<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
DATE OF REPORT: March 19, 1998
VIB Corp
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation)
333-43021 33-0780371
(Commission File Number) (IRS Employer I.D. Number)
1498 Main Street, El Centro, California 92243
(Address of principal executive offices) (Zip Code)
(760) 337-3200
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
-1-
<PAGE> 2
Item 2. Acquisition or Disposition of Assets.
Bank Holding Company Reorganization
On November 18, 1997, Valley Independent Bank (the "Bank"), VIB Merger
Company (the "Merger Company"), and VIB Corp (the "Registrant") entered into a
Plan of Reorganization and Merger Agreement which provided for the merger of the
Bank with the Merger Company, a wholly-owned subsidiary of the Registrant. On
March 12, 1998, after obtaining approval of the corporate reorganization by the
shareholders of the Bank, the Merger Company and the Registrant, and all
applicable regulatory authorities, the reorganization was consummated.
Consequently, effective March 12, 1998, pursuant to the terms of the Plan of
Reorganization and Merger Agreement, the Bank became the wholly-owned subsidiary
of the Registrant, the 6,194,116 issued and outstanding shares of the Bank's
Common Stock were converted into 6,194,116 shares of the Registrant's Common
Stock, all outstanding options and warrants to purchase the Bank's Common Stock
were converted into options and warrants to purchase the Registrant's Common
Stock, respectively, on a one-for-one basis, and the shareholders of the Bank
became shareholders of the Registrant.
Rule 12g-3(f) Disclosure
By operation of Rule 12g-3(a), the Registrant's Common Stock shall be
deemed registered pursuant to Section 12(g) of the Securities Exchange Act of
1934. By operation of Rule 12g-3(b), the Registrant assumes the Bank's
obligation to register the Warrants pursuant to Section 12(g).
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
A. Financial Statements of Business Acquired.
The following financial statements of the Bank are included in this
Report on Form 8-K:
<TABLE>
<CAPTION>
Description Page
----------- ----
<S> <C>
Independent Auditors' Report..................................................1
Statements of Financial Condition - December 31, 1997 and 1996 ...............2
Statements of Income - Years ended December 31, 1997, 1996, and 1995..........4
Statement of Changes in Shareholders' Equity - Years ended December 31,
1997, 1996, and 1995.......................................................5
Statements of Cash Flows - Years ended December 31, 1997, 1996, and 1995......6
Notes to Financial Statements - December 31, 1997, 1996, and 1995.............7
</TABLE>
B. Pro Forma Financial Information.
Pro forma financial information has not been included in this Report on
Form 8-K pursuant to the provisions of Item 7(b)(2) of Form 8-K. The combined
pro forma financials would not be materially different from the 1997 audited
financial statements of Valley Independent Bank as VIB Corp did not have any
operations during 1997 and total assets were $1,000 as of December 31, 1997. VIB
Corp will be filing consolidated financial information in its initial Report on
Form 10-Q for the first quarter of 1998.
<TABLE>
<CAPTION>
C. Exhibits. Page
--------- ----
<S> <C>
2. Plan of Reorganization and Merger Agreement (1)
4.1 Form of Common Stock Certificate (2)
4.2 Form of Warrant Certificate (2)
</TABLE>
- ----------
(1) Filed as Exhibit 2 to Registrant's Registration Statement on Form S-4 dated
December 23, 1997.
(2) Filed as an Exhibit to Registrant's Form 8-A Registration Statement dated
March 19, 1998.
-2-
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
VIB CORP
Date: March 19, 1998 /s/ Harry G. Gooding, III
------------------------------------
Harry G. Gooding, III
Executive Vice President
and Chief Financial Officer
-3-
<PAGE> 4
[VAVRINEK, TRINE, DAY & CO., LLP LETTERHEAD]
To the Shareholders and Board of Directors
of Valley Independent Bank
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying statements of condition of Valley Independent
Bank as of December 31, 1997 and 1996 and the related statements of income,
changes in shareholders' equity, and cash flows for the each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valley Independent Bank as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
VAVRINEK, TRINE, DAY & CO.
January 14, 1998, except for Note S
which is dated January 22, 1998.
