<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1999 Commission File No. 333-79193
CERRITOS VALLEY BANCORP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-4216236
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12100 Firestone Blvd., Norwalk CA 90650
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (562) 868-3221
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
As of October 31, 1999, 997,938 shares of Registrant's no par value common stock
were outstanding.
<PAGE>
CERRITOS VALLEY BANCORP
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Earnings for the three months
and nine months ended September 30, 1999 and 1998 5
Consolidated Statement of Stockholders' Equity for the
year ended December 31, 1998 and nine months
ended September 30, 1999 6
Consolidated Statements of Cash flows for the nine months
ended September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8K
</TABLE>
2
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1999 (Unaudited) 1998
---------------- ----------------
<S> <C> <C>
Cash and due from banks $ 8,615,745 $ 8,610,342
Federal funds sold 22,825,000 6,453,000
---------------- ----------------
Cash and cash equivalents 31,440,745 15,063,342
Investment securities
Available for sale 35,360,755 40,487,055
Held to maturity - fair value of $5,090,728 and
$3,298,498 in 1999 and 1998, respectively 5,084,861 3,278,770
Loans receivable, net of allowance for loan losses
of $1,179,330 and $1,237,680 in 1999 and
1998, respectively 61,811,230 59,834,047
Loans held for sale 1,129,089 1,284,631
Bank premises and equipment 1,767,614 1,920,206
Accrued interest receivable 1,177,902 932,216
Prepaid expenses and other assets 3,462,856 3,034,092
---------------- ----------------
Total assets $141,235,052 $125,834,359
================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
1999 (Unaudited) 1998
---------------- ----------------
<S> <C> <C>
Liabilities
Deposits
Checking noninterest-bearing $ 47,434,660 $ 33,314,390
Checking interest-bearing and savings 24,525,686 24,873,713
Money market accounts 12,045,711 7,942,643
Time certificates of deposit under $100,000 14,156,577 13,480,453
Time certificates of deposit $100,000 and over 17,547,998 19,120,417
---------------- ----------------
Total deposits 115,710,632 98,731,616
FHLB advances 12,133,772 12,650,837
Treasury, tax and loan 1,217,099 -
Obligations under capital lease 234,563 250,790
Accrued expenses and other liabilities 2,081,220 1,784,466
---------------- ----------------
Total liabilities 131,377,286 113,417,709
Commitments and contingencies - -
Stockholders' equity
Contributed capital
Common stock - authorized, 20,000,000 shares, no
par value; 997,938 and 991,667 shares issued
and outstanding in 1999 and 1998, respectively 6,150,869 6,540,813
Additional paid in capital stock - warrants 1,740,800 -
Retained earnings 2,605,462 5,848,246
Accumulated other comprehensive income (639,365) 27,591
---------------- ----------------
Total stockholders' equity 9,857,766 12,416,650
---------------- ----------------
Total liabilities and stockholders' equity $ 141,235,052 $ 125,834,359
================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Cerritos Valley Bank and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST REVENUES
Loans $1,677,131 $1,483,518 $4,933,367 $4,380,886
Investment Securities 594,723 511,778 1,755,014 1,416,522
Federal Funds Sold 179,380 183,858 382,128 408,276
Interest Earning Deposits 1,557 1,556 4,619 4,620
---------- ---------- ---------- ----------
TOTAL INTEREST REVENUES 2,452,791 2,180,710 7,075,128 6,210,304
INTEREST EXPENSE
Deposits 588,322 570,459 1,735,500 1,650,630
TT&L/FHLB Borrowing 188,106 114,358 555,627 176,450
Capital Lease 5,643 6,056 17,248 18,457
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 782,071 690,873 2,308,375 1,845,537
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,670,720 1,489,837 4,766,753 4,364,767
PROVISION FOR LOAN LOSSES - 100,000 130,000 250,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION 1,670,720 1,389,837 4,636,753 4,114,767
FOR LOAN LOSSES
NON INTEREST REVENUES
Service Charges on Deposit Accounts 295,874 281,873 897,235 790,809
Other Service Charges and Income 96,445 91,641 308,347 269,296
Gain on Sale of Real Estate Owned 14,681 14,681
Gain on Sale of Loans 365 22,160 1,262 79,224
---------- ---------- ---------- ----------
TOTAL NON INTEREST REVENUES 392,684 410,355 1,206,844 1,154,010
NON INTEREST EXPENSE
Employee 628,879 556,775 1,637,853 1,622,585
Operating 310,156 469,285 1,364,750 1,367,708
Occupancy 89,414 97,584 269,558 203,695
Professional 177,365 82,686 433,776 252,075
---------- ---------- ---------- ----------
TOTAL NON INTEREST EXPENSE 1,205,814 1,206,330 3,705,937 3,446,063
EARNINGS BEFORE INCOME TAXES 857,590 593,862 2,137,660 1,822,714
INCOME TAX PROVISION 311,782 221,660 874,904 688,399
---------- ---------- ---------- ----------
NET EARNINGS $ 545,808 $ 372,202 $1,262,756 $1,134,315
========== ========== ========== ==========
Basic earnings per share $ 0.55 $ 0.37 $ 1.27 $ 1.13
========== ========== ========== ==========
Diluted earnings per share $ 0.51 $ 0.34 $ 1.19 $ 1.05
========== ========== ========== ==========
Basic weighted average shares outstanding 1,000,753 1,000,000 996,854 1,000,000
