<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, 1996
Commission File No. 0-20862
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 December 31, 1996, the aggregate market value of the voting
shares held by non-affiliates of the registrant was approximately $5,473,000.
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, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders, which will be filed on or before April 30, 1997, are
incorporated by reference in Part III of this Form 10-K.
<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.
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, 1996, the Company had total consolidated assets of
approximately $120 million, total consolidated net loans of approximately $97
million, total consolidated deposits of approximately $107 million and total
stockholders' equity of approximately $7.9 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 Blue Jay,
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,
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 but one of its banking offices, and the Bank
has 24-hour Automated Teller Machines ("ATM's") at all five of its banking
offices.
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<PAGE> 3
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, 1996, the Bank had approximately 5,665 demand deposit accounts representing
aggregate deposits of approximately $25,946,000 with an average account balance
of $4,580, approximately 2,279 accounts representing approximately $28,614,000
in "NOW", super "NOW" and money market checking accounts with an average
account balance of $9,799, approximately 3,199 accounts representing
approximately $9,475,000 in savings deposits with an average account balance of
$2,962 and approximately 2,416 accounts representing approximately $42,568,000
in time deposits ("TCD's") with an average account balance of $17,619. Of the
total deposits at December 31, 1996, $9,426,000 were in the form of TCD's in
denominations greater than $100,000 and $2,764,000 were municipal and other
governmental deposits, both time and demand.
During the 12 months ended December 31, 1996, average demand deposits
decreased by approximately $340,000 or 1%, and "NOW", super "NOW" and money
market checking accounts decreased by approximately $3,223,000 or 9%. Average
savings deposits decreased by approximately $1,748,000 or 15%, while average
time deposits increased by approximately $10,347,000 or 37%, including an
increase of $367,000 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,
1996, no individual, corporate or public depositor accounted for more than
approximately 2% of the Bank's total deposits, and the five largest deposit
accounts collectively represented 6% of total deposits.
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<PAGE> 4
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. 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,
--------------------------------------
1996 1995
Average Percent Average Percent
Assets Balance of Total Balance of Total
------- -------- ------- --------
<S> <C> <C> <C> <C>
Investment Securities
Taxable $11,220 9.7 $13,015 11.9
Non-taxable 0.0 3 0.0
Federal funds sold 3,467 3.0 4,156 3.8
Due from banks-time deposits 669 0.6 568 0.5
Loans 85,216 73.4 78,097 71.3
Direct lease financing 394 0.3 928 0.8
Reserve for loan and lease losses (715) (0.6) (967) (0.8)
-------- ----- -------- -----
Net Loans and Leases 84,895 73.1 78,058 71.3
-------- ----- -------- -----
Total Interest Earning Assets 100,251 86.4 95,800 87.5
Cash and non-interest earning deposits 6,865 5.9 7,148 6.5
Net premises, furniture and equipment 5,675 4.9 3,832 3.5
Other assets 3,263 2.8 2,703 2.5
-------- ----- -------- -----
Total Assets $116,054 100.0 $109,483 100.0
======== ===== ======== =====
Liabilities and Stockholders' Equity
Savings deposits(1) 41,877 36.1 46,848 42.8
Time deposits 38,550 33.2 28,203 25.8
Short-term borrowings 38 0.0 6 0.0
-------- ----- -------- -----
Total Interest-bearing Liabilities 80,465 69.3 75,057 68.6
Demand deposits 26,422 22.8 26,082 23.8
Other liabilities 1,472 1.3 1,065 1.0
-------- ----- -------- -----
Total Liabilities 108,359 93.4 102,204 93.4
Stockholders' Equity 7,695 6.6 7,279 6.6
-------- ----- -------- -----
Total Liabilities and Stockholders'
Equity $116,054 100.0 $109,483 100.0
======== ===== ======== =====
</TABLE>
(1) Includes Savings, NOW, Super NOW and Money Market Accounts.
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.")
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<PAGE> 5
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) 1996 1995
------------------------ ------------------------
Average Average Average Average
Earning Assets Balance Interest Yield Balance Interest Yield
- -------------- ------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Investment Securities
U.S. Treasury(3) $6,430 370 5.8% $4,138 233 5.6%
U.S. Government agencies(3) 4,408 249 5.6% 8,661 512 5.9%
Municipal agencies(1) 3 1 15.8%
Other securities 376 10 2.7% 174 10 5.7%
-------- ------ ------- ------
Total Investment Securities 11,214 629 5.6% 12,976 756 5.8%
Federal funds sold 3,467 179 5.2% 4,156 232 5.6%
Due from banks - time deposits 669 35 5.2% 568 36 6.3%
Loans(2) 85,216 8,137 9.5% 78,097 7,470 9.6%
Lease financing(1) 394 39 9.9% 928 128 13.8%
-------- ------ ------- ------
Total Interest Earning Assets(1) $100,960 $9,019 8.9% $96,725 $8,622 8.9%
======== ====== ======= ======
Interest Bearing Liabilities
Domestic Deposits and Borrowed Funds
Savings deposits(4) 41,877 751 1.8% 46,848 839 1.8%
Time deposits 38,550 2,108 5.5% 28,203 1,560 5.5%
Short-term borrowings 38 2 5.3% 6 1 12.2%
-------- ------ ------- ------
Total Interest Bearing Liabilities $80,465 $2,861 3.6% $75,057 $2,400 3.2%
======== ====== ======= ======
</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) 1996 1995
------- -------
<S> <C> <C>
Total interest income(1)(2) $9,019 $8,622
Total interest expense(5) 2,861 2,400
Total interest earnings(1)(2) 6,158 6,222
Total average earning assets 100,245 95,758
Net yield on average earning assets(1)(2) 6.1% 6.5%
Net yield on average earning assets (excluding loan fees)(1)(2) 5.6% 6.1%
</TABLE>
(1) Interest income includes the effects of tax equivalent adjustments on tax
exempt securities and leases using tax rates which approximate 21.0 percent for
1996 and 41.2 percent for 1995.
(2) Loans, net of unearned income, include non-accrual loans but do not reflect
average reserves for probable loan losses of $715,000 in 1996 and $967,000 in
1995. Loan fees of $523,000 in 1996 and $420,000 in 1995, are included in loan
interest income. There were five non-accruing loans totaling approximately
$434,000 at December 31, 1996 and $479,000 at December 31, 1995.
(3) The yield for securities that are classified as available-for-sale is based
on historical amortized cost balances.
(4) Savings deposits includes savings, NOW, Super NOW and Money Market deposit
accounts.
(5) Includes Savings, NOW, Super NOW and Money Market Deposit Accounts, Time
Deposits and Federal Funds Purchased.
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<PAGE> 6
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
--------------------- Federal Direct
Non- Funds Lease Time
Taxable Taxable(1) Sold Loans(2) Financing(1) Deposits Total
--------- ---------- ------- -------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Earned On:
1996 compared to 1995
Increase/(decrease) due to:
Volume changes ($101) ($36) $741 ($60) $78 $622
Rate changes (26) (17) (74) (29) (79) (225)
----- --- ---- ---- ----- --- ----
Net Increase/(Decrease) ($127) $0 ($53) $667 ($89) ($1) $397
===== === ==== ==== ===== === ====
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 $0 $120 ($41) ($78) $25 $109
===== === ==== ==== ===== === ====
</TABLE>
(1) Interest income includes the effects of tax equivalent adjustments on tax
exempt securities using tax rates which approximate 21.0 percent for 1996 and
41.2 percent for 1995.
(2) Includes an increase in loan fees of $403,000 in 1996 and a decrease of
$37,000 in 1995.
<TABLE>
<CAPTION>
(Dollars in Thousands) Savings Time Short-term
Deposits Deposits Borrowings(3) Total
-------- -------- ------------- -----
<S> <C> <C> <C> <C>
Interest Paid On:
1996 compared to 1995
Increase/(decrease) due to:
Volume changes ($90) $566 $1 $477
Rate changes 2 (18) (16)
----- ---- --- ----
Net Increase/(Decrease) ($88) $548 $1 $461
===== ==== === ====
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
===== ==== === ====
</TABLE>
(3) Short-term Borrowings consist of Federal Funds Purchased.
Page 6
<PAGE> 7
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," 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>
1996 1995
Available-for-Sale Available-for-Sale
------------------ ------------------
<S> <C> <C>
U.S. Treasury $5,468 $6,012
Federal agencies 7,237
Other securities 432 182
------ -------
$5,900 $13,431
====== =======
</TABLE>
The following table shows the maturities of investment securities at
December 31, 1996, and the weighted average yields 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 $2,988 5.30% $2,480 5.13%
Other securities 432 2.25%
------ ------
$3,420 4.92% $2,480 5.13%
====== ======
</TABLE>
LOAN PORTFOLIO
The following table sets forth the amount of loans outstanding for each
of the past two years.
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Types of Loans
Domestic
Commercial, financial and agricultural $9,737 $9,257
Real estate construction 830 680
Real estate mortgage 40,993 28,881
Installment loans to individuals 50,000 41,723
Lease financing 1 188 589
All other loans (including overdrafts) 105 69
------- -------
101,853 81,199
Less:
Unearned income (4,387) (3,128)
Reserve for loan and lease losses (728) (783)
------- -------
Total $96,738 $77,288
======= =======
</TABLE>
(1) Lease financing is net of unearned income of approximately $16,000 for 1996
and $61,000 for 1995.
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<PAGE> 8
Real estate mortgage loans are comprised of construction loans, SFR's
and commercial real estate loans which represent .4%, 5.6% and 34.1% of total
loan commitments respectively. The growth of commercial real estate loans is
the result of consistent promotions and competitive pricing.
Installment loan concentrations remain in auto loans, both indirect and
direct. The auto financing area exhibits a good diversity in customers and
smaller loan totals. Indirect dealer loans represent approximately 70.2% of
total installment loans and 30.8% of total loan commitments. Approximately
96.4% of all indirect loans are "A" paper. While the Bank goes to adequate
lengths to assess its auto dealers, the risks are evident with this type of
financing.
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, 1996.
<TABLE>
<CAPTION>
Maturing
--------------------------------
Within One to After
One Year Five Years Five Years Total
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Domestic
Commercial, financial and agricultural $4,051 $4,769 $917 $9,737
Real estate construction 731 99 830
Real estate mortgage 20,003 7,652 13,338 40,993
Installment loans to individuals 1,829 46,152 2,019 50,000
Lease financing (net of unearned income) 140 48 188
All other loans 83 22 105
------- ------- ------- --------
Total $26,837 $58,742 $16,274 $101,853
======= ======= ======= ========
Loans and leases with predetermined interest rates $5,188 $52,268 $10,789 $68,245
Loans and leases with floating or adjustable interest rates 21,649 6,474 5,485 33,608
------- ------- ------- --------
Total $26,837 $58,742 $16,274 $101,853
======= ======= ======= ========
</TABLE>
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, 1996. 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
47% of its total deposits at December 31, 1996, 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.