Laguna Hills, California
1
<PAGE> 5
VALLEY INDEPENDENT BANK
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 33,821,287 $ 26,885,674
Interest-Bearing Deposits 586,000 879,000
Securities Available for Sale - Note B 69,287,466 36,522,326
Federal Funds Sold 4,000,000 8,000,000
Loans - Note C:
Commercial 46,049,768 41,645,806
Agricultural 49,128,668 35,096,406
Real Estate - Construction 35,926,148 26,418,593
Real Estate - Other 157,566,136 122,007,938
Consumer 26,741,763 21,710,470
------------- -------------
TOTAL LOANS 315,412,483 246,879,213
Net Deferred Loan Fees (1,665,059) (1,458,015)
Allowance for Credit Losses (2,330,000) (2,634,000)
------------- -------------
NET LOANS 311,417,424 242,787,198
Premises and Equipment - Note D 11,452,257 6,585,680
Other Real Estate Owned 1,171,027 1,947,615
Cash Surrender Value of Life Insurance 2,282,805 2,007,958
Deferred Tax Asset - Note G 1,650,000 1,571,000
Goodwill - Notes Q and R 3,607,404 1,900,943
Accrued Interest and Other Assets 4,891,773 4,477,925
------------- -------------
$ 444,167,443 $ 333,565,319
============= =============
</TABLE>
2
<PAGE> 6
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits - Note E:
Noninterest-Bearing Demand $126,660,748 $ 87,228,872
Money Market and NOW 93,732,297 70,656,078
Savings 40,811,775 29,607,879
Time Deposits Under $100,000 67,110,498 66,695,128
Time Deposits $100,000 and Over 70,897,030 50,388,447
------------ ------------
TOTAL DEPOSITS 399,212,348 304,576,404
Capitalized Lease Obligation- Note D 2,842,336 --
Accrued Interest and Other Liabilities 1,858,749 1,949,382
------------ ------------
TOTAL LIABILITIES 403,913,433 306,525,786
Commitments and Contingencies - Note I
Shareholders' Equity - Notes J, K, and N:
Common Shares - Authorized
13,500,000 Shares; Issued and
Outstanding: 6,187,397 in 1997 and
5,458,892 in 1996 35,932,844 24,286,693
Undivided Profits 4,053,921 2,473,963
Net Unrealized Appreciation on
Available-for-Sale Securities, Net of Taxes
of $186,000 in 1997 and $194,000 in 1996 267,245 278,877
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 40,254,010 27,039,533
------------ ------------
$444,167,443 $333,565,319
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 7
VALLEY INDEPENDENT BANK
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $27,631,592 $21,978,502 $19,197,257
Interest on Investment Securities - Taxable 3,399,135 1,390,508 1,460,198
Interest on Investment Securities - Nontaxable 1,031,879 584,014 426,907
Other Interest Income 396,337 307,854 691,578
----------- ----------- -----------
TOTAL INTEREST INCOME 32,458,943 24,260,878 21,775,940
INTEREST EXPENSE
Interest on Money Market and NOW 2,117,229 1,537,461 1,201,553
Interest on Savings Deposits 791,595 556,675 537,827
Interest on Time Deposits 7,304,118 4,890,655 4,211,219
Interest on Other Borrowings 208,191 142,953 22,548
----------- ----------- -----------
TOTAL INTEREST EXPENSE 10,421,133 7,127,744 5,973,147
----------- ----------- -----------
NET INTEREST INCOME 22,037,810 17,133,134 15,802,793
Provision for Credit Losses 1,850,000 635,000 1,008,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 20,187,810 16,498,134 14,794,793
NONINTEREST INCOME
Service Charges and Fees 3,313,572 1,903,902 1,510,704
Gain on Sale of Loans and Servicing Fees 1,421,869 658,670 387,686
Mortgage Fees -- 87,811 326,135
Gain on Sale of Securities 551,024 48,835 1,792
Other Income 464,497 375,442 293,202
----------- ----------- -----------
5,750,962 3,074,660 2,519,519
----------- ----------- -----------
25,938,772 19,572,794 17,314,312
NONINTEREST EXPENSE
Salaries and Employee Benefits 9,799,637 8,191,646 7,349,992
Occupancy Expenses 1,638,517 1,253,655 922,312
Furniture and Equipment 1,839,948 1,473,887 1,115,487
Other Expenses - Note F 6,916,681 4,829,399 4,061,421
----------- ----------- -----------
20,194,783 15,748,587 13,449,212
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 5,743,989 3,824,207 3,865,100
Income Taxes - Note G 1,943,000 1,249,000 1,440,000
----------- ----------- -----------
NET INCOME $ 3,800,989 $ 2,575,207 $ 2,425,100
=========== =========== ===========
Per Share Data - Note H:
Net Income - Basic $ 0.67 $ 0.47 $ 0.46
Net Income - Diluted $ 0.63 $ 0.44 $ 0.42
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 8
VALLEY INDEPENDENT BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Net
Unrealized
Appreciation
Common Shares (Depreciation)
------------------------------ on Available-
Number of Undivided for-Sale
Shares Amount Profits Securities Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 4,578,430 $ 16,418,733 $ 3,836,526 $ (402,679) $ 19,852,580
Stock Dividends 183,556 1,580,613 (1,580,613)
Cash Dividends (11,051) (11,051)
Exercise of Stock Options,
Including the Realization of
Tax Benefits of $166,000 124,552 652,886 652,886
Net Income for the Year 2,425,100 2,425,100
Net Changes in Unrealized
Appreciation on Available-
for-Sale Securities, Net of
Taxes of $528,000 758,901 758,901
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1995 4,886,538 18,652,232 4,669,962 356,222 23,678,416
Stock Dividends 406,538 4,755,505 (4,755,505)
Cash Dividends (15,701) (15,701)
Exercise of Stock Options,
