<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[X] Quarterly report pursuant to under Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended June 30, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________________ to ___________________
Commission File Number: 333-43021
VIB Corp
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 33-0780371
- ----------------------------------------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.)
</TABLE>
1498 MAIN STREET, EL CENTRO, CALIFORNIA 92243
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(760) 337-3200
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, it changed since
Last Report)
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 10,856,068 shares as of July
31, 1999.
1
<PAGE> 2
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following Consolidated Balance Sheets, Consolidated Statements of Income,
Consolidated Statements of Cash Flows, and Consolidated Statement of
Stockholders' Equity for the period ended June 30, 1999 have been prepared by
VIB Corp (the "Company") without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and changes in
financial condition at or for the period ended June 30, 1999 have been made. The
results of operations for the period ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the full year.
2
<PAGE> 3
Part 1. - Financial Information
Item 1. - Financial Statements
VIB CORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30,1999 and December 31,1998
(Unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 42,305,387 $ 32,058,948
Federal funds sold 2,387,304 3,249,316
------------- -------------
Total cash and cash equivalents 44,692,691 35,308,264
Interest bearing deposits 739,244 722,559
Investment Securities (note B) 181,223,581 125,058,559
Loans: (note C)
Commercial 93,977,468 72,319,129
Agricultural 41,582,197 44,331,588
Real estate-construction 79,863,377 61,679,821
real estate-other 314,122,504 276,303,688
Consumer 47,193,441 46,719,192
------------- -------------
Total Loans 576,738,987 501,353,418
Net deferred loan fees (3,115,748) (3,524,697)
Allowance for credit losses (5,041,205) (4,296,414)
------------- -------------
Net Loans 568,582,034 493,532,307
Premises and equipment 12,335,000 12,426,157
Other real estate owned 643,397 1,071,064
Cash surrender life insurance 7,833,848 8,642,738
Deferred tax asset 5,236,699 3,175,915
Intangible assets 5,904,929 5,010,833
Accrued interest and other assets 8,517,567 6,279,864
------------- -------------
TOTAL ASSETS $ 835,708,990 $ 691,228,260
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
VIB CORP AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30,1999 and December 31,1998
(Unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 158,352,989 $ 162,393,380
Money Market and NOW 137,313,927 142,157,859
Savings 76,211,379 55,148,291
Time deposits under $100,000 182,173,063 124,436,631
Time deposits $100,000 and over 121,478,486 115,522,088
------------- -------------
Total Deposits 675,529,844 599,658,249
Fed funds purchased 63,500,000 25,000,000
Capital lease obligations 2,907,591 2,886,342
Company-obligated mandatorily redeemable
Capital Securities of subsidiary trust holding
solely Subordinated Debentures of the Company 22,400,000 -
Other Borrowings 11,500,000 4,000,000
Accrued interest and other liabilities 4,138,495 4,081,523
------------- -------------
Total Liabilities 779,975,930 635,626,114
Stockholders' Equity:
Preferred shares, no par value;
10,000,000 shares authorized;
issued 0 shares in 1999 and 1998 - -
Common shares,no par value, Authorized
25,000,000 in 1999 and 1998,
Outstanding: 10,855,499 in 1999 and
10,828,949 in 1998 53,615,245 50,445,799
Undivided Profits 4,401,834 5,052,917
Accumulated other comprehensive
income, net of tax of ($1,590,830) in
1999 and $71,437 in 1998 (2,284,019) 103,430
------------- -------------
Total Stockholders' Equity 55,733,060 55,602,146
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 835,708,990 $ 691,228,260
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
VIB CORP AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Six Month
Periods Ended Periods Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans $13,050,330 $10,719,634 $24,858,406 $20,784,545
Interest on Investment Securities-Taxable 1,834,827 1,222,412 3,511,071 2,502,199
Interest on Investment Securities-Nontaxable 634,018 268,626 1,172,880 511,340
Other Interest Income 73,179 69,517 467,791 183,949
----------- ----------- ----------- -----------
Total Interest Income 15,592,354 12,280,189 30,010,148 23,982,033
Interest Expense:
Interest on Money Market and NOW 814,696 774,393 1,664,380 1,471,364
Interest on Savings Deposits 399,431 298,397 798,594 579,132
Interest on Time Deposits 3,833,127 3,086,476 7,663,968 6,077,860
Interest on Other Borrowings 1,183,748 154,991 1,760,934 288,547
----------- ----------- ----------- -----------
Total Interest Expense 6,231,002 4,314,257 11,887,876 8,416,903
----------- ----------- ----------- -----------
Net Interest Income 9,361,352 7,965,932 18,122,272 15,565,130
Provision for Credit Losses 675,000 660,000 1,350,000 1,365,000
----------- ----------- ----------- -----------
Net Interest Income after Provision for Credit Losses 8,686,352 7,305,932 16,772,272 14,200,130
Non-interest Income:
Service Charges and Fees 1,192,229 1,107,480 2,171,228 2,272,838
Gain on Sale of Loans and Servicing Fees 427,410 470,049 859,152 732,563
Gain on Sale of Securities 6,251 - 6,251 -
Other Income 115,713 251,771 187,942 379,834
----------- ----------- ----------- -----------
Total Non-interest Income 1,741,603 1,829,300 3,224,573 3,385,235
Non-interest Expense:
Salaries and Employee Benefits 3,784,067 3,482,588 7,724,813 6,779,710
Occupancy Expenses 654,548 592,279 1,298,809 1,140,952
Furniture and Equipment 594,743 567,773 1,212,881 1,126,065
Other Expenses (note D) 2,816,256 2,446,183 5,953,907 4,785,639
----------- ----------- ----------- -----------
Total Non-interest Expense 7,849,614 7,088,823 16,190,410 13,832,366
----------- ----------- ----------- -----------
Income Before Income Taxes 2,578,341 2,046,409 3,806,435 3,752,999
