SECURITIES AND EXCHANGE COMMISSION
Washington D.C 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from.......................................
to.............................................
Commission File No. 33-8743
ORANGE NATIONAL BANCORP
(Exact Name of Registrant as Specified in Charter)
1201 East Katella Avenue
Orange, California 92867
California (714) 771-4000 33-0190684
(State of Incorporation) (Address and Telephone Number (I.R.S. Employer
of Principal Executive Offices) Identification No.)
Securities registered pursuant to Section 12(b) of the Act: 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 X
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.
The aggregate market value of the voting shares held by nonaffiliates
of the Registrant was $37,097,336 as of February 28,1999. 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 of $27.63 per share.
2,000,171 Shares of Common Stock were outstanding at February 28, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference portions of the
Proxy Statement to be filed with the Securities and Exchange Commission
in connection with the Annual Meeting of Shareholders to be held on May
17, 1999.
ORANGE NATIONAL BANCORP
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Submissions of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 19
Item 6. Selected Financial Data 21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 28
PART III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management 29
Item 13. Certain Relationships and Related Transactions 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 30
Signatures 31
Index to Exhibits 33
PART I
ITEM 1. BUSINESS
General
Orange National Bancorp ("Bancorp" or "Company") was organized and
incorporated as a bank holding company under the laws of the State of
California on July 28, 1986. The Company acquired all the outstanding
capital stock of Orange National Bank ("Bank") in a one-bank holding
company organization at the direction of the Board of Directors of the
Bank. The Company commenced operations as a bank holding company
within the definition of the Bank Holding Company Act of 1956, as
amended, and is subject to the supervision and regulation of the Board
of Governors of the Federal Reserve System. The Bank became a wholly-
owned subsidiary of the Bancorp on January 16, 1987, with the approval
of the Office of the Comptroller of the Currency ("OCC") and the
Federal Reserve Board ("FRB"). The Bank was organized and chartered as
a national banking association on October 31, 1979 and opened for
business on that date.
Substantially all consolidated operating earnings and net earnings
are presently derived from banking related activities. Such banking
related activities would continue to represent the Company's primary
source of operating earnings and net earnings for the foreseeable
future. The Bank currently has six branch offices located throughout
Orange County, California.
Narrative Description of Business
The Company is engaged in the ownership of one commercial bank. The
Company does not consider its business to be seasonal nor to be
dependent upon a single customer or a few customers. Thus, the loss of
any one customer would not have a material adverse effect upon the
Company or its subsidiary. Neither the Company nor its subsidiary
operate outside the United States nor derive revenues from customers
located outside of the United States.
The Bank offers a full range of commercial banking services,
including the acceptance of demand, money-market, savings and time
deposits; and the origination of commercial, real estate, Small
Business Administration, personal, equity, home improvement,
automobile, installment and term loans; and letters and lines of
credit. The Bank also offers travelers' checks, safe deposit boxes,
notary public, international banking and other customary bank services
to its customers, except trust services. The lobby of each branch 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. Selected branches are open on Saturday.
Each branch has an automated teller machine ("ATM") that is included on
several national ATM networks. In addition, drive-up services are
available at three branch offices. The Federal Deposit Insurance
Corporation ("FDIC") insures the deposits of the Bank up to a maximum
of $100,000, subject to certain limitations. The Bank is a member of
the Federal Reserve System.
The Bank currently does not issue MasterCard or VISA credit cards,
but honors merchant drafts under both types of cards.
The principal sources of the Bank's income are interest income and
fees from the Bank's loan portfolio, interest income on the Bank's
investments and gains on sales of loans. These sources comprised
66.8%, 20.5% and 3.0%, respectively, of the Bank's total income for
1998. Other sources of income include fees on deposit accounts and
other customer services.
Distribution of Assets, Liabilities, and Stockholders' Equity
The following schedule presents the average balances of the
Company's asset, liability, and stockholders' equity accounts and the
distribution percentage of each item based on total average assets.
Average balances were computed using the average daily balances for the
years ended December 31:
1998 1997 1996
Dollars Percent Dollars Percent Dollars Percent
(dollars in thousands)
Assets
Cash and due
from banks $ 19,665 7.8% $ 23,212 10.5% $ 20,415 9.4%
Securities 27,700 11.0 26,134 11.8 44,937 20.7
Federal funds sold 54,177 21.5 29,362 13.3 29,725 13.7
Loans 139,521 55.4 131,077 59.4 109,802 50.7
Less allowance
for credit losses (1,580) (0.6) (1,488) (0.7) (1,487) (0.7)
Net loans 137,941 54.8 129,589 58.7 108,315 50.0
Premises and
equipment, net 5,510 2.2 5,187 2.4 5,382 2.5
Other assets 6,875 2.7 7,193 3.3 7,998 3.7
Total assets $251,868 100.0% $220,677 100.0% $216,772 100.0%
Liabilities and
stockholders' equity
Liabilities
Deposits:
Noninterest
bearing demand $ 84,499 33.5% $ 76,444 34.6% $ 67,662 31.2%
Money market
demand and NOW 103,142 41.0 91,931 41.7 101,562 46.9
Savings 12,186 4.8 11,485 5.2 12,420 5.7
Time 28,088 11.2 19,423 8.8 15,969 7.4
Total deposits 227,915 90.5 199,283 90.3 197,613 91.2
Other liabilities 2,097 0.8 1,793 0.8 1,381 0.6
Total liabilities 230,012 91.3 201,076 91.1 198,994 91.8
Stockholders' equity:
Common stock 7,950 3.2 7,770 3.5 7,594 3.5
Retained earnings 13,906 5.5 11,831 5.4 10,184 4.7
Total
stockholders'
equity 21,856 8.7 19,601 8.9 17,778 8.2
Total liabilities
and stockholders'
equity $251,868 100.0% $220,677 100.0% $216,772 100.0%
Interest Income Rates
Average interest-earning assets, their yields and amounts earned by
category are presented in the following chart for the years ended
December 31. Amounts outstanding are the average daily balances for
the respective years, including nonaccrual loans. Yields and amounts
earned include loan origination fees. The Company does not have tax-
exempt income bonds or notes in its securities portfolio.
1998 1997 1996
(dollars in thousands)
Securities:
Average outstanding $27,700 $26,134 $44,937
Average yield 5.78% 6.02% 5.85%
Amount of interest earned $1,602 $1,573 $2,627
Federal funds sold:
Average outstanding $54,177 $29,362 $29,725
Average yield 5.32% 5.44% 5.23%
Amount of interest earned $2,881 $1,598 $1,555
Loans:
Average outstanding $139,521 $131,077 $109,802
Average yield 10.49% 10.44% 10.67%
Amount of interest and fees earned $14,633 $13,686 $11,712
Total interest-earning assets:
Average outstanding $221,398 $186,573 $184,464
Average yield 8.63% 9.04% 8.62%
Amount of interest earned $19,116 $16,857 $15,894
Interest Expense Rates
The following table presents the Company's average interest-bearing
deposits, the average rate paid on such deposits and the amounts paid
or accrued for the years indicated. Amounts outstanding are the
average daily balances outstanding for the years ended December 31:
1998 1997 1996
(dollars in thousands)
NOW and money market (1):
Average outstanding $103,142 $91,931 $101,562
Average rate paid 2.44% 2.34% 2.47%
Amount of interest paid or accrued $2,517 $2,154 $2,510
Savings:
Average outstanding $12,186 $11,485 $12,420
Average rate paid 2.01% 2.02% 2.00%
Amount of interest paid or accrued $245 $232 $249
Time:
Average outstanding $28,088 $19,423 $15,969
Average rate paid 5.00% 4.98% 4.76%
Amount of interest paid or accrued $1,403 $967 $760
Total interest-bearing liabilities:
Average outstanding $143,416 $122,839 $129,951
Average rate paid 2.90% 2.73% 2.71%
Amount of interest paid or accrued $4,165 $3,353 $3,519
Net yield on interest-earning assets 6.75% 7.24% 6.71%
<FN>
(1) NOW and money markets include only interest-bearing transaction
accounts.
