<PAGE>
REGISTRATION NO. 333-______
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COMMUNITY FIRST BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6022 46-0391436
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
520 MAIN AVENUE
FARGO, NORTH DAKOTA 58124-0001
(701) 298-5600
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
DONALD R. MENGEDOTH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COMMUNITY FIRST BANKSHARES, INC.
520 MAIN AVENUE
FARGO, NORTH DAKOTA 58124-0001
(701) 298-5600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES TO:
PATRICK DELANEY, ESQ. JAMES K. STERRETT, ESQ.
MARTIN R. ROSENBAUM, ESQ. CHARLES R. KIMMEL, ESQ.
LINDQUIST & VENNUM P.L.L.P. STERRETT & KIMMEL, LLP
4200 IDS CENTER SUITE 2SK
80 SOUTH EIGHTH STREET 1298 PROSPECT STREET
MINNEAPOLIS, MINNESOTA 55402-2205 LA JOLLA, CALIFORNIA
92037-3625
TELEPHONE: (612) 371-3211 TELEPHONE: (858) 454-0206
------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(2)
<S> <C> <C> <C> <C>
Common Stock, $.01 par value.......... 3,611,111 shares (2) $60,488,043.75 $16,815.68
</TABLE>
(1) Represents the maximum number of shares of common stock of the Registrant
that may be issued to the stockholders of Valley National Corporation in the
merger described in this registration statement determined on the basis of
the maximum exchange rate for such shares in the merger (i.e., 1.119 shares
of Community First Bankshares, Inc. common stock for each share of common
stock of Valley National Corporation, including shares subject to options).
(2) Each share of common stock of Valley National will be converted into the
right to receive shares of common stock of the Registrant in the merger
described in this registration statement. Pursuant to Rule 457(f)(1) under
the Securities Act, the registration fee has been calculated based on the
average of the high and low prices per share of the Valley National common
stock as reported on the Nasdaq National Market on August 5, 1999 and the
maximum number of shares of Valley National common stock to be acquired by
the Registrant in the merger.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
VALLEY NATIONAL CORPORATION
1234 EAST MAIN STREET
EL CAJON, CALIFORNIA 92021
(619) 593-3323
3,611,111 SHARES OF COMMUNITY FIRST BANKSHARES, INC. COMMON STOCK
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
TO THE STOCKHOLDERS OF VALLEY NATIONAL CORPORATION:
The board of directors of Valley National Corporation has approved an agreement
that provides for the merger of Valley National Corporation with and into
Community First Bankshares, Inc. We think the merger will give you a fair price
for your Valley National common stock.
The merger will give you the opportunity to convert your shares on a tax-free
basis to shares in a larger, more diversified enterprise. Community First common
stock has a more active trading market than Valley National's common stock.
We cannot complete the merger unless stockholders of Valley National approve it.
We have called a special stockholders meeting to consider approving the merger.
The date, time and place of the meeting is:
Thursday, September 16, 1999
7:00 p.m., Local Time
Singing Hills Country Club
3007 Dehesa Road
El Cajon, California 92019
Whether or not you plan to attend the meeting, please take the time to complete
and mail your proxy to us at your earliest opportunity, but no later than
. If you return an UNMARKED proxy form, your proxy will be counted as a
vote in FAVOR of the merger. If you DO NOT RETURN your
proxy, you will be treated as having VOTED AGAINST the merger.
If the merger is completed, you will receive shares of Community First common
stock in exchange for your Valley National shares. On the closing date,
Community First and Valley National will calculate the exchange rate based on a
formula.
The exchange rate will depend on the average trading value of Community First
common stock, the net book value of Valley National, and the number of shares of
Valley National common stock and shares subject to stock options on the closing
date. See the description on pages 3 and 25 for examples and a more complete
description of the formula.
We are pleased to enclose for your review this proxy statement/prospectus that
provides you with the information you need to evaluate the merger. We encourage
you to review it carefully before making a decision.
We recommend that you vote your shares for approval of the merger.
Sincerely,
William V. Ehlen
President and Chief Executive Officer,
Valley National Corporation
This merger involves risks. SEE RISK FACTORS ON PAGE 16
Neither the Securities and Exchange Commission nor any state securities
regulators have approved the Community First stock to be issued under this proxy
statement/prospectus or determined if this proxy statement/prospectus is
accurate or adequate. Any representation to the contrary is a criminal offense.
Proxy statement/prospectus dated , 1999, and first mailed to
stockholders on , 1999.
<PAGE>
VALLEY NATIONAL CORPORATION
1234 EAST MAIN STREET
EL CAJON, CALIFORNIA 92021
(619) 593-3323
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
<TABLE>
<S> <C>
TIME:
7:00 p.m., Local Time
DATE:
September 16, 1999
PLACE:
Singing Hills Country Club
3007 Dehesa Road
El Cajon, California 92019
PURPOSE:
Vote on the merger of Valley National Corporation into Community First Bankshares,
Inc.
Only stockholders of record on , 1999 may vote at the meeting.
</TABLE>
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY CARD
IN THE ENCLOSED ENVELOPE PROMPTLY.
- ------------------------
Secretary
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER.................................................................. 1
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS.............................................. 1
SUMMARY................................................................................................. 2
HISTORICAL AND PRO FORMA COMPARATIVE UNAUDITED PER SHARE DATA........................................... 8
COMMUNITY FIRST SELECTED CONSOLIDATED FINANCIAL INFORMATION............................................. 10
VALLEY NATIONAL SELECTED FINANCIAL INFORMATION.......................................................... 12
RISK FACTORS............................................................................................ 14
MARKET PRICES AND DIVIDEND POLICY....................................................................... 16
Market for Community First Common Stock............................................................... 16
Market for Valley National Common Stock............................................................... 16
Stockholder Data...................................................................................... 16
Community First Common Stock Dividend Payment History and Restrictions................................ 16
Valley National Dividend Policy and Payment History................................................... 17
INFORMATION ABOUT THE VALLEY NATIONAL SPECIAL MEETING................................................... 18
Purpose of the Special Meeting........................................................................ 18
Vote Required and Shares Entitled to Vote............................................................. 18
Voting and Revocation of the Proxies.................................................................. 18
Solicitation of Proxies............................................................................... 19
THE MERGER.............................................................................................. 20
General............................................................................................... 20
Background of the Merger.............................................................................. 20
Reasons for the Merger................................................................................ 20
Opinion of Valley National's Financial Advisor........................................................ 21
Effective Time of the Merger.......................................................................... 25
Consequences of the Merger............................................................................ 25
Conversion of Valley National Common Stock and Calculation of Exchange Rate........................... 25
Delivery of Community First Common Stock.............................................................. 26
Certain Federal Income Tax Consequences............................................................... 27
Regulatory Matters and Conditions to the Merger....................................................... 28
Indemnification and Liability Insurance............................................................... 30
Interests of Certain Persons in the Merger............................................................ 30
Community First Option to Acquire Valley National Shares.............................................. 31
Resale of Community First Common Stock................................................................ 31
No Dissenters' Rights................................................................................. 32
Representations and Warranties........................................................................ 32
Covenants and Conduct of Valley National's Business Pending the Merger................................ 32
Amendment, Waiver and Termination..................................................................... 36
Effect on Valley National Stock Option Plans.......................................................... 36
Effect on Other Valley National Employee Benefit Plans................................................ 36
Expenses.............................................................................................. 36
Accounting Treatment.................................................................................. 37
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF VALLEY
NATIONAL.............................................................................................. 38
Basis of Presentation................................................................................. 38
Results of Operations................................................................................. 38
Financial Condition................................................................................... 46
Year 2000 Compliance Issues........................................................................... 56
BUSINESS OF VALLEY NATIONAL............................................................................. 59
General............................................................................................... 59
Legal Proceedings..................................................................................... 60
Directors and Executive Officers...................................................................... 60
Supervision and Regulation............................................................................ 61
VALLEY NATIONAL'S PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT........................... 65
Transactions With Officers, Directors and Affiliates.................................................. 66
MATERIAL DIFFERENCES IN RIGHTS OF VALLEY NATIONAL STOCKHOLDERS.......................................... 67
Capital Stock......................................................................................... 67
Election of Directors................................................................................. 67
Required Vote for Authorization of Certain Actions.................................................... 67
Anti-takeover Provisions.............................................................................. 68
LEGAL MATTERS........................................................................................... 68
WHERE YOU CAN FIND MORE INFORMATION..................................................................... 68
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE....................................................... 69
WHO CAN HELP ANSWER YOUR QUESTIONS...................................................................... 69
EXPERTS................................................................................................. 70
INDEX TO FINANCIAL STATEMENTS........................................................................... F-1
APPENDIX A - MERGER AGREEMENT........................................................................... A-1
APPENDIX B - OPINION OF HOVDE FINANCIAL, INC............................................................ B-1
</TABLE>
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHEN AND WHERE IS THE STOCKHOLDER MEETING?
A: The meeting will take place on Thursday, September 16, 1999 at 7:00 p.m. The
meeting will take place at Singing Hills Country Club, 3007 Dehesa Road, El
Cajon, California 92019.
Q: WHAT DO I NEED TO DO NOW?
A: Read this proxy statement/prospectus, then mail your signed proxy card in
the enclosed return envelope, so that your shares may be represented at the
stockholders' meeting. To make sure we receive your vote, please send your
proxy card even if you currently plan to attend the meeting in person. The
board of directors of Valley National recommends that you vote in favor of
the merger.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: Just sign another proxy card, date it after the first one and send it to the
Secretary of Valley National before the stockholders' meeting. Or, attend
the meeting in person and vote. You may also revoke your proxy by sending a
notice of revocation to the Secretary of Valley National, 1234 East Main
Street, El Cajon, California 92021.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares held in "street name" only if you provide
your broker with instructions on how to vote your shares. If you do not give
voting instructions to your broker, you will, in effect, be voting against
the merger unless you appear in person at the meeting and vote in favor of
the merger. You should therefore be sure to provide your broker with
instructions on how to vote your shares.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is approved and completed, we will send you written
instructions for exchanging your share certificates.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We hope to complete the merger by the end of October, 1999. We are working
to complete the merger as quickly as possible. In addition to stockholder
approval, we must also obtain the approval of bank regulatory agencies.
Q: WHO DO I CALL IF I HAVE QUESTIONS ABOUT THE MEETING OR THE MERGER?
A: You may call Lilli Walsh at (619) 593-3323.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains forward-looking statements. These
statements relate to future events or the future financial performance of
Community First and Valley National. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "anticipates," "believes," "future," "intends," "estimates,"
"predicts," "potential," or "continue" or the negative of such terms and other
comparable terminology. These statements only reflect management's expectations
and estimates. Actual events or results may differ materially from those
projected in the forward-looking statements as a result of the risks outlined
beginning on page 16. These factors may cause our actual results to differ
materially from any forward-looking statements. We are not undertaking any
obligations to update any forward-looking statements contained in this proxy
statement/prospectus to reflect any future events or developments.
1
<PAGE>
SUMMARY
THIS SUMMARY INCLUDES SELECTED INFORMATION FROM THIS DOCUMENT. TO UNDERSTAND
THE MERGER MORE FULLY AND FOR A DESCRIPTION OF THE LEGAL TERMS OF THE MERGER,
YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE OTHER AVAILABLE
INFORMATION REFERRED TO IN "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 68. THE
MERGER AGREEMENT IS INCLUDED AS APPENDIX A TO THIS PROXY STATEMENT/PROSPECTUS.
WE ENCOURAGE YOU TO READ THE MERGER AGREEMENT. IT IS THE LEGAL DOCUMENT THAT
GOVERNS THE MERGER. WE HAVE INCLUDED PAGE REFERENCES IN PARENTHESES TO DIRECT
YOU TO A MORE COMPLETE DESCRIPTION OF THE TOPICS PRESENTED IN THIS SUMMARY.
THE COMPANIES
COMMUNITY FIRST BANKSHARES, INC. (SEE PAGE 68)
520 Main Avenue
Fargo, North Dakota 58124-0001
(701) 298-5600
Community First is a multi-bank holding company that owns and operates banks
and bank branches in 154 communities in Arizona, Colorado, Iowa, Minnesota,
Nebraska, New Mexico, North Dakota, South Dakota, Utah, Wisconsin and Wyoming.
Total assets of Community First are approximately $5.9 billion. Community First
acquired banks and bank branches in 50 communities in 1998. Community First's
banks are community banks that provide a full range of commercial and consumer
banking services primarily to individuals and businesses in small and
medium-sized communities and the surrounding market areas. A few of the banks
are located in large metropolitan areas. Community First encourages local
autonomy for its local bank presidents, while providing the benefits of holding
company affiliation.
Community First's primary strategy is to operate and continue to acquire
banks and bank branches in communities which generally have populations between
3,000 and 50,000 and are located in Community First's key target acquisition
states of Arizona, Colorado, Iowa, Kansas, Minnesota, Montana, Nebraska, New
Mexico, North Dakota, Oregon, South Dakota, Utah, Washington, Wisconsin and
Wyoming, and additionally in the adjacent states of California, Idaho, Illinois,
Missouri, Nevada, Oklahoma and Texas. These communities are believed to provide
Community First with the opportunity for a stable, relatively low-cost deposit
base. The individual banks and bank branches sought to be acquired by Community
First generally have approximately $20 million to $150 million in assets.
In addition, Community First has decided to adopt a national community
banking strategy, expanding its search for bank acquisitions in similar
communities in other states throughout the United States. In pursuing its
national community banking strategy, Community First intends to concentrate on
larger acquisitions, focusing on banks and banking groups with $200 million to
$500 million in assets.
VALLEY NATIONAL CORPORATION (SEE PAGE 59)
1234 East Main Street
El Cajon, California 92021
(619) 593-3330
Valley National is a bank holding company. It conducts business through its
only subsidiary bank, Valle de Oro Bank, National Association, which is located
in El Cajon, California. Valle do Oro Bank operates six offices in East San
Diego County. Valle de Oro Bank conducts the same business operations as a
typical independent, commercial bank, including accepting demand, savings and
time deposits and making commercial, real estate and consumer loans. As of
December 31, 1998, Valley National had total assets of approximately $240.8
million, total deposits of $219.6 million, net loans of $154.4 million, and
shareholders' equity of $19.9 million.
2
<PAGE>
Valley National became the holding company for Valle de Oro Bank on March
31, 1999. Before that, Valle de Oro Bank was a publicly held company. When we
refer to "Valley National" in this proxy statement/prospectus, we are also
referring to Valle de Oro Bank for the time periods before March 31, 1999.
THE MERGER
Valley National Corporation will merge into Community First and Community
First will be the surviving company. The merger will combine our businesses
under a single holding company called Community First. As a result of the
merger, Community First will become the holding company for Valle de Oro Bank.
The merger agreement is attached as Appendix A to this proxy
statement/prospectus. We encourage you to read the merger agreement. It is the
legal document governing the merger.
WHAT VALLEY NATIONAL STOCKHOLDERS WILL RECEIVE IN THE MERGER--THE EXCHANGE RATE
(SEE PAGE 25)
On completion of the merger, you will receive Community First common shares
for your Valley National common shares. In addition to Community First common
stock, you will also receive a check for a small amount of cash instead of any
fractional share you might receive.
To calculate the exact number of shares you will receive, you will have to
multiply the number of Valley National shares you own by an exchange rate. The
exchange rate will be between 0.775 and 1.119 shares of Community First common
stock for each share of Valley National common stock. This exchange rate assumes
that 3,226,029 shares of Valley National common stock are outstanding or subject
to options on the closing date, and assumes that Valley National's net book
value is exactly $20 million. The following table illustrates the estimated
exchange rate and value of shares to be received for one share of Valley
National common stock, based on these assumptions and various assumed levels of
the trading value of Community First common stock.
<TABLE>
<CAPTION>
TRADING VALUE OF COMMUNITY
ASSUMED TRADING TOTAL COMMUNITY FIRST FIRST COMMON STOCK RECEIVED
VALUE OF COMMUNITY SHARES ISSUED IN THE FOR EACH VALLEY NATIONAL
FIRST COMMON STOCK MERGER EXCHANGE RATE SHARE
- ------------------ --------------------- --------------- ---------------------------
<S> <C> <C> <C>
$ 30.00 2,500,000 0.775 $ 23.25
$ 26.00 2,500,000 0.775 20.15
$ 22.00 2,954,545 0.916 20.15
$ 18.00 3,611,111 1.119 20.14
$ 14.00* 3,611,111 1.119 15.67
</TABLE>
- ------------------------
* If the average trading value of Community First common stock falls below
$18.00 per share AND this represents a decline of more than 20% since May 7,
1999 relative to an index of comparable stocks, Valley National's board of
directors may elect to terminate the merger agreement.
The calculation of the exchange rate is described in detail in "The
Merger--Conversion of Valley National Common Stock and Calculation of Exchange
Rate" on pages 25 and 26.
REASONS FOR THE MERGER
The Valley National board of directors believes the merger will benefit both
you and Valley National for several reasons, including:
- The amount and adequacy of the merger consideration;
- The opinion of Hovde Financial, its financial advisor, as to the fairness
of the merger consideration;
3
<PAGE>
- The current market price, dividend payment history and book value of
Community First;
- The historical and prospective business, operations, earnings and
financial condition of Community First; and
- The merger will be federal income tax-free to Valley National stockholders
except for cash received for fractional shares.
The board of directors of Valley National believes the reasons for the
merger must be viewed as a whole and did not assign any greater or lessor
importance to a specific reason.
VALLEY NATIONAL BOARD'S RECOMMENDATION TO YOU (SEE PAGE 18)
The Valley National board of directors believes that the merger is fair to
you and in your best interests. The Valley National board of directors
unanimously recommends that you vote "For" adoption of the merger agreement and
approval of the merger.
OPINION OF VALLEY NATIONAL'S FINANCIAL ADVISOR (SEE PAGE 21 AND APPENDIX B)
Valley National's financial advisor, Hovde Financial, Inc., issued an
opinion to the Valley National board of directors that the consideration to be
received by the stockholders of Valley National in the merger is fair from a
financial point of view. Valley National's board of directors considered this
opinion in deciding to approve the merger. The opinion is attached as Appendix
B, and we encourage you to read this opinion carefully.
Hovde Financial performed several analyses in connection with delivering its
opinion. These analyses included comparing Valley National's and Community
First's historical stock trading prices, comparing Valley National and Community
First to other publicly-traded companies, and estimating the relative values and
contributions of Valley National and Community First based on past and estimated
future performance. Hovde Financial will be paid $975,000 for providing its
opinion in the event that the merger is completed, plus reasonable expenses.
THE SPECIAL MEETING (SEE PAGE 18)
Valley National will hold a special meeting of stockholders on Thursday,
September 16, 1999, at 7:00 p.m., local time, at Singing Hills Country Club,
3007 Dehesa Road, El Cajon, California 92019 to approve the merger agreement.
RECORD DATE AND VOTING POWER (SEE PAGE 18)
You are entitled to vote at the stockholders' special meeting if you owned
shares of Valley National common stock on the close of business on ,
1999, the record date for the special meeting. You will have one vote at the
special meeting for each share of Valley National common stock you owned on the
record date. There are shares of Valley National common stock
entitled to be voted at the special meeting.
REQUIRED VOTE (SEE PAGE 18)
The merger agreement must be approved by the holders of a majority of the
shares of Valley National common stock outstanding on the record date.
The merger does not require the approval of Community First's stockholders.
4
<PAGE>
SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN STOCKHOLDERS (SEE PAGE 65)
The directors and executive officers of Valley National own approximately
32.5% of the shares entitled to vote at the stockholders' special meeting. All
of them have indicated that they expect to vote their shares in favor of the
merger agreement and approval of the merger.
OWNERSHIP OF COMMUNITY FIRST AFTER THE MERGER
Community First will issue shares of its stock to Valley National
stockholders in connection with the merger which would constitute between 5.0%
and 7.1% of the outstanding stock of Community First after the merger. The
shares will be listed for trading on the Nasdaq National Market.
TREATMENT OF VALLEY NATIONAL STOCK OPTIONS (SEE PAGE 36)
In the merger, all outstanding stock options of Valley National will be
converted into options to purchase Community First stock. The number of shares
of Community First common stock subject to each option will be determined by
multiplying the number of Valley National shares subject to the option by the
exchange rate. The exercise price of each option will be determined by dividing
the existing exercise price by the exchange rate. As of the date of this proxy
statement/prospectus, there were 443,394 shares of Valley National common stock
subject to stock options, of which 306,863 are currently exercisable.
MONETARY BENEFITS TO VALLEY NATIONAL'S OFFICERS AND DIRECTORS IN THE MERGER (SEE
PAGE 30)
You should be aware that several of Valley National's officers and directors
have stock options and severance packages and one officer has an employment
contract. These arrangements give them interests in the merger that are
different from other Valley National stockholders. In addition, Community First
will maintain indemnification arrangements for Valley National's officers and
directors for actions taken in their official capacity before the effective time
of the merger, and Valley National intends to acquire liability insurance
covering its officers and directors for these activities.
The Valley National board was aware of these and other interests and
considered them before approving and adopting the merger agreement.
COMPARATIVE MARKET PRICE INFORMATION (SEE PAGE 16)
Community First common stock is traded on the Nasdaq National Market under
the symbol "CFBX." On May 7, 1999, the last trading day before the announcement
that Community First and Valley National entered into the merger agreement, the
closing sale price of Community First common stock was reported at $20.938 per
share. On August 5, 1999, the closing sale price of Community First common stock
was reported at $21.25.
Valley National common stock is traded on the Nasdaq National Market under
the symbol "VADO." On May 7, 1999, the last trading day before the announcement
that Community First and Valley National entered into the merger agreement, the
closing sale price of Valley National common stock was reported at $16.875 per
share. On August 5, 1999, the closing sale price of Valley National common stock
was reported at $19.50. After the closing of the merger, Valley National common
stock will no longer be publicly traded because all of the shares of Valley
National common stock will be converted into Community First common stock.
NO FEDERAL INCOME TAX ON SHARES RECEIVED IN MERGER (SEE PAGE 27)
Valley National stockholders generally will not recognize gain or loss for
federal income tax purposes for the shares of Community First common stock they
receive in the merger. Valley National shareholders will be taxed on cash
received in lieu of any fractional share. Tax matters are complicated,
5
<PAGE>
and tax results may vary among stockholders. We urge you to contact your own tax
advisor to understand fully how the merger will affect you.
ANTICIPATED ACCOUNTING TREATMENT (SEE PAGE 37)
The merger is expected to be accounted for as a pooling of interests for
financial accounting purposes. This accounting treatment is a condition to
Community First's obligation to proceed with the merger.
NO APPRAISAL RIGHTS (SEE PAGE 32)
Valley National is organized under Delaware law. Under Delaware law,
stockholders of Valley National have no rights to an appraisal of the value of
their shares in connection with the merger.
CONDITIONS TO THE MERGER (SEE PAGE 28)
Community First and Valley National will not complete the merger unless the
following conditions are satisfied or waived:
CONDITIONS FOR EACH PARTY
- the approval of the merger by the Valley National stockholders;
- the authorization for listing by the Nasdaq National Market of the
Community First common stock to be issued in the merger to the Valley
National stockholders;
- the compliance by Community First and Valley National with their
obligations under the merger agreement and the accuracy of the
representations and warranties made by Community First and Valley
National; and
- the delivery by counsel for each company of its legal opinion to the other
company.
ADDITIONAL CONDITIONS TO COMMUNITY FIRST'S OBLIGATIONS
- the net book value of Valley National is at least $20 million; and
- the delivery by the auditors for both parties of letters that support the
conclusion that the merger may be accounted for as a pooling of interests.
TERMINATION OF THE MERGER AGREEMENT
Community First and Valley National can agree by mutual written consent to
terminate the merger agreement at any time, whether before or after the receipt
of stockholder approval. Also, either company can terminate the merger agreement
if:
- the merger is not completed on or before December 31, 1999;
- a final court order prohibits the merger;
- the stockholders of Valley National do not vote to approve the merger;
- the other party materially breaches its representations, warranties,
covenants or agreements contained in the merger agreement;
- Community First can terminate the agreement if it is not satisfied with
the results of the environmental assessment to be prepared on behalf of
Valley National;
- Valley National can terminate the agreement if the average trading value
of Community First common stock falls below $18.00 per share and this
represents a decline of more than 20% since May 7, 1999 relative to an
index of comparable stocks.
6
<PAGE>
COMMUNITY FIRST OPTION TO ACQUIRE VALLEY NATIONAL STOCK (SEE PAGE 31)
When Community First and Valley National signed the merger agreement, they
also entered into a stock option agreement intended to compensate Community
First in the event a third party acquires Valley National at a higher price.
Community First may acquire up to 19.9% of Valley National's common stock at a
price of $18.00 per share if Valley National agrees to be acquired by a third
party or if there are other events described in the option agreement that
involve the acquisition of Valley National by a third party. In some cases,
after Community First acquires the Valley National shares it has the right to
have the shares registered for public resale at the expense of Valley National
or to have the shares repurchased by Valley National at a price that reflects
the higher price to be paid by the third party.
7
<PAGE>
HISTORICAL AND PRO FORMA COMPARATIVE UNAUDITED PER SHARE DATA
The following tables present selected comparative unaudited per share data
for Community First on a pro forma combined basis, and for Valley National on a
historical and pro forma equivalent basis, giving effect to the merger using the
pooling of interests method of accounting. See "The Merger-- Accounting
Treatment."
The per share data should be read in conjunction with the historical and
consolidated financial statements and unaudited pro forma condensed combined
financial information (including the related notes) and the selected financial
data regarding Community First and Valley National presented elsewhere herein or
incorporated by reference. The per share data is not necessarily indicative of
the results of operations or combined financial position that would have
resulted had the merger been completed prior to the periods indicated, nor is it
necessarily indicative of the results of operations of future periods or future
combined financial position.
COMMUNITY FIRST BANKSHARES, INC.
MERGER WITH VALLEY NATIONAL CORPORATION*
HISTORICAL AND PRO FORMA COMPARATIVE UNAUDITED PER SHARE DATA
BOOK VALUE PER SHARE:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
----------------- -------------------
<S> <C> <C>
CFB--Historical(A)............................................................ $ 8.61 $ 8.60
Valley National--Historical(B)................................................ $ 7.15 $ 6.99
CFB and Valley National pro forma(C).......................................... $ 8.48 $ 8.46
Valley National pro forma equivalent(D)....................................... $ 8.96 $ 8.94
</TABLE>
BASIC INCOME FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM PER SHARE:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED -------------------------------
MARCH 31, 1999 1998 1997 1996
--------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
CFB--Historical(E)................................................. $ 0.37 $ 0.99 $ 1.35 $ 1.01
Valley National--Historical(F)..................................... $ 0.23 $ 0.87 $ 0.68 $ 0.52
CFB and Valley National pro forma(G)............................... $ 0.36 $ 0.98 $ 1.29 $ 0.97
Valley National pro forma equivalent(H)............................ $ 0.38 $ 1.04 $ 1.37 $ 1.03
</TABLE>
DILUTED INCOME FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM PER SHARE:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED -------------------------------
MARCH 31, 1999 1998 1997 1996
--------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
CFB--Historical(I)................................................. $ 0.37 $ 0.98 $ 1.31 $ 0.97
Valley National--Historical(J)..................................... $ 0.21 $ 0.81 $ 0.63 $ 0.50
CFB and Valley National pro forma(K)............................... $ 0.36 $ 0.96 $ 1.26 $ 0.94
Valley National pro forma equivalent(L)............................ $ 0.38 $ 1.01 $ 1.33 $ .99
</TABLE>
8
<PAGE>
DIVIDENDS DECLARED PER SHARE:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED -------------------------------
MARCH 31, 1999 1998 1997 1996
------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
CFB--Historical.................................................... $ 0.14 $ 0.44 $ 0.35 $ 0.29
Valley National--Historical........................................ $ 0.035 $ 0.13 $ 0.12 $ 0.12
CFB and Valley National pro forma(M)............................... $ 0.14 $ 0.44 $ 0.35 $ 0.29
Valley National pro forma equivalent(N)............................ $ 0.15 $ 0.47 $ 0.37 $ 0.31
</TABLE>
- ------------------------
* When we refer to "Valley National" in this proxy statement/prospectus, we
are also referring to Valle de Oro Bank for the time periods before March
31, 1999.
(A) Based on 47,128,274 and 47,118,864 shares of Community First Common Stock
outstanding as of March 31, 1999 and December 31, 1998, respectively.
(B) Based on 2,782,000 and 2,778,000 shares of Valley National Common Stock
outstanding as of March 31, 1999 and December 31, 1998, adjusted for stock
splits and stock dividends.
(C) Represents the pro forma combined net book value of Community First and
Valley National, divided by the sum of (i) the number of shares of Community
First Common Stock outstanding as of March 31, 1999, plus (ii) the number of
Community First Common Stock issuable in the merger at the assumed
conversion ratio of 1.0572:1.
(D) Represents the amount computed pursuant to Note "C" above, multiplied by the
assumed conversion ratio of 1.0572:1.
(E) Based on average shares of Community First Common Stock and Common Stock
equivalents outstanding of 47,140,043 for the three months ended March 31,
1999 and for the years ended December 31, 1998, 1997, and 1996 of
47,280,245, 43,461,264 and 39,429,607 respectively.
(F) Based on average shares of Valley National Common Stock and Common Stock
equivalents outstanding of 2,782,000 for the three months ended March 31,
1999 and for the years ended December 31, 1998, 1997, and 1996 of 2,755,000
and 2,721,000 and 2,711,000 respectively.
(G) Amount reflects net income per common share and common share equivalents on
a pro forma combined basis. Such amount is determined by dividing pro forma
combined net income by the weighted average number of shares of Community
First Common Stock and common share equivalents outstanding during the
applicable period and the shares of Community First Common Stock assumed to
be issued pursuant to the merger.
(H) Represents the amount computed pursuant to Note "G" above, multiplied by the
assumed conversion ratio of 1.0572:1.
(I) Based on average shares of Community First Common Stock and Common Stock
equivalents outstanding on a diluted basis of 47,498,661 for the three
months ended March 31, 1999 and for the years ended December 31, 1998, 1997,
and 1996 of 47,881,575, 44,649,922 and 42,695,783 respectively.
(J) Based on average shares of Valley National Common Stock and Common Stock
equivalents outstanding on a diluted basis of 3,012,000 for the three months
ended March 31, 1999 and for the years ended December 31, 1998, 1997, and
1996 of 2,976,000, 2,929,000 and 2,788,000 respectively.
(K) Footnote "G" on a diluted basis.
(L) Represents the amount computed pursuant to Note "K" above, multiplied by the
assumed conversion ratio of 1.0572:1.
(M) The pro forma combined dividends declared assume no changes in the
historical dividends declared per Community First common share.
(N) Represents the amount computed pursuant to Note "M" above, multiplied by the
assumed conversion ratio of 1.0572:1.
9
<PAGE>
COMMUNITY FIRST SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected consolidated financial information
concerning Community First for the three months ended March 31, 1999 and 1998
and for the fiscal years ended December 31, 1994 through 1998. The historical
selected financial information for the three years ended December 31, 1998 is
derived from the audited consolidated financial statements of Community First,
including the related notes. The financial data as of and for the three months
ended March 31, 1999 and 1998 are derived from the unaudited consolidated
financial statements of Community First. The unaudited consolidated financial
statements reflect, in the opinion of management, all adjustments of a normal
recurring nature necessary for a fair presentation of financial condition and
results of operations. The results for the three months ended March 31, 1999 are
not necessarily indicative of the results to be expected for the entire year.
For additional information regarding plans and objectives of management for
future operations and financial condition and results of operations, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" included in Community First's amended annual report on Form 10-K/A
for the year ended December 31, 1998, which report is incorporated by reference
in this proxy statement/prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------------------------------------
1999 1998
----------- -----------
1997 1996 1995 1994
1998 ----------- ----------- ----------- -----------
-----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income....................... $ 110,156 $ 104,142 $ 449,244 $ 326,519 $ 270,198 $ 228,294 $ 170,994
Interest expense...................... 44,161 44,010 188,484 134,540 108,761 94,424 60,671
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income................... 65,995 60,132 260,760 191,979 161,437 133,870 110,323
Provision for loan losses............. 4,731 1,752 22,509 6,107 7,483 3,628 2,458
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses..................... 61,264 58,380 238,251 185,872 153,954 130,242 107,865
Noninterest income.................... 15,678 14,192 60,260 47,203 36,946 32,129 27,683
Noninterest expense................... 50,148 49,528 230,092 149,953 125,980 102,631 89,020
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing operations
before income taxes and
extraordinary items................. 26,794 23,044 68,419 83,122 64,920 59,740 46,528
Provision for income taxes............ 9,183 6,277 21,448 24,811 23,398 21,790 17,761
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from continuing operations
before extraordinary items.......... 17,611 16,767 46,971 58,311 41,522 37,950 28,767
----------- ----------- ----------- ----------- ----------- ----------- -----------
Discontinued operations............... -- (68) (2,232) 967 -- -- --
Disposal of discontinued operations... -- -- (1,676) -- -- -- --
Extraordinary items................... -- -- -- (265) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income............................ 17,611 16,699 43,063 59,013 41,522 37,950 28,767
----------- ----------- ----------- ----------- ----------- ----------- -----------
Dividends on preferred stock.......... -- -- -- -- 1,610 1,610 1,091
Net income applicable to common
equity.............................. $ 17,611 $ 16,699 $ 43,063 $ 59,013 $ 39,912 $ 36,340 $ 27,676
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic............................... $ 0.37 $ 0.35 $ 0.91 $ 1.36 $ 1.01 $ 0.98 $ 0.75
Diluted............................. $ 0.37 $ 0.35 $ 0.90 $ 1.32 $ 0.97 $ 0.93 $ 0.71
AVERAGE COMMON SHARES OUTSTANDING:
Basic............................... 47,140,043 47,304,562 47,280,245 43,461,264 39,429,607 37,113,098 37,009,450
Diluted............................. 47,498,661 48,041,294 47,881,575 44,649,922 42,695,783 40,725,658 40,622,010
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------------------------------------
1999 1998
----------- -----------
1997 1996 1995 1994
1998 ----------- ----------- ----------- -----------
-----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
(RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RATIOS AND OTHER DATA:
Return on average assets.............. 1.20% 1.24% 0.74% 1.44% 1.25% 1.34% 1.22%
Return on average common stockholders'
equity.............................. 17.74% 17.74% 10.93% 19.44% 16.85% 18.90% 17.43%
Net interest margin................... 5.07% 5.08% 5.09% 5.32% 5.49% 5.06% 4.95%
Net charge-offs to average loans...... 0.42% 0.24% 0.44% 0.24% 0.18% 0.19% 0.03%
Ratio of earnings to fixed charges(2):
Excluding interest on deposits...... 4.70 6.36 3.45 6.36 4.87 5.15 6.04
Including interest on deposits...... 1.61 1.52 1.36 1.62 1.58 1.62 1.75
FINANCIAL CONDITION DATA
(END OF PERIOD):
Assets................................ $ 5,916,813 $ 5,775,193 $ 6,002,972 $ 5,454,135 $ 3,606,406 $ 3,210,017 $ 2,494,917
Loans................................. 3,327,424 3,102,074 3,386,142 3,024,322 2,395,165 2,058,152 1,575,271
Investment securities(3).............. 2,071,753 1,953,171 2,050,436 1,761,913 807,620 779,521 672,039
Deposits.............................. 4,772,081 4,807,215 4,884,672 4,152,918 2,972,744 2,749,665 2,114,479
Long-term debt........................ 94,443 127,175 93,472 124,529 54,758 89,681 46,523
Preferred shareholders' equity........ 0 0 0 0 22,988 23,000 23,000
Common shareholders' equity........... 405,793 396,857 405,246 388,013 261,405 216,394 163,847
Book value per common share........... 8.61 8.39 8.60 8.20 6.43 5.60 4.67
Tangible book value per common
share............................... 5.84 5.44 5.77 6.14 5.46 4.71 4.17
FINANCIAL CONDITION RATIOS
(END OF PERIOD):
Nonperforming assets to total loans
and OREO............................ 0.94% 0.52% 0.78% 0.63% 0.72% 0.31% 0.35%
Allowance for loan losses to total
loans............................... 1.55% 1.29% 1.48% 1.32% 1.26% 1.26% 1.30%
Allowance for loan losses to
nonperforming loans................. 191% 329% 221% 268% 194% 648% 488%
REGULATORY CAPITAL RATIOS
(END OF PERIOD):
Tier 1 capital........................ 9.72% 9.80% 9.35% 11.53% 9.18% 8.88% 11.02%
Total risk-based capital.............. 12.38% 12.92% 12.08% 14.98% 11.18% 11.26% 13.60%
Leverage ratio........................ 6.68% 6.54% 6.40% 7.51% 6.84% 6.37% 7.35%
NET INCOME AND RATIOS EXCLUDING
GOODWILL AND OTHER INTANGIBLE ASSETS
AMORTIZATION AND BALANCES ("CASH"):
Net income applicable to common
equity.............................. $ 19,446 $ 18,370 $ 51,984 $ 63,478 $ 42,726 $ 38,666 $ 29,355
Diluted earnings per share............ $ 0.41 $ 0.38 $ 1.09 $ 1.42 $ 1.04 $ 0.99 $ 0.75
Return on average assets.............. 1.36% 1.39% 0.92% 1.57% 1.35% 1.44% 1.30%
Return on average common stockholders'
equity.............................. 19.59% 19.52% 13.20% 20.91% 18.03% 20.11% 18.49%
</TABLE>
- --------------------------
(1) Represents the after-tax effect of prepayment penalties and unamortized debt
issuance costs in connection with the redemption of certain indebtedness.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
represent income before income taxes, extraordinary items and fixed charges.
Fixed charges represent interest expense, including the interest component
of rental expense, and preferred stock dividends. Fixed charges attributable
to the preferred stock dividends are assumed to equal the amount of pre-tax
income that would be necessary to pay such dividends.
(3) Includes available-for-sale securities and held-for-sales securities.
11
<PAGE>
VALLEY NATIONAL SELECTED FINANCIAL INFORMATION
The following table sets forth certain financial information concerning
Valley National. All of these periods are prior to March 31, 1999, when Valley
National became the holding company for Valle de Oro Bank. For March 31, 1999
and all dates and periods after that date, the consolidated financial statements
of Valley National will be the same as the financial statements of Valle de Oro
Bank. The historical selected financial data for the three years ended December
31, 1998 is derived from the audited consolidated financial statements of Valley
National, including the related notes. The financial data as of and for the
three months ended March 31, 1999 and 1998 are derived from the unaudited
consolidated financial statements of Valley National. The unaudited consolidated
financial statements reflect, in the opinion of management, all adjustments of a
normal recurring nature necessary for a fair presentation of financial condition
and results of operations. The results for the three months ended March 31, 1999
are not necessarily indicative of the results to be expected for the entire
year. This information should be read in conjunction with the consolidated
financial statements of Valley National, and the related notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations,
appearing elsewhere in this proxy statement/prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income:.......................... $ 4,573 $ 4,295 $ 18,026 $ 16,270 $ 14,865 $ 13,573 $ 11,487
Interest expense:......................... 1,394 1,557 6,297 5,940 5,316 4,329 2,866
Net interest income....................... 3,179 2,738 11,729 10,330 9,549 9,244 8,621
Provision for loan losses................. 150 181 627 497 1,062 862 837
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for
loan losses............................. 3,029 2,557 11,102 9,833 8,487 8,382 7,784
Noninterest income........................ 802 650 3,007 2,744 2,249 1,914 1,649
Noninterest expense....................... 2,840 2,527 10,562 9,688 8,542 8,446 7,707
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes................ 991 680 3,547 2,889 2,194 1,850 1,726
Provision for taxes....................... 347 232 1,147 1,037 791 707 676
--------- --------- --------- --------- --------- --------- ---------
Net income................................ $ 644 $ 448 $ 2,400 $ 1,852 $ 1,403 $ 1,143 $ 1,050
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE:
Basic..................................... $ 0.23 $ 0.16 $ 0.87 $ 0.68 $ 0.52 $ 0.42 $ 0.51
Diluted................................... $ 0.21 $ 0.15 $ 0.81 $ 0.63 $ 0.50 $ 0.42 $ 0.51
AVERAGE COMMON SHARES OUTSTANDING:
(IN THOUSANDS)
Basic..................................... 2,782 2,722 2,755 2,721 2,711 2,693 2,078
Diluted................................... 3,012 2,973 2,976 2,929 2,788 2,730 2,078
OPERATING RATIOS AND OTHER DATA
Return on average assets.................. 1.07% 0.85% 1.06% 0.93% 0.80% 0.79% 0.84%
Return on average common stockholders'
equity.................................. 13.05% 10.38% 13.19% 11.50% 9.56% 8.31% 10.84%
Net interest margin....................... 5.87% 5.76% 5.75% 5.82% 6.10% 7.26% 7.82%
Net charge-offs to average loans.......... 0.00% 0.02% 0.20% 0.28% 0.96% 0.83% 1.08%
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA
(END OF PERIOD)
Assets.................................... $ 240,832 $ 215,246 $ 236,800 $ 206,083 $ 183,449 $ 156,838 $ 128,620
Loans, net................................ 154,360 131,765 149,708 134,837 118,219 103,457 94,274
Deposits.................................. 219,558 196,474 216,393 188,147 167,059 141,968 114,701
Common stockholders' equity............... 19,889 17,570 19,410 17,026 15,397 14,303 13,249
Net book value per common share........... 7.15 6.31 6.99 6.26 5.66 5.31 4.92
FINANCIAL CONDITION RATIOS
(END OF PERIOD)
Nonperforming assets to total loans and
OREO.................................... 1.00% 1.67% 1.08% 1.57% 3.60% 4.50% 4.14%
Allowance for loan losses to total loans.. 1.17% 1.12% 1.11% 0.99% 1.00% 1.14% 1.22%
Allowance for loan losses to nonperforming
loans................................... 380.08% 150.45% 318.90% 150.11% 66.46% 48.13% 87.56%
REGULATORY CAPITAL RATIOS
(END OF PERIOD)
Tier 1 capital............................ 11.27% 11.94% 11.47% 11.72% 11.93% 12.90% 12.96%
Total risk-based capital.................. 12.31% 12.96% 12.47% 12.65% 12.85% 13.80% 14.10%
Leverage ratio............................ 8.25% 8.29% 8.06% 8.22% 8.23% 8.96% 10.28%
</TABLE>
13
<PAGE>
RISK FACTORS
VALLEY NATIONAL'S STOCKHOLDERS SHOULD CAREFULLY REVIEW THE FOLLOWING FACTORS
IN EVALUATING WHETHER TO APPROVE THE MERGER. THEY SHOULD CONSIDER THESE FACTORS
ALONG WITH ANY ADDITIONAL RISK FACTORS NOTED THROUGHOUT THIS PROXY
STATEMENT/PROSPECTUS AND ANY DOCUMENT INCORPORATED BY REFERENCE INTO THIS PROXY
STATEMENT/PROSPECTUS, AS WELL AS ANY EXHIBITS AND ATTACHMENTS TO THIS PROXY
STATEMENT/PROSPECTUS.
COMMUNITY FIRST'S ACQUISITION STRATEGY MAY ADVERSELY AFFECT ITS FUTURE FINANCIAL
RESULTS
Community First has grown and intends to continue to grow primarily through
acquisitions of banks and other financial institutions. After these
acquisitions, Community First may experience adverse changes in results of
operations of acquired entities, unforeseen liabilities, asset quality problems
of acquired entities, loss of personnel, loss of customers because of change of
identity, and deterioration in local economic conditions. Community First cannot
predict many of these risks because they involve future events that are beyond
its control. When Community First acquires financial institutions, it may
acquire new businesses that are different from its core business of commercial
banking. These businesses involve operating and strategic risks different from
the risks of commercial banking. These various acquisition risks can be
heightened in larger transactions.
Managing growth through acquisitions is a difficult process that includes
integration and training of personnel, combining office and operations
procedures and related matters. In its recent significant acquisitions,
Community First has experienced problems with data and item processing
conversion, management training, staffing and other operational integration
areas. Community First management and support personnel have had to allocate
increased time to the integration process. This has slowed the marketing and
business development efforts of some of the acquired institutions. Although
Community First has taken steps to address the issues resulting from recent
acquisitions, Community First may experience these issues in connection with
future acquisitions. These integration problems may result in disruption or
expense.
Community First's management believes the company will need to make further
acquisitions to provide a significant part of its future growth in assets and
earnings. The ability of Community First to make acquisitions depends in part on
its capital position and, in the case of cash acquisitions, on its cash assets
or ability to acquire cash. Further, acquisition candidates may not be available
in the future on favorable terms. Community First must compete with a variety of
individuals and institutions, including major regional bank holding companies,
for suitable acquisition candidates.
Although Community First has focused its attention on smaller markets in
which Community First believed there was less competition from the money center
banks and major regional bank holding companies, in recent years Community First
has acquired operations in metropolitan areas. Community First may make further
acquisitions of companies with operations in metropolitan areas, in which case
it will face more competition for those acquisitions from larger institutions.
Further, certain regional holding companies have focused in some cases on the
smaller markets traditionally targeted by Community First, and there can be no
assurance that the acquisition activities of competitors in these markets will
not increase. This competition is likely to affect Community First's ability to
make acquisitions, increase the price that Community First pays for certain
acquisitions and increase Community First's costs in analyzing possible
acquisitions.
COMMUNITY FIRST MAY BE UNABLE TO OBTAIN THE FINANCING IT NEEDS ON ACCEPTABLE
TERMS
Community First depends on its ability to obtain additional debt and equity
capital in pursuing its business strategy. There is no assurance that Community
First will be successful in obtaining future financing on satisfactory terms.
14
<PAGE>
Community First's access to the capital markets or the costs of this capital
could be affected by various factors including changes in interest rates,
general economic conditions and the perception in the capital markets of the
Community First's business, results of operations, leverage, financial condition
and business prospects. Each of these factors depends on economic, financial,
competitive and other conditions beyond Community First's control. In addition,
covenants under Community First's current and future debt securities and credit
facilities may significantly restrict Community First's ability to incur
additional indebtedness and to issue preferred stock.
THE YEAR 2000 MAY DISRUPT THE BUSINESS AND INCREASE COSTS
Community First is evaluating the potential impact of what is commonly
referred to as the "Year 2000" issue. This issue addresses the potential
inability of certain information systems to properly recognize and process dates
containing the year 2000 and beyond. If not corrected, these systems could fail
or create erroneous results, which would disrupt the banking business. Community
First has completed its testing and confirmed the readiness of mission-critical
systems and the business interruption contingency plan. However, it still must
complete systems upgrades, and establish readiness of any entities acquired in
1999. It is impossible to predict the costs of these tasks with certainty.
Regardless of the Year 2000 readiness of Community First's systems,
Community First may be adversely affected by the failure of others to become
Year 2000 compliant. The risks may include unusual cash withdrawals by
customers, potential losses related to loans made to third parties whose
businesses are adversely affected by the Year 2000 issue, the disruption or
inaccuracy of data provided by non-Year 2000 compliant third parties and
business disruption caused by the failure of service providers, including
security and data processing companies, to become Year 2000 compliant. The Year
2000 issue may have a material financial impact in future periods because of
these uncertainties.
RELAXED GOVERNMENT REGULATION WILL RESULT IN INCREASED COMPETITION
Like Valley National, Community First is a bank holding company subject to
extensive government regulation. Recent trends in laws and regulations have
steadily expanded the geographic scope of services that may be offered by the
banking industry and have allowed additional competition in many geographic
regions. Both houses of Congress have recently approved legislation that
generally allows broad affiliations of bank and nonbank organizations. This
legislation would repeal legal prohibitions currently in force. If the two
versions of the legislation are reconciled, passed by Congress and signed into
law by the President, the legislation may lead to acquisitions of banks by
nonbank organizations. This could result in increased competition for
acquisitions. These trends affect Community First more than Valley National
because Community First is more dispersed geographically. Community First's
profitability may decrease due to increased competition in the future.
LOSS OF KEY COMMUNITY FIRST PERSONNEL MIGHT REDUCE GROWTH OR PROFITABILITY
Community First depends on its management team to continue its growth
through acquisitions while maintaining asset quality and operational standards.
Community First is especially dependent on a limited number of key persons,
including Donald R. Mengedoth, the President and Chief Executive Officer, Mark
A. Anderson, the Vice Chairman--Corporate Services, Chief Financial Officer and
Chief Information Officer, and Ronald K. Strand, the Vice Chairman--Financial
Services Division. There would likely be a difficult transition period in case
the services of any of these individuals were lost to Community First because of
death or other reasons. This might slow Community First's growth or reduce the
profitability of the company.
15
<PAGE>
COMMUNITY FIRST'S BOARD MAY ISSUE PREFERRED STOCK WITHOUT STOCKHOLDER APPROVAL
Community First's board of directors is authorized, without stockholder
approval, to issue shares of classes or series of preferred stock with terms and
conditions to be determined by the board of directors, subject to some
limitations. Community First is party to a stockholders' rights agreement
(poison pill) which could serve as a deterrent against a possible change of
control not approved by Community First's board of directors. This could
discourage offers to buy your stock that you would like to consider.
