<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 June 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)
<TABLE>
<S> <C>
CALIFORNIA 33-0780371
- -------------------------------------------------------------- ---------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.)
</TABLE>
1498 MAIN STREET, EL CENTRO, CALIFORNIA 92243
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(Address of Principal Executive Offices)
(760)337-3200
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(Registrant's Telephone Number, Including Area Code)
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(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: 7,792,204 shares as of
August 4, 1998.
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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 June 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 June 30, 1998 have been made. The
results of operations for the period ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the full year.
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Part 1. - Financial Information
Item 1. - Financial Statements
VIB CORP AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30,1998 and December 31,1997
(Unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 35,408,352 $ 33,821,287
Federal funds sold 0 4,000,000
------------- -------------
Total cash and cash equivalents 35,408,352 37,821,287
Interest bearing deposits 955,086 586,000
Securities available for sale (note B) 72,576,148 69,287,466
Loans: (note C)
Commercial 55,478,547 46,049,768
Agricultural 37,685,061 49,128,668
Real estate-construction 40,223,974 35,926,148
Real estate-other 190,368,835 157,566,136
Consumer 27,353,151 26,741,763
------------- -------------
Total Loans 351,109,568 315,412,483
Net deferred loan fees (1,815,037) (1,665,059)
Allowance for credit losses (2,478,179) (2,330,000)
------------- -------------
Net Loans 346,816,352 311,417,424
Premises and equipment 11,630,670 11,452,257
Other real estate owned 225,317 1,171,027
Cash surrender life insurance 2,469,966 2,282,805
Deferred tax asset 1,635,290 1,650,000
Goodwill 4,666,619 3,607,404
Accrued interest and other assets 5,404,907 4,891,773
------------- -------------
TOTAL ASSETS $ 481,788,707 $ 444,167,443
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
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VIB CORP AND SUBSIDIARY
Consolidated Statements of Financial Condition
June 30,1998 and December 31,1997
(Unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $132,829,263 $126,660,748
Money Market and NOW 107,697,572 93,732,297
Savings 47,393,244 40,811,775
Time deposits under $100,000 68,430,786 67,110,498
Time deposits $100,000 and over 76,142,513 70,897,030
------------ ------------
Total Deposits 432,493,378 399,212,348
Fed funds purchased 1,500,000 0
Capital lease obligations 2,866,410 2,842,336
Accrued interest and other liabilities 2,371,145 1,858,749
------------ ------------
Total Liabilities 439,230,933 403,913,433
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: 7,792,204 in 1998 and
7,734,246 in 1997 36,171,339 35,932,844
Undivided Profits 6,097,330 4,053,921
Accumulated other comprehensive
income, net of tax of $200,904 in
1998 and $327,917 in 1997 289,105 267,245
------------ ------------
Total Stockholders' Equity 42,557,774 40,254,010
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $481,788,707 $444,167,443
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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VIB CORP AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Six Month
Periods Ended Periods Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans $ 8,610,371 $ 6,566,408 $16,591,298 $12,891,667
Interest on Investment Securities-Taxable 840,189 900,534 1,718,567 1,529,401
Interest on Investment Securities-Nontaxable 268,626 295,945 511,340 541,183
Other Interest Income 29,214 78,211 78,330 245,612
----------- ----------- ----------- -----------
Total Interest Income 9,748,400 7,841,098 18,899,535 15,207,863
Interest Expense:
Interest on Money Market and NOW 708,270 515,124 1,350,231 964,275
Interest on Savings Deposits 225,962 206,851 431,741 379,211
Interest on Time Deposits 1,938,976 1,840,244 3,779,822 3,583,536
Interest on Other Borrowings 148,525 12,420 273,956 14,062
----------- ----------- ----------- -----------
Total Interest Expense 3,021,733 2,574,639 5,835,750 4,941,084
----------- ----------- ----------- -----------
Net Interest Income 6,726,667 5,266,459 13,063,785 10,266,779
Provision for Credit Losses 555,000 320,000 1,110,000 625,000
----------- ----------- ----------- -----------
Net Interest Income after Provision for Credit Losses 6,171,667 4,946,459 11,953,785 9,641,779
Non-interest Income:
Service Charges and Fees 939,891 882,960 1,962,799 1,640,495
Gain on Sale of Loans and Servicing Fees 195,553 57,516 289,723 121,126
Gain on Sale of Securities 0 0 0 0
Other Income 251,390 39,273 310,062 88,571
----------- ----------- ----------- -----------
