<PAGE> 1
As Filed With the Securities And Exchange Commission on November 12, 1998
Registration No. _________________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VIB CORP
(Exact Name of Registrant as Specified in its Charter)
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<S> <C> <C>
California 6712 33-0780371
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
1498 Main Street
El Centro, California 92243
(760) 337-3200
(Address, including zip code,
and telephone number, including area code, of registrant's principal executive
offices)
----------------
Harry G. Gooding, III
Executive Vice President and Chief Financial Officer
VIB Corp
1498 Main Street
El Centro, California 92243
(760) 337-3200
Fax: (760) 337-3211
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
----------------
With copy to:
S. ALAN ROSEN, Esq.
Horgan, Rosen, Beckham & Coren, L.L.P.
21700 Oxnard St., Suite 1400
Woodland Hills, CA 91367
(818) 340-6100
Fax: (818) 340-6190
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement and the satisfaction or waiver of all other conditions to the Merger
described in the Joint Proxy Statement-Prospectus.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum
Title of Each Class Amount To Be Offering Price Aggregate Amount of
of Securities To Be Registered Registered(1) Per Unit(2) Offering Price(2) Registration Fee
- ------------------------------------------------------------------------------------------------------------------------------------
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Common Stock, no par value....................... 2,785,000 shares $13.50 $16,365,577 $4,828
====================================================================================================================================
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(1) Represents the estimated maximum number of shares of Common
Stock, no par value, of VIB Corp that are issuable upon
consummation of the merger of Bank of Stockdale, F.S.B.
("Stockdale") with a wholly-owned subsidiary of VIB Corp.
(2) Pursuant to Rule 457(f)(1), the registration fee is based on the
average of the bid and ask prices on November 3, 1998 of
Stockdale's $4.00 par value common stock on the over-the-counter
market and computed based on the number of shares of Stockdale's
common stock outstanding.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
================================================================================
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VIB CORP BANK OF STOCKDALE, F.S.B.
1498 Main Street 5151 Stockdale Highway
El Centro, CA 92243 Bakersfield, CA 93309
(760) 337-3200 (805) 833-9292
December 10, 1998
Dear Shareholder:
The Boards of Directors of VIB Corp and Bank of Stockdale, F.S.B., have
agreed upon a merger pursuant to which Bank of Stockdale will become a wholly
owned subsidiary of VIB Corp and continue to operate as a federal stock savings
bank, headquartered in Bakersfield, California.
VIB Corp and Bank of Stockdale have scheduled Special Meetings of
Shareholders to approve the merger. If the merger is completed, each outstanding
share of Stockdale's common stock will be converted into shares of VIB Corp's
common stock based on a formula to be calculated just prior to the effective
time of the merger and, as such, is subject to change until that time. However,
although no assurances can be given, if the conversion were calculated assuming
a closing on October 7, 1998 (based on unaudited financial information as of
September 30, 1998), each share of Stockdale's common stock issued and
outstanding as of that date would be converted into the right to receive 1.798
shares of VIB Corp's common stock.
The merger cannot be completed unless the shareholders of both companies
approve it. We have scheduled special meetings for our shareholders to vote on
the merger. The dates, times and places of the meetings are as follows:
FOR VIB CORP SHAREHOLDERS: FOR BANK OF STOCKDALE SHAREHOLDERS:
January 12, 1999, January 12, 1999
6:00 p.m. 5:30 p.m.
1448 Main Street 5151 Stockdale Highway
El Centro, California 92243 Bakersfield, California 93309
The attached Joint Proxy Statement - Prospectus provides you with
detailed information about the proposed merger and includes, as Appendix A, a
copy of the Merger Agreement. In addition, you may obtain information about VIB
Corp from documents it has filed with the Securities and Exchange Commission. We
encourage you to read this entire document carefully.
It is important that your shares be represented and voted regardless of
the number of shares you own and whether or not you plan to attend. The
affirmative vote of the holders of two-thirds of Bank of Stockdale's common
stock and a majority of VIB Corp's common stock is required for approval of the
merger. Your failure to vote for approval of the merger has the same effect as
voting against the merger. Therefore, we urge you to sign, date and mail the
enclosed proxy. If you decide to attend your Special Meeting and wish to vote in
person, you may withdraw your proxy at that time.
Sincerely,
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Richard D. Foss, Thomas S. Kelly,
Chairman of the Board of Directors, Chairman of the Board of Directors,
VIB Corp Bank of Stockdale, F.S.B.
-------------------------------------- ---------------------------------------
Dennis L. Kern, Ed L. Hickman,
President and Chief Executive Officer, President and Chief Executive Officer,
VIB Corp Bank of Stockdale, F.S.B.
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
OF BANK OF STOCKDALE, F.S.B.
To be held January 12, 1999
5:30 p..m.
TO THE SHAREHOLDERS
OF BANK OF STOCKDALE, F.S.B.:
NOTICE IS HEREBY GIVEN that, pursuant to the Bylaws of Bank of
Stockdale, F.S.B. ("Stockdale") and the call of its Board of Directors, a
Special Meeting of Shareholders of Stockdale (the "Stockdale Meeting") will be
held at 5151 Stockdale Highway, Bakersfield, California 93309, on January 12,
1999 at 5:30 p.m., for the purpose of considering and voting upon the following
matters:
1. Merger of BOS Interim Bank, F.S.B. with Stockdale. To consider
and vote on a proposal to approve the principal terms of the
Agreement and Plan of Reorganization dated September 15, 1998
(the "Merger Agreement"), by and between Stockdale and VIB Corp
("VIBC") whereby Stockdale will become a wholly-owned subsidiary
of VIBC. Upon consummation of the merger, each outstanding share
of Stockdale's common stock will be converted into the right to
receive shares of VIBC's common stock, as more particularly
described in the attached Joint Proxy Statement - Prospectus and
in the Merger Agreement attached as Appendix A thereto.
2. Other Business. To transact such other business as may properly
come before the Stockdale Meeting or any postponement or
adjournment thereof.
The Board of Directors of Stockdale has fixed the close of business on
November ___, 1998 as the record date for determination of the shareholders
entitled to notice of and to vote at the Stockdale Meeting or any adjournment
thereof. Approval of the matters to be voted upon in connection with the merger
requires the affirmative vote of two-thirds of the outstanding shares of
Stockdale's common stock.
THE BOARD OF DIRECTORS OF STOCKDALE HAS CONCLUDED THAT THE MERGER IS IN
THE BEST INTERESTS OF STOCKDALE AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" THE MERGER.
Shareholders may be entitled to exercise dissenters' rights as provided
under regulations issued by the Office of Thrift Supervision and to receive cash
equal to the appraised value of their shares of Stockdale's common stock by
complying with certain procedures specified in the regulations.
The accompanying Joint Proxy Statement-Prospectus and the appendices
thereto (including the Merger Agreement and certain of the Exhibits to the
Merger Agreement attached as Appendix A thereto) form a part of this Notice.
By Order of the Board of the Directors
of Bank of Stockdale, F.S.B.
-----------------------------------------
Fred H. Carlisle, Jr.,
Dated: December 10, 1998 Corporate Secretary
WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS
POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE STOCKDALE MEETING IN PERSON. THE
ENCLOSED PROXY IS SOLICITED BY THE BOARD OF DIRECTORS. ANY SHAREHOLDER GIVING A
PROXY MAY REVOKE IT PRIOR TO THE TIME IT IS VOTED BY NOTIFYING THE CORPORATE
SECRETARY IN WRITING OF REVOCATION OF SUCH PROXY, BY FILING A DULY EXECUTED
PROXY BEARING A LATER DATE, OR BY ATTENDING THE STOCKDALE MEETING AND VOTING IN
PERSON.
PLEASE INDICATE ON THE PROXY WHETHER OR NOT YOU EXPECT TO ATTEND THE
STOCKDALE MEETING SO THAT WE CAN ARRANGE FOR ADEQUATE ACCOMMODATIONS.
<PAGE> 4
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
OF VIB CORP
To be held January 12, 1999
6:00 p.m.
TO THE SHAREHOLDERS
OF VIB CORP:
NOTICE IS HEREBY GIVEN that, pursuant to the Bylaws of VIB Corp ("VIBC")
and the call of its Board of Directors, a Special Meeting of Shareholders of
VIBC (the "VIBC Meeting") will be held at the main office of Valley Independent
Bank, 1448 Main Street, El Centro, California 92243, on January 12, 1999, at
6:00 p.m. for the purpose of considering and voting upon the following matters:
1. Merger of BOS Interim Bank, F.S.B. with Stockdale. To consider
and vote on a proposal to approve the principal terms of the
Agreement and Plan of Reorganization dated September 15, 1998
(the "Merger Agreement"), by and between Bank of Stockdale,
F.S.B. ("Stockdale") and VIBC whereby Stockdale will become a
wholly-owned subsidiary of VIBC. Upon consummation of the
merger, each outstanding share of Stockdale's common stock will
be converted into the right to receive shares of VIBC's common
stock, as more particularly described in the attached Joint
Proxy Statement - Prospectus and in the Merger Agreement
attached as Appendix A thereto.
2. Other Business. To transact such other business as may properly
come before the VIBC Meeting or any postponement or adjournment
thereof.
The Board of Directors of VIBC has fixed the close of business on
November ___, 1998 as the record date for determination of the shareholders
entitled to notice of and to vote at the VIBC Meeting or any adjournment
thereof. Approval of the matters to be voted upon in connection with the merger
requires the affirmative vote of a majority of the outstanding shares of VIBC's
common stock.
THE BOARD OF DIRECTORS OF VIBC HAS CONCLUDED THAT THE MERGER IS IN THE
BEST INTERESTS OF VIBC AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU
VOTE "FOR" THE MERGER.
Shareholders may be entitled to exercise dissenters' rights as provided
in the California General Corporation Law and to receive cash in an amount equal
to the fair market value of the shares of VIBC's common stock as of September
15, 1998 by complying with certain procedures specified in California law.
The accompanying Joint Proxy Statement-Prospectus and the Appendices
thereto (including the Merger Agreement and certain of the Exhibits to the
Merger Agreement attached as Appendix A thereto) form a part of this Notice.
By Order of the Board of the Directors
of VIB Corp
----------------------------------------
Charlotte Studer,
Dated: December 10, 1998 Corporate Secretary
WE URGE YOU TO SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS
POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE VIBC MEETING IN PERSON. THE
ENCLOSED PROXY IS SOLICITED BY THE BOARD OF DIRECTORS. ANY SHAREHOLDER GIVING A
PROXY MAY REVOKE IT PRIOR TO THE TIME IT IS VOTED BY NOTIFYING THE CORPORATE
SECRETARY IN WRITING OF REVOCATION OF SUCH PROXY, BY FILING A DULY EXECUTED
PROXY BEARING A LATER DATE, OR BY ATTENDING THE VIBC MEETING AND VOTING IN
PERSON.
PLEASE INDICATE ON THE PROXY WHETHER OR NOT YOU EXPECT TO ATTEND THE
VIBC MEETING SO THAT WE CAN ARRANGE FOR ADEQUATE ACCOMMODATIONS.
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VIB CORP BANK OF STOCKDALE, F.S.B.
1498 MAIN STREET 5151 STOCKDALE HIGHWAY
EL CENTRO, CALIFORNIA 92243 BAKERSFIELD, CALIFORNIA 93309
(760) 337-3200 (805) 833-9292
JOINT PROXY STATEMENT-PROSPECTUS
The boards of directors of VIB Corp ("VIBC") and Bank of Stockdale,
F.S.B. ("Stockdale") have scheduled special meetings of shareholders to be held
for the purpose of approving a transaction (the "Merger") pursuant to which
Stockdale will become a wholly-owned subsidiary of VIBC. VIBC's Special Meeting
of Shareholders will be held at the main office of Valley Independent Bank, 1448
Main Street, El Centro, California 92243 on January ___, 1999, at 6:00 p.m.
Stockdale's Special Meeting of Shareholders will be held at Stockdale's main
office, 5151 Stockdale Highway, Bakersfield, California 93309 on January ___,
1999, at 5:30 p.m.
You are cordially invited to attend your special meeting; however,
because you may not be able to attend, the Boards of Directors of both
institutions are asking you to return a proxy, which is enclosed, which
authorizes someone else to vote for you in the way that you want to vote.
This Joint Proxy Statement - Prospectus provides you with detailed
information about the Merger as well as about both institutions. In addition,
you may obtain information about VIBC from documents filed with the Securities
and Exchange Commission.
VIBC and Stockdale have entered into an Agreement and Plan of
Reorganization dated September 15, 1998 (the "Merger Agreement"), a copy of
which is attached as Appendix A to this Joint Proxy Statement - Prospectus and
is incorporated herein by this reference. Pursuant to the Merger Agreement,
Stockdale will become a wholly-owned subsidiary of VIBC. Stockdale's
shareholders will receive newly issued shares of VIBC's common stock based upon
a formula to be calculated just prior to the consummation of the Merger. The
formula provides for making certain adjustments to the amount of Stockdale's
shareholders' equity, multiplying the result by 2.83, and making further
adjustments to ultimately determine a per share value for each share of
Stockdale's common stock. The formula also provides for measuring the value of
VIBC's common stock by measuring the average closing prices on the Nasdaq
National Market prior to the closing. The actual number of shares of VIBC's
common stock to be received by Stockdale's shareholders will then be determined
by dividing the Stockdale value by the market value for VIBC's common stock.
Because the exchange ratio is not fixed pursuant to the Merger Agreement,
changes in the trading price of VIBC's common stock as well as changes in
Stockdale's shareholders' equity will affect the number of shares of VIBC's
common stock to be received in the Merger by Stockdale's shareholders. However,
by way of example only, if the closing occurred on October 7, 1998, each share
of Stockdale's common stock would be converted into the right to receive
approximately 1.798 shares of VIBC's common stock. (See "RISK FACTORS - Risks
Regarding VIBC's Common Stock," "SUMMARY-Markets and Market Prices," "THE
MERGER- Calculation of the Exchange Ratio," and "INFORMATION REGARDING VIBC"
herein.)
VIBC's common stock is quoted on the Nasdaq National Market under the
symbol "VIBC."
Holders of Stockdale's common stock may be entitled to dissenters'
rights in connection with the Merger and in accordance with the provisions of a
federal regulation. (See "THE MERGER - Dissenters' Rights" and Appendix B
hereto.)
Holders of VIBC's common stock may be entitled to dissenters' rights in
connection with the Merger if demand for payment with respect to five percent
(5%) or more of the outstanding shares of VIBC's common stock is made in
accordance with the provisions of California law. (See "THE MERGER - Dissenters'
Rights" and Appendix C hereto.)
SEE "RISK FACTORS" BEGINNING ON PAGE ___ FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHAREHOLDERS SHOULD CONSIDER WITH RESPECT TO THE MERGER.
This Joint Proxy Statement-Prospectus and the related proxy and other
materials are first being provided to VIBC's shareholders on or about
____________, 1998 and to Stockdale's shareholders on or about ___________,
1998.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR
ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS JOINT PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF VIBC'S COMMON STOCK OFFERED HEREBY ARE NOT DEPOSITS AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION. VIBC AND STOCKDALE
DO NOT GUARANTEE THE INVESTMENT VALUE OF THE TRANSACTION DESCRIBED IN THIS JOINT
PROXY STATEMENT-PROSPECTUS. AN INVESTMENT IN VIBC'S COMMON STOCK MAY LOSE VALUE
BEFORE OR AFTER THE MERGER.
THE DATE OF THIS JOINT PROXY STATEMENT-PROSPECTUS IS , 1998.
1
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TABLE OF CONTENTS
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LIST OF APPENDICES.........................................................................2
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE.......................................................................2
SUMMARY....................................................................................3
Information About The Companies....................................................3
The Merger.........................................................................3
The VIBC Special Meeting...........................................................4
The Stockdale Special Meeting......................................................4
Votes Required; Securities Held By Insiders........................................4
Regulatory Approvals...............................................................5
Conditions to the Merger...........................................................5
Closing Of The Merger..............................................................5
Termination........................................................................5
Certain Federal Income Tax Consequences............................................6
Dissenters' Rights.................................................................6
Markets and Market Prices..........................................................6
Summary Historical Financial Data..................................................8
Summary Pro Forma Combined Financial Data.........................................10
Selected Historical and Pro Forma Per Share
Data.......................................................................11
Proposed Branch Acquisition.......................................................12
Proposed Offering.................................................................12
RISK FACTORS..............................................................................13
Risks Regarding the Merger........................................................13
Risks Regarding VIBC's Common Stock...............................................13
Risks Regarding the Businesses of VIBC and
Stockdale..................................................................14
THE MEETINGS..............................................................................17
General...........................................................................17
Stockdale's Special Meeting.......................................................17
VIBC's Special Meeting............................................................18
THE MERGER................................................................................20
History of the Merger.............................................................20
Reasons for the Merger............................................................21
Recommendations of the Boards of Directors........................................22
Structure of the Merger...........................................................22
Calculation of the Exchange Ratio.................................................23
Certain Federal Income Tax Consequences...........................................24
Regulatory Approvals..............................................................25
Resale of VIBC's Common Stock.....................................................26
Certain Effects of the Merger.....................................................26
Interests of Certain Persons in the Merger........................................26
Dissenters' Rights................................................................27
Opinion of Financial Advisor......................................................29
Relationship Between Hovde and Stockdale..........................................32
Accounting Treatment..............................................................32
The Merger Agreement..............................................................33
UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL DATA..................................................................39
The Merger........................................................................39
The Branch Acquisition and Trust Preferred
Securities Offering........................................................46
INFORMATION REGARDING VIBC................................................................48
Business of VIBC..................................................................48
Pending Branch Acquisition........................................................48
Proposed Offering - Trust Preferred Securities....................................48
Certain Information Regarding VIBC Management
and Principal Shareholders.................................................49
Litigation........................................................................52
Available Information.............................................................52
Incorporation of Certain Information by Reference.................................53
INFORMATION REGARDING STOCKDALE...........................................................54
Business of Stockdale.............................................................54
Certain Information Regarding Stockdale
Management and Principal Shareholders......................................54
Litigation........................................................................60
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................61
DESCRIPTION OF STOCKDALE COMMON STOCK.....................................................83
COMPARISON OF SHAREHOLDER RIGHTS..........................................................83
Comparison of Corporate Structure.................................................83
Voting Rights.....................................................................84
Dividends and Dividend Policy.....................................................84
Number of Directors...............................................................85
Indemnification of Directors and Officers.........................................85
Fair Price Protection.............................................................85
SUPERVISION AND REGULATION................................................................85
Introduction......................................................................85
VIB Corp..........................................................................86
Stockdale and Valley Independent Bank.............................................88
Competition.......................................................................98
Impact of Monetary Policies.......................................................99
VALIDITY OF VIBC'S COMMON STOCK...........................................................99
EXPERTS...................................................................................99
SHAREHOLDER PROPOSALS TO BE
PRESENTED AT NEXT ANNUAL MEETING..........................................................99
INDEX TO FINANCIAL STATEMENTS............................................................101
VIB Corp Consolidated Financial Statements.......................................101
Bank of Stockdale Financial Statements...........................................101
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LIST OF APPENDICES
Appendix A - Agreement and Plan of Reorganization Dated September 15, 1998,
by and between VIB Corp and Bank of Stockdale, F.S.B.
Appendix B - Section 552.14 of Title 12 of the Code of Federal Regulations
Appendix C - Chapter 13 of the California General Corporation Law
Appendix D - Fairness Opinion of Hovde Financial, Inc.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Joint Proxy Statement - Prospectus incorporates important business
and financial information about VIBC that is not included herein or attached
hereto. THE BUSINESS AND FINANCIAL INFORMATION ABOUT VIBC IS AVAILABLE WITHOUT
CHARGE UPON WRITTEN OR ORAL REQUEST TO: MR. HARRY G. GOODING, III, EXECUTIVE
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, 1498 MAIN STREET, EL CENTRO,
CALIFORNIA 92243, (760) 337-3255. TO ASSURE TIMELY DELIVERY OF THE REQUESTED
MATERIALS, PLEASE MAKE SURE TO SUBMIT YOUR REQUEST NO LATER THAN FIVE BUSINESS
DAYS PRIOR TO THE DATE YOU WISH TO COMPLETE AND RETURN YOUR PROXY. PLEASE NOTE
THAT PROXIES SHOULD BE RETURNED BY NO LATER THAN ____________________, 1998, TO
ASSURE TIMELY RECEIPT BY VIBC OR STOCKDALE, AS APPROPRIATE.
2
<PAGE> 7
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement - Prospectus. Please carefully read and refer to this
Joint Proxy Statement-Prospectus, the Appendices hereto and the documents
incorporated herein by reference for more detailed information. Certain
capitalized terms which are used but not defined in this Summary are defined
elsewhere in this Joint Proxy Statement - Prospectus.
INFORMATION ABOUT THE COMPANIES
VIBC (See "INFORMATION REGARDING VIBC" herein.)
VIB Corp was incorporated under the laws of the State of California on
November 7, 1997, for the purpose of becoming a bank holding company. On March
12, 1998, VIBC acquired Valley Independent Bank, El Centro, California ("VIB")
and VIB's shareholders became shareholders of VIBC.
VIB opened for business as a California state-chartered bank on March
19, 1981. The deposits of VIB are insured up to the applicable limits by the
Federal Deposit Insurance Corporation (the "FDIC"), and VIB is a member of the
Federal Reserve System (the "Federal Reserve"). VIB's main office is located at
1448 Main Street, El Centro, California, 92243. VIB operates branch offices in
Brawley, Calexico and Holtville, Imperial County, Blythe, Coachella, Indio, La
Quinta, Palm Desert, Palm Springs and Thousand Palms, Riverside County, and
Julian and Tecate, San Diego County, California. VIB also operates loan
production offices in Carlsbad, El Centro, Indio, and Orange, California, Yuma,
Arizona, and Las Vegas, Nevada. VIB is in the process of acquiring a branch
office in Hemet, California, from Fremont Investment & Loan, which acquisition
is pending receipt of regulatory approvals.
VIB offers a full range of commercial banking services, including the
acceptance of demand, savings and time deposits, and the origination of
commercial, U.S. Small Business Administration ("SBA"), accounts receivable,
real estate, construction, home improvement, and other installment and term
loans. It also offers merchant credit card processing, safe deposit, and other
customary bank services to its customers. VIB is a "Preferred Lender" of the SBA
and as such is able to process SBA loans more quickly than institutions which do
not have such status.
STOCKDALE (See "INFORMATION REGARDING STOCKDALE" herein.)
Bank of Stockdale, F.S.B., was initially incorporated on February 26,
1985, as Stockdale Savings and Loan Association, a California state-chartered
savings and loan association, and began operations on that date. Effective June
27, 1991, Stockdale converted to a federal stock savings bank and currently
operates under a federal charter as Bank of Stockdale, F.S.B. Stockdale's
deposits are insured up to the applicable limits by the FDIC and Stockdale is a
member of the Federal Home Loan Bank. Stockdale's main office is located at 5151
Stockdale Highway, Bakersfield, California 93309. Stockdale also operates two
branch offices in Bakersfield and a loan production office in Fresno,
California.
Stockdale's banking services include those traditionally offered by
community banks, such as checking and savings accounts, and real estate and home
improvement loans. The majority of Stockdale's loan originations are sold into
the secondary market. Stockdale also provides other customary bank services to
its customers.
BOS INTERIM BANK, F.S.B.
BOS Interim Bank, F.S.B. will be organized under the laws of the United
States as a wholly-owned subsidiary of VIBC, in accordance with the terms of the
Merger Agreement, as a vehicle to assist in accomplishing the Merger. Its
corporate existence will cease upon consummation of the Merger.
THE MERGER
On September 9, 1998, Stockdale's Board of Directors, and on September
15, 1998, VIBC's Board of Directors each approved the principal terms of the
Merger. The Merger Agreement, which embodies the principal terms of the Merger,
was executed on September 15, 1998.
The Merger Agreement provides that, if Stockdale's shareholders and
VIBC's shareholders approve the principal terms of the Merger Agreement, and
subject to receipt of regulatory approvals and other customary closing
conditions as more fully set forth below, then Stockdale will merge with BOS
Interim Bank, F.S.B., with Stockdale being the surviving association. Stockdale
will become a wholly-owned subsidiary of VIBC and will continue to operate as a
federal stock savings bank with its present name and charter. (See "THE
MERGER-Structure of the Merger" herein.)
In connection with the Merger, each share of Stockdale's common stock
issued and outstanding will be converted into, subject to fractional shares and
the exercise of dissenters' rights, shares of VIBC's common stock, based upon a
formula exchange ratio. Each outstanding share of VIBC's common stock will
remain outstanding after the Merger, subject to the exercise of dissenters'
rights. (See "THE MERGER - Dissenters' Rights" herein.)
The exchange ratio for conversion of Stockdale's common stock into
shares of VIBC's common stock is based upon a formula where a "value" for each
security is first calculated and then the exchange ratio is determined
3
<PAGE> 8
by dividing the value for Stockdale's common stock by the value for VIBC's
common stock. The value for Stockdale's common stock will be determined by the
following formula:
o First, subtract $180,000 from Stockdale's
shareholders' equity as of the last day of the
calendar month next preceding the month the
Merger is closed;
o Second, multiply the foregoing result by 2.83;
o Third, subtract from the foregoing result all of
Stockdale's expenses related to the Merger,
including finders' fees; and
o Fourth, divide the result by the total number of
shares of Stockdale's common stock
outstanding.
Assuming the merger was closed on October 7, 1998, and based upon
Stockdale's shareholders' equity as of September 30, 1998, the estimated
expenses of the Merger, and the number of shares outstanding at September 30,
1998, the value for Stockdale's common stock would be $21.83.
The value for VIBC's common stock will be determined by taking the
average of the closing prices of VIBC's common stock on the Nasdaq National
Market for the 20 trading days preceding the fifth business day prior to the
closing. If the closing was held on October 7, 1998, the fifth business day
preceding the closing would be September 30, 1998. The average of the closing
prices of VIBC's common stock on the Nasdaq National Market for the 20 trading
days preceding September 30, 1998 was $12.14.
Based upon the foregoing assumptions, the exchange ratio would be 1.798
shares of VIBC's common stock for each outstanding share of Stockdale's common
stock. Please note that the foregoing calculation is an example only, subject to
change based upon changes to the market value of VIBC's common stock as well as
changes to Stockholder's Merger expenses or shareholders' equity.
If the average trading price for VIBC's common stock is calculated to be
less than $9.50, then the value shall be set at $9.50. If the average trading
price is calculated to be greater than $15.50, but not greater than $19.50, then
the value shall be set at $15.50 plus 25% of the amount by which the average
actually exceeds $15.50. Thus, if the average is calculated as $19.50, then the
value of VIBC's common stock will be set at $16.50. In the event the average
trading price is calculated to be greater than $19.50, then the value of VIBC's
common stock will be set at $16.50.
Based upon the foregoing example, VIBC will issue approximately
2,179,652 new shares of its common stock to Stockdale's shareholders, who will
own approximately 21.83% of the total issued and outstanding shares of VIBC's
common stock following the Merger (excluding shares of VIBC's common stock which
might be purchased pursuant to outstanding stock options or warrants or which
may be the subject of dissenters' rights). (See "THE MERGER-Calculation of the
Exchange Ratio" herein.)
THE VIBC SPECIAL MEETING
VIBC's Special Meeting to consider and vote on approval of the principal
terms of the Merger will be held on January ___, 1999 at 6:00 p.m., at the main
office of Valley Independent Bank, 1448 Main Street, El Centro, California
92243. Only holders of record of VIBC's common stock at the close of business on
November ___, 1998 will be entitled to vote at VIBC's Special Meeting. As of
November ___, 1998, there were outstanding and entitled to vote 7,894,067 shares
of VIBC's common stock. Each holder of VIBC's common stock is entitled to one
vote for each share held of record upon each matter properly submitted at VIBC's
Special Meeting. (See "THE MEETINGS - VIBC's Special Meeting" herein.)
THE STOCKDALE SPECIAL MEETING
Stockdale's Special Meeting to consider and vote on approval of the
principal terms of the Merger will be held on __________, January ___, 1999 at
5:30 p.m., at 5151 Stockdale Highway, Bakersfield, California 93309. Only
holders of record of Stockdale's common stock at the close of business on
November ___, 1998 will be entitled to vote at Stockdale's Special Meeting. On
November ___, 1998, there were outstanding and entitled to vote 1,212,265 shares
of Stockdale's common stock. Each holder of Stockdale's common stock is entitled
to one vote for each share held of record upon each matter properly submitted at
Stockdale's Special Meeting. (See "THE MEETINGS - Stockdale's Special Meeting"
herein.)
VOTES REQUIRED; SECURITIES HELD BY INSIDERS
Approval of the Merger requires the affirmative vote of the holders of a
majority of the outstanding shares of VIBC's common stock and the affirmative
vote of the holders of two-thirds of the outstanding shares of Stockdale's
common stock. As a result, the failure to vote in person or by proxy or
abstaining has the same effect as voting against the Merger. (See "THE MEETINGS
- - Stockdale's Special Meeting" and "THE MEETINGS - VIBC's Special Meeting"
herein.)
As of the record dates for VIBC's Special Meeting and Stockdale's
Special Meeting the directors and executive officers of VIBC owned 20.9% of the
outstanding shares of VIBC's common stock and the principal shareholder,
directors and executive officers of Stockdale owned 61.2% of the outstanding
shares of Stockdale's common stock. VIBC's directors and Stockdale's principal
shareholder and directors have entered into separate agreements pursuant to
which they have agreed, among other things, to vote "FOR" the Merger. (See "THE
MERGER - The Merger Agreement The Director's Agreements" herein.)
4
<PAGE> 9
Both VIBC's Board of Directors and Stockdale's Board of Directors
unanimously approved the Merger Agreement and the transactions contemplated
thereby, unanimously believe that the Merger and the transactions contemplated
by the Merger Agreement are fair to, and in the best interest of, VIBC's and
Stockdale's shareholders, and unanimously recommend a vote "FOR" the Merger. The
conclusions of VIBC's Board of Directors and Stockdale's Board of Directors with
respect to the Merger are based upon a number of factors. (See "THE MERGER -
Reasons for the Merger" and "THE MERGER - Recommendations of the Boards of
Directors" herein.)
REGULATORY APPROVALS
Closing the Merger requires the prior approvals of the Federal Reserve
and the Office of Thrift Supervision. VIBC and Stockdale submitted applications
seeking approval of the Merger and related matters to the Federal Reserve on
___________, 1998 and to the Office of Thrift Supervision on _______________,
1998. Both approvals are currently pending. Neither VIBC nor Stockdale have any
reason to believe the approvals will not be obtained. (See "THE
MERGER-Regulatory Approvals" herein.)
CONDITIONS TO THE MERGER
In addition to regulatory and shareholder approvals, the obligations of
VIBC and Stockdale to close the Merger are subject to certain conditions,
including receipt of a ruling issued by the Internal Revenue Service or, in lieu
thereof, receipt of the opinion of Vavrinek, Trine, Day & Co., LLP, that the
Merger qualifies as a tax-free reorganization for federal tax purposes and the
condition that the Merger qualifies for "pooling of interests" accounting
treatment.
The obligation of VIBC to close the Merger is also subject to the
fulfillment or waiver by VIBC of certain conditions, including the following:
o the representations and warranties of Stockdale being true and
correct unless the failure to be true and correct is not likely
to have a material adverse effect on Stockdale;
o the performance by Stockdale in all material
respects of all obligations contained in the
Merger Agreement required to be performed by
Stockdale;
o receipt by VIBC of an opinion letter from the law firm of
McCormick, Barstow, Sheppard, Wayte & Carruth, LLP, with respect
to certain matters concerning Stockdale; and
o the appointment by Stockdale of Mr. Richard D.
Foss and Mr. Dennis L. Kern to Stockdale's
Board of Directors.
The obligation of Stockdale to close the Merger is also subject to the
fulfillment or waiver by Stockdale of certain conditions, including the
following:
o the representations and warranties of VIBC being true and correct
unless the failure to be true and correct is not likely to have a
material adverse effect on VIBC;
o the performance by VIBC in all material respects
of all obligations contained in the Merger
Agreement required to be performed by VIBC;
o receipt by Stockdale of an opinion letter from the
law firm of Horgan, Rosen, Beckham & Coren,
L.L.P. with respect to certain matters concerning
VIBC; and
o the appointment by VIBC of Mr. Ed L. Hickman
to VIBC's Board of Directors. (See "THE
MERGER - The Merger Agreement - Conditions"
herein.)
CLOSING OF THE MERGER
Subject to the timely receipt of all required regulatory and shareholder
approvals, and subject to all of the conditions to the Merger having been met or
waived, it is anticipated that the Merger will close on or about January ___,
1999, although there can be no assurance as to whether or when the Merger will
close. (See "THE MERGER - The Merger Agreement - The Closing" herein.)
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the closing of the Merger by mutual consent of VIBC and Stockdale
or by either VIBC or Stockdale if:
o the other party materially breaches any representation, warranty,
covenant or agreement contained in the Merger Agreement and such
breach is not cured or curable within a 30-day grace period;
o the Merger is not consummated by January 31,
1999;
o 30 days after the failure to obtain the approval of
a governmental authority required for
consummation of the Merger;
o if Stockdale's Board of Directors receives a third-party proposal
and determines, based upon the written opinion of a financial
advisor, that the financial terms of the proposal are superior to
the Merger from Stockdale's shareholders' perspective;
o if VIBC's Board of Directors receives a third-party proposal and
determines, based upon the written opinion of a financial
advisor, that the
5
<PAGE> 10
financial terms of the proposal are superior to the Merger from
VIBC's shareholders' perspective; or
o VIBC enters into another merger transaction where VIBC or its
shareholders will still control the resulting entity but the
transaction will have a material adverse effect upon VIBC. (See
"THE MERGER - The Merger Agreement Termination; Liquidated
Damages" herein.)
If the Merger Agreement is terminated by either VIBC or Stockdale
pursuant to a material breach of any representation, warranty, covenant or
agreement of the other party that is not cured within 30 days after written
notice of such breach, the breaching party will owe the other party, as
reasonable and full liquidated damages and not as a penalty or forfeiture, the
sum of $150,000. If the Merger Agreement is terminated by either VIBC or
Stockdale as a result of Stockdale's involvement in a third-party proposal,
Stockdale will owe VIBC, as reasonable and full liquidated damages and not as a
penalty or forfeiture, the sum of $750,000. If the Merger Agreement is
terminated by either VIBC or Stockdale as a result of VIBC's involvement in a
third-party proposal, VIBC will owe Stockdale, as reasonable and full liquidated
damages and not as a penalty or forfeiture, the sum of $750,000. (See "THE
MERGER - The Merger Agreement - Termination; Liquidated Damages" herein.)
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger will be treated as a tax-free
reorganization under federal tax law so that Stockdale's shareholders will not
recognize any gain or loss for tax purposes on their receipt of VIBC's common
stock in exchange for their shares of Stockdale's common stock in the Merger
(except to the extent they receive cash in lieu of fractional shares). (See "THE
MERGER Certain Federal Income Tax Consequences" herein.)
BECAUSE OF THE COMPLEXITY OF THE TAX LAWS AND THE INDIVIDUAL NATURE OF
CERTAIN TAX CONSEQUENCES OF THE MERGER TO EACH OF STOCKDALE'S SHAREHOLDERS, EACH
OF STOCKDALE'S SHAREHOLDERS SHOULD CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING
CERTAIN OTHER FEDERAL AND ALL STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
MERGER THAT MAY BE APPLICABLE.
DISSENTERS' RIGHTS
In connection with the Merger, Stockdale's shareholders will be entitled
to dissenters' rights under federal regulation, the text of which is attached
hereto as Appendix B. In order for any of Stockdale's shareholders to exercise
dissenters' rights, a notice of such shareholder's intention to exercise
dissenters' rights must be sent by such shareholder and received by Stockdale on
or before the date of Stockdale's Special Meeting and any such shareholder must
not have voted in favor of the Merger. Failure to send such notice or voting in
favor of the Merger will result in a waiver of such shareholder's dissenters'
rights. (See "THE MERGER - Dissenters' Rights" and Appendix B herein.)
In connection with the Merger, VIBC's shareholders may be entitled to
dissenters' rights under applicable California law, the text of which is
attached hereto as Appendix C. In order for any of VIBC's shareholders to
exercise dissenters' rights, a notice of such shareholder's intention to
exercise dissenters' rights must be sent by such shareholder and received by
VIBC on or before the date of VIBC's Special Meeting and any such shareholder
must vote against approval of the Merger. Failure to send such notice and to
vote against the Merger will result in a waiver of such shareholder's
dissenters' rights. (See "THE MERGER-Dissenters' Rights" and Appendix C herein.)
MARKETS AND MARKET PRICES
The following table summarizes the approximate high and low sales prices
on a per share basis for VIBC's common stock and high and low bid prices for
Stockdale's common stock and the volume of trading for the periods indicated.
VIBC's common stock was listed on the Nasdaq National Market and has traded
under the symbol "VIBC" since March 12, 1998. Previously, Valley Independent
Bank's common stock traded over-the-counter until listing on the Nasdaq National
Market on August 25, 1997, under the symbol "VAIB." Stockdale's common stock
trades over-the-counter under the symbol "BKSD." The information in the
following table is based upon information provided by various market makers for
trading on the over-the-counter market and by Nasdaq for trading on the Nasdaq
National Market and has been adjusted to reflect previous stock splits declared
by VIBC and Valley Independent Bank, but not stock dividends. Bid quotations
reflect inter-dealer prices, without adjustments for mark-ups, mark-downs, or
commissions and may not necessarily represent actual transactions.
6
<PAGE> 11
<TABLE>
<CAPTION>
VIBC COMMON STOCK STOCKDALE COMMON STOCK
--------------------------------- ---------------------------------
HIGH LOW VOLUME HIGH BID LOW BID VOLUME
------ ------ ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1996
First Quarter........................... $ 8.17 $ 7.33 253,231 $ 6.75 $ 6.12 125,503
Second Quarter........................ $ 9.17 $ 7.66 452,906 $ 6.50 $ 6.00 52,941
Third Quarter......................... $ 9.66 $ 8.50 134,141 $ 7.50 $ 5.75 17,602
Fourth Quarter........................ $11.17 $ 9.42 297,670 $ 6.25 $ 6.00 103,151
1997
First Quarter......................... $11.17 $ 9.83 203,417 $ 6.00 $ 6.00 71,293
Second Quarter........................ $12.25 $12.00 253,211 $ 6.00 $ 6.00 24,978
Third Quarter......................... $15.20 $13.00 173,983 $ 6.00 $ 6.00 16,432
Fourth Quarter........................ $15.30 $13.20 118,587(1) $ 6.25 $ 6.00 27,176
1998
First Quarter......................... $14.70 $12.90 163,754 $ 8.50 $ 6.25 44,145
Second Quarter........................ $14.40 $12.40 423,329 $ 9.75 $ 8.75 60,591
Third Quarter......................... $13.63 $10.75 250,474 $11.50 $10.00 1,351
October............................... $12.50 $11.00 48,224 $13.00 $11.00 3,047
</TABLE>
The following table sets forth the closing price per share of VIBC's
common stock on the Nasdaq National Market, the closing price per share of
Stockdale's common stock as reported by A.G. Edwards & Sons, Inc., and the
"equivalent per share price" (as defined below) of Stockdale's common stock as
of September 15, 1998, the last trading day before the date on which VIBC and
Stockdale announced the execution of the Merger Agreement, and as of
______________, 1998, the last practicable date prior to the date of this Joint
Proxy Statement-Prospectus. The "equivalent per share price" of Stockdale's
common stock on any date equals the closing price of VIBC's common stock on that
date, multiplied by the assumed exchange ratio of 1.798.
<TABLE>
<CAPTION>
VIBC STOCKDALE STOCKDALE EQUIVALENT
MARKET PRICE PER SHARE AS OF COMMON STOCK COMMON STOCK PER SHARE PRICE
- ---------------------------- ------------ ------------ --------------------
<S> <C> <C> <C>
September 15, 1998................................ $12.25 $11.00 $22.03
____________, 1998................................ $ $ $
</TABLE>
Because the exchange ratio is not fixed pursuant to the Merger
Agreement, a change in the trading price of VIBC's common stock or changes in
Stockdale's Merger expenses or shareholders' equity will affect the number of
shares of VIBC's common stock to be received in the Merger by Stockdale's
shareholders. THERE CAN BE NO ASSURANCE AS TO THE MARKET PRICE OF VIBC'S COMMON
STOCK AT ANY TIME BEFORE, AT OR AFTER THE MERGER. SHAREHOLDERS ARE URGED TO
OBTAIN CURRENT MARKET QUOTATIONS FOR VIBC'S COMMON STOCK AND STOCKDALE'S COMMON
STOCK.
- --------
(1) Does not include the 631,762 shares issued pursuant to Valley
Independent Bank's 1997 Unit Offering.
7
<PAGE> 12
SUMMARY HISTORICAL FINANCIAL DATA
VIBC
The following summary historical financial data for the five years ended
December 31, 1997, are derived from the audited financial statements of VIBC and
Valley Independent Bank. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information included or incorporated by reference in this Joint Proxy
Statement-Prospectus. The following summary historical financial data for the
nine months ended September 30, 1998 and 1997 are derived from unaudited
consolidated financial statements of VIBC and Valley Independent Bank and
include, in the opinion of VIBC's management, all adjustments necessary to
present fairly the data for such periods. The results for the nine month period
ended September 30, 1998 are not necessarily indicative of the results to be
expected for the full year.
<TABLE>
<CAPTION>
VIB CORP
AT OR FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
-------- --------
(Dollars in thousands,
except per share data)
<S> <C> <C>
RESULTS OF OPERATIONS:
Interest income $ 29,208 $ 23,465
Interest expense 9,014 7,643
-------- --------
Net interest income 20,194 15,822
Provision for loan losses 1,665 1,070
-------- --------
Net interest income after
provision for loan losses 18,529 14,752
Other operating income 4,053 3,585
Other operating expenses 17,594 14,959
-------- --------
Income before taxes 4,988 3,378
Income tax expense 1,748 1,089
-------- --------
Net income $ 3,240 $ 2,289
======== ========
ENDING BALANCE SHEET DATA:
Assets $491,328 $409,853
Securities $ 82,784 $ 74,515
Loans, net $344,221 $280,477
Allowance for loan losses $ 2,843 $ 2,832
Deposits $441,793 $372,745
Other liabilities $ 5,566 $ 2,786
Total shareholders' equity $ 43,969 $ 29,991
PER SHARE DATA(1) AND OTHER SELECTED RATIOS:
Net income per common share:
Basic $ 0.42 $ 0.33
Diluted $ 0.40 $ 0.31
Dividends declared per share $ 0.00 $ 0.00
Book value per share $ 5.63 $ 4.22
Shareholders' equity to assets at period end 8.95% 7.32%
Tangible shareholders' equity to assets at
period end 8.10% 6.44%
Return on average assets 0.96% 0.79%
Return on average equity 10.75% 10.77%
Average equity to average assets 8.96% 7.40%
Net interest margin 6.53% 6.24%
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS:
Interest income $ 32,459 $ 24,261 $ 21,776 $ 18,545 $ 14,857
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 loan losses 1,850 635 1,008 1,210 968
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 20,188 16,498 14,795 13,036 10,344
Other operating income 5,751 3,075 2,519 2,494 2,540
Other operating expenses 20,195 15,749 13,449 12,221 10,840
-------- -------- -------- -------- --------
Income before taxes 5,744 3,824 3,865 3,308 2,045
Income tax expense 1,943 1,249 1,440 1,028 488
-------- -------- -------- -------- --------
Net income $ 3,801 $ 2,575 $ 2,425 $ 2,280 $ 1,557
======== ======== ======== ======== ========
ENDING BALANCE SHEET DATA:
Assets $444,167 $333,565 $257,465 $226,031 $207,564
Securities $ 69,287 $ 36,522 $ 39,393 $ 19,194 $ 27,301
Loans, net $311,417 $242,787 $188,878 $166,475 $158,690
Allowance for loan losses $ 2,330 $ 2,634 $ 2,024 $ 2,494 $ 1,827
Deposits $399,212 $304,576 $230,533 $204,491 $175,999
Other liabilities $ 4,701 $ 1,949 $ 1,853 $ 1,687 $ 13,465
Total shareholders' equity $ 40,254 $ 27,040 $ 23,678 $ 19,853 $ 18,100
PER SHARE DATA(1) AND OTHER SELECTED RATIOS:
Net income per common share:
Basic $ 0.54 $ 0.38 $ 0.36 $ 0.35 $ 0.25
Diluted $ 0.51 $ 0.36 $ 0.34 $ 0.34 $ 0.24
Dividends declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Book value per share $ 5.21 $ 3.88 $ 3.51 $ 3.02 $ 2.82
Shareholders' equity to assets at period end 9.06% 8.11% 9.20% 8.78% 8.72%
Tangible shareholders' equity to assets at
period end 8.32% 7.58% 9.20% 8.78% 8.72%
Return on average assets 0.97% 0.95% 1.04% 1.09% 0.85%
Return on average equity 12.83% 10.24% 11.13% 12.07% 9.45%
Average equity to average assets 7.55% 9.27% 9.30% 9.11% 9.05%
Net interest margin 6.37% 7.05% 7.45% 7.53% 6.99%
</TABLE>
- --------
(1) On October 21, 1998, VIBC's Board of Directors declared a 3% stock
dividend payable on or about December 11, 1998, to shareholders of
record on November 20, 1998.
8
<PAGE> 13
Stockdale
The following summary historical financial data for the five years ended
December 31, 1997 are derived from the audited financial statements of
Stockdale. The data should be read in conjunction with the financial statements,
related notes, and other financial information included in this Joint Proxy
Statement-Prospectus. The following summary historical financial data for the
nine months ended September 30, 1998 and 1997 are derived from unaudited
financial statements of Stockdale and include, in the opinion of Stockdale's
management, all adjustments necessary to present fairly the data for such
periods. The results for the nine month period ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
BANK OF STOCKDALE, F.S.B.
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
(Dollars in thousands
except per share data)
RESULTS OF OPERATIONS:
Interest income $ 7,648 $ 7,288
Interest expense 3,907 4,040
--------- ---------
Net interest income 3,741 3,248
Provision for loan losses 306 354
--------- ---------
Net interest income after
provision for loan losses 3,435 2,894
Other operating income 1,583 1,263
Other operating expense 4,117 4,071
--------- ---------
Income (loss) before taxes 901 86
Income tax expense (benefit) 193 (15)
Cumulative effect at Jan 1, 1993 of change
in accounting for income taxes
--------- ---------
Net income (loss) $ 708 $ 101
--------- ---------
ENDING BALANCE SHEET DATA:
Assets $ 138,096 $ 126,686
Securities $ 25,089 $ 18,563
Loans, net $ 98,995 $ 89,487
Allowance for loan losses $ 1,009 $ 837
Deposits $ 123,848 $ 119,235
Other liabilities $ 4,428 $ 1,635
Total shareholders' equity $ 9,820 $ 5,815
PER SHARE DATA AND OTHER SELECTED RATIOS:
Net income (loss) per common share:
Basic $ 0.58 $ 0.13
Diluted $ 0.58 $ 0.13
Dividends declared per share $ 0.00 $ 0.00
Book value per share $ 8.10 $ 7.67
Shareholders' equity to assets at period end 7.11% 4.59%
Tangible shareholders' equity to
assets at period end 7.08% 4.65%
Return on average assets 0.72% 0.11%
Return on average equity 10.07% 2.39%
Average equity to average assets 7.10% 4.51%
Net interest margin 3.99% 3.69%
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS: (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $ 9,712 $ 9,685 $ 10,160 $ 9,377 $ 10,126
Interest expense 5,390 5,630 6,169 4,937 5,111
--------- --------- --------- --------- ---------
Net interest income 4,322 4,055 3,991 4,440 5,015
Provision for loan losses 415 854 475 2 93
--------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 3,907 3,201 3,516 4,438 4,922
Other operating income 1,741 1,529 1,794 1,975 2,135
Other operating expense 5,390 6,428 6,300 6,572 6,251
--------- --------- --------- --------- ---------
Income (loss) before taxes 258 (1,698) (990) (159) 806
Income tax expense (benefit) (44) (729) (334) 18 251
Cumulative effect at Jan 1, 1993 of change
in accounting for income taxes (146)
--------- --------- --------- --------- ---------
Net income (loss) $ 302 $ (969) $ (656) $ (177) $ 701
--------- --------- --------- --------- ---------
ENDING BALANCE SHEET DATA:
Assets $ 130,573 $ 126,734 $ 126,980 $ 135,387 $ 125,738
Securities $ 24,837 $ 22,286 $ 23,740 $ 31,383 $ 18,183
Loans, net $ 90,297 $ 90,328 $ 92,720 $ 93,031 $ 90,057
Allowance for loan losses $ 815 $ 1,158 $ 1,182 $ 851 $ 1,318
Deposits $ 120,643 $ 115,662 $ 114,363 $ 110,867 $ 105,302
Other liabilities $ 905 $ 5,383 $ 5,872 $ 17,128 $ 12,986
Total shareholders' equity $ 9,025 $ 5,689 $ 6,745 $ 7,392 $ 7,450
PER SHARE DATA AND OTHER SELECTED RATIOS:
Net income (loss) per common share:
Basic $ 0.39 $ (1.28) $ (0.87) $ (0.25) $ 1.02
Diluted $ 0.39 $ (1.27) $ (0.86) $ (0.24) $ 1.01
Dividends declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Book value per share $ 7.44 $ 7.51 $ 8.90 $ 9.90 $ 11.78
Shareholders' equity to assets at period end 6.91% 4.49% 5.31% 5.46% 5.92%
Tangible shareholders' equity to
assets at period end 6.94% 4.54% 5.26% 5.36% 5.78%
Return on average assets 0.24% -0.76% -0.50% -0.14% 0.55%
Return on average equity 5.17% -14.79% -9.35% -2.39% 10.26%
Average equity to average assets 4.65% 5.12% 5.40% 5.67% 5.41%
Net interest margin 3.66% 3.44% 3.33% 3.55% 4.45%
</TABLE>
9
<PAGE> 14
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth certain summary unaudited pro forma
combined financial data for VIBC after giving effect to the Merger, as if it had
occurred as of the beginning of each of the periods presented, using the assumed
exchange ratio of 1.798 and accounting for the Merger as a pooling of interests.
(See "THE MERGER-Accounting Treatment" herein.) This information should be read
in conjunction with the financial statements of VIBC and Stockdale, including
the notes thereto, appearing elsewhere in this Joint Proxy Statement-Prospectus
or incorporated herein by reference. (See "UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL DATA" herein.)
The unaudited pro forma combined balance sheet data are not necessarily
indicative of the actual financial position that would have existed had the
Merger been consummated on the dates indicated, or that may exist in the future.
The unaudited pro forma combined results of operations are not necessarily
indicative of the results that would have occurred had the Merger been
consummated at the beginning of the periods indicated or that may be achieved in
the future.
<TABLE>
<CAPTION>
VIB CORP PRO FORMA
AT OR FOR THE NINE
MONTHS ENDED AT OR FOR THE YEAR
SEPTEMBER 30, ENDED DECEMBER 31,
------------------------- ------------------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS:
Interest income $ 36,856 $ 30,753 $ 42,171 $ 33,946 $ 31,936
Interest expense 12,921 11,683 15,811 12,758 12,142
-------- -------- -------- -------- --------
Net interest income 23,935 19,070 26,360 21,188 19,794
Provision for loan losses 2,271 1,424 2,265 1,489 1,483
-------- -------- -------- -------- --------
Net interest income after
Provision for loan losses 21,664 17,646 24,095 19,699 18,311
Other operating income 5,636 4,848 7,492 4,604 4,313
Other operating expenses 22,703 19,030 25,585 22,177 19,749
-------- -------- -------- -------- --------
Income before taxes 4,597 3,464 6,002 2,126 2,876
Income tax expense 1,751 1,074 1,899 520 1,106
-------- -------- -------- -------- --------
Net income $ 2,846 $ 2,390 $ 4,103 $ 1,606 $ 1,769
======== ======== ======== ======== ========
ENDING BALANCE SHEET DATA:
Assets $628,322 $536,539 $574,740 $460,299 $384,445
Securities $109,982 $ 93,078 $ 96,107 $ 58,808 $ 63,133
Loans, net $442,916 $369,964 $401,714 $333,115 $281,598
Allowance for loan losses $ 4,152 $ 3,669 $ 3,145 $ 3,792 $ 3,206
Deposits $565,641 $491,980 $519,855 $420,238 $344,896
Other liabilities $ 9,994 $ 4,421 $ 5,606 $ 7,332 $ 7,725
Total shareholders' equity $ 52,687 $ 35,806 $ 49,279 $ 32,729 $ 30,423
PER SHARE DATA AND OTHER SELECTED RATIOS:
Net income per common share:
Basic $ 0.29 $ 0.28 $ 0.48 $ 0.20 $ 0.22
Diluted $ 0.27 $ 0.27 $ 0.46 $ 0.19 $ 0.21
Dividends declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Book value per share $ 5.28 $ 4.82 $ 4.97 $ 4.00 $ 4.07
Shareholders' equity to assets at period end 8.38% 6.67% 8.57% 7.11% 7.91%
Tangible shareholders' equity to assets at
period end 7.66% 5.97% 7.95% 6.71% 7.90%
Return on average assets 0.60% 0.60% 0.79% 0.40% 0.49%
Return on average equity 7.41% 9.23% 11.56% 5.07% 6.14%
Average equity to average assets 8.16% 6.49% 6.84% 7.94% 7.90%
Net interest margin 5.67% 5.33% 5.68% 5.87% 5.89%
</TABLE>
10
<PAGE> 15
SELECTED HISTORICAL AND PRO FORMA PER SHARE DATA
The following table sets forth for VIBC's common stock and Stockdale's
common stock certain selected historical and unaudited pro forma equivalent per
share data at September 30, 1998 and 1997 and for the nine months ended
September 30, 1998 and 1997, and at the end of and for each of the three years
ended December 31, 1997, giving effect to the Merger using the pooling of
interests method of accounting. The information is derived from the historical
consolidated financial statements of VIBC and the historical financial
statements of Stockdale, including the related notes thereto, and the pro forma
combined financial information giving effect to the Merger, appearing elsewhere
herein. The information below should be read in conjunction with the historical
and pro forma combined financial information of VIBC and Stockdale, including
the notes thereto, appearing elsewhere in this Joint Proxy Statement-Prospectus
or incorporated herein by reference. (See "UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL DATA" herein.)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
------------------------ -----------------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:(1)
VIBC $.42 $.33 $.54 $ .38 $ .36
Stockdale $.58 $.13 $.39 $(1.28) $(.87)
VIBC combined pro forma $.40 $.28 $.48 $ .20 $ .22
Stockdale equivalent pro forma $.72 $.50 $.86 $ .36 $ .42
DILUTED EARNINGS (LOSS) PER SHARE:(1)
VIBC $.40 $.31 $.51 $ .36 $ .34
Stockdale $.58 $.13 $.39 $(1.27) $(.86)
VIBC combined pro forma $.40 $.27 $.46 $ .19 $ .21
Stockdale equivalent pro forma $.72 $.48 $.83 $ .34 $ .38
DIVIDENDS PER SHARE:(2)
VIBC cash dividends per share N/A N/A N/A N/A N/A
Stockdale cash dividends per share N/A N/A N/A N/A N/A
VIBC combined pro forma cash
dividends per share N/A N/A N/A N/A N/A
Stockdale equivalent pro forma cash
dividends per share N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998 AT DECEMBER 31, 1997
--------------------- --------------------
<S> <C> <C>
BOOK VALUE PER SHARE:(3)
VIBC............................................... $5.63 $5.21
Stockdale.......................................... $8.10 $7.44
VIBC combined pro forma............................ $5.28 $5.41
Stockdale equivalent pro forma..................... $9.53 $9.73
</TABLE>
- ----------
(1) The VIBC combined pro forma diluted earnings per share were calculated
by using aggregate historical income information divided by the average
pro forma diluted shares outstanding of the combined entity. The average
diluted pro forma shares of the combined entity were calculated by
combining VIBC's historical diluted shares with the historical diluted
shares of Stockdale as adjusted by the assumed exchange ratio of 1.798.
(See "THE MERGER - Calculation of the Exchange Ratio" herein.)
Stockdale's equivalent pro forma earnings per share amounts were
computed by multiplying VIBC's combined pro forma amounts by the assumed
exchange ratio of 1.798.
(2) Stockdale's equivalent pro forma cash dividends per share amounts were
computed by multiplying VIBC's cash dividends per share by the assumed
exchange ratio of 1.798.
(3) VIBC's combined pro forma book value per share is based on the aggregate
historical common shareholders' equity of the VIBC and Stockdale,
divided by the total pro forma common shares of the combined entity
based on the assumed exchange ratio of 1.798. Stockdale's equivalent pro
forma book value per share at period end represents VIBC's pro forma
amounts multiplied by the assumed exchange ratio of 1.798. (See "THE
MERGER AGREEMENT - Calculation of the Exchange Ratio" herein.)
11
<PAGE> 16
PROPOSED BRANCH ACQUISITION
On September 22, 1998 Valley Independent Bank executed an Agreement to
Assume Liabilities and to Acquire Assets of Branch Office (the "Branch
Agreement" ) with Fremont Investment & Loan pursuant to which VIB will acquire
Fremont Investment & Loan's Hemet branch office. The Branch Agreement provides
for VIB to assume the deposits of the Hemet branch, to assume the lease and
certain other obligations regarding the Hemet branch, and to purchase certain of
the loans of the Hemet branch, for a purchase price of approximately $1 million.
It is anticipated that the total deposits of the branch to be assumed by VIB,
which is scheduled to close in mid-January, 1999, will approximate $100 million.
VIB's purchase of the Hemet branch is subject to regulatory approvals,
which applications are presently pending. No assurances can be given that the
regulatory authorities will approve the proposed acquisition, although except as
discussed below, neither VIB nor VIBC have any reason to believe that the
applications will not be approved on a timely basis.
In connection with the applications to the regulatory authorities, VIB
has anticipated the need to increase its equity capital by approximately $8.5
million to support the growth of assets which will result from the branch
acquisition. It is anticipated that the regulatory applications, if approved
prior to the receipt of the additional capital, will be conditioned upon receipt
of the additional capital prior to the closing of the branch acquisition. (See
"UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA - The Branch Acquisition
and Trust Preferred Securities Offering," "INFORMATION REGARDING VIBC Pending
Branch Acquisition" and "INFORMATION REGARDING VIBC - Proposed Offering - Trust
Preferred Securities" herein.)
PROPOSED OFFERING
In connection with VIB's proposal to purchase the Hemet branch of
Fremont Investment & Loan, VIBC proposes to raise up to $20 million through the
issuance of trust preferred securities. It is VIBC's intention to use $8.5
million of the proceeds from the proposed offering to increase the equity
capital of VIB to support the proposed branch acquisition. The balance of the
proceeds will be retained by VIBC to use for other corporate purposes.
Trust preferred securities are a hybrid form of security which is
considered debt, with the interest paid deductible for federal income tax
purposes, but which is considered capital for bank regulatory purposes. It is
anticipated that the trust preferred securities will be sold through an
underwriter to institutional investors. Because the trust preferred securities
do not convert into common stock, the issuance of the trust preferred securities
will not be dilutive to the voting interests of holders of VIBC's common stock.
However, the dividends on the trust preferred securities, which cumulate, must
be paid ahead of dividends to other preferred shareholders and holders of VIBC's
common stock. (See "UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA - The
Branch Acquisition and Trust Preferred Securities Offering," "INFORMATION
REGARDING VIBC - Pending Branch Acquisition" and "INFORMATION REGARDING VIBC -
Proposed Offering - Trust Preferred Securities" herein.)
12
<PAGE> 17
RISK FACTORS
In addition to the information contained elsewhere in this Joint
Proxy Statement-Prospectus or incorporated herein by reference, VIBC's and
Stockdale's shareholders considering the proposal to approve the Merger should
carefully consider the following factors, among others, before making any final
decision.
RISKS REGARDING THE MERGER
FORWARD-LOOKING STATEMENTS MAY NOT PROVE
ACCURATE
This Joint Proxy Statement-Prospectus includes "forward-looking
statements" within the meaning of federal securities laws. Although each of VIBC
and Stockdale believes that its plans, intentions and expectations reflected in
such forward-looking statements are reasonable, neither can give any assurance
that such plans, intentions or expectations will be achieved. Important factors
that could cause actual results to differ materially from VIBC's and Stockdale's
forward-looking statements are set forth below and elsewhere in this Joint Proxy
Statement-Prospectus. Furthermore, VIBC and Stockdale do not intend to update or
revise the forward- looking statements to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events. Do not
place undue reliance on any of the forward-looking statements included herein.
All forward-looking statements attributable to VIBC, Stockdale or persons acting
on either of their behalves are qualified in their entirety by cautionary
statements such as "anticipate," "estimate," "expect," "project" and "believe."
NO INDEPENDENT FAIRNESS OPINION
The Board of Directors of VIBC has decided not to obtain an opinion from
a third party advisor that the consideration to be paid by VIBC to Stockdale's
shareholders is fair to VIBC's shareholders from a financial point of view. The
consideration being paid has been agreed to after arm's-length negotiations by
representatives of both companies with the approval of their respective Boards
of Directors.
FLUCTUATION OF EXCHANGE RATIO
The assumed exchange ratio of 1.798 is based upon a hypothetical closing
on October 7, 1998, using September 30, 1998 financial data for Stockdale and
assumptions regarding Stockdale's Merger costs. The assumed exchange ratio is
subject to fluctuation based upon changes in the market value of VIBC's common
stock as well as changes to Stockdale's Merger expenses or shareholders' equity.
As a result, no assurances can be given as to the exact number of shares or the
value thereof that Stockdale's shareholders will receive in the Merger. (See
"THE MERGER - Calculation of the Exchange Ratio" herein.)
ABILITY TO INTEGRATE THE OPERATIONS OF VIBC AND
STOCKDALE
Because the markets in which VIBC and Stockdale operate are highly
competitive and because of the inherent uncertainties associated with merging
two companies, there can be no assurance that the entities will be able to
realize fully the operating efficiencies VIBC and Stockdale currently expect to
realize as a result of the Merger and the consolidation of certain
administrative operations of Stockdale or that such operating efficiencies will
be realized in the time frame currently anticipated. (See "THE MERGER - Reasons
for the Merger" herein.)
ACCOUNTING TREATMENT
In the event the Merger cannot be accounted for as a pooling of
interests (or the availability of the pooling of interests method of accounting
with respect to the Merger cannot be determined prior to the consummation of the
Merger), the parties may nonetheless determine to proceed with the consummation
of the Merger using the purchase method of accounting. (See "THE MERGER-
Accounting Treatment" herein.) In such event, VIBC will be required to recognize
additional goodwill of approximately $16,829,350 which will be amortized over a
period of 15 years, resulting in a potential reduction of reported net income of
approximately $1,121,956 per year. (See "UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL DATA" herein.) Although management of VIBC and Stockdale currently
expect that the Merger will be accounted for as a pooling of interests, there
can be no assurance that such accounting treatment will be available, and VIBC
and Stockdale may determine to consummate the Merger whether or not such
accounting treatment is available.
RISKS REGARDING VIBC'S COMMON STOCK
LIMITED MARKET FOR VIBC'S COMMON STOCK
VIBC's common stock was designated for quotation on the Nasdaq National
Market on March 12, 1998. There can be no assurance that an active trading
market for VIBC's common stock will continue or that shareholders of VIBC after
the Merger will be able to resell their securities or otherwise liquidate their
investment, if at all, without considerable delay or considerable impact on the
sales
13
<PAGE> 18
price. (See "SUMMARY-Markets and Market Prices" herein.)
There can be no assurance as to the market value of VIBC's common stock,
which market value may be significantly affected by various factors, including
but not limited to announcements of expanded services by VIBC or its
competitors, acquisitions of related companies and variations in quarterly
operating results, as well as by the dilutive effects of the issuance of
additional shares of VIBC's common stock.
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION
Shares of VIBC's common stock eligible for future sale could have a
dilutive effect on the market for VIBC's common stock and could adversely affect
market prices. As of November ___, 1998, VIBC's Articles of Incorporation
authorized 25,000,000 shares of common stock, of which 7,894,067 shares were
issued and outstanding. It is anticipated that approximately 2,179,652
additional shares of VIBC's common stock will be issued in the Merger to
Stockdale's shareholders. (See "THE MERGER - Calculation of the Exchange Ratio"
herein.) Pursuant to its Stock Option Plan, VIBC had outstanding options to
purchase an additional 752,235 shares of VIBC's common stock with exercise
prices of between $2.09 and $14.25 and VIBC had warrants outstanding to purchase
126,704 shares of common stock at $17.65 per share. Further, Stockdale had
options outstanding to purchase 33,000 shares of its common stock with exercise
prices of between $5.63 and $8.00.
It is VIBC's intention to pursue acquisitions of other companies from
time to time where such acquisitions are believed by VIBC to enhance shareholder
value or satisfy other strategic objectives. Such acquisitions, if any, could be
accomplished by the issuance of additional shares of VIBC's common stock or
other securities convertible into or exercisable for VIBC's common stock. (See
"UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA" herein.)
RISKS REGARDING THE BUSINESSES OF VIBC AND STOCKDALE
GENERAL BUSINESS RISKS
The businesses of VIBC and Stockdale are subject to various business
risks. The volume of loan originations is dependent upon demand for loans of the
type originated by VIB, VIBC's wholly-owned subsidiary, and Stockdale and the
competition in the marketplace for such loans. The level of consumer confidence,
fluctuations in real estate values, fluctuations in prevailing interest rates
and fluctuations in investment returns expected by the financial community could
combine to make loans of the type originated by VIB and Stockdale less
attractive. In addition, VIBC, VIB and Stockdale may be adversely affected by
other factors that could (1) increase the cost to the borrower of loans
originated by VIB and Stockdale, (2) create alternative lending sources for such
borrowers, or (3) increase the cost of funds of VIB and Stockdale at rates
faster than any increase in interest income, thereby narrowing their net
interest rate margins. Managements of VIBC, VIB, and Stockdale believe that loan
demand will continue to improve, but there can be no assurance that there will
be sufficient loan demand in the future to keep pace with increases in deposits
such that the asset mix desired by VIBC and Stockdale can be achieved and
maintained. Governmental interventions through elimination of tax benefits for
home equity loans increased regulation of loans or the introduction of
additional regulations could also adversely affect the businesses in which VIBC
and Stockdale are engaged. (See "SUPERVISION AND REGULATION" herein.)
LITIGATION RISKS
In the ordinary course of business, VIBC, VIB, and Stockdale are subject
to claims made against them by borrowers and investors arising from, among other
things, losses that are claimed to have been incurred as a result of (1) alleged
breaches of fiduciary obligation, (2) alleged misrepresentations, errors or
omissions by employees and officers (including appraisers), (3) alleged
incomplete documentation, or (4) alleged failure to comply with applicable laws
and regulations. VIBC and Stockdale believe that any liability with respect to
any currently asserted claims or legal actions against VIB or Stockdale is not
likely to be material to the consolidated financial position or results of
operations of either institution; however, any claims asserted in the future may
result in legal expense or liabilities that could have a material adverse effect
on the financial positions and results of operations of VIBC or Stockdale. (See
"INFORMATION REGARDING VIBC - Litigation" and "INFORMATION REGARDING STOCKDALE -
Litigation" herein.)
INTEREST RATE RISK
It is expected that VIBC, through its subsidiaries including Stockdale,
will continue to realize income from the differential or "spread" between the
interest earned on loans, securities and other interest-earning assets, and the
interest paid on deposits, borrowings and other interest-bearing liabilities.
Net interest spreads are affected by the difference between the maturities and
repricing characteristics of interest-earning assets and interest-bearing
liabilities. In addition, loan volume and yields are affected by market interest
rates on loans, and rising interest rates generally are associated with a lower
volume of loan originations. There can be no assurance that VIBC's and
Stockdale's interest rate risk will be minimized or eliminated. In addition, an
increase in the general level of interest rates may affect the ability of
certain borrowers to pay the interest on and principal of their obligations.
Accordingly, changes in levels of market interest rate could materially
adversely affect VIBC's
14
<PAGE> 19
and Stockdale's net interest spread, asset quality, loan origination volume and
overall results of operation.
YEAR 2000 COMPLIANCE
Many existing computer programs use only the last two digits to refer to
a year and, therefore, will have difficulty in recognizing the year change to
2000. This problem is likely to have a significant impact on many businesses,
including banking institutions, which are highly independent on computer
applications in a variety of ways. The extent of the potential impact of the
Year 2000 problem is unknown but VIBC and Stockdale have taken action to assess
the potential risk and to implement remedial action to minimize the impact of
the Year 2000 problem. (See "INFORMATION REGARDING VIBC Incorporation of Certain
Information by Reference" and "INFORMATION REGARDING STOCKDALE Management's
Discussion and Analysis of Financial Condition and Results of Operations"
herein.)
CONCENTRATION OF OPERATIONS; RECESSIONARY
ENVIRONMENTS; DECLINE IN REAL ESTATE VALUES
The business activities of VIBC and Stockdale currently are focused in
the Imperial, Coachella and San Joaquin Valleys and other inland communities in
Southern California. Moreover, a significant portion of Stockdale's loans are
secured by real estate in the Kern County area. Although VIB has expanded into
coastal, north San Diego County and Orange County, California, Yuma, Arizona,
and Las Vegas, Nevada, with loan production offices, the results of operations
and financial condition of VIBC and Stockdale are dependent upon general
economic trends in Kern, Imperial, and Riverside Counties. The concentration of
VIB's and Stockdale's operations in these counties exposes them to greater risk
than other banking companies with a wider geographic base in the event of
economic slow-down or recession affecting certain segments of the economy,
especially agriculture, or in the event of localized catastrophes, such as
earthquakes, fires and floods. Moreover, localized declines in market values of
real estate of the type that secure loans originated by VIB and Stockdale,
reducing homeowners' equity in their homes and businesses' equity in their
properties, will result in increased delinquencies and foreclosures, the
weakening of collateral coverage on loans previously made, may necessitate
increased provisions for loan losses, and may also diminish the market for
future loan originations.
SEASONALITY AND AGRICULTURE IN THE IMPERIAL AND
COACHELLA MARKETS
VIBC's business is moderately affected by the seasonality of the
agricultural economy of the Imperial and Coachella Valleys. This seasonality
impacts liquidity; however, VIBC has taken steps to closely monitor its
liquidity and to adjust for seasonal fluctuations. Moreover, VIBC considers the
special risks involved in agriculture in considering the adequacy of its
allowance for credit losses because at least 7.9% of its loans are
agriculturally related and the Imperial and Coachella Valleys are dependent upon
the success of their agricultural businesses. (See "INFORMATION REGARDING VIBC -
Incorporation of Certain Information By Reference" herein.)
ECONOMIC ENVIRONMENT OF THE BAKERSFIELD
MARKET
Stockdale is based in Bakersfield, Kern County, California. The
California economy has just recently pulled out of its worst recession of 50
years. While not untouched by this recession, the City of Bakersfield and Kern
County have not experienced the severity of this downturn, as have Southern
California and to some extent some of the cities of Northern California. There
has been a noticeable slowing of growth in the 1990's, when compared to the
1980's. The City of Bakersfield and Kern County are projected to experience
continued population growth. The Bakersfield Metropolitan Statistical Area has
been recognized as one of the fastest growing in the nation through 1990 and is
projected to add 50,000 or more additional households between 1990 and the year
2000. A major factor in this growth has been the supply of affordable housing,
which is ranked among the least expensive in California. The local economy is
focused in three sectors: petroleum production, agriculture, and
government/institutional. At present, Kern County accounts for one half of all
the petroleum production in the State of California and is considered the
greatest single oil producing county in the nation. In 1994, Kern County's farm
production placed it third among the agricultural counties across the U.S. The
federal, state, county, and municipal governments are important employers in the
Kern County economy, providing 45,800 jobs out of an estimated total of 625,000.
As projected by the Bureau of Economic Analysis, the total job growth in
Bakersfield between 1990 and 2000 will be 44,309. While one of Kern County's
primary employers is the military, thus far the county has not been impacted
greatly by the reduction in military spending or base closures. Base
consolidations have actually increased military employment in the county;
however, there can be no assurance of this in the future. If Bakersfield and
Kern County were to experience recessionary influences as Southern California
has, or population growth ceased or slowed considerably, or any one of the
economic components of the local economy suffered adversely, the business and
prospects of Stockdale could correspondingly suffer.
COMPETITION
The banking business in California generally, and in VIBC's and
Stockdale's service areas in particular, is highly competitive with respect to
both loans and deposits and is dominated by a relatively small number of major
financial institutions that have many offices operating throughout wide
geographic
15
<PAGE> 20
areas. In addition, there are numerous other independent commercial banks and
savings associations within their service areas, many of which have greater
resources, greater capital and, in some cases, less stringent regulatory
limitations. Certain of their competitors may be better able to respond to
changing capital and other regulatory requirements and better able to maintain
or improve market share. (See "SUPERVISION AND REGULATION - Competition"
herein.)
REGULATION
The operations of VIBC, VIB, and Stockdale are subject to extensive
regulation by federal, state and local governmental authorities and are subject
to various laws and judicial and administrative decisions imposing requirements
and restrictions on part or all of their respective operations. VIBC and
Stockdale each believes that it is in substantial compliance in all material
respects with applicable federal, state and local laws, rules and regulations.
Because the businesses of VIBC and Stockdale are highly regulated, the laws,
rules and regulations applicable to VIBC and Stockdale are subject to regular
modification and change. There are currently proposed various laws, rules and
regulations that, if adopted, would impact VIBC, VIB and Stockdale. There can be
no assurance that these proposed laws, rules and regulations, or other such
laws, rules or regulations, will not be adopted in the future, which could make
compliance much more difficult or expensive, restrict VIBC's or Stockdale's
ability to originate, broker or sell loans, further limit or restrict the amount
of commissions, interest or other charges earned on loans originated or sold by
VIB or Stockdale or otherwise adversely affect the business or prospects of VIBC
and Stockdale. (See "SUPERVISION AND REGULATION" herein.)
16
<PAGE> 21
THE MEETINGS
GENERAL
This Joint Proxy Statement-Prospectus is furnished in connection with
the solicitation by Stockdale's Board of Directors of proxies representing
Stockdale's common stock to be voted at Stockdale's Special Meeting to be held
on January ___, 1999, and at any postponement or adjournment thereof and in
connection with the solicitation by VIBC's Board of Directors of proxies
representing VIBC's common stock to be voted at VIBC's Special Meeting to be
held on January ___, 1999, and at any postponement or adjournment thereof. This
Joint Proxy Statement-Prospectus and accompanying proxy are first being mailed
to Stockdale's shareholders on or about December ___, 1998 and to VIBC's
shareholders on or about December ___, 1998.
STOCKDALE'S SPECIAL MEETING
The purposes of Stockdale's Special Meeting are (1) to consider and vote
upon the principal terms of the Merger; and (2) to transact such other business
as may properly come before the Special Meeting or any adjournments or
postponements thereof. Consummation of the Merger is subject to satisfaction of
a number of conditions, including the receipt of various regulatory approvals
for the Merger, and the approval of the principal terms of the Merger by
Stockdale's shareholders. (See "THE MERGER - The Merger Agreement" herein.)
STOCKDALE'S RECORD DATE
Stockdale's Board of Directors has fixed the close of business on
November ___, 1998 as the record date for the determination of Stockdale's
shareholders entitled to receive notice of, and to vote at, Stockdale's Special
Meeting. Only holders of record of shares of Stockdale's common stock at the
close of business on the record date will be entitled to notice of, and to vote
at, Stockdale's Special Meeting and any adjournments or postponements thereof.
On the record date, 1,212,265 shares of Stockdale's common stock were issued and
outstanding.
SOLICITATION OF PROXIES BY STOCKDALE
This solicitation of proxies is being made by Stockdale's Board of
Directors. The expense of preparing, assembling and printing this Joint Proxy
Statement - Prospectus will be born jointly by Stockdale and VIBC. The expense
of mailing this Joint Proxy Statement - Prospectus and the materials used in the
solicitation of proxies for Stockdale's Special Meeting will be borne by
Stockdale. It is contemplated that proxies will be solicited principally through
the use of the mail, but officers, directors and employees of Stockdale may
solicit proxies personally or by telephone, without receiving special
compensation therefor. Although there is no formal agreement to do so, Stockdale
may reimburse banks, brokerage houses and other custodians, nominees and
fiduciaries for their reasonable expenses in forwarding these proxy materials to
shareholders whose stock in Stockdale is held of record by such entities. In
addition, Stockdale may use the services of individuals or companies it does not
regularly employ in connection with this solicitation of proxies, if management
determines it advisable. Stockdale also will provide persons, firms, banks and
corporations holding shares in their names or in the names of nominees, which in
any case are beneficially owned by others, with proxy materials for transmittal
to such beneficial owners and will reimburse such record owners for their
expenses of doing so.
VOTES REQUIRED AND VOTING OF PROXIES
A majority of all shares of Stockdale's common stock entitled to vote,
represented in person or by proxy, constitutes a quorum. Abstentions will be
included in the determination of the number of shares present; however, they
will not be counted as votes in favor of the Merger. Each share of Stockdale's
common stock held of record will be entitled to one vote upon each matter
properly submitted to Stockdale's shareholders at Stockdale's Special Meeting
and any adjournments or postponements thereof.
The affirmative vote of the holders of at least two-thirds of the total
number of outstanding shares of Stockdale's common stock is required to approve
the Merger. The failure to vote, an abstention, or a broker non- vote thus has
the same effect as a vote against the Merger.
For Stockdale's shareholders, a form of proxy for voting at Stockdale's
Special Meeting is enclosed. Any shareholder of Stockdale who executes and
delivers the proxy has the right to revoke it at any time before it is exercised
by filing with the Secretary of Stockdale an instrument revoking it or a duly
executed proxy bearing a later date. In addition, the powers of the proxy
holders will be revoked if the person executing the proxy is present at
Stockdale's Special Meeting and elects to vote in person. A proxy received in
time for Stockdale's Special Meeting will be voted by the proxy holders in
accordance with the instructions specified in the proxy. IF NO
17
<PAGE> 22
INSTRUCTION IS SPECIFIED WITH RESPECT TO THE MERGER, THE SHARES REPRESENTED BY
AN EXECUTED PROXY WILL BE VOTED IN FAVOR OF THE MERGER.
Stockdale's Board of Directors is not currently aware of any business to
be acted upon at Stockdale's Special Meeting other than as described herein. IF
ANY OTHER BUSINESS IS PROPERLY PRESENTED AT THE SPECIAL MEETING, THE PROXY WILL
BE VOTED IN ACCORDANCE WITH THE RECOMMENDATIONS OF STOCKDALE'S BOARD OF
DIRECTORS.
