<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, 1999 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 March 17, 2000, the aggregate market value of the voting shares
held by non-affiliates of the registrant was approximately $6,629,373. 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.
1,862,776 shares of Common Stock of the registrant were outstanding at
March 17, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement for its 1999
Annual Meeting of Shareholders, which will be filed on or before April 30, 2000,
are incorporated by reference in Part III of this Form 10-K.
This Report includes a
total of 74 pages.
Exhibit Index appears
on page 72.
1
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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, 1999, the Company had total consolidated assets of
approximately $116 million, total consolidated net loans of approximately $85
million, total consolidated deposits of approximately $105 million and total
stockholders' equity of approximately $8.7 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. The Company was formed to provide 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.
2
<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,
1999, the Bank had approximately 5,612 demand deposit accounts representing
aggregate deposits of approximately $34,208,000 with an average account balance
of $6,096, approximately 2,396 accounts representing approximately $30,361,000
in "NOW", super "NOW" and money market checking accounts with an average account
balance of $12,672, approximately 3,494 accounts representing approximately
$10,117,000 in savings deposits with an average account balance of $2,896 and
approximately 1,492 accounts representing approximately $29,837,000 in time
deposits ("TCD's") with an average account balance of $19,998. Of the total
deposits at December 31, 1998, $10,087,000 were in the form of TCD's in
denominations greater than $100,000 and $2,354,000 were municipal and other
governmental deposits.
During the 12 months ended December 31, 1999, average demand deposits
increased by approximately $4,244,000 or 14.2%, and "NOW", super "NOW" and money
market checking accounts increased by approximately $1,005,000 or 3.5%. Average
savings deposits increased by approximately $458,000 or 5.0%, while average time
deposits decreased by approximately $3,013,000 or 8.3%, including a decrease of
$419,000 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 deposit balances, but makes the Bank less subject to the adverse
effects resulting from the loss of a substantial depositor. At December 31,
1999, no individual, corporate or public depositor accounted for more than
approximately 3% of the Bank's total deposits, and the five largest deposit
accounts collectively represented 6% of total deposits.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY: INTEREST RATES AND
INTEREST DIFFERENTIAL
The following table sets forth the Company's condensed average balances
for each principal category of assets and liabilities and also for stockholders'
equity for each of the past two years. 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.
3
<PAGE> 4
<TABLE>
<CAPTION>
(Dollars in Thousands)
Year Ended December 31,
1999 1998
------------------------- -------------------------
Average Percent Average Percent
Assets Balance of Total Balance of Total
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Investment Securities
Taxable $ 9,177 7.8 $ 5,539 4.9
Federal funds sold 6,278 5.3 5,849 5.1
Due from banks-time deposits 865 0.7 372 0.3
FRB & Other Stock 177 0.2 175 0.1
Loans 84,781 72.2 86,782 76.2
Direct lease financing 0 - 13 0.0
Reserve for loan and lease losses (676) (0.6) (661) (0.5)
--------- --------- --------- ---------
Net Loans and Leases 84,105 71.6 86,134 75.7
--------- --------- --------- ---------
Total Interest Earning Assets 100,602 85.6 98,069 86.1
Cash and non-interest earning deposits 7,339 6.2 6,181 5.4
Net premises, furniture and equipment 6,282 5.4 6,596 5.8
Other assets 3,267 2.8 3,087 2.7
--------- --------- --------- ---------
Total Assets $ 117,490 100.0 $ 113,933 100.0
========= ========= ========= =========
Liabilities and Stockholders' Equity
Savings deposits(1) 39,173 33.4 37,710 33.1
Time deposits 33,279 28.4 36,292 31.9
Short-term borrowings 0 0.0 2 0.0
--------- --------- --------- ---------
Total Interest-bearing Liabilities 72,452 61.8 74,004 65.0
Demand deposits 34,134 29.1 29,890 26.2
Other liabilities 1,909 1.4 1,545 1.3
--------- --------- --------- ---------
Total Liabilities 108,495 92.3 105,439 92.5
Stockholders' Equity 8,995 7.7 8,494 7.5
--------- --------- --------- ---------
Total Liabilities and Stockholders' Equity $ 117,490 100.0 $ 113,933 100.0
========= ========= ========= =========
</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.")
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.
4
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<TABLE>
<CAPTION>
(Dollars in Thousands) 1999 1998
------------------------------------- -------------------------------------
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) $ 63 3 4.8% $ 1,396 83 5.9%
U.S. Government agencies(3) 9,118 500 5.5% 4,087 232 5.7%
-------- -------- -------- --------
Total Investment Securities 9,181 503 5.5% 5,483 315 5.7%
Federal funds sold 6,278 301 4.8% 5,849 300 5.1%
Due from banks - time deposits 865 45 5.2% 372 20 5.4%
FRB & Other Stock 177 9 5.1% 175 10 5.7%
Loans(2) 84,781 8,137 9.6% 86,782 8,532 9.8%
Lease financing(1) 13 1 7.7%
-------- -------- -------- --------
Total Interest Earning Assets(1) $101,282 $ 8,995 8.9% $ 98,674 $ 9,178 9.3%
======== ======== ======== ========
Interest Bearing Liabilities
Domestic Deposits and Borrowed Funds
Savings deposits(4) 39,173 661 1.7% 37,710 656 1.7%
Time deposits 33,279 1,543 4.6% 36,292 1,896 5.2%
Short-term borrowings 2 0 0.0%
-------- -------- -------- --------
Total Interest Bearing Liabilities $ 72,452 $ 2,204 3.0% $ 74,004 $ 2,552 3.4%
======== ======== ======== ========
</TABLE>
The table below shows the net interest earnings and the net yield on
average earning assets (net of the allowance for loan and lease losses).
<TABLE>
<CAPTION>
(Dollars in Thousands) 1999 1998
-------- --------
<S> <C> <C>
Total interest income(1), (2) $ 8,994 $ 9,178
Total interest expense(5) 2,204 2,552
Total interest earnings (1), (2) 6,790 6,626
Total average earning assets 101,282 98,674
Net yield on average earning assets(1), (2) 6.7% 6.7%
Net yield on average earning assets (excluding loan fees)(1), (2) 6.1% 6.0%
</TABLE>
(1) Interest income includes the effects of tax equivalent adjustments on tax
exempt securities and leases using tax rates which approximate 41% for 1998.
There were no tax exempt securities or leases in 1999.
(2) Loans, net of unearned income, include non-accrual loans but do not reflect
average allowance for loan and lease losses of $676,000 in 1999 and $661,000 in
1998. Loan fees of $585,000 in 1999 and $678,000 in 1998, are included in loan
interest income. There were three non-accruing loans totaling approximately
$495,000 at December 31, 1999 and two non-accruing loans totaling approximately
$114,000 at December 31, 1998.
(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.
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.
5
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<TABLE>
<CAPTION>
(Dollars in Thousands) Investment Federal Direct FRB &
Securities Funds Lease Other Time
Taxable Sold Loans(2) Financing(1) Stock Deposits Total
---------- --------- --------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Earned On:
1999 compared to 1998
Increase/(decrease) due to:
Volume changes $ 202 $ 9 $ (194) $ (1) $ 1 $ 26 $ 43
Rate changes (14) (8) (201) 0 (2) (1) (226)
--------- --------- --------- --------- --------- --------- ---------
Net Increase/(Decrease) $ 188 $ 1 $ (395) $ (1) $ (1) $ 25 $ (183)
========= ========= ========= ========= ========= ========= =========
Interest Earned On:
1998 compared to 1997
Increase/(decrease) due to:
Volume changes $ (43) $ 125 $ (871) $ (5) $ 4 $ (790)
Rate changes (7) (10) 772 (1) (1) 753
--------- --------- --------- --------- --------- --------- ---------
Net Increase/(Decrease) $ (50) $ 115 $ (99) $ (6) $ 3 $ (37)
========= ========= ========= ========= ========= ========= =========
</TABLE>
(1) Interest income includes the effects of tax equivalent adjustments on direct
lease financing using tax rates which approximate 41.0 percent for 1998. There
were no leases in 1999.
(2) Includes decrease in loan fees of $93,000 in 1999 and an increase of
$144,000 in 1998.
<TABLE>
<CAPTION>
(Dollars in Thousands) Savings Time Short-term
Deposits(4) Deposits Borrowings(3) Total
----------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Interest Paid On:
1999 compared to 1998
Increase/(decrease) due to:
Volume changes $ 22 $ (150) $ (128)
Rate changes (17) (203) (220)
---------- ---------- ------------- ----------
Net Increase/(Decrease) $ 5 $ (353) (348)
========== ========== ============= ==========
Interest Paid On:
1998 compared to 1997
Increase/(decrease) due to:
Volume changes $ (25) $ (243) $ (5) $ (273)
Rate changes (5) (111) (2) (118)
---------- ---------- ------------- ----------
Net Increase/(Decrease) $ (30) $ (354) $ (7) $ (391)
========== ========== ============= ==========
</TABLE>
(3) Short-term Borrowings consist of Federal Funds Purchased.
(4) Savings deposits include saving, NOW, Super NOW and Money Market deposit
accounts.
6
<PAGE> 7
INVESTMENT PORTFOLIO
The following table shows the book value of the portfolio of investment
securities at the end of each of the past two years. The Bank 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>
1999 1998
Available-for-Sale Available-for-Sale
------------------ ------------------
<S> <C> <C>
U.S. Treasury $ 0 $ 500
Federal agencies 9,423 5,550
Other securities 5 10
------------------ ------------------
$ 9,428 $ 6,060
================== ==================
</TABLE>
The following table shows the maturities of investment securities at
December 31, 1999, and the weighted average yields of such securities.
<TABLE>
<CAPTION>
(Dollars in Thousands) After One But
Within Five Years
---------------------
Available-for-Sale
---------------------
Amount Yield
---------- --------
<S> <C> <C>
U.S. Agencies $ 9,423 5.15%
</TABLE>
Other securities do not have a predetermined maturity date.
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,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Types of Loans
Domestic
Commercial, financial and agricultural $ 14,671 $ 15,135
Real estate construction 6,602 3,825
Real estate mortgage 45,370 43,201
Installment loans to individuals 18,852 24,835
Loans held for sale 835 2,178
Lease financing - -
All other loans (including overdrafts) 170 92
-------- --------
86,500 89,266
Less:
Unearned income (783) (1,333)
Allowance for loan and lease losses (639) (686)
-------- --------
Total $ 85,078 $ 87,247
======== ========
</TABLE>
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<PAGE> 8
Real estate mortgage loans are comprised of multi-family real estate
loans, SFR's and commercial real estate loans which represent 1.6%, 10.1% and
42.2% 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 36.6% of
total installment loans. Approximately 91% of all indirect loans are "A/B"
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, 1999.
<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 $ 10,587 $ 3,613 $ 471 $ 14,671
Real estate construction 5,081 756 765 6,602
Real estate mortgage 10,214 17,339 18,652 46,205
Installment loans to individuals 1,815 15,862 1,175 18,852
All other loans 170 170
---------- ---------- ---------- ----------
Total $ 27,867 $ 37,570 $ 21,063 $ 86,500
========== ========== ========== ==========
Loans and leases with predetermined interest rates 4,326 23,289 20,905 48,520
Loans and leases with floating or adjustable interest rates 23,541 14,281 158 37,980
---------- ---------- ---------- ----------
Total $ 27,867 $ 37,570 $ 21,063 $ 86,500
========== ========== ========== ==========
</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, 1999. 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 42% of its total
deposits at December 31, 1999, have tended to be relatively insensitive to
rising interest rates, management believes that the Company's net interest
margin will not be significantly impacted by changes in interest rates.
