<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission File No. 33-24541
VINEYARD NATIONAL BANCORP
(Exact Name of Registrant as Specified in its Charter)
California 33-0309110
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
9590 Foothill Boulevard 91730
Rancho Cucamonga, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (909) 987-0177
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
As of February 28, 1996, the aggregate market value of the voting
shares held by non-affiliates of the registrant was approximately $7,450,572.
Solely for the purposes of this calculation, shares held by directors, executive
officers, and each person owning more than 10% of the outstanding Common Stock
of the registrant have been excluded.
1,862,643 shares of Common Stock of the registrant were outstanding at
February 28, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement for its 1996
Annual Meeting of Shareholders, which will be filed on or before April 30, 1996,
are incorporated by reference in Part III of this Form 10-K.
This Report includes a total of 79 pages.
Exhibit Index appears on page 78. Page 1 of 79
<PAGE> 2
PART I
ITEM I. DESCRIPTION OF BUSINESS
Vineyard National Bancorp (referred to herein on an unconsolidated
basis as "VNB" and on a consolidated basis as the "Company") is a corporation
that was incorporated under the laws of the State of California on May 18, 1988
and commenced business on December 16, 1988 when, pursuant to a reorganization,
the Bancorp acquired all of the voting stock of Vineyard National Bank (the
"Bank"). As a bank holding company, the Company is registered under and subject
to the Bank Holding Company Act of 1956, as amended. The Company's principal
asset is the capital stock of Vineyard National Bank, a nationally chartered
bank (the "Bank"), and the business of the Bank is carried on as a wholly-owned
subsidiary of the Company.
VNB's principal business is to serve as a holding company for the Bank
and its subsidiaries and for other banking or banking-related subsidiaries which
the Company may establish or acquire. Although the Company may, in the future,
consider acquiring other businesses or engaging in other activities as permitted
under Federal Reserve Board regulations, the Company has no specific plans to do
so. The Company is currently considering, on a preliminary basis, various
alternatives to eliminate the holding company and operate the Bank as an
institution that is directly owned by its shareholders. These alternatives
include, among others, merging VNB into a subsidiary of the Bank or distributing
the shares of the Bank to its existing shareholders. In either case, the current
shareholders of the Company would become the shareholders of the Bank. Any such
transaction, however, would be subject to, among other things, the receipt of
shareholder and all appropriate regulatory approvals.
VNB's principal source of income is dividends from the Bank. Legal
limitations are imposed on the amount of dividends that may be paid and loans
that may be made by the Bank to VNB. (See Item. 1 - Description of Business;
Supervision and Regulation; Restrictions of Dividends by the Company and
Transfers of Funds to the Company by the Bank)
As of December 31, 1995, the Company had total consolidated assets of
approximately $108 million, total consolidated net loans of approximately $77
million, total consolidated deposits of approximately $98 million and total
stockholders' equity of approximately $7.8 million.
THE BANK
The Bank was organized as a national banking association under federal
law and commenced operations under the name Vineyard National Bank on September
10, 1981.
The Bank's deposit accounts are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to the maximum amount permitted under law. The
Bank is a member of the Federal Reserve System.
The Bank presently operates five offices, one in each of the
communities of Rancho Cucamonga, Chino, Diamond Bar, Crestline, and Lake
Arrowhead, California, which are located between approximately 30 to 70 miles
east of Los Angeles, California.
VINEYARD SERVICE COMPANY, INC.
The Bank owns 100% of the capital stock of Vineyard Service Company,
Inc., which conducts operations out of the Bank's office in Rancho Cucamonga,
California. Services which are provided to both customers of the Bank and
others, include life and disability insurance. At present, the assets,
Page 2 of 79
<PAGE> 3
revenues and earnings of Vineyard Service Company, Inc., are not material in
amount compared to the Bank.
SERVICES PROVIDED BY VINEYARD NATIONAL BANK
The Bank's organization and operations have been designed to meet the
banking needs of individuals and small-to-medium sized businesses located in the
area known as the Inland Empire in Southern California, in which the Bank
conducts its operations. The Bank emphasizes personalized service and
convenience of banking and attracts banking customers by offering morning
through early evening and Saturday banking hours. Drive-up or walk-up facilities
are available at all of its banking offices, and the Bank has 24-hour Automated
Teller Machines ("ATM's") at all five of its banking offices.
The Bank offers a full range of commercial banking services including
the acceptance of checking and savings deposits, and the making of various types
of installment, commercial and real estate loans. In addition, the Bank provides
safe deposit, collection, travelers checks, notary public and other customary
non-deposit banking services. The Bank also provides lease financing to various
municipalities for the acquisition of vehicles and other equipment.
DEPOSITS OF VINEYARD NATIONAL BANK
Deposits represent the Bank's primary source of funds. As of December
31, 1995, the Bank had approximately 5,487 demand deposit accounts representing
aggregate deposits of approximately $25,692,000 with an average account balance
of $4,682, approximately 2,397 accounts representing approximately $32,638,000
in "NOW", super "NOW" and money market checking accounts with an average account
balance of $13,616, approximately 3,094 accounts representing approximately
$10,195,000 in savings deposits with an average account balance of $3,298 and
approximately 1,937 accounts representing approximately $29,890,000 in time
deposits ("TCD's") with an average account balance of $15,431. Of the total
deposits at December 31, 1995, $8,933,000 were in the form of TCD's in
denominations greater than $100,000 and $3,086,000 were municipal and other
governmental deposits, both time and demand.
During the 12 months ended December 31, 1995, average demand deposits
decreased by approximately $1,068,000 or 4%, and "NOW", super "NOW" and money
market checking accounts decreased by approximately $7,563,000 or 18%. Average
savings deposits decreased by approximately $4,854,000 or 29%, while average
time deposits increased by approximately $8,780,000 or 45%, including an
increase of $2,324,000 in average time certificates of deposits of $100,000 or
more.
Although there are some public depositors that carry large short-term
deposits with the Bank, the Bank is not dependent on a single customer or a few
customers for its deposits. Most of the Bank's deposits are obtained from
individuals and small-to-moderate size businesses. This results in relatively
small average deposits balances, but makes the Bank less subject to the adverse
effects which result from the loss of a substantial depositor. At December 31,
1995, no individual, corporate or public depositor accounted for more than
approximately 3% of the Bank's total deposits, and the five largest deposit
accounts collectively represented 7% of total deposits.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY: INTEREST RATES AND
INTEREST DIFFERENTIAL
The following table sets forth the Company's condensed average balances
for each principal category of assets and liabilities and also for stockholders'
equity for each of the past two years.
Page 3 of 79
<PAGE> 4
Average balances are based on daily averages for the Bank and quarterly averages
for VNB, since VNB did not maintain daily average information. Management
believes that the difference between quarterly and daily average data (where
quarterly data has been used) is not significant.
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended December 31,
-----------------------------------------------------
1995 1994
----------------------- ------------------------
Average Percent Average Percent
Balance of Total Balance of Total
------------ ---------- ------------ ---------
<S> <C> <C> <C> <C>
ASSETS
Investment Securities
Taxable $ 13,015 11.9% $ 14,957 13.1%
Non-taxable 3 0.0 5 0.0
Federal funds sold 4,156 3.8 2,990 2.6
Due from banks-time deposits 568 0.5 289 0.3
Loans 78,097 71.3 79,489 69.5
Direct lease financing 928 0.8 1,969 1.7
Reserve for loan and lease losses (967) (0.8) (1,152) (1.0)
----------- --------- ----------- ---------
Net Loans and Leases 78,058 71.3 80,306 70.2
----------- --------- ----------- ---------
Total Interest
Earning Assets 95,800 87.5 98,547 86.2
Cash and non-interest earning deposits 7,148 6.5 7,984 7.0
Net premises, furniture and equipment 3,832 3.5 4,058 3.5
Other assets 2,703 2.5 3,783 3.3
----------- --------- ----------- ---------
Total Assets $ 109,483 100.0% $ 114,372 100.0%
=========== ========= =========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits (1) 46,848 42.8 59,265 51.8
Time deposits 28,203 25.8 19,423 17.0
Short-term borrowings 6 0.0 32 0.0
----------- --------- ----------- ---------
Total Interest-
bearing Liabilities 75,057 68.6 78,720 68.8
Demand deposits 26,082 23.8 27,150 23.8
Other liabilities 1,065 1.0 897 0.8
----------- --------- ----------- ---------
Total Liabilities 102,204 93.4 106,767 93.4
Stockholders' Equity 7,279 6.6 7,605 6.6
----------- --------- ----------- ---------
Total Liabilities and
Stockholders' Equity $ 109,483 100.0% $ 114,372 100.0%
=========== ========= =========== =========
</TABLE>
- -------------------------------
(1) Includes Savings, NOW, Super NOW, and Money Market Accounts
Page 4 of 79
<PAGE> 5
INTEREST RATES AND DIFFERENTIALS
The Company's earnings depend primarily upon the difference between the
income the Bank receives from its loan portfolio and investment securities and
the Bank's cost of funds, principally interest paid on savings and time
deposits. Interest rates charged on the Bank's loans are affected principally by
the demand for loans, the supply of money available for lending purposes, and
competitive factors. In turn, these factors are influenced by general economic
conditions and other constraints beyond the Company's control, such as Federal
economic and tax policies, general supply of money in the economy, governmental
budgetary actions, and the actions of the Federal Reserve Board. (See "Effect of
Governmental Monetary Policies and Recent Legislation.")
Information concerning average interest earning assets and interest
bearing liabilities, along with the average interest rates earned and paid
thereon is set forth in the following table. Averages were computed based upon
daily balances.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994
------------------------------------------ -----------------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Investment Securities
U.S. Treasury $ 4,169 $ 233 5.6% $ 11,416 $ 462 4.1%
U.S. Government agencies 8,672 512 5.9 3,374 200 5.9
Municipal agencies (1) 3 1 15.8 5 1 11.5
Other securities 174 10 5.7 167 10 6.0
---------- --------- ---------- ----------
Total Investment
Securities 13,018 756 5.8 14,962 673 4.8
Federal funds sold 4,156 232 5.6 2,990 112 3.7
Due from banks - time deposits 568 36 6.3 289 11 3.8
Loans (2) 78,097 7,470 9.6 79,489 7,511 9.4
Lease financing (1) 928 128 13.8 1,969 205 10.4
---------- --------- ---------- ----------
Total Interest
Earning Assets (1) $ 96,767 $ 8,622 8.9% $ 99,699 $ 8,512 8.6%
========== ========= ========== ==========
</TABLE>
- -----------------------------
(1) Interest income includes the effects of tax equivalent adjustments on
tax exempt securities and leases using tax rates which approximate 41.2
percent for 1995 and 19.4 percent for 1994.
(2) Loans, net of unearned income, include non-accrual loans but do not
reflect average reserves for probable loan losses of $967,000 in 1995
and $152,000 in 1994. Loan fees of $420,000 in 1995 and $457,000 in
1994 are included in loan interest income. There were four non-accruing
loans totaling approximately $479,000 at December 31, 1995 and four
loans totaling $139,000 at December 31, 1994.
Page 5 of 79
<PAGE> 6
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994
------------------------------------------ ---------------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
----------- ---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
INTEREST BEARING LIABILITIES
Domestic Deposits and Borrowed Funds
Savings deposits $ 46,848 $ 839 1.8% $ 59,265 $ 1,248 2.1%
Time deposits 28,203 1,560 5.5 19,423 670 3.4
Short-term borrowings 6 1 12.2 32 1 3.1
---------- --------- ---------- ----------
Total Interest
Bearing Liabilities $ 75,057 $ 2,400 3.2% $ 78,720 $ 1,919 2.4%
========== ========= ========== ==========
</TABLE>
The table below shows the net interest earnings and the net yield on
average earning assets (net of the reserves for probable loan losses).
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
---------- -----------
<S> <C> <C>
Total interest income (1, 2) $ 8,622 8,512
Total interest expense (3) 2,400 1,919
Total interest earnings (1, 2) 6,222 6,593
Total average earning assets 95,800 98,547
Net yield on average earning assets (1, 2) 6.5% 6.7%
Net yield on average earning assets
(excluding loan fees) (1, 2) 6.1% 6.2%
</TABLE>
- -------------------------
(1) Interest income includes the effects of tax equivalent adjustments on
tax exempt securities and leases using tax rates which approximate 41.2
percent for 1995 and 19.4 percent for 1994.
(2) Loans, net of unearned income, include non-accrual loans but do not
reflect average reserves for probable loan losses of $967,000 in 1995
and $1,152,000 in 1994. Loan fees of $420,000 in 1995 and $457,000 in
1994 are included in loan interest income. There were four non-accruing
loans totaling approximately $479,000 at December 31, 1995 and four
loans totaling $139,000 at December 31, 1994.
(3) Includes Savings, NOW, Super NOW and Money Market Deposit Accounts,
Time Deposits and Federal Funds Purchased.
Page 6 of 79
<PAGE> 7
The following table sets forth the changes in interest earned,
including loan fees and interest paid. The net increase/(decrease) is segmented
into the change attributable to variations in volume and variations in interest
rates. Changes in the interest earned and interest paid due to both the rate and
volume have been allocated to the change due to volume and the change due to
rate in proportion to the relationship of the absolute dollar amounts of the
changes in each.
<TABLE>
<CAPTION>
(Dollars in Thousands) Investment Securities
---------------------------
Non- Federal Direct Lease Time
Taxable Taxable(1) Funds Sold Loans(2) Financing(1) Deposits Total
------------ ------------ ---------- --------- ------------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON
1995 compared to 1994
Increase/(decrease) due to:
Volume changes $ (67) $ (1) $ 53 $ (137) $ (197) $ 15 $ (334)
Rate changes 150 1 67 96 119 10 443
------- ------- ------- ------- ------- ------- -------
Net Increase/(Decrease) $ 83 $ -- $ 120 $ (41) $ (78) $ 25 $ 109
======= ======= ======= ======= ======= ======= =======
INTEREST EARNED ON
1994 compared to 1993
Increase/(decrease) due to:
Volume changes $ 4 $ (2) $ (158) $ (580) $ (155) $ (19) $ (910)
Rate changes 46 2 103 (321) (14) 1 (183)
------- ------- ------- ------- ------- ------- -------
Net Increase/(Decrease) $ 50 $ -- $ (55) $ (901) $ (169) $ (18) $(1,093)
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ----------------------------
(1) Interest income includes the effects of tax equivalent adjustments on
tax exempt securities and leases using tax rates which approximate 41.2
percent for 1995 and 19.4 percent for 1994.
(2) Includes a decrease in loan fees of $37,000 in 1995 and a decrease of
$163,000 in 1994.
Page 7 of 79
<PAGE> 8
<TABLE>
<CAPTION>
(Dollars in Thousands) Savings Time Notes Short-term
Deposits Deposits Payable Borrowings(1) Total
----------- ----------- ----------- --------------- --------
<S> <C> <C> <C> <C> <C>
INTEREST PAID ON
1995 compared to 1994
Increase/(decrease) due to:
Volume changes $ (239) $ 381 $ - $ - $ 142
Rate changes (170) 509 - (1) 338
--------- ---------- --------- ------------- -------
Net Increase/(Decrease) $ (409) $ 890 $ - $ (1) $ 480
========= ========== ========= ============= =======
INTEREST PAID ON
1994 compared to 1993
Increase/(decrease) due to:
Volume changes $ (130) $ (94) $ (15) $ (2) $ (241)
Rate changes (248) (74) - 1 (321)
--------- ---------- --------- ------------- -------
Net Increase/(Decrease) $ (378) $ (168) $ (15) $ (1) $ (562)
========= ========== ========= ============= =======
</TABLE>
INVESTMENT PORTFOLIO
The following table shows the book value of the portfolio of investment
securities at the end of each of the past two years. The Bank adopted SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities" on
January 1, 1994, which addresses the accounting for investments in equity
securities that have readily determinable fair values and for investments in all
debt securities. Securities are classified in three categories and accounted for
as follows: debt and equity securities that the Bank has the positive intent and
ability to hold to maturity are classified as held-to-maturity and are measured
at amortized cost; debt and equity securities bought and held principally for
the purpose of selling in the near term are classified as trading securities and
are measured at fair value, with unrealized gains and losses included in
earnings; debt and equity securities not classified as either held-to-maturity
or trading securities are deemed as available-for-sale and are measured at fair
value, with unrealized gains and losses, net of applicable taxes, reported in a
separate component of stockholders' equity.
<TABLE>
<CAPTION>
1995 1994
------------ --------------------------
Available- Available- Held-to-
for-Sale for-Sale Maturity
------------ ------------ ----------
<S> <C> <C> <C>
U.S. Treasury $ 6,012 $ 1,914 $ 2,001
Federal agencies 7,237 973 2,983
State and political subdivisions - - 5
Other securities 182 167 -
------------ ------------ ----------
$ 13,431 $ 3,054 $ 4,989
============ ============ ==========
</TABLE>
- ----------------------------------------
(1) Short-term Borrowings consist of Federal Funds Purchased.
Page 8 of 79
<PAGE> 9
The following table shows the maturities of investment securities at
December 31, 1995 and the weighted average yields (for tax-exempt obligations on
a fully taxable basis assuming a 34% tax rate) of such securities.
<TABLE>
<CAPTION>
After One But
Within One Year Within Five Years
---------------------- ----------------------
Available-for-Sale Available-for-Sale
Amount Yield Amount Yield
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury $ 6,012 5.54% $ - - %
Federal agencies 5,020 6.24 2,217 5.32
Other securities 182 5.36 - -
---------- ----------
$ 11,214 5.85% $ 2,217 5.32%
========== ==========
</TABLE>
LOAN PORTFOLIO
The following table sets forth the amount of loans outstanding for each
of the past two years.
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
TYPES OF LOANS
Domestic
Commercial, financial and agricultural $ 9,257 $ 9,151
Real estate construction 680 1,484
Real estate mortgage 28,881 26,890
Installment loans to individuals 41,723 49,657
Lease financing (1) 589 1,305
All other loans (including overdrafts) 69 96
----------- -----------
81,199 88,583
Less
Unearned income (3,128) (3,782)
Reserve for loan and lease losses (783) (1,014)
----------- -----------
Total $ 77,288 $ 83,787
=========== ===========
</TABLE>
- ----------------------------
(1) Lease financing is net of unearned income of approximately $61,000 for 1995
and $164,000 for 1994.
Page 9 of 79
<PAGE> 10
MATURITIES AND SENSITIVITIES TO INTEREST RATES
The following table shows the maturities and sensitivities to changes in
interest rates on loans outstanding at December 31, 1995.
<TABLE>
<CAPTION>
Maturing
-----------------------------------------
Within One to After
One Year Five Years Five Years Total
------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Domestic
Commercial, financial and agricultural $ 3,814 $ 4,170 $ 1,273 $ 9,257
Real estate construction 680 - - 680
Real estate mortgage 18,292 7,120 3,469 28,881
Installment loans to individuals 2,163 37,259 2,301 41,723
Lease financing (net of unearned income) 214 375 - 589
All other loans 57 11 1 69
------------ ------------- --------- ----------
Total $ 25,220 $ 48,935 $ 7,044 $ 81,199
============ ============= ========= ==========
Loans and leases with predetermined
interest rates $ 5,392 $ 42,807 $ 4,518 $ 52,717
Loans and leases with floating or adjustable
interest rates 19,828 6,128 2,526 28,482
------------ ------------- --------- ----------
Total $ 25,220 $ 48,935 $ 7,044 $ 81,199
============ ============= ========= ==========
</TABLE>
Page 10 of 79
<PAGE> 11
ASSET/LIABILITY MANAGEMENT
The table below sets forth information concerning the interest rate
sensitivity of the Company's consolidated assets and liabilities as of December
31, 1995. Assets and liabilities are classified by the earliest possible
repricing date or maturity, whichever comes first.