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<PAGE> 9
<TABLE>
<CAPTION>
(Dollars in Thousands) Three Over Three Over One
Months Through Through Over Non-interest
or Less 12 Months Five Years Five Years Bearing Total
------- ---------- ---------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits in banks $396 $396
Investment securities 182 $2,988 $2,480 $250 5,900
Net loans and leases 11,679 26,684 52,268 $10,789 (4,683) 96,737
Noninterest-bearing assets 16,491 16,491
-------- -------- ------- ------- -------- ---------
Total Assets $12,257 $29,672 $54,748 $10,789 $12,058 $119,524
======== ======== ======= ======= ======== =========
Liabilities and Stockholders' Equity
Noninterest-bearing deposits 25,946 25,946
Interest-bearing deposits 40,556 27,948 12,153 80,657
Short-term borrowings 3,700 3,700
Other liabilities 1,370 1,370
Stockholders' Equity 7,851 7,851
-------- -------- ------- ------- -------- ---------
Total Liabilities and
Stockholders' Equity $44,256 $27,948 $12,153 $0 $35,167 $119,524
======== ======== ======= ======= ======== =========
Interest Rate Sensitivity Gap ($31,999) $1,724 $42,595 $10,789 ($23,109 ) $0
-------- -------- ------- ------- -------- ---------
Cumulative Interest Rate Sensitivity Gap ($31,999) ($30,275) $12,320 $23,109 $0 $0
======== ======== ======= ======= ======== =========
</TABLE>
RISK ELEMENTS
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Accruing Loans More Than 90 Days Past Due(1)
Aggregate loan amounts
Commercial, financial and agricultural $85
Real estate 38
Installment loans to individuals $49 197
Aggregate leases
Renegotiated loans(2)
Non-accrual loans(3)
Aggregate loan amounts
Commercial 5 12
Real estate 429 467
---- ----
$483 $799
==== ====
</TABLE>
(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 five loans on non-accrual status approximately totaling $434,000
at December 31, 1996, and four loans totaling approximately $479,000 at
December 31, 1995. The amount of interest that would have been collected on
these loans had they remained current in accordance with their original terms
was $7,000 in 1996 and $39,000 in 1995, respectively.
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<PAGE> 10
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, 1996, the Bank's classified loans consist of
$3,373,000 of loans classified as substandard. The Bank's $3,373,000 in loans
classified as substandard consisted of $2,890,000 of performing loans and
$483,000 of non-accrual loans and loans delinquent 90 days or more but still
accruing.
Consumer loans which are 120 days or more delinquent and not insured or
guaranteed by the U.S. Government, are generally charged off. All other loans
are charged off at such time the loan is classified as loss. Losses are
recognized in the period in which the asset is deemed uncollectible.
With the exception of these loans, management is not aware of any loans
as of December 31, 1996, 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.
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<PAGE> 11
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) December 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
Loans and Leases Outstanding, Year-end(1) $97,465 $78,071
======= =======
Average Amount of Loans and Leases Outstanding(1) $85,610 $79,025
======= =======
Loans and Lease Loss Reserve Balance, Beginning of year $783 $1,014
------- -------
Reserve on Loans Acquired in Business Combination
Charge-offs
Domestic
Commercial, financial and agricultural 101 245
Real estate - construction
Real estate - mortgage 201 69
Consumer loans 384 383
Lease financing
------- -------
686 697
Foreign
------- -------
686 697
------- -------
Recoveries
Domestic
Commercial, financial and agricultural 102 795
Real estate - construction
Real estate - mortgage 100
Consumer loans 112
Lease financing
------- -------
214 895
Foreign
------- -------
Net Charge-offs/(recoveries) 472 (198)
------- -------
Additions/(Reductions) charged to operations 417 (429)
------- -------
Loan and Lease Loss Reserve Balance, End of year $728 $783
======= =======
Ratio of Net Charge-offs/(Recoveries) During the Year
to Average Loans and Leases Outstanding During the Year 0.55% -0.25%
======= =======
Ratio of Reserve for Loan Losses to Loans at Year-end 0.75% 1.00%
======= =======
</TABLE>
(1) Net of unearned income
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, 1996.
Page 11
<PAGE> 12
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 Executive 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, 1996, 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 a loan-by-loan basis as
part of normal loan review procedures at the Bank.
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.
All loans on non-accrual are measured for impairment. The Bank applies
the measurement provision of SFAS No. 114 to all loans in its portfolio except
for installment loans which are charged off after 120 days of delinquency. All
other loans are generally charged off at such time the loan is classified loss.
At December 31, 1996 and 1995, the Bank had loans amounting to
approximately $434,000 and $564,000, respectively, that were specifically
classified as impaired. The average balance of these loans amounted to
approximately $508,000 and $567,000 for the year ended December 31, 1996 and
1995, respectively. The allowance for loan losses related to these impaired
loans amounted to approximately $66,000 and $67,000 at December 31, 1996 and
1995, respectively.
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 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.
Page 12
<PAGE> 13
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended December 31,
--------------------------------------------
1996 1995
--------------------- ---------------------
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 $17 9.5 $287 11.4
Real estate 393 41.1 226 36.4
Installment loans to individuals 156 49.2 150 51.5
Lease financing 0.2 0.7
Foreign
Unallocated Allowance 162 120
---- ----- ---- -----
Total $728 100.0 $783 100.0
==== ===== ==== =====
</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,
--------------------------------------
1996 1995
------------------ ------------------
Average Average Average Average
Balance Rate Balance Rate
-------- ------- -------- -------
<S> <C> <C> <C> <C>
In Domestic Offices
Noninterest bearing demand deposits $26,422 $26,082
Savings deposits(1) 41,877 1.8% 46,848 1.8%
Time deposits 38,550 5.5% 28,203 5.5%
-------- --- -------- ---
Total Deposits $106,849 2.7% $101,133 2.4%
======== === ======== ===
</TABLE>
(1) Includes Savings, NOW, Super NOW and Money Market Deposit Accounts.
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,
1996
------------
<S> <C>
Three months or less $4,051
Over three through 12 months 4,974
Over one through five years 400
------
$9,425
======
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table sets forth the ratios of net income to average
total assets/(return on assets), net income to average equity/(return on
equity), dividends declared per share to net income per share/(dividend payout
ratio), and average equity to average total assets/(equity to asset ratio).
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Return on assets 0.10% 0.77%
Return on equity 1.38% 11.46%
Dividend payout ratio
Equity to asset ratio 7.03% 6.65%
</TABLE>
Page 13
<PAGE> 14
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 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.
Page 14
<PAGE> 15
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 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.
Page 15
<PAGE> 16
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 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.
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.
Page 16
<PAGE> 17
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 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.
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%.
Page 17
<PAGE> 18
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 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 200 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 18
<PAGE> 19
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, 1996.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1996
----------------------------
Minimum
Actual Capital
Amount Ratio Requirement
------ ----- -----------
<S> <C> <C> <C>
Leverage ratio $7,840 6.49% 4.0%
Tier 1 risk-based ratio 7,840 7.53% 4.0%
Total risk-based ratio 8,568 8.23% 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" unless its capital ratio actually warrants such treatment.
Page 19
<PAGE> 20
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 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.
Page 20
<PAGE> 21
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 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. On November 14, 1995, the FDIC issued
regulations that establish a new assessment rate schedule ranging from 0 cents
per $100 of deposit to 27 cents per $100 of deposits applicable to members of
BIF. 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 using the same standard used by
the FDIC for its prompt corrective action regulations. A well capitalized
institution is generally 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 generally 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
generally 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 analysis
of financial statements and other information relevant to evaluating the risk
posed by the institution. The three supervisory categories are: financially
sound with only a few minor weaknesses (Group A), demonstrates weaknesses that
could result in significant deterioration (Group B), and poses a substantial
probability of loss (Group C).
Page 21
<PAGE> 22
The BIF assessment rates are set forth below for institutions based on
their risk-based assessment categorization.
<TABLE>
<CAPTION>
Assessment Rates Effective January 1, 1996*
-------------------------------------------
Group A Group B Group C
--------- --------- ---------
<S> <C> <C> <C>
Well capitalized 0 3 17
Adequately capitalized 3 10 24
Undercapitalized 10 24 27
</TABLE>
* Assessment figures are expressed in terms of cents per $100 of deposits.
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 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. In May 1995, the federal banking agencies issued
final regulations which change the manner in which they measure a bank's
compliance with its CRA obligations. The final regulations adopt a
performance-based evaluation system which bases CRA ratings on an institution's
actual lending service and investment performance, rather than the extent to
which the institution conducts needs assessments, documents community outreach,
activities or complies with other procedural requirements.
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.
Page 22
<PAGE> 23
Risk-Based Examinations. In accordance with the OCC's "supervision by
risk" program, the OCC's examination philosophy is a way of allocating examiner
resources to focus on those functions or activities of the bank that pose the
most risk-ultimately to capital and earnings of the bank. The OCC has
identified nine risk categories and definitions to measure risk: credit,
interest rate, liquidity, price, foreign exchange, transaction, compliance,
reputation and strategic. The risk management program is not a substitute for
capital, assets, management, earnings and liquidity (CAMEL) nor is it meant to
change the way the bank manages it business. The OCC's supervision by risk
examination procedures differentiate between large banks and community banks.
A community bank is defined as a national bank with total assets of less than
$1 billion or one that is part of a holding company where none of the bank's
assets exceed $1 billion. Community banks can be further categorized as
complex or non-complex. The rating system for the bank is based on the size
and complexity of the institution. Community banks will receive only a
composite risk rating and a rating on the direction or trend of the risk. The
community bank risk assessment system (RAS) is meant to be a less stringent
exam than the large bank exam.
ACCOUNTING CHANGES
In June of 1996, the FASB issued SFAS No. 125 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," as
amended by SFAS No. 127 "Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125," establishing accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of the financial-components approach. This
approach requires the recognition of financial assets when control is
surrendered, and the derecognition of liabilities when they are extinguished.
Specific criteria are established for determining when control has been
surrendered in the transfer of financial assets. Liabilities and derivatives
incurred or obtained by transferors in conjunction with the transfer of
financial assets are required to be measured at fair value, if practicable.
