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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From _____ to ______
COMMISSION FILE No.: 333-43021
VIB CORP
Incorporated Under the Laws of the State of California
I.R.S. EMPLOYER IDENTIFICATION NO.: 33-0780371
1498 MAIN STREET
EL CENTRO, CALIFORNIA 92243
TELEPHONE: (760) 337-3200
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common
Stock, No Par Value
Warrants (to purchase Common Stock)
Indicate by checkmark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting Common Stock held by non-affiliates at
March 5, 1999: $97,381,000
Number of shares of Common Stock outstanding as of March 5, 1999:
10,527,689
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
identified parts of this Form 10-K:
VIB CORP's 1998 Annual Report to Shareholders - Part II, Items 5 and 6.
1999 Annual Meeting Proxy Statement - Part III, Items 10, 11, 12 and 13.
Total No. of Pages: 122
Exhibit Index at Page: 85
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INDEX
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS................................................................ 3
ITEM 2 - DESCRIPTION OF PROPERTY................................................................31
ITEM 3 - LEGAL PROCEEDINGS......................................................................32
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................32
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................................32
ITEM 6 - SELECTED FINANCIAL DATA................................................................32
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................................32
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...............................................................................52
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................52
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................................81
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................81
ITEM 11 - EXECUTIVE COMPENSATION................................................................81
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.....................................................................81
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................81
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K .......................................................................81
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
THE COMPANY
VIB Corp (the "Company" or the "Registrant") was incorporated on
November 7, 1997 under the laws of the State of California at the direction of
the Board of Directors of Valley Independent Bank ("VIB") for the purpose of
becoming VIB's holding company. The holding company reorganization was
consummated on March 12, 1998, pursuant to a Plan of Reorganization and Merger
Agreement dated November 18, 1997, and each outstanding share of VIB's Common
Stock was converted into one share of the Company's Common Stock and all
outstanding shares of VIB's Common Stock were transferred to the Company in a
transaction accounted for as a pooling of interests. Further, each outstanding
Warrant to purchase VIB's Common Stock, issued in connection with VIB's 1997
Unit Offering, was converted into a Warrant to purchase the Company's Common
Stock. (See "THE BANKING SUBSIDIARIES - VIB" and "SUPERVISION AND REGULATION -
THE COMPANY" herein.)
On September 15, 1998, the Company entered into an Agreement and Plan
of Reorganization (the "Merger Agreement") with Bank of Stockdale, F.S.B.
("Stockdale"), a federal stock savings bank headquartered in Bakersfield,
California, providing for a stock-for- stock merger transaction (the "Merger")
whereby Stockdale would become the Company's wholly-owned subsidiary. Requisite
approvals for the Merger were received from the Federal Reserve and the Office
of Thrift Supervision (the "OTS") in December, 1998, and from the Company's and
Stockdale's shareholders in January, 1999, and the Merger was closed on January
28, 1999, and was accounted for as a pooling of interests. Pursuant to the
Merger Agreement, the Company issued approximately 2,355,430 shares of its
Common Stock in exchange for all of the issued and outstanding shares of
Stockdale's common stock, and Stockdale became the Company's second banking
subsidiary. (See "THE BANKING SUBSIDIARIES - Stockdale" and "ITEM 4 - SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS" herein.)
On December 10, 1998, the Company formed a wholly-owned business trust
subsidiary, Valley Capital Trust (the "Trust"), pursuant to the laws of the
State of Delaware. The Company formed the Trust for the specific purpose of: (1)
investing in the Company's 9.00% Junior Subordinated Debentures (the
"Debentures"), due February 5, 2029; (2) selling 9% Cumulative Capital
Securities (the "Capital Securities"), representing a 97% beneficial interest in
the Debentures owned by the Trust; and (3) issuing Common Securities (the
"Common Securities") to the Company, representing a 3% beneficial interest in
the Debentures owned by the Trust.
On January 29, 1999, the Company entered into a Purchase Terms
Agreement (the "Purchase Terms Agreement") with First Tennessee Capital Markets,
a subsidiary of First Tennessee Bank, N.A. (the "Placement Agent"). Pursuant to
the Purchase Terms Agreement, the Placement Agent solicited subscriptions for
the purchase of up to $23 million of the Capital Securities from accredited
investors within the meaning of Rule 501 of Regulation D of the Securities Act
of 1933 in a private placement.
On February 5, 1999, the Company issued $23.093 million in Debentures
to the Trust. Concurrently, the Trust issued $22.4 million of the Capital
Securities to accredited investors and $693,000 of Common Securities to the
Company. The Debentures were purchased by the Trust concurrently with the
issuance of the Capital Securities and Common Securities. The proceeds to the
Company, net of the Placement Agent's fees and other offering expenses, was
approximately $22.2 million, of which approximately $17.4 million will be
treated as Tier 1 capital by the
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Company for regulatory purposes. Additionally, the Company plans to use
approximately $8.5 million of the proceeds to increase VIB's regulatory capital.
The remainder will be used for general corporate purposes.
The interest on the Debentures will be deductible and paid by the
Company and represents the sole source of the Trust's revenues available for
distributions to the holders of the Capital Securities. The Company has the
right, assuming that no default has occurred regarding the Debentures, to defer
interest payments on the Debentures, at any time and for a period of up to
twenty consecutive calendar quarters. The Capital Securities will mature
concurrently with the Debentures on February 5, 2029, but can be called after
February 5, 2009.
Other than receiving interest payments on the Debentures and making
distributions to the holders of the Capital Securities when required, the Trust
does not conduct any other business.
During 1998 the Company did not conduct any business other than through
VIB and as described above. At year-end, the Company had total assets of $546.8
million. Upon consummation of the transactions described above, the Company
conducts its banking business only through VIB and Stockdale (collectively, the
"Banking Subsidiaries"). Neither the Company nor the Banking Subsidiaries earn
revenues from sources outside of the United States.
The Company has its own "home page" on the world wide web. The Company's
internet address is: http://www.vibcorp.com.
THE BANKING SUBSIDIARIES
VIB
VIB was incorporated under the laws of the State of California on March
28, 1980, and commenced operations as a California state-chartered bank on March
19, 1981. VIB's deposit accounts are insured under the Federal Deposit Insurance
Act, up to the maximum legal limits thereof, and VIB is a member of the Federal
Reserve System. VIB's main office is located in the City of El Centro and has
branch offices in Brawley, Calexico and Holtville, in Imperial County, Blythe,
Coachella, Hemet, Indio, La Quinta, Palm Desert, Thousand Palms and Palm Springs
in Riverside County, and Julian and Tecate, in San Diego County, California. VIB
also operates six loan production offices, located in Carlsbad, El Centro,
Orange and Rancho Mirage, California, in Yuma, Arizona, and in Las Vegas,
Nevada.
VIB has grown through de novo branching and acquisitions. On December
31, 1992, VIB consummated its first acquisition, acquiring the Coachella branch
office through the merger of The First National Bank in Coachella. During 1996
VIB consummated two acquisitions. On June 21, 1996, VIB acquired the Calexico
branch office of California Commerce Bank and combined its Calexico branch with
and into the acquired facility. On September 12, 1996, VIB acquired four
branches, Indio, La Quinta, Palm Desert and Thousand Palms, by the merger of
Bank of the Desert, N.A. On February 14, 1997, VIB purchased two branches from
Wells Fargo Bank, N.A., Blythe in Riverside County and Tecate in San Diego
County. These acquisitions enhanced VIB's market share in the Coachella Valley
and the City of Calexico and expanded VIB's geographic market areas.
During 1998 VIB continued its growth through acquisitions. On March 27,
1998 VIB acquired the Palm Springs branch office of Palm Desert National Bank.
VIB assumed approximately $16.1 million in deposits and the lease for the branch
and purchased approximately $8.3 million in loans. In consummating the
transaction, Valley paid a premium of $1.22 million on the deposits assumed.
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On September 22, 1998, VIB entered into a definitive agreement to
acquire the Hemet, California branch office of Fremont Investment and Loan (the
"Hemet Branch Acquisition"). The Hemet Branch Acquisition was approved by the
Federal Reserve and the California Department of Financial Institutions in
December, 1998 and January, 1999, respectively. On January 22, 1999, the
acquisition was consummated, whereby VIB assumed approximately $112 million in
deposits, the lease to the premises and $27,000 in other assets associated with
the branch. In acquiring the branch, VIB paid a premium of approximately $1.12
million on the deposits assumed.
VIB also has plans to open new loan production offices in Phoenix and
Tuscon, Arizona later in 1999.
VIB offers a full range of commercial banking services, including the
origination of commercial, U.S. Small Business Administration ("SBA"), accounts
receivable, real estate, construction, home improvement, consumer, and other
installment and term loans; checking, savings, time, NOW, super NOW and
money-market deposit accounts; travelers' checks, pre-approved overdraft lines,
and safe deposit; and other customary non-deposit banking services. VIB is a
"Preferred Lender" of the SBA and, as such, is able to process SBA loans more
quickly than other institutions that do not have such status. VIB is an agent
for VISA(R) and MasterCard(R) credit cards and is a merchant depository for
cardholder drafts under both types of credit cards. Although VIB does not
presently provide trust services, such services are made available to its
customers through correspondent banks. VIB's branches, the majority of which
offer drive-through banking services, also provide 24-hour automated teller
machines which are integrated into multi-state ATM networks.
STOCKDALE
Stockdale is a federal stock savings bank, chartered by the OTS on June
27, 1991. Stockdale was initially incorporated on February 26, 1985, as
Stockdale Savings and Loan Association, a California state-chartered savings and
loan association, and began operations on that date. Effective June 27, 1991,
Stockdale converted to a federal stock savings bank and currently operates under
a federal charter as Bank of Stockdale, F.S.B. Stockdale is a member of the
Federal Home Loan Bank ("FHLB") of San Francisco, which is one of twelve
regional banks making up the Federal Home Loan Bank System. Stockdale's deposits
are insured up to the applicable limits by the Savings Association Insurance
Fund of the FDIC. Stockdale's principal executive office is located at 5151
Stockdale Highway, Bakersfield, California 93309, and its telephone number is
(805) 833-9292. As of December 31, 1998, Stockdale had branch offices located at
3990 Gosford Road, Bakersfield, California 93309, and 2700 Mount Vernon Avenue,
Bakersfield, California 93306. In addition, Stockdale has a loan production
office in Fresno, California.
Stockdale's services include those traditionally offered by community
banks, such as checking and savings accounts and real estate and home
improvement loans. The vast majority of Stockdale's loan are direct loans made
to individuals, professionals, and small and medium sized businesses within
Stockdale's marketing area. The majority of Stockdale's loans are sold into the
secondary market while retaining servicing rights and fees generated therefrom.
Stockdale's principal sources of income are interest received on real
estate and other loans, and income derived from the sale of loans. To a lesser
extent, Stockdale earns income from investments, from fees received in
connection with the servicing of loans and consumer banking activities. Its
principal expenses are interest paid on deposits and other borrowings, and
administrative and other operating expenses. The sources of funds for lending
activities are deposit acquisitions, borrowings, loan sales and repayments.
Stockdale's primary use of funds is the origination of real estate loans and
loans to small businesses.
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Stockdale's results of operations depend upon the local real estate
market and the interest rate environment, both of which impact the demand for
loans. Interest rates also impact the difference between interest earned on
loans and investments, and the interest paid on deposits and borrowings. Other
significant influences on Stockdale's operations, and on the operations of
thrifts generally, include general economic conditions, the related monetary and
fiscal policies of the federal government and the policies of the various
regulatory authorities.
MARKET AREAS
During 1998 the Company's primary market areas included the cities and
surrounding rural communities in the Imperial and Coachella Valleys. Agriculture
is the major economic activity within Imperial County, with year-round
harvesting. El Centro is Imperial County's largest city and also serves as the
county's financial center. Agriculture also is the most significant economic
activity in the Coachella Valley, although the tourism, retail and service
industries are growing. The Company's customers include individuals, many of
whom are farmers or ranchers, and small-to-medium sized businesses.
VIB significantly increased its market area in recent years through
acquisitions and de novo branching. The Julian, California, office opened in
1995, and the Tecate, California, office, acquired in 1997, expanded VIB's
service area to eastern San Diego County. The Julian office serves customers in
that and neighboring eastern San Diego County mountain communities and the
Tecate office serves customers on both sides of the international border. The
Blythe office, acquired in 1997, extended VIB's service area to the Palo Verde
Valley, along the Colorado River, in eastern Riverside County. Blythe is the
only incorporated city on the eastern side of Riverside County along Interstate
10 and serves as the major service and retail center for eastern Riverside
County and the Palo Verde Valley, including communities on the Arizona side of
the Colorado River. The acquisition of the Hemet branch in January, 1999, marks
VIB's first entry into the San Jacinto Valley, which is approximately 90 miles
east of Los Angeles, 35 miles southeast of Riverside and 85 miles northeast of
San Diego.
VIB has its own "home page" address on the world wide web as an
additional means of expanding its market and providing banking services through
the internet. VIB's internet address is: http://www.vibank.com.
The Company further expanded the geographic scope of its banking
franchise into California's San Joaquin Valley through the acquisition of
Stockdale during the first quarter of 1999. Stockdale operates three
full-service offices in Bakersfield, in the southern San Joaquin Valley, and a
loan production office in Fresno, in the central San Joaquin Valley.
Bakersfield is Kern County's largest city and also serves as the
county's financial center. The economy in Kern County is focused in three
sectors - petroleum production, agriculture, and government/institutional. Kern
County accounts for one-half of all of the petroleum production in the State of
California and is considered the greatest single oil producing county in the
nation. Kern County's farm production placed it among the top agricultural
counties in the United States. The federal, state, county and municipal
governments are also important employers in Kern County, with military one of
the largest components. Thus far, the county has not been impacted by the
reduction of military spending or base closures, with base consolidations having
actually increased military employment in the county.
EMPLOYEES
As of December 31, 1998, the Company, through VIB, employed
approximately 265 full-time and 55 part-time persons. After consummating the
Merger and the Hemet Branch
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Acquisition, the number of full-time equivalent employees increased to
approximately 384 persons. None of the employees are represented by any union or
other collective bargaining agreement and the Company has not experienced any
type of strike or labor dispute. The Company considers its relationship with its
employees to be excellent.
COMPETITION
The banking business in California, generally, and in VIB's and
Stockdale's service areas specifically, is highly competitive with respect to
both loans and deposits and is dominated by a number of major banks which have
many offices operating over wide geographic areas. The Banking Subsidiaries
compete for deposits and loans principally with these major banks, savings and
loan associations, finance companies, credit unions and other financial
institutions located in the Banking Subsidiaries' market areas. Among the
advantages which the major banks have over the Banking Subsidiaries are their
ability to finance extensive advertising campaigns and to allocate their
investment assets to regions of highest yield and demand. Many of the major
commercial banks operating in the Banking Subsidiaries' service areas offer
certain services (such as trust and international banking services) which are
not offered directly by the Banking Subsidiaries and, by virtue of their greater
total capitalization, such banks have substantially higher lending limits than
the Banking Subsidiaries.
Moreover, banks generally, and the Banking Subsidiaries in particular,
face increasing competition for loans and deposits from non-bank financial
intermediaries such as savings and loan associations, thrift and loan
associations, credit unions, mortgage companies, insurance companies, and other
lending institutions. The Depository Institutions Deregulation and Monetary
Control Act of 1980 ("DIDA") authorized savings and loan associations and credit
unions to make certain consumer loans. The Garn-St. Germain Depository
Institutions Act of 1982 (the "Garn-St. Germain Act") and California legislation
further expanded the power of savings and loan associations to make consumer and
commercial loans in competition with commercial banks. Further, DIDA and a 1979
amendment to the usury provisions of the California Constitution have resulted
in the inflow of lendable funds from out-of-state lenders and in increased
competition from previously non-exempt in-state lenders for loans. (See
"SUPERVISION AND REGULATION - THE BANKING SUBSIDIARIES" herein.)
Historically, banks were not permitted to pay the same rates of
interest on similar deposit accounts as those offered by savings and loan
associations, credit unions and money-market funds. DIDA began the process of
deregulating interest rate controls and the Garn-St. Germain Act, which
authorized banks and savings and loan associations to pay money-market interest
rates on most types of accounts and eliminated interest rate differentials
between banks and savings and loan associations, and subsequent actions of
federal regulatory agencies have accelerated the deregulation process, enabling
banks to compete more effectively for deposits.
However, banks have faced increasing competition for deposits because
these same legislative and regulatory developments have permitted non-bank
financial intermediaries to offer certain types of deposit accounts not
previously permitted.
Further, the recent trend has been for other institutions, such as
brokerage firms, credit card companies, and even retail establishments, to offer
alternative investment vehicles, such as money market funds, as well as to offer
traditional banking services such as check access to money market funds and cash
advances on credit card accounts. In addition, other entities (both public and
private) seeking to raise capital through the issuance and sale of debt or
equity securities also compete with the Banking Subsidiaries in the acquisition
of deposits.
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In order to compete with the other financial institutions in its market
areas the Banking Subsidiaries rely principally upon local promotional activity,
personal contacts by their officers, directors, employees and the Company's
shareholders, and specialized services. In conjunction with the Banking
Subsidiaries' business plans to serve the financial needs of local residents and
small-to medium-sized businesses, they also rely on officer calling programs to
existing and prospective customers, focusing their overall marketing efforts
towards their local communities. The Banking Subsidiaries' promotional
activities emphasize the advantages of dealing with a locally-headquartered
institution sensitive to the particular needs of their local communities. For
customers whose loan demands exceed a Banking Subsidiary's lending limit, the
Banking Subsidiary attempts to arrange for such loans on a participation basis
with other banks. The Banking Subsidiaries also assist customers requiring
services not offered by them to obtain these services from their correspondent
banks.
OTHER SIGNIFICANT FACTORS RELATING TO THE COMPANY
Certain matters discussed in this Annual Report on Form 10-K may
constitute forward- looking statements, within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act, that involve substantial
risks and uncertainties. When used in this Annual Report on Form 10-K, the words
"anticipate," "believe," "estimate," "intend," "expect" and similar expressions
identify certain of such forward-looking statements. Actual results, performance
or achievements could differ materially from those contemplated, expressed or
implied by the forward-looking statements contained herein. The considerations
listed below represent certain important factors the Company believes could
cause such results to differ. These considerations are not intended to represent
a complete list of the general or specific risks that may affect the Company's
future results of operations or stock price and should be considered carefully.
HOLDING COMPANY STRUCTURE AND DEBT SERVICE
As a bank holding company, substantially all of the Company's operating
assets are owned by the Banking Subsidiaries. The Company, therefore, relies
upon receipt of sufficient funds from the Banking Subsidiaries, primarily in the
form of dividends, to meets its obligations and corporate expenses. The ability
of the Banking Subsidiaries to pay dividends to the Company, however, is limited
by statutory and regulatory authority, which may preclude payment of dividends
when the Company most needs them. On February 5, 1999, the Company issued the
Debentures which will increase its interest expense by approximately $2.1
million annually. The ability of the Company to meet its interest obligations on
the Debentures, therefore, may be impaired should the Banking Subsidiaries be
unable to pay dividends. (See "SUPERVISION AND REGULATION - THE COMPANY - Bank
Holding Company Liquidity" herein.)
Additionally, pursuant to an Agreement as to Expenses and Liabilities
(the "Expense Agreement") the Company irrevocably and unconditionally guaranteed
to each person or entity with which Trust itself becomes indebted or liable, the
full costs of any expenses or liabilities of the Trust, other than the Trust's
obligations to pay holders of the Capital Securities of the amounts due,
pursuant to the terms of the Capital Securities. Consequently, third party
creditors of the Trust may proceed directly against the Company under the
Expense Agreement, regardless of whether they have notice of the Expense
Agreement.
ACQUISITIONS
The Company's future results depend, to a significant extent, upon its
ability to successfully manage its recent external growth. There can be no
assurance that the Company will
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be able to adequately and profitably manage its expanded operations. Factors
that could adversely affect the Company's future prospects and financial results
include:
Ability to Manage Growth. Taking into consideration VIB's acquisition
of its Palm Springs and Hemet branch offices and the Company's merger with
Stockdale, the Company has increased its asset size by approximately $279
million, the number of its branch locations by five, and the number of loan
production offices by one since January 1, 1998. The Company's future success
is, therefore, dependent, in significant part, upon its ability to properly
manage and effectively integrate the new operations. Management has devoted
substantial time to the Company's growth strategy, including the
above-referenced acquisitions, and anticipates devoting substantial time to
future growth and acquisition opportunities. While the Company has experience in
managing external growth, there can be no assurance that the Company will be
successful in integrating the recent acquisitions or that they will enhance the
Company's profitability.
Ability to Achieve Operating Efficiencies. Because the markets in which
the Banking Subsidiaries operate are highly competitive and due to the inherent
uncertainties associated with integrating their operations, there can be no
assurance that the Banking Subsidiaries will be able to fully realize the
operating efficiencies contemplated by Management in connection with the Merger.
Such efficiencies include, but are not limited to, centralization of accounting,
data processing, cash clearing, personnel and executive management functions.
Furthermore, should operating efficiencies be realized, there can be no
assurance as to the timing of their realization.
Deployment of Excess Liquidity. The Company realized approximately $132
million in excess liquidity upon consummation of the Hemet Branch Acquisition
and the Trust's issuance of the Capital Securities. The Company's future results
of operations could be adversely effected by its and VIB's ability to
effectively invest or otherwise deploy the excess amount of cash received as a
result these transactions.
GENERAL BUSINESS RISKS
The business of the Banking Subsidiaries are subject to various
business risks. The volume of loan originations depends upon demand for loans of
the type originated by the Banking Subsidiaries and the competition in the
marketplace for such loans. The level of consumer confidence, fluctuations in
real estate values, in prevailing interest rates and in investment returns
expected by the financial community could combine to make loans of the type
originated by the Banking Subsidiaries less attractive. Additionally, the
Company and the Banking Subsidiaries may be adversely affected by factors that
could : (1) increase the costs to the borrowers of loans originated by the
Banking Subsidiaries, (2) create alternative lending sources for such borrowers,
or (3) increase the cost of funds to the Banking Subsidiaries at rates faster
than increases in interest income, thereby narrowing interest rate margins.
There can be no assurance, therefore, that there will be sufficient loan demand
or interest margins in the future to keep pace with deposit growth experienced.
Additionally, governmental interventions through elimination of income tax
benefits of home equity loans, increased or the addition of additional
regulations could also adversely affect the business in which the Banking
Subsidiaries are engaged. (See "SUPERVISION AND REGULATION - THE BANKING
SUBSIDIARIES - IMPACT OF MONETARY POLICIES" herein.)
RESERVE FOR LOAN LOSSES
Historical experience indicates that a portion of the Banking
Subsidiaries' loans will become delinquent and will require either a partial or
total charge-off. Regardless of the underwriting criteria utilized, losses may
be experienced by the Company as a result of various
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factors beyond its or the Banking Subsidiaries' control, including changes in
market conditions affecting the value of collateral and problems affecting a
borrower's continued creditworthiness. The Banking Subsidiaries' determination
of the adequacy of their reserves for loan losses is based upon various
considerations, including an analysis of risk characteristics of various
classifications of loans, previous loan loss experience, specific loans which
have loss potential, delinquency trends, estimated fair value of underlying
collateral, current economic conditions, results of regulatory examinations
(which can mandate additional loss reserves), geographic and industry
concentrations. Such factors can necessitate higher provisions for loan losses
and higher-charge- offs, thus adversely affecting the Banking Subsidiaries' and
the Company's net income. Some of the more significant factors affecting the
Banking Subsidiaries' reserves for loan losses are:
Seasonality and Agriculture. The Banking Subsidiaries' market areas are
heavily dependent upon the success of the seasonal agricultural economies of the
Imperial, Coachella and San Joaquin Valleys. This seasonality impacts evaluation
of the special risks involved in considering the adequacy of loan loss reserves.
In late December, 1998 and early January, 1999, California's Central Valley was
subject to unexpected freezing temperatures which severely damaged the region's
citrus crop. While the Banking Subsidiaries are dependent on agriculture, they
do not anticipate any negative impact from the freeze.
Concentration of Operations; Recessionary Environments; Decline in Real
Estate Values. The Banking Subsidiaries business activities are currently
focused in the Imperial, Coachella and San Joaquin Valleys, as well as other
inland communities in Southern California. Although VIB has expanded into
coastal, north San Diego County and Orange County, California, Yuma, Arizona and
Las Vegas, Nevada, with loan production offices, the results of operations of
the Banking Subsidiaries are dependent on general economic trends in Kern,
Imperial and Riverside Counties. The concentration of the Banking Subsidiaries'
operations in these counties exposes them to greater risk than other banks with
a wider geographic base in the event of an economic slow-down or recession
affecting certain segments of the economy, especially agriculture, or in the
event of localized catastrophes, such as earthquakes, fires and floods.
Moreover, localized declines in the market values of real estate of the type
that secure loans originated by the Banking Subsidiaries, reducing homeowners'
equity and businesses' equity in their properties could result in: (1) weakening
of collateral coverage on loans previously made and (2) diminish the available
market for similar loan originations in the future.
Year 2000 Issues. At the end of the current year, many companies,
including financial institutions such as the Company and the Banking
Subsidiaries, will face potentially serious issues associated with the inability
of certain existing data processing hardware and software to appropriately
recognize calendar dates beginning in the year 2000. Many computer programs that
can only distinguish the final two digits of the year entered may read entries
for the year 2000 as the year 1900 and compute payment, interest or delinquency
based on the wrong date or, are expected to be unable to compute payment,
interest or delinquency. Additionally, the failure of a banking customer to
prepare for year 2000 compatibility could have a significant adverse effect on
such customer's operations and profitability, in turn, inhibiting its ability to
repay loans in accordance with their terms.
The Banking Subsidiaries have implemented detailed plans to address
Year 2000 issues regarding their own states of preparedness regarding their
critical and secondary operating systems. However, there can be no assurance
that their customers or vendors will be prepared or not experience unforeseen
delays, or whether loan loss reserves established to cover Year 2000 risks will
be adequate.
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SUPERVISION AND REGULATION - THE COMPANY
Banking is a complex, highly regulated industry. The primary goals of
the regulatory scheme are to maintain a safe and sound banking system and to
facilitate the conduct of sound monetary policy. In furtherance of these goals,
Congress has created several largely autonomous regulatory agencies and enacted
numerous laws that govern banks, bank holding companies and the banking
industry. The descriptions of and references to the statutes and regulations
below are brief summaries and do not purport to be complete. The descriptions
are qualified in their entirety by reference to the specific statutes and
regulations discussed.
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "Act"), and is subject to supervision by
the FRB. As a bank holding company, the Company is required to file with the FRB
an annual report and such other additional information as the FRB may require
under the Act. The FRB may also make examinations of the Company and its
subsidiaries.
The Act requires prior approval by the FRB for, among other things, the
acquisition by a bank holding company of direct or indirect ownership or control
of more than 5% of the voting shares, or substantially all the assets, of any
bank or for a merger or consolidation by a bank holding company with any other
bank holding company.
The Company is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by, and may be required to file reports
with, the Commissioner. Regulations have not yet been proposed or adopted or
steps otherwise taken to implement the Commissioner's powers under this statute.
BANK HOLDING COMPANY LIQUIDITY
The Company is a legal entity, separate and distinct from its
subsidiaries. Although there exists the ability to raise capital on its own
behalf or borrow from external sources, it may also obtain additional funds
through dividends paid by, and fees for services provided to, its subsidiaries.
Regarding VIB, the Company is entitled to receive dividends, when and
as declared by VIB's Board of Directors, out of funds legally available
therefor, as specified and limited by the California Financial Code. Under
Section 642 of the California Financial Code, funds available for cash dividend
payments by a bank are restricted to the lesser of: (i) a bank's retained
earnings; or (ii) a bank's net income for its last three fiscal years (less any
distributions to shareholders made during such period). With the prior approval
of the Commissioner of the California Department of Financial Institutions, cash
dividends may also be paid out of the greater of: (i) a bank's retained
earnings; (ii) net income for a bank's last preceding fiscal year; or (iii) net
income for a bank's current fiscal year. If the Commissioner finds that the
shareholders' equity of the bank is not adequate or that the payment of a
dividend would be unsafe or unsound for the bank, the Commissioner may order the
bank not to pay a dividend to the bank's shareholders.
Regarding Stockdale, OTS regulations impose limitations upon all
capital distributions by savings associations, such as cash dividends, payment
to repurchase or otherwise acquire its shares, payments to shareholders of
another institution in a cash-out merger and other distributions charged against
capital. In general, Stockdale may not declare or pay a cash dividend on its
capital stock if the payment would cause Stockdale to fail to meet one of its
regulatory capital requirements. Stockdale must also provide the OTS with 30
days advance notice of any proposed dividend declaration.
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<PAGE> 12
Under the OTS regulations, an association that meets its capital
requirements both before and after a proposed distribution and has not been
notified by the OTS that it is in need of more than normal supervision (a "Tier
1 association") may, after prior notice to but without the approval of the OTS,
make capital distributions during a calendar year up to the higher of: (i) 100%
of its net income to date during the calendar year plus the amount that would
reduce by one-half its surplus capital ratio at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four-quarter period. A
Tier 1 association may make capital distributions in excess of the above amount
if it gives notice to the OTS and the OTS does not object to the distribution.
At December 31, 1998, Stockdale qualified as a Tier 1 association for purposes
of the capital distribution rule.
If an association does not meet the definition of a Tier 1 association,
its ability to pay dividends is somewhat more restricted. In addition, the OTS
may prohibit a proposed capital distribution that would otherwise be permitted
if the OTS determines that the distribution would constitute an unsafe or
unsound practice.
On January 19, 1999 the OTS issued amended regulations regarding
capital distributions, to conform its requirements to the OTS's prompt
corrective action regulation and to conform to the rules of the other banking
agencies, to the extent possible. The amended regulations are effective April 1,
1999. Under the amended regulations, an institution that would remain at least
adequately capitalized after making a capital distribution, and was not owned by
a holding company, would no longer be required to provide notice to the OTS
prior to making a capital distribution. "Troubled" associations and
undercapitalized associations would be allowed to make capital distributions
only by filing an application and receiving OTS approval, and such applications
would be approved under certain limited circumstances. Such regulations only
apply to OTS regulated institutions which are not bank holding company
subsidiaries. Currently, it is not contemplated that Stockdale will cease to be
a bank holding company subsidiary and would continue to be exempt from the new
regulations.
Under the Financial Institutions Supervisory Act, the FDIC also has the
authority to prohibit an insured institution from engaging in business practices
which the FDIC considers to be unsafe or unsound. Since both VIB and Stockdale
are insured institutions, it is therefore possible, depending upon their
financial conditions and other factors, that the FDIC could assert that the
payment of dividends or other payments might, under some circumstances,
constitute an unsafe or unsound practice and thereby prohibit such payments.
TRANSACTIONS WITH AFFILIATES
The Company and any subsidiaries it may purchase or organize are deemed
to be affiliates of the Banking Subsidiaries within the meaning of the Act.
Pursuant thereto, loans by the Banking Subsidiaries to affiliates, investments
by the Banking Subsidiaries in affiliates' stock, and taking affiliates' stock
by the Banking Subsidiaries as collateral for loans to any borrower will be
limited to 10% of the Banking Subsidiaries' capital, in the case of any one
affiliate, and will be limited to 20% of the Banking Subsidiaries' capital in
the case of all affiliates. In addition, such transactions must be on terms and
conditions that are consistent with safe and sound banking practices; in
particular, a bank and its subsidiaries generally may not purchase from an
affiliate a low-quality asset, as defined in the Federal Reserve Act. Such
restrictions also prevent a bank holding company and its other affiliates from
borrowing from a banking subsidiary of the bank holding company unless the loans
are secured by marketable collateral of designated amounts. The Company and the
Banking Subsidiaries are also subject to certain restrictions with respect to
engaging in the underwriting, public sale and distribution of securities.
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<PAGE> 13
LIMITATIONS ON BUSINESSES AND ACTIVITIES
With certain limited exceptions, a bank holding company is prohibited
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company and
from engaging directly or indirectly in any activity other than banking or
managing or controlling banks or furnishing services to or performing services
for its authorized subsidiaries. A bank holding company may, however, engage or
acquire an interest in a company that engages in activities which the FRB has
determined to be closely related to banking or managing or controlling banks as
to be properly incident thereto. In making such a determination, the FRB is
required to consider whether the performance of such activities can reasonably
be expected to produce benefits to the public, such as greater convenience,
increased competition, or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interests, or unsound banking practices. Although the
future scope of permitted activities is uncertain and cannot be predicted, some
of the activities that the FRB has determined by regulation to be closely
related to banking are:
o making or acquiring loans or other extensions of credit for
its own account or for the account of others;
o servicing loans and other extensions of credit for any person;
o operating an industrial bank, Morris Plan bank, or industrial
loan company, as authorized under state law, so long as the
institution is not a bank;
o operating a trust company in the manner authorized by federal
or state law, so long as the institution is not a bank and
does not make loans or investments or accept deposits, except
as permitted under the FRB's Regulation Y;
o subject to certain limitations, acting as an investment or
financial adviser to investment companies and other persons;
o leasing personal and real property or acting as agent, broker,
or adviser in leasing such property in accordance with various
restrictions imposed by Regulation Y, including a restriction
that it is reasonably anticipated that each lease will
compensate the lessor for not less than the lessor's full
investment in the property;
o making equity and debt investments in corporations or projects
designed primarily to promote community welfare;
o providing financial, banking, or economic data processing and
data transmission services, facilities, data bases, or
providing access to such services, facilities, or data bases;
o acting as principal, agent, or broker for insurance directly
related to extensions of credit which are limited to assuring
the repayment of debts in the event of death, disability, or
involuntary unemployment of the debtor;
o acting as agent or broker for insurance directly related to
extensions of credit by a finance company subsidiary;
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<PAGE> 14
o owning, controlling, or operating a savings association
provided that the savings association engages only in
activities permitted for bank holding companies under
Regulation Y;
o providing courier services of limited character;
o providing management consulting advice to non-affiliated bank
and nonbank depository institutions, subject to the
limitations imposed by Regulation Y;
o selling money orders, travelers' checks and U.S. Savings
Bonds;
o appraisal of real estate and personal property;
o acting as an intermediary for the financing of commercial or
industrial income- producing real estate;
o providing securities brokerage services, related securities
credit activities pursuant to Regulation T, and other
incidental activities;
o underwriting and dealing in obligations of the U.S., general
obligations of states and their political subdivisions, and
other obligations authorized for state member banks under
federal law; and
o providing general information and statistical forecasting,
advisory and transactional services with respect to foreign
exchange through a separately incorporated subsidiary.
Federal law prohibits a bank holding company and any subsidiary banks
from engaging in certain tie-in arrangements in connection with the extension of
credit. Thus, for example, the Banking Subsidiaries may not extend credit, lease
or sell property, or furnish any services, or fix or vary the consideration for
any of the foregoing on the condition that:
o the customer must obtain or provide some additional credit,
property or services from or to the Banking Subsidiaries other
than a loan, discount, deposit or trust service;
o the customer must obtain or provide some additional credit,
property or service from or to the Company or any of the
Banking Subsidiaries; or
o the customer may not obtain some other credit, property or
services from competitors, except reasonable requirements to
assure soundness of credit extended.
