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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NO. 333-79193
CERRITOS VALLEY BANCORP
(Exact name of registrant as specified in its charter)
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CALIFORNIA 95-4216236
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12100 FIRESTONE BLVD., NORWALK CA 90650
(Address of principal executive (Zip code)
offices)
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Registrant's telephone number, including area code: (562) 868-3221
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Securities to be registered under Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K /X/
Net earnings for the year ended December 31, 1999. $1,584,807.
The aggregate market value of voting stock held by non-affiliates of the
Company was $8,270,199, based on the most recent over the counter price of
$10.50 per share on April 9, 1999.
As of February 29, 2000, 999,875 shares of Registrant's no par value common
stock were outstanding.
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FORM 10-K
TABLE OF CONTENTS AND CROSS REFERENCE SHEET
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 8. Financial Statements and Supplementary Data................. 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 58
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 59
Item 11. Executive Compensation...................................... 60
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 62
Item 13. Certain Relationships and Related Transactions.............. 63
PART IV
Item 14. Exhibits to Consolidated Financial Statements Schedules and
Report of Independent Auditors and INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS AND SCHEDULES.......................... 64
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PART I
ITEM 1. BUSINESS
GENERAL
CERRITOS VALLEY BANCORP
Cerritos Valley Bancorp (the "Company") is a bank holding company organized
as a corporation under the laws of the State of California on July 1, 1987. As a
bank holding company, the Company is subject to the Bank Holding Company Act of
1956, as amended ("BHCA"). The Company was organized pursuant to a plan of
reorganization for the purpose of becoming the parent corporation of Cerritos
Valley Bank (the "Bank"), and on January 11, 1988, the reorganization was
effected and shares of Cerritos Valley Bancorp common stock were issued to the
shareholders of Cerritos Valley Bank for the common shares held by Cerritos
Valley Bank's shareholders. The Company conducts its operations at the head
office of Cerritos Valley Bank located at 12100 Firestone Boulevard, Norwalk,
California 90650.
The Company's principal business is to serve as a holding company for the
Bank and for other banking or finance-related subsidiaries which the Company may
establish or acquire. At December 31, 1999, the Company had total consolidated
assets of $126.8 million, total consolidated net loans of approximately
$66.8 million, total consolidated deposits of approximately $101.7 million and
total consolidated shareholders' equity of approximately $10 million. The
discussion and analysis for the year ended December 31, 1999 reflect the
operations of the Company and the Bank.
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 $460,381 were deducted from the proceeds of common stock. Total
stockholders' equity at December 31, 1999 was $9,956,260 compared to $12,416,650
at December 31, 1998. The primary difference between total stockholders' equity
is a result of dividends paid to facilitate the abovementioned merger.
CERRITOS VALLEY BANK
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-charter 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 as 12100 Firestone Boulevard, Norwalk, California. The
Bank has three branch offices located at 18300 Pioneer Boulevard, Artesia,
California, 3508 E. Florence Avenue, Huntington Park, California, and 411 N.
Central Avenue, Glendale, California.
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BANKING SERVICES
The Company's primary service area is the Southern California communities of
Norwalk, Artesia, Huntington Park and Glendale. The 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 the Bank's primary service areas and local
businesses, including retail, professional and real estate-related activities in
those areas.
The Company offers a broad range of services to individuals and businesses
in its primary services area with and emphasis upon customer service, efficiency
and personalized services. The 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
market accounts, individual retirement accounts and time certificates of
deposits, direct deposit of social security and payroll checks and wire
transfers services with plans in the future to institute personal computer
banking.
The 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 whose demand for funds falls within Cerritos
Valley Bank's lending limits, such as small to medium-sized business concerns,
real estate developers and professional firms. Consumer lending is oriented
primarily toward the personal needs of the 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 the
Bank's officers, directors, and stockholders. 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 business concerns and professional firms.
COMPETITION
The Bank faces competition in attracting both deposits and originating
loans. The Bank's competition in loans comes principally from community based,
regional and multi-regional commercial banks, investment banks, asset based
finance companies, savings and loan associations, mortgage companies, and to a
lesser degree, thrift and loan companies, credit unions and insurance companies.
Many of the nation's largest commercial banks and savings and loan associations
with which the Bank competes have significantly greater lending limits than the
Bank and perform other services for their customers which the Bank can offer
only through correspondents or other vendors, if at all. Deregulation of the
banking industry and increased competition from non-bank entities for the cash
balances of individuals and businesses has had and will continue to have an
impact on the competitive position of the Bank. Among the advantages of these
larger institutions is their ability to make larger loans, finance extensive
advertising campaigns and generally allocate their assets to regions of highest
yield and demand. Management believes that the most direct competition for
deposits comes from commercial banks, stock brokerage firms, savings and loan
associations, thrift and loan companies and credit unions. The Bank does not
have significant market share of the deposits or loans in the southern
California marketplace.
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In order to compete with other financial services entities in its service
area, the Bank relies primarily upon personal contacts obtained through its
officers, directors, employees and stockholders to attract and maintain
relationships. For clients with credit demands in excess of the Bank's lending
limits, the Bank attempts to arrange for such loans on a participated basis with
institutions who desire to work with the Bank to leverage its expertise. The
Bank also assists clients requiring services not offered by the Bank by
obtaining these services through its correspondent banks and other joint
relationships.
SUPERVISION AND REGULATION
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 and 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 of 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 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 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 bonk
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.
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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, of 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 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:
- expanding the list of permissible nonbanking activities in which well run
bank holding companies may engage without prior Federal Reserve Board
approval;
- streamline the procedures for well run bank holding companies to obtain
approval to engage in other nonbanking activities; and
- eliminating most of the anti-tying restrictions imposed upon bank holding
companies and their nonblank subsidiaries.
Amended Regulation Y also provided 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 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:
- maintain a total risk-based capital ratio of 10% or greater;
- maintain a Tier 1 risk-based capital ratio of 6% or greater;
- maintain a leverage ratio of 5% or greater; and
- 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.
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To qualify as "well managed":
- 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;
- none of the bank holding company's depository institutions may have
received one of the two lowest composite ratings; and
- 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.
GOVERNMENT POLICIES
Banking is a business which depends on rate differentials. In general, the
difference between the interest rate paid by Cerritos Valley on its deposits and
other borrowings and the interest rate received by Cerritos Valley 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.
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, 2000 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 determined that the effect
implementation of Statement No. 133 will have no impact on its financial
statements.
RECENT LEGISLATION AND OTHER CHANGES
The Financial Services Modernization Act ("FSMA") was enacted in late 1999.
FSMA among other things repeals the Glass-Steagall Act. The Glass-Steagall Act
enacted in the Depression era prohibits banks from affiliating with securities
firms. In addition, FMSA will allow for a new type of bank holding company under
the Bank Holding Company Act. The new bank holding company will be allowed to
engage in insurance and securities underwriting, merchant banking and insurance
company portfolio investment activities. Currently, bank holding companies are
strictly limited in the amount of insurance and securities underwriting
activities in which they may engage.
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FSMA will also allow bank holding companies to engage in any activity
considered "financial" in nature or incidental to such financial activities.
Under the existing Bank Holding Company Act, incidental activities are limited
to those that are "banking" in nature or incidental to such banking activities.
Financial activities include as well as lending, providing insurance as an
agent, broker or as principal, issuing annuities, underwriting, and dealing in
or making a market in securities. All insurance activities that are to be
conducted must be conducted in compliance with applicable state laws. In
connection with insurance sales the United States Supreme Court case of BARNETT
BANK OF MARION COUNTY N.A. V. NELSON, 116 S. Ct. 1103 (1996) is followed by
FSMA, and FSMA further provides that "no state may, by statute, regulation,
order, interpretation, or other action, prevent or significantly interfere with
the ability of an insured depository institution, or a subsidiary or affiliate
thereof, to engage, directly or indirectly, either by itself or in conjunction
with a subsidiary, affiliate, or any other party, in any insurance sales,
solicitation, or cross-marketing activity."
The Community Reinvestment Act provisions in FSMA require that any new bank
holding company that is formed meet the conditions that all of the company's
insured depository institutions are well capitalized and well managed or
received at least a satisfactory rating in the most recent Community
Reinvestment Act examination.
Other key aspects of FSMA include the following:
- streamlining bank holding company supervision by defining the roles of the
Federal Reserve and other federal and state regulators;
- prohibiting FDIC assistance to affiliates and subsidiaries of banks and
thrifts;
- allowing a national bank that is well capitalized and well managed to
establish new operating subsidiaries that may engage in financial
activities other than insurance underwriting, merchant banking, insurance
company portfolio investments, real estate development and real estate
investment, so long as the aggregate assets of all financial subsidiaries
do not exceed 45% of the parent's assets or $50 billion, whichever is
less;
- permitting national banks to underwrite municipal bonds;
- providing that securities activities conducted by a bank subsidiary will
be subject to regulation by the Securities and Exchange Commission;
- providing that insurance activities conducted by a bank subsidiary will be
subject to regulation by the applicable state insurance authority;
- replacing broker-dealer exemptions allowed to banks with limited
exemptions;
- providing that de novo unitary thrift holding company applications
received by the Office of Thrift Supervision after May 4, 1999 shall not
be approved;
- providing that existing unitary thrift holding companies may only be sold
to financial companies;
- adopting new privacy provisions which allow customers to "opt out" of
sharing nonpublic personal information with nonaffiliated third parties
subject to certain exceptions;
- requiring that ATM's which impose a fee on noncustomers to disclose on the
ATM screen the amount of the fee prior to a transaction becoming
irrevocable on the ATM;
- providing regulatory relief to smaller banks with less than $250 million
in total assets with respect to the frequency of CRA examinations. The
time between examinations may be as long as five years for small banks and
savings and loans; and
- requiring plain language for federal banking agency regulations.
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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 were 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 Department of Financial Institutions to close
a bank, if the 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 cents per
$100 of deposits until the FICO bonds mature in 2017. There is a three-year
moratorium on conversions of SAIF deposits to Bank Insurance Fund ("BIF")
deposits. The 1996 Act also has certain regulatory relief provisions for the
banking industry. Lender liability under the Superfund is eliminated for lenders
who foreclose on property that is contaminated provided that the lenders were
not involved with the management of the entity that contributed to the
contamination. There is a five year sunset provision for the elimination of
civil liability under the Truth in Savings Act. The FRB and Department of
Housing and Urban Development are to develop a single format for Real Estate
Settlement Procedures Act and Truth in Lending Act ("TILA") disclosures. TILA
disclosures for adjustable mortgage loans are to be simplified. Significant
revisions are made to the Fair Credit Reporting Act ("FCRA") including requiring
that entities which provide information to credit bureaus conduct an
investigation if a consumer claims the information to be in error. Regulatory
agencies may not examine for FCRA compliance unless there is a consumer
complaint investigation that reveals a violation or where the agency otherwise
finds a violation. In the area of the Equal Credit Opportunity Act, banks that
self-test for compliance with fair lending laws will be protected from the
results of the test provided that appropriate corrective action is taken when
violations are found.
During 1996, new federal legislation amended the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") and the underground storage
tank provisions of the Resource Conversation and Recovery Act to provide lenders
and fiduciaries with greater protections from environmental liability. In
June 1997, the U.S. Environmental Protection Agency ("EPA") issued its official
policy with regard to the liability of lenders under CERCLA as a result of the
enactment of the Asset Conservation, Lender Liability and Deposit Insurance
Protection Act of 1996. California law provides that, subject to numerous
exceptions, a lender acting in the capacity of a lender shall not be liable
under any state or local statute, regulation or ordinance, other than the
California Hazardous Waste Control Law, to undertake a cleanup, pay damages,
penalties or fines, or forfeit property as a result of the release of hazardous
materials at or from the property.
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In 1997, California adopted the Environmental Responsibility Acceptance Act
(the "Act") (Cal. Civil Code SectionSection 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.
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.
EMPLOYEES
On December 31, 1999, the Company had 50 full-time equivalent employees.
Management considers its relations with employees to be satisfactory.
ITEM 2. PROPERTIES
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, the real estate loan center and the head
office of Cerritos Valley and Cerritos Valley Bank. The lease was executed in
1978 and will expire in August 2001.
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 13,350 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 with terms from 2 to 5 years.
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. The current lease on the first floor would
have expired on July 16, 2002. The second floor consists of 7,565 square feet
and its current lease would have expired on July 16, 2004. Subsequent to
year-end, Cerritos Valley Bank exercised its option to purchase the entire
building. The purchase price of $1.25 million is expected to close escrow during
the second quarter 2000. At that time, Cerritos Valley and Cerritos Valley Bank
intends to relocate its administration offices and real estate loan center from
its current location in the Norwalk office and occupy the entire 2nd floor of
the Artesia 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.
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ITEM 3. 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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. 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 table shows the high and low bid quotations for Cerritos Valley common
stock, as reported by the above brokers during the four quarters 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 PRICE
-------------------
QUARTER HIGH LOW VOLUMES
- ------- -------- -------- --------
<S> <C> <C> <C>
4th Quarter 1999.................................... $10.50 $10.50 --
3rd Quarter 1999.................................... $10.50 $10.50 --
2nd Quarter 1999.................................... $10.50 $10.50 --
1st Quarter 1999.................................... $10.75 $ 8.50 562
4th Quarter 1998.................................... N/A N/A --
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
</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 then proposed, and now completed, 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 December 31, 1999, was $10.50, which reflects a sale
that occurred on April 9, 1999. The "bid" and "asked" prices of Cerritos Valley
common stock on April 9, 1999 were $10.50 and $10.50, respectively.
