As filed with the Securities and Exchange Commission on October 27, 2004
Registration statement No. 333-118883
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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VALLEY COMMERCE BANCORP
(Name of small business issuer in its charter)
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California 6022 46-1981399
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
200 South Court Street, Visalia, California
93291 (559) 622-9000
(Address and telephone number of principal executive offices
and principal place of business)
Donald A. Gilles
President and Chief Executive Officer
Valley Commerce Bancorp
200 South Court Street,
Visalia, California 93291
(559) 622-9000
(Name, address and telephone number of agent for service)
Copies to:
Thomas G. Reddy
Keith D. Ungles Alan B. Spatz
Bingham McCutchen LLP Troy & Gould PC
Three Embarcadero Center 1801 Century Park East, 26th Floor
San Francisco, California 94111 Los Angeles, CA 90067
(415) 393-2000 (310) 553-4441
-------------------------
Approximate date of commencement of proposed sale of the securities to the
public: as soon as practicable following the effective date of this registration
statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis under Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement of
the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
Calculation of Registration Fee
==================================================================================================================
Title of each class of Proposed maximum
securities being registered Amount to be registered aggregate offering price Amount of registration fee
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Common stock, no par value (1) $7,800,000 $7,800,000 (2) $995.28 (3)
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(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended (the
"Securities Act"), this registration statement also covers an indeterminate
number of additional shares that may be issuable in connection with share
splits, share dividends or similar transactions.
(2) Provided in accordance with Rule 457(o) under the Securities Act, solely for
the purpose of calculating the registration fee.
(3) Previously paid.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
2
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion ________________, 2004
600,000 Shares
[VALLEY COMMERCE BANCORP LOGO]
Common Stock
We are the bank holding company for Bank of Visalia, a California
state-chartered commercial bank founded in 1996 and focused on California's
South San Joaquin Valley, which is comprised of Tulare, Fresno, Kings, Madera
and Kern counties. We are offering up to 600,000 shares of our common stock. We
estimate that the offering price will be between $11.00 and $13.00 per share.
The offering will expire 30 days after the date of this prospectus unless we
extend it for up to 14 days. The minimum purchase by any one investor is 1,000
shares.
Wedbush Morgan Securities is the underwriter and intends to commit to purchase a
minimum of 300,000 of our shares. We will offer the rest of the shares directly
to our directors, employees and customers and to friends and relatives of our
directors and employees in Tulare County. Although we can give no assurances, we
expect our directors and officers to purchase approximately 160,000 shares in
this offering. See "Underwriting and Plan of Distribution."
Our common stock is traded on the OTC Bulletin Board under the symbol "VCBP.OB."
Trading volume in our stock is very limited and sales are sporadic. On
___________, 2004, the last trading day on which a sale on the OTC Bulletin
Board was reported, the last reported sale price was $_____ per share (adjusted
to reflect the three-for-two stock split for shareholders of record as of August
20, 2004).
The underwriter has an option to purchase 45,000 additional shares of common
stock from us at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments of
shares. These 45,000 shares are included in the 600,000 shares being offered.
Investing in our common stock involves certain risks. See "Risk Factors"
beginning on page 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Shares of our common stock are not deposits and are not insured by the FDIC or
any other government agency. They are subject to investment risk, including
possible loss of your principal.
Proceeds to Valley
Public offering price Underwriting discount Commerce Bancorp (1)
Per Share
Minimun Total (1)
Maximum Total
(1) Before deducting expenses of the offering payable by us estimated at
$300,000. Assumes sale of all 600,000 shares being offered. No underwriting
discounts will be paid in connection with sales to our directors, employees and
customers and to friends and relatives of our directors and employees in Tulare
County. We have also agreed to indemnify the underwriter against certain
liabilities related to the offering.
The underwriter expects to deliver the shares of common stock to its investors
on or about ______, 2004. Delivery of the shares of the common stock purchased
from us will be made against payment in immediately available funds promptly
following the closing of those sales.
WEDBUSH MORGAN SECURITIES
The date of this prospectus is ____________, 2004
[MAP OMITTED]
South San Joaquin Valley Population Growth
Historical and Projected
(In thousands)
------------------------------------- % Increase
Actual* Projected** -----------------------------
------------------------------------- 2000 2010 2020
County 1990 2000 2010 2020 vs 1990 vs 2000 vs 2010
- -------------------------------------------------- -----------------------------
Tulare 312 368 447 544 17.9% 21.5% 21.6%
Fresno 667 803 950 1,115 20.4% 18.2% 17.3%
Kern 543 659 809 950 21.3% 22.8% 17.5%
Kings 101 131 156 185 29.9% 19.1% 18.2%
Madera 88 117 150 184 33.1% 28.4% 22.4%
-------------------------------------- -----------------------------
Total 1,711 2,079 2,513 2,977 21.5% 20.9% 18.5%
====================================== =============================
* Source: 1990 and 2000 Census Bureau
** Source: State of California, Department of Finance, "Population
Projections by Race/Ethnicity, Gender and Age for California and its
Counties," May 2004.
Our executive offices are located at 200 South Court Street, Visalia,
California. Our telephone number is (559)622-9000. Our website can be found at
www.bankofvisalia.com. The information on our website is not a part of this
prospectus.
In this prospectus, the terms "we," "us," and "our" refer to Valley Commerce
Bancorp and/or our wholly-owned subsidiary, Bank of Visalia, as applicable.
2
You may rely only on the information contained in this Prospectus. We have not
authorized anyone to provide information different from that contained in this
Prospectus. Neither the delivery of this Prospectus nor the sale of common stock
means that information contained in this Prospectus is correct after the date of
this Prospectus. This Prospectus is not an offer to sell or solicitation of an
offer to buy these shares of common stock in any circumstances under which the
offer or solicitation is unlawful.
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should carefully read the
entire prospectus, including "Risk Factors" and the financial statements, before
making an investment decision. All share and per share amounts in this
prospectus are adjusted to reflect a three-for-two stock split for shareholders
of record as of August 20, 2004 and all prior stock dividends.
Valley Commerce Bancorp and Bank of Visalia
Valley Commerce Bancorp is a rapidly growing bank holding company and the parent
of Bank of Visalia, a California state-chartered commercial bank that commenced
operations in 1996. We conduct substantially all of our business through the
Bank.
We operate through our main office in the city of Visalia and three branch
offices in Fresno, Woodlake and Tipton, all in the South San Joaquin Valley of
Central California. Our target customers are local businesses, professionals and
commercial property owners. We offer a full range of commercial banking
services, including the acceptance of demand, savings and time deposits, and the
making of commercial real estate, commercial and construction loans and, to a
lesser extent, agricultural and consumer loans. We also offer travelers' checks,
safe deposit boxes, banking-by-mail, on-line cash management, and other
customary bank services to our customers. Deposits in the Bank are insured by
the Federal Deposit Insurance Corporation up to legal limits.
Our total assets grew from $102 million at December 31, 1999, to $153 million at
June 30, 2004, an increase of 50%. A significant amount of this growth has
occurred in the last three years and is attributable to growth in the regional
economy and our marketing efforts during that period.
Growing Market Area
Our primary geographic focus has been the city of Visalia, which has a
population of approximately 101,000 and is the county seat of Tulare County. The
very fertile and extensively cultivated valley floor in Tulare County has
allowed it and adjoining Fresno County to become the two leading producers of
agricultural commodities among all counties in the United States. The relatively
low cost of land in this area has promoted residential and commercial
development.
We are expanding our efforts into Fresno, Kern, Kings and Madera counties, which
as a group are contiguous to Tulare County. These five counties comprise the
South San Joaquin Valley. Our expansion efforts in this area include the
acquisition of our Fresno branch in October 2003, increased calling efforts by
our loan officers and increased advertising in local media. The South San
Joaquin Valley is one of the fastest growing regions in California. See the
table showing historical and projected population increases in these counties on
the inside cover of this prospectus.
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3
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Growth and Strategy
Most of the Bank's business originates from small businesses, professionals and
commercial property owners located in and around Tulare County. We have focused
on building core deposits and have achieved strong growth in a very competitive
market. Our asset growth in the first eight years of our operations exceeded
that of two other banks headquartered in Visalia: Visalia Community Bank, which
opened 27 years ago and had total assets of $149 million as of June 30, 2004,
and Kaweah National Bank, which opened five years before we opened and had total
assets of $87 million when it was acquired in September 2003 by Citizens
Business Bank, a regional bank headquartered in Southern California. Our market
share of FDIC insured deposits in Tulare County was approximately 3.5% of the
total $3.1 billion in deposits as of June 30, 2003. Our market share of
FDIC-insured deposits in Visalia was approximately 4.6% of the $1.8 billion in
deposits as of June 30, 2003.
Our strategic goals include the following:
Geographic Expansion. We want to expand in the South San Joaquin Valley by
opening "de novo" branches and loan production offices and by acquiring branches
from other institutions. We hope to open or acquire another office within the
next 12 months but have no specific plans at this time. We intend to continue to
expand our service area to cover more effectively a greater portion of the South
San Joaquin Valley contiguous to Tulare County, with a particular emphasis on
the Fresno area.
Asset and Capital Growth. We intend to use the capital we raise in this offering
together with our retained earnings to support continued growth in our loan
portfolio and other earning assets.
High Credit Quality. We have made a concerted effort to build a top caliber
credit administration team. This team interfaces regularly with our directors'
loan committee, which is committed to maintaining a high standard of loan
quality. Credit quality is a factor in our lending team's compensation. We hope
to maintain high credit quality while we increase our base of loans and other
earning assets.
Core Deposit Growth. We have achieved core deposit growth to date by active
deposit solicitation efforts and through the community's knowledge that the Bank
is staffed by an experienced management team and personnel that has worked in
the market area for many years. Core deposits increased $7.7 million or 7.4% in
the six months ended June 30, 2004 and $13.1 million or 14.4% in the year ended
December 31, 2003. Core deposits reduce our costs of funds, help support our
strong net interest margin and improve our efficiency ratio. We target new
prospects with our sales team, whose compensation depends in part on increases
of core deposits. We also provide financial incentives to all other employees
for increasing the number of new core deposit accounts or expanding core deposit
relationships.
Maintain Strong Net Interest Margin. A low cost of funds, discussed above, and
loan pricing that reflects our high level of service, are significant
contributors to our strong net interest margin. Our net interest margin was
4.76% for the six months ended June 30, 2004, compared to 4.85% for the year
ended December 31, 2003.
Improve Efficiency Ratio. We regularly evaluate our efficiency ratio (the ratio
of non-interest expenses to the sum of net interest income and non-interest
income). This ratio reflects our cost (other than interest expense) of
generating revenue. Our efficiency ratio increased to 73.7% in the six months
ended June 30, 2004 compared to 68.2% for the six months ended June 30, 2003 and
67.4% for the year ended December 31, 2003. The minor increase was due to
operating expenses of the Fresno branch acquired in October 2003. We carefully
review non-interest expenses on a regular basis for potential savings. We also
regularly review and implement technological developments to improve efficiency
and reduce our costs.
Relationship Banking. Our strategy includes the retention of a highly effective
business development team of community bankers, most of whom gained their
experience at other local financial institutions. We place special emphasis on
building solid financial relationships with our customers.
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4
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We provide a high level of customer service in our market area by operating
under a "service first" approach. We commit, under the "service first"
philosophy, to differentiate ourselves by providing customers with the highest
priority in all aspects of our service. We intend to commit substantial
resources to our "service first" philosophy. Management believes the focus on
marketing and direct personal contact with customers helps to differentiate the
Bank from less responsive alternative financial service providers and to attract
the business and professional customers that we desire.
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5
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The Offering
Securities offered 600,000 shares of common stock
Estimated offering price range $11.00 to $13.00
Minimum purchase 1,000 shares
Offering period The offering period will extend until 30
days after the date of this prospectus,
unless we extend it for up to 14 days.
Number of shares outstanding 1,437,508 shares, excluding 231,926
before the offering shares issuable upon exercise of
currently outstanding options.
Number of shares to be outstanding 2,037,508 shares, assuming the sale of
after the offering all 600,000 shares being offered or
1,737,508 shares assuming the sale of the
minimum of 300,000 shares, and
including the 45,000 shares of the
overallotment option, but excluding
231,926 shares issuable upon exercise of
currently outstanding options.
Use of proceeds Primarily to support growth of our
subsidiary Bank of Visalia and to a
lesser extent for general corporate
purposes.
Underwriter Wedbush Morgan Securities Inc.
Type of offering This is a partially underwritten
offering. The underwriter intends to
commit to purchase a minimum of
300,000 shares. We will offer the
remaining shares to our directors,
employees and customers and to friends
and relatives of our directors and
employees in Tulare County. Although we
can give no assurances, we expect our
directors and officers will purchase
approximately 160,000 shares in this
offering.
How to purchase shares If you are interested in purchasing
shares, either (i) complete the
subscription agreement offer that
accompanies this prospectus and return it
to us with full payment or (ii) contact
the underwriter. Once submitted to us, a
subscription agreement offer is
irrevocable. We reserve the right to
reject any subscription, in whole or in
part. See "Underwriting and Plan of
Distribution." No offer will be accepted
until the Securities and Exchange
Commission has declared our registration
statement effective.
OTC Bulletin Board symbol VCBP.OB
Risk Factors
Investing in our common stock involves certain risks. See "Risk Factors"
beginning on page 9.
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6
SELECTED FINANCIAL DATA
The following table presents a summary of selected financial information which
should be read in conjunction with our financial statements and notes thereto
included as Appendix A to this prospectus. The financial information as of and
for the six months ended June 30, 2004 and 2003 has not been audited but, in the
opinion of management, contains all adjustments necessary to present fairly our
consolidated financial position and results of operations as of and for such
periods. The results of operations for the six months ended June 30, 2004 are
not necessarily indicative of the results of operations that may be expected for
the year ending December 31, 2004, or for any future periods. Average balances
used in this table and throughout this prospectus are based on daily averages.
As of and for the
As of and for the year ended December 31, six months ended June 30,
(in thousands except ------------------------------------------------------------------ -------------------------
share and per share data) 1999 2000 2001 2002 2003 2003 2004
---- ---- ---- ---- ---- ---- ----
Statement of Income Data:
Interest income $ 5,280 $ 6,835 $ 6,528 $ 6,404 $ 7,188 $ 3,460 $ 3,864
Interest expense 1,619 2,212 2,217 1,454 1,426 710 723
Net interest income 3,661 4,623 4,311 4,950 5,762 2,750 3,141
Provision for (credit to)
loan losses 125 200 215 405 315 140 (94)
Net interest income after
provision for (credit to)
loan losses 3,536 4,423 4,096 4,545 5,447 2,610 3,235
Non-interest income 487 592 704 1,065 1,055 562 461
Non-interest expense 3,081 3,437 3,546 4,079 4,648 2,291 2,686
Income before income taxes 942 1,578 1,254 1,531 1,854 881 1,010
Income taxes 346 650 504 600 705 340 385
Net income 596 928 750 931 1,149 541 625
Per Share Data:
Basic earnings per share $ 0.42 $ 0.66 $ 0.53 $ 0.66 $ 0.81 $ 0.38 $ 0.44
Diluted earnings per share $ 0.42 $ 0.65 $ 0.52 $ 0.64 $ 0.77 $ 0.37 $ 0.42
Book value per share $ 4.89 $ 5.72 $ 6.27 $ 7.01 $ 7.66 $ 7.37 $ 7.90
Average shares -basic 1,407,070 1,413,201 1,418,562 1,418,074 1,421,710 1,417,854 1,437,508
Average shares - diluted 1,420,618 1,424,759 1,442,637 1,452,573 1,483,954 1,465,027 1,483,944
Statement of Condition Data:
Investment securities $ 20,425 $ 17,516 $ 11,538 $ 25,976 $ 21,888 $ 17,113 $ 28,196
Total loans, net 50,647 56,366 75,373 76,988 101,137 91,517 105,528
Allowance for loan losses 724 908 1,051 1,102 1,433 1,275 1,357
Other real estate owned -- -- -- -- -- -- 765
Total assets 102,238 92,715 102,203 120,365 139,571 129,797 153,031
Total deposits 92,115 82,001 91,464 107,759 119,668 110,427 130,625
Total shareholders' equity 6,882 8,111 8,892 9,937 11,020 10,455 11,358
(Continued on next page)
7
(Continued from previous page)
As of and for the
As of and for the year ended December 31, six months ended June 30,
------------------------------------------------------- -------------------------
1999 2000 2001 2002 2003 2003 2004
---- ---- ---- ---- ---- ---- ----
Selected Performance Ratios:
Return on average assets (1) 0.79% 1.12% 0.81% 0.85% 0.89% 0.89% 0.87%
Return on average equity (1) 8.93% 12.52% 8.72% 9.85% 11.01% 10.65% 11.09%
Net interest margin 5.37% 6.09% 5.02% 5.03% 4.85% 4.90% 4.76%
Average net loans as a
percentage of average
deposits 64.3% 76.1% 79.6% 81.9% 81.4% 77.8% 85.4%
Efficiency ratio (2) 72.8% 64.7% 69.5% 66.8% 67.4% 68.2% 73.7%
Selected Asset Quality Ratios:
Nonperforming assets to
total assets (3) 0.0% 0.0% 2.2% 1.0% 0.7% 1.0% 0.8%
Nonperforming loans to
total loans (4) 0.0% 0.0% 3.0% 1.5% 1.0% 1.4% 0.4%
Net loan charge-offs to
average loans 0.2% 0.1% 0.1% 0.5% 0.0% 0.0% 0.0%
Allowance for loan losses
to total loans 1.41% 1.58% 1.37% 1.41% 1.40% 1.37% 1.26%
Allowance for loan losses
to nonperforming loans (5) na na 45.7% 92.8% 138.1% 101.3% 283.9%
Capital Ratios: (6)
Bank
Leverage 8.5% 8.8% 8.7% 8.0% 9.8% 10.2% 9.6%
Tier 1 risk-based 12.1% 12.4% 10.9% 10.8% 12.7% 13.2% 12.5%
Total risk-based 13.4% 13.7% 12.2% 12.1% 14.0% 14.4% 13.7%
Consolidated (7)
Leverage na na na 8.0% 10.0% 8.0% 9.8%
Tier 1 risk-based na na na 10.8% 13.0% 10.3% 12.7%
Total risk-based na na na 12.1% 14.2% 11.6% 13.9%
Notes:
(1) Returns for the six month periods are annualized.
(2) Efficiency ratio is the ratio of non-interest expenses to the sum of net
interest income and non-interest income.
(3) Nonperforming assets consist of loans on nonaccrual, loans past due 90
days or more, restructured debt, and other real estate owned.
(4) Nonperforming loans consist of loans on nonaccrual and loans past due 90
days or more.
(5) We had no nonperforming loans at December 31, 1999 and 2000.
(6) The Risk-Based and Leverage Capital ratios are defined in the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Capital Resources."
(7) Valley Commerce Bancorp became the Bank's holding company in 2002.
Recent Developments
Our consolidated net income for the third quarter of 2004 was $698,000 or $.49
per basic share, which brought year to date earnings to $1.3 million or $.92 per
basic share. On a fully diluted basis, earnings per share were $.45 and $.86 for
the respective periods.
Third quarter 2004 net income included pretax income of $663,000, or
approximately $398,000 of after-tax net income, recognized from the sale of
other real estate that was acquired in June 2004. Management cautions that the
income described in this paragraph is of a nonrecurring nature. We have no
comparable assets on our books that could result in income and/or gains of this
magnitude in the foreseeable future.
Return on average assets for the nine month period ended September 30, 2004 was
1.19%. Return on average shareholders' equity for the nine month period ended
September 30, 2004 was 15.32%.
At September 30, 2004, our consolidated total assets were $163 million, total
deposits were $139 million, and net loans were $106 million.
Net interest income earned during the third quarter of 2004 was $2.1 million,
which included $423,000 of interest income resulting from the collection of
interest previously reversed related to the other real estate noted above. The
net interest margin for the first nine months of 2004 was 5.17%. Excluding the
interest income from nonaccrual loans, the net interest margin was 4.75%.
The allowance for loan losses totaled $1.35 million or 1.25% of total loans at
September 30, 2004. We recorded a loan loss provision of $40,000 in the third
quarter of 2004. Non-performing assets at September 30, 2004 totaled $527,000,
which was equal to 0.5% of total loans.
Non-interest income earned in the third quarter of 2004 totaled $496,000, which
included a $240,000 gain on sale of other real estate, net of related carrying
costs.
We had 1,437,508 shares of common stock outstanding at September 30, 2004. The
book value per share was $8.62 at September 30, 2004.
8
RISK FACTORS
In addition to the other information contained in this prospectus, you should
carefully consider the following factors in evaluating us, our business and our
prospects before purchasing any of our shares being offered.
Risks related to our company and its stock
There is a limited, sporadic trading market for our common stock, which will
make it more difficult for you to sell your shares at a price acceptable to you.
While our common stock generally is not subject to any restrictions on transfer,
prior to this offering there has been only very limited and sporadic trading in
our common stock. During the 12 months ended September 30, 2004, trading
occurred in our stock on an average of 3.2 days per month, with average trading
volume of 6,143 shares per month or 1,940 shares per day on days when trades
took place. It is unlikely that an active public market will develop as a result
of this offering. We do not intend to apply for listing on The Nasdaq Stock
Market or on any securities exchange. The OTC Bulletin Board is a market with
generally less liquidity and fewer buyers and sellers than the Nasdaq Stock
Market or certain exchanges. Even if a liquid market develops for our stock,
there is no assurance that it will continue. An active, orderly trading market
depends on the presence and participation of willing buyers and sellers that
neither we nor any market makers for our stock can control. This may affect your
ability to sell your shares. Also, the sale of a large number of shares at one
time or over a relatively short period of time could depress the market price of
our stock. For these and other reasons, our stock should be viewed as a
long-term investment. See "Market Price for Common Equity and Related
Shareholder Matters."
Future sales of our stock could depress the market price, so that the amount you
would receive on sale of your shares might be less than the amount you paid for
your shares. Under the United States federal securities laws, substantially all
of our shares may be resold immediately in the public market, except for any
shares held by our affiliates or restricted shares of our common stock acquired
within the past two years by affiliates or nonaffiliates. Some shareholders may
decide that they do not want to continue holding our shares and may sell them.
We cannot predict whether shareholders will resell large numbers of our shares
in the public market following this offering or how quickly they may resell
their shares. If our shareholders sell large numbers of our shares over a short
period of time, or if investors anticipate large sales of our shares over a
short period of time, this could depress the trading price of the shares. See
"Shares Eligible for Future Sale."
We are unlikely to pay cash dividends in the foreseeable future, so other
investments offering a cash dividend or other form of cash distribution may be a
more appropriate investment for you. Our ability to pay cash dividends in the
future will depend on our profitability, growth and capital needs and on our
cash position at Valley Commerce Bancorp, which depends substantially on
dividends from the Bank. It has been our policy to retain earnings for the
purpose of increasing capital to support growth. The payment of dividends by the
Bank to Valley Commerce Bancorp is solely within the discretion of the Bank's
board of directors, subject to compliance with regulatory requirements.
Management expects that there will be substantial legal and strategic
constraints on the Bank's ability and willingness to pay cash dividends in the
future. Accordingly, it is likely that no cash dividends will be paid in the
foreseeable future. See "Market Price for Common Equity and Related Shareholder
Matters."
9
Upon completion of the offering, we will become subject to the Sarbanes-Oxley
Act, which will impose substantial new costs on us. The Sarbanes-Oxley Act of
2002 imposes substantial corporate governance, compliance and reporting burdens
on companies filing periodic reports with the Securities and Exchange
Commission. At present we are not subject to this Act, but we will become
subject to it upon the completion of this offering. We expect that compliance
will require us to incur substantial new expenses to implement internal controls
over financial reporting and to insure accurate and timely financial reporting
and compliance with other provisions of the new law. These additional expenses
could have a material adverse effect on our results of operations.
Our executive officers and directors have substantial control over our affairs,
and their interests may not coincide with those of investors who purchase shares
in this offering. Our executive officers and directors and entities affiliated
with them will, in the aggregate, beneficially own approximately 20% of our
common stock following this offering. These shareholders acting together will
have the ability to exert substantial influence over all matters requiring
approval by our shareholders, including the election and removal of directors
and any proposed merger, consolidation or sale of all or substantially all of
our
10
assets. This concentration of ownership could have the effect of delaying,
deferring or preventing a change in control, or impeding a merger or
consolidation, takeover or other business combination.
We depend on our management expertise; the departure of any executive officer
would require us to find a qualified replacement, and we have no assurance that
we would be able to do so within a reasonable time. Our success depends on the
services and prospective customer relationships of Donald A. Gilles, our chief
executive officer, and other members of senior management. Additionally, we
depend upon the technical skills of Allan W. Stone, our chief credit officer,
and other officers involved in the production of loans and deposits. The loss of
any officer for any reason could have a material adverse effect on us. We do not
have employment agreements with these persons, although we have executive
supplemental compensation agreements with each of them. See
"Management-Supplemental Retirement and Life Insurance Plan" on page __ below.
There is also no guaranty that we would be able to replace such individuals with
persons of comparable skills or with comparable customer relationships. We also
may not be able to attract and retain additional key personnel with the skills
and expertise necessary to achieve and manage our planned growth.
Risk related to our industry
Our business may be affected by adverse economic conditions, including
California's budget crisis. In recent years and continuing to the date of this
prospectus, the California economy has been affected by an economic downturn.
While improvement has been seen in other sections of the United States, the
recovery has been only moderate in many regions of California, including our
market area. The threat of terrorism and the uncertainty associated with the
impact of the war in Iraq have hurt chances for economic recovery. In addition,
the State of California is suffering a budget crisis, in that its tax revenues
are insufficient to fund all of its services and commitments. If the economic
recovery stalls in our market area, if economic conditions worsen, or if the
State of California enacts substantial new or increased taxes or makes
substantial cuts in government services or programs, our business could be
adversely affected, including the demand for loans, the ability of borrowers to
repay outstanding loans and the value of the property held as collateral for
outstanding loans.
Risks related to the offering
The offering price reflects factors in addition to the market price of our stock
and therefore may not represent a price at which you would be able to sell your
shares. We have established the offering price through negotiations with the
underwriter. The price at which the common stock has traded in the past or the
price at which it currently trades was one factor we took into account. However,
in establishing the offering price, we also considered prevailing market
conditions, the most recent reported sale prices and lack of trading volume of
our common stock, the results of our operations in recent periods, the market
capitalizations and stages of development of other companies that we and the
underwriter believe to be comparable to ours, estimates of our business
potential, our present state of development and other factors deemed relevant.
The offering price does not necessarily reflect the price at which the common
stock has recently traded or the price at which it will trade following this
offering. See "Determination of Offering Price."
11
Investors in the offering will suffer immediate and substantial dilution in the
tangible book value of the shares purchased. Investors purchasing shares in the
offering will incur immediate and substantial dilution in net tangible book
value per share. To the extent outstanding options to purchase common stock are
exercised, there will be further dilution. See "Dilution."
We have substantial discretion in the use of proceeds of the offering and could
use the funds for purposes that you might find unacceptable. We intend to
contribute a portion of the net proceeds of the offering to Bank of Visalia as
additional capital. Although the Bank intends to continue making loans,
investing in securities and paying operating expenses with its funds, there are
no restrictions, other than those imposed by applicable law on the activities of
a commercial bank in California, on the actual use to which the Bank puts such
funds. We will retain a portion of the proceeds in Valley Commerce Bancorp and
may use such funds for any purposes that our management deems appropriate.
12
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements." These forward-looking
statements are subject to risks and uncertainties. Our actual results could
differ materially from those expressed or implied by these forward-looking
statements as a result of various factors, including the risk factors described
above and elsewhere in this prospectus. We undertake no obligation to update any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future. Forward-looking statements
include information concerning our possible or assumed future results of
operations as well as statements that include the words "believe," "expect,"
"anticipate," "intend" or similar expressions. You should understand that
certain important factors, including those set forth in "Risk Factors" above and
elsewhere in this prospectus could affect our future results of operations and
could cause those results to differ materially from those expressed in our
forward-looking statements. In connection with these forward-looking statements,
you should carefully review the risks set forth in this prospectus. Potential
risks and uncertainties include, but are not limited to:
o significant increases in competitive pressure in the banking and
financial services industries;
o changes in the interest rate environment, which could reduce
anticipated or actual margins;
o changes in the regulatory environment;
o general economic conditions, either nationally or regionally and
especially in our primary service area, becoming less favorable than
expected and resulting in, among other things, a deterioration in
credit quality;
o operational risks, including data processing systems failures or
fraud;
o changes in business conditions and inflation;
o changes in technology;
o changes in monetary and tax policies;
o changes in the securities markets; and
o other risks and uncertainties that will be described from time to
time in our filings with the Securities and Exchange Commission.
13
USE OF PROCEEDS
We estimate that our net proceeds from the sale of 600,000 shares of common
stock in the offering will be approximately $6.6 million, after deducting
estimated underwriting discounts and offering expenses, and assuming an offering
price of $12.00 per share (the midpoint of the estimated offering price range).
The following table shows gross and estimated net proceeds to us if we sell the
minimum of 300,000 shares and maximum of 600,000 shares and the intended use of
those proceeds, after deducting a 5% underwriting discount (assuming all shares
sold were subject to the underwriting discount) and estimated offering expenses:
Estimated net proceeds and use of proceeds
Assuming this number
of shares is sold:
--------------------------------
300,000 600,000
------- -------
Price per share $ 12.00 $ 12.00
---------- ----------
Gross proceeds $3,600,000 $7,200,000
Estimated expenses and underwriter's discount 480,000 660,000
---------- ----------
Net proceeds $3,120,000 $6,540,000
========== ==========
Use of proceeds
Investment in Bank of Visalia and for general corporate purposes $3,120,000 $6,540,000
========== ==========
We plan to have the Bank increase its assets and deposits, and the primary use
of proceeds will be to support that anticipated growth by maintaining its
capital ratios above required levels. The Bank may seek to broaden and increase
its loan portfolio or it may establish new products or new branches or seek to
acquire other institutions, or their branches, as such opportunities may arise,
as part of its growth strategy. We hope to open or acquire another office within
the next 12 months but we have no specific plans at this time. Although we may
engage in such transactions and mergers, we are not currently negotiating with
respect to any such matter. Valley Commerce Bancorp and the Bank currently
exceed all applicable regulatory capital requirements.
The amount and timing of the uses of the net proceeds will depend on the capital
needs and financial requirements of the Bank and on local loan demand and
acquisition opportunities. No assurance can be given that we will establish any
new branches in the future or that we will consummate any acquisition or, if we
are able to do so, that the resulting impact on our financial condition will be
favorable. When we acquired our Fresno branch, we paid approximately
$20,000 for equipment and leasehold improvements. The costs of opening
a new branch or acquiring a branch from another institution may be greater than
these amounts. Pending the ultimate application of the proceeds, we intend to
invest the net proceeds of this offering in investment securities, federal funds
sold or other short or intermediate term investments, or a combination of such
investments.
We may retain a portion of the net proceeds in our holding company and apply
such funds to such uses as our management deems appropriate, including scheduled
payments on the subordinated deferrable interest debentures it has issued in
connection with the trust preferred securities issued by Valley Commerce Trust
I. At present the holding company engages in no material activities other than
acting as the holding company for the Bank and conducting this offering and has
no material expenses or liabilities except with respect to the offering and the
subordinated deferrable interest debentures.
14
DETERMINATION OF OFFERING PRICE
The public offering price for the common stock was determined by negotiations
between us and the underwriter. Among the factors we considered in such
negotiations were prevailing market conditions, the recent trading price and
volume of our common stock, the results of our operations in recent periods, the
market capitalizations and operations and financial conditions of other
companies that we and the underwriter believe to be comparable to ours,
estimates of our business potential, our present state of development and other
factors we and the underwriter deemed relevant.
The offering price does not necessarily reflect the price at which the common
stock has recently traded, nor does the offering price necessarily reflect the
price at which the common stock will trade following this offering. Prior to
this offering there has been very limited and sporadic trading in our common
stock. See "Market Price for Common Equity and Related Shareholder Matters."
The estimated initial public offering price range set forth on the cover of this
prospectus is subject to change as a result of market conditions and other
factors.
15
MARKET PRICE FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
General
Our common stock is traded on the OTC Bulletin Board under the symbol "VCBP.OB."
There is very limited over-the-counter market for our common stock. During the
12 months ended September 30, 2004, trading occurred in our stock on an average
of 3.2 days per month, with average trading volume of 6,143 shares per month or
1,940 shares per day on days when trades took place. Wedbush Morgan Securities
Inc. and Hoefer & Arnett Incorporated have acted as market makers for our common
stock. These market makers have no obligation to make a market for our common
stock, and they may discontinue making a market at any time. It is unlikely that
an active trading market will develop or be sustained for the common stock as a
result of this offering or at any other time in the future.
The information in the following table indicates the high and low "bid"
quotations for our common stock for each quarterly period since January 1, 2002,
and is based upon information provided by market makers. Quotations before
November 21, 2002, are for common stock of Bank of Visalia before the
reorganization by which Valley Commerce Bancorp became its holding company.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down,
or commission, do not reflect actual transactions, which have been very
sporadic, and do not include nominal amounts traded directly by shareholders or
through other dealers who are not market makers.