CAPITAL ADEQUACY
The FRB's risk-based capital adequacy guidelines for bank holding
companies and state member banks, discussed in more detail below (see
"SUPERVISION AND REGULATION THE BANKING SUBSIDIARIES - Recent Legislation and
Regulatory Developments - 3. Risk- Based Capital Guidelines" herein), assign
various risk percentages to different categories of assets, and capital is
measured as a percentage of risk assets. While in many cases total risk assets
calculated in accordance with the guidelines is less than total assets
calculated absent the rating, certain non-balance sheet assets, including loans
sold with recourse, legally binding loan commitments and standby letters of
credit, are treated as risk assets, with the assigned rate
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<PAGE> 15
varying with the type of asset. As a result, it is possible that total risk
assets for purposes of the guidelines exceeds total assets under generally
accepted accounting principles, thereby reducing the capital-to-assets ratio.
Under the terms of the guidelines, bank holding companies are expected to meet
capital adequacy guidelines based both on total assets and on total risk assets.
SUPERVISION AND REGULATION - THE BANKING SUBSIDIARIES
GENERAL
Stockdale, as a federal stock savings bank whose deposits are insured
by the FDIC up to the maximum extent provided by law, is subject to regulation,
supervision, and regular examination by the OTS and the FDIC. VIB as a
state-chartered banking corporation which is also a member of the Federal
Reserve System, is subject to regulation, supervision, and regular examinations
by the California Department of Financial Institutions, the FDIC and the Federal
Reserve. The Banking Subsidiaries' deposits are insured by the FDIC up to the
maximum extent provided by law. The regulations of these agencies govern most
aspects of the Banking Subsidiaries' business, including capital ratios,
reserves against deposits, interest rates payable on certain types of deposits,
loans, investments, mergers and acquisitions, borrowings, dividends and
locations of branch offices. California law exempts all banks from usury
limitations on interest rates.
RECENT LEGISLATION AND REGULATORY DEVELOPMENTS
1. INTRODUCTION
General. From time to time legislation is proposed or enacted which has
the effect of increasing the cost of doing business and changing the competitive
balance between banks and other financial and non-financial institutions.
Various federal laws enacted over the past several years have provided, among
other things, for the maintenance of mandatory reserves with the Federal Reserve
on deposits by depository institutions (state reserve requirements have been
eliminated); the phasing-out of the restrictions on the amount of interest which
financial institutions may pay on certain of their customers' accounts; and the
authorization of various types of new deposit accounts, such as NOW accounts,
"Money Market Deposit" accounts and "Super NOW" accounts, designed to be
competitive with money market mutual funds and other types of accounts and
services offered by various financial and non-financial institutions. The
lending authority and permissible activities of certain non-bank financial
institutions such as savings and loan associations and credit unions have been
expanded, and federal regulators have been given increased authority and means
for providing financial assistance to insured depository institutions and for
effecting interstate and cross-industry mergers and acquisitions of failing
institutions. These laws have generally had the effect of altering competitive
relationships existing among financial institutions, reducing the historical
distinctions between the services offered by banks, savings and loan
associations and other financial institutions, and increasing the cost of funds
to banks and other depository institutions.
Other legislation has been proposed or is pending before the United
States Congress which would affect the financial institutions industry. Such
legislation includes wide-ranging proposals to further alter the structure,
regulation and competitive relationships of the nation's financial institutions,
to reorganize the federal regulatory structure of the financial institutions
industry, to subject banks to increased disclosure and reporting requirements,
and to expand the range of financial services which banks and bank holding
companies can provide. Other proposals which have been introduced or are being
discussed would equalize the relative powers of savings and loan holding
companies and bank holding companies, and authorize such holding companies to
engage in insurance underwriting and brokerage, real estate development and
brokerage, and
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<PAGE> 16
certain securities activities, including underwriting and dealing in United
States Government securities and municipal securities, sponsoring and managing
investment companies and underwriting the securities thereof. It cannot be
predicted whether or in what form any of these proposals will be adopted, or to
what extent they will effect the various entities comprising the financial
institutions industry.
Certain of the potentially significant changes which have been enacted
in the past several years are discussed below.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act"), enacted on September 29, 1994,
repealed the McFadden Act of 1927, which required states to decide whether
national or state banks could enter their state, and, effective June 1, 1997,
allows banks to open branches across state lines. The Riegle-Neal Act also
repealed the 1956 Douglas Amendment to the Bank Holding Company Act, which
placed the same requirements on bank holding companies. The repeal of the
Douglas Amendment made it possible for bank holding companies to buy
out-of-state banks in any state after September 29, 1995, which, after June 1,
1997, may now be converted into interstate branches.
The Riegle-Neal Act permitted interstate banking to begin effective
September 29, 1995. The amendment to the Bank Holding Company Act permits bank
holding companies to acquire banks in other states provided that the acquisition
does not result in the bank holding company controlling more than 10 percent of
the deposits in the United States, or 30 percent of the deposits in the state in
which the bank to be acquired is located. However, the Riegle-Neal Act also
provides that states have the authority to waive the state concentration limit.
Individual states may also require that the bank being acquired be in existence
for up to five years before an out-of-state bank or bank holding company may
acquire it.
The Riegle-Neal Act provides that, since June 1, 1997, interstate
branching and merging of existing banks is permitted, provided that the banks
are at least adequately capitalized and demonstrate good management. Interstate
mergers and branch acquisitions were permitted at an earlier time if the state
choose to enact a law allowing such activity. The states were also authorized to
enact laws to permit interstate banks to branch de novo.
On September 28, 1995, the California Interstate Banking and Branching
Act of 1995 ("CIBBA") was enacted and signed into law. CIBBA authorized
out-of-state banks to enter California by the acquisition of or merger with a
California bank that has been in existence for at least 5 years, unless the
California bank is in danger of failing or in certain other emergency
situations. CIBBA does not permit out-of-state banks to enter California by
branch acquisition or de novo branching. CIBBA allows a California state bank to
have agency relationships with affiliated and unaffiliated insured depository
institutions and allows a bank subsidiary of a bank holding company to act as an
agent to receive deposits, renew time deposits, service loans and receive
payments for a depository institution affiliate.
Proposed Expansion of Securities Underwriting Authority. Various bills
have been introduced in the United States Congress which would expand, to a
lesser or greater degree and subject to various conditions and limitations, the
authority of bank holding companies to engage in the activity of underwriting
and dealing in securities. Some of these bills would authorize securities firms
(through the holding company structure) to own banks, which could result in
greater competition between banks and securities firms. No prediction can be
made as to whether any of these bills will be passed by the United States
Congress and enacted into law, what provisions such a bill might contain, or
what effect it might have on the Company or its Banking Subsidiaries.
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<PAGE> 17
Expansion of Investment Opportunities for California State-Chartered
Banks. Legislation enacted by the State of California has substantially expanded
the authority of California state-chartered banks to invest in real estate,
corporate stock and other corporate securities. National banks are governed in
these areas by federal law, the provisions of which are more restrictive than
California law. However, provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991, discussed below, limits state-authorized activities to
that available to national banks, unless the FDIC has determined that such
activities would pose no risk to the insurance fund of which it is a member and
the institution is in compliance with applicable regulatory requirements.
2. FINANCIAL INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF
1989
General. On August 9, 1989, the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA") was signed into law. This
legislation has resulted in major changes in the regulation of insured financial
institutions, including significant changes in the authority of government
agencies to regulate insured financial institutions.
Under FIRREA, the Federal Savings and Loan Insurance Corporation
("FSLIC") and the Federal Home Loan Bank Board were abolished and the FDIC was
authorized to insure savings associations, including federal savings
associations, state chartered savings and loans and other corporations
determined to be operated in substantially the same manner as a savings
association. FIRREA established two deposit insurance funds to be administered
by the FDIC. The money in these two funds is separately maintained and not
commingled. The FDIC Permanent Insurance Fund was replaced by the Bank Insurance
Fund (the "BIF") and the FSLIC deposit insurance fund was replaced by the
Savings Association Insurance Fund (the "SAIF").
VIB's deposit accounts are insured by the BIF, as administered by the
FDIC, up to the maximum amount permitted by law. Stockdale's deposit accounts
are insured by the SAIF, as administered by the FDIC, up to the maximum amount
permitted by law. Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator.
Deposit Insurance Assessments. Under FIRREA, the premium assessments
made on banks and savings associations for deposit insurance were initially
increased, with rates set separately for banks and savings associations, subject
to statutory restrictions. The Omnibus Budget Reconciliation Act of 1990,
designed to address the federal budget deficit, increased the insurance
assessment rates for members of the BIF and the SAIF over that provided by
FIRREA, and eliminated FIRREA's maximum reserve-ratio constraints on the BIF.
The FDIC raised BIF premiums to 23(cent) per $100 in insured deposits for 1993
from a base of 12(cent) in 1990.
Effective January 1, 1994, the FDIC implemented a risk-based assessment
system, under which an institution's premium assessment is based on the
probability that the deposit insurance fund will incur a loss with respect to
the institution, the likely amount of such loss, and the revenue needs of the
deposit insurance fund. As long as BIF's reserve ratio is less than a specified
"designated reserve ratio," 1.25%, the total amount raised from BIF members by
the risk-based assessment system may not be less than the amount that would be
raised if the assessment rate for all BIF members were 23(cent) per $100 in
insured deposits. The FDIC determined that the designated reserve ratio was
achieved on May 31, 1995. Accordingly, on August 8, 1995, the FDIC issued final
regulations adopting an assessment rate schedule for BIF members of 4(cent) to
31(cent)
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per $100 in insured deposits that became effective June 1, 1995. On November 14,
1995, the FDIC further reduced the BIF assessment rates by 4(cent) so that
effective January 1, 1996, the BIF premiums ranged from zero to 27(cent) per
$100 in insured deposits, but in any event not less than $2,000 per year. The
Deposit Insurance Funds Act of 1996, signed into law on September 30, 1996,
eliminated the minimum assessment, commencing with the fourth quarter of 1996.
Under the risk-based assessment system, as of December 31, 1995, SAIF
members paid within a range of 23(cent) to 31(cent) per $100 in insured
deposits, depending upon the institution's risk classification. Pursuant to the
Economic Growth and Paperwork Reduction Act of 1996 (the "EGPRA"), the FDIC
imposed a special assessment on SAIF members to capitalize SAIF at the
"designated reserve ratio" of 1.25% as of October 1, 1996. Based on Stockdale's
deposits as of March 31, 1995, the date for measuring the amount of the special
assessment pursuant to the EGPRA, Stockdale paid a special assessment of
$760,000 in October, 1996 to recapitalize the SAIF. This expense was recognized
during the third quarter of 1996.
Under the risk-based assessment system, a BIF member institution such
as VIB is categorized into one of three capital categories (well capitalized,
adequately capitalized, and undercapitalized) and one of three categories based
on supervisory evaluations by its primary federal regulator (in VIB's case, the
FRB). The three supervisory categories are: financially sound with only a few
minor weaknesses (Group A), demonstrates weaknesses that could result in
significant deterioration (Group B), and poses a substantial probability of loss
(Group C). The capital ratios used by the FRB to define well-capitalized,
adequately capitalized and undercapitalized are the same as in the FRB's prompt
corrective action regulations (discussed below). The BIF assessment rates since
January 1, 1997 are summarized below; assessment figures are expressed in terms
of cents per $100 in insured deposits. The capital and supervisory group ratings
for SAIF institutions are the same as for BIF institutions. Accordingly,
Stockdale's deposit insurance assessment rate is also derived from the following
table:
ASSESSMENT RATES EFFECTIVE JANUARY 1, 1997
<TABLE>
<CAPTION>
SUPERVISORY GROUP
---------------------------------------------
CAPITAL GROUP GROUP A GROUP B GROUP C
- ------------- ------- ------- -------
<S> <C> <C> <C>
Well Capitalized................... 0 3 17
Adequately Capitalized............. 3 10 24
Undercapitalized................... 10 24 27
</TABLE>
Pursuant to the EGPRA, Stockdale pays its normal deposit insurance
premiums as a member of the SAIF. In addition, Stockdale also pays an amount
equal to 6.4(cent) per $100 deposits towards the retirement of the Financing
Corporation bonds ("FICO Bonds") issued in the 1980s to assist in the recovery
of the savings and loan industry. In addition, after December 31, 1996, banks
are required to share in the payment of interest on the FICO Bonds. Previously,
the FICO debt was paid solely out of the SAIF assessment base. The assessments
imposed on insured depository institutions with respect to any BIF-assessable
deposit are assessed at a rate equal to 1/5 of the rate of the assessments
imposed on insured depository institutions with respect to any SAIF-assessable
deposit. Although the FICO assessment rates are annual rates, they are subject
to change quarterly. Since the FICO bonds do not mature until the year 2019, it
is conceivable that banks will continue to share in the payment of the interest
on the bonds until then.
The following table shows the quarterly assessment rates for SAIF and
BIF insured deposits, expressed in cents per $100 in insured deposits:
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<TABLE>
<CAPTION>
FICO ASSESSMENT RATES
SAIF BIF
--------------------- ---
<S> <C> <C>
First Quarter, 1997....................................... 6.48(cent) 1.296(cent)
Second Quarter, 1997...................................... 6.50 1.300
Third Quarter, 1997....................................... 6.30 1.260
Fourth Quarter, 1997...................................... 6.32 1.264
First Quarter, 1998....................................... 6.28 1.256
Second Quarter, 1998...................................... 6.22 1.244
Third Quarter, 1998....................................... 6.10 1.220
Fourth Quarter, 1998...................................... 5.82 1.164
</TABLE>
Under EGPRA, the FDIC is not permitted to establish SAIF assessment
rates that are lower than comparable BIF assessment rates. Beginning no later
than January 1, 2000, the rate paid to retire the FICO Bonds will be equal for
members of the BIF and the SAIF. The EGPRA also provides for the merging of the
BIF and the SAIF by January 1, 2000, provided there are no financial
institutions still chartered as savings associations at that time. Should the
insurance funds be merged before January 1, 2000, the rate paid by all members
of this new fund to retire the FICO Bonds would be equal.
With certain limited exceptions, FIRREA prohibits a bank from changing
its status as an insured depository institution with the BIF to the SAIF and
prohibits a savings association from changing its status as an insured
depository institution with the SAIF to the BIF, without the prior approval of
the FDIC.
FDIC Receiverships. Pursuant to FIRREA, the FDIC may be appointed
conservator or receiver of any insured bank or savings association. In addition,
FIRREA authorized the FDIC to appoint itself as sole conservator or receiver of
any insured state bank or savings association for any, among others, of the
following reasons:
o insolvency of such institution;
o substantial dissipation of assets or earnings due to any
violation of law or regulation or any unsafe or unsound
practice;
o an unsafe or unsound condition to transact business, including
substantially insufficient capital or otherwise;
o any willful violation of a cease and desist order which has
become final;
o any concealment of books, papers, records or assets of the
institution;
o the likelihood that the institution will not be able to meet
the demands of its depositors or pay its obligations in the
normal course of business;
o the incurrence or likely incurrence of losses by the
institution that will deplete all or substantially all of its
capital with no reasonable prospect for the replenishment of
the capital without federal assistance; or
o any violation of any law or regulation, or an unsafe or
unsound practice or condition which is likely to cause
insolvency or substantial dissipation of assets or
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<PAGE> 20
earnings, or is likely to weaken the condition of the
institution or otherwise seriously prejudice the interest of
its depositors.
As a receiver of any insured depository institution, the FDIC may
liquidate such institution in an orderly manner and make such other disposition
of any matter concerning such institution as the FDIC determines is in the best
interests of such institution, its depositors and the FDIC. Further, the FDIC
shall as the conservator or receiver, by operation of law, succeed to all
rights, titles, powers and privileges of the insured institution, and of any
stockholder, member, account holder, depositor, officer or director of such
institution with respect to the institution and the assets of the institution;
may take over the assets of and operate such institution with all the powers of
the members or shareholders, directors and the officers of the institution and
conduct all business of the institution; collect all obligations and money due
to the institution and preserve; and conserve the assets and property of such
institution.
Enforcement Powers. Some of the most significant provisions of FIRREA
were the expansion of regulatory enforcement powers. FIRREA has given the
federal regulatory agencies broader and stronger enforcement authorities
reaching a wider range of persons and entities.
Some of those provisions included those which:
o expanded the category of persons subject to enforcement under
the Federal Deposit Insurance Act;
o expanded the scope of cease and desist orders and provided for
the issuance of a temporary cease and desist orders;
o provided for the suspension and removal of wrongdoers on an
expanded basis and on an industry-wide basis;
o prohibited the participation of persons suspended or removed
or convicted of a crime involving dishonesty or breach of
trust from serving in another insured institution;
o required regulatory approval of new directors and senior
executive officers in certain cases;
o provided protection from retaliation against "whistleblowers"
and establishes rewards for "whistleblowers" in certain
enforcement actions resulting in the recovery of money;
o required the regulators to publicize all final enforcement
orders;
o required each insured financial institution to provide its
independent auditor with its most recent Report of Condition
("Call Report");
o significantly increased the penalties for failure to file
accurate and timely Call Reports; and
o provided for extensive increases in the amounts and
circumstances for assessment of civil money penalties, civil
and criminal forfeiture and other civil and criminal fines and
penalties.
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<PAGE> 21
Crime Control Act of 1990. The Crime Control Act of 1990 further
strengthened the authority of federal regulators to enforce capital
requirements, increased civil and criminal penalties for financial fraud, and
enacted provisions allowing the FDIC to regulate or prohibit certain forms of
golden parachute benefits and indemnification payments to officers and directors
of financial institutions.
3. RISK-BASED CAPITAL GUIDELINES
The federal banking agencies have established risk-based capital
guidelines. The risk- based capital guidelines include both a new definition of
capital and a framework for calculating risk weighted assets by assigning assets
and off-balance sheet items to broad credit risk categories. A bank's risk-based
capital ratio is calculated by dividing its qualifying capital (the numerator of
the ratio) by its risk weighted assets (the denominator of the ratio).
A bank's qualifying total capital consists of two types of capital
components: "core capital elements" (comprising Tier 1 capital) and
"supplementary capital elements" (comprising Tier 2 capital). The Tier 1
component of a bank's qualifying capital must represent at least 50% of
qualifying total capital and may consist of the following items that are defined
as core capital elements:
o common stockholders' equity;
o qualifying noncumulative perpetual preferred stock (including
related surplus); and
o minority interest in the equity accounts of consolidated
subsidiaries.
The Tier 2 component of a bank's qualifying total capital may consist of the
following items:
o allowance for loan and lease losses (subject to limitations);
o perpetual preferred stock and related surplus (subject to
conditions);
o hybrid capital instruments (as defined) and mandatory
convertible debt securities; and
o term subordinated debt and intermediate-term preferred stock,
including related surplus (subject to limitations).
Assets and credit equivalent amounts of off-balance sheet items are
assigned to one of several broad risk categories, according to the obligor, or,
if relevant, the guarantor or the nature of collateral. The aggregate dollar
value of the amount in each category is then multiplied by the risk weight
associated with that category. The resulting weighted values from each of the
risk categories are added together, and this sum is the bank's total risk
weighted assets that comprise the denominator of the risk-based capital ratio.
Risk weights for all off-balance sheet items are determined by a
two-step process. First, the "credit equivalent amount" of off-balance sheet
items such as letters of credit and recourse arrangements is determined, in most
cases by multiplying the off-balance sheet item by a credit conversion factor.
Second, the credit equivalent amount is treated like any balance sheet asset and
generally is assigned to the appropriate risk category according to the obligor,
or, if relevant, the guarantor or the nature of the collateral.
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<PAGE> 22
The supervisory standards set forth below specify minimum supervisory
ratios based primarily on broad risk considerations. The risk-based ratios do
not take explicit account of the quality of individual asset portfolios or the
range of other types of risks to which banks may be exposed, such as interest
rate, liquidity, market or operational risks. For this reason, banks are
generally expected to operate with capital positions above the minimum ratios.
All banks are required to meet a minimum ratio of qualifying total
capital to risk weighted assets of 8%, of which at least 4% should be in the
form of Tier 1 capital net of goodwill, and a minimum ratio of Tier 1 capital to
risk weighted assets of 4%. The maximum amount of supplementary capital elements
that qualifies as Tier 2 capital is limited to 100% of Tier 1 capital net of
goodwill. In addition, the combined maximum amount of subordinated debt and
intermediate-term preferred stock that qualifies as Tier 2 capital is limited to
50% of Tier 1 capital. The maximum amount of the allowance for loan and lease
losses that qualifies as Tier 2 capital is limited to 1.25% of gross risk
weighted assets. Allowance for loan and lease losses in excess of this limit
may, of course, be maintained, but would not be included in a bank's risk-based
capital calculation.
In addition to the risk-based guidelines, the federal banking agencies
require all banks to maintain a minimum amount of Tier 1 capital to total
assets, referred to as the leverage ratio. For a bank rated in the highest of
the five categories used by regulators to rate banks, the minimum leverage ratio
of Tier 1 capital to total assets is 3%. For all banks not rated in the highest
category, the minimum leverage ratio must be at least 4% to 5%. In addition to
these uniform risk-based capital guidelines and leverage ratios that apply
across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
In December, 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss reserves to classified
assets. The benchmark set forth by the policy statement is the sum of: (1)
assets classified loss; (2) 50% of assets classified doubtful; (3) 15% of assets
classified substandard; and (4) estimated credit losses on other assets over the
upcoming twelve months.
The federal banking agencies have recently revised their risk-based
capital rules to take account of concentrations of credit and the risks of
non-traditional activities. Concentrations of credit refers to situations where
a lender has a relatively large proportion of loans involving one borrower,
industry, location, collateral or loan type. Non-traditional activities are
considered those that have not customarily been part of the banking business but
that start to be conducted as a result of developments in, for example,
technology or financial markets. The regulations require institutions with high
or inordinate levels of risk to operate with higher minimum capital standards.
The federal banking agencies also are authorized to review an institution's
management of concentrations of credit risk for adequacy and consistency with
safety and soundness standards regarding internal controls, credit underwriting
or other operational and managerial areas.
Further, the banking agencies recently have adopted modifications to
the risk-based capital rules to include standards for interest rate risk
exposures. Interest rate risk is the exposure of a bank's current and future
earnings and equity capital arising from adverse movements in interest rates.
While interest rate risk is inherent in a bank's role as financial intermediary,
it introduces volatility to bank earnings and to the economic value of the bank.
The banking agencies have addressed this problem by implementing changes to the
capital standards to include a bank's
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<PAGE> 23
exposure to declines in the economic value of its capital due to changes in
interest rates as a factor that the banking agencies will consider in evaluating
an institution's capital adequacy. Bank examiners consider a bank's historical
financial performance and its earnings exposure to interest rate movements as
well as qualitative factors such as the adequacy of a bank's internal interest
rate risk management. The federal banking agencies recently considered adopting
a uniform supervisory framework for all institutions to measure and assess each
bank's exposure to interest rate risk and establish an explicit capital charge
based on the assessed risk, but ultimately elected not to adopt such a uniform
framework. Even without such a uniform framework, however, each bank's interest
rate risk exposure is assessed by its primary federal regulator on an
individualized basis, and it may be required by the regulator to hold additional
capital for interest rate risk if it has a significant exposure to interest rate
risk or a weak interest rate risk management process.
Effective April 1, 1995, the federal banking agencies issued rules
which limit the amount of deferred tax assets that are allowable in computing a
bank's regulatory capital. The standard had been in effect on an interim basis
since March, 1993. Deferred tax assets that can be realized for taxes paid in
prior carryback years and from future reversals of existing taxable temporary
differences are generally not limited. Deferred tax assets that can only be
realized through future taxable earnings are limited for regulatory capital
purposes to the lesser of: (i) the amount that can be realized within one year
of the quarter-end report date; or (ii) 10% of Tier 1 capital. The amount of any
deferred tax in excess of this limit would be excluded from Tier 1 capital,
total assets and regulatory capital calculations.
4. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
General. The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") was signed into law on December 19, 1991. FDICIA recapitalized
the FDIC's Bank Insurance Fund, granted broad authorization to the FDIC to
increase deposit insurance premium assessments and to borrow from other sources,
and continued the expansion of regulatory enforcement powers, along with many
other significant changes.
Prompt Corrective Action. FDICIA established five categories of bank
capitalization: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized" and mandated the establishment of a system of "prompt
corrective action" for institutions falling into the lower capital categories.
Under FDICIA, banks are prohibited from paying dividends or management fees to
controlling persons or entities if, after making the payment the bank would be
undercapitalized, that is, the bank fails to meet the required minimum level for
any relevant capital measure. Asset growth and branching restrictions apply to
undercapitalized banks, which are required to submit acceptable capital plans
guaranteed by its holding company, if any. Broad regulatory authority was
granted with respect to significantly undercapitalized banks, including forced
mergers, growth restrictions, ordering new elections for directors, forcing
divestiture by its holding company, if any, requiring management changes, and
prohibiting the payment of bonuses to senior management. Even more severe
restrictions are applicable to critically undercapitalized banks, those with
capital at or less than 2%, including the appointment of a receiver or
conservator after 90 days, even if a bank is still solvent.
The federal banking agencies have promulgated substantially similar
regulations to implement this system of prompt corrective action. Under the
regulations, a bank shall be deemed to be:
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<PAGE> 24
o "well capitalized" if it has a total risk-based capital ratio
of 10.0% or more, has a Tier 1 risk-based capital ratio of
6.0% or more, has a leverage capital ratio of 5.0% or more and
is not subject to specified requirements to meet and maintain
a specific capital level for any capital measure;
o "adequately capitalized" if it has a total risk-based capital
ratio of 8.0% or more, a Tier 1 risk-based capital ratio of
4.0% or more and a leverage capital ratio of 4.0% or more
(3.0% under certain circumstances) and does not meet the
definition of "well capitalized";
o "undercapitalized" if it has a total risk-based capital ratio
that is less than 8.0%, a Tier 1 risk-based capital ratio that
is less than 4.0%, or a leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances);
o "significantly undercapitalized" if it has a total risk-based
capital ratio that is less than 6.0%, a Tier 1 risk-based
capital ratio that is less than 3.0% or a leverage capital
ratio that is less than 3.0%; and
o "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
Information concerning the Company's capital adequacy at December 31,
1998 and on a pro forma basis, giving effect to the Hemet Branch Acquisition,
the Merger and the proceeds of the Capital Securities is as follows:
<TABLE>
<CAPTION>
AMOUNT TO
BE "WELL
MINIMUM CAPITALIZED"
AMOUNT UNDER
FOR PROMPT
ACTUAL PRO FORMA CAPITAL MINIMUM CORRECTIVE
------------------- ------------------- ADEQUACY REGULATORY ACTION
AMOUNT RATIO AMOUNT RATIO PURPOSES RATIO PROVISIONS RATIO
------ ----- ------ ----- -------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Total Capital (To Risk-
Weighted Assets)............. $44,195 9.65% $68,043 11.79% $36,630 8.0% $45,788 10.0%
Tier 1 Capital (To Risk-
Weighted Assets)............. 41,257 9.01 77,496 13.43 18,315 4.0 27,473 6.0
Leverage Ratio (Tier 1 Capital
To Average Assets)........... 41,257 8.10 77,496 8.64 20,374 4.0 25,468 5.0
</TABLE>
FDICIA and the implementing regulations also provide that a federal
banking agency may, after notice and an opportunity for a hearing, reclassify a
well capitalized institution as adequately capitalized and may require an
adequately capitalized institution or an undercapitalized institution to comply
with supervisory actions as if it were in the next lower category if the
institution is in an unsafe or unsound condition or engaging in an unsafe or
unsound practice. (The federal banking agency may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
Operational Standards. FDICIA also granted the regulatory agencies
authority to prescribe standards relating to internal controls, credit
underwriting, asset growth and compensation, among others, and required the
regulatory agencies to promulgate regulations prohibiting excessive compensation
or fees. Many regulations have been adopted by the regulatory agencies to
implement these provisions and subsequent legislation (the "Riegal Community
Development and Regulatory
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<PAGE> 25
Improvement Act of 1994" discussed below) gave the regulatory agencies the
option of prescribing the safety and soundness standards as guidelines rather
than regulations.
Regulatory Accounting Reports. Each bank with $500 million or more in
assets is required to submit an annual report to the FDIC, as well as any other
federal banking agency with authority over the bank, and any appropriate state
banking agency. This report must contain a statement regarding management's
responsibilities for: (1) preparing financial statements; (2) establishing and
maintaining adequate internal controls; and (3) complying with applicable laws
and regulations. In addition to having an audited financial statement by an
independent accounting firm on an annual basis, the accounting firm must
determine and report as to whether the financial statements are presented fairly
and in accordance with generally accepted accounting principles and comply with
other requirements of the applicable federal banking authority. In addition, the
accountants must attest to and report to the regulators separately on
management's compliance with internal controls.
Truth in Savings. FDICIA further established a new truth in savings
scheme, providing for clear and uniform disclosure of terms and conditions on
which interest is paid and fees are assessed on deposits. The Federal Reserve's
Regulation DD, implementing the Truth in Savings Act, became effective June 21,
1993.
Brokered Deposits. Effective June 16, 1992, FDICIA placed restrictions
on the ability of banks to obtain brokered deposits or to solicit and pay
interest rates on deposits that are significantly higher than prevailing rates.
FDICIA provides that a bank may not accept, renew or roll over brokered deposits
unless: (1) it is "well capitalized"; or (2) it is adequately capitalized and
receives a waiver from the FDIC permitting it to accept brokered deposits paying
an interest rate not in excess of 75 basis points over certain prevailing market
rates. FDIC regulations define brokered deposits to include any deposit
obtained, directly or indirectly, from any person engaged in the business of
placing deposits with, or selling interests in deposits of, an insured
depository institution, as well as any deposit obtained by a depository
institution that is not "well capitalized" for regulatory purposes by offering
rates significantly higher (generally more than 75 basis points) than the
prevailing interest rates offered by depository institutions in such
institution's normal market area. In addition to these restrictions on
acceptance of brokered deposits, FDICIA provides that no pass-through deposit
insurance will be provided to employee benefit plan deposits accepted by an
institution which is ineligible to accept brokered deposits under applicable law
and regulations.
Lending. New regulations have been issued in the area of real estate
lending, prescribing standards for extensions of credit that are secured by real
property or made for the purpose of the construction of a building or other
improvement to real estate. In addition, the aggregate of all loans to executive
officers, directors and principal shareholders and related interests may now not
exceed 100% (200% in some circumstances) of the depository institution's
capital.
State Authorized Activities. The new legislation also created
restrictions on activities authorized under state law. FDICIA generally
restricts activities through subsidiaries to those permissible for national
banks, unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements, thereby effectively eliminating real
estate investment authorized under California law, and provided for a five-year
divestiture period for impermissible investments. Insurance activities were also
limited, except to the extent permissible for national banks.
Qualified Thrift Lender ("QTL")Test. Savings associations, like
Stockdale, must meet a QTL test, by maintaining a specified level of assets in
qualified thrift investments as specified in the Home Owners' Loan Act. If
Stockdale maintains an appropriate level of certain specified investments
25
<PAGE> 26
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, it will continue
to enjoy full borrowing privileges from the FHLB. The required percentage of
investments under HOLA is 65% of assets. An association must be in compliance
with the QTL test or the Internal Revenue Code definition of domestic building
and loan association on a monthly basis in nine out of every 12 months.
Associations that fail to meet the QTL test will generally be prohibited from
engaging in any activity not permitted for both a national bank and a savings
association. As of September 30, 1998, Stockdale was in compliance with its QTL
requirements.
Activities of Subsidiaries. A savings association seeking to establish
a new subsidiary, acquire control of an existing company or conduct a new
activity through a subsidiary must provide 30 days prior notice to the FDIC and
the OTS and conduct any activities of the subsidiary in accordance with
regulations and orders of the OTS. The OTS has the power to require a savings
association to divest any subsidiary or terminate any activity conducted by a
subsidiary that the OTS determines to pose a serious threat to the financial
safety, soundness or stability of the savings association or to be otherwise
inconsistent with sound banking practices.
Federal Home Loan Bank System. The Banking Subsidiaries are members of
the FHLB system. Among other benefits, each FHLB serves as a reserve or center
bank for its members within its assigned region. Each FHLB is financed primarily
from the sale of consolidated obligations of the FHLB system. Each FHLB makes
available to its members loans (i.e., advances) in accordance with the policies
and procedures established by the Board of Directors of the individual FHLB.
5. RIEGLE COMMUNITY DEVELOPMENT AND REGULATORY IMPROVEMENT ACT OF 1994
The Riegle Community Development and Regulatory Improvement Act of 1994
(the "1994 Act"), which has been issued as the most important piece of banking
legislation since the enactment of FDICIA, was signed into law on September 23,
1994. In addition to providing funding for the establishment of a Community
Development Financial Institutions Fund (the "Fund"), which provides assistance
to new and existing community development lenders to help to meet the needs of
low- and moderate-income communities and groups, the 1994 Act mandated changes
to a wide range of banking regulations. These changes included:
o modifications to the publication requirements for Call
Reports,
o less frequent regulatory examination schedules for small
institutions, small business and commercial real estate loan
securitization,
o amendments to the money laundering and currency transaction
reporting requirements of the Bank Secrecy Act,
o clarification of the coverage of the Real Estate Settlement
Procedures Act for business,
o commercial and agricultural real estate secured transactions,
o amendments to the national flood insurance program, and
o amendments to the Truth in Lending Act to provide greater
protection for consumers by reducing discrimination against
the disadvantaged.
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<PAGE> 27
The "Paperwork Reduction and Regulatory Improvement Act," Title III of
the 1994 Act, required the federal banking agencies to consider the
administrative burdens that new regulations will impose before their adoption
and requires a transition period in order to provide adequate time for
compliance. This act also requires the federal banking agencies to work together
to establish uniform regulations and guidelines as well as to work together to
eliminate duplicative or unnecessary requests for information in connection with
applications or notices. This act reduces the frequency of examinations for
well-rated institutions, simplifies the quarterly Call Reports and eliminated
the requirement that financial institutions publish their Call Reports in local
newspapers. This act also established an internal regulatory appeal process and
independent ombudsman to provide a means for review of material supervisory
determinations. The Paperwork Reduction and Regulatory Improvement Act also
amended the Bank Holding Company Act and Securities Act of 1933 to simplify the
formation of bank holding companies.
Title IV of the 1994 Act amended the Bank Secrecy Act by reducing the
reporting requirements imposed on financial institutions for large currency
transactions, expanding the ability of financial institutions to provide
exemptions to the reporting requirements for businesses that regularly deal in
large amounts of currency, and providing for the delegation of civil money
penalty enforcement from the Treasury Department to the individual federal
banking agencies.
6. SAFETY AND SOUNDNESS STANDARDS
In July, 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by FDICIA and the
1994 Act. The guidelines set forth operational and managerial standards relating
to internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth and
compensation, fees and benefits. Guidelines for asset quality and earnings
standards will be adopted in the future. The guidelines establish the safety and
soundness standards that the agencies will use to identify and address problems
at insured depository institutions before capital becomes impaired. If an
institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan or to implement an accepted
plan may result in enforcement action.
The federal banking agencies issued regulations prescribing uniform
guidelines for real estate lending. The regulations require insured depository
institutions to adopt written policies establishing standards, consistent with
such guidelines, for extensions of credit secured by real estate. The policies
must address loan portfolio management, underwriting standards and loan to value
limits that do not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
27
<PAGE> 28
7. CONSUMER PROTECTION LAWS AND REGULATIONS
The bank regulatory agencies are focusing greater attention on
compliance with consumer protection laws and their implementing regulations.
