<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1996
---------------
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 number: 0-18202
-------
VALLICORP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0229483
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
8405 NORTH FRESNO STREET, FRESNO, CALIFORNIA 93720
-------------------------------------------------------
(Address of principal executive offices)
(209) 437-5700
--------------
(Registrant's telephone number, including area code)
NONE
----
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $.01 PAR VALUE
13,335,651 SHARES OUTSTANDING AS OF APRIL 24, 1996
THIS REPORT INCLUDES A TOTAL OF 31 PAGES
(Sequential numbering appears in lower right hand corner)
<PAGE>
INDEX
VALLICORP HOLDINGS, INC.
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
- - ------------------------------ ----
<S> <C>
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets-
March 31, 1996 and December 31, 1995.......................... 3
Unaudited Consolidated Statements of Income -
Three Months Ended March 31, 1996 and 1995.................... 4
Unaudited Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995.................... 5
Notes to Unaudited Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 12
PART II - OTHER INFORMATION
- - ---------------------------
Item 6. Exhibits and Reports on Form 8-K................................... 30
SIGNATURES.................................................................. 31
- - ----------
</TABLE>
Page 2
<PAGE>
VALLICORP HOLDINGS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
---------------------------
(RESTATED)
<S> <C> <C>
ASSETS
Cash and due from banks $ 76,783 $ 103,004
Federal funds sold 100,000 57,770
---------- ----------
Cash and cash equivalents 176,783 160,774
Loans held for sale 4,915 5,158
Securities:
Available for sale 200,438 249,586
Held to maturity (market value $23,464
in 1996 and $66,075 in 1995) 23,142 65,646
--------- ---------
Total securities 223,580 315,232
Loans 836,189 865,749
Allowance for loan losses (12,769) (14,986)
--------- ---------
Net loans 823,420 850,763
Accrued interest receivable 10,240 11,201
Premises and equipment, net 26,467 25,919
Other assets 18,640 17,744
--------- ---------
Total assets $1,284,045 $1,386,791
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing transaction accounts $ 264,628 $ 300,746
Interest-bearing transaction and
savings accounts 520,124 526,274
Certificates of deposit, $100,000 and over 125,906 136,284
Other time deposits 216,007 258,082
--------- ---------
Total deposits 1,126,665 1,221,386
Other liabilities 1,273 6,942
Federal funds purchased and repurchase agreements 8,674 10,410
Debt financing 20,909 20,932
--------- ---------
Total liabilities 1,157,521 1,259,670
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 5,000,000
shares, none issued - -
Common stock, $.01 par value; authorized 20,000,000
shares, issued and outstanding 13,309,353 shares in
1996 and 13,266,087 in 1995 133 133
Paid-in capital 84,559 84,135
Net unrealized securities losses, net of income taxes (1,773) (536)
Retained earnings 43,605 43,389
--------- ---------
Total stockholders' equity 126,524 127,121
--------- ---------
Total liabilities and stockholders' equity $1,284,045 $1,386,791
========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
Page 3
<PAGE>
VALLICORP HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
--------------------
(RESTATED)
<S> <C> <C>
INTEREST INCOME
Loans, including fees $20,475 $21,812
Securities 3,575 4,183
Federal funds sold and other 1,217 456
------ ------
Total interest income 25,267 26,451
INTEREST EXPENSE
Deposits 7,551 7,651
Debt financing 333 431
Other 125 52
------ ------
Total interest expense 8,009 8,134
------ ------
NET INTEREST INCOME 17,258 18,317
PROVISION FOR LOAN LOSSES 1,925 678
------- -------
Net interest income after provision
for loan losses 15,333 17,639
OTHER INCOME
Service charges on deposits 1,780 1,820
Other service charges and fees 648 419
Mortgage Banking 295 281
Gain (loss) on sale of securities 11 (71)
Other 447 475
----- -----
Total other income 3,181 2,924
OTHER EXPENSE
Salaries and employee benefits 6,390 6,679
Occupancy 1,574 1,387
Equipment and maintenance 1,199 1,062
Merger costs 4,576 -
Other 4,382 4,540
------ ------
Total other expenses 18,121 13,668
INCOME BEFORE INCOME TAXES 393 6,895
Income taxes 177 2,769
------ ------
NET INCOME $ 216 $ 4,126
======= =======
EARNINGS PER SHARE
Primary $ 0.02 $ 0.31
====== =====
Fully Diluted $ 0.02 $ 0.31
====== =====
DIVIDENDS PER SHARE PAID BY VALLICORP $ 0.10 $ 0.09
===== =====
</TABLE>
See notes to unaudited consolidated financial statements.
Page 4
<PAGE>
VALLICORP HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
-----------------------
(RESTATED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 216 $ 4 ,126
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for loan losses 1,925 678
Provision for losses on other real estate owned 275 125
Depreciation and amortization 1,680 1,447
Deferred income tax benefit - (16)
Originations of loans held for sale, net of principal collected (18,506) (6,541)
Proceeds from loan sales 18,987 6,638
Gain on sale of loans (238) (65)
Gain (loss) on sale of securities (11) 79
Gain (loss) on sale of other real estate owned (48) 26
Decrease in accrued interest receivable 497 903
Increase in other assets (4,761) (3,914)
(Decrease) in other liabilities (2,850) (1,310)
------ ------
Net cash (used in) provided by operating activities (2,834) 2,176
INVESTING ACTIVITIES
Proceeds from sales of available for sale securities - 6,594
Proceeds from maturities of available for sale securities 60,745 7,052
Purchases of available for sale securities (12,999) (32,038)
Proceeds from maturities of held to maturity securities 40,507 2,871
Net decrease in loans excluding loan participations and loans held for sale 23,333 17,197
Sales of loan participations 6,085 546
Purchases of premises and equipment (1,995) (1,198)
Proceeds from premises and equipment disposals 413 315
Proceeds from sale of other real estate owned 696 726
------ ------
Net cash provided by investing activities 116,785 2,065
FINANCING ACTIVITIES
(Decrease) increase in deposits (94,721) 8,209
Decrease in federal funds purchased and repurchase agreements (1,736) (5,500)
Principal payments on debt financing (2) (2)
Common stock issued under Dividend Reinvestment
Stock Purchase Plan 117 -
Cash paid for fractional shares in connection with mergers (4) -
Stock options exercised 290 222
Cash dividends (1,886) (913)
------- ------
Net cash (used in) provided by financing activities (97,942) 2,016
------- ------
Increase in cash and cash equivalents 16,009 6,257
Cash and cash equivalents at beginning of period 160,774 106,968
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $176,783 $113,225
======= =======
- - ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid $ 8,700 $8,042
Income taxes paid 13,222 1,978
Transfer of loans to other real estate 2,671 610
Transfer of securities from held to maturity to available
for sale in connection with merger 980 -
Conversion of subordinated notes into common stock 21 21
Financing sale of premises and other real estate 345 312
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to unaudited consolidated financial statements.
Page 5
<PAGE>
VALLICORP HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements
include the effect of the first quarter 1996 acquisitions of El Capitan
Bancshares, Inc. (El Capitan) and CoBank Financial Corporation (CoBank) which
were accounted for as poolings-of-interests. These financial statements include
the accounts of ValliCorp Holdings, Inc. (ValliCorp) and its subsidiary,
ValliWide Bank , hereinafter referred to as the "Company". Accordingly, the
financial information included in the consolidated financial statements and
notes thereto, present the combined results of operations of ValliCorp, El
Capitan and CoBank as if the merger had been in effect for all periods
presented. All significant intercompany balances and transactions have been
eliminated in consolidation.
These unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles on a basis consistent
with the accounting policies reflected in the audited consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995. They do not, however, include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. Refer to the Form 10-K for the year ended December 31,
1995 for additional information and the complete financial statements. In the
opinion of management, the unaudited interim consolidated financial statements
reflect all adjustments (all of which are of a normal, recurring nature)
necessary for a fair statement of the results for the interim periods presented.
Operating results for the interim periods presented are not necessarily
indicative of the results that may be expected for any other interim period or
for the year as a whole.
RECLASSIFICATIONS: Certain reclassifications have been made to prior year
balances to conform to current year presentation.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS: The Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which was adopted by the Company effective January 1,
1996. SFAS No. 121 establishes standards for accounting for the impairment of
long-lived assets, certain identifiable intangibles and goodwill. It does not
apply to financial instruments, long-term customer relationships of a financial
institution (e.g., core deposit intangibles), mortgage and other servicing
rights, or deferred tax assets. The effect of adoption of this standard is not
material.
MORTGAGE SERVICING RIGHTS: The FASB issued SFAS No. 122, "Accounting for
Mortgage Servicing Rights," which was adopted by the Company effective January
1, 1996. SFAS No. 122 requires that the Company recognize as separate assets
rights to service mortgage loans for others, whether those servicing rights are
originated or purchased. Previously, only purchased servicing rights were
capitalizable as an asset whereas internally originated rights were expensed.
SFAS No. 122 also requires that capitalized servicing rights be assessed for
impairment based on fair value, rather than an estimate of undiscounted future
cash flows. The effect of adoption of this standard is not material.