</FN>
Rate/Volume Analysis of Net Interest Income
The following table presents the cause and amounts of change in
interest income and expense for the years ended December 31:
1998 over 1997 (1) 1997 over 1996 (1)
Volume Rate Total Volume Rate Total
(dollars in thousands)
Increase (decrease) in:
Interest income:
Investment securities $ 94 $ (65) $ 29 $(1,099) $ 45 $(1,054)
Federal funds sold 1,351 (68) 1,283 (19) 62 43
Loans 882 65 947 2,269 (295) 1,974
Total interest income $2,327 $( 68) $2,259 $ 1,151 $(188) $ 963
Interest expense:
Money market deposits $ 263 $ 100 $ 363 $ (238) $(118) $ (356)
Savings deposits 14 (1) 13 (19) 2 (17)
Time deposits 431 5 436 164 43 207
Total interest expense $ 708 $ 104 $ 812 $ (93) $ (73) $ (166)
Net interest income $1,619 $ (172) $1,447 $ 1,244 $(115) $ 1,129
<FN>
(1) The variance not solely due to rate or volume is allocated to the
rate variance. Nonaccrual loans have been included in this
analysis. Loan fees of $1.0 million, $1.1 million and $1.0 million
for 1998, 1997, and 1996, respectively, have been included in this
analysis. The Company does not have tax-exempt income bonds or
notes in its securities portfolio.
</FN>
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 Bank does not invest in derivative financial instruments. The Bank
purchases mortgage-backed securities of investment grade only. The
following schedule summarizes the amounts and the distribution of the
Bank's held-to-maturity securities as of December 31:
1998 1997 1996
Amortized Market Amortized Market Amortized Market
Cost(1) Value Cost(1) Value Cost(1) Value
(dollars in thousands)
Mortgage-backed
securities $17,640 $17,691 $9,037 $8,972 $10,937 $10,844
<FN>
(1) Held-to-maturity securities are stated at amortized cost (i.e., cost
adjusted for amortization of premium and accretion of discount.)
</FN>
The following schedule summarizes the available-for-sale securities
as of December 31:
1998 1997 1996
Amortized Market Amortized Market Amortized Market
Cost (2) Value Cost (2) Value Cost (2) Value
(dollars in thousands)
U.S. Treasury
securities and
obligations of
other U.S.
Government agencies
and Corporations $14,503 $14,512 $8,992 $8,976 $28,992 $28,899
Mortgage-backed
securities 25,241 25,226 - - - -
Other 911 911 170 170 174 174
Total available
-for-sale
securities $40,655 $40,649 $9,162 $9,146 $29,166 $29,073
<FN>
(2) Available-for-sale securities are stated at fair value with
unrealized gains and losses being reported as an adjustment to
stockholders' equity net of the related tax effect.
</FN>
Maturity of Securities
The following table summarizes the maturities of the Company's
securities and their weighted average yield as of December 31, 1998:
Carrying Market Average
Amount(1) Value Yield(2)
(dollars in thousands)
Mortgage-backed securities (3) $42,866 $42,917 5.85%
U.S. Treasury Securities and
obligations of U.S. Government
Agencies and corporations:
Due within one year 9,000 9,000 5.31%
Due after one year but within five years 5,512 5,512 5.75%
Other 911 911 6.00%
Total securities $58,289 $58,340 5.67%
<FN>
(1) Held-to-maturity securities are stated at amortized cost (i.e., cost
adjusted for amortization of premiums and accretion of discounts).
Available-for-sale securities are recorded at fair value.
(2) Weighted average yield is the computed using the investment yield
and the amortized cost of securities.
(3) Mortgage-backed securities are not scheduled for maturities due to
the periodic principal payments received and unknown amount of
expected prepayments.
</FN>
Loan Portfolio
A major part of the Bank's objective is serving the credit needs of
customers in Orange County and surrounding areas. Credit decisions are
based upon the judgement of the Bank's lending personnel and Loan
Committee. The legal lending limit to each customer is restricted to a
percentage of the Bank's total capital, the exact percentage depends on
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
policy to obtain collateral for loans under most circumstances. The
Bank has a highly diversified portfolio, a solid underwriting process,
a loan review program and an active loan service function which
management believes serves to minimize the possibility of material loss
in the loan portfolio.
The three general areas in which the Bank has directed virtually all
of its lending activities are (a) real estate loans, (b) commercial
loans, and (c) loans to individuals. These three categories accounted
for 63.8%, 28.2%, and 7.8%, respectively, of the Bank's loan portfolio
as of December 31, 1998. Commercial real estate loans are originated
for terms of up to 25 years. Commercial loans are primarily funded to
small- and medium-sized businesses for terms ranging from 30 days to 5
years. Consumer installment loans are for a maximum term of 48 months
on unsecured loans and for a term of the depreciable life of tangible
property used as collateral on secured loans.
Variable interest rate loans comprise 64% of the loan portfolio as
of December 31, 1998.
The Bank had standby letters of credit of $0.5 million and
commitments to extend credit of $23.9 million as of December 31, 1998.
The Bank presently has sufficient liquidity to fund all loan
commitments.
The Bank originates loan commitments that are unsecured. The Bank
had funded unsecured loans to companies or individuals of $1.9 million
with unfunded unsecured commitments of $3.9 million as of December 31,
1998. The Bank has a lending policy to obtain collateral whenever
available or desirable, subject to the degree of risk the Bank is
willing to undertake.
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 OCC
periodically reviews the Company's allowance for credit losses as an
integral part of their normal recurring examination process, 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
Loan Portfolio Composition
The composition of the Bank's loan portfolio (all domestic) as of
December 31 is presented in the following table:
1998 1997 1996 1995 1994
(dollars in thousands)
Dollars
Real estate:
Commercial $ 86,049 $ 78,534 $ 64,611 $ 61,891 $61,881
Construction 5,074 118 1,412 242 2,286
Commercial and
industrial 40,217 44,301 44,766 41,361 40,976
Loans to individuals 11,180 10,586 10,256 10,343 9,384
Other 241 122 152 1,207 177
Total loans 142,761 133,661 121,197 115,044 114,704
Unearned net loan fees
and premiums (1,097) (891) (837) (807) (536)
Allowance for credit
losses (1,524) (1,581) (1,369) (1,513) (1,465)
Total, net $140,140 $131,189 $118,991 $112,724 $112,703
Unsecured loans,
included in
table above $1,901 $3,910 $2,836 $4,753 $3,743
Percentages
Real estate:
Commercial 60.2% 58.8% 53.3% 53.8% 53.9%
Construction 3.6 0.1 1.2 0.2 2.0
Commercial and industrial 28.2 33.1 36.9 36.0 35.7
Loans to individuals 7.8 7.9 8.5 9.0 8.2
Other 0.2 0.1 0.1 1.0 0.2
Total loans 100.0% 100.0% 100.0% 100.0% 100.0%
Loan Maturities and Sensitivity to Changes in Interest Rates
The following table presents the repricing and maturities of the
Bank's loan portfolio by category as of December 31, 1998. In
addition, the table presents the distribution between those loans with
predetermined (fixed) interest rates and those with variable (floating)
interest rates maturing after one year. Floating rate loans generally
fluctuate with changes in the prime interest rate. The table excludes
unearned net loan fees and premiums of $1,097,000.