Examination and enforcement have become more intense in nature, and insured
institutions have been advised to monitor carefully compliance with various
consumer protection laws and their implementing regulations. Banks are subject
to many federal consumer protection laws and regulations including, but not
limited to, the Community Reinvestment Act (the "CRA"), the Truth in Lending Act
(the "TILA"), the Fair Housing Act (the "FH Act"), the Equal Credit Opportunity
Act (the "ECOA"), the Home Mortgage Disclosure Act ("HMDA"), and the Real Estate
Settlement Procedures Act ("RESPA").
The CRA, enacted into law in 1977, is intended to encourage insured
depository institutions, while operating safely and soundly, to help meet the
credit needs of their communities. The CRA specifically directs the federal bank
regulatory agencies, in examining insured depository institutions, to assess
their record of helping to meet the credit needs of their entire community,
including low- and moderate-income neighborhoods, consistent with safe and sound
banking practices. The CRA further requires the agencies to take a financial
institution's record of meeting its community credit needs into account when
evaluating applications for, among other things, domestic branches, consummating
mergers or acquisitions, or holding company formations.
The federal banking agencies have adopted regulations which measure a
bank's compliance with its CRA obligations on a performance-based evaluation
system. This system bases CRA ratings on an institution's actual lending service
and investment performance rather than the extent to which the institution
conducts needs assessments, documents community outreach or complies with other
procedural requirements. The ratings range from "outstanding" to a low of
"substantial noncompliance."
The ECOA, enacted into law in 1974, prohibits discrimination in any
credit transaction, whether for consumer or business purposes, on the basis of
race, color, religion, national origin, sex, marital status, age (except in
limited circumstances), receipt of income from public assistance programs, or
good faith exercise of any rights under the Consumer Credit Protection Act. In
March, 1994, the Federal Interagency Task Force on Fair Lending issued a policy
statement on discrimination in lending. The policy statement describes the three
methods that federal agencies will use to prove discrimination: overt evidence
of discrimination, evidence of disparate treatment and evidence of disparate
impact. This means that if a creditor's actions have had the effect of
discriminating, the creditor may be held liable -- even when there is no intent
to discriminate.
The FH Act, enacted into law in 1968, regulates may practices,
including making it unlawful for any lender to discriminate in its
housing-related lending activities against any person because of race, color,
religion, national origin, sex, handicap, or familial status. The FH Act is
broadly written and has been broadly interpreted by the courts. A number of
lending practices have been found to be, or may be considered, illegal under the
FH Act, including some that are not specifically mentioned in the FH Act itself.
Among those practices that have been found to be, or may be considered, illegal
under the FH Act are: declining a loan for the purposes of racial
discrimination; making excessively low appraisals of property based on racial
considerations; pressuring, discouraging, or denying applications for credit on
a prohibited basis; using excessively burdensome qualifications standards for
the purpose or with the effect of denying housing to minority applicants;
imposing on minority loan applicants more onerous interest rates or other terms,
conditions or requirements; and racial steering, or deliberately guiding
potential purchasers to or away from certain areas because of race.
28
<PAGE> 29
The TILA, enacted into law in 1968, is designed to ensure that credit
terms are disclosed in a meaningful way so that consumers may compare credit
terms more readily and knowledgeably. As a result of the TILA, all creditors
must use the same credit terminology and expressions of rates, the annual
percentage rate, the finance charge, the amount financed, the total payments and
the payment schedule.
HMDA, enacted into law in 1975, grew out of public concern over credit
shortages in certain urban neighborhoods. One purpose of HMDA is to provide
public information that will help show whether financial institutions are
serving the housing credit needs of the neighborhoods and communities in which
they are located. HMDA also includes a "fair lending" aspect that requires the
collection and disclosure of data about applicant and borrower characteristics
as a way of identifying possible discriminatory lending patterns and enforcing
anti-discrimination statutes. HMDA requires institutions to report data
regarding applications for one-to-four family loans, home improvement loans, and
multifamily loans, as well as information concerning originations and purchases
of such types of loans. Federal bank regulators rely, in part, upon data
provided under HMDA to determine whether depository institutions engage in
discriminatory lending practices.
RESPA, enacted into law in 1974, requires lenders to provide borrowers
with disclosures regarding the nature and costs of real estate settlements.
Also, RESPA prohibits certain abusive practices, such as kickbacks, and places
limitations on the amount of escrow accounts.
Violations of these various consumer protection laws and regulations
can result in civil liability to the aggrieved party, regulatory enforcement
including civil money penalties, and even punitive damages.
8. RECENT CALIFORNIA DEVELOPMENTS
In August, 1997, Governor Wilson of California signed Assembly Bill
1432 ("AB1432"), which provides for certain changes in the banking laws of
California. Effective January 1, 1998, AB1432 eliminated the provisions
regarding impairment of contributed capital and the assessment of shares when
there is an impairment in capital. AB1432 permits the Commissioner to close a
bank, if the Commissioner finds that the bank's tangible shareholders' equity is
less than the greater of 3% of the bank's total assets or $1 million.
In addition, California law, in general, provides the Commissioner with
certain additional enforcement powers. For example, if it appears to the
Commissioner that a bank is violating its articles of incorporation or state
law, or is engaging in unsafe or unsound business practices, the Commissioner
can order the bank to comply with the law or to cease the unsafe or injurious
practices. The Commissioner also has the power to suspend or remove the bank
officers, directors and employees who: (i) violate any law, regulation or
fiduciary duty to the bank; (ii) engage in any unsafe or unsound practices
related to the business of the bank; or (iii) are charged with or convicted of a
crime involving dishonesty or breach of trust.
9. CONCLUSION
As a result of the recent federal and California legislation, there has
been a competitive impact on financial institutions. There has been a lessening
of the historical distinction between the services offered by banks, savings and
loan associations, credit unions, and other financial institutions, banks have
experienced increased competition for deposits and loans which may result in
increases in their cost of funds, and banks have experienced increased costs.
Further, the federal banking agencies have increased enforcement authority over
financial institutions and their directors and officers.
29
<PAGE> 30
Future legislation is also likely to impact the Company's and the
Banking Subsidiaries' businesses. Consumer legislation has been proposed in
Congress which may require banks to offer basic, low-cost, financial services to
meet minimum consumer needs. Various proposals to restructure the federal bank
regulatory agencies are currently pending in Congress, some of which include
proposals to expand the ability of banks to engage in previously prohibited
businesses. Further, the regulatory agencies have proposed and may propose a
wide range of regulatory changes, including the calculation of capital adequacy
and limiting business dealings with affiliates. These and other legislative and
regulatory changes may have the impact of increasing the cost of business or
otherwise impacting the earnings of financial institutions. However, the degree,
timing and full extent of the impact of these proposals cannot be predicted.
Management of the Company and the Banking Subsidiaries cannot predict what other
legislation might be enacted or what other regulations might be adopted or the
effects thereof.
The foregoing summary of the relevant laws, rules and regulations
governing banks and bank holding companies do not purport to be a complete
summary of all applicable laws, rules and regulations governing banks and bank
holding companies.
IMPACT OF MONETARY POLICIES
Banking is a business which depends on rate differentials. In general,
the difference between the interest rate paid by the Banking Subsidiaries on
their deposits and their other borrowings and the interest rate earned by the
Banking Subsidiaries on loans, securities and other interest-earning assets will
comprise the major source of the Company's earnings. These rates are highly
sensitive to many factors which are beyond the Company's and the Banking
Subsidiaries' control and, accordingly, the earnings and growth of the Banking
Subsidiaries are subject to the influence of economic conditions generally, both
domestic and foreign, including inflation, recession, and unemployment; and also
to the influence of monetary and fiscal policies of the United States and its
agencies, particularly the FRB. The FRB implements national monetary policy,
such as seeking to curb inflation and combat recession, by its open-market
dealings in United States government securities, by adjusting the required level
of reserves for financial institutions subject to reserve requirements, by
placing limitations upon savings and time deposit interest rates, and through
adjustments to the discount rate applicable to borrowings by banks which are
members of the Federal Reserve System. The actions of the FRB in these areas
influence the growth of bank loans, investments, and deposits and also affect
interest rates. The nature and timing of any future changes in such policies and
their impact on the Company or the Banking Subsidiaries cannot be predicted;
however, depending on the degree to which the Banking Subsidiaries'
interest-earning assets and interest-bearing liabilities are rate sensitive,
increases in rates would have the temporary effect of increasing their net
interest margin, while decreases in interest rates would have the opposite
effect.
SELECTED STATISTICAL DISCLOSURES
The following table presents certain ratios for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Income to Average(1)
Shareholders' Equity............................ 11.41% 12.83% 10.24% 11.13% 12.07%
Net Income to Average Assets...................... 1.02 0.97 0.95 1.04 1.09
Average Net Loans to Average Deposits............. 79.26 75.49 86.24 80.05 89.98
</TABLE>
- ---------
(1) Averages used herein, unless indicated otherwise, are based on daily
averages.
30
<PAGE> 31
Additional statistical disclosures relating to the Company's business
and operations are included in ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 2 - DESCRIPTION OF PROPERTY
VIB leased property located adjacent to its main office, at 1498 Main
Street, El Centro, California 92243, on which VIB constructed a new facility to
house its corporate and loan functions and to consolidate its loan center. The
Company maintains its offices at this facility. The lease has a twenty-year term
and two five-year renewal options. Construction cost $591,276 and was completed
in June, 1997. The term of the lease commenced upon completion of the
construction. The rent for each year of the term is $318,972, plus
cost-of-living adjustments of not less than 3.5% and not more than 5.5% each
year after the initial year.
VIB owns its main office and its branches in Brawley, Calexico,
Coachella, La Quinta and Thousand Palms. VIB leases its remaining branches as
well as an operations center at 2415 La Brucherie Road, Imperial, and its loan
production offices in El Centro, Carlsbad, Orange and Rancho Mirage, California,
Yuma, Arizona, and Las Vegas, Nevada.
VIB's Holtville lease expired in 1998 and was renewed through November
30, 2003. The remaining leases expire in 2000 or beyond and/or have extension
options. The Indio loan production office was vacated in 1998 and moved to
Rancho Mirage.
VIB purchased a parcel of vacant land at 81-710 Highway 111, Indio,
with the original intention of constructing a permanent Indio branch office. The
purchase price was $310,000. The purchase preceded the acquisition of Bank of
the Desert, N.A., and VIB has not yet determined whether to keep the property
for a permanent site after expiration of the existing Indio branch lease at
81-790 Highway 111, which has been extended to February, 2000, or whether to
sell the property and exercise an additional 28-month extension option. VIB has
also purchased a parcel of vacant land adjacent to its La Quinta office, at a
cost of $23,100, to be used as additional parking for that branch.
During 1998 VIB's aggregate lease expense for these properties was
$816,468. VIB's aggregate lease expense in 1997 was $467,437.
As a result of the Hemet Branch Acquisition, in January, 1999, VIB
assumed a lease at 2091 West Florida Avenue, Suite 100, Hemet, California 92545.
Stockdale owns its branch location at 2700 Mount Vernon Avenue,
Bakersfield, California 93306 and leases its main office at 5151 Stockdale
Highway, Bakersfield, California 93309, its branch at 3990 Gosford Road,
Bakersfield, California 93309, and its loan production office at 7433 North
First Street, Suite 103, Fresno, California 93720.
VIB's and Stockdale's premises are deemed to be adequate for their
present and anticipated needs and no material capital expenditures are
contemplated. In Management's opinion, VIB and Stockdale have sufficient
insurance to cover their interests in their premises.
31
<PAGE> 32
ITEM 3 - LEGAL PROCEEDINGS
To the best of the Company's knowledge, there are no pending legal
proceedings to which the Company or the Banking Subsidiaries are a party and
which may have a materially adverse effect upon the Company's or the Banking
Subsidiaries' property or business.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders during the
fourth quarter of 1998.
On January 12, 1999, at a Special Meeting noticed on December 11, 1998,
the Company's shareholders approved the Merger Agreement with Stockdale. A total
of 4,868,557 shares entitled to vote were present either in person or by proxy,
and constituted the necessary quorum. There were 4,582,101 votes, or 58.0% of
the outstanding shares, cast in favor of the Merger; 239,736 votes, or 3.0%,
cast against; and 46,720, or .6%, abstentions. There were no broker non-votes.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item regarding the market for the
Company's Common Stock, the number of holders, and the payment of dividends is
incorporated by reference from Page 15 of the Company's Annual Report to
Shareholders for the year ended December 31, 1998.
During 1996, 1997 and 1998 the Company's predecessor, VIB, issued
995,064 shares of its Common Stock without registration under the Securities Act
of 1933 upon exercise of stock options pursuant to VIB's 1989 Stock Option Plan,
pursuant to VIB's 1997 Unit Offering, and pursuant to the exercise of Warrants
issued in VIB's 1997 Unit Offering. The aggregate proceeds were $10,376,716. The
issuances of VIB's Common Stock were exempt from the registration requirements
of the Securities Act of 1933 pursuant to Section 3(a)(2) thereof.
ITEM 6 - SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference from
Page 6 of the Company's Annual Report to Shareholders for the year ended
December 31, 1998.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion, which incorporates an analysis of financial
condition and results of operations, is designed to provide a more comprehensive
understanding of the significant changes and trends related to the Company's
financial condition, results of operations, liquidity and capital resources. The
discussion should be read in conjunction with the Financial Statements of the
Company and Notes thereto and the "Selected Financial Data" included elsewhere
herein as ITEM 8 and the "Selected Financial Data" incorporated by reference in
ITEM 6 herein.
32
<PAGE> 33
The following table sets forth, for the periods indicated, the increase
or decrease of certain items in the Statements of Income as compared to the
prior comparable period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1998 VERSUS 1997 1997 VERSUS 1996
------------------------------ ------------------------------
AMOUNT OF AMOUNT OF
INCREASE PERCENT OF INCREASE PERCENT OF
(DECREASE) INCREASE (DECREASE) INCREASE
(000'S) (DECREASE) (000'S) (DECREASE)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total Interest Income .......... $ 7,870 24.28% $ 8,191 33.76%
Total Interest Expense ......... 1,827 17.53 3,293 46.20
------- ------
Net Interest Income ............ 6,043 27.47 4,898 28.59
Provision for Credit Losses .... 70 3.78 1,215 191.34
------- ------
Net Interest Income After
Provision for Credit Losses 5,973 29.65 3,683 22.32
Non-Interest Income ............ (481) (8.31) 2,684 87.28
Non-Interest Expense ........... 3,659 18.12 4,447 28.24
------- ------
Income Before Taxes ............ 1,833 31.91 1,920 50.21
Income Taxes ................... 766 39.42 694 55.56
------- ------
Net Income ..................... $ 1,067 28.07 $ 1,226 47.61
======= ======
</TABLE>
GENERAL
VIB Corp's financial performance for the year concluded December 31,
1998 was highlighted with record earnings growth, Valley Independent Bank's
acquisition of a branch in Palm Springs, California, the finalization of the
bank holding company reorganization, Valley Independent Bank's agreement to
purchase a branch in Hemet, California and the Company's agreement to merge with
Bank of Stockdale, F.S.B.
VIB Corp was incorporated in California on November 7, 1997, at the
direction of the Board of Directors of VIB 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 VIB's Common Stock was converted into
one share of the Company's Common Stock and all outstanding shares of VIB's
Common Stock were transferred to the Company in a transaction accounted for as a
pooling of interests. Further, each outstanding warrant to purchase VIB's Common
Stock, issued in connection with VIB's 1997 unit offering, was converted into a
warrant to purchase the Company's Common Stock.
Effective March 27, 1998 VIB acquired certain of the assets and certain
of the deposit liabilities of the Palm Springs, California branch office of Palm
Desert National Bank. As a result of the acquisition VIB 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 as well as relocated the Indio, California,
Loan Production Office to Rancho Mirage, Riverside County, California
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, on
33
<PAGE> 34
January 28, 1999, Bank of Stockdale ("Stockdale") became a wholly-owned
subsidiary of VIB Corp and continues to operate under its federal stock savings
bank charter. As a result of the merger, the Company acquired total assets of
$144.4 million, comprising $9.1 million in cash and due from banks, $23.5
million in securities and investments, $102.4 million in net loans and $9.4
million in other assets. Total liabilities assumed amounted to $134.6 million,
of which $128.9 million comprised deposits. The remainder represented other
borrowed funds and other liabilities.
The Stockdale merger was accounted for as a pooling of interest. The
Company issued 2,355,430 shares of its Common Stock in exchange for all
1,212,265 shares of Stockdale's issued and outstanding common stock (at an
exchange ration of 1.943 to 1). Additionally, Mr. Ed Hickman, Stockdale's
President and Chief Executive Officer and one of its Directors, was added to the
Company's Board of Directors.
On September 22, 1998 VIB entered into a branch acquisition agreement
with Fremont Investment & Loan to acquire certain of the assets and to assume
certain of the liabilities of Fremont's Hemet branch office, including
substantially all the deposits of the branch. On January 22, 1999, the
acquisition was consummated. VIB assumed approximately $112 million in deposits
and the lease on the branch premises, and acquired approximately $27,000 in
loans as well as cash on hand and fixtures and equipment associated with the
branch. The consideration paid amounted to approximately $1.12 million.
In connection with the branch acquisition by Valley Independent Bank it
was anticipated that VIB would require additional capitalization. On February 5,
1999, the Company raised approximately $22.4 million in net proceeds from an
offering of up to 23,000 Capital Securities in a private placement. The proceeds
will be used to increase Valley Independent Bank's capital by at least $8.5
million with the balance to be used for general corporate purposes. On December
19, 1998, the Company formed a wholly-owned business trust subsidiary, Valley
Capital Trust (the "Trust"), pursuant to the laws of the state of Delaware. The
Company formed the Trust for the specific purpose of: (1) investing in the
Company's 9.00 percent Junior Subordinate Debentures (the "Debentures"), due
February 5, 2029; (2) selling 9.00 percent Cumulative Capital Securities (the
"Capital Securities"), representing a 97 percent beneficial interest in the
Debentures owned by the Trust; and (3) issuing beneficial interests in the
Debentures owned by the Trust.
On January 29, 1999, the Company entered in a Purchase Terms Agreement
(the "Agreement") with First Tennessee Capital Markets, a subsidiary of First
Tennessee Bank, N.A. (the "Placement Agent"). Pursuant to the Agreement, the
Placement Agent solicited subscriptions for the purchase of up to $23 million of
the Capital Securities from accredited investors within the meaning of Rule 501
of Regulation D of the Securities Act.
On February 5, 1999, the Company issued $23.093 million in Debentures
to the Trust. Concurrently, the Trust issued $22.4 million of the Capital
Securities to the accredited investors and $693,000 of Common Securities to the
Company. The Debentures were purchased by the Trust concurrently with the
Trust's issuance of the Capital Securities and Common Securities. The proceeds
to the Company, net of the Placement Agent's fees and other offering expenses,
was approximately $22.4 million, of which approximately $17.4 million will be
treated as Tier 1 capital for regulatory purposes.
The interest on the Capital Securities will be deductible. The Company
has the right, assuming that no default has occurred, to defer interest payments
at any time and for a period of up to twenty consecutive calendar quarters. The
Capital Securities will mature on February 5, 2029, but can be called after
February 5, 2009.
34
<PAGE> 35
The Board of Directors approved a five-for-four split of the Company's
no par value Common Stock. The stock split was effective May 29, 1998, for
shareholders of record on that date, and was issued on June 12, 1998. In
addition, the Board of Directors approved a 3% stock dividend for shareholders
of record on November 20, 1998. The dividend was paid on December 11, 1998.
Consequently, all per share information has been restated to reflect the stock
split and stock dividend.
For the year ended December 31, 1998 the Company registered net income
of $4.9 million, an increase of $1.1 million or 28.1%, when compared to $3.8
million for the prior year. On a per diluted share basis, earnings were $.58 for
the year, compared with $.49 reported in 1997. Increases in net interest income
partially offset by increases in the provision for credit losses, income taxes
and in non interest expense were the primary elements effecting the increased
financial performance in 1998. Net Income of $3.8 million in 1997 represented an
increase of $1.2 million, or 47.6%, from the $2.6 million net income earned in
1996. The Company's return on average assets ratio was 1.02% in 1998 compared to
.97% and .95% in 1997 and 1996 respectively. The return on average equity ratio
in 1998 was 11.41% compared to 12.83% and 10.24% respectively, in the two
previous years.
Total assets at December 31, 1998 were $546.8 million, an increase of
$102.6 million, or 23.1% compared to December 31, 1997. Total deposits increased
$71.6 million, or 17.9%, to $470.8 million at December 31, 1998. Total loans
increased $80.9 million, or 25.8%, to $394.6 million at December 31, 1998.
During 1997 total assets increased $110.6 million, or 33.2%, from $333.6 million
at year-end 1996. Total deposits increased $94.6 million, or 31.1%, from
year-end 1996 to $399.2 million at December 31, 1997. Total loans increased
$68.3 million, or 27.8%, from December 31, 1996.
At December 31, 1998, the Company's Tier 1 and total capital to risk
weighted assets ratios decreased to 9.01% and 9.65%, respectively, when compared
to 9.83% and 10.47%, respectively, at December 31, 1997. At December 31, 1996
the Tier I capital ratio was 8.76% and the total capital ratio was 9.69%. These
ratios exceed regulatory requirements.
YEAR 2000 READINESS COMPLIANCE
Many computer systems will not properly recognize date sensitive
information when the date changes to the year 2000 ("Y2K"). Computer systems
that do not properly recognize Y2K could generate erroneous data or cause the
system to fail. Those computer systems will have to be modified or replaced
prior to Y2K in order to remain functional.
During 1996 VIB began the process of identifying and addressing issues
surrounding Y2K and their impact on VIB's operations. That process continued
through 1997 during which VIB conducted a comprehensive review of its computer
systems to identify applications that would be affected by Y2K issue and VIB
developed an implementation plan to bring VIB's systems into compliance prior to
Y2K. VIB's compliance program includes review of bank-wide computer processing
systems as well as review of third party vendors' interface systems and review
of large corporate borrowers' systems. During 1997 VIB completed the assessment
phase of its program and during 1998 VIB began the implementation and validation
of hardware and software upgrades, system replacements, vendor certifications
and other associated changes. VIB anticipates that final implementation and
validation will occur in early 1999, with final certification of all internal
systems by no later than June 30, 1999. Simultaneously, VIB has been evaluating
the impact of Y2K compliance on large corporate customers as well as the third
party vendors. As of December 1998, VIB has completed its assessment of Y2K risk
in this regard and has established a reserve of $400,000 and liquidity policies
to mitigate this risk. The ongoing
35
<PAGE> 36
assessment on this risk is monitored on a monthly basis with appropriate
adjustments to reserves, as required. While management considers the $400,000 in
reserves adequate as of December 31, 1998, such amount is subject to change
based on an ongoing review. Consequently, the amount provided at December 31,
1998, should not be interpreted as indicative of future adequacy.
VIB has established detailed contingency plans for all mission critical
and secondary operating systems. Trigger dates have been established for
activating any required contingency plan. VIB has also established a Business
Resumption Plan specific to Y2K, which is coordinated with VIB's Disaster
Recovery Plan. An additional measure taken by VIB 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.
VIB is currently on schedule to implement the systems and programming
changes necessary to address the Y2K issue and does not believe that the costs
of such actions will have a material effect on VIB's results of operations or
financial condition. VIB has expended $125,000 through December 31, 1998 and
expects to spend an additional $275,000 in 1999. There can be no assurance,
however, that there will not be a delay in, or increased costs associated with
the implementations of such changes, and VIB'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 Y2K compliant and, consequently, VIB could incur incremental
costs to convert to other vendors.
Bank of Stockdale engages the services of third-party software vendors
and service providers for substantially all of its electronic data processing.
As such, a primary focus of Stockdale's Y2K compliance program is to monitor the
progress of its software providers toward Y2K compliance and to prepare and test
future-date sensitive data of Stockdale in simulated processing.
Stockdale's Y2K compliance program has been divided into the following
phases: (1) inventorying date-sensitive information technology and other
business systems; (2) assigning priorities to identified items and assessing the
efforts required for Y2K compliance of those determined to be material to
Stockdale; (3) upgrading or replacing material items that are determined not to
be Y2K compliant and testing material items; (4) assessing the status of third
party risks; and ( 5) designing and implementing contingency and business
continuation plans.
As part of the ongoing supervision of the banking industry, bank
regulatory agencies are continuously surveying Stockdale's progression and
results in each of the phases.
In the first phase of Stockdale's Y2K compliance program, Stockdale
conducted a thorough inventory of current information technology systems,
software, and embedded technologies that could be affected by Y2K issues.
Non-information technology systems such as climate control systems, telephone
systems, vault and building security equipment were also surveyed. This stage of
the Y2K compliance program is complete.
In phase two of Stockdale's Y2K compliance program, results from the
inventory were assessed and evaluated to determine the Y2K impact and necessary
actions required to obtain Y2K compliance. Stockdale divided the results of the
inventory into two principal categories those information technology systems
that are considered by Stockdale to be "mission critical,"
36
<PAGE> 37
and those that are not. Stockdale defines a "mission critical system" as a
system that is vital to the successful continuance of Stockdale's core business
and/or maintaining customer account integrity. Stockdale has identified 16
mission critical systems that could be affected by Y2K issues. To obtain Y2K
compliance for these mission critical systems, Stockdale has opted to upgrade or
replace all such systems that are determined not to be Y2K compliant.
Phase three of Stockdale's Y2K compliance program includes the
upgrading, replacement and/or retirement of systems and testing. Stockdale will
first address mission critical systems and then non-mission critical systems.
This phase of Y2K compliance program is ongoing and is scheduled to be completed
during the first six months of 1999. For Stockdale's internal systems, necessary
actions primarily consist of upgrading computer hardware and equipment. Such
hardware upgrades are scheduled to be completed by March 31, 1999. Stockdale
estimates that 90% of its third party software upgrades have been completed.
Testing of updated or new systems is ongoing and scheduled to be completed by
June 30, 1999. "Future-date" testing of upgrades and/or replacements is being
conducted along with test to ensure integration with Stockdale's overall data
processing environment. As of December 31, 1998, Stockdale estimates that
testing of mission critical systems was 55% completed.
The fourth phase of Stockdale's Y2K compliance program, assessing
third-party risks, includes the process of identifying and prioritizing critical
suppliers, borrowers, and customers at the direct interface level as well as
other material relationships with third parties, including various exchanges,
clearing houses, other banks, telecommunications companies and public utilities.
This evaluation includes communicating with the third parties about their plans
and progress in addressing Y2K issues. Detailed evaluations of the most critical
third parties have been initiated. Evaluation of critical Stockdale customers
and borrowers was completed in November, 1998. In this regard a reserve of
$80,000 will be established in 1999. Evaluations of other critical third parties
are scheduled for completion by June 30, 1999. No problems have been identified
to date. These evaluations will be followed with contingency plans which are
ongoing and scheduled to be completed in the second quarter 1999, with follow up
reviews scheduled through the remainder of 1999.
The final phase of Stockdale's Y2K compliance program relates to
contingency plans. Stockdale maintains contingency plans in the normal course of
business designed to be deployed in the event of various potential business
interruptions. These plans have been expanded to address Y2K-specific
interruptions such as power and telecommunication infrastructure failures, and
will continue to be supplemented if and when the results of systems integration
testing identify additional business functions at risk. Such enhancements to
existing plans will likely include remediation of systems, reinstallation of
software, installation of third-party vendor software or some combination of
alternatives.
As Stockdale relies upon third-party software vendors and service
providers for substantially all of its electronic data processing, the primary
costs of the Y2K compliance program have been and will continue to be the
reallocation of internal resources for testing and for the purchase of computer
hardware and, therefore, do not represent material incremental expense to
Stockdale. The estimated value of internal resources allocated to the Y2K
compliance program and the cost of computer hardware is approximately $157,000,
of which approximately $105,000 had been expended through December 31, 1998.
Stockdale's total costs associated with required modifications to be Y2K
compliant is not expected to be material to its results of operations, liquidity
or capital resources.
37
<PAGE> 38
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
The following tables present the average amounts outstanding for the
major categories of the Company's assets, liabilities and equity accounts, the
amount and average rate of interest income earned or interest expense paid for
each category of interest-earning asset and interest-bearing liability, and net
interest margin for the periods indicated. Tax-exempt interest income from
investment securities has not been adjusted to a tax-equivalent basis.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1998 1997
----------------------------------- ----------------------------------
AVERAGE AMOUNT OF AVERAGE AMOUNT OF
BALANCE INTEREST AVERAGE BALANCE INTEREST AVERAGE
(000'S) (000'S) RATE (000'S) (000'S) RATE
-------- --------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Interest Bearing Deposits $ 669 $ 40 5.98% $ 1,288 $ 53 4.11%
Investment Securities 80,587 4,730 5.87 67,923 4,431 6.52
Federal Funds Sold 5,539 303 5.47 6,491 343 5.28
Net Loans(1) 336,979 35,216 10.45 270,079 27,592 10.22
-------- ------- -------- -------
TOTAL INTEREST-EARNING ASSETS 423,774 40,289 9.51 345,781 32,419 9.38
NON INTEREST-EARNING ASSETS
Cash and Due from Banks 29,919 25,171
Allowance for Credit Losses (2,744) (2,751)
Premises and Equipment 11,491 9,127
Other Assets 16,292 15,148
-------- --------
TOTAL NON INTEREST-EARNING ASSETS 54,958 46,695
-------- --------
TOTAL ASSETS $478,732 $392,476
======== ========
LIABILITIES AND EQUITY
INTEREST-BEARING LIABILITIES
Money Market and Now Accounts $111,344 $ 2,981 2.68% $ 84,445 $ 2,117 2.51%
Time and Savings Deposits 115,076 4,487 3.90 112,510 4,803 4.27
Time Deposits Over $100,000 78,698 4,183 5.32 62,383 3,293 5.28
-------- ------- -------- -------
Total Interest-Bearing Deposits 305,118 11,651 3.82 259,338 10,213 3.94
Borrowed Funds 7,548 597 7.91 2,383 208 8.73
-------- ------- -------- -------
TOTAL INTEREST-BEARING LIABILITIES 312,666 12,248 3.92 261,721 10,421 3.98
NON INTEREST-BEARING LIABILITIES
Demand Deposits 120,032 98,452
Other Liabilities 3,367 2,673
-------- --------
TOTAL NON INTEREST-BEARING 123,399 101,125
LIABILITIES
SHAREHOLDERS' EQUITY 42,667 29,630
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $478,732 $392,476
======== ========
NET INTEREST INCOME $28,041 5.59% $21,998 5.40%
NET INTEREST INCOME AS A PERCENT
OF INTEREST-EARNING ASSETS 6.62% 6.36%
</TABLE>
- ---------
(1) Yields and amounts include loan fees and late charges of $2,688,119,
$1,469,067, and $1,430,979, for the years ended December 31,1998, 1997
and 1996, respectively.
38
<PAGE> 39
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996
---------------------------------------------------
AVERAGE AMOUNT OF
BALANCE INTEREST AVERAGE
(000'S) (000'S) RATE
-------- --------- -------
<S> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Interest Bearing Deposits $ 301 $ 15 4.98%
Investment Securities 28,979 1,980 6.83
Federal Funds Sold 5,513 287 5.21
Net Loans(1) 208,178 21,946 10.54
-------- -------
TOTAL INTEREST-EARNING ASSETS 242,971 24,228 9.97
NON INTEREST-EARNING ASSETS
Cash and Due from Banks 16,633
Allowance for Credit Losses (2,351)
Premises and Equipment 5,296
Other Assets 8,556
--------
TOTAL NON INTEREST-EARNING ASSETS 28,134
--------
TOTAL ASSETS $ 271,105
========
LIABILITIES AND EQUITY
INTEREST-BEARING LIABILITIES
Money Market and Now Accounts $ 59,292 $ 1,538 2.59%
Time and Savings Deposits 75,309 3,151 4.18
Time Deposits Over $100,000 42,229 2,296 5.44
-------- -------
Total Interest-Bearing Deposits 176,830 6,985 3.95
Borrowed Funds 2,532 143 5.65
-------- -------
TOTAL INTEREST-BEARING LIABILITIES 179,362 7,128 3.97
NON INTEREST-BEARING LIABILITIES
Demand Deposits 64,575
Other Liabilities 2,024
--------
TOTAL NON INTEREST-BEARING LIABILITIES 66,599
SHAREHOLDERS' EQUITY 25,144
--------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $271,105
========
NET INTEREST INCOME $ 17,100 6.00%
NET INTEREST INCOME AS A PERCENT
OF INTEREST-EARNING ASSETS 7.04%
</TABLE>
- ---------
(1) Yields and amounts include loan fees and late charges of $2,688,119,
$1,469,067, and $1,430,979, for the years ended December 31,1998, 1997
and 1996, respectively.
NET INTEREST INCOME AND NET INTEREST MARGIN
Average interest-earning assets totaled $423.8 million in 1998, an
increase of $78 million, or 22.6%, compared to 1997. Average investment
securities increased $12.7 million, or 18.6%, primarily related to the liquidity
obtained in the branch acquisition from Palm Desert National Bank. In addition,
VIB experienced significant average loan growth of $66.9 million, or 24.8%. In
1997 average interest-earning assets increased $102.8 million, or 42.3%, from a
1996 average of $243 million.
Average interest-bearing liabilities grew $50.9 million, or 19.5%, from
$261.7 million for 1997 to $312.7 million for 1998. During 1998 all
interest-bearing liability categories increased,
39
<PAGE> 40
including borrowed funds, which increased $5.2 million or 216.7%. In 1997,
average interest-bearing liabilities increased $82.4 million, or 45.9%, from
$179.4 million for 1996.
Interest income in 1998 was $40.3 million, an increase of $7.9 million,
or 24.3%, compared to 1997. The increase in interest income was the result of
volume increases in investment securities and loans along with a slightly higher
overall interest rate environment. The yield on interest-earning assets
increased 13 basis points to 9.51% in 1998 from 9.38% in 1997. The yield on the
loan portfolio, the largest portion of the Bank's interest-earning assets,
increased 23 basis points, from 10.22% in 1997 to 10.45% in 1998.
Interest expense increased $1.8 million, or 17.5%, to $12.2 million
during 1998. The increase in interest expense was the result of volume increases
in all interest-bearing categories, including borrowed funds, slightly offset by
net decreases in interest rates. The cost of interest-bearing liabilities
decreased 6 basis points from 3.98% in 1997 to 3.92% in 1998.
Net interest income was $28.0 million for 1998, which represented an
increase from the prior year of $6.0 million, or 27.5%. The net interest spread
percentage, which represents the difference between the rate earned on average
interest-earning assets and the rate paid on average interest-bearing
liabilities, increased to 5.40% for the year-ending December 31, 1998, compared
to 5.39% in 1997. Net interest income as a percentage of average
interest-earning assets, or the net interest margin, increased to 6.62% in 1998
compared to 6.36% in 1997. The increased yields in both net interest spread and
net interest margin resulted primarily from the larger proportionate growth in
the higher yielding interest-earning categories than the growth in the lower
yielding interest-earning categories, partially aided by a lower overall
interest rate environment for interest-bearing liabilities.
