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, 1995
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.............................................
Commission File No. 33-8743
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)
92667
(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 February 15,1996, the aggregate market value of the voting shares held
by nonaffiliates of the Registrant was approximately $13,638,353. 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.
1,937,646 Shares of Common Stock were outstanding at March 15, 1996.
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, 1995
Part III
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 Registrant 28
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
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 92667.
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 92667 and the five branch offices are located at 77
Plaza Square, Orange, California 92666; 2019 West Orangewood Avenue, Orange,
California 92668; 7510 East Chapman Avenue, Orange, California 92669; 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 92668 and at 115 and 274 North
Glassell Street, Orange, California 92666.
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. Losses from the discontinued
mortgage banking operations totaled $224,000 in 1994 and $258,000 in 1993.
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, 1995, these three categories accounted for approximately 36.2%,
9.1%, and 53.7%, 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 85% of loans are written with variable interest rates.
As of December 31, 1995, the Bank has total unused loan and credit
commitments of $25,272,000 of which $1,533,000 were standby letters of credit
and $23,739,000 were commitments to grant loans. The Bank presently has
sufficientliquidity to fund all loan commitments.
Although the loan portfolio is diversified, as of December 31, 1995, the
Bank is the creditor for approximately $4.8 million of loans to companies or
individuals and approximately $6.3 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, 1995, the Bank had approximately $70.2 million in total
noninterest bearing demand deposits, $12.5 million in savings, $14.6 million in
time deposits for individuals and corporations, and $91.7 million in NOW and
money market accounts.
As of December 31, 1995, the Bank had total deposits of approximately
$189.0 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 1995, these sources comprised approximately 66.9% and 18.7%,
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.):
Year Ended December 31,
ASSETS 1995 1994
Cash and due from banks $19,679 9.5% $18,934 9.8%
Interest bearing deposits at
financial institutions 0 0 2 0
Securities 43,073 20.8 32,960 17.0
Federal funds sold 20,372 9.9 19,944 10.3
Loans 114,820 55.4 114,718 59.3
Less allowance for loan losses (1,601) (0.7) (1,562) (0.8)
Net loans 113,219 54.7 113,156 58.5
Bank premises and equipment, net 5,483 2.7 5,492 2.8
Accrued interest receivable and
other assets 5,101 2.4 3,143 1.6
TOTAL ASSETS $206,927 100.0% $193,631 100.0%
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits:
Noninterest-bearing, demand $64,372 31.1% $59,628 30.8%
Market rate and money
market, demand 99,182 47.9 90,734 46.9
Savings 13,474 6.5 14,229 7.3
Time 12,511 6.1 13,650 7.1
Total deposits 189,539 91.6 178,241 92.1
Other liabilities 1,286 0.6 869 0.4
Total liabilities 190,825 92.2 179,110 92.5
Stockholders' equity:
Common stock 7,109 3.4 6,848 3.5
Retained earnings 8,993 4.4 7,673 4.0
Total stockholders' equity 16,102 7.8 14,521 7.5
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $206,927 100.0% $193,631 100.0%
ASSETS 1993
Cash and due from banks $18,812 10.1%
Interest bearing deposits at
financial institutions 4,266 2.3
Securities 8,930 4.8
Federal funds sold 28,522 15.3
Loans 118,774 63.7
Less allowance for loan losses (1,732) (0.9)
Net loans 117,041 62.8
Bank premises and equipment, net 5,619 3.0
Accrued interest receivable and
other assets 3,213 1.7
TOTAL ASSETS $186,403 100.0%
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing, demand $51,141 27.4%
Market rate and money
market, demand 88,661 47.6
Savings 14,354 7.7
Time 14,923 8.0
Total deposits $169,079 90.7
Other liabilities 2,540 1.4
Total liabilities 171,619 92.1
Stockholders' equity:
Common stock 6,848 3.5
