UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996Commission File No. 33-8743
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from.......................................
to.............................................
Orange National Bancorp
(Exact Name of Registrant as Specified in Charter)
California
(State or Other Jurisdiction of Incorporation or
Organization)
33-0190684
(I.R.S. Employer Identification No.)
1201 E. Katella Avenue
Orange, California
(Address of Principal Executive Offices)
92867
(Zip Code)
Registrant's telephone number, including area code
(714) 771-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on
Which Registered
None
None
Securities registered pursuant to Section 12(g)
of the Act:
Common Stock
(Title of Class)
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 periods that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of January 31,1997, the aggregate market value of the voting shares held by
nonaffiliates of the Registrant was approximately $17,704,115. The aggregate
market value of the voting shares held by nonaffiliates includes all
stockholders except officers and directors and was computed based on a
market price which resulted from a recent trade.
1,958,296 Shares of Common Stock were outstanding at March 14, 1997.
<PAGE> DOCUMENTS INCORPORATED BY REFERENCE
Document Incorporated
Part of Form 10-K
into which incorporated
Definitive Proxy Statement for the Annual Meeting
of Stockholders to be filed within 120 days of the
fiscal year ended December 31, 1996
Part III
<PAGE> TABLE OF CONTENTS
PART I
ITEM Page
1. Business 4-20
2. Properties 20
3. Legal Proceedings 20
4. Submissions of Matters to a Vote of Security Holders 20
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters21
6. Selected Financial Data 21
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 22-27
8. Financial Statements and Supplementary Data 27
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures 27
PART III
10. Directors and Executive Officers of the Registrant28
11. Executive Compensation 28
12. Security Ownership of Certain Beneficial Owners and Management28
13. Certain Relationships and Related Transactions 28
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K29
Signatures 30-31
Index to Exhibits 32
<PAGE> PART I.
ITEM 1. BUSINESS
General
Orange National Bancorp (the "Bancorp") was organized and incorporated under
the laws of the State of California on July 28, 1986, at the direction of the
Board of Directors of Orange National Bank (the "Bank") and for the purpose
of becoming a bank holding company to acquire all the outstanding capital
stock of the Bank. The principal location of the Bancorp and its
operations is at the head office of the Bank located at 1201 East Katella
Avenue, Orange, CA 92867. On January 16, 1987, with the approval of the
Comptroller of the Currency and the Federal Reserve Bank of San Francisco, the
Bank became a wholly-owned subsidiary of the Bancorp, and the Bancorp commenced
operations as a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended, and became subject to the supervision and
regulation of the Board of Governors of the Federal Reserve System.
Substantially all consolidated operating income and net income is presently
derived from banking related activities. For the foreseeable future, it is
expected that such banking related activities will continue to represent the
Bancorp's primary source of operating income and net income. In 1992, the
Bancorp formed a new subsidiary to perform mortgage brokerage services.
In 1993, the Company began mortgage banking operations including
origination, sale and servicing of mortgage loans. During 1994, the Company
ceased its mortgage banking operations and there were no gains or losses on
the disposal of the Segment. The Bank was organized and chartered as a
national banking association on October 31, 1979 and opened for business on
the same date. The Bank currently has six offices. Its head office is
located at 1201 East Katella Avenue, Orange, California 92867 and the five
branch offices are located at 77 Plaza Square, Orange, California 92866; 2019
West Orangewood Avenue, Orange, California 92868; 7510 East Chapman Avenue,
Orange, California 92869; 800 Glenneyre Road, Laguna Beach, California
92651; and 25255 Cabot Road, Laguna Hills, California 92653. Additional
administration offices are located at 2117 West Orangewood Avenue, Orange,
California 92868 and at 115 and 274 North Glassell Street, Orange,
California 92866.
Narrative Description of Business
The Bancorp is engaged in the ownership of one commercial bank. During 1993
and 1994 the Bancorp was involved in mortgage banking operations. These
operations were discontinued in 1994. The Bancorp does not consider its
business to be seasonal nor is any material part of the business of the
Bancorp and its subsidiaries dependent upon a single customer or a few
customers and the loss of any one customer would not have a material adverse
effect upon the Bancorp or its subsidiary. Neither the Bancorp nor its
subsidiary are engaged in operations outside the United States or derive a
portion of revenues from customers located outside of the United States.
The Bank offers a full range of commercial banking services, including the
acceptance of demand, savings and time deposits, and the making of commercial,
real estate, Small Business Administration, personal, home improvement,
automobile, and other installment and term loans. It also offers travelers'
checks, safe deposit boxes, notary public, international banking, and other
customary bank services to its customers, except trust services. The
Bank's lobby is open from 9:00 a.m. to 5:00 p.m., Monday through Thursday,
and 9:00 a.m. through 6:00 p.m. on Friday. In addition, drive-up services are
available at the Bank's main office. The Bank is insured by Federal Deposit
Insurance Corporation and is a member of the Federal Reserve System.
<PAGE>
Narrative Description of Business (Continued)
The Bank currently does not issue VISA or MASTERCARD credit cards but honors
merchant drafts under both types of cards, and its customers are offered
MASTERCARD and VISA credits cards through one of its correspondent banks. In
addition, although management of the Bank believes there is a need for trust
services in its service area, the Bank does not operate or have any present
intention to seek authority to operate a trust department since management
of the Bank believes that the costs of establishing and operating such a
department would not be justified by the potential income to be gained
therefrom.
The three general areas in which the Bank has directed virtually all of its
lending activities are (I) commercial loans, (ii) loans to individuals, and
(iii) residential, commercial, and construction real estate loans. As of
December 31, 1996, these three categories accounted
for approximately 36.9%, 8.5%, and 54.5%, respectively, of the Bank's loan
portfolio. The Bank's commercial loans are primarily to small and medium sized
businesses and are for terms ranging primarily from 30 days to 5 years, with
the majority of loans being due within one year. Consumer installment
loans are for a maximum term of 48 months for unsecured loans and for a term
of the depreciable life of tangible property used as collateral for
secured loans. Commercial real estate loans are generally for terms of up to
5 years. Approximately 80% of loans are written with variable interest rates.
As of December 31, 1996, the Bank has total unused loan and credit commitments
of $28,358,000 of which $1,907,000 were standby letters of credit and
$26,457,000 were commitments to grant loans. The Bank presently has sufficient
liquidity to fund all loan commitments.
Although the loan portfolio is diversified, some loans and loan commitments
are unsecured. As of December 31, 1996, the Bank is the creditor for
approximately $2.8 million of loans to companies or individuals and
approximately $6.7 million in loan commitments which are
unsecured. The Bank's policy for requiring collateral is to obtain collateral
whenever it is available or desirable, depending upon the degree of risk the
Bank is willing to undertake.
The Bank's deposits are attracted primarily from individuals and commercial
enterprises. The Bank also attracts some deposits from municipalities and
other government agencies. The Bank does not have nor does it anticipate
originating any brokered deposits.
As of December 31, 1996, the Bank had approximately $77.8 million in total
noninterest bearing demand deposits, $10.9 million in savings, $17.4 million
in time deposits for individuals and corporations, and $92.2 million in NOW and
money market accounts.
As of December 31, 1996, the Bank had total deposits of approximately
$198.4 million. This total accounted for approximately 13% of the total
deposits in the City of Orange and surrounding service area, and
approximately 1% of the total deposits in the Laguna Beach area.
The principal source of the Bank's income are interest and fees and other
charges from the Bank's loan portfolio and interest income on the Bank's
investments. For 1996, these sources comprised approximately 62.9% and
22.5%, respectively, of the Bank's total income for this period. The
remaining significant sources of income are from fees on deposit accounts
and other customer services.
<PAGE>
Distribution of Assets, Liabilities, and Stockholders' Equity
The following schedule shows the average balance of the Bancorp's assets,
liabilities, and stockholders' equity accounts and the percentage distribution
of the items, computed using the average daily balances for the periods
indicated. Percentages indicated below are percentages of total average
assets. (In thousands of dollars, except percent amounts.):
<TABLE>
<CAPTION>
Years Ended December 31,
ASSETS 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Cash and due from banks $20,415 9.4% $19,679 9.5% $18,934 9.8%
Interest bearing deposits at financial institutions
0 0 0 0 2 0
Securities 44,937 20.7 43,073 20.8 32,960 17.0
Federal funds sold 29,725 13.7 20,372 9.9 19,944 10.3
Loans 109,802 50.7 114,820 55.4 114,718 59.3
Less allowance for credit losses
(1,487) (0.7) (1,601) (0.7) (1,562) (0.8)
Net loans 108,315 50.0 113,219 54.7 113,156 58.5
Bank premises and equipment, net
5,382 2.5 5,483 2.7 5,492 2.8
Other assets 7,998 3.7 5,101 2.4 3,143 1.6
TOTAL ASSETS 216,772 100% $206,927 100.0% $193,631 100.0%
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing, demand
$67,662 31.2% $64,372 31.1% $59,628 30.8%
Market rate and money market, demand
101,562 46.9 99,182 47.9 90,734 46.9
Savings 12,420 5.7 13,474 6.5 14,229 7.3
Time 15,969 7.4 12,511 6.1 13,650 7.1
Total deposits197,613 91.2 189,539 91.6 178,241 92.1
Other liabilities 1,381 0.6 1,286 0.6 869 0.4
Total liabilities
198,994 91.8 190,825 92.2 179,110 92.5
Stockholders' equity:
Common stock 7,594 3.5 7,109 3.4 6,848 3.5
Retained earnings 10,184 4.7 8,993 4.4 7,673 4.0
Total stockholders' equity
17,778 8.2 16,102 7.8 14,521 7.5
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
$216,772 100% $206,927 100.0% $193,631 100.0%
</TABLE>
<PAGE>
Interest Income Rates
Certain information concerning average interest-earning assets and yields
thereon is set forth in the following chart. Amounts outstanding are the
average daily balances for the respective periods. Yields and amounts
earned include loan origination fees. Non-accrual loans have been included for
the purposes of this analysis. Tax exempt income is not presented on a tax
equivalent basis as the amounts are not material. (In thousands of dollars,
except percent amounts.):
<TABLE>
<CAPTION>
Years Ended December 31,
Category 1996 1995 1994
<S> <C> <C> <C>
Interest bearing deposits at financial institutions:
Average outstanding $- $- $2
Average yield - - -
Amount of interest earned - - -
Securities:
Average outstanding $44,937 $43,073 $32,960
Average yield 5.85% 5.74% 4.87%
Amount of interest earned $2,627 $2,471 $1,606
Federal funds sold:
Average outstanding $29,725 $20,372 $19,944
Average yield 5.23% 5.63% 4.12%
Amount of interest earned $1,555 $1,146 $822
Net loans:
Average outstanding $108,315 $113,219 $113,156
Average yield 10.81% 11.44% 10.15%
Amount of interest and
fees earned $11,712 $12,954 $11,480
Total earning assets:
Average outstanding $182,977 $176,664 $166,062
Average yield 8.69% 9.38% 8.38%
Amount of interest earned $15,894 $16,571 $13,908
</TABLE>
<PAGE>
Interest Expense Rates
The following table sets forth the Bancorp's amount of savings and time
deposits and other borrowings and the average rate paid on such deposits and
borrowings for the periods indicated. (In thousands of dollars, except percent
amounts.) Amounts outstanding are the average daily balances outstanding for
the respective periods:
<TABLE>
<CAPTION>
Category Years Ended December 31,
<S> <C> <C> <C>
1996 1995 1994
Market rate and money market deposits(1)
Average outstanding $101,562 $99,182 $90,734
Average rate paid 2.47% 2.34% 2.01%
Amount of interest paid or accrued
$2,510 $2,325 $1,826
Savings:
Average outstanding $12,420 $13,474 $14,229
Average rate paid 2.00% 1.98% 2.00%
Amount of interest paid or accrued
$249 $267 $285
Time:
Average outstanding $15,969 $12,511 $13,650
Average rate paid 4.76% 4.39% 2.90%
Amount of interest paid or accrued
$760 $549 $396
Total interest-bearing liabilities:
Average outstanding $129,951 $125,167 $118,613
Average rate paid 2.71% 2.51% 2.11%
Amount of Interest paid or accrued
$3,519 $3,141 $2,507
(1) Market rate and money market deposits include only interest-bearing
transaction accounts.