MARKET PRICES AND DIVIDEND POLICY
MARKET FOR COMMUNITY FIRST COMMON STOCK
Community First common stock is traded on the Nasdaq National Market under
the symbol "CFBX." On May 7, 1999, the last trading day before the announcement
that Community First and Valley National entered into the merger agreement, the
closing sale price of Community First common stock was reported at $20.938 per
share. Following the merger, Community First common stock will continue to be
traded on the Nasdaq National Market under the symbol "CFBX." On August 5, 1999,
the closing sale price of Community First common stock was reported at $21.25.
MARKET FOR VALLEY NATIONAL COMMON STOCK
Valley National common stock is traded on the Nasdaq National Market under
the symbol "VADO." On May 7, 1999, the last trading day before the announcement
that Community First and Valley National entered into the merger agreement, the
closing sale price of Valley National common stock was reported at $16.875 per
share. On August 5, 1999, the closing sale price of Valley National common stock
was reported at $19.50. Following the merger, Valley National common stock will
cease to be traded on the Nasdaq National Market because all of the outstanding
shares of Valley National common stock will be converted into Community First
common stock.
STOCKHOLDER DATA
As of August 2, 1999, there were approximately 1,685 owners of record of
Community First common stock and an estimated 9,116 additional beneficial
stockholders whose stock was held in street name by brokerage houses.
As of July 8, 1999, there were approximately 920 owners of record of Valley
National common stock and an estimated 331 additional beneficial stockholders
whose stock was held in street name by brokerage houses.
COMMUNITY FIRST COMMON STOCK DIVIDEND PAYMENT HISTORY AND RESTRICTIONS
Since its initial public offering in August 1991, Community First has paid
quarterly cash dividends on its common stock. The final determination of the
timing, amount and payment of dividends on the Community First common stock at
the discretion of the Community First board of directors and will depend on
conditions then existing, including Community First's profitability, financial
condition, capital requirements and other relevant factors, including the
restrictions described below. The principal source of Community First's income
(including the funds needed to pay dividends on the Community First common
stock) is dividends from the Community First banks. The payment of dividends by
the Community First banks is subject to restrictions imposed by federal and
state banking laws and regulations.
Community First's ability to pay cash dividends on its common stock also is
subject to statutory restrictions and restrictions arising under the terms of
its outstanding securities. Under applicable law, cash dividends may be paid
only from surplus, or, if there is no surplus, from net profits earned in the
16
<PAGE>
current and/or preceding fiscal year. Applicable federal regulation of bank
holding companies may also impose restrictions on the ability of a bank holding
company to pay dividends. Community First does not believe that Delaware
corporate law, applicable banking law, or the terms of its securities will
materially inhibit its plans to pay cash dividends on its common stock for the
foreseeable future.
VALLEY NATIONAL DIVIDEND POLICY AND PAYMENT HISTORY
Valley National paid a 5% stock dividend to its stockholders in May of 1999
and a quarterly cash dividend of $.035 per share in July of 1999. Valley
National's subsidiary, Valle de Oro Bank, paid quarterly cash dividends to its
stockholders before Valley National became its holding company. Dividends were
$0.03 per share in the first and second quarters of 1998, and in each quarter of
1997 and 1996. In the third and fourth quarters of 1998, Valle de Oro Bank paid
a dividend of $0.035 per share, as adjusted for the two-for-one stock split.
Valle de Oro Bank has also paid 5% stock dividends to stockholders in each year
from 1988 through 1998. In each case, cash was paid in lieu of fractional
shares.
The ability of Valley National to obtain funds for the payment of dividends
and for other cash requirements is largely dependent on the amount of dividends
which may be declared by its subsidiary, Valle de Oro Bank. The principal source
of Valley National's income (including the funds needed to pay dividends on the
Valley National common stock) is dividends from Valle de Oro Bank. The payment
of dividends by the Valle de Oro Bank is subject to restrictions imposed by
federal and state banking laws and regulations. These restrictions depend upon
the earnings, financial condition and cash needs of the bank, as well as general
business conditions.
A national bank is prohibited from paying dividends out of common capital.
Dividends must be paid out of undivided profits. If losses have, at any time,
been sustained equal to or exceeding a bank's undivided profits then on hand, no
dividend may be paid. Moreover, even if a national bank's surplus exceeded its
common capital and its undivided profits exceed its losses, the approval of the
Comptroller is required for the payment of dividends if the total of all
dividends declared by a national bank in any calendar year would exceed the
total of its net profits of that year combined with its net profits of the two
preceding years, less any required transfers to surplus.
After the merger, Valle de Oro Bank will pay its dividends to Community
First because Valley National will have been merged into Community First.
17
<PAGE>
INFORMATION ABOUT THE VALLEY NATIONAL SPECIAL MEETING
This proxy statement/prospectus is being furnished to the stockholders of
Valley National in connection with the solicitation by the board of directors of
Valley National of proxies to be voted at the Valley National special meeting of
stockholders.
PURPOSE OF THE SPECIAL MEETING
At the stockholders' special meeting, stockholders of Valley National will
be asked to consider and vote upon the approval of the merger agreement. A copy
of the merger agreement is attached as Appendix A to this proxy
statement/prospectus. If any other matters are properly presented at the special
meeting for consideration, including, among other things, consideration of a
motion to adjourn the special meeting to another time or place, the persons
named in the enclosed form of proxy and will have discretion to vote on such
matters in accordance with their best judgment.
VOTE REQUIRED AND SHARES ENTITLED TO VOTE
The merger will require the approval of the owners of at least a majority of
the shares of Valley National common stock outstanding. Holders of record of
Valley National common stock at the close of business on , 1999 are
entitled to receive notice of, and to vote at, the Valley National stockholders'
special meeting. At the close of business on July 28, 1999 there were 2,782,635
shares of Valley National common stock outstanding. Each share of Valley
National common stock will be entitled to one vote. The presence in person or by
proxy of the holders of a majority of the outstanding shares of Valley National
common stock will constitute a quorum for the transaction of business at the
Valley National special meeting.
As of the Record Date, directors and officers of Valley National and their
affiliates owned beneficially an aggregate of 992,195 shares (or approximately
32.5%) of the outstanding Valley National common stock.
VOTING AND REVOCATION OF THE PROXIES
The board of directors of Valley National has unanimously approved the
merger and the board requests that the Valley National stockholders sign, date
and return the enclosed proxy card in the accompanying envelope. No postage is
required if mailed within the United States. The shares represented by the
proxies properly signed, dated and returned will be voted at the stockholders'
special meeting in accordance with the their instructions. If a proxy is
properly signed but contains no voting instructions, the shares represented will
be voted FOR the merger and, at the discretion of the proxy holders, as to any
other matters which may properly come before the special meeting.
If an executed proxy card is returned by a broker holding shares in street
name which indicates that the broker does not have discretionary authority to
vote on any matter, or if a Valley National stockholder abstains from voting on
any proposal, the shares represented by the proxy will be considered present at
the special meeting for purposes of determining a quorum and for purposes of
calculating the vote, but will not be voted. Because the merger requires the
approval of the owners of at least a majority of the total number of outstanding
shares of Valley National common stock entitled to vote at the special meeting,
abstentions and "broker non-votes" will have the same effect as votes against
the merger.
Each proxy may be revoked at any time before it is voted by executing and
returning a proxy bearing a later date, by giving written notice of revocation
to the Secretary of the special meeting or by attending the special meeting and
voting in person.
18
<PAGE>
SOLICITATION OF PROXIES
Following the mailing of proxy soliciting materials, directors, officers and
employees of Valley National (who will not be specifically compensated for such
services) may solicit proxies by mail, telephone, telegraph and personal
interviews. Valley National will bear the expenses of proxy solicitation,
including reimbursement of reasonable out-of-pocket expenses incurred by
brokerage houses and other custodians, nominees and fiduciaries in forwarding
proxy soliciting material to the beneficial owners of stock held of record by
those persons.
19
<PAGE>
THE MERGER
THE FOLLOWING DESCRIPTION CONTAINS SUMMARIES OF SOME PROVISIONS OF THE
MERGER AGREEMENT. THIS DESCRIPTION IS QUALIFIED BY REFERENCE TO THE FULL TEXT OF
THE MERGER AGREEMENT, A COPY OF WHICH IS INCLUDED AS APPENDIX A TO THIS PROXY
STATEMENT/PROSPECTUS.
GENERAL
Community First and Valley National have entered into the merger agreement.
It provides that Valley National will be merged into Community First and
Community First will be the surviving corporation. Valley National stockholders
will receive the shares of Community First common stock in exchange for their
shares of Valley National common stock, according to the formula in the merger
agreement. The effective time of the merger will be on the date a Certificate of
Merger is filed with the Delaware Secretary of State, after satisfaction or
waiver of each of the conditions described in the merger agreement. The
effective time of the merger is expected to occur as soon as practicable after
Valley National's stockholders approve the merger.
BACKGROUND OF THE MERGER
Representatives of Community First and Valley National were introduced by
Valley National's financial advisor in late 1998. The introductions were
prompted by long-standing mutual interest in each other's organizations, a
common philosophy of community banking and participation in industry trade
groups. In January 1999, Community First Chairman Don Mengedoth met with Valley
National President Bill Ehlen in San Diego. Later that month, Community First
executed a confidentiality agreement and began to review more detailed
information regarding Valley National.
Based on that review, Community First proposed to Valley National an
exchange of Community First common stock worth $65 million. After further
discussion and negotiation involving Community First and Valley National's legal
and financial advisors, the two parties executed a letter of intent on March 23,
1999.
Preparation of the definitive agreement followed immediately. Although the
two parties exchanged additional information on significant topics,
confidentiality concerns caused the full on-site due diligence by each party to
be postponed until after execution and public announcement of the agreement.
Final agreement on the merger agreement was reached in early May 1999.
The merger agreement was presented to the board of directors of Valley
National at a special meeting held on May 6, 1999. At the meeting,
representatives of Hovde Financial presented an analysis of the financial terms
of the proposed merger agreement and delivered Hovde's opnion that the merger
agreement was fair to Valley National stockholders from a financial point of
view. James K. Sterrett of Sterrett & Kimmel, LLP, special counsel to Valley
National, presented an analysis of the terms and conditions of the merger
agreement. After further discussion and questions, the board of directors of
Valley National unanimously approved the merger agreement.
The execution of the agreement was completed and the boards of directors of
Community First and Valley National issued a joint press release on May 10, 1999
to announce the proposed merger between Community First and Valley National.
The board of directors of Community First approved the merger agreement on
August 3, 1999.
REASONS FOR THE MERGER
The Valley National board of directors believes the merger with Community
First is in the best interests of the Valley National stockholders. After
careful consideration and review, the Valley National board reached its decision
based on an analysis of the following critical factors.
20
<PAGE>
- The effect on stockholder value of Valley National's remaining an
independent entity. The board of directors considered the current and
prospective economic environment facing financial institutions, increased
competition faced by community banks in general from large bank holding
companies and other financial institutions;
- A review of (a) the business, operations, earnings, and financial
condition, including the capital levels and asset quality, of Community
First on both an historical and prospective basis; (b) the business fit of
Community First and Valley National; (c) Community First's decentralized
style of management, which would enable Valley National to maintain its
community bank image, and its responsiveness to its customers; and (d) the
operating philosophy, competence, experience and integrity of Community
First and its management;
- The adequacy of the merger consideration. A comparison of the financial
terms of recent bank acquisitions indicated that the financial terms of
the merger agreement compared favorably with other recent transactions;
- The terms of the merger agreement, including the exchange rate and the
ability of Valley National to terminate the merger agreement under certain
circumstances;
- The financial advice rendered by Hovde Financial, its financial advisor,
regarding the terms of the merger, including its opinion that the exchange
rate was fair to Valley National stockholders from a financial point of
view, and the Valley National board's review of the methodology and
appropriateness of the assumptions used by the board in its analysis of
the fairness of the exchange rate;
- The timeliness of a merger given the state of the economy and the stock
markets as well as anticipated trends in both;
- The anticipated tax-free nature of the merger from federal income taxes to
the stockholders of Valley National receiving solely Community First
common stock in exchange for their shares of Valley National common stock;
- The current market price of Community First common stock, Community
First's dividend payment history and book value;
- The strong likelihood that regulatory approval for the merger will be
obtained without undue conditions or delay; and
- The economic effect of the merger on Valley National, Valle de Oro Bank,
employees, customers, creditors and other elements of the community.
While each member of the Valley National board of directors individually
considered the foregoing and other factors, the board of directors did not
collectively assign any specific or relative weights to the factors considered
and did not make any determination as to any individual factor. The Valley
National board of directors collectively made its determination based on the
unanimous conclusion reached by its members, in light of the factors that each
of them consider as appropriate, that the merger is in the best interest of
Valley National stockholders.
The terms of the merger, including the exchange rate, were the result of
arm's length negotiations between representatives of Valley National and
representatives of Community First. Based upon its consideration of the
foregoing factors, the board of directors of Valley National approved the merger
agreement and the merger as being in the best interest of Valley National and
its stockholders. The Valley National board unanimously recommends that the
stockholders of Valley National vote for approval of the merger.
OPINION OF VALLEY NATIONAL'S FINANCIAL ADVISOR
Valley National retained Hovde Financial, Inc. to act as its financial
advisor in connection with the merger. Hovde Financial has rendered its written
opinion dated May 6, 1999 and August , 1999 to
21
<PAGE>
Valley National that the merger consideration to be paid by Community First was
fair, from a financial point of view, to the shareholders of Valley National.
The full text of the opinion of Hovde Financial, which specifies assumptions
made, matters considered and qualifications and limitations of the review
undertaken, is attached as Appendix B. Valley National stockholders are urged to
read the Hovde Financial opinion in its entirety. The Hovde Financial opinion
addresses only the fairness to the holders of Valley National Common Stock, from
a financial point of view, of the consideration to be paid to Valley National
stockholders pursuant to the merger agreement. It was rendered to the Valley
National board for its consideration in determining whether to approve the
merger agreement. It does not constitute a recommendation to Valley National
stockholders as to how they should vote.
THE SCOPE OF THE ENGAGEMENT. No limitations were imposed by Valley National
on the scope of Hovde Financial's investigation or the procedures to be followed
by Hovde Financial in rendering its opinion. Hovde Financial was not requested
to make any recommendation to the Valley National board as to the form or amount
of consideration to be offered by Community First to Valley National in the
merger. In arriving at its opinion, Hovde Financial did not ascribe a specific
range of value to Community First or Valley National, but rather made its
determination as to the fairness of the consideration on the basis of the
financial analyses described below. Hovde Financial was not requested to give an
opinion as to Valley National's underlying business decision to effect the
merger.
During the course of the engagement, Hovde Financial reviewed and analyzed:
- material bearing upon the financial and operating conditions of Community
First and Valley National;
- the merger agreement;
- publicly available information concerning Community First and its
subsidiaries, Valle de Oro Bank and Valley National;
- consolidated financial statements for each of the three years ended
December 31, 1996, 1997 and 1998 and the quarter ended March 31, 1999;
- documents filed by them with the SEC, the FRB, the OCC and other state or
regulatory agencies;
- recent internal reports for both companies and financial projections for
Valley National;
- the terms of recent sale and merger transactions involving banks and bank
holding companies that Hovde Financial considered relevant; and
- financial and other information provided to Hovde Financial by the
managements of Valley National and Community First.
In arriving at its opinion, Hovde Financial assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information. Hovde Financial also relied on the assurances of the managements of
Community First and Valley National that they were not aware of any facts or
circumstances that would make such information inaccurate or misleading. Hovde
Financial assumed that the financial projections it reviewed were reasonably
prepared on a basis reflecting the best available estimates and judgments of the
managements of Community First or Valley National, as the case may be. Hovde
Financial assumed that the merger will be accounted for using the
pooling-of-interests method of accounting and would be treated as a tax-free
exchange of shares to Valley National stockholders upon the advice of Valley
National and its legal and accounting advisors. Hovde Financial did not conduct
a physical inspection of the properties and facilities of Community First or
Valley National. Hovde Financial did not make or obtain any evaluations or
appraisals of the assets or liabilities of Community First or Valley National.
In addition, Hovde Financial advised Community First and Valley National that it
is not expert in the evaluation of loan portfolios, allowances for loan losses
and allowances for
22
<PAGE>
real estate owned losses. It assumed that the allowances for loan and real
estate owned losses (as currently stated or as adjusted for in connection with
the merger) provided to it by Valley National were adequate to cover all such
losses upon the advice of Valley National. Hovde Financial's opinion was based
upon market, economic and other conditions as they could be evaluated on the
date of its letters.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial and comparative analysis
and the application of those methods to the particular circumstances and,
therefore, such an opinion is not readily susceptible to summary description.
Hovde Financial did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Hovde Financial believes
that its analyses should be considered as a whole. Considering any portion of
such analyses and factors, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying its opinion.
Hovde Financial made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond the control of Valley National. Any estimates contained in these analyses
were not necessarily indicative of actual values or predictive of future results
or values, which may be significantly more or less favorable. In addition,
analyses relating to the value of businesses did not purport to be appraisals or
to reflect the prices at which businesses may actually be sold.
FINANCIAL AND COMPARATIVE ANALYSES UNDERTAKEN BY HOVDE FINANCIAL. The
following is a summary of the financial and comparative analyses Hovde Financial
performed in arriving at its opinion.
PURCHASE PRICE ANALYSIS. Hovde Financial calculated the price-to-book,
price-to-tangible book and price-to-earnings multiples, and the deposit premium
paid in the merger using December 31, 1998 financial data and based upon an
aggregate transaction value of $65.0 million. The deposit premium paid was
defined as the transaction value, minus the tangible book value, divided by core
deposits. This analysis yielded a price-to-book value multiple of 334.9%, a
price-to-tangible book value multiple of 334.9%, a price to last 12 months'
earnings multiple of 27.1x, and a deposit premium of 23.0%.
COMPARABLE COMPANY ANALYSIS. Using publicly available information, Hovde
Financial compared the financial performance of Valley National with all other
publicly traded banks in California with assets between $200 million and $300
million. These banks included:
- Bank of Hemet
- Borel Bank & Trust
- BWC Financial Corp.
- California Independent Bancorp
- Desert Community Bank
- First Regional Bancorp
- Nara Bank
- North Valley Bancorp
- Orange National Bancorp
- Professional Bancorp, Inc.
- Regency Bancorp
- Wilshire State Bank
Measures of financial performance included:
- profitability (return on average assets and return on average equity for
the latest twelve-month period ended March 31, 1999, of 1.12% and 13.83%,
respectively, for Valley National, and averages of 1.30% and 14.53%,
respectively, for the comparable bank group);
- the ratio of tangible equity to tangible assets (8.26% for Valley National
and an average of 8.64% for the comparable bank group); and
- the ratio of non-performing assets to total assets (.64% for Valley
National and an average of .91% for the comparable bank group).
In addition, Hovde Financial compared the financial performance of Community
First with publicly-traded bank holding companies located nationwide with total
assets between $5 billion and $10
23
<PAGE>
billion. The comparable bank group included 31 financial institutions.
Indications of such financial performance and stock market valuation included:
- profitability (return on average assets and return on average equity for
the latest 12-month period ended March 31, 1999, of .74% and 11.02%,
respectively, for Community First and averages of 1.21% and 13.76%,
respectively, for the comparable bank group;
- the multiple for stock price to the last 12 months' earnings (13.5x for
Community First and an average of 16.1x for the comparable bank group; and
- the ratio of stock price to tangible book value (342% for Community First
and an average of 264% for the comparable bank group).
Hovde Financial believed that a purely quantitative comparable company
analysis would not be particularly meaningful in the context of the merger
because of the inherent differences in the businesses, operations, financial
conditions and prospects of Valley National, Community First and the companies
included in the comparable bank groups. Hovde Financial believed that the use of
a comparable company analysis would also include qualitative judgments
concerning the differences between Valley National and the companies included in
its comparable bank group, which differences would affect their stock trading
values.
COMPARABLE TRANSACTION ANALYSIS. Using publicly available information,
Hovde Financial reviewed terms and financial characteristics including
historical price-to-earnings ratios, the price-to-book ratios, the
price-to-tangible book ratios, and the deposit premiums paid in commercial
banking institution merger or acquisition transactions in California announced
from June 1, 1998 to May 6, 1999. The average values for these transactions for
the price-to-latest-12-months'-earnings ratio, price-to-book ratio and
price-to-tangible book ratio were 18.8x, 208.0%, and 207.8%, respectively. These
compared to transaction multiples of 27.1x, 334.9%, and 334.9%, respectively,
for the merger based on the closing price of Community First common stock on May
6, 1999, which was $20.1875. The range of deposit premiums paid in these
transactions was 6.9% to 56.7%, with an average value of 20.3%, compared to a
deposit premium of 23.0% for the merger.
Hovde Financial believed that a purely quantitative comparable transaction
analysis would not be particularly meaningful in the context of the evaluation
of the fairness of the merger consideration because the circumstances
surrounding each of the comparable transactions analyzed were so diverse and
because of the inherent differences in the businesses, operations, financial
conditions and prospects of Valley National, Community First and the companies
included in the comparable bank transactions group. Hovde Financial believed
that the appropriate use of a comparable transaction analysis in this instance
would involve qualitative judgments concerning the differences between the
characteristics of these transactions and the merger, which differences would
affect the acquisition values of the acquired companies and Valley National.
DISCOUNTED TERMINAL VALUE ANALYSIS. Hovde Financial estimated the present
value of the Valley National common stock by assuming:
- a range of discount rates from 11% to 13%,
- a 15% annual growth rate in earnings through 2003, and
- a 5% earnings growth rate from 2004 into perpetuity, starting with
estimated earnings of $2.9 million in 1999.
This analysis and its underlying assumptions yielded a range of value for
Valley National's shares of approximately $14.33 to $19.53. This compares to a
per share merger value of $21.15. In arriving at the value of Valley National's
book value at December 31, 2003, Hovde Financial assumed 100% earnings retention
from September 30, 1999 through December 31, 2003. These rates and values were
chosen to reflect different assumptions regarding the required rates of return
of holders or prospective buyers of Valley National common stock.
24
<PAGE>
PRO FORMA MERGER ANALYSIS. Hovde Financial analyzed the impact of the
merger on Valley National's most recent earnings per share estimates for 1999
and 2000, calculated by Hovde Financial. Hovde Financial concluded that the
merger consideration would result in accretion of between 41% and 99% to Valley
National's earnings per share in 2000, based upon the information provided by
the management of Valley National and analysts' estimates for Community First.
Accretion is the percentage increase in earnings per share that Valley National
stockholders will realize under the assumptions used in the analysis completed
by Hovde Financial.
INFORMATION ABOUT HOVDE FINANCIAL. Hovde Financial is a nationally
recognized investment banking firm. Hovde Financial is engaged in the evaluation
of businesses and securities in connection with mergers and acquisitions,
competitive biddings, private placements, corporate management planning and
other purposes as part of its investment banking business. The Valley National
board retained Hovde Financial based upon Hovde Financial's experience and
expertise and its familiarity with Valley National and Community First. Hovde
Financial is acting as financial advisor to Valley National in connection with
the merger. Valley National has agreed to pay Hovde Financial a fee equal to
$975,000 pursuant to a letter agreement dated April 1, 1999, between Valley
National and Hovde Financial, in the event the merger is completed. The letter
agreement also provides that Valley National will reimburse Hovde Financial for
its reasonable out-of-pocket expenses incurred in connection with the merger and
will indemnify Hovde Financial and related persons and entities against certain
liabilities, including liabilities under securities laws, incurred in connection
with its services.
EFFECTIVE TIME OF THE MERGER
The merger will be effective on the date that the parties file a certificate
of merger with the Delaware Secretary of State. They will make this filing after
the conditions to closing described in the merger agreement are satisfied or
waived or on another date agreed to by the parties. The parties expect to cause
the merger to become effective on the date of the Valley National stockholders'
special meeting or within a few days after the meeting.
CONSEQUENCES OF THE MERGER
At the effective time of the merger, Valley National will merge into
Community First. The surviving corporation will be Community First and the
separate existence of Valley National will cease. The certificate of
incorporation and bylaws of Community First in effect before the effective time
of the merger will continue to be in effect. Community First will be the sole
stockholder of Valley de Oro Bank and Community First will elect directors and
officers of Valley National following the merger. At the effective time of the
merger, the holders of certificates representing shares of Valley National
common stock will no longer have any rights as stockholders of Valley National
and their sole rights shall be their right to receive (a) the number of whole
shares of Community First common stock into which their shares of Valley
National common stock have been converted in the merger (as discussed below),
and (b) the cash value of any fraction of a share of Community First common
stock into which their shares of Valley National common stock have been
converted.
CONVERSION OF VALLEY NATIONAL COMMON STOCK AND CALCULATION OF EXCHANGE RATE
At the effective time of the merger, each share of Valley National common
stock will be converted at the exchange rate into shares of Community First
common stock.
No fractional shares of Community First common stock will be issued in
connection with the merger. Instead, each holder of shares of Valley National
common stock otherwise entitled to a fraction of a share of Community First
common stock will be paid in cash in an amount equal to the fraction multiplied
by the trading value of the Community First common stock.
25
<PAGE>
On the closing date, Community First and Valley National will calculate the
exchange rate in the merger as follows:
1. FIRST, THEY WILL CALCULATE THE AVERAGE TRADING VALUE OF COMMUNITY FIRST
COMMON STOCK:
- They will determine the average trading value of Community First common
stock for the 20 trading days ending with the fourth trading day before
the closing date.
2. SECOND, THEY WILL CALCULATE THE TOTAL NUMBER OF COMMUNITY FIRST SHARES TO
BE ISSUED IN THE MERGER:
- They will divide $65 million by the average trading value of Community
First common stock.
- The number of shares to be issued will be limited by a "collar" on the
trading value of the Community First common stock:
- If the average Community First trading value is less than $18 per
share, Valley National may terminate the merger agreement in some
cases. If it does not, Community First will issue a total of 3,611,111
shares.
- If the average Community First trading value is greater than $26 per
share, Community First will issue a total of 2,500,000 shares.
- The total number of Community First shares issued in the merger includes
Community First shares to be issued under Community First stock options
exchanged for Valley National options as part of the merger.
3. THIRD, THEY WILL CALCULATE THE EXCHANGE RATE:
- They will divide the total number of Community First shares being issued
in the merger by the number of shares of Valley National common stock
outstanding or subject to options, warrants or other rights to calculate
the exchange rate.
4. FINALLY, THEY MAY ADJUST THE EXCHANGE RATE:
- They will calculate the net book value of Valley National within five
business days before the closing. See Section 1.4(a) of the merger
agreement for the method of calculating the net book value.
- If the net book value of Valley National is greater than $20 million, the
total number of Community First shares to be issued in the merger will be
increased, unless the Valley National board declares a cash dividend, as
described below. This will increase the exchange rate in the merger. The
increase will be equal to the net book value of Valley National in excess
of $20 million divided by the average trading value of Community First
common stock.
EXAMPLE. If the net book value is $22 million and the average
trading value of Community First common stock is $22.00 per share,
the increase in the number of shares will be $2 million excess net
book value divided by $22.00, or 90,909 shares. This would increase
the exchange rate by 0.028, from 0.916 to 0.944, assuming that
3,226,029 shares of Valley National common stock are outstanding or
subject to options on the closing date.
See the table on page 3 in the Summary for some examples of the Exchange Rate
that may result from assumed trading prices of Community First common stock.
DELIVERY OF COMMUNITY FIRST COMMON STOCK
Within five business days after the effective time, letters of transmittal
will be mailed to each holder of Valley National common stock. Each holder will
be asked to complete the letter of transmittal and return it, together with the
holder's surrendered Valley National common stock certificates, to the exchange
agent named in the letter of transmittal. The letter of transmittal will specify
that delivery will be effective and risk of loss and title to Valley National
common stock
26
<PAGE>
certificates will pass only upon delivery of the certificates to the exchange
agent. The letter will also include instructions for effecting the surrender of
the Valley National common stock certificates and the cash to be paid in lieu of
any fractional share upon conversion of the Valley National shares. Certificates
for Community First common stock will be delivered to or for the account of a
holder of Valley National common stock only after the merger is completed and
the holder has surrendered to the exchange agent the old certificates for the
holder's Valley National common stock, accompanied by a duly executed letter of
transmittal in proper form.
At the closing, Community First will deposit with the exchange agent, for
the benefit of the holders of shares of Valley National common stock,
certificates dated the closing date representing the shares of Community First
common stock and the cash to be paid in lieu of fractional shares to be issued
and paid in exchange for the outstanding shares of Valley National common stock.
If Community First declares a dividend or makes any other distribution
declared or made with respect to shares of Community First common stock to be
issued or transferred to holders of Valley National common stock, no such
dividend or distribution will be paid or made to persons otherwise entitled to
receive them until the certificates for their Valley National common stock have
been surrendered following the Closing Date. The exchange agent will receive and
hold such distributions in its name as agent. No interest will be paid on the
cash in lieu of fractional shares and unpaid dividends and distributions, if
any, payable to Valley National stockholders. Holders of unsurrendered Valley
National common stock certificates shall not be entitled to vote after the
closing date at any meeting of Community First stockholders until they have
exchanged their Valley National common stock certificates.
No transfer taxes will be payable by Valley National's stockholders in
connection with the exchange of old certificates representing Valley National
common stock for new certificates representing Community First common stock
except that if any new certificate is to be issued in a name other than that in
which the Valley National certificate surrendered in exchange is registered, it
will be a condition of the exchange that the person requesting the exchange
either pay to the exchange agent any required transfer or other taxes or satisfy
the exchange agent that the transfer or other tax has been paid or is not
applicable. At the effective time of the merger, the stock transfer books of
Valley National will be closed and thereafter no transfers of Valley National
common stock will be made on those books.
VALLEY NATIONAL STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL
THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND INSTRUCTIONS.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Community First and Valley National expect the merger to be treated as a
tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Code
and that for federal income tax purposes, no gain or loss will be recognized by
any stockholder of Valley National upon receipt of Community First common stock
pursuant to the merger, except for the receipt of cash in lieu of any fractional
share interests of Community First common stock. The Internal Revenue Service
has not and will not be asked to rule upon the tax consequences of the merger.
However, it is a condition to the completion of the merger that Valley National
receive the opinion of counsel that the merger will qualify as a tax-free
reorganization. The opinion is being supplied by Sterrett & Kimmel, LLP, special
counsel to Valley National, and will be addressed to Valley National. The
following summary of the material United States federal income tax consequences
of the merger is presented in reliance upon that opinion. The conclusions
discussed are based, in part, upon certain representations made by Valley
National and Community First. These conclusions also are based upon the Internal
Revenue Code, regulations now in effect, current administrative rulings
practiced, and judicial authority, all of which are subject to change. An
opinion of counsel is not binding upon the Internal Revenue Service, and there
can be no assurance, and none is given, that the Internal Revenue Service will
not take a position contrary to one or more of the positions reflected or that
the opinion will be upheld by the courts if challenged by the Internal Revenue
Service. Each holder of Valley National common stock is urged to consult his or
her
27
<PAGE>
own tax and financial advisors as to the effect of such federal income tax
consequences on his or her own particular facts or circumstances and also as to
any state, local, foreign or other federal tax consequences arising out of the
merger.
Based upon the facts and representations provided to it, and subject to
various assumptions and qualifications, Sterrett & Kimmel, LLP will given an
opinion substantially to the effect that, with regard to the stockholders of
Valley National, the following federal income tax consequences will result from
the merger:
(a) The merger will qualify as a reorganization within the meaning of
Section 368(a)(1)(A) of the Code;
(b) Community First and Valley National will each be a party to the
reorganization within the meaning of Section 368(b) of the Code;
(c) No gain or loss will be recognized for federal income tax purposes by
any Valley National stockholder, except to the extent of cash received in
lieu of fractional shares of Community First common stock upon the
exchange of Valley National common stock for Community First common stock
in the merger; and
(d) No gain or loss will be recognized for federal income tax purposes by
Valley National as a result of the completion of the merger.
The foregoing is only a general description of certain federal income tax
consequences of the merger and does not discuss all the tax considerations that
may be relevant to particular Valley National stockholders in light of their
personal investment circumstances, or to certain types of stockholders that may
be subject to special treatment under the Code (such as insurance companies,
dealers in securities, exempt organizations or foreign holders) or to
stockholders of Valley National who acquired their Valley National common stock
pursuant to the exercise of employee stock options or otherwise as compensation.
The above summary does not purport to be a complete analysis of all potential
tax facts of the transactions contemplated by the merger agreement or the merger
itself. No information is provided as to the tax consequences, if any, of the
merger under state, local, foreign or other tax laws.
REGULATORY MATTERS AND CONDITIONS TO THE MERGER
The merger must be approved by applicable federal and state banking
regulators and by the vote of the holders of a majority of the outstanding
shares of Valley National common stock. According to the requirements of Section
3 of the Bank Holding Company Act of 1956, as amended, Community First submitted
its application for approval of the merger to the Federal Reserve Board on June
2, 1999 and received approval on July 8, 1999. The approval of this agency
reflects only its view that the transaction does not contravene the competitive
standards of the law and is consistent with regulatory concerns relating to bank
management and to the safety and soundness of the subject banking organizations
and banks. This approval is not to be interpreted as an opinion by the Federal
Reserve that the merger is favorable to the stockholders of Community First or
Valley National from a financial point of view or that the Federal Reserve has
considered the adequacy of the exchange rate. In addition, the regulatory
approval in no way constitutes an endorsement or recommendation of the merger by
the Federal Reserve.
Community First and Valley National's obligations to complete the merger are
further subject to various other conditions in the merger agreement, including
the following:
- approval of the merger by the stockholders of Valley National, in
accordance with Delaware law and the certificate of incorporation and
bylaws of Valley National;
28
<PAGE>
- the shares of Community First common stock issuable to the Valley National
stockholders pursuant to the merger shall have been approved for listing
on the Nasdaq National Market;
- all consents, orders or approvals of, or declarations or filings with, and
all expirations of waiting periods imposed by, any governmental entity
which are prescribed by law as necessary for the completion of the merger
and the other transactions contemplated by the merger agreement (other
than immaterial consents) shall have been filed, occurred or been
obtained;
- the Registration Statement and this proxy statement/prospectus shall have
become effective under the Securities Act, and no stop order suspending
the effectiveness of such Registration Statement shall have been issued
and no proceedings for that purpose shall have been initiated or
threatened by the SEC;
- no order, injunction or decree issued by any court or agency of competent
jurisdiction or other legal restraint or prohibition preventing the
completion of the merger or any of the transactions contemplated by the
merger agreement shall be in effect, nor shall any proceeding by any
governmental entity seeking any injunction be pending, and no statute,
rule, regulation, order, injunction or decree shall have been enacted,
entered, or enforced by any governmental entity which prohibits, restricts
or makes illegal the completion of the merger; and
- there shall not be any action taken, or any statute, rule, regulation or
order enacted, entered, enforced or deemed applicable to the merger or any
of the transactions contemplated by the merger agreement, by any federal
or state governmental entity which, in connection with the grant of a
permit, consent or authorization by a governmental entity necessary to
complete the merger, imposes any condition or restriction upon Community
First, Valley National, or any of their subsidiaries which would so
materially adversely impact the economic or business benefits of the
transaction contemplated by the merger agreement as to render inadvisable,
in the reasonable business judgment of the board of directors of either
Community First or Valley National, the consummation of the merger.
The obligation of Community First to complete the merger is also subject to
certain additional conditions in the merger agreement, including the following:
- the continued accuracy of the representations and warranties of Valley
National stated in the merger agreement;
- the performance by Valley National in all material respects of its
obligations required to be performed under the merger agreement;
- the net worth of Valley National as of the Determination Date shall not be
less than $20,000,000;
- Community First shall have received a letter from Ernst & Young LLP,
subject to receipt of a letter by Community First and Ernst & Young LLP
from the auditors of Valley National, expressing an opinion that the
merger shall qualify as a pooling of interests in accordance with
generally accepted accounting principles;
- Valley National shall have received the opinion of Sterrett & Kimmel, LLP
to the effect that the merger will qualify as a tax-free reorganization.
The obligation of Valley National to complete the merger is also subject to
certain additional conditions in the merger agreement, including the following:
- the continued accuracy of the representations and warranties of Community
First in the merger agreement;
29
<PAGE>
- the performance by Community First in all material respects of its
obligations to be performed under the merger agreement;
- Community First shall have obtained the consent or approval of each person
whose consent or approval shall be required in connection with the
transactions contemplated thereby under any loan or credit agreement,
note, mortgage, indenture, lease, license or other agreement or instrument
to which Community First or any of its subsidiaries is a party or is
otherwise bound, except those for which failure to obtain such consents
and approvals would not, in the reasonable opinion of Valley National,
individually or in the aggregate, have a material adverse effect on
Community First or upon the completion of the transactions contemplated
under the merger agreement;
- Valley National shall have received the opinion of its counsel to the
effect that the merger will be treated for federal income tax purposes as
a reorganization within the meaning of Section 368(a) of the Code, and
that Community First and Valley National will each be a party to that
reorganization within the meaning of Section 368(b) of the Code and that
stockholders of Valley National who exchange their shares of the Valley
National common stock for shares of Community First common stock will not
recognize a gain or loss, for purposes of federal income tax, except to
the extent of the cash received in lieu of fractional shares, and that
Valley National will not recognize gain or loss, for purposes of federal
income tax, as a result of completion of the merger; and
- Valley National shall have received an opinion of Community First's legal
counsel, Lindquist & Vennum P.L.L.P., confirming the due incorporation and
good standing of Community First and authority to complete the transaction
and that, when issued, the shares will be legally issued, fully paid and
non-assessable.
INDEMNIFICATION AND LIABILITY INSURANCE
Under the merger agreement, Community First will permit Valley National to
extend its director and officer liability insurance coverage to continue to
cover any loss, liability and expense the Valley National directors and officers
might incur as a result of their service to Valley National before the effective
time. Also, after the effective time, Community First will indemnify directors
and officers of Valley National for this service to the fullest extent permitted
under Delaware law.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The board of directors of Valley National is aware of the agreements and
interests of certain persons in the merger described below and considered them
in recommending approval of the merger and the transactions contemplated
thereby.
As of July 28, 1999, the officers and directors of Valley National
beneficially owned 992,195 shares (or approximately 32.5%) of Valley National
common stock. Pursuant to the merger agreement, the board of directors of Valley
National has agreed to use its best efforts to obtain the requisite stockholder
approval, subject to the fiduciary duties of the directors.
Valley National and Valle de Oro Bank expect to renew an employment
agreement with Mr. Ehlen as President and Chief Executive Officer of Valley
National and Valle de Oro Bank. The renewed agreement will be effective as of
July 1, 1999. The renewed agreement, which expires July 1, 2002, provides for a
minimum base salary of $187,500 annually, plus an automobile allowance and some
insurance benefits. The employment agreement is governed by Title 12 United
States Code Section 24 which provides that all officers of a national bank may
be dismissed at the pleasure of the Board of Directors. Neither Valley National
nor Valle de Oro Bank have entered into any other employment agreements.
30
<PAGE>
On January 10, 1996, Valle de Oro Bank entered into a salary continuation
agreement with Mr. Ehlen providing for the payment of specific benefits to him.
Under the terms of the salary continuation agreement, upon retirement after age
62 or in the event Mr. Ehlen dies while in the employ of Valle de Oro Bank, the
bank will be obligated to pay Mr. Ehlen or his estate $108,000 per year, payable
monthly for a period of 180 months. In the event Mr. Ehlen terminates employment
with Valle de Oro Bank prior to age 62, the bank is obligated to pay Mr. Ehlen
an amount of salary continuation benefit accrued to the date of termination. In
addition, the salary continuation agreement provides that in the event Mr.
Ehlen's employment is terminated by reason of, or within two years after, a
"change in control," the bank is obligated to pay Mr. Ehlen $108,000 per year,
payable monthly for a period of 180 months. A "change in control" is deemed to
occur:
- when there is a change in the composition of Valley National or Valle de
Oro Bank's board of directors, as a result of which fewer than two-thirds
of the incumbent directors are directors who either (a) had been directors
of Valley National or Valle de Oro Bank, respectively 24 months prior to
the change or (b) were elected, or nominated for election, to the Board
with the votes of at least a majority of the directors who had been
directors of Valley National or Valle de Oro Bank, respectively, 24 months
prior to the change and who were still in office at the time of the
election or nomination; or
- with specific exceptions, whenever any person is or becomes the beneficial
owner, directly or indirectly, of 26% or more of the combined voting power
of Valley National's or Valle de Oro Bank's then outstanding securities
having the right to vote for the election of directors.
The merger of Valley National with Community First will be a change of
control, such that, if Mr. Ehlen were terminated within two years of the merger,
the benefits under the salary continuation agreement would be payable to Mr.
Ehlen.
In the event Mr. Ehlen's employment is terminated by Valle de Oro Bank for
cause, the bank is under no obligation to make any payments to Mr. Ehlen under
the salary continuation agreement. Under the salary continuation agreement, Mr.
Ehlen's accrued salary continuation benefits were $37,700 for 1998.
COMMUNITY FIRST OPTION TO ACQUIRE VALLEY NATIONAL SHARES
When Community First and Valley National signed the merger agreement, they
also entered into a stock option agreement intended to compensate Community
First in the event a third party acquires Valley National at a higher price.
Community First may acquire up to 19.9% of Valley National's common stock at a
price of $18.00 per share if Valley National agrees to be acquired by a third
party or if there are other events described in the option agreement that
involve the acquisition of Valley National by a third party. In some cases,
after Community First acquires the Valley National shares it has the right to
have the shares registered for public resale at the expense of Valley National
or to have the shares repurchased by Valley National at the price paid by the
third party acquiror or a higher price specified in the option agreement that
reflects the premium being paid in the third party acquisition.
RESALE OF COMMUNITY FIRST COMMON STOCK
The issuance of shares of Community First common stock to stockholders of
Valley National upon completion of the merger will be registered under the
Securities Act of 1933. These shares may be traded without restriction on
transferability by those stockholders who are not deemed to be affiliates of
Valley National or Community First. "Affiliates" are generally defined as
persons who control, are controlled by or are under common control with Valley
National or Community First at the time of the determination. Affiliates
generally include directors and executive officers of Valley National.
31
<PAGE>
Community First common stock received by those stockholders of Valley
National who are deemed to be affiliates of Valley National or Community First
may be resold without registration as provided for by Rules 144 and 145, or as
otherwise permitted under the Securities Act; PROVIDED, that no such resale will
be permitted until the public release by Community First of its financial
results for a period that includes 30 days of combined operations following the
merger. Assuming Community First continues to be subject to, and complies with,
the Exchange Act reporting requirements, Rule 145(d) allows limited resales by
such affiliates without registration if the holder:
- has held the shares of Community First common stock for one year and is
not an affiliate of Community First at the time of sale; or
- has held the shares of Community First common stock for two years and has
not been an affiliate of Community First for at least three months; or
- sells the shares in a Rule 144 brokers' transaction in the manner and
subject to the quantity limitations of such rule.
This proxy statement/prospectus does not cover any resales of Community
First common stock received by affiliates of Valley National, their family
members or related interests. Each stockholder who may be deemed to be an
affiliate is urged to consult independent counsel concerning applicable
restrictions on resale.
NO DISSENTERS' RIGHTS
Valley National stockholders will not have appraisal rights in connection
with the merger. Under Delaware law, these appraisal rights are not available to
stockholders whose shares, at the record date designated for notice of the
meeting to approve the merger are listed on a national securities exchange or
designated as a national market system security on Nasdaq.
REPRESENTATIONS AND WARRANTIES
Valley National and Community First have made customary warranties and
representations to each other including, among other things, their businesses,
assets, liabilities, financial condition and results of operations. Generally,
warranties, representations and covenants have no continuing legal effect after
the merger is completed. However, pursuant to Section 8.1 of the merger
agreement, the representations and warranties made by Community First in the
merger agreement will survive the merger.
COVENANTS AND CONDUCT OF VALLEY NATIONAL'S BUSINESS PENDING THE MERGER
Valley National has agreed, among other things, that prior to the effective
time of the merger, Valley National and Valle de Oro Bank will carry on their
respective businesses in the usual and ordinary course. Valley National has
further agreed that neither it nor Valle de Oro Bank will, among other things:
- enter into any new material line of business;
- increase or decrease the current number of the directors of Valley
National and Valle de Oro Bank;
- change its or Valle de Oro Bank's lending, investment, liability
management or other material banking policies in any respect that is
material to such party; or
- incur or commit to any capital expenditures (or any obligations or
liabilities in connection therewith) other than certain budgeted capital
expenditures (and obligations or liabilities in connection therewith).
32
<PAGE>
In addition, Valley National has also agreed that it will not take certain
actions, except in the ordinary course of business, without the prior written
consent of Community First. These actions include:
- selling any shares of its capital stock or rights to acquire its stock,
except in limited circumstances;
- redeeming or otherwise acquiring any shares of its capital stock or
securities convertible into or exchangeable for its shares;
- effecting a split, combination or reclassification of its capital stock;
- assuming or otherwise becoming responsible for, in any material amount,
the obligations of a third party;
- paying any material liability or discharging or satisfying any material
lien on any of its or Valle de Oro Bank's properties or assets;
- mortgaging, pledging or subjecting to any lien or other encumbrance any of
its assets except (a) in the ordinary course of business, (b) liens and
encumbrances for current property taxes not yet due and payable and (c)
liens and encumbrances which do not materially affect or interfere with
the current use or ability to convey the property;
- selling, assigning or transferring any tangible or intangible assets with
a book value greater than $25,000;
- entering into any individual employment, agency or other contract or
arrangement for the performance of personal services for an amount in
excess of $50,000, or as necessary to accommodate replacement;
- amending its certificate of incorporation, Valle de Oro Bank's articles of
association, or either of their bylaws or other governing documents;
- failing to maintain a reserve for loss and costs associated with
litigation matters described in the merger agreement, to the extent
required by generally accepted accounting principles;
- canceling any material debt or claim or waiving any right of material
value;
- repurchasing or entering into any agreement to repurchase all or any
portion of any loan previously participated to any other financial
institution other than loans repurchased in compliance with applicable
laws and regulations;
- originating any loan which is thereafter participated to another financial
institution providing for payment upon default on any basis other than pro
rata;
- making or committing to make any further advances on any loan which is
either in default or classified, whether such classification is a result
of a federal or state bank regulatory examination or internal
classification of substandard or lower by Valle de Oro Bank's officers or
directors, unless Valle de Oro Bank is under a legal obligation to do so;
- (a) making or agreeing to make any secured loan, or increasing any
existing secured loan, for an amount in excess of $500,000 to any one
borrower, unless the loan is made pursuant to a properly documented and
legally enforceable commitment of Valle de Oro Bank to the borrower made
prior to the date of the merger agreement; (b) making, or agreeing to
make, any unsecured loan in excess of $100,000 or increasing any existing
unsecured loan to $100,000 or more, to any one borrower, unless the loan
is made pursuant to a properly documented and legally enforceable
commitment of Valle de Oro Bank to the borrower made prior to the date of
the merger agreement; (c) making, or agreeing to make, any new loan or any
advance on an
33
<PAGE>
existing loan except in conformity with Valle de Oro Bank's current loan
policies; or (d) making any change with respect to the terms of any
existing loan, except in the ordinary course of business; with certain
additional provisions applicable to Community First's approval or
disapproval of any such loans;
- making or agreeing to make any loan to any director or executive officer
of Valley National or Valle de Oro Bank, any holder of 10% or more of the
capital stock of Valley National or any person where the making of the
loan would be a violation of any state or federal law or regulation;
- incurring any obligation or liability with respect to capital expenditures
which exceeds $10,000 for any single matter or $50,000 in the aggregate;
- failing to timely pay and discharge all federal and state taxes and other
accounts payable for which it is liable; provided that Valley National or
Valle de Oro Bank may establish appropriate reserve accounts for payment
of these taxes;
- except for compensation paid to commissioned employees, paying or
committing to pay salary or other compensation to any of Valley National's
or Valle de Oro Bank's officers, directors or employees at a rate which
exceeds 110% of aggregate compensation at December 31, 1998; provided
that, through the effective time of the merger, Valley National and Valle
de Oro Bank may adopt and implement reasonable bonus or special
compensation plans for employees;
- except as otherwise required under the merger agreement, entering into,
adopting, amending, terminating, making or granting any increase above
current funding levels in any of Valley National's or Valle de Oro Bank's
benefit plans;
- purchasing or selling any bonds or other investment securities without
written consent of Community First or making or agreeing to make any
investment in violation of any federal law or regulation, except that
Valle de Oro Bank may purchase U.S. Treasury or agency securities with
maturity dates of 36 months or less;
- failing to charge and pay interest rates on loans and deposits,
respectively, not generally consistent with Valle de Oro Bank's prior
practices and currently prevailing conditions in its marketplace;
- failing to use its reasonable best efforts to comply with any law, rule,
regulation or order applicable to either Valle de Oro Bank or Valley
National, or both, if such failure would have a material adverse effect
upon Valley National;
- Valle de Oro Bank's failing to make all appropriate and required transfers
to its loan loss reserves, either based upon its existing policies or at
the request of any regulatory agency, or in any event, failing to maintain
a loan loss allowance at least equal to 1.17% of total loans;
- changing any accounting methods, practices or procedures with respect to
the accumulation and presentation of financial information, except as
directed by applicable law or regulation or to conform with accounting
standards;
- failing to declare or pay any dividends or distributions with respect to
its stock at a rate and in a manner consistent with recent prior
practices;
- failing to use its reasonable efforts to obtain the consents or approvals
required in order to permit the succession by Community First following
the merger to any obligation, right or interest of Valley National under
any loan or credit agreement, note, mortgage, indenture, lease, license or
other agreement; and
34
<PAGE>
- with limited exceptions, initiating, soliciting, encouraging, endorsing or
in any other way facilitating actions that might represent or lead to a
competing offer to acquire or the acquisition of all of or a partial
interest in Valley National. Valley National is required to notify
Community First promptly upon receiving any such oral or written offer,
giving all relevant details of such offer. Valley National has received no
such oral or written offer as of the date of this proxy
statement/prospectus.
