-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NJBW1gsCL42LGehOArPCacUWIigLqWOZjw97fYPpmAUi3/jv8DLdBpsMP8ObfOe9 QWWjpbPyua4NGkqmVUFiCw== 0000898430-96-001801.txt : 19960619 0000898430-96-001801.hdr.sgml : 19960619 ACCESSION NUMBER: 0000898430-96-001801 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VALLICORP HOLDINGS INC CENTRAL INDEX KEY: 0000849865 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 770229483 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14314 FILM NUMBER: 96562339 BUSINESS ADDRESS: STREET 1: 8405 N FRESNO ST STREET 2: THIRD FLR CITY: FRESNO STATE: CA ZIP: 93720 BUSINESS PHONE: 2094375705 MAIL ADDRESS: STREET 1: 8405 NORTH FRESNO ST CITY: FRESNO STATE: CA ZIP: 93720 10-Q 1 FORM 10-Q DATED 3/31/96 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 1996 --------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _________ Commission file number: 0-18202 ------- VALLICORP HOLDINGS, INC. (Exact name of registrant as specified in its charter) DELAWARE 77-0229483 -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 8405 NORTH FRESNO STREET, FRESNO, CALIFORNIA 93720 ------------------------------------------------------- (Address of principal executive offices) (209) 437-5700 -------------- (Registrant's telephone number, including area code) NONE ---- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK, $.01 PAR VALUE 13,335,651 SHARES OUTSTANDING AS OF APRIL 24, 1996 THIS REPORT INCLUDES A TOTAL OF 31 PAGES (Sequential numbering appears in lower right hand corner) INDEX VALLICORP HOLDINGS, INC.
PART I - FINANCIAL INFORMATION Page - - ------------------------------ ---- Item 1. Financial Statements Unaudited Consolidated Balance Sheets- March 31, 1996 and December 31, 1995.......................... 3 Unaudited Consolidated Statements of Income - Three Months Ended March 31, 1996 and 1995.................... 4 Unaudited Consolidated Statements of Cash Flows - Three Months Ended March 31, 1996 and 1995.................... 5 Notes to Unaudited Consolidated Financial Statements.......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 12 PART II - OTHER INFORMATION - - --------------------------- Item 6. Exhibits and Reports on Form 8-K................................... 30 SIGNATURES.................................................................. 31 - - ----------
Page 2 VALLICORP HOLDINGS, INC. UNAUDITED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARES)
MARCH 31, DECEMBER 31, 1996 1995 --------------------------- (RESTATED) ASSETS Cash and due from banks $ 76,783 $ 103,004 Federal funds sold 100,000 57,770 ---------- ---------- Cash and cash equivalents 176,783 160,774 Loans held for sale 4,915 5,158 Securities: Available for sale 200,438 249,586 Held to maturity (market value $23,464 in 1996 and $66,075 in 1995) 23,142 65,646 --------- --------- Total securities 223,580 315,232 Loans 836,189 865,749 Allowance for loan losses (12,769) (14,986) --------- --------- Net loans 823,420 850,763 Accrued interest receivable 10,240 11,201 Premises and equipment, net 26,467 25,919 Other assets 18,640 17,744 --------- --------- Total assets $1,284,045 $1,386,791 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing transaction accounts $ 264,628 $ 300,746 Interest-bearing transaction and savings accounts 520,124 526,274 Certificates of deposit, $100,000 and over 125,906 136,284 Other time deposits 216,007 258,082 --------- --------- Total deposits 1,126,665 1,221,386 Other liabilities 1,273 6,942 Federal funds purchased and repurchase agreements 8,674 10,410 Debt financing 20,909 20,932 --------- --------- Total liabilities 1,157,521 1,259,670 STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; authorized 5,000,000 shares, none issued - - Common stock, $.01 par value; authorized 20,000,000 shares, issued and outstanding 13,309,353 shares in 1996 and 13,266,087 in 1995 133 133 Paid-in capital 84,559 84,135 Net unrealized securities losses, net of income taxes (1,773) (536) Retained earnings 43,605 43,389 --------- --------- Total stockholders' equity 126,524 127,121 --------- --------- Total liabilities and stockholders' equity $1,284,045 $1,386,791 ========= =========
See notes to unaudited consolidated financial statements. Page 3 VALLICORP HOLDINGS, INC. UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, 1996 1995 -------------------- (RESTATED) INTEREST INCOME Loans, including fees $20,475 $21,812 Securities 3,575 4,183 Federal funds sold and other 1,217 456 ------ ------ Total interest income 25,267 26,451 INTEREST EXPENSE Deposits 7,551 7,651 Debt financing 333 431 Other 125 52 ------ ------ Total interest expense 8,009 8,134 ------ ------ NET INTEREST INCOME 17,258 18,317 PROVISION FOR LOAN LOSSES 1,925 678 ------- ------- Net interest income after provision for loan losses 15,333 17,639 OTHER INCOME Service charges on deposits 1,780 1,820 Other service charges and fees 648 419 Mortgage Banking 295 281 Gain (loss) on sale of securities 11 (71) Other 447 475 ----- ----- Total other income 3,181 2,924 OTHER EXPENSE Salaries and employee benefits 6,390 6,679 Occupancy 1,574 1,387 Equipment and maintenance 1,199 1,062 Merger costs 4,576 - Other 4,382 4,540 ------ ------ Total other expenses 18,121 13,668 INCOME BEFORE INCOME TAXES 393 6,895 Income taxes 177 2,769 ------ ------ NET INCOME $ 216 $ 4,126 ======= ======= EARNINGS PER SHARE Primary $ 0.02 $ 0.31 ====== ===== Fully Diluted $ 0.02 $ 0.31 ====== ===== DIVIDENDS PER SHARE PAID BY VALLICORP $ 0.10 $ 0.09 ===== =====
See notes to unaudited consolidated financial statements. Page 4 VALLICORP HOLDINGS, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, 1996 1995 ----------------------- (RESTATED) OPERATING ACTIVITIES Net income $ 216 $ 4 ,126 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,925 678 Provision for losses on other real estate owned 275 125 Depreciation and amortization 1,680 1,447 Deferred income tax benefit - (16) Originations of loans held for sale, net of principal collected (18,506) (6,541) Proceeds from loan sales 18,987 6,638 Gain on sale of loans (238) (65) Gain (loss) on sale of securities (11) 79 Gain (loss) on sale of other real estate owned (48) 26 Decrease in accrued interest receivable 497 903 Increase in other assets (4,761) (3,914) (Decrease) in other liabilities (2,850) (1,310) ------ ------ Net cash (used in) provided by operating activities (2,834) 2,176 INVESTING ACTIVITIES Proceeds from sales of available for sale securities - 6,594 Proceeds from maturities of available for sale securities 60,745 7,052 Purchases of available for sale securities (12,999) (32,038) Proceeds from maturities of held to maturity securities 40,507 2,871 Net decrease in loans excluding loan participations and loans held for sale 23,333 17,197 Sales of loan participations 6,085 546 Purchases of premises and equipment (1,995) (1,198) Proceeds from premises and equipment disposals 413 315 Proceeds from sale of other real estate owned 696 726 ------ ------ Net cash provided by investing activities 116,785 2,065 FINANCING ACTIVITIES (Decrease) increase in deposits (94,721) 8,209 Decrease in federal funds purchased and repurchase agreements (1,736) (5,500) Principal payments on debt financing (2) (2) Common stock issued under Dividend Reinvestment Stock Purchase Plan 117 - Cash paid for fractional shares in connection with mergers (4) - Stock options exercised 290 222 Cash dividends (1,886) (913) ------- ------ Net cash (used in) provided by financing activities (97,942) 2,016 ------- ------ Increase in cash and cash equivalents 16,009 6,257 Cash and cash equivalents at beginning of period 160,774 106,968 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $176,783 $113,225 ======= ======= - - --------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOWS INFORMATION Interest paid $ 8,700 $8,042 Income taxes paid 13,222 1,978 Transfer of loans to other real estate 2,671 610 Transfer of securities from held to maturity to available for sale in connection with merger 980 - Conversion of subordinated notes into common stock 21 21 Financing sale of premises and other real estate 345 312 - - ---------------------------------------------------------------------------------------------------------------------------
