EXHIBIT 13
THE VINTAGE BANK 1998 ANNUAL REPORT TO SHAREHOLDERS
-12-
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TABLE OF CONTENTS
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To Our Shareholders 2
Selected Financial Data 3
Management's Discussion
and Analysis of Financial Condition
and Results of Operations 4
Balance Sheets 10
Income Statements 11
Shareholders' Statement 12
Statements of Cash Flows 13
Notes to Financial Statements 14
Report of Independent Public Accountants 27
Directors 28
Employees 29
Corporate Information 30
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TO OUR SHAREHOLDERS
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Your Bank completed another year of increased profits in 1998. Net income was
$2,110,736, or $1.37 per share, compared with $1,854,076, or $1.26 per share, in
1997 and $1,646,443, or $1.15 per share, in 1996. Total assets grew 23% in 1998
to $180,290,550, representing our largest historical dollar growth in assets
during a single year. Return on average assets was 1.29% and return on average
shareholders' equity was 13.45%. We have continued our 5% stock dividend for the
eighth consecutive year, and we again paid a $.20 per share cash dividend; both
were payable on March 22, 1999.
Two primary goals for 1998 were to increase operating efficiency and deal
successfully with the Year 2000 or "Y2K" issue. In late 1996 and early 1997, we
completed an internal reorganization and relocation of most "back office"
functions to our Bel Aire location. These changes positioned us to absorb
projected growth for several years, but optimizing any organization is a
continual process of revising and refining procedures and systems. During 1998,
we identified numerous opportunities to improve performance; we will implement
most of these improvements by mid-1999.
Dealing with the Y2K issue required commitments of human resources from all
areas of the Bank. Documentation and reporting required by regulatory agencies
added to the burden. Substantially all of our "mission critical" systems have
now been successfully tested for Y2K compliance, and the bulk of the related
work is behind us. We are most pleased with the manner in which the Bank's
management and employees pulled together to successfully deal with this issue.
Another goal for 1998 was to develop an attractive and comprehensive new web
site (www.vintagebank.com). We are very pleased with the results of this
project, which will ultimately serve as the "front door" for our
internet/on-line banking service.
We look forward to 1999 and beyond with optimism. A major goal for 1999 is to
increase our internal productivity. We plan to absorb 1999's growth with no net
increase in full-time equivalent employees. Although we have reported increased
earnings for ten consecutive years, our returns on assets and equity have been
relatively flat for several years; we intend to increase these returns in 1999.
Also, we plan on implementing internet/on-line banking service this year. This
project was delayed due to diverting resources to the Y2K issue, but we are now
again positioned to focus on this project.
To summarize, 1998 was a very good year, but we are committing ourselves to
achieving better percentage returns in 1999 and beyond. We recognize that our
most important assets are our loyal customers, our outstanding employees and our
broad base of supportive local shareholders. We thank all of you for providing
us the privilege of guiding your Bank into the new millenium.
Very truly yours,
Terry L. Robinson Thomas F. Malloy
President & Chief Chairman of the Board
Executive Officer
2
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SELECTED FINANCIAL DATA
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The following table presents a summary of selected data for the Bank for the
five years ended December 31, 1998. This information should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the financial statements and notes thereto appearing
elsewhere in the annual report:
(In 000's)
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
STATEMENTS OF OPERATIONS DATA:
Interest income $ 11,907 $ 10,085 $ 9,154 $ 8,309 $ 6,894
Interest expense 3,992 3,141 2,982 2,641 1,795
---------- ---------- ---------- ---------- ----------
Net interest income 7,915 6,944 6,172 5,668 5,099
Provision for loan losses 240 240 240 180 275
---------- ---------- ---------- ---------- ----------
Net interest income after
Provision for loan losses 7,675 6,704 5,932 5,488 4,824
Noninterest income 1,397 1,443 776 320 485
Noninterest expense 5,660 5,050 3,989 3,648 3,365
Provision for income taxes 1,301 1,243 1,073 792 695
---------- ---------- ---------- ---------- ----------
Net income $ 2,111 $ 1,854 $ 1,646 $ 1,368 $ 1,249
========== ========== ========== ========== ==========
BASIC PER SHARE DATA: (1)
Earnings per share $ 1.41 $ 1.30 $ 1.17 $ 1.00 $ 1.18
Average shares outstanding 1,496,266 1,429,785 1,405,051 1,365,101 1,054,698
DILUTED PER SHARE DATA: (1)
Earnings per share $ 1.37 $ 1.26 $ 1.15 $ .98 $ 1.10
Average shares outstanding 1,542,776 1,475,895 1,429,041 1,388,945 1,128,318
BALANCE SHEET DATA:
Net loans $ 94,775 $ 80,991 $ 70,780 $ 63,370 $ 50,094
Total assets 180,291 146,982 122,740 110,124 92,387
Total deposits 162,173 131,390 109,849 96,488 83,824
Shareholders' equity 16,910 14,486 12,116 10,458 8,045
<FN>
(1) All per share amounts have been adjusted to reflect the 5% stock dividends
declared February 22, 1994, February 27, 1995, January 22, 1996, January 27,
1997, January 26, 1998 and January 28, 1999 as well as a two-for-one stock split
effective October 1, 1997.
</FN>
3
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MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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OVERVIEW
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The Vintage Bank (the "Bank") reported net income of $2,110,736, or $1.37 per
share, in 1998 compared with $1,854,076, or $1.26 per share, in 1997 and
$1,646,443, or $1.15 per share, in 1996, equating to a return on average assets
of 1.29%, 1.39% and 1.38% for years 1998, 1997 and 1996, respectively. The
return on average equity was 13.45% in 1998 compared with 14.17% and 14.65% in
1997 and 1996, respectively. The increase in net income during 1998 compared
with 1997 resulted primarily from growth in net interest income.
As of December 31, 1998, total assets were $180,290,550 compared with total
assets of $146,982,232 and $122,739,505 at year end 1997 and 1996, respectively,
representing a 23% increase in 1998 and a 20% increase in 1997. Deposits
increased 23% in 1998 compared with a 20% increase in 1997. Loans, net of the
allowance for loan losses, increased 17% in 1998 compared with a 14% increase in
1997.
SUMMARY OF EARNINGS
Net Interest Income
Net interest income, (total interest income less total interest expense), was
$7,914,604, $6,943,764 and $6,172,017, in 1998, 1997 and 1996, respectively,
representing increases of 14% and 13% in 1998 and 1997, respectively.
Net interest income is impacted by changes in the volume and mix of earning
assets and interest-bearing liabilities, and changes in interest rates. The
increase in net interest income in 1998 compared with 1997 was primarily the
result of volume increases in loans and investments. The net interest margin
(defined as net interest income divided by average earning assets) decreased
slightly in 1998 as average yields on loans declined while rates paid on
deposits remained relatively stable throughout 1998. The Bank has traditionally
enjoyed an overall cost of funds lower than peer banks of comparable size.
Taxable-equivalent interest income increased $1,901,256 in 1998 compared with
1997. Increases in the volume of earning assets accounted for $2,241,994 of this
increase, with a decrease of $340,738 attributable to lower rates. An increase
of $923,454 in 1997 compared with 1996 consisted of a $1,266,823 increase due to
volume growth and a decrease of $343,369 attributable to lower rates.
Interest paid on interest-bearing liabilities increased $850,321 in 1998
compared with 1997. Increases in the volume of deposits and other borrowings
accounted for $623,652 of this increase, with a $226,669 increase attributable
to an increase in rates. Interest paid on interest-bearing liabilities increased
$159,888 in 1997 compared with 1996; the effect of volume increases accounted
for $197,756 offset by $37,868 attributable to a decrease in rates.
The net interest margin, using taxable equivalent interest income, was 5.36% in
1998 compared with 5.89% in 1997. Interest rates were relatively stable
throughout both years; the decrease in the net interest margin is the result of
lower loan rates due to competitive pressures, along with deposit mix changes
and a lower average loan-to-deposit ratio in 1998 compared to 1997.
The net interest margin is expected to remain consistent during 1999 unless
general rates increase or decrease significantly during the year. Since interest
rates have been relatively stable for over two years, the Bank's interest margin
should not be significantly impacted by the effects of any "lags" in adjusting
rates during 1999 to reflect previous changes in general interest rates as loans
and time deposits mature and renew. Assuming there are no dramatic changes in
general interest rates or deposit mix, total net interest income is expected to
increase during 1999 consistent with volumes of earning assets.