In connection with completion of the merger, Valley National has also agreed
as to itself and, where applicable, Valle de Oro Bank, that it will, among other
things, take the following actions:
- take all necessary actions to (a) terminate the compensation agreements or
arrangements of the directors and officers of Valley National and Valle de
Oro Bank identified in the merger agreement, (b) terminate or amend, if
requested and as required by the merger agreement, all qualified pension
and welfare benefit plans and compensation arrangements, and (c) where
required, request a favorable determination letter from the Internal
Revenue Service for each plan;
- not increase or enter into any agreement or arrangement to increase the
compensation of any officer, director or employee or pay any benefit not
required by any plan or arrangement in effect before the merger, with
limited exceptions;
- maintain its current insurance coverage through the effective date of the
merger; and
- not take any action which would disqualify the merger as a pooling of
interests for accounting purposes.
Valley National and Community First have also agreed that between the date
of the merger agreement and the effective time of the merger, they will do the
following, among other things:
- each party will cooperate with the other and use their reasonable best
efforts to prepare and file all required documentation and applications
and obtain all required consents and authorizations necessary to obtain
the requisite regulatory approvals and to complete the merger;
- each party will promptly furnish the other with copies of written
communications received from or delivered by them to any governmental
agency regarding the merger;
- each party will generally afford the other access to their books and
records during normal business hours, provide copies or otherwise make
available information and documentation relating to the filing of the
registration statement and the merger, and in general hold in confidence
all non-public documents and information relating to the business of the
other party;
- Valley National will use its reasonable best efforts to cause each
director, executive officer or other person who may be deemed an
"affiliate" (for purposes of Rule 145 under the Securities Act) of Valley
National to deliver to Community First at least 32 days before the closing
date, a written agreement providing that the affiliate will not engage in
certain transactions with respect to Valley National common stock held by
the affiliate;
- each person who is an employee of Valle de Oro Bank at the effective time
of the merger shall be a participant in the welfare plans of Community
First and shall be eligible for participation, subject to its eligibility
requirements, in the pension plans of Community First;
- each party will pay all costs and expenses incurred in connection with the
merger agreement and related transactions incurred by them;
- each party will use their reasonable best efforts to take all action and
execute all documents necessary to obtain the necessary approvals and
complete the merger and related transactions;
35
<PAGE>
- neither party will take any action that is intended to result in any of
the representations or warranties in the merger agreement being untrue or
that would adversely affect the ability of the parties to obtain the
requisite regulatory approvals; and
- Valley National will have engaged at its expense an independent, qualified
environmental engineering firm acceptable to Community First for the
purpose of conducting Phase I hazardous waste assessments of all real
properties owned or controlled by Valle de Oro Bank, with such assessments
to be completed within 30 days after the date of the merger agreement.
AMENDMENT, WAIVER AND TERMINATION
The merger agreement may be amended by a written instrument in such manner
as may be agreed upon by the parties, whether before or after approval of the
merger by the stockholders of Valley National, and any provision of the merger
agreement may be waived by the party entitled to the benefit provided, however,
that after the special meeting of stockholders no amendment may be made which by
law requires further approval of Valley National or Community First's
stockholders. Notice of any material amendment or modification will be sent to
Valley National and Community First's stockholders.
The circumstances that allow termination of the merger agreement are
described in the Summary on page 6.
EFFECT ON VALLEY NATIONAL STOCK OPTION PLANS
In the merger, all outstanding stock options of Valley National will be
converted into options to purchase Community First stock. The number of shares
of Community First common stock subject to each option will be determined by
multiplying the number of Valley National shares subject to the option by the
exchange rate. The exercise price of each option will be determined by dividing
the existing exercise price by the exchange rate. As of the date of this proxy
statement/prospectus, there were 443,394 shares of Valley National common stock
subject to stock options.
EFFECT ON OTHER VALLEY NATIONAL EMPLOYEE BENEFIT PLANS
Each person who is an employee of Valle de Oro Bank as of the effective time
of the merger shall be participants in the employee welfare plans, and shall be
eligible for participation in the pension plans of Community First, in effect
from time to time, subject to any eligibility requirements (with full credit for
years of past service to Valle de Oro Bank, or to any predecessor-in-interest of
Valle de Oro Bank to the extent such service is presently given credit under the
current benefit plans of Valle de Oro Bank, for the purpose of satisfying any
eligibility and vesting periods) applicable to the plans (but not subject to any
pre-existing condition exclusions) and shall enter each welfare plan immediately
after the effective time of the merger and shall enter each pension plan not
later than the first day of the calendar quarter which begins at least 32 days
after the effective time. For the purpose of determining each bank employee's
benefit for the year in which the merger occurs under the Community First
vacation program, vacation taken by a bank employee in the year in which the
merger occurs will be deducted from the total Community First benefit. Each bank
employee shall be eligible for participation, as a new employee, in the
Community First Pension Plan under the terms of that plan.
EXPENSES
Community First and Valley National will pay their own expenses in
connection with the merger and the transactions contemplated thereby, including
professional fees.
36
<PAGE>
ACCOUNTING TREATMENT
It is intended that the merger will be accounted for using the pooling of
interests method of accounting. Community First shall have received a letter,
prior to completion of the merger, from Ernst & Young LLP regarding such firm's
concurrence with Community First management's and Valley National management's
conclusions, as to the appropriateness of pooling of interests accounting for
the merger under Accounting Principles Board Opinion No. 16 if closed and
completed in accordance with the merger agreement. Among other considerations,
such letter will be subject to receipt by Ernst & Young LLP and Community First
of a letter from KPMG LLP, Valley National's independent auditors, in form and
substance reasonably satisfactory to Ernst & Young, LLP related to the
eligibility of Valley National to qualify for pooling treatment, and to the
condition that less than 10% of the merger consideration will consist of cash,
including cash paid in the merger in lieu of fractional shares of Valley
National common stock.
In order to satisfy certain conditions precedent for the qualification of
the merger as a pooling of interests for accounting purposes, the affiliates of
Valley National will enter into agreements with Community First providing that
each such person will not sell or otherwise reduce his or her risk relative to
any shares of the Community First common stock received in the merger until
financial results covering at least 30 days of post-merger combined operations
are published or until such later time as such person is notified by Community
First so as to ensure that the merger qualifies as a pooling of interests for
accounting purposes. Under the merger agreement, Valley National has agreed that
neither it nor Valle de Oro Bank shall take any action, with certain exceptions,
which would disqualify the merger as a pooling of interests for accounting
purposes.
Under pooling of interests accounting, as of the effective time of the
merger, the assets and liabilities of Valley National will be added to those of
Community First at their recorded book values and the stockholders' equity
account of Valley National will be included on Community First's consolidated
balance sheet. The merger will have a material impact on the consolidated
financial statements of Community First. Accordingly, the consolidated financial
statements for preceding periods will be restated.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF VALLEY NATIONAL
BASIS OF PRESENTATION
The following is Valley National's management discussion and analysis of the
results of operations and the historical financial condition of Valley National
and its consolidated subsidiary Valle de Oro Bank. This discussion should be
read in conjunction with Valley National's audited financial statements and
accompanying footnotes and other selected financial data presented elsewhere
herein.
The financial information discussed below reflects the operations of Valle
de Oro Bank. Valley National began operations on March 31, 1999 as the holding
company of Valle de Oro Bank.
RESULTS OF OPERATIONS
EARNINGS PERFORMANCE. Valley National earned $2,400,000 in 1998, $1,852,000
in 1997, and $1,403,000 in 1996. The increase in net earnings during the past
three years is primarily the result of the growth of Valley National. Valley
National has grown for several reasons, among them, its focus and attention on
customer service, and its participation and reputation in the local communities
it serves. In addition, the local economy has been good. Low interest rates, low
unemployment and rising real estate values are factors that helped the local
economy and contributed to Valley National's earnings performance.
The following is a condensed summary of the consolidated statement of
operations along with selected profitability ratios:
VALLEY NATIONAL CORPORATION
ANALYSIS OF NET INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net interest income...................................... $ 3,179 $ 2,738 $ 11,729 $ 10,330 $ 9,549
Provision for loan losses................................ 150 181 627 497 1,062
Other operating income................................... 772 650 2,926 2,696 2,249
Net gains on sales of SBA loans.......................... 30 -- 81 48 --
Other operating expense.................................. 2,840 2,527 10,562 9,688 8,542
Net income............................................... 644 448 2,400 1,852 1,403
Return on average assets................................. 1.07% 0.85% 1.06% 0.93% 0.80%
Return on average equity................................. 13.05% 10.38% 13.19% 11.50% 9.56%
Dividend payout ratio.................................... 14.40% 16.52% 14.13% 15.76% 19.83%
Equity to assets......................................... 8.20% 8.19% 8.07% 8.11% 8.33%
</TABLE>
38
<PAGE>
NET INTEREST INCOME. Net interest income is affected by changes in both
interest rates and the volume of average earning assets and interest-bearing
liabilities. The following table presents Valley National's average balance
sheets, interest earned or paid, and the related yields and rates on major
categories of Valley National's earning assets and interest-bearing liabilities
for the periods indicated:
VALLEY NATIONAL CORPORATION
ANALYSIS OF AVERAGE RATES AND BALANCES
YEARS ENDED DECEMBER 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
INTEREST INTEREST INTEREST INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELDS AND AVERAGE INCOME/ YIELDS AND AVERAGE INCOME/ YIELDS AND
BALANCE EXPENSE RATES(1) BALANCE EXPENSE RATES(1) BALANCE EXPENSE RATES(1)
-------- ------- ---------- -------- ------- ---------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net......................... $139,001 $14,456 10.40% $120,592 $13,053 10.82% $110,342 $12,292 11.14%
Investment securities:
Taxable.......................... 23,744 1,429 6.02% 24,565 1,524 6.20% 20,137 1,236 6.14%
Exempt from federal income
taxes(2)....................... 14,591 704 8.04% 11,605 558 8.01% 7,646 362 7.89%
Federal funds sold................. 21,568 1,141 5.29% 16,479 877 5.32% 15,099 774 5.13%
Deposits with financial
institutions..................... 5,049 296 5.86% 4,302 258 6.00% 3,425 201 5.88%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest earning assets.... 203,953 18,026 9.07% 177,543 16,270 9.37% 156,648 14,865 9.64%
Noninterest earning assets......... 21,699 21,069 19,482
-------- -------- --------
Total assets..................... $225,652 $198,612 $176,130
-------- -------- --------
-------- -------- --------
LIABILITIES
Time deposits of $100,000 or
more............................. $ 15,376 815 5.30% $ 14,620 799 5.47% $ 14,981 815 5.44%
All other interest-bearing
deposits......................... 149,569 5,482 3.67% 131,788 5,141 3.90% 117,403 4,501 3.83%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total interest-bearing
liabilities.................... 164,945 6,297 3.82% 146,407 5,940 4.06% 132,384 5,316 4.02%
Noninterest-bearing deposits....... 41,506 34,955 28,128
Other liabilities.................. 1,001 1,139 943
Stockholders' equity............... 18,200 16,110 14,674
-------- -------- --------
Total liabilities and stockholders'
equity........................... $225,652 $198,612 $176,130
-------- -------- --------
-------- -------- --------
Interest income/earning assets..... $18,495 9.07% $16,642 9.37% $15,106 9.64%
Interest expense/earning assets.... 6,297 3.09% 5,940 3.35% 5,316 3.39%
Net interest income................ $12,198 5.98% $10,702 6.03% $9,790 6.25%
</TABLE>
- ------------------------------
(1) Includes nonaccrual loans and loan fees.
(2) Yields on securities have been adjusted to a fully tax-equivalent basis
using a rate of 40%.
Average earning assets grew to $204.0 million in 1998, an increase of $26.4
million or 15% over 1997. Average loans increased $18.4 million or 15%. Average
securities, both taxable and tax-exempt, increased $2.2 million or 6% primarily
in tax-exempt securities. Average federal funds sold increased $5.1 million or
31%, and interest-earning deposits with other banks increased $747,000 or 17%.
39
<PAGE>
In 1998 Valley National increased its efforts to generate loans by focusing
on small business, real estate, and consumer lending. In addition, the local
economy has been good. Low interest rates, low unemployment and rising real
estate values are some of the factors that helped the local economy and
contributed to Valley National's operating results in 1998.
In recent years, fierce competition for loans has caused loan yields to
decline. In addition, the Federal Reserve Bank lowered short-term interest rates
in the fourth quarter of 1998, which affected most of Valley National's earning
assets as well as interest-bearing liabilities. This decline in interest rates,
however, was offset by the growth of earning assets.
Average loans and federal funds sold accounted for the largest growth in
earning assets in 1998, increasing 15% and 31%, respectively. In 1998 average
federal funds sold increased as a result of increases in deposits. Average
taxable securities and interest-earning deposits grew in 1998, but a lesser
rate. Securities exempt from federal income taxes increased both in yield and in
volume. In 1998 the returns on tax-exempt securities were more attractive to
Valley National than what was available on fully taxable securities.
Average earning assets grew to $177.5 million in 1997, an increase of $21.0
million or 13% over 1996. This increase in earning assets was primarily in loans
and securities. In 1997 average net loans grew $10.3 million or 9% over 1996.
Loan demand in 1997 continued at a somewhat moderate rate. In 1997 average
securities increased $8.4 million or 30% over 1996, a majority of which was
divided somewhat evenly between taxable and tax-exempt securities, although
tax-equivalent yields were better for tax-exempt securities. In 1997 average
federal funds sold and average interest-earning deposits with other financial
institutions grew, but at a lesser rate than loans or securities. Yields on
these short-term assets increased in 1997 in line with other short-term interest
rates.
In 1996 average-earning assets increased $29.2 million or 23% over 1995. Due
to moderate loan demand, the growth of average securities of $14.1 million
exceeded the $11.6 million growth in net loans. Yields on loans also declined in
1996. Yields were slightly higher for securities.
40
<PAGE>
VALLEY NATIONAL CORPORATION
ANALYSIS OF AVERAGE RATES AND BALANCES
THREE MONTHS ENDED MARCH 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
------------------------------------- -------------------------------------
INTEREST INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELDS AND AVERAGE INCOME/ YIELDS AND
BALANCE EXPENSE RATES(1) BALANCE EXPENSE RATES(1)
--------- ----------- ------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net....................................... $ 148,793 $ 3,689 9.92% $ 134,167 $ 3,511 10.47%
Investment securities:
Taxable........................................ 29,724 428 5.76% 23,318 357 6.12%
Exempt from federal income taxes(2)............ 17,461 205 7.83% 13,294 163 8.17%
Federal funds sold............................... 14,101 164 4.65% 14,736 198 5.37%
Deposits with financial institutions............. 6,373 87 5.46% 4,500 66 5.87%
--------- ----------- --- --------- ----------- -----
Total interest earning assets.................. 216,453 $ 4,573 8.45% 190,015 $ 4,295 9.04%
Noninterest earning assets....................... 24,379 25,231
--------- ---------
Total assets................................... $ 240,832 $ 215,246
--------- ---------
--------- ---------
LIABILITIES
Time deposits of $100,000 or more................ $ 17,519 $ 209 4.77% $ 14,413 $ 194 5.38%
All other interest-bearing deposits.............. 155,731 1,185 3.04% 140,801 1,363 3.87%
--------- ----------- --- --------- ----------- -----
Total interest-bearing liabilities............. 173,250 $ 1,394 3.22% 155,214 $ 1,557 4.01%
Noninterest-bearing deposits..................... 46,700 37,520
Other liabilities................................ 993 4,942
Stockholders' equity............................. 19,889 17,570
--------- ---------
Total liabilities and stockholders' equity..... $ 240,832 $ 215,246
--------- ---------
--------- ---------
Interest income/earning assets................... $ 4,573 8.45% $ 4,295 9.04%
Interest expense/earning assets.................. 1,394 2.58% 1,557 3.28%
----------- --- ----------- -----
Net interest income.............................. $ 3,179 5.87% $ 2,738 5.76%
</TABLE>
- ------------------------------
(1) Includes nonaccrual loans and loan fees.
(2) Yields on securities have been adjusted to a fully-tax equivalent basis
using a rate of 40%.
41
<PAGE>
The following table reflects changes in interest income and expense
attributable to changes in volume and interest rates of significant
interest-bearing assets and liabilities:
VALLEY NATIONAL CORPORATION
ANALYSIS OF VOLUME AND INTEREST RATES
YEARS ENDED DECEMBER 31,
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
COMPARED TO 1998 PERIOD 1998 COMPARED TO 1997 1997 COMPARED TO 1996
----------------------- --------------------- ---------------------
ATTRIBUTABLE TO ATTRIBUTABLE TO
ATTRIBUTABLE TO CHANGE CHANGE CHANGE
----------------------- --------------------- ---------------------
TOTAL IN IN TOTAL IN IN TOTAL IN IN
CHANGE VOLUME RATE CHANGE VOLUME RATE CHANGE VOLUME RATE
------ ------ ----- ------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net........................................ $ 178 $363 $(185) $1,403 $1,915 $(512) $ 761 $1,110 $(349)
Investment securities
Taxable......................................... 71 92 (21) (95 ) (49 ) (46) 288 275 13
Exempt from federal income taxes................ 42 49 (7) 243 240 3 327 318 9
Federal funds sold................................ (34) (7) (27) 264 269 (5) 103 74 29
Deposits with financial institutions.............. 21 26 (5) 38 44 (6) 57 52 5
------ ------ ----- ------ ------ ----- ------ ------ -----
Total........................................... $ 278 $523 $(245) $1,853 $2,419 $(566) $1,536 $1,829 $(293)
Time deposits of $100,000 or more................. $ 15 $ 37 $ (22) $ 16 $ 41 $ (25) $ (16 ) $ (20 ) $ 4
All other deposits................................ (178) 114 (292) 341 652 (311) 640 561 79
Total........................................... $(163) $151 $(314) $ 357 $ 693 $(336) $ 624 $ 541 $ 83
------ ------ ----- ------ ------ ----- ------ ------ -----
Net interest income............................... $ 441 $372 $ 69 $1,496 $1,726 $(230) $ 912 $1,288 $(376)
------ ------ ----- ------ ------ ----- ------ ------ -----
------ ------ ----- ------ ------ ----- ------ ------ -----
</TABLE>
The change in interest income/expense attributable to volume reflects the
change in volume times the prior year's rate and the change in interest
income/expense attributable to rate reflects the change in rates times the
current year's volume.
For the first three months of 1999 net interest income before provision for
loan losses increased to $3.2 million compared to $2.7 million in the first
three months of 1998. In the first quarter of 1999 average earning assets
increased to $216.4 million compared to $190.0 million in the same period in
1998. Between these two periods, average loans increased $14.6 million. In
recent months, Valley National's commercial real estate lending activity has
been strong, followed by increases in multi-family real estate and home equity
credit lines. In addition to the growth in average loans, average securities
increased followed by interest-earning deposits. Average federal funds sold
remained the same.
In the first quarter of 1998, net interest income before provision for loan
losses increased as a result of the growth of average earning assets, especially
loans and tax-exempt securities. Average federal funds sold and taxable
securities declined during this period. However, the decline in average federal
funds sold was offset by the rise in average yield.
The yield on earning assets declined in the first quarter of 1999 to 8.45%,
on a tax-equivalent basis, from 9.04% in the same period of 1998. However,
interest expense to average earning assets fell at a faster rate from 3.28% in
the first quarter of 1998 to 2.58% in the first quarter of 1999. This resulted
in an increase in the net yield on interest-earning assets from 5.76% to 5.87%.
The combination of both the increased volume of earning assets and increased net
interest margin was a factor for the increased net earnings during the first
quarter of 1999.
PROVISION FOR LOAN LOSSES. Valley National made provisions for loan losses
for 1998 and 1997 of $627,000 and $497,000, respectively, and $1,062,000 in
1996. The provisions were determined based on management's assessment of an
adequate reserve for possible loan losses.
42
<PAGE>
Management continually assesses the adequacy of the loan loss reserve by
evaluating the collectability of loans. This process includes assigning risk
ratings to loans and reserving percentages of these balances according to
reserve allocation formulas. This valuation process takes into consideration
such factors as changes in the nature and volume of Valley National's loan
portfolio, prior loan loss experience, overall loan portfolio quality, review of
specific problem loans, current and anticipated economic conditions that may
affect a borrower's ability to pay and other factors that in management's
judgment, deserve recognition. For the year 1998, as with previous years,
management utilized this process in evaluating the adequacy of the allowance for
loan loss.
Steadily improving economic conditions and disciplined underwriting have
resulted in lower loan delinquencies over the past several years. As a result of
declining loan delinquencies, Valley National's net loan charge-offs decreased
to $282,000 in 1998 compared to $344,000 and $1,071,000 in 1997 and 1996,
respectively. The provision for loan losses increased in 1998, as compared to
1997, to keep pace with the growth in loans.
In 1997 the provision for loan losses was decreased to $497,000 from $1.1
million in 1996 as a result of the decline in net loan charge-offs in 1997 and
improved credit quality.
In 1996 loan charge-offs increased $1.2 million and recoveries were lower
compared to 1995. Higher loan charge-offs and fewer recoveries prompted the
increase in the provision for loan losses.
For the three month period ended March 31, 1999 the provision for loan
losses declined to $150,000 compared to $181,000 for the same period in 1998.
Net loan losses were $5,000 for the quarter ended March 31, 1999 compared to
$29,000 for the same period in 1998. However, loans on nonaccrual status
increased from $92,000 as of December 31, 1998 to $478,000 as of March 31, 1999.
NON-INTEREST INCOME. The following table presents a summary of non-interest
income:
VALLEY NATIONAL CORPORATION
ANALYSIS OF NON-INTEREST INCOME
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts.................................. $ 412 $ 400 $ 1,614 $ 1,642 $ 1,495
Merchant processing fees............................................. 151 109 546 514 418
Mortgage brokerage fees.............................................. 64 44 254 192 63
Gain on sale of loans................................................ 30 -- 81 48 --
Other................................................................ 145 97 512 348 273
--------- --------- --------- --------- ---------
Total.............................................................. $ 802 $ 650 $ 3,007 $ 2,744 $ 2,249
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Service charges on deposit accounts increased to $412,000 in the first three
months of 1999 compared to $400,000 in the same period in 1998 as a result of
the growth in deposits and the increased number of accounts subject to charge.
Valley National has not changed its service charge fees in several years. Valley
National continues to implement new products such as "PC Banking and Bill Pay"
to expand its services and improve fee income. Merchant processing fees
increased as a result of raising merchant transaction fees and new customers.
Mortgage brokerage fees have increased due to low mortgage rates and the
resulting increased real estate sales and refinancing activity. Gain on sale of
loans is the result of sales of the guaranteed portion of SBA loans. Other
income increased primarily
43
<PAGE>
as a result of increased commissions earned on the sale of mutual funds,
annuities and other nondeposit investment products.
Service charges on deposit accounts declined slightly for the year ended
1998 because Valley National did not raise service charge fees in 1998 and
depositors, especially small businesses, maintained higher account balances,
which resulted in fewer account charges. Merchant processing fees were higher as
a result of an increase in merchant accounts. Mortgage banking fees increased
32% due to an increase in mortgage refinancing activities. Other income includes
commissions on the sale of nondeposit investment products, transaction fees on
credit and debit card processing, and other miscellaneous items.
NON-INTEREST EXPENSE. The following table presents a summary of
non-interest expense:
VALLEY NATIONAL CORPORATION
ANALYSIS OF NON-INTEREST EXPENSE
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Compensation and employee benefits.............................. $ 1,364 $ 1,327 $ 5,236 $ 4,951 $ 4,359
Occupancy expense............................................... 305 284 1,142 1,101 872
Furniture and equipment......................................... 183 154 683 622 503
Other........................................................... 988 762 3,501 3,014 2,808
--------- --------- --------- --------- ---------
Total......................................................... $ 2,840 $ 2,527 $ 10,562 $ 9,688 $ 8,542
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
During the first quarter of 1999, compensation and employee benefits
increased $37,000 to $1,364,000 compared to $1,327,000 for the same period in
1998. Staffing levels have remained fairly steady over the past year and expense
controls have been effective. Occupancy expense increased $21,000 to $305,000
and furniture and equipment expense increased $29,000 to $183,000 in the first
three months of 1999 compared to 1998 primarily due to higher depreciation
resulting from acquisitions of additional equipment and to increases in the
operating and maintenance costs of premises and equipment. Other operating
expense increased $226,000 in the first quarter of 1999 compared to 1998. Data
processing, merchant processing expense, stationery, telephone and postage
increased as a result of the growth of Valley National. Professional services
and other operating expenses increased as a result of costs related to the
formation of Valley National which was completed on March 31, 1999.
Compensation and employee benefits increased in each of the past three years
as a result of an increase in the number of employees, and salary increases for
promotions and cost of living adjustments. In 1998 this expense increased 6%
compared to 14% in 1997. Valley National did not open any new facilities or
engage in any new lines of business in 1998. In 1997 staffing levels increased
to accommodate the opening of a sixth banking office in Santee California, and
to engage in the sale of non-deposit investment products. In 1996 staffing
levels remained fairly constant rising at a rate of approximately 6%.
In 1998, occupancy costs rose 4% compared to 26% in 1997. In 1997, occupancy
expense increased due to the opening of the Santee office and the completion of
the Grossmont Center office, which was completely destroyed by fire in late
1995. The new facility is larger and contains more amenities designed to support
the future growth of Valley National in the La Mesa area. Insurance proceeds due
from the loss of property were fully collected in 1997.
44
<PAGE>
In 1996 occupancy expense decreased due to the lower cost of temporary
facilities for the Grossmont Center office.
Furniture and equipment expense increased 10% in 1998 compared to 24% in
1997. In 1998 Valley National spent approximately $171,000 on software upgrades
and other equipment, which would not have otherwise been spent, except for the
Year 2000 issue. In 1997 furniture and equipment expense increased as a result
of higher depreciation expense for the Santee and Grossmont Center offices. By
comparison, furniture and equipment expense increased 4% in 1996, which was
largely the result of higher equipment maintenance and upgrade costs.
In 1998 other operating expenses increased 16% compared to 7% in 1997 as a
result of the general growth of Valley National and some modest price increases.
In 1998 data processing expense increased 19% due to the growth in the number of
accounts, plus the initial cost of Valley National's "PC Banking & Bill Pay"
product. Professional services increased, in part, as a result of consulting
fees for Year 2000. Merchant processing expense, like merchant processing fees,
was higher due to an increase in merchant accounts. Also, other expenses include
$142,000 of organizational costs for Valley National, the holding company for
Valle de Oro Bank.
In 1997 other expenses increased 7% over 1996 as a result of the growth of
Valley National's operations. Other real estate owned expense, however,
decreased 62% in 1997 due to a reduction in other real estate owned properties
and their related holding costs.
In 1996 the decline in other expenses was attributable to a significant
reduction in FDIC deposit insurance costs. Stationery and supplies declined
because of improved cost controls and data processing costs were lower due to
greater system utilization. Professional services declined in 1996 as a result
of converting item processing from an outside vendor to Valley National
personnel in mid-1995.
INCOME TAXES. Valley National's income tax provision for 1998 was
$1,147,000 compared with $1,037,000 in 1997, and $791,000 in 1996. The effective
tax rates were 32% in 1998, 36% in 1997, and 36% in 1996. The effective tax rate
differs from the federal statutory rate primarily as a result of tax-exempt
interest.
Income taxes have increased in each of the last three years as a result of
higher pre-tax earnings. Valley National has reduced its effective tax rate in
each of the past three years by increasing its investment in tax-exempt
securities. In 1998 Valley National also made an adjustment of $107,000 to
reduce its tax liability that was no longer needed.
45
<PAGE>
FINANCIAL CONDITION
LOANS. The following table presents the balance of each major category of
loans at the dates indicated:
VALLEY NATIONAL CORPORATION
ANALYSIS OF LOANS
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
--------------------------------- ---------------------------------------------------
1999 1998 1998 1997 1996
--------------- --------------- --------------- --------------- ---------------
% OF % OF % OF % OF % OF
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Category:
Commercial and industrial............... $ 57,032 36% $ 54,668 41% $ 62,341 41% $ 56,477 41% $ 51,183 43%
Real estate-construction................ 7,557 5% 4,387 3% 7,960 5% 5,899 4% 5,560 5%
Real estate-mortgage.................... 77,508 49% 62,843 47% 66,850 44% 61,070 45% 52,349 44%
Consumer loans.......................... 14,941 10% 12,054 9% 15,062 10% 13,449 10% 10,983 9%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans........................... 157,038 100% 133,952 100% 152,213 100% 136,895 100% 120,075 100%
-------- -------- -------- -------- --------
Less allowance for loan losses.......... (1,832) (1,494) (1,687) (1,342) (1,189)
Less deferred loan fees................. (846) (693) (818) (716) (667)
-------- -------- -------- -------- --------
Total gross loans..................... $154,360 $131,765 $149,708 $134,837 $118,219
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
A principal component of Valley National's earning assets is its loan
portfolio. Loans have steadily grown over the past three years. From March 31,
1998 to 1999, net loans increased 17%. Net loans increased 11% to $149.7 million
in 1998 compared to an increase of 14% in both 1997 and 1996. Generally, Valley
National focuses on small business commercial and real estate secured lending,
including loans guaranteed by the Small Business Administration. Consumer
lending has also been pursued, primarily in automobile financing and retail
credit card programs.
VALLEY NATIONAL CORPORATION
NONACCRUAL, RESTRUCTURED AND PAST DUE LOANS
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans.......................................... $ 478 $ 175 $ 92 $ 350 $ 619
Restructured loans........................................ -- -- -- -- 1,158
Loans past due 90 days or more............................ 4 818 437 544 12
--------- --------- --------- --------- ---------
Total nonperforming loans............................... $ 482 $ 993 $ 529 $ 894 $ 1,789
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Note: Loans are generally placed on nonaccrual status when the borrowers are
past due 90 days and when payment in full of principal or interest is not
expected. At the time a loan is placed on nonaccrual status, any interest
income previously accrued but not collected is reversed against current
period interest income. Income on nonaccrual loans is subsequently
recognized only to the extent cash is received and the loan's principal
balance is deemed collectible. Loans are restored to accrual status when
the loans become both well secured and are in the process of collection.
46
<PAGE>
Interest income of $12,000 would have been recorded for the three months
ended March 31, 1999 and 1998, respectively, if nonaccrual loans had been
on a current basis, in accordance with their original terms. Interest
income of $43,000, $45,000 and $66,000 would have been recorded for the
years ended December 31, 1998, 1997 and 1996, respectively, if nonaccrual
loans had been on a current basis, in accordance with their original
terms. No interest income was recognized on loans subsequently
transferred to nonaccrual status during the three month periods ended
March 31, 1999 and 1998. Interest income of $20,000, $17,000 and $15,000
was recognized on loans subsequently transferred to nonaccrual status as
of December 31, 1998, 1997 and 1996, respectively.
ALLOWANCE FOR LOAN LOSSES. Valley National's loan loss allowance is
available to absorb future loan losses. The current level of the loan loss
allowance is a result of management's assessment of the risk within the loan
portfolio based on the information revealed in the credit reporting processes.
Valley National utilizes a risk-rating system on loans and a monthly credit
review and reporting process which results in the calculation of the guideline
allowances based on the risk within the portfolio. This assessment of risk takes
into account the composition of the loan portfolio, review of specific problem
loans, previous loan experience, current and anticipated economic conditions and
other factors that, in management's judgment, deserve recognition.
Nonperforming loans have generally decreased over the past three years,
reflecting Valley National's attention to loan quality as well as an improving
local economy. Net loans increased 14% in both 1997 and 1996.
47
<PAGE>
The following table presents the changes in Valley National's loan loss
allowance as of the dates indicated:
VALLEY NATIONAL CORPORATION
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period................. $ 1,687 $ 1,342 $ 1,342 $ 1,189 $ 1,198
Charge-offs:
Commercial and industrial.................... -- (8) (97) (211) (923)
Real estate--construction.................... -- -- -- -- --
Real estate--mortgage........................ -- -- (103) (129) (64)
Consumer loans............................... (6) (36) (168) (109) (179)
Total...................................... (6) (44) (368) (449) (1,166)
Recoveries:
Commercial and industrial.................... -- 15 71 40 52
Real estate--construction.................... -- -- -- -- --
Real estate--mortgage........................ 1 -- -- 57 21
Consumer loans............................... -- -- 15 8 22
Total...................................... 1 15 86 105 95
Net charge-offs................................ (5) (29) (282) (344) (1,071)
Provision for loan losses...................... 150 181 627 497 1,062
Balance at end of period....................... $ 1,832 $ 1,494 $ 1,687 $ 1,342 $ 1,189
Allowance for loan losses to total loans at
period....................................... 1.17% 1.12% 1.11% 0.98% 0.99%
Net charge-offs to average loans............... 0.00% 0.02% 0.20% 0.29% 0.97%
</TABLE>
The loan loss allowance at March 31, 1999 was $1,832,000. Management
believes such amount is sufficient to cover any possible losses from nonaccrual
loans as well as the remainder of the loan portfolio.
48
<PAGE>
The following table allocates the loan loss allowance based on management's
judgment of potential losses in the respective areas. While management has
allocated reserves to various portfolio segments for purposes of this table, the
reserve is general in nature and is available for the portfolio in its entirety.
VALLEY NATIONAL CORPORATION
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, COMMERCIAL REAL ESTATE CONSUMER UNALLOCATED TOTAL
- ----------------------------------------------------- ------------- ------------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
1999
Allowance for loan losses............................ $ 458 $ 586 $ 348 $ 440 $ 1,832
% of loans in each category to total loans........... 25% 32% 19% 24% 100%
1998
Allowance for loan losses............................ $ 478 $ 359 $ 299 $ 358 $ 1,494
% of loans in each category to total loans........... 32% 24% 20% 24% 100%
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------
1998
Allowance for loan losses............................ $ 483 $ 475 $ 325 $ 404 $ 1,687
% of loans in each category to total loans........... 29% 28% 19% 24% 100%
1997
Allowance for loan losses............................ $ 485 $ 263 $ 265 $ 329 $ 1,342
% of loans in each category to total loans........... 36% 20% 20% 24% 100%
1996
Allowance for loan losses............................ $ 464 $ 217 $ 289 $ 219 $ 1,189
% of loans in each category to total loans........... 39% 18% 24% 19% 100%
</TABLE>
INVESTMENT PORTFOLIO. The investment activities of Valley National are
designed to assist in maximizing income consistent with quality and liquidity
requirements, supply collateral to secure public funds, provide a means for
balancing market and credit risks, and provide consistent income and market
value throughout changing economic times.
Valley National's portfolio consists of U.S. Treasury and government agency
obligations, including SBA loan pools, taxable and tax-exempt municipal
securities, and corporate debt. Valley National's investment portfolio does not
contain concentration of investments in any one issuer in excess of 10% of
Valley National's total investment portfolio. Exempt from this calculation are
securities of the U.S. government and U.S. government agencies.
49
<PAGE>
The following table presents the composition of Valley National's investment
portfolio at the dates indicated:
VALLEY NATIONAL CORPORATION
INVESTMENT PORTFOLIO
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1999 1998 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and government agency
securities................................... $ 22,089 $ 16,289 $ 22,254 $ 19,825 $ 19,248
States and political subdivisions.............. 23,907 17,981 23,542 16,962 11,362
Other.......................................... 765 475 766 477 485
--------- --------- --------- --------- ---------
Total investments............................ $ 46,761 $ 34,745 $ 46,562 $ 37,264 $ 31,095
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
For the investment portfolio as of December 31, 1998, the following table
presents a summary of yield and maturities:
VALLEY NATIONAL CORPORATION
ANALYSIS OF INVESTMENT YIELDS AND MATURITIES
DECEMBER 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
ONE YEAR OVER FIVE
ONE YEAR OR THROUGH FIVE YEARS THROUGH OVER TEN
LESS YEARS TEN YEARS YEARS TOTAL
------------- -------------- -------------- ------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------- ----- ------- ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and government agencies... $2,757 5.92% $14,725 5.89% $3,093 6.04% $1,679 5.70% $22,254 5.90%
States and political subdivisions....... 347 5.82% 8,628 5.11% 11,913 4.87% 2,654 5.29% 23,542 5.22%
Other................................... 468 6.04% 298 5.56% -- 0.00% -- 0.00% 766 5.85%
------ ----- ------- ----- ------- ----- ------ ----- ------- -----
Total................................. $3,572 5.93% $23,651 5.60% $15,006 5.11% $4,333 5.45% $46,562 5.46%
------ ------- ------- ------ -------
------ ------- ------- ------ -------
</TABLE>
Yields are not stated on a tax-equivalent basis.
50
<PAGE>
For the investment portfolio as of March 31, 1999, the following table
presents a summary of yield and maturities:
VALLEY NATIONAL CORPORATION
ANALYSIS OF INVESTMENT YIELDS AND MATURITIES
MARCH 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
ONE YEAR OVER FIVE
ONE YEAR OR THROUGH FIVE YEARS THROUGH OVER TEN
LESS YEARS TEN YEARS YEARS TOTAL
------------- -------------- -------------- ------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------- ----- ------- ----- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and government agencies... $2,252 5.74% $15,143 5.81% $3,040 5.70% $1,654 5.14 $22,089 5.74%
States and political subdivisions....... 546 5.32% 8,467 5.29% 12,404 4.81% 2,490 5.31 23,907 5.05%
Other................................... 466 6.04% 299 5.56% -- 0.00% -- 0.00 765 5.85%
------ ----- ------- ----- ------- ----- ------ ----- ------- -----
Total................................. $3,264 5.71% $23,909 5.63% $15,444 4.99% $4,144 5.02 $46,761 5.37%
------ ------- ------- ------ -------
------ ------- ------- ------ -------
</TABLE>
Yields are not stated on a tax-equivalent basis.
DEPOSITS. The following table presents a summary of Valley National's
average deposits as of the dates indicated and the maturity of time deposits
over $100,000:
VALLEY NATIONAL CORPORATION
ANALYSIS OF DEPOSITS
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
--------------------------------- ---------------------------------------------------
1999 1998 1998 1997 1996
--------------- --------------- --------------- --------------- ---------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing..................... $ 46,700 $ 37,520 $ 41,506 $ 34,955 $ 28,128
Interest-bearing NOW.................... 27,583 0.99% 22,635 1.00% 26,745 1.02% 21,145 1.00% 17,935 1.00%
Savings deposits........................ 89,271 2.98% 80,818 4.08% 84,794 3.84% 74,108 4.07% 65,956 3.89%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Time deposits < $100,000................ 38,877 4.63% 37,348 5.16% 38,030 5.13% 36,535 5.24% 33,513 5.22%
Time deposits > $100,000................ 17,519 4.77% 14,413 5.38% 15,376 5.30% 14,620 5.47% 14,981 5.44%
-------- -------- -------- -------- --------
Total deposits........................ $219,950 $192,734 $206,451 $181,363 $160,513
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
51
<PAGE>
VALLEY NATIONAL CORPORATION
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
(In thousands)
<TABLE>
<CAPTION>
< 3 MONTHS >3-6 MONTHS 6-12 MONTHS >12 MONTHS TOTAL
----------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
March 31, 1999.................................... $ 9,803 4,752 3,453 1,333 $ 19,341
December 31, 1998................................. $ 9,407 4,489 3,640 1,011 $ 18,547
</TABLE>
Year-end deposits for 1998 were $206.5 million as compared to $181.4 million
for year-end 1997 and $160.5 million for year-end 1996. At March 31, 1999 total
deposits were $219.6 million. Deposits have steadily increased over the past
three years due to Valley National's reputation in the local community and its
business development and marketing efforts. In the first quarter of 1999, time
deposits of $100,000 or more increased at a faster rate than in the previous
years due to higher rates paid by Valley National and its competitors on those
funds, especially those with longer maturities.
CAPITAL. Bank regulatory agencies measure capital adequacy through
standardized risk-based capital guidelines which compare different levels of
capital (as defined by such guidelines) to risk-weighted asset and off-balance
sheet obligations. Banks are required to maintain a minimum risk-based capital
ratio of 8%. Banking organizations considered to be among the most highly rated,
based upon examination results also must maintain a minimum leverage ratio of 3%
and a minimum risk-based capital ratio of 8%. Banks that are not the most highly
rated are expected to maintain a capital leverage ratio of at least 100 to 200
basis points above the minimum 3% levels. See "Business of Valley
National--Supervision and Regulation" on page 71 for a detailed discussion of
these capital requirements.
The following table presents regulatory capital requirements and risk-based
capital levels of Valley National:
REGULATORY CAPITAL REQUIREMENTS:
(In thousands)
<TABLE>
<CAPTION>
TIER 1 TOTAL RISK-BASED
CAPITAL CAPITAL LEVERAGE RATIO
------------- ----------------- --------------
<S> <C> <C> <C>
DECEMBER 31, 1998
Adequate....................................................... $ 6,722 $ 13,444 $ 9,563
Well capitalized............................................... $ 10,083 $ 16,805 $ 11,954
Actual......................................................... $ 19,268 $ 20,955 $ 19,268
MARCH 31, 1999
Adequate....................................................... $ 7,048 $ 14,095 $ 9,630
Well capitalized............................................... $ 10,571 $ 17,619 $ 12,037
Actual......................................................... $ 19,864 $ 21,696 $ 19,864
</TABLE>
52
<PAGE>
VALLEY NATIONAL CORPORATION
RISK-BASED CAPITAL
(Dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------------- --------------------
AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Capital Category:
Tier 1 Capital........................................ $ 19,864 11.27% $ 19,268 11.47%
Total Capital......................................... $ 21,696 12.31% $ 20,955 12.47%
Total risk weighted assets.............................. $ 176,189 $ 168,046
Leverage ratio.......................................... $ 19,864 8.25% $ 19,268 8.06%
</TABLE>
As of March 31, 1999, Valley National exceeded each of the capital
requirements of the federal banking regulatory agencies.
LIQUIDITY AND FUNDS MANAGEMENT. Liquidity management requires an ability to
meet financial commitments when contractually due and to respond to other
requirements for funds. Valley National has an Asset/Liability Management
Committee (ALCO) responsible for managing balance sheet and off-balance sheet
commitments to meet the needs of customers while achieving Valley National's
financial objectives. Valley National's ALCO meets regularly to review funding
capacities, current and forecasted loan demand, and investment opportunities.
Funds are held in cash and cash equivalents, which are comprised of cash and
due from banks plus federal funds sold. Cash and cash equivalents increased to
$23.6 million at December 31, 1998 compared to $19.3 million and $18.8 million
at December 31, 1997 and 1996, respectively, largely through increased demand
deposits. The only restriction on Valley National's cash and cash equivalents is
a $350,000 compensating balance arrangement with the Federal Reserve Bank.
Short-term securities classified as available-for-sale also provide a
secondary source of liquidity because these securities can be sold at any time,
if necessary. The fair value of available-for-sale securities maturing in one
year or less at December 31, 1998 totaled $3.1 million (see Note 2 to the
consolidated financial statements).
As an additional source of liquidity, Valley National maintains lines of
credit for $11.5 million with correspondent banks for the purchase of overnight
funds. These lines are subject to availability of funds. Valley National also
has the capability of borrowing overnight funds from the Federal Reserve's
discount window. Historically, Valley National has used its borrowing
capabilities infrequently.
Cash and cash equivalents, primarily federal funds sold, decreased $1.5
million during the three month period ended March 31, 1999 primarily as a result
of increased lending and slower deposit growth. Net loans increased $4.7 million
during the first three months of 1999 as a result of a strong local economy and
improved loan demand, especially for commercial real estate. Total deposits, by
comparison, grew at a slower rate in the first quarter of 1999 resulting in a
decrease in federal funds sold. Beginning in the latter part of 1998, Valley
National began reducing interest rates on deposits to improve its net interest
margin. As a result, deposit growth slowed.
INTEREST RATE SENSITIVITY. Significant changes in interest rates affect the
composition, yield and cost of balance sheet components. The rate sensitivity of
these assets and liabilities is monitored and matched to control the risk
associated with movements in rates. The ALCO for Valley National meets monthly
to monitor and formulate strategies and policies to provide sufficient levels of
net interest income while maintaining acceptable levels of interest rate
sensitivity, risk and liquidity. The primary object of rate sensitivity
management is to ensure earnings stability by minimizing the sensitivity of net
53
<PAGE>
interest income to fluctuations in interest rates. Valley National uses gap
analysis and other systems to measure, monitor and adapt to changing interest
rate environments. Valley National monitors and evaluates its interest rate risk
position on a quarterly basis using traditional gap analysis. Gap analysis
calculates the mismatches over certain time periods between assets and
liabilities whose interest rates are subject to repricing at their contractual
maturity dates or repricing period.
The following table presents Valley National's interest rate sensitivity
analysis by contractual repricing or maturity at December 31, 1998:
VALLEY NATIONAL CORPORATION
INTEREST RATE SENSITIVITY
AS OF DECEMBER 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
LESS THAN 3 3 MONTHS TO 1 TO 5 OVER 5 NON-RATE
MONTHS 1 YEAR YEARS YEARS SENSITIVE TOTAL
----------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REPRICING INTERVAL
Deposits with financial institutions................ $ 1,397 $ 3,998 $ 1,001 $ -- $ -- $ 6,396
Federal funds sold.................................. 11,890 -- -- -- -- 11,890
Investment securities............................... 1,502 2,070 23,651 19,339 -- 46,562
Loans, gross........................................ 87,275 10,780 29,756 24,310 92 152,213
All other assets.................................... -- -- -- -- 19,739 19,739
----------- ----------- --------- --------- ----------- ---------
Total............................................. $ 102,064 $ 16,848 $ 54,408 $ 43,649 $ 19,831 $ 236,800
----------- ----------- --------- --------- ----------- ---------
----------- ----------- --------- --------- ----------- ---------
Non-interest bearing deposits....................... -- -- -- -- $ 44,015 $ 44,015
Savings & NOW deposits.............................. -- -- -- $ 45,971 -- 45,971
Money market deposits............................... $ 69,969 -- -- -- -- 69,969
Time deposits under $100,000........................ 12,619 $ 21,191 $ 3,997 84 -- 37,891
Time deposits of $100,000 or more................... 9,407 8,129 1,011 -- -- 18,547
All other liabilities............................... 9 25 18 -- 945 997
Stockholders' equity................................ -- -- -- -- 19,410 19,410
----------- ----------- --------- --------- ----------- ---------
Total............................................. $ 92,004 $ 29,345 $ 5,026 $ 46,055 $ 64,370 $ 236,800
----------- ----------- --------- --------- ----------- ---------
----------- ----------- --------- --------- ----------- ---------
Period gap.......................................... $ 10,060 $ (12,497) $ 49,382 $ (2,406) $ (44,539)
Cumulative gap...................................... $ 10,060 $ (2,437) $ 46,945 $ 44,539
Cumulative rate sensitive gap %..................... 4% (1%) 20% 19%
</TABLE>
Note: All amounts are reported at their contractual maturity or repricing
periods. For purposes of this analysis, Valley National assumes that
savings deposits, which have no stated maturity, are not rate sensitive.
Money market accounts are repriced at the discretion of management and
generally are more rate sensitive.
Valley National has a positive cumulative gap of $10.0 million or 4% of
total assets in the period of less than three months, which reverses to a
negative cumulative gap of $2.4 million or negative 1% of total assets in the
three months to one year period. When rates rise, net interest income will
increase in the first three months, then decline over the remaining nine months
as more interest-bearing liabilities reprice. When rates fall, the opposite is
true. Valley National has a positive cumulative gap beyond one year that is
offset by noninterest-bearing liabilities and stockholders' equity. Valley
National normally evaluates its risk to earnings using interest rate changes of
200 basis points upon its one year cumulative gap. At December 31, 1998 an
adverse change in interest rates upon the negative one year cumulative gap of
$2.4 million would result in a decrease of approximately $49,000, or less than
1% of net interest income, which Valley National views as reasonable.
