<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, 1997 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, 1997, the aggregate market value of the voting shares
held by non-affiliates of the registrant was approximately $7,610,000. 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, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement for its 1998
Annual Meeting of Shareholders, which will be filed on or before April 30, 1998,
are incorporated by reference in Part III of this Form 10-K.
This Report includes a total of 70 pages.
Exhibit Index appears on page 69. Page 1 of 70
<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, 1997, the Company had total consolidated assets of
approximately $112 million, total consolidated net loans of approximately $88
million, total consolidated deposits of approximately $102 million and total
stockholders' equity of approximately $8.3 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.
Page 2 of 70
<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,
1997, the Bank had approximately 5,894 demand deposit accounts representing
aggregate deposits of approximately $29,455,000 with an average account balance
of $4,997, approximately 2,516 accounts representing approximately $28,451,000
in "NOW", super "NOW" and money market checking accounts with an average account
balance of $11,308, approximately 3,263 accounts representing approximately
$9,280,000 in savings deposits with an average account balance of $2,844 and
approximately 1,961 accounts representing approximately $34,555,000 in time
deposits ("TCD's") with an average account balance of $17,621. Of the total
deposits at December 31, 1997, $7,523,000 were in the form of TCD's in
denominations greater than $100,000 and $2,198,000 were municipal and other
governmental deposits, both time and demand.
During the 12 months ended December 31, 1997, average demand deposits
increased by approximately $1,842,000 or 7%, and "NOW", super "NOW" and money
market checking accounts decreased by approximately $2,589,000 or 8%. Average
savings deposits decreased by approximately $163,000 or 2%, while average time
deposits decreased by approximately $2,614,000 or 7%, including an increase of
$1,223,000 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,
1997, 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 5% of total deposits.
Page 3 of 70
<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,
1997 1996
---------------------- -----------------------
Average Percent Average Percent
Assets Balance of Total Balance of Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Investment Securities
Taxable $ 6,478 5.5 $ 11,220 9.7
Federal funds sold 3,409 2.9 3,467 3.0
Due from banks-time deposits 278 0.2 669 0.6
Loans 92,963 78.9 85,216 73.4
Direct lease financing 79 0.1 394 0.3
Reserve for loan and lease losses (715) (0.6) (715) (0.6)
--------- ----- --------- -----
Net Loans and Leases 92,327 78.4 84,895 73.1
--------- ----- --------- -----
Total Interest Earning Assets 102,492 87.0 100,251 86.4
Cash and non-interest earning deposits 6,417 5.4 6,865 5.9
Net premises, furniture and equipment 6,444 5.5 5,675 4.9
Other assets 2,410 2.1 3,263 2.8
--------- ----- --------- -----
Total Assets $ 117,763 100.0 $ 116,054 100.0
========= ===== ========= =====
Liabilities and Stockholders' Equity
Savings deposits (1) 39,118 33.2 41,877 36.1
Time deposits 40,858 34.7 38,550 33.2
Short-term borrowings 107 0.1 38 0.0
--------- ----- --------- -----
Total Interest-bearing Liabilities 80,083 68.0 80,465 69.3
Demand deposits 28,264 24.0 26,422 22.8
Other liabilities 1,369 1.2 1,472 1.3
--------- ----- --------- -----
Total Liabilities 109,716 93.2 108,359 93.4
Stockholders' Equity 8,047 6.8 7,695 6.6
--------- ----- --------- -----
Total Liabilities and Stockholders' Equity $ 117,763 100.0 $ 116,054 100.0
========= ===== ========= =====
</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.")
Page 4 of 70
<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) 1997 1996
- ---------------------- ------------------------------- ------------------------------
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) $ 4,108 239 5.8% $ 6,430 370 5.8%
U.S. Government agencies (3) 2,171 126 5.8% 4,408 249 5.6%
Municipal agencies (1)
Other securities 182 10 5.5% 376 10 2.7%
-------- -------- -------- --------
Total Investment Securities 6,461 375 5.8% 11,214 629 5.6%
Federal funds sold 3,409 185 5.4% 3,467 179 5.2%
Due from banks - time deposits 278 17 6.1% 669 35 5.2%
Loans (2) 92,963 8,631 9.3% 85,216 8,137 9.5%
Lease financing (1) 79 7 8.9% 394 39 9.9%
-------- -------- -------- --------
Total Interest Earning Assets(1) $103,190 $ 9,215 8.9% $100,960 $ 9,019 8.9%
======== ======== ======== ========
Interest Bearing Liabilities
Domestic Deposits and Borrowed Funds
Savings deposits (4) 39,118 685 1.8% 41,877 751 1.8%
Time deposits 40,858 2,250 5.5% 38,550 2,108 5.5%
Short-term borrowings 107 7 6.5% 38 2 5.3%
-------- -------- -------- --------
Total Interest Bearing Liabilities $ 80,083 $ 2,942 3.7% $ 80,465 $ 2,861 3.6%
======== ======== ======== ========
</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) 1997 1996
------- -------
<S> <C> <C>
Total interest income (1, 2) $ 9,215 $ 9,019
Total interest expense (5) 2,942 2,861
Total interest earnings (1, 2) 6,273 6,158
Total average earning assets 102,475 100,245
Net yield on average earning assets (1, 2) 6.1% 6.1%
Net yield on average earning assets (excluding loan fees) (1, 2) 5.5% 5.6%
</TABLE>
1 Interest income includes the effects of tax equivalent adjustments on tax
exempt securities and leases using tax rates which approximate 25.0
percent for 1997 and 21.0 percent for 1996.
2 Loans, net of unearned income, include non-accrual loans but do not
reflect average reserves for probable loan losses of $715,000 in 1997 and
$715,000 in 1996. Loan fees of $590,000 in 1997 and $523,000 in 1996, are
included in loan interest income. There were four non-accruing loans
totaling approximately $229,000 at December 31, 1997 and four
non-accruing loans totaling approximately $434,000 at December 31, 1996.
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.
Page 5 of 70
<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 Federal Direct
Securities Funds Lease Time
Taxable Sold Loans (2) Financing (1) Deposits Total
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Earned On:
1997 compared to 1996
Increase/(decrease) due to:
Volume changes $(277) $ (3) $ 699 $ (27) $ (29) $ 363
Rate changes 23 9 (205) (6) 12 (167)
----- ----- ----- ----- ----- -----
Net Increase/(Decrease) $(254) $ 6 $ 494 $ (33) $ (17) $ 196
===== ===== ===== ===== ===== =====
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) $ (53) $ 667 $ (89) $ (1) $ 397
===== ===== ===== ===== ===== =====
</TABLE>
1 Interest income includes the effects of tax equivalent adjustments on tax
exempt securities using tax rates which approximate 25.0 percent for 1997
and 21.0 percent for 1996.
2 Includes an increase in loan fees of $67,000 in 1997 and an increase of
$403,000 in 1996.
<TABLE>
<CAPTION>
(Dollars in Thousands) Savings Time Short-term
Deposits Deposits Borrowings(3) Total
-------- -------- ------------- -----
<S> <C> <C> <C> <C>
Interest Paid On:
1997 compared to 1996
Increase/(decrease) due to:
Volume changes $ (49) $ 127 $ 4 $ 82
Rate changes (17) 16 1 0
----- ----- ----- -----
Net Increase/(Decrease) $ (66) $ 143 $ 5 $ 82
===== ===== ===== =====
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
===== ===== ===== =====
</TABLE>
3 Short-term Borrowings consist of Federal Funds Purchased.
Page 6 of 70
<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 accounts for
investments in accordance with 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>
(Dollars in Thousands) 1997 1996
Available-for-Sale Available-for-Sale
------------------ ------------------
<S> <C> <C>
U.S. Treasury $2,993 $5,468
Federal agencies 1,512
Other securities 196 432
------ ------
$4,701 $5,900
====== ======
</TABLE>
The following table shows the maturities of investment securities at
December 31, 1997, and the weighted average yields of such securities.
<TABLE>
<CAPTION>
(Dollars in Thousands) 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 $2,497 5.91% $ 496 5.70%
U.S. Agencies 1,512 6.15%
Other securities 196 5.21%
------- --------
$2,693 5.86% $ 2,008 6.04%
====== =========
</TABLE>
LOAN PORTFOLIO
The following table sets forth the amount of loans outstanding for
each of the past two years.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
- ---------------------- --------------------------
1997 1996
--------- ---------
<S> <C> <C>
Types of Loans
Domestic
Commercial, financial and agricultural $ 10,585 $ 9,737
Real estate construction 1,960 830
Real estate mortgage 41,917 40,993
Installment loans to individuals 37,334 50,000
Lease financing (1) 14 188
All other loans (including overdrafts) 31 105
--------- ---------
91,841 101,853
Less:
Unearned income (2,727) (4,387)
Reserve for loan and lease losses (694) (728)
--------- ---------
Total $ 88,420 $ 96,738
========= =========
</TABLE>
1 Lease financing is net of unearned income of approximately $1,000 for
1997 and $16,000 for 1996.
Page 7 of 70
<PAGE> 8
Real estate mortgage loans are comprised of construction loans, SFR's and
commercial real estate loans which represent 3.5%, 6.6% and 36.2% 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 52.4% of
total installment loans and 18.5% of total loan commitments. Approximately
95.75% 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, 1997.
<TABLE>
<CAPTION>
(Dollars in Thousands) Maturing
-------------------------------------
Within One to After
One Year Five Years Five Years Total
------- ------- ------- -------
<S> <C> <C> <C> <C>
Domestic
Commercial, financial and agricultural $ 4,063 $ 4,935 $ 1,587 $10,585
Real estate construction 1,883 77 1,960
Real estate mortgage 2,191 3,690 36,036 41,917
Installment loans to individuals 2,791 31,963 2,580 37,334
Lease financing (net of unearned income) 14 0 14
All other loans 31 0 31
------- ------- ------- -------
Total $10,973 $40,665 $40,203 $91,841
======= ======= ======= =======
Loans and leases with predetermined interest rates 4,334 35,597 17,127 57,058
Loans and leases with floating or adjustable interest rates 6,639 5,068 23,076 34,783
------- ------- ------- -------
Total $10,973 $40,665 $40,203 $91,841
======= ======= ======= =======
</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, 1997. 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
38% of its total deposits at December 31, 1997, 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.
Page 8 of 70
<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
Federal Funds Sold $ 2,950 $ 2,950
Investment securities $ 2,497 $ 2,008 $ 181 $ 15 4,701
Net loans and leases 4,800 34,089 35,597 17,127 (3,193) 88,420
Noninterest-bearing assets 15,440 15,440
-------- -------- -------- -------- -------- --------
Total Assets $ 7,750 $ 36,586 $ 37,605 $ 17,308 $ 12,262 $111,511
======== ======== ======== ======== ======== ========
Liabilities and Stockholders' Equity
Noninterest-bearing deposits 29,456 29,456
Interest-bearing deposits 51,731 18,205 2,349 72,285
Other liabilities 1,503 1,503
Stockholders' Equity 8,267 8,267
-------- -------- -------- -------- -------- --------
Total Liabilities and
Stockholders' Equity $ 51,731 $ 18,205 $ 2,349 $ - $ 39,226 $111,511
======== ======== ======== ======== ======== ========
Interest Rate Sensitivity Gap $(43,981) $ 18,381 $ 35,256 $ 17,308 $(26,964) $ -
======== ======== ======== ======== ======== ========
Cumulative Interest Rate Sensitivity Gap $(43,981) $(25,600) $ 9,656 $ 26,964 $ - $ -
======== ======== ======== ======== ======== ========
</TABLE>
RISK ELEMENTS
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
- ---------------------- -----------------
1997 1996
------- ------
<S> <C> <C>
Accruing Loans More Than 90 Days Past Due (1)
Aggregate loan amounts
Commercial, financial and agricultural
Real estate $ 109
Installment loans to individuals 107 $ 49
Aggregate leases
Renegotiated loans (2)
Non-accrual loans (3)
Aggregate loan amounts
Commercial 28 5
Real estate 201 429
------- ------
$ 445 $ 483
======= ======
</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 four loans on non-accrual status approximately totaling
$229,000 at December 31, 1997, and four loans totaling approximately
$434,000 at December 31, 1996. The amount of interest that would have
been collected on these loans had they remained current in accordance
with their original terms was $26,000 in 1997 and $7,000 in 1996,
respectively.