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<PAGE> 9
RISK ELEMENTS
<TABLE>
<CAPTION>
(Dollars in Thousands) Three Over Three Over One
Months Through Through Over Non-interest
or Less 12 Months Five Years Five Years Bearing Total
---------- ---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing deposits
in other financial institutions $ 495 $ 495
Federal funds Sold 3,390 3,390
Investment securities $ 4,956 $ 4,467 $ 5 9,428
Net loans and leases 35,789 6,022 23,289 $ 20,905 (927) 85,078
Noninterest-bearing assets 17,537 17,537
---------- ---------- ---------- ---------- ---------- ----------
Total Assets $ 39,674 $ 10,978 $ 27,756 $ 20,905 $ 16,615 $ 115,928
========== ========== ========== ========== ========== ==========
Liabilities and Stockholders' Equity
Noninterest-bearing deposits 34,216 34,216
Interest-bearing deposits 54,314 13,996 2,005 70,315
Other liabilities 2,147 2,147
Stockholders' Equity 9,250 9,250
---------- ---------- ---------- ---------- ---------- ----------
Total Liabilities and
Stockholders' Equity $ 54,314 $ 13,996 $ 2,005 $ 0 $ 45,613 $ 115,928
========== ========== ========== ========== ========== ==========
Interest Rate Sensitivity Gap $ (14,640) $ (3,018) $ 25,751 $ 20,905 $ (28,998) $ 0
========== ========== ========== ========== ========== ==========
Cumulative Interest Rate Sensitivity Gap $ (14,640) $ (17,658) $ 8,093 $ 28,998 $ 0 $ 0
========== ========== ========== ========== ========== ==========
</TABLE>
The Company's management also utilizes the results of a dynamic
simulation model to quantify the estimated exposure of net interest income to
sustained interest rate changes. The simulation model estimates the impact of
changing interest rates on the interest income from all interest earning assets
and the interest expense paid on all interest bearing liabilities reflected on
the Company's balance sheet. This sensitivity analysis is compared to policy
limits which specify a maximum tolerance level for net interest income exposure
over a one year horizon assuming no balance sheet growth, given both a 200 basis
point upward and downward shift in interest rates. A parallel and pro rata shift
in rates over a 12-month period is assumed.
The following reflects the Company's net interest income sensitivity analysis as
of December 31, 1999:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Estimated Net Market Value
Simulated Interest Income ---------------------------------------
Rate Changes Sensitivity Assets Liabilities
- --------------------- ------------------------- ------------------- ----------------
<S> <C> <C> <C>
+200 Basis Points 3.8% $ 112,546 $ 105,159
-200 Basis Points -6.0% $ 117,596 $ 108,267
</TABLE>
The estimated sensitivity does not necessarily represent a Company
forecast and the results may not be indicative of actual changes to the
Company's net interest income. These estimates are based upon a number of
assumptions including: the nature and timing of interest rate levels including
yield curve shape, prepayments on loans and securities, pricing strategies on
loans and deposits, replacement of asset and liability cashflows, and other
assumptions. While the assumptions used are based on current economic and local
market conditions, there is no assurance as to the predictive nature of these
conditions including how customer preferences or competitor influences might
change.
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<PAGE> 10
NON-ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Accruing Loans More Than 90 Days Past Due(1)
Aggregate loan amounts
Commercial, financial and agricultural
Real estate
Installment loans to individuals $ 14 $ 1
Aggregate leases
Renegotiated loans(2)
Non-accrual loans(3)
Aggregate loan amounts
Commercial 269 114
Real estate 226
------- -------
$ 509 $ 115
======= =======
</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 three loans on non-accrual status totaling approximately $495,000
at December 31, 1999, and two loans totaling approximately $114,000 at December
31, 1998. The amount of interest that would have been collected on these loans
had they remained current in accordance with their original terms was $23,000 in
1999 and $6,000 in 1998, respectively.
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, 1999, the Bank's classified loans consist of
$1,695,000 of loans classified as substandard and $250,000 of loans classified
as doubtful. The Bank's $1,695,000 in loans classified as substandard consisted
of $1,200,000 of performing loans and $495,000 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.
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<PAGE> 11
With the exception of these loans, management is not aware of any loans
as of December 31, 1999, 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.
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.
11
<PAGE> 12
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Loans and Leases Outstanding, Year-end(1) $85,078 $87,933
======= =======
Average Amount of Loans and Leases Outstanding(1) $84,791 $86,795
======= =======
Loans and Lease Loss Reserve Balance, Beginning of year $ 686 $ 695
------- -------
Allowance on Loans Acquired in Business Combination
Charge-offs
Domestic
Commercial, financial and agricultural 94 40
Real estate - construction
Real estate - mortgage
Consumer loans 103 213
Lease financing
------- -------
197 253
Foreign
------- -------
197 253
------- -------
Recoveries
Domestic
Commercial, financial and agricultural 27 8
Real estate - construction
Real estate - mortgage 41
Consumer loans 82 52
Lease financing
------- -------
109 101
Foreign
------- -------
Net Charge-offs/(recoveries) 88 152
------- -------
Additions/(Reductions) charged to operations 41 143
------- -------
Allowance for Loan and Lease Loss, End of year $ 639 $ 686
======= =======
Ratio of Net Charge-offs/(Recoveries) During the Year
to Average Loans and Leases Outstanding During the Year 0.10% 0.18%
======= =======
Ratio of Allowance for Loan and Lease Losses to Loans and Leases at Year-end 0.75% 0.78%
======= =======
</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 December 31, 1999. Although, as yet, a report of examination
has not been issued which, when subsequently issued, may require the Bank to
recognize additions to the allowance.
12
<PAGE> 13
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 seven
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.
13
<PAGE> 14
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, 1999, 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, 1999 and 1998, the Bank had loans amounting to
approximately $495,000 and $114,000, respectively, that were specifically
classified as impaired. The average balance of these loans amounted to
approximately $164,000 and $106,000 for the year ended December 31, 1999 and
1998, respectively. The allowance for loan losses related to these impaired
loans amounted to $0 at December 31, 1999 and 1998, respectively.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Although the Bank does not normally allocate the allowance for 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.
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Ended December 31,
--------------------------------------------------------
1999 1998
-------------------------- --------------------------
Percent of Percent of
Loans in Loans in
Allowance Each Allowance Each
for Loan Category to for Loan Category to
Losses Total Loans Losses Total Loans
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Domestic
Commercial, financial and agricultural $ 78 17.0 $ 56 17.0
Real estate 61.2 55.1
Installment loans to individuals 10 21.8 61 27.9
Lease financing
Foreign
Unallocated allowance 551 569
----------- ----------- ----------- -----------
Total $ 639 100.0 $ 686 100.0
=========== =========== =========== ===========
</TABLE>
14
<PAGE> 15
The allocation of the allowance for 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.
DEPOSITS
The average amount of and the average rate paid on deposits is summarized
below:
(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,
1999
-------------
<S> <C>
Three months or less $ 6,506
Over three through 12 months 3,581
-------------
$ 10,087
=============
</TABLE>
RETURN ON EQUITY AND ASSETS
The following table sets forth the ratios of net income to average total
assets/(return on assets), net income to average equity/(return on equity),
dividends declared per share to net income per share/(dividend payout ratio),
and average equity to average total assets/(equity to asset ratio).
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Return on assets 0.04% 0.39%
Return on equity 0.60% 5.22%
Dividend payout ratio
Equity to asset ratio 7.65% 7.46%
</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
15
<PAGE> 16
loans extended to its customers and securities held in the Bank's portfolio
comprise the major portion of the Company's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Bank. Accordingly,
the earnings and growth of the Company are subject to the influence of domestic
and foreign economic conditions, including inflation, recession and
unemployment.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve Board. The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by adjusting
the required level of reserves for financial institutions subject to its reserve
requirements and by varying the discount rates applicable to borrowings by
depository institutions. The actions of the Federal Reserve Board in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The nature and impact of
any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, in the California legislature and
before various bank regulatory and other professional agencies. For example,
legislation was recently introduced in Congress that would repeal the current
statutory restrictions on affiliations between commercial banks and securities
firms. Under the proposed legislation, bank holding companies would be allowed
to control both a commercial bank and a securities affiliate, which could engage
in the full range of investment banking activities, including corporate
underwriting. The likelihood of any major legislative changes and the impact
such changes might have on the Company are impossible to predict. See "ITEM 1.
BUSINESS - Supervision and Regulation."
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under both
federal and state law. Set forth below is a summary description of certain laws
and regulations which relate to the regulation of the Company and the Bank. The
description does not purport to be a complete summary of all such authority and
is qualified in its entirety by reference to the applicable laws and
regulations.
The Company. The Company, as a registered bank holding company, is
subject to regulation under the Bank Holding Company Act of 1956, as amended
(the "BHCA"). The Company is required to file with the Federal Reserve Board
quarterly and annual reports and such additional information as the Federal
Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may
conduct examinations of the Company and its subsidiaries.
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
16
<PAGE> 17
are deemed by the Federal Reserve Board to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making any
such determination, the Federal Reserve Board is required to consider whether
the performance of such activities by the Company or an affiliate can reasonably
be expected to produce benefits to the public, such as greater convenience,
increased competition or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The Federal
Reserve Board is also empowered to differentiate between activities commenced de
novo and activities commenced by acquisition, in whole or in part, of a going
concern.
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving as
a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both. This doctrine has become known as the
"source of strength" doctrine. Although the United States Court of Appeals for
the Fifth Circuit found the Federal Reserve Board's source of strength doctrine
invalid in 1990, stating that the Federal Reserve Board had no authority to
assert the doctrine under the BHCA, the decision, which is not binding on
federal courts outside the Fifth Circuit, was recently reversed by the United
States Supreme Court on procedural grounds. The validity of the source of
strength doctrine is likely to continue to be the subject of litigation until
definitively resolved by the courts or by Congress.
The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its subsidiaries
are subject to examination by, and may be required to file reports with, the
California State Banking Department.
Finally, the Company is subject to the periodic reporting requirements of
the Securities Exchange Act of 1934, as amended, including but not limited to,
filing annual, quarterly and other current reports with the Securities and
Exchange Commission.
The Bank. The Bank, as a national banking association, is subject to
primary supervision, examination and regulation by the Office of the Comptroller
of the Currency ("Comptroller"). If, as a result of an examination of a Bank,
the Comptroller should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity or other
aspects of the Bank's operations are unsatisfactory or that the Bank or its
management is violating or has violated any law or regulation, various remedies
are available to the Comptroller. Such remedies include the power to enjoin
"unsafe or unsound practices," to require affirmative action to correct any
conditions resulting from any violation or practice, to issue an administrative
order that can be judicially enforced, to direct and increase in capital, to
restrict the growth of the Bank, to assess civil monetary penalties, and to
remove officers and directors. The FDIC has similar enforcement authority, in
addition to its authority to terminate a Bank's deposit insurance in the absence
of action by the Comptroller and upon 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
17
<PAGE> 18
by California law. Under California law, shareholders of the Company may receive
dividends when and as declared by the Board of Directors out of funds legally
available for such purpose. With certain exceptions, a California corporation
may not pay a dividend to its shareholders unless (i) its retained earnings
equal at least the amount of the proposed dividend, or (ii) after giving effect
to the dividend, the corporation's assets would equal at least 1.25 times its
liabilities and, for corporations with classified balance sheets, the current
assets of the corporation would be at least equal to its current liabilities or,
if the average of the earnings of the corporation before taxes on income and
before interest expense for the two preceding fiscal years was less than the
average of the interest expense of the corporation for those fiscal years, at
least equal to 1.25 times its current liabilities.
Federal Reserve Board policy prohibits a bank holding company from
declaring or paying a cash dividend which would impose undue pressure on the
capital of subsidiary banks or would be funded only through borrowings or other
arrangements that might adversely affect the holding company's financial
position. The policy further declares that a bank holding company should not
continue its existing rate of cash dividends on its common stock unless its net
income is sufficient to fully fund each dividend and its prospective rate of
earnings retention appears consistent with its capital needs, asset quality and
overall financial condition. Other Federal Reserve Board policies forbid the
payment by bank subsidiaries to their parent companies of management fees which
are unreasonable in amount or exceed the fair market value of the services
rendered.
There are statutory and regulatory limitations on the amount of dividends
which may be paid to the Company by the Bank. The prior approval of the
Comptroller is required if the total of all dividends declared by a national
bank in any calendar year exceeds the bank's net profits (as defined) for that
year combined with its retained net profits (as defined) for the preceding two
years, less any transfers to surplus.
The Comptroller has authority to prohibit the Bank from engaging in
activities that, in the Comptroller's opinion, constitute unsafe or unsound
practices in conducting its business. It is possible, depending upon the
financial condition of the bank in question and other factors, that the
Comptroller could assert that the payment of dividends or other payments might,
under some circumstances, be such an unsafe or unsound practice. Further, the
Comptroller and the Federal Reserve Board have established guidelines with
respect to the maintenance of appropriate levels of capital by banks or bank
holding companies under their jurisdiction. Compliance with the standards set
forth in such guidelines and the restrictions that are or may be imposed under
the prompt corrective action provisions of federal law could limit the amount of
dividends which the Bank or the 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 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
18
<PAGE> 19
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%.
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
19
<PAGE> 20
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
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.