Certain of Stockdale's shareholders, all of whom are directors or
principal shareholders of Stockdale, holding approximately 31.8% of Stockdale's
common stock outstanding on the record date, have agreed, among other things, to
vote "FOR" approval of the Merger. (See "THE MERGER - The Merger Agreement - The
Director's Agreements" herein.)
If a quorum is not obtained, or fewer shares of Stockdale's common stock
are voted in favor of the Merger than the number required for approval of the
Merger, it is expected that Stockdale's Special Meeting will be adjourned or
postponed for the purpose of allowing additional time to obtain additional
proxies or votes, and at any subsequent reconvening of Stockdale's Special
Meeting, all proxies will be voted in the same manner as such proxies would have
been voted at the original convening of Stockdale's Special Meeting (except for
any proxies that have theretofore effectively been revoked or withdrawn).
VIBC'S SPECIAL MEETING
The purposes of VIBC's Special Meeting are (1) to consider and vote upon
the principal terms of the Merger; and (2) to transact such other business as
may properly come before the Special Meeting or any adjournments or
postponements thereof. Consummation of the Merger is subject to satisfaction of
a number of conditions, including the receipt of various regulatory approvals
for the Merger, and the approval of the principal terms of the Merger by VIBC's
shareholders. (See "THE MERGER - The Merger Agreement" herein.)
VIBC RECORD DATE
VIBC's Board of Directors has fixed the close of business on November
___, 1998 as the record date for the determination of VIBC's shareholders
entitled to receive notice of, and to vote at, VIBC's Special Meeting. Only
holders of record of shares of VIBC's common stock at the close of business on
the record date will be entitled to notice of, and to vote at, VIBC's Special
Meeting and any adjournments or postponements thereof. On the record date,
7,894,067 shares of VIBC's common stock were issued and outstanding.(2)
SOLICITATION OF PROXIES BY VIBC
This solicitation of proxies is being made by VIBC's Board of Directors.
The expense of preparing, assembling and printing this Joint Proxy - Prospectus
will be born jointly by VIBC and Stockdale. The expense of mailing this Joint
Proxy Statement - Prospectus and the materials used in the solicitation of
proxies for VIBC's Special Meeting will be borne by VIBC. It is contemplated
that proxies will be solicited principally through the use of the mail, but
officers, directors and employees of VIBC may solicit proxies personally or by
telephone, without receiving special compensation therefor. Although there is no
formal agreement to do so, VIBC may reimburse banks, brokerage houses and other
custodians, nominees and fiduciaries for their reasonable expenses in forwarding
these proxy materials to shareholders whose stock in VIBC is held of record by
such entities. In addition, VIBC may use the services of individuals or
companies it does not regularly employ in connection with this solicitation of
proxies, if management determines it advisable. VIBC also will provide persons,
firms, banks and corporations holding shares in their names or in the names of
nominees, which in any case are beneficially owned by others, with proxy
materials for transmittal to such beneficial owners and will reimburse such
record owners for their expenses of doing so.
VOTES REQUIRED AND VOTING OF PROXIES
A majority of all shares of VIBC's common stock entitled to vote,
represented in person or by proxy, constitutes a quorum. Abstentions will be
included in the determination of the number of shares present; however, they
will not be counted as votes in favor of the Merger. Each share of VIBC's common
stock held of record will be entitled to one vote upon each matter properly
submitted to VIBC's shareholders at VIBC's Special Meeting and any adjournments
or postponements thereof.
- --------
(2) The shares of VIBC's common stock to be issued in connection with VIBC's
recently declared 3% stock dividend were not "issued and outstanding" on
the record date for VIBC's Special Meeting.
18
<PAGE> 23
The affirmative vote of the holders of at least a majority of the total
number of outstanding shares of VIBC's common stock is required to approve the
Merger. The failure to vote, an abstention, or a broker non-vote thus has the
same effect as a vote against the Merger.
For VIBC's shareholders, a form of proxy for voting at VIBC's Special
Meeting is enclosed. Any shareholder of VIBC who executes and delivers the proxy
has the right to revoke it at any time before it is exercised by filing with the
Secretary of VIBC an instrument revoking it or a duly executed proxy bearing a
later date. In addition, the powers of the proxy holders will be revoked if the
person executing the proxy is present at VIBC's Special Meeting and elects to
vote in person. A proxy received in time for VIBC's Special Meeting will be
voted by the proxy holders in accordance with the instructions specified in the
proxy. IF NO INSTRUCTION IS SPECIFIED WITH RESPECT TO THE MERGER, THE SHARES
REPRESENTED BY AN EXECUTED PROXY WILL BE VOTED IN FAVOR OF THE MERGER.
VIBC's Board of Directors is not currently aware of any business to be
acted upon at VIBC's Special Meeting other than as described herein. IF ANY
OTHER BUSINESS IS PROPERLY PRESENTED AT THE SPECIAL MEETING, THE PROXY WILL BE
VOTED IN ACCORDANCE WITH THE RECOMMENDATIONS OF VIBC'S BOARD OF DIRECTORS.
Certain of VIBC's shareholders, all of whom are directors of VIBC,
holding approximately 16.8% of VIBC's common stock outstanding on the record
date, have agreed, among other things, to vote "FOR" approval of the Merger.
(See "THE MERGER - The Merger Agreement - The Director's Agreements" herein.)
If a quorum is not obtained, or fewer shares of VIBC's common stock are
voted in favor of the Merger than the number required for approval of the
Merger, it is expected that VIBC's Special Meeting will be adjourned or
postponed for the purpose of allowing additional time to obtain additional
proxies or votes, and at any subsequent reconvening of VIBC's Special Meeting,
all proxies will be voted in the same manner as such proxies would have been
voted at the original convening of VIBC's Special Meeting (except for any
proxies that have theretofore effectively been revoked or withdrawn).
19
<PAGE> 24
THE MERGER
This section of the Joint Proxy Statement-Prospectus describes certain
aspects of the proposed Merger. Because this is a summary, it does not contain
all the information that may be important to you. You should read the entire
Proxy Statement - Prospectus, including the appendices hereto, and the documents
incorporated herein by reference. A copy of the Merger Agreement is set forth as
Appendix A to this Joint Proxy Statement-Prospectus and is incorporated herein
by this reference.
HISTORY OF THE MERGER
On April 15, 1998, Stockdale received an unsolicited expression of
interest from an existing financial institution seeking to enter into
discussions leading toward the execution of a definitive agreement. The offer
contemplated a cash purchase of Stockdale at a price in the range of 2.0 times
book value. Following receipt of this proposal, Stockdale met with Hovde
Financial, Inc. ("Hovde") on April 21, 1998, to evaluate the proposal and
Stockdale's strategic options. Following this meeting, Stockdale's Board of
Directors directed Hovde to contact the prospective acquirer to discuss their
proposal and to inquire regarding the acquirer's willingness to offer stock
verses cash. In addition, Hovde was asked to develop a formal approach to
respond to the offer and prepare for a broader scale marketing process to ensure
"fairness." During this same time period Stockdale received an unsolicited
request for a meeting between Stockdale management and a local investor group
interested in acquiring Stockdale verses forming a new enterprise. Stockdale
management and representatives of Hovde met with this group in late April to
explore their interest and expected pricing levels. Following completion of this
meeting it was concluded that the investor group would be unable to provide
Stockdale with a compelling offer.
In early May, 1998, Hovde contacted four institutions that Hovde
believed would have a strong strategic and financial interest in acquiring
Stockade. Each of these institutions possessed the cash and/or stock resources
necessary to complete a transaction. All of the parties received and executed
confidentiality agreements. None of these institutions could provide Stockdale
with stock or cash at a level above the benchmark price requirement of no less
than 2.5 times book established by Stockdale's Board of Directors.
On May 25, 1998, representatives of Hovde met with the Chairman of the
Board and Chief Executive Officer of VIBC to present the merits of a business
combination between Stockdale and VIBC. Following this meeting, VIBC stated an
interest in receiving confidential information concerning Stockdale. VIBC
executed a confidentiality agreement and on June 5, 1998, met with management
and board members of Stockdale to complete preliminary due diligence. On June
12, 1998, VIBC provided Stockdale with a Letter of Understanding which provided
for a combination between Stockdale and VIBC. Following negotiation and
revisions a new Letter of Understanding was prepared and delivered to Stockdale
on June 22, 1998. The Letter of Understanding included terms which provided for
a deal value of 2.83 times ending book value, two seats on VIBC's Board of
Directors, continuity of operations under the name Bank of Stockade with
retention of all board members, and the addition of two new members from VIBC's
board.
Following execution of the Letter of Understanding, VIBC conducted due
diligence at Stockdale in July, 1998. Following completion of due diligence,
VIBC submitted a revised proposal which requested that Stockdale establish
additional reserves for loan losses and, therefore, reduced the effective
consideration to Stockdale's shareholders. Following meetings of representatives
of VIBC and Stockdale, and completion of Stockdale's due diligence of VIBC
during the week of July 13, 1998, as well as a special meeting between
management of VIBC and Stockdale on August 24, 1998, the parties agreed to the
terms of a transaction which provided for, among other things, a purchase price
equal to 2.83 times ending book value (gross consideration), with such gross
consideration to be reduced by $300,000 (tax affected to $180,000) in additional
loan loss reserves and certain transaction expenses, as well as the appointment
of one of Stockdale's directors to VIBC's Board of Directors.
On September 9, 1998, Stockdale's Board of Directors met to review and
discuss the Merger Agreement. Stockdale's Board of Directors, with the advice of
its financial advisor, Hovde Financial, Inc., concluded that the terms of the
Merger are fair to and in the best interests of Stockdale's shareholders. In
evaluating the terms of the Merger, Stockdale's Board of Directors considered a
variety of factors discussed below.
On September 15, 1998, VIBC's Board of Directors met to review and
approve the Merger Agreement. The Board of Directors concluded that the Merger
was in the best interests of VIBC's shareholders and adopted a resolution
authorizing management to enter into the Merger Agreement after considering
various factors discussed below. (See "THE MERGER - History of the Merger"
herein.)
Following approval by both Boards of Directors, the Merger Agreement was
signed on September 15, 1998.
20
<PAGE> 25
REASONS FOR THE MERGER
VIBC, through its wholly-owned subsidiary, Valley Independent Bank,
conducts general commercial banking operations centered in Imperial and
Riverside Counties with branches in San Diego County and loan production offices
in San Diego and Orange Counties, California, Yuma, Arizona and Las Vegas,
Nevada. VIB's market area primarily includes the Imperial and Coachella Valleys.
In serving individuals and small businesses, VIB historically has focused on a
community-based approach to banking.
Stockdale operates as a federal savings bank headquartered in
Bakersfield County providing home loans, other real estate lending services and
commercial loans. Stockdale operates two additional branch offices in
Bakersfield as well as a loan production office in Fresno, serving the San
Joaquin Valley.
Management of each of VIBC and Stockdale has been cognizant of the
rapidly changing structure of the banking market in California, in part as a
result of the problems associated with the savings and loan industry and the
problems experienced by other independent banks during the recent recession. The
structure of the banking market is changing largely through a process of
consolidation. As is the case throughout the United States, the managements of
VIBC and Stockdale believe that the process of consolidation will continue to
occur in the California financial services industry resulting in, among other
things, a reduction in the number of independent banks and independent savings
and loan associations.
Moreover, present law allows savings and loan associations, such as
Stockdale, to expand across state lines into Arizona by buying existing
branches, acquiring other institutions, or by starting new branches. Present law
prohibits commercial banks, such as VIB, from crossing state lines into Arizona
by buying existing branches or starting new branches.
The managements of VIBC and Stockdale believe that the two institutions
complement each other in their community-based approaches to banking, their
lines of business, and in terms of their markets, both geographic and
demographic. Consequently, both managements perceive opportunities for increased
operating efficiencies through combination and believe that, by combining
forces, they will be able more effectively to compete and more successfully to
take advantage of banking opportunities in the rapidly evolving California
market.
Consequently, the Merger is intended to serve the following purposes:
o broaden the combined entities' geographic bases;
o enhance VIBC's ability to expand across state lines, in
particular Arizona where VIB presently has a loan production
office;
o create a larger consolidated financial services entity to better
compete with other larger financial institutions; and
o enhance shareholder value by achieving certain cost savings from
increased efficiencies by consolidating certain back office
functions.
In reaching its determination to approve the Merger, Stockdale's Board
of Directors analyzed Stockdale's alternatives for enhancement of shareholder
value, including Stockdale's prospects under several assumptions so as to be
able to compare the value of Stockdale's common stock with VIBC's common stock
as well as with comparable transactions. At the same time, Stockdale's Board of
Directors also reviewed the history of VIBC and the prospects of VIBC if the
Merger were consummated. The factors that were examined as part of this
analysis, include, but were not limited to, the following:
o data showing VIBC's and Stockdale's results of operations and
financial condition;
o the increasing competition in Stockdale's markets from both
existing and potential competitors, some of whom have far
greater assets and resources, in part as a result of the
consolidation taking place in the financial institutions
industry;
o the efficacy of Stockdale's strategic plan to increase financial
performance and shareholder value over the period of its
projections under current competitive conditions and actions;
o the consolidation of the financial services industry nationally
and in California;
21
<PAGE> 26
o a review of potential benefits for shareholders of a larger
organization with greater resources and increased operating
efficiencies;
o the belief of Stockdale's Board of Directors and management that
a business combination with VIBC would offer increased long-term
value and liquidity to Stockdale's shareholders;
o a comparison of VIBC's offer with reported transactions,
nationally and in California, by financial institutions with
similar characteristics;
o discussions with representatives of Hovde Financial regarding
strategic alternatives available to Stockdale; and
o the determination of Stockdale's Board of Directors that the
exchange ratio was fair, from a financial point of view, to
Stockdale's shareholders.
VIBC's Board of Directors, in reaching its conclusion to recommend to
VIBC's shareholders to approve the Merger, reviewed the history and prospects of
Stockdale and the potential enhancement to the operations of VIBC with Stockdale
as a subsidiary. The factors examined included, but were not limited to, the
following:
o data showing Stockdale's results of operations and financial
condition;
o the potential benefits to VIBC by having a subsidiary financial
institution with a federal stock savings bank charter and having
its primary focus on originating, servicing and selling
residential and other real estate secured loans;
o the potential to expand VIBC's geographic market in California;
o the attractiveness of Stockdale's charter for interstate
expansion;
o the potential to further employ VIBC's enhanced data processing
and sophisticated computing systems; and
o the potential for enhanced earnings on a consolidated basis for
VIBC.
The foregoing discussion of material factors considered by Stockdale's
Board of Directors and VIBC's Board of Directors is not exhaustive but does set
forth the principal factors considered. The Boards of Directors collectively
reached the unanimous conclusion to approve the Merger in light not only of the
factors described above, but of such other factors as each Board member felt was
appropriate. The Boards of Directors did not assign relative or specific weights
to any of the factors described above and individual directors may have weighted
such factors differently. After consideration of the foregoing factors, the
Boards of Directors concluded that the Merger is in the best interests of VIBC's
and Stockdale's shareholders.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
FOR THE REASONS SET FORTH ABOVE STOCKDALE'S BOARD OF DIRECTORS AND
VIBC'S BOARD OF DIRECTORS HAVE UNANIMOUSLY APPROVED THE MERGER AS IN THE BEST
INTERESTS OF STOCKDALE AND VIBC AND THEIR SHAREHOLDERS AND UNANIMOUSLY RECOMMEND
THAT STOCKDALE'S AND VIBC'S SHAREHOLDERS APPROVE THE PRINCIPAL TERMS OF THE
MERGER.
STRUCTURE OF THE MERGER
The Merger Agreement provides for the merger of Stockdale with a
wholly-owned subsidiary of VIBC formed for the sole purpose of facilitating the
Merger, BOS Interim Bank, F.S.B. As a result of the Merger, Stockdale will be
the surviving association and will operate under its name and charter. Each
share of Stockdale's common stock issued and outstanding (other than shares with
respect to which dissenters' rights have been perfected) will be converted into
shares of VIBC's common stock based a formula exchange ratio. Each share of
VIBC's common stock outstanding will remain outstanding after the Merger as one
share of VIBC's common stock (other than shares with respect to which
dissenters' rights have been perfected). (See "THE MERGER - Calculation of the
Exchange Ratio" and "THE MERGER - Dissenters' Rights" herein.)
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<PAGE> 27
CALCULATION OF THE EXCHANGE RATIO
VALUE OF STOCKDALE'S COMMON STOCK
The Merger Agreement provides for the conversion of Stockdale's common
stock into shares of VIBC's common stock based upon determining the values of
both securities and dividing the value of Stockdale's common stock by the value
of VIBC's common stock. Thus, for example, if the value of Stockdale's common
stock is determined to be $26.00 and the value of VIB's common stock is
determined to be $13.00, the exchange ratio would be 2.0 and each share of
Stockdale's common stock would be exchanged for two shares of VIBC's common
stock.
The Merger Agreement provides the following specific formula for
calculating the value of Stockdale's common stock:
o first, determine the shareholders' equity as of the end of the
month before the month of the closing (if the closing occurred
on October 7, 1998, the stockholders' equity would have been
measured as of September 30, 1998);
o second, subtract $180,000;
o third, multiply by 2.83;
o fourth, subtract all expenses related to the Merger, including
finders' fees; and
o fifth, divide by the total number of shares of Stockdale's
common stock outstanding at the closing.
<TABLE>
<CAPTION>
Calculation Based upon
September 30, 1998
Data and Estimates
----------------------
<S> <C>
$ 9,820,000
- 180,000
---------------
9,640,000
x 2.83
---------------
27,281,000
- 812,000(1)
---------------
26,469,000
/ 1,212,265(2)
---------------
= $ 21.83
===============
</TABLE>
VALUE OF VIBC'S COMMON STOCK
The value of VIBC's common stock will be determined by taking the
average of the closing prices of VIBC's common stock on the Nasdaq National
Market for the twenty trading days preceding the fifth business day prior to the
date of the closing. For example, if the closing is on January 29, 1999, the
fifth business day preceding the closing would be January 22, 1999 and the
twenty trading days preceding January 22 would be the twenty trading days ending
on and including January 21, 1999.
If the average is calculated at less than $9.50, the value shall be
deemed to be $9.50. If the average is calculated to be greater than $15.50, but
not greater than $19.50, then the value shall be deemed to be $15.50 plus 25% of
the amount by which the average exceeds $15.50. In the event the average exceeds
$19.50, then the value shall be deemed to be $16.50.
Based upon the formula in the Merger Agreement, if the closing occurred
on October 7, 1998, the value of VIB's common stock would have been calculated
at $12.14.
<TABLE>
<CAPTION>
VIBC's Common
Stock "Average"
at September 30, 1998(3)
------------------------
<S> <C>
$12.14
</TABLE>
- ----------
(1) Merger expenses are estimated at $812,000, including finders' fees of
$682,000. (See "THE MERGER - Interests of Certain Persons in the Merger"
herein.)
(2) Assumes no changes in the total number of shares of Stockdale's common
stock outstanding.
(3) Assumes the closing was on October 7, 1998. The fifth business day prior
thereto was September 30, 1998.
(4) These figures do not reflect VIBC's recently declared 3% stock dividend.
No presumption can be made as to the impact the stock dividend will
have, if any, on the market value of VIBC's common stock during the
measurement period prior to the closing.
23
<PAGE> 28
ESTIMATED EXCHANGE RATIO
Assuming the closing was on October 7, 1998, the exchange ratio would
have been $21.83 divided by $12.14, or 1.798. Thus, each share of Stockdale's
common stock would have been entitled to receive 1.798 shares of VIBC's common
stock. Based on the foregoing assumption and assuming no shareholders exercise
dissenters' rights, if the closing occurred on October 7, 1998, Stockdale's
shareholders would have received approximately 2,179,652 newly issued shares of
VIBC's common stock and would have owned approximately 21.83% of the total
issued and outstanding shares of VIBC's common stock following the Merger.(4)
<TABLE>
<CAPTION>
Exchange Ratio Calculation
--------------------------
<S> <C>
$21.83
/ $12.14
--------------------------
1.798
</TABLE>
PLEASE NOTE THAT SINCE THE EXCHANGE RATIO WILL BE CALCULATED IMMEDIATELY
PRECEDING THE CLOSING OF THE MERGER, IT IS VERY LIKELY THAT THE ACTUAL EXCHANGE
RATIO WILL DIFFER FROM THE FOREGOING ESTIMATE.
FRACTIONAL SHARES
It is very unlikely that the exchange ratio will be a whole number, such
as 2.0. As a result, it is very likely that some, if not most, of Stockdale's
shareholders will be entitled to receive a fractional interest of a share of
VIBC's common stock in addition to a whole number of shares of VIB's common
stock. The Merger Agreement provides that, in lieu of receiving a fractional
share, Stockdale's shareholders entitled to a fractional share will receive cash
equal to the value of the fractional interest.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the anticipated federal tax
consequences of the Merger and does not contain all the information that may be
important to shareholders. The discussion may not be applicable to certain
classes of shareholders, including insurance companies, securities dealers,
financial institutions, tax exempt organizations or trusts, foreign persons,
persons who hold shares of Stockdale's common stock as part of a straddle or
conversion transaction and persons who acquired shares of Stockdale's common
stock pursuant to the exercise of employee stock options or rights or otherwise
as compensation. Stockdale's shareholders are urged to consult their own tax
advisors as to the specific tax consequences to them of the Merger, including
the applicability and effect of federal, state, local and other tax laws.
TAX RULING OR OPINION
It is intended that the Merger will be treated as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code. Consummation
of the Merger as a reorganization is conditioned upon receipt by VIBC and
Stockdale of a ruling by the Internal Revenue Service or, in lieu thereof, a tax
opinion of Vavrinek, Trine, Day & Co., LLP, substantially to the effect that,
for federal income tax purposes: (1) the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code; and (2) each of VIBC and Stockdale will be a party to that reorganization
within the meaning of Section 368(b) of the Internal Revenue Code.
A tax opinion issued by Vavrinek, Trine, Day & Co., LLP, will not be
binding on the Internal Revenue Service and there can be no assurance that the
Internal Revenue Service will not contest the conclusions expressed therein. A
tax opinion by Vavrinek, Trine, Day & Co., LLP, will be based in part upon
certain factual assumptions and upon certain representations made, and
certificates delivered, by VIBC and Stockdale, which representations and
certificates Vavrinek, Trine, Day & Co., LLP, will assume to be true, correct
and complete. If such representations or certificates are inaccurate, the tax
opinion could be adversely affected.
TAX CONSEQUENCES - STOCKDALE'S SHAREHOLDERS
No gain or loss will be recognized by a Stockdale shareholder who
receives VIBC's common stock in exchange for Stockdale's common stock (except to
the extent the shareholder receives cash in lieu of a fractional share interest
in VIBC's common stock). The tax basis in VIBC's common stock received pursuant
to the Merger will equal the shareholder's aggregate tax basis in the shares of
Stockdale's common stock exchanged, reduced by any amount allocable to the
fractional share interest of VIBC's common stock for which cash is received. The
holding period of VIBC's common stock received pursuant to the Merger will
include the holding period of the shares of Stockdale's Common Stock exchanged,
provided that such shares were held as a capital asset.
24
<PAGE> 29
A Stockdale shareholder who receives cash in lieu of a fractional share
interest in VIBC's common stock will be treated as having received such
fractional share pursuant to the Merger and then as having exchanged such
fractional share for cash in a redemption by VIBC. The redemption will be
treated as a sale of the fractional share, provided that it is not "essentially
equivalent to a dividend." If VIBC's common stock represents a capital asset in
the hands of the shareholder, the shareholder will generally recognize capital
gain or loss on the redeemed fractional share in an amount determined by the
difference between the amount of cash received and the shareholder's tax basis
in the fractional share. The capital gain or loss will be long-term if
Stockdale's common stock exchanged was held for more than one year. Under
recently-enacted legislation, long-term capital gain of an individual is
generally subject to a maximum capital gains rate of 20% for capital assets held
for more than one year.
REGULATORY APPROVALS
FEDERAL RESERVE BOARD
The Merger is subject to prior approval by the Federal Reserve Board
(the "FRB"). In reviewing the application, the FRB will take into consideration,
among other things, competition, the financial and managerial resources and
future prospects of the companies, and the convenience and needs of the
communities to be served. The Bank Holding Company Act prohibits the FRB from
approving the Merger if it would result in undue concentration of resources or
decreased or unfair competition, unless the FRB finds that the anti-competitive
effects of the Merger are clearly outweighed by the benefits to the public.
The FRB has the authority to deny an application if it concludes that
the combined organization would have an inadequate capital structure, taking
into account, among other factors, the nature of the business and operations and
plans for expansion. Furthermore, the FRB must also assess the records of VIB
and Stockdale under the Community Reinvestment Act of 1977, as amended, which
requires that the all federal bank regulatory agencies assess, when evaluating
an application, each depository institution's record of meeting the credit needs
of its local communities, including low- and moderate-income neighborhoods,
consistent with safe and sound operation and take such record into account when
evaluating certain regulatory applications. Both VIB and Stockdale have a
"satisfactory" rating.
VIBC submitted an application seeking approval of the Merger to the FRB
on ___________, 1998. It is expected that the FRB's approval will be received
prior to the two Special Meetings, but there can be no assurance that such
approval will be obtained.
OFFICE OF THRIFT SUPERVISION
Since Stockdale is a federal stock savings bank, consummation of the
Merger is also subject to receipt of the prior approval of the Office of Thrift
Supervision ("OTS") under the Bank Merger Act, which requires that the OTS take
into consideration, among other factors, the financial and managerial resources
and future prospects of the institutions and the convenience and needs of the
communities to be served. The OTS cannot approve the Merger if the Merger would
result in a monopoly or would substantially lessen competition or tend to create
a monopoly, unless the OTS finds that the anti-competitive effects of the Merger
are clearly outweighed by the public benefits.
VIBC and Stockdale submitted an application seeking approval of the
Merger and related matters to the OTS on ____________, 1998. In addition to
seeking approval of the Merger, the application filed with the OTS also seeks
the OTS's approval to organize BOS Interim Bank, F.S.B. It is expected that the
OTS's approvals will be received prior to the two Special Meetings, but there
can be no assurance that such approvals will be obtained.
STATUTORY WAITING PERIOD
The Merger may not be consummated until the 15th day following the last
of FRB's or OTS' approval, or such earlier date as may be determined by the FRB
or the OTS. If the United States Department of Justice commences an action
challenging the Merger on antitrust grounds during the 15-day waiting period,
commencement of such action would stay the effectiveness of the regulatory
approvals, unless a court specifically orders otherwise.
The Merger cannot proceed in the absence of the regulatory approvals.
VIBC and Stockdale are not aware of any reasons why regulatory approvals will
not be timely received. VIBC and Stockdale have agreed to use their reasonable
best efforts to obtain all necessary regulatory approvals. HOWEVER, THERE CAN BE
NO ASSURANCE THAT APPROVALS WILL BE OBTAINED, NOR CAN THERE BE ASSURANCE AS TO
THE DATE OF ANY SUCH APPROVAL. THERE CAN ALSO BE
25
<PAGE> 30
NO ASSURANCE THAT ANY SUCH APPROVAL WILL NOT CONTAIN UNACCEPTABLE CONDITIONS OR
REQUIREMENTS.
RESALE OF VIBC'S COMMON STOCK
All shares of VIBC's common stock received by Stockdale's shareholders
in the Merger will be freely transferrable, except that shares of VIBC's common
stock received by the directors, executive officers and the principal
shareholder of Stockdale will be subject to resale limitations.
The Securities Act of 1933 and the Securities and Exchange Commission's
Rule 145 promulgated thereunder impose limitations on the ability of the
directors, executive officers, principal shareholders, and other "affiliates" of
Stockdale to resell the shares of VIBC's common stock they will receive in the
Merger. At the time the Merger Agreement was executed, each of Stockdale's
affiliates signed an Affiliate's Letter in the form attached to the Merger
Agreement as Exhibit "C," acknowledging their understanding and agreement to
comply with the resale limitations imposed by the Securities Act of 1993 and the
SEC's Rule 145.
CERTAIN EFFECTS OF THE MERGER
After the Merger, Stockdale will be a separate, wholly-owned subsidiary
of VIBC. Stockdale will continue to be headquartered at 5151 Stockdale Highway,
Bakersfield, California 93309, and will continue to operate under its present
name and charter at its main office and its existing branches and loan
productions offices.
Stockdale will continue to operate with its present directors and
executive officers, except that two of VIBC's directors, its Chairman of the
Board, Mr. Richard D. Foss, and its President and Chief Executive Officer, Mr.
Dennis L. Kern, will be added to Stockdale's Board of Directors. To make room
for the two new directors, two of Stockdale's existing directors, Mr. Irving R.
Beimler and Mr. Jeffery W. Warlick, will resign. Messrs. Beimler and Warlick
were originally added to Stockdale's Board of Directors as representatives of
Stockdale's principal shareholder, Financial Institutions Partners, Ltd.
After the Merger, there will be no further trading in Stockdale's common
stock. Each of Stockdale's shareholders will receive written instructions from
VIBC's transfer agent with respect to the exchange of Stockdale's stock
certificates for VIBC's stock certificates.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Shareholders should be aware that certain members of Stockdale's and
VIBC's Board of Directors have certain interests in the Merger that may create
potential conflicts of interest, discussed below.
MESSRS. RICHARD D. FOSS, ED L. HICKMAN AND DENNIS L. KERN
The Merger Agreement provides that, upon consummation of the Merger, two
of VIBC's directors, Mr. Richard D. Foss, Chairman of the Board, and Mr. Dennis
L. Kern, President and Chief Executive Officer, will be added to Stockdale's
Board of Directors. The Merger Agreement also provides that, upon consummation
of the Merger, Mr. Ed L. Hickman, Stockdale's President and Chief Executive
Officer, will be added to VIBC's Board of Directors.
CHANGE IN CONTROL AND SALARY CONTINUATION AGREEMENTS
Stockdale's four executive officers, Mr. Ed L. Hickman, Mr. Bruce C.
Jay, Mr. Rick L. Roper, and Mr. Ronald L. Scheidt each have Change in Control
and Salary Continuation Agreements which provide for certain compensation
benefits. As a result of the Merger, certain provisions in the Change in Control
and the Salary Continuation Agreements will become applicable, which provisions
provide for accelerated or otherwise enhanced benefits upon retirement,
termination or resignation. (See "INFORMATION REGARDING STOCKDALE - Certain
Information Regarding Stockdale Management and Principal Shareholders" herein.)
FINDER'S FEE AGREEMENT
On March 31, 1997, Stockdale entered into a Financial Advisory Services
Agreement with Hovde Financial, Inc. ("Hovde"), pursuant to which:
o Hovde was paid a non-refundable retainer fee of $10,000;
o Hovde is entitled to receive a finder's fee of 2.5% of the value
of the Merger; and
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<PAGE> 31
o Hovde was paid an estimated 25% of the finder's fee, or
$180,412, on a non-refundable basis upon signing of the Merger
Agreement.
Hovde provided significant services in connection with the Merger,
including identifying VIBC as a merger partner, as well as in negotiating the
terms of the Merger Agreement. If the Merger is not consummated for any reason,
Hovde will not be entitled to the balance of its finder's fee, notwithstanding
its continued services.
DISSENTERS' RIGHTS
STOCKDALE'S SHAREHOLDERS
If the Merger is consummated, Stockdale's shareholders who dissent will
be entitled to receive cash equal to the appraised or fair value of their common
stock. The appraised or fair value may be more or less than the value of VIBC's
common stock that would have been received in exchange.
The following discusses in more detail the dissenters' rights applicable
to Stockdale's shareholders. Please refer to Appendix B, attached hereto and
incorporated herein by this reference, for complete information concerning
Stockdale's shareholders' dissenters' rights.
ALL STOCKDALE SHAREHOLDERS SHOULD CONSULT THEIR OWN ADVISORS REGARDING
TAKING ACTION TO EXERCISE DISSENTERS' RIGHTS IN CONNECTION WITH THE MERGER AND
THEIR REVIEW OF APPENDIX B, WHICH CONTAINS THE TEXT OF OTS REGULATION SECTION
552.14.
In order to be entitled to exercise dissenters' rights, a Stockdale
shareholder must:
o make written demand to Stockdale before Stockdale's Special
Meeting indicating the intention to demand dissenters' rights;
and
Written demand should be addressed to Bank of Stockdale, F.S.B.,
5151 Stockdale Highway, Bakersfield, California 93309, Attn:
Beckie Roberts.
o not vote in favor of the Merger.
If no instruction is indicated on a proxy received by Stockdale, the
proxy will be voted for the Merger. Those Stockdale shareholders who return
their proxies without instructions, resulting in a vote for the Merger, will not
be entitled to dissenters' rights. A PROXY OR VOTE AGAINST APPROVAL OF THE
MERGER DOES NOT CONSTITUTE A WRITTEN DEMAND.
Notice of the consummation of the Merger will be sent to all dissenting
Stockdale shareholders.
The notice will make a written offer to pay for dissenting shares at a
price deemed by VIBC and Stockdale to be the fair value of Stockdale's common
stock. The notice will also inform shareholders that they will have 60 days to
accept the offer or, if the offer of fair value is not accepted, to file a
petition with the OTS demanding a determination of the fair market value.
Finally, the notice will also provide Stockdale's shareholders with financial
information concerning Stockdale. When responding, Stockdale's shareholders must
also return their certificates of Stockdale's common stock in accordance with
the instructions to be provided in the notice.
If the shareholder does not deliver the certificates and a written
acceptance or petition within the 60-day period, the shareholder will lose
dissenters' rights. A shareholder losing dissenters' rights will be treated in
the same manner as a shareholder who voted in favor of the Merger.
Under the terms of Section 552.14, the value of Stockdale's common stock
will be determined by one or more persons. The Director of the OTS may select
one or more independent persons or may select appropriate members of the OTS
staff to conduct the appraisal. The final appraisal must be approved by the
Director of the OTS, who will then direct payment of the appraised value to
dissenting shareholders, together with interest from the date of the Merger.
Shareholders who exercise dissenters' rights will not be entitled to the
benefits of the tax-free exchange. Shareholders exercising dissenters' rights
will be taxed as if they had sold their stock, recognizing gain or loss, short
term or long term, depending upon the tax basis and the length of time
Stockdale's common stock had been
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<PAGE> 32
held. (See "THE MERGER - Certain Federal Income Tax Consequences" herein.)
VIBC'S SHAREHOLDERS
If the Merger is consummated, VIBC's shareholders may be entitled to
dissenters' rights under Chapter 13 of the California General Corporation Law,
the text of which is attached hereto as Appendix C and incorporated herein by
this reference. The description of VIBC's shareholders' dissenters' rights
contained in this Joint Proxy Statement-Prospectus is qualified in its entirety
by reference to Appendix C.
ALL VIBC SHAREHOLDERS SHOULD CONSULT THEIR OWN ADVISORS REGARDING TAKING
ACTION TO EXERCISE DISSENTERS' RIGHTS IN CONNECTION WITH THE MERGER AND THEIR
REVIEW OF APPENDIX C, WHICH CONTAINS THE TEXT OF CHAPTER 13 OF THE CALIFORNIA
GENERAL CORPORATION.
In order to be entitled to exercise dissenters' rights, a VIBC
shareholder must:
o make written demand to VIBC before VIBC's Special Meeting that
VIBC purchase the shareholders' shares for cash; and
Written demand should be addressed to VIB Corp, 1498 Main
Street, El Centro, California 92243, Attn: Charlotte Studer.
o vote against approval of the Merger.
If no instruction is indicated on a proxy received by VIBC, the proxy
will be voted for the Merger. Those VIBC shareholders who return their proxies
without instructions, resulting in a vote for the Merger, will not be entitled
to dissenters' rights.
The written demand to purchase the shares of VIBC's common stock must
state the number of shares that the shareholder demands that VIBC purchase and
contain a statement of what the shareholder claims to be the fair market value
of the shares as of September 15, 1998, the day before the first announcement of
the Merger. The written demand will constitute an offer by the shareholder to
sell the shares at the stated price. A written demand may not be withdrawn
unless VIBC consents thereto. A PROXY OR VOTE AGAINST APPROVAL OF THE MERGER
DOES NOT CONSTITUTE A WRITTEN DEMAND.
In addition, because VIBC's common stock is traded on the Nasdaq
National Market, VIBC's shareholders will not be entitled to dissenters' rights
unless:
o 5% or more of the outstanding shares of VIBC's common stock are
voted against the Merger; and
o written demand on behalf of such shares is timely received by
VIBC.
In the event the Merger is approved by VIBC's shareholders and timely
demands are made by holders of 5% or more of VIBC's common stock who voted
against the Merger, the dissenting shareholders will be entitled to payment in
cash equal to the fair market value of their shares of VIBC's common stock as of
September ___, 1998; provided that the shareholders timely submit their
certificates for endorsement.
If 5% or more of VIBC's shareholders are entitled to dissenters' rights,
VIBC will mail to those shareholders a notice of approval of the Merger within
10 days after VIBC's Special Meeting, accompanied by:
o a copy of Sections 1300, 1301, 1302, 1303 and 1304 of Chapter
13;
o a statement of the price determined by VIBC to represent the
fair market value as of September 15, 1998 (which VIBC has
determined to be $12.25); and
o a brief description of the procedure to be followed if the
shareholder desires to exercise his or her dissenters' rights.
VIBC's statement of price will constitute an offer by VIBC to purchase
the dissenting shares. The dissenting shareholder must submit the certificates
for endorsement to VIBC at its principal office or at the office of its transfer
agent within 30 days after the date on which VIBC's notice of approval of the
Merger was mailed.
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<PAGE> 33
If VIBC denies that shares submitted properly qualify as dissenting
shares, or if VIBC and a dissenting shareholder fail to agree on the fair market
value, either the shareholder or VIBC may file a complaint in the Superior Court
of the proper county in California requesting that the court determine such
issue. Such complaint must be filed within six months after the date on which
VIBC's notice of the approval of the Merger is mailed. It is the opinion of VIBC
that the fair market value of its shares with regard to valuation for
dissenters' rights purposes is $12.25, the closing price of VIBC's common stock
on the day prior to the first announcement of the Merger.
On trial of the action, the court will first determine whether or not
the shares qualify as dissenting shares and, if so determined, the court will
either determine the fair market value or appoint one or more impartial
appraisers to do so. If both VIBC and the dissenting shareholder fail to file a
complaint within six months after the date on which notice of the approval of
the Merger was mailed, the shareholder will lose dissenters' rights. In
addition, if the shareholder transfers the shares prior to their submission for
the required endorsement, the shares will lose their status as dissenting
shares.
Any demands, notices, certificates or other documents delivered to VIBC
prior to or after the Merger may be sent to Charlotte Studer, Corporate
Secretary, VIB Corp, 1498 Main Street, El Centro, California 92243.
FAILURE TO TAKE ANY NECESSARY STEP WILL RESULT IN A TERMINATION OR
WAIVER OF THE RIGHTS OF THE SHAREHOLDER UNDER CALIFORNIA LAW. A PERSON HAVING A
BENEFICIAL INTEREST IN VIBC'S COMMON STOCK THAT IS HELD OF RECORD IN THE NAME OF
ANOTHER PERSON, SUCH AS A TRUSTEE OR NOMINEE, MUST ACT PROMPTLY TO CAUSE THE
RECORD HOLDER TO FOLLOW THE REQUIREMENTS OF CALIFORNIA LAW IN A TIMELY MANNER IF
SUCH PERSON ELECTS TO DEMAND PAYMENT OF THE FAIR MARKET VALUE OF SUCH SHARES.
OPINION OF FINANCIAL ADVISOR
ATTACHED HERETO AS APPENDIX D IS THE OPINION OF HOVDE FINANCIAL, INC.
WITH RESPECT TO THE FAIRNESS OF THE MERGER TO STOCKDALE'S SHAREHOLDERS FROM A
FINANCIAL POINT OF VIEW. THE OPINION IS BASED UPON CERTAIN ASSUMPTIONS AND WAS
INTENDED FOR THE USE OF STOCKDALE'S BOARD OF DIRECTORS. THE FOLLOWING IS A
SUMMARY OF THE OPINION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE OPINION ATTACHED AS APPENDIX D.
Stockdale retained Hovde Financial, Inc. ("Hovde") to render financial
advisory and investment banking services. Under terms of this engagement, and as
more fully discussed above, Hovde initiated marketing efforts on behalf of
Stockdale in April, 1998. These efforts resulted in the execution of the Merger
Agreement. (See "THE MERGER - History of the Merger" herein.)
On September 9, 1998, Hovde delivered its written opinion to Stockdale's
Board of Directors to the effect that, as of the date thereof, and subject to
the assumptions and qualifications set forth therein, the terms of the Merger
were fair, from a financial point of view, to Stockdale's shareholders.
Stockdale's Board of Directors imposed no limitations upon Hovde with respect to
the investigations made or procedures followed in rendering its written opinion.
At the September 9, 1998 meeting of Stockdale's Board of Directors, the Board of
Directors considered the fairness opinion from Hovde and voted unanimously in
favor of the Merger.
In connection with its opinion, Hovde, among other things:
o reviewed certain publicly available financial and other data
with respect to Stockdale and VIBC, including the audited
consolidated financial statements for the past three fiscal
years ending December 31, 1997, and unaudited consolidated
financial statements for the period ending June 30, 1998, and
certain other relevant financial and operating data relating to
Stockdale and VIBC made available to Hovde from published
sources and from the internal records of Stockdale and VIBC; o
reviewed a draft of the Merger Agreement;
o reviewed certain publicly available information concerning the
trading of, and the trading market for shares of Stockdale's and
VIBC's common stock;
o compared both Stockdale and VIBC from a financial point of view
with certain other companies in the banking industry, which
Hovde deemed to be relevant;
o considered the financial terms, to the extent publicly
available, of business combinations in the banking industry
which Hovde deemed to be comparable, in whole or in part, to the
Merger;
o reviewed and discussed with representatives of the management of
Stockdale certain information
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<PAGE> 34
of a business and financial nature regarding Stockdale furnished
to Hovde by them, including financial forecasts and related
assumptions of Stockdale;
o discussed the Merger and the Merger Agreement and other matters
related thereto with Stockdale's legal counsel; and
o performed such other analyses and examinations as Hovde deemed
appropriate.
Hovde took into account its assessment of general economic, market and
financial conditions and its experience in other transactions, as well as its
experience in securities valuation and its knowledge of the banking industry
generally. Hovde also considered such financial and other factors as it deemed
appropriate under the circumstances. Hovde's opinion was necessarily based upon
conditions as they existed and could only be evaluated on the date thereof and
the information made available to Hovde through the date thereof.
In conducting its review and in arriving at its opinion, Hovde relied
upon and assumed the accuracy and completeness of the financial and other
information provided to it or publicly available and did not attempt
independently to verify the same. Hovde relied upon the management of Stockdale
and VIBC as to the reasonableness of the financial and operating forecasts,
projections and projected operating cost savings. Hovde also assumed, without
independent verification, that the aggregate allowances for loan losses for
Stockdale and VIBC were adequate to cover such losses. Hovde did not make or
obtain any evaluations or appraisals of the property of Stockdale or VIBC.
HOVDE'S OPINION IS LIMITED TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, TO
THE SHAREHOLDERS OF STOCKDALE OF THE CONSIDERATION TO BE RECEIVED BY STOCKDALE'S
SHAREHOLDERS IN THE MERGER. TERMS OF THE MERGER AGREEMENT WERE REACHED FOLLOWING
ARM'S-LENGTH NEGOTIATIONS AND HOVDE'S OPINION HAS NOT AND DOES NOT ADDRESS
STOCKDALE'S UNDERLYING DECISION TO PROCEED WITH THE MERGER.
In connection with rendering its opinion to Stockdale, Hovde performed
certain financial analyses which are summarized below. The summary set forth
below does not purport to be a complete description of the presentation by Hovde
to Stockdale or of the analyses performed by Hovde. Hovde believes that its
analyses must be considered as a whole and that selecting portions of such
analyses and the factors considered therein, without considering all factors and
analyses, could create an incomplete view of the analyses and the processes
underlying its opinion. The preparation of a fairness opinion is a complex
process involving subjective judgments and is not necessarily susceptible to
partial analysis or summary description. In its analyses, Hovde made numerous
assumptions with respect to industry performance, business and economic
conditions and other matters, many of which are beyond the control of Stockdale
and VIBC. Any estimates contained in Hovde's analyses are not necessarily
indicative of future results or values, which may be significantly more or less
favorable than such estimates. Estimates of values of companies do not purport
to be appraisals or necessarily reflect the prices at which companies or their
securities may actually be sold. Of the financial analyses performed by Hovde,
none was assigned a greater significance than was any other.
Set forth below is a brief summary of the analyses performed by Hovde in
reaching its opinion. Hovde assumed for purposes of its opinion that the Merger
will be accounted for as a tax-free exchange of shares which qualifies as a
"pooling-of-interests" under generally accepted accounting principles. The
analyses focused on core financial and operating projections and statistics that
are not specifically adjusted for nonrecurring charges, unless otherwise stated.
Unless otherwise noted in the analyses, Hovde used the assumed exchange ratio of
1.839 to determine the level at which Stockdale's common stock would be
exchanged if the closing of the Merger were the same as the day prior to the
signing of the Merger Agreement. The exchange ratio formula was developed
pursuant to extensive negotiations between Stockdale and VIBC. Hovde analyzed
certain effects of the Merger assuming various exchange ratios and concluded
pursuant to the analysis of the range of possible values of the exchange ratio
that the financial terms of the Merger remained fair to the holders of shares of
Stockdale's common stock from a financial point of view.
TRANSACTION SUMMARY
Under the terms of the Merger Agreement each of Stockdale's shareholders
will receive shares of VIBC's common stock with a value equal to 2.83 times
Stockdale's book value (as of the last day of the calendar month next preceding
the month of the closing). Based upon 1,212,265 shares outstanding with an
estimated book value of $8.26 per share as of December 31, 1998 (the projected
measurement date assuming a closing in January, 1999), and subject to certain
adjustments for additional loan losses and merger expenses to be born by
Stockdale pursuant to the Merger Agreement (see "THE MERGER - Calculation of the
Exchange Ratio" herein), Hovde estimated the effective price per share at
closing to be equal to $22.30. The actual value per share to be received by
Stockdale's shareholders may increase or decrease as a result of the exchange
ratio formula. Moreover, and to the extent the factors cause Stockdale to fail
to meet its earnings targets for the year ending December 31, 1998, the
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consideration to be received by Stockdale's shareholders could be materially
lower than the $22.30 per share estimate shown above.
In addition to converting shares of Stockdale's common stock into shares
of VIBC's common stock pursuant to the terms of the Merger Agreement, VIBC shall
issue substitute stock options to each optionee holding an outstanding Stockdale
stock option pursuant to VIBC's Stock Option Plan and shall retain the same
terms and vesting schedules as the Stockdale options being exchanged. As of
September 30, 1998, there were 33,000 fully vested options outstanding with an
effective strike price of $7.21 per share. Assuming an effective price of $22.30
per share, the options held by certain officers of Stockdale will have an
effective value of $497,970. Hovde estimates the total value of the VIBC
proposal, including value to be received by option holders assuming an effective
price per share of $22.30, at $27.5 million.
DISCOUNTED EARNINGS ANALYSIS
Hovde analyzed the results of a discounted earnings analysis designed to
compare the present value per share, under certain assumptions, that could be
attained if Stockdale were to remain independent through the year 2001. In
performing the analysis, Hovde estimated the future earnings per share of
Stockdale for each of the years of 1998, 1999, 2000 and 2001. The estimated
earnings per share for each year were then multiplied by an estimated
price-to-earnings multiple for pooling transactions using historical earnings
per share comparables ranging from 14 times to 16 times actual or projected
earnings. The results were then discounted to a present value using a discount
rate of 13%. This analysis indicated Stockdale's future value on a stand-alone
basis ranged from $12.77 to $14.59 per share for 1998, $13.00 to $14.85 per
share for 1999, $13.23 to $15.12 per share for 2000 and $13.46 to $15.38 per
share for 2001. VIBC's offer of approximately $22.30 per share compared
favorably to the present value calculations derived in this analysis. After
giving effect to certain adjustments to ending equity more fully discussed in
the Merger Agreement, Hovde concluded that the effective price-to-book multiple
for the transaction was 2.74 times ending equity.
COMPARABLE TRANSACTION ANALYSIS
For purposes of facilitating a fair comparison to comparable
transactions, Hovde computed the effective price-to-book multiple paid to
Stockdale's shareholders of 2.83 times book value and price-to-earnings of 37.68
times earnings. Hovde then reviewed and compared these results to the thrift
merger and acquisition transactions for California and West Coast institutions
announced or closed through September 30, 1998. This analysis, which is
presented below, showed how the consideration paid to Stockdale compared to the
high, median and average pricing multiples of other West Coast thrift
transactions:
<TABLE>
<CAPTION>
Tangible Book
Deal Price/ Deal Price/ Deal Price/ Premium/Core
Book Tangible Book 4-Qtr EPS Deposits
----------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
Bank of Stockdale 274.00% 283.00% 23.8(1) 19.35
California Comparables:
High 390.67% 457.63% 22.38 42.41
Median 147.00% 147.00% 17.96 5.69
Average 202.34% 212.46% 16.56 13.87
West Coast Comparables:
High 390.67% 457.63% 22.38 42.41
Median 147.54% 147.54% 19.71 8.23
Average 195.56% 204.41% 17.09 13.48
</TABLE>
(1) Assumes earnings for the twelve month period from January 1, 1998
through December 31, 1998.
MERGER AND CONTRIBUTION ANALYSIS
Hovde analyzed the contribution of each of Stockdale and VIBC to, among
other things, total assets, net loans, loan loss allowance, total deposits and
total equity of the pro forma combined companies for the period ending June 30,
1998 and projected net income for the calendar years ending December 31, 1998
and 1999. This analysis showed, among other things, that based on pro forma
combined balance sheets for Stockdale and VIBC at June 30, 1998, Stockdale would
have contributed 21.7% of the total assets, 21.5% of the total net loans, 23.5%
of the total loan loss provisions, 22.0% of the total deposits and 18.3% of the
total equity. The pro forma projected income statement for the periods ending
December 31, 1998 and 1999 showed that Stockdale would contribute 16.6% and
17.4%, respectively, of the net income of the combined companies. Based on an
exchange ratio as defined in the Merger Agreement and assuming a 100% stock
transaction, holders of Stockdale's common stock
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would own approximately 21.0% (assuming a trading price for VIBC of $11.875 per
share, as defined in the Merger Agreement) of the combined companies based on
common shares outstanding at June 30, 1998.
FINANCIAL ADVISORY FEE
In consideration for the rendering of financial advice, initiating the
Merger and for the preparation and delivery of its opinion, Stockdale has agreed
to pay Hovde a fee equal to 2.5% of the total deal value. In addition, Stockdale
has agreed to reimburse Hovde for all reasonable out-of-pocket expenses
associated with this transaction.
IN FURNISHING ITS OPINION, HOVDE DOES NOT ADMIT THAT IT IS AN EXPERT
WITH RESPECT TO THE REGISTRATION STATEMENT OF WHICH THIS JOINT PROXY STATEMENT -
PROSPECTUS IS PART WITHIN THE MEANING OF THE TERM "EXPERTS" AS USED IN THE
SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED
THEREUNDER, OR THAT ITS OPINION CONSTITUTES A REPORT OR VALUATION WITHIN THE
MEANING OF SECTION 11 OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE RULES
AND REGULATIONS PROMULGATED THEREUNDER, AND STATEMENTS TO THAT EFFECT ARE
INCLUDED IN THE TEXT OF HOVDE'S WRITTEN OPINION. HOVDE'S OPINION IS ADDRESSED TO
STOCKDALE'S BOARD OF DIRECTORS, COVERS ONLY THE FAIRNESS OF THE CONSIDERATION TO
BE RECEIVED BY HOLDERS OF STOCKDALE'S COMMON STOCK FROM A FINANCIAL POINT OF
VIEW AS OF THE DATE OF THE OPINION, AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY HOLDER OF STOCKDALE'S COMMON STOCK AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT
STOCKDALE'S SPECIAL MEETING.
RELATIONSHIP BETWEEN HOVDE AND STOCKDALE
In connection with the Merger transaction, Hovde Financial, Inc.,
serving in its capacity as Stockdale's financial advisor, facilitated the Merger
between VIBC and Stockdale and rendered a fairness opinion to Stockdale's Board
of Directors. Hovde Financial, Inc. is a nationally recognized investment
banking firm that specializes in providing investment banking and financial
advisory services to commercial banks and thrift institutions. Hovde's
principals are experienced in the independent valuation of securities in
connection with negotiated underwritings, subscription and community offerings,
private placements, merger and acquisition transactions and recapitalizations.
In early 1997, Stockdale sought the services of an investment banking
firm. In March, 1997, Hovde was engaged by Stockdale to provide a wide range of
financial advisory services including the attraction of new capital, and
assistance with mergers and acquisitions. Stockdale selected Hovde as its
investment banking advisor for two reasons. First, Stockdale's management had
worked previously with a representative of Hovde and had a favorable opinion of
him. Second, Hovde has a good reputation in the banking industry and was
specifically recommended to Stockdale's management by banking executives from
other institutions.
In late 1997, Hovde and Stockdale completed a recapitalization of
Stockdale under which newly issued shares were acquired by certain officers and
directors of Stockdale and by Financial Institutions Partners, Ltd. As a result
of the Stockdale recapitalization described above, Financial Institutions
Partners, Ltd., controls 31.83% of the issued and outstanding shares of
Stockdale's common stock. Mr. Eric D. Hovde and Mr. Steven D. Hovde, each of
whom controls Hovde Financial, Inc., also control Financial Institutions
Partners, Ltd. Several officers and employees (and/or their spouses) of Hovde
Financial, Inc. also hold member interests in Financial Institutions Partners,
Ltd.
The services provided by Hovde, including the Stockdale recapitalization
described above and the rendering of the fairness opinion in connection with the
Merger, were provided under terms of an engagement letter between Hovde and
Stockdale. Pursuant to the terms of its engagement letter with Stockdale, Hovde
received an initial retainer of $10,000, and a non-refundable definitive
agreement/fairness opinion fee of $180,412. Upon the closing of the Merger
transaction described herein, Hovde will receive a completion fee equal to 2.5%
of the value of Merger less the $180,412 definitive agreement/fairness opinion
fee previously paid by Stockdale.
The amount of consideration to be paid in the Merger was determined by
VIBC and Stockdale as a result of arm's-length negotiations between Stockdale
and VIBC. (See "THE MERGER - History of the Merger" herein.) The section
entitled "THE MERGER - Opinion of Financial Advisor," provides a detailed
summary of the process followed by Hovde in reaching its opinion regarding the
fairness of the consideration paid by VIBC to Stockdale and notes the absence of
any limitations imposed upon Hovde by Stockdale.
ACCOUNTING TREATMENT
For accounting and financial reporting purposes it is currently expected
that the Merger will be accounted for as a pooling of interests in accordance
with generally accepted accounting principles, and confirmation by VIBC's
independent accountants of the ability to use such accounting treatment is one
of the conditions to the
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consummation of the Merger. Under this method of accounting, the previously
recorded assets and liabilities and income and expenses of Stockdale and BOS
Interim Bank, F.S.B., would be carried forward on Stockdale's books at their
recorded amounts; and the previously recorded assets and liabilities and income
and expenses of VIBC would include the assets and liabilities and income and
expenses of Stockdale on a consolidated basis, as if the Merger had been closed
at the beginning of each period.
Although the Merger is expected to be accounted for as a pooling of
interests, the Merger will qualify for such treatment only if numerous
requirements are met. If the Merger does not qualify for pooling of interests
treatment, the Merger Agreement provides that VIBC and Stockdale may proceed
with the Merger under the purchase accounting method. (See "UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION" and "THE MERGER - The Merger Agreement
- - Conditions" herein.)
THE MERGER AGREEMENT
SET FORTH BELOW IS A DESCRIPTION OF CERTAIN OF THE TERMS AND CONDITIONS
OF THE MERGER AGREEMENT AND RELATED MATTERS. THIS SUMMARY IS NOT COMPLETE AND IS
QUALIFIED IN ITS ENTIRELY BY REFERENCE TO THE FULL TEXT OF THE MERGER AGREEMENT,
ATTACHED HERETO AS APPENDIX A AND INCORPORATED HEREIN BY THIS REFERENCE.
THE MERGER
The Merger Agreement was entered into by and between VIBC and Stockdale
on September 15, 1998. Pursuant to the Merger Agreement, VIBC will cause the
formation of BOS Interim Bank, F.S.B., to facilitate the Merger and at the
closing Stockdale will merge with BOS Interim Bank, F.S.B. The separate
corporate existence of BOS Interim Bank, F.S.B., will then cease and Stockdale
will continue in existence as a separate, wholly-owned subsidiary of VIBC. In
connection with the Merger, each share of Stockdale's common stock issued and
outstanding (other than shares with respect to which dissenters' rights have
been perfected) will be converted into shares of VIBC's common stock. Each share
of VIBC's common stock outstanding immediately prior to the closing will remain
outstanding after the Merger as one share of VIBC's common stock (other than
shares with respect to which dissenters' rights have been perfected). (See "THE
MERGER - Calculation of the Exchange Ratio" and "THE MERGER - Dissenters'
Rights" herein.)
It is expected that the Merger will be a tax-free reorganization for
federal tax purposes and accounted for as a pooling interests. (See "THE MERGER
- - Certain Federal Income Tax Consequences" and "THE MERGER Accounting Treatment"
herein.)
THE CLOSING
The Merger will be effective at the date and time a short form merger
agreement (or articles of combination) (in the form attached to the Merger
Agreement as Exhibit "A") is endorsed by the OTS. At the closing to be held just
prior thereto, the parties will exchange various documents, including officers'
certificates and legal opinions, as required by the Merger Agreement. The Merger
Agreement provides that the timing for the closing and the consummation of the
Merger shall be mutually agreed upon by the parties and shall be held within 15
days after the last to occur of:
o all conditions to the consummation of the Merger being satisfied
or waived;
o the receipt of all regulatory approvals; and
o the expiration of all applicable waiting periods in connection
with the regulatory approvals.
Based upon the timing for the two Special Meetings and the present and
anticipated timing of the regulatory approvals, it is presently anticipated that
the Merger will be closed on or about January ___, 1999. No assurance can be
given, however, with respect to the occurrence or timing of the pre-conditions
to the closing.
EXCHANGE OF STOCK CERTIFICATES
Prior to the closing, VIBC will deposit with U.S. Stock Transfer
Corporation, its transfer agent, certificates representing its common stock to
be exchanged for Stockdale's common stock, plus an estimated amount of cash to
be paid in exchange for fractional interests. As soon as practicable after the
closing, each of Stockdale's shareholders will be sent transmittal documents for
use in exchanging their certificates for the appropriate number of shares of
VIBC's common stock, plus cash in lieu of fractional interests. Upon receipt of
the completed transmittal documents and certificates for Stockdale's common
stock, VIBC and U.S. Stock Transfer
33
<PAGE> 38
Corporation will cause to be issued to Stockdale's shareholders VIBC's
certificates and checks representing the fractional interests. No interest will
be paid on any cash to be paid in lieu of fractional interests or in respect of
dividends or distributions which any of Stockdale's shareholder will be entitled
to receive upon such delivery.
STOCKDALE'S SHAREHOLDERS SHOULD NOT FORWARD THEIR CERTIFICATES TO U.S.
STOCK TRANSFER CORPORATION UNTIL THEY HAVE RECEIVED THE TRANSMITTAL DOCUMENTS.
STOCKDALE'S SHAREHOLDERS SHOULD NOT RETURN THEIR CERTIFICATES WITH THE ENCLOSED
PROXY.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties about each institution for the benefit of the other. The
representations and warranties relate to, among other things:
o corporate organization and similar corporate matters;
o capital structure;
o authorization, execution, delivery, performance and
enforceability of the Merger Agreement and related matters;
o conflicts under charter documents, required consents or
approvals, and violations of any agreements or law;
o the accuracy of documents filed with the Securities and Exchange
Commission, the FRB and the OTS;
o absence of certain material adverse events, changes, effects or
undisclosed liabilities;
o retirement and other employee plans and matters relating to the
Employee Retirement Income Security Act of 1974, as amended;
o litigation;
o compliance with law, including environmental compliance;
o tax returns and audits;
o ownership of real property;
o absence of regulatory actions; and
o labor matters.
THE FOREGOING IS AN OUTLINE OF THE TYPES OF REPRESENTATIONS AND
WARRANTIES CONTAINED IN THE MERGER AGREEMENT. SHAREHOLDERS SHOULD CAREFULLY
REVIEW THE ENTIRE MERGER AGREEMENT, AND IN PARTICULAR ARTICLES III AND IV OF THE
MERGER AGREEMENT, WHICH CONTAIN THE DETAILED REPRESENTATIONS AND WARRANTIES OF
THE PARTIES.
CONDUCT OF BUSINESS PRIOR TO THE MERGER
The Merger Agreement provides restrictions on, and commitments with
respect to, Stockdale's and VIBC's conduct of business during the period from
the date of the Merger Agreement until the closing. Both Stockdale and VIBC have
agreed to make available their books and records for ongoing review by the other
and, in addition, Stockdale has agreed to allow a representative from VIBC to
attend the meetings of its Board of Directors and committees. Both Stockdale and
VIBC have agreed to use their best efforts to prepare and file the necessary
regulatory applications and to obtain the approvals from the various regulatory
agencies as well as to work together for the purpose of preparing this Joint
Proxy Statement - Prospectus. Further, both Stockdale and VIBC have agreed to
use their best efforts to prevent any material changes in their representations
and warranties set forth in the Merger Agreement.
In addition, Stockdale has agreed that, until the closing, subject to
certain exceptions including the prior approval of VIBC, Stockdale will not take
certain actions or otherwise conduct its business other than in the ordinary and
usual course, including but not limited to the following:
34
<PAGE> 39
o make, renew, or extend any loan if the aggregate indebtedness of
the borrower exceeds or will exceed $600,000;
o purchase any loan participation interest in excess of $200,000;
o declare or pay any cash, stock, or in-kind dividends upon its
common stock;
o amend its Charter or Bylaws;
o grant any salary increase or amend any compensation plan, except
as specifically required by the Merger Agreement;
o institute, settle or agree to settle any lawsuit with a claim in
excess of $25,000;
o change any basic policies and practices with respect to
liquidity management, cash flow planning, marketing, deposit
origination, lending, budgeting, profit and tax planning,
personnel practices, accounting, or any other material aspect of
its business or operations; or
o knowingly default in any material respect any material contract,
agreement, or commitment to which it is bound.
Until the closing, Stockdale has agreed that it will use its best
efforts to take certain actions and provide VIBC with certain reports, including
but not limited to the following:
o provide VIBC with Stockdale's monthly Board Reports; monthly New
Loan Reports, monthly Past Due Loan Reports, and monthly reports
regarding non-accrual and other problem loans;
o provide VIBC with five days' notice prior to making any loan
where the aggregate outstanding indebtedness of the borrower
exceeds $450,000 or prior to purchasing or selling any loan
participation interest;
o provide VIBC with an independent third party's profitability
analysis of Stockdale's mortgage department;
o increase loan loss reserves by $300,000 just prior to the
closing;
o cause the termination of its 1985 and 1995 Stock Option Plans;
and
o amend its Change in Control and Salary Continuation Agreements
to refine the definition of "good reason" to clarify
circumstances after the Merger pursuant to which the executive
officers would be entitled to certain compensation benefits in
the event of voluntary resignations.
VIBC has agreed to similar, but not identical restrictions and
commitments. Until the closing, subject to certain exceptions including the
prior approval of Stockdale, VIBC has agreed that it will not take certain
actions or otherwise conduct its business other than in the ordinary and usual
course, including but not limited to:
o create or incur any liabilities in excess of $1,000,000 or
having a term in excess of one year, other than in the ordinary
course of business;
o make any capital expenditures in excess of $1,000,000, except
for ordinary and necessary repairs and replacements;
o sell or otherwise dispose of any its assets or properties in
excess of $1,000,000, except in the usual and ordinary course of
business;
o institute, settle or agree to settle any lawsuit with a claim in
excess of $500,000;
o change any of its or VIB's basic policies and practices with
respect to liquidity management, cash flow planning, marketing,
deposit origination, lending, budgeting, profit and tax
planning, personnel practices, accounting, or any other material
aspect of their businesses or operations; or
o conduct its business in any manner that would violate its
Articles of Incorporation or Bylaws.
35
<PAGE> 40
Until the closing, VIBC has agreed that it will use its best efforts to
take certain actions and provide Stockdale with certain reports, including but
not limited to the following:
o provide Stockdale with financial information as reasonably
necessary to prepare regulatory applications;
o maintain its insurance coverage as presently in effect; and
o take all actions necessary to issue stock options pursuant to
VIBC's Stock Option Plan in exchange for the cancellation of all
of Stockdale's outstanding stock options, based upon the same
exchange ratio to be used in connection with the Merger.
THE FOREGOING IS A SUMMARY OF THE NEGATIVE AND AFFIRMATIVE COVENANTS OF
THE MERGER AGREEMENT. SHAREHOLDERS ARE ENCOURAGED TO REVIEW THE TERMS OF THE
MERGER AGREEMENT, INCLUDING THE SPECIFIC COVENANTS CONTAINED IN ARTICLES V AND
VI OF THE MERGER AGREEMENT.
DISCUSSIONS WITH THIRD PARTIES
The Merger Agreement provides that neither Stockdale nor VIBC shall
solicit or encourage third party proposals which would result in a merger,
exchange offer, or other form of combination and requires that if such a
proposal is received, notification must be given to the other party.
Notwithstanding the prohibition on soliciting or encouraging such proposals, the
Merger Agreement recognizes that an unsolicited third party proposal might be
received. Moreover, the Merger Agreement permits engaging in discussions or
negotiations with the third party if the proposal is determined, after
consultation with counsel and a financial advisor, to be superior, from the
shareholders' perspective to the Merger.
Notwithstanding the prohibition with respect to discussions with third
parties, VIBC is permitted to engage in discussions with third parties that will
not have a material adverse effect upon VIBC or the Merger. Thus, VIBC would not
be prohibited from entering into third party discussions to acquire another
financial institution, so long as that transaction would not materially
adversely impact VIBC or otherwise prevent the consummation of the Merger.
In the event the Merger Agreement is terminated because either VIBC or
Stockdale elects to proceed with a third party transaction, the party electing
to proceed will be obligated to pay a termination fee to the other party in the
amount of $750,000.
THE FOREGOING IS A SUMMARY OF THE PROVISIONS OF THE MERGER AGREEMENT
RELATING TO DISCUSSIONS WITH THIRD PARTIES. SHAREHOLDERS ARE ENCOURAGED TO
REVIEW THE TERMS OF THE MERGER AGREEMENT, INCLUDING THE SPECIFIC PROVISIONS
CONTAINED IN SECTIONS 5.6 AND 6.5 OF THE MERGER AGREEMENT.
EMPLOYEE BENEFITS
It is anticipated that, after consummation of the Merger, certain of the
employee benefits provided to VIBC's employees will be made available to
Stockdale's employees in lieu of or in addition to benefits presently provided
by Stockdale. For example, it is anticipated that VIBC's 401K and ESOP plans
will be made available to Stockdale's employees. Similarly, after consummation
of the Merger, all future stock option grants will be made pursuant to VIBC's
Stock Option Plan and not pursuant to Stockdale's Stock Option Plans, which will
be terminated.
In addition, all outstanding stock options pursuant to Stockdale's Stock
Option Plans will be canceled and exchanged for an equivalent amount of stock
options pursuant to VIBC's Stock Option Plan. The same exchange ratio to be used
in connection with the Merger will be applied to the conversion of the stock
options, which will be granted by VIBC for the same remaining terms and with the
same remaining vesting schedules as exist for Stockdale's outstanding stock
options.
CONDITIONS
The obligations of VIBC and Stockdale to consummate the Merger are
subject to certain mutual conditions, including but not limited to the
following:
o the approval by Stockdale's and VIBC's shareholders of the
principal terms of the Merger;
36
<PAGE> 41
o receipt of the regulatory approvals required in connection with
the Merger (the parties have agreed that the approvals must not
have unacceptable terms or conditions);
o the absence of any statute, rule, regulation, order, injunction
or decree being in effect and prohibiting the consummation of
the Merger;
o the Registration Statement having become effective and there
being issued no stop order suspending the effectiveness of the
Registration Statement and no proceedings for that purpose
initiated or threatened by the Securities and Exchange
Commission;
o the receipt and continued effectiveness of all permits and other
authorizations under state securities laws necessary to
consummate the transactions contemplated by the Merger Agreement
and to issue the shares of VIBC's common stock to be issued in
the Merger;
o receipt of a letter from the Internal Revenue Service or
Vavrinek, Trine, Day & Co., LLP, stating that in its opinion,
the Merger will be treated as a tax free reorganization for
federal tax purposes; and
o no fact, circumstance or event shall have occurred or is
reasonably likely to occur that would cause the Merger not to
qualify for pooling of interests accounting treatment.
The obligation of VIBC to consummate the Merger is also subject to the
fulfillment or waiver by VIBC of certain conditions, including but not limited
to the following:
o the representations and warranties of Stockdale being true and
correct in all material respects;
o the performance by Stockdale in all material respects of all
obligations contained in the Merger Agreement required to be
performed by Stockdale before the closing;
o the absence of an event which has had or is likely to have a
materially adverse effect on Stockdale;
o compliance with the Shareholder's Agreement by Stockdale's
principal shareholder;
o receipt of an opinion of McCormick, Barstow, Sheppard ,Wayte &
Carruth, LLP, regarding certain legal matters; and
o the resignations of Messrs. Beimler and Warlick from Stockdale's
Board of Directors and the appointment of Messrs. Foss and Kern
to Stockdale's Board of Directors.
In addition, the obligation of Stockdale to consummate the Merger is
also subject to the fulfillment or waiver by Stockdale of certain conditions,
including but not limited to the following:
o the representations and warranties of VIBC being true and
correct in all material respects;
o the performance by VIBC in all material respects of all
obligations contained in the Merger Agreement required to be
performed before the closing;
o the absence of an event which has had or is likely to have a
material adverse effect on VIBC;
o receipt of an opinion of Horgan, Rosen, Beckham & Coren, L.L.P.,
regarding certain legal matters; and
o the appointment of Mr. Hickman to VIBC's Board of Directors.
THE FOREGOING IS A SUMMARY OF THE CONDITIONS OF THE MERGER AGREEMENT.
SHAREHOLDERS ARE ENCOURAGED TO REVIEW THE TERMS OF THE MERGER AGREEMENT,
INCLUDING THE SPECIFIC PROVISIONS CONTAINED IN ARTICLES VIII, IX AND X OF THE
MERGER AGREEMENT.
TERMINATION; LIQUIDATED DAMAGES
The Merger Agreement may be terminated, and the Merger abandoned, prior
to the closing:
37
<PAGE> 42
o by the mutual agreement of VIBC and Stockdale;
o by either of VIBC or Stockdale, by written notice to the other,
in the event of: (1) a material breach by the other party of any
representation, warranty, covenant or agreement contained in the
Merger Agreement that is not cured or not curable within 30 days
after written notice of such breach is given to the party
committing such breach; (2) the Merger not having been
consummated by January 31, 1999; or (3) 30 days after any
approval of a governmental authority required to permit
consummation of the Merger or any transaction necessary to
consummate the Merger shall have been denied;
o by Stockdale or VIBC, if Stockdale's Board of Directors receives
a proposal from a third party and determines, in good faith and
based upon the written advice of a financial advisor, that the
financial terms of the proposal are superior to the Merger from
Stockdale's shareholders' perspective;
o by Stockdale if VIBC enters into a third-party transaction which
has a material adverse effect on VIBC; or
o by VIBC or Stockdale, if VIBC's Board of Directors receives a
proposal from a third party and determines, in good faith and
based upon the written advice of a financial advisor, that the
financial terms of the proposal are superior to the Merger from
VIBC's shareholders' perspective and requires termination of the
Merger.
If the Merger Agreement is terminated by VIBC or Stockdale pursuant to a
material breach of any representation, warranty, covenant or agreement by the
other that is not cured within 30 days after written notice of the breach, the
breaching party will owe the other party a termination fee equal to $150,000. In
the event that there is a termination as a result of one party being involved in
a third-party proposal under the circumstances described above, the party
involved in the third-party proposal will owe to the other party a termination
fee equal to $750,000. The payment of the aforementioned sums shall be made as
reasonable liquidated damages and not as a penalty or forfeiture.
THE FOREGOING IS A SUMMARY OF THE TERMINATION PROVISIONS OF THE MERGER
AGREEMENT. SHAREHOLDERS ARE ENCOURAGED TO REVIEW THE TERMS OF THE MERGER
AGREEMENT, INCLUDING THE SPECIFIC PROVISIONS CONTAINED IN ARTICLE XI OF THE
MERGER AGREEMENT.
EXPENSES
The Merger Agreement provides that all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
shall be paid by the party incurring such costs or expenses.
THE DIRECTOR'S AGREEMENTS
VIBC has entered into Director's Agreements with each of Stockdale's
directors who hold, in the aggregate, shares representing approximately 25.6% of
Stockdale's common stock outstanding. The Director's Agreements, in the form
attached to the Merger Agreement as Exhibit "B-1," require each of Stockdale's
directors to vote in favor of the Merger at Stockdale's Special Meeting.
Stockdale has entered into Director's Agreements with each of VIBC's
directors who hold, in the aggregate, shares representing approximately 16.8% of
VIBC's common stock outstanding. The Director's Agreements, in the form attached
to the Merger Agreement as Exhibit "B-2," require each of VIBC's directors to
vote in favor of the Merger at VIBC's Special Meeting.
Each Director's Agreement also provides that the director will not enter
into or become subject to any agreement or commitment which would restrict or in
any way impair the obligation of the director to comply with all the terms of
the Director's Agreement. In addition, each director agreed not to sell, assign,
transfer or dispose of any of his or her shares of Stockdale's common stock or
VIBC's common stock, as applicable, during the term of the Director's Agreement.
The Director's Agreements will terminate when the Merger Agreement is
terminated in accordance with its terms.
The Director's Agreements bind the actions of the directors only in
their capacity as shareholders. The
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<PAGE> 43
directors are not and could not be contractually bound to abrogate their
fiduciary duties as directors of Stockdale or VIBC. Accordingly, while the
directors are contractually bound to vote as a Stockdale or VIBC shareholder in
favor of the Merger, their fiduciary duties as directors nevertheless require
them to act in their capacity as directors in the best interests of Stockdale or
VIBC when they consider the Merger. In addition, the directors will continue to
be bound by their fiduciary duties as Stockdale's or VIBC's directors with
respect to any further decisions they may take in connection with the Merger.
SHAREHOLDER'S AGREEMENT
Financial Institutions Partners, Ltd., a Nevada limited liability
company which owns 31.8% of the outstanding shares of Stockdale's common stock,
and Mr. Eric D. Hovde, an individual, have entered into a Shareholder's
Agreement in the form attached to the Merger Agreement as Exhibit "D." The
Shareholder's Agreement provides that Financial Institutions Partners, Limited
will vote in favor of the Merger at Stockdale's Special Meeting and will cause
its two representatives on Stockdale's Board of Directors, Messrs. Beimler and
Warlick, to tender their written resignations effective as of the closing.
Financial Institutions Partners, Ltd., purchased its shares of
Stockdale's common stock in December, 1997, pursuant to a commitment letter
entered into between Stockdale and Mr. Eric D. Hovde, predecessor in interest of
Financial Institutions Partners, Ltd. Pursuant to the terms of the commitment
letter, Stockdale and Mr. Hovde agreed that Mr. Hovde or his assigns would be
entitled to participate in any future offerings by Stockdale to be able to
maintain his or its relative percentage ownership. Pursuant to the terms of the
Shareholder's Agreement, Financial Institutions Partners, Ltd., and Mr. Hovde
have waived their rights to participate in future stock offerings by Stockdale.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
THE MERGER
The following unaudited pro forma combined condensed financial
statements combines the historical consolidated condensed financial statements
of VIBC and the historical consolidated condensed financial statements of
Stockdale, giving effect to the Merger as if it had been effective on September
30, 1998, with respect to the Pro Forma Combined Condensed Balance Sheet, and as
of the beginning of the periods indicated, with respect to the Pro Forma
Combined Condensed Statements of Income. This information is presented under the
pooling of interests accounting method.
The information for the period ended September 30, 1998 is derived from
the unaudited financial statements of the companies which includes, in the
opinion of the management of the companies, all adjustments (consisting only of
normal accruals) necessary to present fairly the data for such periods. This
information should be read in conjunction with the historical consolidated
financial statements of the companies, including their respective notes thereto,
which are included or incorporated by reference into this Joint Proxy Statement-
Prospectus, and in conjunction with the combined condensed historical selected
financial data and other pro forma combined financial information, including the
notes thereto, appearing elsewhere in this Joint Proxy Statement- Prospectus.
(See "INFORMATION REGARDING VIBC - Incorporation of Certain Information by
Reference" herein.)
The effect of estimated merger and reorganization costs expected to be
incurred in connection with the Merger have been reflected in the Unaudited Pro
Forma Combined Condensed Balance Sheet; however, since the estimated costs are
nonrecurring, they have not been reflected in the Unaudited Pro Forma Combined
Condensed Statements of Income. (See Note 2 to the Unaudited Pro Forma Combined
Condensed Financial Information.) The unaudited pro forma combined condensed
financial statements do not give effect to any anticipated operating
efficiencies in conjunction with the Merger.
The Unaudited Pro Forma Combined Condensed Balance Sheet is not
necessarily indicative of the actual financial position that would have existed
had the Merger been consummated on September 30, 1998, or that may exist in the
future. The Unaudited Pro Forma Combined Condensed Statements of Income are not
necessarily indicative of the results that would have occurred had the Merger
been consummated on the dates indicated or that may be achieved in the future.
Assuming the consummation of the Merger, the actual financial position and
results of operations will differ, perhaps significantly, from the pro forma
amounts reflected herein because of a variety of factors, including changes in
values and changes in operating results between the dates of the unaudited pro
forma financial data and the date on which the Merger takes place.