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 December 31, 1999, the outstanding shares of Cerritos Valley common
stock were held by approximately 212 shareholders.
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 its 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 that the average of its interest expense
for those fiscal years, then current assets must equal at least 1 1/4 times
current liabilities.
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,
12
<PAGE>
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.
Cerritos Valley has not paid any cash or stock dividends to its shareholders
during 1998, 1997 or 1996. However, on September 13, 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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data for the
Company at or for the five years ended December 31, 1999. The information below
for the three years ended December 31, 1999, has been derived from financial
statements audited by Grant Thornton LLP and from the financial statements
audited by Vavrinek, Day & Company for the years ended December 31, 1996 and
1995. These statements should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,
"Business" and the Company's Consolidated Financial Statements and Notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
--------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest income.......................... $ 9,388 $ 8,553 $ 7,301 $ 6,895 $ 7,611
Interest expense......................... 3,063 2,607 1,985 1,883 2,347
--------- --------- --------- --------- -------
Net interest income...................... 6,325 5,946 5,316 5,012 5,264
Provision for loan losses................ 240 310 750 604 2,208
--------- --------- --------- --------- -------
Net interest income after provision for
loan losses............................ 6,085 5,636 4,566 4,408 3,056
Other noninterest income................. 1,677 1,563 1,515 2,337 1,704
Noninterest expense...................... 5,096 4,707 4,310 5,117 4,980
--------- --------- --------- --------- -------
Earnings before income taxes............. 2,666 2,492 1,771 1,628 (220)
Provision for income taxes(2)............ 1,081 954 262 613 (108)
--------- --------- --------- --------- -------
Net earnings............................. $ 1,585 $ 1,538 $ 1,509 $ 1,015 $ (112)
========= ========= ========= ========= =======
Basic earnings per share................. $ 1.59 $ 1.54 $ 1.51 $ 1.01 $ (0.11)
Number of shares used in basic earnings
per share calculation(3)............... 997,160 999,653 999,911 999,901 999,901
Diluted earnings per share............... $ 1.42 $ 1.41 $ 1.42 $ 0.99 $ (0.11)
Number of shares used in diluted
earnings per share calculation(4)........ 1,113,655 1,088,161 1,066,553 1,023,976 999,901
</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.
13
<PAGE>
(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 informaton 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>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets.............................. $126,852 $125,834 $101,539 $90,571 $91,769
Total loans............................... 66,806 59,834 48,751 40,237 45,077
Securities available-for-sale............. 33,516 40,487 26,522 23,936 13,071
Securities held-to-maturity............... 3,504 2,000 4,257 5,555 4,823
Total deposits............................ 101,664 98,732 86,680 79,307 81,984
Shareholders' equity...................... 9,956 12,417 10,975 9,377 8,494
Performance and leverage ratios:
Net earnings to average shareholders'
equity.................................... 13.44% 13.09% 15.34% 11.62% (1.32)%
Net earnings to average total assets........ 1.21% 1.37% 1.59% 1.11% (0.12)%
Average shareholders' equity to average
total assets.............................. 8.99% 10.44% 10.35% 9.61% 9.01%
Total interest expense to total interest
income.................................... 32.62% 30.48% 27.19% 27.31% 30.84%
Other noninterest income to noninterest
expense................................... 32.91% 33.21% 35.15% 45.67% 34.21%
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
The discussions contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 1. "Business" are
intended to provide information to facilitate the understanding as assessment of
the consolidated financial statements and footnotes and should be read and
considered in conjunction therewith. These discussions included forward-looking
statements within the meaning of Section 21E of the Exchange Act regarding
management's beliefs, estimates, projections, and assumptions with respect to
future operations. Actual results and operations for any future period may vary
materially from those projected herein and from past results discussed herein.
OVERVIEW
Management's Discussion and Analysis of Financial Condition and Results of
Operations is intended to provide a better understanding of the material changes
in trends relating to the financial condition, results of operations, and
liquidity of the Company. The following presentation is prepared as of the dates
and for the periods indicated. This discussion should be read in conjunction
with "Selected Consolidated Financial Data," the Company's Consolidated
Financial Statements and the accompanying Notes included elsewhere herein.
14
<PAGE>
The Company's business strategy is to offer a broad range of commercial
banking products and services to individuals and businesses in its primary
service area with an emphasis upon customer service, efficiency, and
personalized services. The Company's business strategy is to increase its market
share of loans and deposits by focusing upon the banking needs of local
businesses, including retail, professional and real estate-related activities,
and individuals living and working in the Southern California communities of
Norwalk, Artesia, Huntington Park and Glendale.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its loan
portfolio, securities and other earning assets, and its cost of funds,
consisting of interest paid on its deposits and borrowings. The Company's
operating results are also impacted by provisions for loan losses, and to lesser
extent service charges on deposit accounts and other noninterest income. In
addition, the Company's operating expenses principally consist of salaries,
wages and employee benefits, occupancy expenses, professional services, and
other general noninterest expenses. The Company's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in interest rates and actions of regulatory authorities.
For the year ended December 31, 1999, the Company earned $1.6 million, or
$1.59 per basic share and $1.42 per diluted share. By comparison, the Company
earned $1.5 million, or $1.54 per basic share and $1.41 per diluted share, for
the year ended December 31, 1998, and earned $1.5 million, or $1.51 per basic
share and $1.42 per diluted share for the year ended December 31, 1997. Return
on average assets for the periods ended December 31, 1999, 1998 and 1997 were
1.21%, 1.37% and 1.59%, respectively. Return on average equity for the period
ended December 31, 1999 was 13.44% compared to 13.09% and 15.34% for the same
respective periods in 1998 and 1997.
RESULTS OF OPERATIONS
NET INCOME
The Company recorded net income of $1,585,000, or $1.59 basic earnings per
share and $1.42 diluted earnings per share, for the year ended December 31,
1999. For the year ended December 31, 1998, net earnings for the Company were
$1,538,000, or $1.54 basic earnings per share and $1.41 diluted earnings per
share and net income for the year ended December 31, 1997, was $1,509,000, or
$1.51 basic earnings per share and $1.42 diluted earnings per share. The
increase in net income in 1999 compared to 1998 and 1997 is primarily a result
of an increase in net interest margin due to an increase in average
interest-earning assets. Average interest earning assets increased from
$83.32 million in 1997 and $99.5 million in 1998 to $116.7 million in 1999. The
increase in net interest margin was substantially offset by an increase in other
operating expense.
NET INTEREST INCOME AND NET INTEREST MARGIN
A significant component of the Company's operations is net interest income,
which is the difference between interest and fees received on earning assets and
interest paid on deposits and other sources of funds. Net interest income, when
expressed as a percentage of average total interest earning assets, is referred
to as the net interest margin. The Company's net interest income is affected by
the change in the amount and mix of interest-earning assets and interest-bearing
liabilities. It is also affected by changes in yields earned on interest-earning
assets and rates paid on deposits and other borrowed funds. Approximately 51.1%
of the Bank's loan portfolio adjusts with the prime rate.
The Company recorded net interest income of $6.3 million, $5.9 million and
$5.3 million in 1999, 1998, and 1997 respectively, representing increases of
6.7% and 11.3% in 1999 and 1998. The resulting net interest margin decreased
from 6.38% in 1997 to 5.93% in 1998 and to 5.42% in 1999. A contributing factor
to the decrease in net interest margin is the substantial increase in average
outstanding loan balances. In 1999 and1998, the average outstanding loan
balances increased 15.12%
15
<PAGE>
and 23.79%, respectively. 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. In addition, while interest rates on deposits
and borrowings decreased, the overall mix of interest-sensitive liabilities
changed to include a greater percentage of higher interest-bearing liabilities.
The growth in deposits resulted in the increase in interest expense for the year
ended December 31, 1999 over the same period in 1998 and 1997.
One of the two contributing factors to net interest income, namely interest
income, increased in 1999 to $9.3 million as compared to $8.5 million in 1998
and $7.3 million in 1997. The other factor is interest expense, which increased
to $3.0 million in 1999 from $2.6 million in 1998 and $1.9 million in 1997.
ANALYSIS OF NET INTEREST INCOME
The following table presents 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 and rates for the three years ended December 31, 1999.
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------- --------------------------------- ----------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE(2) RATE INTEREST BALANCE(2) RATE INTEREST BALANCE(2)
---------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-earning assets:
Loans(1).......................... $ 65,842 9.98% $6,570 $ 57,196 10.55% $6,032 $46,205
Investment securities............. 38,539 5.74% 2,212 30,899 6.20% 1,915 29,326
Federal funds sold................ 10,822 4.85% 525 10,667 5.23% 558 7,709
FHLB stock and other deposits..... 1,518 5.34% 81 760 6.45% 49 234
-------- ------ -------- ------ -------
Total interest-earning assets... 116,721 8.04% 9,388 99,522 8.59% 8,554 83,474
Deferred loan fees.................. (97) (115) (155)
Allowance for loan losses........... (1,191) (1,209) (1,299)
Nonearning assets:
Cash and due from banks........... 9,663 8,144 7,460
Bank premises and equipment....... 1,828 1,986 2,016
Accrued interest receivable....... 1,011 707 629
Prepaid expenses and other
assets.......................... 3,274 3,505 2,845
-------- -------
Total assets.................... $131,209 $112,540 $94,970
======== =======
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing deposits......... $ 11,719 1.48% $ 173 $ 10,066 1.46% $ 147 $ 9,556
Savings and money market
deposits........................ 24,467 2.21% 540 20,245 1.90% 384 19,675
Time deposits..................... 32,244 4.94% 1,593 32,126 5.37% 1,724 24,701
Other borrowings and capital
lease........................... 13,293 5.69% 757 5,697 6.18% 352 890
-------- ------ -------- ------ -------
Total interest-bearing
liabilities................... 81,723 3.75% 3,063 68,134 3.83% 2,607 54,822
------ ------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits........................ 35,685 31,157 28,007
Other liabilities................. 2,011 1,496 2,307
Stockholders' equity.............. 11,790 11,753 9,834
-------- -------
Total liabilities and
stockholders' equity.......... $131,209 $112,540 $94,970
======== =======
Net interest spread................. 4.30% 4.77%
Net interest margin(3) and income... 5.42% $6,325 5.98% $5,947
====== ======
<CAPTION>
1997
--------------------
YIELD/
RATE INTEREST
-------- --------
<S> <C> <C>
Assets
Interest-earning assets:
Loans(1).......................... 10.84% $5,008
Investment securities............. 6.36% 1,865
Federal funds sold................ 5.42% 418
FHLB stock and other deposits..... 4.27% 10
------
Total interest-earning assets... 8.75% 7,301
Deferred loan fees..................
Allowance for loan losses...........
Nonearning assets:
Cash and due from banks...........
Bank premises and equipment.......
Accrued interest receivable.......
Prepaid expenses and other
assets..........................
Total assets....................
Liabilities and stockholders' equity
Interest-bearing liabilities:
Interest-bearing deposits......... 1.43% $ 137
Savings and money market
deposits........................ 2.72% 536
Time deposits..................... 5.06% 1,250
Other borrowings and capital
lease........................... 6.85% 61
------
Total interest-bearing
liabilities................... 3.62% 1,984
------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposits........................
Other liabilities.................
Stockholders' equity..............
Total liabilities and
stockholders' equity..........
Net interest spread................. 5.13%
Net interest margin(3) and income... 6.37% $5,317
======
</TABLE>
- ------------------------------
(1) Nonaccrual loans are included in average balance calculations; however,
interest on such loans has been excluded in computing the average yields for
the periods.
16
<PAGE>
(2) Average balances are primarily computed on daily balances during the period.
When such balances are not available, averages are computed on a monthly
basis.
(3) The net interest margin for a period is net interest income divided by
average interest-earning assets.
A changing interest rate environment may have a significant impact on the
Company's net interest margin as measured against average interest-earning
assets. Management monitors the Company's net interest margin by utilizing an
interest rate simulation model under various interest rate scenarios. The
process quantifies the impact on net interest income. These results provide a
basis for repricing loan and deposit products after giving consideration to such
factors as competition, the economic environment and projected maturities in the
loan, investment securities and deposit portfolios.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
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 liabilities,
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 years indicated. The changes due to rate and
volume have been allocated to rate and volume in proportion to the relationship
between their absolute dollar amounts. The effect of tax equivalent yields has
not been presented because they were deemed immaterial.
<TABLE>
<CAPTION>
1999 VERSUS 1998 1998 VERSUS 1997
------------------------------ ------------------------------
CHANGE CHANGE CHANGE CHANGE
TOTAL DUE TO DUE TO TOTAL DUE TO DUE TO
CHANGE RATE VOLUME CHANGE RATE VOLUME
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans........................................ $538 $(338) $ 876 $1,024 $(138) $1,162
Investment securities........................ 297 (149) 446 50 (48) 98
Federal funds sold........................... (33) (41) 8 140 (15) 155
Other deposits............................... 32 (10) 42 39 7 32
---- ----- ----- ------ ----- ------
Total interest-earning assets.............. 834 (538) 1,372 1,253 (194) 1,447
Interest-bearing deposits.................... 26 2 24 10 3 7
Savings and money market deposits............ 156 69 87 (152) (167) 15
Time deposits................................ (131) (137) 6 474 79 395
Other borrowings and capital lease........... 405 (30) 435 291 (7) 298
---- ----- ----- ------ ----- ------
Total interest-bearing liabilities......... 456 (96) 552 623 (92) 715
---- ----- ----- ------ ----- ------
Net interest income.......................... $378 $(442) $ 820 $ 630 $(102) $ 732
==== ===== ===== ====== ===== ======
</TABLE>
Total interest income increased from $7.3 million in 1997 to $8.5 million in
1998, and to $9.3 million in 1999, representing an increase of 16.4% increase in
1998 over 1997and a 9.4% increase in 1999 over 1998. Total interest income
increases in the periods indicated were primarily the result of growth in the
Company's loan and investment portfolio as a result of opening the Glendale
branch in April 1998, and growth in Cerritos Valley's established market area.