Provision and Allowance for Loan Losses
The Bank maintains an allowance for loan losses at a level considered adequate
to provide for probable losses inherent in the existing loan portfolio. The
allowance is increased by provisions for loan losses and
4
reduced by net charge-offs. The allowance for loan losses is based on estimates
and ultimate losses may vary from current estimates. These estimates are
reviewed periodically and as adjustments become necessary they are reported in
earnings in the periods in which they become known. The Bank makes credit
reviews of the loan portfolio and considers current economic conditions,
historical loan loss experience and other factors in determining the adequacy of
the allowance balance. This evaluation establishes a specific allowance for all
impaired loans over $50,000, and establishes percentage allowance requirements
for all other loans, according to their classification as determined by the
Bank's internal grading system. As of December 31, 1998, the allowance for loan
losses of $1,751,693 represented 1.81% of loans outstanding. This compares with
an allowance balance of 1.86% and 2.04% of loans outstanding at year end 1997
and 1996, respectively. During 1998, 1997 and 1996, $240,000 was charged to
expense each year for the provision for loan losses.
Noninterest Income
Noninterest income was $1,397,158 in 1998 compared with $1,443,473 in 1997 and
$775,883 in 1996. Noninterest income for 1997 includes gains and losses on
securities transactions of $414,629 and $19,377, respectively, including
recoveries on securities previously charged off. Fee income from service charges
on deposit accounts increased from the previous year 10% and 16% in years 1998
and 1997, respectively.
Noninterest Expense
Details of noninterest expense are as follows:
(In 000's)
1998 1997 1996
---- ---- ----
Salaries & Benefits $3,069 $2,636 $2,148
Occupancy 392 361 182
Equipment/Data Processing 450 474 391
Other 1,749 1,579 1,268
------ ------ ------
Total $5,660 $5,050 $3,989
====== ====== ======
Salaries and benefits expense increased 16% and 23% in 1998 and 1997,
respectively, from the previous year. The increases were primarily due to
increases in the number of full-time equivalent employees, which has increased
from approximately 58 at year-end 1996 to 73 at year-end 1998. The
proportionately large increase in personnel during 1997 reflects staffing
required for the new Bel Aire Office, as well as the effects of an internal
reorganization and relocation of functions intended to position the Bank for
future growth. No net increases in personnel are anticipated during 1999.
The increase in occupancy expense during 1998 compared with 1997 was primarily
in rent and depreciation. Occupancy expense in 1997 nearly doubled 1996 expense
primarily due to the opening of the Bel Aire Office during the first quarter of
1997. The Bank owns its Main Office facility at 1500 Soscol Avenue in Napa, so
no lease expense associated with the Main Office is included in occupancy
expense. Consequently, when the Bank entered into a lease for approximately
6,000 square feet in the Bel Aire location with lease payments of approximately
$7,800 per month, occupancy expense was impacted dramatically.
Equipment and Data Processing expense decreased 5% in 1998 compared with 1997.
The decrease was primarily due to the core banking system being fully
depreciated by mid-year 1998. Equipment is depreciated over periods of 3 to 5
years. Purchases of all types of equipment during 1998 totaled approximately
$145,000.
Major anticipated equipment purchases during 1999 include equipment associated
with electronic internet banking services, a new voice response system and
miscellaneous equipment such as personal computers and software. Expenditures in
these areas are anticipated to total approximately $250,000. All other
anticipated expenditures for equipment during 1999, including routine purchases
of vehicles and miscellaneous equipment, are expected to total less than
$200,000. The financial impact of these capital expenditures, if all are made,
will be to increase monthly depreciation by approximately $10,000.
The key components of other expense are as follows:
5
(In 000's)
1998 1997 1996
---- ---- ----
Business Promotion $ 274 $ 236 $ 191
Professional Services 350 321 235
ATM Expenses 109 85 74
Stationery & Supplies 172 159 126
Insurance 54 49 45
Other 790 729 597
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Total $1,749 $1,579 $1,268
====== ====== ======
Business promotion expense increased in both 1998 and 1997 compared to the prior
year primarily due to increases in advertising, customer relations expense and
donations. The increase in 1998 includes increased promotions associated with
the Bank's seeking deposits of branches closed by competitors. Professional
services increased in 1998 compared with 1997 due to fees for services provided
by the firm hired to manage our investment portfolio beginning in the second
quarter of 1996. These fees totaled $79,000 in 1998 compared with $72,000 and
$35,000 in 1997 and 1996, respectively. Also, ATM expenses increased by
approximately 28% and 15% in 1998 and 1997, respectively, reflecting costs
associated with adding two additional ATM's in 1997 and additional expenses
associated with the Y2K issue and other maintenance. Stationery and supplies
expense increased 8% and 26% in 1998 and 1997, respectively, reflecting overall
volume increases; 1997 expense was also higher due to costs associated with
opening the Bel Aire Office and relocating functions to the new location.
Insurance expenses have remained relatively constant for three years, reflecting
the benefits of generally lower premiums resulting from an improving insurance
market, offsetting the effects on premiums of the Bank's increasing size and
volumes. Other expense increased approximately $61,000 in 1998 compared with
1997, primarily due to increased expenses in telephone, postage, courier
services, conferences and other miscellaneous expenses. These expense increases
were generally less than proportionate with our overall growth and volume
increases.
Management anticipates that total other expense will increase proportionately
less than the Bank's overall growth rate during 1999. In order to avoid risking
any costly system failure as a result of hardware or software not being
operational or compatible after December 31, 1999, the Bank has devoted
substantial resources to planning, converting, testing and documenting for Y2K
compliance in all systems. During 1997, Management devoted significant personnel
resources to addressing this issue, primarily in planning for Year 2000. Most of
the "hard dollar" expenditures required to solve this problem were expensed
during 1998. For 1999, we have budgeted approximately $75,000 for non-recurring
expenditures, in addition to the costs of internal human resources required to
achieve Y2K compliance. We think this is reasonable and most of our "mission
critical" systems have been successfully tested as of the date of this
publication. However, unanticipated problems could push actual costs
substantially higher.
The Bank reported a provision for income taxes of $1,301,000, $1,243,000 and
$1,073,000 for years 1998, 1997 and 1996, respectively. These provisions reflect
accrual for taxes at the applicable rates for Federal and California State
income taxes based upon reported pre-tax income, adjusted for the beneficial
effect of the Bank's investment in qualified municipal securities. The Bank has
not been subject to an alternative minimum tax (AMT).
BALANCE SHEET
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Total assets as of December 31, 1998 were $180,290,550 compared with
$146,982,232, and $122,739,505 as of year end 1997 and 1996, respectively,
representing a 23% increase in 1998 and a 20% increase in 1997. Total deposits
grew $30,783,007 to $162,173,206 in 1998, representing a 23% increase, compared
with a 20% increase in 1997. Total loans, net of allowance for loan losses, grew
$13,784,415 to $94,775,177 in 1998, representing a 17% increase; compared with a
14% increase in 1997. Investment securities increased from $39,566,991 at
year-end 1997 to $62,018,042 in 1998, a 57% increase, compared with an increase
of only 5% during 1997.
6
Liquidity and Capital Adequacy
The Bank's liquidity is determined by the level of assets (such as cash, federal
funds sold, and marketable securities) that are readily convertible to cash to
meet customer withdrawal and borrowing needs. The Bank's liquidity position is
reviewed by management on a regular basis to verify that it is adequate to meet
projected loan funding and potential withdrawal of deposits. The Bank has a
comprehensive Asset/Liability Management and Liquidity Policy which it uses to
determine adequate liquidity.
Securities classified as "Held-to-Maturity" are reported at amortized cost, and
"Available-for-Sale" securities are reported at fair value with unrealized gains
and losses excluded from earnings and reported as a separate component of
accumulated other comprehensive income. As of December 31, 1998,
"Held-to-Maturity" securities had an amortized cost of $13,512,384 and
"Available-for-Sale" securities had a fair value of $48,505,658, with an
unrealized gain, net of income taxes, of $385,106 reflected as a component of
accumulated other comprehensive income in the shareholders' equity section of
the Balance Sheet.
At year end 1998 liquid assets represented 42% of total assets, as compared with
39% and 37% in liquid assets as of year end 1997 and 1996, respectively. The
level of liquid assets at December 31, 1998 exceeds the liquidity required by
the Bank's liquidity policy. However, securities could be sold from the
"Held-to-Maturity" category only in specific circumstances without requiring the
entire portfolio to be reclassified as "Available-for-Sale" and recorded at fair
value. Management expects to be able to meet the liquidity needs of the Bank
during 1999 primarily through balancing loan growth with corresponding increases
in deposits.