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, 1999.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1999
------------------------------------------
Actual Minimum
-------------------------- Capital
Amount Ratio Requirement
----------- ----------- -----------
<S> <C> <C> <C>
Leverage ratio $ 8,737 7.5% 4.0%
Tier 1 risk-based ratio 8,737 9.2% 4.0%
Total risk-based ratio 9,376 9.9% 8.0%
</TABLE>
At December 31, 1999, the Company's capital ratios were substantially the same
as the Bank.
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
20
<PAGE> 21
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.
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
21
<PAGE> 22
judicial determination that the agency would be harmed if such equitable relief
was not granted.
Safety and Soundness Standards. On February 2, 1995, the federal banking
agencies adopted final safety and soundness standards for all insured depository
institutions. The standards, which were issued in the form of guidelines rather
than regulations, relate to internal controls, information systems, internal
audit systems, loan underwriting and documentation, compensation and interest
rate exposure. In general, the standards are designed to assist the federal
banking agencies in identifying and addressing problems at insured depository
institutions before capital becomes impaired. If an institution fails to meet
these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan. Failure to submit a compliance plan may
result in enforcement proceedings. Additional standards on earnings and
classified assets are expected to be issued in the near future.
In December 1992, the federal banking agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective on March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan to value limits that do
not exceed the supervisory limits prescribed by the regulations.
Appraisals for "real estate related financial transactions" must be
conducted by either state certified or state licensed appraisers for
transactions in excess of certain amounts. State certified appraisers are
required for all transactions with a transaction value of $1,000,000 or more;
for all nonresidential transactions valued at $250,000 or more; and for
"complex" 1-4 family residential properties of $250,000 or more. A state
licensed appraiser is required for all other appraisals. However, appraisals
performed in connection with "federally related transactions" must now comply
with the agencies' appraisal standards. Federally related transactions include
the sale, lease, purchase, investment in, or exchange of, real property or
interests in real property, the financing or refinancing of real property, and
the use of real property or interests in real property as security for a loan or
investment, including mortgage-backed securities.
Premiums for Deposit Insurance. Federal law has established several
mechanisms to increase funds to protect deposits insured by the Bank Insurance
Fund ("BIF") administered by the FDIC. The FDIC is authorized to borrow up to
$30 billion from the United States Treasury; up to 90% of the fair market value
of assets of institutions acquired by the FDIC as receiver from the Federal
Financing Bank; and from depository institutions that are members of the BIF.
Any borrowings not repaid by asset sales are to be repaid through insurance
premiums assessed to member institutions. Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide insurance 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).
22
<PAGE> 23
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.
Financial Modernization Legislation. On November 12, 1999, the President
signed into law the Gramm-Leach-Bliley Act, or GLB Act, which significantly
changed the regulatory structure and oversight of the financial services
industry. The GLB Act revises the Bank Holding Company Act of 1956 and repeals
the affiliation provisions of the Glass-Steagall Act of 1933, prohibiting a
qualifying holding company, called a financial holding company, to engage in a
full range of financial activities, including banking, insurance, and securities
activities, as well as merchant banking and additional activities that are
"financial in nature" or "complementary" to such financial activities. The GLB
Act thus provides expanded financial affiliation opportunities for existing bank
holding companies and permits various non-bank financial services providers to
acquire banks by allowing bank holding companies to engage in activities such as
securities underwriting, and underwriting and brokering of insurance products.
The GLB Act also expands passive investments by financial holding companies in
any type of company, financial or non-financial, through merchant banking and
insurance company investments. In order for a bank holding company to qualify as
a financial holding company, its subsidiary depository institutions must be
"well-capitalized" and "well-managed" and have at least a "satisfactory"
Community Reinvestment Act rating.
The GLB Act also reforms the regulatory framework of the financial
services industry. Under the GLB Act, financial holding companies are subject to
primary supervision by the Federal Reserve Board while current federal and
23
<PAGE> 24
state regulators of financial holding company regulated subsidiaries such as
insurers, broker-dealers, investment companies and banks generally retain their
jurisdiction and authority. In order to implement its underlying purposes, the
GLB Act preempts state laws restricting the establishment of financial
affiliations authorized or permitted under the GLB Act, subject to specified
exceptions for state insurance regulators. With regard to securities laws, the
GLB Act removes the current blanket exemption for banks from the broker-dealer
registration requirements under the Securities Exchange Act of 1934, amends the
Investment Company Act of 1940 with respect to bank common trust fund and mutual
fund activities, and amends the Investment Advisers Act of 1940 to require
registration of banks that act as investment advisers for mutual funds.
The GLB Act also includes provisions concerning subsidiaries of national
banks, permitting a national bank to engage in most financial activities through
a financial subsidiary, provided that the bank and its depository institution
affiliates are "well capitalized" and "well managed" and meet certain other
qualification requirements relating to total assets, subordinated debt, capital,
risk management, and affiliate transactions. With respect to subsidiaries of
state banks, new activities as "principal" would be limited to those permissible
for a national bank financial subsidiary. The GLB Act requires a state bank with
a financial subsidiary permitted under the GLB Act as well as its depository
institution affiliates to be "well capitalized," and also subjects the bank to
the same capital, risk management and affiliate transaction rules as applicable
to national banks. The provisions of the GLB Act relating to financial holding
companies become effective 120 days after its enactment, or about March 15,
2000, excluding, the federal preemption provisions, which became effective on
the date of enactment.
The GLB Act will likely increase competition in the markets in which the
Company operates, although it is difficult to assess the impact that such
increased competition may have on the Company's operations.
The Company currently meets all the requirements for financial holding
company status. However, the Company does not expect to elect financial holding
company status unless and until it intends to engage in any of the expanded
activities under the GLB Act which require such status. Unless and until it
elects such status, the Company will only be permitted to engage in non-banking
activities that were permissible for bank holding companies as of the date of
the enactment of the GLB Act.
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.
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.
24
<PAGE> 25
ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. This new standard was originally
effective for 2000. In June 1999, the FASB issued SFAS NO. 137,"Accounting for
Derivatives Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133". This Statement establishes the effective date of
SFAS 133 for 2001 and is not expected to have a material impact on the Bank's
financial statements.
EMPLOYEES
At March 17, 2000, the Company had approximately 55 full-time and 30
part-time employees. Total full-time equivalent employees at March 17, 2000,
were approximately 71. 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 November 1999, and has been with the Bank since
1991.
Mrs. Sensenbach has served as the Secretary of the Company since 1992 and
has been with the Bank since 1988. Mrs. Sensenbach is currently serving as
Executive Vice President/Chief Financial Officer.
Mrs. Ahern was 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.
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 three years and one year,
respectively. The Bank's total occupancy expense for 1999, excluding furniture
and equipment expense, approximated $616,000. Management believes that the
Bank's present facilities are adequate for its present purposes.
25
<PAGE> 26
ITEM 3. LEGAL PROCEEDINGS
On October 25, 1999, a jury rendered a verdict against the Bank in the
amount of approximately $3.5 million arising from a lawsuit by a borrower who
also leased to the Bank a branch office. The Bank foreclosed on the real
property securing its loan to the borrower. The borrower claimed that the
foreclosure was wrongful. On February 25, 2000, the trial judge found that the
jury verdict was excessive and ordered a new trial on damages if the borrower
did not agree to a reduction to $860,000. The Bank has filed an appeal. The Bank
has accrued a loss of $860,000 in recognition of the amount of liability
determined by the court which is included in litigation expense. However, the
Bank and its legal counsel continue to vigorously dispute any liability in this
lawsuit and believe that there is a significant probability that there will be a
favorable outcome for the pending appeal.
The Company, is involved in various other litigation. In the opinion of
Management and the Company's legal counsel, the disposition of all such other
litigation pending will not have a material effect on the Company's financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
26
<PAGE> 27
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 March 17, 2000, the
Company had 622 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.
<TABLE>
<CAPTION>
Sales Prices of
Common Stock(1), (2), (3)
-------------------------
High Low
----------- -----------
<S> <C> <C>
1998
First Quarter $ 6.25 $ 5.13
Second Quarter 6.75 6.25
Third Quarter 6.75 6.00
Fourth Quarter 6.00 4.00
1999
First Quarter $ 6.13 $ 6.13
Second Quarter 5.00 5.00
Third Quarter 7.88 6.75
Fourth Quarter 5.50 5.50
</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.
(3) There were no cash dividends paid during 1998 and 1999.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the fiscal years ended
December 31, 1999, 1998 and 1997, 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, 1996 and 1995,
are derived from audited financial statements examined by Vavrinek, Trine, Day &
Co., LLP which are not included in this Report.
27
<PAGE> 28
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 8,994,503 $ 9,178,049 $ 9,213,228 $ 9,011,147 $ 8,568,863
Interest Expense 2,204,034 2,551,992 2,942,507 2,860,834 2,399,588
Net Interest Income 6,790,469 6,626,057 6,270,721 6,150,313 6,169,275
(Provision)/Credit for Loan and Lease Losses (41,000) (142,982) (143,782) (416,900) 429,000
Other Income 1,903,441 1,915,801 1,741,588 1,837,933 3,961,580
Other Expenses (8,564,374) (7,648,693) (7,330,591) (7,437,768) (9,141,796)
------------- ------------- ------------- ------------- -------------
Income/(Loss) Before Taxes 88,536 750,183 537,936 133,578 1,418,059
Income Taxes (38,400) (306,800) (133,800) (28,000) (584,254)
------------- ------------- ------------- ------------- -------------
Net Income/(Loss) $ 50,136 $ 443,383 $ 404,136 $ 105,578 $ 833,805
============= ============= ============= ============= =============
Earnings/(Loss) Per Share of Common Stock(1)
Basic $ 0.03 $ 0.24 $ 0.22 $ 0.06 $ 0.45
Diluted $ 0.03 $ 0.22 $ 0.21 $ 0.06 $ 0.44
Weighted Average Number of Shares(1)
Basic 1,862,776 1,862,776 1,862,776 1,862,776 1,862,776
Diluted 1,988,616 1,994,255 1,882,986 1,874,852 1,875,104
Stock Splits - - - 6 for 5
Balance Sheet Data
Assets $ 116,303,156 $ 115,863,031 $ 111,510,812 $ 119,523,686 $ 107,559,133
============= ============= ============= ============= =============
Deposits $ 104,523,178 $ 105,314,990 $ 101,741,356 $ 106,602,789 $ 98,414,447
============= ============= ============= ============= =============
Loans and Leases/(Net) $ 85,078,459 $ 87,246,922 $ 88,419,559 $ 96,737,786 $ 77,287,938
============= ============= ============= ============= =============
Stockholders' Equity $ 8,705,235 $ 8,728,159 $ 8,266,503 $ 7,851,412 $ 7,752,714
============= ============= ============= ============= =============
</TABLE>
(1) Retroactively adjusted for stock splits.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations is intended to provide a better understanding of the significant
changes in trends relating to the Company's financial condition, results of
operations, liquidity and interest rate sensitivity. The following discussion
and analysis should be read in conjunction with the Consolidated Financial
Statements of the Company.
Vineyard National Bancorp is operating as a bank holding company whose
only operating subsidiary is Vineyard National Bank. The Bank was acquired by
the holding company on December 16, 1988, and comprises substantially all of the
Company's revenues and expenses. Accordingly, management's discussion and
analysis is focused on and results from the financial condition and operations
of the Bank.
For the year ended December 31, 1999, Vineyard National Bancorp on a
consolidated basis reported Net Income of $50,000 compared to $443,000 and
$404,000 in the comparable 1998 and 1997 periods. Basic Earnings Per Share was
$0.03 compared to $0.24 in 1998 and $0.22 in 1997. Diluted Earnings Per Share
were $0.03 compared to $0.22 in 1998 and $0.21 in 1997. Consolidated total
assets at December 31, 1999 were $116,303,000 compared to $115,863,000 at
December 31, 1998, an increase of less than 1%. Total deposits decreased from
$105,315,000 as of December 31, 1998 to $104,523,000 at year-end 1999.
Stockholders' equity was $8,705,000 at December 31, 1999, down from its
$8,728,000 level a year earlier, owing primarily to the unrealized loss on
securities available-for-sale of $39,000 which decreased $73,000 from the year
before. This was offset with net income of $50,000 for 1999.
The allowance for loan and lease losses, which serves as a "buffer"
against possible future losses, had losses totaling $197,000 charged against it
during 1999. Recoveries of loans previously charged-off amounted to $109,000,
which were credited back to the reserve. A provision for loan and lease losses
of $41,000 was recorded in 1999 compared to a provision of $143,000 in 1998 and
$144,000 in 1997.