High and low bid quotations
High Low
---- ---
2004
Fourth quarter (through October 22) $13.25 $12.75
Third quarter 16.00 12.33
Second quarter 13.37 12.00
First quarter 12.70 10.79
2003
Fourth quarter $13.33 $10.79
Third quarter 10.92 9.84
Second quarter 10.79 9.07
First quarter 9.07 7.60
2002
Fourth quarter $ 8.48 $ 7.25
Third quarter 8.16 7.25
Second quarter 8.06 6.66
First quarter 7.49 7.34
As of August 20, 2004, there were 410 record holders of our common stock and
approximately 590 beneficial holders.
Dividend Policy
We have not paid any cash dividends on our common stock since our inception in
1996. Following the completion of this offering, we intend to retain any future
earnings for the development and operations of our business. Accordingly, we do
not anticipate paying cash dividends on our capital stock in the foreseeable
future.
Holders of our common stock will be entitled to receive such cash dividends as
may be declared by the board of directors out of funds legally available for
that purpose. We are subject to certain restrictions on dividends under the
California General Corporation Law. Generally, California law permits us to pay
dividends not exceeding our retained earnings. In the alternative, we may pay a
greater amount as
16
dividends if our tangible assets after the dividends would be at least 125% of
our liabilities (other than certain deferred items) and we meet certain
financial ratio tests. However, a bank holding company ordinarily cannot meet
these alternative requirements. In addition, we have agreed not to pay cash
dividends if we are in default or deferring interest payments under our trust
preferred securities.
Our ability to pay cash dividends will also depend to a large extent upon the
amount of cash dividends paid by the Bank to Valley Commerce Bancorp. The
ability of the Bank to pay cash dividends will depend upon its earnings and
financial condition. Under California law, a California-chartered bank may pay
dividends not exceeding the lesser of its retained earnings or its net income
for the last three fiscal years (less any previous dividends; provided, with the
prior regulatory approval, a bank may pay dividends not exceeding the greatest
of (a) its retained earnings, (b) its net income for the previous fiscal year or
(c) its net income for the current fiscal year. However, the Bank has no formal
dividend policy, and dividends are issued in the sole discretion of the Bank's
board of directors. There can be no assurance as to when or whether a dividend
will be paid or the amount of any dividend. The Bank currently has a policy of
retaining earnings to support the growth of the Bank except as necessary to
enable Valley Commerce Bancorp to pay its direct expenses and amounts due under
subordinated debentures issued in connection with trust preferred securities.
We paid 5% stock dividends in each year from 2000 to 2004.
Registrar and Transfer Agent
Registrar and Transfer Company is the registrar and transfer agent for our
common stock. Its address is 10 Commerce Drive, Cranford, New Jersey 07016. Its
phone number is (800) 368-5948 and its email address is invrelations@rtco.com.
17
CAPITALIZATION
The following table sets forth our capitalization and capital ratios at June 30,
2004, and pro forma capitalization and capital ratios as of that date after
giving effect to sales of the minimum of 300,000 shares and the maximum of
600,000 shares being offered at an assumed sale price of $12.00 per share, after
deducting a 5% underwriting discount (assuming all shares sold were subject to
the underwriting discount) and estimated offering expenses:
Actual and Pro Forma Capitalization and Capital Ratios at June 30, 2004
Pro forma assuming
(dollars in thousands) this number of shares is sold
---------------------------------
Actual 300,000 600,000
------ ------- -------
Long-term debt $ 6,782 $ 6,782 $ 6,782
Junior subordinated deferrable interest debentures 3,093 3,093 3,093
----------- ----------- -----------
Total debt 9,875 9,875 9,875
Common stock 10,703 13,823 17,243
Retained earnings 956 956 956
Unrealized (loss) in securities available-for-sale (301) (301) (301)
----------- ----------- -----------
Total shareholders' equity 11,358 14,478 17,898
----------- ----------- -----------
Total capitalization $ 21,233 $ 24,353 $ 27,773
=========== =========== ===========
Shares of common stock outstanding 1,437,508 1,737,508 2,037,508
Capital ratios: (1)
Leverage 9.8% 11.6% 13.6%
Tier 1 risk-based capital 12.7% 15.0% 17.4%
Total risk-based capital 13.9% 16.2% 18.5%
(1) These ratios are described under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital Resources."
18
DILUTION
As of June 30, 2004, our net tangible book value was approximately $11,131,000,
or $7.74 per share of common stock. Net tangible book value per share is equal
to our tangible net assets, less total liabilities, divided by the number of
shares of common stock outstanding. Net tangible book value dilution per share
to new investors represents the difference between the amount per share paid by
purchasers of shares of common stock in this offering and the net tangible book
value per share of common stock immediately after completion of this offering.
After giving effect to the sale of the minimum of 300,000 shares of common
stock, after deducting a 5% underwriting discount (assuming all shares sold were
subject to an underwriting discount) and estimated offering expenses, our pro
forma net tangible book value as of June 30, 2004 would be $14,251,000 or $8.20
per share which would represent an immediate increase in pro forma net tangible
book value of $0.46 per share to existing stockholders and immediate dilution in
pro forma net tangible book value of $3.80 per share to new investors. After
giving effect to the sale of the maximum of 600,000 shares of common stock,
after deducting a 5% underwriting discount (assuming all shares sold were
subject to an underwriting discount) and estimated offering expenses, our pro
forma net tangible book value as of June 30, 2004 would be $17,671,000 or
$8.67 per share which would represent an immediate increase in pro forma net
tangible book value of $0.93 per share to existing stockholders and immediate
dilution in pro forma net tangible book value of $3.33 per share to new
investors. The following table illustrates the per share dilution in both
scenarios.
Dilution per share
Assuming this number
of shares is sold
------------------------
300,000 600,000
------- -------
Assumed initial offering price $12.00 $12.00
Net tangible book value at June 30, 2004 7.74 7.74
Increase attributable to new investors 0.46 0.93
------ ------
Net tangible book value after offering $ 8.20 $ 8.67
====== ======
Dilution to new investors $ 3.80 $ 3.33
====== ======
The following table summarizes, as of June 30, 2004, the total number of shares
of common stock purchased from us, the total cash consideration paid to us, and
the average price per share paid by our existing shareholders and to be paid by
new investors purchasing shares from us in the offering, assuming sale of all
600,000 shares being offered, which includes exercise of the underwriter's
over-allotment option, at an assumed offering price of $12.00 per share:
Shares purchased Total consideration
----------------------- ------------------------- Average price
Number Percent Amount Percent per share
--------- ------ ----------- ------ -------------
Existing shareholders 1,437,621 70.5% $10,702,736 59.8% $ 7.44
New investors 600,000 29.5 7,200,000 40.2 12.00
--------- ------ ----------- ------ -------
Total 2,037,621 100.0% $17,902,736 100.0% $ 8.79
========= ====== =========== ====== =======
The tables above exclude 231,926 shares issuable upon exercise of options
outstanding as of June 30, 2004. The weighted average exercise price of these
outstanding options is $7.78 per share. Of these, options to acquire 169,946
shares at a weighted average exercise price of $6.70 per share are exercisable
as of June 30, 2004. Exercise of these options would result in further dilution
to new investors.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read together with selected financial data and
our financial statements and related notes appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results may differ
materially as a result of many factors, including but not limited to those set
forth under "Risk Factors" and elsewhere in this prospectus.
Overview
Our founders opened Bank of Visalia in 1996 to serve as a community bank in
Visalia and Tulare County. In 1998 the Bank purchased two branch offices of Bank
of America in the Tulare County towns of Woodlake and Tipton. At present Bank of
Visalia is the only banking facility in each of these communities. On November
21, 2002, with shareholder approval, Valley Commerce Bancorp became the holding
company for Bank of Visalia, and outstanding shares of the Bank's common stock
were exchanged on a one-for-one basis with newly issued shares of common stock
of Valley Commerce Bancorp. In October 2003, the Bank acquired the branch
facilities and deposits of the Fresno branch of Humboldt Bank. We assumed the
lease obligation, assumed $5.8 million in deposit liabilities and paid an
additional $20,000 for equipment and leasehold improvements used in the
operation of the branch. This location became our first office outside of Tulare
County and achieved our strategic goal of entering the Fresno marketplace.
In 2003, Valley Commerce Bancorp formed Valley Commerce Trust I as a Delaware
business trust with capital of $93,000 for the sole purpose of issuing trust
preferred securities. We issued $3,000,000 of trust preferred securities later
that year.
We derive our income primarily from interest received on real estate related
loans, commercial loans, and consumer loans and to a lesser extent fees from the
sale or brokerage of loans, interest on investment securities and fees for
services provided to deposit customers. Our major operating expenses are the
interest we pay on deposits and borrowings and general operating expenses,
consisting primarily of salaries and employee benefits and, to a lesser extent,
occupancy and equipment, data processing and operations.
Critical Accounting Policies
Valley Commerce Bancorp's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP).
Our accounting policies are integral to understanding the financial results
reported. Our most complex accounting policies require management's judgment to
ascertain the valuation of assets, liabilities, commitments and contingencies.
We have established detailed policies and control procedures that are intended
to ensure valuation methods are well controlled and consistently applied from
period to period. In addition, the policies and procedures are intended to
ensure that the process for changing methodologies occurs in an appropriate
manner. The allowance for loan losses is the accounting area where management's
judgment is most likely to materially impact our financial results. The
following is a brief description of our current accounting policies involving
the allowance for loan losses:
Allowance for Loan Losses
The allowance for loan losses represents our best estimate of losses inherent in
the existing loan portfolio. The purpose of the allowance for loan losses is to
provide for estimated losses that are probable to have occurred as of the
balance sheet date, and not to predict or account for future potential losses.
We believe that the allowance for loan losses is a "critical accounting
estimate" because it is based upon
20
management's assessment of various factors affecting the collectibility of
loans. The determination of the allowance for loan losses requires management to
make significant estimates based on information available as of the balance
sheet date. These estimates are subject to change in future reporting periods if
such conditions and information change. For example, a decline in the California
real estate market could result in an increase in delinquencies or foreclosures,
which may require additional allowances for losses in future periods.
The level of the allowance for loan losses is based upon the current status of
quantitative and qualitative (judgmental) risk factors. Our analysis considers
all significant conditions that might affect the ability of borrowers to perform
on their obligations. Quantitative and qualitative risk factors that may affect
loss recognition in the portfolio include, but are not limited to the following:
Quantitative factors
o Specific allocations for significant classified loans
o Migration and historical loss experience by type and
classification
o The review and risk grading of the portfolio
Qualitative (judgmental) factors
o Volume and trends in delinquent and non-accrual loans
o Volume, severity, and trends in identified problem loans
o The value of the underlying collateral
o Volume and nature of the existing portfolio
o Concentrations of credit
o National and local economic conditions affecting the loan
portfolio
o Lending policies and systems
o Experience, ability and depth of lending personnel
o Off-balance sheet credit risk
The allowance for loan losses is increased through periodic provisions to the
allowance for loan losses that are charged against income, and decreased by
charge-offs for actual losses, net of recoveries. Charge-offs represent losses
on the outstanding principal balance and any interest payments previously
accrued. Additions to the allowance for loan losses are expected to maintain the
adequacy of the total allowance after credit losses and loan growth.
The accuracy of the allowance for loan losses at June 30, 2004 can only be
proven over the remaining life of the loan portfolio in existence at that date.
As stated above, the historical loss experience of the Company is a key risk
factor considered in establishing the level of the allowance. During the five
years ended December 31, 2003, the total net charge-offs recorded by the Company
totaled $617,000. The allowance for loan losses at the beginning of that 5-year
period, January 1, 1999, was $575,000, or 1.4 % of total loans. The level of
correlation between these figures needs to consider a number of factors
including changes that would have occurred over the 5-year period including
changes in the size and composition of the loan portfolio, changes in the
economic environment during the 5-year period, changes in lending practices and
personnel, and the circumstances of specific impaired loans.
Management's Allowance for Loan losses analysis produces a range of possible
allowance amounts that reflect generally accepted accounting principles.
Management's determination of which amount is appropriate at a particular date
is based on its evaluation of the quantitative and qualitative risk factors
described above. At June 30, 2004, management determined the proper level of the
allowance to be $1,357,010 or 1.26% of total loans. The decrease in allowance
percentage from prior periods reflects diminished expectations for future loan
losses. A key factor in this determination was the expected favorable resolution
of a significant impaired loan.
Further information is provided in the "Provision for Loan Losses" and
"Allowance for Loan Losses" sections of this discussion and analysis.
Allowance for Loan Losses Related to Undisbursed Loan Commitments
A separate allowance for loan losses related to undisbursed loan commitments is
maintained. We estimate the amount of probable losses by applying the loss
factors used in our allowance for loan losses methodology to our estimate of the
expected usage of undisbursed commitments and letters of credit.
Results of Operations for the Six Months Ended June 30, 2004 and 2003
Overview
We earned net income of $625,000, or $0.42 per diluted share, for the six months
ended June 30, 2004, compared to $541,000, or $0.37 per diluted share, for the
six months ended June 30, 2003. The annualized return on average assets was
0.87% for the six months ended June 30, 2004 and 0.89% for the
21
same period in 2003. The annualized return on average shareholders' equity for
the same periods was 11.09% and 10.65%, respectively.
The increase in earnings was primarily related to our continued strong growth
and a credit to the allowance for loan losses for the six month period ended
June 30, 2004, partially offset by costs incurred to expand our infrastructure
and branches.
At June 30, 2004, our total assets were $153.0 million, representing an increase
of $13.5 million or 19% compared to December 31, 2003. Total loans, net of the
allowance for loan losses, were $105.5 million at June 30, 2004, representing an
increase of $4.4 million or 9% compared to December 31, 2003. Total deposits
were $130.6 million at June 30, 2004, representing an increase of $11.0 million
or 18% compared to December 31, 2003.
At June 30, 2004, our leverage ratio was 9.8% while our tier 1 risk-based
capital ratio and our total risk-based capital ratio were 12.7% and 13.9%,
respectively. The leverage, tier 1 risk-based capital and total risk-based
capital ratios at December 31, 2003 were 10.0%, 13.0% and 14.2%, respectively.
A detailed presentation of our financial results as of, or for the six months
ended June 30, 2004 and 2003 follows. The comparisons made in this presentation
are for the six month periods ended June 30 of the referenced year; e.g., "net
interest income for the 2004 period" refers to net interest income for the six
months ended June 30, 2004.
Net Interest Income
Our earnings depend largely upon our net interest income, which is the
difference between the total interest income we earn on interest earning assets
(primarily loans and investment securities) and the total interest expense we
incur on interest bearing liabilities (primarily deposits and borrowed funds).
Net interest income is affected by changes in the interest rates earned on
interest earning assets, the interest rates paid on interest bearing
liabilities, and the average account balances included in each category. Our net
interest margin (net interest income expressed as a percentage of average total
interest earning assets) provides a measure of our performance in generating net
interest income when comparing different time periods.
The interest rates we earn on assets and pay on liabilities are affected
principally by our direct competition, and general economic conditions at the
state and national level which result in factors beyond our control such as
actions of the Federal Reserve Board, the general supply of money in the
economy, legislative tax policies, governmental budgetary matters, and other
state and federal economic policies. Our average balances of interest earning
assets and interest bearing liabilities are affected principally by our direct
competition, economic conditions within our area of operations, and our internal
management of asset quality, capital and liquidity. Our inability to maintain
strong asset quality, capital or liquidity may adversely affect (a) our ability
to accommodate desirable borrowing customers, thereby impacting growth in
quality, higher-yielding earning assets, and (b) our ability to attract
comparatively stable, lower-cost deposits.
Total interest income increased from $3.46 million in the 2003 period to $3.86
million in the 2004 period due to higher average interest earning assets during
2004, which offset a 32 basis points (bps) decrease (from 6.16% to 5.84%) in the
weighted average yield on interest earning assets. This was due primarily to an
increase of $22.0 million or 27% in average loans outstanding offset by a 50 bps
decline in the weighted average yield earned on loans. The average amounts of
other categories of interest earning assets remained relatively constant in the
two periods. The increase in loans was due to our continued marketing efforts
which resulted in growth in all segments of the loan portfolio. The decrease in
weighted average yield was due to decreases in market interest rates, thus
resulting in lower rates being
22
assigned to loans at scheduled renewal or repricing dates and lower yields on
newly originated or purchased loans and securities.
Total interest expense remained consistent from the 2003 period to the 2004
period as the $10.4 million increase in total average interest-bearing
liabilities was almost fully offset by a 17 bps decrease (from 1.77% to 1.60%)
in the weighted average rate paid on these liabilities. The decrease in our cost
of funds was also due to decreasing market rates; this enabled us to lower rates
paid on existing deposits while continuing to attract new deposits also at lower
rates.
Net interest income before (credit to) provision for loan losses increased to
$3.14 million for the 2004 period from $2.75 million for the 2003 period due to
the factors described above. While increased volume of net average earning
assets resulted in an increase in our net interest income of $609,000, the
decrease in interest rates reduced net interest income by $218,000.
Our net interest margin decreased 14 bps (from 4.90% to 4.76%). The decrease in
net interest margin was attributable to the fact that the decrease in weighted
average yield on interest earning assets of 32 bps was more than the decrease in
the weighted average rate paid on interest bearing liabilities of 17 bps. This
occurred because (i) interest rates on assets continued to reprice at lower
rates, (ii) our ability to reduce pricing on deposits was somewhat limited by
the historically low interest rate environment and (iii) other borrowings,
consisting of relatively higher cost Federal Home Loan Bank advances and junior
subordinated deferrable interest debentures, constituted a higher percentage of
our interest bearing liabilities in the 2004 period. See "Borrowings" and
"Junior Subordinated Deferrable Interest Debentures."
The increased significance of non-interest-bearing deposits as a funding source
prevented our net interest margin from deteriorating further. Average
non-interest bearing deposits totaled $40.6 million, representing 33% of average
deposits during the 2004 period, compared to $30.5 million, representing 29% of
average deposits, during the 2003 period.
23
The following table presents our average balance sheet, including weighted
average yields and rates on a taxable-equivalent basis, for the six month
periods indicated:
Average balances and weighted average yields and rates
Six months ended June 30,
-----------------------------------------------------------------
2004 2003
----------------------------- ------------------------------
Interest Average Interest Average
Average income/ yield/ Average income/ yield/
(dollars in thousands) balance expense cost balance expense cost
------- ------- ---- ------- ------- ----
ASSETS
Due from banks $ 83 $ 2 4.82% $ 397 $ 7 3.53%
Federal funds sold 6,350 31 .98% 6,774 39 1.15%
Available-for-sale investment securities:
Taxable 19,032 309 3.25% 21,067 418 3.94%
Non-taxable (1) 3,138 52 5.02% 2,213 45 6.16%
-------- ------ -------- ------
Total securities (1) 22,170 361 3.50% 23,280 463 4.15%
Loans (2) (3) 104,582 3,470 6.64% 82,619 2,951 7.14%
-------- ------ -------- ------
Total interest earning assets (1) 133,185 3,864 5.84% 113,070 3,460 6.16%
Non-interest earning assets, net of allowance for loan losses 10,813 9,220
-------- --------
Total assets $143,998 $122,290
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing $ 47,408 $ 181 .76% $ 42,171 $ 181 .86%
Time deposits less than $100,000 17,688 161 1.82% 17,468 203 2.32%
Time deposits $100,000 or more 16,757 188 2.24% 15,993 207 2.59%
-------- ------ -------- ------
Total interest-bearing deposits 81,853 530 1.30% 75,632 591 1.56%
Other borrowings 8,759 193 4.41% 4,601 119 5.17%
-------- ------ -------- ------
Total interest-bearing liabilities 90,612 723 1.60% 80,233 710 1.77%
------ ------
Non-interest bearing deposits 40,621 30,497
Other liabilities 1,423 1,319
-------- --------
Total liabilities 132,656 112,049
Shareholders' equity 11,342 10,241
-------- --------
Total liabilities and shareholders' equity $143,998 $122,290
======== ========
Net interest income and margin (1) $3,141 4.76% $2,750 4.90%
====== ==== ====== ====
(1) Interest income is not presented on a taxable-equivalent basis, however,
the average yield was calculated on a taxable-equivalent basis by using a
marginal tax rate of 34%.
(2) Nonaccrual loans are included in total loans. Interest income is included
on nonaccrual loans only to the extent cash payments have been received.
(3) Interest income includes amortized loan fees of $213 and $166 for 2004 and
2003, respectively.
24
The following table sets forth a summary of the changes in interest income and
interest expense from changes in average earning assets and interest-bearing
liabilities (volume) and changes in average interest rates for the periods
indicated. Changes not solely attributable to volume or rates have been
allocated in proportion to the respective volume and rate components.
Changes in net interest income due to changes in volumes and rates
Six months ended June 30,
2004 compared to 2003
---------------------------
Volume Rate Total
------ ---- -----
(in thousands)
Increase (decrease) in interest income:
Due from banks $ (6) $ 1 $ (5)
Federal funds sold (2) (6) (8)
Available-for-sale investment securities (24) (78) (102)
Loans 784 (265) 519
----- ----- -----
Total interest income 752 (348) 404
----- ----- -----
(Decrease) increase in interest expense:
Interest-bearing deposits 22 (22) 0
Time deposits less than $100,000 3 (45) (42)
Time deposits $100,000 or more 10 (29) (19)
Other borrowings 108 (34) 74
----- ----- -----
Total interest expense 143 (130) 13
----- ----- -----
Increase in net interest income $ 609 $(218) $ 391
===== ===== =====
(Credit to) Provision for Loan Losses
The (credit to) provision for loan losses, which is included in operations to
support the required level of the allowance for loan losses, is based on loan
growth, credit experience, portfolio mix and our ongoing evaluation of the loan
portfolio risk and economic conditions. A credit to the provision occurs when we
have determined that the existing balance of the allowance for loan losses
exceeds the estimated inherent losses in the loan portfolio as of the balance
sheet date.
The (credit to) provision for loan losses for the six months ended June 30, 2004
was comprised of loss provisions totaling $35,000 recorded prior to June 2004
offset by a $129,000 credit recorded in June 2004. The June credit resulted from
our determination that the loss exposure on an impaired loan had been
eliminated, and that the portion of the allowance for loan losses specifically
reserved for this loan was no longer required. As a result, the overall level of
the reserve was in excess of the amounts determined as necessary by management
and the provision was reduced accordingly. We made this determination following
the foreclosure and evaluation of the fair value of the impaired loan's
underlying collateral in June 2004 and the subsequent receipt of a favorable
purchase offer. We accepted this offer with escrow closing in September 2004.
The reduction in the provision for loan losses recorded in June 2004 adjusted
the allowance for loan losses to the level required to provide for credit losses
estimated in the loan portfolio at June 30, 2004.
We recorded a provision for loan losses in the 2003 period of $140,000 due
primarily to growth of the loan portfolio. Net loan recoveries totaled $18,000
in the 2004 period compared to net loan recoveries of $33,000 in the 2003
period. For further information regarding credit losses and the allowance for
loan losses see "Critical Accounting Polices" and "Financial Condition -
Allowance for Loan Losses."
25
Non-Interest Income
Non-interest income for the 2004 period totaled $461,000 compared with $565,000
in the 2003 period. The components of non-interest income during these periods
were as follows:
Non-interest income
Six months ended June 30,
------------------------------------
Increase
(in thousands) 2004 2003 (Decrease)
---- ---- ----------
Service charges $ 246 $ 243 $ 3
Gain on sales of available-for-sale investment
securities 7 97 (90)
Mortgage loan brokerage fees 88 126 (38)
Earnings on cash surrender value of life insurance
policies 44 42 2
Other 76 54 22
------- ------- -------
Total non-interest income $ 461 $ 562 $ (101)
======= ======= =======
Despite deposit growth during the 2004 period, income from service charges on
deposit accounts increased only slightly from the 2003 period. This was
primarily due to higher average balances maintained by customers.
During the first six months of 2004, we brokered fewer residential mortgage
loans and therefore earned less loan brokerage fees. This was due to a slowdown
in refinance activity that was experienced throughout the mortgage industry.
Greater refinance activity occurred in the 2003 period when mortgage interest
rates initially decreased to historically low levels.
The gains on sale of available-for-sale investment securities decreased during
the 2004 period. This was due to the sale of certain securities in the 2003
period. We have no established program of selling securities other than as a
source of liquidity or to achieve interest rate risk management goals. From time
to time, we evaluate the portfolio of investment securities and may initiate
sales of selected securities. Sales of securities can produce either gains or
losses depending upon the prevailing interest rate environment.
Non-Interest Expense
Total non-interest expense was $2.7 million in the 2004 period, up $395,000 or
17%, from the $2.3 million in non-interest expense in the 2003 period. The ratio
of non-interest expense to net operating revenue (efficiency ratio) was 75% and
69% for the 2004 period and the 2003 period, respectively. This ratio reflects
changes in non-interest expense as well as changes in revenue from interest and
non-interest sources. The decrease in efficiency was caused by expansion of our
infrastructure and operations in the 2004 period in anticipation of future loan
and deposit growth. Although net interest income increased in the 2004 period,
our efficiency ratio would have been lower in the 2004 period had we been able
to maintain our net interest margin from the 2003 period.
26
The following table presents the major components of non-interest expense for
the periods indicated.
Non-interest expense
Six months ended June 30,
------------------------------
Increase
(in thousands) 2004 2003 (Decrease)
------ ------ ----------
Salaries and employee benefits $1,457 $1,195 $ 262
Occupancy and equipment 300 248 52
Data processing 209 209 0
Operations 185 130 55
Professional and legal 128 153 (25)
Advertising and business development 88 49 39
Telephone and postal 66 58 8
Supplies 54 48 6
Assessment and insurance 60 45 15
Amortization expense 31 31 0
Other expenses 108 125 (17)
------ ------ ------
Total non-interest expense $2,686 $2,291 $ 395
====== ====== ======
The increase in non-interest expense resulted from growth, including the
addition of the Fresno branch in the fourth quarter of 2003. Of the $395,000
increase in non-interest expense, $186,000 represented the employee, occupancy
and other non-interest costs of the Fresno branch, which were not present in the
comparable period of 2003. The remainder of the variance is attributable to
increased employee costs, advertising and business development expenses, and
other expenses associated with our growth.
Additional increases in employee costs were to enhance loan production
capability and for normal salary adjustments. Operations costs increased due to
significantly higher costs in the areas of correspondent bank charges and
courier/armored car charges. These reflected our growth as well as changing
vendor cost structures. The other expenses category decreased in the 2004 period
due to the absence of an operations-related loss that occurred in the 2003
period.
Provision for Income Taxes
The provision for income taxes for the 2004 period was $385,000 compared to
$340,000 in the 2003 period. Our effective tax rates for these periods were 38%,
and 39%, respectively.
27
Results of Operations for the Years Ended December 31, 2003 and 2002
Overview
We earned net income of $1.15 million, or $0.77 per diluted share, for the year
ended December 31, 2003, compared to $931,000, or $0.64 per diluted share, for
the year ended December 31, 2002. The returns on average assets were 0.89% in
2003 and 0.85% in 2002. Returns on average shareholders' equity for the same
periods were 11.01% and 9.85%, respectively.
The increase in earnings was related to our continued strong growth and more
favorable loan loss experience in 2003. At December 31, 2003, our total assets
were $139.6 million, representing an increase of $19.2 million or 16% compared
to December 31, 2002. Total loans, net of the allowance for loan losses, were
$101.1 million at December 31, 2003, representing an increase of $24.1 million
or 31% compared to December 31, 2002. Total deposits were $119.7 million at
December 31, 2003, representing an increase of $11.9 million or 11% compared to
December 31, 2002.
At December 31, 2003, our leverage ratio was 10.0% while our tier 1 risk-based
capital ratio and our total risk-based capital ratio were 13.0% and 14.2%,
respectively. The leverage, tier 1 risk-based capital, and total risk-based
capital ratios at December 31, 2002 were 8.0%, 10.8%, and 12.1%, respectively.
A detailed presentation of our financial results for the years ended December
31, 2003 and 2002 follows.
Net Interest Income
Total interest income increased from $6.40 million in 2002 to $7.19 million in
2003 due to higher average volume of interest earning assets during 2003, which
offset a 45 basis points (bps) decrease (from 6.49% to 6.04%) in the weighted
average yield on interest earning assets. This was due primarily to an increase
of $11.3 million or 14% in average loans outstanding offset by 18 bps decline in
the weighted average yield earned on loans. Additionally, average
available-for-sale investment securities increased by $8.1 million or 56%.
However, the impact on net interest income was mitigated by a 115 bps decline in
the average interest rate earned on investment securities. The increase in loans
was due to our continued marketing efforts while the increase in investment
securities reflected the use of additional funds from increased average
deposits. The decrease in weighted average yield was due to decreases in market
interest rates; this resulted in lower rates being assigned to loans at
scheduled renewal or repricing dates and lower yields on newly originated or
purchased loans and securities. In addition, certain higher yielding investment
securities were sold in 2002.
Total interest expense decreased $28,000 from 2002 to 2003 despite a $12.4
million or 17% increase in average interest-bearing liabilities. The increase
was more than offset by a 33 bps decrease (from 2.03% to 1.70%) in the weighted
average rate paid on these liabilities. The decrease in our cost of funds was
also due to decreasing market rates; this enabled us to lower rates paid on
existing deposits while continuing to attract new deposits.
Net interest income before provision for loan losses increased to $5.76 million
for 2003 from $4.95 million for 2002 due to the factors described above. The
increased volume of net average earning assets resulted in an increase in our
net interest income of $791,000 and the decrease in interest rates added an
additional $21,000 of net interest income.
Our net interest margin decreased 18 bps (from 5.03% to 4.85%). The decrease in
net interest margin was attributable to the fact that the decrease in weighted
average yield on interest earning assets was more than the decrease in the
weighted average rate paid on interest bearing liabilities. This occurred
because:
28
(i) interest rates for assets continued to reprice at lower rates, (ii) our
ability to reduce pricing for deposits was somewhat limited by the historically
low interest rate environment and (iii) other borrowings, consisting of
relatively higher cost Federal Home Loan Bank advances and junior subordinated
deferrable interest debentures, constituted a higher percentage of our interest
bearing liabilities in 2003. See "Borrowings" and "Junior Subordinated
Deferrable Interest Debentures."
Non-interest bearing deposits gained more significance as a funding source in
2003, which prevented greater deterioration in our net interest margin. Average
non-interest-bearing deposits totaled $32.7 million, representing 30% of average
deposits during 2003 compared to $26.7 million, representing 28% of average
deposits, during 2002.
The following table presents our average balance sheet, including average yields
and rates on a taxable-equivalent basis, for the years indicated:
Average balances and weighted average yields and rates
Year ended December 31,
-----------------------
2003 2002
------------------------------ ------------------------------
Interest Average Interest Average
Average income/ yield/ Average income/ yield/
(dollars in thousands) balance expense rate balance expense rate
------- ------- ---- ------- ------- ----
ASSETS:
Due from banks $ 309 $ 11 3.56% $ 433 $ 19 4.39%
Federal funds sold 6,693 72 1.08% 5,813 92 1.58%
Available-for-sale investment securities:
Taxable 20,581 738 3.59% 11,928 534 4.48%
Non-taxable (1) 1,979 75 5.74% 2,543 117 6.97%
-------- -------- ---- -------- -------- ----
Total securities (1) 22,560 813 3.77% 14,471 651 4.92%
Loans (2) (3) 90,153 6,292 6.98% 78,847 5,642 7.16%
-------- -------- ---- -------- -------- ----
Total interest earning assets (1) 119,715 7,188 6.04% 99,564 6,404 6.49%
Non-interest earning assets, net of allowance for loan losses 9,192 9,924
-------- --------
Total assets $128,907 $109,488
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Interest bearing $ 44,213 $ 352 .80% $ 38,821 $ 447 1.15%
Time deposits less than $100,000 17,550 378 2.15% 14,350 441 3.07%
Time deposits $100,000 or more 15,930 395 2.48% 16,149 415 2.57%
-------- -------- ---- -------- -------- ----
Total interest-bearing deposits 77,693 1,125 1.45% 69,320 1,303 1.88%
Other borrowings 6,274 301 4.80% 2,246 151 6.72%
-------- -------- ---- -------- -------- ----
Total interest-bearing liabilities 83,967 1,426 1.70% 71,566 1,454 2.03%
-------- --------
Non-interest bearing deposits 32,671 26,719
Other liabilities 1,836 1,751
-------- --------
Total liabilities 118,474 100,036
Shareholders' equity 10,433 9,452
-------- --------
Total liabilities and shareholders' equity $128,907 $109,488
======== ========
Net interest income and margin (1) $ 5,762 4.85% $ 4,950 5.03%
======== ==== ======== ====
(1) Interest income is not presented on a taxable-equivalent basis, however,
the average yield was calculated on a taxable-equivalent basis by using a
marginal tax rate of 34%.
(2) Nonaccrual loans are included in total loans. Interest income is included
on nonaccrual loans only to the extent cash payments have been received.
29
(3) Interest income includes amortized loan fees of $473 and $376, for 2003
and 2002, respectively.
The following table sets forth a summary of the changes in interest income and
interest expense from changes in average earning assets and interest-bearing
liabilities (volume) and changes in average interest rates for the periods
indicated. Changes not solely attributable to volume or rates have been
allocated in proportion to the respective volume and rate components.