54
<PAGE>
The following table presents Valley National's interest rate sensitivity
analysis by contractual repricing or maturity at March 31, 1999:
VALLEY NATIONAL CORPORATION
INTEREST RATE SENSITIVITY
AS OF MARCH 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
LESS THAN 3 3 MONTHS TO 1 TO 5 OVER 5 NON-RATE
MONTHS 1 YEAR YEARS YEARS SENSITIVE TOTAL
----------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REPRICING INTERVAL
Deposits with financial institutions................ $ 1,498 $ 4,099 $ 802 $ -- $ -- $ 6,399
Federal funds sold.................................. 9,240 -- -- -- -- 9,240
Investment securities............................... 1,988 2,212 24,077 18,484 -- 46,761
Loans, gross........................................ 84,302 9,813 33,814 27,785 478 156,192
All other assets.................................... -- -- -- -- 22,240 22,240
----------- ----------- --------- --------- ----------- ---------
Total............................................. $ 97,028 $ 16,124 $ 58,693 $ 46,269 $ 22,718 $ 240,832
----------- ----------- --------- --------- ----------- ---------
----------- ----------- --------- --------- ----------- ---------
Non-interest bearing deposits....................... -- -- -- -- $ 47,320 $ 47,320
Savings & NOW deposits.............................. -- -- -- 46,483 -- 46,483
Money market deposits............................... 68,435 -- -- -- -- 68,435
Time deposits under $100,000........................ 12,812 21,388 3,779 -- -- 37,979
Time deposits of $100,000 or more................... 9,040 9,270 1,031 -- -- 19,341
All other liabilities............................... 9 26 9 -- 1,341 1,385
Stockholders' equity................................ -- -- -- -- 19,889 19,889
----------- ----------- --------- --------- ----------- ---------
Total............................................. $ 90,296 $ 30,684 $ 4,819 $ 46,483 $ 68,550 $ 240,832
----------- ----------- --------- --------- ----------- ---------
----------- ----------- --------- --------- ----------- ---------
Period gap.......................................... $ 6,732 $ (14,560) $ 53,874 $ (214) $ (45,832)
Cumulative gap...................................... $ 6,732 $ (7,828) $ 46,046 $ 45,832
Cumulative rate sensitive gap %..................... 3% (3%) 19% 19%
</TABLE>
Note: All amounts are reported at their contractual maturity or repricing
periods. For purposes of this analysis, Valley National assumes that
savings deposits, which have no stated maturity, are not rate sensitive.
Money market accounts are repriced at the discretion of management and
generally are more rate sensitive.
55
<PAGE>
The following table presents Valley National's interest rate sensitivity
analysis at the dates indicated with respect to individual categories of loans
and provides separate analyses with respect to fixed interest rate loans and
floating interest rate loans:
VALLEY NATIONAL CORPORATION
LOAN REPRICING OR MATURING
AS OF DECEMBER 31, 1998
(In thousands)
<TABLE>
<CAPTION>
REPRICING OR MATURING IN
--------------------------------------------------
1 YEAR OR OVER 1 TO 5 OVER 5
LESS YEARS YEARS TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Loan Category:
Commercial and industrial.................... $ 21,617 $ 22,201 $ 18,523 $ 62,341
Real estate--construction.................... 7,738 222 -- 7,960
----------- ------------- ----------- ---------
Total........................................ $ 29,355 $ 22,423 $ 18,523 $ 70,301
----------- ------------- ----------- ---------
----------- ------------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
FLOATING
FIXED RATE RATE TOTAL
----------- ------------ ---------
<S> <C> <C> <C>
Commercial and industrial............................... $ 12,249 $ 50,092 $ 62,341
Real estate--construction............................... 218 7,742 7,960
----------- ------------ ---------
Total................................................... $ 12,467 $ 57,834 $ 70,301
----------- ------------ ---------
----------- ------------ ---------
</TABLE>
VALLEY NATIONAL CORPORATION
LOAN REPRICING OR MATURING
AS OF MARCH 31, 1999
(In thousands)
<TABLE>
<CAPTION>
REPRICING OR MATURING IN
--------------------------------------------------
1 YEAR OR OVER 1 TO 5 OVER 5
LESS YEARS YEARS TOTAL
----------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Loan Category:
Commercial and industrial.................... $ 15,762 $ 23,494 $ 17,486 $ 56,742
Real estate--construction.................... 1,140 6,417 -- 7,557
----------- ------------- ----------- ---------
Total........................................ $ 16,902 $ 29,911 $ 17,486 $ 64,299
----------- ------------- ----------- ---------
----------- ------------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
FLOATING
FIXED RATE RATE TOTAL
----------- ------------ ---------
<S> <C> <C> <C>
Commercial and industrial............................... $ 12,147 $ 44,595 $ 56,742
Real estate--construction............................... 480 7,077 7,557
----------- ------------ ---------
Total................................................... $ 12,627 $ 51,672 $ 64,299
----------- ------------ ---------
----------- ------------ ---------
</TABLE>
YEAR 2000 COMPLIANCE ISSUES
The Year 2000 ("Y2K") issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of Valley
National's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a variety
of system miscalculations, operating problems and system failures.
56
<PAGE>
Valley National is addressing its Y2K issues using a five-phase program. The
five phases are awareness, assessment, renovation, validation and
implementation. A brief description of each phase and Valley National's progress
toward completing each phase follows.
The awareness phase identifies potential Y2K problems, develops an overall
strategy for addressing the issues, obtains support from the board of directors
and management, appoints a project team of employees to direct Valley National's
activities, and implements an internal and external communication program to
raise awareness of the problems and issues. Valley National completed this phase
as of March 31, 1998.
The assessment phase identifies all information technology systems i.e.,
hardware, software, networks, ATMs, etc., and non-information technology systems
such as alarm and security systems, and environmental controls, etc. This phase
also develops a system to evaluate and assess borrower and vendor preparedness,
including a tracking and monitoring system to identify potential problems.
Valley National's program to assess borrower preparedness includes
commercial, real estate and consumer borrowers. The program is designed to
evaluate each borrower's exposure to Y2K issues, the borrower's preparedness in
addressing this exposure, and an assessment of the borrower's ability to meet
its obligations under a worst case Y2K scenario. Based on this assessment,
additional amounts are specifically allocated, as necessary, to cover potential
losses for borrowers considered having a high Y2K risk rating. In addition,
funds have been allocated to cover potential Y2K related losses, in general,
without regard to specific borrowers.
Valley National has completed all of its information and non-information
technology system assessments. In addition, it has communicated with borrowers
and vendors, established a monitoring system, logged responses, and assigned
risk factors. Valley National has begun quantifying the Y2K risk factors
associated with its borrowers and assigned preliminary allocations of the
allowance for loan losses. This allocation process will be reviewed and revised
on a quarterly basis through, at least, the first quarter of 2000. Accordingly,
monitoring and communication with borrowers and vendors is ongoing.
Valley National has also made initial assessments of its liquidity position
in relation to the Y2K impact on large depositors and the deposit base, in
general. At this time, Valley National does not see a high level of concern by
customers regarding their ability to conduct normal banking activities. However,
Valley National has made an initial assessment of its projected level of cash
and cash-equivalents for the upcoming 1999 year-end, and is taking appropriate
steps to ensure adequate funds will be available to meet customer needs, should
the need arise. Such steps include adjusting the maturity date of certain assets
to fall in the latter part of the fourth quarter of 1999 and offering attractive
rates on time deposits for terms of one year or more. Valley National plans to
review and appraise this issue on a quarterly basis and more frequently after
June 1999.
The renovation phase involves making the necessary information technology
and non-information technology changes and upgrades necessary to be Y2K
compliant. Valley National has installed new item processing equipment, new
voice response hardware and software, and new local area network servers. It has
upgraded its communication system, purchased new security and alarm systems, and
installed three new automated teller machines. Valley National considers the
renovation phase on all mission critical systems to be complete.
The validation phase is the testing phase. Valley National uses a third
party data processing vendor whose software is Y2K compliant. During the first
quarter of 1999, proxy testing was completed with no significant Y2K issues
found. Valley National has finished testing its other internal specialized
systems.
57
<PAGE>
The implementation phase introduces system changes into its operating
environment. Once tested, Y2K compliant systems are ready to be introduced into
Valley National's operating environment. The target date for implementation of
all systems is September 30, 1999.
Contingency planning has begun. The board of directors has appointed a
business resumption contingency planning project manager. A workgroup has been
established, and an outside consulting firm was engaged to help prepare a Y2K
business resumption contingency plan. A business resumption contingency planning
outline has been developed which provides a guided approach to assessing
possible Y2K disruption risk, determines a logical course of action to fix the
problem or a plan to implement an alternative procedure. Valley National is
currently in the process of identifying Y2K disruption risks and preparing
written operating procedures. Valley National has completed a full business
resumption plan. The process of validating contingency procedures is currently
being performed.
With respect to the cost of preparing for Y2K, Valley National's use of a
third-party data processor and its policy of periodically upgrading in-house
hardware and software systems have mitigated its direct expenses for Y2K. In
1998 Valley National spent approximately $30,000, not including the cost of a
significant amount of Valley National staff time, on assessing, renovating and
testing its various systems. In the first quarter of 1999, Valley National has
spent approximately $9,000 on its Y2K efforts. Valley National's operating
budget related to Y2K matters is $50,500 in 1999 and $13,500 in 2000. In 1999,
its capital budget related to Y2K matters has recently been increased to
$100,000, including the cost of a generator that was approved and ordered in the
first quarter for installation in the second quarter of 1999.
Although significant steps are being taken to alleviate many of the Y2K
concerns, management still considers the most likely worst case Y2K scenario
will involve the inability of Valley National's utility and telephone service
providers to furnish consistent, uninterrupted power and telecommunication
services to Valley National in the early weeks of 2000. This view continues to
be based solely on a lack of meaningful disclosure provided to Valley National
by these companies. The correspondence Valley National has received to date has
been somewhat general in nature, and lacking the specific steps they have taken
and still need to take to become fully compliant. Due to the complexity of
today's power and telecommunication systems, management feels that there may be
a good chance of occasional power outages, or loss of telephone service that may
last for several hours or even several days.
If Valley National lost telephone service for a few hours, it would be
disruptive and certainly change normal operations but, most likely, Valley
National would not close its doors. Valley National has undertaken a plan to
receive and use data in hard copy form and use cellular or digital wireless
communications in the event of telephone service disruptions.
Electrical service is a vital part of Valley National's operation. If Valley
National lost power for more than a few hours it, most likely, would have to
close its doors and discontinue normal operations. For this type of contingency,
Valley National has approved and ordered an electrical generator at a cost of
approximately $50,000 to provide power to one of its offices. If a loss of power
occurs for an extended period of time, Valley National would consolidate
operations at this office. The generator has the capacity to provide consistent,
uninterrupted power for 5 days. Management feels this will keep Valley National
operating, with limited services, under a worst-case electrical disruption.
58
<PAGE>
BUSINESS OF VALLEY NATIONAL
GENERAL
Valle de Oro Bank opened in 1983. Valle de Oro Bank conducts substantially
the same business operations as a typical independent, commercial bank including
accepting demand, savings and time deposits and making commercial, real estate
and consumer loans. It has six offices:
<TABLE>
<S> <C> <C>
- Casa de Oro 9832 Campo Road, Spring Valley, California
- Sweetwater 491 Sweetwater Road, Spring Valley, California
- Rancho San Diego 2986 Jamacha Road, El Cajon, California
- Grossmont Center 8690 Center Drive, La Mesa, California
- Santee 8867 Cuyamaca Street, Santee, California
- El Cajon 1234 East Main Street, El Cajon, California
</TABLE>
Valle de Oro Bank issues cashier's checks and money orders, sells traveler's
cheques and provides other customary banking services. Valle de Oro Bank also
offers mortgage brokerage services, including a variety of conventional and
FHA/VA residential real estate loan products as well as commercial loan
products. Valle de Oro Bank sells to its customers, through a third party
broker/dealer, nondeposit investment products including mutual funds, fixed and
variable annuities, stocks, bonds and other nondeposit investment products.
Valle de Oro Bank does not operate or have any present intention to seek
authority to operate a trust department.
Valle de Oro Bank has always emphasized consumer and small business banking.
Most of Valle de Oro Bank's depositors are consumers and small business
customers.
As of March 31, 1999, Valle de Oro Bank has concentrated its lending
activities in three areas:
- real estate loans (54%)
- commercial loans to small businesses (36%)
- consumer loans (10%).
Valle de Oro Bank's real estate loan portfolio is comprised of amortizing
loans and consumer lines of credit secured by residential properties, loans
secured by commercial real estate, and construction loans. These loans are made
primarily for the purpose of purchasing or improving residential real estate, to
purchase or improve commercial real estate and to construct owner-occupied,
single family residential real estate. Commercial loans to small businesses,
including Small Business Administration loans, are made essentially to provide
working capital and equipment financing for small business customers. Consumer
loans are for household expenditures including automobiles, recreation and other
personal expenditures.
Valle de Oro Bank evaluates each borrower's credit-worthiness on a
case-by-case basis. The amount of collateral obtained by Valle de Oro Bank, if
necessary, is based upon management's credit evaluation of the borrower.
Collateral held varies but may include certificates of deposit, accounts
receivable, inventory, property, plant and equipment, residential real estate
and income-producing commercial properties. Valle de Oro Bank's lending
activities are concentrated in San Diego County.
Valle de Oro Bank has a borrower assessment program for Y2K issues. Valle de
Oro Bank's program includes commercial, real estate and consumer borrowers. The
program is designed to evaluate each borrower's exposure to Y2K issues, their
preparedness in addressing this exposure, and an assessment of the borrower's
ability to meet its obligations under a worst case Y2K scenario.
59
<PAGE>
Valle de Oro Bank provides 24-hour daily banking transactional service
through its electronic Automatic Teller Machines (ATMs) at all of its offices,
and is a member of the STAR SYSTEM, PLUS and VISA ATM networks. In 1997, Valle
de Oro Bank introduced its VISA Check Card where purchases are charged directly
to the customer's checking account rather than a credit card line, but looks
similar to a credit card and can be used anywhere a VISA credit card is
accepted. Valle de Oro Bank also provides automated clearing house services for
both origination and receipt of funds through the California Clearing House
Association.
Most of Valle de Oro Bank's business originates from its primary service
areas, consisting of the communities of Spring Valley, El Cajon, Lemon Grove, La
Mesa and Santee, all located in eastern San Diego County, California. Valle de
Oro Bank does not attract deposits from, and has not made loans to, foreign
governments or foreigners. Valle de Oro Bank's business is not seasonal. There
has been no material effect upon Valle de Oro Bank's capital expenditures,
earnings or competitive position as a result of federal, state or local
environmental regulations.
Valle de Oro Bank does not obtain a material portion of its deposits from a
single person or few persons, nor is a material portion of Valle de Oro Bank's
loans concentrated within a single industry or group of related industries.
Valle de Oro Bank's deposits are insured by the Federal Deposit Insurance
Corporation to applicable legal limits, and Valle de Oro Bank is supervised and
regulated by the Office of the Comptroller of the Currency.
LEGAL PROCEEDINGS
There is no material pending litigation to which Valley National or Valle de
Oro Bank is a party, other than routine litigation incidental to the business of
Valle de Oro Bank. Further, there is no material legal proceeding in which any
director, executive officer, principal stockholder, or affiliate of Valley
National or Valle de Oro Bank or any associate of any director, executive
officer, or principal stockholder is a party and has a significant interest
opposed to the interests of Valley National or Valle de Oro Bank. None of the
routine litigation in which Valle de Oro Bank is involved is expected to have a
material adverse impact upon the financial position or results of operations of
Valley National or Valle de Oro Bank.
DIRECTORS AND EXECUTIVE OFFICERS
Valley National's Board of Directors is presently composed of six members,
two of whom stand for election each year.
60
<PAGE>
Biographical information regarding the directors of Valley National is
described below:
<TABLE>
<CAPTION>
NAME BIOGRAPHICAL INFORMATION
- ---------------------------- ------------------------------------------------------------------------------------
<S> <C>
James F. Carroll Chairman of the Board of Directors of Valley National; Chairman of the Board of
Directors of Valle de Oro Bank; President of Data Disposal, Inc.; member of the
Association of Naval Aviation, the Tailhook Association and the Retired Officers
Association.
Samuel M. Ciccati, Ph.D. Director of Valle de Oro Bank; Investor in real estate during the past five years;
formerly President of Cuyamaca College, El Cajon from 1984 until his retirement in
1993.
Obert D. "Dale" Conway Vice Chairman of the Board of Directors of Valle de Oro Bank; owner of Continental
Investors, a firm which makes investments in cleaning establishments.
William V. Ehlen President of Valley National; Director, President and Chief Executive Officer of
Valle de Oro Bank since its inception in 1983.
Philip J. Gelber Director of Valle de Oro Bank; Ophthalmologist in practice in San Diego, California;
Medical Director of the San Diego Eye Bank; past President of the San Diego
Ophthalmologic Society.
C.K. Hill Director of Valle do Oro Bank; Secretary of Valley National; Owner of Casa de Oro
Travel; active in the Spring Valley Rotary Club.
</TABLE>
None of the directors of Valley National were selected under arrangements or
understandings other than with the directors and stockholders of Valley National
acting within their capacity as directors and stockholders of Valley National.
There are no family relationships between any of the directors, and none of the
directors serve as a director of any company which has a class of securities
registered under the Securities Exchange Act of 1934, as amended, or is required
to file periodic reports with the SEC, or any company registered as an
investment company under the Investment Company Act of 1940.
Biographical information is presented below for Paul Cable, who is the only
person who is an executive officer, but not a director of Valley National.
<TABLE>
<CAPTION>
NAME BIOGRAPHICAL INFORMATION
- ---------------- ------------------------------------------------------------------------------------------------
<S> <C>
Paul M. Cable Chief Financial Officer of Valley National; Senior Vice President and Chief Financial Officer of
Valle de Oro Bank, a position he has held since July, 1998; previously Vice President and
Controller of Valle de Oro Bank since 1995; Senior Vice President and Chief Financial Officer of
First National Bank of North County, from 1991 to 1995.
</TABLE>
SUPERVISION AND REGULATION
Some of the information below consists of summaries of certain statutory
provisions. These summaries are qualified by reference to the described
provisions.
VALLEY NATIONAL. Valley National is subject to provisions of the Bank
Holding Company Act of 1956, as amended (the "BHCA"), which requires a bank
holding company to register with the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") and be subject to its supervision. As a
bank holding company, Valley National's activities are subject to the BHCA and
Regulation Y of the Federal Reserve Board. Transactions between Valley National
and Valle de Oro Bank are subject to certain restrictions under the BHCA, the
Federal Reserve Act and other banking statutes.
61
<PAGE>
As a bank holding company, the acquisition of control of Valley National by
an individual or company is subject to the prior approval of the Federal Reserve
Board. The term "company" is broadly defined to include any corporation,
partnership, association or trust or similar organization, while the definition
of "control" for these purposes may be met by (i) the ownership or control or
power to vote 25% or more of the outstanding shares of any class of voting stock
of Valley National, directly or indirectly, (ii) control over the election of a
majority of the directors of Valley National, or (iii) the power to exercise
directly or indirectly a controlling influence over the management or policies
of Valley National. In addition, under certain circumstances, the ownership,
control or power to vote 10% or more, but less than 25%, of the shares of any
class of voting securities of Valley National, directly or indirectly, may
require prior notice to the Federal Reserve Board under the BHCA and Regulation
Y.
The BHCA requires prior approval by the Federal Reserve Board of the
acquisition by a bank holding company of more than 5% of the voting stock or
substantially all of the assets of any bank, but does not require prior approval
before acquisition of any additional shares in banks, the majority of the shares
of which are already controlled by such bank holding company. A bank holding
company is prohibited, with certain limited exceptions, from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
company that is not a bank and from engaging in activities other than those of
banking or of managing or controlling banks and other authorized subsidiaries
and providing services to its subsidiaries. One of the exceptions to this
prohibition permits ownership of the shares of a company, the activities of
which the Federal Reserve Board determines to be so closely related to the
business of banking or of managing or controlling banks as to be a proper
incident thereto. Valley National does not currently engage in any non-banking
activities.
Valley National is required to file periodic reports with the Federal
Reserve Board and such other information as may be required to keep the Federal
Reserve Board informed regarding Valley National's compliance with the
provisions of BHCA and the rules, regulations and orders issued thereunder. The
reports consist primarily of financial and management information regarding
Valley National and Valle de Oro Bank. The Federal Reserve Board examines Valley
National periodically.
VALLE DE ORO BANK. Valle de Oro Bank, as a national bank, is subject to the
supervision and regulation of, and is regularly examined by the Comptroller of
the Currency (the "Comptroller"). Valle de Oro Bank is also a member of the
Federal Reserve. Among the requirements and restrictions imposed upon national
banks are the requirements to maintain reserves against deposits, restrictions
on the nature and amounts of loans that may be made, restrictions relating to
investments, opening of bank offices, and other activities. Federal law limits
or prohibits the payment of dividends by national banks if payment of the
dividends would impair the bank's capital or the bank's surplus is not equal to
its common capital. In addition, approval of the Comptroller is required prior
to payment of dividends by the bank if the dividends declared in any year exceed
the total of net profits for that year combined with retained net profits for
the preceding two years, less any required transfers to surplus or to a fund for
the retirement of preferred stock.
Valle de Oro Bank is required to comply with capital adequacy standards.
There are two basic measures of capital adequacy: a risk-based measure and a
tier-one leverage measure.
The risk-based capital measure was adopted to assist in the assessment of
capital adequacy of financial institutions by:
- making regulatory capital requirements more sensitive to differences in
risk portfolios among organizations;
- introducing off-balance sheet items into the assessment of capital
adequacy;
- reducing disincentives to holding liquid, low-risk assets; and
62
<PAGE>
- achieving greater consistency in evaluation of capital adequacy of major
banking organizations throughout the world.
The risk-based measures include both a definition of capital and a framework
for calculating risk-weighted assets by assigning assets and off-balance sheet
items to broad-risk categories. An institution's risk-based capital ratio is
calculated by dividing its qualifying capital by its risk-weighted assets. The
current minimum ratio of qualifying capital to risk-weighted assets is 8%.
An important component of qualifying capital is the core capital or tier-one
capital. Tier-one capital for a national bank generally consists of:
- common stockholders equity;
- non-cumulative perpetual preferred stock and related surplus; and
- minority interest in the equity accounts of consolidated subsidiaries;
less
- good will.
The tier-one component of an institution's qualifying capital must represent
at least 50% of the qualifying total capital. Supplementary capital (tier-two
capital) consists of such additional capital elements as:
- allowance for loan losses (subject to limitations);
- cumulative perpetual preferred stock, convertible preferred stock, and
- any related surplus (subject to certain conditions);
- hybrid capital instruments and mandatory convertible debt securities; and
- long term subordinated debt and intermediate term preferred stock (subject
to limitations).
The maximum amount of tier-two capital that may be included in qualifying
total capital is limited to 100% of tier-one capital (net of good will).
Valle de Oro Bank's risk-based capital ratios are reviewed by the
Comptroller by analysis of Valle de Oro Bank's quarterly financial reports,
review of any applications filed by Valle de Oro Bank and through the
examination process. Although the risk-based capital ratio focuses on broad
categories of credit risk and, to a lesser extent, interest rate and market
risk, the risk-based ratio does not incorporate other factors that can affect an
organization's financial condition. These factors include overall interest rate
exposure, liquidity, funding, and market risks; the quality and level of
earnings; investment or loan portfolio concentration; the quality of loans and
investments; the effectiveness of loan and investment policy; and management's
ability to monitor and control financial and other operational risks.
The primary federal regulatory agencies have also adopted a minimum leverage
ratio, defined as a ratio of tier-one capital to adjusted total assets, which is
intended to be used as a supplement to the risk-based capital measure. An
institution must meet both capital adequacy standards to be in compliance.
Banking organizations considered to be among the most highly rated, based upon
examination results, must maintain a minimum leverage ratio of 3% and a minimum
risk-based capital ratio of 8%. Banks that are not the most highly rated are
expected to maintain a leverage ratio of at least 100 to 200 basis points above
the minimum levels.
The primary federal regulatory agencies have additional enforcement
authority over undercapitalized depository institutions. The Comptroller is
generally required to take action to restrict the activities of an
undercapitalized institution, generally defined to be one with less than minimum
capital ratios. Any such bank must submit a capital restoration plan (which must
include a performance guarantee from any company controlling the bank), and
until such plan is approved by the Comptroller,
63
<PAGE>
may not increase its assets, acquire another institution, establish a branch or
engage in any new activities, and generally may not make capital distributions
or pay management fees. The Comptroller is authorized to impose the additional
restrictions and take additional actions if the bank fails to comply with its
capital restoration plan or becomes significantly undercapitalized or critically
undercapitalized.
Valle de Oro Bank is in compliance with all capital standards currently
applicable to it.
The deposits of Valle de Oro Bank are insured under the provisions of the
Federal Deposit Insurance Act. Valle de Oro Bank is also subject to the
supervision and examination by the Federal Deposit Insurance Corporation (the
"FDIC"). Valle de Oro Bank is subject to assessments by the FDIC.
64
<PAGE>
VALLEY NATIONAL'S PRINCIPAL STOCKHOLDERS AND
SECURITY OWNERSHIP OF MANAGEMENT
The table below discloses the number of shares of Valley National common
stock held as of the record date by the officers and directors of Valley
National and each person Valley National knows to be the beneficial owners of
more than 5% of the outstanding Valley National common stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK
BENEFICIALLY PERCENT OF
NAME, TITLE & ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) CLASS
- ---------------------------------------------------------------------------------- -------------------- -----------
<S> <C> <C>
James F. Carroll ................................................................. 97,437(3) 3.5%
Chairman, Board of Directors,
Valley National Corporation and Valle de Oro Bank
Samuel M. Ciccati, Ph.D. ......................................................... 29,709(4) 1.1%
Director, Valley National Corporation and Valle de Oro Bank
Obert D. "Dale" Conway ........................................................... 174,391(5) 6.2%
Director, Valley National Corporation,
Vice Chairman, Board of Directors, Valle de Oro Bank
William V. Ehlen ................................................................. 146,776(6) 5.1%
Director and President, Valley National Corporation;
Director, President and Chief Executive Officer, Valle de Oro Bank
Tom Ferrara ...................................................................... 69,600(7) 2.5%
Executive Vice President and Chief Credit Officer, Valle de Oro Bank
Myron D. Fessler, M.D. ........................................................... 46,368(8) 1.7%
Director, Valle de Oro Bank
Financial Institution Partners, L.P. ............................................. 157,204 5.7%
1824 Jefferson Place, N.W.
Washington, D.C. 20036
Philip J. Gelber, M.D. ........................................................... 27,512(9) 1.0%
Director, Valley National Corporation and Valle de Oro Bank
C.K. Hill, O.D. .................................................................. 66,474(10) 2.4%
Secretary, Board of Directors, Valley National Corporation and
Valle de Oro Bank
Janet L. Johnson ................................................................. 55,318(11) 2.0%
Director, Valle de Oro Bank
Lloyd E. Peterson ................................................................ 54,900(12) 2.0%
Director, Valle de Oro Bank
Joseph G. Vehige ................................................................. 37,058(13) 1.3%
Director, Valle de Oro Bank
Paul M. Cable .................................................................... 7,402 (14) .3%
Chief Financial Officer, Valley National Corporation;
Senior Vice President and Chief Financial Officer,
Valle de Oro Bank
All directors and executive officers as a group (15 persons)...................... 992,195(15) 32.5%
</TABLE>
- ------------------------
(1) Unless otherwise indicated, the business address for each of the persons
listed in the table is 1234 East Main Street, El Cajon, California, 92021.
65
<PAGE>
(2) Shares are beneficially owned, directly and indirectly, together with
spouses, and, unless otherwise indicated, holders share voting power with
their spouses.
(3) Includes 24,787 shares which Mr. Carroll has the right to acquire within 60
days of , 1999 pursuant to the exercise of options.
(4) Includes 24,559 shares held in trust for which Dr. Ciccati is the trustee
and 5,150 shares which Dr. Ciccati has the right to acquire within 60 days
of , 1999 pursuant to the exercise of options.
(5) Includes 157,113 shares held in trust for which Mr. Conway is trustee and
15,479 shares which Mr. Conway has the right to acquire within 60 days of
, 1999 pursuant to the exercise of options.
(6) Includes 95,668 shares which Mr. Ehlen has the right to acquire within 60
days of , 1999 pursuant to the exercise of options.
(7) Includes 47,596 shares which Mr. Ferrara has the right to acquire within 60
days of , 1999 pursuant to the exercise of options.
(8) Includes 19,733 shares held in trust for which Dr. Fessler is co-trustee,
10,464 shares held in a pension plan and 15,479 shares which Dr. Fessler
has the right to acquire within 60 days of , 1999 pursuant to
the exercise of options.
(9) Includes 25,746 shares held in trust for which Dr. Gelber is trustee and
1,766 shares which Dr. Gelber has the right to acquire within 60 days of
, 1999 pursuant to the exercise of options.
(10) Includes 60,303 shares held in trust for which Dr. Hill is trustee and
6,171 shares which Dr. Hill has the right to acquire within 60 days of
, 1999 pursuant to the exercise of options.
(11) Includes 8,759 shares which Mrs. Johnson has the right to acquire within 60
days of , 1999 pursuant to the exercise of options.
(12) Includes 37,529 shares held in trust for which Mr. Peterson is trustee and
15,479 shares which Mr. Peterson has the right to acquire within 60 days of
, 1999 pursuant to the exercise of options.
(13) Includes 28,425 shares held in trust for which Mr. Vehige is co-trustee and
8,633 shares which Mr. Vehige has the right to acquire within 60 days of
, 1999 pursuant to the exercise of options.
(14) Includes 6,731 shares which Mr. Cable has the right to acquire within 60
days of , 1999 pursuant to the exercise of options.
(15) Includes 268,953 shares which the directors and executive officers have the
right to acquire within 60 days of , 1999 pursuant to the
exercise of options.
TRANSACTIONS WITH OFFICERS, DIRECTORS AND AFFILIATES
Some of the directors and executive officers of Valley National and the
companies with which they are associated are customers of, and have had banking
transactions with, Valle de Oro Bank in the ordinary course of the bank's
business. Valle de Oro Bank expects to have banking transactions with these
persons and companies in the future. In management's opinion, all loans and
commitments to lend included in said transactions were made in compliance with
applicable laws on substantially the same terms, including interest rates and
collateral, as those prevailing for comparable contemporaneous transactions with
other persons of similar creditworthiness, and did not involve more than a
normal risk of collectability or present other unfavorable features. The
aggregate amount of all of these types of
66
<PAGE>
loans made during 1997 amounted to $236,000 and during 1998 amounted to
$470,000, including in both cases renewals of previous loans. The balance of
these loans and loans made in prior years outstanding at March 31, 1999 amounted
to $1,065,000.
MATERIAL DIFFERENCES IN RIGHTS OF VALLEY NATIONAL STOCKHOLDERS
The rights of Valley National stockholders are governed by the certificate
of incorporation of Valley National and the Valley National bylaws and the laws
of the State of Delaware. The rights of Community First stockholders are
governed by the certificate of incorporation and bylaws of Community First and
the laws of the State of Delaware. After the merger becomes effective, the
rights of Valley National stockholders who become Community First stockholders
will be governed by the Community First certificate of incorporation, the
Community First bylaws and will continue to be governed by the laws of the State
of Delaware.
CAPITAL STOCK
The Valley National certificate of incorporation authorizes the issuance of
10,000,000 shares of common stock, $0.0001 par value per share. Valley National
had 2,782,635 shares of common stock outstanding as of March 31, 1999, after
adjustment for stock dividends.
The Community First certificate of incorporation authorizes the issuance of
82,000,000 shares of capital stock, par value $.01 per share, consisting of
80,000,000 shares of common stock and 2,000,000 shares of preferred stock. As of
March 31, 1999, 47,128,274 shares of Community First common stock and no shares
of preferred stock were outstanding. If Community First issues any preferred
stock, the holders may have rights and preferences that are superior to those of
holders of Community First common stock with respect to dividends and upon
liquidation. The relative rights and preferences of any Community First
preferred stock issued in the future may be established by the Community First
board of directors without stockholder action, and such shares, when and if
issued, could have dividend, liquidation, voting, and other rights superior to
those of Community First common stock.
ELECTION OF DIRECTORS
Valley National's board of directors currently consists of six members who
are elected for three year staggered terms. Community First's board of directors
currently consists of ten directors, each of whom is elected each year for a one
year term. The Community First certificate of incorporation and the Valley
National certificate of incorporation each provides for cumulative voting. In
any election of directors, each holder of stock shall be entitled to as many
votes as shall equal the number of votes which he or she would be entitled to
cast for the election of directors with respect to his or her shares of stock
multiplied by the number of directors to be elected by him or her, and that he
or she may cast all such votes for a single director or may distribute them
among the number to be voted for, or for any two or more of them as he or she
may see fit.
REQUIRED VOTE FOR AUTHORIZATION OF CERTAIN ACTIONS
The Valley National certificate of incorporation contains "fair price and
supermajority vote" provisions intended to prevent hostile takeovers. These
provisions require the vote of the holders of at least 80% of the Valley
National shares to approve business combinations between Valley National and an
interested stockholder, unless the transaction is approved by the disinterested
directors of the Valley National board of directors. Other conditions must also
be met which result in a fair price being paid to all stockholders. If board
approval of the transaction by the disinterested directors is obtained, the
transaction may be approved by the vote of the holders of a majority of the
Valley National shares present and entitled to vote at a meeting called for that
purpose. The disinterested directors of Valley National have approved the merger
with Community First.
67
<PAGE>
The Community First certificate of incorporation does not contain a
supermajority vote provision. Under Delaware law, the vote of a simple majority
of the outstanding shares of Community First common stock entitled to vote is
required to approve a merger or consolidation, or the sale, lease, or exchange
of substantially all of Community First's corporate assets.
ANTI-TAKEOVER PROVISIONS
The Valley National certificate of incorporation contains "fair price and
supermajority vote" provisions intended to prevent hostile takeovers. These
provisions are described under "Required Vote for Authorization of Certain
Actions" above. In addition, the Valley National bylaws include provisions for a
staggered board. The Community First certificate of incorporation does not
contain these provisions.
Community First is party to a stockholders' rights agreement which could
serve as a deterrent against a possible change of control not approved by
Community First's board of directors. Under the agreement, upon the occurrence
of certain events which result in a change of control as defined by the
agreement, registered holders of shares of Community First common stock are
entitled to purchase one-hundredth of a share of junior participating preferred
stock of Community First at a stated price, or to purchase shares of common
stock in the acquiring entity with a market value equal to two times the
exercise price. The rights may be redeemed by Community First and expire in
2005.
LEGAL MATTERS
The validity of the Community First common stock to be issued to the
stockholders of Valley National in connection with the merger will be passed
upon for Community First by Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota.
Patrick Delaney, a partner of Lindquist & Vennum, is a director of Community
First and an owner of Community First common stock and options to purchase
Community First common stock. Certain federal income tax consequences in
connection with this merger will be passed upon by Sterrett & Kimmel, LLP, La
Jolla, California.
WHERE YOU CAN FIND MORE INFORMATION
Community First has filed with the SEC a registration statement on Form S-4
(Registration No. 333- ) under the Securities Act that registers the
distribution of shares of common stock of the Company to Valley National
stockholders. The registration statement, including attached exhibits and
schedules, contains additional relevant information about Community First and
Valley National. The rules and regulations of the SEC permit us to omit some of
the information contained in the registration statement from this document.
Community First and Valley National each file annual, quarterly and special
reports, proxy statements and other information with the SEC. You may read and
copy any document filed by Community First or Valley National at the following
SEC public reference facilities:
<TABLE>
<S> <C> <C>
Chicago Regional Office
Public Reference Room New York Regional Office Citicorp Center
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street, Suite
Room 1024 Suite 1300 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661-2511
</TABLE>
Please call the SEC at 1-800-SEC-0330 for further information about its public
reference facilities. You may also obtain copies of this information by mail
from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. The SEC filings of Community First
and Valley National are also available to the public at the SEC's website at
http://www.sec.gov. Reports, proxy statements and other information concerning
Community First and Valley National can also be
68
<PAGE>
inspected at the offices of The Nasdaq Stock Market, National Market Operations,
1735 K Street, N.W., Washington, D.C. Community First also has a web site at
http://www.cfbx.com.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows Community First to "incorporate by reference" the information
we file with the SEC, which means that we can disclose important information to
you by referring to documents we have previously filed with the SEC. The
information incorporated by reference is considered a part of this proxy
statement/prospectus, and any later information that we file with the SEC will
automatically update and supersede this information.
Community First incorporates by reference the documents listed below, and
any additional documents Community First files with the SEC between the date of
this proxy statement/prospectus and the date of the special meeting:
- Community First's annual report on Form 10-K for the year ended December
31, 1998, as amended by filing of a Form 10-K/A on July 12, 1999;
- Its quarterly report on Form 10-Q for the quarter ended March 31, 1999;
- Its proxy statement for the annual meeting of shareholders held on April
27, 1999, except for portions of that proxy statement that are not
incorporated by reference into other filings; and
- The description of its securities included in its Form 8-A registration
statement filed with the SEC on April 7, 1994 and amended on September 19,
1994 and in its Form 8-A registration statement filed with the SEC on
January 9, 1995.
Documents incorporated by reference are available without charge, excluding
all exhibits unless such exhibits have been specifically incorporated by
reference in this proxy statement/prospectus. You may obtain documents
incorporated by reference by requesting them in writing or by telephone from the
person at Community First listed below under "Who Can Help Answer Your
Questions." In order to ensure timely delivery of the documents, please make
your requests by , 1999.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have additional questions about the merger, you should contact:
COMMUNITY FIRST BANKSHARES, INC.
520 Main Avenue
Fargo, North Dakota 58124-0001
Attention: Mark A. Anderson,
Vice Chairman--Corporate Services
Telephone Number: (701) 298-5600
VALLEY NATIONAL CORPORATION
1234 East Main Street
El Cajon, California 92021
Attention: William V. Ehlen,
Chief Executive Officer
Telephone Number: (619) 593-3323
69
<PAGE>
EXPERTS
The consolidated financial statements of Community First at December 31,
1998 and 1997, and for each of the three years in the period ended December 31,
1998, incorporated by reference in this proxy statement/prospectus have been
audited by Ernst & Young LLP, independent auditors, as stated in their report
incorporated herein by reference and given upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of Valley National (formerly Valle de
Oro Bank N.A.) and subsidiary as of December 31, 1998 and 1997, and for each of
the years in the two-year period ended December 31, 1998, have been included
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere in this proxy
statement/prospectus and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of Valley National for the year ended December 31,
1996 included in this proxy statement/prospectus have been included in reliance
upon the report of PricewaterhouseCoopers, LLP, former independent accountants,
appearing elsewhere in this proxy statement/prospectus and given upon the
authority of such firm as experts in accounting and auditing.
70
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Valley National
Corporation and subsidiary are included in this proxy statement/prospectus:
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED):
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998..................................... F-2
Consolidated Statements of Earnings for the three months ended March 31, 1999 and 1998..................... F-3
Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998................... F-4
Notes to Consolidated Financial Statements................................................................. F-5
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996:
Report of KPMG LLP, Independent Auditors................................................................... F-17
Report of PricewaterhouseCoopers, LLP, Independent Accountants............................................. F-18
Consolidated Balance Sheets as of December 31, 1998 and 1997............................................... F-19
Consolidated Statements of Earnings for the years ended December 31, 1998, 1997 and 1996................... F-20
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996......................................................................... F-21
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................. F-22
Notes to Consolidated Financial Statements................................................................. F-23
</TABLE>
F-1
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks.......................................................... $ 12,820,000 $ 11,704,000
Federal funds sold............................................................... 9,240,000 11,890,000
Interest-earning deposits........................................................ 6,399,000 6,396,000
Securities:
Available-for-sale............................................................. 23,625,000 23,609,000
Held-to-maturity............................................................... 23,136,000 22,953,000
Federal Reserve Bank stock....................................................... 445,000 445,000
Loans, net....................................................................... 154,360,000 149,708,000
Premises and equipment, net...................................................... 4,878,000 4,978,000
Other real estate owned, net..................................................... 1,065,000 1,103,000
Accrued interest receivable...................................................... 1,582,000 1,617,000
Other assets..................................................................... 3,282,000 2,397,000
-------------- --------------
Total assets................................................................. $ 240,832,000 $ 236,800,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing........................................................... $ 47,320,000 $ 44,015,000
Savings........................................................................ 114,918,000 115,940,000
Time deposits under $100,000................................................... 37,979,000 37,891,000
Time deposits of $100,000 or more.............................................. 19,341,000 18,547,000
-------------- --------------
Total deposits............................................................... 219,558,000 216,393,000
Long-term debt................................................................... 44,000 52,000
Accrued expenses and other liabilities........................................... 1,341,000 945,000
-------------- --------------
Total liabilities............................................................ 220,943,000 217,390,000
-------------- --------------
Stockholders' equity:
Common stock, $.0001 par value; authorized 10,000,000 shares; issued and
outstanding 2,782,000 and 2,778,000 shares as of March 31, 1999 and December
31, 1998, respectively....................................................... 17,140,000 17,121,000
Accumulated other comprehensive income--unrealized gains on securities
available-for-sale, net...................................................... 25,000 142,000
Retained earnings.............................................................. 2,724,000 2,147,000
-------------- --------------
Total stockholders' equity................................................... 19,889,000 19,410,000
-------------- --------------
Total liabilities and stockholders' equity................................... $ 240,832,000 $ 236,800,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Interest income:
Interest and fees on loans.......................................................... $ 3,689,000 $ 3,511,000
Interest on securities
Taxable........................................................................... 428,000 357,000
Exempt from federal income taxes.................................................. 205,000 163,000
Interest on federal funds sold...................................................... 164,000 198,000
Interest on interest-earning deposits............................................... 87,000 66,000
------------ ------------
4,573,000 4,295,000
------------ ------------
Interest expense:
Time deposits of $100,000 or more..................................................... 209,000 194,000
Other deposits........................................................................ 1,185,000 1,363,000
------------ ------------
1,394,000 1,557,000
------------ ------------
Net interest income before provision for loan losses.................................. 3,179,000 2,738,000
Provision for loan losses............................................................. 150,000 181,000
------------ ------------
Net interest income after provision for loan losses............................. 3,029,000 2,557,000
------------ ------------
Other operating income:
Service charges on deposit accounts................................................. 412,000 400,000
Merchant processing fees............................................................ 151,000 109,000
Mortgage brokerage fees............................................................. 64,000 44,000
Gain on sale of loans............................................................... 30,000 --
Other............................................................................... 145,000 97,000
------------ ------------
802,000 650,000
------------ ------------
Other operating expenses:
Compensation and employee benefits.................................................. 1,364,000 1,327,000
Occupancy expense................................................................... 305,000 284,000
Furniture and equipment............................................................. 183,000 154,000
Other............................................................................... 988,000 762,000
------------ ------------
2,840,000 2,527,000
------------ ------------
Income before income taxes............................................................ 991,000 680,000
Income tax expense.................................................................... 347,000 232,000
------------ ------------
Net earnings.................................................................... $ 644,000 $ 448,000
------------ ------------
------------ ------------
Basic earnings per share.............................................................. $ 0.23 $ 0.16
------------ ------------
------------ ------------
Diluted earnings per share............................................................ $ 0.21 $ 0.15
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings..................................................................... $ 644,000 $ 448,000
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Gain on sale of loans.......................................................... (30,000) --
Depreciation and amortization.................................................. 256,000 232,000
Gain on sale of other real estate owned........................................ (8,000) --
Provision for loan losses...................................................... 150,000 181,000
Provision for losses on other real estate owned................................ 15,000 15,000
Increase in accrued interest receivable and other assets....................... (773,000) (138,000)
Increase in accrued expenses and other liabilities............................. 422,000 299,000
------------- -------------
Net cash provided by operating activities.................................... 676,000 1,037,000
------------- -------------
Cash flows from investing activities:
Purchases of securities held-to-maturity......................................... (202,000) (1,012,000)
Maturities of securities available-for-sale...................................... 1,597,000 4,534,000
Purchases of securities available-for-sale....................................... (1,827,000) (1,003,000)
Net additions to interest-earning deposits....................................... (3,000) --
Net (increase) decrease in loans outstanding..................................... (5,134,000) 2,891,000
Purchases of bank premises and equipment......................................... (117,000) (164,000)
Proceeds from sale of loans...................................................... 362,000 --
Proceeds from sale of other real estate owned.................................... 31,000 --
------------- -------------
Net cash used in investing activities........................................ (5,293,000) 5,246,000
------------- -------------
Cash flows from financing activities:
Net increase in deposits......................................................... 3,165,000 8,327,000
Payments on long-term debt....................................................... (8,000) (7,000)
Proceeds from exercise of stock options.......................................... 19,000 152,000
Cash dividends paid.............................................................. (93,000) (73,000)
------------- -------------
Net cash provided by financing activities.................................... 3,083,000 8,399,000
------------- -------------
Net increase (decrease) in cash and cash equivalents............................... (1,534,000) 14,682,000
Cash and cash equivalents at beginning of period................................... 23,594,000 19,293,000
------------- -------------
Cash and cash equivalents at end of period......................................... $ 22,060,000 $ 33,975,000
------------- -------------
------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest......................................... $ 1,379,000 $ 1,562,000
Cash paid during the period for income taxes..................................... $ 68,000 $ 60,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF OPERATIONS
The interim financial statements included herein have been prepared by
Valley National Corporation (the "Company") without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). The Company
is a bank holding company, which does substantially all of its business through
its wholly owned subsidiary Valle de Oro Bank, N.A. (the "Bank"). A discussion
of the Company is a discussion of the Bank. Certain information and footnote
disclosures, normally included in the consolidated financial "statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. These
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's latest Annual
Report. In the opinion of management, all adjustments, including normal
recurring adjustments necessary to present fairly the financial position of the
Company with respect to the interim financial statements and the results of its
operations for the interim period ended March 31, 1999, have been included.
Certain reclassifications may have been made to prior year amounts to conform to
the 1998 presentation. The results of operations for interim periods are not
necessarily indicative of results for the full year.
The Company operates six offices in San Diego County, California. The
Company's primary source of revenue is interest from real estate and commercial
loans to individuals and small to middle-market businesses. The accounting and
reporting policies of the Company conform to generally accepted accounting
principles and to general practices within the banking industry. The following
is a description of the more significant policies.
(B) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, cash and cash equivalents
consist of cash, due from banks and Federal funds sold. Generally, Federal funds
are sold for one-day periods. The Company keeps $350,000 on deposit at the
Federal Reserve Bank in accordance with a compensating balance arrangement.
(C) SECURITIES
Management determines the appropriate classification of securities at the
time of purchase. If management has the intent and the Company has the ability
at the time of purchase to hold securities until maturity, they are classified
as held-to-maturity. Securities held-to-maturity are stated at cost, adjusted
for amortization of premiums and accretion of discounts over the period to call
or maturity of the related security using the interest method. Securities to be
held for indefinite periods of time, but not necessarily to be held-to-maturity
or on a long-term basis, are classified as available-for-sale and carried at
fair value with unrealized gains or losses, net of tax, reported as a separate
component of other comprehensive income until realized. Realized gains or losses
on the sale of securities available-for-sale, if any, are determined using the
amortized cost of the specific securities sold. Securities available-for-sale
include securities that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates, prepayment risk and other related factors. Securities are individually
evaluated for appropriate classification, when acquired; consequently, similar
types of securities may be classified differently depending on factors existing
at the time of purchase.
F-5
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
When a security is sold, the realized gain or loss, determined on a
specific-identification basis, is included in earnings. To the extent a security
has a decline in fair value, which is determined by the Company as other than
temporary, the adjusted cost basis is written down to fair value and the amount
of the write-down is charged to earnings.
(D) LOANS AND LOAN FEES
Loans are stated at the amount of principal outstanding. Interest income is
accrued daily on the outstanding loan balances using the simple-interest method.
Loans are generally placed on nonaccrual status when the borrowers are past due
90 days and when payment in full of principal or interest is not expected. At
the time a loan is placed on nonaccrual status, any interest income previously
accrued but not collected is reversed against current period interest income.
Income on nonaccrual loans is subsequently recognized only to the extent cash is
received and the loan's principal balance is deemed collectible. Loans are
restored to accrual status when the loans become both well secured and are in
process of collection.
Nonrefundable fees and related direct costs associated with the origination
of loans are deferred and netted against outstanding loan balances. Net deferred
fees and costs are recognized in interest income over the terms of the loans
using the interest method. The amortization of loan fees is discontinued on
nonaccrual loans.