Income Taxes 849,710 685,467 1,413,596 1,232,620
----------- ----------- ----------- -----------
Net Income $ 1,728,631 $ 1,360,942 $ 2,392,839 $ 2,520,379
Per Share Data: (note E)
Net Income - Basic $ 0.16 $ 0.13 $ 0.22 $ 0.24
Net Income - Diluted $ 0.16 $ 0.12 $ 0.22 $ 0.23
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
VIBCORP AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Shares Accumulated
------------------------------ Other
Number of Undivided Comprehensive
Shares Amount Profits Income Total
------------- ------------ ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance January 1,1998 (note F) 10,089,580 $ 46,590,570 $ 3,170,790 $ 252,269 $ 50,013,629
Comprehensive Income
Net income 4,868,441 4,868,441
Other comprehensive income
Unrealized gains on securities, net
of taxes of $97,191 139,862 139,862
Less reclassification adjustments
for gains included in net income,
net of taxes of $200,622 (288,701) (288,701)
------------
Total other comprehensive income (148,839)
------------
Total Comprehensive income 4,719,602
Exercise of warrants 2,496 38,513 38,513
Cash dividends (27,693) (27,693)
Stock dividends 235,559 2,958,621 (2,958,621) 0
Exercise of stock options
Including the realization of
Tax benefits of $180,000 185,908 858,095 858,095
------------ ------------ ------------ ------------ ------------
Balance December 31,1998 10,513,543 50,445,799 5,052,917 103,430 $ 55,602,146
Comprehensive Income
Net income 2,392,839 2,392,839
Other comprehensive income
Unrealized losses on securities, net
of taxes of ($1,593,018) (2,383,386) (2,383,386)
Less reclassification adjustments
for gains included in net income,
net of taxes of $2,188 (4,063) (4,063)
------------
Total other comprehensive income (2,387,449)
------------
Total Comprehensive income 5,390
Cash dividends (17,053) (17,053)
Stock dividend 314,480 3,026,870 (3,026,870) 0
Exercise of stock options 27,466 142,396 142,396
Exercise of stock warrants 10 180 180
------------ ------------ ------------ ------------ ------------
Balance at June 30, 1999 10,855,499 $ 53,615,245 $ 4,401,833 ($ 2,284,019) $ 55,733,059
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 7
VIBCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(in Thousands)
<TABLE>
<CAPTION>
For the Six-Month
Periods Ended
June 30,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flow from operating activities:
Net income $ 2,392,839 $ 2,520,379
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization (199,209) 308,965
Deferred income taxes (334,115) (2,832)
Provision for credit losses 1,350,000 1,365,000
Originations of loans held for sale (36,041,749) (28,430,928)
Proceeds from sale of loans 43,022,281 34,065,782
Net gain on loan sales and securitization (681,705) (529,205)
Gain on sale of other real estate owned (45,401) (170,169)
Net increase/(decrease) in cash surrender value of life insurance 808,890 (226,732)
Net realized gains in available for sale securities (6,251) -
Net amortization of premium/discount on available
for sale securities 123,410 94,573
Net change in accrued interest, other assets,
and other liabilities (2,332,091) 328,231
------------- -------------
Net cash provided by operating activities 8,056,899 9,323,064
Cash flow from investing activities:
Purchases of investment securities (79,782,082) (35,641,975)
Net cash received from purchase of branches 110,295,948 6,524,474
Proceeds from sales of other real estate owned 390,439 2,499,321
Proceeds from sales of investment securities 1,104,583 -
Proceeds from maturities of investment securities 18,281,201 31,784,980
Loans granted net of repayments (81,279,780) (39,000,588)
Premises and equipment expenditures (884,746) (1,510,597)
Net increase in interest bearing deposits (16,685) (369,000)
------------- -------------
Net cash used by investing activities (31,891,122) (35,713,385)
Cash flow from financing activities:
Net increase/(decrease) in demand deposits and savings (8,374,660) 16,982,477
Net increase/(decrease) in time deposits (26,953,462) 2,064,438
Net change in capitalized lease obligations 21,249 24,000
Net change in fed funds purchased 38,500,000 1,500,000
Net change in other borrowings 7,500,000 1,000,000
Proceeds from Capital Securities 22,400,000 -
Payments for dividends (17,053) (12,400)
Proceeds from exercise of stock options and warrants 142,576 238,000
------------- -------------
Net cash provided by financing activities 33,218,650 21,796,515
Net change in cash and cash equivalents $ 9,384,427 $ (4,593,806)
============= =============
Cash and cash equivalents:
Beginning of period $ 35,308,264 $ 45,757,468
End of period $ 44,692,691 $ 41,163,662
Supplemental disclosure of cash flow information:
(in Thousands)
Cash paid for interest expense $ 11,887 $ 7,560
Cash paid (received) for income taxes $ 1,764 $ 1,638
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 8
VIB CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(A) General
See note A of Notes to Financial Statements incorporated by reference in the
Company's 1998 Annual Report on Form 10-K for a summary of significant
accounting policies.
The unaudited financial statements included herein were prepared from the books
of the Company in accordance with generally accepted accounting principles and
reflect all adjustments which are, in the opinion of management, necessary to
provide a fair statement of the results of operations and financial position for
the interim periods. Such financial statements generally conform to the
presentation reflected in the Company's 1998 Annual Report to Stockholders, and
reflect adjustments that are solely of a normal, recurring nature. The current
interim periods reported herein are included in the fiscal year subject to
independent audit at the end of the year. The unaudited financial statements of
VIB CORP include the accounts of the Company and its wholly owned subsidiaries,
Valley Independent Bank, The Bank of Stockdale and Valley Capital Trust. All
significant intercompany accounts and transactions have been eliminated in the
consolidated financial statements. Certain items previously reported have been
reclassified to conform to the current period's classifications.