Including the Realization of
Tax Benefits of $195,000 165,816 878,956 878,956
Net Income for the Year 2,575,207 2,575,207
Net Changes in Unrealized
Appreciation on Available-
for-Sale Securities, Net of
Taxes of $54,000 (77,345) (77,345)
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1996 5,458,892 24,286,693 2,473,963 278,877 27,039,533
Stock Dividends 120,510 2,199,307 (2,199,307) --
Cash Dividends (21,724) (21,724)
Exercise of Stock Options,
Including the Realization of
Tax Benefits of $96,000 97,335 637,470 637,470
Issuance of Common shares,
net of expenses of $123,425 510,660 8,809,374 8,809,374
Net Income for the Year 3,800,989 3,800,989
Net Changes in Unrealized
Appreciation on Available-
for-Sale Securities, Net of
Taxes of $8,000 (11,632) (11,632)
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1997 6,187,397 $ 35,932,844 $ 4,053,921 $ 267,245 $ 40,254,010
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 9
VALLEY INDEPENDENT BANK
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
OPERATING ACTIVITIES 1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net Income $ 3,800,989 $ 2,575,207 $ 2,425,100
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Depreciation and Amortization 2,097,348 1,278,406 1,023,741
Deferred Income Taxes (71,000) (236,000) 374,000
Net Realized Gains in Available-for-Sale Securities (551,024) (48,835) (1,792)
Provision for Credit Losses 1,850,000 635,000 1,008,000
Proceeds From Loans Sold 15,067,594 6,226,899 2,878,373
Originations of Loans Held for Sale (21,918,858) (7,265,343) (3,142,713)
Gain on Sale of Loans (1,115,827) (375,091) (135,592)
Loss (Gain) on Sale of Other Real Estate Owned (39,876) 110,146 (45,597)
Net Increase in Cash Surrender Value of Life Insurance (274,847) (318,351) (170,970)
Net Change in Accrued Interest, Other Assets
and Other Liabilities 680,051 (870,067) (271,346)
------------- ------------- -------------
NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES (475,450) 1,711,971 3,941,204
INVESTING ACTIVITIES
Proceeds from Sales of Other Real Estate Owned 517,781 -- 423,860
Purchases of Available-for-Sale Securities (95,354,148) (26,334,100) (32,120,961)
Proceeds from Sales of Available-for-Sale Securities 29,677,064 17,003,275 3,459,681
Proceeds from Maturities of Available-for-Sale Securities 33,332,315 20,837,268 9,655,303
Net Decrease in Interest-Bearing Deposits 293,000 -- --
Net Cash Received from Purchase of
Bank of the Desert, N.A -- 943,154 --
Net Increase in Loans (63,338,270) (34,890,343) (24,252,557)
Purchases of Premises and Equipment (3,651,527) (3,040,899) (1,252,307)
------------- ------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (98,523,785) (25,481,645) (44,086,981)
FINANCING ACTIVITIES
Net Increase in Demand Deposits and Savings Accounts 71,689,814 10,778,345 10,627,341
Net Increase in Time Deposits 20,923,953 29,174,236 15,389,660
Repayments of Capitalized Lease Obligation (7,664) -- --
Net Change in Federal Funds Purchased -- (1,400,000) 1,400,000
Proceeds from Issuance of Common Shares 8,809,374 -- --
Payments for Dividends (21,724) (15,701) (11,051)
Proceeds from Exercise of Stock Options 541,095 683,956 486,886
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 101,934,848 39,220,836 27,892,836
------------- ------------- -------------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 2,935,613 15,451,162 (12,252,941)
Cash and Cash Equivalents at Beginning of Year 34,885,674 19,434,512 31,687,453
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 37,821,287 $ 34,885,674 $ 19,434,512
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 10,358,196 $ 7,017,682 $ 5,887,307
Income Taxes Paid $ 1,046,000 $ 1,787,422 $ 1,070,425
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 10
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Bank operates twelve branches throughout the Imperial and Coachella Valleys
and in Blythe, Tecate, and Julian. The Bank also operates business loan centers
in El Centro, Indio and Yuma, Arizona. The Bank's primary source of revenue is
providing loans to customers, who are predominately small and middle-market
businesses and individuals.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and 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.
Cash and Due from Banks and Federal Funds Sold
For the purposes of reporting cash flows, cash and due from banks includes cash
on hand and amounts due from banks. Cash flows from loans originated by the
Bank, deposits and federal funds sold are reported net.
The Bank maintains amounts due from banks which exceed federally insured limits.
In addition, federal funds sold were placed with one institution. The Bank has
not experienced any losses in such accounts.
Cash Equivalents
For the purpose of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts included in the statements of financial
condition captions "Cash and Due from Banks" and "Federal Funds Sold."
Securities Available for Sale
Available-for-sale securities consist of bonds, notes, debentures, and certain
equity securities not classified as trading securities nor as held-to-maturity
securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of capital until
realized.
