<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 JUNE 30, 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
13,089,748 SHARES OUTSTANDING AS OF AUGUST 4, 1996
<PAGE>
INDEX
VALLICORP HOLDINGS, INC.
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets-
June 30, 1996 and December 31, 1995...................... 3
Unaudited Consolidated Statements of Income -
Three Months and Six Months Ended June 30, 1996 and 1995. 4
Unaudited Consolidated Statements of Cash Flows -
Six Months Ended June 30, 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.............................. 29
SIGNATURES............................................................. 30
- ----------
</TABLE>
Page 2
<PAGE>
VALLICORP HOLDINGS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
---------------------------
(RESTATED)
<S> <C> <C>
ASSETS
Cash and due from banks $ 85,607 $ 103,004
Federal funds sold 80,200 57,770
---------- ----------
Cash and cash equivalents 165,807 160,774
Loans held for sale 1,873 5,158
Securities:
Available for sale 182,589 249,586
Held to maturity (market value $21,147
in 1996 and $66,074 in 1995) 21,007 65,646
---------- ----------
Total securities 203,596 315,232
Loans 839,868 865,749
Allowance for loan losses (12,599) (14,986)
---------- ----------
Net loans 827,269 850,763
Premises and equipment, net 26,441 25,919
Accrued interest receivable 10,116 11,201
Other assets 22,957 20,988
---------- ----------
Total assets $1,258,059 $1,390,035
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing transaction accounts $ 271,962 $ 300,746
Interest-bearing transaction and savings accounts 494,565 526,274
Certificates of deposit, $100,000 and over 119,320 136,284
Other time deposits 214,710 258,082
---------- ----------
Total deposits 1,100,557 1,221,386
Federal funds purchased and repurchase agreements 6,000 10,410
Other liabilities 7,064 10,186
Debt financing 20,887 20,932
---------- ----------
Total liabilities 1,134,508 1,262,914
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 13,390,300 shares in 1996 and
13,266,088 in 1995, including treasury shares 134 133
Paid-in capital 85,343 84,135
Retained earnings 46,043 43,389
Net unrealized securities losses, net of income taxes (2,719) (536)
Treasury shares at cost (336,000 shares) (5,250) -
---------- ----------
Total stockholders' equity 123,551 127,121
---------- ----------
Total liabilities and stockholders' equity $1,258,059 $1,390,035
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
Page 3
<PAGE>
VALLICORP HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
-------- -------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees $20,358 $22,964 $40,839 $44,774
Securities 3,121 4,179 6,697 8,361
Federal funds sold and other 1,144 760 2,361 1,216
------- ------- ------- -------
Total interest income 24,623 27,903 49,897 54,351
INTEREST EXPENSE
Deposits 7,093 9,225 14,644 16,873
Debt financing 328 467 661 898
Other 117 51 242 106
------- ------- ------- -------
Total interest expense 7,538 9,743 15,547 17,877
------- ------- ------- -------
NET INTEREST INCOME 17,085 18,160 34,350 36,474
PROVISION FOR LOAN LOSSES (1,602) (1,084) (3,527) (1,762)
------- ------- ------- -------
Net interest income after provision
for loan losses 15,483 17,076 30,823 34,712
OTHER INCOME
Service charges on deposit 679 664 1,359 1,363
Other service charges and fees 1,604 1,560 3,140 2,990
Mortgage banking 159 220 365 387
Gain/(loss) on sale of securities 2 (58) 13 (129)
Other 1,260 817 1,966 1,481
------- ------- ------- -------
Total other income 3,704 3,203 6,843 6,092
OTHER EXPENSE
Salaries and employee benefits 5,278 6,156 11,669 12,836
Occupancy 1,613 1,335 3,187 2,724
Equipment and maintenance 1,170 1,201 2,369 2,264
Merger and integration costs - 126 4,576 126
Other 4,787 4,827 9,147 9,326
------- ------- ------- -------
Total other expense 12,848 13,645 30,948 27,276
------- ------- ------- -------
Income before income taxes 6,339 6,634 6,718 13,528
Income taxes 2,571 2,611 2,733 5,380
------- ------- ------- -------
NET INCOME $ 3,768 $ 4,023 $ 3,985 $ 8,148
======= ======= ======= =======
EARNINGS PER SHARE
PRIMARY $ 0.28 $ 0.30 $ 0.30 $ 0.61
======= ======= ======= =======
FULLY DILUTED $ 0.28 $ 0.30 $ 0.29 $ 0.60
======= ======= ======= =======
DIVIDENDS PER SHARE $ 0.10 $ 0.09 $ 0.20 $ 0.18
======= ======= ======= =======
</TABLE>
See notes to unaudited consolidated financial statements.