Interest Rate Sensitivity
The following table sets forth the repricing opportunities for rate-sensitive
assets and rate-sensitive liabilities at December 31, 1998. Rate sensitivity
analysis usually excludes noninterest-bearing demand deposits. Including these
deposits, which totaled $39,469,756, would result in a significant shift in the
gap position. Rate-sensitive assets and rate-sensitive liabilities are
classified by the earliest possible repricing date or maturity, whichever comes
first.
(In 000's)
3 Months Over 3 Mos. Over 1 Yr. Over 5
or Less To 1 Yr. To 5 Yrs. Years Total
--------- --------- ------- ------- -------
Interest rate-sensitive assets:
Loans, gross $ 42,315 $ 6,125 $ 21,961 $ 26,126 $ 96,527
Interest-bearing deposits in
other banks 100 100 0 0 200
Investment securities 1,500 2,030 19,994 38,494 62,018
Federal funds sold 6,000 0 0 0 6,000
-------- -------- -------- -------- --------
Total 49,915 8,255 41,955 64,620 164,745
Interest rate-sensitive liabilities:
Interest-bearing demand
Deposits 54,501 0 0 0 54,501
Time deposits >$100,000 8,177 7,794 1,366 106 17,443
Other time deposits 15,717 16,001 4,500 0 36,218
Savings deposits 14,542 0 0 0 14,542
-------- -------- -------- -------- --------
Total 92,937 23,795 5,866 106 122,704
-------- -------- -------- -------- --------
Interest rate sensitivity gap $(43,022) $(15,540) $ 36,089 $ 64,514 $ 42,041
======== ======== ======== ======== ========
Ratio of interest rate sensitivity to
earning assets (26.11%) (9.43%) 21.91% 39.16%
This table indicates that the Bank has a "negative" GAP for one year into the
future, and a "positive" GAP beyond one year. The implication is that during the
negative GAP "horizon" Bank earnings will increase in a falling interest rate
environment, as interest rates on interest-bearing liabilities reprice downward
more rapidly than rates on earning assets; conversely, earnings would decline in
a rising rate environment. This
7
traditional analysis does not recognize or assume any "lag" in interest rate
changes on earning assets and interest-bearing liabilities, and it assumes that
all earning assets and interest-bearing liabilities reprice to the same absolute
degree, regardless of the mix of earning assets and interest-bearing
liabilities. The Bank utilizes a simulation model to assist with asset/liability
management that considers the effects of lags and different ranges of interest
rate changes among various classes of earning assets and interest-bearing
liabilities. Based on the model, the Bank is free of material interest rate risk
for the one-year horizon (i.e., the earnings will not change significantly with
an increase or decrease in interest rates), as opposed to being
liability-sensitive as indicated by this table using traditional GAP analysis.
The Bank's capital ratios remained relatively steady during 1998 compared with
1997 levels. As of December 31, 1998 the Bank's total risk-based capital ratio,
tier I risk-based capital ratio and leverage ratio were 14.4%, 13.1% and 9.3%,
respectively. These compare with ratios of 14.6%, 13.4% and 10.0% as of December
31, 1997. The Bank projects average percentage increases in assets during the
next few years to be similar to the return on average equity. Consequently, the
Bank is positioned to support projected growth while paying modest cash
dividends without negatively impacting capital ratios.
In January, 1999, the Bank declared a 5% stock dividend and a $.20 per share
cash dividend for shareholders of record as of March 1, 1999. The stock dividend
will affect the Bank's capital and its capital ratios only to the extent that
cash is distributed in lieu of fractional shares. Accordingly, the stock
dividend will not materially impact the Bank's overall capital. The cash
dividend will total approximately $290,000, equating to a reduction in the
Bank's leverage ratio of approximately .02%.
DESCRIPTION OF OPERATIONS
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The Vintage Bank is a California corporation organized as a state chartered bank
in 1984. The Bank engages in the commercial banking business in Napa County from
its main banking office located at 1500 Soscol Avenue, Napa, California. The
Bank has two other business locations, one located in the Brown's Valley
Shopping Center at 3271 Brown's Valley Road, Napa, California and one at 3626
Bel Aire Plaza, Napa, California. The Bank has a remote ATM and night drop
services at 629 Factory Stores Drive, Suite B, Napa California and at 6498
Washington Street, Yountville, California. The Bank conducts a commercial
banking business, offering a full range of commercial banking services to
individuals, businesses and agricultural communities in Napa County. The Bank
emphasizes its retail commercial banking operations and accepts checking and
savings deposits, issues drafts, sells traveler's checks and provides other
customary banking services.
SECURITIES OF THE BANK
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The Bank's outstanding securities consist of one class, common stock, of which
there were 1,437,491 shares outstanding at March 1, 1999, held by 881
shareholders of record. The Bank's common stock is traded over-the-counter and
is quoted on the OTC "Bulletin Board" under the symbol VTGB. The firm of Hoefer
& Arnett serves as the primary market maker in the Bank's stock.
The following table (adjusted for the 1998 and 1999 stock dividend) summarizes
the common stock high and low bid prices based upon transactions of which the
Bank is aware:
- ---------------------------------------------- --------- ---------
Quarter ended High Low
- ---------------------------------------------- --------- ---------
- ---------------------------------------------- --------- ---------
March 31, 1997 $ 14.51 $ 13.15
- ---------------------------------------------- --------- ---------
June 30, 1997 14.51 13.72
- ---------------------------------------------- --------- ---------
September 30, 1997 15.42 14.63
- ---------------------------------------------- --------- ---------
December 31, 1997 24.49 15.19
- ---------------------------------------------- --------- ---------
March 31, 1998 25.71 21.90
- ---------------------------------------------- --------- ---------
June 30, 1998 21.90 19.05
- ---------------------------------------------- --------- ---------
September 30, 1998 20.71 17.14
- ---------------------------------------------- --------- ---------
December 31, 1998 19.52 16.90
- ---------------------------------------------- --------- ---------
8
There may be other transactions of which the Bank is not aware and accordingly,
they are not reflected in the range of actual sales prices stated. Further,
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions. Additionally, since
trading in the Bank's common stock is limited, the range of prices stated are
not necessarily representative of prices which would result from a more active
market.
The Bank paid cash dividends of $0.20 per share in 1998 and $.16 in 1997. The
holders of common stock of the Bank are entitled to receive cash dividends when
and as declared by the Board of Directors, out of funds legally available
therefore. Federal Reserve Board regulations prohibit cash dividends, except
under limited circumstances, if the distribution would result in a withdrawal of
capital or exceed the Bank's net profits then on hand, after deducting its
losses and bad debts. Furthermore, cash dividends cannot be paid without the
prior written approval of the Federal Reserve Board if the total of all
dividends declared in one year exceeds the total of net profits for that year
plus the preceding two calendar years, less any required transfers to surplus
under state or federal law. California banking laws limit cash dividends to the
lesser of retained earnings or net income for the last three years, net of the
amount of any other distribution made to shareholders during such period. As of
December 31, 1998, the Bank had retained earnings of $5,521,351 eligible for
dividends.
YEAR 2000 COMPLIANCE
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The Bank has adopted a Year 2000 Plan and appointed a Year 2000 Administrator.
Since December, 1996, the Bank has been conducting, and continues to conduct, an
Awareness Phase of the Plan to educate employees of the Bank about the potential
effect Year 2000 issues could have on the Bank's ability to provide service to
its customers.
Commencing in August, 1997, the Plan entered the Assessment Phase. During this
phase the Bank has been assessing, and continues to assess, areas within the
Bank's daily functions that may be affected by Year 2000 issues. As part of this
phase, mission critical applications and third party relationships have been
inventoried, assessed and prioritized. Additionally the Bank has made its
customers aware of the issue by providing resource material and offering
seminars within the community. Loan underwriting standards address the
borrowers' Year 2000 readiness. Major borrowers and depositors have been
interviewed for Year 2000 preparedness. Based on these evaluations the Bank is
not aware of more than normal risks associated with these relationships.
In April, 1998 the Bank entered the Renovation Phase of its Plan. During this
phase work was performed and continues to be performed according to the priority
determined in the Assessment Phase. Renovation includes making and documenting
hardware and software changes, developing or purchasing replacement systems as
necessary and eliminating systems that are no longer required. While not
anticipated at this time, the Bank could potentially experience disruptions of
some of its business functions as a result of non-compliance systems utilized by
the Bank or unrelated third parties. Therefore, contingency plans for mission
critical applications have been developed to mitigate the extent of any such
disruptions.