Net Yield on Interest- Earning Assets
6.76% 7.60% 6.87%
</TABLE>
<PAGE>
Rate/Volume Analysis of Net Interest Income
The following table sets forth the cause and amounts of change in interest
earned and paid for the periods indicated (In thousands of dollars):
<TABLE>
<CAPTION>
1996 over 1995 (1) 1995 over 1994 (1)
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Interest income:
Investment securities 107 49 156 493 372 865
Federal funds sold 527 (118) 409 18 306 324
Net loans (561) (681) (1,242) 6 1,468 1,474
Total earning assets $73 $(750) $(677) $517 $2,146 $2,663
Interest expense:
Market rate and money market deposits
$56 $129 $185 $170 $329 $499
Savings deposits (21) 3 (18) (15) (3) (18)
Time deposits 152 59 211 (33) 186 153
Total Interest-bearing liabilities
$187 $191 $378 $122 $512 $634
</TABLE>
(1) The variance not solely due to rate or volume is allocated to the rate
variances. Non-accrual loans have been included for the purpose of this
analysis. Loan fees of approximately $1,037,000 for 1996, $1,089,000 for 1995,
and $1,153,000 for 1994 have been included for purposes of this analysis. Tax
exempt income is not presented on a tax equivalent basis as the amounts are
not material.
<PAGE>
Securities
The Bank's Board of Directors reviews all securities transactions on a
monthly basis. There are no securities from a single issuer other than
securities of the U.S. Government, Agencies and corporations whose aggregate
market value is greater than 10% of stockholders' equity. The
following schedule summarizes the amounts and the distribution of the Bank's
securities held to maturity as of the dates indicated (in thousands of
dollars)
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
Amortized Market Amortized Market Amortized Market
Cost (1) Value Cost (1) Value Cost (1) Value
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
$10,937 $10,844 $12,479 $12,421 $12,857 $11,745
U.S. Treasury securities and obligations of
other U.S. Government agencies and corporations
-0- -0- -0- -0- 8,873 8,649
Other 174 174 174 174 174 174
Total $11,111 $11,018 $12,653 $12,595 $21,904 $20,568
(1) Securities held to maturity are stated at cost as disclosed in the notes to
financial statements, adjusted for amortization of premium and accretion of
discount.
The securities classified as available for sale as of the dates indicated
are as follows (in thousands of dollars):
December 31,
1996 1995 1994
Amortized Market Amortized Market Amortize Market
Cost Value(2) Cost Value(2) Cost Value(2)
U.S. Treasury securities and obligations of other U.S.
Government agencies and corporations
$28,992 $28,899 $24,984 $24,914 $15,940 $15,377
Mortgage-backed securities
-0- -0- 2,018 1,994 4,024 3,871
Total $28,992 $28,899 $27,002 $26,908 $19,964 $19,248
</TABLE>
(2) Securities available for sale are stated at market value with unrealized
gains and losses being reported as an adjustment to stockholders' equity net of
the related tax effect. None of the mortgage-backed securities are classified as
"high risk" by the Bank's regulators.
On March 31, 1994, the Company transferred certain securities from available for
sale to held to maturity. The amortized cost and fair value of the securities
at date of transfer were $5,972,000 and $5,701,000, respectively. Amortized
cost of held to maturity securities is presented net of approximately
$111,000 of unrealized loss on the securities transferred from available for
sale.
On December 29, 1995 the Company reassessed the appropriateness of the
classification of all securities in accordance with the issuance of Financial
Accounting Standards Board Guide to Implementation of Statement No. 115 on
Accounting for Certain Investments in Debt and Equity Securities. As a
result, the Company transferred debt securities at their fair value of
$4,995,483 on December 29, 1995 previously classified as held-to-maturity into
available-for-sale securities and recorded an unrealized holding loss of
$3,827.
<PAGE>
Maturity of Investment Securities
The following table summarizes the maturity of the Bancorp's and Bank's
securities and weighted average yield as of December, 31 1996 (in thousands of
dollars, except percent amounts):
<TABLE>
<CAPTION>
Principal Amount Book Value (1) Average Yield (2)
<S> <C> <C> <C>
Mortgage-backed securities (3)
$11,038 $10,937 $5.38%
U.S. Treasury Securities and obligations of U.S. Government
Agencies and corporations:
Due within one year 4,000 4,005 5.66%
Due after one year but within
five years 25,000 24,894 6.50%
Other 174 174 5.86%
Total Securities $40,212 $40,010 6.11%
</TABLE>
(1) Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts, securities available for
sale are recorded at quoted market values.
(2) Weighted average yield is the yield on the book value of the
security computed on the coupon rate and amortization of premium and accretion
of discount.
(3) Mortgage-backed securities are not scheduled for maturities due
to the periodic principal payments received and unknown amount of expected
prepayments.
<PAGE>
Loan Portfolio
A major part of the Bank's objective is serving the legitimate credit needs of
clientele in central Orange County and surrounding areas. Credit decisions
have been based upon the best judgement of the Bank's lending personnel, giving
full recognition to the needs and limitations of the Bank due to its size and
staff. Legal lending limits to each customer are restricted to a percentage
of the Bank's total stockholders' equity, the exact percentage
depending upon the nature of the particular loan and the collateral involved.
Credit risk is inherent to any loan portfolio and it is the management of
this risk which defines the quality of the portfolio. The Bank has a highly
diversified portfolio and a loan review procedure which management believes
serves to minimize the possibility of material loss.
The allowance for credit losses is established through a provision for credit
losses charged to expense. Loans are charged against the allowance for credit
losses when management believes that collectibility of the principal is
unlikely. The allowance is an amount that management believes will be
adequate to absorb estimated losses on existing loans that
may become uncollectible, based on evaluation of the collectibility of loans
and prior loan loss experience. This evaluation also takes into consideration
such factors as changes in the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem loans, and current
economic conditions that may affect the borrower's ability to pay. While
management uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant
changes in economic or other conditions. In addition, the Office of the
Comptroller of the Currency (OCC), as an integral part of their examination
process, periodically reviews the Company's allowance for credit losses, and
may require the Company to make additions to the allowance based on
their judgment about information available to them at the time of their
examinations.
A loan is impaired when it is probable the creditor will be unable to collect
all contractual principal and interest payments due in accordance with terms of
the loan agreement. Impaired loans 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. The
amount of impairment, if any, and any subsequent changes are included in the
allowance for credit losses.
<PAGE>
Types of Loans
The types of the Bank's total loans (all domestic) as of the
dates indicated are shown in the following table (in thousands of dollars,
except percent amounts):
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
Real estate, mortgage (includes only
loans secured primarily by real estate $64,124 53.3% $61,084 53.5% $61,345 53.7% $64,310 55.9% $61,816 52.1%
Mortgage loans held for sale - - - - - - 2,050 1.8% - -
Real estate, construction 1,401 1.2 242 0.2% 2,286 2.0% 3,473 3.0% 7,097 6.0%
Commercial and industrial 44,428 36.9 41,361 36.2% 40,976 35.9% 34,376 29.8% 38,432 32.4%
Loans to individuals 10,255 8.5 10,343 9.1% 9,384 8.2% 10,127 8.8% 10,455 8.8%
Other 152 0.1 1,207 1.0% 177 0.2% 858 0.7% 890 0.7%
TOTAL LOANS $120,360 100% $114,237 100% $114,168 100%$115,194 100% $118,690 100%
Less allowance for credit losses (1,369) (1,513) (1,465) (1,524) (1,425)
TOTAL NET LOANS $118,991 $112,724 $112,703 $113,670 $117,265
</TABLE>
Included in the loans above are approximately $2,836,000, $4,753,000,
$3,743,000, $4,236,000 and $4,037,000 from companies or individuals
which are unsecured as of December 31, 1996,1995,1994, 1993 and 1992,
respectively.
<PAGE>
Loan Maturities and Sensitivity to Changes in Interest Rates
The following table (in thousands of dollars) sets forth the
maturity distribution of the Bank's total net loans by category as of
December 31 1996. In addition, the table shows the distribution between
those loans with predetermined (fixed) interest rates and those with
variable (floating) interest rates. Floating rates generally fluctuate with
changes in the Bank's interest cost:
<TABLE>
<CAPTION>
Within one After one but After
year (1) within five five years
years
<S> <C> <C> <C>
Commercial and industrial 15,625 7,976 21,164
Real estate construction 1,412 - -
Distribution between fixed and floating
interest rates after one year:
Fixed interest rates 265 582
Floating interest rates 7,711 20,582
</TABLE>
The above maturity schedule does not include $348,000 of unearned net loan
fees and premiums.
(1)Demand loans and overdrafts are shown as "within one year" and scheduled
Repayments are reported in the maturing periods in which the final payments
are due.
Credit Risk Management
In managing its loan portfolio, the Bank utilizes procedures
designed to assure acceptable quality and to bring any potential losses or
potential defaults in existing loans to the attention of the appropriate
management personnel. Each lending officer has primary responsibility to
conduct credit and documentation reviews of the loans for which he is
responsible. The Bank's Senior Vice President and Senior Credit Officer are
responsible for general supervision of the loan portfolio and adherence by the
loan officers to the loan policy of the Bank. The Bank has an outside
consulting firm to periodically review the loan portfolio to provide
suggested risk rating of the loans. Bank management reviews the suggested
ratings along with all other available information to properly monitor the loan
portfolio.
In accordance with the Bank's policies, management presents a
written report to the Bank's Board of Directors at the monthly Board of
Directors meeting. The Directors review the list of all loans which are
30 days or more past due and the loans on the Bank's watch list which
include loans having increased credit risk over the rest of the portfolio.
Additionally, the report includes a listing of all loans made the prior month.
Management and the Board of Directors also review all loan evaluations made
during periodic examinations by the Officer of the Comptroller of the Currency.
<PAGE>
Credit Risk Management (continued)
As previously noted, the Bank maintains an allowance for credit losses to
provide for losses in the loan portfolio. Additions to the allowance for
credit losses are made by charges to operating expenses in the form of a
provision for possible credit losses. All loans which are judged to be
uncollectible are charged against the allowance while any recoveries are
credited to the allowance. The allowance for credit losses is maintained at a
level determined by management to be adequate, based on the performance of
loans in the Bank's portfolio, evaluation of collateral for such loans, the
prospects or worth of the prospective borrowers or guarantors, and such
other factors which, in the Bank's judgement, deserve consideration in the
estimation of possible losses. The allowance for credit losses is
established and maintained after analyzing loans identified by management
with certain unfavorable feature affixing a risk of loss attributable to each
loan. An inherent risk of loss in accordance with industry standards and
economic conditions is then allocated to specific loan pools and to the
remainder of the portfolio on an aggregate basis.
The following table sets forth information with respect to
loans which were accounted for on a non-accrual basis or contractually past
due 90 days or more as to interest or principal payments, or restructured
(in thousands of dollars):
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans on non-accrual basis $2,464 $3,055 $3163 $2,744 $3,100
Loans past due 90 days or more and still
accruing interest 7 33 158 46 958
Troubled debt restructuring, and not included above
-0- -0- -0- -0- -0-
Total $2,471 $3,088 $3,321 $2,790 $4,058
</TABLE>
If all such loans had been current in accordance with their original
terms during the year ended December 31, 1996, approximately $624,000 would
have been the gross interest income. The amount of interest income included
in income on these non-accrual loans during the year ended December 31, 1996
was approximately $132,000.
Loans are generally placed on non-accrual status when principal
or interest payments are past due 90 days or more. Certain loans are placed
on non-accrual status earlier if there is reasonable doubt as to the
collectibility of interest or principal. Loans which are in the process of
renewal in the normal course of business, or are well secured, and in the
process of collection, continue to accrue interest.