Page 4
<PAGE>
VALLICORP HOLDINGS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1996 1995
----------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,985 $ 8,148
Adjustments to reconcile net income
to net cash provided by operating activities:
Provision for possible loan losses 3,527 1,762
Provision for losses on other real estate owned 323 223
Depreciation and amortization 2,862 3,369
Originations of loans held for sale, net of principal collected (34,282) (21,608)
Proceeds from loan sales 37,796 20,543
Decrease in accrued interest receivable 1,085 1,258
Increase in other assets (7,683) (5,218)
Decrease in other liabilities (3,122) (2,522)
Other operating activities, net (541) (24)
--------- --------
Net cash provided by operating activities 3,950 5,931
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale - 33,999
Proceeds from maturities of securities available for sale 79,276 12,103
Purchases of securities available for sale (15,106) (32,038)
Proceeds from maturities of securities held to maturity 42,673 14,981
Net decrease (increase) in loans including loan participations 24,605 (25,346)
Purchases of premises and equipment (5,420) (2,820)
Proceeds from premises and equipment disposals 2,808 566
Proceeds from sale of other real estate owned 2,903 1,058
--------- --------
Net cash provided by investing activities 131,739 2,503
FINANCING ACTIVITIES
(Decrease) increase in deposits (120,829) 31,786
Decrease in debt financing agreements (4,413) (3,153)
Issuance of common stock 1,167 282
Repurchase of common stock (5,250) -
Cash dividends (1,331) (1,913)
--------- --------
Net cash (used in) provided by financing activities (130,656) 27,002
--------- --------
Increase in cash and cash equivalents 5,033 35,436
Cash and cash equivalents at beginning of period 160,774 106,968
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 165,807 $142,404
========= ========
- ------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 16,372 $ 17,615
Income taxes paid 4,265 5,367
Transfers of loans to other real estate 3,309 955
Conversion of subordinated notes into common stock 42 121
Financing sales 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 wholly owned
subsidiary, ValliWide Bank (ValliWide), hereinafter collectively referred to as
the "Company". Accordingly, the financial information included in the
consolidated financial statements and notes thereto presents the combined
financial condition and results of operations of ValliCorp, El Capitan, and
CoBank as if the mergers 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 ValliCorp's Annual Report 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 supplemental consolidated financial statements for the
year ended December 31, 1995 included in the Company's Registration Statement on
Form S-4 filed with the Securities and Exchange Commission (Registration 333-
06411 dated June 20, 1996) for additional information and the complete financial
statements. In the opinion of management, the unaudited interim consolidated
financial statements contained herein reflect all adjustments (all of which are
of a normal and 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.
Page 6
<PAGE>
VALLICORP HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - MERGERS AND ACQUISITIONS
COMPLETED TRANSACTIONS
EL CAPITAN: On February 2, 1996, El Capitan together with its wholly-owned
subsidiary, El Capitan National Bank, were merged with and into ValliCorp and
ValliWide 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 securities, and total unaudited liabilities of $113 million,
including $112 million in deposits. The merger was accounted for as a pooling-
of-interests.
COBANK: On March 22, 1996, CoBank, together with its wholly-owned subsidiary,
Commerce Bank of San Luis Obispo, N.A., were merged with and into ValliCorp and
ValliWide, 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
securities, and total unaudited liabilities of $88 million including 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 fully diluted
earnings per share for ValliCorp, El Capitan, and CoBank on a combined basis.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1995 1994 1993
---------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
NET INTEREST INCOME:
ValliCorp $59,364 $54,422 $37,605
El Capitan 6,849 7,503 7,902
CoBank 6,096 5,158 4,590
------- ------- -------
Combined $72,309 $67,083 $50,097
======= ======= =======
NET INCOME:
ValliCorp $10,247 $ 7,794 $ 8,116
El Capitan 1,045 1,882 2,317
CoBank 510 775 803
------- ------- -------
Combined $11,802 $10,451 $11,236
======= ======= =======
FULLY DILUTED EARNINGS PER SHARE:
ValliCorp $ 0.98 $ 0.75 $ 1.08
El Capitan 1.22 2.21 2.73
CoBank 0.60 0.97 0.95
Combined 0.87 0.78 1.07
</TABLE>
PENDING TRANSACTION
AUBURN BANCORP INC. (AUBURN): ValliCorp and 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. As of June 30, 1996, Auburn had three branches with unaudited
total loans, deposits and equity of approximately $59,313,000, $67,151,000 and
$7,289,000, 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 up to 927,000 shares
(including Treasury Shares -see Note F) of ValliCorp common stock for all of
Auburn's common stock and stock options at the completion of the merger. The
Auburn Agreement calls for the merger of Auburn with and into ValliCorp, and the
merger of Auburn's subsidiary, Bank of Commerce, N.A., into ValliWide. The
Company anticipates that the merger will be consummated in the third quarter of
1996 and accounted for under the purchase method. Completion of the merger is
subject to, among other things, the approval of Auburn's shareholders and
appropriate regulatory authorities.
Page 8
<PAGE>
VALLICORP HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - MERGERS AND ACQUISITIONS - CONTINUED
As of June 30, 1996, certain costs amounting to approximately $60,000 related to
the merger with Auburn have been incurred by the Company and capitalized pending
consummation of the merger. In addition, the Company anticipates it will incur
additional costs of approximately $2,000,000 as of the merger date. Such costs
relate primarily to separation and benefit costs, leased premises expected to be
vacated, and other merger costs. Noncash expenses included in merger costs are
not significant. As of the date of the merger, these costs will become part of
the purchase price of Auburn. Should the merger with Auburn be terminated for
any reason, the capitalized costs will be charged against the Company's results
of operations.