Changes in net interest income due to changes in volumes and rates
Years ended December 31,
2003 compared to 2002
--------------------------------
Volume Rate Total
------ ---- -----
(in thousands)
Increase (decrease) in interest income:
Due from banks $ (5) $ (3) $ (8)
Federal funds sold 14 (34) (20)
Available-for-sale investment securities 398 (236) 162
Loans 809 (159) 650
------- ------- -------
Total interest income 1,216 (432) 784
------- ------- -------
(Decrease) increase in interest expense:
Interest-bearing deposits 62 (157) (95)
Time deposits less than $100,000 98 (161) (63)
Time deposits $100,000 or more (6) (14) (20)
Other borrowings 271 (121) 150
------- ------- -------
Total interest expense 425 (453) (28)
------- ------- -------
Increase in net interest income $ 791 $ 21 $ 812
======= ======= =======
Provision for Loan Losses
We have made no changes in loan loss methodology for any of the periods
presented in this filing which significantly affected the provision or allowance
for loan losses. Further details related to our methodology are included in the
above discussion of critical accounting policies and in our comparison of
operating results for the six-month periods ending June 30, 2004 and 2003.
The provisions for loan losses in 2003 and 2002 were $315,000 and $405,000,
respectively. The loan loss provision was greater in the prior year due to net
loan charge-offs of $354,000 in 2002 compared to net loan recoveries of $16,000
in 2003. The 2002 charge-offs included a $208,000 charge-off for a loan to a
company that provided computer network services, and an $87,000 charge-off on a
landscaping company. Both losses were attributable to borrowers' management
deficiencies that developed subsequent to loan origination and were not industry
related. Without this difference in net loan losses, the 2003 provision for loan
losses would have exceeded the 2002 provision due to growth in the loan
portfolio.
30
Non-Interest Income
Non-interest income for 2003 totaled $1.05 million compared with $1.07 million
in 2002. The components of non-interest income were as follows:
Non-interest income
Year ended December 31,
-----------------------------
Increase
(in thousands) 2003 2002 (Decrease)
---- ---- ----------
Service charges $ 496 $ 495 $ 1
Gain on sales of available-for-sale investment
securities 131 172 (41)
Mortgage loan brokerage fees 202 148 54
Earnings on cash surrender value of life insurance
policies 75 93 (18)
Other 151 157 (6)
------ ------ ------
Total non-interest income $1,055 $1,065 $ (10)
====== ====== ======
Despite deposit growth during 2003, income from service charges on deposit
accounts remained static. Fees charged on checking and savings accounts declined
compared to the prior year due to higher average balances maintained by business
and professional customers. This was offset by increased nonsufficient funds
charges due to an increased number of consumer accounts.
During 2003, we earned greater loan brokerage fees on residential mortgage loans
than the prior year due to increased refinance activity. The increase reflected
mortgage interest rates decreasing to historically low levels in 2003.
The gains on sale of available-for-sale investment securities decreased during
2003. We have no established program of selling securities other than as a
source of liquidity or to achieve interest rate risk management goals. From time
to time, we evaluate the portfolio of investment securities and may initiate
sales of certain securities. Sales of securities can produce either gains or
losses depending upon the prevailing interest rate environment.
Non-Interest Expense
Total non-interest expense was $4.6 million in 2003, up $569,000 or 14%, from
the $4.1 million in non-interest expense in 2002. The ratio of non-interest
expense to net operating revenue (efficiency ratio), remained consistent at
67.4% compared to 67.8% for 2003 and 2002, respectively.
31
The following table presents the major components of non-interest expense for
the years indicated.
Non-interest expense
Year ended December 31,
-------------------------------
Increase
(in thousands) 2003 2002 (Decrease)
---- ---- ----------
Salaries and employee benefits $2,419 $2,096 $ 323
Occupancy and equipment 550 459 91
Data processing 418 383 35
Operations 309 176 133
Professional and legal 200 285 (85)
Advertising and business development 128 112 16
Telephone and postal 121 104 17
Supplies 111 83 28
Assessment and insurance 100 86 14
Amortization expense 63 63 0
Other expenses 229 232 (3)
------ ------ ------
Total non-interest expense $4,648 $4,079 $ 569
====== ====== ======
Much of the increase in non-interest expense was related to the general growth
we have experienced which affected all areas of expense. The increase in
salaries and related benefits was primarily to enhance loan production
capability. Occupancy and equipment expense reflected acquisition of new leased
facilities for administrative employees.
Operations costs increased due to significantly higher costs in the areas of
correspondent bank charges and courier/armored car charges. These reflected our
growth as well as changing vendor cost structures. Also included in the
operations category was branch security costs which increased significantly at
certain locations based on greater need.
Professional and legal costs incurred in 2003 were down from the prior year due
to the absence of legal costs incurred in 2002 related to the formation of our
bank holding company.
Additional non-interest expense was incurred due to the acquisition and opening
of our full service Fresno branch in October 2003. Including legal costs, the
non-interest expense related to the Fresno branch totaled approximately $151,000
in 2003.
Provision for Income Taxes
The provision for income taxes for 2003 was $705,000 compared to $600,000 in
2002. Our effective tax rates for these periods were 38.0%, and 39.2%,
respectively.
32
Financial Condition
Investment Securities
We purchase investment securities primarily to maintain adequate liquidity. Our
portfolio consists of obligations of U.S. Government agencies, mortgage-backed
securities of U.S. government sponsored enterprises, obligations of states and
political subdivisions, and other investment grade securities.
All existing investment securities are classified as available-for-sale
securities rather than as held-to-maturity securities. In classifying its
investments as available-for-sale, securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported, net of taxes,
as accumulated other comprehensive income within shareholders' equity.
The following tables set forth the estimated market value of available-for-sale
investment securities at the dates indicated:
Market value of securities available for sale
June 30, 2004
---------------------------------------------------------
(in thousands) Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---- ---- ---- -----
U.S. government agencies $13,698 $ 5 $ (154) $13,549
Mortgage-backed securities 9,800 -- (214) 9,586
Municipal securities 4,511 38 (136) 4,413
Corporate debt securities 652 -- (4) 648
------- ------- ------- -------
Total $28,661 $ 43 $ (508) $28,196
======= ======= ======= =======
December 31, 2003
---------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---- ---- ---- -----
U.S. government agencies $ 9,614 $ 18 $ (63) $ 9,269
Mortgage-backed securities 9,423 12 (62) 9,373
Municipal securities 1,741 63 (2) 1,802
Corporate debt securities 1,140 4 -- 1,444
------- ------- ------- -------
Total $21,918 $ 97 $ (127) $21,888
======= ======= ======= =======
December 31, 2002
---------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
---- ---- ---- -----
U.S. government agencies $14,172 $ 111 $ -- $14,283
Mortgage-backed securities 8,602 171 (2) 8,771
Municipal securities 2,386 47 (28) 2,405
Corporate debt securities 512 5 -- 517
------- ------- ------- -------
Total $25,672 $ 334 $ (30) $25,976
======= ======= ======= =======
33
The following table summarizes the amounts and distribution of our investment
securities and their weighted average yields as of June 30, 2004. Expected
maturities may differ from contractual maturities where the issuers of the
securities have the right to call or prepay obligations without penalty.
Maturities of securities available for sale
----------------------------------------------------------------------------------------------------
After one After five
Within but within but within After
one year five years ten years ten years Total
-------- ---------- --------- --------- -----
(dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
U.S. government agencies $ 3,008 1.60% $ 6,131 3.26% $ 3,900 4.90% $ 510 7.18% $13,549 3.27%
Mortgage-backed securities -- -- 723 3.80% 5,603 3.79% 3,260 4.49% 9,586 4.03%
Municipal securities (1) -- -- 524 3.04% 1,759 6.05% 2,130 5.65% 4,413 5.50%
Corporate debt securities 126 2.40% 522 3.70% -- -- -- -- 648 3.45%
------- ------- ------- ------- -------
Total $ 3,134 1.63% $ 7,900 3.33% $11,262 4.55% $ 5,900 5.14% $28,196 3.88%
======= ======= ======= ======= =======
(1) Yields shown are not computed on a tax equivalent basis.
Loan Portfolio
Lending activities are geographically concentrated in the South San Joaquin
Valley, primarily in Tulare and Fresno counties. The loan portfolio mix consists
primarily of commercial and real estate loans. Consumer and other types of loans
are offered to meet the broader needs of business customers and the community in
general.
The following table sets forth the breakdown of loans outstanding by type at the
dates indicated by amount and percentage of the portfolio:
Loan portfolio
(dollars in thousands June 30, 2004 December 31, 2003 December 31, 2002
------------------------- ------------------------- -------------------------
Commercial $ 32,095 30% $ 27,900 27% $ 24,503 31%
Real estate - mortgage (1) 58,092 54 55,406 54 38,563 49
Real estate - construction 10,882 10 10,925 11 7,548 10
Agricultural 3,589 3 4,885 5 4,047 5
Consumer and other 2,656 3 3,786 3 3,674 5
--------- --- --------- --- --------- ---
Subtotal 107,314 100% 102,902 100% 78,335 100%
--------- === --------- === --------- ===
Deferred loan fees, net (429) (332) (245)
Allowance for loan losses (1,357) (1,433) (1,102)
--------- --------- ---------
Total loans, net $ 105,528 $ 101,137 $ 76,988
========= ========= =========
(1) Consists primarily of commercial mortgage loans.
Loans outstanding at June 30, 2004 increased by $4.4 million or 4% compared to
December 31, 2003 and by $14.1 million or 15% compared to June 30, 2003. This is
indicative of significant economic growth in our lending territory and our
strong marketing efforts.
34
The primary focus of our Lending Division is in the commercial arena. The Bank
also offers a full slate of retail products as a means to service our primary
target group which is the Commercial and Professional market. The Bank does
little lending in the agricultural market and that continues to be the plan. As
noted in the loan growth there has been good growth in the targeted areas. The
strongest growth has been in the real estate related segment of the portfolio.
This is indicative of the region the Bank is in. The majority of all loans,
including the real estate loans in the portfolio, also have numerous other
relationships with the Bank. The Bank strives to attain depository relationships
along with each loan.
The following table presents the maturity distribution of the loan portfolio as
of June 30, 2004. The table shows the distribution of such loans between those
loans with fixed interest rates and those with floating (variable) interest
rates. Floating rates generally fluctuate with changes in the prime rate.
Maturity of loans
-----------------
After one
Within but within After
(in thousands) one year five years five years Total
-------- ---------- ---------- -----
Commercial $ 29,873 $ 2,146 $ 76 $ 32,095
Real estate - mortgage (1) 39,177 3,061 15,854 58,092
Real estate - construction 10,545 337 0 10,882
Agriculture 3,589 0 0 3,589
Consumer and other 2,286 329 41 2,656
-------- -------- -------- --------
Total $ 85,470 $ 5,873 $ 15,971 $107,314
======== ======== ======== ========
Loans with fixed interest rates $ 1,625 $ 5,333 $ 15,971 $ 22,929
Loans with floating interest rates 83,845 540 0 84,385
-------- -------- -------- --------
Total $ 85,470 $ 5,873 $ 15,971 $107,314
======== ======== ======== ========
(1) Consists primarily of commercial mortgage loans.
A majority of our floating rate loans have rate floors. Because of the
historically low interest rate environment, approximately 30% of our floating
rate loans were at their rate floors during 2003 and 2004.
Credit Risk
We assess and manage credit risk on an ongoing basis through stringent credit
review and approval policies, extensive internal monitoring and established
formal lending policies. Additionally, we contract with an outside loan review
consultant to periodically examine new loans and to review the existing loan
portfolio. We believe our ability to identify and assess the risk and the return
characteristics of the loan portfolio is critical for profitability and growth.
We strive to maintain the historically low level of loan losses by continuing
our emphasis on credit quality in the loan approval process, active credit
administration and regular monitoring. With this in mind, we have designed and
implemented a comprehensive loan review and grading system that functions to
continually assess the credit risk inherent in the loan portfolio. We closely
evaluate the primary and secondary sources of repayment of all credits granted
with strong emphasis on cash flows.
Ultimately, the credit quality of our loans may be influenced by underlying
trends in the national and local economic and business cycles. We closely
monitor these trends and believe that timely adjustments to lending policies and
underwriting standards based on our evaluation will enable us to mitigate losses
in an economic downturn; however, there is no assurance that losses will not
occur under such circumstances.
35
Nonperforming Assets
The following table presents nonaccrual loans, loans past due 90 days and still
accruing interest, restructured loans, and other real estate owned, all as of
the dates indicated:
Nonperforming assets
December 31,
June 30, ----------------
(dollars in thousands) 2004 2003 2002
---- ---- ----
Nonaccrual loans $ 478 $1,038 $1,188
Loans 90 days or more past due and still accruing 0 0 0
Restructured loans 0 0 0
Other real estate owned 765 0 0
------ ------ ------
Total nonperforming assets $1,243 $1,038 $1,188
====== ====== ======
Nonperforming assets to total loans 1.2% 1.0% 1.5%
====== ====== ======
Nonaccrual loans are comprised primarily of commercial mortgage loans. The
underlying collateral for the largest nonaccrual loan outstanding at December
31, 2003 was foreclosed in June 2004. This accounted for most of the decrease in
nonaccrual loans in the 2004 period as well as the full amount of the increase
in other real estate owned. The real estate acquired in June 2004 was
subsequently placed in escrow and anticipated sale proceeds are expected to
result in a full recovery of foregone interest and expenses we have incurred on
the related loan. A significant nonrefundable deposit was received from the
purchaser and the transaction is expected to close in the third quarter of 2004.
Generally, loans are placed on nonaccrual status when full collectibility of
principal or interest is uncertain or when principal or interest is past due for
90 days (unless the loan is well secured and in the process of collection). From
the time a loan is placed on nonaccrual status, interest previously accrued but
not collected is reversed from interest income. Any interest or principal
payments received on a nonaccrual loan are normally applied as a principal
reduction. A nonaccrual loan may be restored to accrual status when none of its
principal and interest is past due and unpaid, and certain other factors are
satisfied.
Classification of a loan as nonaccrual does not necessarily indicate that
collection of principal and interest will be uncollectible in whole or in part.
Impaired Loans
We consider a loan impaired when collection of all amounts due according to the
original contractual terms is not probable. The category of impaired loans is
not coextensive with the category of non-accrual loans, although the two
categories may overlap in part or in full and did overlap in full at June 30,
2004, and December 31, 2003. The recorded investment in loans that were
considered to be impaired totaled $478,000, $1.04 million, and $1.19 million at
June 30, 2004, December 31, 2003, and December 31, 2002, respectively. At June
30, 2004, management determined that no specific allowance for impaired loans
was necessary. The related specific allowance for loan losses for impaired loans
was $177,000 and $178,000 at December 31, 2003 and 2002, respectively. The
average recorded investment in impaired loans for the six-month period ended
June 30, 2004, and the years ended December 31, 2003 and 2002 was $1.31 million,
$1.20 million and $2.34 million, respectively.
36
Allowance for Loan Losses
We maintain an allowance for loan losses to absorb losses inherent in the loan
portfolio that is based on our regular assessments of the probable estimated
losses inherent in the loan portfolio. Determining the adequacy of the allowance
is a matter of careful judgment, which reflects consideration of all significant
factors that affect the collectibility of the portfolio as of the evaluation
date. Our methodology for measuring the appropriate level of the allowance for
loan losses relies on several key elements, which include the formula allowance
and specific allowances for identified problem loans.
The allowance for loan losses totaled $1.36 million or 1.27% of total loans at
June 30, 2004 compared to $1.43 million or 1.40% at December 31, 2003 and $1.10
million or 1.41% at December 31, 2002. The decrease in this percentage related
to the reassessment of the overall required level of reserves principally due to
the reversal of a portion of the allowance that was allocated to a specific loan
as discussed above in "Nonperforming Assets."
Our policy is to maintain the allowance for loan losses at a level adequate for
risks inherent in the loan portfolio. Based on information currently available
to analyze loan loss potential, including economic factors, overall credit
quality, historical delinquency and a history of actual charge-offs, we believe
that the loan loss provision and allowance for loan losses are adequate.
However, no prediction of the ultimate level of loans charged off in future
years can be made with any certainty.
The following table summarizes the changes in the allowance for loan losses for
the periods indicated:
Changes in allowance for loan losses
Year ended December 31,
Six months ended -----------------------
(dollars in thousands) June 30, 2004 2003 2002
------------- ---- ----
Balance, beginning $ 1,433 $ 1,102 $ 1,051
(Credit to) Provision for loan losses (94) 315 405
Charge-offs 0 (17) (390)
Recoveries 18 33 36
--------- --------- ---------
Balance, ending $ 1,357 $ 1,433 $ 1,102
========= ========= =========
Net charge-offs to average loans outstanding (.02)% (.02)% .45%
Average loans outstanding $ 104,582 $ 90,153 $ 78,847
Ending allowance to total loans outstanding 1.26% 1.40% 1.41%
37
Charge-offs and recoveries for the periods presented pertained primarily to
commercial loans and to a lesser extent, consumer loans. The allocation of the
allowance for loan losses ("ALL") by loan category and the percentage of loans
to total loans is presented in the following table:
Allocation of allowance for loan losses
December 31,
-------------------------------
(dollars in thousands) June 30, 2004 2003 2002
------------- ---------------------- ----------------------
ALL by % of loans ALL by % of loans ALL by % of loans
category to total category to total category to total
-------- -------- -------- -------- -------- --------
Commercial $ 393 30% $ 416 27% $ 320 31%
Real estate - mortgage 719 54 759 54 584 49
Real estate - construction 163 10 172 11 132 10
Agricultural 41 3 43 5 33 5
Consumer and other 41 3 43 3 33 5
------ ------ ------ ------ ------ ------
Total allowance for loan losses $1,357 100% $1,433 100% $1,102 100%
====== ====== ====== ====== ====== ======
The allocation percentages are very similar to the percentage distribution of
loan volume by category. The category of real estate - construction loans has a
slightly higher percentage of the allowance for loan losses due to management's
assessment of the risk factors involved. While the allowance is allocated by
loan types in the table above, the allowance is general in nature and available
in its entirety to provide for losses in any loan category.
Deposits
Deposits are obtained from local businesses and residents. The average daily
deposits and the average rates paid for the six-month periods ended June 30,
2004 and 2003, and for the years ended December 31, 2003 and 2002 are presented
in the respective "Results of Operations" sections under the heading "Net
Interest Income."
Average deposits for the six months ended June 30, 2004 increased $16.3 million,
or 15%, compared to average deposits for the first six months of 2003. Average
deposits for 2003 increased $14.3 million, or 15%, compared to average deposits
in 2002. The steady increase in deposits is attributable to a continued strong
marketing effort to attract local deposits, particularly from business
customers.
The following table summarizes by time remaining to maturity, the amount of
certificates of deposit issued in amounts of $100,000 or more as of June 30,
2004.
Maturities of certificates of deposit of $100,000 or more
(dollars in thousands) Balance Percent of total
------- ----------------
Three months or less $ 7,812 41.9%
Over three months through six months 2,424 13.0
Over six months through twelve months 4,638 24.9
Over twelve months 3,757 20.2
------- -----
Total certificates of deposit of $100,000 and more $18,631 100.0%
======= =====
Borrowings
We maintain a borrowing relationship with the Federal Home Loan Bank of San
Francisco primarily as a source of liquidity and secondarily as a source of
fixed rate funds. At June 30, 2004, long-term debt
38
outstanding from the FHLB totaled $6.78 million. A portion of this debt was
collateralized by qualifying mortgage loans originated and held for investment
and the remainder was collateralized by investment securities. At December 31,
2003 and 2002, long-term debt outstanding from the FHLB totaled $5.19 million
and $2.06 million, respectively. The increase in long-term debt resulted from a
greater customer demand for fixed rate loans. We obtained fixed rate debt from
FHLB to match the cash flow characteristics of certain fixed rate loans.
Average borrowings from FHLB totaled $5.76 million for the six months ended June
30, 2004 at an average cost of 4.29%. Average borrowings from FHLB totaled $4.01
million in 2003 at an average cost of 4.76%, and $2.25 million in 2002 at an
average cost of 6.66%. The decrease in the average cost of our FHLB borrowings
reflects that we increased our FHLB indebtedness within a period of time during
which interest rates charged by FHLB were trending significantly lower.
Additionally, we maintain short-term unsecured borrowing arrangements with
correspondent banks to meet unforeseen deposit outflows and cash needs.
Short-term borrowings are also available from FHLB secured by loans and
investments securities which have been pledged by us as collateral. To date, we
have not utilized short-term borrowings from either source.
Junior Subordinated Deferrable Interest Debentures
During 2003, we formed Valley Commerce Trust I with capital of $93,000 for the
sole purpose of issuing trust preferred securities. During the second quarter of
2003, Valley Commerce Trust I issued trust preferred securities for gross
proceeds of $3.0 million and invested this amount plus the $93,000 of capital
proceeds in floating rate junior subordinated deferrable interest debentures
issued by Valley Commerce Bancorp. The Subordinated Debentures mature on April
7, 2033 and are repriced quarterly to an interest rate that is the sum of
3-month Libor plus 3.30%. The interest rate at June 30, 2004 and December 31,
2003 was 4.44% and 4.59%, respectively.
Trust preferred securities are includable in Valley Commerce Bancorp's Tier 1
capital for regulatory purposes subject to certain limitations. The action taken
to form Valley Commerce Trust I and issue trust preferred securities was made
for the purpose of enhancing our capital position and to provide for continued
growth.
Off-Balance Sheet Items
We have certain ongoing commitments under operating leases for branch and
administrative office space in Visalia and Fresno which require payments
totaling approximately $19,000 per month in 2004. As of June 30, 2004 and
December 31, 2003, commitments to extend credit and letters of credit were the
only financial instruments with off-balance sheet risk. As of June 30, 2004 and
December 31, 2003, commitments to extend credit totaled $30 million and $27
million, respectively, and letters of credit totaled $1.2 million and $806,000,
respectively. We have not entered into any contracts for financial derivative
instruments such as futures, swaps, options or similar instruments.
Capital Resources
Federal regulations establish guidelines for calculating "risk-adjusted" capital
ratios. These guidelines, which apply to banks and bank holding companies,
establish a systematic approach of assigning risk weights to assets and
commitments making capital requirements more sensitive to differences in risk
profiles. For these purposes, "Tier 1" capital consists of common equity,
non-cumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries and excludes goodwill. "Tier 2" capital
consists of cumulative perpetual preferred stock, limited-life preferred stock,
mandatory convertible securities, subordinated debt and (subject to a limit of
1.25% of risk-weighted assets) general loan loss reserves. In calculating the
relevant ratio, a company's assets and off-balance sheet commitments are
risk-weighted; thus, for example, loans are included at 100% of their book value
39
while assets considered less risky are included at a percentage of their book
value (20%, for example, for U. S. Government Agency securities, and 0% for
vault cash and U. S. Government Treasury securities).
Our board of directors regularly reviews our capital ratios to ensure that
capital exceeds the prescribed regulatory minimums and is otherwise adequate to
meet our future needs. The following table summarizes our risk-based capital
ratios as of June 30, 2004 and December 31, 2003 and 2002:
Capital and capital adequacy ratios
December 31,
---------------------------------------------
June 30, 2004 2003 2002
------------- -------------------- --------------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Leverage Ratio
Valley Commerce Bancorp
and Subsidiary $14,433 9.8% $13,781 10.0% $ 9,446 8.0%
Minimum regulatory requirement $ 5,917 4.0% $ 5,517 4.0% $ 4,719 4.0%
Bank of Visalia $14,249 9.6% $13,511 9.8% $ 9,446 8.0%
Minimum requirement for "Well-
Capitalized" institution $ 7,393 5.0% $ 6,892 5.0% $ 5,899 5.0%
Minimum regulatory requirement $ 5,915 4.0% $ 5,513 4.0% $ 4,719 4.0%
Tier 1 Risk-Based Capital Ratio
Valley Commerce Bancorp
and Subsidiary $14,433 12.7% $13,781 13.0% $ 9,446 10.8%
Minimum regulatory requirement $ 4,558 4.0% $ 4,245 4.0% $ 3,498 4.0%
Bank of Visalia $14,249 12.5% $13,511 12.7% $ 9,446 10.8%
Minimum requirement for "Well-
Capitalized" institution $ 6,821 6.0% $ 6,363 6.0% $ 5,247 6.0%
Minimum regulatory requirement $ 4,547 4.0% $ 4,242 4.0% $ 3,498 4.0%
Total Risk-Based Capital Ratio
Valley Commerce Bancorp
and Subsidiary $15,790 13.9% $15,108 14.2% $10,546 12.1%
Minimum regulatory requirement $ 9,116 8.0% $ 8,490 8.0% $ 6,996 8.0%
Bank of Visalia $15,606 13.7% $14,838 14.0% $10,546 12.1%
Minimum requirement for "Well-
Capitalized" institution $11,368 10.0% $10,605 10.0% $ 8,745 10.0%
Minimum regulatory requirement $ 9,095 8.0% $ 8,484 8.0% $ 6,996 8.0%
At June 30, 2004, December 31, 2003, and December 31, 2002, all of our capital
ratios were in excess of minimum regulatory requirements, and Bank of Visalia
exceeded the minimum requirements of a "well capitalized" institution. As
described above, in the second quarter of 2003 Valley Commerce Trust I issued
$3.0 million of trust preferred securities, which enhanced our capital position
and provided for continued growth. Trust preferred securities are includable in
Tier 1 capital, subject to regulatory limitation. At June 30, 2004, and December
31, 2003, we were able to include the entire $3.0 million in Tier 1 capital.
Our average equity as a percentage of average assets was 7.88% for the six
months ended June 30, 2004, and 8.09% and 8.63% for the years ended December 31,
2003 and 2002, respectively. Shareholders' equity as a percentage of assets was
7.42%, 7.89% and 8.26% at June 30, 2004 and December 31, 2003
40
and 2002, respectively. Although mitigated by net income, our strong growth in
2004 and 2003 caused these equity percentages to decrease.
We declared a three-for-two stock split in August 2004 and paid 5% stock
dividends in 2004 and 2003. We have not declared or paid cash dividends since
inception. Stock splits and dividends are not dilutive to our capital ratios.
Risk Management
We maintain policies and guidelines for managing risks related to on-balance
sheet and off-balance sheet activities. Such policies and guidelines are
integral to the asset/liability management process conducted by our
asset-liability management committee ("ALCO"). Certain policies may be governed
and implemented by committees or persons other than the ALCO as directed by the
board of directors. Overall asset/liability management encompasses the
management and monitoring of asset quality, liquidity and capital needs, and in
particular, interest rate risk.
One of the principal objectives of asset/liability management is to manage the
risks associated with changing interest rates and the potential impact on
earnings and stockholder value. The goal of interest rate risk management is to
maintain a balance sheet that generates stable earnings and stockholder value
across a variety of interest rate environments. Interest rate risk is inherent
to both the asset side of the balance sheet; i.e., lending/investing activities,
and the liability side; i.e., deposit/borrowing activities.
Our ALCO monitors interest rate risk primarily through the use of Earnings at
Risk analysis and Gap analysis. Earnings at Risk analysis calculates the change
in net interest margin that results from an immediate shift in interest rates;
i.e., +/- 100 basis points (bps) and +/- 200 bps change in the national prime
rate. This analysis is monitored by the ALCO on a quarterly basis. The following
table summarizes the results of the Earnings at Risk analysis as of June 30,
2004, and December 31, 2003 and 2002.
Percentage Change in Net Interest Margin from Base Case
June 30, December 31,
-------- ------------
Interest /Rate Scenario 2004 2003 2002
---- ---- ----
+ 200 bps 4.91% 6.27% 5.00%
+ 100 bps 2.77% 3.39% 2.88%
- 100 bps -4.44% -5.39% -5.09%
- 200 bps -11.03% -12.58% -10.80%
In our opinion, the interest rate environment, which reached historic lows in
2004, is likely to trend higher in coming years. As indicated by the Earnings at
Risk analysis, we have positioned our balance sheet for a higher interest rate
environment. Conversely, we have greater exposure to income loss if our economic
forecast is incorrect and a decrease in the prime rate occurs.
Gap analysis compares the amount of interest-earning assets maturing or
otherwise repricing within a given period to the amount of interest-bearing
liabilities maturing or otherwise repricing within the same period. The
following table sets forth the distribution of repricing opportunities of our
interest-earning assets and interest-bearing liabilities, the interest rate
sensitivity gap (i.e., interest rate sensitive assets less interest rate
sensitive liabilities), the cumulative interest rate sensitivity gap and the
cumulative gap as a percentage of total interest-earning assets as of June 30,
2004. The table also sets forth the time periods during which interest-earning
assets and interest-bearing liabilities will mature or may reprice in accordance
with their contractual terms.
41
Distribution of Repricing Opportunities at June 30, 2004
(dollars in thousands) After three After one
Next day but months but year but After
within three within 12 within 5 five
Immediately Months months years years Total
----------- ------ ------ ----- ----- -----
Interest rate sensitivity gap:
Loans $ 62,279 $ 18,637 $ 4,554 $ 5,873 $ 15,971 $107,314
Available-for-sale investment
securities (1) -- 126 3,008 7,900 17,162 28,196
Federal funds sold 3,180 -- -- -- -- 3,180
-------- -------- -------- -------- -------- --------
Total interest-earning assets $ 65,459 $ 18,763 $ 7,562 $ 13,773 $ 33,133 $138,690
======== ======== ======== ======== ======== ========
Interest-bearing demand
deposits $ -- $ 43,160 $ -- $ -- $ -- $ 43,160
Other interest-bearing
deposits 7,716 -- -- -- 7,716
Time deposits -- 16,127 14,740 5,877 -- 36,744
Long-term debt -- 5 15 4,749 2,013 6,782
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $ -- $ 67,008 $ 14,755 $ 10,626 $ 2,013 $ 94,402
======== ======== ======== ======== ======== ========
Interest rate sensitivity gap $ 65,459 $(48,245) $ (7,193) $ 3,147 $ 31,120 $ 44,288
Cumulative gap $ 65,459 $ 17,214 $ 10,021 $ 13,168 $ 44,288
Cumulative gap percentage
to total earning assets 47.2% 12.4% 7.2% 9.5% 31.9%
(1) Investment securities are stated at fair value.
Based on the contractual terms of its assets and liabilities, as of June 30,
2004 we were asset sensitive in terms of our exposure to interest rates. If
interest rates continue to trend upward, we expect our net interest margin to
improve. This will be mitigated for a time by the portion of our loans that will
not come off of their interest rate floors until interest rates have increased
by the necessary amount.
Liquidity
Liquidity is our ability to provide funds to meet customers' loan and deposit
needs and to fund operations in a timely and cost effective manner. The primary
source of funds is deposits. On an ongoing basis, we anticipate funding needs
for loans, asset purchases, maturing deposits, and other needs and initiate
deposit promotions to meet them. We measure our liquidity position monthly
through the use of regulatory and internal liquidity calculations. These are
monitored on an ongoing basis by our board of directors and our ALCO.
In recent years, we have had considerable success in attracting deposits due
primarily to establishing deposit relationships with business customers and by
offering competitive rates and high quality service to deposit customers. We
also recognize that the economic slowdown that commenced in 2000 reduced the
competition for investment dollars and contributed to relatively high liquidity
levels at many banks. A sustained favorable growth rate in the United States
economy could lead to a general outflow of funds from banks to equity markets or
into higher yielding investments. Continued deposit growth and achievement of
necessary liquidity levels will require us to operate with a higher average cost
of deposits in this scenario.
We have not and do not intend to engage in off-balance sheet financing
arrangements. Our future asset growth is expected to be financed primarily
through deposit growth, and to a much lesser extent, through FHLB borrowings.
Equity financing will remain a relatively small percentage of our total
financing as we seek to prudently leverage our paid-in and earned capital for
the benefit of our shareholders.
As stated above, the primary goal of our investment policy is to maintain a
specified level of liquidity in the investment securities portfolio.
Accordingly, all of our securities are classified as available-for-sale. We
periodically evaluate the securities portfolio based on our current and
forecasted liquidity needs, the most significant being the funding of loans. We
may sell certain securities and purchase others in order to better align the
cash flows from the investment portfolio with our operating needs. In 2003 and
2002, proceeds from sales and maturities of investment securities totaled $22.1
million and $8.2 million, respectively. In these same years, purchases of
investment securities totaled $23.4 million and $24.6 million. Most of the
investment securities we sold in 2002 and 2003 resulted in gains because market
interest rates had decreased subsequent to their purchase. Due to changing
economic circumstances, we do not expect similar gains to occur in future
periods.
As discussed above, our subsidiary, Valley Commerce Trust I, issued trust
preferred securities for gross proceeds of $3.0 million on April 7, 2003.
Quarterly interest payments on these securities are considered in our normal
evaluation of liquidity needs. Although the trust preferred securities do not
mature until April 7, 2033, Valley Commerce Trust I has the option to redeem the
trust preferred securities on or at any time after April 7, 2008. The securities
may not be redeemed prior to this date without penalty. We do not intend to
redeem these securities prior to maturity at the present time, but will
carefully consider the impact on our capital and liquidity of such redemption if
circumstances change.
