger will be accounted for as an issuance of shares of Cerritos
Valley common stock and a redemption of shares from, and a deemed dividend to,
the existing shareholders of Cerritos Valley. The pro forma statements of
earnings assume the merger took place as of January 1, 1998.
These pro forma financial statements should be read in connection with the
historical financial statements and the related notes to the financial
statements which are included in this proxy statement/prospectus.
The pro forma information is not necessarily indicative of the financial
position or results of operations of Cerritos Valley which would have been
achieved had the merger been effected on the assumed date and should not be
construed as representative of future operations.
38
<PAGE>
EXISTING AND PRO FORMA CONSOLIDATED CAPITALIZATION
The following table shows the existing capitalization of Cerritos Valley and
Cerritos Merger Co. and the pro forma consolidated capitalization of Cerritos
Valley as if the merger had taken place at March 31, 1999 (dollars in
thousands).
<TABLE>
<CAPTION>
Pro Forma
Consolidated
Cerritos Surviving
Cerritos Valley Merger Co. Adjustments(1) Cerritos Valley(1)
--------------- ---------- -------------- ------------------
<S> <C> <C> <C> <C>
Shareholders' equity:
Contributed capital $ 6,541 $12,800 $ (9,729)(2)
(1,524)(3) $ 8,088
Retained earnings 6,200 (3,846)(2)
(615)(3)
(147)(4) 1,592
Accumulated other
comprehensive income (196) (196)
-------- ------- --------- -------
Total shareholders'
equity $ 12,545 $12,800 $ (15,861) $ 9,484
-------- ------- --------- -------
-------- ------- --------- -------
Authorized shares of
common stock 20,000,000 10,000,000 20,000,000
Outstanding shares 991,667 543,959 (543,959) 991,667
</TABLE>
- -----------------
(1) Assumes that holders of 100% of Cerritos Valley common stock convert
their shares into cash and .5271 shares of Cerritos Valley common
stock and that an aggregate of 543,959 shares of Cerritos Valley
common stock are issued to the California Fund and 522,708 shares of
Cerritos Valley common stock are issued in the merger and 75,000
owned by James N. Koury are redeemed immediately following the
merger.
(2) Adjustment represents the redemption of 468,959 shares of common
stock from existing shareholders in connection with the merger.
Assuming that all of the outstanding shares of Cerritos Valley
common stock are converted, the agreement calls for the existing
shareholders to receive cash in the amount of $13,374,711.
The redemption was accounted for as a repurchase of shares of
$9,529,247 at a price per share of $20.32, plus estimated merger
costs of $200,000. The redemption value per share was determined
based on the California Fund's purchase price of $20.32 per share
of Cerritos Valley common stock and warrants to acquire 86,000
shares of Cerritos Valley common stock. The remaining $3,845,464
was accounted for as a deemed dividend paid to the existing
shareholders.
(3) Adjustment represents the redemption of 75,000 shares of Cerritos
Valley common stock from Mr. Koury, the President and Chairman of the
Board of Cerritos Valley as consideration for amending his existing
rights to purchase shares of Cerritos Valley common stock. The
purchase price of $2,139,000 was accounted for as redemption in the
amount $1,524,000 and a deemed dividend of $615,000.
(4) Adjustment represents a charge to earnings as a result of a
settlement of certain options held by employees in exchange for
$237,500, net of tax adjustment of $90,250.
39
<PAGE>
CERRITOS VALLEY AND SUBSIDIARY
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
--------------- ----------------- ---------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 9,140,214 $ 12,800,000 (1) $ 6,189,003
(237,500)(2)
13,374,711)(3)
(2,139,000)(4)
Federal funds sold 8,435,000 -- 8,435,000
-------------- --------------- -------------
Cash and cash equivalents 17,575,214 (2,951,211) 14,624,003
Investment securities
Available-for-sale 38,516,539 38,516,539
Held-to-maturity, fair value of $3,298,498 2,277,506 2,277,506
Loans receivable, net of allowance for
loan losses of $1,145,488 at March 31, 1999 62,563,672 62,563,672
Loans held for sale 1,232,486 1,232,486
Bank premises and equipment 1,872,688 1,872,688
Accrued interest receivable 1,138,205 1,138,205
Prepaid expenses and other assets 3,099,260 -- 3,099,260
-------------- --------------- -------------
Total assets $128,275,570 $ (2,951,211) $125,324,359
-------------- --------------- -------------
-------------- --------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Checking noninterest-bearing $ 34,086,161 $ -- $ 34,086,161
Checking interest-bearing and savings 24,951,630 24,951,630
Money markets accounts 9,940,353 9,940,353
Time certificates of deposits
under $100,000 14,123,182 14,123,182
Time certificates of deposits
$100,000 and over 17,298,079 17,298,079
-------------- --------------- -------------
Total deposits 100,399,405 100,399,405
FHLB advances 12,848,223 12,848,223
Treasury, tax and loan 310,773 310,773
Obligations under capital leases 243,595 243,595
Accrued expenses and other liabilities 1,928,919 (90,250)(2) 2,038,669
200,000 (3)
-------------- ------------- -------------
Total liabilities 115,730,915 109,750 115,840,665
Commitments and contingencies -- -- --
Stockholders' equity
Contributed capital
Common stock-authorized 20,000,000 shares, 11,059,200 (1)
no par value; 991,667 (pro forma 991,667) (9,729,247)(3)
shares issued and outstanding 6,540,813 (1,524,000)(4) 6,346,766
Additional paid-in-capital-stock warrants 1,740,800 (1) 1,740,800
Retained earnings 6,200,024 (3,845,464)(3) 1,592,310
(615,000)(4)
(147,250)(2)
Accumulated other comprehensive income (196,182) -- (196,182)
-------------- --------------- -------------
Total stockholders' equity 12,544,655 (3,060,961) 9,483,694
-------------- --------------- -------------
Total liabilities and stockholders'
equity $ 128,275,570 $ (2,951,211) $ 125,324,359
-------------- --------------- -------------
-------------- --------------- -------------
</TABLE>
- -----------------
(Footnotes on the following page.)
40
<PAGE>
(1) Adjustment represents the purchase of 543,959 shares of Cerritos
Valley common stock and 86,000 stock warrants by California Fund, as
indicated in the agreement. The purchase price of $12,800,000 was
allocated between the shares of Cerritos Valley common stock and
stock warrants based on their relative fair values at the date of the
agreement.
(2) Adjustment represents a charge to earnings as a result of a
settlement of certain options held by employees in exchange for
$237,500, net of tax adjustment of $90,250.
(3) Adjustment represents the redemption of 468,959 shares of common
stock from existing shareholders in connection with the merger.
Assuming that all of the outstanding shares of Cerritos Valley
common stock are converted, the agreement calls for the existing
shareholders to receive cash in the amount of $13,374,711. The
redemption was accounted for as a repurchase of shares of $9,529,247
at a price per share of $20.32, plus estimated merger costs of
$200,000. The redemption value per share was determined based on the
California Fund's purchase price of $20.32 per share of Cerritos
Valley common stock and warrants to acquire 86,000 shares of
Cerritos Valley common stock. The remaining $3,845,464 was accounted
for as a deemed dividend paid to the existing shareholders.
(4) Adjustment represents the redemption of 75,000 shares of Cerritos
Valley common stock from Mr. Koury, the President and Chairman of the
Board of Cerritos Valley as consideration for amending his existing
rights to purchase shares of Cerritos Valley common stock. The
purchase price of $2,139,000 was accounted for as redemption in the
amount $1,524,000 and a deemed dividend of $615,000.
41
<PAGE>
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Historical Pro Forma
----------- -----------
<S> <C> <C>
Interest income
Interest and fees on loans $1,600,512 $1,600,512
Interest on investment securities
Available-for-sale 535,729 535,729
Held-to-maturity 26,237 26,237
FHLB dividends and other interest 153 153
Interest on federal funds sold 95,595 95,595
---------- ----------
Total interest income 2,258,226 2,258,226
---------- ----------
Interest expense
Deposits 568,774 568,774
Other 188,811 188,811
---------- ----------
Total interest expense 757,585 757,585
---------- ----------
Net interest income 1,500,641 1,500,641
Provision for loan losses 85,000 85,000
---------- ----------
Net interest income after provision
for loan losses 1,415,641 1,415,641
Noninterest income
Service charges on deposit accounts 300,802 300,802
Other service charges and income 82,566 82,566
Gain on sale of loans 396 396
---------- ----------
Total noninterest income 383,764 383,764
---------- ----------
Noninterest expense
Salaries and employee benefits 503,507 503,507
Occupancy 89,741 89,741
Other operating expenses 611,185 611,185
---------- ----------
Total noninterest expense 1,204,433 1,204,433
---------- ----------
Earnings before income taxes 594,972 594,972
Income tax expense 243,194 243,194
---------- ----------
Net earnings $ 351,778 $ 351,778
---------- ----------
---------- ----------
Basic earnings per share $0.35 $0.35
----- -----
----- -----
Diluted earnings per share $0.32 $0.29
----- -----
----- -----
Basic weighted average shares outstanding 991,667 991,667
---------- ----------
---------- ----------
Dilutive weighted average shares outstanding 1,083,970 1,195,636
---------- ----------
---------- ----------
</TABLE>
42
<PAGE>
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- ----------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $6,032,266 $6,032,266
Interest on investment securities
Available for sale 1,692,897 1,692,897
Held to maturity 221,636 221,636
FHLB dividends and other interest 48,915 48,915
Interest on federal funds sold 557,701 557,701
---------- ----------
Total interest income 8,553,415 8,553,415
---------- ----------
Interest expense
Deposits 2,255,122 2,255,122
Other 351,839 351,839
---------- ----------
Total interest expense 2,606,961 2,606,961
---------- ----------
Net interest income 5,946,454 5,946,454
Provision for loan losses 310,000 310,000
---------- ----------
Net interest income after provision
for loan losses 5,636,454 5,636,454
Noninterest income
Service charges on deposit accounts 1,081,733 1,081,733
Other service charges and income 385,785 385,785
Gain on sale of real estate owned 14,681 14,681
Gain on sale of loans 80,837 80,837
---------- ----------
Total noninterest income 1,563,036 1,563,036
---------- ----------
Noninterest expense
Salaries and employee benefits 2,230,404 $237,500(1) 2,467,904
Occupancy 304,496 304,496
Other operating expenses 2,172,290 2,172,290
---------- --------- ----------
Total noninterest expense 4,707,190 237,500(1) 4,944,690
---------- --------- ----------
Earnings before income taxes 2,492,300 (237,500) 2,254,800
Income tax expense 954,301 (90,250)(1) 864,141
---------- --------- ----------
Net earnings $1,537,909 $(147,250) $1,390,659
---------- --------- ----------
---------- --------- ----------
Basic earnings per share $1.54 $1.39
----- -----
----- -----
Diluted earnings per share $1.41 $1.16
----- -----
----- -----
Basic weighted-average shares outstanding 999,653 999,653
---------- ----------
---------- ----------
Dilutive weighted-average shares outstanding 1,088,161 1,203,622
---------- ----------
---------- ----------
</TABLE>
- -----------------
(1) Adjustment represents a charge to earnings as a result of settlement
of certain nonqualified stock options held by employees in exchange
for cash of $237,500 net of an income tax adjustment to $90,250 in
connection with the merger.
43
<PAGE>
COMPARATIVE PER SHARE DATA
The following depicts historical and pro forma diluted common per share
information for Cerritos Valley for the three month period ended March 31, 1999
and the year ended December 31, 1998. The pro forma per share information
assumes that (1) the merger was completed at January 1, 1998, (2) each
outstanding share of Cerritos Valley common stock was converted into .5271
shares of new Cerritos Valley common stock, and (3) an additional 75,000 shares
of new Cerritos Valley common stock were redeemed. The following information
should be read in connection with the financial statements for the three month
period ended March 31, 1999 and year ended December 31, 1998. See "Description
of the Merger--Exchange of Shares and Options."
<TABLE>
<CAPTION>
Three Month
Period Ended Year Ended
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Amounts per diluted common share
Cerritos Valley-historical
Net earnings(1) $ 0.35 $ 1.41
Book value(2) $12.65 $12.52
Amounts per diluted common share
Cerritos Valley-pro forma
Net earnings(3) $ 0.29 $ 1.16
Book value(2) $ 9.56 $ 9.43
</TABLE>
- -----------------
(1) Historical net earnings per share calculations use the
weighted-average common stock and common stock equivalents shares
outstanding.
(2) Historical book value per share and pro forma book value per share
are based on the actual/pro forma number of shares outstanding at the
end of the period.
(3) Pro forma net earnings per share is determined in the same manner as
in footnote (1) above, except the issuance and redemption of Cerritos
Valley shares are assumed to have taken place on January 1, 1998 and
a price per share of $20.32 is used to determine the number of common
stock equivalents outstanding.
44
<PAGE>
REGULATORY CAPITAL ADEQUACY
The following table shows, as of March 31, 1999, the regulatory capital ratios
of Cerritos Valley on a historical basis and Cerritos Valley on a pro forma
basis assuming completion of the merger, and the minimum regulatory capital
ratios.
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------
Cerritos
Minimum Valley
--------- ---------
<S> <C> <C>
Leverage ratio 3.0 - 5.0% 10.0%
Tier 1 risk-based capital ratio 4.0% 15.9%
Total risk-based capital ratio 8.0% 17.1%
Cerritos Valley
Minimum Following the Merger
--------- ----------------------
Leverage ratio 3.0 - 5.0% 7.7%
Tier 1 risk-based capital ratio 4.0% 12.3%
Total risk-based capital ratio 8.0% 13.5%
</TABLE>
45
<PAGE>
DESCRIPTION OF CERRITOS VALLEY
BUSINESS
GENERAL. Cerritos Valley was incorporated in California on July 1, 1987.
Cerritos Valley was organized pursuant to a plan of reorganization for the
purpose of becoming the parent corporation of Cerritos Valley Bank, and on
January 11, 1988, the reorganization was effected and shares of Cerritos
Valley common stock were issued to the shareholders of Cerritos Valley Bank
for the common shares held by Cerritos Valley Bank's shareholders. Cerritos
Valley is a registered bank holding company under the Bank Holding Company
Act of 1956. Cerritos Valley conducts its operations at the head office of
Cerritos Valley Bank located at 12100 Firestone Boulevard, Norwalk,
California 90650.
Cerritos Valley Bank was incorporated under the laws of the State of
California on January 24, 1969, and was licensed by the former California
State Banking Department, which is now the California Department of Financial
Institutions, and commenced operations as a California state-chartered bank
in 1969. Cerritos Valley Bank is an insured bank under the Federal Deposit
Insurance Act, up to the applicable limits under the Federal Deposit
Insurance Act, and it is a member of the Federal Reserve System. Cerritos
Valley Bank's head office is located at 12100 Firestone Boulevard, Norwalk,
California, and its branch offices are located at 18300 Pioneer Boulevard,
Artesia, California, 3508 E. Florence Avenue, Huntington Park, California,
and 411 N. Central Avenue, Glendale, California. Cerritos Valley Bank does
not have any affiliates or subsidiaries.
BANKING SERVICES. Cerritos Valley is a locally owned and operated bank holding
company, and its primary service area is the Southern California communities
of Norwalk, Artesia, Huntington Park and Glendale. Cerritos Valley Bank's
primary business is servicing the banking needs of these communities and its
marketing strategy stresses its local ownership and commitment to serve the
banking needs of individuals living and working in Cerritos Valley Bank's
primary service areas and local businesses, including retail, professional
and real estate-related activities in those service areas.
Cerritos Valley offers a broad range of services to individuals and businesses
in its primary service area with an emphasis upon customer service, efficiency,
and personalized services. Cerritos Valley Bank offers a full line of consumer
services and also offers personal and business checking and savings accounts,
including individual interest-bearing negotiable orders of withdrawal ("NOW"),
money markets accounts, individual retirement accounts and time certificate of
deposits, direct deposit of social security and payroll checks and wire
transfers services with plans in the future to institute personal computer
banking.
Cerritos Valley Bank engages in a full complement of lending activities,
including commercial, construction, Small Business Administration, second trust
deed homeowner equity, home improvement, automobile, boat, and consumer loans,
as well as overdraft protection lines of credit, standby letters of credit,
revolving lines of credits, credit card, issued and serviced by an independent
entity, and other short term real estate loans, with particular emphasis on
small- and medium-size credits. Commercial lending activities are directed
principally towards businesses
46
<PAGE>
whose demand for funds falls within Cerritos Valley Bank's lending limits, such
as small- to medium-size business concerns, real estate developers and
professional firms. Consumer lending is oriented primarily toward the personal
needs of Cerritos Valley Bank's customers, with emphasis on automobile and
recreational vehicle financing. Consumer loans also include loans for boats,
home improvement, and debt consolidation. Real estate loans include home equity,
home improvement, and short-term construction loans.
Management seeks to obtain sufficient market penetration through the full range
of services described above and through personal solicitation by Cerritos Valley
Bank's officers, directors, and shareholders. All loan officers are responsible
for making regular calls on potential customers to solicit business and on
existing customers to obtain referrals. Promotional efforts are directed toward
individuals and small- to medium-sized businesses and professional firms. As of
March 31, 1999, Cerritos Valley Bank had a total of 10,452 accounts consisting
of demand deposit, NOW, money market accounts, savings accounts, time
certificates of $100,000 or more and other time deposits. Cerritos Valley Bank
has not obtained any deposits through deposit brokers and has no present
intention of using brokered deposits. There is no concentration of deposits or
any customer with 5% or more of Cerritos Valley Bank's deposits.
EMPLOYEES. As of March 31, 1999, Cerritos Valley employed 53 persons on a
full-time equivalent basis. Senior management believes that Cerritos Valley's
relations with its employees are good.
PROPERTIES. Cerritos Valley and Cerritos Valley Bank are leasing the property
located at 12100 Firestone Boulevard, Norwalk, California. The stand alone
building situated on the property consists of 7,500 square feet and it houses
the administration offices and the head office of Cerritos Valley and Cerritos
Valley Bank. The lease was executed in 1978 and will expire in August 2007.
Cerritos Valley Bank owns the branch office located at 3508 E. Florence Avenue,
Huntington Park, California. Cerritos Valley Bank purchased the building that
houses the Huntington Park branch in 1995 from the FDIC when it acquired the
branch. The building consists of 13,530 square feet of which the Huntington Park
branch utilizes 4,797 square feet. Cerritos Valley Bank leases the rest of the
space to seven other tenants that are renting for 2 to 5 year terms.
Cerritos Valley Bank leases its Artesia branch office. The Artesia branch office
is located at 18300 Pioneer Boulevard, Artesia, California in a two-story
building. The first floor consists of 7,106 square feet and houses Cerritos
Valley Bank's Artesia branch office and the real estate loan center. The lease
for the first floor will expire on July 16, 2002. The second floor consists of
7,565 square feet and its lease will expire on June 16, 2004, with an option to
renew until June 17, 2012. Cerritos Valley Bank is actively listing the second
floor for subleasing to one tenant. Cerritos Valley Bank also has an option to
purchase the entire building.
Cerritos Valley Bank also leases its Glendale branch office. The Glendale branch
office is located at 411 N. Central Avenue, Glendale, California. The branch
space at this site consists of approximately 3,500 square feet. The premises are
leased for a term expiring on March 1, 2008.
LEGAL PROCEEDINGS. From time to time, Cerritos Valley is a party to claims
and legal proceedings arising in the ordinary course of business. Cerritos
Valley's management is not
47
<PAGE>
aware of any material pending litigation proceedings to which either it or
Cerritos Valley Bank is a party or has recently been a party, which will have a
material adverse effect on the financial condition or results of operations of
Cerritos Valley and Cerritos Valley Bank, taken as a whole.
SUPERVISION AND REGULATION
SUPERVISION AND REGULATION OF BANK HOLDING COMPANIES. Cerritos Valley is a bank
holding company subject to the Bank Holding Company Act of 1956, as amended.
Cerritos Valley reports to, registers with, and may be examined by, the Federal
Reserve Board. The Federal Reserve Board also has the authority to examine
Cerritos Valley's nonbanking subsidiaries. The costs of any examination by the
Federal Reserve Board are payable by Cerritos Valley.
Cerritos Valley also is a bank holding company within the meaning of Section
3700 of the California Financial Code. As such Cerritos Valley and Cerritos
Valley Bank are subject to examination by, and may be required to file reports
with, the California Department of Financial Institutions.
The Federal Reserve Board has significant supervisory and regulatory authority
over Cerritos Valley and its affiliates. The Federal Reserve Board requires
Cerritos Valley to maintain certain levels of capital. See "Description of
Cerritos Valley--Management's Discussion And Analysis of Financial Condition And
Results Of Operations--Regulatory Matters." The Federal Reserve Board also has
the authority to take enforcement action against any bank holding company that
commits any unsafe or unsound practice, or violates certain laws, regulations or
conditions imposed in writing by the Federal Reserve Board. See "Description of
Cerritos Valley--Recent Legislation and Other Changes."
Under the Bank Holding Company Act, a bank holding company generally must obtain
the prior approval of the Federal Reserve Board before it exercises a
controlling influence over a bank, or acquires directly or indirectly, more than
5% of the voting shares or substantially all of the assets of any bank or bank
holding company. Thus, Cerritos Valley would be required to obtain the prior
approval of the Federal Reserve Board before it acquires, merges or consolidates
with any bank or bank holding company; and any company seeking to acquire, merge
or consolidate with Cerritos Valley also would be required to obtain the
approval of the Federal Reserve Board.
Cerritos Valley is generally prohibited under the Bank Holding Company Act from
acquiring ownership or control of more than 5% of the voting shares of any
company that is not a bank or bank holding company and from engaging directly or
indirectly in activities other than banking, managing banks, or providing
services to affiliates of the holding company. A bank holding company, with the
approval of the Federal Reserve Board, may engage, or acquire the voting shares
of companies engaged, in activities that the Federal Reserve Board has
determined to be so closely related to banking or managing or controlling banks
as to be a proper activity. A bank holding company must demonstrate that the
benefits to the public of the proposed activity will outweigh the possible
adverse effects associated with the activity.
A bank holding company may acquire banks in states other than its home state
without regard to the permissibility of such acquisitions under state law, but
subject to any state requirement that the bank has been organized and operating
for a minimum period of time, not to exceed five years, and the requirement that
the bank holding company, prior to or following the proposed
48
<PAGE>
acquisition, controls no more than 10% of the total amount of deposits of
insured depository institutions in the United States and no more than 30% of
such deposits in that state (or such lesser or greater amount set by state law).
Banks may also merge across states lines, therefore creating interstate
branches. Furthermore, a bank is now able to open new branches in a state in
which it does not already have banking operations, if the laws of such state
permit such de novo branching.
The Federal Reserve Board generally prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowing or other
arrangements that might adversely affect a bank holding company's financial
position. The Federal Reserve Board's policy is that a bank holding company
should not continue its existing rate of cash dividends on its common stock
unless its net income is sufficient to fully fund each dividend and its
prospective rate of earnings retention appears consistent with its capital
needs, asset quality and overall financial condition.
See the section entitled "Dividends" for additional restrictions.
Transactions between Cerritos Valley and Cerritos Valley Bank are subject to a
number of other restrictions. Federal Reserve Board policies forbid the payment
by bank subsidiaries of management fees which are unreasonable in amount or
exceed the fair market value of the services rendered, or, if no market exists,
actual costs plus a reasonable profit. Subject to limitations, depository
institution subsidiaries of bank holding companies may extend credit to, invest
in the securities of, purchase assets from, or issue a guarantee, acceptance, or
letter of credit on behalf of, an affiliate, provided that the aggregate of such
transactions with any affiliate may not exceed 10% of the capital stock and
surplus of the institution, and the aggregate of such transactions with all
affiliates may not exceed 20% of the capital stock and surplus of such
institution. Cerritos Valley may only borrow from depository institution
subsidiaries if the loan is secured by marketable obligations with a value of a
designated amount in excess of the loan. Further, Cerritos Valley may not sell a
low-quality asset to a depository institution subsidiary.
The Federal Reserve Board has adopted comprehensive amendments to Regulation Y
which became effective April 21, 1998, and are intended to improve the
competitiveness of bank holding companies by, among other things:
o expanding the list of permissible nonbanking activities in which well run
bank holding companies may engage without prior Federal Reserve Board
approval;
o streamlining the procedures for well run bank holding companies to obtain
approval to engage in other nonbanking activities; and
o eliminating most of the anti-tying restrictions imposed upon bank holding
companies and their nonbank subsidiaries.
Amended Regulation Y also provides for a streamlined and expedited review
process for bank acquisition proposals submitted by well run bank holding
companies and eliminates certain duplicative reporting requirements when there
has been a further change in bank control or in bank directors or officers after
an earlier approved change. These changes to Regulation Y are subject to
numerous qualifications, limitations and restrictions. In order for a bank
holding
49
<PAGE>
company to qualify as "well run," both it and the insured depository
institutions that it controls must meet the "well capitalized" and "well
managed" criteria set forth in Regulation Y.
To qualify as "well capitalized," the bank holding company must, on a
consolidated basis:
o maintain a total risk-based capital ratio of 10% or greater;
o maintain a Tier 1 risk-based capital ratio of 6% or greater;
o maintain a leverage ratio of 5% or greater; and
o not be subject to any order by the Federal Reserve Board to
meet a specified capital level.
Its lead insured depository institution must be well capitalized as that term is
defined in the capital adequacy regulations of the applicable bank regulator,
80% of the total risk-weighted assets held by its insured depository
institutions must be held by institutions that are well capitalized, and none of
its insured depository institutions may be undercapitalized.
To qualify as "well managed":
o each of the bank holding company, its lead depository institution and its
depository institutions holding 80% of the total risk-weighted assets of
all its depository institutions at their most recent examination or review
must have received a composite rating, rating for management and rating
for compliance which were at least satisfactory;
o none of the bank holding company's depository institutions may have
received one of the two lowest composite ratings; and
o neither the bank holding company nor any of its depository institutions
during the previous 12 months may have been subject to a formal
enforcement order or action.
BANK SUPERVISION AND REGULATION. As a California state-licensed bank,
Cerritos Valley Bank is subject to regulation, supervision and periodic
examination by the Department of Financial Institutions and the FDIC.
Cerritos Valley Bank is also a member of the Federal Reserve System, and is
subject to certain regulations of the Federal Reserve Board. Cerritos Valley
Bank's deposits are insured by the FDIC to the maximum amount permitted by
law, which is currently $100,000 per depositor in most cases.
The regulations of these state and federal bank regulatory agencies govern most
aspects of Cerritos Valley Bank's business and operations, including but not
limited to, the scope of its business, its investments, its reserves against
deposits, the nature and amount of any collateral for loans, the timing of
availability of deposited funds, the issuance of securities, the payment of
dividends, bank expansion and bank activities, including real estate development
and insurance activities, and the maximum rates of interest allowed on certain
deposits. Cerritos Valley Bank is also subject to the requirements and
restrictions of various consumer laws and regulations.
50
<PAGE>
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS. Cerritos Valley Bank
is subject to certain fair lending requirements and reporting obligations
involving home mortgage lending operations and Community Reinvestment Act
activities. The Community Reinvestment Act generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and Community Reinvestment
Act into account when regulating and supervising other activities.
SUMMARY OF EARNINGS
The following consolidated Summary of Earnings of Cerritos Valley and subsidiary
for the three years ended December 31, 1998 has been derived from financial
statements audited by Grant Thornton LLP for the years ended 1998 and 1997, and
from the financial statements audited by Vavrinek, Trine, Day & Co., LLP for the
year ended 1996. Both Grant Thornton LLP, and Vavrinek, Trine, Day & Co., LLP
are independent certified public accountants, as described in their reports
included at the end of this proxy statement/prospectus. The amounts shown for
the three months ended March 31, 1999 and 1998 are unaudited. The March 31, 1999
and 1998 amounts reflect, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results of operations for such periods. The three months
earnings are not necessarily an indication of a full year's results of
operations. These statements should be read in conjunction with the Financial
Statements and the Notes to the Financial Statements which appear at the end of
this proxy statement/prospectus.
51
<PAGE>
<TABLE>
<CAPTION>
Three
Months Ended
March 31, Year Ended December 31,(1)
(Dollars in thousands, --------------------------- -------------------------------------------
except per share data) 1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income $ 2,258 $ 1,975 $ 8,553 $ 7,301 $ 6,896
Interest expense 758 572 2,607 1,985 1,883
--------- --------- --------- --------- ---------
Net interest income 1,500 1,403 5,946 5,316 5,012
Provision for loan losses 85 75 310 750 604
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 1,415 1,328 5,636 4,566 4,408
Other noninterest income 384 335 1,563 1,515 2,337
Noninterest expense 1,204 1,070 4,707 4,310 5,117
--------- --------- --------- --------- ---------
Earnings before income taxes 595 593 2,492 1,771 1,628
Provision for income taxes(2) 243 227 954 262 613
--------- --------- --------- --------- ---------
Net earnings $ 352 $ 366 $ 1,538 $ 1,509 $ 1,015
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per share $ 0.35 $ 0.37 $ 1.54 $ 1.51 $ 1.01
Number of shares used in basic
earnings per share calculation(3) 991,667 1,000,000 999,653 999,911 999,901
Diluted earnings per share $ 0.32 $ 0.34 $ 1.41 $ 1.42 $ 0.99
Number of shares used in diluted
earnings per share calculation 1,083,970 1,084,331 1,088,161 1,066,553 1,023,976
</TABLE>
- ------------
(1) See Notes to Financial Statements for a summary of significant
accounting policies and other related data.
(2) See Notes to Financial Statements for an explanation of income taxes.
(3) Basic earnings per share information is based on the weighted average
number of shares of common stock outstanding during each period.
(4) Diluted earnings per share information is based on the weighted
average number of shares of common stock and common stock equivalents
outstanding during each period.
The following table sets forth selected ratios for the periods indicated:
<TABLE>
<CAPTION>
Three
Months Ended
March 31, Year Ended December 31,
--------------------------- -------------------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings to average
shareholders' equity 11.27% 13.07% 13.09% 15.34% 11.62%
Net earnings to average
total assets 1.11% 1.42% 1.37% 1.59% 1.11%
Average shareholders' equity
to average total assets 9.82% 10.87% 10.44% 10.35% 9.61%
Total interest expense to
total interest income 33.57% 28.96% 30.48% 27.19% 27.31%
Other noninterest income
to noninterest expense 31.89% 31.31% 33.21% 35.15% 45.67%
</TABLE>
- -----------------
(1) Ratios have been annualized for the three months ended March 31, 1999
and 1998.
52
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the significant changes
in income and expense accounts presented in the Summary of Earnings for the
years ended December 31, 1998, 1997 and 1996 and the three months ended March
31, 1999 and 1998.
INTRODUCTION. This discussion is designed to provide a better understanding of
significant trends related to Cerritos Valley's financial condition, results of
operations, liquidity, capital resources and interest rate sensitivity. This
discussion should be read in conjunction with Cerritos Valley's audited
financial statements and notes thereto and the other financial information
appearing elsewhere in this proxy statement/prospectus.
NET INTEREST INCOME AND NET INTEREST MARGIN. Total interest income increased
from $6.89 million in 1996 to $7.30 million in 1997, and to $8.55 million in
1998, representing a 5.9% increase in 1997 over 1996 and a 17.2% increase in
1998 over 1997. Total interest income increased from $1.98 million for the three
months ended March 31, 1998, to $2.26 million for the three months ended March
31, 1999, representing a 14.3% increase. Total interest income increases in the
periods discussed were primarily the result of the growth in Cerritos Valley
Bank's loan and investment portfolios as a result of opening the Glendale branch
in April 1998, and growth in Cerritos Valley's established market areas. Total
interest expense increased from $1.88 million in 1996 to $1.98 million in 1997,
and to $2.61 million in 1998, representing a 5.39% increase in 1997 over 1996
and a 31.35% increase in 1998 over 1997. The increase in interest expense in
1998 over 1997 was primarily the result of obtaining advances from the Federal
Home Loan Bank ("FHLB") at favorable interest rates to match the funding of
fixed term loans, and the growth in deposits as a result of opening a new branch
in Glendale. Total interest expense increased from $572,000 for the three months
ended March 31, 1998, to $758,000 for the three months ended March 31, 1999,
representing a 32.52% increase.
Cerritos Valley's net interest margin (net interest income divided by average
earning assets) was 6.39% in 1996, 6.38% in 1997 and 5.94% in 1998. The net
interest margin for the three months ended March 31, 1998 was 6.16% and for the
three months ended March 31, 1999 was 5.27%. The primary reason for the decrease
in net interest margin was the increased competition for quality loans and the
overall growth and change in the mix in the investment and loan portfolios,
which decreased the yield on interest-earning assets. The overall yield on the
investment portfolio decreased from 6.63% in 1996 to 6.34% in 1997 to 6.07% in
1998 and to 5.49% for the three months ended March 31, 1999. During the same
period, the yield on loans decreased from 11.03% in 1996 to 10.87% in 1997 to
10.57% in 1998 and to 9.92% for the three months ended March 31, 1999. In
addition, while interest rates on deposits decreased, the overall mix of
interest-sensitive liabilities changed to include a greater percentage of higher
interest-bearing advances from the FHLB, which increased the overall interest
expense on interest-bearing liabilities. The growth in deposits resulted in the
increase in interest expense for the three months ended March 31, 1999 over the
same three month period in 1998.
53
<PAGE>
Cerritos Valley's net interest income increased from $5.01 million in 1996, to
$5.32 million in 1997 and to $5.95 million in 1998, representing an 6.06%
increase in 1997 over 1996 and a 11.86% increase in 1998 over 1997. The
increases in the periods discussed were primarily the result of the overall
growth of Cerritos Valley, with average interest-earning assets increasing
20.10% to $100.07 million in 1998 from $83.32 million in 1997 and 6.26% from
$78.41 million in 1996. During the same periods, the net interest margin
decreased to 5.94% in 1998 from 6.38% in 1997 and 6.39% in 1996. However, the
increase in volume due to Cerritos Valley's growth outweighed the decrease in
the net interest margin, which resulted in the significant growth in net
interest income discussed above. Net interest income increased from $1.40
million for the three months ended March 31, 1998 to $1.50 million for the three
months ended March 31, 1999, representing a 6.91% increase. Average
interest-earning assets increased 25.01% to $113.85 million for the three months
ended March 31, 1999 from $91.07 million for the comparable period in 1998, with
a decrease in the net interest margin to 5.27% for the three months ended March
31, 1999 from 6.16% for the comparable period in 1998. The increase in net
interest income for the three months ended March 31, 1999 from the three months
ended March 31, 1998 was primarily due to the reasons noted above.
54
<PAGE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME. The following table sets forth the
changes in interest income and expense attributable to changes in rates and
volume:
<TABLE>
<CAPTION>
March 31, 1999
Versus March 31, 1998 1998 Versus 1997 1997 Versus 1996
--------------------------------- ------------------------------- ----------------------------------
(Dollars in Change Change Change Change Change Change
thousands) Total Due to Due to Total Due to Due to Total Due to Due to
Change Rate Volume Change Rate Volume Change Rate Volume
-------- -------- --------- -------- --------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold $ (26) $ (16) $ (10) $ 140 $ (15) $ 155 $(245) $ 31 $(276)
Investment securities 111 (49) 160 88 (82) 170 368 (68) 436
Loans 199 (109) 308 1,024 (145) 1,169 282 (66) 348
----- ----- ----- ------ ----- ------ ----- ----- -----
Total interest-
earning assets 284 (174) 458 1,252 (242) 1,494 405 (103) 508
NOW, money market 26 7 19 9 2 7 (70) (22) (48)
Savings 6 (1) 7 (34) (54) 20 (9) 30 (39)
Time deposits (3) (26) 23 356 (15) 371 163 (14) 177
Other borrowings 157 (6) 163 291 (7) 298 17 (2) 19
----- ----- ----- ------ ----- ------ ----- ----- -----
Total interest-
bearing liabilities 186 (26) 212 622 (74) 696 101 (8) 109
Net interest income $ 98 $(148) $ 246 $ 630 $(168) $ 798 $ 304 $ (95) $ 399
----- ----- ----- ------ ----- ------ ----- ----- -----
----- ----- ----- ------ ----- ------ ----- ----- -----
</TABLE>
The change in interest income or interest expense that is attributable to both
change in rate and change in volume has been allocated to the change due to rate
and the change due to volume in proportion to the relationship of the absolute
amount of changes in each.
The following is a summary of changes in earnings of Cerritos Valley for the
three months ended March 31, 1999 and 1998 and for the years ended December 31,
1998, 1997 and 1996. In the opinion of Cerritos Valley's management, the
following summary of changes in earnings reflects all adjustments which Cerritos
Valley considers necessary for a fair presentation of the results of its
operations for these periods. This summary of changes in earnings should be read
in conjunction with the Financial Statements and Notes to the Financial
Statements appearing at the end of this proxy statement/prospectus.
55
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Year Ended December 31,
March 31, ---------------------------------------------------------
(Dollars in thousands) 1999 versus 1998 1998 versus 1997 1997 versus 1996
------------------------ -------------------------- ---------------------------
Amount of % of Amount of % of Amount of % of
Change Change Change Change(1) Change Change(1)
------------ --------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $198 14.12% $1,024 20.45% $ 282 5.96%
Interest on securities 111 24.57% 88 4.70% 368 24.46%
Interest on federal funds sold (26) (21.55%) 140 33.43% (245) (36.96%)
---- ------ -----
Total interest income 283 14.32% 1,252 17.16% 405 5.87%
Interest expense:
Interest on deposits 28 5.18% 331 17.24% 84 4.58%
Other borrowings 158 493.75% 291 474.34% (17) (39.17%)
---- ------ -----
Total interest expense 186 32.52% 622 31.35% 101 5.38%
Net interest income 97 6.93% 630 11.85% 304 6.06%
Provision for loan losses 10 13.33% (440) (58.67%) 146 24.17%
---- ------ -----
Net interest income after
provision for loan losses 87 6.57% 1,070 23.44% 158 3.58%
Noninterest income:
Service charges 61 25.42% 256 31.04% (195) (19.11%)
Other income (12) (12.63%) (208) (30.17%) (627) (47.64%)
---- ------ -----
Total noninterest income 49 14.51% 48 3.19% (822) (35.17%)
Noninterest expenses:
Salaries and employee benefits (13) (2.51%) 98 4.60% (213) (9.06%)
Occupancy 41 83.67% 123 67.51% (65) (26.34%)
Other operating expenses 106 21.06% 176 8.84% (529) (20.97%)
---- ------ -----
Total noninterest expenses 134 12.52% 397 9.21% (807) (15.77%)
---- ------ -----
Earnings before
income taxes 2 0.34% 721 40.73% 143 8.79%
Provision for income taxes 16 7.15% 692 264.61% (351) (57.31%)
---- ------ -----
Net earnings $(14) (3.88%) $ 29 1.90% $ 494 48.73%
---- ------ -----
---- ------ -----
</TABLE>
- ------------
(1) Increase or (decrease) over previous period's amount.
56
<PAGE>
NONINTEREST INCOME. Noninterest income decreased from $2.34 million in 1996, to
$1.51 million in 1997 and increased to $1.56 million in 1998, representing a
35.17% decrease in 1997 from 1996 and a 3.19% increase in 1998 over 1997.
Noninterest income increased from $335,000 for the three months ended March 31,
1998 to $384,000 for the three months ended March 31, 1999, representing a
14.51% increase. The primary reason for the decrease in the noninterest income
in 1997 from 1996 was in the gain on sale of other real estate owned property
("OREO"). During 1996, Cerritos Valley Bank realized a total gain of $672,000
because of the sale of OREO properties, and during 1997, the total gain on sale
of OREO decreased to $20,000. During 1998, the service fees income increased to
$1.47 million from $1.25 million in 1997 because of the growth in the deposit
base. This increase was offset by a decrease in the income from the gain on sale
of FHA loans, which decreased from $244,000 in 1997 to $81,000 in 1998. During
1998, Cerritos Valley Bank's management decided to terminate the FHA loan
origination and sale program and decided to keep the FHA loans on the balance
sheet. The net effect of the increase in deposit service fee income and decrease
in income from the sale of FHA loans was a net increase in 1998 in total
noninterest income by 3.19%. The increases in noninterest income in the first
three months of 1999 versus three months of 1998 was primarily in service
charges as a result of growth in the deposit base. Cerritos Valley's management
expects the service fee income from deposits to continue to increase.
