FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 2-79261
DELTA NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
California 94-2839814
(State of incorporation or organization) (IRS Employer Identification No.)
611 North Main Street, Manteca, California 95336-3740
(Address of principal executive offices) (Zip code)
(209) 824-4050
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
None
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 [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant:
Aggregate Market Value of
Date Market Value Non-Affiliate Stock Holdings
December 31,1996 $26.00/Share $ 9,796,332
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of December 31, 1996: Common Stock, no par value - 376,782
shares.
<PAGE>
FORM 10-K CROSS REFERENCE INDEX
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Part I Page
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Item 1. Business
Financial Review 8-20
Selected Statistical Information 4, 9-23
Description of Business 5-7
Item 2. Properties 21
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a vote of security holders 22
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Part II Page
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Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters 4, 22
Item 6. Selected Financial Data 4, 21-22
Item 7. Management Discussion and Analysis of Financial
Condition and Results of Operations 8-20
Item 8. Financial Statements and Supplementary Data
Delta National Bancorp and Subsidiaries -
Consolidated Financial Statements 23-27
Notes to Consolidated Financial Statements 28-43
Independent Auditors' Report 44
Selected Statistical Information 4, 9-22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 45
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Part III Page
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Item 10. Directors and Executive Officers of the Registrant 45-46
Item 11. Executive Compensation 47-48
Item 12. Security Ownership of Certain Beneficial Owners
and Management 48
Item 13. Certain Relationships and Related Transactions 49
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Part IV Page
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Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 50
(a) (1) Financial Statements (See Item 8 for a listing of all
financial statements
(2) Financial Statement Schedules
All schedules normally required by Form 10-K are
omitted since they either are not applicable or
the required information is shown in the
financial statements and notes thereto.
(3) Exhibits
(b) No reports on Form 8-K have been filed during the
fourth quarter of the last year.
<PAGE>
<TABLE>
<CAPTION>
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FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
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Year Ended December 31:
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(Amounts in thousands) 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income ......................................... $ 8,022 $ 7,865 $ 6,612 $ 6,560 $ 7,385
Interest expense ........................................ 2,738 3,019 2,310 2,280 2,892
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Net interest income .................................... 5,284 4,846 4,302 4,280 4,493
Provision for loan losses ............................... 185 624 192 642 465
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Net interest income after provision for loan losses.. 5,099 4,223 4,110 3,638 4,028
Non-interest income ..................................... 1,300 675 692 906 1,142
Non-interest expense .................................... 4,506 3,485 3,442 3,239 3,328
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Income before income taxes .............................. 1,893 1,412 1,360 1,305 1,842
Income taxes ........................................ 765 552 539 514 720
Net Earnings ............................................ $ 1,128 $ 860 $ 821 $ 791 $ 1,122
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Earnings per share
Net income per share ................................ $ 2.99 $ 2.28 $ 2.18 $ 2.10 $ 2.98
Cash dividends per share ............................ .70 .70 .70 .70 .70
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At Year End
Cash and due from banks ................................. $ 5,728 $ 4,381 $ 3,349 $ 5,987 $ 4,496
Investment securities ................................... 25,778 33,278 33,028 29,425 28,833
Federal funds sold ...................................... 7,600 7,600 2,800 4,300 3900
Loans, net .............................................. 49,394 46,520 47,044 42,598 47,057
Other assets ............................................ 3,525 3,145 2,968 3,252 2,626
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Total assets ............................................ $ 92,025 $ 94,924 $ 89,189 $ 85,562 $ 86,912
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Demand deposits ......................................... $ 29,612 $ 29,893 $ 28,329 $ 30,866 $ 31,114
Time and savings deposits ............................... 51,441 54,946 51,892 45,962 47,223
Other liabilities ....................................... 365 314 221 135 530
Stockholders' equity .................................... 10,607 9,771 8,747 8,599 8,045
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Total liabilities & stockholders' Equity ................ $ 92,025 $ 94,924 $ 89,189 $ 85,562 $ 86,912
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Selected Ratios (1)
Return on equity ........................................ 10.28% 8.73% 9.18% 9.43% 15.44%
Return on assets ........................................ 1.21% .93% .94% .93% 1.34%
Equity-to-assets ........................................ 11.76% 10.69% 10.19% 9.86% 8.68%
Capital Ratios
Leverage ratio .......................................... 11.23% 10.02% 9.92% 9.65% 8.90%
Risk based capital
Tier I ratio ........................................ 18.50% 16.88% 14.49% 13.43% 11.70%
Total capital ratio ................................. 19.76% 18.14% 15.47% 14.22% 13.13%
Average Balances
Total assets ............................................ $ 93,269 $ 92,197 $ 87,812 $ 85,075 $ 83,739
Earning assets .......................................... 86,129 85,566 80,977 77,315 76,774
Loans ................................................... 49,664 47,806 45,480 46,798 46,952
Total deposits .......................................... 81,559 81,579 78,305 76,132 75,881
Stockholders' equity .................................... 10,971 9,852 8,945 8,385 7,266
Common Share and Stockholder Data
Market price, end of year ............................... $ 26.00 $ 21.00 $ 16.75 $ 16.00 $ 15.00
Book value, end of year ................................. 28.15 25.93 23.22 22.82 21.34
Common dividends ........................................ 263,747 263,747 263,747 263,747 263,747
Dividend payout ratio ................................... 23.39% 30.67% 32.11% 33.32% 23.51%
Average common shares outstanding ....................... 376,782 376,782 376,782 376,782 376,782
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(1) Ratios are based on average balances
</TABLE>
<PAGE>
DESCRIPTION OF BUSINESS
BUSINESS
Delta National Bancorp (the "Company") is a single bank holding company,
registered under the Bank Holding Company Act of 1956. The Company was
incorporated under the laws of the State of California on December 21, 1981. The
Company's principal office is located at 611 N. Main Street, Manteca,
California. The Company owns all of the capital stock of its subsidiary, Delta
National Bank (the "Bank").
The Company was organized at the direction of the Board of Directors for the
purpose of becoming a bank holding company pursuant to a Plan of Reorganization
and Agreement of a Merger which was consummated on June 27, 1983, following
receipt of the required regulatory and shareholder approval. On that date, (1)
Delta National Bank was merged into the New Delta National Bank, (an "interim"
California Banking Corporation organized as a wholly-owned subsidiary of the
Company for the purpose of facilitating the formation of the Company), (2) the
name of the New Delta National Bank was changed to "Delta National Bank" , and
(3) the stockholders of the Bank (with the exception of those stockholders who
perfected their rights as deserting stockholders) became stockholders of the
Company.
The Bank was organized in 1973 as a national banking association under the name
First National Bank of Riverbank; its present name was adopted in 1975 when the
Bank moved its headquarters location from Riverbank, California to Manteca,
California. At the present time, the Bank operates four branches serving the
communities of Manteca, Riverbank, Denair and Modesto, California. The service
area of the Bank is located in the heart of California's Central Valley. The
entire region consists of rich, flat farmland that benefits from a long growing
season. The Bank has grown over the years, which is a direct result from the
growth in the valley, both in employment and new construction, which has come
from a prosperous agriculture industry.
Through its branches, the Bank provides a wide range of commercial banking
services to individuals and small and medium-sized businesses. Services include
those traditionally offered by commercial banks, such as checking and savings
accounts, commercial, real estate, personal, home improvement, automobile and
other installment and term loans, travelers' checks, safe deposit boxes, escrow
services, collection services, computer payroll and accounting services, night
depository facilities, and wire transfers. The Bank does not have a trust
department; however, the Bank will make arrangements with its correspondent
institution to provide trust services, investment and international banking
services.
Competition: The banking business in California, especially in the market areas
served by the Bank, is highly competitive. The Bank competes for loans and
deposits with other commercial banks, savings and loan associations, finance
companies, money market funds, and credit unions for deposit and loan business.
Further, large commercial banks have greater lending limits than the Bank and
perform certain other functions, including trust services, which the Bank does
not offer directly. In competing for banking business, including deposits and
other related activities, the Bank employs personal contact, localized
advertising, interest rate competition and availability of specialized services
in order to meet the needs of various types of customers.
The Bank's loan portfolio consists of both secured and unsecured loans with a
significant portion either real estate secured or real estate related.
The latest available information indicates there were approximately 128 banking
offices including the Bank's four offices operating throughout San Joaquin and
Stanislaus county. The banking offices held approximately five billion in
deposits of which approximately 81 million were held by the Bank. The Bank's
deposit market share varies within the communities served by its offices ranging
from 2% in Modesto, 15% in Manteca, 100% in Riverbank, and 100% in Denair.
<PAGE>
Supervision, Regulation and Government Policies: The Bank as a National Banking
Association, is subject to primary supervision, examination and regulation by
the Comptroller of the Currency. It is also a member of the Federal Reserve
System and as such, is subject to applicable provisions of the Federal Reserve
Act and regulations issued thereunder. The deposits of the Bank are insured by
the Federal Deposit Insurance Corporation to the maximum extent provided by law.
The Bank is also subject to applicable provisions of California laws, insofar as
they do not conflict with or are not preempted by Federal banking law.
Various requirements and restrictions under the laws of the United States and
the State of California affect the operations of the Bank. Federal statutes and
regulations relate to many aspects of the Bank's operations, including reserves
against deposits, interest rates payable on loans, investments, mergers and
acquisitions, borrowings, dividends, location of branch offices, and capital
levels.
In addition, from time to time, legislation is proposed which has the effect of
increasing the cost of doing business, limiting permissible activities or
affecting the competitive balance between banks and other financial
institutions. Changes in rates by the FDIC for deposit insurance will also
effect the cost of business.
Risk-adjusted capital guidelines were issued by bank regulatory authorities
early in 1989. These guidelines assign risk weighting to assets and off-balance
sheet items and place increased emphasis on common equity. The guidelines
currently require a minimum Tier I (core) capital ratio of 4% and a total risk
weighted capital ratio of 8% in order for an institution to be classified as
adequately capitalized. Institutions which maintain a Tier I ratio of 6% and
total capital ratio of 10% are defined as well capitalized. The Bank's Tier I
and total risk-weighted ratios at December 31, 1996 were 18.50% and 19.76%,
respectively.
In addition to the risk weighted ratios, the highest rated banks are required to
maintain a minimum leverage ratio of 3%. All other banks are expected to
maintain higher leverage ratios, to be determined on an individual basis. This
ratio is defined as Tier I capital to average total assets for the most recent
quarter. The Bank's leverage ratio at December 31, 1996 was 11.23%.
In September, 1995, FDICIA 305 was implemented and requires the banking agencies
to revise their risk based capital standards to ensure that those standards take
adequate account of interest rate risk. This rule amends the capital standards
to specify that the banking agencies will include in their evaluations of
capital adequacy an assessment of the exposure to declines in the economic value
of the bank's capital due to changes in interest rates. A bank may be required
to hold additional capital for interest rate risk if it has a significant
exposure or a weak interest rate risk management process. To date, the final
rule does not codify a measurement framework for assessing the level of a bank's
interest rate risk exposure nor does it specify a level of exposure above which
a bank will be required to hold more capital. The Bank is currently exempt from
certain reporting of interest rate risk but is prudently managing its interest
rate risk through risk management practices which include risk measurement, risk
management and risk control.
In 1993, federal bank regulatory agencies issued a statement imposing certain
limitations in the inclusion of net deferred tax assets calculated under
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109") in regulatory capital. Deferred tax assets that are dependent
on future taxable income or the institution's tax planning strategies may only
be counted as a component of Tier I capital to the extent they do not exceed the
lesser of: (1) 10% of Tier 1 capital, or (2) the amount of such benefits which
may be realized based on one year's projected earnings. The Company adopted FAS
109 on January 1, 1993 at which time this regulation became applicable in
determination of its capital ratios. The effect of this new standard on income
tax expense for the year ended December 31, 1993 was not material.
<PAGE>
The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), enacted on
December 19, 1991 in connection with the recapitalization of the Banks Insurance
Fund ("BIF"), required the FDIC to set semi-annual assessment rates at levels
sufficient to increase the BIF's reserve ratio to a designated level within a
prescribed period of time. In August, 1995, the FDIC announced that, effective
June 1, 1995, it had significantly reduced the deposit insurance premiums paid
by most banks. Under the new rate structure, the best-rated institutions insured
by the BIF pay 4 cents per $100 of domestic deposits, down from the prior rate
of 23 cents per $100. The weakest institutions continue to pay 31 cents per $100
of domestic deposits depending on their risk classification. This risk
classification is based on an institution's capital group and supervisory
subgroup assignments. The FDIC has assigned the Bank the lowest premium
possible.
In January, 1996, the FDIC further reduced the deposit insurance premiums paid
by most banks. Under the new rate structure for the BIF, assessment rates were
lowered by four cents per $100 of domestic deposits. Given the four cent
reduction, the highest-rated institutions will pay the statutory annual minimum
of $2,000 for FDIC insurance. Rates for all other institutions were reduced by
four cents per $100 as well, leaving a premium range of 3-27 cents per $100,
instead of the previous 4-31 cents per $100.
Effective December 31, 1993, the Bank adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". These securities are
classified into one of three categories: held-to-maturity, available-for-sale or
trading. Held-to-maturity securities are measured at amortized cost and
available-for-sale securities are measured at fair value. Unrealized holding
gains and losses for available-for-sale securities are excluded from earnings
and reported as a net amount in a separate component of stockholders' equity
until realized. Risk-based and leverage capital ratios will not reflect the
impact of unrealized gains or losses on securities available-for-sale as a
result of the regulatory and industry concerns about the potential for
volatility in regulatory capital ratios.