28
<PAGE> 29
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 1999 was $6,790,000, up from the $6,626,000 reported in 1998 and
$6,271,000 reported in 1997. This represents an increase of 2.5% in 1999 and
5.7% in 1998, 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 1999 from 1998 was due to
the decrease in interest expense exceeding the decrease in interest income.
Interest income decreased $184,000 to $8,994,000 in 1999 from $9,178,000 in 1998
while interest expense decreased $348,000 to $2,204,000 from $2,552,000 in 1998.
The resulting increase in net interest income can be attributed to a number of
factors. First, average loans, the Bank's highest yielding asset, decreased from
$86,782,000 in 1998 to $84,781,000. This was offset by increases in average
investment securities of $3,698,000, federal funds sold of $429,000 and $493,000
in interest-earning deposits with other financial institutions. Secondly,
although the volume of interest earning assets was higher on average in 1999
than in 1998, the average yield earned on these assets decreased .4% from 9.3%
in 1998 to 8.9% in 1999. Third, average interest-bearing liabilities decreased
2.1% from $74,004,000 in 1998 to $72,452,000 in 1999. 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,
increased 3.8% from $37,710,000 in 1998 to $39,173,000 in 1999. Time deposits,
the Bank's highest interest paying deposit account, decreased 8.3% from
$36,292,000 in 1998 to $33,279,000 in 1999. The Bank offered higher time deposit
rates at different times during 1998. Fourth, the average yield paid on
interest-bearing liabilities decreased to 3.0% in 1999 from 3.4% in 1998.
The increase in net interest income in 1998 from 1997 was due to the
decrease in interest expense exceeding the decrease in interest income. Interest
income decreased $35,000 to $9,178,000 in 1998 from $9,213,000 in 1997 while
interest expense decreased $391,000 to $2,552,000 in 1998 from $2,943,000 in
1997. The resulting increase in net interest income can be attributed to a
number of factors. First, the Bank's average interest-earning assets decreased
4.3% from $103,207,000 in 1997 to $98,674,000 in 1998. This decrease is mostly
attributable to a 6.7% decrease in average loans, the Bank's highest yielding
asset. Average loans decreased from $92,963,000 in 1997 to $86,782,000 in 1998.
Average investment securities decreased from $6,478,000 in 1997 to $5,714,000 in
1998, average federal funds sold, the Bank's lowest yielding asset increased
from $3,409,000 in 1997 to $5,849,000 in 1998. Secondly, although the volume of
interest earning assets was lower on average in 1998 than in 1997, the average
yield earned on these assets increased .4% from 8.9% in 1997 to 9.3% in 1998.
Third, average interest-bearing liabilities decreased 7.6% from $80,083,000 in
1997 to $74,004,000 in 1998. 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 3.6% from $39,118,000
in 1997 to $37,710,000 in 1998 and time deposits, the Bank's highest interest
paying deposit account, decreased 11.2% from $40,858,000 in 1997 to $36,292,000
in 1997. The Bank offered higher time deposit rates at different times during
1998 and 1997. This created fluctuations in average balances due to account
maturities and the timing of promotional interest rates. Fourth, the average
yield paid on interest-bearing liabilities decreased to 3.4% in 1998 from 3.7%
in 1997.
29
<PAGE> 30
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) 1999 1998
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Yield Balance Interest Yield
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans $ 84,781 $ 8,137 9.6% $ 86,782 $ 8,532 9.8%
Lease financing 13 1 7.7%
Investment securities (3) 9,181 503 5.5% 5,483 315 5.7%
Federal funds sold 6,278 301 4.8% 5,849 300 5.1%
Interest-earning deposits with
other financial institutions 865 45 5.2% 372 20 5.4%
FRB & Other Stock 177 9 5.1% 175 10 5.7%
--------- --------- --------- ---------
Total Interest-earning Assets 101,282 8,995 8.9% 98,674 9,178 9.3%
--------- --------- --------- ---------
Other Assets 16,547 15,864
Less: Allowance for Loan Losses (676) (661)
--------- ---------
Total Average Assets $ 117,153 $ 113,877
========= =========
Liabilities and Shareholders' Equity
Savings deposits 39,173 661 1.7% 37,710 656 1.7%
Time deposits 33,279 1,543 4.6% 36,292 1,896 5.2%
Other 2 0.0%
--------- --------- --------- --------- --------- ---------
Total Interest-bearing Liabilities 72,452 2,204 3.0% 74,004 2,552 3.4%
--------- --------- --------- ---------
Demand deposits 34,134 29,890
Other liabilities 1,572 1,521
Shareholders' equity 8,995 8,462
--------- ---------
Total Average Liabilities
and Shareholders' Equity $ 117,153 $ 113,877
========= =========
Net Interest Spread (1) 5.8% 5.9%
========= =========
Net Interest Income and Net Interest Margin (2) $ 6,791 6.7% $ 6,626 6.7%
========= ========= ========= =========
</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.
30
<PAGE> 31
<TABLE>
<CAPTION>
(Dollars in Thousands) 1997
------------------------------------
Average Average
Balance Interest Yield
--------- --------- ---------
<S> <C> <C> <C>
Assets
Loans $ 92,963 $ 8,720 9.4%
Lease financing 79 7 8.9%
Investment securities (3) 6,461 375 5.8%
Federal funds sold 3,409 185 5.4%
Interest-earning deposits with
other financial institutions 278 17 6.1%
--------- --------- ---------
Total Interest-earning Assets 103,190 9,304 9.0%
--------- ---------
Other Assets 15,271
Less: Allowance for Loan Losses (715)
---------
Total Average Assets $ 117,746
=========
Liabilities and Shareholders' Equity
Savings deposits 39,118 685 1.8%
Time deposits 40,858 2,250 5.5%
Other 107 7 6.5%
--------- --------- ---------
Total Interest-bearing Liabilities 80,083 2,942 3.7%
--------- ---------
Demand deposits 28,264
Other liabilities 1,362
Shareholders' equity 8,037
---------
Total Average Liabilities
and Shareholders' Equity $ 117,746
=========
Net Interest Spread (1) 5.3%
=========
Net Interest Income and Net Interest Margin (2) $ 6,362 6.2%
========= =========
</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.
31
<PAGE> 32
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) 1999 - 1998 1998 - 1997
-------------------------------- --------------------------------
Volume Rate Total Volume Rate Total
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Increase/(Decrease) In
Interest Income
Loans 1 $ (194) $ (201) $ (395) $ (871) $ 772 $ (99)
Leases 2 (1) - $ (1) (5) (1) (6)
Investment securities 2 202 (14) 188 (43) (7) (50)
Deposits 25 (1) 24 4 (1) 3
FRB & Other Stock 1 (2) (1) 1 (1) 0
Federal funds sold 9 (8) 1 125 (10) 115
------ ------ ------ ------ ------ ------
42 (226) (184) (789) 752 (37)
------ ------ ------ ------ ------ ------
Increase/(Decrease) In
Interest Expense
Savings deposits 22 (17) 5 (25) (5) (30)
Time deposits (150) (203) (353) (243) (111) (354)
Short-term borrowings - - - (5) (2) (7)
------ ------ ------ ------ ------ ------
(128) (220) (348) (273) (118) (391)
------ ------ ------ ------ ------ ------
Increase/(Decrease)
in Net Interest Income $ 170 $ (6) $ 164 $ (516) $ 870 $ 354
====== ====== ====== ====== ====== ======
</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 $23,000 in 1999, $6,000 in
1998 and $26,000 in 1997.
(2) Interest income includes the effects of tax equivalent adjustments on tax
exempt securities and leases using tax rates which approximate 41.0% for 1998
and 25.0% for 1997. There were no tax exempt securities or leases in 1999.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for 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 loan and lease losses of $41,000 was recorded in 1999.
This is compared to a provision of $143,000 in 1998 and $144,000 in 1997. The
provision for loan and lease losses recorded in 1999, 1998 and 1997 is a result
of management's assessment of the potential losses inherent in the loan
portfolio. The need for additional provision for loan and lease losses in 2000
will be contingent upon management's on-going analysis of the adequacy of the
allowance for 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 1999, the Bank's non-accrual loans increased from $114,000 to
$495,000. 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 "Allowance for Loan
and Lease Losses."
32
<PAGE> 33
NON-INTEREST INCOME
Non-interest decreased $13,000 from $1,916,000 in 1998 to $1,903,000 in
1999. The Bank posted securities gains of $49,000 in 1998 and posted a loss of
$108 in 1999. This was offset by a gain on sale of OREO of $6,000 in 1999 versus
a $32,000 loss in 1998.
Non-interest income for 1998 totaled $1,916,000 compared to $1,742,000
in 1997. This represents an 10.0% increase during 1998. The increase during 1998
was due to an increase in fees and service charges and gains on the sale of
investment securities.
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) litigation expense and (v) 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 1999 was $8,564,000 compared to $7,649,000 in 1998
compared to $7,331,000 in 1997. The change in 1999 was due to an increase in
salaries and employee benefits of $260,000 and an increase of $841,000 in
litigation expense. The change in 1998 was due to a decrease in salaries and
employee benefits which was offset by increases in furniture and equipment
expense and other expenses.
Salaries and employees benefits totaled $3,766,000 in 1999 compared to
$3,506,000 in 1998 and $3,646,000 in 1997. The increase in 1999 was attributable
to employee bonus, performance compensation and deferred compensation. The
decrease in 1998 was attributable to a decrease in the number of full time
equivalent employees and commissions paid.
Litigation expense was $920,000 in 1999 compared to $79,000 in 1998. On
October 25, 1999, a jury rendered a verdict against the Bank in the amount of
approximately $3.5 million arising from a lawsuit by a borrower who also leased
to the Bank a branch office. The Bank foreclosed on the real property securing
its loan to the borrower. The borrower claimed that the foreclosure was
wrongful. On February 25, 2000, the trial judge found that the jury verdict was
excessive and ordered a new trial on damages if the borrower did not agree to a
reduction to $860,000. The Bank has filed an appeal. The Bank has accrued a loss
of $860,000 in recognition of the amount of liability determined by the court
which is included in litigation expense. However, the Bank and its legal counsel
continue to vigorously dispute any liability in this lawsuit and believe that
there is a significant probability that there will be a favorable outcome for
the pending appeal. In 1998, a settlement of a lawsuit of approximately $79,000
was posted.
The majority of the increase in 1998 was due to contributions to a new
director's deferred compensation plan totaling approximately $180,000 and
additions to the CEO's supplemental retirement plan of approximately $102,000.
Non-interest expense as a percentage of total income was 79% in 1999
compared to 69% in 1998 and 67% in 1997.
INCOME TAXES
Total income tax expense for 1999, 1998 and 1997 were $38,000, $307,000
and $134,000, respectively, which approximated 43.4, 40.9% and 24.9% of pre-tax
income, respectively.
FINANCIAL CONDITION
ASSETS
Total consolidated assets increased $440,000 or .4% to $116,303,000 as of
December 31, 1999 from $115,863,000 as of December 31, 1998.
33
<PAGE> 34
LOANS
The Company's loan portfolio has decreased by approximately $2,168,000
during the year ended December 31, 1999. This decrease was primarily due to a
decrease in installment loans to individuals, which decreased $5,983,000 from
$24,835,000 in 1998 to $18,852,000 in 1999. This decrease also resulted in a
$511,000 decrease in unearned income on installment loans. Loans held for sale
also decreased $1,342,000 from $2,178,000 in 1998 to $835,000 in 1999. The
decrease in installment loans and loans held for sale was partially offset by a
$2,777,000 increase in real estate construction loans and a $1,308,000 increase
in real estate mortgage loans. The Company's installment portfolio is comprised
of predominantly auto loans, both indirectly and directly funded. Indirect auto
loans represent approximately 36.6% and 53.7% of total installment loans at
December 31, 1999 and 1998, respectively. Approximately 91% of all indirect
loans are "A/B" 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 1999 and 1998.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Accruing Loans More Than 90 Days Past Due (1)
Aggregate Loan Amounts
Commercial, financial and agricultural
Real estate
Installment loans to individuals $ 14 $ 1
------ ------
Total Loans Past Due More Than 90 Days 14 1
------ ------
Renegotiated loans (2) - -
------ ------
Non-accrual loans (3)
Aggregate Loan Amounts
Commercial, financial and agricultural 269 114
Real estate 226
Installment loans to individuals
------ ------
Total Non-accrual Loans 495 114
------ ------
Total Non-performing Loans $ 509 $ 115
====== ======
</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
1999 and 1998.
(3) There were three loans on non-accrual status totaling approximately $495,000
at December 31, 1999 and two loans on non-accrual status totaling approximately
$114,000 at December 31, 1998.