Page 9 of 70
<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, 1997, the Bank's classified loans consist of
$1,859,000 of loans classified as substandard and $17,000 of loans classified as
doubtful. The Bank's $1,859,000 in loans classified as substandard consisted of
$1,552,000 of performing loans and $337,000 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, 1997, where the known credit problems of the borrower
would cause it to have serious doubts as to the ability of such borrowers to
comply with their present loan repayment terms and which would result in such
loans being included in the non-accrual, past due and restructured loan table
set forth above at some future date. Management cannot, however, predict the
extent to which the current economic environment may persist or worsen or the
full impact such environment may have on the Bank's loan portfolio. Furthermore,
management cannot predict the results of any subsequent examinations of the
Bank's loan portfolio by the Comptroller. Accordingly, there can be no assurance
that other loans will not become included in the table above in the future.
FOREIGN OUTSTANDINGS
The Bank did not have any loans, acceptances, interest-bearing
deposits or other monetary assets of any foreign country.
LOAN CONCENTRATIONS
The Bank does not have loans made to borrowers who are engaged in
similar activities where the aggregate amount of the loans exceeds 10% of their
loan portfolio that are not broken out as a separate category in the loan
portfolio.
OTHER INTEREST-BEARING ASSETS
The Bank does not have any interest-bearing assets for which
management believes that recovery of the interest on and principal thereof is at
significant risk.
Page 10 of 70
<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,
------------
1997 1996
------- -------
<S> <C> <C>
Loans and Leases Outstanding, Year-end(1) $89,114 $97,465
======= =======
Average Amount of Loans and Leases Outstanding(1) $93,042 $85,610
======= =======
Loans and Lease Loss Reserve Balance, Beginning of year $ 728 $ 783
------- -------
Reserve on Loans Acquired in Business Combination
Charge-offs
Domestic
Commercial, financial and agricultural 34 101
Real estate -- construction
Real estate -- mortgage 14 201
Consumer loans 309 384
Lease financing
------- -------
357 686
------- -------
Foreign
357 686
------- -------
Recoveries
Domestic
Commercial, financial and agricultural 18 102
Real estate - construction
Real estate - mortgage 6
Consumer loans 156 112
Lease financing
------- -------
180 214
------- -------
Foreign
Net Charge-offs 177 472
------- -------
Additions/(Reductions) charged to operations 144 417
------- -------
Loan and Lease Loss Reserve Balance, End of year $ 695 $ 728
======= =======
Ratio of Net Charge-offs During the Year
to Average Loans and Leases Outstanding During the Year 0.19% 0.55%
======= =======
Ratio of Reserve for Loan Losses to Loans at Year-end 0.78% 0.75%
======= =======
</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, 1997.
Page 11 of 70
<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 retains an outside consultant to review 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, 1997, see "RISK ELEMENTS - Non-accrual, Past Due and
Restructured Loans and Potential Problem Loans."
The Bank accounts for impaired loans in accordance with 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
or when the loan is fully secured and in process of collection. 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, 1997 and 1996, the Bank had loans amounting to
approximately $229,000 and $434,000, respectively, that were specifically
classified as impaired. The average balance of these loans amounted to
approximately $354,000 and $508,000 for the year ended December 31, 1997 and
1996, respectively. The allowance for loan losses related to these impaired
loans amounted to approximately $8,000 and $66,000 at December 31, 1997 and
1996, 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 of 70
<PAGE> 13
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended December 31,
----------------------------------------------
1997 1996
--------------------- ----------------------
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
------ ----------- ------ -----------
Domestic
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 20 9.5 $ 17 9.5
Real estate 62 41.1 393 41.1
Installment loans to individuals 64 49.2 156 49.2
Lease financing 0.2 0.2
Foreign
Unallocated Allowance 549 162
---- ----- ---- -----
Total $695 100.0 $728 100.0
==== ===== ==== =====
</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,
----------------------------------------------
1997 1996
------------------- ---------------------
Average Average Average Average
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
In Domestic Offices
Noninterest bearing demand deposits $ 28,264 $ 26,422
Savings deposits (1) 39,118 1.8% 41,877 1.8%
Time deposits 42,858 5.5% 38,550 5.5%
-------- --------
Total Deposits $110,240 2.7% $106,849 2.7%
======== ========
</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,
1997
--------
<S> <C>
Three months or less $ 3,276
Over three through 12 months 4,147
Over one through five years 100
--------
$ 7,523
========
</TABLE>
Page 13 of 70
<PAGE> 14
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>
1997 1996
---- ----
<S> <C> <C>
Return on assets 0.34% 0.10%
Return on equity 5.02% 1.38%
Dividend payout ratio
Equity to asset ratio 6.83% 7.03%
</TABLE>
COMPETITION
The Bank faces substantial competition for deposits and loans
throughout its market areas. The primary factors in competing for deposits are
interest rates, personalized services, the quality and range of financial
services, convenience of office locations and office hours. Competition for
deposits comes primarily from other commercial banks, savings institutions,
credit unions, money market funds and other investment alternatives. The primary
factors in competing for loans are interest rates, loan origination fees, the
quality and range of lending services and personalized services. Competition for
loans comes primarily from other commercial banks, savings institutions,
mortgage banking firms, credit unions and other financial intermediaries. The
Bank faces competition for deposits and loans throughout its market areas not
only from local institutions but also from out-of-state financial intermediaries
which have opened loan production offices or which solicit deposits in its
market areas. Many of the financial intermediaries operating in the Bank's
market areas offer certain services, such as trust, investment and international
banking services, which the Bank does not offer directly. Additionally, banks
with larger capitalization and financial intermediaries not subject to bank
regulatory restrictions have large lending limits and are thereby able to serve
the needs of larger customers. Neither the deposits nor loans of any office of
the Bank exceed 1% of the aggregate loans or deposits of all financial
intermediaries located in the counties in which such offices are located.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business which depends largely on rate differentials. In
general, the difference between the interest rate paid by the Bank on its
deposits and its other borrowings and the interest rate received by the Bank on
loans extended to its customers and securities held in the Bank's portfolio
comprise the major portion of the Company's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Bank. Accordingly,
the earnings and growth of the Company are subject to the influence of domestic
and foreign economic conditions, including inflation, recession and
unemployment.
The commercial banking business is not only affected by general
economic conditions but is also influenced by the monetary and fiscal policies
of the federal government and the policies of regulatory agencies, particularly
the Federal Reserve Board. The Federal Reserve Board implements national
monetary policies (with objectives such as curbing inflation and combating
recession) by its open-market operations in United States Government securities,
by adjusting the required level of reserves for financial institutions subject
to its reserve requirements and by varying the discount rates applicable to
borrowings by depository institutions. The actions of the Federal Reserve Board
in these areas influence the growth of bank loans, investments and deposits and
also affect interest 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."
Page 14 of 70
<PAGE> 15
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain laws
and regulations which relate to the regulation of the Company and the Bank. The
description does not purport to be a complete summary of all such authority and
is qualified in its entirety by reference to the applicable laws and
regulations.
The Company. The Company, as a registered bank holding company, is
subject to regulation under the Bank Holding Company Act of 1956, as amended
(the "BHCA"). The Company is required to file with the Federal Reserve Board
quarterly and annual reports and such additional information as the Federal
Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may
conduct examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board, a
bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See "ITEM 1. BUSINESS - Supervision and Regulation - Capital
Standards." The Company is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the outstanding shares of
any class of voting securities or substantially all of the assets of any bank or
bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank holding
company.
The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly 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.
Page 15 of 70
<PAGE> 16
The Company is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by, and may be required to file reports
with, the California State Banking Department.
Finally, the Company is subject to the periodic reporting requirements
of the Securities Exchange Act of 1934, as amended, including but not limited
to, filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
The Bank. The Bank, as a national banking association, is subject to
primary supervision, examination and regulation by the Office of the Comptroller
of the Currency ("Comptroller"). If, as a result of an examination of a Bank,
the Comptroller should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity or other
aspects of the Bank's operations are unsatisfactory or that the Bank or its
management is violating or has violated any law or regulation, various remedies
are available to the Comptroller. Such remedies include the power to enjoin
"unsafe or unsound practices," to require affirmative action to correct any
conditions resulting from any violation or practice, to issue an administrative
order that can be judicially enforced, to direct and increase in capital, to
restrict the growth of the Bank, to assess civil monetary penalties, and to
remove officers and directors. The FDIC has similar enforcement authority, in
addition to its authority to terminate a Bank's deposit insurance in the absence
of action by the Comptroller and upon 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 of 70
<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 of 70
<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 of 70
<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, 1997.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1997
-----------------------------------
Minimum
Actual Capital
Amount Ratio Requirement
------ ----- -----------
<S> <C> <C> <C>
Leverage ratio $ 8,244 7.29% 4.0%
Tier 1 risk-based ratio 8,244 8.59% 4.0%
Total risk-based ratio 8,939 9.32% 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 of 70
<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 of 70
<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 of 70
<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 of 70
<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 1997, Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." This statement, which is effective for
the year ending December 31, 1998, establishes standards of disclosure and
financial statement display for reporting comprehensive income and its
components.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This statement changes current practice under SFAS 14 by
establishing a new framework on which to base segment reporting )referred to as
the management approach) and also requires certain related disclosures about
products and services, geographic areas and major customers. The disclosures are
required for the year ending December 31, 1998.
EMPLOYEES
At December 31, 1997, the Company had approximately 71 full-time and
29 part-time employees. Total full-time equivalent employees at December 31,
1997, were approximately 90. 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 Executive Vice President/Cashier/
Director of Operations
</TABLE>
All officers hold office at the pleasure of the Board of Directors.
Mr. Sensenbach has served as President and Chief Executive of the Company
since its formation in December 1988. Mr. Sensenbach has been President and
Chief Executive Officer of the Bank since 1981.
Mr. Schoeffler was appointed Executive Vice President/Senior Credit
Administrator of the Bank in January 1993, and has been with the Bank since
1991.