(B) Investment Securities
The Company's investment securities portfolio at June 30, 1999 had a net
unrealized loss of approximately $3,874,000, as compared with a net unrealized
gain of approximately $174,000 at December 31, 1998, a decrease during the six
months beginning January 1, 1999 of $4,048,000. The change for the period is
attributable to a rising interest rate environment and the recomposition of the
portfolio due to the application of funds received in the acquisition of the
Hemet branch of Fremont Investment and Loan.
INVESTMENT SECURITIES
JUNE 30, 1999
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
($ In 000's) Cost Gains Losses Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 573 $21 $ - $ 594
U.S. Govern & Agency Securities 78,272 - 2,056 76,216
State and Political Subd. 58,329 - 1,251 57,078
Mortgage-Backed Securities 39,085 - 588 38,497
Other Equity 8,839 - - 8,839
-------- --- ------ --------
$185,096 $21 $3,895 $181,224
</TABLE>
8
<PAGE> 9
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
($ In 000's) Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 550 $ 37 $ - $ 587
U.S. Government and
Agency Securities 44,384 114 133 44,365
State and Political Subd. 38,052 450 263 38,239
Mortgage-Backed Securities 35,870 98 129 35,839
Other Equity 6,029 - - 6,029
-------- ---- ---- --------
$124,885 $699 $525 $125,059
</TABLE>
Investment securities carried at approximately $122,878,000 and $72,237,000, at
June 30,1999 and December 31,1998, respectively, were pledged to secure public
deposits, bank advances and other purposes as required by law.
(C) Loans
The Company's loan portfolio consists primarily of loans to borrowers within
southern California, Bakersfield, Fresno (Central Valley), Las Vegas, Nevada and
Yuma, Arizona. Although the Company seeks to avoid concentrations of loans to a
single industry or based upon a single class of collateral, real estate and
agricultural associated businesses are among the principal industries in the
Company's market area. As a result, the Company's loan and collateral portfolio
are, to some degree, concentrated in those industries.
The Company also originates real estate related and farmland loans for sale to
governmental agencies and institutional investors. At June 30,1999 and December
31,1998 the Company was servicing approximately $111,387,000 and $121,628,000,
respectively, in loans previously sold.
A summary of the changes in the allowance for credit losses follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31,1998
------------- ----------------
<S> <C> <C>
($ In 000's)
Balance at beginning of year $4,296 $3,145
Additions to the allowance charged to expense 1,350 2,704
Recoveries on loans charged off 29 178
Loans charged off 634 1,731
------ ------
Balance at end of period $5,041 $4,296
</TABLE>
9
<PAGE> 10
A summary of nonperforming loans and assets follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31,1998
------------- ----------------
<S> <C> <C>
($ In 000's)
Non-accrual loans $ 5,134 $ 4,315
Loans 90 days past due and still accruing 255 567
---------- ----------
Total Nonperforming loans 5,389 4,882
Other Real Estate Owned 643 1,071
---------- ----------
Total nonperforming assets $ 6,032 $ 5,953
Nonperforming loans to total ending loans .93% .97%
Nonperforming assets to total loans and
Other Real Estate Owned 1.04% 1.18%
</TABLE>
(D) Other Expenses
Other expenses for the periods indicated are as follows:
<TABLE>
<CAPTION>
($ In 000's) June 30,1999 June 30,1998
------------ ------------
<S> <C> <C>
Data Processing $ 1,107 $ 745
Advertising 257 237
Legal and Professional 926 849
Regulatory Assessments 127 173
Insurance 112 111
Amortization of Intangibles 198 222
Office Expenses 1,005 877
Promotion 757 707
Merger Related 665 -
Other 800 865
---------- ----------
Total Other Expenses $ 5,954 $ 4,786
</TABLE>
(E) Earnings Per Share
Earnings per share are calculated based on the weighted average number of common
shares outstanding during each period as follows: 10,844,731 for the six months
ended June 30, 1999 and 10,644,097 for the six months ended June 30, 1998,
respectively; 10,847,810 for the three months ended June 30,1999 and 10,651,552
for the three months ended June 30,1998, respectively.
10
<PAGE> 11
Diluted earnings per share for the three month periods ended March 31,1999 and
1998, are computed by dividing net earnings by the weighted average common
equivalent shares outstanding during the respective periods. Common share
equivalents include dilutive common stock option share equivalents determined by
using the treasury stock method.
(F) Stockholders' Equity
On January 28,1999 the Bank of Stockdale, F.S.B., Bakersfield, California,
became the Company's wholly-owned subsidiary in a stock-for-stock merger
transaction pursuant to a definitive agreement entered into on September
15,1998. The Company issued 2,355,334 shares of its common stock for all of the
Bank of Stockdale's issued and outstanding shares of common stock. The Bank of
Stockdale continues to operate as a separate, wholly owned subsidiary under its
current name and federal savings bank charter. The merger was accounted for
utilizing the pooling of interests method of accounting and all prior period
financial information has been restated to reflect consolidated financial
information. The Bank of Stockdale's total stockholders' equity at the time of
purchase was $9,759,619.