In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". These statements, which were effective January 1, 1995, requires
that impaired loans, as defined, be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. The Bank adopted
and implemented SFAS No. 114 and SFAS No.
118, as of January 1, 1995.
Employees: The number of persons employed by the registrant is 63, as of
December 31, 1996.
Economic Conditions and Governmental Monetary Policies: The Bank continues to
service the two counties in which all of the branches are located and has
slightly extended into one or more adjacent counties. The economic conditions
within the service area of the Bank has improved significantly over the past
year or more. Unemployment has been reduced and many companies have relocated to
the central valley spurring peripheral business activity. The Bank continues to
participate in the affordable housing market as well as agricultural lending.
The State of California, in general, has shown economic growth having adapted to
the military cutbacks and provided solutions to the exodus of many large
companies. State revenues appear to be adequate to sustain the upcoming budget
process.
The national economy appears to be stable with some growth anticipated. Interest
rates are expected to be manageable with only slight adjustments during the
year. The Bank has successfully positioned itself to minimize interest rate risk
by basing the majority of its assets and liabilities on a variable rate program.
Given the volatility of all segments of the economy, the bank has developed a
strategic plan that responds quickly to unforeseen events.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL REVIEW
PERFORMANCE SUMMARY
The following discussion is intended to provide information to facilitate the
understanding and assessment of significant changes in trends related to the
financial condition of Delta National Bancorp ("the Company") and its results of
operations. It should be read in conjunction with the audited financial
statements and footnotes appearing elsewhere in this report.
At December 31, 1996, the Company's total assets were $92,025,115, net loans
amounted to $49,394,123, stockholders' equity was $10,607,355 and the allowance
for loan losses was $1,082,278. This compares to total assets of $94,924,333,
net loans of $46,519,819, stockholders' equity of $9,771,029 and allowance for
loan losses of $1,219,304 at December 31, 1995. Total assets decreased 3.05%
which was primarily due to a decrease in the securities portfolio of 22.54%.
Although net loans increased 6.18%, total deposits decreased 4.46%, particularly
in the regular savings category.
Net income for 1996 amounted to $1,127,600 or $2.99 per share, as compared with
$859,877 or $2.28 per share earned in 1995. This represents a 3l.14% increase in
1996 over 1995. A significant portion of the increase in net income was due to
increased interest income earned on commercial and real estate loans and a
decrease in interest expense. Non-interest income also increased in 1996 and was
primarily due to an increase in income from other real estate owned, other
repossessed assets and mortgage department fees.
Earnings as measured by return on assets increased to 1.21% in 1996, compared to
.93% in the prior year. Return on equity approximated 10.28% in 1996, compared
to 8.73% in 1995. The increase in the return on equity is primarily due to a
substantial increase in the net income for 1996. The increase in net income was
attributed to a significant increase in non-interest income of 92.73% over 1995.
In addition, the provision to loan losses for 1996 decreased 70.27% over 1995.
Non-accrual loans at year end amounted to $329,609, down from $1,694,556 at
December 31, 1995. One loan makes up the major portion of the non-accrual loans
in 1996. Two loans made up the major portion of the non-accrual loans in 1995,
one of which was transferred to other repossessed assets and the other was
transferred to OREO in 1996. At December 31, 1996, other real estate owned
("OREO") (net of the valuation allowance) totaled $500,000, compared with OREO
of $560,600 at December 31, 1995. Restructured loans, loans outstanding whose
original terms have been modified, totaled $1,131,184 at December 31, 1996,
which consisted of one real estate loan. Restructured loans were $1,146,080 at
December 31, 1995 and consisted of the same loan as in 1996.
Although there was a decrease in the provision for loan losses, net charge-offs
increased in 1996. The provision for loan losses was $185,540, down from
$624,014 for 1995. Net loans charged-off amounted to $322,566 in 1996 versus
$4,132 in 1995. The increase in net loans charged-off for 1996 is primarily due
to two loans, one which was partially charged-off at the time of repossession
and transferred to other repossessed assets and another loan which was partially
charged-off at foreclosure and transferred to OREO.
Net interest income and net interest margin in 1996 were $5,284,428 and 6.13%,
respectively, compared to $4,846,567 and 5.66%, respectively, for 1995. Net
interest income increased approximately 9% in 1996. The increase was primarily
due to increased interest income on commercial and real estate loans and a
decrease in interest expense on deposits. Interest expense decreased 9.29% due
to lower rates on deposits and decreased interest bearing balances.
Non-interest income amounted to $1,300,295 in 1996, compared to $674,677 in
1995. Income related to service charges on deposits increased $24,080. Income
related to foreclosed assets which consists of otherreal estate owned and other
repossessed assets increased $491,520. Other income which included mortgage
department fee income increased $110,018. Total non-interest income increased
92.73% over the same period in 1995.
Operating expenses amounted to $4,506,583 in 1996, compared to $3,485,353 in
1995. This represents a 29.30% increase. FDIC assessments decreased $88,446 in
1996 while salaries, wages, and employee benefits increased due to normal
operating expenditures and a contribution in 1996 to the employee profit sharing
plan. Other increases in operating expenses were due to additions made to the
valuation allowance for other real estate owned and expenses for other
repossessed assets that were not made in 1995.
<PAGE>
EARNINGS PERFORMANCE
Distribution of Average Assets, Liabilities, and Stockholders' Equity; Interest
Rates and Interest Differential: The following table sets forth consolidated
average daily balances of each principal category of assets, liabilities and
stockholders' equity, interest on interest earning assets, and interest on
interest bearing liabilities, and the average yields earned or rates paid
thereon for the years ended December 31, 1996, 1995 and 1994. The table also
shows the net interest earnings and the net yield on average earning assets.
Averages were computed based upon daily balances.
<TABLE>
<CAPTION>
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1996 1995 1994
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Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(In Thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Deposits with other inst
institutions .................. $ 268 $ 13 -- $ 1 $ -- -- $ -- $ -- --
Investment Securities: (5)
U. S. treasury ............ 37 -- -- 1,638 68 4.15% 2,797 119 4.25%
U. S. government agency ... 29,186 1,798 6.16% 25,612 1,676 6.54% 18,170 944 5.20%
Obligations of states and
political subdivisions (2). 1,047 59 5.64% 2,536 118 4.65% 4,082 176 4.31%
Corporate bonds ........... 337 16 4.75% 2,919 135 4.62% 4,730 238 5.03%
Other ..................... 94 3 3.19% 55 3 5.45% 55 2 3.64%
Federal funds sold ............ 5,496 301 5.48% 4,999 301 6.02% 5,663 243 4.29%
Loans-interest & fees (1)(4)... 49,664 5,832 11.74% 47,806 5,564 11.64% 45,480 4,890 10.75%
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Total Earning Assets ...... $86,129 $8,022 9.31% $85,566 $7,865 9.19% $80,977 $ 6,612 8.17%
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Cash and due from banks ........... 3,770 3,972 4,400
Premises and equipment ............ 1,227 695 513
Other Assets ...................... 2,143 1,964 1,922
------- ------- -------
Total Assets .................. $93,269 $92,197 $87,812
------- ------- -------
Deposits:
Non-interest bearing .......... $13,987 $ -- -- $12,786 $ -- -- $12,072 $ -- --
Interest bearing .............. 67,572 2,738 4.05% 68,793 3,019 4.39% 66,233 2,310 3.49%
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Total Deposits ................ $81,559 $2,738 3.36% $81,579 $3,019 3.70% $78,305 $ 2,310 2.95%
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Other liabilities ................. 739 766 562
Stockholders' equity .............. 10,971 9,852 8,945
------- ------- -------
Total liabilities and
stockholders' equity .......... $93,269 $92,197 $87,812
------- ------- -------
As a percentage of earning assets:
Interest and fee income ........... $8,022 9.31% $7,865 9.19% $ 6,612 8.17%
Interest expense .................. 2,738 3.18% 3,019 3.53% 2,310 2.85%
------ ------ ------ ------ ------- ------
Net interest income/net
interest margin (3) ............... $5,284 6.13% $4,846 5.66% $ 4,302 5.32%
------ ------ ------ ------ ------- ------
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<FN>
(1) Loan interest includes loan fees of $627,619, $431,406, and $472,036 in 1996, 1995, and 1994, respectively.
(2) Tax exempt interest income includes $24,000, $48,000, and $65,000 in 1996, 1995, and 1994, respectively to adjust to
a fully taxable equivalent basis using the Federal statutory rate of 34%.
(3) Net interest margin is computed by dividing net interest income by total average earning assets.
(4) Non-accruing loans not yet charged off are included in the loan balance.
(5) Average available-for-sale securities totaled $11,850,000, $17,650,000,and $17,422,000 in 1996, 1995 and 1994,respectively.
Average held-to-maturity securities totaled $18,757,000, $15,055,000, and $12,357,000 in 1996, 1995, and 1994, respectively.
</FN>
</TABLE>
<PAGE>
Net Interest Income: The Company's operating results depend primarily on net
interest income. A primary factor affecting the level of net interest income is
the Company's interest rate margin between the yield earned on interest-earning
assets and the rate paid on interest-bearing liabilities as well as the
difference between the relative amounts of average interest-earning assets and
interest-bearing liabilities. Net interest income increased 9% to $5,284,428 for
the year ended December 31, 1996, compared to $4,846,567 in 1995 and $4,301,578
in 1994. Net interest income increased primarily due to increased income on
commercial and real estate loans and a decrease in interest expense on deposits.
Interest expense decreased 9.29% over 1995 which was primarily due to lower
interest rates and falling interest bearing deposit balances.
Net interest margin increased to 6.13% for 1996 from 5.66% for 1995, and 5.32%
in 1994. The increase in income is a result of sound lending and investing
practices, cost control methods and prudent management decisions.
Changes in the Company's net interest income are a function of both changes in
rates and changes in volumes of interest-earning assets and interest-bearing
liabilities. The following table summarizes the changes in net interest income
for the major categories of interest-earning assets and interest-bearing
liabilities for 1996 and 1995. The total change is segmented into the change
attributable to variations in volume (changes in volume multiplied by old rate)
and the change attributable to variations in interest rates (changes in rates
multiplied by old volume). Changes not solely attributable to volume or rate
have been allocated to volume. Non-accrual loans are included in average loans
used to compute this table.
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1996 Over 1995 1995 Over 1994
(In Thousands) Volume Rate Total Volume Rate Total
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Increase/(Decrease) in:
Loans, net of unearned income
and deferred loan fees..... $ 177 $ 90 $ 267 $ 225 $ 450 $ 675
Interest-bearing deposits
placed with banks............ 65 (52) 13 -- -- --
Taxable securities........... (46) (30) (76) 200 354 554
Tax-exempt securities (1).... (61) 14 (47) (45) 12 (33)
Federal funds sold .......... 30 (30) 0 (29) 86 57
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Total interest income ... $ 165 $ (8) $ 157 $ 351 $ 902 $1,253
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Total interest bearing
deposits .................... $ (54) $(227) $(281) $ 89 $ 619 $ 708
-------------------------------------------------------------------------------
Total interest expense .. $ (54) $(227) $(281) $ 89 $ 619 $ 708
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Changes in net interest
income ...................... $ 219 $ 219 $ 438 $ 262 $ 283 $ 545
- --------------------------------------------------------------------------------
(1) Interest income is reflected on a fully tax equivalent basis.
Provision for Loan Losses: The provision for loan losses totaled $185,540 for
1996, compared to $624,014 for 1995 and $191,750 in 1994. The provision for loan
losses reflects management's on-going evaluation of the risk inherent in the
loan portfolio, which includes consideration of numerous factors, such as
economic conditions, relative risks in the loan portfolio, loan loss experience
and review and monitoring of individual loans for identification and resolution
of potential problems.
Non-Interest Income: Non-interest income amounted to $1,300,295 for 1996, up
92.73% from $674,677 for 1995 and $692,648 in 1994. Service charges on deposits
increased approximately 4.95% in 1996. Total non-interest income increased due
to increased income on other real estate owned and other repossessed assets as
well as an increase in mortgage department fee income. Included in 1995 income
is a pre-tax gain on the sale of one OREO property.
<PAGE>
The following represents a breakdown of non-interest income for 1996, 1995 and
1994:
- --------------------------------------------------------------------------------
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Service charges on deposit accounts ....... $ 510,753 $ 486,673 $ 516,347
Income OREO ............................... 61,262 26,655 --
Income on other repo assets ............... 456,913 -- --
Mortgage department fee income ............ 107,090 25,252 28,774
Gain on sale of OREO ...................... 5,674 26,128 --
Gain on sale of fixed assets .............. 8,960 -- 2,912
Other income .............................. 149,643 109,969 144,615
- --------------------------------------------------------------------------------
Total ................................. $1,300,295 $ 674,677 $ 692,648
- --------------------------------------------------------------------------------
Non-Interest Expense: Non-interest expense amounted to $4,506,583 in 1996,
compared to $3,485,353 in 1995 and $3,442,079 in 1994. FDIC assessments
decreased 68.50% in 1996 due to reduced BIF assessments. Professional fees
decreased 12.61%. Salaries and wages increased due to normal operating
expenditures. Employee benefits expense increased in 1996 over 1995 due to a
contribution of $150,000 that was made to the employee profit sharing plan. A
$100,000 contribution was made to the plan in 1995. Total operating expenses
increased 29.30% over the same period in 1995. Other increases in operating
expenses were due to additions made to the valuation allowance for other real
estate owned and expenses relating to other repossessed assets that were not
made in 1995.