Commencing in August, 1998 the Bank entered the Validation Phase of its Plan.
During this phase detailed test plans and schedules were developed and
coordinated with correspondents, customers and independent applications.
Physical testing of all items identified during the Awareness Phase will be
conducted with testing of mission critical applications, which was completed
during December, 1998. The Bank also expects all initial testing of non-critical
applications to be completed by March 31, 1999.
Thereafter, the Bank will enter the Implementation Phase of its Plan. During
this final phase implementation of validated systems will be closely coordinated
with correspondents, customers and independent applications. Through December
31, 1998, the Bank has incurred costs of $25,000 for upgrades to existing
software and hardware, consultants and other minor expenses associated with the
Year 2000 project. Management expects the additional costs will not have a
material impact on the results of operations.
The foregoing discussion constitutes a Year 2000 Readiness Disclosure pursuant
to the Year 2000 Information and Readiness Disclosure Act.
9
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BALANCE SHEETS
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December 31, 1998 and 1997
1998 1997
---- ----
ASSETS
CASH AND DUE FROM BANKS $ 8,401,566 $ 12,621,181
FEDERAL FUNDS SOLD 6,000,000 5,000,000
------------- -------------
Cash and cash equivalents 14,401,566 17,621,181
TIME DEPOSITS WITH OTHER
FINANCIAL INSTITUTIONS 200,000 200,000
INVESTMENT SECURITIES:
Held-to-maturity (fair value of $13,756,772 in 1998
and $4,175,745 in 1997) 13,512,384 4,017,714
Available-for-sale 48,505,658 35,549,277
------------- -------------
TOTAL INVESTMENT SECURITIES 62,018,042 39,566,991
LOANS, net of allowance for loan losses of
$1,751,693 in 1998 and $1,532,128 in 1997 94,775,177 80,990,762
BANK PREMISES AND EQUIPMENT, net 2,733,834 2,976,018
INTEREST RECEIVABLE AND OTHER ASSETS 6,161,931 5,627,280
------------- -------------
Total assets $180,290,550 $146,982,232
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
DEPOSITS:
Demand $ 39,469,756 $ 33,203,445
Interest-bearing transaction 54,500,653 37,353,837
Time and savings 68,202,797 60,832,917
------------- -------------
Total deposits 162,173,206 131,390,199
INTEREST PAYABLE AND OTHER LIABILITIES 1,207,313 1,106,151
------------- -------------
Total liabilities 163,380,519 132,496,350
COMMITMENTS AND CONTINGENT LIABILITIES (Note 5)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value - Authorized 1,000,000 shares
Issued and outstanding - None
Common stock, no par value - Authorized 2,000,000
shares Issued and outstanding - 1,437,491
shares in 1998 and 1,326,857 shares in 1997 11,003,574 8,824,139
Retained earnings 5,521,351 5,360,816
Accumulated other comprehensive income 385,106 300,927
------------- -------------
Total shareholders' equity 16,910,031 14,485,882
Total liabilities and shareholders' equity $180,290,550 $146,982,232
============= =============
<FN>
The accompanying notes are an integral part of these statements.
</FN>
10
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INCOME STATEMENTS
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For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
INTEREST INCOME:
Interest and fees on loans $8,465,003 $7,537,434 $6,575,665
Interest on federal funds sold 461,039 142,480 602,984
Interest on investment securities 2,472,704 2,144,912 1,685,287
Interest on tax exempt investment securities 496,666 249,000 277,984
Interest on time deposits with other
financial institutions 11,018 11,443 11,714
----------- ---------- ----------
Total interest income 11,906,430 10,085,269 9,153,634
----------- ----------- -----------
INTEREST EXPENSE:
Interest on interest-bearing
transaction deposits 1,104,570 595,046 552,179
Interest on time and savings deposits 2,886,573 2,520,219 2,310,812
Interest on short term borrowings 683 26,240 118,626
----------- ----------- -----------
Total interest expense 3,991,826 3,141,505 2,981,617
----------- ----------- -----------
Net interest income 7,914,604 6,943,764 6,172,017
PROVISION FOR LOAN LOSSES 240,000 240,000 240,000
----------- ----------- -----------
Net interest income after
provision for loan losses 7,674,604 6,703,764 5,932,017
NONINTEREST INCOME:
Service charges on deposit accounts 743,291 674,219 582,343
Gain (loss) on securities transactions, net 65,278 395,252 (63,348)
Gain (loss) on sale of other real estate owned (2,512) 24,180 0
Other 591,101 349,822 256,888
----------- ----------- -----------
Total noninterest income 1,397,158 1,443,473 775,883
----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries and related benefits 3,068,958 2,636,617 2,147,691
Occupancy 392,357 360,744 181,568
Equipment 450,118 474,141 391,463
Other 1,748,593 1,578,659 1,267,735
----------- ----------- -----------
Total noninterest expense 5,660,026 5,050,161 3,988,457
----------- ----------- -----------
Income before provision for income taxes 3,411,736 3,097,076 2,719,443
PROVISION FOR INCOME TAXES 1,301,000 1,243,000 1,073,000
----------- ----------- -----------
NET INCOME $2,110,736 $1,854,076 $1,646,443
=========== =========== ===========
BASIC EARNINGS PER SHARE: $1.41 $1.30 $1.17
DILUTED EARNINGS PER SHARE: $1.37 $1.26 $1.15
<FN>
The accompanying notes are an integral part of these statements.
</FN>
11
- ----------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
Accumulated
Other Total
Common Retained Comprehensive Shareholders' Comprehensive
Stock Earnings Income Equity Income
---------- ---------- --------- ----------- ----------
BALANCE, DECEMBER 31, 1995 $6,726,026 $3,698,372 $33,960 $10,458,358
Stock dividend 530,968 (537,373) (6,405)
Cash dividend (203,332) (203,332)
Comprehensive income:
Net income 1,646,443 1,646,443 1,646,443
Other comprehensive income, net of tax:
Change in net unrealized gains on
available-for-sale securities, net of
tax of $53,575 net of reclassification
adjustment (Note 17) 74,748
-----------
Total other comprehensive income 74,748 74,748 74,748
-----------
Comprehensive income 1,721,191
===========
Stock options exercised 146,316 146,316
------------ ----------- ---------- ------------
BALANCE, DECEMBER 31, 1996 7,403,310 4,604,110 108,708 12,116,128
Stock dividend 872,871 (883,992) (11,121)
Cash dividend (213,378) (213,378)
Comprehensive income:
Net income 1,854,076 1,854,076 1,854,076
Other comprehensive income, net of tax:
Change in net unrealized gains on
available-for-sale securities, net of
tax of $137,771 net of reclassification
adjustment (Note 17) 192,219
------------
Total other comprehensive income 192,219 192,219 192,219
------------
Comprehensive income 2,046,295
============
Stock options exercised 547,958 547,958
------------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 1997 8,824,139 5,360,816 300,927 14,485,882
Stock dividend 1,669,700 (1,681,208) (11,508)
Cash dividend (268,993) (268,993)
Comprehensive income:
Net income 2,110,736 2,110,736 2,110,736
Other comprehensive income, net of tax:
Change in net unrealized gains on
available-for-sale securities,net of
tax of $60,334 net of reclassification
adjustment (Note 17) 84,179
------------
Total other comprehensive income 84,179 84,179 84,179
------------
Comprehensive income 2,194,915
============
Stock options exercised 509,735 509,735
------------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 1998 $11,003,574 $5,521,351 $385,106 $16,910,031
============= =========== ========== ============
12
- ------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1998, 1997 and
1996 (In 000's) (In 000's)
1998 1997 1996
-------- -------- --------
Cash Flows From Operating Activities:
Net income $ 2,111 $ 1,854 $ 1,646
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 388 404 308
Provision for loan losses 240 240 240
Amortization of deferred loan fees (161) (149) (187)
Amortization (accretion) of investment securities
premiums (discounts), net (60) (14) 57
Provision for deferred income taxes 0 47 (11)
Loss (gain) on sale of OREO 3 (24) 0
Loss (gain) on sale or retirement of capital assets 0 0 11
Net loss (gain) on securities transactions (65) (395) 63
Changes in:
Interest receivable and other assets (595) (2,875) (524)
Interest payable and other liabilities 102 332 96
-------- -------- --------
Total adjustments (148) (2,434) 53
-------- -------- --------
Net cash provided (used) by operating activities 1,963 (580) 1,699
-------- -------- --------
Cash Flows From Investing Activities:
Investment securities held to maturity:
Proceeds from maturities and principal payments 540 1,530 1,744
Purchases (10,043) (749) (700)
Investment securities available for sale:
Proceeds from maturities and principal payments 17,786 2,348 5,210
Proceeds from sales and recoveries 4,341 4,411 14,798
Purchases (34,809) (8,849) (29,904)
Net increase in loans (13,874) (10,302) (8,174)
Proceeds from sale of OREO 11 366 369
Capital expenditures (146) (702) (631)
-------- -------- --------
Net cash used in investing activities (36,194) (11,947) (17,288)
-------- -------- --------
Cash Flows From Financing Activities:
Net increase in deposits 30,783 21,541 13,361
Payments of notes payable 0 0 (2,500)
Stock options exercised 510 548 146
Dividends (281) (224) (210)
-------- -------- --------
Net cash provided by financing activities 31,012 21,865 10,797
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (3,219) 9,338 (4,792)
Cash and cash equivalents at beginning of year 17,621 8,283 13,075
-------- -------- --------
Cash and cash equivalents at end of year $ 14,402 $ 17,621 $ 8,283
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 3,984 $ 2,987 $ 2,967
Income taxes paid $ 1,254 $ 1,232 $ 1,217
Supplemental Disclosures of Noncash Investing and
Financing Activities:
Transfer of loan to other real estate owned $0 $0 $711
Retirements of fixed assets $0 $0 $34
13
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Vintage Bank (the "Bank") is a California state chartered bank. The Bank
operates three branches in the California County of Napa. The Bank offers a full
range of commercial banking services to individuals and the business and
agricultural communities of Napa County. Most of the Bank's customers are retail
customers and small to medium-sized businesses. The accounting and reporting
policies of the Bank conform with generally accepted accounting principles and
general practice within the banking industry. The more significant accounting
and reporting policies are discussed below.