After
one but
Within one within five After
year (1) years five years Total
(dollars in thousands)
Real estate:
Commercial $47,267 $11,443 $27,339 $86,049
Construction 5,074 - - 5,074
Commercial and industrial 36,044 3,752 421 40,217
Loans to individuals 10,039 1,141 - 11,180
Other 241 - - 241
$98,665 $16,336 $27,760 $142,761
Distribution between fixed and floating interest rates after one year:
Fixed interest rates $14,602 $27,760 $42,362
Floating interest rates 1,734 - 1,734
$16,336 $27,760 $44,096
<FN>
(1) Demand loans and overdrafts are included in the "within one year"
column with scheduled repayments reported in the periods in which
the final payments are due.
</FN>
Credit Risk Management
The Bank manages its loan portfolio through a process designed to
assure acceptable quality of loans entering the portfolio 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 assigned. 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 policies of the Bank. The Bank currently engages an outside
consulting firm to periodically review the loan portfolio to provide
suggested risk rating of selected loans. Bank management reviews the
suggested ratings along with all other available information to
properly monitor the loan portfolio, including all loan evaluations
made during periodic examinations by the OCC.
In accordance with the Bank's loan policies, management presents a
written report to the Bank's Board of Directors at its monthly meeting.
The Directors review the delinquency report listing of all loans 30
days or more past due and the watch list report including loans having
increased credit risk, both delinquency and other factors, over the
rest of the portfolio. Additionally, the Directors review a monthly
report including all loans originated the prior month.
As previously noted, the Bank maintains an allowance for credit
losses to provide for potential losses in the loan portfolio.
Additions to the allowance for credit losses are charged to operations
in the form of a provision for possible credit losses. All loans that
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 features 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 presents information with respect to loans that
were accounted for on a nonaccrual basis or contractually past due 90
days or more as to interest or principal payments, or restructured as
of December 31:
1998 1997 1996 1995 1994
(dollars in thousands)
Loans on non-accrual basis $1,631 $2,447 $2,464 $3,055 $3,163
Loans past due 90 days or more
and still accruing interest 76 660 7 33 158
Troubled debt restructuring,
not included above - - - - -
Total $1,707 $3,107 $2,471 $3,088 $3,321
If all such loans had been current in accordance with their original
terms during the year ended December 31, 1998, the gross interest
income would have been approximately $382,000. The amount of interest
income included in earnings on these nonaccrual loans was $203,000 in
1998.
Loans are generally placed on nonaccrual status when principal or
interest payments are past due 90 days or more. Certain loans are
placed on nonaccrual status earlier if there is reasonable doubt as to
the collectibility of interest or principal. Loans that are in the
renewal process, have sufficient collateral, or are in the process of
collection continue to accrue interest.
Management has no knowledge of any additional loans not disclosed in
this section on nonaccrual, 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 Note 4 of
the Notes to the Consolidated Financial Statements. Loans on
nonaccrual status 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.
There were no loan concentrations exceeding 10% of the total loan
portfolio and no other interest-bearing assets that would be required
to be in the paragraphs above, if such assets were classified as loans
as of December 31, 1998, 1997, 1996, 1995 and 1994.
The following table presents loans outstanding, charge-offs,
recoveries on loans previously charged-off, the allowance for credit
losses, and pertinent ratios during the years ended and as of December
31:
1998 1997 1996 1995 1994
(dollars in thousands)
Average gross loans $139,521 $131,077 $109,802 $114,820 $114,718
Total gross loans
at end of period $142,761 $133,661 $120,360 $114,237 $114,168
Allowance for loan losses:
Balance,
beginning of period $1,581 $1,369 $1,513 $1,465 $1,524
Charge-offs:
Commercial and industrial 78 14 252 302 459
Real estate construction - - - - -
Commercial real estate 121 44 125 70 25
Installment - 8 10 16 4
199 66 387 388 488
Recoveries:
Commercial and industrial 41 122 30 63 129
Leases - - - 45 -
Commercial real estate 1 9 8 8 -
Installment - 7 - - 2
42 138 38 116 131
Net charge-offs (recoveries) 157 (72) 349 272 357
Additions charged
to operations 100 140 205 320 298
Balance, end of period $1,524 $1,581 $1,369 $1,513 $1,465
Net charge-offs (recoveries)
during the period to
average gross loans
outstanding during year 0.11% (0.05%) 0.32% 0.24% 0.31%
The Bank has allocated the allowance for credit losses to provide
for the possibility of losses being incurred within loan categories as
of December 31 are set forth in the table below:
1998 1997 1996 1995 1994
Percent Percent Percent Percent Percent
Of Loan Of Loan Of Loan Of Loan Of Loan
Cate- Allow Cate- Allow Cate- Allow Cate- Allow Cate- Allow
gory -ance gory -ance gory -ance gory -ance gory -ance
(dollars in thousands)
Real estate:
Commer-
cial 60.2% $1,296 58.8% $1,265 53.3% $ 959 53.8% $ 594 53.9% $ 468
Constru-
ction 3.6 - 0.1 - 1.2 9 0.2 3 2.0 124
Commer-
cial and
indust-
rial 28.2 217 33.1 298 36.9 343 36.0 831 35.7 744
Loans to
indiv
-iduals 7.8 11 7.9 18 8.5 58 9.0 62 8.2 108
Other 0.2 - 0.1 - 0.1 - 1.0 23 0.2 21
100.0% $1,524 100.0% $1,581 100.0% $1,369 100.0% $1,513 100.0% $1,465
Included in the Bank's allocation of its allowance for credit losses
are specific reserves on certain identified loans and general reserves
for unknown potential losses. Management classifies loans through its
internal loan review system that uses an independent third party
reviewer and review of loans from its regulators. None of these
classifications indicate trends or uncertainties, which will materially
impact future operating results, liquidity, or capital resources. The
allowance provides 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 - Management's Discussion and Analysis of Financial Condition
and Results of Operations. 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 currently the Bank's sole source of funds. The Bank
can obtain additional funds when needed to meet occasional declines in
deposits or other short-term liquidity needs, through the overnight
purchase of federal funds. However, the Bank does not currently use
these sources of funds. Generally, the Bank has funds in excess of
the needs for its deposit withdrawals or short-term liquidity needs and
it, therefore, sells federal funds to other financial institutions or
invests in short-term securities.
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
foreign deposits, brokered deposits or variable rate fixed-term
deposits. The Bank does not expect to obtain future deposits through
the use of brokered deposits. The Bank had noninterest-bearing demand
deposits of $99.9 million, interest-bearing NOW and money market
accounts of $113.9 million, time deposits for individuals and
corporations of $33.3 million, and savings of $13.3 million as of
December 31, 1998.
The Company had interest-bearing deposits of 61.6% and 57.4% of
total deposits as of December 31, 1998 and 1997, respectively. 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 has a deposit concentration from five customers of
$43,048,000 as of December 31, 1998. Management believes it has
sufficient liquidity to meet loan commitments and deposit demands.
The following table sets forth information regarding the Bank's
average balances of deposits, as a percentage of average total deposits
and average interest paid by category for the years ended December 31:
MMDA Total
Demand and NOW Savings Time Deposits
(dollars in thousands)
1998
Average balance $84,499 $103,142 $12,186 $28,088 $227,915
Percent of total 37.1% 45.3% 5.3% 12.3% 100.0%
Average interest
rate paid 0.0% 2.4% 2.0% 5.0% 1.8%
1997
Average balance $76,444 $91,931 $11,485 $19,423 $199,283
Percent of total 38.4% 46.1% 5.8% 9.7% 100.0%
Average interest
rate paid 0.0% 2.3% 2.0% 5.0% 1.7%
1996
Average balance $67,662 $101,562 $12,420 $15,969 $197,613
Percent of total 34.2% 51.4% 6.3% 8.1% 100.0%
Average interest
rate paid 0.0% 2.5% 2.0% 4.8% 1.8%
The following table indicates the amount and maturity of the Bank's
time certificates of deposit over $100,000 as of December 31, 1998:
Percent of
Balance Total
(dollars in thousands)
Less than three months $16,217 84.9%
Three months through six months 936 4.9
Six months through twelve months 1,728 9.1
Over twelve months 211 1.1
Total time certificates of deposit over $100,000 $19,092 100.0%
Return on Equity and Assets
The following table indicates the key financial ratios of the
Company for the years ended December 31:
1998 1997 1996
Profitability ratios:
Rate of return on average total assets 1.32% 1.45% 1.02%
Rate of return on average stockholders' equity 15.24% 16.32% 12.38%
Capital ratios:
Cash dividend payment ratio to net earnings 41.74% 25.73% 32.60%
Average stockholders' equity to average total assets 8.68% 8.88% 8.20%
Competition
The banking business in southern 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 several 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, brokerage houses 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). Such banks also have substantially higher lending
limits than the Bank has or will have due to their larger capital base.