Gains and losses on the sale of available-for-sale securities are determined
using the specific-identification method.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
7
<PAGE> 11
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Loans Held for Sale
Mortgage and SBA 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
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances reduced by any charge-offs or specific valuation
accounts and net of any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
For impairment recognized in accordance with Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan (SFAS No. 114), as amended by SFAS 118, the
entire change in the present value of expected cash flows is reported as either
provision for loan losses in the same manner in which impairment initially was
recognized, or as a reduction in the amount of provision for loan losses that
otherwise would be reported.
Allowance for Credit Losses
The allowance for credit losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of cost, or fair value
minus estimated costs to sell. Revenue and expenses from operations and changes
in the valuation allowance are included in other expenses.
8
<PAGE> 12
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Premises and Equipment
Land is carried at cost. Bank premises, furniture and equipment, and leasehold
improvements are carried at cost, less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated service lives of the related assets. Leasehold improvements are
amortized over the lives of the respective leases or the service lives of the
improvements, which ever is shorter.
Goodwill
The Bank has classified as goodwill the cost in excess of fair value of the net
assets (including tax attributes) of business and branches acquired in purchase
transactions. Goodwill is being amortized on a straight line method over lives
ranging from nine to fifteen years. The Bank periodically reviews goodwill to
assess recoverability from projected, undiscounted net cash flows of the related
business unit, and impairments which would be recognized in operating results if
a permanent reduction in value were to occur.
Income Taxes
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.
Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit, commitments
under credit card arrangements, commercial letters of credit, and standby
letters of credit. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received.
Earnings Per Shares (EPS)
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
9
<PAGE> 13
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Current Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income". This statement, which is effective for the
year ending December 31, 1998, establishes standards of disclosure and financial
statement display for reporting comprehensive income and its components.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement changes current practice under SFAS 14 by establishing a new framework
on which to base segment reporting (referred to as the management approach) and
also requires certain related disclosures about products and services,
geographic areas and major customers. The disclosures are required for the year
ending December 31, 1998.
Reclassifications
Certain reclassifications were made to prior years' presentations to conform to
the current year. These reclassifications are of a normal recurring nature.
10
<PAGE> 14
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE B - INVESTMENT SECURITIES
Debt and equity securities have been classified in the statements of financial
condition according to management's intent. The carrying amount of securities
and their approximate fair values at December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
DECEMBER 31, 1997:
U.S. Treasury Securities $ 507,202 $ 36,920 $ -- $ 544,122
U.S. Government and
Agency Securities 39,124,861 99,021 27,401 39,196,481
States and Political
Subdivisions 18,566,989 334,838 166 18,901,661
Mortgage-Backed Securities 9,892,506 38,872 29,126 9,902,252
Federal Reserve Stock 742,950 -- -- 742,950
----------- ----------- ----------- -----------
$68,834,508 $ 509,651 $ 56,693 $69,287,466
=========== =========== =========== ===========
AVAILABLE-FOR-SALE SECURITIES:
DECEMBER 31, 1996:
U.S. Treasury Securities $ 467,726 $ 39,564 $ -- $ 507,290
U.S. Government and
Agency Securities 17,486,170 81,924 15,750 17,552,344
States and Political
Subdivisions 13,417,162 431,396 5,118 13,843,440
Mortgage-Backed Securities 4,678,595 19,604 78,947 4,619,252
----------- ----------- ----------- -----------
$36,049,653 $ 572,488 $ 99,815 $36,522,326
=========== =========== =========== ===========
</TABLE>
11
<PAGE> 15
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE B - INVESTMENT SECURITIES - CONTINUED
Gross realized gains and gross realized losses on sales of available-for-sale
securities were:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
GROSS REALIZED GAINS:
U.S. Government and Agency Securities $ 63,250 $ 88,122 $ 18,750
States and Political Subdivisions 498,480 31,176 28,204
-------- -------- --------
$561,730 $119,298 $ 46,954
======== ======== ========
GROSS REALIZED LOSSES:
U.S. Government and Agency Securities $ 10,706 $ 23,705 $ --
Mortgage-Backed Securities -- 46,758 45,162
-------- -------- --------
$ 10,706 $ 70,463 $ 45,162
======== ======== ========
</TABLE>
Investment securities carried at approximately $6,328,000 and $11,891,000, at
December 31, 1997 and 1996, respectively, were pledged to secure public deposits
and other purposes as required by law. The scheduled maturities of securities
available for sale at December 31, 1997, were as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in One Year or Less $ 129,652 $ 130,573
Due from One Year to Five Years 10,420,806 10,489,404
Due from Five to Ten Years 34,045,420 34,195,108
Due after Ten Years 13,603,174 13,827,179
Mortgage-Backed Securities 9,892,506 9,902,252
Federal Reserve Stock 742,950 742,950
----------- -----------
$68,834,508 $69,287,466
=========== ===========
</TABLE>
12
<PAGE> 16
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE C - LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within
Imperial and Riverside counties and Yuma, Arizona. Although the Bank seeks to
avoid concentrations of loans to a single industry or based upon a single class
of collateral, real estate and agricultural associated businesses are among the
principal industries in the Bank's market area. As a result, the Bank's loan and
collateral portfolios are, to some degree, concentrated in those industries.