Generally, where rate-sensitive assets exceed rate-sensitive
liabilities, the net interest margin is expected to be positively impacted
during periods of increasing interest rates and negatively impacted during
periods of decreasing interest rates. When rate-sensitive liabilities exceed
rate-sensitive assets generally the net interest margin will be negatively
affected during periods of increasing interest rates and positively affected
during periods of decreasing interest rates. However, because interest rates for
different asset and liability products offered by depository institutions
respond in a different manner, both in terms of the responsiveness as well as
the extent of the responsiveness to changes in the interest rate environment,
the interest rate sensitivity gap is only a general indicator of interest rate
sensitivity. Based upon the interest rate sensitivity gap set forth below and
the fact that the Bank's demand and savings deposits, which comprised more than
53% of its total deposits at December 31, 1995, have tended to be relatively
insensitive to rising interest rates, management believes that the Company's net
interest margin will not be significantly impacted by changes in interest rates.
<TABLE>
<CAPTION>
(Dollars in Thousands) Three Over Three Over One Over
Months Through Through Five Non-interest
or Less 12 Months Five Years Years Bearing Total
---------- --------------- -------------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing deposits in banks $ 792 $ - $ - $ - $ - $ 792
Federal funds sold 1,925 1,925
Investment securities 3,997 7,035 2,399 - - 13,431
Net loans and leases 14,751 19,257 42,730 3,982 (3,432) 77,288
Noninterest-bearing assets - - - - 14,123 14,123
---------- -------------- ------------- ---------- --------------- ------------
Total Assets $ 21,465 $ 26,292 $ 45,129 $ 3,982 $ 10,691 $ 107,559
========== ============== ============= ========== =============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits - - - - - -
Interest-bearing deposits - - - - 25,691 25,691
Short-term borrowings 47,481 17,147 8,095 - - 72,723
Other liabilities - - - - 1,392 1,392
Stockholders' equity - - - - 7,753 7,753
---------- -------------- ------------- ---------- --------------- ------------
Total Liabilities and
Stockholders' Equity $ 47,481 $ 17,147 $ 8,095 $ - $ 34,836 $ 107,559
========== ============== ============= ========== =============== ============
INTEREST RATE SENSITIVITY GAP $ (26,016) $ 9,145 $ 37,034 $ 3,982 $ (24,145) $ -
========== ============== ============= ========== =============== ============
CUMULATIVE INTEREST RATE SENSITIVITY GAP $ (26,016) $ (16,871) $ 20,163 $ 24,145 $ - $ -
========== ============== ============= ========== =============== ============
</TABLE>
Page 11 of 79
<PAGE> 12
RISK ELEMENTS
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
<TABLE>
<CAPTION>
December 31,
-------------------
1995 1994
------- --------
<S> <C> <C>
Accruing Loans More Than 90 Days Past Due (1)
Aggregate loan amounts
Commercial, financial and agricultural $ 85 $ 4
Real estate 38 595
Installment loans to individuals 197 103
Aggregate leases - -
Renegotiated loans (2) - -
Non-accrual loans (3) - -
Aggregate loan amounts
Commercial 12 139
Real estate 467 -
Consumer - -
------- --------
$ 799 $ 841
======= ========
</TABLE>
POTENTIAL PROBLEM LOANS
The policy of the Company is to review each loan in the portfolio to
identify problem credits. In addition, as an integral part of its regular
examination of the Bank, the Comptroller also identifies problem loans. There
are three classifications for problem loans: "substandard," "doubtful," and
"loss." Substandard loans have one or more defined weaknesses and are
characterized by the distinct possibility that the Bank will sustain some loss
if the deficiencies are not corrected. Doubtful loans have the weaknesses of
substandard loans with the additional characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, questionable.
A loan classified loss is considered uncollectible and of such little
value that the continuance as an asset of the institution is not warranted.
Another category designated "special mention" is maintained for loans which do
not currently expose the Bank to a sufficient degree of risk to warrant
classification as substandard, doubtful or loss but do possess credit
deficiencies for potential weaknesses deserving management's close attention.
As of December 31, 1995, the Bank's classified loans consist of
$3,356,000 of loans classified as substandard and $90,000 of loans classified as
doubtful. The Bank's $3,356,000 in loans
- ----------------------------
(1) Reflects loans for which there has been no payment of interest and/or
principal for 90 days or more. Ordinarily, loans are placed on
non-accrual status (accrual of interest is discontinued) when the Bank
has reason to believe that continued payment of interest and principal
is unlikely.
(2) Renegotiated loans are those which have been renegotiated to provide a
deferral of interest or principal.
(3) There were four loans on non-accrual status approximately totaling
$479,000 at December 31, 1995, and four loans totaling approximately
$139,000 at December 31, 1994. The amount of interest that would have
been collected on these loans had they remained current in accordance
with their original terms was $42,000 in 1995 and $13,000 in 1994,
respectively.
Page 12 of 79
<PAGE> 13
classified as substandard consisted of $2,647,000 of performing loans and
$709,000 of non-accrual loans and loans delinquent 90 days or more but still
accruing. The Bank's $90,000 of loans classified as doubtful consisted wholly of
non-accrual loans. In addition to the classified loans, the Bank was also
monitoring $78,000 of loans designated as special mention at December 31, 1995.
With The exception of these loans, management is not aware of any loans
as of December 31, 1995 where the known credit problems of the borrower would
cause it to have serious doubts as to the ability of such borrowers to comply
with their present loan repayment terms and which would result in such loans
being included in the non-accrual, past due and restructured loan table set
forth above at some future date. Management cannot, however, predict the extent
to which the current economic environment may persist or worsen or the full
impact such environment may have on the Bank's loan portfolio. Furthermore,
management cannot predict the results of any subsequent examinations of the
Bank's loan portfolio by the Comptroller. Accordingly, there can be no assurance
that other loans will not become included in the table above in the future.
FOREIGN OUTSTANDINGS
The Bank did not have any loans, acceptances, interest-bearing deposits
or other monetary assets of any foreign country.
LOAN CONCENTRATIONS
The Bank does not have loans made to borrowers who are engaged in
similar activities where the aggregate amount of the loans exceeds 10% of their
loan portfolio that are not broken out as a separate category in the loan
portfolio.
OTHER INTEREST-BEARING ASSETS
The Bank does not have any interest-bearing assets for which management
believes that recovery of the interest on and principal thereof is at
significant risk.
Page 13 of 79
<PAGE> 14
SUMMARY OF LOAN AND LEASE LOSS EXPERIENCE
The following table sets forth an analysis of the Bank's loan and lease
experience, by category, for the past two years.
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended December 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
Loans and Leases Outstanding, Year-end (1) $ 78,071 $ 84,801
======== ========
Average Amount of Loans and Leases Outstanding (1) $ 79,025 $ 81,458
======== ========
Loans and Lease Loss Reserve Balance, Beginning of year $ 1,014 $ 1,307
Reserve on Loans Acquired in Business Combination
Charge-offs
Domestic
Commercial, financial and agricultural 245 1,469
Real estate - construction -- --
Real estate - mortgage 69 80
Consumer loans 383 449
Lease financing -- --
-------- --------
697 1,998
Foreign -- --
-------- --------
697 1,998
-------- --------
Recoveries
Domestic
Commercial, financial and agricultural 795 134
Real estate - construction -- --
Real estate - mortgage 100 131
Consumer loans -- --
Lease financing -- --
-------- --------
895 265
Foreign -- --
-------- --------
Net Charge-offs/(recoveries) (198) 1,733
-------- --------
Additions (reductions)/charged to operations (429) 1,440
-------- --------
Loan and Lease Loss Reserve Balance, End of year $ 783 $ 1,014
======== ========
Ratio of Net Charge-offs/(recoveries) During the Year (0.25)% 2.13%
to Average Loans and Leases Outstanding During the Year
======== ========
Ratio of Reserve for Loan Losses to Loans at Year-end 1.00% 1.20%
======== ========
</TABLE>
- ------------------------------
(1) Net of unearned income.
Page 14 of 79
<PAGE> 15
The allowance for loan losses is maintained through provisions, charged
to operating expenses, at a level considered adequate to provide for potential
loan losses, based on management's evaluation of the composition of the loan
portfolio, the performance of the loans in the portfolio, evaluations of loan
collateral, prior loss experience, current economic conditions and the prospects
or worth of respective borrowers or guarantors. In addition, the Comptroller, as
an integral part of its examination process, periodically reviews the Bank's
allowance for loan losses. The Comptroller may require the Bank to recognize
additions to the allowance based upon its judgment of the information available
to it at the time of examination. The Bank was most recently examined by the
Comptroller as of September 30, 1995.
The risk of non-payment of loans is an inherent feature of the banking
business. That risk varies with the type and purpose of the loan, the collateral
which is utilized to secure payment, and, ultimately, the creditworthiness of
the borrower. In order to minimize this credit risk, the Bank has established
lending limits for each of its officers having lending authority, in each case
based upon the officer's experience level and prior performance. Whenever a
proposed loan by itself, or when aggregated with outstanding extensions of
credit to the same borrower, exceeds the officer's lending limits, the loan must
be approved by the Bank's lending committee which is comprised of three
directors, the President and Senior Vice President/Credit Administrator of the
Bank. In addition, each loan officer has primary responsibility to conduct
credit documentation reviews of all loans made by that officer.
The Bank also maintains a program of periodic review of all existing
loans. The Bank's Loan Review/Compliance Officer reviews all loans and leases
made, with emphasis placed on large credits. Loans and leases are reviewed for
creditworthiness as well as documentation and compliance with the Bank's lending
policies. Problem loans or leases identified in the review process are scheduled
for special attention and remedial action and, where appropriate, reserves are
established for such loans and leases. For a discussion of the Bank's problem
credits as of December 31, 1995, see "RISK ELEMENTS -- Non-accrual, Past Due and
Restructured Loans and Potential Problem Loans."
Effective January 1, 1995, the Bank adopted SFAS No. 114, (as amended
by SFAS No. 118), "Accounting by Creditors for Impairment of a Loan." Under SFAS
No. 114, a loan is impaired when it is "probable" that the creditor will be
unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement. All loans identified as
"impaired" are to be measured on the present value of expected future cash flows
discounted at the loan's effective interest rate, except that as a practical
expedient, a creditor may measure impairment based on a loan's observable market
price, or the fair value of the collateral if the loan is collateral dependent.
Loan impairment is evaluated on loan-by-loan basis as part of normal loan review
procedures at the Bank.
At December 31, 1995, the Bank had loans amounting to approximately
$564,000 that were specifically classified as impaired. The average balance of
these loans amounted to approximately $567,000 for the year ended December 31,
1995. The allowance for loan losses related to these impaired loans amounted to
approximately $67,000 at December 31, 1995.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Although the Bank does not normally allocate the reserve for probable
loan and lease losses to specific loan categories, an allocation to the major
categories has been made for the purposes of this report as set forth in the
following table. The allocations are estimates based upon historical loss
experience and management's judgment.
The allocation of the reserve for probable loan and lease losses
should not be interpreted as
Page 15 of 79
<PAGE> 16
an indication that charge-offs will occur in these amounts or proportions, or
that the allocation indicates future charge-off trends. Furthermore, the portion
allocated to each loan category is not the total amount available for future
losses that might occur within such categories, since even in the reserve there
is an unallocated portion, and, as previously stated, the total reserve is a
general reserve applicable to the entire portfolio.
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended December 31,
---------------------------------------------------------
1995 1994
--------------------------- --------------------------
Percent of Percent of
Loans in Loans in
Reserve Each Reserve Each
for Loan Category to for Loan Category to
Losses Total Loans Losses Total Loans
------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Domestic
Commercial, financial and
agricultural $ 287 11.4% $ 265 10.3%
Real estate 226 36.4 436 32.0
Installment loans to individuals 150 51.5 182 56.2
Lease financing - 0.7 - 1.5
Foreign - - - -
Unallocated Allowance 120 - 131 -
------------ -------------- ----------- ------------
Total $ 783 100.0% $ 1,014 100.0%
============ ============== =========== ============
</TABLE>
DEPOSITS
The average amount of and the average rate paid on deposits is
summarized below:
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended December 31,
---------------------------------------------------------
1995 1994
--------------------------- --------------------------
Average Average Average Average
Balance Rate Balance Rate
------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
In Domestic Offices
Noninterest bearing demand deposits $ 26,082 - % $ 27,150 - %
Savings deposits (1) 46,848 1.8 59,265 2.1
Time deposits 28,203 5.5 19,423 3.4
------------ -----------
Total Deposits $ 101,133 2.4% $ 105,838 1.8%
============ ===========
</TABLE>
Set forth below is a maturity schedule of domestic time certificates of
deposit of $100,000 or more:
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
1995
-----------------
<S> <C>
Three months or less $ 4,260
Over three through 12 months 4,373
Over one through five years 300
-----------------
$ 8,933
=================
</TABLE>
- ------------------------------
(1) Includes Savings, NOW, Super NOW, and Money Market Deposit Accounts.
Page 16 of 79
<PAGE> 17
RETURN ON EQUITY AND ASSETS
The following table sets forth the ratios of net income/(loss) to
average total assets/(return on assets), net income/(loss) to average
equity/(return on equity), dividends declared per share to net income/(loss) per
share/(dividend payout ratio), and average equity to average total
assets/(equity to asset ratio).
<TABLE>
<CAPTION>
1995 1994
--------- ----------
<S> <C> <C>
Return on assets 0.77% (1.35)%
Return on equity 11.46 (20.23)
Dividend payout ratio - -
Equity to asset ratio 6.65 6.65
</TABLE>
COMPETITION
The Bank faces substantial competition for deposits and loans
throughout its market areas. The primary factors in competing for deposits are
interest rates, personalized services, the quality and range of financial
services, convenience of office locations and office hours. Competition for
deposits comes primarily from other commercial banks, savings institutions,
credit unions, money market funds and other investment alternatives. The primary
factors in competing for loans are interest rates, loan origination fees, the
quality and range of lending services and personalized services. Competition for
loans comes primarily from other commercial banks, savings institutions,
mortgage banking firms, credit unions and other financial intermediaries. The
Bank faces competition for deposits and loans throughout its market areas not
only from local institutions but also from out-of-state financial intermediaries
which have opened loan production offices or which solicit deposits in its
market areas. Many of the financial intermediaries operating in the Bank's
market areas offer certain services, such as trust, investment and international
banking services, which the Bank does not offer directly. Additionally, banks
with larger capitalization and financial intermediaries not subject to bank
regulatory restrictions have large lending limits and are thereby able to serve
the needs of larger customers. Neither the deposits nor loans of any office of
the Bank exceed 1% of the aggregate loans or deposits of all financial
intermediaries located in the counties in which such offices are located.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business which depends largely on rate differentials. In
general, the difference between the interest rate paid by the Bank on its
deposits and its other borrowings and the interest rate received by the Bank on
loans extended to its customers and securities held in the Bank's portfolio
comprise the major portion of the Company's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Bank. Accordingly,
the earnings and growth of the Company are subject to the influence of domestic
and foreign economic conditions, including inflation, recession and
unemployment.
The commercial banking business is not only affected by general
economic conditions but is also influenced by the monetary and fiscal policies
of the federal government and the policies of regulatory agencies, particularly
the Federal Reserve Board. The Federal Reserve Board implements national
monetary policies (with objectives such as curbing inflation and combating
recession) by its open-market operations in United States Government securities,
by adjusting the required level of reserves for financial institutions subject
to its reserve requirements and by varying the discount rates applicable to
borrowings by depository institutions. The actions of the Federal Reserve Board
in these areas influence the growth of bank loans, investments and deposits and
also affect interest
Page 17 of 79
<PAGE> 18
rates charged on loans and paid on deposits. The nature and impact of any future
changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, in the California legislature and
before various bank regulatory and other professional agencies. For example,
legislation was recently introduced in Congress that would repeal the current
statutory restrictions on affiliations between commercial banks and securities
firms. Under the proposed legislation, bank holding companies would be allowed
to control both a commercial bank and a securities affiliate, which could engage
in the full range of investment banking activities, including corporate
underwriting. The likelihood of any major legislative changes and the impact
such changes might have on the Company are impossible to predict. See "ITEM 1.
BUSINESS -- Supervision and Regulation."
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain laws
and regulations which relate to the regulation of the Company and the Bank. The
description does not purport to be a complete summary of all such authority and
is qualified in its entirety by reference to the applicable laws and
regulations.
The Company. The Company, as a registered bank holding company, is
subject to regulation under the Bank Holding Company Act of 1956, as amended
(the "BHCA"). The Company is required to file with the Federal Reserve Board
quarterly and annual reports and such additional information as the Federal
Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may
conduct examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See "ITEM 1. BUSINESS -- Supervision and Regulation -- Capital
Standards." The Company is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the outstanding shares of
any class of voting securities or substantially all of the assets of any bank or
bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank holding
company.
The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly
Page 18 of 79
<PAGE> 19
in activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, the Company, subject to the
prior approval of the Federal Reserve Board, may engage in any, or acquire
shares of companies engaged in, activities that are deemed by the Federal
Reserve Board to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. In making any such determination, the
Federal Reserve Board is required to consider whether the performance of such
activities by the Company or an affiliate can reasonably be expected to produce
benefits to the public, such as greater convenience, increased competition or
gains in efficiency, that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. The Federal Reserve Board is also
empowered to differentiate between activities commenced de novo and activities
commenced by acquisition, in whole or in part, of a going concern.
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving as
a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both. This doctrine has become known as the
"source of strength" doctrine. Although the United States Court of Appeals for
the Fifth Circuit found the Federal Reserve Board's source of strength doctrine
invalid in 1990, stating that the Federal Reserve Board had no authority to
assert the doctrine under the BHCA, the decision, which is not binding on
federal courts outside the Fifth Circuit, was recently reversed by the United
States Supreme Court on procedural grounds. The validity of the source of
strength doctrine is likely to continue to be the subject of litigation until
definitively resolved by the courts or by Congress.
The Company is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by, and may be required to file reports
with, the California State Banking Department.
Finally, the Company is subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended, including but not limited
to, filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
The Bank. The Bank, as a national banking association, is subject to
primary supervision, examination and regulation by the Office of the Comptroller
of the Currency ("Comptroller"). If, as a result of an examination of a Bank,
the Comptroller should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity or other
aspects of the Bank's operations are unsatisfactory or that the Bank or its
management is violating or has violated any law or regulation, various remedies
are available to the Comptroller. Such remedies include the power to enjoin
"unsafe or unsound practices," to require affirmative action to correct any
conditions resulting from any violation or practice, to issue an administrative
order that can be judicially enforced, to direct and increase in capital, to
restrict the growth of the Bank, to assess civil monetary penalties, and to
remove officers and directors. The FDIC has similar enforcement authority, in
addition to its authority to terminate a Bank's deposit insurance in the absence
of action by the Comptroller and upon a finding that a Bank is in an unsafe or
unsound condition, is engaging in unsafe or unsound activities, or that its
conduct poses a risk to the deposit insurance fund or make prejudice the
interest of its depositors.
Page 19 of 79
<PAGE> 20
The deposits of the Bank are insured by the FDIC in the manner and to
the extent provided by law. For this protection, the Bank pays a semiannual
statutory assessment. See "ITEM 1. BUSINESS -- Supervision and Regulation
Premiums for Deposit Insurance." The Bank is also subject to certain regulations
of the Federal Reserve Board and applicable provisions of California law,
insofar as they do not conflict with or are not preempted by federal banking
law.