Servicing assets and other retained interests in transferred assets are
required to be measured by allocating the previous carrying amount between the
assets sold, if any, and the interest that is retained, if any, based on the
relative fair values of the assets on the date of the transfer. Servicing
assets retained are subsequently subject to amortization and assessment for
impairment. Management has not determined the potential impact this statement
will have, however believes that there will be no material effect on the Bank's
financial condition or results of operations. SFAS No. 125 is effective for
transactions occurring after December 31, 1996.
EMPLOYEES
At December 31, 1996, the Company had approximately 72 full-time and 31
part-time employees. Total full-time equivalent employees at December 31,1996,
were approximately 91. 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 Sensenbach Secretary Executive Vice President/
Chief Financial Officer
Sara Ahern Cashier Senior Vice President/Cashier/
Director of Operations
</TABLE>
Page 23
<PAGE> 24
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. Sensenbach has served as the Secretary of the Company since 1992
and has been with the Bank since 1988. Mrs. Sensenbach 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.
ITEM 2. PROPERTIES
The Company's executive offices are located at the Bank's main banking
office at 9590 Foothill Boulevard, Rancho Cucamonga, California. During 1996,
the Bank acquired the corporate headquarters and main branch building. This
resulted in an increase in bank premises of approximately $2,471,000.
The Bank also owns the land and building where its Chino and Crestline
offices are located, and leases the facilities in which its Diamond Bar and
Blue Jay offices are located under leases expiring in two years and fours
years, respectively. The Bank's total occupancy expense for 1996, excluding
furniture and equipment expense, approximated $843,000. 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 24
<PAGE> 25
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, 1996, the
Company had approximately 795 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>
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
1996
First Quarter $4.13 $3.50
Second Quarter 3.75 3.25
Third Quarter 3.38 3.25
Fourth Quarter 3.50 3.25
</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 25
<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the fiscal years ended
December 31, 1996, 1995 and 1994, 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, 1993 and 1992,
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,
----------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest Income $9,011,147 $8,568,863 $8,472,532 $9,514,751 $11,135,433
Interest Expense 2,860,834 2,399,588 1,919,004 2,481,123 3,715,864
Net Interest Income 6,150,313 6,169,275 6,553,528 7,033,628 7,419,569
(Provision)/Credit for Loan and Lease Losses (416,900) 429,000 (1,440,000) (300,000) (2,351,800)
Other Income 1,837,933 3,961,580 2,808,965 3,897,471 3,995,952
Other Expenses (7,437,768) (9,141,796) (9,831,082) (10,133,676) (10,415,287)
------------ ------------ ------------ ------------ ------------
Income/(Loss) Before Taxes 133,578 1,418,059 (1,908,589) 497,423 (1,351,566)
Income Taxes (28,000) (584,254) 370,100 (144,800) 269,200
------------ ------------ ------------ ------------ ------------
Income/(Loss) Before Cumulative Effect
of Accounting Change 105,578 833,805 (1,538,489) 352,623 (1,082,366)
Cumulative Effect of Change in Accounting
for Income Taxes 107,000
------------ ------------ ------------ ------------ ------------
Net Income/(Loss) $105,578 $833,805 ($1,538,489) $459,623 ($1,082,366)
============ ============ ============ ============ ============
Earnings/(Loss) Per Share of Common Stock(1)
Income/(Loss) Before Cumulative Effect $0.06 $0.45 ($0.83) $0.19 ($0.58)
Cumulative Effect 0.06
------------ ------------ ------------ ------------ ------------
Net Income/(Loss) $0.06 $0.45 ($0.83) $0.25 ($0.58)
============ ============ ============ ============ ============
Stock Splits - 6 for 5 - - -
Balance Sheet Data
Assets $119,523,686 $107,559,133 $107,417,232 $120,646,469 $137,835,991
============ ============ ============ ============ ============
Deposits $106,602,789 $98,414,447 $98,584,479 $111,186,106 $127,715,070
============ ============ ============ ============ ============
Loans and Leases/(Net) $96,737,786 $77,287,938 $83,786,866 $83,940,271 $94,815,525
============ ============ ============ ============ ============
Stockholders' Equity $7,851,412 $7,752,714 $6,860,144 $8,446,305 $7,986,682
============ ============ ============ ============ ============
</TABLE>
(1) Retroactively adjusted for stock splits.
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.
Page 26
<PAGE> 27
For the year ended December 31, 1996, Vineyard National Bancorp on a
consolidated basis reported Net Income/(Loss) of $106,000 compared to $834,000
and $(1,538,000) in the comparable 1995 and 1994 periods. Net Income/(Loss)
Per Share was $0.06 compared to $0.45 in 1995 and $(0.83) in 1994.
Consolidated total assets at December 31, 1996 were $119,524,000 compared to
$107,559,000 at December 31, 1995, up approximately 11%. Total deposits also
increased from $98,414,000 as of December 31, 1995 to $106,603,000 at year-end
1996. Stockholders' equity was $7,851,000 at December 31, 1996, up from its
$7,753,000 level a year earlier, owing primarily to net income of $106,000 for
1996. Also impacting stockholders' equity was the unrealized gain on
securities available-for-sale of $5,000 which is down from the unrealized gain
of $12,000 on securities available-for-sale at December 31, 1995.
The reserve for probable loan and lease losses, which serves
as a "buffer" against possible future losses, had losses totaling $686,000
charged against it during 1996. Recoveries of loans previously charged-off
amounted to $214,000 which were credited back to the reserve. A provision for
probable loan and lease losses of $417,000 was recorded in 1996 compared to a
negative provision of $(429,000) in 1995 and a provision of $1,440,000 in 1994.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income represents the difference between interest and
fees generated on all earning assets and interest paid on interest bearing
liabilities which include customer deposits and borrowed funds. Net Interest
Income for 1996 was $6,150,000, down from the $6,169,000 reported in 1995 and
$6,554,000 reported in 1994. This represents decreases of .3% in 1996 and 5.9%
in 1995, respectively. The components of net interest income change in
response to both change in rate, average balance and mix on both earning assets
and liabilities.
The decline in net interest income in 1996 from 1995 was due to the
increase in interest expense exceeding the increase in interest income.
Interest income increased $442,000 to $9,011,000 in 1996 from $8,569,000 in
1995 while interest expense increased $461,000 to $2,861,000 in 1996 from
$2,400,000 in 1995. The resulting decrease in net interest income can be
attributed to a number of factors. First, the Bank's average interest-earning
assets increased 4.4% from $96,725,000 in 1995 to $100,960,000 in 1996. This
increase is mostly attributable to a 9.1% increase in average loans, the Bank's
highest yielding asset. Average loans increased from $78,097,000 in 1995 to
$85,216,000 in 1996. Average investment securities decreased from $12,976,000
in 1995 to $11,214,000 in 1996, average federal funds sold, the Bank's lowest
yielding asset, decreased from $4,156,000 in 1995 to $3,467,000 in 1996.
Secondly, although the volume of interest earning assets was higher on average
in 1996 than in 1995, the average yield earned on these assets remained
constant at 8.9% in 1996 and 1995. Third, average interest-bearing liabilities
increased 7.2% from $75,057,000 in 1995 to $80,465,000 in 1996. This increase
is attributable to a shift in the composition of the Bank's deposit
liabilities. Average savings deposits, the Bank's lowest interest paying
deposit account, decreased 10.6% from $46,848,000 in 1995 to $41,877,000 in
1996 while time deposits, the Bank's highest interest paying deposit account,
increased 36.7% from $28,203,000 in 1995 to $38,550,000 in 1996. This shift
was due to the Bank offering higher time deposit rates in an effort to raise
deposit levels. Fourth, the average yield paid on interest-bearing liabilities
increased to 3.6% in 1996 from 3.2% in 1995.
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.
Page 27
<PAGE> 28
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.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1995
-------------------------- --------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
--------- -------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans $85,216 $8,137 9.5% $78,097 $7,470 9.6%
Lease financing 394 31 7.9% 928 75 8.1%
Investment securities(3) 11,214 629 5.6% 12,976 756 5.8%
Federal funds sold 3,467 179 5.2% 4,156 232 5.6%
Interest-earning deposits with
other financial institutions 669 35 5.2% 568 36 6.3%
-------- ------ --- -------- ------ ----
Total Interest-earning Assets 100,960 9,011 8.9% 96,725 8,569 8.9%
------ --- ------ ----
Other Assets 15,803 13,683
Less: Allowance for Loan Losses (715) (967)
-------- --------
Total Average Assets $116,048 $109,441
======== ========
Liabilities and Shareholders' Equity
Savings deposits 41,877 751 1.8% 46,848 839 1.8%
Time deposits 38,550 2,108 5.5% 28,203 1,560 5.5%
Other 38 2 5.3% 6 1 12.2%
-------- ------ --- -------- ------ ----
Total Interest-bearing Liabilities 80,465 2,861 3.6% 75,057 2,400 3.2%
------ --- ------ ----
Demand deposits 26,422 26,082
Other liabilities 1,469 1,047
Shareholders' equity 7,692 7,255
-------- --------
Total Average Liabilities
and Shareholders' Equity $116,048 $109,441
======== ========
Net Interest Spread(1) 5.3% 5.7%
=== ===
Net Interest Income and Net Interest Margin(2) $6,150 6.1% $6,169 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.
(3) The yield for securities that are classified as available-for-sale is based
on historical amortized cost balances.
Page 28
<PAGE> 29
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994
------------------------
Average Average
Balance Interest Yield
------- -------- -------
<S> <C> <C> <C>
Assets
Loans $79,489 $7,511 9.4%
Lease financing 1,969 166 8.4%
Investment securities(3) 14,930 673 4.5%
Federal funds sold 2,990 112 3.7%
Interest-earning deposits with
other financial institutions 289 11 3.8%
-------- ------ ---
Total Interest-earning Assets 99,667 8,473 8.6%
------ ---
Other Assets 15,825
Less: Allowance for Loan Losses (1,152)
--------
Total Average Assets $114,340
========
Liabilities and Shareholders' Equity
Savings deposits 59,265 1,248 2.1%
Time deposits 19,423 670 3.4%
Other 32 1 3.1%
-------- ------ ---
Total Interest-bearing Liabilities 78,720 1,919 2.4%
------ ---
Demand deposits 27,150
Other liabilities 883
Shareholders' equity 7,587
--------
Total Average Liabilities
and Shareholders' Equity $114,340
========
Net Interest Spread(1) 6.2%
===
Net Interest Income and Net Interest Margin(2) $6,554 6.6%
====== ===
</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.