Page 6
<PAGE>
VALLICORP HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING POLICIES - CONTINUED
ACCOUNTING FOR STOCK-BASED COMPENSATION: The FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." The new standard defines a fair
value method of accounting for stock options and other equity instruments, such
as stock purchase plans. Under this method, compensation cost is measured based
on the fair value of the stock award when granted and is recognized as an
expense over the service period, which is usually the vesting period. This
standard is effective for the Company beginning in 1996, and requires
measurement of awards made beginning in 1995.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net income and
earnings per share as if the company had applied the new method of accounting.
The Company will follow these disclosure requirements for its employee stock
plans. As a result, adoption of the new standard did not impact reported
earnings or earnings per share, and has no effect on the Company's cash flows.
NOTE B - MERGERS AND ACQUISITIONS
COMPLETED TRANSACTIONS
EL CAPITAN BANCSHARES, INC.: On February 2, 1996, El Capitan Bancshares, Inc.
together with its wholly-owned subsidiary, El Capitan National Bank, were merged
with and into ValliCorp Holdings, Inc. and its wholly-owned subsidiary,
ValliWide Bank, respectively. Pursuant to the amended Agreement and Plan of
Reorganization each outstanding share of El Capitan common stock was exchanged
for 2.3286 shares of ValliCorp's common stock resulting in approximately 2
million shares being issued. At the date of the merger, El Capitan had
unaudited total assets of $128 million, including $63 million in loans and $48
million in investment securities, and total unaudited liabilities of $113
million, including $112 million in deposits. The merger was accounted for as a
pooling-of-interests.
COBANK FINANCIAL CORPORATION: On March 22, 1996, CoBank Financial Corporation,
together with its wholly-owned subsidiary, Commerce Bank of San Luis Obispo,
N.A., were merged with and into ValliCorp Holdings, Inc. and its wholly-owned
subsidiary, ValliWide Bank, respectively. Pursuant to the amended Agreement and
Plan of Reorganization each outstanding share of CoBank common stock was
exchanged for 1.1875 shares of ValliCorp's common stock resulting in
approximately 1 million shares being issued. At the date of the merger, CoBank
had unaudited total assets of $97 million, including $64 million in loans and
$24 million in investment securities, and total unaudited deposits of $87
million. The merger was accounted for as a pooling-of-interests.
Page 7
<PAGE>
VALLICORP HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents net interest income, net income and earnings per
share for ValliCorp, El Capitan and CoBank and on a combined basis.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1995 1994
--------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
NET INTEREST INCOME:
ValliCorp $59,364 $54,422
El Capitan 6,849 7,503
CoBank 6,096 5,158
------ ------
Combined $72,309 $67,083
======= =======
NET INCOME:
ValliCorp $10,247 $ 7,794
El Capitan 1,044 1,882
CoBank 510 775
------ ------
Combined $11,801 $10,451
======= =======
FULLY-DILUTED EARNINGS PER SHARE:
ValliCorp $ 0.98 $ 0.75
El Capitan 1.22 2.21
CoBank 0.60 0.97
Combined 0.87 0.78
</TABLE>
PENDING TRANSACTION
AUBURN BANCORP: ValliCorp and Auburn Bancorp, Inc. ("Auburn") have entered into
an Agreement and Plan of Reorganization (the "Auburn Agreement") dated March 27,
1996, whereby ValliCorp has agreed to acquire the outstanding shares of Auburn
in a merger. Auburn, as of March 31, 1996, has three branches with total loans,
deposits and equity of approximately $55,000,000, $67,000,000 and $7,000,000,
respectively. Under the terms of the Auburn Agreement, Auburn shareholders will
receive 0.8209 shares of ValliCorp common stock for each share of Auburn common
stock. The Company expects to issue approximately 900,000 shares of ValliCorp
common stock at the completion of the merger with Auburn. The Auburn Agreement
calls for the merger of Auburn with and into ValliCorp, and the merger of
Auburn's subsidiary, Bank of Commerce, National Association, into ValliCorp's
subsidiary, ValliWide Bank. The Company anticipates that the merger will be
consummated in the third quarter 1996 and accounted for using the purchase
method. Completion of the merger is subject to, among other things, the
approval of Auburn's shareholders and regulatory authorities.
Page 8
<PAGE>
VALLICORP HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - SECURITIES
The amortized cost and approximate fair value of available for sale securities
are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ----- --------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities $51,368 $51,112 $55,507 $55,418
U.S. Government agencies 74,554 72,431 121,190 120,491
U.S. Government agency mortgage-
backed securities 53,709 52,127 50,681 49,545
State and political subdivisions 16,146 16,998 15,503 16,496
Corporate and other securities 7,771 7,770 7,521 7,636
------ ------ ------ ------
$203,548 $200,438 $250,402 $249,586
======= ======= ======= =======
</TABLE>
The amortized cost and approximate fair value of held to maturity securities are
as follows:
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ----- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 998 $ 986 $ 982 $ 996
U.S. Government agencies 2,603 2,587 42,579 42,535
U.S. Government agency mortgage-
backed securities 8,061 7,948 8,258 8,222
State and political subdivisions 11,480 11,943 13,827 14,322
------ ------ ------ ------
$23,142 $23,464 $65,646 $66,075
====== ====== ====== ======
</TABLE>
In connection with the CoBank merger, the Company transferred approximately
$980,000 of securities from the held to maturity portfolio to the available for
sale portfolio. This transfer was made in compliance with generally accepted
accounting principles, to maintain the Company's existing interest rate risk
position and credit risk policy.
Page 9
<PAGE>
VALLICORP HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - LOANS
Loans consist of the following as of the indicated dates:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Commercial $436,996 $443,660
Real estate - construction 79,919 74,720
Real estate - mortgage 117,875 136,278
Installment 196,418 205,869
Other 4,981 5,222
------- -------
836,189 865,749
Allowance for loan losses (12,769) (14,986)
------- -------
Net loans $823,420 $850,763
======= =======
</TABLE>
At March 31, 1996, the Company's recorded investment in loans for which an
impairment has been recognized totaled $8,225,000. Included in this amount is
$3,712,000 of impaired loans for which the related SFAS No. 114 allowance is
$1,898,000. The balance of the allowance for loan losses in excess of these
specific reserves is available to absorb losses from all loans, although
allocations have been made for certain loans and loan categories as part of
management's quarterly analysis of the allowance. The average recorded
investment in impaired loans was $10,484,000 for the first three months of 1996.
The Company uses the cash basis method of income recognition for impaired loans.
For the quarter ended March 31, 1996, the Company did not recognize any interest
income on such loans.
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1996 1995 1995
------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period $14,986 $14,130 $14,130
Provision for loan losses 1,925 678 9,633
Charge-offs (4,643) (381) (9,448)
Recoveries 501 243 671
------ ------ ------
Balance at end of period $12,769 $14,670 $14,986
====== ====== ======
</TABLE>
Page 10
<PAGE>
VALLICORP HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - ALLOWANCE FOR LOSSES ON OTHER REAL ESTATE OWNED
Changes in the allowance for losses on other real estate owned (OREO) are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1996 1995 1995
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning-of-period $ 496 $250 $ 250
Net charge-offs (630) (142) (689)
Provision for losses on other
real estate owned 275 146 935
----- ---- ----
Balance at end-of-period $ 141 $ 254 $ 496
==== ===== ====
</TABLE>
NOTE F - EARNINGS PER SHARE
The weighted average shares outstanding for the respective periods are
approximately:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
---- ----
(IN THOUSANDS)
<S> <C> <C>
Primary 13,452 13,472
Fully-diluted 13,463 13,521
</TABLE>
In April 1996, the Board of Directors approved a regular quarterly cash dividend
per share of $0.10, payable on May 28, 1996 to stockholders of record on May 10,
1996.
NOTE G - MERGER COSTS
Merger costs totaling $4,576,000 ($2,767,000 net of tax) were recorded in 1996.
Such costs were recorded in connection with the El Capitan and CoBank mergers.
Such costs related primarily to separation and benefit costs, professional,
legal and investment banking fees, facilities termination fees and other merger
related costs. Noncash expenses included in merger costs were not material.
Page 11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's strategy is to provide high quality, community tailored financial
services to businesses and consumers located in Central California. The Company
is continually seeking to increase its market share through the opening of new
branches in the communities it serves and through acquisitions of other
financial institutions and/or branches within its target market.
In the first quarter of 1996, the Company completed two acquisitions within its
target market, El Capitan Bancshares, Inc. (El Capitan) and CoBank Financial
Corporation (CoBank). El Capitan, located in Sonora, California, was an eight
branch bank holding company with assets of $128 million at the date of the
merger. CoBank, located in San Luis Obispo, California and serving the central
coast of California, was a four branch bank holding company with assets of $97
million at the date of the merger. Following these mergers, the Company will
cover a substantial portion of Central California through its franchise of 54
full-service banking offices.
The El Capitan and CoBank mergers were accounted for as poolings-of-interests
and, accordingly, the financial information included in the remainder of this
management's discussion and analysis of the consolidated financial condition and
results of operations presents the combined results of operations of ValliCorp,
El Capitan and CoBank as if the merger had been in effect for all periods
presented.
The Company achieved consolidated net income before merger costs for the three
months ended March 31, 1996 of $3 million , or $0.22 per share on a fully-
diluted basis, compared to $4.1 million, or $0.31 per share, for the same
quarter in 1995. Including the merger related charge of $4.6 million ($2.8
million after tax), the Company achieved net income of $216,000, or $0.02 per
share, for the first quarter of 1996. The first quarter of 1996 was
significantly impacted by an increased provision for loan losses as compared to
the corresponding period of the prior year (refer to "Nonperforming Assets").
