<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1998
REGISTRATION NO. 333-67169
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
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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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. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
Common
Stock, no par value...... 2,785,000 shares $13.50 $16,365,577 $4,828
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</TABLE>
(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.
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<PAGE> 2
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(VIB CORP LOGO) (BANK OF STOCKDALE LOGO)
1498 Main Street 5151 Stockdale Highway
El Centro, CA 92243 Bakersfield, CA 93309
(760) 337-3200 (805) 833-9292
</TABLE>
December 11, 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:
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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 Bakersfield, California 93309
92243
</TABLE>
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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/s/ RICHARD D. FOSS /s/ THOMAS S. KELLY
----------------------------------------------------- -----------------------------------------------------
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.
/s/ DENNIS L. KERN /s/ ED L. HICKMAN
----------------------------------------------------- -----------------------------------------------------
Dennis L. Kern, Ed L. Hickman,
President and Chief Executive Officer, President and Chief Executive Officer,
VIB Corp Bank of Stockdale, F.S.B.
</TABLE>
<PAGE> 3
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 Tuesday, 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 27, 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.
/s/ Fred H. Carlisle, Jr.
---------------------------------------------
Fred H. Carlisle, Jr.,
Dated: December 11, 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 Tuesday, 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
27, 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
/s/ Charlotte Studer
---------------------------------------------
Charlotte Studer,
Dated: December 11, 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.
<PAGE> 5
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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
</TABLE>
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 12, 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 12,
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 15 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 December
11, 1998 and to Stockdale's shareholders on or about December 11, 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 DECEMBER 11, 1998.
<PAGE> 6
TABLE OF CONTENTS
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PAGE
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LIST OF APPENDICES............... ii
INCORPORATION OF CERTAIN
INFORMATION
BY REFERENCE................... ii
SUMMARY.......................... 1
Information About The
Companies................... 1
The Merger..................... 2
The VIBC Special Meeting....... 3
The Stockdale Special
Meeting..................... 3
Votes Required; Securities Held
By Insiders................. 3
Regulatory Approvals........... 4
Conditions to the Merger....... 4
Closing Of The Merger.......... 5
Termination.................... 5
Certain Federal Income Tax
Consequences................ 5
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........ 12
Proposed Branch Acquisition.... 13
Proposed Offering.............. 13
RISK FACTORS..................... 15
Risks Regarding the Merger..... 15
Risks Regarding VIBC's Common
Stock....................... 16
Risks Regarding the Businesses
of VIBC and Stockdale....... 16
THE MEETINGS..................... 20
General........................ 20
Stockdale's Special Meeting.... 20
VIBC's Special Meeting......... 21
THE MERGER....................... 24
History of the Merger.......... 24
Reasons for the Merger......... 25
Recommendations of the Boards
of Directors................ 27
Structure of the Merger........ 27
Calculation of the Exchange
Ratio....................... 27
Certain Federal Income Tax
Consequences................ 30
Regulatory Approvals........... 31
</TABLE>
<TABLE>
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Resale of VIBC's Common Stock.. 32
Certain Effects of the
Merger...................... 32
Interests of Certain Persons in
the Merger.................. 33
Dissenters' Rights............. 33
Opinion of Financial Advisor... 36
Relationship Between Hovde and
Stockdale................... 40
Accounting Treatment........... 41
The Merger Agreement........... 41
UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL DATA....... 50
The Merger..................... 50
INFORMATION REGARDING VIBC....... 60
Business of VIBC............... 60
Pending Branch Acquisition..... 60
Proposed Offering -- Trust
Preferred Securities........ 61
Certain Information Regarding
VIBC Management and
Principal Shareholders...... 61
Litigation..................... 66
Available Information.......... 66
Incorporation of Certain
Information by Reference.... 66
INFORMATION REGARDING
STOCKDALE...................... 68
Business of Stockdale.......... 68
Certain Information Regarding
Stockdale Management and
Principal Shareholders...... 68
Litigation..................... 76
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...... 77
DESCRIPTION OF STOCKDALE COMMON
STOCK.......................... 98
COMPARISON OF SHAREHOLDER
RIGHTS......................... 98
Comparison of Corporate
Structure................... 98
Voting Rights.................. 99
Dividends and Dividend
Policy...................... 99
</TABLE>
i
<PAGE> 7
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Number of Directors............ 100
Indemnification of Directors
and Officers................ 100
Fair Price Protection.......... 101
SUPERVISION AND REGULATION....... 101
Introduction................... 101
VIB Corp....................... 102
Stockdale and Valley
Independent Bank............ 104
</TABLE>
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Competition.................... 119
Impact of Monetary Policies.... 120
VALIDITY OF VIBC'S COMMON
STOCK.......................... 121
EXPERTS.......................... 121
SHAREHOLDER PROPOSALS TO BE
PRESENTED AT NEXT ANNUAL
MEETING........................ 121
INDEX TO FINANCIAL STATEMENTS.... 122
</TABLE>
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 JANUARY 8, 1998, TO ASSURE TIMELY RECEIPT BY
VIBC OR STOCKDALE, AS APPROPRIATE.
ii
<PAGE> 8
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, Rancho Mirage, 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.
1
<PAGE> 9
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 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:
- 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;
- Second, multiply the foregoing result by 2.83;
- Third, subtract from the foregoing result all of Stockdale's expenses
related to the Merger, including finders' fees; and
- 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
2
<PAGE> 10
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 Tuesday, January 12, 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 27, 1998 will be entitled to vote at VIBC's Special
Meeting. As of November 27, 1998, there were outstanding and entitled to vote
7,896,533 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 Tuesday, January 12, 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 27, 1998
will be entitled to vote at Stockdale's Special Meeting. On November 27, 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
3
<PAGE> 11
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.)
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 and to
the Office of Thrift Supervision on November 13, 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:
- 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;
- the performance by Stockdale in all material respects of all obligations
contained in the Merger Agreement required to be performed by Stockdale;
- 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
- 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:
- 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;
- the performance by VIBC in all material respects of all obligations
contained in the Merger Agreement required to be performed by VIBC;
- receipt by Stockdale of an opinion letter from the law firm of Horgan,
4
<PAGE> 12
Rosen, Beckham & Coren, L.L.P. with respect to certain matters concerning
VIBC; and
- 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 29,
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:
- 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;
- the Merger is not consummated by January 31, 1999;
- 30 days after the failure to obtain the approval of a governmental
authority required for consummation of the Merger;
- 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;
- if VIBC'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
VIBC's shareholders' perspective; or
- 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.)
5
<PAGE> 13
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> 14
<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
November............. $13.62 $11.04 96,548 $17.50 $13.00 1,497
</TABLE>
- -------------------------
(1) Does not include the 631,762 shares issued pursuant to Valley Independent
Bank's 1997 Unit Offering.