Management has no knowledge of any additional loans not
disclosed in this section on non-accrual, past due, or troubled debt
restructuring that may be potential problem loans. The Bank has no loans
to foreign borrowers. The Company has quantified its impaired loans in
footnote 4 to the financial statements. Loans on nonaccrual basis are
greater than the total impaired loans because the collateral value of certain
nonaccrual loans are large enough that management believes all principal and
interest will be collected on those loans and therefore do not meet the
definition of impaired. A loan is impaired when it is probable the creditor
will be unable to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement. Impaired
loans are valued primarily at the fair value of the underlying collateral.
<PAGE>
Credit Risk Management (continued)
As of December 31, 1996, 1995, 1994, 1993 and 1992 there was no
concentration of loans exceeding 10% of total loans which was not otherwise
disclosed as a category in the loan portfolio table and there were no other
interest bearing assets that would be required to be in the paragraphs
above, if such assets were classified as loans.
The following table shows loans outstanding, actual charge-offs,
recoveries on loans previously charged-off, the allowance for credit losses,
and pertinent ratios during the periods and as of the dates indicated (in
thousands of dollars, except percent amounts):
<TABLE>
<CAPTION>
ANALYSIS OF THE ALLOWANCE FOR CREDIT LOSSES
Years Ended December 31
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Average loans $109,802 $114,820 $114,718 $118,774 $120,028
Total gross loans at end of period $120,360 $114,237 $114,168 $115,194 $118,690
Reserve for loan losses:
Balance, beginning of period $1,513 $1,465 $1,524 $1,425 $ 950
Charge-offs:
Commercial and industrial $252 $302 $459 $232 $582
Real estate - construction -0- -0- -0- 30 -0-
Real estate - mortgage 125 70 25 76 -0-
Installment 10 16 4 27 2
$387 $388 $488 $365 $584
Recoveries:
Commercial and industrial 30 $63 $129 $67 $34
Leases -0- 45 -0- -0- -0-
Real estate - construction -0- -0- -0- -0- -0-
Real estate - mortgage 8 8 -0- -0- -0-
Installment -0- -0- 2 3 4
$38 $116 $131 $70 $38
Net charge-offs $349 $272 $357 $295 $546
Additions charged to operations $205 $320 $298 $394 $790
Acquired by purchase of Laguna Bank $-0- $-0- $-0- $-0- $231
Balance, end of period $1,369 $1,513 $1,465 $1,524 $1,425
Net charge-offs during the period to average
gross loans outstanding during period 0.32% 0.24% 0.31% 0.25% 0.45%
</TABLE>
<PAGE>
Credit Risk Management (continued)
The Bank has allotted the allowance for credit losses according to the
amount deemed reasonably necessary to provide for the possibility of losses
being incurred within categories of loans set forth in the table below (in
thousands of dollars, except percent amounts):
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993/1992
Percent of Percent Of Percent of Percent of
Loans In Each Loans In Each Loans in Each Loans in Each
Allowance Category to Allowance Category to Allowance Category to AllowanceCategory to
Total Loans Total Loans Total Loans Total Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and Industrial $343 36.9% $831 36.2% $744 35.9% $550 29.8%
$550 32.4%
Real Estate - construction 9 1.2 3 0.2 124 2.0 75 3.1
417 6.0
Mortgage loans held for sale -0- -0- -0- 0.0 -0- 0.0 -0- 1.8
-0- 0.0
Real estate - mortgage 959 53.3 594 53.5 468 53.7 837 55.9
400 52.1
Installment 58 8.5 62 9.1 108 8.2 40 8.8
56 8.8
Other -0- 0.1 23 1.0 21 0.2 22 0.7
2 0.7
$1,369 100.0% $1,513 100.0% $1,465 100.0% $1,524 100.0%
$1,425 100.0%
</TABLE>
Included in the Bank's allocation of its allowance for credit losses
are provisions for specific loans, current economic conditions and a general
reserve for unknown potential losses. Bank management considers loans
classified by its internal loan review system, an independent third party
reviewer and its regulators. None of these classifications indicate trends
or uncertainties which will materially impact future operating results,
liquidity, or capital resources. The Bank has provided for the potential
adverse effects of current economic conditions. However, the full effects of
the economy on the loan portfolio cannot be predicted with any certainty. See
discussion in item 7. Any loans which management doubts the ability of
borrowers to comply with loan repayment terms are provided for in the allowance.
<PAGE>
Summary of Deposits
Deposits are the Bank's primary source of funds. The Bank can obtain
additional funds when needed to meet occasional declines in deposits to satisfy
cash reserve requirements, or for other short-term liquidity needs, through
the overnight purchase of federal funds. However, the Bank does not use
these sources of funds. Regularly, the Bank has more funds than it needs for
its reserve requirements or short-term liquidity needs, and it, therefore,
sells federal funds to other financial institutions, places funds in
certificates of deposit with other financial institutions, or invests
in short-term securities.
At December 31, 1996 and 1995, the aggregate amount of
interest-bearing deposits was 60.8% and 62.8%, respectively, of total
deposits. The Bank has no foreign deposits. While the Bank does not
experience material repeated seasonal fluctuations in deposit levels, the Bank's
relative growth in deposits and loans may be affected by seasonal and economic
changes which, in turn, may impact liquidity. The Bank does not have any
brokered deposits. As of December 31, 1996, the Bank has deposit
concentrations of $29,053,000 from five customers. Management believes it has
sufficient liquidity to meet loan commitments and deposit demands.
The following table sets forth information for the periods
indicated regarding the average balances of the Bank's deposits by category
and as a percentage of average total deposits (in thousands of dollars,
except percent amounts):
<TABLE>
<CAPTION>
Years Ended Demand (non- Money Market Savings Time Total
December 31 Interest Bearing and NOW Deposits
<S> <C> <C> <C> <C> <C>
1996
Average balance $67,662 $101,562 $12,420 $15,969 $197,613
Percent of total 34.2% 51.4% 6.3% 8.1% 100%
Average rate paid 0.0% 2.5% 2.0% 4.8% 1.8%
1995
Average balance $64,372 $99,182 $13,474 $12,511 $189,539
Percent of total 34.0% 52.3% 7.1% 6.6% 100.0%
Average rate paid 0.0% 2.3% 2.0% 4.4% 1.7%
1994
Average balance $59,628 $90,734 $14,229 $13,650 $178,241
Percent of total 33.5% 50.9% 8.0% 7.6% 100%
Average rate paid 0.0% 2.0% 2.0% 2.9% 1.4%
</TABLE>
The following table indicates the amount (in thousands of dollars, except
percent amounts) and maturity of the Bank's time certificates of deposit over
$100,000 as of December 31, 1996.
<TABLE>
<CAPTION>
1996
<S> <C> <C>
Balance Percent of Total
Less than three months $6,870 78.0%
Three months through six months 1,123 12.7
Six months through twelve months 815 9.3
Over twelve months 0 0.0
$8,808 100.0%
</TABLE>
<PAGE>
Return on Equity and Assets
The following table indicates the key financial ratios of the Bank for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Profitability ratios:
Rate of return on average total assets 1.02% 1.22% 0.43%
Rate of return on average stockholders' equity
12.38% 15.68% 5.75%
Capital Ratios:
Dividend payment ratio to net income (1) 32.6% 19.23% 11.00%
Average stockholders' equity to average total assets
8.20% 7.78% 7.50%
(1) Dividends declared exclude stock dividends
</TABLE>
Competition
The banking business in California and the market areas served
by the Bank are highly competitive with respect to both loans and deposits and
are dominated by a relatively small number of major banks with many offices
operating over a wide geographic area. The Bank is one of five locally
owned independent banks located in the Bank's primary service area. The Bank
also competes for loans and deposits with other commercial banks, including
many which are much larger than the Bank, as well as with savings and loan
associations, finance companies, credit unions, and other financial
institutions. Larger commercial banks offer certain services (such as trust
and investment services) which the Bank does not offer directly (but some of
which it offers indirectly through correspondent institutions). By virtue of
their greater total capitalization, such banks also have substantially higher
lending limits than the Bank has or will have. In addition, as a result of
recently enacted legislation, it is anticipated that there will be
increased competition between banks, savings and loan associations, and
credit unions for the deposit and loan business of individuals. The growth
of money market funds and quasi-financial institutions, such as certain
activities of retailers and other which are not subject to the same
regulatory controls, also presents a source of competition for the Bank.
With the decline in interest rates, depositors have been seeking alternative
investments to earn higher yields than the Bank is currently paying.
The Bank's primary service area encompasses the boundaries
delineated by the Orange Unified School District. The same area constitutes
the community covered by the Bank's Community Reinvestment Act Statement.
This service area is currently serviced by banking offices which may provide
competition for the Bank.
In order to compete with the other financial institutions in
its primary service area, the Bank relies principally upon local promotional
activities, personal contact by its officers, directors, employees, and
stockholders, extended hours, and specialized services. For customers whose
loan demands exceed the Bank's lending limit, the Bank has attempted and
will continue in the future to attempt to arrange for such loans on a
participation basis with other banks. The Bank also assists customers
requiring other services not offered by the Bank in obtaining such services
from its correspondent banks.
<PAGE>
Supervision and Regulation
The Company is subject to the regulation of the Federal Reserve
Bank Holding Company Act of 1965, as amended, and the Board of Governors of the
Federal Reserve System. Orange National Bank is subject to the regulation of
the Federal Deposit Insurance Corporation and the Office of the Comptroller
of the Currency (OCC). Among other regulations, the OCC establishes minimum
capital requirement which the Bank exceeds as of December 31, 1996.
Employees
As of December 31, 1996, the Bank employed 117 full-time and
16 part-time persons, including 32 principal officers. None of the Bank's
employees are represented by a union or covered by a collective bargaining
agreement. The management of the Bank believes that, in general, its
employee relations are good.
ITEM 2. PROPERTIES
The Bank and the Bancorp's head office is located in a two-story
building located at 1201 East Katella Avenue, Orange, California. The Bank
owns this building and the land the building is situated on. This building
is approximately 16,000 square feet of interior and exterior floor space and
is located on a lot of approximately 55,000 square feet. The facility has
adequate parking and an automated teller machine.
The Bank leases the building and land at its branch offices
offering all banking services, at the following locations: 77 Plaza Square,
Orange, California; 2019 West Orangewood Avenue, Orange, California; 7510
East Chapman Avenue, Orange, California; 800 Glenneyre, Laguna Beach,
California; and 25255 Cabot Road, Laguna Hills, California. The branch
offices have approximately 27,000 square feet of interior and exterior floor
space. Each branch has an automated teller machine. The Bank also
leases the building and land for administrative purposes at three additional
locations at 115 and 274 North Glassell Street, Orange, California, and
2117 West Orangewood Avenue, Orange, California. These offices have
approximately 8,400 square feet of floor space.
ITEM 3 LEGAL PROCEEDINGS
To the best of management's knowledge, there are no pending or
threatened legal proceedings to which the Bank, or the Bancorp is or may become
a party which may have a materially adverse effect upon the Bank, the Bancorp
or their property. However, in the normal course of business, the Bank, or
the Bancorp may initiate actions to protect their interests and may
occasionally be made a party to actions relating thereto seeking to
recover damages from the Bank, or the Bancorp.
ITEM 4 SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
<PAGE>
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
Stock market information and history of cash and stock dividends and stock
splits is set forth in item 7 of this Form 10-K on page 26 and 27.