NOTE C - SECURITIES
The amortized cost and approximate fair value of securities available for sale
are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
---------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- --------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 38,424 $ 38,152 $ 55,506 $ 55,417
U.S. Government agencies 70,937 68,444 115,751 115,131
U.S. Government agency mortgage-
backed securities 52,472 49,790 56,120 54,906
State and political subdivisions 17,699 18,384 15,503 16,496
Other securities 7,827 7,819 7,626 7,636
-------- -------- -------- -------
$187,359 $182,589 $250,506 $249,586
======== ======== ======== ========
</TABLE>
The amortized cost and approximate fair value of securities held to maturity are
as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 998 $ 992 $ 982 $ 996
U.S. Government agencies 1,179 1,155 42,578 42,534
U.S. Government agency mortgage-
backed securities 7,769 7,581 8,258 8,222
State and political subdivisions 11,061 11,419 13,828 14,322
-------- -------- -------- -------
$ 21,007 $ 21,147 $ 65,646 $ 66,074
======== ======== ======== =======
</TABLE>
Page 9
<PAGE>
VALLICORP HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - LOANS
Loans consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
--------- -------------
(IN THOUSANDS)
<S> <C> <C>
Commercial $449,661 $443,660
Real estate - construction 77,234 74,720
Real estate - mortgage 117,376 136,278
Installment 190,510 205,869
Other 5,087 5,222
-------- --------
839,868 865,749
Allowance for loan losses (12,599) (14,986)
-------- --------
Net loans $827,269 $850,763
======== ========
</TABLE>
On June 30, 1996, the recorded investment in loans that were considered to be
impaired under SFAS No. 114 totaled $9,476,000 (all of which were on nonaccrual)
for which the related allowance for loan losses was $3,222,000. The average
recorded investment in impaired loans during the six months ended June 30, 1996
was approximately $9,279,000. The Company uses the cash basis method of income
recognition for impaired loans. For the quarter ended June 30, 1996, the
Company did not recognize any interest income on such loans.
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 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 3,527 1,762 9,633
Charge-offs (6,808) (803) (9,448)
Recoveries 894 338 671
------- ------- -------
Balance at end of period $12,599 $15,427 $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 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1996 1995 1995
-------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period $ 496 $ 250 $ 250
Net charge-offs (360) (211) (756)
Provision for losses on other
real estate owned 323 223 1,002
----- ----- ------
Balance at end of period $ 459 $ 262 $ 496
===== ===== ======
</TABLE>
NOTE F - STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
The Company has repurchased a total of 336,000 common shares of treasury stock
as of June 30, 1996, of which 329,000 common shares were repurchased at a cost
of approximately $5.2 million for reissuance in conjunction with the Auburn
merger.
The weighted average primary and fully diluted shares outstanding were
13,493,000 and 13,557,000 for the six months ended June 30, 1996, respectively
and 13,487,000 and 13,535,000 for the same periods in 1995. For the three
months ended June 30, 1996, the weighted average primary and fully diluted
shares outstanding were 13,535,000 and 13,651,000, respectively, as compared to
13,499,000 and 13,545,000 for the same period in 1995.
In July 1996, the Board of Directors approved a regular quarterly cash dividend
per share of $0.10, payable on August 26, 1996 to stockholders of record as of
August 10, 1996.
NOTE G - MERGER AND INTEGRATION COSTS
Merger and integration costs in connection with the El Capitan and CoBank
mergers totaling $4,576,000 ($2,767,000 net of tax) were recorded in 1996. Such
costs related primarily to separation and benefit costs, professional, legal and
investment banking fees, facilities termination fees and other merger related
costs.
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 financial services to
businesses and consumers in communities located in Central California. The
Company is continually seeking to increase its market share through the growth
of existing 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 and CoBank. El Capitan, headquartered in Sonora,
California, was an eight branch bank holding company with assets of $128 million
at the date of the merger. CoBank, headquartered 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 covers a substantial portion of Central California through
its franchise of 55 full-service banking offices.
The El Capitan and CoBank mergers were accounted for as poolings-of-interests
and, accordingly, the financial information included in management's discussion
and analysis of the consolidated financial condition and results of operations
presents the combined financial position and results of operations of ValliCorp,
El Capitan, and CoBank as if the mergers had been in effect for all periods
presented.
The Company achieved consolidated net income before merger and integration costs
of $6.8 million or $0.50 per share for the six months ended June 30, 1996 as
compared to $8.3 million or $0.61 per share for the same period in 1995.
Including merger and integration costs of $4.6 million ($2.8 million after tax
or $0.21 per share), the Company achieved net income of $4.0 million or $0.29
per share. Dividends per share through June 30, 1996 increased by 11% to $0.20
as compared to $0.18 per share for the same period in 1995.
For the three months ended June 30, 1996, net income was $3.8 million or $0.28
per share compared to $4.0 million or $0.30 per share for the same period in
1995. Significant changes with respect to operating results for the three months
ended June 30, 1996 as compared to the corresponding quarter in 1995 have been
discussed throughout the year-to-date comments in the MD&A.
At June 30, 1996, the Company's total risk-based capital and leverage ratios
were 13.97% and 9.27% compared to 13.40% and 8.76% at December 31, 1995,
respectively, all of which were in excess of applicable minimum regulatory
guidelines.