The policy of the Company is to review each loan in the loan portfolio to
identify problem credits. In addition, as an integral part of its review process
of the Bank, the Comptroller also classifies problem credits. There are three
classifications for problem loans: "substandard", "doubtful" and "loss".
Substandard loans have one or more defined weaknesses and are characterized by
the distinct possibility that the Bank will sustain some loss if the
deficiencies are not corrected. Doubtful loans have the weaknesses of
substandard loans with the additional characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, questionable. A loan classified as loss is considered
uncollectible and of such little value that the continuance as an asset of the
institution is not warranted. Another category designated "special mention" is
maintained for loans which do not currently expose the Bank to a significant
degree or risk to warrant classification in a substandard, doubtful or loss but
do possess credit deficiencies or potential weaknesses deserving management's
close attention.
As of December 31, 1998, the Bank's classified loans consist of
$1,695,000 of loans classified as
34
<PAGE> 35
substandard and $250,000 loans classified as doubtful. The Bank's $1,695,000 in
loans classified as substandard consisted of $1,200,000 of performing loans and
$495,000 of non-accrual loans and loans delinquent 90 days or more but still
accruing.
RESERVE FOR PROBABLE LOAN AND LEASE LOSSES
The allowance for probable loan and lease losses is a general allowance
established by management to absorb potential losses inherent in the entire
portfolio. The level of and ratio of additions to the allowance are based on a
continuous analysis of the loan and lease portfolio and, at December 31, 1999,
reflected an amount which, in management's judgment, was adequate to provide for
known and inherent loan losses. In evaluating the adequacy of the allowance,
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 December 31, 1999.
The allowance for loan and lease losses at December 31, 1999, was
$639,000 or .75%, of total loans and leases, as compared to $686,000 or .78%, of
total credits at December 31, 1998. Additions to the allowance 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) 1999 1998
-------- --------
<S> <C> <C>
Allowance For Loan Losses
Balance, Beginning of period $ 686 $ 695
-------- --------
Charge-offs
Commercial, financial and agricultural 94 40
Real estate construction
Real estate mortgage
Consumer loans 103 213
Lease financing
-------- --------
Total Charge-offs 197 253
-------- --------
Recoveries
Commercial, financial and agricultural 27 8
Real estate construction
Real estate mortgage 41
Consumer loans 82 52
Lease financing
-------- --------
Total Recoveries 109 101
-------- --------
Net Charge-offs/(Recoveries) 88 152
Provision/(Credit) Charged to Operations 41 143
-------- --------
Balance, End of period $ 639 $ 686
======== ========
Net Charge-offs During the Year to Average Loans
Outstanding During the Year 0.10% 0.18%
======== ========
Allowance For Loan Losses to Total Losses 0.75% 0.78%
======== ========
</TABLE>
35
<PAGE> 36
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. Agency
Securities. As of December 31, 1999, 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 $4,000 and $60,000 in 1999 and 1998,
respectively, and unrealized losses for the same corresponding periods of
$71,000 and $1,000. The Company generated gains of $49,000 and $2,000 during
1998 and 1997, respectively.
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, 1999 were $104,523,000 compared with $105,315,000 in 1998. The
$792,000 decrease represents a 1.0% decrease. The mix of the Bank's deposits
showed wide fluctuations with an increase in savings and NOW deposits of
$3,349,000 or 13.4%, an increase in money market deposits of $1,022,000 or 9.2%,
an increase in demand deposits of $1,638,000 or 5.0%, an increase in time
deposits in denominations of $100,000 or more of $634,000 or 6.7% and a decrease
in other time deposits of $7,435,000 or 27.4%. The increases in savings, NOW and
money market accounts is a result of customers transferring monies from time
deposit accounts. The Bank was offering higher interest rates on short-term time
deposits in 1999 and 1998. 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.
36
<PAGE> 37
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 weekly. Vineyard
National Bank had liquid assets (cash, deposits in other financial institutions
and investment securities not pledged as collateral) as a percent of total
deposits and borrowed funds of 20% and 14% as of December 31, 1999 and 1998
respectively. The Bank's loan to deposit ratio was 82% and 83% as of December
31, 1999 and 1998, respectively. The Bank's policy is to strive for a loan to
deposit ratio between 70% and 90%. Loan demand has decreased $2,216,000 while
deposits increased by $792,000.
Liquidity has increased from $15,050,000 at December 31, 1998 to
$17,119,000 at December 31, 1999 due to increases in investment securities not
pledged as collateral and cash and due from banks of $3,313,000 and $1,380,000,
respectively. This was offset by decreases in federal funds sold and
interest-bearing deposits in other financial institutions of $2,425,000 and
$198,000, respectively.
While the level of liquid assets is modest, management believes it is
sufficient to meet current and anticipated funding needs. Liquid assets
represent approximately 14.7% 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).
37
<PAGE> 38
Although as of 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; the Bank will be
categorized as adequately capitalized based upon its year-end ratios. 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, 1999
Total capital to risk-weighted assets $ 9,376 9.9% $ 7,570 8.0% $ 9,462 10.0%
Tier 1 capital to risk-weighted assets 8,737 9.2% 3,785 4.0% 5,677 6.0%
Tier 1 capital to average assets 8,737 7.5% 4,675 4.0% 5,843 5.0%
As of December 31, 1998
Total capital to risk-weighted assets $ 9,373 9.8% $ 7,687 8.0% $ 9,609 10.0%
Tier 1 capital to risk-weighted assets 8,687 9.0% 3,843 4.0% 5,765 6.0%
Tier 1 capital to average assets 8,687 7.5% 4,633 4.0% 5,791 5.0%
</TABLE>
ECONOMIC CONCERNS
The Bank concentrates on marketing to, and serving the needs of, small
and medium-sized businesses, professionals and individuals located in San
Bernardino County and the Western portion of Los Angeles County of Southern
California.
The 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.
38
<PAGE> 39
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 40
Consolidated Balance Sheets
December 31, 1999 and 1998 41
Consolidated Statements of Income
For the Years Ended December 31, 1999, 1998 and 1997 42
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997 43
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997 44
Notes to Consolidated Financial Statements 46
</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.
39
<PAGE> 40
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, 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, 1999, in conformity
with generally accepted accounting principles.
/s/ VAVRINEK, TRINE, DAY & CO., LLP
Rancho Cucamonga, California
March 21, 2000
40
<PAGE> 41
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
------------- -------------
<S> <C> <C>
Cash and due from banks (Note #1F) $ 7,853,489 $ 6,473,959
Federal funds sold 3,390,000 5,815,000
------------- -------------
Total Cash and Cash Equivalents 11,243,489 12,288,959
------------- -------------
Interest-bearing deposits in other financial institutions 495,000 693,000
Investment securities (Notes #1G and #2)
Available-for-sale 9,428,297 6,059,988
Loans, net of unearned income (Notes #1H and #3) 84,881,774 85,755,246
Loans held for sale (Notes #1I and #3) 835,323 2,177,692
------------- -------------
85,717,097 87,932,938
Less: Allowance for loan losses (Notes 1J and #4) (638,638) (686,016)
------------- -------------
85,078,459 87,246,922
Bank premises and equipment (Notes #1K and #6) 6,051,588 6,436,612
Accrued interest 573,187 496,093
Cash surrender value of life insurance 2,262,934 1,801,984
Other real estate owned (Notes #1L, #16 and #17) 262,714 287,354
Federal Reserve Bank and other stock at cost 177,200 177,200
Other assets 730,288 374,919
------------- -------------
Total Assets $ 116,303,156 $ 115,863,031
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand deposits 34,208,093 32,570,373
Savings and NOW deposits 28,352,216 25,003,583
Money market deposits 12,125,849 11,103,667
Time deposits in denominations of $100,000 or more (Note #19) 10,087,216 9,452,872
Other time deposits (Note #19) 19,749,804 27,184,495
------------- -------------
104,523,178 105,314,990
Accrued employee salary and benefits 1,052,156 781,629
Accrued interest and other liabilities 2,022,587 1,038,253
------------- -------------
Total Liabilities 107,597,921 107,134,872
------------- -------------
Commitments and Contingencies (Note #8)
Stockholders' Equity
Contributed capital
Common stock - authorized 15,000,000 shares, no par
value, issued and outstanding 1,862,776 shares in
1999 and 1998 2,106,258 2,106,258
Additional paid-in capital 3,306,684 3,306,684
Retained earnings 3,331,118 3,280,982
Accumulated other comprehensive income (38,825) 34,235
------------- -------------
Total Stockholders' Equity 8,705,235 8,728,159
------------- -------------
Total Liabilities and Stockholders' Equity $ 116,303,156 $ 115,863,031
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE> 42
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans (Note #1H) $ 8,136,750 $ 8,531,979 $ 8,631,123
Interest on Investment Securities (Note #1G)
Obligations of U.S. Treasury and Agencies 502,636 315,532 364,779
Other securities 9,533 9,948 9,833
Interest on deposits 44,739 20,268 17,398
Interest on Federal funds sold 300,845 299,538 185,151
Direct lease financing income 784 4,944
----------- ----------- -----------
Total Interest Income 8,994,503 9,178,049 9,213,228
----------- ----------- -----------
INTEREST EXPENSE
Interest on savings deposits 192,135 206,686 216,723
Interest on NOW and money market deposits 468,995 448,803 468,881
Interest on time deposits in denominations of $100,000 or more 370,207 323,822 481,436
Interest on other time deposits 1,172,368 1,572,361 1,768,438
Interest on Federal funds purchased and other interest 329 320 7,029
----------- ----------- -----------
Total Interest Expense 2,204,034 2,551,992 2,942,507
----------- ----------- -----------
Net Interest Income 6,790,469 6,626,057 6,270,721
PROVISION FOR LOAN AND LEASE LOSSES - (Notes #1J and #4) (41,000) (142,982) (143,782)
----------- ----------- -----------
Net Interest Income After Provision
for Loan and Lease Losses 6,749,469 6,483,075 6,126,939
----------- ----------- -----------
OTHER INCOME
Fees and service charges, gain on sale of loans
and loan servicing income (Note #10) 1,716,881 1,709,063 1,622,015
Net gain (loss) on sale of other real estate owned 6,462 (31,556) (7,166)
Net (loss) gain on sale of investment securities (108) 49,072 2,450
Other income 180,206 189,222 124,289
----------- ----------- -----------
Total Other Income 1,903,441 1,915,801 1,741,588
----------- ----------- -----------
OTHER EXPENSES
Salaries and employee benefits 3,766,182 3,505,857 3,671,701
Occupancy expense of premises 616,437 623,994 634,410
Furniture and equipment expense 606,183 672,893 553,456
Litigation expense (Note #8) 920,000 79,236
Other expenses (Note #10) 2,655,572 2,766,713 2,471,024
----------- ----------- -----------
Total Other Expenses 8,564,374 7,648,693 7,330,591
----------- ----------- -----------
Income Before Income Taxes 88,536 750,183 537,936
Income Taxes (Notes #1M and #7) 38,400 306,800 133,800
----------- ----------- -----------
Net Income $ 50,136 $ 443,383 $ 404,136
=========== =========== ===========
Earnings Per Share (Notes #1N and #14)
Basic $ 0.03 $ 0.24 $ 0.22
=========== =========== ===========
Diluted $ 0.03 $ 0.22 $ 0.21
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE> 43
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock
--------------------------------- Additional
Number of Paid-in Comprehensive
Shares Amount Capital Income
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 1,862,766 $ 2,106,258 $ 3,306,684
Comprehensive income
Net Income $ 404,136
Unrealized security holding gains
(net of $8,544 tax) 12,792
less reclassification adjustments for
gains (net of $613 tax) (1,837)
--------------
Total Comprehensive income $ 415,091
-------------- -------------- -------------- ==============
BALANCE, December 31, 1997 1,862,766 2,106,258 3,306,684
Comprehensive income
Net Income $ 443,383
Unrealized security holding gains
(net of $33,840 tax) 46,735
less reclassification adjustments for
gains (net of $20,610 tax) (28,462)
--------------
Total Comprehensive income $ 461,656
-------------- -------------- -------------- ==============
BALANCE, December 31, 1998 1,862,766 2,106,258 3,306,684
Comprehensive income
Net Income $ 50,136
Unrealized security holding losses
(net of $52,887 tax) (73,123)
less reclassification adjustments for
losses (net of $45 tax) 63
--------------
Total Comprehensive income $ (22,924)
-------------- -------------- -------------- ==============
BALANCE, December 31, 1999 1,862,766 $ 2,106,258 $ 3,306,684
============== ============== ==============
<CAPTION>
Accumulated
Other
Retained Comprehensive
Earnings Income Total
-------------- -------------- --------------
<S> <C> <C> <C>
BALANCE, December 31, 1996 $ 2,433,463 $ 5,007 $ 7,851,412
Comprehensive income
Net Income 404,136 404,136
Unrealized security holding gains
(net of $8,544 tax) 12,792 12,792
less reclassification adjustments for
gains (net of $613 tax) (1,837) (1,837)
Total Comprehensive income
-------------- -------------- --------------
BALANCE, December 31, 1997 2,837,599 15,962 8,266,503
Comprehensive income
Net Income 443,383 443,383
Unrealized security holding gains
(net of $33,840 tax) 46,735 46,735
less reclassification adjustments for