Various other requirements and restrictions under the laws of the
United States and the State of California affect the operations of the Bank.
Federal and California statutes and regulations relate to many aspects of the
Bank's operations, including reserves against deposits, interest rates payable
on deposits, loans, investments, mergers and acquisitions, borrowings,
dividends, locations of branch offices, capital requirements and disclosure
obligations to depositors and borrowers. Further, the Bank is required to
maintain certain levels of capital. See "ITEM 1. BUSINESS -- Supervision and
Regulation -- Capital Standards."
Restrictions on Dividends by the Company and Transfers of Funds to the
Company by the Bank. The Company is a legal entity separate and distinct from
the Bank. The Company's ability to pay cash dividends is limited by California
law. Under California law, shareholders of the Company may receive dividends
when and as declared by the Board of Directors out of funds legally available
for such purpose. With certain exceptions, a California corporation may not pay
a dividend to its shareholders unless (i) its retained earnings equal at least
the amount of the proposed dividend, or (ii) after giving effect to the
dividend, the corporation's assets would equal at least 1.25 times its
liabilities and, for corporations with classified balance sheets, the current
assets of the corporation would be at least equal to its current liabilities or,
if the average of the earnings of the corporation before taxes on income and
before interest expense for the two preceding fiscal years was less than the
average of the interest expense of the corporation for those fiscal years, at
least equal to 1.25 times its current liabilities.
Federal Reserve Board policy prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowings or other
arrangements that might adversely affect the holding company's financial
position. The policy further declares that a bank holding company should not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality and
overall financial condition. Other Federal Reserve Board policies forbid the
payment by bank subsidiaries to their parent companies of management fees which
are unreasonable in amount or exceed the fair market value of the services
rendered.
There are statutory and regulatory limitations on the amount of
dividends which may be paid to the Company by the Bank. The prior approval of
the Comptroller is required if the total of all dividends declared by a national
bank in any calendar year exceeds the bank's net profits (as defined) for that
year combined with its retained net profits (as defined) for the preceding two
years, less any transfers to surplus.
The Comptroller has authority to prohibit the Bank from engaging in
activities that, in the Comptroller's opinion, constitute unsafe or unsound
practices in conducting its business. It is possible, depending upon the
financial condition of the bank in question and other factors, that the
Comptroller could assert that the payment of dividends or other payments might,
under some circumstances, be such an unsafe or unsound practice. Further, the
Comptroller and the Federal Reserve Board have established guidelines with
respect to the maintenance of appropriate levels of capital by banks or bank
holding companies under their jurisdiction. Compliance with the standards set
forth in such guidelines and the restrictions that are or may be imposed under
the prompt corrective action provisions of federal law could limit the amount of
dividends which the Bank or the
Page 20 of 79
<PAGE> 21
Company may pay. See "ITEM 1. BUSINESS -- Supervision and Regulation -- Prompt
Corrective Regulatory Action and Other Enforcement Mechanisms" and -- "Capital
Standards" for a discussion of these additional restrictions on capital
distributions.
At present, substantially all of the Company's revenues, including
funds available for the payment of dividends and other operating expenses, is,
and will continue to be, primarily dividends paid by the Bank. The Bank is not
permitted to pay dividends to VNB without the prior written consent of the
Comptroller.
The Bank is subject to certain restrictions imposed by federal law on
any extensions of credit to, or the issuance of a guarantee or letter of credit
on behalf of, the Company or other affiliates, the purchase of or investments in
stock or other securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to or in the
Company or to or in any other affiliate is limited to 10% of the Bank's capital
and surplus (as defined by federal regulations) and such secured loans and
investments are limited, in the aggregate, to 20% of the Bank's capital and
surplus (as defined by federal regulations). California law also imposes certain
restrictions with respect to transactions involving the Company and other
controlling persons of the Bank. Additional restrictions on transactions with
affiliates may be imposed on the Bank under the prompt corrective action
provisions of federal law. See "ITEM 1. BUSINESS -- Supervision and Regulation
Prompt Corrective Regulatory Action and Other Enforcement Mechanisms."
Potential and Existing Enforcement Actions. Commercial banking
organizations, such as the Bank, and their institution-affiliated parties, which
include the Company, may be subject to potential enforcement actions by the
Federal Reserve Board, and the Comptroller for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease-and-desist order that can be judicially
enforced, the termination of insurance of deposits, the imposition of civil
money penalties, the issuance of directives to increase capital, the issuance of
formal and informal agreements, the issuance of removal and prohibition orders
against institution-affiliated parties and the imposition of restrictions and
sanctions under the prompt corrective action provisions of the FDIC Improvement
Act of 1991. Additionally, a holding company's inability to serve as a source of
strength to its subsidiary banking organizations could serve as an additional
basis for a regulatory action against the holding company.
On February 25, 1993, the Comptroller entered into a Formal Agreement
(the "Agreement") with the Bank. The Agreement required the Bank, among other
things (a) to achieve on or before May 31, 1993 and thereafter maintain a ratio
of Tier 1 capital to risk-weighted assets of at least 8.0% and a ratio of Tier 1
capital to actual adjusted total assets of at least 5.5%; (b) to develop and
submit for regulatory approval a three year capital program that includes, among
other things, specific plans for the maintenance of adequate capital (including
that required by the Agreement), projections for growth and capital
requirements, projections of the sources and timing of additional capital and a
dividend policy that permits the declaration of dividends only when the dividend
is in compliance with the capital program and applicable law and the declaration
of such dividend has been approved in advance by the Comptroller; (c) to review
the adequacy of the Bank's allowance for loan and lease losses and establish a
program for the maintenance of an adequate allowance; (d) to establish a loan
review program to assure timely identification and categorization of problem
credits; (e) to develop a written program to improve the effectiveness of
supervision by the board of directors; (f) to develop and implement a written
program to improve the Bank's loan administration; (g) to take immediate and
Page 21 of 79
<PAGE> 22
continuing action to protect the Bank's interest in those assets criticized in
the Comptroller's most recent examination and any subsequent examination or
under the Bank's own loan review program; (h) to review and revise the Bank's
liquidity policy; (i) to correct each apparent violation of law, rule or
regulation identified in the Comptroller's most recent examination or any
subsequent examination and implement procedures to prevent future violations;
and (j) to appoint a compliance committee of outside directors who shall be
responsible for monitoring the Bank's adherence to the provisions of the
Agreement and shall submit a written progress report on a quarterly basis to
both the full board of directors and the Comptroller.
On December 2, 1994, the Comptroller of the Currency officially
terminated the Formal Agreement.
Capital Standards. The Federal Reserve Board and the Comptroller have
adopted risk-based minimum capital guidelines intended to provide a measure of
capital that reflects the degree of risk associated with a banking
organization's operations for both transactions reported on the balance sheet as
assets and transactions, such as letters of credit and recourse arrangements,
which are recorded as off balance sheet items. Under these guidelines, nominal
dollar amounts of assets and credit equivalent amounts of off balance sheet
items are multiplied by one of several risk adjustment percentages, which range
from 0% for assets with low credit risk, such as certain U.S. Treasury
securities, to 100% for assets with relatively high credit risk, such as
business loans.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which includes off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily
of common stock, retained earnings, noncumulative perpetual preferred stock
(cumulative perpetual preferred stock for bank holding companies) and minority
interests in certain subsidiaries, less most intangible assets. Tier 2 capital
may consist of a limited amount of the allowance for possible loan and lease
losses, cumulative preferred stock, long term preferred stock, eligible term
subordinated debt and certain other instruments with some characteristics of
equity. The inclusion of elements of Tier 2 capital is subject to certain other
requirements and limitations of the federal banking agencies. The federal
banking agencies require a minimum ratio of qualifying total capital to
risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%.
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the leverage ratio. For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets is
3%. For all banking organizations not rated in the highest category, the minimum
leverage ratio must be at least 100 to 200 basis points above the 3% minimum, or
4% to 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
The federal banking regulators have issued a proposed rule to take
account of interest rate risk in calculating risk-based capital. The proposed
rule includes a supervisory model for taking account of interest rate risk.
Under that model, institutions would report their assets, liabilities and off
balance sheet positions in time bands based upon their remaining maturities. The
federal banking agencies would then calculate a net risk weighted interest rate
exposure. If that interest rate risk exposure was in excess of a certain
threshold (1% of assets), the institution could be required to hold additional
capital proportionate to that excess risk. Alternatively, the agencies have
proposed making interest rate risk exposure a subjective factor in considering
capital adequacy. Exposures would be
Page 22 of 79
<PAGE> 23
measured in terms of the change in the present value of an institution's assets
minus the change in the present value of its liabilities and off-balance sheet
positions for an assumed 100 basis point parallel shift in market interest
rates. However, the federal banking agencies have proposed to let banks use
their own internal measurement of interest rate risk if it is declared adequate
by examiners.
Effective January 17, 1995, the federal banking agencies issued a final
rule relating to capital standards and the risks arising from the concentration
of credit and nontraditional activities. Institutions which have significant
amounts of their assets concentrated in high risk loans or nontraditional
banking activities and who fail to adequately manage these risks, will be
required to set aside capital in excess of the regulatory minimums. The federal
banking agencies have not imposed any quantitative assessment for determining
when these risks are significant, but have identified these issues as important
factors they will review in assessing an individual bank's capital adequacy.
In December 1993, the federal banking agencies issued an interagency
policy statement on the allowance for loan and lease losses which, among other
things, establishes certain benchmark ratios of loan loss reserves to classified
assets. The benchmark set forth by such policy statement is the sum of (i)
assets classified loss; (ii) 50 percent of assets classified doubtful; (iii) 15
percent of assets classified substandard; and (iv) estimated credit losses on
other assets over the upcoming 12 months.
Federally supervised banks and savings associations are currently
required to report deferred tax assets in accordance with SFAS No. 109. See
"ITEM 1. BUSINESS -- Supervision and Regulation -- Accounting Changes." The
federal banking agencies recently issued final rules governing banks and bank
holding companies, effective April 1, 1995, which limit the amount of deferred
tax assets that are allowable in computing an institutions regulatory capital.
This standard has been in effect on an interim basis since March 1993. Deferred
tax assets that can be realized for taxes paid in prior carryback years and from
future reversals of existing taxable temporary differences are generally not
limited. Deferred tax assets that can only be realized through future taxable
earnings are limited for regulatory capital purposes to the lesser of (i) the
amount that can be realized within one year of the quarter-end report date, or
(ii) 10% of Tier 1 Capital. The amount of any deferred tax in excess of this
limit would be excluded from Tier 1 Capital and total assets and regulatory
capital calculations.
Future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of the Bank to grow and could restrict the amount of
profits, if any, available for the payment of dividends.
Page 23 of 79
<PAGE> 24
The following table presents the amounts of regulatory capital and the
capital ratios for the Bank, compared to its minimum regulatory capital
requirements, as of December 31, 1995.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1995
-------------------------------------------
Actual Minimum
---------------------- Capital
Amount Ratio Requirement
----------- --------- ----------------
<S> <C> <C> <C>
Leverage ratio $ 7,735 7.24% 4.0%
Tier 1 risk-based ratio 7,735 9.26 4.0
Total risk-based ratio 8,518 10.20 8.0
</TABLE>
Prompt Corrective Action and Other Enforcement Mechanisms. Federal law
requires each federal banking agency to take prompt corrective action to resolve
the problems of insured depository institutions, including but not limited to
those that fall below one or more prescribed minimum capital ratios. The law
required each federal banking agency to promulgate regulations defining the
following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
In September 1992, the federal banking agencies issued uniform final
regulations implementing the prompt corrective action provisions of federal law.
Under these regulations, an insured depository institution will be classified In
the following categories:
- "well capitalized" if it (i) has total risk-based capital of
10% or greater, Tier I risk-based capital of 6% or greater and
a leverage ratio of 5% or greater, and (ii) is not subject to
an order, written agreement, capital directive or prompt
corrective action directive to meet and maintain a specific
capital level for any capital measure;
- "adequately capitalized" if it has total risk-based capital of
8% or greater, Tier 1 risk-based capital of 4% or greater and
a leverage ratio of 4% or greater (or a leverage ratio of 3%
or greater if the institution is rated Composite I under the
applicable regulatory rating system in its most recent report
of examination);
- "undercapitalized" if it has total risk-based capital that is
less than 8%, Tier 1 risk-based capital that is less than 4%
or a leverage ratio that is less than 4% (or a leverage ratio
that is less than 3% if the institution is rated Composite I
under the applicable regulatory rating system in its most
recent report of examination);
- "significantly undercapitalized" if it has total risk-based
capital that is less than 6%, Tier 1 risk-based capital that
is less than 3% or a leverage ratio that is less than 3%; and
- "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2%.
An institution that, based upon its capital levels, is classified as
"well capitalized," "adequately capitalized" or "undercapitalized" may be
treated as though it were in the next lower capital category if the appropriate
federal banking agency, after notice and opportunity for hearing, determines
that an unsafe or unsound condition or an unsafe or unsound practice warrants
such treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized"
Page 24 of 79
<PAGE> 25
unless its capital ratio actually warrants such treatment.
The law prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions if after such transaction the institution would be
undercapitalized. If an insured depository institution is undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency 45 days after
becoming undercapitalized. The appropriate federal banking agency cannot accept
a capital plan unless, among other things, it determines that the plan (i)
specifies the steps the institution will take to become adequately capitalized;
(ii) is based on realistic assumptions; and (iii) is likely to succeed in
restoring the depository institution's capital. In addition, each company
controlling an undercapitalized depository institution must guarantee that the
institution will comply with the capital plan until the depository institution
has been adequately capitalized on an average basis during each of four
consecutive calendar quarters and must otherwise provide adequate assurances of
performance. The aggregate liability of such guarantee is limited to the lesser
of (a) an amount equal to 5% of the depository institution's total assets at the
time the institution became undercapitalized, or (b) the amount which is
necessary to bring the institution into compliance with all capital standards
applicable to such institution as of the time the institution fails to comply
with its capital restoration plan. Finally, the appropriate federal banking
agency may impose any of the additional restrictions or sanctions that it may
impose on significantly undercapitalized institutions if it determines that such
action will further the purpose of the prompt correction action provisions.
An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a material
respect to implement, an acceptable capital restoration plan, is subject to
additional restrictions and sanctions. These include, among other things (i) a
forced sale of voting shares to raise capital or, if grounds exist for
appointment of a receiver or conservator, a forced merger; (ii) restrictions on
transactions with affiliates; (iii) further limitations on interest rates paid
on deposits; (iv) further restrictions on growth or required shrinkage; (v)
modification or termination of specified activities; (vi) replacement of
directors or senior executive officers; (vii) prohibitions on the receipt of
deposits from correspondent institutions; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) required
divestiture of subsidiaries by the institution; or (x) other restrictions as
determined by the appropriate federal banking agency. Although the appropriate
federal banking agency has discretion to determine which of the foregoing
restrictions or sanctions it will seek to impose, it is required to force a sale
of voting shares or merger, impose restrictions on affiliate transactions and
impose restrictions on rates paid on deposits unless it determines that such
actions would not further the purpose of the prompt corrective action
provisions. In addition, without the prior written approval of the appropriate
federal banking agency, a significantly undercapitalized institution may not pay
any bonus to its senior executive officers or provide compensation to any of
them at a rate that exceeds such officer's average rate of base compensation
during the 12 calendar months preceding the month in which the institution
became undercapitalized.
Further restrictions and sanctions are required to be imposed on
insured depository institutions that are critically undercapitalized. For
example, a critically undercapitalized institution generally would be prohibited
from engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
except under limited circumstances, the appropriate federal banking agency, not
later than 90 days after an insured depository institution becomes critically
undercapitalized, is required to appoint a conservator or receiver for the
institution. The board of
Page 25 of 79
<PAGE> 26
directors of an insured depository institution would not be liable to the
institution's shareholders or creditors for consenting in good faith to the
appointment of a receiver or conservator or to an acquisition or merger as
required by the regulator.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with the
agency. Enforcement actions may include the imposition of a conservator or
receiver, the issuance of a cease and desist order that can be judicially
enforced, the termination of insurance of deposits (in the case of a depository
institution), the imposition of civil money penalties, the issuance of
directives to increase capital, the issuance of formal and informal agreements,
the issuance of removal and prohibition orders against institution-affiliated
parties and the enforcement of such actions through injunctions or restraining
orders based upon a judicial determination that the agency would be harmed if
such equitable relief was not granted.
Safety and Soundness Standards. On February 2, 1995, the federal
banking agencies adopted final safety and soundness standards for all insured
depository institutions. The standards, which were issued in the form of
guidelines rather than regulations, 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. Failure to
submit a compliance plan may result in enforcement proceedings. Additional
standards on earnings and classified assets are expected to be issued in the
near future.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective on March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan to value limits that do
not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
Premiums for Deposit Insurance. Federal law has established several
mechanisms to increase funds to protect deposits insured by the Bank Insurance
Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to
$30 billion from the United States Treasury; up to 90% of the fair market value
of assets of institutions acquired by the FDIC as receiver from the Federal
Financing Bank; and from depository institutions that are members of the BIF.
Any borrowings not repaid by asset sales are to be repaid through insurance
premiums assessed to member institutions. Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide insurance
Page 26 of 79
<PAGE> 27
fund reserves of $1.25 for each $100 of insured deposits. The result of these
provisions is that the assessment rate on deposits of BIF members could increase
in the future. The FDIC also has authority to impose special assessments against
insured deposits.
The FDIC has adopted final regulations implementing a risk-based
premium system required by federal law. Under the regulations, which cover the
assessment periods commencing on and after January 1, 1994, insured depository
institutions are required to pay insurance premiums currently within a range of
.23 cents per $100 of deposits to .31 cents per $100 of deposits depending on
their risk classification. On January 31, 1995, the FDIC issued proposed
regulations that would establish a new assessment rate schedule of .04 cents per
$100 of deposits to .31 cents per $100 of deposits applicable to members of BIF.
There can be no assurance that the final regulations will be adopted as
proposed. To determine the risk-based assessment for each institution, the FDIC
will categorize an institution as well capitalized, adequately capitalized or
undercapitalized based on its capital ratios. A well-capitalized institution is
one that has at least a 10% total risk-based capital ratio, a 6% Tier 1
risk-based capital ratio and a 5% Tier 1 leverage capital ratio. An adequately
capitalized institution will have at least an 8% total risk-based capital ratio,
a 4% Tier 1 risk-based capital ratio and a 4% Tier 1 leverage capital ratio. An
undercapitalized institution will be one that does not meet either of the above
definitions. The FDIC will also assign each institution to one of three
subgroups based upon reviews by the institution's primary federal or state
regulator, statistical analyses of financial statements and other information
relevant to evaluating the risk posed by the institution.
Interstate Banking and Branching. On September 29, 1994, the President
signed into law the Riegel-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Interstate Act"). Under the Interstate Act, beginning one year
after the date of enactment, a bank holding company that is adequately
capitalized and managed may obtain approval under the BHCA to acquire an
existing bank located in another state without regard to state law. A bank
holding company would not be permitted to make such an acquisition if, upon
consummation, it would control (a) more than 10% of the total amount of deposits
of insured depository institutions in the United States or (b) 30% or more of
the deposits in the state in which the bank is located. A state may limit the
percentage of total deposits that may be held in that state by any one bank or
bank holding company if application of such limitation does not discriminate
against out-of-state banks. An out-of-state bank holding company may not acquire
a state bank in existence for less than a minimum length of time that may be
prescribed by state law except that a state may not impose more than a five year
existence requirement.