Use of estimates in the preparation of financial statements 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.
Investment securities Investments in debt and equity securities are classified
as "held-to-maturity" or "available-for-sale". Investments classified as
held-to-maturity are those which the Bank has the ability and the intent to hold
until maturity, and are reported at cost, adjusted for the amortization or
accretion of premiums or discounts. Investments classified as available-for-sale
are reported at fair value with unrealized gains and losses, net of related tax,
if any, reported as other comprehensive income and included in shareholders'
equity. Premiums and discounts are amortized or accreted over the life of the
related investment security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when earned.
Realized gains and losses are computed on the specific identification method.
Securities deemed permanently impaired are written down in the period such a
determination is made.
Loans Loans are stated at the principal amount outstanding, net of unearned
income. Nonrefundable loan origination fees and loan origination costs are
deferred and amortized into income over the contractual life of the loan.
Interest income is accrued on a simple interest basis. Loans on which the
accrual of interest has been discontinued are designated as nonaccrual loans.
The Bank's policy is to place loans on nonaccrual status when management
believes that the borrower's financial condition, after giving consideration to
economic and business conditions and collection efforts, is such that the
presumption of collectibility of interest no longer is prudent. In determining
income recognition on loans, generally no interest is recognized with respect to
loans on which a default of interest or principal has occurred for a period of
90 days or more.
Allowance for loan losses The Bank maintains an allowance for loan losses at a
level considered adequate to provide for probable losses inherent in the
existing loan portfolio. The allowance is increased by provisions for loan
losses and reduced by net charge-offs. The allowance for loan losses is based on
estimates and ultimate losses may vary from current estimates. These estimates
are reviewed periodically and as adjustments become necessary they are reported
in earnings in the periods in which they become known. The Bank makes credit
reviews of the loan portfolio and considers current economic conditions,
historical loan loss experience and other factors in determining the adequacy of
the allowance balance. The Bank defines a loan as impaired when it is probable
the Bank will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Impaired loans are measured based on the present
value of expected future cash flows discounted at the loan's original effective
interest rate or based on the loan's observable market price or the fair value
of the collateral if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the impairment
is recorded through a valuation allowance.
Other real estate owned Other real estate owned represents real estate acquired
through foreclosure and is carried at the lower of cost or fair value, less
estimated selling costs.
14
Bank premises and equipment Bank premises, leasehold improvements, furniture,
fixtures and equipment are carried at cost, net of accumulated depreciation and
amortization, which are calculated on a straight-line basis over the estimated
useful life of the property or the term of the lease (if less). Bank premises
are depreciated over forty years, furniture and fixtures are depreciated over
five to fifteen years, and equipment is generally depreciated over three to five
years.
Income taxes For financial reporting purposes, the Bank records a provision for
income taxes using the liability method of accounting. A deferred tax liability
or asset is recorded for all temporary differences between financial and tax
reporting. Deferred tax expense or benefit results from the net change during
the year of the deferred tax assets and liabilities. The measurement of tax
assets and liabilities is based on the provisions of enacted tax laws.
Statements of cash flows The Bank defines cash and due from banks and federal
funds sold as cash and cash equivalents for the statements of cash flows.
Stock-based compensation The Bank uses the intrinsic value method to account for
its stock option plans (in accordance with the provisions of Accounting
Principles Board Opinion No. 25). Under this method, compensation expense is
recognized for awards of options to purchase shares of common stock to employees
under compensatory plans only if the fair market value of the stock at the
option grant date (or other measurement date, if later) is greater than the
amount the employee must pay to acquire the stock. Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123)
permits companies to continue using the intrinsic value method to account for
stock option plans. The fair value based method results in recognizing as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. The Bank has elected to continue to use the intrinsic value
method and the pro forma disclosures required by SFAS 123 using the fair value
method and are included in Note 12.
Earnings per common share In 1997, the Bank adopted SFAS No. 128, "Earnings Per
Share", which establishes standards for computing and presenting earnings per
share (EPS). It replaced the presentation of primary and fully diluted EPS with
a presentation of basic and diluted EPS. It also requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. The implementation of this statement
had no effect on The Vintage Bank's reported financial position or net income.
As a result of adopting SFAS No. 128, earnings per share data for all prior
periods has been restated.
Segment reporting Effective January 1, 1998, the Bank adopted Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information," (SFAS 131). This Statement establishes
standards for the reporting and display of information about operating segments
and related disclosures. The Bank's only operating segments consist of its
traditional community banking activities provided through its branches.
Community banking activities include the Bank's commercial and retail lending,
deposit gathering and investment and liquidity management activities. As
permitted under the Statement, the Bank has aggregated the results of the
branches into a single reportable segment. The combined results are reflected in
the financial statements.
Future financial accounting standards In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities. The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedged accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedge
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999 and
the Bank plans to adopt its provisions effective January 1, 2000. While the Bank
does not currently utilize any traditional derivative instruments (options,
swaps, forwards, etc.) in its business, certain of its loans and other financial
15
instruments may have embedded derivatives such as call or put features that
would be required to be accounted for differently under this Statement as
compared to current accounting principles. The Bank has not yet quantified the
impacts, if any, of adopting Statement 133 on its financial statements.
(2) INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities at
December 31, 1998 are as follows:
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
----------- -------- ------- -----------
Held-to-maturity:
Municipal securities $13,512,384 $289,032 $44,644 $13,756,772
=========== ======== ======= ===========
Available-for-sale:
Equity securities $777,200 $0 $0 $777,200
Securities of the US Treasury
and other government agencies 11,531,766 172,189 523 11,703,432
Corporate debt securities 12,272,305 179,936 7 12,452,234
Mortgage-backed securities 23,265,298 340,384 32,890 23,572,792
----------- -------- ------- -----------
$47,846,569 $692,509 $33,420 $48,505,658
=========== ======== ======= ===========
The amortized cost and approximate fair value of investment securities at December 31, 1997 are as
follows:
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
----------- -------- ------- -----------
Held-to-maturity:
Municipal securities $4,017,714 $158,031 $0 $4,175,745
=========== ======== ======= ===========
Available-for-sale:
Equity securities $688,400 $0 $0 $688,400
Securities of the US Treasury
and other government agencies 7,508,676 79,898 0 7,588,574
Corporate debt securities 8,650,197 86,097 3 8,736,291
Mortgage-backed securities 18,186,983 361,497 12,468 18,536,012
----------- -------- ------- -----------
$35,034,256 $527,492 $12,471 $35,549,277
=========== ======== ======= ===========
The following table shows the amortized cost and estimated fair value of investment securities by
contractual maturity at December 31, 1998:
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
Within one year $0 $0 $3,509,873 $3,529,389
After one but within five years 1,513,655 1,578,949 15,762,676 16,038,049
After five but within ten years 4,839,580 4,911,695 1,022,083 1,034,590
Over ten years 7,159,149 7,266,128 3,509,439 3,553,639
Equity securities 0 0 777,200 777,200
Mortgage-backed securities 0 0 23,265,298 23,572,791
----------- ----------- ----------- -----------
Total $13,512,384 $13,756,772 $47,846,569 $48,505,658
=========== =========== =========== ===========
As of December 31, 1998 and 1997 securities carried at $2,067,813 and
$2,028,125, respectively, were pledged to secure public and other deposits as
required by law. Total proceeds from the sale of securities available for sale
during 1998 were $4,327,823. Gross gains of $52,600 were realized on those
sales. The Bank also recovered $12,678 on previously charged off securities.