========== ========== ========== ==========
Dilutive weighted average shares outstanding 1,063,292 1,084,333 1,062,700 1,084,333
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Cerritos Valley Bank and Subsidiary
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Year Ended December 31, 1998 and the Nine Months
Ended September 30, 1999
<TABLE>
<CAPTION>
Accumulated
Number Add'l other
of shares Common Paid in Cap comprehensive Retained
outstanding stock Warrants income earnings Total
----------- ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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 avaliable for
sale, net of tax benefit
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
Net changes in unrealized gain
on securities avaliable for
sale, net of tax benefit
of $409,657 - - - (666,956) - (666,956)
Net earnings for the period - - - - 1,262,756 1,262,756
------------
Comprehensive income 595,800
Stock options exercised 11,000 84,567 - - - 84,567
Redemption of stock and
deemed dividend (548,688) (11,149,340) - - (4,505,540) (15,654,880)
Issuance of stock and warrants (net
of issuance costs of $ 384,371) 543,959 10,674,829 1,740,800 - - 12,415,629
----------- ------------ ---------- ------------ ------------ ------------
Balance - September 30, 1999 997,938 $ 6,150,869 $1,740,800 $ (639,365) $ 2,605,462 $ 9,857,766
=========== ============ ========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
6
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------------
1999 (Unaudited) 1998
---------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,262,756 $ 1,134,315
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Net amortization/accretion of
discount/premium on securities (3,354) 128,417
Depreciation 193,381 183,195
Deferred income tax (benefit) expense (371,332) (87,402)
Other losses and (gains) (1,202) (93,905)
Purchases of loans held for sale - (4,475,500)
Sales and payments received on loans held for sale 156,744 4,559,353
(Increase) decrease in interest receivable (245,686) (129,743)
Net (increase) decrease in other assets (57,431) (78,522)
Net increase in other liabilities 296,754 129,783
Provision for loan losses 130,000 250,000
----------- -----------
Net cash provided by
operating activities 1,360,630 1,519,991
Cash flows from investing activities:
Proceeds from maturities and principal collected
on sales of securities:
Available for sale 8,926,663 18,987,744
Held to maturity 1,374,451 531,285
Purchases of investment securities:
Available for sale (4,466,281) (21,208,827)
Held to maturity (3,178,226) (809,100)
Net (increase) decrease in loans (2,107,183) (14,105,613)
Purchases of premises and equipment (40,790) (184,888)
Proceeds from sale of other real estate owned - 84,437
----------- -----------
Net cash provided by (used in) investing
activities 508,634 (16,704,962)
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE>
Cerritos Valley Bancorp and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 (Unaudited) 1998
<S> <C> <C>
Cash flows from financing activities:
Net increase in interest and
noninterest bearing accounts, savings and
money market accounts $ 17,875,311 $ 7,990,342
Net (decrease) increase in time certificates
of deposit (896,295) 3,309,317
Payments made under capital lease obligations (16,227) (12,180)
Net increase in treasury, tax and loan note (517,065) (660,518)
Net increase in FHLB advances 1,217,099 7,553,368
Proceeds from issuance of stock and warrants,
net of issuance costs of $384,371 12,415,629 -
Payment for the redemption of stock and deemed dividend (15,654,880) -
Proceeds from exercise of stock options 84,567 -
------------ ------------
Net cash provided by
financing activities 14,508,139 18,180,329
------------ ------------
Increase (decrease) in cash and
cash equivalents 16,377,403 2,995,358
Cash and cash equivalents at beginning of year 15,063,342 15,115,817
------------ ------------
Cash and cash equivalents at end of year $ 31,440,745 $ 18,111,175
============ ============
Supplemental disclosures of cash flow information:
Interest paid $ 2,332,877 $ 1,791,439
Income taxes paid $ 1,108,600 $ 925,216
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
Cerritos Valley Bancorp and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by Cerritos Valley Bancorp (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the results of operations for the periods covered
have been made. Certain information and note disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principals have been condensed or omitted pursuant to such rules and
regulations. Management believes that the disclosures are adequate to make the
information presented not misleading.
The financial position at September 30, 1999, and the results of
operations for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results of operations that may be expected for the
year ending December 31, 1999. These unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles on a basis consistent with the Company's audited financial
statements, and these interim financial statements should be read in conjunction
with the Company's audited financial statements and notes thereto included in
the Company's Form S-4 for the year ended December 31, 1998.