Other sources of liquidity include borrowing arrangements with correspondent
banks and FHLB (see "Borrowings"). FHLB advances are used to fund certain of our
fixed rate loans in order to limit our interest rate risk. We structure FHLB
advances so that cash flows from the loan generally provide the liquidity to
repay the related indebtedness. Our fixed rate loans and the related FHLB
advances are subject to prepayment penalties. Our strategic objectives include
expanding through opening of "de novo" branches and loan production offices in
the near term and acquiring branch offices from other institutions in the longer
term. The addition of branch offices is expected to involve significant cash
outlays; e.g., for buildings, improvements, and equipment. Our planning efforts
consider the impact of such cash outlays so that sufficient liquidity is
maintained for both capital and operational needs.
In 2003, we acquired the deposits and office equipment of Humboldt Bank's Fresno
branch and assumed the branch office lease. The acquisition resulted in our
receipt of $5.7 million from Humboldt Bank, comprised primarily of funds from
time certificates. We commenced operating the Fresno Branch as a full service
branch of Bank of Visalia in October 2003. Since that time, branch deposits have
increased and are providing much of the underlying funding for our lending
operations in the Fresno market.
42
DESCRIPTION OF BUSINESS
General
We are a rapidly growing bank holding company and the parent of Bank of Visalia,
a California state-chartered commercial bank. We conduct substantially all of
our business through the Bank. We operate through our main office in Visalia and
three branch offices located in Fresno, Woodlake and Tipton, all in California's
South San Joaquin Valley.
Our target customers are local businesses, professionals and commercial property
owners. We offer a full range of commercial banking services, including the
acceptance of demand, savings and time deposits, and the making of commercial
real estate, commercial and construction loans and, to a lesser extent,
agricultural and consumer loans. We also offer travelers' checks, safe deposit
boxes, banking-by-mail, on-line cash management, and other customary bank
services. Deposits in the Bank are insured by the Federal Deposit Insurance
Corporation up to legal limits.
We derive our income primarily from interest received on real estate related
loans, commercial loans, and consumer loans and, to a lesser extent, fees from
the sale or brokerage of loans, interest on investment securities and fees for
services provided to deposit customers. Our major operating expenses are the
interest we pay on deposits and borrowings and general operating expenses. Our
operating results are significantly influenced by economic conditions in
California, including the strength of California's agriculture industry and the
local real estate market. In addition the fiscal and regulatory policies of the
federal government and regulatory authorities that govern financial institutions
and market interest rates also affect our financial condition, results of
operations and cash flows.
Valley Commerce Bancorp's operations are conducted at the same location and in
the same facilities as some of the current operations of the Bank, and it
utilizes employees of the Bank to conduct some of its activities. The holding
company does not engage or expect to engage in activities other than the
operation of the Bank in the immediate future. At present, it expects to receive
all of its income from dividends paid by the Bank. The Bank has no formal
dividend policy, and dividends are issued solely in the discretion of the Bank's
board of directors, subject to regulatory limitations. There can be no assurance
as to when or whether such a dividend will be paid or the amount thereof. See
"Market Price for Common Equity and Related Shareholder Matters."
Our activities are subject to examination and supervision by federal and state
banking regulators. We may engage, directly or through subsidiary corporations,
in those activities closely related to banking which are specifically permitted
under the Bank Holding Company Act of 1956, as amended. See "Regulation and
Supervision."
Our total assets grew from $102 million at December 31, 1999, to $153 million at
June 30, 2004, an increase of 50%. A significant amount of this growth has
occurred in the last three years and is attributable to growth in the regional
economy and our marketing efforts during that period.
In the three and a half years since the end of 2000, our business has grown as
shown in the following table:
December 31, June 30,
---------------------- 2004
----
(dollars in 000s, except 2000 2003
per share data) ---- ----
Total assets $92,715 $139,517 $153,031
Loans, net 56,366 101,137 105,528
Deposits 82,001 119,668 130,625
Shareholders' equity 8,111 11,020 11,358
Book value per share $5.72 $7.66 $7.90
Branches 3 4 4
Our net income grew from $750,000 in 2001 to $931,000 in 2002, $1.1 million in
2003 and $625,000 in the first six months of 2004. We have paid a 5% stock
dividend in each year from 2000 to 2004.
Growth and Strategy
Most of our business originates from businesses, professionals and commercial
property owners located in and around Tulare County. We have focused on building
core deposits and have achieved strong internal growth in a very competitive
market. Our asset growth in the first eight years of our operations exceeded
that of two other banks headquartered in Visalia: Visalia Community Bank, which
opened 27 years ago and had total assets of $149 million as of June 30, 2004,
and Kaweah National Bank, which opened five years before we opened and had total
assets of $87 million when it was acquired in
43
September 2003 by Citizens Business Bank, a regional bank headquartered in
Southern California. At June 30, 2003, we had one of the 26 banking offices in
the city of Visalia and $83.5 million or 4.63% of the total of $1.8 billion in
deposits at institutions in Visalia. Our market share of FDIC-insured deposits
in Tulare County was approximately 3.5% of the total $3.1 billion in deposits as
of June 30, 2003.
Our strategic goals are the following:
Geographic Expansion. We want to expand in the South San Joaquin Valley by
opening "de novo" branches and loan production offices and by acquiring branches
from other institutions. We intend to continue to expand our service area to
cover more effectively a greater portion of the South San Joaquin Valley
contiguous to Tulare County, with a particular emphasis on the Fresno area. We
hope to open or acquire another office in the next 12 months but have no
specific plans at this time. When we acquired our Fresno branch, we assumed the
lease obligation and $5.8 million in deposits liabilities and paid approximately
$20,000 for equipment and leasehold improvements. The costs of opening a new
branch or acquiring a branch from another institution may be greater than these
amounts.
Asset Growth. We intend to use the capital we raise in this offering to support
an increase in our loan portfolio and other earning assets. The additional
capital will allow us to substantially increase the size of our loan portfolio,
which is our largest source of income, while remaining well-capitalized under
regulatory guidelines. The additional capital will also increase our legal
lending limit, which is the maximum amount we may lend to a single borrower and
its related entities. With a higher lending limit, we will be better able to
service customers who are also experiencing growth and might otherwise be forced
to seek financing from another larger institution.
High Credit Quality. We have made a concerted effort to build a top caliber
credit administration team. This team interfaces regularly with our directors'
loan committee, which is committed to maintaining a high standard of loan
quality. Credit quality is a factor in our lending team's compensation. We hope
to maintain high credit quality while we increase our base of loans and other
earning assets.
Core Deposit Growth. We have achieved core deposit growth to date by active
deposit solicitation efforts and through the community's knowledge that we are
staffed by an experienced management team and staff that has worked in the
market area for many years. Core deposits reduce our costs of funds, help
support our strong net interest margin and improve our efficiency ratio. We
target new prospects with our sales team, whose compensation depends in part on
the amount of increase of core deposits. We also provide financial incentives to
all other employees for increasing the number of new core deposit accounts or
expanding core deposit relationships.
Maintain Strong Net Interest Margin. A low cost of funds, discussed above, and
loan pricing that reflects our high level of service, are significant
contributors to our strong net interest margin. Our asset-liability management
committee and directors' loan committee regularly evaluate our loan pricing to
maximize our net interest margin.
Improve Efficiency Ratio. We regularly evaluate our efficiency ratio (the ratio
of non-interest expenses to the sum of net interest income and non-interest
income). This ratio reflects our cost (other than interest expense) of
generating revenue. We review non-interest expenses on a regular basis for
potential cost savings review and implement technological developments to
improve efficiency and reduce our costs.
Build Relationships. We place special emphasis on building solid financial
relationships with our customers. To accomplish this, we maintain a highly
effective business development team of community bankers. New loan relationships
require a deposit commitment, and we always encourage new depositors to utilize
additional services. Our management delivers a message encouraging relationship
building to our employees on a regular basis.
Differentiated Community Bank Services. We offer the service-oriented,
customized and quality services that we believe local businesses, professionals
and commercial property owners want. We have focused on developing and selling
financial products that our customers have identified as products they want,
44
rather than products we think they should have. Our internal growth strategy is
primarily focused on "total relationship banking," a term we use to mean
developing a personalized package of financial services and products requested
by customers and providing superior service customized for the targeted
customer, delivered by a team of banking professionals who know and understand
the uniqueness of the South San Joaquin Valley. We intend to introduce
investment management services in the near future.
We provide a high level of customer service in our market area by operating
under a "service first" approach. We commit, under the "service first"
philosophy, to differentiate ourselves by providing customers with the highest
priority in all aspects of our service. We intend to commit substantial
resources to our "service first" philosophy. Management believes the focus on
marketing and direct personal contact with the customer helps to differentiate
us from less responsive alternative financial service providers and to attract
the business and professional customers that we desire.
We believe that the rapid consolidation of other banks and the formation of
large, impersonal financial institutions have caused, and will continue to
cause, customers in our target market to seek out the kind of banking service we
offer. By focusing on customer relationships within our targeted groups, we
believe that we fill a niche neglected by the larger banks. We believe that our
internal growth strategy, driven by product and service incentives awards paid
to our sales team, along with a dedication to the retention of competent and
highly motivated employees at all levels of the organization, sets us apart from
other community banks in the region. We believe our strategy, if successfully
executed, will allow us to grow faster than the over-all market.
Experienced Local Management Team
Our business development personnel consist of local community bankers, most of
whom gained their experience at other local financial institutions. Donald A.
Gilles, our President and CEO since our opening, was previously chief executive
officer of Mineral King National Bank until its merger with Valliwide Bank of
Fresno in 1994. Other former Mineral King National Bank officers and staff have
joined us. Additionally, other officers have brought us new business and
experience gained through their employment at other local community banks. Mr.
Gilles and our other officers have more than 75 years of banking experience in
Tulare and Fresno counties. All of our directors have strong local ties.
Growing Market Area
Our primary geographic focus has been the city of Visalia, which has a
population of approximately 101,000. Visalia is the county seat of Tulare
County. The very fertile and extensively cultivated valley floor in Tulare
County has allowed it and adjoining Fresno County to become the two leading
producers of agricultural commodities among all counties in the United States.
Other businesses that are important to our market include tourism, healthcare,
small businesses and distribution facilities of large companies. The relatively
low cost of land in this area has promoted residential and commercial
development.
Visalia is located 185 miles north of Los Angeles and 225 miles south of San
Francisco at the junction of Freeway 99 and Highway 198 at the base of the
Sierra Nevada range. Tulare County covers 4,844 square miles and stretches from
the California Central Valley, where agriculture predominates, to the mountains
of the Sierra Nevada, where tourism and recreation are the principal industries.
We are expanding our efforts into Fresno, Kern, Kings and Madera counties, which
as a group are contiguous to Tulare County. These five counties comprise the
South San Joaquin Valley, one of the fastest growing regions in California.
Competition
Our primary market area consists of Tulare County and nearby communities of
adjacent counties. In California generally and in our market area specifically,
major banks and local regional banks dominate the commercial banking industry.
As of June 30, 2003, 18 commercial banks and savings associations had a total of
65 offices in Tulare County. The following table shows information about us and
several of our competitors in Tulare County:
45
Deposits and Offices in Tulare County June 30, 2003
Deposits Market
Institution No. of Offices (000) Share
----------- -------------- -------- ------
Wells Fargo Bank 5 $ 853,961 27.27%
Bank of America 8 589,415 18.82
Bank of the Sierra 9 436,513 13.94
Union Bank of California 6 164,087 5.24
Citibank West FSB 3 162,150 5.18
Visalia Community Bank 4 124,880 3.99
Bank of Visalia 3 110,549 3.53
Total for Tulare County 65 3,131,145 100.00
Source: FDIC Summary of Deposits, June 30, 2003 (before acquisition of our
Fresno branch in Fresno County)
By virtue of their larger capital bases, many of our competitors have
substantially greater lending limits than us, as well as more locations, more
products and services, greater economies of scale and greater ability to make
investments in technology for the delivery of financial services.
Our principal competitors for deposits and loans are other banks (particularly
major banks), savings and loan associations, credit unions, thrift and loans,
mortgage brokerage companies and insurance companies. Other institutions, such
as mutual funds, stockbrokerage, credit card companies and even retail
establishments have offered new investment vehicles, such as money-market funds,
that also compete with banks. The direction of federal legislation in recent
years favors competition between different types of financial institutions and
encourages new entrants into the financial services market, and we anticipate
that this trend will continue.
To compete with larger financial institutions in our service area, we rely on
personalized service, responsive handling of customer needs, local promotional
activity, and personal contacts by our officers, directors and staff, compared
to large multi-branch banks that compete primarily on interest rates and
location of branches. We also assist customers requiring services not offered by
us to obtain such services from our correspondent banks. For customers whose
loan demands exceed our lending limits, we seek to make those loans and
concurrently sell participation interests in them to other lenders.
Employees
As of June 30, 2004, we employed a total of approximately 59 full-time
equivalent employees, including three executive officers and eight other
officers. None of our employees is currently represented by a union or covered
by a collective bargaining agreement. We believe our employee relations are
excellent.
Seasonal Nature of Business
Although we experience some modest seasonal trends in deposit growth and loan
originations, in general our business is not seasonal.
Lending Activities
We originate primarily commercial mortgage loans, secured and unsecured
commercial loans and construction loans. We also originate a small number of
consumer and agricultural loans and broker single-family residential loans to
other mortgage lenders. We target small business, professionals and commercial
property owners in our market areas for our loans. We attract and retain
borrowers primarily on the basis of personalized service, responsive handling of
their needs, local promotional activity, and personal contacts by our officers,
directors and staff.
The majority of our loans bear interest at adjustable rates tied to our prime
rate, which is administered by us and will not necessarily change at the same
time or by the same amount as the prevailing national prime rate. At June 30,
2004, our prime rate was 50 basis points higher than the prevailing national
prime
46
rate as published in the Wall Street Journal. The remaining loans in our
portfolio either bear interest at adjustable rates tied to the national prime
rate or are priced with fixed rates or under custom pricing programs.
Commercial Mortgage Loans. Our commercial mortgage loans are generally secured
by first liens on office, retail facilities and industrial buildings. We
underwrite these loans primarily on the basis of cash flow and the ratio of loan
amount to collateral value. These loans generally have terms ranging from five
to 25 years, bear interest at adjustable rates and have a loan-to-value ratio at
origination not greater than 80%. We generally require an independent appraisal
and title insurance for all of these loans. Most term loans with floating rates
have floors established equal to the start rate of the loan.
Commercial Loans. We make commercial loans, including revolving lines of credit,
to provide working capital, finance the purchase of equipment and for other
business purposes. Revolving lines of credit generally are for one year, require
monthly interest payments, and permit draws tied to specified percentages of
accounts receivable and/or inventories. Term loans generally have maturities
ranging from one to 25 years, bear interest at adjustable rates, and are made to
finance the purchase of equipment or permanent working capital. We underwrite
secured term loans and revolving lines of credit primarily on the basis of the
borrower's cash flow and the ability to service the debt, although we rely on
the liquidation value of the underlying collateral as a secondary payment
source, where applicable. As a result, if the borrower defaults and we foreclose
on the assets, we may not be able to recover the full amount of the loan.
Construction Loans. We make loans to finance the acquisition, development and/or
construction of individual single-family residences and commercial properties.
Loans to finance the construction of individual single-family residences may be
made to individual borrowers to construct their primary residence. Our
construction loans generally have terms from 9 to 18 months and bear interest at
adjustable rates. The loan-to-value ratio of our construction loans generally
does not exceed 80% of the estimated value of the project upon completion. We
require the borrower to have equity in the project (generally a minimum of 15%
of the acquisition, development and construction costs) in connection with each
construction loan. We generally require personal guarantees from corporate or
other entity borrowers. We disburse construction loan proceeds on either a draw
or voucher basis and carefully monitor disbursements based on the project budget
and percentage of completion at the time of disbursement. We require a current
appraisal in connection with each of our construction loans.
Consumer Loans. We make consumer loans to finance the purchase of automobiles
and other types of consumer goods and for other personal purposes. We do not
actively solicit consumer loans but generally make them as an accommodation to
business borrowers. We do not attempt to be the lowest cost provider of consumer
loans and will normally price various consumer products at the higher end of the
market. Pricing considerations may be made to high end customers, based on
credit risk, deposits, and overall profitability of the customer. Our consumer
loans generally provide for the monthly payment of principal and interest. Most
consumer loans are secured by the personal property being purchased.
Single-Family Residential Loans. We primarily broker single-family residential
loans. We have on rare occasion retained some of these loans for our portfolio
to solidify relationships with top customers. Generally, these loans have been
underwritten based on the borrower's cash flow, and have a loan-to-value ratio
at origination of not more than 80% (based on an independent appraisal). We
require an independent appraisal and title insurance for all of these loans.
Agricultural Loans. We do not actively seek agricultural loans such as crop
production or agriculture development loans. We have on occasion made such loans
but on a very select basis with most being supported by a strong secondary
source of repayment such as real estate or government guarantee.
47
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Loan Portfolio."
Lending Policies and Procedures
Our lending operations are subject to written policies and procedures. Our board
of directors reviews and approves the loan policies annually. The loan policies
address the types of loans that we seek, our target markets, the underwriting
and collateral requirements, the loan terms, the interest rate and yield
considerations, and compliance with laws and regulations. All loans or credit
lines are subject to approval procedures and amount limitations. These
limitations apply to the borrower's total outstanding indebtedness, including
indebtedness as a guarantor. Loan officers do not have individual credit
approval authority. The president and chief credit officer each have authority
acting alone to approve loans up to $400,000. These two officers acting together
can approve new loans up to $800,000. These two officers may also approve
non-criticized renewal loans up to $2.0 million on an every-other-renewal basis.
All new loans above $800,000 and renewals above $2.0 million must be approved by
the directors loan committee, which consists of four directors and the
president. The directors loan committee is given a list of all loans approved
outside of the committee on a monthly basis.
Under California law, the legal limit to any single borrower is equal to 15% of
our unimpaired capital and surplus for unsecured loans and up to 25% when a loan
is secured by a first trust deed on real estate. As of June 30, 2004, our loan
limits to one borrower were approximately $2.4 million for unsecured loans and
$4.0 million for secured loans. Assuming we sell all 600,000 shares being
offered at an assumed offering price of $12.00 per share, these limits will
increase to approximately $3.4 million and $5.7 million, respectively.
If a borrower requests a loan in excess of our legal lending limit, we may
originate the loan with the participation of one or more other lenders.
Historically, we have not subordinated our retained interest in these loans to
the participation interest and have retained the servicing rights for the loans.
At June 30, 2004, we were servicing approximately $4.6 million of participated
loans. The following table provides the amount of participated loans transferred
and retained as of the dates indicated.
June 30, 2004 December 31, 2003 December 31, 2002
---------------------- ---------------------- ---------------------
---------------------- ---------------------- ---------------------
Participations transferred $ 4,684,877 $ 3,478,706 $ 4,600,799
Participations retained 6,429,741 5,784,021 5,030,537
---------------------- ---------------------- ---------------------
---------------------- ---------------------- ---------------------
Total $ 11,114,618 $ 9,262,727 $ 9,631,336
====================== ====================== =====================
Participated loans are originated solely by us with concurrent funding by
participating banks at loan closing. This allows us to avoid exceeding our legal
lending limit at any point in time. Loan participations sold to other lenders
are excluded from the loan totals on our financial statements. We retain no
right to repurchase any participated loan and there are no recourse obligations
in our participation agreements. In general, our participated loans are sold at
par without an added premium or discount for servicing. The costs we incur to
provide loan servicing and the estimated liability related to future servicing
obligations are insignificant. In the event of default, the Company and the
participating bank share in the risk on a pro rata basis according to the
relative ownership of each party.
Deposit Activities
We offer a full range of deposit products and services, including non-interest
bearing demand checking, savings, time deposits and certificates of deposit;
courier services; cash management and reconciliation; and safe deposit boxes. As
part of the loan underwriting process, we generally require borrowers to
maintain deposits with us. We have not used brokers or a money desk to solicit
deposits.
48
Description of Property
The following table summarizes certain information about our main office and
branch offices:
Approximate
Office location Year opened square footage Owned or leased
--------------- ----------- -------------- ---------------
Main office 1996 8,700 Leased
200 South Court Street
Visalia, California
Administrative office 2003 2,265 Leased
100 Willow Plaza, Suite 101
Visalia, California
Fresno branch 2003 3,216 Leased
1377 West Shaw Avenue, Suite 101
Fresno, California
Woodlake branch 1998 5,000 Owned
232 North Valencia
Woodlake, California
Tipton branch 1998 5,610 Owned
174 South Burnett
Tipton, California
We lease our main office premises under a noncancelable operating lease with a
nonaffiliated third party expiring 2009 with the option to extend the lease for
two additional five-year terms. The primary operating area consists of
approximately 8,700 square feet of space comprising the entire usable space in a
single-story building. The lease arrangement for the primary operating area is a
"triple net lease" with monthly rent of $11,130 in 2004, and $11,200 starting
December 2004 until the term expires on November 30, 2009. In the event we
exercise our renewal option, the annual rent to be paid will be equivalent to
10% of the fair market value of the leased premises.
In close proximity to our main office is our administrative office housing
credit and finance personnel. These premises are leased under a noncancelable
operating lease for three years with the option to extend the lease for two
additional years. The primary operating area consists of an office suite of
approximately 2,265 square feet in a four-story building. The lease arrangement
for the primary operating area is a "triple net lease" with monthly rent of
$3,171 in 2004, and $3,284 starting February 2005 until the term expires on
January 31, 2006. In the event we exercise our renewal option, the annual rent
to be paid will increase by approximately 3.5% in each of the extension years.
We lease our Fresno branch under a noncancelable operating lease with a
nonaffiliated third party for five years with no option to extend. Our primary
operating area consists of approximately 3,216 square feet of space comprising
the entire usable space in a single-story building. The lease arrangement for
the primary operating area is a "triple net lease" expiring October 31, 2007.
The current monthly rent under the lease is $4,969, increasing to $5,118, $5,271
and $5,429 for the third through fifth years.
At June 30, 2004, the total net book value of our land, buildings, leasehold
improvements and equipment was approximately $1,044,000. We consider each of our
facilities to be in good condition and adequately covered by insurance.
49
Legal Proceedings
We are not a party to any material litigation.
Certain Business Risks
Our allowance for loan losses may not be adequate to cover actual losses in the
future, so future earnings could be impaired. The risk of loan losses is
inherent in the business of lending. On an ongoing basis we make provisions to
an allowance for loan losses that we can use to offset loan losses as they
occur. The amount of the allowance at any time represents the amount management
deems adequate under generally accepted accounting principles and regulatory
standards to cover future loan losses in light of identified weaknesses in
specified loans and more general risk factors not attributable to specific
loans. However, we can give no assurance that actual loan losses will not exceed
our allowance for loan losses and that the amount of our allowance for loan
losses at any time will be sufficient to cover actual losses that we may incur.
We may not be successful in managing our planned growth and as a result may
experience greater loan losses and customer or employee dissatisfaction than we
expect. As a result of the increase in our shareholders' equity from this
offering, unless and until we increase our volume of loans and other earning
assets, our return on equity will decline from its current level. Even if we are
successful in increasing our loan portfolio, we may not be successful in
maintaining the level of asset quality that we have previously achieved, and
both return on equity and return on assets could be adversely affected. Although
additional capital will allow us to make larger loans to a single borrower and
its related entities, no assurance can be given that we will be able to compete
successfully for such loans. Even if we are successful in making larger loans,
larger and stronger borrowers may be more creditworthy and therefore may be able
to negotiate for lower interest rates on their loans, which in turn may reduce
our net interest margin and our return on assets.
We face substantial competition for loans, deposits and other banking products;
unless we compete successfully, we will be unable to grow or to be profitable.
In California generally, and in our market area specifically, major banks
dominate the commercial banking industry. By virtue of their larger capital
bases, such institutions have substantially greater lending limits than ours, as
well as more locations and more products and services. In obtaining deposits and
in making loans, we compete with these larger commercial banks and other
financial institutions, such as savings and loan associations and credit unions,
which offer most services traditionally offered only by banks. In addition, we
compete with other institutions such as money market funds, brokerage firms, and
even retail stores seeking to penetrate the financial services market. See
"Description of Business - Competition."
Upon completion of the offering, we will become subject to the Sarbanes-Oxley
Act, which will impose substantial new costs on us. The Sarbanes-Oxley Act of
2002 imposes substantial corporate governance, compliance and reporting burdens
on companies filing periodic reports with the Securities and Exchange
Commission. At present we are not subject to this Act, but we will become
subject to it upon the completion of this offering. We expect that compliance
will require us to incur substantial new expenses to implement internal controls
over financial reporting and to insure accurate and timely financial reporting
and compliance with other provisions of the new law. These additional expenses
could have a material adverse effect on our results of operations.
Our articles of incorporation permit our board of directors to authorize the
issuance of preferred stock, which may discourage takeovers that might be
beneficial to shareholders and permit management to entrench itself at the
expense of shareholder interests. Our articles of incorporation permit our board
of directors to authorize the issuance, without shareholder approval, of
preferred stock with such terms as the board may determine. These provisions of
our articles of incorporation could discourage potential acquisition proposals
and could delay or prevent a change in control of our company, even though a
majority of our shareholders may consider such proposals desirable.
We may be unable to provide new financial products and services demanded by our
customers, who may be able to obtain those products and services from our
competitors. As the banking industry changes, whether we succeed will depend on
our ability to offer new products and provide new financial services that meet
changing customer requirements. There can be no assurance that we can
successfully develop and bring new products and services to market in a timely
manner.
We must successfully manage future technological changes; if we fail to do so,
we may not meet customer expectations. Our future success will depend in part
on our ability to adapt to technological changes and to use technology to
provide products and services that are desired by customers. Many of our
competitors have substantially greater resources to invest in technological
improvements and have more experience in managing technological change.
Certain Risks Related to Our Industry
Our business may be affected by adverse economic conditions, including
California's budget crisis. In recent years and continuing to the date of this
prospectus, the California economy has been affected by an economic downturn.
While improvement has been seen in other sections of the United States, the
recovery has been only moderate in many regions of California, including our
market area. The threat of terrorism and the uncertainty associated with the
impact of the war in Iraq have hurt chances for economic recovery. In addition,
the State of California is suffering a budget crisis, in that its tax revenues
are insufficient to fund all of its services and commitments. If the economic
recovery stalls in our market area, if economic conditions worsen, or if the
State of California enacts substantial new or increased taxes or makes
substantial cuts in government services or programs, our business could be
adversely affected, including the demand for loans, the ability of borrowers to
repay outstanding loans and the value of the property held as collateral for
outstanding loans.
Government monetary policy may substantially affect our result of operations.
Our income depends to a great extent on the difference between the interest
rates earned on our loans, securities and other interest-earning assets and the
interest rates paid on our deposits and other interest-bearing liabilities.
These rates are highly sensitive to many factors that are beyond our control,
including general economic conditions and the policies of various governmental
and regulatory agencies, in particular, the Board of Governors of the Federal
Reserve System.
REGULATION AND SUPERVISION
Regulatory Environment
The banking and financial services industry is extensively regulated. Statutes,
regulations and policies affecting the industry are frequently under review by
Congress and state legislatures, and by the federal and state agencies charged
with supervisory and examination authority over banking institutions. Changes in
the regulation of the banking and financial services industry may create
opportunities for us to compete in financial markets with less regulation.
However, these changes also may create new competitors. Changes in the statutes,
regulations, or policies that impact us and the bank cannot necessarily be
predicted and may have a material effect on our business and earnings. In
addition, the operations of bank holding companies and their subsidiaries are
affected by the credit and monetary policies of the Federal Reserve Board, which
influence the over-all level of bank loans, investments and deposits, the
interest rates charged on loans and paid for deposits, the price of the dollar
in foreign exchange markets, and the level of inflation. The credit and monetary
policies of the Federal Reserve Board have a significant effect on us.
Set forth below is a summary of some significant statutes, regulations and
policies that apply to the operation of banking institutions. This summary is
qualified in its entirety by reference to the full text of such statutes,
regulations and policies.
Holding Company Regulation
Valley Commerce Bancorp is a bank holding company within the meaning of the Bank
Holding Company Act and is registered as such with the Federal Reserve Board. A
bank holding company is required to file with the Federal Reserve Board annual
reports and other information regarding its business operations and those of its
subsidiaries. It is also subject to examination by the Federal Reserve Board and
is required to obtain Federal Reserve Board approval before acquiring ownership
or control of more than 5% of the voting stock of any bank. According to Federal
Reserve Board policy, bank holding companies are expected to act as a source of
financial strength to each of their subsidiary banks and to commit resources to
support each subsidiary. The Federal Reserve Board has issued regulations that
describe the activities in which a bank holding company can and cannot engage.
In general, bank holding companies can engage in the business of banking or
managing or controlling banks or furnishing services to or performing services
for their subsidiary banks.
A holding company for a bank and any subsidiary which it may acquire or organize
are deemed to be affiliates of the bank and are therefore subject to the Federal
Reserve Act. This means, for example, that there are limitations on loans by the
bank to affiliates, on investments by the bank in any affiliate's stock and on
the bank's taking any affiliate's stock as collateral for loans to any borrower.
Also, transactions by the bank with an affiliate must be on substantially the
same terms as would be available for non-affiliates.
Sections 23A and 23B of the Federal Reserve Act limit the risks to a bank from
transactions between the bank and its affiliates and limit the ability of a bank
to transfer to its affiliates the benefits arising from the bank's access to
insured deposits, the payment system and the discount window and other benefits
of the Federal Reserve system. Federal Reserve Board Regulation W
comprehensively implements sections 23A and 23B of the Federal Reserve Act. The
statute and rule impose quantitative and
50
qualitative limits on the ability of a bank to extend credit to, or engage in
certain other transactions with, an affiliate (and a nonaffiliate if an
affiliate benefits from the transaction). However, certain transactions that
generally do not expose a bank to undue risk or abuse the safety net are
exempted from coverage under Regulation W.
We are also prohibited from engaging in certain tie-in arrangements in
connection with the extension of credit. For example, generally the Bank may not
extend credit on the condition that the customer obtain some additional service
from the bank or its parent company, or refrain from obtaining such service from
a competitor.
Bank Regulation
Federal law mandates frequent examinations of all banks, with the costs of
examinations assessed against the bank. Bank of Visalia's primary federal
regulator is the FDIC. As a California state-chartered bank whose accounts are
insured by the FDIC up to a maximum of $100,000 per depositor, Bank of Visalia
is subject to regulation, supervision and regular examination by the California
Commissioner of Financial Institutions and the FDIC, and must comply with
certain regulations of the Federal Reserve Board. The regulations of these
agencies govern most aspects of the bank's business, including the making of
periodic reports, activities relating to dividends, investments, loans,
borrowings, capital requirements, certain check-clearing activities, branching,
mergers and acquisitions, reserves against deposits and numerous other areas.
Supervision, legal action and examination by these agencies is generally
intended to protect depositors and is not intended for the protection of
shareholders.
Capital Adequacy Requirements
Valley Commerce Bancorp is subject to the capital adequacy regulations of the
Federal Reserve Board and Bank of Visalia is subject to the capital adequacy
regulations of the Federal Deposit Insurance Corporation. The regulations
incorporate both risk-based and leverage capital requirements and define capital
in terms of "core capital elements," or Tier 1 capital, and "supplemental
capital elements," or Tier 2 capital. Our capital requirements and actual ratios
are shown in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Capital Resources."
Prompt Corrective Action Provisions
Federal law requires the federal banking agencies to take prompt corrective
action to resolve the problems of insured financial institutions, including
institutions that fall below prescribed minimum capital ratios. Regulations of
the federal banking agencies define five capital categories: well capitalized
(total risk-based capital ratio of 10%; tier 1 risk-based capital ratio of 6%;
and leverage ratio of 5%); adequately capitalized (total risk-based capital l
ratio of 8%; tier 1 risk-based capital ratio of 4%; and leverage ratio of 4%, or
3% if the institution receives the highest rating from its primary regulator);
undercapitalized (total risk-based capital ratio of less than 8%; tier 1
risk-based capital ratio of less than 4%; or leverage ratio of less than 4%, or
3% if the institution receives the highest rating from its primary regulator);
significantly undercapitalized (total risk-based capital ratio of less than 6%;
tier 1 risk-based capital ratio of less than 3%; or leverage ratio less than
3%); and critically undercapitalized (tangible equity to total assets less than
2%). A bank may be treated as though it were in the next lower capital category
if regulators find to be in an unsafe or unsound condition, but a bank may not
be treated as critically undercapitalized unless its actual capital ratio
warrants such treatment. At each successively lower capital category, an insured
bank is subject to increased restrictions on its operations.
In addition to measures taken under the prompt corrective action provisions,
insured banks may be subject to actions by federal regulators for unsafe or
unsound practices or for violation of any law, rule, regulation or condition
imposed in writing by the agency or included in any written agreement with the
51
agency. Enforcement actions may include the issuance of cease and desist orders,
termination of insurance of deposits (in the case of a bank), the imposition of
civil money penalties, the issuance of directives to increase capital, formal
and informal agreements, or removal and prohibition orders against
"institution-affiliated" parties.
Safety And Soundness Standards
The federal banking agencies have also adopted guidelines establishing safety
and soundness standards for insured depository institutions. These guidelines
relate to internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation, and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan or, if an acceptable compliance plan is not submitted, institute
enforcement proceedings.