Dividends per share increased by 11% to $0.10 as compared to $0.09 per share in
the first quarter of 1995.
At March 31, 1996, the Company's total risk-based capital and leverage ratios
were 14.16% and 9.75% compared to 13.40% and 8.76% at December 31, 1995,
respectively, all of which were in excess of applicable minimum regulatory
guidelines.
Page 12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW - CONTINUED
Nonperforming assets were $15,247,000 at March 31, 1996 (1.19% of total assets)
compared to $20,249,000 at December 31, 1995 (1.46% of total assets). The
allowance for loan losses as a percentage of total loans was 1.53% at March 31,
1996 compared to 1.73% at December 31, 1995. The coverage ratio (allowance for
loan losses divided by nonperforming loans) was 119%.
RESULTS OF OPERATIONS
Net income for the three months ended March 31, 1996 was impacted by merger
charges totaling $4.6 million ($2.8 million after tax, $0.20 per share) relating
to the El Capitan and CoBank mergers. Excluding the merger charges, net income
for the three months ended March 31, 1996 decreased by $1.1 million, or 27% as
compared to the same period in 1995. This decrease is primarily due to the
higher provision for loan losses of $1.9 million at March 31, 1996 as compared
to $678,000 at March 31, 1995. The increased provision is due to a significant
increase in net charge offs in the first quarter of 1996 related to previously
identified problem loans (refer to "Allowance for Loan Losses").
Page 13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the distribution of average assets, liabilities and
stockholders' equity as well as the total dollar amount of interest income from
average interest-earning assets and resultant yields, and the dollar amounts of
interest expense and average interest-bearing liabilities, expressed both in
dollars and in rates.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1996 1995
-------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE INTEREST BALANCE RATE INTEREST
-------------------------------------------------------------------
ASSETS: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans/(1) (3)/ $ 825,395 9.98% $20,475 $857,357 10.32% $21,812
Securities/(2)/ 248,333 5.79 3,575 297,647 5.70 4,183
Federal funds sold and other 87,024 5.62 1,217 30,470 6.02 456
------- ---- ------- -------- ----- ------
Total interest-earning assets 1,160,752 8.75 25,267 1,185,474 9.05 26,451
Allowance for loan losses (14,735) (14,464)
Noninterest-bearing assets:
Cash and due from banks 85,703 86,668
Premises and equipment, net 26,505 25,011
Accrued interest receivable 10,008 9,704
Other assets 32,428 29,416
------- -------
Total average assets $1,300,661 $1,321,809
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Transaction accounts $ 349,883 2.07% $ 1,803 $404,466 2.39% $ 2,381
Savings accounts 170,231 2.62 1,107 122,928 2.21 671
Certificates of deposit 349,626 5.34 4,641 371,215 5.02 4,599
Debt financing 20,909 6.41 333 26,100 6.70 431
Short-term borrowings 9,875 5.09 125 4,112 5.33 52
------- ---- ------- ------- ---- ------
Total interest-bearing liabilities 900,524 3.58 8,009 928,821 3.55 8,134
Noninterest-bearing liabilities:
Transaction accounts 268,413 268,784
Other liabilities 3,634 4,861
------- ------
Total liabilities 1,172,571 1,202,466
Total stockholders' equity 128,090 119,343
--------- -------
Total average liabilities and
stockholders' equity $1,300,661 $1,321,809
========= =========
NET INTEREST INCOME $17,258 $18,317
====== ======
Interest income as a percentage
of average earning assets 8.75% 9.05%
Interest expense as a percentage
of average earning assets (2.78) (2.78)
----- -----
NET INTEREST MARGIN 5.97% 6.27%
===== =====
</TABLE>
/(1)/ Amount includes loans held for sale, but excludes nonaccrual loans.
/(2)/ Applicable nontaxable securities yields have not been presented on a
taxable-equivalent basis as the effect on net interest margin is not
significant. Tax equivalent yields on investment securities were 6.21% and
6.09% at March 31, 1996 and 1995, respectively.
/(3)/ Interest income includes the amortization of net origination fees of
$145,000 and $473,000 for the period ended March 31, 1996 and 1995,
respectively.
Page 14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's primary source of revenue is net interest income, which is the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities. The Company's net interest margin is
influenced by competitive forces within its market area, the mix of its earning
assets and deposit base, interest reversals related to loans placed on
nonaccrual status and the changing interest rate environment. Net interest
income before provision for loan losses decreased $1,059,000 (6%) for the three
months ended March 31, 1996 compared to the corresponding period in 1995. As
summarized in the net interest income variance analysis on the following page,
this decline was comprised of a decrease in total interest income of $1,184,000
(4%) which was offset by a decrease in total interest expense of $125,000 (2%).
The Company's net interest margin (based on average earning assets) for the
three months ended March 31, 1996 decreased 30 basis points to 5.97% as compared
to March 31, 1995. The reduction in the net interest margin is primarily
attributable to a decline in interest rates and a change in the interest-earning
asset mix, such that the loan portfolio represents a declining portion of the
mix at March 31, 1996 as compared to the same period in 1995. This results in a
lower yield on earning assets.
Interest-earning Asset Mix:
(Percentage of average interest-earning assets)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 31, YEAR ENDED DECEMBER 31,
--------- -----------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loans 71% 72% 72% 68% 71%
Securities 21 25 23 30 25
Federal Funds sold and other 8 3 5 2 4
--- --- --- --- ---
Total earning assets 100% 100% 100% 100% 100%
=== === === === ===
</TABLE>
The Company's net interest income is affected by changes in the amount and mix
of interest-earning assets and interest-bearing liabilities, referred to as a
"volume change." It is also affected by changes in yields earned on interest-
earning assets and rates paid on interest-bearing deposits and other borrowed
funds, referred to as a "rate change." The following table sets forth changes
in interest income and interest expense for each major category of interest-
earning asset and interest-bearing liability, and the amount of change
attributable to volume and rate changes for the years indicated. The changes
due to rate and volume have been allocated to rate and volume in proportion to
the relationship between their absolute dollar amounts. The effects of tax-
equivalent yields have not been considered because they are not significant.
Page 15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1996 COMPARED TO 1995
-----------------------------------------
TOTAL RATE VOLUME
----- ---- ------
(IN THOUSANDS)
<S> <C> <C> <C>
NET INTEREST INCOME VARIANCE ANALYSIS:
Increase (decrease) in interest income:
Loans $(1,337) $(628) $(709)
Securities (608) 68 (676)
Federal funds sold 761 (35) 796
----- ----- -----
Total (1,184) (595) (589)
Increase (decrease) in interest expense:
Interest-bearing transaction accounts (578) (286) (292)
Savings accounts 436 140 296
Certificates of deposit 42 298 (256)
Debt financing (98) (18) (80)
Short-term borrowings 73 - 73
----- ---- -----
Total (125) 134 (259)
---- ---- ----
Decrease in net interest income $(1,059) $(729) $(330)
====== ==== ====
</TABLE>
The decrease in total interest income of $1,184,000 is comprised of a $589,000
volume decrease associated with the $24,722,000 decrease in average earning
assets for the three months ended March 31, 1996 compared to the same period in
1995 and a $595,000 rate decrease associated with a decrease in the total yield
on interest-earning assets to 8.75% for the three months ended March 31, 1996
from 9.05% for the same period in 1995. The slight decrease in total interest
expense of $125,000 at March 31, 1996 is comprised of a volume decrease of
$259,000 related to the $28,297,000 decrease in average interest-bearing
liabilities for the three months ended March 31, 1996 compared to the same
period of 1995 and a $134,000 rate increase associated with an increase in the
cost of funds to 3.58% for the three months ended March 31, 1996 from 3.55% for
the same period in 1995.
The average balance of securities decreased from $297,647,000 for the three
months ended March 31, 1995 to $248,333,000 for the three months ended March 31,
1996. This $49,314,000 decrease is primarily due to the maturity of securities
held for investment, as well as the sale of certain available for sale
securities for asset/liability management purposes.
Average loans decreased $31,962,000 to $825,395,000 for the three months ended
March 31, 1996. The decrease in the yield on loans from 10.32% for the three
months ended March 31, 1995 to 9.98% for the same period of 1996 reflects the
impact of declining interest rates in the first quarter of 1996 and increased
competition on loan pricing.
Page 16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Average deposits decreased $28,869,000 to $869,740,000 for the three months
ended March 31, 1996 due primarily to a planned reduction in high cost time
deposits. The interest rate paid on average deposits rose to 3.50% for the
three months ended March 31, 1996 compared to 3.45% for the same period of 1995.
A changing interest rate environment can have a significant impact on the
Company's net interest margin as measured against average earning assets and its
interest rate spread. Management continually monitors its net interest margin
by repricing its loan and deposit products after giving effect to such factors
as competition in the market place and expected maturities in the loan,
investment securities and deposit portfolios.
OTHER INCOME
Service charge income on deposits decreased slightly from last year primarily
due to a decrease in certain deposit accounts on which service charge income is
earned. Other service charges and fees increased principally due to revenues
generated from merchant services. The increase in mortgage banking revenue
compared to the same period of 1995 was due to an increase in refinancing
activity resulting from a more favorable interest-rate environment.
