<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] Quarterly report pursuant to under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from__________________to_____________________
Commission File Number: 333-43021
VIB CORP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0780371
- ------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1498 MAIN STREET, EL CENTRO, CALIFORNIA 92243
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(760) 337-3200
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
it changed since Last Report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 7,804,991 shares as of
September 30, 1998.
1
<PAGE> 2
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following Consolidated Balance Sheets, Consolidated Statements of
Income, Consolidated Statements of Cash Flows, and Consolidated Statement of
Stockholders' Equity for the period ended September 30, 1998 have been prepared
by VIB Corp (the "Company") without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and changes in
financial condition at or for the period ended September 30, 1998 have been
made. The results of operations for the period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the full year.
2
<PAGE> 3
Part 1. - Financial Information
Item 1. - Financial Statements
VIB CORP AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30,1998 and December 31,1997
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 31,363,471 $ 33,821,287
Federal funds sold 6,000,000 4,000,000
------------- -------------
Total cash and cash equivalents 37,363,471 37,821,287
Interest bearing deposits 664,181 586,000
Securities available for sale (note B) 82,783,786 69,287,466
Loans: (note C)
Commercial 57,969,551 46,049,768
Agricultural 27,316,221 49,128,668
Real estate-construction 41,420,257 35,926,148
Real estate-other 196,165,138 157,566,136
Consumer 27,440,594 26,741,763
------------- -------------
Total Loans 350,311,761 315,412,483
Net deferred loan fees (3,248,267) (1,665,059)
Allowance for credit losses (2,842,989) (2,330,000)
------------- -------------
Net Loans 344,220,505 311,417,424
Premises and equipment 11,394,691 11,452,257
Other real estate owned 148,236 1,171,027
Cash surrender life insurance 2,552,091 2,282,805
Deferred tax asset 1,518,098 1,650,000
Goodwill 4,536,904 3,607,404
Accrued interest and other assets 6,145,690 4,891,773
------------- -------------
TOTAL ASSETS $ 491,327,653 $ 444,167,443
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
VIB CORP AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30,1998 and December 31,1997
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $121,307,176 $126,660,748
Money Market and NOW 119,513,268 93,732,297
Savings 44,740,523 40,811,775
Time deposits under $100,000 75,527,982 67,110,498
Time deposits $100,000 and over 80,703,884 70,897,030
------------ ------------
Total Deposits 441,792,833 399,212,348
Fed funds purchased 0 0
Capital lease obligations 2,876,216 2,842,336
Accrued interest and other liabilities 2,689,446 1,858,749
------------ ------------
Total Liabilities 447,358,495 403,913,433
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
7,734,246 in 1997 36,230,101 35,932,844
Undivided Profits 7,281,309 4,053,921
Accumulated other comprehensive
income, net of tax of $318,096 in
1998 and $185,713 in 1997 457,748 267,245
------------ ------------
Total Stockholders' Equity 43,969,158 40,254,010
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $491,327,653 $444,167,443
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
VIB CORP AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Nine Month
Periods Ended Periods Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans 8,942,434 $ 6,894,466 $25,533,732 $19,786,133
Interest on Investment Securities-Taxable 830,940 988,603 2,549,507 2,518,004
Interest on Investment Securities-Nontaxable 320,123 266,097 831,463 807,280
Other Interest Income 214,695 107,740 293,025 353,352
----------- ----------- ----------- -----------
Total Interest Income 10,308,192 8,256,906 29,207,727 23,464,769
Interest Expense:
Interest on Money Market and NOW 848,514 589,536 2,198,745 1,553,811
Interest on Savings Deposits 232,653 211,392 664,394 590,603
Interest on Time Deposits 2,004,424 1,821,778 5,784,246 5,405,314
Interest on Other Borrowings 92,870 79,253 366,826 93,315
----------- ----------- ----------- -----------
Total Interest Expense 3,178,461 2,701,959 9,014,211 7,643,043
----------- ----------- ----------- -----------
Net Interest Income 7,129,731 5,554,947 20,193,516 15,821,726
Provision for Credit Losses 555,000 455,000 1,665,000 1,070,000
----------- ----------- ----------- -----------
Net Interest Income after Provision for Credit Losses 6,574,731 5,099,947 18,528,516 14,751,726
Non-interest Income:
Service Charges and Fees 895,441 943,543 2,858,240 2,483,407
Gain on Sale of Loans and Servicing Fees 195,239 444,107 484,962 565,233
Gain on Sale of Securities 284,939 192,049 284,939 192,049
Other Income 114,702 154,782 424,764 343,984
----------- ----------- ----------- -----------
Total Non-interest Income 1,490,321 1,734,481 4,052,905 3,584,673
Non-interest Expense:
Salaries and Employee Benefits 2,974,640 2,724,949 8,505,607 7,394,645
Occupancy Expenses 533,356 447,481 1,481,290 1,178,304
Furniture and Equipment 641,519 448,463 1,638,243 1,300,643
Other Expenses (note D) 2,091,996 1,530,737 5,968,749 5,084,930
----------- ----------- ----------- -----------
Total Non-interest Expense 6,241,511 5,151,630 17,593,889 14,958,522
----------- ----------- ----------- -----------
Income Before Income Taxes 1,823,541 1,682,798 4,987,532 3,377,877
Income Taxes 639,418 592,000 1,748,418 1,089,000
----------- ----------- ----------- -----------
Net Income $ 1,184,123 $ 1,090,798 $ 3,239,114 $ 2,288,877
Per Share Data: (note E)
Net Income - Basic $ 0.15 $ 0.16 $ 0.42 $ 0.33
Net Income - Diluted $ 0.15 $ 0.15 $ 0.40 $ 0.31
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
VIBCORP AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Shares Accumulated
------------------------- Other
Number of Undivided Comprehensive
Shares Amount Profits Income Total
--------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance January 1,1997 5,458,892 $24,286,693 $2,473,963 $278,877 $27,039,533
Comprehensive Income
Net income 3,800,989 3,800,989
Other comprehensive income
Unrealized gains on securities, net
of taxes of $218,000 313,472 313,472
Less reclassification adjustments for gains
included in net income,net of taxes of $226,000 (325,104) (325,104)
-----------
Total other comprehensive income (11,632)
-----------
Total Comprehensive income 3,789,357
Issuance of common shares
net of expense of $123,425 510,660 8,809,374 8,809,374
Cash dividends (21,724) (21,724)
Stock dividends 120,510 2,199,307 (2,199,307) 0
Exercise of stock options
Including the realization of
Tax benefits of $96,000 97,335 637,470 637,470
--------- ----------- ---------- -------- -----------
Balance January 1,1998 6,187,397 35,932,844 4,053,921 267,245 $40,254,010
Comprehensive Income
Net income 3,239,114 3,239,114
Other comprehensive income
Unrealized gains on securities, net
of taxes of $202,000 358,442 358,442
Less reclassification adjustments for gains
included in net income,net of taxes of $117,000 (167,939) (167,939)
-----------
Total other comprehensive income 190,503
-----------
Total Comprehensive income 3,429,617
Stock split 1,550,678
Cash dividends (11,726) (11,726)
Exercise of stock options 65,039 262,743 262,743
Exercise of stock warrants 1,877 34,515 34,515
--------- ----------- ---------- -------- -----------
Balance at September 30, 1998 7,804,991 $36,230,102 $7,281,309 $457,748 $43,969,159
========= =========== ========== ======== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 7
VIBCORP AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(in Thousands)
<TABLE>
<CAPTION>
For the Nine Month
Periods Ended
September 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 3,239 $ 2,289
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 227 484
Deferred income taxes 0 (289)
Provision for credit losses 1,665 1,070
Originations of loans held for sale (2,953) (13,378)
Proceeds from sale of loans 3,324 5,285
Net loss/(gain) on loan sales and securitization (273) (273)
Loss (Gain) on sale of other real estate owned (111) (38)
Net increase in cash surrender value of life insurance (269) (206)
Net realized gains in available for sale securities (285) (192)
Net amortization of premium/discount on available
for sale securities (15) 86
Net change in accrued interest, other assets,
and other liabilities (402) (3,311)
-------- --------
Net cash provided (used) by operating activities 4,147 (8,473)
Cash flow from investing activities:
Purchases of available for sale securities (59,478) (69,957)
Net cash received from purchase of branches 6,524 39,223
Proceeds from sales of other real estate owned 1,459 676
Proceeds from sales of available for sale securities 7,026 8,640
Proceeds from maturities of available for sale securities 39,578 22,958
Loans granted net of repayments (25,204) (31,068)
Premises and equipment expenditures (1,419) (5,787)
Net increase in interest bearing deposits (78) 293
-------- --------
Net cash provided (used) by investing activities (31,592) (35,022)
Cash flow from financing activities:
Net increase/(decrease) in demand deposits and savings 11,193 22,030
Net increase in time deposits 15,475 7,548
Net change in capitalized lease obligations 34 2,831
Payments for dividends (12) (8)
Net change in fed funds purchased 0 1,500
Proceeds from exercise of stock options and warrants 297 477
-------- --------
Net cash provided (used) by financing activities 26,987 34,378
Net change in cash and cash equivalents ($458) ($9,117)
======== ========
Cash and cash equivalents:
Beginning of period $ 37,821 $ 34,886
End of period $ 37,363 $ 25,769
Supplemental disclosure of cash flow information:
(in Thousands)
Cash paid for interest expense $ 8,733 $ 7,529
Cash paid (received) for income taxes $ 2,506 $ 302
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 8
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(A) General
See note A of Notes to Financial Statements incorporated by reference
in the Company's 1997 Annual Report on Form 10-K for a summary of significant
accounting policies.