(3) The yield for securities that are classified as available-for-sale is based
on historical amortized cost balances.
Page 29
<PAGE> 30
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) 1996 - 1995 1995 - 1994
---------------------- ----------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Increase/(Decrease) In
Interest Income
Loans(1) $741 ($74) $667 ($137) $96 ($41)
Leases(2) (60) (29) (89) (197) 119 (78)
Investment securities(2) (101) (26) (127) (68) 151 83
Deposits 78 (79) (1) 15 10 25
Federal funds sold (36) (17) (53) 53 67 120
---- ----- ---- ----- ---- -----
622 (225) 397 (334) 443 109
---- ----- ---- ----- ---- -----
Increase/(Decrease) In
Interest Expense
Savings deposits (90) 2 (88) (239) (170) (409)
Time deposits 566 (18) 548 381 509 890
Short-term borrowings 1 1 (1) (1)
Note payable 0 0
---- ----- ---- ----- ---- -----
477 (16) 461 142 338 480
---- ----- ---- ----- ---- -----
Increase/(Decrease)
in Net Interest Income $145 ($209) ($64) ($476) $105 ($371)
==== ===== ==== ===== ==== =====
</TABLE>
(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 $7,000 in 1996, $39,000 in
1995 and $13,000 in 1994.
(2) Interest income includes the effects of tax equivalent adjustments on tax
exempt securities and leases using tax rates which approximate 21.0% for 1996,
41.2% for 1995 and 19.4% for 1994.
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 provision for probable loan and lease losses of $417,000 was
recorded in 1996. This is compared to a negative provision of $(429,000) in
1995 and a large provision of $1,440,000 in 1994. The provision for loan and
lease losses recorded in 1996 is a result of management's assessment of the
potential losses inherent in the loan portfolio. The decrease in the provision
in 1995 was primarily a result of the receipt of a large recovery on a
previously charged off loan and a substantial decrease in charge-offs recorded
from 1994 to 1995. The large provision recorded in 1994 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. Charge-offs recorded in 1994 were $1,998,000. The need for
additional provision for loan and lease losses in 1997 will be contingent upon
management's on-going analysis of the adequacy of the reserve for probable loan
and lease losses. While management believes it to be adequately funded at the
present time, the appropriate value can fluctuate in response to economic
conditions and the subjective decisions which must be made in response to those
conditions.
During 1996, the Bank's non-accrual loans decreased from $479,000 to
$434,000. For further information regarding charge-offs, non- performing and
classified loans and 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."
Page 30
<PAGE> 31
NON-INTEREST INCOME
Non-interest income for 1996 totaled $1,838,000 compared to $3,962,000
in 1995 and $2,809,000 in 1994. This represents a (46)% decrease during 1996,
a 42% increase in 1995 and a (29)% decrease in 1994. The largest component of
the decrease during 1996 was due to one- time revenues received in connection
with the sale of the Bank's mortgage servicing rights. Income of $1,489,000
received from the sale of these rights was included in non-interest income
during 1995. In addition, as a result of the sale of these rights, loan
servicing income decreased $150,000 in 1996 and $300,000 in 1995. 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 the volume of mortgage loans for
sale and servicing.
Other fee and service charge income decreased to $1,750,000 during 1996
from $2,447,000 in 1995 and $2,825,000 in 1994. The decrease in 1996 is mostly
attributable to the sale of certain assets and liabilities of its Victorville
branch which occurred during 1995. 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
Total non-interest expense for 1996 was $7,438,000 compared to
$9,142,000 in 1995 and $9,831,000 in 1994. Salaries and employees benefits
totaled $3,511,000 in 1996 compared to $3,991,000 in 1995 and $4,091,000 in
1994. The decrease was mostly due to the savings associated with no longer
operating the Victorville branch. The savings from the sale of this branch
were also reflected in the $711,000 decrease in other expense during 1996.
Other expenses were $2,500,000 in 1996 compared to $3,210,000 in 1995 and
$3,808,000 in 1994. Three of the largest declines in other expenses during
1996 were a $141,000 decline in professional expenses, a $178,000 decline in
insurance and assessment expense and a $212,000 decline in loan related
expenses.
Occupancy expense was $814,000 in 1996 compared to $1,254,000 in 1995
and $1,210,000 in 1994. The decrease in 1996 was mostly attributable to the
elimination of lease payments due to the acquisition of the Bank's main branch
building and administrative headquarters during 1996.
Non-interest expense decreased in absolute terms from $9,831,000 in
1994 to $9,142,000 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.
Non-interest expense as a percentage of total income was 69% in 1996 as
compared to 73% in 1995 and 87% in 1994.
INCOME TAXES
Total income tax expense for 1996 and 1995 were $28,000 and $584,000,
respectively, which approximated 20.1% and 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. 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.
FINANCIAL CONDITION
ASSETS
Total consolidated assets increased $11,965,000 or 1.1% to
$119,524,000 as of December 31, 1996 from $107,559,000 as of December 31, 1995.
The increase in the Company's size is mostly attributable to a $20,654,000
increase in gross loans, a $2,737,000 increase in bank premises and equipment
which was offset by a decrease in federal funds sold of $1,925,000 and a
decrease in investment securities of $7,532,000.
Page 31
<PAGE> 32
LOANS
As noted above, the Company's loan portfolio has increased by
approximately $20,654,000 during the year ended December 31, 1996. The two
largest increases were in real estate mortgages which increased $12,112,000
from $28,881,000 in 1995 to $40,993,000 in 1996 and in installment loans to
individuals which increased $8,277,000 from $41,723,000 in 1995 to $50,000,000
in 1996. As the economy in Southern California has begun to improve, real
estate prices and sales activity have increased allowing for more opportunity
to originate loans to finance real estate transactions. The Company's
installment portfolio is comprised of predominantly auto loans, both indirectly
and directly funded. The increase in these loans were due to the Company's
aggressive marketing of it's pricing of indirect auto rates.
NON-PERFORMING LOANS
The following table sets forth information regarding the Bank's
non-performing loans at year-end 1996 and 1995.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Accruing Loans More Than 90 Days Past Due(1)
Aggregate Loan Amounts
Commercial, financial and agricultural $85
Real estate 38
Installment loans to individuals $49 197
---- ----
Total Loans Past Due More Than 90 Days 49 320
---- ----
Renegotiated loans(2) - -
---- ----
Non-accrual loans(3)
Aggregate Loan Amounts
Commercial, financial and agricultural 5 12
Real estate 429 467
Installment loans to individuals
---- ----
Total Non-accrual Loans 434 479
---- ----
Total Non-performing Loans $483 $799
==== ====
</TABLE>
(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
1996 and 1995.
(3) There were five loans on non-accrual status totaling approximately $434,000
at December 31, 1996, and four loans totaling approximately $479,000 at
December 31, 1995.
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.
Page 32
<PAGE> 33
As of December 31, 1996, the Bank's classified loans consisted of
$3,373,000 of loans classified as substandard. The Bank's $3,373,000 of loans
classified as substandard consisted of $2,890,000 of performing loans and
$483,000 of non-accrual loans and loans delinquent 90 days or more but still
accruing.
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, 1996,
reflected an amount which, in management's judgment, 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, 1996.
The reserve for probable loan and lease losses at December 31, 1996,
was $728,000 or .75%, of total loans and leases, as compared to $783,000 or
1.00%, of total credits at December 31, 1995. 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) 1996 1995
------ ------
<S> <C> <C>
Allowance For Loan Losses
Balance, Beginning of period $783 $1,014
---- ------
Charge-offs
Commercial, financial and agricultural 101 245
Real estate construction
Real estate mortgage 201 69
Consumer loans 384 383
Lease financing
---- ------
Total Charge-offs 686 697
---- ------
Recoveries
Commercial, financial and agricultural 102 795
Real estate construction
Real estate mortgage
Consumer loans 112 100
Lease financing
---- ------
Total Charge-offs 214 895
---- ------
Net Charge-offs/(Recoveries) 472 (198)
Provision/(Credit) Charged to Operations 417 (429)
---- ------
Balance, End of period $728 $783
==== ======
Net Charge-offs During the Year to Average Loans
Outstanding During the Year 0.55% (0.23)%
==== ======
Allowance For Loan Losses to Total Losses 0.75% 1.00%
==== ======
</TABLE>
Page 33
<PAGE> 34
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.
INVESTMENT SECURITIES
The Company's investment portfolio primarily consists of U.S. Treasury
Securities. As of December 31, 1996, the Company categorized their investment
securities as available-for-sale (which requires continual mark to market
adjustments to the Company's capital account, but no impact on the income
statement). The Company holds no securities that should be classified as
trading securities and has determined that since its securities may be sold
prior to maturity because of interest rate changes, to meet liquidity needs, or
to better match the repricing characteristics of funding sources, its entire
portfolio should be classified as available-for-sale. No securities are
classified as held-to- maturity.
The Company had unrealized gains of $9,000 and $20,000 in 1996 and
1995, respectively, and no unrealized losses for the same corresponding
periods. The Company generated gains of $2,000 during 1996 and losses of
$8,000 and $29,000 on sales of investment securities during 1995 and 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
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 either available-for-sale and are measured at fair value, with
unrealized gains and losses, reported as a separate component of stockholders'
equity.
SOURCES OF FUNDS
While the Bank is competitive with major banks in terms of its
structure of interest rates on deposit products offered, it was more aggressive
during 1996 in terms of paying higher rates to attract additional deposits.
Given the current increase in loan demand and the Bank's decreased liquidity,
Management felt the need to be especially aggressive on the rates being paid.
As a result, total deposits increased during 1996 to $106,603,000 from
$98,414,000 in 1995. The $8,189,000 increase represents an 8.3% increase. The
mix of the Bank's deposits showed a wide fluctuation with a decrease in savings
and NOW deposits of $2,268,000 or 8.6%, a decrease in money market deposits of
$2,477,000 or 15.2%, an increase in demand deposits of $255,000 or 1%, an
increase in time deposits in denominations of $100,000 or more of $493,000 or
5.5% and an increase in other time deposits of $12,185,000 or 41.9%.
LIQUIDITY
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. Typical demands on liquidity are deposit run-off from demand
deposits and savings accounts, maturing time deposits which are not renewed,
and anticipated funding under credit commitments to customers. Interest rate
sensitivity management seeks to avoid fluctuating interest margins to enhance
consistent growth of net interest income through periods of changing interest
rates.