ITEM 6 SELECTED FINANCIAL DATA
ORANGE NATIONAL BANCORP FINANCIAL HIGHLIGHTS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Results of operations(000's except per share amounts):
Total Interest income $15,894 $16,571 $13,908 $12,416 $12,436
Net Interest Income 12,375 13,430 11,400 9,792 8,917
Provisions for possible credit losses
205 320 298 394 790
Non Interest Income 2,713 2,781 2,612 2,279 2,381
Non Interest Expense 11,547 12,187 11,962 11,744 10,119
Income from continuing operations
3,336 3,703 1,060 457 229
Loss from discontinued operations
- - (225) (258) -
Net Income 2,201 2,524 835 199 229
Earnings per common share $1.13 $1.30 $0.43 $0.10 $0.13
Cash dividends per share 0.37 0.25 0.05 - 0.29
Weighted average number of shares oustanding
1,951 1,941 1,931 1,931 1,745
Financial condition (000's):
Total assets $218,845 $207,928 $206,510 $193,290 $175,681
Loans (net) 118,991 112,724 112,703 113,670 117,265
Deposits 198,364 188,991 190,406 177,571 159,118
Stockholders' equity 18,956 17,262 14,782 14,543 14,419
</TABLE>
Earnings per share from continuing operations in 1994 and 1993 were $.58 and
$.25, respectively. Earnings per share prior to 1995 are restated to reflect
5% stock dividends in 1995.
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This filing contains forward-looking statements which involve risks and
uncertainties. The company's actual future results may differ significantly
from the results discussed in the forward-looking statements. Factors that
might cause a difference include, but are not limited to, loan demand,
deposit withdrawals, interest rates, particularly the spread between loan
rates and deposit rates, the effect of the Southern California economy and
real estate values, and other general business risks.
Financial Condition
Total interest earning assets increased approximately $15,000,000 from
December 31, 1995 to 1996. The Company is focusing efforts on increasing
its loan base with quality loans. Interest earning assets decreased
approximately $11,300,000 from December 31, 1994 to 1995. In 1996 deposits
increased approximately $9,373,000. The increase was invested primarily in
loans and federal funds
sold.
The Company has been increasing its investment in securities from 1994 to 1996.
Average balances have increased $10,113,000 in 1995 and $1,864,000 in 1996.
The reason for the increase is due to an increase in deposits and relative
soft loan demand. The Company believes securities are the best available
investment after its liquidity needs are met through cash and due from banks and
federal funds sold. Generally, mortgage backed securities are classified as
held-to-maturity and U.S. Treasury and Agency securities are classified as
available-for-sale. The market values of securities increased in 1995 due to
a decline in interest rates late in the year. In 1996 the market values of
securities decreased slightly due to a small increase in short term
interest rates during the year.
Loans increased 5.56% in 1996 compared to a decrease of 0.02% in 1995. The
supply of high quality loans continues to be soft in the Southern California
area.
Bank premises and equipment, net of depreciation, decreased by $313,983 in
1996 and increased $139,898 in 1995. The Company purchased approximately
$675,000 in equipment in 1995 and $223,000 in 1996. The level of capital
expenditures in the future is not expected to be substantially higher than
1995 expenditures.
In the fourth quarter of 1995, the Company entered into deferred compensation
agreements with certain officers and directors. These agreements provide a
death benefit prior to retirement. The Company also invested $3,500,000 in
life insurance policies in conjunction with these agreements. The Company
does not anticipate any substantial purchases of life insurance in the future.
Total deposits increased 5.0% in 1996 compared to a decrease of 0.7% in 1995.
In 1995 the bank had a deposit relationship with a company that administered
pension funds. Deposits from the company were approximately $14,000,000 as of
December 31, 1995. In the fourth quarter of 1996 the company was sold and the
accounts were closed. Without the loss of those deposits the increase
in 1995 would have been greater. Deposit differences between the years
fluctuate due to balances maintained by large depositors.
Liquidity
The Company maintains substantial liquid and other short-term assets to meet
increases in loan demands, deposit withdrawals and maturities.
The loan-to-deposit ratio at December 31, 1996 was 60.0% compared to 59.6% at
December 31, 1995. The ratio of liquid assets (cash and due from banks,
interest bearing deposits at financial institutions, federal funds sold, and
investments with maturities of one year or less) to demand deposits was
30.8% at December 31, 1996 compared to 29.4% at December 31, 1995. The Company
may borrow funds under securities sold with agreements to repurchase for
securities that have not been pledged. At December 31, 1996 unpledged
securities totaled approximately $36,000,000. All of the Company's
installment loans require monthly payments, which provide a steady return of
cash funds. Liquidity needs can also be met through federal funds purchased
from correspondent banks and/or direct borrowings from the Federal Reserve
Bank. The Company has established Federal Funds borrowing lines with various
banks up to $3,000,000. As of this date, the Company has never used these
facilities.
<PAGE>
Liquidity (continued)
The subsidiary bank has a significant base of core deposits and has not used
brokered deposits. The Bank also avoids using other wholesale, highly rate
sensitive, short-term funds and believes their deposits represent funding
sources which are relatively stable with respect to liquidity. As of
December 31, 1996, the Bank has deposit concentrations of $29,053,000 from
five customers. The Company continues to meet its loan demands from its
deposit base and with cash flow from operations. If loan demand were to
substantially increase, the Company would be able to generate cash flow from
its federal funds sold, sale of marketable securities which are available for
sale, increasing deposits and borrowing on its established credit resources.
Management believes the Bank has sufficient liquidity to meet loan commitments
and deposit withdrawals.
Capital Management
Capital management requires that sufficient capital be maintained for
anticipated growth and to provide depositors assurance that their funds are
on deposit with a solvent institution.
The subsidiary Bank has minimum regulatory capital requirements. The parent
company and subsidiary Bank have similar capital requirements. At
December 31, 1996, minimum core capital is required to be 4% of risk
adjusted assets and minimum total capital is required to be 8%. The
leverage ratio is required to be 4%. Core capital for the Bank under the
regulations is defined as only stockholders' equity and total capital is
stockholders' equity plus the allowance for credit losses. Leverage is the
ratio of core capital to total average assets. At December 31, 1996 core capital
of the Bank was $18,568,000, total capital was $19,937,000. The ratio of core
and total capital to risk adjusted assets at December 31, 1996 was 12.4% and
13.3%, respectively. The leverage ratio was 8.3% at December 31, 1996. At
December 31, 1996, the Bank's capital ratios exceeded the "well capitalized
" threshold prescribed in the rules of its principal federal regulator.
Management believes that the Company and its subsidiary are properly and
adequately capitalized, as evidenced by these ratios and the strong liquidity
position.
Results of Operations
Total interest income decreased 4.1% in 1996, and increased 19.2% in 1995. The
average yield decreased in 1996 by 0.69% and increased in 1995 by 1.00%. The
decrease in interest income in 1996 was due primarily to decreased rates. The
average rate decrease on loans in 1996 was 0.63%. The yield on loans will
change along with the movements in the prime rate as approximately 80% of
the loan portfolio is based on variable rates. The total average balances of
interest earning assets increased approximately $6,300,000 in 1996. The average
balance in loans decreased approximately $5,000,000 in 1996 and average
balances in investment securities increased approximately $1,900,000.
Interest income from investment securities increased in 1995 due to the increase
in the average balances of investment securities. Interest income from
investment securities increased in 1996 due primarily to the increase in the
average balances of investment securities. The average balance in federal
funds sold increased by $9,350,000 in 1996. Interest income on federal funds
sold increased by 35.6% in 1996 and 39.4% in 1995. The increase in 1996
was due to increased balances and the 1995 increase was primarily due to
increased rates.
Total interest expense increased 12.0% in 1996 and 25.3% in 1995. The increase
in 1995 was due to a 0.40% increase in the average rate paid and average
interest bearing liabilities increasing by approximately $6,550,000 or 5.5%.
The increase in 1996 was due to a .20% increase in the average rate paid
and average interest bearing liabilities increasing by approximately $4,800,000
or 3.8%.
In 1996, 1995 and 1994 the credit loss provisions were $205,000, $320,000 and
$298,000 respectively. Management believes that the allowance for credit losses
is adequate to provide for potential losses in the portfolio. The economic
outlook for 1997 cannot be predicted and, accordingly, future provisions for
credit losses cannot be estimated at this time. See Note 1 in the Notes to
Consolidated Financial Statements.
<PAGE>
Results of Operations (continued)
Other income decreased $67,000 in 1996 compared to an increase of $169,000 in
1995 . The increase in 1995 was primarily due to increased gains on sale of
loans. Other expenses decreased approximately $640,000 in 1996. This
decrease was partially caused by a $153,000 decrease in salary and benefit
costs due to a decrease in staff between 1995 and 1996 as a result of a
reorganizational study in the second half of 1994 that continued into 1995.
Insurance expenses were down in 1996 due to a decrease in the cost of FDIC
insurance. Other real estate owned expenses are down in 1996 due to a
decrease in the number of properties owned by the Bank.
In 1995, the Company reduced its valuation allowance on net deferred tax
assets by $483,000, compared to a $165,000 reduction in 1996. These
reductions also reduced income tax expense. Income tax expense in 1994
reflects effective tax rates on taxable earnings which approximates the
federal and state statutory tax rates of 40%. As of December 31, 1996, there
is no valuation allowance on deferred tax assets, therefore there is no
expected reduction in tax expense in 1997.
In 1995 the Company had approximately $165,000 recorded as a valuation
allowance against net deferred tax assets which could reduce future income
tax expense if the net assets become realizable. In 1996, management
determined the valuation allowance was no longer necessary as the
deferred tax assets are considered to be more likely than not to be realized.
Accordingly, income tax expense is less than the amount computed at the
federal statutory rate. See footnote No. 8 to the financial statements.
The provisions in FASB Statement No. 109 and the effect of alternative
minimum tax have the potential for producing, under certain conditions,
significant distortions in future income tax provisions and the effective
tax rate.
Net income in 1996 decreased approximately $323,000 over 1995 due primarily to
a decrease in the average rate on interest earning assets. 1995 net income
increased approximately $1,700,000 over 1994 due primarily to an increase
in the average rate paid on on interest earning assets and a $483,000
reduction in the tax expense. While management is optimistic about the future,
the effects of current economic conditions on the collectability of loans
cannot be predicted with absolute certainty and its effects on future
profitability cannot be determined.
Off-Balance Sheet Analysis
The contractual amounts associated with certain financial transactions are not
recorded as assets or liabilities on the balance sheet. Off-balance sheet
treatment is generally considered appropriate either where exchange of the
underlying asset or liability has not occurred nor is assured, or where
contractual amounts are used solely to determine cash flows to be exchanged.
Off-balance sheet financial instruments consist of commitments to extend
credit and standby letters of credit. A majority of these commitments are
with variable interest rates and therefore are not derivative instruments.
Additional information about off-balance sheet financial instruments is provided
in Note 9 of Notes to Consolidated Financial Statements.
Interest Rate Sensitivity
The Company manages its balance sheet to minimize the impact of interest rate
movements on its earnings. The term "rate sensitive" refers to those assets and
liabilities which are "sensitive" to fluctuations in rates and yields. When
interest rates move, earnings may be affected in many ways. Interest rates
in assets and liabilities may change at different times or by different amounts.
Maintaining a proper balance between rate sensitive earning assets and rate
sensitive liabilities is the principal function of asset and liability
management of a banking organization.
<PAGE>
Interest Rate Sensitivity (continued)
The following table shows the repricing period for interest earning assets and
interest bearing liabilities and the related repricing gap in thousands:
<TABLE>
<CAPTION>
Repricing period (000's omitted)
Three months or Over three months One year through Over Five Years
Less through Twelve Five Years
months
<S> <C> <C> <C> <C>
Interest earning assets
125,369 5,132 40,212 (1) 16,457
Interest bearing liabilities
114,413 5,065 1,057 -
Repricing gap
10,956 67 39,155 16,457
Cumulative repricing gap
10,956 11,023 50,178 66,635
Cumulative gap as a percent of earning assets
5.9% 5.9% 26.8% 35.6%
</TABLE>
(1)Collateralized mortgage obligations are allocated to the one year to five
year maturities based on the average expected lives.
The Company has $28,899,000 in securities classified as available for sale and
are recorded at market value. The remaining securities of $11,111,000 are
classified as held to maturity and recorded at amortized cost. The held to
maturity securities may be called or repaid without penalties. The value
of these securities is subject to fluctuation based upon current long-term
interest rates.