gains (net of $20,610 tax) (28,462) (28,462)
Total Comprehensive income
-------------- -------------- --------------
BALANCE, December 31, 1998 3,280,982 34,235 8,728,159
Comprehensive income
Net Income 50,136 50,136
Unrealized security holding losses
(net of $52,887 tax) (73,123) (73,123)
less reclassification adjustments for
losses (net of $45 tax) 63 63
Total Comprehensive income
-------------- -------------- --------------
BALANCE, December 31, 1999 $ 3,331,118 $ (38,825) $ 8,705,235
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE> 44
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and fees received $ 8,332,313 $ 7,693,391 $ 7,555,823
Service fees and other income received 1,897,087 1,900,070 1,680,159
Financing revenue received under leases 784 4,944
Interest paid (2,286,942) (2,605,020) (3,195,513)
Cash paid to suppliers and employees (6,930,145) (7,575,320) (6,607,753)
Decrease/(increase) in loans held for sale 1,342,369 (1,752,742) (424,950)
Income taxes paid (517,929) (185,435) (10,000)
------------ ------------ ------------
NET CASH PROVIDED BY/(USED IN)
OPERATING ACTIVITIES 1,836,753 (2,524,272) (997,290)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities,
available-for-sale 4,000,000 4,050,000 3,350,000
Proceeds from sales of investment securities,
available-for-sale 1,008,492 549,197 6,392,159
Purchase of investment securities held-to-maturity
Purchase of investment securities available-for-sale (8,467,993) (6,010,595) (8,484,567)
Purchase of other investment securities (5,000)
Net decrease/(increase) in deposits in other
financial institutions 198,000 (693,000) 396,000
Recoveries on loans previously written off 108,877 101,283 180,559
Net loans made to customers and principal
collections of loans 1,226,495 4,060,850 9,905,466
Net decrease in leases to customers 14,354 174,135
Capital expenditures (274,784) (427,218) (861,941)
Proceeds from sale of property, plant and equipment 79,400 76,198 31,404
Proceeds from sale of OREO 31,102 169,182 210,547
------------ ------------ ------------
NET CASH (USED IN)/PROVIDED BY
INVESTING ACTIVITIES (2,090,411) 1,885,251 11,293,762
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts,
savings accounts, and money market deposits 6,008,535 1,491,152 3,151,564
Net (decrease)/increase in certificates of deposits (6,800,347) 2,082,482 (8,012,997)
Net decrease in federal funds purchased (3,700,000)
------------ ------------ ------------
NET CASH (USED IN)/PROVIDED BY
FINANCING ACTIVITIES (791,812) 3,573,634 (8,561,433)
------------ ------------ ------------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (1,045,470) 2,934,613 1,735,039
CASH AND CASH EQUIVALENTS, Beginning of year 12,288,959 9,354,346 7,619,307
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, End of year $ 11,243,489 $ 12,288,959 $ 9,354,346
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE> 45
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY/(USED IN) OPERATING ACTIVITIES
Net Income $ 50,136 $ 443,383 $ 404,136
----------- ----------- -----------
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities
Depreciation and amortization 581,142 650,375 538,527
Investment securities accretion/amortization (34,818) (38,724) (38,017)
Provision for loan and lease losses 41,000 142,982 143,782
Provision for OREO losses 4,400
(Gain)/loss on sale of equipment (734) 5,334 (9,309)
(Decrease)/Increase in taxes payable (104,129) 120,565 123,000
Increase in other assets (816,317) (820,311) (98,324)
Decrease/(Increase) in loans held for sale 1,342,369 (1,752,742) (424,950)
Decrease in unearned loan fees (550,278) (1,394,090) (1,660,765)
Increase in interest receivable (77,094) (51,060) (41,907)
Decrease in interest payable (82,908) (53,028) (253,006)
Increase in accrued expense and other liabilities 1,494,738 236,160 314,827
Loss/(Gain) on sale of investment securities 108 (49,072) (2,450)
(Gain)/Loss on sale of OREO (6,462) 31,556 7,166
----------- ----------- -----------
Total Adjustments 1,786,617 (2,967,655) (1,401,426)
----------- ----------- -----------
NET CASH PROVIDED BY/(USED IN)
OPERATING ACTIVITIES $ 1,836,753 $(2,524,272) $ (997,290)
=========== =========== ===========
SUPPLEMENTARY INFORMATION
Change in valuation allowance
for investment securities $ (73,060) $ 18,273 $ 10,955
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
45
<PAGE> 46
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
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 (the Bank). Intercompany balances
and transactions have been eliminated.
B. Nature of Operations
The Company was organized and operates as a single reporting segment. The
Company operates five branches within San Bernardino and Los Angeles
Counties and provides a variety of financial services to individuals and
small-to-medium sized businesses. The Company 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. The financial information for the Company has been
aggregated into one reporting segment.
C. 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.
46
<PAGE> 47
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
D. Reclassifications
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to 1999 classifications.
E. Cash and Cash Equivalents
Fur purposes of reporting cash flows, cash and cash equivalents include
cash, due from banks and federal funds sold. Generally, federal funds are
sold for one day periods.
F. Cash and Due From Banks
Banking regulations require that all banks maintain a percentage of their
deposits as reserves in cash or on deposit with the Federal Reserve Bank.
The Bank complied with the reserve requirements as of December 31, 1999.
The Bank maintains amounts due from banks that exceed federally insured
limits. The Bank has not experienced any losses in such accounts.
G. Investment Securities
In accordance with Statement of Financial Accounting Standards (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.
H. 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).
47
<PAGE> 48
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
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 as a loss.
I. 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.
J. Allowance for Loan and Lease Losses
The allowance for 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 allowance is based on
management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and economic
conditions. The allowance is increased by a provision for loan and lease
losses, which is charged to expense and reduced by charge-offs, net of
recoveries.
K. Premises and Equipment
Land is carried at cost. Premises and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives, which ranges from
three to ten years for furniture and fixtures and forty years for buildings.
Leasehold improvements are amortized using the straight-line method over the
estimated useful lives of the improvements or the remaining lease term,
whichever is shorter. Expenditures for betterments or major repairs are
capitalized and those for ordinary repairs and maintenance are charged to
operations as incurred. Total depreciation expense for the reporting periods
ending December 31, 1999, and 1998 and 1997, was approximately $581,000,
$650,000, and $539,000, respectively.
48
<PAGE> 49
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
L. 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.
M. 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."
N. 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.
O. Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but
does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Bank has chosen to continue
to account for stock-based compensation using the instrinsic value method
prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock issued to Employees", and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess,
if any, of the quoted market price of the Bank's stock at the date of the
grant over the amount an employee must pay to acquire the stock. The pro
forma effects of adoption are disclosed in Note #9.
P. Comprehensive Income
Beginning in 1998, the Bank adopted SFAS No. 130, "Reporting Comprehensive
Income", which requires the disclosure of comprehensive income and its
components. Changes in unrealized gain (loss) on available-for-sale
securities net of income taxes is the only components of accumulated other
comprehensive income for the Bank.
Q. Current Account Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. This new standard was originally
effective for 2000. In June 1999, the FASB issued SFAS No. 137, "Accounting
for Derivatives Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133". This Statement establishes the
effective date of SFAS 133 for 2001 and is not expected to have a material
impact on the Bank's financial statements.
49
<PAGE> 50
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #2 - INVESTMENT SECURITIES
At December 31, 1999 and 1998, 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, 1999, were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. Agency securities $ 9,493,833 $ (71,328) $ 9,422,505
Other 1,340 $ 4,452 5,792
----------- ----------- ----------- -----------
Total $ 9,495,173 $ 4,452 $ (71,328) $ 9,428,297
=========== =========== =========== ===========
</TABLE>
The amortized cost and fair values of investment securities available-for-sale
at December 31, 1998, were:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 499,577 $ 423 $ 500,000
U.S. Agency securities 5,491,866 59,302 $ (699) 5,550,469
Other 9,519 9,519
--------------- --------------- --------------- ---------------
Total $ 6,000,962 $ 59,725 $ (699) $ 6,059,988
=============== =============== =============== ===============
</TABLE>
The amortized cost and fair values of investment securities available-for-sale
at December 31, 1999, 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 $ 4,983,683 $ 4,956,250
Due after one year but less than five years 4,510,150 4,466,255
------------ ------------
9,493,833 9,422,505
Other securities 1,340 5,792
------------ ------------
Total Securities $ 9,495,173 $ 9,428,297
============ ============
</TABLE>
Proceeds from sales of investment securities available-for-sale during 1999 were
$1,008,492. Gross losses on those sales were $108. There were no gains during
1999. Included in shareholders' equity at December 31, 1999 is $38,825 of net
unrealized losses (net of $28,051 estimated tax benefit) on investment
securities available-for-sale.
50
<PAGE> 51
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #2 - INVESTMENT SECURITIES, Continued
Proceeds from sales of investment securities available-for-sale during 1998 were
$549,197. Gross gains on those sales were $49,072. There were no losses during
1998. Included in shareholders' equity at December 31, 1998 is $34,235 of net
unrealized gains (net of $24,791 estimated tax expense) on investment securities
available-for-sale.
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.
Securities with a carrying value and fair value of $4,945,408 and $4,047,187 at
December 31, 1999 and 1998, 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>
1999 1998
------------ ------------
<S> <C> <C>
Commercial, financial and agricultural $ 14,670,727 $ 15,134,834
Real Estate - construction 6,602,104 3,825,482
Real Estate - mortgage
Commercial 36,181,308 34,872,740
Residential 9,188,841 8,327,810
Installment loans to individuals 18,851,726 24,835,185
All other loans (including overdrafts) 169,693 92,098
------------ ------------
85,664,399 87,088,149
Unearned income on installment loans (466,051) (977,920)
Deferred loan fees (316,574) (354,983)
------------ ------------
Loans, Net of Unearned Income $ 84,881,774 $ 85,755,246
============ ============
Loans held for sale $ 835,323 $ 2,177,692
============ ============
</TABLE>
51
<PAGE> 52
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #3 - LOANS, Continued
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>
1999 1998
-------- --------
<S> <C> <C>
Impaired loans without a valuation allowance $495,000 $114,000
Impaired loans with a valuation allowance -- --
-------- --------
Total impaired loan $495,000 $114,000
======== ========
Valuation allowance related to impaired loans $ 0 $ 0
======== ========
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Average investment in impaired loans 164,000 106,000 354,000
Interest income recognized on impaired loans 0 0 0
Interest income recognized on a cash basis on impaired loans 5,000 5,000 3,000
</TABLE>
No additional funds are committed to be advanced in connection with impaired
loans.
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 $495,000 and $114,000 at December 31,
1999 and 1998, respectively. As of December 31, 1999 and 1998, 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 $23,000, $6,000, and $26,000 in 1999, 1998 and 1997, respectively.
At December 31, 1999 and 1998, the Company had approximately $14,000 and
$216,000, 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, 1999, no loans were classified as troubled debt restructurings.
Loans with a carrying amount of approximately $4,135,000 have been pledged to
secure a line of credit at the Federal Reserve Bank.
52
<PAGE> 53
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #4 - ALLOWANCE FOR PROBABLE LOAN AND LEASE LOSSES
Transactions in the reserve for loan and lease losses are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance, Beginning of year $ 686,016 $ 694,880 $ 727,667
Recoveries on loans previously charged off 108,877 101,283 180,559
Loans charged off (197,255) (253,129) (357,128)
Provision/(credit) charged to operating expense 41,000 142,982 143,782
--------- --------- ---------
Balance, End of year $ 638,638 $ 686,016 $ 694,880
========= ========= =========
</TABLE>
NOTE #5 - LOANS TO DIRECTORS AND OFFICERS
In the ordinary course of business, the Company has granted loans to certain
directors and officers and the companies with which they are associated. All
such loans were made under the terms which are consistent with the Bank's normal
lending policies.