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<PAGE> 44
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AT
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
VIBC AND
VIBC STOCKDALE PRO FORMA STOCKDALE
(HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS:
Cash and due from banks ..................... $ 31,363 $ 5,867 $ (992) $ 36,238
Federal funds sold .......................... 6,000 0 6,000
----------- ----------- --------- -----------
Total cash and cash equivalents ......... 37,363 5,867 (992) 42,238
Interest bearing deposits ................... 664 400 1,064
Federal Reserve Bank and Federal
Home Loan Bank stock, at cost ........... 2,306 1,045 3,351
Securities held to maturity ................. 0 1,461 1,461
Securities available for sale ............... 80,478 23,628 104,106
----------- ----------- --------- -----------
Total securities ........................ 82,784 26,134 0 108,918
Net loans ................................... 344,221 98,995 (300) 442,916
Premises and equipment ...................... 11,395 1,117 12,512
Other real estate owned ..................... 148 727 875
Other assets ................................ 14,753 4,856 190 19,799
----------- ----------- --------- -----------
Total assets ........................... $ 491,328 $ 138,096 $ (1,102) $ 628,322
=========== =========== ========= ===========
LIABILITY AND SHAREHOLDERS' EQUITY
LIABILITIES:
Non-interest bearing deposits ............... $ 121,307 $ 15,467 $ 0 $ 136,774
Interest bearing deposits ................... 320,486 108,381 428,867
----------- ----------- --------- -----------
Total deposits ......................... 441,793 123,848 0 565,641
Borrowed funds .............................. 0 3,000 3,000
Accrued interest payable and other
liabilities ............................. 5,566 1,428 6,994
----------- ----------- --------- -----------
Total liabilities ...................... 447,358 128,276 0 575,634
SHAREHOLDERS' EQUITY:
Common stock and surplus .................... 36,230 10,657 0 46,887
Retained earnings ........................... 7,281 (881) (1,102) 5,298
Unrealized net gains (losses) on investments
available for sale ..................... 458 44 502
----------- ----------- --------- -----------
Total shareholders' equity ............. 43,969 9,820 (1,102) 52,687
----------- ----------- --------- -----------
Total liabilities & shareholders' equity $ 491,328 $ 138,096 $ (1,102) $ 628,322
=========== =========== ========= ===========
Number of common shares outstanding ......... 7,804,991 1,212,265 9,984,643
Common shareholders' equity per share ....... $ 5.63 $ 8.10 $ 5.28
</TABLE>
40
<PAGE> 45
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
VIBC AND
VIBC STOCKDALE PRO FORMA STOCKDALE
(HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fees on loans ............. $ 25,534 $ 6,299 $ 31,833
Interest on interest bearing deposits in
other banks ........................ 30 156 186
Interest on investment securities ...... 3,381 1,193 4,574
Interest on federal funds sold ......... 263 0 263
------------ ------------ ------------ ------------
Total interest income ............. 29,208 7,648 36,856
INTEREST EXPENSE:
Interest expense on deposits ........... 8,647 3,876 12,523
Interest expense on borrowings ......... 367 31 398
------------ ------------ ------------ ------------
Total interest expense ............ 9,014 3,907 12,921
------------ ------------ ------------ ------------
NET INTEREST INCOME ......................... 20,194 3,741 23,935
Less: provisions for loan losses ........ 1,665 306 $ 300 2,271
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses ........ 18,529 3,435 (300) 21,664
NON-INTEREST INCOME:
Gains from loan sales .................. 378 605 983
Loan servicing income .................. 218 88 306
Service charges, commissions and fees .. 2,858 499 3,357
Securities gains ....................... 285 0 285
Other income ........................... 313 391 704
------------ ------------ ------------ ------------
Total non-interest income ......... 4,053 1,583 5,636
NON-INTEREST EXPENSE:
Salaries and benefits .................. 8,506 1,925 10,431
Occupancy, furniture and equipment ..... 3,120 491 3,611
Postage and freight .................... 149 62 211
Advertising and business development ... 1,142 155 1,297
Other real estate owned ................ 112 177 289
Professional services .................. 1,101 145 762 2,008
Telephone, stationery and supplies ..... 1,135 202 1,337
Data processing ........................ 939 128 200 1,267
Intangible asset amortization .......... 357 0 357
Other expense .......................... 1,033 832 30 1,895
------------ ------------ ------------ ------------
Total non-interest expense ........ 17,594 4,117 992 22,703
------------ ------------ ------------ ------------
Income before income taxes .................. 4,988 901 (1,292) 4,597
Income taxes ................................ 1,748 193 (190) 1,751
------------ ------------ ------------ ------------
Net income ........................ $ 3,239 $ 708 $ (1,102) $ 2,846
============ ============ ============ ============
PER SHARE INFORMATION:
Number of shares (weighted average)
Basic ............................. 7,765,359 1,212,265 9,945,011
Diluted ........................... 8,139,184 1,226,967 10,345,271
Income per share
Basic ............................. $0.42 $0.58 $0.29
Diluted ........................... $0.40 $0.58 $0.27
</TABLE>
41
<PAGE> 46
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30,1997
<TABLE>
<CAPTION>
VIBC AND
VIBC STOCKDALE STOCKDALE
(HISTORICAL) (HISTORICAL) PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fees on loans ............. $ 19,786 $ 6,119 $ 25,905
Interest on interest bearing deposits in
other banks ........................ 38 130 168
Interest on investment securities ...... 3,325 1,039 4,364
Interest on federal funds sold ......... 315 0 315
------------ ------------ ------------
Total interest income ............. 23,465 7,288 30,753
INTEREST EXPENSE:
Interest expense on deposits ........... 7,550 3,981 11,531
Interest expense on borrowings ......... 93 59 152
------------ ------------ ------------
Total interest expense ............ 7,643 4,040 11,683
------------ ------------ ------------
NET INTEREST INCOME ......................... 15,822 3,248 19,070
Less: provision for loan losses ........ 1,070 354 1,424
------------ ------------ ------------
Net interest income after
provision for loan losses ......... 14,752 2,894 17,646
NON-INTEREST INCOME:
Gains from loan sales .................. 424 417 841
Loan servicing income .................. 179 101 280
Service charges, commissions and fees .. 2,483 438 2,921
Securities gains ....................... 192 0 192
Other income ........................... 306 307 613
------------ ------------ ------------
Total non-interest income ......... 3,585 1,263 4,848
NON-INTEREST EXPENSE:
Salaries and benefits .................. 7,395 1,806 9,201
Occupancy, furniture and equipment ..... 2,479 482 2,961
Postage and freight .................... 135 66 201
Advertising and business development ... 1,045 85 1,130
Other real estate owned ................ 70 420 490
Professional services .................. 1,011 172 1,183
Telephone, stationery and supplies ..... 843 168 1,011
Data processing ........................ 772 186 958
Intangible asset amortization .......... 227 0 227
Other expense .......................... 982 686 1,668
------------ ------------ ------------
Total non-interest expense ........ 14,959 4,071 19,030
------------ ------------ ------------
Income before income taxes .................. 3,378 86 3,464
Income taxes (benefit) ...................... 1,089 (15) 1,074
------------ ------------ ------------
Net income ........................ $ 2,289 $ 101 $ 2,390
============ ============ ============
PER SHARE INFORMATION:
Number of shares (weighted average)
Basic ............................. 7,009,804 757,719 8,372,183
Diluted ........................... 7,411,700 759,880 8,777,964
Income per share
Basic ............................. $ 0.33 $ 0.13 $ 0.28
Diluted ........................... $ 0.31 $ 0.13 $ 0.27
</TABLE>
42
<PAGE> 47
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
VIBC AND
VIBC STOCKDALE STOCKDALE
(HISTORICAL) (HISTORICAL) PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fees on loans ............. $ 27,632 $ 8,054 $ 35,686
Interest on interest bearing deposits in
other banks ........................ 53 240 293
Interest on investment securities ...... 4,431 1,418 5,849
Interest on federal funds sold ......... 343 0 343
------------ ------------ ------------
Total interest income ............. 32,459 9,712 42,171
INTEREST EXPENSE:
Interest expense on deposits ........... 10,213 5,328 15,541
Interest expense on borrowings ......... 208 62 270
------------ ------------ ------------
Total interest expense ............ 10,421 5,390 15,811
------------ ------------ ------------
NET INTEREST INCOME ......................... 22,038 4,322 26,360
Less: provisions for loan losses ....... 1,850 415 2,265
------------ ------------ ------------
Net interest income after
provision for loan losses ........ 20,188 3,907 24,095
NON-INTEREST INCOME:
Gains from loan sales .................. 1,182 576 1,758
Loan servicing income .................. 240 136 376
Service charges, commissions and fees .. 3,314 599 3,913
Securities gains ....................... 551 0 551
Other income ........................... 464 430 894
------------ ------------ ------------
Total non-interest income ......... 5,751 1,741 7,492
NON-INTEREST EXPENSE:
Salaries and benefits .................. 9,800 2,417 12,217
Occupancy, furniture and equipment ..... 3,478 639 4,117
Postage and freight .................... 173 91 264
Advertising and business development ... 1,414 121 1,535
Other real estate owned ................ 23 478 501
Professional services .................. 1,403 206 1,609
Telephone, stationery and supplies ..... 1,159 236 1,395
Data processing ........................ 1,030 249 1,279
Intangible asset amortization .......... 316 0 316
Other expense .......................... 1,399 953 2,352
------------ ------------ ------------
Total non-interest expense ........ 20,195 5,390 25,585
------------ ------------ ------------
Income before income taxes .................. 5,744 258 6,002
Income taxes (benefit) ...................... 1,943 (44) 1,899
------------ ------------ ------------
Net income ........................ $ 3,801 $ 302 $ 4,103
============ ============ ============
PER SHARE INFORMATION:
Number of shares (weighted average)
Basic ............................. 7,074,698 768,926 8,457,227
Diluted ........................... 7,518,747 770,551 8,904,198
Income per share
Basic ............................. $ 0.54 $ 0.39 $ 0.49
Diluted ........................... $ 0.51 $ 0.39 $ 0.46
</TABLE>
43
<PAGE> 48
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
VIBC AND
VIBC STOCKDALE STOCKDALE
(HISTORICAL) (HISTORICAL) PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fees on loans ............. $ 21,979 $ 8,082 $ 30,061
Interest on interest bearing deposits in
other banks ........................ 21 270 291
Interest on investment securities ...... 1,975 1,333 3,308
Interest on federal funds sold ......... 287 0 287
------------ ---------- ------------
Total interest income ............. 24,261 9,685 33,946
INTEREST EXPENSE:
Interest expense on deposits ........... 6,985 5,414 12,399
Interest expense on borrowings ......... 143 216 359
------------ ---------- ------------
Total interest expense ............ 7,128 5,630 12,758
------------ ---------- ------------
NET INTEREST INCOME ......................... 17,133 4,055 21,188
Less: provisions for loan losses ....... 635 854 1,489
------------ ---------- ------------
Net interest income after
provision for loan losses ......... 16,498 3,201 19,699
NON-INTEREST INCOME:
Gains from loan sales .................. 423 509 932
Loan origination fees .................. 88 0 88
Loan servicing income .................. 235 132 367
Service charges, commissions and fees .. 1,904 547 2,451
Securities gains ....................... 49 58 107
Other income ........................... 375 283 658
------------ ---------- ------------
Total non-interest income ......... 3,075 1,529 4,604
NON-INTEREST EXPENSE:
Salaries and benefits .................. 8,192 2,298 10,490
Occupancy, furniture and equipment ..... 2,728 696 3,424
Postage and freight .................... 149 60 209
Advertising and business development ... 1,263 110 1,373
Other real estate owned ................ 157 356 513
Professional services .................. 874 282 1,156
Telephone, stationery and supplies ..... 721 197 918
Data processing ........................ 698 253 951
Other expense .......................... 968 2,176 3,144
------------ ---------- ------------
Total non-interest expense ........ 15,749 6,428 22,177
------------ ---------- ------------
Income (loss) before income taxes ........... 3,824 (1,698) 2,126
Income taxes (benefit) ...................... 1,249 (729) 520
------------ ---------- ------------
Net income (loss) ................. $ 2,575 $ (969) $ 1,606
============ ========== ============
PER SHARE INFORMATION:
Number of shares (weighted average)
Basic ............................. 6,827,596 757,719 8,189,975
Diluted ........................... 7,238,814 760,985 8,607,065
Income per share
Basic ............................. $ 0.38 $ (1.28) $ 0.20
Diluted ........................... $ 0.36 $ (1.27) $ 0.19
</TABLE>
44
<PAGE> 49
UNAUDITED PRO FORMA COMBINED CONDENSED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
VIBC AND
VIBC STOCKDALE STOCKDALE
(HISTORICAL) (HISTORICAL) PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INTEREST INCOME:
Interest and fees on loans ............. $ 19,197 $ 8,306 $ 27,503
Interest on interest bearing deposits in
other banks ........................ 0 279 279
Interest on investment securities ...... 1,887 1,575 3,462
Interest on federal funds sold ......... 691 0 691
------------ ---------- ------------
Total interest income ............. 21,776 10,160 31,936
INTEREST EXPENSE:
Interest expense on deposits ........... 5,951 5,555 11,506
Interest expense on borrowings ......... 23 614 637
------------ ---------- ------------
Total interest expense ............ 5,973 6,169 12,142
------------ ---------- ------------
NET INTEREST INCOME ......................... 15,803 3,991 19,794
Less: provisions for loan losses ....... 1,008 475 1,483
------------ ---------- ------------
Net interest income after
provision for loan losses ........ 14,795 3,516 18,311
NON-INTEREST INCOME:
Gains from loan sales .................. 179 737 916
Loan origination fees .................. 326 0 326
Loan servicing income .................. 209 124 333
Service charges, commissions and fees .. 1,511 424 1,935
Securities gains ....................... 2 149 151
Other income ........................... 292 360 652
------------ ---------- ------------
Total non-interest income ......... 2,519 1,794 4,313
NON-INTEREST EXPENSE:
Salaries and benefits .................. 7,350 2,650 10,000
Occupancy, furniture and equipment ..... 2,038 807 2,845
Postage and freight .................... 116 60 176
Advertising and business development ... 946 80 1,026
Other real estate owned ................ 0 254 254
Professional services .................. 924 290 1,214
Telephone, stationery and supplies ..... 518 232 750
Data processing ........................ 593 304 897
Other expense .......................... 964 1,623 2,587
------------ ---------- ------------
Total non-interest expense ........ 13,449 6,300 19,749
------------ ---------- ------------
Income (loss) before income taxes ........... 3,865 (990) 2,875
Income taxes (benefit) ...................... 1,440 (334) 1,106
------------ ---------- ------------
Net income (loss) ................. $ 2,425 $ (656) $ 1,769
============ ========== ============
PER SHARE INFORMATION:
Number of shares (weighted average)
Basic ............................. 6,645,737 757,719 8,008,116
Diluted ........................... 7,162,180 760,985 8,530,431
Income per share
Basic ............................. $ 0.36 $ (0.87) $ 0.22
Diluted ........................... $ 0.34 $ (0.86) $ 0.21
</TABLE>
45
<PAGE> 50
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL DATA
NOTE 1: BASIS OF PRESENTATION. Certain historical data of Stockdale have
been reclassified on a pro forma basis to conform to VIBC's classifications.
Transactions between the companies are not material in relation to the unaudited
pro forma combined financial statements, and have not been eliminated from the
pro forma combined amounts.
NOTE 2: MERGER COSTS. The unaudited pro forma combined condensed
financial data reflects VIBC's and Stockdale's management's current estimate,
for purposes of pro forma presentation, of the aggregate estimated merger costs
of $1,292,000 ($1,102,000 net of taxes for deductible expenditures) expected to
be incurred in connection with the Merger. While a portion of these costs may be
required to be recognized over time, the current estimate of these costs has
been recorded in the Unaudited Pro Forma Combined Condensed Income Statement for
September 30, 1998, in order to disclose-the aggregate effect of these
activities on VIBC's pro forma combined financial position. The estimated
aggregate costs include the following:
<TABLE>
<S> <C>
Computer conversion costs............................... $ 200,000
Investment banking fees................................. 682,000
Legal and other professional costs...................... 80,000
Printing costs.......................................... 30,000
Other costs............................................. 300,000
-----------
Total Estimated Aggregate Costs..................... $ 1,292,000
===========
</TABLE>
The foregoing cost estimates are forward-looking. The ultimate level and
timing of recognition of such costs will be based on many factors beyond the
control of VIBC or Stockdale. The type and amount of actual costs incurred could
vary materially from these estimates if future developments differ from the
underlying assumptions used by management in determining the current estimate of
these costs.
NOTE 3: COMMON SHARES OUTSTANDING. The unaudited pro forma number of
common shares outstanding, common shareholders' equity per share, number of
shares (basic and diluted) and income per share (basic and diluted) are based on
the share amounts for VIBC plus the historical share amounts for Stockdale
multiplied by the assumed exchange ratio of 1.798.
THE BRANCH ACQUISITION AND TRUST PREFERRED SECURITIES OFFERING
The following Unaudited Pro Forma Combined Balance Sheet combines the
historical consolidated condensed financial statements of VIBC, the historical
consolidated condensed financial statements of Stockdale, the historical
financial data for the Hemet branch office, and the proposed $20 million
offering of trust preferred securities giving effect to the Merger, the branch
acquisition and the offering as if they had been effective on September 30,
1998. The Merger is presented under the pooling of interests accounting method.
The branch acquisition is presented under the purchase accounting method.
This information should be read in conjunction with the historical
consolidated financial statements of the companies, including their respective
notes thereto, which are included or incorporated by reference into this Joint
Proxy Statement - Prospectus, and in conjunction with the combined condensed
historical selected financial data and other pro forma combined financial
information, including the notes thereto, appearing elsewhere in this Joint
Proxy Statement - Prospectus. (See "INFORMATION REGARDING VIBC - Incorporation
of Certain Information by Reference" herein.)
The effect of estimated merger and reorganization costs expected to be
incurred in connection with the Merger have been reflected in the Unaudited Pro
Forma Combined Condensed Balance Sheets. The Unaudited Pro Forma Combined
Condensed Balance Sheets are not necessarily indicative of the actual financial
position that would have existed had the Merger, the branch acquisition and the
offering been consummated on September 30, 1998, or that may exist in the
future.
46
<PAGE> 51
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS AT
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PENDING OFFERING AND
VIBC STOCKDALE BRANCH PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ACQUISITION ADJUSTMENTS COMBINED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS:
Cash and due from banks ....................... $ 31,363 $ 5,867 $ 200 $ (992) $ 36,438
Federal funds sold ............................ 6,000 0 1,690(1) 19,250(2) 26,940
------------ ------------ ------------ ------------ ------------
Total cash and cash equivalents ........... 37,363 5,867 1,890 18,258 63,378
Interest bearing deposits ..................... 664 400 1,064
Federal Reserve Bank and Federal
Home Loan Bank stock, at cost ............. 306 1,045 0 3,351
Securities held to maturity ................... 0 1,461 0 1,461
Securities available for sale ................. 80,478 23,628 85,000 189,106
------------ ------------ ------------ ------------ ------------
Total securities .......................... 82,784 26,134 85,000 193,918
Net loans ..................................... 344,221 98,995 16,830 (300) 459,746
Premises and equipment ........................ 11,395 1,117 30 12,542
Investments in real estate ventures ........... 0 0 0 0
Other real estate owned ....................... 148 727 0 875
Other assets .................................. 14,753 4,856 2,181(1) 940(3) 22,730
------------ ------------ ------------ ------------ ------------
Total assets ............................. $ 491,328 $ 138,096 $ 105,931 $ 18,898 $ 754,253
============ ============ ============ ============ ============
LIABILITY AND SHAREHOLDERS' EQUITY LIABILITIES:
Non-interest bearing deposits ................. $ 121,307 $ 15,467 $ 0 $ 0 $ 136,774
Interest bearing deposits ..................... 320,486 108,381 105,631 534,498
------------ ------------ ------------ ------------ ------------
Total deposits ........................... 441,793 123,848 105,631 0 671,272
Borrowed funds ................................ 0 3,000 0 3,000
Accrued interest payable and other liabilities 5,566 1,428 300 20,000(2) 27,294
------------ ------------ ------------ ------------ ------------
Total liabilities ........................ 447,358 128,276 105,931 20,000 701,565
SHAREHOLDERS' EQUITY:
Common stock and surplus ...................... 36,230 10,657 46,887
Retained earnings ............................. 7,281 (881) (1,102) 5,298
Unrealized net gains (losses) on
investments available for sale, net ........ 458 44 502
------------ ------------ ------------ ------------ ------------
Total shareholders' equity ................ 43,969 9,820 0 (1,102) 52,687
------------ ------------ ------------ ------------ ------------
Total liabilities & shareholders' equity .. $ 491,328 $ 138,096 $ 105,931 $ 18,898 $ 754,253
============ ============ ============ ============ ============
</TABLE>
- ----------
(1) The Stockdale Merger is accounted for utilizing the pooling method of
accounting and the Branch acquisition is accounted for utilizing the
purchase method of accounting. The excess cost over fair value of net
assets acquired for the Branch acquisition was assumed to have been
$1,059,000.
(2) VIBC will issue $20,000,000 in long term debt from the trust preferred
securities offering.
(3) Expenses associated with the issuance of the trust preferred securities
are assumed to total $750,000 and have been capitalized.
47
<PAGE> 52
INFORMATION REGARDING VIBC
BUSINESS OF VIBC
VIBC is a bank holding company registered under the Bank Holding Company
Act and its principal business is to serve as a holding company for its banking
subsidiary, Valley Independent Bank. VIBC was organized on November 7, 1997, as
a California corporation. VIBC became VIB's holding company on March 12, 1998.
VIB 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. VIB's main office is located at 1448 Main Street, El Centro,
California 92243. In addition, as of September 30, 1998, VIB had branch offices
in Brawley, Calexico and Holtville, in Imperial County, Blythe, Coachella,
Indio, La Quinta, Palm Desert, Palms Springs, and Thousand Palms, in Riverside
County, and Julian and Tecate in San Diego County. The Bank also operates loan
production offices in El Centro, Carlsbad, Orange, and Rancho Mirage,
California, Yuma, Arizona, and Las Vegas, Nevada. Further, VIB has applications
pending for regulatory approval to acquire the Hemet Branch office of Fremont
Investment & Loan.
VIB 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 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. VIB is an agent for
VISA(R) and MasterCard(R) credit cards, and is a merchant depository for card
holder drafts under both types of credit cards. At the present time, VIB does
not have a trust department but can provide that service through a correspondent
bank. VIB 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 a majority of its branch locations.
PENDING BRANCH ACQUISITION
On September 22, 1998 Valley Independent Bank entered into an Agreement
to Assume Liabilities and to Acquire Assets of Branch Office with Fremont
Investment & Loan. The Branch Agreement provides for the acquisition of Fremont
Investment and Loan's Hemet branch office located at 2091 West Florida Avenue,
Suite 100, Hemet, California 92545. Pursuant to the Branch Agreement, VIB will
acquire certain of the loans of the Hemet branch, will acquire the furniture and
fixtures, will assume the deposits of the Branch and will assume the lease for
the branch. The premium to be paid by VIB for the purchase is presently
anticipated to be approximately $1 million. It is anticipated that the total
deposits of the branch to be assumed by VIB, which is scheduled to close in mid
January - 1999, will be approximately $100 million. The acquisition of the Hemet
branch is subject to receipt of regulatory approvals and satisfaction of
standard terms and conditions for branch acquisitions. Applications have been
filed with the FRB and the California Department of Financial Institutions for
approval of the branch acquisition. No assurances can be given that the
regulatory authorities will approve the proposed acquisition, although, except
as discussed below, neither VIB nor VIBC have any reason to believe the
applications will not be approved on a timely basis.
Because the acquisition of the branch will result in a significant
increase in the total assets and liabilities of VIB, it is anticipated that the
regulatory approvals will be conditioned upon VIB increasing its equity capital
by at least $8.5 million and, accordingly, VIB has projected a capital increase
of at least that amount in its regulatory applications, which are currently
pending. As discussed below, VIBC is proposing to raise more than sufficient
capital through an issuance of trust preferred securities of at least $20
million which will be used to increase VIB's capital to support the proposed
branch acquisition. (See "INFORMATION REGARDING VIBC - Proposed Offering - Trust
Preferred Securities" herein.) Consummation of the branch acquisition will be
conditioned upon increasing VIB's capital.
Management of VIB viewed the opportunity to acquire the branch location
as an excellent opportunity to expand VIB's services into the San Jacinto
Valley, which is about 90 miles east of Los Angeles, 35 miles southeast of
Riverside, and 85 miles northeast of San Diego.
PROPOSED OFFERING - TRUST PREFERRED SECURITIES
VIBC is in the process of preparing offering materials for the purpose
of raising $20 million through the sale of trust preferred securities. It is
presently contemplated that the sale of the trust preferred securities will be
effected through the services of an underwriter and that the securities will be
sold on a private placement basis to institutional investors. No assurances can
be given, however, that VIBC will be successful in selling the trust preferred
securities or in otherwise raising the capital necessary to support VIB's
proposed branch acquisition.
Trust preferred securities are a hybrid form of security which is
considered debt, with the interest paid deductible for income tax purposes, but
which is considered capital for bank regulatory purposes. Typically, a new sole
purpose entity is established as a trust by the issuer, and the trust issues
preferred securities to investors. The cash received from investors is
48
<PAGE> 53
used by the trust to purchase subordinated debentures from the issuer. The
issuer, in turn, may use the cash from the sale of the subordinated debentures
to capitalize its bank subsidiary, or for other corporate purposes.
Trust preferred securities do not convert into common stock and,
therefore, the issuance of trust preferred securities will not be dilutive to
the voting interests of holders of VIBC's common stock. However, the dividends
on trust preferred securities, which accumulate, must be paid ahead of dividends
to other preferred shareholders and holders of VIBC's common stock.
CERTAIN INFORMATION REGARDING VIBC MANAGEMENT AND PRINCIPAL SHAREHOLDERS
BENEFICIAL OWNERSHIP OF STOCK
Except as set forth below, management of VIBC does not know of any
person who owns beneficially or of record, more than 5% of the VIBC's
outstanding common stock. The following table sets forth certain information as
of November ___, 1998, concerning the beneficial ownership of VIBC's common
stock by each of the directors and executive officers(1) and by all directors
and executive officers of VIBC as a group. Management is not aware of any change
in control of VIBC which has occurred since January 1, 1997, or of any
arrangement which may, at a subsequent date, result in a change in control of
VIBC.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NUMBER OF SHARES SUBJECT TO VESTED OF CLASS
OF COMMON STOCK STOCK OPTIONS AND BENEFICIALLY
NAME AND TITLE BENEFICIALLY OWNED(2) OUTSTANDING WARRANTS(3) OWNED(3)
- -------------- --------------------- ----------------------- ------------
<S> <C> <C> <C>
JACK BRITTAIN, JR., ...................... 20,382(4) 3,240 .30%
Executive Vice President, VIB
CHARLES ELLIS, ........................... 22,069 26,033 .61%
Director
R. STEPHEN ELLISON, ...................... 242,269(5) 34,807 3.49%
Director
RICHARD D. FOSS, ......................... 98,298(6) 39,497 1.73%
Chairman of the Board of Directors
HARRY G. GOODING, III, ................... 12,371(7) 4,104 .21%
Executive Vice President and
Chief Financial Officer
DENNIS L. KERN,(8) ....................... 387,649(5)(9) 126,383 6.41%
Director, President and
Chief Executive Officer
EDWARD MCGREW, ........................... 35,558 34,860 .89%
Director
RONALD A. (RUSTY) PEDERSEN,(10) 553,799(5) 18,473 7.23%
Vice Chairman of the Board
MARTIN E. PLOURD, ........................ 19,086(11) 13,430 .41%
Executive Vice President, VIB
JOHN L. SKINNER, ......................... 59,783 24,015 1.06%
Director
THOMAS TOPUZES, .......................... 24,692(12) 10,956 .45%
Executive Vice President, VIB
ALICE HELEN LOWERY WESTERFIELD,(13) 325,450 18,388 4.35%
Vice Chairman of the Board
</TABLE>
49
<PAGE> 54
<TABLE>
<S> <C> <C> <C>
ALL DIRECTORS AND EXECUTIVE .............. 1,372,254(5) 354,186 20.93%
OFFICERS AS A GROUP (12 in number)
</TABLE>
- ----------
(1) With respect to VIBC, the term "executive officer" means the President
and Chief Executive Officer and the Executive Vice President and Chief
Financial Officer. VIBC's Chairman of the Board, Vice Chairmen of the
Board, and Secretary are not deemed to be executive officers of VIBC.
However, VIB's Executive Vice President and Chief Administrative
Officer, Executive Vice President and Chief Credit Officer, and
Executive Vice President and Branch Administrator are also considered
executive officers of VIBC.
(2) Includes shares beneficially owned, directly and indirectly, together
with associates, except for shares subject to vested stock options and
outstanding Warrants. Also includes shares held as trustee and held by
or as custodian for minor children. Unless otherwise noted, all shares
are held as community property under California law or with sole
investment and voting power.
(3) Shares subject to options held by directors or executive officers that
were exercisable within 60 days after November ___, 1998 ("vested") and
all outstanding Warrants held by directors or executive officers are
treated as issued and outstanding for the purpose of computing the
percent of the class owned by such person but not for the purpose of
computing the percent of class owned by any other person.
(4) Includes 1,902 shares allocated to Mr. Brittain pursuant to the 401(k)
Plan and 4,122 shares in the ESOP.
(5) Includes 214,576 shares held as trustee of the ESOP. The trustees have
voting rights over these shares to the extent not exercised by the
ESOP's participants. These shares are included for each of Messrs.
Ellison, Kern and Pedersen, the trustees, and are included once for the
category "All Directors and Executive Officers as a Group."
(6) Includes 11,313 shares held in trust for the benefit of Mr. Foss.
(7) Includes 1,960 shares allocated to Mr. Gooding pursuant to the 401(k)
Plan and 3,308 shares in the ESOP.
(8) Mr. Kern's business address is 1498 Main Street, El Centro, California
92243.
(9) Includes 8,881 shares allocated to Mr. Kern pursuant to the 401(k) Plan
and 6,957 shares in the ESOP.
(10) Mr. Pedersen's business address is 330 West Aten Road, Imperial,
California 92251.
(11) Includes 364 shares allocated to Mr. Plourd pursuant to the 401(k) Plan
and 3,788 shares in the ESOP.
(12) Includes 2,875 shares allocated to Mr. Topuzes pursuant to the 401(k)
Plan and 4,585 shares in the ESOP.
(13) Ms. Westerfield's address is 82-257 Bliss, Indio, California 92201.
DIRECTORS
Article V(a) of VIBC's Articles of Incorporation provide for a range of
six to ten directors and permit the exact number of directors to be fixed by
board or shareholder action. The Board of Directors has fixed the number of
directors at eight. Article VIII(b) of VIBC's Articles of Incorporation provide
that when the number of directors has been fixed at six or more, but less than
nine, the Board of Directors shall be classified into two classes with each
class serving for staggered two-year terms.
The persons named below, all of whom are currently members of VIBC's
Board of Directors, were elected at VIBC's 1998 Annual Meeting of Shareholders
to serve until the 1999 or the 2000 Annual Meetings of Shareholders and until
their successors are elected and have qualified. At the 1998 Annual Meeting of
Shareholders VIBC's shareholders first implemented the classification of VIBC's
Board of Directors. Hereafter, so long as VIBC has six or more but less than
nine directors, the directors will serve two-year, staggered terms. If the Board
of Directors is expanded to nine or more, as contemplated by the Merger
Agreement, the directors will be divided into three classes serving staggered
three-year terms.
None of the directors or executive officers of VIBC were selected
pursuant to any arrangement or understanding, other than with the directors and
executive officers of VIBC, acting within their capacities as such. There are no
family relationships between the directors and executive officers of VIBC and
none of the directors or executive officers of VIBC serve as directors of any
other company which has a class of securities registered under, or which is
subject to the periodic reporting requirements of, the Securities Exchange Act
of 1934 or any investment company registered under the Investment Company Act of
1940.
50
<PAGE> 55
The following table sets forth the names and certain information as of
November ____, 1998, concerning the directors of VIBC:
<TABLE>
<CAPTION>
YEAR FIRST YEAR FIRST
ELECTED OR ELECTED OR
BUSINESS EXPERIENCE APPOINTED CURRENT APPOINTED
DURING THE PAST DIRECTOR TERM DIRECTOR
NAME AND TITLE AGE FIVE YEARS OF VIBC EXPIRES OF VIB
- -------------- --- ---------------------------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
CHARLES ELLIS, 71 President, Coachella Valley 1997 2000 1995
Director Insurance Service, Inc.
R. STEPHEN ELLISON, 49 President, Jordan/Central 1997 2000 1990
Director Implement (Machinery)
RICHARD D. FOSS, 58 President, Foss Account- 1997 1999 1980
Chairman of the tancy Corporation,
Board of Directors Certified Public Accountants
DENNIS L. KERN, 58 President and Chief 1997 1999 1983
Director, President Executive Officer,
and Chief Executive Valley Independent Bank
Officer(1)
EDWARD MCGREW, 60 Owner-Operator of MAGCO 1997 2000 1983
Director (general farming and
cattle feeding)
RONALD A. (RUSTY) PEDERSEN, 64 Owner, Imperial Pre-Mix 1997 1999 1983
Vice Chairman of the Co. (cattle feed supplement
Board of Directors manufacturing)
JOHN L. SKINNER, 68 Owner, T.C. Worthy 1997 2000 1990
Director Cash & Carry
ALICE HELEN LOWERY 69 Retired; Regional Customer 1997 1999 1992
WESTERFIELD, Relations Officer, Valley
Vice Chairman of the Independent Bank (1993 to
Board of Directors 1997); previously Chairman,
President and Chief Executive
Officer, The First National
Bank in Coachella
</TABLE>
- ----------
(1) This person is an executive officer of VIBC.
EXECUTIVE OFFICERS
The following table sets forth the names and certain information as of
November ___, 1998, concerning the executive officers of VIBC, except Mr. Kern,
who is a director and included in the table set forth above. Messrs. Brittain,
Plourd and Topuzes are officers of VIB and are considered to be executive
officers of VIBC.
51
<PAGE> 56
<TABLE>
<CAPTION>
TERM
TITLE WITH TITLE WITH BUSINESS EXPERIENCE OF OFFICE
NAME VIBC VIB AGE DURING THE PAST FIVE YEARS WITH VIB
- ---- ------------ ------------- --- -------------------------- --------
<S> <C> <C> <C> <C> <C>
JACK BRITTAIN, JR. N/A Executive Vice 50 Chief Credit Officer, Valley Since 1988
President and Independent Bank
Chief Credit
Officer
HARRY G. GOODING, III Executive Vice Executive Vice 51 Chief Financial Officer, Since 1991
President and President and Valley Independent Bank
Chief Financial Chief Financial
Officer Officer
MARTIN E. PLOURD N/A Executive Vice 40 Branch Administrator, Since 1986
President and Valley Independent Bank
Branch
Administrator
THOMAS TOPUZES N/A Executive Vice 51 Chief Administrative Since 1991
President and Officer, Valley Independent
Chief Bank
Administrative
Officer
</TABLE>
SIGNIFICANT EMPLOYEE
The following table sets forth the name and certain information as of
November ____, 1998, concerning the significant employee of VIB who is not
deemed an executive officer of VIB or VIBC.
<TABLE>
TERM
TITLE WITH TITLE WITH BUSINESS EXPERIENCE OF OFFICE
NAME VIBC VIB AGE DURING THE PAST FIVE YEARS WITH VIB
- ---- ----------- ------------- --- --------------------------- --------
<S> <C> <C> <C> <C> <C>
JANICE STEWART GRADY N/A Senior Vice 45 Human Resources Director, Since 1989
President and Valley Independent Bank
Human Resources
Director
</TABLE>
LITIGATION
As of the date of this Prospectus - Joint Proxy Statement, VIBC is not
aware of any litigation pending or threatened to which VIBC or VIB is a party
the outcome of which is likely to have a material adverse effect on VIBC.
AVAILABLE INFORMATION
VIBC is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance therewith,
VIBC files reports, proxy statements and other information with the Securities
and Exchange Commission (the "SEC"). The reports, proxy statements and other
information filed by VIBC with the SEC may be inspected and copied at the Public
Reference Room of the SEC located at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the SEC's regional offices at 7 World Trade Center, New York, New
York 10048, and Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661, at prescribed rates. Such material may also be accessed electronically by
means of the SEC's home page on the Internet at http://www.sec.gov.
Shares of VIBC's common stock are designated for quotation on the Nasdaq
National Market under the symbol "VIBC." Exchange Act reports filed by VIBC can
be inspected at the offices of the National Association of Securities Dealers,
Inc., Reports Section, 1735 K Street, N.W., Washington, D.C. 20006. VIBC became
a reporting company as of March 19, 1998. Prior thereto, VIBC's predecessor
corporation (now its wholly-owned subsidiary), Valley Independent Bank, filed
reports, proxy statements, and other information with the Federal Deposit
Insurance Corporation.
52
<PAGE> 57
VIBC has filed with the SEC a Registration Statement on Form S-4
(including exhibits thereto, the "Registration Statement") pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), covering the shares
of VIBC's common stock issuable in the Merger. This Joint Proxy
Statement-Prospectus does not contain all the information set forth in the
Registration Statement. Any additional information may be obtained from the
SEC's principal office in Washington, D.C. Statements contained in this Joint
Proxy Statement-Prospectus as to the contents of any contract or other document
referred to herein are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Joint Proxy Statement-Prospectus incorporates by reference
documents not included herein. Documents relating to VIBC, excluding exhibits
unless specifically incorporated herein, are available without charge upon
request to Mr. Harry G. Gooding, III, Executive Vice President and Chief
Financial Officer, 1498 Main Street, El Centro, California 92243. Telephone
requests may be directed to Mr. Harry G. Gooding, III at (760) 337-3255.
The following documents filed with the SEC by VIBC are incorporated
herein by reference:
(a) VIBC's Registration Statement on Form 8-A dated March 19, 1998;
(b) VIBC's Annual Report on Form 10-K for the year ended December
31, 1997;
(c) VIBC's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1998, June 30, 1998, and September 30, 1998; and
(d) VIBC's Current Reports on Form 8-K dated March 19, 1998, May 1,
1998, and September 29, 1998.
Such incorporation by reference shall not be deemed to incorporate by
reference the information referred to in Item 402(a)(8) of SEC's Regulation S-K.
All documents and reports filed by VIBC pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior
to VIBC's Special Meeting and Stockdale's Special Meeting shall be deemed to be
incorporated herein by reference and to be a part hereof from the date of such
filing and any statement contained herein or in a document incorporated or
deemed to be incorporated herein by reference shall be deemed to be modified or
superseded for purposes hereof to the extent that a statement contained herein
or in any other subsequently filed document that also is, or is deemed to be,
incorporated herein by reference, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed to constitute a
part hereof, except as so modified or superseded.
The documents and reports filed by VIBC with the SEC may be read and
copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy statements, and other information
regarding issuers that file electronically with the SEC, including VIBC. The
SEC's Internet site is http://www.sec.gov. VIBC's Internet site is
http://www.vibcorp.com.
53
<PAGE> 58
INFORMATION REGARDING STOCKDALE
BUSINESS OF STOCKDALE
Stockdale is a federal stock savings bank, chartered by the Office of
Thrift Supervision (the "OTS") on June 27, 1991. Stockdale was initially
incorporated on February 26, 1985, as Stockdale Savings and Loan Association, a
California state-chartered savings and loan association and began operations on
that date. Effective June 27, 1991, Stockdale converted to a federal stock
savings bank and currently operates under a federal charter as Bank of
Stockdale, F.S.B. Stockdale is a member of the Federal Home Loan Bank ("FHLB")
of San Francisco, which is one of twelve regional banks making up the Federal
Home Loan Bank System. Stockdale's deposits are insured up to the applicable
limits by the Savings Association Insurance Fund of the FDIC. Stockdale's
principal executive office is located at 5151 Stockdale Highway, Bakersfield,
California 93309, and its telephone number is (805) 833-9292. As of September
30, 1998, Stockdale had branch offices located at 3990 Gosford Road,
Bakersfield, California 93309, and 2700 Mount Vernon Avenue, Bakersfield,
California 93306. In addition, Stockdale has a loan production office in Fresno,
California. Services include those traditionally offered by community banks,
such as checking and saving accounts and real estate and home improvement loans.
The vast majority of Stockdale's loans are direct loans made to individuals,
professionals, and small and medium sized businesses within Stockdale's
marketing area.
Stockdale's principal sources of income are interest received on real
estate and other loans, and income derived from the sale of loans. To a lesser
extent, Stockdale earns income from investments, from fees received in
connection with the servicing of loans and consumer banking activities. Its
principal expenses are interest paid on deposits and other borrowings, and
administrative and other operating expenses. The sources of funds for lending
activities are deposit acquisitions, borrowings, loan sales and repayments.
Stockdale's primary use of funds is the origination of real estate loans and
loans to small businesses.
Stockdale's results of operations depend upon the local real estate
market and the interest rate environment, both of which impact the demand for
loans. Interest rates also impact the difference between interest earned on
loans and investments, and the interest paid on deposits and borrowings. Other
significant influences on Stockdale's operations, and on the operations of
thrifts generally include general economic conditions, the related monetary and
fiscal policies of the federal government and the policies of the various
regulatory authorities.
Stockdale is subject to examination and comprehensive regulation by the
OTS and the FDIC. Stockdale is further subject to regulations of the Board of
Governors of the Federal Reserve System (the "FRB") governing reserves required
to be maintained against deposits and certain other matters.
CERTAIN INFORMATION REGARDING STOCKDALE MANAGEMENT AND PRINCIPAL SHAREHOLDERS
BENEFICIAL OWNERSHIP OF COMMON STOCK
Principal Shareholders. Stockdale's management knows of no person,
group, corporation, or other entity which owns beneficially, directly or
indirectly, more than five percent (5%) of the outstanding shares of Stockdale's
common stock as of the record date, November ____, 1998 (1,212,265 shares
outstanding), other than as set forth below:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNERS BENEFICIAL OWNERSHIP OF CLASS
------------------- -------------------- --------
<S> <C> <C>
Financial Institution Partners, Ltd. 385,865 31.83%
1629 Colonial Parkway
Inverness, IL 60067
Ed L. Hickman 67,6751 5.48%(1)
5151 Stockdale Highway
Bakersfield, CA 93309
</TABLE>
Financial Institution Partners, Ltd. acquired the shares listed above as
beneficially owned in December, 1997, pursuant to a Commitment Letter entered
into between its predecessor and one of its principals, Mr. Eric D. Hovde, on
the one hand, and Stockdale, on the other, dated July 1, 1997 and amended July
17 and September 29, 1997 (the "Commitment Letter"). The shares were purchased
from Stockdale out of its authorized and previously unissued
- --------
(1) Includes 22,000 shares which Mr. Hickman has the right to acquire
pursuant to the exercise of options granted under Stockdale's 1985 Stock
Option Plan.
54
<PAGE> 59
common stock for $6.60 per share in cash. Stockdale paid Hovde Financial, Inc.,
of which Mr. Hovde is also a principal, a consulting fee of $11,961.75 in
connection with the issuance of the shares to Financial Institution Partners,
Ltd.
The Commitment Letter provides that Financial Institution Partners, Ltd.
may designate two representatives to serve on Stockdale's Board of Directors
from the date it acquires the shares through the first annual meeting of
shareholders after that date. As permitted by Stockdale's Bylaws, the Board of
Directors increased the number of its members from 12 to 14 and appointed
Messrs. Jeffrey W. Warlick and Irving R. Beimler to fill the vacancies so
created as the designees of Financial Institution Partners, Ltd. They began
serving as new members of the Board of Directors on February 18, 1998. Mr.
Warlick has been appointed to a two year term expiring in 2001 and Mr. Beimler
has been appointed to a one year term expiring in 1999.
At the same time Financial Institutions Partners, Ltd. purchased the
362,431 shares of Common Stock in December, 1997, six members of Stockdale's
Board of Directors (or entities of which they are beneficial owners) and one
other person purchased an aggregate of 92,115 newly issued shares of Stockdale's
common stock. They each paid $6.60 per share in cash.
Beneficial Ownership of Common Stock by Directors and Officers. The
following table sets forth as of November ___, 1998, the number of shares of
Stockdale's common stock beneficially owned, directly and indirectly, by
Stockdale's directors and executive officers(2), and by all directors and
executive officers of Stockdale, as a group. Management is not aware of any
change in control of Stockdale which has occurred since January 1, 1997, or any
arrangement which may, at a subsequent date, result in a change in control of
Stockdale except for the Merger. The information contained herein has been
obtained from Stockdale's records or furnished directly by the individual or
entity to Stockdale.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF CLASS
OF COMMON STOCK BENEFICIALLY
NAME AND TITLE(2) BENEFICIALLY OWNED(3) OWNED
- ----------------- --------------------- ----------------
<S> <C> <C>
JIM BANDUCCI, 7,500 .62%
Director
IRVING R. BEIMLER, 385,865(4) 31.83%
Director
JOHN BROCK, JR., 6,600 .54%
Director
DWIGHT E. BYRUM, 36,220(5) 2.99%
Director
FRED H. CARLISLE, JR., 38,000(6) 3.13%
Director
JAMES F. DANDY, 21,747(7) 1.79%
Director
</TABLE>
- --------
(2) With respect to Stockdale, the term "executive officer" means the President
and Chief Executive Officer, Executive Vice President and Chief Financial
Officer, Executive Vice President and Chief Loan Officer, and Senior Vice
President and Commercial Loan Officer. Stockdale's Chairman of the Board,
Secretary, and other Vice Presidents are not deemed to be executive officers.
(3) Unless otherwise indicated, each person has sole voting and investment power
over the stock shown as beneficially owned, subject to community property laws
where applicable.
(4) Mr. Beimler and Mr. Warlick are representatives of Financial
Institution Partners, Ltd. and all of the shares shown are owned of record by
Financial Institution Partners, Ltd. These shares are included for each of
Messrs. Beimler and Warlick and are included once for the category "All
Directors and Executive Officers as a Group."
(5) 31,500 of which are owned by Bakersfield Pipe and Supply Pension Plan, of
which Mr. Byrum is a trustee.
(6) 11,000 of which are owned by S.A. Camp Companies, of which Mr. Carlisle is
Secretary/Treasurer.
(7) 21,747 of which are owned by the J.L. Dandy & Co Employee Profit Sharing
Plan & Trust of which Mr. Dandy is a trustee.
55
<PAGE> 60
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF CLASS
OF COMMON STOCK BENEFICIALLY
NAME AND TITLE(2) BENEFICIALLY OWNED(3) OWNED
- ----------------- --------------------- ----------------
<S> <C> <C>
EARLE J. GIBBONS, 39,000(8) 3.22%
Director
ED L. HICKMAN, 67,675(9) 5.48%
Director, President and
Chief Executive Officer
BRUCE C. JAY, 2,720 .22%
Executive Vice President
and Chief Financial Officer
THOMAS S. KELLY, 34,249 2.83%
Chairman of the Board of Directors
THOMAS J. PHILLIPS, 16,500 1.36%
Director
RICK L. ROPER, 11,000(10) .90%
Executive Vice President and
Chief Loan Officer
KEN SORENSON, 22,000(11) 1.81%
Director
RONALD L. SCHEIDT, 0 N/A
Senior Vice President and
Commercial Loan Officer
MARVIN E. STEINERT, 36,000 2.97%
Director
JEFFERY W. WARLICK, 385,865(4) 31.83%
Director
RICHARD P. WILSON, 16,389(12) 1.35%
Director
ALL DIRECTORS AND EXECUTIVE OFFICERS 741,465 61.16%
AS A GROUP (17 in number)
</TABLE>
DIRECTORS
Stockdale's Bylaws provide that the authorized number of directors shall
be 14. Stockdale's Board of Directors is divided into 3 classes, with staggered
terms of 3 years per class, so that approximately one-third of Stockdale's Board
of Directors is elected each year by Stockdale's shareholders. The following
table sets forth the names and certain information as of November ___, 1998,
concerning Stockdale's directors. Officers serve at the pleasure of Stockdale's
Board of Directors. None of the directors or executive officers of Stockdale
were selected
- --------
(8) 22,000 of which are owned by Regional Mortgage Co. Which is partially
owned by a trust of which Mr. Gibbons is a trustee. Also includes 6,600
shares which are owned by River West, a partnership of which Mr. Gibbons
is a partner.
(9) Includes 22,000 shares of which Mr. Hickman has an unexpired vested
stock option pursuant to Stockdale's 1985 Stock Option Plan.
(10) Includes 11,000 shares of which Mr. Roper has an unexpired vested stock
option pursuant to Stockdale's 1985 Stock Option Plan.
(11) 5,500 of which are in Mr. Sorenson's individual retirement account held
by A.G. Edwards, Inc.
(12) 7,476 of which are owned by the Wilson, Schultz & Paves Insurance
Agency, Inc. 401(k) Profit Sharing Trust of which Mr. Wilson is a
trustee.
56
<PAGE> 61
pursuant to any arrangement or understanding, other than with the directors and
executive officers of Stockdale acting within their capacities as such. Except
as noted below, there are no family relationships between the directors and
executive officers of Stockdale. None of the directors or executive officers
serve as directors of any company which has a class of securities registered
under, or which are subject to the periodic reporting requirements of the
Securities Exchange Act of 1934 or any investment company registered under the
Investment Company Act of 1940.
<TABLE>
<CAPTION>
Year First
Elected or
Appointed Current
Business Experience Director of Term
Name and Title Age During the Past Five Years Stockdale Expires
- -------------- --- -------------------------- ----------- -------
<S> <C> <C> <C> <C>
JIM BANDUCCI, 68 Farmer; Real Estate 1983 2000
Director
IRVING R. BEIMLER, 52 Consultant, Senior Vice President of Hovde 1998 1999
Director Capital; formerly Executive Vice President of
Riggs Bank (1994-1995) and Executive Vice
President of Fleet Bank of New York (1993)
JOHN BROCK, JR., 50 Real Estate Development; Vice President, 1983 2000
Director Gregory D. Bynum & Associates; formerly
President, Malcolm Brock Company
DWIGHT E. BYRUM, 69 President, Bakersfield Pipe & Supply 1990 1999
Director
FRED H. CARLISLE, JR., 62 Agricultural and Real Estate Development; 1983 2000
Director Secretary, Treasurer, S.A. Camp Companies
JAMES F. DANDY, 64 Residential Construction; Owner and President, 1987 1998
Director J.L. Dandy and Co.
EARLE J. GIBBONS, 68 Real Estate and Construction; Vice President, 1983 1998
Director Elmer F. Karpe, Inc.
ED L. HICKMAN,(1) 60 President, Chief Executive Officer, Bank of 1988 1999
Director, President and Stockdale
Chief Executive Officer
THOMAS S. KELLY, 66 Real Estate Investment and Management; Chief 1983 2000
Chairman of the Board Executive Officer, Thomas Kelly Associates
of Directors
THOMAS J. PHILLIPS, 72 Certified Public Accountant; previously 1983 1999
Director Managing Partner with Daniells, Phillips,
Vaughan & Bock
KEN SORENSON, 60 Architect; President, KSA Group Architects 1983 1998
Director
MARVIN E. STEINERT, 76 Real Estate Development; Owner, Steinert 1995 1998
Director Investments
JEFFERY W. WARLICK, 49 Investment Banker to financial institutions, 1998 2000
Director Financial Advisor
RICHARD P. WILSON, 60 President and Insurance Agent, Wilson Schultz 1995 1998
Director and Paves Insurance Agency
</TABLE>
- ----------
(1) THIS PERSON IS AN EXECUTIVE OFFICER OF STOCKDALE.
57
<PAGE> 62
EXECUTIVE OFFICERS
The following tables sets forth the names and certain information as of
November ___, 1998, concerning the executive officers of Stockdale, except Mr.
Hickman, who is a director and included in the table set forth above:
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE TERM OF OFFICE
NAME TITLE AGE DURING THE PAST FIVE YEARS WITH STOCKDALE
- ----- ----- --- -------------------------- --------------
<S> <C> <C> <C> <C>
BRUCE C. JAY Executive Vice President 47 Executive Vice President and Chief 1984 to present
and Chief Financial Financial Officer of Bank of
Officer Stockdale
RICK L. ROPER Executive Vice President 45 Executive Vice Present and Chief 1989 to present
and Chief Loan Officer Loan Officer of Bank of Stockdale
RONALD L. SCHEIDT Senior Vice President/ 59 Senior Vice President/ Commercial 1995 to present
Commercial Loan Loan Officer of Bank of Stockdale
Officer since 1995. Executive Administrator
and Marketing Director, Dowling,
Magarian, Aaron & Heyman, 1992-
1995, President and Chief Operating
Officer, Community First Bank,
1984-1992.
</TABLE>
SUMMARY COMPENSATION
The following table sets forth a summary of annual and long-term
compensation for services in all capacities to Stockdale for the President and
Chief Executive Officer, the only executive officer of Stockdale whose aggregate
cash compensation exceeded $100,000:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION(2)
- ----------------- ---- ------ ----- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
ED L. HICKMAN 1997 $150,000 $0 $0 0 $0
President and Chief 1996 $150,000 $0 $0 0 $0
Executive Officer 1995 $150,000 $0 $0 0 $0
</TABLE>
STOCK OPTIONS
Stockdale's 1985 Stock Option Plan, which has expired, had options for
33,000 shares outstanding on November ___, 1998. Stockdale's 1995 Stock Option
Plan provides for the issuance of up to 100,000 shares, of which no options were
outstanding on November ___, 1998, leaving 100,000 shares available for future
grants. No stock options were granted by Stockdale during 1997.
The following table sets forth certain information regarding stock
options exercised during 1997 and outstanding stock options held by Messrs.
Hickman, Jay, Roper and Scheidt:
- --------
(1) Perquisites paid to an executive officer which total less than the
lesser of $50,000 or 10% of salary and bonus are omitted.
(2) Under the provisions of a salary continuation plan executed in February,
1994, Mr. Hickman will receive $50,000 per year for 15 years beginning
at age 65 in return for continued satisfactory performance by Mr.
Hickman at Stockdale until age 65. Mr. Hickman is entitled to 12 months'
salary if there is a change in control of Stockdale and if he is
terminated without cause or a change in responsibilities occurs.
58
<PAGE> 63
<TABLE>
<CAPTION>
Value of Unexercised in
Number of Unexercised the Money Options
Number of Options at December 31, 1997 at December 31, 1997
Shares ----------------------------- -------------------------------
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ED L. HICKMAN 0 N/A 22,000 0 $0 N/A
BRUCE C. JAY 0 N/A 0 0 N/A N/A
RICK L. ROPER 0 N/A 11,000 0 $6,820 N/A
RONALD L. SCHEIDT 0 N/A 0 0 N/A N/A
</TABLE>
EMPLOYMENT AGREEMENTS
Stockdale has no written employment agreements with any of its
employees.
Salary Continuation Plan for Executive Officers. To provide an incentive
to retain key executives, in February, 1994, Stockdale adopted a Salary
Continuation Plan ("SCP") with its executive officers, Messrs. Hickman, Jay,
Roper, and Scheidt. Under the SCP, Stockdale agrees to pay the executive
additional benefits at retirement in return for continued current satisfactory
performance by the executive. The maximum benefit to each executive is a payment
of $50,000 per year for 15 years beginning at age 65. The SCP is embodied in a
written agreement between Stockdale and the executives.
The SCP is an unfunded plan, which means that the executives have no
rights under the agreement beyond those of a general creditor of Stockdale, and
there are no specific assets set aside by Stockdale in connection with the
establishment of the Plan. The SCP is not an employment contract and, if the
covered executive leaves Stockdale's employ, either voluntarily or
involuntarily, the agreement terminates and the executive receives no immediate
benefits, but may be vested in certain amounts payable on termination of
employment or beginning at age 65 at the discretion of the Stockdale Board.
Additionally, the executives' beneficiaries are entitled to certain benefits
under the plan in the event the executive dies while employed by Stockdale.
Stockdale paid an aggregate single premium of $860,000 to purchase life
insurance policies on each executive included in the SCP to fund the death
benefit. Stockdale owns each policy and earns a rate of return on the invested
premium which is reflected by an increase to the cash value of each policy.
The accounting rules concerning deferred compensation plans, including
salary continuation plans, require that Stockdale accrue sufficient expenses so
that the present value of the benefits to be paid to the executive at retirement
is reflected as a liability on Stockdale's books by the time of retirement. The
accrual for 1997 was approximately $52,000. Management believes this expense is
partially offset by the higher earnings on the insurance premium investment,
which are non-taxable if certain conditions are met, than the earnings on
taxable investments made in the ordinary course of business.
Change in Control Agreements with Executive Officers. In March, 1996,
Stockdale entered into an agreement with each of its executive officers, Messrs.
Hickman, Jay, Roper, and Scheidt, that provides certain severance benefits in
the event that a change in control of Stockdale occurs. Under these agreements,
each such executive officer shall be entitled to 12 months salary from the date
of termination following a change in control. This severance payment is
triggered if the executive terminates his employment for "good reason" or if the
executive's employment is terminated without "cause," in either case within 24
months following a change in control.
DIRECTORS' COMPENSATION
The Board of Directors of Stockdale has held a total 15 meetings during
the first nine months of 1998. All of the persons who were directors of
Stockdale during 1997 attended at least 75% of the aggregate of (1) the total
number of Board of Directors meetings of Stockdale and (2) the total number of
meetings held by all committees of the Board of Directors of Stockdale on which
he served during the year.
Directors of Stockdale received $7,200 per director for Board and
Committee meetings during 1997, except the Chairman of the Board who received
$10,800. Directors' fees for 1998 are estimated to be $7,200 per director,
except for Mr. Kelly, Chairman of the Board, whose fees are estimated to be
$10,800. President/Chief Executive Officer Hickman receives no directors' fees.
59
<PAGE> 64
In February, 1994, Stockdale established a deferred compensation plan
for the directors. The plan provides for deferral, at the election of each
director, of up to 100% of annual compensation from Stockdale. The deferral
program commences at the time the director elects to participate and continues
for a period of ten years. At the end of the ten year program, the deferred
compensation, including accrued interest, is paid to the director in equal
annual payments over a ten year period. If the director terminates his
directorship during the ten year plan period, for reasons other than death, all
amounts deferred, including accrued interest, will be paid at the time of
termination or pursuant to the deferral at the discretion of the Stockdale
Board. In the event of death while a member of the Board of Directors, the
director's beneficiary will receive an amount that would have been paid to the
director had he remained in the program for the ten year period. Stockdale paid
an aggregate single premium of $1,007,050 to purchase life insurance policies on
each director participating in the Plan to fund the death benefit. Stockdale
owns the policies and earns a rate of return on the invested premiums which is
reflected by an increase to the cash value of the policy. Management believes
that the premium investment, after consideration of the non-taxable nature of
earnings on certain insurance investments, produces a higher return than other
taxable investments made in the normal course of business. Therefore, the net
cost of this deferred compensation program to Stockdale is believed to be
minimal. President/Chief Executive Officer Hickman does not participate in this
deferred compensation plan.
Proposal to Change Existing Salary Continuation and Deferred
Compensation. Stockdale is working with a benefit consultant group to revise
existing salary continuation and deferred compensation plans for officers and
directors of Stockdale. The proposed concept is to change such non-qualified
plans from "defined benefit" plans to "defined contribution" plans; reducing the
risk and future expense to Stockdale. Stockdale anticipates finalizing these
changes by December 1, 1998.
EMPLOYEE BENEFIT PLANS
401(k) Plan. Effective January 1, 1991, Stockdale adopted a Cash or
Deferred Profit Sharing Plan (the "401(k) Plan") organized under Section 401(k)
of the Internal Revenue Code. All employees of Stockdale who have completed one
year of service are eligible to participate in this 401(k) Plan. Under the terms
of the 401(k) Plan, participants may elect to make contributions to the 401(k)
Plan of up to 10% of their pre-tax compensation and Stockdale will match 25% of
the first 6% of participating employees' compensation contributed to the 401(k)
Plan. Participants are automatically vested 100% in all employee contributions.
Participants may direct investment of their contributions to the 401(k) Plan in
any of several authorized investment vehicles.
Cafeteria Plan. Effective March 1, 1992, Stockdale adopted a Flexible
Benefit Plan (the "Cafeteria Plan") intended to qualify for exclusion from
income under Internal Revenue Code Section 125. All employees of Stockdale are
eligible to participate in the Cafeteria Plan upon the first day of the month
following 30 days of employment. Under the terms of the Cafeteria Plan employees
may obtain the following benefits: Group medical insurance, vision care
insurance, disability income - short term, cancer insurance, accidental death
and dismemberment insurance, group dental insurance, group term life insurance,
disability income - long term, intensive care insurance, accident insurance,
hospital indemnity insurance, medical care expense reimbursement, dependent care
expense reimbursement.
CERTAIN TRANSACTIONS
Some of the directors, officers and principal shareholders of Stockdale,
and the businesses with which they are associated, were customers of, and had
banking transactions with Stockdale in the ordinary course of Stockdale's
business during 1997. All loans and commitments to lend included in such
transactions were made in compliance with applicable laws and on substantially
the same terms, including interest rates, collateral and repayment terms, as
those prevailing at the time for comparable transactions with other persons of
similar credit worthiness and, in the opinion of management of Stockdale, did
not involve more than a normal risk of collectability or present other
unfavorable features. As of December 31, 1997 the aggregate principal amount of
extensions of credit to directors and executive officers and related interests
was $1,334,856 which represents approximately 14.8% of Stockdale's shareholders'
equity as of that date.
Stockdale leases its main office located at 5151 Stockdale Highway,
Bakersfield, California, from Stockdale Partners, a general partnership
comprised of six of Stockdale's directors. Prior to entering into the lease,
Stockdale, pursuant to applicable law and regulations, obtained consent from the
OTS, stating, in part, that the lease was fair and in the best interests of
Stockdale. The lease was approved by Stockdale's shareholders at the Annual
Meeting held on April 24, 1991. During 1997 and 1996, Stockdale paid $130,028
and $147,313, respectively, in rent to Stockdale Partners.
LITIGATION
As of the date of this Prospectus - Joint Proxy Statement, Stockdale is
not aware of any litigation pending or threatened to which it is a party the
outcome of which is likely to have a material adverse effect on Stockdale.
60
<PAGE> 65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the increase or
decrease of certain items in the statements of income as compared to the prior
periods:
STATEMENTS OF INCOME COMPARISON
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE YEAR ENDED DECEMBER 31,
ENDED SEPTEMBER 30, -----------------------------------------------------------------------------
1998 VERSUS 1997 1997 VERSUS 1996 1996 VERSUS 1995 1995 VERSUS 1994
----------------------- ----------------------- ----------------------- -----------------------
AMOUNT OF PERCENT OF AMOUNT OF PERCENT OF AMOUNT OF PERCENT OF AMOUNT OF PERCENT OF
INCREASE INCREASE INCREASE INCREASE INCREASE INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE) (DECREASE) (DECREASE) (DECREASE (DECREASE) (DECREASE)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income ..... $ 360 4.94% $ 27 0.28% $(475) -4.68% $ 783 8.35%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest expense..... (133) -3.29% (240) -4.26% (539) - 8.74 1,232 24.95%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income........ 493 15.18% 267 6.58% 64 1.60% (449) -10.11%
Provision (credit) for
loan losses.............. (48) -13.56% (439) -51.41% 379 79.79% 473 23,650.00%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision (credit) for
loan losses.............. 541 18.69% 706 22.06% (315) -8.96% (922) -20.78%
Non interest income ....... 320 25.34% 212 13.87% (265) -14.77% (181) -9.16%
Non interest expense ...... 46 1.13% (1,038) -16.15% 128 2.03% (272) -4.14%
Income taxes .............. 208 -1,386.67% 685 93.96% (395) -118.26% (352) -1,955.56%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income................. $ 607 600.99% $ 1,271 131.17% $(313) -47.71% ($ 479) -270.62%
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
61
<PAGE> 66
NET INTEREST INCOME AND NET INTEREST MARGIN
Stockdale's earnings depend largely upon the difference between the
income received from its loan portfolio and investment securities and the
interest paid on its liabilities, including interest paid on deposits. This
difference is "net interest income." The net interest income, when expressed as
a percentage of average total interest-earning assets, is referred to as the net
yield on interest-earning assets. Stockdale's net interest income is affected by
the change in the level and the mix of interest-earning assets and
interest-bearing liabilities, referred to as volume changes. Stockdale's net
yield on interest-earning assets is also affected by changes in the yields
earned on assets and rates paid on liabilities, referred to as rate changes.
Interest rates charged on Stockdale's loans are affected principally by the
demand for such loans, the supply of money available for lending purposes and
competitive factors. These factors are in turn affected by general economic
conditions and other factors beyond Stockdale's control, such as federal
economic policies, the general supply of money in the economy, legislative tax
policies, governmental budgetary matters, and the actions of the Federal Reserve
Board.
Net interest income for the nine months ended September 30, 1998 was
$3.7 million, an increase of $493,000 or 15% from $3.2 million for the same
period of 1997. This increase was primarily due to the volume of
interest-earning assets increasing more rapidly than the volume of
interest-bearing liabilities. Average interest-earning assets increased $7.5
million or 6.4%, while average interest-bearing liabilities decreased $1.2
million or 1.1%. The average yield on interest-earning assets was 8.15%, down 12
basis points from the average yield of 8.27% in the first nine months of 1997.
Similarly, the rates paid on deposits declined 11 basis points to 4.86% for the
first nine months of 1998. As a result, the net yield on interest-earning assets
increased from 3.69% for the first nine months of 1997 to 3.99% for the first
nine months of 1998. This increase was primarily attributable to the increase in
the average balance of non-interest bearing demand deposit accounts which
reduced the total rate paid on liabilities and a decrease in non-performing
loans which increased the yield on loans.
For 1997, net interest income was $4.3 million, an increase of $267,000
or 6.6% from $4.1 million for 1996. This increase was primarily attributable to
the increase in the average balance of non-interest bearing demand deposit
accounts which allowed Stockdale to reduce interest-bearing liabilities by $4.0
million, or 3.5%, and a decrease in non-performing assets which increased the
yield on assets. Average interest-earning assets increased by .2% from $117.9
million for 1996 to $118.1 million for 1997. The net yield on interest-earning
assets increased slightly from 8.21% in 1996 to 8.22% in 1997.
The following table presents the average amounts outstanding for the
major categories of Stockdale's interest-earning assets and interest-bearing
liabilities, the average interest rates earned or paid thereon, and the net
yield on average interest earning assets for the periods indicated:
62
<PAGE> 67
AVERAGE BALANCES AND INTEREST RATES
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------------
AVERAGE INTEREST AVERAGE INTEREST
AVERAGE YIELD OR EARNED AVERAGE YIELD OR EARNED
BALANCE(1) RATE PAID(2) OR PAID(2) BALANCE(1) RATE PAID(2) OR PAID(2)
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Cash in banks .............................. $ 6,121 3.40% $ 156 $ 4,739 3.66% $ 130
Investment securities....................... 25,141 6.33% 1,193 20,740 6.68% 1,039
Loans, net.................................. 93,783 8.96% 6,299 92,018 8.87% 6,119
--------- --------- --------- --------- --------- ---------
Total interest earning assets: $ 125,045 8.15% 7,648 $ 117,497 8.27% 7,288
INTEREST BEARING LIABILITIES:
Deposits:
Money market and NOW .................. $ 22,609 2.38% 403 $ 21,354 2.52% 403
Time deposits.......................... 83,867 5.52% 3,473 85,816 5.56% 3,578
--------- --------- --------- --------- --------- ---------
Total deposits:..................... 106,476 4.85% 3,876 107,170 4.95% 3,981
Other borrowings......................... 668 6.19% 31 1,150 6.84% 59
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities: $ 107,144 4.86% 3,907 $ 108,320 4.97% 4,040
--------- ---------
Net interest income......................... $ 3,741 $ 3,248
========= =========
Net yield on interest earning assets........ 3.99% 3.69%
========= =========
</TABLE>
- --------
(1) The average balance of non-accruing loans is immaterial as a percentage
of total loans and as such has been included in net loans.
(2) Yields and amounts earned on loans include loan fees of $164,654 and
$169,062 for the nine months ended September 30, 1998 and 1997,
respectively.
63
<PAGE> 68
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996
-------------------------------------- -------------------------------------
AVERAGE INTEREST AVERAGE INTEREST
AVERAGE YIELD OR EARNED AVERAGE YIELD OR EARNED
BALANCE(1) RATE PAID(2) OR PAID(2) BALANCE(1) RATE PAID(2) OR PAID(2)
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Cash in banks.............................. $ 6,281 3.81% $ 239 $ 4,757 5.68% $ 270
Investment securities...................... 21,069 6.74% 1,419 21,771 6.12% 1,333
Loans, net................................. 90,777 8.87% 8,054 91,415 8.84% 8,082
--------- --------- --------- --------- --------- ---------
Total interest earning assets: $ 118,127 8.22% 9,712 $ 117,943 8.21% 9,685
INTEREST BEARING LIABILITIES:
Deposits:
Money market and NOW ................. $ 21,476 2.38% 512 $ 20,124 2.05% 413
Time deposits......................... 85,759 5.62% 4,816 88,106 5.68% 5,001
--------- --------- --------- --------- --------- ---------
Total deposits: ................. 107,235 4.97% 5,328 108,230 5.00% 5,414
Other borrowings ....................... 862 7.19% 62 3,842 5.62% 216
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities: $ 108,097 4.99% 5,390 $ 112,072 5.02% 5,630
--------- ---------
Net interest income ....................... $ 4,322 $ 4,055
========= =========
Net yield on interest earning assets....... 3.66% 3.44%
========= =========
</TABLE>
- --------
(1) The average balance of non-accruing loans is immaterial as a percentage
of total loans and as such has been included in net loans.
(2) Yields and amounts earned on loans include loan fees of $184,668 and
$323,209 for the years ended December 31, 1997 and 1996, respectively.
64
<PAGE> 69
The following tables set forth an analysis of the changes in interest
income and interest expense. The total change is shown in the column designated
"Net Change" and is allocated to the change attributable to variations in volume
and the change attributable to variations in interest rate. Changes due to both
volume and rate changes have been allocated between the volume and rate
categories in proportion to the relationship of the changes due solely to the
changes in volume and the changes due solely to changes in rate.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------
INCREASE (DECREASE)
DUE TO CHANGE IN:
-----------------
INTEREST EARNING ASSETS: VOLUME RATE NET CHANGE
----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash in banks ......................... $ 38 ($ 12) $ 26
Investment securities ................. 220 (66) 154
Loans, net ............................ 117 63 180
----- ----- -----
Total interest-earning assets ....... 376 (16) 360
INTEREST BEARING LIABILITIES:
Deposits:
Money market and NOW ................ 24 (24) 0
Time deposits ....................... (81) (24) (105)
Other borrowings ...................... (25) (3) (28)
----- ----- -----
Total interest bearing liabilities.. (82) (51) (133)
----- ----- -----
Net interest income ............. $ 458 $ 35 $ 493
===== ===== =====
</TABLE>
65
<PAGE> 70
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
COMPARED TO THE YEAR ENDED
DECEMBER 31, 1996
-----------------
INCREASE (DECREASE)
DUE TO CHANGE IN:
-----------------
NET
VOLUME RATE CHANGE
----- ----- -----
(DOLLARS IN THOUSANDS)
INTEREST EARNING ASSETS:
<S> <C> <C> <C>
Cash in banks ........................ $ 86 ($117) ($ 31)
Investment securities ................ (43) 129 86
Loans, net ........................... (56) 28 (28)
----- ----- -----
Total interest-earning assets ...... (13) 40 27
INTEREST BEARING LIABILITIES:
Deposits:
Money market and NOW ............... 28 71 99
Time deposits ...................... (133) (52) (185)
Other borrowings ..................... (168) 14 (154)
----- ----- -----
Total interest bearing liabilities.. (273) 33 (240)
----- ----- -----
Net interest income ............. $ 260 $ 7 $ 267
===== ===== =====
</TABLE>
PROVISION FOR LOAN LOSSES
Provisions for loan losses are charged to earnings to bring the total
allowance for possible loan losses to a level deemed appropriate by management
based on such factors as historical experience, the volume and type of lending
conducted by Stockdale, the amount of non-performing loans, regulatory policies,
generally accepted accounting principles, general economic conditions, and other
factors related to the collectability of loans in Stockdale's portfolio.
Each month Stockdale reviews the allowance for possible loan losses and
makes additional transfers to the allowance, as needed. During the first nine
months of 1998, Stockdale recorded a provision for loan losses of $306,000, down
13.6% from a provision of $354,000 in the same period of 1997. The provision for
loan losses was $415,000 in 1997 compared to a provision of $854,000 in 1996 and
$475,000 in 1995. The decrease in the provision during 1997 reflected the
decrease in nonperforming loans and the amount of net charge-offs during that
period. As of September 30, 1998 and December 31, 1997, Stockdale believes the
allowance for possible credit losses was adequate.
NONINTEREST INCOME AND NONINTEREST EXPENSE
Noninterest income for the nine months ended September 30, 1998 was $1.6
million or a 25.3% increase from the same period in 1997. This increase of
$320,000 was primarily the result of an increase in gains on the sale of loans
of $188,000 and an increase in service charges and fees of $61,000.
Noninterest income in 1997 was $1.7 million compared to $1.5 million in
1996 and $1.8 million in 1995. The 1997 increase of $212,000 or 13.9% was caused
primarily by an increase in gains on the sale of loans of $67,000, an increase
in fee income on deposit accounts of $52,000, and an increase in OREO income of
$75,000.
Noninterest income decreased by $265,000 or 14.8% in 1996 compared to
1995. This decrease was primarily attributable to a $319,000 decrease in gains
on the sale of loans and mortgage-backed securities, partially offset by an
increase in fee income from deposit accounts.
66
<PAGE> 71
The following table sets forth for the periods indicated the various
components of Stockdale's noninterest income:
NONINTEREST INCOME
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEARS
MONTHS ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- --------------------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Service charges ....... $ 457 $ 397 $ 540 $ 501 $ 386
Other deposit fees .... 42 41 59 46 38
Gain on sale of loans.. 605 417 576 509 737
Other ................. 479 408 566 473 633
------ ------ ------ ------ ------
Total ............ $1,583 $1,263 $1,741 $1,529 $1,794
====== ====== ====== ====== ======
</TABLE>
Noninterest expense for the nine months ended September 30, 1998 and
1997 was $4.1 million. As a percent of average assets, annualized noninterest
expense was 4.16% for the nine months ended September 30, 1998 and 4.33% for the
same period in 1997.
Noninterest expense was $5.4 million in 1997, $6.4 million in 1996, and
$6.3 million in 1995. The decrease of $1.0 million or 16.1% in 1997 was
comprised primarily of the absence of the one-time Savings Association Insurance
Fund ("SAIF") assessment of $760,000, and the absence of the one-time expense of
$400,000 in legal and settlement costs related to a law suit in 1996, offset by
an increase in salaries and employee benefits of $119,000, resulting from
routine expansion of operations. As a percent of average assets, noninterest
expense was 5.71% in 1997 and 6.69% in 1996.
Noninterest expense increased $128,000 or 2.0% in 1996 from 1995. This
increase was caused primarily by a one-time SAIF assessment of $760,000, and
$400,000 in legal and settlement costs related to a law suit, offset by a $1.1
million reduction in merger related expenses and combined operating expenses
prior to the merger of Paramount Savings Bank into Stockdale in July, 1995, and
other expenses related to other real estate owned.
67
<PAGE> 72
The following table sets forth for the periods indicated the various
components of Stockdale's noninterest expense:
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEARS
MONTHS ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- --------------------------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits ..... $1,925 $1,806 $2,417 $2,298 $2,650
Occupancy expense .................. 313 298 394 438 557
Furniture and equipment ............ 178 184 245 258 250
Advertising ........................ 155 85 121 110 80
Other real estate owned ............ 177 420 478 356 254
Professional fees .................. 145 172 206 282 290
Telephone, stationary and supplies.. 202 168 236 197 232
Data processing .................... 128 186 249 253 304
Merger costs ....................... 0 0 0 0 239
Other .............................. 894 752 1,044 2,236 1,444
------ ------ ------ ------ ------
Total ............... $4,117 $4,071 $5,390 $6,428 $6,300
====== ====== ====== ====== ======
</TABLE>
As a result of the regulations issued by FDIC on September 30, 1996, a
new rate schedule for institutions whose deposits are insured by the SAIF was
adopted. The rate Stockdale pays for insurance on its deposits increased as a
result of the regulation. (See "SUPERVISION AND REGULATION - Stockdale and
Valley Independent Bank" herein.)
INCOME TAXES
Income tax expense was $193,000 for the nine months ended September 30,
1998 and an income tax benefit of ($15,000) for the same period in 1997. Income
tax benefits were ($44,000), ($729,000) and ($334,000) for the years ended
December 31, 1997, 1996, and 1995, respectively. These amounts differ from the
amounts computed by applying the expected tax rate of approximately 41% to
pre-tax income. The principal reasons for this difference are due to: (1) tax
benefits arising from low income tax credits acquired by Stockdale in 1996; (2)
tax deductions taken by Stockdale against its base year bad debt reserve which
are not required to be recaptured for financial reporting purposes; and (3)
state limitations on utilizing net operating losses against future taxable
income.