The Interstate Act also permits, beginning June 1, 1997, mergers of
insured banks located in different states and conversion of the branches of the
acquired bank into branches of the resulting bank. Each state may permit such
combinations earlier than June 1, 1997, and may adopt legislation to prohibit
interstate mergers after that date in that state or in other states by that
state's banks. The same concentration limits discussed in the preceding
paragraph apply. The Interstate Act also permits a national or state bank to
establish branches in a state other than its home state if permitted by the laws
of that state, subject to the same requirements and conditions as for a merger
transaction.
The Interstate Act is likely to increase competition in the Company's
market areas especially from larger financial institutions and their holding
companies. It is difficult to assess the impact such likely increased
competition will have on the Company's operations.
In 1986, California adopted an interstate banking law. The law allows
California banks and bank holding companies to be acquired by banking
organizations in other states on a "reciprocal" basis (i.e., provided the other
state's laws permit California banking organizations to acquire banking
organizations in that state on substantially the same terms and conditions
applicable to banking organizations solely within that state). The law took
effect in two stages. The first stage allowed
Page 27 of 79
<PAGE> 28
acquisitions on a "reciprocal" basis within a region consisting of 11 western
states. The second stage, which became effective January 1, 1991, allows
interstate acquisitions on a national "reciprocal" basis. California has also
adopted similar legislation applicable to savings associations and their holding
companies.
Community Reinvestment Act and Fair Lending Developments. The Bank is
subject to certain fair lending requirements and reporting obligations involving
home mortgage lending operations and Community Reinvestment Act ("CRA")
activities. The CRA generally requires the federal banking agencies to evaluate
the record of a financial institution in meeting the credit needs of their local
communities, including low and moderate income neighborhoods. In addition to
substantial penalties and corrective measures that may be required for a
violation of certain fair lending laws, the federal banking agencies may take
compliance with such laws and CRA into account when regulating and supervising
other activities. On December 21, 1993, the federal banking agencies issued a
proposal to change the manner in which they measure a bank's compliance with its
CRA obligations, but no final regulation has yet been approved.
On March 8, 1994, the federal Interagency Task Force on Fair Lending
issued a policy statement on discrimination in lending. The policy statement
describes the three methods that federal agencies will use to prove
discrimination: overt evidence of discrimination, evidence of disparate
treatment and evidence of disparate impact.
ACCOUNTING CHANGES
In March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets To Be Disposed Of." This Statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used for
long-lived assets and certain identifiable intangibles to be disposed of. An
impairment loss shall be measured as the amount by which the carrying amount of
the asset exceeds the fair value of the asset. After an impairment is
recognized, the reduced carrying amount of the asset shall be accounted for as
its new cost.
In May 1995, FASB issued Statement No. 122, "Accounting for Mortgage
Servicing Rights." SFAS No. 122 amends certain provisions of SFAS No. 65
"Accounting for Certain Mortgage Banking Activities" to eliminate the accounting
distinction between rights to service mortgage loans for others that are
acquired through loan origination activities and those acquired through purchase
transactions. When accounting for the cost of mortgage servicing rights in
accordance with SFAS No. 122, regardless of the origin of those costs, the cost
of acquisition includes the cost of the related mortgage servicing rights. If
the mortgage banking enterprise sells a mortgage and a note and retains
servicing rights, the total cost of the mortgage loan should be allocated to the
mortgage servicing rights and the loan based upon the fair value of each. If the
values are not practicably determinable, the entire cost of the acquisition
should be allocated to the loan only.
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-based Compensation." This Statement
establishes a fair value based method of accounting for stock-based compensation
plans and encourages all entities to adopt that method of accounting for all of
their employee stock compensation plans. Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
Page 28 of 79
<PAGE> 29
The Bank has not elected early adoption of any of the statements and
has not determined the potential impact of the statements on its financial
statements. The statements are effective for financial statements issued for
fiscal years beginning after December 15, 1995.
EMPLOYEES
At December 31, 1995, the Company had approximately 74 full-time and 31
part-time employees. Total full-time equivalent employees at December 31,1995
were approximately 94. The Company believes that its employee relations are
satisfactory.
EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is certain information regarding the executive officers
of the Company and the Bank:
<TABLE>
<CAPTION>
Name Position With Company Position With Bank
- ------------------------ -------------------------------------- --------------------------------------
<S> <C> <C>
Steven R. Sensenbach President and President and
Chief Executive Officer Chief Executive Officer
Robert J. Schoeffler Executive Vice President/
Senior Credit Administrator
Soule Claude Secretary Executive Vice President/
Chief Financial Officer
Sara Ahern Cashier Senior Vice President/Cashier/
Director of Operations
</TABLE>
All officers hold office at the pleasure of the Board of Directors.
Mr. Sensenbach has served as President and Chief Executive of the
Company since its formation in December 1988. Mr. Sensenbach has been President
and Chief Executive Officer of the Bank since 1981.
Mr. Schoeffler was appointed Executive Vice President/Senior Credit
Administrator of the Bank in January 1993, and has been with the Bank since
1991.
Mrs. Claude has served as the Secretary of the Company since 1992 and
has been with the Bank since 1988. Mrs. Claude is currently serving as Executive
Vice President/Chief Financial Officer.
Mrs. Ahern was elected as the Company's Cashier in November 1993. She
has been with the Bank since June 1993, and is currently serving as Senior Vice
President/Cashier/Director of Operations.
Page 29 of 79
<PAGE> 30
ITEM 2. PROPERTIES
The Company's executive offices are located at the Bank's main banking
office at 9590 Foothill Boulevard, Rancho Cucamonga, California. The Bank leases
the facility on an eight year lease expiring in 1997 with a five year option to
renew.
The Bank owns the land and building where its Chino and Crestline
offices are located, and leases the facilities in which its Rancho Cucamonga,
Diamond Bar and Lake Arrowhead offices are located under leases expiring in two
years, three years and fours years, respectively. The Bank's total occupancy
expense for 1995, excluding furniture and equipment expense, approximated
$521,000. Management believes that the Bank's present facilities are adequate
for its present purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation. In the opinion of
management and the Company's legal counsel, the disposition of all such
litigation pending will not have a material effect on the Company's financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Page 30 of 79
<PAGE> 31
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Trading in the Company's Common Stock has been relatively inactive and
the trades that do occur from time to time cannot be characterized as
constituting an active trading market. The Common Stock is not listed on any
national or regional stock exchange or with NASDAQ. At December 31, 1995, the
Company had approximately 742 shareholders.
The following table summarizes the high and low prices at which the
shares of Common Stock of the Company have traded during the periods indicated,
based upon trades of which management of the Company has knowledge. Quoted
prices reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions. This
information has been provided by the Company's securities dealer, Sutro &
Company.
<TABLE>
<CAPTION>
Sales Prices of
Common Stock (1, 2)
----------------------------------
High Low
----------- ----------
<S> <C> <C>
1994
First Quarter $ 3.25 $ 2.75
Second Quarter 2.75 2.00
Third Quarter 2.75 2.00
Fourth Quarter 3.00 2.75
1995
First Quarter $ 3.50 3.00
Second Quarter 3.88 3.50
Third Quarter 3.88 3.00
Fourth Quarter 3.50 3.00
</TABLE>
- ----------------------------
(1) Adjusted to reflect all stock splits by the Company.
(2) Trades by directors and/or executive officers of the Company did not
account for any of the trades reflected in the above table.
Page 31 of 79
<PAGE> 32
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the fiscal years ended December
31, 1995, 1994 and 1993, are derived from the audited consolidated and Bank
financial statements of the Company examined by Vavrinek, Trine, Day & Co.,
Certified Public Accountants, included elsewhere in this Report and should be
read in conjunction with those consolidated financial statements. The selected
financial data for the fiscal years ended December 31, 1992 and 1991, are
derived from audited financial statements examined by Vavrinek, Trine, Day & Co.
which are not included in this Report.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Interest Income $ 6,169,275 $ 6,553,528 $ 7,033,628 $ 7,419,569 $ 8,188,677
(Provision)/Credit for Loan and Lease Losses 429,000 (1,440,000) (300,000) (2,351,800) (355,000)
Other Income 3,922,117 2,769,679 3,893,329 3,995,952 3,036,943
Other Expenses (9,102,333) (9,791,796) (10,129,534) (10,415,287) (9,851,790)
------------- ------------- ------------- ------------- -------------
Income/(Loss) Before Taxes 1,418,059 (1,908,589) 497,423 (1,351,566) 1,018,830
Income Taxes (584,254) (370,100) 144,800 (269,200) 315,200
------------- ------------- ------------- ------------- -------------
Income/(Loss) Before Cumulative Effect
of Accounting Change 833,805 (1,538,489) 352,623 (1,082,366) 703,630
Cumulative Effect of Change in
Accounting For Income Taxes -- -- 107,000 -- --
------------- ------------- ------------- ------------- -------------
Net Income/(Loss) $ 833,805 $ (1,538,489) $ 459,623 $ (1,082,366) $ 703,630
============= ============= ============= ============= =============
Earnings/(Loss) Per Share of Common Stock(1)
Income/(Loss) Before Cumulative Effect $ 0.45 $ (0.83) $ 0.19 $ (0.58) $ 0.38
Cumulative Effect -- -- 0.06 -- --
------------- ------------- ------------- ------------- -------------
Net Income/(Loss) $ 0.45 $ (0.83) $ 0.25 $ (0.58) $ 0.38
============= ============= ============= ============= =============
Number of Shares Used in Per Share Calculation(1) 1,862,643 1,862,643 1,862,643 1,862,643 1,850,303
Stock Splits 6 for 5 -- -- -- 6 for 5
BALANCE SHEET DATA
Assets $ 107,559,133 $ 107,417,232 $ 120,646,469 $ 137,835,991 $ 144,936,450
============= ============= ============= ============= =============
Deposits $ 98,414,447 $ 98,584,479 $ 111,186,106 $ 127,715,070 $ 134,377,806
============= ============= ============= ============= =============
Loans and Leases/(Net) $ 77,287,938 $ 83,786,866 $ 83,940,271 $ 94,815,525 $ 107,386,227
============= ============= ============= ============= =============
Stockholders' Equity $ 7,752,714 $ 6,860,144 $ 8,446,305 $ 7,986,682 $ 9,069,716
============= ============= ============= ============= =============
</TABLE>
- --------------------------
(1) Retroactively adjusted for stock splits.
Page 32 of 79
<PAGE> 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is intended to provide a better understanding of the significant
changes in trends relating to the Company's financial condition, results of
operations, liquidity and interest rate sensitivity. The following discussion
and analysis should be read in conjunction with the Consolidated Financial
Statements of the Company.
Vineyard National Bancorp is operating as a bank holding company whose
only operating subsidiary is Vineyard National Bank. The Bank was acquired by
the holding company on December 16, 1988 and comprises substantially all of the
Company's revenues and expenses. Accordingly, management's discussion and
analysis is focused on and results from the financial condition and operations
of the Bank.
The Company reported a net profit of $834,000 which equated to $.45 per
common share of stock for 1995, compared to a net loss of $(1,538,000) or $(.83)
per share, for 1994 and a net profit of $460,000 or $.25 per share, for 1993.
The 1995 net profit versus the 1994 net loss was most attributable to one-time
revenues generated from the sale of its mortgage servicing rights, and a
$429,000 credit to the provision for loan and lease losses. The 1994 net loss
versus the 1993 net income was most attributable to (i) reduced interest and fee
income on loans due to decreased volume and reduced yields; (ii) increased
provisions for loan and lease losses; and (iii) reduced income from loans
generated, sold and serviced to and for the secondary market.
A negative provision for loan losses of $(429,000) was recorded in 1995
compared to a provision of $1,440,000 in 1994 and $300,000 in 1993. The
substantial decrease in the provision for loan losses in 1995 is a result of
management's assessment of the potential losses inherent in the loan portfolio
in addition to a decrease in charge-offs and the receipt of a large recovery on
a previously charged off loan. The increase in the provision for loan losses in
1994 compared to 1993 reflects management's assessment of the impact that the
continuing general economic slowdown and declining real estate market in
California has had on the Bank's loan portfolio. The Bank has experienced
substantial charge-offs on loans in the past two out of three years which has
had a very significant impact on the required provisions as well as the net
results of operations.
The Company experienced a .1% increase in total assets during 1995 from
$107,417,000 at December 31, 1994 to $107,559,000 at year-end 1995. This slight
increase is a result of an increase in investment securities and Federal Funds
Sold which was offset by a decrease in net loans. The Bank experienced a
$170,000 decrease in its deposits due to competition, including alternative
investment sources (i.e. mutual funds), and customer limitations associated with
the economy.
On February 25, 1993, the Comptroller of the Currency (OCC) entered
into a formal Agreement with the Bank. The Agreement required, among other
things, for the Bank (i) to achieve on or before May 31, 1993 and thereafter
maintain a ratio of Tier 1 to risk-weighted assets of at least 8.0% and a ratio
of Tier 1 capital to actual adjusted total assets of at least 5.5%; (ii) to
develop a three year capital program; (iii) to refrain from paying cash
dividends without the prior approval of the Comptroller; and (iv) to develop,
adopt and otherwise implement various programs and procedures designed to
improve the condition of the Bank. On December 2, 1994, the OCC terminated the
Formal Agreement.
Page 33 of 79
<PAGE> 34
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income represents the difference between interest income
generated from the Bank's loan, lease and investment portfolios and the interest
expense incurred on its deposits and borrowed funds. Net interest income was
$6,169,000 in 1995, $6,554,000 in 1994, and $7,034,000 in 1993. This represents
decreases of 5.9% in 1995 and 6.8% in 1994, respectively.
The decline in net interest income in 1995 from 1994 was due to the
increase in interest expense exceeding the increase in interest income. Interest
income increased to $8,569,000 in 1995 from $8,473,000 in 1994. This increase
resulted primarily from a change in the composition of the Bank's
interest-earning assets. The Bank's average interest-earning assets declined
2.8% in 1995 compared to 1994. Average loans, the Bank's highest yielding asset,
declined 1.8% from $79,489,000 during 1994 to $78,097,000 in 1995 and average
federal funds sold, the Bank's lowest yielding asset, increased from $2,990,000
during 1994 to $4,156,000 during 1995.
The decline in net interest income in 1994 from 1993 was due to the
decline in interest income exceeding the decline in interest expense. Interest
income declined to $8,473,000 in 1994 from $9,515,000 in 1993. This reduction
resulted primarily from a change in the composition of the Bank's
interest-earning assets. The Bank's average interest-earning assets declined
9.5% in 1994 compared to 1993. Average loans, the Bank's highest yielding asset,
declined 7.1% from $85,537,000 during 1993 to $79,489,000 in 1994 and average
federal funds sold, the Bank's lowest yielding asset, decreased from $5,884,000
during 1993 to $2,990,000 during 1994. The reduction in the total earning assets
is directly attributable to the aforementioned reduction in deposits of $12.6
million.
The following table presents the distribution of the Company's average
assets, liabilities and shareholders' equity in combination with the total
dollar amounts of interest income from average interest-earning assets and the
resultant yields without giving effect for any tax exemption, and the dollar
amounts of interest expense and average interest-bearing liabilities, expressed
both in dollars and rates. Loans include non-accrual loans whereas non-accrual
interest is excluded.
Page 34 of 79
<PAGE> 35
<TABLE>
<CAPTION>
1995 1994
------------------------------- -------------------------------
(Dollars in Thousands) Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
--------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans $ 78,097 $ 7,470 9.6% $ 79,489 $ 7,511 9.4%
Lease financing 928 75 8.1 1,969 166 8.4
Investment securities 13,018 756 5.8 14,962 673 4.8
Federal funds sold 4,156 232 5.6 2,990 112 3.7
Interest-earning deposits with
other financial institutions 568 36 6.3 289 11 3.8
--------- -------- --------- --------- --------- ---------
Total Interest-earning Assets 96,767 8,569 8.9 99,699 8,473 8.6
-------- --------- --------- ---------
OTHER ASSETS 13,683 15,825
Less: Allowance for Loan Losses (967) (1,152)
--------- ---------
Total Average Assets $ 109,483 $ 114,372
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings deposits 46,848 839 1.8 59,265 1,248 2.1
Time deposits 28,203 1,560 5.5 19,423 670 3.4
Other 6 1 12.2 32 1 3.1
--------- -------- --------- --------- --------- ---------
Total Interest-bearing
Liabilities 75,057 2,400 3.2 78,720 1,919 2.4
-------- --------- --------- ---------
Demand deposits 26,082 27,150
Other liabilities 1,065 897
Shareholders' equity 7,279 7,605
--------- ---------
Total Average Liabilities and
Shareholders' Equity $ 109,483 $ 114,372
========= =========
Net Interest Spread (1) 5.7% 6.2%
========= =========
Net Interest Income and
Net Interest Margin (2) $ 6,169 5.7% $ 6,554 6.6%
======== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
1993
-------------------------------
(Dollars in Thousands) Average
Average Yield/
Balance Interest Rate
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Loans $ 85,537 $ 8,412 9.8%
Lease financing 3,446 284 8.2
Investment securities 14,874 623 4.2
Federal funds sold 5,884 167 2.8
Interest-earning deposits with
other financial institutions 777 29 3.7
--------- --------- ---------
Total Interest-earning Assets 110,518 9,515 8.6
--------- ---------
OTHER ASSETS 17,571
Less: Allowance for Loan Losses (1,603)
---------
Total Average Assets $ 126,486
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Savings deposits 64,744 1,626 2.5
Time deposits 22,031 838 3.8
Other 115 17 14.8
--------- --------- ---------
Total Interest-bearing
Liabilities 86,890 2,481 2.9
--------- ---------
Demand deposits 30,166
Other liabilities 1,089
Shareholders' equity 8,341
---------
Total Average Liabilities and
Shareholders' Equity $ 126,486
=========
Net Interest Spread (1) 5.7%
=========
Net Interest Income and
Net Interest Margin (2) $ 7,034 6.4%
========= =========
</TABLE>
- --------------------------------
(1) Net interest spread represents the average yield earned on
interest-earning assets less the average rate paid on interest-bearing
liabilities.
(2) Net interest margin is computed by dividing net interest income by
total average earning assets.
Page 35 of 79
<PAGE> 36
The following table sets forth changes in interest income and interest
expense for each major category of interest-earning asset and interest-bearing
liability, and the amount of change attributable to volume and rate changes for
the year indicated. The changes due to rate and volume have been allocated in
proportion to the relationship between their absolute dollar amounts.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 - 1994 1994 - 1993
---------------------------- --------------------------------
Volume Rate Total Volume Rate Total
---------- ------ ------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE/(DECREASE) IN
Interest Income
Loans (1) $ (137) $ 96 $ (41) $ (580) $ (321) $ (901)
Leases (2) (197) 119 (78) (155) (14) (169)
Investment securities (2) (68) 151 83 2 48 50
Deposits 15 10 25 (19) 1 (18)
Federal funds sold 53 67 120 (158) 103 (55)
---------- ------ ------- --------- ------ ----------
(334) 443 109 (910) (183) (1,093)
---------- ------ ------- --------- ------ ----------
INCREASE/(DECREASE) IN
Interest Expense
Savings deposits (239) (170) (409) (130) (248) (378)
Time deposits 381 509 890 (94) (74) (168)
Short-term borrowings - (1) (1) (2) 1 (1)
Note payable - - - (15) - (15)
---------- ------ ------- --------- ------ ----------
142 338 480 (241) (321) (562)
---------- ------ ------- --------- ------ ----------
Increase/(Decrease) in
Net Interest Income $ (476) $ 105 $ (371) $ (669) $ 138 $ (531)
========== ====== ======= ========= ====== ==========
</TABLE>
PROVISION FOR PROBABLE LOAN AND LEASE LOSSES
The provision for probable loan and lease losses, which is an operating
expense of the Company, creates an allowance for estimated future loan and lease
losses. When losses occur they are charged against the allowance for probable
loan and lease losses.