NOTE 2 -MERGER AND ACQUISITION
On September 7, 1999, the shareholders of the Company approved a
merger and reorganization under the terms of the 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 Partner (the "Fund"), Cerritos Merger Company, Cerritos Valley
Bancorp and Cerritos Valley Bank (the "Agreement") which became effective
September 13, 1999. Under the Agreement, each outstanding share of the
Company stock was converted into cash in the amount of $13.4871 and 0.5271
shares of Company stock. As a result of this merger, the Company redeemed
shares from and paid dividends to its shareholders and issued 81,000 warrants
to acquire additional shares of stock. Immediately following the completion
of the merger, there were approximately 1,071,937 shares of Cerritos Valley
Bancorp common stock outstanding, consisting of 543,959 shares issued to the
Fund in the merger and the remainder issued to the existing shareholders. In
addition the Company purchased 75,000 shares of its outstanding stock from
James N. Koury, President and Chief Executive Officer of the Company,
pursuant to a stock purchase rights amendment agreement. Upon completion of
the merger, the Fund owned 54.56% of the Company.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Cerritos Valley Bancorp (the "Company"), holding company for Cerritos Valley
Bank (the "Bank"), recorded net earnings of $545,808, or $0.55 basic earnings
per share, for the third quarter of 1999, compared with net earnings of
$372,202, or $0.37 per share, for the third quarter of 1998. For the nine months
ended September 30, 1999, the Company had net earnings of $1,262,756, or $1.27
basic earnings per share, compared to $1,134,315, or $1.13 basic earnings per
share for the same period in 1998. The Company had diluted earnings per share
for the third quarter of 1999 of $0.51 per share and $1.19 diluted earnings per
share for the nine months ended September 30, 1999.
The increase in net earnings for the three months and nine months ended
September 30, 1999 were primarily the result of an increase in average interest
earning assets of $17,080,000 and $20,807,000 for the three and nine months
ended September 30, 1999, a decline in yields on interest earning assets, and
emphasis on expense control.
Loans
The following table sets for the amount of loans outstanding by category and the
percentage of each category to the total loan portfolio.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------------ ------------------------
Amount % of Total Amount % of Total
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Commercial $22,536,608 35.73% $22,665,354 37.08%
Construction 7,607,152 12.06% 6,918,400 11.32%
Real estate 30,507,009 48.36% 28,714,130 46.97%
Installment 2,430,051 3.85% 2,830,655 4.63%
------------------------ -----------------------
Subtotal 63,080,820 100.00% 61,128,539 100.00%
Less:
Deferred loan fees (90,260) (56,812)
Allowance for loan losses (1,179,330) (1,237,680)
------------ ------------
Net loans $61,811,230 $59,834,047
============ ============
</TABLE>
It is management's intent to continue to increase interest income with the
addition of loans which meet the Bank's underwriting criteria. In accordance
with management's credit administration and regulatory policy, loans are placed
on non-accrual status when the collection of principal or interest is 90 days or
more past due, unless the loan is well secured and in the process of collection
or in the process of renewal.
10
<PAGE>
The following table sets forth information about non-performing assets 90 days
or more past due and continuing to accrue and certain ratios.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
(in thousands)
Nonperforming loans (1) $ - $ 199
Other real estate owned - -
------------------ -----------------
Total nonperforming assets $ - $ 199
------------------ -----------------
Accruing loans 90 days or more past due $ 1,326 $ 517
------------------ -----------------
Nonperforming loans to total loans 0.00% 0.33%
Nonperforming assets
to total loans 0.00% 0.33%
to total assets 0.00% 0.16%
</TABLE>
(1) Nonperforming loans and nonperforming assets do not include
accruing loans 90 days or more past due.
The Company maintains the allowance for loan losses at a level considered
adequate by management to provide for potential loan losses. Although the
Company maintains its allowance for loan losses at a level which it considers to
be adequate to provide for potential losses based on presently known conditions,
there can be no assurances that such losses will not exceed the estimated
amounts, thereby adversely affecting future results of operations. The
calculation of the adequacy of the allowance for loan losses, and therefore the
requisite amount of provision for loan losses, is based on several factors,
including underlying loan collateral values, delinquency trends and historical
loan loss experience, all of which can change without notice based upon economic
conditions and other factors.
The following table sets forth information about the allowance for loan losses.
11
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Balance at beginning of period $ 1,237,680 $ 1,155,839
Provision for loan losses 130,000 310,000
Loan charge-offs (206,662) (309,888)
Recoveries on loans previously charged-off 18,312 81,729
------------------ -----------------
Net charge-offs (recoveries) (188,350) (228,159)
------------------ -----------------
Balance at end of period $ 1,179,330 $ 1,237,680
================== =================
Loans outstanding at end of period $ 63,080,820 $ 61,128,539
Average loans outstanding during period $ 65,921,499 $ 57,081,000
Net charge-offs (recoveries) to average loans
outstanding -0.29% -0.40%
Allowance for loan losses:
to total loans 1.87% 2.17%
to nonperforming loans 0.00% 621.95%
to nonperforming assets 0.00% 621.95%
</TABLE>
Management considers a loan to be impaired when, based upon available
information and current events, it believes that it is probable the Company will
be unable 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, the loan's market price, or the fair value of the collateral if
the loan is collateral dependent. Impairment is recognized by the establishment
of a valuation allowance equal to the excess of the Company's recorded
investment in the loan over its measured value.
The Company had no impaired loans as of September 30, 1999. The average recorded
investment in impaired loans during the first nine months of 1999 was
approximately $40,441 and no income was recorded utilizing the cash basis and
accrual basis method of accounting.