ANALYSIS OF FINANCIAL CONDITION
The following table sets forth the average balances of each principal
category of Stockdale's assets, liabilities and capital accounts for the periods
indicated, as well as the percentage of each category to total assets for the
periods indicated:
68
<PAGE> 73
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
1998 1997
------------------------ ------------------------
AVERAGE PERCENT OF AVERAGE PERCENT OF
ASSETS: BALANCE TOTAL ASSETS BALANCE TOTAL ASSETS
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and due from banks ................ $ 6,121 4.64% $ 4,739 3.78%
Investment securities .................. 25,141 19.05% 20,740 16.55%
Loans, net ............................. 93,783 71.05% 92,018 73.43%
Premises and equipment ................. 851 0.64% 827 0.66%
Other real estate owned ................ 1,090 0.83% 1,957 1.56%
Accrued interest and other assets ...... 5,011 3.80% 5,035 4.02%
--------- --------- --------- ---------
Total assets ....................... $ 131,997 100.00% $ 125,316 100.00%
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Deposits:
Noninterest-bearing demand ............. $ 13,125 9.94% $ 9,451 7.54%
Money market and NOW ................... 22,609 17.13% 21,354 17.04%
Time deposits .......................... 83,867 63.54% 85,816 68.48%
--------- --------- --------- ---------
Total deposits ...................... 119,601 90.61% 116,621 93.06%
Other borrowings ....................... 668 0.52% 1,150 0.92%
Accrued interest and other liabilities.. 2,353 1.77% 1,892 1.51%
--------- --------- --------- ---------
Total liabilities ................... 122,622 92.90% 119,663 95.49%
SHAREHOLDERS' EQUITY:
Common Stock ........................... 10,658 8.07% 7,678 6.13%
Retained earnings ...................... (1,204) -0.91% (1,922) -1.53%
Unrecognized gains (losses) ............ (79) -0.06% (103) -0.08%
--------- --------- --------- ---------
Total shareholders' equity .......... 9,375 7.10% 5,653 4.51%
--------- --------- --------- ---------
Total liabilities and
shareholders' equity .............. $ 131,997 100.00% $ 125,316 100.00%
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996
------------------------ ------------------------
AVERAGE PERCENT OF AVERAGE PERCENT OF
ASSETS: BALANCE TOTAL ASSETS BALANCE TOTAL ASSET
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and due from banks ................ $ 6,281 4.99% $ 4,757 3.77%
Investment securities .................. 21,069 16.75% 21,771 17.27%
Loans, net ............................. 90,777 72.15% 91,415 72.52%
Premises and equipment ................. 803 0.64% 938 0.74%
Other real estate owned ................ 1,729 1.37% 1,356 1.08%
Accrued interest and other assets ...... 5,150 4.09% 5,814 4.61%
--------- --------- --------- ---------
Total assets ....................... $ 125,809 100.00% $ 126,051 100.00%
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Deposits:
Noninterest-bearing demand ............. $ 10,215 8.12% $ 6,459 5.12%
Money market and NOW ................... 21,476 17.07% 20,124 15.96%
Time deposits .......................... 85,759 68.17% 88,106 69.90%
--------- --------- --------- ---------
Total deposits ...................... 117,450 93.36% 114,689 90.99%
Other borrowings ....................... 862 0.69% 3,842 3.05%
Accrued interest and other liabilities.. 1,649 1.31% 966 0.77%
--------- --------- --------- ---------
Total liabilities ................... 119,961 95.35% 119,497 94.80%
SHAREHOLDERS' EQUITY:
Common Stock ........................... 7,751 6.16% 7,678 6.09%
Retained earnings ...................... (1,861) -1.48% (1,080) -0.86%
Unrecognized gains (losses) ............ (42) -0.03% (44) -0.03%
--------- --------- --------- ---------
Total shareholders' equity .......... 5,848 4.65% 6,554 5.20%
--------- --------- --------- ---------
Total liabilities and
shareholders' equity .............. $ 125,809 100.00% $ 126,051 100.00%
========= ========= ========= =========
</TABLE>
INVESTMENT PORTFOLIO
In order to maintain a reserve of readily saleable assets to meet
Stockdale's liquidity and loan requirements, Stockdale purchases United States
Treasury securities, mortgage backed securities and other investments. Placement
of funds in certificates of deposit with other financial institutions may be
made as alternative investments pending utilization of funds for loans or other
purposes.
Stockdale's investment policy allows it to invest in debt securities of
the U.S. Treasury and other U.S. government agencies. The current investment
portfolio includes securities issued by these agencies.
Stockdale accounts for its investment portfolio following SFAS no. 115,
"Accounting for Certain Investments in Debt and Equity Securities," which
requires the investment portfolio to be classified into securities "Available
for Sale," securities "Held to Maturity" and "Trading" securities. Securities
designated as available for sale are stated at their current market value with
stockholders' equity being adjusted for the after-tax unrecognized gain (loss)
on said securities. Investment securities classified as
69
<PAGE> 74
held to maturity are stated at cost, decreased by amortization of premium and
increased by accretion of discount, over the period to maturity of the related
securities. Stockdale does not engage in securities trading activity.
The following table summarizes the amounts and distribution of
Stockdale's investment securities held as of the dates indicated, and the
weighted average yields as of September 30, 1998:
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
SEPTEMBER 30, 1998 1997 1996
------------------------------- ------------------- -------------------
WEIGHTED
AMORTIZED MARKET AVERAGE AMORTIZED MARKET AMORTIZED MARKET
COST VALUE YIELD COST VALUE COST VALUE
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
U.S. GOVERNMENT & AGENCY SECURITIES:
Within one year ................... $ 1,000 $ 1,001 5.76% 2,001 2,001 2,002 2,002
Over five years ................... 3,216 3,210 5.41% 4,149 4,104 4,752 4,724
------- ------- ------- ------- ------- ------- -------
Total U.S. Government and Agency
Securities ........................... 4,216 4,211 5.49% 6,150 6,105 6,754 6,726
MORTGAGE-BACKED SECURITIES:
Over five years ................... 19,334 19,417 6.44% 17,100 17,073 11,949 11,810
------- ------- ------- ------- ------- ------- -------
Total mortgage-backed securities ..... 19,334 19,417 6.44% 17,100 17,073 11,949 11,810
------- ------- ------- ------- ------- ------- -------
Total available-for-sale securities .. 23,550 23,628 6.27% 23,250 23,178 18,703 18,536
------- ------- ------- ------- ------- ------- -------
HELD-TO-MATURITY SECURITIES
U.S. GOVERNMENT & AGENCY SECURITIES:
Within one year ................... 0 0 0.00% 0 0 2,000 2,001
------- ------- ------- ------- ------- ------- -------
Total U.S. Government and Agency
Securities ........................... 0 0 0.00% 0 0 2,000 2,001
------- ------- ------- ------- ------- ------- -------
MORTGAGE-BACKED SECURITIES:
One to five years ................. 38 37 6.71% 50 50 105 106
Over five years ................... 1,423 1,416 6.78% 1,609 1,608 1,645 1,642
------- ------- ------- ------- ------- ------- -------
Total mortgage-backed securities ..... 1,461 1,453 6.77% 1,659 1,658 1,750 1,748
------- ------- ------- ------- ------- ------- -------
Total held-to-maturity securities .... 1,461 1,453 6.77% 1,659 1,658 3,750 3,749
------- ------- ------- ------- ------- ------- -------
Total securities ..................... $25,011 $25,081 6.30% $24,909 $24,836 $22,453 $22,285
======= ======= ======= ======= ======= ======= =======
</TABLE>
70
<PAGE> 75
LOAN PORTFOLIO
General. The following table presents Stockdale's loan portfolio as of
the dates indicated:
LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real estate - construction ........... $ 12,292 $ 7,748 $ 7,567
Real estate - residential ............ 43,586 47,561 47,354
Real estate - other .................. 16,604 15,047 18,213
Consumer ............................. 18,395 13,048 10,766
Commercial business, non real estate.. 8,351 6,972 5,589
Other loans (Visa, check reserve,
savings loans) .................. 857 863 2,161
-------- -------- --------
Total loans ..................... 100,085 91,239 91,650
Less:
Unearned fees and discounts .......... 81 127 164
Allowance for possible loan losses ... 1,009 815 1,158
-------- -------- --------
Net loans ....................... $ 98,995 $ 90,297 $ 90,328
======== ======== ========
</TABLE>
The majority of Stockdale's loans are made to finance the purchase of
single-family homes in Kern and Fresno Counties in California. These loans are
collateralized by the related real property, and loan-to-value ratios generally
do not exceed 90%. Stockdale offers both fixed and floating rate loans.
Maturities on such loans are generally 15 or 30 years. Stockdale's policy is to
generally sell its fixed rate loan originations in the secondary market
servicing released.
Real estate construction loans are made primarily to builder-owners of
individual homes, generally in Kern and Fresno Counties. Construction loans are
collateralized by the related real property and the loan-to-value ratio
generally do not exceed 80% based on appraisals received by Stockdale.
Other real estate loans consist of land loans and loans secured by
office or industrial buildings in Kern County. Loan-to-value ratios are
restricted to 70% of appraisal value of the underlying real property.
Consumer loans primarily consist of lines of credit extended to
individuals and small businesses.
With certain exceptions, Stockdale is permitted under applicable law to
make related extensions of credit to any one borrowing entity up to 15% of
Stockdale's regulatory capital. As of September 30, 1998, these lending limits
for Stockdale were $1.6 million.
Loan Concentrations. Stockdale does not have any concentrations in its
loan portfolio by industry or group of industries, except that as of September
30, 1998, approximately 91% of Stockdale's loans were secured by real property.
Loan Portfolio Maturities and Interest Rate Sensitivity. The following
table sets forth the amounts of Stockdale's loans outstanding at December 31,
1997, which, based on the remaining scheduled repayments of principal, have the
ability to be repriced or are due in less than one year, in one to five years,
or in more than five years. In addition, the table shows the distribution of
such loans between those loans with predetermined (fixed)
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<PAGE> 76
interest rates and those with variable (floating) interest rates. Floating rates
generally fluctuate with changes in the Prime Rate, U.S. Treasury Securities
(T-Bills) rate and the Federal Home Loan Bank's Eleventh District Cost of Funds.
As of December 31, 1997, 55.3% of Stockdale's loan portfolio were floating
interest rate loans. Nonperforming loans are included in this schedule based on
nominal maturities, even though Stockdale may be unable to collect such loans at
their maturity date.
MATURITIES AND RATE SENSITIVITY OF LOANS
<TABLE>
<CAPTION>
OVER ONE
ONE YEAR BUT
YEAR OR LESS THAN OVER FIVE
LESS(1) FIVE YEARS YEARS TOTAL
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate - construction .................... $ 5,863 $ 0 $ 1,885 $ 7,748
Real estate - residential ..................... 24,443 1,580 21,538 47,561
Real estate - other ........................... 10,332 1,800 2,915 15,047
Consumer ...................................... 1,811 142 11,095 13,048
Commercial business, non real estate .......... 6,898 74 0 6,972
Other loans (Visa, check reserve,
savings loans) ........................... 863 0 0 863
------- ------- ------- -------
Total loans ........................... $50,210 $ 3,596 $37,433 $91,239
======= ======= ======= =======
Loans with predetermined (fixed)
interest rates ........................... $ 1,317 $ 2,006 $37,433 $40,758
Loans with variable (floating) interest rates.. 48,893 1,590 0 50,483
------- ------- ------- -------
Total .................................. $50,210 $ 3,596 $37,433 $91,239
======= ======= ======= =======
</TABLE>
- --------
(1) All loans due on demand, having no stated repayment schedule or
maturity, and overdrafts are reported as due in one year or less.
72
<PAGE> 77
Commitments and Standby Letters of Credit. The following table sets
forth at the dates indicated Stockdale's loan commitments. Stockdale had no
outstanding standby letters of credit:
LOAN COMMITMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
SEPTEMBER 30, 1998 1997 1996
------------------ ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan commitments........ $ 4,173 $ 3,632 $ 831
</TABLE>
Stockdale's outstanding loan commitments at September 30, 1998 and
December 31, 1997, primarily consisted of single family residential loans. Based
upon Stockdale's historical experience, the outstanding loan commitments
fluctuate throughout the year depending on loan demand.
Non-Performing Assets. interest on performing loans is accrued and taken
into income daily. Loans over 90 days past due are deemed "non-performing" and
are placed on a nonaccrual status. Interest received on nonaccrual loans is
credited to income only upon receipt.
When appropriate or necessary to protect Stockdale's interests, real
estate taken as collateral on a loan may be taken by Stockdale through
foreclosure or a deed in lieu of foreclosure. Real property acquired in this
manner by Stockdale is known as "other real estate owned" ("OREO"). The OREO is
carried on the books of Stockdale as an asset, at the lesser of Stockdale's
recorded investment or the fair value less estimated costs to sell. Stockdale
periodically revalues the OREO properties and charges other expenses for any
further write-downs. The OREO represents an additional category of
"non-performing assets."
As of September 30, 1998, as well as of December 31, 1997, Stockdale
held OREO of $752,000 and $843,000, respectively.
The following table sets forth information regarding the components of
Stockdale's non-performing assets at the dates indicated:
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
December 31,
September 30, -----------------------
1998 1997 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans ..................................... $ 535 $ 877 $1,499
Loans past due 90 days or more but not on nonaccrual.. 150 152 830
------ ------ ------
Total non-performing loans ........................... 685 1,029 2,329
OREO ................................................. 752 843 2,432
------ ------ ------
Total non-performing assets .......................... $1,437 $1,872 $4,761
====== ====== ======
Total non-performing assets to total assets .......... 1.04% 1.43% 3.76%
====== ====== ======
Troubled debt restructured ........................... $1,420 $1,757 $3,176
====== ====== ======
</TABLE>
Nonaccrued interest at September 30, 1998 totaled $43,022.
The risk of nonpayment of loans is an inherent feature of the banking
business. That risk varies with the type and purpose of the loan, the collateral
which is utilized to secure payment, and ultimately, the creditworthiness of the
borrower. In order to minimize this credit risk, Stockdale requires that all
loans be approved by at least two officers, one of whom must be an executive
officer. Larger loans must be approved by the Directors' Loan Committee or the
Board of Directors.
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<PAGE> 78
Stockdale maintains an internal asset review program which reviews loans
based on defined criteria for weaknesses which may require classification of a
loan. Loans are graded from "pass" to "loss" depending on credit quality, with
"pass" representing loans which involve a degree of risk which is not
unwarranted given the favorable aspects of the credit. Classified loans
identified in the review process are added to Stockdale's Internal Watchlist.
Upon classification, a review of collateral values, which may include obtaining
new appraisals, is conducted to determine the adequacy of loan loss reserves for
such loans.
The classified loans as of September 30, 1998, totaled $1.7 million and
are largely due to poor payment histories by the borrowers and borrower
bankruptcies. Management believes that it has adequately provided an allowance
to cover estimated losses in the loan portfolio. Significant further
deterioration in California real estate values could materially impact future
operating results, liquidity, or capital resources.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Stockdale maintains an allowance for possible loan losses to provide for
potential losses in the loan portfolio. Additions to the allowance are made by
charges to operating expenses in the form of a provision for loan losses. All
loans which are judged to be uncollectible are charged against the allowance
while any recoveries are credited to the allowance. Management conducts a
critical evaluation of the loan portfolio monthly. This evaluation includes an
assessment of the following factors: the results of Stockdale's internal loan
review, any external loan review, and any regulatory examination, loan loss
experience, estimated potential loss exposure on each credit, concentrations of
credit, value of collateral, any known impairment in the borrower's ability to
repay, and present economic conditions.
It is Stockdale's policy to annually review Stockdale's criteria for
establishing general valuation allowances. Stockdale utilizes its historical
loss performance experience, peer data, and an evaluation of the current local
economic environment as a basis for this review. For evaluation purposes, loans
are segregated by type in determining the appropriate valuation allowance rates
for unclassified, special mention and substandard classifications. Although
management believes it uses the best information available to make
determinations with respect to the allowance for possible loan losses, future
adjustments may be necessary if economic conditions differ from the assumptions
used. Management believes that the allowance for possible loan losses at
September 30, 1998 was adequate to absorb known and inherent risks in the loan
portfolio. However, there can be no assurance that economic conditions which may
adversely affect Stockdale's market area or other circumstances will not result
in increased loan losses in Stockdale's loan portfolio which might be in excess
of the allowance.
Effective January 1, 1995, Stockdale adopted Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan
("SFAS 114"), as amended by Statement of Financial Accounting Standards No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures ("SFAS 118"). Under SFAS 114, a loan is impaired when it is
"probable" that a creditor will be unable to collect all amounts due (i.e. both
principal and interest) according to the contractual terms of the loan
agreement. The measurement of impairment may be based on (i) the present value
of the expected future cash flows of the impaired loan discounted at the loans's
original effective interest rate, (ii) the observable market price of the
impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The adoption of SFAS 114, as amended by SFAS 118, had
no material impact on the Bank's financial statements as Stockdale's existing
policy of measuring loan impairment is consistent with methods prescribed in
these standards.
The following table summarizes Stockdale's loan loss experience,
transactions in the allowance for possible credit losses and certain pertinent
ratios for the periods indicated:
74
<PAGE> 79
ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
AT OR FOR THE YEAR
AT OR FOR THE ENDED DECEMBER 31,
INE MONTHS ENDED ---------------------------
SEPTEMBER 30, 1998 1997 1996
------------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCES:
Average total loans .................................... $ 93,783 $ 90,777 $ 91,415
Total loans at end of period ........................... $100,085 $ 91,239 $ 91,650
ALLOWANCE FOR POSSIBLE LOAN LOSSES:
Balance at beginning of period ......................... $ 815 $ 1,158 $ 1,182
Actual charge-offs:
Commercial .......................................... 0 0 0
Consumer ............................................ 92 167 52
Real estate ......................................... 25 611 892
-------- -------- --------
Total charge-offs ................................ 117 778 944
Less recoveries:
Commercial .......................................... 0 0 0
Consumer ............................................ 3 3 7
Real Estate ......................................... 2 17 59
-------- -------- --------
Total Recoveries ................................. 5 20 66
-------- -------- --------
Net loans charged-off .................................. 112 758 878
Provision for loan losses .............................. 306 415 854
-------- -------- --------
Balance at end of period ............................ $ 1,009 $ 815 $ 1,158
======== ======== ========
RATIOS:
Net loans charged-off to average loans ................. 0.16% 0.83% 0.96%
Net loans charged-off to total loans at end of period... 0.15% 0.83% 0.96%
Allowance for possible loan losses to average loans..... 1.08% 0.90% 1.27%
Allowance for possible loan losses to
total loans at end of period ........................ 1.01% 0.89% 1.26%
Allowance for possible loan losses to
non-performing loans at end of period ............... 147.30% 79.21% 49.72%
Net loans charged off to beginning allowance for
possible loan losses ................................ 18.32% 65.45% 74.28%
Net loans charged off to provision for loan losses...... 36.60% 182.64% 102.81%
</TABLE>
75
<PAGE> 80
The following table summarizes the allocation of the allowance for
possible loan losses by loan type and the percent of loans in each category
compared to total loans for the periods indicated:
ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
SEPTEMBER 30, 1998 1997 1996
------------------------- ------------------------- ------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real Estate - Construction... $ 28 12.28% $ 19 8.49% $ 48 8.26%
Real Estate - Residential.... 326 43.55% 249 52.13% 428 51.67
Real Estate - Other ......... 181 16.59% 195 16.49% 173 19.87%
Consumer .................... 335 19.24% 258 15.25% 102 14.10%
Commercial Business ......... 134 8.34% 67 7.64% 77 6.10%
Unallocated ................. 4 0.00% 26 0.00% 330 0.00%
------ ------ ------ ------ ------ ------
Total .................... $1,009 100.00% $ 815 100.00% $1,158 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
DEPOSITS
Deposits are Stockdale's primary source of funds. At September 30, 1998,
Stockdale had a deposit mix of 70.1% time and savings deposits, 11.9% in money
market and NOW deposits, and 11.0% in noninterest-bearing demand deposits.
Stockdale's deposits are obtained from a cross-section of the community
it serves. No material portion of Stockdale's deposits has been obtained from or
is dependent upon any one person or industry. Stockdale's business is not
seasonal in nature. Stockdale accepts deposits in excess of $100,000 from
customers. Those deposits are priced to remain competitive. As of September 30,
1998 and 1997 and December 31, 1997 and 1996, Stockdale has no brokered funds on
deposit.
Stockdale is not dependent upon funds from sources outside the United
States and has not made loans to any foreign entities. Stockdale has not made
any loans to finance leveraged buyouts or for highly leveraged transactions.
76
<PAGE> 81
The following table summarizes the distribution of average deposits and
the average rates paid (annualized for September 30, 1998) for the periods
indicated:
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
SEPTEMBER 30, 1998 1997 1996
----------------------- ----------------------- -----------------------
(DOLLARS IN THOUSANDS)
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Non interest-bearing demand deposits... $ 13,125 0.00% $ 10,215 0.00% $ 6,459 0.00%
Money market and NOW .................. 22,609 2.38% 21,476 2.38% 20,124 2.05%
Time deposits ......................... 83,867 5.52% 85,759 5.62% 88,106 5.68%
-------- -------- -------- -------- -------- --------
Total average deposits ............. $119,601 4.32% $117,450 4.54% $114,689 4.72%
======== ======== ======== ======== ======== ========
</TABLE>
The following table indicates the maturity schedule of Stockdale's
certificates of deposit of $100,000 or more as of September 30, 1998:
TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
PERCENT OF
BALANCE TOTAL
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less ................... $ 9,489 29.38%
Over three months through six months.... 6,614 20.48%
Over six months through twelve months... 10,780 33.38%
Over twelve months ..................... 5,415 16.77%
------- -------
Total ............................... $32,298 100.00%
======= =======
</TABLE>
LIQUIDITY AND LIABILITY MANAGEMENT
Liquidity management for federal savings banks requires that funds
always be available to pay anticipated deposit withdrawals and maturing
financial obligations promptly and fully in accordance with their terms. The
balance of the funds required is generally provided by payments on loans, sale
of loans, liquidation of assets and the acquisition of additional deposit
liabilities. One method federal savings banks utilize for acquiring additional
liabilities is through the acceptance of "brokered deposits" (defined to include
not only deposits received through deposit brokers, but also deposits bearing
interest in excess of 75 basis points over market rates), typically attracting
large certificates of deposit at high interest rates. Stockdale does not utilize
brokered deposits.
To meet liquidity needs, Stockdale maintains a portion of its funds in
cash deposits in other banks and available-for-sale investment securities. As of
September 30, 1998, Stockdale's liquidity ratio was 6.14%, defined as $5.9
million in cash and due from banks and $1.4 million in other liquid investments,
as a percentage of deposits plus other borrowings less passbook loans.
Liquidity can be enhanced, if necessary, through short-term borrowings.
Stockdale has a line of credit with the Federal Home Loan Bank of San Francisco
equal to 20% of assets secured by real estate loans and certain investment
securities.
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<PAGE> 82
The careful planning of asset and liability maturities and the matching
of interest rates to correspond with this maturity matching is an integral part
of the active management of an institution's net yield. To the extent maturities
of assets and liabilities do not match in a changing interest rate environment,
net yields may be affected. Even with perfectly matched repricing of assets and
liabilities, risks remain in the form of prepayment of assets, timing lags in
adjusting certain assets and liabilities that have varying sensitivities to
market interest rates and basis risk. In its overall attempt to match assets and
liabilities, management takes into account rates and maturities to be offered in
connection with its certificates of deposit and offers variable rate loans.
Stockdale has generally been able to control its exposure to changing interest
rates by maintaining primarily floating interest rate loans and a majority of
its time certificates in relatively short maturities.
The table below sets forth the interest rate sensitivity of Stockdale's
interest-earning assets and interest-bearing liabilities as of September 30,
1998, using the interest rate sensitivity gap ratio. For purposes of the
following table, an asset or liability is considered rate-sensitive within a
specified period when it can be repriced or matures within its contractual
terms:
78
<PAGE> 83
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
DUE IN DUE AFTER
WITHIN THREE TO ONE YEAR DUE AFTER
THREE TWELVE TO FIVE FIVE
MONTHS MONTHS YEARS YEARS TOTAL
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Interest-earning cash deposits ............ $ 5,270 $ 0 $ 0 $ 0 $ 5,270
Investment securities ..................... 4,380 5,328 4,404 10,977 25,089
Gross loans ............................... 28,772 22,844 3,351 45,118 100,085
-------- -------- -------- -------- --------
Total .................................. $ 38,422 $ 28,172 $ 7,755 $ 56,095 $130,444
INTEREST-BEARING LIABILITIES:
Money market and NOW deposits ............. $ 23,256 $ 0 $ 0 $ 0 $ 23,256
Time deposits ............................. 25,921 43,478 15,675 51 85,125
Other borrowings .......................... 1,000 1,000 1,000 0 3,000
-------- -------- -------- -------- --------
Total .................................. $ 50,177 $ 44,478 $ 16,675 $ 51 $111,381
Interest Rate Sensitivity Gap ............. $(11,755) $(16,306) $( 8,920) $ 56,044 $ 19,063
Cumulative Interest Rate Sensitivity Gap... $(11,755) $(28,061) $(36,981) $ 19,063
Cumulative Interest Rate Sensitivity Gap...
Ratio Based on Total Assets ............. -8.51% -20.32% -26.78% 13.80%
</TABLE>
Since interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously, a cumulative gap analysis alone cannot be
used to evaluate Stockdale's interest rate sensitivity position. To supplement
traditional gap analysis, Stockdale utilizes the interest rate risk exposure
report received from the OTS quarterly.
Stockdale's Investment Committee meets monthly to monitor Stockdale's
investments, liquidity needs and oversee its asset-liability management. In
between meetings of the Committee, Stockdale's management oversees Stockdale's
liquidity management.
CAPITAL RESOURCES
The Financial Institution Reform, Recovery and Enforcement Act of 1989
("FIRREA") requires savings and loan institutions to have a minimum regulatory
tangible capital ratio equal to 1.5% of adjusted total assets, a minimum 3.0%
core capital ratio and an 8.0% total risk-based capital ratio. At September 30,
1998, Stockdale exceeded all minimum capital requirements for tangible, core,
and risk-based capital.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") also adopted leverage requirements that apply in addition to the
risk-based capital requirements. FDICIA established five capital categories
applicable to insured institutions, each with specific regulatory consequences.
The capital categories, in declining order, are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized."
To be considered "well capitalized" under FDICIA, an institution must
generally have a core capital ratio of at least 5%, a total risk-based capital
ratio of at least 10% and a Tier I risk-based capital ratio of at least 6%.
At September 30, 1998, Stockdale's capital exceeded all minimum
regulatory requirements and Stockdale was
79
<PAGE> 84
considered to be "well capitalized" as defined in the regulations issued by the
FDIC. Stockdale's risk-based capital ratios, shown below as of September 30,
1998, have been computed accordance with regulatory accounting policies:
CAPITAL RATIOS
<TABLE>
<CAPTION>
STOCKDALE MINIMUM REQUIREMENTS
--------- --------------------
<S> <C> <C>
Leverage Ratio ..... 7.10% 3.00%
Tier 1 Risk-Based... 11.72% 4.00%
Total Risk-Based.... 12.67% 8.00%
</TABLE>
ACCOUNTING MATTERS
In June, 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("Statement
125"). Statement 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and
is to be applied prospectively. This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. The adoption of Statement 125
did not have a material impact on Stockdale's financial position, results of
operations or liquidity.
In December, 1996, the FASB issued Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125" ("Statement 127"). Statement 127 defers for one year the
effective date of certain provisions of Statement 125. Management of Stockdale
does not expect the adoption of Statement 127 to have a material impact on
Stockdale's financial position, results of operations or liquidity.
In June, 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("Statement 130"), which
establishes standards for reporting and display of comprehensive income and its
components in a full set of financial statements. Statement 130 requires the
display of comprehensive income and its components in a financial statement that
is displayed in equal prominence with other financial statements that constitute
a full set of financial statements. The Statement does not require, however, a
specific format for the financial statement but requires the display of net
income as a component of comprehensive income in that financial statement.
Enterprises may elect to display comprehensive income and its components in one
or two statements of financial performance or in a statement of changes in
equity. If an enterprise chooses to display comprehensive income in a statement
of changes in equity, that statement must be presented as part of a full set of
financial statements and not in the notes to the financial statements. Statement
130 is effective for interim and annual periods beginning after December 15,
1997. Earlier application is permitted. Comparative financial statements
provided for earlier periods are required to be reclassified to reflect
application of the provisions of the Statement. Management of Stockdale does not
anticipate that the adoption of Statement 130 will have a material impact on
Stockdale's financial position, results of operations or liquidity.
In June, 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("Statement 131"). Statement 131 is effective for fiscal years
beginning after December 15, 1997. Statement 131 establishes standards for
reporting financial and descriptive information about an enterprise's operating
segments in its financial statements and selected segment information in interim
financial reports. Restatement of comparative financial statements or financial
information for earlier periods is required upon adoption of Statement 131.
Application of Statement 131 requirements is not expected to have a material
impact on Stockdale's disclosures.
In June, 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("Statement 133"). Statement 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires than an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated
80
<PAGE> 85
forecasted transaction.
Under Statement 133, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach of determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk. This Statement is
effective for all quarters of fiscal years beginning after June 15, 1999.
Management of Stockdale does not anticipate that the adoption of Statement 133
will have a material impact on Stockdale's financial position or results of
operations.
INFLATION
The impact of inflation on a financial institution can differ
significantly from that exerted on other companies. Federal savings banks, as
financial intermediaries, have many assets and liabilities which may move in
concert with inflation both as to interest rates and value. This is especially
true for companies, such as Stockdale, with a high percentage of interest rate
sensitive assets and liabilities. It is Stockdale's policy to have the majority
of its loan portfolio be variable interest rate loans. Federal savings banks can
further reduce the impact of inflation if it can manage its interest rate
sensitivity gap. Stockdale attempts to structure its mix of financial
instruments and manage its interest rate sensitivity gap in order to minimize
the potential adverse effects of inflation or other market forces on its net
interest income and therefore its earnings and capital.
However, financial institutions are also affected by inflation's impact
on noninterest expenses, such as salaries and occupancy expenses. Through
September 30, 1998 and during 1997, and 1996, the problems of inflation remained
relatively stable, due primarily to continuous management of the money supplied
by the FRB which has maintained stable interest rates during those years.
Because of Stockdale's ratio of rate sensitive assets to rate sensitive
liabilities, Stockdale benefits in the short term from a decreasing interest
rate market and suffers in an increasing interest rate market. As such,
indirectly, the management of the money supply by the FRB to control the rate of
inflation has an impact on the earnings of Stockdale. Also, the changes in
interest rates may have a corresponding impact on the ability of borrowers to
repay loans with Stockdale.
YEAR 2000 COMPLIANCE
The "Year 2000 problem" exists because many existing computer programs
use only the last two digits to refer to a year. Therefore, these computer
programs do not properly recognize a year that begins with "20" instead of the
familiar "19." If not corrected, many computer applications could fail or create
erroneous results. The extent and potential impact of the Year 2000 problem is
not yet known, and if not timely corrected, it could affect the global economy.
The potential impact of the Year 2000 problem on the financial services
industry could be material, as virtually every aspect of the industry and
processing of transactions will be affected. Due to the size of the task facing
the financial services industry and the interdependent nature of its
transactions, Stockdale may be adversely affected by this problem, depending on
whether it and the entities with which it does business address this issue
successfully. The impact of Year 2000 issues on Stockdale will depend not only
on corrective actions that Stockdale takes, but also on the way in which Year
2000 issues are addressed by governmental agencies, businesses and other third
parties that provide services or data to, or receive services or data from
Stockdale, or whose financial condition or operational capability is important
to Stockdale.
STOCKDALE'S STATE OF READINESS. Since Stockdale engages the services of
third-party software vendors and service providers for substantially all of its
electronic data processing, a primary focus of Stockdale's Year 2000 compliance
program is to monitor the progress of its software providers toward Year 2000
compliance and to prepare and test future-date sensitive data of Stockdale in
simulated processing.
Stockdale's Year 2000 compliance program has been divided into the
following phases: (1) inventorying date- sensitive information technology and
other business systems; (2) assigning priorities to identified items and
assessing the efforts required for Year 2000 compliance of those determined to
be material to Stockdale; (3) upgrading or replacing material items that are
determined not to be Year 2000 compliant and testing material items; (4)
assessing the status of third party risks; and (5) designing and implementing
contingency and business continuation plans.
As part of the ongoing supervision of the banking industry, bank
regulatory agencies are continuously surveying Stockdale's progression and
results in each of the phases.
In the first phase of Stockdale's Year 2000 compliance program,
Stockdale conducted a thorough inventory of current information technology
systems, software, and embedded technologies that could be affected by Year 2000
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issues. Non-information technology systems such as climate control systems,
telephone systems, vault and building security equipment were also surveyed.
This stage of the Year 2000 compliance program is complete.
In phase two of Stockdale's Year 2000 compliance program, results from
the inventory were assessed and evaluated to determine the Year 2000 impact and
necessary actions required to obtain Year 2000 compliance. Stockdale divided the
results of the inventory into two principal categories - those information
technology systems that are considered by Stockdale to be "mission critical,"
and those that are not. Stockdale defines a "mission critical system" as a
system that is vital to the successful continuance of Stockdale's core business
and/or maintaining customer account integrity. Stockdale has identified 16
mission critical systems that could be affected by Year 2000 issues. To obtain
Year 2000 compliance for these mission critical systems, Stockdale has opted to
upgrade or replace all such systems that are determined not to be Year 2000
compliant.
Phase three of Stockdale's Year 2000 compliance program includes the
upgrading, replacement and/or retirement of systems and testing. Stockdale will
first address mission critical systems and then non-mission critical systems.
This phase of the Year 2000 compliance program is ongoing and is scheduled to be
completed during the first six months of 1999. For Stockdale's internal systems,
necessary actions primarily consist of upgrading computer hardware and
equipment. Such hardware upgrades should be completed by March 31, 1999.
Stockdale estimates that 90% of its third party software upgrades have been
completed. Testing of updated or new systems is ongoing and scheduled to be
completed by June 30, 1999. "Future-date" testing of upgrades and/or
replacements is being conducted along with tests to ensure integration with
Stockdale's overall data processing environment. As of September 30, 1998,
Stockdale estimates that testing of mission critical systems was 5% completed.
The fourth phase of Stockdale's Year 2000 compliance program, assessing
third-party risks, includes the process of identifying and prioritizing critical
suppliers, borrowers, and customers at the direct interface level as well as
other material relationships with third parties, including various exchanges,
clearing houses, other banks, telecommunication companies and public utilities.
This evaluation includes communicating with the third parties about their plans
and progress in addressing Year 2000 issues. Detailed evaluations of the most
critical third parties have been initiated. Evaluation of critical Stockdale
customers and borrowers is scheduled for completion on November 15, 1998.
Evaluation of other critical third parties is scheduled for completion by June
30, 1999. No problems have been identified to date. These evaluations will be
followed with contingency plans which are ongoing and scheduled to be completed
in the second quarter 1999, with follow up reviews scheduled through the
remainder of 1999.
CONTINGENCY PLAN. The final phase of Stockdale's Year 2000 compliance
program relates to contingency plans. Stockdale maintains contingency plans in
the normal course of business designed to be deployed in the event of various
potential business interruptions. These plans are in the process of being
expanded to address Year 2000-specific interruptions such as power and
telecommunication infrastructure failures, and will continue to be supplemented
if and when the results of systems integration testing identify additional
business functions at risk. Such enhancements to existing plans will likely
include remediation of systems, reinstallation of software, installation of
third-party vendor software or some combination of alternatives.
COSTS. As Stockdale relies upon third-party software vendors and service
providers for substantially all of its electronic data processing, the primary
costs of the Year 2000 compliance program have been and will continue to be the
reallocation of internal resources for testing and for the purchase of computer
hardware and, therefore, do not represent incremental expense to Stockdale.
The estimated value of internal resources allocated to the Year 2000
compliance program and the cost of computer hardware is approximately $157,000,
of which $88,000 had been expended through September 30, 1998. Stockdale's total
costs associated with required modifications to become Year 2000 compliant is
not expected to be material to its results of operations, liquidity and capital
resources.
RISKS. Failure to correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain normal business activities or
operations. Stockdale believes that, with the implementation of new or upgraded
business systems and completion of its Year 2000 compliance program as
scheduled, the possibility of significant interruptions of normal operations due
to the failure of those systems will be reduced. Stockdale, however, is
dependent upon the power and telecommunications infrastructure within the United
States, and processes large volumes of transactions through various clearing
houses and correspondent banks. The most reasonably likely worst case scenario
would be that Stockdale may experience disruption in its operations if any such
third-party supplier reported a system failure. Although Stockdale's Year 2000
compliance program will reduce the level of uncertainty about the compliance and
readiness of its material third-party providers, due to the general uncertainty
over Year 2000 readiness of such third-party suppliers, Stockdale is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact.
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Readers are cautioned that forward-looking statements contained herein
should be read in conjunction with Stockdale's disclosures below under the title
"Cautionary Statement for the Purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995."
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE SAFE HARBOR PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. Stockdale is including the
following cautionary statement to take advantage of the "Safe Harbor" provisions
of the Private Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, Stockdale. The factors identified in this
cautionary statement are important factors (but not necessarily all important
factors) that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, Stockdale.
Where any such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement, Stockdale
cautions that while it believes such assumptions or bases to be reasonable and
makes them in good faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and actual results
can be material, depending on the circumstances. In any forward-looking
statement, if Stockdale expresses an expectation or belief as to future results,
such expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will result, or be achieved or accomplished.
Taking into account the foregoing, the following are identified as
important risk factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of,
Stockdale:
The dates on which Stockdale believes its Year 2000 compliance program
will be completed are based on management's best estimates which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved, or that there will not be a delay in, or increased costs associated
with, the implementation of Stockdale's Year 2000 compliance program. Specific
factors that might cause differences between the estimates and actual results
include, but are not limited to, the availability and cost of trained personnel,
ability to locate and correct all computer related issues, timely responses to
and corrections by third-parties and suppliers, the availability to implement
interfaces between new systems and the systems not being replaced, and similar
uncertainties. Due to the general uncertainty inherent in the Year 2000 problem,
resulting in part from the uncertainty of the Year 2000 readiness of
third-parties, Stockdale cannot ensure its ability to timely and
cost-effectively resolve problems associated with the Year 2000 issue that may
affect its operations and business or expose it to third-party liability.
DESCRIPTION OF STOCKDALE COMMON STOCK
Stockdale's Charter authorizes the issuance of up to 10,000,000 shares
of common stock, $4.00 par value, of which 1,212,265 shares are issued and
outstanding as of the date of this Joint Proxy Statement - Prospectus. As of
that same date, options covering 33,000 shares of Stockdale's common stock were
outstanding pursuant to Stockdale's 1985 and 1995 Stock Option Plans. Except for
the outstanding stock options, Stockdale had no outstanding warrants,
commitments, agreements, or other rights in or with respect to the unissued
shares of Stockdale's common stock or any other securities convertible into
Stockdale's common stock.
COMPARISON OF SHAREHOLDER RIGHTS
COMPARISON OF CORPORATE STRUCTURE
VIBC is a California corporation governed by the applicable provisions
of the California General Corporation Law. Stockdale is a federal stock savings
bank governed by applicable provisions of the Homeowners' Loan Act and the
various regulations adopted by the Office of Thrift Supervision.
Consequently, there are numerous differences between the rights of the
holders of VIBC's common stock and the rights of the holders of Stockdale's
common stock with regard to electing directors, amending the articles of
incorporation (charter) or bylaws, calling special meetings of shareholders,
acting by written consent of shareholders without a meeting and indemnifying
directors.
Certain differences in the articles of incorporation (charter) and
bylaws of VIBC and Stockdale are discussed below.
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VOTING RIGHTS
Both VIBC's shareholders and Stockdale's shareholders are entitled to
one vote for each share of common stock held of record on all matters voted upon
at meetings of shareholders except that, in connection with the election of
directors, shares of Stockdale's common stock may be voted cumulatively. VIBC
has eliminated cumulative voting for the election of directors.
DIVIDENDS AND DIVIDEND POLICY
STOCKDALE
Dividends may be paid to the holders of Stockdale's common stock when
and as declared by Stockdale's Board of Directors out of funds legally available
therefore. To date, Stockdale has paid no dividend on its common stock.
An OTS regulation imposes limitations upon all capital distributions by
savings associations, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. In general,
Stockdale may not declare or pay a cash dividend on its capital stock if the
payment would cause Stockdale to fail to meet one of its regulatory capital
requirements. Stockdale must also provide the OTS with 30 days advance notice of
any proposed dividend declaration.
Under the regulation, an association that meets its capital requirements
both before and after a proposed distribution and has not been notified by the
OTS that it is in need of more than normal supervision (a "Tier 1 association")
may, after prior notice to but without the approval of the OTS, make capital
distributions during a calendar year up to the higher of:
- 100% of its net income to date during the calendar year plus the
amount that would reduce by one-half its surplus capital ratio
at the beginning of the calendar year; or
- 75% of its net income over the most recent four-quarter period.
A Tier 1 association may make capital distributions in excess of the
above amount if it gives notice to the OTS and the OTS does not object to the
distribution. At September 30, 1998, Stockdale qualified as a Tier 1 association
for purposes of the capital distribution rule.
If an association does not meet the definition of a Tier 1 association,
its ability to pay dividends is somewhat more restricted. In addition, the OTS
may prohibit a proposed capital distribution that would otherwise be permitted
if the OTS determines that the distribution would constitute an unsafe or
unsound practice.
The OTS has proposed to amend its capital distribution regulation to
conform its requirements to the OTS's prompt corrective action regulation. Under
the proposed regulation, an institution that would remain at least adequately
capitalized after making a capital distribution, and was not owned by a holding
company, would no longer be required to provide notice to the OTS prior to
making a capital distribution. "Troubled" associations and undercapitalized
associations would be allowed to make capital distributions only by filing an
application and receiving OTS approval, and such applications would be approved
under certain limited circumstances.
VIBC
Holders of VIBC's common stock are entitled to receive dividends
declared by VIBC's Board of Directors out of funds legally available therefor
under the laws of the State of California, subject to the rights of holders of
any preferred stock of VIBC that may be issued after the date hereof. VIBC has
not paid any dividends since its formation on November 7, 1997. Under California
law, VIBC is prohibited from paying dividends unless:
- its retained earnings immediately prior to the dividend payment
equals or exceeds the amount of the dividend; or
- immediately after giving effect to the dividend (1) the sum of
VIBC's assets will be at least equal to 125% of its liabilities
and, (2) the current assets of VIBC will be at least equal to
its current liabilities or, if the average of its earnings
before taxes on income and before interest expense for the two
preceding fiscal years was less than the average of its interest
expense for the two preceding fiscal years, the current assets
of VIBC would be at least equal to 125% of its current
liabilities.
The future dividend policy of VIBC is subject to the discretion of the
VIBC's Board of Directors and will depend upon a number of factors, including
earnings, financial condition, cash needs and general business conditions.
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VIBC's current dividend policy is to retain the majority of its earnings to
increase capital, and VIBC intends to maintain such policy in the foreseeable
future.
NUMBER OF DIRECTORS
Stockdale's Charter provides that the fixed number of directors is 14.
VIBC's Articles of Incorporation provides that the authorized number of
directors of VIBC shall not be less than six nor more than ten and that any
amendment to the Articles affecting the authorized number of directors must be
approved by a two-thirds majority of VIBC's shareholders. Currently, the fixed
number of directors is eight.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California General Corporation Law authorizes a court
to award, or a corporation's board of directors to grant, indemnity to
directors, officers and employees in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act. VIBC's
Articles of Incorporation provide for elimination of personal liability for
monetary damages of its directors, and VIBC's Articles of Incorporation and
Bylaws provide for indemnification of its directors, officers, employees and
other agents to the fullest extent permitted by the California General
Corporation Law. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of VIBC pursuant to the foregoing provisions, or otherwise, VIBC has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Section 317 of the California General Corporation Law applies to
Stockdale and Stockdale may indemnify each of its agents against expenses,
judgments, fines, settlements, and other amounts actually and reasonable
incurred to the fullest extent possible under the provisions of Section 317.
FAIR PRICE PROTECTION
VIBC's Articles of Incorporation contain a fair price provision not
contained in the Stockdale's Charter. The fair price provision is intended to
prevent certain of the potential inequities of business combinations to which
VIBC may be a party which are part of a "two-step" transaction. In the absence
of the fair price provision, a purchaser who acquired control of VIBC could
subsequently, by virtue of such control, force the remaining shareholders to
sell or exchange their shares at a price which might not fully reflect any
premium such purchaser may have paid in order to acquire the controlling
interest. The fair price provision is designed to ensure that VIBC's
shareholders will receive fair and equitable treatment in the event of a
business combination or other significant transaction between VIBC and a
shareholder (or business entity controlled by such shareholder) who holds a 10%
or more stock interest in VIBC at the time of the proposed transaction. The most
significant aspects of the fair price provision are:
- imposing supermajority shareholder vote or disinterested
director approval requirements in connection with certain
mergers, acquisitions and other business combinations, unless
specified minimum price and procedural requirements are
satisfied in the proposed transaction; and
- imposing a supermajority shareholder vote requirement for an
amendment, change or repeal of the fair price provision.
The fair price provision may also be characterized as an "anti-takeover"
provision as the overall effect of the fair price provision may be to discourage
any attempt to take over control of VIBC. The fair price provision makes it more
difficult for the holder of a large block of voting securities of VIBC to
acquire VIBC in a merger or other transaction which has not been approved by
VIBC's Board of Directors. Accordingly, the effect of the fair price provision
may be to deprive shareholders of an opportunity to sell their shares at a
premium over prevailing market prices as takeover bids frequently involve
purchases of stock directly from shareholders at such a premium.
SUPERVISION AND REGULATION
INTRODUCTION
Stockdale, as a federal stock savings bank whose deposits are insured by
the FDIC up to the maximum extend provided by law, is subject to regulation,
supervision, and regular examination by the Office of Thrift Supervision and the
FDIC. VIBC, as a California corporation and bank holding company under the Bank
Holding Company Act, is subject to supervision and regulation by the FRB. VIBC's
wholly-owned subsidiary, VIB, is a state-chartered banking corporation which is
also a member of the Federal Reserve System. Accordingly, VIB is subject to
regulation,
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supervision, and regular examination by the California Department of Financial
Institutions and the FRB. VIB's deposits are insured by the FDIC up to the
maximum extent provided by law. The regulations of these agencies govern most
aspects of Stockdale's, VIBC's and VIB's business, including capital ratios,
reserves against deposits, interest rates payable on certain types of deposits,
loans, investments, mergers and acquisitions, borrowings, dividends and
locations of branch offices. California law exempts all banks from usury
limitations on interest rates.
VIB CORP
VIBC is a bank holding company registered under the Bank Holding Company
Act and is subject to supervision by the FRB. As a bank holding company, VIBC is
required to file with the FRB an annual report and such other additional
information as the FRB may require. The FRB may also make examinations of VIBC
and its subsidiaries.
The Bank Holding Company 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 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.
VIBC and any subsidiaries it may organize are deemed to be affiliates of
VIB within the meaning of the Bank Holding Company Act. Pursuant thereto, loans
by VIB to affiliates, investments by VIB in affiliates' stock, and taking
affiliates' stock by VIB as collateral for loans to any borrower will be limited
to 10% of VIB's capital, in the case of any one affiliate, and will be limited
to 20% of VIB'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 Bank
Holding Company 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. VIBC and VIB 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:
- making or acquiring loans or other extensions of credit for its
own account or for the account of others;
- servicing loans and other extensions of credit for any person;
- 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;
- 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;
- subject to certain limitations, acting as an investment or
financial adviser to investment companies and other persons;
- 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;
- making equity and debt investments in corporations or projects
designed primarily to promote
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community welfare;
- providing financial, banking, or economic data
processing and data transmission services, facilities,
data bases, or providing access to such services,
facilities, or data bases;
- 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;
- acting as agent or broker for insurance directly related
to extensions of credit by a finance company subsidiary;
- owning, controlling, or operating a savings association
provided that the savings association engages only in
activities permitted for bank holding companies under
Regulation Y;
- providing courier services of limited character;
- providing management consulting advice to non-affiliated
bank and nonbank depository institutions, subject to the
limitations imposed by Regulation Y;
- selling money orders, travelers' checks and U.S. Savings
Bonds;
- appraisal of real estate and personal property;
- acting as an intermediary for the financing of
commercial or industrial income-producing real estate;
- providing securities brokerage services, related
securities credit activities pursuant to Regulation T,
and other incidental activities;
- 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
- providing general information and statistical
forecasting, advisory and transactional services with
respect to foreign exchange through a separately
incorporated subsidiary.
Federal law prohibits a bank holding company and any subsidiary banks
from engaging in certain tie-in arrangements in connection with the extension of
credit. Thus, for example, VIB 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:
- 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;
- the customer must obtain or provide some additional
credit, property or service from or to VIBC or any other
subsidiary of VIBC; or
- 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 - Stockdale and Valley Independent Bank" herein),
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 guidelines 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 guidelines based
both on total assets and on total risk assets.
VIBC is also a bank holding company within the meaning of Section 3700
of the California Financial Code. As such, VIBC and its subsidiaries are subject
to examination by, and may be required to file reports with, the Department of
Financial Institutions. Regulations have not yet been proposed or adopted or
steps otherwise taken to implement the Department of Financial Institutions'
powers under this statute.
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STOCKDALE AND VALLEY INDEPENDENT BANK
RECENT LEGISLATION AND REGULATORY DEVELOPMENTS
Introduction. 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
FRB 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 affect 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 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 does not permit out-of-state banks to enter California by
branch acquisition or de novo branching. 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
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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 VIBC, VIB or Stockdale.
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, limits state-authorized activities to
that available to 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 institution is in compliance with applicable regulatory requirements.
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").
VIB's deposit accounts are insured by the BIF, as administered by the
FDIC, up to the maximum amount permitted by law. Stockdale's deposit accounts
are insured by the SAIF, as administered by the FDIC, up to the maximum amount
permitted by law. Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator.
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(cent) per $100 in insured deposits for 1993
from a base of 12(cent) 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(cent) 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(cent) to
31(cent) 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(cent)
so that effective January 1, 1996, the BIF premiums ranged from zero to 27(cent)
per $100 in insured deposits, but in any event not less than $2,000 per year.
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.
Under the risk-based assessment system, as of December 31, 1995, SAIF
members paid within a range of 23(cent) to 31(cent) per $100 in insured
deposits, depending upon the institution's risk classification. Pursuant to the
Economic
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Growth and Paperwork Reduction Act of 1996 (the "EGPRA"), the FDIC imposed a
special assessment on SAIF members to capitalize SAIF at the "designated reserve
ratio" of 1.25% as of October 1, 1996. Based on Stockdale's deposits as of March
31, 1995, the date for measuring the amount of the special assessment pursuant
to the EGPRA, Stockdale paid a special assessment of $760,000 in October, 1996
to recapitalize the SAIF. This expense was recognized during the third quarter
of 1996.
Under the risk-based assessment system, a BIF member institution such as
VIB 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 VIB's case, the
FRB). 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 FRB to define well-capitalized,
adequately capitalized and undercapitalized are the same as in the FRB'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. The capital and supervisory group ratings
for SAIF institutions are the same as for BIF institutions. Accordingly,
Stockdale's deposit insurance assessment rate is also derived from the following
table:
ASSESSMENT RATES EFFECTIVE JANUARY 1, 1997
SUPERVISORY GROUP
<TABLE>
<CAPTION>
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>
Pursuant to the EGPRA, Stockdale pays its normal deposit insurance
premiums as a member of the SAIF. In addition, Stockdale also pays an amount
equal to 6.4(cent) per $100 deposits towards the retirement of the Financing
Corporation Bonds ("FICO Bonds") issued in the 1980s to assist in the recovery
of the Savings and Loan Industry. In addition, after December 31, 1996, banks
are required to share in the payment of interest on the FICO Bonds. Previously,
the FICO Debt was paid solely out of the SAIF Assessment Base. The Assessments
imposed on insured depository institutions with respect to any BIF-Assessable
deposit are 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. 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.
The following table shows the quarterly Assessment Rates for SAIF and
BIF insured deposits, expressed in cents per $100 in insured deposits:
FICO ASSESSMENT RATES
<TABLE>
<CAPTION>
SAIF BIF
---- ---
<S> <C> <C>
First Quarter, 1997 6.48(cent) 1.296(cent)
Second Quarter, 1997 6.50(cent) 1.300(cent)
Third Quarter, 1997 6.30(cent) 1.260(cent)
Fourth Quarter, 1997 6.32(cent) 1.264(cent)
First Quarter, 1998 6.28(cent) 1.256(cent)
Second Quarter, 1998 6.22(cent) 1.244(cent)
Third Quarter, 1998 6.10(cent) 1.220(cent)
Fourth Quarter, 1998 5.82(cent) 1.164(cent)
</TABLE>
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Under EGPRA, the FDIC is not permitted to establish SAIF assessment
rates that are lower than comparable BIF assessment rates. Beginning no later
than January 1, 2000, the rate paid to retire the FICO Bonds will be equal for
members of the BIF and the SAIF. The EGPRA also provides for the merging of the
BIF and the SAIF by January 1, 2000, provided there are no financial
institutions still chartered as savings associations at that time. Should the
insurance funds be merged before January 1, 2000, the rate paid by all members
of this new fund to retire the FICO Bonds would be equal.
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:
- insolvency of such institution;
- substantial dissipation of assets or earnings due to any
violation of law or regulation or any unsafe or unsound
practice;
- an unsafe or unsound condition to transact business, including
substantially insufficient capital or otherwise;
- any willful violation of a cease and desist order which has
become final;
- any concealment of books, papers, records or assets of the
institution;
- 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;
- 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; or
- 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:
- expanded the category of persons subject to enforcement under
the Federal Deposit Insurance Act;
- expanded the scope of cease and desist orders and provided for
the issuance of a temporary cease and desist orders;
- provided for the suspension and removal of wrongdoers on an
expanded basis and on an industry-wide basis;
- 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;
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- required regulatory approval of new directors and senior
executive officers in certain cases;
- provided protection from retaliation against "whistleblowers"
and establishes rewards for "whistleblowers" in certain
enforcement actions resulting in the recovery of money;
- required the regulators to publicize all final enforcement
orders;
- required each insured financial institution to provide its
independent auditor with its most recent Report of Condition
("Call Report");
- significantly increased the penalties for failure to file
accurate and timely Call Reports; and
- 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.
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:
- common stockholders' equity;
- qualifying noncumulative perpetual preferred stock (including
related surplus); and
- 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:
- allowance for loan and lease losses (subject to limitations);
- perpetual preferred stock and related surplus (subject to
conditions);
- hybrid capital instruments (as defined)1 and mandatory
convertible debt securities; and
- 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
- --------
(1) Trust preferred securities have been determined to qualify as Tier 1
capital up to an amount equal to 25% of the other components of Tier 1
capital, with the balance qualifying as Tier 2 capital.
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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 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: (1)
assets classified loss; (2) 50% of assets classified doubtful; (3) 15% of assets
classified substandard; and (4) 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. Nontraditional 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 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.
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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 Stockdale 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:
- "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;
- "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";
- "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);
- "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
- "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
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: (1) preparing financial statements; (2) establishing and
maintaining adequate internal controls; and (3) 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
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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: (1) it is "well capitalized"; or (2) 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 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.
Qualified Thrift Lender Test. Savings associations, like Stockdale, must
meet a QTL test, by maintaining a specified level of assets in qualified thrift
investments as specified in the Home Owners' Loan Act. If Stockdale maintains an
appropriate level of certain specified investments (primarily residential
mortgages and related investments, including certain mortgage-related
securities) and otherwise qualifies as a QTL, it will continue to enjoy full
borrowing privileges from the FHLB. The required percentage of investments under
HOLA is 65% of assets. An association must be in compliance with the QTL test or
the definition of domestic building and loan association on a monthly basis in
nine out of every 12 months. Associations that fail to meet the QTL test will
generally be prohibited from engaging in any activity not permitted for both a
national bank and a savings association. As of December 31, 1997, Stockdale was
in compliance with its QTL requirements.
Activities of Subsidiaries. A savings association seeking to establish a
new subsidiary, acquire control of an existing company or conduct a new activity
through a subsidiary must provide 30 days prior notice to the FDIC and the OTS
and conduct any activities of the subsidiary in accordance with regulations and
orders of the OTS. The OTS has the power to require a savings association to
divest any subsidiary or terminate any activity conducted by a subsidiary that
the OTS determines to pose a serious threat to the financial safety, soundness
or stability of the savings association or to be otherwise inconsistent with
sound banking practices.
Federal Home Loan Bank System. Stockdale and VIB are members of the FHLB
system. Among other benefits, each FHLB serves as a reserve or center bank for
its members within its assigned region. Each FHLB is financed primarily from the
sale of consolidated obligations of the FHLB system. Each FHLB makes available
to its members loans (i.e., advances) in accordance with the policies and
procedures established by the Board of Directors of the individual FHLB.
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
95
<PAGE> 100
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.
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 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
96
<PAGE> 101
securities.
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 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 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.
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<PAGE> 102
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.
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.
CONCLUSION
As a result of the recent federal and California legislation, there has
been a competitive impact on financial institutions. 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
financial institutions and their directors and officers.
Future legislation is also likely to impact VIBC's, VIB's and
Stockdale's businesses. 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.
COMPETITION
The banking business in California, generally, and in Stockdale's and
VIB's service areas specifically, is highly competitive with respect to both
loans and deposits and is dominated by a number of major banks and savings
institutions which have many offices operating over wide geographic areas.
Stockdale and VIB compete for deposits and loans principally with these major
banks and savings institutions, finance companies, credit unions and other
financial institutions located in their market areas. Among the advantages which
the major banks and savings institutions have over Stockdale and VIB 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 their service areas offer certain services (such
as trust and international banking services) which are not offered directly by
Stockdale or VIB and, by virtue of their greater total capitalization, such
banks have substantially higher lending limits than Stockdale and VIB.
Moreover, banks and savings and loan associations, generally, and
Stockdale and VIB in particular, face increasing competition for loans and
deposits from non-bank financial intermediaries such as 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
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<PAGE> 103
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 Stockdale and VIB rely principally upon local promotional activity,
personal contacts by their officers, directors, employees and shareholders, and
specialized services. In conjunction with Stockdale's and VIB's business plans
to serve the financial needs of local residents and small- to medium-sized
businesses, Stockdale and VIB rely on a formalized officer calling program to
existing and prospective customers and Stockdale and VIB focus their overall
marketing efforts towards the local community. Stockdale's and VIB's promotional
activities emphasize the advantages of dealing with a locally-owned and
headquartered institution sensitive to the particular needs of the local
community. For customers whose loan demands exceed Stockdale's and VIB's lending
limits, Stockdale and VIB attempt to arrange for such loans on a participation
basis with other banks. Stockdale and VIB also assist customers requiring
services not offered by Stockdale and VIB to obtain these services from their
correspondent banks.
IMPACT OF MONETARY POLICIES
Banking is a business which depends on rate differentials. In general,
the difference between the interest rate paid by the financial institution on
its deposits and its other borrowings and the interest rate earned by the
financial institution on loans, securities and other interest-earning assets
will comprise the major source of the financial institution's earnings. These
rates are highly sensitive to many factors which are beyond the control of the
financial institution and, accordingly, the earnings and growth of the financial
institution will be 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 FRB. The FRB 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 FRB 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 financial institutions cannot be predicted; however,
depending on the degree to which the financial institution's interest-earning
assets and interest-bearing liabilities are positively rate sensitive, increases
in rates would have the temporary effect of increasing the financial
institution'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 financial institution's net income.
VALIDITY OF VIBC'S COMMON STOCK
The validity of the shares of VIBC's common stock to be issued in the
Merger has been reviewed by the firm of Horgan, Rosen, Beckham & Coren, L.L.P.,
21700 Oxnard Street, Suite 1400, Woodland Hills, California 91365. Such review
should not be construed as constituting an opinion as to the merits of the
offering made hereby, the accuracy or adequacy of the disclosures contained
herein, or the suitability of VIBC's common stock for any of Stockdale's
shareholders. Members of that firm own approximately 4,616 shares of VIBC's
common stock.
EXPERTS
The consolidated financial statements of VIB (VIBC's predecessor
corporation) as of December 31, 1997 and 1996 and for each of the years in the
three year period ended December 31, 1997, have been included herein and in the
Registration Statement in reliance on the report of Vavrinek, Trine, Day & Co.,
LLP, independent certified public accountants, included herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Stockdale as of December 31, 1997 and 1996
and for each of the years in the three year period ended December 31, 1997, have
been included herein and in the Registration Statement in reliance on the report
of KPMG Peat Marwick LLP, independent certified public accountants, included
herein, and upon the authority of said firm as experts in accounting and
auditing.
SHAREHOLDER PROPOSALS TO BE
PRESENTED AT NEXT ANNUAL MEETING
The deadline for shareholders to submit proposals to be considered for
inclusion in the proxy materials for
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<PAGE> 104
VIBC's 1999 Annual Meeting of Shareholders, which is tentatively scheduled for
April 22, 1999, is December 11, 1998.
In the event the Merger is not closed, the deadline for shareholders to
submit proposals to be considered for inclusion in the proxy materials for
Stockdale's 1999 Annual Meeting of Shareholders, which is tentatively scheduled
for April 22, 1999, was November 20, 1998.
100
<PAGE> 105
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
VIB CORP CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report ..................................................................... F-1
Consolidated Statements of Financial Condition as of December 31, 1997 and 1996 .................. F-2
Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 ........... F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31,
1997, 1996 and 1995 ............................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 ....... F-6
Notes to Consolidated Financial Statements ....................................................... F-7
Consolidated Statements of Financial Condition as of September 30, 1998 and 1997 (unaudited) ..... F-27
Consolidated Statements of Income for the Nine Months Ended September 30, 1998 and
1997 (unaudited) .................................................................. F-29
Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended September 30,
1998 and 1997 (unaudited) ......................................................... F-30
Consolidated Statements of the Cash Flows for the Nine Months Ended September 30, 1998 and
1997 (unaudited) .................................................................. F-31
Notes to Unaudited Consolidated Financial Statements ............................................. F-32
BANK OF STOCKDALE FINANCIAL STATEMENTS
Independent Auditors' Report ..................................................................... F-35
Balance Sheets as of December 31, 1997 and 1996 .................................................. F-36
Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 .................... F-37
Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 .......... F-38
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 .................... F-39
Notes to Financial Statements .................................................................... F-41
Balance Sheets as of September 30, 1998 and 1997 (unaudited) ..................................... F-69
Statements of Income for the Nine Months Ended September 30, 1998 and
1997 (unaudited) .................................................................. F-70
Statements of Stockholders' Equity for the Nine Months Ended September 30, 1998 and
1997 (unaudited) .................................................................. F-71
Statements of the Cash Flows for the Nine Months Ended September 30, 1998 and 1997 (unaudited) ... F-72
Notes to Unaudited Financial Statements .......................................................... F-74
</TABLE>
101
<PAGE> 106
To the Shareholders and Board of Directors
of Valley Independent Bank
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying statements of condition of Valley Independent
Bank as of December 31, 1997 and 1996 and the related statements of income,
changes in shareholders' equity, and cash flows for the each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Valley Independent Bank as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
VAVRINEK, TRINE, DAY & CO., LLP
January 14, 1998, except for Note S
which is dated January 22, 1998.
Laguna Hills, California
F-1
<PAGE> 107
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>
F-2
<PAGE> 108
<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.
F-3
<PAGE> 109
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.
F-4
<PAGE> 110
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>
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.
F-5
<PAGE> 111
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.
F-6
<PAGE> 112
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.
F-7
<PAGE> 113
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Loans Held for Sale
Mortgage and SBA loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
Loans
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances reduced by any charge-offs or specific valuation
accounts and net of any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
For impairment recognized in accordance with Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan (SFAS No. 114), as amended by SFAS 118, the
entire change in the present value of expected cash flows is reported as either
provision for loan losses in the same manner in which impairment initially was
recognized, or as a reduction in the amount of provision for loan losses that
otherwise would be reported.
Allowance for Credit Losses
The allowance for credit losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Bank's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of cost, or fair value
minus estimated costs to sell. Revenue and expenses from operations and changes
in the valuation allowance are included in other expenses.
F-8
<PAGE> 114
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Premises and Equipment
Land is carried at cost. Bank premises, furniture and equipment, and leasehold
improvements are carried at cost, less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated service lives of the related assets. Leasehold improvements are
amortized over the lives of the respective leases or the service lives of the
improvements, which ever is shorter.
Goodwill
The Bank has classified as goodwill the cost in excess of fair value of the net
assets (including tax attributes) of business and branches acquired in purchase
transactions. Goodwill is being amortized on a straight line method over lives
ranging from nine to fifteen years. The Bank periodically reviews goodwill to
assess recoverability from projected, undiscounted net cash flows of the related
business unit, and impairments which would be recognized in operating results if
a permanent reduction in value were to occur.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance sheet
financial instruments consisting of commitments to extend credit, commitments
under credit card arrangements, commercial letters of credit, and standby
letters of credit. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received.
Earnings Per Shares (EPS)
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
F-9
<PAGE> 115
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.
F-10
<PAGE> 116
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>
F-11
<PAGE> 117
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>
F-12
<PAGE> 118
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>
F-13
<PAGE> 119
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>
F-14
<PAGE> 120
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>
<CAPTION>
<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>
F-15
<PAGE> 121
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>
F-16
<PAGE> 122
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 antidilutive
F-17
<PAGE> 123
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE I - COMMITMENTS AND CONTINGENCIES
The Bank has entered into leases for its branches and operating facilities,
which expire at various dates through 2015. These leases include provisions for
periodic rent increases as well as payment by the lessee of certain operating
expenses. Rental expense relating to these leases was approximately $446,000 in
1997, $446,000 in 1996, and $324,000 in 1995.
The approximate future minimum annual payments for these leases by year are as
follows:
<TABLE>
<S> <C>
1998 $ 451,000
1999 358,000
2000 332,000
2001 317,000
2002 188,000
Thereafter 1,139,000
-------------
$ 2,785,000
-------------
</TABLE>
The minimum rental payments shown above are given for the existing lease
obligations and are not a forecast of future rental expense.
The Bank is involved in various litigation which has arisen in the ordinary
course of its business. In the opinion of management, the disposition of such
pending litigation will not have a material effect on the Bank's financial
statements.
In the ordinary course of business, the Bank enters into financial commitments
to meet the financing needs of its customers. These financial commitments
include commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk not recognized in the statements of condition.
The Bank's exposure to credit loss in the event of nonperformance on commitments
to extend credit and standby letters of credit is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in making
commitments as it does for loans reflected in the financial statements.
As of December 31, 1997, the Bank had the following outstanding financial
commitments whose contractual amount represents credit risk:
<TABLE>
<S> <C>
Commitments to Extend Credit $77,582,000
Standby Letters of Credit 1,155,000
-----------
$78,737,000
===========
</TABLE>
F-18
<PAGE> 124
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Standby
letters of credit are conditional commitments to guarantee the performance of a
Bank customer to a third party. Since many of the commitments and standby
letters of credit are expected to expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. The Bank
evaluated each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained if deemed necessary by the Bank is based on management's
credit evaluation of the customer. The majority of the Bank's commitments to
extend credit and standby letters of credit are secured by real estate.
NOTE J - STOCK OPTION PLAN
At December 31, 1997, the Bank has a fixed stock option plan, which is described
below. The Bank applies APB Opinion 25 and related interpretations in accounting
for its plan. Accordingly, no compensation cost has been recognized for its
fixed stock option plan.
In 1989, the Bank adopted a stock option plan (the "1989 Plan") which was last
amended in 1993, under which 1,613,603 shares of the Bank's common shares may be
issued to directors, officers, and key employees at not less than 100% of the
fair market value at the date the options are granted.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for 1997, 1996
and 1995, respectively: risk-free rates of 5.8%, 6.1% and 5.4%; volatility of
17.5% for 1997 and 15% for 1996 and 1995, and expected lives of three years.
F-19
<PAGE> 125
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE J - STOCK OPTION PLAN - CONTINUED
A summary of the status of the Bank's fixed stock option plan as of December 31,
1997, 1996, and 1995, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
Beginning of Year 572,134 $ 6 716,807 $ 5 721,776 $4
Granted 151,152 13 48,415 10 156,487 8
Exercised (99,054) 6 (184,566) 4 (142,253) 3
Forfeited (13,693) 7 (8,522) 6 (19,203) 6
-------- --- -------- --- -------- --
Outstanding at End
of year 610,539 8 572,134 6 716,807 5
======== === ======== === ======== ==
Options Exercisable
at Year-End 290,103 5 290,050 5 331,582 5
Weighted-Average Fair
Value of Options
Granted During
the Year $ 2.76 $ 2.44 $ 1.80
</TABLE>
The following table summarizes information about fixed options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ------------------------
Weighted- Weighted Weighted-
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- ---------- ----------- ---------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 3 to $ 4 177,718 1.1 Years $ 3 133,856 $ 3
$ 5 to $ 7 171,752 1.9 Years 6 130,576 6
$ 8 to $10 101,390 3.1 Years 9 23,599 9
$11 to $13 142,594 4.1 Years 13 2,072 12
$16 to $17 17,085 4.6 Years 17 -- --
------- -------
610,539 2.5 Years 8 290,103
======= =======
</TABLE>
F-20
<PAGE> 126
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE J - STOCK OPTION PLAN - CONTINUED
Had the Bank determined compensation cost based on the fair value at the grant
date for its stock options under No. 123, the Bank's net income would have been
reduced to the following pro forma amount:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net Income:
As Reported $ 3,800,989 $ 2,575,207 $ 2,425,100
Pro Forma $ 3,637,591 $ 2,495,245 $ 2,368,765
Per Share Data:
Net Income - Basic
As Reported .67 .47 .46
Pro Forma .64 .46 .45
Net Income - Diluted
As Reported .63 .44 .42
Pro Forma .60 .43 .41
</TABLE>
NOTE K - STOCK OFFERING AND WARRANTS
In 1997, the Bank completed a supplemental stock offering of 510,660 shares of
common stock at $17.50 per share. In connection with the offering, the Bank also
issued 103,154 warrants. Each warrant is exercisable for one share of common
stock at an exercise price of $19.12 per share through October 31, 1998 and
$22.06 thereafter. All warrants expire on October 29, 1999.
NOTE L - EMPLOYEE STOCK OWNERSHIP AND RETIREMENT SAVINGS PLANS
The Bank has adopted an Employee Stock Ownership Plan and a Retirement Savings
Plan for the benefit of its employees. Contributions to the Plans are determined
annually by the Board of Directors. The combined expenses for these plans were
$243,000 in 1997, $292,000 in 1996, and $200,000 in 1995.
NOTE M - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain
officers and directors and the companies with which they are associated. In the
Bank's opinion, all loans and loan commitments to such parties are made on
substantially the same terms including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons. The
balance of these loans outstanding at December 31, 1997 and 1996 was
approximately $4,174,000 and $3,488,000, respectively.
F-21
<PAGE> 127
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE N - STOCK DIVIDENDS
The Bank has issued stock dividends of 2%, 8%, and 4% in 1997, 1996, and 1995,
respectively, and a six-for-five stock split in 1997 and a three-for-two stock
split in 1995. The per share data in the statements of income and the footnotes
have been adjusted to give retroactive effect to these dividends and splits.
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market value exists
for a significant portion of the financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involve uncertainties and
matters of judgment and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business, and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the realization
of the unrealized gains and losses can have a potential effect on fair value
estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments:
Financial Assets
The carrying amounts of cash, short term investments, due from customers on
acceptances, and bank acceptances outstanding are considered to approximate fair
value. Short term investments include federal funds sold, securities purchased
under agreements to resell, and interest bearing deposits with banks. The fair
values of investment securities, including available for sale, are generally
based on quoted market prices. The fair value of loans are estimated using a
combination of techniques, including discounting estimated future cash flows and
quoted market prices of similar instruments where available.
F-22
<PAGE> 128
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Financial Liabilities
The carrying amounts of deposit liabilities payable on demand, commercial paper,
and other borrowed funds are considered to approximate fair value. For fixed
maturity deposits, fair value is estimated by discounting estimated future cash
flows using currently offered rates for deposits of similar remaining
maturities. The fair value of long term debt is based on rates currently
available to the Bank for debt with similar terms and remaining maturities.
Off Balance Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of credit is
estimated using the fees currently charged to enter into similar agreements. The
fair value of these financial instruments is not material.
The estimated fair value of financial instruments at December 31 is summarized
as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
Carry Value Fair Value Carry Value Fair Value
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Due From Banks $ 33,821 $ 33,821 $ 26,886 $ 26,886
Interest-Bearing Deposits $ 586 $ 586 $ 879 $ 879
Investment Securities $ 69,287 $ 69,287 $ 36,522 $ 36,522
Federal Funds Sold $ 4,000 $ 4,000 $ 8,000 $ 8,000
Loans $311,417 $309,570 $242,787 $239,970
Cash Surrender Value -
Life Insurance $ 2,283 $ 2,283 $ 2,008 $ 2,008
Financial Liabilities:
Deposits $398,427 $398,471 $303,944 $303,524
Capitalized Lease Obligation $ 2,842 $ 2,842 $ -- $ --
</TABLE>
F-23
<PAGE> 129
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE P - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action (there are no conditions or
events since that notification that management believes have changed the Bank's
category). To be categorized as well-capitalized, the Bank must maintain minimum
ratios as set forth in the table below. The following table also sets forth the
Bank's actual capital amounts and ratios (dollar amounts in thousands):
<TABLE>
<CAPTION>
Amount of Capital Required
------------------------------------------
To Be To Be
Adequately Well-
Actual Capital Capitalized Capitalized
------------------- ----------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets) $38,283 10.4% $29,305 8.0% $36,631 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $35,953 9.8% $14,652 4.0% $21,979 6.0%
Tier 1 Capital (to Average Assets) $35,953 8.6% $16,581 4.0% $20,726 5.0%
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets) $27,410 9.7% $22,581 8.0% $28,227 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $24,776 8.7% $11,291 4.0% $16,936 6.0%
Tier 1 Capital (to Average Assets) $24,776 7.9% $12,525 4.0% $15,656 5.0%
</TABLE>
F-24
<PAGE> 130
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.
F-25
<PAGE> 131
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.
F-26
<PAGE> 132
VIB CORP AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30,1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
September 30 September 30
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 31,363,471 $ 25,769,043
Federal funds sold 6,000,000 0
------------- -------------
Total cash and cash equivalents 37,363,471 25,769,043
Interest bearing deposits 664,181 586,000
Securities available for sale (note B) 82,783,786 75,314,282
Loans: (note C)
Commercial 57,969,551 48,962,536
Agricultural 27,316,221 26,721,452
Real estate-construction 41,420,257 34,005,178
real estate-other 196,165,138 153,245,863
Consumer 27,440,594 21,835,426
------------- -------------
Total Loans 350,311,761 284,770,455
Net deferred loan fees (3,248,267) (1,461,140)
Allowance for credit losses (2,842,989) (2,831,952)
------------- -------------
Net Loans 344,220,505 280,477,363
Premises and equipment 11,394,691 11,244,384
Other real estate owned 148,236 2,997,605
Cash surrender life insurance 2,552,091 2,213,581
Deferred tax asset 1,518,098 1,864,269
Goodwill 4,536,904 3,695,675
Accrued interest and other assets 6,145,690 5,690,474
------------- -------------
TOTAL ASSETS $ 491,327,653 $ 409,852,676
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-27
<PAGE> 133
VIB CORP AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30,1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
September 30 September 30
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $121,307,176 $104,024,842
Money Market and NOW 119,513,268 90,616,799
Savings 44,740,523 40,771,144
Time deposits under $100,000 75,527,982 71,338,123
Time deposits $100,000 and over 80,703,884 65,994,337
------------ ------------
Total Deposits 441,792,833 372,745,245
Fed funds purchased 0 1,500,000
Capital lease obligations 2,876,216 2,830,865
Accrued interest and other liabilities 2,689,446 2,785,978
------------ ------------
Total Liabilities 447,358,495 379,862,088
Stockholders' Equity:
Preferred shares, no par value;
10,000,000 shares authorized;
issued 0 shares in 1998 and 1997 0 0
Common shares,no par value, Authorized
25,000,000 in 1998 and 16,875,000 in 1997,
Outstanding: 7,804,991 in 1998 and
7,058,352 in 1997 36,230,101 24,763,744
Undivided Profits 7,281,309 4,754,990
Accumulated other comprehensive
income, net of tax of $318,096 in
1998 and $327,917 in 1997 457,748 471,854
------------ ------------
Total Stockholders' Equity 43,969,158 29,990,588
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $491,327,653 $409,852,676
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-28
<PAGE> 134
VIB CORP AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Month
Periods Ended
September 30, September 30,
1998 1997
----------- -----------
<S> <C> <C>
Interest Income:
Interest and Fees on Loans $25,533,732 $19,786,133
Interest on Investment Securities-Taxable 2,549,507 2,518,004
Interest on Investment Securities-Nontaxable 831,463 807,280
Other Interest Income 293,025 353,352
----------- -----------
Total Interest Income 29,207,727 23,464,769
Interest Expense:
Interest on Money Market and NOW 2,198,745 1,553,811
Interest on Savings Deposits 664,394 590,603
Interest on Time Deposits 5,784,246 5,405,314
Interest on Other Borrowings 366,826 93,315
----------- -----------
Total Interest Expense 9,014,211 7,643,043
----------- -----------
Net Interest Income 20,193,516 15,821,726
Provision for Credit Losses 1,665,000 1,070,000
----------- -----------
Net Interest Income after Provision for Credit Losses 18,528,516 14,751,726
Non-interest Income:
Service Charges and Fees 2,858,240 2,483,407
Gain on Sale of Loans and Servicing Fees 484,962 565,233
Gain on Sale of Securities 284,939 192,049
Other Income 424,764 343,984
----------- -----------
Total Non-interest Income 4,052,905 3,584,673
Non-interest Expense:
Salaries and Employee Benefits 8,505,607 7,394,645
Occupancy Expenses 1,481,290 1,178,304
Furniture and Equipment 1,638,243 1,300,643
Other Expenses (note D) 5,968,749 5,084,930
----------- -----------
Total Non-interest Expense 17,593,889 14,958,522
----------- -----------
Income Before Income Taxes 4,987,532 3,377,877
Income Taxes 1,748,418 1,089,000
----------- -----------
Net Income $ 3,239,114 $ 2,288,877
Per Share Data: (note E)
Net Income - Basic $ 0.42 $ 0.33
Net Income - Diluted $ 0.40 $ 0.31
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-29
<PAGE> 135
VIB CORP AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Shares Accumulated
------------------------- Other
Number of Undivided Comprehensive
Shares Amount Profits Income Total
--------- ------ --------- ------------- -----
<S> <C> <C> <C> <C> <C>
Balance January 1,1997 5,458,892 $ 24,286,693 $ 2,473,963 $ 278,877 $ 27,039,533
Comprehensive Income
Net income -- -- 3,800,989 -- 3,800,989
Other comprehensive income
Unrealized gains on securities, net
of taxes of $218,000 -- -- -- 313,472 313,472
Less reclassification adjustments for gains
included in net income,net of taxes of $226,000 -- -- -- (325,104) (325,104)
------------
Total other comprehensive income -- -- -- -- (11,632)
------------
Total Comprehensive income -- -- -- -- 3,789,357
Issuance of common shares
net of expense of $123,425 510,660 8,809,374 -- -- 8,809,374
Cash dividends -- -- (21,724) -- (21,724)
Stock dividends 120,510 2,199,307 (2,199,307) -- 0
Exercise of stock options
Including the realization of
Tax benefits of $96,000 97,335 637,470 -- -- 637,470
------------ ------------ ------------ ------------ ------------
Balance January 1,1998 6,187,397 35,932,844 4,053,921 267,245 $ 40,254,010
Comprehensive Income
Net income -- -- 3,239,114 -- 3,239,114
Other comprehensive income
Unrealized gains on securities, net
of taxes of $202,000 -- -- -- 358,442 358,442
Less reclassification adjustments for gains
included in net income,net of taxes of $117,000 -- -- -- (167,939) (167,939)
------------
Total other comprehensive income -- -- -- -- 190,503
------------
Total Comprehensive income -- -- -- -- 3,429,617
Stock split 1,550,678 -- -- -- --
Cash dividends -- -- (11,726) -- (11,726)
Exercise of stock options 65,039 262,743 -- -- 262,743
Exercise of stock warrants 1,877 34,515 -- -- 34,515
------------ ------------ ------------ ------------ ------------
Balance at September 30,1998 7,804,991 $ 36,230,102 $ 7,281,309 $ 457,748 $ 43,969,159
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-30
<PAGE> 136
VIB CORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(in Thousands)
<TABLE>
<CAPTION>
For the Nine Month
Periods Ended
September 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 3,239 $ 2,289
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 227 484
Deferred income taxes 0 (289)
Provision for credit losses 1,665 1,070
Originations of loans held for sale (2,953) (13,378)
Proceeds from sale of loans 3,324 5,285
Net loss/(gain) on loan sales and securitization (273) (273)
Loss(Gain) on sale of other real estate owned (111) (38)
Net increase in cash surrender value of life insurance (269) (206)
Net realized gains in available for sale securities (285) (192)
Net amortization of premium/discount on available
for sale securities (15) 86
Net change in accrued interest, other assets,
and other liabilities (402) (3,311)
-------- --------
Net cash provided (used) by operating activities 4,147 (8,473)
Cash flow from investing activities:
Purchases of available for sale securities (59,478) (69,957)
Net cash received from purchase of branches 6,524 39,223
Proceeds from sales of other real estate owned 1,459 676
Proceeds from sales of available for sale securities 7,026 8,640
Proceeds from maturities of available for sale securities 39,578 22,958
Loans granted net of repayments (25,204) (31,068)
Premises and equipment expenditures (1,419) (5,787)
Net increase in interest bearing deposits (78) 293
-------- --------
Net cash provided (used) by investing activities (31,592) (35,022)
Cash flow from financing activities:
Net increase/(decrease) in demand deposits and savings 11,193 22,030
Net increase in time deposits 15,475 7,548
Net change in capitalized lease obligations 34 2,831
Payments for dividends (12) (8)
Net change in fed funds purchased 0 1,500
Proceeds from exercise of stock options and warrants 297 477
-------- --------
Net cash provided (used) by financing activities 26,987 34,378
Net change in cash and cash equivalents ($ 458) ($ 9,117)
======== ========
Cash and cash equivalents:
Beginning of period $ 37,821 $ 34,886
End of period $ 37,363 $ 25,769
Supplemental disclosure of cash flow information:
(in Thousands)
Cash paid for interest expense $ 8,733 $ 7,529
Cash paid (received) for income taxes $ 2,506 $ 302
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-31
<PAGE> 137
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(A) General
See note A of Notes to Financial Statements incorporated by reference in
the Company's 1997 Annual Report on Form 10-K for a summary of significant
accounting policies.