See notes to unaudited consolidated financial statements. Page 5 VALLICORP HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES BASIS OF PRESENTATION: The accompanying consolidated financial statements include the effect of the first quarter 1996 acquisitions of El Capitan Bancshares, Inc. (El Capitan) and CoBank Financial Corporation (CoBank) which were accounted for as poolings-of-interests. These financial statements include the accounts of ValliCorp Holdings, Inc. (ValliCorp) and its subsidiary, ValliWide Bank , hereinafter referred to as the "Company". Accordingly, the financial information included in the consolidated financial statements and notes thereto, present the combined results of operations of ValliCorp, El Capitan and CoBank as if the merger had been in effect for all periods presented. All significant intercompany balances and transactions have been eliminated in consolidation. These unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles on a basis consistent with the accounting policies reflected in the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. They do not, however, include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Refer to the Form 10-K for the year ended December 31, 1995 for additional information and the complete financial statements. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments (all of which are of a normal, recurring nature) necessary for a fair statement of the results for the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the year as a whole. RECLASSIFICATIONS: Certain reclassifications have been made to prior year balances to conform to current year presentation. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS: The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was adopted by the Company effective January 1, 1996. SFAS No. 121 establishes standards for accounting for the impairment of long-lived assets, certain identifiable intangibles and goodwill. It does not apply to financial instruments, long-term customer relationships of a financial institution (e.g., core deposit intangibles), mortgage and other servicing rights, or deferred tax assets. The effect of adoption of this standard is not material. MORTGAGE SERVICING RIGHTS: The FASB issued SFAS No. 122, "Accounting for Mortgage Servicing Rights," which was adopted by the Company effective January 1, 1996. SFAS No. 122 requires that the Company recognize as separate assets rights to service mortgage loans for others, whether those servicing rights are originated or purchased. Previously, only purchased servicing rights were capitalizable as an asset whereas internally originated rights were expensed. SFAS No. 122 also requires that capitalized servicing rights be assessed for impairment based on fair value, rather than an estimate of undiscounted future cash flows. The effect of adoption of this standard is not material. Page 6 VALLICORP HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE A - ACCOUNTING POLICIES - CONTINUED ACCOUNTING FOR STOCK-BASED COMPENSATION: The FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." The new standard defines a fair value method of accounting for stock options and other equity instruments, such as stock purchase plans. Under this method, compensation cost is measured based on the fair value of the stock award when granted and is recognized as an expense over the service period, which is usually the vesting period. This standard is effective for the Company beginning in 1996, and requires measurement of awards made beginning in 1995. The new standard permits companies to continue to account for equity transactions with employees under existing accounting rules, but requires disclosure in a note to the financial statements of the pro forma net income and earnings per share as if the company had applied the new method of accounting. The Company will follow these disclosure requirements for its employee stock plans. As a result, adoption of the new standard did not impact reported earnings or earnings per share, and has no effect on the Company's cash flows. NOTE B - MERGERS AND ACQUISITIONS COMPLETED TRANSACTIONS EL CAPITAN BANCSHARES, INC.: On February 2, 1996, El Capitan Bancshares, Inc. together with its wholly-owned subsidiary, El Capitan National Bank, were merged with and into ValliCorp Holdings, Inc. and its wholly-owned subsidiary, ValliWide Bank, respectively. Pursuant to the amended Agreement and Plan of Reorganization each outstanding share of El Capitan common stock was exchanged for 2.3286 shares of ValliCorp's common stock resulting in approximately 2 million shares being issued. At the date of the merger, El Capitan had unaudited total assets of $128 million, including $63 million in loans and $48 million in investment securities, and total unaudited liabilities of $113 million, including $112 million in deposits. The merger was accounted for as a pooling-of-interests. COBANK FINANCIAL CORPORATION: On March 22, 1996, CoBank Financial Corporation, together with its wholly-owned subsidiary, Commerce Bank of San Luis Obispo, N.A., were merged with and into ValliCorp Holdings, Inc. and its wholly-owned subsidiary, ValliWide Bank, respectively. Pursuant to the amended Agreement and Plan of Reorganization each outstanding share of CoBank common stock was exchanged for 1.1875 shares of ValliCorp's common stock resulting in approximately 1 million shares being issued. At the date of the merger, CoBank had unaudited total assets of $97 million, including $64 million in loans and $24 million in investment securities, and total unaudited deposits of $87 million. The merger was accounted for as a pooling-of-interests. Page 7 VALLICORP HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The following table presents net interest income, net income and earnings per share for ValliCorp, El Capitan and CoBank and on a combined basis.
YEAR ENDED DECEMBER 31, -------------------- 1995 1994 -------------------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) NET INTEREST INCOME: ValliCorp $59,364 $54,422 El Capitan 6,849 7,503 CoBank 6,096 5,158 ------ ------ Combined $72,309 $67,083 ======= ======= NET INCOME: ValliCorp $10,247 $ 7,794 El Capitan 1,044 1,882 CoBank 510 775 ------ ------ Combined $11,801 $10,451 ======= ======= FULLY-DILUTED EARNINGS PER SHARE: ValliCorp $ 0.98 $ 0.75 El Capitan 1.22 2.21 CoBank 0.60 0.97 Combined 0.87 0.78
PENDING TRANSACTION AUBURN BANCORP: ValliCorp and Auburn Bancorp, Inc. ("Auburn") have entered into an Agreement and Plan of Reorganization (the "Auburn Agreement") dated March 27, 1996, whereby ValliCorp has agreed to acquire the outstanding shares of Auburn in a merger. Auburn, as of March 31, 1996, has three branches with total loans, deposits and equity of approximately $55,000,000, $67,000,000 and $7,000,000, respectively. Under the terms of the Auburn Agreement, Auburn shareholders will receive 0.8209 shares of ValliCorp common stock for each share of Auburn common stock. The Company expects to issue approximately 900,000 shares of ValliCorp common stock at the completion of the merger with Auburn. The Auburn Agreement calls for the merger of Auburn with and into ValliCorp, and the merger of Auburn's subsidiary, Bank of Commerce, National Association, into ValliCorp's subsidiary, ValliWide Bank. The Company anticipates that the merger will be consummated in the third quarter 1996 and accounted for using the purchase method. Completion of the merger is subject to, among other things, the approval of Auburn's shareholders and regulatory authorities. Page 8 VALLICORP HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE C - SECURITIES The amortized cost and approximate fair value of available for sale securities are as follows:
MARCH 31, 1996 DECEMBER 31, 1995 -------------- ----------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- ----- --------- ----- (IN THOUSANDS) U.S. Treasury securities $51,368 $51,112 $55,507 $55,418 U.S. Government agencies 74,554 72,431 121,190 120,491 U.S. Government agency mortgage- backed securities 53,709 52,127 50,681 49,545 State and political subdivisions 16,146 16,998 15,503 16,496 Corporate and other securities 7,771 7,770 7,521 7,636 ------ ------ ------ ------ $203,548 $200,438 $250,402 $249,586 ======= ======= ======= =======
The amortized cost and approximate fair value of held to maturity securities are as follows:
MARCH 31, 1996 DECEMBER 31, 1995 -------------- ----------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- ----- ------- ----- (IN THOUSANDS) U.S. Treasury securities $ 998 $ 986 $ 982 $ 996 U.S. Government agencies 2,603 2,587 42,579 42,535 U.S. Government agency mortgage- backed securities 8,061 7,948 8,258 8,222 State and political subdivisions 11,480 11,943 13,827 14,322 ------ ------ ------ ------ $23,142 $23,464 $65,646 $66,075 ====== ====== ====== ======
In connection with the CoBank merger, the Company transferred approximately $980,000 of securities from the held to maturity portfolio to the available for sale portfolio. This transfer was made in compliance with generally accepted accounting principles, to maintain the Company's existing interest rate risk position and credit risk policy. Page 9 VALLICORP HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE D - LOANS Loans consist of the following as of the indicated dates:
MARCH 31, DECEMBER 31, 1996 1995 ------- ------- (IN THOUSANDS) Commercial $436,996 $443,660 Real estate - construction 79,919 74,720 Real estate - mortgage 117,875 136,278 Installment 196,418 205,869 Other 4,981 5,222 ------- ------- 836,189 865,749 Allowance for loan losses (12,769) (14,986) ------- ------- Net loans $823,420 $850,763 ======= =======
At March 31, 1996, the Company's recorded investment in loans for which an impairment has been recognized totaled $8,225,000. Included in this amount is $3,712,000 of impaired loans for which the related SFAS No. 114 allowance is $1,898,000. The balance of the allowance for loan losses in excess of these specific reserves is available to absorb losses from all loans, although allocations have been made for certain loans and loan categories as part of management's quarterly analysis of the allowance. The average recorded investment in impaired loans was $10,484,000 for the first three months of 1996. The Company uses the cash basis method of income recognition for impaired loans. For the quarter ended March 31, 1996, the Company did not recognize any interest income on such loans. Changes in the allowance for loan losses are as follows:
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, 1996 1995 1995 ------- -------- ----------- (IN THOUSANDS) Balance at beginning of period $14,986 $14,130 $14,130 Provision for loan losses 1,925 678 9,633 Charge-offs (4,643) (381) (9,448) Recoveries 501 243 671 ------ ------ ------ Balance at end of period $12,769 $14,670 $14,986 ====== ====== ======