Page 23 of 70
<PAGE> 24
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 appointed as the Company's Cashier in November 1993. She
has been with the Bank since June 1993, and is currently serving as Executive
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 one years and three years,
respectively. The Bank's total occupancy expense for 1997, excluding furniture
and equipment expense, approximated $634,000. 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 of 70
<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, 1997, the
Company had approximately 681 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>
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
1997
First Quarter $ 3.63 $ 3.50
Second Quarter 3.63 3.63
Third Quarter 4.50 3.63
Fourth Quarter 5.13 4.50
</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 of 70
<PAGE> 26
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the fiscal years ended
December 31, 1997, 1996 and 1995, are derived from the audited consolidated and
Bank financial statements of the Company examined by Vavrinek, Trine, Day & Co.,
LLP, 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, 1994 and 1993,
are derived from audited financial statements examined by Vavrinek, Trine, Day &
Co., LLP which are not included in this Report.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 9,213,228 $ 9,011,147 $ 8,568,863 $ 8,472,532 $ 9,514,751
Interest Expense 2,942,507 2,860,834 2,399,588 1,919,004 2,481,123
Net Interest Income 6,270,721 6,150,313 6,169,275 6,553,528 7,033,628
(Provision)/Credit for Loan and Lease Losses (143,782) (416,900) 429,000 (1,440,000) (300,000)
Other Income 1,748,754 1,837,933 3,961,580 2,808,965 3,897,471
Other Expenses (7,337,757) (7,437,768) (9,141,796) (9,831,082) (10,133,676)
------------- ------------- ------------- ------------- ------------
Income/(Loss) Before Taxes 537,936 133,578 1,418,059 (1,908,589) 497,423
Income Taxes (133,800) (28,000) (584,254) 370,100 (144,800)
Income/(Loss) Before Cumulative Effect
of Accounting Change 404,136 105,578 833,805 (1,538,489) 352,623
Cumulative Effect of Change in Accounting
for Income Taxes 107,000
------------- ------------- ------------- ------------- ------------
Net Income/(Loss) $ 404,136 $ 105,578 $ 833,805 $ (1,538,489) 459,623
============= ============= ============= ============= ============
Earnings/(Loss) Per Share of Common Stock (1)
Basic
Income/(Loss) Before Cumulative Effect $ 0.22 $ 0.06 $ 0.45 $ (0.83) 0.19
Cumulative Effect 0.06
------------- ------------- ------------- ------------- ------------
Net Income/(Loss) $ 0.22 $ 0.06 $ 0.45 $ (0.83) 0.25
============= ============= ============= ============= ============
Diluted
Income/(Loss) Before Cumulative Effect $ 0.21 $ 0.06 $ 0.44 $ (0.83) 0.19
Cumulative Effect 0.06
------------- ------------- ------------- ------------- ------------
Net Income/(Loss) $ 0.21 $ 0.06 $ 0.44 $ (0.83) 0.25
============= ============= ============= ============= ============
Weighted Average Number of Shares (1)
Basic 1,862,643 1,862,643 1,862,643 1,862,643 1,862,643
Diluted 1,882,853 1,874,719 1,874,971 1,862,643 1,862,643
Stock Splits -- -- 6 for 5 -- --
Balance Sheet Data
Assets $ 111,510,812 $ 119,523,686 $ 107,559,133 $ 107,417,232 $120,646,469
============= ============= ============= ============= ============
Deposits $ 101,741,356 $ 106,602,789 $ 98,414,447 $ 98,584,479 $111,186,106
============= ============= ============= ============= ============
Loans and Leases/(Net) $ 88,419,559 $ 96,737,786 $ 77,287,938 $ 83,786,866 $ 83,940,271
============= ============= ============= ============= ============
Stockholders' Equity $ 8,266,503 $ 7,851,412 $ 7,752,714 $ 6,860,144 $ 8,446,305
============= ============= ============= ============= ============
</TABLE>
1 Retroactively adjusted for stock splits.
Page 26 of 70
<PAGE> 27
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.
For the year ended December 31, 1997, Vineyard National Bancorp on a
consolidated basis reported Net Income of $404,000 compared to $106,000 and
$834,000 in the comparable 1996 and 1995 periods. Basic Earnings Per Share were
$0.22 compared to $0.06 in 1996 and $0.45 in 1995. Diluted Earnings Per Share
were $0.21 compared to $0.06 in 1996 and $0.44 in 1995. Consolidated total
assets at December 31, 1997 were $111,511,000 compared to $119,524,000 at
December 31, 1996, down approximately 7%. Total deposits also decreased from
$106,603,000 as of December 31, 1996 to $101,741,000 at year-end 1997.
Stockholders' equity was $8,267,000 at December 31, 1997, up from its $7,851,000
level a year earlier, owing primarily to net income of $404,000 for 1997. Also
impacting stockholders' equity was the unrealized gain on securities
available-for-sale of $16,000 which is up from the unrealized gain of $5,000 on
securities available-for-sale at December 31, 1996.
The reserve for probable loan and lease losses, which serves as a
"buffer" against possible future losses, had losses totaling $357,000 charged
against it during 1997. Recoveries of loans previously charged-off amounted to
$181,000 which were credited back to the reserve. A provision for probable loan
and lease losses of $144,000 was recorded in 1997 compared to a provision of
$417,000 in 1996 and a negative provision of $429,000 in 1995.
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 1997 was $6,271,000, up from the $6,150,000 reported in 1996 and
$6,169,000 reported in 1995. This represents an increase of 2.0% in 1997 and a
decrease of 0.3% in 1996, respectively. The components of net interest income
change in response to changes in rate, average balance and mix on both earning
assets and liabilities.
The increase in net interest income in 1997 from 1996 was due to the
increase in interest income exceeding the increase in interest expense. Interest
income increased $202,000 to $9,213,000 in 1997 from $9,011,000 in 1996 while
interest expense increased $83,000 to $2,943,000 in 1997 from $2,860,000 in
1996. The resulting increase in net interest income can be attributed to a
number of factors. First, the Bank's average interest-earning assets increased
2.2% from $100,960,000 in 1996 to $103,207,000 in 1997. This increase is mostly
attributable to a 9.1% increase in average loans, the Bank's highest yielding
asset. Average loans increased from $85,216,000 in 1996 to $92,963,000 in 1997.
Average investment securities decreased from $11,214,000 in 1996 to $6,478,000
in 1997, average federal funds sold, the Bank's lowest yielding asset decreased
from $3,467,000 in 1996 to $3,409,000 in 1997. Secondly, although the volume of
interest earning assets was higher on average in 1997 than in 1996, the average
yield earned on these assets increased only .1% from 8.9% in 1996 to 9.0% in
1997. Third, average interest-bearing liabilities decreased 3.3% from
$80,465,000 in 1996 to $80,083,000 in 1997. This decrease 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 6.6% from
$41,877,000 in 1998 to $39,118,000 in 1997 while time deposits, the Bank's
highest interest paying deposit account, increased 6.0% from $38,550,000 in 1996
to 40,858,000 in 1997. This shift was due to the Bank offering higher time
deposit rates in an effort to raise longer-term deposit levels. Fourth, the
average yield paid on interest-bearing liabilities increased to 3.7% in 1997
from 3.6% in 1996.
Page 27 of 70
<PAGE> 28
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 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) 1997 1996
------------------------ -----------------------------------------
Average Average Average Average
Assets Balance Interest Yield Balance Interest Yield
--------- --------- --- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Loans $ 92,963 $ 8,720 9.4% $ 85,216 $ 8,137 9.5%
Lease financing 79 7 8.9% 394 31 7.9%
Investment securities (3) 6,461 375 5.8% 11,214 629 5.6%
Federal funds sold 3,409 185 5.4% 3,467 179 5.2%
Interest-earning deposits with
other financial institutions 278 17 6.1% 669 35 5.2%
--------- --------- --- --------- --------- ---
Total Interest-earning Assets 103,190 9,304 9.0% 100,960 9,011 8.9%
--------- --- --------- ---
Other Assets 15,271 15,803
Less: Allowance for Loan Losses (715) (715)
--------- ---------
Total Average Assets $ 117,746 $ 116,048
========= =========
Liabilities and Shareholders' Equity
Savings deposits 39,118 685 1.8% 41,877 751 1.8%
Time deposits 40,858 2,250 5.5% 38,550 2,108 5.5%
Other 107 7 6.5% 38 2 5.3%
--------- --------- --- --------- --------- ---
Total Interest-bearing Liabilities 80,083 2,942 3.7% 80,465 2,861 3.6%
----- --- ------ ----- ---
Demand deposits 28,264 26,422
Other liabilities 1,362 1,469
Shareholders' equity 8,037 7,692
----- -----
Total Average Liabilities
and Shareholders' Equity $ 117,746 $ 116,048
========= =========
Net Interest Spread(1) 5.3% 5.3%
=== ===
Net Interest Income and Net Interest Margin(2) $ 6,362 6.2% $ 6,150 6.1%
========= === ========= ===
</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 of 70
<PAGE> 29
<TABLE>
<CAPTION>
(Dollars in Thousands) 1995
Average Average
Assets Balance Interest Yield
------- ------ ---
<S> <C> <C> <C>
Loans $78,097 $7,470 9.6%
Lease financing 928 75 8.1%
Investment securities (3) 12,976 756 5.8%
Federal funds sold 4,156 232 5.6%
Interest-earning deposits with
other financial institutions 568 36 6.3%
------- ------ ---
Total Interest-earning Assets 96,725 8,569 8.9%
------ ---
Other Assets 13,683
Less: Allowance for Loan Losses (967)
Total Average Assets $109,441
========
Liabilities and Shareholders' Equity
Savings deposits 46,848 839 1.8%
Time deposits 28,203 1,560 5.5%
Other 6 1 12.2%
------- ------ ---
Total Interest-bearing Liabilities 75,057 2,400 3.2%
Demand deposits 26,082 ------ -----
Other liabilities 1,047
Shareholders' equity 7,255
-----
Total Average Liabilities
and Shareholders' Equity $109,441
========
Net Interest Spread(1) 5.7%
===
Net Interest Income and Net Interest Margin(2) $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 29 of 70
<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) 1997 - 1996 1996 - 1995
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Increase/(Decrease) In
Interest Income
Loans (1) $713 $(123) $590 $741 $(74) $667
Leases (2) (27) (6) (33) (60) (29) (89)
Investment securities (2) (277) 23 (254) (101) (26) (127)
Deposits (29) 12 (17) 78 (79) (1)
Federal funds sold (3) 9 6 (36) (17) (53)
---- ---- ---- ---- ----- ----
377 (85) 292 622 (225) 397
---- ---- ---- ---- ----- ----
Increase/(Decrease) In
Interest Expense
Savings deposits (49) (17) (88) (90) 2 (88)
Time deposits 127 16 143 566 (18) 548
Short-term borrowings 4 1 5 1 1
---- ---- ---- ---- ----- ----
82 0 82 477 (16) 461
---- ---- ---- ---- ----- ----
Increase/(Decrease)
in Net Interest Income $295 $(85) $210 $145 $(209) $(64)
==== ==== ==== ==== ===== ====
</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
$26,000 in 1997, $7,000 in 1996 and $39,000 in 1995.
(2) Interest income includes the effects of tax equivalent adjustments on tax
exempt securities and leases using tax rates which approximate 25.0% for
1997, 21.0% for 1996 and 41.2% for 1995.
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 $144,000 was
recorded in 1997. This is compared to a provision of $417,000 in 1996 and a
negative provision of $(429,000) in 1995. The provision for loan and lease
losses recorded in 1997 and 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 need for additional provision for loan and lease losses
in 1998 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 1997, the Bank's non-accrual loans decreased from $434,000 to
$229,000. 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 of 70
<PAGE> 31
NON-INTEREST INCOME
Non-interest income for 1997 totaled $1,749,000 compared to $1,838,000
in 1996 and $3,962,000 in 1995. This represents a (4.9)% decrease during 1997, a
(54.0)% decrease in 1996 and a 41.0% increase in 1995. The decrease during 1997
was due to a decrease in fees and service charges. 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.