The unaudited financial statements included herein were prepared from
the books of the Company in accordance with generally accepted accounting
principles and reflect all adjustments which are, in the opinion of management,
necessary to provide a fair statement of the results of operations and financial
position for the interim periods. Such financial statements generally conform to
the presentation reflected in the Company's 1997 Annual Report to Stockholders,
and reflect adjustments which are solely of a normal, recurring nature. The
current interim periods reported herein are included in the fiscal year subject
to independent audit at the end of the year. The unaudited financial statements
of VIB CORP include the accounts of the Company and its wholly-owned subsidiary,
Valley Independent Bank. All significant intercompany accounts and transactions
have been eliminated in the consolidated financial statements. Certain items
previously reported have been reclassified to conform with the current period's
classifications.
(B) Available-for-sale Securities
The Company's available-for-sale securities portfolio at September 30,
1998 had a net unrealized gain of approximately $776,000, as compared with a net
unrealized gain of approximately $453,000 at December 31, 1997, an improvement
during the nine months beginning January 1, 1998 of $323,000.
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>
December 31, 1997
------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 507 $ 37 $ 544
U.S. Government and
Agency Securities 39,125 99 $ 28 39,196
State and Political Subd. 18,567 335 18,902
Mortgage-Backed Securities 9,893 39 29 9,902
Other Equity 743 743
------- ------- ------- -------
$68,835 $ 510 $ 57 $69,287
</TABLE>
8
<PAGE> 9
Investment securities carried at approximately $50,455,000 and
$6,328,000, at September 30,1998 and December 31,1997, 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 December 31,1997 the Company was servicing approximately $65,850,000 and
$59,289,000, respectively, in loans previously sold.
A summary of the changes in the allowance for credit losses follows:
<TABLE>
<CAPTION>
September 30,1998 December 31,1997
----------------- ----------------
<S> <C> <C>
Balance at beginning of year $2,330,000 $2,634,000
Additions to the allowance charged to expense 1,665,000 1,850,000
Recoveries on loans charged off 152,000 259,000
Loans charged off 1,304,000 2,413,000
---------- ----------
Balance at end of period $2,843,000 $2,330,000
</TABLE>
A summary of nonperforming loans and assets follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31,1997
------------------ ----------------
<S> <C> <C>
Non-accrual loans $4,180,000 $4,317,000
Loans 90 days past due and still accruing 167,000 373,000
---------- ----------
Total nonperforming loans 4,347,000 4,690,000
Other Real Estate Owned 148,000 1,171,000
---------- ----------
Total nonperforming assets $4,495,000 $5,861,000
Nonperforming loans to total ending loans 1.24% 1.49%
Nonperforming assets to total loans and
Other Real Estate Owned 1.29% 1.85%
</TABLE>
(D) Other Expenses
Other expenses for the periods indicated are as follows:
9
<PAGE> 10
<TABLE>
<CAPTION>
September 30,1998 September 30,1997
----------------- -----------------
<S> <C> <C>
Data Processing $ 939,000 $ 772,000
Advertising 252,000 186,000
Legal and Professional 1,101,000 1,011,000
Regulatory Assessments 108,000 80,000
Insurance 104,000 93,000
Amortization of Intangibles 357,000 227,000
Office Expenses 1,136,000 978,000
Promotion 890,000 859,000
Other 1,082,000 879,000
---------- ----------
Total Other Expenses $5,969,000 $5,085,000
</TABLE>
(E) Earnings Per Share
Earnings per share are calculated based on the weighted average number
of common shares outstanding during each period as follows: 7,765,359 for the
nine months ended September 30, 1998 and 7,009,804 for the nine months ended
September 30, 1997, respectively; 7,801,745 for the three months ended September
30,1998 and 7,039,941 for the three months ended September 30,1997,
respectively.
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.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
This analysis is designed to provide a more complete understanding of the
material changes and trends related to the Company's financial condition,
results of operations, cash flow and capital resources. This discussion should
be read in conjunction with the attached Financial Statements included in Item
1, and the Company's Annual Report on Form 10-K.
GENERAL
VIB Corp's financial performance during the nine month's ended September 30,
1998 was highlighted with continued earnings growth, Valley Independent Bank's
acquisition of a branch location from Palm Desert National Bank in Palm Springs,
and the finalization of the bank holding company reorganization.
VIB Corp was incorporated on November 7, 1997 under the Laws of the State of
California at the direction of the Board of Directors of Valley Independent Bank
(the "Bank") for the purpose of becoming a bank holding company. The holding
company organization was consummated on March 12, 1998, pursuant to a Plan of
Reorganization and Merger Agreement dated November 18, 1997, and each
outstanding share of Valley Independent Bank's Common Stock was converted into
one share of the Company's Common Stock and all outstanding shares of Valley
Independent Bank's Common Stock were transferred to the Company in a transaction
accounted for as a pooling of interests. Further, each outstanding warrant to
purchase Valley Independent Bank's Common Stock, issued in connection with the
Bank's 1997 unit offering, was converted into a warrant to purchase the
Company's Common Stock.