Total Non-interest Income 1,386,834 979,749 2,562,584 1,850,192
Non-interest Expense:
Salaries and Employee Benefits 2,828,061 2,302,743 5,530,967 4,669,696
Occupancy Expenses 486,710 386,441 947,934 730,823
Furniture and Equipment 503,969 404,004 996,724 852,180
Other Expenses (note D) 1,999,486 1,982,848 3,876,753 3,554,193
----------- ----------- ----------- -----------
Total Non-interest Expense 5,818,226 5,076,036 11,352,378 9,806,892
----------- -----------
Income Before Income Taxes 1,740,275 850,172 3,163,991 1,685,079
Income Taxes 619,000 227,000 1,109,000 497,000
----------- ----------- ----------- -----------
Net Income $ 1,121,275 $ 623,172 $ 2,054,991 $ 1,188,079
Per Share Data: (note E)
Net Income - Basic $ 0.14 $ 0.09 $ 0.27 $ 0.17
Net Income - Diluted $ 0.14 $ 0.08 $ 0.25 $ 0.16
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
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VIB CORP AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Shares Accumulated
--------------------------- Other
Number of Undivided Comprehensive
Shares Amount Profits Income Total
------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1997 5,458,892 $ 24,286,693 $ 2,473,963 $ 278,877 $ 27,039,533
Comprehensive Income
Net income 3,800,989 3,800,989
Other comprehensive income
Unrealized gains on securities, net
of taxes of $218,000 313,472 313,472
Less reclassification adjustments for gains
included in net income,net of taxes of $226,000 (325,104) (325,104)
------------
Total other comprehensive income (11,632)
------------
Total Comprehensive income 3,789,357
Issuance of common shares
net of expense of $123,425 510,660 8,809,374 8,809,374
Cash dividends (21,724) (21,724)
Stock dividends 120,510 2,199,307 (2,199,307) 0
Exercise of stock options
Including the realization of
Tax benefits of $96,000 97,335 637,470 637,470
------------ ------------ ------------ ------------ ------------
Balance January 1,1998 6,187,397 35,932,844 4,053,921 267,245 $ 40,254,010
Comprehensive Income
Net income 2,054,991 2,054,991
Other comprehensive income
Unrealized gains on securities,
net of taxes of $15,191 21,860 21,860
------------
Total other comprehensive income 21,860
------------
Total Comprehensive income 2,076,851
Stock split 1,550,452
Cash dividends (11,583) (11,583)
Exercise of stock options 52,601 205,911 205,911
Exercise of stock warrants 1,754 32,585 32,585
------------ ------------ ------------ ------------ ------------
Balance at June 30,1998 7,792,204 $ 36,171,340 $ 6,097,329 $ 289,105 $ 42,557,774
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
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VIB CORP AND SUBSIDIARY
Consolidated Statement of Cash Flow
(Unaudited)
(in Thousands)
<TABLE>
<CAPTION>
For the Six-Month
Periods Ended
June 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 2,055 $ 1,188
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 279 272
Deferred income taxes (1) (484)
Provision for credit losses 1,110 625
Originations of loans held for sale (2,333) (5,729)
Proceeds from sale of loans 2,004 0
Net loss/(gain) on loan sales and securitization (147) 0
Loss(Gain) on sale of other real estate owned (111) (2)
Net increase in cash surrender value of life insurance (187) (136)
Net realized gains in available for sale securities 0 0
Net amortization of premium/discount on available
for sale securities 62 (54)
Net change in accrued interest, other assets,
and other liabilities 22 105
------------ ------------
Net cash provided (used) by operating activities 2,753 (4,215)
Cash flow from investing activities:
Purchases of available for sale securities (30,465) (45,131)
Net cash received from purchase of branches 6,524 39,223
Proceeds from sales of other real estate owned 1,407 428
Proceeds from sales of available for sale securities 0 0
Proceeds from maturities of available for sale securities 27,152 10,648
Loans granted net of repayments (27,342) (21,294)
Premises and equipment expenditures (1,191) (1,964)
Net increase in interest bearing deposits (369) 0
------------ ------------
Net cash provided (used) by investing activities (24,284) (18,090)
Cash flow from financing activities:
Net increase/(decrease) in demand deposits and savings 13,552 19,335
Net increase in time deposits 3,816 2,425
Net change in capitalized lease obligations 24 0
Payments for dividends (12) (8)
Net change in fed funds purchased 1,500 0
Proceeds from exercise of stock options and warrants 238 472
------------ ------------
Net cash provided (used) by financing activities 19,118 22,224
Net change in cash and cash equivalents ($ 2,413) ($ 81)
============ ============
Cash and cash equivalents:
Beginning of period $ 37,821 $ 34,886
End of period $ 35,408 $ 34,805
Supplemental disclosure of cash flow information:
(in Thousands)
Cash paid for interest expense $ 4,965 $ 4,887
Cash paid (received) for income taxes $ 1,638 $ 177
</TABLE>
The accompanying notes are an integral part of the financial
statements.