Other fee and service charge income decreased to $1,622,000 during
1997 from $1,750,000 in 1996 and $2,447,000 in 1995. The decrease in 1997 is
mostly attributable to a decrease in fees received from the sale of real estate
warehouse loans which decreased from $181,000 in 1996 to $80,000 in 1997. 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
Non-interest expense consists primarily of (i) salaries and employee
benefits, (ii) occupancy expenses of premises, (iii) furniture and equipment
expense and (iv) other expenses which include data processing costs, marketing
expenses, professional expenses, office supplies, insurance and assessments and
other loan and administrative expenses. Total non-interest expense for 1997 was
$7,331,000 compared to $7,438,000 in 1996 and $9,142,000 in 1995. The decrease
in 1997 was due to a decrease in occupancy expense which was offset by an
increase in salaries and employee benefits. The decrease in 1996 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.
Salaries and employees benefits totaled $3,672,000 in 1997 compared to
$3,511,000 in 1996 and $3,991,000 in 1995. The increase was attributable in part
to bonuses and raises paid to employees.
Occupancy expense was $634,000 in 1997 compared to $814,000 in 1996
and $1,254,000 in 1995. The decrease in 1997 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 and reductions in lease
payments on the Diamond Bar Branch and the relocation of the Arrowhead branch to
Blue Jay
Other expenses were $2,471,000 in 1997 compared to $2,500,000 in 1996
and $3,210,000 in 1995. The largest fluctuations in other expenses during 1997
were a $72,000 decline in data processing costs, a $167,000 increase in
professional expenses and a $81,644 decline in loan related expenses.
Non-interest expense as a percentage of total income was 67% in 1997
as compared to 69% in 1996 and 73% in 1995.
INCOME TAXES
Total income tax expense for 1997, 1996 and 1995 were $ 133,800,
$28,000 and $584,000, respectively, which approximated 24.9%, 20.1% and 41.2% of
pre-tax income, respectively.
FINANCIAL CONDITION
ASSETS
Total consolidated assets decreased $8,013,000 or 6.7% to $111,511,000
as of December 31, 1997 from $119,524,000 as of December 31, 1996. The decrease
in the Company's size is mostly attributable to an $8,318,000 decrease in net
loans, which was offset by an increase in federal funds sold of $2,950,000 and
decreases in investment securities and cash and due from banks of $1,198,000 and
1,215,000, respectively.
Page 31 of 70
<PAGE> 32
LOANS
As noted above, the Company's loan portfolio has decreased by
approximately $8,351,000 during the year ended December 31, 1997. This decrease
was primarily due to a decrease in installment loans to individuals which
decreased $12,666,000 from $50,000,000 in 1996 to $37,334,000 in 1997. This
decrease also resulted in a $1,629,000 decrease in unearned income on
installment loans. The decrease in installment loans was partially offset by a
$1,130,000 increase in real estate construction loans, a $924,000 increase in
real estate mortgage loans and an $848,000 increase in commercial, financial and
agricultural loans. The Company's installment portfolio is comprised of
predominantly auto loans, both indirectly and directly funded. Indirect auto
loans represent approximately 52.5% and 70.2% of total installment loans at
December 31, 1997 and 1996, respectively. Approximately 95.7% of all indirect
loans are "A" paper. It is the Bank's intent to divest itself of indirect dealer
installment loans.
NON-PERFORMING LOANS
The following table sets forth information regarding the Bank's
non-performing loans at year-end 1997 and 1996.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Accruing Loans More Than 90 Days Past Due(1)
Aggregate Loan Amounts
Commercial, financial and agricultural
Real estate $109
Installment loans to individuals 107 $49
---- ----
Total Loans Past Due More Than 90 Days 216 49
---- ----
Renegotiated loans(2) -- --
---- ----
Non-accrual loans(3)
Aggregate Loan Amounts
Commercial, financial and agricultural 28 5
Real estate 201 429
Installment loans to individuals
---- ----
Total Non-accrual Loans 229 434
---- ----
Total Non-performing Loans $445 $483
==== ====
</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 1997 and 1996.
(3) There were four loans on non-accrual status totaling approximately
$229,000 at December 31, 1997, and five loans totaling approximately
$434,000 at December 31, 1996.
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 of 70
<PAGE> 33
As of December 31, 1997, the Bank's classified loans consisted of
$1,889,000 of loans classified as substandard and $17,000 of loans classified as
doubtful. The Bank's $1,552,000 of loans classified as substandard consisted of
$1,859,000 of performing loans and $337,000 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, 1997,
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, 1997.
The reserve for probable loan and lease losses at December 31, 1997,
was $695,000 or .78%, of total loans and leases, as compared to $728,000 or
.75%, of total credits at December 31, 1996. 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) 1997 1996
---- ----
<S> <C> <C>
Allowance For Loan Losses
Balance, Beginning of period $728 $783
---- ----
Charge-offs
Commercial, financial and agricultural 34 101
Real estate construction
Real estate mortgage 15 201
Consumer loans 308 384
Lease financing
---- ----
Total Charge-offs 357 686
---- ----
Recoveries
Commercial, financial and agricultural 18 102
Real estate construction
Real estate mortgage 6
Consumer loans 155 112
Lease financing
---- ----
Total Charge-offs 179 214
---- ----
Net Charge-offs 178 472
Provision Charged to Operations 144 417
---- ----
Balance, End of period $694 $728
==== ====
Net Charge-offs During the Year to Average Loans
Outstanding During the Year 0.19% 0.55%
==== ====
Allowance For Loan Losses to Total Losses 0.78% 0.75%
==== ====
</TABLE>
Page 33 of 70
<PAGE> 34
The Bank accounts for impaired loans in accordance with SFAS No. 114
(as amended by SFAS No. 118), "Accounting by Creditors for Impairment of a
Loan." 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, 1997, 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 $28,000 and $9,000 in 1997 and
1996, respectively, and no unrealized losses for the same corresponding periods.
The Company generated gains of $2,000 during 1997 and 1996 and losses of $8,000
on sales of investment securities during 1995.
In accordance with 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 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
The Bank primarily funds its assets with deposits. Total deposits at
December 31, 1997 were $101,741,000 compared with $106,603,000 in 1996. The
$4,862,000 decrease represents an 4.6% decrease. The mix of the Bank's deposits
showed wide fluctuations with an increase in savings and NOW deposits of
$1,293,000 or 5.3%, a decrease in money market deposits of $1,651,000 or 11.9%,
an increase in demand deposits of $3,509,000 or 13.5%, a decrease in time
deposits in denominations of $100,000 or more of $1,903,000 or 20.2% and a
decrease in other time deposits of $6,110,000 or 18.4%. The decreases in time
deposits in denominations of $100,000 or more and in other time deposits
represents the run-off from time deposits that were last offered in early 1997
at approximately 60 basis points above local market rates. The increase in
demand deposits was a result of the Bank's effort to increase core deposits and
improve liquidity.
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 of 70
<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
14% and 13% as of December 31, 1997 and 1996 respectively. The Bank's loan to
deposit ratio was 87% and 91% as of December 31, 1997 and 1996. 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%. Loan demand has decreased
$8,351,000 while deposits decreased by only $4,862,000.
Liquidity has increased from $10,215,000 at December 31, 1996 to
$14,056,000 at December 31, 1997 mainly due to a decrease in borrowed funds of
$3,700,000.
While the level of liquid assets is modest, management believes it is
sufficient to meet current and anticipated funding needs. Liquid assets
represent approximately 12.6% 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 four correspondent banks
totaling $4.7 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, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
Page 35 of 70
<PAGE> 36
As of December 31, 1997, 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, 1997
Total capital to risk-weighted assets $8,939 9.3% $7,681 8.0% $9,602 10.0%
Tier 1 capital to risk-weighted assets 8,244 8.6% 3,839 4.0% 5,758 6.0%
Tier 1 capital to average assets 8,244 7.3% 4,525 4.0% 5,656 5.0%
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%
</TABLE>
Capital ratios have increased between December 31, 1996 and December
31, 1997, as a result of increased 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.
YEAR 2000
The Company is currently working to resolve the potential impact of
the year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in miscalculations or system failures. Based on
preliminary information, the costs of addressing potential problems currently
are not expected to have a material adverse impact on the Company's financial
position, results of operations or liquidity in future periods. However, if the
Company is unable to resolve such processing issues in a timely manner, it could
result in a material financial risk. Accordingly, the Company plans to devote
the necessary resources to resolve all significant year 2000 issues in a timely
manner. However, even if the Company is able to resolve any such issues with
respect to its computerized information systems, there is no assurance that
customers who utilize computer information systems to effectuate banking
transactions, or the Company's vendors or financial institutions with which the
company does business, will not encounter problems that could adversely affect
the Company's business.
Page 36 of 70
<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 ........................................................... 38
Consolidated Balance Sheets
December 31, 1997 and 1996 ............................................................. 39
Consolidated Statements of Income
For the Years Ended December 31, 1997, 1996 and 1995 ................................... 40
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995 ................................... 41
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995 ................................... 42
Notes to Consolidated Financial Statements ............................................. 44
</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 of 70
<PAGE> 38
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, 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, 1997, in conformity
with generally accepted accounting principles.