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.
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 1956, as amended, and the Board of Governors of
the Federal Reserve System. The Bank is subject to the regulation of
the FDIC and the OCC. Among other regulations, the OCC establishes
minimum capital requirements, which the Bank exceeds as of December 31,
1998.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding
permissible activities or affecting the competitive balance between
banks and other financial institutions. Proposals to change the laws
and regulations governing the operations and taxation of banks and
other financial institutions are frequently made in Congress, in the
California legislature and before various bank regulatory agencies.
The likelihood of any major changes and the impact such changes might
have on the Bancorp and the Bank is impossible to predict. Certain of
the potentially significant changes, which have been enacted recently
by Congress and others, which are currently under consideration by
Congress or various regulatory or professional agencies are discussed
below.
On October 1, 1998, the FDIC adopted two new rules governing minimum
capital levels that FDIC-supervised banks must maintain against the
risks to which they are exposed. The first rule makes risk-based
capital standards consistent for two types of credit enhancements
(i.e., recourse arrangements and direct credit substitutes) and
requires different amounts of capital for different risk positions in
asset securitization transactions. The second rule permits limited
amounts of unrealized gains on equity securities to be recognized for
risk-based capital purposes. The Bank may apply these rules on
September 1, 1998.
In August 1997, Governor Wilson of California signed Assembly Bill
1432 ("AB1432") which provides for certain changes in the banking laws
of California. Effective January 1, 1998 AB1432 eliminates the
provisions regarding impairment of contributed capital and the
assessment of shares when there is an impairment of capital. AB1432
now allows the DFI to close a bank, if the DFI finds that the bank's
tangible shareholders' equity is less than 3% of the bank's total
assets or $1 million. AB1432 also moved administration of the Local
Agency Program from the California Department of Financial Institutions
to the California State Treasurer's office.
The Economic Growth and Regulatory Paperwork Reduction Act (the
"1996 Act") as part of the Omnibus Appropriations Bill was enacted on
September 30, 1996 and includes many banking related provisions. The
most important banking provision is the recapitalization of the Savings
Association Insurance Fund ("SAIF"). The 1996 Act provides for a one
time assessment, payable on November 30, 1996, of approximately 65
basis points per $100 of deposits of SAIF insured deposits including
SAIF insured deposits which were assumed by banks in acquisitions of
savings associations. For the years 1997 through 1999 the banking
industry will assist in the payment of interest on Financing
Corporation ("FICO") bonds that were issued to help pay for the clean
up of the savings and loan industry. Banks will pay approximately 1.3
cents per $100 of deposits for this special assessment, and after the
Year 2000, banks will pay approximately 2.4 cents per $100 of deposits
until the FICO bonds mature in 2017. There is a three-year moratorium
on conversions of SAIF deposits to Bank Insurance Fund ("BIF")
deposits. The 1996 Act also has certain regulatory relief provisions
for the banking industry. Lender liability under the Superfund is
eliminated for lenders who foreclose on property that is contaminated
provided that the lenders were not involved with the management of the
entity that contributed to the contamination. There is a five-year
sunset provision for the elimination of civil liability under the Truth
in Savings Act. The FRB and Department of Housing and Urban
Development are to develop a single format for Real Estate Settlement
Procedures Act and Truth in Lending Act ("TILA") disclosures. TILA
disclosures for adjustable mortgage loans are to be simplified.
Significant revisions are made to the Fair Credit Reporting Act
("FCRA") including requiring that entities which provide information to
credit bureaus conduct an investigation if a consumer claims the
information to be in error. Regulatory agencies may not examine for
FCRA compliance unless there is a consumer complaint investigation that
reveals a violation or where the agency otherwise finds a violation.
In the area of the Equal Credit Opportunity Act, banks that self-test
for compliance with fair lending laws will be protected from the
results of the test provided that appropriate corrective action is
taken when violations are found.
During 1996, new federal legislation amended the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and
the underground storage tank provisions of the Resource Conversation
and Recovery Act to provide lenders and fiduciaries with greater
protections from environmental liability. In June 1997, the U.S.
Environmental Protection Agency ("EPA") issued its official policy with
regard to the liability of lenders under CERCLA as a result of the
enactment of the Asset Conservation, Lender Liability and Deposit
Insurance Protection Act of 1996. California law provides that,
subject to numerous exceptions, a lender acting in the capacity of a
lender shall not be liable under any state or local statute, regulation
or ordinance, other than the California Hazardous Waste Control Law, to
undertake a cleanup, pay damages, penalties or fines, or forfeit
property as a result of the release of hazardous materials at or from
the property.
In 1997, California adopted the Environmental Responsibility
Acceptance Act (the "Act") (Cal. Civil Code '' 850-855) to facilitate
(i) the notification of government agencies and potentially responsible
parties (e.g., for cleanup) of the existence of contamination and
(ii) the cleanup or other remediation of contamination by the
potentially responsible parties. The Act requires, among other things,
that owners of sites who have actual awareness of a release of a
hazardous material that exceeds a specified notification threshold to
take all reasonable steps to identify the potentially responsible
parties and to send a notice of potential liability to the parties and
the appropriate oversight agency.
On September 28, 1995, Assembly Bill 1482 (known as the Caldera,
Weggeland, and Killea California Interstate Banking and Branching Act
of 1995 and referred to herein as "CIBBA") was enacted which allows for
early interstate branching in California. Under the federally enacted
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("IBBEA"), discussed in more detail below, individual states could
"opt-out" of the federal law that would allow banks on an interstate
basis to engage in interstate branching by merging out-of-state banks
with host state banks after June 1, 1997. In addition under IBBEA,
individual states could also "opt-in" and allow out-of-state banks to
merge with host state banks prior to June 1, 1997. The host-state is
allowed under IBBEA to impose certain nondiscriminatory conditions on
the resulting depository institution until June 1, 1997. California,
in enacting CIBBA, authorizes out-of-state banks to enter California by
the acquisition of or merger with a California bank that has been in
existence for at least five years.
Section 3824 of the California Financial Code ("Section 3824") as
added by CIBBA provides for the election of California to "opt-in"
under IBBEA allowing interstate bank merger transactions prior to July
1, 1997 of an out-of-state bank with a California bank that has been in
existence for at least five years. The early "opt in" has the
reciprocal effect of allowing California banks to merge with out-of-
state banks where the states of such out-of-state banks have also
"opted in" under IBBEA. The five-year age limitation is not required
when the California bank is in danger of failing or in certain other
emergency situations.
Under IBBEA, California may also allow interstate branching through
the acquisition of a branch in California without the acquisition of an
entire California bank. Section 3824 provides an express prohibition
against interstate branching through the acquisition of a branch in
California without the acquisition of the entire California bank.
IBBEA also has a provision allowing states to "opt-in" with respect to
permitting interstate branching through the establishment of de novo or
new branches by out-of-state banks. Section 3824 provides that
California expressly prohibits interstate branching through the
establishment of de novo branches of out-of-state banks in California,
or in other words, California did not "opt-in" this aspect of IBBEA.
CIBBA also amends the California Financial Code to include agency
provisions to allow California banks to establish affiliated insured
depository institution agencies out-of-state as allowed under IBBEA.