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VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(A) General
See note A of Notes to Financial Statements incorporated by reference
in VIB CORP's (the "Company")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 June
30, 1998 had a net unrealized gain of approximately $490,000, as
compared with a net unrealized gain of approximately $453,000 at
December 31, 1997, an improvement during the six months beginning
January 31, 1998 of $37,000.
Available-for-sale securities
<TABLE>
<CAPTION>
June 30, 1998
---------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(in thousands) Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 528 $ 34 $ 562
U.S. Government and
Agency Securities 35,845 96 $ 78 35,863
State and Political Subd. 22,188 385 22,573
Mortgage-Backed Securities 11,061 68 15 11,114
Other Equity 2,464 2,464
---------- ---------- ---------- ----------
$ 72,086 $ 583 $ 93 $ 72,576
</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>
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<PAGE> 9
Investment securities carried at approximately $45,537,000 and
$6,328,000, at June 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 June 30,1998 and
December 31,1997 the Company was servicing approximately $66,479,000 and
$59,289,000, respectively, in loans previously sold.
A summary of the changes in the allowance for credit losses follows:
<TABLE>
<CAPTION>
June 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 1,110,000 1,850,000
Recoveries on loans charged off 87,000 259,000
Loans charged off 1,049,000 2,413,000
---------- ----------
Balance at end of period $2,478,000 $2,330,000
</TABLE>
A summary of nonperforming loans and assets follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31,1997
<S> <C> <C>
Non-accrual loans $2,469,000 $4,317,000
Loans 90 days past due and still accruing 135,000 373,000
---------- ----------
Total nonperforming loans 2,604,000 4,690,000
Other Real Estate Owned 225,000 1,171,000
---------- ----------
Total nonperforming assets $2,829,000 $5,861,000
Nonperforming loans to total ending loans .74% 1.49%
Nonperforming assets to total loans and
Other Real Estate Owned .81% 1.85%
</TABLE>
(D) Other Expenses
Other expenses for the periods indicated are as follows:
<TABLE>
<CAPTION>
June 30,1998 June 30,1997
------------ ------------
<S> <C> <C>
Data Processing $ 573,000 $ 502,000
Advertising 136,000 146,000
Legal and Professional 697,000 679,000
Regulatory Assessments 78,000 17,000
Insurance 70,000 68,000
Amortization of Intangibles 222,000 139,000
Office Expenses 702,000 651,000
</TABLE>
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<TABLE>
<S> <C> <C>
Promotion 642,000 627,000
Other 757,000 725,000
--------------------------------
Total Other Expenses $3,877,000 $3,554,000
</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: 7,746,257 for the
six months ended June 30, 1998 and 6,994,486 for the six months ended June 30,
1997, respectively; 7,753,284 for the three months ended June 30,1998 and
7,008,615 for the three months ended June 30,1997, respectively.
Diluted earnings per share for the six month periods ended June 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.
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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 six month's ended June 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.
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During 1996 the Bank began the process of identifying and addressing issues
surrounding the year 2000 and their impact on the Bank's operations. That
process continued through 1997 during which the Bank conducted a comprehensive
review of its computer systems to identify applications that would be affected
by the year 2000 issue and the Bank developed an implementation plan to bring
the Bank's systems into compliance prior to the year 2000. The Bank's compliance
program includes review of bankwide computer processing systems as well as
review of third party vendors' interface systems and review of large corporate
borrowers' systems. During 1997 the Bank completed the assessment phase of its
program and anticipates, during 1998, to end the implementation and begin the
validation of hardware and software upgrades, system replacements, vendor
certifications and other associated changes. The Bank anticipates that final
implementation and validation will occur in early 1999, with final certification
of all internal systems by no later that June 30, 1999. Simultaneously, the Bank
will be evaluating the impact of year 2000 compliance on large corporate
customers as well as third party vendors.