Rancho Cucamonga, California
February 6, 1998
Page 38 of 70
<PAGE> 39
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
------------- ------------
<S> <C> <C>
Cash and due from banks (there was no minimum Federal
Reserve Balance requirement at December 31, 1997) $ 6,404,346 $ 7,619,307
Federal funds sold 2,950,000
------------ ------------
Total Cash and Cash Equivalents 9,354,346 7,619,307
------------ ------------
Interest-bearing deposits in other financial institutions 396,000
Investment securities (Notes #1C and #2)
Available-for-sale 4,701,490 5,899,729
Loans, net of unearned income (Notes #1D and #3) 88,675,135 97,276,964
Loans held for sale (Notes #1E and #3) 424,950
------------ ------------
89,100,085 97,276,964
Direct lease financing (Notes #1G and #4) 14,354 188,489
Less: Reserve for probable loan and lease losses (Notes #1F and #5) (694,880) (727,667)
------------ ------------
88,419,559 96,737,786
Bank premises and equipment (Notes #1H and #7) 6,741,300 6,439,982
Accrued interest 445,033 403,126
Cash surrender value of life insurance 981,467 845,556
Other real estate owned (Notes #1K, #19 and #20) 492,492 710,205
Other assets 375,125 471,995
------------ ------------
Total Assets $111,510,812 $119,523,686
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand deposits 29,455,497 25,946,157
Savings and NOW deposits 25,562,601 24,269,489
Money market deposits 12,168,373 13,819,261
Time deposits in denominations of $100,000 or more 7,522,574 9,425,758
Other time deposits 27,032,311 33,142,124
------------ ------------
101,741,356 106,602,789
Federal funds purchased 3,700,000
Accrued employee salary and benefits 781,712 466,226
Accrued interest and other liabilities 721,241 903,259
------------ ------------
Total Liabilities 103,244,309 111,672,274
------------ ------------
Stockholders' Equity
Contributed capital
Common stock - authorized 15,000,000 shares, no par value,
issued and outstanding 1,862,643 shares in 1997 and 1996 2,106,258 2,106,258
Additional paid-in capital 3,306,684 3,306,684
Retained earnings 2,837,599 2,433,463
Valuation allowance for investments 15,962 5,007
------------ ------------
Total Stockholders' Equity 8,266,503 7,851,412
------------ ------------
Total Liabilities and Stockholders' Equity $111,510,812 $119,523,686
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 39 of 70
<PAGE> 40
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans (Note #1D) $8,631,123 $8,136,925 $7,470,066
Interest on Investment Securities (Note #1C)
Obligations of U.S. Government Agencies and Corporations 364,779 620,061 745,436
Obligations of State and Political Subdivisions 271
Interest on other securities 9,833 9,792 9,749
Interest on deposits 17,398 34,777 36,022
Interest on Federal funds sold 185,151 178,734 232,159
----------- ---------- ----------
Total Interest Income 9,213,228 9,011,147 8,568,863
----------- ---------- ----------
Interest Expense
Interest on savings deposits 216,723 221,431 258,963
Interest on NOW and money market deposits 468,881 529,933 573,804
Interest on time deposits in denominations of $100,000 or more 481,436 352,970 334,410
Interest on other time deposits 1,768,438 1,754,823 1,225,710
Interest on Federal funds purchased and other interest 7,029 1,677 6,701
----------- ---------- ----------
Total Interest Expense 2,942,507 2,860,834 2,399,588
----------- ---------- ----------
Net Interest Income 6,270,721 6,150,313 6,169,275
(Provision)/Credit for Loan and Lease Losses -- (143,782) (416,900) 429,000
----------- ---------- ----------
(Notes #1F and #5)
Net Interest Income After (Provision)/Credit
for Loan and Lease Losses 6,126,939 5,733,413 6,598,275
----------- ---------- ----------
Other Income
Fees and service charges, gain on sale of loans
and loan servicing income (Note #12) 1,622,015 1,750,110 2,447,100
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 2,450 2,200 (8,237)
Other income 124,289 63,248 10,944
----------- ---------- ----------
Total Other Income 1,748,754 1,837,933 3,961,580
----------- ---------- ----------
Other Expenses
Salaries and employee benefits 3,671,701 3,511,460 3,991,474
Occupancy expense of premises 634,410 813,515 1,253,892
Furniture and equipment expense 553,456 549,022 646,499
Net loss on sale of other real estate owned 7,166 63,992 39,463
Other expenses (Note #12) 2,471,024 2,499,779 3,210,468
----------- ---------- ----------
Total Other Expenses 7,337,757 7,437,768 9,141,796
----------- ---------- ----------
Income Before Income Taxes 537,936 133,578 1,418,059
Income Taxes (Notes #1J and #8) 133,800 28,000 584,254
----------- ---------- ----------
Net Income $ 404,136 $ 105,578 $ 833,805
=========== ========== ==========
Earnings Per Share (Notes #1L and #16)
Basic $ 0.22 $ 0.06 $ 0.45
=========== ========== ==========
Diluted $ 0.21 $ 0.06 $ 0.44
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 40 of 70
<PAGE> 41
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 1997, 1996 AND 1995
<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, 1995 1,552,425 $2,106,258 $3,306,684 $1,494,874 $(47,672)
Change in unrealized 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
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
Change in unrealized gain
on investment securities
available-for-sale (net of tax) 10,955
Net income for the year 404,136
--------- ---------- ---------- ---------- -------
BALANCE, DECEMBER 31, 1997 1,862,643 $2,106,258 $3,306,684 $2,837,599 $15,962
========= ========== ========== ========== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 41 of 70
<PAGE> 42
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees received $ 7,555,823 $ 10,382,661 $ 7,543,620
Service fees and other income received 1,680,159 1,835,733 3,944,375
Financing revenue received under leases 4,944 30,858 75,160
Interest paid (3,195,513) (2,836,415) (2,027,170)
Cash paid to suppliers and employees (6,607,753) (7,002,983) (8,856,917)
Income taxes paid (10,000) (18,044) 311,393
----------- ------------ -----------
Net Cash Provided By/(Used In)
Operating Activities (572,340) 2,391,810 990,461
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment
securities held-to-maturity 2,797,500
Proceeds from maturities of investment securities,
available-for-sale 3,350,000 13,085,000 10,055,000
Proceeds from sales of investment securities,
available-for-sale 6,392,159 5,011,954 1,000,000
Purchase of investment securities held-to-maturity
Purchase of investment securities available-for-sale (8,484,567) (10,578,602) (18,948,067)
Net (increase)/decrease in deposits in other
financial institutions 396,000 396,000 (693,000)
Recoveries on loans previously written off 180,559 213,798 894,920
Net loans made to customers and principal
collections of loans 9,480,516 (22,353,294) 5,686,829
Net decrease in leases to customers 174,135 400,376 716,544
Capital expenditures (861,941) (3,339,414) (494,129)
Proceeds from sale of property, plant and equipment 31,404 74,727 39,161
Proceeds from sale of branch 200,000
Proceeds from sale of OREO 210,547 409,861 434,337
----------- ------------ -----------
Net Cash Provided By/(Used In)
Investing Activities 10,868,812 (16,679,594) 1,689,095
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand deposits, NOW accounts,
savings accounts, and money market deposits 3,151,564 (4,489,987) (9,132,818)
Net increase in certificates of deposits (8,012,997) 12,678,329 8,962,786
Net increase/(decrease) in federal funds purchased (3,700,000) 3,700,000 (1,000,000)
Cash paid in lieu of fractional shares (794)
----------- ------------ -----------
Net Cash Provided By/(Used In)
Financing Activities (8,561,433) 11,888,342 (1,170,826)
----------- ------------ -----------
NET (DECREASE)/INCREASE IN CASH
AND CASH EQUIVALENTS 1,735,039 (2,399,442) 1,508,730
CASH AND CASH EQUIVALENTS, Beginning of year 7,619,307 10,018,749 8,510,019
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, End of year $ 9,354,346 $ 7,619,307 $10,018,749
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 42 of 70
<PAGE> 43
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -----------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY/(USED IN) OPERATING ACTIVITIES
Net Income $ 404,136 $ 105,578 $ 833,805
----------- ---------- ----------
<S> <C> <C> <C>
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities
Depreciation and amortization 500,510 503,187 249,933
Provision/(credit) for probable credit losses 143,782 416,900 (429,000)
Provision for probable OREO losses 37,260 49,740
(Gain)/loss on sale of equipment (9,309) 28,589 (260)
Increase/(decrease) in taxes payable 123,000 (5,044) 895,647
Increase in other assets (98,324) (142,586) (157,491)
Increase/(decrease) in unearned loan fees (1,660,765) 1,259,746 (654,365)
(Increase)/decrease in interest receivable (41,907) 138,849 (53,809)
Increase/(decrease) in interest payable (253,006) 24,419 372,418
Increase (decrease) in accrued expense and
other liabilities 314,827 (36,880) (140,873)
Gain on sale of branch (22,984)
(Gain)/loss on sale of investment securities (2,450) (2,200) 8,237
Loss on sale of OREO 7,166 63,992 39,463
----------- ---------- ----------
Total Adjustments (976,476) 2,286,232 156,656
----------- ---------- ----------
Net Cash Provided By/(Used In)
Operating Activities $ (572,340) $2,391,810 $ 990,461
=========== ========== ==========
SUPPLEMENTARY INFORMATION
Change in valuation allowance
for investment securities $ 10,955 $ (6,880) $ 59,559
=========== ========== ==========
Book value of investment securities transferred
from held-to-maturity to available-for-sale -- -- $2,197,960
=========== ========== ==========
Transfer of loans to real estate owned through
foreclosure -- $ 612,624 $ 284,000
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 43 of 70
<PAGE> 44
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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.
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
In accordance with 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 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 44 of 70
<PAGE> 45
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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 discounts 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 accounts for impaired loans in accordance with SFAS No. 114, (as
amended by SFAS No. 118), "Accounting by Creditors for Impairment of a
Loan." 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. Loans Held for Sale
Loans held for sale are carried at the lower of aggregate cost or market.
Net unrealized losses are recognized through a valuation allowance by
charges to income.
F. 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.
G. 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.
Page 45 of 70
<PAGE> 46
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
H. 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, 1997, 1996 and 1995,
was approximately $539,000, $499,000 and $492,000, respectively.
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. Earnings Per Share (EPS)
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity.
M. New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." This statement, which is effective
for the year ending December 31, 1998, establishes standards of disclosure
and financial statement display for reporting comprehensive income and its
components.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information."
This statement changes current practice under SFAS 14 by establishing a new
framework on which to base segment reporting (referred to as the management
approach) and also requires certain related disclosures about products and
services, geographic areas and major customers. The disclosures are
required for the year ending December 31, 1998.
Page 46 of 70
<PAGE> 47
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #2 - INVESTMENT SECURITIES
At December 31, 1997 and 1996, the investment securities portfolio was comprised
of securities classified as available-for-sale, in accordance with SFAS No. 115,
resulting in investment securities available-for-sale being carried at fair
value, adjusted for amortization of premiums and accretions of discounts.
The amortized cost and fair values of investment securities available-for-sale
at December 31, 1997, were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $2,989,943 $ 3,338 $2,993,281
U.S. Agency securities 1,502,180 9,695 1,511,875
Other 181,844 14,490 196,334
---------- ------- ---------- ----------
Total $4,673,967 $27,523 $4,701,490
========== ======= ========== ==========
</TABLE>
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 $5,899,729
========== ====== ========== ==========
</TABLE>
The amortized cost and fair values of investment securities available-for-sale
at December 31, 1997, 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 $2,493,798 $2,497,031
Due after one year but less than five years 1,998,325 2,008,125
---------- ----------
4,492,123 4,505,156
Other securities 181,844 196,334
---------- ----------
Total Securities Available-for-Sale $4,673,967 $4,701,490
========== ==========
</TABLE>
Proceeds from sales of investment securities available-for-sale during 1997 were
$6,392,159. Gross gains and losses on those sales were $5,288 and $2,838,
respectively. Included in shareholders' equity at December 31, 1997 is $15,962
of net unrealized gains (net of $11,559 estimated tax expense) on investment
securities available-for-sale.
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.
Page 47 of 70
<PAGE> 48
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #2 - INVESTMENT SECURITIES, Continued
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.
Securities with a carrying value and fair value of $3,992,124 and $3,826,791 at
December 31, 1997 and 1996, respectively, were pledged to secure public monies
as required by law.
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>
1997 1996
---------------- ----------------
<S> <C> <C>
Commercial, financial and agricultural $10,584,778 $ 9,737,235
Real Estate - construction 1,960,384 830,238
Real Estate - mortgage
Commercial 32,622,866 34,628,900
Residential 9,293,773 6,363,664
Installment loans to individuals 37,333,936 49,999,727
All other loans (including overdrafts) 31,341 104,985
---------------- ----------------
91,827,078 101,664,749
Unearned income on installment loans (2,294,624) (3,924,182)
Deferred loan fees (432,369) (463,603)
---------------- ----------------
Loans, Net of Unearned Income $89,100,085 $97,276,964
================ ================
</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>
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Recorded investment in impaired loans $229,000 $434,000 $564,000
Related allowance for loan losses 8,000 66,000 67,000
Average recorded investment in impaired loans 354,000 508,000 567,000
Interest income recognized for cash payments 3,000 6,000 5,000
Cash receipts applied to reduce principal balance 17,000 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 $229,000 and $434,000 at December 31,
1997 and 1996, respectively. As of December 31, 1997 and 1996, 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 $26,000, $7,000 and $39,000 in 1997, 1996 and 1995, respectively.