(G) Supplemental Disclosure of Combined Results
The following table summarizes the separate results for the combined entities
for the periods shown prior to the merger with Bank of Stockdale:
<TABLE>
<CAPTION>
Six months Ended June 30,
(Dollars in Thousands) 1999 1998
-----------------------------
<S> <C> <C>
Interest and Noninterest Income:
The Company-Pre-merger $ 3,847 $ 21,462
Bank of Stockdale-Pre-merger 991 5,905
The Company-Post-merger 28,397 -
---------- ----------
Total $ 33,235 $ 27,367
Net Income:
The Company-Pre-merger $ 343 $ 2,055
Bank of Stockdale-Pre-merger (423) 465
The Company-Post-merger 2,473 -
---------- ----------
Total $ 2,393 $ 2,520
</TABLE>
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
This analysis is designed to provide a more complete understanding of the
material changes and trends related to the Company's financial condition,
results of operations, cash flow and capital resources. This discussion should
be read in conjunction with the attached Financial Statements included in Item
1, and the Company's Annual Report on Form 10-K. This document may contain
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. For a
discussion of factors that could cause actual results to differ, please see the
company's publicly available Securities and Exchange Commission filings,
including its annual report on Form 10-K for the year ended December 31, 1998
and particularly the discussion of risk factors within that document.
GENERAL
VIB Corp's financial performance through the second quarter of 1999 was
indicative of the execution of business plans that facilitate the Company's
strategic direction. Improvement in overall efficiency was evident in the
continued integration of VIB Corp's first quarter 1999 acquisition of Bank of
Stockdale, headquartered in Bakersfield, California and the acquisition by the
Company's subsidiary Valley Independent Bank of a branch located in Hemet,
California. In addition, strong credit quality and significant business demand
in the markets the Company serves contributed greatly to the first half results.
VIB Corp was incorporated on November 7, 1997 under the Laws of the State of
California at the direction of the Board of Directors of Valley Independent Bank
for the purpose of becoming a bank holding company. The holding company
organization was consummated on March 12, 1998, pursuant to a Plan of
Reorganization and Merger Agreement dated November 18, 1997, and each
outstanding share of Valley Independent Bank's Common Stock was converted into
one share of the Company's Common Stock and all outstanding shares of Valley
Independent Bank's Common Stock were transferred to the Company in a transaction
accounted for as a pooling of interests. Further, each outstanding warrant to
purchase Valley Independent Bank's Common Stock, issued in connection with the
Bank's 1997 unit offering, was converted into a warrant to purchase the
Company's Common Stock. As of June 30, 1999, there were 99,149 remaining
warrants outstanding with an exercise expiration date of October 29, 1999.
On January 28, 1999, VIB Corp acquired Bank of Stockdale, F.S.B., Bakersfield,
California, pursuant to an Agreement and Plan of Reorganization dated September
15, 1998. Bank of Stockdale 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.
12
<PAGE> 13
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 ratio 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 January 22, 1999 VIB acquired certain of the assets and assumed certain of
the liabilities of Fremont Investment & Loan's Hemet branch office, including
substantially all the deposits of the branch. 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. Goodwill arising from the transaction totaled
approximately $1,139,000.
In connection with the branch acquisition by Valley Independent Bank it was
anticipated that VIB would require additional capitalization. On December 19,
1998, the Company formed a wholly owned business trust subsidiary, Valley
Capital 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 interest in the Debentures owned
by the Trust.
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 investors is a private placement 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 is treated
as Tier 1 capital for regulatory purposes. $8.5 and $.5 million of the proceeds
have been used to increase Valley Independent Bank's and Bank of Stockdale's
respective capital, with the balance used for general corporate purposes.
The interest on the Capital Securities is 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.
Consolidated net income for the six months ended June 30, 1999, adjusted for
merger and related non-recurring costs, was $3.1 million or $.28 per share fully
diluted based upon average shares outstanding of 10,980,032. This compares with
net income of $2.5 million or $.23 per share fully diluted based upon the
average shares outstanding of 11,096,348 for the same period in 1998. After
merger and related non-recurring costs, net income for the period ending June
30, 1999 was $2.4 million or $.22 per share fully diluted.
13
<PAGE> 14
Net income for the three months ending June 30, 1999 was $1.7 million or $.16
per share fully diluted based upon average shares outstanding of 10,927,022.
This compared with net earnings of $1.4 million or $.12 per share fully diluted
based upon the average shares outstanding of 11,085,671 for the same period in
1998.
On March 23, 1999, the Board of Directors approved a 3% stock dividend for
shareholders of record on May 14, 1999. The dividend was paid on June 4, 1999.
All per share figures have been retroactively adjusted for this and previous
stock dividends and splits.
Total gross loans at June 30, 1999 were $573.6 million, which represented an
increase of $75.8 million or 15.2% from December 31, 1998. Since June 30, 1998,
total gross loans have increased $128.5 million or 28.9%.
Total deposits at June 30, 1999 increased $75.8 million or 12.6% from year-end
1998 to $675.5 million. This increase includes the assumption of deposits
acquired from Fremont Investment & Loan, discussed earlier, and the normal
seasonal deposit cycle experienced in the Imperial, Coachella and Central
Valleys as it relates to the local agricultural business cycle. Total deposits,
compared to June 30, 1998, and increased $121.0 million or 21.8%.
In future developments the Bank of Stockdale anticipates opening its fourth
branch location in Fresno, California during the late third quarter or early
fourth quarter of this year. Valley Independent Bank, during the third quarter,
anticipates opening business loan centers in Fresno and Riverside, California.
YEAR 2000 READINESS COMPLIANCE
Certain computer systems may not properly recognize date sensitive information
when the date changes to the year 2000 ("Y2K"). Computer systems that do not
properly recognize the year 2000 could generate erroneous data or cause the
system to fail. Those computer systems will have to be modified or replaced
prior to the year 2000 in order to remain functional.