Nonperforming assets totaled $14,255,000 at June 30, 1996 (1.13% 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 1.50% at June
30, 1996 compared to 1.73% at December 31, 1995. The coverage ratio (allowance
for loan losses divided by nonperforming loans) was 111% at June 30, 1996
compared to 84% at December 31, 1995.
Page 12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PENDING MERGER
As described more fully in Note B to the unaudited consolidated financial
statements at June 30, 1996, the Company has entered into an Agreement and Plan
of Reorganization with Auburn in which the Company will acquire all of Auburn's
outstanding shares in a transaction to be accounted for under the purchase
method. Auburn's wholly owned subsidiary, The Bank of Commerce, N.A., will be
merged with and into ValliWide Bank. Subject to Auburn shareholder and
appropriate regulatory approvals, among other things, the Auburn merger is
expected to close in the third quarter of 1996.
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 1996 was impacted by merger and
integration costs incurred during the first quarter of 1996 totaling $4.6
million ($2.8 million after tax, or $0.21 per share) relating to the El Capitan
and CoBank mergers. Excluding merger and integration costs, net income for the
six months ended June 30, 1996 decreased by $1.5 million, or 18%, as compared to
the same period in 1995. This decrease is primarily due to the higher provision
for loan losses of $3.5 million for the six months ended June 30, 1996 as
compared to $1.8 million for the six months ended June 30, 1995 and the
reduction in net interest income from lower average earning asset volumes and
net interest margins. The increased provision reflects additional amounts for
impaired loans as deemed necessary to maintain reserves at levels considered
adequate by management (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>
SIX MONTHS ENDED JUNE 30,
1996 1995
-------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE INTEREST BALANCE RATE INTEREST
-------------------------------------------------------------------
ASSETS: (IN THOUSANDS, EXCEPT YIELD INFORMATION)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans/(1) (3)/ $ 828,784 9.91% $40,839 $864,597 10.44% $44,774
Securities
Taxable 201,110 5.78 5,780 263,010 5.60 7,304
Tax-exempt /(2)/ 28,256 6.53 917 33,188 6.42 1,057
---------- ---- ------ -------- ----- ------
Total securities 229,366 5.87 6,697 296,198 5.69 8,361
Federal funds sold and other 85,049 5.58 2,361 39,551 6.20 1,216
---------- ---- ------ -------- ----- ------
Total interest-earning assets 1,143,199 8.78 49,897 1,200,346 9.13 54,351
Allowance for loan losses (13,899) (14,652)
Noninterest-earning assets:
Cash and due from banks 85,742 84,356
Premises and equipment, net 26,541 25,127
Accrued interest receivable 9,907 11,267
Other assets 37,793 36,522
---------- ----------
Total average assets $1,289,283 $1,342,966
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Transaction accounts $ 349,183 2.03% $ 3,533 $385,134 2.36% $ 4,516
Savings accounts 167,088 2.61 2,165 148,587 2.79 2,056
Certificates of deposit 343,266 5.24 8,946 386,845 5.37 10,301
Debt financing 20,898 6.36 661 26,055 6.95 898
Short-term borrowings 9,622 5.06 242 3,667 5.83 106
---------- ---- ------ -------- ----- ------
Total interest-bearing liabilities 890,057 3.51 15,547 950,288 3.79 17,877
Noninterest-bearing liabilities:
Transaction accounts 263,228 261,164
Other liabilities 8,106 10,024
---------- ----------
Total liabilities 1,161,391 1,221,476
Total stockholders' equity 127,892 121,490
---------- ----------
Total average liabilities and
stockholders' equity $1,289,283 $1,342,966
========== ==========
Net interest income $34,350 $36,474
======= =======
Interest income as a percentage
of average earning assets 8.78% 9.13%
Interest expense as a percentage
of average earning assets 2.73 3.00
---- ----
Net interest margin 6.05% 6.13%
==== ====
</TABLE>
/(1)/ Amount includes loans held for sale, but excludes nonaccrual loans.
/(2)/ The tax equivalent yields for the six months ended June 30, 1996 and 1995
are 9.75% and 9.56%, respectively.
/(3)/ Interest income includes amortization of net origination fees of $119,000
and $867,000 for the periods ended June 30, 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, among other things, 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 $2,124,000 (6%)
for the six months ended June 30, 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 $4,454,000 (8%) which was offset by a decrease in total interest
expense of $2,330,000 (13%). The Company's net interest margin (based on
average earning assets) decreased eight basis points to 6.05% for the six months
ended June 30, 1996 from 6.13% for the same period of 1995, primarily
attributable to a decline in interest rates and increased competition in loan
pricing. However, the net interest margin for the three months ended March 31,
1996 of 5.97% increased to 6.09% for the three months ended June 30, 1996,
primarily attributable to a decrease in cost of funds.
Earning Asset Mix:
(Percentage of average earning assets)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ ----------------------
1996 1995 1995 1994 1993
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loans 72% 72% 72% 68% 71%
Securities 20 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
"volume changes." 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 "rate changes." 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 and the effects of tax-equivalent yields
have not been considered because management does not deem them to be
significant.
