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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO ______
COMMISSION FILE NO.: 333-43021
VIB CORP
INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA
I.R.S. EMPLOYER IDENTIFICATION NO.: 33-0780371
1498 MAIN STREET
EL CENTRO, CALIFORNIA 92243
TELEPHONE: (760) 337-3200
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: COMMON
STOCK, NO PAR VALUE
WARRANTS (TO PURCHASE COMMON STOCK)
INDICATE BY CHECKMARK 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 [ ] NO [X]
INDICATE BY CHECKMARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]
AGGREGATE MARKET VALUE OF THE VOTING COMMON STOCK HELD BY NON-AFFILIATES
AT MARCH 23, 1998: $86,128,000
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 23, 1998:
6,194,116
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE INTO
THE IDENTIFIED PARTS OF THIS FORM 10-K:
VALLEY INDEPENDENT BANK'S 1997 ANNUAL REPORT TO SHAREHOLDERS - PART II,
ITEMS 5, 6, 7, 7A AND 8.
1998 ANNUAL MEETING PROXY STATEMENT - PART III, ITEMS 10, 11, 12 AND 13.
TOTAL NO. OF PAGES: 440
EXHIBIT INDEX AT PAGE: 25
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
THE COMPANY
VIB Corp (the "Company" or the "Registrant") was incorporated on
November 7, 1997 under the laws of the State of California at the direction of
the Board of Directors of Valley Independent Bank (the "Bank") for the purpose
of becoming the Bank's holding company. The holding company reorganization was
consummated on March 12, 1998, pursuant to a Plan of Reorganization and Merger
Agreement dated November 18, 1997, and each outstanding share of the Bank's
Common Stock was converted into one share of the Company's Common Stock and all
outstanding shares of the Bank's Common Stock were transferred to the Company in
a transaction accounted for as a pooling of interests. Further, each outstanding
Warrant to purchase the Bank's Common Stock, issued in connection with the
Bank's 1997 Unit Offering, was converted into a Warrant to purchase the
Company's Common Stock.
During 1997 the Company did not conduct any business and, at year-end,
had total assets of $1,000. Upon consummation of the reorganization the Company
conducts business only through the Bank, its wholly-owned subsidiary.
THE BANK
Valley Independent Bank was incorporated under the laws of the State of
California on March 28, 1980, and commenced operations as a California
state-chartered bank on March 19, 1981. The Bank's deposit accounts are insured
under the Federal Deposit Insurance Act, up to the maximum legal limits thereof,
and the Bank is a member of the Federal Reserve System. The Bank's main office
is located in the City of El Centro. The Bank has branch offices in Brawley,
Calexico and Holtville, in Imperial County, Blythe, Coachella, Indio, La Quinta,
Palm Desert and Thousand Palms, in Riverside County, and Julian and Tecate, in
San Diego County. The Bank also operates three loan production offices, one in
El Centro, one in Indio and one in Yuma, Arizona.
The Bank has grown through de novo branching and acquisitions. On
December 31, 1992, the Bank consummated its first acquisition, acquiring the
Coachella branch office through the merger of The First National Bank in
Coachella. During 1996 the Bank consummated two acquisitions. On June 21, 1996,
the Bank acquired the Calexico branch office of California Commerce Bank and
combined its Calexico branch with and into the acquired facility. On September
12, 1996, the Bank acquired four branches, Indio, La Quinta, Palm Desert and
Thousand Palms, by the merger of Bank of the Desert, N.A. During 1997 the Bank
consummated another acquisition. On February 14, 1997, the Bank purchased two
branches from Wells Fargo Bank, N.A., Blythe in Riverside County and Tecate in
San Diego County. These acquisitions enhanced the Bank's market share in the
Coachella Valley and the City of Calexico and expanded the Bank's geographic
market areas.
On January 22, 1998, the Bank entered into a branch acquisition
agreement with Palm Desert National Bank to acquire that bank's Palm Springs
branch office. That acquisition is expected to close on March 27, 1998. The Bank
also has plans to open new loan production offices in Phoenix and Tuscon,
Arizona, Las Vegas, Nevada, and in San Diego County, California later in 1998.
The Bank offers a full range of commercial banking services, including
the making of commercial loans and various types of consumer loans; the
acceptance of checking, savings and
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time deposits; NOW, super NOW and money-market deposit accounts; and provides
travelers' checks, pre-approved overdraft lines, safe deposit and other
customary non-deposit banking services. The Bank is an agent for VISA(R) and
MasterCard(R) credit cards, and is a merchant depository for cardholder drafts
under both types of credit cards. At the present time, the Bank does not have a
trust department but can provide that service through a correspondent bank. The
Bank has 24-hour automated teller machines at its branches, which are integrated
into multi-state ATM networks; as well as drive-through banking service at the
majority of its branch locations.
MARKET AREA
With its main office and branch offices, the Bank's primary service
areas includes the cites and surrounding rural areas in the Imperial Valley and
Coachella Valley. Agriculture is the major economic activity within Imperial
County, with year-round harvesting. El Centro is Imperial County's largest city
and also serves as the county's financial center. Agriculture is also the most
significant economic activity in the Coachella Valley, although the tourism,
retail and service industries are growing. The Bank's customers include
individuals, many of whom are farmers or ranchers, and small-to-medium sized
businesses.
The Julian office, opened in 1995, and the Tecate office, acquired in
1997, expanded the Bank's service area to eastern San Diego County. The Julian
office serves customers in that and neighboring eastern San Diego County
mountain communities. The Tecate office services customers on both sides of the
international border.
The Blythe office, acquired in 1997, extended the Bank's service area to
the Palo Verde Valley, along the Colorado River, in eastern Riverside County.
Blythe, the only incorporated city on the eastern side of Riverside County along
Interstate 10, serves as the major service and retail center for eastern
Riverside County and the Palo Verde Valley, including communities on the Arizona
side of the river.
The Bank has its own "home page" address on the world wide web as an
additional means of expanding its market and providing banking services through
the internet. The Bank's internet address is: http://www.vibank.com.
EMPLOYEES
At December 31, 1997, the Bank had 241 full-time and 56 part-time
employees. The Bank's employees are not represented by any union or other
collective bargaining agreement and the Bank believes its relations with its
employees to be excellent.
COMPETITION
The banking business in California, generally, and in the Bank's service
areas specifically, is highly competitive with respect to both loans and
deposits and is dominated by a number of major banks which have many offices
operating over wide geographic areas. The Bank competes for deposits and loans
principally with these major banks, savings and loan associations, finance
companies, credit unions and other financial institutions located in the Bank's
market area. Among the advantages which the major banks have over the Bank are
their ability to finance extensive advertising campaigns and to allocate their
investment assets to regions of highest yield and demand. Many of the major
commercial banks operating in the Bank's service area offer certain services
(such as trust and international banking services) which are not offered
directly by the Bank and, by virtue of their greater total capitalization, such
banks have substantially higher lending limits than the Bank.
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Moreover, banks generally, and the Bank in particular, face increasing
competition for loans and deposits from non-bank financial intermediaries such
as savings and loan associations, thrift and loan associations, credit unions,
mortgage companies, insurance companies, and other lending institutions. The
Depository Institutions Deregulation and Monetary Control Act of 1980 ("DIDA")
authorized savings and loan associations and credit unions to make certain
consumer loans. The Garn-St. Germain Depository Institutions Act of 1982 (the
"Garn-St. Germain Act") and California legislation further expanded the power of
savings and loan associations to make consumer and commercial loans in
competition with commercial banks. Further, DIDA and a 1979 amendment to the
usury provisions of the California Constitution have resulted in the inflow of
lendable funds from out-of-state lenders and in increased competition from
previously non-exempt in-state lenders for loans.
Historically, banks were not permitted to pay the same rates of interest
on similar deposit accounts as those offered by savings and loan associations,
credit unions and money-market funds. DIDA began the process of deregulating
interest rate controls and the Garn-St. Germain Act, which authorized banks and
savings and loan associations to pay money-market interest rates on most types
of accounts and eliminated interest rate differentials between banks and savings
and loan associations, and subsequent actions of federal regulatory agencies
have accelerated the deregulation process, enabling banks to compete more
effectively for deposits.
However, banks have faced increasing competition for deposits because
these same legislative and regulatory developments have permitted non-bank
financial intermediaries to offer certain types of deposit accounts not
previously permitted.
Further, the recent trend has been for other institutions, such as
brokerage firms, credit card companies, and even retail establishments, to offer
alternative investment vehicles, such as money market funds, as well as to offer
traditional banking services such as check access to money market funds and cash
advances on credit card accounts. In addition, other entities (both public and
private) seeking to raise capital through the issuance and sale of debt or
equity securities also compete with the Bank in the acquisition of deposits.
In order to compete with the other financial institutions in its market
areas the Bank relies principally upon local promotional activity, personal
contacts by its officers, directors, employees and shareholders, and specialized
services. In conjunction with the Bank's business plan to serve the financial
needs of local residents and small-to medium-sized businesses, the Bank also
relies on an officer calling program to existing and prospective customers and
the Bank focuses its overall marketing efforts towards the local community. The
Bank's promotional activities emphasize the advantages of dealing with a
locally-owned and headquartered institution sensitive to the particular needs of
the High Desert. For customers whose loan demands exceed the Bank's lending
limit, the Bank attempts to arrange for such loans on a participation basis with
other banks. The Bank also assists customers requiring services not offered by
the Bank to obtain these services from its correspondent banks.
SUPERVISION AND REGULATION -- THE COMPANY
VIB Corp is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "Act"), and is subject to supervision by
the Federal Reserve Board (the "FRB"). As a bank holding company, the Company is
required to file with the FRB an annual report and such other additional
information as the FRB may require pursuant to the Act. The FRB may also make
examinations of the Company and its subsidiaries.
The Act requires prior approval by the FRB for, among other things, the
acquisition by a bank holding company of direct or indirect ownership or control
of more than 5% of the voting
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shares, or substantially all the assets, of any bank or for a merger or
consolidation by a bank holding company with any other bank holding company.
The Company and any subsidiaries it may organize are deemed to be
affiliates of the Bank within the meaning of the Act. Pursuant thereto, loans by
the Bank to affiliates, investments by the Bank in affiliates' stock, and taking
affiliates' stock by the Bank as collateral for loans to any borrower will be
limited to 10% of the Bank's capital, in the case of any one affiliate, and will
be limited to 20% of the Bank's capital in the case of all affiliates. In
addition, such transactions must be on terms and conditions that are consistent
with safe and sound banking practices; in particular, a bank and its
subsidiaries generally may not purchase from an affiliate a low-quality asset,
as defined in the Act. Such restrictions also prevent a bank holding company and
its other affiliates from borrowing from a banking subsidiary of the bank
holding company unless the loans are secured by marketable collateral of
designated amounts. VIB Corp and the Bank are also subject to certain
restrictions with respect to engaging in the underwriting, public sale and
distribution of securities.
With certain limited exceptions, a bank holding company is prohibited
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company and
from engaging directly or indirectly in any activity other than banking or
managing or controlling banks or furnishing services to or performing services
for its authorized subsidiaries. A bank holding company may, however, engage or
acquire an interest in a company that engages in activities which the FRB has
determined to be closely related to banking or managing or controlling banks as
to be properly incident thereto. In making such a determination, the FRB is
required to consider whether the performance of such activities can reasonably
be expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interests, or unsound banking practices. Although the
future scope of permitted activities is uncertain and cannot be predicted, some
of the activities that the FRB has determined by regulation to be closely
related to banking are: (i) making or acquiring loans or other extensions of
credit for its own account or for the account of others; (ii) servicing loans
and other extensions of credit for any person; (iii) operating an industrial
bank, Morris Plan bank, or industrial loan company, as authorized under state
law, so long as the institution is not a bank; (iv) operating a trust company in
the manner authorized by federal or state law, so long as the institution is not
a bank and does not make loans or investments or accept deposits, except as
permitted under the FRB's Regulation Y; (v) subject to certain limitations,
acting as an investment or financial adviser to investment companies and other
persons; (vi) leasing personal and real property or acting as agent, broker, or
adviser in leasing such property in accordance with various restrictions imposed
by Regulation Y, including a restriction that it is reasonably anticipated that
each lease will compensate the lessor for not less than the lessor's full
investment in the property; (vii) making equity and debt investments in
corporations or projects designed primarily to promote community welfare; (viii)
providing financial, banking, or economic data processing and data transmission
services, facilities, data bases, or providing access to such services,
facilities, or data bases; (ix) acting as principal, agent, or broker for
insurance directly related to extensions of credit which are limited to assuring
the repayment of debts in the event of death, disability, or involuntary
unemployment of the debtor; (x) acting as agent or broker for insurance directly
related to extensions of credit by a finance company subsidiary; (xi) owning,
controlling, or operating a savings association provided that the savings
association engages only in activities permitted for bank holding companies
under Regulation Y; (xii) providing courier services of limited character;
(xiii) providing management consulting advice to non-affiliated bank and nonbank
depository institutions, subject to the limitations imposed by Regulation Y;
(xiv) selling money orders, travelers' checks and U.S. Savings Bonds; (xv)
appraisal of real estate and personal property; (xvi) acting as an intermediary
for the financing of commercial or industrial
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income-producing real estate; (xvii) providing securities brokerage services,
related securities credit activities pursuant to Regulation T, and other
incidental activities; (xiii) underwriting and dealing in obligations of the
U.S., general obligations of states and their political subdivisions, and other
obligations authorized for state member banks under federal law; and (xix)
providing general information and statistical forecasting, advisory and
transactional services with respect to foreign exchange through a separately
incorporated subsidiary.
Federal law prohibits a holding company and any subsidiary banks from
engaging in certain tie-in arrangements in connection with the extension of
credit. Thus, for example, the Bank may not extend credit, lease or sell
property, or furnish any services, or fix or vary the consideration for any of
the foregoing on the condition that: (i) the customer must obtain or provide
some additional credit, property or services from or to the Bank other than a
loan, discount, deposit or trust service; or (ii) the customer must obtain or
provide some additional credit, property or service from or to VIB Corp or any
other subsidiary of VIB Corp; or (iii) the customer may not obtain some other
credit, property or services from competitors, except reasonable requirements to
assure soundness of credit extended.
The FRB's risk-based capital adequacy guidelines for bank holding
companies and state member banks, discussed in more detail below (see
"SUPERVISION AND REGULATION -- THE BANK -- RECENT LEGISLATION AND REGULATORY
CHANGES - 3. Risk-Based Capital Guidelines"), assign various risk percentages to
different categories of assets, and capital is measured as a percentage of risk
assets. While in many cases total risk assets calculated in accordance with the
guildelines is less than total assets calculated absent the rating, certain non-
balance sheet assets, including loans sold with recourse, legally binding loan
commitments and standby letters of credit, are treated as risk assets, with the
assigned rate varying with the type of asset. As a result, it is possible that
total risk assets for purposes of the guidelines exceeds total assets under
generally accepted accounting principles, thereby reducing the capital-to-assets
ratio. Under the terms of the guidelines, bank holding companies are expected to
meet capital adequacy guildelines based both on total assets and on total risk
assets. These requirements did not apply to VIB Corp at December 31, 1997.
VIB Corp is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its subsidiaries
are subject to examination by, and may be required to file reports with, the
Commissioner. Regulations have not yet been proposed or adopted or steps
otherwise taken to implement the Commissioner's powers under this statute.