Other provisions of CIBBA amend the intrastate branching laws,
govern the use of shared ATM's, and amend intrastate branch acquisition
and bank merger laws. Another banking bill enacted in California in
1995 was Senate Bill 855 (known as the State Bank Parity Act and is
referred to herein as the "SBPA"). SBPA went into effect on January 1,
1996, and its purpose is to allow a California state bank to be on a
level playing field with a national bank by the elimination of certain
disparities and allowing the DFI authority to implement certain changes
in California banking law which are parallel to changes in national
banking law such as closer conformance of California's version of
Regulation O to the FRB's version of Regulation O and certain other
changes including allowing the repurchase of stock with the prior
written consent of the DFI.
On September 29, 1994, IBBEA was enacted which has eliminated many
of the current restrictions to interstate banking and branching. IBBEA
permits full nationwide interstate banking to adequately capitalized
and adequately managed bank holding companies beginning September 29,
1995 without regard to whether such transaction is expressly prohibited
under the laws of any state. IBBEA's branching provisions permit full
nationwide interstate bank merger transactions to adequately
capitalized and adequately managed banks beginning June 1, 1997.
However, states retain the right to completely opt out of interstate
bank mergers and to continue to require that out-of-state banks comply
with the states' rules governing entry.
The states that opt out must enact a law after September 29, 1994
and before June 1, 1997 that (i) applies equally to all out-of-state
banks and (ii) expressly prohibits merger transactions with out-of-
state banks. States that opt out of allowing interstate bank merger
transactions will preclude the mergers of banks in the opting out state
with banks located in other states. In addition, banks located in
states that opt out are not permitted to have interstate branches.
States can also "opt in" which means states can permit interstate
branching earlier than June 1, 1997.
The laws governing interstate banking and interstate bank mergers
provide that transactions, which result in the bank holding company or
bank controlling or holding in excess of ten percent of the total
deposits nationwide or thirty percent of the total deposits statewide,
will not be permitted except under certain specified conditions.
However, any state may waive the thirty- percent provision for such
state. In addition, a state may impose a cap of less than thirty
percent of the total amount of deposits held by a bank holding company
or bank provided such cap is not discriminatory to out-of-state bank
holding companies or banks.
On September 23, 1994, the Riegle Community Development and
Regulatory Improvement Act of 1994 (the "1994 Act") was enacted which
covers a wide range of topics including small business and commercial
real estate loan securitization, money laundering, flood insurance,
consumer home equity loan disclosure and protection as well as the
funding of community development projects and regulatory relief.
The major items of regulatory relief contained in the 1994 Act
include an examination schedule that has been eased for the top rated
banks and will be every 18 months for CAMEL 1 banks with less than $250
million in total assets and CAMEL 2 banks with less than $100 million
in total assets (the $100 million amount was amended to $250 million by
the 1996 Act discussed above). The 1994 Act amends Federal Deposit
Insurance Corporation Improvement Act of 1991 with respect to the
Section 124, the mandate to the federal banking agencies to issue
safety and soundness regulations, including regulations concerning
executive compensation allowing the federal banking regulatory agencies
to issue guidelines instead of regulations.
Further regulatory relief is provided in the 1994 Act, as each of
the federal regulatory banking agencies, including the National Credit
Union Administration Board, is required to establish an internal
regulatory appeals process for insured depository institutions within 6
months. In addition, the Department of Justice 30 day waiting period
for mergers and acquisitions is reduced by the 1994 Act to 15 days for
certain acquisitions and mergers.
In the area of currency transaction reports, the 1994 Act requires
the Secretary of the Treasury to allow financial institutions to file
such reports electronically. The 1994 Act also requires the Secretary
of the Treasury to publish written rulings concerning the Bank Secrecy
Act, and staff commentary on Bank Secrecy Act regulations must also be
published on an annual basis.
The procedures for forming a bank holding company have also been
simplified. The formal application process for many holding company
formations is now a simplified 30-day notice procedure. In addition,
the Securities Act of 1933 has been amended by the 1994 Act to further
simplify the securities issuance in connection with a bank holding
company formation.
Pending Legislation and Regulations
There are pending legislative proposals to reform the Glass-Steagall
Act to allow affiliations between banks and other firms engaged in
"financial activities," including insurance companies and securities
firms. Certain other pending legislative proposals include bills to
let banks pay interest on business checking accounts, to cap consumer
liability for stolen debit cards, and to give judges the authority to
force high-income borrowers to repay their debts rather than cancel
them through bankruptcy.
It is impossible to predict what effect the enactment of the above-
mentioned legislation will have on the Bancorp, the Bank and on the
financial institutions industry in general. Moreover, it is likely
that other bills affecting the business of banks may be introduced in
the future by the United States Congress or California legislature.
Taxation
The Company reports its income and expenses using the accrual method
of accounting and uses the calendar year as its tax year for both
federal income and state franchise tax purposes. The Company is
subject to the federal income tax, under existing provisions of the
Internal Revenue Code of 1986, as amended, in generally the same manner
as other corporations.
The Internal Revenue Service has examined through the Company's 1995
federal income tax return. The 1995 examination did not result in a
material adjustment to the tax return or a material adverse affect on
the financial statements.
Employees
The Bank had 117 full-time and 6 part-time employees, including 46
principal officers as of February 28, 1999. The Bank's employees are
not 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 Company's head office, including a branch office,
is located in a two-story building located at 1201 East Katella Avenue,
Orange, California. The Bank owns both the land and the building.
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 is in good condition and adequate for the
Bank's present operations with adequate parking, an automated teller
machine and drive-up teller stations.
The Bank leases the premises at its five full-service branch
offices. Each branch has an automated teller machine. Drive-up teller
banking is available at two leased branches. The Bank also leases
premises for administrative functions. The principal terms relating to
premises currently leased by the Bank and the net book value of
leasehold improvements as of December 31, 1998 are detailed below.
None of the leases contain any unusual terms and all are "net" or
"triple net" leases.
Expiration Square Monthly Renewal Net Book
Office Location Date Feet Rental Options Value
Branches
77 Plaza Square, Orange 04/30/08 9,443 $8,860 4 @ 5 yrs. $681,768
1800 West Katella Avenue, Orange 12/31/07 5,266 8,057 2 @ 5 yrs. 245,380
7510 East Chapman Avenue, Orange 09/30/04 3,300 10,599 2 @ 5 yrs. 115,733
800 Glenneyre, Laguna Beach 08/31/07 5,894 9,933 1 @ 5 yrs. 147,709
25255 Cabot Road, Laguna Hills 01/01/04 6,737 8,203 3 @ 5 yrs. 220,214
Administration
115 North Glassell Street, Orange 12/31/00 1,600 640 1 @ 5 yrs. 17,092
1249 East Katella Avenue, Orange 01/06/03 13,845 11,429 2 @ 5 yrs. 159,191
$1,587,087
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 Company is or may
become a party, which may have a materially adverse effect upon the
Bank, the Company or their property. However, in the normal course of
business, the Bank, or the Company 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
Company.
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
Stock Market Information
Shares of Company's common stock are traded on the National
Association of Securities Dealers Automated Quotation system (NASDAQ),
under the ticker 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 prices
for the Company's common stock since the first quarter of 1996.