Effective March 27, 1998 Valley Independent Bank, the sole wholly-owned
subsidiary bank of VIB Corp, acquired certain of the assets and certain of the
deposit liabilities of the Palm Springs, California branch office of Palm Desert
National Bank, a national banking association headquartered in Palm Desert,
California. As a result of the acquisition, the Bank assumed approximately
$16,122,000 in deposit liabilities, purchased $8,308,000 in loans outstanding,
purchased the fixed assets of the branch and assumed the lease for the branch
location. Valley Independent Bank paid a premium for the deposits assumed in the
amount of $1,225,000.
Valley Independent Bank also opened new loan production offices during the
second quarter in Carlsbad, San Diego County and Orange, Orange County,
California and Las Vegas, Nevada, relocated the Indio, California, Loan
Production Office to Rancho Mirage, Riverside County, California, and has plans
to open new loan production offices in Phoenix and Tucson, Arizona later in
1998.
11
<PAGE> 12
PENDING TRANSACTIONS
On September 15, 1998, VIB Corp and Bank of Stockdale, F.S.B., Bakersfield,
California entered into an Agreement and Plan of Reorganization pursuant to
which Bank of Stockdale will become a wholly-owned subsidiary of VIB Corp and
will continue to operate under its federal stock savings bank charter. Upon
consummation of the merger, each issued and outstanding share of Bank of
Stockdale stock will be converted into the right to receive that number of newly
issued shares of VIB Corp stock equal to the result from dividing the Bank of
Stockdale "Per Share Value" by the VIB Corp "Market Value Per Share", as both
terms are defined in the Agreement and Plan of Reorganization.
The completion of the merger is subject to receipt of regulatory approval
including approvals of the Office of Thrift Supervision and the Board of
Governors of the Federal Reserve System. The transaction must also be approved
by holders of at least two-thirds (2/3) of the issued and outstanding shares of
Bank of Stockdale stock and a majority of the issued and outstanding shares of
VIB Corp stock. The parties anticipate that the transaction will be completed
during the first quarter of 1999. As of September 30, the total assets of the
Bank of Stockdale were approximately $138,000,000.
On or about September 22, 1998 Valley Independent Bank entered into a branch
acquisition agreement with Fremont Investment & Loan, a California industrial
loan company ("Fremont") headquartered in Anaheim, California, to acquire
certain of the assets and to assume certain of the liabilities of Fremont's
branch office located at 2091 West Florida Avenue, Suite 100, Hemet, California
92545, including substantially all of the deposits of the branch. As of
September 30, 1998, the total deposits of the branch were approximately
$105,000,000. The Bank will pay an amount equal to one percent (1%) of the
branch deposits it assumes. The Bank will also assume the branch lease and will
acquire certain of the leasehold improvements and certain of the loans assigned
to the branch.
The branch purchase is subject to regulatory approval including the approval of
California Commissioner of Financial Institutions and the Board of Governors of
the Federal Reserve System. It is anticipated that the branch purchase will be
completed during the first quarter of 1999.
In connection with the branch purchase it is anticipated that the Bank will be
required to increase its capital by $8,500,000. Although final decisions have
not yet been made, VIB Corp is exploring the possibility of issuing up to
$20,000,000 in trust preferred securities to generate sufficient resources to
increase the Bank's capital and to provide for other corporate purposes.
12
<PAGE> 13
OVERVIEW OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net earnings for the nine months ending September 30, 1998 was $3.2 million or
$.40 per share fully diluted based upon average shares outstanding of 8,139,184.
This compared with net earnings of $2.3 million or $.31 per share fully diluted
based upon average shares outstanding of 7,411,700 for the same period in 1997.
Net earnings for the three months ending September 30, 1998 was $1.2 million or
$.15 per share fully diluted based upon average shares outstanding of 8,116,894.
This compared with net earnings of $1.1 million or $.15 per share fully diluted
based upon the average shares outstanding of 7,478,185 for the same period in
1997.
The Board of Directors approved stock splits in May 1997 and May 1998 as well as
a stock dividend in December 1997. All per share figures have been retroactively
adjusted for these and previous stock splits and dividends.
Loan growth was strong during the nine months ending September 30, 1998. This
growth was stimulated by the general economic soundness of the communities
serviced by Valley Independent Bank as well as the impact of the previously
discussed loan production office openings. Total gross loans at September 30,
1998 were $347.1 million which represented an increase of $33.3 million or 10.6%
from December 31, 1998. Since September 30, 1997, total gross loans have
increased $63.7 million or 22.5%. This increase since September 1997 also
includes $8.3 million in loans acquired in the Palm Springs branch office
acquisition which was consummated in March 1998.
Total deposits at September 30, 1998 increased $42.6 million or 10.7% from
year-end 1997 to $441.8 million. This increase includes the assumption of
deposits acquired from Palm Desert National Bank, discussed earlier, and the
normal seasonal deposit cycle experienced in the Imperial and Coachella Valleys
as it relates to the local agricultural business cycle. Total deposits, compared
to the September 30, 1997, increased $69.0 million or 18.5%.