Page 15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 COMPARED TO 1995
------------------------------
TOTAL RATE VOLUME
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
NET INTEREST INCOME VARIANCE ANALYSIS:
Increase (decrease) in interest income:
Loans $(3,935) $(2,173) $(1,762)
Securities (1,664) 257 (1,921)
Federal funds sold and other 1,145 (131) 1,276
------- ------- -------
Total (4,454) (2,047) (2,407)
Increase (decrease) in interest expense:
Interest-bearing transaction accounts (983) (589) (394)
Savings accounts 109 (139) 248
Certificates of deposit (1,355) (238) (1,117)
Debt financing (237) (71) (166)
Short-term borrowings 136 (16) 152
------- ------- -------
Total (2,330) (1,053) (1,277)
------- ------- -------
Decrease in net interest income $(2,124) $ (994) $(1,130)
======= ======= =======
</TABLE>
The decrease in total interest income of $4,454,000 is comprised of a $2,407,000
volume decrease associated with the $57,147,000 decrease in average earning
assets for the six months ended June 30, 1996 compared to the same period in
1995 and a $2,047,000 rate decrease associated with a decrease in the total
yield on interest-earning assets to 8.78% for the six months ended June 30, 1996
from 9.13% for the same period in 1995. The decrease in total interest expense
of $2,330,000 at June 30, 1996 is comprised of a volume decrease of $1,277,000
related to the $60,231,000 decrease in average interest-bearing liabilities for
the six months ended June 30, 1996 compared to the same period of 1995 and a
$1,053,000 rate decrease associated with a decrease in the cost of funds to
3.51% for the six months ended June 30, 1996 from 3.79% for the same period in
1995.
The average balance of securities and federal funds sold decreased from
$335,749,000 for the six months ended June 30, 1995 to $314,415,000 for the six
months ended June 30, 1996. This $21,334,000 decrease (6%) is primarily
attributed to the maturity of securities held for investment.
Average loans decreased by $35,813,000 (4%) to $828,784,000 during the six
months ended June 30, 1996 as compared to the six months ended June 30, 1995.
The decrease in the yield on loans from 10.44% for the six months ended June 30,
1995 to 9.91% for the same period in 1996 reflects the impact of declining
interest rates in 1996 along with increased competition on loan pricing within
the Company's target market. Additionally, in 1996, the Company is reevaluating
its credit standards, the goal of which is to strengthen asset quality.
Average interest-bearing deposits decreased by $61,029,000 to $859,537,000 for
the six months ended June 30, 1996 primarily due to a planned reduction in high
cost time deposits in the first quarter of 1996. As a result, the interest rate
paid on average interest-bearing deposits during the six months ended June 30,
1996 decreased 27 basis points to 3.43% as compared to the similar period ended
1995.
Page 16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 marketplace and expected maturities in the loan, securities
and deposit portfolios.
OTHER INCOME
Other income for the six months ended June 30, 1996 of $6,843,000 increased
$751,000 (12%) compared to the six months ended June 30, 1995. Other service
charges and fees totaled $3,140,000 for the six months ended June 30, 1996
compared to $2,990,000 for the same period of 1995. The increase in other
income was primarily attributable to revenues generated from growth in merchant
services and the implementation of various fee enhancement programs. The extent
to which these enhancements continue is dependent upon various factors beyond
the control of the Company including economic conditions, unanticipated changes
in business conditions and inflation.
OTHER EXPENSE
The following table summarizes changes in other expense for the six months ended
June 30, 1996 as compared to the corresponding period in 1995.
<TABLE>
<CAPTION>
JUNE 30, CHANGE 1996 VS. 1995
---------------- --------------------
1996 1995 AMOUNT PERCENT
-----------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and employee benefits $11,669 $12,836 $(1,167) (9)%
Occupancy 3,187 2,724 463 17
Equipment and maintenance 2,369 2,264 105 5
Professional and legal fees 1,422 648 774 119
Amortization of intangible assets 780 845 (65) (8)
FDIC assessments 47 1,293 (1,246) (96)
Stationary and supplies 540 659 (119) (18)
Marketing 513 718 (205) (29)
Telephone 717 484 233 48
Data processing 1,018 293 725 247
Merchant credit card 680 225 45 202
OREO expense 400 294 106 36
Miscellaneous 3,030 3,867 (837 (22)
------- ------- ------- ----
Total other expense before merger and
integration costs 26,372 27,150 (778) (3)
Merger and integration costs 4,576 126 4,450 NM
------- ------- ------- ----
Total other expense $30,948 $27,276 $ 3,672 13%
======= ======= ======= ====
</TABLE>
NM = Not meaningful
Other expense totaled $30,948,000 in 1996, up $3,672,000, or 13%, compared to
the same period in 1995. Excluding, for comparative purposes, merger and
integration costs totaling $4,576,000 and $126,000 in 1996 and 1995,
respectively, other expense in 1996 decreased $778,000, or 3%. This decrease
resulted primarily from decreases in salaries and employee benefits and FDIC
assessments offset by increases in occupancy, professional and legal fees, data
processing expense and merchant credit card services.