Page 48 of 70
<PAGE> 49
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #3 - LOANS, Continued
At December 31, 1997 and 1996, the Company had approximately $216,000 and
$49,000, respectively, in loans past due 90 days or more in interest or
principal and still accruing interest. These loans are well secured and in the
process of collection, or are secured by 1-4 single family residences.
At December 31, 1997, no loans were classified as troubled debt restructurings.
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>
1997 1996
------------ -------------
<S> <C> <C>
Lease payments receivable $ 15,252 $204,201
Unearned income (898) (15,712)
------------ -------------
Total Direct Lease Financing $ 14,354 $188,489
============ =============
</TABLE>
The Company had no outstanding commitments relating to municipal leases at
December 31, 1997 and 1996.
At December 31, 1997, future minimum lease payments receivable under direct
financing leases are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
- ------------------------
<S> <C>
1998 $14,354
===========
</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>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, Beginning of year $ 727,667 $ 783,466 $1,014,433
Recoveries on loans previously charged off 180,559 213,798 894,920
Loans charged off (357,128) (686,497) (696,887)
Provision/(credit) charged to operating expense 143,782 416,900 (429,000)
-------------- -------------- --------------
Balance, End of year $ 694,880 $ 727,667 $ 783,466
============== ============== ==============
</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.
Page 49 of 70
<PAGE> 50
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #6 - LOANS TO DIRECTORS AND OFFICERS, Continued
An analysis of the activity with respect to such aggregate loans to related
parties during 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Outstanding Balance, Beginning of year $1,634,428 $1,455,884
Credit granted, including renewals 339,992 581,404
Repayments (150,952) (402,860)
--------------- --------------
Outstanding Balance, End of year $1,823,468 $1,634,428
=============== ==============
</TABLE>
Not included in the balances outstanding at December 31, 1997 and 1996, were
undisbursed commitments to lend of approximately $142,000 and $103,000,
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 1997
and 1996.
NOTE #7 - PREMISES AND EQUIPMENT
Major classifications of Company premises and equipment are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
--------------- ----------------
<S> <C> <C>
Building $ 3,901,215 $ 3,860,185
Furniture and equipment 4,082,328 3,398,717
Leasehold improvements 1,172,077 1,133,417
--------------- ----------------
9,155,620 8,392,319
Less: Accumulated depreciation and amortization (3,699,320) (3,237,337)
Land 1,285,000 1,285,000
--------------- ----------------
Total $ 6,741,300 $ 6,439,982
=============== ================
</TABLE>
NOTE #8 - INCOME TAXES
<TABLE>
<CAPTION>
Year Ending December 31,
--------------------------------------------
1997 1996 1995
------------- ------------ -------------
<S> <C> <C> <C>
Tax provision applicable to
income before income taxes $133,800 $ 28,000 $584,254
============= ============ =============
Federal Income Tax
Current 29,300 - -
Deferred 51,600 15,000 416,752
------------- ------------ -------------
80,900 15,000 416,752
------------- ------------ -------------
State Franchise Tax
Current 50,500 10,800 2,400
Deferred 2,400 2,200 165,102
------------- ------------ -------------
Total State Franchise Tax 52,900 13,000 167,502
------------- ------------ -------------
Total Income Taxes $133,800 $ 28,000 $584,254
============= ============ =============
</TABLE>
Page 50 of 70
<PAGE> 51
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #8 - INCOME TAXES, Continued
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>
1997 1996 1995
-------------------------- -------------------------- --------------------------
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 $ 40,100 $ 1,560 $ 21,160 $ 4,600 $253,602 $118,340
Depreciation computed
differently on tax returns than
for financial statements (10,800) (2,520) 7,500 300 2,740 (6,551)
Deferred compensation plan (19,700) (4,640) (19,900) (4,500) 14,550 4,836
Provision for loan loss deduction
in tax return over amount
charged for financial
statement purposes 42,000 8,000 6,240 1,800 145,860 48,477
------------ ------------ ------------ ------------ ------------ ------------
Total $ 51,600 $ 2,400 $ 15,000 $ 2,200 $416,752 $165,102
============ ============ ============ ============ ============ ============
</TABLE>
As a result of the following items, the total income tax expense/(credit) for
1997, 1996 and 1995, was different than the amount computed by applying the
statutory U.S. Federal income tax rate to income before taxes:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ------------------------ --------------------------
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
------------ ------------ ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Federal rate $182,898 34.0 $45,416 34.0 $482,140 34.0
Changes due to State income
tax, net of Federal tax benefit 34,914 6.5 8,580 6.4 110,551 7.8
Exempt interest (51,045) (9.5) (28,410) (21.2) (21,800) (1.5)
Other (32,967) (6.1) 2,414 1.8 13,363 0.9
------------ ------------ ----------- ------------ ------------- ------------
Total $133,800 24.9 $28,000 21.0 $584,254 41.2
============ ============ =========== ============ ============= ============
</TABLE>
The deferred tax assets and liabilities of the Company are composed of the
following tax-affected cumulative timing differences.
Page 51 of 70
<PAGE> 52
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred Tax Assets
Real estate owned writedowns $ 14,000 $ 14,000
Deferred compensation 180,000 110,000
Deferred fees 170,000 130,000
Non-deductible reserves 72,000 18,000
Other 39,000 203,000
------------- -------------
475,000 475,000
Less: Valuation allowance(1) (475,000) (475,000)
------------- -------------
0 0
Deferred Tax Liabilities
Reserve for loan losses (98,000) (48,000)
Unrealized gain on securities (11,000)
Fixed assets (128,000) (135,000)
------------- -------------
Net Deferred Tax Liability $(237,000) $(183,000)
============= =============
</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 1997 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>
1998 $ 54,862
1999 23,390
2000 7,797
===========
Total $ 86,049
===========
</TABLE>
Total property and equipment expenditures charged to leases for the reporting
periods ended December 31, 1997, 1996 and 1995, were approximately $124,000,
$303,000 and $733,000, 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, 1997 and 1996, the Company had commitments to extend credit of
approximately $6,884,000 and $5,622,000 and obligations under standby letters of
credit of approximately $311,000 and $271,000.
Page 52 of 70
<PAGE> 53
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #9 - COMMITMENTS AND CONTINGENCIES, Continued
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, 1997, 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.
Page 53 of 70
<PAGE> 54
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #11 -- STOCK OPTION PLAN, Continued
During 1997, the Board of Directors and stockholders of Vineyard National
Bancorp elected to terminate the existing 1987 Incentive Stock Option Plan and
approve the 1997 Incentive Stock Option Plan. The new Plan authorizes an
additional 200,000 shares of the Bancorp's authorized but unissued common stock
to be combined with the 53,316 shares which remain under the 1987 Plan for a
total of 253,316 shares. Directors of the Bancorp are eligible to participate
under the new Plan. Options granted expire on such date as the Option Committee
or Board of Directors may determine, but not later than the tenth anniversary
date on which the option is granted.
The fair value of each option granted during 1997, 1996 and 1995, respectively,
were estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions; risk-free rates of 5.75%, 6.28%, and 5.45%;
dividend yield of 0.0% for all years; volatility of 25%, 24%, and 25%; expected
life of 7 years for all years presented.
A summary of the status of the Company's incentive stock option plan as of
December 31, 1997, 1996 and 1995, respectively, and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------ -----------------------------------------
Number of Shares Weighted- Number of Shares 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 53,316 73,136 $2.91 50,036 76,416 $2.89
Additional options authorized 200,000
Cancelled 1,872 (1,872) $2.92 8,280 (8,280) $2.92
Granted (5,000) 5,000 $3.50 (5,000) 5,000 $3.13
------------ --------------- ------------ ---------------
Outstanding at end of year 250,188 76,264 $2.97 53,316 73,136 $2.91
============ =============== ============ ===============
Options exercisable at year-end 76,264 73,136
Weighted-average fair value of
Options granted during the year $ 1.18 $ 1.12
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------------------------
Number of Shares Weighted-
---------------------------------
Available Average
For Exercise
Granting Outstanding Price
----------- --------------- -------------
<S> <C> <C> <C>
Outstanding at beginning of year 46,404 80,048 $2.92
Cancelled 9,632 (9,632) $2.92
Granted (6,000) 6,000 $2.60
------------------------------
Outstanding at end of year 50,036 76,416 $2.89
=========== ===============
Options exercisable at year-end 76,416
Weighted-average fair value of
Options granted during the year $ 0.86
</TABLE>
Page 54 of 70
<PAGE> 55
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #11 - STOCK OPTION PLAN , Continued
The following table summarizes information about incentive stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
- ----------------------------------------------------------------------------------------
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price
- -------------------- --------------- ---------------------- ----------------------
<S> <C> <C> <C>
$2.91 to $3.50 76,264 7 $2.97
</TABLE>
NOTE #12 - OTHER INCOME/EXPENSES
The following is a breakdown of fees and other servicing income and expenses for
the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- ---------------
<S> <C> <C> <C>
Fees and Other Servicing Income
Fees and service charges $1,622,015 $1,750,110 $2,286,071
Gain on sale of loans 10,614
Loan servicing 150,415
--------------- -------------- ---------------
Total $1,622,015 $1,750,110 $2,447,100
=============== ============== ===============
Other Expenses
Data processing $ 683,086 $ 754,617 $ 826,520
Marketing expenses 334,662 307,233 326,605
Professional expenses 530,457 421,209 561,825
Office supplies, postage and telephone 346,224 363,892 431,034
Insurance and assessment expense 191,461 157,931 336,096
Loan related expense 65,897 147,541 359,095
Administrative expense 106,044 85,316 99,767
Other 213,193 262,040 269,526
--------------- -------------- ---------------
Total $2,471,024 $2,499,779 $3,210,468
=============== ============== ===============
</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, 1997, the combined amount of funds available
from these two sources amounted to approximately $2,995,000 or 36%.
Page 55 of 70
<PAGE> 56
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #14 - DEFERRED COMPENSATION
The Company has a 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. 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 $85,911 ($51,546 net of income
taxes), $84,535 ($66,815 net of income taxes), and $138,833 ($81,911 net of
income taxes) for the years ended December 31, 1997, 1996 and 1995,
respectively.
NOTE #15 - DEFINED CONTRIBUTION PLAN
The Company has 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 $6,732 ($4,040 net of income taxes),
$14,862 ($11,747 net of income taxes) and $36,070 ($21,281 net of income taxes)
for the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE #16 - INCOME PER COMMON AND COMMON EQUIVALENT SHARE
The following is a reconciliation of net income and shares outstanding to the
income and number of shares used to compute EPS:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- ---------------------------- ---------------------------
Income Share Income Share Income Share
------------ ------------- ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net Income as Reported $404,136 1,862,643 $105,578 1,862,643 $833,805 1,862,643
------------ ------------- ------------ -------------- ------------ -------------
Used in Basic EPS 404,136 1,862,643 105,578 1,862,643 833,805 1,862,643
Dilutive Effect of Outstanding
Stock Options 20,210 12,076 12,328
------------ ------------- ------------ -------------- ------------ -------------
Used in Dilutive EPS $404,136 1,882,853 $105,578 1,874,719 $833,805 1,874,971
============ ============= ============ ============== ============ =============
</TABLE>
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.
Page 56 of 70
<PAGE> 57
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #17 - REGULATORY MATTERS, Continued
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, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, 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, 1997
Total capital to risk-weighted assets $ 8,939 9.3% $ 7,681 8.0% $ 9,602 10.0%
Tier 1 capital to risk-weighted assets 8,244 8.6% 3,839 4.0% 5,758 6.0%
Tier 1 capital to average assets 8,244 7.3% 4,525 4.0% 5,656 5.0%
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%
</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 $0 at December 31,
1997, 1996 and 1995. Servicing fee income amounted to approximately $0, $0, and
$150,000 in 1997, 1996, and 1995, 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 $0,
$22,000 and $1,489,000 from the sale in 1997,1996 and 1995, respectively.