Page 34
<PAGE> 35
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. Vineyard
National Bank had liquid assets (cash, deposits in other financial institutions
and investment securities) as a percent of total deposits and borrowed funds of
13% and 25% as of December 31, 1996 and 1995, respectively. The Bank's loan to
deposit ratio was 91% and 79% as of December 31, 1996 and 1995. This means
that there are more deposits invested in the loan portfolio, which tends to be
a less liquid asset than a typical investment security. The Bank's policy is
to strive for a loan to deposit ratio between 70% and 90%. Increased loan
demand has resulted in a decline in liquidity. This increase was funded to a
large extent by an increase in borrowed funds of $3,700,000 and an increase in
TCD's under $100,000 of approximately $12,185,000 between December 31, 1995 and
December 31, 1996. TCD's under $100,000 represent 28% of total deposits
resulting in an imbalance in the Bank's deposit base. Management closely
monitors these TCD's and intends to replace them with core deposits.
While liquidity has declined, management believes it is sufficient to
meet current and anticipated funding needs. Liquid assets represent
approximately 12% of total assets. The liquidity contingency process outlines
authorities and a reasonable course of action in case of unexpected liquidity
needs. The Bank has borrowing lines with three correspondent banks totaling
$3.7 million and a secured line at the Federal Reserve.
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.
CAPITAL RESOURCES
Neither the Company nor the Bank has any significant commitments for
capital expenditures. The Bank is subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the
Bank meets all capital adequacy requirements to which it is subject.
Page 35
<PAGE> 36
As of December 31, 1996, the most recent notification from the Office
of the Comptroller of the Currency (OCC) categorized the Bank as adequately
capitalized under the regulatory framework for prompt corrective action (there
are no conditions or events since that notification that management believes
have changed the Bank's category). To be categorized as well-capitalized, the
Bank must maintain minimum ratios as set forth in the table below. The
following table also sets forth the Bank's actual capital amounts and ratios
(dollar amounts in thousands):
<TABLE>
<CAPTION>
Capital Needed
-----------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Provisions
-------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total capital to risk-weighted asset $8,568 8.2% $8,329 8.0% $10,411 10.0%
Tier 1 capital to risk-weighted asse 7,840 7.5% 4,165 4.0% 6,247 6.0%
Tier 1 capital to average assets 7,840 6.5% 4,832 4.0% 6,040 5.0%
As of December 31, 1995
Total capital to risk-weighted asset 8,518 10.2% 6,681 8.0% 8,351 10.0%
Tier 1 capital to risk-weighted asse 7,735 9.3% 3,327 4.0% 4,990 6.0%
Tier 1 capital to average assets 7,735 7.3% 4,238 4.0% 5,298 5.0%
</TABLE>
Capital ratios have declined between December 31, 1995 and December 31,
1996, as a result of asset growth and a decline in earnings.
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 36
<PAGE> 37
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 39
Consolidated Balance Sheets
December 31, 1996 and 1995 40
Consolidated Statements of Income
For the Years Ended December 31, 1996, 1995 and 1994 41
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994 42
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994 43
Notes to Consolidated Financial Statements 45
</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 37
<PAGE> 38
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
DECEMBER 31, 1996, 1995 AND 1994
CONTENTS
<TABLE>
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . 39
Financial Statements
Consolidated Balance Sheets
December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . 40
Consolidated Statements of Income
For the Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . 41
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . 42
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994 . . . . . . . . . . 43
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 45
</TABLE>
Page 38
<PAGE> 39
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, 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, 1996, in conformity
with generally accepted accounting principles.
Rancho Cucamonga, California
March 7, 1997
Page 39
<PAGE> 40
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
Assets
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Cash and due from banks (minimum Federal Reserve
Balance at December 31, 1996 was $625,000) $7,619,307 $8,093,749
Federal funds sold 1,925,000
------------ ------------
Total Cash and Cash Equivalents 7,619,307 10,018,749
------------ ------------
Interest-bearing deposits in other financial institutions 396,000 792,000
Investment securities (Notes #1C and #2)
Available-for-sale 5,899,729 13,431,518
Loans, net of unearned income (Notes #1D and #3) 97,276,964 77,482,539
Direct lease financing (Notes #1F and #4) 188,489 588,865
Less: Reserve for probable loan and lease
losses (Notes 1E and #5) (727,667) (783,466)
------------ ------------
96,737,786 77,287,938
Bank premises and equipment (Notes #1G and #7) 6,439,982 3,703,294
Accrued interest 403,126 541,975
Cash surrender value of life insurance 845,556 741,834
Other real estate owned (Notes #1K, #19 and #20) 710,205 608,694
Other assets 471,995 433,131
------------ ------------
Total Assets $119,523,686 $107,559,133
============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand deposits 25,946,157 25,691,559
Savings and NOW deposits 24,269,489 26,537,492
Money market deposits 13,819,261 16,295,843
Time deposits in denominations of $100,000 or more 9,425,758 8,932,511
Other time deposits 33,142,124 20,957,042
------------ ------------
106,602,789 98,414,447
Federal funds purchased 3,700,000
Accrued employee salary and benefits 466,226 443,013
Accrued interest and other liabilities 903,259 948,959
------------ ------------
Total Liabilities 111,672,274 99,806,419
------------ ------------
Stockholders' Equity
Contributed capital
Common stock - authorized 15,000,000 shares, no par
value, issued and outstanding 1,862,643 shares in
1996 and 1995 2,106,258 2,106,258
Additional paid-in capital 3,306,684 3,306,684
Retained earnings 2,433,463 2,327,885
Valuation allowance for investments 5,007 11,887
------------ ------------
Total Stockholders' Equity 7,851,412 7,752,714
------------ ------------
Total Liabilities and Stockholders'
Equity $119,523,686 $107,559,133
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 40
<PAGE> 41
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans (Note #1D) $8,136,925 $7,470,066 $7,511,170
Interest on Investment Securities (Note #1C)
Obligations of U.S. Government Agencies and
Corporatioms 620,061 745,436 662,282
Obligations of State and Political Subdivisions 271 465
Interest on other securities 9,792 9,749 9,641
Interest on deposits 34,777 36,022 11,235
Interest on Federal funds sold 178,734 232,159 112,145
Direct lease financing income (Note #1F) 30,858 75,160 165,594
---------- ---------- -----------
Total Interest Income 9,011,147 8,568,863 8,472,532
---------- ---------- -----------
INTEREST EXPENSE
Interest on savings deposits 221,431 258,963 378,918
Interest on NOW and money market deposits 529,933 573,804 856,661
Interest on time deposits in denominations
of $100,000 or more 352,970 334,410 212,361
Interest on other time deposits 1,754,823 1,225,710 457,673
Interest on Federal funds purchased and other interest 1,677 6,701 13,391
---------- ---------- -----------
Total Interest Expense 2,860,834 2,399,588 1,919,004
---------- ---------- -----------
Net Interest Income 6,150,313 6,169,275 6,553,528
(PROVISION)/CREDIT FOR LOAN AND LEASE LOSSES -
(Notes #1E and #5) (416,900) 429,000 (1,440,000)
---------- ---------- -----------
Net Interest Income After (Provision)/
Credit for Loan and Lease Losses 5,733,413 6,598,275 5,113,528
---------- ---------- -----------
OTHER INCOME
Fees and service charges, gain on sale of loans
and loan servicing income (Note #12) 1,750,110 2,447,100 2,824,731
Sale of mortgage servicing rights (Note #18) 22,375 1,488,789
Sale of branch office (Note #22) 22,984
Net gain (loss) on sale of investment securities 2,200 (8,237) (29,051)
Other income 63,248 10,944 13,285
---------- ---------- -----------
Total Other Income 1,837,933 3,961,580 2,808,965
---------- ---------- -----------
OTHER EXPENSES
Salaries and employee benefits 3,511,460 3,991,474 4,090,822
Occupancy expense of premises 813,515 1,253,892 1,209,886
Furniture and equipment expense 549,022 646,499 683,351
Net loss on sale of other real estate owned 63,992 39,463 39,286
Other expenses (Note #12) 2,499,779 3,210,468 3,807,737
---------- ---------- -----------
Total Other Expenses 7,437,768 9,141,796 9,831,082
---------- ---------- -----------
Income/(Loss) Before Income Taxes 133,578 1,418,059 (1,908,589)
Income Taxes (Notes #1J and #8) 28,000 584,254 (370,100)
---------- ---------- -----------
Net Income/(Loss) $105,578 $833,805 $(1,538,489)
========== ========== ===========
Net Income/(Loss) Per Share (Note #16) $0.06 $0.45 ($0.83)
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 41
<PAGE> 42
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 1996, 1995 AND 1994
<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, 1994 1,552,425 $ 2,106,258 $ 3,306,684 $ 3,033,363
Unrealized loss on investment
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
Change in unrealized gain/(loss)
on investment securities
available-for-sale (net of tax) (6,880)
Net income for the year 105,578
--------- ----------- ----------- ----------- ---------
Balance, December 31, 1996 1,862,643 $ 2,106,258 $ 3,306,684 $ 2,433,463 $ 5,007
========= =========== =========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 42
<PAGE> 43
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees received $10,382,661 $7,543,620 $9,569,008
Service fees and other income received 1,835,733 3,944,375 2,838,016
Financing revenue received under leases 30,858 75,160 165,594
Interest paid (2,836,415) (2,027,170) (1,950,722)
Cash paid to suppliers and employees (7,002,983) (8,856,917) (9,240,442)
Income taxes paid (18,044) 311,393 134,338
----------- ----------- -----------
Net Cash Provided By Operating
Activities 2,391,810 990,461 1,515,792
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment
securities held-to-maturity 2,797,500 9,500,000
Proceeds from maturities of investment securities,
available-for-sale 13,085,000 10,055,000 6,000,000
Proceeds from sales of investment securities,
available-for-sale 5,011,954 1,000,000 8,955,590
Purchase of investment securities held-to-maturity (2,975,156)
Purchase of investment securities available-for-sale (10,578,602) (18,948,067) (9,866,130)
Net (increase)/decrease in deposits in other
financial institutions 396,000 (693,000) 390,000
Recoveries on loans previously written off 213,798 894,920 265,128
Net loans made to customers and principal
collections of loans (22,353,294) 5,686,829 (4,229,284)
Net decrease in leases to customers 400,376 716,544 1,404,057
Capital expenditures (3,339,414) (494,129) (224,977)
Proceeds from sale of property, plant and equipment 74,727 39,161 1,141
Proceeds from sale of branch 200,000
Proceeds from sale of OREO 409,861 434,337 143,334
----------- ----------- -----------
Net Cash Provided By/(Used In)
Investing Activities (16,679,594) 1,689,095 9,363,703
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand deposits, NOW accounts,
savings accounts, and money market deposits (4,489,987) (9,132,818) (13,562,350)
Net increase in certificates of deposits 12,678,329 8,962,786 960,723
Net increase/(decrease) in federal funds purchased 3,700,000 (1,000,000) 1,000,000
Cash paid in lieu of fractional shares (794)
----------- ----------- -----------
Net Cash Provided By/(Used In)
Financing Activities 11,888,342 (1,170,826) (11,601,627)
----------- ----------- -----------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (2,399,442) 1,508,730 (722,132)
CASH AND CASH EQUIVALENTS, Beginning of year 10,018,749 8,510,019 9,232,151
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, End of year $7,619,307 $10,018,749 $8,510,019
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 43
<PAGE> 44
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME/(LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Income/(Loss) $105,578 $833,805 $(1,538,489)
---------- ---------- -----------
Adjustments to Reconcile Net Income/(Loss)
to Net Cash Provided by Operating Activities
Depreciation and amortization 503,187 249,933 482,375
Provision/(credit) for probable credit losses 416,900 (429,000) 1,440,000
Provision for possible OREO losses 37,260 49,740 137,129
(Gain)/loss on sale of equipment 28,589 (260) 1,330
Increase/(decrease) in taxes payable (5,044) 895,647 (235,762)
Increase in other assets (142,586) (157,491) (67,034)
Increase/(decrease) in unearned loan fees 1,259,746 (654,365) 1,083,350
(Increase)/decrease in interest receivable 138,849 (53,809) 186,005
Increase/(decrease) in interest payable 24,419 372,418 (31,718)
Decrease in accrued expense and other liabilities (36,880) (140,873) (9,731)
Gain on sale of branch (22,984)
(Gain)/loss on sale of investment securities (2,200) 8,237 29,051
Loss on sale of OREO 63,992 39,463 39,286
---------- ---------- -----------
Total Adjustments 2,286,232 156,656 3,054,281
---------- ---------- -----------
Net Cash Provided By Operating
Activities $2,391,810 $990,461 $1,515,792
========== ========== ===========
SUPPLEMENTARY INFORMATION
Change in valuation allowance for investment securities ($6,880) $59,559 ($47,672)
========== ========== ===========
Book value of investment securities transferred
from held-to-maturity to available-for-sale $0 $2,197,960 $0
========== ========== ===========
Transfer of loans to real estate owned through
foreclosure $612,624 $284,000 $240,954
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 44
<PAGE> 45
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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," 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. Gains or losses on sales of investment
securities are determined on the specific identification method.