A negative provision for loan losses of $(429,000) was recorded in 1995
compared to a provision of $1,440,000 in 1994 and $300,000 in 1993. The
substantial decrease in the provision for loan losses in 1995 is a result of
management's assessment of the potential losses inherent in the loan portfolio
in addition to a decrease in charge-offs and the receipt of a large recovery on
a previously charged off loan. The increase in the provision for loan losses in
1994 compared to 1993 reflects management's assessment of the impact that the
continuing general economic slowdown and declining real estate market in
California has had on the Bank's loan portfolio. The Bank has experienced
substantial charge-offs on loans in the past two out of three years which has
had a very significant impact on the required provisions as well as the net
results of operations.
During 1995, the Bank's non-accrual loans increased while net
charge-offs decreased significantly. For further information regarding
charge-offs, non-performing and classified loans and
- ----------------------------
(1) Does not include interest income which would have been earned on
non-accrual loans. The amount that would have been collected on these
loans had they remained current in accordance with their terms was $42
in 1995, $13 in 1994 and $134 in 1993.
(2) Interest income includes the effects of tax equivalent adjustments on
tax exempt securities and leases using tax rates which approximate
41.2% for 1995, 19.4% for 1994 and 23.9% for 1993.
Page 36 of 79
<PAGE> 37
the allowance for probable loan and lease losses, see MANAGEMENT DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- "Financial Condition
- -- Non- performing Loans" and -- "Reserve for Probable Loan and Lease Losses."
OTHER OPERATING INCOME
Other operating income increased by $1,152,000 or 41.6% during 1995 as
compared to a $(1,124,000) or (28.9)% decrease in 1994. The large increase
during 1995 is primarily due to income of $1,489,000 received from the sale of
the Bank's mortgage servicing rights. As a result of the sale of these rights,
loan servicing income decreased $300,000. The large decrease during 1994 was due
to the increases in mortgage interest rates over the previous year which had
directly affected the mortgage loan market, particularly as it related to
refinancing of home mortgages. Accordingly, the Company realized a significant
decrease in volume of mortgage loans for sale and servicing.
Other fee and service charge income has remained substantially level
during the three year period.
During 1995, the Company sold certain assets and liabilities of its
Victorville branch. Total assets sold were approximately $1,275,000, and total
liabilities assumed by the buyer were approximately $4,104,000. The transaction
resulted in a gain of approximately $23,000, which has been included in other
income in 1995. The Bank is no longer operating the branch in Victorville.
NON-INTEREST EXPENSES
Non-interest expense decreased in absolute terms from $9.8 million in
1994 to $9.1 million in 1995 which equates to a 7% decline. Occupancy expense of
premises were up but were more than offset by the decrease in salaries and
employee benefits and furniture and equipment and other expenses. During 1994
non-interest expense decreased in absolute terms from $10.1 million in 1993 to
$9.8 million which equates to a 3% decline. Occupancy expense of premises and
other expenses were up but were more than offset by the decrease in salaries and
employee benefits and furniture and equipment expenses. Non-interest expense as
a percentage of total income was 73% in 1995 as compared to 87% in 1994 and 76%
in 1993.
INCOME TAXES
Total income tax expense for 1995 was $584,000 which approximated 41.2%
of pre-tax income. Due to the loss incurred in 1994, the Company realized an
income tax credit of $370,000 which represented approximately 19% of the loss
before said credit. Total income tax expense for 1993 was $145,000 which
approximated 29% of pre-tax income. The Company has a significant amount of
federally tax exempt interest income in its portfolio which resulted in the less
than statutory effective rates of tax for the applicable years.
SECURITIES, GAINS AND LOSSES
The Company had unrealized gains of $20,000 and $0 in 1995 and 1994,
respectively, whereas it had unrealized losses of $0 in 1995 and $183,000 in
1994, respectively. The Company generated losses of $8,000 and $29,000 on sales
of investment securities during 1995 and 1994 and a gain of $2,000 during 1993.
On January 1, 1994 the Company adopted SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" which addresses the accounting for
investments in equity securities that have readily determinable fair values and
for investments in all debt securities. Securities are classified in three
categories and accounted for as follows: debt and equity securities that the
Company has the positive intent and ability to hold to maturity are classified
Page 37 of 79
<PAGE> 38
as held-to-maturity and securities are measured at amortized cost; debt and
equity securities bought and held principally for the purpose of selling in the
near term are classified as trading securities and are measured at fair value,
with unrealized gains and losses included in earnings; debt and equity
securities not classified as either held-to-maturity or trading securities are
deemed as available-for-sale and are measured at fair value, with unrealized
gains and losses, reported as a separate component of stockholders' equity. For
1993, investment securities were stated at cost and adjusted for amortization of
premiums and accretion of discounts, which are recognized as adjustments to
interest income. Gains or losses on disposition were based on the net proceeds
and adjusted carrying amount of the securities sold.
FINANCIAL CONDITION
ASSETS
Total consolidated assets increased $142,000 or .1% to $107,559,000 as
of December 31, 1995 from $107,417,000 as of December 31, 1994. The increase in
the Company size is mostly attributable to an increase in investment securities
and an increase in Federal Funds Sold which was offset by a decrease in net
loans. The balance of the Company's assets remained relatively comparable to
prior years. Investment securities increased 67% to $13,432,000 as of December
31, 1995 from $8,043,000 at year-end 1994. Federal Funds Sold increased to
$1,925,000 as of December 31, 1995 from $0 as of year-end 1994. Net loans
decreased (7.8)% to $77,288,000 as of December 31, 1995 from $83,787,000 as of
year-end 1994.
The Company's ability to increase its assets in the future is limited
by the minimum capital ratios that the Bank must achieve and maintain. As a
result of an examination by the Office of the Comptroller of the Currency (OCC)
as of August 31, 1992, the Comptroller of the Currency entered into a Formal
Agreement that required the Bank to achieve as of May 31, 1993 and maintain
thereafter Tier 1 capital of at least 8% of risk-weighted assets and 5.5% of
adjusted total assets. As of December 31, 1995, the Bank had a ratio of Tier 1
capital to risk-weighted assets of 10.20% and a ratio of Tier 1 capital to total
risk-weighted assets of 9.26%. On December 2, 1994, the OCC terminated the
Formal Agreement.
Page 38 of 79
<PAGE> 39
NON-PERFORMING LOANS
The following table sets forth information regarding the Bank's
non-performing loans at year-end 1995 and 1994.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
---------------
1995 1994
---- ----
<S> <C> <C>
Accruing Loans More Than 90 Days Past Due (1)
Aggregate loan amounts
Commercial, financial and agricultural $ 85 $ 4
Real estate 38 594
Installment loans to individuals 197 103
---- ----
Total Loans Past Due More Than 90 Days 320 701
---- ----
Renegotiated Loans (2) -- --
---- ----
Non-accrual Loans (3)
Aggregate loan amounts
Commercial, financial and agricultural 12 139
Real estate 467 --
Installment loans to individuals -- --
---- ----
Total Non-accrual Loans 479 139
---- ----
Total Non-performing Loans $799 $840
==== ====
</TABLE>
The policy of the Company is to review each loan in the loan portfolio
to identify problem credits. In addition, as an integral part of its review
process of the Bank, the Comptroller also classifies problem credits. There are
three classifications for problem loans: "substandard", "doubtful" and "loss".
Substandard loans have one or more defined weaknesses and are characterized by
the distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected. Doubtful loans have the weaknesses of
substandard loans with the additional characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, questionable. A loan classified as loss is considered
uncollectible and of such little value that the continuance as an asset of the
institution is not warranted. Another category designated "special mention" is
maintained for loans which do not currently expose the Bank to a significant
degree or risk to warrant classification in a substandard, doubtful or loss but
do possess credit deficiencies or potential weaknesses deserving management's
close attention.
As of December 31, 1995, the Bank's classified loans consisted of
$3,356,000 of loans classified as substandard and $90,000 of loans classified as
doubtful. The Bank's $3,356,000 of loans classified as substandard consisted of
$2,647,000 of performing loans and $709,000 of non-accrual loans and loans
delinquent 90 days or more but still accruing. The Bank's $90,000 of loans
- --------------------------------
(1) Reflects loans for which there has been no payment of interest and/or
principal for 90 days or more. Ordinarily, loans are placed on
non-accrual status (accrual of interest is discounted) when the Bank
has reason to believe that continued payment of interest and principal
is unlikely.
(2) Renegotiated loans are those which have been renegotiated to provide a
deferral of interest or principal. The Bank had no renegotiated loans
during 1995 and 1994.
(3) There were four loans on non-accrual status totaling approximately
$479,000 at December 31, 1995 and four loans totaling approximately
$139,000 at December 31, 1994.
Page 39 of 79
<PAGE> 40
classified as doubtful consisted wholly of non-accrual loans. In addition to
classified loans, the Bank was also monitoring $78,000 of loans designated as
special mention at December 31, 1995.
RESERVE FOR PROBABLE LOAN AND LEASE LOSSES
The reserve for probable loan and lease losses is a general reserve
established by Management to absorb potential losses inherent in the entire
portfolio. The level of and ratio of additions to the reserve are based on a
continuous analysis of the loan and lease portfolio and, at December 31, 1995,
reflected an amount which, in management's judgement, was adequate to provide
for known and inherent loan losses. In evaluating the adequacy of the reserve,
management gives consideration to the composition of the loan portfolio, the
performance of loans in the portfolio, evaluations of loan collateral, prior
loss experience, current economic conditions and the prospects or worth of
respective borrowers or guarantors. In addition, the Comptroller, as an integral
part of its examination process, periodically reviews the Bank's allowance for
possible loan and lease losses. The Comptroller may require the Bank to
recognize additions to the allowance based upon its judgment of the information
available to it at the time of its examination. The Bank was most recently
examined by the Comptroller as of September 30, 1995.
The reserve for probable loan and lease losses at December 31, 1995 was
$783,000 or 1.00%, of total loans and leases, as compared to $1,014,000 or
1.20%, of total credits at December 31, 1994. Additions to the reserve are
effected through the provision for loan and lease losses which is an operating
expense of the Company.
The following table provides certain information with respect to the
Company's allowance for loan losses as well as charge-off and recovery activity.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995 1994
------ ------
<S> <C> <C>
ALLOWANCE FOR LOAN LOSSES
Balance, Beginning of period $1,014 $1,307
------ ------
Charge-offs
Commercial, financial and agricultural 245 1,469
Real estate construction -- --
Real estate mortgage 69 80
Consumer loans 383 449
Lease financing -- --
------ ------
Total Charge-offs 697 1,998
------ ------
Recoveries
Commercial, financial and agricultural 795 134
Real estate construction -- --
Real estate mortgage -- --
Consumer loans 100 131
Lease financing -- --
------ ------
Total Recoveries 895 265
------ ------
Net Charge-offs/(Recoveries) (198) 1,733
Provision/(Credit) Charged to Operations (429) 1,440
------ ------
Balance, End of Period $ 783 $1,014
====== ======
Net Charge-offs During the Year to Average Loans
Outstanding During the Year (0.25)% 2.13%
====== ======
Allowance for Loan Losses to Total Losses 1.00% 1.20%
====== ======
</TABLE>
Page 40 of 79
<PAGE> 41
The Bank adopted SFAS No. 114 (as amended by SFAS No. 118), "Accounting
by Creditors for Impairment of a Loan" on January 1, 1995. The statement
generally requires those loans identified as "impaired" to be measured on the
present value of expected future cash flows discounted at the loan's effective
interest rate, except that as a practical expedient, a creditor may measure
impairment based on a loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. A loan is impaired when it is
probable the creditor will not be able to collect all contractual principal and
interest payments due in accordance with the terms of the loan agreement. Loan
impairment is evaluated on a loan-by-loan basis as part of normal loan review
procedures of the Bank.
SOURCES OF FUNDS
Total deposits decreased during 1995 to $98,414,000 from $98,584,000 in
1994. The $170,000 decrease represents a .2% reduction. The mix of the Bank's
deposits showed a wide fluctuation with decreases in demand and
savings/interest-bearing transaction accounts of 2.4%, and 11.8%, respectively
and an increase in time deposit accounts of 42.8%.
ASSET-LIABILITY MANAGEMENT
The Company relies on asset-liability management to assure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and interest-bearing liabilities. Liquidity management and interest
sensitivity management are key factors in asset-liability management. Liquidity
management involves the ability to meet the cash flow requirements of customers
who may be either depositors wanting to withdraw funds or borrowers needing
assurances that sufficient funds will be available to meet their credit needs.
Interest rate sensitivity management seeks to avoid fluctuating interest margins
to enhance consistent growth of net interest income through periods of changing
interest rates.
The Bank's Asset-Liability Management Committee (ALCO) manages the
Company's liquidity position, the parameters of which are approved by the Board
of Directors. The liquidity position of the Bank is monitored daily and the Bank
had liquid assets (cash, federal funds sold, deposits in other financial
institutions and investment securities) as a percent of total deposits and
borrowed funds of 25% and 17% as of December 31, 1995 and December 31, 1994,
respectively. The Bank's Investment Committee manages the investment portfolio,
based upon the Investment Policy which is approved by the Board of Directors.
Deposits with other institutions and Federal funds sold, when
appropriate, will be maintained as alternative short-term investments.
Management's intention is to maintain an investment portfolio which contributes
an adequate rate of return with minimized market or credit risk.
Interest rate sensitivity varies with different types of
interest-earning assets and interest-bearing liabilities. Vineyard National Bank
intends to maintain interest-earning assets, comprised primarily of both loans
and investments, and interest-bearing liabilities, comprised primarily of
deposits, maturing or repricing evenly in order to minimize or eliminate any
impact from interest rate changes.
Vineyard National Bank, on an unconsolidated basis, had deposits of
$98,422,000 at December 31, 1995. Presently, the holding company derives funds
from interest on deposits with the Bank. Management believes that these deposits
and the interest earned thereon are adequate to meet its current cash flow
needs. Pursuant to the Agreement that the Bank has entered into with the
Comptroller, the Bank cannot declare and pay any dividends to Vineyard National
Bancorp without obtaining prior regulatory approval, and the Bank is required to
achieve and maintain specified capital
Page 41 of 79
<PAGE> 42
ratios that exceed the minimums applicable to banks generally.
CAPITAL RESOURCES
Neither the Company nor the Bank has any significant commitments for
capital expenditures.
The Bank is required to meet certain minimum risk-based and leverage
capital standards promulgated by the bank regulatory authorities. Under federal
regulations, the Bank is currently required to maintain a minimum ratio of total
qualifying capital to risk-weighted assets of 8%, of which at least 4% must
consist of Tier 1 capital (consisting primarily of common stock and retained
earnings, less intangibles). Furthermore, federal regulations require banks to
maintain a minimum leverage ratio of at least 4% to be considered "adequately
capitalized" for federal regulatory purposes. Pursuant to the Agreement entered
into with the Comptroller, the Bank was required to achieve higher ratios than
those otherwise applicable to banks generally. In accordance with the terms of
the Agreement, the Bank was required to maintain its ratio of Tier 1 capital to
risk-weighted assets at a minimum of 8.0% and its ratio of Tier 1 capital to
actual adjusted total assets at a minimum of 5.5% by no later than May 31, 1993.
The following table sets forth the minimum capital ratios required to
be maintained by the Bank as of December 31, 1995:
<TABLE>
<CAPTION>
Required Minimum Ratios Bank
- -------------------------------------------------------------------- -------
<S> <C> <C>
Risk-based Ratios
Tier 1 capital......................................... (4.0)% 9.26%
Total capital.......................................... (8.0)% 10.20%
Leverage ratio......................................... (4.0)% 7.24%
</TABLE>
ECONOMIC CONCERNS
The Bank concentrates on marketing to, and serving the needs of, small and
medium-sized businesses, professionals and individuals located in San Bernardino
County and the Western portion of Los Angeles County of Southern California. The
general economy in this market area, and particularly the real estate market, is
suffering from the effects of a prolonged recession that has negatively impacted
the ability of certain borrowers of the Bank to perform their obligations to the
Bank.
The financial condition of the Bank has been, and is expected to continue to
be, affected by the overall general economic conditions and the real estate
market in California. The future success of the Bank is dependent, in large
part, upon the quality of its assets. Although management of the Bank has
devoted substantial time and resources to the identification, collection and
workout of non-performing assets, the real estate markets and the overall
economy in California are likely to have a significant effect on the Bank's
assets in future periods and, accordingly, the Company's financial condition and
results of operations.
Page 42 of 79
<PAGE> 43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statement
Schedules covered by Independent Auditors' Report.
<TABLE>
<CAPTION>
Page Reference
<S> <C>
Independent Auditors' Report .......................................... 44
Consolidated Balance Sheets
December 31, 1995 and 1994 ............................................ 45
Consolidated Statements of Income
For the Years Ended December 31, 1995, 1994 and 1993 .................. 46
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1995, 1994 and 1993 .................. 47
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1995, 1994 and 1993 .................. 48
Notes to Consolidated Financial Statements ............................ 50
</TABLE>
All schedules omitted for the reason that they are not required, are
not applicable or the required information is shown in the Consolidated
Financial Statements or notes thereto.
Page 43 of 79
<PAGE> 44
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Vineyard National Bancorp and Subsidiary
We have audited the accompanying consolidated balance sheets of Vineyard
National Bancorp and Subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income and changes in stockholders' equity
and statements of cash flows for each of the three years in the period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vineyard National
Bancorp and Subsidiary as of December 31, 1995 and 1994, the results of their
operations and changes in their stockholders' equity and their cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
Vavrinek, Trine, Day & Co.