Total interest expense increased from $1.98 million in 1997 to
$2.61 million in 1998 and to $3.06 million in 1999. The increase in interest
expense in 1999 over 1998 and 1997 was primarily the result of obtaining
advances from the Federal Home Loan Bank ("FHLB") at favorable interest rates
primarily to match the funding of fixed rate loans and the growth in deposits
which occurred due to the opening of a new branch in Glendale in April 1998.
17
<PAGE>
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, 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 such other 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.
The provision for loan losses for 1999 was $240,000, $310,000 for 1998, and
$750,000 for 1997. The decrease in the provision for loan losses for 1999
compared to 1998 and 1997 is in response to the improved quality of the
portfolio and the decline in nonperforming loans and other real estate owned.
Net charge-offs, loans charged-off net of recoveries, were $201,000 in 1999,
$228,000 in 1998 and $1,155,000 in 1997. Net charge-offs to average outstanding
loans decreased to 0.31% for 1999 compared to 0.40% in 1998 which was a decrease
from 2.51% in 1997. The allowance for loan losses was 1.87% of total gross loans
as of December 31, 1999, compared to 1.98% and 2.31% of total gross loans as of
December 31, 1998 and December 31, 1997, respectively.
In management's opinion, the balance of the allowance for loan losses at
December 31, 1999, was sufficient to sustain any foreseeable losses in the loan
portfolio at that time.
NONINTEREST REVENUES
Noninterest revenues increased from $1.51 million in 1997 and $1.56 million
in 1998, to $1.68 million in 1999. The primary reason for the $48,332, or 3.19%,
increase in noninterest revenues in 1998 over 1997 was the increase in service
charges on deposit accounts which increased $256,230 from $825,503 in 1997 to
$1,081,733 in 1998. The primary reason for the increase in service charges on
deposit accounts was twofold; first, in April 1998, the Company opened the
Glendale branch, and second, the Company experienced growth in the established
marketing areas of the Bank. This increase in service charges on deposit
accounts was offset by a decline in gain on sale of loans, which decreased
$162,856 from $243,693 in 1997 to $80,837 in 1998. During 1998, the management
of the Company decided to terminate the FHA loan origination and sale program
and decided to retain the FHA loans within the portfolio. The $113,972, or
7.29%, increase in noninterest revenue from $1.56 million in 1998 to
$1.68 million in 1999 was primarily in service charges on deposits accounts.
Service charges on deposit accounts increased $160,017 from $1,081,733 in 1998
to $1,241,750 in 1999. The 14.8% increase in service charges on deposit accounts
from 1998 to 1999 was predominately in NSF fees and account analysis fees which
increased due to the increase in the deposit base.
NONINTEREST EXPENSE
The Company's noninterest expense includes salaries and benefits, occupancy
expense and other operating expenses. The Company incurred total noninterest
expense of $4,309,865 in 1997, $4,707,190 in 1998 compared to $5,096,240 in
1999. The primary reason for the $397,325, or 9.2%, increase in 1998 over 1997
was the opening of the Glendale branch in April 1998 which resulted in increased
in salaries and benefits for additional personnel, occupancy for the additional
premises and equipment, and other operating expenses.
18
<PAGE>
Noninterest expense increased $389,050, or 8.3%, in 1999 over the same
period in 1998. Other operating expense, the primary component of this increase,
rose $382,703 from $2,172,290 in 1998 to $2,554,993 in 1999. The primary area
within other operating expense, which increased due to growth in the Bank, is
data processing and item processing and postage. Legal fees also increased in
1999 as a result of ongoing efforts to maintain the quality of the loan
portfolio and due to litigation arising out of the normal course of business.
Offsetting the increase was a decrease in advertising and business development
expense in 1999 over 1998 which occurred as a result of the Bank conducting an
advertisement campaign for the opening of the Glendale branch in 1998.
INCOME TAXES
The Company recorded an income tax provision of $1,080,950, $954,391 and
$261,756, in 1999, 1998, and 1997, respectively. The effective tax rate in these
years were 40.5%, 38.3% and 14.8%. The Company has no net operating loss
carryforwards ("NOL"). For further information see Note I of Notes to
Consolidated Financial Statements.
FINANCIAL CONDITION
Distribution of Assets, Liabilities and Stockholders' Equity
The following table sets forth the Company's consolidated average balances
of each principal category of assets, liabilities and stockholders' equity and
the percentage distribution of these items for each of the past two fiscal
years.
<TABLE>
<CAPTION>
AVERAGE PERCENT OF AVERAGE PERCENT OF
BALANCE TOTAL BALANCE TOTAL
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks.............................. $ 9,663 7.36% $ 8,239 7.32%
Federal funds sold................................... 10,822 8.25% 10,667 9.48%
Investment securities available for sale............. 36,396 27.74% 26,882 23.89%
Investment securities held to maturity............... 2,222 1.69% 5,347 4.75%
Loans, net of allowance for loan losses.............. 64,554 49.20% 55,872 49.65%
Bank premises and equipment.......................... 1,828 1.39% 1,986 1.76%
Accrued interest receivable and other assets......... 5,724 4.36% 3,548 3.15%
-------- ------ -------- ------
Total assets................................... $131,209 100.00% $112,541 100.00%
======== ====== ======== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand, noninterest bearing........................ $ 35,685 27.20% $ 31,157 27.69%
Demand, interest bearing........................... 11,719 8.93% 10,211 9.07%
Savings and money market........................... 24,467 18.65% 20,100 17.86%
Time deposits...................................... 32,244 24.57% 32,127 28.55%
Other borrowings..................................... 13,055 9.95% 5,919 5.26%
Obligations under capital lease...................... 238 0.18% 256 0.23%
Accrued expenses and other liabilities............... 2,011 1.53% 1,017 0.90%
-------- ------ -------- ------
Total liabilities.............................. 119,419 91.01% 100,787 89.56%
Stockholders' equity................................. 11,790 8.99% 11,753 10.44%
-------- ------ -------- ------
Total liabilities and stockholders' equity..... $131,209 100.00% $112,540 100.00%
======== ====== ======== ======
</TABLE>
The Company's total average assets increased to $131,209,000, or 16.59%,
during 1999, from $112,540,000 during 1998. The Company's ratio of average
interest-earning assets to average assets was
19
<PAGE>
88.95% during 1999 compared to 88.43% during 1998. The Company determines the
allocation of resources based upon the contribution to capital. Optimum
allocation of resources within operating ranges to specific loan and investment
products have been determined and documented in the appropriate policies of the
Company. Consequently, consistency in the average interest earning assets to
average assets ratio is to be expected.
INVESTMENT SECURITIES
The Company has the authority to invest in a variety of investment
securities including United States Government and agency securities. The Company
classifies securities as either investment securities available-for-sale or
held-to maturity under generally accepted accounting principals. Investment
securities available-for-sale are carried at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity, net of taxes. Investment securities held-to-maturity,
which the Company has the positive intent and ability to hold to maturity, are
reported at amortized cost, adjusted for amortization of premiums and accretion
of discounts. Investment securities consist of securities classified as
available-for-sale and held-to-maturity. At December 31, 1999, the Company had
average investment securities available-for-sale of $36,396,000, or 27.74% of
total average assets, and average investment securities held-to-maturity of
$2,222,000, or 1.69% of total average assets. The average yield on the Company's
securities was 5.72% in 1999 compared with 6.07% in 1998 and 6.36% in 1997. The
decrease in average yield is primarily related to the overall decline in rates
in the marketplace, which resulted in a decline in the blended yield of the
portfolio as new securities were acquired at market rates.
The following table sets forth the carrying value of investment securities
available-for-sale at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
U.S. Treasury securities........................... $ 497,345 $ 2,522,969
Obligations of other U.S. Government agencies and
corportations.................................... 25,372,043 28,593,281
Mortgage-backed securities......................... 2,090,057 2,898,625
Obligations of state and political subdivisions.... 1,783,046 2,287,106
Corporate bonds.................................... 3,773,010 4,090,074
Other.............................................. -- 95,000
----------- -----------
Total.......................................... $33,515,501 $40,487,055
=========== ===========
</TABLE>
The following table sets forth the maturities of investment securities
available-for-sale at December 31, 1999 and the weighted average yields,
exclusive of tax effects, of such securities. Borrowers may have the right to
prepay obligations with or without prepayment penalties. This right may cause
actual maturities to differ from the contractual maturities summarized below.
Mortgage-backed obligations often have stated maturities of over ten years but
are subject to prepayments which could accelerate actual maturities.
20
<PAGE>
<TABLE>
<CAPTION>
MATURITIES
-------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN ONE THROUGH THROUGH AFTER TEN
YEAR FIVE YEARS TEN YEARS YEARS
------------------- ------------------- ------------------- -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities............... $ -- $ 497 5.63% $ -- $ --
Obligations of other U.S. Government
agencies and corporations............ -- 22,797 5.60% 1,202 6.89% 1,373 6.75%
Mortgage-backed securities............. -- 1,441 6.40% 650 5.67% --
Obligations of state and political
subdivisions......................... -- 983 4.09% 800 4.64% --
Corporate bonds........................ -- 1,445 5.95% 1,423 6.78% 905 7.43%
Other.................................. -- -- -- --
------- ------- ------ ------
$ -- $27,163 $4,075 $2,278
======= ======= ====== ======
<CAPTION>
MATURITIES
-------------------
TOTAL
AMOUNT YIELD
-------- --------
<S> <C> <C>
U.S. Treasury securities............... $ 497 5.63%
Obligations of other U.S. Government
agencies and corporations............ $25,372 5.73%
Mortgage-backed securities............. $ 2,091 6.17%
Obligations of state and political
subdivisions......................... $ 1,783 4.34%
Corporate bonds........................ $ 3,773 6.63%
Other.................................. --
-------
$33,516
=======
</TABLE>
The following table sets forth the amortized cost of investment securities
held-to-maturity at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Obligations of other U.S. Government agencies and
corporations.............................................. $2,000,000 $1,000,000
Mortgage-backed securities.................................. 680,124 770,575
Obligations of state and political subdivisions............. 823,802 229,795
Corporate bonds............................................. -- --
---------- ----------
Total................................................... $3,503,926 $2,000,370
========== ==========
</TABLE>
The following table sets forth the maturities of securities held-to-maturity
at December 31, 1999 and the weighted average yields, exclusive of tax effects,
of such securities. Borrowers may have the right to prepay obligations with or
without prepayment penalties. This right may cause actual maturities to differ
from the contractual maturities summarized below. Mortgage-backed securities
generally have state maturities of over ten years but are subject to prepayments
which could accelerate actual maturities.
<TABLE>
<CAPTION>
MATURITIES
-----------------------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN ONE THROUGH THROUGH AFTER TEN
YEAR FIVE YEARS TEN YEARS YEARS
------------------- ------------------- ------------------- ------------------- TOTAL
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of other
U.S. Government
agencies and
corporations......... $ -- $ -- $ 500 7.57% $1,500 8.07% $2,000 7.95%
Mortgage-backed
securities........... -- 197 8.02% 483 6.65% -- 680 7.05%
Obligations of state
and political
subdivisions......... 100 6.80% 250 6.90% 304 5.37% 170 4.84% 824 5.90%
---- ---- ------ ------ ------
$100 $447 $1,287 $1,670 $3,504
==== ==== ====== ====== ======
</TABLE>
21
<PAGE>
LOAN PORTFOLIO
The Company focuses its lending activities in two principal areas,
commercial loans and real estate/ construction loans. Commercial loans are made
for the purpose of providing working capital funds, financing the purchase of
equipment or inventory and for other business purposes. Real estate/
construction loans include loans made primarily for the construction and/or
improvement of single-family residences, and commercial or industrial
properties. The interest rates charged for the loans made by the Company vary
with the degree of risk, the size and maturity of the loan, the borrowers'
depository relationships with the Company, and prevailing market rates.
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.
Although the risk of non-payment exists with respect to all types of loans,
certain other specific risks are associated with each type of loan. The primary
risks associated with commercial loans, including real estate secured commercial
loans, are the quality of the borrower's management and a number of economic and
other factors, including competition, insufficient capital, changes in laws and
regulations and general changes in the marketplace, which induce business
failures and cause the value of business assets pledged to secure the loan to
depreciate. The Company's commercial portfolio does not include any known
concentrations; therefore, these risks are mitigated by the diversity of
borrowers within the portfolio.
Real estate/construction loans carry certain inherent risks not typically
associated with commercial loans, including, the accuracy of the estimate of the
property's valuation at completion of construction, the estimated costs of
construction, the length of the construction period, economic changes including
depressed real estate values and increased interest rates, and the availability
of permanent financing, if needed, upon the completion of the construction
project. The Company attempts to mitigate these risks by (1) carefully
evaluating the costs of construction prior to commitment, (2) utilizing a
disbursement control system during the construction period, (3) carefully
evaluating the market for the finished product, and (4) carefully evaluating the
development experience of the borrower.
The Company extends credit pursuant to a comprehensive lending policy
tailored to the specific attributes of the Company's lending activities. The
Company's lending policy establishes requirements and defines parameters
covering loan applications, borrower financial information, title policies, fire
and extended liability coverage casualty insurance, credit reports, and other
necessary documents to support each extension of credit. An independent
appraiser appraises real property collateral, which secures the Company's loans.