Page 10 VALLICORP HOLDINGS, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE E - ALLOWANCE FOR LOSSES ON OTHER REAL ESTATE OWNED Changes in the allowance for losses on other real estate owned (OREO) are as follows:
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, 1996 1995 1995 -------- -------- --------- (IN THOUSANDS) Balance at beginning-of-period $ 496 $250 $ 250 Net charge-offs (630) (142) (689) Provision for losses on other real estate owned 275 146 935 ----- ---- ---- Balance at end-of-period $ 141 $ 254 $ 496 ==== ===== ====
NOTE F - EARNINGS PER SHARE The weighted average shares outstanding for the respective periods are approximately:
THREE MONTHS ENDED MARCH 31, ------------------ 1996 1995 ---- ---- (IN THOUSANDS) Primary 13,452 13,472 Fully-diluted 13,463 13,521
In April 1996, the Board of Directors approved a regular quarterly cash dividend per share of $0.10, payable on May 28, 1996 to stockholders of record on May 10, 1996. NOTE G - MERGER COSTS Merger costs totaling $4,576,000 ($2,767,000 net of tax) were recorded in 1996. Such costs were recorded in connection with the El Capitan and CoBank mergers. Such costs related primarily to separation and benefit costs, professional, legal and investment banking fees, facilities termination fees and other merger related costs. Noncash expenses included in merger costs were not material. Page 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's strategy is to provide high quality, community tailored financial services to businesses and consumers located in Central California. The Company is continually seeking to increase its market share through the opening of new branches in the communities it serves and through acquisitions of other financial institutions and/or branches within its target market. In the first quarter of 1996, the Company completed two acquisitions within its target market, El Capitan Bancshares, Inc. (El Capitan) and CoBank Financial Corporation (CoBank). El Capitan, located in Sonora, California, was an eight branch bank holding company with assets of $128 million at the date of the merger. CoBank, located in San Luis Obispo, California and serving the central coast of California, was a four branch bank holding company with assets of $97 million at the date of the merger. Following these mergers, the Company will cover a substantial portion of Central California through its franchise of 54 full-service banking offices. The El Capitan and CoBank mergers were accounted for as poolings-of-interests and, accordingly, the financial information included in the remainder of this management's discussion and analysis of the consolidated financial condition and results of operations presents the combined results of operations of ValliCorp, El Capitan and CoBank as if the merger had been in effect for all periods presented. The Company achieved consolidated net income before merger costs for the three months ended March 31, 1996 of $3 million , or $0.22 per share on a fully- diluted basis, compared to $4.1 million, or $0.31 per share, for the same quarter in 1995. Including the merger related charge of $4.6 million ($2.8 million after tax), the Company achieved net income of $216,000, or $0.02 per share, for the first quarter of 1996. The first quarter of 1996 was significantly impacted by an increased provision for loan losses as compared to the corresponding period of the prior year (refer to "Nonperforming Assets"). Dividends per share increased by 11% to $0.10 as compared to $0.09 per share in the first quarter of 1995. At March 31, 1996, the Company's total risk-based capital and leverage ratios were 14.16% and 9.75% compared to 13.40% and 8.76% at December 31, 1995, respectively, all of which were in excess of applicable minimum regulatory guidelines. Page 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW - CONTINUED Nonperforming assets were $15,247,000 at March 31, 1996 (1.19% of total assets) compared to $20,249,000 at December 31, 1995 (1.46% of total assets). The allowance for loan losses as a percentage of total loans was 1.53% at March 31, 1996 compared to 1.73% at December 31, 1995. The coverage ratio (allowance for loan losses divided by nonperforming loans) was 119%. RESULTS OF OPERATIONS Net income for the three months ended March 31, 1996 was impacted by merger charges totaling $4.6 million ($2.8 million after tax, $0.20 per share) relating to the El Capitan and CoBank mergers. Excluding the merger charges, net income for the three months ended March 31, 1996 decreased by $1.1 million, or 27% as compared to the same period in 1995. This decrease is primarily due to the higher provision for loan losses of $1.9 million at March 31, 1996 as compared to $678,000 at March 31, 1995. The increased provision is due to a significant increase in net charge offs in the first quarter of 1996 related to previously identified problem loans (refer to "Allowance for Loan Losses"). Page 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table presents the distribution of average assets, liabilities and stockholders' equity as well as the total dollar amount of interest income from average interest-earning assets and resultant yields, and the dollar amounts of interest expense and average interest-bearing liabilities, expressed both in dollars and in rates.
THREE MONTHS ENDED MARCH 31, 1996 1995 ------------------------------------------------------------------- AVERAGE YIELD/ AVERAGE YIELD/ BALANCE RATE INTEREST BALANCE RATE INTEREST ------------------------------------------------------------------- ASSETS: (DOLLARS IN THOUSANDS) Interest-earning assets: Loans/(1) (3)/ $ 825,395 9.98% $20,475 $857,357 10.32% $21,812 Securities/(2)/ 248,333 5.79 3,575 297,647 5.70 4,183 Federal funds sold and other 87,024 5.62 1,217 30,470 6.02 456 ------- ---- ------- -------- ----- ------ Total interest-earning assets 1,160,752 8.75 25,267 1,185,474 9.05 26,451 Allowance for loan losses (14,735) (14,464) Noninterest-bearing assets: Cash and due from banks 85,703 86,668 Premises and equipment, net 26,505 25,011 Accrued interest receivable 10,008 9,704 Other assets 32,428 29,416 ------- ------- Total average assets $1,300,661 $1,321,809 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY: Interest-bearing liabilities: Transaction accounts $ 349,883 2.07% $ 1,803 $404,466 2.39% $ 2,381 Savings accounts 170,231 2.62 1,107 122,928 2.21 671 Certificates of deposit 349,626 5.34 4,641 371,215 5.02 4,599 Debt financing 20,909 6.41 333 26,100 6.70 431 Short-term borrowings 9,875 5.09 125 4,112 5.33 52 ------- ---- ------- ------- ---- ------ Total interest-bearing liabilities 900,524 3.58 8,009 928,821 3.55 8,134 Noninterest-bearing liabilities: Transaction accounts 268,413 268,784 Other liabilities 3,634 4,861 ------- ------ Total liabilities 1,172,571 1,202,466 Total stockholders' equity 128,090 119,343 --------- ------- Total average liabilities and stockholders' equity $1,300,661 $1,321,809 ========= ========= NET INTEREST INCOME $17,258 $18,317 ====== ====== Interest income as a percentage of average earning assets 8.75% 9.05% Interest expense as a percentage of average earning assets (2.78) (2.78) ----- ----- NET INTEREST MARGIN 5.97% 6.27% ===== =====
/(1)/ Amount includes loans held for sale, but excludes nonaccrual loans. /(2)/ Applicable nontaxable securities yields have not been presented on a taxable-equivalent basis as the effect on net interest margin is not significant. Tax equivalent yields on investment securities were 6.21% and 6.09% at March 31, 1996 and 1995, respectively. /(3)/ Interest income includes the amortization of net origination fees of $145,000 and $473,000 for the period ended March 31, 1996 and 1995, respectively. Page 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NET INTEREST INCOME The Company's primary source of revenue is net interest income, which is the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The Company's net interest margin is influenced by competitive forces within its market area, the mix of its earning assets and deposit base, interest reversals related to loans placed on nonaccrual status and the changing interest rate environment. Net interest income before provision for loan losses decreased $1,059,000 (6%) for the three months ended March 31, 1996 compared to the corresponding period in 1995. As summarized in the net interest income variance analysis on the following page, this decline was comprised of a decrease in total interest income of $1,184,000 (4%) which was offset by a decrease in total interest expense of $125,000 (2%). The Company's net interest margin (based on average earning assets) for the three months ended March 31, 1996 decreased 30 basis points to 5.97% as compared to March 31, 1995. The reduction in the net interest margin is primarily attributable to a decline in interest rates and a change in the interest-earning asset mix, such that the loan portfolio represents a declining portion of the mix at March 31, 1996 as compared to the same period in 1995. This results in a lower yield on earning assets. Interest-earning Asset Mix: (Percentage of average interest-earning assets)
THREE MONTHS ENDED ------------------ MARCH 31, YEAR ENDED DECEMBER 31, --------- ----------------------- 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- Loans 71% 72% 72% 68% 71% Securities 21 25 23 30 25 Federal Funds sold and other 8 3 5 2 4 --- --- --- --- --- Total earning assets 100% 100% 100% 100% 100% === === === === ===