OTHER EXPENSE
The following table summarizes changes in other expense for the three months
ended March 31, 1996 as compared to the corresponding period in 1995:
<TABLE>
<CAPTION>
MARCH 31, CHANGE 1996 VS. 1995
---------------- --------------------
1996 1995 AMOUNT PERCENT
---- ---- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 6,390 $ 6,679 $(289) (4)%
Occupancy 1,574 1,477 97 7
Equipment and maintenance 1,199 1,106 93 8
Professional and legal fees 606 393 213 54
Amortization of intangible assets 390 435 (45) (10)
FDIC assessments 27 636 (609) (96)
Marketing 254 281 (27) (10)
Stationary and supplies 250 360 (110) (31)
Telephone 271 257 14 5
Data processing 533 153 380 248
Merchant credit card 303 117 186 159
OREO expense 313 227 86 38
Miscellaneous 1,435 1,547 (112) (7)
------ ------ ----- ---
Total other expenses before merger costs 13,545 13,668 (123) (1)
Merger costs 4,576 - 4,576 -
------ ------ ----- ---
Total other expenses $18,121 $13,668 $4,453 33%
====== ====== ===== ===
</TABLE>
Other expense totaled $18,121,000 in 1996, up $4,453,000, or 33%, compared to
the same period in 1995. Excluding, for comparative purposes, merger costs
totaling $4,576,000 in 1996, other expense in 1996 decreased $123,000, or 1%
compared to 1995. This decrease resulted primarily from decreases in salaries
and employee benefits and FDIC assessments, offset by an increase in
professional and legal fees and data processing expenses.
Page 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER EXPENSE - CONTINUED
The decrease in salaries and employee benefits of $289,000 (4%) is primarily
attributable to a reduction in FTE's related to the two recently completed
acquisitions and outsourcing of data processing functions. Effective June 1,
1995, the FDIC reduced premiums resulting in a decrease of $609,000 (96%) in
assessments for 1996. Professional and legal fees increased by $213,000 (54%)
principally related to outside legal collection services on nonperforming loans.
Data processing expenses increased $380,000 (248%) primarily related to
outsourcing part of the Company's data processing functions which was offset by
reduced personnel costs and related expenses.
Merger costs totaling $4.6 million ($2.8 million after taxes or $0.20 per
share) were recorded in 1996 in connection with the El Capitan and CoBank
mergers. Such costs relate primarily to separation and benefit costs,
professional, legal and investment banking fees, facilities termination costs
and other related merger costs. Noncash expenses included in merger costs were
not material.
The Company believes, as a result of the El Capitan and CoBank mergers,
anticipated cost savings of approximately $2.5 million is projected to be
achieved in future periods through consolidation of operations and elimination
of duplicate services. The timing and extent to which any additional operating
cost savings will be achieved depends on, among other things, the regulatory
environment and economic conditions and may be affected by unanticipated changes
in business activities, inflation and operating costs. Therefore, there can be
no assurance that any additional operating cost savings will be realized in full
or in part.
The efficiency ratio excluding merger charges, for the three months ended March
31, 1996 and 1995 was 66.27% and 64.35%, respectively. The increase in the
Company's efficiency ratio reflects in large part, on the reduction in the net
interest margin (refer to "Net Interest Income"). Other expenses for the first
quarter 1996 do not include the full impact of cost savings projected to be
realized during the remainder of the year as a result of the consolidation of
operations related to the two recently completed acquisitions are achieved.
BALANCE SHEET ANALYSIS
For the three months ended March 31, 1996, when compared to December 31, 1995
the Company's total loans, assets and deposits decreased by $29,560,000 (3%),
$101,058,000 (7%), and $94,721,000 (8%), respectively. Assets and deposits
decreased primarily from a planned reduction in high cost certificates of
deposits, as well as seasonal and merger-related decreases in deposits.
SECURITIES PORTFOLIO
Securities available for sale totaled $200,438,000 at March 31, 1996 compared to
$249,586,000 at December 31, 1995. Sales and maturities of U.S. Government
agency securities accounted for the majority of the decrease. Additionally, the
available for sale securities portfolio had net unrealized losses of
approximately 1.55% of the portfolio compared to approximately 0.33% at December
31, 1995, principally due to the rising interest-rate environment.
Page 18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Securities held to maturity totaled $23,142,000 at March 31, 1996, compared with
$65,646,000 at December 31, 1995. Maturities of U.S. Government agency
securities accounted for the majority of the decrease.
LOAN PORTFOLIO
The Company concentrates its lending activities in four principal areas:
commercial; real estate-construction; real estate-mortgage; and installment
loans. Interest rates charged for loans made by the Company vary with the
degree of risk, the size and maturity of the loan, the borrowers' depository
relationships with the Company, and prevailing market rates.
The following table sets forth the amount of loans outstanding by type of credit
extension as of the periods indicated.
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
---------------- -----------------
DOLLAR PERCENT DOLLAR PERCENT
AMOUNT OF LOANS AMOUNT OF LOANS
------ -------- ------ --------
LOAN CATEGORIES: (In thousands)
<S> <C> <C> <C> <C>
Commercial $436,996 52% $443,660 51%
Real estate - construction 79,919 10 74,720 8
Real estate - mortgage 117,875 14 136,278 16
Installment 196,418 23 205,869 24
Other 4,981 1 5,222 1
-------- --- -------- ---
Total loans 836,189 100% 865,749 100%
Less allowance for loan losses (12,769) (14,986)
-------- --------
Net loans $823,420 $850,763
======== ========
</TABLE>
Page 19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
There were no concentrations of loans exceeding 10% of total loans which were
not otherwise disclosed as a category of loans in the above table. Unsecured
loans do not comprise a significant portion of the loan portfolio.
The Company has collateral management policies in place ensuring that collateral
lending of all types is on a basis which the Company believes is consistent with
regulatory lending standards. Valuation analyses are utilized to take into
consideration the potentially adverse economic conditions under which
liquidation of collateral could occur. It is generally the Company's policy to
fully collateralize all loans with loan-to-value ratios determined on an
individual loan basis taking into account the financial stability of each
borrower and the value and type of collateral. In addition to real estate,
other collateral accepted as security against loans includes deposits,
securities, accounts receivable, inventories, equipment and other assets.
COMMERCIAL
The Company's commercial and agribusiness loans, referred to herein as
commercial loans, totaled $436,996,000 (52%) and $443,660,000 (51%) of the
Company's total loans at March 31, 1996 and December 31, 1995, respectively.
Commercial loans consist primarily of short-to medium-term financing for small-
to medium-sized businesses and professionals located in Central California
(California's Heartland). Commercial loans are diversified as to industries and
types of businesses, with no material industry concentrations and a profile
which the Company believes generally reflects the economy of California's
Heartland. Approximately 47% of total loans at March 31, 1996 are commercial
loans which are unsecured or secured by various assets, including equipment,
receivables, deposits and other assets. The primary source of loan repayment is
the cash flow from the commercial businesses, while the collateral represents a
secondary source of repayment. Loan-to-value ratios generally range from
approximately 40% to 80%, depending on the nature of the collateral.
Approximately 5% of total loans at March 31, 1996 are commercial loans secured
by real estate, but since commercial loans are typically repaid through cash
flows from the borrower's business, they are not classified by the Company as
real estate-mortgage loans. For agricultural businesses, loan-to-value ratios
generally range from 50% to 60%, for agricultural development loans, and up to
70% for other purposes. For other commercial business loans secured by real
estate (represent 5% of total loans at March 31, 1996), loan-to-value ratios
approximate 65% to 70% or less. The Company also makes commercial loans that
are guaranteed by the SBA and the Valley Small Business Corporation ranging from
85% to 90% of the balance. At March 31, 1996, the Company had outstanding 41
commercial loans in excess of $1,000,000.
REAL ESTATE - CONSTRUCTION LOANS
Real estate-construction loans are primarily for residential housing. The
primary market focus is toward local developers and small residential projects
located in the Company's market area. The economic viability of the project and
the borrower's past development record and credit worthiness are primary
considerations in the loan underwriting decision. The Company's real estate-
construction loan portfolio at March 31, 1996 and December 31, 1995 totaled
$79,919,000 and $74,720,000, or 10% and 8%, respectively, of total loans. At
March 31, 1996, the Company had outstanding 15 real estate-construction loans in
excess of $1,000,000.
Page 20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's senior lending officers monitor the residential real estate-
construction market on a periodic basis by reviewing internally prepared
residential lot inventory activity reports and independent surveys of the
residential properties market. Loan-to-value ratios generally depend on the
nature of the collateral, ranging from up to 65% for land acquisition and
development loans, 70% for commercial projects, and 80% for single-family
individual-borrower construction loans.
REAL ESTATE - MORTGAGE LOANS
As of March 31, 1996 and December 31, 1995, the Company's real estate-mortgage
loans totaled $117,875,000 and $136,278,000, or 14% and 16%, respectively of
its total loans. These loans are collateralized by properties located primarily
in Central California. Nonresidential loans (representing 8% of total loans at
March 31, 1996) are primarily "mini-perm" (medium-term) commercial real estate
mortgages, with maturities generally ranging from five to seven years. Such
loans generally range in size from $250,000 to $1,250,000. Residential mortgage
loans totaled approximately $47,636,113 at March 31, 1996, or 6% of total loans.
At March 31,1996, the Company had 12 outstanding real estate-mortgage loans in
excess of $1,000,000.