(E) ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level deemed appropriate by
management to adequately provide for known and inherent risks in the loan
portfolio and other extensions of credit, including off-balance sheet credit
extensions. The allowance is based upon a continuing review of the portfolio,
past loan loss experience, current economic conditions that may affect the
borrowers' ability to pay, and the underlying collateral value of the loans.
When a loan or portion of a loan is determined to be uncollectible, the portion
deemed uncollectible is charged off and deducted from the allowance. The
provision for loan losses and recoveries on loans previously charged off are
added to the allowance.
A loan is considered impaired when it is probable that a creditor will be
unable to collect all amounts due according to the original contractual terms of
the loan agreement. If the measure of the impaired loan is less than the
recorded investment in the loan, a valuation allowance is established with a
corresponding charge to the provision for loan losses. Since substantially all
of the Company's loans are collateral dependent, the calculation of the
allowance for losses on impaired loans is generally based on the fair value of
the collateral, less estimated costs of disposal.
The allowance for loan losses is subjective and may be adjusted in the
future because of changes in economic conditions and the repayment abilities of
the borrowers. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance. These
agencies may require the Company to recognize additions to the allowance based
on their judgments related to information available to them at the time of their
examinations.
F-6
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is charged to operating expense using the straight-line method over
the estimated useful lives of depreciable assets, which range from 3 to 30
years. Leasehold improvements are capitalized and amortized to operating expense
over the term of the respective lease or the estimated useful life of the
improvement, whichever is shorter.
(G) OTHER REAL ESTATE OWNED
Real estate properties acquired through loan foreclosure or through
acceptance of a deed-in-lieu of foreclosure are initially recorded at fair
value, less estimated selling costs at the date of foreclosure. Once real estate
properties are acquired, valuations are periodically obtained by management and
an allowance for losses is established by a charge to operations if the carrying
value of a property exceeds its fair value, less estimated costs of disposal.
Real estate properties held for sale are carried at the lower of cost, including
the cost of improvements and amenities incurred subsequent to acquisition, or
fair value, less estimated selling costs. Costs related to development and
improvement of properties are capitalized, whereas costs relating to holding the
properties are expensed.
(H) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in earnings in the
period that includes the enactment date.
(I) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by the
weighted-average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed by dividing net earnings by the
weighted-average number of shares of common stock, common stock equivalents and
other potentially dilutive securities outstanding during the period.
The weighted-average number of shares used for the basic earnings per share
calculations was 2,782,000 and 2,722,000 as of March 31, 1999 and 1998. The
weighted-average number of shares used for the diluted earnings per share
calculations was 3,012,000 and 2,973,000 as of March 31, 1999 and 1998,
respectively. These calculations reflect the 5% stock dividend declared April
21, 1999.
(J) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the
F-7
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reporting period to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
(K) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("Statement 130"). Statement
130 establishes standards for the reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements; it
does not change the display or components of present-day net earnings.
Comprehensive income for the three months ended March 31, 1999 and 1998 is
as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
Net earnings......................................................... $ 644,000 $ 448,000
Change in unrealized gains (losses) on securities available-for-
sale............................................................... (194,000) 30,000
Income tax benefit (loss)............................................ 77,000 (13,000)
----------- ----------
Comprehensive net income............................................. $ 527,000 $ 465,000
----------- ----------
----------- ----------
</TABLE>
(L) YEAR 2000
The Company has developed a remediation plan and is in the process of
converting computer systems and applications for the Year 2000. Expenditures
related to Year 2000 issues are expensed as incurred.
(M) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
F-8
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) SECURITIES AVAILABLE-FOR-SALE
The amortized cost, gross unrealized gains and losses and fair value of
securities available-for-sale as of March 31, 1999 and December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
MARCH 31, 1999:
U.S. Treasury notes and U.S. agency securities............ $ 14,571,000 $ 80,000 $ (59,000) $ 14,592,000
Obligations of states and political subdivisions.......... 8,711,000 106,000 (83,000) 8,734,000
Corporate obligations..................................... 301,000 -- (2,000) 299,000
------------- ---------- ----------- -------------
$ 23,583,000 $ 186,000 $ (144,000) $ 23,625,000
------------- ---------- ----------- -------------
------------- ---------- ----------- -------------
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
U.S. Treasury notes and U.S. agency securities............ $ 14,655,000 $ 155,000 $ (55,000) $ 14,755,000
Obligations of states and political subdivisions.......... 8,417,000 162,000 (23,000) 8,556,000
Corporate obligations..................................... 301,000 -- (3,000) 298,000
------------- ---------- ----------- -------------
$ 23,373,000 $ 317,000 $ (81,000) $ 23,609,000
------------- ---------- ----------- -------------
------------- ---------- ----------- -------------
</TABLE>
The maturity distribution based on amortized cost and fair value as of March
31, 1999, by contractual maturity, is shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 2,094,000 $ 2,098,000
Due after one year through five years.......................... 14,072,000 14,082,000
Due after five years through ten years......................... 5,807,000 5,791,000
Due after ten years............................................ 1,610,000 1,654,000
------------- -------------
$ 23,583,000 $ 23,625,000
------------- -------------
------------- -------------
</TABLE>
As of March 31, 1999, securities held-to-maturity with an amortized cost of
$2,655,000 and securities available-for-sale with a fair value of $1,566,000
totaling $4,221,000 were pledged as security for public deposits and other
purposes as required by various statutes and agreements.
F-9
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) SECURITIES HELD-TO-MATURITY
The amortized cost, gross unrealized gains and losses and fair value of
securities held-to-maturity as of March 31, 1999 and December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
MARCH 31, 1999:
U.S. Treasury notes and U.S. government agencies........... $ 7,497,000 $ 49,000 $ (56,000) $ 7,490,000
Obligations of states and political subdivisions........... 15,173,000 460,000 (29,000) 15,604,000
Corporate obligations...................................... 466,000 2,000 -- 468,000
------------- ---------- ---------- -------------
$ 23,136,000 $ 511,000 $ (85,000) $ 23,562,000
------------- ---------- ---------- -------------
------------- ---------- ---------- -------------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
U.S. Treasury notes and U.S. government agencies........... $ 7,499,000 $ 85,000 $ (17,000) $ 7,567,000
Obligations of states and political subdivisions........... 14,986,000 609,000 -- 15,595,000
Corporate obligations...................................... 468,000 2,000 -- 470,000
------------- ---------- ---------- -------------
$ 22,953,000 $ 696,000 $ (17,000) $ 23,632,000
------------- ---------- ---------- -------------
------------- ---------- ---------- -------------
</TABLE>
The maturity distribution based on amortized cost and fair value as of March
31, 1999, by contractual maturity, is shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
------------- -------------
<S> <C> <C>
Due in one year or less............................................................ $ 1,166,000 $ 1,172,000
Due after one year through five years.............................................. 9,827,000 9,877,000
Due after five years through ten years............................................. 9,653,000 9,855,000
Due after ten years................................................................ 2,490,000 2,658,000
------------- -------------
$ 23,136,000 $ 23,562,000
------------- -------------
------------- -------------
</TABLE>
F-10
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) LOANS
The composition of the Company's loan portfolio is as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
Construction................................................. $ 7,557,000 $ 7,960,000
Real estate.................................................. 77,508,000 66,850,000
Commercial and industrial loans.............................. 56,742,000 62,341,000
Installment.................................................. 14,941,000 14,754,000
All other loans (including overdrafts)....................... 290,000 308,000
-------------- --------------
157,038,000 152,213,000
Less allowance for loan losses............................... (1,832,000) (1,687,000)
Less deferred loan fees...................................... (846,000) (818,000)
-------------- --------------
$ 154,360,000 $ 149,708,000
-------------- --------------
-------------- --------------
</TABLE>
Although the Company seeks to avoid undue concentrations of loans to a
single industry or based upon a single class of collateral, the Company's loan
portfolio consists primarily of loans to borrowers within San Diego County and,
as a result, the Company's loan and collateral portfolios are to some degree
concentrated. The portfolio is well diversified in both project type and area
within the San Diego County region. The Company evaluates each credit on an
individual basis and determines collateral requirements accordingly. When real
estate is taken as collateral, advances are generally limited to a certain
percentage of the appraised value of the collateral at the time the loan is
made, depending on the type of loan, the underlying property and other factors.
The Company has established a monitoring system for its loans in order to
identify potential problem loans and to permit the periodic evaluation of
impairment and the adequacy of the allowance for loan losses in a timely manner.
Impaired loans included in the Company's loan portfolio as of March 31, 1999 and
December 31, 1998 were $143,000 and $92,000, respectively, which have aggregate
specific related allowance amounts of $35,000 and $9,000, respectively. For the
three months ended March 31, 1999, the average balance of impaired loans was
$130,000. For the three months ended March 31, 1999, no interest was recognized
on these loans during the period of impairment.
A summary of the activity in the allowance for loan losses for the three
months ended March 31, is as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Balance, beginning of period...................................... $ 1,687,000 $ 1,342,000
Provision for loan losses charged to expense...................... 150,000 181,000
Loans charged off to the allowance................................ (6,000) (44,000)
Recoveries credited to the allowance.............................. 1,000 15,000
------------ ------------
Balance, end of period............................................ $ 1,832,000 $ 1,494,000
------------ ------------
------------ ------------
</TABLE>
F-11
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) LOANS (CONTINUED)
Loans on nonaccrual amounted to $478,000, and $92,000 as of March 31, 1999
and December 31, 1998, respectively. Interest income of $12,000 would have been
recorded for the three months ended March 31, 1999 if nonaccrual loans had been
on a current basis, in accordance with their original terms. No interest income
was recognized on loans subsequently transferred to nonaccrual status during the
three months ended March 31, 1999. Loans contractually past due greater than 90
days and still accruing interest totaled approximately $4,000 and $437,000, as
of March 31, 1999 and December 31, 1998, respectively.
In the normal course of business, the Company has granted loans to certain
directors and their affiliates under terms which Company management believes are
consistent with the Company's general lending policies. An analysis of this
activity for the three months ended March 31, 1999 is as follows:
<TABLE>
<CAPTION>
MARCH 31,
1999
------------
<S> <C>
Balance, beginning of period.................................................... $ 1,113,000
Loans granted, including renewals............................................... 12,000
Repayments...................................................................... (60,000)
------------
Balance, end of period.......................................................... $ 1,065,000
------------
------------
</TABLE>
The Corporation had additional commitments for loans of $1,905,000 to these
individuals as of March 31, 1999.
F-12
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
Land............................................................ $ 746,000 $ 746,000
Buildings....................................................... 1,510,000 1,500,000
Leasehold improvements.......................................... 3,330,000 3,318,000
Furniture, fixtures and equipment............................... 3,972,000 3,888,000
------------- -------------
9,558,000 9,452,000
Less accumulated depreciation and amortization.................. (4,680,000) (4,474,000)
------------- -------------
$ 4,878,000 $ 4,978,000
------------- -------------
------------- -------------
</TABLE>
(6) OTHER REAL ESTATE OWNED
A summary of the changes in the allowance for possible losses on other real
estate owned is as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Balance, beginning of period.......................................... $ 300,000 $ 235,000
Provision charged to expense.......................................... 15,000 15,000
Charge-offs........................................................... -- 5,000
---------- ----------
Balance, end of period................................................ $ 315,000 $ 255,000
---------- ----------
---------- ----------
</TABLE>
(7) DEPOSITS
The maturity distribution of time deposits as of March 31, 1999 is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Three months or less........................................................... $ 22,574,000
Over three through six months.................................................. 15,511,000
Over six through twelve months................................................. 13,967,000
Over twelve months............................................................. 5,268,000
-------------
Total...................................................................... $ 57,320,000
-------------
-------------
</TABLE>
F-13
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(8) LONG-TERM DEBT
Long-term debt of $44,000 and $52,000 at March 31, 1999 and December 31,
1998, respectively, consisted of a mortgage note payable in monthly installments
of $3,100 through July 2000, including interest at a fixed rate of 8.5%. Future
maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999............................................................................... $ 26,000
2000............................................................................... 18,000
---------
$ 44,000
---------
---------
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheets. The
contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
counterparty to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Commitments to extend credit amounting to
$49,059,000 and $43,138,000 were outstanding as of March 31, 1999 and December
31, 1998, respectively. Of these commitments to extend credit, $7,899,000 and
$7,747,000 represent home equity lines of credit at March 31, 1999 and December
31, 1998, respectively, which will be repaid over a ten year period if drawn
upon. The Company evaluates each customer's credit-worthiness on a case-by-case
basis. The amount of collateral obtained by the Company, if deemed necessary
upon extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include certificates of deposit,
accounts receivable, inventory, property, plant and equipment, residential real
estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Company holds various
types of collateral (primarily certificates of deposit) to support those
commitments for which collateral is deemed necessary. The Company had
approximately $488,000 in standby letters of credit outstanding as of both March
31, 1999 and December 31, 1998, respectively. Most of the letters of credit
expire within twelve months.
F-14
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Management does not anticipate any material losses will arise from
additional fundings of the aforementioned lines of credit or letters of credit.
As of March 31, 1999, the Company had lines of credit in the amount of
$11,500,000 from correspondent banks, of which no amounts were outstanding.
These lines are renewable annually. The availability of the lines of credit, as
well as adjustments in deposit programs, provides for liquidity in the event
that the level of deposits should fall abnormally low. These sources provide
that funding thereof may be withdrawn depending upon the financial strength of
the Company.
Because of the nature of its activities, the Company is at all times subject
to pending and threatened legal actions that arise out of the normal course of
its business. In the opinion of management, the disposition of these matters
will not have a material adverse effect on the Company's financial position or
results of operations.
(10) REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of March 31, 1999, that the Bank
meets all capital adequacy requirements to which it is subject.
As of March 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
F-15
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(10) REGULATORY MATTERS (CONTINUED)
The Bank's actual capital amounts and ratios are also presented in the
following table.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE ACTION PROVISIONS
ACTUAL PURPOSES
------------------ ----------------------------- -----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
----------- ----- ----------- ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
Total Capital (to Risk- Greater than or % Greater than or %
Weighted Assets)....... $21,696,000 12.31% $14,095,000 equal to 8.0 $17,619,000 equal to 10.0
Tier I Capital (to Risk- Greater than or % Greater than or %
Weighted Assets)....... $19,864,000 11.27% $ 7,048,000 equal to 4.0 $10,571,000 equal to 6.0
Tier I Capital (to Greater than or % Greater than or %
Average Assets)........ $19,864,000 8.25% $ 9,630,000 equal to 4.0 $12,037,000 equal to 5.0
</TABLE>
Under Federal banking law, dividends declared by the Bank in any calendar
year may not, without the approval of the Comptroller of the Currency (OCC),
exceed its net earnings for that year combined with its retained income from the
preceding two years. However, the OCC has previously issued a bulletin to all
national banks outlining new guidelines limiting the circumstances under which
national banks may pay dividends even if the banks are otherwise statutorily
authorized to pay dividends. The limitations impose a requirement or in some
cases suggest that prior approval of the OCC should be obtained before a
dividend is paid if a national bank is the subject of administrative action or
if the payment could be viewed by the OCC as unsafe or unusual.
(11) OTHER EXPENSES
Other expenses are as follows for the three months ended March 31:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Stationery and supplies............................................... $ 77,000 $ 58,000
Telephone, courier and postage........................................ 95,000 87,000
Data processing....................................................... 150,000 137,000
Merchant processing expense........................................... 110,000 78,000
Promotional expenses.................................................. 68,000 71,000
Professional services................................................. 106,000 36,000
Insurance............................................................. 43,000 51,000
FDIC and regulatory assessments....................................... 23,000 21,000
Other real estate owned expenses...................................... 2,000 21,000
Other................................................................. 314,000 202,000
---------- ----------
$ 988,000 $ 762,000
---------- ----------
---------- ----------
</TABLE>
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Valley National Corporation
We have audited the accompanying consolidated balance sheets of Valley
National Corporation (formerly Valle de Oro Bank N.A.) and subsidiary as of
December 31, 1998 and 1997 and the related consolidated statements of earnings,
changes in stockholders' equity and comprehensive income, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. The accompanying
consolidated financial statements of the Company for the year ended December 31,
1996 were audited by other auditors whose report thereon, dated January 17,
1997, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Valley
National Corporation and subsidiary as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
San Diego, California
January 20, 1999, except for note 16 which is as of May 10, 1999
F-17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Valley National Corporation
In our opinion, the accompanying statements of earnings, changes in equity
and comprehensive income and cash flows present fairly, in all material
respects, the results of operations and cash flows of Valley National
Corporation (formerly Valle de Oro Bank, N.A.) for the year ended December 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers, LLP
San Diego, California
January 17, 1997
F-18
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks.......................................................... $ 11,704,000 $ 10,562,000
Federal funds sold............................................................... 11,890,000 8,731,000
Interest-earning deposits........................................................ 6,396,000 4,499,000
Securities:
Available-for-sale............................................................. 23,609,000 21,209,000
Held-to-maturity............................................................... 22,953,000 16,055,000
Federal Reserve Bank stock....................................................... 445,000 384,000
Loans, net....................................................................... 149,708,000 134,837,000
Premises and equipment, net...................................................... 4,978,000 5,220,000
Other real estate owned, net..................................................... 1,103,000 1,249,000
Accrued interest receivable...................................................... 1,617,000 1,600,000
Other assets..................................................................... 2,397,000 1,737,000
-------------- --------------
Total assets............................................................... $ 236,800,000 $ 206,083,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing........................................................... $ 44,015,000 $ 35,110,000
Savings........................................................................ 115,940,000 100,873,000
Time deposits under $100,000................................................... 37,891,000 36,021,000
Time deposits of $100,000 or more.............................................. 18,547,000 16,143,000
-------------- --------------
Total deposits............................................................. 216,393,000 188,147,000
Long-term debt................................................................... 52,000 83,000
Accrued expenses and other liabilities........................................... 945,000 827,000
-------------- --------------
Total liabilities.......................................................... 217,390,000 189,057,000
-------------- --------------
Stockholders' equity:
Common stock, $.0001 par value; authorized 10,000,000 shares; issued and
outstanding 2,778,000 and 2,468,000 shares in 1998 and 1997, respectively.... 17,121,000 12,808,000
Accumulated other comprehensive income-unrealized gains on securities
available-for-sale, net...................................................... 142,000 76,000
Retained earnings.............................................................. 2,147,000 4,142,000
-------------- --------------
Total stockholders' equity................................................. 19,410,000 17,026,000
-------------- --------------
Total liabilities and stockholders' equity................................. $ 236,800,000 $ 206,083,000
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans........................................ $ 14,456,000 $ 13,053,000 $ 12,292,000
Interest on securities:
Taxable......................................................... 1,429,000 1,524,000 1,236,000
Exempt from federal income taxes................................ 704,000 558,000 362,000
Interest on federal funds sold.................................... 1,141,000 877,000 774,000
Interest on interest-earning deposits............................. 296,000 258,000 201,000
------------- ------------- -------------
18,026,000 16,270,000 14,865,000
------------- ------------- -------------
Interest expense:
Time deposits of $100,000 or more................................. 815,000 799,000 815,000
Other deposits.................................................... 5,482,000 5,141,000 4,501,000
------------- ------------- -------------
6,297,000 5,940,000 5,316,000
------------- ------------- -------------
Net interest income before provision for loan losses.......... 11,729,000 10,330,000 9,549,000
Provision for loan losses........................................... 627,000 497,000 1,062,000
------------- ------------- -------------
Net interest income after provision for loan losses........... 11,102,000 9,833,000 8,487,000
------------- ------------- -------------
Other operating income:
Service charges on deposit accounts............................... 1,614,000 1,642,000 1,495,000
Merchant processing fees.......................................... 546,000 514,000 418,000
Mortgage brokerage fees........................................... 254,000 192,000 63,000
Gain on sale of loans............................................. 81,000 48,000 --
Other............................................................. 512,000 348,000 273,000
------------- ------------- -------------
3,007,000 2,744,000 2,249,000
------------- ------------- -------------
Other operating expenses:
Compensation and employee benefits................................ 5,236,000 4,951,000 4,359,000
Occupancy expense................................................. 1,142,000 1,101,000 872,000
Furniture and equipment........................................... 683,000 622,000 503,000
Other............................................................. 3,501,000 3,014,000 2,808,000
------------- ------------- -------------
10,562,000 9,688,000 8,542,000
------------- ------------- -------------
Earnings before income taxes.................................. 3,547,000 2,889,000 2,194,000
Income tax expense.................................................. 1,147,000 1,037,000 791,000
------------- ------------- -------------
Net earnings.................................................. $ 2,400,000 $ 1,852,000 $ 1,403,000
------------- ------------- -------------
------------- ------------- -------------
Basic earnings per share............................................ $ 0.87 $ 0.68 $ 0.52
------------- ------------- -------------
------------- ------------- -------------
Diluted earnings per share.......................................... $ 0.81 $ 0.63 $ 0.50
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
--------------------------- COMPREHENSIVE RETAINED
SHARES AMOUNT INCOME EARNINGS TOTAL
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996.................... 2,216,000 $ 10,972,000 $ 128,000 $ 3,203,000 $ 14,303,000
5% stock dividend............................. 110,000 769,000 (769,000) --
Cash issued in lieu of fractional shares in 5%
stock dividend.............................. -- -- -- (6,000) (6,000)
Stock options exercised....................... 26,000 104,000 -- -- 104,000
Cash dividends at $0.12 per share............. -- -- -- (279,000) (279,000)
Comprehensive income:
Net unrealized change in securities
available-for-sale, net of taxes of
$68,000................................... -- -- (128,000) -- (128,000)
Net earnings................................ -- -- -- 1,403,000 1,403,000
-------------
Total comprehensive income.................... 1,275,000
------------ ------------- ------------- ------------- -------------
Balance at December 31, 1996.................. 2,352,000 11,845,000 -- 3,552,000 15,397,000
5% stock dividend............................. 116,000 963,000 -- (963,000) --
Cash issued in lieu of fractional shares in 5%
stock dividend.............................. -- -- (7,000) (7,000)
Cash dividends at $0.12 per share............. -- -- -- (292,000) (292,000)
Comprehensive income:
Net unrealized change in securities
available-for-sale, net of taxes of
$48,000................................... -- -- 76,000 -- 76,000
Net earnings................................ -- -- -- 1,852,000 1,852,000
-------------
Total comprehensive income.................... 1,928,000
------------ ------------- ------------- ------------- -------------
Balance at December 31, 1997.................. 2,468,000 12,808,000 76,000 4,142,000 17,026,000
5% stock dividend............................. 124,000 1,794,000 -- (1,794,000) --
Cash issued in lieu of fractional shares in 5%
stock dividend.............................. -- -- -- (15,000) (15,000)
Stock options exercised....................... 54,000 272,000 -- -- 272,000
Cash dividends at $0.13 per share............. -- -- -- (339,000) (339,000)
5% stock dividend declared on April 21, 1999
(Note 16)................................... 132,000 2,247,000 (2,247,000)
Comprehensive income:
Net unrealized change in securities
available-for-sale, net of taxes of
$46,000................................... -- -- 66,000 -- 66,000
Net earnings................................ -- -- -- 2,400,000 2,400,000
-------------
Total comprehensive income.................... 2,466,000
------------ ------------- ------------- ------------- -------------
Balance at December 31, 1998.................. 2,778,000 $ 17,121,000 $ 142,000 $ 2,147,000 $ 19,410,000
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings......................................................... $ 2,400,000 $ 1,852,000 $ 1,403,000
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Gain on sale of loans.............................................. (81,000) (48,000) --
Depreciation and amortization...................................... 955,000 1,010,000 617,000
(Gain) loss on sale of other real estate owned..................... (29,000) (75,000) 26,000
Provision for loan losses.......................................... 627,000 497,000 1,062,000
Provision for losses on other real estate owned.................... 60,000 143,000 --
Increase in accrued interest receivable and other assets........... (723,000) (498,000) (122,000)
Increase (decrease) in accrued expenses and other liabilities...... 118,000 (54,000) 453,000
------------ ------------ ------------
Net cash provided by operating activities........................ 3,327,000 2,827,000 3,439,000
------------ ------------ ------------
Cash flows from investing activities:
Net increase in securities........................................... -- -- (8,293,000)
Maturities of securities held-to-maturity............................ 1,136,000 -- --
Purchases of securities held-to-maturity............................. (8,162,000) (8,954,000) --
Proceeds from sale of securities available-for-sale.................. -- 675,000 --
Maturities of securities available-for-sale.......................... 9,485,000 4,732,000 --
Purchases of securities available-for-sale........................... (11,773,000) (2,723,000) --
Net additions to interest-earning deposits........................... (1,897,000) (601,000) (599,000)
Purchases of Federal Reserve Bank stock.............................. (61,000) (30,000) (25,000)
Net increase in loans outstanding.................................... (16,209,000) (17,891,000) (16,570,000)
Purchases of bank premises and equipment............................. (585,000) (1,496,000) (2,496,000)
Proceeds from insurance.............................................. -- 1,154,000 --
Proceeds from sale of loans.......................................... 837,000 745,000 --
Proceeds from sale of other real estate owned........................ 70,000 1,323,000 425,000
------------ ------------ ------------
Net cash used in investing activities............................ (27,159,000) (23,066,000) (27,558,000)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in deposits............................................. 28,246,000 21,088,000 25,091,000
Payments on long-term debt........................................... (31,000) (29,000) (27,000)
Proceeds from exercise of stock options.............................. 272,000 -- 104,000
Cash paid in lieu of fractional shares on 5% stock dividend.......... (15,000) (7,000) (6,000)
Cash dividends paid.................................................. (339,000) (292,000) (279,000)
------------ ------------ ------------
Net cash provided by financing activities........................ 28,133,000 20,760,000 24,883,000
------------ ------------ ------------
Net increase in cash and cash equivalents.............................. 4,301,000 521,000 764,000
Cash and cash equivalents at beginning of year......................... 19,293,000 18,772,000 18,008,000
------------ ------------ ------------
Cash and cash equivalents at end of year............................... $ 23,594,000 $ 19,293,000 $ 18,772,000
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................................. $ 6,336,000 $ 5,916,000 $ 5,299,000
Cash paid during the year for income taxes............................. $ 1,554,000 $ 1,451,000 $ 665,000
Supplemental disclosure of noncash investing and financing activities:
Loans transferred to other real estate owned........................... $ 738,000 $ 79,000 $ 664,000
Deletions of Bank premises and equipment due to fire................... $ -- $ 1,679,000 $ --
Loans to facilitate the sale of other real estate owned................ $ 783,000 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF OPERATIONS
Valley National Corporation (the Company) is a bank holding company (Note
16), which does substantially all of its business through its wholly owned
subsidiary Valle de Oro Bank, N.A. (the Bank) A discussion of the Company is a
discussion of the Bank. The Bank operates six offices in San Diego County,
California. The Company and the Bank's primary source of revenue is interest
from real estate and commercial loans to individuals and small to middle-market
businesses. The accounting and reporting policies of the Company conform to
generally accepted accounting principles and to general practices within the
banking industry. The following is a description of the more significant
policies.
(B) CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
consist of cash, due from banks and Federal funds sold. Generally, Federal funds
are sold for one-day periods. The Bank keeps $350,000 on deposit at the Federal
Reserve Bank in accordance with a compensating balance arrangement.
(C) SECURITIES
Management determines the appropriate classification of securities at the
time of purchase. If management has the intent and the Company has the ability
at the time of purchase to hold securities until maturity, they are classified
as held-to-maturity. Securities held-to-maturity are stated at cost, adjusted
for amortization of premiums and accretion of discounts over the period to call
or maturity of the related security using the interest method. Securities to be
held for indefinite periods of time, but not necessarily to be held-to-maturity
or on a long-term basis, are classified as available-for-sale and carried at
fair value with unrealized gains or losses, net of tax, reported as a separate
component of other comprehensive income until realized. Realized gains or losses
on the sale of securities available-for-sale, if any, are determined using the
amortized cost of the specific securities sold. Securities available-for-sale
include securities that management intends to use as part of its asset/
liability management strategy and that may be sold in response to changes in
interest rates, prepayment risk and other related factors. Securities are
individually evaluated for appropriate classification, when acquired;
consequently, similar types of securities may be classified differently
depending on factors existing at the time of purchase.
When a security is sold, the realized gain or loss, determined on a
specific-identification basis, is included in earnings. To the extent a security
has a decline in fair value, which is determined by the Company as other than
temporary, the adjusted cost basis is written down to fair value and the amount
of the write-down is charged to earnings.
(D) LOANS AND LOAN FEES
Loans are stated at the amount of principal outstanding. Interest income is
accrued daily on the outstanding loan balances using the simple-interest method.
Loans are generally placed on nonaccrual status when the borrowers are past due
90 days and when payment in full of principal or interest is not expected. At
the time a loan is placed on nonaccrual status, any interest income previously
accrued but not collected is reversed against current period interest income.
Income on nonaccrual loans is
F-23
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
subsequently recognized only to the extent cash is received and the loan's
principal balance is deemed collectible. Loans are restored to accrual status
when the loans become both well-secured and are in process of collection.
Nonrefundable fees and related direct costs associated with the origination
of loans are deferred and netted against outstanding loan balances. Net deferred
fees and costs are recognized in interest income over the terms of the loans
using the interest method. The amortization of loan fees is discontinued on
nonaccrual loans.
(E) ALLOWANCE FOR LOAN LOSSES
An allowance for loan losses is maintained at a level deemed appropriate by
management to adequately provide for known and inherent risks in the loan
portfolio and other extensions of credit, including off-balance sheet credit
extensions. The allowance is based upon a continuing review of the portfolio,
past loan loss experience, current economic conditions which may affect the
borrowers' ability to pay, and the underlying collateral value of the loans.
When a loan or portion of a loan is determined to be uncollectible, the portion
deemed uncollectible is charged off and deducted from the allowance. The
provision for loan losses and recoveries on loans previously charged off are
added to the allowance.
A loan is considered impaired when it is probable that a creditor will be
unable to collect all amounts due according to the original contractual terms of
the loan agreement. If the measure of the impaired loan is less than the
recorded investment in the loan, a valuation allowance is established with a
corresponding charge to the provision for loan losses. Since substantially all
of the Company's loans are collateral dependent, the calculation of the
allowance for losses on impaired loans is generally based on the fair value of
the collateral, less estimated costs of disposal.
The allowance for loan losses is subjective and may be adjusted in the
future because of changes in economic conditions and the repayment abilities of
the borrowers. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance. These
agencies may require the Company to recognize additions to the allowance based
on their judgments related to information available to them at the time of their
examinations.
(F) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is charged to operating expense using the straight-line method over
the estimated useful lives of depreciable assets, which range from 3 to 30
years. Leasehold improvements are capitalized and amortized to operating expense
over the term of the respective lease or the estimated useful life of the
improvement, whichever is shorter.
(G) OTHER REAL ESTATE OWNED
Real estate properties acquired through loan foreclosure or through
acceptance of a deed-in-lieu of foreclosure are initially recorded at fair
value, less estimated selling costs at the date of foreclosure. Once real estate
properties are acquired, valuations are periodically obtained by management and
an allowance for losses is established by a charge to operations if the carrying
value of a property exceeds
F-24
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
its fair value, less estimated costs of disposal. Real estate properties held
for sale are carried at the lower of cost, including the cost of improvements
and amenities incurred subsequent to acquisition, or fair value, less estimated
selling costs. Costs related to development and improvement of properties are
capitalized, whereas costs relating to holding the properties are expensed.
(H) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in earnings in the
period that includes the enactment date.
(I) STOCK-BASED COMPENSATION
Prior to January 1, 1996, the Company accounted for its stock option plans
in accordance with the provisions of Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"),
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, Statement
123 also allows entities to continue to apply the provisions of APB No. 25 and
provide pro forma net earnings and pro forma net earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in Statement 123 had been applied. The Company
has elected to continue to apply the provisions of APB No. 25 and provide the
pro forma disclosure provisions of Statement 123.
(J) EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by the
weighted-average number of shares of common stock outstanding during the period.
Diluted earnings per share is computed by dividing net earnings by the
weighted-average number of shares of common stock, common stock equivalents and
other potentially dilutive securities outstanding during the period.
(K) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting
period to prepare these consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
F-25
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(L) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("Statement 130"). Statement 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements; it does not change the display or
components of present-day net earnings. Comprehensive income consists of net
earnings and net unrealized gains (losses) on available-for-sale securities and
is presented in the statements of stockholders' equity and comprehensive income.
Statement 130 requires only additional disclosures in the financial statements;
it does not affect the Company's financial position or results of operations.
Prior year financial statements have been reclassified to conform to the
requirements of Statement 130.
(M) YEAR 2000
The Company has developed a remediation plan and is in the process of
converting computer systems and applications for the Year 2000. Expenditures
related to Year 2000 issues are expensed as incurred.
(N) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation. In addition, stockholders' equity has been reclassified to
conform to the presentation pursuant to the Bank's reorganization on March 31,
1999 (Note 16).
(2) SECURITIES AVAILABLE-FOR-SALE
The amortized cost, gross unrealized gains and losses and fair value of
securities available-for-sale as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
1998:
U.S. Treasury notes and U.S. agency securities............. $ 14,655,000 $ 155,000 $ (55,000) $ 14,755,000
Obligations of states and political subdivisions........... 8,417,000 162,000 (23,000) 8,556,000
Corporate obligations...................................... 301,000 -- (3,000) 298,000
------------- ---------- ---------- -------------
$ 23,373,000 $ 317,000 $ (81,000) $ 23,609,000
------------- ---------- ---------- -------------
------------- ---------- ---------- -------------
1997:
U.S. Treasury notes and U.S. agency securities............. $ 16,844,000 $ 69,000 $ (4,000) $ 16,909,000
Obligations of states and political subdivisions........... 4,241,000 68,000 (9,000) 4,300,000
------------- ---------- ---------- -------------
$ 21,085,000 $ 137,000 $ (13,000) $ 21,209,000
------------- ---------- ---------- -------------
------------- ---------- ---------- -------------
</TABLE>
The maturity distribution based on amortized cost and fair value as of
December 31, 1998, by contractual maturity, is shown below. Expected maturities
may differ from contractual maturities
F-26
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(2) SECURITIES AVAILABLE-FOR-SALE (CONTINUED)
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties:
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 3,094,000 $ 3,103,000
Due after one year through five years.......................... 13,058,000 13,211,000
Due after five years through ten years......................... 5,509,000 5,616,000
Due after ten years............................................ 1,712,000 1,679,000
------------- -------------
$ 23,373,000 $ 23,609,000
------------- -------------
------------- -------------
</TABLE>
As of December 31, 1998, securities held-to-maturity with an amortized cost
of $1,910,000 and securities available-for-sale with a fair value of $2,565,000
totaling $4,475,000 were pledged as security for public deposits and other
purposes as required by various statutes and agreements.
During 1998, 1997 and 1996, all unrealized gains arose during the year and
are included in other comprehensive income. No previous unrealized gains or
losses were realized in earnings for the years ended December 31, 1998, 1997 or
1996.
(3) SECURITIES HELD-TO-MATURITY
The amortized cost, gross unrealized gains and losses and fair value of
securities held-to-maturity as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
1998:
U.S. Treasury notes and U.S. government agencies........... $ 7,499,000 $ 85,000 $ (17,000) $ 7,567,000
Obligations of states and political subdivisions........... 14,986,000 609,000 -- 15,595,000
Corporate obligations...................................... 468,000 2,000 -- 470,000
------------- ---------- ---------- -------------
$ 22,953,000 $ 696,000 $ (17,000) $ 23,632,000
------------- ---------- ---------- -------------
------------- ---------- ---------- -------------
1997:
U.S. Treasury notes and U.S. government agencies........... $ 2,916,000 $ 27,000 $ (1,000) $ 2,942,000
Obligations of states and political subdivisions........... 12,662,000 255,000 (55,000) 12,862,000
Corporate obligations...................................... 477,000 -- -- 477,000
------------- ---------- ---------- -------------
$ 16,055,000 $ 282,000 $ (56,000) $ 16,281,000
------------- ---------- ---------- -------------
------------- ---------- ---------- -------------
</TABLE>
The maturity distribution based on amortized cost and fair value as of
December 31, 1998, by contractual maturity, is shown below. Expected maturities
may differ from contractual maturities
F-27
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(3) SECURITIES HELD-TO-MATURITY (CONTINUED)
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties:
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 468,000 $ 470,000
Due after one year through five years.......................... 10,440,000 10,581,000
Due after five years through ten years......................... 9,391,000 9,721,000
Due after ten years............................................ 2,654,000 2,860,000
------------- -------------
$ 22,953,000 $ 23,632,000
------------- -------------
------------- -------------
</TABLE>
(4) LOANS
The composition of the Company's loan portfolio is as follows as of December
31:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Construction................................................. $ 7,960,000 $ 5,899,000
Real estate.................................................. 66,850,000 61,070,000
Commercial and industrial loans.............................. 62,341,000 56,477,000
Installment.................................................. 14,754,000 12,621,000
All other loans (including overdrafts)....................... 308,000 828,000
-------------- --------------
152,213,000 136,895,000
Less allowance for loan losses............................... (1,687,000) (1,342,000)
Less deferred loan fees...................................... (818,000) (716,000)
-------------- --------------
$ 149,708,000 $ 134,837,000
-------------- --------------
-------------- --------------
</TABLE>
Although the Company seeks to avoid undue concentrations of loans to a
single industry or based upon a single class of collateral, the Company's loan
portfolio consists primarily of loans to borrowers within San Diego County and,
as a result, the Company's loan and collateral portfolios are to some degree
concentrated. The portfolio is well diversified in both project type and area
within the San Diego County region. The Company evaluates each credit on an
individual basis and determines collateral requirements accordingly. When real
estate is taken as collateral, advances are generally limited to a certain
percentage of the appraised value of the collateral at the time the loan is
made, depending on the type of loan, the underlying property and other factors.
The Company has established a monitoring system for its loans in order to
identify potential problem loans and to permit the periodic evaluation of
impairment and the adequacy of the allowance for loan losses in a timely manner.
Impaired loans included in the Company's loan portfolio as of December 31, 1998
and 1997 were $92,000 and $158,000, respectively, which had aggregate specific
related allowance amounts of $9,000 and $61,000, respectively. During 1998, 1997
and 1996, the average balances of impaired loans were $302,000, $219,000 and
$2,102,000, respectively. During 1998 and 1997, no interest was recognized on
these loans during the period of impairment. During 1996, $75,000 of interest
was recognized on these loans during the period of impairment on a cash basis in
accordance with Company policy.
F-28
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
A summary of the activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Balance, beginning of year......................... $ 1,342,000 $ 1,189,000 $ 1,198,000
Provision for loan losses.......................... 627,000 497,000 1,062,000
Loans charged off.................................. (368,000) (449,000) (1,166,000)
Recoveries......................................... 86,000 105,000 95,000
------------ ------------ -------------
Balance, end of year............................... $ 1,687,000 $ 1,342,000 $ 1,189,000
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Loans on nonaccrual amounted to $92,000, $350,000 and $619,000 as of
December 31, 1998, 1997 and 1996, respectively. Interest income of $43,000,
$45,000 and $66,000 would have been recorded for the years ended December 31,
1998, 1997 and 1996, respectively, if nonaccrual loans had been on a current
basis, in accordance with their original terms. Interest income of $20,000,
$17,000 and $15,000 was recognized on loans subsequently transferred to
nonaccrual status as of December 31, 1998, 1997 and 1996, respectively. Loans
contractually past due greater than 90 days and still accruing interest totaled
approximately $437,000, $544,000 and $12,000 as of December 31, 1998, 1997 and
1996, respectively.
In the normal course of business, the Company has granted loans to certain
directors and their affiliates under terms which Company management believes are
consistent with the Company's general lending policies. An analysis of this
activity is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Balance, beginning of year........................................ $ 1,041,000 $ 982,000
Loans granted, including renewals................................. 470,000 236,000
Repayments........................................................ (398,000) (177,000)
------------ ------------
Balance, end of year.............................................. $ 1,113,000 $ 1,041,000
------------ ------------
------------ ------------
</TABLE>
The Company had additional commitments for loans of $2,345,000 and $731,000
to certain directors and their affiliates as of December 31, 1998 and 1997,
respectively.
(5) PREMISES AND EQUIPMENT
Premises and equipment consist of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Land............................................................ $ 746,000 $ 746,000
Buildings....................................................... 1,500,000 1,416,000
Leasehold improvements.......................................... 3,318,000 3,227,000
Furniture, fixtures and equipment............................... 3,888,000 3,478,000
------------- -------------
9,452,000 8,867,000
Less accumulated depreciation and amortization.................. (4,474,000) (3,647,000)
------------- -------------
$ 4,978,000 $ 5,220,000
------------- -------------
------------- -------------
</TABLE>
F-29
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(5) PREMISES AND EQUIPMENT (CONTINUED)
Depreciation expense for the years ended December 31, 1998, 1997 and 1996
totaled $827,000, $788,000 and $617,000, respectively. In December 1995, the
Company's Grossmont Center Office was destroyed by fire. During 1996 and 1997,
the Company reconstructed the facility. As of December 31, 1997, the Company had
been fully reimbursed for its loss, less a $1,000 deductible.
(6) OTHER REAL ESTATE OWNED
A summary of the changes in the allowance for possible losses on other real
estate owned is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Balance, beginning of year.............................. $ 235,000 $ 218,000 $ 140,000
Provision charged to expense............................ 60,000 143,000 93,000
Recoveries (charge-offs), net........................... 5,000 (126,000) (15,000)
---------- ----------- ----------
Balance, end of year.................................... $ 300,000 $ 235,000 $ 218,000
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
(7) DEPOSITS
The maturity distribution of time deposits as of December 31, 1998 is as
follows:
<TABLE>
<S> <C>
Three months or less........................................... $22,026,000
Over three through six months.................................. 14,926,000
Over six through twelve months................................. 14,394,000
Over twelve months............................................. 5,092,000
----------
Total........................................................ $56,438,000
----------
----------
</TABLE>
(8) LONG-TERM DEBT
Long-term debt of $52,000 and $83,000 as of December 31, 1998 and 1997,
respectively, consisted of a mortgage note payable in monthly installments of
$3,100 through July 2000, including interest at a fixed rate of 8.5%. Future
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1999............................................................... $ 34,000
2000............................................................... 18,000
---------
$ 52,000
---------
---------
</TABLE>
F-30
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(9) INCOME TAXES
The components of income taxes for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Federal:
Current............................................. $ 1,056,000 $ 858,000 $ 622,000
Deferred............................................ (286,000) (157,000) (67,000)
------------ ------------ ----------
770,000 701,000 555,000
------------ ------------ ----------
State:
Current............................................. 484,000 351,000 261,000
Deferred............................................ (107,000) (15,000) (25,000)
------------ ------------ ----------
377,000 336,000 236,000
------------ ------------ ----------
Total............................................. $ 1,147,000 $ 1,037,000 $ 791,000
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
A reconciliation of total income taxes for the years ended December 31,
1998, 1997 and 1996 to the amount computed by applying the applicable statutory
federal income tax rate of 34% to earnings before income taxes follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Computed "expected" income tax....................... $ 1,206,000 $ 982,000 $ 748,000
State tax, net of federal benefit.................... 249,000 222,000 163,000
Tax-exempt interest.................................. (267,000) (162,000) (149,000)
Reduction of tax liability........................... (107,000) -- --
Other, net........................................... 66,000 (5,000) 29,000
------------ ------------ -----------
$ 1,147,000 $ 1,037,000 $ 791,000
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
F-31
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(9) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses........................................... $ 292,000 $ 173,000
Deferred compensation............................................... 46,000 51,000
Nonaccrual interest................................................. 12,000 17,000
State taxes......................................................... 165,000 133,000
Other real estate owned............................................. 100,000 70,000
Organization costs.................................................. 56,000 --
Depreciation........................................................ 140,000 --
---------- ----------
811,000 444,000
Deferred tax liabilities:
Depreciation........................................................ -- (26,000)
Unrealized gains on securities available-for-sale................... (94,000) (48,000)
---------- ----------
Net deferred tax assets........................................... $ 717,000 $ 370,000
---------- ----------
---------- ----------
</TABLE>
Based upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not that the Company will realize the
benefits of these deductible differences.
Income taxes payable at December 31, 1998 and 1997 totaled $174,000 and
$189,000, respectively.
(10) COMMITMENTS AND CONTINGENCIES
As of December 31, 1998, minimum rental payments due under operating leases
having initial or remaining noncancelable lease terms in excess of one year are
as follows:
<TABLE>
<S> <C>
1999............................................................ $ 455,000
2000............................................................ 325,000
2001............................................................ 329,000
2002............................................................ 319,000
2003............................................................ 310,000
Thereafter...................................................... 2,260,000
Less minimum sublease rentals................................... (484,000)
---------
$3,514,000
---------
---------
</TABLE>
Net rental expense relating to these leases was approximately $462,000,
$503,000 and $356,000 in 1998, 1997 and 1996, respectively, including sublease
rentals of $56,000 in 1998, $42,000 in 1997 and none in 1996. There are no
contingent rental payments applicable to any of the leases. Most of the leases
provide that the Company pay taxes, maintenance, insurance and certain other
operating expenses applicable to the leased premises in addition to the monthly
minimum payments. Management expects that in the normal course of business,
leases that expire will be renewed or replaced by other leases.
F-32
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(10) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has adopted three plans for the benefit of its eligible
employees. In 1998, the Company adopted an Employee Stock Ownership Plan (the
"ESOP") to replace its profit sharing plan. The Board approved discretionary
contributions to the ESOP of $155,000 for 1998. The Board approved contributions
of $120,000 and $62,000 to the profit sharing plan in 1997 and 1996,
respectively. The Company also has a salary deferral 401(k) plan and a cash
incentive plan. The Board approved contributions to these plans of $43,000,
$39,000 and $30,000 for 1998, 1997 and 1996, respectively.
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheets. The
contract or notional amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
counterparty to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Commitments to extend credit amounting to
$43,138,000 and $30,830,000 were outstanding as of December 31, 1998 and 1997,
respectively. Of these commitments to extend credit, $7,747,000 and $6,839,000
represent home equity lines of credit as of December 31, 1998 and 1997,
respectively, which will be repaid over a ten-year period if drawn upon. The
Company evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained by the Company, if deemed necessary upon extension
of credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include certificates of deposit, accounts
receivable, inventory, property, plant and equipment, residential real estate
and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Company holds various
types of collateral (primarily certificates of deposit) to support those
commitments for which collateral is deemed necessary. The Company had
approximately $488,000 and $270,000 in standby letters of credit outstanding as
of December 31, 1998 and 1997, respectively. Most of the letters of credit
expire within twelve months.
Management does not anticipate any material losses will arise from
additional fundings of the aforementioned lines of credit or letters of credit.
F-33
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(10) COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of December 31, 1998, the Bank guaranteed $240,000 of outstanding debt of
Valley National Corporation, a Delaware corporation formed to become the holding
company for the Bank. The debt will be repaid in March 1999 upon completion of
the reorganization, subject to stockholder approval.
As of December 31, 1998 and 1997, the Company had lines of credit in the
amount of $11,500,000 from correspondent banks, of which no amounts were
outstanding as of December 31, 1998 or 1997. These lines are renewable annually.
The availability of the lines of credit, as well as adjustments in deposit
programs, provide for liquidity in the event the level of deposits should fall
abnormally low. These sources provide that funding thereof may be withdrawn
depending upon the financial strength of the Company.
Because of the nature of its activities, the Company is at all times subject
to pending and threatened legal actions which arise out of the normal course of
its business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Company's financial
position, results of operations or liquidity.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values for the Company's financial instruments and a
description of the methodologies and assumptions used to determine such amounts
follows:
(A) CASH AND DUE FROM BANKS, INTEREST-EARNING DEPOSITS AND FEDERAL FUNDS
SOLD
The carrying amount is assumed to be the fair value because of the liquidity
of these instruments.
(B) FEDERAL RESERVE BANK STOCK
The carrying value approximates the fair value because the stock can be
redeemed at par.
(C) INVESTMENT SECURITIES
Fair value of investment securities is based on quoted market prices
available as of the balance sheet date. If quoted market prices are not
available, fair value is estimated based on quoted market prices for similar
securities.
(D) LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type and further segmented into fixed
and adjustable rate interest terms and by credit risk categories.
The fair value of fixed rate loans and nonperforming or adversely classified
adjustable rate loans is calculated by discounting scheduled cash flows through
the estimated maturity using estimated market discount rates that reflect the
credit and interest rate risk inherent in the loans. The discount rates used for
performing fixed rate loans are the Company's current offer rates for comparable
instruments with similar terms.
F-34
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair value of performing adjustable rate loans is estimated to be
carrying value. These loans reprice frequently at market rates and the credit
risk is not considered to be greater than normal.
(E) DEPOSITS
The fair value of deposits with no stated maturity, such as non-interest
bearing demand deposits, savings and checking accounts, is equal to the amount
payable on demand as of the balance sheet date. The fair value of time deposits
is based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities. No value has been assigned to the Company's long-term relationships
with its deposit customers (core deposit intangible).