The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a "volume change." It is also affected by changes in yields earned on interest- earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a "rate change." The following table sets forth changes in interest income and interest expense for each major category of interest- earning asset and interest-bearing liability, and the amount of change attributable to volume and rate changes for the years indicated. The changes due to rate and volume have been allocated to rate and volume in proportion to the relationship between their absolute dollar amounts. The effects of tax- equivalent yields have not been considered because they are not significant. Page 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO 1995 ----------------------------------------- TOTAL RATE VOLUME ----- ---- ------ (IN THOUSANDS) NET INTEREST INCOME VARIANCE ANALYSIS: Increase (decrease) in interest income: Loans $(1,337) $(628) $(709) Securities (608) 68 (676) Federal funds sold 761 (35) 796 ----- ----- ----- Total (1,184) (595) (589) Increase (decrease) in interest expense: Interest-bearing transaction accounts (578) (286) (292) Savings accounts 436 140 296 Certificates of deposit 42 298 (256) Debt financing (98) (18) (80) Short-term borrowings 73 - 73 ----- ---- ----- Total (125) 134 (259) ---- ---- ---- Decrease in net interest income $(1,059) $(729) $(330) ====== ==== ====
The decrease in total interest income of $1,184,000 is comprised of a $589,000 volume decrease associated with the $24,722,000 decrease in average earning assets for the three months ended March 31, 1996 compared to the same period in 1995 and a $595,000 rate decrease associated with a decrease in the total yield on interest-earning assets to 8.75% for the three months ended March 31, 1996 from 9.05% for the same period in 1995. The slight decrease in total interest expense of $125,000 at March 31, 1996 is comprised of a volume decrease of $259,000 related to the $28,297,000 decrease in average interest-bearing liabilities for the three months ended March 31, 1996 compared to the same period of 1995 and a $134,000 rate increase associated with an increase in the cost of funds to 3.58% for the three months ended March 31, 1996 from 3.55% for the same period in 1995. The average balance of securities decreased from $297,647,000 for the three months ended March 31, 1995 to $248,333,000 for the three months ended March 31, 1996. This $49,314,000 decrease is primarily due to the maturity of securities held for investment, as well as the sale of certain available for sale securities for asset/liability management purposes. Average loans decreased $31,962,000 to $825,395,000 for the three months ended March 31, 1996. The decrease in the yield on loans from 10.32% for the three months ended March 31, 1995 to 9.98% for the same period of 1996 reflects the impact of declining interest rates in the first quarter of 1996 and increased competition on loan pricing. Page 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Average deposits decreased $28,869,000 to $869,740,000 for the three months ended March 31, 1996 due primarily to a planned reduction in high cost time deposits. The interest rate paid on average deposits rose to 3.50% for the three months ended March 31, 1996 compared to 3.45% for the same period of 1995. A changing interest rate environment can have a significant impact on the Company's net interest margin as measured against average earning assets and its interest rate spread. Management continually monitors its net interest margin by repricing its loan and deposit products after giving effect to such factors as competition in the market place and expected maturities in the loan, investment securities and deposit portfolios. OTHER INCOME Service charge income on deposits decreased slightly from last year primarily due to a decrease in certain deposit accounts on which service charge income is earned. Other service charges and fees increased principally due to revenues generated from merchant services. The increase in mortgage banking revenue compared to the same period of 1995 was due to an increase in refinancing activity resulting from a more favorable interest-rate environment. OTHER EXPENSE The following table summarizes changes in other expense for the three months ended March 31, 1996 as compared to the corresponding period in 1995:
MARCH 31, CHANGE 1996 VS. 1995 ---------------- -------------------- 1996 1995 AMOUNT PERCENT ---- ---- ------ ------- (IN THOUSANDS) Salaries and employee benefits $ 6,390 $ 6,679 $(289) (4)% Occupancy 1,574 1,477 97 7 Equipment and maintenance 1,199 1,106 93 8 Professional and legal fees 606 393 213 54 Amortization of intangible assets 390 435 (45) (10) FDIC assessments 27 636 (609) (96) Marketing 254 281 (27) (10) Stationary and supplies 250 360 (110) (31) Telephone 271 257 14 5 Data processing 533 153 380 248 Merchant credit card 303 117 186 159 OREO expense 313 227 86 38 Miscellaneous 1,435 1,547 (112) (7) ------ ------ ----- --- Total other expenses before merger costs 13,545 13,668 (123) (1) Merger costs 4,576 - 4,576 - ------ ------ ----- --- Total other expenses $18,121 $13,668 $4,453 33% ====== ====== ===== ===
Other expense totaled $18,121,000 in 1996, up $4,453,000, or 33%, compared to the same period in 1995. Excluding, for comparative purposes, merger costs totaling $4,576,000 in 1996, other expense in 1996 decreased $123,000, or 1% compared to 1995. This decrease resulted primarily from decreases in salaries and employee benefits and FDIC assessments, offset by an increase in professional and legal fees and data processing expenses. Page 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER EXPENSE - CONTINUED The decrease in salaries and employee benefits of $289,000 (4%) is primarily attributable to a reduction in FTE's related to the two recently completed acquisitions and outsourcing of data processing functions. Effective June 1, 1995, the FDIC reduced premiums resulting in a decrease of $609,000 (96%) in assessments for 1996. Professional and legal fees increased by $213,000 (54%) principally related to outside legal collection services on nonperforming loans. Data processing expenses increased $380,000 (248%) primarily related to outsourcing part of the Company's data processing functions which was offset by reduced personnel costs and related expenses. Merger costs totaling $4.6 million ($2.8 million after taxes or $0.20 per share) were recorded in 1996 in connection with the El Capitan and CoBank mergers. Such costs relate primarily to separation and benefit costs, professional, legal and investment banking fees, facilities termination costs and other related merger costs. Noncash expenses included in merger costs were not material. The Company believes, as a result of the El Capitan and CoBank mergers, anticipated cost savings of approximately $2.5 million is projected to be achieved in future periods through consolidation of operations and elimination of duplicate services. The timing and extent to which any additional operating cost savings will be achieved depends on, among other things, the regulatory environment and economic conditions and may be affected by unanticipated changes in business activities, inflation and operating costs. Therefore, there can be no assurance that any additional operating cost savings will be realized in full or in part. The efficiency ratio excluding merger charges, for the three months ended March 31, 1996 and 1995 was 66.27% and 64.35%, respectively. The increase in the Company's efficiency ratio reflects in large part, on the reduction in the net interest margin (refer to "Net Interest Income"). Other expenses for the first quarter 1996 do not include the full impact of cost savings projected to be realized during the remainder of the year as a result of the consolidation of operations related to the two recently completed acquisitions are achieved. BALANCE SHEET ANALYSIS For the three months ended March 31, 1996, when compared to December 31, 1995 the Company's total loans, assets and deposits decreased by $29,560,000 (3%), $101,058,000 (7%), and $94,721,000 (8%), respectively. Assets and deposits decreased primarily from a planned reduction in high cost certificates of deposits, as well as seasonal and merger-related decreases in deposits. SECURITIES PORTFOLIO Securities available for sale totaled $200,438,000 at March 31, 1996 compared to $249,586,000 at December 31, 1995. Sales and maturities of U.S. Government agency securities accounted for the majority of the decrease. Additionally, the available for sale securities portfolio had net unrealized losses of approximately 1.55% of the portfolio compared to approximately 0.33% at December 31, 1995, principally due to the rising interest-rate environment. Page 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Securities held to maturity totaled $23,142,000 at March 31, 1996, compared with $65,646,000 at December 31, 1995. Maturities of U.S. Government agency securities accounted for the majority of the decrease. LOAN PORTFOLIO The Company concentrates its lending activities in four principal areas: commercial; real estate-construction; real estate-mortgage; and installment loans. Interest rates charged for loans made by the Company vary with the degree of risk, the size and maturity of the loan, the borrowers' depository relationships with the Company, and prevailing market rates. The following table sets forth the amount of loans outstanding by type of credit extension as of the periods indicated.