Rancho Cucamonga, California
February 2, 1996
Page 44 of 79
<PAGE> 45
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Cash and due from banks (minimum Federal Reserve Balance
at December 31, 1995 was $1,388,000) $ 8,093,749 $ 8,510,019
Federal funds sold 1,925,000 --
------------- -------------
Total Cash and Cash Equivalents 10,018,749 8,510,019
------------- -------------
Interest-bearing deposits in other financial institutions 792,000 99,000
Investment Securities (Notes #1C and #2)
Available for sale 13,431,518 3,053,407
Held to maturity (approximate fair value $4,888,000) -- 4,989,313
Loans, net of unearned income (Notes #1D and #3) 77,482,539 83,495,890
Direct lease financing (Notes #1F and #4) 588,865 1,305,409
Less: Reserve for probable loan and lease
losses (Notes #1E and #6) (783,466) (1,014,433)
------------- -------------
77,287,938 83,786,866
Bank premises and equipment (Note #1G and #7) 3,703,294 3,916,924
Accrued interest 541,975 488,166
Cash surrender value of life insurance 741,834 547,601
Other real estate owned (Notes #1K, #22 and #23) 608,694 848,234
Other assets 433,131 1,177,702
------------- -------------
Total Assets $ 107,559,133 $ 107,417,232
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand deposits 25,691,559 26,310,472
Savings and NOW deposits 26,537,492 32,601,508
Money market deposits 16,295,843 18,745,732
Time deposits in denominations of $100,000 or more 8,932,511 7,364,006
Other time deposits 20,957,042 13,562,761
------------- -------------
98,414,447 98,584,479
Federal funds purchased -- 1,000,000
Accrued employee salary and benefits (Notes #14 and #15) 443,013 486,236
Accrued interest and other liabilities 948,959 486,373
------------- -------------
Total Liabilities 99,806,419 100,557,088
------------- -------------
STOCKHOLDERS' EQUITY
Contributed Capital
Common stock - authorized 15,000,000 shares, no par
value, issued and outstanding 1,862,643 shares in
1995 and 1994 (Note #10) 2,106,258 2,106,258
Additional paid in capital 3,306,684 3,306,684
Retained Earnings 2,327,885 1,494,874
Valuation allowance for investments 11,887 (47,672)
------------- -------------
Total Stockholders' Equity $ 7,752,714 $ 6,860,144
------------- -------------
Total Liabilities and Stockholders' Equity $ 107,559,133 $ 107,417,232
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 45 of 79
<PAGE> 46
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans (Note #1D) $ 7,470,066 $ 7,511,170 $ 8,411,963
Interest on Investment Securities (Note #1C)
Obligations of U.S. Government Agencies and Corporations 745,436 662,282 612,789
Obligations of State and Political Subdivisions 271 465 665
Interest on other securities 9,749 9,641 9,461
Interest on deposits 36,022 11,235 28,582
Interest on Federal funds sold 232,159 112,145 167,111
Direct lease financing income (Note #1F) 75,160 165,594 284,180
------------ ------------ ------------
Total Interest Income 8,568,863 8,472,532 9,514,751
------------ ------------ ------------
INTEREST EXPENSE
Interest on savings deposits 258,963 378,918 488,631
Interest on NOW and money market deposits 573,804 856,661 1,136,962
Interest on time deposits in denominations of $100,000 or more 334,410 212,361 239,772
Interest on other time deposits 1,225,710 457,673 598,999
Interest on Federal funds purchased and other interest 6,701 13,391 16,759
------------ ------------ ------------
Total Interest Expense 2,399,588 1,919,004 2,481,123
------------ ------------ ------------
Net Interest Income 6,169,275 6,553,528 7,033,628
PROVISION/CREDIT FOR LOAN AND LEASE LOSSES (Note #1E and #6) 429,000 (1,440,000) (300,000)
------------ ------------ ------------
Net Interest Income After Provision
for Loan and Lease Losses 6,598,275 5,113,528 6,733,628
------------ ------------ ------------
OTHER INCOME
Fees and service charges, gain on sale of loans
and loan servicing income (Note #12) 2,447,100 2,824,73 3,871,517
Sale of mortgage servicing rights (Note #19) 1,488,789 -- --
Sale of branch office (Note #25) 22,984 -- --
Net loss on sale of other real estate owned (39,463) (39,286) (4,142)
Net gain/(loss) on sale of investment securities (8,237) (29,051) 2,344
Other Income 10,944 13,285 23,610
------------ ------------ ------------
Total Other Income 3,922,117 2,769,679 3,893,329
------------ ------------ ------------
OTHER EXPENSES
Salaries and employee benefits 3,991,474 4,090,822 4,664,969
Occupancy expense of premises 1,253,892 1,209,886 1,177,941
Furniture and equipment expenses 646,499 683,351 794,315
Other expenses (Note #12) 3,210,468 3,807,737 3,492,309
------------ ------------ ------------
Total Other Expenses 9,102,333 9,791,796 10,129,534
------------ ------------ ------------
Income/(Loss) Before Income Taxes and Cumulative
Effect of Accounting Change 1,418,059 (1,908,589) (497,423)
Income Taxes (Notes #1J and #8) 584,254 (370,100) 144,800
------------ ------------ ------------
Income/(Loss) Before Cumulative Effect of Accounting Change 833,805 (1,538,489) 352,623
Cumulative Effect of Change in Accounting For Income Taxes
(Note #17) -- -- 107,000
------------ ------------ ------------
Net Income/(Loss) $ 833,805 $ (1,538,489) $ 459,623
============ ============ ============
Income/(Loss) Per Share
Earnings/(Loss) Per Share (Note #16)
Income/(Loss) Before Cumulative Effect $ 0.45 $ (0.83) $ 0.19
Cumulative Effect -- -- 0.06
------------ ------------ ------------
Net Income/(Loss) $ 0.45 $ (0.83) $ 0.25
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 46 of 79
<PAGE> 47
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Valuation
Number of Additional Allowance
Shares Common Paid-in Retained for
Outstanding Stock Capital Earnings Investments
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1993 1,552,425 $ 2,106,258 $ 3,306,684 $ 2,573,740 $ --
Net income for the year -- -- -- 459,623 --
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1993 1,552,425 2,106,258 3,306,684 3,033,363 --
Unrealized loss on invest-
ment securities available-
for-sale (net of tax) -- -- -- -- (47,672)
Net loss for the year -- -- -- (1,538,489) --
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1994 1,552,425 2,106,258 3,306,684 1,494,874 (47,672)
Change in unrealized
gain/(loss) on investment
securities available-for-
sale (net of tax) -- -- -- -- 59,559
Six-for-five stock split 310,218
Cash paid to shareholders
in lieu of fractional shares
on six-for-five stock split -- -- -- (794) --
Net income for the year -- -- -- 833,805 --
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1995 1,862,643 $ 2,106,258 $ 3,306,684 $ 2,327,885 $ 11,887
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 47 of 79
<PAGE> 48
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
DECREASE IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees received $ 7,543,620 $ 9,569,008 $ 10,079,171
Service fees and other income received 3,944,375 2,838,016 3,881,428
Financing revenue received under leases 75,160 165,594 284,180
Interest paid (2,027,170) (1,950,722) (2,583,173)
Cash paid to suppliers and employees (8,906,657) (9,377,571) (9,720,421)
Income taxes 311,393 134,338 25,513
------------ ------------ ------------
Net Cash Provided By Operating Activities 940,721 1,378,663 1,966,698
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales and maturities of investment
securities held to maturity 2,797,500 9,500,000 12,007,422
Proceeds from sales and maturities of investment
securities, available for sale 11,055,000 14,955,590 --
Purchase of investment securities held to maturity -- (2,975,156) (19,055,196)
Purchase of investment securities available for sale (18,948,067) (9,866,130) --
Proceeds from maturities of deposits in other
financial institutions 891,000 781,000 2,073,000
Increase in OREO (263,372) (53,025) (1,374,258)
Purchase of deposits in other financial institutions (1,584,000) (391,000) (1,672,000)
Recoveries on loans previously written off 894,920 265,128 578,555
Net (increase)/decrease in loans to customers 5,970,829 (4,039,130) 7,807,203
Net decrease in leases to customers 716,544 1,404,057 1,502,117
Capital expenditures (494,129) (224,977) (403,993)
Proceeds from sale of property, plant and equipment 39,161 1,141 247,687
Proceeds from sale of branch 200,000 -- --
Proceeds from sale of OREO 463,449 143,334 392,287
------------ ------------ ------------
Net Cash Provided By Investing Activities 1,738,835 9,500,832 2,102,824
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand deposits, NOW accounts,
savings accounts, and money market deposits (9,132,818) (13,562,350) (13,033,202)
Net increase/(decrease) in certificates of deposits 8,962,786 960,723 (3,495,762)
Net increase/(decrease) in federal funds purchased (1,000,000) 1,000,000 --
Cash paid in lieu of fractional shares (794) -- --
Decrease in mortgages payable -- -- (887,277)
------------ ------------ ------------
Net Cash Used In Financing Activities (1,170,826) (11,601,627) (17,416,241)
------------ ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 1,508,730 (722,132) (13,346,719)
CASH AND CASH EQUIVALENTS, Beginning of year 8,510,019 9,232,151 22,578,870
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, End of year $ 10,018,749 $ 8,510,019 $ 9,232,151
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 48 of 79
<PAGE> 49
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME/(LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Income/(Loss) $ 833,805 $(1,538,489) $ 459,623
----------- ----------- -----------
Adjustments to Reconcile Net Income/(Loss)
to Net Cash Provided by Operating Activities
Depreciation and amortization 249,933 482,375 608,859
Provision/(credit) for probable credit losses (429,000) 1,440,000 300,000
(Gain)/loss on sale of equipment (260) 1,330 (610)
Increase/(decrease) in taxes payable 895,647 (235,762) 63,313
Increase in other assets (157,491) (67,034) (59,662)
Increase/(decrease) in unearned loan fees (654,365) 1,083,350 686,379
(Increase)/decrease in interest receivable (53,809) 186,005 139,902
Increase/(decrease) in interest payable 372,418 (31,718) (102,050)
Decrease in accrued expense and
other liabilities (140,873) (9,731) (130,854)
Gain on sale of branch (22,984) -- --
(Gain)/loss on sale of investment securities 8,237 29,051 (2,344)
Loss on sale of OREO 39,463 39,286 4,142
----------- ----------- -----------
Total Adjustments 106,916 2,917,152 1,507,075
----------- ----------- -----------
Net Cash Provided by
Operating Activities $ 940,721 $ 1,378,663 $ 1,966,698
=========== =========== ===========
SUPPLEMENTARY INFORMATION
Change in valuation allowance for
investment securities $ 59,559 $ (47,672) $ --
=========== =========== ===========
Book value of investment securities transferred
from held-to-maturity to available-for-sale $ 2,197,960 $ -- $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 49 of 79
<PAGE> 50
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Vineyard National Bancorp (the Company)
and Subsidiary conform to generally accepted accounting principles and to
general practices within the banking industry. A summary of the Company's
significant accounting and reporting policies consistently applied in the
preparation of the accompanying financial statements follows:
A. Principles of Consolidation
The consolidated financial statements include the Company and its wholly
owned subsidiary, Vineyard National Bank. Intercompany balances and
transactions have been eliminated.
B. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent 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 those estimates.
Estimates that are particularly susceptible to significant change relate to
the determination of the allowance for losses on loans and the valuation of
real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses on
loans and foreclosed real estate, management obtains independent appraisals
for significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowances for losses on loans and foreclosed real estate.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination. Because of these factors, it is reasonably possible that
the allowances for losses on loans and foreclosed real estate may change.
C. Investment Securities
The Company adopted SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" on January 1, 1994, which addresses the
accounting for investments in equity securities that have readily
determinable fair values and for investments in all debt securities.
Securities are classified in three categories and accounted for as follows:
debt securities that the Company has the positive intent and ability to hold
to maturity are classified as held-to-maturity and are measured at amortized
cost; debt and equity securities bought and held principally for the purpose
of selling in the near term are classified as trading securities and are
measured at fair value, with unrealized gains and losses included in
earnings; debt and equity securities are deemed as either available-for-sale
and are measured at fair value, with unrealized gains and losses, reported
in a separate component of stockholders' equity. For 1993, investment
securities
Page 50 of 79
<PAGE> 51
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
C. Investment Securities, Continued
were stated at cost and adjusted for amortization of premiums and accretion
of discounts, which are recognized as adjustments to interest income. Gains
or losses on disposition were based on the net proceeds and adjusted
carrying amount of the securities sold.
D. Loans and Interest on Loans
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan fees and unearned discounts. Interest income is
accrued monthly as earned on all loans not discounted. The Bank recognizes
loan origination fees to the extent they represent reimbursement for initial
direct costs, as income at the time of loan boarding. The excess of fees
over costs, if any, is deferred and credited to income over the term of the
loan. Unearned discount on installment loans is recognized as income over
the term of the loans by the sum-of-the-month-digits method (Rule of 78's).
The Bank adopted SFAS No. 114, (as amended by SFAS No. 118), "Accounting by
Creditors for Impairment of a Loan" on January 1, 1995. The statement
generally requires those loans identified as "impaired" to be measured on
the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor
may measure impairment based on a loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent. A loan is
impaired when it is probable the creditor will not be able to collect all
contractual principal and interest payments due in accordance with the terms
of the loan agreement.
Loans are placed on non-accrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Any unpaid interest previously accrued on those loans is reversed from
income. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan principal
balance.
E. Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the nature
of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions. The allowance
is increased by a provision for loan losses, which is charged to expense and
reduced by charge-offs, net of recoveries.
Page 51 of 79
<PAGE> 52
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
F. Direct Lease Financing
The investment in lease contracts is recorded using the finance method of
accounting. Under the finance method, an asset is recorded in the amount of
the total lease payments receivable and estimated residual value, reduced by
unearned income. Income, represented by the excess of the total receivable
over the cost of the related asset, is recorded in income in decreasing
amounts over the term of the contract based upon the principal amount
outstanding. The financing lease portfolio consists of buses and relocatable
buildings, with terms from three to seven years.
G. Bank Premises, Equipment and Leasehold Improvements
The Company's furniture, equipment and leasehold improvements are stated at
cost less accumulated depreciation. Depreciation is computed on the
straight-line method. Rates of depreciation are based on the following
depreciable lives: furniture, two to fifteen years; leasehold improvements,
fifteen years; and equipment, five to twenty years. Total depreciation
expense for the reporting periods ending December 31, 1995, 1994 and 1993,
was approximately $492,000, $490,000 and $587,000, respectively.
H. Reclassifications
Certain reclassifications have been made to the 1993 and 1994 financial
statements to conform to 1995 classifications.
I. Consolidated Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and Federal funds sold. Generally, Federal
funds are purchased and sold for one-day periods.
J. Income Taxes
Provisions for income taxes are based on amounts reported in the statements
of income (after exclusion of non-taxable income such as interest on state
and municipal securities) and include deferred taxes on temporary
differences in the recognition of income and expense for tax and financial
statement purposes. Deferred taxes are computed on the liability method as
prescribed in SFAS No. 109, "Accounting for Income Taxes."
Page 52 of 79
<PAGE> 53
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
K. Other Real Estate Owned
Other real estate owned, which represents real estate acquired through
foreclosure, is stated at the lower of the carrying value of the loan or the
estimated fair value less estimated selling costs of the related real
estate. Loan balances in excess of the fair value of the real estate
acquired at the date of acquisition are charged against the allowance for
loan losses. Any subsequent declines in estimated fair value less selling
costs, operating expenses or income and gains or losses on disposition of
such properties are charged to current operations.
L. New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of." This Statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used for
long-lived assets and certain identifiable intangibles to be disposed of. An
impairment loss shall be measured as the amount by which the carrying amount
of the asset exceeds the fair value of the asset. After an impairment is
recognized, the reduced carrying amount of the asset shall be accounted for
as its new cost.
In May 1995, FASB issued Statement No. 122, "Accounting for Mortgage
Servicing Rights." SFAS No. 122 amends certain provisions of SFAS No. 65
"Accounting for Certain Mortgage Banking Activities" to eliminate the
accounting distinction between rights to service mortgage loans for others
that are acquired through loan origination activities and those acquired
through purchase transactions. When accounting for the cost of mortgage
servicing rights in accordance with SFAS No. 122, regardless of the origin
of those costs, the cost of acquisition includes the cost of the related
mortgage servicing rights. If the mortgage banking enterprise sells a
mortgage and a note and retains servicing rights, the total cost of the
mortgage loan should be allocated to the mortgage servicing rights and the
loan based upon the fair value of each. If the values are not practicably
determinable, the entire cost of the acquisition should be allocated to the
loan only.
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, "Accounting for Stock-based Compensation." This Statement
establishes a fair value based method of accounting for stock-based
compensation plans and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the
fair value based method, compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period,
which is usually the vesting period.
The Bank has not elected early adoption of any of the statements and has not
determined the potential impact of the statements on its financial
statements. The statements are effective for financial statements issued for
fiscal years beginning after December 15, 1995.
Page 53 of 79
<PAGE> 54
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #2 - INVESTMENT SECURITIES
At December 31, 1995 and 1994, the investment securities portfolio was comprised
of securities classified as available-for-sale and held-to-maturity, in
conjunction with the adoption of SFAS No. 115, resulting in investment
securities available-for-sale being carried at fair value and investment
securities held-to-maturity being carried at cost, adjusted for amortization of
premiums and accretions of discounts.
The amortized cost and fair values of investment securities available-for-sale
at December 31, 1995 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 6,003,641 $ 8,546 $ 6,012,187
Obligations of other
U.S. government agencies
and corporations 7,225,536 11,951 7,237,487
Other securities 181,844 181,844
-------------- ------------- ------------- ---------------
$ 13,411,021 $ 20,497 $ - $ 13,431,518
============== ============= ============= ===============
</TABLE>
The amortized cost and fair values of investment securities available-for-sale
at December 31, 1994 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,968,755 $ (54,692) $ 1,914,063
Obligations of other
U.S. government agencies
and corporations 1,000,000 (27,500) 972,500
Other securities 166,844 166,844
-------------- ------------- ------------ ---------------
$ 3,135,599 $ - $ (82,192) $ 3,053,407
============== ============= ============ ===============
</TABLE>
The amortized cost and fair values of investment securities held-to-maturity at
December 31, 1994 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,000,737 $ (10,737) $ 1,990,000
Obligations of other
U.S. government agencies
and corporations 2,983,558 (90,283) 2,893,275
Obligations of state and
political subdivisions 5,018 $ 12 5,030
-------------- ------------- ------------ ---------------
$ 4,989,313 $ 12 $ (101,020) $ 4,888,305
============== ============= ============ ===============
</TABLE>
Page 54 of 79
<PAGE> 55
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #2 - INVESTMENT SECURITIES, Continued
The amortized cost and fair values of investment securities available-for-sale
at December 31, 1995, by expected maturity are shown below. Expected maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities
Available-for-Sale
-----------------------------------
Amortized Fair
Cost Value
--------------- ---------------
<S> <C> <C>
Due in one year or less $ 11,018,774 $ 11,032,674
Due after one year but less than five years 2,210,403 2,217,000
--------------- ---------------
13,229,177 13,249,674
Other securities 181,844 181,844
--------------- ---------------
$ 13,411,021 $ 13,431,518
=============== ===============
</TABLE>
Proceeds from sales and maturities of investment securities available-for-sale
and held-to-maturity during 1995 were $11,055,000 and $2,797,500, respectively.
Gross losses on those sales and maturities were $8,237. Included in
shareholders' equity at December 31, 1995 is $11,887 of net unrealized losses
(net of $8,611 estimated tax benefit) on investment securities
available-for-sale.
Proceeds from sales and maturities of investment securities available-for-sale
and held-to-maturity during 1994 were $14,955,590 and $9,500,000, respectively.
Gross gains and losses on those sales and maturities were $3,816 and $32,867,
respectively. Included in shareholders' equity at December 31, 1994 is $47,672
of net unrealized losses (net of $34,520 estimated tax benefit) on investment
securities available-for-sale.
Securities with a carrying value of $3,802,906 and $4,295,804 and market value
of $3,802,906 and $4,205,045 at December 31, 1995 and 1994, respectively, were
pledged to secure public monies as required by law.
Page 56 of 79
<PAGE> 56
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #3 - LOANS
All the Company's loans, commitments, and commercial and standby letters of
credit have been granted to customers in the Company's market area, which
includes the counties of San Bernardino and Los Angeles. These loans are
collateralized in accordance with Company policy. The concentrations of credit
by type of loan are outlined as follows:
<TABLE>
<CAPTION>
1995 1994
--------------- ---------------
<S> <C> <C>
Commercial, financial and agricultural $ 9,256,985 $ 9,150,757
Real Estate - construction 680,085 1,483,921
Real Estate - mortgage
Commercial 22,299,858 18,426,302
Residential 6,580,811 8,464,082
Installment loans to individuals 41,723,335 49,657,401
All other loans (including overdrafts) 69,477 95,804
--------------- ---------------
80,610,551 87,278,267
Unearned income on installment loans (2,796,117) (3,538,061)
Deferred loan fees (331,895) (244,316)
--------------- ---------------
Loans, Net of Unearned Income $ 77,482,539 $ 83,495,890
=============== ===============
</TABLE>
Non-accruing loans totaled approximately $479,000 and $139,000 at December 31,
1995 and 1994, respectively. Interest income that would have been recognized on
non-accrual loans if they had performed in accordance with the terms of the
loans was approximately $42,000, $13,000 and $134,000 for the years ended
December 31, 1995, 1994 and 1993, respectively. This had the effect of reducing
earnings per share $.02, $.01 and $.07 for the years ended December 31, 1995,
1994 and 1993, respectively.