- --------------------------------------------------------------------------------
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Salaries and wages ...................... $1,839,069 $1,589,306 $1,502,791
Employee benefits ....................... 378,472 307,076 222,797
Occupancy and equipment ................. 749,379 673,222 586,905
Stationary and supplies ................. 87,595 84,328 91,022
Professional fees ....................... 135,567 155,132 137,757
FDIC assessments ........................ 40,671 129,117 207,213
Other operating ......................... 575,985 447,284 392,452
Writedown of OREO ....................... 112,560 37,923 261,544
OREO expenses ........................... 23,589 29,184 39,598
Other repo assets expense ............... 550,274 -- --
Loss on sale of fixed assets ............ -- 15,781 --
Loss on sale of other repo assets ....... 13,422 -- --
Loss on sale of OREO .................... -- -- --
Loss on sale of available-for-sale
security ................................ -- 17,000 --
- --------------------------------------------------------------------------------
Total ............................... $4,506,583 $3,485,353 $3,442,079
- --------------------------------------------------------------------------------
<PAGE>
INCOME TAXES
For the year ended December 31, 1996, the Company filed a consolidated Federal
income tax return and State return. At December 31, 1996, the Company had a
$397,000 net deferred tax asset. Income tax expense reflects rates on earnings
before income taxes of 40.42% and 39.1% for the two years ended December 31,
1996 and 1995, respectively.
ASSET LIABILITY MANAGEMENT
Liquidity: For the Company, as with most commercial banking institutions,
liquidity is the ability to roll over substantial amounts of maturing
liabilities and to acquire new liabilities at levels consistent with
management's financial targets. During 1996, the Company continued to maintain a
high level of liquidity. Highly liquid assets consisting of cash, deposits
placed with banks, federal funds sold and securities available-for-sale averaged
approximately $21,384,000 or 22.93% of average total assets as compared with
approximately $26,622,000 or 28.9% of average total assets for 1995. At year
end, the Bank had a liquidity ratio of 20.44%.
Interest Rate Sensitivity Management: The primary objectives of the asset
liability management process are to provide a stable net interest margin,
generate net interest income to meet the Company's earnings objectives and
manage balance sheet risks. These risks include liquidity risk, capital adequacy
and overall interest rate risk inherent in the Company's balance sheet. In order
to manage its interest rate sensitivity, the Company has adopted policies which
attempt to limit the change in pre-tax net interest income assuming various
interest rate scenarios. This is accomplished by adjusting the repricing
characteristics of the Company's assets and liabilities as interest rates
change. The Company's Asset Liability Committee chooses strategies in
conformance with its policies to achieve an appropriate trade off between
interest rate sensitivity and the volatility of pre-tax net interest income and
net interest margin.
The following table sets out the maturity and rate sensitivity of the Company's
interest-earning assets and interest-bearing liabilities as of December 31,
1996. The cumulative interest sensitivity gap ("gap") as reflected in the table
represents the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing, whichever is earlier, at a given point in
time and is not necessarily indicative of the position on other dates.
<TABLE>
<CAPTION>
<PAGE>
- ----------------------------------------------------------------------------------------------------------------
0 - 30 31 - 90 3 - 6 6 - 12 1 - 5 5
(In Thousands) Days Days Months Months Years Years Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Fed funds sold ................ $ 7,600 $ -- $ -- $ -- $ -- $ -- $ 7,600
Deposit accounts with
other banks ................... 676 -- -- -- -- -- 676
Securities: (3) (6)
U. S. government
agencies .................. -- 14,857 10,275 -- -- 22 25,154
Municipals ................ -- -- -- -- -- 390 390
Loans: (1)
Commercial - fixed ........ 49 1,043 1,500 1,807 2,333 330 7,062
Commercial - variable (2).. 14,318 -- -- -- -- -- 14,318
Real estate - fixed ....... 198 120 390 640 549 50 1,947
Real estate - variable .... 25,618 -- -- -- -- -- 25,618
Installment (4) ........... 42 18 62 94 1,029 -- 1,245
- ----------------------------------------------------------------------------------------------------------------
Total loans ................... $40,225 $ 1,181 $ 1,952 $ 2,541 $ 3,911 $ 380 $50,190
- ----------------------------------------------------------------------------------------------------------------
Total assets .................. $48,501 $16,038 $12,227 $ 2,541 $ 3,911 $ 792 $84,010
- ----------------------------------------------------------------------------------------------------------------
Source of Funds: Deposits
Interest-bearing
demand deposits ........... $12,909 -- -- -- -- -- $12,909
Time deposits greater than
$ 100,000.................. 3,507 3,490 4,967 5,974 3,969 -- 21,907
Time deposits less than
$ 100,000.................. 1,716 1,923 6,437 2,228 959 -- 13,263
Passbook time deposits
- variable ................ 5,423 -- -- -- -- -- 5,423
Savings (5) ............... -- 9,091 -- -- -- -- 9,091
- ----------------------------------------------------------------------------------------------------------------
Total deposits ................ $23,555 $14,504 $11,404 $ 8,202 $ 4,928 $ -- $62,593
- ----------------------------------------------------------------------------------------------------------------
Total liabilities ............. $23,555 $14,504 $11,404 $ 8,202 $ 4,928 $ -- $62,593
- ----------------------------------------------------------------------------------------------------------------
Gap ........................... $24,946 $ 1,534 $ 823 $(5,661) $(1,017) $ 792 $21,417
- ----------------------------------------------------------------------------------------------------------------
Cumulative interest
sensitivity gap ............... $24,946 $26,480 $27,303 $21,642 $20,625 $21,417 $21,417
- ----------------------------------------------------------------------------------------------------------------
<FN>
(1) Non-accruing loans not yet charged off are included in the loan balance.
(2) Overdrafts are not included in the loan balance.
(3) Securities are stated at amortized cost.
(4) Credit Cards are not included in the loan balance.
(5) IRA's and Christmas Club accounts are not included in the balance.
(6) FRB and other stock is not included in the balance.
</FN>
</TABLE>
The gap is considered positive when the amount of interest rate sensitive assets
which reprice over a given time period exceeds the amount of interest rate
sensitive liabilities which reprice over the same time period and is considered
negative when the reverse is true. During a period of rising interest rates, a
positive gap tends to result in increased net interest income while a negative
gap would have an adverse affect on net interest income. As illustrated by the
table, the Company maintained a positive gap at December 31, 1996. The Company,
therefore, was asset sensitive and was positioned for increased net interest
income given a rise in interest rates in 1996. The degree of positive gap is not
so large that a significant detrimental impact would result from stable or
declining interest rates.
<PAGE>
BALANCE SHEET ANALYSIS
Cash and Due from Banks: Average cash and due from banks for the year ended
December 31, 1996 was $3,770,428, down 5.1% from the prior year average of
$3,972,362 due to increased loan activity and lower cash balance requirements.
Securities: The fair value of available-for-sale securities totaled $10,349,542
at December 31, 1996, as compared to $12,926,352 at the end of 1995, with
balances averaging approximately $11,850,000 and $17,650,000, respectively. The
decrease in available-for-sale securities was primarily due to investments that
matured during the year. All but one of the new securities purchased in 1996
were placed in the held-to-maturity category due to the Banks intent to hold
these funds until they mature. As of December 31, 1996, available-for-sale
securities made up 40% of the securities portfolio. The majority of these
securities are variable rate at 98% of the securities portfolio and 2% are fixed
rate. One available-for-sale security was sold in 1995 resulting in a loss of
$17,000.
The Company's short-term investments, consisting of securities
available-for-sale and federal funds sold averaged approximately $17,346,000 for
1996, compared to approximately $22,649,000 for 1995. These investments amounted
to $17,949,542 at year-end 1996, compared to $20,526,352 for 1995. In 1996, the
securities portfolio consisted primarily of U.S. government agency securities.
In 1996, federal funds sold averaged approximately $5,496,000 as compared to
approximately $4,999,000 in 1995. The amortized cost of held-to-maturity
securities totaled $15,428,286 in 1996, compared to $20,351,537 in 1995.
The following table shows the amortized cost (book value) of the Company's
portfolio of available-for-sale and held-to-maturity securities for the periods
ending 1996 and 1995:
- --------------------------------------------------------------------------------
At December 31, (In Thousands) 1996 1995
- --------------------------------------------------------------------------------
Available-for-sale:
U. S. government agencies ...................... $ 9,725,856 $12,188,734
States & political subdivisions ................ 389,776 605,656
Corporate bonds and other ...................... 204,350 55,350
- --------------------------------------------------------------------------------
Total ...................................... $10,319,982 $12,849,740
- --------------------------------------------------------------------------------
Held-to-maturity:
U. S. government agencies ...................... $15,428,286 $18,252,276
States & political subdivisions ................ -- 695,578
Corporate bonds and other ...................... -- 1,403,683
- --------------------------------------------------------------------------------
Total ...................................... $15,428,286 $20,351,537
- --------------------------------------------------------------------------------
<PAGE>
The following tables show the amortized cost (book value) and maturities of
securities at December 31, 1996 and the weighted average yields (1).
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Securities/Maturities - December 31, 1996
---------------------------------------------------------------------------------------
After 1 but After 5 but
Within 1 year Within 5 Years Within 10 Years After 10 Years
---------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-sale: (3)
U.S. government
agencies .......... $ 607,055 5.79% $ 919,202 6.52% $ 8,199,599 6.65% $ -- --
States & political
subdivisions (2) .. -- -- -- -- -- -- 389,776 13.50%
- ---------------------------------------------------------------------------------------------------------------
Total ......... $ 607,055 5.79% $ 919,202 6.52% $ 8,199,599 6.65% $ 389,776 13.50%
- ---------------------------------------------------------------------------------------------------------------
Held-to-maturity:
U.S. government
agencies .......... $ 23,020 8.14% $ 3,171,817 8.00% $10,642,289 7.35% $ 1,591,160 7.57%
States & political
subdivisions (2) .. -- -- -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------
Total ......... $ 23,020 8.14% $ 3,171,817 8.00% $10,642,289 7.35% $ 1,591,160 7.57%
- ---------------------------------------------------------------------------------------------------------------
<FN>
(1) Yields are calculated on a tax equivalent basis using the Federal statutory rate of 34%.
(2) There were no securities which exceeded 10% of stockholders' equity.
(3) Federal Reserve and other stock not included in balance.
</FN>
</TABLE>
Loan Composition: The loan portfolio totaled $49,394,123 at December 31, 1996
with a 6.18% increase over $46,519,819 in 1995. There was a shift from
commercial loans to real estate construction and mortgage loans. Real estate
construction increased approximately 46% over the same period in 1995. Consumer
loans continue to decline due to recessionary influences and competition.
The composition of the Bank's loan portfolio as of December 31, is as follows:
- --------------------------------------------------------------------------------
Percentage Percentage
of Total of Total
1996 Loans 1995 Loans
- --------------------------------------------------------------------------------
Commercial, financial and
agricultural................ $ 21,428,989 42.16% $ 22,755,013 47.30%
Real Estate - construction.. 13,404,461 26.37% 9,175,475 19.10%
Real Estate - mortgage ..... 14,160,539 27.86% 14,090,502 29.30%
Installment loans to
individuals ................ 1,837,465 3.61% 2,073,749 4.30%
- --------------------------------------------------------------------------------
$ 50,831,454 100.00% $ 48,094,739 100.00%
Unearned discount ........ (61,208) (80,189)
Allowance for possible
loan losses .............. (1,082,278) (1,219,304)
Deferred loan fees ....... (293,845) (275,427)
- --------------------------------------------------------------------------------
Loans, net (l) ....... $ 49,394,123 $46,519,819
- --------------------------------------------------------------------------------
(1) There were no lease financing or foreign loans
<PAGE>
Loan maturities as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
RE RE
Comc'l Comc'l Const. Const. Other Other
Total Fixed Variable Fixed Variable Fixed Variable
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
One year or
less ........... $25,086,302 $ 4,446,973 $ 5,705,311 $ 553,626 $ 9,941,309 $ 1,566,918 $ 2,872,165
After one year
through five
years .......... 21,376,837 2,333,327 6,234,807 - 2,909,526 1,560,338 8,338,839
After five
years .......... 4,368,315 330,291 2,378,280 - - 50,056 1,609,688
- --------------------------------------------------------------------------------------------------------------------
Total ...... $50,831,454 $ 7,110,591 $14,318,398 $ 553,626 $12,850,835 $ 3,177,312 $12,820,692
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank's customers are primarily located in Stanislaus County and San Joaquin
County. Approximately 54% of the Bank's loans are for real estate and
construction and approximately 42% of the Bank's loans are for general
commercial uses including professional, retail, agricultural and small business.
Generally real estate loans are secured by real property and commercial and
other loans are secured by funds on deposit, business or personal assets.
Repayment is generally expected from the proceeds of the sales of property for
real estate construction loans, and from cash flows of the borrower for other
loans.
Neither the Bank or the regulators have placed any limitations on the
composition of the Bank's loan portfolio. There were no concentrations of loans
exceeding 10% of total loans which were not otherwise disclosed as a category of
loans in the above table. Unsecured loans are not a significant portion of the
loan portfolio depicted in the above table. There were no other interest bearing
assets at the end of the period.
The Bank has collateral management policies in place so that collateral lending
of all types is on a basis which it believes is consistent with regulatory
lending standards. Valuation analyses are utilized to take into consideration
the potentially adverse economic conditions under which liquidation of
collateral could occur. It is generally the Bank's policy to fully collateralize
all loans with loan-to-value ratios determined on an individual loan basis
taking into account the financial stability of each borrower and the value and
type of the collateral.