The following table sets forth the amounts of loans outstanding by type of
credit extension as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 PERCENT 1998 PERCENT 1997 PERCENT
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial.................... $27,913,786 40.95% $22,665,354 36.32% $22,070,226 44.07%
Construction.................. 6,487,052 9.52% 6,918,400 11.08% 7,357,490 14.69%
Real estate................... 31,241,895 45.83% 29,998,761 48.06% 16,778,751 33.51%
Installment................... 2,526,134 3.71% 2,830,655 4.54% 3,870,717 7.73%
----------- ------- ----------- ------- ----------- -------
Subtotal...................... 68,168,867 100.00% 62,413,170 100.00% 50,077,184 100.00%
Less:
Deferred loan fees............ (86,054) (56,812) (170,368)
Allowance for loan losses..... (1,277,141) (1,237,680) (1,155,839)
----------- ----------- -----------
Net loans..................... $66,805,672 $61,118,678 $48,750,977
=========== =========== ===========
</TABLE>
22
<PAGE>
There was no category of loans exceeding 10% of total loans which was not
otherwise disclosed as a distinct line item in the above table.
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 the Bank's or Wall Street Journal's Prime
varies.
COMMERCIAL LOANS
Commercial loans represent, as a percentage of total loans for the period
ended December 31, approximately 41% in 1999, 36% in 1998 and 44% in 1997.
Commercial loans, which are made for the purpose of providing working capital
funds, financing the purchase of equipment or inventory and for other business
purposes, 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 payments
of both principal and interest. Cerritos Valley also extends lines of credit to
business customers. On our business 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 loans will be used
and the security, if any, are generally determined before the Company's
commitment is extended. Normally, Cerritos Valley does not make loan commitments
in material amounts for periods more than one year.
REAL ESTATE/CONSTRUCTION LOANS
Real estate/construction loans, primarily loans for the construction and/or
improvement of single family residences and commercial or industrial properties,
compose approximately 55% of the portfolio at December 31, 1999, compared to
approximately 59% and 48% at December 31, 1998 and 1997, respectively.
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.
INSTALLMENT LOANS
Installment loans represents approximately 4%, 5%, and 8% of the loan
portfolio at December 31, 1999, 1998, and 1997, respectively. Most installment
loans are short-term loans for a period of up to 60 months. Auto loans, which
are included in this category, are normally made with an amortization period not
to exceed five years.
MATURITY AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES
The following table shows the maturity distribution of the Company's loans
outstanding at December 31, 1999, 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, in five to ten years or in more than ten years.
Management has increased the fixed rate portion of the loan portfolio as part of
the
23
<PAGE>
strategy to match fund loans against borrowings of Cerritos Valley Bank at the
Federal Home Loan Bank.
<TABLE>
<CAPTION>
MATURITIES
-------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN THROUGH THROUGH AFTER TEN
ONE YEAR FIVE YEARS TEN YEARS YEARS TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Commercial.................... $10,731,696 $ 7,459,878 $ 3,450,828 $ 6,271,384 $27,913,786
Construction.................. 6,079,278 407,774 -- -- 6,487,052
Real estate................... 2,243,850 7,410,651 9,997,391 11,590,003 31,241,895
Installment................... 417,703 1,902,837 99,458 106,136 2,526,134
----------- ----------- ----------- ----------- -----------
Total......................... $19,472,527 $17,181,140 $13,547,677 $17,967,523 $68,168,867
=========== =========== =========== =========== ===========
Fixed rate.................... $ 2,300,372 $ 7,799,952 $13,953,677 $ 9,270,387 $33,324,388
Variable rate................. 34,844,479 -- -- -- 34,844,479
----------- ----------- ----------- ----------- -----------
$37,144,851 $ 7,799,952 $13,953,677 $ 9,270,387 $68,168,867
=========== =========== =========== =========== ===========
</TABLE>
LOAN COMMITMENTS
In the normal course of business, there are various commitments outstanding
to extend credit that are not reflected in the consolidated financial
statements. These financial instruments include commitments to extend credit for
working capital, other term purposes and include standby and commercial letters
of credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk. Cerritos Valley's exposure to credit loss in the event of
nonperformance by the other party to commitments to extend credit and letters of
credit is represented by the contractual notional (principal) amount of those
instruments. However, other than letters of credit, all such documents contain
legal language that would allow the Company an ability for non-advance.
Accordingly, loss potential is minimized for commitments extended under such
documents. At December 31, 1999 and 1998, Cerritos Valley had commitments to
extend credit of approximately $12,570,000 and $12,458,000, respectively, and
obligations under standby letters of credit of approximately $415,000 and
$625,000, respectively.
Standby letters of credit are commitments issued by Cerritos Valley to
support the performance of a client to a third party. All standby letters of
credit are generally extended for a period of two years or less. In making
commitments and issuing letters of credit, the Company uses credit policies
similar to those used in connection with extension of credit to all customers
with creditworthiness evaluated on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on a credit evaluation of the customer. Collateral varies but
may include accounts receivable, inventory, property, plant and equipment,
contracts, contract rights and income-producing commercial real estate.
SUMMARY OF LOAN LOSS EXPERIENCE
Management believes that the objective of sound credit policy is to extend
loans to qualified customers wile managing risks which could affect
stockholders' returns. The Senior Loan Committee, made up of outside members of
the Board of Directors of the Bank and executive management, approve credit
policy, review asset quality, and determine compliance to credit policy and
procedure. Cerritos Valley maintains a program of systematic review of its
existing loans for loan quality and determines which loans require further
monitoring and supervision. Significant problem loans are reviewed on a monthly
basis by the Bank's Senior Loan Committee and at the Bank's monthly Board of
Directors meeting. Loans which are probable that the Bank will be unable to
collect all amounts due, including principal and interest, are considered
impaired. In addition, when principal and interest
24
<PAGE>
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 December 31, 1999, were
$1,354,000 compared to $517,000 at December 31, 1998 and no accruing loans past
due at December 31, 1997. Total impaired loans at December 31, 1999 were
$514,000, at December 31, 1998 were $199,000, and at December 31, 1997 were
$598,000.
The following table sets forth information about nonperforming assets, which
includes nonaccrual loans, other real estate owned ("OREO"), and accruing loans
90 or more days past due and certain ratios at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
Nonperforming assets:
Nonperforming loans......................................... $ 514 $ 199 $ 598
Other real estate owned..................................... -- -- 70
------ ------ ------
Total nonperforming loans................................... $ 514 $ 199 $ 668
====== ====== ======
Accruing loans 90 days or more past due and still
accruing.................................................. $1,354 $ 517 $ --
Nonperforming loans to total loans (1)...................... 0.75% 0.32% 1.19%
Nonperforming assets (1) to total loans and OREO............ 0.75% 0.32% 1.33%
to total assets........................................... 0.41% 0.16% 0.66%
</TABLE>
ALLOWANCE FOR LOAN LOSSES
Management's determination of the allowance for loan losses requires the use
of estimates and assumptions related to both actual and inherent risks in the
loan portfolio. Actual results may, however, differ significantly from such
estimates. Cerritos Valley routinely adds to the allowance for loan losses
through provisions for loan losses. The Company makes recurring provisions at a
level deemed by management to be sufficient to absorb the inherent losses in the
Company's loan portfolio. Provisions for loan losses were $240,000, $310,000,
and $750,000 for 1999, 1998, and 1997, respectively. Because of a continuing
decrease in the rate of loan charge-offs from 1997 to 1999, the rate of growth
in the Company's loan portfolio exceeded the rate of growth in the allowance for
loan losses.
25
<PAGE>
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
Balance at the beginning of the period.............. $1,238 $1,156 $1,561
Recoveries:
Commercial........................................ 12 6 11
Real estate....................................... 9 76 152
Installment....................................... 4 -- 2
------ ------ ------
Total recoveries................................ 25 82 165
====== ====== ======
Charge-offs:
Commercial........................................ (118) (143) (1,157)
Construction
Real estate....................................... (87) (140) (73)
Installment....................................... (19) (24) (80)
Credit card....................................... (2) (3) (10)
------ ------ ------
Total charge-offs............................... (226) (310) (1,320)
Provision for loan losses........................... 240 310 750
------ ------ ------
Balance at the end of the period.................... $1,277 $1,238 $1,156
====== ====== ======
</TABLE>
The adequacy of the 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 that may be relevant.
Because these estimates and evaluations are primarily judgmental factors, no
assurance can be given that the Company 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 the allowance for loan losses.
26
<PAGE>
The following table summarizes Cerritos Valley's loan loss experience for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
(DOLLARS IN THOUSANDS) 1999 1998 1997
- ---------------------- -------- -------- --------
<S> <C> <C> <C>
BALANCES
Average loans............................................. $65,842 $57,196 $46,205
Loans at end of period.................................... 68,169 61,129 50,077
Allowance for loan losses at beginning of period.......... 1,238 1,156 1,561
Loans charged-off......................................... 226 310 1,320
Loan recoveries........................................... 25 82 165
Net loans charged-off..................................... 201 228 1,155
Provision for loan losses................................. 240 310 750
Allowance for loan losses at end of period ("ALLL")(1).... 1,277 1,238 1,156
RATIOS
Net charge-offs to average loans.......................... 0.31% 0.40% 2.50%
Net charge-offs to loans at end of period................. 0.29% 0.37% 2.31%
ALLL to average loans..................................... 1.94% 2.16% 2.50%
ALLL to loans at end of the period........................ 1.87% 2.03% 2.31%
Net charge-offs to ALLL................................... 15.74% 18.42% 99.91%
Net charge-offs to provision for loan losses.............. 83.75% 73.55% 154.00%
</TABLE>
The allowance for loan losses was 1.87%, 2.03% and 2.31% for December 31,
1999, 1998, and 1997, respectively. Cerritos Valley charged off approximately
$226,000 in 1999, down from $310,000 in 1998 and $1,320,000 in 1997.
Correspondingly, recoveries declined from $165,000 in 1997, to $82,000 in 1998
and $25,000 in 1999. 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 estimation loan losses. Management believes that the current level of the
allowance for loan losses is adequate at December 31, 1999, although future
provisions may be required based upon future changes in credit risk.
DEPOSITS AND OTHER BORROWINGS
Cerritos Valley attracts deposits primarily from individuals and businesses
within the Company's established market areas. The Company, generally, competes
for its deposits with other Southern California-based financial services
companies, including banks, savings associations and thrift and loans. The
Company has no brokered deposits and the Company's practice is to not purchase
brokered deposits. The Company has no known foreign deposits. The average daily
amount of deposits for each of the periods indicated is summarized below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
AVERAGE PERCENT AVERAGE AVERAGE PERCENT AVERAGE AVERAGE PERCENT AVERAGE
(DOLLARS IN THOUSANDS) BALANCE OF TOTAL YIELD BALANCE OF TOTAL YIELD BALANCE OF TOTAL YIELD
- ---------------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits.......... $ 35,685 34.27% 0.00% $31,157 33.29% 0.00% $28,007 34.18% 0.00%
NOW accounts............. 11,719 11.26% 1.48% 10,065 10.75% 1.45% 9,556 11.66% 1.42%
Savings deposits......... 11,033 10.60% 1.93% 12,801 13.68% 2.50% 12,085 14.75% 2.93%
Money market............. 11,376 10.93% 2.92% 7,445 7.95% 2.47% 7,590 9.26% 2.40%
Time deposits............ 34,302 32.95% 4.63% 32,127 34.33% 5.00% 24,701 30.15% 5.06%
-------- ------ ------- ------ ------- ------
$104,115 100.00% 2.21% $93,595 100.00% 2.41% $81,939 100.00% 2.35%
======== ====== ==== ======= ====== ==== ======= ====== ====
</TABLE>
27
<PAGE>
Time deposits of $100,000 or more are generally received from the Company's
business and professional client base. The impact on Cerritos Valley's liquidity
from the potential withdrawal of these deposits is considered in the Company's
asset/liability management policies, which anticipates Cerritos Valley's
liquidity needs through the management of investments, federal funds sold,
and/or by generating additional deposits or other borrowings.
The table sets forth the remaining maturities of time deposits of $100,000
or more at December 31, 1999.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1999
- ---------------------- -----------------
<S> <C>
Three months or less........................................ $13,262
Over three through twelve months............................ 4,286
Over one year through three years........................... 217
Over three years............................................ --
-------
Total....................................................... $17,765
=======
</TABLE>
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.
In addition to federal funds sold, the Company has the investment securities
portfolio and borrowing capacity from the Federal Home Loan Bank to provide
sources of liquidity. For the year ended December 31, 1999, federal funds sold
averaged $10,822,000 compared to $10,667,000 for the same period in 1998.
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 December 31, 1999 were $33,515,501 and $3,429,465, respectively. In addition,
the Company has unsecured short-term borrowing agreements with three of its
correspondent banks in the total amount of $7 million. In addition, the Company
can borrow from the discount window at the Federal Reserve Bank on an overnight
basis for up to $2 million.
To augment the short-term borrowing capacity, the Company has the ability to
borrow from the Federal Home Loan Bank. The twelve district banks, which
comprise the Federal Home Loan Bank ("FHLB") System, function as a source of
credit to member associations. Cerritos Valley may apply for advances form the
FHLB secured by the capital stock of the FHLB owned by the Company and certain
of the Company's investment securities and loans. Advances can be requested for
any business purpose
28
<PAGE>
in which Cerritos Valley is authorized to engage. In granting advances, the FHLB
considers a member's creditworthiness and other relevant factors. At December
31, 1999, the Company had approximately $12 million in advances from the FHLB,
at an average rate of 5.65%.