The Company had approximately $199,000 in impaired loans as of December 31,
1998. The allowance for loan losses related to impaired loans at December 31,
1998 was $149,434. The average recorded investment in impaired loans was
$380,000 during the year 1998. Total cash collected on impaired loans during the
year ended December 31, 1998 was $173,848, of which $169,417 was credited to the
principal balance outstanding on such loans and $4,431 was recognized as
interest income.
12
<PAGE>
The Company had approximately $292,497 in impaired loans as of September 30,
1998. The allowance for loan losses related to impaired loans at September 30,
1998 was $191,101. The average recorded investment in impaired loans was
$366,162 during the first nine months of 1998. Total cash collected on impaired
loans during the first nine months of 1998 was $115,044, of which $113,140 was
credited to the principal balance outstanding on such loans and $1,904 was
recognized as interest income.
Investment Securities
The following table sets forth the amortized cost and fair value of securities
available-for-sale as of September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------------------------
Amortized Estimated
cost Gains Losses fair value
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,497,370 $ 4,190 $ - $ 1,501,560
Obligations of other U.S.
Government agencies
and corporations 26,427,596 - 823,115 25,604,481
Mortgage-backed securities 2,245,139 - 9,987 2,235,152
Obligations of state and
political subdivisions 2,122,810 3,855 14,618 2,112,047
Corporate bonds 4,038,448 - 225,933 3,812,515
Other 95,000 - - 95,000
----------- ----------- ----------- -----------
$36,426,363 $ 8,045 $ 1,073,653 $35,360,755
=========== =========== =========== ===========
<CAPTION>
December 31, 1998
-----------------------------------------------------------------
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>
13
<PAGE>
The amortized cost and fair value of securities held to maturity as of September
30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------------------------
Amortized Estimated
cost Gains Losses fair value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ - $ - $ -
Obligations of other U.S.
Government agencies
and corporations 2,000,000 - 35,640 $1,964,360
Mortgage-backed securities 703,189 6,687 - $ 709,876
Obligations of state and -
political subdivisions 823,772 44,122 9,302 $ 858,592
Corporate bonds - - $ -
Other 1,557,900 - $1,557,900
---------- ---------- ---------- ----------
$5,084,861 $ 50,809 $ 44,942 $5,090,728
========== ========== ========== ==========
<CAPTION>
December 31, 1998
--------------------------------------------------------------
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>
During the nine months ended September 30, 1999, and the year ended December 31,
1998, there were no sales of available-for-sale securities.
14
<PAGE>
Deposits
Total deposits at September 30, 1999 were $115,710,632, an increase of
$16,979,016, or 17.20%, from $98,731,616 at December 31, 1998. The Company
attracts deposits primarily from individuals and businesses within the Company's
primary service area in the Southern California communities of Norwalk, Artesia,
Huntington Park and Glendale. The Company has no brokered deposits, and the
Company's practice is to not purchase brokered deposits.
The following table sets forth the amount of deposits by category and the
percentage of each category to all deposits as of September 30, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
Amount % of Total Amount % of Total
<S> <C> <C> <C> <C>
Checking noninterest $ 47,434,660 40.99% $ 33,314,390 33.74%
Checking interest-bearing and savings 24,525,686 21.20% 24,873,713 25.19%
Money market accounts 12,045,711 10.41% 7,942,643 8.04%
Time certificates of deposit under $100,000 14,156,577 12.23% 13,480,453 13.65%
Time certificates of deposit $100,000 and over 17,547,998 15.17% 19,120,417 19.37%
------------ -------- ------------ --------
$115,710,632 100.00% $ 98,731,616 100.00%
============ ======== ============ =======
</TABLE>
Capital
The Federal Reserve Bank (the "FRB"), the Company's primary regulator, has
established minimum leverage ratio guidelines. For 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.
Risk-based capital standards were implemented on December 31, 1992. Since
December 31, 1992, banking organizations have been expected to meet minimum
ratio for qualifying total capital to risk-weighted assets of 8.0%, 4.0% of
which must be Tier 1 capital. A banking organization's risk-based capital ratios
are obtained by dividing its qualifying capital by its total risk-adjusted
assets and risk-weighted off-balance sheet items.
The Federal Deposit Insurance Act of 1991 contains "prompt corrective action"
provisions pursuant to which insured depository institutions are to be
classified into one of five categories based primarily upon capital adequacy,
ranging from "well-capitalized" to "critically undercapitalized" and which
require, subject to certain exceptions, the
15
<PAGE>
appropriate federal banking agency to take prompt corrective action with
respect to an institution which becomes "undercapitalized" and to take
additional actions if the institution becomes "significantly
undercapitalized" or critically undercapitalized."
The following table presents the capital ratios for the Company and the Bank,
compared with the standards for "well-capitalized" depository institutions
(which standards do not apply to bank holding companies) and the minimum
required capital ratios to be deemed "adequately capitalized" under applicable
federal regulations, as of September 30, 1999.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
---------------------- ----------------------
(in thousands) Amount Ratio Amount Ratio
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Company
Leverage $10,497 7.72% $5,441 4.00%
Tier 1 risk-based 10,497 12.48% 3,363 4.00%
Total risk-based 11,548 13.76% 6,727 8.00%
Bank
Leverage $10,442 7.68% $5,441 4.00%
Tier 1 risk-based 10,442 12.42% 3,363 4.00%
Total risk-based 11,493 13.69% 6,725 8.00%
</TABLE>
As indicated in the above table, the Bank has exceeded all applicable regulatory
capital guidelines at September 30, 1999. 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.