Allowance for Loan Losses: The provision for loan losses is based upon
management's evaluation of the adequacy of the existing allowance for loans
outstanding. These evaluations take into consideration such factors as changes
in the nature and volume of the portfolio, overall portfolio quality, loan
concentrations, specific loan problems and current economic conditions that may
affect the borrower's ability to repay. The allowance for loan losses is
increased by provisions charged to expense and reduced by loan charge-offs net
of recoveries. Early recognition of problem credits is critical to avoid
shortages in the allowance. The allowance for loan losses totaled $1,082,278 or
2.13% of total gross loans at December 31, 1996, compared to $1,219,304 or 2.54%
at December 31, 1995 and $599,422 or 1.25% at December 31, 1994. The increase in
the allowance in 1995 was primarily a response to the state of the dairy
industry at that time which had somewhat deteriorated. One dairy loan in
particular accounted for a significant portion of the increase to the allowance
in 1995 over 1994. As of December 31, 1996, the allowance reflects the inherent
risk in each component of the portfolio in addition to a sizeable allocation for
a commercial retail center that is experiencing difficulty in leases and cash
flow.
The provision for loan losses is a product of the Bank's allowance for loan loss
methodology that reflects the potential losses in the loan portfolio. The Bank's
conservative lending philosophy allows this provision to be quite manageable.
Loans totaling $488,608 were charged off during the period and $166,042 was
collected in recoveries. Loans charged off totaled $112,366 in 1995 and $563,719
in 1994, while recoveries totaled $108,234 and $163,848, respectively. As a
percent of average loans outstanding during the year, net loans charged off were
.65% in 1996, .009% in 1995, and .88% in 1994.
<PAGE>
The following table summarizes the loan loss experience of the Company for 1996,
1995, and 1994:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Balance at January 1 .............. $1,219,304 $ 599,422 $ 807,543
Charge Offs:
Commercial, financial and
agricultural .................. (324,340) -- (357,634)
Real Estate - construction .... (61,638) -- --
Real Estate - mortgage ........ (48,696) -- (163,896)
Installment loans to
individuals ................... (53,934) (112,366) ( 42,189)
- --------------------------------------------------------------------------------
Total Charge Offs ...... (488,608) (112,366) (563,719)
- --------------------------------------------------------------------------------
Recoveries:
Commercial, financial and
agricultural .................. -- 1,390 3,448
Real Estate - construction .... 123,139 80,425 80,436
Real Estate - mortgage ........ 2,000 2,200 60,292
Installment loans to
individuals.................... 40,903 24,219 19,672
- --------------------------------------------------------------------------------
Total Recoveries ....... 166,042 108,234 163,848
- --------------------------------------------------------------------------------
Net charge offs ................... (322,566) ( 4,132) (399,871)
Additions charged to operations ... 185,540 624,014 191,750
- --------------------------------------------------------------------------------
Balance at December 31, ........... $1,082,278 $1,219,304 $ 599,422
- --------------------------------------------------------------------------------
Ratio of net charge-offs during
period to average loans
outstanding ....................... .650% .009% .879%
- --------------------------------------------------------------------------------
The following table sets forth the allocation for loan losses to each loan
category and the percentage of each loan category to total loans for the past
two years. The allocation of the allowance for loan losses should not be
interpreted as an indication that charge-offs will occur in these amounts 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.
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Percentage Percentage
of Loans of Loans
in each in each
Category to Category to
Total Total
Allowance Loans Allowance Loans
- --------------------------------------------------------------------------------
Commercial, financial and
agricultural ............... $ 276,128 42.16% $ 599,783 47.30%
Real Estate - construction . 258,633 26.37% 262,944 19.10%
Real Estate - mortgage ..... 509,594 27.86% 313,455 29.30%
Installment loans to
individuals ................ 37,923 3.61% 43,122 4.30%
Unallocated ................ - - - -
- --------------------------------------------------------------------------------
Total Reserves ......... $1,082,278 100.00% $1,219,304 100.00%
- --------------------------------------------------------------------------------
<PAGE>
Total loans classified for regulatory purposes as loss, doubtful, substandard,
or special mention (including non-accrual loans and troubled debt restructuring)
at December 31, 1996 and 1995 were $3,945,378 and $9,189,084, respectively. Of
the total classified, one of the loans was classified as doubtful at the end of
1996 totalling $71,634 and none were classified as doubtful at the end of 1995.
Management is not aware of any other material credit which there is serious
doubt regarding the ability to repay other than those reflected in classified
loans and in the allowance for possible loan losses.
Impaired Loans: Impaired loans, as defined, are measured based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent.
Impaired loans totaled $1,460,793 at December 31, 1996 and $2,840,637 at year
end 1995, of which $1,131,184 and $1,146,080, respectively are the result of a
troubled debt restructuring. The average investment in impaired loans during
1996 was approximately $1,850,000, compared to $1,572,000 in 1995. The total
allowance for loan losses relating to these loans was $281,345 and $334,981,
respectively, for 1996 and 1995. Total cash collected on impaired loans during
1996 approximated $710,800, compared to $78,800 in 1995. In 1996, $602,600 was
credited to the principal balance outstanding and $108,200 was recognized as
interest income. In 1995, $6,300 was credited to the principal balance
outstanding, and $72,500 was recognized as interest income. Interest income that
would have been recognized on impaired loans was approximately $205,000 and
$210,000 for the years ended December 31, 1996 and 1995, respectively.
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Amounts due according to the
contractual terms include both principal and interest. The Company has
determined that the definition of impaired loans will include any loans placed
on non-accrual status and any loans which have had a modification of terms under
troubled debt restructuring. Loans in the amount of $300,000 or more will be
evaluated individually. Large groups of smaller-balance homogenous loans, under
$300,000, will be evaluated on a composite basis using historical data, such as
average recovery period and average amount recovered, along with a composite
rate of interest as a means of measuring for impairment. Loans that are not
evaluated individually will be grouped together by similar risk characteristics.
The following categories will be grouped together: Agricultural, Commercial,
Real Estate Construction, Residential Real Estate, Consumer, and Commercial Real
Estate loans.
Loan impairment is measured by estimating the present value of expected future
cash flows discounted at the loan's effective interest rate, its observable
market price, or the fair value of collateral if the loan is collateral
dependent. When it has been substantiated that a loss is evident and should be
recognized, the impaired loan will be charged off. The recorded investment in
these loans and the valuation allowance for loan losses related to loan
impairment are as follows:
- --------------------------------------------------------------------------------
Recorded Investment 1996 1995
- --------------------------------------------------------------------------------
Principal amount of impaired loans ................. $1,460,793 $2,840,637
Accrued Interest ................................... 4,068 267
Deferred loan costs ................................ 231 1,408
- --------------------------------------------------------------------------------
1,465,092 2,842,312
Less valuation allowance ........................... 281,345 334,981
- --------------------------------------------------------------------------------
Total carrying value ............................... $1,183,747 $2,507,331
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Valuation Allowance 1996 1995
- --------------------------------------------------------------------------------
Valuation allowance at beginning of period .......... $ 334,981 $ -
Net charges to operations for impairment ............ 307,911 334,981
Direct write-downs .................................. (361,547) -
Recoveries .......................................... -- -
- --------------------------------------------------------------------------------
Valuation allowance at end of period ................ $ 281,345 $ 334,981
- --------------------------------------------------------------------------------
<PAGE>
Non-Accrual Loans, Restructured Loans and Real Estate Owned: Information
regarding non-accrual loans, past due loans and restructured loans is presented
below.
- --------------------------------------------------------------------------------
At December 31, 1996 1995
- --------------------------------------------------------------------------------
Non-accrual loans:
Commercial loans ......................... $ -- $1,200,342
Real estate loans ........................ 329,609 494,214
Consumer loans ........................... -- --
- --------------------------------------------------------------------------------
Total non-accrual loans .............. $ 329,609 $1,694,556
- --------------------------------------------------------------------------------
Loans past due 90 days or more
still accruing interest ...................... -- --
- --------------------------------------------------------------------------------
Troubled debt restructuring .................. $1,131,184 $1,146,080
- --------------------------------------------------------------------------------
Non-accrual loans at year-end amounted to $329,609, down from $1,694,556 at
December 31, 1995. One real estate loan makes up the major portion of the
non-accrual loans. Gross interest income that would have been recorded for
non-accrual loans if loans had been current in accordance with original terms
and had been outstanding throughout the period or since origination for 1996 and
1995 was $55,425 and $115,869, respectively. There was no interest income
included in net income for the period for non-accrual loans. There were no loans
past due 90 days or more which were still accruing interest.
Management is constantly aware of the need for maintaining high credit
standards. The Company is not involved in foreign lending and is not engaged in
high yield, high risk loans. A loan is placed on non-accrual status when either
principal or interest is in default for 90 days more, or when external factors
indicate that payment in full of principal and interest appears unlikely unless
the loan is well secured and in the process of collection. When a loan is placed
on non-accrual status, all interest previously accrued but uncollected shall be
reversed against the appropriate income account. In most cases, if the loan is
rated substandard or better, payments shall be applied to interest first and
then principal provided no loss is anticipated. If a loss is anticipated, all
payments shall be applied to principal first and then interest. When one loan of
a customer is placed on non-accrual status, related borrowings will be evaluated
as to whether they should also be placed on non-accrual status. Non-accrual
loans will be restored to an accruing status when principal and interest is no
longer past due and unpaid, or the loan otherwise becomes well secured and in
the process of collection.
A troubled debt restructuring occurs when the Bank, for economic or legal
reasons related to the debtor's financial difficulties, grants a concession to
the debtor that it would not ordinarily consider. Troubled debt restructuring
can occur in a variety of forms, such as transferring assets in a full or
partial settlement of the debt, issuing debt, or modifying terms including
reducing the stated interest rate, extending maturity dates, reducing the face
amount or maturity of the debt, or reducing accrued interest. Restructured loans
totaled $1,131,184 at December 31, 1996 and $1,146,080 at December 31, 1995. All
restructured loans were current as to principal and interest.
Foreclosed real estate owned includes real estate properties acquired through,
or in lieu of, foreclosure are to be sold and are initially recorded at the
lower of carrying amount or fair value less cost to sell at the date of
foreclosure. After foreclosure, valuations are periodically performed by
management. Any subsequent revisions in estimates of fair value less cost to
sell are reported as adjustments to the carrying amount of the real estate
provided that the adjusted carrying amount does not exceed the original carrying
amount at the date of foreclosure. Revenue and expenses from operations and
changes in the valuation allowance are included in other operating expenses.
Total foreclosed real estate was $784,193 at December 31, 1996, compared to
total foreclosed real estate of $856,167 at December 31, 1995. At the end of
1996, this consisted of two properties, one of which represents bare land. The
second property is a condominium complex consisting of eight units which were
completed and placed in service as rental units by the Bank. The valuation
allowance at the end of 1996 totaled $284,193 and $295,567 in 1995.
<PAGE>
FUNDING SOURCES
Deposits: Total deposits amounted to $81,052,506 at December 31, 1996, compared
to $84,839,377 at the end of 1995, a decrease of 4.5%. Average deposits during
the year were approximately $81,559,000 and $81,579,000, respectively, for 1996
and 1995.
Non-interest bearing demand deposits averaged approximately $13,987,000 in 1996,
compared to $12,786,000 in 1995. Interest bearing deposits averaged
approximately $67,572,000 in 1996, a decrease of 1.8%, or $1,221,000 from the
average for 1995.
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Average Average Average Average
Balance Rate Balance Rate
- --------------------------------------------------------------------------------
Interest bearing deposits
Checking accounts .... $14,186,109 1.88% $14,368,972 2.12%
Savings .............. 18,142,195 4.24% 21,271,869 3.91%
Time deposits (1) .... 35,243,466 4.13% 33,152,076 5.59%
Non-interest bearing deposits.. 13,987,382 12,786,029
- --------------------------------------------------------------------------------
(1) Included at December 31, 1996 are $21,906,825 in time certificates of
$100,000 or more, of which $6,997,212 matures in 3 months or less,
$4,967,265 matures in 3 to 6 months, $5,973,745 matures in 6 to 12
months, and $3,968,603 matures in more than 12 months.
Other Borrowings: There were no other borrowings as of December 31, 1996 or
December 31, 1995.
Capital: Retained earnings from operations has been the primary source of new
capital for the Company. As of December 31, 1996, stockholders' equity was
$10,607,355, compared to $9,771,029 at year-end 1995. Risk-adjusted capital
guidelines, issued by bank regulatory agencies, assign risk weighting to assets
and off-balance sheet items and place increased emphasis on common equity. The
guidelines require adequately capitalized institutions to maintain a Tier I
(core) capital ratio of 4% and a combined Tier I and Tier II capital ratio of
8%. Institutions whose Tier I and total capital ratios meet or exceed 6% and
10%, respectively, are deemed to be well capitalized. For the Company, Tier I
capital consists of common stockholders' equity. In addition to the
risk-weighted ratios, all banks are expected to maintain leverage ratios, to be
determined on an individual basis, but not below a minimum of 3%. This ratio is
defined as Tier I capital to average total assets for the most recent quarter.