The unaudited financial statements included herein were prepared from
the books of the Company in accordance with generally accepted accounting
principles and reflect all adjustments which are, in the opinion of management,
necessary to provide a fair statement of the results of operations and financial
position for the interim periods. Such financial statements generally conform to
the presentation reflected in the Company's 1997 Annual Report to Stockholders,
and reflect adjustments which are solely of a normal, recurring nature. The
current interim periods reported herein are included in the fiscal year subject
to independent audit at the end of the year. The unaudited financial statements
of VIB CORP include the accounts of the Company and its wholly-owned subsidiary,
Valley Independent Bank. All significant intercompany accounts and transactions
have been eliminated in the consolidated financial statements. Certain items
previously reported have been reclassified to conform with the current period's
classifications.
(B) Available-for-sale Securities
The Company's available-for-sale securities portfolio at
September 30, 1998 had a net unrealized gain of approximately $776,000,
as compared with a net unrealized gain of approximately $800,000 at
September 30, 1997, a decrease during the twelve month period of
$24,000.
Available-for-sale securities
<TABLE>
<CAPTION>
September 30, 1998
----------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 539 $ 41 $ 580
U.S. Government and
Agency Securities 43,645 229 $ 5 43,869
State and Political Subd. 23,780 552 24,332
Mortgage-Backed Securities 10,811 18 59 10,770
Other Equity 3,233 3,233
------- ---- ------- -------
$82,008 $840 $ 64 $82,784
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
----------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 497 $ 36 -- $ 533
U.S. Government and
Agency Securities 49,529 411 $ 28 49,912
State and Political Subd. 17,095 452 2 17,545
Mortgage-Backed Securities 7,393 15 84 7,324
</TABLE>
F-32
<PAGE> 138
<TABLE>
<S> <C> <C> <C> <C>
Other Equity -- --
------- ---- ------- -------
$74,514 $914 $ 114 $75,314
</TABLE>
Investment securities carried at approximately $50,455,000 and
$10,709,000, at September 30,1998 and 1997 respectively, were pledged to secure
public deposits, bank advances and other purposes as required by law.
(C) Loans
The Company's loan portfolio consists primarily of loans to borrowers
within Imperial, Riverside, San Diego and Orange counties, California and Yuma,
Arizona. Although the Company 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
Company's market area. As a result, the Company's loan and collateral portfolio
are, to some degree, concentrated in those industries.
The Company also originates real estate related and farmland loans for
sale to governmental agencies and institutional investors. At September 30,1998
and 1997 the Company was servicing approximately $65,850,000 and $50,626,000,
respectively, in loans previously sold.
A summary of the changes in the allowance for credit losses follows:
<TABLE>
<CAPTION>
September 30,1998 September 30,1997
----------------- -----------------
<S> <C> <C>
Balance at beginning of year $2,330,000 $2,634,000
Additions to the allowance charged to expense 1,665,000 1,070,000
Recoveries on loans charged off 152,000 93,000
Loans charged off 1,304,000 965,000
---------- ----------
Balance at end of period $2,843,000 $2,832,000
</TABLE>
A summary of nonperforming loans and assets follows:
<TABLE>
<CAPTION>
September 30, 1998 September 30,1997
------------------ -----------------
<S> <C> <C>
Non-accrual loans $4,180,000 $5,432,000
Loans 90 days past due and still accruing 167,000 51,000
---------- ----------
Total nonperforming loans 4,347,000 5,483,000
Other Real Estate Owned 148,000 2,998,000
---------- ----------
Total nonperforming assets $4,495,000 $8,481,000
Nonperforming loans to total ending loans 1.24% 1.93%
Nonperforming assets to total loans and
Other Real Estate Owned 1.29% 2.95%
</TABLE>
(D) Other Expenses
Other expenses for the periods indicated are as follows:
<TABLE>
<CAPTION>
September 30,1998 September 30,1997
<S> <C> <C>
Data Processing $ 939,000 $ 772,000
</TABLE>
F-33
<PAGE> 139
<TABLE>
<S> <C> <C>
Advertising 252,000 186,000
Legal and Professional 1,101,000 1,011,000
Regulatory Assessments 108,000 80,000
Insurance 104,000 93,000
Amortization of Intangibles 357,000 227,000
Office Expenses 1,136,000 978,000
Promotion 890,000 859,000
Other 1,082,000 879,000
---------- ----------
Total Other Expenses $5,969,000 $5,085,000
</TABLE>
(E) Earnings Per Share
Earnings per share are calculated based on the weighted average number
of common shares outstanding during each period as follows: 7,765,359 for the
nine months ended September 30, 1998 and 7,009,804 for the nine months ended
September 30, 1997.
Diluted earnings per share for the nine month periods ended September
30,1998 and 1997, are computed by dividing net earnings by the weighted average
common equivalent shares outstanding during the respective periods. Common share
equivalents include dilutive common stock option share equivalents determined by
using the treasury stock method.
F-34
<PAGE> 140
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Bank of Stockdale, FSB:
We have audited the accompanying balance sheets of Bank of Stockdale, FSB (the
Bank) as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year 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 Bank of Stockdale, FSB at
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
February 11, 1998
F-35
<PAGE> 141
BANK OF STOCKDALE, FSB
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 5,063,794 4,504,821
Money market mutual funds 3,091,965 --
Interest-bearing deposits in insured financial
institutions 399,940 399,940
Marketable investment securities (note 3) 24,836,994 22,285,985
Loans, net (note 4) 90,297,462 90,328,151
Real estate acquired through foreclosure (note 5) 842,797 2,432,178
Accrued interest on loans and investments (note 7) 782,094 889,345
Premises and equipment, net (note 8) 720,639 894,705
Federal Home Loan Bank stock 997,100 1,172,700
Prepaid expenses and other assets 3,435,793 3,392,263
Income tax receivable 104,799 433,955
------------- -------------
$ 130,573,377 126,734,043
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (note 9) $ 120,642,664 115,662,220
Advances from Federal Home Loan Bank (note 10) -- 4,000,000
Accrued expenses and other liabilities 905,287 1,383,116
------------- -------------
Total liabilities 121,547,951 121,045,336
------------- -------------
Stockholders' equity (notes 13 and 14):
Common stock - par value $4 per share; authorized
10,000,000 shares, issued and outstanding
1,212,265 shares in 1997 and 757,719 shares in
1996 (note 21) 4,849,060 3,030,876
Additional paid-in capital 5,808,666 4,647,338
Accumulated deficit (1,590,295) (1,892,521)
Unrealized loss on marketable investment
securities, net (42,005) (96,986)
------------- -------------
Total stockholders' equity 9,025,426 5,688,707
Commitments and contingencies (notes 12 and 16)
------------- -------------
$ 130,573,377 126,734,043
============= =============
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE> 142
BANK OF STOCKDALE, FSB
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans $ 8,053,963 8,082,482 8,306,430
Mortgage-backed securities 929,566 846,028 1,177,762
Investment securities and other earning assets 729,097 756,492 675,703
----------- ----------- -----------
Total interest income 9,712,626 9,685,002 10,159,895
----------- ----------- -----------
Interest expense:
Deposit liabilities (note 9) 5,328,247 5,413,522 5,554,795
FHLB advances and other 61,960 216,068 613,635
----------- ----------- -----------
Total interest expense 5,390,207 5,629,590 6,168,430
----------- ----------- -----------
Net interest income 4,322,419 4,055,412 3,991,465
Provision for loan losses (note 6) 414,817 854,399 474,623
----------- ----------- -----------
Net interest income after provision for loan losses 3,907,602 3,201,013 3,516,842
----------- ----------- -----------
Other income:
Net gain on sale of investments and mortgage-backed
securities -- 58,364 148,930
Net gain on sale of loans 576,141 509,360 736,637
Net gain on sale of real estate 54,911 3,732 6,598
Demand account service charges and fees 599,402 546,824 383,434
Loan servicing fees 136,068 131,942 124,418
Other income 374,338 278,935 393,510
----------- ----------- -----------
Total noninterest income 1,740,860 1,529,157 1,793,527
----------- ----------- -----------
Other expense:
Salaries and benefits 2,417,292 2,298,116 2,650,289
Provision for losses on real estate acquired through
foreclosure (note 6) 266,083 292,001 147,080
Occupancy 390,164 450,643 586,782
Depreciation and amortization 282,959 291,817 271,293
Savings Association Insurance Fund premiums (note 18) 173,300 1,055,325 304,203
Real estate owned 212,722 64,052 106,700
Service bureau expense 248,722 253,201 303,926
Advertising 120,260 110,499 79,676
Insurance 72,851 78,305 101,741
Professional fees 205,889 282,086 312,296
Office supplies 84,146 57,864 83,149
Telephone and postage 136,984 104,203 126,588
Bank charges 182,038 208,661 209,792
Legal settlement expense -- 335,000 --
Merger expenses -- -- 239,476
Other 596,441 546,847 777,414
----------- ----------- -----------
Total noninterest expense 5,389,851 6,428,620 6,300,405
----------- ----------- -----------
Income (loss) before income tax benefit 258,611 (1,698,450) (990,036)
Income tax benefit (note 11) 43,615 729,019 333,962
----------- ----------- -----------
Net income (loss) $ 302,226 (969,431) (656,074)
=========== =========== ===========
Basic earnings (loss) per share (note 15) $ 0.39 (1.28) (0.87)
=========== =========== ===========
Diluted earnings (loss) per share (note 15) $ 0.39 (1.27) (0.86)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE> 143
BANK OF STOCKDALE, FSB
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
OUTSTANDING LOSSES ON
SHARES MARKETABLE
OF ADDITIONAL INVESTMENT
COMMON COMMON PAID-IN ACCUMULATED SECURITIES,
STOCK STOCK CAPITAL DEFICIT NET TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 746,726 $2,986,904 4,642,477 (267,016) 29,695 7,392,060
Net loss -- -- -- (656,074) -- (656,074)
Exercise of stock
options, exercise
price of $4.50 per
share 10,993 43,972 4,861 -- -- 48,833
Unrealized losses, net
of $28,905 income tax
effect, on marketable
investment securities -- -- -- -- (39,911) (39,911)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995 757,719 3,030,876 4,647,338 (923,090) (10,216) 6,744,908
Net loss -- -- -- (969,431) -- (969,431)
Change in unrealized
losses, net of
$62,833 income tax
effect, on marketable
investment securities -- -- -- -- (86,770) (86,770)
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996 757,719 3,030,876 4,647,338 (1,892,521) (96,986) 5,688,707
Issuance of common
stock, 454,546
shares, net of
$20,492 issue costs 454,546 1,818,184 1,161,328 -- -- 2,979,512
Net income -- -- -- 302,226 -- 302,226
Change in unrealized
losses, net of
$39,814 income tax
effect, on marketable
investment securities -- -- -- -- 54,981 54,981
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997 1,212,265 $4,849,060 5,808,666 (1,590,295) (42,005) 9,025,426
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE> 144
BANK OF STOCKDALE, FSB
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 302,226 (969,431) (656,074)
Adjustments to reconcile net income
(loss) to net cash (used in) provided
by operating activities:
Provision for loan and real estate
losses 680,900 1,146,400 621,703
Depreciation and amortization 282,959 291,817 271,293
Net gain on sales of:
Available for sale investments
and mortgage-backed securities -- (58,364) (148,930)
Loans (576,141) (509,360) (736,637)
Real estate (54,911) (3,732) (6,598)
Fixed assets -- -- (6,903)
Originations of loans held for sale (39,263,812) (33,222,190) (44,264,332)
Proceeds from sale of loans 38,353,721 35,553,533 43,763,886
Decrease (increase) in interest
receivable 107,251 (20,168) 301,587
Decrease (increase) in income tax
receivable 407,972 (254,152) (57,973)
(Decrease) increase in construction
loan interest reserve -- (176,761) 83,553
Increase in prepaid expenses and
other assets (184,468) (431,880) (21,866)
(Decrease) increase in accrued
expenses and other liabilities (477,829) 510,921 (55,555)
Deferred income tax benefit (11,937) (480,456) (12,989)
Net decrease in deferred fees (36,471) (156,953) (112,169)
------------ ------------ ------------
Net cash (used in) provided
by operating activities (470,540) 1,219,224 (1,038,004)
------------ ------------ ------------
Investing activities:
Proceeds from sales of
available-for-sale securities 250,000 2,000,000 9,450,000
Proceeds from sales of mortgage-backed
securities -- 4,432,477 13,920,930
Proceeds from maturities of
available-for-sale securities 204,403 14,698,375 195,875
Proceeds from maturities of
held-to-maturity securities 2,000,000 -- --
Purchases of mortgage-backed securities (7,260,898) (16,292,797) --
Purchases of available for sale
securities -- (1,186,652) (9,468,955)
Principal collected on
available-for-sale securities 1,412,648 1,561,234 --
Principal collected on mortgage-backed
securities 1,187,633 521,412 1,446,077
Dividends from Federal Home Loan Bank
stock (74,400) (64,900) (52,400)
Decrease (increase) in loans, net 281,882 (6,576,095) (1,648,865)
Purchases of premises and equipment (74,648) (183,689) (285,660)
Decrease in interest bearing deposits -- 200,000 --
Proceeds on sale of real estate acquired
through foreclosure 2,234,902 93,807 857,809
Proceeds from sale of premises and
equipment -- -- 29,892
------------ ------------ ------------
Net cash provided by (used
in) investing activities 161,522 (796,828) 9,444,703
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
(Continued)
F-39
<PAGE> 145
BANK OF STOCKDALE, FSB
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Financing activities:
Net increase in deposit liabilities $ 4,980,444 1,299,018 3,496,307
Decrease in securities sold under
agreements to repurchase -- -- (2,500,000)
Decrease in FHLB advances (4,000,000) (1,000,000) (8,700,000)
Proceeds from issuance of common stock 2,979,512 -- 48,833
----------- ----------- -----------
Net cash provided by (used
in) financing activities 3,959,956 299,018 (7,654,860)
----------- ----------- -----------
Increase in cash and cash equivalents 3,650,938 721,414 751,839
Cash and cash equivalents at beginning
of year 4,504,821 3,783,407 3,031,568
----------- ----------- -----------
Cash and cash equivalents at end of year $ 8,155,759 4,504,821 3,783,407
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash payments during the year for:
Interest $ 5,400,881 5,612,528 6,231,170
=========== =========== ===========
Income taxes $ -- 106,487 62,000
=========== =========== ===========
Noncash transactions:
Loans transferred to real estate
acquired through foreclosure $ 2,289,518 2,494,730 1,073,872
=========== =========== ===========
Loans securitized $ -- 4,371,443 2,820,253
=========== =========== ===========
Change in unrealized losses on
available-for-sale securities $ 94,795 149,603 68,816
=========== =========== ===========
Loans to facilitate sale of real
estate $ 1,432,825 241,088 1,142,700
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE> 146
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bank of Stockdale is a federally chartered savings bank located in
Bakersfield, California. On July 31, 1995, Paramount Bank, FSB, also
located in Bakersfield, merged with and into Bank of Stockdale. Paramount
Bank's shareholders received 146,452 new shares of Bank of Stockdale
common stock. The merger was accounted for as a pooling of interests.
Accordingly, financial statements for the period prior to the merger have
been restated to include accounts of both Bank of Stockdale and Paramount
Bank.
(a) BASIS OF FINANCIAL STATEMENT PRESENTATION
The financial statements of Bank of Stockdale, FSB (the Bank) have been
prepared in conformity with generally accepted accounting principles. In
preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses
for the period. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan
losses and the valuation of real estate acquired in connection with
foreclosures in satisfaction of loans. In connection with the
determination of the allowance for loan losses and real estate acquired
through foreclosure, management obtains independent appraisals and other
market value information for each property.
(b) CASH EQUIVALENTS
For purposes of the statements of cash flows, the Bank considers all
highly liquid investments with a maturity, at date of purchase, of three
months or less to be cash equivalents.
(c) MARKETABLE INVESTMENT SECURITIES
Marketable investment securities consist of U.S. Treasury obligations,
mortgage-backed and debt securities. The Bank classifies its debt and
marketable equity securities in one of three categories: trading,
available-for-sale, or held-to-maturity. Trading securities are bought and
held principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the Bank has the
ability and intent to hold the security until maturity. All other
securities not included in trading or held-to-maturity are classified as
available-for-sale. The Bank does not engage in trading activity.
(Continued)
F-41
<PAGE> 147
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
Held-to-maturity securities are recorded at their amortized cost, adjusted
for the amortization or accretion of premiums or discounts. Unrealized
holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported
as a separate component of stockholders' equity until realized. Transfers
of securities between categories are recorded at fair value at the date of
transfer. The unrealized holding gains or losses included in the separate
component of equity for securities transferred from available-for-sale to
held-to-maturity are maintained and amortized into earnings over the
remaining life of the security as an adjustment to yield in a manner
consistent with the amortization or accretion of premium or discount on
the associated security.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than temporary
is charged to earnings resulting in the establishment of a new cost basis
for the security.
Premiums and discounts are amortized or accreted over the life of the
related held-to-maturity security as an adjustment to yield using a method
which approximates the interest method. Dividend and interest income are
recognized when earned. Realized gains and losses for securities
classified as available-for-sale and held-to-maturity are included in
earnings and are derived using the specific identification method for
determining the cost of securities sold.
(d) LOANS
Loans are stated at the amount of principal outstanding, net of the
undisbursed portion of loans in process, deferred loan origination fees,
and the allowance for loan losses. Loans held for sale are carried at the
lower of cost or market.
Loan origination fees, net of direct loan origination costs, are deferred
and amortized over the lives of the related loans as an adjustment to
interest income, using the level-yield method.
(Continued)
F-42
<PAGE> 148
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
(e) ALLOWANCES FOR LOSSES ON LOANS AND REAL ESTATE ACQUIRED THROUGH
FORECLOSURE
The allowances for loan losses and real estate acquired through
foreclosure are maintained to provide for estimated losses that might
occur in the normal course of business. The allowances are based on the
character of the loan portfolio, management's analysis of the portfolio
and business and economic conditions and the real estate market in the
Bank's service area. The allowances are established either through a
provision for loan losses or a provision for losses on real estate
acquired through foreclosure.
Impaired loans are loans for which it is probable that the Bank will not
be able to collect all principal and interest amounts due in accordance
with the terms of the loan. Impaired loans are measured based upon the
present value of future cash flows discounted at the loan's effective
rate, the loan's observable market price, or the fair value of collateral
if the loan is collateral-dependent. Interest on impaired loans is
recognized on a cash basis.
Management believes that the allowances for losses on loans and real
estate acquired through foreclosure are adequate. While management uses
available information to recognize losses on loans and real estate
acquired through foreclosure, future additions to the allowances may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for losses on loans and real
estate acquired through foreclosure. Such agencies may require the Bank to
recognize additions to the allowances based on their judgments about
information available to them at the time of their examination.
Interest is accrued as earned unless the collectibility is in doubt, at
which time any nonrecoverable accrued interest is charged against income.
Generally, loans are placed on nonaccrual status when they become 90 days
delinquent. Accruals are resumed only when the loans are brought fully
current with respect to interest and principal and when in the judgment of
management the loan is estimated to be fully collectible.
Real estate acquired through foreclosure is initially recorded at its
estimated fair value at the date of foreclosure. If at foreclosure, the
loan balance is greater than the fair value of the property acquired, the
excess is charged against the allowance for loan losses. Subsequent to
foreclosure, an allowance for losses on such real estate is provided when
the carrying value of individual properties exceeds their estimated fair
value, less estimated selling costs, and a provision is charged to current
operations. Fair value is generally determined by obtaining appraisals on
the properties. Generally, the Bank expects to sell the properties within
one year.
(Continued)
F-43
<PAGE> 149
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
(f) GAIN OR LOSS ON SALE OF LOANS AND SERVICING RIGHTS
In June, 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings. In addition, it requires that servicing
assets and other retained interests in transferred assets be measured by
allocating the previous carrying amount of the transferred assets between
the assets sold, if any and retained interests, if any, based on their
relative fair value at the date of transfer. Liabilities and derivatives
incurred or obtained by transferors as part of a transfer of financial
assets are to be initially measured at fair value. Servicing assets and
liabilities are to be subsequently amortized in proportion to and over the
period of estimated net servicing income or loss and assessed for asset
impairment or increased obligation based on fair value.
The Bank recognizes a gain and a related asset for the fair value of the
rights to service loans for others when loans are sold. In accordance with
SFAS No. 125, the fair value of the servicing assets is estimated based
upon the present value of the estimated expected future cash flows. The
Bank measures the impairment of the servicing asset based on the
difference between the carrying amount of the servicing asset and its
current fair value. As of December 31, 1997 and 1996, there was no
impairment in the mortgage servicing asset.
A gain or loss is recognized to the extent that the sales proceeds and the
fair value of the servicing asset exceed or are less than the book value
of the loan. Additionally, a normal cost for servicing the loan is
considered in the determination of the gain or loss.
When servicing rights are sold, a gain or loss is recognized at the
closing date to the extent that the sales proceeds, less costs to complete
the sale, exceed or are less than the carrying value of the servicing
rights held.
(Continued)
F-44
<PAGE> 150
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
(g) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost. Depreciation, including
amortization of leasehold improvements, is computed using the
straight-line method over the estimated useful lives of the related
assets. Estimated useful lives range from 3 to 7 years for leasehold
improvements and furniture and equipment, and 32 years for the branch
building.
(h) FEDERAL HOME LOAN BANK STOCK
The Bank is required to hold a specified amount of stock in the Federal
Home Loan Bank of San Francisco (FHLB). At December 31, 1997 and 1996, the
bank owned 9,971 and 11,727, respectively, of the FHLB's $100 par value
capital stock which is carried at cost.
(i) PREMIUM ON DEPOSITS ACQUIRED
Premiums on core deposit liabilities acquired are included in other assets
and are amortized on the straight-line method over periods ranging from
five to eight years. The unamortized balance of those premiums was $0 and
$34,245 at December 31, 1997 and 1996, respectively.
(j) INCOME TAXES
The Bank accounts for income taxes under the asset and liability method,
whereby deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
(k) STOCK OPTION PLAN
Prior to January 1, 1996, the Bank accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
interpretations. Under APB Opinion No. 25, compensation expense is
recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. On January 1, 1996, the Bank
adopted SFAS No. 123, Accounting for Stock-Based Compensation, which
requires entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma
(Continued)
F-45
<PAGE> 151
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Bank has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123, when applicable.
(l) LIQUIDITY REQUIREMENT
In accordance with federal regulations, the Bank must maintain an average
daily balance each month of liquid assets of not less than a specified
percentage of its average daily balances of net withdrawalable accounts
and short-term borrowings, as defined. The Bank has satisfied such
requirements through December 31, 1997.
(m) EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, Earnings per Share. SFAS
No. 128 replaces APB Opinion 15, Earnings per Share, and simplifies the
computation of earnings per share (EPS) by replacing the presentation of
primary EPS with a presentation of basic EPS. In addition, the statement
requires dual presentation of basic and diluted EPS by entities with
complex capital structures. Basic EPS includes no 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 of securities that could share
in the earnings of an entity, similar to fully diluted EPS.
(n) YEAR 2000
In January 1997, the Bank developed a plan to address the Year 2000 issue
and began converting its computer systems to be Year 2000 compliant. The
plan provides for the conversion efforts to be completed by the end of
1999. The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Most
software used by the Bank is vendor developed software. Therefore, the
Bank's total direct cost of the project is expected to be immaterial and
will be funded through operating cash flows. The Bank will expense all
costs associated with these system changes as the costs are incurred. As
of December 31, 1997, no costs had been expended.
(2) REGULATIONS
Under the Financial Institutions Reform, Recovery and Enforcement Act,
thrifts must maintain sufficient capital to meet all of the following
requirements: (1) tangible capital of at least 1.5 percent of total
assets, (2) core capital of 3 percent of total assets, and (3) an overall
risk-based capital requirement of 8 percent of total assets, which
includes
(Continued)
F-46
<PAGE> 152
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
certain off-balance sheet items. Also, loans to one borrower are generally
limited to 15 percent of unimpaired regulatory capital. Higher levels, not
to exceed an additional 15 percent, may be available if certain conditions
are met. The Bank is in compliance with capital and loans to one borrower
requirements.
Additionally, the Federal Deposit Insurance Corporation Improvement Act,
among other items, prescribes a qualified thrift lender (QTL) test that
requires institutions to have at least 65 percent of their "portfolio
assets" in residential housing-related investments determined on a
consolidated basis. The Bank is in compliance with the QTL test.
(3) MARKETABLE INVESTMENT SECURITIES
Marketable investment securities at December 31, 1997 and 1996 consist of:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Available-for-sale, at fair value $23,178,159 18,536,349
Held-to-maturity, at amortized cost 1,658,835 3,749,636
----------- -----------
$24,836,994 22,285,985
=========== ===========
</TABLE>
The amortized cost, unrealized holding gains, unrealized holding losses
and fair value for available-for-sale and held-to-maturity securities by
major security type at December 31, 1997, were as follows:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available-for-sale:
Mortgage-backed
securities $17,100,411 27,805 (55,146) 17,073,070
U.S. Government
securities 6,150,171 174 (45,256) 6,105,089
----------- ----------- ----------- -----------
$23,250,582 27,979 (100,402) 23,178,159
=========== =========== =========== ===========
Held-to-maturity:
Mortgage-backed
securities $ 1,658,835 332 (1,024) 1,658,143
----------- ----------- ----------- -----------
$ 1,658,835 332 (1,042) 1,658,143
=========== =========== =========== ===========
</TABLE>
(Continued)
F-47
<PAGE> 153
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
The amortized cost, unrealized holding gains, unrealized holding losses
and fair value for available-for-sale and held-to-maturity securities by
major security type at December 31, 1996, were as follows:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available-for-sale:
Mortgage-backed
securities $11,743,816 2,224 (140,446) 11,605,594
U.S. Government
securities 6,755,348 5,794 (34,790) 6,726,352
Other 204,403 -- -- 204,403
----------- ----------- ----------- -----------
$18,703,567 8,018 (175,236) 18,536,349
=========== =========== =========== ===========
Held-to-maturity:
Mortgage-backed
securities $ 1,749,636 967 (2,643) 1,747,960
U.S. Government
Agency Step-up
bonds 2,000,000 984 -- 2,000,984
----------- ----------- ----------- -----------
$ 3,749,636 1,951 (2,643) 3,748,944
=========== =========== =========== ===========
</TABLE>
Maturities of investment securities classified as available-for-sale and
held-to-maturity were as follows at December 31, 1997:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Available-for-sale:
Due within one year $ 2,001,141 2,001,400
Due after five years through ten years 2,774,000 2,794,791
Due after ten years 18,475,441 18,381,968
----------- -----------
$23,250,582 23,178,159
=========== ===========
Held-to-maturity:
Due after one year through five years $ 50,139 49,836
Due after ten years 1,608,696 1,608,307
----------- -----------
$ 1,658,835 1,658,143
=========== ===========
</TABLE>
(Continued)
F-48
<PAGE> 154
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
There were no gain on sales of available-for-sale investment securities
during 1997. In 1996, the realized gains and losses on sales of available
for sale investment securities were $81,034 and $22,670, respectively. In
1995, the gross realized gains and losses on sales of available for sale
investment securities were $150,147 and $1,217, respectively.
(4) LOANS
Outstanding loans at December 31, 1997 and 1996 are summarized below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Real estate loans, secured by deeds of trust:
Residential $47,560,517 47,354,294
Commercial 15,047,206 18,212,668
Construction 16,259,027 11,883,994
Consumer 13,048,119 10,766,467
Commercial business, non real estate 6,972,582 5,588,570
Other loans 862,626 2,161,468
----------- -----------
99,750,077 95,967,461
----------- -----------
Less:
Undisbursed portion of loans in process 8,510,721 4,317,203
Deferred loan origination fees 127,271 163,742
Allowance for loan losses (note 6) 814,623 1,158,365
----------- -----------
9,452,615 5,639,310
----------- -----------
$90,297,462 90,328,151
=========== ===========
</TABLE>
At December 31, 1997 and 1996, loans serviced for others totaled
$56,887,441 and $57,562,684, respectively.
At December 31, 1997 and 1996, the Bank had loans held for sale of
$3,187,046 and $1,700,814, respectively.
Nonaccrual loans totaled $877,287 and $1,499,235 at December 31, 1997 and
1996, respectively. The foregone interest income on nonaccrual loans was
$51,633, $58,178 and $150,539 for the years ended December 31, 1997, 1996
and 1995, respectively.
The Bank had outstanding balances of $1,775,490 and $1,499,235 in impaired
loans which had valuation allowances of $108,852 and $310,757 at December
31, 1997 and 1996, respectively. The average outstanding balance of
impaired loans was $2,163,576, $1,877,136 and $2,178,874, on which
interest income of $92,361, $67,990 and $103,889 was recognized for the
years ended December 31, 1997, 1996 and 1995, respectively.
(Continued)
F-49
<PAGE> 155
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
(5) REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure at December 31, 1997 and 1996
consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Real estate acquired through foreclosure
and deed-in-lieu of foreclosure $ 1,188,563 2,799,726
Less allowance for estimated losses (note 6) (345,766) (367,548)
----------- -----------
$ 842,797 2,432,178
=========== ===========
</TABLE>
(6) ALLOWANCE FOR ESTIMATED LOSSES
The following is a summary of the activity in the allowance for loan
losses and real estate acquired through foreclosure:
<TABLE>
<CAPTION>
REAL ESTATE
ACQUIRED THROUGH
LOANS FORECLOSURE TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Balance at December 31, 1994 $ 850,746 1,084,563 1,935,309
Provision for losses 474,623 147,080 621,703
Charge-offs and recoveries, net (143,100) (1,142,175) (1,285,275)
----------- ----------- -----------
Balance at December 31, 1995 1,182,269 89,468 1,271,737
Provision for losses 854,399 292,001 1,146,400
Charge-offs and recoveries, net (878,303) (13,921) (892,224)
----------- ----------- -----------
Balance at December 31, 1996 1,158,365 367,548 1,525,913
Provision for losses 414,817 266,083 680,900
Charge-offs and recoveries, net (758,559) (287,865) (1,046,424)
----------- ----------- -----------
Balance at December 31, 1997 $ 814,623 345,766 1,160,389
=========== =========== ===========
</TABLE>
(7) ACCRUED INTEREST ON LOANS AND INVESTMENTS
Accrued interest on loans and investments at December 31, 1997 and 1996
consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Loans $572,507 665,504
Mortgage-backed securities 110,068 82,870
Investments 99,519 140,971
-------- --------
$782,094 889,345
======== ========
</TABLE>
(Continued)
F-50
<PAGE> 156
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
(8) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land $ 252,000 252,000
Building 198,484 198,484
Furniture and equipment 1,483,972 1,413,313
Leasehold improvements 270,737 266,749
---------- ----------
2,205,193 2,130,546
Less accumulated depreciation and amortization 1,484,554 1,235,841
---------- ----------
$ 720,639 894,705
========== ==========
</TABLE>
(9) DEPOSITS
Deposits at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Non-interest bearing checking accounts $ 12,827,687 8,462,617
NOW accounts 8,834,760 6,846,829
Money market accounts 3,444,902 4,726,485
Savings accounts 9,283,507 8,701,043
Time deposits of $100,000 or more 31,593,629 30,832,462
Time deposits - other 54,658,179 56,092,784
------------ ------------
$120,642,664 115,662,220
============ ============
</TABLE>
Time deposits at December 31, 1997 and 1996 mature as follows:
<TABLE>
<CAPTION>
MONTHS TO MATURITY 1997 1996
------------------ ----------- -----------
<S> <C> <C>
Less than 12 $71,308,467 70,912,822
12 to 24 5,990,489 9,851,828
24 to 36 2,903,616 2,586,969
36 to 48 2,155,122 1,702,653
48 to 60 3,894,114 1,870,974
----------- -----------
$86,251,808 86,925,246
=========== ===========
</TABLE>
(Continued)
F-51
<PAGE> 157
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
At December 31, 1997 and 1996, the Bank held public agency deposits of
$200,000 and $398,579.
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Savings accounts $ 304,184 225,628 195,311
Interest-bearing NOW accounts 116,514 88,670 75,425
Money market accounts 110,750 119,049 146,682
Time deposits of $100,000 or more 1,833,468 2,002,552 1,944,325
Time deposits - other 2,963,331 2,977,623 3,193,052
---------- ---------- ----------
$5,328,247 5,413,522 5,554,795
========== ========== ==========
</TABLE>
(10) ADVANCES FROM FEDERAL HOME LOAN BANK (FHLB)
The FHLB has established a Financing Availability for each shareholder
that sets the total amount and maximum term that can be obtained on all
credit products combined without additional underwriting. The Bank is
eligible to obtain credit from the FHLB equal to 15 percent of assets with
terms up to 84 months.
A summary of advances from the FHLB follows:
<TABLE>
<CAPTION>
YEAR OF DECEMBER 31,
NOTE MATURITY/ INTEREST --------------------------
NUMBER PAY OFF RATE 1997 1996
------ --------- -------- --------- ---------
<S> <C> <C> <C> <C>
57065 1997 6.10% $ -- 2,000,000
963507 1997 6.79% -- 1,000,000
963750 1997 6.79% -- 1,000,000
--------- ---------
$ -- 4,000,000
========= =========
</TABLE>
Mortgage loans and investment securities with a carrying value of
$8,875,452 and $16,778,859 at December 31, 1997 and 1996, respectively,
are pledged as collateral on available FHLB borrowings.
(Continued)
F-52
<PAGE> 158
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
(11) INCOME TAXES
The income tax benefit consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal income tax:
Current $ 6,536 (250,050) (313,004)
Deferred (51,002) (340,169) 54,051
--------- --------- ---------
(44,466) (590,219) (258,953)
--------- --------- ---------
State franchise tax:
Current 1,600 1,487 (52,368)
Deferred (749) (140,287) (22,641)
--------- --------- ---------
851 (138,800) (75,009)
--------- --------- ---------
Income tax benefit $ (43,615) (729,019) (333,962)
========= ========= =========
</TABLE>
The income tax benefit differs from the amount computed by applying the
statutory federal income tax rates to pretax earnings for the following
reasons, expressed in percentages:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Federal income tax at statutory rate 34.00% (34.00)% (34.00)%
State franchise taxes, net of
federal income tax benefit (4.93) (3.05) (3.70)%
AMT credit carryover 4.44 (0.83) --
Low income housing credit carryover (81.36) -- --
Merger costs -- -- 8.22%
Change in valuation allowance 13.26 5.28 (14.90)%
Net operating loss carryover 17.19 (9.47) --
Other 0.54 (0.85) 10.68%
------- ------- -------
(16.86)% (42.92)% (33.70)%
======= ======= =======
</TABLE>
(Continued)
F-53
<PAGE> 159
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities consist
of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for losses:
Loans $ 293,363 432,856
Real estate owned 155,041 164,810
Capitalized real estate owned expenses 16,185 10,925
Net operating loss carryforwards 575,399 619,850
AMT credit carryover 2,578 14,069
Low income housing credit carryover 210,400 --
Capital loss carryover 55,896 91,230
Unrealized loss on marketable investment
securities 30,418 70,232
Depreciation 70,134 45,325
Nonaccrual interest 30,371 26,087
Core deposit premium 8,481 12,377
Deferred loan fees 50,760 50,760
Deferred compensation 213,307 149,640
Other 67,894 55,961
----------- -----------
Total deferred tax assets 1,780,227 1,744,122
Less valuation allowance (517,169) (482,869)
----------- -----------
1,263,058 1,261,253
----------- -----------
Deferred tax liabilities:
Deferred excess servicing premium (51,480) (54,884)
State franchise taxes deferred (86,473) (94,312)
Deferred installment sale gain (84,302) (84,302)
FHLB stock (143,643) (142,532)
----------- -----------
Total deferred tax liabilities (365,898) (376,030)
----------- -----------
Net deferred tax assets $ 897,160 885,223
=========== ===========
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will be not realized. Management
believes that the valuation allowance is sufficient to cover that portion
that may not be fully realized. The net change in the total valuation
allowance for the years ended December 31, 1997 and 1996 was an increase
of $34,300 and $89,614, respectively.
(Continued)
F-54
<PAGE> 160
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
Net deferred tax assets are included in prepaid expenses and other assets
in the accompanying balance sheets.
As of December 31, 1997, the Bank had net operating loss carryforwards of
$1,245,000 for federal income tax purposes, which expire in 2011 and
$1,248,000 for state franchise tax purposes which expire in 2001.
Income tax (benefit) expense for the years ended December 31, 1997, 1996
and 1995 were allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income from continuing operations $ (43,615) (729,019) (333,962)
Stockholders' equity for unrealized
losses on available-for-sale
securities 39,814 (62,833) (28,905)
--------- --------- ---------
$ (3,801) (791,852) (362,867)
========= ========= =========
</TABLE>
(12) COMMITMENTS AND CONTINGENCIES
(a) OPERATING LEASES
The Bank has executed noncancelable operating lease agreements for real
property.
Future minimum lease payments for noncancelable operating leases with
initial or remaining terms of one year or more at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31, LEASES
----------- ---------
<S> <C>
1998 $156,747
1999 140,638
2000 146,264
2001 61,917
--------
Total minimum lease payments $505,566
========
</TABLE>
Rent expense under operating leases totaled approximately $240,700,
$282,600 and $369,700, for the years ended December 31, 1997, 1996 and
1995, respectively.
(Continued)
F-55
<PAGE> 161
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
(b) BENEFIT PLANS
The Bank has an employee savings plan which allows employees to contribute
up to $9,500 in 1997. Substantially, all employees of the Bank can
participate in the plan. The Company will match 25 percent of the
employee's elected contribution, as defined, not to exceed 6 percent of
annual eligible compensation. The Bank contributed $20,828, $15,812 and
$18,811 to this plan for the years ended December 31, 1997, 1996 and 1995,
respectively.
The Bank has established a salary continuation plan for certain key
executives and a deferred compensation plan for the Directors. Benefits
under the salary continuation plan are payable for a period of fifteen
years upon retirement (age 65) or death. The Bank expenses annually an
amount sufficient to accrue the present value of the benefits to be paid
to the executives upon their retirement. Additionally, the key executives'
beneficiaries are entitled to certain death benefits under the plan in the
event the executive dies while employed by the Bank.
In accordance with the provisions of the deferred compensation plan, a
Director may choose to defer all or a portion of his annual Director's
fee. The Bank expenses the directors' fees annually regardless of whether
or not the director has chosen to defer fees. Benefits under the plan are
payable ten years after entrance to the plan or upon termination of his
directorship, whichever is sooner. Payments are made in annual
installments over a ten year period. In the event of death, while a member
of the Board of Directors, the director's beneficiary will receive an
amount that would have been paid to the director had he remained in the
plan for a ten-year period.
The death benefits payable under both plans are funded by life insurance
policies purchased by the Bank. The cash surrender value of these
policies, which was $2,104,026 and $2,035,322 at December 31, 1997 and
1996, respectively, is included in prepaid expenses and other assets.
Compensation expense associated with the plans was $54,329, $69,916 and
$63,382 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(c) LITIGATION
The Bank is involved in certain legal proceedings in the normal course of
business. In the opinion of management, after having consulted with legal
counsel, the outcome of the legal proceedings should not have a material
effect on the financial condition of the Bank.
(Continued)
F-56
<PAGE> 162
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
(13) CAPITAL ADEQUACY AND RESTRICTION ON DIVIDENDS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate 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 I capital (as defined in the regulations)
to Risk Weighted Assets (as defined), Tier I Capital to total assets (as
defined) and tangible capital (as defined).
As of December 31, 1997, the most recent notification, the Office of
Thrift Supervision categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized the Bank must meet the minimum ratios as set forth in the
following table. There are no conditions or events since that notification
that management believes have changed the institution's category.
(Continued)
F-57
<PAGE> 163
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
The Bank's actual capital amounts and ratios are presented in the table as
of December 31, as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
------------------ ------------------ -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Risk-Based
Capital (to Risk
Weighted Assets) $9,768,782 13.0% $6,031,790 8.0% $7,539,738 10.0%
Tier I Capital (to
Risk Weighted
Assets) $9,067,431 12.0% $3,015,895 4.0% $4,523,843 6.0%
Tier I Capital (to
Total Assets) $9,067,431 7.0% $3,906,735 3.0% $6,511,225 5.0%
Tangible Ratio (to
Total Assets) $9,067,431 7.0% $1,953,368 1.5% $2,604,490 2.0%
As of December 31, 1996:
Total Risk-Based
Capital (to Risk
Weighted Assets) $6,601,000 8.6% $6,143,000 8.0% $7,697,000 10.0%
Tier I Capital (to
Risk Weighted
Assets) $5,785,691 7.5% $3,072,000 4.0% $4,607,000 6.0%
Tier I Capital (to
Total Assets) $5,785,691 4.6% $3,798,000 3.0% $6,330,000 5.0%
Tangible Ratio (to
Total Assets) $5,751,445 4.5% $1,898,000 1.5% $2,531,000 2.0%
</TABLE>
The Bank may not declare or pay dividends on its common stock if the
effect thereof would cause regulatory capital to be reduced below any of
the requirements stated above.
(14) INCENTIVE STOCK OPTION PLAN
In July 1985, the Stockholders of the Bank approved an Incentive Stock
Option Plan. Under the Plan, options may be granted to salaried employees
to purchase a maximum of 100,000 shares of the authorized but unissued
common stock of the Bank. Stock options are granted with an exercise price
equal to the stock's fair value at the date of grant. All stock options
have 10 year terms and vest and become fully exercisable after 10 years
from the date of grant. Any stock options not granted within the 10 year
term of the Plan become no longer available for grant.
(Continued)
F-58
<PAGE> 164
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
In July, 1995, the Stockholders approved the 1995 Incentive Stock Option
Plan which authorized an additional 100,000 shares available for grant.
The per share weighted-average fair value of stock options granted during
1995 was $4.55 on the date of grant using the Black Scholes option-pricing
model with the following weighted average assumptions: 1995 - expected
dividend yield 0%; risk-free interest rate of 6.5%; volatility of 30%, and
an expected life of 10 years.
The Bank applies the provisions of APB Opinion No. 25 in accounting for
its Plan and, accordingly, no compensation cost has been recognized for
stock options granted in the financial statements. Had the Bank determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Bank's 1995 net income would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<S> <C>
Net loss:
As reported $ (656,074)
Pro forma adjustment (58,058)
-----------
Pro forma net loss $ (714,132)
===========
Loss per share:
As reported $ (.87)
Pro forma adjustment (.07)
-----------
Pro forma loss per share $ (.94)
===========
</TABLE>
Pro forma net loss reflects only options granted in 1995. Therefore, the
full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net loss amounts presented above
because compensation cost for options granted prior to January 1, 1995 is
not considered.
Stock options activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-
OF AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Balance at December 31, 1994 44,000 $ 5.35
Granted 22,000 8.00
Exercised (11,000) 4.50
Forfeited -- --
Expired (22,000) 5.63
------- -------
Balance at December 31, 1995 33,000 $ 7.21
======= =======
</TABLE>
(Continued)
F-59
<PAGE> 165
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
At December 31, 1997 and 1996, the number of options exercisable was
33,000 and the weighted-average exercise price of those options was $7.21.
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $5.63 - $8.00 and 7
years, respectively. No options were granted, exercised, forfeited, or
expired in 1997 and 1996.
(15) EARNINGS PER SHARE (EPS)
The following reconciles the denominator used in the calculation of both
basic and diluted earnings per share for each of the years ended December
31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
BASIC EPS CALCULATION
Numerator: Net income (loss) $302,226 (969,431) (656,074)
-------- -------- --------
Denominator: Weighted number of
common shares outstanding 768,926 757,719 757,719
-------- -------- --------
Basic EPS $ 0.39 (1.28) (0.87)
======== ======== ========
DILUTED EPS CALCULATION
Numerator: Net income (loss) $302,226 (969,431) (656,074)
-------- -------- --------
Denominator:
Weighted number of common shares
outstanding 768,926 757,719 757,719
Common stock options 1,625 3,266 3,266
-------- -------- --------
770,551 760,985 760,985
-------- -------- --------
Diluted EPS $ 0.39 (1.27) (0.86)
======== ======== ========
</TABLE>
(16) RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into transactions
with related parties, including directors, officers, employees and
affiliates. These transactions include deposits and loans with the Bank
with substantially the same terms, including interest rates, as deposits
and loans with unrelated parties. The amount of such deposits totaled
$1,381,786 and $1,072,363 and the amount of loans to related parties
totaled $1,483,714 and $1,286,982 at December 31, 1997 and 1996,
respectively.
(Continued)
F-60
<PAGE> 166
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
The Bank leases its headquarters facility from a partnership whose
partners consist of certain members of the Bank's Board of Directors. Rent
expense charged to operations under this lease totaled $130,028, $147,313
and $172,278 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(17) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk
in the normal course of business. These financial instruments include
commitments to extend credit, purchase and sell loans and standby letters
of credit. These instruments involve, to varying degrees, elements of
credit risk. The Bank's exposure to credit loss is the contractual amount
funded.
The following summarizes the contractual amounts of financial instruments
with off-balance sheet risk at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commitments to extend credit $16,544,075 7,471,738
Commitments to sell loans $ 6,819,064 3,496,772
</TABLE>
The Bank uses the same credit policies in making commitments to extend
credit as it does for on-balance sheet instruments. Commitments to extend
credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or termination clauses. Since some
of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral, if any, obtained by the Bank
is based on management's evaluation of the customer.
Commitments to sell loans are agreements to sell to another party loans
originated by the Bank if certain conditions are met. The Bank only sells
loans to third parties without recourse. The Bank is not exposed to credit
loss if the borrower fails to perform according to the promissory note as
long as the Bank has fulfilled its obligations stated in the sale
commitment. The Bank may or may not retain servicing of the loans. Standby
letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third-party. The credit risk
involved in issuing letters of credit is essentially the same as extending
loans to customers. The Bank uses the same underwriting policies as if a
loan were made. The amount of collateral, if any, obtained by the Bank is
based on management's evaluation of the customer.
(Continued)
F-61
<PAGE> 167
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
(18) SAVINGS ASSOCIATION INSURANCE FUND PREMIUMS
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the Act)
was signed into law. The Act empowered the Board of Directors of the
Federal Deposit Insurance Corporation (FDIC) to impose a special
assessment on Savings Association Insurance Fund deposits of depository
institutions. This special assessment, which was based on Savings
Association Insurance Fund-assessable deposits at March 31, 1995, is
intended to recapitalize the Savings Association Insurance Fund. The
Bank's deposits are insured by the Savings Association Insurance Fund and
accordingly, the Bank was subject to the special assessment on Savings
Association Insurance Fund deposits. The special assessment of
approximately $763,000 was paid by the Bank in October, 1996 and has been
included as part of Savings Association Insurance Fund premiums in the
accompanying statement of operations.
(19) SIGNIFICANT GROUP CONCENTRATION OF LOAN CREDIT RISK
At December 31, 1997 and 1996, approximately $85,785,000 or 86% and
$83,040,000 or 87%, respectively, of gross outstanding loans are located
primarily in the Southern San Joaquin Valley and Central California. These
loans are expected to be repaid from cash flows from the borrower's
employment or operations or sale of the collateral.
The Bank normally only lends funds up to a certain percentage of the
collateral's value as stated in the Bank's underwriting policies based on
the type of real estate. The different types of real estate collateral
securing the Bank's loan portfolio are single family residences, apartment
complexes, office buildings, shopping centers, undeveloped land and other
real estate.
(20) DERIVATIVE FINANCIAL INSTRUMENTS
The Bank holds $1,346,000 and $1,343,000 in mortgage derivative securities
classified as held-to-maturity and carried at amortized cost at December
31, 1997 and 1996, respectively. The fair value of these securities was
$1,343,000 at December 31, 1997 and 1996. The Bank also holds $4,840,315
and $5,594,000 in mortgage derivative securities classified as available
for sale and carried at fair value at December 31, 1997 and 1996,
respectively. Additionally, the Bank held one U.S. Government Agency
Step-up bond, considered a structured note, with a carrying value of
$2,000,000 at December 31, 1996. The bond was classified as
held-to-maturity and was called on January 31, 1997. The fair value of
this bond was $2,001,000 at December 31, 1996.
(Continued)
F-62
<PAGE> 168
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
(21) COMMON STOCK
On December 23, 1997, the Bank issued 454,546 shares of common stock
through a private placement stock offering. The shares were sold for a
price of $6.60 per share. 362,431 shares were purchased by Financial
Institutions Partners, Ltd. (FIP) and the remaining shares were sold to
officers and directors of the Bank. As a result of the transaction,
approximately 30% of the Bank's outstanding stock is owned by FIP as of
December 31, 1997.
(22) PRE-MERGER RESULTS OF OPERATIONS
Separately reported interest income and net loss (including merger costs)
for Bank of Stockdale and Paramount Bank for the seven months ended July
31, 1995 are as follows:
<TABLE>
<CAPTION>
STOCKDALE PARAMOUNT
----------- -----------
<S> <C> <C>
Interest income $ 4,037,859 1,936,028
=========== ===========
Net loss (617,861) (112,796)
=========== ===========
</TABLE>
(23) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents
The carrying amounts reported in the balance sheet for cash and cash
equivalents are a reasonable estimate of fair value.
Money Market Mutual Funds
The carrying amounts reported in the balance sheet for money market
mutual funds are a reasonable estimate of fair value.
Interest bearing deposits in insured financial institutions
The carrying amounts reported in the balance sheet for interest bearing
deposits in insured financial institutions are a reasonable estimate of
fair value.
Marketable investment securities
Fair values for marketable investment securities are based on quoted
market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. (See note 3).
(Continued)
F-63
<PAGE> 169
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
Loans
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The
fair values for fixed-rate loans (e.g., residential, commercial, and
other loans) are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
Accrued interest on loans and investments
The carrying amount of accrued interest receivable approximates fair
value.
Commitments to extend credit and sell loans
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counterparties. For commitments to sell loans, fair value is the
difference between the net estimated sales price and carrying value.
Deposits
The fair values disclosed for demand deposits (e.g., non-interest
bearing checking, NOW, money market, and savings accounts) are, by
definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). The fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits. The carrying amount of accrued interest payable
approximates its fair value.
Advances from Federal Home Loan Bank
The fair values for fixed rate advances are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered for advances to a schedule of expected maturities on
advances.
Limitations
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 Bank's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Bank's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and
(Continued)
F-64
<PAGE> 170
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Other significant assets
and liabilities that are not considered financial assets or liabilities
include the mortgage banking operation, deferred tax assets, and
property, plant, and equipment. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have
a significant effect on fair value estimates and have not been
considered in many of the estimates.
(Continued)
F-65
<PAGE> 171
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
1997
-----------------------------------
CARRYING FAIR
AMOUNT VALUE
------------- -------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 5,063,794 5,063,794
Money market mutual funds 3,091,965 3,091,965
Interest bearing deposits in insured
financial institutions 399,940 399,940
Marketable investment securities 24,836,994 24,836,302
Loans:
Fixed rate 40,137,000 41,365,936
Variable rate 59,613,222 59,613,222
Less:
Undisbursed portion of loans in process (8,510,866) (8,510,866)
Deferred loan origination fees (127,271) (127,271)
Allowance for loan losses (814,623) (814,623)
------------- -------------
Net loans 90,297,462 91,526,398
Accrued interest on loans and investments 782,094 782,094
Federal Home Loan Bank Stock 997,100 997,100
Income tax receivable 104,799 104,799
Financial liabilities:
Deposits:
Demand accounts 12,827,687 12,827,687
NOW accounts 8,834,760 8,834,760
Money market accounts 3,444,902 3,444,902
Savings accounts 9,283,507 9,283,507
Time deposits 86,251,808 87,350,904
------------- -------------
Total deposits 120,642,664 121,741,760
</TABLE>
<TABLE>
<CAPTION>
CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE
----------- ----------- -----------
<S> <C> <C> <C>
Unrecognized financial instruments:
Commitments to extend credit $16,544,075 -- 248,161
Commitments to sell loans 3,187,046 -- 46,413
</TABLE>
(Continued)
F-66
<PAGE> 172
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1996
-----------------------------------
CARRYING FAIR
AMOUNT VALUE
------------- -------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,504,821 4,504,821
Interest bearing deposits in insured
financial institutions 399,940 399,940
Marketable investment securities 22,285,985 22,285,293
Loans:
Fixed rate 37,705,000 38,278,946
Variable rate 58,262,461 58,262,461
Less:
Undisbursed portion of loans in process (4,317,203) (4,317,203)
Deferred loan origination fees (163,742) (163,742)
Allowance for loan losses (1,158,365) (1,158,365)
------------- -------------
Net loans 90,328,151 90,902,097
Accrued interest on loans and investments 889,345 889,345
Federal Home Loan Bank Stock 1,172,700 1,172,700
Income tax receivable 433,955 433,955
Financial liabilities:
Deposits:
Demand accounts 8,462,617 8,462,617
NOW accounts 6,846,829 6,846,829
Money market accounts 4,726,485 4,726,485
Savings accounts 8,701,043 8,701,043
Time deposits 86,925,246 87,876,294
------------- -------------
Total deposits 115,662,220 116,613,268
Advances from Federal Home Loan Bank 4,000,000 4,026,173
</TABLE>
<TABLE>
<CAPTION>
CONTRACT CARRYING FAIR
AMOUNT AMOUNT VALUE
---------- ---------- ----------
<S> <C> <C> <C>
Unrecognized financial instruments:
Commitments to extend credit $7,471,738 -- 112,076
Commitments to sell loans 1,700,814 -- 22,718
</TABLE>
(Continued)
F-67
<PAGE> 173
BANK OF STOCKDALE, FSB
NOTES TO FINANCIAL STATEMENTS
(23) PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
In June 1997, the FSAB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. It does
not, however, specify when to recognize or how to measure items that make
up comprehensive income. SFAS No. 130 was issued to address the concerns
over the practice of reporting elements of comprehensive income directly
in equity.
F-68
<PAGE> 174
BANK OF STOCKDALE, FSB
CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------
ASSETS 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $ 5,740,291 $ 10,556,272
Money market mutual funds 127,128 81,839
Interest-bearing deposits in insured financial
institutions 399,940 399,940
Marketable investment securities 25,088,386 18,336,450
Loans, net 98,994,901 89,487,020
Real estate acquired through foreclosure 726,743 1,043,965
Accrued interest on loans and investments 847,885 833,101
Premises and equipment, net 1,117,406 765,347
Federal Home Loan Bank stock 1,045,000 1,227,300
Prepaid expenses and other assets 4,008,353 3,533,583
Income tax receivable -- 420,696
- --------------------------------------------------------------------------------------
138,096,033 126,685,513
======================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------
Liabilities:
Deposits $ 123,847,588 $ 119,235,199
Advances from Federal Home Loan Bank 3,000,000 --
Income taxes currently payable 247,397 --
Accrued expenses and other liabilities 1,180,854 1,635,105
- --------------------------------------------------------------------------------------
TOTAL LIABILITIES 128,275,839 120,870,304
- --------------------------------------------------------------------------------------
Stockholders' equity:
Common stock - par value $4 per share;
authorized 10,000,000 shares, issued and
outstanding 1,212,265 shares 4,849,060 3,030,876
Additional paid-in capital 5,808,666 4,647,338
Accumulated deficit (881,936) (1,791,048)
Accumulated other comprehensive income
(loss), net 44,404 (71,957)
- --------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 9,820,194 5,815,209
- --------------------------------------------------------------------------------------
Commitments and contingencies
======================================================================================
$ 138,096,033 $ 126,685,513
======================================================================================
</TABLE>
F-69
<PAGE> 175
BANK OF STOCKDALE, FSB
CONDENSED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30,
------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans $ 6,299,113 $ 6,119,642
Mortgage-backed securities 921,380 664,636
Investment securities and other earning assets 427,975 504,156
- ---------------------------------------------------------------------------------------------------
Total interest income 7,648,468 7,288,434
- ---------------------------------------------------------------------------------------------------
Interest expense:
Deposit liabilities 3,876,238 3,981,317
FHLB advances and other 31,246 59,206
- ---------------------------------------------------------------------------------------------------
Total interest expense 3,907,484 4,040,523
- ---------------------------------------------------------------------------------------------------
Net interest income 3,740,984 3,247,911
Provision for loan losses (note 3) 306,156 354,024
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,434,828 2,893,887
- ---------------------------------------------------------------------------------------------------
Other income:
Net gain (loss) on sale of investments and
mortgage-backed securities -- --
Net gain on sale of loans 605,354 416,509
Net gain on sale of real estate 60,772 33,719
Demand account service charges and fees 499,358 438,286
Loan servicing fees 88,354 100,734
Other income 329,684 274,136
- ---------------------------------------------------------------------------------------------------
Total noninterest income 1,583,522 1,263,384
- ---------------------------------------------------------------------------------------------------
Other expense:
Salaries and benefits 1,925,421 1,805,733
Provision for losses on real estate acquired
through foreclosure 98,844 246,876
Occupancy 309,522 297,312
Depreciation and amortization 181,487 218,638
Savings Association Insurance Fund premiums 120,660 126,712
Real estate owned 77,884 172,906
Service bureau expense 128,002 186,102
Advertising 153,938 84,645
Insurance 57,201 54,614
Professional fees 144,892 171,895
Office supplies 68,005 60,289
Telephone and postage 118,183 100,186
Bank charges 166,601 137,320
Other 566,044 407,435
- ---------------------------------------------------------------------------------------------------
Total noninterest expense 4,116,684 4,070,663
- ---------------------------------------------------------------------------------------------------
Income before income taxes 901,666 86,608
- ---------------------------------------------------------------------------------------------------
Income taxes 193,307 (14,865)
- ---------------------------------------------------------------------------------------------------
Net income $ 708,359 $ 101,473
- ---------------------------------------------------------------------------------------------------
Other comprehensive income:
Unrealized gains on securities, net of taxes of
$62,573 and $18,125 for September 30, 1998
and 1997, respectively 86,409 25,029
- ---------------------------------------------------------------------------------------------------
Total other comprehensive income 86,409 25,029
- ---------------------------------------------------------------------------------------------------
Total comprehensive income 794,768 126,502
===================================================================================================
Basic earnings per share (note 2) $ 0.58 $ 0.13
===================================================================================================
Diluted earnings per share (note 2) $ 0.58 $ 0.13
===================================================================================================
</TABLE>
F-70
<PAGE> 176
BANK OF STOCKDALE, FSB
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OUTSTANDING OTHER
SHARES OF ADDITIONAL COMPREHENSIVE
COMMON COMMON PAID-IN ACCUMULATED INCOME
STOCK STOCK CAPITAL DEFICIT (LOSS), NET TOTAL
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 757,719 $3,030,876 4,647,338 (1,892,521) (96,986) 5,688,707
Net income 101,473 101,473
Change in unrealized losses, net of
$18,125 income tax effect on
marketable investment securities 25,029 25,029
------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 757,719 $3,030,876 4,647,338 (1,791,048) (71,957) 5,815,209
====================================================================================
BALANCE AT DECEMBER 31, 1997 1,212,265 $4,849,060 5,808,666 (1,590,295) (42,005) 9,025,426
====================================================================================
Net income 708,359 708,359
Change in unrealized losses, net of
$62,573 income tax effect on
marketable investment securities 86,409 86,409
BALANCE AT SEPTEMBER 30, 1998 1,212,265 $4,849,060 5,808,666 (881,936) 44,404 9,820,194
====================================================================================
</TABLE>
F-71
<PAGE> 177
BANK OF STOCKDALE, FSB
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30,
-----------------------------
1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $708,359 $101,473
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan and real estate losses 405,000 600,900
Depreciation and amortization 181,487 218,638
Net (gain) loss on sales of:
Loans (605,354) (416,509)
Real estate (60,772) (33,719)
Originations of loans held for sale (46,560,663) (25,786,232)
Proceeds from sale of loans 47,163,354 24,563,509
(Increase) decrease in interest receivable (65,791) 56,244
Decrease in income taxes receivable 25,983 13,258
Increase in taxes currently payable 184,824 0
Increase in prepaid expenses and other assets (493,744) (193,689)
Increase in accrued expenses and other liabilities 275,567 251,989
Net decrease in net deferred fees (46,517) (50,134)
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,111,733 (674,272)
- -------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from maturities of held-to-maturity securities 1,000,000 2,000,000
Purchase of mortgage-backed securities (2,538,165) 0
Purchase of available-for-sale securities (4,593,531) 0
Principal collected on available-for-sale securities 915,485 475,455
Principal collected on mortgage-backed securities 5,113,801 1,312,830
Dividends from Federal Home Loan Bank stock (47,900) (54,600)
(Increase) decrease in loans, net (9,217,554) 2,705,327
Purchases of premises and equipment (578,254) (55,035)
Proceeds on sale of real estate acquired through foreclosure 341,121 646,202
- -------------------------------------------------------------------------------------------------
Net cash provide by (used in) investing activities (9,604,997) 7,030,179
- -------------------------------------------------------------------------------------------------
Financing activities:
Net increase in deposit liabilities 3,204,924 3,572,980
Increase (decrease) in FHLB advances 3,000,000 (4,000,000)
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,204,924 (427,020)
- -------------------------------------------------------------------------------------------------
</TABLE>
F-72
<PAGE> 178
BANK OF STOCKDALE, FSB
CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30,
-----------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Decrease) increase in cash and cash equivalents (2,288,340) 5,928,887
Cash and cash equivalents at beginning of period 8,155,759 4,709,224
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 5,867,419 10,638,111
============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments during the quarter for:
Interest $ 798,690 1,087,191
============================================================================================================
Noncash transactions:
Loans transferred to real estate acquired through foreclosure $ 1,381,818 1,485,293
============================================================================================================
Change in unrealized gains (losses) on available-for-sale securities $ 148,982 43,154
============================================================================================================
Loans to facilitate sale of real estate $ 1,118,679 2,014,147
============================================================================================================
</TABLE>
F-73
<PAGE> 179
BANK OF STOCKDALE
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Bank of Stockdale (the Bank)
conform with generally accepted accounting principles and prevailing
practices within the banking industry. In preparing the condensed
financial statements, Management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the date of the balance sheet and revenue and expense for the
period. Actual results could differ from those estimates applied in the
preparation of the financial statements. The following is a description
of a new accounting standard adopted during the current period.
(a) Reporting Comprehensive Income
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 130, Reporting
Comprehensive Income. SFAS No. 130 is effective for interim and annual
periods beginning after December 15, 1997 and is to be applied
retroactively to all periods presented. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. It
does not, however, specify when to recognize or how to measure items
that make up comprehensive income. SFAS No. 130 was issued to address
concerns over the practice of reporting elements of comprehensive income
directly in equity. This statement requires all items that are required
to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed in equal prominence with the other financial statements. It
does not require a specific format for that financial statement but
requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
Enterprises are required to classify items of "other comprehensive
income" by their nature in the financial statement and display the
balance of other comprehensive income separately in the equity section
of a statement of financial position.
F-74
<PAGE> 180
(2) WEIGHTED AVERAGE SHARES OUTSTANDING
Basic and diluted earnings per share for the nine months ended September
30, 1998 and 1997 were computed as follows:
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
NINE MONTHS ENDED SEPTEMBER 30, 1998 (NUMERATOR) (DEMONINATOR) AMOUNT
- ------------------------------------ ----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share $ 708,359 1,212,265 $ .58
Effect of dilutive securities -- 14,702 --
--------- --------- -------
Diluted earnings per share $ 708,359 1,226,967 $ .58
========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
NINE MONTHS ENDED SEPTEMBER 30, 1998 (NUMERATOR) (DEMONINATOR) AMOUNT
- ------------------------------------ ----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share $ 101,473 757,719 $ .13
Effect of dilutive securities -- 2,161 --
--------- --------- -------
Diluted earnings per share $ 101,473 759,880 $ .13
========= ========= =======
</TABLE>
(3) ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
09/30/98
-----------
<S> <C>
Balance at beginning of period $ 815,000
Loans charged off (117,000)
Recoveries 5,000
Provisions charged to operations 306,000
-----------
Balance at end of period $ 1,009,000
===========
</TABLE>
(4) PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
Reporting for Segments of a Business Enterprise
In September 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 is
effective for annual periods beginning after December 15, 1997 and is to
be applied retroactively to all periods presented. SFAS No. 131
establishes standards for the way public business enterprises are to
report information about operating segments in annual financial
statements and requires those enterprises to report selected information
about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS
No. 131 supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprises but retains the requirements to report information
about major customers. Management does not expect that adoption of SFAS
No. 131 will have a material impact on the Bank's consolidated financial
statements.
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Accounting for Derivative Instruments and Hedging Activity
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires recognition of all derivatives as either assets
or liabilities on the balance sheet and measurement of those instruments
at fair value. If certain conditions are met, a derivative may be
designated specifically as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment (a fair value hedge) or (b) a hedge of the exposure to
variable cash flows of a forecasted transaction (a cash flow hedge).
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Bank expects to adopt the Statement
beginning January 1, 1999. Management does not expect that adoption of
SFAS No. 133 will have a material impact on the Bank's financial
statements.
Accounting for Costs of Computer Software Developed or Obtained for
Internal Use
In March 1998, the American Society of Certified Public Accounts (AICPA)
issued Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1
provides guidance on accounting for the costs of computer software
developed or obtained for internal use. It specifies that computer
software meeting certain characteristics be designated as internal-use
software and sets forth criteria for expensing, capitalizing, and
amortizing certain costs related to the development or acquisition of
internal-use software. SOP 98-1 is effective for fiscal years beginning
after December 15, 1998. The Bank expects to adopt this Statement
beginning January 1, 1999. Management does not expect that adoption of
SOP 98-1 will have a material impact on the Bank's financial statements.
Reporting on the Costs of Start-Up Activities
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities. SOP 98-5 provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred.
SOP 98-5 is effective for fiscal years beginning after December 5, 1998.
The Bank expects to adopt the Statement beginning January 1, 1999.
Management does not expect that adoption of SOP 98-5 will have a
material impact on the Bank's financial statements.
Year 2000 Compliance
See "INFORMATION REGARDING STOCKDALE - Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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APPENDIX A
AGREEMENT AND
PLAN OF REORGANIZATION
BY AND BETWEEN
VIB CORP
AND
BANK OF STOCKDALE, F.S.B.
DATED SEPTEMBER 15, 1998
A-1
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TABLE OF CONTENTS
AGREEMENT AND PLAN OF REORGANIZATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - THE MERGER AND RELATED TRANSACTIONS....................................................... 2
1.1 Creation of BOS Interim Bank........................................................ 2
1.2 Merger.............................................................................. 2
(a) Merger of BOS Interim Bank and BOS......................................... 2
(b) Effect on BOS Interim Bank Shares.......................................... 2
(c) Effect on BOS Shares....................................................... 2
(d) Effect on VIBC Shares...................................................... 3
(e) Alternative Method......................................................... 3
1.3 Dissenting Shares of BOS Stock...................................................... 3
1.4 Dissenting Shares of VIBC Stock..................................................... 3
1.5 Fractional Shares................................................................... 4
1.6 Delivery of Certificates and Cash................................................... 4
(a) Transfer Agent............................................................. 4
(b) Exchange Procedures........................................................ 4
(c) Transfers.................................................................. 4
(d) Termination of Exchange Fund............................................... 4
(e) Lost, Stolen or Destroyed Certificates..................................... 5
1.7 Exchange of BOS Stock Options....................................................... 5
1.8 Effect of the Merger................................................................ 5
1.9 Name of Merged Bank................................................................. 5
1.10 Charter and Bylaws of Merged Bank................................................... 5
1.11 Directors and Officers of Merged Bank............................................... 6
1.12 Articles of Incorporation, Bylaws and Directors of VIBC............................. 6
1.13 Director's Agreement................................................................ 6
1.14 Affiliate's Letter.................................................................. 6
1.15 Shareholder's Agreement............................................................. 6
1.16 Cooperation; Best Efforts........................................................... 6
ARTICLE II - THE CLOSING.............................................................................. 6
2.1 Closing Date........................................................................ 6
2.2 Execution of Merger Agreement....................................................... 7
2.3 Documents to be Delivered........................................................... 7
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF BOS................................................... 7
3.1 Organization, Standing and Power.................................................... 7
3.2 Capitalization...................................................................... 8
3.3 Subsidiaries........................................................................ 8
3.4 Authority........................................................................... 8
3.5 Branches............................................................................ 9
3.6 Financial Statements................................................................ 9
3.7 Undisclosed Liabilities............................................................. 9
</TABLE>
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<TABLE>
<S> <C>
3.8 Title to Assets.................................................................... 10
3.9 Real Estate........................................................................ 10
3.10 Environmental Liabilities.......................................................... 10
(a) Compliance................................................................ 10
(b) No Investigations......................................................... 11
(c) Hazardous Substances...................................................... 11
3.11 Loans and Investments.............................................................. 12
3.12 Extensions of Credit............................................................... 12
3.13 Deposits........................................................................... 13
3.14 Litigation and Governmental Proceedings............................................ 13
3.15 Contracts and Agreements........................................................... 13
3.16 Performance of Obligations......................................................... 14
3.17 Insurance.......................................................................... 14
3.18 Taxes.............................................................................. 15
3.19 Absence of Certain Changes......................................................... 15
3.20 Brokers' and Finders' Fees......................................................... 16
3.21 Employees.......................................................................... 16
3.22 Regulatory Reports................................................................. 16
3.23 BOS Employee Benefit Plans and Employment and Labor Contracts...................... 17
3.24 Stock Option Plans................................................................. 19
3.25 Absence of Certain Practices....................................................... 19
3.26 No Violation of Law................................................................ 19
3.27 Certain Interests.................................................................. 19
3.28 Minute Books....................................................................... 20
3.29 Accounting Records; Data Processing................................................ 20
3.30 Operating Losses................................................................... 20
3.31 CRA Standing....................................................................... 20
3.32 Year 2000 Matters.................................................................. 20
3.33 Accuracy and Currentness of Information Furnished.................................. 21
3.34 Effective Date of Representations, Warranties, Covenants and
Agreements......................................................................... 21
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF VIBC.................................................. 21
4.1 Organization, Standing and Power................................................... 21
4.2 Capitalization..................................................................... 21
4.3 Subsidiaries....................................................................... 21
4.4 Authority.......................................................................... 22
4.5 Financial Statements............................................................... 22
4.6 Undisclosed Liabilities............................................................ 23
4.7 Title to Assets.................................................................... 23
4.8 Real Estate........................................................................ 23
4.9 Environmental Liabilities.......................................................... 24
(a) Compliance................................................................ 24
(b) No Investigations......................................................... 24
(c) Hazardous Substances...................................................... 24
4.10 Loans and Investments.............................................................. 24
</TABLE>
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<TABLE>
<S> <C>
4.11 Deposits........................................................................... 25
4.12 Litigation and Governmental Proceedings............................................ 25
4.13 Contracts and Agreements........................................................... 25
4.14 Performance of Obligations......................................................... 26
4.15 Insurance.......................................................................... 27
4.16 Taxes.............................................................................. 27
4.17 Absence of Certain Changes......................................................... 27
4.18 Brokers' and Finders' Fees......................................................... 28
4.19 Employees.......................................................................... 28
4.20 Regulatory Reports................................................................. 28
4.21 VIBC Employee Benefit Plans and Employment and Labor Contracts..................... 29
4.22 Stock Option Plan.................................................................. 31
4.23 Absence of Certain Practices....................................................... 31
4.24 No Violation of Law................................................................ 31
4.25 Certain Interests.................................................................. 32
4.26 Minute Books....................................................................... 32
4.27 Accounting Records; Data Processing................................................ 32
4.28 Operating Losses................................................................... 32
4.29 CRA Standing....................................................................... 32
4.30 Year 2000 Matters.................................................................. 33
4.31 Accuracy and Currentness of Information Furnished.................................. 33
4.32 Effective Date of Representations, Warranties, Covenants and
Agreements......................................................................... 33
ARTICLE V - COVENANTS OF BOS PRIOR TO CLOSING........................................................ 33
5.1 Business Records and Information................................................... 33
5.2 Limitations Upon BOS Prior to Closing.............................................. 34
5.3 Affirmative Conduct of BOS Prior to Closing........................................ 36
5.4 Indemnification.................................................................... 38
5.5 Execute Agreement to Merge......................................................... 38
5.6 Discussion With Third Parties...................................................... 38
(a) Strategic Transactions.................................................... 38
(b) Qualifying Proposal....................................................... 39
(c) Disclosure and Trading.................................................... 39
5.7 Stock Option Plans................................................................. 40
5.8 Change in Control and Salary Continuation Agreements............................... 40
5.9 Proxy Statement.................................................................... 40
ARTICLE VI - COVENANTS OF VIBC PRIOR TO CLOSING...................................................... 41
6.1 Business Records and Information................................................... 41
6.2 Limitations Upon VIBC Prior to Closing............................................. 41
6.3 Affirmative Conduct of VIBC Prior to Closing....................................... 43
6.4 Indemnification.................................................................... 44
6.5 Discussion With Third Parties...................................................... 44
(a) Strategic Transactions.................................................... 44
(b) Qualifying Proposal....................................................... 44
</TABLE>
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<TABLE>
<S> <C>
(c) VIBC Acquisition Transaction.............................................. 45
(d) Disclosure and Trading.................................................... 45
6.6 Stock Option Plan.................................................................. 46
6.7 Preparation of S-4 and the Proxy Statement......................................... 46
6.8 Proxy Statement.................................................................... 46
ARTICLE VII - MEETINGS OF SHAREHOLDERS AND FEDERAL SECURITIES LAWS................................... 46
7.1 Shareholders' Meetings............................................................. 46
7.2 Federal Securities Laws............................................................ 47
ARTICLE VIII - CONDITIONS PRECEDENT TO OBLIGATIONS OF BOS............................................ 47
8.1 Continued Accuracy of Representations and Warranties............................... 48
8.2 Performance of Obligations......................................................... 48
8.3 Absence of Material Changes........................................................ 48
8.4 Officers' Certificate.............................................................. 48
8.5 Receipt of Legal Opinion........................................................... 48
8.6 Fairness Opinion................................................................... 48
8.7 Appointment of VIBC Director....................................................... 48
8.8 Closing Documents.................................................................. 48
ARTICLE IX - CONDITIONS PRECEDENT TO OBLIGATIONS OF VIBC............................................. 49
9.1 Continued Accuracy of Representations and Warranties............................... 49
9.2 Performance of Obligations......................................................... 49
9.3 Absence of Material Changes........................................................ 49
9.4 Affiliate's Letters................................................................ 49
9.5 Resignation and Appointment of Directors........................................... 49
9.6 Officers' Certificate.............................................................. 49
9.7 Receipt of Legal Opinion........................................................... 49
9.8 Fairness Opinion................................................................... 50
9.9 Closing Documents.................................................................. 50
ARTICLE X - CONDITIONS PRECEDENT TO THE MERGER....................................................... 50
10.1 Permits and Approvals.............................................................. 50
10.2 Tax Ruling or Opinion.............................................................. 50
10.3 Absence of Litigation.............................................................. 51
10.4 Shareholder Approvals.............................................................. 51
(a) Approval of Merger........................................................ 51
(b) Other Actions............................................................. 52
10.5 Continuity of Interest............................................................. 52
ARTICLE XI - TERMINATION............................................................................. 52
11.1 Termination of This Agreement...................................................... 52
11.2 Immaterial Breach.................................................................. 53
11.3 Effect of Termination.............................................................. 53
11.4 Termination Fee and Liquidated Damages............................................. 54
(a) Termination Fee........................................................... 54
</TABLE>
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<TABLE>
<S> <C>
(b) Liquidated Damages........................................................ 54
(c) Exclusive Remedy.......................................................... 54
ARTICLE XII - GENERAL PROVISIONS..................................................................... 54
12.1 Expenses........................................................................... 54
12.2 Notices............................................................................ 54
12.3 Successors and Assigns............................................................. 55
12.4 Third Party Beneficiaries.......................................................... 55
12.5 Counterparts....................................................................... 55
12.6 Governing Law...................................................................... 56
12.7 Captions........................................................................... 56
12.8 Exhibits and Schedules............................................................. 56
12.9 Representations and Warranties..................................................... 56
12.10 Waiver and Modification............................................................ 56
12.11 Attorneys' Fees.................................................................... 56
12.12 Knowledge.......................................................................... 56
12.13 Entire Agreement................................................................... 57
12.14 Consents........................................................................... 57
12.15 Severability....................................................................... 57
12.16 Press Release...................................................................... 57
12.17 Arbitration........................................................................ 57
</TABLE>
LIST OF EXHIBITS AND SCHEDULES
<TABLE>
<CAPTION>
EXHIBITS
- --------
<CAPTION>
<S> <C>
Merger Agreement................................................................ Exhibit A
Director's Agreement (BOS)...................................................... Exhibit B-1
Director's Agreement (VIBC)..................................................... Exhibit B-2
Affiliate's Letter.............................................................. Exhibit C
Shareholder's Agreement......................................................... Exhibit D
SCHEDULES
- ---------
Bank of Stockdale, F.S.B.:
Articles of Association and Bylaws.............................................. Schedule 3.1
Subsidiaries.................................................................... Schedule 3.3
Agreements, Instruments, Obligations............................................ Schedule 3.4
Financial Statements ........................................................... Schedule 3.6
Liabilities..................................................................... Schedule 3.7
Assets.......................................................................... Schedule 3.8
Real Estate .................................................................... Schedule 3.9
Environmental Liabilities....................................................... Schedule 3.10
Loans and Investments........................................................... Schedule 3.11
Classified Loans................................................................ Schedule 3.12
</TABLE>
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<TABLE>
<S> <C>
Deposits ....................................................................... Schedule 3.13
Litigation ..................................................................... Schedule 3.14
Understandings ................................................................. Schedule 3.15
Obligations..................................................................... Schedule 3.16
Insurance ...................................................................... Schedule 3.17
Taxes........................................................................... Schedule 3.18
Certain Changes................................................................. Schedule 3.19
Brokers' and Finders' Fees...................................................... Schedule 3.20
Regulatory Reports.............................................................. Schedule 3.22
Employee Benefit Plans.......................................................... Schedule 3.23
Stock Option Plan............................................................... Schedule 3.24
Certain Practices............................................................... Schedule 3.25
Certain Interests............................................................... Schedule 3.27
Data Processing ................................................................ Schedule 3.29
Operating Losses................................................................ Schedule 3.30
VIB Corp:
- ---------
Articles of Incorporation and Bylaws ........................................... Schedule 4.1
Agreements, Instruments and Obligations ........................................ Schedule 4.4
Financial Statements............................................................ Schedule 4.5
Liabilities..................................................................... Schedule 4.6
Assets.......................................................................... Schedule 4.7
Real Estate .................................................................... Schedule 4.8
Environmental Liabilities....................................................... Schedule 4.9
Loans and Investments........................................................... Schedule 4.10
Deposits........................................................................ Schedule 4.11
Litigation...................................................................... Schedule 4.12
Understandings.................................................................. Schedule 4.13
Obligations..................................................................... Schedule 4.14
Insurance....................................................................... Schedule 4.15
Taxes........................................................................... Schedule 4.16
Certain Changes................................................................. Schedule 4.17
Brokers' and Finders' Fees...................................................... Schedule 4.18
Regulatory Reports.............................................................. Schedule 4.20
Employee Benefit Plans.......................................................... Schedule 4.21
Stock Option Plan............................................................... Schedule 4.22
Certain Practices............................................................... Schedule 4.23
Data Processing................................................................. Schedule 4.27
Operating Losses ............................................................... Schedule 4.28
Closing:
Closing Schedule................................................................ Schedule 2.3
Legal Opinion to BOS............................................................ Schedule 8.5
Legal Opinion to VIBC........................................................... Schedule 9.7
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of September 15, 1998, by and among VIB Corp, a California
corporation ("VIBC"), 1498 Main Street, El Centro, California 92243, and Bank of
Stockdale, F.S.B., a federal stock savings bank ("BOS"), 5151 Stockdale Highway,
Bakersfield, California 93309, pursuant to which BOS will become a separate,
wholly-owned subsidiary of VIBC, with reference to the following:
R E C I T A L S
WHEREAS, BOS is a federal stock savings bank with its principal
office in the City of Bakersfield, County of Kern, State of
California, and VIBC is a California corporation with its principal
office in the City of El Centro, County of Imperial, State of
California;
WHEREAS, Valley Independent Bank ("VIB") is a California banking
corporation with its principal office in the City of El Centro, County
of Imperial, State of California, and is a wholly-owned subsidiary of
VIBC;
WHEREAS, BOS and VIBC desire to enter into this Agreement which
contemplates the acquisition of BOS by VIBC, pursuant to which BOS
will become a separate, wholly-owned subsidiary of VIBC;
WHEREAS, this Agreement provides for the completion of the
acquisition of BOS by VIBC through the merger (the "Merger") of BOS
with an interim federal stock savings bank which shall be a
wholly-owned subsidiary of VIBC ("BOS Interim Bank") under the
applicable laws of the United States and in accordance with the
articles of combination (the "Merger Agreement") to be entered into by
and between BOS Interim Bank and BOS substantially in the form of
Exhibit "A" hereto;
WHEREAS, to consummate the Merger the parties hereto will have to
take various steps and actions in furtherance of the transaction
contemplated by this Agreement (collectively, with the Merger, the
"Transactions"); and
WHEREAS, the Boards of Directors of VIBC and BOS have determined
that this Agreement and the Transactions are in the best interests of
their respective shareholders and have approved this Agreement and
authorized its execution;
NOW, THEREFORE, in consideration of the mutual covenants,
agreements, representations and warranties contained herein, and
intending to be legally bound, the parties hereto agree as follows:
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A G R E E M E N T
ARTICLE I
THE MERGER AND RELATED TRANSACTIONS
1.1 CREATION OF BOS INTERIM BANK. As soon as practicable VIBC shall
organize BOS Interim Bank pursuant to 12 CFR Section 552.2-2 as a new, interim
federal stock savings bank wholly-owned by VIBC.