The Bank expects to implement successfully the systems and programming changes
necessary to address the year 2000 issue and does not believe that the costs of
such actions will have a material effect on the Bank's results of operations or
financial condition. There can be no assurance, however, that there will not be
a delay in, or increased costs associated with the implementation of such
changes, and the Bank's inability to implement such changes could have an
adverse effect on 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.
Net earnings for the six months ending June 30, 1998 was $2.1 million or $.25
per share fully diluted based upon average shares outstanding of 8,137,085. This
compared with net earnings of $1.2 million or $.16 per share fully diluted based
upon average shares outstanding of 7,384,309 for the same period in 1997.
Net earnings for the three months ending June 30, 1998 was $1.1 million or $.14
per share fully diluted based upon average shares outstanding of 8,127,021. This
compared with net earnings of $623,000 or $.08 per share fully diluted based
upon the average shares outstanding of 7,421,486 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 dividends and splits.
Loan growth was significant during the six months ending June 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 June 30, 1998
were $349.3 million which represented an increase of $35.6 million or 11.3% from
December 31, 1998. Since June 30, 1997, total
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<PAGE> 13
gross loans have increased $76.8 million or 28.2%. This increase since June 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 June 30, 1998 increased $33.3 million or 8.3% from year-end
1997 to $432.5 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 June 30, 1997, increased $64.0 million or 17.4%.
The Bank's liquidity position, enhanced by the Palm Desert National Bank branch
acquisition, remained adequate to meet future contingencies. At June 30, 1998
the Bank had $1.5 million in federal funds purchased outstanding. This compared
to $5.5 million in federal funds sold outstanding at June 31, 1997. Since
December 31, 1997, Federal Funds sold have decreased $4.0 million. The Bank's
liquidity ratio at June 30, 1998 was 20.3%. This ratio represented a decrease
from 24.6% at June 30, 1997 and a decrease from 21.2% at December 31, 1997.
During the same periods, the Bank's investment portfolio increased from $71.4
million at June 30, 1997 and $69.3 million at December 31, 1997 to $72.6 million
at June 30, 1998.
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 June 30, 1998
the Company had adequate liquidity to meet its anticipated funding needs.
NET INTEREST INCOME
Average interest earning assets totaled $399.9 million during the six months
ending June 30, 1998, an increase of $70.9 million or 21.6% 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 $67.9 million or 26.5% to $323.9 million.
Average interest bearing liabilities in the six months ended June 30, 1998
increased $43.2 million or 17.2% to average $294.3 million as compared to the
same period last year. During this comparative period average interest bearing
deposit categories increased $37.5 million or 15.0% to $288.2 million. Average
borrowed funds increased $5.6 million or 1,161.7% to $6.1 million during the
same time frame. These comparative changes were minimally affected by the Palm
Springs branch acquisition.
Interest income for the six month period ended June 30, 1998 was $18.9 million,
an increase of $3.7 million or 24.3% compared to the six months ending June 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 25 basis points to
9.45% for the six months ended June 30, 1998 from 9.20% for the comparative
period last year.
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Interest expense increased $.9 million or 18.1% to $5.8 million during the six
months ending June 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 1 basis point from 3.93% for the six month ended June 30, 1997 to
3.94% for the six months ended June 30, 1998.
Net interest income was $13.1 million for the six months ending June 30, 1998,
representing an increase of $2.8 million or 27.2% from June 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 5.51% for the period ending June 30, 1998, compared to
5.27% for the same period in 1997. Net interest income as a percentage of
average interest earning assets, or the net interest margin, increased to 6.55%
for the period ending June 30, 1998, compared to 6.19% for the period ending
June 30, 1997. 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 second quarter ended June 30, 1998 was $9.7 million
which represented an increase of $1.9 million or 24.3% to the comparative period
ending June 30, 1997. Interest expense was $3.0 million for the three month
period ending June 30, 1998, an increase of $.4 million or 17.4% compared to the
same period in 1997. Net interest income during the second quarter ending June
30, 1998 was $6.7 million, an increase of $1.5 million or 27.7% for the
comparative period ending June 30, 1997. The same factors affecting the six
month period also applies to the second quarter comparisons of 1998 to 1997.