In the third quarter of 1999, the shareholders of the Company approved a
merger and reorganization under the terms of the 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 Partner (the "Fund"), Cerritos Merger Company, Cerritos Valley
Bancorp and Cerritos Valley Bank (the "Agreement"). Under the Agreement, each
outstanding share of the Company stock was converted into cash in the amount
of $13.4871 and 0.5271 shares of Company stock. As a result of this merger,
the Company redeemed shares from and paid dividends to its shareholders and
issued warrants to acquire additional shares of stock. Immediately following
the completion of the merger, there were approximately 1,071,937 shares of
Cerritos Valley Bancorp common stock outstanding, consisting of 543,959
shares issued to the Fund in the merger and the remainder issued to the
existing shareholders. In addition the Company purchased 75,000 shares of its
outstanding stock from James N. Koury, President and Chief Executive Officer
of the Company, pursuant to a stock purchase rights amendment agreement.
Issuance costs associated with the transaction of $384,371 were deducted from
the proceeds of common stock. Total stockholders' equity at September 30,
1999 was $9,857,766 compared to
16
<PAGE>
$12,416,650 at December 30, 1998. The primary difference between total
stockholders' equity is a result of dividends paid to facilitate the
abovementioned merger.
Liquidity
The Company's primary source of liquidity is dividends from the Bank. Dividends
from the Bank to the Company are 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 a pay 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.
The Bank's primary sources of liquidity are federal funds sold to other banks,
the investment securities portfolio and borrowing capacity from the Federal Home
Loan Bank. For nine months ended September 30, 1999, federal funds sold averaged
$10,833,000 compared to $10,175,000 for the same period in 1998. In addition,
securities in the available for sale portfolio can be sold in response to
liquidity needs or used as collateral for advances from the Federal Home Loan
Bank. Securities held to maturity are available for liquidity needs primarily as
collateral. The fair value of securities available for sale and held to maturity
at September 30, 1999 were $35,360,755 and $5,090,728, respectively.
Year 2000 Compliance
The Year 2000 issue presents a very real and significant challenge to the
Company, along with the entire financial services industry. This problem has the
potential to affect a wide range of systems and equipment, including software
and hardware, utilities, communications platforms and devices, and facilities.
The Year 2000 issue relates to the fact that many computer programs used only
two digits to represent a year, such as "98"
17
<PAGE>
to represent "1998," which means that in the Year 2000 such programs could
produce inaccurate or unpredictable results. Such occurrences may have a
material adverse effect on the Company's financial condition, results of
operations, or business as the Company, like most financial organizations, is
significantly subject to the potential Year 2000 issues due to the nature of
financial information.
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 required to assess the
soundness of a bank's internal controls and to identify whether further
corrective action may be necessary to assure and appropriate level of attention
to Year 2000 processing capabilities.
While no one can accurately predict what will happen with the date change to the
year 2000, the Company's management and Board of Directors take the potential
risks seriously, and have been working since early in 1997, and will continue to
work to be prepared for the Year 2000 transition.
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
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 complete.
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 most of its vendors are Year
2000 compliant as of September 30, 1999. 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
18
<PAGE>
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 September 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. After reviewing
the responses from the loan customers, Cerritos Valley Bank classified two
loans with loan balances totaling $849,000 as "high risk," and 28 loans with
balances totaling $8,272,000 as "medium risk." The high risk customers are
being monitored by Cerritos Valley Bank on an ongoing basis.
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 and 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 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
19
<PAGE>
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 was scheduled to take place.
As of September 30, 1999, Cerritos Valley has incurred approximately $74,000 in
Year 2000 costs, which have been expensed as incurred.
Results of Operations
The Company reported consolidated net earnings of $545,808 for the third quarter
of 1999, compared with net earnings of $372,202 for the third quarter of 1998.
Basic earnings per share for the third quarter of 1999 were $0.55 per share
compared to $0.37 for the same quarter of 1998. Diluted earnings per share were
$0.51 per share as compared to $0.34 for the same period in 1998.
For the first nine months of 1999, the Company reported net earnings of
$1,262,756 compared to $1,134,315 for the same period in 1998. Basic earnings
per share were $1.27 and $1.13 for the nine months ended September 30, 1999 and
1998, respectively, and diluted earnings per share were $1.19 and $1.05 for the
same period in 1999 and 1998, respectively.