1998 1997 1996
Calendar Quarter High Low High Low High Low
1st quarter $25.750 $23.750 $15.125 $13.125 $12.50 $10.50
2nd quarter 31.250 25.125 18.000 13.750 15.00 11.75
3rd quarter 30.000 17.000 21.125 17.500 14.50 13.25
4th quarter 27.750 19.000 24.250 19.750 13.75 12.75
History of Cash and Stock Dividends and Stock Splits
The Company has a history of paying cash dividends to its
stockholders. In recent years, the Company has paid dividends
quarterly. The following table summarizes the cash dividend history of
the Company:
Cash Dividends Paid
Year Per Share Total
1984 $0.09 $ 143,568
1985 0.10 166,320
1986 0.12 200,584
1987 0.16 250,730
1988 0.13 202,734
1989 0.17 267,329
1990 0.18 290,008
1991 - -
1992 0.30 485,130
1993 - -
1994 0.05 91,956
1995 0.25 473,947
1996 0.37 718,417
1997 0.42 823,974
1998 0.70 1,389,986
For comparative purposes, dividends per share for all years are
computed after the effects of stock splits and stock dividends. 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 subsidiary Bank. Future dividend
payments will depend on future profitability, meeting regulatory
requirements and the outlook of economic conditions.
The Company declared a $0.15 per common share quarterly dividend on
January 20, 1999 to the stockholders of record as of February 11, 1999,
paid on March 1, 1999.
The Company had approximately 451 stockholders of record as of
February 28, 1999.
Transfer Agent and Registrar
U.S Stock Transfer Corporation
1745 Gardena Avenue
Glendale, CA 91204-2991
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of and for the years
ended December 31 is derived from and should be read in conjunction
with the consolidated financial statements and the notes thereto of the
Company which have been audited by McGladrey & Pullen, LLP, independent
certified public accountants. The consolidated financial statements as
of December 31, 1998 and 1997 and for the three years in the period
ended December 31, 1998 and the report thereon of McGladrey & Pullen,
LLP are included with Item 14 of this Form 10-K.
1998 1997 1996 1995 1994
(dollars in thousands, except for per share amounts)
Financial condition
Total assets $285,862 $242,279 $218,845 $207,928 $206,510
Loans, net 140,140 131,189 118,991 112,724 112,703
Deposits 260,334 218,792 198,364 188,991 190,406
Stockholders' equity 23,723 21,586 18,956 17,262 14,782
Results of operations
Interest income $19,116 $16,857 $15,894 $16,571 $13,908
Net interest income 14,951 13,504 12,375 13,430 11,400
Provisions for
possible credit losses 100 140 205 320 298
Other income 2,783 3,707 2,713 2,781 2,612
Other expense 12,157 11,776 11,547 12,187 11,962
Income from
continuing operations 5,477 5,295 3,336 3,703 1,060
Loss from
discontinued operations - - - - (225)
Net earnings 3,330 3,198 2,201 2,524 835
Basic earnings
per share $1.67 $1.63 $1.13 $1.31 $0.43
Dilutive earnings
per share 1.64 1.60 1.13 1.30 0.43
Cash dividends
per share 0.70 0.42 0.37 0.25 0.05
Weighted average number
of common shares
outstanding
(in thousands) 1,989 1,961 1,944 1,932 1,931
Earnings per share from continuing operations in 1994 were $0.58.
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
Forward Looking Statements
Certain statements in this filing, including without limitation
statements containing the words "believes," "anticipates," "intends,"
"expects," "pro forma," and words of similar import, constitute
forward-looking statements. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be
materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the following: general economic
conditions in the Company's market areas; variances in interest rates;
changes in or amendments to regulatory authorities' capital
requirements or other regulations applicable to the Company; increased
competition for loans and deposits; and other factors referred to
elsewhere in this filing. Given these uncertainties, shareholders are
cautioned not to place undue reliance on forward-looking statements.
The Company disclaims any obligation to update such factors which are
not considered to be material or to publicly announce the result of any
revisions to any of the forward-looking statements included herein
which are not considered to be material to reflect future events or
developments.
Results of Operations
Total interest income was $19.1 million in 1998, an increase of $2.2
million or 13.4% from the $16.9 million in 1997. Total interest
income in 1997 increased $1.0 million or 6.1% from the $15.9 million in
1996. The average interest-earning assets were $221.4 million in 1998,
an increase of $34.8 million, or 18.7% from the $186.6 million in 1997.
The average interest-earning assets in 1997 increased $2.1 million or
1.1% from the $184.5 million in 1996. The average yield decreased in
1998 by 0.4% from 1997 and increased in 1997 by 0.4% from 1996. The
increase in interest income in 1998 resulted from a larger average of
interest-earning assets and partially offset by a lower general
interest rate environment. A higher general interest rate environment
existed in 1997.
Interest income on loans was $14.6 million in 1998, an increase of
$0.9 million or 6.9% from the $13.7 million in 1997. Total interest
income on loans in 1997 increased $2.0 million or 16.9% from the $11.7
million in 1996. The increase in 1998 resulted from the increase in
the average loan portfolio during 1998 in spite of lower long-term
interest rates as compared to 1997 and interest collected on nonaccrual
loans. The average loan portfolio was $139.5 million in 1998, an
increase of $8.4 million or 6.4% from the $131.1 million in 1997. The
yield on the loan portfolio was 10.5% in 1998, an increase of 0.1% from
the 10.4% in 1997. The average loan portfolio in 1997 increased $21.3
million or 19.4% from the $109.8 million in 1996. The increase in the
average loan portfolio resulted from continued loan demand during 1998
and 1997. The yield on loans changes with the movements in the prime
rate as approximately 64% of the loan portfolio are based on variable
rates.
Interest income on securities was $1.6 million in both 1998 and
1997. Interest income on securities in 1997 decreased $1.0 million or
40.1% from the $2.6 million in 1996. Interest income on securities in
1998 remained unchanged from 1997 although the average size of the
investment securities portfolio increased and interest rates were
slightly lower. The average balance of securities was $27.7 million in
1998, an increase of $1.6 million or 6.0% from the $26.1 million in
1997. The yield on securities was 5.8% in 1998, a decrease of 0.2%
from the 6.0% in 1997. The decrease in interest income from securities
in 1997 resulted from the decrease in the average balance of securities
and slightly higher yields. The average balance of securities in 1997
decreased $18.8 million or 41.8% from the $44.9 million in 1996. The
yield on securities increased 0.2% in 1997 from 1996.
Interest income on federal funds sold was $2.9 million in 1998, an
increase of $1.3 million or 80.3% from the $1.6 million in 1997.
Interest income on federal funds sold in 1997 remained unchanged at
$1.6 million from 1996. The average balance in federal funds sold was
$54.2 million in 1998, an increase of $24.8 million or 84.5% from the
$29.4 million in 1997. The yield on federal funds sold was 5.3% in
1998, a decrease of 0.1% from the 5.4% in 1997. The interest income on
federal funds sold remaining constant in 1997 and 1996 although the
average balance of federal funds sold decreased and the yield increased
slightly in 1997. The average balance in federal funds sold was $29.4
million in 1997, a decrease of $0.4 million or 1.2% from the $29.7
million in 1996. The yield on federal funds sold was 5.4% in 1997, an
increase of 0.2% from the 5.2% in 1996.
Interest expense was $4.2 million in 1998, an increase of $0.8
million or 24.2% from the $3.4 million in 1997. The increase resulted
from an increase in interest-bearing deposits and a slight increase in
deposit rates. The average interest-bearing deposits were $143.4
million in 1998, an increase of $20.6 million or 16.8% from the $122.8
million in 1997. The average rate paid on such deposits was 2.9% in
1998, an increase of 0.2% from the 2.7% in 1997. Interest expense was
$3.4 million in 1997, a decrease of $0.1 million or 4.7% from the $3.5
million in 1996. The 1997 decrease resulted from a decrease in the
average interest-bearing deposits and a very slight increase in deposit
rates. The rate increase in 1997 was 0.02% over the 2.7% in 1996. The
average interest-bearing deposits in 1997 decreased $7.2 million or
5.5% from the $130.0 million in 1996.
The provision for credit losses was $100,000, $140,000 and $205,000
in 1998, 1997 and 1996, respectively. The decreased provision in 1998
from 1997 and 1996 reflect a higher quality loan portfolio resulting
from an improved local economy in Orange County. The Company also
experienced recoveries in 1998 and 1997 on amounts previously charged-
off. These recoveries offset the need for additional provision.