Page 57 of 70
<PAGE> 58
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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>
1997 1996
-------------- -------------
<S> <C> <C>
Balance, Beginning of year $ 710,205 $ 608,694
Additions 612,624
Sales (255,578) (459,908)
Valuation adjustments and other 37,865 (51,205)
-------------- -------------
Balance, End of year $ 492,492 $ 710,205
============== =============
</TABLE>
The balances at December 31, 1997 and 1996, are shown net of reserves.
NOTE #20 - RESERVE FOR PROBABLE LOSSES ON OTHER REAL ESTATE OWNED
Transactions in the reserve for other real estate owned are summarized for 1997,
1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -------------
<S> <C> <C> <C>
Balance, Beginning of year $ 89,338 $38,133 $ 93,263
Provision charged to other expense 75,125 49,740
Charge-offs and other reductions (37,865) (23,920) (104,870)
------------ ----------- -------------
Balance, End of year $ 51,473 $89,338 $ 38,133
============ =========== =============
</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.
Page 58 of 70
<PAGE> 59
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #21 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
The following table presents the carrying amounts and fair values of financial
instruments at December 31, 1997. 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 $9,354,346 $ 9,354,346
Investment securities 4,701,490 4,701,490
Loans receivable 91,131,822 90,791,234
Accrued interest receivable 445,033 445,033
Liabilities
Non-interest bearing deposits 29,455,497 29,455,497
Interest bearing deposits 72,285,859 72,295,594
Accrued interest payable 412,296 412,296
Notional Cost to Cede
Amount or Assume
-------------- ---------------
Off-Balance Sheet Instruments
Commitments to extend credit and standby letters of credit $7,195,352 $ 71,954
</TABLE>
The following methods and assumptions were used by the Bank in estimating fair
value disclosures:
- - Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets' fair values due to the short-term
nature of the assets.
- - 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.
Page 59 of 70
<PAGE> 60
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #21 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
- - Deposits
The fair values disclosed for demand deposits (for example,
interest-bearing checking accounts and passbook accounts) are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The fair values for certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated contractual maturities on such time deposits. The carrying
amount of accrued interest payable approximates fair value.
- - Off-balance Sheet Instruments
Fair values of loan commitments and financial guarantees are based upon
fees currently charged to enter similar agreements, taking into account the
remaining terms of the agreement and the counterparties' credit standing.
NOTE #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.
NOTE #23 - TIME DEPOSIT LIABILITIES
At December 31, 1997, the Company had time certificates of deposit with maturity
distributions as follows:
<TABLE>
<S> <C>
Within one year $32,205,516
After one but within five years 2,349,369
---------------
$34,554,885
===============
</TABLE>
NOTE #24 - BORROWINGS
The Bank has borrowing lines with four correspondent banks totaling $4.7 million
and another line at the Federal Reserve. Loans with a carrying amount of
approximately $957,000 have been pledged to secure the line at the Federal
Reserve.
Page 60 of 70
<PAGE> 61
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #25 - CONDENSED FINANCIAL INFORMATION OF VINEYARD NATIONAL BANCORP (PARENT
COMPANY)
<TABLE>
<CAPTION>
BALANCE SHEETS
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Cash in Vineyard National Bank $ 7,496 $ 7,335 $ 7,177
Prepaid expenses 543 570 670
Investment in subsidiary 8,259,625 7,844,695 7,746,154
---------- ---------- ----------
Total Assets $8,267,664 $7,852,600 $7,754,001
========== ========== ==========
LIABILITIES
Due to shareholders in lieu of
fractional shares on stock splits 1,161 1,188 1,287
---------- ---------- ----------
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 2,853,561 2,438,470 2,339,772
---------- ---------- ----------
Total Stockholders' Equity 8,266,503 7,851,412 7,752,714
---------- ---------- ----------
Total Liabilities and Stockholders' Equity $8,267,664 $7,852,600 $7,754,001
========== ========== ==========
STATEMENTS OF INCOME
INCOME
Equity in income of subsidiary $ 403,975 $ 105,420 $ 833,639
Interest 961 958 966
---------- ---------- ----------
404,936 106,378 834,605
---------- ---------- ----------
INCOME TAXES 800 800 800
---------- ---------- ----------
Net Income $ 404,136 $ 105,578 $ 833,805
========== ========== ==========
</TABLE>
Page 61 of 70
<PAGE> 62
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE #25 - CONDENSED FINANCIAL INFORMATION OF VINEYARD NATIONAL BANCORP (PARENT
COMPANY)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------- -------------- --------------
<S> <C> <C> <C>
INCREASE IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 961 $ 958 $ 966
Income taxes paid (800) (800) (800)
------------- -------------- --------------
Net Cash Flows Provided by Operating Activities 161 158 166
------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash paid for fractional shares (794)
------------- -------------- --------------
Net Increase in Cash and Cash Equivalents 161 158 (628)
Cash, Beginning of year 7,335 7,177 7,805
------------- -------------- --------------
Cash, End of year $ 7,496 $ 7,335 $ 7,177
============= ============== ==============
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED/(USED) BY OPERATING ACTIVITIES
Net Income 404,136 105,578 833,805
Adjustments to Reconcile Net Income to
Net Cash Provided By Operating Activities
(Increase)/decrease in other assets 27 99 (153)
Undistributed earnings of subsidiary (403,975) (105,420) (833,639)
Increase/(decrease) in other liabilities (27) (99) 153
------------- -------------- --------------
Net Cash Flows Provided by Operating Activities $ 161 $ 158 $ 166
============= ============== ==============
</TABLE>
Page 62 of 70
<PAGE> 63
SELECTED QUARTERLY FINANCIAL DATA
The selected quarterly data for 1997 is based on the unaudited financial
statements of the Company as presented by management.
<TABLE>
<CAPTION>
Quarter Ended 1997
----------------------------------------------------------------------
March 31 June 30 September 30 December 31
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Interest Income $ 1,548,787 $ 1,603,132 $ 1,542,712 $ 1,576,090
Provision for Loan and Lease Losses (47,782) -- (31,000) (65,000)
Other Income 398,955 417,022 414,345 518,432
Other Expenses (1,811,053) (1,767,927) (1,897,588) (1,861,189)
------------- ------------- ------------- -------------
Income/(Loss) Before Taxes 88,907 252,227 28,469 168,333
Income Taxes (36,000) (103,000) (9,000) 14,200
------------- ------------- ------------- -------------
Net Income/(Loss) $ 52,907 $ 149,227 $ 19,469 $ 182,533
============= ============= ============= =============
Earnings/(Loss) Per Share
of Common Stock
Basic $ 0.03 $ 0.08 $ 0.04 $ 0.07
============= ============= ============= =============
Diluted $ 0.03 $ 0.08 $ 0.04 $ 0.06
============= ============= ============= =============
Weighted Average Shares Used
in Per Share Calculation
Basic 1,862,643 1,862,643 1,862,643 1,862,643
Diluted 1,875,278 1,876,363 1,883,026 1,882,853
Balance Sheet Data
Assets $ 120,001,975 $ 121,944,173 $ 117,347,588 $ 111,510,812
============= ============= ============= =============
Deposits $ 110,761,185 $ 112,286,679 $ 107,787,643 $ 101,741,356
============= ============= ============= =============
Loans and Leases/(Net) $ 93,837,450 $ 93,012,938 $ 91,235,454 $ 88,419,559
============= ============= ============= =============
Stockholders' Equity $ 7,901,644 $ 8,056,405 $ 8,147,231 $ 8,266,503
============= ============= ============= =============
</TABLE>
Page 63 of 70
<PAGE> 64
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
Basic $ (0.05) $ (0.07) $ 0.06 $ 0.12
============= ============= ============= =============
Diluted $ (0.05) $ (0.07) $ 0.06 $ 0.12
============= ============= ============= =============
Weighted Average Shares Used
in Per Share Calculation
Basic 1,862,643 1,862,643 1,862,643 1,862,643
Diluted 1,879,754 1,874,697 1,871,279 1,874,719
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>
Retroactively adjusted for stock splits.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Page 64 of 70
<PAGE> 65
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, 1998, for the
Company's 1998 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, 1998, for the Company's 1998 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, 1998, for the Company's 1998 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, 1998, for the Company's 1998 annual shareholders' meeting.
Page 65 of 70
<PAGE> 66
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 69 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 69 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 69 of this Form 10-K.
Page 66 of 70
<PAGE> 67
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 1998.
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, 1998.
<TABLE>
<S> <C>
President, Chief Executive Officer (Principal Executive
/s/ STEVEN R. SENSENBACH Officer) and Director
- -------------------------------
Executive Vice President, Chief Financial Officer,
/s/ SOULE SENSENBACH (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 67 of 70
<PAGE> 68
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Vineyard National Bancorp:
We consent to the incorporation of our Report dated February 6, 1998, on
the consolidated financial statements of Vineyard National Bancorp as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, included in its Annual Report on Form 10-K for the year ended
December 31, 1997.
VAVRINEK, TRINE, DAY & CO., LLP
Certified Public Accountants
Rancho Cucamonga, California
Page 68 of 70
<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 Bancorp 1987 (R-1)
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. Sensenbach (R-1)
10.6 1988 Extension Agreement for Employment Agreement Between Vineyard National Bank (R-1)
and Steven R. Sensenbach
10.7 Lease Agreement Between Vineyard National Bank and Landlord Regarding Rancho (R-1)
Cucamonga Office 1987
10.8 Lease Agreement Between Vineyard National Bank and Landlord Regarding Chino Office (R-1)
1988
10.9 Lease Agreement Between Vineyard National Bank and Landlord Regarding Diamond Bar (R-1)
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 National Bank (R-1)
and Landlord 1988
10.14 Lease Agreement Between Vineyard National Bank and Landlord Regarding Additional (R-1)
Rancho Cucamonga Office Space 1988
10.15 Buy/Sell Agreement Between Vineyard National Bank and Wells Fargo 1984 (R-1)
10.16 Buy/Sell Agreement Between Vineyard National Bank and Arrowhead Pacific Savings (R-1)
Bank 1988
10.17 Change in Terms and Conditions Between Vineyard National Bank and Landlord (R-1)
Regarding Rancho Cucamonga Office 1989
10.18 Lease Agreement Between Vineyard National Bank and Landlord Regarding Victorville (R-1)
Office 1989
10.19 Lease Agreement Between Vineyard National Bank and Landlord Regarding Additional (R-2)
Victorville Office Space 1989
21 Subsidiaries of the Registrant (R-2)
23 Consent of Vavrinek, Trine, Day & Co., LLP
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 of 70
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Vineyard National Bancorp:
We consent to the incorporation of our Report dated February 6, 1998, on
the consolidated financial statements of Vineyard National Bancorp as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, included in its Annual Report on Form 10-K for the year ended
December 31, 1997.