An analysis of the activity with respect to such aggregate loans to related
parties during 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Outstanding Balance, Beginning of year $ 2,839,235 $ 1,823,468
Credit granted, including renewals 1,027,341 1,575,755
Repayments (1,109,986) (559,988)
----------- -----------
Outstanding Balance, End of year $ 2,756,590 $ 2,839,235
=========== ===========
</TABLE>
Not included in the balances outstanding at December 31, 1999 and 1998, were
undisbursed commitments to lend of approximately $275,000. There were no
non-accruing loans to Directors and Officers and loans classified by the
Company's regulatory agency or by the Company in 1999 and 1998.
Deposits from related parties held by the Bank at December 31, 1999 and 1998
amounted to approximately $3,453,000 and $2,547,000, respectively.
53
<PAGE> 54
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #6 - PREMISES AND EQUIPMENT
Major classifications of Company premises and equipment are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Building $ 3,868,395 $ 3,868,395
Furniture and equipment 3,524,261 3,546,881
Leasehold improvements 1,264,014 1,204,983
----------- -----------
8,656,670 8,620,259
Less: Accumulated depreciation and amortization (3,890,082) (3,468,647)
Land 1,285,000 1,285,000
----------- -----------
Total $ 6,051,588 $ 6,436,612
=========== ===========
</TABLE>
The Company is obligated under leases for equipment and property. The original
terms of the leases range from three to ten years. The leases contain options to
extend for periods from twelve months to sixty-seven months. All options to
extend have been exercised and the related lease costs are included below. The
following is a schedule of future minimum lease payments based upon obligations
at year-end.
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
2000 $ 89,822
2001 89,822
2002 89,822
2003 18,868
--------
Total $288,334
========
</TABLE>
Total property and equipment expenditures charged to leases for the reporting
periods ended December 31, 1999, 1998 and 1997, were approximately $110,000,
$110,000, and $124,000, respectively.
54
<PAGE> 55
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #7 - INCOME TAXES
<TABLE>
<CAPTION>
Year Ending December 31,
--------------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Tax provision applicable to
income before income taxes $ 38,400 $ 306,800 $133,800
========= ========= ========
Federal Income Tax
Current 421,600 330,700 29,300
Deferred (credit) (396,400) (92,200) 51,600
--------- --------- --------
Total Federal Income Tax 25,200 238,500 80,900
--------- --------- --------
State Franchise Tax
Current 144,200 98,800 50,500
Deferred (credit) (131,000) (30,500) 2,400
--------- --------- --------
Total State Franchise Tax 13,200 68,300 52,900
--------- --------- --------
Total Income Taxes $ 38,400 $ 306,800 $133,800
========= ========= ========
</TABLE>
Deferred tax expense/(credits) result from timing differences in the recognition
of revenues and expenses for tax and financial statement purposes. The sources
of these differences and the tax effect of each are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- ----------------------
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 $(313,300) $ (97,800) $ 66,100 $ 1,500 $ 40,100 $ 1,560
Depreciation computed
differently on tax returns than
for financial statements (10,700) (4,300) (25,300) 4,600 (10,800) (2,520)
Deferred compensation plan (72,400) (28,900) (84,400) (26,300) (19,700) (4,640)
Provision for loan loss deduction
in tax return over/(under) amount
charged for financial
statement purposes - - (48,600) (10,300) 42,000 8,000
--------- --------- --------- --------- --------- ---------
Total $(396,400) $(131,000) $ (92,200) $ (30,500) $ 51,600 $ 2,400
========= ========= ========= ========= ========= =========
</TABLE>
55
<PAGE> 56
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #7 - INCOME TAXES, Continued
As a result of the following items, the total income tax expense/(credit) for
1999, 1998 and 1997, was different than the amount computed by applying the
statutory U.S. Federal income tax rate to income before taxes:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -------------------------
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Federal rate $ 30,102 34.0 $ 255,062 34.0 $ 182,898 34.0
Changes due to State income
tax, net of Federal tax benefit 8,712 9.8 45,078 6.1 34,914 6.5
Exempt interest (1,240) (1.3) (2,180) (0.3) (51,045) (9.5)
Other 826 0.9 8,840 1.1 (32,967) (6.1)
--------- --------- --------- --------- --------- ---------
Total $ 38,400 43.4 $ 306,800 40.9 $ 133,800 24.9
========= ========= ========= ========= ========= =========
</TABLE>
The deferred tax assets and liabilities of the Company are composed of the
following tax-affected cumulative timing differences.
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred Tax Assets
Reserve for loan losses $ 40,000 $ 40,000
Real estate owned writedowns 12,000 19,000
Deferred compensation 358,000 257,000
Deferred fees 110,000 146,000
Non-deductible reserves 426,000 47,000
Other Unrealized Loss on Securities 28,000 --
--------- ---------
974,000 509,000
Less: Valuation allowance(1) (475,000) (475,000)
--------- ---------
499,000 34,000
Deferred Tax Liabilities
Reserve for loan losses -- (52,000)
Unrealized gain on securities -- (28,000)
Fixed assets (105,000) (120,000)
--------- ---------
Net Deferred Tax Assets (Liabilities) $ 394,000 $(166,000)
========= =========
</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 1999 or 1998.
56
<PAGE> 57
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #8 - COMMITMENTS AND CONTINGENCIES
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, 1999 and 1998, the Company had commitments to extend credit of
approximately $10,165,000 and $7,479,000 and obligations under standby letters
of credit of approximately $174,000 and $430,000.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, income-producing
commercial properties, residential properties and properties under construction.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
On October 25, 1999, a jury rendered a verdict against the Bank in the amount of
approximately $3.5 million arising from a lawsuit by a borrower who also leased
to the Bank a branch office. The Bank foreclosed on the real property securing
its loan to the borrower. The borrower claimed that the foreclosure was
wrongful. On February 25, 2000, the trial judge found that the jury verdict was
excessive and ordered a new trial on damages if the borrower did not agree to a
reduction to $860,000. The Bank has filed an appeal. The Bank has accrued a loss
of $860,000 in recognition of the amount of liability determined by the court
which is included in litigation expense. However, the Bank and its legal counsel
continue to vigorously dispute any liability in this lawsuit and believe that
there is a significant probability that there will be a favorable outcome for
the pending appeal.
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.
As discussed in Note #15, Contingent Matters, the Bank has potential
contingencies due to the effects, if any, from the forthcoming report of
examination to be issued by the Office of the Comptroller of the Currency at the
conclusion of their examination currently in progress.
57
<PAGE> 58
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #9 - STOCK OPTION PLAN
At December 31, 1999, 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 the Company's stock option plan been determined on the fair value at the
grant dates for awards under the plan consistent with the method prescribed by
SFAS 123, the Company's net income and earnings per share would have been
adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income As reported $ 50,136 $ 443,383 $ 404,136
Pro forma $ 44,105 $ 437,325 $ 399,704
Earnings per share As reported $ 0.03 $ 0.24 $ 0.22
Pro forma $ 0.02 $ 0.23 $ 0.22
Earnings per share - As reported $ 0.03 $ 0.22 $ 0.21
assuming dilution Pro forma $ 0.02 $ 0.22 $ 0.21
</TABLE>
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 vest at a rate of 33?
1/3% every two years with all options vesting at the end of the sixth year after
the date 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.
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 vest at a rate of 33 1/3% every two years with all
options vesting at the end of the sixth year after the date of grant. 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.
58
<PAGE> 59
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #9 - STOCK OPTION PLAN, Continued
The fair value of each option granted during 1999, 1998 and 1997, respectively,
were estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions; risk-free rates of 6.56%, 4.75%, and 5.75%,
dividend yield of 0.0% for all years; volatility of 30%, 28%, 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, 1999, 1998 and 1997, respectively, and changes during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------- ------------------------------------------
Number of Shares Number of Shares
--------------------------- Weighted- --------------------------- Weighted-
Available Average Available Average
For Exercise For Exercise
Granting Outstanding Price Granting Outstanding Price
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 152,188 174,264 $ 5.23 250,188 76,264 $ 2.97
Cancelled 8,940 (8,940) $ 5.51
Granted (5,000) 5,000 $ 5.75 (98,000) 98,000 $ 6.90
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at end of year 156,128 170,324 $ 5.14 152,188 174,264 $ 5.23
=========== =========== =========== =========== =========== ===========
Options exercisable at year-end 84,824 81,264
Weighted-average fair value of
Options granted during the year $ 2.13 $ 2.05
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------
Number of Shares
--------------------------- Weighted-
Available Average
For Exercise
Granting Outstanding Price
----------- ----------- -----------
<S> <C> <C> <C>
Outstanding at beginning of year 53,316 73,136 $ 2.91
Additional options authorized 200,000
Cancelled 1,872 (1,872) $ 2.92
Granted (5,000) 5,000 $ 3.50
----------- -----------
Outstanding at end of year 250,188 76,264 $ 2.97
=========== ===========
Options exercisable at year-end 76,264
Weighted-average fair value of
Options granted during the year $ 1.18
</TABLE>
59
<PAGE> 60
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #9 - STOCK OPTION PLAN, Continued
The following table summarizes information about incentive stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
---------------------------------------------------------------------------------------------------------------
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price
------------------------------ -------------------- ---------------------------- -----------------------
<S> <C> <C> <C> <C>
$2.92 to $3.50 74,824 6 $2.97
$5.13 5,000 8 $5.13
$5.75 5,000 9 $5.75
</TABLE>
NOTE #10 - OTHER INCOME/EXPENSES
The following is a breakdown of fees and other servicing income and expenses for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Fees and Other Servicing Income
Fees and service charges $1,531,882 $1,451,626 $1,534,423
Premium on sale of loans 184,999 257,437 87,592
---------- ---------- ----------
Total $1,716,881 $1,709,063 $1,622,015
========== ========== ==========
Other Expenses
Data processing $ 668,228 $ 663,553 $ 683,086
Marketing expenses 252,808 287,876 334,662
Professional expenses 687,931 629,466 530,457
Office supplies, postage and telephone 319,614 366,833 346,224
Insurance and assessment expense 160,149 167,040 191,461
Loan related expense 51,759 77,022 65,897
Administrative expense 315,354 373,276 106,044
Other 199,729 201,647 213,193
---------- ---------- ----------
Total $2,655,572 $2,766,713 $2,471,024
========== ========== ==========
</TABLE>
NOTE #11 - 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, 1999, the combined amount of funds available
from these two sources amounted to approximately $2,637,000 or 30%.
60
<PAGE> 61
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #12 - 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 officers' deferrals up to a maximum of 25% and 50% of senior
officers' deferrals to a maximum of 10% of before tax compensation. 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
$76,600 ($43,377 net of income taxes), $70,239 ($57,770 net of income taxes),
and $85,911 ($51,546 net of income taxes) for the years ended December 31, 1999,
1998 and 1997, respectively.
NOTE #13 - 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 $10,000 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 $16,121 ($9,129 net of income taxes),
$15,321 ($12,563 net of income taxes), and $6,732 ($4,040 net of income taxes)
for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE #14 - 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>
1999 1998 1997
------------------------- -------------------------- -------------------------
Net Net Net
Income Shares Income Shares Income Shares
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <S> <C> <C> <C> <C>
Net income as reported $ 50,136 $ 443,383 $ 404,136
Shares outstanding at year-end 1,862,776 1,862,776 1,862,776
---------- ---------- ---------- ---------- ---------- ----------
Used in Basic EPS 50,136 1,862,776 443,383 1,862,776 404,136 1,862,776
Dilutive effect of outstanding
stock options 125,840 131,479 20,210
---------- ---------- ---------- ---------- ---------- ----------
Used in Diluted EPS $ 50,136 1,988,616 $ 443,383 1,994,255 $ 404,136 1,882,986
========== ========== ========== ========== ========== ==========
</TABLE>
61
<PAGE> 62
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #15 - REGULATORY MATTERS
General
The Company (on a consolidated basis) and the Bank are 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 Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors. Prompt corrective action
provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and 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,
1999, that the Company and the Bank meets all capital adequacy requirements to
which it is subject.