(F) LONG-TERM DEBT
The carrying amount is assumed to be the fair value because the rate is
consistent with current market rates for similar instruments.
(G) COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. The fair value of standby letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with the counterparties.
(H) LIMITATIONS
Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a portion of the Company's
financial instruments, fair value estimates are based on what management
believes to be conservative judgments regarding expected future cash flows,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. Since the fair value is estimated as of December 31, 1998 and
1997, the amounts that will actually be realized or paid at settlement or
maturity of the instruments could be significantly different.
F-35
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair value of the Company's financial instruments as of December 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998
------------------------------
CARRYING/
CONTRACT FAIR
AMOUNT VALUE
-------------- --------------
<S> <C> <C>
Financial assets:
Cash and due from banks........................................................ $ 11,704,000 $ 11,704,000
Federal funds sold............................................................. 11,890,000 11,890,000
Interest-earning deposits...................................................... 6,396,000 6,396,000
Securities available-for-sale.................................................. 23,609,000 23,609,000
Investment securities held-to-maturity......................................... 22,953,000 23,632,000
Federal Reserve Bank stock..................................................... 445,000 445,000
Loans, net..................................................................... 149,708,000 150,283,000
Financial liabilities:
Deposits....................................................................... 216,393,000 216,635,000
Long-term debt................................................................. 52,000 52,000
Off-balance sheet financial instruments:
Commitments to extend credit................................................... 43,138,000 261,000
Standby letters of credit...................................................... 488,000 9,000
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------
CARRYING/
CONTRACT FAIR
AMOUNT VALUE
-------------- --------------
<S> <C> <C>
Financial assets:
Cash and due from banks........................................................ $ 10,562,000 $ 10,562,000
Federal funds sold............................................................. 8,731,000 8,731,000
Interest-earning deposits...................................................... 4,499,000 4,499,000
Securities available-for-sale.................................................. 21,209,000 21,209,000
Investment securities held-to-maturity......................................... 16,055,000 16,281,000
Federal Reserve Bank stock..................................................... 384,000 384,000
Loans, net..................................................................... 134,837,000 134,537,000
Financial liabilities:
Deposits....................................................................... 188,147,000 188,195,000
Long-term debt................................................................. 83,000 83,000
Off-balance sheet financial instruments:
Commitments to extend credit................................................... 30,830,000 166,000
Standby letters of credit...................................................... 270,000 5,000
</TABLE>
F-36
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(12) REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to
maintain minimum amounts and ratios (set forth in the table below) of total and
Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1998, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes has changed the Bank's
category.
The Bank's actual capital amounts and ratios as of December 31, 1998 and
1997 are presented in the following tables:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
------------------------ ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets).... $ 20,955,000 12.47% $ 13,444,000 >8.00% $ 16,805,000 >10.00%
Tier I Capital (to Risk-Weighted Assets)... 19,268,000 11.47% 6,722,000 >4.00% 10,083,000 >6.00%
Tier I Capital (to Average Assets)......... 19,268,000 8.06% 9,563,000 >4.00% 11,954,000 >5.00%
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
------------------------ ------------------------ ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets).... $ 18,294,000 12.65% $ 11,571,000 >8.00% $ 14,463,000 >10.00%
Tier I Capital (to Risk-Weighted Assets)... 16,952,000 11.72% 5,785,000 >4.00% 8,678,000 >6.00%
Tier I Capital (to Average Assets)......... 16,952,000 8.22% 8,252,000 >4.00% 10,315,000 >5.00%
</TABLE>
F-37
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(12) REGULATORY MATTERS (CONTINUED)
Under Federal banking law, dividends declared by the Bank in any calendar
year may not, without the approval of the Comptroller of the Currency (OCC),
exceed its net earnings for that year combined with its retained earnings from
the preceding two years. However, the OCC has previously issued a bulletin to
all national banks outlining new guidelines limiting the circumstances under
which national banks may pay dividends even if the banks are otherwise
statutorily authorized to pay dividends. The limitations impose a requirement or
in some cases suggest that prior approval of the OCC should be obtained before a
dividend is paid if a national bank is the subject of administrative action or
if the payment could be viewed by the OCC as unsafe or unusual.
(13) STOCK OPTIONS
In 1982 and 1994, the stockholders of the Company approved stock option
plans (the "1982 Plan" and the "1994 Plan") pursuant to which the Company's
Board of Directors may grant stock options to officers, directors and certain
key employees. The 1982 Plan, which expired in 1992, authorized grants of
options to purchase up to 183,000 shares of common stock after adjustment for
stock dividends and stock splits (original authorized number of shares was
25,000), and the 1994 Plan authorizes grants of options to purchase up to
636,000 shares of common stock after adjustments for stock dividends and stock
splits (original authorized number of shares was 250,000). Stock options are
granted with an exercise price equal to the stock's fair value at the date of
grant. All stock options have ten-year terms and vest and become fully
exercisable at a rate of 20% per year commencing one year from the grant date.
As of December 31, 1998, there were no additional shares available for grant
under the 1982 Plan and 242,000 shares available for grant under the 1994 Plan.
The fair value of each stock option granted has been estimated on the date of
the grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1998--dividend yield of 1.19%; volatility of
20.96%; risk-free interest rate of 4.75%; and expected lives of 6.68 years; 1997
and 1996--dividend yield of 1.6%; volatility of 25.63%; risk-free interest rate
ranging from 6.74%--7.76%; and expected lives of 7.35 years.
The per share weighted-average fair value of stock options granted during
1998 was $4.08.
The Company applies the provisions of APB No. 25 in accounting for its
Plans, and accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
Statement 123, the Company's net earnings and basic and diluted net earnings per
share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net earnings, as reported........................... $ 2,400,000 $ 1,852,000 $ 1,403,000
Pro forma net earnings.............................. 2,309,000 1,785,000 1,336,000
Basic earnings per share, as reported............... $ 0.87 $ 0.68 $ 0.52
Pro forma basic earnings per share.................. 0.84 0.66 0.49
Diluted earnings per share, as reported............. $ 0.81 $ 0.63 $ 0.50
Pro forma diluted earnings per share................ 0.78 0.61 0.48
</TABLE>
F-38
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(13) STOCK OPTIONS (CONTINUED)
Restated stock option activity (see Note 16) for the years ended December
31, 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS PRICE
--------- -----------
<S> <C> <C>
Balance as of January 1, 1996........................................... 286,000 $ 5.38
Stock options granted................................................... 118,000 7.65
Stock options exercised................................................. (26,000) 5.38
Stock options forfeited................................................. (10,000) 5.38
5% stock dividend....................................................... 14,000 5.38
--------- -----------
Balance as of December 31, 1996......................................... 382,000 6.11
5% stock dividend....................................................... 18,000 6.11
--------- -----------
Balance as of December 31, 1997......................................... 400,000 5.79
Stock options granted................................................... 66,000 14.80
Stock options exercised................................................. (54,000) 5.03
Stock options forfeited................................................. (6,000) 5.14
5% stock dividend....................................................... 18,000 6.11
5% stock dividend declared in April 1999 (Note 16) 21,000 7.05
--------- -----------
Balance as of December 31, 1998......................................... 445,000 $ 7.05
--------- -----------
--------- -----------
Exercisable as of December 31, 1998..................................... 263,000 $ 5.05
--------- -----------
--------- -----------
</TABLE>
As of December 31, 1998, options outstanding have exercise prices between
$4.40 and $15.00 and a weighted-average remaining contractual life of 6 years.
As of December 31, 1997, options outstanding had exercise prices between $4.62
and $7.38 and a weighted-average remaining contractual life of 6.2 years.
(14) OTHER EXPENSES
Other expenses are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Stationery and supplies............................. $ 245,000 $ 243,000 $ 240,000
Telephone, courier and postage...................... 358,000 336,000 319,000
Data processing..................................... 569,000 480,000 428,000
Merchant processing expense......................... 394,000 360,000 285,000
Promotional expenses................................ 391,000 350,000 282,000
Professional services............................... 215,000 149,000 80,000
Insurance........................................... 180,000 169,000 137,000
FDIC and regulatory assessments..................... 85,000 77,000 54,000
Other real estate owned expenses.................... 52,000 77,000 201,000
Other............................................... 1,012,000 773,000 782,000
------------ ------------ ------------
$ 3,501,000 $ 3,014,000 $ 2,808,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-39
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(15) NET EARNINGS PER SHARE
In accordance with SFAS 128, the following is a reconciliation of the
numerators and denominators of the basic and diluted earnings per share.
<TABLE>
<CAPTION>
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNTS
------------ ------------- -----------
<S> <C> <C> <C>
Basic 1998 EPS
Net earnings....................................... $ 2,400,000 2,755,000 $ 0.87
Effect of dilutive stock options................... -- 221,000 (0.06)
------------ ------------- -----
Dilutive EPS......................................... $ 2,400,000 2,976,000 $ 0.81
------------ ------------- -----
Basic 1997 EPS
Net earnings....................................... $ 1,852,000 2,721,000 $ 0.68
Effect of dilutive stock options................... -- 208,000 (0.05)
------------ ------------- -----
Dilutive EPS......................................... $ 1,852,000 2,929,000 $ 0.63
------------ ------------- -----
Basic 1996 EPS
Net earnings....................................... $ 1,403,000 2,711,000 $ 0.52
Effect of dilutive stock options................... -- 77,000 (0.02)
------------ ------------- -----
Dilutive EPS......................................... $ 1,403,000 2,788,000 $ 0.50
------------ ------------- -----
</TABLE>
(16) SUBSEQUENT EVENTS
On April 1, 1999, stockholders of the Bank became entitled to receive two
shares of the Company's common stock for each share they held in the Bank, which
now operates as a wholly owned subsidiary of the Company. The Company became the
bank holding company for the Bank on March 31, 1999, after stockholder approval.
The retroactive effect of this new capital structure, which is reflected in the
consolidated financial statements, thereby increases the number of shares
outstanding at December 31, 1998 and 1997, but has no net effect on
shareholders' equity. Earnings per share data has been restated to reflect such
restructuring.
On April 21, 1999, the Board of Directors of the Company declared a 5% stock
dividend to the shareholders of record on May 3, 1999. The retroactive effect of
this dividend, which is reflected in the consolidated financial statements,
thereby increases the number of shares outstanding at December 31, 1998 and
increases common stock while decreasing retained earnings for the fair value of
stock issued. Earnings per share data has been restated to reflect such
dividend.
On May 10, 1999, the Company announced that a definitive agreement has been
signed under which the Company will merge with Community First Bankshares, Inc.
The Company's principal subsidiary, Valle de Oro Bank, N.A., will be acquired by
Community First Bankshares, Inc. in the merger. The agreement is subject to
regulatory and other approvals and is expected to close in the fourth quarter of
1999. The merger is structured to be tax-free and is intended to be accounted
for as a pooling of interests.
F-40
<PAGE>
VALLEY NATIONAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(17) QUARTERLY EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED:
-------------------------------------------------------
<S> <C> <C> <C> <C>
1998 DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- -------------------------------------------------------- ------------ ------------- ------------ ------------
Interest income......................................... $4,657,000 $ 4,646,000 $ 4,428,000 $ 4,295,000
Interest expense........................................ 1,525,000 1,650,000 1,565,000 1,557,000
Net interest income before provision for loan losses.... 3,132,000 2,996,000 2,863,000 2,738,000
Provision for loan losses............................... 139,000 139,000 168,000 181,000
Net interest income after provision for loan losses..... 2,993,000 2,857,000 2,695,000 2,557,000
Other operating income.................................. 826,000 758,000 773,000 650,000
Other operating expenses................................ 2,858,000 2,642,000 2,535,000 2,527,000
Earnings before income taxes............................ 961,000 973,000 933,000 680,000
Income taxes............................................ 233,000 349,000 333,000 232,000
Net earnings............................................ $ 728,000 $ 624,000 $ 600,000 $ 448,000
Basic earnings per share................................ $ 0.26 $ 0.23 $ 0.22 $ 0.16
Diluted earnings per share.............................. $ 0.25 $ 0.21 $ 0.20 $ 0.15
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED:
-------------------------------------------------------
<S> <C> <C> <C> <C>
1997 DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
- -------------------------------------------------------- ------------ ------------- ------------ ------------
Interest income......................................... $4,271,000 4,133,000 3,998,000 3,868,000
Interest expense........................................ 1,580,000 1,534,000 1,448,000 1,378,000
Net interest income before provision for loan losses.... 2,691,000 2,599,000 2,550,000 2,490,000
Provision for loan losses............................... 76,000 84,000 140,000 197,000
Net interest income after provision for loan losses..... 2,615,000 2,515,000 2,410,000 2,293,000
Other operating income.................................. 695,000 816,000 634,000 599,000
Other operating expenses................................ 2,462,000 2,500,000 2,432,000 2,294,000
Earnings before income taxes............................ 848,000 831,000 612,000 598,000
Income taxes............................................ 316,000 298,000 211,000 212,000
Net earnings............................................ $ 532,000 $ 533,000 $ 401,000 $ 386,000
Basic earnings per share................................ $ 0.20 $ 0.20 $ 0.14 $ 0.14
Diluted earnings per share.............................. $ 0.19 $ 0.18 $ 0.13 $ 0.13
</TABLE>
F-41
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY 10, 1999
BETWEEN
COMMUNITY FIRST BANKSHARES, INC.
AND
VALLEY NATIONAL CORPORATION
A-1
<PAGE>
TABLE OF CONTENTS TO AGREEMENT AND PLAN OF MERGER
<TABLE>
<CAPTION>
PAGE
---------
<C> <C> <S> <C>
ARTICLE 1 THE MERGER....................................................................................... A-5
1.1 Effective Time of the Merger..................................................................... A-5
1.2 Closing.......................................................................................... A-5
1.3 Effects of the Merger............................................................................ A-5
1.4 Calculation of VNC Value......................................................................... A-6
ARTICLE 2 EFFECT OF THE MERGER ON THE CAPITAL STOCK........................................................ A-6
2.1 Effect on Capital Stock.......................................................................... A-6
(a) Conversion............................................................................ A-6
(b) Exchange Rate......................................................................... A-7
(c) Adjustments to Exchange Rate Based on CFB Trading Value............................... A-7
(d) Adjustments to Exchange Rate Based on VNC Value....................................... A-8
(e) Shareholders' Right of Dissent........................................................ A-8
2.2 Exchange of Certificates......................................................................... A-8
(a) Exchange Agent........................................................................ A-8
(b) Exchange Procedures................................................................... A-8
(c) Distributions and Voting.............................................................. A-9
(d) Transfers............................................................................. A-9
(e) Fractional Shares..................................................................... A-9
(f) Termination of Exchange Fund.......................................................... A-9
(g) Withholding Rights.................................................................... A-9
(h) Lost or Destroyed Certificates........................................................ A-9
2.3 VNC Stock Options................................................................................ A-10
2.4 Stock Transfer Books............................................................................. A-10
ARTICLE 3 REPRESENTATIONS AND WARRANTIES................................................................... A-10
3.1 Representations and Warranties of VNC............................................................ A-10
(a) Bank Organization..................................................................... A-10
(b) VNC Organization...................................................................... A-10
(c) Enforceability........................................................................ A-11
(d) Reports............................................................................... A-11
(e) Limitation of Bank's Powers........................................................... A-11
(f) Corporate Records..................................................................... A-11
(g) Insured Status of Bank................................................................ A-12
(h) No Default or Creation of Liens....................................................... A-12
(i) Financial Statements.................................................................. A-12
(j) No Material Adverse Change............................................................ A-12
(k) Fidelity Insurance.................................................................... A-12
(l) Employment Contracts.................................................................. A-12
(m) Employee Benefits..................................................................... A-13
(n) Litigation............................................................................ A-13
(o) Taxes................................................................................. A-13
(p) Title to Property..................................................................... A-14
(q) Insurance Policies.................................................................... A-14
(r) Bank Property......................................................................... A-14
(s) Conduct of Business................................................................... A-14
(t) Internal Controls and Records......................................................... A-14
(u) Loan Allowance and Documentation...................................................... A-15
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<C> <C> <S> <C>
(v) Leases and Contracts.................................................................. A-15
(w) Shareholder Lists..................................................................... A-15
(x) Bank Principals....................................................................... A-16
(y) Information Supplied.................................................................. A-16
(z) Agreements with Bank Regulators....................................................... A-16
(aa) Year 2000............................................................................. A-16
3.2 Representations and Warranties of CFB............................................................ A-16
(a) CFB Organization...................................................................... A-16
(b) Reports............................................................................... A-17
(c) Enforceability........................................................................ A-17
(d) Limitation of Subsidiary Banks' Powers................................................ A-17
(e) No Default or Creation of Liens....................................................... A-17
(f) Financial Statements.................................................................. A-17
(g) Information Supplied.................................................................. A-18
(h) Litigation............................................................................ A-18
(i) Loan Allowance and Documentation...................................................... A-18
(j) No Plan to Transfer Assets............................................................ A-18
ARTICLE 4 COVENANTS OF VNC AND CFB......................................................................... A-19
4.1 Covenants of VNC................................................................................. A-19
(a) Ordinary Course....................................................................... A-19
(b) Shareholder Meeting................................................................... A-19
(c) Confidential Information.............................................................. A-19
(d) Benefit Plans......................................................................... A-19
(e) Insurance............................................................................. A-20
(f) Pooling Restrictions.................................................................. A-20
(g) Financial Statements.................................................................. A-20
(h) Additional Covenants of VNC........................................................... A-20
4.2 Covenants of CFB................................................................................. A-23
(a) Ordinary Course....................................................................... A-23
(b) Application........................................................................... A-23
(c) Listing............................................................................... A-24
(d) Confidential Information.............................................................. A-24
(e) Director and Officer Indemnification.................................................. A-24
(f) Rules 144 and 145(d).................................................................. A-24
4.3 Covenants of VNC and CFB......................................................................... A-24
(a) Governing Documents................................................................... A-24
(b) Other Actions......................................................................... A-24
(c) Advice of Changes and Government Filings.............................................. A-24
(d) Environmental Assessment.............................................................. A-25
ARTICLE 5 ADDITIONAL AGREEMENTS............................................................................ A-25
5.1 Registration Statement........................................................................... A-25
5.2 Regulatory Matters............................................................................... A-25
5.3 Access to Information............................................................................ A-26
5.4 Affiliates....................................................................................... A-26
5.5 Employee Benefit Plans........................................................................... A-26
5.6 Expenses......................................................................................... A-26
5.7 Additional Agreements and Best Efforts........................................................... A-27
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<C> <C> <S> <C>
ARTICLE 6 CONDITIONS PRECEDENT............................................................................. A-27
6.1 Conditions to Each Party's Obligation to Effect the Merger....................................... A-27
(a) Stockholder Approval.................................................................. A-27
(b) Nasdaq Listing........................................................................ A-27
(c) Approvals............................................................................. A-27
(d) No Injunctions, Restraints or Illegality.............................................. A-27
(e) No Unduly Burdensome Condition........................................................ A-27
6.2 Conditions to Obligations of CFB................................................................. A-27
(a) Representations and Warranties........................................................ A-27
(b) Performance of Obligations of VNC..................................................... A-28
(c) Minimum VNC Value..................................................................... A-28
(d) Pooling Letter........................................................................ A-28
(e) Legal Opinion......................................................................... A-28
6.3 Conditions to Obligations of VNC................................................................. A-28
(a) Representations and Warranties........................................................ A-28
(b) Performance of Obligations of CFB..................................................... A-28
(c) Consents Under Agreements............................................................. A-28
(d) Tax Opinion........................................................................... A-28
(e) Legal Opinion......................................................................... A-29
ARTICLE 7 TERMINATION AND AMENDMENT........................................................................ A-29
7.1 Termination...................................................................................... A-29
7.2 Effect of Termination............................................................................ A-30
7.3 Amendment........................................................................................ A-30
7.4 Extension and Waiver............................................................................. A-30
ARTICLE 8 GENERAL PROVISIONS............................................................................... A-30
8.1 Non-Survival of Representations and Warranties................................................... A-31
8.2 Notices.......................................................................................... A-31
8.3 Interpretation................................................................................... A-31
8.4 Counterparts..................................................................................... A-31
8.5 Entire Agreement................................................................................. A-31
8.6 Third Party Beneficiaries........................................................................ A-31
8.7 Rights of Ownership.............................................................................. A-31
8.8 Publicity........................................................................................ A-31
8.9 Assignment....................................................................................... A-32
8.10 Enforcement of Agreement......................................................................... A-32
</TABLE>
EXHIBITS
EXHIBIT A -- Option Agreement
EXHIBIT 1.1 -- Certificate of Merger
EXHIBIT 2.1(c) -- Illustrations of Calculation of Exchange Rates
EXHIBIT 3.1 -- VNC Disclosure Schedule
EXHIBIT 3.2 -- CFB Disclosure Schedule
EXHIBIT 4.1(d) -- Officer/Director Agreements
EXHIBIT 5.4 -- Affiliate Agreement
EXHIBIT 6.2 -- Dostart Clapp Sterrett & Coveney, LLP Opinion
EXHIBIT 6.3 -- Lindquist & Vennum, P.L.L.P. Opinion
EXHIBIT 7.1(f) -- Index Group
A-4
<PAGE>
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER is dated as of May 10, 1999 (the
"Agreement"), by and between Community First Bankshares, Inc., a Delaware
corporation ("CFB"), and Valley National Corporation, a Delaware corporation
("VNC") and made with respect to the following recitals.
WHEREAS, the Boards of Directors of CFB and VNC have approved, and deem it
advisable and in the best interests of their respective companies and their
stockholders to consummate the business combination transaction provided for
herein in which VNC will be merged with and into CFB (the "Merger"); and
WHEREAS, as a condition to and immediately after, the execution of this
Agreement, VNC and CFB are entering into a VNC Stock Option Agreement (the
"Option Agreement") in the form attached hereto as EXHIBIT A; and
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368(a)(1)(A)
of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, and
intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE 1
THE MERGER
1.1 EFFECTIVE TIME OF THE MERGER. Subject to the provisions of this
Agreement, a certificate of merger in substantially the form as attached hereto
as EXHIBIT 1.1 shall be duly prepared, executed and acknowledged by CFB and VNC
and thereafter delivered for filing to the Secretary of State of the State of
Delaware, as provided in the Delaware Corporation Law (the "Delaware Law") on
the Closing Date (as defined in Section 1.2). The Merger shall become effective
at the date and time specified in the Certificate of Merger (the "Effective
Time").
1.2 CLOSING. Subject to the terms and conditions hereof, the closing of
the Merger (the "Closing") will take place prior to the Effective Time and after
the satisfaction or waiver (subject to applicable law) of the last to occur of
the conditions set forth in Article 6 hereof. The Closing will take place at the
offices of Lindquist & Vennum P.L.L.P., at 4200 IDS Center, 80 South 8th Street,
Minneapolis, Minnesota, unless another time, date or place is agreed to in
writing by the parties hereto. Each of the parties shall use its reasonable best
efforts to cause the Closing to be completed within 30 days after the
satisfaction or waiver of the conditions set forth in Article 6 of this
Agreement.
1.3 EFFECTS OF THE MERGER.
(a) At the Effective Time: (i) the separate existence of VNC shall cease
and VNC shall be merged with and into CFB; (ii) the Certificate of
Incorporation of CFB, as in effect immediately prior to the Effective Time
shall be the Certificate of Incorporation of the Surviving Corporation until
duly amended in accordance with applicable law; (iii) the By-laws of CFB, as
in effect immediately prior to the Effective Time shall be the By-laws of
the Surviving Corporation until amended in accordance with applicable law;
(iv) the members of Board of Directors of the Surviving Corporation shall
consist of the members of the Board of Directors of CFB holding office
immediately prior to the Effective Time.
(b) At the Effective Time: (i) the holders of the outstanding capital
stock of CFB shall continue as shareholders of the Surviving Corporation;
and (ii) the holders of certificates
A-5
<PAGE>
representing shares of VNC Common Stock (as defined in Section 2.1(a) below)
shall cease to have any rights as shareholders of VNC, except such rights,
if any, as they may have pursuant to Section 262 of the Delaware Law, and
their sole right shall be the right to receive (A) the number of whole
shares of CFB Common Stock (as defined in Section 2.1(a) below) into which
their shares of VNC Common Stock have been converted in the Merger as
provided herein (together with any dividend payments with respect thereto,
to the extent provided in Section 2.2(c) below), and (B) the cash value of
any fraction of a share of CFB Common Stock into which their shares of VNC
Common Stock have been converted as provided herein.
(c) As used in this Agreement, the term "Constituent Corporations" shall
mean VNC and CFB. The term "Surviving Corporation" shall mean CFB, after
giving effect to the Merger.
(d) At and after the Effective Time, the Merger will have the effects
set forth in Section 251 of the Delaware Law.
1.4 CALCULATION OF VNC VALUE.
(a) As of the "Determination Date" (as hereinafter defined), VNC shall
prepare a consolidated balance sheet of VNC in accordance with generally
accepted accounting principles, but excluding the effects of any adjustments
otherwise required by FASB 115 and excluding any footnotes that might be
required to be included with such financial statements (the "Determination
Date Financial Statements"). The Determination Date Financial Statements
shall be prepared and delivered to CFB not less than five business days
prior to the Effective Time, so that CFB and its accountants may review and
confirm their accuracy. For purposes of this Agreement, the "VNC Value"
shall be equal to the total consolidated assets of VNC minus the total
consolidated liabilities of VNC, as reflected on the Determination Date
Financial Statements, prepared in accordance with this Section 1.4. Total
consolidated liabilities of VNC shall include, without limitation,
provisions for (i) income and real property taxes, (ii) the expenses of
preparation of final tax returns of VNC and (iii) all anticipated
transaction expenses.
(b) As used herein, the "Determination Date" shall be the last day of
the month immediately preceding the Effective Time; provided, however, that
in the event the Effective Time shall be within the first ten days of a
calendar month, the "Determination Date" shall be the last day of the month
next preceding the Effective Time, and income for the month immediately
preceding the Effective Time shall be determined by multiplying the number
of days in the month by the average daily net income (determined by dividing
year-to-date net income through the Determination Date by the number of days
from January 1, 1999 to the Determination Date).
ARTICLE 2
EFFECT OF THE MERGER ON THE CAPITAL STOCK
2.1 EFFECT ON CAPITAL STOCK.
(a) CONVERSION. At the Effective Time, by virtue of the Merger and
without any action on the part of any holder of shares of common stock,
$0.0001 par value, of VNC ("VNC Common Stock"), each issued and outstanding
share of VNC Common Stock, other than shares of VNC Common Stock held by
persons who have taken all steps required to perfect their right to be paid
the fair value of such shares under Sections 262 of the Delaware Law, shall
be converted into validly issued, fully paid and nonassessable shares of
common stock of CFB, $.01 par value ("CFB Common Stock"). The number of
shares of CFB Common Stock exchanged for shares of VNC Common Stock shall be
determined in accordance with Section 2.1(b). All such shares of VNC Common
Stock shall no longer be outstanding and shall automatically be canceled and
retired and shall cease to exist. Each VNC shareholder's certificate or
certificates previously representing shares of VNC Common Stock (each a "VNC
Certificate") shall be aggregated (if a single
A-6
<PAGE>
stockholder holds more than one VNC Certificate) and exchanged for a single
certificate representing whole shares of CFB Common Stock and cash in lieu
of any fractional share issued in consideration therefor upon the surrender
of such VNC Certificates in accordance with Section 2.2, without any
interest thereon. In the event that, subsequent to the date of this
Agreement but prior to the Effective Time, the outstanding shares of CFB
Common Stock shall have been increased, decreased, changed into or exchanged
for a different number or kind of shares or securities through a
reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split, or other similar change in CFB's capitalization,
then an appropriate and proportionate adjustment shall be made to the
"Exchange Rate," as hereinafter defined, so that the number of shares of CFB
Common Stock into which a share of VNC Common Stock shall be converted will
equal the number of shares of CFB Common Stock that the holders of shares of
VNC Common Stock would have received pursuant to such reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse
stock split or other similar change had the record date therefor been
immediately following the Closing Date.
(b) EXCHANGE RATE. Subject to (i) the confirmation of the minimum VNC
Value, as provided in Section 6.2(c) hereof and (ii) the limitations and
conditions of Section 2.1(c) hereof, the aggregate number of shares of CFB
Common Stock to be exchanged for all of the issued and outstanding shares of
VNC Common Stock and any and all options, warrants and rights exercisable
for or convertible into shares of VNC Common Stock (the "Merger
Consideration") shall be determined by dividing $65,000,000 by the CFB
Trading Value (defined below).
For purposes of this Agreement, the "Exchange Rate" shall be determined
by dividing the Merger Consideration, as determined above, by the number of
shares of VNC Common Stock outstanding or subject to option, warrant or
other right of issuance, whether or not vested or accrued as of the
Effective Time.
All calculations will be rounded to four decimal places. Any fractional
share of CFB Common Stock will be paid in cash in accordance with Section
2.2(e).
(c) ADJUSTMENTS TO EXCHANGE RATE BASED ON CFB TRADING
VALUE. Notwithstanding anything to the contrary in this Article 2, the
Exchange Rate shall be subject to modification as set forth below:
(i) If the CFB Trading Value is less than $18 per share, then the
number of shares of CFB Common Stock to be issued in exchange for all of
the issued and outstanding shares of VNC Common Stock (and any and all
options, warrants and rights exercisable for or convertible into shares
of VNC Common Stock) shall be 3,611,111;
(ii) If the CFB Trading Value is greater than $26 per share, then
the number of shares of CFB Common Stock to be issued for all of the
issued and outstanding shares of VNC Common Stock (and any and all
options, warrants and rights exercisable for or convertible into shares
of VNC Common Stock) shall be 2,500,000.
For purposes of this Agreement, the "CFB Trading Value" of the CFB
Common Stock shall be the average of the per share closing price for the CFB
Common Stock as reported by the Nasdaq Stock Market for the 20 trading days
ending at the end of the fourth trading day immediately preceding the
Closing Date (as appropriately and proportionately adjusted in the event
that, between the date hereof and the termination of such 20 trading day
period, shares of CFB Common Stock shall be changed into a different number
of shares or a different class of shares by reason of any reclassification,
recapitalization, split-up, combination, exchange of shares or readjustment
or stock dividend). Illustrations of the Exchange Rate calculations are
attached as EXHIBIT 2.1(C) hereto and incorporated herein by reference.
A-7
<PAGE>
(d) ADJUSTMENTS TO EXCHANGE RATE BASED ON VNC VALUE. VNC shall use its
best efforts to distribute all amounts in excess of the minimum VNC Value
(as provided in Section 6.2(c) hereof) to its shareholders on or before the
Determination Date. In the event that the VNC Value, calculated in
accordance with Section 1.4, above, shall be greater than $20,000,000, then,
at the election of VNC and subject to the requirements of Section 6.2(d)
hereof, either (i) the difference shall be paid by special dividend to VNC
shareholders immediately prior to the Determination Date or (ii) the Merger
Consideration determined in accordance with Sections 2.1(b) and (c) shall be
subject to increase. The amount of increase shall be determined by (i)
subtracting the difference between the VNC Value and $20,000,000, and then
(ii) dividing such difference by the CFB Trading Value.
(e) SHAREHOLDERS' RIGHT OF DISSENT. Any holder of shares of VNC Common
Stock who does not vote in favor of the Merger at the meeting of
shareholders of VNC called to vote on the Merger and has given notice in
writing to the presiding officer prior to or at the meeting of his or her
objection to the proposed corporate action shall be entitled to demand to
receive the fair value of the VNC Common Stock so held by him or her in
accordance with Section 262 of the Delaware Law.
2.2 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. At the Closing, CFB shall deposit with Norwest
Bank Minnesota, N.A. or such other bank or trust company acceptable to the
parties (the "Exchange Agent"), for the benefit of the holders of shares of
VNC Common Stock, certificates dated the Closing Date representing the
shares of CFB Common Stock and the cash to be paid in lieu of fractional
shares (such cash and certificates for shares of CFB Common Stock together
with any dividends or distributions with respect thereto being hereinafter
referred to as the "Exchange Fund") to be issued and paid pursuant to
Section 2.1 in exchange for the outstanding shares of VNC Common Stock.
(b) EXCHANGE PROCEDURES. Within five business days after the Closing
Date, CFB shall cause the Exchange Agent to mail to each holder of record of
a VNC Certificate or VNC Certificates (i) a letter of transmittal which
shall specify that delivery shall be effective, and risk of loss and title
to the VNC Certificate(s) shall pass, only upon delivery of the VNC
Certificate(s) to the Exchange Agent and which shall be in such form and
have such other provisions as CFB and VNC may reasonably specify not later
than five business days before the Closing Date and (ii) instructions for
use in effecting the surrender of the VNC Certificate(s) in exchange for a
certificate representing shares of CFB Common Stock and the cash to be paid
in lieu of any fractional share. Upon surrender of a shareholder's VNC
Certificate or VNC Certificates for cancellation to the Exchange Agent
together with such letter of transmittal, duly executed, the holder of such
VNC Certificate(s) shall be entitled to receive in exchange therefor (1) a
certificate representing the number of whole shares of CFB Common Stock and
(2) a check representing the amount of the cash to be paid in lieu of a
fractional share, if any, and unpaid dividends and distributions, if any,
which such holder has the right to receive in respect of the VNC
Certificate(s) surrendered, as provided in Section 2.2(c) below, and the VNC
Certificate(s) so surrendered shall forthwith be canceled. No interest will
be paid on the cash in lieu of fractional shares and unpaid dividends and
distributions, if any, payable to holders of VNC Certificates. In the event
of a transfer of ownership of VNC Common Stock which is not registered in
the transfer records of VNC, a CFB Certificate representing the proper
number of shares of CFB Common Stock, together with a check for the cash to
be paid in lieu of a fractional share, may be issued to such a transferee if
the VNC Certificate representing such VNC Common Stock is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer.
A-8
<PAGE>
(c) DISTRIBUTIONS AND VOTING. The Exchange Agent shall receive and
hold, for distribution without interest to the first record holder of the
certificate or certificates representing shares of VNC Common Stock, all
dividends and other distributions paid on shares of CFB Common Stock held in
the Exchange Agent's name as agent. Holders of unsurrendered VNC
Certificates shall not be entitled to vote after the Closing Date at any
meeting of CFB shareholders until they have exchanged their VNC
Certificates.
(d) TRANSFERS. After the Effective Time, there shall be no transfers
on the stock transfer books of VNC of the shares of VNC Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, VNC Certificates are presented to the Surviving Corporation,
they shall be canceled and exchanged for the shares of CFB Common Stock and
cash, in an amount as determined in accordance with the provisions of
Section 2.1(a) and this Section 2.2, deliverable in respect thereof pursuant
to this Agreement. VNC Certificates surrendered for exchange by any person
constituting an "affiliate" of VNC for purposes of Rule 145(c) under the
Securities Act of 1933, as amended (the "Securities Act"), shall not be
exchanged until CFB has received a written agreement from such person as
provided in Section 5.4.
(e) FRACTIONAL SHARES. No fractional shares of CFB Common Stock shall
be issued pursuant hereto. In lieu of the issuance of any fractional share,
cash adjustments will be paid to holders in respect of any fractional share
of CFB Common Stock that would otherwise be issuable, and the amount of such
cash adjustment shall be equal to such fractional proportion of the Trading
Value of a share of CFB Common Stock. For purposes of calculating fractional
shares, a holder of VNC Common Stock with more than one VNC Certificate
shall receive cash only for the fractional share remaining after aggregating
all of the holder's VNC Common Stock to be exchanged.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any CFB Common Stock)
that remains unclaimed by the shareholders of VNC for 12 months after the
Closing Date shall be paid to CFB. Any shareholders of VNC who have not
theretofore complied with this Article 2 shall thereafter look only to CFB
for payment of their shares of CFB Common Stock, and cash in an amount as
determined in accordance with the provisions of Section 2.1(a) and this
Section 2.2, without any interest thereon. Notwithstanding the foregoing,
none of CFB, the Exchange Agent nor any other person shall be liable to any
former holder of shares of VNC Common Stock for any amount properly
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(g) WITHHOLDING RIGHTS. CFB shall be entitled to deduct and withhold
from any cash consideration payable pursuant to this Agreement to any holder
of VNC common stock such amounts as CFB is required to deduct and withhold
with respect to the making of such payment under the Code, or any provision
of state, local or foreign tax law. To the extent that amounts are so
withheld by CFB, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the holder of the VNC Common Stock in
respect of which such deduction and withholding was made by VNC Common
Stock.
(h) LOST OR DESTROYED CERTIFICATES. In the event any VNC Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming such VNC Certificate to be lost, stolen
or destroyed and, if required by the Exchange Agent, the posting by such
person of a bond in such amount as CFB may direct as indemnity against any
claim that may be made against it with respect to such VNC Certificate, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed VNC
Certificate the shares of CFB Common Stock, and cash in an amount as
determined in accordance with the provisions of Section 2.1(a) and this
Section 2.2, deliverable in respect thereof pursuant to this Agreement.
A-9
<PAGE>
2.3 VNC STOCK OPTIONS.
(a) At the Effective Time, each option granted by VNC to purchase shares
of VNC Common Stock which is outstanding and unexercised immediately prior
thereto shall cease to represent a right to acquire shares of VNC Common
Stock and shall be converted automatically into an option to purchase shares
of CFB Common Stock in an amount and at an exercise price determined as
provided below (and otherwise subject to the terms of the VNC Stock Plans
and the agreements evidencing grants thereunder):
(i) The number of shares of CFB Common Stock to be subject to the
new option shall be equal to the product of the number of shares of VNC
Common Stock subject to the original option and the Exchange Rate,
provided that any fractional shares of VNC Common Stock resulting from
such multiplication shall be rounded to the nearest whole share; and
(ii) The exercise price per share of CFB Common Stock under the new
option shall be equal to the exercise price per share of VNC Common Stock
under the original option divided by the Exchange Ratio, provided that
such exercise price shall be rounded to the nearest whole cent.
(b) The adjustment provided herein with respect to any options which are
"incentive stock options" (as defined in Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code")), shall be and is intended to be
effected in a manner which is consistent with Section 424(a) of the Code.
The duration and other terms of the new option shall be the same as the
original option except that all references to VNC shall be deemed to be
references to CFB.
2.4 STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer books
of VNC shall be closed and there shall be no further registration of transfers
of shares of VNC Common Stock thereafter on the records of VNC. From and after
the Effective Time, the holders of certificates evidencing ownership of shares
of VNC Common Stock outstanding immediately prior to the Effective Time shall
cease to have any rights with respect to such shares except as otherwise
provided herein or by law. On or after the Effective Time, any certificates
presented to the Exchange Agent or CFB for any reason shall be converted into
shares of CFB Common Stock in accordance with this Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF VNC. In order to induce CFB to enter
into this Agreement, VNC represents and warrants to CFB, in all material
respects, as of the date of this Agreement (except as otherwise expressly
provided), as follows, except as disclosed on the attached EXHIBIT 3.1 (the "VNC
Disclosure Schedule"), and the schedules thereunder (which are numbered to
correspond to the representations set forth below):
(a) BANK ORGANIZATIONS. VNC's sole subsidiary is Valle de Oro Bank,
N.A. (the "Bank"). The Bank is a national banking association duly organized
and validly existing and in good standing under the laws of the United
States. VNC owns all of the shares of stock of the Bank, free and clear of
any liens or encumbrances. The authorized capital of the Bank consists of
10,000,000 shares of voting common stock, par value $0.0001 per share, of
which 1,325,231 shares of stock are presently issued and outstanding, all of
which have been validly issued, fully paid and non-assessable, and there are
no stock options or other commitments outstanding pursuant to which the Bank
is obligated to issue additional shares of such stock or purchase or redeem
any outstanding shares of such stock.
(b) VNC ORGANIZATION. VNC is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. As of
April 1, 1999, VNC had authorized capital
A-10
<PAGE>
stock consisting of 10,000,000 shares of common stock (the "VNC Common
Stock"), $0.0001 par value per share, of which 2,650,462 shares are issued
and outstanding and 422,280 are subject to options. All of the shares of VNC
Common Stock issued and outstanding have been validly issued, fully paid and
non-assessable. There are no options, warrants or other commitments
outstanding pursuant to which VNC is or could become obligated to issue
additional shares (the "VNC Options"). VNC has all requisite power,
authority, charters, licenses and franchises necessary or required by law to
carry on the business activity in which it is presently engaged, except
where the failure to have any such power, authority, charter, license or
franchise would not reasonably be expected to have a material adverse effect
on the business, operations, prospects or financial condition of VNC. VNC is
registered as a company under Section 1841 of Title 12, United States Code,
as amended (the "Bank Holding Company Act" or "BHCA"). VNC has no direct or
indirect subsidiaries except the Bank and is not a partner to any
partnership.
(c) ENFORCEABILITY. Subject only to the required approval of the
Merger by the shareholders of VNC, VNC has the corporate power and authority
to enter into this Agreement and the Option Agreement to carry out its
obligations hereunder and thereunder. The execution, delivery and
performance of this Agreement and the Option Agreement by VNC and the
consummation of the transactions contemplated hereby have been duly
authorized by the Board of Directors of VNC. Subject to approval by the VNC
shareholders and of government agencies and other governing bodies having
regulatory authority over VNC or the Bank, as may be required by statute or
regulation, this Agreement and the Option Agreement constitute valid and
binding obligations of VNC, enforceable against it in accordance with their
respective terms.
(d) REPORTS. VNC and the Bank have filed all reports, registrations,
applications and statements, together with any required amendments thereto,
that they were required to file with (i) the Securities and Exchange
Commission ("SEC"), including, but not limited to, a registration statement
and a proxy statement on Form S-4, (ii) the Board of Governors of the
Federal Reserve (the "Federal Reserve Board"), (iii) the Federal Deposit
Insurance Corporation (the "FDIC"), (iv) the Comptroller of the Currency
("Comptroller") and (v) any applicable state securities or banking
authorities. All such reports and statements filed with any such regulatory
body or authority are collectively referred to herein as the "VNC Reports."
As of their respective dates, the VNC Reports complied in all material
respects with all the rules and regulations promulgated by the SEC, the
Federal Reserve Board, the FDIC, the Comptroller and any applicable state
securities or banking authorities, as the case may be, and did not contain
any untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
VNC has timely filed with the SEC all reports, statements and forms required
to be filed pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
(e) LIMITATION OF BANK'S POWERS. There are no proceedings or actions
pending by any federal or state regulatory body having authority over the
Bank to limit or impair any of its powers, rights or privileges, to
terminate deposit insurance or to dissolve the Bank. The Bank has not
received any written protest, complaint or criticism in the last three years
by the public or any regulatory agency relating to the Bank's performance
under the Community Reinvestment Act or any other consumer protection
statute or regulation.
(f) CORPORATE RECORDS. VNC's Certificate of Incorporation and Bylaws,
and the Bank's Articles of Association and Bylaws are each unchanged from
the form in which they were delivered to CFB on or before the date of this
Agreement. The minute books of VNC and the Bank contain reasonably complete
and accurate records of all meetings and corporate actions of each of their
respective shareholders and Boards of Directors (including committees of the
Boards of Directors).
A-11
<PAGE>
(g) INSURED STATUS OF BANK. The Bank is an insured bank under the
provisions of Chapter 16 of Title 12, United States Code, known as the
"Federal Deposit Insurance Act," and no act or default on the part of the
Bank exists that could reasonably be expected to have a material adverse
effect on its status as an insured bank thereunder. The Bank possesses and
is in full compliance with all licenses, franchises, permits and other
governmental authorizations that are legally required to hold its properties
or conduct its business, except where the failure to possess any such
licenses, franchises, permits or other governmental authorizations would not
reasonably be expected to have a material adverse effect on VNC or the Bank.
(h) NO DEFAULT OR CREATION OF LIENS. Neither the execution and
delivery of this Agreement, nor the consummation of the Merger will conflict
with, result in the breach of, constitute a default under or accelerate the
performance provided by the terms of any judgment, order or decree of any
court or other governmental agency to which VNC or the Bank may be subject,
any of the "Material Contracts," as hereinafter defined, or the Certificate
of Incorporation, Articles of Association and Bylaws of VNC or the Bank, or
constitute an event that, with the lapse of time or action by a third party,
would result in a default under any of the foregoing or result in the
creation of any lien, charge or encumbrance upon the VNC Common Stock or the
Bank's capital stock.
(i) FINANCIAL STATEMENTS. The following financial statements of the
Bank and VNC (each, a "Financial Statement") have been delivered to CFB and
are incorporated by reference herein:
(i) The Consolidated Reports of Condition and Income of the Bank as
of December 31 for each of the years 1996, 1997 and 1998; and
(ii) The audited financial statements of the Bank, prepared in the
ordinary course of business for each of the years ended December 31,
1996, 1997 and 1998.
Each of the aforementioned financial statements is true and correct in
all material respects, and together they fairly present, in accordance with
generally accepted accounting principles (applied on a consistent basis
except as disclosed in the footnotes thereto and except that the unaudited
financial statements are subject to any adjustments which might be required
as a result of an examination by independent accountants) the financial
position and results of operation of the Bank as of the dates and for the
periods therein set forth. To the knowledge of VNC, such financial
statements did not, as of the date of the preparation thereof, include any
material assets or omit to state any material liability, absolute or
contingent, the inclusion or omission of which renders such financial
statements, in light of the circumstances in which they were made,
misleading in any material respect.
(j) NO MATERIAL ADVERSE CHANGE. Since December 31, 1998, there has
been no material adverse change in the financial condition, results of
operation or business of the Bank, taken as a whole (other than changes in
banking laws or regulations, changes in generally accepted accounting
principles or interpretations thereof that affect the banking industry
generally, or changes in general economic conditions that affect the banking
industry on a nationwide basis, including changes in the general level of
interest rates).
(k) FIDELITY INSURANCE. The Bank is insured under a Banker's Blanket
Bond which is in full force and effect and the Bank has not received notice
of cancellation or non-renewal thereof, or filed any claim thereunder during
the past five years. There are no unresolved claims.
(l) EMPLOYMENT CONTRACTS. Neither VNC nor the Bank is a party to or
bound by any written or oral (i) employment or consulting contract that is
not terminable without penalty by VNC or the Bank on 30 days' or less notice
or (ii) any collective bargaining agreement covering employees. VNC and the
Bank are in material compliance with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and are not
A-12
<PAGE>
engaged in any unfair labor practice. There is no unfair labor practice
complaint against VNC or the Bank pending before the National Labor
Relations Board. There is no labor strike, dispute, slowdown, representation
campaign or work stoppage actually pending or threatened against or
affecting VNC or the Bank. No grievance or arbitration proceeding arising
out of or under collective bargaining agreements is pending and no claim
therefor has been asserted against VNC or the Bank. Neither VNC nor the Bank
is experiencing any material work stoppage.
(m) EMPLOYEE BENEFITS. Section 3.1(m) of the VNC Disclosure Schedule
lists every employee benefit plan within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), which
VNC or the Bank maintain or to which VNC or the Bank contribute on behalf of
current or former employees of VNC or the Bank. All of the plans and
programs listed in Section 3.1(m) of the VNC Disclosure Schedule
(hereinafter referred to as the "Plans") are in compliance in all material
respects with all applicable requirements of ERISA and all other applicable
federal and state laws. Each of the Plans that is a defined benefit pension
plan has assets with an aggregate value that exceeds the present value of
its liability for accrued benefits, all as determined on a termination
basis, using appropriate interest and discount rates. None of the Plans has
engaged in a "prohibited transaction," within the meaning of Section 4975 of
the Code or Section 406 of ERISA, none of the Plans which is subject to
Title IV of ERISA or any trust created thereunder has been terminated nor
have there been any "reportable events" as that term is defined in Section
4043 of ERISA with respect to any Plan and none of the Plans has incurred an
accumulated funding deficiency within the meaning of Section 412(a) of the
Code.
VNC has delivered to CFB copies of (i) each Plan or if no plan document
exists, a written summary of the material terms thereof, (ii) current
summary plan descriptions of each Plan for which they are required, (iii)
each trust agreement, insurance policy or other instrument relating to the
funding of any Plan, (iv) the most recent Annual Reports (Form 5500 series)
and accompanying schedules filed with the IRS or United States Department of
Labor with respect to each Plan for which they are required, (v) the most
recent determination letter issued by the IRS with respect to each Plan that
is intended to qualify under Section 401 of the Code, and (vi) the most
recent available financial statements for each Plan that has assets.
(n) LITIGATION. No claims have been asserted by written notice to VNC
or the Bank and no relief has been sought against VNC, the Bank, or any of
the Plans in any pending litigation or governmental proceedings or
otherwise. Neither VNC nor the Bank is a party to any unsatisfied order,
judgment or decree which is adverse to VNC or the Bank, and neither VNC nor
the Bank nor any Plan (i) is the subject of any cease and desist order, or
other formal or informal enforcement action by any regulatory authority; or
(ii) has made any commitment to or entered into any agreement with any
regulatory authority that restricts or adversely affects its operations or
financial condition. To the knowledge of VNC, there do not exist facts that
would reasonably be expected to give rise to a material claim against VNC,
the Bank, or any Plan after the Closing Date.