OTHER EXPENSES. Cerritos Valley's noninterest expense includes salaries and
benefits, occupancy expenses and operating expenses. Cerritos Valley Bank's
expenses decreased from $5.12 million in 1996, to $4.31 million in 1997 and
increased to $4.71 million in 1998. This represents a decrease of 15.77% in 1997
from 1996 and an increase of 9.22% in 1998 over 1997. The primary reason for the
reduction in expense in 1997 was due to the dramatic improvement in asset
quality that resulted in the reduction in loan collection and legal expenses. In
addition, Cerritos Valley Bank settled a lawsuit with Cerritos Valley Bank's
landlord pertaining to the Artesia branch lease. Total other expenses in 1998
increased due to the growth in assets of Cerritos Valley Bank. In April 1998,
Cerritos Valley Bank added a new branch location in Glendale which resulted in
increase spending in compensation, premises and other operating expenses.
Cerritos Valley Bank conducted an advertisement campaign for the opening of the
Glendale branch that resulted in an increase in marketing and business
development expenses. Cerritos Valley's noninterest expenses increased from
$1.07 million in the first three months of 1998 to $1.20 million in the first
three months of 1999. This represents an increase of 12.52%. The primary reason
for the increase in noninterest expense was due to the opening of the Glendale
branch. The first quarter of 1999 includes the operating expenses of the
Glendale branch. During that same period in 1998, Cerritos Valley did not incur
any operating expenses for the Glendale branch since the Glendale branch did not
open until April 1998.
57
<PAGE>
The following table compares the various elements of other expenses as a
percentage of average assets for the years ended December 31, 1998, 1997 and
1996 and the three months ended March 31, 1999 and 1998. (Dollars in thousands
except percentage amounts.)
<TABLE>
<CAPTION>
Salaries and Other
Average Employee Occupancy Operating
Period Assets(1) Benefits Expenses Expenses
- ------------------ ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Three Months Ended
March 31,(2)
- -------------------
1999 $127,144 1.58% 0.28% 1.92%
1998 $103,021 2.00% 0.19% 1.96%
Year Ended
December 31,
- -------------------
1998 $112,540 1.98% 0.27% 1.93%
1997 $ 94,970 2.24% 0.19% 2.10%
1996 $ 90,953 2.58% 0.27% 2.78%
</TABLE>
- ------------
(1) Based on the average of daily balances.
(2) Expense ratios are calculated on an annualized basis.
PROVISION FOR LOAN LOSSES. The provision for loan losses corresponds directly to
the level of the allowance that management deems sufficient to offset potential
losses. The balance in the loan loss allowance reflects the amount which, in
management's judgment, is adequate to provide for potential loan losses after
weighing the mix of the loan portfolio, current economic conditions, past loan
experience and such other factors as deserve recognition in estimating loan
losses.
Management allocated $310,000 as a provision for loan losses in 1998, $750,000
in 1997 and $604,000 in 1996. Loans charged off net of recoveries in 1998 were
$228,000, in 1997 were $1.16 million and in 1996 were $299,000. For the three
months ended March 31, 1999, $85,000 was allocated as a provision for loan
losses and for the three months ended March 31, 1998, $75,000 was allocated as a
provision for loan losses. Loans charged off net of recoveries for the three
months ended March 31, 1999 were $177,000 and for the three months ended March
31, 1998 were $88,000. The ratio of the allowance for loan losses to total gross
loans was 2.03% at December 31, 1998, 2.31% at December 31, 1997 and 3.72% at
December 31, 1996, and for the interim periods was 1.80% at March 31, 1999 and
2.23% at March 31, 1998.
In management's opinion, the balance of the allowance for loan losses at March
31, 1999 was sufficient to sustain any foreseeable losses in the loan portfolio
at that time.
INCOME TAXES. Income tax provisions were $954,000 in 1998, $262,000 in 1997, and
$613,000 in 1996. The effective tax rate for the Bank averages 38%; however, for
1997, the deferred tax valuation allowance of approximately $264,000 was
reversed that resulted in decreasing the current tax provision expense by that
amount. The Bank is not carrying any net operating losses ("NOL"). The estimated
income tax provision for the three months ended March 31, 1999 and 1998 was
$243,000 and $227,000, respectively.
58
<PAGE>
NET EARNINGS. The net earnings and basic earnings per share of Cerritos Valley
were $1.54 million and $1.54 per share in 1998, $1.51 million and $1.51 per
share in 1997, and $1.01 million and $1.01 per share in 1996, respectively. The
net income and basic earnings per share for the three months ended March 31,
1999 were $352,000 and $0.35 per share as compared to a net income of $366,000
and $0.37 per share for the three months ended March 31, 1998, respectively. The
decrease in net earnings for the three months ended in 1999 versus 1998 was due
to the increase in other operating expenses relating to the opening of the
Glendale branch.
LIQUIDITY. Cerritos Valley has an asset and liability management program
allowing it to maintain its interest margins during times of both rising and
falling interest rates and to maintain sufficient liquidity. Liquidity of
Cerritos Valley at December 31, 1998 was 32.84%, at December 31, 1997 was 41.60%
and at December 31, 1996 was 36.32% based on liquid assets, (consisting of cash
and due from banks, investment securities not pledged, federal funds sold, and
loans held for sale) divided by total liabilities. Liquidity of Cerritos Valley
at March 31, 1999 was 30.44%. Cerritos Valley's management believes it maintains
liquidity at a high level.
CAPITAL RESOURCES. The shareholders' equity accounts of Cerritos Valley
increased from $9.38 million at December 31, 1996, to $10.98 million at December
31, 1997 and to $12.42 million at December 31, 1998. These increases are
attributable to the growth in retained earnings. Cerritos Valley is subject to
various regulatory capital requirements administered by the federal banking
agencies. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, Cerritos Valley must meet specific capital guidelines
that involve quantitative measures of Cerritos Valley's assets, liabilities and
certain off-balance sheet items as calculated under regulatory guidelines.
Cerritos Valley's capital amounts and classifications of assets are also subject
to qualitative judgements by the regulators about components, risk weightings
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Cerritos Valley to maintain minimum amounts and ratios of total and Tier
1 capital, which is primarily common stock and retained earnings, to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of March 31, 1999, that Cerritos Valley exceeds all capital
adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the FDIC categorized
Cerritos Valley as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, Cerritos Valley must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table below. There are no conditions or events since that
notification which management believes have changed Cerritos Valley's
categorization.
59
<PAGE>
<TABLE>
<CAPTION>
Minimum Minimum Well Actual
Capital Capitalized March 31,
Requirement Requirement 1999
----------- ------------ -----------
<S> <C> <C> <C>
Capital Ratios:
Total capital to
risk-weighted assets 8.0% 10.0% 17.11%
Tier 1 capital to
risk-weighted assets 4.0% 6.0% 15.86%
Tier 1 to total
average assets 4.0% 5.0% 9.96%
</TABLE>
60
<PAGE>
SCHEDULE OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY. The following schedule
shows the average balances of Cerritos Valley's assets, liabilities and
shareholders' equity accounts and the percentage distribution of the items,
computed using the daily average balances, for the periods indicated.
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended
March 31, Year Ended December 31,
------------------------------------------ ------------------------------------------------------
1999 1998 1998 1997 1996
------------------- ------------------- ------------------- ------------------- ------------------
Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1)
-------- ---------- -------- ---------- -------- ---------- -------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 8,701 6.84% $ 7,639 7.41% $ 8,144 7.24% $ 7,460 7.86% $ 8,233 9.05%
Investment securities 40,913 32.18% 29,554 28.69% 32,323 28.72% 29,560 31.13% 22,729 24.99%
Federal funds sold 8,402 6.61% 9,170 8.90% 10,667 9.48% 7,709 8.12% 12,822 14.10%
Loans:
Commercial 22,376 17.60% 22,249 21.60% 24,682 21.93% 18,423 19.40% 16,722 18.39%
Installment 2,415 1.90% 3,547 3.44% 3,127 2.78% 4,112 4.33% 4,969 5.46%
Real estate 31,375 24.68% 18,324 17.79% 21,336 18.96% 16,210 17.07% 15,335 16.86%
Construction 8,186 6.44% 8,226 7.98% 7,849 6.97% 7,323 7.71% 5,798 6.37%
Credit card and other 277 0.22% 163 0.16% 202 0.18% 137 0.14% 158 0.17%
Less deferred costs (94) (0.07%) (167) (0.16%) (115) (0.10%) (155) (1.16%) (125) (0.14%)
Less allowance for
loan losses (1,253) (0.99%) (1,185) (1.15%) (1,209) (1.07%) (1,299) (1.37%) (1,289) (1.42%)
-------- ---------- -------- ---------- -------- ---------- -------- ---------- ------- ----------
Net loans 63,282 49.77% 51,157 49.66% 55,872 49.65% 44,751 47.12% 41,568 45.70%
Bank premises and
equipment, net 1,899 1.49% 1,986 1.93% 1,986 1.76% 2,016 2.12% 2,169 2.38%
OREO 0 0.00% 70 0.07% 44 0.04% 424 0.45% 600 0.66%
Other assets 3,947 3.10% 3,455 3.35% 3,504 3.11% 3,050 3.21% 2,832 3.11%
-------- ---------- -------- ---------- -------- ---------- -------- ---------- ------- ----------
TOTAL ASSETS $127,144 100.00% $103,021 100.00% $112,540 100.00% $94,970 100.00% $90,953 100.00%
-------- ---------- -------- ---------- -------- ---------- -------- ---------- ------- ----------
-------- ---------- -------- ---------- -------- ---------- -------- ---------- ------- ----------
LIABILITIES AND
SHAREHOLDERS EQUITY
Deposits:
Demand $ 32,982 25.94% $ 28,555 27.72% $ 31,157 27.69% $28,007 29.49% $26,541 29.18%
NOW and money markets 20,197 15.89% 16,336 15.86% 17,510 15.56% 17,146 18.05% 19,686 21.64%
Savings 13,546 10.65% 12,444 12.08% 12,801 11.37% 12,085 12.73% 13,471 14.81%
Time 13,811 10.86% 12,512 12.15% 12,886 11.45% 12,423 13.08% 12,834 14.11%
Time > $100,000 19,096 15.02% 18,526 17.98% 19,241 17.10% 12,278 12.93% 8,377 9.21%
-------- ---------- -------- ---------- -------- ---------- -------- ---------- ------- ----------
Total deposits 99,632 78.36% 88,373 85.78% 93,595 83.17% 81,939 86.28% 80,909 88.96%
Other liabilities 15,022 11.81% 3,447 3.35% 7,192 6.39% 3,197 3.37% 1,307 1.44%
-------- ---------- -------- ---------- -------- ---------- -------- ---------- ------- ----------
Total liabilities 114,654 90.18% 91,820 89.13% 100,787 89.56% 85,136 89.65% 82,216 90.39%
Shareholders' equity:
Common stock 5,992 4.71% 5,992 5.82% 5,992 5.32% 5,992 6.31% 5,992 6.59%
Retained earnings 6,549 5.15% 4,990 4.84% 5,726 5.09% 3,948 4.16% 2,882 3.17%
Accumulated other
comprehensive income (51) (0.04%) 219 0.21% 35 0.03% (106) (0.11%) (137) (0.15%)
-------- ---------- -------- ---------- -------- ---------- -------- ---------- ------- ----------
Total shareholders'
equity 12,490 9.82% 11,201 10.87% 11,753 10.44% 9,834 10.35% 8,737 9.61%
-------- ---------- -------- ---------- -------- ---------- -------- ---------- ------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $127,144 100.00% $103,021 100.00% $112,540 100.00% $94,970 100.00% $90,953 100.00%
-------- ---------- -------- ---------- -------- ---------- -------- ---------- ------- ----------
-------- ---------- -------- ---------- -------- ---------- -------- ---------- ------- ----------
</TABLE>
- ------------
(1) Percentage of categories under assets, liabilities and shareholders'
equity are shown as percentages of average total assets.
61
<PAGE>
INVESTMENT PORTFOLIO. The following table summarizes the amounts, terms,
distribution and yields of Cerritos Valley's investment securities as of March
31, 1999, December 31, 1998 and December 31, 1997. (Dollars in thousands.)
<TABLE>
<CAPTION>
Available for Sale
---------------------------------------------------------------------------------------------
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
----------------- ----------------- ----------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1999
- --------------
US treasury &
government agency $2,259 5.87% $23,536 5.45% $1,444 6.30% $4,909 6.83% $32,148 5.50%
Municipals 447 5.23% 1,006 4.15% 840 4.58% 0 0% 2,293 4.65%
Other bonds 0 0.00% 1,583 5.91% 1,487 6.72% 1,005 7.51% 4,075 5.58%
-------- -------- -------- -------- --------
Total $2,706 5.55% $26,125 5.23% $3,771 5.87% $5,914 7.17% $38,516 5.48%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
---------------------------------------------------------------------------------------------
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
----------------- ----------------- ----------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1999
- --------------
US treasury &
government agency $ 0 0.00% $ 0 0.00% $254 6.30% $ 496 6.83% $ 750 6.57%
Municipals 50 5.45% 100 6.80% 80 4.52% 0 0.00% 230 5.59%
FHLB stock 0 0.00% 0 0.00% 0 0.00% 1,297 0.00% 1,297 5.44%
-------- -------- -------- -------- --------
Total $ 50 5.45% $100 6.80% $334 5.41% $1,793 6.14% $2,277 5.65%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Available for Sale
---------------------------------------------------------------------------------------------
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
----------------- ----------------- ----------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998
- -----------------
US treasury &
government agency $6,504 5.44% $18,379 5.68% $6,725 6.48% $2,407 6.13% $34,015 5.93%
Municipals 450 5.33% 1,005 4.24% 832 4.58% 0 0.00% 2,287 4.72%
Other bonds 0 0.00% 1,606 6.51% 1,549 6.21% 1,030 7.53% 4,185 6.75%
-------- -------- -------- -------- --------
Total $6,954 5.39% $20,990 5.48% $9,106 5.76% $3,437 6.83% $40,487 5.80%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
---------------------------------------------------------------------------------------------
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
----------------- ----------------- ----------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998
- -----------------
US treasury &
government agency $ 0 0.00% $270 7.85% $1,501 6.82% $ 0 0.00% $1,771 7.01%
Municipals 50 4.74% 100 6.80% 80 8.00% 0 0.00% 230 6.51%
FHLB stock 0 0.00% 0 0.00% 0 0.00% 1,278 5.44% 1,278 5.44%
-------- -------- -------- -------- --------
Total $50 4.74% $370 7.33% $1,581 7.41% $1,278 6.32% $3,279 6.32%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Available for Sale
---------------------------------------------------------------------------------------------
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
----------------- ----------------- ----------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997
- -----------------
US treasury &
government agency $7,983 5.61% $ 9,474 6.16% $3,529 7.06% $3,986 6.55% $24,972 6.35%
Municipals 202 7.05% 720 4.95% 491 4.77% 42 5.25% 1,455 5.51%
Other bonds 0 0.00% 95 6.50% 0 0.00% 0 0.00% 95 6.50%
-------- -------- -------- -------- --------
Total $8,185 6.33% $10,289 5.87% $4,020 5.92% $4,028 5.90% $26,522 6.12%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
---------------------------------------------------------------------------------------------
One Year After One Year After Five Years
or Less to Five Years to Ten Years After Ten Years Total
----------------- ----------------- ----------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997
- -----------------
US treasury &
government agency $ 999 5.04% $351 7.82% $1,518 6.87% $499 7.13% $3,367 6.35%
Municipals 355 6.51% 149 6.13% 85 8.00% 0 0.00% 589 6.88%
FHLB stock 0 0.00% 0 0.00% 0 0.00% 301 5.88% 301 5.88%
-------- -------- -------- -------- --------
Total $1,354 5.78% $500 6.98% $1,603 7.44% $800 6.51% $4,257 6.37%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
64
<PAGE>
LOAN PORTFOLIO. Cerritos Valley's largest historical lending categories are real
estate loans and commercial (business) loans. These categories accounted for as
a percentage of total loans for the period ending of December 31, of
approximately 84% in 1998, 78% in 1997 and 75% in 1996 and approximately 83% at
March 31, 1999. Loans are carried at face amount, less payments collected and
the allowance for loan losses. Interest on all loans is accrued monthly on a
simple interest basis. Once a loan is placed on nonaccrual status, Cerritos
Valley reverses interest accrued through the date of transfer. Loans are placed
on nonaccrual status when principal or interest on a loan is past due 90 days or
more, unless the loan is well secured and in the process of collection. Interest
actually received for loans on nonaccrual status is recognized as income at the
time of receipt. Problem loans are maintained on accrual status only when
management of Cerritos Valley is confident of full repayment within a reasonable
period of time.
The rates of interest charged on variable rate loans are set at specific
increments in relation to Wall Street Journal prime and Cerritos Valley Bank's
published reference rate and varies as Cerritos Valley Bank's or Wall Street
Journal's prime rates vary from time to time. At December 31, 1998,
approximately 50.19% of Cerritos Valley's loan portfolio was comprised of
variable rate loans, and at March 31, 1999, variable rate loans comprised
approximately 49.66% of Cerritos Valley's loan portfolio.
DISTRIBUTION OF LOANS. The distribution of Cerritos Valley's total loans by type
of loan as of the date indicated is displayed in the following table (dollars in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
----------------------- -------------------------------------
TYPE OF LOAN 1999 1998 1998 1997 1996
- -------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Commercial $22,812 $22,640 $22,666 $22,070 $19,860
Construction 8,042 8,932 6,918 7,357 6,247
Real estate 30,315 16,070 28,714 16,779 11,417
Installment 2,652 3,497 2,831 3,871 4,408
------- ------- ------- ------- -------
Total 63,820 51,139 61,129 50,077 41,932
------- ------- ------- ------- -------
Less:
Deferred loan fees 111 138 57 170 134
Allowance for
loan losses 1,146 1,143 1,238 1,156 1,561
------- ------- ------- ------- -------
Total net loans $62,563 $49,858 $59,834 $48,751 $42,237
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
Commercial loans are made for the purpose of providing working capital funds,
financing the purchase of equipment or inventory and for other business
purposes. Such loans include loans with maturities ranging from 30 days to 365
days, and term loans, which are loans with maturities normally ranging from one
to five years. Short-term business loans are generally used to finance current
transactions and typically provide for periodic interest payments, with
principal being payable at maturity or periodically. Term loans normally provide
for monthly payments of both principal and interest. Cerritos Valley also
extends lines of credit to business customers. On our business credit lines,
Cerritos Valley specifies a maximum amount which it stands ready to fund to the
customer during a specified period in return for which the customer agrees to
maintain its primary banking relationship with Cerritos Valley Bank. The purpose
for which such loans will be used and the security therefor, if any, are
generally determined before Cerritos Valley's commitment is extended. Normally,
Cerritos Valley does not make loan commitments in material amounts for periods
more than one year.
65
<PAGE>
CONSTRUCTION/REAL ESTATE LOANS. Real estate loans are primarily made for the
construction and/or improvement of single family residences, and commercial or
industrial properties. As of March 31, 1999 approximately 24.79% of Cerritos
Valley's real estate construction loans consisted of loans secured by first
trust deeds on the construction of single family residence tract developments,
and 21.32% consisted of secured first trust deed loans on individual
owner-occupied residences and commercial properties. Construction loans are
generally underwritten for a period of 12 months with a potential 90 day
extension and normally do not exceed 70% to 75% loan to value ratio. The risk
associated with speculative construction lending includes the borrower's
inability to complete and sell the project, the borrower's incorrect estimate of
necessary construction funds and/or time for completion, economic changes
including depressed real estate values and increased interest rates. Management
has established underwriting criteria to minimize losses on speculative
construction loans by lending to only experienced builders/developers with
proven track records. To date Cerritos Valley has not suffered any significant
losses through its speculative construction loan portfolio.
INSTALLMENT LOANS. Most installment loans are short-term loans, for a period
of up to five years. Auto loans are normally made up to a five-year amortization
period.
MATURITY AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES. The following
table sets forth the amounts of loans outstanding of Cerritos Valley as of March
31, 1999 and December 31, 1998, which based on the remaining scheduled
repayments of principal, have the ability to be repriced or are due in less than
one year, in one to five years, or in more than five years. Management has
increased the fixed rate portion of Cerritos Valley's loan portfolio as part of
the strategy to match fund loans against borrowings of Cerritos Valley Bank at
the Federal Home Loan Bank.
<TABLE>
<CAPTION>
Less than One to Over 5
(Dollars in thousands) 1 Year Five Years Years Total
--------- ---------- ------- -------
<S> <C> <C> <C> <C>
March 31, 1999
- --------------
Fixed rate $ 3,908 $9,966 $17,640 $31,514
Variable rate 32,306 0 0 32,306
-------- ------ ------- -------
Total $36,214 $9,966 $17,640 $63,820
-------- ------ ------- -------
-------- ------ ------- -------
December 31, 1998
- -----------------
Fixed rate $ 3,268 $10,532 $16,780 $30,580
Variable rate 30,549 0 0 30,549
-------- ------ ------- -------
Total $33,817 $10,532 $16,780 $61,129
-------- ------ ------- -------
-------- ------ ------- -------
</TABLE>
66
<PAGE>
LOAN COMMITMENTS. The following table shows Cerritos Valley's loan commitments
at the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
---------------------- -------------------------------------
(Dollars in thousands) 1999 1998 1998 1997 1996
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Commercial $ 7,654 $ 4,218 $ 7,610 $ 4,421 $ 4,399
Real estate 8,175 9,943 4,848 8,842 6,134
------- ------- ------- ------ -------
Total commitments $15,965 $14,161 $12,458 $13,263 $10,533
------- ------- ------- ------ -------
------- ------- ------- ------ -------
</TABLE>
Based upon prior experience and prevailing economic conditions, it is
anticipated that approximately 45% of the commitments at March 31, 1999 will be
exercised in 1999.
SUMMARY OF LOAN LOSS EXPERIENCE. As a natural corollary to Cerritos Valley's
lending activities, some loan losses are experienced. The risk of loss varies
with the type of loan being made and the creditworthiness of the borrower over
the term of the loan. To some extent, the degree of perceived risk is taken into
account in establishing the structure of, and interest rates and security for,
specific loans and for various types of loans. Cerritos Valley attempts to
minimize its credit risk exposure by use of thorough loan application and
approval procedures.
Cerritos Valley maintains a program of systematic review of its existing loans.
Loans are graded for their overall quality prior to booking the asset. Loans
which Cerritos Valley Bank's management determines require further monitoring
and supervision are segregated and reviewed on a periodic basis. Significant
problem loans are reviewed on a monthly basis by the Bank's Senior Loan
Committee and at Cerritos Valley Bank's monthly Board of Directors meeting.
Loans which are probable that Cerritos Valley will be unable to collect all
amounts due (including principal and interest) are considered impaired. In
addition, when principal and interest on a loan is past due 90 days or more, the
loan is placed on nonaccrual status unless it is both well secured and in the
process of collection. Total accruing loans past due 90 days or more at March
31, 1999 were $926,000; at December 31, 1998 were $517,000; and there were no
accruing loans past due 90 days or more at December 31, 1997. Total impaired
loans at March 31, 1999 were $22,000; at December 31, 1998 were $199,000; and at
December 31, 1997 were $598,000.
Cerritos Valley charges off that portion of any loan which management or bank
examiners consider to represent a loss. A loan is generally considered by
management to represent a loss in whole or in part when an exposure beyond any
collateral value is apparent, servicing of the unsecured portion has been
discontinued or collection is not anticipated based on the borrower's financial
condition and general economic conditions in the borrower's industry. The
principal amount of any loan which is declared a loss is charged against
Cerritos Valley's allowance for loan losses.
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<PAGE>
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Three
Months Ended Year Ended
March 31, December 31,
------------ ------------------
1999 1998 1997
------------ ------ ------
<S> <C> <C> <C>
Balance at beginning of period $1,238 $1,156 $1,561
Recoveries:
Real estate 7 76 152
Commercial 0 6 11
Installment 0 0 2
------ ------ ------
Total recoveries 7 82 165
Charge-offs:
Commercial 181 143 1,157
Real estate 1 140 73
Installment 2 24 80
Credit card 3 10
------ ------ ------
Total charge-offs (184) (310) (1,320)
Provision for loan losses 85 310 750
------ ------ ------
Balance at the end of the period $1,146 $1,238 $1,156
------ ------ ------
------ ------ ------
</TABLE>
68
<PAGE>
The following table sets forth the amount of loans on Cerritos Valley's books
which were 30 to 89 days past due at the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 1999 1998 1997
--------- ----------------------
<S> <C> <C> <C>
Commercial $ 0 $ 9 $11
Real estate 948 849 20
---- ---- ---
Total $948 $858 $31
---- ---- ---
---- ---- ---
</TABLE>
The following table sets forth the amount of loans on Cerritos Valley's books
which were past due 90 days or more and still accruing interest at the dates
indicated:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 1999 1998 1997
--------- ----------------------
<S> <C> <C> <C>
Real estate $926 $517 $ 0
---- ---- ----
Total $926 $517 $ 0
---- ---- ----
---- ---- ----
</TABLE>
The following table highlights loans on nonaccrual status at the dates
indicated:
<TABLE>
<CAPTION>
March 31, December 31,
(Dollars in thousands) 1999 1998 1997
--------- ----------------------
<S> <C> <C> <C>
Commercial $ 0 $183 $587
Real estate 15 16 11
Installment 7 0 0
---- ---- ----
Total $22 $199 $598
---- ---- ----
---- ---- ----
</TABLE>
Cerritos Valley's allowance for loan losses is to provide for losses which can
be reasonably estimated. The allowance for loan losses is established through
charges to operating expenses in the form of provisions for loan losses.
Provisions for loan losses amounted to $85,000 for the first three months of
1999, $310,000 in 1998, $750,000 in 1997 and $604,000 in 1996. Actual loan
losses or recoveries are charged or credited, respectively, directly to the
allowance for loan losses. The increase in loan charge offs in 1997 reflects the
write off of a commercial loan of an auto dealership in Valencia, California.
The dealership was placed in receivership by the courts and the borrower is
suing Ford Motor Company for negligence, breach of fiduciary responsibility and
has brought a lenders liability action against Ford.
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<PAGE>
The adequacy of the allowance for loan losses is determined by management based
on factors including levels of classified assets, general portfolio trends
relative to asset and portfolio size, nonaccrual loan levels, delinquent loan
levels, historical loan loss experience, risks associated with changes in
economic and business conditions, findings of banking regulatory authorities and
other factors. As of March 31, 1999, the allowance for loan losses was based on
the above factors, including the increase in delinquent real estate loans and
the decrease in nonaccrual commercial loans. Overall, the allowance for loan
losses at March 31, 1999, compared to December 31, 1998, decreased relative to
the total loan portfolio based on management's assessment of the improvement in
the portfolio.
Because these estimates and evaluations are primarily judgmental factors, no
assurance can be given that Cerritos Valley may not sustain loan losses
substantially higher in relation to the size of the allowance for loan losses or
that subsequent evaluations of the loan portfolio may not require substantial
changes in such allowance.
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<PAGE>
The following table summarizes Cerritos Valley's loan loss experience for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
----------------------- ----------------------------------------------
(Dollars in thousands) 1999 1998 1998 1997 1996
------- ------ -------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCES
Average loans $64,535 $52,342 $57,081 $46,050 $42,857
Loans at end of period 63,820 51,139 61,129 50,077 41,932
Loans charged-off 184 147 310 1,320 680
Loan recoveries 7 59 82 165 381
Net loans charged-off 177 88 228 1,155 299
Allowance for loan
losses ("ALLL")(1) 1,146 1,143 1,238 1,156 1,561
Provision for loan losses 85 75 310 750 604
RATIOS
Net charge-offs to average loans 0.27% 0.17% 0.40% 2.51% 0.70%
Net charge-offs to loans at
the end of period 0.27% 0.17% 0.37% 2.31% 0.71%
ALLL to average loans 1.78% 2.18% 2.17% 2.51% 3.64%
ALLL to loans at
end of the period 1.80% 2.23% 2.03% 2.31% 3.72%
Net charge-offs to ALLL 15.45% 7.70% 18.42% 99.91% 19.15%
Net charge-offs to provision
for loan losses 208.23% 117.33% 73.55% 154.00% 49.50%
- --------------------
(1) As of the end of the period presented.
</TABLE>
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<PAGE>
At December 31, 1998 and 1997, the allowance for loan losses was 2.03% and 2.31%
of total loans then outstanding, respectively. At March 31, 1999, the allowance
was 1.80% of the loans then outstanding. Although the current level of the
allowance is deemed adequate by management, future provisions may be required
based on future changes in the credit risk.
Management of Cerritos Valley reviews with Cerritos Valley Bank's Board of
Directors the adequacy of the allowance for loan losses on a monthly basis and
adjusts the loan loss provision upward where specific items reflect a need for
such an adjustment. Management of Cerritos Valley charged off approximately
$310,000 in 1998 and $1,320,000 in 1997. Recoveries for the same time frame were
$82,000 and $165,000, respectively. The charge-offs for the three months ended
March 31, 1999 were $184,000 and recoveries were $7,000. Management does not
believe there has been any significant deterioration in Cerritos Valley's loan
portfolio. Management also believes that Cerritos Valley has adequately provided
for potential losses in its portfolio as of March 31, 1999.
INVESTMENT SECURITIES. Cerritos Valley has invested $49.23 million in federal
instruments, securities issued by states and political subdivisions and other
debt securities, which yielded approximately 5.34% per annum during the first
three months of 1999. Cerritos Valley's present investment policy is to invest
excess funds in federal funds, U.S. treasuries, securities issued by the U.S.
government, corporate bonds, and securities issued by states and political
subdivisions.
INTEREST RATES AND DIFFERENTIALS. Certain information concerning
interest-earning assets and interest-bearing liabilities and yields on the
assets and liabilities is set forth in the following table. Amounts outstanding
are daily average balances:
72
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
(Dollars in thousands) March 31,(1)(2) Year Ended December 31,
-------------------------- --------------------------------------------
1999 1998 1998 1997 1996
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold:
Average outstanding $ 8,402 $ 9,170 $ 10,667 $ 7,709 $12,822
Average yield 4.57% 5.32% 5.23% 5.42% 5.17%
Interest income $ 96 $ 122 $ 558 $ 418 $ 663
Investment securities:
Average outstanding $ 40,913 $29,554 $ 32,323 $29,560 $22,729
Average yield 5.49% 6.10% 6.07% 6.34% 6.63%
Interest income $ 562 $ 451 $ 1,963 $ 1,875 $ 1,507
Loans:
Average outstanding $ 64,535 $52,342 $ 57,081 $46,050 $42,857
Average yield 9.92% 10.71% 10.57% 10.87% 11.03%
Interest income $ 1,600 $ 1,402 $ 6,032 $ 5,008 $ 4,726
Total interest-earning assets:
Average outstanding $113,850 $91,066 $100,071 $83,319 $78,408
Average yield 7.95% 8.70% 8.55% 8.76% 8.80%
Interest income $ 2,258 $ 1,975 $ 8,553 $ 7,301 $ 6,896
Interest-bearing liabilities:
NOW and money market
demand accounts:
Average outstanding $ 20,197 $16,336 $ 17,510 $17,146 $19,686
Average yield 1.98% 1.81% 1.88% 1.87% 1.98%
Interest expense $ 100 $ 74 $ 329 $ 320 $ 390
Savings deposits:
Average outstanding $ 13,546 $12,444 $ 12,801 $12,085 $13,471
Average yield 2.48% 2.51% 2.50% 2.93% 2.69%
Interest expense $ 84 $ 78 $ 320 $ 354 $ 363
Time deposits:
Average outstanding $ 32,907 $31,038 $ 32,127 $24,701 $21,211
Average yield 4.68% 5.00% 5.00% 5.06% 5.12%
Interest expense $ 385 $ 388 $ 1,606 $ 1,250 $ 1,087
Other borrowings:
Average outstanding $ 13,184 $ 1,877 $ 5,703 $ 890 $ 612
Average yield 5.73% 6.82% 6.17% 6.85% 7.19%
Interest expense $ 189 $ 32 $ 352 $ 61 $ 44
Total interest-bearing liabilities:
Average outstanding $ 79,834 $61,695 $ 68,141 $54,822 $54,980
Average yield 3.80% 3.71% 3.82% 3.62% 3.43%
Interest expense $ 758 $ 572 $ 2,607 $ 1,985 $ 1,884
Net interest income $ 1,500 $ 1,403 $ 5,946 $ 5,316 $ 5,012
Average yield on interest-
earning assets 5.27% 6.16% 5.94% 6.38% 6.39%
</TABLE>
- ----------------
(1) Three month yields have been annualized.
(2) Average loans outstanding includes nonaccrual loans.
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<PAGE>
LIQUIDITY MANAGEMENT. To augment short-term liquidity, Cerritos Valley has
unsecured short-term borrowing agreements with three of its correspondent banks
in the total amount of $7 million. In addition, Cerritos Valley can borrow from
the discount window on an overnight basis for up to $2 million. Cerritos Valley
has pledged collateral at the Federal Home Loan Bank and as of March 31, 1999,
Cerritos Valley Bank had additional borrowing capacity available for up to $2.3
million. As of March 31, 1999, Cerritos Valley had $12.85 million outstanding in
advances secured by investment securities and at December 31, 1998, Cerritos
Valley had $12.65 million outstanding in advances secured by investment
securities.
Policies have been developed by Cerritos Valley's management and approved by the
Board of Directors which establishes guidelines for the investments and
liquidity of Cerritos Valley. These policies include an Asset and Liability
Policy and an Investment Policy. The goals of these policies are to provide
liquidity to meet the financial requirements of Cerritos Valley's customers,
maintain adequate reserves as required by regulatory agencies, control interest
rate risk, and maximize earnings of Cerritos Valley.
74
<PAGE>
The following table shows Cerritos Valley's average deposits for each of the
periods indicated below, based upon average daily balances:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
--------------------------------------- --------------------------------------------------------------
1999 1998 1998 1997 1996
------------------ ------------------ ------------------ ------------------ -------------------
(Dollars in thousands) Average Percent Average Percent Average Percent Average Percent Average Percent
Balance of Total Balance of Total Balance of Total Balance of Total Balance of Total
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits $32,982 33.10% $28,555 32.31% $31,157 33.29% $28,007 34.18% $26,541 32.80%
NOW accounts 11,429 11.47% 9,554 10.81% 10,065 10.75% 9,556 11.66% 10,304 12.74%
Savings deposits 13,545 13.60% 12,444 14.08% 12,801 13.68% 12,085 14.75% 13,471 16.65%
Money market 8,769 8.80% 6,782 7.67% 7,445 7.95% 7,590 9.26% 9,382 11.60%
Time deposits 32,907 33.03% 31,038 35.12% 32,127 34.33% 24,701 30.15% 21,211 26.22%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total deposits $99,632 100.00% $88,373 100.00% $93,595 100.00% $81,939 100.00% $80,909 100.00%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
</TABLE>
75
<PAGE>
LIABILITY MANAGEMENT. Management's goal is to maintain the maturities of a
majority of its certificates of deposit in denominations of $100,000 or more to
less than two years. The maturities of such time certificates of deposits
("TCD's"), as well as other time deposits, were as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------------- -----------------------
TCD's Other TCD's Other
(Dollars in thousands) Over Time Over Time
$100,000 Deposits $100,000 Deposits
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Less than three months $ 8,566 $ 5,842 $11,314 $ 5,839
Over three months through
twelve months 8,327 7,912 7,506 7,055
Over twelve months
through five years 405 369 300 587
Over five years 0 0 0 0
------- ------- ------- -------
Total $17,298 $14,123 $19,120 $13,481
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Time deposits in denominations in excess of $100,000 and over increased from
$16.85 million at December 31, 1997, to $19.12 million at December 31, 1998 and
to $17.30 million at March 31, 1999. Management believes that there is no
concentration of certificates of deposit in excess of $100,000 from any one
customer.
While the deposits of Cerritos Valley may fluctuate up and down somewhat with
local and national economic conditions, management of Cerritos Valley does not
believe that such deposits, or the business of Cerritos Valley in general, are
seasonal in nature. Liability management is monitored by Cerritos Valley's Board
of Directors which meets monthly.
REGULATORY MATTERS.
CAPITAL ADEQUACY. The capital adequacy of banking institutions has become
increasingly important in recent years. The deregulation of the banking industry
during the 1980's has resulted in, among other things, a broadening of business
activities beyond that of traditional banking products and services. Because of
this volatility within the banking industry, regulatory agencies have increased
their focus upon ensuring that banking institutions meet certain capital
requirements as a means of protecting depositors and investors against such
volatility.
The FDIC has adopted regulations requiring insured institutions to maintain a
minimum leverage ratio of Tier 1 capital, which is the sum of common
shareholders' equity, noncumulative perpetual preferred stock and minority
interests in consolidated subsidiaries, minus intangibles assets, identified
losses and investments in certain subsidiaries, to total assets. Institutions
which have received the highest composite regulatory rating and which are not
experiencing or anticipating significant growth are required to maintain a
minimum leverage ratio of 3% Tier 1 capital to total assets. All other
institutions are required to maintain a minimum leverage capital ratio of at
least 100 to 200 basis points above the 3% minimum requirements.
The FDIC has also adopted a statement of policy, supplementing its leverage
capital ratio requirement, which provided definitions of qualifying total
capital, consisting of Tier 1 capital
76
<PAGE>
and supplementary capital, including the allowance for loan losses up to maximum
of 1.25% of risk-weighted assets, and sets forth minimum risk-based capital
ratios. Insured institutions are required to maintain a ratio of qualifying
total capital to risk-weighted assets of 8%, at least one-half of which must be
in the form of Tier 1 capital.
The following table sets forth Cerritos Valley Bank's capital positions at March
31, 1999 and December 31, 1998 under the regulatory guidelines discussed above:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
Actual Capital Ratios Actual Capital Ratios Minimum
--------------------- --------------------- ---------
<S> <C> <C> <C>
CAPITAL RATIOS
Total risk-based
capital ratio 17.1% 17.3% 8.0%
Tier 1 capital to
risk-weighted assets 15.9% 16.1% 4.0%
Leverage ratio 10.0% 10.0% 4.0%
</TABLE>
As is indicated by the above table, Cerritos Valley Bank exceeded all applicable
regulatory capital guidelines at March 31, 1999 and December 31, 1998. Cerritos
Valley's management believes that, under the current regulations, Cerritos
Valley Bank will continue to meet its minimum capital requirements in the
foreseeable future.
DIVIDENDS. Cerritos Valley, as the sole shareholder of Cerritos Valley Bank, is
entitled to cash dividends when and as declared by Cerritos Valley Bank's Board
of Directors out of funds legally available for the payment of dividends,
subject to the restrictions set forth in the California Financial Code. The
California Financial Code provides that a bank may not make a cash distribution
to its shareholder in an amount which exceeds the lesser of (1) the retained
earnings or (2) the net income of the bank for its last three fiscal years, less
the amount of any distributions made by the bank to its shareholders during that
period; however, a bank may, with the approval of the Department of Financial
Institutions, make a distribution to its shareholders in an amount not exceeding
the greatest of:
- - the retained earnings of the bank,
- - the net income of the bank for its last fiscal year, or
- - the net income of the bank for its current fiscal year.
If the Commissioner of the Department of Financial Institutions finds that the
shareholders' equity of a bank is not adequate or that the payment of a dividend
would be unsafe or unsound for the bank, the Commissioner of the Department of
Financial Institutions may order the bank not to pay any dividend to the
shareholders. In addition, Cerritos Valley Bank as a state-chartered bank is
also subject to dividend restrictions set forth by the FDIC.
During 1998, Cerritos Valley Bank paid dividends to Cerritos Valley in the
amount of $125,000. The purpose of this dividend was to allow Cerritos Valley to
purchase 8,333 shares of Cerritos Valley common stock from a shareholder and to
retire the shares. Prior to the purchase of shares, Cerritos Valley had
1,000,000 shares of Cerritos Valley common stock outstanding and after the
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<PAGE>
purchase, 991,667 shares remained outstanding as of December 31, 1998. As of
March 31, 1999, Cerritos Valley Bank paid $100,000 dividends to Cerritos Valley.
The purpose of the 1999 dividend was to pay for professional fee expenses paid
by Cerritos Valley.
RESERVE BALANCES. Cerritos Valley is required to maintain average reserve
balances with the Federal Reserve Bank. At March 31, 1999 and December 31, 1998,
the average reserve balance with the Federal Reserve Bank was $977,000 and
$938,000, respectively.
YEAR 2000 COMPLIANCE. The Year 2000 issue relates to the fact that many computer
programs used 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. Cerritos Valley could be
materially and adversely affected either directly or indirectly by the Year 2000
issue. This could happen if any of its critical computer systems or equipment
containing preprogrammed computer chips 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 Cerritos Valley to complete testing and renovation of its critical
systems on a timely basis could have a material adverse effect on its financial
condition and results of operations, as could Year 2000 problems faced by others
with whom Cerritos Valley 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.