The Company has approximately $123,313,000 of interest earning loans and
federal funds sold and approximately $103,111,000 of interest bearing demand
and savings deposits which are able to reprice overnight.
Repricing gap equals total interest earning assets less total interest bearing
liabilities available for repricing during a given time interval.
A positive repricing gap for a given period exists when total interest earning
assets exceed total interest bearing liabilities and a negative repricing gap
exists when total interest bearing liabilities are in excess of interest
earning assets.
Generally, a positive repricing gap will result in increased net interest
income in a rising rate environment and decreased net interest income in a
falling rate environment. A negative repricing gap tends to produce
increased net interest income in a falling rate environment and decreased net
interest income in a rising rate environment. The Company's repricing gap
indicates that it is positioned to benefit from a rising rate environment.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflations.
<PAGE>
Impact of Inflation and Changing Prices (continued)
Unlike most industrial companies, virtually all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the price of goods and
services. In the current interest rate environment, the liquidity and the
maturity structure of the Company's assets and liabilities are critical to
the maintenance of acceptable performance levels.
Effect of FASB Statements
The Financial Accounting Standards Board (FASB) has issued Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities, which becomes effective for transactions occurring after
December 31, 1996. The Statement does not permit earlier or retroactive
application. The Statement distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. A transferred assets of
financial assets in which the transferor surrenders control over those assets
is accounted for as a sale to the extent that consideration other than
beneficial interests in the transferred assets is received in exchange. The
Statement also establishes standards on the initial recognition and
measurement of servicing assets and other retained interests and servicing
liabilities, and their subsequent measurement. The Statement requires that
debtors reclassify financial assets pledged as collateral and that secured
parties recognize those assets and their obligation to return them in
certain circumstances in which the secured party has taken control of those
assets. In addition, the Statement requires that a liability be
derecognized only if the debtor is relieved of its obligation through payment to
the creditor or by being legally released from being the primary obligor
under the liability either judicially or by the creditor.
In December 1996, FASB issued Statement No. 127 which amended Statement
No. 125 by delaying the effective date of the Statement No. 125 for one year
for certain transactions.
Management does not believe the application of the Statements to transactions
of the Bank that have been typical in the past will materially affect the
Bank's financial position and results of operations.
Stock Market Information
On February 13, 1996 Orange National Bancorp shares of common stock commenced
trading on the National Association of Securities Dealers Automated Quotation
(NASDAQ), under the symbol OGNB. Active traders for the stock are Everen
Securities, 620 Newport Center Drive, Suite 1300, Newport Beach, California
92660 and Smith Barney, 650 Town Center Drive, Suite 100, Costa Mesa,
California 92626.
The following table summarizes the approximate high and low bid prices for the
Company's common stock since the first quarter of 1994.
<TABLE>
<CAPTION>
Bid Prices
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994
Calendar Quarter High Low High Low High Low
1st quarter 12.50 10.50 $5.95 $4.75 6.00 5.00
2nd quarter 15.00 11.75 7.15 5.45 6.00 5.00
3rd quarter 14.50 13.25 9.50 6.35 6.00 5.00
4th quarter 13.75 12.75 10.50 9.25 6.00 5.00
</TABLE>
Market quotations prior to February 13, 1996 reflect inter-dealer prices,
without retail markup, markdown, or commission and may not necessarily
represent actual transactions.
<PAGE>
History of Cash and Stock Dividends and Stock Splits
The Company has a history of paying cash dividends to its stockholders. At
December 31, 1996, the Company had approximately 540 stockholders of record.
The following table summarizes the cash dividend history of the Bank:
<TABLE>
<CATION>
Dividends* Total Amount of
Date Per Share Dividends Paid
<S> <C> <C>
1984 $ .09 $143,568
1985 .10 $166,320
1986 .12 $200,584
1987 .16 $250,730
1988 .13 $202,734
1989 .17 $267,329
1990 .18 $290,008
1991 - -
1992 .30 $485,130
1993 - -
1994 .05 $ 91,956
1995 .25 $473,947
1996 .37 $718,417
</TABLE>
Also, the Company declared a three-for-two stock split on October 15, 1985, a
5% stock dividend on November 16, 1988, a three-for-two stock split on November
20, 1989, and a 5% stock dividend on July 31, 1995.
The Company's ability to pay dividends is dependent upon the dividend payment
it receives from its Bank subsidiary. On February 19, 1997, the Company
declared a $.22 cent per share dividend on its common stock. Future
dividend payments will depend upon future profitability, meeting regulatory
requirements and the outlook of economic conditions.
*For comparative purposes, dividends per share for all years are computed
after the effects of stock splits and stock dividends.
Transfer Agent and Registrar
CHASEMELLON Shareholder Services, California 90017.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are set forth on pages
F-2 to F-25 following. The Auditors' Report thereon is set forth on Page F-1
following.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None
<PAGE>
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning the directors and executive
officers of the Bancorp, see "Election of Directors" included in the
Bancorp's definitive proxy statement ("Proxy Statement"), which information
is incorporated by reference. The Proxy Statement will be filed with the
SEC within the time period specified by General Instruction G to Form 10-K.
ITEM 11 EXECUTIVE COMPENSATION
For information concerning management remuneration, see
"Executive Compensation" included in the Proxy Statement, which information
is incorporated herein by reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
For information concerning security ownership of
beneficial owners and management, see "Stock Ownership of Certain Beneficial
Owners and Management" included in the Proxy Statement, which information is
incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning related party transactions, see
"Certain Transactions" included in the Proxy Statement, which information is
incorporated herein by reference.
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES , AND REPORTS ON FORM
8-K
The following financial statements of the Bancorp and
subsidiaries are included in this Form 10-K. Page number references follow:
ORANGE NATIONAL BANCORP AND SUBSIDIARIES
Independent auditor's report F-1
Consolidated balance sheets December 31, 1996 and 1995 F-2
Consolidated statements of income for the three years ended
December 31, 1996 F-3
Consolidated statement of stockholders' equity F-4
for the three years ended December 31, 1996
Consolidated statement of cash flows
for the three years ended December 31, 1996 F-5
Notes to consolidated financial statements F-6 to F-25
Schedules
All schedules are omitted as the information is not required ,
is not material, or is otherwise furnished.
Exhibits
See Index to exhibits at Page 32 of this Form 10-K
Reports on Form 8-K
No reports on Form 8-K were filed by the Bancorp during the
last quarter for the year ended December 31, 1996.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 25(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.
ORANGE NATIONAL BANCORP
By: KENNETH J. COSGROVE
Kenneth J. Cosgrove
Chief Executive Officer
Date: 3/25/97
By:ROBERT W. CREIGHTON
Robert W. Creighton, Secretary
Chief Financial Officer
Date 3/25/97
Signed by a majority of the Board of Directors:
3/27/97 MICHAEL W. ABDALLA
Date Michael W. Abdalla
3/27/97 FRED L. BARRERA
Date Fred L. Barrera
Date Michael J. Christianson
3/25/97 KENNETH J. COSGROVE
Date Kenneth J. Cosgrove
3/25/97 ROBERT W. CREIGHTON
Date Robert W. Creighton
<PAGE>
Signatures (continued)
3/27/97 ARMAND DURANTE
Date Armand Durante
Date William S. Frantz
Date Charles R. Foulger
3/26/97 GERALD R. HOLTE
Date Gerald R. Holte
3/26/97 JAMES E. MAHONEY
Date James E. Mahoney
Date Wayne F. Miller
Date Harlan A. Smith
Date San E. Vaccaro
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Page No.
3.1 Registrant's Articles of Incorporation (1)N/A
3.2 Bylaws of the Bancorp (2) N/A
10.1 The material contracts of Registrant's
subsidiary, Orange National Bank, were each
filed as exhibits 10, 10.1, 10.3, 10.4, and 10.5
of the Registrant's Registration Statement on
Form S-4, File No. 33-8743, and are hereby
incorporated by reference.N/A
23.1 Consent of Independent Accountants 33
(1) The Articles of Incorporation of Orange National Bancorp were
filed as exhibit 3 of the Registrant's Registration Statement on Form S-4, File
No. 33-8743, and are hereby incorporated by reference.
(2) Filed as exhibit 3.1 to the Registrant's Registration Statement
on Form S-1, File No. 33-13162, which exhibits are incorporated herein by
reference.
(3) Filed as exhibit 2 to the Registrant's Registration Statement
on Form S-4, File No. 33-8743, and are hereby incorporated by reference.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
Orange National Bancorp
Orange, California
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8, dated August 20, 1993, of Orange National Bancorp of
our report dated January 17, 1997, appearing in item 8 in this Annual
Report on Form 10-K.