Retained earnings 7,936 4.2
Total stockholders' equity 14,784 7.9
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $186,403 100.0%
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.):
Year Ended December 31,
Category 1995 1994 1993
Interest bearing deposits at
financial institutions:
Average outstanding $- $2 $4,266
Average yield - - 3.59%
Amount of interest earned - - $153
Securities:
Average outstanding $43,073 $32,960 $8,930
Average yield 5.74% 4.87% 4.87%
Amount of interest earned $2,471 $1,606 $435
Federal funds sold:
Average outstanding $20,372 $19,944 $28,522
Average yield 5.63% 4.12% 2.82%
Amount of interest earned $1,146 $822 $805
Net loans:
Average outstanding $113,219 $113,156 $117,041
Average yield 11.44% 10.15% 9.42%
Amount of interest and
fees earned $12,954 $11,480 $11,022
Total earning assets:
Average outstanding $176,664 166,062 $158,759
Average yield 9.38% 8.38% 7.82%
Amount of interest earned $16,571 $13,908 $12,415
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:
Category Year Ended December 31,
1995 1994 1993
Market rate and money market deposits(1)
Average outstanding $99,182 $90,734 $88,661
Average rate paid 2.34% 2.01% 2.10%
Amount of interest paid or
accrued $2,325 $1,826 $1,865
Savings:
Average outstanding $13,474 $14,229 $14,354
Average rate paid 1.98% 2.00% 2.30%
Amount or interest paid or
accrued $267 $285 $330
Time:
Average outstanding $12,511 $13,650 $14,923
Average rate paid 4.39% 2.90% 2.87%
Amount of interest paid or
accrued $549 $396 $428
Total interest-bearing liabilities:
Average outstanding $125,167 $118,613 $117,938
Average rate paid 2.51% 2.11% 2.22%
Interest expense $3,141 $2,507 $2,623
(1) Market rate and money market deposits include only interest-bearing
transaction accounts.
Net Yield on Interest- Earning Assets 7.60% 6.87% 6.17%
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):
1995 over 1994 (1)
Volume Rate Total
Increase (decrease) in:
Interest income:
Interest-bearing deposits
at financial institutions $-0- $-0- $-0-
Investment securities 493 372 865
Federal funds sold 18 306 324
Net loans 6 1,468 1,474
Total earning assets $517 $2,146 $2,663
Interest expense:
Market rate and money
market deposits $170 $329 $499
Savings deposits (15) (3) (18)
Time deposits (33) 186 153
Total Interest-bearing
liabilities $122 $512 $634
<CAPTION
1994 over 1993 (1)
Volume Rate Total
Increase (decrease) in:
Interest income:
Interest-bearing deposits
at financial institutions $(153) $-0- $(153)
Investment securities 1,170 1 1,171
Federal funds sold (242) 259 17
Net loans (366) 824 458
Total earning assets $409 $1,084 $1,493
Interest expense:
Market rate and money
market deposits $44 $(83) $(39)
Savings deposits (3) (42) (45)
Time deposits (37) 5 (32)
Total Interest-bearing
liabilities $4 $(120) $(116)
(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 $1,089,000 for 1995 , $1,153,000 for
1994, and $1,042,000 for 1993 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)
December 31,
1995 1994
Amortized Market Amortized Market
Cost (1) Value Cost (1) Value
Mortgage-backed securities $12,479 $12,421 $12,857 $11,745
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations -0- -0- 8,873 8,649
Other 174 174 174 174
Total $12,653 $12,595 $21,904 $20,568
1993
Amortized Market
Cost (1) Value
Mortgage-backed securities $9,076 $8,959
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations 999 975
Other 174 174
Total $10,249 $10,108
(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,
1995 1994
Amortized Market Amortized Market
Cost Value (2) Cost Value(2)
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations $24,984 $24,914 $15,940 $15,377
Mortgage-backed securities 2,018 1,994 4,024 3,871
Total $27,002 $26,908 $19,964 $19,248
1993
Amortized Market
Cost Value (2)
<C.
U.S. Treasury securities and
obligations of other U.S.
Government agencies and
corporations $10,010 $9,993
Mortgage-backed securities 8,020 7,912
Total $18,030 $17,905
(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
$192,000 of unrealized loss on the securities transferred from available for
sale.
Securities (continued)
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 1995 (in
thousands of dollars, except percent amounts):
Principal Amount Book Value(1) Average Yield(2)
Mortgage-backed securities(3) $14,641 $14,473 5.28%
U.S. Treasury Securities and
obligations of U.S.