Premiums for Deposit Insurance
FDIC regulations implement a risk-based premium system, whereby insured
depository institutions are required to pay insurance premiums depending on
their risk classification. Under this system, institutions such as Bank of
Visalia which are insured by the Bank Insurance Fund are categorized into one of
three capital categories (well capitalized, adequately capitalized, and
undercapitalized) and one of three supervisory categories based on federal
regulatory evaluations: financially sound with only a few minor weaknesses
(Group A); demonstrates weaknesses that could result in significant
deterioration (Group B); or poses a substantial probability of loss (Group C).
Community Reinvestment Act
Bank of Visalia is subject to certain requirements and reporting obligations
involving Community Reinvestment Act activities. The Community Reinvestment Act
generally requires the federal banking agencies to evaluate the record of a
financial institution in meeting the credit needs of its local communities,
including low and moderate income neighborhoods, and to take into account a
financial institution's record of meeting its community credit needs when
evaluating applications for, among other things, domestic branches, consummating
mergers or acquisitions, or holding company formations. In its assessment of
Community Reinvestment Act performance, the FDIC assigns a rating of
"outstanding," "satisfactory," "needs to improve" or "substantial noncompliance.
We have a "satisfactory" rating.
Other Consumer Protection Laws and Regulations
In addition to the other laws and regulations discussed herein, Bank of Visalia
is subject to certain consumer and public interest laws and regulations that are
designed to protect customers in transactions with banks. While this list is not
exhaustive, these laws and regulations include the Truth in Lending Act, the
Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the
Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act, the
Fair Credit Reporting Act, the Fair Debt Collection Practices Act and the Right
to Financial Privacy Act. These laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial institutions must deal
with customers when taking deposits, making loans, collecting loans and
providing other services. Failure to comply with these laws and regulations can
subject the bank to various penalties, including enforcement actions,
injunctions, fines or criminal penalties, punitive damages to consumers and the
loss of certain contractual rights.
The Americans with Disabilities Act, in conjunction with similar California
legislation, requires employers with 15 or more employees and all businesses
operating "commercial facilities" or "public
52
accommodations" to accommodate disabled employees and customers. The Americans
with Disabilities Act has two major objectives: (1) to prevent discrimination
against disabled job applicants, job candidates and employees, and (2) to
provide disabled persons with ready access to commercial facilities and public
accommodations. Commercial facilities such as Bank of Visalia must ensure that
all new facilities are accessible to disabled persons, and in some instances may
be required to adapt existing facilities to make them accessible.
Interstate Banking and Branching
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act") regulates the interstate activities of banks and bank
holding companies and establishes a framework for nationwide interstate banking
and branching. Since June 1, 1997, a bank in one state has generally been
permitted to merge with a bank in another state without the need for explicit
state law authorization, although states were given the ability to prohibit
interstate mergers with banks in their own state. Adequately capitalized and
managed bank holding companies are permitted to acquire banks located in any
state, subject to certain exceptions. Also, a bank may establish and operate de
novo branches in any state in which that bank does not maintain a branch if that
state has enacted legislation to expressly permit all out-of-state banks to
establish branches in that state. California does not permit out-of-state banks
to acquire existing branches or establish de novo branches in California; an
out-of-state bank that wishes to enter California must acquire an existing bank
or establish a new one.
Financial Modernization Act
The Financial Modernization Act repealed provisions of the Glass-Steagall Act
which restricted the affiliation of Federal Reserve Member Banks with firms
"engaged principally" in specified securities activities and which restricted
officer, director, or employee interlocks between a member bank and any company
or person "primarily engaged" in specified securities activities. In addition,
it contains provisions that expressly preempt any state law restricting the
establishment of financial affiliations, primarily related to insurance. The
general effect of the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms, and
other financial service providers by revising and expanding the Bank Holding
Company Act framework to permit a holding company system to engage in a full
range of financial activities through a new entity known as a financial holding
company. The Financial Modernization Act also broadens the activities that may
be conducted by national banks, banking subsidiaries of bank holding companies,
and their financial subsidiaries and provides an enhanced framework for
protecting the privacy of consumer information.
In order for Valley Commerce Bancorp to take advantage of the ability to
affiliate with other financial services providers, it must become a "financial
holding company" as permitted under an amendment to the Bank Holding Company Act
effected by the Financial Modernization Act. Valley Commerce Bancorp currently
meets the requirements to make an election to become a financial holding company
but it has not determined to become financial holding company.
Pursuant to the Financial Modernization Act, the federal banking agencies have
released joint rules that establish minimum requirements to be followed by
financial institutions for protecting the privacy of financial information
provided by consumers. The rules, which establish privacy standards to be
followed by state banks such as Bank of Visalia, requires a financial
institution to (i) provide notice to customers about its privacy policies and
practices, (ii) describe the conditions under which the institution may disclose
nonpublic personal information about consumers to nonaffiliated third parties,
and (iii) provide a method for consumers to prevent the financial institution
from disclosing that information to nonaffiliated third parties by "opting out"
of that disclosure.
53
We do not believe that the Financial Modernization Act will have a material
adverse effect on our operations in the near-term period. However, to the extent
that it permits banks, securities firms, and insurance companies to affiliate,
the financial services industry may experience further consolidation. The
Financial Modernization Act is intended to grant to community banks certain
powers as a matter of right that larger institutions have accumulated on an ad
hoc basis. Nevertheless, this act may have the result of increasing the amount
of competition that we face from larger institutions and other types of
companies offering financial products, many of which may have substantially more
financial resources.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") implemented legislative
reforms intended to address corporate and accounting fraud. Sarbanes-Oxley
places certain restrictions on the scope of services that may be provided by
accounting firms to their public company audit clients. Any non-audit services
being provided to a public company audit client require preapproval by the
company's audit committee. In addition, Sarbanes-Oxley made changes to the
requirements for accounting firm partner rotation after a period of time.
Sarbanes-Oxley requires chief executive officers and chief financial officers,
or their equivalent, to certify to the accuracy of periodic reports filed with
the SEC, subject to civil and criminal penalties if they knowingly or willingly
violate the certification requirement. In addition, under Sarbanes-Oxley,
counsel are required to report evidence of a material violation of the
securities laws or a breach of fiduciary duty by a company to its chief
executive officer or its chief legal officer, and, if such officer does not
appropriately respond, to report such evidence to the audit committee or other
similar committee of the board of directors or to the board itself.
Sarbanes-Oxley accelerates the time frame for disclosures by public companies,
as they must immediately disclose any material changes in their financial
condition or operations. In most cases directors and executive officers must
provide information regarding changes in ownership in a company's securities
within two business days of the change. Sarbanes-Oxley increases
responsibilities and codifies certain requirements relating to audit committees
of public companies and how they interact with the company's public accounting
firm. Audit committee members must be independent and are absolutely barred from
accepting consulting, advisory or other compensatory fees from the issuer. In
addition, companies must disclose whether at least one member of the committee
is a "financial expert" (as defined by the SEC) and if not, why not.
Sarbanes-Oxley also requires the public accounting firm that issues a company's
audit report to attest to and report on management's assessment of the company's
internal controls.
We became subject to many of the requirements of the Sarbanes-Oxley Act at the
commencement of the offering. We anticipate that we will incur substantial
additional expenses in complying with these requirements.
USA PATRIOT Act
The terrorist attacks in September 2001 impacted the financial services industry
and led to the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT
Act"). Part of the USA PATRIOT Act is the International Money Laundering
Abatement and Financial Anti-Terrorism Act of 2001 ("IMLAFATA"). IMLAFATA
authorizes the Secretary of the Treasury, in consultation with the heads of
other government agencies, to adopt special measures applicable to banks, bank
holding companies and other financial institutions. These measures may include
enhanced recordkeeping and reporting requirements for certain financial
transactions that are of primary money laundering concern, due diligence
requirements concerning the beneficial ownership of certain types of accounts,
and restrictions or prohibitions on certain types of accounts with foreign
financial institutions.
54
Among its other provisions, IMLAFATA requires each financial institution to: (i)
establish an anti-money laundering program; (ii) establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. IMLAFATA
expands the circumstances under which funds in a bank account may be forfeited
and requires covered financial institutions to respond under certain
circumstances to requests for information from federal banking agencies within
120 hours. Additional regulations implement minimum standards to verify customer
identity, encourage cooperation among financial institutions, federal banking
agencies, and law enforcement authorities regarding possible money laundering or
terrorist activities, prohibit the anonymous use of "concentration accounts,"
and require all covered financial institutions to have in place a Bank Secrecy
Act compliance program.
Other Pending and Proposed Legislation
Other legislative and regulatory initiatives which could affect Valley Commerce
Bancorp and Bank of Visalia and the banking industry in general are pending, and
additional initiatives may be proposed or introduced, before the United States
Congress, the California legislature and other governmental bodies in the
future. Such proposals, if enacted, may further alter the structure, regulation
and competitive relationship among financial institutions, and may subject
Valley Commerce Bancorp and Bank of Visalia to increased regulation, disclosure
and reporting requirements. In addition, the various banking regulatory agencies
often adopt new rules and regulations to implement and enforce existing
legislation. We cannot predict whether, or in what form, any such legislation or
regulations may be enacted or the extent to which it might affect our business.
55
MANAGEMENT
Directors and Executive Officers
The persons named below are members of our board of directors and our executive
officers. Directors of Valley Commerce Bancorp are also directors of Bank of
Visalia. Directors' terms run until the next annual meeting of shareholders and
until their successors are duly elected and qualified.
Principal occupation, business
Position with Director experience during past five years
Name Age company(1) since and other information
---- --- ---------- ----- ---------------------
Walter A. Dwelle 58 Chairman and 1996 General Partner and Manager of Nella
Director Oil Company, an oil marketing and
convenience store operator, since 1988.
Russell F. Hurley 54 Vice Chairman 1996 Attorney and shareholder with the law
and Director firm of Hurley & Laird since 1982.
Fred P. LoBue, Jr. 63 Director and 1996 President of LoBue Bros., Inc., a
Secretary commercial orange packing house
operation, since 1998; Chief Financial
Officer and a director of LoBue Bros.,
Inc., since 1982; and since 1983
President and Chairman of Harvest
Container Corp., a manufacturer of
corrugated boxes.
Donald A. Gilles 60 President, CEO and 1996 President and CEO of Valley Commerce
Director Bancorp since 2002; President and CEO
of Bank of Visalia since 1996; from
1995-1996, consultant to the Bank of
Visalia Organizing Group; and from 1982
to 1995, various positions with Mineral
King National Bank, including President,
CEO and Director.
David B. Day 61 Director 2000 Chief Executive Officer (retired) of
California Delinting Co., a cottonseed
conditioning and sales firm.
Thomas A. Gaebe 53 Director 2003 Certified public accountant and partner
in the public accounting firm of
Vollmer, Daniel, Gaebe, Grove & Berg
since 1980.
56
Principal occupation, business
Position with Director experience during past five years
Name Age company(1) since and other information
---- --- ---------- ----- ---------------------
Philip R. Hammond, Jr. 56 Director 1999 President of Philip R. Hammond
Construction, a commercial property
development firm, since 1976; Partner
of Tetra Property Management LLC since
1998; and Partner of D & H Vineyards
since 1995.
Kenneth H. Macklin 52 Director 2000 Owner and President of H.R. Macklin &
Sons, Inc., an agricultural service
company involved in the placement of
long-term farm loans, appraisals, farm
management and real estate brokerage,
since 1994; and since 1990 partner in
Vintage Equipment Company, a farm
equipment operation and leasing company.
Stanley J. Shamoon 52 Director 1996 President and owner of Visalia Produce
Sales, Inc., a produce marketing firm,
since 1988; and General Partner of
Kingsburg Kold Storage, a fruit and
vegetable cold storage facility, since
1992.
Roy O. Estridge 49 Executive Vice -- Executive Vice President and Chief
President and Chief Financial Officer of Bank of Visalia
Financial Officer and Valley Commerce Bancorp since
2002. Vice President and Chief
Financial Officer for Valley AgCredit
in Visalia, California from 1992 to
2002, with responsibility for its
financial management and strategic
planning. Senior Vice President and
Chief Financial Officer for Pacific
Coast Farm Credit in Santa Rosa,
California from 1989 to 1992.
Allan W. Stone 49 Executive Vice -- Executive Vice President and Chief
President and Chief Credit Officer of Valley Commerce
Credit Officer Bancorp since 2002, Executive Vice
President and Chief Credit Officer of
Bank of Visalia since June 1998.
Senior Vice President and Chief Credit
Officer for Bank of Ventura from 1994
to 1998.
- ----------
(1) Includes service as a director of Bank of Visalia
57
There are no family relationships among any of our executive officers or
directors.
None of our directors is also a director of any other public company or
registered investment company.
Committees of the Board of Directors
Audit Committee
The members of the audit committee are Thomas A. Gaebe, chairman, Fred P. LoBue,
Jr., Walter A. Dwelle, Russell F. Hurley, and Kenneth H. Macklin. All members of
the audit committee would be deemed independent under Rule 4350(d)(2)(A) of
Nasdaq's listing standards. The board of directors has not determined whether
any member of the audit committee qualifies for designation as its "financial
expert" for purposes of the Sarbanes-Oxley Act. The board of directors expects
to make such a determination before the issuance of the annual report for the
year ending December 31, 2004.
The principal duties of the audit committee are the following: (i) select the
firm of independent certified public accountants; (ii) meet with the independent
certified public accountants to review and approve the scope of their audit
engagement and the fees related to such work; (iii) meet with our financial
management, internal audit management and independent certified public
accountants to review matters relating to internal accounting controls, the
internal audit program, our accounting practices and procedures and other
matters relating to our consolidated financial condition; and (iv) periodically
report to the board any conclusions or recommendations that the audit committee
may have with respect to such matters. The audit committee met five times during
2003.
Personnel/Compensation Committee
The members of the personnel/compensation committee are David B. Day, chairman,
Donald A. Gilles, Philip R. Hammond, Jr., Fred P. LoBue, Jr. and Stanley J.
Shamoon.
The principal duties of the personnel/compensation committee are (i) the
selection, recruitment and performance evaluation of executive personnel; (ii)
making recommendations to the board of directors regarding the salary, benefits
and incentive compensation to be paid to our executive officers; (iii) the
development of corporate-wide compensation and benefit policies; (iv) the
development of our personnel policies; (v) our compliance with laws and
regulations pertaining to personnel, compensation and employment matters; and
(vi) the development of employee training and internal communications programs.
The personnel/compensation committee met three times during 2003.
Loan Committee
The members of the loan committee are Russell F. Hurley, chairman, Walter A.
Dwelle, Donald A. Gilles, Philip R. Hammond, Jr., and Kenneth H. Macklin.
The loan committee is responsible for the approval and supervision of loans and
the development of our loan policies and procedures. The loan committee met 23
times during 2003.
Asset-Liability Management Committee
The members of the asset-liability management committee are Philip R. Hammond,
Jr., chairman, David B. Day, Walter A. Dwelle, and Donald A. Gilles. Allan W.
Stone, Executive Vice President and Chief Credit Officer, and Roy O. Estridge,
Executive Vice President and Chief Financial Officer, serve as management
liaisons to the asset-liability management committee.
58
The asset-liability management committee is responsible for (i) the development
of policies and procedures related to liquidity and asset-liability management,
and (ii) supervision of our investments. The asset-liability management
committee met four times during 2003.
Compliance Committee
The members of the compliance committee are Russell F. Hurley, chairman, Fred P.
LoBue, Jr., and Kenneth H. Macklin.
The principal duties of the compliance committee are to review, coordinate and
monitor our compliance with the federal and state laws and regulations that
govern the business and activities of a registered bank holding company and a
California state-chartered commercial bank, including the Community Reinvestment
Act and the laws and regulations pertaining to equal credit opportunity. The
compliance committee met once during 2003.
We have a code of ethics for our chief executive officer, chief financial
officer and persons performing similar functions as described in the
Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange
Commission.
Executive Committee
The members of the executive committee are Walter A. Dwelle, chairman, Donald A.
Gilles, Russell F. Hurley, and Fred P. LoBue, Jr.
The executive committee has the authority of the board of directors in the
management of the company during the intervals between meetings of the board.
The executive committee met eleven times during 2003.
Valley Commerce Bancorp does not have a nominating committee. The executive
committee performs the functions of a nominating committee. In this capacity,
the executive committee develops recommendations of candidates for election or
appointment to the board of directors and considers the qualifications that are
appropriate in a candidate. The board of directors has determined that all
members of the executive committee other than Mr. Gilles are independent under
standards for director independence established by Nasdaq. The executive
committee does not have a separate charter for its activities as a nominating
committee.
The executive committee approves the award of options under the Stock Option
Plan and generally administers the Stock Option Plan. Mr. Gilles does not
participate in matters pertaining to options granted to him.
During 2003, our board of directors met 12 times for regularly scheduled
meetings and three times for special meetings. With the exception of Stanley J.
Shamoon, each director attended at least 75% of the aggregate of: (i) the total
number of meetings of the board of directors; and (ii) the total number of
meetings of board committees on which that director served.
59
Executive Compensation
The following information is furnished with respect to each of our executive
officers whose compensation for the years indicated exceeded $100,000.
Annual Compensation
-------------------
Name and Other annual
principal position Year Salary Bonus compensation
------------------ ---- ------ ----- ------------
Donald A. Gilles 2003 $128,083 $3,720 $3,600
President and Chief Executive 2002 $123,063 $5,750 $2,773
Officer 2001 $119,602 $5,500 $3,563
Allan W. Stone 2003 $119,926 $3,150 $3,373
Executive Vice President and Chief 2002 $107,012 $4,725 $3,282
Credit Officer 2001 $101,601 $4,500 $3,045
We pay the cost of premiums on life insurance policies insuring all employees,
including executive officers, in amounts equal to (i) two times each officer's
salary, up to a maximum of $200,000 in coverage; (ii) $25,000 for each
nonofficer employee; (iii) $10,000 for an employee's spouse; and (iv) $5,000 for
dependents of employees. The policies are payable to the employees' designated
beneficiaries. In addition, we provide certain incidental personal benefits to
executive officers. The incremental cost to us of providing such benefits to the
executive officers named above did not, for the fiscal year ended December 31,
2003, exceed 10% of the compensation to these executive officers.
Stock Option Plan
Our 1997 Stock Option Plan ("Plan") is intended to promote our long-term success
of the company and the creation of shareholder value. The Plan authorizes us to
grant stock options to our officers, employees and directors to purchase up to
249,258 shares. Options may be granted for terms of up to 10 years and with
exercise prices not less than fair market value at the time of grant (or 110% of
fair market value if required to qualify the option as an "incentive stock
option" under the Internal Revenue Code).
During 2003, we granted to director Thomas A. Gaebe options to purchase 15,750
shares at an exercise price of $11.11 per share. We did not issue stock options
to any of the executive officers named in the summary executive compensation
table above during 2003. The following table summarizes the options held by
those executive officers at December 31, 2003.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
Number of securities
underlying unexercised Value of in-the-money
options at 12/31/03 options at 12/31/03 (1)
------------------- -----------------------
Shares
acquired on Value
Name exercise realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
Donald A. Gilles None None 22,185 3,126 $169,290 $20,264
Allan W. Stone None None 1,735 2,605 $ 11,260 $16,885
(1) Based upon the difference between the per share option exercise price and
the market value of the common stock at the applicable measurement date.
60
Information on shares underlying outstanding options and the number of shares
available for which options may be granted in the future is set forth in the
table below.
Equity Compensation Plan Information at June 30, 2004
No. of securities to be Weighted average No. of securities remaining
issued upon exercise exercise price of available for future issuance
of outstanding outstanding under equity compensation
options, warrants options, warrants plans (excluding securities
Plan category and rights and rights reflected in column (a))
(a) (b) (c)
Equity compensation plans approved
by securities holders 231,926 $7.78 17,329
Equity compensation plans not
approved by security holders None
Supplemental Retirement and Life Insurance Plan
In an effort to attract and retain qualified officers, we have implemented a
supplemental retirement and life insurance plan for the benefit of certain of
our executive officers.
The defined benefit portion of the plan is designed to provide participating
executive officers (currently Mr. Gilles, Mr. Estridge and Mr. Stone) at normal
retirement age with an annual retirement benefit of specified amounts to be paid
monthly for life under executive supplemental compensation agreements with each
of them. The plan has vesting schedules that are designed to create an incentive
for the officers to remain in our employment to normal retirement age.
The purpose of these agreements is to offer a compensation benefit program as a
fringe benefit for executive officers in order to attract and retain individuals
with extensive and valuable experience in the banking industry. The agreements
provide that upon the executive's retirement at normal retirement date we will
pay to the executive, during his lifetime, a yearly amount equal to the
lesser of 65% of the average of the executive's five highest years of total W-2
compensation or a pre-determined target benefit amount that is $102,482 for Mr.
Gilles, $128,028 for Mr. Stone, and $95,822 for Mr. Estridge. The normal
retirement date is defined as the later of the executive's 65th birthday or the
date on which the executive completes 15 years of service. The normal retirement
date for Mr. Gilles is March 31, 2010, the normal retirement date for Mr. Stone
is March 1, 2012, and the normal retirement date for Mr. Estridge is March 3,
2020. The amount of supplemental compensation payable to these executives is
reduced in accordance with the terms of the agreements in the event of early
retirement, disability, termination without cause or a change in control of the
Company prior to the executive's normal retirement date. No supplemental
compensation is due in the event of an executive's termination for cause or
voluntary resignation prior to the time the executive is 100% vested in the
benefits payable pursuant to the agreement. Benefit payments may be reduced in
the event the payment would be considered a "golden parachute payment" as
defined in the Federal Deposit Insurance Act and the Rules and Regulations of
the Federal Deposit Insurance Corporation or is otherwise prohibited, restricted
or subject to the prior approval of a bank regulatory agency.
The executive officers who participate in the plan are also provided a death
benefit. This benefit is an endorsement split dollar life insurance benefit in
an amount that is the lesser of $800,000 or the net-at-risk insurance portion of
the proceeds until age 70, the lesser of $500,000 or the net-at-risk insurance
portion of the proceeds from age 70 through age 79, and the lesser of $250,000
or the net-at-risk insurance portion of the proceeds at age 80 and thereafter.
The net-at-risk insurance portion is the amount of the total policy proceeds
less the cash value of the policy. We are entitled to the remainder of the
policy proceeds.
Our obligations under the retirement benefit portion of the plan are not funded;
however, we have purchased life insurance policies that are actuarially designed
to offset the annual expenses associated with the plan and that will, given
reasonable actuarial assumptions, offset all plan costs during the lives of the
executive officers and provide a complete recovery of all plan costs upon the
deaths of the executive officers. We have all the ownership rights in the cash
values and death benefits of the policies. We have paid the premiums for the
policies for the three executives in full. We record annual increases in the
cash values of the policies as income, and, as benefits accrued to the three
participants under the plan, we record a compensation expense on a annual basis.
Although we believe that the actuarial assumptions we have made are reasonable
and that the policy benefits will fund substantially all of our liability under
this plan, we will be responsible for payment of accrued benefits even if those
assumption prove to be incorrect or we do not receive all the insurance cash
value or proceeds that we expect.
Employment Contracts
We have no employment contracts with any of our officers or employees.
61
Compensation of Directors
During 2003 we paid fees to nonemployee directors for their services. The
payment schedule provides for nonemployee directors to be paid $200 for each
regularly-scheduled or special meeting of the board of directors attended, with
the chairman receiving $300 for each monthly or special meeting attended.
Members of board committees receive $100 for each committee meeting they attend,
and the committee chairmen receive $150 for each committee meeting they attend.
In addition, nonemployee directors receive a monthly retainer of $250, paid
quarterly, and members of the executive committee receive an additional monthly
retainer of $150, also paid quarterly. Employee directors and employee liaisons
to board committees do not receive director's fees. Total directors fees paid in
2003 were $28,400. We also granted options to acquire our common stock to
directors as a form of compensation.
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS
The following table sets forth information as of June 30, 2004, pertaining to
beneficial ownership of our common stock (the sole class of stock outstanding)
by our current directors and named executive officers, by all our directors and
executive officers as a group and by the only shareholder known to us who owns
at least 5% of our outstanding shares. The information in the following table
has been obtained from our records or from information furnished directly by the
individual or entity to us.
For purposes of the following table, shares issuable pursuant to stock options
which may be exercised within 60 days of date set forth above are deemed to be
issued and outstanding and have been treated as outstanding in determining the
amount and nature of beneficial ownership and in calculating the percentage of
ownership of the individual possessing such ownership, but not for any other
individuals.
Amount and nature
Name and address of beneficial Exercisable Percent
of beneficial owner(1) ownership(2) options(3) of class(2)
- ---------------------- ------------ ---------- -----------
Walter A. Dwelle 62,782(4) 20,572 4.30%
Russell F. Hurley 47,895(5) 20,572 3.28%
Fred P. LoBue, Jr 51,110(6) 20,572 3.50%
Donald A. Gilles 25,885 22,656 1.77%
Thomas A. Gaebe 3,622 3,622 *
David B. Day 25,844 19,616 1.77%
Philip R. Hammond, Jr 49,765(7) 19,616 3.41%
Kenneth H. Macklin 21,416(8) 15,058 1.47%
Stanley J. Shamoon 24,530(9) 20,572 1.68%
Roy O. Estridge 826 826 *
Allan W. Stone 2,595 1,735 *
All directors and executive
officers as a group (11 in number) 316,270 165,417 19.73%
The Banc Fund Company, LLC
208 South LaSalle Street
Chicago, Illinois 60604 135,699 -- 9.44%
- ----------
* Less than 1%
62
(1) Except as shown, the address for all persons is c/o Valley Commerce
Bancorp, 200 South Court Street, Visalia, California 93291.
(2) Includes shares beneficially owned (including shares under the
"Exercisable Options" column). Subject to applicable community property
laws and shared voting and investment power with a spouse, the persons
listed have sole voting and investment power with respect to such shares
unless otherwise noted.
(3) Indicates number of shares subject to options exercisable currently or
within 60 days.
(4) Includes 30,150 shares held in an Individual Retirement Account.
(5) Includes 20,100 shares held by Milru Ranch Company, of which he is a
general partner, and 5,468 shares held by the Hurley & Laird Retirement
Trust, and 200 shares held as custodian for Joseph F. Hurley, his minor
child.
(6) Includes 1,001 shares held in the name of Donna S. LoBue, his wife, and
5,022 shares held in an Individual Retirement Account.
(7) Includes 24,119 shares held by the Philip R. Hammond Construction Company
Profit Sharing Plan.
(8) Includes 6,358 shares held by Vintage Equipment Profit Sharing Plan.
(9) Includes 198 shares held in the name of Adam Shamoon, his minor child.
Management is not aware of any arrangements, including the pledge by any person
of our shares, the operation of which may at a subsequent date result in a
change in control of our Company.
The positions held by the persons n the above table are shown above under the
caption "Management - Directors and Executive Officers."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of our directors and executive officers, as well as their immediate family
and associates, are customers of, and have had banking transactions with, the
Bank in the ordinary course of the Bank's business, and we expect these persons
to have such ordinary banking transactions with the Bank in the future. In the
opinion of our management, all loans and commitments to lend included in such
transactions were made in the ordinary course of business on the same terms,
including interest rates and collateral, as those prevailing for comparable
transactions with other persons of similar creditworthiness, and do not involve
more than the normal risk of collectability or present other unfavorable
features. While the Bank does not have any limits on the aggregate amount it may
lend to directors and executive officers as a group, loans to individual
directors and officers must comply with the Bank's lending policies and
statutory lending limits. In addition, prior approval of our board of directors
is required for all such loans.
We lease our administrative office from a partnership in which director Thomas
Gaebe is a partner. We entered into the lease before he became a director. In
our opinion, the amount of his financial interest in our annual lease payments
is not material.
Except for transactions described above, in 2003 and 2002 there were no material
transactions between us and any of our directors, executive officers, nominees
for election as a director, or the immediate family or associates of any of the
foregoing persons, nor do we propose to enter into any such transactions.
63
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and provisions of our articles of
incorporation and bylaws is a summary only and is not a complete description. It
is subject to and qualified in its entirety by reference to our articles of
incorporation, our bylaws and the California General Corporation Law. Our
articles of incorporation and bylaws have been filed with the Securities and
Exchange Commission as an exhibit to the registration statement of which this
prospectus is a part.
The authorized capital stock of Valley Commerce Bancorp consists of 30,000,000
shares of common stock and 10,000,000 shares of preferred stock.
Shares of our capital stock are not deposits and are not insured by the FDIC or
any other government agency. They are subject to investment risk, including
possible loss of your principal.
Common Stock
Holders of our common stock have one vote per share on all matters submitted to
a vote of shareholders, except that shareholders may have cumulative voting
rights with respect to the election of directors. Cumulative voting allows each
shareholder to cast a number of votes equal to the number of directors to be
elected multiplied by the number of votes held by the shareholder. This total
number of votes may be cast for one nominee or may be distributed among as many
candidates as the shareholder desires. The holders of our common stock have the
right to receive dividends if they are declared by our board of directors and
there are sufficient funds to legally pay dividends, subject to the rights of
the holders of any outstanding preferred stock, if any, to receive preferential
dividends. Upon the liquidation of Valley Commerce Bancorp, holders of our
common stock would share ratably in any assets available for distribution to
shareholders after payment of all of our obligations and the aggregate
liquidation preference (including accrued and unpaid dividends) of outstanding
preferred stock, if any. Our common stock is not redeemable and has no
preemptive, subscription or conversion rights. Shares of our common stock
currently outstanding are, and shares of common stock that may be issued under
the prospectus will be, validly issued, fully paid and nonassessable.
As of June 30, 2004, we had 1,437,508 shares of common stock outstanding. In
addition, 231,926 shares of common stock were issuable upon exercise of
outstanding options; of these, options to acquire 169,946 shares were
exercisable at June 30, 2004. Unless indicated otherwise, all information set
forth in this prospectus regarding the outstanding shares of common stock
reflects the three-for-two stock split for shareholders of record as of August
20, 2004, and all prior stock dividends.
Preferred Stock
Our board of directors has the authority, without further action by the
shareholders, to authorize the issuance up to 10,000,000 shares of preferred
stock. Our board of directors may issue preferred stock in one or more series
and fix the rights, preferences, privileges and restrictions of such preferred
stock, including: dividend rights; dividend rate; conversion or exchange rights;
voting rights; rights and terms of redemption, including redemption at our
option or at the option of the holders; any sinking fund or similar provision;
redemption price or prices; the liquidation preferences of any wholly unissued
series of preferred stock; the number of shares constituting any series or the
designation of such series; and any or all other preferences and participating,
optional or other special rights, privileges or qualification, limitations or
restrictions.
Notwithstanding the foregoing, to comply with the North American Securities
Administrators Association's (the "NASAA") statement of policy regarding
preferred stock we will not offer any shares of preferred stock to any of our
officers or directors, any person or entity which holds five percent or more of
any class of our equity securities or any other person or entity who would be
deemed a "promoter" as defined by the NASAA, unless we offer such shares of
preferred stock on the same terms to all our other shareholders at the time of
such offer or a majority of our independent directors who do not have an
interest in the transaction approves the issuance of such shares of preferred
stock, provided that such directors have access, at our expense, to our legal
counsel or independent legal counsel.
The issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to the holders of our common stock or adversely
affect the rights and powers, including
64
voting rights, of the holders of our common stock. As of June 30, 2004, we had
no shares of preferred stock outstanding, and we have no present plans to issue
any preferred stock.
Shares Eligible For Future Sale
If our shareholders sell substantial amounts of our stock in the public market
following the offering, then the market price of our stock could fall. After the
offering, 2,037,508 shares of our common stock will be outstanding, assuming
sale of all 600,000 shares being offered. Of those shares, all shares sold in
the offering or previously outstanding will be freely tradable, except for
20,101 shares issued in 2003 upon exercise of options that are restricted
securities under the Securities Act and any shares purchased or previously held
by our "affiliates" (as defined in Rule 144 under the Securities Act), including
our directors and executive officers. Our executive officers and directors have
agreed to enter into lockup agreements restricting their right to sell any
shares of common stock for a period of 180 days after the offering. Restricted
securities and shares held by our affiliates may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144 or Rule 701. These rules are summarized below.
In general, Rule 144 provides that any person who has beneficially owned
restricted shares for at least one year, and any affiliate, is generally
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the shares of common stock then outstanding,
which will be approximately 20,376 shares immediately after the offering
(assuming sale of all 600,000 shares being offered), or the reported average
weekly trading volume of the common stock during the four calendar weeks
immediately preceding the sale. Sales under Rule 144 are subject to manner of
sale restrictions, notice requirements and availability of current public
information concerning us. Under Rule 144(k), a person who is not our affiliate
and who has not been our affiliate within three months prior to the sale
generally may sell shares without regard to the limitations of Rule 144,
provided that the person has held the shares for at least two years.
Any of our employees, directors, officers or consultants holding shares
purchased pursuant to a written compensatory plan or contract, including
options, entered into prior to the offering is entitled to rely on the resale
provisions of Rule 701, which permit nonaffiliates to sell shares without having
to comply with the public information, holding period, volume limitation or
notice requirements of Rule 144 and permit affiliates to sell their Rule 701
shares without having to comply with the holding period restrictions of Rule
144, in each case beginning 90 days after the effective date of the registration
statement of which this prospectus is a part.