McGLADREY & PULLEN, LLP
Anaheim, California
March 27, 1997
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Orange National Bancorp
Orange, California
We have audited the accompanying consolidated balance sheets of Orange
National Bancorp and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orange
National Bancorp and subsidiary as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Anaheim, California
January 17, 1997<PAGE>
ORANGE NATIONAL BANCORP CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS 1996 1995
Cash and due from banks (Note 2) $19,635,829 $22,929,660
Securities (Note 3):
Held-to-maturity securities (fair value 1996 $11,018,288; 1995 $12,595,011)
11,111,231 12,652,817
Available-for-sale securities 28,899,373 26,908,298
Federal funds sold 26,800,000 18,500,000
Loans, net of allowance for credit losses 1996 $1,369,288; 1995 $1,512,544
(Notes 4, 5 and 12) 118,991,170 112,724,034
Bank premises and equipment, net (Note 6) 5,212,594 5,526,577
Other real estate owned, net (Note 5) 2,445,955 3,784,482
Accrued interest receivable 1,352,331 1,167,707
Cash value of life insurance 3,717,225 3,514,896
Other assets (Note 8) 679,661 219,553
218,845,369 207,928,024
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 7):
Noninterest bearing demand $77,828,911 $70,237,126
Interest bearing:
Demand 92,176,073 91,698,505
Savings 10,935,397 12,456,884
Time certificates of deposits of $100,000 or more
8,808,554 6,632,038
Other time 8,614,818 7,966,817
Total deposits 198,363,753 188,991,370
Accrued interest payable and other liabilities 1,525,629 1,674,757
Total liabilities 199,889,382 190,666,127
Commitments and Contingencies (Notes 9 and 11)
Stockholders' Equity (Notes 10 and 13)
Common stock, no par value or stated value; 20,000,000 shares authorized;
1996 1,952,671; 1995 1,933,571 issued and outstanding
7,675,505 7,509,888
Retained earnings 11,403,180 9,920,549
Unrealized (loss) on available-for-sale securities, net (Note 3)
(122,698) (168,540)
Total stockholders' equity 18,955,987 17,261,897
218,845,369 207,928,024
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ORANGE NATIONAL BANCORPCONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Interest Income
Loans $11,712,351 $12,953,799 $11,479,904
Securities 2,627,308 2,470,549 1,605,738
Federal funds sold 1,554,410 1,146,474 821,864
Total interest income 15,894,069 16,570,822 13,907,506
Interest Expense, deposits 3,519,428 3,140,658 2,507,412
Net interest income 12,374,641 13,430,164 11,400,094
Provision for Credit Losses (Note 5) 205,000 320,000 297,907
Net interest income after provision for credit losses
12,169,641 13,110,164 11,102,187
Other Income
Service charges on deposit accounts
1,169,304 1,112,918 1,173,022
Fees for other customer services 616,357 666,802 718,236
Gain on sale of loans 560,372 754,766 651,620
Increase in cash value of life insurance
183,113 - -
Other 184,240 246,290 68,916
2,713,386 2,780,776 2,611,794
Other Expenses
Salaries, wages and employee benefits
6,097,983 6,251,351 6,148,077
Occupancy expense (Note 9) 1,153,417 1,104,460 1,106,871
Data processing expense (Note 9) 927,501 1,069,909 1,154,260
Furniture and equipment expense 633,424 706,584 572,628
Promotion expense 429,421 467,519 366,318
Legal and professional services 626,664 507,354 603,782
Insurance 181,759 427,928 592,694
Stationery and supplies 248,923 278,925 252,576
Telephone and postage 382,624 373,674 344,234
Other real estate owned (Note 5) 217,147 424,907 160,675
Other 648,063 574,839 659,748
11,546,926 12,187,450 11,961,863
Income from continuing operations before income taxes
3,336,101 3,703,490 1,752,118
Income tax expense (Note 8) 1,135,052 1,179,000 692,200
Income from continuing operations
2,201,049 2,524,490 1,059,918
Loss from discontinued operations (Note 17)
- - 224,432
Net income (Note 10) $2,201,049 $2,524,490 $835,486
Earnings per share from continuing operations
$1.13 $1.30 $0.55
Earnings per share $1.13 $1.30 $0.43
Weighted average number of shares
1,951,276 1,941,286 1,931,072
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ORANGE NATIONAL BANCORP CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION> Unrealized
Gain(Loss) on
Available-
Common Stock Retained For-Sale
Shares Amount Earnings Securities Total
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $1,839,116 $6,848,120 $7,770,163 $(75,089)$14,543,194
Net income - - 835,486 - 835,486
Cash dividend paid($.05 per share) - -(91,956) - (91,956)
Net change in unrealized (loss) on available-for- sale securities (Note 3)
- - - (504,522) (504,522)
Balance, December 31, 1994 1,839,116 6,848,120 8,513,693 (579,611)14,782,202
- - 2,524,490 - 2,524,490
Cash dividend paid($.25 per share) - - (473,943) - (473,943)
Stock dividend paid(5% per share) 91,955 643,691 (643,691) - -
Exercise of stock options 2,500 18,077 - - 18,077
Net change in unrealized(loss) on available- for-sale securities (Note 3)
- - - 411,071 411,071
Balance, December 31, 1995 1,933,571 7,509,888 9,920,549 (168,540)17,261,897
Net income - - 2,201,049 - 2,201,049
Cash dividend paid ($.37 per share) - - (718,418) - (718,418)
Exercise of stock options 19,100 165,617 - - 165,617
Net change in unrealized (loss) on available- for-sale securities (Note 3)
- - - 45,842 45,842
Balance, December 31, 1996 $1,952,671 $7,675,505 $11,403,180$(122,698)$18,955,987
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ORANGE NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $2,201,049 $2,524,490 $835,486
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 537,133 535,474 448,448
Provision for credit losses 205,000 320,000 297,907
Deferred income taxes (benefits)(78,000) (309,000) 338,000
(Gain) on sale of loans (560,372) (754,766) (759,837)
Provision for other real estate owned
160,217 303,561 31,612
Proceeds from loan sales 5,984,015 5,428,82219,073,450
Originations of loans held for sale
(5,423,643) (4,674,056) (18,313,613)
(Increase) decrease in other assets
(797,795) 263,699 1,627,086
Increase in other liabilities 434,870 398,577 137,036
Net cash provided by operating activities 2,662,474 4,036,801 3,715,575
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits
in other financial institutions - - 198,000
Purchase of securities to be held-to-maturity
- - (11,090,000)
Proceeds from maturities of securities held-to-maturity
1,541,586 4,400,000 5,090,000
Purchase of available-for-sale securities
(38,481,479) (16,883,874) (7,829,879)
Proceeds from sales of available-for-sale securities
36,564,980 14,748,366 -
Change in loans made to customers, net
(7,273,917) (3,261,938) (1,301,330)
Net (increase) decrease in federal funds sold
(8,300,000) 9,715,000 800,000
Purchase of life insurance - (3,514,896) -
Proceeds from sale of other real estate owned
1,396,093 841,043 -
Purchases of bank premises and equipment
(223,150) (675,372) (315,431)
Net cash provided by (used in)investing activities
(14,775,887) 5,368,329 (14,448,640)
Cash Flows from Financing Activities
Net increase (decrease) in deposits 9,372,383 (1,414,483)12,834,554
Proceeds from exercise of stock options
165,617 18,077 -
Cash dividends paid (718,418) (473,943) (91,956)
Net cash provided by (used in)financing activities
8,819,582 (1,870,349) 12,742,598
Increase (decrease) in cash and due from banks
(3,293,831) 7,534,781 2,009,533
Cash and Due from Banks
Beginning 22,929,660 15,394,879 13,385,346
Ending $19,635,829 $22,929,660 $15,394,879
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Banking Activities and Summary of Significant
Accounting Policies
Nature of operations: Orange National Bancorp is a bank holding company
which provides a full range of banking services to its commercial and
consumer customers through six branches located in Orange County,
California.
The Company grants commercial, residential and consumer loans to
customers, substantially all of whom are middle-market businesses or
residents. The Company's business is concentrated primarily in Orange
County, California, and the loan portfolio includes a significant credit
exposure to the real estate industry and local economy of this area. As
of December 31, 1996, real estate related loans accounted for
approximately 55% of total loans. Substantially all of these loans are
secured by first liens with an initial loan to value ratio of generally
not more than 75%.
The loans are expected to be repaid from cash flows or proceeds from the
sale of selected assets of the borrowers. The Company's policy requires
that collateral be obtained on substantially all loans. Such collateral
is primarily first trust deeds on property.
Use of estimates in the preparation of financial statements: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Principles of consolidation: The consolidated financial statements
include the accounts of Orange National Bancorp and its wholly-owned
subsidiary Orange National Bank (Bank). These entities are collectively
referred to herein as the Company. All significant intercompany balances
and transactions have been eliminated in consolidation.
Cash and due from banks and federal funds sold: For purposes of reporting
cash flows, cash and due from banks includes cash on hand and amounts due
from banks. Cash flows from loans originated by the Company, deposits and
federal funds sold are reported net.
The Company maintains amounts due from banks which exceed federally
insured limits. In addition, federal funds sold were placed with two
financial institutions. The Company has not experienced any losses in
such accounts.
Held-to-maturity securities: Securities classified as held-to-maturity
are those debt securities the Company has both the intent and ability to
hold to maturity regardless of changes in market conditions, liquidity
needs or changes in general economic conditions. These securities are
carried at cost adjusted for amortization of premiums and accretion of
discounts, computed by the interest method over their contractual lives.
The sale of a security within three months of its maturity date or after
at least 85% of the principal outstanding has been collected is considered
a maturity for purposes of classification and disclosure.
<PAGE>
Note 1. Nature of Banking Activities and Summary of Significant Accounting
Policies (Continued)
Available-for-sale securities: Securities classified as
available-for-sale are those debt securities that the Company intends to
hold for an indefinite period of time, but not necessarily to maturity.
Any decision to sell a security classified as available-for-sale would be
based on various factors, including significant movements in interest
rates, changes in the maturity mix of the Company's assets and
liabilities, liquidity needs, regulatory capital considerations, and other
similar factors. Securities available-for-sale are carried at fair value.
Unrealized gains or losses, net of the related deferred tax effect, are
reported as increases or decreases in stockholders' equity. Realized
gains or losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
Transfers: Transfers of debt securities into the held-to-maturity
classification from the available-for-sale classification are made at fair
value on the date of transfer. The unrealized holding gains or losses on
the date of transfer are retained as a separate component of stockholders'
equity and in the carrying value of the held-to-maturity securities. Such
amounts are amortized over the remaining contractual lives of the
securities by the interest method.
Loans: Loans are stated at the amount of unpaid principal, reduced by
unearned fees and allowance for credit losses.
The allowance for credit losses is established through a provision for
credit losses charged to expense. Loans are charged against the allowance
for credit losses when management believes that collectibility of the
principal is unlikely. The allowance is an amount that management
believes will be adequate to absorb estimated losses on existing loans
that may become uncollectible, based on evaluation of the collectibility
of loans and prior loan loss experience. This evaluation also takes into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans,
and current economic conditions that may affect the borrower's ability to
pay. While management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary if there
are significant changes in economic or other conditions. In addition, the
Office of the Comptroller of the Currency, as an integral part of their
examination process, periodically reviews the Company's allowance for
credit losses, and may require the Company to make additions to the
allowance based on their judgment about information available to them at
the time of their examinations.
A loan is impaired when it is probable the creditor will be unable to
collect all contractual principal and interest payments due in accordance
with the terms of the loan agreement. Impaired loans 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. The amount of impairment, if any, and any
subsequent changes are included in the allowance for credit losses.
<PAGE>
Note 1. Nature of Banking Activities and Summary of Significant
Accounting Policies (Continued)
Interest and fees on loans: Interest on loans is recognized over the
terms of the loans and is calculated using the simple-interest method on
principal amounts outstanding. The accrual of interest on loans is
discontinued when, in management's opinion, the borrower may be unable to
meet payments as they become due. When interest accrual is discontinued,
all unpaid accrued interest is reversed. Generally, interest income is
not subsequently recognized until all principal amounts are received.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net amount amortized as an adjustment of the
related loan's yield. The Company is generally amortizing these amounts
over the contractual life.
Sale of loans: The Company sells the guaranteed portion of small business
administration loans in the secondary market to provide funds for
additional lending and to generate servicing income. Under such
agreements, the Company continues to service that loans and the buyer
receives the principal collected together with interest. Loans held for
sale are valued at the lower of cost or market value.
Gains and losses on sales of loans are calculated on a predetermined
formula in compliance with Emerging Issues Task Force Issue No. 88-11
based on the difference between the selling price and the book value of
the loans sold. Any inherent risk of loss on loans is transferred to the
buyer at the date of sale on the portion of the loan sold. However, the
Company maintains the risk on the portion retained.
The Company has issued various representations and warranties associated
with the sale of loans. These representations and warranties may require
the Company to repurchase loans for a period of 90 days after the date of
sale as defined per the applicable sales agreement. The Company
experienced no losses during the years ended December 31, 1996 and 1995
regarding these representations and warranties.
Premises and equipment: Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed
principally by the straight-line method over the following estimated
useful lives: Buildings and leasehold improvements -- 4 to 28 years;
equipment and furnishings -- 5 to 10 years.
Improvements to leased property are amortized over the lesser of the term
of the lease or life of the improvements.
Other real estate owned: Other real estate owned (OREO) represents
properties acquired through foreclosure or other proceedings. OREO is
held for sale and is recorded at the lower of the carrying amounts of the
related loans or the estimated fair value of the properties less estimated
costs of disposal. Any write-down to estimated fair value less cost to
sell at the time of transfer to OREO is charged to the allowance for
credit losses. Property is evaluated regularly by management and
reductions of the carrying amount to estimated fair value less estimated
costs to dispose are recorded as necessary. Depreciation is recorded
based on the recorded amount of depreciable assets after they have been
owned for one year. Depreciation and additions to or reductions from
valuation allowances are recorded in income.
<PAGE>
Note 1. Nature of Banking Activities and Summary of Significant
Accounting Policies (Continued)
Income taxes: Deferred taxes are provided on an asset and liability
method whereby deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards and deferred
tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when management determines that it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment.
Off-balance sheet instruments: In the ordinary course of business, the
Company has entered into off-balance sheet financial instruments
consisting of commitments to extend credit, commercial letters of credit
and standby letters of credit. Such financial instruments are recorded in
the financial statements when they are funded.
Fair value of financial instruments: Management uses its best judgment in
estimating the fair value of the Company's financial instruments; however,
there are inherent weaknesses in any estimation technique. Therefore, for
substantially all financial instruments, the fair value estimates
presented herein are not necessarily indicative of the amounts the Company
could have realized in a sales transaction at either December 31, 1996 or
1995. The estimated fair value amounts for 1996 and 1995 have been
measured as of their respective year ends, and have not been reevaluated
or updated for purposes of these consolidated financial statements
subsequent to those respective dates. As such, the estimated fair values
of these financial instruments subsequent to the respective reporting
dates may be different than the amounts reported at each year-end.