The following table approximates the maximum month-end balance outstanding,
average daily balance outstanding, average rates paid during the years
indicated, and the average rates on the balance at December 31, for FHLB
advances:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Maximum month-end balance.............................. $13,742,286 $12,650,837 $1,200,000
Average daily balance.................................. $12,595,237 $ 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............................... $12,023,912 $12,650,837 $1,200,000
</TABLE>
CAPITAL RESOURCES
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 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
29
<PAGE>
companies) and the minimum required capital ratios to be deemed "adequately
capitalized" under applicable federal regulations, as of December 31, 1999.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES PROVISIONS
--------------------- --------------------- ---------------------
AMOUNT AMOUNT AMOUNT
(DOLLARS IN THOUSANDS) (IN 000'S) RATIO (IN 000'S) RATIO (IN 000'S) RATIO
- ---------------------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital (to Risk Weighted Assets)............. $11,796 13.7% $6,898 8.0% $8,623 10.0%
Tier 1 Capital (to Risk Weighted Assets)............ 10,716 12.4% 3,448 4.0% 5,173 6.0%
Tier 1 Capital (to Average Assets).................. 10,716 8.1% 5,272 4.0% 6,590 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%
</TABLE>
As indicated in the above table, the Bank has exceeded all applicable
regulatory capital guidelines at December 31, 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, Cerritos Merger Company, Cerritos Valley Bancorp and Cerritos Valley
Bank (the "Agreement"). Under the agreement, the 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. Total stockholders' equity at December 31, 1999 was
$9,956,260 compared to $12,416,650 at December 30, 1999. The primary difference
between total stockholders' equity is a result of dividends paid to facilitate
the abovementioned merger.
YEAR 2000
The Company completed its Year 2000 upgrades to its computer hardware and
software systems, resulting in a smooth transition for its computer systems over
the 1999 year-end. The cost of implementing the Year 2000 compliance program
related to software and hardware was approximately $81,000. Of the costs
associated with the Year 2000 upgrades, most were capital expenditures.
INTEREST RATE RISK MANAGEMENT
The objective of interest rate risk management is to stabilize the Company's
net interest income while limiting the change in its market value from interest
rate fluctuations.
The Company's net interest income is dependent upon the spread between the
interest and fee revenues received from lending money or investing it in
securities, and the interest paid to depositors and to other lenders. An
interest rate sensitive asset or liability is one that, within a defined time
period, either matures or can experience an interest rate change. As interest
rate sensitive assets and liabilities have various repricings and maturities,
changes in interest rtes may increase or decrease the Bank's net interest
income. This exposure to changes in interest rates is measured among other
methodologies by an institution as "gap", or the difference between interest
rate sensitive assets and rate sensitive liabilities within specified periods of
time.
30
<PAGE>
An excess of maturing or repricing assets over maturing or repricing
liabilities during a given period will serve to increase net interest income
when interest rates decline. In a rising rate environment, the assets will
reprice a current interest rates earlier than the liabilities thus increasing
the Bank's net interest margin. Conversely, when maturing or repricing
liabilities exceed maturing or repricing assets during a given period, a rising
interest rate environment generally will reduce the Bank's net interest margin.
Market value is the discounted present value of the difference between
incoming cash flows on interest-earning assets and outgoing cash flows on
interest-bearing liabilities. The Company uses interest rate simulations to
measure market value. Interest rate simulations provide the Company with an
estimate of both the dollar amount and percentage change in net interest income
under various interest rate scenarios. All assets and liabilities are subjected
to tests up to 300 basis points in increases and decreases in interest rates.
The Company seeks to stabilize its net interest income and market value by
matching its interest sensitive assets and liabilities, and maintaining the
maturity and repricing of these assets and liabilities at appropriates levels
given the interest rate environment.
The following table sets forth the distribution of the Company's interest
rate sensitive assets and liabilities as of December 31, 1999. The table also
sets forth the time period in which assets and liabilities will mature or
reprice in accordance with their contractual terms. Mortgage-backed securities
provide cash flows on a monthly basis; however, this analysis does not include
prepayment assumptions.
<TABLE>
<CAPTION>
MATURING MATURING MATURING
AFTER ONE AFTER THREE AFTER FIVE MATURING
MATURING YEAR BUT YEAR BUT YEAR BUT AFTER
WITHIN WITHIN THREE WITHIN FIVE WITHIN FIFTEEN FIFTEEN TOTAL
(DOLLARS IN THOUSANDS) ONE YEAR YEARS YEARS YEARS YEARS AMOUNT
- ---------------------- -------- ------------ ----------- -------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Loans............................... $37,144 $ 3,869 $ 3,773 $20,427 $ 2,956 $ 68,169
Investment securities............... 2,984 8,432 16,746 7,228 3,224 38,614
Federal funds sold.................. 2,000 -- -- -- -- 2,000
------- -------- ------- ------- ------- --------
Total interest-earning assets....... $42,128 $ 12,301 $20,519 $27,655 $ 6,180 $108,783
Interest-bearing transaction
accounts.......................... $11,194 $ 11,193 $ -- $ -- $ -- 22,387
Savings accounts.................... 6,574 5,779 -- -- -- 12,353
Time deposits....................... 30,465 598 -- -- 66 31,129
Other borrowings.................... 1,978 3,200 1,512 6,246 296 13,232
------- -------- ------- ------- ------- --------
Total interest-bearing
liabilities....................... $50,211 $ 20,770 $ 1,512 $ 6,246 $ 362 $ 79,101
Interest sensistive GAP............. $(8,083) $ (8,469) $19,007 $21,409 $ 5,818
Cumulative GAP...................... $(8,083) $(16,552) $ 2,455 $23,864 $29,682
Cumulative GAP as a percentage of
interest-earning assets........... -7.43% -15.22% 2.26% 21.94% 27.29%
</TABLE>
ITEM 7A. 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 rate 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 two methods for measuring interest rate risk, GAP analysis and interest
rate simulations. GAP analysis focuses on measuring absolute dollar amounts
subject to repricing within certain periods of time. The Company has a negative
GAP in the one to within three year horizon. After three years and beyond, the
GAP is positive. Interest rate simulations provide the Company with an estimate
of both the dollar
31
<PAGE>
amount and percentage change in net interest income under various interest rate
scenarios. 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 or raised. For example, Cerritos Valley did not lower its
reference rate when the Wall Street prime rate was lowered in 1998. This policy
insulates the variable loan portfolio from changes in the interest rate risk and
it protects the Company's net interest margin. On the liability side, the
deposit interest rates are priced to the market on a continuous basis. Based
upon Cerritos Valley's interest rate simulation, net interest income is expected
to rise with increasing interest rates and fall with declining interest rates.
The Company's positive gap after three years is the result of the majority
of investments having terms greater than three years on the asset side. Also
approximately 60% of its loan portfolio reprices and matures over a one year
period. On the liability side, the majority of the Company's time deposits have
an average term life of less than one year while savings accounts, NOW accounts
and money market accounts are recorded for gap analysis in the maturing within
one year category because they do not have a contractual maturity date. The
borrowings form the Federal Home Loan Bank have an average term life greater
than three years.
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. The Company uses internal reference rate for pricing loans which
changes at a slower rate than prime. For fixed term loans, the Company uses
Federal Home Loan Bank advances to match the fundings of the loans in order to
protect the spread over the life of the loan. Also, the Company holds the
majority of its investments in the available-for-sale category in order to be
able to react to changes in interest rate.
32
<PAGE>
Certain information concerning interest-earning assets and interest-bearing
liabilities and yields on the assets and liabilities is set forth in the
following table. The amounts outstanding are daily average balances.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold:
Average outstanding..................................... $10,822 $10,667 $7,709
Average yield........................................... 4.85% 5.23% 5.42%
Interest income......................................... 525 558 418
Investment securities:
Average outstanding..................................... 38,539 30,899 29,326
Average yield........................................... 5.74% 6.20% 6.36%
Interest income......................................... 2,212 1,915 1,865
Loans:
Average outstanding..................................... 65,842 57,196 46,205
Average yield........................................... 9.98% 10.55% 10.84%
Interest income......................................... 6,570 6,032 5,008
Total interest-earning assets
Average outstanding................................. 116,721 99,522 83,474
Average yield....................................... 8.04% 8.60% 8.75%
Interest income..................................... 9,388 8,554 7,301
Interest-bearing liabilities:
Interest-bearing transaction accounts:
Average outstanding..................................... 11,719 10,066 9,556
Average yield........................................... 1.48% 1.46% 1.43%
Interest expense........................................ 173 147 137
Savings and money market deposit:
Average outstanding..................................... 24,467 20,245 19,675
Average yield........................................... 2.21% 1.90% 2.72%
Interest expense........................................ 540 384 536
Time deposits:
Average outstanding..................................... 32,244 32,126 24,701
Average yield........................................... 4.94% 5.37% 5.06%
Interest expense........................................ 1,593 1,724 1,250
Other borrowings
Average outstanding..................................... 13,293 5,697 890
Average yield........................................... 5.69% 6.18% 6.85%
Interest expense........................................ 757 352 61
Total interest-bearing liabilities
Average outstanding................................. 81,723 68,134 54,822
Average yield....................................... 3.75% 3.83% 3.62%
Interest expense.................................... 3,063 2,607 1,984
Net interest income......................................... 6,325 5,947 5,317
Average yield on interest-earning assets.................... 5.42% 5.98% 6.37%
</TABLE>
33
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
CERRITOS VALLEY BANCORP
AND SUBSIDIARY
DECEMBER 31, 1999 AND 1998
CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.......... 35
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS............................................ 36
STATEMENTS OF EARNINGS.................................... 37
STATEMENT OF STOCKHOLDERS' EQUITY......................... 38
STATEMENTS OF CASH FLOWS.................................. 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. 40
</TABLE>
34
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Cerritos Valley Bancorp and Subsidiary
We have audited the accompanying consolidated balance sheets of Cerritos
Valley Bancorp and Subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These 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 audits 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, 1999 and 1998, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Los Angeles, California
January 31, 2000
35
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 12,779,517 $ 8,610,342
Federal funds sold.......................................... 2,000,000 6,453,000
------------ ------------
Cash and cash equivalents............................. 14,779,517 15,063,342
Investment securities
Available for sale........................................ 33,515,501 40,487,055
Held to maturity--fair value of $3,429,466 and $2,020,098
in 1999 and 1998, respectively.......................... 3,503,926 2,000,370
Loans receivable, net of allowance for loan losses of
$1,277,141 and $1,237,680 in 1999 and 1998,
respectively.............................................. 66,805,672 59,834,047
Loans held for sale......................................... -- 1,284,631
Bank premises and equipment................................. 1,722,752 1,920,206
Accrued interest receivable................................. 1,072,048 932,216
Prepaid expenses and other assets........................... 5,452,383 4,312,492
------------ ------------
Total assets.......................................... $126,851,799 $125,834,359
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Checking noninterest-bearing............................ $ 35,789,486 $ 33,314,390
Checking interest-bearing and savings................... 23,497,164 24,873,713
Money market accounts................................... 11,248,567 7,942,643
Time certificates of deposit under $100,000............. 13,363,696 13,480,453
Time certificates of deposit $100,000 and over.......... 17,765,391 19,120,417
------------ ------------
Total deposits........................................ 101,664,304 98,731,616
FHLB advances............................................. 12,023,912 12,650,837
Treasury, tax and loan.................................... 978,094 --
Obligations under capital lease........................... 229,885 250,790
Accrued expenses and other liabilities.................... 1,999,344 1,784,466
------------ ------------
Total liabilities..................................... 116,895,539 113,417,709
Commitments and contingencies............................... -- --
Stockholders' equity
Contributed capital
Common stock--authorized, 20,000,000 shares, no par
value; 999,875 and 991,667 shares issued and
outstanding in 1999 and 1998, respectively............ 6,090,859 6,540,813
Additional paid in capital stock--warrants.............. 1,740,800 --
Retained earnings......................................... 2,927,514 5,848,246
Accumulated other comprehensive income.................... (802,913) 27,591
------------ ------------
Total stockholders' equity............................ 9,956,260 12,416,650
------------ ------------
Total liabilities and stockholders' equity............ $126,851,799 $125,834,359
============ ============
</TABLE>
The accompanying notes are integral part of these statements.
36
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST REVENUES
Loans.................................................. $6,570,387 $6,032,266 $5,007,530
Investment securities.................................. 2,211,974 1,914,533 1,865,134
Federal funds sold..................................... 524,688 557,701 417,987
FHLB stock and other deposits.......................... 80,625 48,915 10,175
---------- ---------- ----------
TOTAL INTEREST REVENUES.................................. 9,387,674 8,553,415 7,300,826
INTEREST EXPENSE
Deposits............................................... 2,306,070 2,255,122 1,923,455
FHLB borrowings........................................ 711,100 301,007 --
Other.................................................. 45,515 50,832 61,260
---------- ---------- ----------
TOTAL INTEREST EXPENSE................................... 3,062,685 2,606,961 1,984,715
---------- ---------- ----------
NET INTEREST INCOME...................................... 6,324,989 5,946,454 5,316,111
PROVISION FOR LOAN LOSSES................................ 240,000 310,000 750,000
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...... 6,084,989 5,636,454 4,566,111
NON INTEREST REVENUES
Service charges on deposit accounts.................... 1,241,750 1,081,733 825,503
Other service charges and income....................... 430,584 385,785 425,171
Gain on sale of real estate owned...................... 3,007 14,681 20,337
Gain on sale of loans.................................. 1,667 80,837 243,693
---------- ---------- ----------
TOTAL NON INTEREST REVENUES.............................. 1,677,008 1,563,036 1,514,704
NON INTEREST EXPENSE
Employee............................................... 2,183,556 2,230,404 2,132,286
Occupancy.............................................. 357,691 304,496 181,783
Other operating expense................................ 2,554,993 2,172,290 1,995,796
---------- ---------- ----------
TOTAL NON INTEREST EXPENSE............................... 5,096,240 4,707,190 4,309,865
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES............................. 2,665,757 2,492,300 1,770,950
INCOME TAX PROVISION..................................... 1,080,950 954,391 261,756
---------- ---------- ----------
NET EARNINGS............................................. $1,584,807 $1,537,909 $1,509,194
========== ========== ==========
Basic earnings per share................................. $ 1.59 $ 1.54 $ 1.51
========== ========== ==========
Diluted earnings per share............................... $ 1.42 $ 1.41 $ 1.42
========== ========== ==========
Basic weighted average shares outstanding................ 997,160 999,653 999,911
========== ========== ==========
Dilutive weighted average shares outstanding............. 1,113,655 1,088,161 1,066,553
========== ========== ==========
</TABLE>
The accompanying notes are integral part of these statements.