MARCH 31, 1996 DECEMBER 31, 1995 ---------------- ----------------- DOLLAR PERCENT DOLLAR PERCENT AMOUNT OF LOANS AMOUNT OF LOANS ------ -------- ------ -------- LOAN CATEGORIES: (In thousands) Commercial $436,996 52% $443,660 51% Real estate - construction 79,919 10 74,720 8 Real estate - mortgage 117,875 14 136,278 16 Installment 196,418 23 205,869 24 Other 4,981 1 5,222 1 -------- --- -------- --- Total loans 836,189 100% 865,749 100% Less allowance for loan losses (12,769) (14,986) -------- -------- Net loans $823,420 $850,763 ======== ========
Page 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS There were no concentrations of loans exceeding 10% of total loans which were not otherwise disclosed as a category of loans in the above table. Unsecured loans do not comprise a significant portion of the loan portfolio. The Company has collateral management policies in place ensuring that collateral lending of all types is on a basis which the Company believes is consistent with regulatory lending standards. Valuation analyses are utilized to take into consideration the potentially adverse economic conditions under which liquidation of collateral could occur. It is generally the Company's policy to fully collateralize all loans with loan-to-value ratios determined on an individual loan basis taking into account the financial stability of each borrower and the value and type of collateral. In addition to real estate, other collateral accepted as security against loans includes deposits, securities, accounts receivable, inventories, equipment and other assets. COMMERCIAL The Company's commercial and agribusiness loans, referred to herein as commercial loans, totaled $436,996,000 (52%) and $443,660,000 (51%) of the Company's total loans at March 31, 1996 and December 31, 1995, respectively. Commercial loans consist primarily of short-to medium-term financing for small- to medium-sized businesses and professionals located in Central California (California's Heartland). Commercial loans are diversified as to industries and types of businesses, with no material industry concentrations and a profile which the Company believes generally reflects the economy of California's Heartland. Approximately 47% of total loans at March 31, 1996 are commercial loans which are unsecured or secured by various assets, including equipment, receivables, deposits and other assets. The primary source of loan repayment is the cash flow from the commercial businesses, while the collateral represents a secondary source of repayment. Loan-to-value ratios generally range from approximately 40% to 80%, depending on the nature of the collateral. Approximately 5% of total loans at March 31, 1996 are commercial loans secured by real estate, but since commercial loans are typically repaid through cash flows from the borrower's business, they are not classified by the Company as real estate-mortgage loans. For agricultural businesses, loan-to-value ratios generally range from 50% to 60%, for agricultural development loans, and up to 70% for other purposes. For other commercial business loans secured by real estate (represent 5% of total loans at March 31, 1996), loan-to-value ratios approximate 65% to 70% or less. The Company also makes commercial loans that are guaranteed by the SBA and the Valley Small Business Corporation ranging from 85% to 90% of the balance. At March 31, 1996, the Company had outstanding 41 commercial loans in excess of $1,000,000. REAL ESTATE - CONSTRUCTION LOANS Real estate-construction loans are primarily for residential housing. The primary market focus is toward local developers and small residential projects located in the Company's market area. The economic viability of the project and the borrower's past development record and credit worthiness are primary considerations in the loan underwriting decision. The Company's real estate- construction loan portfolio at March 31, 1996 and December 31, 1995 totaled $79,919,000 and $74,720,000, or 10% and 8%, respectively, of total loans. At March 31, 1996, the Company had outstanding 15 real estate-construction loans in excess of $1,000,000. Page 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's senior lending officers monitor the residential real estate- construction market on a periodic basis by reviewing internally prepared residential lot inventory activity reports and independent surveys of the residential properties market. Loan-to-value ratios generally depend on the nature of the collateral, ranging from up to 65% for land acquisition and development loans, 70% for commercial projects, and 80% for single-family individual-borrower construction loans. REAL ESTATE - MORTGAGE LOANS As of March 31, 1996 and December 31, 1995, the Company's real estate-mortgage loans totaled $117,875,000 and $136,278,000, or 14% and 16%, respectively of its total loans. These loans are collateralized by properties located primarily in Central California. Nonresidential loans (representing 8% of total loans at March 31, 1996) are primarily "mini-perm" (medium-term) commercial real estate mortgages, with maturities generally ranging from five to seven years. Such loans generally range in size from $250,000 to $1,250,000. Residential mortgage loans totaled approximately $47,636,113 at March 31, 1996, or 6% of total loans. At March 31,1996, the Company had 12 outstanding real estate-mortgage loans in excess of $1,000,000. Real estate-mortgage and construction lending contain potential risks which are not inherent in other types of loans. These potential risks include declines in market values of underlying real property collateral and, with respect to construction lending, delays or cost overruns which could expose the Company to loss. In addition, risks in commercial real estate lending include declines in commercial real estate values, general economic conditions surrounding the commercial real estate properties, and vacancy rates. A decline in the general economic conditions or real estate values within the Company's market area could have a negative impact on the performance of the loan portfolio or value of the collateral. Because the Company lends primarily within its market area, the real property collateral for its loans is similarly concentrated, rather than diversified over a broader geographic area. The Company could therefore be adversely affected by a further decline in real estate values in the Company's target market, even if real estate values elsewhere in California generally remained stable or increased. INSTALLMENT LOANS At March 31, 1996 and December 31, 1995, installment loans aggregated approximately $196,418,000 and $205,869,000, or 23% and 24%, respectively of total loans. Approximately 11% and 12% of total loans at March 31, 1996 are installment loans which are secured by real estate and installment loans unsecured or secured by other collateral. Included in this loan category are home equity lines, home equity loans, automobile loans, home improvement loans and swimming pool loans. The ratio of loans to appraised values range from up to 80% for home equity lines, 85% for home equity loans, 90% for home improvement loans, and 100% for automobile loans. Page 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CREDIT RISK MANAGEMENT AND ASSET QUALITY Management believes that the objective of a sound credit policy is to extend quality loans on a diversified basis to customers while controlling risk affecting stockholders and depositors. The Credit Quality Committee, made up of members of the Board of Directors of ValliWide Bank, approves credit policy, and reviews asset quality and ensures compliance with credit policy. The Company maintains a loan review staff as part of its internal audit function that examines the loan portfolios for compliance with established standards. Executive management and senior credit officers also perform reviews of loan quality and monitor, on a periodic basis, the progress of watch list loans requiring an action plan for rehabilitation or refinancing. In addition, credit underwriting guidelines are periodically reviewed and adjusted to reflect current economic conditions. The Company places a loan on nonaccrual status when one of the following events occurs: any installment of principal or interest is 90 days or more past due (unless the loan is well-secured and in the process of collection); management determines the ultimate collection of principal or interest on a loan to be unlikely; management deems it to be probable the Company will take possession of the collateral in satisfaction of the loan; or the terms of a loan have been renegotiated resulting in a decrease in the present value of contractual cash flows. A loan is considered in the process of collection if, based on a probable specific event, management expects that the loan will be repaid or brought current. When a loan is placed on nonaccrual status, the Company's general policy is to reverse and charge against current income previously accrued but unpaid interest, unless the interest is deemed collectible. Income on such loans is subsequently recognized only to the extent that cash is received and future collection of principal is probable. Loans for which collectibility of the principal balance or interest is considered to be doubtful by management are placed on nonaccrual status prior to becoming 90 days delinquent. Loans for which collateral has been repossessed or foreclosed upon are classified as "OREO" ("Other Assets" for personal property collateral) on the Company's financial statements. In accordance with SFAS No. 114, a loan is classified "OREO" when the Company has taken possession of the collateral regardless of whether formal foreclosure proceedings take place. The Company values its OREO properties at the lower of the net carrying amount or fair value, less selling expenses, based on appraisals generally performed at the time the property is acquired. Management's objective is to dispose of these properties in an expeditious manner in an effort to minimize holding costs. Due to possible market fluctuations in real estate values, management can give no assurance that the values of OREO properties will ultimately be realized upon disposition. Page 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NONPERFORMING ASSETS The table below sets forth information about nonperforming assets and accruing loans 90 days or more past due. Management's classification of a loan as nonaccrual or restructured does not necessarily indicate the principal of the loan is uncollectible in whole or in part.
MARCH 31, DECEMBER 31, ---------------------------------------------- 1996 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ ------ (IN THOUSANDS) Nonaccrual loans.................... $10,453 $17,480 $7,303 $6,059 $4,930 $3,259 Restructured loans.................. 257 257 558 933 830 900 ------ ------- ------- ------- ------ ------ Nonperforming loans................. 10,710 17,737 7,861 6,992 5,760 4,159 Other real estate owned............. 4,537 2,512 3,665 3,537 1,771 1,506 ------ ------- ------- ------- ------ ------ Total nonperforming assets......... $15,247 $20,249 $11,526 $10,529 $7,531 $5,665 ====== ======= ======= ======= ====== ====== Accruing loans 90-days past due..... $1,415 $1,451 $3,073 $1,195 $732 $1,640 ====== ======= ======= ======= ====== ====== Nonperforming loans to total loans.. 1.28% 2.05% 0.89% 0.97% 1.04% 0.79% Nonperforming assets: To total loans..................... 1.82% 2.34% 1.31% 1.46% 1.36% 1.07% To total loans and OREO............ 1.81 2.33 1.30 1.45 1.36 1.07 To total assets.................... 1.19 1.47 0.87 0.87 0.88 0.70