The information in Note 15 should not be interpreted as an estimate of the
fair value of the entire Company since a fair value calculation is only
required for a limited portion of the Company's assets. This disclosure
of fair value amounts does not include the fair values of any intangibles,
including core deposit intangibles or mortgage servicing rights. Due to
the wide range of valuation techniques and the degree of subjectivity used
in making the estimate, comparisons between the Company's disclosures and
those of other banks may not be meaningful.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
Cash and short-term instruments: The carrying amounts reported in
the consolidated balance sheets for cash and due from banks,
interest bearing deposits and federal funds sold approximate their
fair values.
Securities: Fair values for securities are based on quoted market
prices when available. For certain mortgage backed securities, the
Company utilizes a broker to determine fair value. This broker
obtains estimates of fair value from up to three pricing services
which estimate fair value through a mapping process to other
mortgage pools adjusted for interest rate, maturity, etc. There is
no guarantee that the prices obtained for these methods can be
realized upon ultimate sale of the security.
<PAGE>
Note 1. Nature of Banking Activities and Summary of Significant
Accounting Policies (Continued)
Loans: For variable-rate loans that reprice frequently and that
have experienced no significant change in credit risk, fair values
are based on carrying values. At December 31, 1996 and 1995,
variable rate loans comprised approximately 80% and 85%,
respectively, of the loan portfolio. Fair values for all other
loans are estimated based on discounted cash flows, using interest
rates currently being offered for loans with similar terms to
borrowers with similar credit quality. Prepayments prior to the
repricing date are not expected to be significant. Loans are
expected to be held-to-maturity and any unrealized gains or losses
are not expected to be realized.
Off-balance sheet instruments: Fair values for off-balance sheet
instruments (guarantees, letters of credit and lending commitments)
are based on quoted fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
Deposit liabilities: Fair values disclosed for savings and demand
deposits equal their carrying amounts, which approximate the amount
payable on demand. The carrying amounts for variable-rate 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 aggregate expected monthly maturities
on time deposits. Early withdrawals of fixed-rate certificates of
deposit are not expected to be significant.
Accrued interest receivable and payable: The fair values of both
accrued interest receivable and payable approximate their carrying
amounts.
Earnings per share: Earnings per share of common stock are based on the
weighted average number of common shares and common equivalent shares
outstanding.
Financial instruments: The Company has purchased collateralized mortgage
obligations (CMO's) which are derivative financial instruments. These
financial instruments are held for purposes other than trading.
Current accounting development: The Financial Accounting Standards Board
(FASB) has issued Statement No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, which
becomes effective for transactions occurring after December 31, 1996. The
Statement does not permit earlier or retroactive application. The
Statement distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. A transferred assets of financial
assets in which the transferor surrenders control over those assets is
accounted for as a sale to the extent that consideration other than
beneficial interests in the transferred assets is received in exchange.
The Statement also establishes standards on the initial recognition and
measurement of servicing assets and other retained interests and servicing
liabilities, and their subsequent measurement.
<PAGE>
Note 1. Nature of Banking Activities and Summary of Significant
Accounting Policies (Continued)
Current accounting development (continued): The Statement requires that
debtors reclassify financial assets pledged as collateral and that secured
parties recognize those assets and their obligation to return them in
certain circumstances in which the secured party has taken control of
those assets. In addition, the Statement requires that a liability be
derecognized only if the debtor is relieved of its obligation through
payment to the creditor or by being legally released from being the
primary obligor under the liability either judicially or by the creditor.
In December 1996, FASB issued Statement No. 127 which amended statement
No. 125 by delaying the effective date of Statement No. 125 for one year
for certain transactions.
Management does not believe the application of these Statements to
transactions of the Bank that have been typical in the past will
materially affect the Bank's financial position and results of operations.
Note 2. Restrictions on Cash and Due from Banks
The Company is required to maintain reserve balances in cash or on deposit
with Federal Reserve Banks. The total of those reserve balances was
approximately $4,035,000 as of December 31, 1996.
Note 3. Securities
Carrying amounts and fair values of securities being held-to-maturity as
of December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
1996
<S> <C> <C> <C> <C>
Mortgage-backed securities $10,937,560 - $(92,943) $10,844,617
Other 173,671 - - 173,671
$11,111,231 $- $(92,943) $11,018,288
1995
Mortgage-backed securities $12,479,146 $5,416 $(63,222) $12,421,340
Other 173,671 - - 173,671
$12,652,817 $5,416 $(63,222) $12,595,011
</TABLE>
Securities being held-to-maturity with a carrying amount of $4,004,227 and
$4,006,440 at December 31, 1996 and 1995, respectively, were pledged as
collateral on public deposits and for other purposes as required or
permitted by law.
<PAGE>
Note 3. Securities (Continued)
Carrying amounts and fair values of available-for-sale securities as of
December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Values
1996
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of other
U.S. Government corporations and agencies
$28,991,728 $44,785 $(137,140) $28,899,373
1995
U.S. Treasury securities and obligations of other
U.S. Government corporations and agencies
$24,984,083 $72,382 $(142,243) $24,914,222
Mortgage-backed securities 2,018,380 - (24,304) 1,994,076
$27,002,463 $72,382 $(166,547) $26,908,298
</TABLE>
Available-for-sale securities with a carrying amount of $4,001,643 and
$3,991,010 at December 31, 1996 and 1995, respectively, were pledged as
collateral on public deposits and for other purposes as required or
permitted by law.
The amortized cost and fair value of investment securities as of December
31, 1996 by contractual maturities are shown below. Maturities may differ
from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or prepaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the following maturity summary:
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $- $- $3,998,702 $4,005,120
Due after one year through five years - - 16,997,87616,961,740
Due in six years through ten years - - 7,995,150 7,932,513
Mortgage-backed securities 10,937,56 10,844,617 - -
Other 173,671 173,671 - -
$11,111,231 $11,018,288 $28,991,728 $28,899,373
</TABLE>
Gross realized (losses) from the sale of $20,998,675 and $14,846,582
available-for-sale securities for the years ended December 31, 1996 and
1995 was $(23,578) and $(20,075), respectively.
<PAGE>
Note 3. Securities (Continued)
On March 31, 1994, the Company transferred certain securities from
available-for-sale to held-to-maturity. The amortized cost and fair value
of the securities at the date of the transfer were $5,971,740 and
$5,701,014 respectively. Amortized cost of held-to-maturity securities is
presented net of approximately $111,000 of unrealized loss on the
securities transferred from available-for-sale.
On December 29, 1995, the Company reassessed the appropriateness of the
classification of all securities in accordance with the issuance of
Financial Accounting Standards Board Guide to Implementation of Statement
No. 115 on Accounting for Certain Investments in Debt and Equity
Securities. As a result, the Company transferred debt securities at their
fair value of $4,995,483 on December 29, 1995 previously classified as
held-to-maturity into available-for-sale securities and recorded an
unrealized holding loss of $3,827.
Note 4. Loans
The composition of the Company's loan portfolio is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Real Estate Loans
Construction $1,412,112 $243,402
Commercial 64,611,382 61,563,940
66,023,494 61,807,342
Commercial and industrial loans 44,765,651 41,686,636
Loans to individuals 10,255,452 10,343,229
Other 152,421 1,206,759
121,197,018 115,043,966
Deduct
Unearned net loan fees and premiums (836,560) (807,388)
Allowance for credit losses ,369,288)( 1,512,544)
$118,991,170 $112,724,034<PAGE>
Note 4. Loans (Continued)
</TABLE>
<PAGE>
Impaired loans:
Information about impaired loans as of and for the years ended December
31, is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Loans receivable for which there is a related allowance
for credit losses $904,337 $1,642,374
Loans receivable for which there is no related allowance
for credit losses 180,181 217,260
Total impaired loans $1,084,518 $1,859,634
Related allowance for credit losses $267,695 $390,031
Average balance (based on month-end balances) $1,472,076 $2,634,317
Interest income recognized $140,000 $284,000
</TABLE>
The Company is not committed to lend additional funds to debtors whose
loans have been modified due to impairment.
As of December 31, 1996 and 1995, the Company had loans totaling
approximately $2,464,000 and $3,055,000, respectively, on which income was
not currently being accrued due to their delinquent status. Interest
income which would have been earned on such nonaccrual loans was
approximately $492,000, $205,000 and $169,000 (earnings per share effect
of $.15, $.06 and $.05) for the years ended December 31, 1996, 1995 and
1994, respectively. The Company's policy for requiring collateral is to
obtain collateral whenever it is available or desirable, depending upon
the degree of risk the Company is willing to undertake. Management
estimates that certain nonaccrual loans, which are not classified as
impaired, will ultimately be collected in full in accordance with the
original terms.
Loans serviced: The Company services approximately $53,374,000 and
$56,530,000 of loans for others as of December 31, 1996 and 1995,
respectively, which are not included in the accompanying balance sheets.
Note 5. Allowance for Credit Losses and Reserve for Other Real Estate
Owned
Changes in the allowance for credit losses are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance, beginning $1,512,544 465,000 $1,524,329
Provision charged to expense 205,000 320,000 297,907
Recoveries of amounts charged off 38,427 115,342 131,251
Amounts charged off (386,683) (387,798) (488,487)
Balance, ending $1,369,288 $1,512,544 $1,465,000
</TABLE>
<PAGE>
Note 5. Allowance for Credit Losses and Reserve for Other Real Estate
Owned (Continued)
Changes in the reserve for other real estate owned are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance, beginning $300,684 $31,612 $-
Provision charged to other real estate owned expense
160,217 303,561 31,612
Disposal of other real estate owned (209,160) (34,489) -
Balance, ending $251,741 $300,684 $31,612
</TABLE>
Note 6. Bank Premises and Equipment
The major classes of bank premises and equipment and the total accumulated
depreciation and amortization are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $1,100,000 $1,100,000
Buildings and leasehold improvements 4,472,086 4,384,645
Equipment and furnishings 3,241,679 3,132,999
8,813,765 8,617,644
Less accumulated depreciation and amortization
3,601,171 3,091,067
$5,212,594 $5,526,577
</TABLE>
Note 7. Deposits and Concentrations
At December 31, 1996, substantially all certificates of deposits mature within
one year.
As of December 31, 1996, the Company has deposit concentrations of approximately
$29,053,000 from five customers.
<PAGE>
Note 8 Income Taxes
The cumulative tax effects of the primary temporary differences are shown in the
following table:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred Tax Assets
Credit loss allowances $316,000 $378,000
Deferred compensation accruals 215,000 165,000
Interest accruals 90,000 93,000
Acquired net operating loss carryforward 85,000 94,000
Unrealized loss on available-for-sale securities
88,000 118,000
Other real estate allowance 105,000 125,000
State income taxes 136,000 133,000
Total deferred tax assets 1,035,000 1,106,000
Deferred tax liability, premises and equipment 678,000 632,000
Subtotal 357,000 474,000
Valuation allowance for deferred tax assets - 165,000
Net deferred tax assets $357,000 $309,000
</TABLE>
The Company recorded valuation allowances on deferred tax assets in excess of
deferred tax liabilities at December 31, 1995, due to the uncertainty of future
taxable income and reversal patterns of temporary differences. Management
believes that the net deferred tax assets, as of December 31, 1996, are more
likely than not to be realized.
The provision for income taxes charged to operations consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C>
Current tax expense $1,213,052 $1,488,000 $354,200
Deferred tax expense (benefit) (78,000) (309,000) 338,000
$1,135,052 $1,179,000 $692,200
</TABLE>
<PAGE>
Note 8. Income Taxes (Continued)
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income as follows:
1996 1995 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Computed "expected" tax expense $1,168,000 $1,296,000 $613,200
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit
249,000 278,000 105,000
Change in valuation allowance (165,000) (483,000) (10,000)
Cash value of life insurance (85,000) - -
Other (31,948) 88,000 (16,000)
$1,135,052 $1,179,000 $692,200
</TABLE>
Note 9. Commitments and Contingencies
Contingencies: In the normal course of business, the Company is
involved in various legal proceedings. In the opinion of management, any
liability resulting from such proceedings would not have a material
adverse effect on the consolidated financial statements.