PROVISION FOR CREDIT LOSSES
The allowance for credit losses at June 30, 1998 was $2.5 million, compared to
$2.7 million at June 30, 1997, a decrease of $.2 million or 7.4%, and compared
to $2.3 million at December 31, 1997, an increase of $.2 million or 8.6%. As a
percent of total loans, the allowance was .71% at June 30, 1998, compared to
1.01% at June 30, 1997 and .74% at December 31, 1997.
The provision for credit losses was $1.1 million for the first six months of
1998, an increase of $.5 million or 77.6% from the $.6 million provided for the
first six months of 1997. The provision was $555,000 for the second quarter of
1998 compared to $320,000 for the second quarter of 1997, an increase of 235,000
or 73.4%.
Total non-accrual loans as of June 30, 1998 were $2.5 million as compared to
$4.7 million at June 30, 1997 and $3.9 million at March 31, 1998. Non-accrual
loans decreased $1.2 million during the current second quarter of 1998. Net
charge-offs were $962,000 for the
14
<PAGE> 15
six months ended June 30, 1998. This compared to $516,000 for the same period in
1997. During the second quarter ending June 30, 1998, $819,000 was recorded in
net charge-offs compared to $396,000 net charge-offs in the second quarter of
1997.
The Bank has an established 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. 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 June 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 $2.6 million for the six months ended June 30,
1998 representing an increase of $.7 million or 38.5% compared with the same
period in the prior year. A $322,000 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 $178,000 in gains on the sale of Small Business Administration Loans
and an increase of $109,000 in gains on the sale of foreclosed properties were
the principal reason for the increase in other income.
Total other income for the second quarter of 1998 was $1.4 million, an increase
of $.4 million or 41.5% from the second quarter of 1997. The increase resulted
from the same factors.
OTHER EXPENSE
Total other expense in the first six months of 1998 was $11.4 million, an
increase of $1.5 million or 15.8% as compared to the same period in 1998.
Salary expense during the first six months of 1998 was $4.1 million, an increase
of $.5 million or 13.9% 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 $1.4 million for the period ending June 30, 1998,
an increase of $.2 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
15
<PAGE> 16
401K and ESOP funding costs and increases in medical insurance expense.
Occupancy expense was $.9 million for the period ended June 30, 1998, an
increase of $.2 million or 29.7% as compared to the first six months in 1997.
Furniture and equipment expense was $1.0 million for the first six months in
1998, an increase of $.1 million or 17.0% 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 $3.9 million during the first six months
ended June 30, 1998, an increase of $.3 million or 9.1% 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 second quarter of 1998, total other expenses were $5.8 million, an
increase of $.7 million or 14.6% from $5.1 million for the second quarter of
1997. The increase in each category were for the same reasons, as noted above
for the comparable six month periods.
INCOME TAXES
Income tax expense for the six months ending June 30, 1998 was $1.1 million as
compared with $.5 million for the same period in 1997. The increase in expense
was primarily attributable to a $1.5 million increase in taxable operating
income as well as an increase in the Company's effective tax rate from 29.5% for
the six months ended June 30, 1997 to 35.1% for the six months ended June 30,
1998. The effective tax rate increase was primarily the result of increases in
non-deductible intangible asset amortization expense and a $30,000 decrease in
non-taxable income from municipal securities. Income taxes for the second
quarter were $619.000, an increase of $392,000 or 172.7% from the second quarter
of 1997. The increase in expense was primarily related to an increase in the
Company's effective tax rate from 26.7% for the three months ended June 30, 1997
to 35.6% for the three months ended June 30, 1998. The effective tax rate
increase was primarily the result of the previously discussed decreases in
non-taxable income from municipal securities and increase in non-deductible
intangible asset amortization expense.
CAPITAL RESOURCES
Total stockholders' equity as of June 30, 1998 was $42.6 million which
represented an increase of $2.3 million from December 31, 1997 and $13.9 million
from June 30, 1997. The increase since December 31, 1997 included $2.0 million
in net income, $.2 million in exercised common stock options and warrants and a
$22,000 increase in the cumulative unrealized gain on securities classified as
available for sale. The increase since June 30, 1997 included $8.8 million in
proceeds from a capital offering conducted by Valley
16
<PAGE> 17
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 June 30, 1998 the Tier 1 and total risk based capital ratios were
8.95% and 9.54%, respectively, compared to 7.56% and 8.41%, respectively, at
June 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 8.00% at
June 30, 1998, compared to 6.15% at June 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 may not be adequate to support
additional acquisitions.