VALLEY INDEPENDENT BANK
During 1996 VIB began the process of identifying and addressing issues
surrounding the year 2000 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 the Y2K
issue and VIB developed an implementation plan to bring VIB's systems into
compliance prior to the year 2000. 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, began the
implementation and validation of hardware and software upgrades, system
replacements, vendor certifications and other associated changes. Final
implementation, validation and certification of all internal systems were
14
<PAGE> 15
accomplished by June 30, 1999. Simultaneously, VIB has conducted an ongoing
evaluation for the impact of Y2K compliance on large corporate customers as well
as the third party vendors. As of June 1999, VIB has updated its assessment of
Y2K risk in this regard and has established a specific reserve of $800,000
within the general reserve for credit losses and liquidity policies to mitigate
this risk. The ongoing assessment on this risk is monitored on a monthly basis
with appropriate adjustments to reserves, as required. While management
considers the $800,000 in reserves adequate as of June 30, 1999, such amount is
subject to change based on an ongoing review. Consequently, the amount provided
at June 30, 1999, 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, and 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 $349,000 through June 30, 1999 and expects to spend
an additional $109,000 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
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.
15
<PAGE> 16
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.
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 obtaining 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" 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 originally identified 16 mission critical
systems that could be affected by Y2K issues. During the second quarter the
number of mission critical systems were analyzed and reduced to seven. To obtain
Y2K compliance for these mission critical systems, Stockdale has remediated or
replaced all such systems that have been determined not to be Y2K compliant.
Phase three of Stockdale's Y2K compliance program included the upgrading,
replacement and/or retirement of systems and testing. Stockdale first addressed
mission critical systems and then non-mission critical systems. This phase of
the Y2K compliance program was completed during the first six months of 1999.
For Stockdale's internal systems, necessary actions primarily consist of
upgrading computer hardware and equipment. Such hardware upgrades should be
completed by September 30, 1999. Stockdale estimates that 98% of its third party
software upgrades have been completed. Testing of updated or new systems is
ongoing. "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 June 30, 1999, Stockdale's testing of mission
critical systems was 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 and updated for new customers through June 30,
1999. In this regard a specific reserve of $80,000 within
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<PAGE> 17
the general reserve for credit losses was established in 1999. Evaluations of
other critical third parties were completed by June 30, 1999. No problems have
been identified to date. These evaluations will be followed with contingency
plans, which are ongoing and initially 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 and
contingency plan integration testing identify additional business functions at
risk. Such enhancements to existing plans will 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 cost of the Y2K
compliance program has been and will continue to be the reallocation of internal
resources for testing and for the purchase of computer hardware and, therefore,
does not represent incremental expense to Stockdale. The estimated value of
internal resources allocated to the Y2K compliance program and the cost of
computer hardware is approximately $281,000 of which approximately $231,000 had
been expended through June 30, 1999. 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.
NET INTEREST INCOME
Average interest earning assets totaled $717.4 million during the six months
ending June 30, 1999, an increase of $197.2 million or 37.9% compared to the
same period last year. All comparative areas of earning assets grew
significantly. This growth was highlighted by an increase in average total loans
of $108.4 million or 26.0% to $525.5 million. Average interest bearing
liabilities in the first six months of 1999 increased $178.3 million or 44.6% to
average $578.2 million as compared to the same period last year. During this
comparative period average interest bearing deposit categories increased $132.6
million or 33.7% to $526.6 million. Average borrowed funds increased $45.6
million or 763.6% to $51.6 million during the same time frame. These comparative
changes in average deposits and borrowed funds include the effects of the branch
acquisition and issuance of the Capital Securities, discussed earlier.
Interest income for the six-month period ending June 30, 1999 was $30.0 million,
an increase of $6.0 million or 25.1% compared to the first six months in 1998.
The increase in interest income was primarily the result of the volume increases
previously discussed. This increase was partially offset by a decreased interest
rate environment. The yield on interest earning assets decreased 86 basis points
to 8.44% for the six-month period ended June 30, 1999 from 9.30% for the
comparative period last year.
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<PAGE> 18
Interest expense increased $3.5 million or 41.2% during the six months ended
June 30, 1999 as compared to the same period last year. The increase in interest
expense was principally the result of volume increases in all interest-bearing
categories as well as a deposit mix shift towards the higher interest bearing
categories. This increase was partially impacted by a lower interest rate
environment. The cost of interest bearing funds decreased 9 basis points from
4.24% for the six-months ended June 30, 1998 to 4.15% for the six months ended
June 30, 1999.
Net interest income was $18.1 million for the six months ending June 30, 1999,
representing an increase of $2.5 million or 16.4% from the same period ended
June 30, 1998. The net interest spread, which represents the difference between
the rate earned on average interest earning assets and the rate paid on average
interest bearing liabilities decreased to 4.28% for the period ending June 30,
1999, compared to 5.05% for the same period in 1998. Net interest income as a
percentage of average interest earning assets, or the net interest margin,
decreased to 5.09% for the period ending June 30, 1999, compared to 6.03% for
the period ending June 30, 1998. A lower interest rate environment and a shift
in the deposit mix towards the higher interest bearing categories and the
issuance of the Capital Securities, offset by the relatively greater increases
in interest earning assets than in interest bearing liabilities and the greater
proportionate growth in loans, the highest yielding assets, were the primary
reasons for the comparative decrease in yield for both the net interest spread
and the net interest margin.
Interest income for the second quarter ended June 30, 1999 was $15.6 million,
which represented an increase of $3.3 million or 27.0% to the comparative period
ending June 30, 1998. Interest expense was $6.2 million for the three-month
period ending June 30, 1999, in increase or $1.9 million or 44.4% compared to
the same period in 1998. Net interest income during the second quarter ending
June 30, 1999 was $9.4 million, an increase of $1.4 million or 17.5% for the
comparative period ending June 30, 1998. The same factors affecting the first
six month periods also apply to the second quarter comparison of 1999 to 1998.