37
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED
NUMBER PAID IN OTHER
OF SHARES COMMON CAPITAL COMPREHENSIVE RETAINED
OUTSTANDING STOCK WARRANTS INCOME EARNINGS TOTAL
----------- ----------- ---------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
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
avaliable for sale, net
of tax benefit 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 12,572,545
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
$535,275................ -- -- -- (830,504) -- (830,504)
Net earnings for the
year.................... -- -- -- -- 1,584,807 1,584,807
-----------
Comprehensive income.... 754,303
Stock options exercised..... 13,000 100,567 -- -- -- 100,567
Redemption of stock and
deemed dividend........... (548,751) (11,149,340) -- -- (4,505,539) (15,654,879)
Issuance of stock and
warrants (net of issuance
costs of $460,381)........ 543,959 10,598,819 1,740,800 -- -- 12,339,619
--------- ----------- ---------- --------- ---------- -----------
Balance--December 31, 1999.. 999,875 $ 6,090,859 $1,740,800 $(802,913) $2,927,514 $10,710,563
========= =========== ========== ========= ========== ===========
</TABLE>
The accompanying notes are integral part of these statements.
38
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operatig activities:
Net earnings.............................................. $ 1,584,807 $ 1,537,909 $ 1,509,194
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Net amortization/accrection of discount/premium on
securities............................................ (4,803) (158,949) 65,293
Depreciation............................................ 254,801 249,996 211,334
Deferred income tax (benefit) expense................... (591,327) (191,826) (171,731)
Other (gains) and losses................................ (1,607) (14,681) 6,268
Principal payments from and sale of loans held for
sale.................................................. -- 4,373,947 --
Purchases of loans held for sale........................ -- (4,286,971) (918,736)
Increase in interest receivable......................... (139,832) (181,780) (37,236)
Net decrease (increase) in other assets................. (40,880) (47,893) (549,794)
Net increase in other liabilities....................... 214,878 313,065 250,327
Provision for loan losses............................... 240,000 310,000 750,000
------------ ------------ ------------
Net cash provided by operating activities............. 1,516,037 1,902,817 1,114,919
Cash flows from investing activities:
Proceeds from maturities and principal collected on sale
of securities:
Available for sale...................................... 10,633,951 33,903,161 5,236,187
Held to maturity........................................ 1,145,170 982,490 1,575,692
Purchases of investment securities:
Available for sale...................................... (4,995,781) (47,705,230) (7,777,228)
Held to maturity........................................ (2,648,726) -- (301,000)
Net (increase) decrease in loans.......................... (5,925,387) (11,393,070) (9,333,354)
Purchases of premises and equipment....................... (60,354) (209,264) (126,803)
Proceeds from sale of bank equipment...................... 3,006 -- 8,407
Proceeds from sale of other real estate owned............. -- 84,437 632,906
------------ ------------ ------------
Net cash used in investing activities................. (1,848,121) (24,337,476) (10,085,193)
Cash flows from financing activities:
Net increase in interest and noninterest bearing accounts,
savings and money market accounts....................... $ 4,404,471 $ 9,137,318 $ (482,505)
Net (dececrease) increase in time certificates of
deposits................................................ (1,471,783) 2,914,634 7,855,309
Payments made under capital lease obligations............. (20,905) (13,599) (14,953)
Net increase (decrease) in treasury, tax and loan note.... 978,094 (1,002,845) 561,158
Net (decrease) increase in FHLB advances.................. (626,925) 11,450,837 1,200,000
Proceeds from issuance of stock and warrants, net of
issuance costs of $460,381 in 1999...................... 12,339,619 -- 1,028
Payment for the redemption of stock and deemed dividend... (15,654,879) -- --
Proceeds from exercise of stock options................... 100,567 -- --
Proceeds for retirement of stock.......................... -- (104,161) --
------------ ------------ ------------
Net cash provided by financing activities............. 48,259 22,382,184 9,120,037
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents...... (283,825) (52,475) 149,763
Cash and cash equivalents at beginning of year.............. 15,063,342 15,115,817 14,966,054
------------ ------------ ------------
Cash and cash equivalents at end of year.................... $ 14,779,517 $ 15,063,342 $ 15,115,817
============ ============ ============
Supplemental disclosures of cash flow information
Interest paid............................................. $ 3,209,375 $ 2,482,264 $ 1,984,715
============ ============ ============
Income taxes paid......................................... $ 895,500 $ 992,416 $ 262,000
============ ============ ============
Supplemental disclosures of noncash investing activities:
Acquisition of real estate in settlement of loans......... $ -- $ -- $ 70,000
============ ============ ============
Transfer of loans held for sale to loans receivable....... $ 1,284,631 -- --
============ ============ ============
</TABLE>
The accompanying notes are integral part of these statements.
39
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 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 December 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:
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.
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
40
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 income
taxes.
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 of 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,
41
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
which is charged to expense and reduced by charge-offs, net of 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.
10. BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per share is based upon the weighted average number of common
shares outstanding. Diluted earnings 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 1998 and 1997 financial
statements to conform to the 1999 classifications.
42
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
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 $1,000,000 and $938,000 at December 31, 1999 and 1998,
respectively.
NOTE C--SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
The amortized cost and estimated fair values of securities available for
sale as of December 31, are as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------------
AMORTIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- -------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities......................... $ 497,853 $ -- $ 508 $ 497,345
Obligations of other U.S. Government agencies and
corporations................................... 26,406,357 -- 1,034,314 25,372,043
Mortgage-backed securities....................... 2,103,941 -- 13,884 2,090,057
Obligations of state and political
subdivisions................................... 1,808,300 494 25,748 1,783,046
Corporate bonds.................................. 4,037,237 -- 264,227 3,773,010
----------- ---- ---------- -----------
$34,853,688 $494 $1,338,681 $33,515,501
=========== ==== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
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>
The amortized cost and fair values of securities held to maturity at
December 31, were:
<TABLE>
<CAPTION>
1999
---------------------------------------------
AMORTIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
Obligations of other U.S. Government agencies and
corporations..................................... $2,000,000 $ -- $71,772 $1,928,228
Mortgage-backed securities......................... 680,124 2,666 2,629 680,162
Obligations of state and political subdivisions.... 823,802 14,133 16,860 821,076
---------- ------- ------- ----------
$3,503,926 $16,799 $91,260 $3,429,465
========== ======= ======= ==========
</TABLE>
43
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE C--SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY (CONTINUED)
<TABLE>
<CAPTION>
1998
---------------------------------------------
AMORTIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
Obligations of 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
---------- ------- ------ ----------
$2,000,370 $19,728 $ -- $2,020,098
========== ======= ====== ==========
</TABLE>
The amortized cost and fair values of securities available for sale and
securities held to maturity at December 31, 1999, 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>
HELD TO MATURITY AVAILABLE FOR SALE
----------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less..................... $ 100,000 $ 100,305 $ -- $ --
Due from one year to five years............. 447,496 452,300 28,090,823 27,162,526
Due from five to ten years.................. 1,286,738 1,273,806 4,270,619 4,074,700
Due after ten years......................... 1,669,692 1,603,055 2,492,246 2,278,275
---------- ---------- ----------- -----------
Total....................................... $3,503,926 $3,429,466 $34,853,688 $33,515,501
========== ========== =========== ===========
</TABLE>
Securities with a carrying value of $25,155,199 and $22,826,615 and a market
value of $24,230,251 and $22,824,746 at December 31, 1999 and 1998,
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 December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Commercial......................................... $27,913,786 $22,665,354
Construction....................................... 6,487,052 6,918,400
Real Estate........................................ 31,241,895 28,714,130
Installment........................................ 2,526,134 2,830,655
----------- -----------
Sub Total........................................ 68,168,867 61,128,539
Less:
Deferred loan fees............................... (86,054) (56,812)
Allowance for loan losses........................ (1,277,141) (1,237,680)
----------- -----------
$66,805,672 $59,834,047
=========== ===========
</TABLE>
44
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE D--LOANS RECEIVABLE (CONTINUED)
Changes in the allowance for loan losses for the years ended December 31,
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year........................... $ 1,237,680 $ 1,155,839 $ 1,561,161
Amounts charged off.................................... (225,747) (309,888) (1,320,359)
Recoveries............................................. 25,208 81,729 165,037
Loan loss provision.................................... 240,000 310,000 750,000
----------- ----------- -----------
Balance at end of year................................. $ 1,277,141 $ 1,237,680 $ 1,155,839
=========== =========== ===========
</TABLE>
The recorded investment in impaired loans was $514,000 and $199,000 at
December 31, 1999 and 1998, respectively. The average recorded investment in
impaired loans was $506,000 for 1999 and $380,000 for 1998. Total cash collected
on impaired loans during 1999 and 1998 was $43,676 and $173,848, of which $8,435
and $169,417 was credited to the principal balance outstanding on such loans and
$35,217 and $4,431 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 $97,000, $60,000 and
$117,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The activity in the allowance for loan losses related specifically to
impaired loans is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year................................ $ 149,434 $ 254,659 $ 66,476
Loan loss provision......................................... 111,272 194,697 848,894
Amounts charged off, net of recoveries...................... (181,150) (299,922) (660,711)
--------- --------- ---------
Balance at end of year...................................... $ 79,556 $ 149,434 $ 254,659
========= ========= =========
</TABLE>
NOTE E--BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land and building.................................... $1,225,000 $1,225,000
Land and building under capital leases............... 402,350 402,350
Leasehold improvements............................... 465,141 465,141
Furniture and equipment.............................. 2,174,987 2,125,886
---------- ----------
4,267,478 4,218,377
Less accumulated depreciation and amortization....... (2,544,726) (2,298,171)
---------- ----------
$1,722,752 $1,920,206
========== ==========
</TABLE>
45
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE F--DEPOSITS
At December 31, 1999, the scheduled maturities of time certificates of
deposits are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000........................................................ $30,464,669
2001........................................................ 454,658
2002 and thereafter......................................... 209,760
-----------
$31,129,087
===========
</TABLE>
NOTE G--ADVANCES FROM FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
FHLB advances represent collateralized obligations with the Federal Home
Loan Bank ("FHLB"), at various rates and terms.
Pursuant to collateral agreements with the FHLB, advances are collateralized
by certain Bank mortgage loans and securities. Bank assets with a carrying value
of $15,690,631 and $16,097,626 have been pledged to collateralize these advances
at December 31, 1999 and 1998, respectively. Advances at December 31, 1999 have
the following maturity dates: $1 million in 2000, $3.2 million in 2002,
$1.5 million in 2003, $300,000 in 2005 and $6.0 million, thereafter. Interest
rates range from 5.10% to 6.24%.
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 December 31, for FHLB advances:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Maximum month-end balance.............................. $13,742,286 $12,650,837 $1,200,000
Average daily balance.................................. $12,595,237 $ 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............................... $12,023,912 $12,650,837 $1,200,000
</TABLE>
46
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE H--COMMITMENTS
The minimum rental commitments under capital and operating leases at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------ -------- ----------
<S> <C> <C>
2000................................................... $ 40,850 $ 201,064
2001................................................... 40,850 201,064
2002................................................... 40,850 201,064
2003................................................... 40,850 211,064
2004................................................... 40,850 172,317
Thereafter............................................. 125,954 575,824
-------- ----------
Future minimum lease payments.......................... 330,204 $1,562,397
==========
Less amount representing interest...................... (100,319)
--------
Present value of net minimum lease payments............ $229,885
========
</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 years ended December 31, 1999, 1998 and 1997, was
approximately $201,000, $139,000 and $59,000, respectively.