Cerritos Valley has a written plan to address the risks associated with the
impact of the Year 2000. The plan directs Cerritos Valley's Year 2000 compliance
efforts under the framework of a five-step program mandated by the Federal
Financial Institutions Examination Council (the "FFIEC"). The FFIEC's five-step
program consists of five phases: awareness, assessment, renovation, validation
and implementation. In the awareness phase, which Cerritos Valley has completed,
the Year 2000 problem is defined and executive level support for the necessary
resources to prepare Cerritos Valley for Year 2000 compliance is obtained. In
the assessment phase, which Cerritos Valley 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, Cerritos Valley continues to evaluate new issues as they arise. In
the renovation phase, which Cerritos Valley has substantially completed, the
required incremental changes to hardware and software components are tested. In
the validation phase, which Cerritos Valley has also substantially completed,
the hardware and software components are tested. In the implementation phase
changes to hardware and components are brought on line. The implementation phase
is 85% complete.
78
<PAGE>
Cerritos Valley is utilizing both internal and external resources to identify,
correct and test its systems for Year 2000 compliance. Based on information
received from its vendors, Cerritos Valley believes approximately 90% of its
vendors are Year 2000 compliant as of December 31, 1998. Testing of the critical
system applications for the core banking products provided by Cerritos Valley's
primary vendors has been completed and the results were all satisfactory. The
core banking product includes general ledger, accounts payable, certificates of
deposit and individual retirement accounts, commercial and installment loans,
checking and savings accounts, proof of deposit applications and ancillary
support products.
Cerritos Valley is also making efforts to ensure that its customers,
particularly its significant customers, are aware of the Year 2000 problem.
Cerritos Valley has sent Year 2000 correspondence to its significant deposit and
loan customers. Starting in November of 1997, Cerritos Valley mailed 368 letters
with questionnaires to all customers who maintained $50,000 or more in deposits.
Cerritos Valley received 261 responses back, which equals a 70.9% response rate.
In addition, Cerritos Valley mailed 75 letters with risk assessment
questionnaires to customers with loan balances greater than $100,000 covering
64% of the entire loan portfolio. As of March 1999, Cerritos Valley received a
100% response from these loan customers either by direct contact or by a
follow-up to the letter. Currently, all new depositors who maintain $50,000 or
more in deposits, and new loan customers with loan balances greater than
$100,000 are surveyed when a new account is opened or a loan is funded.
A customer of Cerritos Valley is deemed significant if the customer possesses
any of the following characteristics:
- - Total indebtedness to Cerritos Valley Bank of $100,000 or more.
- - The customer's business is dependent on the use of high technology
and/or the electronic exchange of information.
- - The customer's business is dependent on third party providers of data
processing services or products.
- - An average ledger deposit balance greater than $50,000.
- - Collateral taken by Cerritos Valley Bank which could become impaired by
Year 2000 problems.
- - Unsecured lines of credit from which borrowers can draw funds at will.
Cerritos Valley has amended its credit authorization documentation to include
consideration of the Year 2000 problem. Cerritos Valley assesses its significant
customer's Year 2000 readiness and assigns the customer an assessment of "low,"
"medium" or "high" risk. Risk evaluation of Cerritos Valley's significant
customers was completed on December 31, 1998. Any depositor or lending customer
determined to have a high or medium risk is scheduled for an evaluation by
Cerritos Valley every 90 days until the customer can be assigned a low risk
assessment.
Because of the range of possible issues and large number of variables involved,
it is impossible to quantify the total potential cost of Year 2000 problems or
to determine Cerritos Valley's
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<PAGE>
worst-case scenario in the event Cerritos Valley's Year 2000 remediation efforts
or the efforts of those with whom it does business are not successful. In order
to deal with the uncertainty associated with the Year 2000 problem, Cerritos
Valley is developing 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 manual processing of information for critical information
technology systems and increased cash on hand. The contingency plans were
completed by March 31, 1999, after which the appropriate implementation training
is scheduled to take place.
As of March 31, 1999, Cerritos Valley has incurred $45,000 in Year 2000 costs,
which have been expensed as incurred. Cerritos Valley estimates that its costs
to complete Year 2000 compliance will be approximately $110,000. This estimate
includes the cost of purchasing hardware and licenses for software programming
tools, the cost of the time of internal staff and the cost of consultants. The
estimate does not include the time that internal staff is devoting to testing
programming changes. Testing is not expected to add significant incremental
costs.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk is the
risk of loss from adverse changes in market prices and rates. Cerritos Valley's
market risk arises primarily from interest rates risk inherent in its loan and
deposit functions and management actively monitors and manages this interest
rate risk exposure. Cerritos Valley does not have any market risk sensitive
instruments entered into for trading purposes. Management uses several different
tools to monitor its interest rate risk. One measure of exposure to interest
rate risk is gap analysis. A positive gap for a given period means that the
amount of interest-earning assets maturing or otherwise repricing within such
period is greater than the amount of interest-bearing liabilities maturing or
otherwise repricing within the same period. Cerritos Valley has a negative gap
measured with 12 months period. From one year and beyond, the negative gap
changes to a positive gap. In addition, Cerritos Valley uses interest rate shock
analysis to estimate the effect of certain hypothetical rate changes on income
and capital on a present value basis. Cerritos Valley uses an internal reference
rate index to price its loans. This reference rate is not automatically adjusted
when the Wall Street prime rate is lowered. As a result, Cerritos Valley Bank
did not lower its reference rate when the Wall Street prime rate was lowered
during 1998. This policy insulates the variable loan portfolio from changes in
the interest rate risk and it protects Cerritos Valley Bank's interest rate
margin. On the liability side, the deposits interest rates are priced to the
market on a continuous basis. Cerritos Valley Bank does not pay any broker to
obtain deposits and therefore is able to price its deposit below competitive
prices. Based upon Cerritos Valley's shock analysis, net interest income is
expected to rise with increasing rates and fall with declining rates.
Cerritos Valley's positive gap after one year is the result of the majority of
investments having terms greater than one year on the asset side. Also,
approximately 46% of its loan portfolio reprices and matures over a 1 year
period. On the liability side, the majority of Cerritos Valley's time deposits
have an average term life of less than 1 year while savings accounts, NOW
accounts and money market accounts are recorded for gap analysis in the next day
to three month category because they do not have a contractual maturity date.
The borrowings from the Federal Home Loan Bank have an average term life greater
than three years.
80
<PAGE>
Taking into consideration that savings accounts and other interest-bearing
transaction accounts typically do not react immediately to changes in interest
rates, management has taken the following steps to manage its positive interest
rate gap. Cerritos Valley uses an internal reference rate for pricing loans
which changes at a slower rate than prime. For fixed term loans, Cerritos Valley
Bank uses Federal Home Loan Bank advances to match the funding of the loans in
order to protect the spread over the life of the loan. Also, Cerritos Valley
Bank holds the majority of its investments in the available-for-sale category in
order to be able to react to changes in interest rate.
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<PAGE>
The following table sets forth the distribution of repricing opportunities of
Cerritos Valley's interest-earning assets and interest-bearing liabilities, the
interest rate sensitivity gap, i.e. interest rate sensitive assets less interest
rate sensitive liabilities, the cumulative interest rate sensitivity gap and the
cumulative gap as a percentage of total interest-earning assets as of December
31, 1998. The table also set forth the time periods within which
interest-earning assets and interest-bearing liabilities will mature or may
reprice in accordance with their contractual terms. The interest rate
relationships between the repriceable assets and repriceable liabilities are not
necessarily constant. The table should, therefore, be used only as a guide as to
the possible effect changes in interest rates might have on the net margins of
Cerritos Valley.
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------------
Over
Three
Months Over
(Dollars in thousands) Next Day Through One Year
to Three Twelve Through Over
Months Months Five Years Five Years Total
--------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS:
Federal funds sold $ 6,453 $ 0 $ 0 $ 0 $ 6,453
Taxable investment securities 5,350 4,059 19,207 12,671 41,287
Nontaxable investment securities 0 493 727 1,259 2,479
Loans(1) 32,056 1,762 10,532 16,523 60,873
-------- -------- ------- ------- --------
Total interest-earning assets 43,859 6,314 30,466 30,453 111,092
LIABILITIES:
Savings deposits(2) 32,816 0 0 0 32,816
Time deposits 17,050 14,663 871 17 32,601
Other borrowed funds 0 1,500 4,900 6,502 12,902
-------- -------- ------- ------- --------
Total interest-
bearing liabilities 49,866 16,163 5,771 6,519 78,319
-------- -------- ------- ------- --------
Net (interest-bearing liabilities)
interest earning assets $ (6,007) $ (9,849) $24,695 $23,934 $ 32,773
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
Cumulative net (interest-bearing
liabilities) interest-earning
assets (GAP) $ (6,007) $(15,856) $ 8,839 $32,773 $ 32,773
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
Cumulative GAP as a
percentage of total
interest-earning assets (5.41%) (14.27%) 7.96% 29.50% 29.50%
-------- -------- ------- ------- --------
-------- -------- ------- ------- --------
</TABLE>
- -----------------
(1) Gross loans net of nonaccrual.
(2) Savings deposits include interest-bearing transaction accounts.
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<PAGE>
MANAGEMENT
INFORMATION ON DIRECTORS AND EXECUTIVE OFFICERS. The following descriptions
contain information as of June 30, 1999 about those persons who are directors
and executive officers of Cerritos Valley and Cerritos Valley Bank, including
their business experience for the past five years.
GARY EINSTEIN has been a member of Cerritos Valley's and Cerritos Valley
Bank's Boards of Directors since 1982. Mr. Einstein is a practicing attorney
in the law firm of Einstein & Spiegel. Mr. Einstein is 47 years of age.
SHIBLEY HORANEY has been a member of Cerritos Valley's and Cerritos Valley
Bank's Boards of Directors since 1998. Mr. Horaney is the Chairman of the
Board, President and Chief Executive Officer of H & H Insurance Agency, the
President of Sterling Casualty Insurance Co., the President of D. H. Claim
Service Inc., the President of Fairway Auto Rental Inc. and the President of
Dashus Insurance Service Inc. Mr. Horaney is 65 years of age.
JAMES N. KOURY has been a member of Cerritos Valley's and Cerritos Valley
Bank's Boards of Directors since 1993. Mr. Koury serves as the Chairman of
the Board, the President and Chief Executive Officer of both Cerritos Valley
and Cerritos Valley Bank. Mr. Koury has been in the banking business for 35
years and prior to joining Cerritos Valley, Mr. Koury was the Chairman and
Chief Executive Officer of Security Pacific State Bank. Mr. Koury is 64
years of age.
PRICILLA F. KOURY has been a member of Cerritos Valley's Board of Directors
since 1997. Mrs. Koury is a private investor and is the wife of James N.
Koury, the Chairman, President and Chief Executive Officer of Cerritos
Valley. Mrs. Koury is 55 years of age.
JAMES MCGINLEY has been a member of Cerritos Valley's and Cerritos Valley
Bank's Boards of Directors since 1986. Mr. McGinley is the Owner and General
Manager of Amity, Inc., a metal stamping and tool dying company. Mr.
McGinley is 64 years of age.
SEYMOUR MELNIK, M.D. has been a member of Cerritos Valley's and Cerritos
Valley Bank's Boards of Directors since 1996. Dr. Melnik is an
obstetrician/gynecologist and is a Partner in Women's Specialty Medical
Group. Dr. Melnik is 59 years of age.
GARO V. MINASSIAN has been a member of Cerritos Valley's and Cerritos Valley
Bank's Boards of Directors since 1977. Mr. Minassian is an architect and is
the President of Minassian Architects. Mr. Minassian is 53 years of age.
CHRISTIAN PLUMMER has been an officer of Cerritos Valley Bank since 1989.
Mr. Plummer serves as the First Vice President and Chief Credit Officer of
Cerritos Valley Bank. Mr. Plummer has been in the banking business for 30
years. Mr. Plummer is 55 years of age.
RICHARD J. ROMERO has been a member of Cerritos Valley's and Cerritos Valley
Bank's Boards of Directors since 1995. Mr. Romero serves as the Vice
Chairman of Cerritos Valley Bank. Mr. Romero is the President of Oremor
Management and Investment Company in the automotive industry. Mr. Romero is
also a director of Empire Nissan, Romero Motors Corp, Oremor
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<PAGE>
Management, Jeep Chrysler Plymouth of Ontario, Norwalk Auto Auction, Oremor
Development and Oremor of Glendale. Mr. Romero is 31 years of age.
NAJAM M. SAIDUDDIN has been an officer of Cerritos Valley and Cerritos Valley
Bank since 1993. Mr. Saiduddin serves as the Senior Vice President and Chief
Financial Officer of Cerritos Valley and Cerritos Valley Bank. Mr. Saiduddin
has been in the banking business for 18 years. Mr. Saiduddin is 38 years of
age.
JOANN SAN PAOLO has been a member of Cerritos Valley's Board of Directors
since 1982. Mrs. San Paolo is the Vice President of San Paolo Salon, Inc.
Mrs. San Paolo is 53 years of age.
ELLEN TOMA has been a member of the Cerritos Valley's and Cerritos Valley
Bank's Boards of Directors since 1986. Mrs. Toma is a private investor.
Mrs. Toma is 70 years of age.
CERRITOS VALLEY'S BOARD OF DIRECTORS AND COMMITTEES. Cerritos Valley's Board
of Directors met four times during 1998. None of the directors attended less
than 75 percent of all of Cerritos Valley's Board of Directors meetings and
committee meetings (of which they were a member).
Cerritos Valley has an Audit Committee which met three times in 1998. The
Audit Committee consists of Richard J. Romero, Gary Einstein and Ellen Toma.
The purpose of the Audit Committee is to review all internal and external
examination reports, review internal audit findings, and to select Cerritos
Valley's independent certified public accountants.
Cerritos Valley has a Compensation Committee which met two times in 1998. The
Audit Committee consists of James N. Koury (chairman), James McGinley and
Seymour Melnik. The purpose of the Compensation Committee is to make
recommendations to the Board of Directors regarding executive compensation,
benefits and annual employee incentives.
During 1998, Cerritos Valley did not have a nominating committee.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTOR COMPENSATION. During 1998, no fees were paid to the directors of
Cerritos Valley. However, the members of Cerritos Valley Bank's board of
directors, other than Mr. Koury, did receive director fees of $500 per board
meeting. In addition, directors, other Mr. Koury, attending other standing
committee meetings of Cerritos Valley Bank received $250 per meeting.
EXECUTIVE COMPENSATION. During 1998, Cerritos Valley did not pay any cash
compensation to its executive officers and no such cash compensation is
expected to be paid during 1999. However, the persons serving as the
executive officers of Cerritos Valley received during 1998, and have received
in 1999, cash compensation in their capacities as executive officers of
Cerritos Valley Bank.
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<PAGE>
The following table sets forth a summary of the compensation paid during the
past three fiscal years for services rendered in all capacities to James N.
Koury, Chairman of the Board, President and Chief Executive Officer of
Cerritos Valley Bank and to Thomas Yott, the former Executive Vice President
and Chief Credit Officer of Cerritos Valley Bank whose annual base
compensation and bonus exceeded $100,000 during the 1998 fiscal year.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation -------------------------------
Awards Payouts
- -----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other
Annual Restricted All Other
Name and Compen- Stock LTIP Compen-
Principal Salary Bonus sation(1) Award(s) Options/ Payouts sation
Position Year ($) ($) ($) ($) SARs ($) ($)(2)
- -----------------------------------------------------------------------------------------------------------------------------------
James N. Koury 1998 195,833 20,000 1,699 0 0 0 7,908
Chairman of the Board, --------------------------------------------------------------------------------------------
President and Chief 1997 190,000 0 5,746 0 0 0 7,908
Executive Officer of --------------------------------------------------------------------------------------------
Cerritos Valley Bank 1996 150,000 0 5,903 0 0 0 7,908
- -----------------------------------------------------------------------------------------------------------------------------------
Thomas E. Yott(3) 1998 100,000 10,000 0 0 0 0 0
Executive Vice President --------------------------------------------------------------------------------------------
and Chief Credit Officer 1997 100,000 0 0 0 0 0 0
of Cerritos Valley Bank --------------------------------------------------------------------------------------------
1996 90,000 0 0 0 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------------
(1) These amounts represent perquisites consisting of county club fees and car
mileage allowance for Mr. James N. Koury.
(2) This amount represents Cerritos Valley's contribution for the cost of
premiums for life insurance.
(3) Mr. Yott resigned from Cerritos Valley Bank effective April 15, 1999.
</TABLE>
85
<PAGE>
OPTION/SAR EXERCISES AND YEAR END VALUE TABLE
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND YEAR END OPTION/SAR VALUE
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
- ------------------------------------------------------------------------------------------------------------------------
Value of
Number of Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
Year End (#) Year End ($)
Shares Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable(1) Unexercisable(1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James N. Koury 0 0 150,000/0 $450,000/$0
- ------------------------------------------------------------------------------------------------------------------------
Thomas E. Yott 0 0 8,000/2,000 $27,000/$3,000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Cerritos Valley has no SARs.
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<PAGE>
DEFERRED COMPENSATION PLAN. Under the deferred compensation plan, Mr. James
Koury may elect to defer any or all of the compensation earned during his
tenure. On December 24, 1993, Mr. Koury elected to defer 100 percent of his
salary for seven years following the agreement. During 1998, Mr. Koury elected
to take $5,833 in cash and defer the balance of his compensation. Upon
distribution, in January 2001, Mr. Koury will then receive equal installment
payments, including interest accrued at prime plus 2%, for a period of 60-120
months.
Cerritos Valley Bank purchased a life insurance policy in the amount of $1.2
million during 1993, and a $510,000 policy during 1997. The cash surrender value
of the policy has been included with other assets on the balance sheet.
STOCK PURCHASE AGREEMENT. In 1994, Cerritos Valley granted Mr. Koury a right to
purchase 150,000 shares of Cerritos Valley common stock for cash at the price of
$6.00 per share under a stock purchase agreement. This right became fully vested
in December 1998 and shall remain exercisable until December 2003. None of these
shares have been exercised. However, in connection with the merger, Mr. Koury
has entered into a stock purchase rights amendment agreement. Mr. Koury agreed
in the stock purchase rights amendment agreement, in consideration for not
exercising any rights to purchase Cerritos Valley common stock prior to the
completion of the merger, as follows:
- - the right to purchase the first 75,000 shares of Cerritos Valley common
stock must be exercised by no later than the latest of one year after Mr.
Koury's death or twenty months after completion of the merger;
- - if the first 75,000 shares are not purchased within that period, the right
to purchase those shares terminates; and
- - the option to acquire the remaining 75,000 shares continues to be
exercisable under its original terms.
In the stock purchase rights amendment agreement, Cerritos Valley agreed to
purchase 75,000 of Mr. Koury's shares of Cerritos Valley common stock,
immediately after completion of the merger, at the cash price of $28.52 per
share for a total consideration of $2,139,000.
CERTAIN TRANSACTIONS
Some of the directors and executive officers of Cerritos Valley and their
immediate families, as well as the companies with which they are associated,
are customers of, or have had banking transactions with, Cerritos Valley in
the ordinary course of Cerritos Valley's business, and Cerritos Valley
expects to have banking transactions with such persons in the future. In
management's opinion, all loans and commitments to lend in such transactions
were made in compliance with applicable laws and on substantially the same
terms, including interest rates and collateral, as those prevailing for
comparable transactions with other persons of similar creditworthiness and in
the opinion of management did not involve more than a normal risk of
collectibility or present other unfavorable features.
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<PAGE>
COMPETITION
The banking business in California generally, and in the market areas served
by Cerritos Valley specifically, is highly competitive with respect to both
loans and deposits. Cerritos Valley competes for loans and deposits with
other commercial banks, savings and loan associations, finance companies,
money market funds, credit unions and other financial institutions, including
a number that are much larger than Cerritos Valley. As of June 30, 1998 there
were 188 banking offices, including 104 offices of nine major chain banks,
operating within Cerritos Valley's primary market areas in Los Angeles
County. There has been increased competition for deposit and loan business
over the last several years as a result of deregulation. Additionally, with
the recent enactment of interstate banking legislation in California, bank
holding companies headquartered outside of California may enter the
California market and provide further competition for Cerritos Valley. See
"Effect of Governmental Policies and Recent Legislation" below. Many of the
major commercial banks operating in Cerritos Valley's market areas offer
certain services, such as trust and international banking services, which
Cerritos Valley does not offer directly. Additionally, banks with larger
capitalization have larger lending limits and are thereby able to serve
larger customers.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business which depends on rate differentials. In general, the
difference between the interest rate paid by Cerritos Valley Bank on its
deposits and other borrowings and the interest rate received by Cerritos
Valley Bank on loans extended to its customers and securities held in its
portfolio comprise the major portion of Cerritos Valley's earnings. These
rates are highly sensitive to many factors which are beyond the control of
Cerritos Valley. Accordingly, the earnings and growth of Cerritos Valley are
subject to the influence of domestic and foreign economic conditions,
including inflation, recession and unemployment.
The earnings and growth of Cerritos Valley are also influenced by the
monetary and fiscal policies of the federal government and the policies of
regulatory agencies, particularly the Federal Reserve Board. The Federal
Reserve Board implements national monetary policies, with objectives such as
to curb inflation and combat recession, by its open-market operations in
United States Government securities, by adjusting the required level of
reserves for financial institutions subject to its reserve requirements and
by varying the discount rates applicable to borrowing by depository
institutions. The actions of the Federal Reserve Board in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The nature and impact
of any future change in monetary policies cannot be predicted.
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 change and the impact
such change may have on Cerritos Valley is impossible to predict. Certain of
the potentially significant changes which have been enacted recently and
others which are currently under consideration by Congress or various
regulatory or professional agencies are discussed below.
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<PAGE>
CURRENT ACCOUNTING DEVELOPMENTS
The Financial Accounting Standards Board issued Statement No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This Statement is effective
for fiscal years beginning after June 15, 1999 but may be adopted as of the
beginning of any fiscal quarter that begins after the issuance of the Statement.
Management of Cerritos Valley has not yet completed its analysis to determine
the effect implementation of Statement No. 133 will have on its financial
statements.
RECENT LEGISLATION AND OTHER CHANGES
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 Cerritos Valley are 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. These rules may be applied by Cerritos Valley 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 California Department of Financial
Institutions to close a bank, if the California Department of Financial
Institutions finds that the bank's tangible shareholders' equity is less than
the greater of 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
89
<PAGE>
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 Federal
Reserve Board 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 ss.ss. 850-855) to facilitate the notification of
government agencies and potentially responsible parties, for example, for
cleanup, of the existence of contamination and 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 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.
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<PAGE>
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 certain of the
above-mentioned legislation will have on Cerritos Valley 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.
91
<PAGE>
DESCRIPTION OF BELVEDERE CAPITAL AND THE CALIFORNIA FUND
The California Fund is a limited partnership organized in 1997 under the laws of
the State of California to take advantage of the significant decline in the
number of locally owned and managed banks in California by investing in
community oriented financial institutions, allowing them to continue to operate
as community oriented independent entities, and assisting them to move into
markets that are no longer served by independent financial institutions. This
decline resulted from the recent wave of consolidations both at the community
bank level as well as the regional level with institutions such as First
Interstate Bank disappearing into Wells Fargo Bank, which then combined with
Norwest. Belvedere Capital is the general partner of the California Fund.
The California Fund completed its offering of partnership interests on April 29,
1998, with capital commitments from its partners to contribute an aggregate of
$160 million to the California Fund, including Belvedere Capital's commitment as
general partner of not less than 1% of the aggregate capital contributions of
all partners. Pursuant to its limited partnership agreement, limited partners in
the California Fund are required to fund their respective capital commitments
upon call by Belvedere Capital for, among other things, designated investments
in portfolio companies such as Cerritos Valley. From these commitments, the
California Fund will contribute $12,800,000 to Cerritos Merger Co.
Both Belvedere Capital and the California Fund are registered bank holding
companies. The California Fund is the holding company of California Financial
Bancorp which is the registered bank holding company of Security First Bank,
Fullerton, California, The Bank of Orange County, Fountain Valley, California,
Downey National Bank, Downey, California, and National Business Bank, Torrance
California.
California Financial Bancorp and the California Fund own or have the right to
acquire approximately 64% of the outstanding shares of Security First Bank. At
December 31, 1998, Security First Bank had assets of $52.7 million and as of
June 30, 1998 (the latest date as of which deposit data for the relevant area
was available) deposits in Security First Bank represented approximately 1.60%
of the total bank and thrift deposits in the Fullerton area (defined by Security
First Bank to include Fullerton, Brea and Yorba Linda, California).
In November 1998, California Financial Bancorp purchased 62.63% of the
outstanding shares of common stock of National Business Bank. National Business
Bank opened for business on November 3, 1998, and at December 31, 1998 had
assets of $8.9 million.
In November 1998, California Financial Bancorp also acquired all of the
outstanding shares of Downey Bancorp. Downey Bancorp was the sole shareholder
and holding company of Downey National Bank. Immediately following completion of
this acquisition, Downey Bancorp was merged with and into California Financial
Bancorp in a statutory short-form merger, with California Financial Bancorp as
the surviving corporation. At December 31, 1998, Downey National Bank had assets
of $62.6 million and as of June 30, 1998 (the latest date as of which deposit
data for the relevant area was available) deposits in Downey National Bank
represented approximately 2.60% of total bank and thrift deposits in Downey,
California.
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<PAGE>
In December 1998, California Financial Bancorp acquired all of the outstanding
shares of The Bank of Orange County. The Bank of Orange County had assets of
$111.9 million and as of June 30, 1998 (the latest date as of which deposit data
for the relevant area was available) deposits in The Bank of Orange County
represented approximately 1.63% of total bank and thrift deposits in the cities
in which The Bank of Orange County operates branches (Fountain Valley, Mission
Viejo and Orange, California).
Pursuant to an agreement entered into as of May 11, 1999 by and among Belvedere
Capital, as general partner and on behalf of the California Fund, Placer Capital
Co., a California corporation, PC Merger Co, a California corporation and
wholly-owned subsidiary of Placer Capital Co., and Placer Savings Bank, a
California a savings bank, Belvedere Capital and the California Fund have agreed
to acquire 100% of the outstanding shares of Placer Savings Bank for a cash
consideration of $80,000,000, subject to certain conditions, including
shareholder and regulatory approvals.
Belvedere Capital is a California limited liability company whose articles of
organization were filed with the California Secretary of State on January 4,
1999. Belvedere Capital was organized for the sole purpose of assuming the
general partnership interest in the California Fund of Belvedere Capital
Partners, Inc., a California corporation. Belvedere Capital succeeded to
Belvedere Capital Partners, Inc.'s role as the sole general partner of the
California Fund, pursuant to an assignment of general partnership interest and
assumption of general partnership liability and an assignment of assets and
assumption of liabilities both entered into, subject to receipt of regulatory
approvals, as of January 4, 1999. Final regulatory approval was received on May
11, 1999.
Belvedere Capital is managed by Richard W. Decker, Jr. and Ronald W. Bachli,
each of whom is a member of Belvedere Capital.
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DESCRIPTION OF CERRITOS VALLEY FOLLOWING THE MERGER
BUSINESS
Management of Cerritos Valley anticipates that following the merger, Cerritos
Valley will continue to operate the business of Cerritos Valley Bank in
substantially the same form as its business was conducted prior to the merger.
MANAGEMENT
Upon completion of the merger, the Board of Directors of Cerritos Valley will
consist of 12 directors. All of the ten directors of Cerritos Valley then in
office immediately prior to the completion of the merger shall continue to serve
as directors of Cerritos Valley, and in addition, Ronald W. Bachli and J. Thomas
Byrom of Belvedere Capital, will be added to the Board of Directors of Cerritos
Valley. For information concerning these persons, see "Description of Cerritos
Valley--Management--Information on Directors and Executive Officers" and
"Description of Belvedere Capital and the California Fund."
Management of Cerritos Valley anticipates that the directors of Cerritos Valley
and Cerritos Valley Bank will receive fees in amounts which are substantially
similar to those presently paid to directors of Cerritos Valley and Cerritos
Valley Bank. See "Description of Cerritos Valley--Management--Compensation of
Directors and Executive Officers."
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Articles of Incorporation and Bylaws of Cerritos Valley provide for
indemnification of agents including directors, officers and employees to the
maximum extent allowed by California law including the use of an indemnity
agreements. Cerritos Valley's Articles further provide for the elimination of
director liability for monetary damages to the maximum extent allowed by
California law. The indemnification law of the State of California generally
allows indemnification in matters not involving the right of the corporation, to
an agent of the corporation if such person acted in good faith and in a manner
such person reasonably believed to be in the best interests of the corporation,
and in the case of a criminal matter, had no reasonable cause to believe the
conduct of such person was unlawful. California law, with respect to matters
involving the right of a corporation, allows indemnification of an agent of the
corporation, if such person acted in good faith, in a manner such person
believed to be in the best interests of the corporation and its shareholders;
provided that there shall be no indemnification for:
- - amounts paid in settling or otherwise disposing of a pending action
without court approval;
- - expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval;
- - matters in which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the court in which the
proceeding is or was pending shall determine that such person is entitled
to be indemnified; or
94
<PAGE>
- - other matters specified in the California General Corporation Law.
Cerritos Valley's Bylaws provide that Cerritos Valley shall to the maximum
extent permitted by law have the power to indemnify its directors, officers and
employees. Cerritos Valley's Bylaws also provide that Cerritos Valley shall have
the power to purchase and maintain insurance covering its directors, officers
and employees against any liability asserted against any of them and incurred by
any of them, whether or not Cerritos Valley would have the power to indemnify
them against such liability under the provisions of Cerritos Valley's Bylaws.
Each of the directors and executive officers of Cerritos Valley has an
indemnification agreement that provides that Cerritos Valley shall indemnify
such person to the full extent authorized by the applicable provisions of
California law, and further provide advances to pay for any expenses which would
be subject to reimbursement.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (the "Securities Act") may be permitted to directors, officers
or persons controlling Cerritos Valley pursuant to the foregoing, Cerritos
Valley has been informed that in the opinion of the SEC, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
INDEPENDENT PUBLIC ACCOUNTANTS
Management of Cerritos Valley anticipates that Grant Thornton LLP will continue
to provide accounting services to Cerritos Valley and Cerritos Valley Bank, such
services to include audits of year end financial statements and other services
as required.
95
<PAGE>
PROPOSAL 2:
ELECTION OF DIRECTORS
NOMINEES
Cerritos Valley's Bylaws provide that the number of directors of Cerritos Valley
shall not be less than eight (8) nor more than eleven (11) until changed by an
amendment to the Bylaws adopted by Cerritos Valley's shareholders. The Bylaws
further provide that the exact number of directors shall be established, within
the limits specified, by a Bylaw amending Article III, Section 2 of the Bylaws,
duly adopted by the Board of Directors or by the shareholders.
The persons named below, all of whom are currently members of the Board of
Directors, have been nominated for election as directors to serve until the 2000
annual meeting of shareholders and until their successors are elected and have
qualified. Votes of the proxyholders will be cast in such a manner as to effect
the election of all ten (10) nominees, as appropriate, (or as many thereof as
possible under the rules of cumulative voting). The ten nominees for directors
receiving the most votes will be elected directors. In the event that any of the
nominees should be unable to serve as a director, it is intended that the proxy
will be voted for the election of such substitute nominee, if any, as shall be
designated by the Board of Directors. The Board of Directors has no reason to
believe that any of the nominees named below will be unable to serve if elected.
NAME AND TITLE WITH CERRITOS VALLEY
Gary R. Einstein, Director
Shibley Horaney, Director
Pricilla F. Koury, Director
James N. Koury, Chairman, President and Chief Executive Officer
James M. McGinley, Director
Seymour J. Melnik, M.D., Director
Garo V. Minassian, Director
Richard J. Romero, Director
JoAnn San Paolo, Director
Ellen Toma, Director
96
<PAGE>
For additional information on the nominees, see "Description of Cerritos
Valley--Management--Information on Directors and Executive Officers."
All of the nominees named above have served as members of Cerritos Valley's
Board of Directors for the past year. All nominees will continue to serve if
elected at the meeting until the 2000 annual meeting of shareholders and until
their successors are elected and have been qualified. None of the directors were
selected pursuant to any arrangement or understanding other than with the
directors and executive officers of Cerritos Valley acting within their
capacities as such. There are no family relationships between any of the
directors of Cerritos Valley other than James N. Koury and Pricilla F. Koury who
are husband and wife. No director of Cerritos Valley serves as a director of any
company which has a class of securities registered under, or which is subject to
the periodic reporting requirements of, the Exchange Act, or of any company
registered as an investment company under the Investment Company Act of 1940. On
April 30, 1997, Cerritos Valley's director Garo Minassian, and his wife Aida,
filed bankruptcy petitions in the United States Bankruptcy Court for the Central
District of California in Los Angeles. On July 30, 1998, an Order approving
Compromise was granted. Neither Cerritos Valley nor Cerritos Valley Bank was a
creditor of Garo or Aida Minassian.
97
<PAGE>
PROPOSAL 3:
INCREASE IN THE RANGE OF THE NUMBER OF DIRECTORS
Article III, Section 2 of Cerritos Valley's Bylaws currently provides that the
range of directors of Cerritos Valley shall be from 8 to 11. The agreement
requires that Belvedere Capital be allowed to appoint two additional directors
of Cerritos Valley following the merger. Since Cerritos Valley currently has 10
directors, Cerritos Valley currently only has room for one of the additional
appointments and needs to amend its Bylaws to increase the size of the range of
directors from 8 to 11, to 8 to 15.
Approval of the increase in the range of the number of directors requires the
affirmative vote of a majority of the outstanding shares of Cerritos Valley
common stock entitled to vote at the meeting.
MANAGEMENT RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE INCREASE IN THE RANGE
OF THE NUMBER OF DIRECTORS.
98
<PAGE>
EXPERTS
The financial statements of Cerritos Valley as of December 31, 1998 and 1997 and
for each of the two years in the period ended December 31, 1998 included in this
proxy statement/prospectus have been audited by Grant Thornton LLP, independent
auditors, as stated in their report appearing herein and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing. The financial statements of Cerritos Valley for the
period ended December 31, 1996 included in this proxy statement/prospectus have
been audited by Vavrinek, Trine, Day & Co., LLP independent auditors, as stated
in their report appearing herein and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
Representatives of Grant Thornton LLP will be present at the meeting, and they
will be given an opportunity to make a statement if they desire to do so. They
will also be available to respond to appropriate questions.
LEGAL MATTERS
The validity of the securities to be issued by Cerritos Valley in connection
with the merger is being passed upon by Gary Steven Findley & Associates,
Anaheim, California.
OTHER BUSINESS
The Board of Directors of Cerritos Valley does not know of any other matters to
be presented at the meeting. If other matters properly come before the meeting,
however, it is the intention of the persons named in the accompanying proxy
cards to vote the proxy cards in accordance with their best judgment and in
their sole discretion.