At March 31, 1996, nonperforming assets decreased approximately 25% from December 31, 1995 to $15 million. Nonaccrual loans decreased approximately $7 million (40%) primarily due to charge-offs of approximately $3.5 million related primarily to previously identified problem loans a $2.3 million transfer to OREO, with the remainer collected or reclassified to accruing, offset by newly classified nonaccrual loans. The most significant decrease in nonaccrual loans occurred in the commercial and real estate-construction loan categories with balances at December 31, 1995 of approximately $10 million and $4.9 million decreasing to $7.4 million and $3 million at March 31, 1996, respectively. The increase in OREO relates principally to the transfer from nonaccrual loans of a $2.3 million real estate-construction credit which comprises 53% of the OREO balance at March 31, 1996. While the overall credit quality of the loan portfolio has improved, total nonaccrual balances may fluctuate from quarter to quarter based upon changes in the economic conditions within the Company's target market. Although the volume of nonperforming assets and accruing loans 90 days past due will depend on the future economic environment, management of the Company has identified approximately $4 million in potential problem loans as to which it has serious doubts as to the ability of the borrowers to comply with the present repayment terms and which may become nonperforming assets or accruing loans 90 days past due, based on known information about possible credit problems of the borrower. Page 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ALLOWANCE FOR LOAN LOSSES Management's determination of the allowance for loan losses requires the use of estimates and assumptions related to risks inherent in the loan portfolio. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant fluctuation relate to the valuation of real estate because management revalues the asset to the lower of the net carrying amount or fair value less selling expenses. In connection with the determination of the allowance for loan losses and the valuation of OREO, management generally obtains independent appraisals for significant properties. Management believes its current appraisal policies conform to federal regulatory guidelines. A formal evaluation of the overall quality of the portfolio is performed monthly to determine the necessary level of the allowance for loan losses. This evaluation takes into consideration, among other factors, specific knowledge of certain loans, general economic conditions, the classification of loans and the application of loss estimates to these classifications. The Company classifies loans as pass, watch, special mention, substandard, doubtful, or loss based on classification criteria believed to be consistent with the criteria applied by the Company's banking examiners. These classifications and loss estimates take into consideration all sources of repayment, underlying collateral, the value of such collateral, and current and anticipated economic conditions, trends, and uncertainties. These processes provide management with data that helps to identify and estimate the credit risk inherent in the portfolio so that management may identify potential problem loans on a timely basis. However, this evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance for loan losses reflects the result of these estimates. In addition, various banking regulatory agencies periodically review the allowance for loan losses as part of their examination process. Such agencies may require the Company to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. Their findings are reflected in the calculation of the allowance as well as considered in the continuing evaluation of the Company's policies and procedures. At March 31, 1996, the $12,769,000 allowance for loan losses constituted 1.53% of total loans and 119% of nonperforming loans. The provision for loan losses for the three months ended March 31, 1996 was $1,925,000 as compared to $678,000 for the corresponding period in 1995. Net charge-offs during the first quarter of 1996 totaled $4,142,000 as compared to $138,000 for the same period in 1995. The increase in the provision for loan losses is directly related to a significant increase in net charge-offs of previously identified problem loans and the effect of two mergers completed during the 1996 quarter (refer to "Nonperforming Assets"). While the Company's policy is to charge off those loans for which a loss is considered probable, there also exists the risk of future losses which cannot be precisely quantified or attributed to particular loans or classes of loans. Because this risk is continually changing in response to factors beyond the control of the Company, management's judgment as to the adequacy of the allowance for loan losses in future periods is necessarily an approximate one. Page 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table provides a summary of the Company's allowance for loan losses and charge-off and recovery activity for the periods indicated:
THREE THREE YEAR MONTHS ENDED MONTHS ENDED ENDED MARCH 31, MARCH 31, DECEMBER 31, 1996 1995 1995 ---------- ----------- ----------- (IN THOUSANDS) Allowance for loan losses: Balance at beginning-of-period $ 14,986 $ 14,130 $ 14,130 Provision for loan losses 1,925 678 9,633 Charge-offs: Commercial 2,445 225 4,362 Real estate - construction 1,008 - 109 Real estate - mortgage 48 48 3,515 Installment 1,142 90 1,346 Other - 18 116 ----- ------ ------ Total charge-offs 4,643 381 9,448 Recoveries: Commercial 117 170 400 Real estate - mortgage 27 17 26 Installment 357 43 227 Other - 13 18 ----- ------ ------ Total recoveries 501 243 671 ------ ------ ------ Net charge-offs 4,142 138 8,777 ------- ------ ------ Balance at end-of-period $12,769 $14,670 $14,986 ====== ====== ====== Loans outstanding at end-of-period $836,189 $863,166 $865,749 Average loans 840,697 861,639 883,508 Net charge-offs during the period to average loans 1.98% 0.06% 0.99% Allowance for loan losses: To total loans 1.53% 1.70% 1.73% To nonperforming loans 119 89 84 To nonperforming assets 84 75 74
CAPITAL RESOURCES Stockholders' equity decreased $861,000 during the three months ended March 31, 1996. The decrease was primarily attributable to the net-of-tax effect of the change in unrealized losses on available for sale securities of $1,237,000, offset by net income of $216,000. The Company and its subsidiary are required to maintain minimum capital ratios defined by various federal government regulatory agencies. These regulatory agencies have established risk-based capital guidelines, which include minimum capital requirements. Page 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table presents the Company's capital positions under the regulatory guidelines:
MINIMUM WELL MARCH 31, DECEMBER 31, CAPITALIZED 1996 1995 RATIOS -------- ------------ -------- CAPITAL RATIOS: Total risk-based capital ratio 14.16% 13.40% 10.00% Tier 1 capital to risk-weighted assets 12.87 12.11 6.00 Leverage ratio 9.75 8.76 5.00
At March 31, 1996, the Company and its subsidiary bank exceeded all applicable federal capital standards. The primary factor contributing to the increase in total risk-based capital was a change in the composite risk-weighting of the Company's short-term investments. The Company is subject to regulation and examination by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). ValliWide Bank, the Company's subsidiary, is subject to regulation and examination by the Federal Reserve and the California State Banking Department. The Company and ValliWide Bank promptly respond to findings of regulators. Following a 1995 examination of the Company by the Federal Reserve and of ValliWide Bank by the Federal Reserve and California State Banking Department, the Board of Directors of the Company and ValliWide Bank adopted resolutions directing management of the Company and ValliWide Bank to address certain matters related to the establishment of loan loss reserves, loan classification and administration, liquidity and asset/liability management planning and analysis, and the management of certain functions, and to report actions taken on such matters to the Federal Reserve and the California State Banking Department. The adoption of such resolutions is not expected to have a material adverse effect on the Company's liquidity, capital resources, or results of operations. LIQUIDITY AND ASSET/LIABILITY MANAGEMENT The primary objectives of the asset/liability management process are to provide a stable net interest margin, generate net interest income to meet the Company's earnings objectives, and manage balance sheet risks. These risks include liquidity risk, capital adequacy and overall interest rate risk inherent in the Company's balance sheet. In order to manage its interest rate sensitivity, the Company has adopted policies which attempt to limit the change in net interest income assuming various interest rate scenarios. This is accomplished by adjusting the repricing characteristics of the Company's assets and liabilities as interest rates change. The Company's Asset/Liability Committee chooses strategies in conformance with its policies to achieve an appropriate trade off between interest rate sensitivity and the volatility of net interest income and net interest margin. Page 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's policy has been to maintain an adequate liquidity position which, in addition to cash and cash equivalents, relies on cash inflows principally from deposits, repayments of principal on loans and investments, and interest earned. The Company's principal cash outflows are for loan origination, purchases of investment securities, depositor withdrawals, and payment of operating expenses. At March 31, 1996, the Company's cash and cash equivalents totaled $177 million, an increase of $16 million from the balance at December 31, 1995. The Company's operations utilized approximately $2.8 million in day to day operations. Investing activities provided $117 million primarily due to maturities of securities exceeding purchases by $88 million, offset by maturities and principal repayments in excess of loan originations of $23 million. The Company's financing activities decreased cash and cash equivalents by an additional $98 million principally due to a decrease of $95 million in deposits. The Company has borrowing capacity from various sources to provide necessary liquidity. The Company has arranged unsecured federal funds lines of credit in the amount of $62,708,000 with five major correspondent banks to provide funds in periods of temporary declines in deposits. The Company has additional sources of short-term credit through repurchase borrowing arrangements with various brokerage firms. Liquidity management is a focus of the Company as well as its subsidiary bank. Aside from accessing the capital markets, the Company's primary source of liquidity is dividends. There are potential restrictions which could be placed on dividends from its subsidiary; however, management believes that adequate dividends will be received to meet the Company's cash flow needs through 1996. Through interest rate sensitivity management, the Company seeks to manage net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The difference between the amount of assets and liabilities that are repricing in various time frames is called the "Gap." Generally, if repricing assets exceed repricing liabilities in a given time period, the Company would be "asset sensitive", or if repricing liabilities exceed repricing assets, the Company would be "liability sensitive". Page 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth the interest rate sensitivity and repricing schedule of the Company's interest-earning assets and interest-bearing liabilities, the interest rate sensitivity gap, the cumulative interest rate sensitivity gap and the cumulative interest rate sensitivity gap ratio.