Net interest income, which amounted to $22.0 million in 1997,
represented an increase of $4.9 million, or 28.7%, compared to 1996. Interest
income was $32.4 million, an increase of $8.2 million, or 33.9%, compared to
1996. The increase in interest income was the result of volume increases in all
interest earning categories offset by a slightly lower overall interest rate
environment. The yield on interest-earning assets decreased 59 basis points to
9.38% in 1997 from 9.97% in 1996. Interest expense increased $3.3 million, or
46.2% to $10.4 million during 1997. The increase in interest expense was the
result of volume increases in all interest-bearing categories, with the
exception of borrowed funds, slightly offset by decreases in interest rates with
the exception of interest rates paid on borrowed funds. The cost of total
interest bearing liabilities increased 1 basis points from 3.97% in 1996 to
3.98% in 1997. Despite a greater proportionate growth in the higher yielding
interest-earning asset categories, a lower cost mix of interest-bearing
liabilities as well as the repricing effect of interest-earning assets and
interest-bearing liabilities in a lower rate environment were the principal
causes for the increased yields in both net interest spread percentage and net
interest margin.
The following table sets forth the dollar amount of changes in interest
earned and paid for each major category of interest-earning assets and
interest-bearing liabilities and the amount of changes attributable to changes
in average balances (volume) or changes in average interest rates. The variances
attributable to both balance and rate changes have been allocated to volume and
rate changes in proportion to the relationship of the absolute dollar amounts of
the changes in each category. Tax-exempt interest income from investment
securities has not been adjusted to a tax-equivalent basis since the effect of
such an adjustment would not be material.
40
<PAGE> 41
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,1998 YEAR ENDED DECEMBER 31,1997
OVER OVER
YEAR ENDED DECEMBER 31,1997 YEAR ENDED DECEMBER 31,1996
INCREASE/DECREASE DUE INCREASE/DECREASE DUE
TO CHANGE IN (000'S) TO CHANGE IN (000'S)
--------------------------------------- ---------------------------------------
NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Interest Bearing Deposits $ (25) $ 12 $ (13) $ 49 $ (11) $ 38
Investment Securities 826 (527) 299 2,661 (210) 2,451
Federal Funds Sold (50) 10 (40) 51 5 56
Net Loans(1)(2) 6,835 789 7,624 6,568 (922) 5,646
------- ------- ------- ------- ------- -------
Total Interest Income $ 7,585 $ 285 $ 7,870 $ 9,329 $(1,138) $ 8,191
======= ======= ======= ======= ======= =======
Interest-Bearing Liabilities
Money Market and NOW $ 674 $ 190 $ 864 $ 652 $ (73) $ 579
Time and Savings 110 (426) (316) 1,557 95 1,652
Time Deposits Over $100,000 861 29 890 1,096 (99) 997
Borrowed Funds 451 (62) 389 (8) 73 65
------- ------- ------- ------- ------- -------
Total Interest Expense 2,096 (269) 1,827 3,297 (4) 3,293
------- ------- ------- ------- ------- -------
Interest Differential or
Net Interest Income $ 5,489 $ 554 $ 6,043 $ 6,032 $(1,134) $ 4,898
======= ======= ======= ======= ======= =======
</TABLE>
- ---------
(1) The average balance of non-accruing loans is immaterial as a percentage
of total loans and as such have been included in net loans.
(2) Loan fees and late charges of $2,688,119, $1,469,067 and $1,430,979 for
the years ended December 31,1998, 1997 and 1996, respectively, have
been included in the interest income computation.
LOANS
Total loans averaged $337.0 million in 1998, an increase of $66.9
million, or 24.8% compared to 1997. The average loan growth is reflective of the
full year effect of the 1997 opening of the Yuma Loan Production Office as well
as an overall strong lending economic environment. At December 31, 1998, total
loans were $394.6 million, representing an increase of $80.9 million or 25.8%,
over December 31, 1997. The yield on the total portfolio increased 23 basis
points to 10.45% in 1998, from 10.22% in 1997. This increase in yield was the
result of a loan mix with a larger proportionate growth in higher yielding loans
offset by the repricing of variable-rate loans in an overall lower interest rate
environment.
In 1997 total loans averaged $270.1 million, which represented an
increase of $61.9 million, or 29.7%, compared to 1996. At December 31, 1997,
total loans were $313.7 million, which represented an increase of $68.3 million,
or 27.8%, over December 31, 1996. The yield on the total portfolio decreased 32
basis points to 10.22% in 1997 from 10.54% in 1996. This decrease was the result
of the repricing of variable rate loans in an overall lower interest rate
environment.
The loan portfolio represents the diversification of the markets
served. At December 31, 1998, there were no significant concentration of loans
within any particular industry. However, the local economies of VIB's service
area are agriculturally related and are impacted by fluctuations in farming
commodity pricing.
The following table sets forth the amount of the Company's total
outstanding loans, net of participations sold, in each category. The retained
portion of SBA loans, as well as the guaranteed portion of such loans held for
sale, are included primarily within the commercial and real estate construction
loan totals.
41
<PAGE> 42
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997 1996
------------------------ ------------------------ ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
(000'S) OF TOTAL (000'S) OF TOTAL (000'S) OF TOTAL
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial and Agricultural $284,611 71.5% $205,096 65.0% $151,827 61.5%
Real Estate- Construction 50,077 12.6 35,926 11.4 26,419 10.7
Real Estate - Mortgage 36,064 9.1 47,648 15.1 46,922 19.0
Installment 27,263 6.8 26,742 8.5 21,711 8.8
-------- -------- -------- -------- -------- --------
Total Loans $398,015 100.0% $315,412 100.0% $246,879 100.0%
======== ======== ======== ======== ======== ========
</TABLE>
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, certain past due
loans not on non-accrual, and properties taken in foreclosure. Non-accrual loans
include loans that are past due 90 days or more as to principal or interest, or
where reasonable doubt exists as to timely collectibility. At the time a loan is
placed on non-accrual status, previously accrued and uncollected interest is
reversed against interest income in the current period. Interest collections on
non-accrual loans are generally credited to interest income when received.
However, if ultimate collectibility of principal is in doubt, interest
collections are applied as principal reductions.
Interest accruals cease on commercial, mortgage and consumer loans,
excluding home equity loans, when they are 90 days past due. At that time,
previously accrued and uncollected interest is reversed against income. These
loans are charged off when they are 120 days past due. For home equity loans,
accruals cease at 180 days and uncollected interest is reversed against interest
income. Thereafter, these loans are continually reviewed and charged off when
deemed uncollectible.
The following table provides information with respect to components of
the Company's non-performing loans. The Company had $3.9 million and $5.5
million in restructured loans outstanding as of December 31, 1998 and 1997,
respectively. There were $7.8 million in restructured loans outstanding at
December 31, 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997 1996 1995 1994
(000'S) (000's) (000's) (000's) (000'S)
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans $3,918 $4,317 $5,020 $4,327 $1,837
Loans Past Due 90 Days or More
But Not on Non-Accrual Basis 81 373 137 846 515
------ ------ ------ ------ ------
Total $3,999 $4,690 $5,157 $5,173 $2,352
====== ====== ====== ====== ======
</TABLE>
The following table sets forth the gross interest income that would
have been recorded for the period indicated if the non-accrual loans had been
current in accordance with their terms and the amount of interest income
recognized on these loans.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------
<S> <C>
Interest Income - Original Terms $424,184
Interest Income - Recorded 222,311
--------
Forgiven Interest Income $201,873
========
</TABLE>
Properties taken in foreclosure, or other real estate owned, constitute
another category of non-performing assets. Other real estate owned decreased
from $1,171,027 at December 31,1997 to $284,422 at December 31, 1998. The
Company is actively marketing these properties for sale.
42
<PAGE> 43
INVESTMENTS
Total investments averaged $80.6 million in 1998, representing an
increase of $12.7 million from 1997. At December 31, 1998, the investment
portfolio amounted to $100.4 million, an increase of $31.2 million compared to
December 31, 1997. At December 31, 1998, the yield of the portfolio on a
tax-equivalent basis decreased 83 basis points to 6.18%. This decrease was the
result of the reinvestment of maturities in a lower interest rate environment
for securities.
The investment strategy employed during 1998 was the investment of
temporarily idle deposit growth funds and investment maturities primarily into
short-term callable Federal Agency obligations. The nature of these securities
has provided liquidity through periodic repayment of principal and interest. The
callable characteristic of these investments also provide liquidity to fund
anticipated loan growth in the future.
U.S. Government and federal agencies averaged $52.9 million during
1998, an increase of $4.1 million, or 8.4%. This increase reflected the strategy
to provide liquidity for anticipated loan growth. The yield on the portfolio
decreased 77 basis points to 6.05% at December 31, 1998, compared to 6.82% at
December 31, 1997.
State and municipal securities increased on average $6.0 million to
$25.0 million. The tax- equivalent yield on this portfolio declined 122 basis
points to 6.32% at December 31, 1998, compared with 7.54% at December 31, 1997.
Federal funds sold averaged $5.5 million in 1998, a decrease of 1.0
million, or 14.7% compared to 1997. At December 31, 1998, there were no Federal
funds sold outstandings. These funds represent excess funds temporarily
invested. The yield on Federal funds increased 19 basis points to 5.47% in 1998.
The increase in yield was reflective of the higher overnight investment interest
rate environment during 1998.
The investment portfolio averaged $67.9 million during 1997,
representing an increase of $38.9 million from 1996. At December 31, 1997, total
investments amounted to $69.3 million, an increase of $32.8 million compared to
December 31, 1996. The portfolio yield on a tax- equivalent basis decreased 61
basis points at December 31, 1997 to 7.01% as a result of the lower interest
rate environment during 1997.
Securities are pledged to meet security requirements imposed as a
condition to receipt of public fund deposits. At December 31, 1998 and December
31, 1997, the market value of securities pledged to secure public deposits was
approximately $14.0 million and $14.4 million, respectively.
43
<PAGE> 44
The following tables summarize the amounts and distribution of the
Company's investment securities held as of the dates indicated, and the weighted
tax-equivalent average yield.
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------------------------------------- ---------------------------------------
BOOK MARKET WEIGHTED BOOK MARKET WEIGHTED
VALUE VALUE AVERAGE VALUE VALUE AVERAGE
(000'S) (000'S) YIELD (000'S) (000'S) YIELD
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
U.S. TREASURY & GOVERNMENT AGENCIES:
Within One Year $ 3,653 $ 3,663 6.21% $ 1,617 $ 1,619 5.82%
One to Five Years 30,525 30,513 5.85 11,235 11,285 6.69
Over Five Years 23,304 23,319 6.29 36,673 36,738 6.90
-------- -------- -------- --------
TOTAL U.S. TREASURY & GOVERNMENT AGENCIES 57,482 57,495 6.05 49,525 49,642 6.82
STATE AND POLITICAL SUBDIVISIONS:
Within One Year 498 502 7.24 130 130 9.40
One to Five Years 3,664 3,731 6.54 1,568 1,599 8.03
Over Five Years 33,890 34,006 6.28 16,869 17,173 7.48
-------- -------- -------- --------
TOTAL STATE AND POLITICAL SUBDIVISIONS 38,052 38,239 6.32 18,567 18,902 7.54
TOTAL OTHER SECURITIES 4,709 4,709 6.65 743 743 6.00
-------- -------- -------- --------
TOTAL SECURITIES $100,243 $100,443 6.18 $ 68,835 $ 69,287 7.01
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------
BOOK MARKET WEIGHTED
VALUE VALUE AVERAGE
(000'S) (000'S) YIELD
------- ------- --------
<S> <C> <C> <C>
U.S. TREASURY & GOVERNMENT AGENCIES:
Within One Year $ 1,093 $ 1,095 5.83%
One to Five Years 11,582 11,637 6.93
Over Five Years 9,962 9,947 7.06
------- -------
TOTAL U.S. TREASURY & GOVERNMENT AGENCIES 22,637 22,679 6.93
STATE AND POLITICAL SUBDIVISIONS:
Within One Year 681 684 7.26
One to Five Years 2,470 2,569 9.52
Over Five Years 10,266 10,590 8.67
------- -------
TOTAL STATE AND POLITICAL SUBDIVISIONS 13,417 13,843 8.75
TOTAL OTHER SECURITIES 0 0 N/A
------- -------
TOTAL SECURITIES $36,054 $36,522 7.62
======= =======
</TABLE>
DEPOSITS
Total deposits averaged $425.1 million during 1998, an increase of
$67.3 million, or 18.8%, compared with 1997. At December 31, 1998 total deposits
were $470.8 million, representing an increase of $71.6 million, or 17.9%, over
December 31, 1997. Deposit growth was primarily utilized to fund loan growth.
During 1998 demand deposits averaged $120.0 million, an increase of
$21.6 million, or 21.9%, from the average $98.5 million for 1997. Demand
deposits amounted to $146.9 million at year-end 1998, representing an increase
of $20.3 million, or 15.9%, compared to the prior year end.
Money market and NOW accounts averaged $111.3 million, an increase of
$26.9 million, or 31.9%, over 1997. These accounts totaled $126.8 million at
year end, an increase of $33.1 million, or 35.3%, from 1997. Regular savings
deposits increased $4.8 million, or 12.0%, over
44
<PAGE> 45
1997 to average $44.8 million. At year end these deposits amounted to $45.7
million, an increase of $4.9 million, or 12.0%, compared to the prior year.
Total time deposits averaged $148.9 million in 1998, an increase of $14.1
million, or 10.5%, compared with 1997. At December 31, 1998 these balances
totaled $151.4 million, an increase of $13.4 million, or 9.7%, from the prior
year end. The cost of total interest-bearing deposits decreased to 3.82% in 1998
from 3.94% in 1997, or 16 basis point. This decline in overall cost was
primarily the result of a slightly lower interest rate environment.
In 1997 total deposits averaged $357.8 million, representing an
increase of $116.4 million, or 48.2%, compared to 1996. At December 31, 1997
total deposits amounted to $399.2 million, an increase of $94.6 million, or
31.1% from the prior year end. The cost of interest-bearing deposits was 3.94%
in 1997 and represented a decrease of 1 basis point from 3.95% in 1996.
The following schedules reflect the Company's deposits, based upon
average balances, for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1998 1997
--------------------------------------- ---------------------------------------
AVERAGE PERCENT AVERAGE AVERAGE PERCENT AVERAGE
BALANCE OF RATE BALANCE OF RATE
(000'S) TOTAL PAID (000'S) TOTAL PAID
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
DEMAND:
Non-Interest Bearing $120,032 28.2% N/A $ 98,452 27.5% N/A
Money Market and NOW 111,344 26.2 2.68% 84,445 23.6 2.51%
SAVINGS: 44,833 10.6 1.90 40,032 11.2 1.98
TIME:
Under $100,000 70,243 16.5 5.18 72,478 20.3 5.53
$100,000 or More 78,698 18.5 5.32 62,383 17.4 5.28
-------- -------- -------- --------
TOTAL DEPOSITS $425,150 100.0% 2.74 $357,790 100.0% 2.85
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996
----------------------------------------
AVERAGE PERCENT AVERAGE
BALANCE OF RATE
(000'S) TOTAL PAID
-------- -------- -------
<S> <C> <C> <C>
DEMAND:
Non-Interest Bearing $ 64,575 26.7% N/A
Money Market and NOW 59,292 24.6 2.59%
SAVINGS: 27,699 11.5 2.01
TIME:
Under $100,000 47,609 19.7 5.45
$100,000 or More 42,229 17.5 5.44
-------- --------
TOTAL DEPOSITS $241,404 100.0% 2.89
======== ========
</TABLE>
BORROWED FUNDS
Borrowed funds, which consist of Federal funds purchased and other
forms of borrowing, were utilized primarily for funding loans and investments.
During 1998, as a result of increases in loan funding and investments, there was
an increase in the use of borrowed funds for these purposes.
45
<PAGE> 46
In 1998 borrowed funds averaged $7.5 million, an increase of $5.2
million, or 216.7% from 1997. At year-end there was $27.9 million outstanding in
borrowed funds, an increase of $25.1 million from the prior year-end. The cost
of borrowed funds decreased 82 basis points to 7.91% in 1998 from 8.73% in 1997.
The decrease in cost was reflective of the increase in the use of lower cost
advances from the Federal Home Loan Bank and to a lesser degree by a lower
interest rate environment.
Borrowed funds in 1997 averaged $2.4 million, a decrease of $.1
million, or 4.0%, compared to 1996. At year end 1997 there was $2.8 million
outstanding in borrowed funds. This represented an increase of $2.8 million from
year-end 1996 and in its entirety represented the Company's outstandings in
capital lease obligations. The cost of borrowed funds increased 308 basis points
to 8.73% from 5.65% in 1996 as a result of the increase in the Company's capital
lease obligations offset slightly by a lower interest rate environment.
PROVISION FOR CREDIT LOSSES
The allowance for credit losses at December 31, 1998 was $2.9 million,
compared to $2.3 million at December 31, 1997, an increase of $.6 million, or
26.1%. As a percent of total loans, the allowance was .74% at both year-ends
1997 and 1998. At year-end 1996, the allowance was $2.6 million or 1.07% of
total loans.
Management believes the allowance at December 31, 1998, was adequate
based on present economic conditions and its ongoing evaluation of the risks
inherent in the loan portfolio. In evaluating the adequacy of the allowance for
credit losses the Company considers the special risks involved in agriculture
because at least 11.2% of its loans are agriculturally related and the Imperial
and Coachella Valleys are dependent upon the success of their agricultural
businesses. These risks include fluctuations in commodity prices which do not
necessarily match the general rate of inflation; dependence of the agricultural
community on the export market and the adverse impact which the dollar's
strength against other currencies has had on such exports; variability of
production costs, weather and climatic changes; and the fact that, in any
downturn in the economy, agriculture is usually one of the last sectors of the
economy to recover. Furthermore, agricultural businesses are extremely sensitive
to actions of governmental agencies regarding price supports, subsidies and
import or export policies, the impact of which cannot be predicted.
VIB has also established a standard process in 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 regulatory authorities are included in the process of assessing
the adequacy of the allowance for credit losses. This process seeks to maintain
an allowance level adequate to provide for potential losses.
The provision for credit losses was $1.9 million in both 1997 and 1998.
The provision expense in 1996 was $.6 million.
Net charge-offs were $1.3 million, or .39% of average loans, in 1998 as
compared to $2.2 million, or .80%, in 1997. In 1996 net charge-offs were $.3
million, or .16% of average loans. Net charge-offs are projected to be $780,000
in 1999. Based upon the known risks in the portfolio as well as historical
trends, 60% of the projected 1999 net charge-offs are anticipated to be
commercial and agricultural and 20% are anticipated to be real estate
construction loans. The
46
<PAGE> 47
20% balance of the projected 1999 charge-offs is anticipated to be installment
loans to individuals.
At December 31, 1998, the loan portfolio was not subject to any known
significant risks except the non-performing loans previously identified. The
Company's loan portfolio at December 31, 1998 did not have any outstandings in
international loans and, accordingly, did not have any direct risk associated
with currency fluctuations in Mexico or the financial crisis in Asia.
The following table summarizes, for the periods indicated, loan
balances at the end of each period and average loans for the period, changes in
the allowance for credit losses arising from loans charged off, recoveries on
loans previously charged off, and additions to the allowance which have been
charged to operating expense and certain ratios relating to the allowance for
credit losses. While management has attributed reserves to various portfolio
segments, the allowance is general in nature and is available for the entire
portfolio.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCES (000'S)
Average Loans $336,979 $270,079 $208,178 $168,743 $163,820
Total Loans at end of Period 394,627 313,747 245,421 190,902 168,969
ALLOWANCE FOR CREDIT LOSSES (000'S)
BALANCE - BEGINNING OF PERIOD $ 2,330 $ 2,634 $ 2,024 $ 2,494 $ 1,827
Charge -Offs
Commercial and Agricultural 1,066 1,983 257 1,446 389
Real Estate - Construction -- 159 406 51 77
Installment 422 271 282 304 138
-------- -------- -------- -------- --------
TOTAL CHARGE - OFFS 1,488 2,413 945 1,801 604
Recoveries:
Commercial and Agricultural 38 63 575 272 12
Real Estate - Construction -- 16 12 18 6
Installment 138 180 35 33 43
-------- -------- -------- -------- --------
TOTAL RECOVERIES 176 259 622 323 61
-------- -------- -------- -------- --------
Net Charge - Offs 1,312 2,154 323 1,478 543
Provision for Credit Losses 1,920 1,850 635 1,008 1,210
Reserves Acquired by Acquisition 298
-------- -------- -------- -------- --------
BALANCE - END OF PERIOD $ 2,938 $ 2,330 $ 2,634 $ 2,024 $ 2,494
======== ======== ======== ======== ========
Ratios:
Net Loans Charged Off to Average Loans 0.39% 0.80% 0.16% 0.88% 0.33%
Net Loans Charged Off to Total Loans
at End of Period 0.33 0.69 0.13 0.77 0.32
Allowance for Credit Losses to Average Loans 0.87 0.86 1.27 1.20 1.52
Allowance for Credit Losses to Total Loans
at End of Period 0.74 0.74 1.07 1.06 1.48
Net Loans Charged Off to Allowance
for Credit Losses 44.66 92.45 12.26 73.02 21.77
Net Loans Charged Off to Provision
for Credit Losses 68.33 116.43 50.87 146.63 44.88
</TABLE>
NONINTEREST INCOME
Total noninterest income was $5.3 million in 1998, $5.8 million in 1997
and $3.1 million in 1996. Service charges and fees on deposits were $3.7 million
in 1998, an increase of $280,000, or 8.2%, over 1997. In 1997 service charge
income rose $1.4 million, representing an increase of
47
<PAGE> 48
72.7%, from 1996. The increases in service charge income have been directly
related to VIB's various acquisitions as well as the internal growth in the
number and volume of deposit accounts.
Other income amounted to $489,000 in 1998, an increase of $80,000, or
19.6%, compared to the prior year. In 1997 other income totaled $409,000,
representing an increase of $71,000, or 21.2%, from 1996.
Income generated through the sale of government guaranteed loans
provide an additional source of earnings. In 1998, the gains on sale of loans
and related servicing fees totaled $644,000, a decrease of $778,000, or 54.7%,
from 1997. Loan sale gains in 1997 amounted to $1.4 million, an increase of $.7
million, or 115.9% from 1996.
For the year ended December 31, 1998, securities gains were $489,000,
compared to $551,000 in 1997. Securities gains in 1996 were $49,000.
NONINTEREST EXPENSE
Noninterest expense in 1998 totaled $23.9 million, an increase of $3.7
million, or 18.1%, as compared to 1997. These expenditures amounted to $20.2
million in 1997, representing an increase of $4.5 million, or 28.2%, over 1996.
Salary expense in 1998 amounted to $8.7 million, an increase of $1.2
million, or 16.0%, compared to 1997. The increase in salaries was due primarily
to personnel additions related to the branch acquisition from Palm Desert
National Bank, merit increases and the opening of VIB's new loan production
offices. In 1997, salary expense was $7.5 million, an increase of $1.4 million,
or 22.9%, compared to 1996.
Employee benefits expense was $2.8 million for the year ended December
31, 1998, an increase of $.5 million, or 21.7% compared to 1997. The increase in
benefits was attributable primarily to the previously discussed staffing
additions and increases in the Company's funding of The ESOP and 401K plans. In
1997, employee benefit expense amounted to $2.3 million representing an increase
of $3 million, or 15.0%, compared to 1996.
Occupancy expenses were $2.0 million in 1998, an increase of $.4
million, or 23.6%, compared to 1997. In 1997, occupancy expense amounted to $1.6
million representing an increase of $.3 million, or 30.7%, compared to 1996.
Furniture and equipment expense totaled $2.3 million in 1998, an increase of $.5
million, or 25.3%, over 1997. In 1997, furniture and equipment expense amounted
to $1.8 million, an increase of $.4 million, or 24.8%, compared with 1996. The
increase in occupancy, furniture and equipment expenses in 1998 was primarily
related to the opening of VIB's new loan production offices, the Palm Springs
branch acquisition and its conversion to a new data processing system.
All other noninterest expenses amounted to $8.0 million in 1998, an
increase of $1.1 million, or 15.9%, compared to 1997. Increased professional
fees, data processing, advertising, business promotion expense, intangible asset
amortization expenses and other expenses related to the branch acquisition from
Palm Desert National Bank were the primary reasons for the increase in this
category. All other noninterest expenses in 1997 were $6.9 million, representing
an increase of $2.1 million, or 43.8%, over 1996.
48
<PAGE> 49
INCOME TAX EXPENSE
Income tax expense for the year ending December 31, 1998 was $2.7
million as compared with $1.9 million for 1997, an increase of $.8 million, or
39.4% The increase in expense was primarily attributable to a $1.8 million
increase in taxable operating income as well as an increase in the Company's
effective tax rate from 33.8% for the year ended December 31, 1997 to 35.7% for
the year ended December 31, 1998. The effective tax rate increase was primarily
the result of increases in non-deductible intangible asset amortization expense
partially offset by a $166,000 increase in non-taxable income from municipal
securities.
Income tax expense for the year ending December 31, 1997 was $1.9
million as compared with $1.2 million for 1996, an increase of $.7 million, or
55.6%. The increase in expense was primarily attributed to a $1.9 million
increase in taxable operating income as well as an increase in the Company's
effective tax rate from 32.6% for the year ended December 31, 1996 to 33.8% for
the year ended December 31, 1997. The effective tax rate increase was primarily
the result of a $316,000 increase in non-deductible intangible asset
amortization expense partially offset by a $448,000 increase in non-taxable
income from municipal securities.
CAPITAL RESOURCES
Shareholders' equity averaged $42.7 million in 1998, an increase of
$13.1 million, or 44.3%, compared to 1997. At December 31, 1998 shareholders'
equity amounted to $45.8 million, an increase of $5.5 million, or 13.6% over the
prior year. During 1997 shareholders' equity averaged $29.6 million, an increase
of $4.5 million, or 17.9%, compared to 1996. At December 31, 1997, shareholders'
equity totaled $40.3 million, representing an increase of $13.3 million, or
49.3% compared to year-end 1996. Per common share book value increased to $5.62
at year end 1998 from $5.06 the prior year. Book value per common share at
year-end 1996 was $3.77.
Under regulatory guidelines, capital adequacy is measured as a
percentage of risk-adjusted assets in which risk percentages are applied to
assets on as well as off the balance sheet. At December 31, 1998, the Tier I and
total risk based capital ratios were 9.01% and 9.65%, respectively, compared to
9.83% and 10.47%, respectively, at December 31, 1997. The minimum regulatory
guidelines for Tier I and total risk-based capital ratios are 4.0% and 8.0%,
respectively. The leverage ratio, which is a measure of average Tier I capital
to adjusted average assets was 8.10% at December 31, 1998, compared to 8.59% at
year-end 1997. The leverage ratio at December 31, 1996 was 7.91%. The Bank's
leverage ratio exceeds the current regulatory minimum of 3.0%. The Bank's
capital adequacy supports present as well as planned future growth.
LIQUIDITY AND LIABILITY MANAGEMENT
VIB's Asset/Liability Committee (ALCO) functions to manage the
maintenance of liquidity and the preservation of net interest income when
subjected to fluctuations in market interest rates. The ability to meet funding
commitments present and in the future is the measure of liquidity. Liquidity is
also needed to meet borrowing needs, deposit withdrawals and asset growth. The
Bank develops liquidity through deposit growth, maturities and repayments of
loans and investments, net interest income, fee income and access to purchase
funds through correspondent banks or other entities.
49
<PAGE> 50
The liquidity position of VIB remained adequate during 1997 and 1998 as
a result of strong deposit growth and moderated loan growth. In addition, VIB
maintained a consistently strong net interest income margin and developed
expanded sources of purchased funds.
VIB's ALCO manages the interest rate sensitivity or repricing
characteristics of the assets and liabilities. VIB's primary source of earnings
is net interest income, which is subject to movements in interest rates. To
minimize the effect of changes in rates the balance sheet requires structuring
in order that the repricing opportunities for both assets and liabilities exist
in nearly equivalent amounts at approximately similar time intervals. Interval
differences may exist at times creating interest sensitivity gaps which
represent the difference between interest sensitive assets and interest
sensitive liabilities. These gaps are static in nature and do not consider
future activity. As such, these gap measurements serve best as an indicator for
potential interest rate exposure.
The sensitivity to interest rate fluctuations is measured in several
time frames. Various strategies such as liability cost administration and
redeployment of asset maturities are utilized to preserve interest income from
the effect of changes in interest rates. The gap positions are monitored as a
function of the asset and liability management process. The monitoring process
includes the use of periodic simulated business forecasts which incorporate
various interest rate environments. Financial modeling is utilized to assist
management in maintaining consistent earnings in an environment of changing
interest rates.
The following table sets forth the relative maturities of the
commercial, agricultural and construction loan portfolios and provides a
breakout relative to fixed and variable rate loan maturities.
<TABLE>
<CAPTION>
OVER ONE
YEAR
BUT LESS
ONE YEAR THAN OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Loans (000's)
Commercial and Agricultural $ 79,847 $119,747 $ 85,017 $284,611
Real Estate - Construction 32,839 8,214 9,024 50,077
-------- -------- -------- --------
TOTAL $112,686 $127,961 $ 94,041 $334,688
======== ======== ======== ========
Loans With Predetermined (Fixed) Interest Rates $ 6,916 $ 60,497 $ 50,615 $118,028
Loans With Variable (Floating) Interest Rates 105,770 67,464 43,426 216,660
-------- -------- -------- --------
TOTAL $112,686 $127,961 $ 94,041 $334,688
======== ======== ======== ========
</TABLE>
The following schedule sets forth the maturities of time certificates
of deposit over $100,000 and their relative mix.
<TABLE>
<CAPTION>
BALANCE PERCENT
(000'S) OF TOTAL
-------- --------
<S> <C> <C>
Less Than Three Months $ 48,224 59.5%
Three Months Through Six Months 15,051 18.6
Seven Months Through Twelve Months 15,690 19.4
Over Twelve Months 2,065 2.5
-------- --------
TOTAL $ 81,030 100.0%
======== ========
</TABLE>
VIB does not maintain a trading account for any class of financial
instrument nor does it engage in hedging activities or purchase high-risk
derivative instruments. Furthermore, VIB is not subject to foreign currency
exchange rate risk or commodity price risk.
50
<PAGE> 51
In addition to gap measurement, VIB's ALCO is further responsible for
the measurement of interest rate risk, i.e., the risk of loss in value due to
changes in interest rates. The ALCO monitors and considers methods of managing
interest rate risk by monitoring changes in net portfolio value ("NPV") and net
interest income under various interest rate scenarios. The ALCO attempts to
manage the various components of VIB's balance sheet to minimize the impact of
sudden and sustained changes in interest rates on NPV and net interest income.
VIB's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. If potential changes to
NPV and net interest income resulting from hypothetical interest rate swings are
not within the limits established by the Board, the Board may direct management
to adjust its assets and liability mix to bring interest rate risk within Board-
approved limits.
VIB uses interest rate sensitivity analysis to measure interest rate
risk by computing estimated changes in NPV of its cash flows from assets and
liabilities in the event of a range of assumed changes in market interest rates.
NPV represents the market value of portfolio equity and is equal to the market
value of assets minus the market value of liabilities. This analysis assesses
the risk of loss in market rate sensitive instruments in the event of sudden and
sustained increases and decreases in market interest rates ranging from one
hundred to four hundred basis points. VIB's Board of Directors has adopted an
interest rate risk policy which establishes a maximum limit of decrease in the
NPV in the event of sudden and sustained increases and decreases in market
interest rates. The following tables present VIB's projected changes in NPV and
net interest income for the various rate shock levels as of December 31, 1998.
CHANGE IN NET PORTFOLIO VALUE
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
NET PORTFOLIO ACTUAL PERCENTAGE
CHANGE IN INTEREST RATES VALUE (000'S) CHANGE (000'S) CHANGE
- ------------------------ ------------- -------------- ----------
<S> <C> <C> <C>
300 basis point rise $63,167 $(3,848) (5.74)
200 basis point rise 64,527 (2,488) (3.71)
100 basis point rise 65,887 (1,128) (1.68)
Base Rate Scenario 67,015 N/A N/A
100 basis point decline 66,751 (264) (0.39)
200 basis point decline 66,425 (590) (0.88)
300 basis point decline 66,256 (759) (1.13)
</TABLE>
CHANGE IN NET INTEREST INCOME
AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
NET PORTFOLIO ACTUAL PERCENTAGE
CHANGE IN INTEREST RATES VALUE (000'S) CHANGE (000'S) CHANGE
- ------------------------ ------------- -------------- ----------
<S> <C> <C> <C>
300 basis point rise $29,580 $ (348) (1.16)
200 basis point rise 29,797 (131) (0.44)
100 basis point rise 29,973 45 0.15
Base Rate Scenario 29,928 N/A N/A
100 basis point decline 28,931 (997) (3.33)
200 basis point decline 27,140 (2,788) (9.32)
300 basis point decline 25,319 (4,609) (15.40)
</TABLE>
51
<PAGE> 52
Certain shortcomings are inherent in the method of analysis presented
in the computation of NPV. Although certain assets and liabilities may have
similar maturities or periods within which they will reprice, they may react
differently to changes in market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. There may also be repayment risk if interest rates rise on loans.
Computation of forecasted effects of hypothetical interest rate changes
should not be relied upon as indicative of actual future results. Further, the
computations do not contemplate any actions the ALCO could undertake in response
to change in interest rates.
The Company is a legal entity, separate and distinct from its
subsidiaries. Although there exists the ability to raise capital on its own
behalf (such as the recent private placement of Capital Securities) or borrow
from external sources, the Company may obtain additional funds through dividends
paid by, and fees for services provided to, its subsidiaries. Regulations limit
the amount of dividends as well as service fees paid by subsidiaries. The
Company's expenses have been primarily covered by fees charged to and dividends
received from VIB and it is anticipated that the Company will be able to
continue to rely on dividends from its subsidiaries to fund its separate
operations and obligations. The Company may not always be able to rely solely on
its current or future subsidiaries to meet its obligations, including
obligations under the Capital Securities, or to maintain its separate liquidity.
Under such circumstances, the Company would be forced to seek other means to
raise capital.