At December 31, 1996, the Company exceeded its capital requirements. Based on
the guidelines, the Bank's Tier I and combined Tier I and Tier II risk-weighted
ratios at December 31, 1996 were as follows:
- --------------------------------------------------------------------------------
Minimum 1996 1995 1994
- --------------------------------------------------------------------------------
Risk Based Capital Ratio 8.00% 19.76% 18.14% 15.47%
Tier I Ratio 4.00% 18.50% 16.88% 14.49%
Leverage Ratio 3.00% 11.23% 10.02% 9.92%
- --------------------------------------------------------------------------------
<PAGE>
SELECTED STATISTICAL INFORMATION
FINANCIAL RATIOS
The following table shows key financial ratios for the Company for 1996, 1995
and 1994:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Net income as a percentage of:
Average stockholders' equity .................... 10.28% 8.73% 9.18%
Average total assets ............................ 1.21% .93% .94%
Average earning assets .......................... 1.31% 1.01% 1.01%
Stockholders' equity at year-end as a percentage of:
Total assets at year-end ........................ 11.53% 10.29% 9.81%
Net loans at year-end ........................... 21.47% 21.00% 18.60%
Total deposits at year-end ...................... 13.09% 11.52% 10.90%
Average stockholders' equity as a percentage of:
Average assets .................................. 11.76% 10.69% 10.19%
Average loans ................................... 22.09% 20.61% 19.67%
Average deposits ................................ 13.45% 12.08% 11.42%
- --------------------------------------------------------------------------------
PROPERTIES
Manteca Branch - In 1981 the Bank acquired the property located at 611 North
Main Street in Manteca, California, for $308,000. The Company's headquarters and
administrative offices are also located there. The property consists of 2.4
acres and a building of approximately 13,000 square feet. On December 31, 1987,
the property was transferred to the Company. Under the terms of the lease which
expires in January, 1998, the Bank pays the Company $2,000 per month.
Riverbank Branch - In 1996, the Bank leased the facility located at 3300 Santa
Fe in Riverbank, California. Under the terms of the lease which expires in
April, 1997, the Bank pays $3,000 per month. Land was purchased by the Bank in
1995 for the purpose of building a new Riverbank facility. The facility is
projected to be open by the end of 1997 or beginning of 1998.
Denair Branch - The Bank currently leases the facility located at 4701 Main
Street, Denair, California. Under the terms of the lease the Bank currently pays
$3,100 per month. The lease expires in July, 1998 with the option of renewing
until 2003 and then again until the year 2008.
Modesto Branch - The Bank currently leases the facility located at 1901 McHenry
Ave, Modesto, California. Under the terms of the lease the Bank currently pays
$1,721 per month. The lease expires in the year 2000 with one ten year option
available.
LEGAL PROCEEDINGS
Except for minor and usual collection litigation there are no pending claims
against the Company, or its subsidiary which in counsel's reasonable opinion
will result in a substantial loss.
<PAGE>
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through the solicitation of
proxies or otherwise.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed with A. G. Edwards, Inc. The Company's
stock is not listed with the National Association of Securities Dealers
automated quotations system. There has been a limited trading market in the
stock.
The following table states the high and low sales prices of the Company's stock
for all quarters in 1996 and 1995:
- --------------------------------------------------------------------------------
1996 1995
High Low High Low
- --------------------------------------------------------------------------------
First Quarter ........ $ 35.00 $ 26.00 $ 17.50 $ 16.50
Second Quarter ........ 28.00 26.00 17.00 16.75
Third Quarter ......... 26.00 23.00 19.50 19.00
Fourth Quarter ........ 27.00 26.00 21.00 19.50
- --------------------------------------------------------------------------------
There can be no assurance that an established public market for the common stock
will develop and the Company presently has no intention to seek the listing of
the common stock on any Securities Exchange or quotation on the NASDAQ inter
dealer quotation system, in the foreseeable future.
As of December, 1996, the Company had approximately 315 holders of record of
Delta National Bancorp Stock. The stockholders of the Company will be entitled
to receive dividends when and as declared.
The following table shows the dividends declared and paid by the Company for the
years 1996, 1995 and 1994:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Cash Dividends Paid .................... $ 263,747 $ 263,747 $ 263,747
Dividend payout ratio .................. 23.39% 30.67% 32.11%
Book value at year end ................. $ 28.15 $ 25.93 $ 23.22
Market price/book value at year end .... 92.35% 80.99% 72.13%
- --------------------------------------------------------------------------------
<PAGE>
DELTA NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
1996 1995
----------- -----------
Cash and due from banks ...................... $ 5,052,387 $ 4,330,351
Interest-bearing deposits in bank ............ 676,115 51,043
Federal funds sold ........................... 7,600,000 7,600,000
----------- -----------
Total cash and cash
equivalents (notes A13 and B) ..... 13,328,502 11,981,394
Securities available-for-sale(notes A4 and C). 10,349,542 12,926,352
Securities held-to-maturity(notes A3 and C) .. 15,428,286 20,351,537
Loans, net (notes A5, A6, and D) ............. 49,394,123 46,519,819
Property and equipment (notes A7 and E) ...... 1,719,682 1,342,500
Interest receivable and other assets
(notes A8, F, G and K)........................ 1,804,980 1,802,731
----------- -----------
$92,025,115 $94,924,333
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Demand - non interest-bearing ............ $16,702,725 $15,980,639
Demand - interest-bearing ................ 12,908,637 13,912,667
Regular savings .......................... 16,271,723 19,375,825
Time, under $100,000 (note H) ............ 13,262,596 10,710,398
Time, $100,000 and over (note H) ......... 21,906,825 24,859,848
----------- -----------
Total deposits .................... 81,052,506 84,839,377
Accrued interest and other liabilities ....... 365,254 313,927
----------- -----------
Total liabilities ................. 81,417,760 85,153,304
Stockholders' equity
Common stock, no par value
Authorized - 5,000,000 shares
Issued and outstanding-376,782 shares.. 3,531,886 3,531,886
Retained earnings ........................ 7,058,211 6,194,358
Net unrealized appreciation on securities
available-for-sale, net of tax of $12,302
and $31,827 at December 31, 1996 and
1995, respectively (note C) ........... 17,258 44,785
----------- -----------
Total stockholders' equity ........ 10,607,355 9,771,029
----------- -----------
$92,025,115 $94,924,333
=========== ===========
The accompanying notes are an integral part of these statements.
<PAGE>
DELTA NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31,
1996 1995 1994
---------- ---------- ----------
Interest income
Interest and fees on loans ........... $5,831,747 $5,564,417 $4,889,682
Securities available-for-sale ........ 728,848 1,023,444 1,004,370
Securities held-to-maturity .......... 1,148,438 976,537 474,260
Federal funds sold ................... 300,689 300,467 243,408
Interest-bearing deposits in banks ... 12,934 215 50
---------- ---------- ----------
Total interest income ............. 8,022,656 7,865,080 6,611,770
Interest expense on deposits (note J) ... 2,738,228 3,018,513 2,310,192
---------- ---------- ----------
Net interest income ............... 5,284,428 4,846,567 4,301,578
Provision for loan losses ............... 185,540 624,014 191,750
---------- ---------- ----------
Net interest income after
provision for loan losses ....... 5,098,888 4,222,553 4,109,828
Other income
Service charges on deposits .......... 510,753 486,673 516,347
Foreclosed assets (note F) ........... 518,175 26,655 --
Other ................................ 271,367 161,349 176,301
---------- ---------- ----------
1,300,295 674,677 692,648
---------- ---------- ----------
Other expenses
Salaries and wages ................... 1,839,069 1,589,306 1,502,791
Employee benefits .................... 378,472 307,076 222,797
Occupancy and equipment .............. 749,379 673,222 586,905
Foreclosed assets (note F) ........... 686,423 67,107 29,198
Stationery and supplies .............. 87,595 84,328 91,022
Professional fees .................... 135,567 155,132 137,757
FDIC assessments ..................... 40,671 129,117 207,213
Other operating ...................... 589,407 480,065 664,396
---------- ---------- ----------
4,506,583 3,485,353 3,442,079
---------- ---------- ----------
Earnings before income taxes ...... 1,892,600 1,411,877 1,360,397
Income taxes (notes A9 and K) ........... 765,000 552,000 539,000
---------- ---------- ----------
NET EARNINGS ...................... $1,127,600 $ 859,877 $ 821,397
========== ========== ==========
Net earnings per share (note A11) ....... $ 2.99 $ 2.28 $ 2.18
========== ========== ==========
The accompanying notes are an integral part of these statements.
<PAGE>
DELTA NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three years ended December 31, 1996
<TABLE>
<CAPTION>
Net change
in available-
Common stock Retained for-sale
Shares Amount earnings securities Total
<S> <C> <C> <C> <C> <C>
Balances at
January 1, 1994 ....... 376,782 $ 3,531,886 $ 5,040,578 $ 26,243 $ 8,598,707
Cash dividends
paid ($.70 per share) . -- -- (263,747) -- (263,747)
Net changes in
unrealized depreciation
on available-for-sale
securities ............ -- -- -- (408,822) (408,822)
Net earnings ............. -- -- 821,397 -- 821,397
------------ ------------ ------------ ------------ ------------
Balances at
December 31, 1994 ..... 376,782 3,531,886 5,598,228 (382,579) 8,747,535
Cash dividends
paid ($.70 per share) . -- -- (263,747) -- (263,747)
Net changes in
unrealized appreciation
on available-for-sale
securities ............ -- -- -- 427,364 427,364
Net earnings ............. -- -- 859,877 -- 859,877
------------ ------------ ------------ ------------ ------------
Balances at
December 31, 1995 ..... 376,782 3,531,886 6,194,358 44,785 9,771,029
Cash dividends
paid ($.70 per share) . -- -- (263,747) -- (263,747)
Net changes in
unrealized appreciation
on available-for-sale
securities ............ -- -- -- (27,527) (27,527)
Net earnings ............. -- -- 1,127,600 -- 1,127,600
------------ ------------ ------------ ------------ ------------
Balances at
December 31, 1996 ..... 376,782 $ 3,531,886 $ 7,058,211 $ 17,258 $ 10,607,355
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
DELTA NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
------------ -------------- -------------
<S> <C> <C> <C>
Increase (decrease) in cash and
cash equivalents
Cash flows from operating activities:
Net earnings ............................... $ 1,127,600 $ 859,877 $ 821,397
Adjustments to reconcile net
earnings to net cash provided
by operating activities
(Gain) loss on sale of assets ...... (1,211) 6,654 (2,914)
Provision for loan losses .......... 185,540 624,014 191,750
Provision for depreciation and
amortization ..................... 580,717 467,219 340,759
Provision for losses on foreclosed
real estate ...................... 112,560 37,923 261,544
Decrease (increase) in interest
receivable and other assets ...... 278,913 (548,317) 407,577
Increase in interest
payable and other liabilities .... 51,327 93,199 85,875
------------ ------------ ------------
Net cash provided by
operating activities ....... 2,335,446 1,540,569 2,105,988
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sales of securities
available-for-sale ...................... -- 483,000 --
Proceeds from calls and maturities of
securities available-for-sale ........... 3,898,366 8,485,510 2,547,296
Proceeds from calls and maturities of
securities held-to-maturity ............. 6,573,515 4,253,496 6,529,093
Purchase of securities available-for-sale .. (1,383,320) -- (6,257,374)
Purchase of securities held-to-maturity .... (1,982,717) (12,984,116) (7,230,577)
Net increase in loans ...................... (3,908,991) (100,233) (5,012,193)
Purchase of property and equipment ......... (622,576) (707,079) (280,859)
Proceeds from sale of property and
equipment ............................... 20,800 9,850 16,000
Proceeds from sale of foreclosed assets .... 467,203 496,613 316,293
------------ ------------ ------------
Net cash provided by (used in)
investing activities ....... 3,062,280 (62,959) (9,372,321)
------------ ------------ ------------
</TABLE>
<PAGE>
DELTA NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in demand deposit
and savings accounts ...................... (3,386,046) 3,125,241 3,233,049
Net (decrease) increase in time deposits ...... (400,825) 1,493,375 159,377
Cash dividends ................................ (263,747) (263,747) (263,747)
------------ ------------ ------------
Net cash (used in) provided by
financing activities ............. (4,050,618) 4,354,869 3,128,679
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents .............................. 1,347,108 5,832,479 (4,137,654)
Cash and cash equivalents at
beginning of year .......................... 11,981,394 6,148,915 10,286,569
------------ ------------ ------------
Cash and cash equivalents at
end of year ................................ $ 13,328,502 $ 11,981,394 $ 6,148,915
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ................................. $ 2,808,700 $ 2,970,959 $ 2,251,309
Income taxes ............................. $ 857,600 $ 982,000 $ 188,000
</TABLE>
Noncash investing and financing activities:
The Bank foreclosed on loans with balances of $849,147 and $375,051 in
1996 and 1994, respectively. No loans were foreclosed upon during 1995.
During 1996, the Bank recognized a decrease in the unrealized gain on
available-for-sale securities of $47,052. As a result, the deferred tax
asset was increased by $19,525 and equity was reduced by $27,527.
During 1995, the Bank recognized an increase in the unrealized gain on
available-for-sale securities of $730,537. As a result, the deferred tax
asset was decreased by $303,173 and equity was increased by $427,364.
During 1994, the Bank recognized a decrease in the unrealized gain on
available-for-sale securities of $698,841. As a result, the deferred tax
asset was increased by $290,019 and equity was reduced by $408,822.
The accompanying notes are an integral part of these statements.
<PAGE>
DELTA NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Delta National Bancorp (the Company) was incorporated under the laws of the
State of California on December 21, 1981 for the purpose of serving as a bank
holding company under the Bank Holding Company Act of 1956. The Company's
wholly-owned subsidiary, Delta National Bank (the Bank), operates as a
commercial bank in the cities of Manteca, Riverbank, Denair and Modesto,
California. Through its branches the Bank provides traditional commercial
banking services to individuals and small and medium-sized businesses located
in the California Central Valley. The accounting and reporting policies of
the Company and the Bank conform with generally accepted accounting
principles and general practice within the banking industry.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reported period.