PROVISION FOR CREDIT LOSSES
The allowance for credit losses at June 30, 1999 was $5.0 million, compared to
$3.4 million at June 30, 1998, an increase of $1.6 million or 46.8%. As a
percent of total loans, the allowance was .88% at June 30, 1999, compared to
.77% at June 30, 1998 and .86% at December 31, 1998.
The provision for credit losses was $1.3 million for the first six months of
1999, compared with $1.4 million provided for the six months ended June 30,
1998, a decrease of 1.1%. The provision was $675,000 for the second quarter of
1999 compared to $660,000 for the second quarter of 1998, an increase of $15,000
or 2.3%
Total non-performing loans as of June 30, 1999 were $5.4 million as compared to
$3.2 million at June 30, 1998 with $4.9 million at December 31, 1998.
Non-performing loans increased $.5 million during the six months ended June 30,
1999.
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<PAGE> 19
Net charge-offs were $.6 million for the six months ended June 30, 1999. This
represents a decrease of $.4 million when compared to $1.0 million in net charge
offs for the same period in 1998. During the second quarter ending June 30,
1999, $.4 million was recorded in net charge-offs compared to $.9 million net
charge-offs in the second quarter of 1998.
The subsidiary banks have an established standard process for assessing the
adequacy of the allowance for credit losses. In addition to reviewing the
inherent risks of their respective loan portfolios, 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 individual loans with general allocations
assigned to the various loan categories. Loans classified by the subsidiary
bank's internal review or by the regulatory authorities are included in the
process of assessing the adequacy of the allowance for credit losses. This
process seeks to maintain an allowance level adequate to provide for potential
losses.
Management of the Company believes the consolidated allowance at June 30, 1999,
was adequate based on present economic conditions and its ongoing evaluation of
the risks inherent in the subsidiary banks' loan portfolios.
NON-INTEREST INCOME
Total non-interest income amounted to $3.2 million for the six months ended June
30, 1999 representing a decrease of $161,000 or 4.8% compared with the same
period in the prior year. A $102,000 decrease in service charges on deposits as
well as a $192,000 decrease in other income related to a one-time prior period
insurance recovery in 1998 and a $67,000 decrease in the gain on sale of other
real estate owned, partially offset by an increase of $127,000 in the gain on
sale of small business government guaranteed loans were the primary reasons for
the decrease in non-interest income.
Total other income for the second quarter of 1999 was $1.7 million, a decrease
of $ .1 million or 4.8% from the second quarter of 1998. The decrease resulted
from a $43,000 decrease in gains on the sale of Small Business Administration
loans and a $47,000 decrease in gains on sale of other real estate owned,
partially offset by a $85,000 increase in service charges on deposits and a
$6,000 increase in gains on the sale of investment securities.
NON-INTEREST EXPENSE
Total non-interest expense for the six months ended June 30, 1999 was $16.2
million, an increase of $2.4 million or 17.0% as compared to the same period in
1998. After adjusting for $.7 million in merger and one-time related expenses
non-interest expense for the six months ended June 30, 1999 was $15.5 million,
an increase of $1.7 million or 12.1%.
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<PAGE> 20
Salary expense during the six months ended June 30, 1999 was $5.9 million, an
increase of $.7 million or 14.1% over the comparable period in 1998. The growth
in salary expense is attributable to staffing additions related to the 1998 Palm
Springs, California branch acquisition from Palm Desert National Bank, the
previously discussed Hemet, California branch acquisition from Fremont
Investment & Loan, merit increases, paid commissions and performance incentives.
Employee benefits expense was $1.8 million for the period ending June 30, 1999,
an increase of $221,000 or 13.5% from the same period in the prior year. The
increase in benefits expense is attributable to the previously discussed
staffing additions, increased 401K and ESOP funding costs and increases in
medical insurance expense.
Occupancy expense was $1.3 million for the six month period ended June 30, 1999,
an increase of $.2 million or 13.8% as compared to the first six months in 1998.
Furniture and equipment expense was $1.2 million for the six month period ended
June 30, 1999, an increase of $.1 million or 7.7% from the same period in 1998.
These increases were primarily the result of the acquisitions previously
discussed, increased depreciation expense on planned additions to computer
hardware and software expenditures.
Other operating expense amounted to $5.9 million during the six-month period
ended June 30, 1999, an increase of $1.2 million or 24.4% from the same period
in the prior year. Increases in data processing as well as $682,000 in merger
and related non-recurring expenses were the primary causes for the increase in
this category.
For the second quarter of 1999, total non-interest expenses were $7.8 million,
an increase of $.8 million or 10.7% from $7.1 million for the second quarter of
1998. The increase in each category were for the same reasons as noted above for
the comparable six month periods with the exception of the merger costs
discussed previously.
INCOME TAXES
Income tax expense for the six months ending June 30, 1999 was $1.4 million as
compared with $1.2 million for the same period in 1998. The slight increase in
expense was primarily attributable to a $.7 million increase in taxable
operating income adjusted for $682,000 in non-tax deductible merger and related
non-recurring costs, offset by a decrease in the Company's adjusted effective
tax rate from 32.8% for the six months ended June 30, 1998 to 31.5% for the six
months ended June 30, 1999. The effective tax rate decrease was primarily the
result of increases in non-taxable investment interest income.