Page 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The decrease in salaries and employee benefits of $1,167,000 (9%) is primarily
attributable to a reduction in full time equivalent employees related to the
recently completed acquisitions and outsourcing of certain data processing
functions. Effective June 1, 1995, the FDIC reduced deposit insurance premiums,
resulting in a decrease of $1,246,000 (96%) in assessments for the six months
ended June 30, 1996. As part of the Company's growth and expansion, occupancy
costs increased as a result of consolidating various support and administrative
functions from numerous locations into a centralized headquarters office. With
a more centralized operation, certain operating efficiencies and economies are
expected to be achieved. Professional and legal fees increased $774,000 (119%),
principally related to the engagement of outside consultants to review our
operations with the objective of revenue enhancements and streamlining our work
functions and outside legal collection services related to nonperforming loans.
Data processing expenses increased $725,000 (247%) primarily as a result of
outsourcing part of the Company's data processing functions. Merchant credit
card costs increased as a result of an increase in services provided to merchant
customers.
Merger and integration costs totaling $4.6 million ($2.8 million after taxes, or
$0.21 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 merger related costs.
As a result of the El Capitan and CoBank mergers, annual cost savings in excess
of $3 million are projected to be achieved 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, no assurance can be given with respect to the ultimate level of cost
savings to be realized, or that such savings will be realized in the time frame
currently anticipated.
The efficiency ratio excluding, merger and integration costs for the six months
ended June 30, 1996, increased to 64.02% as compared to 63.78% for the same
period in 1995. However, the efficiency ratio in the second quarter of 1996
improved to 61.80% as compared to 63.28% for the comparable period in 1995. This
improvement reflects, among other things, cost savings anticipated to be
realized by the Company as a result of the consolidation of operations related
to the two recently completed acquisitions.
BALANCE SHEET ANALYSIS
For the six months ended June 30, 1996, as compared to December 31, 1995, the
Company's total loans, total assets, and total deposits decreased by
$25,881,000, or 3%, $131,976,000, or 9%, and $120,829,000, or 10%, respectively.
The decreases in loans, assets and deposits resulted primarily from decreases in
loan demand and a planned reduction in high-cost time deposits as well as
seasonal and anticipated merger-related decreases in deposits.
SECURITIES PORTFOLIO
Securities available for sale totaled $182,589,000 at June 30, 1996 compared to
$249,586,000 at December 31, 1995. 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 2.54% of the portfolio compared to .37% 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 $21,007,000 at June 30, 1996 compared to
$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>
JUNE 30, 1996 DECEMBER 31, 1995
------------------------- --------------------------
DOLLAR PERCENT DOLLAR PERCENT
AMOUNT OF LOANS AMOUNT OF LOANS
-------- --------- --------- ----------
LOAN CATEGORIES: (DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial $449,661 53% $443,660 51%
Real estate - construction 77,234 9 74,720 8
Real estate - mortgage 117,376 14 136,278 16
Installment 190,510 23 205,869 24
Other 5,087 1 5,222 1
-------- --- --------- ---
Total loans 839,868 100% 865,749 100%
Less allowance for loan losses (12,599) (14,986)
-------- ---------
Net loans $827,269 $850,763
======== =========
</TABLE>
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.
Management believes that the decrease in the Company's loans since December 31,
1995 is attributable, in part, to an emphasis on reducing the levels of
criticized/classified and nonperforming loans and to the implementation of plans
of new members of the Company's executive management to reposition the mix of
the Company's loan portfolio. The Company's loan portfolio mix is changing
toward further reliance on commercial lending, in particular to agribusiness
concerns, increased consumer lending and a focus upon residential construction
lending as opposed to longer-term real estate mortgages. Following this
transitional period, management anticipates further growth in these areas
compared to other components of the Company's loan portfolio.
Page 19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMMERCIAL
The Company's commercial, financial and agribusiness loans, referred to herein
as commercial loans, totaled $449,661,000 and $443,660,000 or 53% and 51% of the
Company's total loans at June 30, 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.
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 Central California. Approximately 34% of
total loans at June 30, 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 operations 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 20% of total loans at June 30, 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, loan-to-value ratios approximate 65% to 70%. 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.
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 June 30, 1996 and December 31, 1995 totaled
$77,234,000 and $74,720,000 or 9% and 8%, respectively, of total loans.
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 June 30, 1996 and December 31, 1995, the Company's real estate-mortgage
loans totaled $117,376,000 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 9% of total loans at
June 30, 1996) are primarily "mini-perm" (medium-term) commercial real estate
mortgages, with maturities generally ranging from five to seven years.
Residential mortgage loans totaled approximately $44,297,000 at June 30, 1996.
Page 20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Real estate-mortgage and construction lending entail 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 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 June 30, 1996 and December 31, 1995, installment loans aggregated
approximately $190,510,000 and $205,869,000, or 23% and 24%, respectively, of
total loans. Approximately 11% and 12% of total loans at June 30, 1996 are
installment loans which are secured by real estate and installment loans
unsecured or secured by other collateral, respectively. 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.
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 risks
affecting stockholders and depositors. The Credit Quality Committee, made up of
members of the Board of Directors of ValliWide, approves credit policy and
reviews asset quality and compliance with credit policy. ValliCorp maintains a
loan review staff as part of its internal audit function that examines the loan
portfolios of its subsidiary bank for compliance with established standards.