Real estate-mortgage and construction lending contain potential risks which are
not inherent in other types of loans. These potential risks include declines in
market values of underlying real property collateral and, with respect to
construction lending, delays or cost overruns which could expose the Company to
loss. In addition, risks in commercial real estate lending include declines in
commercial real estate values, general economic conditions surrounding the
commercial real estate properties, and vacancy rates. A decline in the general
economic conditions or real estate values within the Company's market area could
have a negative impact on the performance of the loan portfolio or value of the
collateral. Because the Company lends primarily within its market area, the
real property collateral for its loans is similarly concentrated, rather than
diversified over a broader geographic area. The Company could therefore be
adversely affected by a further decline in real estate values in the Company's
target market, even if real estate values elsewhere in California generally
remained stable or increased.
INSTALLMENT LOANS
At March 31, 1996 and December 31, 1995, installment loans aggregated
approximately $196,418,000 and $205,869,000, or 23% and 24%, respectively of
total loans. Approximately 11% and 12% of total loans at March 31, 1996 are
installment loans which are secured by real estate and installment loans
unsecured or secured by other collateral. Included in this loan category are
home equity lines, home equity loans, automobile loans, home improvement loans
and swimming pool loans. The ratio of loans to appraised values range from up
to 80% for home equity lines, 85% for home equity loans, 90% for home
improvement loans, and 100% for automobile loans.
Page 21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CREDIT RISK MANAGEMENT AND ASSET QUALITY
Management believes that the objective of a sound credit policy is to extend
quality loans on a diversified basis to customers while controlling risk
affecting stockholders and depositors. The Credit Quality Committee, made up of
members of the Board of Directors of ValliWide Bank, approves credit policy, and
reviews asset quality and ensures compliance with credit policy. The Company
maintains a loan review staff as part of its internal audit function that
examines the loan portfolios for compliance with established standards.
Executive management and senior credit officers also perform reviews of loan
quality and monitor, on a periodic basis, the progress of watch list loans
requiring an action plan for rehabilitation or refinancing. In addition, credit
underwriting guidelines are periodically reviewed and adjusted to reflect
current economic conditions.
The Company places a loan on nonaccrual status when one of the following events
occurs: any installment of principal or interest is 90 days or more past due
(unless the loan is well-secured and in the process of collection); management
determines the ultimate collection of principal or interest on a loan to be
unlikely; management deems it to be probable the Company will take possession of
the collateral in satisfaction of the loan; or the terms of a loan have been
renegotiated resulting in a decrease in the present value of contractual cash
flows.
A loan is considered in the process of collection if, based on a probable
specific event, management expects that the loan will be repaid or brought
current. When a loan is placed on nonaccrual status, the Company's general
policy is to reverse and charge against current income previously accrued but
unpaid interest, unless the interest is deemed collectible. Income on such
loans is subsequently recognized only to the extent that cash is received and
future collection of principal is probable. Loans for which collectibility of
the principal balance or interest is considered to be doubtful by management are
placed on nonaccrual status prior to becoming 90 days delinquent.
Loans for which collateral has been repossessed or foreclosed upon are
classified as "OREO" ("Other Assets" for personal property collateral) on the
Company's financial statements. In accordance with SFAS No. 114, a loan is
classified "OREO" when the Company has taken possession of the collateral
regardless of whether formal foreclosure proceedings take place.
The Company values its OREO properties at the lower of the net carrying amount
or fair value, less selling expenses, based on appraisals generally performed at
the time the property is acquired. Management's objective is to dispose of
these properties in an expeditious manner in an effort to minimize holding
costs. Due to possible market fluctuations in real estate values, management
can give no assurance that the values of OREO properties will ultimately be
realized upon disposition.
Page 22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NONPERFORMING ASSETS
The table below sets forth information about nonperforming assets and accruing
loans 90 days or more past due. Management's classification of a loan as
nonaccrual or restructured does not necessarily indicate the principal of the
loan is uncollectible in whole or in part.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------------------------------------
1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans.................... $10,453 $17,480 $7,303 $6,059 $4,930 $3,259
Restructured loans.................. 257 257 558 933 830 900
------ ------- ------- ------- ------ ------
Nonperforming loans................. 10,710 17,737 7,861 6,992 5,760 4,159
Other real estate owned............. 4,537 2,512 3,665 3,537 1,771 1,506
------ ------- ------- ------- ------ ------
Total nonperforming assets......... $15,247 $20,249 $11,526 $10,529 $7,531 $5,665
====== ======= ======= ======= ====== ======
Accruing loans 90-days past due..... $1,415 $1,451 $3,073 $1,195 $732 $1,640
====== ======= ======= ======= ====== ======
Nonperforming loans to total loans.. 1.28% 2.05% 0.89% 0.97% 1.04% 0.79%
Nonperforming assets:
To total loans..................... 1.82% 2.34% 1.31% 1.46% 1.36% 1.07%
To total loans and OREO............ 1.81 2.33 1.30 1.45 1.36 1.07
To total assets.................... 1.19 1.47 0.87 0.87 0.88 0.70
</TABLE>
At March 31, 1996, nonperforming assets decreased approximately 25% from
December 31, 1995 to $15 million. Nonaccrual loans decreased approximately $7
million (40%) primarily due to charge-offs of approximately $3.5 million related
primarily to previously identified problem loans a $2.3 million transfer to
OREO, with the remainer collected or reclassified to accruing, offset by newly
classified nonaccrual loans. The most significant decrease in nonaccrual loans
occurred in the commercial and real estate-construction loan categories with
balances at December 31, 1995 of approximately $10 million and $4.9 million
decreasing to $7.4 million and $3 million at March 31, 1996, respectively. The
increase in OREO relates principally to the transfer from nonaccrual loans of a
$2.3 million real estate-construction credit which comprises 53% of the OREO
balance at March 31, 1996. While the overall credit quality of the loan
portfolio has improved, total nonaccrual balances may fluctuate from quarter to
quarter based upon changes in the economic conditions within the Company's
target market.
Although the volume of nonperforming assets and accruing loans 90 days past due
will depend on the future economic environment, management of the Company has
identified approximately $4 million in potential problem loans as to which it
has serious doubts as to the ability of the borrowers to comply with the present
repayment terms and which may become nonperforming assets or accruing loans 90
days past due, based on known information about possible credit problems of the
borrower.
Page 23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ALLOWANCE FOR LOAN LOSSES
Management's determination of the allowance for loan losses requires the use of
estimates and assumptions related to risks inherent in the loan portfolio.
Actual results could differ significantly from those estimates. Estimates that
are particularly susceptible to significant fluctuation relate to the valuation
of real estate because management revalues the asset to the lower of the net
carrying amount or fair value less selling expenses. In connection with the
determination of the allowance for loan losses and the valuation of OREO,
management generally obtains independent appraisals for significant properties.
Management believes its current appraisal policies conform to federal regulatory
guidelines.
A formal evaluation of the overall quality of the portfolio is performed monthly
to determine the necessary level of the allowance for loan losses. This
evaluation takes into consideration, among other factors, specific knowledge of
certain loans, general economic conditions, the classification of loans and the
application of loss estimates to these classifications. The Company classifies
loans as pass, watch, special mention, substandard, doubtful, or loss based on
classification criteria believed to be consistent with the criteria applied by
the Company's banking examiners. These classifications and loss estimates take
into consideration all sources of repayment, underlying collateral, the value of
such collateral, and current and anticipated economic conditions, trends, and
uncertainties. These processes provide management with data that helps to
identify and estimate the credit risk inherent in the portfolio so that
management may identify potential problem loans on a timely basis. However,
this evaluation is inherently subjective as it requires material estimates
including the amounts and timing of future cash flows expected to be received on
impaired loans that may be susceptible to significant change. The allowance for
loan losses reflects the result of these estimates. In addition, various
banking regulatory agencies periodically review the allowance for loan losses as
part of their examination process. Such agencies may require the Company to
recognize additions to the allowance based on their judgments of information
available to them at the time of their examination. Their findings are
reflected in the calculation of the allowance as well as considered in the
continuing evaluation of the Company's policies and procedures. At March 31,
1996, the $12,769,000 allowance for loan losses constituted 1.53% of total loans
and 119% of nonperforming loans.
The provision for loan losses for the three months ended March 31, 1996 was
$1,925,000 as compared to $678,000 for the corresponding period in 1995. Net
charge-offs during the first quarter of 1996 totaled $4,142,000 as compared to
$138,000 for the same period in 1995. The increase in the provision for loan
losses is directly related to a significant increase in net charge-offs of
previously identified problem loans and the effect of two mergers completed
during the 1996 quarter (refer to "Nonperforming Assets").
While the Company's policy is to charge off those loans for which a loss is
considered probable, there also exists the risk of future losses which cannot be
precisely quantified or attributed to particular loans or classes of loans.
Because this risk is continually changing in response to factors beyond the
control of the Company, management's judgment as to the adequacy of the
allowance for loan losses in future periods is necessarily an approximate one.