Government Agencies and
corporations:
Due within one year 6,000 6,004 5.62%
Due after one year but
within five years 19,000 18,910 5.77%
Other 174 174 5.87%
Total Securities $39,815 $39,561 5.57%
(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.
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. 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.
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):
December 31,
1995 1994
TYPE OF LOAN
Real estate, mortgage (includes
only loans secured primarily
by real estate $61,084 53.5% $61,345 53.7%
Mortgage loans held for sale - - - -
Real estate, construction 242 0.2% 2,286 2.0%
Commercial and industrial 41,361 36.2% 40,976 35.9%
Loans to individuals 10,343 9.1% 9,384 8.2%
Other 1,207 1.0% 177 0.2%
TOTAL LOANS $114,237 100% $114,168 100%
Less allowance for possible loan losses
(1,513) (1,465)
TOTAL NET LOANS $112,724 $112,703
December 31,
1993 1992
TYPE OF LOAN
Real estate, mortgage
(includes only loans secured
primarily by real estate $64,310 55.9% $61,816 52.1%
Mortgage loans held for sale 2,050 1.8% - -
Real estate, construction 3,473 3.0% 7,097 6.0%
Commercial and industrial 34,376 29.8% 38,432 32.4%
Loans to individuals 10,127 8.8% 10,455 8.8%
Other 858 0.7% 890 0.7%
TOTAL LOANS $115,194 100% $118,690 100%
Less allowance for possible loan losses
(1,524) (1,425)
TOTAL NET LOANS $113,670 $117,265
[CAPTION]
December 31,
1991
[S] [C] [C]
TYPE OF LOAN
Real estate, mortgage
(includes only loans secured
primarily by real estate $51,527 44.8%
Mortgage loans held for sale - -
Real estate, construction 5,472 4.7%
Commercial and industrial 42,710 37.2%
Loans to individuals 11,225 9.8%
Other 4,007 3.5%
TOTAL LOANS $114,941 100%
Less allowance for possible loan losses
( 950)
TOTAL NET LOANS $113,991
[/TABLE]
Included in the loans above are approximately $4,753,000, $3,743,000,
$4,236,000, $4,037,000 and $5,385,000 from companies or individuals which are
unsecured as of December 31, 1995,1994,1993, 1992 and 1991, 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 1995.
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:
Within one After one but After
year (1) within five five years
years
Commercial and industrial $34,755 $5,864 $742
Real estate construction 242 -0- -0-
Distribution between fixed and
floating interest rates after one
year:
Fixed interest rates 403 50
Floating interest rates 5,561 692
(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
defaultsin 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 is 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 incudes 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):
At December 31,
1995 1994 1993 1992 1991
Loans on non-accrual basis $3,055 $3163 $2,744 $3,100 $310
Loans past due 90 days or more
and still accruing interest 33 158 46 958 347
Troubled debt restructuring, and
not included above -0- -0- -0- -0- -0-
Total $3,088 $3,321 $2,790 $4,058 $657
If all such loans had been current in accordance with their original terms
during the year ended December 31, 1995, approximately $273,000 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, 1995 was
approximately $68,000.
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.
As of December 31, 1995, 1994, 1993, 1992 and 1991 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.