1.2 MERGER. The Merger shall become effective (the "Effective Time of
the Merger") on the date and time specified on the endorsement of the articles
of combination by the Office of Thrift Supervision (the "OTS"). At the Effective
Time of the Merger and pursuant to the terms of this Agreement and the Merger
Agreement, the following transactions will be deemed to have occurred
simultaneously:
(a) MERGER OF BOS INTERIM BANK AND BOS. BOS Interim Bank and
BOS will merge, and the separate corporate existence of BOS Interim
Bank shall cease. BOS as the savings bank surviving the Merger is
sometimes referred to herein as the "Merged Bank."
(b) EFFECT ON BOS INTERIM BANK SHARES. Each share of the
common stock of BOS Interim Bank (the "BOS Interim Bank Stock") issued
and outstanding immediately prior to the Effective Time of the Merger,
on and after the Effective Time of the Merger, pursuant to the Merger
Agreement and without any further action on the part of VIBC or BOS
Interim Bank, shall be converted into one share of common stock of the
Merged Bank (the "Merged Bank Stock"). Each outstanding stock
certificate which prior to the Effective Time of the Merger represented
shares of BOS Interim Bank Stock automatically and for all purposes
shall be deemed to represent the number of shares of Merged Bank Stock
into which the shares of BOS Interim Bank Stock represented by such
certificate have been converted as provided in this Section 1.2(b);
provided, however, at the request of VIBC, the Merged Bank shall
exchange VIBC's certificate or certificates formerly representing
shares of BOS Interim Bank Stock for a certificate or certificates of
Merged Bank Stock.
(c) EFFECT ON BOS SHARES. Each share of the common stock,
$4.00 par value, of BOS (the "BOS Stock") issued and outstanding
immediately prior to the Effective Time of the Merger, on and after the
Effective Time of the Merger, pursuant to the Merger Agreement and
without any further action on the part of BOS or the holders of BOS
Stock, automatically shall be canceled and cease to be an issued and
outstanding share of BOS Stock and shall be converted into the right to
receive that number of newly issued shares of common stock, no par
value, of VIBC (the "VIBC Stock") equal to the whole and fractional
number resulting from dividing the BOS Per Share Value by the VIBC
Market Value Per Share (the "Exchange Ratio"); provided, however, cash
shall be paid in lieu of fractional interests pursuant to Section 1.5
hereof. For purposes of this Agreement, the BOS Per Share Value shall
be determined by: (i) first, subtracting the amount of $180,000 from
the BOS shareholders' equity as of the last day of the calendar month
next preceding the month of the Closing; (ii) second, multiplying the
result times 2.83; (iii) third, subtracting from the resultant
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multiple all expenses related to this Agreement, including finders'
fees; and (iv) fourth, dividing the result by the total number of
shares of BOS Stock outstanding at the Closing. The BOS shareholders'
equity shall be determined in accordance with generally accepted
accounting principles, consistently applied, and shall be determined
consistent with the requirements of Section 3.6 hereof. For purposes of
this Agreement the VIBC Market Value Per Share shall be determined by
taking the average of the closing prices of the VIBC Stock on the
Nasdaq National Market for the 20 trading days preceding the fifth
business day prior to the Closing (the "Nasdaq Average"). In the event
the Nasdaq Average is between $9.50 and $15.50, the VIBC Market Value
Per Share shall be the Nasdaq Average. In the event the Nasdaq Average
is less than $9.50, the VIBC Market Value Per Share shall be $9.50. In
the event the Nasdaq Average is greater than $15.50, but not greater
than $19.50, then the VIBC Market Value Per Share shall be $15.50 plus
twenty-five percent (25%) of the amount by which the Nasdaq Average
exceeds $15.50. In the event the Nasdaq Average exceeds $19.50, the
VIBC Market Value per Share shall be $16.50. Certificates formerly
evidencing shares of BOS Stock shall be surrendered for exchange to the
Transfer Agent (as defined in Section 1.6 hereof) in accordance with
Section 1.6.
(d) EFFECT ON VIBC SHARES. Each share of VIBC Stock issued and
outstanding immediately prior to the Effective Time of the Merger
shall, on and after the Effective Time of the Merger, remain issued and
outstanding and shall automatically and for all purposes be deemed to
represent one share of common stock of VIBC.
(e) ALTERNATIVE METHOD. Anything herein to the contrary
notwithstanding, upon written notice to BOS, VIBC may at any time prior
to the Effective Time of the Merger change the method of effecting the
acquisition of BOS (including, without limitation, the provisions of
this Article I) if and to the extent it deems such change to be
necessary, appropriate or desirable; provided, however, that no such
change shall (i) alter or change the amount or kind of consideration to
be issued to holders of BOS Stock as provided for in this Agreement,
(ii) cause the transaction to be treated as anything other than a
tax-free reorganization to the holders of BOS Stock, or (iii)
materially impede or delay the receipt of any approvals referred to in
Section 10.1 or the consummation of the Transactions contemplated by
this Agreement.
1.3 DISSENTING SHARES OF BOS STOCK. Each outstanding shares of BOS
Stock whose holder has lawfully dissented from the Merger in accordance with 12
C.F.R. Section 552.14 and has timely filed with BOS a written demand for
appraisal of his or her shares accompanied by surrender of his or her stock
certificates pursuant to Section 552.14 is herein called a "Dissenting BOS
Share." Dissenting BOS Shares whose holders have not effectively withdrawn or
lost their dissenters' rights under Section 552.14 shall not be converted
pursuant to Section 1.2(c), but the holders thereof shall be entitled only to
such rights as are granted them by Section 552.14. Each dissenting shareholder
who is entitled to payment pursuant to Section 552.14 shall receive such payment
in an amount as determined pursuant to Section 552.14.
1.4 DISSENTING SHARES OF VIBC STOCK. Any shareholder of VIBC who shall
have lawfully dissented from the Transactions in accordance with the applicable
statutes of the State of California, and who shall have timely demanded payment
of the value of such shareholder's VIBC Stock and submitted such shares for
endorsement as provided in Section 1300(b) of the California
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General Corporation Law ("Dissenting VIBC Shares"), shall thereafter have only
such rights as are provided a dissenting shareholder in accordance with said
statutes and shall have no other rights under this Agreement or as shareholders
of VIBC.
1.5 FRACTIONAL SHARES. No fractional shares of VIBC Stock shall be
issued in the Merger. In lieu thereof, each holder of BOS Stock who would
otherwise be entitled to receive fractional shares of VIBC Stock shall receive
an amount in cash equal to the VIBC Fair Market Value Per Share (as determined
in Section 1.2(c) hereof), multiplied by the fraction of a share of VIBC Stock
to which such holder would otherwise be entitled.
1.6 DELIVERY OF CERTIFICATES AND CASH.
(a) TRANSFER AGENT. Prior to the Effective Time of the Merger
VIBC shall deliver or cause to be delivered to U.S. Stock Transfer
Corporation, its transfer agent (the "Transfer Agent"), an amount of
cash equal to the anticipated aggregate amount of fractional interests
to be paid pursuant to Section 1.5 hereof, and sufficient certificates
of the VIBC Stock for issuance to BOS's shareholders. Delivery to the
holders of BOS Stock of the certificates for VIBC Stock and cash to
which they are entitled will subsequently be made by the Transfer Agent
against delivery of share certificates formerly evidencing BOS Stock
(duly executed and in proper form for transfer) to the Transfer Agent
in accordance with this Section 1.6 and the terms and conditions of an
agreement to be entered into by and between VIBC and the Transfer Agent
(the "Transfer Agent Agreement"). A copy of the Transfer Agent
Agreement will be provided to BOS and its counsel for approval prior to
consummation of the Merger, which approval shall not be unreasonably
withheld.
(b) EXCHANGE PROCEDURES. As soon as practicable after the
Effective Time of the Merger, the Transfer Agent will send a notice and
transmittal form to each holder of a certificate previously
representing shares of BOS Stock advising such holders of the
applicable terms of the conversion effected by the Merger and the
procedure for surrendering to the Transfer Agent such certificate for
conversion. Each holder of such certificates, upon surrender of the
same to the Transfer Agent in accordance with such transmittal form,
shall be entitled to receive the consideration provided for in Section
1.2(c) hereof. If the consideration for shares of BOS Stock provided
for in Section 1.2(c) is to be delivered to any person other than the
registered holder of said shares surrendered for exchange, the amount
of any stock transfer tax or similar taxes (whether imposed on the
registered holder or such person) payable on account of the transfer to
such person shall be paid to the Transfer Agent by such person, or the
Transfer Agent may refuse to make such exchange unless satisfactory
evidence of the payment of such taxes or exemption therefrom is
submitted. The certificates so surrendered shall forthwith be canceled.
No interest will be paid or accrued on any amount payable upon due
surrender of the certificates.
(c) TRANSFERS. After the Effective Time of the Merger, there
shall be no transfers on the stock transfer books of BOS of the BOS
Stock that was outstanding immediately prior to the Effective Time of
the Merger.
(d) TERMINATION OF EXCHANGE FUND. Any portion of the cash
delivered to the Transfer Agent (including the proceeds of any
investments thereof) that remains unclaimed
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by the holders of BOS Stock for six months after the Effective Time of
the Merger shall be returned to VIBC. Any holders of BOS Stock who have
not theretofore complied with this Section 1.6 shall thereafter look
only to VIBC for exchange of their BOS Stock upon due surrender of
their certificates (or affidavits of loss in lieu thereof), without any
interest thereon. Notwithstanding the foregoing, none of VIBC, BOS, the
Transfer Agent or any other person shall be liable to any former holder
of BOS Stock for any amount properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(e) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any
certificate shall have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming such certificate to
be lost, stolen or destroyed and, if required by VIBC, the posting by
such person of a bond in customary amount as indemnity against any
claim that may be made against it with respect to such certificate, the
Transfer Agent shall exchange such lost, stolen or destroyed
certificate, upon due surrender thereof, in accordance with the
provisions of this Section 1.6.
1.7 EXCHANGE OF BOS STOCK OPTIONS. VIBC shall issue substitute stock
options, effective at the Effective Time of the Merger, to each optionee holding
an outstanding stock option pursuant to BOS's 1985 and 1995 Stock Option Plans.
The substitute stock options, to be issued pursuant to VIBC's 1997 Stock Option
Plan, shall be issued for the same remaining terms and the same vesting
schedules as the BOS stock options being exchanged therefor; and shall be issued
for the same numbers of shares of VIBC Stock and the same exercise prices,
adjusted for the Exchange Ratio. Such adjustment in the numbers and exercise
prices shall be made without change in the total exercise price applicable to
the unexercised portion of the BOS stock option. Any fractional share interests
shall be disregarded.
1.8 EFFECT OF THE MERGER. By virtue of the Merger and at the Effective
Time of the Merger, all of the rights, privileges, powers and franchises and all
property and assets of every kind and description of BOS Interim Bank and BOS
shall be vested in and be held and enjoyed by the Merged Bank, without further
act or deed, and all the estates and interests of every kind of BOS Interim Bank
and BOS, including all debts due to either of them, shall be as effectively the
property of the Merged Bank as they were the property of BOS Interim Bank and
BOS, and the title to any real estate vested by deed or otherwise in either BOS
Interim Bank or BOS shall not revert or be in any way impaired by reason of the
Merger; and all rights of creditors and liens upon any property of BOS Interim
Bank and BOS shall be preserved unimpaired, and all debts, liabilities and
duties of BOS Interim Bank and BOS shall be debts, liabilities and duties of the
Merged Bank and may be enforced against it to the same extent as if such debts,
liabilities and duties had been incurred or contracted by it, and none of such
debts, liabilities or duties shall be expanded, increased, broadened or enlarged
by reason of the Merger.
1.9 NAME OF MERGED BANK. The name of the Merged Bank shall be "Bank of
Stockdale, F.S.B."
1.10 CHARTER AND BYLAWS OF MERGED BANK. The Charter and Bylaws of BOS
as in effect immediately prior to the Effective Time of the Merger shall be the
Charter and Bylaws of the Merged Bank.
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1.11 DIRECTORS AND OFFICERS OF MERGED BANK. The directors of BOS at the
Effective Time of the Merger shall be the directors of the Merged Bank until
their successors have been chosen and qualified in accordance with the Charter
and the Bylaws of the Merged Bank; provided, however, that at the Effective Time
of the Merger Messrs. Irving R. Beimler and Jeffery W. Warlick shall resign from
the BOS Board of Directors and Messrs. Richard D. Foss and Dennis L. Kern shall
be appointed for three-year terms to the Board of Directors of BOS. The officers
of BOS at the Effective Time of the Merger shall be the officers of the Merged
Bank until they resign or are replaced or terminated by the Board of Directors
of the Merged Bank or otherwise in accordance with the Merged Bank's Charter or
Bylaws.
1.12 ARTICLES OF INCORPORATION, BYLAWS AND DIRECTORS OF VIBC. At the
Closing, VIBC's Articles of Incorporation and Bylaws as in effect immediately
prior to the Closing shall remain the Articles of Incorporation and Bylaws of
VIBC. At the Effective Time of the Merger, Mr. Ed L. Hickman, or if he shall be
unable to serve, another individual designated by VIBC, in its sole and absolute
discretion, shall be appointed for a one-year term to the Board of Directors of
VIBC.
1.13 DIRECTOR'S AGREEMENT. Concurrently with the execution of this
Agreement BOS and VIBC shall cause each of their directors to enter into an
agreement in the form of Exhibit "B-1" or Exhibit "B-2" hereto, respectively,
pursuant to which each director shall agree to vote or cause to be voted all
shares of his or her BOS Stock or VIBC Stock with respect to which such director
has voting power on the date hereof or hereafter acquired to approve the
Transactions contemplated hereby and all requisite matters related thereto.
1.14 AFFILIATE'S LETTER. Concurrently with the execution of this
Agreement BOS shall use its best efforts to cause each of its "affiliates" for
purposes of Rule 145 under the Securities Act of 1933, as amended, to sign an
Affiliates' Letter substantially in the form of Exhibit "C" hereto. At the
Closing, BOS shall use its best efforts to cause any affiliates who had not
previously signed an Affiliates' Letter to do so. Each share of VIBC Stock
issued in respect of BOS Stock pursuant to the Merger to such affiliates shall
bear the restrictive legend specified in Exhibit "C".
1.15 SHAREHOLDER'S AGREEMENT. Concurrently with the execution of this
Agreement BOS shall cause Financial Institutions Partners, Ltd. and Mr. Eric D.
Hovde to enter into a Shareholder's Agreement substantially in the form of
Exhibit "D" hereto.
1.16 COOPERATION; BEST EFFORTS. Each of the parties, consistent with
the fiduciary duties of the directors of each party, will use its best efforts
to consummate the Transactions contemplated by this Agreement and cooperate in
any action necessary or advisable to facilitate such consummation including,
without limitation, making all filings required in order to obtain any necessary
consents or to comply with any law and providing any information required in
connection therewith.
ARTICLE II
THE CLOSING
2.1 CLOSING DATE. The consummation of the Transactions contemplated by
this Agreement (the "Closing"), unless another date or place is agreed in
writing by the parties hereto, shall take place at the main office of BOS, 5151
Stockdale Highway, Bakersfield, California 93309,
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on a date designated in a written notice to BOS by VIBC within 15 days after the
last of the following shall have occurred: (i) the receipt of all approvals and
consents specified in Article X hereof; (ii) the expiration of the applicable
waiting period under the Bank Merger Act and the Bank Holding Company Act; and
(iii) all conditions specified in Articles VIII, IX and X hereof shall have been
satisfied (the "Closing Date"); provided, however, that if the parties cannot
agree on the Closing Date, the Closing Date shall be the last business day in
such fifteen day period.
2.2 EXECUTION OF MERGER AGREEMENT. Prior to the Closing Date, and as
soon as practicable after the approval of the OTS to organize BOS Interim Bank,
and the approval of this Agreement and the Transactions contemplated hereby by
the shareholder of BOS Interim Bank and the shareholders of BOS and VIBC and the
satisfaction of the conditions precedent to the consummation of the Merger, the
Merger Agreement in the form attached as Exhibit "A" (as amended, if necessary,
to conform to the requirements of law or a governmental authority or agency
having authority over the Merger which requirements are not materially in
contravention of any of the substantive terms hereof) shall be executed by BOS
and BOS Interim Bank. The Merger shall become effective in accordance with the
approval granted by the OTS (the "Effective Time of the Merger").
2.3 DOCUMENTS TO BE DELIVERED. The parties shall deliver, or cause to
be delivered, the documents called for by the Closing Schedule attached hereto
as Schedule 2.3, along with such other documents or certificates as may be
necessary, in the reasonable opinion of counsel for each of the parties, to
effectuate the Transactions called for hereunder. In the event that counsel for
any of the parties believes that documents necessary for the Closing have not
been set forth on the Closing Schedule, counsel shall advise the other party in
writing, no less than five business days prior to the Closing Date, setting
forth a brief description of the additional documents desired and such documents
shall also be provided at the Closing. If, at any time after the Effective Time
of the Merger, the Merged Bank or VIBC or their successors or assigns shall
determine that any further conveyance, assignment or other documents or any
further action is necessary or desirable to further effectuate the Transactions
set forth herein or contemplated hereby, the officers and directors of the
parties hereto shall execute and deliver, or cause to be executed and delivered,
all such documents as may be reasonably required to effectuate such
Transactions, whether at the Closing of thereafter.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BOS
BOS hereby represents and warrants to VIBC as follows:
3.1 ORGANIZATION, STANDING AND POWER. BOS is a federal stock savings
bank, duly organized, validly existing and in good standing under the laws of
the United States, and is authorized by the OTS to conduct business as a federal
savings bank. BOS is a member of the Federal Home Loan Bank of San Francisco and
is an "insured depository institution" as defined in the Federal Deposit
Insurance Act; and BOS has all requisite corporate power and authority to own,
lease and operate its properties and assets and to carry on its business as
presently conducted. Neither the scope of the business of BOS nor the location
of any of its properties requires that it be licensed or qualified to do
business in any jurisdiction other than the State of California. Attached hereto
as Schedule 3.1 are true and correct copies of its Charter and Bylaws, as
amended to the date hereof.
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3.2 CAPITALIZATION. The authorized capitalization of BOS consists of
10,000,000 shares of common stock, $4.00 par value, of which 1,212,265 shares
are issued and outstanding as of the date of this Agreement. As of the date of
this Agreement, the BOS Stock is held of record or beneficially by approximately
205 shareholders and the BOS Stock was not registered under the Securities
Exchange Act of 1934, as amended. All of the outstanding shares of the BOS Stock
are validly issued, fully paid and nonassessable. Except as contemplated herein
and except for fully vested stock options covering 33,000 shares of the BOS
Stock under the BOS 1985 and 1995 Stock Option Plans, there are presently, and
on the Closing Date there will be, no outstanding options, warrants or other
rights in or with respect to the unissued shares of the BOS Stock or any
securities convertible into such BOS Stock, and BOS is not obligated to issue
any additional shares of its BOS Stock or any other security convertible into
its BOS Stock.
3.3 SUBSIDIARIES. Except as set forth on Schedule 3.3, BOS does not
own, directly or indirectly (except as pledgee pursuant to loans which are not
in default or for shares held by BOS as the result of any foreclosure by BOS on
any loan, which shares do not exceed 4.9% of the outstanding common stock of any
such company), any outstanding stock or other voting interests in any
corporation, partnership, joint venture or other entity. Each subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdiction set forth on Schedule 3.3.
3.4 AUTHORITY. The execution and delivery by BOS of this Agreement and
the Merger Agreement and the consummation of the Transactions contemplated
hereby and thereby, have been duly and validly authorized by all necessary
corporate action on the part of BOS. The Agreement is, and the Merger Agreement
will be, binding and enforceable obligations of BOS, except as enforceability
thereof may be limited by bankruptcy, insolvency, moratorium or similar laws
affecting the rights of creditors generally or federal savings banks, or by
general equitable principles, or by 12 U.S.C. Section 1818(b)(6)(D). Neither the
execution and delivery by BOS of this Agreement or the Merger Agreement, nor the
consummation of the Transactions contemplated herein or therein, nor compliance
by BOS with any of the provisions hereof or thereof will: (a) conflict with, or
result in a breach of, any provision of its Charter or Bylaws; or (b) except as
set forth in Schedule 3.4, constitute a breach of, or result in default, or give
rise to any rights of termination, cancellation or acceleration, or give rise to
any right by any other person or entity to acquire any security interest in any
assets under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, franchise, license, permit, agreement or other instrument
or obligation to which BOS or any of its properties or assets are subject. No
consent or approval of, notice to or filing with any governmental authority
having jurisdiction over any aspect of the business or assets of BOS, and no
consent or approval of or notice to any other person or entity, is required in
connection with the execution and delivery by BOS of this Agreement or the
Merger Agreement or the consummation by BOS of the Transactions contemplated
hereby or thereby, except: (a) approval of this Agreement and the Merger
Agreement by the shareholders of BOS and BOS Interim Bank; (b) such approvals of
this Agreement, the Merger Agreement, and the Transactions contemplated herein
as may be required by the OTS pursuant to the applicable requirements of the
Home Owners' Loan Act and the Bank Merger Act and/or by the Board of Governors
of the Federal Reserve System as may be required under the Bank Holding Company
Act of 1956, as amended; and (c) as set forth on Schedule 3.4.
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3.5 BRANCHES. Except for its main office located at 5151 Stockdale
Highway, Bakersfield, California 93309, and its branch offices located at 3990
Gosford Road, Bakersfield, California 93309, and 2700 Mount Vernon Avenue,
Bakersfield, California 93306, a loan production office located at 7433 North
First Street, Suite 103, Fresno, California 93720, and a loan servicing office
located at 5555 California Street, Bakersfield, California 93309, BOS does not
operate or conduct business out of any other location and has not applied for or
received permission to open any other branch or to operate out of any other
location.
3.6 FINANCIAL STATEMENTS. Except as disclosed in the notes relating
thereto, or otherwise on Schedule 3.6, the audited financial statements of BOS
as of and for the periods ended December 31, 1996 and 1997, as well as the
unaudited financial statements of BOS as of and for the periods ended June 30,
1997 and 1998, attached hereto as Schedule 3.6 (all of these statements are
collectively referred to herein as the "BOS Financial Statements"): (i) fairly
and accurately present the financial condition of BOS as of the dates thereof
and the results of operations and its cash flows for the periods therein set
forth; (ii) have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved; and (iii) are
based on the books and records of BOS. Except to the extent that VIBC and BOS
have agreed that, following regulatory approval being obtained and the
satisfaction of all other conditions to the Closing and immediately prior to the
Effective Time of the Merger, BOS shall increase its reserves for possible loan
losses by $300,000 over its reserve for possible loan losses as reported in the
BOS Financial Statements as of June 30, 1998 and maintain its reserves for
possible loan losses at a level at least as adequate as so adjusted, BOS's
reserves for possible loan losses as disclosed in the BOS Financial Statements
were adequate as of such dates to absorb reasonably anticipated losses in the
loan portfolio of BOS in view of the size and character of such portfolio, then
current economic conditions, and other pertinent factors; and no facts have
subsequently come to the attention of management of BOS which would cause
management to restate as of any of such dates in any material way the level of
such reserves for possible loan losses. Except to the extent that VIBC and BOS
have agreed that BOS will hereafter fully accrue for all benefits due its
executive officers pursuant to their Salary Continuation Agreements and for all
benefits due its directors pursuant to their Deferred Compensation Plans as a
result of the "change in control" provisions thereof, the BOS Financial
Statements have properly accrued for all known and reasonably anticipated
liabilities and contingencies. With respect to other real estate owned by BOS,
the value attributed thereto for purposes of preparing the BOS Financial
Statements does not exceed the aggregate fair market value of such real estate
as of the date of acquisition of such real estate or as subsequently reduced,
all in accordance with generally accepted accounting principles. With regard to
investments owned by BOS, the value attributed thereto for purposes of preparing
the BOS Financial Statements is in accordance with generally accepted accounting
principles.
3.7 UNDISCLOSED LIABILITIES. BOS does not have any liabilities or
obligations, either accrued or contingent, which are material to BOS taken as a
whole and which have not been: (a) reflected or disclosed in the BOS Financial
Statements; or (b) disclosed in Schedule 3.7. BOS does not know of any basis for
the assertion against it of any liability, obligation or claim (including,
without limitation, that of any regulatory authority) that is reasonably likely
to result in or cause any material adverse change in the business or financial
condition of BOS when taken as a whole, which is not fairly reflected in the BOS
Financial Statements or otherwise disclosed in Schedule 3.7 hereto.
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3.8 TITLE TO ASSETS. BOS has good, valid and marketable title to all
material properties and assets, other than real property and securities pledged
to secure public deposits or retail repurchase agreements, owned or stated to be
owned by BOS and reflected on the BOS Financial Statements, or acquired after
December 31, 1997 (except properties sold or otherwise transferred in the
ordinary course of business since December 31, 1997), free and clear of all
mortgages, liens, encumbrances, pledges or charges of any kind or nature (except
for liens for current taxes not yet due and payable and except as disclosed in
the BOS Financial Statements or in Schedule 3.8 hereto).
3.9 REAL ESTATE. Schedule 3.9 hereto contains a list of all real
property, including leaseholds and "other real estate owned," owned by BOS and
copies of all leases to which BOS is a party. Schedule 3.9 contains, among other
things, an accurate summary of all material commitments which BOS has to improve
real estate owned or leased by it. BOS has good and marketable title to all the
real property, and valid leasehold interests in the leaseholds, described in
Schedule 3.9, free and clear of all mortgages, covenants, conditions,
restrictions, easements, liens, security interests, charges, claims and
encumbrances, except for: (a) rights of lessors, co-lessees or sublessees in
such matters which are reflected in the leases; (b) current taxes not yet due
and payable; (c) as described in any title policies (included in Schedule 3.9);
(d) such imperfections of title and encumbrances, if any, as do not materially
detract from the value of or materially interfere with the present use of such
property; or (e) except as described in Schedule 3.9 hereto. Copies of title
policies for properties described in Schedule 3.9 as owned by BOS have been
delivered or made available to VIBC. The activities of BOS with respect to its
real property owned and their leaseholds for use in connection with their
operations are in all material respects permitted and authorized by applicable
zoning laws, ordinances and regulations and all laws and regulations of any
governmental department or agency relative to environmental matters affecting
such property, except as otherwise disclosed in Schedule 3.9. BOS enjoys quiet
and peaceful possession of all such property. All tangible properties of BOS
that are material to the business, financial condition, results of operations or
prospects of BOS are in a good state of maintenance and repair, except for
ordinary wear and tear, and are adequate for the conduct of the business of BOS
as presently conducted. Except as set forth in Schedule 3.9: (i) the execution
of this Agreement, the performance of the obligations of BOS hereunder and the
consummation of the Transactions contemplated herein do not conflict with and
will not result in a breach or default under any lease, agreement or contract
described in Schedule 3.9, or give any other party thereto a right to terminate
or modify any term thereof; (ii) each lease and agreement under which BOS is a
lessee or holds or operates any property (real, personal or mixed) owned by any
third party is in full force and effect and is a valid and legally binding
obligation of BOS; (iii) BOS and each other party to any such lease or agreement
have performed in all material respects all the obligations required to be
performed by them to date under such lease or agreement and are not in default
in any material respect under any such lease or agreement and there is no
pending or threatened proceeding, or proceeding which BOS has reason to believe
may be threatened, that would interfere with the quiet enjoyment of such
leasehold or such material property by BOS; (iv) no underground storage tanks or
surface impoundments are on or in the real property; and (v) no asbestos is
contained or located on any of the real property. None of such leases or
agreements contain any unusual provision which now or in the future may cause a
material adverse change in the business condition of BOS.
3.10 ENVIRONMENTAL LIABILITIES.
(a) COMPLIANCE. Except as set forth on Exhibit 3.10, BOS is
conducting and, to the best of its knowledge, has conducted its
business, and is using and, to the best of its
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knowledge, has used its properties, whether currently owned, operated
or leased, or owned, operated or leased by BOS at any time in the past,
and all properties in which BOS has a security interest have been used
and are being used, in compliance with all applicable Environmental
Laws (as that term is defined below).
For purposes of this Agreement, "Environmental Law" shall mean
any federal, state, county, or local statute, law, ordinance, rule,
regulation, order, consent, decree, judicial or administrative decision
or directive of the United States or other jurisdiction whether now
existing or as hereinafter promulgated, issued or enacted prior to the
Closing relating to: (i) pollution or protection of the environment,
including natural resources; (ii) exposure of persons, including
employees, to Hazardous Substances (as that term is defined below) or
other products, materials or chemicals; (iii) protection of the public
health or welfare from the effects of products, by-products, wastes,
emissions, discharges or releases of chemicals or other substances from
industrial or commercial activities; or (iv) regulation of the
manufacture, use or introduction into commerce of substances from
industrial or commercial activities; or (iv) regulation of the
manufacture, use or introduction into commerce of substances,
including, without limitation, their manufacture, formulation,
packaging, labeling, distribution, transportation, handling, storage
and disposal. For the purposes of this definition, the term
"Environmental Law" shall include, without limiting the foregoing, the
following statutes, as amended from time to time: (1) the Clean Air
Act, as amended, 42 U.S.C. Section 7401 et seq.; (2) the Federal Water
Pollution Control Act, as amended, 33 U.S.C. Section 1251 et seq.; (3)
the Resource Conservation and Recovery Act of 1976, as amended, 42
U.S.C. Section 6901 et seq.; (4) the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (including
the Superfund Amendments and Reauthorization Act of 1986), 42 U.S.C.
Section 2601 et seq.; (5) the Toxic Substances Control Act, as amended,
15 U.S.C. Section 2601 et seq.; (6) the Occupational Safety and Health
Act, as amended, 29 U.S.C. Section 651; (7) the Emergency Planning and
Community Right-To-Know Act of 1986, 42 U.S.C. Section 1101 et seq.;
(8) the Mine Safety and Health Act of 1977, as amended, 30 U.S.C.
Section 801 et seq.; (9) the Safe Drinking Water Act, 42 U.S.C. Section
300f et seq.; and (10) all comparable state and local laws, laws of
other applicable jurisdictions or orders and regulations including, but
not limited to, the Carpenter-Presley-Tanner Hazardous Substance
Account Act, California Health & Safety Code Section 25300 et seq.
(b) NO INVESTIGATIONS. BOS has not received notice that any
property currently owned, operated or leased by BOS or which has been
in the past owned, operated or leased by BOS, or in which BOS has a
security interest, is subject to any existing, pending or threatened
investigation, action or proceeding, including any notice of violation,
by any governmental authority regarding contamination of any part of
the property or infractions of any law, statute, ordinance or
regulation or any license or permit issued by any government agency
pertaining to health, industrial hygiene or environmental safety or
environmental conditions on, under or about the property, except for
such investigations, actions, proceedings, notifications, or
infractions which, in the aggregate, have not had and are not
reasonably likely to have a material adverse effect on BOS.
(c) HAZARDOUS SUBSTANCES. Except as set forth on Schedule
3.10, there are no Hazardous Substances (as that term is defined below)
presently located on, under or about any property which is currently
owned, operated, under the control of, or leased by BOS, or
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in which BOS has a security interest, nor was there any Hazardous
Substances located on, under or about any property prior to or during
the period any such property has been owned, operated, under the
control of, or leased by BOS. There has not been any generation, use,
handling, transportation, treatment or disposal of any Hazardous
Substances in connection with the conduct of the business of BOS that
has or might result in any material liability under any Environmental
Law.
For purposes of this Agreement, the term "Hazardous
Substances" shall mean: (i) substances that are defined or listed in,
or otherwise classified pursuant to, or the use or disposal of which
are regulated by, any Environmental Law as "hazardous substances,"
"toxic substances," or any other formulation intended to define, list
or classify substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity, reproductive
toxicity, or "EP toxicity"; (ii) oil or petroleum derived from
substances and drilling fluids, produced waters, and other wastes
associated with the exploration, development, or production of crude
oil, natural gas, or geothermal resources; (iii) any flammable
substances or explosives, any radioactive materials, any hazardous
wastes or substances, any toxic wastes or substances or any other
materials or pollutants which pose a hazard to any property or to
individuals or entities on or about such property; and (iv) asbestos in
any form or electrical equipment which contains any oil or dielectric
fluid containing levels of polychlorinated biphenyls in excess of 50
parts per million.
3.11 LOANS AND INVESTMENTS. Except as disclosed in Schedule 3.11
hereto: (a) all the loans and investments of BOS are legal, valid and permitted
under federal and state laws and regulations applicable at the time of their
origination or assumption; and (b) BOS is not subject to any liability or claim
for violation of any state or federal law or regulation concerning extensions of
credit, including, without limitation, those relating to discriminatory lending
practices and truth-in-lending. Except for investments that have matured or been
sold, Schedule 3.11 sets forth all of the investments reflected in the balance
sheets of BOS dated December 31, 1997 and June 30, 1998. Except as set forth in
Schedule 3.11, none of such investments is subject to any restriction,
contractual, statutory or other, that would materially impair the ability of BOS
to dispose freely of any such investment at any time, except restrictions on the
public distribution or transfer of such investments under the Securities Act of
1933, as amended, or state securities laws. Except as set forth in Schedule
3.11, as of December 31, 1997, BOS had no holdings of positions in forwards,
futures, options, swaps, interest rate caps, collars and floors, or any other
similar instruments ("Derivative Instruments"). Except as set forth in Schedule
3.11, since January 1, 1996 BOS has not engaged in any transactions in or
involving Derivative Instruments except as agent on the order and for the
account of others. Schedule 3.11 sets forth for each Derivative Instrument held
by BOS since January 1, 1996, the present book value and market value, if
applicable, the open exposure of BOS, if any, and whether any counterparties to
any contract or agreement with respect to any such instrument is in default with
respect to such contract or agreement.
3.12 EXTENSIONS OF CREDIT. Schedule 3.12 sets forth a description of:
(a) by type and classification, if any, all loans, leases or other extensions of
credit by BOS on nonaccrual; (b) by type and classification, if any, all loans,
leases, or other extensions of credit or other real estate owned that have been
classified by the OTS or FDIC examiners, external or internal auditors,
directors, or management as "Watch List," "Specially Mentioned," "Substandard,"
"Doubtful," "Loss" or any
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comparable classification; and (c) all loans, leases or other extensions of
credit of BOS as to which any payment of principal, interest or other amount is
90 days or more past due.
3.13 DEPOSITS. Schedule 3.13 sets forth a list of deposit accounts
outstanding at BOS with an outstanding balance as of June 30, 1998, in excess of
$100,000.00.
3.14 LITIGATION AND GOVERNMENTAL PROCEEDINGS. Except as otherwise
expressly disclosed in Schedule 3.14, BOS is not engaged in, or threatened with,
any legal action or other proceeding before any court or administrative agency
which might be material to its business or in which the amount claimed against
it is $25,000 or more; except as set forth in Schedule 3.14, BOS is not in
default of any of its duties or obligations under, or with respect to, any
judgment, order, writ, injunction or decree of any court or governmental
department, commission, board, bureau, agency or other instrumentality having
jurisdiction over BOS or its business; except as disclosed in Schedule 3.14, BOS
has not been served with notice of and is not, to the best of its knowledge,
under investigation with respect to, any possible violation of any provision of
federal, state or local laws, rules, or regulations; and except as set forth in
Schedule 3.14, BOS is not subject to any order, letter agreement or written
direction of any governmental agency with respect to its financial or operating
ratios, or with respect to any other standards or tests imposed by state and
federal laws and regulations, including, without limitation, those relating to
net worth, liquidity and the maintenance of reserves, nor has any such order,
letter agreement or written direction been proposed to BOS. Schedule 3.14
contains a list identifying any claims pending on behalf of BOS against the
Small Business Administration (the "SBA"), any other governmental agencies, or
any third parties for reimbursement for loan defaults, indicating the date of
the claim, the name of the borrower, and the amount of the claim.
3.15 CONTRACTS AND AGREEMENTS. Except as provided by this Agreement and
except as set forth in Schedule 3.15, BOS is not a party to any contract,
agreement, commitment or offer which may become a binding obligation if accepted
by another person or entity, whether written or oral (collectively referred to
herein as an "Understanding") which individually, or with all other similar
Understandings relating to the same or similar subject matter, falls within any
of the following classifications:
(a) Any loan commitment, agreement, pledge, conditional sale
contract, security agreement, lease (excluding leases of real property
listed in Schedule 3.9), guarantee, subordination agreement or other
similar or related type of Understanding (but not including any deposit
agreements as to which BOS is the debtor), involving the expenditure of
$25,000 or more as to which BOS is a debtor, pledgor, lessee or
obligor;
(b) Any Understanding for the employment of any officer or
employee which is not terminable by BOS without liability, except as
may be provided by law, on not more than 30 days' notice;
(c) Any Understanding with any labor organization;
(d) Any Understanding which obligates BOS for a period in
excess of one year to purchase, sell or provide services, materials,
supplies, merchandise, facilities or equipment;
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(e) Any Understanding for the sale of any of its assets in
excess of $25,000 in amount, or for the grant of any preferential right
to purchase any of its assets, properties or rights in excess of
$25,000 in amount, or which requires the consent of any third party to
the transfer and assignment of any of its assets, properties or rights
in excess of $25,000 in amount, other than in the ordinary course of
business;
(f) Any Understanding for the borrowing of any money by BOS or
for a line of credit to BOS, except borrowings from the Federal Home
Loan Bank of San Francisco in the ordinary course of business;
(g) Any Understanding for any one capital expenditure or
series of related capital expenditures in excess of $25,000;
(h) Any Understanding to make, renew or extend the term of a
loan to any affiliate (as that term is defined for purposes of Rule 144
under the Securities Act of 1933) or group of persons related to any
affiliate, which, including any undisbursed or unfunded amount, when
aggregated with all outstanding indebtedness of such affiliate or group
of related persons to BOS, would exceed $25,000;
(i) Any Understanding of any kind (other than contracts
relating to demand, savings or time deposits) with any director or
officer of BOS or with any affiliate or member of the immediate family
(defined to include a person's spouse, parents, in laws, descendants or
siblings) of any such director, officer or affiliate;
(j) Any Understanding for the sale of loans with recourse; or
(k) Any Understanding not otherwise disclosed pursuant to this
Section 3.15 which is material to the financial condition, results of
operations, assets or business of BOS taken as a whole.
True and correct copies of all contracts, including amendments thereto,
setting forth the foregoing Understandings, are attached as a part of Schedule
3.15.
3.16 PERFORMANCE OF OBLIGATIONS. BOS has performed in all respects all
of the material obligations required to be performed by it to date and BOS is
not in default in any material respect under any agreement, contract or lease to
which it is a party or subject or is otherwise bound and which are material to
the financial condition of BOS taken as a whole; and no party with whom BOS has
an agreement which is of material importance to the business of BOS is in
material default thereunder, except as has been disclosed in Schedule 3.16. With
respect to loan delinquencies, Schedule 3.12 contains the monthly loan
delinquency report dated on or about June 30, 1998, in the form customarily
prepared for and delivered to the Board of Directors of BOS.
3.17 INSURANCE. Except as set forth in Schedule 3.17, BOS has in full
force and effect policies of insurance, including, without limitation, a
banker's blanket bond, with respect to its assets and business and against such
casualties and contingencies and of such amounts, types and forms as are
appropriate for its business, operations, properties and assets and as are usual
and customary in the banking industry. Set forth in Schedule 3.17 hereto is a
schedule of all policies of insurance (other
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than title insurance) carried and owned by BOS; showing the name of the
insurance company, the nature of the coverage, the policy limit, the annual
premiums and the expiration dates. There has been delivered to or made available
to VIBC a copy of each such policy of insurance. BOS has continually for the
past five years maintained a fidelity bond insuring it against acts of
dishonesty by its employees in such amounts as are disclosed in Schedule 3.17.
No claims have been made under such bond. BOS is not aware of any facts which
would form the basis of a claim under any such bond; nor does BOS have any
reason to believe that any insurance coverage will not be renewed by the
existing carrier on substantially the same terms as existing coverage.
3.18 TAXES. Except as set forth in Schedule 3.18 hereto, BOS has timely
filed all federal, state and local tax returns required to be filed by it or on
its behalf. Except as set forth in Schedule 3.18, all taxes shown by such
returns to be due and payable have been paid or are reflected as a liability on
the BOS Financial Statements. None of the federal, state and local tax returns
of BOS have been audited by the Internal Revenue Service or other governmental
authorities having jurisdiction over the examination of such returns except for
the years or periods indicated in Schedule 3.18. All material deficiencies
(including interest and penalties, if any, thereon), if any, imposed as a result
of such examinations have been either paid, or have been accrued as a liability
on the BOS Financial Statements, or are being contested in good faith and are
disclosed in Schedule 3.18. No material tax deficiency has been or to the
knowledge of BOS is proposed to be assessed against BOS by any federal, state or
local authority or agency. BOS has not agreed to any extension of time for the
assessment of any taxes of whatsoever kind or nature payable by it, nor has BOS
waived or been requested to waive any applicable statute of limitations with
relation to the payment of any federal, state or local taxes. The accruals for
taxes reflected on the BOS Financial Statements are adequate for all unpaid
federal, state or local taxes (including interest and penalties, if any,
thereon) due, or which became due for any period commencing prior to December
31, 1997.
3.19 ABSENCE OF CERTAIN CHANGES. Except as disclosed on Schedule 3.19
or as permitted by this Agreement, since December 31, 1997, the business of BOS
has been conducted diligently and only in the ordinary course, in the same
manner as heretofore conducted and there has not been:
(a) Any change (other than changes affecting financial
institutions generally, including changes in interest rates, laws or
regulations) in the financial condition of BOS taken as a whole which
has been materially adverse;
(b) Any declaration, setting aside, or the payment of any
dividend or other distribution with respect to BOS Stock or the
issuance of any additional shares of, or options to purchase, BOS Stock
or any other security of BOS;
(c) Any damage, destruction or loss (whether or not covered by
insurance) which individually or taken as a whole materially adversely
affects the property, business or prospects of BOS;
(d) Any change in accounting methods or practices of BOS;
(e) Any revaluation by BOS of any of BOS's assets except as
may be applicable to available-for-sale securities;
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(f) Any increase in the salary schedule or compensation rate,
or the declaration, payment or commitment or obligation of any kind for
the payment by BOS of a bonus or other additional salary or
compensation, other than in accordance with past practice;
(g) Any sale, assignment or transfer of any material assets of
BOS except in the ordinary course of business;
(h) Any waiver or release of any material right or claim of
BOS, except in the ordinary course of business; or
(i) Any agreement to take any action specified in Sections
3.19(a) through (h) hereof.
3.20 BROKERS' AND FINDERS' FEES. Except for Hovde Financial, Inc., or
as specified in Schedule 3.20, neither BOS nor any of its officers or employees
have paid or agreed to pay, or have done any act which would give rise to the
payment of, any fee, commission or consideration to any agent, broker, finder or
other person on account of services rendered as a broker or finder in connection
with this Agreement or the Transactions contemplated herein, or which has
resulted in, or may give rise to, any obligation on the part of BOS or VIBC
therefor. Schedule 3.20 contains a true and correct copy of the fee agreement
with Hovde Financial, Inc. BOS agrees to indemnify and hold VIBC harmless from
and against any and all claims, liabilities, or obligations with respect to any
other brokers' or finders' fees, commissions, or expenses asserted by any other
person on the basis of any act or statement alleged to have been made by BOS or
its affiliates.
3.21 EMPLOYEES. There are no material controversies pending or
threatened between BOS and any of its employees. Except as disclosed in the BOS
Financial Statements, all material sums due for employee compensation and
benefits have been duly and adequately paid or accrued on the books of BOS.
3.22 REGULATORY REPORTS. Except as otherwise set forth in Schedule
3.22, since January 1, 1995, BOS has filed all reports, returns, registrations
and statements, together with any amendments required to be made with respect
thereto (such reports, filings and amendments referred to hereinafter as "BOS
Filings"), that were required to be filed with (a) the OTS, (b) the FDIC, and
(c) any other applicable regulatory agency, except where the failure to file
such reports, returns, registrations and statements has not had and is not
reasonably expected to have a material adverse effect on the business, financial
condition, results of operations or prospects of BOS. Except as otherwise set
forth in Schedule 3.22, no administrative actions have been taken or orders
issued in connection with such BOS Filings and as of their respective dates,
each of such BOS Filings: (i) complied in all material respects with all rules
and regulations promulgated by the regulatory agency with which it was filed (or
was amended so as to be so promptly following discovery of any such
noncompliance); and (ii) did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. Any financial statement contained in any of such BOS
Filings that was intended to present the financial position of BOS fairly
presented the financial position of BOS and was prepared in accordance with
generally accepted accounting principles or banking regulations consistently
applied, except as stated therein, during the periods
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involved. BOS has furnished VIBC with true and correct copies of all BOS Filings
filed by BOS since January 1, 1996.
3.23 BOS EMPLOYEE BENEFIT PLANS AND EMPLOYMENT AND LABOR CONTRACTS.
(a) Schedule 3.23 sets forth and describes all director and/or
employee benefit plans and any collective bargaining agreements, labor
contracts and employment agreements in which BOS participates, or by
which it is bound, including, without limitation: (i) any profit
sharing, deferred compensation, bonus, stock option, stock purchase,
pension, ESOP, retainer consulting, retirement, welfare or incentive
plan or agreement whether legally binding or not; (ii) any written
employment agreement and any other employment agreement whether written
or oral; (iii) any other "employee benefit plan" [within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1975
("ERISA")] (collectively, the "BOS Employment Agreements"); or (iv) any
salary continuation or change in control agreements. Except as set
forth in Schedule 3.23: (i) there are no negotiations, demands or
proposals that are pending or, to the best knowledge of BOS, threatened
that concern matters now covered, or that would be covered, by any
employment agreements or employee benefit plans other than amendments
to plans qualified under Section 401 of the Internal Revenue Code (the
"Code") that are required by the Tax Reform Act of 1986 and later
legislation; (ii) BOS is in material compliance with the requirements
prescribed by any and all rules and regulations currently in effect
including but not limited to ERISA and the Code applicable to all such
employee benefit plans; (iii) BOS is in compliance in all material
respects with all other rules and regulations applicable to employee
benefit plans and employment agreements; (iv) BOS has performed all of
its obligations under all such employee benefit plans and employment
agreements; and (v) there are no actions, suits or claims pending or,
to the best knowledge of BOS, threatened against any such employee
benefit plans, or the assets of such plans, or with respect to any BOS
Employment Agreements, and no facts exist which are reasonably likely
to give rise to any actions, suits or claims (other than routine claims
for benefits) against such plans or the assets of such plans or BOS on
account of any such employment agreements, whether written or oral.
(b) The "employee pension benefit plans" (within the meaning
of Section 312 of ERISA) described on Schedule 3.23 have been duly
authorized by the Board of Directors of BOS. Except as set forth in
Schedule 3.23, each such plan and associated trust is qualified in form
and operation under Section 401(a) and exempt from tax under Section
501(a) of the Code, respectively, and no event has occurred that will
or is reasonably likely to give rise to disqualification of any such
plan or loss of the exemption from tax of any such trust under said
sections. No event has occurred that will or is reasonably likely to
subject any such plans to tax under Section 511 of the Code. None of
such plans has engaged in a merger or consolidation with any other plan
or transferred assets or liabilities from any other plan. No prohibited
transaction (within the meaning of Section 409 or 502(i) of ERISA or
Section 4975 of the Code) or party-in-interest transaction (within the
meaning of Section 406 of ERISA) has occurred with respect to any of
such plans. No employee of BOS has engaged in any transactions which
could subject BOS to indemnify such person against liability. All costs
of plans have been provided for on the basis of consistent methods in
accordance with sound actuarial assumptions and practices. No employee
benefit plan has incurred any "accumulated funding deficiency" (as
defined in ERISA), whether or not waived, taking into
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account contributions made within the period described in Section
412(c)(10) of the Code; nor are there any unfunded amounts under any
employee benefit plan; nor has BOS failed to make any contributions or
pay any amount due and owing as required by law or the terms of any
employee benefit plan or employment agreement. Subject to amendments
that are required by the Tax Reform Act of 1986 as amended and later
legislation, since the last valuation date for each employee pension
benefit plan, there has been no amendment or change to such plan that
would increase the amount of benefits thereunder.
(c) BOS does not sponsor or participate in, and has not
sponsored or participated in, any employee benefit pension plan to
which Section 4021 of ERISA applies that would create a liability under
Title IV of ERISA.
(d) BOS does not sponsor or participate in, and has not
sponsored or participated in, any employee benefit pension plan that is
a "multi-employer plan" (within the meaning of Section 3(37) of ERISA)
that would subject BOS to any liability with respect to any such plan.
(e) All group health plans of BOS (including any plans of
affiliates of BOS that must be taken into account under Section 162(i)
or (k) of the Code as in effect immediately prior to the Technical and
Miscellaneous Revenue Act of 1988 and Section 4980B of the Code) have
been operated in compliance with the group health plan continuation
coverage requirements of Section 4980B of the Code to the extent such
requirements are applicable.
(f) There have been no acts or omissions by BOS that have
given rise to or, to the best knowledge of BOS, may give rise to fines,
penalties, taxes, or related charges under Sections 502(c) or (i) or
4071 of ERISA or Chapter 43 of the Code.
(g) Except as described in Section 3.23(j), BOS does not
maintain any employee benefit plan or employment agreement pursuant to
which any benefit plan or other payment will be required to be made by
BOS or pursuant to which any other benefit will accrue or vest in any
director, officer or employee of BOS, in either case as a result of the
consummation of the transactions contemplated by the Agreement.
(h) No "reportable event," as defined in ERISA, has occurred
with respect to any of the employee benefit plans.
(i) All amendments required to bring each of the employee
benefit plans into conformity with all of the provisions of ERISA and
the Code and all other applicable laws, rules and regulations have been
made.
(j) Schedule 3.23 sets forth the name of each director,
officer or employee of BOS entitled to receive any benefit or any
payment of any amount under any existing employment agreement,
severance plan or other benefit plan as a result of the consummation of
any transaction contemplated in this Agreement, and with respect to
each such person, the nature of such benefit or the amount of such
payment, the event triggering the benefit or payment, and the date of,
and parties to, such employment agreement, severance plan or other
benefit plan. BOS has furnished VIBC with true and correct copies of
all documents with
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respect to the plans and agreements referred to in Schedule 3.23
delivered as of the date of this Agreement, including all amendments
and supplements thereto, and all related summary plan descriptions. For
each of the employee pension benefit plans of BOS referred to in
Schedule 3.23 delivered as of the date of this Agreement, if any, or
except as noted therein, BOS has furnished VIBC with true and correct
copies of: (i) the Form 5500 which was filed in each of the three most
recent plan years, including without limitation, all schedules thereto
and all financial statements with attached opinions of independent
accountants; (ii) the most recent determination letter from the
Internal Revenue Service; (iii) the statement of assets and liabilities
as of the most recent valuation date; and (iv) the statement of changes
in fund balance and in financial position or the statement of changes
in net assets available for benefits under each of said plans for the
most recently ended plan year. The documents referred to in
subdivisions (iii) and (iv) fairly present the financial condition of
each of said plans as of and at such dates and the results of
operations of each of said plans, all in accordance with generally
accepted accounting principles applied on a consistent basis.
3.24 STOCK OPTION PLANS. Schedule 3.24 sets forth a true and correct
copy of BOS's 1985 and 1995 Stock Option Plans and a schedule showing the names,
dates of grant, vesting schedules, termination dates, and option prices for each
option outstanding as of the date of this Agreement. The 1985 and 1995 Stock
Option Plans have been duly approved by the Board of Directors and shareholders
of BOS and by the OTS, each stock option has been approved by the Board of
Directors of BOS, and, upon exercise of the options in accordance with their
terms, the shares of BOS Stock issued have been and will be validly issued,
fully paid and nonassessable.
3.25 ABSENCE OF CERTAIN PRACTICES. Except as may be disclosed to VIBC
on Schedule 3.25, neither BOS, nor any officer, director, employee or agent of
BOS has, directly or indirectly, within the past four years, given or made or
agreed to give or make any illegal commission, payment, gratuity, gift,
political contribution or similar benefit to any customer, supplier,
governmental employee or other person in order to obtain business for or further
the business of BOS.
3.26 NO VIOLATION OF LAW. BOS is in substantial compliance with all
material laws relating to its business or employment practices or the ownership
of its properties, and is in substantial compliance with each material law,
ordinance, order, decree or regulation of any governmental entity applicable to
the conduct thereof or the ownership of the properties related thereto, except
in each case for violations which either individually or in the aggregate do not
and will not have a material adverse effect on the business, financial condition
or results of operations of BOS taken as a whole.
3.27 CERTAIN INTERESTS. Except as disclosed on Schedule 3.27, except in
arm's-length transactions pursuant to normal commercial terms and conditions:
(a) no officer or director of BOS has any material interest in any property,
real or personal, tangible or intangible, used in or pertaining to the business
of BOS except for the normal rights of a shareholder of BOS; (b) no such person
is indebted to BOS except for normal business expense advances or lending
transactions in the ordinary course of business on the same terms, including
interest rates and collateral on loans as those prevailing at the same time for
comparable transactions with others; and (c) BOS is not indebted to any such
person except for amounts due under normal salary or reimbursement of ordinary
business expenses. Except as disclosed on Schedule 3.23, the consummation of the
Transactions contemplated hereby will not (either alone, or upon the occurrence
of any act or event, or with the lapse of time,
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or both) result in any payment (severance or other) becoming due from BOS to any
employee of BOS.
3.28 MINUTE BOOKS. The minute books of BOS accurately reflect all
material actions duly taken by the shareholders, Board of Directors and
committees of BOS and contain true and complete copies of BOS's Charter and
Bylaws and all amendments thereto.
3.29 ACCOUNTING RECORDS; DATA PROCESSING. BOS has records that, in all
material respects, fairly reflect its transactions, and accounting controls
sufficient to ensure that such transactions are in all material respects: (a)
executed in accordance with management's general or specific authorization; and
(b) recorded in conformity with generally accepted accounting principles.
Schedule 3.29 contains a true and correct copy of the OTS's most recent audit of
BOS's data processing system. Except as set forth in Schedule 3.29, the
procedures and equipment, including, without limitation, the data processing
equipment, data transmission equipment, and related peripheral equipment and
software, used by BOS in the operation of its business (including any disaster
recovery facility) to generate and retrieve such records are adequate in
relation to the size and complexity of the business of BOS.
3.30 OPERATING LOSSES. Schedule 3.30 sets forth any individual
Operating Loss (as defined below) in excess of $500.00 that has occurred at BOS
during the period after December 31, 1997. Except as set forth on Schedule 3.30,
since December 31, 1997, no event has occurred, and no action has been taken or
omitted to be taken by any employee of BOS that has resulted in the occurrence
by BOS of an Operating Loss or that might reasonably be expected to result in
the occurrence by BOS of an Operating Loss after December 31, 1997, which, net
of any insurance proceeds payable in respect thereof, exceeds, or would exceed
$10,000 by itself or $50,000 when aggregated with all other Operating Losses
during such period. For purposes of this Agreement, "Operating Loss" means any
loss resulting from cash shortages, lost or misposted items, disputed clerical
and accounting errors, forged checks, payment of checks over stop payment
orders, counterfeit money, wire transfers made in error, theft, robberies,
employee dishonesty, defalcations, check kiting, fraudulent use of credit cards
or electronic teller machines, civil money penalties, fines, litigation, claims,
arbitration awards or other similar acts or occurrences.
3.31 CRA STANDING. BOS's compliance under the Community Reinvestment
Act (the "CRA") should not constitute grounds for either the denial by any
regulatory agency of any application to consummate the Transactions contemplated
by this Agreement or the imposition of a materially burdensome condition in
connection with the approval of any such application. BOS has not been advised
of any concerns regarding compliance with the CRA by any regulatory agency or
any other person.
3.32 YEAR 2000 MATTERS. BOS has completed a review of its computer
systems to identify systems that could be affected by the "Year 2000." The
management of BOS has developed and commenced implementation of a plan to
respond to this issue. Between the date of this Agreement and the Effective Time
of the Merger, BOS shall use commercially practicable efforts to implement
and/or continue to undertake such a plan. BOS has not been advised by any
regulatory authority to undertake any additional actions nor is BOS subject to
any regulatory order, memorandum or directive (other than directives of general
applicability to financial institutions) with respect thereto.
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Year 2000 issues have not had, and are not reasonably expected to have, a
material adverse effect on BOS.
3.33 ACCURACY AND CURRENTNESS OF INFORMATION FURNISHED. The
representations and warranties made by BOS hereby and in the schedules hereto
contain no statements of fact which are untrue or misleading, or omit to state
any material fact which is necessary under the circumstances to prevent the
statements contained herein or in such schedules from being misleading. BOS
hereby covenants that it shall, as of the Effective Time of the Merger, amend
and/or supplement the schedules prepared and delivered pursuant to this Article
III to ensure that the information set forth in such schedules accurately
reflects the then-current status of BOS.
3.34 EFFECTIVE DATE OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. Each representation, warranty, covenant and agreement of BOS set
forth in this Agreement shall be deemed to be made on and as of the date hereof
and, as subsequently amended and/or supplemented as provided in Section 3.33, as
of the Effective Time of the Merger.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF VIBC
VIBC hereby represents and warrants to BOS as follows:
4.1 ORGANIZATION, STANDING AND POWER. VIBC is a California corporation,
duly organized, validly existing and in good standing under the laws of the
State of California and VIBC has all requisite corporate power and authority to
own, lease and operate its properties and assets and to carry on its business as
presently conducted. Neither the scope of the business of VIBC nor the location
of any of its properties requires that it be licensed to do business in any
jurisdiction other than the State of California. Attached hereto as Schedule 4.1
are true and correct copies of its Articles of Incorporation and Bylaws, as
amended to the date hereof.
4.2 CAPITALIZATION. The authorized capitalization of VIBC consists of
10,000,000 shares of Preferred Stock of which none are issued and outstanding
and 25,000,000 shares of Common Stock, no par value, of which 7,803,121 shares
are issued and outstanding as of the date of this Agreement. As of the date of
this Agreement, VIBC Stock was held of record or beneficially by approximately
2,061 shareholders of record and the VIBC Stock was registered under the
Securities Exchange Act of 1934, as amended. All of the outstanding shares of
the VIBC Stock are, and when issued in exchange for the BOS Stock will be,
validly issued, fully paid and nonassessable.
4.3 SUBSIDIARIES. Except for VIB, VIBC does not own, directly or
indirectly (except as pledgee pursuant to loans which are not in default or for
shares held by VIB as the result of any foreclosure by VIB on any loan, which
shares do not exceed 4.9% of the outstanding common stock of any such company),
any outstanding stock or other voting interests in any corporation, partnership,
joint venture or other entity. VIB is a California state banking corporation,
duly organized, validly existing and in good standing under the laws of the
State of California; is an "insured bank" as defined in the Federal Deposit
Insurance Act; and VIB has all requisite corporate power and authority to own,
lease and operate its properties and assets and carry on its business as
presently conducted. Neither the scope of the business of VIB nor the location
of any of its properties requires that it be
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licensed or qualified to do business in any jurisdiction other than the States
of California, Arizona and Nevada. The shares of VIB's common stock held by VIBC
are free and clear of all security interests, encumbrances, restrictions, claims
or other defects in title.
4.4 AUTHORITY. The execution and delivery by VIBC of this Agreement and
the consummation of the Transactions contemplated hereby have been duly and
validly authorized by all necessary corporate action on the part of VIBC. The
Agreement is, and the Merger Agreement will be, binding and enforceable
obligations of VIBC and BOS Interim Bank, respectively, except as enforceability
thereof may be limited by bankruptcy, insolvency, moratorium or similar laws
affecting the rights of creditors generally or California corporations, or
federal savings banks, or by general equitable principles, or by 12 U.S.C.
Section 1818(b)(6)(D). Neither the execution and delivery by VIBC of this
Agreement, nor the consummation of the Transactions contemplated herein, nor
compliance by VIBC with any of the provisions hereof will: (a) conflict with, or
result in a breach of, any provision of its Articles of Incorporation or Bylaws;
or (b) except as set forth in Schedule 4.4, constitute a breach of, or result in
default, or give rise to any rights of termination, cancellation or
acceleration, or give rise to any right by any other person or entity to acquire
any security interest in any assets under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, franchise, license, permit,
agreement or other instrument or obligation to which VIBC or any of its
properties or assets are subject. No consent or approval of, notice to or filing
with any governmental authority having jurisdiction over any aspect of the
business or assets of VIBC, and no consent or approval of or notice to any other
person or entity, is required in connection with the execution and delivery by
VIBC of this Agreement or by BOS Interim Bank of the Merger Agreement or the
consummation by VIBC of the Transactions contemplated hereby or thereby, except:
(a) approval of this Agreement and the Merger Agreement by the shareholder of
BOS Interim Bank; (b) such approvals of this Agreement, the Merger Agreement,
and the Transactions contemplated herein and therein as may be required by the
OTS pursuant to the applicable requirements of the Home Owners Loan Act, as
amended, and the Bank Merger Act, as amended, and/or by the Board of Governors
of the Federal Reserve System as may be required under the Bank Holding Company
Act of 1956, as amended; and (c) as set forth on Schedule 4.4.
4.5 FINANCIAL STATEMENTS. Except as disclosed in the notes relating
thereto, or otherwise on Schedule 4.5, the audited consolidated financial
statements of VIBC as of and for the periods ended December 31, 1996 and 1997,
as well as the unaudited consolidated financial statements of VIBC as of and for
the periods ended June 30, 1997 and 1998, attached hereto as Schedule 4.5 (all
of these statements are collectively referred to herein as the "VIBC Financial
Statements"): (i) fairly and accurately present the financial condition of VIBC
as of the dates thereof and the results of operations and its cash flows for the
periods therein set forth; (ii) have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved; and (iii) are based on the books and records of VIBC. VIBC's reserves
for possible loan losses as disclosed in the VIBC Financial Statements were
adequate as of such dates to absorb reasonably anticipated losses in the loan
portfolio of VIBC in view of the size and character of such portfolio, then
current economic conditions, and other pertinent factors; and no facts have
subsequently come to the attention of management of VIBC which would cause
management to restate as of any of such dates in any material way the level of
such reserves for possible loan losses. With respect to other real estate owned
by VIBC, the value attributed thereto for purposes of preparing the VIBC
Financial Statements does not exceed the aggregate fair market value of such
real estate as of the date of acquisition of such real estate or as subsequently
reduced, all in accordance with generally accepted
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accounting principles. With regard to investments owned by VIBC, the value
attributed thereto for purposes of preparing the VIBC Financial Statements is in
accordance with generally accepted accounting principles.
4.6 UNDISCLOSED LIABILITIES. VIBC and VIB do not have any liabilities
or obligations, either accrued or contingent, which are material to VIBC taken
as a whole and which have not been: (a) reflected or disclosed in the VIBC
Financial Statements; or (b) disclosed in Schedule 4.6. VIBC does not know of
any basis for the assertion against it or VIB of any liability, obligation or
claim (including, without limitation, that of any regulatory authority) that is
reasonably likely to result in or cause any material adverse change in the
business or financial condition of VIBC when taken as a whole, which is not
fairly reflected in the VIBC Financial Statements or otherwise disclosed in
Schedule 4.6 hereto.
4.7 TITLE TO ASSETS. VIBC and VIB have good, valid and marketable title
to all material properties and assets, other than real property and securities
pledged to secure public deposits or retail repurchase agreements, owned or
stated to be owned by VIBC or VIB and reflected on the VIBC Financial
Statements, or acquired after December 31, 1997 (except properties sold or
otherwise transferred in the ordinary course of business since December 31,
1997), free and clear of all mortgages, liens, encumbrances, pledges or charges
of any kind or nature (except for liens for current taxes not yet due and
payable and except as disclosed in the VIBC Financial Statements or in Schedule
4.7 hereto).
4.8 REAL ESTATE. Schedule 4.8 hereto contains a list of all real
property, including leaseholds and "other real estate owned," owned or leased by
VIBC or VIB. Schedule 4.8 contains, among other things, an accurate summary of
all material commitments which VIBC or VIB has to improve real estate owned or
leased by it. VIBC or VIB has good and marketable title to all the real
property, and valid leasehold interests in the leaseholds, described in Schedule
4.8, free and clear of all mortgages, covenants, conditions, restrictions,
easements, liens, security interests, charges, claims and encumbrances, except
for: (a) rights of lessors, co-lessees or sublessees in such matters which are
reflected in the leases; (b) current taxes not yet due and payable; (c) as
described in any title policies; (d) such imperfections of title and
encumbrances, if any, as do not materially detract from the value of or
materially interfere with the present use of such property; or (e) except as
described in Schedule 4.8 hereto. Copies of title policies for properties
described in Schedule 4.8 as owned by VIBC or VIB have been made available to
BOS. The activities of VIBC and VIB with respect to their real property owned
and their leaseholds for use in connection with their operations are in all
material respects permitted and authorized by applicable zoning laws, ordinances
and regulations and all laws and regulations of any governmental department or
agency relative to environmental matters affecting such property, except as
otherwise disclosed in Schedule 4.8. VIBC and/or VIB enjoy quiet and peaceful
possession of all such property. All tangible properties of VIBC that are
material to the business, financial condition, results of operations or
prospects of VIBC are in a good state of maintenance and repair, except for
ordinary wear and tear, and are adequate for the conduct of the business of VIBC
and VIB as presently conducted. Except as set forth in Schedule 4.8: (i) the
execution of this Agreement, the performance of the obligations of VIBC
hereunder and the consummation of the Transactions contemplated herein do not
conflict with and will not result in a breach or default under any lease,
agreement or contract described in Schedule 4.8, or give any other party thereto
a right to terminate or modify any term thereof; (ii) each lease and agreement
under which VIBC or VIB is a lessee or holds or operates any property (real,
personal or mixed) owned
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by any third party is in full force and effect and is a valid and legally
binding obligation of VIBC or VIB; (iii) VIBC or VIB and each other party to any
such lease or agreement have performed in all material respects all the
obligations required to be performed by them to date under such lease or
agreement and are not in default in any material respect under any such lease or
agreement and there is no pending or threatened proceeding, or proceeding which
VIBC has reason to believe may be threatened, that would interfere with the
quiet enjoyment of such leasehold or such material property by VIBC or VIB; (iv)
no underground storage tanks or surface impoundments are on or in the real
property; and (v) no asbestos is contained or located on any of the real
property. None of such leases or agreements contain any unusual provision which
now or in the future may cause a material adverse change in the business
condition of VIBC.
4.9 ENVIRONMENTAL LIABILITIES.
(a) COMPLIANCE. Except as set forth on Schedule 4.9, VIBC and
VIB are conducting and, to the best of their knowledge, have conducted
their business, and are using and, to the best of their knowledge, have
used their properties, whether currently owned, operated or leased, or
owned, operated or leased by VIBC or VIB at any time in the past, and
all properties in which VIBC or VIB has a security interest have been
used and are being used, in compliance with all applicable
Environmental Laws.
(b) NO INVESTIGATIONS. Neither VIBC nor VIB has received
notice that any property currently owned, operated or leased by VIBC or
VIB or which has been in the past owned, operated or leased by VIBC or
VIB, or in which VIBC or VIB has a security interest, is subject to any
existing, pending or threatened investigation, action or proceeding,
including any notice of violation, by any governmental authority
regarding contamination of any part of the property or infractions of
any law, statute, ordinance or regulation or any license or permit
issued by any government agency pertaining to health, industrial
hygiene or environmental safety or environmental conditions on, under
or about the property, except for such investigations, actions,
proceedings, notifications, or infractions which, in the aggregate,
have not had and are not reasonably likely to have a material adverse
effect on VIBC.
(c) HAZARDOUS SUBSTANCES. Except as set forth on Schedule 4.9,
there are no Hazardous Substances presently located on, under or about
any property which is currently owned, operated, under the control of,
or leased by VIBC or VIB, or in which VIBC or VIB have a security
interest, nor was there any Hazardous Substances located on, under or
about any property prior to or during the period any such property has
been owned, operated, under the control of, or leased by VIBC or VIB.
There has not been any generation, use, handling, transportation,
treatment or disposal of any Hazardous Substances in connection with
the conduct of the business of VIBC or VIB that has or might result in
any material liability under any Environmental Law.
4.10 LOANS AND INVESTMENTS. Except as disclosed in Schedule 4.10
hereto: (a) all the loans and investments of VIB are legal, valid and permitted
under federal and state laws and regulations applicable at the time of their
origination or assumption; and (b) VIB is not subject to any liability or claim
for violation of any state or federal law or regulation concerning extensions of
credit, including, without limitation, those relating to discriminatory lending
practices and truth-in-lending. Except for investments that have matured or been
sold, Schedule 4.10 sets forth all of the investments
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reflected in the balance sheets of VIB dated December 31, 1997 and June 30,
1998. Except as set forth in Schedule 4.10, none of such investments is subject
to any restriction, contractual, statutory or other, that would materially
impair the ability of VIB to dispose freely of any such investment at any time,
except restrictions on the public distribution or transfer of such investments
under the Securities Act of 1933, as amended, or state securities laws. Except
as set forth in Schedule 4.10, as of December 31, 1997, VIB had no holdings of
positions in Derivative Instruments. Except as set forth in Schedule 4.10, since
January 1, 1996 VIB has not engaged in any transactions in or involving
Derivative Instruments except as agent on the order and for the account of
others. Schedule 4.10 sets forth for each Derivative Instrument held by VIB
since January 1, 1996, the present book value and market value, if applicable,
the open exposure of VIB, if any, and whether any counterparties to any contract
or agreement with respect to any such instrument is in default with respect to
such contract or agreement.
4.11 DEPOSITS. Schedule 4.11 sets forth a list of deposit accounts
outstanding at VIB with an outstanding balance as of July 20, 1998, in excess of
$250,000.00.
4.12 LITIGATION AND GOVERNMENTAL PROCEEDINGS. Except as otherwise
expressly disclosed in Schedule 4.12, VIBC and VIB are not engaged in, or
threatened with, any legal action or other proceeding before any court or
administrative agency which might be material to its or their business or in
which the amount claimed against them is $100,000 or more; except as set forth
in Schedule 4.12, VIBC and VIB are not in default of any of their duties or
obligations under, or with respect to, any judgment, order, writ, injunction or
decree of any court or governmental department, commission, board, bureau,
agency or other instrumentality having jurisdiction over VIBC and VIB or their
businesses; except as disclosed in Schedule 4.12, VIBC and VIB have not been
served with notice of and are not, to the best of their knowledge, under
investigation with respect to, any possible violation of any provision of
federal, state or local laws, rules, or regulations; and except as set forth in
Schedule 4.12, VIBC and VIB are not subject to any order, letter agreement or
written direction of any governmental agency with respect to its financial or
operating ratios, or with respect to any other standards or tests imposed by
state and federal laws and regulations, including, without limitation, those
relating to net worth, liquidity and the maintenance of reserves, nor has any
such order, letter agreement or written direction been proposed to VIBC or VIB.
Schedule 4.12 contains a list identifying any claims pending on behalf of VIB
against the SBA, any other governmental agencies, or any third parties for
reimbursement for loan defaults, indicating the date of the claim, the name of
the borrower, and the amount of the claim.
4.13 CONTRACTS AND AGREEMENTS. Except as provided by this Agreement and
except as forth in Schedule 4.13 VIBC and VIB are not parties to any
Understanding which individually, or with all other similar Understandings
relating to the same or similar subject matter, falls within any of the
following classifications:
(a) Any loan commitment, agreement, pledge, conditional sale
contract, security agreement, lease (excluding leases of real property
listed in Schedule 4.8), guarantee, subordination agreement or other
similar or related type of Understanding (but not including any deposit
agreements as to which VIB is the debtor), involving the expenditure of
$100,000 or more as to which VIBC or VIB is a debtor, pledgor, lessee
or obligor;
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(b) Any Understanding for the employment of any officer or
employee which is not terminable by VIBC or VIB without liability on
not more than 30 days' notice;
(c) Any Understanding with any labor organization;
(d) Any Understanding which obligates VIBC or VIB for a period
in excess of one year to purchase, sell or provide services, materials,
supplies, merchandise, facilities or equipment;
(e) Any Understanding for the sale of any of VIBC's or VIB's
assets in excess of $100,000 in amount, or for the grant of any
preferential right to purchase any of their assets, properties or
rights in excess of $100,000 in amount, or which requires the consent
of any third party to the transfer and assignment of any of their
assets, properties or rights in excess of $100,000 in amount, other
than in the ordinary course of business;
(f) Any Understanding for the borrowing of any money by VIBC
or VIB or for a line of credit to VIBC or VIB, except borrowings from
the Federal Reserve Bank of San Francisco in the ordinary course of
business;
(g) Any Understanding for any one capital expenditure or
series of related capital expenditures in excess of $100,000;
(h) Any Understanding to make, renew or extend the term of a
loan to any affiliate (as that term is defined for purposes of Rule 144
under the Securities Act of 1933) or group of persons related to any
affiliate, which, including any undisbursed or unfunded amount, when
aggregated with all outstanding indebtedness of such affiliate or group
of related persons to VIBC, would exceed $100,000;
(i) Any Understanding of any kind (other than contracts
relating to demand, savings or time deposits) with any director or
officer of VIBC or with any affiliate or member of the immediate family
(defined to include a person's spouse, parents, in laws, descendants or
siblings) of any such director, officer or affiliate;
(j) Any Understanding for the sale of loans with recourse; or
(k) Any Understanding not otherwise disclosed pursuant to this
Section 4.13 which is material to the financial condition, results of
operations, assets or business of VIBC taken as a whole.