Net Interest Income
The Company's earnings depend primarily on net interest income, which is the
difference between the interest and fees earned on loans and investments less
the interest paid on deposits and borrowings. For the quarter ended September
30, 1999, net interest income increased 12.1% to $1,670,720 from $1,489,837 for
the same period in 1998. For the nine months ended September 30, 1999 and 1998,
net interest income was $4,766,753 and $4,364,767, respectively. The increase in
net income for the third quarter ended September 30, 1999 as compared to the
same period in 1998, is primarily the result of a 16.38% or $17,080,000 increase
average interest earning assets outstanding during the quarter offset by a
decline in yield of interest-earning assets. The yield on interest-earning
assets declined 54 basis points to 8.08% in the first nine months of 1999
compared to the same period in 1998. The decline in yield is a result of
increased competition for quality loans and the overall growth and change in mix
in the investment and loan portfolios . For the nine months ended September 30,
1999 average interests earning assets grew 21.6% to $117,084,000 as compared to
$96,277,000 for the same period in 1998. For the three and nine months ended
September 30, 1999, the net interest margin (net interest income divided by
average interest-earning assets) was 5.56% and 5.45% respectively, compared to
5.54% and 6.06% for the same respective periods in 1998.
20
<PAGE>
The following tables present the distribution of average assets, liabilities
and shareholders' equity as well as the total dollar amount of interest
income from average interest-earning assets and resultant yields, and the
dollar amounts of interest expense and average interest-bearing liabilities,
expressed both in dollars (000's) and rates for the three months ended
September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1999 September 30, 1998
Average Yield/ Average Yield/
Balance Rate Interest Balance Rate Interest
--------- ---------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Securities $ 40,180 5.94% $ 595 $ 33,896 6.06% $ 512
Loans 66,376 10.13% 1,677 56,537 10.53% 1,483
Federal funds sold 14,726 4.89% 179 13,769 5.36% 184
Interest-earning deposits 95 6.57% 2 95 6.57% 2
--------- ----------------------- ---------
Total interest-earning assets 121,377 8.10% $ 2,453 104,297 8.39% $ 2,181
--------- ----------------------- ---------
Deferred loan fees (104) (112)
Allowance for loan losses (1,179) (1,245)
Noninterest-earning assets
Cash and due from banks 9,527 8,207
Premises and equipment 1,803 1,992
Accrued interest 1,040 677
Other assets 3,392 2,850
--------- ---------
Total assets $ 135,856 $ 116,666
========= =========
Liabilities and Shareholders' Equity
Interest-bearing liabilities
Interest-bearing demand deposits $ 11,630 1.49% $ 43 $ 10,022 1.47% $ 37
Savings and money market deposits 25,785 2.78% 179 20,361 2.51% 127
Time deposits under $100,000 14,383 4.45% 159 12,945 4.91% 158
Time deposits over $100,000 17,934 4.62% 206 19,372 5.13% 249
Other borrowings 13,440 5.61% 188 7,281 6.30% 114
Capital lease 236 9.59% 6 254 9.58% 6
--------- ----------------------- ---------
83,408 3.76% $ 781 70,235 3.95% $ 691
--------- ----------------------- ---------
Noninterest-bearing liabilities
Noninterest-bearing demand
deposits 38,272 33,039
Other liabilites 2,139 1,439
Shareholders' equity 12,037 11,953
--------- ---------
Total liabilities and
shareholders' equity $ 135,856 $ 116,666
========= =========
</TABLE>
The following tables present the distribution of average assets, liabilities
and shareholders' equity as well as the total dollar amount of interest
income from average interest-earning assets and resultant yields, and the
dollar amounts of interest expense and average interest-bearing liabilities,
expressed both in dollars (000's) and rates for the nine months ended
September 30, 1999 and 1998.
21
<PAGE>
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1999 September 30, 1998
Average Yield/ Average Yield/
Balance Rate Interest Balance Rate Interest
--------- ------- --------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Securities $ 40,234 5.83% $ 1,755 $ 31,099 6.09% $ 1,417
Loans 65,922 10.00% 4,933 54,908 10.67% 4,380
Federal funds sold 10,833 4.72% 382 10,175 5.36% 408
Interest-earning deposits 95 6.50% 5 95 6.50% 5
--------- ----------------------- ---------
Total interest-earning assets 117,084 8.08% $ 7,075 96,277 8.62% $ 6,210
--------- ----------------------- ---------
Deferred loan fees (102) (129)
Allowance for loan losses (1,197) (1,200)
Noninterest-earning assets
Cash and due from banks 9,183 8,023
Premises and equipment 1,853 1,999
Accrued interest receivable 994 677
Other assets 3,190 2,855
--------- ---------
Total assets $ 131,005 $ 108,502
========= =========
Liabilities and Shareholders' Equity
Interest-bearing liabilities
Interest-bearing demand deposits $ 11,600 1.47% $ 128 $ 9,853 1.45% $ 107
Savings and money market deposits 24,189 2.69% 487 17,864 2.73% 365
Time deposits under $100,000 14,133 4.49% 475 14,444 4.30% 465
Time deposits over $100,000 18,430 4.68% 646 18,744 5.09% 714
Other borrowings 13,223 5.62% 556 3,828 6.16% 176
Capital lease 241 9.58% 17 258 9.57% 18
--------- ----------------------- ---------
81,816 3.77% $ 2,308 64,991 3.80% $ 1,845
--------- ----------------------- ---------
Noninterest-bearing liabilities
Noninterest-bearing demand deposits 34,840 30,480
Other liabilites 1,965 1,465
Shareholders' equity 12,384 11,566
--------- ---------
Total liabilities and
shareholders' equity $ 131,005 $ 108,502
========= =========
</TABLE>
The Company's net interest income is affected by changes in the amount and mix
of interest-earning assets and interest-bearing liabilities, referred to as
"volume change." It is also affected by changes in yields earned on
interest-earning assets and interest rates paid on interest-bearing deposits and
other borrowed funds, referred to as a "rate change." The following table sets
forth changes in interest income and interest expense for each major category of
interest-earning assets and interest-bearing liabilities, and the amount of
change attributable to volume and rate changes for the three and nine months
ended September 30, 1999 and 1998. The changes due to both rate and volume have
been allocated to rate and volume in proportion to the relationship between
their absolute dollar amounts.