SUPERVISION AND REGULATION -- THE BANK
GENERAL. As a state-chartered bank whose deposits are insured by the
Federal Deposit Insurance Corporation (the "FDIC") up to the maximum extent
provided by law, the Bank is subject to supervision, examination and regulation
by the California Department of Financial Institutions and by federal bank
regulatory agencies. The Bank's primary federal bank regulatory agency is the
Board of Governors of the Federal Reserve System but the Bank is also subject to
certain regulations of the FDIC. The regulations of these agencies govern most
aspects of the Bank's business, including capital adequacy ratios, reserves
against deposits, restrictions on the rate of interest which may be paid on some
deposit instruments, limitations on the nature and amount of loans which may be
made, the location of branch offices, borrowings, and dividends. Supervision,
regulation and examination of the Bank by the regulatory agencies are generally
intended to protect depositors and are not intended for the protection of the
Bank's shareholders.
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RECENT LEGISLATION AND REGULATORY CHANGES.
1. INTRODUCTION
General. From time to time legislation is proposed or enacted which has
the effect of increasing the cost of doing business and changing the competitive
balance between banks and other financial and non-financial institutions.
Various federal laws enacted over the past several years have provided, among
other things, for the maintenance of mandatory reserves with the Federal Reserve
Bank on deposits by depository institutions (state reserve requirements have
been eliminated); the phasing-out of the restrictions on the amount of interest
which financial institutions may pay on certain of their customers' accounts;
and the authorization of various types of new deposit accounts, such as NOW
accounts, "Money Market Deposit" accounts and "Super NOW" accounts, designed to
be competitive with money market mutual funds and other types of accounts and
services offered by various financial and non-financial institutions. The
lending authority and permissible activities of certain non-bank financial
institutions such as savings and loan associations and credit unions have been
expanded, and federal regulators have been given increased authority and means
for providing financial assistance to insured depository institutions and for
effecting interstate and cross-industry mergers and acquisitions of failing
institutions. These laws have generally had the effect of altering competitive
relationships existing among financial institutions, reducing the historical
distinctions between the services offered by banks, savings and loan
associations and other financial institutions, and increasing the cost of funds
to banks and other depository institutions.
Other legislation has been proposed or is pending before the United
States Congress which would effect the financial institutions industry. Such
legislation includes wide-ranging proposals to further alter the structure,
regulation and competitive relationships of the nation's financial institutions,
to reorganize the federal regulatory structure of the financial institutions
industry, to subject banks to increased disclosure and reporting requirements,
and to expand the range of financial services which banks and bank holding
companies can provide. Other proposals which have been introduced or are being
discussed would equalize the relative powers of savings and loan holding
companies and bank holding companies, and authorize such holding companies to
engage in insurance underwriting and brokerage, real estate development and
brokerage, and certain securities activities, including underwriting and dealing
in United States Government securities and municipal securities, sponsoring and
managing investment companies and underwriting the securities thereof. It cannot
be predicted whether or in what form any of these proposals will be adopted, or
to what extent they will effect the various entities comprising the financial
institutions industry.
Certain of the potentially significant changes which have been enacted
in the past several years are discussed below.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act"), enacted on September 29, 1994,
repealed the McFadden Act of 1927, which required states to decide whether
national or state banks could enter their state, and, effective June 1, 1997,
allows banks to open branches across state lines. The Riegle-Neal Act also
repealed the 1956 Douglas Amendment to the Bank Holding Company Act, which
placed the same requirements on bank holding companies. The repeal of the
Douglas Amendment made it possible for bank holding companies to buy
out-of-state banks in any state after September 29, 1995, which, after June 1,
1997, may now be converted into interstate branches.
The Riegle-Neal Act permitted interstate banking to begin effective
September 29, 1995. The amendment to the Bank Holding Company Act permits bank
holding companies to acquire banks in other states provided that the acquisition
does not result in the bank holding company
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controlling more than 10 percent of the deposits in the United States, or 30
percent of the deposits in the state in which the bank to be acquired is
located. However, the Riegle-Neal Act also provides that states have the
authority to waive the state concentration limit. Individual states may also
require that the bank being acquired be in existence for up to five years before
an out-of-state bank or bank holding company may acquire it.
The Riegle-Neal Act provides that, since June 1, 1997, interstate
branching and merging of existing banks is permitted, provided that the banks
are at least adequately capitalized and demonstrate good management. Interstate
mergers and branch acquisitions were permitted at an earlier time if the state
choose to enact a law allowing such activity. The states were also authorized to
enact laws to permit interstate banks to branch de novo.
On September 28, 1995, the California Interstate Banking and Branching
Act of 1995 ("CIBBA") was enacted and signed into law. CIBBA authorized
out-of-state banks to enter California by the acquisition of or merger with a
California bank that has been in existence for at least 5 years, unless the
California bank is in danger of failing or in certain other emergency
situations. CIBBA allows a California state bank to have agency relationships
with affiliated and unaffiliated insured depository institutions and allows a
bank subsidiary of a bank holding company to act as an agent to receive
deposits, renew time deposits, service loans and receive payments for a
depository institution affiliate.
Proposed Expansion of Securities Underwriting Authority. Various bills
have been introduced in the United States Congress which would expand, to a
lesser or greater degree and subject to various conditions and limitations, the
authority of bank holding companies to engage in the activity of underwriting
and dealing in securities. Some of these bills would authorize securities firms
(through the holding company structure) to own banks, which could result in
greater competition between banks and securities firms. No prediction can be
made as to whether any of these bills will be passed by the United States
Congress and enacted into law, what provisions such a bill might contain, or
what effect it might have on the Bank.
Expansion of Investment Opportunities for California State-Chartered
Banks. Legislation enacted by the State of California has substantially expanded
the authority of California state-chartered banks to invest in real estate,
corporate stock and other corporate securities. National banks are governed in
these areas by federal law, the provisions of which are more restrictive than
California law. However, provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991, discussed below, limit state-authorized activities to
that available to national banks, unless approved by the FDIC.
2. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF
1989
General. On August 9, 1989, the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 ("FIRREA") was signed into law. This legislation has
resulted in major changes in the regulation of insured financial institutions,
including significant changes in the authority of government agencies to
regulate insured financial institutions.
Under FIRREA, the Federal Savings and Loan Insurance Corporation
("FSLIC") and the Federal Home Loan Bank Board were abolished and the FDIC was
authorized to insure savings associations, including federal savings
associations, state chartered savings and loans and other corporations
determined to be operated in substantially the same manner as a savings
association. FIRREA established two deposit insurance funds to be administered
by the FDIC. The money in these two funds is separately maintained and not
commingled. The FDIC Permanent Insurance Fund was replaced by the Bank Insurance
Fund (the "BIF") and the FSLIC deposit insurance fund was replaced by the
Savings Association Insurance Fund (the "SAIF").
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Deposit Insurance Assessments. Under FIRREA, the premium assessments
made on banks and savings associations for deposit insurance were initially
increased, with rates set separately for banks and savings associations, subject
to statutory restrictions. The Omnibus Budget Reconciliation Act of 1990,
designed to address the federal budget deficit, increased the insurance
assessment rates for members of the BIF and the SAIF over that provided by
FIRREA, and eliminated FIRREA's maximum reserve-ratio constraints on the BIF.
The FDIC raised BIF premiums to 23(cents) per $100 in insured deposits for 1993
from a base of 12(cents) in 1990.
Effective January 1, 1994, the FDIC implemented a risk-based assessment
system, under which an institution's premium assessment is based on the
probability that the deposit insurance fund will incur a loss with respect to
the institution, the likely amount of such loss, and the revenue needs of the
deposit insurance fund. As long as BIF's reserve ratio is less than a specified
"designated reserve ratio," 1.25%, the total amount raised from BIF members by
the risk-based assessment system may not be less than the amount that would be
raised if the assessment rate for all BIF members were 23(cents) per $100 in
insured deposits. The FDIC determined that the designated reserve ratio was
achieved on May 31, 1995. Accordingly, on August 8, 1995, the FDIC issued final
regulations adopting an assessment rate schedule for BIF members of 4(cents) to
31(cents) per $100 in insured deposits that became effective June 1, 1995. On
November 14, 1995, the FDIC further reduced the BIF assessment rates by 4(cents)
so that effective January 1, 1996, the premiums ranged from zero to 27(cents)
per $100 in insured deposits, but in any event not less than $2,000 per year.
Under the risk-based assessment system, a BIF member institution such as
the Bank is categorized into one of three capital categories (well capitalized,
adequately capitalized, and undercapitalized) and one of three categories based
on supervisory evaluations by its primary federal regulator (in the Bank's case,
the Comptroller). The three supervisory categories are: financially sound with
only a few minor weaknesses (Group A), demonstrates weaknesses that could result
in significant deterioration (Group B), and poses a substantial probability of
loss (Group C). The capital ratios used by the Comptroller to define
well-capitalized, adequately capitalized and undercapitalized are the same as in
the Comptroller's prompt corrective action regulations (discussed below). The
BIF assessment rates since January 1, 1997 are summarized below; assessment
figures are expressed in terms of cents per $100 in insured deposits.
<TABLE>
<CAPTION>
Assessment Rates Effective January 1, 1997
Supervisory Group
-----------------
Capital Group Group A Group B Group C
------------- ------- ------- -------
<S> <C> <C> <C>
Well Capitalized. . . . . . . . . . . . . . . . 0 3 17
Adequately Capitalized. . . . . . . . . . . . . 3 10 24
Undercapitalized. . . . . . . . . . . . . . . . 10 24 27
</TABLE>
The Deposit Insurance Funds Act of 1996, signed into law on September
30, 1996, eliminated the minimum assessment, commencing with the fourth quarter
of 1996. In addition, after December 31, 1996, banks are required to share in
the payment of interest on Financing Corp. ("FICO") bonds. Previously, the FICO
debt was paid out of the SAIF assessment base. The assessments imposed on
insured depository institutions with respect to any BIF-assessable deposit will
be assessed at a rate equal to 1/5 of the rate of the assessments imposed on
insured depository institutions with respect to any SAIF-assessable deposit.
Although the FICO assessment rates are annual rates, they are subject to change
quarterly. For the first quarter of 1997, the SAIF-FICO assessment rate was
6.48(cents) per $100 in insured deposits. Accordingly, the
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BIF-FICO assessment rate was 1.296(cents) per $100 in insured deposits. For the
second quarter of 1997, the SAIF-FICO assessment rate was 6.5(cents) per $100 in
insured deposits and the BIF-FICO assessment rate was 1.3(cents) per $100 in
insured deposits. For the third quarter of 1997, the SAIF-FICO assessment rate
was 6.3(cents) and the BIF-FICO assessment rate was 1.26(cents). For the fourth
quarter of 1997, the SAIF-FICO assessment rate was 6.32(cents) and the BIF-FICO
assessment rate was 1.264(cents). Since the FICO bonds do not mature until the
year 2019, it is conceivable that banks will continue to share in the payment of
the interest on the bonds until then.
With certain limited exceptions, FIRREA prohibits a bank from changing
its status as an insured depository institution with the BIF to the SAIF and
prohibits a savings association from changing its status as an insured
depository institution with the SAIF to the BIF, without the prior approval of
the FDIC.
FDIC Receiverships. Pursuant to FIRREA, the FDIC may be appointed
conservator or receiver of any insured bank or savings association. In addition,
FIRREA authorized the FDIC to appoint itself as sole conservator or receiver of
any insured state bank or savings association for any, among others, of the
following reasons: (i) insolvency of such institution; (ii) substantial
dissipation of assets or earnings due to any violation of law or regulation or
any unsafe or unsound practice; (iii) an unsafe or unsound condition to transact
business, including substantially insufficient capital or otherwise; (iv) any
willful violation of a cease and desist order which has become final; (v) any
concealment of books, papers, records or assets of the institution; (vi) the
likelihood that the institution will not be able to meet the demands of its
depositors or pay its obligations in the normal course of business; (vii) the
incurrence or likely incurrence of losses by the institution that will deplete
all or substantially all of its capital with no reasonable prospect for the
replenishment of the capital without federal assistance; and (viii) any
violation of any law or regulation, or an unsafe or unsound practice or
condition which is likely to cause insolvency or substantial dissipation of
assets or earnings, or is likely to weaken the condition of the institution or
otherwise seriously prejudice the interest of its depositors.
As a receiver of any insured depository institution, the FDIC may
liquidate such institution in an orderly manner and make such other disposition
of any matter concerning such institution as the FDIC determines is in the best
interests of such institution, its depositors and the FDIC. Further, the FDIC
shall as the conservator or receiver, by operation of law, succeed to all
rights, titles, powers and privileges of the insured institution, and of any
stockholder, member, account holder, depositor, officer or director of such
institution with respect to the institution and the assets of the institution;
may take over the assets of and operate such institution with all the powers of
the members or shareholders, directors and the officers of the institution and
conduct all business of the institution; collect all obligations and money due
to the institution and preserve; and conserve the assets and property of such
institution.
Enforcement Powers. Some of the most significant provisions of FIRREA
were the expansion of regulatory enforcement powers. FIRREA has given the
federal regulatory agencies broader and stronger enforcement authorities
reaching a wider range of persons and entities. Some of those provisions
included those which: (i) expanded the category of persons subject to
enforcement under the Federal Deposit Insurance Act; (ii) expanded the scope of
cease and desist orders and provided for the issuance of a temporary cease and
desist orders; (iii) provided for the suspension and removal of wrongdoers on an
expanded basis and on an industry-wide basis; (iv) prohibited the participation
of persons suspended or removed or convicted of a crime involving dishonesty or
breach of trust from serving in another insured institution; (v) required
regulatory approval of new directors and senior executive officers in certain
cases; (vi) provided protection from retaliation against "whistleblowers" and
establishes rewards for "whistleblowers" in certain enforcement actions
resulting in the recovery of money; (vii) required the regulators to publicize
all final enforcement orders; (viii) required each insured financial institution
to provide its
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independent auditor with its most recent Report of Condition ("Call Report");
(ix) significantly increased the penalties for failure to file accurate and
timely Call Reports; and (x) provided for extensive increases in the amounts and
circumstances for assessment of civil money penalties, civil and criminal
forfeiture and other civil and criminal fines and penalties.
Crime Control Act of 1990. The Crime Control Act of 1990 further
strengthened the authority of federal regulators to enforce capital
requirements, increased civil and criminal penalties for financial fraud, and
enacted provisions allowing the FDIC to regulate or prohibit certain forms of
golden parachute benefits and indemnification payments to officers and directors
of financial institutions.
3. RISK-BASED CAPITAL GUIDELINES
The federal banking agencies have established risk-based capital
guidelines. The risk-based capital guidelines include both a new definition of
capital and a framework for calculating risk weighted assets by assigning assets
and off-balance sheet items to broad credit risk categories. A bank's risk-based
capital ratio is calculated by dividing its qualifying capital (the numerator of
the ratio) by its risk weighted assets (the denominator of the ratio).