INFLATION
The impact of inflation on a financial institution differs
significantly from that exerted on an industrial concern, primarily because its
assets and liabilities consist largely of monetary items. The relatively low
proportion of VIB's fixed assets to total assets of 2.1% at December 31, 1998,
and 2.6% at December 31, 1997, reduces both the potential for inflated earnings
resulting from understated depreciation changes, and the potential for
significant understatement of absolute asset values. However, financial
institutions are affected by inflation's impact on non-interest expenses, such
as salaries and occupancy expense, and to some extent, by inflative impact on
interest rates.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information in response to this Item is included in ITEM 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Financial Statements are included in this Annual Report
on Form 10-K:
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C>
Independent Auditors' Report 53
Statements of Financial Condition as of December 31, 1998 and 1997 54
Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 56
Statement of Changes in Shareholders' Equity for the Years Ended December 31,
1998, 1997 and 1996 57
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 58
Notes to Financial Statements 59
</TABLE>
52
<PAGE> 53
[VAVRINEK, TRINE, DAY & CO., LLP LETTERHEAD]
To the Shareholders and Board of Directors
of VIB Corp and Subsidiary
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of VIB Corp and
Subsidiary as of December 31, 1998 and 1997 and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for the
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the VIB Corp's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VIB Corp and Subsidiary as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
VAVRINEK, TRINE, DAY & CO., LLP
January 13, 1999, except for Note S
which is dated February 5, 1999
Laguna Hills, California
53
<PAGE> 54
VIB CORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 27,891,537 $ 33,821,287
Federal Funds Sold -- 4,000,000
------------- -------------
TOTAL CASH AND CASH EQUIVALENTS 27,891,537 37,821,287
Interest-Bearing Deposits 422,619 586,000
Securities Available for Sale 100,443,472 69,287,466
Loans:
Commercial 58,184,717 46,049,768
Agricultural 44,331,588 49,128,668
Real Estate - Construction 50,077,268 35,926,148
Real Estate - Other 218,158,848 157,566,136
Consumer 27,263,326 26,741,763
------------- -------------
TOTAL LOANS 398,015,747 315,412,483
Net Deferred Loan Fees (3,388,246) (1,665,059)
Allowance for Credit Losses (2,937,983) (2,330,000)
------------- -------------
NET LOANS 391,689,518 311,417,424
Premises and Equipment 11,306,206 11,452,257
Other Real Estate Owned 284,422 1,171,027
Cash Surrender Value of Life Insurance 2,677,027 2,282,805
Deferred Tax Asset 2,059,000 1,650,000
Goodwill 4,419,687 3,607,404
Accrued Interest and Other Assets 5,591,735 4,891,773
------------- -------------
$ 546,785,223 $ 444,167,443
============= =============
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-Bearing Demand $146,870,278 $126,660,748
Money Market and NOW 126,847,812 93,732,297
Savings 45,666,489 40,811,775
Time Deposits Under $100,000 70,377,152 67,110,498
Time Deposits $100,000 and Over 81,030,467 70,897,030
------------ ------------
TOTAL DEPOSITS 470,792,198 399,212,348
Federal Home Loan Bank Advances 25,000,000 --
Capitalized Lease Obligation 2,886,342 2,842,336
Accrued Interest and Other Liabilities 2,264,156 1,858,749
------------ ------------
TOTAL LIABILITIES 500,942,696 403,913,433
Commitments and Contingencies - Note I
Shareholders' Equity:
Preferred Stock - Authorized 10,000,000 Shares,
None Outstanding
Common Shares - Authorized
25,000,000 Shares; Issued and
Outstanding: 8,158,209 in 1998 and
7,734,246 in 1997 39,788,073 35,932,844
Retained Earnings 5,936,048 4,053,921
Accumulated Other Comprehensive Income-Net
Unrealized Gains on Available-for-Sale
Securities, net of Taxes of $82,282 in 1998
and $185,713 in 1997 118,406 267,245
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 45,842,527 40,254,010
------------ ------------
$546,785,223 $444,167,443
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
55
<PAGE> 56
VIB CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $35,216,295 $27,591,537 $21,945,856
Interest on Investment Securities - Taxable 3,531,481 3,399,135 1,395,168
Interest on Investment Securities - Nontaxable 1,198,145 1,031,879 584,014
Other Interest Income 343,332 396,337 303,194
----------- ----------- -----------
TOTAL INTEREST INCOME 40,289,253 32,418,888 24,228,232
INTEREST EXPENSE
Interest on Money Market and NOW 2,981,232 2,117,229 1,537,461
Interest on Savings Deposits 851,160 791,595 556,675
Interest on Time Deposits 7,818,380 7,304,118 4,890,655
Interest on Other Borrowings 597,336 208,191 142,953
----------- ----------- -----------
TOTAL INTEREST EXPENSE 12,248,108 10,421,133 7,127,744
----------- ----------- -----------
NET INTEREST INCOME 28,041,145 21,997,755 17,100,488
Provision for Credit Losses 1,920,000 1,850,000 635,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 26,121,145 20,147,755 16,465,488
NONINTEREST INCOME
Service Charges and Fees 3,688,385 3,408,734 1,974,185
Gain on Sale of Loans and Servicing Fees 644,183 1,421,869 658,670
Mortgage Fees -- -- 87,811
Gain on Sale of Securities 489,323 551,024 48,835
Other Income 488,526 409,390 337,805
----------- ----------- -----------
5,310,417 5,791,017 3,107,306
----------- ----------- -----------
31,431,562 25,938,772 19,572,794
NONINTEREST EXPENSE
Salaries and Employee Benefits 11,508,134 9,799,637 8,191,646
Occupancy Expenses 2,025,886 1,638,517 1,253,655
Furniture and Equipment 2,306,328 1,839,948 1,473,887
Data Processing 1,221,212 1,030,446 698,406
Advertising 374,088 244,385 354,356
Legal and professional 1,732,952 1,402,605 874,335
Regulatory Assessments 128,715 134,920 31,668
Insurance 140,783 124,350 112,076
Office Expenses 1,560,602 1,332,159 869,292
Promotion 1,090,811 1,169,562 908,185
Other Real Estate Owned 21,702 23,031 156,895
Amortization of Goodwill and Core Deposit Intangibles 490,783 315,716 32,219
Other Expenses 1,251,820 1,139,507 791,967
----------- ----------- -----------
23,853,816 20,194,783 15,748,587
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 7,577,746 5,743,989 3,824,207
Income Taxes 2,709,305 1,943,000 1,249,000
----------- ----------- -----------
NET INCOME $ 4,868,441 $ 3,800,989 $ 2,575,207
=========== =========== ===========
Per Share Data
Net Income - Basic $ 0.61 $ 0.52 $ 0.37
Net Income - Diluted $ 0.58 $ 0.49 $ 0.35
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
56
<PAGE> 57
VIB CORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Common Shares Accumulated
-------------------------- Other
Number of Comprehensive Undivided Comprehensive
Shares Amount Income Profits Income Total
------------ ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 6,108,173 $ 18,652,232 $ 4,669,962 $ 356,222 $ 23,678,416
Stock Dividends 508,172 4,755,505 (4,755,505)
Cash Dividends (15,701) (15,701)
Exercise of Stock Options,
Including the Realization of
Tax Benefits of $195,000 207,270 878,956 878,956
COMPREHENSIVE INCOME:
Net Income for the Year $ 2,575,207 2,575,207 2,575,207
Unrealized loss on
Available-for-Sale Securities,
net of Taxes of $33,726 (48,532) (48,532) (48,532)
Less Reclassification Adjustments
for Gains Included in Net Income,
net of Taxes of $20,022 (28,813) (28,813) (28,813)
------------
TOTAL COMPREHENSIVE INCOME $ 2,497,862
------------ ------------ ============ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1996 6,823,615 24,286,693 2,473,963 278,877 27,039,533
Stock Dividends 150,637 2,199,307 (2,199,307)
Cash Dividends (21,724) (21,724)
Exercise of Stock Options,
Including the Realization of
Tax Benefits of $96,000 121,669 637,470 637,470
Issuance of Common Shares
net of expenses of $123,425 638,325 8,809,374 8,809,374
COMPREHENSIVE INCOME:
Net Income for the Year $ 3,800,989 3,800,989 3,800,989
Unrealized gain on
Available-for-Sale Securities,
net of Taxes of $217,837 313,472 313,472 313,472
Less Reclassification Adjustments
for Gains Included in Net Income,
net of Taxes of $225,920 (325,104) (325,104) (325,104)
------------
TOTAL COMPREHENSIVE INCOME $ 3,789,357
------------ ------------ ============ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1997 7,734,246 35,932,844 4,053,921 267,245 40,254,010
Stock Dividends 235,559 2,958,621 (2,958,621) --
Cash Dividends (27,693) (27,693)
Exercise of Warrants 2,496 38,513 38,513
Exercise of Stock Options,
Including the Realization of
Tax Benefits of $180,000 185,908 858,095 858,095
COMPREHENSIVE INCOME:
Net Income for the Year $ 4,868,441 4,868,441 4,868,441
Unrealized gain on
Available-for-Sale Securities,
net of Taxes of $97,191 139,862 139,862 139,862
Less Reclassification Adjustments
for Gains Included in Net Income,
net of Taxes of $200,622 (288,701) (288,701) (288,701)
------------
TOTAL COMPREHENSIVE INCOME $ 4,719,602
------------ ------------ ============ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1998 8,158,209 $ 39,788,073 $ 5,936,048 $ 118,406 $ 45,842,527
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
57
<PAGE> 58
VIB CORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
OPERATING ACTIVITIES 1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net Income $ 4,868,441 $ 3,800,989 $ 2,575,207
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Depreciation and Amortization 2,691,100 2,097,348 1,278,406
Deferred Income Taxes (305,000) (71,000) (236,000)
Net Realized Gains in Available-for-Sale Securities (489,423) (551,024) (48,835)
Provision for Credit Losses 1,920,000 1,850,000 635,000
Proceeds From Loans Sold 13,361,580 15,067,594 6,226,899
Originations of Loans Held for Sale (4,754,924) (21,918,858) (7,265,343)
Gain on Sale of Loans (348,060) (1,115,827) (375,091)
Loss (Gain) on Sale of Other Real Estate Owned (47,824) (39,876) 110,146
Net Increase in Cash Surrender Value of Life Insurance (394,222) (274,847) (318,351)
Net Change in Accrued Interest, Other Assets
and Other Liabilities 36,361 680,051 (870,067)
------------- ------------- -------------
NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES 16,538,029 (475,450) 1,711,971
INVESTING ACTIVITIES
Proceeds from Sales of Other Real Estate Owned 326,930 517,781 --
Purchases of Available-for-Sale Securities (108,060,352) (95,354,148) (26,334,100)
Proceeds from Sales of Available-for-Sale Securities 18,581,915 29,677,064 17,003,275
Proceeds from Maturities of Available-for-Sale Securities 58,339,750 33,332,315 20,837,268
Net Decrease in Interest-Bearing Deposits 163,381 293,000 --
Net Cash Received from Purchase of
Bank of the Desert, N.A. -- -- 943,154
Net Increase in Loans (89,989,476) (63,338,270) (34,890,343)
Purchases of Premises and Equipment (1,817,006) (3,651,527) (3,040,899)
------------- ------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (122,454,858) (98,523,785) (25,481,645)
FINANCING ACTIVITIES
Net Increase in Demand Deposits and Savings Accounts 56,898,073 71,689,814 10,778,345
Net Increase in Time Deposits 13,400,091 20,923,953 29,174,236
Repayments of Capitalized Lease Obligation -- (7,664) --
Net Change in Federal Funds Purchased 25,000,000 -- (1,400,000)
Proceeds from Issuance of Common Shares -- 8,809,374 --
Payments for Dividends (27,693) (21,724) (15,701)
Proceeds from Exercise of Warrants 38,513 -- --
Proceeds from Exercise of Stock Options 678,095 541,095 683,956
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 95,987,079 101,934,848 39,220,836
------------- ------------- -------------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (9,929,750) 2,935,613 15,451,162
Cash and Cash Equivalents at Beginning of Year 37,821,287 34,885,674 19,434,512
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,891,537 $ 37,821,287 $ 34,885,674
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 12,270,154 $ 10,358,196 $ 7,017,682
Income Taxes Paid $ 3,147,226 $ 1,046,000 $ 1,787,422
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
58
<PAGE> 59
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements include the accounts of VIB Corp and its subsidiary,
Valley Independent Bank ("the Bank"), collectively referred to herein as the
"Company".
Nature of Operations
The Bank operates thirteen branches throughout the Imperial and Coachella
Valleys and in Blythe, Tecate, and Julian, California. The Bank also operates
business loan centers in El Centro, Rancho Mirage, Orange, Carlsbad, California,
Las Vegas, Nevada and Yuma, Arizona. The Bank's primary source of revenue is
providing loans to customers, who are predominately small and middle-market
businesses and individuals.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Due From Banks
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit with the federal reserve bank.
The Company maintains amounts due from banks which exceed federally insured
limits. The Company has not experienced any losses in such accounts.
Investment Securities
Bonds, notes, and debentures for which the Company has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity.
Investments not classified as trading securities nor as held to maturity
securities are classified as available-for-sale securities and recorded at fair
value. Unrealized gains or losses on available-for-sale securities are excluded
from net income and reported as an amount net of taxes as a separate component
of other comprehensive income included in shareholders' equity. Premiums or
discounts on held-to-maturity and available-for-sale securities are amortized or
accreted into income using the interest method. Realized gains or losses on
sales of held-to-maturity or available-for-sale securities are recorded using
the specific identification method.
59
<PAGE> 60
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Loans Held for Sale
Mortgage and SBA loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
Loans
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances reduced by any charge-offs or specific valuation
accounts and net of any deferred fees or costs on originated loans, or
unamortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
For impairment recognized in accordance with Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan (SFAS No. 114), as amended by SFAS 118, the
entire change in the present value of expected cash flows is reported as either
provision for loan losses in the same manner in which impairment initially was
recognized, or as a reduction in the amount of provision for loan losses that
otherwise would be reported.
Allowance for Credit Losses
The allowance for credit losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Quarterly detailed reviews are performed to
identify the risks inherent in our loan portfolio, assess the overall quality of
our loan portfolio and to determine the adequacy of our allowance for loan
losses and the related provision for loan losses to be charged to expense. Loans
identified as less than "acceptable" are reviewed individually to estimate the
amount of probable losses that need to be included in the allowance. These
reviews include analysis of financial information as well as evaluation of
collateral securing the credit. Additionally, we consider the inherent risk
present in the "acceptable" portion of our loan portfolio taking into
consideration historical losses on pools of similar loans, adjusted for trends,
conditions and other relevant factors that may affect repayment of the loans in
these pools.
60
<PAGE> 61
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Premises and Equipment
Land is carried at cost. Bank premises, furniture and equipment, and leasehold
improvements are carried at cost, less accumulated depreciation and
amortization. Depreciation is provided using the straight-line method over the
estimated service lives of the related assets. Leasehold improvements are
amortized over the lives of the respective leases or the service lives of the
improvements, which ever is shorter.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are
initially recorded at fair value at the date of foreclosure establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of cost, or fair value
minus estimated costs to sell. Revenue and expenses from operations and changes
in the valuation allowance are included in other expenses.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the estimated fair
value of net assets associated with acquisition transactions of the Company
accounted for as purchases and is amortized over fifteen years. Core deposit
intangibles represent the intangible value of depositor relationships resulting
from deposit liabilities assumed in acquisitions and are amortized over seven to
fifteen years. Goodwill and other intangibles are evaluated periodically for
other than temporary impairment. Should such an assessment indicate that the
undiscounted value of an intangible may be impaired, the net book value of the
intangible would be written down to net estimated recoverable value.
Income Taxes
Deferred income taxes are computed using the asset and liability method, which
recognizes a liability or asset representing the tax effects, based on current
tax law, of future deductible or taxable amounts attributable to events that
have been recognized in the consolidated financial statements. A valuation
allowance is established to reduce the deferred tax asset to the level at which
it is "more likely than not" that the tax asset or benefits will be realized.
Realization of tax benefits of deductible temporary differences and operating
loss carryforwards depends on having sufficient taxable income of an appropriate
character within the carryforward periods.
Disclosure About Fair Value of Financial Instruments
SFAS No. 107 specifies the disclosure of the estimated fair value of financial
instruments. The Company's estimated fair value amounts have been determined by
the Company using available market information and appropriate valuation
methodologies.
61
<PAGE> 62
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Disclosure About Fair Value of Financial Instruments - Continued
However, considerable judgment is required to develop the estimates of fair
value. Accordingly, the estimates are not necessarily indicative of the amounts
the Company could have realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since the balance sheet date
and, therefore, current estimates of fair value may differ significantly from
the amounts presented in the accompanying Notes.
Earnings Per Shares (EPS)
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. The pro forma effects
of adoption are disclosed in Note J.
Current Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". This Statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. This new standard is effective for 2000 and is not
expected to have a material impact on the Company's financial statements.
Reclassifications
Certain reclassifications were made to prior years' presentations to conform to
the current year. These classifications are of a normal recurring nature.
62
<PAGE> 63
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE B - INVESTMENT SECURITIES
Debt and equity securities have been classified in the statements of financial
condition according to management's intent. The carrying amount of securities
and their approximate fair values at December 31 were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
DECEMBER 31, 1998:
U.S. Treasury Securities $ 550,010 $ 37,068 $ -- $ 587,078
U.S. Government and
Agency Securities 41,307,963 114,408 105,381 41,316,990
States and Political
Subdivisions 38,051,649 449,660 262,406 38,238,903
Mortgage-Backed Securities 15,623,762 31,114 63,775 15,591,101
Other 4,709,400 -- -- 4,709,400
------------ ------------ ------------ ------------
$100,242,784 $ 632,250 $ 431,562 $100,443,472
============ ============ ============ ============
AVAILABLE-FOR-SALE SECURITIES:
DECEMBER 31, 1997:
U.S. Treasury Securities $ 507,202 $ 36,920 $ -- $ 544,122
U.S. Government and
Agency Securities 39,124,861 99,021 27,401 39,196,481
States and Political
Subdivisions 18,566,989 334,838 166 18,901,661
Mortgage-Backed Securities 9,892,506 38,872 29,126 9,902,252
Other 742,950 -- -- 742,950
------------ ------------ ------------ ------------
$ 68,834,508 $ 509,651 $ 56,693 $ 69,287,466
============ ============ ============ ============
</TABLE>
63
<PAGE> 64
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE B - INVESTMENT SECURITIES - CONTINUED
Gross realized gains and gross realized losses on sales of available-for-sale
securities were:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
GROSS REALIZED GAINS:
U.S. Government and Agency Securities $ 11,409 $ 63,250 $ 88,122
States and Political Subdivisions 485,893 498,480 31,176
-------- -------- --------
$497,302 $561,730 $119,298
======== ======== ========
GROSS REALIZED LOSSES:
U.S. Government and Agency Securities $ -- $ 10,706 $ 23,705
Mortgage-Backed Securities 7,876 -- 46,758
-------- -------- --------
$ 7,876 $ 10,706 $ 70,463
======== ======== ========
</TABLE>
Investment securities carried at approximately $66,329,000 and $14,367,000, at
December 31, 1998 and 1997, respectively, were pledged to secure public deposits
and other purposes as required by law. The scheduled maturities of securities
available for sale at December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Due in One Year or Less $ 1,790,522 $ 1,796,321
Due from One Year to Five Years 27,313,188 27,363,603
Due from Five to Ten Years 25,711,406 25,942,373
Due after Ten Years 25,094,506 25,040,674
Mortgage-Backed Securities 15,623,762 15,591,101
Other 4,709,400 4,709,400
------------ ------------
$100,242,784 $100,443,472
============ ============
</TABLE>
64
<PAGE> 65
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE C - LOANS
The Bank's loan portfolio consists primarily of loans to borrowers within
Imperial and Riverside counties, California, Las Vegas, Nevada and Yuma,
Arizona. Although the Bank seeks to avoid concentrations of loans to a single
industry or based upon a single class of collateral, real estate and
agricultural associated businesses are among the principal industries in the
Bank's market area. As a result, the Bank's loan and collateral portfolios are,
to some degree, concentrated in those industries.
The Bank also originates real estate related and farmland loans for sale to
governmental agencies and institutional investors. At December 31, 1998 and
December 31, 1997, the Bank was servicing approximately $65,952,000 and
$59,289,000, respectively, in loans previously sold.
A summary of the changes in the allowance for credit losses follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at Beginning of Year $ 2,330,000 $ 2,634,000 $ 2,024,000
Additions to the Allowance Charged to Expense 1,920,000 1,850,000 635,000
Recoveries on Loans Charged Off 175,642 259,000 622,000
Allowance on Loans Acquired from
Bank of the Desert, N.A -- -- 298,000
----------- ----------- -----------
4,425,642 4,743,000 3,579,000
Less Loans Charged Off (1,487,659) (2,413,000) (945,000)
----------- ----------- -----------
Balance at End of Year $ 2,937,983 $ 2,330,000 $ 2,634,000
=========== =========== ===========
</TABLE>
The following is a summary of the investment in impaired loans, the related
allowance for credit losses, and income recognized thereon as of December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Recorded Investment in Impaired Loans $8,517,000 $9,565,000
========== ==========
Related Allowance for Credit Losses $1,217,000 $1,450,000
========== ==========
Average Recorded Investment in Impaired Loans $7,946,000 $8,650,000
========== ==========
Interest Income Recognized from Cash Payments $ 421,000 $ 697,000
========== ==========
</TABLE>
65
<PAGE> 66
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE C - LOANS - CONTINUED
Loans having carrying values of $501,942, $1,866,967, and $1,108,499 were
transferred to other real estate owned in 1998, 1997 and 1996, respectively.
During 1998, 1997 and 1996, loans totaling $1,109,441, $2,165,650 and $367,103,
respectively, were made to facilitate the sale of other real estate owned.
NOTE D - PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31 follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land $ 1,772,128 $ 1,772,128
Buildings and Improvements 2,928,363 2,518,631
Leased Property under Capital Lease 2,850,000 2,850,000
Furniture, Fixtures, and Equipment 7,421,386 8,320,773
Leasehold Improvements 1,668,519 1,844,341
------------ ------------
16,640,396 17,305,873
Less Accumulated Depreciation and Amortization (5,334,190) (5,853,616)
------------ ------------
$ 11,306,206 $ 11,452,257
============ ============
</TABLE>
During 1997, the Bank entered into a twenty-year lease agreement for
administrative offices that expires June 30, 2017. Total accumulated
amortization on property under capital lease at December 31, 1998 and 1997 was
$213,750 and $71,250, respectively.
The future lease payments under the capitalized lease obligation, together with
the present value of the net minimum lease payments as of December 31, 1998, are
as follows:
<TABLE>
<S> <C>
1999 $ 335,913
2000 347,670
2001 359,839
2002 372,433
2003 385,468
Thereafter 6,735,063
-----------
Net Minimum Lease Payments 8,536,386
Less Amount Representing Interest (5,650,044)
-----------
Present Value of Net Minimum Lease Payments $ 2,886,342
===========
</TABLE>
66
<PAGE> 67
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE E - DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
1999 $144,391,243
2000 5,502,568
2001 788,558
2002 250,074
2003 475,176
------------
$151,407,619
============
</TABLE>
NOTE F - FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank Advances consist of the following as of December 31,
1998:
<TABLE>
<CAPTION>
Maturity Rate Amount
- ------------------ -------------- --------------
<S> <C> <C>
1/4/99 4.77% $ 5,000,000
1/25/99 5.29% 20,000,000
--------------
$ 25,000,000
==============
</TABLE>
NOTE G - INCOME TAXES
The provisions for income taxes included in the statements of income consist of
the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 2,260,000 $ 1,586,000 $ 1,174,000
State 754,305 428,000 311,000
----------- ----------- -----------
3,014,305 2,014,000 1,485,000
Deferred (305,000) (71,000) (236,000)
----------- ----------- -----------
$ 2,709,305 $ 1,943,000 $ 1,249,000
=========== =========== ===========
</TABLE>
67
<PAGE> 68
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE G - INCOME TAXES - CONTINUED
Deferred taxes are a result of differences between income tax accounting and
generally accepted accounting principles with respect to income and expense
recognition.
The following is a summary of the components of the deferred tax asset and
liability accounts recognized in the accompanying statements of financial
condition:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Allowance for Credit Losses Due to Tax Limitations $ 385,000 $ 195,000
Valuation Allowance for Other Real Estate Owned 22,000 169,000
Premises and Equipment Due to Depreciation Difference 391,000 363,000
State Taxes 245,000 137,000
Net Operating Loss and Tax Credit Carryforwards 207,000 298,000
Reserve for Deferred Compensation 534,000 434,000
Other Assets/Liabilities 357,000 240,000
----------- -----------
2,141,000 1,836,000
Deferred Tax Liabilities:
Market Value Adjustment on Investment Securities (82,000) (186,000)
----------- -----------
Net Deferred Taxes $ 2,059,000 $ 1,650,000
=========== ===========
</TABLE>
At December 31, 1998, the Bank had net operating loss carryforwards (acquired
from Bank of the Desert, N.A.) for federal and state income tax purposes of
approximately $606,000 and $18,000, respectively, which expire beginning in the
years 2011 and 2001, respectively. Alternative minimum tax credit carryforwards
for tax purposes, which do not expire, are $12,000 as of December 31, 1998.
A comparison of the federal statutory income tax rates to the Bank's effective
income tax rates follow:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
Amount Rate Amount Rate Amount Rate
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Federal Tax Rate $ 2,576,000 34.0% $ 1,953,000 34.0% $ 1,300,000 34.0%
California Franchise Taxes,
Net of Federal Tax Benefit 450,000 5.9 311,000 5.4 170,000 4.4
Tax Savings from Exempt
Loan and Investment Interest (442,000) (5.8) (334,000) (5.8) (197,000) (5.2)
Other Items - Net 125,305 1.6 13,000 0.2 (24,000) (0.6)
----------- ------ ----------- ------ ----------- ------
Bank's Effective Rate $ 2,709,305 35.7% $ 1,943,000 33.8% $ 1,249,000 32.6%
=========== ====== =========== ====== =========== ======
</TABLE>
68
<PAGE> 69
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE H - EARNINGS PER SHARE (EPS)
The following is a reconciliation of net income and shares outstanding to the
income and number of share used to compute EPS:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
Income Shares Income Shares Income Shares
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Income as Reported $4,868,441 -- $3,800,989 -- $2,575,207 --
Weighted Average Shares
Outstanding During the Year -- 8,023,008 -- 7,286,938 -- 7,034,999
---------- ---------- ---------- ---------- ---------- ----------
USED IN BASIC EPS 4,868,441 8,023,008 3,800,989 7,286,938 2,575,207 7,034,999
Dilutive Effect of Outstanding
Stock Options -- 344,046 -- 457,372 -- 420,979
---------- ---------- ---------- ---------- ---------- ----------
USED IN DILUTIVE EPS $4,868,441 8,367,054 $3,800,989 7,744,310 $2,575,207 7,455,978
========== ========== ========== ========== ========== ==========
</TABLE>
Warrants to purchase 130,217 shares of common stock at $14.85 per share were
outstanding during 1998 but were not included in the computation of diluted EPS
because the exercise price was greater than the average market price and
considered anitdilutive.
NOTE I - COMMITMENTS AND CONTINGENCIES
The Bank has entered into leases for its branches and operating facilities,
which expire at various dates through 2015. These leases include provisions for
periodic rent increases as well as payment by the lessee of certain operating
expenses. Rental expense relating to these leases was approximately $674,000 in
1998, $446,000 in 1997, and $446,000 in 1996.
The approximate future minimum annual payments for these leases by year are as
follows:
<TABLE>
<S> <C>
1999 $ 605,000
2000 412,000
2001 339,000
2002 210,000
2003 96,000
Thereafter 1,062,000
----------
$2,724,000
==========
</TABLE>
The minimum rental payments shown above are given for the existing lease
obligations and are not a forecast of future rental expense.
69
<PAGE> 70
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE I - COMMITMENTS AND CONTINGENCIES - CONTINUED
The Company is involved in various litigation which has arisen in the ordinary
course of its business. In the opinion of management, the disposition of such
pending litigation will not have a material effect on the Bank's financial
statements.
In the ordinary course of business, the Bank enters into financial commitments
to meet the financing needs of its customers. These financial commitments
include commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk not recognized in the statements of condition.
The Bank's exposure to credit loss in the event of nonperformance on commitments
to extend credit and standby letters of credit is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in making
commitments as it does for loans reflected in the financial statements.
As of December 31, 1998, the Bank had the following outstanding financial
commitments whose contractual amount represents credit risk:
<TABLE>
<S> <C>
Commitments to Extend Credit $137,646,000
Standby Letters of Credit 1,317,000
------------
$138,963,000
============
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Standby
letters of credit are conditional commitments to guarantee the performance of a
Bank customer to a third party. Since many of the commitments and standby
letters of credit are expected to expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. The Bank
evaluated each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained if deemed necessary by the Bank is based on management's
credit evaluation of the customer. The majority of the Bank's commitments to
extend credit and standby letters of credit are secured by real estate.
NOTE J - STOCK OPTION PLAN
At December 31, 1998, the Company has a fixed stock option plan, which is
described below. The Company applies APB Opinion 25 and related interpretations
in accounting for its plan. Accordingly, no compensation cost has been
recognized for its fixed stock option plan.
In 1997, the Company adopted a stock option plan (the "1997 Plan"), under which
2,575,000 shares of the Bank's common shares may be issued to directors,
officers, and key employees at not less than 100% of the fair market value at
the date the options are granted.
70
<PAGE> 71
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE J - STOCK OPTION PLAN - CONTINUED
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for 1998, 1997
and 1996, respectively: risk-free rates of 4.5%, 5.8%, and 6.1%, volatility of
24.5%, 17.5% and 15%, and expected lives of 2.5 years for 1998 and three years
for 1997 and 1996.
A summary of the status of the Company's fixed stock option plan as of December
31, 1998, 1997, and 1996, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
Beginning of Year 786,068 $ 6 736,622 $ 5 922,889 $4
Granted 156,169 13 194,608 10 62,334 8
Exercised (192,961) 4 (127,532) 4 (237,629) 3
Forfeited (17,322) 8 (17,630) 6 (10,972) 5
-------- -------- --------
Outstanding at End
of year 731,954 8 786,068 6 736,622 5
======== ======== ========
Options Exercisable
at Year-End 286,273 5 373,508 4 373,439 4
Weighted-Average Fair
Value of Options
Granted During
the Year $ 2.66 $ 2.14 $ 1.89
</TABLE>
71
<PAGE> 72
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE J - STOCK OPTION PLAN - CONTINUED
The following table summarizes information about fixed options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------- -----------------------------
Weighted- Weighted Weighted-
Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- -------------------- ----------- ---------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
$ 2 to $ 3 74,354 1.16 $ 2.13 73,524 $ 2.11
$ 4 to $ 5 187,909 0.90 4.97 122,827 4.95
$ 6 to $ 7 101,173 2.00 6.87 42,329 6.86
$ 8 to $10 193,079 3.04 9.87 42,170 9.71
$11 to $14 175,439 4.09 13.06 5,423 13.24
------- 2.41 8.18 ------- 5.36
731,954 286,273
======= =======
</TABLE>
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under No. 123, the Company's net income would
have been reduced to the following pro forma amount:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net Income:
As Reported $ 4,868,441 $ 3,800,989 $ 2,575,207
Pro Forma $ 4,621,961 $ 3,637,591 $ 2,495,245
Per Share Data:
Net Income - Basic
As Reported .61 .52 .37
Pro Forma .58 .50 .35
Net Income - Diluted
As Reported .58 .49 .35
Pro Forma .55 .47 .33
</TABLE>
NOTE K - STOCK OFFERING AND WARRANTS
In 1997, the Company completed a supplemental stock offering of 638,000 shares
of common stock at $14.00 per share. In connection with the offering, the
Company also issued 132,811 warrants. Each warrant is exercisable for one share
of common stock at an exercise price of $14.85 per share through October 31,
1998 and $17.13 thereafter. All warrants expire on October 29, 1999. As of
December 31, 1998, outstanding warrants were 130,217.
72
<PAGE> 73
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE L - EMPLOYEE STOCK OWNERSHIP AND RETIREMENT SAVINGS PLANS
The Company has adopted an Employee Stock Ownership Plan and a Retirement
Savings Plan for the benefit of its employees. Contributions to the Plans are
determined annually by the Board of Directors. The combined expenses for these
plans were $600,000 in 1998, $243,000 in 1997 and $292,000 in 1996.
NOTE M - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain
officers and directors and the companies with which they are associated. In the
Bank's opinion, all loans and loan commitments to such parties are made on
substantially the same terms including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons.
The following is an analysis of the activity of all such loans:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Beginning Balance $ 4,174,000 $ 3,488,000
Credits Granted, Including Renewals 1,141,000 2,177,000
Repayments (1,577,000) (1,491,000)
----------- -----------
$ 3,738,000 $ 4,174,000
=========== ===========
</TABLE>
NOTE N - STOCK DIVIDENDS
The Company has issued stock dividends of 3%, 2%, and 8% in 1998, 1997, and
1996, respectively, a five-for-four stock split in 1998 and a six-for-five stock
split in 1997. The per share data in the statements of income and the footnotes
have been adjusted to give retroactive effect to these dividends and splits.
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market value exists
for a significant portion of the financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involve uncertainties and
matters of judgment and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
73
<PAGE> 74
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
Fair value estimates are based on financial instruments both on and off the
balance sheet without attempting to estimate the value of anticipated future
business, and the value of assets and liabilities that are not considered
financial instruments. Additionally, tax consequences related to the realization
of the unrealized gains and losses can have a potential effect on fair value
estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments:
Financial Assets
The carrying amounts of cash, short term investments, due from customers on
acceptances, and bank acceptances outstanding are considered to approximate fair
value. Short term investments include federal funds sold, securities purchased
under agreements to resell, and interest bearing deposits with banks. The fair
values of investment securities, including available for sale, are generally
based on quoted market prices. The fair value of loans are estimated using a
combination of techniques, including discounting estimated future cash flows and
quoted market prices of similar instruments where available.
Financial Liabilities
The carrying amounts of deposit liabilities payable on demand, commercial paper,
and other borrowed funds are considered to approximate fair value. For fixed
maturity deposits, fair value is estimated by discounting estimated future cash
flows using currently offered rates for deposits of similar remaining
maturities. The fair value of long term debt is based on rates currently
available to the Bank for debt with similar terms and remaining maturities.
Off Balance Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of credit is
estimated using the fees currently charged to enter into similar agreements. The
fair value of these financial instruments is not material.
74
<PAGE> 75
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE O - FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED
The estimated fair value of financial instruments at December 31 is summarized
as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
Carry Value Fair Value Carry Value Fair Value
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Due From Banks $ 27,892 $ 27,892 $ 33,821 $ 33,821
Interest-Bearing Deposits $ 423 $ 423 $ 586 $ 586
Investment Securities $100,443 $100,443 $ 69,287 $ 69,287
Federal Funds Sold $ -- $ -- $ 4,000 $ 4,000
Loans $391,690 $395,338 $311,417 $309,570
Cash Surrender Value -
Life Insurance $ 2,677 $ 2,677 $ 2,283 $ 2,283
Financial Liabilities:
Deposits $470,792 $470,940 $399,212 $398,471
Capitalized Lease Obligation $ 2,886 $ 2,886 $ 2,842 $ 2,842
</TABLE>
NOTE P - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
75
<PAGE> 76
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE P - REGULATORY MATTERS - CONTINUED
As of December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as adequately-capitalized under the
regulatory framework for prompt corrective action (there are no conditions or
events since that notification that management believes have changed the Bank's
category). To be categorized as well-capitalized, the Bank must maintain minimum
ratios as set forth in the table below. The following table also sets forth the
Bank's actual capital amounts and ratios (dollar amounts in thousands):
<TABLE>
<CAPTION>
Amount of Capital Required
---------------------------------------------------
To Be To Be
Adequately Well-
Actual Capital Capitalized Capitalized
---------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
Total Capital (to Risk-Weighted Assets) $43,390 9.4% $36,566 8.0% $45,707 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $40,452 8.8% $18,283 4.0% $27,424 6.0%
Tier 1 Capital (to Average Assets) $40,452 7.9% $20,544 4.0% $25,680 5.0%
AS OF DECEMBER 31, 1997:
Total Capital (to Risk-Weighted Assets) $38,283 10.4% $29,305 8.0% $36,631 10.0%
Tier 1 Capital (to Risk-Weighted Assets) $35,953 9.8% $14,652 4.0% $21,979 6.0%
Tier 1 Capital (to Average Assets) $35,953 8.6% $16,581 4.0% $20,726 5.0%
</TABLE>
NOTE Q - MERGERS AND ACQUISITIONS
On March 12, 1998, VIB Corp acquired Valley Independent Bank by issuing
7,742,645 shares of common stock in exchange for the surrender of all
outstanding shares of the Bank's common stock. There was no cash involved in
this transaction. The acquisition was accounted for as a pooling of interest and
the consolidated financial statements contained herein have been restated to
give full effect to this transaction.