Page 24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides a summary of the Company's allowance for loan
losses and charge-off and recovery activity for the periods indicated:
<TABLE>
<CAPTION>
THREE THREE YEAR
MONTHS ENDED MONTHS ENDED ENDED
MARCH 31, MARCH 31, DECEMBER 31,
1996 1995 1995
---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for loan losses:
Balance at beginning-of-period $ 14,986 $ 14,130 $ 14,130
Provision for loan losses 1,925 678 9,633
Charge-offs:
Commercial 2,445 225 4,362
Real estate - construction 1,008 - 109
Real estate - mortgage 48 48 3,515
Installment 1,142 90 1,346
Other - 18 116
----- ------ ------
Total charge-offs 4,643 381 9,448
Recoveries:
Commercial 117 170 400
Real estate - mortgage 27 17 26
Installment 357 43 227
Other - 13 18
----- ------ ------
Total recoveries 501 243 671
------ ------ ------
Net charge-offs 4,142 138 8,777
------- ------ ------
Balance at end-of-period $12,769 $14,670 $14,986
====== ====== ======
Loans outstanding at end-of-period $836,189 $863,166 $865,749
Average loans 840,697 861,639 883,508
Net charge-offs during the
period to average loans 1.98% 0.06% 0.99%
Allowance for loan losses:
To total loans 1.53% 1.70% 1.73%
To nonperforming loans 119 89 84
To nonperforming assets 84 75 74
</TABLE>
CAPITAL RESOURCES
Stockholders' equity decreased $861,000 during the three months ended March 31,
1996. The decrease was primarily attributable to the net-of-tax effect of the
change in unrealized losses on available for sale securities of $1,237,000,
offset by net income of $216,000.
The Company and its subsidiary are required to maintain minimum capital ratios
defined by various federal government regulatory agencies. These regulatory
agencies have established risk-based capital guidelines, which include minimum
capital requirements.
Page 25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the Company's capital positions under the
regulatory guidelines:
<TABLE>
<CAPTION>
MINIMUM
WELL
MARCH 31, DECEMBER 31, CAPITALIZED
1996 1995 RATIOS
-------- ------------ --------
<S> <C> <C> <C>
CAPITAL RATIOS:
Total risk-based capital ratio 14.16% 13.40% 10.00%
Tier 1 capital to risk-weighted assets 12.87 12.11 6.00
Leverage ratio 9.75 8.76 5.00
</TABLE>
At March 31, 1996, the Company and its subsidiary bank exceeded all applicable
federal capital standards. The primary factor contributing to the increase in
total risk-based capital was a change in the composite risk-weighting of the
Company's short-term investments.
The Company is subject to regulation and examination by the Board of Governors
of the Federal Reserve System (the "Federal Reserve"). ValliWide Bank, the
Company's subsidiary, is subject to regulation and examination by the Federal
Reserve and the California State Banking Department. The Company and ValliWide
Bank promptly respond to findings of regulators. Following a 1995 examination of
the Company by the Federal Reserve and of ValliWide Bank by the Federal Reserve
and California State Banking Department, the Board of Directors of the Company
and ValliWide Bank adopted resolutions directing management of the Company and
ValliWide Bank to address certain matters related to the establishment of loan
loss reserves, loan classification and administration, liquidity and
asset/liability management planning and analysis, and the management of certain
functions, and to report actions taken on such matters to the Federal Reserve
and the California State Banking Department. The adoption of such resolutions is
not expected to have a material adverse effect on the Company's liquidity,
capital resources, or results of operations.
LIQUIDITY AND ASSET/LIABILITY MANAGEMENT
The primary objectives of the asset/liability management process are to provide
a stable net interest margin, generate net interest income to meet the Company's
earnings objectives, and manage balance sheet risks. These risks include
liquidity risk, capital adequacy and overall interest rate risk inherent in the
Company's balance sheet. In order to manage its interest rate sensitivity, the
Company has adopted policies which attempt to limit the change in net interest
income assuming various interest rate scenarios. This is accomplished by
adjusting the repricing characteristics of the Company's assets and liabilities
as interest rates change. The Company's Asset/Liability Committee chooses
strategies in conformance with its policies to achieve an appropriate trade off
between interest rate sensitivity and the volatility of net interest income and
net interest margin.
Page 26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's policy has been to maintain an adequate liquidity position which,
in addition to cash and cash equivalents, relies on cash inflows principally
from deposits, repayments of principal on loans and investments, and interest
earned. The Company's principal cash outflows are for loan origination,
purchases of investment securities, depositor withdrawals, and payment of
operating expenses.
At March 31, 1996, the Company's cash and cash equivalents totaled $177 million,
an increase of $16 million from the balance at December 31, 1995. The Company's
operations utilized approximately $2.8 million in day to day operations.
Investing activities provided $117 million primarily due to maturities of
securities exceeding purchases by $88 million, offset by maturities and
principal repayments in excess of loan originations of $23 million. The
Company's financing activities decreased cash and cash equivalents by an
additional $98 million principally due to a decrease of $95 million in deposits.
The Company has borrowing capacity from various sources to provide necessary
liquidity. The Company has arranged unsecured federal funds lines of credit in
the amount of $62,708,000 with five major correspondent banks to provide funds
in periods of temporary declines in deposits. The Company has additional
sources of short-term credit through repurchase borrowing arrangements with
various brokerage firms.
Liquidity management is a focus of the Company as well as its subsidiary bank.
Aside from accessing the capital markets, the Company's primary source of
liquidity is dividends. There are potential restrictions which could be placed
on dividends from its subsidiary; however, management believes that adequate
dividends will be received to meet the Company's cash flow needs through 1996.
Through interest rate sensitivity management, the Company seeks to manage net
interest margins and to enhance consistent growth of net interest income through
periods of changing interest rates. The difference between the amount of assets
and liabilities that are repricing in various time frames is called the "Gap."
Generally, if repricing assets exceed repricing liabilities in a given time
period, the Company would be "asset sensitive", or if repricing liabilities
exceed repricing assets, the Company would be "liability sensitive".
Page 27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the interest rate sensitivity and repricing
schedule of the Company's interest-earning assets and interest-bearing
liabilities, the interest rate sensitivity gap, the cumulative interest rate
sensitivity gap and the cumulative interest rate sensitivity gap ratio.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------------------------------------------------------
AFTER THREE AFTER ONE
NEXT DAY BUT MONTHS BUT YEAR BUT AFTER
WITHIN THREE WITHIN 12 WITHIN FIVE FIVE
IMMEDIATELY MONTHS MONTHS YEARS YEARS TOTAL
-----------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST RATE SENSITIVITY GAP:
Loans/(1)/.......................... $ - $489,549 $ 106,037 $131,357 $103,708 $830,651
Investment securities............... - 48,532 37,461 84,144 53,443 223,580
Federal funds sold.................. - 100,000 - - - 100,000
------ -------- ------- ------- ------- -------
Total earning assets........... $ - $638,081 $143,498 $215,501 $157,151 $1,154,231
====== ======= ======= ======= ======= =========
Interest-bearing
transaction accounts............ $ - $351,439 - - - $351,439
Savings accounts.................... - 168,685 - - - 168,685
Certificates of deposit............. - 92,731 $ 200,835 $ 48,321 $ 26 341,913
Short-term borrowings............... - 8,674 - - - 8,674
Subordinated notes.................. 909 20,000 - - - 20,909
------ ------- -------- ------- ------- -------
Total interest-bearing
liabilities................. $ 909 $641,529 $ 200,835 $48,321 $ 26 $891,620
====== ======= ======== ======= ======= =======
Interest rate sensitivity gap/(2)/.. $ (909) $ (3,448) $(57,337) $167,180 $157,125 $262,611
Cumulative gap...................... $ (909) $ (4,357) $(61,694) $105,486 $262,611
Cumulative gap percentage to
earning assets.................. (0.08)% (0.38)% (5.39)% 9.21% 22.92%
</TABLE>
(1) Excludes nonaccrual loans of $10,453,000.
(2) Does not assume prepayments of interest-earning assets or run-off of
interest-bearing liabilities.
Page 28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Based upon the above repricing schedule, at March 31, 1996, the Company was
"liability sensitive" with respect to interest-earning assets and interest-
bearing liabilities repricing within one year. Because approximately $62
million of interest-bearing liabilities in excess of interest-earning assets
reprice within one year, management expects that, in an increasing rate
environment, the Company's net interest margin would tend to decrease and in a
decreasing rate environment, the Company's net interest margin would be expected
to increase as liabilities would generally reprice more quickly than assets.
The Company supplements its gap analysis with simulations of net interest income
under a variety of alternative market interest-rate scenarios. The Company
manages its interest rate risk by emphasizing loan products which have variable
interest rates and deposit products which are short-term in duration.
EFFECT OF CHANGING PRICES
The majority of assets and liabilities of a financial institution are monetary
in nature and, therefore, differ greatly from most commercial and industrial
companies that have significant investments in fixed assets or inventories.
However, inflation does have an important impact on the growth of total assets
in the banking industry and the resulting need to increase equity capital in
order to maintain an appropriate equity-to-assets ratio. An important effect of
this has been the reduction in the proportion of earnings paid out as dividends
by some banking organizations. Another significant effect of inflation is on
other expenses which tend to rise during periods of general inflation.
Page 29
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit Index
Exhibit Number Description
-------------- -----------
10 Employment Agreement - Jerry A. Melton
27 Financial Data Schedule
b) Three Form 8-K's were filed during the period from January 1, 1996 to the
date of the filing of this report.