Executive management, senior lending officers 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
Page 21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
which may result in the Company realizing less than book value. Due to possible
market fluctuations in real estate values, management can give no assurance that
the recorded 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 measurably indicate the principal of the
loan is uncollectible in whole or in part.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -----------------------------------------------
1996 1995 1994 1993 1992 1991
--------- ------- -------- ------- ------- ------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans..................... $11,106 $17,480 $ 7,303 $ 6,059 $4,930 $3,259
Restructured loans................... 257 257 558 933 830 900
------- ------- ------- ------- ------ ------
Nonperforming loans.................. 11,363 17,737 7,861 6,992 5,760 4,159
Other real estate owned.............. 2,892 2,512 3,665 3,537 1,771 1,506
------- ------- ------- ------- ------ -----
Total nonperforming assets.......... $14,255 $20,249 $11,526 $10,529 $7,531 $5,665
======= ======= ======= ======= ====== =====
Accruing loans 90-days past due...... $ 2,874 $ 1,451 $ 3,073 $ 1,195 $1,517 $1,640
======= ======= ======= ======= ====== =====
Nonperforming loans to total loans... 1.35% 2.05% 0.89% 0.97% 1.04% 0.79%
Nonperforming assets:
To total loans...................... 1.70% 2.34% 1.31% 1.46 1.36% 1.07%
To total loans and OREO............. 1.69 2.33 1.30 1.45 1.36 1.07
To total assets..................... 1.13 1.46 0.87 0.87 0.88 0.70
</TABLE>
At June 30, 1996, nonperforming assets decreased approximately $6 million (30%)
from December 31, 1995 to $14 million. Nonaccrual loans decreased approximately
36% primarily due to charge-offs of approximately $3.5 million primarily related
to previously identified problem loans and a reclassification of $3.3 million of
foreclosed properties to OREO. 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 $9.8 million and $4.9
million, respectively decreasing to $8.1 million and $1.3 million respectively
at June 30, 1996.
The net increase in OREO of $380,000 is a result of transferring $3.3 million of
foreclosed properties offset by the sale of OREO properties. The foreclosed
properties were mainly comprised of two real estate-construction loans totaling
$2.6 million, one of which was sold for an amount in excess of its book value.
The remaining real estate-construction loan of $1.6 million represents the
majority of the OREO balance at June 30, 1996.
While management believes the overall credit quality of the loan portfolio has
improved, total nonaccrual balances may fluctuate from quarter to quarter based
upon various factors including changes in 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 $1.9 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 June 30,
1996, the $12,599,000 allowance for loan losses constituted 1.50% of total loans
and 111% of nonperforming loans.
The provision for loan losses for the six months ended June 30, 1996 was
$3,527,000 as compared to $1,762,000 for the corresponding period in 1995. Net
charge-offs during the six months ended June 30, 1996 totaled $5,914,000 as
compared to $465,000 for the same period in 1995. The increase in the provision
for loan losses reflects additional amounts for impaired loans as deemed
necessary to maintain reserves at levels considered adequate by management. The
increase in net charge-offs is primarily related to previously identified
problem loans and the effect of the two mergers which were completed during the
first quarter of 1996 (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>
SIX SIX YEAR
MONTHS ENDED MONTHS ENDED ENDED
JUNE 30, JUNE 30, DECEMBER 31,
1996 1995 1995
------------ ------------ -------------
(DOLLAR AMOUNTS 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 3,527 1,762 9,633
Charge-offs:
Commercial, financial and agribusiness 3,061 416 4,362
Real estate - construction 1,834 - 109
Real estate - mortgage 75 158 3,515
Installment 1,838 220 1,346
Other - 9 116
-------- -------- --------
Total charge-offs 6,808 803 9,448
Recoveries:
Commercial, financial and agribusiness 213 217 400
Real estate - construction - 2 -
Real estate - mortgage 28 17 26
Installment 653 92 227
Other - 10 18
-------- -------- --------
Total recoveries 894 338 671
-------- -------- --------
Net charge-offs 5,914 465 8,777
-------- -------- --------
Balance at end-of-period $ 12,599 $ 15,427 $ 14,986
======== ======== ========
Loans outstanding at end-of-period $839,868 $906,130 $865,749
Average loans 839,694 872,608 883,508
Net charge-offs during the period to average loans (annualized) 1.43% 0.11% 0.99%
Allowance for loan losses
To total loans 1.50% 1.74% 1.73%
To nonperforming loans 111 88 84
To nonperforming assets 88 75 74
</TABLE>
Page 25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES
Stockholders' equity decreased $3,570,000 during the six months ended June 30,
1996. The decrease was primarily attributable to the repurchase of common stock
of $5,250,000 and the net-of-tax effect of the change in unrealized losses on
securities available for sale of $2,183,000 offset by net income of $3,985,000.
Through June 30, 1996, the Company has repurchased 329,000 common shares to be
issued in connection with the Auburn merger.
ValliCorp 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.
The following table presents the Company's capital positions under the
regulatory guidelines:
<TABLE>
<CAPTION>
MINIMUM
JUNE 30, DECEMBER 31, CAPITAL
1996 1995 RATIOS
--------- ------------- ------------
<S> <C> <C> <C>
CAPITAL RATIOS:
Total risk-based capital ratio 13.97% 13.40% 8.00%
Tier 1 capital to risk-weighted assets 12.70 12.11 4.00
Leverage ratio 9.27 8.76 3.00 - 5.00
</TABLE>
At June 30, 1996, ValliCorp and its subsidiary bank exceeded all applicable
federal capital standards.