NOTE I--INCOME TAXES
The current and deferred amounts of income tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Current tax expense
Federal................................................... $ 787,583 $ 860,524 $329,450
State..................................................... 349,419 285,693 104,037
---------- --------- --------
Total current tax expense............................... 1,137,002 1,146,217 433,487
Deferred tax expense (benefit)
Federal................................................... (2,354) (167,176) (128,798)
State..................................................... (53,698) (24,650) (42,933)
---------- --------- --------
Total deferred tax expense (benefit).................... (56,052) (191,826) (171,731)
---------- --------- --------
Total income tax expense (benefit)...................... $1,080,950 $ 954,391 $261,756
========== ========= ========
</TABLE>
47
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE I--INCOME TAXES (CONTINUED)
The expense (benefit) for income taxes varies from the Federal statutory tax
rate for the following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Federal income tax based on Statutory rate.................. $ 906,358 $846,416 $602,123
State franchise tax net of federal Income tax benefit....... 190,719 178,106 126,800
Tax exempt interest......................................... (71,865) (82,520) (73,827)
Recognition of deferred tax assets.......................... -- -- (343,524)
Other....................................................... 55,738 12,389 (49,816)
---------- -------- --------
Total income tax expense................................ $1,080,950 $954,391 $261,756
========== ======== ========
</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>
1999 1998
---------- --------
<S> <C> <C>
Deferred tax assets:
Depreciation.......................................... $ -- $ 79,142
Provision for loan losses............................. 222,246 161,118
Deferred gain on sale of property..................... 32,521 36,545
Capital lease......................................... 305,709 18,215
Deferred compensation................................. 637,925 481,016
State taxes........................................... 115,319 65,190
Unrealized loss on securities available for sale...... 535,275 --
---------- --------
Total gross deferred tax assets................... 1,848,995 841,226
---------- --------
Deferred tax liabilities:
Depreciation.......................................... (46,294) --
Rent on the sale/leaseback............................ (295,596) --
Fees and costs........................................ (75,974) (63,498)
State taxes........................................... (62,076) --
---------- --------
(479,940) (63,498)
---------- --------
Net deferred tax assets........................... $1,369,055 $777,728
========== ========
</TABLE>
48
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE J--EARNINGS PER SHARE
Basic and diluted earnings per share for the years ended December 31, 1999,
1998 and 1997 are computed as follows:
<TABLE>
<CAPTION>
1999
----------------------------------
WEIGHTED
NET AVERAGE PER SHARE
EARNINGS SHARES AMOUNT
---------- --------- ---------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings available to common Shareholders............. $1,584,807 997,160 $1.59
=====
Effect of dilutive stock options and warrants............. -- 116,495
---------- ---------
DILUTED EARNINGS PER SHARE
Net earnings available to common Shareholders............. $1,584,807 1,113,655 $1.42
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------
WEIGHTED
NET AVERAGE 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
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------
WEIGHTED
NET AVERAGE 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>
NOTE K--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
49
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE K--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
these instruments. At December 31, 1999, the Bank had commitments to extend
credit of approximately $12,570,000 and obligations under letters of credit of
approximately $415,000.
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.
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 L--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 M--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 December 31,
1999 and 1998 was approximately $2,061,000 and $2,234,000, respectively.
NOTE N--EMPLOYEE STOCK OWNERSHIP PLAN
The Holding Company adopted an Employee Stock Ownership Plan effective
July 1, 1989. A provision of $0 for the years ended December 31, 1999, 1998 and
1997, was allocated by the Bank as a contribution to the Plan.
50
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE O--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:
1. 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% (10.5% at December 31, 1999). 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
$350,000, $290,000 and $269,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
To anticipate the future costs of the plan, the Bank purchased life
insurance policies in the amounts of $1,200,000 and $510,000. The cash surrender
value of the policies has been included in other assets on the consolidated
balance sheets.
2. 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 is exercisable through December 2003. No shares were exercised
in 1999, 1998 and 1997.
NOTE P--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.
The plan is accounted for using the intrinsic value method consistent with
APB Opinion 25 and related Interpretations. 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 years ended December 31, 1999, 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: 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. There were no grants in 1999 and 1998.
51
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE P--STOCK OPTION PLAN (CONTINUED)
Transactions for the three years ended December 31, 1999 for the 1993 Stock
Option Plan are summarized in the table below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
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 $6.12 172,000 $6.12 165,000 $6.00
Granted....................................... -- -- -- -- 10,000 $8.00
Exercised..................................... 13,000 $6.31 -- -- -- --
Canceled...................................... 9,000 -- -- -- (3,000) $6.00
------- ------- -------
Outstanding at end of year.................... 150,000 $6.00 172,000 $6.12 172,000 $6.12
======= ======= =======
</TABLE>
Transactions for the three years ended December 31, 1999, for options
exercisable and weighted fair value of options granted are summarized in the
table below:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Options exercisable at year end............................. 50,000 161,600 127,200
====== ======= =======
Weighted average fair value of options granted during
year...................................................... $ -- $ -- $ 1.83
====== ======= =======
</TABLE>
Transactions for the three years ended December 31, 1999, for the 1993 Stock
Purchase Agreement are summarized in the table below:
<TABLE>
<CAPTION>
OPTIONS
OUTSTANDING OPTIONS EXERCISABLE
---------------- ------------------------------
WEIGHTED-AVERAGE WEIGHTED-
NUMBER REMAINING AVERAGE EXERCISE NUMBER WEIGHTED-AVERAGE
OUTSTANDING CONTRACTUAL LIFE PRICE OUTSTANDING EXERCISE PRICE
----------- ---------------- ---------------- ----------- ----------------
<C> <S> <C> <C> <C>
150,000 5 Years $6.00 150,000 $6.00
</TABLE>
NOTE Q--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.
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
52
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE Q--REGULATORY MATTERS (CONTINUED)
average assets (as defined). Management believes, as of December 31, 1999, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 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
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES 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 December 31, 1999:
Total capital (to Risk Weighted Assets).......... $11,796 13.7% $6,898 8.0% $8,623 10.0%
Tier 1 Capital (to Risk Weighted Assets)......... 10,716 12.4% 3,448 4.0% 5,173 6.0%
Tier 1 Capital (to Average Assets)............... 10,716 8.1% 5,272 4.0% 6,590 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%
</TABLE>
NOTE R--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.
53
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE R--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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 discounted 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.
54
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE R--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------ -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents................ $14,779,517 $4,779,517 $15,063,342 $15,063,342
Investment securities:
Available for sale..................... 33,515,501 33,515,501 40,487,055 40,487,055
Held to maturity....................... 3,503,926 3,429,466 3,278,770 3,298,498
Loans receivable, net.................... 66,805,672 68,138,562 61,118,678 61,250,860
Accrued interest receivable.............. 1,072,048 1,072,048 932,216 932,216
Liabilities
Non-interest bearing deposits............ 35,789,486 35,789,486 33,314,390 33,314,390
Interest bearing deposits................ 65,874,818 62,004,300 65,417,226 65,417,372
FHLB advances............................ 12,023,912 11,463,022 12,650,837 12,862,239
Accrued interest payable................. 215,795 215,795 312,830 312,830
</TABLE>
NOTE S--CONDENSED FINANCIAL INFORMATION
The following financial information represents the balance sheets of the
Holding Company as of December 31, 1999 and 1998, and the related statements of
operations and cash flows for the years ending December 31, 1999, 1998 and 1997.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- -----------
<S> <C> <C>
Cash........................................................ $ 4,237 $ 20,199
Other assets................................................ 38,567 --
Investment in Cerritos Valley Bank.......................... 9,913,456 12,396,451
---------- -----------
Total assets.............................................. $9,956,260 $12,416,650
========== ===========
Total stockholders' equity................................ $9,956,260 $12,416,650
========== ===========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income
Net income of Cerritos Valley Bank..................... $1,757,509 $1,553,919 $1,514,134
Other income........................................... 59 260 988
---------- ---------- ----------
Total income......................................... 1,757,568 1,554,179 1,515,122
Administrative expenses.................................. (172,761) (16,270) (5,928)
---------- ---------- ----------
Net income......................................... $1,584,807 $1,537,909 $1,509,194
========== ========== ==========
</TABLE>
55
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income............................................. $ 1,584,807 $1,537,909 $1,509,194
Adjustments to reconcile net income to
Net cash from operating activities
Equity earnings in subsidiary.......................... (1,757,509) (1,553,919) (1,516,940)
Decrease in accounts payable/other..................... (38,567)
----------- ---------- ----------
Net cash used by operating activities................ (211,269) (16,010) (7,746)
Cash Flows from Investing Activities
Dividend received from Cerritos Valley Bank............ 3,410,000 125,000 --
Cash Flows from Financing Activities
Redemption of stock and deemed dividend................ (15,654,879) (104,161)
Proceeds from issuance of stocks and warrants.......... 1,028
Net of issuance costs of $460,381.................... 12,339,619 -- --
Proceeds from exercise of stock options................ 100,567 -- --
----------- ---------- ----------
Net cash provided (used) by financing activities..... (3,214,693) (104,161) 1,028
----------- ---------- ----------
Net increase (decrease) in cash.......................... (15,962) 4,829 (6,718)
Cash and cash equivalents, beginning of year............. 20,199 15,370 22,088
----------- ---------- ----------
Cash and cash equivalents, end of year................... $ 4,237 $ 20,199 $ 15,370
=========== ========== ==========
</TABLE>
NOTE T--RETIREMENT OF COMMON STOCK
During 1999, and in connection with the exchange of shares resulting from
the purchase of $12.8 million of common stock by California Financial
Institutions Fund Limited Partnership (the "California Fund"), 4,792 shares were
purchased and retired by the Bank. In 1998, the Board of Directors authorized
management to purchase and retire 8,333 shares of common stock from a
shareholder. The Bank purchased and retired shares of common stock for
$11,149,340 and $104,161 during 1999 and 1998, respectively.
NOTE U--MERGER AND ACQUISITION
On September 7, 1999, the shareholders of the Bancorp approved a merger and
reorganization under the terms of the Agreement and Plan of Reorganization and
Merger by and among Belvedere Capital Partners, Inc. ("Belvedere"), 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, the Fund infused $12,800,000 into the Bancorp. Each outstanding
share of the Bancorp's stock was then converted into cash in the amount of
$13.4871 and 0.5271 shares of Bancorp stock. As a result of this merger, the
Bancorp redeemed shares from and paid dividends to its shareholders. In
addition, the Fund was issued 81,000 warrants to acquire additional shares of
stock at $.01 per share.
56
<PAGE>
CERRITOS VALLEY BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
NOTE U--MERGER AND ACQUISITION (CONTINUED)
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. Subsequent to the merger, the Bancorp purchased
75,000 shares of its outstanding stock from James N. Koury, President and Chief
Executive Officer of the Bancorp, pursuant to a stock purchase rights agreement.
Upon completion of the merger, the Fund owned 54.40% of the Bancorp.
57
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
58
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The principal occupations and certain other information about the current
directors of the Company is as follows:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE DURING THE
NAME AND ADDRESS AGE PAST FIVE YEARS
- ---------------- -------- ------------------------------
<S> <C> <C>
Gary R. Einstein.......................... 48 Practicing attorney in the law first of
211 14(th) Street Einstein & Spiegal.
Shibley Horaney........................... 65 Chief Executive Officer and President H &
20351 S. W. Acacia St. H Insurance Agency, President of Sterling
P.O. Box 8128 Casualty Insurance Co., President of D. H.
Newport Beach, Ca 92658 Claim Services, Inc., President of Fairway
Auto Rental Inc., and the President of
Dashers Insurance Service Inc.
James N. Koury............................ 64 Chairman of the Board and President and
12100 Firestone Blvd. Chief Executive Officer of the Company and
Nowalk, Ca 90650 Cerritos Valley Bank.
Pricilla F. Koury......................... 56 Private investor and wife of James N.
410 Reposado Drive Koury
La Habra, Ca 90631
James McGinley............................ 65 Owner and General Manager of Amity, Inc.,
10926 S. Painter a metal stamping and tool dying company.
Santa Fe Springs, Ca 90670
Seymour Melnik, M.D....................... 60 Dr. Melnik is an obstetrician/gynecologist
8141 Cielo Vista Drive and is a partner in Melnik & Soloway M.D.'
Whittier, Ca 90605 s Inc.
Garo V. Minassian......................... 54 Architect and Owner of Garo V. Minassian
140 Acari Drive Architect.
Los Angeles, Ca 90049
Richard J. Romero......................... 32 Vice Chairman of Cerritos Valley Bank,
1724 N. Laurel Ave. President of Oremor Management and
Upland, Ca 91784 Investment in the automotive industry.
Director of Empire Nissan, Romero Motors
Corp., Oremor Jeep Chrysler Plymouth of
Ontario, EVP/Director of Norwalk Auto
Auction, President of Oremor Develop. and
President of Toyota of Glendale.
David A. Duarte........................... 50 Chief Credit Officer and Executive Vice
12100 Firestone Blvd. President of Cerritos Valley Bank, Chief
Norwalk, Ca 90650 Credit Officer and Executive Vice
President of Security First Bank (until
August 1999), Chief Credit Officer and
Executive Vice President of Home Bank
(until February 1997).
Jo Ann San Paolo.......................... 53 Vice President of San Paolo Salons, Inc.
1336 N. Whitehall Drive
La Habra Heights, Ca 90631
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE DURING THE
NAME AND ADDRESS AGE PAST FIVE YEARS
- ---------------- -------- ------------------------------
<S> <C> <C>
Ellen Toma................................ 71 Private investor.
34300 Latern Bay Drive #70
Dana Point, Ca 92629
Richard W. Decker, Jr..................... 55 Manager, Belvedere Capital Partners LLC,
One Maritime Plaza Ste. 800 General partner of the California
San Francisco, Ca 94111 Community Financial Funds, LP and Chairman
and Director of California Community
Bancshares, Inc., a registered bank
holding company.
J. Thomas Byrom........................... 52 Chief Financial Officer and Secretary of
One Maritime Plaza Ste. 800 Belvedere Capital Partners LLC, General
San Francisco, Ca 94111 partner of the California Community
Financial Funds LP and Director and
Secretary of California Community
Bancshares, Inc., a registered bank
holding company.
Melissa Lanfre (1)........................ 48 Chief Financial Officer and Senior Vice
12100 Firestone Blvd. President of the Company and Chief
Norwalk, Ca 90650 Financial Officer and Senior Vice
President and Secretary of the Board of
Directors of Cerritos Valley Bank (since
August 1999); Chief Financial Officer and
Senior Vice President of Financial
Reporting of Hawthorne Savings Bank (until
April 1999); Chief Financial Officer and
Senior Vice President of Professional
Bancorp, Inc. and First Professional Bank
(until November 1998); Chief Financial
Officer and Senior Vice President of
Harbor Bancorp, Inc. and Harbor Bank (July
1987 until November 1998).