Although, as of the most recent formal notification from the Office of the
Comptroller of the Currency, the Bank was categorized as well capitalized under
the regulatory framework for prompt corrective action; the Bank will be
categorized as adequately capitalized based upon its year-end ratios. To be
categorized as well-capitalized, the Bank must maintain minimum capital ratios
as set forth in the table below. The following table also sets forth the Bank's
actual regulatory capital amounts and ratios (dollar amounts in thousands):
<TABLE>
<CAPTION>
Capital Needed
-----------------------------------------------------------
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Regulatory Adequacy Purposes Action Provisions
--------------------------- ---------------------------- ----------------------------
Capital Capital Capital
Amount Ratio Amount Ratio Amount Ratio
-------------- ------------ --------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total capital to risk-weighted assets: $ 9,376 9.9% $ 7,570 8.0% $ 9,462 10.0%
Tier 1 capital to risk-weighted assets: $ 8,737 9.2% $ 3,785 4.0% $ 5,677 6.0%
Tier 1 capital to average assets: $ 8,737 7.5% $ 4,675 4.0% $ 5,843 5.0%
As of December 31, 1998
Total capital to risk-weighted assets: $ 9,373 9.8% $ 7,687 8.0% $ 9,609 10.0%
Tier 1 capital to risk-weighted assets: $ 8,687 9.0% $ 3,843 4.0% $ 5,765 6.0%
Tier 1 capital to average assets: $ 8,687 7.5% $ 4,633 4.0% $ 5,791 5.0%
</TABLE>
At December 31, 1999 and 1998, the Company's capital ratios were substantially
the same as the Bank.
62
<PAGE> 63
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE # 15 - REGULATORY MATTERS (continued)
CONTINGENT MATTERS
The primary regulator of the Bank, The Office of the Comptroller of the Currency
(OCC), is performing a safety and soundness examination of the Bank and has not,
as yet, concluded its work or issued its corresponding report of examination.
Accordingly, the OCC may include matters in its forthcoming report of
examination that could have an effect on the Bank's policies and procedures to
be followed, the classification of some of the credits in the loan portfolio,
the level of its allowance for loan and lease losses, and/or its composite
rating as a regulated financial institution. The impact of any such matters
noted by the OCC could have an effect on the financial performance and condition
of the Bank.
NOTE #16 - OTHER REAL ESTATE OWNED
As discussed in Note #1L, 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>
1999 1998
--------- ---------
<S> <C> <C>
Balance, Beginning of year $ 287,354 $ 492,492
Sales (24,640) (200,738)
Valuation adjustments and other (4,400)
--------- ---------
Balance, End of year $ 262,714 $ 287,354
========= =========
</TABLE>
The balances at December 31, 1999 and 1998, are shown net of reserves.
NOTE #17 - RESERVE FOR PROBABLE LOSSES ON OTHER REAL ESTATE OWNED
Transactions in the reserve for other real estate owned are summarized for 1999,
1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Balance, Beginning of year $ 55,873 $ 51,473 $89,338
Provision charged to other expense 4,400
Charge-offs and other reductions (20,660) (37,865)
-------- -------- -------
Balance, End of year $ 35,213 $ 55,873 $51,473
======== ======== =======
</TABLE>
63
<PAGE> 64
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 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. SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank.
The following table presents the carrying amounts and fair values of financial
instruments at December 31, 1999. SFAS No. 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>
December 31, 1999 December 31, 1998
---------------------------------- ----------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 11,243,489 $ 11,243,489 $ 12,288,959 $ 12,288,959
Interest-bearing deposits in other
financial institutions 495,000 495,000 693,000 693,000
Investment securities 9,428,297 9,428,297 6,059,988 6,059,988
Loans receivable 84,243,136 84,219,640 85,069,230 84,597,659
Loans held for sale 835,323 835,323 2,177,692 2,177,692
Accrued interest receivable 573,187 573,187 496,096 496,093
Liabilities
Non-interest bearing deposits 34,208,093 34,208,093 32,570,373 32,570,373
Interest bearing deposits 70,315,085 70,312,424 72,744,617 72,786,772
Accrued interest payable 276,360 276,360 359,268 359,268
Notional Cost to Cede Notional Cost to Cede
Amount or Assume Amount or Assume
============== ============== ============== ==============
Off-Balance Sheet Instruments
Commitments to extend credit
and standby letters of credit $ 10,339,000 $ 103,390 $ 7,909,000 $ 79,090
</TABLE>
64
<PAGE> 65
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #18 - FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued
The following methods and assumptions were used by the Bank in estimating fair
value disclosures:
- - Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets' fair values due to the short-term
nature of the assets.
- - Interest-bearing Deposits in Other Financial Institutions
Interest-bearing deposits in other financial institutions mature within
ninety days from the date of deposit and, therefore, the carrying amounts
approximate those assets' fair values.
- - 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.
- - Loans Held for Sale
Loans held for sale are recorded at the lower of cost or estimated fair
value and, therefore, the carrying amount approximates fair value.
- - Deposits
The fair values disclosed for demand deposits (for example, interest-bearing
checking accounts and passbook accounts) are, by definition, equal to the
amount payable on demand at the reporting date (that is, their carrying
amounts). The fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated contractual maturities
on such time deposits. The carrying amount of accrued interest payable
approximates fair value.
- - Off-balance Sheet Instruments
Fair values of loan commitments and financial guarantees are based upon fees
currently charged to enter similar agreements, taking into account the
remaining terms of the agreement and the counterparties' credit standing.
65
<PAGE> 66
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #19 - TIME DEPOSIT LIABILITIES
At December 31, 1999, the Company had time certificates of deposit with maturity
distributions as follows:
<TABLE>
<CAPTION>
<S> <C>
Within one year $27,832,461
After one but within five years 2,004,559
-----------
$29,837,020
===========
</TABLE>
NOTE #20 - 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 $4,135,000 have been pledged to secure the line at the Federal
Reserve.
NOTE #21 - DIRECTOR RETIREMENT PLAN
The Company has a Director Retirement Plan, which will provide retirement
benefits to one or more Directors of the Bank. During 1999 and 1998
approximately $154,000 (approximately $87,000 net of income taxes) and $180,000
(approximately $106,000 net of income taxes), respectively, were expensed for
this plan. The benefits to be paid are based upon the individual director's
years of service to the Bank and decision to forego director fees for the
respective years of participation.
NOTE #22 - SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company has a Supplemental Executive Retirement Plan, which will provide
retirement benefits for senior officers of the Bank. Benefits under this plan
are fully vested upon participation. During 1999 and 1998 approximately $104,000
(approximately $59,000 net of income taxes) and $73,000 (approximately $43,000
net of income taxes), respectively, were expensed for this plan. The benefits
to be paid amount to $75,000 per year for 15 years commencing at age 60.
66
<PAGE> 67
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #24 - CONDENSED FINANCIAL INFORMATION OF VINEYARD NATIONAL BANCORP (PARENT
COMPANY)
<TABLE>
<CAPTION>
BALANCE SHEETS
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Cash in Vineyard National Bank $ 7,811 $ 7,661 $ 7,496
Prepaid expenses 269 489 543
Investment in subsidiary 8,698,041 8,721,116 8,259,625
---------- ---------- ----------
Total Assets $8,706,121 $8,729,266 $8,267,664
========== ========== ==========
LIABILITIES
Due to shareholders in lieu of
fractional shares on stock splits 886 1,107 1,161
---------- ---------- ----------
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 3,292,293 3,315,217 2,853,561
---------- ---------- ----------
Total Stockholders' Equity 8,705,235 8,728,159 8,266,503
---------- ---------- ----------
Total Liabilities and Stockholders' Equity $8,706,121 $8,729,266 $8,267,664
========== ========== ==========
STATEMENTS OF INCOME
INCOME
Equity in income of subsidiary $ 49,986 $ 443,218 $ 403,975
Interest 950 965 961
---------- ---------- ----------
50,936 444,183 404,936
---------- ---------- ----------
INCOME TAXES 800 800 800
---------- ---------- ----------
Net Income $ 50,136 $ 443,383 $ 404,136
========== ========== ==========
</TABLE>
67
<PAGE> 68
VINEYARD NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE #23 - CONDENSED FINANCIAL INFORMATION OF VINEYARD NATIONAL BANCORP (PARENT
COMPANY), Continued
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
INCREASE IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
Interest received $ 950 $ 965 $ 961
Income taxes paid (800) (800) (800)
-------- --------- ---------
Net Cash Provided
By Operating Activities 150 165 161
-------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 150 165 161
CASH, Beginning of year 7,661 7,496 7,335
-------- --------- ---------
CASH, End of year $ 7,811 $ 7,661 $ 7,496
======== ========= =========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED/(USED) BY OPERATING ACTIVITIES
Net Income 50,136 443,383 404,136
Adjustments to Reconcile Net Income
to Net Cash Provided By Operating Activities
Decrease in other assets 220 54 27
Undistributed earnings of subsidiary (49,986) (443,218) (403,975)
Decrease in other liabilities (220) (54) (27)
-------- --------- ---------
Net Cash Provided
By Operating Activities $ 150 $ 165 $ 161
======== ========= =========
</TABLE>
68
<PAGE> 69
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, 2000, for the
Company's 1999 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, 2000, for the Company's 1999 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, 2000, for the Company's 1999 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, 2000, for the Company's 1999 annual shareholders' meeting.
69
<PAGE> 70
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 72 of this Form 10-K.
70
<PAGE> 71
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 30th day of
March 2000.
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 30, 2000.
<TABLE>
<CAPTION>
<S> <C>
President, Chief Executive Officer
/s/ STEVEN R. SENSENBACH (Principal Executive Officer) and Director
- ----------------------------------------
Executive Vice President, Chief Financial
/s/ SOULE SENSENBACH Officer, (Principal Financial and
- ---------------------------------------- Accounting Officer)
/s/ FRANK S. ALVAREZ Chairman of the Board of Directors
- ----------------------------------------
/s/ LESTER STROH, M.D Director
- ----------------------------------------
/s/ ROLAND O. NORIEGA Director
- ----------------------------------------
/s/ JOEL H. RAVITZ Director
- ----------------------------------------
/s/ JODIE SMITH Director
- ----------------------------------------
/s/ A. ARTHUR BRAEGER Director
- ----------------------------------------
</TABLE>
71
<PAGE> 72
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 (R-1)
National Bancorp 1987 Incentive Stock Option Plan
10.4 Vineyard National Bank Deferred Compensation Plan (R-1)
10.5 Employment Agreement Between Vineyard National Bank and (R-1)
Steven R. Sensenbach
10.6 1988 Extension Agreement for Employment Agreement Between (R-1)
Vineyard National Bank and Steven R. Sensenbach
10.9 Lease Agreement Between Vineyard National Bank and Landlord (R-1)
Regarding Diamond Bar Office 1987
10.15 Buy/Sell Agreement Between Vineyard National Bank and Wells (R-1)
Fargo 1984
10.16
Buy/Sell Agreement Between Vineyard National Bank and (R-1)
Arrowhead Pacific Savings Bank 1988
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.
72
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Vineyard National Bancorp:
We consent to the incorporation of our Report dated March 21 2000, on the
consolidated financial statements of Vineyard National Bancorp as of December
31, 1999 and 1998, and for each of the three years in the period ended December
31, 1999, included in its Annual Report on Form 10-K for the year ended December
31, 1999.
/s/ VAVRINEK, TRINE, DAY & CO., LLP
- ---------------------------------------------
VAVRINEK, TRINE, DAY & CO., LLP
Certified Public Accountants
Rancho Cucamonga, California
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1999, 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,853,489
<INT-BEARING-DEPOSITS> 495,000
<FED-FUNDS-SOLD> 3,390,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,428,297
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 85,717,097
<ALLOWANCE> 638,638
<TOTAL-ASSETS> 116,303,156
<DEPOSITS> 104,523,178
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,074,743
<LONG-TERM> 0
0
0
<COMMON> 2,106,258
<OTHER-SE> 6,598,977
<TOTAL-LIABILITIES-AND-EQUITY> 116,303,156
<INTEREST-LOAN> 8,136,750
<INTEREST-INVEST> 512,169
<INTEREST-OTHER> 345,584
<INTEREST-TOTAL> 8,994,503
<INTEREST-DEPOSIT> 2,204,034
<INTEREST-EXPENSE> 2,204,034
<INTEREST-INCOME-NET> 6,790,469
<LOAN-LOSSES> 41,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,564,374
<INCOME-PRETAX> 88,536
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,136
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.03
<YIELD-ACTUAL> 0.09
<LOANS-NON> 495,000
<LOANS-PAST> 14,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,695,000
<ALLOWANCE-OPEN> 686,016
<CHARGE-OFFS> 197,255
<RECOVERIES> 108,877
<ALLOWANCE-CLOSE> 638,638
<ALLOWANCE-DOMESTIC> 638,638
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