Credit Risk Management (continued)
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):
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Year Ended December 31
1995 1994 1993
Average loans $114,820 $114,718 $118,774
Total gross loans at end of period $114,237 $114,168 $115,194
Reserve for loan losses:
Balance, beginning of period $1,465 $1,524 $1,425
Charge-offs:
Commercial and industrial $302 $459 $232
Real estate - construction -0- -0- 30
Real estate - mortgage 70 25 76
Installment 16 4 27
$388 $488 $365
Recoveries
Commercial and industrial $63 $129 $67
Leases 45 -0- -0-
Real estate - construction -0- -0- -0-
Real estate - mortgage 8 -0- -0-
Installment -0- 2 3
$116 $131 $70
Net charge-offs (recoveries) $272 $357 $295
Additions charge to
(reductions in) operations $320 $298 $394
Acquired by purchase of Laguna
Bank $-0- $-0- $-0-
Balance, end of period $1,513 $1,465 $1,524
Net charge-offs(recoveries)during the
period to average gross loans
outstanding during period 0.24% 0.31% 0.25%
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Year Ended December 31,
1992 1991
Average loans $120,028 $106,670
Total gross loans at end of period $118,690 $114,941
Reserve for loan losses:
Balance, beginning of period $ 950 $ 900
Charge-offs:
Commercial and industrial $582 $312
Real estate - construction -0- -0-
Real estate - mortgage -0- 59
Installment 2 18
$584 $389
Recoveries
Commercial and industrial $34 $7
Leases -0- 502
Real estate - construction -0- -0-
Real estate - mortgage -0- -0-
Installment 4 4
$38 $513
Net charge-offs (recoveries) $546 $(124)
Additions charge to
(reductions in) operations $790 $(74)
Acquired by purchase of Laguna Bank $231 $-0-
Balance, end of period $1,425 $950
Net charge-offs(recoveries)during the
period to average gross loans
outstanding during period 0.45% (0.12)%
Credit Risk Management (continued)
The Bank has allotted the allowance for loan 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):
December 31,
1995 1994
Allowance Percent of Allowance Percent of
Amount Loans in Each Amount Loans in Each
Category to Category to
Total Loans Total Loans
Commercial and Industrial $831 36.2% $744 35.9%
Real Estate - construction 3 0.2 124 2.0
Mortgage loans held for sale -0- 0.0 -0- 0.0
Real estate - mortgage 594 53.5 468 53.7
Installment 62 9.1 108 8.2
Other 23 1.0 21 0.2
$1,513 100.0% $1,465 100.0%
1993 1992
Commercial and Industrial $550 29.8% 550 32.4%
Real Estate - construction 75 3.1 417 6.0
Mortgage loans held for sale -0- 1.8 -0- 0.0
Real estate - mortgage 837 55.9 400 52.1
Installment 40 8.8 56 8.8
Other 22 0.7 2 0.7
$1,524 100.0% $1,425 100.0%
1991
Commercial and Industrial $370 37.2%
Real Estate - construction 33 4.7
Mortgage loans held for sale -0- 0.0
Real estate - mortgage 256 44.8
Installment 67 9.8
Other 224 3.5
$950 100.0%
Included in the Bank's allocation of its allowance for loan 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. On January 1, 1995, the
Company adopted Financial Accounting Standards Board (FASB) Statement No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by FASB Statement
No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures. There was no effect on the Company's financial statements for
this change, which generally requires impaired loans to be measured on the
present value of the expected future cash flows discounted at the loan's
effective interest rate, or as an expedient at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
The entire change in the present value of the expected future cash flows is
recorded as an increase or decrease in provision for credit losses. 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. Generally, interest income is not recognized until
all principal amounts are received. At January 1, 1995, the Bank has
classified $3,409,000 of its loans as impaired with a specific loss reserve
of $404,000.
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, 1995 and 1994, the aggregate amount of interest-bearing
deposits was 62.8% and 64.1%, 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, 1995, the Bank has deposit concentrations of $28,158,000 from
four 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):
Year Ended Demand MoneyMarket Savings Time TotalDeposits
December 31 (noninterest and Now
Bearing
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%
1993
Average balance $51,141 $88,661 $14,354 $14,923 $169,079
Percent of total 30.3% 52.4% 8.5% 8.8% 100%
Average rate paid 0.0% 2.1% 2.3% 2.9% 1.6%
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 1995.
<CATION>
1995
Balance Percent of Total
Less than three months $4,017 60.6%
Three months through six months 1,611 24.3
Six months through twelve months 1,004 15.1
Over twelve months -0- 0.0
$6,632 100.0%
Return on Equity and Assets
The following table indicates the key financial ratios of the Bank for the
periods indicated:
Year Ended December 31,
1995 1994 1993
Profitability ratios:
Rate of return on average total assets
1.22% 0.43% 0.11%
Rate of return on average stockholders' equity
15.68% 5.75% 1.35%
Capital Ratios:
Dividend payment ratio to net income (1)
19.23% 11.00% 0.0%
Average stockholders' equity to average total assets
7.78% 7.50% 7.93%
(1) Dividends declared exclude stock dividends
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, 1995.