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 November 30, 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
November 30, 1998............. $13.38 $16.75 $24.06
</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.
7
<PAGE> 15
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.
VIB CORP
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest income................... $ 29,208 $ 23,465 $ 32,459 $ 24,261 $ 21,776 $ 18,545 $ 14,857
Interest expense.................. 9,014 7,643 10,421 7,128 5,973 4,299 3,545
-------- -------- -------- -------- -------- -------- --------
Net interest income........... 20,194 15,822 22,038 17,133 15,803 14,246 11,312
Provision for loan losses......... 1,665 1,070 1,850 635 1,008 1,210 968
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses... 18,529 14,752 20,188 16,498 14,795 13,036 10,344
Other operating income............ 4,053 3,585 5,751 3,075 2,519 2,494 2,540
Other operating expenses.......... 17,594 14,959 20,195 15,749 13,449 12,221 10,840
-------- -------- -------- -------- -------- -------- --------
Income before taxes........... 4,988 3,378 5,744 3,824 3,865 3,308 2,045
Income tax expense................ 1,748 1,089 1,943 1,249 1,440 1,028 488
-------- -------- -------- -------- -------- -------- --------
Net income.................... $ 3,240 $ 2,289 $ 3,801 $ 2,575 $ 2,425 $ 2,280 $ 1,557
======== ======== ======== ======== ======== ======== ========
ENDING BALANCE SHEET DATA:
Assets............................ $491,328 $409,853 $444,167 $333,565 $257,465 $226,031 $207,564
Securities........................ $ 82,784 $ 74,515 $ 69,287 $ 36,522 $ 39,393 $ 19,194 $ 27,301
Loans, net........................ $344,221 $280,477 $311,417 $242,787 $188,878 $166,475 $158,690
Allowance for loan losses......... $ 2,843 $ 2,832 $ 2,330 $ 2,634 $ 2,024 $ 2,494 $ 1,827
Deposits.......................... $441,793 $372,745 $399,212 $304,576 $230,533 $204,491 $175,999
Other liabilities................. $ 5,566 $ 2,786 $ 4,701 $ 1,949 $ 1,853 $ 1,687 $ 13,465
Total shareholders' equity........ $ 43,969 $ 29,991 $ 40,254 $ 27,040 $ 23,678 $ 19,853 $ 18,100
PER SHARE DATA(1) AND OTHER SELECTED
RATIOS:
Net income per common share:
Basic........................... $ 0.42 $ 0.33 $ 0.54 $ 0.38 $ 0.36 $ 0.35 $ 0.25
Diluted......................... $ 0.40 $ 0.31 $ 0.51 $ 0.36 $ 0.34 $ 0.34 $ 0.24
Dividends declared per share...... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Book value per share.............. $ 5.63 $ 4.22 $ 5.21 $ 3.88 $ 3.51 $ 3.02 $ 2.82
Shareholders' equity to assets at
period end...................... 8.95% 7.32% 9.06% 8.11% 9.20% 8.78% 8.72%
Tangible shareholders' equity to
assets at period end............ 8.10% 6.44% 8.32% 7.58% 9.20% 8.78% 8.72%
Return on average assets.......... 0.96%(2) 0.79%(2) 0.97% 0.95% 1.04% 1.09% 0.85%
Return on average equity.......... 10.75%(2) 10.77%(2) 12.83% 10.24% 11.13% 12.07% 9.45%
Average equity to average
assets.......................... 8.96% 7.40% 7.55% 9.27% 9.30% 9.11% 9.05%
Net interest margin............... 6.53% 6.24% 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.
(2) These ratios have been annualized.
8
<PAGE> 16
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, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Interest income................... $ 7,648 $ 7,288 $ 9,712 $ 9,685 $ 10,160 $ 9,377 $ 10,126
Interest expense.................. 3,907 4,040 5,390 5,630 6,169 4,937 5,111
-------- -------- -------- -------- -------- -------- --------
Net interest income......... 3,741 3,248 4,322 4,055 3,991 4,440 5,015
Provision for loan losses......... 306 354 415 854 475 2 93
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan
losses.................... 3,435 2,894 3,907 3,201 3,516 4,438 4,922
Other operating income............ 1,583 1,263 1,741 1,529 1,794 1,975 2,135
Other operating expense........... 4,117 4,071 5,390 6,428 6,300 6,572 6,251
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
taxes..................... 901 86 258 (1,698) (990) (159) 806
Income tax expense (benefit)...... 193 (15) (44) (729) (334) 18 251
Cumulative effect at January 1,
1993 of change in accounting for
income taxes.................... (146)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)........... $ 708 $ 101 $ 302 $ (969) $ (656) $ (177) $ 701
======== ======== ======== ======== ======== ======== ========
ENDING BALANCE SHEET DATA:
Assets............................ $138,096 $126,686 $130,573 $126,734 $126,980 $135,387 $125,738
Securities........................ $ 25,089 $ 18,563 $ 24,837 $ 22,286 $ 23,740 $ 31,383 $ 18,183
Loans, net........................ $ 98,995 $ 89,487 $ 90,297 $ 90,328 $ 92,720 $ 93,031 $ 90,057
Allowance for loan losses......... $ 1,009 $ 837 $ 815 $ 1,158 $ 1,182 $ 851 $ 1,318
Deposits.......................... $123,848 $119,235 $120,643 $115,662 $114,363 $110,867 $105,302
Other liabilities................. $ 4,428 $ 1,635 $ 905 $ 5,383 $ 5,872 $ 17,128 $ 12,986
Total shareholders' equity........ $ 9,820 $ 5,815 $ 9,025 $ 5,689 $ 6,745 $ 7,392 $ 7,450
PER SHARE DATA AND OTHER SELECTED
RATIOS:
Net income (loss) per common
share:
Basic........................... $ 0.58 $ 0.13 $ 0.39 $ (1.28) $ (0.87) $ (0.25) $ 1.02
Diluted......................... $ 0.58 $ 0.13 $ 0.39 $ (1.27) $ (0.86) $ (0.24) $ 1.01
Dividends declared per share...... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Book value per share.............. $ 8.10 $ 7.67 $ 7.44 $ 7.51 $ 8.90 $ 9.90 $ 11.78
Shareholders' equity to assets at
period end...................... 7.11% 4.59% 6.91% 4.49% 5.31% 5.46% 5.92%
Tangible shareholders' equity to
assets at period end............ 7.08% 4.65% 6.94% 4.54% 5.26% 5.36% 5.78%
Return on average assets.......... 0.72%(1) 0.11%(1) 0.24% -0.76% -0.50% -0.14% 0.55%
Return on average equity.......... 10.07%(1) 2.39%(1) 5.17% -14.79% -9.35% -2.39% 10.26%
Average equity to average
assets.......................... 7.10% 4.51% 4.65% 5.12% 5.40% 5.67% 5.41%
Net interest margin............... 3.99% 3.69% 3.66% 3.44% 3.33% 3.55% 4.45%
</TABLE>
- -------------------------
(1) These ratios have been annualized.