The Bank also originates real estate related and farmland loans for sale to
governmental agencies and institutional investors. At December 31, 1997 and
December 31, 1996, the Bank was servicing approximately $59,289,000 and
$54,172,000, respectively, in loans previously sold.
A summary of the changes in the allowance for credit losses follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance at Beginning of Year $ 2,634,000 $ 2,024,000 $ 2,494,000
Additions to the Allowance Charged to Expense 1,850,000 635,000 1,008,000
Recoveries on Loans Charged Off 259,000 622,000 323,000
Allowance on Loans Acquired from
Bank of the Desert, N.A -- 298,000 --
----------- ----------- -----------
4,743,000 3,579,000 3,825,000
Less Loans Charged Off (2,413,000) (945,000) (1,801,000)
----------- ----------- -----------
Balance at End of Year $ 2,330,000 $ 2,634,000 $ 2,024,000
=========== =========== ===========
</TABLE>
The following is a summary of the investment in impaired loans, the related
allowance for credit losses, and income recognized thereon as of December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Recorded Investment in Impaired Loans $ 9,565,000 $ 8,151,000
=========== ===========
Related Allowance for Credit Losses $ 1,450,000 $ 1,670,000
=========== ===========
Average Recorded Investment in Impaired Loans $ 8,650,000 $ 6,773,000
=========== ===========
Interest Income Recognized from Cash Payments $ 697,000 $ 230,000
=========== ===========
</TABLE>
13
<PAGE> 17
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE C - LOANS - CONTINUED
Loans having carrying values of $1,866,967, $1,108,499, and $1,241,125 were
transferred to other real estate owned in 1997, 1996 and 1995, respectively.
During 1997 and 1996, loans totaling $2,165,650 and $367,103, respectively, were
made to facilitate the sale of other real estate owned.
NOTE D - PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31 follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Land $ 1,772,128 $ 1,772,128
Buildings and Improvements 2,518,631 2,518,631
Leased Property under Capital Lease 2,850,000 --
Furniture, Fixtures, and Equipment 8,320,773 5,471,887
Leasehold Improvements 1,844,341 1,183,968
------------ ------------
17,305,873 10,946,614
Less Accumulated Depreciation and Amortization (5,853,616) (4,360,934)
------------ ------------
$ 11,452,257 $ 6,585,680
============ ============
</TABLE>
During 1997, the Bank entered into a twenty-year lease agreement for
administrative offices that expires june 30, 2017. Total accumulated
amortization on property under capital lease at December 31, 1997 was $ 71,250.
The future lease payments under the capitalized lease obligation, together with
the present value of the net minimum lease payments as of December 31, 1997, are
as follows:
<TABLE>
<S> <C>
1998 $ 324,554
1999 335,913
2000 347,670
2001 359,839
2002 372,433
Thereafter 7,120,531
-----------
Net Minimum Lease Payments 8,860,940
Less Amount Representing Interest (6,018,604)
-----------
Present Value of Net Minimum Lease Payments $ 2,842,336
===========
</TABLE>
14
<PAGE> 18
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE E - DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
1998 $ 128,092,201
1999 6,766,312
2000 2,532,674
2001 616,341
--------------
$ 138,007,528
==============
</TABLE>
NOTE F - OTHER EXPENSES
Other expenses, as of December 31, consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Data Processing $1,030,446 $ 698,406 $ 592,745
Advertising 244,385 354,356 257,647
Legal and Professional 1,402,605 874,335 924,269
Regulatory Assessments 134,920 31,668 220,588
Insurance 124,350 112,076 77,511
Office Expenses 1,332,159 869,292 641,573
Promotion 1,169,562 908,185 688,850
Other Real Estate Owned 23,031 156,895 --
Other 1,455,223 824,186 658,238
---------- ---------- ----------
$6,916,681 $4,829,399 $4,061,421
========== ========== ==========
</TABLE>
15
<PAGE> 19
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE G - INCOME TAXES
The provisions for income taxes included in the statements of income consist of
the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 1,586,000 $ 1,174,000 $ 847,000
State 428,000 311,000 219,000
----------- ----------- -----------
2,014,000 1,485,000 1,066,000
Deferred (71,000) (236,000) 374,000
----------- ----------- -----------
$ 1,943,000 $ 1,249,000 $ 1,440,000
=========== =========== ===========
</TABLE>
Deferred taxes are a result of differences between income tax accounting and
generally accepted accounting principles with respect to income and expense
recognition.