16
Total proceeds from the sale of securities available for sale during 1997 were
$4,003,516. Gross gains of $7,699 and gross losses of $19,377 were realized on
those sales. The Bank also recovered $406,930 on previously charged off
securities.
(3) LOANS AND ALLOWANCE FOR LOAN LOSSES
At December 31, 1998 and 1997, the loan portfolio consisted of the following,
net of deferred loan fees of $439,302 and $289,570 respectively:
1998 1997
---- ----
Real estate loans $51,643,406 $34,089,199
Installment loans 18,460,555 15,918,156
Construction loans 5,950,207 6,446,381
Commercial loans secured by real estate 6,062,585 9,610,793
Commercial loans 14,410,117 16,458,361
----------- -----------
96,526,870 82,522,890
Less allowance for loan losses 1,751,693 1,532,128
----------- -----------
$94,775,177 $80,990,762
=========== ===========
Nonaccrual loans were $88,694 at December 31, 1998 and $466,051 at December 31,
1997. As a result of being placed on nonaccrual status, approximately $65,905
and $20,595 in interest income was foregone during 1997 and 1996, respectively.
There was no interest foregone during 1998. As of December 31, 1998 and 1997,
there were no loans 90 days or more past due but still accruing interest.
Changes in the allowance for loan losses are as follows:
1998 1997 1996
----------- ----------- -----------
Balance, beginning of year $ 1,532,128 $ 1,474,437 $ 1,326,186
Provision for loan losses 240,000 240,000 240,000
Loans charged off (59,210) (195,903) (127,519)
Recoveries of loans
previously charged off 38,775 13,594 35,770
----------- ----------- -----------
Balance, end of year $ 1,751,693 $ 1,532,128 $ 1,474,437
=========== =========== ===========
As of December 31, 1998 and 1997, the Bank's recorded investment in impaired
loans was $1,174,054 and $2,146,434, respectively, and the related valuation
allowance as of those dates was $120,000 and $140,000. This valuation allowance
is included in the allowance for loan losses on the balance sheet. The average
record investment in impaired loans was $1,660,000, $1,906,000 and $1,742,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
Interest payments received on impaired loans are recorded as interest income
unless collection of the remaining recorded investment is doubtful in which case
payments received are recorded as reductions of principal. The Bank recognized
interest income on impaired loans of $106,379, $202,262 and $136,974 in 1998,
1997 and 1996, respectively.
17
(4) BANK PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 1998 and 1997 consisted of the
following:
Accumulated
Depreciation Net Book
Cost & Amortization Value
1998 ---- -------------- -----
- ----
Land $ 706,277 $ 0 $ 706,277
Bank premises 1,611,508 337,419 1,274,089
Furniture, fixtures and equipment 2,368,523 1,838,755 529,768
Leasehold improvements 312,335 88,635 223,700
---------- ---------- ----------
$4,998,643 $2,264,809 $2,733,834
========== ========== ==========
1997
- ----
Land $ 706,277 $ 0 $ 706,277
Bank premises 1,598,570 290,336 1,308,234
Furniture, fixtures and equipment 2,243,332 1,531,282 712,050
Leasehold improvements 304,016 54,559 249,457
---------- ---------- ----------
$4,852,195 $1,876,177 $2,976,018
========== ========== ==========
Depreciation and amortization expense, included in occupancy expense and
equipment expense, was $388,632, $403,593 and $307,621 in 1998, 1997 and 1996,
respectively.
(5) COMMITMENTS AND CONTINGENCIES
The Bank leases the premises for its Brown's Valley and Bel Aire Offices. Total
rent was $128,043, $113,271 and $38,489 in 1998, 1997 and 1996, respectively,
and is included in occupancy and equipment expenses. The total commitments under
non-cancelable leases are as follows:
Year Todal
---- -----
1999 $119,849
2000 119,568
2001 94,092
2002 100,716
2003 100,716
Thereafter 302,148
--------
Total $837,089
========
(6) TIME DEPOSITS AND INTEREST ON TIME DEPOSITS
Time certificates of deposit in denominations of $100,000 or more totaled
$17,443,413 and $14,765,376 at December 31, 1998 and 1997, respectively.
Interest expense on these deposits was $831,094, $717,442 and $624,560 for 1998,
1997 and 1996, respectively. At December 31, 1998, the scheduled maturities of
CD's are as follows:
Year Total
---- -----
1999 $47,689,225
2000 4,071,499
2001 870,824
2002 390,191
2003 639,864
-----------
$53,661,603
===========
18
(7) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank makes commitments to extend credit in the normal course of business to
meet the financing needs of its customers. 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 amount does not necessarily represent future cash
requirements.
The Bank is exposed to credit loss, in the event of nonperformance by the
borrower, in the contract amount of the commitment. The Bank uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments and evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained if deemed necessary by the Bank is
based on management's credit evaluation of the borrower. Collateral held varies
but may include accounts receivable, inventory, plant and equipment and real
property.
The Bank also issues standby letters of credit which are conditional commitments
to guarantee the performance of a customer to a third party. These guarantees
are primarily issued to support construction bonds, private borrowing
arrangements and similar transactions. Most of these guarantees are short-term
commitments expiring in decreasing amounts through 1999 and are not expected to
be drawn upon. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank holds collateral as deemed necessary, as described above. The contract
amounts of commitments not reflected on the Balance Sheet at December 31, 1998
were as follows:
Contract Amounts
----------------
Loan Commitments $27,964,000
Standby Letters of Credit $ 1,584,000
(8) CONCENTRATIONS OF CREDIT RISKS
The majority of the Bank's loan activity is with customers located in Napa
County, California. Although the Bank has a diversified loan portfolio, a large
portion of its loans is for construction of residences, and many of the Bank's
commercial loans are secured by real estate in Napa County. Approximately 82% of
the Bank's loans are secured by real estate. This concentration is presented
below:
(In 000's)
As of
December 31, 1998
-----------------
Construction/Land Development:
Land Development $ 1,640
Owner Occupied Residential 3,733
Non-owner Occupied Residential 440
Commercial 137
Real Estate 51,643
Commercial - Real Estate Secured 6,063
Installment - Real Estate Secured 15,244
-------
Total $78,900
(9) INCOME TAXES
The provision for (benefits from) federal and state income taxes for the years
ended December 31, 1998, 1997 and 1996 consisted of:
1998 1997 1996
----------- ----------- -----------
Current
Federal $ 926,000 $ 873,000 $ 776,600
State 381,000 323,000 307,100
----------- ----------- -----------
1,307,000 1,196,000 1,083,700
Deferred
Federal (1,000) 31,500 (26,600)
State (5,000) 15,500 15,900
----------- ----------- -----------
$ (6,000) 47,000 $ (10,700)
----------- ----------- -----------
Total $ 1,301,000 $ 1,243,000 $ 1,073,000
=========== =========== ===========
19
20
Deferred tax assets and liabilities result from differences in the timing of the
recognition of certain income and expense items for tax and financial accounting
purposes. The sources of these differences and the amount of each are as follows
as of December 31, 1998 and 1997:
1998 1997
-------- --------
Deferred Tax Assets:
Tax loan loss provision less than book $674,000 $642,200
Other 171,000 139,700
-------- --------
$845,000 $781,900
========
Deferred Tax Liabilities:
Tax benefit on unrealized securities gains $274,000 $214,100
Cumulative difference between cash and
accrual basis reporting 0
Accumulated accretion 36,000 24,800
Tax depreciation more than book 60,000 31,600
Federal tax benefits on state taxes due 65,000 45,800
Other 230,000 233,800
-------- --------
665,000 550,100
-------- --------
Net Deferred Tax Asset $180,000 $231,800
======== ========
The Bank had no valuation allowance as of December 31, 1998 or 1997. The total
tax differs from the federal statutory rate of 34% because of the following:
1998 1997 1996
---- ---- ----
Amount Rate Amount Rate Amount Rate
----------- ---- ----------- ---- ----------- ----
Tax provision at statutory rate $ 1,160,000 34% $ 1,053,000 34% $ 924,600 34%
Interest on obligations of
states and political
subdivisions exempt from
federal taxation (154,000) (3%) (77,000) (3%) (87,600) (3%)
State franchise taxes 245,000 7% 221,500 7% 194,400 7%
Other, net 50,000 2% 45,500 2% 41,600 2%
----------- ---- ----------- ---- ----------- ----
$ 1,301,000 40% $ 1,243,000 40% $ 1,073,000 40%
=========== ---- =========== ==== =========== ====
(10) DIVIDEND RESTRICTIONS
The Bank is regulated by the Board of Governors of the Federal Reserve System
and by the State of California Department of Financial Institutions. Federal
Reserve Board regulations prohibit cash dividends, except under limited
circumstances, if the distribution would result in a withdrawal of capital or
exceed the Bank's net profits then on hand, after deducting its losses and bad
debts. Furthermore, cash dividends cannot be paid without the prior written
approval of the Federal Reserve Board if the total of all dividends declared in
one year exceeds the total of net profits for that year plus the preceding two
calendar years, less any required transfers to surplus under state or federal
law. California banking laws limit cash dividends to the lesser of retained
earnings or net income for the last three years, net of the amount of any other
distribution made to shareholders during such period. As of December 31, 1998,
the Bank had retained earnings of $5,521,351 eligible for dividends.