9
<PAGE> 17
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.
10
<PAGE> 18
VIB CORP PRO FORMA
<TABLE>
<CAPTION>
AT OR FOR THE NINE
MONTHS ENDED AT OR FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- ------------------------------
1998 1997 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
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%(1) 0.60%(1) 0.79% 0.40% 0.49%
Return on average equity..... 7.41%(1) 9.23%(1) 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>
- -------------------------
(1) These ratios have been annualized.
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<PAGE> 19
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.)
12
<PAGE> 20
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.)
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 issu-
13
<PAGE> 21
ance 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.)
14
<PAGE> 22
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
15
<PAGE> 23
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 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
16
<PAGE> 24
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 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
17
<PAGE> 25
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
18
<PAGE> 26
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 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.)
19
<PAGE> 27
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 12, 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 12, 1999, and at any postponement or adjournment thereof. This
Joint Proxy Statement-Prospectus and accompanying proxy are first being mailed
to Stockdale's and to VIBC's shareholders on or about December 11, 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
27, 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.
20
<PAGE> 28
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 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.)
21
<PAGE> 29
VIBC RECORD DATE
VIBC's Board of Directors has fixed the close of business on November 27,
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, 7,896,533 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.
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
- ---------------
(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.
22
<PAGE> 30
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).
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
23
<PAGE> 31
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.
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.
24
<PAGE> 32
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:
- broaden the combined entities' geographic bases;
- enhance VIBC's ability to expand across state lines, in particular
Arizona where VIB presently has a loan production office;
- create a larger consolidated financial services entity to better compete
with other larger financial institutions; and
- 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:
- data showing VIBC's and Stockdale's results of operations and financial
condition;
- 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;
25
<PAGE> 33
- 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;
- the consolidation of the financial services industry nationally and in
California;
- a review of potential benefits for shareholders of a larger organization
with greater resources and increased operating efficiencies;
- 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;
- a comparison of VIBC's offer with reported transactions, nationally and
in California, by financial institutions with similar characteristics;
- discussions with representatives of Hovde Financial regarding strategic
alternatives available to Stockdale; and
- 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:
- data showing Stockdale's results of operations and financial condition;
- 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;
- the potential to expand VIBC's geographic market in California;
- the attractiveness of Stockdale's charter for interstate expansion;
- the potential to further employ VIBC's enhanced data processing and
sophisticated computing systems; and
- 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.
26
<PAGE> 34
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.)
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:
- 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);
- second, subtract $180,000;
- third, multiply by 2.83;
- fourth, subtract all expenses related to the
Merger, including finders' fees; and
- 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>
- -------------------------
(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.
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
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<PAGE> 35
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.
<TABLE>
<S> <C>
------------------------------
Based upon the formula in the Merger Agreement, if VIBC'S COMMON
the closing occurred on October 7, 1998, the value of STOCK "AVERAGE"
VIB's common stock would have been calculated at AT SEPTEMBER 30, 1998(3)
$12.14. $12.14
------------------------------
</TABLE>
- -------------------------
(3) Assumes the closing was on October 7, 1998. The fifth business day prior
thereto was September 30, 1998.
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) 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.
<TABLE>
<CAPTION>
----------------------
EXCHANGE RATIO
CALCULATION
--------------
<S> <C>
$21.83
/ $12.14
----------------
1.798
- -----------------------------------------------------------------------------------
</TABLE>
- -------------------------
(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.
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.
28
<PAGE> 36
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.
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
29
<PAGE> 37
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
November 13, 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 November 13, 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
30
<PAGE> 38
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 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.
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<PAGE> 39
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:
- Hovde was paid a non-refundable retainer fee of $10,000;
- Hovde is entitled to receive a finder's fee of 2.5% of the value of the
Merger; and
- 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.
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<PAGE> 40
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:
- 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.
- 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 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
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<PAGE> 41
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:
- 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.
- 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:
- 5% or more of the outstanding shares of VIBC's common stock are voted
against the Merger; and
- 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 15, 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:
- a copy of Sections 1300, 1301, 1302, 1303 and 1304 of Chapter 13;
- 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
- 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
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<PAGE> 42
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.
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
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<PAGE> 43
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:
- 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;
- reviewed a draft of the Merger Agreement;
- reviewed certain publicly available information concerning the trading
of, and the trading market for shares of Stockdale's and VIBC's common
stock;
- 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;
- 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;
- reviewed and discussed with representatives of the management of
Stockdale certain information of a business and financial nature
regarding Stockdale furnished to Hovde by them, including financial
forecasts and related assumptions of Stockdale;
- discussed the Merger and the Merger Agreement and other matters related
thereto with Stockdale's legal counsel; and
- 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
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<PAGE> 44
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
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
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<PAGE> 45
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% 23.80(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
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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 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
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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 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.
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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:
- all conditions to the consummation of the Merger being satisfied or
waived;
- the receipt of all regulatory approvals; and
- 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 29, 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 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
41
<PAGE> 49
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:
- corporate organization and similar corporate matters;
- capital structure;
- authorization, execution, delivery, performance and enforceability of the
Merger Agreement and related matters;
- conflicts under charter documents, required consents or approvals, and
violations of any agreements or law;
- the accuracy of documents filed with the Securities and Exchange
Commission, the FRB and the OTS;
- absence of certain material adverse events, changes, effects or
undisclosed liabilities;
- retirement and other employee plans and matters relating to the Employee
Retirement Income Security Act of 1974, as amended;
- litigation;
- compliance with law, including environmental compliance;
- tax returns and audits;
- ownership of real property;
- absence of regulatory actions; and
- 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
42
<PAGE> 50
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:
- make, renew, or extend any loan if the aggregate indebtedness of the
borrower exceeds or will exceed $600,000;
- purchase any loan participation interest in excess of $200,000;
- declare or pay any cash, stock, or in-kind dividends upon its common
stock;
- amend its Charter or Bylaws;
- grant any salary increase or amend any compensation plan, except as
specifically required by the Merger Agreement;
- institute, settle or agree to settle any lawsuit with a claim in excess
of $25,000;
- 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
- 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:
- 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;
- 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;
- provide VIBC with an independent third party's profitability analysis of
Stockdale's mortgage department;
- increase loan loss reserves by $300,000 just prior to the closing;
- cause the termination of its 1985 and 1995 Stock Option Plans; and
- 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:
- 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;
43
<PAGE> 51
- make any capital expenditures in excess of $1,000,000, except for
ordinary and necessary repairs and replacements;
- 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;
- institute, settle or agree to settle any lawsuit with a claim in excess
of $500,000;
- 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
- conduct its business in any manner that would violate its Articles of
Incorporation or Bylaws.