The following is a summary of the components of the deferred tax asset and
liability accounts recognized in the accompanying statements of financial
condition:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Allowance for Credit Losses Due to Tax Limitations $ 195,000 $ 531,000
Valuation Allowance for Other Real Estate Owned 169,000 186,000
Premises and Equipment Due to Depreciation Difference 363,000 286,000
State Taxes 137,000 88,000
Net Operating Loss and Tax Credit Carryforwards 298,000 331,000
Reserve for Deferred Compensation 434,000 311,000
Other Assets/Liabilities 240,000 32,000
----------- -----------
1,836,000 1,765,000
Deferred Tax Liabilities:
Market Value Adjustment on Investment Securities (186,000) (194,000)
----------- -----------
Net Deferred Taxes $ 1,650,000 $ 1,571,000
=========== ===========
</TABLE>
16
<PAGE> 20
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE G - INCOME TAXES - CONTINUED
At December 31, 1996, the Bank had net operating loss carryforwards (acquired
from Bank of the Desert, N.A.) for federal and state income tax purposes of
approximately $797,000 and $209,000, respectively, which expire beginning in the
years 2011 and 2001, respectively. Alternative minimum tax credit carryforwards
for tax purposes, which do not expire, are $12,000 as of December 31, 1997.
A comparison of the federal statutory income tax rates to the Bank's effective
income tax rates follow:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- ------------------------- -------------------------
Amount Rate Amount Rate Amount Rate
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Federal Tax Rate $ 1,953,000 34.0% $ 1,300,000 34.0% $ 1,314,000 34.0%
California Franchise Taxes,
Net of Federal Tax Benefit 311,000 5.4 170,000 4.4 202,000 5.2
Tax Savings from Exempt
Loan and Investment Interest (334,000) (5.8) (197,000) (5.2) (145,000) (3.8)
Other Items - Net 13,000 0.2 (24,000) (0.6) 69,000 1.8
----------- ----------- ----------- ----------- ----------- -----------
Bank's Effective Rate $ 1,943,000 33.8% $ 1,249,000 32.6% $ 1,440,000 31.1%
=========== =========== =========== =========== =========== ===========
</TABLE>
NOTE H - EARNINGS PER SHARE (EPS)
The following is a reconciliation of net income and shares outstanding to the
income and number of share used to compute EPS:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------- -------------------------
Income Shares Income Shares Income Shares
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Income as Reported $3,800,989 -- $2,575,207 -- $2,425,100 --
Weighted Average Shares
Outstanding During the Year -- 5,659,758 -- 5,462,077 -- 5,316,590
---------- ---------- ---------- ---------- ---------- ----------
USED IN BASIC EPS 3,800,989 5,659,758 2,575,207 5,462,077 2,425,100 5,316,590
Dilutive Effect of Outstanding
Stock Options -- 355,240 -- 328,974 -- 413,154
---------- ---------- ---------- ---------- ---------- ----------
USED IN DILUTIVE EPS $3,800,989 6,014,998 $2,575,207 5,791,051 $2,425,100 5,729,744
========== ========== ========== ========== ========== ==========
</TABLE>
Warrants to purchase 103,154 shares of common stock at $19.12 Per share were
outstanding during 1997 but were not included in the computation of diluted EPS
because the exercise price was greater than the average market price and
considered anitdilutive.
17
<PAGE> 21
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE I - COMMITMENTS AND CONTINGENCIES
The Bank has entered into leases for its branches and operating facilities,
which expire at various dates through 2015. These leases include provisions for
periodic rent increases as well as payment by the lessee of certain operating
expenses. Rental expense relating to these leases was approximately $446,000 in
1997, $446,000 in 1996, and $324,000 in 1995.
The approximate future minimum annual payments for these leases by year are as
follows:
<TABLE>
<S> <C>
1998 $ 451,000
1999 358,000
2000 332,000
2001 317,000
2002 188,000
Thereafter 1,139,000
-------------
$ 2,785,000
=============
</TABLE>
The minimum rental payments shown above are given for the existing lease
obligations and are not a forecast of future rental expense.
The Bank is involved in various litigation which has arisen in the ordinary
course of its business. In the opinion of management, the disposition of such
pending litigation will not have a material effect on the Bank's financial
statements.
In the ordinary course of business, the Bank enters into financial commitments
to meet the financing needs of its customers. These financial commitments
include commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk not recognized in the statements of condition.
The Bank's exposure to credit loss in the event of nonperformance on commitments
to extend credit and standby letters of credit is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in making
commitments as it does for loans reflected in the financial statements.
As of December 31, 1997, the Bank had the following outstanding financial
commitments whose contractual amount represents credit risk:
<TABLE>
<S> <C>
Commitments to Extend Credit $ 77,582,000
Standby Letters of Credit 1,155,000
-------------
$ 78,737,000
=============
</TABLE>
18
<PAGE> 22
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED
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. Standby
letters of credit are conditional commitments to guarantee the performance of a
Bank customer to a third party. Since many of the commitments and standby
letters of credit are expected to expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. The Bank
evaluated each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained if deemed necessary by the Bank is based on management's
credit evaluation of the customer. The majority of the Bank's commitments to
extend credit and standby letters of credit are secured by real estate.
NOTE J - STOCK OPTION PLAN
At December 31, 1997, the Bank has a fixed stock option plan, which is described
below. The Bank applies APB Opinion 25 and related interpretations in accounting
for its plan. Accordingly, no compensation cost has been recognized for its
fixed stock option plan.