Premiums and discounts on investment securities are amortized or
accreted using the interest method over the expected lives of the
related securities.
Page 45
<PAGE> 46
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
D. Loans and Interest on Loans
Loans are stated at unpaid principal balances, less the reserve for
probable 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 discounted 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 nonaccrual 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.
All loans on nonaccrual are measured for impairment. The Bank applies
the measurement provision of SFAS No. 114 to all loans in its
portfolio except for installment loans which are charged off after 120
days of delinquency. All other loans are generally charged off at
such time the loan is classified loss.
E. Reserve for Probable Loan and Lease Losses
The reserve for probable loan and lease losses is maintained at a
level which, in management's judgment, is adequate to absorb credit
losses inherent in the loan and lease portfolio. The amount of the
reserve 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 reserve is increased by
a provision for loan and lease losses, which is charged to expense and
reduced by charge-offs, net of recoveries.
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, 1996, 1995 and 1994, was approximately $499,000, $492,000
and $490,000, respectively.
Page 46
<PAGE> 47
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
H. Reclassifications
Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform to 1996 classifications.
I. Consolidated Statements 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."
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 June of 1996, the FASB issued SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," as amended by SFAS No. 127 "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125", establishing
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on
consistent application of the financial-components approach. This
approach requires the recognition of financial assets when control is
surrendered, and the derecognition of liabilities when they are
extinguished. Specific criteria are established for determining when
control has been surrendered in the transfer of financial assets.
Liabilities and derivatives incurred or obtained by transferors in
conjunction with the transfer of financial assets are required to be
measured at fair value, if practicable. Servicing assets and other
retained interests in transferred assets are required to be measured
by allocating the previous carrying amount between the assets sold, if
any, and the interest that is retained, if any, based on the relative
fair values of the assets on the date of the transfer. Servicing
assets retained are subsequently subject to amortization and
assessment for impairment. Management has not determined the
potential impact this statement will have on the financial statements,
however believes there will be no material effect on the Bank's
financial condition or results of operations. SFAS No. 125 is
effective for transactions occurring after December 31, 1996.
NOTE #2 - INVESTMENT SECURITIES
At December 31, 1996 and 1995, the investment securities portfolio was
comprised of securities classified as available-for-sale, in conjunction with
the adoption of SFAS No. 115, resulting in investment securities
available-for-sale being carried at fair value, adjusted for amortization of
premiums and accretions of discounts.
Page 47
<PAGE> 48
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
The amortized cost and fair values of investment securities available-for-sale
at December 31, 1996 were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $5,459,248 $8,637 $5,467,885
Other 431,844 431,844
---------- ------ -- ----------
Total $5,891,092 $8,637 $0 $5,899,729
========== ====== == ==========
</TABLE>
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 11,951
agencies and corporations 7,225,536 7,237,487
Other securities 181,844 181,844
---------- ------- -- -----------
Total $13,411,021 $20,497 $0 $13,431,518
========== ======= == ===========
</TABLE>
The amortized cost and fair values of investment securities available-for-sale
at December 31, 1996, 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
Cost Fair Value
---------- ----------
<S> <C> <C>
Due in one year or less $2,987,507 $2,987,572
Due after one year but less than five years 2,471,741 2,480,313
---------- ----------
5,459,248 5,467,885
Other securities 431,844 431,844
---------- ----------
Total Securities $5,891,092 $5,899,729
========== ==========
</TABLE>
Proceeds from sales of investment securities available-for-sale during 1996
were $5,011,954. Gross gains and losses on those sales were $2,761 and $561,
respectively. Included in shareholders' equity at December 31, 1996 is $5,007
of net unrealized gains (net of $3,629 estimated tax expense) on investment
securities available-for-sale.
Proceeds from sales of investment securities available-for-sale during 1995
were $1,000,000. Gross losses on those sales were $8,237. Included in
shareholders' equity at December 31, 1995 is $11,887 of net unrealized gains
(net of $8,611 estimated tax benefit) on investment securities
available-for-sale.
Proceeds from sales of investment securities available-for-sale during 1994
were $8,955,590. Gross gains and losses on those sales 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 and fair value of $3,826,791 and $3,802,906 at
December 31, 1996 and 1995, respectively, were pledged to secure public monies
as required by law.
Page 48
<PAGE> 49
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
During 1995, the Company transferred $2,197,960 of securities at amortized cost
from held-to-maturity to available-for-sale based on FASB's "Special Report - A
Guide to Implementation of Statement No. 115 on Accounting For Certain
Investments in Debt and Equity Securities - Questions and Answers." The
unrealized gain on transferred securities available-for-sale was $41,019 at the
date of transfer.
NOTE #3 - LOANS
All the Bank'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>
1996 1995
----------- -----------
<S> <C> <C>
Commercial, financial and agricultural $ 9,737,235 $ 9,256,985
Real Estate - construction 830,238 680,085
Real Estate - mortgage
Commercial 34,628,900 22,299,858
Residential 6,363,664 6,580,811
Installment loans to individuals 49,999,727 41,723,355
All other loans (including overdrafts) 104,985 69,477
----------- -----------
101,664,749 80,610,571
Unearned income on installment loans (3,924,182) (2,796,117)
Deferred loan fees (463,603) (331,895)
----------- -----------
Loans, Net of Unearned Income $97,276,964 $77,482,559
=========== ===========
</TABLE>
The following is a summary of the investment in impaired loans, the related
allowance for loan losses, and income recognized thereon as of December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Recorded investment in impaired loans $434,000 $564,000
Related allowance for loan losses 66,000 67,000
Average recorded investment in impaired loans 508,000 567,000
Interest income recognized for cash payments 6,000 5,000
Cash receipts applied to reduce principal balance 11,000 7,000
</TABLE>
The provisions of SFAS No. 114 and SFAS No. 118 permit the valuation allowance
reported above to be determined on a loan-by-loan basis or by aggregating loans
with similar risk characteristics. Because the loans currently identified as
impaired have unique risk characteristics, the valuation allowance was
determined on a loan-by-loan basis.
Nonaccruing loans totaled approximately $434,000 and $479,000 at December 31,
1996 and 1995, respectively. As of December 31, 1996 and 1995, all loans on
nonaccrual were classified as impaired. If interest on nonaccrual loans had
been recognized at the original interest rates, interest income would have
increased approximately $7,000, $39,000 and $13,000 in 1996, 1995 and 1994,
respectively.
At December 31, 1996 and 1995, the Company had approximately $49,000 and
$320,000, respectively, in loans past due 90 days or more in interest or
principal and still accruing interest. There loans are well secured and in the
process of collection, or are secured by 1-4 single family residences.
At December 31, 1996, loans totaling approximately $125,000 were classified as
troubled debt restructurings.
Page 49
<PAGE> 50
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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>
1996 1995
-------- --------
<S> <C> <C>
Lease payments receivable $204,201 $649,774
Unearned income (15,712) (60,909)
-------- --------
Total Direct Lease Financing $188,489 $588,865
======== ========
</TABLE>
The Company had no outstanding commitments relating to municipal leases at
December 31, 1996 and 1995.
At December 31, 1996, future minimum lease payments receivable under direct
financing leases are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1997 $163,652
1998 24,837
--------
$188,489
========
</TABLE>
NOTE #5 - RESERVE FOR PROBABLE LOAN AND LEASE LOSSES
Transactions in the reserve for loan and lease losses are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Outstanding Balance, Beginning of year $1,455,884 $1,936,581
Credit granted, including renewals 581,404 448,007
Repayments (402,860) (928,704)
---------- ----------
Outstanding Balance, End of year $1,634,428 $1,455,884
========== ==========
</TABLE>
NOTE #6 - 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 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- ----------
<S> <C> <C> <C>
Balance, Beginning of year $783,466 $1,014,433 $1,307,105
Recoveries on loans previously charged off 213,798 894,920 265,128
Loans charged off (686,497) (696,887) (1,997,800)
Provision/(credit) charged to operating expense 416,900 (429,000) 1,440,000
-------- ---------- ----------
Balance, End of year $727,667 $783,466 $1,014,433
======== ========== ==========
</TABLE>
Page 50
<PAGE> 51
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
Not included in the balances outstanding at December 31, 1996 and 1995, were
undisbursed commitments to lend of approximately $103,000 and $119,000,
respectively. There were no non-accruing loans to Directors and Officers and
loans classified by the Company's regulatory agency or by the Company in 1996
and 1995.