(o) TAXES. VNC and the Bank have filed all federal and state income
tax returns and all other returns with respect to any taxes, either federal,
state or local, which it is required to have filed; said returns have been
correctly and accurately prepared; all taxes reflected thereon have been
paid or adequately accrued or reserved for; no notice of any deficiency,
assessments or additions to tax have been received by VNC or the Bank;
neither VNC nor the Bank has waived any statute of limitations with respect
to any taxes reflected on said returns; and deferred taxes have been
properly reflected on the Financial Statements. There are no other taxes of
any kind or character for which VNC or the Bank is or may be liable which
are now past due, delinquent and/or unpaid. Neither VNC nor the Bank has
made any payments, or been a party to an agreement that under any
circumstances could obligate it to make payments based upon the consummation
of the transactions contemplated hereby constituting a change of the nature
A-13
<PAGE>
described in Section 280G of the Code, that are or will not be deductible
because of Section 280G of the Code.
(p) TITLE TO PROPERTY. Each of VNC and the Bank have good and
marketable title to all material assets and properties, whether real or
personal, that it purports to own, including without limitation all real and
personal assets and properties reflected on the most recent Financial
Statement, or acquired subsequent thereto (except to the extent that such
assets and properties have been disposed of for fair value in the ordinary
course of business since such date) subject to no liens, mortgages, security
interests, encumbrances or charges of any kind, except (i) as noted in said
Financial Statement; (ii) statutory liens for taxes not yet delinquent;
(iii) security interests granted to secure deposits of funds by federal,
state or other governmental agencies; (iv) minor defects and irregularities
in title and encumbrances that do not materially impair the use thereof for
the purposes for which they are held as of the date hereof; and (v) such
liens, mortgages, security interests, encumbrances and charges that are not
in the aggregate material to the assets and properties of VNC or the Bank,
as the case may be.
(q) INSURANCE POLICIES. The policies listed on the Disclosure
Schedule, which constitute all insurance policies of VNC and the Bank as of
the date of this Agreement. Each such policy is in full force and effect,
with all premiums due thereon on or prior to the date of this Agreement
having been paid as and when due.
(r) BANK PROPERTY. All buildings, structures, fixtures, and
appurtenances comprising the premises of VNC and the Bank (the "Property")
are in good condition, subject to ordinary wear and tear. Except for the
facts set forth in the Assessment (as hereinafter defined), to the best
knowledge of VNC, VNC and the Bank are, and have been at all times, in
substantial compliance with all applicable Environmental Laws (as defined
below), and have not engaged in any activity resulting in a material
violation of any applicable Environmental Law. There are no underground or
above ground storage tanks (whether or not currently in use) located on or
under the Property, and no underground tank previously located on the
Property has been removed therefrom. To the best knowledge of VNC, there is
no legal, administrative, or other proceeding, claim, investigation (with
respect to which VNC is aware), inquiry, order, hearing or action of any
nature seeking to impose, or that would reasonably be expected to result in
the imposition, on VNC or the Bank of any liability arising from any
violation of or obligation under any local, state or federal environmental
statute, regulation or ordinance including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("Environmental Laws"), pending or, to the knowledge of
VNC, threatened against VNC or the Bank; to the knowledge of VNC and except
for the facts set forth in the Assessment, there is no reasonable basis for
any such proceeding, claim, investigation, inquiry, order, hearing or
action; and neither VNC nor the Bank is subject to any agreement, order,
judgment, or decree by or with court, governmental authority or third party
imposing any such environmental liability. No claims have been made by any
governmental authority or third party against VNC or the Bank relating to
damage, contribution, cost recovery, compensation, loss or inquiry resulting
from any violation of or obligation under any Environmental Law.
(s) CONDUCT OF BUSINESS. Except for the facts set forth in the
Assessment, VNC and the Bank are in compliance in all material respects with
all laws, regulations and orders (including zoning ordinances) applicable to
them and to the conduct of their business, including without limitation, all
statutes, rules and regulations pertaining to the conduct of the Bank's
banking activities (including the exercise of fiduciary and trust powers),
except where the failure to comply would not reasonably be expected to have
a material adverse effect on VNC or the Bank.
(t) INTERNAL CONTROLS AND RECORDS. VNC and the Bank maintain books of
account which accurately and validly reflect, in all material respects, all
loans, mortgages, collateral and other
A-14
<PAGE>
business transactions and maintain accounting controls sufficient to ensure
that all such transactions are (a) in all material respects, executed in
accordance with its management's general or specific authorization, and (b)
recorded in conformity with generally accepted accounting principles. There
is no amendment to any lending agreement, collateral document or security
which is not fully reflected in the books and records of VNC and the Bank.
(u) LOAN ALLOWANCE AND DOCUMENTATION. The Bank's consolidated
allowance for losses on loans included in the Financial Statements as of
March 31, 1999 was $1,831,000, representing 1.17% of its total consolidated
loans held in portfolio. The amount of such allowance for losses on loans
was adequate to absorb reasonably expectable losses in the loan portfolio of
the Bank. To the knowledge of VNC, there are no facts which would cause it
to increase the level of such allowance for losses on loans. After due
inquiry as to potential losses, and based upon past loan experience, the
executive officers of the Bank know of no facts which would indicate that
the portion of the loan portfolio of the Bank as of March 31, 1999 in excess
of such reserves is not fully collectible in accordance with the terms of
the documentation relating to the loans in such portfolio. The documentation
relating to loans made by the Bank and relating to all security interests,
mortgages and other liens with respect to all collateral for such loans,
taken as a whole, is adequate for the enforcement of the material terms of
such loans and of the related security interests, mortgages and other liens.
The terms of such loans and of the related security interests, mortgages and
other liens comply in all material respects with all applicable laws, rules
and regulations (including laws, rules and regulations relating to the
extension of credit). There are no loans, leases, other extensions of credit
or commitments to extend credit of the Bank that have been or should in
accordance with generally acceptable accounting principles, have been
classified by the Bank as nonaccrual, as restructured, as 90 days past due,
as still accruing and doubtful of collection or any comparable
classification. To the best knowledge of VNC, VNC has provided to CFB true,
correct and complete in all material respects such written information
concerning the loan portfolio of the Bank as CFB has requested.
(v) LEASES AND CONTRACTS. Neither VNC nor the Bank is a party to or
bound by any written or oral (i) lease or license with respect to any
property, real or personal, requiring annual expenditures in excess of
$100,000, whether as a lessor, lessee, licensor or licensee; (ii) contract
or commitment for capital expenditures in excess of $50,000 for any one
project or $100,000 in the aggregate; (iii) contract or commitment for total
expenses in excess of $100,000 made in the ordinary course of business for
the purchase of materials, supplies, or for the performance of services for
a period of more than 180 days from the date of this Agreement; (iv)
contract or option for the purchase or sale of any real or personal property
other than in the ordinary course of business; or (v) any other contract,
agreement or understanding which is not terminable by VNC or the Bank
without additional payment or penalty within 60 days and obligates VNC or
the Bank for payments or other consideration with a value in excess of
$50,000 (all such agreements, contracts, and commitments collectively are
herein referred to as the "Material Contracts"). Each of the Bank and VNC
have performed in all material respects all obligations required to be
performed by them to date, and are not in material default under, and no
event has occurred which, with the lapse of time or action by a third party,
could result in a material default under any of the Material Contracts to
which the Bank or VNC is a party or by which the Bank or VNC is bound. Each
of the Material Contracts is a valid and legally binding obligation of VNC
or the Bank and the other party or parties thereto, subject to (i) all
applicable bankruptcy, insolvency, moratorium or other similar laws
affecting the enforcement of creditors' rights generally, and (ii) the
application of equitable principles if equitable remedies are sought.
(w) SHAREHOLDER LISTS. VNC has furnished to CFB a shareholder list as
of the date set forth therein and other documentation that together
therewith (i) sets forth the record name and
A-15
<PAGE>
number of shares held by each holder of common stock of VNC and (ii)
identifies each shareholder who is an officer or director of the Bank or
VNC.
(x) BANK PRINCIPALS. No director or executive officer of VNC or the
Bank, nor any holder of ten percent or more of the outstanding capital stock
of VNC, nor any affiliate of such person as that term is defined under 12
USC 371(c) ("Bank Principal") (i) is or has during the period subsequent to
December 31, 1996, been a party (other than as a depositor) to any
transaction with the Bank, whether as a borrower or otherwise, which (a) was
made other than in the ordinary course of business; (b) was made on other
than substantially the same terms, including interest rate and collateral,
as those prevailing at the time for comparable transactions for other
persons; or (c) involves more than the normal risk of collectibility or
presents other unfavorable features; or (ii) is a party to any loan or loan
commitment, whether written or oral, from the Bank involving an amount in
excess of $10,000. No Bank Principal holds any position with any depository
organization other than with the Bank or with VNC. For the purposes of this
provision, the term "depository organization" means a commercial bank
(including a private bank), a savings bank, a trust company, a savings and
loan association, a homestead association, a cooperative bank, an industrial
bank, a credit union, or a depository organization holding company.
(y) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by VNC or the Bank for inclusion or incorporation by reference in
the "Registration Statement" (as hereinafter defined) or any amendment or
supplement thereto will, at the date of mailing to the VNC stockholders and
at the time of the meeting of stockholders of VNC to be held in connection
with the Merger, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they are
made, not misleading.
(z) AGREEMENTS WITH BANK REGULATORS. Neither VNC nor the Bank: (i) is
a party to any written agreement or memorandum of understanding with; (ii)
is subject to any order or directive by; (iii) is subject to any
extraordinary supervisory letter from; or (iv) has adopted any Board
resolutions at the request of, federal or state governmental entities
charged with the supervision or regulation of banks or bank holding
companies or engaged in the insurance of bank deposits ("Bank Regulators"),
nor has VNC been advised that any Bank Regulator is contemplating issuing or
requesting any such order, directive, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter, board
resolutions or similar undertaking.
(aa) YEAR 2000. To the best knowledge of VNC, all "mission critical"
systems of the Bank and VNC are "year 2000 compliant," in accordance with
applicable FFIEC Interagency Statements and related releases.
3.2 REPRESENTATIONS AND WARRANTIES OF CFB. In order to induce VNC to enter
into this Agreement, CFB represents and warrants to VNC, in all material
respects, as of the date of this Agreement (except as otherwise expressly
provided) as follows, except as disclosed on the attached EXHIBIT 3.2 (the "CFB
Disclosure Schedule"), and the schedules thereunder (which are numbered to
correspond to the representations set forth below):
(a) CFB ORGANIZATION. CFB is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, with
authorized capital stock consisting of 80,000,000 shares of common stock,
par value of $.01 per share, of which 47,128,274 shares were issued and
outstanding as of March 31, 1999 and 2,000,000 shares of preferred stock, no
shares of which were issued and outstanding as of March 31, 1999. CFB has
all requisite power, authority, charters, licenses and franchises necessary
or required by law to carry on the business activity in which it is
presently engaged, except where the failure to have any such power,
authority, charter, license or franchise would not reasonably be expected to
have a material adverse effect on CFB. CFB is registered as a company under
the Bank Holding Company Act. The capital stock of CFB
A-16
<PAGE>
which is presently issued and outstanding, and the shares of CFB Common
Stock to be issued pursuant to this Agreement, have been duly authorized and
have been (or will be) validly issued, fully paid and non-assessable.
(b) REPORTS. CFB and its subsidiaries have filed all reports,
registrations, applications and statements, together with any required
amendments thereto, that they were required to file with (i) the SEC,
including, but not limited to, Forms 10-K, Forms 10-Q and proxy statements,
(ii) the Federal Reserve Board, (iii) the FDIC, (iv) the Comptroller and (v)
any applicable state securities or banking authorities. All such reports and
statements filed with any such regulatory body or authority are collectively
referred to herein as the "CFB Reports." As of their respective dates, the
CFB Reports complied in all material respects with all the rules and
regulations promulgated by the SEC, the Federal Reserve Board, the FDIC, the
Comptroller and any applicable state securities or banking authorities, as
the case may be, and did not contain any untrue statement of material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading. CFB has timely filed with the SEC all
reports, statements and forms required to be filed pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
(c) ENFORCEABILITY. The execution, delivery and performance of this
Agreement and the Option Agreement by CFB and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by
the Board of Directors of CFB. Subject to approval by the government
agencies and other governing bodies having regulatory authority over CFB as
may be required by statute or regulation, this Agreement and the Option
Agreement constitute valid and binding obligations of CFB, enforceable
against it in accordance with their respective terms. Neither this Agreement
nor the Option Agreement requires the approval of CFB shareholders.
(d) LIMITATION OF SUBSIDIARY BANKS' POWERS. There are no proceedings
or actions pending by any federal or state regulatory body having authority
over any insured depository subsidiary of CFB to limit or impair any of the
its powers, rights or privileges, to terminate deposit insurance or to
dissolve such subsidiary bank. None of CFB's subsidiary banks has received
any material written protest, complaint or criticism in the last three years
by the public or any regulatory agency relating to the bank's performance
under the Community Reinvestment Act or any other consumer protection
statute or regulation.
(e) NO DEFAULT OR CREATION OF LIENS. Neither the execution and
delivery of this Agreement nor the consummation of the transaction
contemplated hereby will conflict with, result in the breach of, constitute
a default under or accelerate the performance provided by the terms of any
judgment, order or decree of any court or other governmental agency to which
CFB or any of its subsidiaries may be subject, or any contract, agreement or
instrument to which CFB or any of its subsidiaries is a party or by which
CFB or any of its subsidiaries is bound or committed, or the Certificate of
Incorporation and Bylaws of CFB, or constitute an event that, with the lapse
of time or action by a third party, could result in a default under any of
the foregoing or result in the creation of any lien, charge or encumbrance
upon the CFB Common Stock.
(f) FINANCIAL STATEMENTS. The following financial statements of CFB
have been delivered to VNC and are incorporated by reference herein:
(i) The Annual Reports of CFB on Form 10K as of December 31 for each
of the years 1996, 1997 and 1998; and
(ii) The audited consolidated financial statements of CFB, prepared
in the ordinary course of business for each of the years ended December
31, 1996, 1997 and 1998.
Each of the aforementioned financial statements is true and correct in
all material respects, and together they fairly present, in accordance with
generally accepted accounting principles
A-17
<PAGE>
(applied on a consistent basis except as disclosed in the footnotes thereto
and except that the unaudited financial statements are subject to any
adjustments which might be required as a result of an examination by
independent accountants) the financial position and results of operation of
CFB as of the dates and for the periods therein set forth. To the knowledge
of CFB, such financial statements did not, as of the date of the preparation
thereof, include any material assets or omit to state any material
liability, absolute or contingent, the inclusion or omission of which
renders such financial statements, in light of the circumstances in which
they were made, misleading in any material respect.
(g) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by CFB or its subsidiaries for inclusion or incorporation by
reference in the Registration Statement and any amendment or supplement
thereto will, at the date of mailing to VNC stockholders and at the time of
the meeting of stockholders of VNC to be held in connection with the Merger,
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein not misleading.
(h) LITIGATION. No claims have been asserted by written notice to CFB
or any subsidiary and no relief has been sought against CFB or any
subsidiary in any pending litigation or governmental proceedings or
otherwise. Neither CFB nor any subsidiary is a party to any unsatisfied
order, judgment or decree which is adverse to CFB or such subsidiary, and
neither CFB nor any subsidiary (i) is the subject of any cease and desist
order, or other formal or informal enforcement action by any regulatory
authority; or (ii) has made any commitment to or entered into any agreement
with any regulatory authority that restricts or adversely affects its
operations or financial condition. To the knowledge of CFB, there do not
exist facts that would reasonably be expected to give rise to a material
claim against CFB or any subsidiary after the Closing Date.
(i) LOAN ALLOWANCE AND DOCUMENTATION. The consolidated allowance for
losses on loans by CFB's subsidiary banks included in the CFB financial
statements as of March 31, 1999 was $51,422,000, representing 1.55% of its
total consolidated loans held in portfolio. The amount of such allowance for
losses on loans was adequate to absorb reasonably expectable losses in the
loan portfolio. To the knowledge of CFB, there are no facts which would
cause it to increase the level of such allowance for losses on loans. After
due inquiry as to potential losses, and based on past loan loss experience,
the executive officers of CFB know of no facts which would indicate that the
portion of the loss portfolio of the subsidiary banks as of March 31, 1999
in excess of such reserves is not fully collectible in accordance with the
terms of the documentation relating to the loans in such portfolio. The
documentation relating to loans made by the subsidiary bank and relating to
all security interests, mortgages and other liens with respect to all
collateral for such loans, taken as a whole, is adequate for the enforcement
of the material terms of such loans and of the related security interests,
mortgages and other liens. The terms of such loans and of the related
security interests, mortgages and other liens comply in all material
respects with all applicable laws, rules and regulations (including laws,
rules and regulations relating to the extension of credit). There are no
loans, leases, other extensions of credit or commitments to extend credit of
the subsidiary banks that have been or should in accordance with generally
acceptable accounting principles, have been classified by the subsidiary
banks as nonaccrual, as restructured, as 90 days past due, as still accruing
and doubtful of collection or any comparable classification. To the best
knowledge of CFB, CFB has provided to VNC true, correct and complete in all
material respects such written information concerning the loan portfolio of
the subsidiary banks as VNC has requested.
(j) NO PLAN TO TRANSFER ASSETS. CFB has no plan or intention to sell
or otherwise dispose of any of the assets of VNC to be acquired in the
Merger, except for dispositions in the ordinary course of business or
transfers to controlled subsidiaries as described in Section 368(a)(2)(C) of
the Code.
A-18
<PAGE>
ARTICLE 4
COVENANTS OF VNC AND CFB
4.1 COVENANTS OF VNC. During the period from the date of this Agreement
and continuing until the Effective Time, VNC agrees as follows:
(a) ORDINARY COURSE. Except as otherwise required under this Agreement
or by CFB, VNC and the Bank shall carry on their respective businesses in
the usual, regular and ordinary course in substantially the same manner as
heretofore conducted and use all reasonable efforts to preserve intact their
present business organizations, maintain their rights and franchises and
preserve their relationships with customers, suppliers and others having
business dealings with them to the end that their goodwill and ongoing
businesses shall not be impaired in any material respect. VNC shall not, nor
shall it permit the Bank to (i) enter into any new material line of
business, (ii) increase or decrease the current number of the directors of
VNC or the Bank (iii) change its or the Bank lending, investment, liability
management or other material banking or financial policies in any respect
that is material to such party; or (iv) incur or commit to any capital
expenditures (or any obligations or liabilities in connection therewith)
other than capital expenditures (and obligations or liabilities in
connection therewith) incurred or committed to in accordance with the
current capital budget of VNC or the Bank, a copy of which has been provided
to CFB as of the date hereof.
(b) SHAREHOLDER MEETING. VNC will cause to be duly called, and will
cause to be held not later than 45 days from the effective date of the
Registration Statement (defined below), a meeting of its shareholders and
will direct that this Agreement be submitted to a vote at such meeting. VNC
will (i) cause proper notice of such meeting to be given to its shareholders
in compliance with Delaware Law and other applicable laws and regulations;
(ii) subject to the fiduciary responsibilities of its Directors, recommend
by the affirmative vote of a majority of the Board of Directors a vote in
favor of approval of this Agreement; and (iii) subject to the fiduciary
responsibilities of its Directors, use its best efforts to solicit from its
shareholders proxies in favor thereof.
(c) CONFIDENTIAL INFORMATION. VNC will hold in confidence all
documents and nonpublic information concerning CFB and its subsidiaries
furnished in connection with the Merger and will not release or disclose
such information to any other person, except as required by law and except
to VNC's outside professional advisers in connection with this Agreement,
with the same undertaking from such professional advisers. If the Merger
contemplated by this Agreement shall not be consummated, such confidence
shall be maintained and such information shall not be used in competition
with CFB (except to the extent that such information can be shown to be
previously known to VNC, in the public domain, or later acquired by VNC from
other legitimate sources) and, upon request, all such documents, any copies
thereof and extracts therefrom shall immediately thereafter be returned to
CFB.
(d) BENEFIT PLANS. VNC and the Bank shall terminate each of the
agreements and arrangements with directors and/or officers identified on
EXHIBIT 4.1(D), attached hereto, on a basis mutually agreeable to the
parties to the respective agreement or arrangement, and shall fully expense
or accrue as of the Determination Date Financial Statements, any resulting
financial obligation or liability incurred. VNC and the Bank shall, to the
extent legally permissible, take all action necessary or required (i) to
terminate or amend, if requested by CFB, all qualified pension and welfare
benefit plans and all non-qualified benefit plans and compensation
arrangements as of the Effective Time; and (ii) to submit application to the
Internal Revenue Service for a favorable determination letter for each of
the Plans which is subject to the qualification requirements of Section
401(a) of the Code prior to the Effective Time.
A-19
<PAGE>
Except as otherwise required pursuant to this Section 4.1(d), VNC agrees
as to itself and the Bank that it will not, without the prior written
consent of CFB, (i) enter into, adopt, amend (except as may be required by
law) or terminate any Plan, as the case may be, or any other employee
benefit plan or any agreement, arrangement, plan or policy between VNC or
the Bank and one or more of its directors or officers; provided, however,
that VNC or the Bank may amend any of the Plans to reduce or eliminate a
requirement of mandatory periodic contributions (provided that if any of the
Plans do not have assets with an aggregate value that exceeds the present
value of its liability for accrued benefits, all as determined on a
termination basis, then VNC shall accrue on its Determination Date Financial
Statements the amount by which any of the Plans are underfunded); (ii)
except as provided in Section 4.1(i)(xix), below, increase in any manner the
compensation of any director, officer, or employee, or pay any benefit not
required by any plan and arrangement as in effect as of the date hereof
(including, without limitation, the granting of stock options, stock
appreciation rights, restricted stock, restricted stock units or performance
units or shares) or enter into any contract, agreement, commitment or
arrangement to do any of the foregoing.
(e) INSURANCE. VNC and the Bank shall maintain the insurance coverage
(or coverage of a like kind and amount) referenced in Section 3.1(q) through
the Effective Time.
(f) POOLING RESTRICTIONS. VNC and the Bank shall take any and all
action reasonably requested by CFB which are necessary, in the opinion of
CFB's accountants, to qualify the Merger as a "pooling of interests" for
accounting purposes. From and after the date of this Agreement, neither VNC
nor the Bank shall take any action which, with respect to VNC, would
disqualify the Merger as a "pooling of interests" for accounting purposes.
(g) FINANCIAL STATEMENTS. VNC shall submit to CFB all quarterly and
management prepared financial statements and any VNC Reports required for
any periods ending at least 30 days before
the Closing Date.
(h) ADDITIONAL COVENANTS OF VNC. From the date of this Agreement to
the Closing Date or the earlier termination of this Agreement, VNC, except
with the prior written consent of CFB, or as specifically required under
this Agreement, shall not, nor shall it allow the Bank to:
(i) Sell or commit to issue or sell any shares of capital stock of
VNC or the Bank, securities convertible into or exchangeable for capital
stock of VNC or the Bank, warrants, options or other rights to acquire
such stock, or enter into any agreement with respect to the foregoing
other than issuance by the Bank of capital stock to VNC except (A) the
issuance of capital stock in connection with the exercise of outstanding
VNC options, in accordance with their terms; (B) the issuance of capital
stock of VNC in exchange for capital stock of the Bank, pursuant to the
terms of the Consolidation Agreement dated as of November 18, 1998, as
amended December 16, 1998, by and between VNC, the Bank and the interim
bank subsidiary of VNC; and (C) stock dividends declared and paid by VNC
in accordance with prior practice;
(ii) Redeem, purchase or otherwise acquire (except for trust account
shares) directly or indirectly, any shares of capital stock of VNC or the
Bank or any securities convertible or exercisable for any shares of
capital stock of VNC or the Bank;
(iii) Split, combine or reclassify any of capital stock of VNC or the
Bank or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of, or in substitution for shares of
capital stock of VNC or the Bank;
(iv) Borrow, assume, guarantee, endorse or otherwise as an
accommodation become responsible for the obligations of any other
individual, corporation or other entity, in any material amount;
A-20
<PAGE>
(v) Other than in the ordinary course of business, discharge or
satisfy any material lien or encumbrance on the properties or assets of
the Bank or pay any material liability;
(vi) Mortgage, pledge or subject to any lien or other encumbrance
any of its assets, except (A) in the ordinary course of business, (B)
liens and encumbrances for current property taxes not yet due and
payable, and (C) liens and encumbrances which do not materially affect
the value or interfere with the current use or ability to convey the
property subject thereto or affected thereby;
(vii) Sell, assign or transfer any tangible or intangible assets with
a book value greater than $25,000, except in the ordinary course of
business;
(viii) Enter into any individual employment, agency or other contract
or arrangement for the performance of personal services for an amount in
excess of $50,000, or as necessary to accommodate replacement;
(ix) Amend VNC's Certificate of Incorporation, Bylaws or other
governing documents;
(x) Fail to maintain a reserve for loss and costs associated with
those litigation matters reflected in Section 3.1(n) of the VNC
Disclosure Schedule to the extent required by generally accepted
accounting principles;
(xi) Cancel any material debt or claim or waive any right of
material value, except in the ordinary course of business;
(xii) Repurchase or enter into any agreement to repurchase all or any
portion of any loan previously participated to any other financial
institution other than loans repurchased in compliance with all
applicable laws and regulations;
(xiii) Originate any loan which is thereafter participated to another
financial institution providing for payment upon default on any basis
other than pro rata;
(xiv) Unless any of the Bank is under a legal obligation to do so,
make or commit to make any further advances on any loan which is either
in default or classified, whether such classification is a result of a
federal or state bank regulatory examination or internal classification
of substandard or lower by the Bank's officers or directors;
(xv) (A) make, or agree to make, any secured loan for an amount in
excess of $500,000 to any one borrower, unless said loan is made pursuant
to a properly documented and legally enforceable commitment of the Bank
to the borrower made prior to the date of this Agreement; (B) make, or
agree to make any additional loan or advance which, when combined with
existing loans, would result in a secured loan in excess of $500,000 to
any one borrower, unless said loan or advance is made pursuant to a
properly documented and legally enforceable commitment of the Bank to the
Borrower made prior to the date of this Agreement; (C) make, or agree to
make, any unsecured loan for an amount in excess of $100,000 to any one
borrower, unless said loan is made pursuant to a properly documented and
legally enforceable commitment of the Bank to the borrower made prior to
the date of this Agreement; (D) make, or agree to make any additional
loan or advance which, when combined with existing loans, would result in
an unsecured loan in excess of $100,000 to any one borrower, unless said
loan or advance is made pursuant to a properly documented and legally
enforceable commitment of the Bank to the Borrower made prior to the date
of this Agreement; (E) make, or agree to make any new loan or advance on
any existing loan, except in conformity with the Bank's current loan
policies; or (F) make any change with respect to the terms of any
existing loan, except in the ordinary course of business (the provisions
of parts A and C of this section shall not apply to renewals of existing
loans, advances under
A-21
<PAGE>
existing loans or increases to existing loans for an amount below the
applicable limit set forth in parts A and C);
(xvi) Make or agree to make any loan to any Bank Principal or any
person, corporation or entity in violation of any state or federal law or
regulation;
(xvii) Incur any obligation or liability with respect to capital
expenditures which is not provided for in the current capital budget and
which exceeds $10,000 for any single matter or $50,000 in the aggregate;
(xviii) Fail to timely pay and discharge all federal and state taxes
and other accounts payable for which it is liable, provided, that VNC or
the Bank may deposit an amount equal to any such taxes, in lieu of the
payment thereof, into a reserve account, determined consistently with
prior practices, from which such taxes will be paid when and to the
extent they are found to be properly due and payable;
(xix) Except for compensation paid to commissioned employees pursuant
to current arrangements, and as otherwise provided herein, pay or commit
to pay salary or other compensation to any of the officers, directors or
employees of VNC or the Bank at a rate which exceeds 110% of aggregate
compensation at December 31, 1998; provided, however, that VNC and the
Bank may adopt and implement reasonable bonus or special compensation
plans for the retention of employees through the Effective Time, the
expense of which shall be accrued on the Determination Date Financial
Statements;
(xx) Except as otherwise required pursuant to Section 4.1(d), enter
into, adopt, amend (except as may be required by law), terminate or make
or grant any increase above current funding levels in any of the Plans
(other than normal premium increases on current health care insurance);
(xxi) Purchase or sell any bonds or other investment securities
without prior written consent of CFB or make or agree to make any
investment in violation of any federal law or regulation, except that the
Bank may purchase U.S. Treasury or Agencies securities with maturity
dates of 36 months or less;
(xxii) Fail to charge and pay interest rates on loans and deposits,
respectively, not generally consistent with any Bank's prior practices
and currently prevailing conditions in the Bank's marketplace;
(xxiii) Fail to use its reasonable best efforts to comply with any
law, rule, regulation or order applicable to the Bank and/or VNC if such
failure would have a material adverse effect upon VNC;
(xxiv) With respect to the Bank, fail to make all appropriate and
required transfers to the Bank's loan loss reserves based upon existing
policies of the Bank or at the request of any regulatory agency or, in
any event, fail to maintain a loan loss allowance of at least equal to
1.17% of total loans;
(xxv) Change any accounting methods, practices or procedures with
respect to the accumulation and presentation of financial information,
except as directed by applicable law or regulation or to conform with
accounting standards;
(xxvi) Fail to declare or pay any dividends or distributions with
respect to its stock at a rate and in a manner consistent with recent
prior practices;
(xxvii) Fail to use its reasonable best efforts to obtain the consent
or approval of each person (other than the government authorities
referred to in Section 6.1(c)) whose consent or approval is required in
order to permit a succession by the Surviving Corporation pursuant to
A-22
<PAGE>
the Merger to any obligation, right or interest of VNC under any loan or
credit agreement, note, mortgage, indenture, lease, license or other
agreement or instrument;
(xxviii) Initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any Competing Transaction (as such
term is defined below), or negotiate with any person in furtherance of
such inquiries or to obtain a Competing Transaction, or agree to endorse
any Competing Transaction, or authorize or permit any of its officers,
directors or employees or any investment banker, financial advisor,
attorney, accountant or other representative retained by it or the Bank
to take any such action; provided, however, that (i) VNC may, upon the
request of one or more of its shareholders, register transfers of shares
of VNC Common Stock and (ii) VNC's Board of Directors may provide (or
authorize the provision of) information to, and may engage (or authorize)
such negotiations or discussions with, any person, directly or through
representatives, if [a] the Board of Directors, after having consulted
with independent counsel, has determined in good faith that providing
such information or engaging in such negotiations or discussions is
reasonably required in order to properly discharge the directors'
fiduciary duties in accordance with Delaware Law, [b] prior to furnishing
such information to such person or engaging in such negotiations or
discussions, VNC provides CFB with reasonable prior notice to the effect
that its furnishing information to, or entering into negotiations or
discussions with, such person, and [c] prior to furnishing such
information to such person, VNC has received from such person an executed
confidentiality agreement in customary form. For purposes of this
Agreement, "Competing Transaction" shall mean any of the following
involving VNC or the Bank: (i) any merger, consolidation, share exchange
or other similar transactions; (ii) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition of ten percent or more of assets in
a single transaction or series of transactions, excluding from the
calculation of the percentage hereunder any such transactions undertaken
in the ordinary course of business and consistent with past practice;
(iii) any sale of 10% or more of shares of capital stock (or securities
convertible or exchangeable into or otherwise evidencing, or any
agreement or instrument evidencing, the right to acquire capital stock);
(iv) any tender offer or exchange offer for ten percent or more of
outstanding shares of capital stock; (v) any solicitation of proxies in
opposition to approval by VNC shareholders of the Merger; (vi) the filing
of an acquisition application (or the giving of acquisition notice)
whether in draft or final form under the BHCA or the Change in Bank
Control Act with respect to VNC or the Bank; (vii) any person shall have
acquired beneficial ownership or the right to acquire beneficial
ownership of, or any "group" (as such term is defined under Section 13(d)
of the Exchange Act and the rules and regulations promulgated thereunder)
shall have been formed which beneficially owns or has the right to
acquire beneficial ownership of, 10% or more of the then outstanding
shares of capital stock of VNC; or (viii) any public announcement of a
proposal, plan or intention to do any of the foregoing.
4.2 COVENANTS OF CFB. During the period from the date of this Agreement
and continuing until the Effective Time, CFB agrees as follows:
(a) ORDINARY COURSE. CFB shall carry on its business in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted.
(b) APPLICATION. Subject to the required cooperation of VNC and its
affiliates, CFB shall use its reasonable best efforts to prepare and submit
within 30 days of the date hereof an application to the Federal Reserve Bank
of Minneapolis for prior approval pursuant to Section 3(a)(5) of the Bank
Holding Company Act of 1956, as amended, of the proposed transaction, and to
prosecute all required federal and state applications.
A-23
<PAGE>
(c) LISTING. CFB will file all documents required to be filed to
obtain approval for listing the CFB Common Stock to be issued pursuant to
the Merger on the Nasdaq Stock Market, National Market System and use its
best efforts to effect said listing.
(d) CONFIDENTIAL INFORMATION. CFB will hold in confidence all
documents and information concerning VNC and the Bank furnished to it and
its representatives in connection with the transactions contemplated by this
Agreement and will not release or disclose such information to any other
person, except as required by law and except to its outside professional
advisers in connection with this Agreement, with the same undertaking from
such professional advisers. If the transactions contemplated by this
Agreement shall not be consummated, such confidence shall be maintained and
such information shall not be used in competition with VNC (except to the
extent that such information can be shown to be previously known to CFB, in
the public domain, or later acquired by CFB from other legitimate sources)
and, upon request, all such documents, copies thereof or extracts therefrom
shall immediately thereafter be returned to VNC.
(e) DIRECTOR AND OFFICER INDEMNIFICATION. CFB agrees to permit VNC to
obtain an extended reporting period (otherwise known as "tail coverage")
under VNC's existing director and officer liability policy, the expense of
which shall be fully accrued by VNC as of the Determination Date. All rights
to indemnification and limitations of liability that the directors and
officers of VNC and the Bank may have as of the Effective Time, pursuant to
their respective Certificate of Incorporation and Articles of Association
and their respective Bylaws, shall continue in full force and effect. As
VNC's successor, CFB shall indemnify and hold the directors and officers of
VNC harmless from and against any and all loss, liability and expense
(including reasonable attorneys' fees) incurred as a result of service on an
officer or director of VNC, to the fullest extent permitted by law and the
Certificate of Incorporation and Bylaws of VNC or the Articles of
Association and Bylaws of the Bank.
(f) RULES 144 AND 145(d). From and for a period of one year after the
Effective Time, CFB shall file all reports with the SEC necessary to permit
the shareholders of VNC who may be deemed "underwriters" (within or meaning
to Rule 145 under the Securities Act) of the VNC Common Stock to sell CFB
Common Stock received by them in connection with the Merger pursuant to
Rules 144 and 145(d) of the Securities Act if they would otherwise be so
entitled.
4.3 COVENANTS OF VNC AND CFB. During the period from the date of this
Agreement and continuing until the Effective Time, except as expressly
contemplated or permitted by this Agreement, or to the extent that the parties
shall otherwise consent in writing:
(a) GOVERNING DOCUMENTS. No party shall amend its Certificate of
Incorporation or Bylaws.
(b) OTHER ACTIONS. Unless such action is required by law, no party
shall, nor shall permit any of its subsidiaries to, take any action that (i)
is intended to result in any of its representations and warranties set forth
in this Agreement being or becoming untrue in any material respect, or in
any of the conditions to the Merger set forth in Article 6 not being
satisfied or in a violation of
any provision of this Agreement, or (ii) would adversely affect the ability
of any of them to obtain any of the Requisite Regulatory Approvals (as
defined in Section 5.2) without imposition of a condition or restriction of
the type referred to in Section 6.1(e) hereof except, in every case, as may
be required by applicable law or this Agreement.
(c) ADVICE OF CHANGES AND GOVERNMENT FILINGS. Each party shall
promptly advise the other orally and in writing of any change or event
constituting a material breach of any of the representations, warranties or
covenants of such party contained herein. Each party shall file all reports
required to be filed by it with the SEC between the date of this Agreement
and the Effective Time and shall deliver to the other party copies of all
such reports promptly after the same are filed. CFB, VNC and each subsidiary
of CFB or VNC that is a bank shall file all call
A-24
<PAGE>
reports with the appropriate bank regulators and all other applications and
other documents required to be filed with the appropriate bank regulators
between the date hereof and the Closing Date and shall make available to the
other party copies of all such reports promptly after the same are filed.
(d) ENVIRONMENTAL ASSESSMENT. VNC shall engage at its expense an
independent, qualified environmental engineering firm, acceptable to CFB for
the purpose of conducting a Phase I Hazardous Waste Assessment (the
"Assessment") of all real properties owned or controlled by the Bank. CFB
shall review and approve the scope of engagement for the Assessment, which
shall satisfy ASTM's E-1527 Standard Practice and shall include a record
review of publicly available federal, state and local sources of
environmental records. The Assessment shall be completed within 30 days
after the date hereof. CFB shall have a period of 30 days from the date of
receipt of the written report of such Assessment to review such Assessment
and give written notice to VNC stating either that (i) such Assessment is
approved by CFB or (ii) such Assessment is not approved by CFB and the
reasons therefor.
If CFB gives a notice pursuant to (ii) above which sets forth specific
objections to the Assessment, then CFB may, at its option, terminate this
Agreement as of the date which is 60 days after the date of such notice
unless during such 60 day period VNC corrects or satisfies such objections,
or indemnifies CFB against loss, liability or expense, to the reasonable
satisfaction of CFB.
ARTICLE 5
ADDITIONAL AGREEMENTS
5.1 REGISTRATION STATEMENT. As promptly as practicable after the execution
of this Agreement, CFB shall prepare and file a registration statement on Form
S-4 (the registration statement together with the amendments thereto are defined
as the "Registration Statement") with the SEC covering CFB Common Stock to be
issued in the Merger (subject to the immediately following sentence), with a
view toward permitting the Registration Statement to become effective as soon as
reasonably practicable. CFB does not undertake to file post-effective amendments
to the Registration Statement or to file a separate registration statement to
register the sale of CFB Common Stock by affiliates of VNC pursuant to Rule 145
promulgated under the Securities Act. VNC will furnish to CFB and its counsel
the opportunity to review and approve such information as set forth in the
Registration Statement and CFB will provide VNC and its counsel the opportunity
to review and approve such information as set forth in the Registration
Statement. CFB and VNC will each render to the other its full cooperation in
preparing, filing, prosecuting the filing of, and amending the Registration
Statement such that it comports at all times with the requirements of the
Securities Act and the Exchange Act. Specifically, but without limitation, each
will promptly advise the other if at any time before the Effective Time any
information provided by it for inclusion in the Registration Statement appear to
have been, or shall have become, incorrect or incomplete and will furnish the
information necessary to correct such misstatements or omissions. Except as
provided above and except with the prior written consent of CFB, VNC will not
mail or otherwise furnish or publish to shareholders of VNC any proxy
solicitation material or other material relating to the Merger that constitutes
a "prospectus" within the meaning of the Securities Act.
5.2 REGULATORY MATTERS.
(a) APPLICATIONS AND NOTICES. The parties hereto shall cooperate with
each other and use their reasonable best efforts to promptly prepare and
file all necessary documentation, to effect all necessary applications,
notices, petitions, filings and other documents, and to obtain as promptly
as practicable all necessary permits, consents, and authorizations of all
governmental entities necessary to consummate the Merger ("Requisite
Regulatory Approvals"). VNC and CFB shall
A-25
<PAGE>
have the right to review in advance, and to the extent practicable each will
consult the other on, subject to applicable laws relating to the exchange of
information, all the information relating to VNC or CFB, as the case may be,
and any of their respective subsidiaries, which appear in any filing made
with, or written materials submitted to any governmental entity in
connection with the Merger. In exercising the foregoing right, each of the
parties hereto shall act reasonably and as promptly as practicable.
(b) GOVERNMENTAL COMMUNICATIONS. VNC and CFB shall promptly furnish
each other with copies of written communications received by VNC or CFB, as
the case may be, or any of their respective Subsidiaries, Affiliates or
Associates (as such items are defined in Rule 12b-2 under the Exchange Act
as in effect on the date hereof) from, or delivered by any of the foregoing
to, any governmental entity in respect of the Merger.
5.3 ACCESS TO INFORMATION.
Upon reasonable notice and subject to applicable laws relating to the
exchange of confidential information, VNC and CFB shall each (and cause each of
its subsidiaries to) afford to the officers, employees, accountants, counsel and
other representatives of each, access during normal business hours during the
period prior to the Effective Time, to all its properties, books, contracts,
commitments and records for the purpose of updating any review of such items
performed prior to the date of this Agreement and, during such period, VNC and
CFB shall (and shall cause each of its subsidiaries to) make available to the
other: (a) a copy of each report, schedule, registration statement and other
document filed or received by it during such period pursuant to the requirements
of federal or state securities laws or federal or state banking laws (other than
reports or documents which either party is not permitted to disclose under
applicable law); and (b) all other information concerning its business,
properties and personnel as either party may reasonably request. It is
contemplated that CFB may conduct an examination of VNC and the Bank prior to
the Closing Date in order to confirm compliance with the representations,
warranties and covenants set forth in this Agreement and verify the
Determination Date Financial Statements.
5.4 AFFILIATES. VNC shall use its reasonable best efforts to cause each
director, executive officer and other person who is an "affiliate" (for purposes
of Rule 145 under the Securities Act) of VNC to deliver to CFB, as soon as
practicable after the date hereof, and at least 32 days prior to the Closing
Date, a written agreement substantially in the form of EXHIBIT 5.4.
5.5 EMPLOYEE BENEFIT PLANS. Each person who is an employee of the Bank as
of the Effective Time ("Bank Employees") shall be participants in the employee
welfare plans, and shall be eligible for participation in the pension plans of
CFB, as in effect from time to time, subject to any eligibility requirements
(with full credit for years of past service to the Bank, or to any
predecessor-in-interest of the Bank to the extent such service is presently
given credit under the Plans of the Bank described in Section 3.1(k) hereof, for
the purpose of satisfying any eligibility and vesting periods) applicable to
such plans (but not subject to any pre-existing condition exclusions) and shall
enter each welfare plan immediately after the Effective Time and shall enter
each pension plan not later than the first day of the calendar quarter which
begins at least 180 days after the Effective Time. For the purpose of
determining each Bank Employee's benefit for the year in which the Merger occurs
under the CFB vacation program, vacation taken by a Bank Employee in the year in
which the Merger occurs will be deducted from the total CFB benefit. Each Bank
Employee shall be eligible for participation, as a new employee with the credit
for past service described above, in the CFB Plans under the terms thereof.
5.6 EXPENSES. Except as otherwise stated herein, whether or not the Merger
is consummated, all costs and expenses incurred in connection with this
Agreement, and the transactions contemplated hereby shall be paid by the party
incurring such expense, except as may be permitted by Section 7.2. All of the
expenses (including but not limited to accountants' and attorneys' fees and fees
payable to Hovde Financial) incurred or to be incurred by VNC in connection with
the Merger and not paid as of
A-26
<PAGE>
the Determination Date shall be estimated and accrued as expenses on the
Determination Date Financial Statements.
5.7 ADDITIONAL AGREEMENTS AND BEST EFFORTS. Subject to the terms and
conditions of this Agreement, each of the parties hereto agrees to use its
reasonable best efforts to take all action and to do all things necessary,
proper or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including, without
limitation, cooperating fully with the other party hereto, providing the other
party hereto with any appropriate information and making all necessary filings
in connection with the Requisite Regulatory Approvals.
ARTICLE 6
CONDITIONS PRECEDENT
6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction prior to the Effective Time of the following conditions:
(a) STOCKHOLDER APPROVAL. This Agreement shall have been approved and
adopted by the holders of the outstanding shares of VNC Common Stock, as
required by the Delaware Law and the Certificate of Incorporation and Bylaws
of VNC.
(b) NASDAQ LISTING. The shares of CFB Common Stock issuable to the VNC
stockholders pursuant to this Agreement shall have been approved for listing
on the Nasdaq Stock Market, National Market System, upon notice of issuance.
(c) APPROVALS. Other than the filing provided for by Section 1.1, all
consents, orders or approvals of, or declarations or filings with, and all
expirations of waiting periods imposed by, any governmental entity which are
prescribed by law as necessary for the consummation of the Merger and the
other transactions contemplated hereby shall have been filed, occurred or
been obtained and all Requisite Regulatory Approvals shall be in full force
and effect.
(d) NO INJUNCTIONS, RESTRAINTS OR ILLEGALITY. No order, injunction or
decree issued by any court or agency of competent jurisdiction or other
legal restraint or prohibition (an "Injunction") preventing the consummation
of the Merger or any of the transactions contemplated hereby shall be in
effect, nor shall any proceeding by any governmental entity seeking any such
Injunction be pending. No statute, rule, regulation, order, injunction or
decree shall have been enacted, entered, or enforced by any governmental
entity which prohibits, restricts or makes illegal consummation of the
Merger.
(e) NO UNDULY BURDENSOME CONDITION. There shall not be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced
or deemed applicable to the Merger or any of the transactions contemplated
hereby, by any federal or state governmental entity which, in connection
with the grant of a Requisite Regulatory Approval, imposes any condition or
restriction upon CFB, or any of its subsidiaries which would so materially
adversely impact the economic or business benefits of the transactions
contemplated by this Agreement as to render the consummation of the Merger
inadvisable, in the reasonable business judgment of the Board of Directors
of CFB.
6.2 CONDITIONS TO OBLIGATIONS OF CFB. The obligation of CFB to effect the
Merger are also subject to the satisfaction or waiver by CFB prior to the
Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of VNC set forth in this Agreement shall be true and correct in all material
respects as of the date of the Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on the Closing Date, except where the failure to
be true and
A-27
<PAGE>
accurate in all material respects would not have or would not be reasonably
expected to have a material adverse effect on VNC, and CFB shall have
received a certificate signed on behalf of VNC by the chief executive
officer and chief financial officer of VNC to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF VNC. VNC shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and CFB shall have received a
certificate signed on behalf of VNC by the chief executive officer and chief
financial officer VNC to such effect.
(c) MINIMUM VNC VALUE. The VNC Value as of the Determination Date
shall not be less than $20,000,000. The confirmation of the minimum VNC
Value shall be made pursuant to the procedures set forth in Section 1.4.
(d) POOLING LETTER. CFB shall have received a letter from Ernst &
Young, in form and substance reasonably satisfactory to CFB, approving the
accounting treatment of the Merger as a "pooling of interests" in accordance
with generally accepted accounting principles, as of a date no more than
five business days prior to the Closing Date; in support of the Ernst &
Young pooling letter, Ernst & Young and CFB shall have received a letter
from VNC's accountants, in form and substance reasonably satisfactory to
Ernst & Young, confirming certain facts on behalf of VNC.
(e) LEGAL OPINION. CFB shall have received the opinion of Dostart
Clapp Sterrett & Coveney, LLP, special counsel to VNC, dated the Closing
Date, in substantially the form attached as EXHIBIT 6.2, and such opinion
shall not have been withdrawn prior to the Effective Time.
6.3 CONDITIONS TO OBLIGATIONS OF VNC. The obligation of VNC to effect the
Merger is also subject to the satisfaction or waiver by VNC prior to the
Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of CFB set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on the Closing Date, except as otherwise
contemplated by this Agreement, and VNC shall have received a certificate
signed on behalf of CFB by senior executive officers CFB to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF CFB. CFB shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and VNC shall have received a
certificate signed on behalf of CFB by two senior executive officers of CFB
to such effect.
(c) CONSENTS UNDER AGREEMENTS. CFB shall have obtained the consent or
approval of each person (other than the Governmental Entities referred to in
Section 6.1(c)) whose consent or approval shall be required in connection
with the transactions contemplated hereby under any loan or credit
agreement, note, mortgage, indenture, lease, license or other agreement or
instrument to which CFB or any of its subsidiaries is a party or is
otherwise bound, except those for which failure to obtain such consents and
approvals would not, in the reasonable opinion of VNC, individually or in
the aggregate, have a material adverse effect on CFB or upon the
consummation of the transactions contemplated hereby.
(d) TAX OPINION. VNC shall have received the opinion of Dostart Clapp
Sterrett & Coveney, LLP, special counsel to VNC, dated the Closing Date,
with a copy provided to CFB, to the effect that (i) the Merger will be
treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a)(1)(A) of the Code, (ii) CFB and VNC will each be a
party to that reorganization within the meaning of Section 368(b) of the
Code, (iii) shareholders of VNC who exchange their shares of VNC Common
Stock for shares of CFB Common Stock will not recognize gain or loss, for
purposes of federal income tax, except to the extent of the cash received
A-28
<PAGE>
in lieu of fractional shares, and (iv) VNC will not recognize gain or loss,
for purposes of federal income tax, as a result of consummation of the
Merger.