True and correct copies of all contracts, including amendments thereto,
setting forth the foregoing Understandings, are attached as a part of Schedule
4.13.
4.14 PERFORMANCE OF OBLIGATIONS. VIBC and VIB have performed in all
respects all of the material obligations required to be performed by them to
date and VIBC or VIB are not in default in any material respect under any
agreement, contract or lease to which they are a party or subject or are
otherwise bound and which are material to the financial condition of VIBC taken
as a whole; no party with whom VIBC or VIB has an agreement which is of material
importance to the business
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of VIBC is in material default thereunder, except as has been disclosed in
Schedule 4.14. With respect to loan delinquencies, Schedule 4.14 contains the
monthly loan delinquency report dated on or about June 30, 1998, in the form
customarily prepared for and delivered to the Board of Directors of VIB.
4.15 INSURANCE. Except as set forth in Schedule 4.15, VIBC and VIB have
in full force and effect policies of insurance, including, without limitation, a
banker's blanket bond, with respect to their assets and business and against
such casualties and contingencies and of such amounts, types and forms as are
appropriate for their business, operations, properties and assets and as are
usual and customary in the banking industry. Set forth in Schedule 4.15 hereto
is a schedule of all policies of insurance (other than title insurance) carried
and owned by VIBC and VIB; showing the name of the insurance company, the nature
of the coverage, the policy limit, the annual premiums and the expiration dates.
There has been delivered to or made available to BOS a copy of each such policy
of insurance. VIB has continually for the past five years maintained a fidelity
bond insuring it against acts of dishonesty by its employees in such amounts as
are disclosed in Schedule 4.15. No claims have been made under such bond. VIBC
is not aware of any facts which would form the basis of a claim under any such
bond; nor does VIBC have any reason to believe that any insurance coverage will
not be renewed by the existing carrier on substantially the same terms as
existing coverage.
4.16 TAXES. Except as set forth in Schedule 4.16 hereto, VIBC and VIB
have timely filed all federal, state and local tax returns required to be filed
by them or on their behalf. Except as set forth in Schedule 4.16, all taxes
shown by such returns to be due and payable have been paid or are reflected as a
liability on the VIBC Financial Statements. None of the federal, state and local
tax returns of VIBC or VIB have been audited by the Internal Revenue Service or
other governmental authorities having jurisdiction over the examination of such
returns except for the years or periods indicated in Schedule 4.16. All material
deficiencies (including interest and penalties, if any, thereon), if any,
imposed as a result of such examinations have been either paid, or have been
accrued as a liability on the VIBC Financial Statements, or are being contested
in good faith and are disclosed in Schedule 4.16. No material tax deficiency has
been or to the knowledge of VIBC is proposed to be assessed against VIBC or VIB
by any federal, state or local authority or agency. Neither VIBC nor VIB have
agreed to any extension of time for the assessment of any taxes of whatsoever
kind or nature payable by it, nor has VIBC or VIB waived or been requested to
waive any applicable statute of limitations with relation to the payment of any
federal, state or local taxes. The accruals for taxes reflected on the VIBC
Financial Statements are adequate for all unpaid federal, state or local taxes
(including interest and penalties, if any, thereon) due, or which became due for
any period commencing prior to December 31, 1997.
4.17 ABSENCE OF CERTAIN CHANGES. Except as disclosed on Schedule 4.17
or as permitted by this Agreement, since December 31, 1997, the business of VIBC
and VIB have been conducted diligently and only in the ordinary course, in the
same manner as heretofore conducted and there has not been:
(a) Any change (other than changes affecting financial
institutions generally, including changes in interest rates, laws or
regulations) in the financial condition of VIBC taken as a whole which
has been materially adverse;
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(b) Any declaration, setting aside, or the payment of any
dividend or other distribution with respect to the VIBC Stock or the
issuance of any additional shares of, or options to purchase, the VIBC
Stock or any other security of VIBC;
(c) Any damage, destruction or loss (whether or not covered by
insurance) which individually or taken as a whole materially adversely
affects the property, business or prospects of VIBC;
(d) Any change in accounting methods or practices of VIBC;
(e) Any revaluation by VIBC of any of VIBC's assets except as
may be applicable to available-for-sale securities;
(f) Any increase in the salary schedule or compensation rate,
or the declaration, payment or commitment or obligation of any kind for
the payment by VIBC of a bonus or other additional salary or
compensation, other than in accordance with past practice;
(g) Any sale, assignment or transfer of any material assets of
VIBC except in the ordinary course of business;
(h) Any waiver or release of any material right or claim of
VIBC, except in the ordinary course of business; or
(i) Any agreement to take any action specified in Sections
4.17(a) through (h) hereof.
4.18 BROKERS' AND FINDERS' FEES. Except as specified in Schedule 4.18,
neither VIBC, VIB, nor any of their officers or employees have paid or agreed to
pay, or have done any act which would give rise to the payment of, any fee,
commission or consideration to any agent, broker, finder or other person on
account of services rendered as a broker or finder in connection with this
Agreement or the Transactions, or which has resulted in, or may give rise to,
any obligation on the part of VIBC or BOS therefor. VIBC agrees to indemnify and
hold BOS harmless from and against any and all claims, liabilities, or
obligations with respect to any brokers' or finders' fees, commissions, or
expenses asserted by any person on the basis of any act or statement alleged to
have been made by VIBC or its affiliates.
4.19 EMPLOYEES. To the best of VIBC's knowledge there are no material
controversies pending or threatened between VIBC or VIB and any of their
employees. Except as disclosed in the VIBC Financial Statements, all material
sums due for employee compensation and benefits have been duly and adequately
paid or accrued on the books of VIBC.
4.20 REGULATORY REPORTS. Except as otherwise set forth in Schedule
4.20, since January 1, 1995, VIBC and VIB have filed all reports, returns,
registrations and statements, together with any amendments required to be made
with respect thereto (such reports, filings and amendments referred to
hereinafter as "VIB Filings"), that were required to be filed with (a) the
California Department of Financial Institutions, (b) the FDIC, (c) the FRB, (d)
the Securities and Exchange Commission (the "SEC"), and (e) any other applicable
regulatory agency, except where the failure to file such reports,
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returns, registrations and statements has not had and is not reasonably expected
to have a material adverse effect on the business, financial condition, results
of operations or prospects of VIBC. Except as otherwise set forth in Schedule
4.20, no administrative actions have been taken or orders issued in connection
with such VIB Filings and as of their respective dates, each of such VIB
Filings: (i) complied in all material respects with all rules and regulations
promulgated by the regulatory agency with which it was filed (or was amended so
as to be so promptly following discovery of any such noncompliance); and (ii)
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Any financial statement contained in any of such VIB Filings that
was intended to present the financial position of VIB or VIBC fairly presented
the financial position of VIB or VIBC and was prepared in accordance with
generally accepted accounting principles or banking regulations and/or
securities rules and regulations, as applicable, consistently applied, except as
stated therein, during the periods involved. VIBC has furnished BOS with true
and correct copies of all VIB Filings filed by VIB or VIBC since January 1,
1996.
4.21 VIBC EMPLOYEE BENEFIT PLANS AND EMPLOYMENT AND LABOR CONTRACTS.
(a) Schedule 4.21 sets forth and describes all employee
benefit plans and any collective bargaining agreements, labor contracts
and employment agreements in which VIB or VIBC participates, or by
which they are bound, including, without limitation: (i) any profit
sharing, deferred compensation, bonus, stock option, stock purchase,
pension, ESOP, retainer consulting, retirement, welfare or incentive
plan or agreement whether legally binding or not; (ii) any written
employment agreement and any other employment agreement whether written
or oral; or (iii) any other "employee benefit plan" [within the meaning
of Section 3(3) of "ERISA"] (collectively, the "VIB Employment
Agreements"). Except as set forth in Schedule 4.21: (i) there are no
negotiations, demands or proposals that are pending or, to the best of
VIBC's knowledge, threatened that concern matters now covered, or that
would be covered, by any employment agreements or employee benefit
plans other than amendments to plans qualified under Section 401 of the
Code that are required by the Tax Reform Act of 1986 and later
legislation; (ii) VIB and VIBC are in material compliance with the
requirements prescribed by any and all rules and regulations currently
in effect including but not limited to ERISA and the Code applicable to
all such employee benefit plans; (iii) VIB and VIBC are in compliance
in all material respects with all other rules and regulations
applicable to employee benefit plans and employment agreements; (iv)
VIB and VIBC have performed all of their obligations under all such
employee benefit plans and employment agreements; and (v) there are no
actions, suits or claims pending or, to the best of VIBC's knowledge,
threatened against any such employee benefit plans, the assets of such
plans, or with respect to any VIB Employment Agreements, and no facts
exist which could give rise to any actions, suits or claims (other than
routine claims for benefits) against such plans or the assets of such
plans or VIB or VIBC on account of any such employment agreements,
whether written or oral.
(b) The "employee pension benefit plans" (within the meaning
of Section 312 of ERISA) described on Schedule 4.21 have been duly
authorized by the Board of Directors of VIB or VIBC. Except as set
forth in Schedule 4.21, each such plan and associated trust is
qualified in form and operation under Section 401(a) and exempt from
tax under Section
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501(a) of the Code, respectively, and no event has occurred that will
or is reasonably likely to give rise to disqualification of any such
plan or loss of the exemption from tax of any such trust under said
sections. No event has occurred that will or is reasonably likely to
subject any such plans to tax under Section 511 of the Code. None of
such plans has engaged in a merger or consolidation with any other plan
or transferred assets or liabilities from any other plan. No prohibited
transaction (within the meaning of Section 409 or 502(i) of ERISA or
Section 4975 of the Code) or party-in-interest transaction (within the
meaning of Section 406 of ERISA) has occurred with respect to any of
such plans. No employee of VIB or VIBC has engaged in any transactions
which could subject VIB or VIBC to indemnify such person against
liability. All costs of plans have been provided for on the basis of
consistent methods in accordance with sound actuarial assumptions and
practices. No employee benefit plan has incurred any "accumulated
funding deficiency" (as defined in ERISA), whether or not waived,
taking into account contributions made within the period described in
Section 412(c)(10) of the Code; nor are there any unfunded amounts
under any employee benefit plan; nor has VIB or VIBC failed to make any
contributions or pay any amount due and owing as required by law or the
terms of any employee benefit plan or employment agreement. Subject to
amendments that are required by the Tax Reform Act of 1986 as amended
and later legislation, since the last valuation date for each employee
pension benefit plan, there has been no amendment or change to such
plan that would increase the amount of benefits thereunder.
(c) VIB and VIBC do not sponsor or participate in, and have
not sponsored or participated in, any employee benefit pension plan to
which Section 4021 of ERISA applies that would create a liability under
Title IV of ERISA.
(d) VIB and VIBC do not sponsor or participate in, and have
not sponsored or participated in, any employee benefit pension plan
that is a "multi-employer plan" (within the meaning of Section 3(37) of
ERISA) that would subject VIBC or VIB to any liability with respect to
any such plan.
(e) All group health plans of VIB and VIBC (including any
plans of affiliates of VIB or VIBC that must be taken into account
under Section 162(i) or (k) of the Code as in effect immediately prior
to the Technical and Miscellaneous Revenue Act of 1988 and Section
4980B of the Code) have been operated in compliance with the group
health plan continuation coverage requirements of Section 4980B of the
Code to the extent such requirements are applicable.
(f) There have been no acts or omissions by VIB or VIBC that
have given rise to or, to the best knowledge of VIB or VIBC, may give
rise to fines, penalties, taxes, or related charges under Sections
502(c) or (i) or 4071 of ERISA or Chapter 43 of the Code.
(g) Except as described in Section 4.21(j), VIB and VIBC do
not maintain any employee benefit plan or employment agreement pursuant
to which any benefit plan or other payment will be required to be made
by VIB or VIBC or pursuant to which any other benefit will accrue or
vest in any director, officer or employee of VIB or VIBC, in either
case as a result of the consummation of the transactions contemplated
by the Agreement.
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(h) No "reportable event," as defined in ERISA, has occurred
with respect to any of the employee benefit plans.
(i) All amendments required to bring each of the employee
benefit plans into conformity with all of the provisions of ERISA and
the Code and all other applicable laws, rules and regulations have been
made.
(j) Schedule 4.21 sets forth the name of each director,
officer or employee of VIB or VIBC entitled to receive any benefit or
any payment of any amount under any existing employment agreement,
severance plan or other benefit plan as a result of the consummation of
any transaction contemplated in this Agreement, and with respect to
each such person, the nature of such benefit or the amount of such
payment, the event triggering the benefit or payment, and the date of,
and parties to, such employment agreement, severance plan or other
benefit plan. VIBC has furnished BOS with true and correct copies of
all documents with respect to the plans and agreements referred to in
Schedule 4.21 delivered as of the date of this Agreement, including all
amendments and supplements thereto, and all related summary plan
descriptions. For each of the employee pension benefit plans of VIB or
VIBC referred to in Schedule 4.21 delivered as of the date of this
Agreement, if any, or except as noted therein, VIBC has furnished BOS
with true and correct copies of: (i) the Form 5500 which was filed in
each of the three most recent plan years, including without limitation,
all schedules thereto and all financial statements with attached
opinions of independent accountants; (ii) the most recent determination
letter from the Internal Revenue Service; (iii) the statement of assets
and liabilities as of the most recent valuation date; and (iv) the
statement of changes in fund balance and in financial position or the
statement of changes in net assets available for benefits under each of
said plans for the most recently ended plan year. The documents
referred to in subdivisions (iii) and (iv) fairly present the financial
condition of each of said plans as of and at such dates and the results
of operations of each of said plans, all in accordance with generally
accepted accounting principles applied on a consistent basis.
4.22 STOCK OPTION PLAN. Schedule 4.22 sets forth a true and correct
copy of VIBC's 1997 Stock Option Plan and a schedule showing the names, dates of
grant, vesting schedules, termination dates, and option prices for each option
outstanding as of the date of this Agreement. The 1997 Stock Option Plan has
been duly approved by the Board of Directors and shareholders of VIBC, and
registered under the Securities and Exchange Act of 1934, each stock option has
been approved by the Board of Directors of VIBC, and, upon exercise of the
options in accordance with their terms, the shares of VIBC Stock issued have
been and will be validly issued, fully paid and nonassessable.
4.23 ABSENCE OF CERTAIN PRACTICES. Except as may be disclosed to BOS on
Schedule 4.23, neither VIBC nor VIB, nor any officer, director, employee or
agent of VIBC or VIB has, directly or indirectly, within the past four years,
given or made or agreed to give or make any illegal commission, payment,
gratuity, gift, political contribution or similar benefit to any customer,
supplier, governmental employee or other person in order to obtain business for
or further the business of VIBC or VIB.
4.24 NO VIOLATION OF LAW. VIBC and VIB are in substantial compliance
with all material laws relating to their business or employment practices or the
ownership of their properties, and are
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in substantial compliance with each material law, ordinance, order, decree or
regulation of any governmental entity applicable to the conduct thereof or the
ownership of the properties related thereto, except in each case for violations
which either individually or in the aggregate do not and will not have a
material adverse effect on the business, financial condition or results of
operations of VIBC taken as a whole.
4.25 CERTAIN INTERESTS. Except in arm's-length transactions pursuant to
normal commercial terms and conditions: (a) no officer or director of VIBC or
VIB has any material interest in any property, real or personal, tangible or
intangible, used in or pertaining to the business of VIBC or VIB except for the
normal rights of a shareholder of VIBC; (b) no such person is indebted to VIBC
or VIB except for normal business expense advances or banking transactions in
the ordinary course of business on the same terms, including interest rates and
collateral on loans as those prevailing at the same time for comparable
transactions with others; and (c) VIBC and VIB are not indebted to any such
person except for amounts due under normal salary or reimbursement of ordinary
business expenses. The consummation of the Transactions contemplated hereby will
not (either alone, or upon the occurrence of any act or event, or with the lapse
of time, or both) result in any payment (severance or other) becoming due from
VIBC or VIB to any employee of VIBC or VIB.
4.26 MINUTE BOOKS. The minute books of VIBC and VIB accurately reflect
all material actions duly taken by the shareholders, Boards of Directors and
committees of VIBC or VIB, as applicable, and contain true and complete copies
of VIBC's and VIB's Articles of Incorporation and Bylaws and all amendments
thereto.
4.27 ACCOUNTING RECORDS; DATA PROCESSING. VIBC and VIB have records
that, in all material respects, fairly reflect their transactions and accounting
controls sufficient to ensure that such transactions are in all material
respects: (a) executed in accordance with management's general or specific
authorization; and (b) recorded in conformity with generally accepted accounting
principles. Schedule 4.27 contains a true and correct copy of Maslac &
Associates' most recent audit of VIBC's data processing system. Except as set
forth in Schedule 4.27, the procedures and equipment, including, without
limitation, the data processing equipment, data transmission equipment, and
related peripheral equipment and software, used by VIBC and VIB in the operation
of their businesses (including any disaster recovery facility) to generate and
retrieve such records are adequate in relation to the size and complexity of the
business of VIBC and VIB.
4.28 OPERATING LOSSES. Schedule 4.28 sets forth any individual
Operating Loss in excess of $500.00 that has occurred at VIB during the period
after December 31, 1997. Except as set forth on Schedule 4.28, since December
31, 1997, no event has occurred, and no action has been taken or omitted to be
taken by any employee of VIBC or VIB that has resulted in the occurrence by VIB
of an Operating Loss or that might reasonably be expected to result in the
occurrence by VIB of an Operating Loss after December 31, 1997, which, net of
any insurance proceeds payable in respect thereof, exceeds, or would exceed
$50,000 by itself or $250,000 when aggregated with all other Operating Losses
during such period.
4.29 CRA STANDING. VIB's compliance under the CRA should not constitute
grounds for either the denial by any regulatory agency of any application to
consummate the Transactions contemplated by this Agreement or the imposition of
a materially burdensome condition in connection
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with the approval of any such application. VIB has not been advised of any
concerns regarding compliance with the CRA by any regulatory agency or any other
person.
4.30 YEAR 2000 MATTERS. VIBC and VIB have completed a review of their
computer systems to identify systems that could be affected by the "Year 2000."
The respective management of each of VIBC and VIB has developed and commenced
implementation of a plan to respond to this issue. Between the date of this
Agreement and the Effective Time of the Merger, VIBC and VIB shall each use
commercially practicable efforts to implement and/or continue to undertake such
a plan. Neither VIBC nor VIB has been advised by any regulatory authority to
undertake any additional actions nor are either of VIBC or VIB subject to any
regulatory order, memorandum or directive (other than directives of general
applicability to financial institutions) with respect thereto. Year 2000 issues
have not had, and are not reasonably expected to have, a material adverse effect
on VIBC or VIB.
4.31 ACCURACY AND CURRENTNESS OF INFORMATION FURNISHED. The
representations and warranties made by VIBC hereby and in the schedules hereto
contain no statements of fact which are untrue or misleading, or omit to state
any material fact which is necessary under the circumstances to prevent the
statements contained herein or in such schedules from being misleading. VIBC
hereby covenants that it shall, as of the Effective Time of the Merger, amend
and/or supplement the schedules prepared and delivered pursuant to this Article
IV to ensure that the information set forth in such schedules accurately
reflects the then-current status of VIBC or VIB.
4.32 EFFECTIVE DATE OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. Each representation, warranty, covenant and agreement of VIBC set
forth in this Agreement shall be deemed to be made on and as of the date hereof
and, as subsequently amended and/or supplemented as provided in Section 4.31, as
of the Effective Time of the Merger.
ARTICLE V
COVENANTS OF BOS PRIOR TO CLOSING
BOS hereby covenants and agrees with VIBC as follows:
5.1 BUSINESS RECORDS AND INFORMATION. During the period commencing on
the date hereof, and ending on the Closing Date, BOS will afford VIBC, its
representatives, counsel, accountants, agents and employees reasonable access
during normal business hours to all of its business, operations, properties,
books, files and records and will do everything reasonably necessary to enable
VIBC and its representatives, counsel, accountants, agents and employees to make
a complete examination of the financial statements, business, operations, assets
and properties of BOS and the conditions thereof, and to update such examination
at such reasonable intervals as VIBC shall deem appropriate. Such examination
shall be conducted in cooperation with the officers of BOS in such a manner as
to minimize, to the extent possible consistent with the conducting of a
comprehensive examination, any disruption of or interference with the normal
business operations of BOS. No such examination or VIBC's examination prior to
the date of this Agreement, however, shall constitute a waiver or relinquishment
on the part of VIBC of its right to rely upon the representations, warranties or
covenants made by BOS herein or pursuant hereto. BOS will permit an authorized
representative or representatives of VIBC, designated as such from time to time
by
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VIBC's President (the "VIBC Representative") access during normal business hours
to all of its business, operations, properties, books, files and records for the
additional purpose of rendering any approvals required of VIBC by BOS pursuant
to Section 5.2. BOS will use its best efforts to have the VIBC Representative or
another authorized representative available during BOS's normal business hours
to render approvals required pursuant to Section 5.2. In addition, BOS shall
provide VIBC and the VIBC Representative with three days' notice of all regular
meetings of its Board of Directors and notice, at the same time notice is given
to members, of any committee meeting, and the earliest possible notice of all
special meetings of its Board of Directors. BOS will permit the VIBC
Representative to attend and observe all Board and committee meetings (except
during confidential discussions regarding the Merger), and BOS shall indemnify
and hold harmless VIBC, BOS Interim Bank and the VIBC Representative in
connection with actions taken by BOS (i) pursuant to any approvals obtained
pursuant to Section 5.2 or (ii) during any Board or committee meetings attended
and observed by the VIBC Representative. It is agreed and acknowledged by BOS
that any such indemnification may be deemed a material adverse change pursuant
to Section 8.3 hereof. BOS will hold in strict confidence all documents and
information concerning VIBC or VIB obtained pursuant to Section 6.1 or obtained
previously pursuant to a Letter of Understanding dated June 22, 1998 and will
not use such documents or information for its own benefit (except to the extent
that such documents or information are a matter of public record or require
disclosure in any application necessary to obtain regulatory approval of the
Transactions contemplated by this Agreement) and, if the Transactions
contemplated herein are not consummated, such confidence shall be maintained and
all such documents shall be returned to VIBC, without any copies being retained
by BOS and BOS shall destroy any document, memoranda, notes and other writings
whatsoever prepared by BOS or any of its agents relating to or containing the
confidential information promptly upon notice by VIBC. Upon request by VIBC,
such destruction shall be certified in writing to VIBC by an authorized officer
of BOS supervising such destruction.
5.2 LIMITATIONS UPON BOS PRIOR TO CLOSING. Except as required by this
Agreement, between the date hereof and the Closing Date, without the prior
written consent of VIBC, which shall not be unreasonably withheld and which
shall be deemed granted if within five days after receipt of written request
refusal of such written consent is not received from VIBC by BOS, BOS shall not
do any of the following:
(a) Create or take action to incur any liabilities in excess
of $25,000 or having a term in excess of one year, other than
liabilities incurred in the ordinary course of business or in
connection with the creation or performance of this Agreement;
(b) Except in the usual or ordinary course of business, create
or incur or suffer to exist any mortgage, lien, pledge, security
interest, charge, encumbrance or restriction of any kind against or in
respect of any property or right of BOS securing an obligation in
excess of $25,000 or having a term in excess of one year, and except
for a pledge of security interests given in connection with the
acceptance of repurchase agreements or government deposits;
(c) Make or become a party to any contract or commitment in
excess of $25,000 or having a term in excess of one year, or renew,
extend, amend or modify any contract or commitment in excess of
$25,000, except in the usual and ordinary course of business or except
in connection with the Transactions contemplated in this Agreement or
the Merger Agreement;
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(d) Make any loan, loan commitment, or renewal or extension
thereof ("Loan") to any person or entity, which, individually or when
aggregated with all other outstanding Loans made by BOS to such person
or entity, exceeds $600,000, or make any Loan to any of its directors
or executive officers;
(e) Purchase any loan participation interest in excess of
$200,000;
(f) File a notice of default on any delinquent real estate
secured loan with a principal balance of $200,000 or more;
(g) Make any capital expenditures in excess of $25,000, except
for ordinary and necessary repairs and replacements;
(h) Sell or otherwise dispose of any of its assets or
properties in excess of $25,000 in value, except in the usual and
ordinary course of its business, or charge off any of its assets or
properties in excess of $25,000 in value;
(i) Declare or pay any dividend (cash, in kind, or stock) or
make any other distribution upon, or purchase or redeem, any shares of
BOS Stock;
(j) Except as contemplated herein, issue or sell or obligate
itself to issue or sell any shares of BOS Stock or any other securities
including, without limitation, any capital notes, or any warrants,
rights or options to acquire any shares of BOS Stock or other
securities otherwise than pursuant to this Agreement; except pursuant
to the exercise of the stock options set forth in Schedule 3.24;
(k) Acquire capital stock of any corporation or any interest
in any person except in the usual and ordinary course of its business;
(l) Amend its Charter or Bylaws, except for such amendments as
contemplated by this Agreement;
(m) Grant any salary increase or enter into or amend, except
as may be required by applicable law, any bonus, incentive
compensation, deferred compensation, pension, profit sharing,
retirement, group insurance or other benefit plan or any employment
agreement or consulting agreement or amend its Personnel Policy where
the individual or aggregate cost to BOS is increased, except as
approved by VIBC, which approval shall not be unreasonably withheld;
(n) Pay any obligation or liability, absolute or contingent,
in excess of $25,000 except liabilities shown on the BOS Financial
Statements, or except in the usual and ordinary course of business or
in connection with the Transactions contemplated herein;
(o) Institute, settle or agree to settle any claim, action or
proceeding involving an expenditure by BOS or waiver of its claims in
excess of $25,000 before any court or governmental agency, except in
the usual and ordinary course of its business;
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(p) Invest in any real estate except upon the foreclosure of
loans in the ordinary course of business, or acceptance of a deed in
lieu of foreclosure, in the ordinary course of business;
(q) Except in the usual and ordinary course of its business,
enter into any continuing contract or series of related contracts in
excess of $25,000 for the purchase of materials, supplies, equipment or
services which cannot be terminated without cause and without payment
of any amount as a penalty, bonus, premium or other compensation for
such termination;
(r) Except as contemplated in Section 5.8 hereof, enter into
or amend any contract or agreement (other than loans or bank accounts)
with any officer, director or any affiliate of such person on terms
that are less favorable to BOS than could be obtained from an unrelated
third party on an arm's-length basis;
(s) File any applications for additional branches or to
relocate operations from any existing location, except as contemplated
herein;
(t) Change any of BOS's basic policies and practices with
respect to liquidity management and cash flow planning, marketing,
deposit origination, lending, budgeting, profit and tax planning,
personnel practices, accounting or any other material aspect of its
business or operations, except such change as may be required in the
opinion of BOS's management to respond to economic or market conditions
or as may be required by the rules of the AICPA or FASB, by applicable
law, or by bank regulatory authorities;
(u) Knowingly default in any material respect under any
Understanding to which BOS is a party, and which, individually or
together with other Understandings with respect to which a default by
BOS exists, would materially adversely affect the business, properties,
prospects or financial condition of BOS taken as a whole; or
(v) Conduct its business in a manner that would violate its
Charter or Bylaws or would materially violate or be in material
conflict with any law, ordinance, rule or regulation of any applicable
federal or state authority; provided, however, that no exception to
this Section 5.2(v) shall constitute a waiver of any rights of VIBC
under any other provision of this Agreement.
5.3 AFFIRMATIVE CONDUCT OF BOS PRIOR TO CLOSING. Between the date
hereof and the Closing Date, BOS shall:
(a) Use its best efforts to obtain as expeditiously as
possible and cooperate with others to expeditiously bring about the
satisfaction of the conditions and approvals specified in Articles VII,
VIII, IX and X hereof and advise VIBC promptly in writing of any matter
which would make the representations and warranties set forth in
Article III hereof not true and correct in all material respects at the
Closing;
(b) Use and devote its best efforts consistent with this
Agreement to maintain and preserve intact its present business
organization and to maintain and preserve its relationships
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and goodwill with account holders, borrowers, employees and others
having business relationships with it;
(c) Carefully prepare or review and make available to VIBC
prior to filing all federal, state and local tax returns and reports to
government authorities regarding BOS required to be filed by it between
the date hereof and the Closing;
(d) Furnish VIBC with such financial and other information
with respect to BOS and its properties, business and operations as in
the reasonable opinion of VIBC, counsel for VIBC and counsel for BOS
shall be necessary in order to prepare applications for and obtain the
permits, approvals, nondisapprovals, consents and authorizations
referred to in Article X hereof; such information will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
information contained therein not misleading;
(e) Provide VIBC and the VIBC Representative with BOS's
monthly Board package and all committee meeting packages at the time
provided to BOS's directors (excluding any confidential information
regarding the transactions contemplated hereby);
(f) Provide VIBC all monthly new loan reports, all monthly
past due loan reports, all listings of any new loans placed on
non-accrual, all monthly watchlist reports, and all listings of loans
greater than $100,000 that have been downgraded within two days of when
such reports are prepared;
(g) Provide VIBC with five days' notice and, subject to any
limitation or prohibition of any so-called "right to privacy" law, a
copy of the applicable credit report prior to making any Loan to any
person or entity which, individually or when aggregated with all other
outstanding Loans made by BOS to such person or entity, exceeds
$450,000;
(h) Provide VIBC with five days' notice prior to purchasing or
selling any loan participation interest;
(i) Provide VIBC with five days' notice prior to initiating
any action to foreclose on real estate or personal property collateral
and provide VIBC with monthly status reports on all foreclosed
properties;
(j) Provide VIBC with qualified appraisals on all newly
acquired foreclosed properties and on all existing foreclosed
properties where appraisals are or become more than 12 months old;
(k) Maintain insurance coverage at least equal to that now in
effect on all of its properties and on all properties for which it is
responsible, and carry not less than the same coverage for fidelity,
directors and officers, public liability, personal injury and property
damage that is presently in effect;
(l) Duly observe and conform to lawful requirements applicable
to its business in all material respects;
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(m) Maintain its books of account and records in the regular
manner in accordance with generally accepted accounting principles,
with all applicable statutory and regulatory requirements applied on a
consistent basis;
(n) Provide VIBC with an independent third-party's
profitability analysis of the BOS Mortgage Department, and provide such
analysis to VIBC no later than when BOS provides the analysis to the
OTS;
(o) Following receipt of regulatory approval and the
satisfaction of all other conditions precedent to the Closing and
immediately prior to the Effective Time of the Merger, BOS shall
increase its reserves for possible loan losses by $300,000. These
reserves shall be additive to those provisions contained in BOS's 1998
Operating Plan; and
(p) Notify VIBC by telephone, confirmed promptly in writing,
of any breach or violation on BOS's part of any covenant contained
herein, or of the occurrence of an event which would cause any
warranties or representations made by BOS herein to be or become false
or misleading, or if BOS becomes a party or is threatened with becoming
a party to any legal or equitable proceeding or governmental
investigation, or upon the occurrence of any event which would result
in a material change in the circumstances of BOS described in the
representations and warranties contained herein.
5.4 INDEMNIFICATION. BOS hereby agrees to indemnify and hold harmless
VIBC against, and with respect to, any liability, damages, losses, expenses or
costs arising from or by virtue of any misstatement or omission to state any
fact which is required to be disclosed by BOS for purposes of the inclusion of
such information in any regulatory filing made on behalf of the parties hereto
for the purpose of effecting the terms of this Agreement and consummating the
Transactions contemplated herein and for any material breach of any
representation, warranty, covenant or agreement of BOS under this Agreement.
5.5 EXECUTE AGREEMENT TO MERGE. As soon as possible after receipt of
approval of the OTS to organize BOS Interim Bank, BOS shall execute the Merger
Agreement.
5.6 DISCUSSION WITH THIRD PARTIES.
(a) STRATEGIC TRANSACTIONS. BOS: (i) shall not, and shall
instruct and cause each of its directors, officers, employees, agents,
representatives and advisors ("Representatives") not to, solicit or
encourage, directly or indirectly, inquires or proposals with respect
to any Strategic Transaction Proposal (as hereinafter defined); and
(ii) except as expressly permitted by Section 5.6(b), shall not, and
shall instruct and cause each of its Representatives not to, furnish
any non-public information relating to or participate in any
negotiations, discussions or other activities concerning, any Strategic
Transaction (as hereinafter defined) with any party other than VIBC.
BOS shall notify VIBC promptly after any Strategic Transaction Proposal
is received by, or any negotiations or discussions regarding a
Strategic Transaction Proposal are sought to be initiated with,
directly or indirectly, BOS or any of its Representatives, and shall
disclose to VIBC the identity of the third party making or seeking to
make such Strategic Transaction Proposal, the terms and conditions
thereof and such other information as VIBC reasonably may request;
provided, however, that if BOS receives a
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Strategic Transaction Proposal and the foregoing disclosure of such
Strategic Transaction Proposal to VIBC would violate a confidentiality
agreement by which BOS is bound, BOS (i) shall make the foregoing
disclosure only to the maximum extent permissible under such
confidentiality agreement, (ii) shall return such Strategic Transaction
Proposal to the initiating party without substantive response, and
(iii) to the extent such disclosure has not been made under clause (i)
of this sentence, shall notify VIBC that a Strategic Transaction
Proposal has been received and that the same has been returned to the
initiating party without substantive response. A "Strategic Transaction
Proposal" means any proposal regarding a Strategic Transaction. For
purposes of this Section 5.6, a "Strategic Transaction" means any
acquisition or purchase of all or a significant (i.e., more than 5%)
portion of the assets of or a significant equity interest in, BOS or
any merger or other business combination involving BOS or any
recapitalization involving BOS resulting in an extraordinary dividend
or distribution to BOS's shareholders or a self-tender for or
redemption of some or all of the outstanding shares of BOS Stock.
(b) QUALIFYING PROPOSAL. Notwithstanding Section 5.6(a),
following receipt of a Qualifying Strategic Transaction Proposal (as
hereinafter defined), neither BOS nor any of its Representatives shall
be prohibited from (i) engaging in discussions or negotiations with a
third party which has made a proposal that satisfies the requirements
of a Qualifying Strategic Transaction Proposal and thereafter providing
to such third party information previously provided or made available
to VIBC, provided the third party shall have entered into a
confidentiality agreement, (ii) taking and disclosing to BOS's
shareholders a position contemplated by Rule 14e-2(a) under the
Securities Exchange Act of 1934, or otherwise making disclosure of the
Qualifying Strategic Transaction Proposal to BOS's shareholders, or
(iii) subject to the terms of Section 11.1(d), terminating this
Agreement. For purposes of this Section 5.6, a "Qualifying Strategic
Transaction Proposal" shall mean a bona fide written Strategic
Transaction Proposal with respect to which BOS's Board of Directors
shall have determined, after consultation with BOS's counsel, that the
action by BOS contemplated under either clause (i), (ii) or (iii), as
applicable, of the immediately preceding sentence is required under the
fiduciary duties owed by the Board of Directors to the holders of BOS
Stock, which determination has been made acting in good faith and on
the basis of a written opinion from a financial advisor retained by BOS
to the effect that the financial terms of such Strategic Transaction
Proposal are, from BOS's shareholders' perspective, superior to the
Merger.
(c) DISCLOSURE AND TRADING. Upon receipt of the disclosure by
VIBC of a Strategic Transaction Proposal involving VIBC or any
subsidiary thereof or a VIBC Acquisition Transaction (as that term is
defined in Section 6.5(c) hereof), BOS, its executive officers and
directors shall, and each hereby agrees to, maintain the
confidentiality of all non-public information regarding the Strategic
Transaction Proposal involving VIBC or any subsidiary thereof or the
VIBC Acquisition Transaction to the same extent as required of VIBC
and/or any subsidiary thereof under the terms of any confidentiality
agreement to which VIBC and/or any subsidiary is a party or is bound
and to refrain from trading in VIBC Stock, BOS Stock and the securities
of the party or parties to the Strategic Transaction Proposal or the
VIBC Acquisition Transaction until the earlier of: (i) full public
disclosure of such non-public information has been made and trading in
the subject securities would not be a violation of applicable
securities laws; or (ii) the Strategic Transaction Proposal or the VIBC
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Acquisition Transaction has been terminated or has expired by its terms
and disclosure of such non-public information is permitted under the
terms of any agreement regarding the transaction and trading in the
subject securities would not be a violation of applicable securities
laws.
5.7 STOCK OPTION PLANS. BOS shall cause its 1985 and 1995 Stock Option
Plans to be terminated as of or prior to the Closing Date. To the extent any
heretofore outstanding options are not exercised, such options will be converted
into VIBC stock options pursuant to Section 1.7 of this Agreement.
5.8 CHANGE IN CONTROL AND SALARY CONTINUATION AGREEMENTS. BOS shall
take all steps necessary and appropriate to amend each of its outstanding Change
in Control Agreements and Salary Continuation Agreements to change the
definitions of "good reason" in the following respects: (i) Paragraph 5.4.1 of
the Salary Continuation Agreements and Paragraph 3(d)(i) of the Change in
Control Agreements shall be amended to read as follows:
"the permanent assignment of the Executive by the Company
employing the Executive to duties materially inconsistent
with, or which substantially or materially alters the nature
or status of the Executive's responsibilities immediately
prior to a Change in Control of the Company."
(ii) Paragraph 5.4.4 of the Salary Continuation Agreements and Paragraph
3(a)(iv) of the Change in Control Agreements shall be amended to read as
follows:
"the Company is requiring the Executive to relocated, or the
assignment to the Executive of duties that reasonably require
the Executive to relocated, to any place other than the
Bakersfield, California, metropolitan area."
and (iii) a new Paragraph 5.4.8 of the Salary Continuation Agreements and a new
Paragraph 3(d)(viii) of the Change in Control Agreements shall be added to read
as follows:
"the Company requiring the Executive to travel a substantial
amount of time, except for travel related to corporate
meetings and temporary assignments, to an extent substantially
inconsistent with Executive's business travel obligations at
the time of a Change in Control of the Company."
5.9 PROXY STATEMENT. The proxy statement and/or any other materials or
documents (collectively, the "Proxy Materials") to be used in connection with
the shareholders' meeting required pursuant to Section 7.1 hereof, with respect
to all information set forth therein relating to BOS, the Agreement, the Merger
Agreement and the Transactions, at the time of mailing to shareholders and at
the time of the shareholders' meetings, shall:
(a) Comply in all material respects with the provisions of all
applicable laws and regulations; and
(b) Except with respect to any information regarding VIBC or
VIB supplied to BOS by VIBC for inclusion in the Proxy Materials, not
contain any statement which, at the
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time and in light of the circumstances under which it is made, is false
or misleading with respect to any material fact or not omit to state
any material fact necessary in order to make the statements therein not
false or misleading or necessary to correct any statement in any
earlier communication with respect to the solicitation of a proxy for
the same meeting or subject matter that has become false or misleading.
ARTICLE VI
COVENANTS OF VIBC PRIOR TO CLOSING
VIBC hereby covenants and agrees with BOS as follows:
6.1 BUSINESS RECORDS AND INFORMATION. During the period commencing on
the date hereof, and ending on the Closing Date, VIBC will afford BOS, its
representatives, counsel, accountants, agents and employees reasonable access
during normal business hours to all of its business, operations, properties,
books, files and records and will do everything reasonably necessary to enable
BOS and its representatives, counsel, accountants, agents and employees to make
a complete examination of the financial statements, business, operations, assets
and properties of VIBC and VIB and the conditions thereof, and to update such
examination at such intervals as BOS shall deem appropriate. Such examination
shall be conducted in cooperation with the officers of VIBC or VIB in such a
manner as to minimize, to the extent possible consistent with the conducting of
a comprehensive examination, any disruption of or interference with the normal
business operations of VIBC or VIB. No such examination or BOS's examination
prior to the date of this Agreement, however, shall constitute a waiver or
relinquishment on the part of BOS of its right to rely upon the representations,
warranties or covenants made by VIBC herein or pursuant hereto. VIBC will hold
in strict confidence all documents and information concerning BOS obtained
pursuant to Section 5.1 or obtained previously pursuant to a Letter of
Understanding dated June 22, 1998 and will not use such documents or information
for its own benefit (except to the extent that such documents or information are
a matter of public record or require disclosure in any application necessary to
obtain regulatory approval of the Transactions contemplated by this Agreement)
and, if the Transactions contemplated herein are not consummated, such
confidence shall be maintained and all such documents and any documents provided
pursuant to Section 5.3(d) shall be returned to BOS, without any copies being
retained by VIBC and VIBC shall destroy any document, memoranda, notes and other
writings whatsoever prepared by VIBC or any of its agents relating to or
containing the confidential information promptly upon notice by BOS. Upon
request by BOS, such destruction shall be certified in writing to BOS by an
authorized officer of VIBC supervising such destruction.
6.2 LIMITATIONS UPON VIBC PRIOR TO CLOSING. Except as required by this
Agreement, between the date hereof and the Closing Date, without the prior
written consent of BOS, which shall not be unreasonably withheld and which shall
be deemed granted if within ten days after receipt of written request refusal of
such written consent is not received from BOS by VIBC, VIBC shall not do any of
the following:
(a) Create or take action to incur any liabilities in excess
of $1,000,000 or having a term in excess of one year, other than
liabilities incurred in the ordinary course of business or in
connection with the creation or performance of this Agreement;
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(b) Except in the usual or ordinary course of business, create
or incur or suffer to exist any mortgage, lien, pledge, security
interest, charge, encumbrance or restriction of any kind against or in
respect of any property or right of VIBC securing an obligation in
excess of $1,000,000, or having a term in excess of one year, and
except for a pledge of security interests given in connection with the
acceptance of repurchase agreements or government deposits;
(c) Make or become a party to any contract or commitment in
excess of $1,000,000 or having a term in excess of one year, or renew,
extend, amend or modify any contract or commitment in excess of
$1,000,000, except in the usual and ordinary course of business or in
connection with the Transaction and as contemplated by this Agreement
or the Merger Agreement;
(d) Make any capital expenditures in excess of $1,000,000,
except for ordinary and necessary repairs and replacements;
(e) Sell or otherwise dispose of any of its assets or
properties in excess of $1,000,000 in value, except in the usual and
ordinary course of its business;
(f) Pay any obligation or liability, absolute or contingent,
in excess of $1,000,000 except liabilities shown on the VIBC Financial
Statements, or except in the usual and ordinary course of business or
in connection with the Transactions contemplated herein;
(g) Institute, settle or agree to settle any claim, action or
proceeding involving an expenditure by VIBC or VIB or waiver of its
claims in excess of $500,000 before any court or governmental agency,
except in the usual and ordinary course of its business;
(h) Enter into or amend any contract or agreement (other than
loans or bank accounts) with any officer, director or principal
shareholder of VIBC or VIB or any affiliate of such person on terms
that are less favorable to VIBC or VIB than could be obtained from an
unrelated third party on an arm's-length basis;
(i) Change any of VIBC's or VIB's basic policies and practices
with respect to liquidity management and cash flow planning, marketing,
deposit origination, lending, budgeting, profit and tax planning,
personnel practices, accounting or any other material aspect of their
business or operations, except such change as may be required in the
opinion of VIBC's or VIB's management to respond to economic or market
conditions or as may be required by the rules of the AICPA or FASB, by
applicable law, or by bank regulatory authorities;
(j) Knowingly default in any material respect under any
Understanding to which VIBC or VIB is a party, and which, individually
or together with other Understandings with respect to which a default
by VIBC or VIB exists, would materially adversely affect the business,
properties, prospects or financial condition of VIBC taken as a whole;
or
(k) Conduct their business in a manner that would violate
their Articles of Incorporation or Bylaws or would materially violate
or be in material conflict with any law,
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ordinance, rule or regulation of any applicable federal or state
authority; provided, however, that no exception to this Section 6.2(k)
shall constitute a waiver of any rights of BOS under any other
provision of this Agreement.
6.3 AFFIRMATIVE CONDUCT OF VIBC PRIOR TO CLOSING. Between the date
hereof and the Closing Date, VIBC shall:
(a) Use its best efforts to obtain as expeditiously as
possible and cooperate with others to expeditiously bring about the
satisfaction of the conditions and approvals specified in Articles VII,
VIII, IX and X hereof, including the organization of BOS Interim Bank,
and advise BOS promptly in writing of any matter which would make the
representations and warranties set forth in Article IV hereof not true
and correct in all material respects at the Closing;
(b) Use and devote its best efforts consistent with this
Agreement to maintain and preserve intact its present business
organization and to maintain and preserve its relationships and
goodwill with account holders, borrowers, employees and others having
business relationships with it;
(c) Furnish BOS with such financial and other information with
respect to VIBC and its properties, business and operations as in the
reasonable opinion of BOS, counsel for BOS and counsel for VIBC shall
be necessary in order to prepare applications for and obtain the
permits, approvals, nondisapprovals, consents and authorizations
referred to in Article X hereof; such information will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
information contained therein not misleading;
(d) Maintain its and VIB's insurance coverage at least equal
to that now in effect on all of their properties and on all properties
for which they are responsible, and carry the same coverage for
fidelity, directors and officers, public liability, personal injury and
property damage that is presently in effect;
(e) Duly observe and conform to lawful requirements applicable
to its and VIB's business in all material respects;
(f) Maintain its and VIB's books of account and records in the
regular manner in accordance with generally accepted accounting
principles, with all applicable statutory and regulatory requirements
applied on a consistent basis; and
(g) Notify BOS by telephone, confirmed promptly in writing, of
any breach or violation on VIBC's part of any covenant contained
herein, or of the occurrence of an event which would cause any
warranties or representations made by VIBC herein to be or become false
or misleading, or if VIBC becomes a party or is threatened with
becoming a party to any legal or equitable proceeding or governmental
investigation, or upon the occurrence of any event which would result
in a change in the circumstances of VIBC described in the
representations and warranties contained herein.
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6.4 INDEMNIFICATION. VIBC hereby agrees to indemnify and hold harmless
BOS against, and with respect to, any liability, damages, losses, expenses or
costs arising from or by virtue of any misstatement or omission to state any
fact which is required to be disclosed by VIBC for purposes of the inclusion of
such information in any regulatory filing made on behalf of the parties hereto
for the purpose of effecting the terms of this Agreement and consummating the
Transactions contemplated herein and for any material breach of any
representation, warranty, covenant or agreement of VIBC under this Agreement.
6.5 DISCUSSION WITH THIRD PARTIES.
(a) STRATEGIC TRANSACTIONS. VIBC and VIB: (i) shall not, and
shall instruct and cause each of their Representatives not to, solicit
or encourage, directly or indirectly, inquires or proposals with
respect to any Strategic Transaction Proposal (as hereinafter defined);
and (ii) except as expressly permitted by Section 6.5(b), shall not,
and shall instruct and cause each of their Representatives not to,
furnish any non-public information relating to or participate in any
negotiations, discussions or other activities concerning, any Strategic
Transaction (as hereinafter defined) with any party other than BOS.
VIBC and VIB shall notify BOS promptly after any Strategic Transaction
Proposal is received by, or any negotiations or discussions regarding a
Strategic Transaction Proposal are sought to be initiated with,
directly or indirectly, VIBC or VIB or any of their Representatives,
and shall disclose to BOS the identity of the third party making or
seeking to make such Strategic Transaction Proposal, the terms and
conditions thereof and such other information as BOS reasonably may
request; provided, however, that if VIBC or VIB receives a Strategic
Transaction Proposal and the foregoing disclosure of such Strategic
Transaction Proposal to BOS would violate a confidentiality agreement
by which VIBC or VIB is bound, VIBC (i) shall make the foregoing
disclosure only to the maximum extent permissible under such
confidentiality agreement, (ii) shall return such Strategic Transaction
Proposal to the initiating party without substantive response, and
(iii) to the extent such disclosure has not been made under clause (i)
of this sentence, shall notify BOS that a Strategic Transaction
Proposal has been received and that the same has been returned to the
initiating party without substantive response. A "Strategic Transaction
Proposal" means any proposal regarding a Strategic Transaction. For
purposes of this Section 6.5, a "Strategic Transaction" means any
acquisition or purchase of all or a significant (i.e., more than 5%)
portion of the assets of or a significant equity interest in, VIBC or
VIB or any merger or other business combination involving VIBC or VIB
or any recapitalization involving VIBC or VIB resulting in an
extraordinary dividend or distribution to VIBC's or VIB's shareholders
or a self-tender for or redemption of some or all of the outstanding
shares of VIBC Stock.
(b) QUALIFYING PROPOSAL. Notwithstanding Section 6.5(a),
following receipt of a Qualifying Strategic Transaction Proposal (as
hereinafter defined), neither VIBC, VIB, nor any of their
Representatives shall be prohibited from (i) engaging in discussions or
negotiations with a third party which has made a proposal that
satisfies the requirements of a Qualifying Strategic Transaction
Proposal and thereafter providing to such third party information
previously provided or made available to BOS, provided the third party
shall have entered into a confidentiality agreement, (ii) taking and
disclosing to VIBC's shareholders a position contemplated by Rule
14e-2(a) under the Exchange Act, or otherwise making disclosure of the
Qualifying Strategic Transaction Proposal to VIBC's shareholders, or
(iii)
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subject to the terms of Section 11.1(e) terminating this Agreement. For
purposes of this Section 6.5, a "Qualifying Strategic Transaction
Proposal" shall mean a bona fide written Strategic Transaction Proposal
with respect to which VIBC's Board of Directors shall have determined,
after consultation with VIBC's counsel, that the action by VIBC
contemplated under either clause (i), (ii) or (iii), as applicable, of
the immediately preceding sentence is required under the fiduciary
duties owed by the Board of Directors to the holders of VIBC Stock,
which determination has been made acting in good faith and on the basis
of a written opinion from a financial advisor retained by VIBC to the
effect that the financial terms of such Strategic Transaction Proposal
are, from VIBC's shareholders' perspective, superior to the Merger.
(c) VIBC ACQUISITION TRANSACTION. Notwithstanding Sections
6.5(a) or (b) hereof, VIBC or VIB shall be permitted to and may cause
their Representatives to solicit, encourage, discuss, negotiate, enter
into agreements, and carry out and complete transactions regarding a
VIBC Acquisition Transaction; provided, however, that should VIBC enter
into or modify any agreement, or complete without any agreement, any
VIBC Acquisition Transaction which has a material adverse effect upon
VIBC or the Transactions contemplated by this Agreement and the Merger
Agreement without written approval of BOS, then such action shall
constitute a breach under this Agreement giving rise to a right of
termination by BOS in accordance with Section 11.1(e) of this
Agreement. For purposes of this Agreement, the term "VIBC Acquisition
Transaction" shall mean: (i) a merger or consolidation or any similar
transaction where VIBC or any of its subsidiaries will be the surviving
or resulting corporation or where the holders of VIBC Stock or any of
VIBC's subsidiaries immediately prior to the completion of the
transaction will own 50% or more of the surviving or resulting
corporation immediately after the completion of the transaction, (ii) a
purchase, lease or other acquisition of all or substantially all of the
assets of or assumption of all or substantially all the deposits of
another corporation, partnership or limited liability company which
business is permissible under the Bank Holding Company Act of 1956, as
amended, and Regulation Y promulgated pursuant thereto, or (iii) the
purchase or other acquisition of securities representing 10% or more of
the voting power of another corporation, partnership or limited
liability company which business is permissible under the Bank Holding
Company Act of 1956, as amended and Regulation Y promulgated pursuant
thereto. VIBC shall promptly notify BOS of any VIBC Acquisition
Transaction and shall disclose to BOS the identity of the party or
parties to the transaction, and the terms and conditions thereof. To
the extent VIBC makes a disclosure of any non-public information to
BOS, its executive officers and/or directors, then BOS and its
executive officers and directors shall, and each hereby agrees to,
maintain the confidentiality of all non-public information regarding
the VIBC Acquisition Transaction so disclosed and to refrain from
trading in VIBC Stock, BOS Stock and the securities of the party or
parties to the VIBC Acquisition Transaction so disclosed in accordance
with the provisions of Section 5.6(c) hereof.
(d) DISCLOSURE AND TRADING. Upon receipt of the disclosure by
BOS of a Strategic Transaction Proposal involving BOS, VIBC, its
executive officers and directors shall, and each hereby agrees to,
maintain the confidentiality of all non-public information regarding
the Strategic Transaction Proposal involving BOS to the same extent as
required of BOS under the terms of any confidentiality agreement to
which BOS is a party or is bound and to refrain from trading in VIBC
Stock, BOS Stock and the securities of the party or
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parties to the Strategic Transaction Proposal until the earlier of: (i)
full public disclosure of such non-public information has been made and
trading in the subject securities would not be a violation of all
applicable securities laws, or (ii) the Strategic Transaction Proposal
has been terminated or has expired by its terms and disclosure of such
non-public information is permitted under the terms of any agreement
regarding the transaction and trading in the subject securities would
not be a violation of applicable securities laws.
6.6 STOCK OPTION PLAN. VIBC shall take all actions necessary for the
issuance of replacement stock options to holders of stock options pursuant to
BOS's 1985 and 1995 Stock Option Plans in accordance with Section 1.7 hereof.
6.7 PREPARATION OF S-4 AND THE PROXY STATEMENT. VIBC shall promptly
prepare and file with the SEC a Registration Statement on Form S-4, in which the
Proxy Statement prepared jointly by BOS and VIBC will be included. Each of VIBC
and BOS shall use its best efforts to have the S-4 declared effective under the
Securities Act of 1933, as amended, as promptly as practicable after such
filing. VIBC shall also take any action (other than qualifying to do business in
any jurisdiction in which it is now not so qualified) required to be taken under
any applicable state securities laws in connection with the issuance of VIBC
Common Stock in the Merger, and BOS shall furnish all information concerning BOS
and the holders of BOS Common Stock as may be reasonably requested in connection
with any such action.
6.8 PROXY STATEMENT. The Proxy Materials to be used in connection with
the shareholders' meetings required pursuant to Section 7.1 hereof, with respect
to all information set forth therein relating to VIBC, the Agreement, the Merger
Agreement and the Transactions, at the time of mailing to shareholders and at
the time of the shareholders' meetings, shall:
(a) Comply in all material respects with the provisions of all
applicable laws and regulations; and
(b) Except with respect to any information regarding BOS
supplied to VIBC by BOS for inclusion in the Proxy Materials, not
contain any statement which, at the time and in light of the
circumstances under which it is made, is false or misleading with
respect to any material fact or not omit to state any material fact
necessary in order to make the statements therein not false or
misleading or necessary to correct any statement in any earlier
communication with respect to the solicitation of a proxy for the same
meeting or subject matter that has become false or misleading.
ARTICLE VII
MEETINGS OF SHAREHOLDERS AND FEDERAL SECURITIES LAWS
VIBC and BOS each covenant and agree with the other as follows:
7.1 SHAREHOLDERS' MEETINGS. BOS and VIBC will, promptly after execution
of this Agreement, cause a meeting of their shareholders (hereinafter referred
to as the "BOS Meeting" and the "VIBC Meeting," respectively) to be duly called
and held upon requisite notice for the purpose of:
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(a) Authorizing and approving this Agreement and the
Transactions contemplated herein; and
(b) Conducting such other business as its Board of Directors
deems advisable and proper in connection therewith.
Each of BOS and VIBC, through its Board of Directors, will recommend
that its shareholders approve the Transactions contemplated hereby, and will use
its best efforts to obtain the affirmative votes of the holders of the largest
possible percentage of its outstanding shares of common stock.
7.2 FEDERAL SECURITIES LAWS. In obtaining the consents of their
shareholders to the matters described in Section 7.1 hereof, VIBC and BOS and
their officers, directors, controlling shareholders, and representatives, will,
in all respects, comply with Sections 10 and 14 of the Securities Exchange Act
of 1934, as amended (the "1934 Act"), the rules and regulations of the SEC
promulgated thereunder, the rules and regulations of the OTS promulgated
thereunder, if applicable, and the securities laws of all states in which
shareholders of BOS or VIBC reside, if required. Without in any way limiting the
generality of the forgoing, VIBC and BOS agree with the other that the Notice of
Meeting, Proxy Statement submitted in connection therewith, form of Proxy, and
other solicitation materials that will be used by them in soliciting the
aforesaid shareholder approvals and authorizations (collectively, the "Proxy
Materials"):
(a) Will be filed with, and not be used before the same are
cleared for use by the SEC and the OTS and, to the extent required, the
securities administrators of all states in which their shareholders
reside;
(b) Will contain all of the information required by the 1934
Act and the rules and regulations of the SEC and OTS thereunder; and
(c) Will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, except that
neither party warrants the accuracy or completeness of any information
contained therein which is furnished to it by the other relating to the
business, assets, properties, financial condition or management of the
other or any corporation or person affiliated therewith.
VIBC and BOS will use their respective best efforts to obtain clearance
by all appropriate regulatory authorities for the use of their Proxy Materials.
VIBC and BOS will consult and cooperate with the other in the preparation of all
such Proxy Materials for the BOS Meeting and the VIBC Meeting.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF BOS
All obligations of BOS to consummate the Transactions contemplated
herein are subject to the satisfaction, on or before the Closing Date, of the
following conditions precedent, unless
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compliance with or the occurrence of any one or more of such conditions
precedent is waived in writing by BOS:
8.1 CONTINUED ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of VIBC contained in this Agreement shall be true
and correct in all material respects as of the date of this Agreement and as of
the Closing Date as though made on and as of the Closing Date, except as
otherwise contemplated by this Agreement.
8.2 PERFORMANCE OF OBLIGATIONS. VIBC shall have performed and satisfied
in all material respects all of the covenants, agreements, obligations and
conditions required by this Agreement to be performed and satisfied by VIBC at
or prior to the Closing Date.
8.3 ABSENCE OF MATERIAL CHANGES. Between the date of this Agreement and
the Closing Date there shall have been: (a) no damage, destruction, whether or
not covered by insurance (except damage, destruction or loss for which, prior to
the Closing Date, VIBC has been compensated by insurance in such measure as to
fully cover the replacement or repair of all damage, destruction or loss) or
Operating Loss, materially and adversely affecting the business or prospects of
VIBC taken as a whole; (b) no material adverse change in the business,
operations, financial condition, income, or prospects of VIBC; and (c) an
absence of the institution of litigation involving VIBC or any of its assets
(including VIB) which, if determined adverse to VIBC or VIB, would have a
material adverse effect upon VIBC taken as a whole, unless BOS shall have
received an opinion satisfactory to it of counsel handling such matter stating
that such action or proceeding will not, in all likelihood, have a material
adverse effect upon VIBC.
8.4 OFFICERS' CERTIFICATE. There shall have been delivered to BOS at
the Closing a certificate executed by the President and Chief Executive Officer,
by the Corporate Secretary, and by the Chief Financial Officer of VIBC
certifying, to the best of their knowledge, compliance by VIBC with all of the
provisions of Sections 8.1, 8.2, and 8.3 of this Agreement.
8.5 RECEIPT OF LEGAL OPINION. BOS shall have received a legal opinion
from Horgan, Rosen, Beckham & Coren, L.L.P., counsel for VIBC, addressed to BOS
and dated the Closing Date and substantially in the form set forth on Schedule
8.5 hereto or in such other form as agreed to by the parties.
8.6 FAIRNESS OPINION. BOS shall have received an opinion from an
investment banking or bank consulting firm on or before the date the Proxy
Materials are first mailed for the BOS Meeting to the effect that the
Transactions contemplated by this Agreement are fair and equitable to the
holders of BOS Stock.
8.7 APPOINTMENT OF VIBC DIRECTOR. VIBC shall have delivered to BOS at
the Closing a copy of resolutions duly adopted by its Board of Directors, which
copy shall be certified by its Corporate Secretary, providing for the
appointment of Mr. Ed L. Hickman by VIBC to the VIBC Board of Directors, as
required by Section 1.12 hereof, effective as of the Closing Date.
8.8 CLOSING DOCUMENTS. VIBC shall have delivered to BOS the Closing
documents required pursuant to Schedule 2.3 and Section 2.3 of this Agreement.
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ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF VIBC
All obligations of VIBC to consummate the Transactions contemplated
herein are subject to the satisfaction, on or before the Closing Date, of the
following conditions precedent, unless compliance with or the occurrence of any
one or more of such conditions precedent is waived in writing by VIBC:
9.1 CONTINUED ACCURACY OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of BOS contained in this Agreement shall be true
and correct in all material respects as of the date of this Agreement and as of
the Closing Date as though made on and as of the Closing Date, except as
otherwise contemplated by this Agreement.
9.2 PERFORMANCE OF OBLIGATIONS. BOS shall have performed and satisfied
in all material respects all of the covenants, agreements, obligations and
conditions required by this Agreement to be performed and satisfied by BOS at or
prior to the Closing Date.
9.3 ABSENCE OF MATERIAL CHANGES. Between the date of this Agreement and
the Closing Date there shall have been: (a) no damage, destruction, whether or
not covered by insurance (except damage, destruction or loss for which, prior to
the Closing Date, BOS has been compensated by insurance in such measure as to
fully cover the replacement or repair of all damage, destruction or loss) or
Operating Loss, materially and adversely affecting the business or prospects of
BOS taken as a whole; (b) no material adverse change in the business,
operations, financial condition, income, or prospects of BOS; and (c) an absence
of the institution of litigation involving BOS or any of its assets which, if
determined adverse to BOS, would have a material adverse effect upon BOS, unless
VIBC shall have received an opinion satisfactory to it of counsel handling such
matter stating that such action or proceeding will not, in all likelihood, have
a material adverse effect upon BOS.
9.4 AFFILIATE'S LETTERS. BOS shall have delivered to VIBC Affiliate's
Letters, substantially in the form of Exhibit "C" hereto, signed by each of its
affiliates, in accordance with Section 1.14 hereof.
9.5 RESIGNATION AND APPOINTMENT OF DIRECTORS. BOS shall have delivered
to VIBC at the Closing the written resignations as directors of BOS, effective
as of the Closing Date, of Messrs. Beimler and Warlick. BOS also shall have
delivered to VIBC at the Closing a copy of resolutions duly adopted by its Board
of Directors, which copy shall be certified by its Corporate Secretary,
providing for the appointment of Messrs. Foss and Kern to the BOS Board of
Directors, as required by Section 1.11 hereof, effective as of the Closing Date.
9.6 OFFICERS' CERTIFICATE. There shall have been delivered to VIBC at
the Closing a certificate executed by the President and Chief Executive Officer,
by the Corporate Secretary, and by the Chief Financial Officer of BOS
certifying, to the best of their knowledge, compliance by BOS with all of the
provisions of Sections 9.1, 9.2, 9.3, 9.4 and 9.5 of this Agreement.
9.7 RECEIPT OF LEGAL OPINION. VIBC shall have received a legal opinion
from McCormick, Barstow, Sheppard, Wayte & Carruth, LLP, counsel for BOS,
addressed to VIBC and
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BOS Interim Bank and dated the Closing Date, substantially in the form set forth
as Schedule 9.7 hereto or in such other form as agreed to by the parties.
9.8 FAIRNESS OPINION. VIBC shall have received an opinion from an
investment banking or bank consulting firm on or before the date the Proxy
Materials are first mailed for the VIBC Meeting to the effect that the
Transactions contemplated by this Agreement are fair and equitable to the
holders of VIBC Stock.
9.9 CLOSING DOCUMENTS. BOS shall have delivered to VIBC the Closing
documents required pursuant to Schedule 2.3 and Section 2.3 of this Agreement.
ARTICLE X
CONDITIONS PRECEDENT TO THE MERGER
The obligations of VIBC and BOS to proceed with the Merger and the
Transactions provided for herein are subject to the fulfillment, at or prior to
the Effective Time of Merger, of the following conditions:
10.1 PERMITS AND APPROVALS. Appropriate permits or approvals from the
OTS, the Federal Reserve System, and any other governmental agencies having
jurisdiction which are necessary to carry out the Transactions contemplated in
this Agreement, shall have been received without the imposition of any
conditions or requirements which, in the reasonable opinion of the affected
party, are materially burdensome or undesirable, and the United States
Department of Justice shall not have taken any adverse action within the period
allowed under 12 U.S.C. Section 1828(c)(6). Said permits and approvals shall be
on terms and conditions acceptable to VIBC and BOS and shall include, but shall
not be limited to, the following:
(a) Prior written approval from the OTS to organize BOS
Interim Bank;
(b) Issuance of a charter for BOS Interim Bank by the OTS;
(c) Prior written approval from the OTS for BOS to merge with
BOS Interim Bank pursuant to 12 U.S.C. Section 1828(c)(2)(D);
(d) Receipt of approval from the Board of Governors of the
Federal Reserve System under the Bank Holding Company Act 1956, as
amended, for VIBC to acquire control of BOS; and
(e) The declaration as effective by the SEC of a registration
statement under the Securities Act of 1933, as amended, with respect to
the shares of VIBC Stock to be issued upon consummation of the Merger,
and the approvals of any requisite state securities administrators.
10.2 TAX RULING OR OPINION. Receipt by the parties of a ruling issued
by the Internal Revenue Service or, in lieu thereof, the opinion of Vavrinek,
Trine, Day & Co., L.L.P., to the effect that:
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(a) The Merger qualifies as a reorganization within the
meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986,
as amended (the "Code"), and VIBC, BOS, and BOS Interim Bank are
parties to a reorganization under Section 368(d) of the Code;
(b) No gain or loss will be recognized by the parties as a
result of the Merger;
(c) The basis and holding periods of the assets and
liabilities exchanged between the parties to the Merger will be the
same as the basis and holding periods of those assets and liabilities
prior to the Merger;
(d) No gain or loss will be recognized by the holders of BOS
Stock upon the conversion of their shares of BOS Stock into shares of
VIBC Stock (except for any fractional share interests to which they may
be entitled);
(e) Where BOS's shareholders hold their BOS Stock as a capital
asset, the basis of VIBC Stock to be received by BOS shareholders will
be the same as the basis of BOS Stock converted into VIBC Stock;
(f) Where BOS's shareholders hold their BOS Stock as a capital
asset, the holding period of VIBC Stock to be received by holders of
BOS Stock will be the same as the holding period of BOS Stock converted
into VIBC Stock; and
(g) Where cash is received by a shareholder of BOS in lieu of
a fractional share interest in VIBC Stock, the cash will be treated as
being received by the shareholder as a distribution in redemption of
his or her fractional share interest, subject to the provisions and
limitations of Section 302 of the Code.
10.3 ABSENCE OF LITIGATION. On the Closing Date and at the Effective
Time of the Merger:
(a) There shall be no action pending before any court of
competent jurisdiction in which any injunction is sought by any
governmental authority against the Transactions contemplated hereby,
unless VIBC shall have received an opinion satisfactory to it of
counsel handling such matter for VIBC or BOS stating that such action
or proceeding will not, in all likelihood, result in a restraint or
prohibition; and
(b) There shall be in effect no order, writ, injunction or
decree of any court or governmental authority prohibiting the
consummation of any of the Transactions contemplated hereby.
10.4 SHAREHOLDER APPROVALS.
(a) APPROVAL OF MERGER. This Agreement shall have been
approved by the holders of at least two-thirds of the issued and
outstanding shares of BOS Stock entitled to vote, by the holder of at
least two-thirds of the issued and outstanding shares of BOS Interim
Bank Stock entitled to vote, and by the holders of at least a majority
of the issued and outstanding shares of VIBC Stock entitled to vote.
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(b) OTHER ACTIONS. Any and all other actions required by the
shareholders of BOS to authorize or effect the Transactions called for
herein shall have been duly and validly taken.
10.5 CONTINUITY OF INTEREST. Taking into account payments to, and
proposed payments to, holders of Dissenting BOS Shares and Dissenting VIBC
Shares and payments of expenses incurred in connection with the Transactions
called for herein, after the Effective Time of the Merger BOS will hold at least
90% of the fair market value of the net assets and 70% of the fair market value
of the gross assets owned by both it and BOS Interim Bank immediately before the
Effective Time of the Merger. All redemptions and distributions made by BOS
immediately preceding the Effective Time of the Merger and which are part of
this Agreement will be considered as assets held by BOS immediately prior to the
Effective Time of the Merger. No fact, circumstance or event shall have occurred
or is reasonably likely to occur that would cause the Merger not to be deemed a
tax-free reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended, or that would cause the Merger to not qualify
for pooling-of-interests accounting treatment, including without limitation
payments made on account of fractional shares of VIBC Stock to be issued in
consideration of BOS Stock in the Merger, Dissenting BOS Shares and Dissenting
VIBC Shares.
ARTICLE XI
TERMINATION
11.1 TERMINATION OF THIS AGREEMENT. This Agreement shall terminate and
be of no further force and effect as between the parties hereto, except as to
liability for a material breach of any representation, warranty or covenant
occurring or arising prior to the date of termination, upon the occurrence of
any of the following:
(a) Immediately upon the expiration of 30 days from the date
that VIBC has given notice to BOS of breach or default by BOS in the
performance of any covenant, agreement, representation, warranty, duty
or obligation hereunder; provided, however, that no such termination
shall be effective if, within said 30-day period, BOS shall have
substantially corrected and cured the grounds for the termination as
set forth in said notice of termination;
(b) Immediately upon the expiration of 30 days from the date
that BOS has given notice to VIBC of breach or default by VIBC in the
performance of any covenant, agreement, representation, warranty, duty
or obligation hereunder provided, however, that no such termination
shall be effective if, within said 30-day period VIBC shall have
substantially corrected and cured the grounds for the termination as
set forth in said notice of termination;
(c) Upon the expiration of 30 days after the OTS, the FRB or
any other applicable regulatory agency denies or refuses in writing to
grant the approvals, nondisapprovals, consents, or authorizations
required to be obtained in order to consummate the Transactions
contemplated by this Agreement, unless within said 30-day period the
parties hereto agree to appeal or resubmit the application to the
regulatory authority which has denied or refused to grant such
approval, nondisapproval, consent, authorization or ruling, as the case
may be;
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(d) Immediately after: (i) VIBC is notified by BOS or VIBC
otherwise becomes aware that, pursuant to Section 5.6, BOS has received
a Qualifying Strategic Transaction Proposal; and (ii) payment by BOS to
VIBC of the Termination Fee pursuant to Section 11.4(a) hereof;
(e) Immediately after: (i) BOS is notified by VIBC or BOS
otherwise becomes aware that, pursuant to Section 6.5, VIBC has
received a Qualifying Strategic Transaction Proposal that is not a VIBC
Acquisition Transaction; and (ii) VIBC has provided BOS with evidence
showing that VIBC has used its best efforts by taking all reasonable
measures necessary to provide for the inclusion of BOS in the
Qualifying Strategic Transaction; and (iii) payment by VIBC of the
Termination Fee pursuant to Section 11.4(a) hereof; provided, however,
in the event VIBC has received a Qualifying Strategic Transaction
Proposal that is not a VIBC Acquisition Transaction and that does not
require VIBC to abandon the Merger as a condition to the consummation
of the transaction contemplated by the Qualifying Strategic Transaction
Proposal, then, at BOS's option by written notice to VIBC, this
Agreement will not be terminated and VIBC shall not be obligated to pay
BOS the Termination Fee pursuant to Section 11.4(a) hereof; or (iv)
VIBC is notified by BOS that VIBC has breached this Agreement as set
forth in Section 6.5(c) and payment by VIBC of the Termination Fee
pursuant to Section 11.4(a) hereof.
(f) By notice by VIBC to BOS or by BOS to VIBC, if the Closing
has not occurred on or before January 31, 1999, but subject to the
expiration of any statutory waiting periods following receipt of any
required regulatory approvals received prior to January 31, 1999,
unless said date shall be extended by the mutual agreement of the
parties hereto and unless such failure results primarily from any
material breach pursuant to Sections 11.1(a) or (b) or by virtue of the
events described in Sections 11.1(c), (d) or (e); or
(g) Upon the mutual agreement of the parties hereto.
11.2 IMMATERIAL BREACH. Notwithstanding anything to the contrary
contained herein, no party hereto shall have the right to terminate this
Agreement on account of its own breach or due to any immaterial breach by any
other party hereto of any covenant, agreement, representation, warranty, duty or
obligation hereunder.
11.3 EFFECT OF TERMINATION. If this Agreement shall be terminated as
provided herein, each party shall redeliver all documents, work papers and other
material of the other party relating to the Transactions contemplated herein to
the party furnishing the same, except that the foregoing shall not apply to any
documents, work papers, material or information which is a matter of public
knowledge. No termination of this Agreement under this Article XI for any reason
or in any manner, except as permitted by Sections 11.1 (f), (g) and (h), shall
release, or be construed as so releasing, any party hereto from any liability or
damage to any other party hereto arising out of, in connection with or otherwise
relating to, directly or indirectly, said party's material and bad faith breach,
default or failure in performance of any of its covenants, agreements, duties or
obligations arising hereunder, or any breaches of any representation or warranty
contained herein; provided, however, neither party shall be liable to the other
for termination pursuant to Section 11.1(c) for the failure of the OTS, the FRB,
or any other applicable regulatory agency to grant the approvals,
nondisapprovals, consents, or authorizations required if the failure is not the
result of a material breach by that party of a
-53- A-60
<PAGE> 242
representation, warranty or covenant set forth in this Agreement. If, however,
such termination shall result from an election to terminate by VIBC pursuant to
Section 11.1(a), then BOS shall pay to VIBC, as reasonable and full liquidated
damages and reasonable compensation for the loss sustained thereby and not as a
penalty or forfeiture, the Liquidated Damages as set forth in Section 11.4(b).
If, however, such termination shall result from an election to terminate by BOS
pursuant to Section 11.1(b), then VIBC shall pay to BOS, as reasonable and full
liquidated damages and reasonable compensation for the loss sustained thereby
and not as a penalty for forfeiture, the Liquidated Damages as set forth in
Section 11.4(b). If, however, such termination shall result from an election to
terminate by VIBC or BOS pursuant to Section 11.1(d), then BOS shall pay to VIBC
the Termination Fee pursuant to Section 11.4(a). If, however, such termination
shall result from an election to terminate by BOS or VIBC pursuant to Section
11.1(e), then VIBC shall pay to BOS the Termination Fee pursuant to Section
11.4(a).
11.4 TERMINATION FEE AND LIQUIDATED DAMAGES.
(a) TERMINATION FEE. The Termination Fee shall be the amount
of $750,000 (the "Termination Fee") in the event this Agreement is
terminated pursuant to Section 11.1(d) or Section 11.1(e).
(b) LIQUIDATED DAMAGES. As reasonable and full liquidated
damages and reasonable compensation for the loss sustained and not as a
penalty or forfeiture in the event that this Agreement is terminated
pursuant to Section 11.1(a) or Section 11.1(b), the liquidated damages
shall be the amount of $150,000 (the "Liquidated Damages").
(c) EXCLUSIVE REMEDY. Except in the event the responsible
party fails to pay the Termination Fee or the Liquidated Damages, as
applicable, within ten business days after receipt of an invoice
therefor, which period shall be extended by an additional reasonable
time if the responsible party has reasonably disputed the existence or
amount of such obligations, timely receipt of such payment shall
constitute an exclusive remedy, and following such receipt and
acceptance, the receiving party shall be barred from recovering damages
for any breach of any term of this Agreement.
ARTICLE XII
GENERAL PROVISIONS
12.1 EXPENSES. VIBC and BOS agree that VIBC and BOS shall each bear
their own expenses incurred in connection with the negotiation, preparation, and
performance of this Agreement, including legal and accounting fees, printing
costs, filing fees, and other necessary expenses regardless of whether the
Merger or any of the Transactions contemplated under this Agreement are
consummated.
12.2 NOTICES. All notices, demands or other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered in
person, or if sent by Federal Express, overnight delivery United States mail, or
other overnight delivery service, or sent by facsimile transmission (with
confirmation) addressed as follows:
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<PAGE> 243
(i) If to VIBC, to:
VIB Corp
1498 Main Street
El Centro, California 92243
Attention: Mr. Dennis L. Kern, President and CEO
Fax: (760) 337-3229
With a copy to:
Horgan, Rosen, Beckham & Coren, L.L.P.
21700 Oxnard Street, Suite 1400
Woodland Hills, California 91365-4335
Attention: S. Alan Rosen, Esq.
Fax: (818) 340-6190
(ii) If to BOS, to:
Bank of Stockdale, F.S.B.
5151 Stockdale Highway
Bakersfield, California 93309
Attention: Mr. Ed L. Hickman, President and CEO
Fax: (805) 833-9469
With a copy to:
McCormick, Barstow, Sheppard, Wayte & Carruth, LLP
5 Riverpark Place East
Fresno, California 93720
Attention: Kenneth Alan Baldwin, Esq.
Fax: (209) 433-2485
The persons or addresses to which mailings or deliveries shall be made
may change from time to time by notice given pursuant to the provisions of this
Section 12.2. Any notice, demand or other communications given pursuant to the
provisions of this Section 12.2 shall be deemed to have been given on the date
actually delivered or the business day following the date sent by overnight
delivery, as the case may be.
12.3 SUCCESSORS AND ASSIGNS. All terms and provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective transferees, successors and assigns; provided, however, that except
as otherwise contemplated hereby, this Agreement and all rights, privileges,
duties and obligations of the parties hereto may not be assigned or delegated by
any party hereto without the prior written consent of the other parties to this
Agreement.
12.4 THIRD PARTY BENEFICIARIES. BOS and VIBC intend that this Agreement
shall not benefit or create any right or cause of action in or on behalf of any
person other than BOS or VIBC.
12.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
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12.6 GOVERNING LAW. This Agreement is made and entered into in the
State of California and the internal laws (without regard to the conflict of law
provisions thereof) of that state shall govern the validity and interpretation
hereof and the performance of the parties hereto of their respective duties and
obligations hereunder, except as required by applicable provisions of Title 12
of the United States Code.