Management believes that the current allowance for credit losses is
adequate to provide for potential losses in the portfolio. The current
local economic outlook for 1999 is promising. However, assurance
cannot be made and, accordingly, future provisions for credit losses
cannot be estimated at this time. See Note 1 in the Notes to
Consolidated Financial Statements.
Other income was $2.8 million in 1998, a decrease of $0.9 million or
24.9% from the $3.7 million in 1997. The decrease in 1998 resulted
from decreased gains on the sale of SBA loans and decreased service
charges on deposits. Other income in 1997 increased $1.0 million or
36.6% from the $2.7 million in 1996. The increase in 1997 resulted
from the increase in gains on the sale of SBA loans.
Other expenses were $12.2 million in 1998, an increase of $0.4
million or 3.2% from the $11.8 million in 1997. The increase in other
expenses in 1998 resulted from nonrecurring costs associated with the
relocation of several offices. Other expenses in 1997 increased $0.3
million or 2.0% from the $11.5 million in 1996. The 1997 increase
resulted from overall expense increases.
Provision for income taxes was $2.1 million in both 1998 and 1997.
The income tax provision in 1998 was computed at the full tax rate on
higher pretax earnings, less certain permanent tax differences. The
pretax earnings were $5.5 million in 1998, an increase of $0.2 million
or 3.4% from the $5.3 million in 1997. The provision for income taxes
in 1997 increased $1.0 million or 84.8% from the $1.1 million in 1996.
A reduction of the valuation allowance on the deferred tax asset
lowered the taxable expense by $0.2 million in 1996. The increase in
1997 resulted from higher pretax earnings and no reduction of a
valuation allowance on the deferred tax asset. Through 1996,
management determined that portions of the valuation allowance were no
longer necessary as the deferred tax assets are considered to be more
likely than not to be realized. Accordingly, the provision for income
taxes is less than the amount computed at the federal statutory rate in
1996. See Note 8 in the Notes to Consolidated 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 earnings were $3.3 million in 1998, an increase of $0.1 million
or 4.1% from the $3.2 million in 1997. The increase in 1998 resulted
from increased net interest income of $1.4 million, and offset by
decreased other income of $0.9 million and increased other expenses of
$0.4 million. Net earnings increased $1.0 million or 45.3% from the
$2.2 million in 1996. The increase in 1997 resulted from increased
interest income of $1.0 million, increase gains on sale of SBA loans of
$0.8 million, and offset by lower tax of $1.0 million. While
management is optimistic about the future, the effects of future
economic conditions on the collectibility of loans cannot be predicted
with absolute certainty and its effects on future profitability cannot
be determined.
Financial Condition
The Company experienced continued asset growth in 1998. Total
assets were $285.9 million as of December 31, 1998, an increase of
$43.6 million or 18.0% from the $242.3 million as of December 31, 1997.
Total assets increased $23.5 million or 10.7% in 1997.
Total interest-earning assets were $255.7 million as of December 31,
1998, an increase of $55.7 million or 27.9% from the $200.0 million as
of December 31, 1997. Total interest-earning assets increased $15.3
million or 8.3% in 1997. The Company continues to focus its efforts on
originating quality loans. The increases in the loan and investment
securities portfolios were funded from the increase in deposits.
The investment securities portfolio was $58.3 million as of December
31, 1998, an increase of $40.1 million or 220.6% from the $18.2 million
as of December 31, 1997. The investment securities portfolio decreased
$21.8 million or 54.6% in 1997. The increase in 1998 resulted from the
large number of investment security purchases. The Company did not
purchase investment securities in 1997 and early 1998 due to the flat
yield curve. The Company believes securities are the best available
investment after its liquidity needs are met through cash, cash due
from banks and federal funds sold. Generally, mortgage backed
securities are classified as either held-to-maturity or available-for-
sale and U.S. Treasury and Agency securities are classified as
available-for-sale. The market values increased slightly in 1998
resulting from lower short-term and long-term interest rates.
The loan portfolio was $140.1 million as of December 31, 1998, an
increase of $8.9 million or 6.8% from the $131.2 million as of December
31, 1997. The loan portfolio increased $12.2 million or 10.3% in 1997.
The increase in 1998 resulted from continued loan demand, primarily SBA
lending on commercial real estate. The quality of the loan portfolio
continues to improve resulting from a healthier Orange County economy.
Total deposits were $260.3 million as of December 31, 1998, an
increase of $41.5 million or 19.0% from the $218.8 million as of
December 31, 1997. Total deposits increased $20.4 million or 10.3% in
1997. The deposit increase between years reflects a general increase
in balances maintained by large depositors.
Credit Risk Management
As previously noted, the Bank maintains an allowance for credit
losses to provide for potential losses in the loan portfolio.
Additions to the allowance for credit losses are charged to operations
in the form of a provision for possible credit losses. All loans that
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 features 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.
Liquidity
The Company maintains substantial liquid and other short-term assets
to meet the funding of loan demand, deposit withdrawals and maturities,
and operating costs. The Company currently meets its funding needs
from its deposit base, and cash flow from operations, loan sales, and
loan principal reductions.
The loan-to-deposit ratio was 53.8% and 60.0% as of December 31,
1998 and 1997, respectively. The decrease of the loan-to-deposit ratio
resulted from deposit growth exceeding loan demand. The ratio of
liquid assets (cash, cash 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 39.3% and 44.5%
as of December 31, 1998 and 1997, respectively. The decrease of the
liquid asset ratio resulted from the increase in deposits being
invested into loans and investment securities with maturities longer
than one year.
The Company has a relatively stable and significant base of core
deposits. Thus, the Company has not used brokered deposits and avoids
using other wholesale, highly rate-sensitive, short-term funds. The
Company had five customers with an aggregate deposit of $43.0 million
as of December 31, 1998.
Other funding sources available to the Company include reduction of
its federal funds sold, sale of its available-for-sale securities,
increasing deposits, and borrowing on its established credit resources.
The Company may borrow funds under securities sold with agreements to
repurchase such securities that have not been pledged. The Company had
unpledged securities of $52.3 million as of December 31, 1998.
Liquidity needs may 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 $8.0 million. The Company has also established a
borrowing capacity of $14.5 million with the FHLB. The Company would
need to pledge certain defined collateral, consisting of loans and/or
securities prior to borrowing from the FHLB. The Company has yet to
use these facilities.
Management believes the Bank has sufficient liquidity to meet its
loan commitments, deposit withdrawals and operating costs.
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 Bank is subject
to various regulatory capital requirements. The Bank must meet
specific capital guidelines that involve qualitative measures of the
Bank's assets and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors. Tier I
capital for the Bank under the regulations is defined as stockholders'
equity before any unrealized gains or losses on its available-for-sale
securities portfolio. Total capital is defined as Tier I capital plus
the allowance for credit losses, subject to certain limitations. The
table below sets forth the Bank's actual capital ratios, the minimum
capital required for adequacy purposes and to be categorized as "well
capitalized" for the capital ratios of total risk-based, Tier I risk-
based and Tier I leverage. The Bank's capital ratios exceeded the
"well capitalized" threshold prescribed in the rules of its principal
federal regulator as of December 31, 1998.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
December 31, 1998
Total capital
(to risk-weighted assets) $24,484 13.7% $14,314 8.0% $17,893 10.0%
Tier I capital
(to risk-weighted assets) 22,960 12.8% 7,157 4.0% 10,736 6.0%
Tier I capital
(to average assets) 22,960 8.4% 10,942 4.0% 13,678 5.0%
December 31, 1997
Total capital
(to risk-weighted assets) $22,563 13.9% $12,962 8.0% $16,202 10.0%
Tier I capital
(to risk-weighted assets) 20,982 13.0% 6,481 4.0% 9,721 6.0%
Tier I capital
(to average assets) 20,982 9.0% 9,368 4.0% 11,710 5.0%
Management believes that the Bank is properly and adequately
capitalized, as evidenced by these ratios as of December 31, 1998. The
most recent notification from the Office of the Comptroller of the
Currency categorized the Bank as "well capitalized" as of June 30, 1997
under the regulatory framework for prompt corrective action.