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:
- provide Stockdale with financial information as reasonably necessary to
prepare regulatory applications;
- maintain its insurance coverage as presently in effect; and
- 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.
44
<PAGE> 52
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:
- the approval by Stockdale's and VIBC's shareholders of the principal
terms of the Merger;
- 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);
- the absence of any statute, rule, regulation, order, injunction or decree
being in effect and prohibiting the consummation of the Merger;
- 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;
- 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;
- 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
- 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.
45
<PAGE> 53
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:
- the representations and warranties of Stockdale being true and correct in
all material respects;
- 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;
- the absence of an event which has had or is likely to have a materially
adverse effect on Stockdale;
- compliance with the Shareholder's Agreement by Stockdale's principal
shareholder;
- receipt of an opinion of McCormick, Barstow, Sheppard ,Wayte & Carruth,
LLP, regarding certain legal matters; and
- 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:
- the representations and warranties of VIBC being true and correct in all
material respects;
- the performance by VIBC in all material respects of all obligations
contained in the Merger Agreement required to be performed before the
closing;
- the absence of an event which has had or is likely to have a material
adverse effect on VIBC;
- receipt of an opinion of Horgan, Rosen, Beckham & Coren, L.L.P.,
regarding certain legal matters; and
- 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:
- by the mutual agreement of VIBC and Stockdale;
- 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;
46
<PAGE> 54
- 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;
- by Stockdale if VIBC enters into a third-party transaction which has a
material adverse effect on VIBC; or
- 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.
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<PAGE> 55
The Director's Agreements bind the actions of the directors only in their
capacity as shareholders. The 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.
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<PAGE> 56
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 and 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.
49
<PAGE> 57
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
------------ ------------ ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
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 and
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>
50
<PAGE> 58
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
------------ ------------ ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
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>
51
<PAGE> 59
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
------------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
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>
52
<PAGE> 60
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
------------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
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>
53
<PAGE> 61
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
------------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
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>
54
<PAGE> 62
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
------------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
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>
55
<PAGE> 63
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.)
56
<PAGE> 64
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.
57
<PAGE> 65
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
------------ ------------ ----------- ------------ ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
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.
58
<PAGE> 66
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,
59
<PAGE> 67
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 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
27, 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
60
<PAGE> 68
of any arrangement which may, at a subsequent date, result in a change in
control of VIBC.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
SUBJECT TO VESTED
STOCK OPTIONS PERCENT
NUMBER OF SHARES AND OF CLASS
OF COMMON STOCK OUTSTANDING BENEFICIALLY
NAME AND TITLE BENEFICIALLY OWNED(2) 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
All Directors and Executive
Officers as a Group (12 in
number)......................... 1,372,254(5) 354,186 20.93%
</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.
61
<PAGE> 69
(3) Shares subject to options held by directors or executive officers that were
exercisable within 60 days after November 27, 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
62
<PAGE> 70
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.
The following table sets forth the names and certain information as of
November 27, 1998, concerning the directors of VIBC:
<TABLE>
<CAPTION>
YEAR FIRST YEAR FIRST
ELECTED OR ELECTED OR
APPOINTED CURRENT APPOINTED
BUSINESS EXPERIENCE DURING DIRECTOR TERM DIRECTOR
NAME AND TITLE AGE THE PAST 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 Accountancy 1997 1999 1980
Chairman of the Board Corporation, Certified Public
of Directors Accountants
Dennis L. Kern,............... 58 President and Chief Executive 1997 1999 1983
Director, President and Officer, Valley Independent
Chief Executive Officer(1) Bank
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 Co. 1997 1999 1983
Vice Chairman of the Board (cattle feed supplement
of Directors manufacturing)
John L. Skinner, ............. 68 Owner, T.C. Worthy Cash & 1997 2000 1990
Director Carry
Alice Helen Lowery 69 Retired; Regional Customer 1997 1999 1992
Westerfield,................ Relations Officer, Valley
Vice Chairman of the Board Independent Bank (1993 to
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.
63
<PAGE> 71
EXECUTIVE OFFICERS
The following table sets forth the names and certain information as of
November 27, 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.
<TABLE>
<CAPTION>
TERM OF
TITLE WITH TITLE WITH BUSINESS EXPERIENCE DURING OFFICE WITH
NAME VIBC VIB AGE THE PAST FIVE YEARS VIB
---- ---------- ---------- --- -------------------------- -----------
<S> <C> <C> <C> <C> <C>
Jack Brittain, Jr.... N/A Executive Vice 50 Chief Credit Officer, Since 1988
President and Chief Valley Independent Bank
Credit Officer
Harry G. Gooding, Executive Vice Executive Vice 51 Chief Financial Officer, Since 1991
III................ President and Chief President and Chief Valley Independent Bank
Financial Officer Financial Officer
Martin E. Plourd..... N/A Executive Vice 40 Branch Administrator, Since 1986
President and Branch Valley Independent Bank
Administrator
Thomas Topuzes....... N/A Executive Vice 51 Chief Administrative Since 1991
President and Chief Officer, Valley
Administrative Officer Independent Bank
</TABLE>
SIGNIFICANT EMPLOYEE
The following table sets forth the name and certain information as of
November 27, 1998, concerning the significant employee of VIB who is not deemed
an executive officer of VIB or VIBC.
<TABLE>
<CAPTION>
TERM OF
TITLE WITH TITLE WITH BUSINESS EXPERIENCE DURING OFFICE WITH
NAME VIBC VIB AGE THE PAST FIVE YEARS VIB
---- ---------- ---------- --- -------------------------- -----------
<S> <C> <C> <C> <C> <C>
Janice Stewart Grady... N/A Senior Vice 45 Human Resources Director, Since 1989
President and Human Valley Independent Bank
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
64
<PAGE> 72
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.
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
65
<PAGE> 73
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.
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.
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<PAGE> 74
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 27, 1998 (1,212,265 shares outstanding),
other than as set forth below:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS OF 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........................... 67,675(1) 5.48%(1)
5151 Stockdale Highway
Bakersfield, CA 93309
</TABLE>
- -------------------------
(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.
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 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 27, 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
67
<PAGE> 75
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
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 as a
Group......................................... 741,465 61.16%
(17 in number)
</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
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<PAGE> 76
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.
(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.
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 27, 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 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
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<PAGE> 77
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 1998 1999
Director President of Hovde 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; 1983 2000
Director Vice President, Gregory D.