In 1989, the Bank adopted a stock option plan (the "1989 Plan") which was last
amended in 1993, under which 1,613,603 shares of the Bank's common shares may be
issued to directors, officers, and key employees at not less than 100% of the
fair market value at the date the options are granted.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for 1997, 1996
and 1995, respectively: risk-free rates of 5.8%, 6.1% and 5.4%; volatility of
17.5% for 1997 and 15% for 1996 and 1995, and expected lives of three years.
19
<PAGE> 23
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE J - STOCK OPTION PLAN - CONTINUED
A summary of the status of the Bank's fixed stock option plan as of December 31,
1997, 1996, and 1995, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
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 572,134 $ 6 716,807 $ 5 721,776 $ 4
Granted 151,152 13 48,415 10 156,487 8
Exercised (99,054) 6 (184,566) 4 (142,253) 3
Forfeited (13,693) 7 (8,522) 6 (19,203) 6
---------- ---------- ----------
Outstanding at End
of year 610,539 8 572,134 6 716,807 5
========== ========== ==========
Options Exercisable
at Year-End 290,103 5 290,050 5 331,582 5
Weighted-Average Fair
Value of Options
Granted During
the Year $ 2.76 $ 2.44 $ 1.80
</TABLE>
The following table summarizes information about fixed options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------- ------------------------------------
Weighted- Weighted Weighted-
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- --------------- ---------------- ----------------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 3 to $ 4 177,718 1.1 Years $ 3 133,856 $ 3
$ 5 to $ 7 171,752 1.9 Years 6 130,576 6
$ 8 to $10 101,390 3.1 Years 9 23,599 9
$11 to $13 142,594 4.1 Years 13 2,072 12
$16 to $17 17,085 4.6 Years 17 - -
---------------- -----------------
610,539 2.5 Years 8 290,103
================ =================
</TABLE>
20
<PAGE> 24
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE J - STOCK OPTION PLAN - CONTINUED
Had the Bank determined compensation cost based on the fair value at the grant
date for its stock options under No. 123, the Bank's net income would have been
reduced to the following pro forma amount:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net Income:
As Reported $ 3,800,989 $ 2,575,207 $ 2,425,100
Pro Forma $ 3,637,591 $ 2,495,245 $ 2,368,765
Per Share Data:
Net Income - Basic
As Reported .67 .47 .46
Pro Forma .64 .46 .45
Net Income - Diluted
As Reported .63 .44 .42
Pro Forma .60 .43 .41
</TABLE>
NOTE K - STOCK OFFERING AND WARRANTS
In 1997, the Bank completed a supplemental stock offering of 510,660 shares of
common stock at $17.50 per share. In connection with the offering, the Bank also
issued 103,154 warrants. Each warrant is exercisable for one share of common
stock at an exercise price of $19.12 Per share through October 31, 1998 and
$22.06 thereafter. All warrants expire on October 29, 1999.
NOTE L - EMPLOYEE STOCK OWNERSHIP AND RETIREMENT SAVINGS PLANS
The Bank has adopted an Employee Stock Ownership Plan and a Retirement Savings
Plan for the benefit of its employees. Contributions to the Plans are determined
annually by the Board of Directors. The combined expenses for these plans were
$243,000 in 1997, $292,000 in 1996, and $200,000 in 1995.
NOTE M - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain
officers and directors and the companies with which they are associated. In the
Bank's opinion, all loans and loan commitments to such parties are made on
substantially the same terms including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons. The
balance of these loans outstanding at December 31, 1997 and 1996 was
approximately $4,174,000 and $3,488,000, respectively.
21
<PAGE> 25
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE N - STOCK DIVIDENDS
The Bank has issued stock dividends of 2%, 8%, and 4% in 1997, 1996, and 1995,
respectively, and a six-for-five stock split in 1997 and a three-for-two stock
split in 1995. The per share data in the statements of income and the footnotes
have been adjusted to give retroactive effect to these dividends and splits.
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market value exists
for a significant portion of the financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involve uncertainties and
matters of judgment and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business, and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the realization
of the unrealized gains and losses can have a potential effect on fair value
estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments:
Financial Assets
The carrying amounts of cash, short term investments, due from customers on
acceptances, and bank acceptances outstanding are considered to approximate fair
value. Short term investments include federal funds sold, securities purchased
under agreements to resell, and interest bearing deposits with banks. The fair
values of investment securities, including available for sale, are generally
based on quoted market prices. The fair value of loans are estimated using a
combination of techniques, including discounting estimated future cash flows and
quoted market prices of similar instruments where available.
22
<PAGE> 26
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Financial Liabilities
The carrying amounts of deposit liabilities payable on demand, commercial paper,
and other borrowed funds are considered to approximate fair value. For fixed
maturity deposits, fair value is estimated by discounting estimated future cash
flows using currently offered rates for deposits of similar remaining
maturities. The fair value of long term debt is based on rates currently
available to the bank for debt with similar terms and remaining maturities.