A report on Form 8-K was filed February 15, 1996 and amended on April 2,
1996. The item reported the consummation of the merger between the
Registrant and El Capitan Bancshares, Inc. (El Capitan). Copies of the
Agreement and Plan of Reorganization between the Registrant and El Capitan
and amendments, together with a copy of the Registrant's February 2, 1996
press release describing the merger, Pro forma financial information giving
effect to the merger and historical audited financial information of El
Capitan, were filed as exhibits to the report on Form 8-K and Form 8-K/A. A
report on Form 8-K was filed April 2, 1996.
A report on Form 8-K was filed April 2, 1996. The item reported the
consummation of the merger between the Registrant and CoBank Financial
Corporation. A copy of the March 22, 1996 press release describing the
above transaction was filed as an exhibit to the report on Form 8-K.
A report on Form 8-K was filed April 2, 1996. The items reported were the
entry by the Registrant and Auburn Bancorp (Auburn) into an Agreement and
Plan of Reorganization (the "Auburn Merger Agreement") dated March 27,
1996. Copies of the Auburn Merger Agreement, together with a copy of the
Registrant's March 28, 1996 press release describing the Auburn Merger
Agreement, were filed as exhibits to the report on Form 8-K.
Page 30
<PAGE>
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.
VALLICORP HOLDINGS, INC.
Date: May 13, 1996 By /s/ J. Mike McGowan
----------------------- -------------------------------
J. Mike McGowan
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1996 By /s/ Wolfgang T.N. Muelleck
--------------------- -------------------------------
Wolfgang T.N. Muelleck
Executive Vice President
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 31
<PAGE>
EXHIBIT 10
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into this 26th day
of February, 1996, by and between ValliCorp Holdings, Inc. (the "Company") and
Jerry A. Melton (the "Executive").
RECITAL:
The parties desire to set forth the terms of Executive's employment with
the Company.
NOW, THEREFORE, the parties hereto agree as follows:
1. Employment. The Company hereby employs Executive and Executive hereby
----------
accepts employment during the Term of Employment upon the terms and conditions
herein set forth.
2. Term of Employment. The "Term of Employment" is the period beginning
------------------
on February 26, 1996 (the "Commencement Date") and ending on January 31, 2000.
The Term of Employment may terminate earlier or be extended as provided in this
Agreement.
3. Renewal. The Term of Employment shall be extended for one year on
-------
each anniversary of the Commencement Date (or such other date as to which the
parties may agree) unless (a) the Company or Executive has given three (3)
months' written notice of its or his intent not to extend the Termination Date
or (b) the Term of Employment has been terminated under the provisions of
Section 8.
4. Duties. Executive is employed as Senior Vice President and Deputy
------
Chief Credit Officer of the Company and, under the direction of the Company's
Board of Directors, the Chief Executive Officer and the Chief Credit Officer,
shall perform and discharge well and faithfully the duties that may be assigned
to him from time to time by them in connection with the conduct of the Company's
business. Nothing herein shall preclude the Board of Directors or CEO from
changing Executive's title or duties.
5. Extent of Services. Executive shall devote his entire business time,
------------------
attention, and energies to the business of the Company during the term of
Executive's employment with the Company. The foregoing, however, shall not
preclude Executive from engaging in appropriate civic, charitable, or religious
activities or from devoting a reasonable amount of time to private investments
or from serving on boards of directors of other entities, as long as such
activities and services do not interfere or conflict with his responsibilities
to the Company.
6. Compensation.
------------
(a) Salary. During the Term of Employment, the Company shall pay
------
Executive a monthly salary of $10,416.67, payable in arrears in installments on
the 15th and the last day of each month. Executive's salary may be adjusted
periodically, on the anniversary of this Agreement (or such other date as to
which the parties may agree), to reflect such changes as the Board of Directors
determines appropriate, based on Executive's performance for the most recent
performance period.
(b) Incentive Programs. During the Term of Employment, Executive
------------------
shall be entitled to participate in any annual and long-term incentive programs
adopted by the Company and which cover employees in positions comparable to that
of Executive.
(c) Expenses. Executive shall be entitled to prompt reimbursement of
--------
all reasonable business expenses incurred by him in the performance of his
duties during the Term of Employment, subject to the presenting of appropriate
vouchers and receipts in accordance with the Company's policies.
7. Employee Benefits. During the Term of Employment, Executive shall be
-----------------
entitled to participate in employee benefit plans or programs of the Company, if
any, to the extent that his position, tenure, salary, age, health, and other
qualifications make him eligible to participate, subject to the rules and
regulations applicable thereto.
1
<PAGE>
8. Termination. Notwithstanding the provisions of Sections 2 and 3, the
-----------
Term of Employment and Executive's employment hereunder may be terminated
without any breach of this Agreement under the following circumstances:
(a) Death. The Term of Employment shall terminate upon Executive's
-----
death.
(b) Disability. The Term of Employment shall terminate three (3)
----------
months after the Company gives Executive written notice that it intends to
terminate his employment on account of Disability or on such later date as the
Company specifies in such notice. If Executive resumes the performance of
substantially all of his duties under this Agreement before the termination
becomes effective, the notice of intent to terminate shall be deemed to have
been revoked.
(c) Voluntary Termination. Executive may terminate his employment
---------------------
with the Company at any time with three (3) months' written notice to the
Company. The Term of Employment shall end on the earlier of the last day of the
notice period or the last day on which Executive performs services for the
Company.
(d) Termination for Good Cause. Executive may terminate his
--------------------------
employment with the Company for Good Cause by giving the Company thirty (30)
days' notice of its breach, the reasons why the breach constitutes Good Cause
and of his intent to terminate on such basis. If the Company cures its breach
within the thirty (30) day period, Executive may rescind his notice of intent to
terminate, or terminate his employment under paragraph (c) as though his notice
of breach was the notice provided for under paragraph (c). If the Company fails
to cure its breach within the thirty (30) day period, the Term of Employment
shall end on the last day of the notice period.
(e) Involuntary Termination. Executive's employment is at will. The
-----------------------
Company reserves the right to terminate Executive's employment at anytime
whatsoever, with or without cause, with thirty (30) days' written notice to
Executive. The Term of Employment shall terminate on the last day of the notice
period, but the Company may require Executive to cease performing services at
any time once the notice is given.
(f) Involuntary Termination for Cause. The Company reserves the
---------------------------------
right to terminate Executive's employment for Cause. The Company shall give
Executive written notice of the termination and the reasons therefor. The Term
of Employment shall terminate immediately upon receipt of the notice.
9. Benefits on Termination of Employment. If Executive's employment
-------------------------------------
is terminated during the Term of Employment, the Executive shall be entitled to
receive benefits as follows:
(a) Death; Disability; Voluntary Termination; Termination for Cause.
---------------------------------------------------------------
If employment is terminated under Section 8(a), (b), (c), or (f), Executive
shall receive salary through the Term of Employment, any incentive payment
earned but not yet paid, and reimbursement of expenses incurred under Section
6(c) but not yet reimbursed. Executive shall be entitled to a pro rata portion
of his annual incentive benefit for the year in which his Term of Employment
ends. All other employee benefits and compensation shall cease on the last day
on which Executive performs services as an employee, except to the extent that
continued coverage is required by law.
(b) Change of Control. If Executive's employment is terminated under
-----------------
the provisions of Section 8(d) or (e), within two years following a Change of
Control, Company shall pay Executive liquidated damages equal to the remaining
salary and accrued but unpaid annual incentive award he would have received
under this Agreement had he continued employment to the end of the Term of
Employment as in effect immediately prior to his termination, not to exceed
eighteen (18) months' salary and the accrued but unpaid annual incentive plan
award in effect immediately prior to his termination. The liquidated damages
payment to which Executive is entitled pursuant to this paragraph (b) shall be
paid in a single installment within thirty (30) days of his termination.
Executive shall be obligated, however, to disclose to the Company his earned
income (within the meaning of Internal Revenue Code Section 911(d)(2)(A)) during
the period ending eighteen (18) months following such termination of employment
and to remit to the Company such earned income up to the amount of Executive's
liquidated damages paid pursuant to this paragraph. Company shall have the right
to request Executive to produce reasonable evidence substantiating the amount
(including zero) of Executive's earned income during the remainder of the Term
of Employment (as described above). If Executive remits the full amount of
liquidated damages, his obligation to disclose his earned income shall end.
Executive shall cease
2
<PAGE>
to be an employee on the effective date of any notice given under this Agreement
and, except as provided by applicable law, shall cease to be entitled to further
compensation or benefits from the Company.
(c) Involuntary Termination; Termination for Good Cause. If
---------------------------------------------------
Executive's employment is terminated under the provisions of Section 8(d) or (e)
and the termination is not within two years following a Change of Control,
Executive shall receive:
(i) twelve (12) months of salary under Section 6(a) computed
with reference to the annual salary in effect immediately preceding the date of
termination;
(ii) any incentive payment earned but not yet paid; and
(iii) reimbursement of expenses incurred under Section 6(c) but
not yet reimbursed.
All other employee benefits and compensation, including any incentive benefits
for the year in which the Term of Employment ends, shall cease on the last day
on which Executive performs services as an employee except to the extent that
continued coverage is required by law.
(d) Non-Renewal. If Executive or the Company gives notice of intent
-----------
not to extend the Term of Employment under Section 3, Executive's salary and
benefits shall cease on the last day of the Term of Employment, except to the
extent that continued coverage is required by law.
10. Definition of Terms. The following terms used in this Agreement when
-------------------
capitalized have the following meanings:
(a) Board of Directors means the Company's board of directors.