The following table depicts securities eligible for future sale (assuming sale
of all 600,000 shares offered in this offering):
Total shares outstanding 2,037,508
Total restricted shares outstanding 20,101
Shares that are freely tradable on the date of this prospectus
under Rule 144(k) or otherwise 1,266,927
Shares that are freely tradable 90 days after the date of this
prospectus under Rule 144 or Rule 701 1,766,764
65
UNDERWRITING AND PLAN OF DISTRIBUTION
Under the terms and subject to the conditions of an underwriting agreement,
Wedbush Morgan Securities Inc., the underwriter named below, has agreed to
purchase from us the number of shares of common stock shown opposite its name
below at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus. Other than the
shares covered by the over-allotment option, the underwriter is obligated to
purchase and accept delivery of all of the shares of common stock listed below
if any are purchased.
Wedbush Morgan Securities Inc. 300,000 shares (minimum)
The underwriter proposes initially to offer the shares of common stock in part
directly to the public at the public offering price shown on the cover page of
this prospectus and in part to dealers at this price less a discount not in
excess of $___ per share. The underwriter may allow, and these dealers may
re-allow other dealers, a discount not in excess of $___ per share. After this
offering, the public offering price, concession and reallowance to dealers may
be reduced by the underwriter. No such reduction shall change the amount of
proceeds to be received by us as set forth on the cover page of this prospectus.
The common stock is offered by the underwriter as stated in this prospectus,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part.
Over-allotment
We have granted the underwriter an option, exercisable within 30 days after the
date of this prospectus, to purchase up to an aggregate of 45,000 shares of
common stock at the public offering price less the underwriting discounts and
commissions. The underwriter may exercise this option solely to cover
over-allotments, if any, made in this offering.
Commissions and Expenses
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriter. The amounts shown assume all sales
are made through the underwriter for the minimum of 300,000 shares and the
maximum of 600,000 shares.
Minimum Maximum
------- -------
Per share
Total
We have paid to the underwriter a fee of $25,000 in connection with this
offering. In the event this offering is not consummated, the $25,000 fee shall
be returned to us by the underwriter, except to the extent that such amount
represents accountable out-of-pocket expenses incurred by the underwriter in
connection with its engagement as the underwriter. We will also reimburse the
underwriter for reasonable out-of-pocket expenses in connection with the
offering not to exceed $70,000. We estimate that expenses payable by us in
connection with this offering, other than the underwriting discounts and
commissions referred to above, will be approximately $300,000.
Indemnity
In the underwriting agreement, we have agreed to indemnify the underwriter
against certain liabilities, including liabilities under the Securities Act of
1933, as amended, and to contribute to payments that the underwriter may be
required to make for these liabilities.
Stabilization, Short Sales and Penalty Bids
In connection with this offering, the underwriter may purchase and sell shares
of common stock in the open market in connection with transactions intended to
stabilize the price of the common stock. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales in accordance with Regulation M under the Securities Exchange Act of
1934, as amended.
66
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
In connection with the offering, the underwriter may make short sales of our
shares and may purchase our shares on the open market to cover positions created
by short sales. Syndicate short sales involve the sale by the underwriter of a
greater number of shares than it is required to purchase in the offering.
"Covered" short sales are sales made in an amount not greater than the
underwriter's over-allotment option to purchase additional shares in this
offering. The underwriter may close out any covered short position by either
exercising its over-allotment option or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriter will consider, among other things, the price of shares available for
purchase in the open market as compared to the price at which it may purchase
shares through the over-allotment option. "Naked" short sales are sales in
excess of the over-allotment option. The underwriter must close out any naked
short position by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriter is concerned that there may be
downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase shares in the offering.
Penalty bids permit the underwriter to reclaim a selling concession from a
syndicate member when the common stock originally sold by the syndicate member
is purchased in a stabilizing or syndicate covering transaction to cover
syndicate short positions.
The activities described above may stabilize, maintain or otherwise affect the
market price of the common stock. As a result, the price of the common stock may
be higher than the price that otherwise might exist in the open market. These
transactions may be effected on the OTC Bulletin Board or otherwise and, if
commenced, may be discontinued at any time.
Stabilization and syndicate covering transactions may cause the price of the
securities to be higher than they would be in absence of these transactions. The
imposition of a penalty bid might also have an effect on the prices of the
securities if it discourages the resale of the securities.
Neither we nor the underwriter make any representation or prediction as to the
direction or magnitude of any effect that the transactions described above, if
any, may have on the price of our common stock. The underwriter is not required
to engage in these activities.
Offers in Other Jurisdictions
Neither we nor the underwriter have taken any action that would permit a public
offering of the shares of common stock offered by this prospectus in any
jurisdiction where action for that purpose is required, other than the United
States. The shares of common stock offered by this prospectus may not be offered
or sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisements related to the offer and sale of these shares of
common stock be distributed or published, in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of these jurisdictions. This prospectus is not an offer to sell or a
solicitation of an offer to buy any shares of common stock offered hereby in any
jurisdiction in which such an offer or solicitation is unlawful.
Electronic Distribution
A prospectus in electronic format may be made available on the Internet sites or
through other online services maintained by the underwriter of this offering or
by its affiliates. In those cases, prospective investors may view offering terms
online and prospective investors may be allowed to place orders
67
online. The underwriter may agree with us to allocate a specific number of
shares for sale to online brokerage account holders.
Other than the prospectus in electronic format, the information on the
underwriter's Web site and any information contained in any other Web site
maintained by the underwriter is not part of this prospectus or the registration
statement of which this prospectus forms a part, has not been approved or
endorsed by us or the underwriter and should not be relied upon by investors.
Relationships
The underwriter and some of its affiliates have engaged in, are engaging in and
may in the future engage in, investment banking and other commercial dealings in
the ordinary course of business with us and our affiliates. They have received
and may receive customary fees and expenses for these commercial and investment
banking transactions.
Direct Sales
In addition to the shares that the underwriter has committed to purchase, we are
directly offering shares in this offering to our directors, employees,
customers, friends and relatives in our community at the public offering price
set forth on the cover page of this prospectus. Our directors and executive
officers have expressed interest in purchasing approximately 160,000 shares in
this offering. However, these indications of interest are not binding, and we
can provide no assurance as to the actual number of shares, if any, that our
directors and executive officers will purchase. The underwriter will not receive
a discount or commission for any shares placed directly by us to our directors,
employees, customer, friends and relatives in Tulare County.
The offering period for direct sales will extend until 30 days after the date of
this prospectus, unless we decide, after consulting with the underwriter, to
extend the offering period for up to 14 days. The purchasers will receive stock
certificates not later than five days after acceptance of their subscriptions.
You may subscribe for shares directly by delivering to us at the following
address: (i) the completed and signed subscription agreement; and (ii) payment
for the shares subscribed to us (checks should be payable to "Valley Commerce
Bancorp"):
Valley Commerce Bancorp
200 South Court Street
Visalia, California 93291
Attention: Roy O. Estridge
Once you submit a subscription agreement offer to us, you may not revoke it. We
will accept or reject each subscription agreement offer within 30 days after we
receive it or by the expiration of the offering, whichever comes earlier.
In the event that our offering is oversubscribed, we anticipate that we will
accept subscription offers based upon the date on which funds are received.
The minimum purchase by any one investor is 1,000 shares. We reserve the right
to reject any subscription offer, in whole or in part. If we reject all or a
portion of a requested subscription offer, we will refund to the subscriber all,
or the appropriate portion, of the amount remitted with the subscription
agreement offer, without interest. We will mail all appropriate refunds within
five days following the termination of the offering.
68
Disclosure of Commission Position on Indemnification for Securities Activities
Liabilities
Section 317 of the California General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors,
officers and other agents in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended.
As permitted by the California General Corporation Law, our bylaws provide that
we must indemnify our directors and officers, and may indemnify our employees
and other agents, to the fullest extent permitted by law. The bylaws also permit
us to secure insurance on behalf of any officer, director, employee or other
agent for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would otherwise permit indemnification. We have
a policy of officer and director liability insurance with respect to liabilities
arising out of certain matters, including matters arising under the Securities
Act.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by us of expenses incurred or paid by one of our
directors, officers or other agents in the successful defense of any action,
suit or proceeding) is asserted by such person in connection with the securities
being registered, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
LEGAL MATTERS
The validity of the common stock being offered hereby will be passed upon for
Valley Commerce Bancorp by Bingham McCutchen LLP, San Francisco, California.
Troy & Gould PC, Los Angeles, California, is acting as counsel for the
underwriter in connection with certain legal matters relating to the shares of
common stock offered by this prospectus.
No expert named in the registration statement was hired on a contingent basis,
will receive any direct or indirect interest in the issuer or was a promoter,
underwriter, voting trustee, director, officer or employee of the issuer.
EXPERTS
The financial statements of Valley Commerce Bancorp as of and for the year ended
December 31, 2003, included in this prospectus have been audited by Perry-Smith
LLP, independent registered public accounting firm, as stated in their report
appearing herein, and have been so included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing. The
financial statements of Valley Commerce Bancorp as of and for the year ended
December 31, 2002, included in this prospectus have been audited by Moss Adams
LLP, independent registered public accounting firm, as stated in their report
appearing herein , and have been so included in reliance upon the reports of
such firm given upon their authority as experts in accounting and auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
Perry-Smith LLP, an independent, registered public accounting firm, has served
as the independent certified public accountants for Valley Commerce Bancorp and
the Bank since 2003. Our audit committee engaged Perry-Smith LLP on March 14,
2003, as a result of a competitive bid process. Moss Adams LLP served as the
independent certified public accountants for Bank of Visalia from December 31,
1999 until December 31, 2002 and served as the independent certified public
accountants for Valley Commerce Bancorp from the date it was incorporated on
February 21, 2002, through December 31, 2002. In 2003, the audit committee
determined to conduct a bid process rather than renew the appointment of Moss
Adams LLP in an effort to ensure the best combination of services and pricing in
accounting services. Moss Adams LLP participated in the bid process, but the
audit committee decided to dismiss Moss Adams LLP on March 14, 2003 and selected
Perry-Smith LLP as its independent accountant.
69
Moss Adams LLP's report on our consolidated financial statements as of and for
the years ended December 31, 2002 and 2001 did not contain an adverse opinion or
a disclaimer of opinion, nor was it qualified or modified as to uncertainty,
audit scope, or accounting principles
In connection with the audits of the two most recent fiscal years ended December
31, 2002, there were no disagreements with Moss Adams LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Moss Adams LLP, would have caused it to make reference to the subject matter of
the disagreements in connection with its report.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
In the past we have not been required to file reports with the Securities and
Exchange Commission but we will do so following the date of this document. We
provide and will continue to provide shareholders with an annual report that
includes audited financial statements.
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 with respect to the common stock in this offering. This
prospectus, which constitutes a part of the registration statement, does not
contain all the information set forth in the registration statement. For further
information about us and the shares of common stock to be sold in the offering,
please refer to the registration statement and the exhibits and schedules
thereto.
The registration statement and exhibits may be inspected, without charge, and
copies may be obtained at prescribed rates, at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The registration statement and other information filed with the
SEC is also available at the web site maintained by the SEC at
http://www.sec.gov.
70
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Valley Commerce Bancorp Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 2004 and December 31, 2003....................................... F-2
Consolidated Statements of Income for the six months ended June 30, 2004 and 2003........................ F-3
Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003.................... F-4
Notes to Consolidated Financial Statements for the six months ended June 30, 2004 and 2003 F-6
Reports of Independent Auditors.......................................................................... F-12
Consolidated Balance Sheets at December 31, 2003 and 2002................................................ F-14
Consolidated Statements of Income for the years ended December 31, 2003 and 2002......................... F-15
Statements of Changes in Shareholders' Equity for the years ended December 31, 2003 and 2002............. F-16
Consolidated Statements of Cash Flows for the years ended December 31, 2003 and 2002..................... F-17
Notes to Consolidated Financial Statements for the years ended December 31, 2003 and 2002................ F-19
F-1
VALLEY COMMERCE BANCORP
CONSOLIDATED BALANCE SHEET
June 30, December 31,
2004 2003
------------- -------------
(Unaudited) (Audited)
Assets
Cash and due from banks $ 8,650,803 $ 9,989,585
Federal funds sold 3,180,000 1,765,000
Interest-bearing deposits in banks -- 198,000
Available-for-sale investment securities (amortized cost of $28,661,002 at
June 30, 2004 and $21,918,045 at December 31, 2003) (Note 3) 28,196,000 21,888,000
Loans, less allowance for loan losses of $1,357,010 at June 30, 2004 and
$1,432,735 at December 31, 2003 (Note 4) 105,527,788 101,137,445
Bank premises and equipment, net 1,043,969 1,006,610
Other real estate 765,245 --
Cash surrender value of Bank-owned life insurance 2,622,388 1,578,693
Accrued interest receivable and other assets 3,044,978 2,007,928
------------- -------------
Total assets $ 153,031,171 $ 139,571,261
============= =============
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 43,004,990 $ 39,804,949
Interest bearing 50,876,030 46,536,482
Time 36,743,555 33,326,540
------------- -------------
Total deposits 130,624,575 119,667,971
Accrued interest payable and other liabilities 1,172,835 598,314
Long-term debt 6,782,476 5,192,102
Junior subordinated deferrable interest debentures 3,093,000 3,093,000
------------- -------------
Total liabilities 141,672,886 128,551,387
------------- -------------
Commitments and contingencies (Note 5)
Shareholders' equity (Note 1 and 7):
Serial preferred stock - no par value; 10,000,000 shares authorized, none
issued -- --
Common stock - no par value; 30,000,000 shares authorized; issued and
outstanding - 1,437,508 shares at June 30, 2004 and 1,369,369 shares at December 31, 2003 10,702,736 9,837,372
Retained earnings 956,746 1,201,124
Accumulated other comprehensive loss (Note 7) (301,197) (18,622)
------------- -------------
Total shareholders' equity 11,358,285 11,019,874
------------- -------------
Total liabilities and shareholders' equity $ 153,031,171 $ 139,571,261
============= =============
See notes to unaudited consolidated financial statements.
F-2
VALLEY COMMERCE BANCORP
CONSOLIDATED STATEMENT OF INCOME
For the Six Months
Ended June 30,
---------------------------
2004 2003
----------- -----------
(Unaudited) (Unaudited)
Interest Income:
Interest and fees on loans $ 3,470,258 $ 2,950,700
Interest on investment securities:
Taxable 309,403 418,170
Exempt from Federal income taxes 51,697 45,004
Interest on Federal funds sold 31,023 39,635
Interest on deposits in banks 1,768 6,717
----------- -----------
Total interest income 3,864,149 3,460,226
----------- -----------
Interest Expense:
Interest on deposits 530,338 590,739
Interest on borrowings 123,819 83,128
Interest on junior subordinated deferrable interest debentures 69,276 36,217
----------- -----------
Total interest expense 723,433 710,084
----------- -----------
Net interest income before provision for loan losses 3,140,716 2,750,142
(Credit to) Provision for Loan Losses (94,000) 140,000
----------- -----------
Net interest income after provision for loan losses 3,234,716 2,610,142
Non-Interest Income:
Service charges 246,237 243,261
Gain on sale of available-for-sale investment securities, net 7,390 97,457
Mortgage loan brokerage fees 87,863 126,227
Earnings on cash surrender value of life insurance policies 43,695 41,743
Other 76,177 53,240
----------- -----------
Total non-interest income 461,362 561,928
----------- -----------
Non-Interest Expense:
Salaries and employee benefits 1,456,724 1,195,387
Occupancy and equipment 300,113 248,010
Other 928,999 847,808
----------- -----------
Total non-interest expense 2,685,836 2,291,205
----------- -----------
Income before income taxes 1,010,242 880,865
Income taxes 385,000 340,000
----------- -----------
Net income $ 625,242 $ 540,865
=========== ===========
Basic earnings per share (Note 5 and 8) $ 0.44 $ 0.38
Diluted earnings per share (Notes 5 and 8) $ 0.42 $ 0.37
See notes to unaudited consolidated financial statements.
F-3
VALLEY COMMERCE BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months
Ended June 30,
-----------------------------
2004 2003
------------ ------------
(Unaudited) (Unaudited)
Cash Flows from Operating Activities:
Net income $ 625,242 $ 540,865
Adjustments to reconcile net income to net cash provided by operating activities:
(Credit to) Provision for loan losses (94,000) 140,000
Increase in deferred loan origination fees, net 97,892 83,163
Depreciation 75,101 54,833
Amortization of intangibles 40,269 37,269
Net gain on sale of available-for-sale investment securities (7,390) (97,457)
Amortization and accretion of investment securities, net 104,899 96,170
Net loss on sale of premises and equipment 450 --
Increase in cash surrender value of life insurance (43,695) (41,743)
Increase in accrued interest receivable and other assets (577,375) (430,216)
Increase in accrued interest payable and other liabilities 574,521 461,477
Deferred taxes, net 25,000 (130,000)
------------ ------------
Net cash provided by operating activities 820,914 714,361
------------ ------------
Cash Flows from Investing Activities:
Proceeds from matured and called available-for-sale investment securities 1,400,000 800,000
Proceeds from sales of available-for-sale investment securities 4,289,610 18,138,433
Purchases of available-for-sale investment securities (13,820,901) (12,268,468)
Proceeds from principal repayments from available-for-sale government-guaranteed
mortgage-backed securities 1,260,963 2,150,229
Purchase of Federal Home Loan Bank Stock (342,700) (105,100)
Decrease in interest-bearing deposits with banks 198,000 100,000
Net increase in loans (5,159,480) (14,751,260)
Purchase of premises and equipment (112,910) (174,418)
Proceeds from surrender of life insurance policy 589,176
Deposits on single premium cash surrender value life insurance policies (1,000,000)
------------ ------------
Net cash used in investing activities (13,287,418) (5,521,408)
------------ ------------
Continued on next page.
F-4
VALLEY COMMERCE BANCORP
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Six Months
Ended June 30,
-----------------------------
2004 2003
------------ ------------
(Unaudited) (Unaudited)
Cash Flows from Financing Activities:
Net increase in demand, interest bearing and savings deposits $ 7,539,589 $ 3,522,339
Net increase (decrease) in time deposits 3,417,015 (854,062)
Proceeds from the issuance of junior subordinated
deferrable interest debentures 3,093,000
Proceeds from Federal Home Loan Bank term advances 1,590,374 2,691,091
Cash paid to repurchase fractional shares (4,256) (2,259)
------------ ------------
Net cash provided by financing activities 12,542,722 8,450,109
------------ ------------
Increase in cash and cash equivalents 76,218 3,643,062
Cash and Cash Equivalents at Beginning of Year 11,754,585 12,525,474
------------ ------------
Cash and Cash Equivalents at End of Period $ 11,830,803 $ 16,168,536
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense $ 738,460 $ 699,574
Income taxes $ 310,000 $ 277,281
Non-Cash Investing Activities:
Net change in unrealized loss on available-for-sale securities $ (464,819) $ (43,874)
Real estate acquired through foreclosure $ 765,245 $ --
See notes to unaudited consolidated financial statements.
F-5
VALLEY COMMERCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
Overview
Valley Commerce Bancorp (the "Company") was incorporated on February 2, 2002, as
a bank holding company for the purpose of acquiring Bank of Visalia (the "Bank")
in a one bank holding company reorganization. The reorganization was completed
on November 21, 2002, subsequent to which the Bank continued its operations as
previously conducted, but as a wholly owned subsidiary of the Company.
The Bank operates four branches in California, including branches in Visalia,
Fresno, Woodlake and Tipton. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation (FDIC) up to applicable legal limits. The Bank's
primary source of revenue is generated from providing loans to customers who are
predominately small and middle market businesses and individuals residing in the
surrounding areas.
Management has determined that since all of the commercial banking products and
services offered by the Company are available in each branch of the Bank of
Visalia, its bank subsidiary (the "Bank"), all branches are located within the
same economic environment and management does not allocate resources based on
the performance of different lending or transaction activities, it is
appropriate to aggregate the Bank branches and report them as a single operating
segment.
During May of 2004 and 2003 the Board of Directors approved a 5% stock dividend.
All earnings per share data and share data related to the stock option
information have been retroactively adjusted to reflect the stock dividend.
Subsequent event
On August 20, 2004 the Board of Directors approved a three for two stock split
for all common stock shareholders of record as of August 31, 2004. As such, all
share, earnings per share and stock option information has been retroactively
adjusted as if the stock split had occurred prior to January 1, 2003.
2. CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited consolidated financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the Company's financial position at June 30, 2004
and December 31, 2003, the results of operations and cash flows for the six
months ended June 30, 2004 and 2003. Certain reclassifications have been made to
prior years' balances to conform to classifications used in 2003.
Certain disclosures normally presented in the notes to the annual consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted. These interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
2003 Annual Report to Shareholders. The interim financial statements included
herein have been prepared on a basis consistent with the accounting principles
and policies reflected in the Company's annual report for the year ended
December 31, 2003. The results of operations and cash flows for the six-month
periods ended June 30, 2004 and 2003 may not necessarily be indicative of future
operating results.
F-6
In preparing such financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the periods
reported. Actual results could differ significantly from those estimates.
3. AVAILABLE-FOR-SALE INVESTMENT SECURITIES
The amortized cost and estimated market value of available-for-sale investment
securities at June 30, 2004 consisted of the following:
June 30, 2004
-----------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ------------------ ------------------ ------------------
U.S. Government
agencies $ 13,697,978 $ 4,592 $ (153,570) $ 13,549,000
Mortgage-backed
securities 9,799,743 (213,743) 9,586,000
Municipal securities 4,511,260 38,335 (136,595) 4,413,000
Corporate debt
securities 652,021 182 (4,203) 648,000
----------------- ------------------ ------------------- ------------------
$ 28,661,002 $ 43,109 $ (508,111) $ 28,196,000
================= ================== ================== ==================
Net unrealized losses on available-for-sale investment securities totaling
$465,002 were recorded, net of $163,805 in tax benefits, as accumulated other
comprehensive loss within shareholders' equity at June 30, 2004. Proceeds and
realized gains from the sale of available-for-sale investment securities for the
six months ended June 30, 2004 totaled $4,289,610 and $7,390, respectively.
At June 30, 2004, no securities had been in a loss position continuously for 12
months.
Management periodically evaluates each available-for-sale investment security in
an unrealized loss position to determine if the impairment is temporary or
other-than-temporary. Management has determined that no investment security is
impaired other than temporarily. This is because the noted unrealized losses are
due solely to interest rate changes and the Company has the ability and intent
to hold all investment securities with identified impairments resulting from
interest rate changes to the earlier of the forecasted recovery or the maturity
of the underlying investment security.
The amortized cost and estimated market value of available-for-sale investment
securities at December 31, 2003 consisted of the following:
December 31,2003
-----------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------------- ------------------ ------------------ ------------------
U.S. Government
agencies $ 9,614,474 $ 17,740 $ (63,214) $ 9,569,000
Mortgage-backed
securities 9,422,665 11,655 (61,320) 9,373,000
Municipal securities 1,741,150 63,131 (2,281) 1,802,000
Corporate debt
securities 1,139,756 4,244 1,144,000
----------------- ------------------ ------------------ ------------------
$ 21,918,045 $ 96,770 $ (126,815) $ 21,888,000
================= ================== ================== ==================
Net unrealized losses on available-for-sale investment securities totaling
$30,045 were recorded, net of $11,423 in tax benefits, as accumulated other
comprehensive loss within shareholders' equity at December 31, 2003. Proceeds
and realized gains from the sale of available-for-sale investment securities for
the year ended December 31, 2003 totaled $20,718,962 and $131,346, respectively.
4. LOANS
Outstanding loans are summarized below:
June 30, December 31,
2004 2003
------------- -------------
Commercial $ 32,094,887 $ 27,900,065
Agricultural 3,589,039 4,884,691
Real estate - mortgage 58,092,471 55,406,424
Real estate - construction 10,881,616 10,924,521
Consumer and other 2,656,400 3,786,202
------------- -------------
107,314,413 102,901,903
Deferred loans fees, net (429,615) (331,723)
Allowance for loan losses (1,357,010) (1,432,735)
------------- -------------
$ 105,527,788 $ 101,137,445
============= =============
Changes in the allowance for loan losses were as follows:
Six months ended Year ended
June 30, 2004 December 31, 2003
Balance, beginning of year $ 1,432,735 $ 1,102,110
(Credit to) Provision for loan losses (94,000) 315,000
Losses charged to allowance (212) (17,524)
Recoveries 18,487 33,149
------------------ ------------------
Balance, end of year $ 1,357,010 $ 1,432,735
================== ==================
The (credit to) provision for loan losses is based upon management's normal
periodic evaluations of the allowance for loan losses. The (credit to) provision
for loan losses for the six months ended June 30, 2004 was comprised of loss
provisions totaling $35,000 recorded prior to June 2004 offset by a $129,000
credit recorded in June 2004. The June credit resulted from management's
determination that the loss exposure on an impaired loan had been eliminated,
and that the portion of the allowance for loan losses specifically reserved for
this loan was no longer required. As a result, the overall level of the reserve
was in excess of the amounts determined as necessary by management and the
provision was reduced accordingly. Management made this determination following
the foreclosure of the impaired loan's underlying collateral in June 2004 and
the subsequent receipt of a favorable purchase offer. The Company accepted this
offer with close of escrow anticipated in September 2004. The credit to the
provision for loan losses recorded in June 2004 adjusted the allowance for loan
losses to the level required to provide for credit losses estimated in the loan
portfolio at June 30, 2004. Any gain from the sale of the real estate described
above will be recorded in an account separate from the (credit to) provision for
loan losses account.
5. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding commitments to
extend credit which are not reflected in the financial statements, including
loan commitments of $30,282,000 and $34,817,000 and letters of credit of
$1,232,000 and $806,000 at June 30, 2004 and December 31, 2003, respectively.
At June 30, 2004, consumer loan commitments represent approximately 8% of total
commitments and are generally unsecured. Commercial loan commitments represent
approximately 53% of total commitments and are generally secured by various
assets of the Borrower. Real estate loan commitments represent the remaining 39%
of total commitments and are generally secured by property with a loan-to-value
ratio not to exceed 80%. In addition, the majority of the Bank's commitments
have variable interest rates. Total commitments do not necessarily represent
future cash requirements. Each loan commitment and the amount and type of
collateral obtained, if any, are evaluated on an individual basis. Collateral
held varies, but may include real property, bank deposits, debt or equity
securities or business assets.
Stand-by letters of credit are conditional commitments written to guarantee the
performance of a customer to a third party. These guarantees are primarily
related to the purchases of inventory by commercial customers and are typically
short-term in nature. Credit risk is similar to that involved in extending loan
commitments to customers and accordingly, evaluation and collateral requirements
similar to those for loan commitments are used. Stand-by letters of credit are
accounted for under Financial Accounting Standards Board Interpretation 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Others (FIN 45). FIN 45 requires that the guarantor
recognize a liability for the guarantee equal to its fair value represented by
the fees received for issuing the guarantee. Such fees were not significant at
June 30, 2004 or December 31, 2003.
6. EARNINGS PER SHARE COMPUTATION
Basic earnings per share are computed by dividing net income by the weighted
average common shares outstanding for the period. Diluted earnings per share
reflect the potential dilution that could occur if outstanding stock options
were exercised. Diluted earnings per share are computed by dividing net income
by the weighted average common shares outstanding for the period plus the
dilutive effect of
F-7
6. EARNINGS PER SHARE COMPUTATION (Continued)
options. Earnings per share computations have been retroactively adjusted for
stock splits for all periods presented.
For the Six Months
Ended June 30,
--------------------------
2004 2003
--------------------------
Earnings Per Share:
Basic earnings per share $ 0.44 $ 0.38
Diluted earnings per share $ 0.42 $ 0.37
Weighted Average Number of Shares Outstanding:
Basic shares 1,437,508 1,417,854
Diluted shares 1,483,944 1,465,027
Shares of common stock issuable under stock options for which the exercise
prices are greater than the average market prices are not included in the
computation of diluted earnings per share due to their antidilutive effect. In
2004 a total of 34,177 stock options are not included in the computation of
diluted earnings per share. There were no options excluded from the computation
of diluted earnings per share for 2003.
7. COMPREHENSIVE INCOME
Total comprehensive income for the six months ended June 30, 2004 and 2003
totaled $342,667 and $520,350, respectively. Other comprehensive loss comprised
of net change in unrealized gains and (losses), net of taxes, on
available-for-sale investment securities, which were $(282,575) and $(20,515)
for the six months ended June 30, 2004 and 2003, respectively, along with net
income. At June 30, 2004 and December 31, 2003, accumulated other comprehensive
loss totaled $301,197 and $18,622, respectively, and as reflected as a component
shareholders' equity.
8. ACCOUNTING PRONOUCEMENTS
In December, 2003, the Financial Accounting Standards Board ("FASB") revised
FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46). This interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business enterprises of
variable interest entities that possess certain characteristics. FIN 46 requires
that if a business enterprise has a controlling financial interest in a variable
interest entity, the assets, liabilities, and results of the activities of the
variable interest entity must be included in the consolidated financial
statements with those of the business enterprise. The Company adopted FIN 46 on
December 31, 2003. Adoption of this standard required the Company to
de-consolidate its investment in Valley Commerce Trust I, a Delaware statutory
business trust, made in March 2003. In management's opinion, the effect
of deconsolidation on the Company's consolidated financial position and results
of operations was not material.
In July 2003, the Board of Governors of the Federal Reserve Systems issued a
supervisory letter instructing bank holding companies to continue to include the
trust preferred securities in their Tier I capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of this accounting change and, if necessary
or warranted, provide
F-8
8. ACCOUNTING PRONOUCEMENTS (Continued)
further appropriate guidance. There can be no assurance that the Federal Reserve
will continue to allow institutions to include trust preferred securities in
Tier I capital for regulatory capital purposes.
On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies the accounting for derivative instruments by providing guidance
related to circumstances under which a contract with a net investment meets the
characteristics of a derivative as discussed in SFAS No. 133. The Statement also
clarifies when a derivative contains a financing component. The Statement is
intended to result in more consistent reporting for derivative contracts and
must be applied prospectively for contracts entered into or modified after June
30, 2003, except for hedging relationships designated after June 30, 2003. In
management's opinion, the adoption of this Statement did not have a material
impact on the Company's consolidated financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities. For mandatorily redeemable financial instruments of a
nonpublic entity, this Statement shall be effective for existing or new
contracts for fiscal periods beginning after December 15, 2004. The Company
adopted the provisions of this Statement on July 1, 2003 and, in management's
opinion, adoption of this Statement did not have a material effect on the
Company's consolidated financial position or results of operations.
9. STOCK-BASED COMPENSATION
At June 30, 2004, the Company had one stock-based compensation plan, for which
249,258 shares of common stock are reserved for issuance to employees and
directors under incentive and non-statutory agreements. The Company accounts for
this plan under the recognition and measurement principles of APB Opinion No.
25, Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based compensation cost is reflected in net income, as all options granted
under these plans had an exercise price equal to the market value of the
underlying common stock on the date of grant.
Statement of Financial Accounting Standards (SFAS) No. 123 Accounting for
Stock-Based Compensation, requires the disclosure of pro forma net income and
earnings per share had the Company adopted the fair value method of accounting
for stock-based compensation. Under SFAS No. 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following assumptions: expected life, 7.5 years; average stock volatility of
39.88%; risk free interest rates of 3.4%; and no dividends during the expected
option term. There were no option grants made during the six month period ended
June 30, 2003.
F-9
9. STOCK-BASED COMPENSATION (Continued)
A summary of the pro forma effects to reported net income and earnings per share
as if the Company had elected to recognize compensation cost based on the fair
value of the options granted as prescribed by SFAS No. 123 is as follows:
For the Six Months
Ended June 30
------------------------
2004 2003
Net income as reported $ 625,242 $ 540,865
Deduct: Total stock-based compensation expense
determined under the fair value based method for
all awards, net of related tax effects (17,000) (12,000)
--------- ---------
Pro forma net income $ 608,242 $ 528,865
========= =========
Basic earnings per share - as reported $ 0.44 $ 0.38
========= =========
Basic earnings per share - pro forma $ 0.42 $ 0.37
========= =========
Diluted earnings per share - as reported $ 0.42 $ 0.37
========= =========
Diluted earnings per share - pro forma $ 0.41 $ 0.36
========= =========
F-10
VALLEY COMMERCE BANCORP
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 2003 AND 2002
AND
REPORTS OF REGISTERED PUBLIC ACCOUNTING FIRMS
F-11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders
and Board of Directors
Valley Commerce Bancorp and Subsidiary
We have audited the accompanying consolidated balance sheet of Valley
Commerce Bancorp and subsidiary (the "Company") as of December 31, 2003, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of the Company for the year ended December 31,
2002 were audited by other auditors whose report is included herein.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Valley Commerce
Bancorp and Subsidiary as of December 31, 2003 and the consolidated results of
their operations and their consolidated cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Perry-Smith LLP
Sacramento, California
February 20, 2004, except
Note 2, as to which the date
is August 20, 2004
F-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Shareholders
and Board of Directors
Valley Commerce Bancorp and Subsidiary
We have audited the accompanying consolidated balance sheet of Valley
Commerce Bancorp and Subsidiary as of December 31, 2002, and the related
consolidated statements of income, shareholders' equity and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Valley Commerce Bancorp and subsidiary as of December 31, 2002 and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Moss Adams LLP
Stockton, California
January 23, 2003
F-13
VALLEY COMMERCE BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 2003 and 2002
2003 2002
------------- -------------
ASSETS
Cash and due from banks $ 9,989,585 $ 8,025,474
Federal funds sold 1,765,000 4,500,000
Interest-bearing deposits in banks 198,000 398,000
Available-for-sale investment securities (Notes 4 and 8) 21,888,000 25,976,000
Loans, less allowance for loan losses of $1,432,735
in 2003 and $1,102,110 in 2002 (Notes 5, 8, 10 and 14) 101,137,445 76,988,484
Bank premises and equipment, net (Note 6) 1,006,610 847,393
Cash surrender value of Bank-owned life insurance
(Note 15) 1,578,693 2,093,312
Accrued interest receivable and other assets (Note 13) 2,007,928 1,535,945
------------- -------------
$ 139,571,261 $ 120,364,608
============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 39,804,949 $ 31,993,180
Interest bearing (Note 7) 46,536,482 41,529,164
Time (Note 7) 33,326,540 34,236,523
------------- -------------
Total deposits 119,667,971 107,758,867
Accrued interest payable and other liabilities 598,314 608,346
Long-term debt (Note 8) 5,192,102 2,060,270
Junior subordinated deferrable interest debentures (Note 9) 3,093,000
------------- -------------
Total liabilities 128,551,387 110,427,483
------------- -------------
Commitments and contingencies (Note 10)
Shareholders' equity (Note 11):
Serial preferred stock - no par value; 10,000,000
shares authorized; none issued -- --
Common stock - no par value; 30,000,000 shares
authorized; issued and outstanding - 1,369,369
shares in 2003 and 1,286,122 shares in 2002 9,837,372 9,020,493
Retained earnings 1,201,124 746,251
Accumulated other comprehensive (loss) income
(Notes 4 and 16) (18,622) 170,381
------------- -------------
Total shareholders' equity 11,019,874 9,937,125
------------- -------------
$ 139,571,261 $ 120,364,608
============= =============
The accompanying notes are an integral
part of these consolidated financial statements.