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.
Liquidity at June 30, 1998 was 20.3%. This compared with a ratio of 24.6% at
June 30, 1997 and 21.2% at December 31, 1997. Liquidity at June 30, 1998 has
decreased since the period ended June 30, 1997. This decrease has been the
combined result of increases in loan growth and investment securities which have
exceeded the increase in the deposit base and an increase in borrowed funds.
17
<PAGE> 18
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 June 30, 1998, the Bank's thirty day and one year static gap ratios were
100.5% and 76.3%, respectively. These ratios compared with respective ratios of
102.0% and 79.5%, respectively, at June 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 it's subsidiary bank. However, VIB Corp may not be able
to rely solely on its current or future subsidiaries to meet its obligations or
maintain its separate liquidity. Under such circumstances, VIB Corp would seek
other means to raise capital.
18
<PAGE> 19
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 2.4% at June 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.
19
<PAGE> 20
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
On May 11, 1998, the Company's shareholders held their 1998 Annual
Meeting. At the Annual Meeting the following directors were elected to the term
indicated:
<TABLE>
<CAPTION>
One Year Term Votes For Votes Withheld
------------- --------- --------------
<S> <C> <C>
Richard D. Foss 4,330,865 30,000
Dennis L. Kern 4,330,865 30,000
Ronald A. (Rusty) Pedersen 4,330,865 30,000
Alice Helen Lowery Westerfield 4,330,865 30,000
Two Year Term
-------------
Charles Ellis 4,333,942 26,923
R. Stephen Ellison 4,331,590 29,275
Edward McGrew 4,333,644 27,221
John L. Skinner 4,334,089 26,776
</TABLE>
The Annual Meeting was adjourned and reconvened on May 26, 1998. At the
reconvened Annual Meeting the shareholders voted to reapprove various provisions
of the Company's Articles of Incorporation:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non Votes
--------- ------- ------- ---------
<S> <C> <C> <C> <C>
Article V(b) - Range of Directors 3,912,576 171,557 72,794 635,674
Article VII - Fair Price Protection 4,120,388 12,104 26,330 633,779
Article VIII(h) - Classified Board 3,931,890 178,042 46,594 636,075
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
20
<PAGE> 21
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 23
</TABLE>
(b) Current Reports on Form 8-K:
During the quarter ended June 30, 1998 the Company filed a Current
Report on Form 8-K as follows:
Description Date of Report
- ----------- --------------
Declaration of five-for-four stock split May 1, 1998
21
<PAGE> 22
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: August 10, 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
22
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 35,408,352
<INT-BEARING-DEPOSITS> 955,086
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72,576,148
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 346,816,352
<ALLOWANCE> (2,478,179)
<TOTAL-ASSETS> 481,788,707
<DEPOSITS> 432,493,378
<SHORT-TERM> 1,500,000
<LIABILITIES-OTHER> 2,371,145
<LONG-TERM> 2,866,410
0
0
<COMMON> 36,171,339
<OTHER-SE> 6,386,435
<TOTAL-LIABILITIES-AND-EQUITY> 481,788,707
<INTEREST-LOAN> 16,591,298
<INTEREST-INVEST> 2,229,907
<INTEREST-OTHER> 78,330
<INTEREST-TOTAL> 18,899,535
<INTEREST-DEPOSIT> 5,561,794
<INTEREST-EXPENSE> 273,956
<INTEREST-INCOME-NET> 13,063,785
<LOAN-LOSSES> 1,110,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,352,378
<INCOME-PRETAX> 3,163,991
<INCOME-PRE-EXTRAORDINARY> 3,163,991
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,054,991
<EPS-PRIMARY> 0.270
<EPS-DILUTED> 0.250
<YIELD-ACTUAL> 9.10
<LOANS-NON> 2,469,514
<LOANS-PAST> 134,620
<LOANS-TROUBLED> 1,436,134
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,329,988
<CHARGE-OFFS> 1,048,713
<RECOVERIES> 86,904
<ALLOWANCE-CLOSE> 2,478,179
<ALLOWANCE-DOMESTIC> 2,478,179
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