Employees
As of December 31, 1995, the Bank employed 126 full-time and 10 part-time
persons, including 28 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
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
1995 1994 1993
Results of operations(000's except per
share amounts):
Total Interest income $16,571 $13,908 $12,416
Net Interest Income 13,430 11,400 9,792
Provisions for possible loan
and lease losses 320 298 394
Non Interest Income 2,781 2,612 2,279
Non Interest Expense 12,187 11,962 11,744
Income from continuing
operations before cumulative
effect of change in accounting
principle 3,703 1,060 457
Cumulative effect in change in
accounting principle - - -
Income from continuing operation 3,703 1,060 457
Loss from discontinued operations - (225) (258)
Net Income 2,524 835 199
Earnings per common share:
Primary $1.30 $0.43 $0.10
Fully diluted 1.30 0.43 0.10
Cash dividends per share 0.25 0.05 -
Weighted average number of common shares
outstanding:
Primary 1,941 1,931 1,931
Fully diluted 1,941 1,931 1,931
Financial condition (000's):
Total assets $207,928 $206,510 $193,290
Loans (net) 112,724 112,703 113,670
Deposits 188,991 190,406 177,571
Mandatory convertible debentures - - -
Stockholders' equity 17,262 14,782 14,543
ORANGE NATIONAL BANCORP FINANCIAL HIGHLIGHTS
SELECTED FINANCIAL DATA
1992 1991
Results of operations(000's
except per share amounts):
Total Interest income $12,436 $14,339
Net Interest Income 8,917 8,635
Provisions for possible loan
and lease losses 790 (74)
Non Interest Income 2,381 2,228
Non Interest Expense 10,119 8,841
Income from continuing
operations before cumulative
effect of change in accounting
principle 229 1,273
Cumulative effect in change in
accounting principle - 900
Income from continuing operations 229 2,173
Loss from discontinued operations - -
Net Income 229 2,173
Earnings per common share:
Primary $0.13 $1.29
Fully diluted 0.13 1.15
Cash dividends per share 0.29 -
Weighted average number of common shares outstanding:
Primary 1,638 1,543
Fully diluted 1,745 1,754
Financial condition (000's):
Total assets $175,681 $178,380
Loans (net) 117,265 113,991
Deposits 159,118 161,139
Mandatory convertible debentures - 1,762
Stockholders' equity 14,419 12,906
Primary and fully diluted earnings per share in 1991 were increased due to the
cumulative effect of the change in accounting principle by $.56 and $.49,
respectively. 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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
Total interest earning assets decreased approximately $11,300,000 from December
31, 1994 to 1995. The decrease is due to a temporary increase in cash and due
from banks, an investment in life insurance and a small decline in deposits. The
Company is trying to increase its loan base with quality loans. Interest earning
assets increased approximately $11,200 from December 31, 1993 to 1994. In 1994,
deposits increased $12,800,000 and that increase was invested primarily in
marketable debt securities.
The Company has been increasing its investment in securities from 1993 to 1995.
Average balances have increased, $24,030,000 in 1994 and $10,113,000 in 1995.
The reason for the increase is due to an increase in deposits without being able
to increase loans. 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 declined in 1994 due to an
increasing interest rate environment. In 1995 the market values of securities
increased almost as much as 1994 values declined due to a decline in interest
rates late in the year.
Loans decreased 0.02% in 1995 compared to a decrease of 0.85% in 1994. The
supply of high quality loans continues to be soft in the Southern California
area.
Bank premises and equipment, net of depreciation, increased by $139,898 in 1995
and decreased $133,017 in 1994. The Company purchased approximately $300,000 in
equipment in 1994 and $675,000 in 1995. The level of capital expenditures in
the future is not expected to be substantially different.
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 decreased .7% in 1995 compared to an increase of 7.2% in 1994. In
the last quarter of 1994 the bank entered into a deposit relationship with a
company that administers pension funds. Deposits from the company were
approximately $8,900,000 as of December 31, 1994 and $14,000,000 as of December
31, 1995. Deposit differences between the years fluctuate due to balances
maintained by large depositors. Overall average deposit balances are up
approximately $10,000,000 in 1995 and 1994.