The Bank's liquidity position, enhanced by the Palm Desert National Bank branch
acquisition, remained adequate to meet future contingencies. At September 30,
1998 the Bank had $6.0 million in federal funds sold outstanding. This compared
to $1.5 million in federal funds sold outstanding at September 30, 1997. Since
December 31, 1997, Federal Funds sold have increased $2.0 million. The Bank's
liquidity ratio at September 30, 1998 was 23.5%. This ratio represented an
increase from 22.9% at September 30, 1997 and an increase from 21.2% at December
31, 1997. During the same periods, the Bank's investment portfolio increased
from $75.1 million at September 30, 1997 and $69.3 million at December 31, 1997
to $82.8 million at September 30, 1998.
13
<PAGE> 14
The Company's separate (stand-alone) liquidity is based upon its separate liquid
resources and the ability of the Bank to pay it cash dividends. At September 30,
1998 the Company had adequate liquidity to meet its anticipated funding needs.
NET INTEREST INCOME
Average interest earning assets totaled $438.1 million during the nine months
ending September 30, 1998, an increase of $99.5 million or 29.4% compared to the
same period last year. All comparative areas of earning assets grew
significantly with the exception of average federal funds sold. This growth was
highlighted by an increase in average total loans of $81.3 million or 31.0% to
$343.2 million. Average interest bearing liabilities in the nine months ended
September 30, 1998 increased $62.0 million or 24.0% to average $319.9 million as
compared to the same period last year. During this comparative period average
interest bearing deposit categories increased $60.2 million or 23.5% to $316.7
million. Average borrowed funds increased $1.8 million or 128.6% to $3.2 million
during the same time frame. These comparative changes were minimally affected by
the Palm Springs branch acquisition.
Interest income for the nine month period ended September 30, 1998 was $29.2
million, an increase of $5.7 million or 24.5% compared to the nine months ending
September 30, 1997. The increase in interest income was primarily the result of
the volume increases previously discussed, enhanced by a slightly increased
interest rate environment. The yield on interest earning assets increased 9
basis points to 8.96% for the nine months ended September 30, 1998 from 8.87%
for the comparative period last year.
Interest expense increased $1.4 million or 17.9% to $9.0 million during the nine
months ending September 30, 1998 as compared to the same period last year. The
increase in interest expense was principally the result of volume increases in
all interest bearing categories. This increase was partially impacted by a
slightly higher interest rate environment. The cost of interest bearing funds
increased 2 basis points from 3.96% for the nine months ended September 30, 1997
to 3.98% for the nine months ended September 30, 1998.
Net interest income was $20.2 million for the nine months ending September 30,
1998, representing an increase of $4.4 million or 27.6% from September 30, 1997.
The net interest spread, which represents the difference between the rate earned
on average interest earning assets and the rate paid on average interest bearing
liabilities increased to 4.98% for the period ending September 30, 1998,
compared to 4.91% for the same period in 1997. Net interest income as a
percentage of average interest earning assets, or the net interest margin,
increased to 6.04% for the period ending September 30, 1998, compared to 5.85%
for the period ending September 30, 1997.
14
<PAGE> 15
The relatively greater increases in interest earning assets than in interest
bearing liabilities, the greater proportionate growth in loans, the highest
yielding assets and the greater increase in the average yield on interest
earning assets than the increase in the cost of funds were the primary reasons
for the comparative increase in yield for both the net interest spread and the
net interest margin.
Interest income for the third quarter ended September 30, 1998 was $10.3 million
which represented an increase of $2.1 million or 24.8% to the comparative period
ending September 30, 1997. Interest expense was $3.2 million for the three month
period ending September 30, 1998, an increase of $.5 million or 17.6% compared
to the same period in 1997. Net interest income during the second quarter ending
September 30, 1998 was $7.1 million, an increase of $1.6 million or 28.3% for
the comparative period ending September 30, 1997. The same factors affecting the
nine month period also applies to the third quarter comparisons of 1998 to 1997.
PROVISION FOR CREDIT LOSSES
The allowance for credit losses at September 30, 1998 was $2.8 million, which
compared similarly to the $2.8 million at September 30, 1997 and compared to
$2.3 million at December 31, 1997, an increase of $.5 million or 22.0%. As a
percent of total loans, the allowance was .82% at September 30, 1998, compared
to 1.00% at September 30, 1997 and .74% at December 31, 1997.
The provision for credit losses was $1.7 million for the first nine months of
1998, an increase of $.6 million or 55.6% from the $1.1 million provided for the
first nine months of 1997. The provision was $555,000 for the third quarter of
1998 compared to $455,000 for the third quarter of 1997, an increase of $100,000
or 22.0%.
Total non-accrual loans as of September 30, 1998 were $4.2 million as compared
to $5.4 million at September 30, 1997 and $2.5 million at June 30, 1998.
Non-accrual loans increased $1.7 million during the current third quarter of
1998. Net charge-offs were $1.1 million for the nine months ended September 30,
1998. This compared to $872,000 for the same period in 1997. During the third
quarter ending September 30, 1998, $190,000 was recorded in net charge-offs
compared to $356,000 net charge-offs in the third quarter of 1997.