12.7 CAPTIONS. The captions contained in this Agreement and the
Exhibits and Schedules hereto are for convenience of reference only and do not
form a part of or affect the interpretation of this Agreement.
12.8 EXHIBITS AND SCHEDULES. The Exhibits and Schedules attached hereto
are an integral part of this Agreement and each Exhibit and Schedule shall be
applicable as if set forth in full in the text hereof only with respect to the
sections of this Agreement to which it is cross-referenced. In the event there
is any absolute unconditional representation contained in this Agreement, said
representation shall be modified by any contrary information set forth on a
Schedule which expressly cross-references to the section where the absolute or
unconditional representation is contained.
12.9 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the parties hereto contained in this Agreement or any Exhibit or Schedule
hereto shall terminate after the Effective Time of the Merger and shall be of no
further force and effect. Nothing in this Article XII shall be construed as
limiting the applicable statute of limitations in the event the Transactions are
not consummated.
12.10 WAIVER AND MODIFICATION. No waiver of any term, provision or
condition of this Agreement, whether by conduct or otherwise, in any one or more
instances shall be deemed to be or construed as a further or continuing waiver
of any such term, provision or condition of this Agreement. This Agreement may
be modified or amended only by an instrument of equal formality signed by the
parties or their duly authorized agents.
12.11 ATTORNEYS' FEES. In the event any of the parties to this
Agreement brings an action or suit against any other party by reason of any
breach of any covenant, agreement, representation, warranty or other provision
hereof, the substantially prevailing party in whose favor final judgment is
entered shall be entitled to have and recover of and from the other party all
reasonable costs and expenses incurred or sustained by such prevailing party in
connection with such suit or action, including, without limitation, legal fees
and court costs.
12.12 KNOWLEDGE. In all representations and warranties concerning the
knowledge of BOS, VIBC or VIB, wherever included herein, there shall be imputed
to BOS, VIBC or VIB the actual and constructive knowledge and notice of their
respective current directors and executive officers.
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<PAGE> 245
12.13 ENTIRE AGREEMENT. The making, execution and delivery of this
Agreement by the parties hereto have been induced by no representations,
statements, warranties or agreements other than those herein expressed. This
Agreement embodies the entire understanding of the parties and there are no
further or other agreements or understandings, written or oral, in effect
between the parties relating to the subject matter hereof, unless expressly
referred to by reference herein.
12.14 CONSENTS. Any and all consents required to be obtained from any
of the parties hereto under this Agreement shall not be unreasonably withheld
and shall be deemed given unless the requesting party receives written notice to
the contrary from the party to whom such request is made within ten business
days after request therefor.
12.15 SEVERABILITY. If any portion of this Agreement shall be deemed by
a court of competent jurisdiction to be unenforceable, the remaining terms
hereof shall provide for the consummation of the Transactions contemplated
herein in substantially the same manner as originally set forth at the date this
Agreement was executed.
12.16 PRESS RELEASE. No press release or other public disclosure of
matters related to this Agreement of any of the Transactions contemplated hereby
shall be made by VIBC, BOS Interim Bank, or BOS unless the other parties shall
have provided their prior consent to the form and substance thereof; provided,
however, that nothing herein shall be deemed to prohibit any party hereto from
making any disclosure which its counsel deems necessary or advisable in order to
fulfill such party's disclosure obligations imposed by law.
12.17 ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach hereof, and which arises after the effective
date of this Agreement, shall be settled by arbitration to take place in Los
Angeles, California, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, and judgment upon the award rendered by the
arbitrator or arbitrators may be entered in any court having jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
<TABLE>
<CAPTION>
BANK OF STOCKDALE, F.S.B. VIB CORP
<S> <C>
By: /s/ Ed L. Hickman By: /s/ Dennis L. Kern
---------------------------------------- ---------------------------------------
Ed L. Hickman Dennis L. Kern
Its: President and Chief Executive Officer Its: President and Chief Executive Officer
By: /s/ Fred H. Carlisle, Jr. By: /s/ Charlotte Studer
---------------------------------------- ---------------------------------------
Fred H. Carlisle, Jr. Charlotte Studer
Its: Corporate Secretary Its: Corporate Secretary
</TABLE>
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<PAGE> 246
EXHIBIT "A"
MERGER AGREEMENT
(ARTICLES OF COMBINATION)
THIS MERGER AGREEMENT (this "Agreement") is made this ___ day of
_________________, 1998, by and between BOS INTERIM BANK, a federal savings bank
(hereinafter referred to as "BOS Interim Bank"), and BANK OF STOCKDALE, F.S.B.,
a federal savings bank (hereinafter referred to as "BOS"), with reference to the
following:
R E C I T A L S
WHEREAS, BOS is a federal stock savings bank duly organized, validly
existing and in good standing under the laws of the United States of America
with 1,212,265 shares of its $4.00 par value common stock outstanding;
WHEREAS, BOS Interim Bank is a federal stock savings bank established as
a wholly-owned interim federal stock savings bank subsidiary of VIB Corp
("VIBC") and is duly organized, validly existing and in good standing under the
laws of the United States of America with ____________ shares of its $4.00 par
value common stock outstanding;
WHEREAS, VIBC and BOS have entered into that certain Agreement and Plan
of Reorganization dated September 15, 1998 (the "Acquisition Agreement")
providing for the acquisition of BOS by VIBC through the merger of BOS with BOS
Interim Bank under the charter and title of BOS (the "Merger");
WHEREAS, both BOS Interim Bank and BOS wish to complete the acquisition
by consummating the Merger;
WHEREAS, the Boards of Directors of each of VIBC, BOS and BOS Interim
Bank have approved this Agreement and have authorized its execution and delivery
and the sole shareholder of BOS Interim Bank and the shareholders of VIBC and
BOS have approved this Agreement and the transactions contemplated hereby; and
WHEREAS, the prior written approval of the Office of Thrift Supervision
is required to consummate the Merger;
NOW, THEREFORE, in consideration of the mutual covenants, conditions and
agreements set forth herein, the parties hereto hereby agree as follows:
A G R E E M E N T
SECTION 1. MERGED BANK. At the Effective Time of the Merger (as that
term is defined in the Acquisition Agreement), BOS Interim Bank and BOS shall be
merged under the charter of BOS (the "Merged Bank").
A-65
<PAGE> 247
SECTION 2. CLOSING. The closing of the transactions contemplated hereby
(the "Closing") shall take place at the offices of BOS, 5151 Stockdale Highway,
Bakersfield, California 93309, on the date fixed therefor pursuant to Section
2.1 of the Acquisition Agreement.
SECTION 3. NAME. The name of the Merged Bank shall be "Bank of
Stockdale, F.S.B."
SECTION 4. BUSINESS; OFFICES. The business of the Merged Bank shall be
that of a federal savings bank. This business shall be conducted by the Merged
Bank at its main office located at 5151 Stockdale Highway, Bakersfield,
California 93309, and at its legally established branches and loan production
offices.
SECTION 5. CAPITAL. The capital account of the Merged Bank at the
Effective Time of the Merger shall be equal to the combined capital accounts of
BOS and BOS Interim Bank, adjusted, however, for normal earnings and expenses up
to the Effective Time of the Merger. The authorized capitalization of the Merged
Bank shall be 10,000,000 shares of common stock, par value $4.00 per share.
SECTION 6. ASSETS; LIABILITIES. All assets of each of BOS and BOS
Interim Bank, as they exist immediately prior to the Effective Time of the
Merger, shall pass to and vest in the Merged Bank without any conveyance or
other transfer. The Merged Bank shall be responsible for all of the liabilities
of every kind and description of each of BOS Interim Bank and BOS existing as of
the Effective Time of the Merger and there shall be no change in the basis upon
which savings accounts of the Merged Bank shall be issued.
SECTION 7. OUTSTANDING STOCK. At the Effective Time of the Merger, the
shareholders of BOS (with the exception of shareholders of BOS who have
perfected their dissenters' rights) shall be entitled to receive ________ shares
of VIBC Stock (as that term is defined in the Acquisition Agreement), plus cash
in lieu of fractional interests, as specified in Section 1.2(c) and Section 1.5
of the Acquisition Agreement, for each share of the BOS Stock (as that term is
defined in the Acquisition Agreement) then held by them, and each share of the
common stock of BOS Interim Bank shall be automatically converted into one share
of the common stock of the Merged Bank.
SECTION 8. DIVIDENDS. Neither BOS Interim Bank nor BOS shall declare or
pay any dividend to its shareholders between the date of this Agreement and the
Effective Time of the Merger, or dispose of any of its assets in any other
manner except in the normal course of business and for adequate value.
SECTION 9. BOARD OF DIRECTORS; OFFICERS. The persons serving as the
Board of Directors of BOS immediately prior to the Effective Time of the Merger,
with the exception of Messrs. Irving R. Beimler and Jeffery W. Warlick, plus two
nominees by VIBC duly approved by the BOS Board of Directors, at and after the
Effective Time of the Merger shall become and be the Board of Directors of the
Merged Bank, and such persons shall serve as the directors of the Merged Bank
until such time as their successors have been elected and qualified. The names,
residence addresses and terms of office of each of the 14 directors are as
follows:
<TABLE>
<CAPTION>
Name Residence Address Term (No. of Years)
---- ----------------- -------------------
<S> <C> <C>
1. Jim Banducci 2221 Myrtle St., Bakersfield, CA 93301 2
2. John Brock, Jr. 2205 Haggin Oaks Blvd., Bakersfield, CA 93311 2
3. Dwight E. Byrum 1708 Clubview Drive, Bakersfield, CA 93309 1
</TABLE>
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<PAGE> 248
<TABLE>
<S> <C> <C>
4. Fred H. Carlisle, Jr. 6515 Mt. Shasta Dr., Bakersfield, CA 93309 2
5. James F. Dandy 3808 Amberwood Lane, Bakersfield, CA 93309 3
6. Richard D. Foss 231 Horne Road, El Centro, CA 92243 3
7. Earle J. Gibbons Star Route, Box 39A, Granite Station, Bakersfield, 3
CA 93308
8. Ed L. Hickman 7219 Meadowbrook Way, Bakersfield, CA 93309 1
9. Thomas S. Kelly 712 Vista Verde Way, Bakersfield, CA 93309 2
10. Dennis L. Kern 1888 Haskell Dr., El Centro, CA 92243 3
11. Thomas J. Phillips 1411 Panorama Drive, Bakersfield, CA 93305 1
12. Ken Sorenson 829 Leeds, Bakersfield, CA 93311 3
13. Marvin E. Steinert 2913 Summit Circle, Bakersfield, CA 93306 3
14. Richard P. Wilson 1605 Fieldspring, Bakersfield, CA 93311 3
</TABLE>
The executive officers of BOS immediately prior to the Effective Time of the
Merger at and after the Effective Time of the Merger shall become and be the
executive officers of the Merged Bank, and such persons shall serve at the
pleasure of the Merged Bank's Board of Directors.
SECTION 10. CHARTER AND BYLAWS OF MERGED BANK. The Charter and Bylaws of
BOS as in effect immediately prior to the Effective Time of the Merger, copies
of which are attached hereto as Exhibits "A" and "B," respectively, shall be the
Charter and Bylaws of the Merged Bank.
SECTION 11. CONDITIONS. The obligations of the parties to proceed with
the Closing are subject to the satisfaction or waiver at or prior to the Closing
of all of the conditions to the Merger set forth herein and in the Acquisition
Agreement.
SECTION 12. TERMINATION. This Agreement may be terminated at any time
prior to the Closing:
(a) by the written agreement of BOS Interim Bank, VIBC and
BOS;
(b) by BOS Interim Bank or BOS if the Closing shall not have
been consummated on or before January 31, 1999, subject to
the expiration of any statutory waiting periods following
receipt of any required regulatory approvals received
prior to January 31, 1999, or such other date, if any,
upon which BOS Interim Bank, VIBC and BOS may agree in
writing; or
(c) automatically in the event the Acquisition Agreement is
terminated in accordance with its terms.
SECTION 13. APPROVALS. This Agreement has been approved and/or ratified
and confirmed by the affirmative vote of the holders of BOS Stock owning at
least two-thirds of its capital stock outstanding, with ____________ shares
voting in favor, ____________ shares voting against, and _____________ shares
abstaining, by the sole shareholder of BOS Interim Bank, by unanimous written
consent or at a meeting held on the call of the Board of Directors, and by the
affirmative vote of the holders of VIBC Stock owning at least a majority of its
capital stock outstanding, with _______________ shares voting in favor,
______________ shares voting against, and _______________ shares abstaining; and
the Merger shall become effective at the time specified on the endorsement of
these Articles of Combination by the Office of Thrift Supervision of the United
States.
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<PAGE> 249
WITNESS the signatures and seals of the merging banks, BOS Interim Bank
and BOS, this ____ day of ___________, 1998, each set by its President and
Secretary, pursuant to a resolution of its Board of Directors, acting by a
majority, and verified by its Secretary.
BOS INTERIM BANK (In Organization)
[seal]
By:
---------------------------------
-----------------------------
President and
Chief Executive Officer
By:
---------------------------------
-----------------------------
Corporate Secretary
I further declare under penalty of perjury that the matters set forth in
this document are true and correct of my own knowledge.
-----------------------------
-----------------------------
BANK OF STOCKDALE, F.S.B.
[seal]
By:
---------------------------------
Ed L. Hickman
President and
Chief Executive Officer
By:
---------------------------------
Fred H. Carlisle, Jr.
Corporate Secretary
I further declare under penalty of perjury that the matters set forth in
this document are true and correct of my own knowledge.
---------------------------------
Fred H. Carlisle, Jr.
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<PAGE> 250
EXHIBIT "B-1"
DIRECTOR'S AGREEMENT
THIS DIRECTOR'S AGREEMENT (this "Director's Agreement"), is made as of
this 15th day of September, 1998, by and among VIB Corp, a California
corporation ("VIBC"), and the director of Bank of Stockdale, F.S.B., a federal
savings bank ("BOS"), whose name is set forth under "Director" on the signature
page hereof (the "Director"). VIBC is contemporaneously herewith entering into
agreements with other directors of BOS, which agreements are identical in all
respects hereto, except as to (a) the number of shares of BOS's common stock,
$4.00 par value (the "BOS Stock") owned by such other directors, and (b) the
name and address of the other directors. The Director and such other persons
shall hereinafter be referred to as to the "Directors" and this Agreement and
such other agreements as the "Director's Agreements." This Director's Agreement
is made with reference to the following:
R E C I T A L S
WHEREAS, that certain Agreement and Plan of Reorganization (the
"Agreement"), dated as of September 15, 1998, entered into by and among VIBC and
BOS, provides for the acquisition by VIBC of one hundred percent (100%) of the
BOS Stock, through the merger (the "Merger") of BOS with an interim bank which
shall be a wholly-owned subsidiary of VIBC ("BOS Interim Bank"); and
WHEREAS, as a condition precedent to the obligations of VIBC and BOS
under Section 1.13 of the Agreement, the Director and all the Directors shall
have entered into Director's Agreements concurrent with the execution of the
Agreement in accordance with the terms, conditions, and provisions thereof;
NOW, THEREFORE, in order to effectuate the transactions set forth above
and in consideration of the mutual covenants, conditions, agreements,
representations and warranties contained herein and in the Agreement, and
intending to be legally bound, the parties hereto agree as follows:
A G R E E M E N T
ARTICLE I
COVENANTS OF DIRECTOR
1.1 Vote of Shareholders. At the meeting of shareholders of BOS referred
to in Section 7.1 of the Agreement (the "Meeting"), the Director shall vote or
cause to be voted the shares of BOS Stock indicated as owned or controlled by
such Director in Schedule I attached hereto, and any other shares of BOS Stock
now owned or hereafter acquired or controlled by such Director, in favor of, and
to approve the principal terms of, the Merger, and any other matter contemplated
by the Agreement which requires the approval of the shareholders of BOS.
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<PAGE> 251
1.2 Other Contracts. From and after the date of this Director's
Agreement, the Director shall not enter into or become subject to any agreement
or commitment which would restrict or in any way impair the obligation of the
Director to comply with all the terms of this Director's Agreement, including,
without limitation, any other agreement to sell, transfer or otherwise dispose
of the Director's shares of BOS Stock.
1.3 Updating Information. In the event that the Director shall discover
that any representation or warranty made herein by him was false or misleading
in any material respect when made or that any event has occurred such that any
representation or warranty of the Director made herein would, if made at and as
of the time of the occurrence of such event, or thereafter, be incorrect in any
material respect, the Director shall deliver to VIBC a statement specifying that
it is delivered pursuant to this Section 1.3 and stating in reasonable detail
the facts with respect thereto. Delivery of any such statement shall not limit
any rights which VIBC may otherwise have under this Director's Agreement.
1.4 Agreement to Recommend. The Director agrees that, upon the execution
of this Director's Agreement, he shall at all times use his best efforts in
order to obtain the approval of the shareholders of BOS of the principal terms
of the Merger, and any other matter contemplated by the Agreement which requires
approval of the shareholders of BOS and shall recommend the approval of such
matters by the shareholders of BOS at the Meeting.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF DIRECTOR
2.1 Representations and Warranties of Director. The Director represents
and warrants to, and agrees with, VIBC as follows:
(a) Capacity. The Director has all requisite capacity to enter
into and to perform the Director's obligations under this Director's Agreement.
(b) Agreement. The Director has received a copy of the Agreement
and has had the opportunity to review and to consider the terms and conditions
contained in this Director's Agreement and in the Agreement and to confer with
his or her counsel concerning said terms and conditions.
(c) Binding Agreement. This Director's Agreement has been duly
executed and delivered by such Director and constitutes a valid and legally
binding agreement of such Director.
(d) Ownership of Shares, Etc. Schedule I hereto correctly sets
forth the number of shares of BOS Stock owned by the Director or with respect to
which such Director has sole or shared voting power, and the Director has good
and marketable title to all such shares of BOS Stock free and clear of any
liens, security interests, charges or other encumbrances of any kind of nature,
except as set forth on Schedule I.
(e) Relationship with BOS. The Director is a director of BOS.
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<PAGE> 252
(f) Non-Contravention. The execution and delivery of this
Agreement by the Director does not, and the performance by the Director of the
Director's obligations hereunder and the consummation by the Director of the
transactions contemplated hereby will not, violate or conflict with or
constitute a default under any agreement, instrument, contract or other
obligation or any order, arbitration award, judgment or decree to which the
Director is a party or by which the Director is bound, or any statute, rule or
regulation to which the Director or any of the Director's property is subject.
ARTICLE III
TERMINATION
3.1 Automatic Termination. This Director's Agreement shall automatically
terminate and be of no further force or effect if the Agreement is terminated in
accordance with the terms thereof, except as to any breach occurring prior to
the date of such termination.
ARTICLE IV
MISCELLANEOUS
4.1 Expenses. Each party hereto shall pay its own costs and expenses in
connection with this Director's Agreement and the transactions covered and
contemplated hereby; provided, however, that nothing contained herein shall
preclude the payment of the Director's expenses in connection with the
negotiation and documentation of this Director's Agreement by BOS.
4.2 Notices, Etc. All communications required or permitted to be given
hereunder shall be in writing and shall be deemed to have been duly given to the
appropriate parties if delivered in person, or if sent by Federal Express,
overnight delivery United States mail, or other overnight delivery service, or
sent by facsimile transmission (with confirmation) addressed as follows:
(a) If to the Director, to the address set forth in Schedule I
attached hereto.
With a copy to:
Bank of Stockdale, F.S.B.
5151 Stockdale Highway
Bakersfield, California 93309
Attention: Mr. Ed L. Hickman, President and CEO
Fax: (805) 833-9469
With an additional copy to:
McCormick, Barstow, Sheppard, Wayte & Carruth, LLP
5 Riverpark Place East
Fresno, California 93720
Attention: Kenneth Alan Baldwin, Esq.
Fax: (209) 433-2485
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(b) If to VIBC, to:
VIB Corp
1498 Main Street
El Centro, California 92243
Attention: Mr. Dennis L. Kern, President and CEO
Fax: (760) 337-3229
With a copy to:
Horgan, Rosen, Beckham & Coren, L.L.P.
21700 Oxnard Street, Suite 1400
Woodland Hills, California 91365-4335
Attention: S. Alan Rosen, Esq.
Fax: (818) 340-6190
or such other address as any party may have furnished in writing to the other
parties.
4.3 Entire and Sole Agreement. The making, execution and delivery of
this Director's Agreement by the parties hereto have not been induced by any
representations, statements, warranties or agreements other than those expressed
herein and in the Agreement. This Director's Agreement embodies the entire
understanding of the parties, and there are no further or other agreements or
understandings, whether written or oral, in effect among the parties relating to
the subject matter hereof, unless expressly referred to by reference herein.
4.4 Successors and Assigns. Except as otherwise provided in this
Director's Agreement, all covenants and agreements of the parties contained in
this Director's Agreement shall be binding upon and inure to the benefit of the
respective successors and assigns of the parties hereto.
4.5 Governing Law. This Director's Agreement shall construed and
enforced in accordance with and governed by the laws of the State of California.
4.6 Counterparts. This Director's Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
4.7 Amendment, Supplement and Waiver. This Director's Agreement may be
amended or supplemented, and compliance with the provisions hereof may be waived
only by an instrument in writing signed by the party against which enforcement
of such amendment, supplement or waiver of compliance is sought.
4.8 Headings. The headings in this Director's Agreement are for purposes
of reference only and shall not limit or otherwise affect the meaning hereof.
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4.9 Specific Performance. It is recognized and agreed that monetary
damages will not compensate the parties hereto for nonperformance by any party.
Accordingly, each party agrees that his, her or its obligation shall be
enforceable by a court order requiring specific performance.
4.10 Several Obligations. All duties and obligations of the Director
executing this Director's Agreement shall be several and not joint with the
duties and obligations of other Directors executing similar Directors'
Agreements with VIBC.
IN WITNESS WHEREOF, the parties hereto have caused this
Director's Agreement to be duly executed as of the date first above written.
DIRECTOR VIB CORP
_____________________________ By: ________________________________
(Name) Dennis L. Kern
Its: President and Chief Executive
Officer
_____________________________
(Signature)
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<PAGE> 255
SCHEDULE I
NAME OF DIRECTOR: _____________________________
ADDRESS OF DIRECTOR: _____________________________
_____________________________
_____________________________
CERTIFICATE NUMBER NUMBER OF SHARES REGISTERED OWNER(S)
- ------------------ ---------------- -------------------
DESCRIBE ANY LIENS:
- -------------------
-6- A-74
<PAGE> 256
EXHIBIT "B-2"
DIRECTOR'S AGREEMENT
THIS DIRECTOR'S AGREEMENT (this "Director's Agreement"), is made as of
this 15th day of September, 1998, by and among Bank of Stockdale, F.S.B., a
federal savings bank ("BOS") and the director of VIB Corp, a California
corporation ("VIBC"), whose name is set forth under "Director" on the signature
page hereof (the "Director"). BOS is contemporaneously herewith entering into
agreements with other directors of VIBC, which agreements are identical in all
respects hereto, except as to (a) the number of shares of VIBC's common stock,
no par value (the "VIBC Stock") owned by such other directors, and (b) the name
and address of the other directors. The Director and such other persons shall
hereinafter be referred to as to the "Directors" and this Agreement and such
other agreements as the "Director's Agreements." This Director's Agreement is
made with reference to the following:
R E C I T A L S
WHEREAS, that certain Agreement and Plan of Reorganization (the
"Agreement"), dated as of September 15, 1998, entered into by and among VIBC and
BOS, provides for the acquisition by VIBC of one hundred percent (100%) of the
BOS Stock, through the merger (the "Merger") of BOS with an interim bank which
shall be a wholly-owned subsidiary of VIBC ("BOS Interim Bank"); and
WHEREAS, as a condition precedent to the obligations of VIBC and BOS
under Section 1.13 of the Agreement, the Director and all the Directors shall
have entered into Director's Agreements concurrent with the execution of the
Agreement in accordance with the terms, conditions, and provisions thereof;
NOW, THEREFORE, in order to effectuate the transactions set forth above
and in consideration of the mutual covenants, conditions, agreements,
representations and warranties contained herein and in the Agreement, and
intending to be legally bound, the parties hereto agree as follows:
A G R E E M E N T
ARTICLE I
COVENANTS OF DIRECTOR
1.1 Vote of Shareholders. At the meeting of shareholders of VIBC
referred to in Section 7.1 of the Agreement (the "Meeting"), the Director shall
vote or cause to be voted the shares of VIBC Stock indicated as owned or
controlled by such Director in Schedule I attached hereto, and any other shares
of VIBC Stock now owned or hereafter acquired or controlled by such Director, in
favor of, and to approve the principal terms of, the Merger, and any other
matter contemplated by the Agreement which requires the approval of the
shareholders of VIBC.
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<PAGE> 257
1.2 Other Contracts. From and after the date of this Director's
Agreement, the Director shall not enter into or become subject to any agreement
or commitment which would restrict or in any way impair the obligation of the
Director to comply with all the terms of this Director's Agreement, including,
without limitation, any other agreement to sell, transfer or otherwise dispose
of the Director's shares of VIBC Stock.
1.3 Updating Information. In the event that the Director shall discover
that any representation or warranty made herein by him was false or misleading
in any material respect when made or that any event has occurred such that any
representation or warranty of the Director made herein would, if made at and as
of the time of the occurrence of such event, or thereafter, be incorrect in any
material respect, the Director shall deliver to BOS a statement specifying that
it is delivered pursuant to this Section 1.3 and stating in reasonable detail
the facts with respect thereto. Delivery of any such statement shall not limit
any rights which BOS may otherwise have under this Director's Agreement.
1.4 Agreement to Recommend. The Director agrees that, upon the execution
of this Director's Agreement, he or she shall at all times use his or her best
efforts in order to obtain the approval of the shareholders of VIBC of the
principal terms of the Merger, and any other matter contemplated by the
Agreement which requires approval of the shareholders of VIBC and shall
recommend the approval of such matters by the shareholders of VIBC at the
Meeting.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF DIRECTOR
2.1 Representations and Warranties of Director. The Director represents
and warrants to, and agrees with, BOS as follows:
(a) Capacity. The Director has all requisite capacity to enter
into and to perform the Director's obligations under this Director's Agreement.
(b) Agreement. The Director has received a copy of the Agreement
and has had the opportunity to review and to consider the terms and conditions
contained in this Director's Agreement and in the Agreement and to confer with
his or her counsel concerning said terms and conditions.
(c) Binding Agreement. This Director's Agreement has been duly
executed and delivered by such Director and constitutes a valid and legally
binding agreement of such Director.
(d) Ownership of Shares, Etc. Schedule I hereto correctly sets
forth the number of shares of VIBC Stock owned by the Director or with respect
to which such Director has sole or shared voting power, and the Director has
good and marketable title to all such shares of VIBC Stock free and clear of any
liens, security interests, charges or other encumbrances of any kind of nature,
except as set forth on Schedule I.
(e) Relationship with VIBC. The Director is a director of VIBC.
-2- A-76
<PAGE> 258
(f) Non-Contravention. The execution and delivery of this
Agreement by the Director does not, and the performance by the Director of the
Director's obligations hereunder and the consummation by the Director of the
transactions contemplated hereby will not, violate or conflict with or
constitute a default under any agreement, instrument, contract or other
obligation or any order, arbitration award, judgment or decree to which the
Director is a party or by which the Director is bound, or any statute, rule or
regulation to which the Director or any of the Director's property is subject.
ARTICLE III
TERMINATION
3.1 Automatic Termination. This Director's Agreement shall automatically
terminate and be of no further force or effect if the Agreement is terminated in
accordance with the terms thereof, except as to any breach occurring prior to
the date of such termination.
ARTICLE IV
MISCELLANEOUS
4.1 Expenses. Each party hereto shall pay its own costs and expenses in
connection with this Director's Agreement and the transactions covered and
contemplated hereby; provided, however, that nothing contained herein shall
preclude the payment of the Director's expenses in connection with the
negotiation and documentation of this Director's Agreement by VIBC.
4.2 Notices, Etc. All communications required or permitted to be given
hereunder shall be in writing and shall be deemed to have been duly given to the
appropriate parties if delivered in person, or if sent by Federal Express,
overnight delivery United States mail, or other overnight delivery service, or
sent by facsimile transmission (with confirmation) addressed as follows:
(a) If to the Director, to the address set forth in Schedule I
attached hereto.
With a copy to:
VIB Corp
1498 Main Street
El Centro, California 92243
Attention: Mr. Dennis L. Kern, President and CEO
Fax: (760) 337-3229
With an additional copy to:
Horgan, Rosen, Beckham & Coren, L.L.P.
21700 Oxnard Street, Suite 1400
Woodland Hills, California 91365-4335
Attention: S. Alan Rosen, Esq.
Fax: (818) 340-6190
-3- A-77
<PAGE> 259
(b) If to BOS, to:
Bank of Stockdale, F.S.B.
5151 Stockdale Highway
Bakersfield, California 93309
Attention: Mr. Ed L. Hickman, President and CEO
Fax: (805) 833-9469
With a copy to:
McCormick, Barstow, Sheppard, Wayte & Carruth, LLP
5 Riverpark Place East
Fresno, California 93720
Attention: Kenneth Alan Baldwin, Esq.
Fax: (209) 433-2485
or such other address as any party may have furnished in writing to the other
parties.
4.3 Entire and Sole Agreement. The making, execution and delivery of
this Director's Agreement by the parties hereto have not been induced by any
representations, statements, warranties or agreements other than those expressed
herein and in the Agreement. This Director's Agreement embodies the entire
understanding of the parties, and there are no further or other agreements or
understandings, whether written or oral, in effect among the parties relating to
the subject matter hereof, unless expressly referred to by reference herein.
4.4 Successors and Assigns. Except as otherwise provided in this
Director's Agreement, all covenants and agreements of the parties contained in
this Director's Agreement shall be binding upon and inure to the benefit of the
respective successors and assigns of the parties hereto.
4.5 Governing Law. This Director's Agreement shall construed and
enforced in accordance with and governed by the laws of the State of California.
4.6 Counterparts. This Director's Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
4.7 Amendment, Supplement and Waiver. This Director's Agreement may be
amended or supplemented, and compliance with the provisions hereof may be waived
only by an instrument in writing signed by the party against which enforcement
of such amendment, supplement or waiver of compliance is sought.
4.8 Headings. The headings in this Director's Agreement are for purposes
of reference only and shall not limit or otherwise affect the meaning hereof.
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<PAGE> 260
4.9 Specific Performance. It is recognized and agreed that monetary
damages will not compensate the parties hereto for nonperformance by any party.
Accordingly, each party agrees that his, her or its obligation shall be
enforceable by a court order requiring specific performance.
4.10 Several Obligations. All duties and obligations of the Director
executing this Director's Agreement shall be several and not joint with the
duties and obligations of other Directors executing similar Directors'
Agreements with VIBC.
IN WITNESS WHEREOF, the parties hereto have caused this
Director's Agreement to be duly executed as of the date first above written.
DIRECTOR BANK OF STOCKDALE, F.S.B.
_____________________________ By: ________________________________
(Name) Ed L. Hickman
Its: President and Chief Executive
_____________________________ Officer
(Signature)
-5- A-79
<PAGE> 261
SCHEDULE I
NAME OF DIRECTOR: _____________________________
ADDRESS OF DIRECTOR: _____________________________
_____________________________
_____________________________
CERTIFICATE NUMBER NUMBER OF SHARES REGISTERED OWNER(S)
- ------------------ ---------------- -------------------
DESCRIBE ANY LIENS:
- -------------------
-6- A-80
<PAGE> 262
EXHIBIT "C"
AFFILIATE'S LETTER
____________, 1998
VIB Corp
1498 Main Street
El Centro, California 92243
Attention: Mr. Dennis L. Kern, President and CEO
Dear Mr. Kern:
I have been advised that I may be an "affiliate," as defined in Rule 145
under the Securities Act of 1933, as amended (the "Act"), of Bank of Stockdale,
F.S.B. ("BOS") at the time of the merger (the "Merger") of BOS and BOS Interim
Bank pursuant to which BOS will become a wholly-owned subsidiary of VIB Corp
("VIBC"). In the Merger, I will acquire shares (the "Shares") of the common
stock of VIBC in exchange for my shares of the common stock of BOS.
I represent and agree as follows:
1. I have carefully read this letter and, to the extent I felt
necessary, I have discussed it with legal counsel.
2. The Shares are being acquired by me in good faith for
investment, for my own account, and not with a view to distributing the
Shares to others or otherwise reselling the Shares.
3. I will not make any sale or other disposition of the Shares in
violation of the Act or related rules and regulations. In this
connection, I understand that the issuance of the Shares to me has been
or will be registered under the Act, but that such registration will not
cover resales by affiliates. Accordingly, the Shares must be held by me
for at least one year unless: (i) the Shares have been registered under
the Act for sale by me; (ii) a sale of the Shares is made in conformity
with the volume and other applicable limitations of paragraph (d) of
Rule 145; or (iii) another exemption from registration is available.
4. I understand that VIBC is under no obligation to register the
sale or other disposition of the Shares by me or on my behalf or to take
any other action to qualify the sale of the Shares for any exemption
from registration.
5. I also understand that stop transfer instructions will be
given to VIBC's transfer agent with respect to the Shares and that there
will be placed on the certificates for the Shares a legend stating in
substance:
THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE BEEN ISSUED IN A TRANSACTION
TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, APPLIES AND
1 A-81
<PAGE> 263
MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IN
COMPLIANCE WITH THE REQUIREMENTS OF RULE 145
OR PURSUANT TO A REGISTRATION STATEMENT
UNDER THAT ACT OR AN EXEMPTION FROM SUCH
REGISTRATION.
6. I agree that commencing on the date on which the Office of
Thrift Supervision approves the Merger and until the time that financial
results covering at least 30 days of post- Merger combined operations of
BOS and VIBC have been published, I will not sell, transfer or otherwise
dispose of any interest in the shares owned by me or any of the Shares
that I receive as a result of the Merger or reduce my interest in or my
risk relating to any of such Shares. I understand that VIBC will publish
such financial results not later than as soon as reasonably practicable
following the close of the first calendar quarter after the Merger.
7. I know of no plan (written or oral) pursuant to which holders
of shares of the outstanding BOS Stock intend to sell or otherwise
dispose of more than 50%, in the aggregate, of their interest in such
shares, either by a sale or other disposition of BOS Stock before the
Merger, by the exercise of dissenters' rights in the Merger, or by a
sale or other disposition of the Shares to be received by them as a
result of the Merger.
8. I understand and agree that VIBC will rely upon the foregoing
representations and warranties in issuing the Shares to me and I hereby
agree to indemnify VIBC and hold it and its officers, directors,
employees, agents and representatives harmless from and against all
liabilities, costs, or expenses (including reasonable attorneys' fees)
arising as a result of a sale or disposition of any of the Shares in
violation of any of the restrictions described above.
9. I understand that so long as I am an "affiliate" of VIBC
within the meaning of the Act, any shares of VIBC's common stock I may
acquire in the future, separate and apart from the Shares described
above, whether or not such shares have been previously registered with
the Securities and Exchange Commission, will also be subject to
restriction on resale. Moreover, I understand that under various
circumstances, including the case where I acquire shares of VIBC's
common stock which have not previously been registered with the
Securities and Exchange Commission, I will be required to hold such
shares for a minimum of one year before I can sell the shares in the
trading market unless otherwise allowed by law, rule or regulation. I
also understand that legends reflecting the restrictions on VIBC's
common stock which I may acquire will be placed on all certificates
representing such shares, and that stop transfer orders will be placed
with VIBC's transfer agent prohibiting transfers by me in violation of
such restrictions.
Very truly yours,
Dated:________________ _____________________________
Signature
_____________________________
Type or Print Name
2 A-82
<PAGE> 264
EXHIBIT "D"
SHAREHOLDER'S AGREEMENT
THIS SHAREHOLDER'S AGREEMENT (this "Shareholder's Agreement"), is made
as of this 15th day of September, 1998, by and among Eric D. Hovde, an
individual, and Financial Institutions Partners, Ltd., a Nevada limited
liability company ("FIPL") (collectively, the "Shareholders"), each of whom are
principal shareholders or affiliates (as defined under Rule 144 of the
Securities Act of 1933) of such principal shareholders of Bank of Stockdale,
F.S.B., a federal stock savings bank (the "Bank"), and VIB Corp, a California
corporation ("VIBC"), with reference to the following:
R E C I T A L S
WHEREAS, that certain Agreement and Plan of Reorganization (the
"Agreement"), dated as of September 15, 1998, entered into by and among VIBC and
the Bank, provides for the acquisition by VIBC of one hundred percent (100%) of
the voting shares of the Bank ("Bank Stock"), through the merger (the "Merger")
of the Bank with an interim federal savings bank which shall be a wholly-owned
subsidiary of VIBC ("BOS Interim Bank") pursuant to which holders of Bank Stock
will become holders of VIBC's common stock ("VIBC Stock");
WHEREAS, as of the date of this Shareholder's Agreement, FIPL is the
record holder of at least 362,431 shares of Bank Stock, which constitutes
approximately 29.9% of the issued and outstanding shares of Bank Stock;
WHEREAS, Section 4(c) of that certain Commitment Letter dated July 14,
1997, entered into by and between Eric D. Hovde and the Bank (the "Commitment
Letter"), provides that in the event the Bank offers to sell shares of Bank
Stock or other voting securities other than as permitted under the terms of the
Commitment Letter, or grants, other than pursuant to a grant of options to
acquire shares of Bank Stock under the Bank's 1995 Incentive Stock Option Plan,
in any manner to any person or entity a right to purchase any Bank Stock, Eric
D. Hovde has a right to purchase on the same terms and conditions, including the
purchase price per share, in Eric D. Hovde's sole discretion, at least a
sufficient number of shares of Bank Stock in any such offering or as a
consequence of any such grant as may be necessary to maintain his then
beneficial ownership percentage interest in Bank Stock immediately prior to such
offering or the exercise of such grant; and
WHEREAS, as a condition precedent to the obligations of VIBC and the
Bank under Section 1.16 of the Agreement, the Shareholders shall have entered
into this Shareholder's Agreement concurrent with the execution of the Agreement
in accordance with the terms, conditions, and provisions thereof;
NOW, THEREFORE, in consideration of the mutual covenants, conditions,
agreements, representations and warranties contained herein and in the
Agreement, and intending to be legally bound, the parties hereto agree as
follows:
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<PAGE> 265
A G R E E M E N T
ARTICLE I
COVENANTS OF SHAREHOLDERS - BANK STOCK
1.1 Vote of Shareholders. At the meeting of shareholders of BOS referred
to in Section 7.1 of the Agreement (the "Meeting"), the Shareholders shall vote
or cause to be voted the shares of Bank Stock indicated as owned or controlled
by such Shareholders in Schedule I attached hereto, and any other shares of Bank
Stock now owned or hereafter acquired or controlled by the Shareholders, in
favor of, and to approve the principal terms of, the Merger, and any other
matter contemplated by the Agreement which requires the approval of the
Shareholders of the Bank.
1.2 Other Contacts. From and after the date of this Shareholder's
Agreement, the Shareholders shall not enter into or become subject to any
agreement or commitment which would restrict or in any way impair the obligation
of the Shareholders to comply with all the terms of Article I of this
Shareholder's Agreement, including, without limitation, any other agreement to
sell, transfer or otherwise dispose of the Shareholders' shares of Bank Stock.
1.3 Resignations. The Shareholders agree to obtain the written
resignations of Messrs. Irving R. Beimler and Jeffery W. Warlick as directors of
the Bank to be effective on the Closing Date (as defined in the Agreement).
1.4 Updating Information. In the event that the Shareholders shall
discover that any representation or warranty made herein was false or misleading
in any material respect when made or that any event has occurred such that any
representation or warranty of the Shareholders made herein would, if made at and
as of the time of the occurrence of such event, or thereafter, be incorrect in
any material respect, the Shareholders shall deliver to VIBC a statement
specifying that it is delivered pursuant to this Section 1.4 and stating in
reasonable detail the facts with respect thereto. Delivery of any such statement
shall not limit any rights which VIBC may otherwise have under this
Shareholder's Agreement.
1.5 Agreement to Recommend. The Shareholders agree that, upon the
execution of this Shareholder's Agreement, the Shareholders shall at all times
uses his or its best efforts in order to obtain the approval of the shareholders
of the Bank of the principal terms of the Merger, and any other matter
contemplated by the Agreement which requires approval of the shareholders of the
Bank, and shall recommend the approval of such matters by the shareholders of
the Bank at the Meeting.
ARTICLE II
COVENANTS OF SHAREHOLDERS - VIBC STOCK
2.1 Commitment Letter. The Shareholders hereby waive any and all present
and future rights or privileges pursuant to Section 4(c) of the Commitment
Letter. This waiver of rights under Section 4(c) shall also apply to stock
offerings or grants by all successors to the Bank.
2 A-84
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2.2 Reporting Obligations. The Shareholders hereby agree to properly and
timely file with the Securities and Exchange Commission and VIBC any and all
reports, forms, schedules or other documents required to be filed with the SEC
and VIBC pursuant to the Securities Exchange Act of 1934, as amended, and the
rules promulgated thereunder as applicable to their ownership of VIBC Stock.
2.3 Other Contracts. From and after the date of this Shareholder's
Agreement, the Shareholders shall not enter into or become subject to any
agreement or commitment which would restrict or in any way impair the
obligations of the Shareholders to comply with all the terms of this
Shareholder's Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
OF SHAREHOLDERS
3.1 Representations and Warranties of Shareholders. The Shareholders
represent and warrant to, and agree with, VIBC as follows:
(a) Capacity. The Shareholders have all requisite capacity to
enter into and to perform the obligations of Articles I and II under this
Shareholder's Agreement.
(b) Agreement. The Shareholders have received a copy of the
Agreement and have had the opportunity to review and to consider the terms and
conditions contained in this Shareholder's Agreement and in the Agreement and to
confer with his or its counsel concerning said terms and conditions.
(c) Binding Agreement. This Shareholder's Agreement has been duly
executed and delivered by the Shareholders and constitutes a valid and legally
binding agreement of the Shareholders.
(d) Ownership of Shares, Etc. Schedule I hereto correctly sets
forth the number of shares of Bank Stock owned by the Shareholders or with
respect to which the Shareholders have sole or shared voting power, and the
Shareholders have good and marketable title to all such shares of Bank Stock
free and clear of any liens, security interests, charges or other encumbrances
of any kind of nature, except as set forth on Schedule I.
(e) Non-Contravention. The execution and delivery of this
Shareholder's Agreement by the Shareholders does not, and the performance by the
Shareholders of their obligations hereunder and the consummation by the
Shareholders of the transactions contemplated hereby will not, violate or
conflict with or constitute a default under any agreement, instrument, contract
or other obligation or any order, arbitration award, judgment or decree to which
the Shareholders are a party or by which the Shareholders are bound, or any
statute, rule or regulation to which the Shareholders or any of the
Shareholders' property is subject.
3 A-85
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ARTICLE IV
TERMINATION
4.1 Automatic Termination. This Shareholder's Agreement shall
automatically terminate and be of no further force or effect if the Agreement is
terminated in accordance with the terms thereof, except as to any breach
occurring prior to the date of such termination.
ARTICLE V
MISCELLANEOUS
5.1 Expenses. Each party hereto shall pay its own costs and expenses in
connection with this Shareholder's Agreement and the transactions covered and
contemplated hereby.
5.2 Notices, Etc. All communications required or permitted to be given
hereunder shall be in writing and shall be deemed to have been duly given to the
appropriate parties if delivered in person, or if sent by Federal Express,
overnight delivery United States mail, or other overnight delivery service, or
sent by facsimile transmission (with confirmation) addressed as follows:
(a) If to Eric D. Hovde:
1826 Jefferson Place, N.W.
Washington, D.C. 20036
Fax: (202) 775-8109
With a copy to:
Perry & Associates, D.C.
1826 Jefferson Place, N.W.
Washington, D.C. 20036
Attention: Richard J. Perry, Jr., Esq.
Fax: (202) 775-8109
(b) If to Financial Institutions Partners Ltd.:
1824 Jefferson Place, N.W.
Washington, D.C. 20036
Attention: Eric D. Hovde
Fax: (202) 775-8109
With a copy to:
Perry & Associates, D.C.
1826 Jefferson Place, N.W.
Washington, D.C. 20036
Attention: Richard J. Perry, Jr., Esq.
Fax: (202) 775-8109
4 A-86
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(c) If to VIBC, to:
VIB Corp
1498 Main Street
El Centro, California 92243
Attention: Mr. Dennis L. Kern, President and CEO
Fax: (760) 337-3229
With a copy to:
Horgan, Rosen, Beckham & Coren, L.L.P.
21700 Oxnard Street, Suite 1400
Woodland Hills, California 91365-4335
Attention: S. Alan Rosen, Esq.
Fax: (818) 340-6190
or such other address as any party may have furnished in writing to the other
parties.
5.3 Entire and Sole Agreement. The making, execution and delivery of
this Shareholder's Agreement by the parties hereto have not been induced by any
representations, statements, warranties or agreements other than those expressed
herein and in the Agreement. This Shareholder's Agreement embodies the entire
understanding of the parties, and there are no further or other agreements or
understandings, whether written or oral, in effect among the parties relating to
the subject matter hereof, unless expressly referred to by reference herein.
5.4 Successors and Assigns. Except as otherwise provided in this
Shareholder's Agreement, all covenants and agreements of the parties contained
in this Shareholder's Agreement shall be binding upon and inure to the benefit
of the respective successors and assigns of the parties hereto.
5.5 Governing Law. This Shareholder's Agreement shall construed and
enforced in accordance with and governed by the laws of the State of California.
5.6 Counterparts. This Shareholder's Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
5.7 Amendment, Supplement and Waiver. This Shareholder's Agreement may
be amended or supplemented, and compliance with the provisions hereof may be
waived only by an instrument in writing signed by the party against which
enforcement of such amendment, supplement or waiver of compliance is sought.
5.8 Headings. The headings in this Shareholder's Agreement are for
purposes of reference only and shall not limit or otherwise affect the meaning
hereof.
5.9 Specific Performance. It is recognized and agreed that monetary
damages will not compensate the parties hereto for nonperformance by any party.
Accordingly, each party agrees that his, her or its obligation shall be
enforceable by a court order requiring specific performance.
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5.10 Several Obligations. All duties and obligations of the Shareholders
shall be several and not joint.
IN WITNESS WHEREOF, the parties hereto have caused this Shareholder's
Agreement to be duly executed as of the date first above written.
VIB CORP
By: ____________________________
Dennis L. Kern
Title: President and Chief
Executive Officer
ERIC D. HOVDE FINANCIAL INSTITUTIONS PARTNERS LTD.
__________________________________ By: ______________________________
(Signature) ______________________________
Title:______________________________
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SCHEDULE I
ERIC D. HOVDE
CERTIFICATE NUMBER NUMBER OF SHARES REGISTERED OWNER(S)
- ------------------ ---------------- -------------------
NONE N/A N/A
DESCRIBE ANY LIENS:
- -------------------
N/A
FINANCIAL INSTITUTIONS PARTNERS, LTD.
CERTIFICATE NUMBER NUMBER OF SHARES REGISTERED OWNER(S)
- ------------------ ---------------- -------------------
362,431 FINANCIAL INSTITUTION
23,434 PARTNERS, LTD.
DESCRIBE ANY LIENS:
- -------------------
NONE
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APPENDIX B
TITLE 12 -- BANKS AND BANKING
CHAPTER V -- OFFICE OF THRIFT SUPERVISION, DEPARTMENT OF THE TREASURY
SUBCHAPTER A -- ORGANIZATION AND PROCEDURES
PART 552 -- INCORPORATION, ORGANIZATION, AND CONVERSION OF FEDERAL STOCK
ASSOCIATIONS
SECTION 552.14 - DISSENTER AND APPRAISAL RIGHTS.
(a) Right to demand payment of fair or appraised value. Except as
provided in paragraph (b) of this section, any stockholder of a Federal stock
association combining in accordance with Section 552.13 of this part shall have
the right to demand payment of the fair or appraised value of his stock:
Provided, That such stockholder has not voted in favor of the combination and
complies with the provisions of paragraph (c) of this section.
(b) Exceptions. No stockholder required to accept only qualified
consideration for his or her stock shall have the right under this section to
demand payment of the stock's fair or appraised value, if such stock was listed
on a national securities exchange or quoted on the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") on the date of the
meeting at which the combination was acted upon or stockholder action is not
required for a combination made pursuant to Section 552.13(h)(2) of this part.
"Qualified consideration" means cash, shares of stock of any association or
corporation which at the effective date of the combination will be listed on a
national securities exchange or quoted on NASDAQ, or any combination of such
shares of stock and cash.
(c) Procedure -- (1) Notice. Each constituent Federal stock association
shall notify all stockholders entitled to rights under this section, not less
than twenty days prior to the meeting at which the combination agreement is to
be submitted for stockholder approval, of the right to demand payment of
appraised value of shares, and shall include in such notice a copy of this
section. Such written notice shall be mailed to stockholders of record and may
be part of management's proxy solicitation for such meeting.
(2) Demand for appraisal and payment. Each stockholder electing to make
a demand under this section shall deliver to the Federal stock association,
before voting on the combination, a writing identifying himself or herself and
stating his or her intention thereby to demand appraisal of and payment for his
or her shares. Such demand must be in addition to and separate from any proxy or
vote against the combination by the stockholder.
(3) Notification of effective date and written offer. Within ten days
after the effective date of the combination, the resulting association shall:
(i) Give written notice by mail to stockholders of constituent Federal
stock associations who have complied with the provisions of paragraph (c)(2) of
this section and have not voted in favor of the combination, of the effective
date of the combination;
(ii) Make a written offer to each stockholder to pay for dissenting
shares at a specified price deemed by the resulting association to be the fair
value thereof; and
(iii) Inform them that, within sixty days of such date, the respective
requirements of paragraphs (c)(5) and (c)(6) of this section (set out in the
notice) must be satisfied.
The notice and offer shall be accompanied by a balance sheet and
statement of income of the association the shares of which the dissenting
stockholder holds, for a fiscal year ending not more than sixteen months before
the date of notice and offer, together with the latest available interim
financial statements.
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(4) Acceptance of offer. If within sixty days of the effective date of
the combination the fair value is agreed upon between the resulting association
and any stockholder who has complied with the provisions of paragraph (c)(2) of
this section, payment therefor shall be made within ninety days of the effective
date of the combination.
(5) Petition to be filed if offer not accepted. If within sixty days of
the effective date of the combination the resulting association and any
stockholder who has complied with the provisions of paragraph (c)(2) of this
section do not agree as to the fair value, then any such stockholder may file a
petition with the Office, with a copy by registered or certified mail to the
resulting association, demanding a determination of the fair market value of the
stock of all such stockholders. A stockholder entitled to file a petition under
this section who fails to file such petition within sixty days of the effective
date of the combination shall be deemed to have accepted the terms offered under
the combination.
(6) Stock certificates to be noted. Within sixty days of the effective
date of the combination, each stockholder demanding appraisal and payment under
this section shall submit to the transfer agent his certificates of stock for
notation thereon that an appraisal and payment have been demanded with respect
to such stock and that appraisal proceedings are pending. Any stockholder who
fails to submit his or her stock certificates for such notation shall no longer
be entitled to appraisal rights under this section and shall be deemed to have
accepted the terms offered under the combination.
(7) Withdrawal of demand. Notwithstanding the foregoing, at any time
within sixty days after the effective date of the combination, any stockholder
shall have the right to withdraw his or her demand for appraisal and to accept
the terms offered upon the combination.
(8) Valuation and payment. The Director shall, as he or she may elect,
either appoint one or more independent persons or direct appropriate staff of
the Office to appraise the shares to determine their fair market value, as of
the effective date of the combination, exclusive of any element of value arising
from the accomplishment or expectation of the combination. Appropriate staff of
the Office shall review and provide an opinion on appraisals prepared by
independent persons as to the suitability of the appraisal methodology and the
adequacy of the analysis and supportive data. The Director after consideration
of the appraisal report and the advice of the appropriate staff shall, if he or
she concurs in the valuation of the shares, direct payment by the resulting
association of the appraised fair market value of the shares, upon surrender of
the certificates representing such stock. Payment shall be made, together with
interest from the effective date of the combination, at a rate deemed equitable
by the Director.
(9) Costs and expenses. The costs and expenses of any proceeding under
this section may be apportioned and assessed by the Director as he or she may
deem equitable against all or some of the parties. In making this determination
the Director shall consider whether any party has acted arbitrarily,
vexatiously, or not in good faith in respect to the rights provided by this
section.
(10) Voting and distribution. Any stockholder who has demanded appraisal
rights as provided in paragraph (c)(2) of this section shall thereafter neither
be entitled to vote such stock for any purpose nor be entitled to the payment of
dividends or other distributions on the stock (except dividends or other
distribution payable to, or a vote to be taken by stockholders of record at a
date which is on or prior to, the effective date of the combination): Provided,
That if any stockholder becomes unentitled to appraisal and payment of appraised
value with respect to such stock and accepts or is deemed to have accepted the
terms offered upon the combination, such stockholder shall thereupon be entitled
to vote and receive the distributions described above.
(11) Status. Shares of the resulting association into which shares of
the stockholders demanding appraisal rights would have been converted or
exchanged, had they assented to the combination, shall have the status of
authorized and unissued shares of the resulting association.
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APPENDIX C
CALIFORNIA CORPORATIONS CODE
TITLE 1. CORPORATIONS
DIVISION 1. GENERAL CORPORATION LAW
CHAPTER 13. Dissenters' Rights
SECTION 1300. RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e)or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by the
Commissioner of Corporations under subdivision (o) of Section 25100 or (B)
listed on the list of OTC margin stocks issued by the Board of Governors of the
Federal Reserve System, and the notice of meeting of shareholders to act upon
the reorganization summarizes this section and Sections 1301, 1302, 1303 and
1304; provided, however, that this provision does not apply to any shares with
respect to which there exists any restriction on transfer imposed by the
corporation or by any law or regulation; and provided, further, that this
provision does not apply to any class of shares described in subparagraph (A) or
(B) if demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
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SECTION 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to
purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval, accompanied
by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of
the price determined by the corporation to represent the fair market value of
the dissenting shares, and a brief description of the procedure to be followed
if the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision (b)
of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
(b) Any shareholder who has a right to require the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand upon
the corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. AGREED PRICE--TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair
market value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
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SECTION 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SECTION 1305. APPRAISERS' REPORT--PAYMENT--COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be
rendered against the corporation for payment of an amount equal to the fair
market value of each dissenting share multiplied by the number of dissenting
shares which any dissenting shareholder who is a party, or who has intervened,
is entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SECTION 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
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SECTION 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SECTION 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their shares,
until the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
SECTION 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SECTION 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SECTION 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
SECTION 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter
to demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be
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paid in respect to them in the event of a reorganization or short-form merger is
entitled to payment in accordance with those terms and provisions or, if the
principal terms of the reorganization are approved pursuant to subdivision (b)
of Section 1202, is entitled to payment in accordance with the terms and
provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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APPENDIX D
September 9, 1998
Board of Directors
Bank of Stockdale
5151 Stockdale Hwy
Bakersfield, California 93309
Members of the Board:
Bank of Stockdale ("Stockdale") is preparing to enter into a Definitive
Agreement (the "Agreement") with VIB Corporation ("VIBC"), holding company for
Valley Independent Bank in the form attached hereto. Pursuant to the Agreement,
shareholders of Stockdale are to receive consideration, in the form of VIBC
stock, as outlined in the Agreement in exchange for a conversion of Stockdale
shares to VIBC shares. Stockdale has requested the opinion of Hovde Financial,
Inc. ("Hovde") as to the fairness to Stockdale's shareholders, from a financial
point of view, of the terms of the transaction.
Hovde specializes in providing investment banking and financial advisory
services to commercial banks and thrift institutions. Our principals are
experienced in the independent valuation of securities in connection with
negotiated underwritings, subscription and community offerings, private
placements, merger and acquisition transactions and recapitalizations. Pursuant
to an agreement dated March 31,1997, between Stockdale and Hovde, Hovde was
engaged to provide investment banking and financial advisory service to
Stockdale and to assist Stockdale in evaluating any definitive agreement and
rendering a fairness opinion for presentation to Stockdale's board of directors,
as well as an updated opinion for inclusion in various materials to be presented
to the shareholders of Stockdale.
As part of our engagement, Hovde reviewed and analyzed material bearing
upon the financial and operating conditions of both VIBC and Stockdale, and
material prepared in connection with the transaction, including: (i) the
Agreement; (ii) certain publicly available information concerning VIBC and
Stockdale; (iii) recent internal reports and financial projections for each of
the companies; (iv) the nature and terms of recent sales and merger transactions
involving banks and bank holding companies that we consider relevant; and (v)
financial and other confidential information provided to us by the management of
Stockdale.
Furthermore, Hovde conducted due diligence with respect to VIBC for the
purpose of reviewing the current condition and future prospects of VIBC. Hovde
has taken into account our assessment of general economic, market and financial
conditions, and our experience in other similar transactions, as well as our
overall knowledge of the banking industry and our general experience in
securities valuation.
In rendering this opinion, Hovde assumed, without independent
verification, the accuracy and completeness of the financial and other
information and representations contained in the material provided to Hovde by
Stockdale or VIBC and in the discussions with Stockdale's and VIBC's management.
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Hovde completed an analysis of the Transaction with respect to the deal
value, pricing characteristics, conversion ratio and shares issued, and the
impact of the Transaction on VIBC effective on the Closing Date based upon
VIBC's average closing price and conversion formulas presented in the Agreement.
Based upon the results of this analysis, Hovde concluded that the expected price
to book, price to tangible book, price to trailing 4-quarters earnings and
tangible book premium to core deposit multiples were consistent with the pricing
levels offered for comparable commercial banks located in California and in the
United States.
In addition to comparing the price to the California and Nationwide
comparables discussed above, Hovde also evaluated the transaction based upon:
(i) expected earnings benefits to be realized by VIBC following the merger; and
(ii) Stockdale's earnings estimates for 1998, 1999 and beyond and their impact
on VIBC's earnings forecast. Based upon the results of its analysis, Hovde
concluded that the price to be paid by VIBC, to shareholders of Stockdale under
the terms outlined in the Agreement is fair, from a financial point of view.
HOVDE FINANCIAL, INC.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Bylaws provide that the Registrant shall, to the
maximum extent and in the manner permitted by the California Corporations Code
(the "Code"), indemnify each of its directors against expenses, judgments,
fines, settlements, and other amounts actually and reasonably incurred in
connection with any proceeding arising by reason of the fact that such person is
or was a director of the Registrant. Furthermore, pursuant to Registrant's
Articles of Incorporation and Bylaws, the Registrant has power, to the maximum
extent and in the manner permitted by the Code, to indemnify its employees,
officers and agents (other than directors) against expenses, judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding arising by reason of the fact that such person is or was an
employee, officer or agent of Registrant.
Under Section 317 of the Code, a corporation may indemnify a director,
officer, employee or agent of the corporation against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
In the case of an action brought by or in the right of a corporation, the
corporation may indemnify a director, officer, employee or agent of the
corporation against expenses (including attorneys' fees) actually and reasonably
incurred by him or her if he or she acted in good faith and in a manner he or
she acted in good faith and in a manner he or she reasonably believed to be in
the best interests of the corporation, except that no indemnification shall be
made: (1) in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless a court finds that, in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnify for such expenses as the court shall deem proper, (2) of
amounts paid in settling or otherwise disposing of a pending action without
court approval, and (3) of expenses incurred in defending a pending action which
is settled or otherwise disposed of without court approval.
The Registrant's Articles of Incorporation provides that to the fullest
extent permitted by the Code as the same exists or may hereafter be amended, a
director of the Registrant shall not be liable to the Registrant or its
shareholders for monetary damages for breach of fiduciary duty as a director.
The Code permits California corporations to include in their articles of
incorporation a provision eliminating or limiting director liability for
monetary damages arising from breaches of their fiduciary duty. The only
imitations imposed under the statute are that the provision may not eliminate or
limit a director's liability (i) for acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law, (ii) for acts or
omissions that a director believes to be contrary to the best interests of the
corporation or its shareholders or that involve the absence of good faith on the
part of the director, (iii) for any transaction from which a director derived an
improper personal benefit, (iv) for acts or omissions that show a reckless
disregard for the director's duty to the corporation or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of serious injury
to the corporation or its shareholders, (v) for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication of
the director's duty to the corporation or its shareholders, (vi) under a
contract or transaction between the corporation and a director or between the
corporation and any corporation in which one more of its directors has a
material financial interest, or (vii) for approving any of the following
corporate actions: (1) the making of any distribution to its shareholders that
would case the corporation to be unable to meet its liabilities, (2) the making
of any distribution to the corporation's shareholders or any shares of its stock
of any class or series that are junior to outstanding shares of any other class
or series with respect to distribution of assets on liquidation if, after giving
effect thereto, the excess of its assets (exclusive of goodwill, capitalized
research and development expenses and deferred charges) over its liabilities
(not including deferred taxes, deferred income and other deferred credits) would
be less than the liquidation preference of all shares having a preference on
liquidation over the class or series to which the distribution is made;
provided, however, that for the purpose of applying the aforementioned to a
distribution by a corporation of cash or property in payment by the corporation
in connection with the purchase of its shares, there shall be deducted from
liabilities all amounts that had been previously added thereto with respect to
obligations incurred in connection with the corporation's repurchase of its
shares and reflected on the corporation's balance sheets, but not in excess of
the principal of the obligations that will remain unpaid after the distribution;
provided, further, that no deduction from liabilities shall occur on account of
any obligation that is a distribution to the corporation's shareholders at the
time the obligation is incurred, (3) the distribution of assets to shareholders
after institution of dissolution proceeding of the corporation, without paying
or adequately providing for all known liabilities of the corporation, excluding
any claims not filed by creditors within the time limit set by the court in a
notice given to creditors under Chapters 18, 19 and 20, (4) the making of any
loan to or guarantee the obligation of any director or officer, unless the
transaction is approved by a majority of the shareholders to act thereon, or (5)
the making of any loan to or guarantee the obligation of, any person upon the
security of shares of the corporation or of its parent if the
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corporation's recourse in the event of default is limited to the security for
the loan or guaranty, unless the loan or guarantee is adequately secured without
considering these shares, or the loan or guaranty is approved by a majority of
the shareholders entitled to act thereon.
The Registrant is insured against liabilities which it may incur by
reason of its indemnification of officers and directors in accordance with its
Bylaws.
The foregoing summaries are necessarily subject to the complete text of
the statute, Articles of Incorporation, Bylaws and agreements referred to above
and are qualified in their entirety by reference thereto.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
<S> <C>
2.1 Agreement and Plan of Reorganization by and Between VIB Corp and Bank of
Stockdale, F.S.B. dated September 15, 1998 (incorporated by reference to
Appendix A to the Joint Proxy Statement included in this Registration
Statement on Form S-4)
4.1 Form of VIB Corp Common Stock Certificate (incorporated by reference to
Exhibit 3 to VIB Corp's Registration Statement on Form 8-A, dated March
19, 1998)
4.2 Form of VIB Corp Warrant Certificate (incorporated by reference to
Exhibit 4 to VIB Corp's Registration Statement on Form 8-A, dated March
19, 1998)
5.1 Opinion of Horgan, Rosen, Beckham & Coren, L.L.P. re Legality (and
consent)
8.1 Tax Opinion of Vavrinek, Trine, Day & Co., L.L.P. (and consent)
9.1 Form of Director's Agreement by and among VIB Corp and Bank of
Stockdale's directors (incorporated by reference to Exhibit "B-1" to
Appendix A to the Joint Proxy Statement included in this Registration
Statement on Form S-4)
9.2 Form of Director's Agreement by and among Bank of Stockdale and VIB
Corp's directors (incorporated by reference to Exhibit "B-2" to Appendix
A to the Joint Proxy Statement included in this Registration Statement
on Form S-4)
9.3 Form of Shareholder's Agreement by and among Eric D. Hovde, an
individual, Financial Institutions Partners, Ltd., a Nevada limited
liability company, and VIB Corp (incorporated by reference to Exhibit
"D" to Appendix A to the Joint Proxy Statement included in this
Registration Statement on Form S-4)
23.1 Consent of Vavrinek, Trine, Day & Co., L.L.P.
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Horgan, Rosen, Beckham & Coren, L.L.P. for Opinion (included
in Opinion filed as Exhibit 5.1)
23.4 Consent of Vavrinek, Trine, Day & Co., L.L.P. (included in Tax Opinion)
23.5 Consent of Hovde Financial
24.1 Power of Attorney (set forth on the signature page to the Registration
Statement on Form S-4)
99.1 Form of VIB Corp Proxy
99.2 Form of Bank of Stockdale Proxy
</TABLE>
II-2
<PAGE> 282
(b) Financial Statement Schedules
Not required.
(c) Fairness Opinion
Included as Appendix D to the Joint Proxy Statement included in this
Registration Statement on Form S-4.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Act of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that it is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) The undersigned Registrant hereby undertakes as follows: that prior
to any public offering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such offering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(c) The undersigned Registrant undertakes that every prospectus: (i)
that is filed pursuant to paragraph (b) immediately preceding; or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Securities Act of
1933 and is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the Registration Statement and
will not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item 20
above, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by its is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(e) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the Prospectus pursuant
to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved herein, that was not the subject of and included
in the Registration Statement when it became effective.
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<PAGE> 283
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement on Form S-4 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of El
Centro, State of California, on November 10, 1998.
VIB CORP
By: /s/ Dennis L. Kern
-------------------------------------
Dennis L. Kern
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dennis L. Kern and S. Alan Rosen, and each or any
one of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Charles Ellis Director November 10, 1998
- -----------------------------
Charles Ellis
/s/ R. Stephen Ellison Director November 10, 1998
- -----------------------------
R. Stephen Ellison
/s/ Richard D. Foss Chairman of the Board November 10, 1998
- ----------------------------- of Directors
Richard D. Foss
/s/ Harry G. Gooding, III Executive Vice President November 10, 1998
- ----------------------------- and Chief Financial Officer
Harry G. Gooding, III (and Principal Accounting Officer)
/s/ Dennis L. Kern Director, President and November 10, 1998
- ----------------------------- Chief Executive Officer
Dennis L. Kern
/s/ Edward McGrew Director November 10, 1998
- -----------------------------
Edward McGrew
/s/ Ronald A. Pedersen Vice Chairman of the November 10, 1998
- ----------------------------- Board of Directors
Ronald A. Pedersen
/s/ John L. Skinner Director November 10, 1998
- -----------------------------
John L. Skinner
/s/ Alice Helen Lowery Westerfield Vice Chairman of the November 10, 1998
- ----------------------------- Board of Directors
Alice Helen Lowery Westerfield
</TABLE>
II-4
<PAGE> 284
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT PAGE
- ----------- ---------------------- ----
<S> <C> <C>
2.1 Agreement and Plan of Reorganization by and Between VIB Corp and Bank of
Stockdale, F.S.B. dated September 15, 1998 (incorporated by reference to Appendix A to
the Joint Proxy Statement included in this Registration Statement on Form S-4)......................... N/A
4.1 Form of VIB Corp Common Stock Certificate (incorporated by reference to Exhibit 3 to
VIB Corp's Registration Statement on Form 8-A, dated March 19, 1998)................................... N/A
4.2 Form of VIB Corp Warrant Certificate (incorporated by reference to Exhibit 4
to VIB Corp's Registration Statement on Form 8-A, dated March 19, 1998)................................ N/A
5.1 Opinion of Horgan, Rosen, Beckham & Coren, L.L.P. re Legality (and consent)............................ II-6
8.1 Tax Opinion of Vavrinek, Trine, Day & Co., L.L.P. (and consent)........................................ *
9.1 Form of Director's Agreement by and among VIB Corp and Bank of Stockdale's directors
(incorporated by reference to Exhibit "B-1" to Appendix A to the Joint Proxy
Statement included in this Registration Statement on Form S-4)......................................... N/A
9.2 Form of Director's Agreement by and among Bank of Stockdale and VIB Corp's directors
(incorporated by reference to Exhibit "B-2" to Appendix A to the Joint Proxy
Statement included in this Registration Statement on Form S-4)......................................... N/A
9.3 Form of Shareholder's Agreement by and among Eric D. Hovde, an individual, Financial
Institutions Partners, Ltd., a Nevada limited liability company, and VIB Corp
(incorporated by reference to Exhibit "D" to Appendix A to the Joint Proxy Statement
included in this Registration Statement on Form S-4)................................................... N/A
23.1 Consent of Vavrinek, Trine, Day & Co., L.L.P........................................................... II-7
23.2 Consent of KPMG Peat Marwick LLP....................................................................... II-8
23.3 Consent of Horgan, Rosen, Beckham & Coren, L.L.P. for Opinion (included in Opinion
filed as Exhibit 5.1).................................................................................. N/A
23.4 Consent of Vavrinek, Trine, Day & Co., L.L.P. (included in Tax Opinion)................................ N/A
23.5 Consent of Hovde Financial............................................................................. II-9
24.1 Power of Attorney (set forth on the signature page to the Registration Statement on
Form S-4).............................................................................................. N/A
99.1 Form of VIB Corp Proxy................................................................................. II-10
99.2 Form of Bank of Stockdale Proxy........................................................................ II-12
</TABLE>
- ------------
* To be filed by amendment.
II-5
<PAGE> 1
EXHIBIT 5.1
[HORGAN, ROSEN, BECKHAM & COREN, L.L.P. LETTERHEAD]
November 11, 1998
Board of Directors
VIB Corp
1498 Main Street
El Centro, California 92243
Re: VIB Corp Acquisition of Bank of Stockdale, F.S.B.
Lady and Gentlemen:
We have acted as counsel to VIB Corp, a California corporation (the
"Company"), in connection with the preparation of the Registration Statement on
Form S-4 of the Company (the "Registration Statement") filed with the Securities
and Exchange Commission (the "Commission"), relating to the registration under
the Securities Act of 1933, as amended (the "Securities Act"), of shares of the
Company's no par value common stock (the "Shares)", issuable pursuant to the
Agreement and Plan of Reorganization dated September 15, 1998 (the "Agreement"),
by and between the Company and Bank of Stockdale, F.S.B. ("Stockdale") whereby
each share of Stockdale's common stock, $4.00 par value, will be exchanged for
shares of the Company's common stock and Stockdale will become the Company's
wholly-owned subsidiary.
In connection with this opinion, we have considered such questions of
law as we have deemed necessary as a basis for the opinions set forth below, and
we have examined and are familiar with originals or copies, certified or
otherwise identified to our satisfaction, of the following: (i) the Registration
Statement; (ii) the Articles of Incorporation and Bylaws of the Company, as
currently in effect; (iii) certain resolutions of the Board of Directors of the
Company relating to the issuance of the Shares and the other transactions
contemplated by the Registration Statement; (iv) the Agreement; and (v) such
other documents as we have deemed necessary or appropriate. In our examination,
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such copies. As to any facts material to this
opinion that we did not independently establish or verify, we have relied upon
statements and representations of officers and other representatives of the
Company and others.
Based upon the foregoing, we are of the opinion that if and when issued
in exchange for shares of Stockdale's common stock pursuant to the terms of the
Agreement and under the circumstances contemplated by the Registration
Statement, the Shares will be validly issued, fully paid and nonassessable.
The law covered by the opinion set forth above is limited to the laws of
the State of California and the federal law of the United States of America.
We hereby consent to the filing of this opinion with the Securities and
Commission as Exhibit 5.1 to the Registration Statement and to the reference to
our name under the caption "Validity of VIBC's Common Stock" in the Joint Proxy
Statement - Prospectus constituting a part of the Registration Statement. In
giving our consent, we do not admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act.
Very truly yours,
/s/ Horgan, Rosen, Beckham & Coren, L.L.P.
------------------------------------------
Horgan, Rosen, Beckham & Coren, L.L.P.
II-6
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion of our Independent Audit's Report dated
January 14, 1998, except for Note S which is dated January 22, 1998, regarding
the statements of financial 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, and the reference to our firm as "experts", in
the Form S-4 filed with the Securities and Exchange Commission.
VAVRINEK, TRINE, DAY & CO., LLP
November 11, 1998
Laguna Hills, California
II-7
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Stockholders and Board of Directors
Bank of Stockdale, FSB:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Sacramento, California
November 9, 1998
II-8
<PAGE> 1
EXHIBIT 23.5
October 28, 1998
Board of Directors
Bank of Stockdale, F.S.B.
5151 Stockdale Highway
Bakersfield, California 93309
Members of the Board:
We hereby consent to the use of our firm's name in the Proxy Statement/
Prospectus to be filed with the Securities and Exchange Commission (the
"Registration Statement") by VIB Corp ("VIB Corp") in connection with VIB Corp's
proposed acquisition of Bank of Stockdale, F.S.B. ("Stockdale").
We further consent to references to, and the inclusion of, our Fairness
Opinion of September 9, 1998 directed to the Board of Directors of Stockdale in
such Registration Statement.
Sincerely,
HOVDE FINANCIAL, INC.
<PAGE> 1
EXHIBIT 99.1
PROXY
VIB CORP
SPECIAL MEETING OF SHAREHOLDERS
JANUARY ___, 1999
The undersigned shareholder of VIB Corp (the "Company") hereby
nominates, constitutes and appoints R. Stephen Ellison, John L. Skinner and
Alice Helen Lowery Westerfield, and each of them, the attorney, agent, and proxy
of the undersigned, with full powers of substitution, to vote all stock of the
Company which the undersigned is entitled to vote at the Special Meeting of
Shareholders of the Company to be held at Valley Independent Bank's Main Office,
1448 Main Street, El Centro, California 92243, on ____________, January ___,
1999, at 6:00 p.m. and at any and all adjournments thereof, as fully and with
the same force and effect as the undersigned might or could do if personally
present there at, as follows:
1. MERGER OF BOS INTERIM BANK, F.S.B. WITH STOCKDALE. To consider
and vote on a proposal to approve the principal terms of the
Agreement and Plan of Reorganization dated September 15, 1998
(the "Merger Agreement"), by and between Bank of Stockdale,
F.S.B. ("Stockdale") and VIBC whereby Stockdale will become a
wholly-owned subsidiary of VIBC. Upon consummation of the
merger, each outstanding share of Stockdale's common stock will
be converted into the right to receive shares of Company's
common stock, as more particularly described in the Joint Proxy
Statement - Prospectus dated __________________, 1998 and in the
Merger Agreement attached as Appendix A thereto.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. OTHER BUSINESS. To transact such other business as may properly
come before the Special Meeting and any adjournment or
adjournments thereof.
PLEASE SIGN AND DATE THE OTHER SIDE
II-10
<PAGE> 2
PLEASE SIGN AND DATE BELOW
The Board of Directors recommends a vote of "FOR" on Proposal 1. The
proxy confers authority and shall be voted in accordance with the recommendation
of the Board of Directors, unless a contrary instruction is indicated, in which
case the proxy shall be voted in accordance with such instruction. In all other
matters, if any, presented at the Special Meeting, this proxy shall be voted in
accordance with the recommendations of the Company's Board of Directors.
____________________________ Dated:________________, 1998
(Number of Shares)
____________________________ ____________________________
(Please Print Your Name) (Signature of Shareholder)
____________________________ ____________________________
(Please Print Your Name) (Signature of Shareholder)
(Please date this proxy and sign your name as it appears on your stock
certificates. Executors, administrators, trustees, etc., should give their full
titles. All joint owners should sign.)
I do [ ] do not [ ] expect to attend the Special Meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE
REVOKED BY THE SHAREHOLDER DELIVERING IT PRIOR TO ITS EXERCISE BY FILING WITH
THE CORPORATE SECRETARY OF THE COMPANY AN INSTRUMENT REVOKING THIS PROXY OR A
DULY EXECUTED PROXY BEARING A LATER DATE OR BY APPEARING AND VOTING IN PERSON AT
THE SPECIAL MEETING.
II-11
<PAGE> 1
EXHIBIT 99.2
PROXY
BANK OF STOCKDALE, F.S.B.
SPECIAL MEETING OF SHAREHOLDERS
JANUARY ___, 1999
The undersigned shareholder of Bank of Stockdale, F.S.B. (the "Bank")
hereby nominates, constitutes and appoints __________________,
__________________ and _________________, and each of them, the attorney, agent,
and proxy of the undersigned, with full powers of substitution, to vote all
stock of the Bank which the undersigned is entitled to vote at the Special
Meeting of Shareholders of the Bank to be held at 5151 Stockdale Highway,
Bakersfield, California 93309, on ____________, January ___, 1999, at 5:30 p.m.
and at any and all adjournments thereof, as fully and with the same force and
effect as the undersigned might or could do if personally present there at, as
follows:
1. MERGER OF BOS INTERIM BANK, F.S.B. WITH STOCKDALE. To consider
and vote on a proposal to approve the principal terms of the
Agreement and Plan of Reorganization dated September 15, 1998
(the "Merger Agreement"), by and between Stockdale and VIB Corp
("VIBC") whereby Stockdale will become a wholly-owned subsidiary
of VIBC. Upon consummation of the merger, each outstanding share
of Stockdale's common stock will be converted into the right to
receive shares of VIBC's common stock, as more particularly
described in the Joint Proxy Statement - Prospectus dated
_____________, 1998, and in the Merger Agreement attached as
Appendix A thereto.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. OTHER BUSINESS. To transact such other business as may properly
come before the Special Meeting and any adjournment or
adjournments thereof.
PLEASE SIGN AND DATE THE OTHER SIDE
II-12
<PAGE> 2
PLEASE SIGN AND DATE BELOW
The Board of Directors recommends a vote of "FOR" on Proposal 1. The
proxy confers authority and shall be voted in accordance with the recommendation
of the Board of Directors, unless a contrary instruction is indicated, in which
case the proxy shall be voted in accordance with such instruction. In all other
matters, if any, presented at the Special Meeting, this proxy shall be voted in
accordance with the recommendations of the Bank's Board of Directors.
____________________________ Dated:________________, 1998
(Number of Shares)
____________________________ ____________________________
(Please Print Your Name) (Signature of Shareholder)
____________________________ ____________________________
(Please Print Your Name) (Signature of Shareholder)
(Please date this proxy and sign your name as it appears on your stock
certificates. Executors, administrators, trustees, etc., should give their full
titles. All joint owners should sign.)
I do [ ] do not [ ] expect to attend the Special Meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE
REVOKED BY THE SHAREHOLDER DELIVERING IT PRIOR TO ITS EXERCISE BY FILING WITH
THE CORPORATE SECRETARY OF THE BANK AN INSTRUMENT REVOKING THIS PROXY OR A DULY
EXECUTED PROXY BEARING A LATER DATE OR BY APPEARING AND VOTING IN PERSON AT THE
SPECIAL MEETING.
II-13