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, 1995 was 59.6% compared to 59.2% at
December 31, 1994. 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 29.4% at
December 31, 1995 compared to 30.8% at December 31, 1994. The Company may
borrow funds under securities sold with agreements to repurchase for
securities that have not been pledged. At December 31, 1995 unpledged
securities totaled approximately $35,500,000. 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, 1995, the Bank has deposit concentrations of $28,000,000 from
four customers which include the $14,000,000 referred to above in deposits
from a company that administers pension funds. The Company continues to meet
its loan demands 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,
1995, 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, 1995 core capital of the Bank was $16,876,000,
total capital was $18,388,000. The ratio of core and total capital to risk
adjusted assets at December 31, 1995 was 11.7% and 12.8%, respectively. The
leverage ratio was 8.2% at December 31, 1995. At December 31, 1995, 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 increased 19.2% in 1995, and 12.0% in 1994. The average
yield increased in 1995 and in 1994 by 1.00% and .60% respectively. The increase
in interest income in 1995 was due primarily to increased rates. The average
rate increase on loans in 1995 was 1.29%. The yield on loans will change along
with the movements in the prime rate as approximately 85% of the loan portfolio
is based on variable rates. The total average balances of interest earning
assets increased approximately $10,600,000 in 1995. The average balance in loans
increased approximately $65,000 in 1995 and average balances in investment
securities increased approximately $10,100,000. Interest income from investment
securities increased in 1994 due to the purchase of $13,000,000 of U.S. Treasury
and Agency securities in 1994. Interest income from investment securities
increased in 1995 due to the increase in the average balances of investment
securities. The average balance in federal funds sold increased by $430,000 in
1995. Interest income on federal funds sold increased by 39.6% in 1995 and 2.0%
in 1994. The 1995 increase is due primarily to the increase in rates for most of
1995.
Total interest expense increased 25.3% in 1995 and decreased 4.4% in 1994. The
decrease in 1994 was due to an .11% decline in the average rate paid partially
offset by the average interest bearing liabilities increasing by approximately
$675,000 or 0.6% in 1994. The increase in 1995 was due to a .40% increase in the
average rate paid and average interest bearing liabilities increasing by
approximately $6,550,000 or 5.5%.
In 1995, 1994 and 1993 the credit loss provisions were $320,000, $298,000 and
$394,000 respectively. Management believes that the allowance for credit losses
is adequate to provide for potential losses in the portfolio. The economic
outlook for 1996 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 increased $169,000 in 1995 compared to an increase of $333,000 in
1994 . The increase in 1994 was primarily due to increased service charges and
fees for business accounts which began in 1993. Other expenses such as salaries,
promotion expense and professional services decreased in 1995 due to the closure
of the mortgage banking department and a restructuring of the bank in 1994.
Other expenses has remained fairly consistent for the years ended 1995, 1994 and
1993.Payroll costs are up slightly in 1995 due to increases in the average
compensation per person and the accrual of discretionary bonuses, while the
total number of full time equivalent employees is declining. Other real estate
owned expenses are up in 1995 due to the increased number of properties owned by
the Bank.
In 1995, the Company reduced its valuation allowance on net deferred tax assets
by $483,000. This reduction 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%. In the first quarter of 1993,
management determined that a reserve for potential future income tax liabilities
was no longer considered necessary and a $500,000 credit to income tax expense
was recorded.
The Company has 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. The provisions in 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 1995 increased approximately $1,700,000 over 1994 due primarily to
an increase in the average rate on interest earning assets and the $483,000
reduction in tax expense and the closure of the mortgage banking operation. 1994
net income increased approximately $635,000 over 1993 due to a decrease in the
average rate paid on deposits and an increase in the average rate on interest
earning assets. However, 1993 net income included the $500,000 reversal of the
income tax contingency reserve provided for in prior years. 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:
Repricing period (000's omitted)
Three months Over three months One year through Over Five
or less through twelve Five Years Years
Months
Interest
earning assets $119,215 $9,066 $28,674 $15,343
Interest bearing
liabilities 111,373 5,523 1,858 -
Repricing gap $7,842 $3,543 $26,816 $15,343
Cumulative
repricing gap $7,842 $11,385 $38,201 $53,544
Cumulative gap
as a percent
of earning assets 4.6% 6.6% 22.2% 31.1%
The Company has $26,908,000 in securities classified as available for sale and
are recorded at market value. The remaining securities of $12,653,000 are
classified as held to maturity and recorded at amortized cost. These 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 $117,416,000 of interest earning loans and federal
funds sold and approximately $104,156,000 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
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of: In March 1995, the FASB issued Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
Statement 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. Statement No. 121 will first be required for the
Company's year ending December 31, 1996. Based on its preliminary analysis, the
Bank does not anticipate that the adoption of Statement No 121 will have a
material impact on the financial statements.