21
(11) SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE
The Bank declared 5% stock dividends on January 22, 1996, January 27, 1997,
January 26, 1998 and January 28, 1999. As a result of the stock dividends and
stock split, the number of common shares outstanding and earnings per share data
was adjusted retroactively for all periods presented.
The following table reconciles the numerator and denominator of the Basic and
Diluted earnings per share computations:
Weighted Average Per-Share
Net Income Shares Amount
---------- ------ ------
For the year ended 1998
-----------------------
Basic earnings per share $2,110,736 1,496,266 $1.41
Stock options 46,510
Diluted earnings per share 1,542,776 $1.37
For the year ended 1997
-----------------------
Basic earnings per share $1,854,076 1,429,785 $1.30
Stock options 46,110
Diluted earnings per share 1,475,895 $1.26
For the year ended 1996
-----------------------
Basic earnings per share $1,646,443 1,405,051 $1.17
Stock options 23,990
Diluted earnings per share 1,429,041 $1.15
(12) STOCK OPTION PLAN
The Bank has a stock option plan. The Bank may grant up to 337,211 options under
the plan. The Bank has granted 271,757 options through December 31, 1998. The
option exercise price equals the stock's market price on the date of grant. The
options become exercisable over five years and expire in five to ten years.
A summary of the status of the Company's stock option plan at December 31, 1998,
1997 and 1996 and stock option activity during the years then ended is presented
in the table below:
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 210,111 $11.14 135,256 $ 6.26 163,787 $5.44
Granted 4,200 $19.88 132,300 $14.16 12,733 $7.99
Exercised (46,273) $ 6.24 (52,213) $ 5.82 (41,264) $3.54
Cancelled 0 $ 0 (5,232) $ 6.47 0 $ 0
Outstanding at
end of year 168,038 $12.96 210,111 $11.14 135,256 $6.26
Exercisable at
end of year 30,827 $ 9.56 44,136 $ 6.13 70,450 $6.07
Weighted-average
fair value of
options granted
during the year $ 6.97 $ 5.81 $2.84
22
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
------------------- -------------------
Range Number Weighted-Average Weighted- Number Exercisable Weighted-
of Outstanding Remaining Average at Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price 12/31/98 Exercise Price
--------------- ----------- ---------------- -------------- -------- --------------
$ 6.46 to $ 7.90 31,958 1.00 $ 7.00 19,340 $ 6.74
$14.06 to $19.88 136,080 3.99 $14.36 11,487 $14.29
-------
168,038
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: risk-free
interest rate of 4.62% for options issued in 1998, 6.33% and 6.65% for options
issued in 1997 and 5.24% for options issued in 1996; expected dividend yields of
..94%, 1.01% and 1.81%; expected lives of 6 years and expected volatility of
30.85%.
The Bank accounts for stock options under APB Opinion No. 25. Had the Bank used
the fair value based method prescribed by SFAS No. 123, the Bank's net income
and earnings per share amounts would have been reduced to the pro forma amounts
indicated below:
1998 1997 1996
---- ---- ----
Net Income:
As Reported $2,110,736 $1,854,076 $1,646,443
Pro Forma $1,984,791 $1,733,004 $1,641,237
Earnings Per Share:
As Reported:
Basic $1.41 $1.30 $1.17
Diluted $1.37 $1.26 $1.15
Pro Forma:
Basic $1.33 $1.27 $1.23
Diluted $1.29 $1.23 $1.21
(13) RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank makes loans to directors, officers
and principal shareholders on substantially the same terms, including interest
rates and collateral, as those for comparable transactions with unaffiliated
persons. An analysis of net loans to related parties for the year ended December
31, 1998 is as follows:
(In 000's)
----------
Balance at beginning of year $4,032
Additions 1,610
Repayments (1,537)
------
Balance at end of year $4,105
Total undisbursed commitments as of December 31, 1998 were $704,254.
A law firm in which one of the Bank's directors and one of its officers are
principals serves as the Bank's general counsel. During 1998, 1997 and 1996 fees
of $38,000, $31,000 and $26,000, respectively, were paid to this firm.
23
(14) RESTRICTIONS
The Bank is required to maintain reserves with the Federal Reserve Bank equal to
a percentage of its reservable deposits. Reserve balances that were required by
the Federal Reserve Bank were $1,506,000 and $1,072,000 for December 31, 1998
and 1997, respectively.
(15) RETIREMENT PLANS
The Bank has a Profit Sharing and Salary Deferral 401(K) Plan to enable its
employees to share in the Bank's profits and to defer receipt of a portion of
their salaries. Employees can defer up to 15% of their base pay, up to the
maximum amount allowed by the Internal Revenue Code. In addition, the Bank makes
discretionary contributions to the profit sharing account and the 401(K)
account, which are determined by the Board of Directors each year. Amounts
charged to operating expenses under this plan were $120,000, $109,000 and
$88,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
During 1998, the Bank implemented a Director's Supplemental Retirement Program.
The Program contains a non-qualified defined benefit plan and a non-qualified
defined contribution plan. Directors and select officers designated by the Board
of Directors of the Bank are covered by one or the other of these plans. The
plans are unfunded, however the Bank has purchased insurance on the lives of the
participants and intends to use the cash values of these policies ($2,540,456 at
December 31, 1998) to pay the retirement obligations.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the Bank's
financial instruments at December 31, 1998 and 1997:
Carrying Fair Carrying Fair
Amounts Value Amounts Value
------- ----- ------- -----
(In 000's)
1998 1997
---- ----
Financial Assets:
Cash and cash equivalents $ 14,402 $ 14,402 $ 17,621 $ 17,621
Time deposits with other
financial institutions 200 200 200 200
Investment securities 62,018 62,262 39,567 39,725
Loans, net 94,775 95,828 80,991 81,542
Accrued interest receivable 1,335 1,335 951 951
Financial Liabilities:
Deposits $162,173 $162,385 $131,390 $131,507
Accrued interest payable 509 509 501 501
SFAS No. 107, Disclosures about Fair Value of Financial Instruments - SFAS No.
107 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.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents - Cash and cash equivalents are valued at their
carrying amounts because of the short-term nature of these instruments.
Investment Securities - Investment securities are valued at quoted market
prices. See Note 2 for further analysis.
Loans - Loans with variable interest rates are valued at the current carrying
value, because these loans are regularly adjusted to market rates. The fair
value of fixed rate loans is estimated by discounting the future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings for the same remaining maturities. The fair value of
impaired loans is stated net of the related valuation allowance, if any.
24
Accrued interest receivable - The balance approximates its fair value.
Accrued interest payable - The balance approximates its fair value.
Deposits, time deposits with other banks - The fair value of demand deposits,
savings accounts and interest-bearing transaction accounts is the amount payable
on demand at the reporting date. The fair value of time deposits is estimated by
discounting the contractual cash flows at current rates offered for similar
instruments with the same remaining maturities.