(e) LEGAL OPINION. VNC shall have received the opinion of Lindquist &
Vennum, P.L.L.P., counsel to CFB, dated the Closing Date, in substantially
the form attached as EXHIBIT 6.3, and such opinion shall not have been
withdrawn prior to the Effective Time.
ARTICLE 7
TERMINATION AND AMENDMENT
7.1 TERMINATION. This Agreement may be terminated in writing at any time
prior to the Effective Time, whether before or after approval of the Merger by
the stockholders of VNC, only in the following circumstances:
(a) by mutual consent of CFB and VNC in a written instrument, if the
Board of Directors of each so determines; or
(b) by either CFB or VNC if (i) any Requisite Regulatory Approval shall
have been denied; or (ii) any governmental entity of competent jurisdiction
shall have issued a final nonappealable order enjoining or otherwise
prohibiting the consummation of the transactions contemplated by this
Agreement; or
(c) by either CFB or VNC if the Merger shall not have been consummated
on or before December 31, 1999, unless the failure of consummation shall be
due to the failure of the party seeking to terminate to perform or observe
in all material respects the covenants and agreements hereunder to be
performed or observed by such party; or
(d) by either CFB or VNC if there shall have been a material breach of
any of the covenants or agreements set forth in this Agreement on the part
of the other party, which breach shall not have been cured before Closing or
within 20 business days following receipt by the breaching party of written
notice of such breach from the other party, whichever occurs first;
(e) by CFB pursuant to the terms of Section 4.3(d) or 4.3(e), as
applicable; or
(f) by VNC if (i) the CFB Trading Value is less than $18 per share, and
(ii) the number obtained by dividing the CFB Trading Value by the closing
price of CFB Common Stock as reported on the Nasdaq on the trading day
immediately preceding the public announcement of this Agreement is less than
the number obtained by dividing the Final Index Price (as defined in
subsection (B) below) by the Initial Index Price (as defined in subsection
(B) below) and subtracting .20 from such quotient. For purposes of this
Section 7.1(f):
(A) The "Index Group" shall mean all of those companies listed on
Exhibit 7.1(f) the common stock of which is publicly traded and as to
which there is no pending publicly announced proposal at any time during
the Calculation Period for such company to acquire another company or
companies in transactions with a value exceeding 10% of the acquirer's
market capitalization or for such company to be acquired.
(B) The "Initial Index Price" shall mean the average of the per share
closing prices of the common stock of the companies comprising the Index
Group, as reported on the consolidated transactions reporting system for
the market or exchange on which such common stock is principally traded,
on the trading day immediately preceding the public announcement of this
Agreement.
(C) The "Final Price" of any company belonging to the Index Group
shall mean the average of the daily closing sale prices of a share of
common stock of such company, as
A-29
<PAGE>
reported in the consolidated transaction reporting system for the market
or exchange on which such common stock is principally traded, during the
Calculation Period.
(D) The "Final Index Price" shall mean the average of the Final
Prices for all of the companies comprising the Index Group.
(E) The "Calculation Period" shall mean the 20 trading days ending at
the end of the fourth trading day immediately preceding the Closing Date.
If CFB or any company belonging to the Index Group declares a stock dividend
or effects a reclassification, recapitalization, split-up, combination, exchange
of shares or similar transaction between the date of this Agreement and the
Closing Date, the closing prices for the common stock of such company shall be
appropriately adjusted for the purposes of the definitions above so as to be
comparable to the price on the date of this Agreement.
7.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
by either CFB or VNC
as provided in Section 7.1, this Agreement shall forthwith become void and have
no effect, except that the obligations under Sections 4.1(c), 4.2(d), 5.6, and
7.2 shall survive termination of this Agreement; provided, however, that no
party shall be relieved or released from any liabilities or damages arising out
of the willful breach by such party of any provision of this Agreement.
7.3 AMENDMENT. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the stockholders of VNC; provided, however, that after any such approval, no
amendment shall be made which by law requires further approval by such
stockholders, without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
7.4 EXTENSION AND WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto;
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any of the Schedules; and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party.
ARTICLE 8
GENERAL PROVISIONS
8.1 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. No representation or
warranty contained in this Agreement shall survive the Merger or the termination
of this Agreement, except that Sections 3.2, 5.1 and 5.5, and this Section 8.1
shall survive the Merger, and Sections 4.1(c) and 4.2(d), 5.6 and 7.2 shall
survive the termination of this Agreement.
A-30
<PAGE>
8.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given when received by the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
<TABLE>
<S> <C>
(a) if to CFB, to: Community First Bankshares, Inc.
Attn: Bruce A. Heysse, SVP-Acquisitions
520 Main Avenue
Fargo, ND 58124-0001
with copies to: Steven J. Johnson, Esq.
Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South 8th Street
Minneapolis, MN 55402-2205
and
(b) if to VNC, to: Valley National Corporation
Attn: William V. Ehlen, CEO
1234 East Main Street
El Cajon, CA 92021
with copies to: James K. Sterrett, Esq.
Dostart Clapp Sterrett & Coveney, LLP
4370 La Jolla Village Dr., Suite 970
San Diego, CA 92122
</TABLE>
8.3 INTERPRETATION. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
8.4 COUNTERPARTS. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement.
8.5 ENTIRE AGREEMENT. This Agreement (including the Option Agreement and
the other documents and the instruments referred to herein) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof.
8.6 THIRD PARTY BENEFICIARIES. This Agreement is not intended to confer
upon any person other than the parties hereto any rights or remedies hereunder,
except that Sections 3.2 and 4.2(c) are intended for the benefit of the VNC
shareholders; Section 4.2(e) is intended for the benefit of VNC officers and
directors, and Section 5.5 is intended for the benefit of employees of the Bank.
8.7 RIGHTS OF OWNERSHIP. No party shall have the right to acquire or shall
be deemed to have acquired shares of common stock of the other party pursuant to
the Merger until consummation thereof.
8.8 PUBLICITY. Except as otherwise required by law or the rules of the
Nasdaq Stock Market or the National Association of Securities Dealers, so long
as this Agreement is in effect, neither CFB nor VNC shall, nor shall either of
them permit any of its subsidiaries to, issue or cause the publication of
A-31
<PAGE>
any press release or other public announcement with respect to the transactions
contemplated by this Agreement without the consent of the other party, which
consent shall not be unreasonably withheld.
8.9 ASSIGNMENT. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
8.10 ENFORCEMENT OF AGREEMENT. Each of the parties hereto agrees that it
will not object if the other party seeks to obtain an injunction to prevent
breaches of this Agreement or to enforce specifically the terms and provision
hereof in any court in the United States or any state have jurisdiction. The
prevailing party shall be entitled to recover its attorneys fees incurred in the
successful enforcement of the terms and provisions of this Agreement.
IN WITNESS WHEREOF, CFB and VNC have caused this Agreement to be signed by
their respective officers thereunto duly authorized as of the date first above
written.
<TABLE>
<S> <C> <C>
COMMUNITY FIRST BANKSHARES, INC.
By: /s/ DONALD R. MENGEDOTH
------------------------------------------
Name: Donald R. Mengedoth
Title: Chairman, President & CEO
By: /s/ MARK ANDERSON
------------------------------------------
Name: Mark Anderson
Title: Vice Chairman-Corporate Services,
CFO/CIO
VALLEY NATIONAL CORPORATION
By: /s/ WILLIAM V. EHLEN
------------------------------------------
Name: William V. Ehlen
Title: Chief Executive Officer
By: /s/ PAUL M. CABLE
------------------------------------------
Name: Paul M. Cable
Title: Chief Financial Officer
</TABLE>
A-32
<PAGE>
APPENDIX B
May 6, 1999
Board of Directors
Valley National Corporation
1234 East Main Street
El Cajon, CA 92021
Members of the Board:
We have reviewed the Agreement and Plan of Reorganization (the "Agreement")
and related exhibits and schedules dated as of the date hereof by and among
Community First Bankshares, Inc. ("CFB") and Valley National Corporation
("VNC"), pursuant to which, among other things, VNC will be merged with and into
CFB (the "Merger"). As is set forth in the Agreement, all of the issued and
outstanding shares of VNC Common Stock, including all Option and Warrant shares
shall be converted into the right to receive $65 million in CFB Common Stock,
subject to adjustment and shareholder dissenters' rights as provided for in the
Agreement (the "Merger Consideration"). Capitalized terms used herein shall have
the same meaning as in the Agreement, unless specifically stated otherwise.
Hovde Financial, Inc. ("Hovde") specializes in providing investment banking
and financial advisory services to commercial bank and thrift institutions. Our
principals are experienced in the independent valuation of securities in
connection with negotiated underwritings, subscription and community offerings,
private placements, merger and acquisition transactions and recapitalizations.
Pursuant to a Consulting Agreement dated April 1, 1999, between VNC and Hovde,
Hovde was engaged to assist VNC in exploring a merger with CFB. Therefore, we
are familiar with VNC having acted as its financial advisor in connection with
the proposed transaction, and having participated in the negotiations leading to
the Agreement.
During the course of our engagement, we reviewed and analyzed material
bearing upon the financial and operating conditions of VNC and CFB, and material
prepared in connection with the proposed transaction, including the following:
the Agreement; certain publicly available information concerning VNC and CFB,
including consolidated financial statements for each of the three years ended
December 31, 1996, 1997 and 1998 for VNC and CFB, respectively; the nature and
terms of recent sale and merger transactions involving banks and bank holding
companies that we consider relevant; historical and current market data for the
common stock of VNC and CFB; and financial and other publicly available
information provided to us by the managements of VNC and CFB.
In addition, we have conducted meetings with members of the senior
management of VNC and CFB for the purpose of reviewing the future prospects of
both companies. We also took into account our assessment of general economic,
market and financial conditions and our experience in other similar transactions
as well as our overall knowledge of the banking industry and our general
experience in securities valuations.
We have acted as financial advisor to VNC with respect to the proposed
Merger and will receive a fee from VNC for our services if the proposed Merger
is consummated. We have no other financial advisory or other relationships with
VNC. In the ordinary course of their businesses, Hovde related-parties may
actively trade the equity securities of VNC for their own accounts and,
accordingly, they may at any time hold such securities.
In rendering this opinion, we have assumed, without independent
verification, the accuracy and completeness of the financial and other
information contained, and representations made, in the
B-1
<PAGE>
Board of Directors
Valley National Corporation
May 6, 1999
Page Two
publicly available materials, other materials provided to us by VNC and CFB, and
in the discussions with the managements of VNC and CFB.
Based on the foregoing and our experience as investment bankers, we are of
the opinion that, as of the date hereof, the Merger Consideration to be received
by the shareholders of VNC in connection with the Merger as described in the
Agreement is fair to such shareholders from a financial point of view.
Sincerely,
/s/ Hovde Financial, Inc.
HOVDE FINANCIAL, INC.
B-2
<PAGE>
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Community First's Bylaws require indemnification of directors and officers
of Community First to the fullest extent permitted by Delaware law. Section 145
of the Delaware General Corporation Law generally provides that any person who
was or is a director or officer may be indemnified against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with the defense or settlement of any
threatened, pending or completed legal proceedings in which he or she is
involved by reason of the fact that he or she is or was a director or officer if
he or she acted in good faith and in a manner that he or she reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, if he or she had no reasonable
cause to believe that his or her conduct was unlawful. However, if the legal
proceeding is by or in the right of the corporation, the director or officer may
not be indemnified in respect of any claim, issue or matter as to which he or
she shall have been adjudged to be liable to the corporation unless the court in
which such action was brought deems it proper.
Community First currently has in effect policies of insurance which provide
insurance protection to its directors and officers against some liabilities
which may be incurred by them on account of their services to Community First.
Community First has also entered into indemnification agreements with each of
its directors and officers, which agreements provide for indemnification to the
fullest extent permitted by Delaware law, except that with respect to an action
commenced by an indemnitee against Community First or by the indemnitee as a
derivative action by or in the right of Community First, such indemnitees shall
be indemnified at the discretion of the board of directors. Subject to certain
limitations, the agreements also provide for indemnification against any and all
expenses (including attorneys fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by the indemnitee in connection with
any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative (including, without
limitation, any derivative action by or in the right of Community First) to
which the indemnitee is, was, or at any time becomes a party or is threatened to
be made a party by reason of the fact that the indemnitee is or was at any time
a director, officer, employee, or agent of Community First or is or was serving
or at any time serves at the request of Community First as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Reorganization dated as of June 25, 1996 between the Registrant and Mountain Parks
Financial Corp. (incorporated by reference to the Appendix to the Registrant's Joint Proxy Statement
with Mountain Parks Financial Corp. included in the Registration Statement on Form S-4 [File No.
333-14439], as declared effective by the Commission on November 7, 1996).
2.2 Stock Purchase Agreement dated as of February 18, 1997 by and among the Registrant, KeyCorp and Key Bank
of the Rocky Mountains, Inc. (incorporated by reference to Exhibit 2.8 to the Registrant's Amendment No.
1 to its Annual Report on Form 10-K for the fiscal year ended December 31, 1996, filed with the
Commission as of May 8, 1997 [the "1996 Form 10-K"]).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER -
- ---------
<S> <C>
2.3 Restated Agreement and Plan of Merger dated as of August 22, 1997, including Agreement and First
Amendment to Agreement dated as of the same date, between the Registrant and First National Summit
Bankshares, Inc. (incorporated by reference to Appendices A and B to the proxy statement/prospectus
contained in the Registrant's Registration Statement on Form S-4 [File No. 333-38997] filed with the
Commission on October 29, 1997).
2.4 Restated Agreement and Plan of Merger dated as of August 28, 1997 between the Registrant and Republic
National Bancorp, Inc. (incorporated by reference to Appendix A to the proxy statement/prospectus
contained in the Registrant's Registration Statement on Form S-4 [File No. 333-38225] filed with the
Commission on October 20, 1997).
2.5 Office Purchase and Assumption Agreement dated as of the 10th day of September, 1997 by and between Bank
One, Arizona, National Association, Bank One, Colorado, National Association, Bank One, Utah, National
Association and the Registrant, (incorporated by reference to Exhibit 2.6 to the Registrant's
Registration Statement on Form S-4 [File No. 333-36091], filed with the Commission on September 22,
1997).
2.6 Agreement and Plan of Merger dated as of November 6, 1997, among the Registrant, Community First
National Bank and Pioneer Bank of Longmont (the "Parties")(incorporated by reference to Exhibit 2.7 to
the Registrant's Registration Statement on Form S-4 [File No. 333-37527], filed with the Commission on
November 21, 1997), and as amended by First Amendment to Agreement and Plan of Merger dated as of the
19th day of December, 1997, by and among the Parties (incorporated by reference to Appendix B to the
proxy statement/ prospectus contained in the Registrant's Registration Statement on Form S-4 [File No.
333-48825] filed with the Commission on March 31, 1998).
2.7 Agreement and Plan of Merger dated as of January 8, 1998 by and between the Registrant and Community
Bancorp, Inc. (incorporated by reference to Exhibit 2.14 to the Registrant's Registration Statement on
Form S-4 [File No. 333-49367] filed with the Commission on June 9, 1998 (the "June 1998 Form S-4")), and
as amended by First Amendment to Agreement and Plan of Merger, dated as of the 9th day of March, 1998,
between the Registrant and Community Bancorp, Inc. (incorporated by reference to Exhibit 2.15 to the
June 1998 Form S-4).
2.8 Agreement and Plan of Merger dated as of April 2, 1998 between the Registrant and Western Bancshares of
Las Cruces, Inc. (incorporated by reference to Exhibit 2.16 to the June 1998 Form S-4).
2.9 Agreement and Plan of Merger dated as of May 18, 1998 between the Registrant and Guardian Bancorp.
(incorporated by reference to Exhibit 2.17 to the June 1998 Form S-4).
2.10 Agreement and Plan of Merger dated as of January 12, 1998 between the Registrant and FNB, Inc.
(incorporated by reference to Exhibit 2.16 to the June 1998 Form S-4).
2.11 Agreement and Plan of Merger dated as of May 10, 1999 between the Registrant and Valley National
Corporation (incorporated in this Registration Statement as Appendix A to the Proxy
Statement/Prospectus).
3.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the
1996 Form 10-K), as amended by a Certificate of Amendment to the Registrant's Certificate of
Incorporation as filed with the Delaware Secretary of State on May 7, 1998 (incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
filed with the Commission on March 23, 1999 [the "1998 Form 10-K"]).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
3.2 Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 [File No. 33-41246], as declared effective by the Commission on August 13, 1991
[the "1991 S-1"]).
4.1 Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of
the Registrant (incorporated by reference to Exhibit A to Exhibit 1 to the Registrant's Registration
Statement on Form 8-A, filed with the Commission on January 9, 1995 [the "Form 8-A"]).
4.2 Form of Rights Agreement dated as of January 5, 1995, between the Registrant, and Norwest Bank
Minnesota, National Association ("Norwest Bank"), which includes as Exhibit B thereto the form of Rights
Certificate (incorporated by reference to Exhibit 1 to the Form 8-A.)
4.3 Subordinated Indenture dated February 5, 1997, between the Registrant and Wilmington Trust Company, as
Indenture Trustee, including form of Junior Subordinated Indenture (incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-3 [File No. 333-19921] filed with the
Commission as of January 30, 1997 [the "1997 CFB Capital I Form S-3"]).
4.4 Amended and Restated Trust Agreement of CFB Capital I dated February 5, 1997, including Form of Capital
Security Certificate of CFB Capital I (incorporated by reference to Exhibit 4.5 to the 1997 CFB Capital
I Form S-3).
4.5 Capital Securities Guarantee Agreement dated as of February 5, 1997, between the Registrant and
Wilmington Trust Company as Trustee (incorporated by reference to Exhibit 4.7 to the 1997 CFB Capital I
Form S-3).
4.6 Indenture dated June 24, 1997 relating to the Registrant's 7.30% Subordinated Notes Due 2004 (the "New
Notes") between the Registrant and Norwest Bank, as trustee (incorporated by reference to Exhibit 4.1 to
the Registrant's Registration Statement on Form S-4 [File No. 333-36091] as declared effective by the
Commission on November 10, 1997 [the "1997 Subordinated Note Form S-4"]).
4.7 Subordinated Indenture dated December 10, 1997, between the Registrant and Wilmington Trust Company, as
Indenture Trustee, including form of Junior Subordinated Indenture (incorporated by reference to Exhibit
4.1 to the Registrant's Registration Statement on Form S-3 [File No. 333-37521] as declared effective by
the Commission on December 4, 1997 [the "1997 CFB Capital II Form S-3"]).
4.8 Amended and Restated Trust Agreement of CFB Capital II dated December 10, 1997, including Form of
Capital Security Certificate of CFB Capital II (incorporated by reference to Exhibit 4.5 to the 1997 CFB
Capital II Form S-3).
4.9 Capital Securities Guarantee Agreement dated as of December 10, 1997, between the Registrant and
Wilmington Trust Company as Trustee (incorporated by reference to Exhibit 4.7 to the 1997 CFB Capital II
Form S-3).
5.1 Opinion and Consent of Lindquist & Vennum P.L.L.P., counsel to the Registrant.
8.1 Form of Opinion and Consent of Sterrett & Kimmel, LLP, special counsel, as to certain tax matters.
10.2 Restated 1987 Stock Option Plan (incorporated by reference to Exhibit 10.7 to the Registrant's
Registration Statement on Form S-8 [File No. 33-46744], as declared effective by the Commission on May
6, 1992).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.3 Form of Tax Sharing Agreement between the Registrant and each of its subsidiary Banks (incorporated by
reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31,
1995 [the "1995 Form 10-K"]).
10.4 Form of Service Agreement for Data Processing between Community First Service Corporation and each of
the subsidiary Banks of the Registrant (incorporated by reference to Exhibit 10.4 to the 1995 Form
10-K).
10.5 Form of Bank Services Agreement between the Registrant and each of its subsidiary Banks (incorporated by
reference to Exhibit 10.5 to the 1995 Form 10-K).
10.6 Form of Agency Agreement between the Registrant and each of its subsidiary Banks, and Assignment of
Agency Agreement and Second Assignment of Agency Agreement, which assign the Registrant's interest in
the Agency Agreement to Community First Financial, Inc. (relating to the Registrant's subsidiary Banks)
(incorporated by reference to Exhibit 10.6 to the 1995 Form 10-K).
10.7 Lease dated April 27, 1993, between Community First Properties, Inc. (formerly Fargo Tower Partners) and
the Registrant (incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994).
10.8 Promissory Note dated July 14, 1997 (Term Note) in the principal amount of $30,000,000, issued to
Norwest Bank, as Agent, on behalf of Harris Trust and Savings Bank ("Harris Trust"), Bank of America
National Trust and Savings Association ("Bank of America") and Norwest (incorporated by reference to
Exhibit 10.8 to Registrant's Amendment No. 1 to its Annual Report on Form 10-K for the year ended
December 21, 1997 [the "1997 Form 10-K"]).
10.9 Promissory Notes dated July 14, 1997 (Current Notes), each in the principal amount of $8,333,333.33,
issued to each of Harris Bank of America, and Norwest (incorporated by reference to Exhibit 10.9 to the
1997 Form 10-K).
10.10 Credit Agreement dated July 14, 1997 among the Company, Harris Trust, Bank of America, Norwest as a
lender, and Norwest as Agent (incorporated by reference to Exhibit 10.10 to the 1997 Form 10-K).
10.11 Form of Indemnification Agreement entered into by and between the Registrant and the Registrant's
officers and directors (incorporated by reference to Exhibit 10.33 to Registrant's Annual Report on Form
10-K for the year ended December 31, 1992 [the "1992 Form 10-K"]).
10.12 1996 Stock Option Plan, as approved by the board of directors on February 6, 1996 (incorporated by
reference to Exhibit 10.15 to the 1995 Form 10-K), and as amended by resolution of the board of
directors on February 1, 1999 (incorporated by reference to Exhibit 10.12 to the 1998 Form 10-K).
10.13 Supplemental Executive Retirement Plan, effective as of August 1, 1995 (incorporated by reference to
Exhibit 10.13 to the 1997 Form 10-K).
10.14 Registrant's Deferred Compensation Plan for Members of the board of directors, effective August 1, 1993,
including First Amendment to the Registrant's Deferred Compensation Plan for Members of the board of
directors, effective as of February 1, 1999 (incorporated by reference to Exhibit 10.14 to the 1998 Form
10-K).
10.15.1 Change in Control Severance Agreement dated December 1, 1998 between the Registrant and Donald R.
Mengedoth (incorporated by reference to Exhibit 10.15.1 to the 1998 Form 10-K).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.15.2 Change in Control Severance Agreement dated December 1, 1998 between the Registrant and Mark A. Anderson
(incorporated by reference to Exhibit 10.15.2 to the 1998 Form 10-K).
10.15.3 Form of Change in Control Severance Agreement dated December 1, 1998 between the Registrant and Messrs.
David A. Lee, Ronald K. Strand and Bruce A. Heysse (incorporated by reference to Exhibit 10.15.3 to the
1998 Form 10-K).
10.15.4 Form of Change in Control Severance Agreement dated December 1, 1998 between the Registrant and
Registrant's executive officers (incorporated by reference to Exhibit 10.15.4 to the 1998 Form 10-K).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of KPMG LLP.
23.3 Consent of Sterrett & Kimmel, LLP.
23.4 Consent of Lindquist & Vennum P.L.L.P. (see Exhibit 5.1 above).
23.5 Consent of PricewaterhouseCoopers, LLP.
23.6 Consent of Hovde Financial, Inc.
24.1 A Power of Attorney is set forth on the signature pages of this Registration Statement.
99.1 Form of proxy for special meeting of Stockholders of Valley National Corporation.
(b) Financial Schedules
</TABLE>
Not applicable.
ITEM 22. UNDERTAKINGS.
The Registrant hereby undertakes:
1. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
2. (a) To file, during any period in which offers or sales are being made,
a post-effective amendment to the registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of a prospectus filed with the
II-5
<PAGE>
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
3. That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
4. To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
5. To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
6. To to deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3
under the Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X are not set
forth in the prospectus, to deliver, or cause to be delivered to each person to
whom the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such interim
financial information.
7. That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form.
8. That every prospectus: (i) that is filed pursuant to paragraph 7
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, any such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on August 6, 1999.
<TABLE>
<S> <C> <C>
COMMUNITY FIRST BANKSHARES, INC.
By: /s/ DONALD R. MENGEDOTH
-----------------------------------------
Donald R. Mengedoth
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
</TABLE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Donald R. Mengedoth and Mark A. Anderson, and
each of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution for him or her and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration statement and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting upon said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or either of them, or their or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration statement has been signed below on the 6th day of August, 1999, by
the following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<C> <S>
/s/ DONALD R. MENGEDOTH President, Chief Executive Officer and Chairman of the
-------------------------------------------- Donald R. Mengedoth Board of Directors and Director
Donald R. Mengedoth (principal executive officer)
/s/ MARK A. ANDERSON Vice Chairman--Corporate Services, Chief Financial
-------------------------------------------- Officer, Chief Information Officer, Secretary and
Mark A. Anderson Treasurer (principal financial and accounting officer)
/s/ JAMES T. ANDERSON
-------------------------------------------- Director
James T. Anderson
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
<C> <S>
/s/ PATRICK E. BENEDICT
-------------------------------------------- Director
Patrick E. Benedict
/s/ PATRICK DELANEY
-------------------------------------------- Director
Patrick Delaney
/s/ JOHN H. FLITTIE
-------------------------------------------- Director
John H. Flittie
/s/ DARRELL G. KNUDSON
-------------------------------------------- Director
Darrell G. Knudson
/s/ DENNIS M. MATHISEN
-------------------------------------------- Director
Dennis M. Mathisen
/s/ MARILYN R. SEYMANN
-------------------------------------------- Director
Marilyn R. Seymann
/s/ THOMAS C. WOLD
-------------------------------------------- Director
Thomas C. Wold
/s/ HARVEY L. WOLLMAN
-------------------------------------------- Director
Harvey L. Wollman
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.11 Agreement and Plan of Merger dated as of May 10, 1999 between the Registrant and Valley National
Corporation (incorporated in this Registration Statement as Appendix A to the Proxy
Statement/Prospectus).
5.1 Opinion and Consent of Lindquist & Vennum P.L.L.P., counsel to the Registrant.
8.1 Form of Opinion and Consent of Sterrett & Kimmel, LLP, special counsel, as to certain tax matters.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of KPMG LLP.
23.3 Consent of Sterrett & Kimmel, LLP.
23.4 Consent of Lindquist & Vennum P.L.L.P. (see Exhibit 5.1 above).
23.5 Consent of PricewaterhouseCoopers, LLP.
23.6 Consent of Hovde Financial, Inc.
24.1 A Power of Attorney is set forth on the signature pages of this Registration Statement.
99.1 Form of proxy for special meeting of Stockholders of Valley National Corporation.
</TABLE>
<PAGE>
EXHIBIT 5.1
[Lindquist & Vennum P.L.L.P. Letterhead]
August 9, 1999
Community First Bankshares, Inc.
520 Main Avenue
Fargo, North Dakota 58124
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
In connection with the Registration statement on Form S-4 filed by
Community First Bankshares, Inc. (the "Company") with the Securities and
Exchange Commission on August 9, 1999 relating to the registration of
3,611,111 shares of common stock, $.01 par value (the "Shares"), to be issued
by the Company in connection with the proposed merger of Valley National
Corporation, a Delaware corporation, with and into the Company (the
"Merger"), please be advised that as counsel to the Company, upon examination
of such corporate documents and records as we have deemed necessary or
advisable for the purposes of this opinion, it is our opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
2. All necessary corporate action on the part of the Company has been
taken to authorize the issuance of the Shares to be issued in connection with
the merger and, when issued pursuant to the merger and paid for as contemplated
by the Registration statement, the Shares will be legally issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to
the Registration statement and to the reference to our firm under the heading
"Legal Matters" in the proxy statement/prospectus comprising a part of the
Registration Statement.
Very truly yours,
/s/ LINDQUIST & VENNUM P.L.L.P.
cc: Galen O. Skarphol
James K. Sterrett, Esq.
Steven J. Johnson, Esq.
<PAGE>
EXHIBIT 8.1
[TAX OPINION OF STERRETT & KIMMEL]
[STERRETT & KIMMEL LETTERHEAD]
August 6, 1999
The Board of Directors
Valley National Corporation
1234 East Main Street
El Cajon, CA 92122
Re: Tax Opinion re: Merger of Valley National Corporation with and into
Community First Bankshares, Inc.
Dear Gentlemen:
We are acting as special counsel to Valley National Corporation ("VNC"), a
corporation organized and existing under the laws of the state of Delaware with
respect to the proposed merger (the "Merger") of VNC with and into Community
First Bankshares, Inc. ("CFB"), a corporation organized and existing under the
laws of the state of Delaware, with CFB as the surviving entity, in accordance
with that certain Agreement and Plan of Merger (the "Merger Agreement"), dated
May 10, 1999, as described in the Registration Statement on Form S-4 to be filed
with the Securities and Exchange Commission ("SEC") on ___________
("Registration Statement").
This opinion is being rendered as required by Section 6.3(d) of the Merger
Agreement.
In rendering this opinion, we have reviewed and relied upon statements made
to us by certain of your officers. We have also examined original or certified
copies of such certificates of public officials that have been made available to
us and such other matters as we have deemed relevant for purposes of this
opinion. In such examination, we have assumed the genuineness of all
signatures, the legal capacity of all natural persons, the authenticity of all
documents submitted to us as originals, the conformity to originals of all
documents submitted to us as certified copies or photocopies and the
authenticity of the originals of such documents.
We also have relied upon the accuracy of the formal matters set forth in
the Proxy Statement-Prospectus contained in the Registration Statement.
Our opinion, in part, is based upon the assumption that the proposed
transaction described herein will occur in accordance with the agreements and
the facts and
<PAGE>
STERRETT & KIMMEL, LLP
The Board of Directors
August 6, 1999
Page 2
representations recited or referred to in this opinion letter and also that the
facts set forth herein are accurate as of the date hereof and will be accurate
at the Effective Time. Our opinion also assumes that the Merger of VNC with and
into CFB qualifies as a statutory merger under applicable state law. We have
undertaken no independent investigation of the accuracy of the facts and
representations recited herein or therein. This opinion is subject to the
receipt by us prior to the Effective Time of the Merger of certain written
representations and covenants of CFB and VNC, the accuracy and truthfulness of
which we shall assume and rely upon without investigation.
We have assumed that any representation or statement referred to above made
"to the knowledge of" or "to the belief of" or otherwise similarly qualified is
correct without such qualification, and all statements and representations,
whether or not qualified are true and will remain true through the Effective
Date.
THE PROPOSED TRANSACTION
Based solely upon our review of the documents described herein, and in
reliance upon such documents, pursuant to the terms of the Merger Agreement, VNC
will merge with and into CFB in a statutory merger, pursuant to Delaware law, as
a result of which Valle de Oro Bank, a wholly owned subsidiary of VNC, will
become a wholly owned subsidiary of CFB.
At the Effective Time of the Merger, each outstanding share of VNC Common
Stock will be converted into a number of shares CFB Common Stock determined
under a formula in the Merger Agreement. Also, cash will be paid in lieu of
fractional shares of CFB Common Stock. VNC stockholders are not entitled to
dissent from the Merger under state law.
The payment of cash in lieu of fractional shares of CFB Common Stock is
solely for the purpose of avoiding the expense and inconvenience to CFB of
issuing fractional shares and does not represent separately bargained for
consideration. The total cash consideration in the transaction that will be
paid to the VNC stockholders instead of issuing fractional shares of CFB will
not exceed one percent of the total consideration that will be issued to the VNC
stockholders in exchange for their VNC shares. The fractional share interests
of each VNC stockholder will be aggregated, and no VNC stockholder will receive
cash in an amount equal to or greater than the value of one CFB share.
The following representations have been made in connection with the
proposed transaction:
1. VNC is a corporation organized under the laws of the state of
Delaware, with its principal place of business at 1234 East Main
Street, El Cajon, California 92021; it has no sales, office or other
facilities in any other state or country;
<PAGE>
STERRETT & KIMMEL, LLP
The Board of Directors
August 6, 1999
Page 3
2. VNC has an authorized capital structure of 10 million shares of
common stock, par value of $0.0001 per share, of which 2,650,462 are
issued, outstanding, and have been fully paid for as of April 1,
1999;
3. VNC is a bank holding company and owns 100% of its sole subsidiary,
Valle de Oro Bank, N.A., a national banking association (the "Bank");
4. The Bank is engaged in the general banking business in San Diego,
California; the Bank provides retail and commercial banking services
to its customers, including checking and savings accounts, time
deposit facilities, personal loans, and installment loans; the Bank
also makes secured and unsecured commercial loans; the Bank does not
operate any foreign offices;
5. To the best of the President's knowledge, VNC is not in violation of
any of the laws of any of the jurisdictions in which it does business
or owns or leases property, and has full corporate powers to transact
its business;
6. VNC and CFB have entered into the Agreement, which provides for the
merger under Delaware law of VNC with and into CFB (the
"transaction"), with CFB as the surviving corporation;
7. The business reasons for the merger with CFB include the following:
a. CFB's offer provides greater economic value to VNC stockholders
than VNC would likely be able to generate in the foreseeable
future by remaining independent. Because the offer is
approximately 25 times 1998 earnings and 3.25 times book value,
it is substantially above the mean price offered to other
California banks in 1998 and 1999 to date. Analysts expect
CFB's value to increase in 1999. The CFB offer presents the
potential for further appreciation. It may be a candidate for
acquisition or "double dip." In addition, the prospect of
lower values for VNC stockholders is significant because of the
FAS change to accounting for mergers, eliminating the pooling
of interests method altogether. First, the requirement for
purchase accounting will add burdens to acquirers' future
earnings and compel them to offer less, because of their need
to produce high levels of current earnings. Second, small
acquirers like VNC will see their currency decline in value and
attractiveness because the impact of the FAS change will make
it harder for small stocks to make acquisitions.
<PAGE>
STERRETT & KIMMEL, LLP
The Board of Directors
August 6, 1999
Page 4
b. The CFB offer will reduce concerns for a downturn for VNC
stockholders because the current price of VNC stock may appear
overvalued when compared to its California peers.
c. CFB's offer involves a merger on a tax-free basis, giving the
VNC stockholders the option to participate in a larger, more
geographically diverse banking organization whose stock is
traded more actively.
d. The CFB offer may mean a greater reward for stockholders and
more options for management in minimizing adverse business and
employees' concerns. CFB supports community banking and
believes in local decision-making.
8. VNC has no subsidiaries other than Valle de Oro Bank;
9. In the transaction, the ratio for the exchange of shares of VNC
common stock for common stock of CFB was negotiated through
arm's-length bargaining and the fair market value of the CFB common
stock and other consideration to be received by each VNC stockholder
in the transaction will be approximately equal to the fair market
value of the VNC common stock surrendered by such stockholder in
exchange therefor;
10. There is no plan or intention by the stockholders of VNC who own 1%
or more of the VNC stock, and to the best of the knowledge of
management of VNC there is no plan or intention on the part of the
remaining stockholders of VNC to sell, exchange, or otherwise dispose
of a number of shares of CFB stock received in the transaction that
would reduce the VNC stockholders' ownership of CFB to a number of
shares having a value, as of the date of the transaction, of less
than 80% of the value of all of the formerly outstanding stock of VNC
as of the same date. For purposes of this representation, shares of
VNC stock exchanged for cash or other property, surrendered by
dissenters, or exchanged for cash in lieu of fractional shares of CFB
stock have been treated as outstanding VNC stock on the date of the
transaction. Moreover, shares of VNC stock and shares of CFB held by
VNC stockholders and otherwise sold, redeemed, or disposed of prior
or subsequent to the transaction have been considered in making this
representation; in addition, the management of VNC knows of no
transfers of VNC stock by any holders thereof prior to the Effective
Time which were made in contemplation of the transaction;
11. There is no intercorporate indebtedness existing between VNC and CFB
that was issued, acquired, or will be settled at a discount;
<PAGE>
STERRETT & KIMMEL, LLP
The Board of Directors
August 6, 1999
Page 5
12. CFB will pay its own expenses incurred in connection with the
transaction. VNC will pay its own expenses incurred in connection
with the transaction. VNC will not pay any of the expenses of the
stockholders of VNC incurred in connection with the transaction;
13. The liabilities of VNC assumed by CFB and the liabilities to which
the transferred assets of VNC are subject were incurred by VNC in the
ordinary course of its business;
14. Following the transaction, CFB will continue the historic business of
VNC or use a significant portion of VNC's historic business assets in
a business;
15. VNC is not under the jurisdiction of a court in a Title 11 or similar
action within the meaning of section 368(a)(3)(A) of the Internal
Revenue Code ("Code");
16. On the date of the transaction, the fair market value of the assets
of VNC will exceed the sum of its liabilities (including any
liabilities to which its assets are subject);
17. No two parties to the transaction are investment companies, as
defined in section 368(a)(2)(F)(iii) and (iv) of the Code; and
18. No dividends will be paid by VNC prior to the consummation of the
transaction other than regular periodic dividends, consistent in
amount and in effect with prior dividend distributions.
19. CFB is a corporation organized under the laws of the state of
Delaware, with its principal place of business at 520 Main Avenue,
Fargo, North Dakota 58124;
20. CFB has an authorized capital structure of 80,000,000 shares of
common stock, par value of $0.01 per share, of which 47,128,274 are
issued, outstanding, and have been fully paid for as of March 31,
1999 and 2,000,000 shares of preferred stock, no shares of which were
outstanding as of March 31, 1999;
21. CFB is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended;
22. CFB, through its subsidiaries, is engaged in the general banking
business in the midwestern United States; neither CFB nor its
subsidiaries operate any foreign offices;
<PAGE>
STERRETT & KIMMEL, LLP
The Board of Directors
August 6, 1999
Page 6
23. CFB has no plan or intention to reacquire any of its own stock issued
in the transaction; and
24. CFB has no plan or intention to sell or otherwise dispose of any of
the assets of VNC acquired in the transaction, except for
dispositions made in the ordinary course of business or transfers
described in section 368(a)(2)(C) of the Internal Revenue Code (the
"Code").
OPINIONS
Based on the foregoing description of the Merger and the terms of the
Registration Statement and subject to the assumptions, qualifications and
limitations set forth in this letter, we are of the opinion that if the Merger
is consummated as described above, then:
(i) The Merger will qualify as a "reorganization" under Section
368(a)(1)(A) of the Code.
(ii) CFB and VNC will each be a "party to the reorganization" within
the meaning of Section 368(b) of the Code.
(iii) No gain or loss will be recognized by VNC as a result of the
consummation of the Merger.
(iv) No gain or loss will be recognized by any VNC stockholder,
except to the extent of cash received in lieu of fractional
shares of CFB Common Stock upon the exchange of VNC Common
Stock for CFB Common Stock in the Merger.
Our opinion set forth herein is based upon the description of the Merger as
set forth in the Merger Agreement and in the Registration Statement. If the
actual facts relating to any aspect of the Merger differ from such description
in any material respect, the opinions expressed herein may become inapplicable.
Further, our opinions are based upon applicable provisions of the Code,
applicable Treasury Regulations, current published administrative decisions of
the IRS and existing judicial decisions as of the date hereof. No assurance can
be given that legislative, administrative or judicial decisions or
interpretations may not be forthcoming that will significantly change the
opinions set forth herein as our opinions. Further, our opinion is not binding
on the IRS, and the tax effects discussed above are not subject to absolute
resolution prior to the running of the statute of limitations or the rendering
of a final determination by a court of law or by a closing agreement with the
IRS. We assume no obligation to advise of any change concerning the above,
whether or not deemed material, which may hereafter come to or be brought to our
attention. We express no opinions other than those stated herein.
<PAGE>
STERRETT & KIMMEL, LLP
The Board of Directors
August 6, 1999
Page 7
In addition, this opinion does not address any aspects of state, local,
foreign or other tax laws that may be relevant to VNC stockholders. The
foregoing opinion presents the material U.S. federal income tax consequences of
the Merger, including certain consequences to stockholders of VNC who are
citizens or residents of the United States and who hold their shares as capital
assets. We express no opinion as to the laws of any jurisdiction other than the
United States of America. The foregoing opinion does not address all aspects of
federal income taxation that may be relevant to a particular VNC stockholder in
light of his or her personal circumstances or to VNC stockholders subject to
special federal income tax treatment (such as insurance companies, dealers in
securities, certain retirement funds, financial institutions, tax exempt
organizations or foreign persons). Further, the opinions stated with respect to
VNC stock do not apply to any stock rights, warrants or options to acquire VNC
stock. The opinion stated as to VNC stockholders are general in nature and do
not necessarily apply to any particular VNC stockholder, and, for example, may
not apply to stockholders who:
- are subject to the alternative minimum tax (to the extent that tax
affects the tax consequences);
- are subject to the "golden parachute" provisions of the Code (to the
extent that tax affects the tax consequences);
- acquired VNC stock pursuant to employee stock options or otherwise as
compensation, if such shares are subject to any restriction related
to employment;
- do not hold their shares as capital assets;
- hold their shares as part of a "straddle", "conversion transaction",
"hedging transaction" or other risk reduction transaction.
In particular, we express no opinion regarding the effects of the Merger and
CFB's assumption of outstanding options under any VNC stock option or stock
purchase plan.
This opinion may be relied upon by VNC and the stockholders of VNC,
except dissenting stockholders of VNC, as if such opinion were issued
directly to them. This opinion may not be relied upon, utilized or quoted by,
delivered or disclosed to, in whole or in part, by any other party, person,
corporation, entity or governmental authority for any other purpose, without
the express written permission of our firm. We hereby consent to the filing
of this opinion as an exhibit to the Registration Statement and to the
reference to our firm made therein under the caption "Legal Matters."
<PAGE>
STERRETT & KIMMEL, LLP
The Board of Directors
August 6, 1999
Page 8
Sincerely,
/s/ STERRETT & KIMMEL, LLP
<PAGE>
EXHIBIT 21.1
COMMUNITY FIRST BANKSHARES, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
OWNERSHIP
SUBSIDIARY BANK: LOCATION: PERCENTAGE
<S> <C> <C>
Community First National Bank Fergus Falls, MN 100.000%
Community First National Bank Fargo, ND 100.000%
Community First State Bank Vermillion, SD 100.000%
Community First National Bank Decorah, IA 100.000%
Community First National Bank Alliance, NE 100.000%
Community First National Bank Spooner, WI 100.000%
Community First National Bank Ft. Morgan, CO 100.000%
Community First National Bank Cheyenne, WY 100.000%
Community First National Bank Phoenix, AZ 100.000%
Community First National Bank Salt Lake City UT 100.000%
Community First National Bank Las Cruces NM 100.000%
NONBANK SUBSIDIARIES:
Community First Financial, Inc. Fargo, ND 100.000%
Community First Service Corporation Fargo, ND 100.000%
Community Insurance, Inc. Fargo, ND 100.000%
Community First Properties, Inc. Fargo, ND 100.000%
CFB Capital I Fargo, ND 100.000%
CFB Capital II Fargo, ND 100.000%
SUBSIDIARIES OF SUBSIDIARIES (100% OWNED):
Community First Insurance Agencies, Inc. Fargo,ND (Subsidiary of Community
First State Bank
[Vermillion, SD])
CFIN, Inc. Las Vegas, NV (Subsidiary of Community
First National Bank
[Spooner])
Equity Lending, Inc. Edina, MN (Subsidiary of Community
First National Bank [Fort
Morgan, CO])
Mountain Parks Financial Services, Inc. Denver, CO (Subsidiary of Community
First National Bank [Fort
Morgan, CO])
i
<PAGE>
OWNERSHIP
SUBSIDIARIES OF SUBSIDIARIES: (CONTINUED) LOCATION: PERCENTAGE
<S> <C> <C>
Community First Minnesota Holdings, Inc. Georgetown, British (Subsidiary of
Cayman Islands Community First National
Bank [Fergus Falls, MN])
CFIRE, Inc. Fargo, ND (Subsidiary of Community
First Minnesota Holdings,
Inc.)
Community First Holdings, Inc. Georgetown, British (Subsidiary of
Cayman Islands Community First National
Bank [Ft. Morgan, CO])
Colorado CFIRE, Inc. Fargo, ND (Subsidiary of Community
First Holdings, Inc.)
</TABLE>
ii
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Regulatory
Matters and Conditions to the Merger," "Accounting Treatment" and "Experts"
in the Registration Statement (Form S-4), related Prospectus of Community
First Bankshares, Inc. and related Proxy Statement/Prospectus of Valley
National Corporation for the registration of up to 3,611,111 shares of
Community First Bankshares, Inc. common stock and to the incorporation by
reference therein of our report dated July 1, 1999, with respect to the
consolidated financial statements of Community First Bankshares, Inc.
included in its Annual Report, as amended, on Form 10-K/A No. 1 for the year
ended December 31, 1998, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
Minneapolis, Minnesota
August 6, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Valley National Corporation
We consent to the inclusion of our report dated January 20, 1999, except for
note 16 of the notes to the consolidated financial statements which is as of
May 10, 1999, with respect to the consolidated balance sheets of Valley
National Corporation and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, changes in stockholders' equity
and comprehensive income, and cash flows for the years then ended, which
report appears in the registration statement on Form S-4 of Community First
Bankshares, Inc. dated August 9, 1999.
/s/ KPMG LLP
San Diego, California
August 9, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF STERRETT & KIMMELL, LLP
[Letterhead of Sterrett & Kimmel, LLP]
August 9, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D. C. 20549
Re: Consent of Sterrett & Kimmel, LLP
Ladies and Gentlemen:
This firm is counsel to Valley National Corporation, a Delaware
corporation. We acknowledge that we are referred to under the headings "The
Merger -- Certain Federal Income Tax Consequences" and "Legal
Matters" of the Prospectus which is a part of the registration statement and we
hereby consent to the use of our name in such registration statement. We
further consent to the filing of our "Tax Matters Opinion" as a part of this
registration statement.
Sincerely,
Sterrett & Kimmel, LLP
/s/ Sterrett & Kimmel, LLP
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Valley National Corporation
We hereby consent to the use in this Registration Statement on Form S-4 of
Community First Bankshares, Inc. of our report dated January 17, 1997 relating
to the financial statements of Valley National Corporation, which appears in
such Registration Statement. We also consent to the references to us under
the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers, LLP
San Diego, California
August 9, 1999
<PAGE>
EXHIBIT 23.6
CONSENT OF HOVDE FINANCIAL, INC.
We hereby consent to the use of our opinion in the Prospectus/Proxy
Statement included in this Registration Statement and to all references to our
firm included in or made a part of this Registration Statement.
HOVDE FINANCIAL, INC.
/s/ Hovde Financial, Inc.
El Cajon, California
August 6, 1999
<PAGE>
EXHIBIT 99.1
VALLEY NATIONAL CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR A SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON SEPTEMBER 16, 1999
The undersigned stockholder of Valley National Corporation, El Cajon,
California, does hereby nominate, constitute, and appoint C. K. Hill and James
F. Carroll, or either of them (with full power of substitution for me and in my
name, place and stead) to vote all the common stock of said Corporation,
standing in my name on its books on ____________________ , 1999, at the Special
Meeting of its stockholders to be held at Singing Hills Country Club, 3007
Dehesa Road, El Cajon, California 92019, on Thursday, September 16, 1999 at 7:00
p.m. (local time), or any adjournments thereof with all the powers the
undersigned would possess if personally present as follows:
1. To approve and vote upon the merger of Valley National Corporation ("VNC")
with Community First Bankshares, Inc. ("CFB"), a Delaware Corporation by
the adoption of an Agreement and Plan of Merger dated May 10, 1999, which
provides for the merger of VNC with and into CFB, with CFB as the surviving
entity with stockholders of VNC receiving stock of CFB in exchange for VNC
stock held by them.
/ / FOR / / AGAINST / / ABSTAIN
2. To transact such other business as may properly come before the meeting or
any adjournment thereof including adjournment of the meeting.
This proxy confers authority to vote "for" the propositions listed above
unless "against" or "abstain" is indicated. If any other business is presented
at said meeting, this proxy shall be voted in accordance with the
recommendations of management. All shares represented by properly executed
proxies will be voted as directed.
___________________________________
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE>
(CONTINUED FROM PREVIOUS SIDE)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE
PROPOSITIONS. THIS PROXY IS SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS AND MAY BE REVOKED PRIOR
TO ITS EXERCISE BY EITHER WRITTEN NOTICE OR
PERSONALLY AT THE MEETING OR BY A SUBSEQUENTLY
DATED PROXY.
Dated _____________________, 1999
--------------------------------------
Stockholder Signature
--------------------------------------
Stockholder Signature if held jointly
--------------------------------------
Please Print Name
--------------------------------------
Please Print Number of Shares
When signing as attorney, executor, administrator,
trustee or guardian, please give full title. If
more than one trustee, all should sign. All joint
owners must sign.
PLEASE SIGN AND RETURN IMMEDIATELY