F-14
VALLEY COMMERCE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 2003 and 2002
2003 2002
----------- -----------
Interest income:
Interest and fees on loans $ 6,292,204 $ 5,642,409
Interest on investment securities:
Taxable 737,907 533,907
Exempt from Federal income taxes 74,837 117,106
Interest on Federal funds sold 71,802 92,214
Interest on deposits in banks 11,182 18,810
----------- -----------
Total interest income 7,187,932 6,404,446
----------- -----------
Interest expense:
Interest on deposits (Note 7) 1,124,459 1,302,797
Interest on borrowings (Note 8) 193,113 151,598
Interest on junior subordinated deferrable
interest debentures (Note 9) 107,928
----------- -----------
Total interest expense 1,425,500 1,454,395
----------- -----------
Net interest income 5,762,432 4,950,051
Provision for loan losses (Note 5) 315,000 405,000
----------- -----------
Net interest income after provision for
loan losses 5,447,432 4,545,051
----------- -----------
Non-interest income:
Service charges 495,575 494,623
Gain on sale of available-for-sale investment
securities, net (Note 4) 131,346 171,913
Mortgage loan brokerage fees 201,751 148,532
Earnings on cash surrender value of life
insurance policies (Note 15) 74,557 93,312
Other 151,411 156,839
----------- -----------
Total non-interest income 1,054,640 1,065,219
----------- -----------
Other expenses:
Salaries and employee benefits (Notes 5 and 15) 2,419,150 2,095,741
Occupancy and equipment (Notes 6 and 10) 550,290 459,101
Other (Note 12) 1,678,621 1,524,262
----------- -----------
Total other expenses 4,648,061 4,079,104
----------- -----------
Income before income taxes 1,854,011 1,531,166
Income taxes (Note 13) 705,000 600,000
----------- -----------
Net income $ 1,149,011 $ 931,166
=========== ===========
Basic earnings per share (Note 2 and 11) $ 0.81 $ 0.66
=========== ===========
Diluted earnings per share (Note 2 and 11) $ 0.77 $ 0.64
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements.
F-15
VALLEY COMMERCE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2003 and 2002
Accumulated
Other
Compre-
Common Stock hensive Share- Compre-
------------------------- Retained (Loss) holders' hensive
Shares Amount Earnings Income Equity Income
----------- ----------- ----------- ----------- ------------ -----------
Balance, January 1, 2002 1,225,294 8,479,813 359,697 52,168 8,891,678
Comprehensive income (Note 16):
Net income 931,166 931,166 $ 931,166
Other comprehensive income, net
of tax:
Unrealized gains on available-for-
sale investment securities 118,213 118,213 118,213
-----------
Total comprehensive income $ 1,049,379
===========
Stock dividend 60,828 540,680 (540,680)
Cash paid for fractional shares (3,932) (3,932)
----------- ----------- ----------- ----------- ------------
Balance, December 31, 2002 1,286,122 9,020,493 746,251 170,381 9,937,125
Comprehensive income (Note 16):
Net income 1,149,011 1,149,011 $ 1,149,011
Other comprehensive loss, net
of tax:
Unrealized losses on available-for-
sale investment securities (Note 4) (189,003) (189,003) (189,003)
-----------
Total comprehensive income $ 960,008
===========
Stock dividend 64,102 691,879 (691,879)
Cash paid for fractional shares (2,259) (2,259)
Stock options exercised (Note 11) 19,145 125,000 125,000
----------- ----------- ----------- ----------- ------------
Balance, December 31, 2003 1,369,369 $ 9,837,372 $ 1,201,124 $ (18,622) $ 11,019,874
=========== =========== =========== =========== ============
2003 2002
---------- ----------
Disclosure of reclassification amount, net of taxes (Note 16):
Unrealized holding (losses) gains arising during the year $ (107,594) $ 214,538
Less: reclassification adjustment for losses included in
net income (81,409) (96,325)
---------- ----------
Net unrealized (loss) gains on available-for-sale investment
securities $ (189,003) $ 118,213
========== ==========
The accompanying notes are an integral
part of these consolidated financial statements.
F-16
VALLEY COMMERCE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2003 and 2002
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 1,149,011 $ 931,166
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 315,000 405,000
Increase in deferred loan origination fees, net 86,756 65,197
Depreciation 127,201 144,909
Amortization of deposit premium 62,538 62,538
Net gain on sale of available-for-sale investment
securities (131,346) (171,913)
Amortization and accretion of securities, net 224,792 52,887
Net gain on sale of other real estate (6,390)
Loss on disposition of premises and equipment 25,320
Increase in cash surrender value of life insurance
policies (74,557) (93,312)
Decrease (increase) in accrued interest receivable
and other assets 6,604 (377,783)
(Decrease) increase in accrued interest payable
and other liabilities (15,357) 135,909
Deferred taxes (263,000) (84,000)
------------ ------------
Net cash provided by operating activities 1,512,962 1,064,208
------------ ------------
Cash flows from investing activities:
Cash acquired in the purchase of selected assets
and liabilities of another bank 5,768,891
Proceeds from matured and called available-for-sale
investment securities 1,400,379 3,944,022
Proceeds from sale of available-for-sale investment
securities 20,718,962 4,238,679
Purchases of available-for-sale investment securities (23,366,582) (24,600,800)
Proceeds from principal repayments from available-
for-sale government-guaranteed mortgage-backed
securities 4,907,667 2,313,572
Decrease (increase) in interest-bearing deposits with
banks 200,000 (100,000)
Net increase in loans (24,550,717) (2,086,087)
Proceeds from sale of other real estate 85,000
Purchase of Federal Home Loan Bank stock (133,000)
Purchases of premises and equipment (291,738) (85,555)
Proceeds from surrender of life insurance policy 589,176
Life insurance policy deposits (2,000,000)
------------ ------------
Net cash used in investing activities (14,756,962) (18,291,169)
------------ ------------
(Continued)
F-17
VALLEY COMMERCE BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2003 and 2002
2003 2002
------------ ------------
Cash flows from financing activities:
Net increase in demand, interest-bearing and
savings deposits $ 11,776,266 $ 12,878,477
Net (decrease) increase in time deposits (5,650,728) 3,415,972
Proceeds from exercise of stock options 125,000
Proceeds from the issuance of junior subordinated
deferrable interest debentures 3,093,000
Proceeds from Federal Home Loan Bank term
advances 3,150,000 1,000,000
Payments on Federal Home Loan Bank term
advances (18,168) (314,650)
Cash paid to repurchase fractional shares (2,259) (3,932)
------------ ------------
Net cash provided by financing activities 12,473,111 16,975,867
------------ ------------
Decrease in cash and cash equivalents (770,889) (251,094)
Cash and cash equivalents at beginning of year 12,525,474 12,776,568
------------ ------------
Cash and cash equivalents at end of year $ 11,754,585 $ 12,525,474
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest expense $ 1,403,140 $ 1,447,908
Income taxes $ 893,281 $ 745,100
Non-cash investing activities:
Net change in unrealized gain on available-for-sale
investment securities $ (334,128) $ 214,279
On October 10, 2003, the Company purchased
certain assets and liabilities of the Fresno
branch from Humboldt Bank (Note 1):
Deposits assumed $ 5,783,566
Premises and equipment (20,000)
Other liabilities 5,325
------------
Cash received $ 5,768,891
============
The accompanying notes are an integral
part of these consolidated financial statements.
F-18
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE BUSINESS OF VALLEY COMMERCE BANCORP
On February 2, 2002, Valley Commerce Bancorp (the "Company") was incorporated as
a bank holding company for the purpose of acquiring Bank of Visalia (the "Bank")
in a one bank holding company reorganization. The new corporate structure
provides the Company and the Bank greater flexibility to expand and diversify.
The reorganization was approved by the Company's shareholders on July 16, 2002,
and all required regulatory approvals with respect to the reorganization were
obtained. The reorganization was completed on November 21, 2002, subsequent to
which the Bank continued its operations as previously conducted, but as a wholly
owned subsidiary of the Company.
The Bank operates four branches in California, including branches in Visalia,
Fresno, Woodlake and Tipton. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation (FDIC) up to applicable legal limits. The Bank's
primary source of revenue is generated from providing loans to customers who are
predominately small and middle market businesses and individuals residing in the
surrounding areas.
On March 19, 2003, the Company formed Valley Commerce Trust I, a Delaware
statutory business trust, for the exclusive purpose of issuing trust preferred
securities.
On May 16, 2003, the Bank entered into an agreement to purchase certain assets
and liabilities of the Fresno Branch Office of Humboldt Bank. Regulatory
approval was subsequently received from the Federal Deposit Insurance
Corporation and the California Department of Financial Institutions, and the
transaction was consummated on October 10, 2003. On this date, the Bank acquired
the branch assets, comprised of banking equipment and office furniture, and
assumed the branch liabilities, consisting of customer deposits. All assets and
liabilities were acquired at face value (without premium or discount) which
approximated fair value.
2. SUBSEQUENT EVENT
On May 16, 2004, the Company distributed a 5% stock dividend and on July 20,
2004 the Board of Directors approved a three for two stock split for all common
stock shareholders of record as of August 20, 2004. As such, all share, earnings
per share and stock option information has been retroactively adjusted as if the
stock dividend and stock split had occurred prior to January 1, 2002.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and
the consolidated accounts of its wholly-owned subsidiary, Bank of Visalia. All
significant intercompany balances and transactions have been eliminated.
F-19
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Consolidation and Basis of Presentation (Continued)
Valley Commerce Trust I is not consolidated into the Company's consolidated
financial statements and, accordingly, is accounted for under the equity method.
The junior subordinated debentures issued and guaranteed by the Company and held
by the Trust are reflected on the Company's consolidated balance sheet in
accordance with the provisions of FASB Interpretation No. 46, Consolidation of
Variable Interest Entities.
The accounting and reporting policies of Valley Commerce Bancorp and subsidiary
conform with accounting principles generally accepted in the United States of
America and prevailing practices within the banking industry.
Investment Securities
Investments are classified as available-for-sale. Available-for-sale securities
are reported at fair value, with unrealized gains and losses excluded from
earnings and reported, net of taxes, as accumulated other comprehensive income
(loss) within shareholders' equity.
Gains or losses on the sale of securities are computed on the specific
identification method. Interest earned on investment securities is reported in
interest income, net of applicable adjustments for accretion of discounts and
amortization of premiums. Investments with fair values that are less than
amortized cost are considered impaired. Impairment may result from either a
decline in the financial condition of the issuing entity or, in the case of
fixed interest rate investments, from rising interest rates. Management assesses
each investment to determine if impaired investments are temporarily impaired or
if the impairment is other-than-temporary based upon the positive and negative
evidence available. Evidence evaluated includes, but is not limited to, industry
analyst reports, credit market conditions, and interest rate trends. If negative
evidence outweighs positive evidence that the carrying amount is recoverable
with in a reasonable period of time, the impairment is deemed to be
other-than-temporary and the security is written down in the period in which
such determination is made.
Investment in Federal Home Loan Bank Stock
As a member of the Federal Home Loan Bank System, the Bank is required to
maintain an investment in the capital stock of the Federal Home Loan Bank. The
investment is carried at cost. At December 31, 2003 and 2002, Federal Home Loan
Bank stock totaled $262,300 and $129,300, respectively. On the consolidated
balance sheet, Federal Home Loan Bank stock is included in accrued interest
receivable and other assets.
Loans
Loans are stated at principal balances outstanding. Interest is accrued daily
based upon outstanding loan balances. However, when, in the opinion of
management, loans are considered to be impaired and the future collectibility of
interest and principal is in serious doubt, loans are placed on nonaccrual
status and the accrual of interest income is suspended. Any interest accrued but
unpaid is charged against income. Payments received are applied to reduce
principal to the extent necessary to ensure collection. Subsequent payments on
these loans, or payments received on nonaccrual loans for which the ultimate
collectibility of principal is not in doubt, are applied first to earned but
unpaid interest and then to principal.
F-20
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
An impaired loan is measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
matter, at the loan's observable market price or the fair value of collateral if
the loan is collateral dependent. A loan is considered impaired when, based on
current information and events, it is probable that the Bank will be unable to
collect all amounts due (including both principal and interest) in accordance
with the contractual terms of the loan agreement.
Loan origination fees, commitment fees, direct loan origination costs and
purchased premiums and discounts on loans are deferred and recognized as an
adjustment of yield, to be amortized, using the interest method, to interest
income over the contractual term of the loan. The unamortized balance of
deferred fees and costs is reported as a component of net loans.
Allowance for Loan Losses
The allowance for loan losses is maintained to provide for losses related to
impaired loans and other losses that can be expected to occur in the normal
course of business. The determination of the allowance is based on estimates
made by management, to include consideration of the character of the loan
portfolio, specifically identified problem loans, potential losses inherent in
the portfolio taken as a whole and economic conditions in the Bank's service
area.
Loans determined to be impaired or classified are individually evaluated by
management for specific risk of loss. In addition, reserve factors are assigned
to currently performing loans based on management's assessment of the following
for each identified loan type: (1) inherent credit risk, (2) historical losses
and, (3) where the Bank has not experienced losses, the loss experience of peer
banks. The company maintains a separate allowance for losses related to
undisbursed loan commitments. Management estimates the amount of probable losses
by applying the loss factors used in the allowance for loans losses methodology
to an estimate of the expected usage of undisbursed commitments. The allowance
totaled $40,000 and $29,000 at December 31, 2003 and 2002, respectively, and is
included in accrued interest payable and other liabilities on the consolidated
balance sheet.
The Bank's Loan Committee reviews the adequacy of the allowance for loan losses
at least quarterly, to include consideration of the relative risks in the
portfolio and current economic conditions. The allowance is adjusted based on
that review if, in management's judgment, changes are warranted.
The allowance is established through a provision for loan losses which is
charged to expense. Additions to the allowance are expected to maintain the
adequacy of the total allowance after credit losses and loan growth. The
allowance for loan losses at December 31, 2003 and 2002, respectively, reflects
management's estimate of possible losses in the portfolio.
F-21
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Real Estate
Other real estate includes real estate acquired in full or partial settlement of
loan obligations. When property is acquired, any excess of the Bank's recorded
investment in the loan balance and accrued interest income over the estimated
fair market value of the property is charged against the allowance for loan
losses. A valuation allowance for losses on other real estate is maintained to
provide for temporary declines in value. The allowance is established through a
provision for losses on other real estate which is included in other expenses.
Subsequent gains or losses on sales or writedowns resulting from permanent
impairment are recorded in other income or expenses as incurred.
Bank Premises and Equipment
Bank premises and equipment are carried at cost. Depreciation is determined
using the straight-line method over the estimated useful lives of the related
assets. The useful lives of premises are estimated to be twenty to thirty years.
The useful lives of furniture, fixtures and equipment are estimated to be two to
ten years. Leasehold improvements are amortized over the life of the asset or
the life of the related lease, whichever is shorter. When assets are sold or
otherwise disposed of, the cost and related accumulated depreciation or
amortization are removed from the accounts, and any resulting gain or loss is
recognized in income for the period. The cost of maintenance and repairs is
charged to expense as incurred.
Intangible Assets
Intangible assets consist of core deposit intangibles related to branch
acquisitions which occurred in prior years and are amortized using the
straight-line method over ten years. Amortization expense totaled $62,538 for
each of the years in the two-year period ended December 31, 2003. The core
deposit premiums totaled $257,870 and $320,408 at December 31, 2003 and 2002,
respectively.
Income Taxes
The Company files its income taxes on a consolidated basis with its subsidiary.
The allocation of income tax expense (benefit) represents each entity's
proportionate share of the consolidated provision for income taxes.
Deferred tax assets and liabilities are recognized for the tax consequences of
temporary differences between the reported amount of assets and liabilities and
their tax bases. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment. On the
consolidated balance sheet, net deferred tax assets are included in accrued
interest receivable and other assets.
F-22
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents
For the purpose of the statement of cash flows, cash and due from banks and
Federal funds sold are considered to be cash equivalents. Generally, Federal
funds are sold for one day periods. Cash held with other federally insured
institutions in excess of FDIC limits as of December 31, 2003 was $2,350,132.
Earnings Per Share
Basic earnings per share (EPS), which excludes dilution, is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock, such as
stock options, result in the issuance of common stock which shares in the
earnings of the Company. The treasury stock method has been applied to determine
the dilutive effect of stock options in computing diluted EPS. Earnings per
share have been retroactively adjusted for the 5% stock dividends that occurred
in 2003 and 2002.
Stock-Based Compensation
At December 31, 2003, the Company had one stock-based compensation plan, the
Valley Commerce Bancorp Amended and Restated 1997 Stock Option Plan, which is
described more fully in Note 11. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based
compensation cost is reflected in net income, as all options granted under these
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant.
F-23
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation (Continued)
Pro forma adjustments to the Company's consolidated net earnings and earnings
per share are disclosed during the years in which the options become vested. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based compensation
(see Note 2).
2003 2002
----------- -----------
Net income, as reported $ 1,149,011 $ 931,166
Deduct: Total stock-based compensation
expense determined under the fair value
based method for all awards, net of
related tax effects (30,000) (35,000)
----------- -----------
Pro forma net income $ 1,119,011 $ 896,166
=========== ===========
Basic earnings per share - as reported $ 0.81 $ 0.66
Basic earnings per share - pro forma $ 0.79 $ 0.63
Diluted earnings per share - as reported $ 0.77 $ 0.64
Diluted earnings per share - pro forma $ 0.75 $ 0.61
Weighted average fair value of options
granted during the year $ 2.83 $ 2.98
The fair value of each option was estimated on the date of grant using an
option-pricing model with the following assumptions:
2003 2002
----------- -----------
Dividend yield N/A N/A
Expected volatility 33.56 24.00
Risk-free interest rate 3.8% 3.6%
Expected option life 7.5 years 7.5 years
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.
F-24
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications
Certain reclassifications have been made to prior years' balances to conform to
classifications used in 2003.
Impact of New Financial Accounting Standards
In December, 2003, the Financial Accounting Standards Board ("FASB") revised
FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46). This interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, addresses consolidation by business enterprises of
variable interest entities that possess certain characteristics. FIN 46 requires
that if a business enterprise has a controlling financial interest in a variable
interest entity, the assets, liabilities, and results of the activities of the
variable interest entity must be included in the consolidated financial
statements with those of the business enterprise. The Company adopted FIN 46 on
December 31, 2003. Adoption of this standard required the Company to
de-consolidate its investment in Valley Commerce Trust I, a Delaware statutory
business trust, made in March 2003. In management's opinion, the effect
of deconsolidation on the Company's consolidated financial position and results
of operations was not material.
In July 2003, the Board of Governors of the Federal Reserve Systems issued a
supervisory letter instructing bank holding companies to continue to include the
trust preferred securities in their Tier I capital for regulatory capital
purposes until notice is given to the contrary. The Federal Reserve intends to
review the regulatory implications of this accounting change and, if necessary
or warranted, provide further appropriate guidance. There can be no assurance
that the Federal Reserve will continue to allow institutions to include trust
preferred securities in Tier I capital for regulatory capital purposes.
On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies the accounting for derivative instruments by providing guidance
related to circumstances under which a contract with a net investment meets the
characteristics of a derivative as discussed in SFAS No. 133. The Statement also
clarifies when a derivative contains a financing component. The Statement is
intended to result in more consistent reporting for derivative contracts and
must be applied prospectively for contracts entered into or modified after June
30, 2003, except for hedging relationships designated after June 30, 2003. The
Company has not participated in any derivative transactions during the years
ending December 31, 2003 and 2002; accordingly, the adoption of this statement
did not have any effect on the Company's consolidated financial position or
results of operations.
F-25
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impact of New Financial Accounting Standards (Continued)
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of
nonpublic entities. For mandatorily redeemable financial instruments of a
nonpublic entity, this Statement shall be effective for existing or new
contracts for fiscal periods beginning after December 15, 2004. The Company
adopted the provisions of this Statement on July 1, 2003 and, in management's
opinion, adoption of this Statement did not have a material effect on the
Company's consolidated financial position or results of operations.
4. AVAILABLE-FOR-SALE INVESTMENT SECURITIES
The amortized cost and estimated market value of available-for-sale investment
securities at December 31, 2003 and 2002 consisted of the following:
2003
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
U.S. Government
agencies $ 9,614,474 $ 17,740 $ (63,214) $ 9,569,000
Mortgage-backed
securities 9,422,665 11,655 (61,320) 9,373,000
Municipal securities 1,741,150 63,131 (2,281) 1,802,000
Corporate debt
securities 1,139,756 4,244 1,144,000
------------ ------------ ------------ ------------
$ 21,918,045 $ 96,770 $ (126,815) $ 21,888,000
============ ============ ============ ============
F-26
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. AVAILABLE-FOR-SALE INVESTMENT SECURITIES (Continued)
Net unrealized losses on available-for-sale investment securities totaling
$30,045 were recorded, net of $11,423 in tax benefits, as accumulated other
comprehensive loss within shareholders' equity at December 31, 2003. Proceeds
and realized gains from the sale of available-for-sale investment securities for
the year ended December 31, 2003 totaled $20,718,962 and $131,346, respectively.
2002
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
U.S. Government
agencies $ 14,171,823 $ 111,177 $ 14,283,000
Mortgage-backed
securities 8,602,092 170,768 $ (1,860) 8,771,000
Municipal securities 2,385,681 47,489 (28,170) 2,405,000
Corporate debt
securities 512,321 4,679 517,000
------------ ------------ ------------ ------------
$ 25,671,917 $ 334,113 $ (30,030) $ 25,976,000
============ ============ ============ ============
Net unrealized gains on available-for-sale investment securities totaling
$304,083 were recorded, net of $133,702 in tax liabilities, as accumulated other
comprehensive income within shareholders' equity at December 31, 2002. Proceeds
and net realized gains from the sale of available-for-sale investment securities
for the year ended December 31, 2002 totaled $4,238,679 and $171,913,
respectively. Proceeds and net realized gains from the sale of
available-for-sale investment securities for the year ended December 31, 2001
totaled $1,633,957 and $12,703, respectively.
Investment securities with unrealized losses at December 31, 2003 are summarized
and classified according to the duration of the loss period as follows:
Less than 12 Months
------------------------------
Fair Unrealized
Value Losses
------------ ------------
U.S. Government agencies $ 5,710,000 $ (63,214)
Mortgage-backed securities 6,999,000 (61,320)
Municipal securities 232,000 (2,281)
------------ ------------
$ 12,941,000 $ (126,815)
============ ============
Management periodically evaluates each available-for-sale investment security in
an unrealized loss position to determine if the impairment is temporary or
other-than-temporary. Management has determined that no investment security
impairment is other than temporary. This is because the noted unrealized losses
are due solely to interest rate changes and the Company has the ability and
intent to hold all investment securities with identified impairments resulting
from interest rate changes to the earlier of the forecasted recovery or the
maturity of the underlying investment security.
F-27
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4. AVAILABLE-FOR-SALE INVESTMENT SECURITIES (Continued)
The amortized cost and estimated market value of investment securities at
December 31, 2003 by contractual maturity are shown below. Expected maturities
will differ from contractual maturities because the issuers of the securities
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Estimated
Amortized Market
Cost Value
------------- -------------
Within one year $ 1,541,047 $ 1,547,000
After one year through five years 4,216,391 4,225,000
After five years through ten years 5,500,740 5,495,000
After ten years 1,237,421 1,248,000
------------- -------------
12,495,599 12,515,000
Investment securities not due at a single
maturity date:
Government-guaranteed mortgage-
backed securities 9,422,446 9,373,000
------------- -------------
$ 21,918,045 $ 21,888,000
============= =============
Investment securities with amortized costs totaling $10,192,544 and $8,117,537
and estimated market values totaling $10,419,000 and $8,293,000 were pledged to
secure public deposits and short-term borrowing arrangements at December 31,
2003 and 2002, respectively (see Note 8).
5. LOANS
Outstanding loans are summarized below:
December 31,
------------------------------
2003 2002
------------- -------------
Commercial $ 27,900,065 $ 24,503,320
Real estate - mortgage 55,406,424 38,563,369
Real estate - construction 10,924,521 7,547,533
Agricultural 4,884,691 4,047,178
Consumer and other 3,786,202 3,674,161
------------- -------------
102,901,903 78,335,561
Deferred loan fees, net (331,723) (244,967)
Allowance for loan losses (1,432,735) (1,102,110)
------------- -------------
$ 101,137,445 $ 76,988,484
============= =============
F-28
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. LOANS (Continued)
Changes in the allowance for loan losses were as follows:
Year Ended December 31,
----------------------------
2003 2002
----------- -----------
Balance, beginning of year $ 1,102,110 $ 1,051,133
Provision charged to operations 315,000 405,000
Losses charged to allowance (17,524) (390,286)
Recoveries 33,149 36,263
----------- -----------
Balance, end of year $ 1,432,735 $ 1,102,110
=========== ===========
The recorded investment in loans that were considered to be impaired totaled
$1,038,000 and $1,188,000 at December 31, 2003 and 2002, respectively. The
related allowance for loan losses for impaired loans was $177,000 and $178,000
at December 31, 2003 and 2002, respectively. The average recorded investment in
impaired loans for the years ended December 31, 2003 and 2002 was $1,200,470 and
$2,342,420, respectively. The Bank recognized $3,869 in interest income on a
cash basis for impaired loans during the year ended December 31, 2003. There was
no interest income recognized on impaired loans during the year ended December
31, 2002.
At December 31, 2003 and 2002, nonaccrual loans totaled $1,038,000 and
$1,188,000, respectively. Interest foregone on nonaccrual loans totaled $65,000
and $224,000 for the years ended December 31, 2003 and 2002, respectively.
Salaries and employee benefits totaling $211,705 and $165,245 have been deferred
as loan origination costs during the years ended December 31, 2003 and 2002,
respectively.
F-29
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
---------------------------
2003 2002
----------- -----------
Furniture and equipment $ 1,189,249 $ 1,073,541
Premises 542,949 435,108
Leasehold improvements 175,519 175,519
Land 51,894 51,894
------------ ------------
1,959,611 1,736,062
Less accumulated depreciation
and amortization (953,001) (888,669)
------------ ------------
$ 1,006,610 $ 847,393
============ ============
Depreciation and amortization included in occupancy and equipment expense
totaled $127,201 and $144,909 for the years ended December 31, 2003 and 2002,
respectively.
7. INTEREST-BEARING DEPOSITS
Interest-bearing deposits consisted of the following:
December 31,
------------------------------
2003 2002
------------ ------------
Savings $ 6,771,331 $ 5,542,542
Money market 22,568,213 18,040,423
NOW accounts 17,196,938 17,946,199
Time, $100,000 or more 17,915,979 17,646,455
Other time 15,410,561 16,590,068
------------ ------------
$ 79,863,022 $ 75,765,687
============ ============
F-30
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. INTEREST-BEARING DEPOSITS (Continued)
Aggregate annual maturities of time deposits are as follows:
Year Ending
December 31,
----------------
2004 $ 28,334,248
2005 2,166,337
2006 625,560
2007 199,073
2008 2,001,322
------------
$ 33,326,540
============
Interest expense recognized on interest-bearing deposits consisted of the
following:
Year Ended December 31,
----------------------------
2003 2002
----------- -----------
Savings $ 22,855 $ 23,499
Money market 217,092 288,715
NOW accounts 110,614 134,709
Time, $100,000 or more 395,498 414,904
Other time 378,400 440,970
----------- -----------
$ 1,124,459 $ 1,302,797
=========== ===========
8. BORROWING ARRANGEMENTS
Short-Term
The Bank has unsecured short-term borrowing agreements with two of its
correspondent banks in the amount of $1,000,000 and $2,000,000, respectively.
There were no short-term borrowings outstanding at December 31, 2003 and 2002.
Long-Term
The Company can borrow up to $7,519,000 from the Federal Home Loan Bank (FHLB)
on a long-term basis, secured by qualifying mortgage loans with unpaid balances
of $16,138,000 at December 31, 2003. The Company had borrowed $3,150,000 from
the FHLB, secured by loans at December 31, 2003. The advances had a weighted
average fixed interest rate of 2.90% and a weighted average maturity of 3.7
years. Monthly payments of interest only are due with final principal payments
at maturity. There were no outstanding borrowings secured by loans at December
31, 2002.
F-31
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8. BORROWING ARRANGEMENTS (Continued)
Long-Term (Continued)
The Company can borrow up to $2,155,000 from the FHLB on a long-term basis,
secured by investments with a fair market value of $10,149,000 at December 31,
2003. Borrowings outstanding from the FHLB secured by investments totaled
$2,042,100 and $2,060,270 at December 31, 2003 and 2002, respectively. The
advances had a weighted average fixed interest rate of 6.69% and a weighted
average maturity of 7.25 years. Payments are due in monthly installments of
approximately $157,000, including principal and interest, with final principal
payments of $953,000 and $1,000,000 due June 22, 2010 and January 2, 2012,
respectively.
All long term borrowings from FHLB may be prepaid upon timely notice to FHLB and
full payment of the prepayment fee calculated by FHLB. The prepayment fee is
comprised of a yield maintenance fee and an administrative fee, both of which
are calculated using a discounted cash flow method. This facility has no call
feature.
Future maturities of outstanding FHLB advances are as follows:
Year Ending
December 31,
----------------
2006 $ 400,000
2007 --
2008 2,750,000
Thereafter 2,042,102
-----------
$ 5,192,102
===========
9. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
Valley Commerce Trust I is a Delaware business trust formed by the Company with
capital of $93,000 for the sole purpose of issuing trust preferred securities
fully and unconditionally guaranteed by the Company. The Company owns all issued
and outstanding shares of Valley Commerce Trust I at December 31, 2003. During
the second quarter of 2003, Valley Commerce Trust I (the "Trust") issued 3,000
Floating Rate Capital Trust Pass-Through Securities ("Trust Preferred
Securities"), with a liquidation value of $1,000 per security, for gross
proceeds of $3,000,000. The entire proceeds of the issuance were invested by the
Trust in $3,093,000 of Floating Rate Junior Subordinated Deferrable Interest
Debentures (the "Subordinated Debentures") issued by the Company, with identical
maturity, repricing and payment terms as the Trust Preferred Securities. The
Subordinated Debentures represent the sole assets of the Trust. The Subordinated
Debentures mature on April 7, 2033, bear a current interest rate of 4.59% (based
on 3-month LIBOR plus 3.30%), with repricing and payments due quarterly. The
Subordinated Debentures are redeemable by the Company, subject to receipt by the
Company of prior approval from the Federal Reserve Board of Governors, on any
January 7, April 7, July 7 or October 7 on or after April 7, 2008. The
redemption price is par plus accrued interest, except in the case of redemption
under a special event which is defined in the debenture. For a special event
redemption prior to April 7, 2008, the redemption price is 107.5% of par plus
accrued interest. The redemption price reverts to par plus accrued interest on
or after this date. The Trust Preferred Securities are subject to mandatory
redemption to the extent of any early redemption of the junior subordinated
debentures and upon maturity of the junior subordinated debentures on April 7,
2033.