Actual results could differ from those estimates.
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows.
1. Consolidation
The consolidated financial statements of the Company include the accounts of
the Company and the Bank. Significant intercompany transactions and amounts
have been eliminated.
2. Fair values of financial instruments
The financial statements include various estimated fair value information as
required by Statement of Financial Accounting Standards (SFAS) No. 107,
"Disclosures about Fair Value of Financial Instruments." Such information,
which pertains to the Bank's financial instruments, is based on the
requirements set forth in SFAS No. 107 and does not purport to represent the
aggregate net fair value of the Bank. Further, the fair value estimates are
based on various assumptions, methodologies and subjective considerations,
which vary widely among different financial institutions and which are
subject to change.
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and short-term instruments approximate those assets' fair values.
Securities: Fair values for securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments. Securities purchased
under repurchase agreements are carried at the contract price.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. The carrying amount of accrued
interest approximates its fair value.
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Off-balance-sheet instruments: Fair values for the Bank's off-balance-sheet
instruments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
credit standing of the counterparties.
Deposit liabilities: The fair values estimated for demand deposits (interest
and non-interest checking, passbook savings, and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposit
approximate their fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of the aggregate expected monthly maturities on
time deposits. The carrying amount of accrued interest payable approximates
its fair value.
Short-term borrowings: The carrying amounts of borrowings under repurchase
agreements and other short term borrowings approximate their fair values.
3. Securities held-to-maturity
Bonds, notes and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for amortization
of premiums and accretion of discounts, which are recognized as adjustments
to interest income over the period to maturity.
4. Securities available-for-sale
Available-for-sale securities consist of bonds, notes and debentures not
classified as trading securities or held-to-maturity securities. Unrealized
holding gains and losses, net of tax, are reported as a net amount in a
separate component of stockholders' equity until realized. Gains and losses
on the sale of available-for-sale securities are determined using the
specific identification method. The amortization of premiums and accretion of
discounts are recognized as adjustments to interest income over the period to
maturity.
5. Loans
Loans are reported at the principal amount outstanding, net of unearned
income, deferred loan fees, and the allowance for loan losses. Unearned
discounts on installment loans are recognized as income over the terms of the
loans. Interest on other loans is calculated by using the simple interest
method on the daily balance of the principal amount outstanding.
Loan fees net of certain direct costs of origination, which represent an
adjustment to interest yield, are deferred and amortized over the contractual
term of the loan.
Loans on which the accrual of interest has been discontinued are designated
as non-accrual loans. Accrual of interest on loans is discontinued either
when reasonable doubt exists as to the full and timely collection of interest
or principal or when a loan becomes contractually past due by ninety days or
more with respect to interest or principal. When a loan is placed on
non-accrual status, all interest previously accrued but not collected is
reversed against current period interest income. Income on such loans is then
recognized only to the extent that cash is received and where the future
collection of principal is probable. Interest accruals are resumed on such
loans only when they are brought fully current with respect to interest and
principal and when, in the judgment of management, the loans are estimated to
be fully collectible as to both principal and interest.
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
6. Allowance for loan losses
The allowance for loan losses is established through a provision for loan
losses charged to expenses. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be
adequate to absorb losses inherent in existing loans and commitments to
extend credit, based on evaluations of collectibility and prior loss
experience of loans and commitments to extend credit. The evaluations take
into consideration such factors as changes in the nature and volume of the
portfolio, overall portfolio quality, loan concentrations, specific problem
loans, commitments, and current economic conditions that may affect the
borrowers' ability to pay.
The Bank adopted SFAS No. 114 "Accounting by Creditors for Impairment of a
Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures," as of January 1, 1995. SFAS No.
114 requires that impaired loans, as defined, be measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The Bank considers a loan impaired when it is probable
that all amounts of principal and interest due, according to the contractual
terms of the loan agreement, will not be collected, which is the same
criteria used for the transfer of loans to non-accrual status. Interest
income is recognized on impaired loans in the same manner as non-accrual
loans.
7. Property and equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided for in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives. Leasehold improvements are amortized over the lives
of the improvements or the terms of the related leases, whichever is shorter.
The straight-line method of depreciation is followed for financial reporting
purposes, but accelerated methods are used for tax purposes. Deferred income
taxes have been provided for the resulting depreciation differences.
8. Foreclosed real estate
Real estate properties acquired through, or in lieu of, loan foreclosure are
to be sold and are initially recorded at the lower of carrying amount or fair
value less cost to sell at the date of foreclosure. After foreclosure,
valuations are periodically performed by management. Any subsequent revisions
in estimates of fair value less cost to sell are reported as adjustments to
the carrying amount of the real estate provided that the adjusted carrying
amount does not exceed the original carrying amount at the date of
foreclosure. Revenue and expenses from operations and changes in the
valuation allowance are included in other operating expenses.
9. Income taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through
the provision for income taxes.
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
10. Long-lived assets and intangibles
The Bank adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," as of January 1, 1996.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles that are used in operations be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
assets might not be recoverable. The financial impact of this pronouncement
was not material.
11. Earnings per share
Earnings per share amounts are computed on the basis of the weighted average
number of shares outstanding during each year. The weighted average number of
shares outstanding for 1996, 1995 and 1994 was 376,782.
12. Stock based compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." This Statement requires entities to disclose the fair value of
their employee stock options, but permits entities to continue to account for
employee stock options under Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." The Bank has determined that
it will continue to use the method prescribed by APB Opinion No. 25, which
recognizes compensation cost to the extent of the difference between the
quoted market price of the stock at the date of grant and the amount an
employee must pay to acquire the stock. The Bank grants stock options to
employees with an exercise price greater than or equal to the quoted market
price of the stock at the date of grant. Accordingly, no compensation cost is
recognized for stock option grants. Disclosure requirements in accordance
with SFAS No. 123 are included at Note M.
13. Cash and cash equivalents
For purposes of the statement of cash flows, the Bank considers due from
banks, interest-bearing deposits in banks and federal funds sold for one-day
periods to be cash equivalents.
14. Reclassifications
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
15. New accounting pronouncement
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers of
financial assets and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial
assets and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. The Bank will adopt
this Statement as of January 1, 1997 and has made no assessment of the
potential impact of adopting SFAS No. 125 at this time.
<PAGE>
NOTE B - CASH AND DEPOSITS
Cash and due from banks includes balances with the Federal Reserve and other
correspondent banks. The Bank is required to maintain specified reserves by
the Federal Reserve Bank. The average reserve requirements are based on a
percentage of the Bank's deposit liabilities. in addition, the Federal
Reserve requires the Bank to maintain a certain minimum balance at all times.
NOTE C - SECURITIES
Amortized cost and estimated fair values of debt securities as of December
31, 1996 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale securities:
Obligations of other U.S.
government agencies.... $ 9,725,856 $ 91 $ (105,130) $ 9,620,817
Obligations of states and
political subdivisions. 389,776 134,599 -- 524,375
Other ................... 204,350 -- -- 204,350
----------- ----------- ----------- -----------
Total ................... $10,319,982 $ 134,690 $ (105,130) $10,349,542
=========== =========== =========== ===========
Held-to-maturity securities:
Obligation of other U.S.
government agencies.... $15,428,286 $ 141,729 $ (29,535) $15,540,480
=========== =========== =========== ===========
The amortized cost and estimated fair value of debt securities at December
31, 1996, by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Fair
Cost Value
Available-for-sale securities:
Due in one year or less .................. $ 499,890 $ 499,375
Due after ten years ...................... 389,776 524,376
Not due at a single date ................. 9,430,316 9,325,791
----------- -----------
$10,319,982 $10,349,542
=========== ===========
Held-to-maturity securities:
Not due at a single date ................. $15,428,286 $15,540,480
=========== ===========
As of December 31, 1996, approximately 65% of the Bank's securities portfolio
consisted of Small Business Administration Guaranteed Loan Pool Certificates.
Credit risk related to such securities is greater than that of U.S.
Treasuries.
Investment securities with a carrying value of $18,630,980 and a fair value
of $18,708,595 at December 31, 1996 were pledged to secure public deposits as
required or permitted by law. Pledged securities at December 31, 1995 had a
carrying value of $10,802,942 and a fair value of $10,943,601.
<PAGE>
NOTE C - SECURITIES - CONTINUED
Amortized cost and estimated fair values of debt securities as of December
31, 1995 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available-for-sale securities:
Obligations of other U.S.
government agencies ... $12,188,734 $ 14,960 $ (80,692) $12,123,002
Obligations of states and
political subdivisions. 605,656 142,415 (71) 748,000
Corporate bonds and othe. 55,350 -- -- 55,350
----------- ----------- ----------- -----------
Total ................... $12,849,740 $ 157,375 $ (80,763) $12,926,352
=========== =========== =========== ===========
Held-to-maturity securities:
Obligation of other U.S.
government agencies.... $18,252,276 $ 145,215 $ (2,931) $18,394,560
Obligation of states and
political subdivisions. 695,578 -- (1,918) 693,660
Corporate bonds and other 1,403,683 -- (7,981) 1,395,702
----------- ----------- ----------- -----------
Total ................... $20,351,537 $ 145,215 $ (12,830) $20,483,922
=========== =========== =========== ===========
Proceeds from sales of available-for-sale securities were approximately
$483,000 in 1995. Gross losses of $17,000 were realized on these sales.
NOTE D - LOANS
The composition of the Bank's loan portfolio at December 31, is as follows:
1996 1995
------------ ------------
Commercial, financial
and agricultural ..................... $ 21,428,989 $ 22,755,013
Real estate - construction ............. 13,404,461 9,175,475
Real estate - mortgage ................. 14,160,539 14,090,502
Installment ............................ 1,837,465 2,073,749
------------ ------------
50,831,454 48,094,739
Unearned discount ...................... (61,208) (80,189)
Allowance for loan losses .............. (1,082,278) (1,219,304)
Deferred loan fees ..................... (293,845) (275,427)
------------ ------------
Loans, net ......................... $ 49,394,123 $ 46,519,819
============ ============
Non-performing assets are loans which are not accruing interest and real
estate acquired through foreclosure. At December 31, 1996 and 1995,
non-performing assets amounted to $1,113,802 and $2,550,723, respectively.
<PAGE>
NOTE D - LOANS - CONTINUED
Changes in the allowance for loan losses for the years ended December 31,
are summarized as follows:
1996 1995 1994
----------- ----------- -----------
Balance at January 1, ............. $ 1,219,304 $ 599,422 $ 807,543
Provision charged to operations ... 185,540 624,014 191,750
Recoveries of loans previously
charged off ..................... 166,042 108,234 163,848
Loans charged off ................. (488,608) (112,366) (563,719)
----------- ----------- -----------
Balance at December 31, ........... $ 1,082,278 $ 1,219,304 $ 599,422
=========== =========== ===========
Impaired loans aggregated approximately $1,461,000 and $2,841,000 at December
31, 1996 and 1995, respectively. Of these amounts, approximately $1,131,000
and $1,146,000 were the result of a troubled debt restructuring as of
December 31, 1996 and 1995, respectively. The average investment in impaired
loans during 1996 and 1995 was approximately $1,850,000 and $1,572,000,
respectively. Total cash collected on impaired loans during 1996 approximated
$710,800, of which $602,600 was credited to the principal balance
outstanding, and $108,200 was recognized as interest income. Total cash
collected on impaired loans during 1995 approximated $78,800, of which $6,300
was credited to the principal balance outstanding, and $72,500 was recognized
as interest income. Interest income that would have been recognized on
impaired loans was approximately $205,000 and $210,000 for the years ended
December 31, 1996 and 1995, respectively.
Changes in the allowance for loan losses related to impaired loans for the
years ended December 31, are summarized below. This allowance is included in
the overall allowance for loan losses summarized above. As SFAS No. 114 was
adopted on January 1, 1995, there was no allowance for loan losses related to
impaired loans in 1994.
1996 1995
--------- ---------
Balance at January 1, ............................. $ 334,981 $ --
Provision charged to operations ................... 307,911 334,981
Recoveries of loans previously charged off ........ -- --
Loans charged off ................................. (361,547) --
--------- ---------
Balance at December 31, ........................... $ 281,345 $ 334,981
========= =========
The Bank's customers are primarily located in Stanislaus County and San
Joaquin County. Approximately 54% of the Bank's loans are for real estate and
construction and approximately 42% of the Bank's loans are for general
commercial uses including professional, retail, agricultural and small
business. Agricultural loans make up approximately 25% of the Bank's loan
portfolio. Generally, real estate loans are secured by real property and
commercial and other loans are secured by funds on deposit, business or
personal assets. Repayment is generally expected from the proceeds of the
sales of property for real estate construction loans, and from cash flows of
the borrower for other loans.
<PAGE>
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consists of the following at December
31:
1996 1995
---------- ----------
Land ................................. $ 636,117 $ 636,117
Building and improvements ............ 444,475 444,475
Furniture, fixtures and equipment .... 2,266,476 1,704,532
Leasehold improvements ............... 143,428 143,428
Automobiles .......................... 38,912 64,042
Construction in progress ............. 76,368 46,238
---------- ----------
3,605,776 3,038,832
Less accumulated depreciation and
amortization ....................... 1,886,094 1,696,332
---------- ----------
$1,719,682 $1,342,500
========== ==========
Depreciation expense on property and equipment was $233,554, $241,353 and
$231,468 in 1996, 1995 and 1994, respectively.