NOTE #7 - PREMISES AND EQUIPMENT
Major classifications of Company premises and equipment are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Building $3,860,185 $1,571,635
Furniture and equipment 3,398,717 3,245,193
Leasehold improvements 1,133,417 1,191,835
---------- ----------
8,392,319 6,008,663
Less: Accumulated depreciation and amortization (3,237,337) (2,965,369)
Land 1,285,000 660,000
---------- ----------
Total $6,439,982 $3,703,294
========== ==========
</TABLE>
NOTE #8 - INCOME TAXES
<TABLE>
<CAPTION>
Year Ending December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Tax provision/(credit) applicable to
income before income taxes $28,000 $584,254 ($370,100)
======= ======== =========
Federal Income Tax
Deferred 15,000 416,752 (372,500)
------- -------- ---------
State Franchise Tax
Current 10,800 2,400 2,400
Deferred 2,200 165,102
------- -------- ---------
Total State Franchise Tax 13,000 167,502 2,400
------- -------- ---------
Total Income Taxes $28,000 $584,254 $(370,100)
======= ======== =========
</TABLE>
Page 51
<PAGE> 52
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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>
1996 1995 1994
--------------- ---------------- ---------------
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 $21,160 $4,600 $253,602 $118,340 ($495,746)
Depreciation computed
differently on tax returns than
for financial statements 7,500 300 2,740 (6,551) (1,670)
Deferred compensation plan (19,900) (4,500) 14,550 4,836 (9,344)
Provision for loan loss deduction
in tax return over amount
charged for financial
statement purposes 6,240 1,800 145,860 48,477 134,260
------- ------ -------- -------- --------- --
Total $15,000 $2,200 $416,752 $165,102 ($372,500) $0
======= ====== ======== ======== ========= ==
</TABLE>
As a result of the following items, the total income tax expense/(credit) for
1996, 1995 and 1994, was different than the amount computed by applying the
statutory U.S. Federal income tax rate to income before taxes:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ -----------------
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Federal rate $45,416 34.0 $482,140 34.0 ($330,477) (17.4)
Changes due to income tax,
net of Federal tax benefit 8,580 6.4 110,551 7.8 1,584 0.1
Exempt interest ($28,410) (21.2) (21,800) (1.5) (54,200) (2.8)
Other 2,414 1.8 13,363 0.9 12,993 0.7
-------- ----- -------- ---- --------- -----
Total $28,000 21.0 $584,254 41.2 ($370,100) (19.4)
======== ===== ======== ==== ========= =====
</TABLE>
Page 52
<PAGE> 53
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
The deferred tax assets and liabilities of the Company are composed of the
following tax-affected cumulative timing differences.
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred Tax Assets
Real estate owned writedowns $ 14,000 $ 23,000
Deferred compensation 110,000 109,000
Deferred fees 130,000 129,000
Non-deductible reserves 18,000 46,000
Net losses 198,000 160,000
Other 5,000 8,000
--------- ---------
475,000 475,000
Less: Valuation allowance(1) (475,000) (475,000)
--------- ---------
0 0
Deferred Tax Liabilities
Reserve for loan losses (48,000) (28,000)
Fixed assets (135,000) (162,000)
--------- ---------
Net Deferred Tax Liability $(183,000) $(190,000)
========= =========
</TABLE>
(1) The valuation allowance is management's estimate of amounts more likely than
not of being realized due to uncertainty regarding future income based on prior
results. The allowance is largely attributable to unused losses previously
incurred and overall limitations on other deferred tax assets. The allowance
was not changed during the 1996 year.
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> <C>
1997 $168,902
1998 37,090
1999 23,390
2000 17,543
--------
Total $246,925
========
</TABLE>
Total property and equipment expenditures charged to leases for the reporting
periods ended December 31, 1996, 1995 and 1994, were approximately $303,000,
$733,000 and $725,000, respectively.
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, 1996 and 1995, the Company had commitments to
extend credit of approximately $5,622,000 and $5,113,000 and obligations under
standby letters of credit of approximately $271,000 and $294,000.
Page 53
<PAGE> 54
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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 Company'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
At December 31, 1996, the Company has one stock-based compensation plan, which
is described below. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized for its incentive stock option plan. Had compensation cost
for this plan been determined on the fair value at the grant dates consistent
with the method of SFAS 123, the impact would not have materially affected net
income.
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). 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 market value of such shares at dates of grant. Options granted expire on
such date as the Stock Option Committee or Board of Directors may determine,
but not later than the sixth anniversary of the date on which the option is
granted.
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.)
During 1996, the Board of Directors of Vineyard National Bancorp elected to
modify the existing incentive stock option plan. Under the new agreement the
options granted expire on such date as the Stock Option Committee or Board
shall determine, but not later than the seventh anniversary of the date on
which the option is granted.
The fair value of each option granted during 1996, 1995 and 1994, respectively,
were estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions; risk-free rates of 6.28%, 5.45% and
5.38%; dividend yield of 0.0% for all years; volatility of 24%, 25% and 24%;
expected life of 7 years for all years presented.
Page 54
<PAGE> 55
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
A summary of the status of the Company's incentive stock option plan as of
December 31, 1996, 1995 and 1994, respectively, and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995
------------------------------- -------------------------------
Number of Shares Number of Shares
--------------------- Weighted- --------------------- Weighted-
Available Average Available Average
For Exercise For Exercise
Granting Outstanding Price Granting Outstanding Price
--------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 50,036 76,416 $2.89 46,404 80,048 $2.92
Exercised
Cancelled 8,280 (8,280) $2.92 9,632 (9,632) $2.92
Granted (5,000) 5,000 $3.13 (6,000) 6,000 $2.60
------ ------ ------ ------
Outstanding at end of year 53,316 73,136 $2.91 50,036 76,416 $2.89
====== ====== ====== ======
Options exercisable at year-end 73,136 76,416
Weighted-average fair value of
Options granted during the year $1.12 $0.86
</TABLE>
<TABLE>
<CAPTION>
1994
--------------------------------
Number of Shares
--------------------- Weighted-
Available Average
For Exercise
Granting Outstanding Price
--------- ----------- ---------
<S> <C> <C> <C>
Outstanding at beginning of year 51,684 74,768 $5.87
Exercised
Cancelled 74,768 (74,768) $5.87
Granted (80,048) 80,048 $2.92
------- -------
Outstanding at end of year 46,404 80,048 $2.92
======= =======
Options exercisable at year-end 80,048
Weighted-average fair value of
Options granted during the year $1.13
</TABLE>
The following table summarizes information about incentive stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
- --------------------------------------------------------------------
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price
- --------------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$2.60 to $3.13 73,136 7 $2.91
</TABLE>
Page 55
<PAGE> 56
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #12 - OTHER INCOME/EXPENSES
The following is a breakdown of fees and other servicing income and expenses
for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Fees and Other Servicing Income
Fees and service charges $1,750,110 $2,286,071 $2,283,054
Gain on sale of loans 10,614 91,023
Loan servicing 150,415 450,654
---------- ---------- ----------
Total $1,750,110 $2,447,100 $2,824,731
========== ========== ==========
Other Expenses
Data processing $754,617 $826,520 $875,477
Marketing expenses 307,233 326,605 414,098
Professional expenses 421,209 561,825 719,950
Office supplies, postage and telephone 363,892 431,034 463,665
Insurance and assessment expense 157,931 336,096 418,795
Loan related expense 147,541 359,095 582,902
Administrative expense 85,316 99,767 129,828
Other 262,040 269,526 203,022
---------- ---------- ----------
Total $2,499,779 $3,210,468 $3,807,737
========== ========== ==========
</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, 1996, the combined amount of funds
available from these two sources amounted to approximately $969,000 or 12.4%.
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. 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 25% of officers' deferrals
up to a maximum of 10% and 50% 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 $84,535 ($66,815 net of income taxes), $138,833
($81,911 net of income taxes) and $107,057 ($81,214 net of income taxes) for
the years ended December 31, 1996, 1995 and 1994, respectively.
Page 56
<PAGE> 57
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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 15% of their compensation with a maximum of
$9,500 annually. The Company's contribution to the plan is based upon an
amount equal to 25% of each participant's eligible contribution for the plan
year not to exceed 4% 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 $14,862 ($11,747 net of income taxes) and $36,070
($21,281 net of income taxes) and $34,533 ($26,197 net of income taxes) for the
years ended December 31, 1996, 1995 and 1994, 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 1996, 1995 and 1994.
NOTE #17 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the
Bank meets all capital adequacy requirements to which it is subject.
Page 57
<PAGE> 58
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency (OCC) categorized the Bank as adequately
capitalized under the regulatory framework for prompt corrective action (there
are no conditions or events since that notification that management believes
have changed the Bank's category). To be categorized as well-capitalized, the
Bank must maintain minimum ratios as set forth in the table below. The
following table also sets forth the Bank's actual capital amounts and ratios
(dollar amounts in thousands):
<TABLE>
<CAPTION>
Capital Needed
------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Provisions
------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total capital to risk-weighted assets $8,568 8.2% $8,329 8.0% $10,411 10.0%
Tier 1 capital to risk-weighted assets 7,840 7.5% 4,165 4.0% 6,247 6.0%
Tier 1 capital to average assets 7,840 6.5% 4,832 4.0% 6,040 5.0%
As of December 31, 1995
Total capital to risk-weighted assets 8,518 10.2% 6,681 8.0% 8,351 10.0%
Tier 1 capital to risk-weighted assets 7,735 9.3% 3,327 4.0% 4,990 6.0%
Tier 1 capital to average assets 7,735 7.3% 4,238 4.0% 5,298 5.0%
</TABLE>
NOTE #18 - 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. The principal balance
of loans being serviced on behalf of others was approximately $0, $0 and
$168,204,000 at December 31, 1996, 1995 and 1994. Servicing fee income
amounted to approximately $0, $150,000 and $436,000 in 1996, 1995, and 1994,
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 $22,000 and $1,489,000 from
the sale in 1996 and 1995, respectively.