Accounting for Stock-Based Compensation:
In 1995, the FASB issued Statement No. 123, Accounting for Stock-based
Compensation. Statement No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans such as a stock purchase
plan. The statement generally suggests, but does not require, stock-based
compensation transactions be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. An enterprise may continue to follow the
requirements of Accounting Principles Board (APB) opinion No. 25, which does not
require compensation to be recorded if the consideration to be received is at
least equal to the fair value at the measurement date. If an enterprise elects
to follow APB Opinion No. 25, it must disclose the pro forma effects on net
income as if compensation were measured in accordance with the suggestions of
Statement No. 123. The Company has determined that it will continue to follow
APB Opinion
No. 25, therefore, adoption of this pronouncement in 1996 is not expected to
have a material impact on the financial statements.
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 1993.
Bid Prices
1993 1994 1995
Calendar Quarter High Low High Low High Low
1st quarter $6.50 $5.75 $6.00 $5.00 $5.95 $4.75
2nd quarter 6.50 5.50 6.00 5.00 7.15 5.45
3rd quarter 6.00 4.50 6.00 5.00 9.50 6.35
4th quarter 5.50 4.25 6.00 5.00 10.50 9.25
Such market quotations 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, 1995, the Company had approximately 590 stockholders of record. The
following table summarizes the cash dividend history of the Bank:
Dividends* Total Amount of
Date Per Share Dividends Paid
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
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 22nd, 1996, the Company declared
a $.25 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.
Form 10-K Reports
A copy of the Company's 10-K reports filed with the Securities and Exchange
Commission for the 1995 Fiscal Year can be obtained by writing to: Corporate
Secretary's Office, Orange National Bancorp, 1201 E. Katella Avenue, Orange,
California 92667.
Transfer Agent and Registrar
First Interstate Bank, Los Angeles, 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-20 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
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.
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 auditors' report F-1
Consolidated balance sheets December 31, 1995 and 1994 F-2
Consolidated statements of income for the three years ended
December 31, 1995 F-3
Consolidated statement of stockholders' equity F-4
for the three years ended December 31, 1995
Consolidated statement of cash flows
for the three years ended December 31, 1995 F-5
Notes to consolidated financial statements F-6 to F-22
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, 1995.
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: March 27, 1996
By: Robert W. Creighton
Robert W. Creighton, Secretary
Chief Financial Officer
Date March 27, 1996
Signed by a majority of the Board of Directors:
Date Michael W. Abdalla
Date Fred L. Barrera
Date Michael J. Christianson
March 27, 1996 Kenneth J. Cosgrove
Date Kenneth J. Cosgrove
March 27, 1996 Robert W. Creighton
Date Robert W. Creighton
Signatures (continued)
Date Armand Durante
March 27, 1996 William S. Frantz
Date William S. Frantz
Date Charles R. Foulger
March 27, 1996 Gerald R. Holte
Date Gerald R. Holte
March 27, 1996 James E. Mahoney
Date James E. Mahoney
Date Wayne F. Miller
March 27, 1996 Harlan A. Smith
Date Harlan A. Smith
March 27, 1996 San E. Vaccaro
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. 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.
CONSENT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
Orange National Bancorp
Orange, California
We consent to the incorporation by reference in the Registration
Statement on Form S-8, dated ugust 20, 1993, of Orange National
Bancorp of our report dated January 24, 1996, appearing in tem 8 in
this Annual Report on Form 10-K.
McGladrey & Pullen, LLP
McGLADREY & PULLEN, LLP
Anaheim, California
January 24, 1996