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.
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.
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.):
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.):
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:
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):
(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.
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)
(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.
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):
(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.
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.
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):
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.
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:
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.
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):
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.
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):
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):
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.
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):
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.
Return on Equity and Assets
The following table indicates the key financial ratios of the Bank for the periods indicated:
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.
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.
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
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
ITEM 4 SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5
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
ITEM 6 SELECTED FINANCIAL DATA
ORANGE NATIONAL BANCORP FINANCIAL HIGHLIGHTS
SELECTED FINANCIAL DATA
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.
ITEM 7
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.
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.
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.
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:
(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.
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.
Market quotations prior to February 13, 1996 reflect inter-dealer prices, without retail markup, markdown, or commission and may not necessarily represent actual transactions.
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:
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
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are set forth on pages to following. The Auditors' Report thereon is set forth on Page following.
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10
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
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
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
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.
PART IV
ITEM 14
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
Consolidated balance sheets December 31, 1996 and 1995
Consolidated statements of income for the three years ended December 31, 1996
Consolidated statement of stockholders' equity for the three years ended December 31, 1996
Consolidated statement of cash flows for the three years ended December 31, 1996
Notes to consolidated financial statements to
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.
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
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
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.
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