A bank's qualifying total capital consists of two types of capital
components: "core capital elements" (comprising Tier 1 capital) and
"supplementary capital elements" (comprising Tier 2 capital). The Tier 1
component of a bank's qualifying capital must represent at least 50% of
qualifying total capital and may consist of the following items that are defined
as core capital elements: (i) common stockholders' equity; (ii) qualifying
noncumulative perpetual preferred stock (including related surplus); and (iii)
minority interest in the equity accounts of consolidated subsidiaries. The Tier
2 component of a bank's qualifying total capital may consist of the following
items: (i) allowance for loan and lease losses (subject to limitations); (ii)
perpetual preferred stock and related surplus (subject to conditions); (iii)
hybrid capital instruments (as defined) and mandatory convertible debt
securities; and (iv) term subordinated debt and intermediate-term preferred
stock, including related surplus (subject to limitations).
Assets and credit equivalent amounts of off-balance sheet items are
assigned to one of several broad risk categories, according to the obligor, or,
if relevant, the guarantor or the nature of collateral. The aggregate dollar
value of the amount in each category is then multiplied by the risk weight
associated with that category. The resulting weighted values from each of the
risk categories are added together, and this sum is the bank's total risk
weighted assets that comprise the denominator of the risk-based capital ratio.
Risk weights for all off-balance sheet items are determined by a
two-step process. First, the "credit equivalent amount" of off-balance sheet
items such as letters of credit and recourse arrangements is determined, in most
cases by multiplying the off-balance sheet item by a credit conversion factor.
Second, the credit equivalent amount is treated like any balance sheet asset and
generally is assigned to the appropriate risk category according to the obligor,
or, if relevant, the guarantor or the nature of the collateral.
The supervisory standards set forth below specify minimum supervisory
ratios based primarily on broad risk considerations. The risk-based ratios do
not take explicit account of the quality of individual asset portfolios or the
range of other types of risks to which banks may be exposed, such as interest
rate, liquidity, market or operational risks. For this reason, banks are
generally expected to operate with capital positions above the minimum ratios.
All banks are required to meet a minimum ratio of qualifying total
capital to risk weighted assets of 8%, of which at least 4% should be in the
form of Tier 1 capital net of goodwill, and a
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minimum ratio of Tier 1 capital to risk weighted assets of 4%. The maximum
amount of supplementary capital elements that qualifies as Tier 2 capital is
limited to 100% of Tier 1 capital net of goodwill. In addition, the combined
maximum amount of subordinated debt and intermediate-term preferred stock that
qualifies as Tier 2 capital is limited to 50% of Tier 1 capital. The maximum
amount of the allowance for loan and lease losses that qualifies as Tier 2
capital is limited to 1.25% of gross risk weighted assets. Allowance for loan
and lease losses in excess of this limit may, of course, be maintained, but
would not be included in a bank's risk-based capital calculation.
In addition to the risk-based guidelines, the federal banking agencies
require all banks to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a bank rated in the highest of
the five categories used by regulators to rate banks, the minimum leverage ratio
of Tier 1 capital to total assets is 3%. For all banks not rated in the highest
category, the minimum leverage ratio must be at least 4% to 5%. In addition to
these uniform risk-based capital guidelines and leverage ratios that apply
across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
In December, 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss reserves to classified
assets. The benchmark set forth by the policy statement is the sum of: (a)
assets classified loss; (b) 50% of assets classified doubtful; (c) 15% of assets
classified substandard; and (d) estimated credit losses on other assets over the
upcoming twelve months.
The federal banking agencies have recently revised their risk-based
capital rules to take account of concentrations of credit and the risks of
non-traditional activities. Concentrations of credit refers to situations where
a lender has a relatively large proportion of loans involving one borrower,
industry, location, collateral or loan type. Non-traditional activities are
considered those that have not customarily been part of the banking business but
that start to be conducted as a result of developments in, for example,
technology or financial markets. The regulations require institutions with high
or inordinate levels of risk to operate with higher minimum capital standards.
The federal banking agencies also are authorized to review an institution's
management of concentrations of credit risk for adequacy and consistency with
safety and soundness standards regarding internal controls, credit underwriting
or other operational and managerial areas.
Further, the banking agencies recently have adopted modifications to the
risk-based capital rules to include standards for interest rate risk exposures.
Interest rate risk is the exposure of a bank's current and future earnings and
equity capital arising from adverse movements in interest rates. While interest
rate risk is inherent in a bank's role as financial intermediary, it introduces
volatility to bank earnings and to the economic value of the bank. The banking
agencies have addressed this problem by implementing changes to the capital
standards to include a bank's exposure to declines in the economic value of its
capital due to changes in interest rates as a factor that the banking agencies
will consider in evaluating an institution's capital adequacy. Bank examiners
consider a bank's historical financial performance and its earnings exposure to
interest rate movements as well as qualitative factors such as the adequacy of a
bank's internal interest rate risk management. The federal banking agencies
recently considered adopting a uniform supervisory framework for all
institutions to measure and assess each bank's exposure to interest rate risk
and establish an explicit capital charge based on the assessed risk, but
ultimately elected not to adopt such a uniform framework. Even without such a
uniform framework, however, each bank's interest rate risk exposure is assessed
by its primary federal regulator on an individualized basis, and it may be
required by the regulator to hold additional capital for interest
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rate risk if it has a significant exposure to interest rate risk or a weak
interest rate risk management process.
Effective April 1, 1995, the federal banking agencies issued rules which
limit the amount of deferred tax assets that are allowable in computing a bank's
regulatory capital. The standard had been in effect on an interim basis since
March, 1993. Deferred tax assets that can be realized for taxes paid in prior
carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of: (i) the amount that can be realized within one year
of the quarter-end report date; or (ii) 10% of Tier 1 capital. The amount of any
deferred tax in excess of this limit would be excluded from Tier 1 capital,
total assets and regulatory capital calculations.
4. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
General. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") was signed into law on December 19, 1991. FDICIA recapitalized
the FDIC's Bank Insurance Fund, granted broad authorization to the FDIC to
increase deposit insurance premium assessments and to borrow from other sources,
and continued the expansion of regulatory enforcement powers, along with many
other significant changes.
Prompt Corrective Action. FDICIA established five categories of bank
capitalization: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized" and mandated the establishment of a system of "prompt
corrective action" for institutions falling into the lower capital categories.
Under FDICIA, banks are prohibited from paying dividends or management fees to
controlling persons or entities if, after making the payment the bank would be
undercapitalized, that is, the bank fails to meet the required minimum level for
any relevant capital measure. Asset growth and branching restrictions apply to
undercapitalized banks, which are required to submit acceptable capital plans
guaranteed by its holding company, if any. Broad regulatory authority was
granted with respect to significantly undercapitalized banks, including forced
mergers, growth restrictions, ordering new elections for directors, forcing
divestiture by its holding company, if any, requiring management changes, and
prohibiting the payment of bonuses to senior management. Even more severe
restrictions are applicable to critically undercapitalized banks, those with
capital at or less than 2%, including the appointment of a receiver or
conservator after 90 days, even if the bank is still solvent.
The federal banking agencies have promulgated substantially similar
regulations to implement this system of prompt corrective action. Under the
regulations, a bank shall be deemed to be: (i) "well capitalized" if it has a
total risk-based capital ratio of 10.0% or more, has a Tier 1 risk-based capital
ratio of 6.0% or more, has a leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure; (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier 1 risk-based capital ratio of
4.0% or more and a leverage capital ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized"; (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
8.0%, a Tier 1 risk-based capital ratio that is less than 4.0%, or a leverage
capital ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%.
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FDICIA and the implementing regulations also provide that a federal
banking agency may, after notice and an opportunity for a hearing, reclassify a
well capitalized institution as adequately capitalized and may require an
adequately capitalized institution or an undercapitalized institution to comply
with supervisory actions as if it were in the next lower category if the
institution is in an unsafe or unsound condition or engaging in an unsafe or
unsound practice. (The federal banking agency may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
Operational Standards. FDICIA also granted the regulatory agencies
authority to prescribe standards relating to internal controls, credit
underwriting, asset growth and compensation, among others, and required the
regulatory agencies to promulgate regulations prohibiting excessive compensation
or fees. Many regulations have been adopted by the regulatory agencies to
implement these provisions and subsequent legislation (the Riegal Community
Development Act, discussed below) gave the regulatory agencies the option of
prescribing the safety and soundness standards as guidelines rather than
regulations.
Regulatory Accounting Reports. Each bank with $500 million or more in
assets is required to submit an annual report to the FDIC, as well as any other
federal banking agency with authority over the bank, and any appropriate state
banking agency. This report must contain a statement regarding management's
responsibilities for: (i) preparing financial statements; (ii) establishing and
maintaining adequate internal controls; and (iii) complying with applicable laws
and regulations. In addition to having an audited financial statement by an
independent accounting firm on an annual basis, the accounting firm must
determine and report as to whether the financial statements are presented fairly
and in accordance with generally accepted accounting principles and comply with
other requirements of the applicable federal banking authority. In addition, the
accountants must attest to and report to the regulators separately on
management's compliance with internal controls.
Truth in Savings. FDICIA further established a new truth in savings
scheme, providing for clear and uniform disclosure of terms and conditions on
which interest is paid and fees are assessed on deposits. The FRB's Regulation
DD, implementing the Truth in Savings Act, became effective June 21, 1993.
Brokered Deposits. Effective June 16, 1992, FDICIA placed restrictions
on the ability of banks to obtain brokered deposits or to solicit and pay
interest rates on deposits that are significantly higher than prevailing rates.
FDICIA provides that a bank may not accept, renew or roll over brokered deposits
unless: (i) it is "well capitalized"; or (ii) it is adequately capitalized and
receives a waiver from the FDIC permitting it to accept brokered deposits paying
an interest rate not in excess of 75 basis points over certain prevailing market
rates. FDIC regulations define brokered deposits to include any deposit
obtained, directly or indirectly, from any person engaged in the business of
placing deposits with, or selling interests in deposits of, an insured
depository institution, as well as any deposit obtained by a depository
institution that is not "well capitalized" for regulatory purposes by offering
rates significantly higher (generally more than 75 basis points) than the
prevailing interest rates offered by depository institutions in such
institution's normal market area. In addition to these restrictions on
acceptance of brokered deposits, FDICIA provides that no pass-through deposit
insurance will be provided to employee benefit plan deposits accepted by an
institution which is ineligible to accept brokered deposits under applicable law
and regulations.
Lending. New regulations have been issued in the area of real estate
lending, prescribing standards for extensions of credit that are secured by real
property or made for the purpose of the construction of a building or other
improvement to real estate. In addition, the aggregate of all
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loans to executive officers, directors and principal shareholders and related
interests may now not exceed 100% (200% in some circumstances) of the depository
institution's capital.
State Authorized Activities. The new legislation also created
restrictions on activities authorized under state law. FDICIA generally
restricts activities through subsidiaries to those permissible for national
banks, unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements, thereby effectively eliminating real
estate investment authorized under California law, and provided for a five-year
divestiture period for impermissible investments. Insurance activities were also
limited, except to the extent permissible for national banks.
5. RIEGLE COMMUNITY DEVELOPMENT AND REGULATORY IMPROVEMENT ACT OF
1994
The Riegle Community Development and Regulatory Improvement Act of 1994
(the "1994 Act"), which has been viewed as the most important piece of banking
legislation since the enactment of FDICIA, was signed into law on September 23,
1994. In addition to providing funding for the establishment of a Community
Development Financial Institutions Fund (the "Fund"), which provides assistance
to new and existing community development lenders to help to meet the needs of
low- and moderate-income communities and groups, the 1994 Act mandated changes
to a wide range of banking regulations. These changes included modifications to
the publication requirements for Call Reports, less frequent regulatory
examination schedules for small institutions, small business and commercial real
estate loan securitization, amendments to the money laundering and currency
transaction reporting requirements of the Bank Secrecy Act, clarification of the
coverage of the Real Estate Settlement Procedures Act for business, commercial
and agricultural real estate secured transactions, amendments to the national
flood insurance program, and amendments to the Truth in Lending Act to provide
greater protection for consumers by reducing discrimination against the
disadvantaged.
The "Paperwork Reduction and Regulatory Improvement Act," Title III of
the 1994 Act, required the federal banking agencies to consider the
administrative burdens that new regulations will impose before their adoption
and requires a transition period in order to provide adequate time for
compliance. This Act also requires the federal banking agencies to work together
to establish uniform regulations and guidelines as well as to work together to
eliminate duplicative or unnecessary requests for information in connection with
applications or notices. This act reduces the frequency of examinations for
well-rated institutions, simplifies the quarterly Call Reports and eliminated
the requirement that financial institutions publish their Call Reports in local
newspapers. This Act also established an internal regulatory appeal process and
independent ombudsman to provide a means for review of material supervisory
determinations. The Paperwork Reduction and Regulatory Improvement Act also
amended the Bank Holding Company Act and Securities Act of 1933 to simplify the
formation of bank holding companies.
Title IV of the 1994 Act amended the Bank Secrecy Act by reducing the
reporting requirements imposed on financial institutions for large currency
transactions, expanding the ability of financial institutions to provide
exemptions to the reporting requirements for businesses that regularly deal in
large amounts of currency, and providing for the delegation of civil money
penalty enforcement from the Treasury Department to the individual federal
banking agencies.
6. SAFETY AND SOUNDNESS STANDARDS
In July, 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA and the
1994 Act. The guidelines set forth operational and managerial standards relating
to internal controls, information systems and
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internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth and compensation, fees and benefits. Guidelines for asset
quality and earnings standards will be adopted in the future. The guidelines
establish the safety and soundness standards that the agencies will use to
identify and address problems at insured depository institutions before capital
becomes impaired. If an institution fails to comply with a safety and soundness
standard, the appropriate federal banking agency may require the institution to
submit a compliance plan. Failure to submit a compliance plan or to implement an
accepted plan may result in enforcement action.
The federal banking agencies issued regulations prescribing uniform
guidelines for real estate lending. The regulations require insured depository
institutions to adopt written policies establishing standards, consistent with
such guidelines, for extensions of credit secured by real estate. The policies
must address loan portfolio management, underwriting standards and loan to value
limits that do not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
7. CONSUMER PROTECTION LAWS AND REGULATIONS
The bank regulatory agencies are focusing greater attention on
compliance with consumer protection laws and their implementing regulations.
Examination and enforcement have become more intense in nature, and insured
institutions have been advised to monitor carefully compliance with various
consumer protection laws and their implementing regulations. Banks are subject
to many federal consumer protection laws and their regulations including, but
not limited to, the Community Reinvestment Act (the "CRA"), the Truth in Lending
Act (the "TILA"), the Fair Housing Act (the "FH Act"), the Equal Credit
Opportunity Act (the "ECOA"), the Home Mortgage Disclosure Act ("HMDA"), and the
Real Estate Settlement Procedures Act ("RESPA").
The CRA, enacted into law in 1977, is intended to encourage insured
depository institutions, while operating safely and soundly, to help meet the
credit needs of their communities. The CRA specifically directs the federal bank
regulatory agencies, in examining insured depository institutions, to assess
their record of helping to meet the credit needs of their entire community,
including low- and moderate-income neighborhoods, consistent with safe and sound
banking practices. The CRA further requires the agencies to take a financial
institution's record of meeting its community credit needs into account when
evaluating applications for, among other things, domestic branches, consummating
mergers or acquisitions, or holding company formations.