99
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
CERRITOS VALLEY BANCORP AND SUBSIDIARY
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Certified Public Accountants' Report...........................F-1
Independent Certified Public Accountants' Report...........................F-2
Consolidated Balance Sheets, March 31, 1999 (unaudited),
December 31, 1998 and 1997................................................F-3
Consolidated Statements of Earnings for the
Three Months Ended March 31, 1999 and 1998 (unaudited)
and the Years Ended December 31, 1998, 1997 and 1996......................F-5
Consolidated Statement of Stockholders' Equity for the
Three Months Ended March 31, 1999 (unaudited) and
the Years Ended December 31, 1998, 1997 and 1996..........................F-7
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 (unaudited)
and the Years Ended December 31, 1998, 1997 and 1996......................F-8
Notes to Consolidated Financial Statements.................................F-10
100
<PAGE>
[GRANT THORNTON LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Cerritos Valley Bancorp
We have audited the consolidated balance sheets of Cerritos Valley Bancorp
and Subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of earnings, stockholders' equity, and cash flows for the years
then ended. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cerritos Valley
Bancorp and Subsidiary as of December 31, 1998 and 1997, and the consolidated
results of their operations and their consolidated cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
- -------------------------------------------
Los Angeles, California
January 29, 1999 (except for Note V, as to
which the date is February 17, 1999)
F-1
<PAGE>
[VAVRINEK LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Cerritos Valley Bancorp and Subsidiary
Cerritos, California
We have audited the accompanying consolidated balance sheets of Cerritos
Valley Bancorp and Subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income and changes in stockholders equity
and statements of cash flows for each of the three years in the period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated 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 Cerritos
Valley Bancorp and Subsidiary as of December 31, 1996 and 1995, the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Vavrinek, Trine, Day & Co., LLP
Rancho Cucamonga, California
February 28, 1997
F-2
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
March 31, ----------------------------------
1999 1998 1997
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 9,140,214 $ 8,610,342 $ 7,056,817
Federal funds sold 8,435,000 6,453,000 8,059,000
------------ ------------ ------------
Cash and cash equivalents 17,575,214 15,063,342 15,115,817
Investment securities
Available for sale 38,516,539 40,487,055 26,522,429
Held to maturity - fair value of $2,323,728, $3,298,498 and
$4,226,902 in 1999, 1998 and 1997, respectively 2,277,506 3,278,770 4,257,444
Loans receivable, net of allowance for loan losses
of $1,145,488, $1,237,680 and $1,155,839 in 1999, 1998
and 1997, respectively 62,563,672 59,834,047 48,750,977
Loans held for sale 1,232,486 1,284,631 1,371,607
Bank premises and equipment 1,872,688 1,920,206 1,960,938
Accrued interest receivable 1,138,205 932,216 750,436
Other real estate owned - - 69,756
Prepaid expenses and other assets 3,099,260 3,034,092 2,739,462
------------ ------------ ------------
Total assets $128,275,570 $125,834,359 $101,538,866
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
March 31, ----------------------------------
1999 1998 1997
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Liabilities
Deposits
Checking noninterest-bearing $ 34,086,161 $ 33,314,390 $ 28,549,313
Checking interest-bearing and savings 24,951,630 24,873,713 21,695,946
Money market accounts 9,940,353 7,942,643 6,748,169
Time certificates of deposit under $100,000 14,123,182 13,480,453 12,839,162
Time certificates of deposit $100,000 and over 17,298,079 19,120,417 16,847,074
------------ ------------ ------------
Total deposits 100,399,405 98,731,616 86,679,664
FHLB advances 12,848,223 12,650,837 1,200,000
Treasury, tax and loan 310,773 - 1,002,845
Obligations under capital lease 243,595 250,790 264,389
Accrued expenses and other liabilities 1,928,919 1,784,466 1,416,490
------------ ------------ ------------
Total liabilities 115,730,915 113,417,709 90,563,388
Commitments and contingencies - - -
Stockholders' equity
Contributed capital
Common stock - authorized, 20,000,000 shares, no par
value; 991,667, 991,667 and 1,000,000 shares issued
and outstanding in 1999, 1998 and 1997, respectively 6,540,813 6,540,813 6,540,813
Retained earnings 6,200,024 5,848,246 4,414,498
Accumulated other comprehensive income (196,182) 27,591 20,167
------------ ------------ ------------
Total stockholders' equity 12,544,655 12,416,650 10,975,478
------------ ------------ ------------
Total liabilities and stockholders' equity $128,275,570 $125,834,359 $101,538,866
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended December 31,
------------------------- ----------------------------------------
1999 1998 1998 1997 1996
----------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans $1,600,512 $1,402,242 $6,032,266 $5,007,530 $4,725,835
Interest on investment securities
Available for sale 535,729 383,134 1,692,897 1,531,285 1,196,477
Held to maturity 26,237 63,633 221,636 333,849 305,027
FHLB dividends and other interest 153 4,472 48,915 10,175 5,211
Interest on federal funds sold 95,595 121,862 557,701 417,987 663,002
----------- ---------- ---------- ---------- ----------
Total interest income 2,258,226 1,975,343 8,553,415 7,300,826 6,895,552
----------- ---------- ---------- ---------- ----------
Interest expense
Deposits 568,774 540,440 2,255,122 1,923,455 1,839,226
Other 188,811 31,576 351,839 61,260 44,018
----------- ---------- ---------- ---------- ----------
Total interest expense 757,585 572,016 2,606,961 1,984,715 1,883,244
----------- ---------- ---------- ---------- ----------
Net interest income 1,500,641 1,403,327 5,946,454 5,316,111 5,012,308
Provision for loan losses 85,000 75,000 310,000 750,000 604,000
----------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 1,415,641 1,328,327 5,636,454 4,566,111 4,408,308
Noninterest income
Service charges on deposit accounts 300,802 239,867 1,081,733 825,503 1,020,274
Other service charges and income 82,566 84,462 385,785 425,171 370,421
Gain on sale of real estate owned - - 14,681 20,337 672,331
Gain on sale of securities available for sale - - - - 14,667
Gain on sale of loans 396 10,796 80,837 243,693 258,864
----------- ---------- ---------- ---------- ----------
Total noninterest income 383,764 335,125 1,563,036 1,514,704 2,336,557
----------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS - CONTINUED
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended December 31,
------------------------- ----------------------------------------
1999 1998 1998 1997 1996
----------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Noninterest expense
Salaries and employee benefits $ 503,507 $ 516,458 $2,230,404 $2,132,286 $2,344,837
Occupancy 89,741 49,194 304,496 181,783 246,780
Other operating expenses 611,185 504,846 2,172,290 1,995,796 2,525,397
----------- ---------- ---------- ---------- ----------
Total noninterest expense 1,204,433 1,070,498 4,707,190 4,309,865 5,117,014
----------- ---------- ---------- ---------- ----------
Earnings before income taxes 594,972 592,954 2,492,300 1,770,950 1,627,851
Income tax expense 243,194 226,972 954,391 261,756 613,134
----------- ---------- ---------- ---------- ----------
NET EARNINGS $ 351,778 $ 365,982 $1,537,909 $1,509,194 $1,014,717
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Basic earnings per share $ 0.35 $ 0.37 $ 1.54 $ 1.51 $ 1.01
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Diluted earnings per share $ 0.32 $ 0.34 $ 1.41 $ 1.42 $ 0.99
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Basic weighted average shares outstanding 991,667 1,000,000 999,653 999,911 999,901
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
Dilutive weighted average shares outstanding 1,083,970 1,084,333 1,088,161 1,066,553 1,023,976
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996 and
three months ended March 31, 1999
<TABLE>
<CAPTION>
Accumulated
Number other
of shares Common comprehensive Retained
outstanding stock income earnings Total
----------- ---------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1996 999,901 $6,539,785 $ 63,671 $1,890,587 $ 8,494,043
Comprehensive income
Net changes in unrealized loss on securities
available for sale, net of tax
benefit of $46,262 - - (131,377) - (131,377)
Net earnings for the year - - - 1,014,717 1,014,717
-----------
Comprehensive income 883,340
----------- ---------- ------------- ---------- -----------
Balance - December 31, 1996 999,901 6,539,785 (67,706) 2,905,304 9,377,383
Comprehensive income
Net changes in unrealized gain on
securities available
for sale, net of tax of $13,445 - - 87,873 - 87,873
Net earnings for the year - - - 1,509,194 1,509,194
-----------
Comprehensive income 1,597,067
Stock issuance 99 1,028 1,028
----------- ---------- ------------- ---------- -----------
Balance - December 31, 1997 1,000,000 6,540,813 20,167 4,414,498 10,975,478
Comprehensive income
Net changes in unrealized gain on securities
available for sale, net of tax of $4,950 - - 7,424 - 7,424
Net earnings for the year - - - 1,537,909 1,537,909
-----------
Comprehensive income 1,545,333
Stock retirement (8,333) - - (104,161) (104,161)
----------- ---------- ------------- ---------- -----------
Balance - December 31, 1998 991,667 6,540,813 27,591 5,848,246 12,416,650
Comprehensive income (unaudited)
Net changes in unrealized loss on
securities available for sale,
net of tax benefit of $149,180
(unaudited) - - (223,773) - (223,773)
Net earnings for the period (unaudited) - - - 351,778 351,778
-----------
Comprehensive income (unaudited) 128,005
----------- ---------- ------------- ---------- -----------
Balance - March 31, 1999 (unaudited) 991,667 $6,540,813 $ (196,182) $6,200,024 $12,544,655
----------- ---------- ------------- ---------- -----------
----------- ---------- ------------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended December 31,
------------------------- ----------------------------------------------
1999 1998 1998 1997 1996
----------- ---------- ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 351,778 $ 365,982 $ 1,537,909 $ 1,509,194 $ 1,014,717
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Net amortization/accretion of
discount/premium on securities 5,563 (26,257) (158,949) 65,293 (222)
Depreciation 64,941 57,423 249,996 211,334 242,116
Gain on sale of securities available
for sale - - - - (14,667)
Deferred income tax (benefit) expense 103,329 (83,467) (191,826) (171,731) 239,880
Other losses and (gains) - - (14,681) 6,268 (649,719)
Principal payments from and sale of loans
held for sale 52,145 551,226 4,373,947 13,212,163 14,363,428
Purchase of loans held for sale - (2,406,500) (4,286,971) (14,130,899) (14,816,299)
(Increase) decrease in interest receivable (205,989) 40,354 (181,780) (37,236) (106,687)
Net (increase) decrease in other assets (168,497) 52,412 (47,893) (549,794) 400,207
Net increase in other liabilities 144,453 142,665 313,065 250,327 420,243
Provision for loan losses 85,000 75,000 310,000 750,000 604,000
---------- ---------- ----------- ---------- ------------
Net cash provided by (used in)
operating activities 432,723 (1,231,162) 1,902,817 1,114,919 1,696,997
Cash flows from investing activities:
Proceeds from maturities and principal
collected on sales of securities:
Available for sale 6,238,225 2,108,424 33,903,161 5,236,187 9,854,349
Held to maturity 1,000,000 18,097 982,490 1,575,692 2,289,217
Purchases of investment securities:
Available for sale (4,495,781) - (47,705,230) (7,777,228) (20,913,477)
Held to maturity - - - (301,000) (2,941,974)
Net (increase) decrease in loans (2,814,625) (1,181,728) (11,393,070) (9,333,354) 2,048,650
Purchases of premises and equipment (17,423) (122,178) (209,264) (126,803) (21,579)
Proceeds from sale of bank equipment - - - 8,407 -
Proceeds from sale of other real
estate owned - - 84,437 632,906 2,448,640
---------- ---------- ----------- ---------- ------------
Net cash (used in) provided
by investing activities (89,604) 822,615 (24,337,476) (10,085,193) (7,236,174)
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOW - CONTINUED
Three months ended March 31, Year ended December 31,
--------------------------- ----------------------------------------
1999 1998 1998 1997 1996
---------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in interest and
noninterest bearing accounts, savings and
money market accounts $ 2,847,398 $ 4,163,009 $ 9,137,318 $ (482,505) $(2,808,053)
Net (decrease) increase in time certificates
of deposit (1,179,609) 1,554,313 2,914,634 7,855,309 130,814
Payments made under capital lease obligations (7,195) (3,964) (13,599) (14,953) (13,602)
Net increase (decrease) in treasury, tax
and loan note 310,773 (507,149) (1,002,845) 561,158 190,053
Net increase in FHLB advances 197,386 - 11,450,837 1,200,000 -
Payment for retirement of stock - - (104,161) - -
Proceeds from issuance of stock - - - 1,028 -
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 2,168,753 5,206,209 22,382,184 9,120,037 (2,500,788)
----------- ----------- ----------- ----------- -----------
Increase (decrease) in cash and
cash equivalents 2,511,872 4,797,662 (52,475) 149,763 (8,039,965)
Cash and cash equivalents at beginning of year 15,063,342 15,115,817 15,115,817 14,966,054 23,006,019
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of year $17,575,214 $19,913,479 $15,063,342 $15,115,817 $14,966,054
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Supplemental disclosures of cash flow information:
Interest paid $ 758,754 $ 579,950 $ 2,482,264 $ 1,984,715 $ 1,908,058
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income taxes paid $ - $ - $ 992,416 $ 262,000 $ 165,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Supplemental disclosures of noncash investing activities:
Acquisition of real estate in settlement of loans $ - $ - $ - $ 70,000 $ 2,187,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-9
<PAGE>
Cerritos Valley Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 (unaudited) and December 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cerritos Valley Bancorp (the "Holding Company") was formed in January 1988
as a bank holding company, the principal operations which are conducted
through Cerritos Valley Bank (the "Bank"), a California state chartered
bank. The Bank is engaged in the business of attracting deposits from the
general public and using such deposits, together with borrowings and other
funds, to make loans primarily secured by real estate. The Bank grants
loans to customers throughout its primary market areas; all of which are in
Southern California. Management believes that there are no industry or
borrower concentrations at March 31, 1999. The ability of the Bank's
customers to honor their loan agreements is dependent, in part, upon the
health of the real estate market as well as the general economy of the
Bank's market area.
Bank revenues are derived principally from interest on loans and
investments, and other fees. The major expense of the Bank is interest
paid on deposits and borrowings. Bank operations and net interest income
are affected by general economic conditions and by the monetary and fiscal
policies of the federal government. Deposit flows and costs of funds are
influenced by interest rates on competing investments and general market
interest rates.
The accounting and reporting policies of the Holding Company and the Bank
conform with generally accepted accounting principles within the banking
industry. A summary of the significant accounting policies consistently
applied in the preparation of the accompanying consolidated financial
statements follows:
Insofar as these consolidated financial statements and notes related to
information at March 31, 1999 and for the three-month periods ended March
31, 1999 and 1998, they are unaudited. In the opinion of management, such
unaudited consolidated financial statements and notes thereto reflect all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of consolidated financial position, results of
operations and cash flows for such periods. The consolidated financial
position at March 31, 1999 and consolidated results of operations for the
three months then ended are not necessarily indicative of the consolidated
financial position that may be expected at December 31, 1999 or
consolidated results of operations that may be expected for the year ending
December 31, 1999.
1. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Holding Company and its wholly-owned subsidiary, Cerritos Valley Bank.
All significant transactions and accounts between the Holding Company and
the Bank have been eliminated in consolidation.
F-10
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
2. CASH EQUIVALENTS
For the purpose of presentation in the consolidated statements of cash
flows, cash and cash equivalents include cash and due from banks and
federal funds sold. Generally, federal funds are sold for one-day periods.
3. USE OF ESTIMATES
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
disclosure 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.
Estimates that are particularly susceptible to significant change relate to
the determination of the allowance for losses on loans and the valuation of
real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses
on loans secured by real estate and foreclosed real estate, management
obtains independent appraisals for significant properties.
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for losses on loans and
foreclosed real estate. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination. Because of these
factors, it is reasonably possible that the allowances for losses on loans
and foreclosed real estate may change.
4. INVESTMENT SECURITIES
The Bank classifies its investment securities as either securities held to
maturity or securities available for sale. Securities that the Bank has
both the ability and intent to hold to maturity are classified as
securities held to maturity and are stated at cost and adjusted for
amortization of premiums and accretion of discounts, which are recognized
as adjustments to income using the interest method over the period to
maturity. Securities that may be sold prior to maturity are classified as
securities available for sale and are carried at their estimated fair value
with unrealized gains and losses reported as accumulated other
comprehensive income in stockholders' equity, net of taxes.
F-11
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. LOANS RECEIVABLE AND LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate.
Net unrealized losses are recognized through a valuation allowance by
charges to income.
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses and net deferred loan fees and unearned
discounts. The Bank recognizes loan origination fees as an adjustment of
the loan's yield over the life of the loan by the interest method, which
results in a constant rate of return. Certain direct costs of originating
the loan are recognized over the life of the loan as a reduction of the
yield rather than as expense when incurred.
A loan is impaired when it is probable the creditor will not be able to
collect all contractual principal and interest payments due in accordance
with the terms of the loan agreement. Impairment is measured on the
present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor
may measure impairment based on a loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Any unpaid interest previously accrued on those loans is reversed from
income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal
balance.
6. PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. Allowance
for impaired loans are generally determined based on collateral values or
the present value of estimated cash flows. The allowance is increased by a
provision for loan losses, which is charged to expense and reduced by
charge-offs, net of
F-12
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. PROVISION AND ALLOWANCE FOR LOAN LOSSES (continued)
recoveries. Although management uses the best information available to
make these estimates, future adjustments to the allowance may be necessary
due to economic, operating, regulatory and other conditions that may be
beyond the Bank's control. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses and may require the Bank to recognize additions
to the allowance based on judgments different from those of management.
7. BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which
range from 3 to 39 years. Improvements to leased property are amortized on
the straight-line method over the shorter of the lease term or the useful
lives of the improvements.
8. OTHER REAL ESTATE OWNED
Other real estate owned represents real estate acquired through foreclosure
of properties in satisfaction of commercial and real estate loans. These
properties are recorded at the lower of the unpaid balance of the loans or
the fair values of the properties at the date of acquisition. Any
valuation adjustments required at the date of acquisition are charged to
the allowance for loan losses. Subsequent to acquisition, other real
estate owned is carried at the lower of recorded cost or fair value less
costs to sell. Subsequent operating expenses or income, reduction in
estimated values, and gains or losses on disposition of such properties are
included in income or expense.
9. INCOME TAXES
Provisions for income taxes are based on amounts reported in the statement
of earnings (after exclusion of non-taxable income such as interest on
state and municipal securities) and include deferred taxes on temporary
differences in the recognition of income and expense for tax and financial
statement purposes. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
F-13
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
10. BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per share is based upon the weighted average number of
common shares outstanding. Diluted net income per share is based on the
assumption that all convertible shares and stock options were converted or
exercised. Dilution is computed by applying the treasury stock method.
Under this method, options and warrants are assumed to be exercised at the
beginning of the period (or at the time of issuance, if later), and as if
funds obtained thereby were used to purchase common stock at the average
market price during the period.
11. RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 classifications.
12. NEW ACCOUNTING PRONOUNCEMENT
The Bank adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," as of January 1, 1998. Accounting
principles generally require that recognized revenue, expenses, gains and
losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of
the balance sheet, such items, along with net income, are components of
comprehensive income. The adoption of SFAS No. 130 had no effect on net
income or shareholders' equity.
NOTE B - CASH AND DUE FROM BANKS
The Bank is required to maintain cash on hand and on deposit to meet
reserve requirements established by the Federal Reserve Bank. Average
reserve requirements were $977,000, $938,000 and $854,000 at March 31,
1999, December 31, 1998 and 1997, respectively.
F-14
<PAGE>
NOTE C - SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
The amortized cost and estimated fair values of securities available for
sale as of March 31, 1999, and December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------------------------------------------------
Gross unrealized
Amortized ----------------------------- Estimated
cost Gains Losses fair value
---------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,496,373 $ 15,814 $ - $ 1,512,187
Obligations of other U.S.
Government agencies and
corporations 28,348,077 12,064 330,808 28,029,333
Mortgage-backed securities 2,616,156 1,162 8,748 2,608,570
Obligations of state and
political subdivisions 2,247,202 44,522 - 2,291,724
Corporate bonds 4,040,701 12,799 76,050 3,977,450
Other 95,000 2,275 - 97,275
-------------- ------------- -------------- ---------------
$38,843,509 $ 88,636 $ 415,606 $ 38,516,539
-------------- ------------- -------------- ---------------
-------------- ------------- -------------- ---------------
<CAPTION>
December 31, 1998
-----------------------------------------------------------------------
Gross unrealized
Amortized ----------------------------- Estimated
Cost Gains Losses Fair value
---------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,495,540 $ 27,429 $ - $ 2,522,969
Obligations of other U.S.
Government agencies and
corporations 28,664,954 32,337 104,010 28,593,281
Mortgage-backed securities 2,893,527 6,290 1,192 2,898,625
Obligations of state and
political subdivisions 2,249,599 37,507 - 2,287,106
Corporate bonds 4,042,449 47,625 4,090,074
Other 95,000 - - 95,000
-------------- ------------- -------------- ---------------
$ 40,441,069 $ 151,188 $ 105,202 $ 40,487,055
-------------- ------------- -------------- ---------------
-------------- ------------- -------------- ---------------
</TABLE>
F-15
<PAGE>
NOTE C - SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY - Continued
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------------
Gross unrealized
Amortized ------------------------------ Estimated
cost Gains Losses fair value
----------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 5,492,471 $ 9,618 $ 214 $ 5,501,875
Obligations of other U.S.
Government agencies and
Corporations 15,984,280 12,681 18,559 15,978,402
Mortgage-backed securities 3,479,175 12,602 - 3,491,777
Obligations of state and
political subdivisions 1,437,891 18,803 1,319 1,455,375
Corporate bonds - - - -
Other 95,000 - - 95,000
----------------- ------------- ------------- -----------------
$ 26,488,817 $ 53,704 $ 20,092 $ 26,522,429
----------------- ------------- ------------- -----------------
----------------- ------------- ------------- -----------------
</TABLE>
The amortized cost and fair values of securities held to maturity at March 31,
1999 and December 31, 1998 and 1997 were:
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------------------------------------------------
Gross unrealized
Amortized ----------------------------- Estimated
cost Gains Losses Fair value
---------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 750,488 $ 36,060 $ - $ 786,548
Obligations of state and
political subdivisions 229,918 10,162 - 240,080
Other 1,297,100 - - 1,297,100
---------------- ------------- ------------- ---------------
$ 2,277,506 $ 46,222 $ - $ 2,323,728
---------------- ------------- ------------- ---------------
---------------- ------------- ------------- ---------------
<CAPTION>
December 31, 1998
-----------------------------------------------------------------------
Gross unrealized
Amortized ------------------------------ Estimated
cost Gains Losses Fair value
---------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Obligations of other U.S.
Government agencies and
corporations $ 1,000,000 $ 800 $ - $ 1,000,800
Mortgage-backed securities 770,575 8,178 - 778,753
Obligations of state and
Political subdivisions 229,795 10,750 - 240,545
Other 1,278,400 - - 1,278,400
---------------- ------------- ------------- ---------------
$ 3,278,770 $ 19,728 $ - $ 3,298,498
---------------- ------------- ------------- ---------------
---------------- ------------- ------------- ---------------
</TABLE>
F-16
<PAGE>
NOTE C - SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY - Continued
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------
Gross unrealized
Amortized ------------------------------ Estimated
cost Gains Losses fair value
---------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Obligations of other U.S.
Government agencies and
corporations $2,498,112 $ 544 $20,693 $2,477,963
Mortgage-backed securities 868,809 8,920 - 877,729
Obligations of state and
Political subdivisions 589,523 20,687 - 610,210
Other 301,000 - - 301,000
---------------- ------------- ------------- ---------------
$4,257,444 $30,151 $20,693 $4,266,902
---------------- ------------- ------------- ---------------
---------------- ------------- ------------- ---------------
</TABLE>
The amortized cost and fair values of securities available for sale and
securities held to maturity at March 31, 1999 and December 31, 1998, by
expected maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
March 31, 1999 Securities available for sale
-------------- ------------------------------------------
Amortized Estimated
Cost fair value
-------------------- ------------------
<S> <C> <C>
Due in one year or less $ 2,692,500 $ 2,706,044
Due after one year through five years 26,402,074 26,125,352
Due after five years through ten years 3,809,691 3,771,041
Due after ten years 5,939,244 5,914,102
-------------------- ------------------
$ 38,843,509 $ 38,516,539
-------------------- ------------------
-------------------- ------------------
<CAPTION>
Securities held to maturity
------------------------------------------
Amortized Estimated
Cost Fair value
-------------------- ------------------
<S> <C> <C>
Due in one year or less $ 49,918 $ 50,080
Due after one year through five years 100,000 101,080
Due after five years through ten years 333,886 356,400
Due after ten years 1,793,702 1,816,168
-------------------- ------------------
$ 2,277,506 $ 2,323,728
-------------------- ------------------
-------------------- ------------------
</TABLE>
F-17
<PAGE>
NOTE C - SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY - Continued
<TABLE>
<CAPTION>
December 31, 1998 Securities available for sale
----------------- ------------------------------------------
Amortized Estimated
Cost fair value
-------------------- ------------------
<S> <C> <C>
Due in one year or less $ 6,932,394 $ 6,954,069
Due after one year through five years 21,002,237 20,989,672
Due after five years through ten years 9,124,076 9,105,933
Due after ten years 3,382,362 3,437,381
-------------------- ------------------
$ 40,441,069 $ 40,487,055
-------------------- ------------------
-------------------- ------------------
<CAPTION>
Securities held to maturity
------------------------------------------
Amortized Estimated
Cost fair value
-------------------- ------------------
<S> <C> <C>
Due in one year or less $ 49,795 $ 50,181
Due after one year through five years 369,502 378,247
Due after five years through ten years 1,581,073 1,591,670
Due after ten years 1,278,400 1,278,400
-------------------- ------------------
$ 3,278,770 $ 3,298,498
-------------------- ------------------
-------------------- ------------------
</TABLE>
Securities with a carrying value of $23,946,692, $22,826,615 and $9,557,533
and a market value of $23,698,344, $22,824,746 and $9,558,059 at March 31,
1999 and December 31, 1998 and 1997, respectively, were pledged to secure
public deposits, treasury, tax and loan deposits, Federal Reserve discount
window deposits and Federal Home Loan Bank credit lines.
NOTE D - LOANS RECEIVABLE
The composition of loans as of March 31, 1999 and December 31, 1998 and
1999 is as follows:
<TABLE>
<CAPTION>
December 31,
March 31, -----------------------------------------
1999 1998 1997
------------------ ------------------ -------------------
<S> <C> <C> <C>
Commercial $22,811,775 $22,665,354 $22,070,226
Construction 8,042,462 6,918,400 7,357,490
Real Estate 30,314,646 28,714,130 16,778,751
Installment 2,651,117 2,830,655 3,870,717
------------------ ------------------ -------------------
Subtotal 63,820,000 61,128,539 50,077,184
Less:
Deferred loan fees (110,740) (56,812) (170,368)
Allowance for loan losses (1,145,588) (1,237,680) (1,155,839)
------------------ ------------------ -------------------
$62,563,672 $59,834,047 $48,750,977
------------------ ------------------ -------------------
------------------ ------------------ -------------------
</TABLE>
F-18
<PAGE>
NOTE D - LOANS RECEIVABLE - Continued
Changes in the allowance for loan losses for the three months ended March
31, 1999 and 1998 and the years ended December 31, 1998, 1997, and 1996 are
as follows:
<TABLE>
<CAPTION>
Three months ended March 31, Year ended December 31,
------------------------------- ------------------------------------------------
1999 1998 1998 1997 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at beginning $1,237,680 $1,155,839 $1,155,839 $1,561,161 $1,256,347
of year
Amounts charged off (184,559) (146,712) (309,888) (1,320,359) (680,450)
Recoveries 7,467 58,977 81,729 165,037 381,264
Loan loss provision 85,000 75,000 310,000 750,000 604,000
------------ ------------ ------------- -------------- -------------
Balance at end of period $1,145,588 $1,143,104 $1,237,680 $1,155,839 $1,561,161
------------ ------------ ------------- -------------- -------------
------------ ------------ ------------- -------------- -------------
</TABLE>
The recorded investment in impaired loans was $22,000, $199,000 and
$598,000 at March 31, 1999 and December 31, 1998 and 1997, respectively.
The average recorded investment in impaired loans was $144,000, $380,000,
and $1,120,000 for the three months ended March 31, 1999 and the years
ended December 31, 1998 and 1997, respectively. Total cash collected on
impaired loans during the three months ended March 31, 1999 and the years
ended December 31, 1998 and 1997 was $0, $173,848 and $173,981, of which
$0, $169,417 and $114,046 was credited to the principal balance outstanding
on such loans and $0, $4,431 and $59,935 was recognized as interest income,
respectively. Interest income that would have been recognized on impaired
loans if they had performed in accordance with the terms of the loans was
approximately $5,000, $14,000, $60,000, $117,000 and $48,000 for the three
months ended March 31, 1999 and 1998 and the years ended December 31, 1998,
1997 and 1996, respectively.
The activity in the allowance for loan losses related specifically to
impaired loans is as follows:
<TABLE>
<CAPTION>
Three months ended Year ended December 31,
March 31,
--------------------------- ------------------------------------------
1999 1998 1998 1997 1996
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $149,434 $254,659 $254,659 $ 66,476 $ 549,830
Provision for loan losses 35,852 89,002 194,697 848,894 74,045
Credit losses charged off,
net of recoveries (181,150) (145,641) (299,922) (660,711) (557,399)
----------- ------------ ------------ ------------ -----------
Allowance at end of period $ 4,136 $198,020 $149,434 $ 254,659 $ 66,476
----------- ------------ ------------ ------------ -----------
----------- ------------ ------------ ------------ -----------
</TABLE>
F-19
<PAGE>
NOTE E - OTHER REAL ESTATE OWNED
An analysis of activity in other real estate owned for the three months
ended March 31, 1999 and the years ended December 31, 1998 and 1997 is
summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
---------------- ------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance at beginning of period, net $ - $ 69,756 $ 639,174
Additions - - 69,756
Disposals - (69,756) (639,174)
---------------- ---------------- ----------------
Balance at end of period, net $ - $ - $ 69,756
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
NOTE F - BANK PREMISES AND EQUIPMENT
Bank premises and equipment at March 31, 1999 and December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
December 31,
March 31, --------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Land and building $ 1,225,000 $ 1,225,000 $ 1,225,000
Land and building under capital leases 402,350 402,350 402,350
Leasehold improvements 465,141 465,141 465,141
Furniture and equipment 2,144,477 2,125,886 1,916,622
----------------- ----------------- -----------------
4,218,377 4,009,113
Less accumulated depreciation 4,236,968
and amortization (2,364,280) (2,298,171) (2,048,175)
----------------- ----------------- -----------------
$ 1,872,688 $ 1,920,206 $ 1,960,938
----------------- ----------------- -----------------
----------------- ----------------- -----------------
</TABLE>
NOTE G - DEPOSITS
At March 31, 1999, the scheduled maturities of time certificates of
deposits are as follows:
<TABLE>
<CAPTION>
Year of Maturity,
-----------------
<S> <C>
1999 $30,647,383
2000 773,878
-----------
$31,421,261
-----------
-----------
</TABLE>
F-20
<PAGE>
NOTE H - ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
FHLB advances represent secured obligations with the Federal Home Loan Bank
("FHLB"), at various rates and terms.
Pursuant to collateral agreements with the FHLB, advances are secured by
the Bank's mortgage loans and securities. Bank assets with a carrying
value of $15,319,976, $16,097,626 and $2,353,740, have been pledged to
secure these advances at March 31, 1999 and December 31, 1998 and 1997,
respectively. Advances at December 31, 1998 have the following maturity
dates: $1.5 million in 1999, $0 in 2000 and 2001, $3.2 million in 2002,
$1.6 million in 2003 and $6.3 million, thereafter. Interest rates range
from 5.10% to 6.10%.
The following table approximates the maximum month-end balance outstanding,
average daily balance outstanding, average rates paid during the year, and
the average rates on the balance at March 31, 1999 and December 31, 1998,
1997 and 1996 for FHLB advances:
<TABLE>
<CAPTION>
December 31,
March 31, --------------------------------------------------------
1999 1998 1997 1996
-------------- ----------------- ---------------- -------------
<S> <C> <C> <C> <C>
Maximum month-end balance $12,848,223 $12,650,837 $1,200,000 $ -
Average daily balance 12,689,000 4,984,000 214,000 -
Average rates paid 5.65% 5.63% 6.10% -
Average rates on balance
at year-end 5.65% 5.65% 6.10% -
Balance at end of period $12,848,223 $12,650,837 $1,200,000 -
</TABLE>
F-21
<PAGE>
NOTE I - COMMITMENTS
The minimum rental commitments under capital and operating leases at
December 31, 1998 are as follows:
<TABLE>
<CAPTION> Capital Operating
Year ending December 31, Leases Leases
------------------------ ----------------- ------------------
<S> <C> <C>
1999 $ 40,850 $ 201,064
2000 40,850 201,064
2001 40,850 201,064
2002 40,850 201,064
2003 40,850 170,317
Thereafter 166,804 719,036
----------------- ----------------
Future minimum lease payments 371,054 $ 1,693,609
----------------
Less amount representing interest (120,264) ----------------
-----------------
Present value of net minimum lease payments $250,790
-----------------
-----------------
</TABLE>
Under the lease agreements, the Bank is also obligated to pay property
taxes, insurance and maintenance costs. Certain leases contain renewal
options. Rental expense for the three months ended March 31, 1999 and 1998
and the years ended December 31, 1998, 1997 and 1996, was approximately
$50,000, $17,000, $139,000, $59,000 and $58,000, respectively.
NOTE J - INCOME TAXES
The current and deferred amounts of income tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended December 31,
-------------------------- ------------------------------------------
1999 1998 1998 1997 1996
----------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Current tax expense
Federal $ 77,101 $252,030 $ 860,524 $329,450 $282,167
State 62,764 58,409 285,693 104,037 91,087
----------- ---------- ------------ ------------ ----------
Total current tax expense 139,865 310,439 1,146,217 433,487 373,254
Deferred tax expense (benefit)
Federal 99,126 (87,359) (167,176) (128,798) 195,787
State 4,203 3,892 (24,650) (42,933) 44,093
----------- ---------- ------------ ------------ ----------
Total deferred tax expense
(benefit) 103,329 (83,467) (191,826) (171,731) 239,880
----------- ---------- ------------ ------------ ----------
Total income tax expense $243,194 $226,972 $ 954,391 $261,756 $613,134
----------- ---------- ------------ ------------ ----------
----------- ---------- ------------ ------------ ----------
</TABLE>
F-22
<PAGE>
NOTE J - INCOME TAXES - Continued
The expense (benefit) for income taxes varies from the Federal statutory
tax rate for the following reasons:
<TABLE>
<CAPTION>
Three months ended March 31, Year ended December 31,
--------------------------- -------------------------------------------
1999 1998 1998 1997 1996
----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Federal income tax based on
Statutory rate $202,300 $201,726 $846,416 $602,123 $553,469
State franchise tax net of federal
Income tax benefit 42,600 42,448 178,106 126,800 122,089
Tax exempt interest (17,086) (18,573) (82,520) (73,827) (33,000)
Recognition of deferred tax assets - - (343,524) -
Other 15,380 1,371 12,389 (49,816) (29,424)
----------- ------------ ----------- ----------- -----------
Total income tax expense $243,194 $226,972 $954,391 $261,756 $613,134
----------- ------------ ----------- ----------- -----------
----------- ------------ ----------- ----------- -----------
</TABLE>
Net deferred tax assets result from temporary differences in the recognition of
revenues and expenses for tax and financial statement purposes. The sources of
these differences and the tax effect are as follows:
<TABLE>
<CAPTION>
December 31,
March 31, ----------------------------------
1999 1998 1997
---------------- -------------- ---------------
<S> <C> <C> <C>
Deferred tax assets:
Depreciation $ 83,447 $ 79,142 $ 72,867
Provision for loan losses 119,824 161,118 152,236
Deferred gain on sale of property 35,539 36,545 40,984
Capital lease 16,261 18,215 25,848
Deferred compensation 518,216 481,016 361,420
State taxes 21,447 65,190 -
---------------- -------------- ---------------
Total gross deferred tax assets 794,734 841,226 653,355
---------------- -------------- ---------------
<CAPTION>
Deferred tax liabilities:
Fees and costs deferred for financial
statement but not for tax purposes (77,946) (63,498) (56,089)
State taxes (42,390) - (11,364)
---------------- -------------- ---------------
Total gross deferred tax liabilities (120,336) (63,498) (67,453)
---------------- -------------- ---------------
Net deferred tax assets $ 674,398 $777,728 $585,902
---------------- -------------- ---------------
---------------- -------------- ---------------
</TABLE>
F-23
<PAGE>
NOTE K - EARNINGS PER SHARE
Basic and diluted earnings per share for the three months ended March 31,
1999 and 1998 and the years ended December 31, 1998, 1997 and 1996 are
computed as follows:
<TABLE>
<CAPTION>
Three months ended March 31, 1999
-------------------------------------------------------------
Net Per share
earnings Shares amount
------------------ ------------------- ----------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings available to common
Shareholders $351,778 991,667 $0.35
----------------
Effect of dilutive stock options - 92,303 ----------------
------------------ -------------------
DILUTED EARNINGS PER SHARE
Net earnings available to common
Shareholders $351,778 1,083,970 $0.32
------------------ ------------------- ----------------
------------------ ------------------- ----------------
<CAPTION>
Three months ended March 31, 1998
-------------------------------------------------------------
Net Per share
earnings Shares amount
------------------ ------------------- ----------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings available to common
Shareholders $365,982 1,000,000 $0.37
----------------
Effect of dilutive stock options - 84,333 ----------------
------------------ -------------------
DILUTED EARNINGS PER SHARE
Net earnings available to common
Shareholders $365,982 1,084,333 $0.34
------------------ ------------------- ----------------
------------------ ------------------- ----------------
</TABLE>
F-24
<PAGE>
NOTE K - EARNINGS PER SHARE - Continued
<TABLE>
<CAPTION>
Year ended December 31, 1998
------------------------------------------------------------
Net Per share
earnings Shares amount
----------------- ------------------ ----------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings available to common
Shareholders $1,537,909 999,653 $1.54
----------------
Effect of dilutive stock options - 88,508 ----------------
----------------- ------------------
DILUTED EARNINGS PER SHARE
Net earnings available to common
Shareholders $1,537,909 1,088,161 $1.41
----------------- ------------------ ----------------
----------------- ------------------ ----------------
Year ended December 31, 1997
------------------------------------------------------------
Net Per share
earnings Shares amount
----------------- ------------------ ----------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings available to common
Shareholders $1,509,194 999,911 $1.51
----------------
Effect of dilutive stock options - 66,642 ----------------
----------------- ------------------
DILUTED EARNINGS PER SHARE
Net earnings available to common
Shareholders $1,509,194 1,066,553 $1.42
----------------- ------------------ ----------------
----------------- ------------------ ----------------
</TABLE>
F-25
<PAGE>
NOTE K - EARNINGS PER SHARE - Continued
<TABLE>
<CAPTION>
Year ended December 31, 1996
------------------------------------------------------------
Net Per share
earnings Shares amount
----------------- ------------------ ----------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings available to common
shareholders $1,014,717 999,901 $1.01
----------------
----------------
Effect on dilutive stock options - 24,075
----------------- ------------------
DILUTED EARNINGS PER SHARE
Net earnings available to common
shareholders $1,014,717 1,023,976 $0.99
----------------- ------------------ ----------------
----------------- ------------------ ----------------
</TABLE>
NOTE L - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Bank is a party to financial
instruments with off-balance-sheet risk. These financial instruments
include commitments to extend credit and standby and commercial letters of
credit. To varying degrees, these instruments involve elements of credit
and interest rate risk in excess of the amount recognized in the balance
sheet. The Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instruments for commitments to extend
credit and under letters of credit is represented by the contractual amount
of these instruments. At March 31, 1999 and December 31, 1998, the Bank
had commitments to extend credit of approximately $15,965,000 and
$12,458,000, respectively, and obligations under letters of credit of
approximately $625,000.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements.
F-26
<PAGE>
NOTE L - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
The Bank uses the same credit policies in making commitments and
conditional obligations as it does for extending loan facilities to
customers. The Bank evaluates each customer's creditworthiness on a case
by case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit
evaluation of the counterpart. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties.
NOTE M - LITIGATION
Because of the nature of their activities, the Holding Company and Bank are
subject to pending and threatened legal actions, which arise out of the
normal course of their business. In the opinion of management, based upon
discussions with their legal counsel, the disposition of these actions and
other such matters will not have a material effect on the Holding Company's
consolidated financial statements.
NOTE N - TRANSACTIONS WITH DIRECTORS AND OFFICERS
In the ordinary course of business, the Bank has granted loans to certain
directors, officers, their immediate families and affiliated companies with
which they are associated, generally on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others. The balance of loans made to such related
parties as of March 31, 1999 and December 31, 1998 and 1997 was
approximately $2,541,000, $2,234,000 and $391,000, respectively.
NOTE O - EMPLOYEE STOCK OWNERSHIP PLAN
The Holding Company adopted an Employee Stock Ownership Plan effective July
1, 1989. A provision of $0 for the three months ended March 31, 1999 and
1998 and the years ended December 31, 1998 and 1997, and $100,000 for 1996,
was allocated by the Bank as a contribution to the Plan.
F-27
<PAGE>
NOTE P - EXECUTIVE COMPENSATION
In 1993, the Bank entered into a compensation agreement with the Chief
Executive Officer (the "Executive"). The agreement includes, among other
things, a deferred compensation plan and a stock purchase agreement, which
are described below:
DEFERRED COMPENSATION PLAN
Under the plan, the Executive may elect to defer any or all of the
compensation earned during his tenure. Deferred compensation accrued
interest at a rate of major bank prime plus 2% (9.75% at December 31,
1998). As of December 24, 1993 the Executive has elected to defer 100
percent of his salary for seven years following the agreement. Upon
distribution, in January 2001, the Executive will then receive equal
installment payments, including interest, for a period of 60-120 months.
Compensation expense under the plan was approximately $83,000, $72,000,
$290,000, $269,000 and $194,000 for the three months ended March 31, 1999
and 1998 and the years ended December 31, 1998, 1997 and 1996,
respectively.
To anticipate the future costs of the plan, the Bank purchased a life
insurance policy in the amount of $1,200,000 during 1993 and a $510,000
policy during 1997. The cash surrender value of the policy has been
included with Other Assets on the consolidated balance sheets.
STOCK PURCHASE AGREEMENT
Under the agreement, the Holding Company has granted the Chief Executive
Officer a right to purchase all or any part of 150,000 authorized but
unissued shares of the Holding Company's common stock for cash at the price
of $6.00 per share. This right was exercisable at 20 percent per year
beginning in December 1994 for four years; at which time, the right shall
be totally exercisable. This right shall remain exercisable until December
2003. During 1998, 1997 and 1996, no shares were exercised.
NOTE Q - STOCK OPTION PLAN
In 1993, the shareholders of the Holding Company approved an incentive
stock option plan. Under the plan, option prices may not be less than 100
percent of the fair market value of the Bancorp's stock at the date of
grant. Under the plan, 197,600 shares of the Bancorp's authorized but
unissued common stock will be available for issuance under the plan.
F-28
<PAGE>
NOTE Q - STOCK OPTION PLAN - Continued
The plan is accounted for under APB Opinion 25 and related Interpretations.
Accordingly, no compensation cost has been recognized. Had compensation
costs for these plans been determined based on the fair value at the grant
dates consistent with the method of SFAS 123, the impact would not have
materially affected net income.
Transactions for the three months ended March 31, 1999 and 1998 and for the
three years ended December 31, 1998, for the plan and the stock purchase
agreement are summarized in the table below. The fair value of each option
granted is estimated at $1.83 on the date of grant using the Black-Scholes
options-pricing model with the following assumptions used for grants in
1997 and 1996 respectively: risk-free rate of 5.26 and 5.22 percent,
dividend yield of 0 percent for all years, volatility of 7.00 percent for
all years, and an expected life of 5 years for all years.
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 172,000 $6.12 172,000 $6.12
Granted - - - -
Canceled - - - -
-------- --------
Outstanding at end of period 172,000 $6.12 172,000 $6.12
-------- --------
-------- --------
Options exercisable at period-end 165,600 $6.05 131,200 $6.03
-------- --------
-------- --------
Weighted-average fair value of
options granted during the period $ - $ -
-------- --------
-------- --------
</TABLE>
F-29
<PAGE>
NOTE Q - STOCK OPTION PLAN - Continued
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------------
1998 1997 1996
------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
---------- ----------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 172,000 $6.12 165,000 $6.00 173,000 $6.00
Granted - - 10,000 8.00 - -
Canceled - - (3,000) 6.00 (8,000) 6.00
-------- -------- --------
Outstanding at end of year 172,000 $6.12 172,000 $6.12 165,000 $6.12
-------- -------- --------
-------- -------- --------
Options exercisable at
year-end 161,600 $6.02 127,200 $6.00 95,000 $6.00
-------- -------- --------
-------- -------- --------
Weighted-average fair
value of options
granted during the year $ - $ 1.83 $ -
-------- -------- --------
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Options outstanding at March 31, 1999 Options exercisable at March 31, 1999
---------------------------------------------------------------- -------------------------------------------
Weighted-
average Weighted
Number remaining average Number Weighted average
outstanding contractual life exercise price outstanding exercise price
--------------- --------------------- ------------------ --------------- ----------------------
<S> <C> <C> <C> <C>
172,000 4.7 Years $6.12 165,600 $6.05
</TABLE>
NOTE R - REGULATORY MATTERS
The Bank is subject to various 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 quantitative 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.
F-30
<PAGE>
NOTE R - REGULATORY MATTERS - Continued
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 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of March 31, 1999,
that the Bank meets all capital adequacy requirements to which it is
subject.