</TABLE>
- ------------------------
(1) Melissa Lanfre resigned from her position with the Company effective
March 10, 2000.
SECTION 16 (A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent of
the Company's Common Stock, to file with the Securities and Exchange Commission
and the American Stock Exchange initial reports of ownership and reports of
changes in ownership of Common Stock of the Company. Officers, directors and
greater than ten percent shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16 (a) reports they file.
To the Company's knowledge, based soley upon review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the year ended December 31, 1999, all Section 16
(a) filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were fulfilled in a timely manner.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid or accrued
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
the Company and Cerritos Valley Bank and to Thomas Yott, the former Executive
Vice President and Chief Credit Officer of Cerritos Valley Bank whose annual
60
<PAGE>
base compensation and bonus exceeded $100,000 during the past three fiscal years
ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------ --------------------------------
AWARDS PAYOUTS
--------------------- --------
(A) (B) (C) (D) (E) (F) (G) (H) (I)
- --- -------- -------- -------- ---------- ---------- -------- -------- ---------
OTHER
ANNUAL RESTRICTED ALL OTHER
COMPEN- STOCK LTIP COMPEN-
SALARY BONUS SATION (1) AWARDS OPTIONS/ PAYOUTS SATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) SARS ($) ($)
- --------------------------- -------- -------- -------- ---------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James N. Koury.................... 1999 225,000 75,000 1,701 -- -- -- 7,908(2)
Chairman of the Board, 1998 195,833 20,000 1,699 -- -- -- 7,908
President and Chief 1997 190,000 -- 5,746 -- -- -- 7,908
Executive Officer of
Cerritos Valley Bank
Thomas E. Yott (3,4).............. 1999 33,711 -- -- -- -- -- 45,000(4)
Executive Vice 1998 100,000 10,000 -- -- -- -- --
President and Chief 1997 100,000 -- -- -- -- -- --
Credit Officer of
Cerritos Valley Bank
</TABLE>
- ------------------------
(1) These amounts represent perquisites consisting of county club fees and car
mileage allowance for Mr. James N. Koury.
(2) This amount represents Cerritos Valley's contribution for the cost of
premiums for life insurance.
(3) Mr. Yott resigned from Cerritos Valley Bank effective April 15, 1999.
(4) Mr. Yott received compensation from stock options exercised.
61
<PAGE>
OPTION/SAR EXERCISES AND YEAR END VALUE TABLE
The following table sets forth information in regard to the executive
officers named in the Summary Compensation Table with respect to option
exercises during 1999 and fiscal year end option values:
AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR END OPTION /SAR
VALUE
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED IN-
UNEXERCISED THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
VALUE YEAR END (#) YEAR END ($)
SHARES ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE (1) UNEXERCISABLE (1)
- ---- ------------------ -------- ----------------- -----------------
(A) (B) (C) (D) (E)
<S> <C> <C> <C> <C>
James N. Koury...................... 0 0 150,000/0 $450,000/$0
Thomas E. Yott...................... 10,000 0 0 0
</TABLE>
- ------------------------
(1) Cerritos Valley Bancorp has no SARs.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists the holdings of the only persons (including any
"group" as that term is used in Section 13 (d) 3 of the Securities Exchange Act
of 1934, as amended) known by the Company to be the beneficial owners of more
than five percent (5%) of the Company's outstanding Common Stock as of
December 31, 1999, based upon 997,885 shares outstanding on that date.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED
--------------------
RELATIONSHIP NUMBER OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER WITH COMPANY SHARES OF CLASS
- ------------------------------------ ------------------------ --------- --------
<S> <C> <C> <C>
California Community Financial Institutions Fund Top tier bank holding 543,959 54.40%
LP.............................................. company of the Company
One Maritime Plaza, Ste. 800
San Francisco, Ca 94111
James N. Koury (1).............................. Chairman of the Board 97,020 9.70%
12100 Firestone Blvd. and President and Chief
Norwalk, Ca 90650 Executive Officer of the
Company and Cerritos
Valley Bank
Ellen Toma...................................... Director 53,198 5.32%
34300 Lantern Bay Drive #70
Dana Point, Ca 92629
</TABLE>
- ------------------------
(1) Includes 21,184 shares of common stock held by Mr. James N. Koury; 21,184
shares of common stock held by Pricilla F. Koury, Director of Company and
Mr. James N. Koury's wife; 7,213 shares of common stock held by Jami Koury,
minor daughter of Mr. James N. Koury and Mrs. Pricilla F. Koury and 47,439
shares of common stock held by Rose Financial Company, Ltd, P.O. Box 707,
West Bay Road, Grand Cayman, Cayman Islands.
62
<PAGE>
The following table shows as of December 31, 1999, the number of shares of
the Company's common stock beneficially owned by each director and named
executive officer of the Company and by all of the Company's directors and
executive officers as a group.
<TABLE>
<CAPTION>
COMMON STOCK PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- ---------------- ------------------ --------
<S> <C> <C>
DIRECTORS AND NAMED EXECUTIVE OFFICERS:
Gary R. Einstein............................................ 2,500 0.25%
Shibley Horaney............................................. -- *
James N. Koury (1).......................................... 218,623 21.86%
Pricilla F. Koury (2)....................................... 28,397 2.84%
James McGinley.............................................. 23,406 2.34%
Seymour Melnik, M.D......................................... -- *
Garo V. Minassian........................................... 6,060 0.61%
Richard J. Romero........................................... 3,843 0.38%
David A. Duarte............................................. -- *
Jo Ann San Paolo............................................ 26,210 2.62%
Ellen Toma.................................................. 53,198 5.32%
Richard W. Decker, Jr. (3).................................. -- *
J. Thomas Byrom............................................. -- *
Melissa Lanfre.............................................. -- *
All directors and executive officers
as a group (14 in all).................................... 362,237 36.23%
</TABLE>
- ------------------------
* Less than 1%
(1) Includes 21,184 shares held by Mr. Koury; 47,439 shares held by Rose
Financial Company, Ltd.; and 150,000 options held by Mr. Koury.
(2) Includes 21,184 shares held by Mrs. Koury and 7,213 shares held by Jami
Koury, a minor daughter of Mr. And Mrs. Koury.
(3) Mr. Decker is a manger of Belvedere Capital Partners LLC, as General Partner
of California Community Financial Institutions Fund which holds shares in
the Company of 543,959, 54.40% of common stock outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the directors and executive officers of Cerritos Valley Bancorp and
their immediate families, as well as companies with which they are associated,
are customers of, or have had banking transactions with, Cerritos Valley Bank in
the ordinary course of Cerritos Valley Banks business, and Cerritos Valley Bank
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.
63
<PAGE>
PART IV
ITEM 14 EXHIBITS TO CONSOLIDATED FINANCIAL STATEMENTS SCHEDULES AND REPORTS OF
INDEPENDENT AUDITORS AND INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
SCHEDULES
(a)
1. Financial Statements.
See Item 8 of this document for Financial Statements and Supplementary
Data.
2. None, except Financial Data Schedule as Exhibit 27 of this document.
3. Exhibits
3.1 Articles of Incorporation as amended of Registrant is contained as
Exhibit 3.1 within the Company's S-4 filing dated May 24, 1999, file
number 333-79193, and is hereby incorporated by reference herein.
3.2 By Laws as amended of Registrant is contained as Exhibit 3.2 within
the Company's S-4 filing dated May 24, 1999, file number 333-79193, and
is hereby incorporated by reference herein.
4.1 Specimen stock certificate of Registrant is contained as Exhibit 4.1
within the Company's S-4 filing dated May 24, 1999, file number
333-79193, and is hereby incorporated by reference herein.
10.2 Stock Purchase Amendment Agreement for James N. Koury is contained
as Exhibit 10.2 within the Company's S-4 filing dated May 24, 1999, file
number 333-79193, and is hereby incorporated by reference herein.
10.3 Cerritos Valley Bank Deferred Compensation Agreement for James N.
Koury is contained as Exhibit 10.3 within the Company's S-4 filing dated
May 24, 1999, file number 333-79193, and is hereby incorporated by
reference herein.
10.4 Amendment to Cerritos Valley Bank Deferred Compensation Agreement
for James N. Koury is contained as Exhibit 10.4 within the Company's S-4
filing dated May 24, 1999, file number 333-79193, and is hereby
incorporated by reference herein.
10.5 Cerritos Valley Bancorp 1993 Stock Option Plan is contained as
Exhibit 10.5 within the Company's S-4 filing dated May 24, 1999, file
number 333-79193, and is hereby incorporated by reference herein.
10.6 Cerritos Valley Bancorp 1993 Stock Option Plan and form of incentive
stock option and nonqualified stock option agreement is contained as
Exhibit 10.6 within the Company's S-4 filing dated May 24, 1999, file
number 333-79193, and is hereby incorporated by reference herein.
10.7 Form of indemnification agreement is contained as Exhibit 10.7
within the Company's S-4 filing dated May 24, 1999, file number
333-79193, and is hereby incorporated by reference herein.
10.8 Directors Agreement form for directors of Registrant is contained as
Exhibit 10.8 within the Company's S-4 filing dated May 24, 1999, file
number 333-79193, and is hereby incorporated by reference herein.
11. Statement re: computation of per share earnings is included in Note J
to the financial statements included in Part II Item 8 of this
Registration Statement
64
<PAGE>
ITEM 14 EXHIBITS TO CONSOLIDATED FINANCIAL STATEMENTS SCHEDULES AND REPORTS OF
INDEPENDENT AUDITORS AND INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
SCHEDULES (CONTINUED)
21. Sole Subsidiary of the Registrant is Cerritos Valley Bank, a
California state-chartered banking corporation.
(b)
Reports on Form 8K. None filed during the reporting period, 4th quarter
1999.
(c)
Financial Data Schedule as Exhibit 27 of this document.
(d)
Financial Data Schedule as Exhibit 27 of this document.
65
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized
CERRITOS VALLEY BANCORP
<TABLE>
<S> <C>
/s/ JAMES N. KOURY
- ---------------------------------------
James N. Koury, Chief Executive Officer and
President
Dated April 12, 2000
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ GARY R. EINSTEIN
- ---------------------------------------
Gary R. Einstein, Director
Dated April 12, 2000
/s/ SHIBLEY HORANEY
- ---------------------------------------
Shibley Horaney, Director
Dated April 12, 2000
/s/ PRICILLA KOURY
- ---------------------------------------
Pricilla Koury, Director
Dated April 12, 2000
/s/ JAMES MCGINLEY
- ---------------------------------------
James McGinley, Director
Dated April 12, 2000
/s/ SEYMOUR MELNIK, M.D.
- ---------------------------------------
Seymour Melnik, M.D., Director
Dated April 12, 2000
/s/ GARO V. MINASSIAN
- ---------------------------------------
Garo V. Minassian, Director
Dated April 12, 2000
</TABLE>
<PAGE>
<TABLE>
<S> <C>
/s/ JO ANN SAN PAOLO
- ---------------------------------------
Jo Ann San Paolo, Director
Dated April 12, 2000
/s/ RICHARD J. ROMERO
- ---------------------------------------
Richard J. Romero, Director
Dated April 12, 2000
/s/ ELLEN TOMA
- ---------------------------------------
Ellen Toma, Director
Dated April 12, 2000
/s/ RICHARD W. DECKER, JR.
- ---------------------------------------
Richard W. Decker, Jr., Director
Dated April 12, 2000
/s/ J. THOMAS BYROM
- ---------------------------------------
J. Thomas Byrom, Director
Dated April 12, 2000
/s/ PAULA-ROSE WIHONGI
- ---------------------------------------
Paula-Rose Wihongi, Principal Financial Officer
and Principal Accounting Officer
Dated April 12, 2000
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,779,517
<INT-BEARING-DEPOSITS> 65,874,818
<FED-FUNDS-SOLD> 2,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,515,501
<INVESTMENTS-CARRYING> 3,503,926
<INVESTMENTS-MARKET> 3,429,466
<LOANS> 66,805,672
<ALLOWANCE> 1,277,141
<TOTAL-ASSETS> 126,851,799
<DEPOSITS> 101,664,304
<SHORT-TERM> 1,978,094
<LIABILITIES-OTHER> 1,999,344
<LONG-TERM> 11,253,797
0
0
<COMMON> 6,090,859
<OTHER-SE> 3,865,401
<TOTAL-LIABILITIES-AND-EQUITY> 126,851,799
<INTEREST-LOAN> 6,570,387
<INTEREST-INVEST> 2,736,662
<INTEREST-OTHER> 80,625
<INTEREST-TOTAL> 9,387,674
<INTEREST-DEPOSIT> 2,306,070
<INTEREST-EXPENSE> 3,062,685
<INTEREST-INCOME-NET> 6,324,989
<LOAN-LOSSES> 240,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,096,240
<INCOME-PRETAX> 2,665,757
<INCOME-PRE-EXTRAORDINARY> 2,665,757
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,584,807
<EPS-BASIC> 1.59
<EPS-DILUTED> 1.42
<YIELD-ACTUAL> 5.42
<LOANS-NON> 514,000
<LOANS-PAST> 1,354,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,237,680
<CHARGE-OFFS> 225,747
<RECOVERIES> 25,208
<ALLOWANCE-CLOSE> 1,277,141
<ALLOWANCE-DOMESTIC> 1,277,141
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