The Bank has an established a standard process for assessing the adequacy of the
allowance for credit losses. In addition to reviewing the inherent risks of the
loan portfolio, consideration is given to exposures such as economic conditions,
credit concentrations, collateral coverage, the composition of the loan
portfolio and trends in delinquencies. Specific allocations are identified by
loans with general allocations assigned to the various loan categories.
15
<PAGE> 16
Loans classified by the Bank's internal review or by the regulatory authorities
are included in the process of assessing the adequacy of the allowance for
credit losses. This process seeks to maintain an allowance level adequate to
provide for potential losses.
Management of the Bank believes the allowance at September 30, 1998, was
adequate based on present economic conditions and its ongoing evaluation of the
risks inherent in the Bank's loan portfolio.
OTHER INCOME
Total other income amounted to $4.1 million for the nine months ended September
30, 1998 representing an increase of $.5 million or 13.1% compared with the same
period in the prior year. A $375,000 increase in service charges on deposits,
primarily a result of two branch acquisitions in 1997 from Wells Fargo Bank,
N.A., and one branch acquisition in 1998 from Palm Desert National Bank, an
increase of $92,000 in gains on the sale of investment securities, an increase
of $73,000 in gains on the sale of foreclosed properties, partially offset by a
decrease of $80,000 in gains on the sale of Small Business Administration loans,
were the principal reasons for the increase in other income.
Total other income for the third quarter of 1998 was $1.5 million, a decrease of
$.2 million or 14.1% from the third quarter of 1997. The decrease resulted from
a $48,000 decrease in service charges on deposits and a $249,000 decrease in
gains on the sale of Small Business Administration loans partially offset by a
$92,000 increase in gains on the sale of investment securities.
OTHER EXPENSE
Total other expense in the first nine months of 1998 was $17.6 million, an
increase of $2.6 million or 17.6% as compared to the same period in 1998.
Salary expense during the first nine months of 1998 was $6.4 million, an
increase of $.8 million or 14.2% over the comparable period in 1997. The growth
in salary expense is attributable to staffing additions related to the 1997 and
first quarter 1998 branch acquisitions, merit increases, paid commissions and
performance incentives.
Employee benefits expense was $2.1 million for the period ending September 30,
1998, an increase of $.3 million or 16.7% from the same period in the prior
year. The increase in benefits expense is attributable to the previously
discussed staffing additions, increased 401K and ESOP funding costs and
increases in medical insurance expense.
16
<PAGE> 17
Occupancy expense was $1.5 million for the period ended September 30, 1998, an
increase of $.3 million or 25.7% as compared to the first nine months in 1997.
Furniture and equipment expense was $1.6 million for the first nine months in
1998, an increase of $.3 million or 26.0% from the same period in 1997. These
increases were primarily the result of the acquisitions previously discussed, as
well as the costs related to a new corporate facility, which was occupied
commencing in July 1997.
Other operating expense amounted to $6.0 million during the first nine months
ended September 30, 1998, an increase of $.9 million or 17.4% from the same
period in the prior year. Increases in the areas of intangible asset
amortization, business development, data processing, professional fee costs and
expenses related to the previously discussed acquisitions were the primary
causes for the increase in this category.
For the third quarter of 1998, total other expenses were $6.2 million, an
increase of $1.1 million or 21.1% from $5.1 million for the third quarter of
1997. The increase in each category were for the same reasons as noted above for
the comparable nine month periods.
INCOME TAXES
Income tax expense for the nine months ending September 30, 1998 was $1.7
million as compared with $1.1 million for the same period in 1997, an increase
of $.7 million or 60.6%. The increase in expense was primarily attributable to a
$1.6 million increase in taxable operating income as well as an increase in the
Company's effective tax rate from 32.2% for the nine months ended September 30,
1997 to 35.1% for the nine months ended September 30, 1998. The effective tax
rate increase was primarily the result of increases in non-deductible intangible
asset amortization expense partially offset by a $24,000 increase in non-taxable
income from municipal securities. Income taxes for the third quarter were
$639,000, an increase of $47,000 or 8.0% from the third quarter of 1997. The
increase in expense was primarily related to a $141,000 increase in the
Company's taxable operating income offset partially by a slight decrease in the
effective tax rate from 35.2% for the three months ended September 30, 1997 to
35.0% for the three months ended September 30, 1998. The effective tax rate
decrease was primarily the result of a $54,000 increase in non-taxable income
from municipal securities.
CAPITAL RESOURCES
Total stockholders' equity as of September 30, 1998 was $44.0 million which
represented an increase of $3.7 million from December 31, 1997 and $14.1 million
from September 30, 1997.
17
<PAGE> 18
The increase since December 31, 1997 included $3.2 million in net income, $.3
million in exercised common stock options and warrants and a $190,000 increase
in the cumulative unrealized gain on securities classified as available for
sale. The increase since September 30, 1997 included $8.8 million in proceeds
from a capital offering conducted by Valley Independent Bank between September 9
and November 21, 1997, as well as net income during the period and the exercise
of stock options and warrants.