During 1998, the Bank entered into an agreement to purchase the Palm Springs
Branch office from Palm Desert National Bank by assuming $16,121,000 in deposits
and purchasing approximately $8,308,000 in loans. The purchase was consummated
on March 26, 1998. Goodwill arising from the transaction totaled approximately
$1,282,000 and is being amortized over seven years on a straight-line basis.
During 1996 the Bank entered into an agreement to assume the deposits and
purchase the deposit related loans of two Wells Fargo branches. The Bank paid
book value for the deposit related loans and fixed assets and a premium of 4.5%
of the average daily deposits. Total deposits were approximately $43,520,000.
The purchase was consummated on February 14, 1997. Goodwill arising from the
transaction totaled approximately $2,022,000 and is being amortized over nine
years on a straight line basis.
76
<PAGE> 77
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE Q - MERGERS AND ACQUISITIONS - CONTINUED
On September 12, 1996, the Bank acquired 100% of the outstanding common stock of
Bank of the Desert, N.A. (BOD) for $3,295,000 in cash. BOD had total assets of
approximately $31,858,000. The acquisition was accounted for using the purchase
method of accounting in accordance with Accounting Principles Board Opinion No.
16. "Business Combinations". Under this method of accounting, the purchase price
was allocated to the assets acquired and deposits and liabilities assumed based
on their fair values as of the acquisition date. The financial statements
include the operations of BOD from the date of the acquisition. Goodwill arising
from the transaction totaled approximately $1,933,000 and is being amortized
over fifteen years on a straight-line basis. The results of BOD's operations are
included in those reported by the Company beginning on September 13, 1996.
NOTE R - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY
VIB Corp operates Valley Independent Bank. VIB Corp commenced operations during
1998. The earnings of the subsidiary are recognized on the equity method of
accounting. Condensed financial statements of the parent company only are
presented below:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
ASSETS:
Cash $ 56,859
Federal Funds Sold - Valley Independent Bank 500,000
Investment in Valley Independent Bank 45,037,408
Other Assets 248,260
-----------
$45,842,527
===========
SHAREHOLDERS' EQUITY $45,842,527
===========
</TABLE>
77
<PAGE> 78
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE R - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
-----------
<S> <C>
INCOME:
Interest Income $ 11,113
Cash Dividends from Subsidiary 350,000
-----------
TOTAL INCOME 361,113
EXPENSES:
Other 327,246
Allocated Tax Benefit (92,695)
-----------
234,551
TOTAL EXPENSES -----------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED INCOME
OF SUBSIDIARY 126,562
EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 4,741,879
-----------
NET INCOME $ 4,868,441
===========
</TABLE>
78
<PAGE> 79
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE R - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY ONLY - CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
-----------
<S> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income $ 4,868,441
Noncash Items Included in Net Income:
Equity in Income of Subsidiary (5,091,879)
Other (248,260)
-----------
NET CASH USED
IN OPERATING ACTIVITIES (471,698)
CASH FLOWS FROM
INVESTING ACTIVITIES:
Dividends Received from Subsidiary 350,000
-----------
NET CASH PROVIDED
BY INVESTING ACTIVITIES 350,000
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from Exercise of Stock Options and Warrants 706,225
Dividends Paid (27,668)
-----------
NET CASH PROVIDED
BY FINANCING ACTIVITIES 678,557
-----------
NET INCREASE IN
CASH AND CASH EQUIVALENTS 556,859
CASH AND CASH EQUIVALENTS,
AT BEGINNING OF YEAR --
-----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 556,859
===========
</TABLE>
79
<PAGE> 80
VIB CORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
NOTE S - SUBSEQUENT EVENTS
On January 22, 1999 the Bank completed the acquisition of the Hemet branch
office from Fremont Investment & Loan by assuming approximately $111,095,000 in
deposits. Goodwill arising from the transaction will total approximately
$1,139,000 and will be amortized over fifteen years.
On January 28, 1999, the Company completed its acquisition of Bank of Stockdale,
f.s.b. The transaction is structured as a merger under which the Company issued
common shares in exchange for the common shares of Bank of Stockdale. The
transaction is accounted for as a pooling of interest. A total of 2,355,430
common shares were issued to the shareholders of Bank of Stockdale, f.s.b.
The following table sets forth selected unaudited pro forma income information
as if the merger had been consummated at the beginning of the period presented:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest and Noninterest Income:
VIB Corp $ 45,599,670 $ 38,209,905 $ 27,335,538
Bank of Stockdale, f.s.b. 12,365,382 11,453,486 11,214,159
------------ ------------ ------------
$ 57,965,052 $ 49,663,391 $ 38,549,697
============ ============ ============
Net Income (Loss):
VIB Corp $ 4,868,441 $ 3,800,989 $ 2,575,207
Bank of Stockdale, f.s.b. 707,165 302,226 (969,431)
------------ ------------ ------------
$ 5,575,606 $ 4,103,215 $ 1,605,776
============ ============ ============
Pro Forma Per Share Data
Net Income - Basic $ .55 $ .47 $ .19
Net Income - Diluted $ .53 $ .45 $ .18
</TABLE>
The pro forma per share data is based on the sum of the historical income and
shares, as reported by VIB Corp, and the historical income and shares of Bank of
Stockdale, f.s.b. converted to VIB Corp shares at the exchange ratio of 1.943
shares of VIB Corp for each share of Bank of Stockdale, f.s.b.
On February 5, 1999 the Company received net proceeds of approximately
$22,200,000, net of expenses, from the issuance of $23,093,000 of 9% capital
securities with a maturity date of February 5, 2029. The securities were issued
by Valley Capital Trust, a wholly-owned trust. Approximately $17,378,000 of the
$23,093,000 of capital securities will be included as Tier 1 capital for the
Company and approximately $5,715,000 will be included as Tier 2 capital for the
Company.
80
<PAGE> 81
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with the Company's accountants on
accounting or financial disclosure.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from
Pages 6 to 9 and Page 27 of the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held April 29, 1999.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from
Pages 9 to 15 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 29, 1999.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from
Pages 4 to 6 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 29, 1999.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from
Page 16 of the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held April 29, 1999.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. FINANCIAL STATEMENTS
The Financial Statements listed on the Index included under "ITEM 8 -
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" are filed as a part of this Annual
Report on Form 10-K.
B. EXHIBITS
The following exhibits are filed as a part of this Report:
81
<PAGE> 82
REG. S-K,
ITEM 601
EXHIBIT NO. DESCRIPTION
2.1 Plan of Reorganization and Merger Agreement, dated November 18,
1997, by and between Valley Independent Bank and VIB Merger
Company
2.2 Agreement and Plan of Reorganization by and between VIB Corp and
Bank of Stockdale, F.S.B. dated September 15, 1998
3.1 Articles of Incorporation of VIB Corp, as amended
3.2 Bylaws of VIB Corp
4.1 Form of Common Stock Certificate
4.2 Form of Warrant Certificate
4.3 Junior Subordinated Indenture dated as of February 5, 1999 by and
between the Registrant and Wilmington Trust Company, as trustee
4.4 Form of Junior Subordinated Debenture included in Article Two of
Exhibit 4.3
4.5 Trust Agreement of Valley Capital Trust dated as of December 10,
1998 (included as Exhibit A to Exhibit 4.6)
4.6 Amended and Restated Trust Agreement of Valley Capital Trust dated
as of February 5, 1999 among the Registrant, Wilmington Trust
Company, as Property Trustee, and Richard D. Foss, Harry G.
Gooding, III, and Dennis L. Kern, as Administrative Trustees
4.7 Form of Common Security Certificate of Valley Capital Trust
(included as Exhibit B to Exhibit 4.6)
4.8 Form of Capital Security Certificate of Valley Capital Trust
(included as Exhibit C to Exhibit 4.6)
4.9 Guarantee Agreement dated February 5, 1999 between the Registrant,
as Guarantor, and Wilmington Trust Company, as Guarantee Trustee
4.10 Agreement as to Expenses and Liabilities dated February 5, 1999
between the Registrant and Valley Capital Trust
10.1 Agreement to Assume Liabilities and to Acquire Branch Banking
Office (Calexico)
10.2 Agreement and Plan of Reorganization Dated April 29, 1996 (Bank of
the Desert, N.A.)
10.3 Purchase and Assumption Agreement Dated October 15, 1996 (Blythe
and Tecate)
10.4 VIB Corp 1997 Stock Option Plan
10.5 Form of VIB Corp Stock Option Agreement
10.6 Form of VIB Corp Indemnity Agreement
10.7 Profit Sharing and 401(k) Plan
10.8 Amendment to 401(k) Plan
10.9 1994 Amendments to 401(k) Plan
10.10 Employee Stock Ownership Plan
10.11 Form of Directors Deferred Compensation Agreement
10.12 Form of Officers Deferred Compensation Agreement
10.13 El Centro Lease
10.14 Agreement to Assume Liabilities and to Acquire Assets of Branch
Banking Office Dated January 22, 1998 (Palm Springs)
10.15 Agreement to Assume Liabilities and to Acquire Assets of Branch
Office between Fremont Investment & Loan and Valley Independent
Bank dated September 22, 1998
82
<PAGE> 83
B. EXHIBITS (CONTINUED)
REG. S-K,
ITEM 601
EXHIBIT NO. DESCRIPTION
- ----------- -----------
13 VIB Corp's 1998 Annual Report to Shareholders (incorporated
portions only)
21 Subsidiaries of the Registrant
23 Consents of Experts and Counsel
27 Financial Data Schedule
C. REPORTS ON FORM 8-K
The Company did not file any Current Reports on Form 8-K during the
fourth quarter of 1998.
83
<PAGE> 84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VIB CORP
Date: March 23, 1999 By: /s/ Harry G. Gooding, III
-------------------------------------
Harry G. Gooding, III,
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Charles Ellis Director March 23, 1999
- -------------------------
Charles Ellis
/s/ Robert S. Ellison Director March 23, 1999
- -------------------------
Robert S. Ellison
/s/ Richard D. Foss Chairman of the Board March 23, 1999
- ------------------------- of Directors
Richard D. Foss
/s/ Harry G. Gooding, III Executive Vice President March 23, 1999
- ------------------------- and Chief Financial
Harry G. Gooding, III Officer (and Principal
Accounting Officer)
/s/ Ed L. Hickman Director March 23, 1999
- -------------------------
Ed L. Hickman
/s/ Dennis L. Kern Director, President and March 23, 1999
- ------------------------- Chief Executive Officer
Dennis L. Kern
/s/ Edward McGrew Director March 23, 1999
- -------------------------
Edward McGrew
/s/ Ronald A. Pedersen Vice Chairman of the March 23, 1999
- ------------------------- Board of Directors
Ronald A. Pedersen
/s/ John L. Skinner Director March 23, 1999
- -------------------------
John L. Skinner
/s/ Alice Helen
Lowery Westerfield Vice Chairman of the March 23, 1999
- ------------------------- Board of Directors
Alice Helen Lowery
Westerfield
</TABLE>
84
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
REG. S-K, PAGE (OR
ITEM 601 FOOTNOTE
EXHIBIT NO. DESCRIPTION REFERENCE)
- ----------- ----------- ----------
<S> <C> <C>
2.1 Plan of Reorganization and Merger Agreement, dated November 18, 1997,
by and between Valley Independent Bank and VIB Merger Company................................(1)
2.2 Agreement and Plan of Reorganization by and between VIB Corp and
Bank of Stockdale, F.S.B. dated September 15, 1998...........................................(2)
3.1 Articles of Incorporation of VIB Corp, as amended............................................(3)
3.2 Bylaws of VIB Corp...........................................................................(4)
4.1 Form of Common Stock Certificate.............................................................(5)
4.2 Form of Warrant Certificate .................................................................(5)
4.3 Junior Subordinated Indenture dated as of February 5, 1999 by and
between the Registrant and Wilmington Trust Company, as trustee..............................(6)
4.4 Form of Junior Subordinate Debenture included in Article Two of
Exhibit 4.3..................................................................................(6)
4.5 Trust Agreement of Valley Capital Trust dated as of December 10, 1998
(included as Exhibit A to Exhibit 4.6).......................................................(6)
4.6 Amended and Restated Trust Agreement of Valley Capital Trust dated as
of February 5, 1999 among the Registrant, Wilmington Trust Company, as
Property Trustee, and Richard D. Foss, Harry G. Gooding, III, and Dennis
L. Kern, as Administrative Trustees..........................................................(6)
4.7 Form of Common Security Certificate of Valley Capital Trust (included as
Exhibit B to Exhibit 4.6)....................................................................(6)
4.8 Form of Capital Security Certificate of Valley Capital Trust (included as
Exhibit C to Exhibit 4.6)....................................................................(6)
4.9 Guarantee Agreement dated February 5, 1999 between the Registrant, as
Guarantor, and Wilmington Trust Company, as Guarantee Trustee................................(6)
4.10 Agreement as to Expenses and Liabilities dated February 5, 1999 between
the Registrant and Valley Capital Trust......................................................(6)
10.1 Agreement to Assume Liabilities and to Acquire Branch Banking
Office (Calexico)(P)........................................................................ (7)
10.2 Agreement and Plan of Reorganization Dated April 29, 1996
(Bank of the Desert, N.A.)(P)................................................................(7)
10.3 Purchase and Assumption Agreement Dated October 15, 1996
(Blythe and Tecate)(P).......................................................................(7)
10.4 VIB Corp 1997 Stock Option Plan..............................................................(4)
10.5 Form of VIB Corp Stock Option Agreement......................................................(4)
10.6 Form of VIB Corp Indemnity Agreement.........................................................(4)
10.7 Profit Sharing and 401(k) Plan(P)............................................................(7)
10.8 Amendment to 401(k) Plan(P)..................................................................(7)
10.9 1994 Amendments to 401(k) Plan(P)............................................................(7)
10.10 Employee Stock Ownership Plan(P).............................................................(7)
10.11 Form of Directors Deferred Compensation Agreement(P).........................................(7)
10.12 Form of Officers Deferred Compensation Agreement(P)..........................................(7)
10.13 El Centro Lease(P)...........................................................................(7)
10.14 Agreement to Assume Liabilities and to Acquire Assets of Branch Banking
Office Dated January 22, 1998 (Palm Springs)..................................................87
</TABLE>
85
<PAGE> 86
EXHIBIT INDEX (CONTINUED)
<TABLE>
<CAPTION>
REG. S-K, PAGE (OR
ITEM 601 FOOTNOTE
EXHIBIT NO. DESCRIPTION REFERENCE)
- ----------- ----------- ----------
<S> <C> <C>
10.15 Agreement to Assume Liabilities and to Acquire Assets of Branch
Office between Fremont Investment & Loan and Valley Independent
Bank dated September 22, 1998................................................................(2)
13 VIB Corp's 1998 Annual Report to Shareholders (incorporated
portions only)............................................................................119(8)
21 Subsidiaries of the Registrant............................................................120
23 Consents of Experts and Counsel...........................................................121
27 Financial Data Schedule...................................................................122
</TABLE>
- ---------
(1) Filed as Exhibit "A" to the Proxy Statement/Prospectus included in the
Registrant's Registration Statement on Form S-4 dated December 23, 1997
(the "1997 S-4 Registration Statement").
(2) Filed as an exhibit to the Registrant's Form 8-K dated September 29,
1998.
(3) Filed as an exhibit to the Registrant's Form 8-K dated May 1, 1998.
(4) Filed as an exhibit to the 1997 S-4 Registration Statement.
(5) Filed as an exhibit to the Registrant's Registration Statement on Form
8-A dated March 19, 1998.
(6) Filed as an exhibit to the Registrant's Form 8-K dated February 5,
1999.
(7) Filed as an exhibit to the Registrant's Form 10-K for the year ended
December 31, 1997.
(8) The Company's Annual Report to Shareholders, portions of which are
incorporated by reference, will be submitted under separate cover.
Except those portions incorporated by reference, the Annual Report to
Shareholders is not to be deemed "filed" as a part of this Form 10-K.
(P) Filed in paper format under cover of Form SE.
86
<PAGE> 1
EXHIBIT 10.14
AGREEMENT
TO
ASSUME LIABILITIES AND
TO ACQUIRE ASSETS OF
BRANCH BANKING OFFICE
Dated as of January 22, 1998
Between
PALM DESERT NATIONAL BANK
as Seller
and
VALLEY INDEPENDENT BANK
as Buyer
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
Definitions
1.1 Agreement.................................................................1
1.2 Assets....................................................................1
1.3 Assumption Price..........................................................1
1.4 Branch....................................................................1
1.5 Branch Account Trial Balance Report.......................................1
1.6 Branch Loan Trial Balance Report..........................................2
1.7 Business Day..............................................................2
1.8 Claim.....................................................................2
1.9 Closing Date and Closing..................................................2
1.10 Commissioner..............................................................2
1.11 Deposits..................................................................2
1.12 Environmental Law.........................................................2
1.13 FRB.......................................................................3
1.14 Governmental Body.........................................................3
1.15 Hazardous Substances......................................................3
1.16 Lease.....................................................................3
1.17 Liabilities...............................................................3
1.18 Loans.....................................................................3
1.19 Personal Property.........................................................4
1.20 Premises..................................................................4
1.21 Retained Assets...........................................................4
1.22 Retained Liabilities......................................................4
ARTICLE II
Assumption of Liabilities and Acquisition of Assets
2.1 Assumption of Deposits, Interest and Certain Other Liabilities............4
2.2 Assumption of Obligations.................................................4
2.3 Retained Liabilities......................................................4
2.4 Transfer of Assets........................................................6
2.5 Assignment of Leases; Etc.................................................7
2.6 Retained Assets...........................................................7
2.7 Individual Retirement Accounts............................................7
ARTICLE III
Assumption Price; Allocation
3.1 Determination and Payment of Assumption Price.............................8
3.2 Allocation of the Consideration for Acquisition of the Branch.............8
</TABLE>
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<TABLE>
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ARTICLE IV
Representations, Warranties and Covenants
4.1 Representations, Warranties and Covenants of the Seller...................8
4.1.1 Powers and Authority...........................................8
4.1.2 Other Agreements...............................................9
4.1.3 Branch Reports.................................................9
4.1.4 Branch Information.............................................9
4.1.5 Personal Property..............................................9
4.1.6 Premises......................................................10
4.1.7 Contracts and Agreements......................................10
4.1.8 Pending Litigation............................................10
4.1.9 Compliance with the Law.......................................10
4.1.10 Employees.....................................................11
4.1.11 Environmental Liabilities.....................................11
4.1.12 Deposits at the Branch........................................11
4.1.13 Loans at the Branch...........................................11
4.1.14 No Material Adverse Change....................................12
4.1.15 Branch Employees..............................................12
4.1.16 Representations and Warranties................................12
4.2 Representations, Warranties and Covenants of the Buyer...................12
4.2.1 Powers and Authority..........................................12
4.2.2 Other Agreements..............................................13
4.2.3 Pending Litigation............................................13
4.2.4 Branch Employees..............................................13
4.2.5 Representations and Warranties................................13
ARTICLE V
Obligations of the Parties Before Closing Date
5.1 Obligations of Both Parties..............................................13
5.1.1 Administrative Approvals......................................14
5.1.2 Best Efforts..................................................14
5.2 Obligations of Seller....................................................14
5.2.1 Shareholder Approval of Agreement.............................14
5.2.2 Access to Information.........................................14
5.2.3 Conduct of Business...........................................14
5.2.4 Ordinary Course and Other Activities..........................14
5.2.5 Condition of Assets...........................................15
5.2.6 Consents......................................................15
5.2.7 Personal Property Report......................................15
5.2.8 Deposit Update................................................15
5.2.9 Loan Update...................................................15
5.2.10 Data Conversion...............................................15
</TABLE>
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<TABLE>
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5.2.11 No Breach.....................................................15
5.3 Obligations of Buyer.....................................................16
5.3.1 Shareholder Approval of Agreement.............................16
5.3.2 Notification of Deposits and Loans Rejected...................16
5.3.3 No Breach.....................................................16
ARTICLE VI
Conditions Precedent to Closing
6.1 Conditions Precedent to Performance by Both Parties......................16
6.1.1 Shareholder Approval..........................................16
6.1.2 Approval of the Commissioner..................................17
6.1.3 Approval of the FRB...........................................17
6.1.4 Other Regulatory Approvals....................................17
6.1.5 No Claim......................................................17
6.1.6 Closing Date..................................................17
6.2 Conditions Precedent to Buyer's Performance..............................17
6.2.1 Accuracy of Warranties and Performance of Obligations.........17
6.2.2 Copies of Documents...........................................17
6.2.3 Consents and Approvals........................................17
6.2.4 Matters Relating to the Premises..............................17
6.2.5 Books and Records.............................................18
6.2.6 Force Majeure.................................................18
6.2.7 Assumption of Safe Deposit Box Business.......................18
6.2.8 Disclosure of Employee Matters................................18
6.2.9 Material Changes..............................................18
6.2.10 Deposits........................................................
6.3 Conditions Precedent to Seller's Performance.............................18
6.3.1 Accuracy of Warranties and Performance of Obligations.........18
6.3.2 Copies of Documents...........................................18
ARTICLE VII
Closing
7.1 Closing..................................................................19
7.2 Seller's Obligations at the Closing......................................19
7.2.1 Transfer of Assets............................................19
7.2.2 Certificates and Further Documents............................19
7.2.3 Premises, Books and Records...................................19
7.2.4 Payment of Assumption Price...................................19
7.2.5 Deposits......................................................19
</TABLE>
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<TABLE>
<S> <C>
7.3 Buyer's Obligations at the Closing.......................................19
7.3.1 Assumption of Liabilities.....................................19
7.3.2 Further Documents.............................................20
ARTICLE VIII
Obligations of the Parties After the Closing
8.1 Seller's Obligations.....................................................20
8.1.1 Business Relationships........................................20
8.1.2 Banking Relationships.........................................20
8.1.3 Confidentiality...............................................20
8.1.4 Notification of Customers.....................................20
8.1.5 Right to Hire Branch Employees................................21
8.1.6 Removal of the Seller's Property..............................21
8.1.7 Restrictive Covenant..........................................21
8.2 Obligations of Both Parties After the Closing............................21
8.2.1 Transfer of Credits by the Seller.............................21
8.2.2 Transit Items.................................................21
8.2.3 Further Documents.............................................21
8.2.4 Prorations; Unresolved Transit Items; Sales and Use Taxes;
Insurance.....................................................21
8.2.5 Adjustment of Assumption Price................................22
8.2.6 Other Transitional Matters....................................23
ARTICLE IX
Remedies
9.1 Termination..............................................................22
9.2 Litigation Costs.........................................................23
ARTICLE X
Miscellaneous Provisions
10.2 Entire Agreement.........................................................24
10.3 Third-Party Rights.......................................................24
10.4 Successors and Assigns...................................................24
10.5 Brokers..................................................................24
10.6 Survival of Warranties and Obligations...................................24
10.7 Severability.............................................................24
10.8 Expenses.................................................................25
10.9 Counterparts.............................................................25
10.10 Headings and Construction................................................25
10.11 Governing Law............................................................25
10.12 Indemnification..........................................................25
</TABLE>
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<TABLE>
<CAPTION>
Section
EXHIBITS Reference
-------- ---------
<S> <C>
A Branch Account Trial Balance Report Section 1.5
B Branch Loan Trial Balance Report Section 1.6
C Branch Lease Section 1.16
D List of Contracts, Commitments and Agreements Section 2.2(b)
Applicable to the Branch (with designations of
those items for which copies are not available)
E List of Personal Property of Seller Section 2.4(b)
F Employee Information Section 4.1.10
G List of Material Adverse Changes in Seller's Business Section 4.1.12
H Assignment of Lease and Consent of Lessor Section 5.2.6
I Transitional Matters Section 5.2.10;
Section 8.1;
Section 8.2
J ATM Locations Section 8.1.7
SCHEDULE
1 Method of Determination of Assumption Price Section 3.1
</TABLE>
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THIS AGREEMENT TO ASSUME LIABILITIES AND TO ACQUIRE ASSETS OF BRANCH
BANKING OFFICE is entered into as of January 22, 1998 between Palm Desert
National Bank, a national banking association (the "Seller") having its main
office and principal place of business in Palm Desert, California, and Valley
Independent Bank, a California banking corporation (the "Buyer") having its main
office and principal place of business in El Centro, California, with reference
to the following:
RECITALS
A. WHEREAS, the Seller owns and operates a branch banking office (the
"Branch") located at 901 East Tahquitz Canyon Way, Palm Springs, California
92262 and conducts a commercial banking business at the Branch;
B. WHEREAS, the Seller is willing to transfer to the Buyer certain
assets and business of the Branch and the Buyer is willing to assume certain
liabilities, duties and obligations of the Seller in respect of the Branch, in
consideration for the payment of certain sums and all upon the terms and subject
to the conditions set forth herein; and
C. WHEREAS, the Buyer is willing to purchase, receive and acquire said
assets, to assume said liabilities, duties and obligations of the Seller, and to
commence a banking business at the Branch in consideration for the receipt of
certain sums and upon the terms and subject to the conditions set forth herein;
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, conditions, representations and warranties contained in this
Agreement, the Buyer and the Seller agree as follows:
ARTICLE I
DEFINITIONS
Unless the context otherwise specifies and requires, each of the terms
defined in this Article I shall, for all purposes of this Agreement to Assume
Liabilities and to Acquire Assets of Branch Banking Office, have the meaning set
forth herein, and all of the following definitions shall be equally applicable
to both the singular and the plural forms of the terms defined:
1.1 Agreement. The term "Agreement" means this Agreement to Assume
Liabilities and to Acquire Assets of Branch Banking Office.
1.2 Assets. The term "Assets" means only those certain assets and
properties owned, held or used by the Seller set forth in Section 2.4 as assets,
tangible and intangible, real, personal and mixed, which are to be transferred
to and purchased by the Buyer.
1.3 Assumption Price. The term "Assumption Price" shall have the
meaning assigned to it in Section 3.1.
1.4 Branch. The term "Branch" means the branch banking office operated
by Seller located at 901 East Tahquitz Canyon Way, Palm Springs, California
92262.
1.5 Branch Account Trial Balance Report. The term "Branch Account Trial
Balance Report" means the internally prepared schedules of Deposits setting
forth the name and address
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of the account holder, the account number, the type, rate and balance or
principal amount of the deposit account, and the accrued but unpaid interest
thereon, duly certified by the Chief Financial Officer of the Seller to be in
accordance with the representations and warranties set forth in Section 4.1.3.
The Branch Account Trial Balance Report as of December 31, 1997, is attached
hereto as Exhibit A.
1.6 Branch Loan Trial Balance Report. The term "Branch Loan Trial
Balance Report" means the internally prepared schedule of loans setting forth
the name and address of the borrower, the account number, the type, rate and
balance or principal amount of the loan outstanding or committed, or both, and
the accrued but unpaid interest thereon, duly certified by the Chief Financial
Officer of the Seller to be in accordance with the representation and warranties
set forth in Section 4.1.3. The Branch Loan Trial Balance Report as of December
31, 1997, is attached hereto as Exhibit B.
1.7 Business Day. The term "Business Day" means each Monday, Tuesday,
Wednesday, Thursday or Friday that banks in California are not required or
permitted by law to be closed.
1.8 Claim. The term "Claim" shall have the meaning assigned to it in
Section 4.1.8.
1.9 Closing Date and Closing. The term "Closing Date" means the date
when the transactions contemplated by this Agreement shall be consummated, as
set forth in Section 7.1, and the term "Closing" means the consummation of the
transactions contemplated in this Agreement, as provided in Article VII hereof.
1.10 Commissioner. The term "Commissioner" shall have the meaning
assigned to it in Section 5.1.1.
1.11 Deposits. The term "Deposits," for any given date, means all
liabilities of the Seller carried on the books of the Branch to customers
arising from deposits which are demand deposits, savings deposits, Treasury Plus
deposits, money market or NOW deposits, or time certificates of deposit, and
which are included on a Branch Account Trial Balance Report for that date
excluding, however: (i) any such liabilities relating to deposits maintained as
compensating balances for loans not included in the Assets; (ii) interbranch
deposits; (iii) any such liabilities assumed after the date of this Agreement at
rates in excess of market rates in Riverside County for bank deposits for the
type and maturity of the deposit instrument as reported by Bisys Information
Services Group; and (iv) any additional such liabilities as may be determined by
the Buyer such that the aggregate amount of Deposits is less than ten percent
(10%) of the Buyer's total deposits on December 31, 1997 as of the Closing Date.
1.12 Environmental Law. The term "Environmental Law" means any federal,
state, county, or local statute, law, ordinance, rule, regulation, order,
consent, decree, judicial or administrative decision or directive of the United
States or other jurisdiction whether now existing or as hereinafter promulgated,
issued or enacted relating to: (i) pollution or protection of the environment,
including natural resources; (ii) exposure of persons, including employees, to
Hazardous Substances or other products, materials or chemicals; (iii) protection
of the public health or welfare from the effects of products, by-products,
wastes, emissions, discharges or releases of chemical or other substances from
industrial or commercial activities; or (iv) regulation of the manufacture, use
or introduction into commerce of substances, including, without limitation,
their manufacture, formulation, packaging, labeling, distribution,
transportation, handling, storage and disposal. For the purposes of this
definition, the term "Environmental Law" shall include, without limiting the
foregoing, the following statutes, as amended from time to
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time: (1) the Clean Air Act, as amended, 42 U.S.C. Section 7401 et seq.; (2) the
Federal Water Pollution Control Act, as amended, 33 U.S.C. Section 1251 et seq.;
(3) the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C.
Section 6901 et seq.; (4) the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended (including the Superfund Amendments and
Reauthorization Act of 1986), 42 U.S.C. Section 2601 et seq.; (5) the Toxic
Substances Control Act, as amended, 15 U.S.C. Section 2601 et seq.; (6) the
Occupational Safety and Health Act, as amended, 29 U.S.C. Section 651; (7) the
Emergency Planning and Community Right-To-Know Act of 1986, 42 U.S.C. Section
1101 et seq.; (8) the Mine Safety and Health Act of 1977, as amended, 30 U.S.C.
Section 801 et seq.; (9) the Safe Drinking Water Act, 42 U.S.C. Section 300f et
seq.; and (10) all comparable state and local laws, laws of other applicable
jurisdiction or orders and regulations including, but not limited to, the
Carpenter-Presley-Tanner Hazardous Substance Account Act, California Health &
Safety Code Section 25300 et seq.
1.13 FRB. The term "FRB" means the Board of Governors of the Federal
Reserve System and for the Federal Reserve Bank of San Francisco.
1.14 Governmental Body. The term "Governmental Body" shall have the
meaning assigned to it in Section 4.1.8.
1.15 Hazardous Substances. The term "Hazardous Substances" means: (i)
substances that are defined or listed in, or otherwise classified pursuant to,
or the use or disposal of which are regulated by, any Environmental Law as
"hazardous substances," "hazardous materials," "hazardous wastes," "toxic
substances," or any other formulation intended to define, list or classify
substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP
toxicity"; (ii) oil or petroleum derived from substances and drilling fluids,
produced waters, and other wastes associated with the exploration, development,
or production of crude oil, natural gas, or geothermal resources; (iii) any
flammable substances or explosives, any radioactive materials, any hazardous
wastes or substances, any toxic wastes or substances or any other materials or
pollutants which pose a hazard to any property or to individuals or entities on
or about such property; and (iv) asbestos in any form or electrical equipment
which contains any oil or dielectric fluid containing levels of polychlorinated
biphenyls in excess of 50 parts per million.
1.16 Lease. The term "Lease" means that certain Office Lease dated
December 1, 1994 by and between 901 Tahquitz, a California General Partnership,
lessor, and Palm Desert National Bank, lessee, covering the Branch Premises and
providing for a term of four (4) years and eight (8) months and one (1) five
(5)-year option to extend, a copy of which is attached hereto as Exhibit C.
1.17 Liabilities. The term "Liabilities" means only those certain
liabilities, duties and obligations of the Seller in connection, in whole or in
part, with the business or affairs of the Branch which are to be assumed by the
Buyer pursuant to Sections 2.1 and 2.2.
1.18 Loans. The term "Loans," for any given date, means all commercial
loans and lease receivables, all installment loans and lease receivables, all
real estate loans and all other loans and lease receivables, including
overdrafts and loan and lease receivable commitments, carried on the books and
records of the Branch, together with all guarantees given with respect thereto
and all stocks, bonds and other property, both real and personal, held as
security or collateral therefor and all of the Seller's rights and interest
therein and thereto, the right to receive the unpaid principal and interest on
such acquired loans, all checks, drafts, notes, instruments, contracts and other
evidences of the respective borrowers' obligations to repay and provide security
or collateral therefor, and all files, books, and records with respect thereto.
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1.19 Personal Property. The term "Personal Property" shall have the
meaning assigned to it in Section 4.1.5.
1.20 Premises. The terms "Premises" or "Branch Premises" shall mean the
leasehold interest located at Units B-101 through B-104, inclusive, 901 East
Tahquitz Canyon Way, Palm Springs, California 92662, consisting of approximately
3,767 rentable square feet.
1.21 Retained Assets. The term "Retained Assets" means the assets of
the Seller which are referred to in Section 2.6.
1.22 Retained Liabilities. The term "Retained Liabilities" means all
liabilities and obligations of the Seller, of any kind or description, whether
known, unknown, disclosed, undisclosed, direct, indirect, absolute, fixed,
contingent or otherwise, other than the Liabilities.
ARTICLE II
ASSUMPTION OF LIABILITIES AND ACQUISITION OF ASSETS
2.1 Assumption of Deposits, Interest and Certain Other Liabilities. In
reliance on the covenants, conditions, representations and warranties of the
Seller included herein, at the Closing the Buyer shall assume and agree to pay,
perform and discharge, as and when such payments or performances are due:
(a) all Deposits as of the Closing Date, including (as
provided in Paragraph 1 of Schedule 1 hereto) accrued interest thereon
to the Closing Date; subject, however, to any right the Buyer may have
to change applicable interest rates as legally permitted or required;
and subject, further, to the Buyer's unconditional right to reject and
not assume: (i) any time certificates of deposit in excess of $100,000;
(ii) any "brokered" time certificates of deposit (as defined by the
rules and regulations of the FDIC); and (iii) any public deposits; and
(b) only such other liabilities of the Seller pertaining to
the Branch as the Buyer shall have agreed in writing, with the written
consent of the Seller, on or before the Closing Date, to assume.
2.2 Assumption of Obligations. At the Closing, the Buyer shall also
assume and agree to pay and discharge, but only if and to the extent that the
Buyer succeeds to the rights and benefits of the Seller under the terms thereof,
all of the obligations of the Seller arising after the Closing Date or to be
performed after the Closing Date under the following contracts, commitments and
agreements, subject to the provisions of Section 2.3:
(a) the Lease;
(b) the contracts, commitments and agreements, if any, set
forth on Exhibit D hereto, to the extent that such contracts,
commitments and agreements are applicable to the Branch; and
(c) all of the obligations of the Seller in respect of the
Branch not reflected in Exhibit D, but only to the extent that such
obligations are applicable to the Branch and are incurred subsequent to
the date of this Agreement and, as permitted by the terms of this
Agreement, are approved in writing by the Buyer.