The Company is subject to regulation and examination by the Board of Governors
of the Federal Reserve System (the "Federal Reserve"). ValliWide is subject to
regulation and examination by the Federal Reserve and the California State
Banking Department. ValliCorp and ValliWide promptly respond to findings of
regulators. Following a 1995 examination of ValliCorp by the Federal Reserve
and of ValliWide by the Federal Reserve and California State Banking Department,
the Board of Directors of ValliCorp and ValliWide adopted resolutions directing
management of ValliCorp and ValliWide 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.
Page 26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND 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.
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 securities, and interest
earned. The Company's principal cash outflows are for loan origination,
purchases of securities, depositor withdrawals, and payment of operating
expenses.
At June 30, 1996, the Company's cash and cash equivalents totaled $166 million,
an increase of $5 million from the balance at December 31, 1995. Operating
activities of the Company provided $3,950,000 primarily related to the Company's
net income of $3,985,000. Investing activities provided $132 million primarily
due to maturities of securities exceeding purchases by $107 million. The
Company's financing activities decreased cash and cash equivalents by an
additional $131 million principally due to a decrease of $121 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 approximately $100 million 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 VallliCorp as well as ValliWide. Aside from
accessing the capital markets, ValliCorp's primary source of liquidity is
dividends from ValliWide. There are potential restrictions which could be
placed on dividends from ValliWide; however, management believes that adequate
dividends will be received to meet ValliCorp'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>
JUNE 30, 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)/............................... $517,179 $ 21,534 $ 61,106 $129,311 $ 99,632 $ 828,762
Securities............................... - 36,566 38,729 77,432 50,869 203,596
Federal funds sold and other............. - 80,200 - - - 80,200
-------- -------- -------- -------- -------- ----------
Total interest earning assets....... $517,179 $138,300 $ 99,835 $206,743 $150,501 $1,112,558
======== ======== ======== ======== ======== ==========
Interest-bearing
transaction accounts................. $321,361 $ - $ - $ - $ - $ 321,361
Savings accounts......................... 162,793 - - - - 162,793
Certificates of deposit.................. - 108,373 180,828 44,753 76 334,030
Federal funds purchased and repurchase
agreements........................... - 6,000 - - - 6,000
Debt financing........................... 20,887 - - - - 20,887
-------- -------- -------- -------- -------- ----------
Total interest-bearing
liabilities...................... $505,041 $114,373 $180,828 $ 44,753 $ 76 $ 845,071
======== ======== ======== ======== ======== ==========
Interest rate sensitivity gap/(2)/....... $ 12,138 $ 23,927 $(80,993) $161,990 $150,425 $ 267,487
Cumulative gap........................... $ 12,138 $ 36,065 $(44,928) $117,062 $267,487
Cumulative gap percentage to interest
earning assets....................... 1% 3% (4)% 11% 24%
</TABLE>
(1) Excludes nonaccrual loans of $11,106.
(2) Does not assume prepayments of interest-earning assets or run-off of
interest-bearing liabilities.
Based upon the above repricing schedule, at June 30, 1996, the Company was
"liability sensitive" with respect to interest-earning assets and interest-
bearing liabilities repricing within one year. Because approximately $45
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.
Page 28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 expense which tends to rise during periods of general inflation.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit Index
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
b) Reports on Form 8-K - None
Page 29
<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: August 9, 1996 By /s/ J. Mike McGowan
-------------------------- -----------------------------------------
J. Mike McGowan
Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 1996 By /s/ Wolfgang T.N. Muelleck
------------------------ ------------------------------------------
Wolfgang T.N. Muelleck
Executive Vice President
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 85,607
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 80,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 182,589
<INVESTMENTS-CARRYING> 21,007
<INVESTMENTS-MARKET> 21,147
<LOANS> 841,741
<ALLOWANCE> 12,599
<TOTAL-ASSETS> 1,258,059
<DEPOSITS> 1,100,557
<SHORT-TERM> 6,000
<LIABILITIES-OTHER> 7,064
<LONG-TERM> 20,887
0
0
<COMMON> 134
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 1,258,059
<INTEREST-LOAN> 40,839
<INTEREST-INVEST> 6,697
<INTEREST-OTHER> 2,361
<INTEREST-TOTAL> 49,897
<INTEREST-DEPOSIT> 14,644
<INTEREST-EXPENSE> 15,547
<INTEREST-INCOME-NET> 34,350
<LOAN-LOSSES> 3,527
<SECURITIES-GAINS> 13
<EXPENSE-OTHER> 30,948
<INCOME-PRETAX> 6,718
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,985
<EPS-PRIMARY> .30
<EPS-DILUTED> .29
<YIELD-ACTUAL> 6.05
<LOANS-NON> 11,106
<LOANS-PAST> 2,874
<LOANS-TROUBLED> 257
<LOANS-PROBLEM> 1,889
<ALLOWANCE-OPEN> 14,986
<CHARGE-OFFS> 6,808
<RECOVERIES> 894
<ALLOWANCE-CLOSE> 12,599
<ALLOWANCE-DOMESTIC> 3,222
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9,377
</TABLE>