During 1995, the Bank purchased land and prepared for the construction of a
branch in the town of Riverbank, California.
NOTE F - ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable and other assets at December 31, are as follows:
1996 1995
---------- ----------
Interest income receivable - investments ......... $ 347,987 $ 464,509
Interest and fee income receivable - loans ....... 379,324 327,622
Deferred income tax asset ........................ 397,000 450,000
Foreclosed real estate, net ...................... 500,000 560,600
Other ............................................ 180,669 --
---------- ----------
$1,804,980 $1,802,731
========== ==========
In May 1996, the Bank foreclosed on a loan which was collateralized by dairy
cattle. The Bank earned revenues from the sale of milk and incurred expenses
relating to dairy operations until the cattle were sold in December 1996.
NOTE G - FORECLOSED REAL ESTATE
Changes in the allowance for losses for foreclosed real estate for the years
ended December 31, are as follows:
1996 1995 1994
--------- --------- ----------
Balance at January 1, ................. $ 295,567 $ 257,644 $ --
Provision charged to operations ....... 112,560 37,923 261,544
Charge-offs, net of recoveries ........ (123,934) -- (3,900)
--------- --------- ---------
Balance at December 31, ............... $ 284,193 $ 295,567 $ 257,644
========= ========= =========
<PAGE>
NOTE H - TIME DEPOSITS
At December 31, 1996, the scheduled maturities of certificates of deposit are
as follows:
1997 $30,241,378
1998 3,912,544
1999 637,782
2000 58,987
2001 318,730
-----------
$35,169,421
NOTE I - EMPLOYEE BENEFIT PLANS
Under the terms of the employee profit-sharing plan, a portion of the Bank's
profits, determined annually by the Board of Directors, will be set aside and
maintained in a trust fund for the benefit of qualified employees.
Contributions to the plan, included in employee benefits on the statements of
earnings, were $150,000 and $100,000 in 1996 and 1995, respectively. No
contribution was made to the plan for 1994.
During 1995, the Bank adopted a defined contribution 401(k) plan (the Plan).
The Plan is available to all employees who are at least 18 years of age and
who have worked a minimum of six months for the Bank. Eligible employees who
elect to participate, may choose to contribute to the Plan, up to 10% of
their compensation for the plan year. The Bank may also elect to make
matching contributions to the Plan. The Bank did not make any matching
contributions to the Plan in 1996 or 1995.
NOTE J - INTEREST EXPENSE ON DEPOSITS
Interest expense on deposits was comprised of the following for the years
ended December 31:
1996 1995 1994
---------- ---------- ----------
Demand deposits and regular savings ..... $ 847,054 $1,209,711 $ 755,796
Time deposits less than $100,000 ........ 634,295 522,539 559,932
Time deposits greater than $100,000 ..... 1,256,879 1,286,263 994,464
---------- ---------- ----------
$2,738,228 $3,018,513 $2,310,192
========== ========== ==========
NOTE K - INCOME TAXES
The provision for income taxes for the years ended December 31, consists of
the following:
1996 1995 1994
--------- --------- ----------
Current:
Federal ......... $ 487,000 $ 632,000 $ 429,000
State ........... 205,000 241,000 167,000
--------- --------- ---------
692,000 873,000 596,000
--------- --------- ---------
Deferred:
Federal ......... 62,000 (240,000) (55,000)
State ........... 11,000 (81,000) (2,000)
--------- --------- ---------
73,000 (321,000) (57,000)
--------- --------- ---------
$ 765,000 $ 552,000 $ 539,000
========= ========= =========
<PAGE>
NOTE K - INCOME TAXES - CONTINUED
A reconciliation of income taxes computed at the federal statutory rate and
the provision for income taxes for the years ended December 31, are as
follows:
1996 1995 1994
--------- --------- ---------
Income taxes at statutory rates ......... $ 643,000 $ 480,000 $ 463,000
Reduction for tax exempt interest ....... (42,000) (38,000) (53,000)
State income taxes, net of federal
income tax benefit .................... 142,000 106,000 103,000
Other ................................... 22,000 4,000 26,000
--------- --------- ---------
$ 765,000 $ 552,000 $ 539,000
========= ========= =========
The tax effect of temporary differences giving rise to the Bank's deferred
income tax asset at December 31, is as follows:
1996 1995
Deferred tax assets:
Allowance for loan losses .......................... $ 265,000 $ 318,000
Foreclosed real estate ............................. 134,000 142,000
State income taxes ................................. 70,000 80,000
--------- ---------
469,000 540,000
--------- ---------
Deferred tax liabilities:
Depreciation on property and equipment ............. (52,000) (52,000)
Unrealized gain on available-for-sale securities ... (12,000) (32,000)
Accretion on investment securities ................. (8,000) (6,000)
--------- ---------
(72,000) (90,000)
--------- ---------
Deferred income tax asset (included in other
assets on the balance sheet) ....................... $ 397,000 $ 450,000
========= =========
NOTE L - COMMITMENTS AND CONTINGENCIES
The Company leases the Riverbank, Denair, and Modesto facilities under
operating leases with initial terms expiring in 1996, 1998 and 2000,
respectively.
At December 31, 1996 the future minimum rental payments under operating
leases are as follows:
Year ending December 31,
1997 $ 92,337
1998 69,857
1999 42,357
2000 20,657
2001 3,443
Thereafter -
---------------
$ 228,651
Rent expense under operating leases was $92,337, $88,705 and $86,973 for
the years ended December 31, 1996, 1995 and 1994, respectively.
<PAGE>
NOTE M - STOCK OPTION PLAN
During 1996, the Company's Board of Directors approved a fixed stock option
plan accounted for under APB Opinion No. 25 and related Interpretations. The
plan allows the Company to grant incentive and non-qualified stock options to
key employees and directors for up to 113,035 shares of common stock. The
options have a term of ten years when issued and vest immediately. The
exercise price of each option is greater than or equal to the fair market
value of the Company's stock on the date of grant. Accordingly, no
compensation cost has been recognized for the plan. Had compensation cost for
the plan been determined based on the fair value of the options at the grant
dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net earnings and earnings per share would have
been reduced to the pro forma amounts indicated below. For those options that
are non-qualified stock options for income tax purposes, the pro forma net
earnings reflect the Company's estimated future tax deduction upon exercise
of the options.
1996
Net earnings
As reported $ 1,127,600
Pro forma $ 729,821
Earnings per share
As reported $ 2.99
Pro forma $ 1.94
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1996: dividend yield of 2.7 percent a year;
expected volatility of 20 percent; risk-free interest rates of 6.8 percent;
and expected life of 10 years.
A summary of the status of the Company's fixed stock option plan for the year
ended December 31, 1996 is presented below.
Weighted
Average
Exercise
Shares Price
Outstanding at January 1, 1996 - $ -
Granted 80,355 $ 27.22
Outstanding at December 31, 1996 80,355 $ 27.22
Options exercisable at December 31, 1996 80,355 $ 27.22
Weighted-average fair value of options
granted during the year $7.85
The following information applies to options outstanding at December 31,
1996:
Number outstanding 80,355
Range of exercise prices $26.00 - $28.60
Weighted-average exercise price $27.22
Weighted-average remaining contractual life 9.5 years
<PAGE>
NOTE N - FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit in the form
of loans or through standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The contract amounts of those
instruments reflect the extent of involvement the Bank has in particular
classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Contract
Amount
Financial instruments whose contract amounts
represent credit risk:
Undisbursed loan commitments $ 8,389,438
Visa/Mastercard lines 1,535,872
Standby letters of credit 226,324
----------------
$ 10,151,634
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 Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation. Collateral held varies
but may include accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties. All of the Bank's
commitments are variable rate with no caps or floors.
Standby letters of credit are conditional commitments issued by the Bank 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 loan facilities to customers.
The following table provides summary information on the fair value of
financial instruments at December 31, 1996:
Carrying Estimated
Amount Fair Value
Financial assets:
Cash and cash equivalents $ 13,328,502 $ 13,328,502
Securities available-for-sale 10,349,542 10,349,542
Securities held-to-maturity 15,428,286 15,540,480
Loans receivable 50,831,454 50,640,589
Accrued interest receivable 727,311 727,311
Financial liabilities:
Deposits (81,051,046) (81,094,126)
Accrued interest payable (129,978) (129,978)
Off-balance-sheet liabilities:
Commitments and letters of credit - (210,000)
<PAGE>
NOTE N - FINANCIAL INSTRUMENTS - CONTINUED
The following table provides summary information on the fair value of
financial instruments at December 31, 1995:
Carrying Estimated
Amount Fair value
Financial assets:
Cash and cash equivalents $ 11,981,394 $ 11,981,394
Securities available-for-sale 12,926,352 12,926,352
Securities held-to-maturity 20,351,537 20,483,922
Loans receivable 48,094,739 47,877,723
Accrued interest receivable 814,267 814,267
Financial liabilities:
Deposits (84,839,377) (84,854,153)
Accrued interest payable (199,188) (199,188)
Off-balance-sheet liabilities:
Commitments and letter of credit - (157,000)
The carrying amounts include $329,609 and $1,694,556 of non-accrual loans
(loans that are not accruing interest) at December 31, 1996 and 1995,
respectively. Management has determined that primarily because of the
uncertainty and the difficulty of predicting the timing of such cash flows
excessive amounts of time and money would be incurred to estimate the fair
values of nonperforming assets. The following aggregate information is
provided about the contractual provisions of these assets at December 31:
1996 1995
--------------- ----------------
Aggregate carrying amount $ 329,609 $ 1,694,556
Effective rate 11.5% 11.25%
Average term to maturity 13 months 19 months
NOTE O - RELATED-PARTY TRANSACTIONS
The Bank, in the ordinary course of business, makes loans and receives
deposits from its directors and stockholders. As of December 31, 1996 and
1995 such loans amounted to $63,067 and $39,700, respectively. In
management's opinion, these transactions were on substantially the same terms
as comparable transactions with other customers of the Bank. During 1996,
$132,033 was paid to related parties in connection with the operation of the
Bank's foreclosed assets.
NOTE P - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the 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 measure
of the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
<PAGE>
NOTE P - REGULATORY MATTERS - CONTINUED
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 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, 1996,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency 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 are
no conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual Adequacy purposes: action provisions:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk greater than greater than
Weighted Assets) .... $10,936,000 19.75% $ 4,429,500 or equal to 8.0% $ 5,536,900 or equal to 10.0%
Tier I Capital (to Risk greater than greater than
Weighted Assets) .... $10,239,000 18.49% $ 2,214,800 or equal to 4.0% $ 3,322,100 or equal to 6.0%
Tier I Capital (to greater than greater than
Average Assets) ..... $10,239,000 11.23% $ 3,647,000 or equal to 4.0% $ 4,558,800 or equal to 5.0%
</TABLE>
NOTE Q - CONDENSED FINANCIAL DATA
The following is the condensed financial data for Delta National Bancorp
(parent company only):
BALANCE SHEETS
December 31,
ASSETS
1996 1995
----------- -----------
Cash ............................................... $ 76,408 $ 42,426
Investment in subsidiary ........................... 10,239,942 9,399,721
Property and equipment, net ........................ 273,747 284,097
----------- -----------
$10,590,097 $ 9,726,244
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities ........................................ $ -- $ --
Stockholders' equity ............................... 10,590,097 9,726,244
----------- -----------
$10,590,097 $ 9,726,244
=========== ===========
<PAGE>
NOTE Q - CONDENSED FINANCIAL DATA - CONTINUED
STATEMENTS OF EARNINGS
Year ended December 31,
1996 1995 1994
---------- ---------- ----------
Income
Interest .............................. $ 1,233 $ 943 $ 2,487
Rent .................................. 86,226 83,698 74,800
Other ................................. 240 475 315
---------- ---------- ----------
87,699 85,116 77,602
---------- ---------- ----------
Expenses
General and administrative ............ 73,270 31,049 28,513
Depreciation .......................... 10,350 10,350 10,350
---------- ---------- ----------
83,620 41,399 38,863
---------- ---------- ----------
Earnings before income taxes
and equity in earnings of
subsidiary ...................... 4,079 43,717 38,739
Income tax expense ...................... 1,700 18,000 16,000
---------- ---------- ----------
2,379 25,717 22,739
Equity in earnings of
Delta National Bank ................... 1,125,221 834,160 798,658
---------- ---------- ----------
NET EARNINGS ............................ $1,127,600 $ 859,877 $ 821,397
========== ========== ==========
<PAGE>
NOTE Q - CONDENSED FINANCIAL DATA - CONTINUED
STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net earnings ................................. $ 1,127,600 $ 859,877 $ 821,397
Adjustment to reconcile net earnings
to net cash provided by operating activities
Provision for depreciation and
amortization ........................... 10,350 10,350 10,350
(Decrease) increase in accrued expenses
and other liabilities .................. -- (55,546) 16,179
Undistributed earnings of subsidiary ..... (1,125,221) (834,160) (798,658)
----------- ----------- -----------
Net cash provided by (used in)
operating activities ................. 12,729 (19,479) 49,268
Cash flows from investing activities:
Cash dividends from subsidiary ............... 285,000 290,000 87,500
----------- ----------- -----------
Net cash provided by
investing activities ................. 285,000 290,000 87,500
Cash flows from financing activities:
Cash dividends ............................... (263,747) (263,747) (263,747)
----------- ----------- -----------
Net cash used in financing activities .. (263,747) (263,747) (263,747)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents ............................. 33,982 6,774 (126,979)
Cash and cash equivalents at beginning of year .... 42,426 35,652 162,631
----------- ----------- -----------
Cash and cash equivalents at end of year .......... $ 76,408 $ 42,426 $ 35,652
=========== =========== ===========
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Delta National Bancorp
We have audited the accompanying consolidated balance sheets of Delta National
Bancorp and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company'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 consolidated financial position of Delta National
Bancorp and Subsidiary as of December 31, 1996 and 1995, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Grant Thornton, LLP
Stockton, California
January 27, 1997
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There were no changes in or disagreements with accountants on accounting and
financial disclosures during the fiscal years ending December 31, 1996 and 1995.