22
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, 1999 and 1998 September 30, 1999 and 1998
Volume Rate Total Volume Rate Total
-------- ----------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest
income:
Securities $ 93 $ (10) $ 83 $ 400 $ (62) $ 338
Loans 252 (58) 194 838 (285) 553
Federal funds sold 12 (17) (5) 25 (51) (26)
Interest-bearing deposits-
banks - - - - - -
------- ------- ------ ------- ------- ------
357 (85) 272 1,263 (398) 865
------- ------- ------ ------- ------- ------
Increase (decrease) in interest
expense:
Interest-bearing demand
deposits 6 - 6 19 1 20
Savings and money market
deposits 37 15 52 127 (6) 121
Time deposits under $100,000 17 (16) 1 (10) 20 10
Time deposits over $ 100,000 (18) (24) (42) (12) (56) (68)
Other borrowings 88 (14) 74 398 (17) 381
Capital lease - - - (1) - (1)
------- ------- ------ ------- ------- ------
130 (39) 91 521 (58) 463
------- ------- ------ ------- ------- ------
Increase (decrease) in net
interest income $ 227 $ (46) $ 181 $ 742 $ (340) $ 402
======= ======= ======= ======= ======= =======
</TABLE>
Interest income represents interest earned on loans, investment securities and
federal funds sold. Interest income increased $272,081 to $2,452,791 for the
three months ended September 30, 1999 from $2,180,710 for the same period in
1998. For the nine months ended September 30, 1999, interest income increased
$864,824, or 13.9%, to $7,075,128 from $6,210,304 for the same period in 1998.
Interest earned on loans increased 13.1% and 11.2% for the three and nine months
ended September 30, 1999 and 1998, respectively. The Company continues to
benefit from modest growth in the loan portfolio and strong liquidity which is
invested in the investment portfolio. Overall, average interest-earning assets
increased $20,807,000, or 21.6%, for the nine months ended September 30, 1999 as
compared to the same period in 1998.
Interest expense represents interest paid on deposits and other borrowings.
Interest expense for the three months ended September 30, 1999 was $782,071
compared to $690,873 for the same period in 1998, an increase of 13.2%. For the
nine months ended September 30, 1999, interest expense increased to $2,308,375
from $1,845,537, or 25.08% for the same period in 1998. The increase in interest
expense for the nine months ended September 30, 1999, is primarily the result of
an increase in TT&L/FHLB borrowings, interest expense for TT&L/FHLB borrowings
increased from $176,450 for
23
<PAGE>
the nine months ended September 30, 1998 to $555,627 for the same period in
1999. TT&L/FHLB borrowings averaged $13,223,000 for the nine months ended
September 30, 1999 compared to $3,828,000 for the same period in 1998.
Provision for Loan Losses
The provision for loan losses is determined by management based upon the
Company's loan loss experience, the performance of loans in the Company's
portfolio, the quality of loans in the Company's portfolio, the evaluation of
collateral for such loans, the economic conditions affecting collectibility of
loans, the prospects and financial condition of the respective borrowers or
guarantors and other such factors which in management's judgment deserve
recognition in the estimation of probable loan losses. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance or to take charge-offs (reductions in the
allowance) in anticipation of losses.
Management allocated $130,000 as a provision for loan losses during the first
nine months of 1999 compared to $250,000 for the same period in 1998. The
decrease in the provision for loan losses in 1999 is in response to management's
assessment of the improvement in the loan portfolio and the resulting decrease
in nonperforming loans. Loans charged off net of recoveries were $188,350 and
$228,159 for the first nine months of 1999 and 1998, respectively. The ratio of
allowance for loan losses to total gross loans was 1.91% at September 30, 1999,
and 2.17% at September 30, 1998.
In management's opinion, the balance of the allowance for loan losses at
September 30, 1999, was sufficient to sustain any foreseeable losses in the loan
portfolio at that time.
Noninterest Revenue
For nine months ended September 30, 1999, noninterest revenue totaled $1,206,844
compared to $1,154,010 for the same period in 1998. The increase was primarily
related to an increase in service charges on deposit accounts and other service
charge and income.
Noninterest Expense
Noninterest expense for the first nine months of 1999, increased to $3,705,937
from $3,446,063 for the same period in 1998. The increase occurred primarily in
Occupancy and Professional expense categories.
Occupancy expense increased $65,863 to $269,558 primarily as a result of the
addition of a new branch location in April 1998. The increase in Professional
expense category is
24
<PAGE>
primarily in legal fees and other professional fees which increased $181,701
from $252,075 for the nine months ended September 30, 1998 to $433,776 for
the same period in 1999. The increase in legal is primarily due to litigation
arising from credit resolution resulting in a decrease in nonperforming
assets.