As of March 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action (there are no conditions
or events since that notification that management believes have changed the
Bank's category). To be categorized as well-capitalized, the Bank must
maintain minimum ratios as set forth in the table below, the following
table also sets forth the Bank's actual capital amounts and ratios (dollar
amounts in thousands):
<TABLE>
<CAPTION>
To be well capitalized
For capital under prompt corrective
Actual adequacy purposes action provisions
----------------------- ---------------------- -------------------------
Amount Amount Amount
(in 000's) Ratio (in 000's) Ratio (in 000's) Ratio
---------- --------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999
Total capital
(to Risk Weighted Assets) $13,670 17.1% $6,404 8.0% $8,005 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 12,669 15.9% 3,202 4.0% 4,803 6.0%
Tier 1 Capital
(to Average Assets) 12,669 10.0% 5,086 4.0% 6,357 5.0%
As of December 31, 1998:
Total capital
(to Risk Weighted Assets) $13,335 17.3% $6,185 8.0% $7,731 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 12,369 16.1% 3,092 4.0% 4,639 6.0%
Tier 1 Capital
(to Average Assets) 12,369 10.0% 4,953 4.0% 6,191 5.0%
As of December 31, 1997:
Total capital
(to Risk Weighted Assets) $11,765 17.9% $5,277 8.0% $6,597 10.0%
Tier 1 Capital
(to Risk Weighted Assets) 10,940 16.7% 2,639 4.0% 3,958 6.0%
Tier 1 Capital
(to Average Assets) 10,940 11.0% 3,978 4.0% 4,973 5.0%
</TABLE>
F-31
<PAGE>
NOTE S - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair
Value of Financial Instruments". The estimated fair value amounts have
been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that could be realized in a current market exchange. The
use of different market assumptions or estimation methodologies may have a
material impact on the estimated fair value amounts.
The following methods and assumptions were used by the Bank in estimating
fair value disclosures:
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets' fair values due to the short-term
nature of the assets.
INVESTMENT SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
Fair values are based upon quoted market prices, where available.
LOANS
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values for other loans (for example, fixed rate commercial real estate and
rental property mortgage loans and commercial and industrial loans) are
estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality. Loan fair value of estimates include judgments
regarding future expected loss experience and risk characteristics. The
carrying amount of accrued interest receivable approximates its fair value.
F-32
<PAGE>
NOTE S - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
DEPOSITS
The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The fair values for certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated contractual maturities on such time deposits.
The carrying amount of accrued interest payable approximates fair value.
FHLB ADVANCES
The fair values of the Bank's Federal Home Loan Bank advances are estimated
using dicounted cash flow analyses based on the Bank's current incremental
borrowing rates for similar types of borrowing arrangements.
COMMITMENT TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND OTHER LETTERS
OF CREDIT
Fair value estimates were not made for these financial instruments as there
is not a quoted market price for these types of financial instruments and
the Bank has not developed a valuation model necessary to make such an
estimate. However, management believes that the current fees assessed on
these off-balance-sheet items represent market rates which would be charged
for similar agreements. The Bank enters into certain financial commitments
in the normal course of business. Management does not anticipate that
those financial instruments will have a material adverse effect on the
Bank's financial position or results of operations.
F-33
<PAGE>
NOTE S - FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued
The estimated fair values of the Bank's financial instruments at December
31, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------ ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $15,063,342 $15,063,342 $15,115,817 $15,115,817
Investment securities:
Available for sale 40,487,055 40,487,055 26,522,429 26,522,429
Held to maturity 3,278,770 3,298,498 4,257,444 4,266,902
Loans receivable and loans held
for sale - net 61,118,678 61,250,860 50,122,584 50,337,898
Accrued interest receivable 932,216 932,216 750,436 750,436
Liabilities
Non-interest bearing deposits 33,314,390 33,314,390 28,549,313 28,549,313
Interest bearing deposits 65,417,226 65,417,372 58,130,351 58,135,763
FHLB advances 12,650,837 12,862,239 1,200,000 1,218,139
Accrued interest payable 312,830 312,830 188,133 188,133
</TABLE>
NOTE T - CONDENSED FINANCIAL INFORMATION
The following financial information represents the balance sheets of the
Holding Company as of March 31, 1999 and December 31, 1998 and 1997, and
the related statements of operations and cash flows for the three months
ended March 31, 1999 and 1998 and the years ended December 31, 1998, 1997
and 1996.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
March 31, ----------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash $ 72,295 $ 20,199 $ 15,370
Investment in Cerritos Valley Bank 12,472,360 12,396,451 10,960,108
------------------ ------------------ ------------------
Total assets $12,544,655 $12,416,650 $10,975,478
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Total stockholders' equity $12,544,655 $12,416,650 $10,975,478
------------------ ------------------ ------------------
------------------ ------------------ ------------------
</TABLE>
F-34
<PAGE>
NOTE T - CONDENSED FINANCIAL INFORMATION - Continued
Statements of Operations
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended December 31,
------------------------- ---------------------------------------------
1999 1998 1998 1997 1996
---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Income
Net income of Cerritos Valley Bank $399,682 $366,342 $1,553,919 $1,514,134 $1,033,080
Other income 10 - 260 988 210
---------- ----------- ------------- ------------- ------------
Total income 399,692 366,342 1,554,179 1,515,122 1,033,290
Administrative expenses (47,914) (360) (16,270) (5,928) (18,573)
---------- ----------- ------------- ------------- ------------
Net income $351,778 $365,982 $1,537,909 $1,509,194 $1,014,717
---------- ----------- ------------- ------------- ------------
---------- ----------- ------------- ------------- ------------
</TABLE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended
March 31, Year ended December 31,
------------------------- -------------------------------------------
1999 1998 1998 1997 1996
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 351,778 $ 365,982 $ 1,537,909 $ 1,509,194 $ 1,014,717
Adjustments to reconcile net income to
Net cash from operating activities
Equity earnings in subsidiary (399,682) (366,342) (1,553,919)) (1,516,940) (1,033,080)
Decrease in accounts payable/other - (1,920)
--------- --------- ----------- ----------- -----------
Net cash used by operating activities (47,904) (360) (16,010) (7,746) (20,283)
--------- --------- ----------- ----------- -----------
Cash Flows From Investing Activities -
Dividends received from
Cerritos Valley Bank 100,000 - 125,000 - 25,000
Cash Flows From Financing Activities
Retirement of stock - - (104,161) - -
Proceeds of stock issuance - - - 1,028 -
--------- --------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities - - (104,161) 1,028 -
--------- --------- ----------- ----------- -----------
Net increase (decrease) in cash 52,096 (360) 4,829 (6,718) 4,717
Cash and cash equivalents, beginning of year 20,199 15,370 15,370 22,088 17,371
--------- --------- ----------- ----------- -----------
Cash and cash equivalents, end of year $ 72,295 $ 15,010 $ 20,199 $ 15,370 $ 22,088
--------- --------- ----------- ----------- -----------
--------- --------- ----------- ----------- -----------
</TABLE>
F-35
<PAGE>
NOTE U - RETIREMENT OF COMMON STOCK
During 1998, the Board of Directors authorized management to purchase and
retire 8,333 shares of common stock from a shareholder. As of December 31,
1998, the Bank purchased and retired the shares of common stock for
$104,161, or $12.50 per share.
NOTE V - PROPOSED EQUITY TRANSACTIONS
On February 17, 1999, the Bancorp announced that it has entered into a
definitive agreement with Belvedere Capital Partners, Inc., ("Belvedere")
the general partner of the California Financial Institutions Fund Limited
Partnership (the "California Fund"). Under the terms of the agreement, the
California Fund will become a 55% shareholder in the Bancorp for a purchase
price of approximately $12.8 million. In connection with the California
Funds purchase, the Bancorp will exchange with its shareholders, for each
share of Bancorp stock, $13.4871 in cash and .5271 shares of the new
Bancorp common stock, following a dividend of approximately $2.95 million
from the Bank to the Bancorp.
The transaction is subject to the approval of the shareholders of the Board
of Governors of the Federal Reserve System, and the California Department
of Financial Institutions.
F-36
<PAGE>
EXHIBIT I
AGREEMENT AND PLAN OF REORGANIZATION AND
MERGER
BY AND AMONG
BELVEDERE CAPITAL PARTNERS, INC.,
AS GENERAL PARTNER OF AND ON BEHALF OF
THE CALIFORNIA COMMUNITY FINANCIAL
INSTITUTIONS FUND LIMITED PARTNERSHIP,
CERRITOS MERGER CO.
CERRITOS VALLEY BANCORP,
AND
CERRITOS VALLEY BANK
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
BY AND AMONG
BELVEDERE CAPITAL PARTNERS, INC.,
AS GENERAL PARTNER OF
THE CALIFORNIA COMMUNITY FINANCIAL INSTITUTIONS FUND
LIMITED PARTNERSHIP,
CERRITOS MERGER CO.
CERRITOS VALLEY BANCORP
AND
CERRITOS VALLEY BANK
This Agreement and Plan of Reorganization and Merger (the "Agreement")
is made and entered into as of February 12, 1999 by and among Belvedere
Capital Partners, Inc. ("Belvedere"), as General Partner and on behalf of the
California Community Financial Institutions Fund Limited Partnership (the
"California Fund"), Cerritos Merger Co., a California corporation a to be
wholly-owned subsidiary of the California Fund ("CMC"), Cerritos Valley
Bancorp, a California corporation ("CVB") and Cerritos Valley Bank, a
California banking corporation and wholly-owned subsidiary of CVB ("CV Bank").
RECITALS
A. The Boards of Directors of CVB and CV Bank have determined that it
would be in the best interests of CVB and CV Bank and their respective
shareholders, and Belvedere as the general partner of the California Fund has
determined that it would be in the best interests of the California Fund and
its partners, for CVB to be merged with CMC, upon the terms and subject to
the conditions set forth in this Agreement and in accordance with the
California General Corporation Law (the "Corporation Law"), the Financial
Code of the State of California (the "Financial Code") and other applicable
laws;
B. The Boards of Directors of CMC, CVB, and CV Bank and Belvedere has
each approved this Agreement and the transactions contemplated hereby;
C. The Board of Directors of CVB has resolved to recommend approval of
the merger of CVB and CMC to the shareholders of CVB;
-1-
<PAGE>
D. Upon consummation of the merger of CMC with and into CVB (the
"Merger"), CVB will be the surviving entity (the "Surviving Entity") and
shall become a majority-owned subsidiary of the California Fund;
E. As a condition to the execution of this Agreement, the following
Directors of CVB have entered into Director's Agreements and executed proxies
contemporaneously with the execution of this Agreement: Gary Einstein,
Shibley H. Horaney, James N. Koury, Priscilla F. Koury, James McGinley,
Seymour Melnik, Garo V. Minassian, R.J. Romero, Jo Ann San Paolo, and Ellen
Toma (the "CVB Directors");
F. For an aggregate purchase price of $12,800,000, the California Fund
desires to purchase 543,959 shares of common stock of CVB at a price of
$23.53 per shares and to be granted the California Warrants as provided in
Section 1.1 hereof.
G. Belvedere has formed CMC, for the purpose of raising $12,800,000 in
capital funds through the purchase of 543,959 shares of CMC's common stock by
the California Fund;
H. In consideration of the Merger, CVB shall sell 543,959 of authorized
but unissued shares of CVB Common Stock to the California Fund at $23.53 a
share, redeem 468,959 shares of CVB's shares of common stock at a redemption
price of $28.52 per share; each holder of CVB Stock Options under the CVB
Stock Option Plan, shall have, prior to the Effective Time, entered into a
Option Termination Agreement in the form attached to this Agreement as
Appendix E; and each holder of CVB Stock Options under the CVB Stock Purchase
Plan shall have, prior to the Effective Time, entered into a Stock Purchase
Rights Amendment Agreement in the form attached to this Agreement as Appendix
F;
I. In connection with the Merger, the CV Bank shall immediately prior
to the Effective time dividend $2,950,000 to its sole shareholder, CVB (the
"CVB Cash Dividend");
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
DEFINITIONS
As used throughout this Agreement, the following words and terms shall
have the meanings ascribed to them in the section or provision hereof set
forth opposite them respectively below:
<TABLE>
<CAPTION>
Defined Word or Term Section or Provision
-------------------- --------------------
<S> <C>
"Acquisition Proposal" 4.2.4
"affiliate of" 2.18.8
"Aggregate Cash Merger Price" 1.3.2.
"Agreement" Preface
-2-
<PAGE>
<CAPTION>
Defined Word or Term Section or Provision
-------------------- --------------------
<S> <C>
"Agreement of Merger" 1.3
"Applicable Law" 2.2.1
"Belvedere" Preface
"Boards" 1.12
"BHCA" 1.8
"Business Day" 1.5.3
"California Fund" Preface
"California Fund Warrants" 1.1
"California Fund Nominees" 1.12
"California Fund Audited Financial Statements" 3.5
"CERCLA" 2.26.1
"CMC" Preface
"CVB" Preface
"CV Bank" Preface
"CV Bank's 1998 Unaudited Financial Statements" 2.6.2
"CV Bank's Audited Financial Statements 2.6.2
"CV Bank Employee Plan" 2.23.8(5)
"CV Bank Benefit Arrangement 2.23.2(6)
"CVB's 1998 Unaudited Financial Statements" 2.6.1
"CVB's Audited Financial Statements" 2.6.1
"CVB Benefit Arrangement" 2.23.2(6)
"CVB Cash Dividend" Recital I
"CVB Collateralizing Real Estate" 2.26.1
"CVB Common Stock" 1.1
"CVB Directors" Recital E
"CVB Employee Plan" 2.23.2(5)
"CVB Filings" 2.25
"CVB Properties" 2.26.1
"CVB Registration Statement" 7.19
"CVB Securities" 7.19
"CVB Stock Option" 1.4.1
"CVB Stock Option Plan" 1.4.1
"CVB Stock Purchase Plan" 1.4.1
"Classified Credits" 4.3.4
"Closing" 1.7
"Closing Date" 1.7
"Code" 2.13..1(1)
"contingent workers" 2.121
"Commissioner" 1.8
"Corporation Law" Recitals
"Date Handling" 2.28.1
"Dissenting Shareholder" 1.5.2
"Dissenting Shares" 1. 3.1
"Effective Time" 1.3
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<CAPTION>
Defined Word or Term Section or Provision
-------------------- --------------------
<S> <C>
"Environmental Laws" 2.26.1
"ERISA" 2.25.2(5)
"Exchange Act" 4.3.13
"Expiration Date" 6.1.2
"Fairness Opinion" 4.3.22 (4)
"Financial Code" Recitals
"FDIC" 2.25
"FRB" 1.8
"GAAP" 2.6.1
"Governmental Authority" 2.2.3
"Hazardous Substances" 2.26.4
"immediate family" 2.18.9
"Indemnified Party" 7.1.2
"Indemnifying Party" 7.1.2
"Material Adverse Effect" 2.2.2
"Merger" Recital D
"OREO" 2.11
"Payment Agent" 1.5.1
"Per Share Cash Merger Price" 1.3.2
"person" 2.18.8
"Prohibited Condition" 1.8
"Proprietary Information" 4.1.2
"Proxy Statement" 4.3.22(2)
"RAP" 2.6.1
"RCRA" 2.26.1
"Registration Statement" 4.3.22(2)
"Regulatory Approval(s)" 1.8
"Required Compliance" 2.28.2
"Returns" 2.13.1(3)
"Reviewed Documents" 5.2.9
"SEC" 4.13.3
"Secretary of State" 1.3
"Securities Act" 4.3.22(1)
"Special Asset List" 4.3.15
"Surviving Entity" Recital D
"Taxes" 2.13.1(1)
"to the knowledge" 7.18
"Transaction Expenses" 5.2.13
"Understanding" 2.18
</TABLE>
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ARTICLE 1. TRANSACTIONS
1.1. STOCK PURCHASE. In consideration of the Merger, immediately
upon the Effective Time of the Merger (all as defined in Section 1.3 hereof),
for an aggregate purchase price of $12,800,000, CVB shall sell and the
California Fund shall purchase 543,959 shares of CVB common stock ("CVB
Common Stock") at a price of $23.53 per share and grant to the California
Fund warrants to acquire up to 86,000 shares of CVB Common Stock (the
"California Fund Warrants"), in the form attached hereto as Appendix H, and
the outstanding shares of CMC shall be deemed to be converted into the
543,959 shares of CVB Common Stock
1.2. CV BANK DIVIDEND TO CVB. Immediately prior to the Effective
Time, CV Bank shall pay a cash dividend to CVB in the amount of $2,950,000.
1.3. THE MERGER. CMC shall be merged with and into CVB, with CVB
being the Surviving Entity, by a statutory merger (the "Merger") in
accordance with the Corporation Law and the Financial Code, on the terms and
subject to the conditions set forth herein and pursuant to an Agreement of
Merger in the form attached hereto as Appendix A (the "Agreement of Merger").
The Merger shall be effective at the time (the "Effective Time") at which
the Agreement of Merger (together with any other documents required by law to
effectuate the Merger) shall have been filed with the Secretary of State of
the State of California (the "Secretary of State"), at which time CMC shall
cease to exist and CVB shall be the Surviving Entity.
1.3.1. TERMS OF THE MERGER. At the Effective Time, each of
the shares of CVB Common Stock issued and outstanding immediately prior to
the Effective Time (except for shares of CVB Common Stock which come within
the definition of "dissenting shares" as defined in Section 1300 of the
Corporation Law ("Dissenting Shares"))shall, by virtue of the Merger and upon
surrender of the certificate representing such shares, without any action on
the part of the holder thereof, be converted into (i) the right to receive
cash in the amount of the product of the Per Share Cash Merger Price as
provided in Section 1.3.2 of the Agreement, and (ii) 0.5271 shares of CVB
Common Stock. The total number of shares of CVB Common Stock outstanding
immediately prior to and immediately after the Effective Time shall not
exceed 991,667.
1.3.2. THE PER SHARE CASH MERGER PRICE. The cash price for
each share of CVB Common Stock as merger consideration (the "Per Share Cash
Merger Price") shall be $28.52 multiplied by 0.4729, or $13.4871 and the
aggregate cash price for all of the shares of CVB Common Stock to be
outstanding as of the Closing Date shall be $13,374,720 (the "Aggregate
Merger Price").
1.4. CVB STOCK OPTIONS.
1.4.1. Schedule 1.4 sets forth all outstanding options to
purchase shares of CVB Common Stock ("CVB Stock Option(s)") under the CVB
Stock Option Plan and the CVB Stock Purchase Plan (the 'CVB Stock Option
Plans").
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1.4.2. After the Effective Time, any unexercised or
uncancelled CVB Stock Options shall remain outstanding in accordance with
their terms, except as may be modified by a Option Termination Agreement or a
Stock Purchase Rights Amendment Agreement, in forms attached hereto as
Appendix E and Appendix F hereto.
1.5. PAYMENT FOR CVB COMMON STOCK; SURRENDER OF CERTIFICATES.
Payment for CVB Common Stock and in respect of the CVB Stock Options
shall be made as follows:
1.5.1. Prior to the Closing Date, CVB shall appoint any
bank or trust company reasonably acceptable to the California Fund as payment
agent (the "Payment Agent") which Payment Agent shall subsequently be
appointed by CVB to act as Transfer Agent for the CVB Common Stock. As soon
as practicable following the appointment of the Payment Agent, CVB shall
provide the Payment Agent with such shareholder information as may be
necessary for the Payment Agent to carry out its appointed tasks.
1.5.2. On the Business Day next preceding the Closing Date,
(a) the California Fund shall deliver to the Payment Agent immediately
available funds in an aggregate amount equal to $12,800,000 as provided in
Section 1.1 and (b) CVB shall deliver to the Payment Agent (i) immediately
available funds in an aggregate amount equal to $2,950,000 as provided in
Section 1.2 which amounts shall be used by the Payment Agent, as exchange
agent, to make the cash payments provided for by Sections 1.3.1 and 1.4
hereof, and to make payment upon receipt of instructions from CVB to the
extent of the Per Share Cash Merger Price, for each share of CVB Common Stock
as to which the rights of a dissenting shareholder, as defined in Section
1300 of the Corporation Law are perfected ("Dissenting Shareholder"). CVB
shall also issue and deliver to the Payment Agent new certificates
representing shares of CVB Common Stock as shall be required to deliver to
CVB Shareholders pursuant to Section 1.3.1 hereof.
1.5.3. As soon as reasonably practicable following the
Closing Date, the Payment Agent shall make available for each record holder
of CVB Common Stock immediately prior to the Effective Time a form letter of
transmittal and instructions for use in effecting the surrender of
certificates of CVB Common Stock for payment therefor. At or after the
Effective Time, upon surrender to the Payment Agent of such certificates
together with the letter of transmittal, duly executed, the Payment Agent
shall promptly pay to the persons entitled thereto, cash in the amount to
which such persons are entitled in accordance with Sections 1.3.1 hereof and
issue new share certificates for each such person's remaining shares of CVB
Common Stock in accordance with Section 1.3.1 hereof. As of the Closing
Date, CVB shall pay the expenses of the Payment Agent. As used herein and
throughout this Agreement, "Business Day" means any day other than a
Saturday, Sunday or day on which banking institutions in San Francisco,
California are obligated by law or executive order to be closed.
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1.5.4. No interest will be paid or accrued on the cash
payable upon the surrender of the certificates representing CVB Common Stock.
If payment is to be made, or new certificates issued, to a person other than
the one in whose name a certificate so surrendered is registered, it shall be
a condition of payment that the certificate so surrendered shall be properly
endorsed or otherwise in proper form for transfer and that the person
requesting such payment shall pay any transfer or other taxes required by
reason of the payment to a person other than the registered holder of the
certificate so surrendered or establish to the satisfaction of the California
Fund that such tax has been paid or is not applicable. At and after the
Effective Time, no transfer of CVB Common Stock outstanding prior to the
Effective Time shall be made on the stock transfer books of the Surviving
Entity. Until surrendered in accordance with the provisions of this Section
1.5, the certificates which immediately prior to the Effective Time
represented issued and outstanding shares of CVB Common Stock shall be deemed
by the California Fund and the Surviving Entity to represent for all purposes
the right to receive the Per Share Cash Merger Price plus a certificate for
the remaining 0.5271 shares of CVB Common Stock, as provided in Section 1.3.1
hereof, without interest thereon.
1.5.5. CVB shall notify the Payment Agent of the names of,
and the number of shares held by, Dissenting Shareholders. In the event that
appraisal proceedings result in a final award per share in excess of the Per
Share Cash Merger Price as provided in Section 1.3.2 hereof, the CVB shall
deposit with the Payment Agent the amount per share in excess of the Per
Share Cash Merger Price, as provided in Section 1.3.2 hereof, multiplied by
the number of shares so affected. Upon instructions from CVB, the Payment
Agent shall pay to the holder of such shares the amount awarded in such
appraisal proceedings.
1.5.6. After one year after the Closing Date, any remaining
funds held by the Payment Agent pursuant to this Section 1.5 shall be
released from trust and shall be paid by the Payment Agent to CVB, except to
the extent that such remaining funds represent the Per Share Cash Merger
Price , as provided in Section 1.3.2 hereof, for shares of CVB Common Stock
for which appraisal proceedings are still in progress, in which case funds
remaining from any such amounts shall be paid by the Payment Agent to CVB one
year after the final award has been rendered with respect to such appraisal
proceedings.
1.6. CERTAIN EFFECTS OF THE MERGER. The Articles of Incorporation
and Bylaws of CVB as in effect immediately prior to the Effective Time shall
continue to be the Articles of Incorporation and Bylaws of the Surviving
Entity following the Merger. The members of the Board of Directors of the
Surviving Entity immediately after the Effective Time shall be the persons
listed as such in the Agreement of Merger. At the Effective Time, the
separate existence of CMC shall cease, and CMC shall be merged into CVB
which, as the Surviving Entity, shall thereupon and thereafter possess all
the rights, privileges, powers and franchises, of a public or of a private
nature, of each of CVB and CMC, shall be subject to all restrictions,
disabilities and duties of each of CVB and CMC, and shall continue its
corporate existence as a California corporation.
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<PAGE>
1.7. CLOSING DATE AND TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
Consummation of the transactions contemplated by this Agreement (the
"Closing") shall, unless another date or place is agreed to in writing by the
parties hereto, take place at the offices of the CVB, 12100 Firestone
Boulevard, Norwalk, California, on the fifteenth Business Day after the last
to occur of (i) the receipt of all Regulatory Approvals and the expiration of
all applicable waiting periods; and (ii) satisfaction of the conditions
precedent set forth in Sections 5.2 and 5.3 or written waiver of such
conditions by the California Fund or CVB, as applicable (the "Closing Date").
1.8. REGULATORY APPROVALS. The Closing shall be subject to
receipt and continued effectiveness, without the imposition of (A) any
condition or commitment which would, in the reasonable opinion of Belvedere
as general partner of the California Fund, be unduly burdensome on the
business and operations of the California Fund or the Surviving Entity as
conducted and as anticipated by the California Fund to be conducted
subsequent to the Closing Date or (B) any condition or requirement which, in
the reasonable opinion of Belvedere as general partner of the California Fund
so materially and adversely affects the anticipated economic and business
benefits to the California Fund of the transactions contemplated by this
Agreement as to render consummation of such transactions inadvisable (in
which case Belvedere shall promptly notify CVB) (each a "Prohibited
Condition"), of (i) the approval required to be received by Belvedere and the
California Fund from the Board of Governors of the Federal Reserve System
(the "FRB") under Section 3 of the Bank Holding Company Act of 1956, as
amended (the "BHCA"), to acquire control of CVB; (ii) the approval required
to be received by Belvedere or the California Fund from the California
Commissioner of Financial Institutions (the "Commissioner") under Section 700
et seq. of the Financial Code to acquire control of CVB and CV Bank; and
(iii) any other approval, order or notice of non-objection required to be
obtained by Belvedere, the California Fund, CMC, CVB, or CV Bank from any
Governmental Authority, (referred to individually as a "Regulatory Approval"
and collectively as the "Regulatory Approvals") in connection with any of the
transactions contemplated by this Agreement. For purposes of this Agreement,
no condition, requirement or disapproval imposed by the FRB, the Commissioner
or any other United States federal or state bank regulatory agency shall be
deemed a Prohibited Condition if such condition does not materially differ
from conditions regularly imposed by the FRB, the Commissioner or such other
United States federal or state bank regulatory agency in orders approving
transactions of the type contemplated by this Agreement and compliance with
such condition, requirement or disapproval would not (X) require the taking
of any action inconsistent with the manner in which the California Fund or
CVB have conducted their respective businesses previously or as contemplated
by this Agreement; (Y) have a material adverse effect on the financial
condition, results of operations or prospects of the California Fund or CVB;
or (Z) preclude satisfaction of any of the conditions to consummation of the
transactions contemplated by this Agreement.
1.9. FURTHER ACTION. In case at any time (whether before or after
the Closing) any further action is necessary or appropriate to carry out the
purposes of and transactions contemplated by this Agreement, the appropriate
party or parties shall take
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<PAGE>
such action as promptly as practicable. If at any time the Surviving Entity,
CV Bank, or the California Fund shall consider or be advised that any further
assignments or assurances are necessary or appropriate according to the terms
hereof to vest in the Surviving Entity the title of any property or rights of
CVB or CV Bank, the acting officers and directors of CVB or CV Bank shall
execute and make all such assignments, assurances, agreements and other
documents and do all things necessary or advisable to vest title in such
property or rights in the Surviving Entity, and otherwise to carry out the
purposes of this Agreement.
1.10. DIRECTOR'S AGREEMENTS AND PROXIES. Concurrently with the
execution of this Agreement, as a condition precedent to the California Fund
entering into this Agreement, the CVB Directors shall each enter into a
separate Director's Agreement and Proxy substantially in the form attached
hereto as Appendix B, pursuant to which each of the CVB Directors shall agree
to, among other things, vote or cause to be voted all shares of CVB Common
Stock with respect to which each such CVB Director has voting power on the
date hereof or hereafter to approve the Merger and the transactions
contemplated hereby and all requisite matters related thereto, and shall
appoint James N. Koury, his nominee or successor as their proxy for such vote.
1.11. AGREEMENTS TO AMEND STOCK OPTION PLANS.
1.11.1. Concurrently with the execution of this Agreement,
as a condition precedent to the California Fund entering into this Agreement,
each holder of CVB Stock Options under the CVB Stock Option Plan shall have
entered into an Option Termination Agreement in the form attached to this
Agreement as Appendix E.
1.11.2. Concurrently with the execution of this Agreement,
as a condition precedent to the California Fund entering into this Agreement,
each holder of CVB Stock Options under the CVB Stock Purchase Plan shall have
entered into an Stock Purchase Rights Amendment Agreement in the form
attached to this Agreement as Appendix F
1.12. BOARD COMPOSITION AFTER THE MERGER. As soon as practicable
following the Effective Time and adoption of such amendments to the Bylaws of
CVB and CV Bank as are required to effect the change, the Boards of Directors
of CVB and CV Bank shall take those actions necessary to cause two nominees
to be selected by the California Fund (the "California Fund Nominees") to be
appointed to the Boards of Directors of CVB and CV Bank (the "Boards"). Once
appointed to the Boards, the nominating committee of CVB shall nominate and
recommend for approval such California Fund Nominees for one year terms at
the annual meetings of CVB for the years 2000, 2001 and 2002
1.12.1. In the event the California Fund Nominees determine
to withdraw from the Boards of Directors of CVB and CV Bank, or in the event
that the California Fund Nominees are removed from the Boards of Directors of
CVB and CV Bank, in lieu of Board membership CVB and CV Bank shall enter
into, at no cost to CVB or CV Bank, a Financial Advisory Contract with the
California Fund, in the Form
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attached as Appendix G to this Agreement, which, among other provisions
provides the California Fund full access to the records and management of CVB
and CV Bank to the full extent provided to directors of CVB and CV Bank under
the California Corporations Code. This Section 1.12 shall survive after the
Effective Time.
ARTICLE 2. REPRESENTATIONS AND
WARRANTIES OF CVB AND CV BANK
CVB represents and warrants, with respect to CVB, and CV Bank represents
and warrants, with respect to CV Bank, to the California Fund as follows:
2.1. ORGANIZATION, CORPORATE POWER, ETC. Each of CVB and CV Bank
is a California corporation duly organized, validly existing and in good
standing under the laws of the State of California and each has all requisite
corporate power and authority to own, lease and operate its properties and
assets and to carry on its business as presently conducted. CVB and CV Bank
each has all requisite corporate power and authority to enter into this
Agreement and, subject to receipt of the Regulatory Approvals and approval by
the holders of a majority of the issued and outstanding shares of CVB Common
Stock, to perform its obligations hereunder with respect to the consummation
of the transactions contemplated hereby. Neither the scope of the business
of CVB or CV Bank , nor the location of any of its properties requires that
either CVB or CV Bank be licensed or qualified to do business in any
jurisdiction other than the State of California. Schedule 2.1 contains true
and correct copies of each of CVB's and CV Bank 's Articles of Incorporation
and Bylaws, as amended and in effect as of the date hereof.
2.2. AUTHORIZATIONS AND APPROVALS; BINDING OBLIGATION.
2.2.1. The execution and delivery by CVB and CV Bank of
this Agreement and the Agreement of Merger and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of CVB and CV Bank, subject only to
the approval of this Agreement, the Agreement of Merger and the Merger by the
holders of a majority of the issued and outstanding shares of CVB Common
Stock. This Agreement has been duly executed and delivered by CVB and CV
Bank, subject to receipt of the Regulatory Approvals, constitutes the legal,
valid and binding obligation of CVB and CV Bank, enforceable in accordance
with its terms (except as may be limited by bankruptcy, insolvency,
moratorium, reorganization or other similar laws affecting the rights of
creditors generally and the availability of equitable remedies). The
Agreement of Merger will, upon receipt of all necessary Regulatory Approvals
and upon due certification, execution, acknowledgment and filing thereof in
accordance with Applicable Law, be the valid and binding obligation of CVB,
enforceable in accordance with its terms (except as may be limited by
bankruptcy, insolvency, moratorium, reorganization or similar laws affecting
the rights of creditors generally and the availability of equitable
remedies). The term "Applicable Law" as used herein and throughout this
Agreement shall mean any domestic or foreign, federal, state or local,
statute, law, ordinance, rule, administrative interpretation, regulation,
order, writ, injunction, directive, judgment, decree or other
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requirement of any Governmental Authority applicable, in the case of CVB or
CV Bank, to each of CVB or CV Bank or to their respective properties, assets,
officers, directors, employees or agents (in connection with such officers',
directors', employees' or agents' activities on behalf of it), and, in the
case of the California Fund, to the California Fund or its properties,
assets, officers, directors, employees or agents (in connection with such
officers', directors', employees' or agents' activities on behalf of it).
Except for the approval of the holders of a majority of the issued and
outstanding shares of CVB Common Stock and the Regulatory Approvals, no other
approvals or consents from any person are necessary for CVB to enter into and
perform this Agreement or the Agreement of Merger and to merge with CMC.
2.2.2. Except as set forth in Schedule 2.2.2, neither the
execution and delivery by CVB or by CV Bank of this Agreement or the
Agreement of Merger nor the consummation of the transactions contemplated
herein or therein, or compliance by CVB with the provisions hereof or
thereof, will (i) conflict with or result in a breach of any provision of
their respective Articles of Incorporation or Bylaws; (ii) 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 CV Bank is a party, or by which CVB
or CV Bank or any of their respective properties or assets are bound, except
where such breach or default would not have a material adverse effect on the
business, assets, financial condition, results of operations or prospects of
CVB and CV Bank taken as a whole, or on the ability of CVB or CV Bank to
perform their respective obligations under this Agreement or to consummate
the transactions contemplated by this Agreement (a "Material Adverse
Effect"); or (iii) violate any order, writ, injunction, decree, statute, rule
or regulation applicable to CVB or CV Bank.
2.2.3. No consent or approval of, notice to or filing with
any Governmental Authority having jurisdiction over any aspect of the
business or assets of CVB or CV Bank, and except as set forth in Schedule
2.2.3, no consent or approval of or notice to any other person or entity, is
required in connection with the execution and delivery by CVB and CV Bank of
this Agreement or by CVB of the Agreement of Merger or the consummation by
CVB and CV Bank of the transactions contemplated hereunder or thereunder,
except approval of the Merger by the holders of a majority of the issued and
outstanding shares of CVB Common Stock; approval of the FRB pursuant to
Section 3 of the Bank Holding Company act of 1956, as amended; approval of
the Commissioner (including, without limitation, approval under Sections
700-711 of the Financial Code); and the filing of the Agreement of Merger
with the Secretary of State pursuant to the Corporation Law. The term
"Governmental Authority" as used herein and throughout this Agreement shall
mean any foreign, domestic, federal, territorial, state or local governmental
authority, court, or any regulatory, administrative or other agency, or any
political or other subdivision, department or branch of any of the foregoing
having jurisdiction over the business or any of the assets or properties of
any of the parties hereto.
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2.3. CAPITALIZATION. The authorized capitalization of CVB
consists of 20,000,000 shares of CVB Common Stock, of which 991,667 shares
are issued and outstanding. CVB has no class of authorized capital stock
other than the CVB Common Stock. All of the outstanding shares of CVB Common
Stock are validly issued, fully paid and nonassessable. The CVB Directors
collectively have voting power over a majority of the issued and outstanding
shares of CVB Common Stock. Except for stock options covering 172,000 shares
of CVB Common Stock granted pursuant to the CVB Stock Plans, there are no
outstanding options, warrants, commitments, agreements or other rights in or
with respect to the unissued shares of CVB Common Stock, or any other
securities convertible into CVB Common Stock. Schedule 1.4 sets forth the
name of each holder of an option granted under the CVB Stock Option Plan, the
number of shares of CVB Common Stock covered by each such holder's option,
the exercise price per share and the expiration date of each such holder's
option.
2.4. SUBSIDIARIES. CVB owns all of the outstanding shares of CV
Bank, and no other subsidiaries, and there are no outstanding options,
warrants, commitments, agreements or other rights in or with respect to the
unissued shares of CV Bank Common Stock, or any other securities convertible
into CV Bank Common Stock.
2.5. BANKING ACTIVITIES; AGREEMENTS WITH BANKING AUTHORITIES. CV
Bank is authorized by the Commissioner to conduct a general banking business
and is not authorized to conduct a trust business. CV Bank is not a member
of the Federal Reserve System. CV Bank's deposits are insured by the FDIC in
the manner and to the full extent provided by law. CV Bank maintains and
operates branch offices only in the State of California. CVB is a registered
bank holding company. Neither CVB nor CV Bank is a party to any written
agreement or memorandum of understanding with, or subject to any order or
directive from, any Governmental Authority, nor to CVB's or CV Bank's
knowledge is any such any written agreement or memorandum of understanding
with, or subject to any order or directive, contemplated by any Governmental
Authority.
2.6. FINANCIAL STATEMENTS.
2.6.1. CVB has furnished to Belvedere its unaudited
consolidated balance sheet as of December 31, 1998 and the related statements
of operations, cash flows and changes in shareholders' equity for the year
then ended ("CVB's 1998 Unaudited Financial Statements"). CVB has also
furnished to Belvedere its audited consolidated balance sheets as of December
31, 1997, 1996 and 1995, and the related statements of operations, cash flows
and changes in shareholders' equity for the years then ended and the related
notes thereto, and the accompanying audit reports of Grant Thorton LLP and
when available will furnish its audited consolidated balance sheet as of
December 31, 1998, and the related statements of operations, cash flows and
changes in shareholders' equity for the years then ended and the related
notes thereto, and the accompanying audit reports of Grant Thorton LLP
(collectively, "CVB's Audited Financial Statements"). When delivered, CVB's
1998 Audited Financial Statements will not be materially different from CVB's
1998 Unaudited Financial Statements. CVB's Audited Financial Statements and
CVB's 1998 Unaudited Financial Statements were
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prepared, and all interim financial statements to be delivered to the
Belvedere pursuant to this Agreement will be prepared, in accordance with
GAAP and RAP, except as disclosed in the notes thereto and presented and will
present fairly the financial position of CVB as of the dates thereof and the
results of operations, cash flows and changes in shareholders' equity for the
periods then ended. None of CVB's Audited Financial Statements and none of
the interim financial statements to be delivered to Belvedere pursuant to
this Agreement contain or will, when delivered, contain any untrue statement
of a material fact or omit to state a material fact necessary in order to
make the statements contained therein not misleading.
2.6.2. CV Bank has furnished to Belvedere its unaudited
consolidated balance sheet as of December 31, 1998 and the related statements
of operations, cash flows and changes in shareholders' equity for the year
then ended ("CV Bank's 1998 Unaudited Financial Statements"). CV Bank has
also furnished to Belvedere its audited consolidated balance sheets as of
December 31, 1997, 1996 and 1995, and when available will furnish its audited
consolidated balance sheet as of December 31, 1998, and the related
statements of operations, cash flows and changes in shareholders' equity for
the years then ended and the related notes thereto, and the accompanying
audit reports of Grant Thorton LLP (collectively, "CV Bank's Audited
Financial Statements"). When delivered, CV Bank's 1998 Audited Financial
Statements will not be materially different from CV Bank's 1998 Unaudited
Financial Statements. CV Bank's Audited Financial Statements and CV Bank's
1998 Unaudited Financial Statements were prepared, and all interim financial
statements to be delivered to Belvedere pursuant to this Agreement will be
prepared, in accordance with GAAP and RAP, except as disclosed in the notes
thereto and presented and will present fairly the financial position of CV
Bank as of the dates thereof and the results of operations, cash flows and
changes in shareholders' equity for the periods then ended. None of CV Bank's
Audited Financial Statements and none of the interim financial statements to
be delivered to Belvedere pursuant to this Agreement contain or will, when
delivered, contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements contained therein not
misleading.
2.7. INSURANCE. Except as set forth in Schedule 2.7(a), CVB and
CV Bank have and at all times since January 1, 1993 have had in full force
and effect policies of insurance and bonds (including without limitation
bankers' blanket bond, fidelity coverage, director and officer liability,
fire, third party liability, use and occupancy) with respect to their
respective assets and business and against casualties and contingencies which
in the judgment of CVB and CV Bank are adequate and appropriate to cover
their respective assets and business. Set forth in Schedule 2.7(b) is a
schedule of all current policies of insurance and bonds (other than title or
credit insurance) carried and owned by CVB and CV Bank, showing the name of
the insurance or bonding company, a summary of the coverage, the amounts, the
deductible features, the annual premiums and the expiration dates. If any
such policy or bond is changed, terminated or modified following the date of
this Agreement, such termination, change or modification shall be promptly
disclosed to Belvedere in writing. CVB and CV Bank are not in default under
any such policy of insurance or bond such that it could be canceled, and all
material claims
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thereunder have been filed in timely fashion. CVB and CV Bank have filed
claims with or given notice of claim to their insurers or bonding companies
with respect to all material matters and occurrences for which either
believes it has coverage.