Under regulatory guidelines, capital adequacy is measured as a percentage of
risk-adjusted assets in which risk percentages are applied to assets on as well
as off the balance sheet. Tier 1 capital consists of common stock and retained
earnings and total capital includes a portion of the allowance for credit
losses. At September 30, 1998 the Tier 1 and total risk based capital ratios
were 9.44% and 10.13%, respectively, compared to 7.48% and 8.30%, respectively,
at September 30, 1997. The current minimum regulatory guidelines for Tier 1 and
total risk-based capital ratios are 4.0% and 8.0%, respectively. The leverage
ratio, which is a measure of Tier 1 capital to adjusted average assets, was
7.95% at September 30, 1998, compared to 6.34% at September 30, 1997. The Bank's
and the Company's leverage ratio also exceeds the current regulatory minimum of
3.0%. Accordingly, the Bank's and the Company's capital ratios exceed all
regulatory minimums and support future planned internal growth, but are not
adequate to support the proposed Hemet branch acquisition.
YEAR 2000 COMPLIANCE
During 1996 the Bank began the process of identifying and addressing issues
surrounding the year 2000 and their impact on the Bank's operations. That
process continued through 1997 during which the Bank conducted a comprehensive
review of its computer systems to identify applications that would be affected
by the year 2000 issue and the Bank developed an implementation plan to bring
the Bank's systems into compliance prior to the year 2000. The Bank's compliance
program includes review of bankwide computer processing systems as well as
review of third party vendors' interface systems and review of large corporate
borrowers' and depositors' systems. During 1997 the Bank completed the
assessment phase of its program. Commencing in 1998, the Bank initiated the
implementation and the validation of hardware and software upgrades, system
replacements, vendor certifications and other associated changes. The Bank
anticipates that final implementation and validation will occur in early 1999,
with final certification of all internal systems by no later that June 30, 1999.
Simultaneously, the Bank has been evaluating the impact of year 2000 compliance
on large corporate customers as well as third-party vendors. As of September
1998, the Bank has completed its assessment of year 2000 risk in this regard and
has established appropriate reserves and liquidity policies to mitigate this
risk. The ongoing assessment on this risk is monitored on a monthly basis with
appropriate adjustments to reserves, as required.
18
<PAGE> 19
The Bank has established detailed contingency plans for all mission critical and
secondary operating systems. Trigger dates have been established for activating
any required contingency plan. The Bank has also established a Business
Resumption Plan specific to year 2000, which is coordinated with the Bank's
Disaster Recovery Plan. An additional measure taken by the Bank has been to
establish a currency contingency plan which addresses the potential failure of
the commercial payment systems (electronic funds transfer, automated teller
machines, point of sale equipment). This plan also addresses the increasing
speculation regarding short and long term unavailability of certain consumer
goods which may prompt people to accumulate or hoard cash in quantities
sufficient to meet their perceived needs for a month or more. This plan
addresses potential customer fears by establishing procedures to provide for any
extreme demand for cash.
The Bank is currently on schedule to successfully implement the systems and
programming changes necessary to address the year 2000 issue and does not
believe that the costs of such actions will have a material effect on the Bank's
results of operations or financial condition. The Bank's current budgeted costs
for year 2000 compliance are approximately $600,000, of which approximately
$408,000 has been expended to date. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with the
implementation of such changes, and the Bank's inability to implement such
changes could have an adverse effect on the Company's future results of
operations. Similarly, there can be no assurance that third party vendors'
systems will be year 2000 compliant and, consequently, the Bank could incur
incremental costs to convert to other vendors.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The Bank's Asset/Liability Committee (ALCO) functions to manage the maintenance
of liquidity and the preservation of net interest income when subjected to
fluctuations in market interest rates. The ability to meet funding commitments
present and in the future is the measure of liquidity. Liquidity is also needed
to meet borrowing needs, deposit withdrawals and asset growth. The Bank develops
liquidity through deposit growth, maturities and repayments of loans and
investments, net interest income, fee income and access to purchased funds
through correspondent banks or other entities.
Management maintains a liquidity policy which includes a liquidity contingency
plan to meet necessary or unforeseen liquidity requirements. Lines of credit
have been established with various correspondents, as well as the Federal
Reserve Bank, in order to meet short-term seasonal fluctuations.
19
<PAGE> 20
Liquidity at September 30, 1998 was 23.5%. This compared with a ratio of 22.9%
at September 30, 1997 and 21.2% at December 31, 1997. Liquidity at September 30,
1998 has increased since the period ended September 30, 1997. This increase has
been the combined result of increases in deposits and shareholder's equity which
have exceeded the increase in loan growth and the increase in investment
securities.
The ALCO Committee manages the interest rate sensitivity or repricing
characteristics of the Bank's assets and liabilities. The Bank's primary source
of earnings is net interest income, which is subject to movements in interest
rates. To minimize the effect of changes in rates the balance sheet requires
structuring in order that the repricing opportunities for both assets and
liabilities exist in nearly equivalent amounts at approximately similar time
intervals.