Off Balance Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of credit is
estimated using the fees currently charged to enter into similar agreements. The
fair value of these financial instruments is not material.
The estimated fair value of financial instruments at December 31 is summarized
as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------------
Carry Value Fair Value Carry Value Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Due From Banks $ 33,821 $ 33,821 $ 26,886 $ 26,886
Interest-Bearing Deposits $ 586 $ 586 $ 879 $ 879
Investment Securities $ 69,287 $ 69,287 $ 36,522 $ 36,522
Federal Funds Sold $ 4,000 $ 4,000 $ 8,000 $ 8,000
Loans $ 311,417 $ 309,570 $ 242,787 $ 239,970
Cash Surrender Value -
Life Insurance $ 2,283 $ 2,283 $ 2,008 $ 2,008
Financial Liabilities:
Deposits $ 398,427 $ 398,471 $ 303,944 $ 303,524
Capitalized Lease Obligation $ 2,842 $ 2,842 $ -- $ --
</TABLE>
23
<PAGE> 27
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE P - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve 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 average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, 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>
Amount of Capital Required
--------------------------------------------
To Be To Be
Adequately Well-
Actual Capital Capitalized Capitalized
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Total Capital (to Risk-Weighted Assets) $38,283 10.4% $29,305 8.0% $36,631 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $35,953 9.8% $14,652 4.0% $21,979 6.0%
Tier 1 Capital (to Average Assets) $35,953 8.6% $16,581 4.0% $20,726 5.0%
AS OF DECEMBER 31, 1996:
Total Capital (to Risk-Weighted Assets) $27,410 9.7% $22,581 8.0% $28,227 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $24,776 8.7% $11,291 4.0% $16,936 6.0%
Tier 1 Capital (to Average Assets) $24,776 7.9% $12,525 4.0% $15,656 5.0%
</TABLE>
24
<PAGE> 28
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE P - REGULATORY MATTERS - CONTINUED
The California Financial Code provides that a bank may not make a cash
distribution to its shareholders in excess of the lessor of the bank's undivided
profits or the bank's net income for its last three fiscal years less the amount
of any distribution made by the bank to shareholders during the same period.
Under these restrictions, approximately $4,054,000 was available for payment of
dividends at December 31, 1997.
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit with the Federal Reserve Bank. At
december 31, 1997, required reserves were approximately $10,264,000.
NOTE Q - MERGER WITH BANK OF THE DESERT, N.A.
On September 12, 1996, the Bank acquired 100% of the outstanding common stock of
Bank of the Desert, N.A. (BOD) for $3,295,000 in cash. BOD had total assets of
approximately $31,858,000. The acquisition was accounted for using the purchase
method of accounting in accordance with Accounting Principles Board Opinion No.
16. "Business Combinations". Under this method of accounting, the purchase price
was allocated to the assets acquired and deposits and liabilities assumed based
on their fair values as of the acquisition date. The financial statements
include the operations of BOD from the date of the acquisition. Goodwill arising
from the transaction totaled approximately $1,933,000 and is being amortized
over fifteen years on a straight-line basis.
The following table sets forth selected unaudited pro forma combined financial
information of the Bank and BOD for the years ended December 31, 1996 and 1995.
The pro forma operating data reflects the effect of the acquisition of BOD as if
it was consummated at the beginning of each year presented. The pro forma
results are not necessarily indicative of the results that would have occurred
had the acquisition been in effect for the full years presented, nor are they
necessarily indicative of the results of future operations (amounts in
thousands, except per share data).
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995
---------- ----------
<S> <C> <C>
Interest and Noninterest Income $ 29,816 $ 27,529
Net Income $ 1,882 $ 2,003
Per Share Data:
Net Income - Basic $ .34 $ .38
Net Income - Diluted $ .32 $ .35
</TABLE>
These proforma disclosures include adjustment to interest income from the
payment of the purchase price in cash and goodwill amortization. No adjustments
have been reflected in these amounts for the expected cost savings to be derived
from this merger.
25
<PAGE> 29
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE R - PURCHASE OF WELLS FARGO, N.A. BRANCHES
During 1996 the Bank entered into an agreement to assume the deposits and
purchase the deposit related loans of two Wells Fargo branches. The Bank paid
book value for the deposit related loans and fixed assets and a premium of 4.5%
of the average daily deposits. Total deposits were approximately $43,520,000.
The purchase was consummated on February 14, 1997. Goodwill arising from the
transaction totaled approximately $2,022,000 and is being amortized over nine
years on a straight line basis.
NOTE S - SUBSEQUENT EVENTS
On January 22, 1998, the Bank entered into an agreement to purchase the Palm
Springs Branch office from Palm Desert National Bank by assuming approximately
$16,000,000 in deposits and purchasing approximately $12,000,000 in loans. The
Bank will pay a premium of $1,225,000 on deposits. It is estimated that the
purchase will be consummated by March 31, 1998.
26