(17) COMPRHENSIVE INCOME
As of January 1, 1998, the Bank adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, (SFAS 130). This Statement
established standards for the reporting and display of comprehensive income and
its components in the financial statements. For the Bank, comprehensive income
includes net income reported on the statement of income and changes in the fair
value of its available-for-sale investments reported as a component of
Stockholders' Equity.
The changes in the components of other comprehensive income for the years ended
December 31 1998, 1997 and 1996 are reported as follows:
1998 1997 1996
---- ---- ----
Holding gain arising during the period, net of tax $122,321 $421,412 $37,734
Reclassification adjustment for net realized gains on
securities available-for-sale included in net income
during the year, net of tax expenses of $27,136, $163,059
and tax benefits of $26,334, respectively (38,142) (229,193) 37,014
-------- -------- -------
Net gain recognized in other comprehensive income $ 84,179 $192,219 $74,748
(18) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements. Failure to meet
minimum capital requirements can initiate certain mandatory--and possible
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 I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal Reserve
Bank categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table. There were no conditions or events since that
notification that management believes have changed the institution's category.
25
The Bank's actual capital amounts and ratios are also presented in the table
below:
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
(In 000's)
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets) $18,100 14.39% $10,065 >8.0% $12,581 >10.0%
- -
Tier I Capital (to Risk
Weighted Assets) 16,525 13.14% 5,032 >4.0% 7,548 >6.0%
- -
Tier I Capital (to
Average Assets) 16,525 9.29% 7,114 >4.0% 8,892 >5.0%
- -
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets) $15,513 14.63% $8,485 >8.0% $10,607 >10.0%
- -
Tier I Capital (to Risk
Weighted Assets) 14,185 13.37% 4,243 >4.0% 6,364 >6.0%
- -
Tier I Capital (to
Average Assets) 14,185 10.01% 5,666 >4.0% 7,083 >5.0%
- -
26
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of The Vintage Bank:
We have audited the accompanying balance sheets of The Vintage Bank (a
California state-chartered Bank) as of December 31, 1998 and 1997 and the
related statements of income, changes in shareholders' equity and cash flows for
each of the three years ended December 31, 1998. These financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Vintage Bank as of December
31, 1998 and 1997 and the results of its operations and its cash flows for each
of the three years ended December 31, 1998 in conformity with generally accepted
accounting principles.
San Francisco, California
February 23, 1999
27
- --------------------------------------------------------------------------------
DIRECTORS
- --------------------------------------------------------------------------------
Sandra H. Funseth Investor
David B. Gaw Attorney with Gaw, Van Male, Smith,
Myers & Miroglio
A Professional Law Corporation
Houghton Gifford, M. D. Physician and Attorney, Retired
William L. Kastner President, Kastner Pontiac-Olds-GMC-Honda
Harlan R. Kurtz General Contractor and President of
K-H Development Corporation
Thomas H. Lowenstein President, North Bay Plywood
Vice Chairman of the Board
Thomas F. Malloy Senior Partner, Malloy Imrie & Vasconi
Insurance Services LLC
- -- Chairman of the Board
Terry L. Robinson President & Chief Executive Officer
Carolyn D. Sherwood Real Estate Broker
Coldwell Banker/Brokers of the Valley
James E. Tidgewell Certified Public Accountant
G & J Seiberlich & Co LLP
Joseph R. Vallerga Chairman of the Board, Vallerga's Markets
Corporate Secretary
Wyman G. Smith, III Attorney with Gaw, Van Male, Smith,
Myers & Miroglio
A Professional Law Corporation
28
- --------------------------------------------------------------------------------
EMPLOYEES
- --------------------------------------------------------------------------------
As of March 1, 1999
Terry L. Robinson Benjamin H. Anderson
President & Chief Executive Officer Stacey L. Beardsley
Kathi Metro Maria A. Betancourt
Senior Vice President & Senior Loan Officer Connie A. Brown
Joen M. McDaniel Kristina E. Bullis
Vice President/Operations Anna F. Calise
Lee-Ann Almeida Noel R. Carreon
Vice President & Chief Financial Officer Patricia E. Carson
Mark C. Richmond Anila Chaudhary
Vice President/Marketing Julie A. Claus
Vince Goetz Betty L. Coffman
Vice President Brian T. Cullinane
Commercial Loan Officer Marcy L. Davison
Dorothy S. Ryan Jerilyn M. Deyro
Assistant Vice President Jerome M. Deyro
Commercial Loan Officer Carolyn B. Doughty
David J. Dillabaugh Jacqueline F. Erickson
Assistant Vice President Sherry L. Fitch
Commercial Loan Officer Kathern J. Foulger
Peggy A. Dittman Stacy R. Fowler
Assistant Vice President Judy Freeman
Real Estate Loan Officer Becky J. Gallaway
Michael S. Spinelli Benvinda Gomes
Assistant Vice President Randal P. Griffin
Real Estate & Consumer Loan Officer Shirley J. Handley
Denise A. Loughran Arlette R. Hatch
Assistant Vice President Loleen R. Hendricks
Consumer Loan Officer Jackie R. Hernandez
Jaime D. Buffington Renee Hippauf
Assistant Vice President Eileen M. Jamison
Operations Officer Michelle A. Jaymot
Carol Clague Denise R. Johnson
Assistant Vice President Deborah J. Lawrence
Personal Banking Officer Cynthia A. Lemmons
Katherine Lewis Shawna L. Lipsey
Assistant Vice President Ellen M. Londo
MIS Manager Brenda A. Marshall
Lynn M. Tuttle Carolyn R. Miller
Assistant Vice President Cynthia D. Myers
Compliance/Human Resources Officer JoAnn C. Noonkester
Debra A. Vollmer Arturo A. Ochoa
Assistant Vice President Crystal E. Owen
Accounting Officer Terelyn Owyeong
Andrea Lindemood June A. Paul
Consumer Loan Officer Alice C. Quint
Christina E. Homick Pamela Robinson
Retail Operations Officer Debra J. Rosado-Davisson
Ann M. Derr Christina M. Rossi
Bel Aire Operations Officer Barbaranne Roth
Jill M. Alley-Altman Tanya L. Rubio
Branch Sales Manager Patricia A. Short
Browns Valley Office Malinda Ann Sifford
Donna C. Wallace Lynne M. Stewart
Personal Banking Officer Kelly J. Thomas
Pansy F. Smith Anna Titus
Assistant Corporate Secretary Amber K. Vick
Sylvia I. Yeager
Rigo Zamora
29
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
- --------------------------------------------------------------------------------
The Vintage Bank is a locally owned and operated state chartered commercial bank
which focuses on serving the banking needs of businesses and individuals
throughout Napa County.
Corporate Headquarters & Main Office Location:
1500 Soscol Avenue
Napa, CA 94559-1314
Branch Locations:
3271 Browns Valley Road
Napa, CA 94558-5499
3626 Bel Aire Plaza
Napa, CA 94558-2831
Shareholder Information:
Trading OTC Bulletin Board - Symbol VTGB
Market Makers Hoefer & Arnett
353 Sacramento Street, 10th Floor
San Francisco, CA 94111
1 (800) 346-5544
Van Kasper & Company
600 California Street, Suite 1700
San Francisco, CA 94108
1 (800) 652-1747
Pacific Crest Securities
111 SW Fifth Avenue, 42nd Floor
Portland, OR 97204
1 (800) 473-3775
Transfer Agent ChaseMellon Shareholder Services, L.L.C.
Shareholder Relations
P. O. Box 3315
South Hackensack, New Jersey 07606
1 (800) 356-2017
TTD FOR HEARING IMPAIRED: 1 (800) 231-5469
Foreign Shareholders: (201) 329-8660
Internet Address: www.chasemellon.com
Notice of
Annual Meeting 1500 Soscol Avenue
Napa, CA 94559-1314 May 4,
1999 - 7:00 p.m.
General Counsel: Wyman G. Smith, III
Gaw, Van Male, Smith, Myers & Mirogilo
944 Main Street
Napa, CA 94559
Corporate Secretary: Wyman G. Smith, III
For additional copies of this report or Pansy F. Smith
copies of the 10-KSB Report contact: Assistant Corporate Secretary
The Vintage Bank
1500 Soscol Avenue
Napa, CA 94559-1314
(707) 258-3971
Independent Auditors: Arthur Andersen LLP
Spear Street Tower, Suite 3500
One Market Street
San Francisco, CA 94105-1019
Web Site: www.vintagebank.com
30