MARCH 31, 1996 ----------------------------------------------------------------------------------- AFTER THREE AFTER ONE NEXT DAY BUT MONTHS BUT YEAR BUT AFTER WITHIN THREE WITHIN 12 WITHIN FIVE FIVE IMMEDIATELY MONTHS MONTHS YEARS YEARS TOTAL ----------------------------------------------------------------------------------- (IN THOUSANDS) INTEREST RATE SENSITIVITY GAP: Loans/(1)/.......................... $ - $489,549 $ 106,037 $131,357 $103,708 $830,651 Investment securities............... - 48,532 37,461 84,144 53,443 223,580 Federal funds sold.................. - 100,000 - - - 100,000 ------ -------- ------- ------- ------- ------- Total earning assets........... $ - $638,081 $143,498 $215,501 $157,151 $1,154,231 ====== ======= ======= ======= ======= ========= Interest-bearing transaction accounts............ $ - $351,439 - - - $351,439 Savings accounts.................... - 168,685 - - - 168,685 Certificates of deposit............. - 92,731 $ 200,835 $ 48,321 $ 26 341,913 Short-term borrowings............... - 8,674 - - - 8,674 Subordinated notes.................. 909 20,000 - - - 20,909 ------ ------- -------- ------- ------- ------- Total interest-bearing liabilities................. $ 909 $641,529 $ 200,835 $48,321 $ 26 $891,620 ====== ======= ======== ======= ======= ======= Interest rate sensitivity gap/(2)/.. $ (909) $ (3,448) $(57,337) $167,180 $157,125 $262,611 Cumulative gap...................... $ (909) $ (4,357) $(61,694) $105,486 $262,611 Cumulative gap percentage to earning assets.................. (0.08)% (0.38)% (5.39)% 9.21% 22.92%
(1) Excludes nonaccrual loans of $10,453,000. (2) Does not assume prepayments of interest-earning assets or run-off of interest-bearing liabilities. Page 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Based upon the above repricing schedule, at March 31, 1996, the Company was "liability sensitive" with respect to interest-earning assets and interest- bearing liabilities repricing within one year. Because approximately $62 million of interest-bearing liabilities in excess of interest-earning assets reprice within one year, management expects that, in an increasing rate environment, the Company's net interest margin would tend to decrease and in a decreasing rate environment, the Company's net interest margin would be expected to increase as liabilities would generally reprice more quickly than assets. The Company supplements its gap analysis with simulations of net interest income under a variety of alternative market interest-rate scenarios. The Company manages its interest rate risk by emphasizing loan products which have variable interest rates and deposit products which are short-term in duration. EFFECT OF CHANGING PRICES The majority of assets and liabilities of a financial institution are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an important impact on the growth of total assets in the banking industry and the resulting need to increase equity capital in order to maintain an appropriate equity-to-assets ratio. An important effect of this has been the reduction in the proportion of earnings paid out as dividends by some banking organizations. Another significant effect of inflation is on other expenses which tend to rise during periods of general inflation. Page 29 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibit Index Exhibit Number Description -------------- ----------- 10 Employment Agreement - Jerry A. Melton 27 Financial Data Schedule b) Three Form 8-K's were filed during the period from January 1, 1996 to the date of the filing of this report. A report on Form 8-K was filed February 15, 1996 and amended on April 2, 1996. The item reported the consummation of the merger between the Registrant and El Capitan Bancshares, Inc. (El Capitan). Copies of the Agreement and Plan of Reorganization between the Registrant and El Capitan and amendments, together with a copy of the Registrant's February 2, 1996 press release describing the merger, Pro forma financial information giving effect to the merger and historical audited financial information of El Capitan, were filed as exhibits to the report on Form 8-K and Form 8-K/A. A report on Form 8-K was filed April 2, 1996. A report on Form 8-K was filed April 2, 1996. The item reported the consummation of the merger between the Registrant and CoBank Financial Corporation. A copy of the March 22, 1996 press release describing the above transaction was filed as an exhibit to the report on Form 8-K. A report on Form 8-K was filed April 2, 1996. The items reported were the entry by the Registrant and Auburn Bancorp (Auburn) into an Agreement and Plan of Reorganization (the "Auburn Merger Agreement") dated March 27, 1996. Copies of the Auburn Merger Agreement, together with a copy of the Registrant's March 28, 1996 press release describing the Auburn Merger Agreement, were filed as exhibits to the report on Form 8-K. Page 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VALLICORP HOLDINGS, INC. Date: May 13, 1996 By /s/ J. Mike McGowan ----------------------- ------------------------------- J. Mike McGowan Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: May 13, 1996 By /s/ Wolfgang T.N. Muelleck --------------------- ------------------------------- Wolfgang T.N. Muelleck Executive Vice President Chief Financial Officer (Principal Financial and Accounting Officer) Page 31 EX-10 2 EMPLOYMENT AGREEMENT - JERRY A. MELTON EXHIBIT 10 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into this 26th day of February, 1996, by and between ValliCorp Holdings, Inc. (the "Company") and Jerry A. Melton (the "Executive"). RECITAL: The parties desire to set forth the terms of Executive's employment with the Company. NOW, THEREFORE, the parties hereto agree as follows: 1. Employment. The Company hereby employs Executive and Executive hereby ---------- accepts employment during the Term of Employment upon the terms and conditions herein set forth. 2. Term of Employment. The "Term of Employment" is the period beginning ------------------ on February 26, 1996 (the "Commencement Date") and ending on January 31, 2000. The Term of Employment may terminate earlier or be extended as provided in this Agreement. 3. Renewal. The Term of Employment shall be extended for one year on ------- each anniversary of the Commencement Date (or such other date as to which the parties may agree) unless (a) the Company or Executive has given three (3) months' written notice of its or his intent not to extend the Termination Date or (b) the Term of Employment has been terminated under the provisions of Section 8. 4. Duties. Executive is employed as Senior Vice President and Deputy ------ Chief Credit Officer of the Company and, under the direction of the Company's Board of Directors, the Chief Executive Officer and the Chief Credit Officer, shall perform and discharge well and faithfully the duties that may be assigned to him from time to time by them in connection with the conduct of the Company's business. Nothing herein shall preclude the Board of Directors or CEO from changing Executive's title or duties. 5. Extent of Services. Executive shall devote his entire business time, ------------------ attention, and energies to the business of the Company during the term of Executive's employment with the Company. The foregoing, however, shall not preclude Executive from engaging in appropriate civic, charitable, or religious activities or from devoting a reasonable amount of time to private investments or from serving on boards of directors of other entities, as long as such activities and services do not interfere or conflict with his responsibilities to the Company. 6. Compensation. ------------ (a) Salary. During the Term of Employment, the Company shall pay ------ Executive a monthly salary of $10,416.67, payable in arrears in installments on the 15th and the last day of each month. Executive's salary may be adjusted periodically, on the anniversary of this Agreement (or such other date as to which the parties may agree), to reflect such changes as the Board of Directors determines appropriate, based on Executive's performance for the most recent performance period. (b) Incentive Programs. During the Term of Employment, Executive ------------------ shall be entitled to participate in any annual and long-term incentive programs adopted by the Company and which cover employees in positions comparable to that of Executive. (c) Expenses. Executive shall be entitled to prompt reimbursement of -------- all reasonable business expenses incurred by him in the performance of his duties during the Term of Employment, subject to the presenting of appropriate vouchers and receipts in accordance with the Company's policies. 7. Employee Benefits. During the Term of Employment, Executive shall be ----------------- entitled to participate in employee benefit plans or programs of the Company, if any, to the extent that his position, tenure, salary, age, health, and other qualifications make him eligible to participate, subject to the rules and regulations applicable thereto. 1 8. Termination. Notwithstanding the provisions of Sections 2 and 3, the ----------- Term of Employment and Executive's employment hereunder may be terminated without any breach of this Agreement under the following circumstances: (a) Death. The Term of Employment shall terminate upon Executive's ----- death. (b) Disability. The Term of Employment shall terminate three (3) ---------- months after the Company gives Executive written notice that it intends to terminate his employment on account of Disability or on such later date as the Company specifies in such notice. If Executive resumes the performance of substantially all of his duties under this Agreement before the termination becomes effective, the notice of intent to terminate shall be deemed to have been revoked. (c) Voluntary Termination. Executive may terminate his employment --------------------- with the Company at any time with three (3) months' written notice to the Company. The Term of Employment shall end on the earlier of the last day of the notice period or the last day on which Executive performs services for the Company. (d) Termination for Good Cause. Executive may terminate his -------------------------- employment with the Company for Good Cause by giving the Company thirty (30) days' notice of its breach, the reasons why the breach constitutes Good Cause and of his intent to terminate on such basis. If the Company cures its breach within the thirty (30) day period, Executive may rescind his notice of intent to terminate, or terminate his employment under paragraph (c) as though his notice of breach was the notice provided for under paragraph (c). If the Company fails to cure its breach within the thirty (30) day period, the Term of Employment shall end on the last day of the notice period. (e) Involuntary Termination. Executive's employment is at will. The ----------------------- Company reserves the right to terminate Executive's employment at anytime whatsoever, with or without cause, with thirty (30) days' written notice to Executive. The Term of Employment shall terminate on the last day of the notice period, but the Company may require Executive to cease performing services at any time once the notice is given. (f) Involuntary Termination for Cause. The Company reserves the --------------------------------- right to terminate Executive's employment for Cause. The Company shall give Executive written notice of the termination and the reasons therefor. The Term of Employment shall terminate immediately upon receipt of the notice. 