2.3 Retained Liabilities. The Seller agrees that the Buyer has not
agreed to assume or pay, shall not be required to assume or be obligated to pay,
perform or discharge, and shall have
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no liability or obligation with respect to, whether on the Closing Date or
otherwise, the Retained Liabilities, including, but not limited to:
(a) any liability or obligation of the Seller to the extent
the same shall have been paid, performed or discharged or which by its
terms was required to be paid, performed or discharged on or prior to
the Closing Date, except that certain expenses in connection with the
operation of the Branch are to be prorated in accordance with the
provisions of Section 8.2.4;
(b) any liability or obligation under any lease, contract,
commitment or agreement which is not either set forth in Exhibits C or
D or referred to in Section 2.2(c) or any lease, contract, commitment
or agreement, whether or not set forth in Exhibits C or D hereto or
referred to in Section 2.2(c) to the extent not applicable to the
Branch; any liability or obligation of the Seller with respect to any
insurance policy maintained by the Seller with respect to the Branch;
any liability, obligation, cost or expense arising out of or in
connection with any Claim whether commenced before, on or after the
Closing Date, with respect to any condition, transaction or event which
relates to or involves the business, properties, assets, liabilities or
affairs of the Branch or the Seller's conduct of business at the Branch
on or prior to the Closing Date except to the extent such liability,
obligation, cost or expense is expressly assumed in writing by the
Buyer; and any liability or obligation with respect to any employees of
the Seller arising on or prior to the Closing Date or in connection
with their employment by the Seller including any liability for any
"employee pension benefit plan," as that term is defined in Section
3(2) of the Employee Retirement Income Security Act of 1974;
(c) any liability or obligation of the Seller arising
subsequent to the Closing Date arising out of or in connection with any
transactions or events which occurred on or prior to the Closing Date
except to the extent that such liability or obligation is expressly
assumed in writing by the Buyer;
(d) any liability or obligation of the Seller for federal,
state or local taxes on or measured by income;
(e) any liability or obligation of the Seller arising out of
or in connection with any lease, contract, agreement or commitment
which is not assigned to or expressly assumed in writing by the Buyer;
(f) any liability or obligation of the Seller arising out of
activities or omissions of the Seller taking place after the Closing
Date;
(g) any liability or obligation the Seller may have under or
in respect of any deposit at the Branch and excluded from the
definition of "Deposits" pursuant to Section 1.11, except as expressly
assumed by the Buyer in writing prior to or at the Closing;
(h) any liability or obligation the Seller may have under or
in respect of any deposit at the Branch and excluded from the Deposits
assumed by the Buyer pursuant to Section 2.1(a);
(i) any liability of the Seller relating to the ownership,
operation or utilization of real property in violation of any
Environmental Law; and
(j) any other liability or obligation the Seller may have
incurred or may incur prior to, on or following the Closing Date in
connection with the operations, business or
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affairs of the Branch, except as specifically provided in Sections 2.1
and 2.2 or to the extent such liability or obligation is expressly
assumed in writing by the Buyer.
2.4 Transfer of Assets. In consideration of assumption of the
Liabilities and payment of the amounts called for by Article III at the Closing,
the Seller shall irrevocably sell, transfer, assign and deliver to the Buyer and
the Buyer shall purchase and accept delivery of the following Assets:
(a) all Loans, including (as provided in Paragraph 3 of
Schedule 1 hereto) accrued interest thereon to the Closing Date;
provided, however the Buyer has the right to reject any loans upon
notice to the Seller at least two (2) Business Days prior to the
Closing Date;
(b) all of the Seller's right, title and interest in and to
the Personal Property set forth on Exhibit E attached hereto and
incorporated herein by this reference, other than any such Personal
Property disposed of in the ordinary course of business prior to the
Closing Date and in accordance with the provisions of this Agreement
and other than any signs or proprietary items; plus any and all
substitutions therefor and replacements and additions thereto which are
purchased by the Seller prior to the Closing Date and which are agreed
to by the Buyer, together with the Seller's books and records with
respect thereto;
(c) all of the Seller's right, title and interest in and to
the Lease and all contracts, commitments and agreements which the Buyer
is assuming pursuant to Sections 2.1 and 2.2, together with Seller's
books and records with respect thereto, and all right, title and
interest to all deposits, prepayments and payments, whether as an
advance, deposit or otherwise, with respect thereto. To the extent such
contracts, commitments or other agreements relate to the conduct of
business by the Seller at the Branch and at locations other than the
Branch, such contracts, commitments or agreements shall be assigned to
the Buyer only to the extent the same are applicable to the Branch. If
the Seller shall have received, on or prior to the Closing Date, any
payments under any such contract, commitment or agreement (whether as
an advance, deposit or otherwise) which relate to the conduct of
business at the Branch after the Closing Date, then an amount equal to
the aggregate of such payments shall be deemed to be a Liability
assumed by the Buyer for the purpose of calculating the Assumption
Price pursuant to Article III hereof;
(d) all of the Seller's right, title and interest in and to
all cash on hand at the Branch and cash due from banks to the Branch
with respect to Deposits assumed on the Closing Date and all of the
Seller's rights in and to the Deposits as of the Closing Date, subject,
in the case of the Deposits, to the individual depositors' continuing
right of withdrawal;
(e) all assets of the Seller used at the Branch as of December
31, 1997 or acquired thereafter in the ordinary and regular course of
business of the Branch and which have not been disposed of in the
ordinary and regular course of business of the Branch and in accordance
with this Agreement on or prior to the Closing Date, except for the
Retained Assets;
(f) all of the Seller's right, title and interest in the
Branch Premises, together with the Seller's books and records with
respect thereto;
(g) all claims and causes of action the Seller has or might
have against any third party arising out of, in connection with or with
respect to the Assets or the Liabilities,
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including, but not limited to, claims under the Seller's insurance
policies with respect to the Assets or the Liabilities;
(h) all of the business connected with the Assets and
Liabilities being transferred hereunder and goodwill, if any, of the
Branch; and
(i) all other assets of the Branch not listed in this Section
2.4, including all items in transit and routine suspense resources, but
not including any asset set forth in Section 2.6 herein. The Seller
shall hold the Buyer harmless from any loss regarding any items in
transit which are rejected if it creates an overdraft in an account
which does not have adequate funds on deposit at the time of the
Closing to cover said items.
Notwithstanding the foregoing provisions of this Section 2.4, if the
assignment or attempted assignment of any Asset would be invalid or would
constitute a breach of any lease, contract, agreement or commitment to which the
Seller is a party or by which it may be bound, that Asset shall be used, held
and/or received by the Seller for the benefit of the Buyer in accordance with
the Buyer's instructions and at the Buyer's expense, and the Seller shall,
without further consideration, convey, transfer, assign and deliver to the Buyer
all such Assets at the earliest time practicable. The Seller shall not be liable
to the Buyer for any loss or liability incurred in connection with any such
Asset or the Seller's handling of any such Asset, except to the extent that such
loss or liability is due to the Seller's gross negligence or intentional
misconduct.
All such sales, conveyances, transfers, assignments and deliveries
shall be effected by such assignments, deeds, bills of sale and other
instruments as shall be reasonably requested by counsel for the Buyer.
2.5 Assignment of Leases; Etc. The Seller shall obtain the consents
necessary for the assignment of the Lease and the contracts, commitments and
agreements set forth on Exhibit D.
2.6 Retained Assets. Notwithstanding any provision of this Agreement to
the contrary, the following assets and the Seller's right, title and interest
therein shall not be transferred to or purchased by the Buyer at the Closing:
(a) all Loans of the Branch rejected by the Buyer;
(b) all funds relating to retirement and pension plans or
programs benefitting employees employed by the Seller at the Branch;
(c) all of the Seller's insurance policies maintained with
respect to the Branch;
(d) any tangible personal property not listed on Exhibit E,
except for such tangible personal property substituted for, replaced
for, or added to the Personal Property set forth on Exhibit E which are
purchased by the Seller prior to the Closing Date and which are agreed
to by the Buyer; and
(e) any non-routine suspense resources.
2.7 Individual Retirement Accounts. With respect to Branch Deposits
which are Individual Retirement Accounts ("IRAs"), the Seller will use its best
efforts and will cooperate with the Buyer, both before and after the Closing, in
taking whatever actions are reasonably necessary to accomplish either the
appointment of the Buyer as successor custodian or the delegation to the Buyer
of the Seller's authority and responsibility as custodian of all such IRA
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deposits except self-directed IRA deposits, including but not limited to,
sending to the depositors thereof appropriate notices, cooperating with the
Buyer in soliciting consents from such depositors, and filing any appropriate
applications with applicable regulatory authorities. If any such delegation is
made to the Buyer, the Buyer will perform all of the duties to delegated and
comply with the terms of the Seller's agreement with the depositor of the IRA
deposits affected thereby.
ARTICLE III
ASSUMPTION PRICE; ALLOCATION
3.1 Determination and Payment of Assumption Price. The Seller and the
Buyer agree that on the Closing Date the Seller will pay to the Buyer, by
official bank or clearing house check or by wire transfer of immediately
available funds to an account at the Buyer's main office at El Centro,
California, in the manner directed by the Buyer in a notice to the Seller on the
day next preceding the Closing Date, an amount (the "Assumption Price") equal
to: (i) the aggregate amount of the Liabilities to be assumed by the Buyer
pursuant hereto determined in accordance with Schedule 1 attached hereto; less
(ii) the sum of (a) the cash on hand and due from banks at the Branch
transferred to the Buyer hereunder, plus (b) the book value of the Personal
Property acquired pursuant to Section 2.4(b), plus (c) the book value of the
Loans acquired pursuant to Section 2.4(a) determined in accordance with Schedule
1 attached hereto, plus (d) the amount of $1,225,000. The aggregate amount of
the Liabilities shall be determined in accordance with Schedule 1 in good faith
by an accounting to be conducted jointly by the Buyer and the Seller based upon
the Branch Account Trial Balance Report prepared by the Seller. The book value
of the Loans acquired shall be determined in accordance with Schedule 1 in good
faith by an accounting to be conducted jointly by the Buyer and the Seller based
upon the Branch Loan Trial Balance Report prepared by the Seller. The book value
of the Personal Property acquired pursuant to Section 2.4(b) shall be determined
in accordance with Schedule 1 in good faith by an accounting to be conducted
jointly by the Buyer and the Seller based upon the books and records of the
Branch. The Buyer and the Seller shall complete their provisional accounting on
the Business Day next preceding the Closing Date and shall jointly execute, and
deliver to each other on the Closing Date, a certificate setting forth the
amount of cash on hand and due from banks at the Branch transferred to the Buyer
hereunder, the amount of such Liabilities, the book value of the Loans and
Personal Property acquired, and stating the Assumption Price to be paid by the
Seller to the Buyer on the Closing Date. Final determination of the Assumption
Price and final settlement of any payment or refund shall be made in accordance
with Section 8.2.5.
3.2 Allocation of the Consideration for Acquisition of the Branch. The
Buyer and the Seller hereby agree that the amount paid by the Buyer for the
Assets, business and properties acquired by the Buyer hereunder, including the
Premises and the Personal Property, shall be allocated as determined in Section
3.1. The Buyer and the Seller agree that the valuations set forth in Section 3.1
were determined by the Buyer and the Seller in good faith and at arm's length
and that the Assumption Price to be paid by the Seller to the Buyer pursuant to
the terms of this Agreement has been agreed upon and established, and the
respective parties have entered into this Agreement, on the basis of the
valuations as determined herein and in Schedule 1.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND COVENANTS
4.1 Representations, Warranties and Covenants of the Seller. The Seller
hereby represents, warrants and covenants to the Buyer as follows:
4.1.1 Powers and Authority. The Seller is a national banking
association duly organized, validly existing and in good standing under the laws
of the United States of America
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with full power and authority to conduct a commercial banking business at the
Branch as now conducted by it, to own and lease all of the assets owned or held
under lease by it at the Branch and to sell the Branch (except to the extent
that the approvals contemplated by Sections 6.1.1, 6.1.2, 6.1.3 and 6.1.4 have
not yet been obtained). The Seller conducts, and on the Closing Date will
conduct, a commercial banking business at the Branch and does not, and will not
on the Closing Date, operate a trust department at the Branch. The execution and
delivery of this Agreement by the Seller have been duly authorized by all
necessary corporate action on the part of the Seller, which authorization will
not have been altered, amended, modified or revoked before the Closing Date,
and, upon execution and delivery, this Agreement will constitute a valid and
binding obligation of the Seller enforceable in accordance with its terms.
Further, provided all of the conditions specified in Sections 6.1.1. through
6.1.4 have been satisfied prior to the Closing Date, on the Closing Date the
Seller will have the full power and authority to grant, sell and assign all
rights and properties to be sold and assigned hereunder and to perform its
obligations hereunder, without shareholder approval.
4.1.2 Other Agreements. Provided all of the conditions
specified in Section 6.1 have been satisfied prior to the Closing Date, the
execution and delivery of this Agreement by the Seller and the consummation of
the transactions contemplated herein will not:
(a) result in breach of or violate any of the terms
or conditions of, or constitute a default under, the Seller's
articles of association or bylaws or any contract, agreement,
commitment, indenture, note, bond, license, mortgage, deed of
trust or other instrument or obligation to which the Seller is
a party or by which it or any of its properties or assets may
be bound or affected; or
(b) violate any law, or any rule or regulation of any
Governmental Body, or any order, writ, injunction, judgment or
decree of any court or Governmental Body applicable to the
Seller, the Assets or the business of the Branch.
4.1.3 Branch Reports. The Branch Account Trial Balance Report
included in Exhibit A and to be provided to the Buyer pursuant to Section 5.2.8
and the Branch Loan Trial Balance Report included in Exhibit B and to be
provided to the Buyer pursuant to Section 5.2.9: (i) are or will be prepared in
accordance with the books and records of the Seller maintained by the Seller in
the ordinary and regular course of its business relating to the conduct of
business at the Branch; and (ii) are or will be correct and complete and fairly
present the information required pursuant to Sections 1.5 and 1.6, respectively.
4.1.4 Branch Information. The financial information used in
determining the aggregate amount of the Liabilities, the cash on hand at the
Branch, the book value of the Loans acquired, the book value of the Personal
Property acquired, and the Assumption Price in accordance with the provisions of
Section 3.1 will be prepared in accordance with the books and records of the
Seller maintained by the Seller in the ordinary and regular course of its
business relating to the conduct of business at the Branch, will be complete and
correct and will fairly present the financial and other data regarding the
Branch. The books and records of the Seller maintained by the Seller with
respect to its business at the Branch are, and until the Closing Date will be,
kept and prepared in accordance with the accounting principles applied by the
Seller with respect to its other branch offices.
4.1.5 Personal Property. Exhibit E attached hereto and
incorporated herein contains an itemized list of all equipment, furniture and
other tangible personal property leased or owned by the Seller which is to be
transferred or sold to the Buyer pursuant to this Agreement (the "Personal
Property"). Unless otherwise indicated on Exhibit E, the Seller has, and on the
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Closing Date will have, good and marketable title to all of the Personal
Property, in each case free and clear of all mortgages, pledges, liens, security
interests, conditional sale agreements, charges, encumbrances and restrictions
of every kind and nature.
4.1.6 Premises. The Seller will delivery the Premises to the
Buyer at the Closing in substantially the same condition as it is in on the date
hereof; except for reasonable wear and tear and repairs which are the
responsibility of the landlord. As of this date there are no repairs to be
completed by the landlord. With respect to the Lease, neither the Seller nor the
landlord is, and on the Closing date neither the Seller nor the landlord will
be, in default under the Lease and the Lease has not been amended and is
currently in full force and effect in the form attached hereto as Exhibit C. On
the Closing Date, there will be no additional premises leased to or owned by the
Seller in connection, in whole or in part, with the business of the Branch.
4.1.7 Contracts and Agreements. Exhibit D attached hereto and
incorporated herein is, to the best of the Seller's knowledge, after due
inquiry, a complete and correct list of all contracts, agreements and other
commitments (other than policies of insurance and retirement, pension, bonus,
profit-sharing, stock option, stock purchase and other fringe benefit plans),
entered into in connection, in whole or in part, with the business of the
Branch, whether written or oral, and of all proposed or uncompleted capital
expenditures or major maintenance projects heretofore authorized in connection,
in whole or in part, with the business of the Branch. Each contract, agreement
and other commitment set forth in Exhibit D is, and on the Closing Date will be,
and each contract, agreement or other commitment referred to in Section 2.2(c)
on the Closing Date will be, valid and enforceable in accordance with its terms.
To the extent available (and, if not available after diligent search, clearly
indicated on Exhibit D as not available), a complete and correct copy of each
written contract, agreement and other commitment will be delivered to the Buyer
within thirty (30) days from the date hereof, and a complete and correct
detailed summary of each oral contract, agreement and other commitment and of
each uncompleted and proposed capital expenditure or major maintenance project
listed in Exhibit D is set forth in Exhibit D. Except as otherwise set forth in
Exhibit D, each contract, agreement and other commitment listed therein is, and
on the Closing Date will be, assignable to the Buyer by the Seller without the
consent of any third party and without any payment or penalty, and the Seller
has not taken any action which impairs the right of further assignment thereof
by any immediate or remote assignee of the Seller. The Seller is not, and on the
Closing Date will not be, in default in any respect under any contract,
agreement or commitment set forth in Exhibit D or referred to in Section 2.2(c)
and, to the best of the Seller's knowledge, after due inquiry, no other party
under any such lease, contract agreement or commitment is in default in any
material respect thereunder, and all of the same are free and clear of all
mortgages, pledges, liens, security interests, conditional sale agreements,
charges, encumbrances and restrictions of any kind and nature created by or on
behalf of the Seller.
4.1.8 Pending Litigation. There is no action, suit, claim,
charge, complaint, proceeding or investigation (each a "Claim") pending or, to
the best of the Seller's knowledge, after due inquiry, threatened against the
Seller affecting the business of the Branch, any of the Assets or the Seller's
ability to perform its obligation hereunder, at law or in equity, in any court,
before any arbitrator or arbitration tribunal or before or by any federal,
state, municipal or other domestic or international governmental authority,
department, commission, board, agency or other instrumentality (collectively, a
"Governmental Body"). There is no outstanding judgment, order, writ, injunction
or decree of any court, any arbitrator or arbitration tribunal or any
Governmental Body against or affecting the business of the Branch or any of the
assets used in connection, in whole or in part, with the business of the Branch.
4.1.9 Compliance with the Law. Other than a banking charter
issued by the Comptroller of the Currency and an authorization to establish a
branch facility issued by the
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Comptroller of the Currency, to the best of the Seller's knowledge, after due
inquiry, the Seller is not required to obtain or maintain any license, permit,
authorization or approval from any Governmental Body in order to conduct its
banking business at the Branch as now conducted by it and to own and operate the
properties and assets utilized by it in such business. No Claim is pending nor
has the Seller been threatened with any Claim wherein the remedy sought is the
revocation or limitation of any governmental license or permit and the Seller
does not know of any basis or grounds for any such revocation or limitation. The
Seller has complied with all laws, rules, regulations, ordinances, codes,
orders, licenses and permits relating to and materially affecting the conduct of
its banking business at the Branch.
4.1.10 Employees. Exhibit F attached hereto and incorporated
herein contains a complete and accurate list of the names and titles of all
officers and employees of the Seller employed at the Branch. The Buyer may, on a
confidential basis, review the salaries, wages, and all other forms of
compensation and benefits provided to the Branch officers and employees and any
existing employment agreements, contracts or commitments with any such officers
and employees. With respect to the Branch there are at present, and on the
Closing Date except as previously disclosed to the Buyer in writing, there will
be no disputes or controversies with any union, no pending or threatened union
organization drives or representation elections, no known threats of strikes or
work stoppages, and no payments due from the Seller to, and no collective
bargaining contracts with, any union.
4.1.11 Environmental Liabilities. To the best of the Seller's
knowledge, the Seller is conducting and has conducted the business of the
Branch, and is using and has used the Premises in compliance with all applicable
Environmental Laws. To the best of the Seller's knowledge, the Premises and all
real property in which there is a security interest for a Loan are not subject
to any existing, pending or threatened investigation, action or proceeding,
including any notice of violation, by any Governmental Body regarding
contamination of any part of thereof or infractions of any law, statute,
ordinance or regulation or any license or permit issued by any Governmental Body
pertaining to health, industrial hygiene or environmental safety or
environmental conditions on, under or about the Premises or such real estate,
except for such investigations, actions, proceedings, notifications or
infractions which, in the aggregate, have not caused and could not cause a
material adverse change in the business condition or results of operations of
the Branch. To the best of the Seller's knowledge, there has not been any
generation, use, handling, transportation, treatment or disposal of any
Hazardous Substances in connection with the conduct of the business of the
Branch or such real estate that has or might result in any material liability
under any Environmental Law.
4.1.12 Deposits at the Branch. During the six-month period
prior to the date hereof the Seller has not transferred, and between the date
hereof and the Closing Date, the Seller will not transfer, any Deposits to any
of the Seller's other branches, except in accordance with the express request of
the depositor in the ordinary and regular course of business, or except as may
be agreed in writing by the Buyer or as may be provided for in this Agreement.
4.1.13 Loans at the Branch. All of the Loans represent actual
loan transactions, are legal, valid and enforceable, except pursuant to
bankruptcy and similar laws, and are authorized under applicable federal and
state laws and, except as set forth on Exhibit B hereto, the Seller's books and
records accurately reflect the payment history and present balance as to each
such loan. Except as set forth in Exhibit B, none of the borrowers on said loans
has notified the Seller of any offset or defense, valid or invalid, to its
obligations under said loans and none of said loans is in default, classified by
any examining authority, specifically reserved against (as compared to general
reserves) or nonperforming. The Seller makes no representation or warranty
concerning the collectability of any loan acquired by the Buyer hereunder.
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4.1.14 No Material Adverse Change. Since September 30, 1997,
and except as to the Retained Assets and the Retained Liabilities and except as
to the effects of this transaction, to the best of the Seller's knowledge: (i)
the Seller has conducted the business of the Branch in the ordinary and regular
course thereof; (ii) except as otherwise set forth in Exhibit G hereto, there
has not been any: 1) material adverse change in the business, operations or
prospects of the Branch or in its condition, financial or otherwise, or in its
assets or liabilities as reflected on Exhibits A and B; 2) damage, destruction
or loss affecting the Branch Premises, business or assets, whether or not
covered by insurance, which, either singly or in the aggregate, has materially
affected said business or assets or which is substantial in amount; 3) material
change in the nature of or in the condition, other than financial, of the
business of the Branch; 4) event or condition of any character whatsoever the
occurrence of which materially and adversely affected the business, operations,
prospects, Premises, or assets of the Branch; or 5) event or condition of any
character whatsoever which is reasonably likely to result in a material change
in the nature of the business of the Branch or a material adverse change in the
condition, financial or otherwise, of said business or is reasonably likely
materially and adversely to affect said business, operations, prospects,
Premises, liabilities or assets, other than any event or condition which is
generally known and understood by persons knowledgeable in the banking industry
to affect the banking industry or the economy in general and other than as
contemplated by this Agreement; and (iii) in its conduct of the business of the
Branch, the Seller has not, except in the ordinary and regular course of the
business of the Branch, incurred any liabilities or obligations, or purchased or
otherwise acquired, mortgaged, pledged or subjected to any lien, charge or other
encumbrance, or sold or transferred any assets, or canceled any debts or claims,
or suffered any extraordinary losses, or breached any contract or commitment, or
waived any rights of value.
4.1.15 Branch Employees. The seller agrees to use its best
efforts to assist the Buyer in retaining the services of all of the Branch
employees the Buyer desires to retain pursuant to Section 4.2.4 and the Seller
shall not compete with the Buyer for those Branch employees; provided, however,
nothing contained herein shall preclude a Branch employee from requesting the
Seller to continue his or her employment with the Seller.
4.1.16 Representations and Warranties. No representation or
warranty by the Seller contained in this Agreement or any exhibit hereto or in
any written statements, certificates or other documents furnished to the Buyer
pursuant to this Agreement or in connection with the transactions contemplated
hereby contains or will contain any untrue statement of a material fact nor will
all of such representations and warranties and all of the contents of this
Agreement and all of such statements, certificates and other documents, taken as
a whole, omit to state any fact necessary to make the statements herein or
therein not misleading. Each and all of the foregoing warranties and
representations are deemed made as of the date hereof and at the Closing.
4.2 Representations, Warranties and Covenants of the Buyer. The Buyer
hereby represents, warrants and covenants to Seller as follows:
4.2.1 Powers and Authority. The Buyer is a state banking
corporation duly organized, validly existing and in good standing under the laws
of the State of California with full power and authority to conduct a commercial
banking business as now conducted by it. The execution and delivery of this
Agreement by the Buyer have been duly authorized by all necessary corporation
action on the part of the Buyer (other than approval of this Agreement and the
transactions contemplated hereby by the Buyer's shareholders, if required by
law), which authorization will not have been altered, amended, modified or
revoked before the Closing Date, and, upon execution and delivery, this
Agreement, subject to its approval by the Buyer's shareholders, if required by
law, will constitute a valid and binding obligation of the Buyer enforceable in
accordance with its terms. Further, provided all of the conditions specified in
Sections 6.1.1. through 6.1.4 have been satisfied prior to the Closing Date, on
the Closing Date
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the Buyer will have the full power and authority to purchase and assume all
rights and properties to be purchased and assigned hereunder and to perform its
obligations hereunder and to operate a branch facility on the Premises. The
Deposits contemplated to be assumed hereunder will not be more than ten percent
(10%) of the Buyer's total deposits as of December 31, 1997 and, therefore, the
Buyer may perform its obligations pursuant to this Agreement without shareholder
approval.
4.2.2 Other Agreements. Provided all of the conditions
specified in Section 6.1 have been satisfied prior to the Closing Date, the
execution and delivery of this Agreement on behalf of the Buyer and the
consummation of the transactions contemplated herein will not:
(a) result in the breach of or violate any of the
terms or conditions of, or constitute a default under, the
Buyer's articles of incorporation or bylaws or any contract,
agreement, commitment, indenture, note, bond, license,
mortgage, deed of trust or other instrument or obligation to
which the Buyer is a party or by which it or any of its
properties or assets may be bound or affected; or
(b) violate any law, or any rule or regulation of any
Governmental Body, or any order, writ, injunction, judgment or
decree of any court or Governmental Body applicable to the
Buyer, the Assets, the Liabilities or the business of the
Branch.
4.2.3 Pending Litigation. There is no pending or threatened
Claim involving the Buyer which would materially adversely affect the
transactions contemplated hereby or the Buyer's ability to perform its
obligations hereunder.
4.2.4 Branch Employees. The Buyer agrees to use its best
efforts to retain all the employees of the Branch as listed on Exhibit F
attached hereto and agrees to notify the Seller ten (10) Business Days prior to
the Closing of any employees the Buyer will not employ; provided, however, that
nothing contained herein shall preclude the termination of any employee by the
Buyer for cause or for other reasons such as Branch staff reduction(s). The
Buyer further agrees that all Employees of the Branch hired by the Buyer will be
entitled to any and all rights and benefits, and be subject to any and all
obligations of any other employee of the Buyer, and for purposes of any existing
employee benefit plan of the Buyer, such former employees of Seller retained by
the Buyer will be considered employees of the Buyer from the date the employee
was employed by the Seller, to the extent permissible under the terms of the
Buyer's plan or policy.
4.2.5 Representations and Warranties. No representation or
warranty of the Buyer contained in this Agreement or any exhibit hereto or in
any written statement, certificate or other document furnished to the Seller
pursuant to this Agreement or in connection with the transactions contemplated
hereby contains or will contain any untrue statement of a material fact nor will
all such representations and warranties and all of the contents of this
Agreement and all of such statements, certificates and other documents omit to
state any fact necessary to make the statements herein or therein not
misleading. Each and all of the foregoing warranties and representations are
deemed made as of the date hereof and at the Closing.
ARTICLE V
OBLIGATIONS OF THE PARTIES BEFORE CLOSING DATE
5.1 Obligations of Both Parties. The Seller and the Buyer agree that
subsequent to the date hereof and prior to the Closing Date:
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5.1.1 Administrative Approvals. Promptly following execution
of this Agreement, the parties shall, with copies to the other of all submitted
material, submit this Agreement to the California Commissioner of Financial
Institutions (the "Commissioner") for approval, as required in Section 4879.09
of the California Financial Code, and the Buyer shall submit this Agreement to
the FRB for approval, as required by 12 U.S.C. Section 1828(c)(2). The parties
hereto shall also promptly file, either individually or jointly, as may be
required, all other applications, amendments thereto, supporting documents and
affidavits, and shall publish all other notices and perform all other acts which
may be required by law or regulation to obtain the final approvals of the
Commissioner, the FRB and any other Governmental Body whose approval is a
prerequisite to the consummation of the transactions contemplated herein. The
Seller and the Buyer shall furnish the other upon request all such information
and material concerning the Branch, the Seller or the Buyer, as the case may be,
required for inclusion in, or preparation of, any applications required to be
made for any regulatory approvals to the acquisition by the Buyer of the Branch
from the Seller hereunder and the transactions hereby contemplated, and shall
keep each other apprised on a current basis of the processing and status of all
such filings and applications for regulatory approvals.
5.1.2 Best Efforts. Each party hereto will use its best
efforts to effectuate the transactions hereby contemplated and to fulfill the
conditions of its obligations under this Agreement.
5.2 Obligations of Seller. The Seller agrees that subsequent to the
date hereof and prior to the Closing Date:
5.2.1 Shareholder Approval of Agreement. If required, the
Seller agrees to seek requisite shareholder approval, in conformance with all
appropriate legal requirements, accompanied by the favorable recommendations of
its management.
5.2.2 Access to Information. Without interfering with the
normal course of business at the Branch, the Buyer and its counsel, accountants
and other representatives shall have full access, upon reasonable notice and
mutual convenience, to all properties, assets, books, accounts, records,
contracts and documents of the Seller related to the conduct of business at the
Branch contemplated to be transferred or assigned hereunder and, in addition
thereto, the Seller shall furnish or cause to be furnished to the Buyer and its
representatives, at the Buyer's expense, such copies of said copies of said
books, accounts, records, contracts and documents as may be reasonably
requested.
5.2.3 Conduct of Business. The Seller shall, except as to the
Retained Assets and the Retained Liabilities: (i) conduct business at the Branch
only in the ordinary course, consistent with past practices; (ii) carry on the
Branch's business practices and keep the Branch's books of account, records and
files in substantially the same manner as heretofore; (iii) use its best efforts
to preserve the Branch's business organization intact, to retain the services of
the Branch's present officers and employees and to preserve the goodwill of the
Branch's depositors, customers and suppliers and others having business
relations with the Branch; and (iv) duly and timely file all reports and returns
required to be filed with any Governmental Body with respect to the business of
the Branch.
5.2.4 Ordinary Course and Other Activities. Except as set
forth in this Agreement, the Seller shall not, without the prior written consent
of the Buyer: (i) sell, lease, abandon, assign, transfer, license, encumber or
otherwise dispose of any Personal Property or Assets other than in the ordinary
course of business, or enter into any agreement to do so; (ii) except as
otherwise expressly provided herein, transfer any Assets or Deposits from the
Branch to the Seller's other branches or operations, subject, in the case of
Deposits, to the individual
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depositor's continuing right of withdrawal; (iii) enter into any leases,
contracts, agreements or other commitments, whether written or oral, in
connection, in whole or in part, with the business of the Branch other than
leases, as lessee, of personal property (copies of which shall be provided to
the Buyer) under which the Seller is not liable or obligated in an amount in
excess of $5,000 in the aggregate and all such leases, contracts, agreements and
commitments so entered into by the Seller shall be assignable to the Buyer by
the Seller without the consent of any third party and without any payment or
penalty, and the Seller will not take any action which impairs the right of
further assignment thereof by any immediate or remote assignee of the Seller;
(iv) increase the compensation or the annual rate of compensation or change the
method of determining the compensation of any employee listed in Exhibit F
hereto except in accordance with the Seller's existing policies and practices
with respect to compensation and bonuses at the Branch and only in the ordinary
course; provided, however, the Seller may pay a one-time bonus to the Branch
employees employed as of December 31, 1997 on a basis to be determined by the
Seller. The total amount to be paid by the Seller will not exceed $20,000. In
order to qualify for this one-time bonus, the identified employees must be
employed by the Seller on the Closing Date and must remain employed by the Buyer
for a period of six (6) months after the Closing. The Seller agrees to open a
non interest-bearing depository account with the Buyer as of the Closing Date
with sufficient funds to cover the maximum liability for these bonuses. The
Seller may retain any remaining balance after payment of these bonuses; (v)
relocate, or file any application to relocate, the Branch, except as such an
application may be necessary to relocate the Branch as a result of a fire or
other natural disaster, and except as may be necessary to transfer the Retained
Assets and the Retained Liabilities after the Closing Date; or (vi) enter into
any contract, agreement, commitment, understanding or other arrangement to
dispose of the Branch or the Assets or Liabilities other than pursuant to the
terms of this Agreement.
5.2.5 Condition of Assets. The Seller shall keep and maintain
the Premises, all Personal Property and all of the Assets in good operating
condition and repair, subject to reasonable wear and tear and further subject to
the provisions of Section 6.2.6.
5.2.6 Consents. The Seller will obtain and deliver to the
Buyer on or prior to the Closing Date all required consents authorizing the
transfer and assignment to the Buyer of, or the substitution of the Buyer for
the Seller under, the Lease and all contracts, agreements and commitments that
are to be sold, conveyed, transferred, assigned and delivered to the Buyer
hereunder, including, but not limited to, those set forth in Exhibit D hereto
and all other Assets, each such consent to be effective prior to or as of the
Closing Date. The assignment of the Lease and the landlord's consent shall be in
substantially in the form of Exhibit H. All such other consents shall be in form
and substance reasonably satisfactory to counsel for the Buyer.
5.2.7 Personal Property Report. On the day next preceding the
Closing Date the Seller will prepare and furnish to the Buyer an update of the
Personal Property Exhibit E as of the day next preceding the Closing Date. Such
final Exhibit E shall comply with the representations and warranties set forth
in Section 4.1.5.
5.2.8 Deposit Update. Not later than five (5) Business Days
prior to the Closing Date the Seller shall deliver to the Buyer a Branch Account
Trial Balance Report listing the Deposits to be assumed by the Buyer. On the day
next preceding the Closing Date the Seller shall deliver to the Buyer an updated
Branch Account Trial Balance Report.
5.2.9 Loan Update. Not later than five (5) Business Days prior
to the Closing Date the Seller shall deliver to the Buyer a Branch Loan Trial
Balance Report listing the Loans to be purchased by the Buyer. On the day next
preceding the Closing Date the Seller shall deliver to the Buyer an updated
Branch Loan Trial Balance Report.
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5.2.10 Data Conversion. At the Buyer's reasonable request, and
in accordance with the procedures outlined in Exhibit I, the Seller shall
cooperate with the Buyer in its data conversion for the Branch prior to the
Closing and for sixty (60) days thereafter, including but not limited to all
reasonable assistance in converting loan and deposit accounts, merchant account
relationships, and ATM cards.