Income taxes for the second quarter were $.8 million, an increase of $.2 million
or 24.0% from the second quarter of 1998. The increase in expense was primarily
related to a $.5 million increase in the Company's taxable operating income
offset partially by a slight decrease in the effective tax rate from 33.5% for
the six months ended June 30, 1998 to 33.0% for the six months ended June 30,
1999. The effective tax rate decrease was primarily the result of a $.4 million
increase in non-taxable income from municipal securities.
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<PAGE> 21
CAPITAL RESOURCES
Total stockholders' equity as of June 30, 1999 was $55.7 million, which
represented an increase of $131,000 from December 31, 1998, and $3.7 million
from June 30, 1998. The increase since December 31, 1998 included $2.4 million
in net income and a $2.4 million decrease in the cumulative unrealized gain on
securities classified as available for sale. The increase since June 30, 1998
included $5.4 million in net income and a $2.5 million decrease in the
cumulative unrealized gain on securities classified as available for sale.
Under regulatory guidelines, capital adequacy is measured as a percentage of
risk-adjusted assets in which risk percentages are applied to assets on as well
as off the balance sheet. Tier 1 capital consists of common stock, a qualifying
percentage of the Capital Securities, and retained earnings and total capital
includes a portion of the allowance for credit losses. At June 30, 1999 the Tier
1 and total risk based capital ratios were 11.24% and 12.50% respectively,
compared to 9.44% and 10.09% respectively, at June 30, 1998. The current minimum
regulatory guidelines for Tier 1 and total risk-based capital ratios are 4.0%
and 8.0%, respectively. The leverage ratio, which is a measure of Tier 1 capital
to adjusted average assets, was 8.89% at June 30, 1999, compared to 7.81% at
June 30, 1998. The Company's leverage ratio also exceeds the current regulatory
minimum of 3.0%. Accordingly, the Company's capital ratios exceed all regulatory
minimums and support future planned growth, but may not be adequate to support
additional acquisitions.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The Company's consolidated liquidity position, enhanced by the Fremont
Investment & Loan branch acquisition, remained adequate to meet future
contingencies. At June 30, 1999 the Company had $75 million in net federal funds
purchased and FHLB advances outstanding. This compared to $.3 million in net
federal funds outstanding at June 30, 1998. Since December 31, 1998, net Federal
Funds purchased and FHLB advances have increased $46.0 million. The Company's
consolidated liquidity ratio at June 30, 1999 was 26.78%. This ratio represented
an increase from 22.15% at June 30, 1998 and an increase from 22.38% at December
31, 1998.
The Company's subsidiary banks' Asset/Liability Committees ("ALCO") function 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
existing and future funding commitments is the measure of liquidity. Liquidity
is also needed to meet borrowing needs, deposit withdrawals and asset growth.
The subsidiaries develop 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.
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<PAGE> 22
The subsidiaries' ALCO manage the interest rate sensitivity or repricing
characteristics of their assets and liabilities. The primary source of earnings
for the subsidiaries 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 and 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 Company's subsidiaries do not maintain a trading account for any class of
financial instrument nor do they engage in hedging activities or purchase
high-risk derivative instruments. Furthermore, the subsidiaries are not subject
to foreign currency exchange rate risk or commodity price risk.
In addition to gap measurement, the subsidiaries' ALCO are further responsible
for the measurement of interest rate risk, i.e., the risk of loss in value due
to changes in interest rates. The subsidiaries' ALCO monitor and consider
methods of managing interest rate risk by monitoring changes in net portfolio
value ("NPV") and net interest income under various interest rate scenarios. The
subsidiaries' ALCO attempts to manage the various components of their respective
balance sheets to minimize the impact of sudden and sustained changes in
interest rates on NPV and net interest income.
The subsidiary banks' exposure to interest rate risk is reviewed on a periodic
basis by their respective Boards 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.
The subsidiary banks utilize interest rate sensitivity analysis to measure
interest rate risk by computing estimated changes in NPV of its cash flows from
assets and liabilities within 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 three hundred basis points. The subsidiary banks' Boards of
Directors have adopted interest rate risk policies, which establish a maximum
limit of decrease in the NPV in the event of sudden and sustained
22
<PAGE> 23
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 June 30, 1999 and Bank of Stockdale's as of March 31, 1999.
VALLEY INDEPENDENT BANK
Change in Net Portfolio Value
at June 30, 1999
<TABLE>
<CAPTION>
NET PORTFOLIO ACTUAL PERCENTAGE
CHANGE IN INTEREST RATES VALUE CHANGE CHANGE
------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C>
300 basis point rise $50,844 $(18,358) -26.53%
200 basis point rise 55,907 (13,295) -19.21%
100 basis point rise 61,560 (7,642) -11.04%
Base Rate Scenario 69,202 - -
100 basis point decline 75,114 5,912 8.54%
200 basis point decline 78,620 9,418 13.61%
300 basis point decline 83,390 14,188 20.50%
</TABLE>
Change in Net Interest Income
at June 30, 1999
<TABLE>
<CAPTION>
NET INTEREST ACTUAL PERCENTAGE
CHANGE IN INTEREST RATES INCOME CHANGE CHANGE
------------ ------------ ------------
<S> <C> <C> <C>
(Dollars in Thousands)
300 basis point rise $30,478 $(1,737) -5.39%
200 basis point rise 31,080 (1,135) -3.52%
100 basis point rise 31,667 (548) -1.70%
Base Rate Scenario 32,215 - -
100 basis point decline 32,496 281 0.87%
200 basis point decline 31,459 (756) -2.35%
300 basis point decline 30,450 (1,765) -5.48%
</TABLE>
BANK OF STOCKDALE
Change in net Portfolio Value
at March 31, 1999
<TABLE>
<CAPTION>
NET INTEREST ACTUAL PERCENTAGE
CHANGE IN INTEREST RATES INCOME CHANGE CHANGE
------------ ------------ ------------
<S> <C> <C> <C>
(Dollars in Thousands)
300 basis point rise $ 7,788 $(5,401) -40.95%
200 basis point rise 9,686 (3,503) -26.56%
100 basis point rise 11,561 (1,628) -12.34%
Base Rate Scenario 13,189 - -
100 basis point decline 14,813 1,624 12.31%
</TABLE>
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<PAGE> 24
<TABLE>
<S> <C> <C> <C>
200 basis point decline 16,452 3,263 24.74%
300 basis point decline 18,455 5,266 39.93%
</TABLE>
Change in Net Interest Income
at March 31, 1999
<TABLE>
<CAPTION>
NET INTEREST ACTUAL PERCENTAGE
CHANGE IN INTEREST RATES INCOME CHANGE CHANGE
------------ ------------ ------------
<S> <C> <C> <C>
(Dollars in Thousands)
300 basis point rise $6,881 $(192) -2.71%
200 basis point rise 7,024 (49) -0.69%
100 basis point rise 7,119 46 0.65%
Base Rate Scenario 7,073 - -
100 basis point decline 7,157 84 1.19%
200 basis point decline 7,107 34 0.48%
300 basis point decline 7,045 (28) -0.40%
</TABLE>
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.