Financial instruments with off-balance sheet risk: The Company is
party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby
letters of credit. They involve, to varying degrees, elements of credit
risk in excess of amounts recognized on the consolidated balance sheets.
The Company's exposure to credit loss in the event of nonperformance by
the other parties to the financial instrument for these commitments is
represented by the contractual amounts of those instruments. The Company
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
A summary of the contract amount of the Company's exposure to off-balance
sheet risk as of December 31, 1996 and 1995 is as follows:
1996 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Commitments to extend credit $26,451,000 $23,739,000
Standby letters of credit 1,907,000 1,533,000
$28,358,000 $25,272,000
</TABLE>
<PAGE>
Note 9. Commitments and Contingencies (Continued)
Commitments to extend credit: Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's creditworthiness
on a case-by-case basis. If deemed necessary upon extension of credit,
the amount of collateral obtained is based on management's credit
evaluation of the counterparty. Collateral held varies, but may include
accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
Standby letters of credit: Standby letters of credit are conditional
commitments issued by the Company to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to
support public and private borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Collateral held
varies as specified above and is required in instances which the Company
deems necessary. At December 31, 1996, substantially all of the standby
letters of credit were collateralized.
Lease commitments: The Company leases certain branch facilities and
equipment from nonaffiliates under operating leases expiring at various
dates through September 2004. The following is a schedule of future
minimum rental payments under these leases: 1997 $465,000; 1998 $367,000;
1999 $303,000; 2000 $257,000 2001 $262,000; thereafter $698,000; total
$2,352,000. Annual rent expense under these leases and other
month-to-month leases for the years ended December 31, 1996, 1995 and
1994, was approximately, $790,000, $ 771,000 and $793,000, respectively.
Data processing commitment: In March 1995, the Company contracted with a
data processing center to provide computer services. The contract expires
in March 2001. Should the Company terminate the contract prior to the
expiration date, the Company is subject to a penalty in the amount of 25%
of the amounts that would have been paid to the center for the remainder
of the contract term. The expense under this contract for the year ended
December 31, 1996 and the nine months ended December 31, 1995 was
approximately $927,000 and $500,000, respectively.
<PAGE>
Note 10. Stock Option Plans
The Company maintains a compensatory incentive stock option plan in which
options to purchase shares of the Company's common stock are granted at
the Board of Directors' discretion to certain management and other key
personnel. The Plan was originally established for a maximum of 193,106
shares of the Company's common stock. Purchase prices associated with the
options range from $5.78 to $9.92 and are based on the fair market value
of the Company's stock at the time the option is granted. The options, if
not exercised, will expire 5 years from the date they were granted. Other
pertinent information relating to the Plan follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Under option, beginning of year 62,600 47,500 41,000
Granted 5,000 21,000 6,500
Canceled - (5,500) -
Effect of 5% stock dividend - 2,100 -
Exercised (19,100) (2,500) -
Under option, end of year 48,500 62,600 47,500
Options exercisable, end of year 48,500 62,600 47,500
Available to grant, end of year 123,006 128,006 136,411
Weighted average price under option, end of year
$6.32 $5.89 $6.07
Weighted average price of options granted,
during the year $9.92 $6.17 $6.09
Weighted average price of options exercised,
during the year $8.67 $7.23 $-
Weighted average price of options canceled,
during the year $- $6.07 $-
</TABLE>
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized. The Company has
elected not to adopt FASB Statement No. 123, Accounting for Stock-Based
Compensation. The Company has not issued any options to nonemployees. Had
compensation cost for the Company's stock option plan been determined
based on the fair value at the grant dates for awards under this plan
consistent with the method of Statement No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C>
Net income As reported $2,201,049 $2,524,490
Pro forma 2,195,029 2,516,337
Earnings per share As reported 1.13 1.30
Pro forma 1.12 1.30
</TABLE>
<PAGE>
Note 10. Stock Option Plans (Continued)
The pro forma compensation cost was recognized for the fair value of the
stock options granted, which was estimated using the Black-Scholes model
with the following assumptions: Expected volatility ranging from 12% to
20%, dividends as a percentage of stock price is 2.8%, expected average
life of four years, and risk-free interest rates, ranging from 5.4% to
7.9%. The weighted average fair value of these stock options granted in
1996 and 1995 was $2.13 and $1.51, respectively.
Note 11. Employee Benefit Plans
Salary deferral 401(k) plan: The Company has a salary deferral 401(k)
plan for all employees who have completed one year of service. The Bank
contributes matching funds at its option which amounted to $102,000 and
$97,000 for 1996 and 1995, respectively.
Contingency contract: The Company has a contingency contract with the
Chief Executive Officer and Chief Financial Officer of the Company which
provides for monthly payments of $13,000 for 179 months in the event that
the Company experiences a merger, acquisition, or other act wherein they
are not retained in similar position with the surviving Company.
Note 12. Loans and Other Transactions With Related Parties
Stockholders of the Company, and officers and directors, including their
families and companies of which they are principal owners, are considered
to be related parties. These related parties were loan customers of, and
had other transactions with, the Company in the ordinary course of
business. In management's opinion, these loans and transactions were on
the same terms as those for comparable loans and transactions with
nonrelated parties.
Total loans to related parties were $2,906,320 and $2,832,606 at December
31, 1996 and 1995, respectively. The activity in such loans is as
follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Balance, beginning $2,832,606 $2,829,182
New loans 2,976,810 4,356,000
Repayments (2,903,096) (4,352,576)
Balance, ending $2,906,320 $2,832,606
</TABLE>
None of these loans are past due, nonaccrual, or restructured to provide
a reduction or deferral of interest or principal because of deterioration
in the financial position of the borrower. There were no loans to a
related party that were considered classified loans at December 31, 1996
and 1995.
<PAGE>
Note 13. Regulatory Capital Requirements
The subsidiary 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 qualitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital 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 June 30, 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, Tier I leverage ratios as set forth in the table. There are
no conditions or events since that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are presented in the
following table (in thousands of dollars):
<TABLE>
<CAPTION>
To Be Well
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Amount Amount
(000's) Ratio (000's) Ratio (000's) Ratio
As of December 31, 1996:
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk
Weighted Assets) $19,937 13.3% > $11,993 8.0% > $14,991 10.0%
Tier I Capital (to Risk
Weighted Assets) $18,568 12.4% > $5,996 4.0% > $8,995 6.0%
Tier I Capital (to
Average Assets) $18,568 8.3% > $8,907 4.0% > $11,134 5.0%
As of December 31, 1995:
Total Capital (to Risk
Weighted Assets) $18,388 12.8% > $11,491 8.0% > $14,364 10.0%
Tier I Capital (to Risk
Weighted Assets) $16,876 11.7% > $5,746 4.0% > $8,618 6.0%
Tier I Capital (to
Average Assets) $16,876 8.2% > $8,277 4.0% > $10,346 5.0%
</TABLE>
The Company's capital amounts and ratios are substantially the same as the
amounts presented above.
<PAGE>
Note 14. Statement of Cash Flows
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash payments (receipts) for:
Interest $3,572,919 $3,035,412 $2,526,592
Income taxes $1,100,000 $2,005,247 $(630,034)
Disposition of Other Real Estate Owned, financed
by loans from the Company $100,000 $272,776 $-
</TABLE>
Note 15. Fair Values of Financial Instruments
The fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION
1996 1995
Carrying Carrying
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Financial Assets
Cash and short-term investments
$19,635,829 $19,635,829 $22,929,660 $22,929,660
Securities 40,010,604 39,917,661 39,561,115 39,503,309
Loans, net 118,991,170 119,051,170 112,724,034 114,468,551
Accrued interest receivable 1,352,331 1,352,331 1,167,707 1,167,707
Federal funds sold 26,800,000 26,800,000 18,500,000 18,500,000
</TABLE>
Financial Liabilities, deposits198,363,753 198,381,562 188,991,370 188,999,119
Fair value of commitments: The estimated fair value of fee income on
letters of credit at December 31, 1995 and 1994, is insignificant.
Interest rate risk:
The Company assumes interest rate risk (the risk that general interest
rate levels will change) as a result of its normal operations. As a
result, fair value of the Company's financial instruments will change when
interest rate levels change and that change may be either favorable or
unfavorable to the Company. Management attempts to match maturities of
assets and liabilities to the extent believed necessary to minimize
interest rate risk. However, borrowers with fixed rate obligations are
less likely to prepay in a rising rate environment and more likely to
prepay in a falling rate environment. Conversely, depositors who are
receiving fixed rates are more likely to withdraw funds before maturity in
a rising rate environment and less likely to do so in a falling rate
environment. Management monitors rates and maturities of assets and
liabilities and attempts to minimize interest rate risk by adjusting terms
of new loans and deposits and by investing in securities with terms that
mitigate the Company's overall interest rate risk.
<PAGE>
Note 16. Parent Company Only Condensed Statements
CONDENSED BALANCE SHEETS
(in 000's)
1996 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Cash $333 $207
Investment in subsidiary 18,445 16,877
Other assets 178 178
$18,956 $17,262
Stockholders' equity $18,956 $17,262
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
(in 000's)
1996 1995 1994
<S> <C> <C> <C>
Operating income, dividends from subsidiary $718 $474 $224
Expenses, professional fees (40) (16) -
Income before equity in subsidiary
undistributed income 678 458 224
Equity in undistributed income of subsidiary 1,523 2,066 611
Net income $2,201 $2,524 $835
</TABLE>
<PAGE>
Note 16. Parent Company Only Condensed Statements (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
(in 000's)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $2,201 $2,524 $835
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiary
(1,523) (2,066) (611)
Decrease in other assets - - 149
Net cash provided by operating activities
678 458 373
Cash Flows from Investing Activities,
capital contributed to subsidiary - - (120)
Cash Flows from Financing Activities
Exercise of stock options 166 18 -
Dividends paid (718) (474) (92)
Net cash (used in) financing activities (552) (456) (92)
Increase in cash and due from banks 126 2 161
Cash and Due from Banks
207 205 44
Ending $333 $207 $205
</TABLE>
Note 17. Discontinued Operations
The Company and its subsidiary operate primarily in the banking industry.
Operations in the banking industry involve a variety of banking and financial
services. In 1993, the Company began a mortgage banking division which
consisted of origination of mortgage loans, sale of mortgage loans in the
secondary market and servicing of mortgage loans. During 1994, the Company
ceased its mortgage banking operations. There was no gain or loss on the
disposal of the segment. Segment information for the year ended
December 31, 1994 is presented on the following table:
<PAGE>
Note 17. Discontinued Operations (Continued)
Mortgage
Banking Banking Consolidated
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1994:
<S> <C> <C> <C>
Unaffiliated revenue $16,544 $512 $17,056
Income (loss) before income taxes $1,752 $(372) $1,380
Identifiable assets $206,510 $- $206,510
</TABLE>
Income tax (credits) allocated to the loss on discontinued operations was
$(148,000).
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 19636
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 26800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28899
<INVESTMENTS-CARRYING> 11111
<INVESTMENTS-MARKET> 11018
<LOANS> 120360
<ALLOWANCE> 1369
<TOTAL-ASSETS> 218845
<DEPOSITS> 198364
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1526
<LONG-TERM> 0
0
0
<COMMON> 7675
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 218845
<INTEREST-LOAN> 11712
<INTEREST-INVEST> 4182
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 15894
<INTEREST-DEPOSIT> 3519
<INTEREST-EXPENSE> 3519
<INTEREST-INCOME-NET> 12375
<LOAN-LOSSES> 205
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11547
<INCOME-PRETAX> 3336
<INCOME-PRE-EXTRAORDINARY> 3336
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2201
<EPS-PRIMARY> $1.13
<EPS-DILUTED> $1.13
<YIELD-ACTUAL> 8.69
<LOANS-NON> 2464
<LOANS-PAST> 7
<LOANS-TROUBLED> 1301
<LOANS-PROBLEM> 1297
<ALLOWANCE-OPEN> 1513
<CHARGE-OFFS> 387
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 1369
<ALLOWANCE-DOMESTIC> 1369
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