5.2.11 No Breach. The Seller shall not take or fail to take
any action which taking or failure would cause or constitute a breach, or would,
if it had been taken or failed to be taken prior to the date hereof, have caused
or constituted a breach, of any of the representations and warranties set forth
in Section 4.1; the Seller will, in the event of, or promptly after becoming
aware of the occurrence of, or the impending or threatened occurrence of, any
event which would cause or constitute a breach or would, if it had occurred
prior to the date hereof, have caused or constituted a breach of any of the
representations and warranties set forth in Section 4.1 or the covenants set
forth in Sections 5.1 or 5.2, or which may result in the nonfulfillment of any
condition set forth in Sections 6.1 or 6.2, give detailed notice thereof to the
Buyer; and the Seller will use its best efforts to prevent or promptly to remedy
such breach or failure to fulfill such covenant or condition.
5.3 Obligations of Buyer. The Buyer agrees that subsequent to the date
hereof and prior to the Closing Date:
5.3.1 Shareholder Approval of Agreement. This Agreement will
be submitted to the shareholders of the Buyer for approval to the extent
necessary under Section 4879.04 of the California Financial Code. If required,
the Buyer agrees to seek shareholder approval, in conformance with all
appropriate legal requirements, accompanied by the favorable recommendations of
its board of directors.
5.3.2 Notification of Deposits and Loans Rejected. The Buyer
agrees that, at least two (2) Business Days prior to the Closing the Buyer will
notify the Seller, in writing, identifying: (i) the Deposits included on the
Branch Account Trial Balance Report provided pursuant to the first sentence of
Section 5.2.8 which the Buyer is rejecting pursuant to Section 2.1(a); and (ii)
the Loans included on the Branch Loan Trial Balance Report provided pursuant to
the first sentence of Section 5.2.9 which the Buyer is rejecting pursuant to
Section 2.4(a).
5.3.3 No Breach. The Buyer shall not take or fail to take any
action which taking or failure would cause or constitute a breach, or would, if
it had been taken or failed to be taken prior to the date hereof, have caused or
constituted a breach, of any of the representations and warranties set forth in
Section 4.2; the Buyer will, in the event of, or promptly after becoming aware
of the occurrence of, or the impending or threatened occurrence of, any event
which would cause or constitute a breach or would, if it had occurred prior to
the date hereof, have caused or constituted a breach of any of the
representations and warranties set forth in Section 4.2 or the covenants set
forth in Sections 5.1 or 5.3, or which may result in the nonfulfillment of any
condition set forth in Sections 6.1 or 6.3, give detailed notice thereof to the
Seller; and the Buyer will use its best efforts to prevent or promptly to remedy
such breach or failure to fulfill such covenant or condition.
ARTICLE VI
CONDITIONS PRECEDENT TO CLOSING
6.1 Conditions Precedent to Performance by Both Parties. The
obligations of the Buyer and the Seller to consummate the transactions
contemplated in this Agreement are expressly subject to the satisfaction, on or
before the Closing Date, of each and all of the conditions set forth below,
which conditions may not be waived by either party:
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6.1.1 Shareholder Approval. This Agreement shall have been
duly approved by the shareholders of the Buyer if and to the extent required and
in any manner permitted by Section 4879.04 of the California Financial Code;
such approval being evidenced either by a vote at a shareholders' meeting
validly called for such purpose or by a writing duly executed by the required
number of shareholders.
6.1.2 Approval of the Commissioner. The Commissioner shall
have given all necessary approvals of this Agreement, including approval of a
partial business unit sale as set forth in Section 4879.02 of the California
Financial Code on terms and conditions which are not materially adverse to
either party hereto.
6.1.3 Approval of the FRB. The FRB shall have given all
necessary consents to the consummation of the transactions contemplated in this
Agreement, including the consent required pursuant to 12 U.S.C.
Section 1828(c)(2), on terms and conditions which are not materially adverse to
either party hereto.
6.1.4 Other Regulatory Approvals. All other regulatory
approvals and actions shall have been obtained and taken as necessary to permit
consummation of the transactions contemplated herein in accordance with all
applicable laws, regulations and orders, on terms which are not materially
adverse to either party hereto.
6.1.5 No Claim. No Claim shall have been instituted by any
Governmental Body challenging the transactions hereby contemplated or seeking to
restrain their consummation and no Claim shall have been instituted or, to the
knowledge of either party hereto, threatened, challenging the legality of such
transactions or seeking to restrain their consummation which, in the opinion of
counsel for either party hereto, would make it impossible or inadvisable for the
parties to consummate such transactions.
6.1.6 Closing Date. The Closing shall occur on or prior to
March 31, 1998, unless the date for the Closing is extended by mutual agreement.
6.2 Conditions Precedent to Buyer's Performance. The obligations of the
Buyer to perform its obligations under this Agreement are subject to the
satisfaction, on or before the Closing Date, of each and all of the conditions
set forth below in this Section 6.2. The Buyer may waive any or all of these
conditions in whole or in part without prior notice; provided, however, that if
the Seller shall be in default of any of its representations, warranties or
covenants under this Agreement, no such waiver of a condition shall constitute a
waiver by the Buyer of any of its rights or remedies at law or in equity.
6.2.1 Accuracy of Warranties and Performance of Obligations.
The representations and warranties of the Seller contained in Section 4.1 shall
be true and correct as of the Closing Date as if made on such date, and the
obligations set forth in Sections 5.1 and 5.2 to be performed by the Seller on
or before the Closing Date shall have been so performed in all material
respects; and the Seller shall have delivered to the Buyer a certificate of its
President and its Chief Financial Officer to such effect.
6.2.2 Copies of Documents. True and complete copies of all
documents reasonably requested by the Buyer shall have been furnished to the
Buyer promptly after request therefore and, in any event, in advance of the
Closing Date.
6.2.3 Consents and Approvals. The Buyer shall have received
the consents the Seller is required to use its best efforts to obtain and
deliver to the Buyer on or before the Closing
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Date pursuant to Section 5.2.6 and all licenses, permits, authorizations and
approvals required by any Governmental Body in connection with its conduct of
business at the Branch.
6.2.4 Matters Relating to the Premises. The Seller shall have
delivered to the Buyer a duly executed Assignment of Lease and a duly executed
Consent of Lessor substantially in the form set forth as Exhibit H.
6.2.5 Books and Records. The Seller shall have made available
to the Buyer its Branch books and records as required under Section 5.2.2.
6.2.6 Force Majeure. The Seller shall maintain insurance as
presently in force on the Assets of the Branch including the Premises. In the
event the Seller suffers a loss due to earthquake, fire, flood, accident or
other casualty which adversely affects the value of any of the Assets or conduct
of the business at the Branch being acquired by the Buyer hereunder, the Buyer
shall have fifteen (15) Business Days from the date of written notice of such
event within which to terminate this Agreement by giving written notice to the
Seller. Should the Buyer not terminate this Agreement pursuant to this Section
6.2.6 within such fifteen (15) Business Day period, at the Closing the Buyer
shall take the Assets and business acquired hereunder as is, together with the
insurance proceeds or the Seller's right to the insurance proceeds relating to
the damaged Assets and business.
6.2.7 Assumption of Safe Deposit Box Business. The Buyer and
the Seller shall do all things necessary to transfer any safe deposit box
business at the Branch to the Buyer.
6.2.8 Disclosure of Employee Matters. There shall not have
been disclosed to the Buyer any matter pursuant to the third sentence of Section
4.1.10.
6.2.9 Material Changes. Except with respect to the Retained
Assets and the Retained Liabilities and the effects of this transaction, there
shall not have been any material change in the business or operations of the
Branch from that as of September 30, 1997.
6.2.10 Deposits. At the Closing the Deposits to be assumed by
the Buyer pursuant to Section 2.1(a) shall total at least $14,500,000, of which
non interest-bearing Deposits shall total at least $6,500,000. If non
interest-bearing Deposits total less than $6,500,000 the Seller, at the Closing,
shall open a non interest-bearing demand deposit for the amount of the shortfall
at the Buyer and maintain that account for a period of one (1) year. If
interest-bearing Deposits total less than $8,000,000 the Seller, at the Closing,
shall place a 3% interest-bearing time certificate of deposit for the amount of
the shortfall at the Buyer for a period of one (1) year.
6.3 Conditions Precedent to Seller's Performance. The obligations of
the Seller to perform its obligations under this Agreement are subject to the
satisfaction, on or before the Closing Date, of each and all of the conditions
set forth below in this Section 6.3. The Seller may waive any or all of these
conditions in whole or in part without prior notice; provided, however, that if
the Buyer shall be in default of any of its representations, warranties or
covenants under this Agreement, no such waiver of a condition shall constitute a
waiver by the Seller of any of its rights or remedies at law or in equity.
6.3.1 Accuracy of Warranties and Performance of Obligations.
The representations and warranties of the Buyer contained in Section 4.2 shall
be true and correct as of the Closing Date as if made on such date, and the
obligations set forth in Sections 5.1 and 5.3 to be performed by the Buyer on or
before the Closing Date shall have been so performed in all material respects;
and the Buyer shall have delivered to the Seller a certificate of its President
and its Chief Financial Officer to such effect.
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6.3.2 Copies of Documents. True and complete copies of all
documents reasonably requested by the Seller shall have been furnished to the
Seller promptly after request therefore and, in any event, in advance of the
Closing Date.
ARTICLE VII
CLOSING
7.1 Closing. The closing (the "Closing") of the transactions
contemplated by this Agreement shall take place at the Branch at 5:00 p.m.,
Pacific time, on the first Friday which is a Business Day following the date on
which the last to occur of the following events shall have occurred: (i) receipt
of written approval of the transactions hereby contemplated by the FRB and the
expiration of the applicable waiting period under the Bank Merger Act; (ii) such
written approvals of this Agreement and the transactions hereby contemplated as
may be required under the California Financial Code have been given by the
Commissioner and have become effective; and (iii) receipt of any other approvals
required from any Governmental Body; or at such time or such other date as the
Buyer and the Seller agree, at the Branch or such other place as the Buyer and
the Seller may agree.
7.2 Seller's Obligations at the Closing. At the Closing, the Seller
shall do the following:
7.2.1 Transfer of Assets. The Seller shall convey, transfer,
assign and deliver to the Buyer, by instruments satisfactory in form and
substance to the Buyer and its counsel, good and marketable title to the Assets,
free and clear of any mortgages, pledges, liens, security interests, conditional
sale agreements, charges and encumbrances and restrictions of any kind and
nature whatsoever except as permitted in this Agreement, and shall execute,
acknowledge and deliver such grant deeds, bills of sale, assignments,
conveyances and other assurances, documents and instruments of transfer as may
reasonably be requested by the Buyer for the purpose of assigning, transferring,
granting, conveying and confirming to the Buyer and reducing to its possession,
any and all property to be conveyed and transferred under this Agreement.
7.2.2 Certificates and Further Documents. The Seller shall
deliver to the Buyer all of the Documents and other instruments to be delivered
to the Buyer pursuant to Sections 6.1 and 6.2 and not previously furnished to
the Buyer and such other certificates and documents as may reasonably be
requested by the Buyer with respect to the fulfillment of the conditions
specified in Sections 6.1 and 6.2.
7.2.3 Premises, Books and Records. The Seller shall deliver
physical possession of the Branch and all of the files, documents, papers,
agreements, books of account and records pertaining to the Assets and
Liabilities being transferred and assumed hereunder. The Seller agrees to make
available any records kept by the Seller relating to the Branch and not
delivered hereunder.
7.2.4 Payment of Assumption Price. Pursuant to Section 3.1, at
the Closing the Seller shall credit or pay to the Buyer in the manner directed
by the Buyer on the Business Day next preceding the Closing Date the amount of
the Assumption Price to be paid to the Buyer hereunder.
7.2.5 Deposits. The Seller shall place a deposit or deposits
at the Buyer to the extent required pursuant to Section 6.2.10.
7.3 Buyer's Obligations at the Closing. At the Closing, the Buyer shall
do the following:
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7.3.1 Assumption of Liabilities. The Buyer shall deliver to
the Seller an undertaking in form and substance satisfactory to the Seller and
its counsel whereby the Buyer assumes and agrees to perform and discharge: (i)
all of the Liabilities set forth in Section 2.1; and (ii) all of the obligations
which are set forth in Section 2.2 and which arise after the Closing Date or are
to be performed after the Closing Date, except those obligations set forth in
Sections 2.2(b) or (c), if any, which cannot be transferred without the consent
of third parties and as to which the Seller shall have been unable to obtain
such consent.
7.3.2 Further Documents. The Buyer shall deliver to the Seller
all of the documents and other instruments to be delivered to the Seller
pursuant to Sections 6.1 and 6.3 and not previously furnished to the Seller and
such other certificates and documents as may reasonably be requested by the
Seller with respect to the fulfillment of the conditions set forth in Sections
6.1 and 6.3.
ARTICLE VIII
OBLIGATIONS OF THE PARTIES AFTER THE CLOSING
8.1 Seller's Obligations. The Seller agrees that, after the Closing
Date:
8.1.1 Business Relationships. The Seller shall not cause, or
attempt to cause or induce, any person or firm now or hereafter supplying goods,
services or credit to the Branch to cease or diminish the furnishing of such
goods, services or credit.
8.1.2 Banking Relationships. For a period of three (3) years
following the Closing Date, the Seller will not directly or indirectly solicit
deposits from or loans to persons who were Branch customers or depositors on the
date hereof, on the Closing Date or during the period between the date hereof
and the Closing Date; provided, however, that nothing in this Section 8.1.2
shall prevent the Seller from: (i) soliciting deposits or loans in connection
with advertising or solicitations directed to the public generally; (ii)
soliciting deposits from or loans to a major or statewide depositor which has
deposits at locations other than the Branch (such as, for example, a company
with more than one location or public entity); (iii) soliciting deposits or
loans outside the State of California; (iv) continuing any existing lending or
deposit relationships domiciled at any of the Seller's banking offices other
than the Branch; (v) making loans or accepting deposits applied for or made by
such Branch customers or depositors in the absence of such solicitation; or (vi)
making loans or accepting deposits applied for or made by such Branch customers
or depositors who represent Retained Assets or Retained Liabilities.
8.1.3 Confidentiality. Neither party shall divulge or
communicate, except as may be required by applicable law, use to the detriment
of the other or for the benefit of any other person or persons, or misuse in any
way, any confidential information or trade secrets of the other acquired in
connection with or in any manner relating to this Agreement and the transactions
contemplated herein; provided, however, that the foregoing shall not apply to
any information: (i) that was or is otherwise available to the public; (ii) that
was readily available to the other party on a non-confidential basis prior to
disclosure pursuant to this Agreement; (iii) that was already lawfully in the
possession of the other party; (iv) that becomes available to a party on a non-
confidential basis after disclosure pursuant to this Agreement; or (v) that is
requested or required by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigation demand or similar
process by or of any Governmental Body. The foregoing provisions of this Section
8.1.2 shall not prohibit or limit the Buyer's use of any such information in its
conduct of its business at the Branch.
8.1.4 Notification of Customers. Promptly after the Closing
Date and in accordance with the procedures outlined in Exhibit I: (i) the Seller
shall notify all persons
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obligated to make payments under loans that are Retained Assets to make all
future payments in respect to said obligations to a specified address other than
that of the Branch; (ii) the Seller shall notify all persons whose deposit
accounts are Retained Liabilities that all deposits and withdrawals pertaining
thereto shall be made at a specified address other than that of the Branch; and
(iii) the parties shall jointly notify all other customers of the Branch of the
change of ownership of the Branch.
8.1.5 Right to Hire Branch Employees. Pursuant to Section
4.2.4, the Buyer shall have the right to employ all persons who are employees of
the Branch on the Closing Date, subject only to the right of any such employee
to terminate his or her employment. For a period of three (3) years after the
Closing Date, the Seller shall not solicit any employee that the Buyer has
agreed to hire.
8.1.6 Removal of the Seller's Property. Not later than five
(5) Business Days after the Closing Date, the Seller will remove from the Branch
premises, at the Seller's expense, all of its personal property not being
transferred to the Buyer, including but not limited to, negotiable instruments,
stationery, forms, labels, logos, building signs, shipping materials, brochures
and advertising material. If the Seller does not do so, the Buyer may dispose of
same in any manner.
8.1.7 Restrictive Covenant. For a period of three (3) years
after the Closing Date the Seller and its successors and assigns shall not
operate a branch office or a loan production office within a five (5) mile
radius of the Branch. The parties acknowledge and agree that the Seller
currently has deployed stand-alone automated teller machines within a five (5)
mile radius of the Branch, as noted on Exhibit J. The parties agree that these
locations do not constitute branch offices for purposes of this Agreement, so
long as the Seller restricts the activities of these locations to that of
dispensing cash and other products or services and does not allow these
locations to accept deposits and/or any loan related activities. The Seller also
agrees to keep any signage to a minimal nature consistent with the current
practices in place at the identified locations. The Seller may expand the number
of ATMs in these locations or relocate to other locations controlled by the same
parties. Any additional ATMs may only provide services and products on a basis
consistent with the existing ATMs.
8.2 Obligations of Both Parties After the Closing.
8.2.1 Transfer of Credits by the Seller. In accordance with
the procedures outlined in Exhibit I, the Seller agrees that it will transfer to
the Buyer any deposits and loan payments received by it after the Closing Date
for credit to transferred accounts, but it shall be under no obligation to
accept such deposits or loan payments.
8.2.2 Transit Items. In accordance with the procedures
outlined in Exhibit I, after the Closing, each party hereto will assist the
other party in the adjustment and delivery of all overages and shortages of
documentary and cash items in transit, items in collection, and any ACH, POS,
wire transfers and ATM transactions ("Transit Items") as of the Closing Date, as
the interest in such Transit Items of the respective parties hereto may appear.
8.2.3 Further Documents. After the Closing: (i) each of the
parties hereto shall execute and deliver, or cause to be executed and delivered,
all such deeds, documents and other instruments, and will take or cause to be
taken all further or other action, as the other party or its counsel may
reasonably deem necessary or desirable in order to vest in and confirm to the
Buyer title to and possession of all of the Assets and to carry out the full
intent and purpose of this Agreement; and (ii) each of the parties will permit
the other access to and the right to inspect and copy the books and records of
such party as may be reasonably necessary or appropriate to enable
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such other party to prepare such further document, instruments, reports or tax
returns as such other party or its counsel determine to be necessary.
8.2.4 Prorations; Unresolved Transit Items; Sales and Use
Taxes; Insurance.
(a) The Seller and the Buyer agree that all expenses
of operating the Branch prior to, on or after the Closing Date,
including but not limited to, state and local personal property taxes,
expenses for utilities, rent, wages, salaries, accrued vacations and
payments in respect of the leases, contracts, commitments and
agreements referred to in Section 2.2, shall, to the extent possible,
be determined and prorated as of the Closing Date in connection with
the determination of the Assumption Price pursuant hereto. To the
extent that such expenses are not capable of being prorated as of the
Closing Date, such expenses shall, to the extent possible, be prorated
by the Buyer and the Seller and all unresolved Transit Items shall be
allocated between the Buyer and the Seller in accordance with Section
8.2.2 within ninety (90) days after the Closing Date and (i) all such
expenses paid by the Seller on or prior to the Closing Date and
attributable to the operation of the Branch after the Closing Date
(including any payments by the Seller in respect of the Lease and any
of the contracts, commitments and agreements referred to in Section
2.2) shall be paid by the Buyer to the Seller within ten (10) Business
Days after notice from the Seller to the Buyer of the amount thereof
not prorated as of the Closing Date in connection with the
determination of the Assumption Price, and (ii) all such expenses
unpaid at the Closing Date and attributable to the operation of the
Branch on or prior to the Closing Date (including any payments by the
Buyer in respect of the Lease and any of the contracts, commitments and
agreements referred to in Section 2.2) and any payments by the Buyer in
respect of any of the Retained Liabilities shall be paid by the Seller
to the Buyer within ten (10) Business Days after notice from the Buyer
to the Seller of the amount thereof, and (iii) all remaining Transit
Items shall be finally settled and paid within ten (10) Business Days.
The Buyer shall, after the Closing, hold the Seller harmless from any
liability on account of and shall pay to the Seller, within ten (10)
Business Days after notice from the Seller to the Buyer of the amount
thereof, any payments by the Seller on account of any amounts to be
paid by the Buyer pursuant to clause (i) of the immediately preceding
sentence, and the Seller shall, after the Closing, hold the Buyer
harmless from any liability on account of and shall pay to the Buyer,
within ten (10) Business Days after notice from the Buyer to the Seller
of the amount thereof, any payments by the Buyer on account of any
amounts to be paid by the Seller pursuant to clause (ii) of the
immediately preceding sentence. The party making any such reimbursement
pursuant to the provisions of this Section 8.2.4(a) shall be deemed to
have made such payment to the ultimate recipient of the payment.
(b) The Buyer and the Seller agree that all sales and
use taxes, if any, payable in connection with this Agreement and the
transactions hereby contemplated, shall be paid by the Seller.
(c) The Buyer and the Seller agree that no insurance
policies are to be prorated and that the Buyer will procure or maintain
its own insurance with respect to the Branch effective as of the
Closing Date.
8.2.5 Adjustment of Assumption Price. The Buyer and the Seller
acknowledge and agree that the payment of the Assumption Price at the Closing
pursuant to Section 7.2.4 will be based on pre-Closing amounts of the Deposits,
Loans, cash on hand, etc. Within five (5) Business Days after the Closing Date
the Buyer and the Seller shall re-calculate the Assumption Price in accordance
with Section 3.1 and Schedule 1, utilizing final amounts for the Deposits,
Loans, cash on hand, etc. as of the Closing Date. Any balance or refund due to
the Buyer or to
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the Seller, respectively, shall be paid in the manner directed by the recipient
on the next Business Day.
8.2.6 Other Transitional Matters. The Buyer and the Seller
agree to cooperate with respect to all transitional matters to effect the
orderly transfer fo the business of the Branch, including taking the actions
outlined in Exhibit I.
ARTICLE IX
REMEDIES
9.1 Termination
(a) Notwithstanding any provision to the contrary herein, and
notwithstanding the fact that the shareholders of the Buyer may have
approved this Agreement, this Agreement may be terminated at any time
at or prior to the Closing Date: (i) by mutual written agreement
authorized by the boards of directors of the Seller and the Buyer; (ii)
by either the Seller or the Buyer if the Closing shall not have taken
place prior to March 31, 1998; (iii) by the Seller if (a) any of the
conditions set forth in Sections 6.1 or 6.3 shall not have been
fulfilled on or prior to the Closing Date or shall become incapable of
fulfillment by such date; or (b) a Claim of the type referred to in
Section 6.1.5 shall have been instituted; and (iv) by the Buyer if (a)
any of the conditions set forth in Sections 6.1 or 6.2 shall not have
been fulfilled on or prior to the Closing Date or shall become
incapable of fulfillment by such date; or (b) a Claim of the type
referred to in Section 6.1.5 shall have been instituted.
(b) If any party hereto breaches or defaults any
representation, warranty, covenant or agreement made by it hereunder in
any material respect, the non-defaulting party may, on or before the
Closing Date, give notice of termination of this Agreement in the
manner provided in Section 10.1. Such notice shall specify with
particularity the breach or default upon which such notice is based,
and termination shall be effective ten (10) Business Days after the
date of such notice unless the specified breach or default has been
cured on or before such effective date. Notwithstanding anything to the
contrary herein, no party hereto shall have the right to terminate this
Agreement on account of its own breach or because of any non-material
breach by any party hereto of any of its or their covenants,
agreements, representations, warranties, duties or obligations
hereunder.
9.2 Litigation Costs. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of its provisions,
the successful or prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in such action or proceeding, in
addition to any other relief to which it may be entitled. The Seller shall
defend, hold harmless and pay to the Buyer the amount of any damages, costs or
expenses with respect to any Claim arising out of a condition, transaction or
event with respect to the Branch occurring on or before the Closing Date,
provided, however, that the Seller shall not be required to so defend, hold
harmless or pay if said Claim is based upon a liability or obligation which the
Buyer expressly has assumed in writing, whether pursuant to this Agreement or
otherwise. The Buyer shall defend, hold harmless and pay to the Seller the
amount of any damages, costs or expenses with respect to any Claim arising out
of a condition, transaction or event with respect to the Branch occurring after
the Closing Date; provided, however, that the Buyer shall not be required to so
defend, hold harmless or pay if said claim is based upon a liability or
obligation which the Seller has retained, whether pursuant to this Agreement or
otherwise.
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ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Notices. All notices, requests, demands, waivers or other
communications hereunder must be in writing and shall be deemed given if
delivered personally or if sent by registered or certified mail, return receipt
requested, proper postage prepaid, to the parties at the following addresses or
at such other addresses as may be specified by a like notice:
If to the Buyer: Valley Independent Bank
1498 Main Street
El Centro, California 92243
Attention: Dennis L. Kern,
President and CEO
With a copy to: Horgan, Rosen, Beckham & Coren, LLP
21700 Oxnard Street, Suite 1400
Woodland Hills, California 91365-4335
Attention: S. Alan Rosen, Esq.
If to the Seller: Palm Desert National Bank
73-745 El Paseo
Palm Desert, California 92260
Attention: Kevin B. McGuire,
President and CEO
With a copy to: Horgan, Rosen, Beckham & Coren, LLP
21700 Oxnard Street, Suite 1400
Woodland Hills, California 91365-4335
Attention: S. Alan Rosen, Esq.
10.2 Entire Agreement. This Agreement constitutes the entire agreement
between the parties pertaining to the subject matter hereof and supersedes any
and all prior and contemporaneous agreements, representations and understandings
of the parties with respect to the subject matter hereof. No supplement,
modification or amendment of this Agreement shall be binding unless executed in
writing by all of the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed, or shall constitute, a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing waiver. No
waiver shall be binding unless in a writing executed by the party making the
waiver.
10.3 Third-Party Rights. Nothing in the Agreement, whether expressed or
implied, is intended to confer any rights or remedies upon any persons other
than the parties hereto and their respective legal representatives, successors
and assigns; nor is any thing in this Agreement intended to relieve or discharge
the obligations or liabilities of any third persons to any party to this
Agreement; nor shall any provision hereof give any third person any right of
subrogation or action over against any party to this Agreement.
10.4 Successors and Assigns. This Agreement shall be binding on, and
shall inure to the benefit of, the parties hereto and their legal
representatives, successors and assigns; provided, however, that no assignment
of this Agreement or any rights or obligations hereunder may be made by any
party hereto without the prior written consent of the other party and no
assignment by any party hereunder shall relieve said party of any of its
obligations or duties hereunder.
24
<PAGE> 31
10.5 Brokers. The parties hereby represent and warrant to each other
that all negotiations relating to this Agreement have been carried on between
and on behalf of the Buyer and the Seller directly, without the intervention of
any agent or broker, and each party hereby agrees to indemnify the other party
and hold it harmless from and against any claims for any commissions relating to
this Agreement or to the transactions contemplated hereby resulting from any
actions by such indemnifying party.
10.6 Survival of Warranties and Obligations. All statements,
certifications, indemnifications, representations and warranties made herein by
the parties to this Agreement, and their respective covenants, agreements and
obligations to be performed pursuant to the terms hereof, shall survive the
Closing Date, notwithstanding any examination by or on behalf of any party
hereto, notwithstanding any notice of a breach or of a failure to perform not
waived in writing and notwithstanding the consummation of the transactions
hereby contemplated with knowledge of such breach or failure.
10.7 Severability. If any provision of this Agreement, as applied to
any party or to any circumstance, shall be adjudged by a court to be void,
invalid or unenforceable, the same shall in no way affect any other provision of
this Agreement, the application of any such provision in any other circumstance,
or the validity of enforceability of the other provisions of this Agreement.
10.8 Expenses. Except as otherwise specifically provided herein, all
expenses incurred by the Buyer in connection with this Agreement shall be paid
and discharged by the Buyer and all expenses incurred by the Seller in
connection with this Agreement shall be paid and discharged by the Seller and
none of the Seller's expenses in connection herewith shall be charged to the
Branch.
10.9 Counterparts. The Agreement may be executed simultaneously or in
one or more counterparts, each of which may be deemed an original, but all of
which together shall constitute one and the same instrument, it not being
necessary in making proof of this Agreement to produce or account for more than
one counterpart executed by each party hereto.
10.10 Headings and Construction. All section headings are included only
for convenience and are not intended to be a full and accurate description of
the contents of the Sections hereof and in no way limit, define or describe the
scope or intent of this Agreement or any provision hereof.
10.11 Governing Law. This Agreement shall be construed in accordance
with, and governed by, the laws of the State of California.
10.12 Indemnification. The Buyer and the Seller each agree to indemnify
and hold harmless the other and its affiliates and their officers, directors,
agents, servants and employees from and against any and all claims, actions,
demands, enforcement proceedings, causes of action, damages, liabilities,
expenses (including, without limitation, reasonable attorney's fees), costs and
fines which may be incurred, suffered, sustained or paid arising out of or
related to the breach by either the Buyer or the Seller, as the case may be, of
any representation, warranty, covenant or agreement in this Agreement. Without
limiting the generality of the foregoing, each party shall promptly indemnify
and hold harmless the other party for any liabilities assumed or retained by
such party in the event such liabilities are asserted against such other party.
25
<PAGE> 32
IN WITNESS WHEREOF, the Seller and the Buyer have cause this Agreement
to be executed in counterparts by their respective Presidents and Secretaries as
of the date first above written.
VALLEY INDEPENDENT BANK PALM DESERT NATIONAL BANK
By: /s/ Dennis L. Kern By: /s/ Kevin B. McGuire
----------------------------- -------------------------------------
Dennis L. Kern, President Kevin B. McGuire, President
By: /s/ Charlotte Studer By: /s/ Doris Kainer
----------------------------- -------------------------------------
Charlotte Studer, Secretary Doris Kainer, Secretary
26
<PAGE> 1
EXHIBIT 13
SELECTED FINANCIAL DATA
The following table presents a summary of selected financial information
for the five years ended December 31, 1998. This financial information should be
read in conjunction with the Financial Statements and Notes thereto, included
elsewhere herein. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the accompanying Form 10-K Annual
Report.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME (000'S)
Total Interest Income $ 40,289 $ 32,419 $ 24,228 $ 21,776 $ 18,545
Total Interest Expense 12,248 10,421 7,128 5,973 4,299
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 28,041 21,998 17,100 15,803 14,246
Provision for Credit Losses 1,920 1,850 635 1,008 1,210
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After
Provision for Credit Losses 26,121 20,148 16,465 14,795 13,036
Non-Interest Income 5,310 5,791 3,107 2,519 2,493
Non-Interest Expense and Income Taxes 26,563 22,138 16,997 14,889 13,249
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 4,868 $ 3,801 $ 2,575 $ 2,425 $ 2,280
- ----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA(1)
Net Income Diluted(2) $ 0.58 $ 0.49 $ 0.35 $ 0.33 $ 0.33
Cash Dividends N/A N/A N/A N/A N/A
Book Value Per Share(1)(3) $ 5.62 $ 5.06 $ 3.77 $ 3.41 $ 2.93
Number of Shares used in
Income Calculations 8,367,054 7,744,310 7,455,978 7,377,045 6,962,770
STATEMENTS OF FINANCIAL CONDITION
(at End of Period) (000's)
Total Assets $ 546,785 $ 444,167 $ 333,565 $ 257,465 $ 226,031
Total Deposits 470,792 399,212 304,576 230,533 204,491
Total Net Loans(4) 391,690 311,417 242,787 188,878 166,475
Allowance for Credit Losses 2,938 2,330 2,634 2,024 2,494
Total Investments 100,443 69,287 36,522 39,393 19,194
Shareholders' Equity 45,843 40,254 27,040 23,678 19,853
OPERATING RATIOS
Total Net Loans to Total Deposits 83.20% 78.01% 79.88% 81.93% 81.41%
Total Equity to Total Assets 8.38 9.06 8.11 9.20 8.78
Average Equity to Average Assets 8.91 7.55 9.27 9.30 9.11
Tier 1 Capital to Risk-Weighted Assets(5) 9.01 9.83 8.76 11.64 10.61
Total Capital to Risk-Weighted Assets(5) 9.65 10.47 9.69 12.65 11.93
Income on Average Equity 11.41 12.83 10.24 11.13 12.07
Income on Average Total Assets 1.02 0.97 0.95 1.04 1.09
Total Interest Expense to Total Interest
Income 30.40 32.11 29.38 27.43 23.18
Allowance for Credit Losses to Total Loans 0.74 0.74 1.07 1.06 1.48
Dividend Payment Ratio N/A N/A N/A N/A N/A
</TABLE>
- ----------
(1) These figures have been adjusted retroactively to reflect previous stock
dividends and the 1994, 1995, 1997 and 1998 stock splits.
(2) Diluted net income per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
(3) "Book value per share" is defined as total capital divided by the number
of shares outstanding at the end of the period.
(4) "Total net loans" is defined as total loans net of unearned discount,
net of deferred fees and the allowance for credit losses.
(5) As defined under regulatory guidelines.
N/A - Not Applicable
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
NAME STATE OF INCORPORATION
- ---- ----------------------
Bank of Stockdale, F.S.B. California
Valley Independent Bank California
Valley Capital Trust Delaware
120
<PAGE> 1
EXHIBIT 23
[VAVRINEK, TRINE, DAY & CO., LLP LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
Board of Directors and Shareholders
VIB Corp
El Centro, California
We consent to the incorporation by reference in the Prospectus constituting
part of The Registration Statement of VIB Corp on Form S-8, registration number
333-50701, of our report dated January 13, 1999, on our audit of the
consolidated balance sheets of VIB Corp as of December 31, 1998 and 1997, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998, which report is incorporated by reference in the 1998 Annual Report
on Form 10-K.
We also consent to the incorporation by reference in the Prospectus
constituting part of The Registration Statement of VIB Corp on Form S-4,
registration number 333-43021, of our report dated January 13, 1999, on our
audit of the consolidated balance sheets of VIB Corp as of December 31, 1998
and 1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998, which report is incorporated by reference in the 1998
Annual Report on Form 10-K.
/s/ Vavrinek, Trine, Day & Co., LLP
March 16, 1999
Laguna Hills, California
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 27,891,537
<INT-BEARING-DEPOSITS> 422,619
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 100,443,472
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 391,689,518
<ALLOWANCE> (2,937,983)
<TOTAL-ASSETS> 546,785,223
<DEPOSITS> 470,792,198
<SHORT-TERM> 25,000,000
<LIABILITIES-OTHER> 2,264,156
<LONG-TERM> 2,886,342
0
0
<COMMON> 39,788,073
<OTHER-SE> 6,054,454
<TOTAL-LIABILITIES-AND-EQUITY> 546,785,223
<INTEREST-LOAN> 35,216,295
<INTEREST-INVEST> 4,729,626
<INTEREST-OTHER> 343,332
<INTEREST-TOTAL> 40,289,253
<INTEREST-DEPOSIT> 11,650,772
<INTEREST-EXPENSE> 597,336
<INTEREST-INCOME-NET> 28,041,145
<LOAN-LOSSES> 1,920,000
<SECURITIES-GAINS> 489,323
<EXPENSE-OTHER> 23,853,816
<INCOME-PRETAX> 7,577,746
<INCOME-PRE-EXTRAORDINARY> 7,577,746
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,868,441
<EPS-PRIMARY> 0.610
<EPS-DILUTED> 0.580
<YIELD-ACTUAL> 9.51
<LOANS-NON> 3,918,246
<LOANS-PAST> 80,697
<LOANS-TROUBLED> 3,940,201
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,330,000
<CHARGE-OFFS> 1,487,659
<RECOVERIES> 175,642
<ALLOWANCE-CLOSE> 2,937,983
<ALLOWANCE-DOMESTIC> 2,937,983
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