The federal banking agencies have adopted regulations which measure a
bank's compliance with its CRA obligations on a performance-based evaluation
system. This system bases CRA ratings on an institution's actual lending service
and investment performance rather than the extent
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to which the institution conducts needs assessments, documents community
outreach or complies with other procedural requirements. The ratings range from
"outstanding" to a low of "substantial noncompliance."
The ECOA, enacted into law in 1974, prohibits discrimination in any
credit transaction, whether for consumer or business purposes, on the basis of
race, color, religion, national origin, sex, marital status, age (except in
limited circumstances), receipt of income from public assistance programs, or
good faith exercise of any rights under the Consumer Credit Protection Act. In
March, 1994, the Federal Interagency Task Force on Fair Lending issued a policy
statement on discrimination in lending. The policy statement describes the three
methods that federal agencies will use to prove discrimination: overt evidence
of discrimination, evidence of disparate treatment and evidence of disparate
impact. This means that if a creditor's actions have had the effect of
discriminating, the creditor may be held liable -- even when there is no intent
to discriminate.
The FH Act, enacted into law in 1968, regulates may practices, including
making it unlawful for any lender to discriminate in its housing-related lending
activities against any person because of race, color, religion, national origin,
sex, handicap, or familial status. The FH Act is broadly written and has been
broadly interpreted by the courts. A number of lending practices have been found
to be, or may be considered, illegal under the FH Act, including some that are
not specifically mentioned in the FH Act itself. Among those practices that have
been found to be, or may be considered, illegal under the FH Act are: declining
a loan for the purposes of racial discrimination; making excessively low
appraisals of property based on racial considerations; pressuring, discouraging,
or denying applications for credit on a prohibited basis; using excessively
burdensome qualifications standards for the purpose or with the effect of
denying housing to minority applicants; imposing on minority loan applicants
more onerous interest rates or other terms, conditions or requirements; and
racial steering, or deliberately guiding potential purchasers to or away from
certain areas because of race.
The TILA, enacted into law in 1968, is designed to ensure that credit
terms are disclosed in a meaningful way so that consumers may compare credit
terms more readily and knowledgeably. As a result of the TILA, all creditors
must use the same credit terminology and expressions of rates, the annual
percentage rate, the finance charge, the amount financed, the total payments and
the payment schedule.
HMDA, enacted into law in 1975, grew out of public concern over credit
shortages in certain urban neighborhoods. One purpose of HMDA is to provide
public information that will help show whether financial institutions are
serving the housing credit needs of the neighborhoods and communities in which
they are located. HMDA also includes a "fair lending" aspect that requires the
collection and disclosure of data about applicant and borrower characteristics
as a way of identifying possible discriminatory lending patterns and enforcing
anti-discrimination statutes. HMDA requires institutions to report data
regarding applications for one-to-four family loans, home improvement loans, and
multifamily loans, as well as information concerning originations and purchases
of such types of loans. Federal bank regulators rely, in part, upon data
provided under HMDA to determine whether depository institutions engage in
discriminatory lending practices.
RESPA, enacted into law in 1974, requires lenders to provide borrowers
with disclosures regarding the nature and costs of real estate settlements.
Also, RESPA prohibits certain abusive practices, such as kickbacks, and places
limitations on the amount of escrow accounts.
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Violations of these various consumer protection laws and regulations can
result in civil liability to the aggrieved party, regulatory enforcement
including civil money penalties, and even punitive damages.
8. CONCLUSION
As a result of the recent federal and California legislation, there has
been a competitive impact on commercial banking. There has been a lessening of
the historical distinction between the services offered by banks, savings and
loan associations, credit unions, and other financial institutions, banks have
experienced increased competition for deposits and loans which may result in
increases in their cost of funds, and banks have experienced increased costs.
Further, the federal banking agencies have increased enforcement authority over
banks and their directors and officers.
Future legislation is also likely to impact the Bank's business.
Consumer legislation has been proposed in Congress which may require banks to
offer basic, low-cost, financial services to meet minimum consumer needs.
Various proposals to restructure the federal bank regulatory agencies are
currently pending in Congress, some of which include proposals to expand the
ability of banks to engage in previously prohibited businesses. Further, the
regulatory agencies have proposed and may propose a wide range of regulatory
changes, including the calculation of capital adequacy and limiting business
dealings with affiliates. These and other legislative and regulatory changes may
have the impact of increasing the cost of business or otherwise impacting the
earnings of financial institutions. However, the degree, timing and full extent
of the impact of these proposals cannot be predicted.
IMPACT OF MONETARY POLICIES. Banking is a business which depends on rate
differentials. In general, the difference between the interest rate paid by the
Bank on its deposits and its other borrowings and the interest rate earned by
the Bank on loans, securities and other interest-earning assets will comprise
the major source of the Bank's earnings. These rates are highly sensitive to
many factors which are beyond the control of the Bank and, accordingly, the
earnings and growth of the Bank are subject to the influence of economic
conditions generally, both domestic and foreign, including inflation, recession,
and unemployment; and also to the influence of monetary and fiscal policies of
the United States and its agencies, particularly the Federal Reserve Board. The
Federal Reserve Board implements national monetary policy, such as seeking to
curb inflation and combat recession, by its open-market dealings in United
States government securities, by adjusting the required level of reserves for
financial institutions subject to reserve requirements, by placing limitations
upon savings and time deposit interest rates, and through adjustments to the
discount rate applicable to borrowings by banks which are members of the Federal
Reserve System. The actions of the Federal Reserve Board in these areas
influence the growth of bank loans, investments, and deposits and also affect
interest rates. The nature and timing of any future changes in such policies and
their impact on the Bank cannot be predicted; however, depending on the degree
to which the Bank's interest-earning assets and interest-bearing liabilities are
rate sensitive, increases in rates would have the temporary effect of increasing
the Bank's net interest margin, while decreases in interest rates would have the
opposite effect.
In addition, adverse economic conditions could make a higher provision
for loan losses prudent and could cause higher loan charge-offs, thus adversely
affecting the Bank's net income.
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CERTAIN RATIOS
The following table presents certain ratios for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Net Income to Average(1)
Shareholders' Equity......................12.83% 10.24% 11.13% 12.07% 9.45%
Net Income to Average Assets............... .97% .95% 1.04% 1.09% .85%
Average Net Loans to Average
Deposits................................ 75.49% 86.24% 80.05% 89.98% 83.74%
</TABLE>
- ------------------
(1) Averages used herein, unless indicated otherwise, are based on daily
averages.
ITEM 2 - DESCRIPTION OF PROPERTY
The Bank owns its main office and its branches in Brawley, Calexico,
Coachella, La Quinta and Thousand Palms. The Bank leases its remaining branches
as well as an operations center at 2415 La Brucherie Road, Imperial, and its
loan production offices in El Centro and Indio, California, and Yuma, Arizona.
The Bank's Holtville lease and the Indio loan production office lease
expire in 1998. The remaining leases expire in 2001 or beyond and/or have
extension options. The Bank intends to negotiate to extend the Holtville branch
lease. The Indio loan production office will be vacated and moved to Rancho
Mirage.
The Bank has leased property located adjacent to the main office, at
1498 Main Street, on which the Bank constructed a new facility to house the
Bank's corporate and loan functions, consolidating the loan center. The lease
has a twenty-year term and two five-year options. Construction cost $591,276 and
was completed by June, 1997. The term of the lease commenced upon completion of
the construction. The rent for each year of the term is $318,972, plus
cost-of-living adjustments of not less than 3.5% and not more than 5.5% each
year after the initial year.
The Bank purchased a parcel of vacant land at 81-710 Highway 111, Indio,
with the original intention of constructing a permanent Indio branch office. The
purchase price was $310,000. The purchase preceded the acquisition of Bank of
the Desert, N.A., and the Bank has not yet determined whether to keep the
property for a permanent site after expiration of the existing Indio branch
lease at 81-790 Highway 111, which has been extended to February, 1999, or
whether to sell the property and exercise its 40-month extension option. The
Bank has also purchased a parcel of vacant land adjacent to its La Quinta
office, at a cost of $23,100, to be used as additional parking for that branch.
During 1997 the Bank's aggregate lease expense for these properties was
$467,437. The Bank's aggregate lease expense in 1996 was $445,935.
The Bank's premises are deemed to be adequate for its present and
anticipated needs and no material capital expenditures are contemplated. In
Management's opinion, the Bank has sufficient insurance to cover its interests
in its premises.
19
<PAGE> 20
ITEM 3 - LEGAL PROCEEDINGS
To the best of the Company's and the Bank's knowledge, there are no
pending legal proceedings to which the Company or the Bank is a party and which
may have a materially adverse effect upon the Company's or the Bank's property
or business.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company was not publicly held during 1997. No matters were submitted
to the Bank's stockholders during the fourth quarter of 1997.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference from
Page 41 of Valley Independent Bank's Annual Report to Shareholders for the year
ended December 31, 1997.
Valley Independent Bank is the Company's predecessor.
During 1995, 1996 and 1997 the Bank issued 892,839 shares of its Common
Stock upon exercise of stock options pursuant to the Bank's 1989 Stock Option
Plan, pursuant to its 1997 Unit Offering, and pursuant to the exercise of
Warrants issued in the 1997 Unit Offering. The aggregate proceeds to the Bank
was $10,978,686. The issuances of the Bank's Common Stock were exempt from the
registration requirements of the Securities Act of 1933 pursuant to Section
3(a)(2) thereof.
ITEM 6 - SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference from
Page 8 of Valley Independent Bank's Annual Report to Shareholders for the year
ended December 31, 1997.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference from
Pages 9 to 25 of Valley Independent Bank's Annual Report to Shareholders for the
year ended December 31, 1997.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The information required by this Item is incorporated by reference from
Pages 24 to 25 of Valley Independent Bank's Annual Report to Shareholders for
the year ended December 31, 1997.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Financial Statements are incorporated herein by reference
from Pages 26 to 40 of Valley Independent Bank's Annual Report to Shareholders
for the year ended December 31, 1997:
20
<PAGE> 21
- Independent Auditors' Report
- Statements of Financial Condition as of December 31, 1997 and 1996
- Statements of Income for the Years Ended December 31, 1997, 1996 and
1995
- Statement of Changes in Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
- Statements of Cash Flows for the Years Ended December 31, 1997, 1996
and 1995
- Notes to Financial Statements
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements with the Bank's accountants on accounting or
financial disclosure.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from
Pages 6 to 8 and Page 25 of VIB Corp's Proxy Statement for the Annual Meeting of
Shareholders to be held May 11, 1998.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
Pages 9 to 13 of VIB Corp's Proxy Statement for the Annual Meeting of
Shareholders to be held May 11, 1998.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this Item is incorporated by reference from
Pages 4 to 5 of VIB Corp's Proxy Statement for the Annual Meeting of
Shareholders to be held May 11, 1998.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
Page 14 of VIB Corp's Proxy Statement for the Annual Meeting of Shareholders to
be held May 11, 1998.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
A. FINANCIAL STATEMENTS
The following Financial Statements are incorporated herein by reference:
21
<PAGE> 22
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C> <C>
A-1. Independent Auditors' Report................................................(1)
A-2. Statements of Financial Condition as of December 31, 1997 and 1996..........(1)
A-3. Statements of Income for the Years Ended December 31, 1997, 1996 and 1995...(1)
A-4. Statement of Changes in Shareholders' Equity for the Years Ended December 31,
1997, 1996 and 1995.........................................................(1)
A-5. Statements of Cash Flows for the Years Ended December 31, 1997, 1996
and 1995....................................................................(1)
A-6. Notes to Financial Statements...............................................(1)
</TABLE>
- ------------------------------
(1) The Financial Statements are incorporated by reference from Pages 26 to
40 of Valley Independent Bank's 1997 Annual Report to Shareholders.
B. Exhibits
The following exhibits are filed as a part of this Report:
<TABLE>
<CAPTION>
REG. S-K,
ITEM 601
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2 Plan of Reorganization and Merger Agreement, dated
November 18, 1997, by and between Valley Independent Bank
and VIB Merger Company
3.1 Articles of Incorporation of VIB Corp, as amended
3.2 Bylaws of VIB Corp
4.1 Form of Common Stock Certificate Warrant
4.2 Form of Warrant Certificate
10.1 Agreement to Assume Liabilities and to Acquire Branch Banking Office
(Calexico)
10.2 Agreement and Plan of Reorganization Dated April 29, 1996
(Bank of the Desert, N.A.)
10.3 Purchase and Assumption Agreement Dated October 15, 1996
(Blythe and Tecate)
10.4 VIB Corp 1997 Stock Option Plan
10.5 Form of VIB Corp Stock Option Agreement
10.6 Form of VIB Corp Indemnity Agreement
10.7 Profit Sharing and 401(k) Plan
10.8 Amendment to 401(k) Plan
10.9 1994 Amendments to 401(k) Plan
10.10 Employee Stock Ownership Plan
10.11 Form of Directors Deferred Compensation Agreement
10.12 Form of Officers Deferred Compensation Agreement
10.13 El Centro Lease
13 Valley Independent Bank's 1997 Annual Report to Shareholders
(incorporated portions only)
21 Subsidiaries
27 Financial Data Schedule
</TABLE>
22
<PAGE> 23
C. REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of 1997. The Bank filed the following Current Report on Form F-3
during the fourth quarter of 1997:
<TABLE>
<CAPTION>
DATE SUBJECTS
---- --------
<S> <C>
As of November 18, 1997 Declaration of a 2% stock dividend - record date
December 28, 1997; approval of bank holding
company reorganization; conclusion of 1997 Unit
Offering - 101,082 Units (5 shares of Common, 1
Warrant) at $87.50 per Unit.
</TABLE>
23
<PAGE> 24
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.
VIB CORP
Date: March 26, 1998 By: /s/ HARRY G. GOODING
-----------------------------------
Harry G. Gooding, III,
Executive Vice President and
Chief Financial Officer
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>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
- --------------------------------- Director March __, 1998
Charles Ellis
- --------------------------------- Director March __, 1998
Robert S. Ellison
/s/ RICHARD D. FOSS
- --------------------------------- Chairman of the Board March 26, 1998
Richard D. Foss of Directors
/s/ HARRY G. GOODING
- --------------------------------- Executive Vice President March 26, 1998
Harry G. Gooding, III and Chief Financial
Officer (and Principal
Accounting Officer)
/s/ DENNIS L. KERN
- --------------------------------- Director, President and March 26, 1998
Dennis L. Kern Chief Executive Officer
/s/ EDWARD McGREW
- --------------------------------- Director March 26, 1998
Edward McGrew
/s/ RONALD A. PEDERSEN
- --------------------------------- Vice Chairman of the March 26, 1998
Ronald A. Pedersen Board of Directors
/s/ JOHN L. SKINNER
- --------------------------------- Director March 26, 1998
John L. Skinner
- --------------------------------- Vice Chairman of the March __, 1998
Alice Helen Lowery Board of Directors
Westerfield
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT INDEX
REG. S-K, PAGE (OR
ITEM 601 FOOTNOTE
EXHIBIT NO. DESCRIPTION REFERENCE)
----------- ----------- ---------
<S> <C> <C>
2 Plan of Reorganization and Merger Agreement, dated
November 18, 1997, by and between Valley Independent Bank
and VIB Merger Company...................................................(1)
3.1 Articles of Incorporation of VIB Corp, as amended........................(2)
3.2 Bylaws of VIB Corp.......................................................(2)
4.1 Form of Common Stock Certificate Warrant.................................(3)
4.2 Form of Warrant Certificate .............................................(3)
10.1 Agreement to Assume Liabilities and to Acquire Branch Banking
Office (Calexico) (P).................................................... 26
10.2 Agreement and Plan of Reorganization Dated April 29, 1996
(Bank of the Desert, N.A.) (P)........................................... 67
10.3 Purchase and Assumption Agreement Dated October 15, 1996
(Blythe and Tecate) (P)..................................................139
10.4 VIB Corp 1997 Stock Option Plan..........................................(2)
10.5 Form of VIB Corp Stock Option Agreement..................................(2)
10.6 Form of VIB Corp Indemnity Agreement.....................................(2)
10.7 Profit Sharing and 401(k) Plan (P).......................................208
10.8 Amendment to 401(k) Plan (P).............................................281
10.9 1994 Amendments to 401(k) Plan (P).......................................286
10.10 Employee Stock Ownership Plan (P)........................................195
10.11 Form of Directors Deferred Compensation Agreement (P)....................263
10.12 Form of Officers Deferred Compensation Agreement (P).....................367
10.13 El Centro Lease (P)......................................................380
13 Valley Independent Bank's 1997 Annual Report to Shareholders
(incorporated portions only).............................................406
21 Subsidiaries.............................................................439
27 Financial Data Schedule..................................................440
</TABLE>
- ------------------------------
(1) Filed as Exhibit A to the Proxy Statement/Prospectus included in
the Registrant's Registration Statement on Form S-4 dated
December 23, 1997 (the "S-4 Registration Statement").