F-32
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES (Continued)
Holders of the Trust Preferred Securities are entitled to a cumulative cash
distribution on the liquidation amount of $1,000 per security at an initial rate
per annum of 4.59%. For each successive period beginning on January 7, April 7,
July 7 or October 7 of each year, the rate will be adjusted to equal the 3-month
LIBOR plus 3.30% provided, however, that prior to July 7, 2008, such annual rate
does not exceed 12.50%. As of December 31, 2003, the rate was 4.45%. The Trust
has the option to defer payment of the distributions for a period of up to five
years, as long as the Company is not in default on the payment of interest on
the junior subordinated debentures. The Trust Preferred Securities were sold and
issued in private transactions pursuant to an exemption from registration under
the Securities Act of 1933, as amended. The Company has guaranteed, on a
subordinated basis, distributions and other payments due on the Trust Preferred
Securities.
Deferred costs related to the junior subordinated debentures, which are included
in other assets on the consolidated balance sheet, at December 31, 2003 were
$90,000 and the amortization of the deferred costs for the year ended December
31, 2003 was $15,000.
10. COMMITMENTS AND CONTINGENCIES
Leases
The Bank leases its Fresno and Visalia branch offices and its administrative
office under noncancelable operating leases which expire in October 2007,
November 2009 and January 2006, respectively. The Visalia branch office lease
contains two options to renew the lease for five year periods. Future minimum
lease payments are as follows:
Year Ending
December 31,
----------------
2004 $ 231,495
2005 236,641
2006 202,516
2007 188,690
2008 134,400
Thereafter 123,200
-----------
$ 1,116,942
===========
Rental expense included in occupancy and equipment expense totaled $171,010 and
$124,375 for the years ended December 31, 2003 and 2002, respectively.
Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business in order to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and letters of
credit. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the consolidated
balance sheet.
F-33
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. COMMITMENTS AND CONTINGENCIES (Continued)
Financial Instruments With Off-Balance-Sheet Risk (Continued)
The Bank's exposure to credit loss in the event of nonperformance by the other
party for commitments to extend credit and letters of credit is represented by
the contractual amount of those instruments. The Bank uses the same credit
policies in making commitments and letters of credit as it does for loans
included on the consolidated balance sheet.
The following financial instruments represent off-balance-sheet credit risk:
December 31,
-----------------------------
2003 2002
------------ ------------
Commitments to extend credit $ 34,817,000 $ 22,175,000
Letters of credit $ 806,000 $ 352,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral held varies, but may include
accounts receivable, crops, inventory, equipment, income-producing commercial
properties, farm land and residential properties.
Letters of credit are conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loans to customers.
At December 31, 2003, consumer loan commitments represent approximately 9% of
total commitments and are generally unsecured. Commercial loan commitments
represent approximately 47% of total commitments and are generally secured by
various assets of the borrower. Real estate loan commitments represent the
remaining 44% of total commitments and are generally secured by property with a
loan-to-value ratio not to exceed 80%. In addition, the majority of the Bank's
commitments have variable interest rates.
Significant Concentrations of Credit Risk
The Bank grants real estate mortgage, real estate construction, commercial,
agricultural and consumer loans to customers throughout the cities of Visalia,
Fresno, Woodlake and Tipton, California.
F-34
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10. COMMITMENTS AND CONTINGENCIES (Continued)
Significant Concentrations of Credit Risk (Continued)
Although the Bank has a diversified loan portfolio, a substantial portion of its
portfolio is secured by commercial and residential real estate. However,
personal and business income represent the primary source of repayment for a
majority of these loans.
Contingencies
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to such actions will not materially affect the
financial position or results of operations of the Company.
11. SHAREHOLDERS' EQUITY
Dividend Restrictions
The Company's ability to pay cash dividends is dependent on dividends paid to it
by the Bank and limited by California corporation law. Under California law, the
holders of common stock of the Company are entitled to receive dividends when
and as declared by the Board of Directors, out of funds legally available,
subject to certain restrictions. The California general corporation law
prohibits the Company from paying dividends on its common stock unless: (i) its
retained earnings, immediately prior to the dividend payment, equals or exceeds
the amount of the dividend or (ii) immediately after giving effect to the
dividend, the sum of the Company's assets (exclusive of goodwill and deferred
charges) would be at least equal to 125% of its liabilities (not including
deferred taxes, deferred income and other deferred liabilities) and the current
assets of the Company would be at least equal to its current liabilities, or, if
the average of its earnings before taxes on income and before interest expense
for the two preceding fiscal years was less than the average of its interest
expense for the two preceding fiscal years, at least equal to 125% of its
current liabilities.
Dividends from the Bank to the Company are restricted under California law to
the lesser of the Bank's retained earnings or the Bank's net income for the
latest three fiscal years, less dividends previously declared during that
period, or, with the approval of the Department of Financial Institutions, to
the greater of the retained earnings of the Bank, the net income of the Bank for
its last fiscal year, or the net income of the Bank for its current fiscal year.
As of December 31, 2003, the maximum amount available for dividend distribution
under this restriction was approximately $1,748,397.
F-35
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
Earnings Per Share
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations is as follows (see Note 2):
Weighted
Average
Number of
Net Shares Per Share
For the Year Ended Income Outstanding Amount
- --------------------------------- ------------ ------------ ------------
December 31, 2003
Basic earnings per share $ 1,149,011 1,421,710 $ 0.81
============
Effect of dilutive stock options 62,244
------------ ------------
Diluted earnings per share $ 1,149,011 1,483,954 $ 0.77
============ ============ ============
December 31, 2002
Basic earnings per share $ 931,166 1,418,074 $ 0.66
============
Effect of dilutive stock options 34,499
------------ ------------
Diluted earnings per share $ 931,166 1,452,573 $ 0.64
============ ============ ============
Shares of common stock issuable under stock options for which the exercise
prices are greater than the average market prices are not included in the
computation of diluted earnings per share due to their antidilutive effect. In
2002, a total of 4,134 stock options are not included in the computation of
diluted earnings per share. There were no options excluded from the computation
of diluted earnings per share for the year ended December 31, 2003.
F-36
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
Stock Options
In 1997, the Company established Stock Option Plans for which 249,258 shares of
common stock are reserved for issuance to employees and directors under
incentive and nonstatutory agreements as of December 31, 2003. The plans require
that the option price may not be less than the fair market value of the stock at
the date the option is granted, and that the stock must be paid in full at the
time the option is exercised. Payment in full for the option price must be made
in cash or with Company common stock previously acquired by the optionee and
held by the optionee for a period of at least six months. The options expire on
dates determined by the Board of Directors, but not later than ten years from
the date of grant. Upon grant, options vest ratably over a one to five year
period. A summary of the activity within the plans follows (see Note 2):
2003 2002
--------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- -------- --------
Incentive
Options outstanding,
beginning of year 24,975 $ 7.61 26,921 $ 7.49
Options granted 4,134 $ 8.25
Options canceled (6,080) $ 7.49
-------- --------
Options outstanding,
end of year 24,975 $ 7.61 24,975 $ 7.61
======== ========
Options exercisable,
end of year 9,162 $ 7.56 4,172 $ 7.49
======== ========
Nonstatutory
Options outstanding,
beginning of year 177,127 $ 6.38 177,127 $ 6.38
Options granted 15,750 $ 11.11
Options exercised (20,102) $ 6.22
-------- --------
Options outstanding,
end of year 172,775 $ 6.83 177,127 $ 6.38
======== ========
Options exercisable,
end of year 152,706 $ 6.48 158,351 $ 6.34
======== ========
F-37
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
Stock Options (Continued)
A summary of options outstanding at December 31, 2003 follows:
Number of Weighted
Options Average Options
Outstanding Remaining Exercisable
Range of December 31, Contractual December 31,
Exercise Prices 2003 Life 2003
--------------------- ------------ ----------- ------------
Incentive
$ 7.49 20,841 7.8 years 8,335
$ 8.25 4,134 8.9 years 827
------------ ------------
24,975 9,162
============ ============
Nonstatutory
$ 6.22 100,503 3.9 years 100,503
$ 6.53 19,144 6.1 years 15,315
$ 6.79 19,144 5.3 years 19,144
$ 6.86 18,234 7.0 years 14,589
$ 11.11 15,750 9.9 years 3,150
------------ ------------
172,775 152,701
============ ============
Regulatory Capital
The Company and the Bank are subject to certain regulatory capital requirements
administered by the Board of Governors of the Federal Reserve System and the
Federal Deposit Insurance Corporation (FDIC). Failure to meet these minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Company's and the
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average
assets. Each of these components is defined in the regulations. Management
believes that the Company and the Bank met all their capital adequacy
requirements as of December 31, 2003 and 2002.
F-38
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11. SHAREHOLDERS' EQUITY (Continued)
Regulatory Capital (Continued)
In addition, the most recent notification from the FDIC categorized the Bank as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth below.
There are no conditions or events since that notification that management
believes have changed the Bank's category.
December 31,
----------------------------------------------------------
2003 2002
-------------------------- ---------------------------
Amount Ratio Amount Ratio
------------ ----------- ------------ -----------
Leverage Ratio
Valley Commerce Bancorp
and Subsidiary $ 13,781,000 10.0% $ 9,446,000 8.0%
Minimum regulatory requirement $ 5,517,000 4.0% $ 4,719,000 4.0%
Bank of Visalia $ 13,511,000 9.8% $ 9,446,000 8.0%
Minimum requirement for "Well-
Capitalized" institution $ 6,892,000 5.0% $ 5,899,000 5.0%
Minimum regulatory requirement $ 5,513,000 4.0% $ 4,719,000 4.0%
Tier 1 Risk-Based Capital Ratio
Valley Commerce Bancorp
and Subsidiary $ 13,781,000 13.0% $ 9,446,000 10.8%
Minimum regulatory requirement $ 4,245,000 4.0% $ 3,498,000 4.0%
Bank of Visalia $ 13,511,000 12.7% $ 9,446,000 10.8%
Minimum requirement for "Well-
Capitalized" institution $ 6,363,000 6.0% $ 5,247,000 6.0%
Minimum regulatory requirement $ 4,242,000 4.0% $ 3,498,000 4.0%
Total Risk-Based Capital Ratio
Valley Commerce Bancorp
and Subsidiary $ 15,108,000 14.2% $ 10,546,000 12.1%
Minimum regulatory requirement $ 8,490,000 8.0% $ 6,996,000 8.0%
Bank of Visalia $ 14,838,000 14.0% $ 10,546,000 12.1%
Minimum requirement for "Well-
Capitalized" institution $ 10,605,000 10.0% $ 8,745,000 10.0%
Minimum regulatory requirement $ 8,484,000 8.0% $ 6,996,000 8.0%
F-39
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12. OTHER EXPENSES
Other expenses consisted of the following:
Year Ended December 31,
----------------------------
2003 2002
----------- -----------
Data processing $ 418,071 $ 383,258
Operations 309,323 175,576
Professional and legal 200,249 285,303
Promotional 128,189 112,423
Telephone and postal 120,959 104,265
Supplies 111,168 83,274
Assessment and insurance 99,393 85,601
Amortization expense 62,538 62,538
Other expenses 228,731 232,024
----------- -----------
$ 1,678,621 $ 1,524,262
=========== ===========
13. INCOME TAXES
The provision for income taxes for the years ended December 31, 2003 and 2002
consisted of the following:
Federal State Total
--------- --------- ---------
2003
Current $ 741,000 $ 227,000 $ 968,000
Deferred (196,000) (67,000) (263,000)
--------- --------- ---------
Income tax expense $ 545,000 $ 160,000 $ 705,000
========= ========= =========
2002
Current $ 492,000 $ 192,000 $ 684,000
Deferred (54,000) (30,000) (84,000)
--------- --------- ---------
Income tax expense $ 438,000 $ 162,000 $ 600,000
========= ========= =========
F-40
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. INCOME TAXES (Continued)
Deferred tax assets (liabilities) consisted of the following:
December 31,
-------------------------
2003 2002
---------- ----------
Deferred tax assets:
Allowance for loan losses $ 541,000 $ 380,000
Future benefit of state income tax deduction 30,000 65,000
Deferred compensation 93,000 31,000
Unrealized loss on available-for-sale
investment securities 11,000
Intangible assets 85,000 58,000
Other 22,000
---------- ----------
Total deferred tax assets 782,000 534,000
---------- ----------
Deferred tax liabilities:
Accrual to cash (60,000) (111,000)
Unrealized gain on available-for-sale
investment securities (134,000)
Bank premises and equipment (58,000) (33,000)
---------- ----------
Total deferred tax liabilities (118,000) (278,000)
---------- ----------
Net deferred tax assets $ 664,000 $ 256,000
========== ==========
The provision for income taxes differs from amounts computed by applying the
statutory Federal income tax rate to operating income before income taxes. The
items comprising these differences consisted of the following:
Year Ended December 31,
----------------------------------------------
2003 2002
--------------------- ---------------------
Amount Rate % Amount Rate %
--------- --------- --------- ---------
Federal income tax
expense, at statutory
rate $ 630,400 34.0 $ 520,500 34.0
State franchise tax, net
of Federal tax effect 129,800 7.0 107,200 7.0
Interest on obligations
of states and political
subdivisions (31,300) (1.7) (39,800) (2.6)
Other (23,900) (1.3) 12,100 0.8
--------- --------- --------- ---------
Total income
tax expense $ 705,000 38.0 $ 600,000 39.2
========= ========= ========= =========
F-41
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. RELATED PARTY TRANSACTIONS
During the normal course of business, the Bank enters into transactions with
related parties, including executive officers and directors. These transactions
include borrowings from the Bank with substantially the same terms, including
rates and collateral, as loans to unrelated parties. The following is a summary
of the aggregate activity involving related party borrowers during 2003:
Balance, January 1, 2003 $ 1,447,612
Disbursements 2,067,394
Amounts repaid (562,984)
-----------
Balance, December 31, 2003 $ 2,952,022
===========
Undisbursed commitments to related
parties, December 31, 2003 $ 357,770
===========
Additionally, the Company leases office space for its administrative functions
from a partnership in which one of its directors has an interest. The lease
expires on January 31, 2006 and monthly lease payments are $3,171 until February
2005 and $3,284 thereafter. The Company conducted arms' length lease
negotiations and management believes the terms are reflective of market terms
and conditions. The director was not directly involved in the negotiations and
was not a member of the Company's board when the negotiations took place.
15. EMPLOYEE BENEFIT PLANS
Employee Retirement Plan
The Company adopted the Bank of Visalia 401(k) Profit Sharing Plan, effective
January 1, 1997. All employees that work 30 or more hours per week with more
than 3 months of service are eligible to participate in the plan. Eligible
employees may elect to make tax deferred contributions of their salary up to the
maximum amount allowed by law. The Company matches 50% of employee
contributions, up to 3% of the employees' annual salary. Company contributions
vest at a rate of 20% annually. Bank contributions for the years ended December
31, 2003 and 2002 totaled $34,000 and $30,000, respectively.
Salary Continuation and Retirement Plans
Salary continuation plans are in place for two key executives. Under these
plans, the executives will receive monthly payments after retirement until
death. These benefits are substantially equivalent to those available under
split-dollar life insurance policies purchased by the Bank on the lives of the
executives. In addition, the estimated present value of these future benefits is
accrued over the period from the effective dates of the plans until the
participants' expected retirement dates. The expense recognized under these
plans for the years ended December 31, 2003 and 2002 totaled $109,042 and
$76,601, respectively.
In connection with these plans, the Bank purchased single premium life insurance
policies with cash surrender values totaling $1,578,692 and $2,093,312 at
December 31, 2003 and 2002, respectively. During the year ended December 31,
2003, the Bank received proceeds of $589,176 in connection with the surrendered
life insurance policy for a former employee. Income earned on these policies,
net of expenses, totaled $74,557 and $93,312 for the years ended December 31,
2003 and 2002, respectively.
F-42
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16. COMPREHENSIVE INCOME
Comprehensive income is reported in addition to net income for all periods
presented. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of other comprehensive income (loss) that
historically has not been recognized in the calculation of net income. The
unrealized gains and losses on the Bank's available-for-sale investment
securities are included in other comprehensive income (loss). Total
comprehensive income and the components of accumulated other comprehensive
income (loss) are presented in the consolidated statement of changes in
shareholders' equity.
At December 31, 2003 and 2002, the Bank held securities classified as
available-for-sale which had unrealized (losses) gains as follows:
Tax
Before Benefit After
Tax (Expense) Tax
---------- ---------- ----------
For the Year Ended December 31, 2003
Other comprehensive loss:
Unrealized holding losses $ (202,782) $ 95,188 $ (107,594)
Reclassification adjustment for gains
included in net income 131,346 (49,937) 81,409
---------- ---------- ----------
Total other comprehensive
loss $ (334,128) $ 145,125 $ (189,003)
========== ========== ==========
For the Year Ended December 31, 2002
Other comprehensive income:
Unrealized holding gains $ 386,192 $ (164,831) $ 221,361
Reclassification adjustment for gains
included in net income 171,913 (68,765) 103,148
---------- ---------- ----------
Total other comprehensive
income $ 214,279 $ (96,066) $ 118,213
========== ========== ==========
F-43
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values are disclosed for financial instruments for which it is
practicable to estimate fair value. These estimates are made at a specific point
in time based on relevant market data and information about the financial
instruments. These estimates do not reflect any premium or discount that could
result from offering the Company's entire holdings of a particular financial
instrument for sale at one time, nor do they attempt to estimate the value of
anticipated future business related to the instruments. In addition, the tax
ramifications related to the realization of unrealized gains and losses can have
a significant effect on fair value estimates and have not been considered in any
of these estimates.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding current
economic conditions, risk characteristics of various financial instruments and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
fair values presented.
The following methods and assumptions were used by management to estimate the
fair value of its financial instruments at December 31, 2003 and 2002:
Cash and cash equivalents: For cash and cash equivalents, the carrying
amount is estimated to be fair value.
Investment securities: For investment securities, fair values are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are estimated using quoted market prices for
similar securities and indications of value provided by brokers.
Loans: For variable-rate loans that reprice frequently with no significant
change in credit risk, fair values are based on carrying values. The fair
values for other loans are estimated using discounted cash flow analyses,
using interest rates currently being offered at each reporting date for
loans with similar terms to borrowers of comparable creditworthiness. The
carrying amount of accrued interest receivable approximates its fair
value.
Cash surrender value of Bank-owned life insurance: The fair values of life
insurance policies are based on current cash surrender values at each
reporting date provided by the insurers.
Deposits: The fair values for demand deposits are, by definition, equal to
the amount payable on demand at the reporting date represented by their
carrying amount. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow analysis using interest rates
offered at each reporting date by the Bank for certificates with similar
remaining maturities. The carrying amount of accrued interest payable
approximates its fair value.
F-44
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Long-term debt: The fair values of fixed-rate borrowings are estimated by
discounting their future cash flows using rates at each reporting date for
similar instruments. The fair values of variable rate borrowings are based on
carrying value.
Junior subordinated deferrable interest debentures: The fair value of junior
subordinated deferrable interest debentures was determined based on the current
market value for the like kind instruments of a similar maturity and structure.
Commitments to extend credit: Commitments to extend credit are primarily for
variable rate loans and letters of credit. For these commitments, there is no
difference between the committed amounts and their fair values. Commitments to
fund fixed rate loans and letters of credit are at rates which approximate fair
value at each reporting date.
December 31, 2003 December 31, 2002
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and due from banks $ 9,989,585 $ 9,989,585 $ 8,025,474 $ 8,025,474
Federal funds sold 1,765,000 1,765,000 4,500,000 4,500,000
Interest-bearing deposits
in banks 198,000 198,000 398,000 398,000
Available-for-sale investment
securities 21,888,000 21,888,000 25,976,000 25,976,000
Loans, net 101,137,445 102,318,300 76,988,484 77,883,187
Cash surrender value of life
insurance policies 1,578,693 1,578,963 2,093,312 2,093,312
Accrued interest receivable 646,751 646,751 507,568 507,568
Financial liabilities:
Deposits 119,667,971 120,044,508 107,758,867 108,056,321
Long-term debt 5,192,102 5,489,962 2,060,270 2,401,915
Junior subordinated deferrable
interest debentures 3,093,000 3,093,000
Accrued interest payable 106,674 106,674 84,314 84,314
Off-balance-sheet financial
instruments:
Commitments to extend
credit 34,817,000 34,817,000 22,175,000 22,175,000
Standby letters of credit 806,000 806,000 352,000 352,000
F-45
VALLEY COMMERCE BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
BALANCE SHEET
December 31, 2003 and 2002
2003 2002
------------ ------------
ASSETS
Cash and due from banks $ 161,497
Investment in bank subsidiary 13,750,268 $ 10,052,508
Other assets 233,989
------------ ------------
$ 14,145,754 $ 10,052,508
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Other liabilities $ 32,880 $ 115,383
Junior subordinated debentures due to subsidiary
grantor trust 3,093,000
------------ ------------
Total liabilities 3,125,880 115,383
------------ ------------
Shareholders' equity:
Common stock 9,837,372 9,020,493
Retained earnings 1,201,124 746,251
Accumulated other comprehensive (loss) income (18,622) 170,381
------------ ------------
Total shareholders' equity 11,019,874 9,937,125
------------ ------------
$ 14,145,754 $ 10,052,508
============ ============
F-46
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF INCOME
For the Years Ended December 31, 2003 and 2002
2003 2002
----------- -----------
Income:
Dividends declared by bank subsidiary $ 400,000
Earnings from investment in Valley Commerce
Trust I 3,245
----------- -----------
Total income 403,245
----------- -----------
Expenses:
Interest on junior subordinated debentures due to
subsidiary grantor trust 107,928
Other expenses 98,069 $ 115,383
----------- -----------
Total expenses 205,997 115,383
----------- -----------
Income (loss) before equity in undistributed
income of subsidiary 197,248 (115,383)
Equity in undistributed income of subsidiary 886,763 1,046,549
----------- -----------
Income before income taxes 1,084,011 931,166
Income tax benefit 65,000
----------- -----------
Net income $ 1,149,011 $ 931,166
=========== ===========
F-47
18. PARENT ONLY CONDENSED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 2003 and 2002
2003 2002
----------- -----------
Cash flows from operating activities:
Net income $ 1,149,011 $ 931,166
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed net income of subsidiary (886,763) (1,046,549)
Increase in other assets (140,989)
(Decrease) increase in other liabilities (82,503) 115,383
----------- -----------
Net cash provided by operating activities 38,756
----------- -----------
Cash flows from investing activities:
Investment in bank subsidiary (3,000,000)
Investment in Valley Commerce Trust I (93,000)
----------- -----------
Net cash used in investing activities (3,093,000)
----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of junior subordinated
deferrable interest debentures 3,093,000
Cash paid for fractional shares (2,259)
Proceeds from the exercise of stock options 125,000
----------- -----------
Net cash provided by financing activities 3,215,741
----------- -----------
Increase in cash and cash equivalents 161,497
Cash and cash equivalents at beginning of year
----------- -----------
Cash and cash equivalents at end of year $ 161,497 $ --
=========== ===========
Non-cash investing activities:
Issuance of common stock in exchange for the
common stock of the Bank -- $ 8,887,746
Net change in unrealized gain on investment
securities available-for-sale $ (334,128) $ 214,279
F-48
Our Visalia branch and corporate headquarters is strategically well located in
the commercial area of downtown Visalia
[PHOTO OMITTED]
73
[LOGO]
600,000 Shares
Common Stock
, 2004
TABLE OF CONTENTS
Page
----
Summary
Risk Factors
Special Note Re Forward-Looking Statements
Use of Proceeds
Determination of Offering Price
Market for Common Equity and Related
Shareholder Matters
Capitalization
Dilution
Selected Financial Data
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Regulation and Supervision
Management
Security Ownership of Management and Principal
Shareholders
Certain Relationships and Related Transactions
Description of Business
Description of Capital Stock
Underwriting and Plan of Distribution
Legal Matters
Experts
Changes in and Disagreements with Accountants and
Accounting Financial Disclosures
Where You Can Find Additional Information
Financial Statements
Dealer Prospectus Delivery Obligation:
Until ___________, 200__ (90 days after the date of this prospectus), all
dealers that buy, sell or trade in these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. Dealers
are also obligated to deliver a prospectus when acting as underwriter and with
respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 317 of the California General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors,
officers and other agents in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended.
As permitted by the California General Corporation Law, the registrant's bylaws
provide that the registrant shall indemnify its directors, officers and other
agents to the fullest extent permitted by law. The bylaws also permit the
registrant to secure insurance on behalf of any officer, director or other agent
for any liability arising out of his or her actions in such capacity, regardless
of whether the bylaws would permit indemnification. The registrant carries
officer and director liability insurance with respect to liabilities arising out
of certain matters, including matters arising under the Securities Act.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses payable by Valley Commerce Bancorp
(the "registrant") in connection with the offering of the securities being
registered, other than the underwriting discounts and commissions. All of the
amounts are estimates except for the SEC registration fee, the NASD filing fee.
SEC registration fee............................................. $ 995.28
NASD filing fee.................................................. _____
Blue Sky fees and expenses....................................... _____
Printing and engraving expenses.................................. _____
Legal fees and expenses.......................................... 160,000.00
Accounting fees and expenses..................................... 80,000.00
Transfer agent and registrar fees and expenses................... _____
[Directors' and Officers' insurance premiums].................... _____
Miscellaneous expenses........................................... _____
Total................................................... $
=======
Item 26. Recent Sales of Unregistered Securities.
From July 2001 through November 21, 2002, the Bank granted options to acquire
31,049 shares of its common stock. The grant of options to acquire shares of the
Bank and the sale of shares of common stock of the Bank were exempt from
registration under the Securities Act of 1933 pursuant to Section 3(a)(2) of the
Act. Options to acquire 20,101 shares of the Bank have been exercised in the
last three years.
On November 21, 2002, Valley Commerce Bancorp became the holding company for
Bank of Visalia. Outstanding shares of Bank of Visalia common stock were
exchanged on a one-for one basis with shares of common stock of Valley Commerce
Bancorp. Valley Commerce Bancorp issued 1,418,074 shares of common stock in that
exchange. The exchange was exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 3(a)(12) of the Act.
In connection with the holding company reorganization, options to acquire
202,101 shares of common stock of the Bank were exchanged for economically
equivalent options to acquire shares of common stock of Valley Commerce Bancorp.
The exchange was exempt from registration under the Securities Act of 1933, as
amended, under Section 3(a)(12) of the Act.
Under its Stock Option Plan, Valley Commerce Bancorp has granted options to
acquire 49,927 shares of its common stock since November 21, 2002. Options to
acquire 20,102 shares granted by Valley Commerce Bancorp were exercised in 2003.
The grant of these options was exempt, and the sale of shares upon exercise of
these options would be exempt, from registration under the Securities Act of
1933, as amended, pursuant to Rule 701 thereunder, except for option shares held
by affiliates.
No underwriter or underwriter was engaged in connection with the above issuances
and sales.
In 2003, Valley Commerce Bancorp formed Valley Commerce Trust I is a Delaware
business trust with capital of $93,000 for the sole purpose of issuing trust
preferred securities fully and unconditionally guaranteed by Valley Commerce
Bancorp. In April 2003, Valley Commerce Trust I issued 3,000 Floating Rate
Capital Trust-Pass-Through Securities, commonly known as trust preferred
securities, with a liquidation value of $1,000 per security, for gross proceeds
of $3,000,000. The trust preferred securities were sold and issued in private
transaction pursuant to an exemption from registration under the Securities Act
of 1933, as amended, pursuant to Section 4(2) of the Act. The underwriter for
the offering and sale of trust preferred securities was Bear, Stearns & Co.
Total discounts and commissions on the offer and sale were $90,000 in commission
and $15,800 in legal fees. The trust preferred securities were offered and sold
to institutional investors.
Item 27. Index to Exhibits.
(a) Exhibits
Exhibit
Number Description of Document
- ------ -----------------------
1.1 Form of Underwriting Agreement *
3.1 Articles of Incorporation of the registrant, as amended (1)
3.2 Bylaws of the registrant (1)
4.3 Specimen Stock Certificate
5.1 Opinion of Bingham McCutchen LLP *
10.1 Valley Commerce Bancorp Amended and Restated 1997 Stock
Option Plan (1)
10.2 Lease of premises at 200 South Court Street, Visalia (1)
10.3 Executive Supplemental Compensation Agreement with Donald
A. Gilles (1)
10.4 Executive Supplemental Compensation Agreement with Roy O.
Estridge (1)
10.5 Executive Supplemental Compensation Agreement with Allan W.
Stone (1)
10.6 Amended and Restated Declaration of Trust of Valley
Commerce Trust I (1)
10.7 Indenture between Valley Commerce Bancorp and Wells Fargo
Bank National Association as Trustee, Junior Subordinated
Debt Securities Due April 7, 2033 (1)
10.8 Junior Subordinated Debt Security Due 2003 of Valley
Commerce Bancorp (1)
10.9 Guaranty Agreement of Valley Commerce Bancorp in favor of
Wells Fargo Bank National Association as Trustee (1)
3
Exhibit
Number Description of Document
- ------ -----------------------
16.1 Letter from Moss Adams LLP regarding change in certifying
accountant
21 Subsidiaries of the Registrant (1)
23.1 Consent of Bingham McCutchen LLP (included in Exhibit 5.1
hereto)
23.2 Consent of Perry-Smith LLP
23.3 Consent of Moss Adams LLP
24.1 Power of Attorney (contained on the signature page to the
registration statement no. 333-11883 as filed on September
9, 2004).
99.1 Form of Subscription Agreement Offer (1)
- --------
(1) Previously filed
* To be filed by amendment
Item 28. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the registrant
of expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered
would not exceed that which was registered) any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Commission Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
4
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For the purpose of determining any liability under the
Securities Act of 1933, treat each post-effective amendment that contains
a form of prospectus as a new registration statement relating to the
securities offered in the registration statement, and that offering of
such securities at that time as the initial bona fide offering thereof.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(4) For the purpose of determining any liability under the
Securities Act of 1933, treat the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as
part of this registration statement at the time the Commission declared
it effective.
(5) Provide to the Underwriter at the closing specified in the
underwriter agreement, certificates in such denominations and registered
in such names as required by the Underwriter to permit prompt delivery to
each purchaser.
5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this amendment no. 1 to its
registration statement to be signed on its behalf by the undersigned, in the
City of Visalia, State of California, on October 26, 2004.
VALLEY COMMERCE BANCORP
By /s/ Donald A. Gilles
----------------------------
Name: Donald A. Gilles
Title: Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933,
this registration statement was signed by the following persons in the
capacities and on the dates stated
Signature Title Date
--------- ----- ----
/s/ Donald A. Gilles Director and Chief Executive October 26, 2004
- ------------------------------ Officer (Principal Executive
Donald A. Gilles Officer)
/s/ Roy O. Estridge Chief Financial Officer October 26, 2004
- ------------------------------ (Principal Financial Officer
Roy O. Estridge and Principal Accounting Officer)
/s/ David B. Day* Director October 26, 2004
- ------------------------------
David B. Day
6
/s/ Walter A. Dwelle* Chairman and Director October 26, 2004
- ------------------------------
Walter A. Dwelle
/s/ Thomas A. Gaebe* Director October 26, 2004
- ------------------------------
Thomas A. Gaebe
/s/ Philip R. Hammond, Jr.* Director October 26, 2004
- ------------------------------
Philip R. Hammond, Jr.
/s/ Russell F. Hurley* Vice Chairman and Director October 26, 2004
- ------------------------------
Russell F. Hurley
/s/ Fred P. LoBue, Jr.* Director October 26, 2004
- ------------------------------
Fred P. LoBue, Jr.
/s/ Kenneth H. Macklin* Director October 26, 2004
- ------------------------------
Kenneth H. Macklin
/s/ Stanley J. Shamoon* Director October 26, 2004
- ------------------------------
Stanley J. Shamoon
by /s/ Donald D. Gilles, Attorney in fact October 26, 2004
--------------------------------------
Donald D. Gilles, Attorney in fact
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------ -----------------------
1.1 Form of Underwriting Agreement*
3.1 Articles of Incorporation of the registrant, as amended (1)
3.2 Bylaws of the registrant (1)
4.3 Specimen Stock Certificate
5.1 Opinion of Bingham McCutchen LLP*
10.1 Valley Commerce Bancorp Amended and Restated 1997 Stock
Option Plan (1)
10.2 Lease of premises at 200 South Court Street, Visalia (1)
10.3 Executive Supplemental Compensation Agreement with Donald
A. Gilles (1)
10.4 Executive Supplemental Compensation Agreement with Roy O.
Estridge (1)
10.5 Executive Supplemental Compensation Agreement with Allan W.
Stone (1)
10.6 Amended and Restated Declaration of Trust of Valley
Commerce Trust I (1)
10.7 Indenture between Valley Commerce Bancorp and Wells Fargo
Bank National Association as Trustee, Junior Subordinated
Debt Securities Due April 7, 2033 (1)
10.8 Junior Subordinated Debt Security Due 2003 of Valley
Commerce Bancorp (1)
10.9 Guaranty Agreement of Valley Commerce Bancorp in favor of
Wells Fargo Bank National Association as Trustee (1)
16.1 Letter from Moss Adams LLP regarding change in certifying
accountant
21 Subsidiaries of the Registrant (1)
23.1 Consent of Bingham McCutchen LLP (included in Exhibit 5.1
hereto)
23.2 Consent of Perry-Smith LLP
23.3 Consent of Moss Adams LLP
24.1 Power of Attorney (contained on the signature page to the
registration statement no. 333-118883 as filed September 9, 2004).
99.1 Form of Subscription Agreement Offer (1)
- --------
(1) Previously filed.
* To be filed by amendment
7