VAVRINEK, TRINE, DAY & CO., LLP
Certified Public Accountants
Rancho Cucamonga, California
Page 68 of 70
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1997, 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,404,346
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,950,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,701,490
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 89,114,439
<ALLOWANCE> 694,880
<TOTAL-ASSETS> 111,510,812
<DEPOSITS> 101,741,356
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,502,953
<LONG-TERM> 0
0
0
<COMMON> 2,106,258
<OTHER-SE> 6,160,245
<TOTAL-LIABILITIES-AND-EQUITY> 111,510,812
<INTEREST-LOAN> 8,636,067
<INTEREST-INVEST> 374,612
<INTEREST-OTHER> 202,549
<INTEREST-TOTAL> 9,213,228
<INTEREST-DEPOSIT> 2,935,478
<INTEREST-EXPENSE> 2,942,507
<INTEREST-INCOME-NET> 6,270,721
<LOAN-LOSSES> 143,782
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,337,757
<INCOME-PRETAX> 537,936
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 404,136
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.21
<YIELD-ACTUAL> 0.06
<LOANS-NON> 229,000
<LOANS-PAST> 216,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,859,000
<ALLOWANCE-OPEN> 727,667
<CHARGE-OFFS> 357,128
<RECOVERIES> 180,559
<ALLOWANCE-CLOSE> 694,880
<ALLOWANCE-DOMESTIC> 694,880
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMER
31, 1996, UNAUDITED FINANCIAL STATEMENTS OF VINEYARD NATIONAL BANCORP AND
SUBSIDIARY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<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> 0.06
<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>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1995 FINANCIAL STATEMENTS OF VINEYARD NATIONAL BANCORP AND SUBSIDIARY AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,093,749
<INT-BEARING-DEPOSITS> 792,000
<FED-FUNDS-SOLD> 1,925,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,431,518
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 78,071,404
<ALLOWANCE> 783,466
<TOTAL-ASSETS> 107,559,133
<DEPOSITS> 98,414,447
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,391,972
<LONG-TERM> 0
0
0
<COMMON> 2,106,258
<OTHER-SE> 5,646,456
<TOTAL-LIABILITIES-AND-EQUITY> 107,559,133
<INTEREST-LOAN> 7,545,226
<INTEREST-INVEST> 755,456
<INTEREST-OTHER> 268,181
<INTEREST-TOTAL> 8,568,863
<INTEREST-DEPOSIT> 2,392,887
<INTEREST-EXPENSE> 2,399,588
<INTEREST-INCOME-NET> 6,169,275
<LOAN-LOSSES> (429,000)
<SECURITIES-GAINS> (8,237)
<EXPENSE-OTHER> 9,102,333
<INCOME-PRETAX> 1,418,059
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 833,805
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 0.6
<LOANS-NON> 478,767
<LOANS-PAST> 320,248
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,446,752
<ALLOWANCE-OPEN> 1,014,433
<CHARGE-OFFS> 696,887
<RECOVERIES> 894,920
<ALLOWANCE-CLOSE> 783,466
<ALLOWANCE-DOMESTIC> 533,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 120,000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31,
1997 UNAUDITED FINANCIAL STATEMENTS OF VINEYARD NATIONAL BANCORP AND SUBSIDIARY
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,634,685
<INT-BEARING-DEPOSITS> 396,000
<FED-FUNDS-SOLD> 3,323,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,009,978
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 94,587,311
<ALLOWANCE> 749,861
<TOTAL-ASSETS> 120,001,975
<DEPOSITS> 110,761,185
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,339,146
<LONG-TERM> 0
0
0
<COMMON> 2,106,258
<OTHER-SE> 5,795,386
<TOTAL-LIABILITIES-AND-EQUITY> 120,001,975
<INTEREST-LOAN> 2,213,388
<INTEREST-INVEST> 62,802
<INTEREST-OTHER> 40,144
<INTEREST-TOTAL> 2,316,334
<INTEREST-DEPOSIT> 767,547
<INTEREST-EXPENSE> 767,547
<INTEREST-INCOME-NET> 1,548,787
<LOAN-LOSSES> 47,782
<SECURITIES-GAINS> 1,057
<EXPENSE-OTHER> 1,811,053
<INCOME-PRETAX> 88,907
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,907
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
<YIELD-ACTUAL> 6.1
<LOANS-NON> 430,000
<LOANS-PAST> 89,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,019,000
<ALLOWANCE-OPEN> 727,667
<CHARGE-OFFS> 75,171
<RECOVERIES> 49,583
<ALLOWANCE-CLOSE> 749,861
<ALLOWANCE-DOMESTIC> 749,861
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1997 UNAUDITED FINANCIAL STATEMENTS OF VINEYARD NATIONAL BANCORP AND SUBSIDIARY
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,304,011
<INT-BEARING-DEPOSITS> 594,000
<FED-FUNDS-SOLD> 4,970,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,176,184
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 93,719,741
<ALLOWANCE> 706,803
<TOTAL-ASSETS> 121,944,173
<DEPOSITS> 112,286,679
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,601,085
<LONG-TERM> 0
0
0
<COMMON> 2,106,258
<OTHER-SE> 5,950,147
<TOTAL-LIABILITIES-AND-EQUITY> 121,944,173
<INTEREST-LOAN> 4,431,041
<INTEREST-INVEST> 171,930
<INTEREST-OTHER> 110,287
<INTEREST-TOTAL> 4,713,258
<INTEREST-DEPOSIT> 1,555,880
<INTEREST-EXPENSE> 1,561,339
<INTEREST-INCOME-NET> 3,151,919
<LOAN-LOSSES> 47,752
<SECURITIES-GAINS> (1,057)
<EXPENSE-OTHER> 3,578,980
<INCOME-PRETAX> 341,134
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 202,134
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
<YIELD-ACTUAL> 6.0
<LOANS-NON> 339,000
<LOANS-PAST> 111,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,928,000
<ALLOWANCE-OPEN> 783,486
<CHARGE-OFFS> 183,000
<RECOVERIES> 114,000
<ALLOWANCE-CLOSE> 706,803
<ALLOWANCE-DOMESTIC> 706,803
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER
30, 1997 UNAUDITED FINANCIAL STATEMENTS OF VINEYARD NATIONAL BANCORP AND
SUBSIDIARY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,026,509
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,725,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,201,178
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 91,798,452
<ALLOWANCE> (677,267)
<TOTAL-ASSETS> 117,233,319
<DEPOSITS> 107,787,643
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,359,715
<LONG-TERM> 0
0
0
<COMMON> 2,106,258
<OTHER-SE> 5,979,703
<TOTAL-LIABILITIES-AND-EQUITY> 117,233,319
<INTEREST-LOAN> 6,551,026
<INTEREST-INVEST> 292,637
<INTEREST-OTHER> 155,012
<INTEREST-TOTAL> 6,998,675
<INTEREST-DEPOSIT> 2,298,495
<INTEREST-EXPENSE> 2,304,045
<INTEREST-INCOME-NET> 4,694,630
<LOAN-LOSSES> 78,782
<SECURITIES-GAINS> (1,057)
<EXPENSE-OTHER> 5,476,568
<INCOME-PRETAX> 369,602
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 221,602
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
<YIELD-ACTUAL> 5.000
<LOANS-NON> 329,000
<LOANS-PAST> 253,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,271,824
<ALLOWANCE-OPEN> 727,667
<CHARGE-OFFS> 270,661
<RECOVERIES> 141,479
<ALLOWANCE-CLOSE> 677,267
<ALLOWANCE-DOMESTIC> 677,267
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31,
1996 UNAUDITED FINANCIAL STATEMENTS OF VINEYARD NATIONAL BANCORP AND SUBSIDIARY
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 7,004,168
<INT-BEARING-DEPOSITS> 792,000
<FED-FUNDS-SOLD> 8,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,669,781
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 80,635,977
<ALLOWANCE> 746,179
<TOTAL-ASSETS> 111,697,167
<DEPOSITS> 102,920,152
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,123,721
<LONG-TERM> 0
0
0
<COMMON> 2,106,258
<OTHER-SE> 5,547,036
<TOTAL-LIABILITIES-AND-EQUITY> 111,697,167
<INTEREST-LOAN> 1,848,067
<INTEREST-INVEST> 173,325
<INTEREST-OTHER> 43,036
<INTEREST-TOTAL> 2,064,428
<INTEREST-DEPOSIT> 621,750
<INTEREST-EXPENSE> 621,750
<INTEREST-INCOME-NET> 1,442,678
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,982,582
<INCOME-PRETAX> (93,533)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (93,533)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
<YIELD-ACTUAL> 6.3
<LOANS-NON> 459,560
<LOANS-PAST> 138,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,654,849
<ALLOWANCE-OPEN> 783,466
<CHARGE-OFFS> 68,230
<RECOVERIES> 30,943
<ALLOWANCE-CLOSE> 746,179
<ALLOWANCE-DOMESTIC> 674,500
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1996 UNAUDITED FINANCIAL STATEMENTS OF VINEYARD NATIONAL BANCORP AND SUBSIDIARY
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 6,712,367
<INT-BEARING-DEPOSITS> 693,000
<FED-FUNDS-SOLD> 1,409,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,135,655
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 86,661,148
<ALLOWANCE> 719,110
<TOTAL-ASSETS> 117,761,821
<DEPOSITS> 109,126,820
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,126,958
<LONG-TERM> 0
0
0
<COMMON> 2,106,258
<OTHER-SE> 5,401,785
<TOTAL-LIABILITIES-AND-EQUITY> 117,761,821
<INTEREST-LOAN> 3,789,432
<INTEREST-INVEST> 358,471
<INTEREST-OTHER> 144,671
<INTEREST-TOTAL> 4,297,574
<INTEREST-DEPOSIT> 1,338,616
<INTEREST-EXPENSE> 1,338,616
<INTEREST-INCOME-NET> 2,958,958
<LOAN-LOSSES> 116,300
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,949,957
<INCOME-PRETAX> (216,158)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (217,758)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
<YIELD-ACTUAL> 5.8
<LOANS-NON> 701,000
<LOANS-PAST> 85,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,702,757
<ALLOWANCE-OPEN> 783,465
<CHARGE-OFFS> 240,252
<RECOVERIES> 89,596
<ALLOWANCE-CLOSE> 719,110
<ALLOWANCE-DOMESTIC> 719,110
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER
30, 1996 UNAUDITED FINANCIAL STATEMENTS OF VINEYARD NATIONAL BANCORP AND
SUBSIDIARY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,393,504
<INT-BEARING-DEPOSITS> 594,000
<FED-FUNDS-SOLD> 1,504,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,265,440
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 93,472,236
<ALLOWANCE> 717,627
<TOTAL-ASSETS> 119,454,829
<DEPOSITS> 110,522,462
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,304,363
<LONG-TERM> 0
0
0
<COMMON> 2,106,258
<OTHER-SE> 5,521,746
<TOTAL-LIABILITIES-AND-EQUITY> 119,454,829
<INTEREST-LOAN> 5,936,823
<INTEREST-INVEST> 519,791
<INTEREST-OTHER> 192,678
<INTEREST-TOTAL> 6,649,292
<INTEREST-DEPOSIT> 2,080,677
<INTEREST-EXPENSE> 2,081,165
<INTEREST-INCOME-NET> 4,566,127
<LOAN-LOSSES> 333,900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,720,984
<INCOME-PRETAX> (111,640)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (113,240)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
<YIELD-ACTUAL> 5.80
<LOANS-NON> 436,000
<LOANS-PAST> 121,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,537,646
<ALLOWANCE-OPEN> 783,466
<CHARGE-OFFS> 577,809
<RECOVERIES> 177,870
<ALLOWANCE-CLOSE> 717,627
<ALLOWANCE-DOMESTIC> 717,627
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