2.8. PROXY STATEMENT; REGULATORY APPLICATIONS. The Proxy
Statement, and if required, the Registration Statement (both as defined in
Section 4.3.22(2)) and any other documents to be filed with any Governmental
Authority in connection with the transactions contemplated by this Agreement
(including, but not limited to, all applications for Regulatory Approvals to
be filed by CVB) with respect to all information set forth therein relating
to CVB, CV Bank, the Merger and in respect to this Agreement and the
Agreement of Merger, at the respective times such documents are filed or
become effective, and with respect to the Proxy Statement, at the time of
mailing to CVB shareholders and at the time of the CVB shareholders' meeting,
will, assuming receipt of all information regarding Belvedere, the California
Fund and CMC reasonably requested by CVB (i) comply in all material respects
with the provisions of Applicable Law; and (ii) not contain any statement
which, at the time and in light of the circumstances under which it is made,
is false or misleading with respect to any material fact, or omit any
material fact necessary in order to make the statements therein not false or
misleading or necessary to correct any statement in any earlier communication
with respect to the solicitation of a proxy for the same meeting or subject
matter which has become false or misleading.
2.9. BOOKS AND RECORDS.
2.9.1. The minute books of CVB and CV Bank provided to the
California Fund contain (i) true, accurate and complete records of all
meetings and actions taken by the Boards of Directors, Board committees and
shareholders of CVB and CV Bank and (ii) true and complete copies of their
respective Articles of Incorporation and Bylaws and all amendments thereto.
The books and records of CVB and CV Bank accurately reflect in all material
aspects their respective businesses and affairs.
2.9.2. Each of CVB and CV Bank has records which accurately
and validly reflect, in all material respects, its transactions and each has
accounting controls sufficient to insure that such transactions are (i) in
all material respects, executed in accordance with management's general or
specific authorization, and (ii) recorded in conformity with GAAP and RAP.
Such records, to the extent they contain important information pertaining to
CVB which is not easily and readily available elsewhere have been duplicated,
and such duplicates are stored safely and securely pursuant to procedures and
techniques reasonably adequate for companies of the size of CVB and CV Bank
and in the business in which CVB and CV Bank is engaged; and the data
processing equipment, data transmission equipment, related peripheral
equipment and software used by CVB and CV Bank in the operation of their
respective businesses (including any disaster recovery facility) to generate
and retrieve such records are reasonably adequate for companies of the size
of CVB and CV Bank and in the business in which CVB and CV Bank is engaged.
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2.9.3. CV Bank and CV Bank each has accounting controls
sufficient to insure that such transactions are (i) in all material respects,
executed in accordance with management's general or specific authorization,
and (ii) recorded in conformity with GAAP and RAP. Such records, to the
extent they contain important information pertaining to CV Bank which is not
easily and readily available elsewhere have been duplicated, and such
duplicates are stored safely and securely pursuant to procedures and
techniques reasonably adequate for companies of the size of CV Bank and in
the business in which CV Bank is engaged; and the data processing equipment,
data transmission equipment, related peripheral equipment and software used
by CV Bank in the operation of its business (including any disaster recovery
facility) to generate and retrieve such records are reasonably adequate for
companies of the size of CV Bank and in the business in which CV Bank is
engaged.
2.10. TITLE TO ASSETS. CVB and CV Bank respectively have good and
marketable title to all material properties and assets, other than real
property, owned or purported to be owned by CVB or CV Bank, free and clear of
all mortgages, liens, encumbrances, pledges or charges of any kind or nature,
except for (i) liens for current taxes not yet due and payable; (ii) liens
incurred in the ordinary course of business and which do not materially
impair the respective businesses of CVB or CV Bank, or materially detract
from the usefulness of the properties subject thereto; or (iii) such liens as
are disclosed in CVB's or CV Bank's Financial Statements as of December 31,
1998, or in Schedule 2.10.
2.11. REAL ESTATE. Schedule 2.11(a) contains a list of all real
property, including leaseholds, owned by CVB or CV Bank other than other real
estate owned ("OREO"). True, correct and complete copies of all such leases
are included in Schedule 2.11(a). Schedule 2.11(b) contains, among other
things, an accurate summary of all material commitments which CVB or CV Bank
has to improve real estate owned by it. Schedule 2.11(c) contains a list of
CV Bank's OREO. Schedule 2.11 contains copies of all Phase I and II reports
prepared for CVB or CV Bank with respect to the properties listed in
Schedules 2.11(a) and 2.11(c). CVB and CV Bank respectively have good and
marketable title to all the real property and valid leasehold interests in
the leaseholds described in Schedules 2.11(a) and 2.11(c), free and clear of
all mortgages, covenants, conditions, restrictions, easements, liens,
security interests, charges, claims, assessments and encumbrances, except for
(i) rights of lessors, co-lessees or subleases in such matters which are
reflected in the leases; (ii) current taxes not yet due and payable; (iii)
such as are described in any title policies delivered pursuant to this
Section 2.11; and (iv) such imperfections of title and encumbrances, if any,
which do not in the aggregate materially and adversely detract from the value
of or materially and adversely interfere with the present use of such
property or the operations of CVB or CV Bank respectively. True, correct and
complete copies of title policies for properties described in Schedules
2.11(a) and 2.11(c) as owned by CVB or CV Bank are attached thereto. To the
best knowledge of CVB and CV Bank, the activities of CVB and CV Bank with
respect to all real property and leaseholds owned by them for use in
connection with their respective operations are in all material respects
permitted and authorized by applicable zoning laws, ordinances and
regulations and all laws and regulations of any governmental department or
agency
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relative to environmental matters affecting such properties, except as
otherwise disclosed in Schedule 2.11(d). CVB and CV Bank enjoy peaceful and
undisturbed possession under all material leases to which each is a party,
and all of such leases are valid and in full force and effect, and (i) there
is no default by CVB or CV Bank or any lessor thereunder, nor has any event
occurred which with notice, the passage of time or both would constitute such
a default, and (ii) all improvements and alterations to any premises so
leased have been completed to the satisfaction of CVB, CV Bank and each
lessor.
2.12. LEGAL PROCEEDINGS AND AGREEMENTS WITH BANKING AUTHORITIES.
2.12.1. Except as set forth in Schedule 2.12(a), there is
no private or governmental suit, claim, action, arbitration or proceeding
pending, nor any private or governmental suit, claim, action, arbitration or
proceeding or to CVB's or CV Bank's knowledge threatened, nor does CVB know
of any facts or circumstances which would form a basis for any such suit,
claim, action, arbitration or proceeding against CVB or CV Bank or against
any of CVB's or CV Bank's respective directors, officers, contingent workers
or employees relating to the performance of their duties in such capacities,
or against or affecting any properties of CVB or CV Bank which individually,
or in the aggregate, could have a Material Adverse Effect. As used herein
and throughout this Agreement, "Contingent Worker" means any individual who
performs services for CVB or CV Bank and (i) whose services are performed
under an agreement, contract, or other arrangement pursuant to which the
individual is characterized or classified by CVB or CV Bank as an independent
contractor (or as an employee of an independent contractor); (ii) the
payments for whose services have not been treated by CVB or CV Bank as
subject to wage withholding under the Code and Applicable Law; (iii) whom CVB
and CV Bank have not classified as its common law employee; (iv) whom CVB or
CV Bank initially classified as a leased employee (as defined in Section
414(n) of the Code); or (v) whom CVB or CV Bank has leased from an entity
that is the individual's employer of record. An individual shall, for
example, be deemed to be a contingent worker if he or she was engaged from a
temporary help service, an employee leasing agency, a technical services
firm, or an outsourcing, managed services, or master vendor firm. Except as
set forth in Schedule 2.12(b), there are no judgments, decrees, stipulations
or orders against CVB or CV Bank enjoining CVB or CV Bank or any of their
respective directors, officers, contingent workers 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. Schedule
2.12(c) contains (i) a true, correct and complete list, including
identification of the applicable insurance policy covering such litigation,
if any, the applicable deductible and the amount of any reserve therefor, of
all pending litigation in which CVB, or CV Bank or any of CVB's or CV Bank's
directors, officers, contingent workers or employees relating to the
performance of their duties in such capacities, is a named party, and except
as set forth in Schedule 2.12(d), all of the litigation listed on such
schedule is adequately covered by insurance in force, except for applicable
deductibles, or has been adequately reserved for in accordance with CVB's or
CV Bank's prior business practice; and (ii) summary reports of counsel
representing CVB and CV Bank on all pending litigation to which CVB, or CV
Bank or any of CVB's or CV Bank's respective directors, officers, contingent
workers or employees relating to the
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performance of their duties in such capacities, is a party and which names
CVB or CV Bank or any of such directors, officers, contingent workers or
employees as a defendant or cross-defendant.
2.12.2. Neither CVB, nor CV Bank, is a party to, or
otherwise subject to, any agreement or memorandum of understanding with or
order of any federal, state or foreign governmental or regulatory authority
charged with the supervision or regulation of bank holding companies or
California state-chartered banks or engaged in the insurance of bank
deposits, that restricts the conduct of their respective businesses, or in
any manner relates to capital adequacy, credit or investment policies or
management.
2.13. TAXES.
2.13.1. DEFINITIONS. For purposes of this Agreement, the
following definitions shall apply:
(1) The term "Code" shall mean the Internal Revenue Code
of 1986, as amended to date.
(2) The term "Taxes" shall mean all taxes for all periods
for which the statute of limitation is open for federal and state tax
purposes, however denominated, including, without limitation, any interest,
penalties or other additions that may become payable in respect thereof,
imposed by any Governmental Authority, which taxes shall include, without
limiting the generality of the foregoing, all income or profits taxes
(including, without limitation, federal income taxes and state income taxes),
alternative or add-on minimum taxes, payroll and employee withholding taxes,
back-up withholding and other withholding taxes, unemployment insurance,
social security taxes, sales and use taxes, ad valorem taxes, excise taxes,
franchise taxes, gross receipts taxes, business license taxes, occupation
taxes, real and personal property taxes, stamp taxes, environmental taxes,
transfer taxes, workers' compensation and Pension Benefit Guaranty
Corporation premiums, self-dealing or prohibited transaction taxes and other
obligations of the same or of a similar nature to any of the foregoing, which
CVB or CV Bank are required to pay, withhold or collect.
(3) The term "Returns" shall mean all reports, estimates,
declarations of estimated tax, claims for refunds, information statements and
returns required to be prepared or filed in connection with, any Taxes,
including any schedule or attachment thereto and any amendment thereof.
2.13.2. RETURNS FILED AND TAXES PAID. All Returns required
to be filed by CVB or CV Bank prior to the Closing Date have been, or will
be, duly filed on a timely basis. Such Returns are, or will be, true,
correct and complete. All Taxes shown to be payable on the Returns or on
subsequent assessments with respect thereto have been, or will be, paid in
full on a timely basis and no other Taxes are owing or payable by CVB or CV
Bank with respect to items or periods covered by such Returns or with respect
to any period prior to the date of this representation and warranty. No
security interests, liens, encumbrances, attachments or similar interests
exist on or with respect to
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any of the assets of CVB or CV Bank that arose in connection with any failure
or alleged failure to pay any Taxes. Except as set forth in Schedule 2.13.2,
CVB and CV Bank have withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any officer,
director, employee, contingent worker or agent (including, without
limitation, any independent contractor, foreign person or other third person)
in compliance with all tax withholding provisions of applicable federal,
state, local and foreign law (including, without limitation, income, social
security, employment tax withholding, and withholding under Sections 1441
through 1445 of the Code). CVB and CV Bank have timely complied with all
requirements under all Applicable Laws relating to information, reporting and
withholding and other similar matters for customer and other accounts
(including back-up withholding and furnishing of Forms 1099 and all similar
reports).
2.13.3. TAX RESERVES. The amount of CVB's and CV Bank's
respective liability for unpaid Taxes for all periods ending on or before the
last day of the month before the Closing Date (including accruals for any
exposure item) shall not, in the aggregate, exceed in a material way the
amount of the liability accruals for Taxes, as such accruals are reflected on
CVB's consolidated balance sheets. All such accruals are, or will be,
recorded in accordance with GAAP. Returns Furnished. Schedule 2.13.3
contains true, correct and complete copies of CVB's consolidated federal and
state income tax Returns for all periods that are open for federal and state
tax purposes. CVB has made available to Belvedere true, correct and complete
copies of all other Returns and other reports and statements relating to such
federal and state income tax Returns, including, without limitation, income
tax audit reports, statements of income or gross receipts tax, franchise tax,
sales tax and transfer tax, deficiencies, and closing or other agreements
relating to income or gross receipts tax, franchise tax, sales tax and
transfer tax received by CVB, as well as draft federal and state income tax
Returns for all periods ending on or before the Closing Date. CVB will
promptly furnish to Belvedere true, complete and correct copies of any other
Returns filed by it after the date of this Agreement and prior to the Closing
Date.
2.13.4. TAX DEFICIENCIES; AUDITS; STATUTES OF LIMITATIONS.
Except as set forth in Schedule 2.13.4(a), (i) no deficiencies have been
asserted with respect to Taxes of CVB or CV Bank that remain unpaid; (ii)
neither CVB nor CV Bank is a party to any action or proceeding for assessment
or collection of Taxes, nor has such action or proceeding been asserted or
threatened against CVB, CV Bank or any of their respective assets; and (iii)
no waiver or extension of any statute of limitations is in effect with
respect to Taxes or Returns of CVB or CV Bank. Except as set forth in
Schedule 2.13.5(b), the Returns of CVB for all tax years for which the
statute of limitations has not expired have never been audited by a
Governmental Authority (which term includes any taxing authority), nor is any
such audit in process, pending or threatened. Neither CVB nor any of its
respective officers or directors (or employees responsible for Tax matters)
expects any Governmental Authority to assess any additional Taxes for any
period for which Returns have been filed.
2.13.5. TAX ELECTIONS AND SPECIAL TAX STATUS.
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(1) Except as set forth in Schedule 2.13.5, (i) CVB and
CV Bank are not a party to any safe harbor lease within the meaning of
Section 168(f)(8) of the Internal Revenue Code of 1954, as in effect prior to
amendment by the Tax Equity and Fiscal Responsibility Act of 1982; (ii) CVB
and CV Bank have not entered into any compensatory agreements with respect to
the performance of services for which payment thereunder would result in a
nondeductible expense to CVB or CV Bank pursuant to Sections 162(m) or 280G
of the Code or an excise tax to the recipient of such payment pursuant to
Section 4999 of the Code; (iii) CVB and CV Bank are not and have not been
United States real property holding corporations within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code; (iv) neither CVB nor CV Bank has ever
been (and does not have any liability because it once was) a member of an
affiliated group within the meaning of Section 1504(a) of the Code during any
part of any Return year; (v) CVB and CV Bank have never been a member of any
unitary group for state income or franchise tax purposes and CVB does not
file combined, unitary, or consolidated Returns for state income or franchise
tax purposes in any state, local or territorial jurisdiction; (vi) neither
CVB nor CV Bank is required to file any Returns or is liable for any Taxes in
any state, local, territorial or foreign taxing jurisdiction other than
California, and political subdivisions thereof; and (vii) CVB and CV Bank are
not (nor have ever been) a party to any tax sharing agreement. Schedule
2.13.5 includes copies of any documents to which any of the exceptions to the
representations in this Section 2.13.5.1 apply.
(2) None of CVB's or CV Bank's assets directly or
indirectly secure any debt the interest on which is tax exempt under Section
103(a) of the Code, or are assets which constitute "tax-exempt use property"
within the meaning of Section 168(h) of the Code. There are no actual or
deemed elections under Section 338 of the Code, protective carryover basis
elections, offset prohibition elections, or similar elections applicable to
CVB or CV Bank. CVB is not required to include in its income any material
adjustment pursuant to Sections 481 or 263A of the Code (or similar
provisions of other law or regulations) by reason of a change in accounting
method or otherwise, and the Internal Revenue Service (or any other
Governmental Authority) has not proposed any such change in accounting method
or other adjustment. CVB is not a "consenting corporation" under Section
341(f) of the Code. CVB has disclosed on its federal income tax returns all
positions taken therein that could give rise to a substantial understatement
penalty of federal income tax within the meaning of Section 6662 of the Code.
CVB and CV Bank do not have any current or contingent contractual obligation
to indemnify any other person with respect to Taxes, other than obligations
to indemnify a lessor for property taxes, sales/use taxes or gross receipts
taxes (but not income or franchise taxes) imposed on lease payments arising
from terms that are customary for leases of similar property.
2.13.6. DISCLOSURE. Schedule 2.13.6 sets forth as of the
date thereof as well as on an estimated basis as of the Closing Date: (i) a
complete schedule of the tax and book differences of CVB and CV Bank in their
respective assets; and (ii) a complete listing of the amount of any net
operating loss, net capital loss, unused investment or other credits, unused
foreign tax credits, or excess charitable contributions
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allocable to CVB or CV Bank. CVB has provided Belvedere with sufficient
access to its tax records and personnel to enable Belvedere to determine the
tax and book basis of CVB and CV Bank in their respective assets.
2.14. COMPLIANCE WITH LAWS AND REGULATIONS.
2.14.1. Except as set forth in Schedule 2.14, neither CVB
nor CV Bank is in default under or in breach of any law, ordinance, rule,
regulation, order, judgment or decree applicable to it promulgated by any
Governmental Authority having authority over it, where such default or breach
would have a Material Adverse Effect.
2.14.2. CVB and CV Bank have conducted their respective
businesses in accordance with all applicable federal, foreign, state and
local laws, regulations and orders, including without limitation, disclosure,
usury, equal credit opportunity, equal employment, fair credit reporting,
community reinvestment, antitrust, licensing and other laws, regulations and
orders, and the forms, procedures and practices used by CVB and CV Bank are
in compliance with such laws, regulations and orders, except for such
violations or noncompliance as will not have a Material Adverse Effect.
2.15. PERFORMANCE OF OBLIGATIONS. Except as set forth in Schedule
2.15(a), CVB and CV Bank have performed in all respects all of the
obligations required to be performed by them to date and are not in default
under or in breach of any term or provision of any covenant, contract, lease,
indenture or any other agreement to which CVB or CV Bank is a party or is
subject or is otherwise bound, and no event has occurred which, 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 a Material Adverse
Effect. No party with whom CVB or CV Bank has an agreement which is material
to the financial condition, results of operations or prospects of CVB or CV
Bank is in default thereunder, except as set forth in Schedule 2.15(b).
2.16. EMPLOYEES. Except as set forth in Schedule 2.16, there are
no written understandings or, to the best knowledge of CVB and CV Bank, any
other understandings, for the employment of any officer, contingent worker or
employee of CVB or CV Bank which are not terminable by CVB or CV Bank , as
the case may be, without liability and without notice for any reason or no
reason. Except as set forth in Schedule 2.16(b), there are no controversies
pending or threatened between CVB or CV Bank and any of their respective
directors, officers, contingent workers or employees. Except as disclosed in
CVB's and CV Bank 's Audited Financial Statements as of December 31, 1998 and
in Schedule 2.16(c), all material sums due for director, officer, contingent
worker and employee compensation and benefits have been duly and adequately
paid or provided for, and all deferred compensation obligations for such
persons are fully funded. Neither CVB nor CV Bank 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. Except as
set forth in Schedule 2.16(d), no director, officer, contingent worker or
employee of CVB or CV Bank is entitled to
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receive any payment of any amount under any existing employment agreement,
severance plan or other benefit plan as a result of the consummation of any
transaction contemplated by this Agreement.
2.17. BROKERS AND FINDERS. Except as set forth in Schedule 2.17,
neither CVB nor CV Bank is a party to any agreement with any investment
banker, broker or finder relating to the transactions contemplated hereby,
and neither the execution of this Agreement nor the consummation of the
transactions provided for or contemplated herein will result in any liability
other than the fee to any such investment banker, broker or finder which fee,
if any, is set forth in Schedule 2.17.
2.18. MATERIAL CONTRACTS. Except as set forth in Schedule 2.18 or
excepted below, neither CVB nor CV Bank is a party to any material contract,
agreement, understanding, commitment or offer, whether written or oral, which
is a binding obligation or may become a binding obligation if accepted by
another person (collectively referred to as an "Understanding") including the
following:
2.18.1. Any loan, letter of credit, pledge, security
agreement, lease (excluding leases of real property listed in Schedule
2.11(a)), guarantee, commitment or subordination agreement or other similar
or related type of Understanding as to which CVB or CV Bank is a debtor,
pledgor, lessee or obligor;
2.18.2. Any Understanding dealing with advertising,
brokerage, licensing, dealership, representative or agency relationships
providing for an aggregate annual payment in excess of $10,000;
2.18.3. Any Understanding dealing with profit-sharing,
group insurance, bonus, deferred compensation, stock option, severance pay,
pension, retirement or other compensation or benefit arrangement;
2.18.4. Any written correspondent banking contracts;
2.18.5. Any Understanding (other than this Agreement) for
the sale of its assets other than in the ordinary course of business, or for
the grant of any preferential right to purchase any of its assets, properties
or rights, or any Understanding which requires the consent of any third party
to the transfer and assignment of any assets, properties or rights;
2.18.6. Any Understanding which provides for an annual
payment in excess of $25,000 in the aggregate to purchase, sell or provide
services, materials, supplies, merchandise, facilities or equipment and which
is not terminable without penalty on not more than 30 days' notice;
2.18.7. Any Understanding for any one capital expenditure
or series of capital expenditures which is in excess of $25,000 individually
or $50,000 in the aggregate;
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2.18.8. Any Understanding to make, renew or extend the term
of a loan (not fully disbursed or funded as of December 31, 1998) to any
person or to any affiliate of such person, which undisbursed or unfunded
amounts, when aggregated with all outstanding indebtedness of such person or
any affiliate of such person to CVB or CV Bank, would exceed $100,000. The
term "person" as used herein and throughout this Agreement shall mean any
individual, corporation, association, partnership, joint venture or other
entity or any government or governmental department or agency. The term
"affiliate of" a specific person as used herein and throughout this Agreement
shall mean a person that directly or indirectly through one or more
intermediaries controls or is controlled by or under common control with the
person specified;
2.18.9. Any Understanding of any kind, except for deposit
relationships or loans made prior to December 31, 1998, with any director or
officer of CVB or CV Bank or with any affiliate or any member of the
immediate family of any such director or officer. The term "immediate family"
as used herein and throughout this Agreement shall mean a person's spouse,
in-laws, children and siblings;
2.18.10. Any Understanding which would be terminable other
than by CVB or CV Bank as a result of the consummation of the transactions
contemplated by this Agreement;
2.18.11. Any contract of participation with any other bank
in any loan entered into by CVB or CV Bank subsequent to December 31, 1998 in
excess of $100,000, or any sales of assets of CVB or CV Bank with recourse of
any kind to CVB or CV Bank;
2.18.12. Any Understanding of any kind that binds CVB or CV
Bank and contains a covenant not to compete; or
2.18.13. Any Understanding not otherwise disclosed or
excepted pursuant to this Section 2.18 which is material to the financial
condition, results of operations, assets or business of CVB and CV Bank,
taken as a whole.
2.18.14. True and correct copies of all documents relating
to the foregoing Understandings are attached as a part of Schedule 2.18.
2.19. ABSENCE OF CERTAIN CHANGES. Except as set forth in Schedule
2.19, since December 31, 1998, the respective businesses of CVB and CV Bank
have been conducted diligently and only in the ordinary course, in the same
manner as theretofore conducted, and there has not been any:
2.19.1. Change in, or development in the business of CVB or
CV Bank which is likely to have a Material Adverse Effect;
2.19.2. Damage, destruction or loss to property (whether or
not covered by insurance), individually or in the aggregate, that could have
a Material Adverse Effect;
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2.19.3. Material contract, agreement, license or
Understanding which CVB or CV Bank has entered into or to which CVB or CV
Bank is a party which has been terminated or amended other than in the
ordinary course of business;
2.19.4. Capital expenditure exceeding $25,000 individually
or $50,000 in the aggregate;
2.19.5. Labor trouble, dispute or problem of any character
involving employees or contingent workers of CVB or CV Bank which could have
a Material Adverse Effect;
2.19.6. Change in accounting policies or practices;
2.19.7. Material revaluation by CVB or CV Bank of any of
its assets except as required by GAAP;
2.19.8. Increase in the salary schedule, compensation,
rate, fees or commissions, or the declaration, payment, commitment or
obligation of any kind directly or indirectly through the payment by CVB or
CV Bank of a bonus or other additional salary, compensation, fee or
commission to any person, except for additional sums for increases paid in
accordance with employment contracts of CVB or CV Bank disclosed in Schedule
2.16(a) or paid in a manner consistent with past practice in accordance with
policies of CVB or CV Bank set forth in Schedule 2.19.8;
2.19.9. Sale, assignment or transfer of any asset of CVB or
CV Bank except in the usual and ordinary course of business;
2.19.10. Mortgage, pledge or encumbrance of any asset of
CVB or CV Bank other than liens for Taxes not yet due, pledges or security
interests given in connection with the acceptance of repurchase agreements or
government deposits, and as set forth in Sections 2.10 and 2.11;
2.19.11. Waiver or release of any right or claim of CVB or
CV Bank except in the usual and ordinary course of business; or
2.19.12. Declaration, setting aside or payment of any
dividend or distribution with respect to CVB or CV Bank Common Stock or the
issuance of any shares of, or options to purchase, CVB or CV Bank Common
Stock or any other securities of CVB or CV Bank.
2.20. LICENSES AND PERMITS. CVB and CV Bank have all licenses and
permits which are necessary for the conduct of their respective businesses,
and such licenses are in full force and effect. The properties and operations
of CVB and CV Bank are and have been maintained and conducted, in all
material respects, in compliance with all Applicable Laws.
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2.21. UNDISCLOSED LIABILITIES. Neither CVB nor CV Bank has any
liabilities or obligations, either accrued or contingent, which are material
to CVB or CV Bank, respectively, and which have not been either (i) reflected
or disclosed in CVB's and CV Bank's Audited Financial Statements as of
December 31, 1998 or (ii) disclosed in Schedule 2.21(a). Neither CVB not CV
Bank knows of any basis for the assertion against either CVB or CV Bank of
any liability, obligation or claim (including, without limitation, that of
any Governmental Authority) that might result in or cause a Material Adverse
Effect which is not fairly reflected in their respective Audited Financial
Statements or otherwise disclosed in Schedule 2.21(b).
2.22. LOANS AND INVESTMENTS.
2.22.1. Except as set forth in Schedule 2.22.1, all loans
and investments of CVB and CV Bank are legal, enforceable and authorized
under Applicable Law, except as the enforceability thereof may be limited by
bankruptcy, insolvency, moratorium, reorganization or other similar laws
affecting the rights of creditors generally and by general equitable
principles. Except as set forth in Schedule 2.22.1, no loans or investments
held by CVB or CV Bank are, at December 31, 1998: (i) more than 90 days past
due with respect to any scheduled payment of principal or interest; (ii)
classified as "loss" "doubtful", "substandard," "special mention" or
"criticized" by federal or state banking regulators; or (iii) on a nonaccrual
status in accordance with Applicable Law. Other than investments that are
pledged for public deposits, none of such investments is subject to any
restriction (contractual, statutory or other) that would materially impair
the ability of the entity holding such investment to dispose freely of any
such investment at any time.
2.22.2. Except as set forth in Schedule 2.22.2, neither CVB
nor CV Bank has any loan, lease or other extension of credit outstanding, or
commitment to make any loan, lease or other extension of credit, to any
director, officer, employee or five-percent shareholder of CVB or CV Bank
which is not on substantially the same terms (including interest rates,
repayment terms and collateral) as a comparable transaction with a person of
similar creditworthiness who is not a director, officer, employee or
five-percent shareholder of CVB or CV Bank
2.23. EMPLOYEES; EMPLOYEE BENEFIT PLANS; ERISA.
2.23.1. All material obligations of CVB or CV Bank for
payment to trusts or other funds or to any Governmental Authority or to any
individual, director, officer, employee, contingent worker or agent (or his
or her heirs, legatees or legal representatives) with respect to unemployment
compensation benefits, profit-sharing, pension or retirement benefits or
social security benefits, whether arising by operation of law, by contract or
by past custom, have been properly accrued for the periods covered thereby on
CVB's Audited Financial Statements and paid when due. All material
obligations of CVB and CV Bank, whether arising by operation of law, by
contract or by past custom for vacation or holiday pay, bonuses and other
forms of compensation and benefits which are payable to their respective
directors, officers, employees, contingent
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workers or agents have been properly accrued on their Audited Financial
Statements for the periods covered thereby and paid when due. Except as set
forth on Schedule 2.23.1, there are no unfair labor practice complaints,
strikes, slowdowns, stoppages or other controversies pending or, to the
knowledge of CVB or CV Bank attempts to unionize or controversies threatened
or relating to, any of CVB's or CV Bank's employees that could have a
Material Adverse Effect. Neither CVB nor CV Bank is a party to any collective
bargaining agreement with respect to any of its employees. Neither CVB nor CV
Bank is a party to a written employment contract with any of its officers,
employees or contingent workers and there are no understandings with respect
to the employment of any officer, employee or contingent worker of CVB or CV
Bank which are not terminable by CVB or CV Bank without liability and without
notice for any reason or no reason. Except as disclosed in CVB's and CV
Bank's Audited Financial Statements for the periods covered thereby, all
material sums due for director, officer, contingent worker and employee
compensation have been paid and all employer contributions for director,
officer, contingent worker and employee benefits, including deferred
compensation obligations, and all material benefit obligations under any CVB
Employee Plan or CV Bank Employee Plan (as defined in Section 2.23.2(5)
hereof) or any CVB Benefit Arrangement or CV Bank Benefit Arrangement (as
defined in Section 2.23.2(6) hereof) have been duly and adequately paid or
provided for in accordance with plan documents. Except as set forth on
Schedule 2.23.1, no director, officer, contingent worker or employee of CVB
or CV Bank is entitled to receive any payment of any amount under any
existing agreement, severance plan or other benefit plan as a result of the
consummation of any transaction contemplated by this Agreement or the
Agreement of Merger. CVB and CV Bank have complied with all Applicable Laws
relating to the employment of labor, except for such noncompliance as would
not have a Material Adverse Effect.
2.23.2. CVB and CV Bank have delivered as Schedule 2.23.2 a
complete list of:
(1) All current employees and contingent workers of CVB
together with each person's tenure with CVB, title or job classification, and
the current annual rate of compensation anticipated to be paid to each such
employee or contingent worker; and
(2) All CVB Employee Plans and CVB Benefit Arrangements,
including all plans or practices providing for compensation, benefits or
accruals for active or retired directors, officers, employees or contingent
workers, including, but not limited to, all benefit plans, all pension,
profit-sharing, retirement, bonus, stock option, incentive, deferred
compensation, severance, long-term disability, medical, dental, health,
hospitalization, life insurance or other insurance plans or related benefits.
(3) All current employees and contingent workers of CV
Bank together with each person's tenure with CV Bank, title or job
classification, and the current annual rate of compensation anticipated to be
paid to each such employee or contingent worker; and
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(4) All CV Bank Employee Plans and CV Bank Benefit
Arrangements, including all plans or practices providing for compensation,
benefits or accruals for active or retired directors, officers, employees or
contingent workers, including, but not limited to, all benefit plans, all
pension, profit-sharing, retirement, bonus, stock option, incentive, deferred
compensation, severance, long-term disability, medical, dental, health,
hospitalization, life insurance or other insurance plans or related benefits.
(5) Except as disclosed on Schedule 2.23.2(5), neither
CVB nor CV Bank maintains, administers or otherwise contributes to any
employee benefit plan or arrangement (including without limitation any
"employee benefit plan," as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974 ("ERISA")) which covers any director,
officer, employee or contingent worker, whether active or retired, of CVB or
CV Bank (any such plan being herein referred to as a "CVB Employee Plan" or
"CV Bank Employee Plan"). True and complete copies of each such CVB Employee
Plan or CV Bank Employee Plan, including amendments thereto, have been
previously delivered to Belvedere, together with (i) all agreements regarding
plan assets with respect to such CVB Employee Plans and CV Bank Employee
Plans, (ii) a true and complete copy of the annual reports for the most
recent three years (Form 5500 Series including, if applicable, Schedules A
and B thereto) prepared in connection with any such CVB Employee Plan or CV
Bank Employee Plan, (iii) a true and complete copy of the actuarial valuation
reports for the most recent three years, if any, prepared in connection with
any such CVB Employee Plan or CV Bank Employee Plan, (iv) a copy of the most
recent summary plan description of each such CVB Employee Plan or CV Bank
Employee Plan, together with any modifications thereto, and (v) a copy of the
most recent favorable determination letter (if applicable) from the Internal
Revenue Service for each CVB Employee Plan or CV Bank Employee Plan. None of
the CVB Employee Plans or CV Bank Employee Plans is a "multiemployer plan" as
defined in Section 3(37) of ERISA or a "multiple employer plan" as covered in
Section 412(c) of the Code, and CVB and CV Bank have not been obligated to
make a contribution to any such multiemployer or multiple employer plan
within the past five years. None of the CVB Employee Plans or CV Bank
Employee Plans is, or for the last five years has been, subject to Title IV
of ERISA. Each CVB Employee Plan or CV Bank Employee Plan which is intended
to be qualified under Section 401(a) of the Code is so qualified and each
trust maintained pursuant thereto is exempt from income tax under Section
501(a) of the Code, and CVB and CV Bank are not aware of any fact which has
occurred which would cause the loss of such qualification or exemption.
(6) Except as disclosed in Schedule 2.23.2(6), neither
CVB nor CV Bank maintains (other than base salary and base wages) any form of
current or deferred compensation, bonus, stock option, stock appreciation
right, severance pay, salary continuation, retirement or incentive plan or
arrangement for the benefit of any director, officer, contingent worker or
employee, whether active or retired, of CVB or CV Bank or for any class or
classes of such directors, officers, contingent workers or employees. Except
as disclosed in Schedule 2.23.2(6), neither CVB and CV Bank maintains any
group or individual health insurance, welfare or similar plan or
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arrangement for the benefit of any director, officer, contingent worker or
employee of CVB or CV Bank, whether active or retired, or for any class or
classes of such directors, officers, contingent workers or employees. Any
such plan or arrangement described in this Section 2.23.2(6), copies of which
are attached to Schedule 2.23.2(6), shall be herein referred to as a "CVB
Benefit Arrangement" or as a "CV Bank Benefit Arrangement."
(7) All CVB Employee Plans, CV Bank Employee Plans, CVB
Benefit Arrangements and CV Bank Benefit Arrangements are operated in
compliance with the requirements prescribed by Applicable Law, including but
not limited to ERISA and the Code and any published authorities and
regulations thereunder, applicable thereto, and plan documents relating to
any such plans or arrangements, comply with or will be amended to comply with
Applicable Law. No "prohibited transaction" (as defined in Section 406 of
ERISA and Section 4975 of the Code) with respect to any CVB Employee Plan, CV
Bank Employee Plan, CVB Benefit Arrangement or CV Bank Benefit Arrangement
have occurred; each "plan official" within the meaning of Section 412 of
ERISA of each CVB Employee Plan or CV Bank Employee Plan is bonded to the
extent required by such Section 412; with respect to each CVB Employee Plan
and each CV Bank Employee Plan, to CVB's knowledge, no employee of CVB or CV
Bank, nor any fiduciary of any CVB Employee Plan, CV Bank Employee Plan, CVB
Benefit Arrangement or CV Bank Benefit Arrangement, has engaged in any breach
of fiduciary duty as defined in Part 4 of Subtitle B of Title I of ERISA
which could subject CVB or CV Bank to liability if CVB or CV Bank is
obligated to indemnify such person against liability. Except as disclosed in
Schedule 2.23.2(7), neither CVB nor CV Bank has failed to make any material
contribution or pay any amount due and owing as required by Applicable Law or
the terms of any CVB Employee Plan, CV Bank Employee Plan, CVB Benefit
Arrangement or CV Bank Benefit Arrangement.
(8) Except as set forth on Schedule 2.23.2(8), no CVB
Employee Plan, CV Bank Employee Plan, CVB Benefit Arrangement or CV Bank
Benefit Arrangement has any material liability of any nature, accrued or
contingent, including, without limitation, liabilities for federal, state,
local or foreign taxes, interest or penalty other than liability for claims
arising in the course of the administration of each such respective CVB
Employee Plan, CV Bank Employee Plan, CVB Benefit Arrangement or CV Bank
Benefit Arrangement. Except as set forth on Schedule 2.23.2(8), there is no
pending, or to CVB's knowledge, threatened, legal action, proceeding or
investigation against any CVB Employee Plan, CV Bank Employee Plan, CVB
Benefit Arrangement, CV Bank Benefit Arrangement or CVB or CV Bank which
could result in liability to such CVB Employee Plan, CV Bank Employee Plan,
CVB Benefit Arrangement, CV Bank Benefit Arrangement or CVB or CV Bank, other
than routine claims for benefits, and CVB is not aware of any basis for any
such legal action, proceeding or investigation.
(9) Each CVB Benefit Arrangement or CV Bank Benefit
Arrangement which is a group health plan (within the meaning of such term
under Section 4980B(g)(2) of the Code) materially complies and has materially
complied with the requirements of Section 601 through 608 of ERISA or Section
4980B of the Code
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governing continuation coverage requirements for employee-provided group
health plans. Each such CVB Benefit Arrangement or CV Bank Benefit
Arrangement does not provide coverage to retired or former CVB or CV Bank
employees, except as required by the aforementioned continuation coverage
requirements.
(10) Except as disclosed in Schedule 2.23.2(10), neither
CVB nor CV Bank has maintained any CVB Employee Plan, CV Bank Employee Plan,
CVB Benefit Arrangement, or CV Bank Benefit Arrangement pursuant to which any
benefit or other payment will be required to be made by CVB or CV Bank or
pursuant to which any other benefit will accrue or vest in any director,
officer, contingent worker or employee of CVB or CV Bank as a result of the
consummation of the transactions contemplated by this Agreement or the
Agreement of Merger.
(11) Except as disclosed in Schedule 2.23.2(11), each of
the CVB Employee Plans, CV Bank Employee Plans, CVB Benefit Arrangements, CV
Bank Benefit Arrangements can be terminated by CVB or CV Bank without
liability or any additional contribution to such CVB Employee Plan, CV Bank
Employee Plan, CVB Benefit Arrangement, or CV Bank Benefit Arrangement or the
payment of any additional compensation or amount or the additional vesting or
acceleration of any benefits.
2.24. LOAN SERVICING PORTFOLIO. Except as set forth in Schedule
2.24, neither CVB nor CV Bank services loans owned in whole or in part by
other persons.
2.25. FILINGS. Since December 31, 1995, CVB and CV Bank have
filed all reports, registrations, statements and filings, together with any
amendments required to be made with respect thereto, that were required to be
filed with the SEC, the Commissioner, the Federal Deposit Insurance
Corporation (the "FDIC"), the FRB or any other Governmental Authority
pursuant to Applicable Law. All such reports, registrations, statements and
filings are collectively referred to herein as the "CVB Filings." Upon
request by Belvedere and subject to applicable legal restrictions, CVB will
promptly provide to Belvedere all CVB Filings filed by CVB since December 31,
1995, together with copies of any orders or other administrative actions
taken in connection with such CVB Filings. As of their respective filing or
mailing dates, each of the CVB Filings (i) was true and complete in all
material respects (or was amended so as to be so promptly following discovery
of any discrepancy); and (ii) complied in all material respects with all of
the statutes, rules and regulations enforced or promulgated by the
Governmental Authority with which it was filed (or was amended so as to be so
promptly following discovery of any noncompliance), and none contained any
untrue statement of a material fact or omitted 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. CVB's
and CV Bank's Audited Financial Statements and all other financial statements
of CVB and CV Bank contained in any such CVB Filings were prepared in
accordance with GAAP or RAP, except as stated therein, and fairly presented
the financial position of CVB or CV Bank as of the dates thereof and the
results of its operations, cash flows and changes in shareholders' equity for
the periods then ended.