Bynum & Associates;
formerly President, Malcolm
Brock Company
Dwight E. Byrum,........... 69 President, Bakersfield Pipe 1990 1999
Director & Supply
Fred H. Carlisle, Jr.,..... 62 Agricultural and Real 1983 2000
Director Estate Development;
Secretary, Treasurer, S.A.
Camp Companies
James F. Dandy,............ 64 Residential Construction; 1987 1998
Director Owner and President, J.L.
Dandy and Co.
Earle J. Gibbons,.......... 68 Real Estate and 1983 1998
Director Construction; Vice
President, Elmer F. Karpe,
Inc.
Ed L. Hickman,(1).......... 60 President, Chief Executive 1988 1999
Director, President and Officer, Bank of Stockdale
Chief Executive Officer
Thomas S. Kelly,........... 66 Real Estate Investment and 1983 2000
Chairman of the Board Management; Chief Executive
of Directors Officer, Thomas Kelly
Associates
Thomas J. Phillips,........ 72 Certified Public 1983 1999
Director Accountant; previously
Managing Partner with
Daniells, Phillips, Vaughan
& Bock
Ken Sorenson,.............. 60 Architect; President, KSA 1983 1998
Director Group Architects
Marvin E. Steinert,........ 76 Real Estate Development; 1995 1998
Director Owner, Steinert Investments
Jeffery W. Warlick,........ 49 Investment Banker to 1998 2000
Director financial institutions,
Financial Advisor
Richard P. Wilson,......... 60 President and Insurance 1995 1998
Director Agent, Wilson Schultz and
Paves Insurance Agency
</TABLE>
- -------------------------
(1) This person is an executive officer of Stockdale.
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<PAGE> 78
EXECUTIVE OFFICERS
The following tables sets forth the names and certain information as of
November 27, 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 47 Executive Vice President and 1984 to present
President and Chief Chief Financial Officer of
Financial Officer Bank of Stockdale
Rick L. Roper....... Executive Vice 45 Executive Vice Present and 1989 to present
President and Chief Chief Loan Officer of Bank of
Loan Officer Stockdale
Ronald L. Scheidt... Senior Vice President/ 59 Senior Vice President/ 1995 to present
Commercial Loan Commercial Loan Officer of
Officer Bank of Stockdale 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
AWARDS
ANNUAL COMPENSATION ------------
---------------------------------- 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>
- -------------------------
(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.
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<PAGE> 79
STOCK OPTIONS
Stockdale's 1985 Stock Option Plan, which has expired, had options for
33,000 shares outstanding on November 27, 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 27, 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:
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN
NUMBER OF OPTIONS AT DECEMBER 31, THE MONEY OPTIONS
SHARES 1997 AT DECEMBER 31, 1997
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,
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<PAGE> 80
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.
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
73
<PAGE> 81
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.
74
<PAGE> 82
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)
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>
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
75
<PAGE> 83
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:
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.
76
<PAGE> 84
<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.
77
<PAGE> 85
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 FOR THE YEAR ENDED
SEPTEMBER 30, 1998 COMPARED DECEMBER 31, 1997
TO THE NINE MONTHS ENDED COMPARED TO THE YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
--------------------------- ---------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: DUE TO CHANGE IN:
--------------------------- ---------------------------
VOLUME RATE NET CHANGE VOLUME RATE NET CHANGE
------ ----- ---------- ------ ----- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Cash in banks............ $ 38 $ (12) $ 26 $ 86 $(117) $ (31)
Investment securities.... 220 (66) 154 (43) 129 86
Loans, net............... 117 63 180 (56) 28 (28)
----- ----- ----- ----- ----- -----
Total
interest-earning
assets........ 376 (16) 360 (13) 40 27
INTEREST BEARING
LIABILITIES:
Deposits:
Money market and NOW.. 24 (24) 0 28 71 99
Time deposits......... (81) (24) (105) (133) (52) (185)
Other borrowings......... (25) (3) (28) (168) 14 (154)
----- ----- ----- ----- ----- -----
Total interest
bearing
liabilities... (82) (51) (133) (273) 33 (240)
----- ----- ----- ----- ----- -----
Net interest
income........ $ 458 $ 35 $ 493 $ 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.
78
<PAGE> 86
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.
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.
79
<PAGE> 87
The following table sets forth for the periods indicated the various
components of Stockdale's noninterest expense:
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEARS
SEPTEMBER 30, ENDED 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.
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<PAGE> 88
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:
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------- -----------------------------------------
1998 1997 1997 1996
------------------- ------------------- ------------------- -------------------
PERCENT PERCENT PERCENT PERCENT
AVERAGE OF TOTAL AVERAGE OF TOTAL AVERAGE OF TOTAL AVERAGE OF TOTAL
BALANCE ASSETS BALANCE ASSETS BALANCE ASSETS BALANCE ASSETS
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and due from banks............ $ 6,121 4.64% $ 4,739 3.78% $ 6,281 4.99% $ 4,757 3.77%
Investment securities.............. 25,141 19.05% 20,740 16.55% 21,069 16.75% 21,771 17.27%
Loans, net......................... 93,783 71.05% 92,018 73.43% 90,777 72.15% 91,415 72.52%
Premises and equipment............. 851 0.64% 827 0.66% 803 0.64% 938 0.74%
Other real estate owned............ 1,090 0.83% 1,957 1.56% 1,729 1.37% 1,356 1.08%
Accrued interest and other
assets........................... 5,011 3.80% 5,035 4.02% 5,150 4.09% 5,814 4.61%
-------- ------ -------- ------ -------- ------ -------- ------
Total assets................. $131,997 100.00% $125,316 100.00% $125,809 100.00% $126,051 100.00%
======== ====== ======== ====== ======== ====== ======== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits:
Noninterest-bearing demand......... $ 13,125 9.94% $ 9,451 7.54% $ 10,215 8.12% $ 6,459 5.12%
Money market and NOW............... 22,609 17.13% 21,354 17.04% 21,476 17.07% 20,124 15.96%
Time deposits...................... 83,867 63.54% 85,816 68.48% 85,759 68.17% 88,106 69.90%
-------- ------ -------- ------ -------- ------ -------- ------
Total deposits............... 119,601 90.61% 116,621 93.06% 117,450 93.36% 114,689 90.99%
Other borrowings................... 668 0.52% 1,150 0.92% 862 0.69% 3,842 3.05%
Accrued interest and other
liabilities...................... 2,353 1.77% 1,892 1.51% 1,649 1.31% 966 0.77%
-------- ------ -------- ------ -------- ------ -------- ------
Total liabilities............ 122,622 92.90% 119,663 95.49% 119,961 95.35% 119,497 94.80%
SHAREHOLDERS' EQUITY:
Common Stock....................... 10,658 8.07% 7,678 6.13% 7,751 6.16% 7,678 6.09%
Retained earnings.................. (1,204) -0.91% (1,922) -1.53% (1,861) -1.48% (1,080) -0.86%
Unrecognized gains (losses)........ (79) -0.06% (103) -0.08% (42) -0.03% (44) -0.03%
-------- ------ -------- ------ -------- ------ -------- ------
Total shareholders' equity... 9,375 7.10% 5,653 4.51% 5,848 4.65% 6,554 5.20%
-------- ------ -------- ------ -------- ------ -------- ------
Total liabilities and
shareholders' equity....... $131,997 100.00% $125,316 100.00% $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 held to maturity are
stated at cost, decreased by amortization of premium and increased
81
<PAGE> 89
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 AND 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 AND 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>
82
<PAGE> 90
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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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 OVER
YEAR OR LESS THAN 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.