At June 30, 1999 the Company had adequate liquidity to meet its anticipated
funding needs.
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<PAGE> 25
INFLATION
The impact of inflation on a financial institution differs significantly from
that exerted on an industrial company, primarily because its assets and
liabilities consist largely of monetary items. The relatively low ratio of fixed
assets to total assets of 1.5% at June 30, 1999 reduces the potential for
inflated earnings resulting from understated depreciation changes. However,
financial institutions are affected by inflation's impact on non-interest
expenses, such as salaries and occupancy expense, and to some extent, by the
inflative impact on interest rates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information in response to this item is included in ITEM 2 - MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
25
<PAGE> 26
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
To the best of the Company's knowledge, there are no pending legal proceedings
to which the Company is a party and which may have a materially adverse effect
upon the Company's property or business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 29, 1999, the shareholders of the Company held their 1999 Annual
Meeting. At the Annual Meting the following directors were elected to the term
indicated:
TWO YEAR TERM VOTES FOR VOTES WITHHELD
- ------------- --------- --------------
Dennis Kern 8,319,484 120,833
THREE YEAR TERM
- ---------------
Richard D. Foss 8,319,494 137,196
Ronald A. (Rusty) Pedersen 8,337,550 119,140
Alice Helen Lowery Westerfield 8,337,091 119,599
The Shareholders also voted to readopt Article V(b) of the Company's Articles of
Incorporation, which provides for the range of directors.
The Annual Meeting was adjourned and reconvened on June 4, 1999. At the
reconvened Annual Meeting the shareholders voted to reapprove Article VII,
dealing with fair price protection, and Article VIII(h), dealing with the
classification of the board of directors. The votes on these three proposals
were as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON VOTES
--------- ------- ------- ---------
<S> <C> <C> <C> <C>
ARTICLE V(B) - RANGE OF DIRECTORS 7,403,677 192,255 860,758 -0-
ARTICLE VII - FAIR PRICE PROTECTION 7,178,084 211,476 106,745 1,541,131
ARTICLE VIII(H) - CLASSIFIED BOARD 6,782,866 570,889 143,204 1,540,477
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
26
<PAGE> 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are filed as a part of this report:
Regulation S-K
Exhibit No. Description Page
- --------------- ------------------------ ----
27 Financial Data Schedule 29
(b) Current Reports on Form 8-K:
During the quarter ended June 30, 1999 the Company did not file any Current
Reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIB CORP
Date: August 11, 1999
/s/ Dennis L. Kern
--------------------------------------
Dennis L. Kern,
President and Chief Executive Officer
/s/ Harry G. Gooding, III
--------------------------------------
Harry G. Gooding, III,
Executive Vice President
and Chief Financial Officer
27
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 42,305,387
<INT-BEARING-DEPOSITS> 739,244
<FED-FUNDS-SOLD> 2,387,304
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 177,365,837
<INVESTMENTS-CARRYING> 3,857,744
<INVESTMENTS-MARKET> 3,784,428
<LOANS> 568,582,034
<ALLOWANCE> (5,041,205)
<TOTAL-ASSETS> 835,708,990
<DEPOSITS> 675,425,079
<SHORT-TERM> 71,000,000
<LIABILITIES-OTHER> 4,243,260
<LONG-TERM> 29,307,591
0
0
<COMMON> 53,615,245
<OTHER-SE> 2,177,815
<TOTAL-LIABILITIES-AND-EQUITY> 835,708,990
<INTEREST-LOAN> 24,858,406
<INTEREST-INVEST> 4,683,951
<INTEREST-OTHER> 467,791
<INTEREST-TOTAL> 30,010,148
<INTEREST-DEPOSIT> 10,126,942
<INTEREST-EXPENSE> 1,760,934
<INTEREST-INCOME-NET> 18,122,272
<LOAN-LOSSES> 1,350,000
<SECURITIES-GAINS> 6,251
<EXPENSE-OTHER> 16,190,410
<INCOME-PRETAX> 3,806,435
<INCOME-PRE-EXTRAORDINARY> 3,806,435
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,392,839
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 8.00
<LOANS-NON> 5,134,000
<LOANS-PAST> 255,000
<LOANS-TROUBLED> 4,352,386
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,296,414
<CHARGE-OFFS> 634,243
<RECOVERIES> 29,034
<ALLOWANCE-CLOSE> 5,041,205
<ALLOWANCE-DOMESTIC> 5,041,205
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