(2) Filed as an exhibit to the S-4 Registration Statement.
(3) Filed as an exhibit to Registrant's Registration Statement on Form
8-A dated March 19, 1998.
(4) The Bank's Annual Report to Shareholders, portions of which are
incorporated by reference, will be submitted under separate
cover. Except those portions incorporated by reference, the
Annual Report to Shareholders is not to be deemed "filed" as a
part of this Form 10-K.
(P) Filed in paper format under cover of Form SE.
25
<PAGE> 1
SELECTED FINANCIAL DATA
The following table presents a summary of selected financial information for the
five years ended December 31, 1997. This financial information should be read in
conjunction with the Financial Statement and Notes thereto, included elsewhere
herein. See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations" herein.
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME (000'S)
Total Interest Income $ 32,459 $ 24,261 $ 21,776 $ 18,545 $ 14,857
Total Interest Expense 10,421 7,128 5,973 4,299 3,545
- ---------------------------------------------------------------------------------------------------------------------
Net Interest Income 22,038 17,133 15,803 14,246 11,312
Provision For Credit Losses 1,850 635 1,008 1,210 968
- ---------------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Credit Losses 20,188 16,498 14,795 13,036 10,344
Non-Interest Income 5,751 3,075 2,519 2,493 2,540
Non-Interest Expense
and Income Taxes 22,138 16,998 14,889 13,249 11,327
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 3,801 $ 2,575 $ 2,425 $ 2,280 $ 1,557
=====================================================================================================================
PER SHARE DATA (1)
- ---------------------------------------------------------------------------------------------------------------------
Net Income-Diluted(2) $ 0.63 $ 0.44 $ 0.42 $ 0.42 $ 0.30
Cash Dividends N/A N/A N/A N/A N/A
Book Value Per Share(1)(3) $ 6.51 $ 4.85 $ 4.39 $ 3.77 $ 3.53
Number of Shares used in
Income Calculations 6,014,998 5,791,051 5,729,744 5,407,977 5,212,788
STATEMENTS OF FINANCIAL CONDITION
(at End of Period) (000's)
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $ 444,167 $ 333,565 $ 257,465 $ 226,031 $ 207,564
Total Deposits 399,212 304,576 230,533 204,491 175,999
Total Net Loans (4) 311,417 242,787 188,878 166,475 158,690
Allowance for Credit Losses 2,330 2,634 2,024 2,494 1,827
Total Investments 69,287 36,522 39,393 19,194 27,301
Shareholders' Equity 40,254 27,040 23,678 19,853 18,100
OPERATING RATIOS
- ---------------------------------------------------------------------------------------------------------------------
Total Net Loans to Total Deposits 78.01% 79.88% 81.93% 81.41% 90.17%
Total Equity to Total Assets 9.06 8.11 9.20 8.78 8.72
Average Equity to Average Assets 7.55 9.27 9.30 9.11 9.05
Tier I Capital to Risk-Weighted Assets(5) 9.83 8.76 11.64 10.61 10.52
Total Capital to Risk-Weighted Assets(5) 10.47 9.69 12.65 11.93 11.60
Income on Average Equity 12.83 10.24 11.13 12.07 9.45
Income on Average Total Assets .97 .95 1.04 1.09 .85
Total Interest Expense to Total
Interest Income 32.11 29.38 27.43 23.18 23.86
Allowance for Credit Losses to
Total Loans .74 1.07 1.06 1.48 1.14
Dividend Payment Ratio N/A N/A N/A N/A N/A
</TABLE>
(1) These figures have been adjusted retroactively to reflect previous stock
dividends and the 1994, 1995 and 1997 stock splits.
(2) Diluted net income per share 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.
(3) "Book value per share" is defined as total capital divided by the number
of shares outstanding at the end of the period.
(4) "Total net loans" is defined as total loans net of unearned discount,
net of deferred fees and the allowance for credit losses.
(5) As defined under regulatory guidelines.
N/A - Not Applicable
8
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's discussion, which incorporates an analysis of financial condition
and results of operations, is designed to provide a more comprehensive
understanding of the significant changes and trends related to the Bank's
financial condition, results of operations, liquidity and capital resources. The
discussion should be read in conjunction with the Financial Statements of the
Bank and Notes thereto and the "Selected Financial Data" included elsewhere
herein.
The following table sets forth, for the periods indicated, the increase or
decrease of certain items in the Statement of Income as compared to the prior
comparable period:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 VERSUS 1996 1996 VERSUS 1995
AMOUNT OF PERCENT OF AMOUNT OF PERCENT OF
INCREASE INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE) (DECREASE)
(000'S) (000'S)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Interest Income $ 8,198 33.79% $ 2,485 11.41%
Total Interest Expense 3,293 46.21 1,155 19.34
- -----------------------------------------------------------------------------------------------
Net Interest Income 4,905 28.63 1,330 8.42
Provision for Credit Losses 1,215 191.34 (373) (37.00)
- -----------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Credit Losses 3,690 22.36 1,703 11.51
Non-Interest Income 2,676 87.04 556 22.07
Non-Interest Expense 4,446 28.23 2,300 17.10
Income Before Taxes 1,920 50.20 (41) (1.06)
Income Taxes 694 55.56 (191) (13.26)
- -----------------------------------------------------------------------------------------------
Net Income 1,226 47.60 150 6.19
===============================================================================================
</TABLE>
GENERAL:
During 1997 Valley Independent Bank experienced record earnings, increased its
capitalization, continued market share expansion and initiated the formation of
a bank holding company. Highlighting the increase in market share was the
February acquisition of the Blythe and Tecate, California branch offices from
Wells Fargo Bank. Total deposits of $42.8 million were acquired in addition to
the purchase of the fixed assets and the assumption of the leases of the two
branches. The aggregate purchase price paid by the Bank was $3,791,000 which
included a premium of $1,975,000 or 4.6% of deposits assumed. The Bank, as a
result, increased its existing presence in Riverside and San Diego Counties. In
addition, the Bank established its initial interstate presence by opening, in
January, a loan production office in Yuma, Arizona. The Yuma market represents
one of the state of Arizona's fastest growing metropolitan areas and presents a
natural extension of the Bank's Imperial County, California market area which is
contiguous to the city of Yuma.
A unit offering began September 9, 1997 and concluded November 21, 1997. Valley
Independent Bank's original intention was to raise $5.0 million in additional
Tier I capital. 60,000 units consisting of 300,000 shares and 60,000 warrants
were to be offered at $87.50 per unit. The warrants are exercisable at an
exercise price of $19.12 per share through October 31, 1998 and at an exercise
price of $22.06 per share until they expire on October 29, 1999.
The offering was oversubscribed, and after receipt of regulatory approval, the
bank sold 101,132 units. The net proceeds from the concluded offering was
$8,721,000 after allowance for estimated expenses of $123,000. A total of
505,660 common shares were issued. The 101,132 warrants, which were also issued,
to the extent exercised, represent potential additional proceeds of up to
$2,274,345 over the life of the warrants, assuming an exercise price of $22.50
per share.
RETURN ON AVERAGE EQUITY
1993........... 9.45%
1994...........12.07%
1995...........11.13%
1996...........10.24%
1997...........12.83%
9
<PAGE> 3
The purpose of the issue was to increase the total capital of the Bank to
support the planned growth in deposits and loans as well as potential growth
through acquisitions. In addition, a portion of the anticipated proceeds are to
be utilized to provide liquid resources for a proposed holding company being
organized. Another objective of the offering was to broaden the base of share
holders. To that extent, the Bank was successful in welcoming 527 new
shareholders. In a related action the Bank's common stock began trading publicly
August 25, 1997 on the NASDAQ Stock Market under the symbol "VAIB".
A new corporate facility, approximately 25,000 square feet in size, was occupied
in July which consolidated the existing El Centro, California loan production
office as well as more efficiently houses executive management, loan
administration, and the human resources and marketing departments. The Bank
leases the facility and plans to temporarily sublet approximately 7,500 square
feet.
The Board of Directors approved a six-for-five split of the Bank's no par value
common stock. The stock split was effective May 9, 1997, for shareholders of
record on that date, and was issued on May 30, 1997. In addition, the Board of
Directors approved a 2% stock dividend for shareholders of record on December
26, 1997. The dividend was paid in January 1998.
The year concluded with regulatory approval to form the aforementioned bank
holding company. The name of the new organization will be VIB Corp. The Board of
Directors and management believe that the formation of a holding company will
provide the flexibility required to facilitate the Bank's orderly growth into
the future. On March 10, 1998 a special shareholders' meeting is scheduled for
the purpose of ratifying the formation of the holding company. The holding
company reorganization will be effected by a one-to-one exchange of holding
company common stock for Valley Independent Bank common stock.
Many computer systems will not properly recognize date sensitive information
when the date changes to the year 2000. Computer systems that do not properly
recognize the year 2000 could generate erroneous data or cause the system to
fail. Those computer systems will have to be modified or replaced prior to the
year 2000 in order to remain functional.
During 1996 the Bank began the process of identifying and addressing issues
surrounding the year 2000 and their impact on the Bank's operations. That
process continued through 1997 during which the Bank conducted a comprehensive
review of its computer systems to identify applications that would be affected
by the year 2000 issue and the Bank developed an implementation plan to bring
the Bank's systems into compliance prior to the year 2000. The Bank's compliance
program includes review of bankwide computer processing systems as well as
review of third party vendors' interface systems and review of large corporate
borrowers' systems. During 1997 the Bank completed the assessment phase of its
program and anticipates, during 1998, to end the implementation and begin the
validation of hardware and software upgrades, system replacements, vendor
certifications and other associated changes. The Bank anticipates that final
implementation and validation will occur in early 1999, with final certification
of all internal systems by no later that June 30, 1999. Simultaneously, the Bank
will be evaluating the impact of year 2000 compliance on large corporate
customers as well as the third party vendors.
RETURN ON AVERAGE ASSETS
1993............ .85%
1994............1.09%
1995............1.04%
1996............ .95%
1997............ .97%
NET INCOME GROWTH
Dollars (In Millions)
1993............1.557
1994............2.280
1995............2.425
1996............2.575
1997............3.801
DILUTED EARNINGS PER SHARE
(Dollars)
1993............$0.30
1994............$0.42
1995............$0.42
1996............$0.44
1997............$0.63
10
<PAGE> 4
The Bank expects to implement successfully the systems and programming changes
necessary to address the year 2000 issue and does not believe that the costs of
such actions will have a material effect on the Bank's results of operations or
financial condition. There can be no assurance, however, that there will not be
a delay in, or increased costs associated with, the implementation of such
changes, and the Bank's inability to implement such changes could have an
adverse effect on future results of operations. Similarly, there can be no
assurance that third party vendors' systems will be year 2000 compliant and,
consequently, the Bank could incur incremental costs to convert to other
vendors.
Net income for the year ended December 31, 1997 was $3.8 million, an increase of
$1.2 million or 47.6%, when compared to $2.6 million for the prior year. On a
diluted per share basis, earnings were $.63 for the year, compared with $.44
reported in 1996. Increases in net interest income and non interest income,
partially offset by increases in the provision for credit losses, income taxes
and in non interest expense were the primary elements effecting the increased
financial performance in 1996. Net income of $2.6 million in 1996 represented an
increase of $150,000, or 6.2%, from the $2.4 million net income earned in 1995.
The return on average assets ratio was .97% for the year ended December 31,
1997, an increase of 2 basis points, or 2.1%, compared with the .95% ratio
reported in 1996. In 1996 the return on average assets ratio decreased 9 basis
points, or 8.7%, from the 1995 ratio of 1.04%.
The return on average equity ratio was 12.83% for the year ended December 31,
1997, an increase of 259 basis points, or 25.3%, compared with the 10.24% ratio
recorded in 1996. For the year ending December 31, 1996, the return on average
equity ratio decreased 89 basis points or 8.0% from the 11.13% ratio generated
in 1995.
Total assets at December 31, 1997 were $444.2 million, an increase of $110.6
million or 33.2% compared to December 31, 1996. Total deposits increased $94.6
million, or 31.1%, to $399.2 million at December 31, 1997. Total loans increased
$68.3 million or 27.8%, to $313.7 million at December 31, 1997. During 1996
total assets increased $76.1 million or 29.6% from $257.5 million at year end
1995. Total deposits increased $73.4 million, or 31.8%, from year end 1995 to
$303.9 million at December 31, 1996.
At December 31, 1997, the Bank's Tier I and total capital to risk weighted
assets ratios increased to 9.83% and 10.47%, respectively, when compared to
8.76% and 9.69%, respectively, at December 31, 1996. At December 31, 1995 the
Tier I capital ratio was 11.64% and the total capital ratio was 12.65%. These
ratios exceed regulatory requirements.
11
<PAGE> 5
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY:
The following table presents the average amounts outstanding for the major
categories of the Bank's assets, liabilities and equity accounts, the amount and
average rate of interest income earned or interest expense paid for each catego-
ry of interest-earning asset and interest-bearing liability, and net interest
margin for the periods indicated. Tax-exempt interest income from investment
securities has not been adjusted to a tax-equivalent basis.