Income Taxes
For the nine months ended September 30, 1999, the provision for income taxes was
$874,904 compared to $688,399 for the same period in 1998.
Management of the Company is not aware of any trends, events, uncertainties or
recommendations by regulatory authorities that will have or that are reasonably
likely to have a material effect on the liquidity, capital resources or
operations of the Company.
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 of 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
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 49.7% 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.
25
<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 rates.
The following table sets forth the distribution of repricing opportunities of
the Company'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 September 30, 1999. 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 rates
relationships between the repriceable assets and repriceable liabilities are
not necessarily constant. The table should be used only as a guide as to the
possible effect changes in interest rates might have on the net margins of
the Company.
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------------------------------
Over
Three
Months Over
Next Day Through One Year Over
to Three Twelve Through Five
Months Months Five Years Years Total
-------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Federal funds sold $ 22,825 $ - $ - $ - $ 22,825
Taxable investment securities 2,994 - 24,284 9,920 37,198
Nontaxable investment securities 316 100 1,543 1,289 3,248
Loans (1) 31,922 2,358 10,465 19,465 64,210
-------- ------- ------- -------- --------
Total interest-earning assets 58,057 2,458 36,292 30,674 127,481
LIABILITIES:
Savings deposits (2) 34,433 - - - 34,433
Time deposits 18,128 14,027 1,688 - 33,843
Other borrowed funds 1,217 1,000 3,754 - 5,971
-------- ------- ------- -------- --------
Total interest-bearing deposits 53,778 15,027 5,442 - 74,247
-------- ------- ------- -------- --------
Net (interest-bearing liabilities)
interest-earning assets $ 4,279 $(12,569) $ 30,850 $ 30,674 $ 53,234
======== ======== ======== ======== ========
Cumulative net (interest-bearing
liabilities) interest-earning
assets (GAP) $ 4,279 $ (8,290) $ 18,281 $ 61,524 $ 83,908
======== ======== ======== ======== ========
Cumulative GAP as a
percentage of total
interest-earning assets 7.37% -337.27% 50.37% 200.57% 65.82%
======== ======= ======== ======== ========
</TABLE>
(1) Gross loans net of nonaccrual.
(2) Savings deposits include interest-bearing transaction accounts.
26
<PAGE>
Forward-Looking Statements
Certain matters discussed in this Quarterly Report constitute "forward-looking
statements" under Section 27A of the Securities Act and Section 21 E of the
Exchange Act, which involve risks and uncertainties. These "forward-looking
statements" relate to, among other things, operating results of Bank (the
Bank"), level of problem credits, expectations of the business environment in
which the Bank operates, projections of future performance, perceived
opportunities in the market and statements regarding the Bank's mission and
vision, the effect of governmental supervision on the Bank, general or specific
economic conditions, management results in resolving problem credits, the costs
and other effects of legal and administrative proceedings, changes in accounting
policies and practices or in the applications of such policies and practices,
the effects of changes within the Bank's organization, and any activities of
parties with which the Bank has an agreement or understanding. The Bank's actual
results, performance, or achievements may differ significantly from the results,
performance, or achievements expressed or implied in such forward-looking
statements. Reference should be made to the Bank's Annual Report for the year
ended December 31, 1998 on Form S-4 for a discussion of these factors.
27
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
Reports on Form 8-K
Form Type: 8-K
SEC File Number: 333-79193
Date File: September 27, 1999
Description:
On September 13, 1999, pursuant to a merger of Cerritos Merger
Co., a wholly-owned subsidiary of California Community
Financial Institutions Fund Limited Partnership with and into
the registrant, the California Fund acquired approximately 55%
of the outstanding shares of the Registrant's common stock.
28
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
CERRITOS VALLEY BANCORP
-------------------------
(Registrant)
November 19, 1999 /s/ James Koury
-------------------------
James Koury
Chairman of the Board
November 19, 1999 /s/ Melissa Lanfre
-------------------------
Chief Financial Officer
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CERRITOS
VALLEY BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED
STATEMENTS OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 31,440,745
<SECURITIES> 40,445,616
<RECEIVABLES> 62,990,560
<ALLOWANCES> 1,179,330
<INVENTORY> 0
<CURRENT-ASSETS> 5,769,847
<PP&E> 4,262,371
<DEPRECIATION> 2,494,757
<TOTAL-ASSETS> 141,235,052
<CURRENT-LIABILITIES> 131,377,286
<BONDS> 0
0
0
<COMMON> 6,158,869
<OTHER-SE> 3,706,897
<TOTAL-LIABILITY-AND-EQUITY> 141,235,052
<SALES> 0
<TOTAL-REVENUES> 8,281,972
<CGS> 0
<TOTAL-COSTS> 2,308,375
<OTHER-EXPENSES> 3,705,937
<LOSS-PROVISION> 130,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,137,660
<INCOME-TAX> 874,904
<INCOME-CONTINUING> 1,262,756
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,262,756
<EPS-BASIC> 1.27
<EPS-DILUTED> 1.19
</TABLE>