NOTE #19 - 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>
1996 1995
-------- --------
<S> <C> <C>
Balance, Beginning of year $608,694 $848,234
Additions 612,624 284,000
Sales (473,853) (578,670)
Valuation adjustments and other (37,260) 55,130
-------- --------
Balance, End of year $710,205 $608,694
======== ========
</TABLE>
The balances at December 31, 1996 and 1995 are shown net of reserves.
Page 58
<PAGE> 59
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #20 - RESERVE FOR PROBABLE LOSSES ON OTHER REAL ESTATE OWNED
Transactions in the reserve for other real estate owned are summarized for
1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Balance, Beginning of year $38,133 $93,263 $1,300
Provision charged to other expense 37,260 49,740 137,129
Charge-offs and other reductions (23,920) (104,870) (45,166)
------- -------- -------
Balance, End of year $51,473 $38,133 $93,263
======= ======== =======
</TABLE>
NOTE #21 - 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 $7,619,307 $7,619,307
Interest bearing deposits 396,000 396,000
Investment securities 5,899,729 5,899,729
Loans receivable 101,125,571 100,941,571
Accrued interest receivable 403,126 403,126
Liabilities
Non-interest bearing deposits 25,946,157 25,946,157
Interest bearing deposits 80,656,632 80,574,632
Federal funds purchased 3,700,000 3,700,000
Accrued interest payable 665,302 665,302
</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 $5,893,000 $58,930
</TABLE>
Page 59
<PAGE> 60
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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.
- - 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.
- - Federal Funds Purchased
The carrying values reported in the balance sheet approximate the fair
values of those instruments due to their short-term nature.
- - 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 #22 - 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 60
<PAGE> 61
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #23 - TIME DEPOSIT LIABILITIES
At December 31, 1996, the Company had time certificates of deposit with
maturity distributions as follows:
<TABLE>
<S> <C>
1997 $37,105,598
1998 5,185,011
1999 277,273
-----------
$42,567,882
===========
</TABLE>
NOTE #24 - BORROWINGS
The Bank has borrowing lines with three correspondent banks totaling $3.7
million and a secured line at the Federal Reserve.
Page 61
<PAGE> 62
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #25 - CONDENSED FINANCIAL INFORMATION OF VINEYARD NATIONAL BANCORP (PARENT
COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C>
Assets
Cash in Vineyard National Bank $7,335 $7,177 $7,805
Prepaid expenses 570 670 517
Investment in subsidiary 7,844,695 7,746,154 6,852,956
---------- ---------- -----------
Total Assets $7,852,000 $7,754,001 $6,861,278
========== ========== ===========
Liabilities
Due to shareholders in lieu of
fractional shares on stock splits 1,188 1,287 1,134
---------- ---------- -----------
Stockholders' Equity
Common stock 2,106,258 2,106,258 2,106,258
Additional paid-in capital 3,306,684 3,306,684 3,306,684
Retained earnings 2,438,470 2,339,772 1,447,202
---------- ---------- -----------
Total Stockholders' Equity 7,851,412 7,752,714 6,860,144
---------- ---------- -----------
Total Liabilities and Stockholders' Equity $7,852,600 $7,754,001 $6,861,278
========== ========== ===========
STATEMENTS OF INCOME
INCOME
Equity in income/(loss) of subsidiary $105,420 $833,639 $(1,538,664)
Interest 958 966 975
---------- ---------- -----------
106,378 834,605 (1,537,689)
---------- ---------- -----------
INCOME TAXES 800 800 800
---------- ---------- -----------
Net Income/(Loss) $105,578 $833,805 $(1,538,489)
========== ========== ===========
</TABLE>
Page 62
<PAGE> 63
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE #25 - CONDENSED FINANCIAL INFORMATION OF VINEYARD NATIONAL BANCORP
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INCREASE IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $958 $966 $975
Income taxes paid (800) (800) (800)
-------- -------- ---------
Net Cash Provided
By Operating Activities 158 166 175
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash paid for fractional shares (794)
-------- -------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 158 (628) 175
CASH, Beginning of year 7,177 7,805 7,630
-------- -------- ---------
CASH, End of year $7,335 $7,177 $7,805
======== ======== =========
RECONCILIATION OF NET INCOME/(LOSS) TO NET CASH
PROVIDED/(USED) BY OPERATING ACTIVITIES
Net Income/(Loss) 105,578 833,805 (1,538,489)
Adjustments to Reconcile Net Income/(Loss)
to Net Cash Provided By Operating Activities
(Increase)/decrease in other assets 99 (153) 18
-------- -------- ---------
Undistributed (earnings)/loss of subsidia (105,420) (833,639) 1,538,664
Increase/(decrease) in other liabilities (99) 153 (18)
-------- -------- ---------
Net Cash Provided
By Operating Activities $158 $166 $175
======== ======== =========
</TABLE>
Page 63
<PAGE> 64
SELECTED QUARTERLY FINANCIAL DATA
The selected quarterly data for 1996 is based on the unaudited
financial statements of the Company as presented by management.
<TABLE>
<CAPTION>
Quarter Ended 1996
------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Interest Income $1,442,678 $1,516,280 $1,609,169 $1,582,186
Provision for Loan and Lease Losses (116,300) (217,600) (83,000)
Other Income 446,371 444,770 483,576 463,216
Other Expenses (1,982,582) (1,967,375) (1,770,627) (1,717,184)
------------ ------------ ------------ ------------
Income/(Loss) Before Taxes (93,533) (122,625) 104,518 245,218
Income Taxes (1,600) (26,400)
------------ ------------ ------------ ------------
Net Income/(Loss) ($93,533) ($124,225) $104,518 $218,818
============ ============ ============ ============
Earnings/(Loss) Per Share
of Common Stock
Net Income/(Loss) ($0.05) ($0.07) $0.06 $0.12
============ ============ ============ ============
Number of Shares Used
in Per Share Calculation 1,862,643 1,862,643 1,862,643 1,862,643
Balance Sheet Data
Assets $111,697,167 $117,761,821 $119,454,829 $119,523,686
============ ============ ============ ============
Deposits $102,920,152 $109,126,820 $111,826,825 $106,602,789
============ ============ ============ ============
Loans and Leases/(Net) $79,889,798 $85,942,038 $92,754,609 $96,737,786
============ ============ ============ ============
Stockholders' Equity $7,653,294 $7,508,043 $7,628,004 $7,851,412
============ ============ ============ ============
</TABLE>
Page 64
<PAGE> 65
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 for5
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.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Page 65
<PAGE> 66
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, 1997, for the
Company's 1997 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, 1997, for the Company's 1997 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, 1997, for the Company's 1997 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, 1997, for the Company's 1997 annual shareholders' meeting.
Page 66
<PAGE> 67
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 70 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 70 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 70 of this Form 10-K.
Page 67
<PAGE> 68
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 24th day of
March 1997.
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 24, 1997.
<TABLE>
<S> <C>
President, Chief Executive Officer (Principal
/s/ STEVEN R. SENSENBACH Executive Officer) and Director
Executive Vice President, Chief Financial
/s/ SOULE SENSENBACH Officer, (Principal Financial and Accounting
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 68
<PAGE> 69
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description Sequentially
Number 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 (R-1)
Bancorp 1987 Incentive Stock Option Plan
10.4 Vineyard National Bank Deferred Compensation Plan (R-1)
10.5 Employment Agreement Between Vineyard National Bank and Steven R. (R-1)
Sensenbach
10.6 1988 Extension Agreement for Employment Agreement Between Vineyard (R-1)
National Bank and Steven R. Sensenbach
10.7 Lease Agreement Between Vineyard National Bank and Landlord Regarding (R-1)
Rancho Cucamonga Office 1987
10.8 Lease Agreement Between Vineyard National Bank and Landlord Regarding (R-1)
Chino Office 1988
10.9 Lease Agreement Between Vineyard National Bank and Landlord Regarding (R-1)
Diamond Bar Office 1987
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 (R-1)
National Bank and Landlord 1988
10.14 Lease Agreement Between Vineyard National Bank and Landlord Regarding (R-1)
Additional Rancho Cucamonga Office Space 1988
10.15 Buy/Sell Agreement Between Vineyard National Bank and Wells Fargo (R-1)
1984
10.16 Buy/Sell Agreement Between Vineyard National Bank and Arrowhead (R-1)
Pacific Savings Bank 1988
10.17 Change in Terms and Conditions Between Vineyard National Bank and (R-1)
Landlord Regarding Rancho Cucamonga Office 1989
10.18 Lease Agreement Between Vineyard National Bank and Landlord Regarding (R-1)
Victorville Office 1989
10.19 Lease Agreement Between Vineyard National Bank and Landlord Regarding (R-2)
Additional Victorville Office Space 1989
21 Subsidiaries of the Registrant (R-2)
23 Consent of Vavrinek, Trine, Day & Company
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 69
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Vineyard National Bancorp:
We consent to the incorporation of our Report dated March 7, 1997, on
the consolidated financial statements of Vineyard National Bancorp as of
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, included in its Annual Report on Form 10-K for the year
ended December 31, 1996.
VAVRINEK, TRINE, DAY & CO.
Certified Public Accountants
Rancho Cucamonga, California
Page 70
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996, AUDITED 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,619,307
<INT-BEARING-DEPOSITS> 396,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,899,729
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 97,465,453
<ALLOWANCE> 727,667
<TOTAL-ASSETS> 119,523,686
<DEPOSITS> 106,602,789
<SHORT-TERM> 3,700,000
<LIABILITIES-OTHER> 1,369,485
<LONG-TERM> 0
0
0
<COMMON> 2,106,258
<OTHER-SE> 5,745,154
<TOTAL-LIABILITIES-AND-EQUITY> 119,523,686
<INTEREST-LOAN> 8,136,925
<INTEREST-INVEST> 629,853
<INTEREST-OTHER> 244,369
<INTEREST-TOTAL> 9,011,147
<INTEREST-DEPOSIT> 2,859,157
<INTEREST-EXPENSE> 2,860,834
<INTEREST-INCOME-NET> 6,150,313
<LOAN-LOSSES> 416,900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,437,768
<INCOME-PRETAX> 133,578
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105,578
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0.09
<LOANS-NON> 434,000
<LOANS-PAST> 49,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,890,058
<ALLOWANCE-OPEN> 783,466
<CHARGE-OFFS> 686,497
<RECOVERIES> 213,798
<ALLOWANCE-CLOSE> 727,667
<ALLOWANCE-DOMESTIC> 727,667
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