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996
--------------------------------------------------------------------------------
AVERAGE AMOUNT OF AVERAGE AVERAGE AMOUNT OF AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
(000'S) (000'S) (000'S) (000'S)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Interest Bearing Deposits $ 1,288 $ 53 4.11% $ 301 $ 15 4.98%
Investment Securities 67,923 4,431 6.52 28,979 1,980 6.83
Federal Funds Sold 6,491 343 5.28 5,513 287 5.21
Net Loans(1) 270,079 27,632 10.23 208,178 21,979 10.56
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 345,781 32,459 9.39 242,971 24,261 9.99
NON INTEREST-EARNING ASSETS
Cash and Due from Banks 25,171 16,633
Allowance for Credit Losses (2,751) (2,351)
Premises and Equipment 9,127 5,296
Other Assets 15,148 8,556
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL NON INTEREST-EARNING ASSETS 46,695 28,134
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 392,476 $ 271,105
=============================================================================================================================
LIABILITIES AND EQUITY
INTEREST-BEARING LIABILITIES:
Money Market and
NOW Accounts $ 84,445 $ 2,117 2.51% $ 59,292 $ 1,538 2.59%
Time and Savings Deposits 112,510 4,803 4.27 75,309 3,151 4.18
Time Deposits Over $100,000 62,383 3,293 5.28 42,229 2,296 5.44
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 259,338 10,213 3.94 176,830 6,985 3.95
Borrowed Funds 2,383 208 8.73 2,532 143 5.65
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 261,721 10,421 3.98 179,362 7,128 3.97
NON INTEREST-BEARING LIABILITIES
Demand Deposits 98,452 64,575
Other Liabilities 2,673 2,024
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL NON INTEREST-BEARING LIABILITIES 101,125 66,599
- -----------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 29,630 25,144
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 392,476 $ 271,105
- -----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 22,038 5.41% $ 17,133 6.02%
- -----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AS A
PERCENT OF INTEREST-EARNING ASSETS 6.37% 7.05%
=============================================================================================================================
</TABLE>
12
<PAGE> 6
<TABLE>
<CAPTION>
For the Year December 31,
- ------------------------------------------------------------------------------------
AVERAGE AMOUNT OF AVERAGE
BALANCE INTEREST RATE
(000's) (000's)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS:
Interest Bearing Deposits
Investment Securities $ 31,386 $ 1,887 6.00%
Federal Funds Sold 12,123 692 5.71
Net Loans (2) 168,743 19,197 11.38
- ------------------------------------------------------------------------------------
TOTAL INTEREST-EARNING ASSETS 212,252 21,776 10.26
NON INTEREST-EARNING ASSETS
Cash and Due from Banks 14,658
Allowance for Credit Losses (2,237)
Premises and Equipment 3,589
Other Assets 6,011
- ------------------------------------------------------------------------------------
TOTAL NON INTEREST-EARNING ASSETS 22,021
- ------------------------------------------------------------------------------------
TOTAL ASSETS $ 234,273
- ------------------------------------------------------------------------------------
LIABILITIES AND EQUITY
INTEREST-BEARING LIABILITIES:
Money Market and
NOW Accounts $ 50,929 1,202 2.36%
Time and Savings Deposits 67,931 2,851 4.20
Time Deposits Over $100,000 34,574 1,897 5.49
- ------------------------------------------------------------------------------------
Total Interest-Bearing Deposits 153,434 5,950 3.88
Borrowed Funds 372 23 6.18
- ------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 153,806 5,973 3.88
NON INTEREST-BEARING LIABILITIES:
Demand Deposits 57,363
Other Liabilities 1,316
- ------------------------------------------------------------------------------------
TOTAL NON INTEREST-BEARING LIABILITIES 58,684
- ------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY 21,783
- ------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 234,273
====================================================================================
NET INTEREST INCOME $ 15,803 6.38%
NET INTEREST INCOME AS A
PERCENT OF INTEREST-EARNING ASSETS 7.45%
</TABLE>
1)Yields and amounts include loan fees and late charges of $1,474,873,
$1,430,979, and $1,429,445, for the years ended December 31, 1997, 1996 and
1995, respectively.
13
<PAGE> 7
NET INTEREST INCOME AND NET INTEREST MARGIN:
Average interest-earning assets totaled $346.8 million in 1997, an increase of
$103.8 million, or 42.7%, compared to 1996. Average investment securities and
federal funds sold increased $38.9 million or 134.4% and $1.0 million or 18.2%,
primarily related to the liquidity obtained in the branch acquisitions from
Wells Fargo Bank. In addition, the Bank experienced significant average loan
growth of $61.9 million or 29.7%. In 1996 average interest-earning assets
increased $30.7 million, or 14.5%, from a 1995 average of $212.2 million.
Average interest-bearing liabilities grew $82.3 million, or 45.9%, from $179.4
million for 1996 to $261.7 million for 1997. During 1997, all interest-bearing
liability categories increased with the exception of borrowed funds which
declined $.1 million or 4.0%. In 1996, average interest-bearing liabilities
increased $25.6 million, or 16.6%, from $153.8 million for 1995.
Interest income in 1997 was $32.4 million, an increase of $8.1 million, or
33.3%, compared to 1996. The increase in interest income was the result of
volume increases in all interest earning categories offset by a slightly lower
overall interest rate environment. The yield on interest-earning assets
decreased 60 basis points to 9.39% in 1997 from 9.99% in 1996. The yield on the
loan portfolio, the largest portion of the Bank's interest earning assets,
decreased 33 basis points, from 10.56% in 1996 to 10.23% in 1997.
Interest expense increased $3.3 million, or 46.5%, to $10.4 million during 1997.
The increase in interest expense was the result of volume increases in all
interest-bearing categories with the exception of borrowed funds, slightly
offset by decreases in interest rates with the exception of interest rates paid
on borrowed funds. The cost of total interest-bearing liabilities increased 1
basis point from 3.97% in 1996 to 3.98% in 1997.
Net interest income was $22.0 million for 1997 which represented an increase
from the prior year of $4.9 million, or 28.7%. The net interest spread
percentage, which represents the difference between the rate earned on average
interest-earning assets and the rate paid on average interest-bearing
liabilities, decreased to 5.41% for the year ending December 31, 1997, compared
to 6.02% in 1996. Net interest income as a percentage of average interest-
earning assets, or the net interest margin, decreased to 6.37% in 1997 compared
to 7.05% in 1996. The reduced yields in both net interest spread and net
interest margin were primarily caused by a larger proportionate growth in the
higher yielding interest-earning categories being offset to a greater degree by
a lower interest rate environment than its effect on interest bearing liability
categories.
Net interest income, which amounted to $17.1 million in 1996 represented an
increase of $1.3 million, or 8.4%, compared to 1995. Interest income was $24.3
million, an increase of $2.5 million, or 11.4%, compared to 1995. The increase
in interest income was the result of volume increases in average loans offset
slightly by decreases in average investments and federal funds sold as well as a
slightly lower interest rate environment. The yield on interest-earning assets
decreased 27 basis points to 9.99% in 1996 from 10.26% in 1995. Interest expense
increased $1.2 million or 19.3% to $7.1 million during 1996. The increase in
interest expense was the result of volume increases in all interest bearing
categories slightly offset by decreases in interest rates. The cost of total
interest bearing liabilities increased 9 basis points from 3.88% in 1995 to
3.97% in 1996. Despite a greater proportionate growth in the higher yielding
interest-earning asset categories, a higher cost mix of interest-bearing
liabilities as well as the repricing effect of interest-earning assets and
interest-bearing liabilities in a lower rate environment were the principal
causes for the reduced yields in both net interest spread percentage and net
interest margin.
14
<PAGE> 8
The following table sets forth the dollar amount of changes in interest earned
and paid for each major category of interest-earning assets and interest-bearing
liabilities and the amount of changes attributable to changes in average
balances (volume) or changes in average interest rates. The variances
attributable to both balance and rate changes have been allocated to volume and
rate changes in proportion to the relationship of the absolute dollar amounts of
the changes in each category. Tax-exempt interest income from investment
securities has not been adjusted to a tax-equivalent basis since the effect of
such an adjustment would not be material.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
OVER OVER
YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
INCREASE/DECREASE DUE INCREASE/DECREASE DUE
TO CHANGE IN (000'S) TO CHANGE IN (000'S)
- -------------------------------------------------------------------------------------------------------------
VOLUME RATE NET VOLUME RATE NET
CHANGE CHANGE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest Bearing Deposits $ 49 $ (11) $ 38 $ 15 $ 15
Investment Securities 2,661 (210) 2,451 (133) $ 228 95
Federal Funds Income 51 5 56 (373) (33) (406)
Net Loans(1)(2) 6,535 (882) 5,653 4,227 (1,446) 2,781
- -------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 9,296 (1,098) 8,198 3,736 (1,251) 2,485
INTEREST-BEARING LIABILITIES:
Money Market and NOW 652 (73) 579 247 89 336
Time and Savings 1,557 95 1,652 359 (59) 300
Time Deposits Over $100,000 1,096 (99) 997 429 (30) 399
Borrowed Funds (8) 73 65 128 (8) 120
- -------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 3,297 (4) 3,293 1,163 (8) 1,155
INTEREST DIFFERENTIAL OR
NET INTEREST INCOME $ 5,999 $(1,094) $ 4,905 $ 2,573 $(1,243) $ 1,330
=============================================================================================================
</TABLE>
(1) The average balance of non-accruing loans is immaterial as a percentage
of total loans and as such have been included in net loans.
(2) Loan fees and late charges of $1,474,873, $1,430,979 and $1,429,445 for
the years ended December 31, 1997, 1996 and 1995, respectively, have
been included in the interest income computation.
LOANS:
Total loans averaged $270.1 million in 1997, an increase of $61.9 million, or
29.7%, compared to 1996. The average loan growth is reflective of the full year
effect of the 1996 acquisition of Bank of the Desert, N.A., the opening of the
Yuma Loan Production Office as well as an overall strong lending economic
environment. At December 31, 1997, total loans were $313.7 million, representing
an increase of $68.3 million or 27.8%, over December 31, 1996. The yield on the
total portfolio decreased 33 basis points to 10.23% in 1997, from 10.56% in
1996. This decrease in yield was the result of the repricing of variable-rate
loans in an overall lower interest rate environment.
In 1996 total loans averaged $208.2 million which represented an increase of
$39.5 million, or 23.4%, compared to 1995. At December 31, 1996, total loans
were $245.4 million which represented an increase of $54.5 million, or 27.8%,
over December 31, 1995. The yield on the total portfolio decreased 82 basis
points to 10.56% in 1996 from 11.38% in 1995. This decrease was the result of
the repricing of variable rate loans in an overall lower interest rate
environment.
The loan portfolio represents the diversification of the markets served. At
December 31, 1997, there were no significant concentration of loans within any
particular industry. However, the local economies of the Bank's service area are
agriculturally related and are impacted by fluctuations in farming commodity
pricing.
AVERAGE GROSS LOAN COMPARISON
Dollars
(In Millions)
1993..............135
1994..............163
1995..............168
1996..............208
1997..............270
15
<PAGE> 9
The following table sets forth the amount of the Bank's total outstanding loans,
net of participations sold, in each category. The retained portion of SBA loans,
as well as the guaranteed portion of such loans held for sale, are included
primarily within the commercial and real estate construction loan totals.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
----------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
(000'S) OF TOTAL (000'S) OF TOTAL (000'S) OF TOTAL
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and
Agricultural $205,096 65.0% $151,827 61.5% $120,598 62.8%
Real Estate - Construction 35,926 11.4 26,419 10.7 21,637 11.3
Real Estate - Mortgage 47,648 15.1 46,922 19.0 32,923 12.1
Installment 26,742 8.5 21,711 8.8 16,924 8.8
- ------------------------------------------------------------------------------------------------------------
Total Loans $315,412 100.0% $246,879 100.0% $192,082 100.0%
============================================================================================================
</TABLE>
NON-PERFORMING ASSETS:
Non-performing assets consist of non-accrual loans, certain past due loans not
on non-accrual, and properties take in foreclosure. Non-accrual loans include
loans that are past due 90 days or more as to principal or interest, or where
reasonable doubt exists as to timely collectibility. At the time a loan is
placed on non-accrual status, previously accrued and uncollected interest is
reversed against interest income in the current period. Interest collections on
non-accrual loans are generally credited to interest income when received.
However, if ultimate collectibility of principal is in doubt, interest
collections are applied as principal reductions.
Interest accruals cease on commercial, mortgage and consumer loans, excluding
home equity loans, when they are 90 days past due. At that time, previously
accrued and uncollected interest is reversed against income. These loans are
charged off when they are 120 days past due. For home equity loans, accruals
cease at 180 days and uncollected interest is reversed against interest income.
Thereafter, these loans are continually reviewed and charged off when deemed
uncollectible.
The following table provides information with respect to components of the
Bank's non-performing loans. The Bank had $5.5 million and $7.8 million in
restructured loans outstanding as of December 31, 1997 and 1996, respectively.
There were $5.0 million in restructured loans outstanding at December 31, 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
(000'S) (000'S) (000'S) (000'S) (000'S)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans $4,317 $5,020 $4,327 $1,837 $1,801
Loans Past Due 90 Days or More
But Not on Non-Accrual Basis 373 137 846 515 670
- -----------------------------------------------------------------------------------------
Total $4,690 $5,157 $5,173 $2,352 $2,471
=========================================================================================
</TABLE>
The following table sets forth the gross interest income that would have been
recorded for the period indicated if the non-accrual loans had been current in
accordance with their terms and the amount of interest income recognized on
these loans.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
- ---------------------------------------------------------------
<S> <C>
Interest Income - Original Terms $466,850
Interest Income - Recorded 235,288
- ---------------------------------------------------------------
Forgiven Interest Income $231,562
===============================================================
</TABLE>
Properties taken in foreclosure, or other real estate owned, constitute another
category of non-performing assets. Other real estate owned decreased from
$1,947,615 at December 31, 1996 to $1,171,027 at December 31, 1997. In 1995
other real estate outstandings increased $776,083, or 66.2%, primarily as a
consequence of the Mexican peso currency devaluation as well as properties
acquired in the Bank of the Desert, N.A. acquisition. The Bank is actively
marketing these properties for sale.
16
<PAGE> 10
INVESTMENTS:
Total investments averaged $67.9 million in 1997, representing an increase of
$38.9 million from 1996. At December 31, 1997, the investment portfolio amounted
to $69.3 million, an increase of $32.8 million compared to December 31, 1996. In
1997, the yield of the portfolio on a tax-equivalent basis decreased 61 basis
points to 7.01%. This decrease was the result of the reinvestment of maturities
in a lower interest rate environment and a modified portfolio mix with a greater
percentage of the lower yielding U.S. Government securities and Federal
Agencies.
The investment strategy employed during 1997 was the investment of temporarily
idle deposit growth funds and investment maturities primarily into short-term
callable Federal Agency obligations. The nature of these securities have
provided liquidity through periodic repayment of principal and interest. The
callable characteristic of these investments also provide liquidity to fund
anticipated loan growth in the future.
U.S. Government and federal agencies averaged $48.8 million during 1997, an
increase of $29.7 million, or 155.5%. This increase reflected the strategy to
provide liquidity for anticipated loan growth. The yield on the portfolio
decreased 11 basis points to 6.82% in 1997, compared to 6.93% in 1996.
State and municipal securities increased on average $9.2 million to $19.0
million. The tax-equivalent yield on this portfolio declined 121 basis points to
7.54% in 1997, compared with 8.75% in 1996.
Federal funds sold averaged $6.4 million in 1997, an increase of $.9 million, or
16.4% compared to 1996. At December 31, 1997, there were $4.0 million in Federal
funds sold outstandings. These funds represent excess funds temporarily
invested. The yield on Federal funds increased 57 basis points to 5.28% in 1997.
The increase in yield was reflective of the higher overnight investment interest
rate environment.