Interval differences may exist at times creating interest sensitivity gaps which
represent the difference between interest sensitive assets and interest
sensitive liabilities. These gaps are static in nature and do not consider
future activity. As such, these gap measurements serve best as an indicator for
potential interest rate exposure.
The sensitivity to interest rate fluctuations is measured in several time
frames. Various strategies such as liability cost administration and
redeployment of asset maturities are utilized to preserve interest income from
the effect of changes in interest rates. The gap positions are monitored as a
function of the asset and liability management process. The monitoring process
includes the use of periodic simulated business forecasts which incorporate
various interest rate environments. Financial modeling is utilized to assist
management in maintaining consistent earnings in an environment of changing
interest rates.
At September 30, 1998, the Bank's thirty day and one year static gap ratios were
110.6% and 92.2%, respectively. These ratios compared with respective ratios of
89.7% and 75.5%, respectively, at September 30, 1997. The Bank is presently
asset sensitive in the short term because of this "positive" 30-day gap ratio
and should experience increased yields in increasing rate environments and
decreased yields in decreasing rate environments. In the longer term, the Bank
is liability sensitive and should experience the opposite in yields in the
discussed rate environments.
VIB Corp is a legal entity, separate and distinct from its subsidiary bank.
Although there exists the ability to raise capital on its own behalf or borrow
from external sources, VIB Corp may obtain additional funds through dividends
paid by, and fees for services provided to its subsidiary bank.
Regulations limit the amount of dividends as well as service fees paid by
subsidiaries. VIB Corp's expenses are primarily covered by fees charged to and
dividends received from the Bank. However, VIB Corp may not be able to rely
solely on its current or future subsidiaries to meet its obligations or to
maintain its separate liquidity. Under such circumstances, VIB Corp would seek
other means to raise capital.
20
<PAGE> 21
INFLATION
The impact of inflation on a financial institution differs significantly from
that exerted on an industrial company, primarily because its assets and
liabilities consist largely of monetary items. The relatively low ratio of fixed
assets to total assets of 2.3% at September 30, 1998, reduces the potential for
inflated earnings resulting from understated depreciation changes. However,
financial institutions are affected by inflation's impact on non-interest
expenses, such as salaries and occupancy expense, and to some extent, by the
inflative impact on interest rates.
21
<PAGE> 22
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
To the best of the Company's knowledge, there are no pending legal
proceedings to which the Company is a party and which may have a materially
adverse effect upon the Company's property or business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are filed as a part of this report:
<TABLE>
<CAPTION>
Regulation S-K
Exhibit No. Description Page
- -------------- ----------- ----
<S> <C> <C>
27 Financial Data Schedule 24
</TABLE>
(b) Current Reports on Form 8-K:
During the quarter ended September 30, 1998 the Company filed a Current
Report on Form 8-K as follows:
<TABLE>
<CAPTION>
Description Date of Report
- ----------- --------------
<S> <C>
Signing of Agreement and Plan of Reorganization - Acquisition of Bank
of Stockdale, F.S.B. and signing of Branch Acquisition Agreement to
purchase Hemet branch office from Fremont Investment & Loan September 29, 1998
</TABLE>
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIB CORP
Date: October 29, 1998
/s/ Dennis L. Kern
----------------------------------------
Dennis L. Kern,
President and Chief Executive Officer
/s/ Harry G. Gooding, III
----------------------------------------
Harry G. Gooding, III,
Executive Vice President and
Chief Financial Officer
23
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 31,363,471
<INT-BEARING-DEPOSITS> 664,181
<FED-FUNDS-SOLD> 6,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 82,783,786
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 344,220,505
<ALLOWANCE> (2,842,989)
<TOTAL-ASSETS> 491,327,653
<DEPOSITS> 441,792,833
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,689,446
<LONG-TERM> 2,876,446
0
0
<COMMON> 36,230,101
<OTHER-SE> 7,739,057
<TOTAL-LIABILITIES-AND-EQUITY> 491,327,653
<INTEREST-LOAN> 25,533,732
<INTEREST-INVEST> 3,380,970
<INTEREST-OTHER> 293,025
<INTEREST-TOTAL> 29,207,727
<INTEREST-DEPOSIT> 8,647,385
<INTEREST-EXPENSE> 366,826
<INTEREST-INCOME-NET> 20,193,516
<LOAN-LOSSES> 1,665,000
<SECURITIES-GAINS> 284,939
<EXPENSE-OTHER> 17,593,889
<INCOME-PRETAX> 4,987,532
<INCOME-PRE-EXTRAORDINARY> 4,987,532
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,239,114
<EPS-PRIMARY> 0.420
<EPS-DILUTED> 0.400
<YIELD-ACTUAL> 8.97
<LOANS-NON> 4,179,657
<LOANS-PAST> 131,871
<LOANS-TROUBLED> 3,554,641
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,329,988
<CHARGE-OFFS> 1,303,964
<RECOVERIES> 151,966
<ALLOWANCE-CLOSE> 2,842,990
<ALLOWANCE-DOMESTIC> 2,842,990
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