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2.26. HAZARDOUS SUBSTANCES. Except as set forth on Schedule 2.26:
2.26.1. Except for ordinary and necessary quantities of
cleaning, pest control and office supplies, and other small quantities of
Hazardous Substances that are used in the ordinary course of the respective
businesses of CVB or CV Bank and in compliance with applicable Environmental
Laws, or ordinary rubbish, debris and nonhazardous solid waste stored in
garbage cans or bins for regular disposal off-site, or petroleum contained in
motor vehicles in their ordinary operation on any of the CVB Properties (as
defined below), neither CVB nor CV Bank has generated, used, manufactured,
treated, transported, stored (in tanks or otherwise), released or threatened
to release, or disposed of Hazardous Substances other than as permitted by
and only in compliance with Applicable Law. "Environmental Laws" shall mean
and include any and all laws, statutes, ordinances, rules, regulations,
orders, or determinations of any Governmental Authority pertaining to health
or to the environment, or otherwise regulating any toxic, corrosive,
carcinogenic, or other hazardous material, substance, or waste, including,
without limitation, the Federal Water Pollution Control Act, as amended,
33 U.S.C. 1251 et seq., the Clean Air Act, as amended, 42 U.S.C. 7401 et
seq., the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, 42 U.S.C. 9601, et seq. ("CERCLA"), the Occupational
Safety and Health Act of 1970, as amended, the Resource Conversion and
Recovery Act of 1976, as amended, 42 U.S.C. 6901 et seq., ("RCRA"), the
Hazardous Materials Transportation Act of 1975, as amended, 49 U.S.C. 1801,
ET SEQ., the Safe Drinking Water Act, as amended, 42 U.S.C. 300f et seq., and
the Toxic Substances Control Act, as amended, 15 U.S.C. 2601 et seq. To
CVB's or to CV Bank's knowledge, no Hazardous Substances have been generated,
used, manufactured, stored, released, or threatened to be released on, in,
under, above, or from any real property which is now or has been previously
owned, or which is currently or during the past three years was leased, by
CVB or CV Bank, including OREO (collectively, the "CVB Properties"), or to
CVB's or CV Bank's knowledge, on or in any real property in which CVB or CV
Bank now holds any security interest, mortgage or other lien or interest
("CVB Collateralizing Real Estate"), except for (i) matters disclosed on
Schedule 2.26; (ii) ordinary and necessary quantities of cleaning, pest
control and office supplies used and stored in compliance with applicable
Environmental Laws, or ordinary rubbish, debris and nonhazardous solid waste
stored in garbage cans or bins for regular disposal off-site, or petroleum
contained in motor vehicles in their ordinary operation on such CVB
Properties; and (iii) such releases, emissions, disposals or deposits which
constituted a violation of an Environmental Law but did not have a material
adverse effect on the CVB Property involved, any other real property, any
person, or the environment (including without limitation ground water, plant
and animal life, and other natural resources), and would not result in the
incurrence or imposition of any liability, expense, penalty or fine against
either CVB or CV Bank in excess of $25,000 individually or in the aggregate.
No activity has been undertaken on any of the CVB Properties and to the
knowledge of CVB or CV Bank no activities have been or are being undertaken
on any of the CVB Collateralizing Real Estate, that would cause or contribute
to:
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(1) any of the CVB Properties or CVB Collateralizing Real
Estate becoming a treatment, storage or disposal facility within the meaning
of RCRA or any similar state law or local ordinance;
(2) the generation or a release or threatened release of
any Hazardous Substances under circumstances which would violate any
Environmental Laws; or
(3) the discharge of Hazardous Substances into any soil,
subsurface water or ground water or into the air, or the dredging or filling
of any waters, that would require a permit or any other approval under any
Environmental Law, the cumulative effect of which would have a material
adverse effect on the CVB Property or CVB Collateralizing Real Estate
involved, any other real property, any person, or the environment (including
without limitation ground water, plant and animal life, and other natural
resources).
2.26.2. To the knowledge of CVB or CV Bank, there are not,
and never have been, any underground or aboveground storage tanks located in
or under any of the CVB Properties or any of the CVB Collateralizing Real
Estate.
2.26.3. Neither CVB nor CV Bank has received any written or
verbal notice of any pending or threatened claims, investigations,
administrative proceedings, litigation, regulatory hearings or requests or
demands for remedial or responsive actions or for compensation, with respect
to any of the CVB Properties or CVB Collateralizing Real Estate, alleging
noncompliance with or violation of any Environmental Law or seeking relief
under any Environmental Law and none of the CVB Properties or CVB
Collateralizing Real Estate is listed on the United States Environmental
Protection Agency's National Priorities List of Hazardous Waste Sites, or, to
the knowledge of CVB or CV Bank, any other list, schedule, log, inventory or
record of hazardous waste sites maintained by any federal, state or local
agency.
2.26.4. As used throughout this Agreement "Hazardous
Substances" shall mean any material or substance which is (i) defined as a
"hazardous waste," "extremely hazardous waste" or "restricted hazardous
waste" under Sections 25115, 25117 or 25122.7, or listed pursuant to Section
25140, of the California Health and Safety Code Division 20, Chapter 6.5
(Hazardous Waste Control Law); (ii) defined as a "hazardous substance" under
Section 25316 of the California Health and Safety Code, Division 20, Chapter
6.8 (Carpenter-Presley-Tanner Hazardous Substance Account Act); (iii) defined
as a "hazardous material," "hazardous substance," or "hazardous waste" under
Section 25501 of the California Health and Safety Code, Division 20, Chapter
6.95 (Hazardous Materials Release Response Plans and Inventory); (iv) defined
as a "hazardous substance" under Section 25281 of the California Health and
Safety Code, Division 20, Chapter 6.7 (Underground Storage of Hazardous
Substances); (v) petroleum or any fraction thereof, any petroleum product and
by-product, gasoline or crude oil; (vi) asbestos or asbestos containing
materials; (vii) listed under Article 9 or defined as hazardous or extremely
hazardous pursuant to Article 11 of Title 22 of the
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California Administrative Code, Division 4, Chapter 20; (viii) designated as
a "hazardous substance" pursuant to Section 311 of the Federal Water
Pollution Control Act (33 U.S.C. 1317); (ix) defined as a "hazardous waste"
pursuant to Section 1004 of the RCRA; (x) defined as a "hazardous substance"
pursuant to Section 101 of CERCLA;, (xi) defined under all other existing
and/or currently proposed federal, state and local laws, ordinances, rules,
regulations, orders, requirements, and decrees (in each case having the force
of law) regulating, relating to, or imposing liability or standards of
conduct concerning any hazardous, toxic or dangerous waste, substance or
material; or (xii) any substance, product, waste or other material of any
nature whatsoever which may give rise to liability (A) under any of the
statutes or regulations described in clauses (i) through (xi) above; or (B)
under any reported decisions of any state or federal court having
jurisdiction over CVB, CV Bank or any portion of the CVB Properties or CVB
Collateralizing Real Estate.
2.27. POWERS OF ATTORNEY. No power of attorney or similar
authorization given by CVB or CV Bank is presently in effect or outstanding.
2.28. YEAR 2000 COMPLIANCE.
2.28.1. CVB and CV Bank have each been and are each
devoting their commercially reasonable best efforts and financial and human
resources, internally and with their respective computer hardware and
software vendors, service providers and customers, to address fully: (i) the
ability to (a) handle date data before and during the twenty-first century;
and (b) accurately process, provide and/or receive (including, without
limitation, calculating, comparing and sequencing) date data before and
during the twenty-first century; and (c) respond to two-digit year date data
in a manner that resolves any ambiguity as to a century (collectively, the
"Date Handling"); and (ii) the development of contingency plans in the event
that the Date Handling cannot be accommodated adequately and properly.
2.28.2. CVB and CV Bank have each been and are each using
and devoting commercially reasonable efforts and financial and human
resources to comply fully with all regulations and guidances promulgated or
issued by the Federal Financial Institutions Examination Council and or any
Governmental Authority that is a member thereof and has supervisory
jurisdiction over CVB or CV Bank (the "Required Compliance").
2.28.3. CVB and CV Bank have each been and are each in full
compliance with all applicable disclosure requirements of all Governmental
Authorities concerning its obligations to disclose fully the efforts it has
undertaken and is undertaking for, and the ability to, accommodate adequately
and properly the Date Handling and to adhere to the Required Compliance.
2.29. ACCURACY AND CURRENT STATUS OF INFORMATION FURNISHED.
2.29.1. The representations and warranties made by CVB and
CV Bank hereby or in the Schedules attached hereto contain no statements of
fact which are
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untrue or misleading, or omit any material fact which is necessary under the
circumstances to prevent the statements contained herein or in such Schedules
from being misleading. CVB hereby covenants that it shall, not later than
the 15th day of each calendar month between the date hereof and the Closing
Date, amend or supplement the Schedules prepared and delivered pursuant to
this Article 2 to ensure that the information set forth in such Schedules
accurately reflects the then-current status of CVB and CV Bank. CVB and CV
Bank shall further amend or supplement the Schedules as of the Closing Date
if necessary to reflect any additional changes in the status of CVB or CV
Bank. No amendment or supplement of the Schedules required by the preceding
two sentences shall affect the conditions to the obligations of CVB and CV
Bank to consummate the transactions contemplated by this Agreement, and any
and all changes or additions contained in any such amendment or supplement
shall be considered in determining whether such conditions have been
satisfied.
2.29.2. Notwithstanding anything set forth elsewhere in
this Agreement, including, but not limited to, the representation of
Belvedere and the California Fund set forth in Section 3.7 hereof, no due
diligence examination of CVB or CV Bank conducted by or on behalf of
Belvedere and the California Fund, either prior or subsequent to execution of
this Agreement, shall have any effect whatsoever on the representations of
CVB or CV Bank in this Section 2 or in any other section of this Agreement.
2.30. FACTS AFFECTING REGULATORY APPROVALS OR CONSENTS. There is
no fact, event or condition applicable to CVB or CV Bank which will, or
reasonably could be expected to, adversely affect the likelihood of securing
the Regulatory Approvals.
2.31. VOTE REQUIREMENT. The affirmative vote of the holders of a
majority of the issued and outstanding shares of CVB Common Stock entitled to
vote on the record date for the meeting of shareholders of CVB at which the
Merger will be considered is the only vote of any class or series of CVB
capital stock necessary to approve the Agreement, the Agreement of Merger,
and the transactions contemplated herein and therein.
2.32. EFFECTIVE DATE OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. Each representation, warranty, covenant and agreement of CVB and
CV Bank set forth in this Agreement shall be deemed to be made on and as of
the date of this Agreement and as of the Closing Date, except for those
representations and warranties which expressly are made as of a specified
date, which representations and warranties shall be deemed made on and as of
such date.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF BELVEDERE AS GENERAL
PARTNER OF THE CALIFORNIA FUND AND OF CMC
Belvedere as general partner of the California Fund and CMC each
represents and warrants to CVB as follows:
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3.1. ORGANIZATION; CORPORATE POWER, ETC. The California Fund is a
California limited partnership, CMC is a California corporation, and both
entities are duly organized, validly existing and in good standing under the
laws of the State of California and have all requisite power and authority to
own, operate and lease their respective properties and assets and to carry on
their respective businesses as presently conducted. Belvedere and the
California Fund are bank holding companies registered under the BHCA. The
California Fund and CMC have all requisite power and authority to enter into
this Agreement and, subject to receipt of the Regulatory Approvals, to
perform their respective obligations hereunder with respect to the
consummation of the transactions contemplated hereby. Neither the scope of
the business of the California Fund or CMC, nor the location of any of their
respective properties requires that the California Fund or CMC be licensed or
qualified to do business in any jurisdiction other than the State of
California. CMC is a wholly-owned subsidiary of the California Fund.
3.2. AUTHORIZATIONS AND APPROVALS; BINDING OBLIGATION.
3.2.1. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, have been duly
authorized and approved by all necessary action on the part of Belvedere as
the general partner of the California Fund and by CMC. This Agreement has
been duly executed and delivered by Belvedere as the general partner of the
California Fund and by CMC and, subject to receipt of the Regulatory
Approvals, constitutes the legal, valid and binding obligation of the
California Fund and CMC, enforceable in accordance with its terms (except as
may be limited by bankruptcy, insolvency, moratorium, reorganization or
similar laws affecting the rights of creditors generally and the availability
of equitable remedies). The Agreement of Merger will, upon receipt of all
necessary Regulatory Approvals and of approval of CMC's shareholder and upon
due certification, execution, acknowledgment and filing thereof in accordance
with Applicable Law, be the valid and binding obligation of CMC, enforceable
in accordance with its terms (except as may be limited by bankruptcy,
insolvency, moratorium, reorganization or similar laws affecting the rights
of creditors generally and the availability of equitable remedies). Except
for the Regulatory Approvals and approval of the shareholder of CMC, no other
approvals or consents from any person are necessary for Belvedere as the
general partner of the California Fund or of CMC to enter into and perform
this Agreement or for CMC to enter into and perform the Agreement of Merger
and to merge with CVB.
3.2.2. Neither the execution and delivery by Belvedere as
the general partner of the California Fund nor by CMC of this Agreement or
the execution and delivery by CMC of the Agreement of Merger nor, subject to
the receipt of the Regulatory Approvals, the consummation of the transactions
contemplated herein or therein, or compliance by the California Fund or CMC
with the provisions hereof or thereof, will (i) conflict with or result in a
breach of any provision of the Limited Partnership Agreement of the
California Fund or the Articles of Incorporation and Bylaws of CMC; (ii)
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,
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indenture, franchise, license, permit, agreement or other instrument or
obligation to which the California Fund or CMC is a party, or by which the
California Fund, CMC or any of their respective properties or assets are
bound, except where such breach or default would not have a material adverse
effect on the ability of the California Fund or CMC to perform their
obligations under this Agreement or to consummate the transactions
contemplated by this Agreement; or (iii) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to the California Fund or CMC.
3.3. LITIGATION. There are no actions, suits, arbitrations or
administrative or other proceedings or investigations pending, or to
Belvedere's or the California Fund's knowledge, threatened against the
California Fund or CMC before any court, governmental body, commission, board
or administrative officer, bureau or agency, whether foreign, federal, state
or local, seeking to prevent or challenging in any other manner the
consummation of the transactions contemplated hereby, the Merger, or the
legality of such transactions or the Merger. Neither the California Fund nor
CMC is subject to any order, writ, injunction or decree of any person which
would have the effect set forth above.
3.4. PROXY STATEMENT AND APPLICATIONS.
3.4.1. The information furnished by Belvedere as general
partner of the California Fund or CMC with respect to the Proxy Statement,
and if required the Registration Statement, will 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 contained therein not
misleading.
3.4.2. When the applications for Regulatory Approvals,
including all amendments and supplements thereto, to be filed by Belvedere or
the California Fund are accepted for filing, they will, assuming receipt of
all information regarding CVB and CV Bank reasonably requested by Belvedere
from CVB or CV Bank, comply with all Applicable Laws.
3.5. FINANCIAL STATEMENTS. Belvedere has furnished to CVB the
California Fund's audited consolidated balance sheet as of December 31, 1997
and the related consolidated statements of operations, changes in partners'
equity and cash flows for the period from inception (September 11, 1997) to
December 31, 1997 and the related notes thereto, and the accompanying audit
report of Arthur Andersen LLP and, when available, Belvedere will furnish to
CVB California Fund's audited consolidated balance sheet as of December 31,
1998 and the related consolidated statements of operations, changes in
partners' equity and cash flows for the period for the year ended December
31, 1998 and the related notes thereto, and the accompanying audit report of
Arthur Andersen LLP ("the California Fund's Audited Financial Statements").
The California Fund's Audited Financial Statements were, and will be,
prepared in accordance with GAAP, except as disclosed in the notes thereto
and present fairly the financial position of the California Fund as of the
date thereof and the results of its statements of operations, changes in
partners' equity and cash flows for the period then ended. The California
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Fund's Audited Financial Statements do not, and will not, contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements contained therein not misleading.
3.6. FACTS AFFECTING REGULATORY APPROVALS OR CONSENTS. There is
no fact, event or condition applicable to the California Fund or CMC which
will, or reasonably could be expected to, adversely affect the likelihood of
securing the Regulatory Approvals.
3.7. DUE DILIGENCE REVIEW. Belvedere as the general partner of
the California Fund , and its representatives, have conducted a due diligence
examination of CVB and CV Bank and have been provided access to CVB's and CV
Bank 's officers and professional advisors.
3.8. ACCURACY; COMPLETENESS OF INFORMATION. The representations,
warranties and other statements of the California Fund and CMC contained in
this Agreement are true and correct in all material respects and the
California Fund and CMC have not failed to state any material fact necessary
to make such representations, warranties and other statements not misleading
in light of the circumstances in which they are made.
ARTICLE 4. COVENANTS
4.1. ACCESS.
4.1.1. Belvedere shall have the right, on reasonable notice
and during ordinary business hours, to examine through its agents, auditors
and attorneys all of the books, records and properties of CVB and CV Bank,
including but not limited to all loan, investment, accounting, property and
legal records and files. Such examination shall be made in a manner that
will not unreasonably interfere with the conduct of CVB's or CV Bank's
business. CVB and CV Bank shall provide adequate space and facilities, to the
end that such examination shall be completed expeditiously, completely and
accurately. In furtherance of the foregoing, prior to the Closing Date,
Belvedere shall have the right to examine CVB's and CV Bank 's records with
respect to its loan portfolio on a monthly basis.
4.1.2. Belvedere shall retain in confidence and shall
require its employees, consultants, professional representatives and agents
to retain in confidence, all information gained thereby, and shall not reveal
it to anyone except as may be necessary for the accomplishment of the
purposes of such examination and the consummation of the transactions
provided for hereby. In the event the Merger provided for hereby is not
consummated for any reason, Belvedere shall not, directly or indirectly: (i)
utilize for its own benefit any Proprietary Information (as hereinafter
defined) or (ii) disclose to any person any Proprietary Information, except
as such disclosure may be required in connection with this Agreement or by
law. "Proprietary Information" shall mean all confidential business
information concerning the pricing, costs, profits and plans
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for the future development of business, and the identity, requirements,
preferences, practices and methods of doing business of specific customers or
otherwise relating to the business and affairs of CVB and CV Bank, other than
information which (A) was otherwise known by Belvedere or the California Fund
or (B) is in the public domain when received or thereafter enters the public
domain through no action of Belvedere or the California Fund. In the event
the Merger is not consummated for any reason, Belvedere shall return to CVB
or CV Bank, as the case may be, (without retaining copies thereof) any and
all documents or other written, photocopied, mechanically or electronically
stored information including summaries, notes, or abstracts of information or
copies thereof obtained in the course of such examination.
4.1.3. Until the Closing Date, a representative of
Belvedere shall be invited to attend, in person, each meeting of the Boards
of Directors of CVB and CV Bank and of CV Bank's Directors Loan Committee;
provided, however, that such representatives shall be excused during (i) any
discussion regarding the Merger or the transactions contemplated by this
Agreement, (ii) any discussion regarding trade secrets or proprietary rights,
or (iii) the conduct or discussion of any business requiring the advice of
counsel when the presence of such representatives would have the effect of
waiving the attorney-client privilege
4.2. NEGATIVE COVENANTS OF CVB AND CV BANK PRIOR TO CLOSING.
Between the date hereof and the Effective Time.
4.2.1. CVB and CV Bank each agrees not to conduct its
business other than in the normal and customary manner and in accordance with
safe and sound banking practices.
4.2.2. Neither CVB not CV Bank shall, without the prior
written consent of the California Fund, take any of the following actions,
provided, however, that in the event that CVB or CV Bank has requested in
writing the prior written consent of Belvedere to take one or more of the
following actions and Belvedere has not notified CVB within five (5) Business
Days after actual receipt by the California Fund of such written request from
CVB or CV Bank, as the case may be, that Belvedere declines to provide such
written consent, Belvedere shall be deemed to have consented to such action:
(1) carry on its business except in substantially the
same manner as heretofore conducted or introduce any new method of management
or operation with respect to its business and properties, except in a manner
consistent with prior practice and in the ordinary course of business;
(2) amend, modify or, except as they may be terminated in
accordance with their terms, terminate any Understanding or default in the
performance of any of its obligations under any Understanding where such
action could have a Material Adverse Effect;
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(3) terminate or unilaterally fail to renew any existing
insurance or bonding coverage;
(4) amend, modify, terminate or fail to renew or preserve
its business organization, material rights, franchises, permits and licenses,
or take any action which would jeopardize the continuance of the goodwill of
its customers where such action could have a Material Adverse Effect;
(5) enter into any Understanding, except (i) deposits
incurred and short-term debt securities (obligations maturing within one
year) issued in the ordinary course of business and consistent with prior
practice, and liabilities arising out of, incurred in connection with, or
related to the consummation of this Agreement; and (ii) loan sales in the
ordinary course of business, provided that no commitment to sell loans shall
extend beyond the Effective Time;
(6) make any loan or other extension of credit, or enter
into any commitment to make any loan or other extension of credit, to any
director, officer, employee or five percent shareholder, except in accordance
with existing practice or policy;
(7) except in accordance with safe and sound banking
practices and consistent with prior practice or as required by any existing
contract, grant any general or uniform increase in the rates of pay of
employees or employee benefits or any increase in salary or employee benefits
of any officer, employee or agent or pay any bonus to any person;
(8) sell, transfer, mortgage, encumber or otherwise
dispose of any assets or any liabilities, except in accordance with safe and
sound banking practices and consistent with prior practice or as required by
any existing contract or for ordinary repairs, renewals or replacements or as
contemplated by this Agreement;
(9) make its credit underwriting policies, standards or
practices relating to the making of loans and other extensions of credit, or
commitments to make loans and other extensions of credit, less stringent than
those in effect on December 31, 1998;
(10) make any capital expenditures or commitments with
respect thereto, except those in accordance with safe and sound banking
practices which do not exceed $25,000 individually or $50,000 in aggregate;
(11) except as provided by Sections 1.2 and 1.5 and 1.11
of this Agreement, make special or extraordinary payments to any person other
than as contemplated and as disclosed in this Agreement or Appendices and
Schedules hereto as of the date hereof;
(12) except for transactions in accordance with safe and
sound banking practices, make any material investments, by purchase of stock
or securities,
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contributions to capital, property transfers, purchases of any property or
assets or otherwise, in any other individual, corporation or other entity;
(13) compromise or otherwise settle or adjust any
assertion or claim of a deficiency in taxes (or interest thereon or penalties
in connection therewith) or file any appeal from an asserted deficiency, or
amend any federal, foreign or state tax return or report or make any tax
election, or change any method or period of accounting unless required by
GAAP or Applicable Law
(14) except as otherwise directed by Belvedere, terminate
any plan or enter into any new employment agreement, severance agreement,
salary continuation agreement or other employee benefit arrangement,
including granting any stock options, stock appreciation rights or other
equity based compensation benefit, or modify any employment agreement,
severance agreement, salary continuation agreement or other employee benefit
arrangement in effect on the date of this Agreement;
(15) amend its Bylaws or Articles of Incorporation;
(16) declare or pay any cash dividends or make any other
distributions in respect of CVB Common Stock, except as consistent with past
practices; or
(17) agree to take or make any commitment to take any
actions prohibited by this Section 4.2.
4.2.3. Neither CVB nor CV Bank shall take any action which
would or is reasonably likely to (i) adversely affect the ability of
Belvedere, the California Fund, CVB, or CV Bank to obtain any necessary
Regulatory Approvals (ii) adversely affect the ability of CVB or CV Bank to
obtain any consents referred to in Section 4.6.2 or 4.6.3, (iii) adversely
affect the ability of CVB, CV Bank, the California Fund or CMC to perform
their respective covenants and agreements under this Agreement or the
Agreement of Merger, or (iv) result in any of the conditions to the Merger
set forth in Article 5 not being satisfied.
4.2.4. NEGOTIATIONS WITH OTHER PARTIES. Neither CVB nor CV
Bank shall, nor shall it authorize or knowingly permit any of its
representatives, directly or indirectly, to entertain, solicit or encourage,
or participate in any discussions or negotiations with, or provide any
information to, any corporation, partnership, person or other entity or group
(other than Belvedere, the California Fund and their representatives)
concerning any Acquisition Proposal (as hereinafter defined) other than the
Acquisition Proposal set forth in this Agreement. CVB and CV Bank shall
notify the California Fund immediately in the manner set forth in Section 7.2
if any such inquiry or Acquisition Proposal is received by CVB or CV Bank,
including the terms thereof. For purposes of this Agreement "Acquisition
Proposal" means any (i) proposal pursuant to which any corporation,
partnership, person or other entity or group would acquire or participate in
a merger or other business combination involving CVB or CV Bank; (ii)
proposal by which any corporation, partnership, person or other entity or
group would acquire the right to
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vote five percent or more of the capital stock of CVB or CV Bank entitled to
vote thereon for the election of directors, other than persons designated as
proxy holders by CVB's Board of Directors; (iii) acquisition of the assets of
CVB or CV Bank other than in the ordinary course of business; (iv)
acquisition of in excess of five percent of the outstanding capital stock of
CVB or CV Bank, other than as contemplated by this Agreement; or (v) any
other reorganization or recapitalization of CVB or CV Bank..
4.2.4.1 The foregoing Section 4.2.4 shall not be construed
to prohibit the Board of Directors of CVB from taking any action if such
Board determines in good faith and upon written advice of counsel, that such
action is required for such Board to comply with its fiduciary obligations.
4.3. AFFIRMATIVE COVENANTS OF CVB AND CV BANK PRIOR TO CLOSING.
Between the date hereof and the Effective Time, CVB or CV Bank, as the case
may be, shall do the following:
4.3.1. Use its commercially reasonable best efforts, or
cooperate with others, to expeditiously bring about the satisfaction of the
conditions specified in Article 5 hereof;
4.3.2. Use and devote 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, contingent workers and
others having business relationships with it;
4.3.3. Use and devote its commercially reasonable best
efforts and financial and human resources, internally and with its computer
hardware and software vendors, service providers and customers, to address
fully (a) (i) the ability to adequately and properly accommodate the Date
Handling; and (ii) the development of contingency plans in the event that the
Date Handling cannot be accommodated adequately and properly; (b) use and
devote its commercially reasonable best efforts and financial and human
resources to adhere fully to the Required Compliance; and (c) use and devote
its commercially reasonable best efforts and financial and human resources to
be in full compliance with all applicable disclosure requirements of all
Governmental Authorities concerning its obligations to disclose fully the
efforts it has undertaken and is undertaking for, and the ability to,
accommodate adequately and properly the Date Handling and to adhere to the
Required Compliance.
4.3.4. CERTAIN LOANS AND OTHER EXTENSIONS OF CREDIT. CVB
and CV Bank will promptly inform Belvedere of the amounts and categories of
any loans, leases or other extensions of credit that have been classified by
any bank regulatory authority, or any internal or outside consultant or
reviewer, or are deemed by CVB or CV Bank to require special attention
pursuant to its internal policies (collectively "Classified Credits"). In
addition, CVB and CV Bank will furnish to Belvedere, as soon as practicable,
and in any event within seven days after receipt by CVB's or CV Bank's
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Board of Directors, as the case may be, schedules, including the following:
(a) Classified Credits; (b) nonaccrual credits; (c) accrual exception credits
that are delinquent 90 or more days and have not been placed on nonaccrual
status; (d) participating loans and leases, stating, with respect to each,
whether it is purchased or sold, the loan or lease type, and the originating
unit; (e) loans or leases (including any commitments) by CVB or CV Bank to
any director, officer at or above vice president level, or shareholder
holding five percent or more of the capital stock of CVB or CV Bank; (f)
letters of credit; (g) loans or leases charged off during the previous month;
(h) loans or leases written down during the previous month; and (i) OREO or
assets owned, stating with respect to each its type.
4.3.5. Advise Belvedere promptly in writing of any material
adverse change known to it including, but not limited to, any matter which
could have a Material Adverse Effect, or of any matter which would make the
representations and warranties set forth in Article 2 hereof not true and
correct in any material respect at the Closing or in the event it determines
that the Merger will not be consummated because of its inability to meet any
of the conditions set forth in Article 5 hereof;
4.3.6. Keep in full force and effect all of its existing
permits and licenses;
4.3.7. Prepare, file and actively prosecute an application
for membership in the Federal Reserve System for CV Bank;
4.3.8. Use its commercially reasonable best efforts to
maintain insurance or bonding coverage on all properties for which it is
responsible and on its business operations; and carry not less than the same
coverage for fidelity, public liability, personal injury, property damage and
other risks equal to that which is now in effect; and notify Belvedere in
writing promptly of any facts or circumstances which could affect its ability
to maintain such insurance or bonding coverage;
4.3.9. Perform its material contractual obligations and not
become in material default on any of such obligations;
4.3.10. Duly observe and conform to all legal requirements
applicable to its business;
4.3.11. Duly and timely file all reports and Returns
required to be filed with any Governmental Authority, unless any extensions
have been duly granted by such authority;
4.3.12. Maintain its assets and properties in good
condition and repair, normal wear and tear excepted;
4.3.13. Promptly advise Belvedere 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 (as defined in Rule 13d-3
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promulgated by the Securities and Exchange Commission (the " SEC") pursuant
to the Securities Exchange Act of 1934, as amended, (the "Exchange Act") of
control of five percent or more of the CVB Common Stock prior to the record
date fixed for the CVB shareholders' meeting or any adjourned meeting thereof
to approve the transactions contemplated herein;
4.3.14. Charge off all loans, receivables and other assets,
or portions thereof, deemed by it to be uncollectible in accordance with
GAAP, RAP, Applicable Law, or classified as "loss" or as directed by any
Governmental Authority or any internal or outside consultant or reviewer
retained by it; and maintain its allowance for credit losses at a level which
is adequate to provide for all known and reasonably expected losses on assets
outstanding and other inherent risks in its loan portfolio;
4.3.15. Furnish to Belvedere, promptly upon request, (i) a
copy of any report submitted to CVB's or CV Bank 's Board of Directors, as
the case may be, and access to the working papers related thereto, and copies
of other operating or financial reports prepared for management and access to
the working papers thereto; provided, however, that it need not furnish
Belvedere communications of its legal counsel regarding its rights against
and obligations to the California Fund and/or CMC under this Agreement; (ii)
copies of all reports, renewals, filings, certificates, statements and other
documents filed with or received from the FDIC, the Commissioner or any other
Governmental Authority; (iii) monthly unaudited statements of its condition
and statements of operations; (iv) its quarterly unaudited statements of
condition and statements of operations and statements of changes in
shareholders' equity, in each case prepared in a manner consistent with GAAP
or RAP; and (v) a monthly classified assets "Special Asset List" specifying
such information and prepared in a manner which is consistent with past
practice. The statements regarding reserves in each Special Asset List shall
be made in reference to the loan loss reserve calculation methodology of CVB
and CV Bank. Each of the financial statements delivered pursuant to this
Section 4.3.15, except as stated therein, shall be prepared in accordance
with GAAP and RAP, except that such financial statements may omit statements
of cash flows and footnote disclosures required by GAAP and RAP. Each of the
financial statements delivered pursuant to this Section 4.3.15 shall be
accompanied by a certificate of the Chief Executive Officer and the Chief
Financial Officer of CVB or CV Bank to the effect that such financial
statements fairly present its financial condition and results of operations
for the periods covered, and reflect all adjustments (which consist only of
normal recurring accruals) necessary for a fair presentation;
4.3.16. CVB and CV Bank agree that through the Effective
Time, as of their respective dates, (i) all CVB Filings will be true and
complete in all material respects; and (ii) each CVB Filing will comply in
all material respects with all of the Applicable Laws enforced or promulgated
by the Governmental Authority 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 will be made, not
misleading. Any financial statement contained in any of such CVB Filings that
is intended to present the
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financial position of CVB will fairly present the financial position of CVB
during the periods involved, and will be prepared in accordance with GAAP or
RAP, except as stated therein;
4.3.17. Maintain adequate reserves for contingent
liabilities in accordance with GAAP or RAP;
4.3.18. Promptly notify Belvedere of the filing of any
litigation, governmental or regulatory action, or similar proceeding or
notice of any claims against it or any of their respective assets;
4.3.19. Advise Belvedere as to the amount and terms of any
commitments to make loans or other extensions of credit;
4.3.20. Advise the California Fund as to any employee or
contingent worker resignations or terminations other than in the ordinary
course of business.
4.3.21. ACCOUNTANTS. Promptly upon request of Belvedere,
CVB and CV Bank will ask their independent accountants to permit Belvedere or
its representatives to review and examine the work papers relating to CVB's
and CV Bank's Audited Financial Statements for, and other accounting records
and Returns related to, the years ended December 31, 1997, 1996 and 1995, and
permit such independent accountants to discuss with Belvedere any matter
relating to the audits, accounting records and Returns of CVB. In addition,
CVB will make available to Belvedere copies of each management letter or
other letter delivered to it by its independent accountants in connection
with such financial statements or relating to any review by its independent
accountants of the internal controls of CVB since January 1, 1993, and CVB
will instruct its independent accountants to make available to Belvedere for
inspection by Belvedere or its representatives all reports and working papers
produced or developed by its independent accountants in connection with their
audits of such financial statements, as well as all such reports and working
papers for any periods for which any tax of CVB has not been finally
determined or barred by applicable statutes of limitation.
4.3.22. SUBMISSION TO CVB SHAREHOLDERS; PREPARATION OF CVB
REGISTRATION STATEMENT AND/OR PROXY STATEMENT:
(1) Not later than 120 days after execution of this
Agreement, unless extended with the consent of Belvedere, CVB shall take all
such actions as may be required to convene a meeting of its shareholders to
consider and vote upon the transactions contemplated hereby and all requisite
matters incident thereto for the approval of its shareholders. CVB shall
recommend by the unanimous approval of its directors that its shareholders
vote in favor of approval of the transactions contemplated hereby and will
use its best efforts to obtain from its shareholders approval of this
Agreement and the Agreement of Merger in accordance with the requirements of
the Corporation Law and all other Applicable Laws. This Section 4.3.22(1)
shall not be construed to require the Board of Directors of CVB to take any
action that such Board
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determines in good faith and upon written advice of counsel, should not be
taken in order for such Board to comply with its fiduciary duties. In
obtaining such approval of shareholders, CVB and its officers and directors
shall comply with applicable provisions of the Exchange Act, and, if
required, the Securities Act of 1933 (the "Securities Act") and all other
Applicable Laws. CVB shall take such measures as Belvedere may reasonably
request to obtain an adequate shareholder response for the approval of this
Agreement and the Agreement of Merger.
(2) CVB shall prepare as soon as practicable after the
date hereof proxy materials for use in connection with such meeting and shall
as soon as practicable thereafter cause such proxy materials to be filed
with, and if necessary, approved by, the DFI. CVB shall cause such proxy
statement to be mailed to the shareholders of CVB (which proxy materials as
so mailed together with any amendments or supplements thereto are herein
referred to as the "Proxy Statement"). If required by the Securities Act,
the Proxy Statement shall be included in a Registration Statement registering
shares of CVB Common Stock to be issued as partial consideration for the
Merger (the "Registration Statement"). CVB shall have responsibility for the
preparation of the Proxy Statement, and if required the Registration
Statement. Belvedere and CMC shall have responsibility for furnishing to CVB
for inclusion in the Proxy Statement, and, if required, the Registration
Statement, information concerning the California Fund or CMC which, in the
opinion of counsel for CVB, is necessary or appropriate in order to comply
with the requirements of the Corporation Law and all other Applicable Laws
and which is not reasonably objectionable to the California Fund's counsel.
CVB shall not submit the proxy materials to the DFI, and if required the
Registration Statement to the SEC, or mail the final proxy materials, without
giving Belvedere and its counsel at least five (5) Business Days to comment
on such proxy materials and CVB shall incorporate therein all reasonable
comments of Belvedere and its counsel.
(3) If the Merger is approved by vote of the holders of a
majority of the issued and outstanding shares of CVB Common Stock, then
within ten (10) days thereafter CVB shall send to each holder of Dissenting
Shares the notice required to be given to record holders of Dissenting Shares
pursuant to Section 1301 of the Corporation Law.
(4) CVB shall obtain (and deliver a copy thereof to
Belvedere), prior to distribution of the Proxy Statement, a written opinion
from Gerry Findley, Inc., dated the date of distribution of the Proxy
Statement (the "Fairness Opinion"), to the effect that the consideration and
other terms of the Merger and this Agreement are fair, from a financial point
of view, to CVB and its shareholders. CVB shall deliver to the California
Fund any correspondence between Gerry Findley, Inc. and CVB relating to any
amendment, modification, withdrawal, disaffirmation of, or in any other
manner relating to, the Fairness Opinion.
4.3.23. OUT-OF-POCKET EXPENSES. CVB shall reimburse CMC
for out-of-pocket costs incurred by CMC in connection with the transactions
contemplated by this Agreement, including, but not limited to, legal and
other costs of due diligence;
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negotiating and preparing this Agreement, preparing and prosecuting
applications in connection with the transactions contemplated by this
Agreement and other corporate activities. The amounts to be reimbursed under
this Section 4.3.23 shall not exceed $100,000, or $125,000 if a Registration
Statement is required..
4.4. CONDUCT OF THE CALIFORNIA FUND PRIOR TO CLOSING. Between the
date hereof and the Effective Time, Belvedere as general partner of the
California Fund shall do the following:
4.4.1. Use its commercially reasonable best efforts, or
cooperate with others, to expeditiously bring about the satisfaction of the
conditions specified in Article 5 hereof;
4.4.2. Use and devote its commercially reasonable efforts
consistent with this Agreement to maintain and preserve intact its present
business organization;
4.4.3. Keep in full force and effect all of its existing
permits and licenses;
4.4.4. Duly observe and conform to all legal requirements
applicable to its business;
4.4.5. Duly and timely file all reports and Returns
required to be filed with any Governmental Authority, unless any extensions
have been duly granted by such authority;
4.4.6. Not take any action which would or is reasonably
likely to (i) adversely affect the ability of Belvedere or the California
Fund, CMC, CVB or CV Bank to obtain any necessary Regulatory Approvals, (ii)
adversely affect the ability of Belvedere and the California Fund to obtain
any consents referred to in Section 4.6.2 or 4.6.3, (iii) adversely affect
the ability of CVB, the California Fund or CMC to perform their respective
covenants and agreements under this Agreement or the Agreement of Merger, or
(iv) result in any of the conditions to the Merger set forth in Article 5 not
being satisfied;
4.4.7. Promptly notify CVB in the event it determines that
the Merger will not be consummated because of its inability to meet any of
the conditions set forth in Article 5 hereof; and
4.4.8. Not reduce the California Funds partners' equity to
less than $300,000 prior to the Closing.
4.5. AFFIRMATIVE COVENANTS OF BELVEDERE AS GENERAL PARTNER OF THE
CALIFORNIA FUND PRIOR TO CLOSING. Between the date hereof and the Effective
Time, Belvedere as General Partner of the California Fund shall do the
following:
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4.5.1. Prepare and promptly file a Change In Control
Application with the California Department of Financial Institutions, and an
Application for Approval to acquire Control of a Bank with the Federal
Reserve Bank of San Francisco; and,
4.5.2. Promptly file the Agreement of Merger and all
supporting documents to the Secretary of State of the State of California.
4.6. MUTUAL COVENANTS OF CVB, CV BANK, BELVEDERE AND THE
CALIFORNIA FUND.
4.6.1. CORPORATE ACTION. Each party promptly shall take or
cause to be taken all necessary action required to carry out the transactions
contemplated in this Agreement and the Agreement of Merger.
4.6.2. REGULATORY APPROVALS. Promptly following execution
of this Agreement, the parties hereto shall prepare, submit and file, or
cause to be prepared, submitted and filed, all applications for approvals and
consents as may be required of any of them, respectively, by Applicable Law
with respect to the transactions contemplated by this Agreement, including,
without limitation, any and all applications required to be filed with the
FRB, the Commissioner and such other Governmental Authorities as the
California Fund or CVB may reasonably believe necessary. Each party shall
cooperate with the other in the preparation of the applications and will
furnish promptly upon request all documents, information, financial
statements or other materials as may be required in order to complete said
applications. Each party shall afford the other a reasonable opportunity to
review all such applications and all amendments and supplements thereto
before filing. CVB, CV Bank, Belvedere and the California Fund each covenants
and agrees that any and all information furnished by it to the other for
inclusion in such applications will not contain any untrue statement of a
material fact and will not 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.
4.6.3. NECESSARY CONSENTS. In addition to the Regulatory
Approvals, the parties hereto shall each apply for and diligently seek to
obtain all other third party consents or approvals which may be necessary for
the consummation of the Merger, including without limitation the written
consent of any lessors of real or personal property which property cannot be
assigned without the written consent of such lessors.
4.6.4. FURTHER ASSURANCES. Belvedere as General Partner of
the California Fund, CV Bank, and CVB each agrees to take such further action
as may reasonably be requested by the other in order to consummate the
transactions contemplated by this Agreement and that are not inconsistent
with the other provisions hereof. This Section 4.6.4 shall survive the
Closing.
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ARTICLE 5. CONDITIONS PRECEDENT TO CONTEMPLATED TRANSACTIONS
5.1. GENERAL CONDITIONS. The obligations of each of the parties
hereto to consummate the transactions contemplated herein are further subject
to the satisfaction, on or before the Closing Date, of the following
conditions precedent:
5.1.1. SHAREHOLDER APPROVAL. The transactions contemplated
hereby shall have received all requisite approvals of the shareholders of CVB.
5.1.2. NO PROCEEDINGS. No legal, administrative,
arbitration, investigatory or other proceeding by any Governmental Authority
shall have been instituted and, at what would otherwise have been the
Effective Time, remain pending by or before a court or any Governmental
Authority to restrain or prohibit the transactions contemplated hereby.