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
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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.
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
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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.
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<PAGE> 94
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:
ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE YEAR
NINE MONTHS ENDED DECEMBER 31,
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>
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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.
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<PAGE> 96
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
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<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.
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<PAGE> 97
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.
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:
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.
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<PAGE> 98
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 1 risk-based capital ratio of at least 6%.
At September 30, 1998, Stockdale's capital exceeded all minimum regulatory
requirements and Stockdale was 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>
MINIMUM
STOCKDALE 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
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<PAGE> 99
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 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
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<PAGE> 100
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.
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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 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
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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.
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.
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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
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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.
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
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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.
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.
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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, 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,
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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;
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- 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 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.
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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.
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
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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
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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 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
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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
23c per $100 in insured deposits for 1993 from a base of 12c 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 23c 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 4c to 31c per $100 in
insured deposits that became effective June 1, 1995. On November 14, 1995, the
FDIC further reduced the BIF assessment rates by 4c so that effective January 1,
1996, the BIF premiums ranged from zero to 27c 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 23c to 31c per $100 in insured deposits,
depending upon the institution's risk classification. Pursuant to the Economic
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
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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
<TABLE>
<CAPTION>
SUPERVISORY GROUP
-----------------------------
GROUP A GROUP B GROUP C
------- ------- -------
<S> <C> <C> <C>
CAPITAL GROUP:
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
6.4c 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.......................... 6.48c 1.296c
Second Quarter, 1997......................... 6.50c 1.300c
Third Quarter, 1997.......................... 6.30c 1.260c
Fourth Quarter, 1997......................... 6.32c 1.264c
First Quarter, 1998.......................... 6.28c 1.256c
Second Quarter, 1998......................... 6.22c 1.244c
Third Quarter, 1998.......................... 6.10c 1.220c
Fourth Quarter, 1998......................... 5.82c 1.164c
</TABLE>
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.
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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);
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- 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 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
- ---------------
(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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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.
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
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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.)
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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 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
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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 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,
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- 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
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<PAGE> 122
$1,000,000 or more; for all nonresidential transactions valued at $250,000 or
more; and for "complex" 1-4 family residential properties of $250,000 or more. A
state licensed appraiser is required for all other appraisals. However,
appraisals performed in connection with "federally related transactions" must
now comply with the agencies' appraisal standards. Federally related
transactions include the sale, lease, purchase, investment in, or exchange of,
real property or interests in real property, the financing or refinancing of
real property, and the use of real property or interests in real property as
security for a loan or investment, including mortgage-backed securities.
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
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<PAGE> 123
lending practices have been found to be, or may be considered, illegal under the
FH Act, including some that are not specifically mentioned in the FH Act itself.
Among those practices that have been found to be, or may be considered, illegal
under the FH Act are: declining a loan for the purposes of racial
discrimination; making excessively low appraisals of property based on racial
considerations; pressuring, discouraging, or denying applications for credit on
a prohibited basis; using excessively burdensome qualifications standards for
the purpose or with the effect of denying housing to minority applicants;
imposing on minority loan applicants more onerous interest rates or other terms,
conditions or requirements; and racial steering, or deliberately guiding
potential purchasers to or away from certain areas because of race.
The TILA, enacted into law in 1968, is designed to ensure that credit terms
are disclosed in a meaningful way so that consumers may compare credit terms
more readily and knowledgeably. As a result of the TILA, all creditors must use
the same credit terminology and expressions of rates, the annual percentage
rate, the finance charge, the amount financed, the total payments and the
payment schedule.
HMDA, enacted into law in 1975, grew out of public concern over credit
shortages in certain urban neighborhoods. One purpose of HMDA is to provide
public information that will help show whether financial institutions are
serving the housing credit needs of the neighborhoods and communities in which
they are located. HMDA also includes a "fair lending" aspect that requires the
collection and disclosure of data about applicant and borrower characteristics
as a way of identifying possible discriminatory lending patterns and enforcing
anti-discrimination statutes. HMDA requires institutions to report data
regarding applications for one-to-four family loans, home improvement loans, and
multifamily loans, as well as information concerning originations and purchases
of such types of loans. Federal bank regulators rely, in part, upon data
provided under HMDA to determine whether depository institutions engage in
discriminatory lending practices.
RESPA, enacted into law in 1974, requires lenders to provide borrowers with
disclosures regarding the nature and costs of real estate settlements. Also,
RESPA prohibits certain abusive practices, such as kickbacks, and places
limitations on the amount of escrow accounts.
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
116
<PAGE> 124
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 addition, other entities (both public and
private) seeking to raise capital through the
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<PAGE> 125
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
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<PAGE> 126
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 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.
119
<PAGE> 127
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>
120
<PAGE> 128
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 April 21, 1998.