The investment portfolio averaged $29.0 million during 1996, representing a
decrease of $2.4 million from 1995. At December 31, 1996, total investments
amounted to $36.5 million, a decrease of $2.9 million compared to December 31,
1995. The portfolio yield on a tax-equivalent basis increased 16 basis points in
1996 to 7.62% as a result of the higher interest rate environment.
Securities are pledged to meet security requirements imposed as a condition to
receipt of public fund deposits. At December 31, 1997 and December 31, 1996, the
market value of securities pledged to secure public deposits was approximately
$14.4 million and $5.9 million, respectively.
17
<PAGE> 11
The following table summarizes the amounts and distribution of the Bank's
investment securities held as of the dates indicated, and the weighted
tax-equivalent average yield.
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------
BOOK MARKET WEIGHTED BOOK MARKET WEIGHTED
VALUE VALUE AVERAGE VALUE VALUE AVERAGE
(000'S) (000'S) YIELD (000'S) (000'S) YIELD
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. TREASURY & GOVERNMENT AGENCIES:
Within One Year $ 1,617 $ 1,619 5.82% $ 1,093 $ 1,095 5.83%
One to Five Years 11,235 11,285 6.69 11,582 11,637 6.93
Over Five Years 36,673 36,738 6.90 9,962 9,947 7.06
- ---------------------------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY &
GOVERNMENT AGENCIES 49,525 49,642 6.82 22,637 22,679 6.93
STATE AND POLITICAL SUBDIVISIONS:
Within One Year 130 130 9.40 681 684 7.26
One to Five Years 1,568 1,599 8.03 2,470 2,569 9.52
Over Five Years 16,869 17,173 7.48 10,266 10,590 8.67
- ---------------------------------------------------------------------------------------------------------------------
TOTAL STATE AND POLITICAL
SUBDIVISIONS 18,567 18,902 7.54 13,417 13,843 8.75
- ---------------------------------------------------------------------------------------------------------------------
TOTAL OTHER SECURITIES 743 743 6.00
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES $68,835 $69,287 7.01% $36,054 $36,522 7.62%
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
- ------------------------------------------------------------------------------
1995
BOOK MARKET WEIGHTED
VALUE VALUE AVERAGE
(000'S) (000'S) YIELD
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. TREASURY & GOVERNMENT AGENCIES:
Within One Year $ 1,030 $ 1,030 6.71%
One to Five Years 16,749 16,817 6.70
Over Five Years 11,188 11,132 6.85
- -----------------------------------------------------------------------------
TOTAL U.S. TREASURY &
GOVERNMENT AGENCIES 28,967 28,979 6.76
STATE AND POLITICAL SUBDIVISIONS:
Within One Year 542 544 9.45
One to Five Years 2,185 2,376 10.77
Over Five Years 7,095 7,494 9.15
- -----------------------------------------------------------------------------
TOTAL STATE AND POLITICAL SUBDIVISIONS 9,822 10,414 9.53
- -----------------------------------------------------------------------------
TOTAL OTHER SECURITIES
- -----------------------------------------------------------------------------
TOTAL SECURITIES $38,789 $39,393 7.46%
=============================================================================
</TABLE>
18
<PAGE> 12
DEPOSITS:
Total deposits averaged $357.8 million during 1997, an increase of $116.4
million, or 48.2%, compared with 1996. At December 31, 1997 total deposits were
$399.2 million representing an increase of $94.6 million, or 31.1%, over
December 31, 1996. Deposit growth was primarily utilized to fund loan growth.
During 1997 demand deposits averaged $98.4 million, an increase of $33.8
million, or 52.3%, from the average $64.6 million for 1996. Demand deposits
amounted to $126.7 million at year-end 1997, representing an increase of $39.4
million, or 45.2%, compared to the prior year end.
Money market and NOW accounts averaged $84.4 million, an increase of $25.1
million, or 42.3%, over 1996. These accounts totaled $93.7 million at year end,
an increase of $23.4 million, or 32.5%, from 1996. Regular savings deposits
increased $12.3 million, or 44.4%, over 1996 to average $40.0 million. At year
end these deposits amounted to $40.8 million, an increase of $11.2 million, or
37.8%, compared to the prior year. Total time deposits averaged $134.8 million
in 1997, an increase of $45.0 million, or 50.1%, compared with 1996. At December
31, 1997 these balances totaled $138.0 million, an increase of $20.9 million, or
17.8%, from the prior year end. The cost of total interest bearing deposits
decreased to 3.94% in 1997 from 3.95% in 1996, or 1 basis point. This decline in
overall cost was primarily the result of a slightly lower interest rate
environment.
In 1996 total deposits averaged $241.4 million, representing an increase of
$30.6 million, or 14.5%, compared to 1995. At December 31, 1996 total deposits
amounted to $304.6 million, an increase of $74.1 million, or 32.1% from the
prior year end. The cost of interest-bearing deposits was 3.95% in 1996 and
represented an increase of 7 basis points from 3.88% in 1995.
AVERAGE TOTAL DEPOSIT COMPARISON
DOLLARS
(In Millions)
1993............... 161
1994............... 182
1995............... 210
1996............... 241
1997............... 357
19
<PAGE> 13
The following schedule reflects the Bank's deposits, based upon average
balances, for the periods indicated:
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996
- -----------------------------------------------------------------------------------------------------
AVERAGE PERCENT AVERAGE AVERAGE PERCENT AVERAGE
BALANCE OF RATE BALANCE OF RATE
(000'S) TOTAL PAID (000'S) TOTAL PAID
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DEMAND:
Non-Interest Bearing $ 98,452 27.5% N/A $ 64,575 26.7% N/A
Money Market and NOW 84,445 23.6 2.51% 59,292 24.6 2.59%
SAVINGS: 40,032 11.2 1.98 27,699 11.5 2.01
TIME:
Under $100,000 72,478 20.3 5.53 47,609 19.7 5.45
$100,000 or More 62,383 17.4 5.28 42,229 17.5 5.44
- -----------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $357,790 100.0% 2.85% $241,404 100.0% 2.89%
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
1995
- ---------------------------------------------------------------------
AVERAGE PERCENT AVERAGE
BALANCE OF RATE
(000'S) TOTAL PAID
- ---------------------------------------------------------------------
<S> <C> <C> <C>
DEMAND:
Non-Interest Bearing $ 57,368 27.2% N/A
Money Market and NOW 50,929 24.1 2.36%
SAVINGS: 25,816 12.3 2.08
TIME:
Under $100,000 42,115 20.0 5.50
$100,000 or More 34,574 16.4 5.49
- ---------------------------------------------------------------------
TOTAL DEPOSITS $210,792 100.0% 2.82%
======================================================================
</TABLE>
BORROWED FUNDS:
Borrowed funds, which consist of Federal funds purchased and other forms of
borrowing, were utilized primarily for funding loans and investments. During
1997, as a result of liquidity acquired in the Wells Fargo branch acquisitions,
there was a decrease in the use of borrowed funds for these purposes.
In 1997 borrowed funds averaged $2.4 million, a decrease of $.1 million, or 4.0%
from 1996. At year end there was $2.8 million outstanding in borrowed funds, an
increase of $2.8 million from the prior year-end. This amount in its entirety
represented the Bank's outstandings in capital lease obligations. The cost of
borrowed funds increased 308 basis points to 8.73% in 1997 from 5.65% in 1996.
The increase in cost was reflective of the increase in capital lease obligations
offset slightly by a lower interest rate environment.
Borrowed funds in 1996 averaged $2.5 million, an increase of $2.2 million, or
580.6%, compared to 1995. At year end 1996 there were no outstandings in
borrowed funds. This represented a decrease of $1.4 million from year-end 1995.
The cost of borrowed funds decreased 53 basis points to 5.65% from 6.18% in 1995
as a result of decreased interest rates in 1996.
20
<PAGE> 14
PROVISIONS FOR CREDIT LOSSES:
The allowance for credit losses at December 31, 1997 was $2.3 million, compared
to $2.6 million at December 31, 1996, a decrease of $.3 million or 11.5%. As a
percent of total loans, the allowance was .74% at year end 1997, compared to
1.07% at the end of 1996. At year-end 1995, the allowance was $2.0 million or
1.06% of total loans.
Management of the Bank believes the allowance at December 31, 1997, was adequate
based on present economic conditions and its ongoing evaluation of the risks
inherent in the Bank's loan portfolio. In evaluating the adequacy of the
allowance for credit losses the Bank considers the special risks involved in
agriculture because at least 15.7% of its loans are agriculturally related and
the Imperial and Coachella Valleys are dependent upon the success of their agri-
cultural businesses. These risks include fluctuations in commodity prices which
do not necessarily match the general rate of inflation; dependence of the
agricultural community on the export market and the adverse impact which the
dollar's strength against other currencies has had on such exports; variability
of production costs, weather and climatic changes; and the fact that, in any
downturn in the economy, agriculture is usually one of the last sectors of the
economy to recover. Furthermore, agricultural businesses are extremely sensitive
to actions of governmental agencies regarding price supports, subsidies and
import or export policies, the impact of which cannot be predicted.
The Bank has also established a standard process in assessing the adequacy of
the allowance for loan losses. In addition to reviewing the inherent risks of
the loan portfolio consideration is given to exposures such as economic condi-
tions, credit concentrations, collateral coverage, the composition of the loan
portfolio and trends in delinquencies. Specific allocations are identified by
loans with general allocations assigned to the various loan categories. Loans
classified by regulatory authorities are included in the process of assessing
the adequacy of the allowance for credit losses. This process seeks to maintain
an allowance level adequate to provide for potential losses.
The provision for credit losses was $1.9 million in 1997, an increase of $1.2
million from the $.6 million provided in 1996. The provision expense in 1995 was
$1.0 million.
Net charge-offs were $2.2 million, or .80% of average loans in 1997 as compared
to $323,000 or .16% in 1996. In 1995 net charge-offs were $1.5 million or .88%
of average loans. Net charge-offs are projected to be $900,000 in 1998. Based
upon the known risks in the portfolio as well as historical trends, 60% of the
projected 1998 net charge-offs are anticipated to be commercial and agricultural
and 20% are anticipated to be real estate construction loans. The 20% balance of
projected 1997 charge-offs are anticipated to be installment loans to
individuals.
At December 31, 1997, the loan portfolio was not subject to any known
significant risks except the non-performing loans previously identified. The
Bank's loan portfolio at December 31, 1997 did not have any outstandings in
international loans and, accordingly, did not have any direct risk associated
with the recent currency devaluation in Mexico or the financial crisis in Asia.
21
<PAGE> 15
The following table summarizes, for the periods indicated, loan balances at the
end of each period and average loans for the period, changes in the allowance
for credit losses arising from loans charged off, recoveries on loans previously
charged off, and additions to the allowance which have been charged to operating
expense and certain ratios relating to the allowance for credit losses. While
management has attributed reserves to various portfolio segments, the allowance
is general in nature and is available for the entire portfolio.
<TABLE>
<CAPTION>
Year Ended December 31,
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
BALANCES (000'S)
Average Loans $270,079 $208,178 $168,743 $163,820 $135,476
Total Loans at End of Period $313,747 $245,421 $190,902 $168,969 $160,969
ALLOWANCE FOR CREDIT LOSSES (000'S)
BALANCE - BEGINNING OF PERIOD $ 2,634 $ 2,024 $ 2,494 $ 1,827 $ 1,325
Charge-Offs:
Commercial and Agricultural 1,983 257 1,446 389 1,277
Real Estate - Construction 159 406 51 77 21
Installment 271 282 304 138 131
- -----------------------------------------------------------------------------------------------------------------
TOTAL CHARGE-OFFS 2,413 945 1,801 604 1,429
Recoveries:
Commercial and Agricultural 63 575 272 12 900
Real Estate - Construction 16 12 18 6 49
Installment 180 35 33 43 14
- -----------------------------------------------------------------------------------------------------------------
TOTAL RECOVERIES 259 622 323 61 963
- -----------------------------------------------------------------------------------------------------------------
Net Charge-Offs 2,154 323 1,478 543 466
Provision for Credit Losses 1,850 635 1,008 1,210 968
Reserves Acquired by Acquisition 298
- -----------------------------------------------------------------------------------------------------------------
BALANCE - END OF PERIOD $ 2,330 $ 2,634 $ 2,024 $ 2,494 $ 1,827
=================================================================================================================
Ratios:
Net Loans Charged Off to Average Loans 0.80% 0.16% 0.88% 0.33% 0.34%
Net Loans Charged Off to Total Loans
at End of Period 0.69 0.13 0.77 0.32 0.29
Allowance for Credit Losses to Average
Loans 0.86 1.27 1.20 1.52 1.35
Allowance for Credit Losses to Total Loans
at End of Period 0.74 1.07 1.06 1.48 1.14
Net Loans Charged Off to Allowance
for Credit Losses 92.45 12.26 73.02 21.77 25.51
Net Loans Charged Off to Provision
for Credit Losses 116.43 50.87 146.63 44.88 48.14
</TABLE>
NON-INTEREST INCOME:
Total non-interest income was $5.8 million in 1997, $3.1 million in 1996 and
$2.5 million in 1995. Service charges and fees on deposit accounts were $3.3
million in 1997, an increase of $1.4 million, or 73.7%, over 1996. In 1996
service charge income rose $393,000, representing an increase of 26.0%, from
1995. The increases in service charge income have been directly related to the
Bank's various acquisitions, as well as the internal Bank growth in the number
and volume of deposit accounts. Other income amounted to $464,000 in 1997, an
increase of $89,000, or 23.7%, compared to the prior year. In 1996 other income
totaled $375,000, representing an increase of $82,000, or 28.0%, from 1995.
22
<PAGE> 16
Income generated through the sale of government guaranteed loans provide an
additional source of earnings. In 1997, the gains on sale of loans and related
servicing fees totaled $1.4 million, an increase of $.7 million, or 50.0% from
1996. Loan sale gains in 1996 amounted to $659,000, an increase of $271,000, or
69.9% from 1995.
For the year ended December 31, 1997, securities gains were $551,000, compared
to $49,000 in 1996. Securities gains in 1995 were $2,000.
NON-INTEREST EXPENSES:
Non-interest expense in 1997 totaled $20.2 million, an increase of $4.5 million,
or 28.7% as compared to 1996. These expenditures amounted to $15.7 million in
1996, representing an increase of $2.3 million, or 17.2%, over 1995.
Salary expense in 1997 amounted to $7.5 million, an increase of $1.4 million, or
22.9%, compared to 1996. The increase in salaries was due primarily to personnel
additions related to the branch acquisitions from Wells Fargo Bank, and merit
increases, partially offset by reduced performance incentive compensation. In
1996, salary expense was $6.1 million, an increase of $.5 million, or 8.9%,
compared to 1995.
Employee benefits expense was $2.3 million for the year ended December 31, 1997,
an increase of $3.0 million, or 15.0% compared to 1996. The increase in benefits
was attributable primarily to the previously discussed staffing additions,
increases in medical insurance expense and the funding of the Bank's 401K plan.
In 1996, employee benefit expense amounted to $2.0 million representing an
increase of $.3 million, or 12.6%, compared to 1995.