At December 31, 1995 and 1994, the Company had approximately $320,000 and
$701,000, respectively, in loans past due 90 days or more in interest or
principal and still accruing interest. These loans are well secured and in the
process of collection, or are secured by 1-4 single family residences.
At December 31, 1995, the Bank had loans amounting to approximately $564,000,
that were specifically classified as impaired. The average balance of these
loans amounted to approximately $567,000 for the year ended December 31, 1995.
The allowance for loan losses related to impaired loans amounted to
approximately $67,000 at December 31, 1995. The following is a summary of cash
receipts on these loans and how they were applied in 1995:
<TABLE>
<S> <C>
Cash receipts applied to reduce principal balance $ 8,853
Cash receipts recognized as interest income 24,931
----------
Total Cash Receipts $ 33,784
==========
</TABLE>
Page 56 of 79
<PAGE> 57
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #4 - DIRECT LEASE FINANCING
The Company leases buses and relocatable buildings to parties under agreements
which range generally from three to seven years. Executory costs are paid by the
lessee and leases do not include any contingent rental features. The net
investment in direct lease financing consists of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Lease payments receivable $ 649,774 $ 1,469,140
Unearned income (60,909) (163,731)
----------- -----------
Total Direct Lease Financing $ 588,865 $ 1,305,409
=========== ===========
</TABLE>
The Company had no outstanding commitments relating to municipal leases at
December 31, 1995 and 1994.
At December 31, 1995, future minimum lease payments receivable under direct
financing leases are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
- -------------------
<S> <C>
1996 $ 395,537
1997 168,491
1998 24,837
-----------
Total $ 588,865
===========
</TABLE>
NOTE #5 - LOANS TO DIRECTORS AND OFFICERS
In the ordinary course of business, the Company has granted loans to certain
directors and officers and the companies with which they are associated. All
such loans were made under the terms which are consistent with the Bank's normal
lending policies.
An analysis of the activity with respect to such aggregate loans to related
parties during 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Outstanding balance, Beginning of year $ 1,936,581 $ 1,539,592
Credit granted, including renewals 448,007 1,463,064
Repayments (928,704) (1,066,075)
-------------- --------------
Outstanding balance, End of year $ 1,455,884 $ 1,936,581
============== ==============
</TABLE>
Page 57 of 79
<PAGE> 58
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #5 - LOANS TO DIRECTORS AND OFFICERS, Continued
Not included in the balances outstanding at December 31, 1995 and 1994 were
undisbursed commitments to lend of approximately $119,000 and $122,000,
respectively. Included in the balances above were loans classified by the
Company's regulatory agency or by the Company for approximately $0 ($0
undisbursed) in 1995 and $431,000 ($89,000 undisbursed) in 1994. There were no
non-accruing loans to Directors and Officers in 1995 and 1994.
NOTE #6 - RESERVE FOR PROBABLE LOAN AND LEASE LOSSES
Transactions in the reserve for loan and lease losses are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, Beginning of year $ 1,014,433 $ 1,307,105 $ 1,868,295
Recoveries on loans previously charged off 894,920 265,128 578,555
Loans charged off (696,887) (1,997,800) (1,439,745)
Provision charged to operating expense (429,000) 1,440,000 300,000
-------------- -------------- --------------
Balance, End of year $ 783,466 $ 1,014,433 $ 1,307,105
============== ============== ==============
</TABLE>
NOTE #7 - PREMISES AND EQUIPMENT
Major classifications of Company premises and equipment are summarized as
follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Buildings $ 1,571,635 $ 1,365,572
Furniture and equipment 3,245,193 3,463,908
Leasehold improvements 1,191,835 1,297,533
----------- -----------
6,008,663 6,127,013
Less: Accumulated depreciation
and amortization (2,965,369) (2,870,089)
Land 660,000 660,000
----------- -----------
Total $ 3,703,294 $ 3,916,924
=========== ===========
</TABLE>
Page 58 of 79
<PAGE> 59
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #8 - INCOME TAXES
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Tax provision/(credit) applicable to
income before income taxes $ 584,254 $(370,100) $ 144,800
========= ========= =========
Federal Income Tax
Current -- -- (106,134)
Deferred 416,752 (372,500) 185,737
--------- --------- ---------
Total Federal Income Tax 416,752 (372,500) 79,603
--------- --------- ---------
State Franchise Tax
Current 2,400 2,400 1,600
Deferred 165,102 -- 63,597
--------- --------- ---------
Total State Franchise Tax 167,502 2,400 65,197
--------- --------- ---------
Total $ 584,254 $(370,100) $ 144,800
========= ========= =========
</TABLE>
Deferred tax expense/(credits) result from timing differences in the recognition
of revenues and expenses for tax and financial statement purposes. The sources
of these differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------- ------------------------ ----------------------------
Federal State Federal State Federal State
----------- --------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Tax Effect Of
Revenue and expenses
reported on a different
basis for tax purposes $ 253,602 $ 118,340 $(495,746) $ (18,559) $ (7,565)
Depreciation computed
differently on tax
returns than for
financial statements 2,740 (6,551) (1,670) (21,021) (2,444)
Deferred compensation
plan 14,550 4,836 (9,344) 25,533 8,341
Provision for loan loss
deduction in tax return
over or/(under) amount
charged for financial
statement purposes 145,860 48,477 134,260 199,784 65,265
--------- --------- --------- -- --------- ---------
Total $ 416,752 $ 165,102 $(372,500) -- $ 185,737 $ 63,597
========= ========= ========= == ========= =========
</TABLE>
Page 59 of 79
<PAGE> 60
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #8 - INCOME TAXES, Continued
As a result of the following items, the total income tax expense/(credit) for
1995, 1994 and 1993, was different than the amount computed by applying the
statutory U.S. Federal income tax rate to income before taxes:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------- ----------------------- -----------------------
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
--------- --------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Federal rate $ 482,140 34.0% $(330,477) (17.4)% $ 169,124 34.0%
Changes due to State
income tax, net of
Federal tax benefit 110,551 7.8 1,584 0.1 43,030 8.6
Exempt interest (21,800) (1.5) (54,200) (2.8) (92,702) (18.6)
Other 13,363 0.9 12,993 0.7 25,348 5.1
--------- ---- --------- ---- --------- ----
Total $ 584,254 41.2% $(370,100) (19.4)% 144,800 29.1%
========= ==== ========= ==== ========= ====
</TABLE>
As of December 31, 1995, the Company has incurred cumulative timing differences
which result in gross deferred tax assets and liabilities of $475,000 and
$190,000, respectively. Management has determined that a $475,000 valuation
allowance against gross deferred tax assets is appropriate which results in a
net deferred tax liability of $190,000. The net amount is included in the other
liabilities of the Company. The change in the valuation allowance was
attributable to likely non-realization of timing differences associated with the
net operating loss generated for income tax purposes.
NOTE #9 - COMMITMENTS AND CONTINGENCIES
The Company is obligated under leases for equipment and property. The original
terms of the leases range from two to thirty years. The following is a schedule
of future minimum lease payments based upon obligations at year-end.
<TABLE>
<CAPTION>
Year Ending
December 31,
- -----------------------
<S> <C>
1996 $ 592,383
1997 473,556
1998 37,066
1999 21,264
2000 8,860
-------------
Total $ 1,133,129
=============
</TABLE>
Total property and equipment expenditures charged to leases for the reporting
periods ended December 31, 1995, 1994 and 1993, were approximately $733,000,
$725,000 and $699,000, respectively.
Page 60 of 79
<PAGE> 61
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #9 - COMMITMENTS AND CONTINGENCIES, Continued
In the normal course of business, the Company is a party to financial
instruments with off-balance-sheet risk. These financial instruments include
commitments to extend credit and standby letters of credit. To varying degrees,
these instruments involve elements of credit and interest rate risk in excess of
the amount recognized in the statement of financial position. The Company's
exposure to credit loss in the event of non-performance by the other party to
the financial instruments for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those instruments. At
December 31, 1995, the Company had commitments to extend credit of approximately
$5,113,000 and obligations under standby letters of credit of approximately
$294,000.
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 many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, income-producing
commercial properties, residential properties and properties under construction.
Standby letters of credit are conditional commitments issued by the Company 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.
The Company is involved in various other litigation. In the opinion of
Management and the Company's legal council, the disposition of all such other
litigation pending will not have a material effect on the Company's financial
statements.
NOTE #10 - STOCK SPLIT
On August 23, 1995, the Bank's Board of Directors approved a six-for-five stock
split of its common stock. The outstanding shares and related calculations
included in these financial statements reflect retroactive adjustments for this
stock split.
NOTE #11 - STOCK OPTION PLAN
An incentive stock option plan was approved by the stockholders in 1987 covering
an aggregate of 126,000 shares (after giving retroactive effect for stock
splits) in which the remaining ungranted shares from the 1981 Incentive Stock
Option Plan (12,374 shares) were removed from the plan and added to the shares
of the 1987 Incentive Stock Option Plan (92,626 shares). The Plan provides that
options of the Company's unissued common stock may be granted to officers and
key employees at prices not less than the fair value of such shares at dates of
grant. Options granted expire on such date as the Stock Option Committee or
Board shall determine, but not later than the sixth anniversary of the date on
which the option is granted.
Page 61 of 79
<PAGE> 62
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #11 - STOCK OPTION PLAN, Continued
During 1994, the Board of Directors of Vineyard National Bancorp elected to
cancel all existing stock options and reissue new stock options at a price of
$3.50 per share ($2.92 per share after giving retroactive effect for the
six-for-five stock split.)
Transactions for the three years ended December 31, 1995 (after giving
retroactive effect for the six-for-five stock split), are summarized as
follows:
<TABLE>
<CAPTION>
Number of Shares
-------------------------------
Available
For
Granting Outstanding Price Per Share
----------- -------------- ------------------
<S> <C> <C> <C>
Balance, January 1, 1993 37,704 88,748 $5.63 to $6.25
Options canceled 19,980 (19,980) $6.25
Options granted (6,000) 6,000 $4.17
----------- -------------
Balance, December 31, 1993 51,684 74,768 $4.17 to $6.25
Options canceled 74,768 (74,768) $4.17 to $6.25
Options granted (80,048) 80,048 $2.92
----------- -------------
Balance, December 31, 1994 46,404 80,048 $2.92
Options canceled 9,632 (9,632) $2.92
Options granted (6,000) 6,000 $2.92
----------- -------------
Balance, December 31, 1995 50,036 76,416 $2.60 to $2.92
=========== =============
</TABLE>
Page 62 of 79
<PAGE> 63
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #12 - OTHER INCOME/EXPENSES
The following is a breakdown of other income and expenses for the years ended
December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Other Income
Fees and service charges $2,286,071 $2,283,054 $3,176,816
Gain on sale of loans 10,614 91,023 258,894
Loan servicing 150,415 450,654 435,807
---------- ---------- ----------
Total $2,447,100 $2,824,731 $3,871,517
========== ========== ==========
Other Expenses
Data Processing $ 826,520 $ 875,477 $ 881,730
Marketing expenses 326,605 414,098 373,192
Professional expenses 561,825 719,950 611,044
Office supplies, postage and telephone 431,034 463,665 458,213
Insurance and assessment expense 336,096 418,795 477,441
Loan related expense 359,095 582,902 296,400
Administrative expense 99,767 129,828 133,346
Other 269,526 203,022 260,943
---------- ---------- ----------
Total $3,210,468 $3,807,737 $3,492,309
========== ========== ==========
</TABLE>
NOTE #13 - RESTRICTION ON TRANSFERS OF FUNDS TO PARENT
There are legal limitations on the ability of the Bank to provide funds to the
Company. Dividends declared by the Bank may not exceed, in any calendar year,
without approval of the Comptroller of the Currency, net income for the year and
the retained net income for the preceding two years. Section 23A of the Federal
Reserve Act restricts the Bank from extending credit to the Company and other
affiliates amounting to more than 20 percent of its contributed capital and
retained earnings. At December 31, 1995, the combined amount of funds available
from these two sources amounted to approximately $1,531,000 or 19.8%.
NOTE #14 - DEFERRED COMPENSATION
During 1987, the Company established a non-qualified, unfunded deferred
compensation plan for certain key management personnel and non-employee
directors whereby they may defer compensation which will then provide for
certain payments upon retirement, death or disability. The plan provides for
payments for fifteen years commencing upon retirement, death or disability. The
plan provides for reduced benefits upon early retirement, disability or
termination of employment.
Page 63 of 79
<PAGE> 64
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #14 - DEFERRED COMPENSATION, Continued
Effective September 1, 1990 the Company adopted a new deferred compensation plan
with similar provisions of the 1987 plan except that the Company may make
matching contributions of 50% of officers' deferrals up to a maximum of 5% and
100% of senior officers' deferrals to a maximum of 10%. The Company's
contribution, in the aggregate, for all Participants shall not exceed 4% of
compensation of all Company employees. Each Participant contributes a minimum of
$1,000 annually to the plan. The deferred compensation expense was $138,833
($81,911 net of income taxes), $107,057 ($81,214 net of income taxes) and
$90,883 ($53,621 net of income taxes) for the years ended December 31, 1995,
1994 and 1993, respectively.
NOTE #15 - DEFINED CONTRIBUTION PLAN
Effective August 1, 1990, the Company established a qualified defined
contribution plan (401(k) Retirement Savings Plan) for all eligible employees.
Employees contribute from 1% to 12% of their compensation with a maximum of
$7,979 annually. The Company's contributions to the plan is based upon an amount
equal to 25% of each participant's eligible contribution for the plan year not
to exceed 2% of the employee's compensation. The Company's matching contribution
will become vested at 20% per year with full vesting after five years. The
expense was $36,070 ($21,281 net of income taxes) and $34,533 ($26,197 net of
income taxes) and $35,509 ($20,950 net of income taxes) for the years ended
December 31, 1995, 1994 and 1993, respectively.
NOTE #16 - INCOME/(LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
The calculation of the income/(loss) per common share was computed by dividing
net income/(loss) by the weighted average number of shares of common stock
outstanding during each period, retroactively adjusted for the six-for-five
stock split. Stock options granted and warrants issued do not have a dilutive
effect, and they have been excluded from the calculation of income/(loss) per
share.
The weighted average number of shares used to compute income/(loss) per common
share was 1,862,643 in 1995, 1994 and 1993.
NOTE #17 - CHANGE IN ACCOUNTING METHOD
During 1993, the Company changed its method of accounting for income taxes to
conform with the new requirements of SFAS No. 109. The effect of this change was
to increase net income for 1993 by $107,000 ($.06 per share after giving
retroactive effect for the six-for-five stock split). The cumulative effect of
the change of $107,000 ($.06 per share after giving retroactive effect for the
six-for-five stock split) is shown as a one-time credit to income in the 1993
income statement.
Page 64 of 79
<PAGE> 65
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #18 - CAPITAL ADEQUACY
The Company's and the Bank's primary regulators, the Federal Reserve Board and
Office of the Comptroller of the Currency, respectively, adopted risk-based
capital guidelines which require bank holding companies and banks to maintain
minimum total capital of 8% (of which 4% must consist of Tier 1 capital) of
risk-weighted assets. Further, the Federal Reserve Board and the Comptroller
generally require bank and bank holding companies to have a minimum leverage
ratio of at least 4% to be considered "adequately capitalized" for federal
regulatory purposes. As of December 31, 1995, the Company had a ratio of total
capital to risk-weighted assets of 10.20%, a ratio of Tier 1 capital to total
risk-weighted assets of 9.26% and a leverage capital ratio of 7.24%. This
compares to comparable ratios of 8.80%, 7.67% and 6.29%, respectively, in 1994.
The Company's management believes that, under current regulations, the Bank will
continue to meet these minimum capital requirements in the foreseeable future.
NOTE #19 - MORTGAGE LOAN SERVICING OPERATIONS
The Company originated long term first and second trust deed mortgages for
resale on the Secondary Market to Federal Home Loan Mortgage Corporation (FHLMC)
and Federal National Mortgage Association (FNMA). The gains or losses on the
sales of these loans were generally recognized at the time of sale. The Company
retained servicing rights to these loans. Servicing arrangements provided for
the Company to maintain all records related to the servicing agreement, to
assume responsibility for billing mortgagors, to collect periodic mortgage
payments, and to perform various other activities necessary to the mortgage
servicing function. The Company received as compensation a servicing fee on the
principal balance of the outstanding loans. Servicing fee income amounted to
approximately $150,000, $436,000 and $333,000 in 1995, 1994, and 1993,
respectively. During 1995, the Company sold the servicing rights on loans
totaling approximately $161 million. The mortgage servicing rights were sold
without recourse. The Bank received approximately $1,489,000 from the sale.
NOTE #20 - CAPITAL CONTRIBUTION
During 1993, the Company contributed $300,000 to its wholly owned subsidiary,
Vineyard National Bank, in the form of a capital contribution. This intercompany
transaction was eliminated in the consolidated financial statements.
Page 65 of 79
<PAGE> 66
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #21 - REGULATORY MATTERS
As a result of an examination by the Office of the Comptroller of the Currency
(OCC) as of August 31, 1992, the Comptroller of the Currency entered into a
Formal Agreement with the Company dated February 25, 1993. The Agreement
required the Bank, among other things: (a) to achieve as of May 31, 1993 and
maintain thereafter Tier 1 capital of at least 8% of risk-weighted assets and
5.5% of adjusted total assets, (b) to take immediate action to protect the
Bank's interest in criticized assets (c) to declare or pay no cash dividends
without prior approval of the OCC, and (d) to alter, amend, develop and
establish various polices and procedures designed to improve the condition of
the Company. On December 2, 1994, the OCC terminated the Formal Agreement.
NOTE #22 - OTHER REAL ESTATE OWNED
As discussed in Note #1K, Other Real Estate Owned is carried at the estimated
fair value of the real estate. An analysis of the transactions for December 31,
were as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Balance, Beginning of year $ 848,234 $ 977,829
Additions 284,000 240,954
Sales (578,670) (227,786)
Valuation adjustments and other 55,130 (142,763)
--------- ---------
Balance, End of year $ 608,694 $ 848,234
========= =========
</TABLE>
The balances at December 31, 1995 and 1994 are shown net of reserves.