Laguna Hills, California
F-1
<PAGE> 129
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> 130
<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: 7,734,248 in 1997 and
6,823,616 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> 131
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 $ 0.54 $ 0.38 $ 0.36
Net Income - Diluted $ 0.51 $ 0.36 $ 0.34
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 132
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 5,723,038 $ 16,418,733 $ 3,836,526 $(402,679) $19,852,580
Stock Dividends 229,445 1,580,613 (1,580,613)
Cash Dividends (11,051) (11,051)
Exercise of Stock Options,
Including the Realization of
Tax Benefits of $166,000 155,690 652,886 652,886
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 6,108,173 18,652,232 4,669,962 356,222 23,678,416
Stock Dividends 508,173 4,755,505 (4,755,505)
Cash Dividends (15,701) (15,701)
Exercise of Stock Options,
Including the Realization of
Tax Benefits of $195,000 207,270 878,956 878,956
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 6,823,616 24,286,693 2,473,963 278,877 27,039,533
Stock Dividends 150,638 2,199,307 (2,199,307) --
Cash Dividends (21,724) (21,724)
Exercise of Stock Options,
Including the Realization of
Tax Benefits of $96,000 121,669 637,470 637,470
Issuance of Common shares,
net of expenses of $123,425 638,325 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 7,734,248 $ 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> 133
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> 134
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> 135
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> 136
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> 137
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> 138
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> 139
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> 140
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> 141
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> 142
VALLEY INDEPENDENT BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE E - DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
1998 $128,092,201
1999 6,766,312
2000 2,532,674
2001 616,341
------------
$138,007,528
============
</TABLE>
NOTE F - OTHER EXPENSES
Other expenses, as of December 31, consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Data Processing $1,030,446 $ 698,406 $ 592,745
Advertising 244,385 354,356 257,647
Legal and Professional 1,402,605 874,335 924,269
Regulatory Assessments 134,920 31,668 220,588
Insurance 124,350 112,076 77,511
Office Expenses 1,332,159 869,292 641,573
Promotion 1,169,562 908,185 688,850
Other Real Estate Owned 23,031 156,895 --
Other 1,455,223 824,186 658,238
---------- ---------- ----------
$6,916,681 $4,829,399 $4,061,421
========== ========== ==========
</TABLE>
F-15
<PAGE> 143
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> 144
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 -- 7,074,698 -- 6,827,596 -- 6,645,737
---------- --------- ---------- --------- ---------- ---------
USED IN BASIC EPS 3,800,989 7,074,698 2,575,207 6,827,596 2,425,100 6,645,737
Dilutive Effect of Outstanding
Stock Options -- 444,049 -- 411,218 -- 516,443
---------- --------- ---------- --------- ---------- ---------
USED IN DILUTIVE EPS $3,800,989 7,518,747 $2,575,207 7,238,814 $2,425,100 7,162,180
========== ========= ========== ========= ========== =========
</TABLE>
Warrants to purchase 128,943 shares of common stock at $15.30 per share were
outstanding during 1997 but were not included in the computation of diluted EPS
because the exercise price was greater than the average market price and
considered anitdilutive.
F-17
<PAGE> 145
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> 146
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 2,017,004 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> 147
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 715,168 $ 5 896,009 $4 902,220 $3
Granted 188,940 10 60,519 8 195,609 6
Exercised (123,818) 5 (230,708) 3 (177,816) 2
Forfeited (17,116) 6 (10,652) 5 (24,004) 5
-------- -------- --------
Outstanding at End
of year 763,174 6 715,168 5 896,009 4
======== ======== ========
Options Exercisable
at Year-End 362,629 4 362,563 4 414,478 4
Weighted-Average Fair
Value of Options
Granted During
the Year $2.21 $ 1.95 $1.44
</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>
$ 2 to $ 3 222,148 1.1 Years $ 2 167,320 $ 2
$ 4 to $ 6 214,690 1.9 Years 5 163,220 5
$ 7 to $ 8 126,738 3.1 Years 7 29,499 7
$ 9 to $10 178,243 4.1 Years 10 2,590 10
$13 to $14 21,355 4.6 Years 14 -- --
----------- -------
763,174 2.5 Years 6 362,629
=========== =======
</TABLE>
F-20
<PAGE> 148
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 .54 .38 .36
Pro Forma .51 .37 .36
Net Income - Diluted
As Reported .51 .36 .34
Pro Forma .48 .34 .33
</TABLE>
NOTE K - STOCK OFFERING AND WARRANTS
In 1997, the Bank completed a supplemental stock offering of 638,325 shares of
common stock at $14 per share. In connection with the offering, the Bank also
issued 128,943 warrants. Each warrant is exercisable for one share of common
stock at an exercise price of $15.30 per share through October 31, 1998 and
$17.65 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> 149
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> 150
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> 151
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> 152
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 $ .28 $ .30
Net Income - Diluted $ .26 $ .28
</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> 153
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.
On March 12, 1998, VIB Corp acquired Valley Independent Bank (VIB) and VIB's
shareholders became shareholders of VIB Corp.
On April 21, 1998, the Company declared a five-for-four stock split. The per
share data in the financial statements and footnotes have been adjusted to give
retroactive effect to this split.
F-26
<PAGE> 154
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> 155
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 OF 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> 156
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> 157
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 $24,286,694 $ 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 $123,425 501,660 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> 158
VIB CORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(in Thousands)
<TABLE>
<CAPTION> For The Nine Month
Period 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> 159
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 19997 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> 160
<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> 161
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
(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> 162
[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
Sacramento, California
F-35
<PAGE> 163
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
II-1
<PAGE> 164
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>
- ------------
* Previously filed.
II-2
<PAGE> 165
(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.
II-3
<PAGE> 166
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Pre-Effective Amendment No. 1 to 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
December 2, 1998.
VIB CORP
By: /s/ Dennis L. Kern
-------------------------------------
Dennis L. Kern
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 1 to 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 December 2, 1998
- -----------------------------
Charles Ellis
/s/ R. Stephen Ellison Director December 2, 1998
- -----------------------------
R. Stephen Ellison
/s/ Richard D. Foss Chairman of the Board December 2, 1998
- ----------------------------- of Directors
Richard D. Foss
/s/ Harry G. Gooding, III Executive Vice President December 2, 1998
- ----------------------------- and Chief Financial Officer
Harry G. Gooding, III (and Principal Accounting Officer)
/s/ Dennis L. Kern Director, President and December 2, 1998
- ----------------------------- Chief Executive Officer
Dennis L. Kern
/s/ Edward McGrew Director December 2, 1998
- -----------------------------
Edward McGrew
/s/ Ronald A. Pedersen Vice Chairman of the December 2, 1998
- ----------------------------- Board of Directors
Ronald A. Pedersen
/s/ John L. Skinner Director December 2, 1998
- -----------------------------
John L. Skinner
/s/ Alice Helen Lowery Westerfield Vice Chairman of the December 2, 1998
- ----------------------------- Board of Directors
Alice Helen Lowery Westerfield
</TABLE>
II-4
<PAGE> 167
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)............................ *
8.1 Tax Opinion of Vavrinek, Trine, Day & Co., L.L.P. (and consent)........................................ II-6
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........................................................... *
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).................................................................................. 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............................................................................. *
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................................................................................. *
99.2 Form of Bank of Stockdale Proxy........................................................................ *
</TABLE>
- ------------
* Previously filed.
II-5
<PAGE> 1
EXHIBIT 8.1
[VAVRINEK, TRINE, DAY & CO., LLP LETTERHEAD]
November 16, 1998
VIB Corp
1498 Main Street
El Centro, CA 92243
Dear Sirs and Mesdames:
You have requested our opinion regarding certain federal income tax consequences
of the proposed acquisition of Bank of Stockdale, F.S.B. ("BOS) by VIB Corp
("VIBC"), pursuant to which BOS will become a separate, wholly-owned subsidiary
of VIBC.