5.1.3. REGULATORY APPROVALS. To the extent required by
Applicable Law, all approvals or consents of any Governmental Authority,
including without limitation those of the FRB and the Commissioner, shall
have been obtained or made for the transactions contemplated hereby without
imposition of any Prohibited Condition. All other statutory or regulatory
requirements for the valid completion of the transactions contemplated hereby
shall have been satisfied, including the expiration of applicable waiting
periods.
5.1.4. PROXY STATEMENT. Copies of the Proxy Statement
shall have been mailed to every shareholder of record of CVB on a record date
not less than twenty days prior to the date of CVB's shareholders' meeting
called to act upon the Merger.
5.1.5. REGISTRATION STATEMENT. If required, the
Registration Statement (including any post-effective amendments thereto)
shall be effective under the Securities Act, and no proceeding shall be
pending or to the knowledge of CVB threatened by the SEC to suspend the
effectiveness of the Registration Statement, and CVB shall have received all
state securities or "Blue Sky" permits or other authorizations, or
confirmations as to the availability of an exemption from the registration or
qualification requirements as may be necessary.
5.2. CONDITIONS TO OBLIGATIONS OF BELVEDERE AND THE CALIFORNIA
FUND. The obligations of Belvedere and the California Fund to effect the
transactions contemplated hereby shall be subject to the following
conditions, any of which, other than Section 5.2.5, may be waived in writing
by Belvedere:
5.2.1. REPRESENTATIONS AND WARRANTIES AND PERFORMANCE OF
COVENANTS. Each of the representations and warranties of CVB set forth
herein shall be true and correct as of the Effective Time in all material
respects, as if made on such date; and CVB shall have performed in all
material respects all of the covenants to be performed by it on or prior to
the Effective Time.
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5.2.2. OPINION OF COUNSEL FOR CVB. The California Fund
shall have received from Gary Steven Findley & Associates, counsel to CVB, an
opinion dated the Effective Time in substantially the form attached hereto as
Appendix C.
5.2.3. AUTHORIZATION OF MERGER. All actions necessary to
authorize the execution, delivery and performance of this Agreement by CVB
and CV Bank and the consummation of the transactions contemplated hereby
shall have been duly and validly taken by the Boards of Directors of CVB and
CV Bank, and CVB and CV Bank shall have full power and right to merge
pursuant to the Agreement of Merger.
5.2.4. DISSENTING SHARES LIMITED TO 10%. Total Dissenting
Shares shall not be greater than ten percent of total outstanding CVB common
stock.
5.2.5. THIRD PARTY CONSENTS. CVB and CV Bank shall have
obtained all consents of other parties to their respective material
mortgages, notes, leases, franchises, agreements, licenses and permits as may
be necessary to permit the transactions contemplated herein to be
consummated, without default, acceleration, breach or loss of rights or
benefits thereunder.
5.2.6. ABSENCE OF CERTAIN CHANGES. As of the Closing Date,
there shall not exist any of the following: (i) any change in the financial
condition, results of operation or prospects of CVB and CV Bank since
December 31, 1998, which individually is or in the aggregate are materially
adverse to CVB or CV Bank, except changes resulting from a change in law, a
change in governmental regulatory practices, a change in GAAP, or a change in
another matter affecting the banking industry generally; or (ii) any damage,
destruction, loss or event materially and adversely affecting the properties,
business or prospects of CVB or CV Bank.
5.2.7. DIRECTOR AGREEMENTS. Each of the CVB Directors
shall have entered into a Director Agreement substantially in the form
attached hereto as Appendix B, and each of the persons executing such
agreement shall have performed in all material respects the obligations to be
performed by him or her thereunder.
5.2.8. AGREEMENT TO NOT EXERCISE STOCK OPTIONS. Each
holder of CVB Stock Options under the CVB Stock Option Plan, shall have,
prior to Execution of this Agreement entered into an Option Termination
Agreement in the form attached to this Agreement as Appendix E, and each
holder of CVB Stock Options under the CVB Stock Purchase Plan shall have,
prior to execution of this Agreement, entered into a Stock Purchase Rights
Amendment Agreement in the form attached to this Agreement as Appendix F.
5.2.9. OFFICERS' CERTIFICATE. There shall have been
delivered to the California Fund on the Closing Date a certificate executed
by the Chief Executive Officer and the Chief Financial Officer of CVB and CV
Bank certifying, to the best of their knowledge, compliance with all of the
provisions of Sections 5.2.1, 5.2.3, 5.2.4, 5.2.5, 5.2.6, 5.2.7, 5.2.8 and
5.2.9 of this Agreement, and that after review of the following documents
(the "Reviewed Documents") that each of the Reviewed Documents fairly,
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accurately and completely represents the relative positions and conditions of
CVB and CV Bank:
5.2.10. VALIDITY OF TRANSACTIONS. The validity of all
transactions herein contemplated, as well as the form and substance of all
opinions, certificates, instruments of transfer and other documents to be
delivered to Belvedere hereunder, shall be subject to the approval, to be
reasonably exercised, of counsel for the California Fund.
5.2.11. OUT-OF-POCKET EXPENSES. CVB shall reimburse all
CMC for all out-of-pocket costs incurred by CMC in connection with the
transactions contemplated by this Agreement, including, but not limited to
the legal and other costs of due diligence; negotiations and preparing this
agreement; preparing and prosecuting applications in connection with the
transactions contemplated by this Agreement and other corporate activities
will be born by CMC and its successor, CVB. The amounts to be reimbursed
under this Section 5.2.11 shall not exceed $100,000, or $125,000 if a
registration statement is required.
5.2.12. FAIRNESS OPINION. A copy of the Fairness Opinion
shall have been delivered to the California Fund prior to the distribution of
the CVB Proxy Statement. The Fairness Opinion shall not have been withdrawn
prior to the Effective Time.
5.2.13. MERGER EXPENSES. CVB's expenses in connection with
the Merger shall be not more than $150,000. CVB's expenses in connection
with the Merger shall include, but not be limited to, consulting, legal and
accounting expenses incurred by CVB during the Merger negotiations and due
diligence examination, and in the preparation of the necessary applications
and the Proxy Statement, and if required the Registration Statement expenses
associated with the rendering of any fairness opinion, fees and expenses paid
or payable to any broker or finder in connection with the transactions
contemplated by this Agreement and any other expenses incurred by CVB under
any other agreement as a result of the consummation of the change in control
of CVB contemplated by this Agreement ("Transaction Expenses"). Transaction
Expenses shall not include any payments made in respect of CVB Stock Options
pursuant to Section 1.4 hereof.
5.2.14. CVB WARRANTS. Pursuant to Section 1.1 of this
Agreement, CVB shall have issued the California Fund Warrants.
5.2.15. CV BANK DIVIDEND. CV Bank shall have declared and
paid the CVB Cash Dividend.
5.2.16. CV Bank shall have prepared, filed and actively
prosecuted an application for membership in the Federal Reserve System.
5.3. CONDITIONS TO OBLIGATIONS OF CVB. The obligations of CVB to
effect the transactions contemplated hereby shall be subject to the following
conditions, any of which, other than Section 5.3.3, may be waived in writing
by CVB:
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5.3.1. REPRESENTATIONS AND WARRANTIES AND PERFORMANCE OF
COVENANTS. Each of the representations and warranties of Belvedere, the
California Fund, and CMC set forth herein shall be true and correct as of the
Effective Time in all material respects, as if made on such date; and the
California Fund and CMC shall have performed in all material respects all of
the covenants to be performed by them on or prior to the Effective Time.
5.3.2. OPINION OF COUNSEL FOR THE CALIFORNIA FUND. CVB
shall have received from Lillick & Charles LLP, counsel to Belvedere, the
California Fund, and CMC, an opinion dated the Effective Time in
substantially the form attached hereto as Appendix D.
5.3.3. AUTHORIZATION OF MERGER. All actions necessary to
authorize the execution, delivery and performance of this Agreement by
Belvedere as general partner of the California Fund and by CMC and the
consummation of the transactions contemplated hereby shall have been duly and
validly taken by the General Partner of the California Fund and the Board of
Directors of CMC, and CMC shall have full power and right to merge pursuant
to the Agreement of Merger.
5.3.4. 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 the California Fund
certifying, to the best of their knowledge, compliance with all of the
provisions of Sections 5.3.1 and 5.3.3 of this Agreement.
5.3.5. VALIDITY OF TRANSACTIONS. The validity of all
transactions herein contemplated, as well as the form and substance of all
opinions, certificates, instruments of transfer and other documents to be
delivered to CVB hereunder, shall be subject to the approval, to be
reasonably exercised, of counsel for CVB.
5.3.6. FAIRNESS OPINION. Prior to solicitation of
shareholder approval, CVB shall have received the Fairness Opinion and the
Fairness Opinion shall not have been withdrawn prior to the Effective Time.
5.3.7. DELIVERY OF PAYMENT. On the Business Day next
preceding the Closing Date, the California Fund shall have delivered
irrevocably to the Payment Agent immediately available funds in an aggregate
amount equal to the amount of $12,800,00 as provided in Section 1.1.
ARTICLE 6. TERMINATION
6.1. TERMINATION OF THIS AGREEMENT.
6.1.1. Notwithstanding that this Agreement and the
Agreement of Merger may have already been approved by the holders of a
majority of the issued and outstanding shares of CVB Common Stock, this
Agreement may be terminated prior to the Effective Time:
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(1) By mutual written consent of the Board of Directors
of CVB and of Belvedere as general partner of the California Fund;
(2) By (i) Belvedere as general partner of the California
Fund immediately upon the expiration of 30 days from the date that Belvedere
has given notice to CVB of a material breach or default by CVB in the
performance of any covenant, agreement, representation, warranty, duty or
obligation hereunder or (ii) CVB immediately upon the expiration of 30 days
from the date that CVB has given notice to Belvedere of a material breach or
default by the California Fund or CMC in the performance of any covenant,
agreement, representation, warranty, duty or obligation hereunder; provided,
however, that no such termination shall be effective if, within such 30-day
period, the breaching or defaulting party shall have corrected and cured the
grounds for the termination as set forth in said notice of termination;
(3) By Belvedere as general partner of the California
Fund or CVB if any Governmental Authority denies or refuses to grant the
Regulatory Approvals required to be obtained in order to consummate the
transactions covered and contemplated by this Agreement without the
imposition of a Prohibited Condition;
(4) By Belvedere as general partner of the California
Fund or CVB if the Merger does not receive the requisite approval of holders
of a majority of the issued and outstanding shares of CVB Common Stock; and
(5) By Belvedere as general partner of the California
Fund if the Board of Directors of CVB approves a transaction (or executes a
letter of intent or other document) pursuant to which any person or entity or
related group of persons or entities acquires, directly or indirectly, record
or beneficial ownership (as defined in Rule 13d-3 promulgated by the SEC
pursuant to the Exchange Act) or control of five percent or more of the
outstanding shares of CVB Common Stock, other than as contemplated herein
6.1.2. Notwithstanding that this Agreement and the
Agreement of Merger may have already been approved by holders of a majority
of the issued and outstanding shares of CVB Common Stock, this Agreement
shall be terminated prior to the Effective Time if any conditions specified
in Article 5 have not been satisfied or waived in writing by the party
authorized to waive such conditions by September 30, 1999 (the "Expiration
Date") unless mutually extended by the parties hereto; provided, however,
that in the event that any conditions set forth in Sections 5.1.3 have not
been satisfied or waived on or before the Expiration Date, either Belvedere
or CVB, acting alone, shall have the right to extend the Expiration Date for
an additional 30-day period by giving written notice to the other party on or
before September 30, 1999.
6.2. EFFECT OF TERMINATION AND SURVIVAL. No termination of this
Agreement under this Article 6 for any reason or in any manner shall release,
or be construed as so releasing, any party hereto from its obligations
pursuant to Sections 1.12, 4.1.2, 6.3, 7.1; 7.2 or 7.19 hereof or from any
liability or damage to the other party hereto arising out of, in connection
with or otherwise relating to, directly or indirectly,
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said party's breach, default or failure in performance of any of its
covenants, agreements, duties or obligations arising hereunder, or any
breaches of any representation or warranty contained herein arising prior to
the date of termination of this Agreement.
6.2.1. LIQUIDATED DAMAGES. The parties have determined
that, in the event the Agreement is terminated by either party under Section
6.1.1(2) or by the California Fund under 6.1.1(5), the terminating party
would suffer damages which would be difficult or impossible to ascertain.
For this reason, the parties have determined by mutual agreement that, in the
event Belvedere as general partner of the California Fund terminates the
Agreement under Section 6.1.1(2)(i) or 6.1.1(5), CVB shall pay the California
Fund on or before the date 90 days after termination, as liquidated damages,
$300,000 in cash; and if CVB terminates the Agreement under Section
6.1.1(2)(ii), the California Fund shall pay CVB on or before the date 90 days
after termination, as liquidated damages, $300,000 in cash. Any such amount
shall bear interest on the unpaid amount thereof from the date due at a rate
equal to The Wall Street Journal prime rate, calculated on a daily basis,
until paid in full.
ARTICLE 7. GENERAL PROVISIONS
7.1. INDEMNIFICATION.
7.1.1. CVB and CV Bank agree to defend, indemnify and hold
harmless Belvedere, the California Fund and CMC, their respective officers
and directors, their respective attorneys and accountants and each person who
controls Belvedere, the California Fund and CMC within the meaning of the
Securities Act from and against any costs, damages, liabilities and expenses
of any nature, insofar as any such costs, damages, liabilities or expenses
arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Proxy Statement, and if
required the Registration Statement, or any amendments or supplements
thereto, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading; provided, however, that CVB
shall not be liable in any such case to the extent that any such cost,
damage, liability or expense arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
the Proxy Statement, and if required the Registration Statement, or
amendments or supplements thereto, in reliance upon and in conformity with
information with respect to the California Fund or CMC furnished to CVB by or
on behalf of Belvedere and the California Fund specifically for use therein.
Notwithstanding the foregoing, this Section 7.1.1 shall be of no further
force or effect if the Merger contemplated by this Agreement is consummated.
7.1.2. The California Fund agrees to defend, indemnify and
hold harmless CVB, CV Bank and their respective officers and directors, its
attorneys, accountants and each person who controls CVB within the meaning of
the Securities Act from and against any costs, damages, liabilities and
expenses of any nature, insofar as any such costs, damages, liabilities or
expenses arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Proxy
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Statement, and if required the Registration Statement, or any amendments or
supplements thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that the California Fund shall not be liable in any such case only
to the extent that any such cost, damage, liability or expense arises out of
or is based upon any untrue statement or alleged untrue statement or omission
or alleged omission made in the Proxy Statement, and if required the
Registration Statement, or amendments or supplements thereto, in reliance
upon and in conformity with information with respect to the CVB or CV Bank or
furnished to Belvedere by or on behalf of CVB or CV Bank specifically for use
therein. Notwithstanding the foregoing, this Section 7.1.2 shall be of no
further force or effect if the Merger contemplated by this Agreement is
consummated.
7.1.3. Promptly after receipt by any party to be indemnified
pursuant to Sections 7.1.1 or 7.1.2 (the "Indemnified Party") of notice of
(i) any claim or (ii) the commencement of any action or proceeding, the
Indemnified Party will give the other party (the "Indemnifying Party")
written notice of such claim or the commencement of such action or
proceeding. The Indemnifying Party shall have the right, at its option, to
compromise or defend, by its own counsel, any such matter involving the
Indemnified Party's asserted liability. In the event that the Indemnifying
Party shall undertake to compromise or defend any such asserted liability, it
shall promptly notify the Indemnified Party of its intention to do so, and
the Indemnified Party agrees to cooperate fully with the Indemnifying Party
and its counsel in the compromise of, or defense against, any such asserted
liability. In any event, the Indemnifying Party shall have the right to
participate in the defense of such asserted liability.
7.2. NOTICES. Unless otherwise specifically permitted by this
Agreement, all notices or other communications required or permitted under
this Agreement shall be in writing, and shall be personally delivered or sent
by registered or certified mail, postage prepaid, return receipt requested,
or sent by telecopy, provided that the telecopy cover sheet contains a
notation of the date and time of transmission, and shall be deemed received:
(i) if personally delivered, upon the date of delivery to the address of the
person to receive such notice; (ii) if mailed in accordance with the
provisions of this Section, two business days after the date placed in the
United States mail; (iii) if mailed other than in accordance with the
provisions of this Section or mailed from outside the United States, upon the
date of delivery to the address of the person to receive such notice; or (iv)
if given by telecopy, when sent. Notices shall be given at the following
addresses, unless changed by notice pursuant to this Section 7.2:
If to the California Fund:
Belvedere Capital Partners, Inc.
One Maritime Plaza, Suite 825
San Francisco, California 94111
Attention: Ronald W. Bachli, Co-Chief
Executive Officer
Fax: (415) 434-9918
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With a copy to:
Lillick & Charles LLP
Two Embarcadero, Suite 2600
San Francisco, California 94111
Attention: R. Brent Faye, Esq.
Fax: (415) 984-8300
If to CMC:
Cerritos Merger Co.
C/O Belvedere Capital Partners, Inc.
One Maritime Plaza, Suite 825
San Francisco, California 94111
Attention: Ronald W. Bachli
Fax: (415) 434-9918
With a copy to:
Lillick and Charles LLP
Two Embarcadero, Suite 2600
San Francisco, California 94111
Attention: R. Brent Faye
Fax: (415) 984-8300
If to CVB and/or CV Bank:
Cerritos Valley Bancorp
12100 Firestone Boulevard
Norwalk, California 90650
Attention: James N. Koury, President
and Chief Executive Officer
Fax: (562) 863-9522
With a copy to:
Gary Steven Findley & Associates
1470 North Hundley Street
Anaheim, California 92806
Attention: Gary Steven Findley, Esq.
Fax: (714) 630-7910
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7.3. COMPLETE AGREEMENT; MODIFICATIONS. This Agreement and
written agreements, if any, entered into concurrently herewith by and between
the parties hereto (i) constitute the parties' entire agreement, including
all terms, conditions, definitions, warranties, representations and
covenants, with respect to the subject matter hereof, (ii) merge all prior
discussions and negotiations between the parties as to the subject matter
hereof, and (iii) supersede and replace all terms, conditions, definitions,
warranties, representations, covenants, agreements, promises and
understandings, whether oral or written, with respect to the subject matter
hereof. This Agreement may not be amended, altered or modified except by a
writing signed by the party to be bound. With regard to such amendments,
alterations or modifications, telecopied signatures shall be effective as
original signatures. Any amendment, alteration or modification requiring the
signature of more than one party may be signed in counterparts.
7.4. FURTHER ACTIONS. Each party agrees to perform any further
acts and execute and deliver any further documents reasonably necessary to
carry out the provisions of this Agreement.
7.5. ASSIGNMENT. Neither party may assign its rights under this
Agreement without the prior written consent of the other party hereto;
provided, however, that the California Fund may assign its rights under this
Agreement to a corporation which is the wholly-owned subsidiary of the
California Community Financial Institutions Fund Limited Partnership.
7.6. SUCCESSORS AND ASSIGNS. Except as explicitly provided herein
to the contrary, this Agreement shall be binding upon and inure to the
benefit of the parties, their respective successors and permitted assigns.
7.7. SEVERABILITY. If any portion of this Agreement shall be held
by a court of competent jurisdiction to be invalid, void or otherwise
unenforceable, the remaining provisions shall remain enforceable to the
fullest extent permitted by law if enforcement would not frustrate the
overall intent of the parties (as such intent is manifested by all provisions
of the Agreement, including such invalid, void or otherwise unenforceable
portion).
7.8. EXTENSION NOT A WAIVER. No delay or omission in the exercise
of any power, remedy or right herein provided or otherwise available to
either party shall impair or affect the right of such party thereafter to
exercise the same. Any extension of time or other indulgence granted to a
party hereunder shall not otherwise alter or affect any power, remedy or
right of any other party, or the obligations of the party to whom such
extension or indulgence is granted except as specifically waived.
7.9. TIME OF ESSENCE. Time is of the essence of each and every
term, condition, obligation and provision hereof.
7.10. NO THIRD PARTY BENEFICIARIES. This Agreement and each and
every provision hereof is for the exclusive benefit of the parties hereto and
not for the benefit of any third party.
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7.11. 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, breach or default in connection with this
Agreement, the prevailing party shall be entitled to recover reasonable
attorney's fees and other costs and expenses incurred in that action or
proceeding, in addition to any other relief to which it may be entitled.
7.12. HEADINGS. The headings in this Agreement are inserted only
as a matter of convenience, and in no way define, limit, extend or interpret
the scope of this Agreement or of any particular provision hereof.
7.13. REFERENCES. A reference to a particular Section of this
Agreement shall be deemed to include references to all subordinate sections,
if any.
7.14. COUNTERPARTS. This Agreement may be signed in multiple
counterparts with the same force and effect as if all original signatures
appeared on one copy; and in the event this Agreement is signed in
counterparts, each counterpart shall be deemed an original and all of the
counterparts shall be deemed to be one agreement.
7.15. APPLICABLE LAW. This Agreement shall be construed in
accordance with, and governed by, the laws of the State of California, except
to the extent preempted by the laws of the United States.
7.16. EFFECT OF DISCLOSURE. Any list, statement, document,
writing or other information set forth in, referenced to or attached to any
Schedule delivered pursuant to any provision of this Agreement shall be
deemed to constitute disclosure for purposes of any other Schedule required
to be delivered pursuant to any other provision of this Agreement.
7.17. PUBLICITY. The parties hereto agree that they will
coordinate on any publicity concerning this Agreement and the transactions
contemplated hereby. Except as may be required by law, no party shall issue
any press release, publicity statement or other public notice relating in any
way to this Agreement or any of the transactions contemplated hereby without
obtaining the prior consent of the other, which consent shall not be
unreasonably withheld.
7.18. KNOWLEDGE OF THE PARTIES. Except in Exhibits C and D, or as
otherwise specified in this Agreement, whenever any statement herein or in
any Schedule, Exhibit, certificate or other documents delivered to any party
pursuant to this Agreement is made "to the knowledge" or "to the best
knowledge" of any party, such statement shall be made to the best knowledge
of such party, after reasonable inquiry of the following officers of such
party: Chief Executive Officer, Chief Financial Officer, Chief Operating
Officer, and, with respect to CV Bank only, Chief Credit Officer.
7.19. REGISTRATION RIGHTS. In the event that CVB registers any of
its securities for sale to the public ("CVB Securities"), whether for its own
account or for the account of other security holders or both (except with
respect to registration statements on Forms S-4, S-8 or another form not
available for registering CVB Securities for sale to
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the public), it will give written notice of its intention to do so to
Belvedere. Upon the written request of Belvedere received by CVB within
twenty (20) days after the giving of any such notice by CVB to register any
of the California Fund's CVB Common Stock (which request shall state the
intended method of disposition thereof), CVB will cause the shares of the
California Fund's CVB Common Stock as to which registration shall have been
so requested to be included in the securities to be covered by the
registration statement proposed to be filed by CVB (the "CVB Registration
Statement"), all to the extent requisite to permit the sale or other
disposition by the California Fund (in accordance with its written request)
of the CVB Common Stock so registered. This Section 7.19 shall survive the
Effective Time.
7.20. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Unless
otherwise expressly stated herein, the representations and warranties made by
the parties to this Agreement, and the respective obligations to be performed
under its terms at or before the Closing Date, shall expire with, and be
terminated and extinguished by the Closing, and no action for breach of such
representations and warranties shall thereafter be brought by any party
hereto.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
on the day and year first above written.
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CVB: CERRITOS VALLEY BANCORP CV Bank: CERRITOS VALLEY BANK
A California Corporation A California Corporation
By:/s/James N. Koury By:/s/ James N. Koury
------------------------------- -------------------------------
James N. Koury James N. Koury
Chief Executive Officer and President Chief Executive Officer and
President
By:/s/ Ellen Toma By: /s/ Ellen Toma
------------------------------- -------------------------------
Ellen Toma Ellen Toma
Secretary Secretary
THE CALIFORNIA FUND: CALIFORNIA COMMUNITY FINANCIAL INSTITUTION
FUND LIMITED PARTNERSHIP
BY: BELVEDERE CAPITAL PARTNERS, INC.
A California Corporation, General Partner
By: /s/ Richard W. Decker, Jr.
-----------------------------------
Richard W. Decker, Jr., President
By: /s/ J. Thomas Byrom
-----------------------------------
J. Thomas Byrom, Secretary
CMC: CERRITOS MERGER CO.
A California Corporation
By:/s/ Richard W. Decker, Jr
-----------------------------------
Richard W. Decker, Jr., President
and Chief Executive Officer
By: /s/ J. Thomas Byrom
-----------------------------------
J. Thomas Byrom, Secretary
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EXHIBIT II
[LETTERHEAD]
February 12, 1999
Members of the Board of Directors
Cerritos Valley Bancorp
12100 Firestone Boulevard
Norwalk, California 90650
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 Cerritos Valley Bancorp,
Norwalk, California ("CVB") of the terms of the proposed merger of Cerritos
Merger Company ("CMC") with and into CVB with CVB shareholders receiving a
combination of cash and shares of CVB Common Stock defined in the Agreement and
Plan of Reorganization and Merger (the "Agreement") entered into as of February
12, 1999 by and among Belvedere Capital Partners, Inc., The California Community
Financial Institution Fund Limited Partnership ("California Fund"), CMC, CVB and
Cerritos Valley Bank ("CV Bank"). Pursuant to the Agreement and subject to the
terms and conditions therein, each share of CVB Common Stock issued and
outstanding immediately prior to the Effective Time shall, on and after the
Effective Time, pursuant to the Agreement and without any further action on the
part of CVB or the holders of CVB Common Stock, be exchanged for and converted
into the right to receive cash in the amount of $13.4871 and 0.5271 shares of
CVB Common Stock. The total number of shares of CVB Common Stock outstanding
immediately prior to and immediately after the Effective Time shall not exceed
991,667. The California Fund shall, upon the Merger, own 543,959 shares of CVB
Common Stock which is in excess of a majority of the outstanding shares of
common stock. A complete description of the Merger is contained in the
Agreement.
As part of its investment banking business, Gerry Findley Incorporated is
continually engaged in the valuation bank, bank holding company and thrift
securities in connection with mergers and acquisitions nationwide. We have
previously provided investment banking and financial advisory services to CVB.
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 CV Bank, including consolidated financial
statements for recent years; (iii) certain other publicly available financial
and other information concerning CVB and CV Bank and the trading markets for the
publicly traded securities of CVB; and (iv) publicly available information
concerning other banks
<PAGE>
Board of Directors - 2 - February 12, 1999
and bank holding companies, the trading markets for their securities and the
nature and terms of certain other merger transactions we believe relevant to our
inquiry. We have held discussions with senior management of CVB concerning past
and current operations, financial condition and prospects.
We have reviewed with the senior managements of CVB 1999 earnings projections
for CVB, as a stand-alone entity, assuming the Merger does not occur. Certain
financial projections for CVB as a stand-alone entity 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 upon the management of
CVB as to the reasonableness of the financial and operating forecasts for 1999
provided to us, and we have assumed that such forecasts and projections reflect
the best currently available estimates and judgements of CVB management. We
have also assumed, without assuming any responsibility for the independent
verification of the same, that the aggregate allowances for loan losses for CVB
are adequate to cover such losses. We have not made or obtained any evaluations
or appraisals of the property of 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 described in the Agreement and
assumed the accuracy of the disclosures set forth in the Agreement. Our opinion
as expressed herein is limited to the fairness, from a financial point of view,
to the holders of the shares of CVB Common Stock of the terms of the Merger and
does not address CVB'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 CVB,
including interest income, interest expense, net interest income, net interest
margin, provision for loan losses, non-interest income, non-interest expense,
earnings, 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 CVB; (ii) the assets and liabilities of
CVB, including the loan and investment 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.
<PAGE>
Board of Directors - 3 - February 12, 1999
Based upon and subject to the foregoing, we are of the opinion as investment
bankers that, as of the date hereof, the terms of the Merger are fair, from a
financial point of view, to the holders of the shares of CVB Common Stock.
The principal of Gerry Findley Incorporated, Gerry Findley, is the father of
Gary Steven Findley, principal of Gary Steven Findley & Associates, attorneys
for CVB.
No principal or affiliate of Gerry Findley Incorporated has any beneficial
ownership of shares of CVB Common Stock
This opinion may not be used or referred to by CVB or quoted or disclosed to any
person in any manner without our prior written consent, with the exception of
submission to the regulatory agencies as part of the applications and included
in the proxy materials provided to shareholders of CVB in relation to approval
of the Merger.
Respectfully,
GERRY FINDLEY INCORPORATED
/s/ Gerry Findley
-------------------
Gerry Findley
<PAGE>
EXHIBIT III
CHAPTER 13 OF
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
SECTION 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.
(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.
<PAGE>
SECTION 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.
SECTION 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.
SECTION 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
2
<PAGE>
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.
SECTION 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.
SECTION 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
3
<PAGE>
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).
SECTION 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.
SECTION 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.
SECTION 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 their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
SECTION 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.
SECTION 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
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
4
<PAGE>
SECTION 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.
SECTION 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 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.
5
<PAGE>
PROXY
CERRITOS VALLEY BANCORP
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. The
undersigned hereby appoints Richard J. Romero and Ellen Toma and each of them
as proxyholders with full power of substitution, to represent, vote and act
with respect to all shares of common stock of Cerritos Valley Bancorp which
the undersigned would be entitled to vote at the Annual Meeting of
Shareholders to be held on Tuesday, AUGUST 17, 1999, at 4:00 p.m., at
Cerritos Valley Bank's principal office located at 12100 Firestone Boulevard,
Norwalk, California or any adjournments thereof, with all the powers the
undersigned would possess if personally present as follows:
1. Approval and adoption of the principal terms of the Agreement and Plan of
Reorganization and Merger by and among Belvedere Capital Partners, Inc., as
general partner of and on behalf of the California Community Financial
Institutions Fund Limited Partnership, Cerritos Merger Co., Cerritos Valley
Bancorp and Cerritos Valley Bank dated as of February 12, 1999, and the
transactions contemplated in the agreement, including the merger of
Cerritos Merger Co. with Cerritos Valley Bancorp and the conversion of each
outstanding share of Cerritos Valley Bancorp common stock into cash in the
amount of $13.4871 and .5271 shares of Cerritos Valley Bancorp common
stock, as further described in the accompanying proxy statement/prospectus
and the agreement which is included as Exhibit I to the proxy
statement/prospectus.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. Election of ten (10) persons to be directors.
Gary R. Einstein Pricilla F. Koury James M. McGinley Garo V. Minassian
JoAnn San Paolo Shibley Horaney James N. Koury Seymour J. Melnik, M.D.
Richard J. Romero Ellen Toma
[ ] FOR ALL NOMINEES LISTED ABOVE [ ] WITHHOLD AUTHORITY
(except as marked to the contrary below)
(INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name on the space below:)
- -------------------------------------------------------------------------------
3. Approval of the amendment of Cerritos Valley Bancorp's Bylaws to change
the range for the number of directors from eight to eleven, to eight to
fifteen.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Transaction of such other business as may properly come before the
meeting and any adjournment or adjournments thereof.
<PAGE>
PLEASE SIGN AND DATE BELOW
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE PROPOSALS. The Proxy
confers authority to vote and shall be voted in accordance with such
recommendation unless a contrary instruction is indicated, in which case, the
shares represented by the Proxy will be voted in accordance with such
instruction. IF NO INSTRUCTION IS SPECIFIED WITH RESPECT TO THE MATTERS TO BE
ACTED UPON, THE SHARES REPRESENTED BY THE PROXY WILL BE VOTED IN ACCORDANCE WITH
THE RECOMMENDATIONS OF MANAGEMENT. IF ANY OTHER BUSINESS IS PRESENTED AT THE
MEETING, THIS PROXY CONFERS AUTHORITY TO AND SHALL BE VOTED IN ACCORDANCE WITH
THE RECOMMENDATIONS OF MANAGEMENT.
(Please date this Proxy and sign your name exactly as it appears on your stock
certificate. Executors, administrators, trustees, etc., should give their full
title. If a corporation, please sign in full corporate name by the president or
other authorized officer. If a partnership, please sign in partnership name by
an authorized person. All joint owners should sign.)
[ ] I DO [ ] I DO NOT EXPECT TO ATTEND THE MEETING.
------------------------------------
(Number of Shares)
------------------------------------
(Please Print Your Name)
------------------------------------
(Please Print Name of Joint Owner)
------------------------------------
(Date)
------------------------------------
(Signature of Shareholder)
------------------------------------
(Signature of Shareholder)
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE REVOKED
PRIOR TO ITS EXERCISE BY FILING WITH THE SECRETARY OF CERRITOS VALLEY BANCORP AN
INSTRUMENT REVOKING THIS PROXY OR A DULY EXECUTED PROXY BEARING A LATER DATE, OR
BY ATTENDING THE MEETING AND VOTING IN PERSON.
<PAGE>
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation and Bylaws of Registrant provide for
indemnification of agents including directors, officers and employees to the
maximum extent allowed by California law including the use of an indemnity
agreement. Registrant's Articles further provide for the elimination of director
liability for monetary damages to the maximum extent allowed by California law.
The indemnification law of the State of California generally allows
indemnification in matters not involving the right of the corporation, to an
agent of the corporation if such person acted in good faith and in a manner such
person reasonably believed to be in the best interests of the corporation, and
in the case of a criminal matter, had no reasonable cause to believe the conduct
of such person was unlawful. California law, with respect to matters involving
the right of a corporation, allows indemnification of an agent of the
corporation, if such person acted in good faith, in a manner such person
believed to be in the best interests of the corporation and its shareholders;
provided that there shall be no indemnification for: (i) amounts paid in
settling or otherwise disposing of a pending action without court approval; (ii)
expenses incurred in defending a pending action which is settled or otherwise
disposed of without court approval; (iii) matters in which such person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the court in which the proceeding is or was pending shall determine that
such person is entitled to be indemnified; or (iv) other matters specified in
the California General Corporation Law.
Registrant's Bylaws provide that Registrant shall to the maximum extent
permitted by law have the power to indemnify its directors, officers and
employees. Registrant's Bylaws also provide that Registrant shall have the power
to purchase and maintain insurance covering its directors, officers and
employees against any liability asserted against any of them or incurred by any
of them, whether or not Registrant would have the power to indemnify them
against such liability under the provisions of Registrant's Bylaws. Each of the
directors and executive officers of Registrant has an indemnification agreement
with Registrant that provides that Registrant shall indemnify such person to the
full extent authorized by the applicable provisions of California law and
further provide advances to pay for any expenses which would be subject to
reimbursement.
ITEM 21. EXHIBITS
2 Agreement and Plan of Reorganization and Merger by and among Belvedere
Capital Partners, Inc., as General Partner and on behalf of the
California Financial Institutions Fund Limited Partnership, Cerritos
Merger Co., Cerritos Valley Bancorp and Cerritos Valley Bank dated as
of February 12, 1999 attached as Exhibit I to the proxy
statement/prospectus contained in Part I of this Registration Statement
*3.1 Articles of Incorporation as amended of Registrant
*3.2 Bylaws as amended of Registrant
*4.1 Specimen stock certificate of Registrant
5.1 Opinion re: legality
*10.1 Stock Purchase Agreement for James N. Koury
- ---------------
* FILED WITH THE ORIGINAL REGISTRATION STATEMENT.
II-1
<PAGE>
ITEM 21. EXHIBITS (CONTINUED)
*10.2 Stock Purchase Amendment Agreement for James N. Koury
*10.3 Cerritos Valley Bank Deferred Compensation Agreement for James N. Koury
*10.4 Amendment to Cerritos Valley Bank Deferred Compensation Agreement for
James N. Koury
*10.5 Cerritos Valley Bancorp 1993 Stock Purchase Plan
*10.6 Cerritos Valley Bancorp 1993 Stock Option Plan and form of incentive
stock option and nonqualified stock option agreement
*10.7 Form of indemnification agreement
*10.8 Director's Agreement form for directors of Registrant
11. Statement re: computation of per share earnings is included in Note K
to the financial statements to the proxy statement/prospectus included
in Part I of this Registration Statement
21. Sole Subsidiary of the Registrant is Cerritos Valley Bank, a California
state-chartered banking corporation
23.1 Consent of Counsel is included with the opinion re: legality as
Exhibit 5 to this Registration Statement
23.2 Consent of Grant Thornton LLP as accountants for Registrant
23.3 Consent of Vavrinek, Trine, Day & Co., LLP as accountants for
Registrant
23.4 Consent of Gerry Findley, Inc. as financial advisor to Registrant is
included with the fairness opinion included as Exhibit II to the proxy
statement/prospectus included in Part I of this Registration Statement
- ---------------
* FILED WITH THE ORIGINAL REGISTRATION STATEMENT.
b) Financial Statement Schedules
None
c) OPINIONS
Opinion of Gerry Findley, Inc. (included as Exhibit II in the
proxy statement/prospectus in Part I herein)
II-2
<PAGE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) 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;
(iii) 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;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the Registration Statement is on Form S-3 or Form S-8 and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, 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.
(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.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus with is part of the registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that 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.
Registrant undertakes that every prospectus: (i) that is filed pursuant to
paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the 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 the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, 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.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
II-3
<PAGE>
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person of 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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Norwalk, California, on
July 13, 1999.
CERRITOS VALLEY BANCORP
/S/ JAMES N. KOURY
-------------------------------
James N. Koury, President & CEO
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
date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/S/ JAMES N. KOURY , Director, Principal Executive July 13, 1999
- --------------------------------------- and Principal Financial Officer
James N. Koury
/S/ GARY R. EINSTEIN , Director July 13, 1999
- ----------------------------------------
Gary R. Einstein
/S/ SHIBLEY HORANEY , Director July 13, 1999
- ---------------------------------------
Shibley Horaney
/S/ PRICILLA F. KOURY , Director July 13, 1999
- ---------------------------------------
Pricilla F. Koury
/S/ JAMES M. MCGINLEY , Director July 13, 1999
- ---------------------------------------
James M. McGinley
/S/ SEYMOUR J. MELNIK, M.D. , Director July 13, 1999
- ---------------------------------------
Seymour J. Melnik, M.D.
II-5
<PAGE>
/S/ GARO V. MINASSIAN , Director July 13, 1999
- -----------------------------------------
Garo V. Minassian
/S/ RICHARD J. ROMERO , Director July 13, 1999
- -----------------------------------------
Richard J. Romero
/S/ JOANN SAN PAOLO , Director July 13, 1999
- -----------------------------------------
JoAnn San Paolo
/S/ ELLEN TOMA , Director July 13, 1999
- -----------------------------------------
Ellen Toma
/S/ NAJAM SAIDDUDIN , Principal Accounting July 13, 1999
- ----------------------------------------- Officer
Najam Saiduddin
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
5.1 Opinion re: legality
23.2 Consent of Grant Thornton LLP as accountants for Registrant
23.3 Consent of Vavrinek, Trine, Day & Co., LLP as accountants for
Registrant
<PAGE>
Exhibit 5.1
[LETTERHEAD]
July 13, 1999
Cerritos Valley Bancorp
12100 Firestone Boulevard
Norwalk, California 90650
Re: Registration Statement on Form S-4
Gentlemen:
At your request, we have examined the form of Registration Statement to be filed
with the Securities and Exchange Commission in connection with the registration
under the Securities Act of 1933, as amended, for the offer and sale of up to
1,152,937 shares of your common stock, no par value (the "Cerritos Valley common
stock"). We are familiar with the actions taken or to be taken in connection
with the authorization, issuance and sale of the Cerritos Valley common stock.
It is our opinion that, upon completion of the merger as described in the
agreement, the Cerritos Valley common stock will, upon the issuance and sale
thereof be legally and validly issued and fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to said Registration
Statement.
Respectfully submitted,
GARY STEVEN FINDLEY & ASSOCIATES
By: /s/ Gary Steven Findley
Gary Steven Findley
Attorney at Law
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We have issued our report dated January 29, 1999 (except for Note V, as to which
the date is February 17, 1999), accompanying the consolidated financial
statements of Cerritos Valley Bancorp and Subsidiary contained in the
Registration Statement and Prospectus on Form S-4. We consent to the use of the
aforementioned report in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts."
/s/ Grant Thornton LLP
Los Angeles, California
July 13, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this Registration Statement on Form S-4
for Cerritos Valley Bancorp of our report dated February 28, 1997 relating to
the financial statements of Cerritos Valley Bancorp and Subsidiary for the year
ended December 31, 1996, and to the reference to our Firm under the caption
"Experts" in the Registration Statement.
/s/ Vavrinek, Trine, Day & Co. LLP
Rancho Cucamonga, California
July 13, 1999