Occupancy expenses were $1.6 million in 1997, an increase of $.3 million or
23.1% compared to 1996. In 1996, occupancy expense amounted to $1.3 million
representing an increase of $.3 million, or 35.9% compared to 1995. Furniture
and equipment expense totaled $1.8 million in 1997, an increase of $.3 million,
or 20.0% over 1996. In 1996, furniture and equipment expense amounted to $1.5
million, an increase of $.4 million, or 32.2% compared with 1995. The increase
in occupancy, furniture and equipment expense in 1997 was primarily related to
the merger with Bank of the Desert N.A., the completion of the new Corporate
facility and the branch acquisitions from Wells Fargo Bank.
Other expenses amounted to $6.9 million in 1997, an increase of $2.1 million, or
43.8% compared to 1996. Increased insurance, data processing, business promotion
expense, intangible asset amortization expenses and other expenses related to
the branch acquisitions from Wells Fargo Bank and the full year effect of the
1996 Bank of the Desert N.A. acquisition were the primary reasons for the
increase in this category. Other expenses in 1996 were $4.8 million, re-
presenting an increase of $.8 million, or 18.9% over 1995.
CAPITAL RESOURCES:
Shareholders' equity averaged $29.6 million in 1997, an increase of $4.5
million, or 17.9%, compared to 1996. At December 31, 1997 shareholders' equity
amounted to $40.3 million, an increase of $13.3 million, or 49.3% over the prior
year. During 1996 shareholders' equity averaged $25.1 million, an increase of
$3.4 million, or 15.4%, compared to 1995. At December 31, 1996, shareholders'
equity totaled $27.0 million, representing an increase of $3.4 million, or 14.2%
compared to year-end 1995. Per common share book value increased to $6.51 at
year end 1997 from $4.85 the prior year. Book value per common share at year-end
1995 was $4.39.
Under regulatory guidelines, capital adequacy is measured as a percentage of
risk-adjusted assets in which risk percentages are applied to assets on as well
as off the balance sheet. At December 31, 1997, the Tier I and total risk based
capital ratios were 9.83% and 10.47%, respectively, compared to 8.76% and 9.69%,
respectively, at December 31, 1996. The minimum regulatory guidelines for Tier I
and total risk-based capital ratios are 4.0% and 8.0%, respectively. The
leverage ratio, which is a measure of average Tier I capital to adjusted average
assets was 8.59% at December 31, 1997, compared to 7.91% at year-end 1996. The
leverage ratio at December 31, 1995 was 9.66%. The Bank's leverage ratio exceeds
the current regulatory minimum of 3.0%. The Bank's capital adequacy supports
present as well as planned future growth.
23
<PAGE> 17
LIQUIDITY AND LIABILITY MANAGEMENT; RISK MANAGEMENT:
The Bank's Asset/Liability Committee (ALCO) functions to manage the maintenance
of liquidity and the preservation of net interest income when subjected to
fluctuations in market interest rates. The ability to meet funding commitments
present and in the future is the measure of liquidity. Liquidity is also needed
to meet borrowing needs, deposit withdrawals and asset growth. The Bank develops
liquidity through deposit growth, maturities and repayments of loans and
investments, net interest income, fee income and access to purchase funds
through correspondent banks or other entities.
The liquidity position of the Bank remained adequate during 1996 and 1997 as a
result of strong deposit growth and moderated loan growth. In addition, the Bank
maintained a consistently strong net interest income margin and developed
expanded sources of purchased funds.
The Bank's ALCO manages the interest rate sensitivity or repricing
characteristics of the assets and liabilities. The Bank's primary source of
earnings is net interest income, which is subject to movements in interest
rates. To minimize the effect of changes in rates the balance sheet requires
structuring in order that the repricing opportunities for both assets and
liabilities exist in nearly equivalent amounts at approximately similar time
intervals. Interval differences may exist at times creating interest sensitivity
gaps which represent the difference between interest sensitive assets and
interest sensitive liabilities. These gaps are static in nature and do not
consider future activity. As such, these gap measurements serve best as an
indicator for potential interest rate exposure.
The sensitivity to interest rate fluctuations is measured in several time
frames. Various strategies such as liability cost administration and
redeployment of asset maturities are utilized to preserve interest income from
the effect of changes in interest rates. The gap positions are monitored as a
function of the asset and liability management process. The monitoring process
includes the use of periodic simulated business forecasts which incorporate
various interest rate environments. Financial modeling is utilized to assist
management in maintaining consistent earnings in an environment of changing
interest rates.
The following table sets forth the relative maturities of the commercial,
agricultural and construction loan portfolios and provides a breakout relative
to fixed and variable rate loan maturities.
<TABLE>
<CAPTION>
OVER ONE YEAR
ONE YEAR BUT LESS THAN OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LOANS (000'S):
Commercial and Agricultural $ 80,606 $ 60,554 $ 63,936 $205,096
Real Estate - Construction 21,844 3,089 10,893 35,926
- ----------------------------------------------------------------------------------------------------------
TOTAL $102,450 $ 63,643 $ 74,829 $241,022
==========================================================================================================
Loans With Predetermined (Fixed) Interest Rates $ 4,579 $ 21,647 $ 42,148 $ 68,374
Loans With Variable (Floating) Interest Rates 97,871 42,096 32,681 172,648
- ----------------------------------------------------------------------------------------------------------
TOTAL $102,450 $ 63,643 $ 74,829 $241,022
==========================================================================================================
</TABLE>
The following schedule sets forth the maturities of time certificates of deposit
over $100,000 and their relative mix.
<TABLE>
<CAPTION>
BALANCE (OOO'S) PERCENT OF TOTAL
- --------------------------------------------------------------------
<S> <C> <C>
Less Than Three Months $38,976 55.0%
Three Months Through Six Months 16,510 23.3
Seven Months Through Twelve Months 11,845 16.7
Over Twelve Months 3,566 5.0
- --------------------------------------------------------------------
TOTAL $70,897 100.0%
====================================================================
</TABLE>
The bank does not maintain a trading account for any class of financial
instrument nor does it engage in hedging activities or purchase high-risk
derivative instruments. Furthermore, the bank is not subject to foreign currency
exchange rate risk or commodity price risk.
24
<PAGE> 18
In addition to gap measurement, the Bank's ALCO is further responsible for the
measurement of interest rate risk; ie, the risk of loss in value due to changes
in interest rates. The ALCO monitors and considers methods of managing interest
rate risk by monitoring changes in net portfolio value ("NPV") and net interest
income under various interest rate scenarios. The ALCO attempts to manage the
various components of the Bank's balance sheet to mini mize the impact of sudden
and sustained changes in interest rates on NPV and net interest income.
The Bank's exposure to interest rate risk is reviewed on at least a quarterly
basis by the Board of Directors and the ALCO. If potential changes to NPV and
net interest income resulting from hypothetical interest rate swings are not
within the limits established by the Board, the Board may direct management to
adjust its assets and liability mix to bring interest rate risk within
Board-approved limits.
The Bank uses interest rate sensitivity analysis to measure interest rate risk
by computing estimated changes in NPV of its cash flows from assets and
liabilities in the event of a range of assumed changes in market interest rates.
NPV represents the market value of portfolio equity and is equal to the market
value of assets minus the market value of liabilities. This analysis assesses
the risk of loss in market rate sensitive instruments in the event of sudden and
sustained increases and decreases in market interest rates ranging from one
hundred to four hundred basis points. The Bank's Board of Directors has adopted
an interest rate risk policy which establishes a maximum limit of decrease in
the NPV in the event of sudden and sustained increases and decreases in market
interest rates. The following tables present the Bank's projected changes in NPV
and net interest income for the various rate shock levels as of December 31,
1997.
<TABLE>
<CAPTION>
CHANGE IN NET PORTFOLIO VALUE
AT DECEMBER 31, 1997
CHANGE IN INTEREST RATES
NET PORTFOLIO ACTUAL PERCENTAGE
VALUE (000'S) CHANGE (000'S) CHANGE
- ------------------------------------------------------------------------
<S> <C> <C> <C>
300 basis point rise $ 48,774 $(10,656) (17.93)
200 basis point rise 52,163 (7,267) (12.23)
100 basis point rise 56,123 (3,307) (5.56)
Base Rate Scenario 59,430 N/A N/A
100 basis point decline 62,744 3,314 5.58
200 basis point decline 66,699 7,269 12.23
300 basis point decline 71,661 12,231 20.58
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
CHANGE IN NET INTEREST INCOME
AT DECEMBER 31, 1997
CHANGE IN INTEREST RATES
NET PORTFOLIO ACTUAL PERCENTAGE
VALUE (000'S) CHANGE (000'S) CHANGE
- ------------------------------------------------------------------------
<S> <C> <C> <C>
300 basis point rise $25,727 $ 95 0.37
200 basis point rise 25,794 162 0.63
100 basis point rise 25,821 189 0.74
Base Rate Scenario 25,632 N/A N/A
100 basis point decline 25,395 (237) (0.92)
200 basis point decline 24,944 (688) (2.68)
300 basis point decline 23,921 (1,711) (6.68)
</TABLE>
Certain shortcomings are inherent in the method of analysis presented in the
computation of NPV. Although certain assets and liabilities may have similar
maturities or periods within which they will reprice, they may react differently
to changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. There may also be repayment risk if interest rates rise on loans.
Computation of forecasted effects of hypothetical interest rate changes should
not be relied upon as indicative of actual future results. Further, the
computations do not contemplate any actions the ALCO could undertake in response
to change in interest rates.
INFLATION:
The impact of inflation on a financial institution differs significantly from
that exerted on an industrial concern, primarily because its assets and
liabilities consist largely of monetary items. The relatively low proportion of
the Bank's fixed assets to total assets of 2.0% at December 31, 1996, and 2.6%
at December 31, 1997, reduces both the potential for inflated earnings resulting
from understated depreciation changes, and the potential for significant
understatement of absolute asset values. However, financial institutions are
affected by inflation's impact on noninterest expenses, such as salaries and
occupancy expense, and to some extent, by inflative impact on interest rates.
25
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors of
Valley Independent Bank
El Centro, California
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.
/S/ VAVRINEK, TRINE, DAY & CO.
- ---------------------------------
Vavrinek, Trine, Day & Co.
January 14, 1998, except for Note S
which is dated January 22, 1998.
Laguna Hills, California
26
<PAGE> 20
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>
<PAGE> 21
<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.
27
<PAGE> 22
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.
28
<PAGE> 23
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.
29
<PAGE> 24
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.
30
<PAGE> 25
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.
<PAGE> 26
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.
31
<PAGE> 27
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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.
<PAGE> 28
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.
32
<PAGE> 29
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>
<PAGE> 30
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>
33
<PAGE> 31
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>
<PAGE> 32
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>
34
<PAGE> 33
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>
<PAGE> 34
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>
35
<PAGE> 35
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.
<PAGE> 36
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.
36
<PAGE> 37
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED
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>
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.
<PAGE> 38
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>
37
<PAGE> 39
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE J - STOCK OPTION PLAN - CONTINUED
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>
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.
<PAGE> 40
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
38
<PAGE> 41
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
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.
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):
39
<PAGE> 42
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
<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>
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>
<PAGE> 43
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.
<PAGE> 44
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.
40
<PAGE> 45
STOCK:
The equity securities of Valley Independent Bank consist of one class of common
stock. At December 31, 1997 there were 6,187,397 shares outstanding, held by
approximately 2,090 shareholders of record. Valley Independent Bank's common
stock traded over-the-counter prior to August 25, 1997 and was listed on the
NASDAQ National Stock Market, trading under the symbol "VAIB" as of that date.
Although the Bank is legally able to pay cash dividends, it is the Bank's
present policy to retain earnings to support growth.
The quarterly market trend price ranges for each of the last two years are shown
in the following table. The market price of the Bank's common stock was $18.38
at December 31, 1997 compared to $13.13 at December 31, 1996. On December 31,
1995 the market price was $10.21. The following information is provided by
Hoefer & Arnett, Inc. and Sutro & Company, Inc. for the period prior to August
25, 1997 and by NASDAQ thereafter.
<TABLE>
<CAPTION>
Sales Price (1)
Quarter Ended HIGH LOW SHARES TRADED
- ------------------------------------------------------------------------
<S> <C> <C> <C>
MARCH 31, 1996 $10.21 $ 9.16 202,585
JUNE 30, 1996 11.46 9.58 362,325
SEPTEMBER 30, 1996 12.08 10.63 107,313
DECEMBER 31, 1996 13.96 11.78 238,136
MARCH 31, 1997 13.96 12.29 162,734
JUNE 30, 1997 15.31 15.00 202,569
SEPTEMBER 30, 1997 19.00 16.25 139,187
DECEMBER 31, 1997 19.13 16.50 94,870(2)
- ------------------------------------------------------------------------
</TABLE>
(1) Does not include nominal amounts traded directly by shareholders or
through other dealers. The figures have not been adjusted to reflect the
4% stock dividends effective May 16, 1996, December 27, 1996, the 2%
stock dividend effective December 26, 1997 and has been adjusted for the
six-for-five stock split effective May 9, 1997.
(2) Does not include the 505,410 shares issued pursuant to the Bank's unit
offering.
Total Return Performance Graph
The following graph presents the cumulative, five-year total return for the
Bank's Common Stock compared with the NASDAQ Total Return Index, a broad market
index of stocks traded in the NASDAQ National Market. The graph assumes the
value of an investment in the Bank's Common Stock and the NASDAQ Index each was
$100 on December 31, 1992, and that all dividends were reinvested.
TOTAL RETURN PERFORMANCE
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
VIB......................... 100.0 94.2 127.3 187.2 260.3 371.7
- --------------------------------------------------------------------------------
NASDAQ TOTAL RETURN......... 100.0 114.8 112.2 158.7 195.2 239.5
</TABLE>
41
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 21
SUBSIDIARIES
NAME STATE OF INCORPORATION
- ---- ----------------------
<S> <C>
Valley Independent Bank California
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS FINANCIAL DATA SCHEDULE ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS
AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS INCORPORATED BY REFERENCE FROM THE 1997 ANNUAL REPORT TO
SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ANNUAL
REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 33,821
<INT-BEARING-DEPOSITS> 586
<FED-FUNDS-SOLD> 4,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,287
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 313,747
<ALLOWANCE> 2,330
<TOTAL-ASSETS> 444,167
<DEPOSITS> 399,212
<SHORT-TERM> 2,842
<LIABILITIES-OTHER> 1,859
<LONG-TERM> 0
0
0
<COMMON> 35,933
<OTHER-SE> 4,321
<TOTAL-LIABILITIES-AND-EQUITY> 444,167
<INTEREST-LOAN> 27,632
<INTEREST-INVEST> 4,431
<INTEREST-OTHER> 396
<INTEREST-TOTAL> 32,459
<INTEREST-DEPOSIT> 10,213
<INTEREST-EXPENSE> 10,421
<INTEREST-INCOME-NET> 22,038
<LOAN-LOSSES> 1,850
<SECURITIES-GAINS> 551
<EXPENSE-OTHER> 20,195
<INCOME-PRETAX> 5,744
<INCOME-PRE-EXTRAORDINARY> 5,744
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,801
<EPS-PRIMARY> .67
<EPS-DILUTED> .63
<YIELD-ACTUAL> 6.37
<LOANS-NON> 4,317
<LOANS-PAST> 373
<LOANS-TROUBLED> 5,500
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,634
<CHARGE-OFFS> 2,413
<RECOVERIES> 259
<ALLOWANCE-CLOSE> 2,330
<ALLOWANCE-DOMESTIC> 2,330
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