9. Benefits on Termination of Employment. If Executive's employment ------------------------------------- is terminated during the Term of Employment, the Executive shall be entitled to receive benefits as follows: (a) Death; Disability; Voluntary Termination; Termination for Cause. --------------------------------------------------------------- If employment is terminated under Section 8(a), (b), (c), or (f), Executive shall receive salary through the Term of Employment, any incentive payment earned but not yet paid, and reimbursement of expenses incurred under Section 6(c) but not yet reimbursed. Executive shall be entitled to a pro rata portion of his annual incentive benefit for the year in which his Term of Employment ends. All other employee benefits and compensation shall cease on the last day on which Executive performs services as an employee, except to the extent that continued coverage is required by law. (b) Change of Control. If Executive's employment is terminated under ----------------- the provisions of Section 8(d) or (e), within two years following a Change of Control, Company shall pay Executive liquidated damages equal to the remaining salary and accrued but unpaid annual incentive award he would have received under this Agreement had he continued employment to the end of the Term of Employment as in effect immediately prior to his termination, not to exceed eighteen (18) months' salary and the accrued but unpaid annual incentive plan award in effect immediately prior to his termination. The liquidated damages payment to which Executive is entitled pursuant to this paragraph (b) shall be paid in a single installment within thirty (30) days of his termination. Executive shall be obligated, however, to disclose to the Company his earned income (within the meaning of Internal Revenue Code Section 911(d)(2)(A)) during the period ending eighteen (18) months following such termination of employment and to remit to the Company such earned income up to the amount of Executive's liquidated damages paid pursuant to this paragraph. Company shall have the right to request Executive to produce reasonable evidence substantiating the amount (including zero) of Executive's earned income during the remainder of the Term of Employment (as described above). If Executive remits the full amount of liquidated damages, his obligation to disclose his earned income shall end. Executive shall cease 2 to be an employee on the effective date of any notice given under this Agreement and, except as provided by applicable law, shall cease to be entitled to further compensation or benefits from the Company. (c) Involuntary Termination; Termination for Good Cause. If --------------------------------------------------- Executive's employment is terminated under the provisions of Section 8(d) or (e) and the termination is not within two years following a Change of Control, Executive shall receive: (i) twelve (12) months of salary under Section 6(a) computed with reference to the annual salary in effect immediately preceding the date of termination; (ii) any incentive payment earned but not yet paid; and (iii) reimbursement of expenses incurred under Section 6(c) but not yet reimbursed. All other employee benefits and compensation, including any incentive benefits for the year in which the Term of Employment ends, shall cease on the last day on which Executive performs services as an employee except to the extent that continued coverage is required by law. (d) Non-Renewal. If Executive or the Company gives notice of intent ----------- not to extend the Term of Employment under Section 3, Executive's salary and benefits shall cease on the last day of the Term of Employment, except to the extent that continued coverage is required by law. 10. Definition of Terms. The following terms used in this Agreement when ------------------- capitalized have the following meanings: (a) Board of Directors means the Company's board of directors. ------------------ (b) Cause means that Executive has: ----- (i) willfully breached or habitually neglected the duties which he was required to perform under the terms of this Agreement or (ii) committed act(s) of dishonesty, theft, embezzlement, fraud, misrepresentation, or other act(s) of moral turpitude against the Company, its subsidiaries or affiliates, its shareholders, or its employees. (c) Change of Control means a change of control of the Company of a ----------------- nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or not the Company is then subject to such reporting requirement; provided, however, that without limitation, such a Change of Control shall be deemed to have occurred if: (i) any person or group (as such terms are used in connection with Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 and 13d-5 under the Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities; (ii) the Company is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or 3 (iii) during any period of twenty-four consecutive months, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new director whose election or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. Notwithstanding the foregoing provisions of this paragraph (c), a "Change of Control" will not be deemed to have occurred solely because of the acquisition of securities of the Company (or any reporting requirement under the Act relating thereto) by an employee benefit plan maintained by the Company for its employees. (d) Disability means that Executive has been unable to perform his ---------- duties under this Agreement for a period of three (3) consecutive months as the result of his incapacity due to physical or mental illness. (e) Good Cause means a material reduction in Executive's compensation ---------- under Section 6 or benefits under Section 7, a material reduction in the Executive's title or responsibilities, or a relocation of Executive's primary place of employment so that Executive's one-way commute distance is increased by more than forty (40) miles. 11. Non-Competition Clause. In addition to his obligations as an ---------------------- executive and whether or not he remains an executive of the Company, Executive agrees that during the period commencing with the Commencement Date and ending upon termination of employment with the Company, however caused, he will not, without the prior written consent of the Company, engage, directly or indirectly, in any business that competes with the Company for customers of the Company located in the Central California. 12. Locations of Performance. Executive's services shall be performed ------------------------ primarily in the vicinity of Fresno, California. The parties acknowledge, however, that Executive may be required to travel in connection with the performance of his duties hereunder. 13. Proprietary Information. ----------------------- (a) Executive agrees to comply fully with the Company's policies relating to non-disclosure of the Company's trade secrets and proprietary information and processes. Without limiting the generality of the foregoing, Executive will not, during the term of his employment by the Company, disclose any such secrets, information, or processes to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, nor shall Executive make use of any such property for his own purposes or for the benefit of any person, firm, corporation, or other entity (except the Company) under any circumstances during or after the term of his employment, provided that after the term of his employment, this provision shall not apply to secrets, information, and processes that are then in the public domain (provided that Executive was not responsible, directly or indirectly, for such secrets, information, or processes entering the public domain without the Company's consent). (b) Executive hereby sells, transfers, and assigns to the Company all of the entire right, title, and interest of Executive in and to all inventions, ideas, disclosures, and improvements, whether patented or unpatented, and copyrightable material, to the extent made or conceived by Executive, solely or jointly, during the term of this Agreement, except to the extent prohibited by Section 2870 of the California Labor Code, a copy of which is attached hereto as Exhibit A. Executive shall communicate promptly and disclose to the Company, in such form as the Company requests, all information, details, and data pertaining to the aforementioned inventions, ideas, disclosures, and improvements; and, whether during the term hereof or thereafter, Executive shall execute and deliver to the Company such formal transfers and assignments and such other papers and documents as may be required of Executive to permit the Company to file and prosecute any patent applications relating to such inventions, ideas, disclosures, and improvements and, as to copyrightable material, to obtain copyright thereon. 4 (c) Trade secrets, proprietary information, and processes shall not be deemed to include information which is: (i) known to Executive at the time of the disclosure; (ii) publicly known (or becomes publicly known) without the fault or negligence of Executive; (iii) received from a third party without restriction and without breach of this Agreement; (iv) approved for release by written authorization of the Company; or (v) required to be disclosed by law; provided, however, that -------- ------- in the event of a proposed disclosure pursuant to this subsection 13(c)(v), the recipient shall give the Company prior written notice before such disclosure is made. 14. Assignment. This Agreement may not be assigned by any party hereto; ---------- provided that the Company may assign this Agreement, in connection with a merger or consolidation involving the Company or a sale of substantially all of its assets, to the surviving corporation or purchaser as the case may be, so long as such assignee assumes the Company's obligations hereunder. 15. Notices. Any notice required or permitted to be given under this ------- Agreement shall be sufficient if in writing and sent by registered mail to Executive at his residence maintained on the Company's records, or to the Company at its executive offices, or such other addresses as either party shall notify the other in accordance with the above procedure. 16. Force Majeure. Neither party shall be liable to the other for any ------------- delay or failure to perform hereunder, which delay or failure is due to causes beyond the control of said party, including, but not limited to: acts of God; acts of the public enemy; acts of the United States of America, or any State, territory, or political subdivision thereto or of the District of Columbia; fires; floods; epidemics; quarantine restrictions; strikes; or freight embargoes. Notwithstanding the foregoing provisions of this Section, in every case the delay or failure to perform must be beyond the control and without the fault or negligence of the party claiming excusable delay. 17. Integration. This Agreement and any attachments, schedules, and ----------- exhibits hereto represent the entire agreement and understanding between the parties as to the subject matter hereof and supersede all prior or contemporaneous agreements whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement shall be binding unless in writing and signed by duly authorized representatives of the parties hereto. 18. Waiver. Failure or delay on the part of either party hereto to enforce any right, power, or privilege hereunder shall not be deemed to constitute a waiver thereof. Additionally, a waiver by either party of a breach of any promise hereof by the other party shall not operate as or be construed to constitute a waiver of any subsequent waiver by such other party. 19. Savings Clause. If any term, covenant, or condition of this Agreement -------------- or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such term, covenant, or condition to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant, or condition of this Agreement shall be valid and enforced to the fullest extent permitted by law. 20. Authority to Contract. The Company warrants and represents that it --------------------- has full authority to enter into this Agreement and to consummate the transactions contemplated hereby and that this Agreement is not in conflict with any other agreement to which the Company is a party or by which it may be bound. The Company further warrants and represents that the individuals executing this Agreement on behalf of the Company have the full power and authority to bind the Company to the terms hereof and have been authorized to do so in accordance with the Company's corporate organization. 5 21. Recovery of Litigation Costs. If any legal action or other proceeding ---------------------------- is brought for the enforcement of this Agreement or any agreement or instrument delivered under or in connection with this Agreement, or because of an alleged dispute, breach, default, or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled. 22. Remedies. In the event of a breach by Executive of Sections 11 or 13 -------- of this Agreement, in addition to other remedies provided by applicable law, the Company will be entitled to issuance of a temporary restraining order or preliminary injunction enforcing its rights under such Sections. 23. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of California. 24. Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement effective as of the day herein first above written. VALLICORP HOLDINGS, INC. /s/ J. Mike McGowan ___________________________________ J. Mike McGowan President and Chief Executive Officer EXECUTIVE /s/ Jerry A. Melton ____________________________________ Jerry A. Melton Senior Vice President and Deputy Chief Credit Officer Exhibit A - California Labor Code Section 2870 6 EXHIBIT A --------- CALIFORNIA LABOR CODE SECTION 2870 SECTION 2870. APPLICATION OF PROVISION PROVIDING THAT EMPLOYEE SHALL ASSIGN OR OFFER TO ASSIGN RIGHTS IN INVENTION TO EMPLOYER (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either; (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer. (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable. 7 EX-27 3 ARTICLE 9 - FDS
9 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 76,783 0 100,000 0 200,438 23,142 23,464 836,189 12,769 1,284,045 1,126,665 8,674 1,273 20,909 0 0 133 126,391 1,284,054 20,475 3,575 1,217 25,267 7,551 8,009 17,258 1,925 11 18,121 393 216 0 0 216 0.02 0.02 5.97 10,453 1,415 257 4,000 14,986 4,643 501 12,769 12,769 0 10,871
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