NOTE #23 - RESERVE FOR POSSIBLE LOSSES ON OTHER REAL ESTATE OWNED
Transactions in the reserve for other real estate owned are summarized for 1995,
1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance, Beginning of year $ 93,263 1,300 $ --
Provision changed to other expense 49,740 137,129 1,300
Charge-offs and other reductions (104,870) (45,166)
--------- --------- ---------
Balance, End of year $ 38,133 $ 93,263 $ 1,300
========= ========= =========
</TABLE>
Page 66 of 79
<PAGE> 67
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #24 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
The following table presents the carrying amounts and fair values of financial
instruments at December 31, 1995. FASB Statement 107, "Disclosures about Fair
Value of Financial Instruments," defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
<TABLE>
<CAPTION>
Carrying
Amount Fair Value
----------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents $10,018,749 $10,018,749
Interest bearing deposits 792,000 792,000
Investment securities 13,431,518 13,431,518
Loans receivable 80,415,950 79,717,685
Accrued interest receivable 541,975 541,975
Liabilities
Non-interest bearing deposits 25,691,559 25,691,559
Interest bearing deposits 72,722,888 72,829,888
Accrued interest payable 640,883 640,883
</TABLE>
<TABLE>
<CAPTION>
Notional Cost to Cede
Amount or Assume
-------------- ------------
<S> <C> <C>
Off-balance sheet instruments
Commitments to extend credit and standby letters of credit $ 5,406,803 $ 54,068
</TABLE>
The following methods and assumptions were used by the Bank in estimating fair
value disclosures:
- - Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets' fair values due to the short-term
nature of the assets.
Page 67 of 79
<PAGE> 68
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #24 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
- - Interest Bearing Deposits
Fair values for time deposits are estimated using a discounted cash flow
analysis that applies interest rates currently being offered on certificates
to a schedule of aggregated contractual maturities on such time deposits.
- - Investment Securities
Fair values are based upon quoted market prices, where available.
- - Loans
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values for other loans (for example, fixed rate commercial real estate and
rental property mortgage loans and commercial and industrial loans) are
estimated using discounted cash flow analysis, based on interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Loan fair value estimates include judgments regarding future
expected loss experience and risk characteristics. The carrying amount of
accrued interest receivable approximates its fair value.
- - Deposits
The fair values disclosed for demand deposits (for example, interest-bearing
checking accounts and passbook accounts) are, by definition, equal to the
amount payable on demand at the reporting date (that is, their carrying
amounts). The fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities
on such time deposits. The carrying amount of accrued interest payable
approximates fair value.
- - Off-balance Sheet Instruments
Fair values of loan commitments and financial guarantees are based upon fees
currently charged to enter similar agreements, taking into account the
remaining terms of the agreement and the counterparties' credit standing.
NOTE #25 - SALE OF BRANCH OFFICE
During 1995, the Company sold certain assets and liabilities of its Victorville
branch. Total assets sold were approximately $1,275,000 and total liabilities
assumed by the buyer were approximately $4,104,000. The transaction resulted in
a gain of approximately $23,000, which has been included in other income in
1995. The Bank is no longer operating the branch in Victorville.
Page 68 of 79
<PAGE> 69
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #26 - CONDENSED FINANCIAL INFORMATION OF VINEYARD NATIONAL BANCORP (PARENT
COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Cash in Vineyard National Bank $ 7,177 $ 7,805
Prepaid expenses 670 517
Investment in subsidiary 7,746,154 6,852,956
---------- ----------
Total Assets $7,754,001 $6,861,278
========== ==========
LIABILITIES
Due to shareholders in lieu of
fractional shares on stock splits 1,287 1,134
---------- ----------
STOCKHOLDERS' EQUITY
Common stock 2,106,258 2,106,258
Additional paid in capital 3,306,684 3,306,684
Retained earnings 2,339,772 1,447,202
---------- ----------
Total Stockholders' Equity 7,752,714 6,860,144
---------- ----------
Total Liabilities and
Stockholders' Equity $7,754,001 $6,861,278
========== ==========
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
INCOME
Equity in income/(loss) of subsidiary $ 833,639 $(1,538,664) $ 495,415
Interest 966 975 5,050
----------- ----------- -----------
834,605 (1,537,689) 500,465
----------- ----------- -----------
EXPENSE
Other -- -- 40,042
----------- ----------- -----------
-- -- 40,042
----------- ----------- -----------
Operating Income/(Loss) 834,605 (1,537,689) 460,423
INCOME TAXES 800 800 800
----------- ----------- -----------
Net Income/(Loss) $ 833,805 $(1,538,489) $ 459,623
=========== =========== ===========
INCOME/(LOSS) PER COMMON SHARE $ 0.45 $ (0.83) $ 0.25
=========== =========== ===========
</TABLE>
Page 69 of 79
<PAGE> 70
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
NOTE #26 - CONDENSED FINANCIAL INFORMATION OF VINEYARD NATIONAL BANCORP (PARENT
COMPANY), CONTINUED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
INCREASE IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 966 $ 975 $ 5,050
Cash paid for operating expenses -- -- (35,902)
Income taxes paid (800) (800) (800)
----------- ----------- -----------
Net Cash/(Used) Provided by
Operating Activities 166 175 (31,652)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contribution to Vineyard National Bank -- -- (300,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash paid for fractional shares (794) -- --
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (628) 175 (331,652)
CASH, Beginning of year 7,805 7,630 339,282
----------- ----------- -----------
CASH, End of year $ 7,177 $ 7,805 $ 7,630
=========== =========== ===========
RECONCILIATION OF NET INCOME/(LOSS) TO NET CASH
PROVIDED/(USED) BY OPERATING ACTIVITIES
Net Income/(Loss) 833,805 (1,538,489) 459,623
----------- ----------- -----------
Adjustments to Reconcile Net Income/(Loss)
to Net Cash/(Used) Provided by Operating
Activities
(Increase)/decrease in other assets (153) 18 4,172
Undistributed (earnings)/loss of subsidiary (833,639) 1,538,664 (495,415)
Increase/(decrease) in other liabilities 153 (18) (32)
----------- ----------- -----------
Net Cash (Used)/Provided by
Operating Activities $ 166 $ 175 $ (31,652)
=========== =========== ===========
</TABLE>
Page 70 of 79
<PAGE> 71
SECURITY ACTIVITY
MARKET PRICE OF AND DIVIDENDS ON REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Bancorp's common stock is not listed on any exchange nor is it listed with
NASDAQ, however, it is listed on the "Pink Sheets" as published by the National
Quotation Bureau. There is a relatively limited trading market in the Bancorp
stock and Management of the Bancorp remains aware of current market trends in
the Bancorp stock. At year end, December 1995, there were 742 shareholders of
record. There have been no cash dividends in the past and the Management of the
Bancorp has no immediate plans to pay cash dividends in the future.
On or about December 16, 1988, the Bank converted to Vineyard National Bancorp,
a California bank holding company. Shares of stock in Vineyard National Bank
were then available for exchange into Bancorp stock at the rate of four shares
of Bank stock for five shares of new Bancorp stock. The date of records of
ownership for purposes of the conversion is the same date of December 16, 1988.
The following table covers the last three fiscal years of the Bancorp and
summarizes the trades in the Bancorp stock by quarters and is based upon the
transactions of which the Management is aware and sets forth high and low prices
as well as volume. Management may not be aware of all prices in some trades nor
may Management be aware of all trades. There is one security dealer who
currently makes a market in the Bancorp stock and that dealer is Sutro & Company
located at 41945 Big Bear Boulevard, Suite 228, Big Bear Lake, California 92315.
The prices shown on the table are for each share of no par value common stock of
Vineyard National Bancorp.
<TABLE>
<CAPTION>
Three Year Summary
- ----------------------------------------------------------------------------------------
Sales Price of the Bancorp's Common Stock (1)
Quarter Approximate Stock
Ended Low High Volume Dividend
- ----------------------- --------- -------- ----------------- ---------
<S> <C> <C> <C> <C>
March 1993 $ 4.25 $ 5.00 3,148 -0-
June 1993 $ 3.75 $ 4.50 2,098 -0-
September 1993 $ 3.50 $ 4.25 6,007 -0-
December 1993 $ 3.25 $ 4.00 34,525 -0-
March 1994 $ 2.75 $ 3.25 2,609 -0-
June 1994 $ 2.00 $ 2.75 6,288 -0-
September 1994 $ 2.00 $ 2.75 41,000 -0-
December 1994 $ 2.75 $ 3.00 47,569 -0-
March 1995 $ 3.00 $ 3.50 50,790 -0-
June 1995 $ 3.50 $ 3.88 61,606 -0-
September 1995 $ 3.00 $ 3.88 3,773 -0-
December 1995 $ 3.00 $ 3.50 67,197 -0-
</TABLE>
- --------------------------
(1) As estimated by management of the Bancorp based upon trades of which
management is aware. Management may not be aware of all prices in some
trades listed within the approximate volume column.
Page 71 of 79
<PAGE> 72
The selected quarterly data for 1995 is based on the unaudited
financial statements of the Company as presented by management.
<TABLE>
<CAPTION>
Quarter Ended 1995
-----------------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Interest Income $ 1,603,894 $ 1,495,232 $ 1,549,014 $ 1,521,135
Provision for Loan and Lease Losses -- -- 300,000 129,000
Other Income 677,415 1,994,645 632,289 617,768
Other Expenses (2,270,509) (2,409,878) (2,277,470) (2,144,476)
------------- ------------- ------------- -------------
Income/(Loss) Before Taxes 10,800 1,079,999 203,833 123,427
Income Taxes (1,600) (445,400) 43,746 (181,000)
------------- ------------- ------------- -------------
Net Income/(Loss) $ 9,200 $ 634,599 $ 247,579 $ (57,573)
============= ============= ============= =============
Earnings/(Loss) Per Share
of Common Stock (1)
Net Income/(Loss) $ 0.49 $ 0.34 $ 0.13 $ (0.03)
============= ============= ============= =============
Number of Shares Used in
Per Share Calculation (1) 1,862,643 1,862,643 1,862,643 1,862,643
Stock Splits -- -- 6 for 5 --
BALANCE SHEET DATA
Assets $ 109,607,887 $ 112,914,128 $ 113,817,164 $ 107,559,133
============= ============= ============= =============
Deposits $ 102,022,637 $ 104,587,762 $ 105,095,300 $ 98,414,447
============= ============= ============= =============
Loans and Leases/(Net) $ 77,770,173 $ 76,052,523 $ 79,204,435 $ 77,287,938
============= ============= ============= =============
Stockholders' Equity $ 6,885,581 $ 7,531,617 $ 7,783,165 $ 7,752,714
============= ============= ============= =============
</TABLE>
- ----------------------------------
(1) Retroactively adjusted for stock splits.
Page 72 of 79
<PAGE> 73
SELECTED QUARTERLY FINANCIAL DATA
The selected quarterly data for 1994 is based on the unaudited
financial statements of the Company as presented by management.
<TABLE>
<CAPTION>
Quarter Ended 1994
----------------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Interest Income $ 1,565,600 $ 1,595,126 $ 1,694,721 $ 1,698,081
Provision for Loan and Lease Losses 1,340,000 -- -- 100,000
Other Income 822,687 711,523 677,595 597,160
Other Expenses 2,514,100 2,410,325 2,310,710 2,595,947
------------- ------------- ------------- -------------
Income/(Loss) Before Taxes (1,465,813) (103,676) 61,606 (400,706)
Income Taxes 614,800 (18,700) (26,000) (200,000)
------------- ------------- ------------- -------------
Net Income/(Loss) $ (851,013) $ (122,376) $ 35,606 $ (600,706)
============= ============= ============= =============
Earnings/(Loss) Per Share
of Common Stock (1)
Net Income/(Loss) $ (0.46) $ (0.07) $ 0.02 $ (0.32)
============= ============= ============= =============
Number of Shares Used in
Per Share Calculation (1) 1,862,643 1,862,643 1,862,643 1,862,643
BALANCE SHEET DATA
Assets $ 115,967,805 $ 113,553,908 $ 111,643,852 $ 107,417,232
============= ============= ============= =============
Deposits $ 107,647,102 $ 105,359,814 $ 103,298,323 $ 98,584,479
============= ============= ============= =============
Loans and Leases/(Net) $ 77,544,830 $ 78,548,401 $ 84,011,816 $ 83,786,866
============= ============= ============= =============
Stockholders' Equity $ 7,579,865 $ 7,452,577 $ 7,490,453 $ 6,860,144
============= ============= ============= =============
</TABLE>
- --------------------------------
(1) Retroactively adjusted for stock splits.
Page 73 of 79
<PAGE> 74
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for information regarding the Registrant's executive officers
which is included in Part I of this Report, the information called for by Item
10 is incorporated herein by reference from the Company's definitive proxy
statement to be filed with the Commission on or before April 30, 1996 for the
Company's 1996 annual shareholders' meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before April 30, 1996 for the Company's 1996 annual shareholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before April 30, 1996 for the Company's 1996 annual shareholders' meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
from the Company's definitive proxy statement to be filed with the Commission on
or before April 30, 1996 for the Company's 1996 annual shareholders' meeting.
Page 74 of 79
<PAGE> 75
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
a) The following documents are filed as part of this Form 10-K:
1) Financial Statements:
See Index to Financial Statements in Item 8 on Page 43 of
this Report.
2) All schedules are omitted as the information is not
required, is not material or is otherwise furnished.
3) Exhibits:
See Index to Exhibits on Page 78 of this Form 10-K.
Included among the Exhibits filed as part of this Report on
Form 10-K are the following Executive Compensation Plans
and arrangements:
A) Incentive Stock Option Plan for Vineyard National Bank,
1981. Exhibit 10.1
B) Incentive Stock Option Plan for Vineyard National Bank,
1987. Exhibit 10.2
C) Joinder Agreement for Employee to Participate in Vineyard
National Bancorp 1987 Incentive Stock Option Plan.
Exhibit 10.3
D) Vineyard National Bank Deferred Compensation Plan.
Exhibit 10.4
E) Employment Agreement between Vineyard National Bank and
Steven R. Sensenbach. Exhibit 10.5
F) 1988 Extension Agreement for Employment Agreement between
Vineyard National Bank and Steven R. Sensenbach.
Exhibit 10.6
b) Reports on Form 8-K:
None.
c) Exhibits:
See Index to Exhibits on Page 79 of this Form 10-K.
Page 75 of 79
<PAGE> 76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf of the undersigned, thereunto duly authorized, on the 28th day of
March 1996.
VINEYARD NATIONAL BANCORP
(Registrant)
By /s/ STEVEN R. SENSENBACH
-------------------------------------
Steven R. Sensenbach,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 28, 1996.
<TABLE>
<S> <C>
President, Chief Executive Officer (Principal
/s/ STEVEN R. SENSENBACH Executive Officer) and Director
- ----------------------------------------------------
Executive Vice President, Chief Financial
Officer, (Principal Financial and Accounting
/s/ SOULE CLAUDE Officer)
- ----------------------------------------------------
/s/ LESTER STROH, M.D. Chairman of the Board of Directors
- ----------------------------------------------------
/s/ FRANK S. ALVAREZ Director
- ----------------------------------------------------
/s/ ROLAND O. NORIEGA Director
- ----------------------------------------------------
/s/ JOEL H. RAVITZ Director
- ----------------------------------------------------
/s/ JODIE SMITH Director
- ----------------------------------------------------
/s/ RENNY V. THOMAS Director
- ----------------------------------------------------
</TABLE>
Page 76 of 79
<PAGE> 77
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Vineyard National Bancorp:
We consent to the incorporation of our Report dated February 2, 1996,
on the consolidated financial statements of Vineyard National Bancorp as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995, included in its Annual Report on Form 10-K for the year ended
December 31, 1995.
VAVRINEK, TRINE, DAY & CO.
Certified Public Accountants
Rancho Cucamonga, California
Page 77 of 79
<PAGE> 78
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Description Numbered Page
- ---------- ------------------------------------------------------------------------ -------------------
<S> <C> <C>
3.1 Registrant's Articles of Incorporation (R-1)
3.2 Registrant's Bylaws (R-1)
3.3 Plan of Reorganization and Agreement of Merger (R-1)
4.0 Specimen Common Stock Certificate of Registrant (R-1)
10.1 Incentive Stock Option Plan for Vineyard National Bank 1981 (R-1)
10.2 Incentive Stock Option Plan for Vineyard National Bank 1987 (R-1)
10.3 Joinder Agreement for Employee to Participate in Vineyard National
Bancorp 1987 Incentive Stock Option Plan (R-1)
10.4 Vineyard National Bank Deferred Compensation Plan (R-1)
10.5 Employment Agreement Between Vineyard National Bank and
Steven R. Sensenbach (R-1)
10.6 1988 Extension Agreement for Employment Agreement Between
Vineyard National Bank and Steven R. Sensenbach (R-1)
10.7 Lease Agreement Between Vineyard National Bank and Landlord
Regarding Rancho Cucamonga Office 1987 (R-1)
10.8 Lease Agreement Between Vineyard National Bank and Landlord
Regarding Chino Office 1988 (R-1)
10.9 Lease Agreement Between Vineyard National Bank and Landlord
Regarding Diamond Bar Office 1987 (R-1)
10.10 Addendum to Lease Agreement Ref 10.9 (R-1)
10.11 Addendum to Lease Agreements Refs 10.9 and 10.10 (R-1)
10.12 Lease Agreement Regarding Lake Arrowhead Office 1988 (R-1)
10.13 Estoppel Certificate to Lease Agreement Ref 10.12 Between
Vineyard National Bank and Landlord 1988 (R-1)
10.14 Lease Agreement Between Vineyard National Bank and Landlord
Regarding Additional Rancho Cucamonga Office Space 1988 (R-1)
10.15 Buy/Sell Agreement Between Vineyard National Bank and Wells
Fargo 1984 (R-1)
10.16 Buy/Sell Agreement Between Vineyard National Bank and
Arrowhead Pacific Savings Bank 1988 (R-1)
10.17 Change in Terms and Conditions Between Vineyard National Bank
and Landlord Regarding Rancho Cucamonga Office 1989 (R-1)
10.18 Lease Agreement Between Vineyard National Bank and Landlord
Regarding Victorville Office 1989 (R-1)
10.19 Lease Agreement Between Vineyard National Bank and Landlord
Regarding Additional Victorville Office Space 1989 (R-2)
21 Subsidiaries of the Registrant (R-2)
23 Consent of Vavrinek, Trine, Day & Company (R-2)
27 Data Schedule
</TABLE>
- ------------------------------------
(R-1) Incorporated by reference to the same numbered exhibit to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1988.
(R-2) Incorporated by reference to the same numbered exhibit to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1989.
Page 78 of 79
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1995 FINANCIAL STATEMENTS OF VINEYARD NATIONAL BANCORP AND SUBSIDIARY AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,093,749
<INT-BEARING-DEPOSITS> 792,000
<FED-FUNDS-SOLD> 1,925,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,431,518
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 78,071,404
<ALLOWANCE> 783,466
<TOTAL-ASSETS> 107,559,133
<DEPOSITS> 98,414,447
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,391,972
<LONG-TERM> 0
0
0
<COMMON> 2,106,258
<OTHER-SE> 5,646,456
<TOTAL-LIABILITIES-AND-EQUITY> 107,559,133
<INTEREST-LOAN> 7,545,226
<INTEREST-INVEST> 755,456
<INTEREST-OTHER> 268,181
<INTEREST-TOTAL> 8,568,863
<INTEREST-DEPOSIT> 2,392,887
<INTEREST-EXPENSE> 2,399,588
<INTEREST-INCOME-NET> 6,169,275
<LOAN-LOSSES> (429,000)
<SECURITIES-GAINS> (8,237)
<EXPENSE-OTHER> 9,102,333
<INCOME-PRETAX> 1,418,059
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 833,805
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.00
<YIELD-ACTUAL> 0.6
<LOANS-NON> 478,767
<LOANS-PAST> 320,248
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,446,752
<ALLOWANCE-OPEN> 1,014,433
<CHARGE-OFFS> 696,887
<RECOVERIES> 894,920
<ALLOWANCE-CLOSE> 783,466
<ALLOWANCE-DOMESTIC> 533,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 120,000
</TABLE>