------------------
(b) Cause means that Executive has:
-----
(i) willfully breached or habitually neglected the duties which
he was required to perform under the terms of this Agreement or
(ii) committed act(s) of dishonesty, theft, embezzlement, fraud,
misrepresentation, or other act(s) of moral turpitude against the Company, its
subsidiaries or affiliates, its shareholders, or its employees.
(c) Change of Control means a change of control of the Company of a
-----------------
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A (or in response to any similar item on any
similar schedule or form) promulgated under the Securities Exchange Act of 1934
(the "Act"), whether or not the Company is then subject to such reporting
requirement; provided, however, that without limitation, such a Change of
Control shall be deemed to have occurred if:
(i) any person or group (as such terms are used in connection
with Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner"
(as defined in Rule 13d-3 and 13d-5 under the Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined voting power
of the Company's then outstanding securities;
(ii) the Company is a party to a merger, consolidation, sale of
assets or other reorganization, or a proxy contest, as a consequence of which
members of the Board of Directors in office immediately prior to such
transaction or event constitute less than a majority of the Board of Directors
thereafter; or
3
<PAGE>
(iii) during any period of twenty-four consecutive months,
individuals who at the beginning of such period constituted the Board of
Directors (including for this purpose any new director whose election or
nomination for election by the Company's stockholders was approved by a vote of
at least two-thirds of the directors then still in office who were directors at
the beginning of such period) cease for any reason to constitute at least a
majority of the Board of Directors.
Notwithstanding the foregoing provisions of this paragraph (c), a "Change of
Control" will not be deemed to have occurred solely because of the acquisition
of securities of the Company (or any reporting requirement under the Act
relating thereto) by an employee benefit plan maintained by the Company for its
employees.
(d) Disability means that Executive has been unable to perform his
----------
duties under this Agreement for a period of three (3) consecutive months as the
result of his incapacity due to physical or mental illness.
(e) Good Cause means a material reduction in Executive's compensation
----------
under Section 6 or benefits under Section 7, a material reduction in the
Executive's title or responsibilities, or a relocation of Executive's primary
place of employment so that Executive's one-way commute distance is increased by
more than forty (40) miles.
11. Non-Competition Clause. In addition to his obligations as an
----------------------
executive and whether or not he remains an executive of the Company, Executive
agrees that during the period commencing with the Commencement Date and ending
upon termination of employment with the Company, however caused, he will not,
without the prior written consent of the Company, engage, directly or
indirectly, in any business that competes with the Company for customers of the
Company located in the Central California.
12. Locations of Performance. Executive's services shall be performed
------------------------
primarily in the vicinity of Fresno, California. The parties acknowledge,
however, that Executive may be required to travel in connection with the
performance of his duties hereunder.
13. Proprietary Information.
-----------------------
(a) Executive agrees to comply fully with the Company's policies
relating to non-disclosure of the Company's trade secrets and proprietary
information and processes. Without limiting the generality of the foregoing,
Executive will not, during the term of his employment by the Company, disclose
any such secrets, information, or processes to any person, firm, corporation,
association, or other entity for any reason or purpose whatsoever, nor shall
Executive make use of any such property for his own purposes or for the benefit
of any person, firm, corporation, or other entity (except the Company) under any
circumstances during or after the term of his employment, provided that after
the term of his employment, this provision shall not apply to secrets,
information, and processes that are then in the public domain (provided that
Executive was not responsible, directly or indirectly, for such secrets,
information, or processes entering the public domain without the Company's
consent).
(b) Executive hereby sells, transfers, and assigns to the Company all
of the entire right, title, and interest of Executive in and to all inventions,
ideas, disclosures, and improvements, whether patented or unpatented, and
copyrightable material, to the extent made or conceived by Executive, solely or
jointly, during the term of this Agreement, except to the extent prohibited by
Section 2870 of the California Labor Code, a copy of which is attached hereto as
Exhibit A. Executive shall communicate promptly and disclose to the Company, in
such form as the Company requests, all information, details, and data pertaining
to the aforementioned inventions, ideas, disclosures, and improvements; and,
whether during the term hereof or thereafter, Executive shall execute and
deliver to the Company such formal transfers and assignments and such other
papers and documents as may be required of Executive to permit the Company to
file and prosecute any patent applications relating to such inventions, ideas,
disclosures, and improvements and, as to copyrightable material, to obtain
copyright thereon.
4
<PAGE>
(c) Trade secrets, proprietary information, and processes shall not
be deemed to include information which is:
(i) known to Executive at the time of the disclosure;
(ii) publicly known (or becomes publicly known) without the
fault or negligence of Executive;
(iii) received from a third party without restriction and
without breach of this Agreement;
(iv) approved for release by written authorization of the
Company; or
(v) required to be disclosed by law; provided, however, that
-------- -------
in the event of a proposed disclosure pursuant to this subsection 13(c)(v), the
recipient shall give the Company prior written notice before such disclosure is
made.
14. Assignment. This Agreement may not be assigned by any party hereto;
----------
provided that the Company may assign this Agreement, in connection with a merger
or consolidation involving the Company or a sale of substantially all of its
assets, to the surviving corporation or purchaser as the case may be, so long as
such assignee assumes the Company's obligations hereunder.
15. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be sufficient if in writing and sent by registered mail to
Executive at his residence maintained on the Company's records, or to the
Company at its executive offices, or such other addresses as either party shall
notify the other in accordance with the above procedure.
16. Force Majeure. Neither party shall be liable to the other for any
-------------
delay or failure to perform hereunder, which delay or failure is due to causes
beyond the control of said party, including, but not limited to: acts of God;
acts of the public enemy; acts of the United States of America, or any State,
territory, or political subdivision thereto or of the District of Columbia;
fires; floods; epidemics; quarantine restrictions; strikes; or freight
embargoes. Notwithstanding the foregoing provisions of this Section, in every
case the delay or failure to perform must be beyond the control and without the
fault or negligence of the party claiming excusable delay.
17. Integration. This Agreement and any attachments, schedules, and
-----------
exhibits hereto represent the entire agreement and understanding between the
parties as to the subject matter hereof and supersede all prior or
contemporaneous agreements whether written or oral. No waiver, alteration, or
modification of any of the provisions of this Agreement shall be binding unless
in writing and signed by duly authorized representatives of the parties hereto.
18. Waiver. Failure or delay on the part of either party hereto to
enforce any right, power, or privilege hereunder shall not be deemed to
constitute a waiver thereof. Additionally, a waiver by either party of a breach
of any promise hereof by the other party shall not operate as or be construed to
constitute a waiver of any subsequent waiver by such other party.
19. Savings Clause. If any term, covenant, or condition of this Agreement
--------------
or the application thereof to any person or circumstance shall to any extent be
invalid or unenforceable, the remainder of this Agreement, or the application of
such term, covenant, or condition to persons or circumstances other than those
as to which it is held invalid or unenforceable, shall not be affected thereby
and each term, covenant, or condition of this Agreement shall be valid and
enforced to the fullest extent permitted by law.
20. Authority to Contract. The Company warrants and represents that it
---------------------
has full authority to enter into this Agreement and to consummate the
transactions contemplated hereby and that this Agreement is not in conflict with
any other agreement to which the Company is a party or by which it may be bound.
The Company further warrants and represents that the individuals executing this
Agreement on behalf of the Company have the full power and authority to bind the
Company to the terms hereof and have been authorized to do so in accordance with
the Company's corporate organization.
5
<PAGE>
21. Recovery of Litigation Costs. If any legal action or other proceeding
----------------------------
is brought for the enforcement of this Agreement or any agreement or instrument
delivered under or in connection with this Agreement, or because of an alleged
dispute, breach, default, or misrepresentation in connection with any of the
provisions of this Agreement, the successful or prevailing party or parties
shall be entitled to recover reasonable attorneys' fees and other costs incurred
in that action or proceeding, in addition to any other relief to which it or
they may be entitled.
22. Remedies. In the event of a breach by Executive of Sections 11 or 13
--------
of this Agreement, in addition to other remedies provided by applicable law, the
Company will be entitled to issuance of a temporary restraining order or
preliminary injunction enforcing its rights under such Sections.
23. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California.
24. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the day herein first above written.
VALLICORP HOLDINGS, INC.
/s/ J. Mike McGowan
___________________________________
J. Mike McGowan
President and Chief Executive Officer
EXECUTIVE
/s/ Jerry A. Melton
____________________________________
Jerry A. Melton
Senior Vice President and Deputy Chief
Credit Officer
Exhibit A - California Labor Code Section 2870
6
<PAGE>
EXHIBIT A
---------
CALIFORNIA LABOR CODE SECTION 2870
SECTION 2870. APPLICATION OF PROVISION PROVIDING THAT EMPLOYEE SHALL ASSIGN OR
OFFER TO ASSIGN RIGHTS IN INVENTION TO EMPLOYER
(a) Any provision in an employment agreement which provides that an employee
shall assign, or offer to assign, any of his or her rights in an invention to
his or her employer shall not apply to an invention that the employee developed
entirely on his or her own time without using the employer's equipment,
supplies, facilities, or trade secret information except for those inventions
that either;
(1) Relate at the time of conception or reduction to practice of the invention
to the employer's business, or actual or demonstrably anticipated research
or development of the employer.
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require an
employee to assign an invention otherwise excluded from being required to
be assigned under subdivision
(a), the provision is against the public policy of this state and is
unenforceable.
7
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