FACTS
VIBC, a corporation organized in California, is a bank holding company and is
the Parent Corporation of BOS Interim Bank, an interim federal stock savings
bank and Valley Independent Bank, a California state-chartered bank. VIBC is
engaged in the business of a bank holding company and Valley Independent Bank
engages in the business of general commercial banking. BOS Interim Bank is a
transitory federal stock savings bank that engages in no substantial business
activities other than to effect this merger. Neither VIBC nor any person related
to VIBC owns, or immediately prior to the merger will own, any stock of BOS.
BOS is a federal stock savings bank. BOS engages in the savings bank business.
The terms of the proposed merger (the "Merger") are contained in (i) the
Agreement and Plan of Reorganization dated as of September 15, 1998, between
VIBC and BOS (the "Plan of Reorganization"), and (ii) the Merger Agreement of
BOS Interim Bank with and into BOS to be dated at a later date, between BOS and
BOS Interim Bank (the "Merger Agreement").
The Plan of Reorganization and the Merger Agreement are collectively referred to
as the "Agreements." Terms not otherwise defined in this letter shall have the
meanings assigned to them in the Plan of Reorganization.
You have directed us to assume in preparing this opinion that (1) the Merger
will be consummated in accordance with the terms, conditions and other
provisions of the Agreements, and (2) all of the factual information,
descriptions, representations and assumptions set forth in this letter, in the
Agreements, in the letters to us from VIBC dated November 16, 1998, and from BOS
dated November 16, 1998 (the "Letters"), and in the Proxy Statement/Prospectus
anticipated to be dated November 30, 1998, and mailed to VIBC and BOS
shareholders in connection with the special meeting of shareholders to approve
the Merger, are accurate and complete and will be accurate and complete at the
time the Merger becomes effective (the "Effective Date"). We have not
independently verified any factual matters relating to the Merger with or apart
from our preparation of this opinion and, accordingly, our opinion does not take
into account any matters not set forth herein which might have been disclosed by
independent verification.
II-6
<PAGE> 2
VIB Corp
November 16, 1998
Page 2
The Agreements provide that BOS Interim Bank will be merged with and into BOS in
accordance with the applicable provisions of federal law. The Merger must be
approved as required by law by the BOS and VIBC shareholders at a special
meeting scheduled to be held on January 12, 1999.
On the Effective Date, all assets and liabilities of BOS Interim Bank will be
transferred by operation of law to BOS; the separate corporate existence of BOS
Interim Bank will cease, and, each share of BOS Interim Bank Common Stock then
outstanding will be converted into one share of common stock of BOS. Each share
of BOS Common Stock then outstanding will be converted into VIBC Common Stock
according to the exchange ratio as defined in section 1.2 (c) of the Plan of
Reorganization.
No fractional shares of VIBC Common Stock will be issued in the Merger. Each
holder of BOS Common Stock, who otherwise would be entitled to receive a
fraction of a share of VIBC Common Stock, will receive instead, cash equal to
such fraction multiplied by the VIBC's Fair Market Value Per Share. Except for
cash paid to dissenters and cash exchanged in lieu of issuing fractional shares
of VIBC Common Stock, no cash will be exchanged for shares of BOS Common Stock
or shares of VIBC Common Stock pursuant to the Merger.
On the Effective Date, 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. Each outstanding
option, shall become the right to receive, upon payment of the exercise price,
that number of shares of VIBC Common Stock equal to the product of the Exchange
Ratio and the number of shares of BOS Common Stock covered by the option.
Except for the options issued pursuant to above, no options to purchase BOS
Common Stock and no securities or other instruments convertible into BOS Common
Stock will be outstanding on the Effective Date.
OPINION
Assuming that the Merger is consummated in accordance with the terms and
conditions set forth in the Agreements and based on the facts set forth in the
Proxy Statement/Prospectus, the Letters, and this letter (including all
representations), it is our opinion that for federal income tax purposes:
1. The Merger will constitute a "reorganization" within the meaning of
section 368(a), VIBC, BOS Interim Bank and BOS will each be a party to
the reorganization within the meaning of Section 368 (b) of the Internal
Revenue Code of 1986, as amended (the "Code").
2. Neither VIBC nor BOS Interim Bank will recognize gain or loss as a
result of the Merger.
3. BOS will not recognize gain or loss as a result of the Merger.
4. To the extent BOS Common Stock is exchanged in the Merger for VIBC Common
Stock, no gain or loss will be recognized by the shareholders of BOS. The
exchange of VIBC or BOS Stock for
II-7
<PAGE> 3
VIB Corp
November 16, 1998
Page 3
cash pursuant to the exercise of dissenters' rights will be a taxable
transaction.
5. The tax basis of the assets in BOS after the Merger will be the same as
the tax basis of assets held by BOS and BOS Interim Bank immediately
before the Merger.
6. The holding period for the shares of VIBC Common Stock received by each
shareholder of BOS will include the holding period for the shares of BOS
Common of such shareholder exchanged in the Merger.
7. The tax basis of the shares of VIBC Common Stock received by each
shareholder of BOS will equal the tax basis of such shareholder's shares
of BOS Common Stock (reduced by any amount allocable to fractional share
interests for which cash is received) exchanged in the Merger.
8. The payment of cash to shareholders of BOS in lieu of fractional share
of interest of VIBC will be treated as if the fractional shares were
distributed as part of the exchange and then redeemed by VIBC. These
cash payments will be treated as having been received as a distribution
in redemption of that fractional share interest subject to the
conditions and limitations of Section 302 of the Code. If a fractional
share of VIBC would constitute a capital asset in the hands of a
redeeming shareholder, any resulting gain or loss will be characterized
as a capital gain or loss in accordance with the provisions and
limitations of Subchapter P of Chapter 1 of the Code.
Our opinion is limited to the foregoing federal income tax consequences of the
Merger, which are the only matters as to which you have requested our opinion,
and you must judge whether the matters addressed herein are sufficient for your
purposes. We do not address any other federal income tax consequences of the
Merger or other matters of federal law and have not considered matters
(including state or local tax consequences) arising under the laws of any
jurisdiction other than matters of federal law arising under the laws of the
United States.
Our opinion is based on the understanding that the relevant facts are, and will
be on the Effective Date, as set forth in this letter. If this understanding is
incorrect or incomplete in any respect, our opinion could be affected. Our
opinion is also based on the Code, Treasury Regulations, case law, and Internal
Revenue Service rulings as they now exist. These authorities are all subject to
change and such change may be made with retroactive effect. We can give no
assurance that after any such change, our opinion would not be different.
We undertake no responsibility to update or supplement our opinion. Only VIBC
and BOS may rely on this opinion, and only with respect to the proposed Merger
described herein.
/s/ VAVRINEK, TRINE, DAY & CO., LLP
- ----------------------------------------
Vavrinek, Trine, Day & Co., LLP
Laguna Hills, California
II-8