DIRECTORS & EXECUTIVE COMPENSATION
Identification of directors: The names of each director of the Company and
certain information about them, is set forth below:
- --------------------------------------------------------------------------------
Director
Director Age Principal Occupation Since
- --------------------------------------------------------------------------------
Andrew J. Rossi 65 President and Chief Executive 1973
Officer - Delta National Bank
(Executive Officer)
President - A. Rossi, Inc.
Jack Dozier 81 Attorney - Atherton & Dozier 1976
Joseph A. Freitas 70 Secretary to the Board 1973
Public Relations-Delta National Bank
- Retired 1991
Theodore Poulos 69 Chairman of the Board - Delta National Bank 1973
Public Relations - Delta National Bank
President - Manteca Drug, Inc.
- Retired 1994
Toinette Rossi 39 Vice President & Manager 1994
Delta National Bank (Executive Officer)
- --------------------------------------------------------------------------------
Each of the directors has been engaged in his/her principal occupation set forth
above during the past five years.
Identification of executive officers: The names of each executive officer of the
Company not already listed in the table above and certain information about
them, is set forth below:
- --------------------------------------------------------------------------------
Executive Principal Occupations Period
Officer Age with Delta National Bank Served
- --------------------------------------------------------------------------------
Warren E. Wegge 48 Executive Vice President 1994
Senior Vice President/Credit Administrator 1991
Vice President/Corporate Banking Officer 1988
Chad B. Meyer 43 Senior Vice President/Credit Administrator 1994
Vice President/Corporate Banking Officer 1991
Ronald P. Dalben 40 Vice President (Investment Officer & Appraiser) 1987
Various other positions 1980
Barbara Jordan 55 Vice President/Operations 1992
Assistant Vice President/Operations 1990
Various other positions 1983
Eileen Pastenieks 35 Vice President/Accounting 1994
Assistant Vice President/Note Dept. 1993
Operations Officer 1990
- --------------------------------------------------------------------------------
<PAGE>
Family relationships: Except for Andrew Rossi and Toinette Rossi, who are
related to each other, there are no other family relationships between any other
director or executive officer of the Company.
Directorships: The following individuals hold other directorships as indicated
below:
- --------------------------------------------------------------------------------
DIRECTOR/EXECUTIVE OFFICER OTHER DIRECTORSHIPS HELD
- --------------------------------------------------------------------------------
Theodore Poulos Doctors Hospital of Manteca
Virotest, PLC
Manteca District Ambulance
Joseph A. Freitas Manteca Boys & Girls Club
Jack C. Dozier Cal Cedar Products
Duraflame, Inc.
Rylock Ltd.
Cal Mills
- --------------------------------------------------------------------------------
Involvement in certain legal proceedings: None of the directors or executive
officers named above have been involved in certain legal proceedings.
<PAGE>
EXECUTIVE COMPENSATION
Director Compensation Table: The following table sets forth information
concerning compensation for Directors in 1996. (See "Summary Compensation
Table" for additional information on Executive Officers)
- --------------------------------------------------------------------------------
Annual
BCORP Bank
Director Director Committee
Name Fees Fees Fees (1) Other (2)
- --------------------------------------------------------------------------------
Andrew J. Rossi ...........$ 5,800 $ -- $ -- $ --
Jack Dozier ............... 5,800 7,200 -- --
Joseph A. Freitas ......... 5,800 7,200 -- --
Theodore Poulos ........... 5,800 7,200 15,600 25,800
Toinette Rossi ............ 5,800 -- -- --
- --------------------------------------------------------------------------------
(1) Finance Committee Annual Fee
(2) Salary from Bank $24,000 for Public Relations and Past Due Meetings $1,800
Summary Compensation Table: The following table shows, as to the Chief
Executive Officer and each of the four other most highly compensated executive
officers, information concerning compensation for services to the Company in
all capacities. (Also see "Director Compensation Table")
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Club or
Name and Organization Profit
Principal Bonus ($) Automobile Membership Sharing Plan
Position Year Salary ($) (1) Use Fees (2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Andrew J. Rossi ..... 1996 $127,627 $ 45,000 $ 2,255 $ 2,262 $ 36,656
President and Chief 1995 112,000 10,000 1,500 2,300 13,944
Executive Officer 1994 100,000 -- -- -- 4,081
1993 88,860 10,000 -- -- 3,897
Warren E. Wegge ..... 1996 $ 84,194 $ 21,000 $ -- $ -- $ 23,108
Executive Officer 1995 78,000 13,500 -- -- 9,680
1994 65,460 2,500 -- -- 2,397
1993 60,660 7,595 2,200
Chad B. Meyer ....... 1996 $ 64,341 $ 13,000 $ -- $ -- $ 11,793
Senior Vice 1995 62,400 6,750 -- -- 6,086
President/Credit 1994 60,000 1,000 -- -- 775
Administrator 1993 53,400 4,716 -- -- 603
Toinette Rossi ...... 1996 $ 61,690 $ 14,495 $ -- $ -- $ 28,552
Vice President & 1995 60,000 5,316 -- -- 9,577
Manager 1994 57,600 1,822 -- -- 3,970
1993 54,780 1,480 -- -- 3,913
- --------------------------------------------------------------------------------------------------
<FN>
(1) 1996 Bonuses were actually paid in 1996 for services rendered in 1996
(2) Profit Sharing
</FN>
</TABLE>
<PAGE>
During 1996, the Company's Board of Directors approved a fixed stock option
plan. The plan allows the Company to grant incentive and non-qualifed stock
options to key employees and directors for up to 113,035 shares of common stock.
The options have a term of ten years when issued and vest immediately. The
exercise price of each option is greater than or equal to the fair market value
of the Company's stock on the date of grant. The following table represents the
options granted in the last fiscal year:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable Value
----------------------------------------------------------------------------------------
No. of Percentage Exercise Grant Date
Options of Total Price Expiration Present
Name Granted Options ($/sh) Date 5% ($) 10% ($) Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Andrew Rossi (1) 37,679 46.9% $ 28.00 03/18/06 $1,107,763 $1,160,513 $1,055,012
Theodore Poulos 15,437 19.3% 26.00 03/18/06 421,430 441,498 401,362
Jack Dozier 6,051 7.5% 26.00 03/18/06 165,192 173,059 157,326
Toinette Rossi 3,151 3.9% 26.00 03/18/06 86,022 90,119 81,926
Joseph Freitas 13,037 16.2% 26.00 03/18/06 355,910 372,858 338,962
Warren Wegge 5,000 6.2% 26.00 03/18/06 136,500 143,000 130,000
- ------------------------------------------------------------------------------------------------------------
Total 80,355 100%
- ------------------------------------------------------------------------------------------------------------
<FN>
(1) Excercise price is 110% of FV because ownership is greater than 10%. If
Andrew is granted options under the incentive plan the term is 5 years,
not 10 years.
</FN>
</TABLE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANAGEMENT
The following table sets forth as of December 31, 1996 information relating to
the beneficial owners of the Company's Common Stock by each person known by the
Company to be the beneficial owner of more than five percent (5%) of the
outstanding shares of Common Stock.
- --------------------------------------------------------------------------------
Total Shares Percent of
Name Address Owned Class
- --------------------------------------------------------------------------------
Andrew J. Rossi 611 North Main St. 94,704 25.14%
Manteca, CA 95336
The Cede & Co. (Nominee of the P. O. Box 222 22,694 6.02%
Depository Trust Company) New York, New York
10041
- --------------------------------------------------------------------------------
<PAGE>
Common Stock Ownership of Directors and Executive Officers: The following table
reflects shares of Common Stock beneficially owned by each director of the
Company, each of the executive officers named in the Summary Compensation Table
appearing elsewhere herein, and by all directors and executive officers as a
group, as of December 31, 1996.
- --------------------------------------------------------------------------------
Direct Indirect Total Approx.
Shares Shares Shares Percent.
Name Position Owned Owned Owned Owned
- --------------------------------------------------------------------------------
Jack C. Dozier ........Director 5,190 -- 5,190 1.38%
Joseph A. Freitas .....Director 11,566 -- 11,566 3.07%
Theodore Poulos .......Chairman of the
Board/Director 12,100 1,142 13,242 3.52%
Andrew J. Rossi (1) ...President &
CEO/Director 75,539 19,165 94,704 25.14%
Toinette Rossi ........V.P. & Manager/
Director 3,296 -- 3,296 less than 1%
Warren E. Wegge .......Executive Vice
President 130 -- 130 less than 1%
Ronald P. Dalben ......Vice President 100 -- 100 less than 1%
- --------------------------------------------------------------------------------
All directors and executive
officers as a group: 128,228 34.03%
- --------------------------------------------------------------------------------
(1) Indirect 5.09% of class
Direct 20.05% of class
CERTAIN RELATIONSHIPS & RELATED PARTIES
In 1996, the Bank renewed an extension of credit to Joseph A. Freitas, Director
of the Company, in the amount of $13,055. As of December 31, 1996, the principal
balance owing was $6,635. This loan bears interest at the a fixed rate of 7.75%
and is due to mature on April 21, 1997. The loan is collateralized by a
certificate of deposit. In addition, the Bank funded a secured loan of $30,000
at a fixed rate of 8%. As of December 31, 1996, the principal balance owing was
$29,293. The loan matures April 3, 1997.
In 1996, the bank funded a loan to Melissa Braun, granddaughter of Joseph
Freitas, Director of the Company, in the amount of $10,000. The loan has a fixed
rate of 8% and is secured by a certificate of deposit. The balance owing at
December 31, 1996 was $9,552 and is scheduled to mature July 2, 1997.
In 1994, the Bank funded an unsecured loan to Linda Abeldt, daughter of Joseph
Freitas, Director of the Company, in the amount of $12,000. In 1995, the Bank
funded an additional unsecured loan in the amount of $9,000. The two loans bear
interest at a fixed rate of 7% and 10%, respectively. As of December 31, 1996,
the principal balance owing was $5,550 and $6,386, respectively on the two
loans. The loans are scheduled to mature on January 25, 1999 and March 22, 2000,
respectively.
In 1991, the Bank extended credit to Valerie Salas, daughter of Andrew Rossi,
President, Chief Executive Officer and Director of the Company, and sister of
Toinette Rossi, Vice President/Manager and Director of the Company, in the
amount of $16,595. At December 31, 1996, the principal balance owing was $4,263.
The loan is unsecured and bears interest at a fixed rate of 13%. The loan
matures on April 23, 1997.
In 1996, the Bank renewed an unsecured line of credit to John Rossi, son of
Andrew Rossi, President, Chief Executive Officer and Director of the Company,
and brother of Toinette Rossi, Vice President/Manager and Director of the
Company, in the amount of $303,250. On December 31, 1996, there was no principal
balance owed. This loan bears interest at the Bank's reference rate plus 2.5%
and is scheduled to mature on November 27, 1997. John Rossi is also a guarantor
on a small installment loan with a current balance of $1,388. The rate on this
loan is fixed at l4.75% and is scheduled to mature March 14, 1997.
<PAGE>
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
(a) 1. Financial Statements: Delta National Bancorp and Subsidiary
See Item 8 for a listing of all financial statements.
2. Financial Statement Schedules
Additional Supplementary Data not included in this section
have been omitted because the information required has been
included in the financial statements or notes thereto or are
not applicable or not required.
3. Exhibits
Registrant's Articles of Incorporation and Bylaws are
furnished by way of incorporation by reference to Exhibit 3 to
registrant's registration statement on Form S-14, as filed
under the Securities Act of 1933 on Sept. 10, 1982 and
declared effective on Oct. 8, 1982.
Plan of Reorganization and Agreement of Merger is furnished by
reference to registrant's Form S-14 as filed under the
Securities Act of 1933 on September 10, 1982 and declared
effective on October 8, 1982.
(b) Reports on Form 8-K
The registrant did not file any reports on Form 8-K during
the ended December 31, 1996.
<PAGE>
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 by the undersigned, thereunto duly authorized.
DELTA NATIONAL BANCORP
(Registrant)
By: /s/ Andrew Rossi
President and Chief Executive
Officer/Director
March 14, 1997
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 indicated capacities, on March 14, 1997.
/s/ Andrew Rossi /s/ Theodore Poulos
Andrew Rossi Theodore Poulos
President and Chairman of the Board
Chief Executive Officer and Director
and Director
(Principal Executive Officer)
/s/ Joseph Freitas /s/ Eileen Pastenieks
Joseph Freitas Eileen Pastenieks
Secretary of the Board and Staff Vice President/
Director Accounting
(Principal Accounting Officer)
/s/ Warren Wegge /s/ Toinette Rossi
Warren Wegge Toinette Rossi
Executive Vice President Vice President and Manager
and (Principal Financial Officer) Director
<TABLE> <S> <C>
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<PERIOD-END> DEC-31-1996
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<FED-FUNDS-SOLD> 7600
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<INVESTMENTS-HELD-FOR-SALE> 10350
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