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 or is not assured, or where contractual amounts are used
solely to determine cash flows to be exchanged.
The Company's 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. Additional
information about off-balance sheet financial instruments is provided
in Note 10 of Notes to Consolidated Financial Statements.
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 inflation.
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.
Year 2000 Issue
The "Year 2000 issue" results from the fact that many computer
programs use only two digits to represent a year, such as "98" to
represent "1998," which means that in the Year 2000 such programs could
incorrectly treat the Year 2000 as the year 1900. This issue has grown
in importance as the use of computers and microchips has become more
pervasive throughout the economy, and interdependencies between systems
have multiplied. The issue must be recognized as a business problem,
rather than simply a computer problem, because of the way its effects
could ripple through the economy. The Year 2000 issue could materially
and adversely affect the Company either directly or indirectly. This
could happen if any of its critical computer systems or equipment
containing embedded logic fail, if the local infrastructure (electric
power, phone system, or water system) fails, if its significant vendors
are adversely impacted, or if its borrowers or depositors are adversely
impacted by their internal systems or those of their customers or
suppliers. Failure of the Company to complete testing and renovation
of its critical systems on a timely basis could have a material adverse
effect on the Company's financial condition and results of operations,
as could Year 2000 problems faced by others with whom the Company does
business.
Federal banking regulators have responsibility for supervision and
examination of banks to determine whether each institution has an
effective plan for identifying, renovating, testing and implementing
solutions for Year 2000 processing and coordinating Year 2000
processing capabilities with its customers, vendors and payment system
partners. Bank examiners are also required to assess the soundness of
a bank's internal controls and to identify whether further corrective
action may be necessary to assure an appropriate level of attention to
Year 2000 processing capabilities.
The Company has a written plan to address its risks associated with
the impact of the Year 2000. The plan directs the Company's Year 2000
compliance efforts under the framework of a five-step program mandated
by the Federal Financial Institutions Examination Council ("FFIEC").
The FFIEC's five-step program consists of five phases: awareness,
assessment, renovation, validation and implementation. In the
awareness phase, which the Company has completed, the Year 2000 problem
is defined and executive level support for the necessary resources to
prepare the Company for Year 2000 compliance is obtained. In the
assessment phase, which the Company has also completed, the size and
complexity of the problem and details of the effort necessary to
address the Year 2000 issues are assessed. Although the awareness and
assessment phases are completed, the Company continues to evaluate new
issues as they arise. In the renovation phase, which the Company has
substantially completed, the required incremental changes to hardware
and software components are installed. In the validation phase, which
the Company has also substantially completed the initial phase, the
hardware and software components are tested. In the implementation
phase, changes to hardware and components are brought on line and re-
testing of such changes are completed. The implementation phase is
currently 60% complete, with an expected completion in April 1999.
The Company is using both internal and external resources to
identify, correct or reprogram, and test its systems for Year 2000
compliance. The Company has identified 25 vendor or software
applications which management believes are material to its operations.
Based on information received from its vendors and testing results, the
Company believes that substantially all material applications of its
operations are Year 2000 compliant as of December 31, 1998. The
Company has not identified any material applications that the Company
does not believe are fully Year 2000 compliant as of December 31, 1998.
The Company is also making efforts to ensure that its customers,
particularly its significant customers, are aware of the Year 2000
problem. The Company has either sent Year 2000 correspondence to, or
met personally with its significant deposit and loan customers. A
customer of the Company is deemed significant if the customer possesses
either of the following characteristics: (1) total indebtedness to the
Company of $500,000 or more, or (2) an average ledger deposit balance
greater than $500,000.
The Company has amended its credit authorization documentation to
include consideration of the Year 2000 problem. The Bancorp assesses
its significant customer's Year 2000 readiness and assigns the customer
an assessment of "low," "medium" or "high" risk. Risk evaluation of
the Company's significant customers was completed in September 1998.
The Company evaluates any depositor or lending customer determined to
have a high or medium risk on an ongoing basis. Currently, 2% of loan
customers are considered high risk and are being monitored closely for
progress. Substantially all deposit customers are either low risk or
compliant, the exception being those loan customers considered high
risk.
It is impossible to quantify the total potential cost of Year 2000
problems or to determine the Company's worst-case scenario in the event
the Company's Year 2000 remediation efforts or the efforts of those
with whom it does business are not successful, due to the wide range of
possible issues and large number of variables involved. In order to
deal with the uncertainty associated with the Year 2000 problem, the
Company has developed a contingency plan to address the possibility
that efforts to mitigate the Year 2000 risk are not successful either
in whole or part. These plans include but are not limited to manual
processing of information for critical information technology systems
and having increased cash on hand. The contingency plan will be
validated, after which the appropriate implementation training will be
scheduled.
The Company incurred and expensed $0.1 million of Year 2000 costs
through December 31, 1998. These Year 2000-related costs have been
funded from the continuing operations of the Company. These costs were
approximately 7% of the Company's 1998 information systems budget. The
Company currently estimates its costs to complete its Year 2000
compliance at approximately $0.3 million. This estimate includes the
cost of purchasing hardware and software licenses, the cost of the time
of internal staff and the cost of consultants. Testing is not expected
to add significant incremental costs.
Current Accounting Developments
In June 1998, FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company does not invest in derivative
instruments nor engage in hedging activities.
Management does not believe the application of the Statement to
transactions of the Bank that have been typical in the past will
materially affect the Bank's financial position and results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
The Company uses asset liability management on its balance sheet to
minimize the exposure of interest rate movements on its net interest
income. The principal function of asset liability management is to
manage the interest rate risk in the balance sheet by maintaining a
proper balance, match and mix between rate-sensitive interest-earning
assets and rate-sensitive interest-bearing liabilities. The term
"rate-sensitive" refers to those assets and liabilities that are
"sensitive" to fluctuations in interest rates. When interest rates
fluctuate, earnings may be affected in many ways as the interest rates
of assets and liabilities change at different times or by different
amounts.
The Company minimizes its interest rate risk in the balance sheet by
emphasizing the origination of variable interest rate loans that have
the ability to reprice overnight and maintaining a high volume of
federal funds sold to offset the deposits that may potentially reprice
overnight.
A repricing gap is the difference between total interest-earning
assets and total interest-bearing liabilities available for repricing
during a given time interval. A positive repricing gap exists when
total interest-earning assets exceed total interest-bearing liabilities
within a repricing period and a negative repricing gap exists when
total interest-bearing liabilities are in excess of interest-earning
assets within a repricing period.
Generally, a positive repricing gap increases net interest income in
a rising rate environment and decreases net interest income in a
falling rate environment. A positive repricing gap may increase net
interest income in a falling rate environment depending on the amount
of the excess repricing gap and extent of the drop in interest rates.
A negative repricing gap tends to increase net interest income in a
falling rate environment and decrease net interest income in a rising
rate environment. The net interest income of the Company will benefit
from a rising rate environment based on the positive repricing gap.
The following table displays the repricing period for interest-
earning assets and interest-bearing liabilities and the related
repricing gap as of December 31, 1998:
After one
Due within Due within but within After
0-3 months 4-12 months five years five years
(dollars in thousands)
Interest-earning assets (1) $159,162 $6,500 $20,927 $69,124
Interest-bearing liabilities 152,016 7,037 1,404 2
Repricing gap 7,146 (537) 19,523 69,122
Cumulative repricing gap $ 7,146 $6,608 $26,131 $95,253
Cumulative gap as a
percent of earning assets 2.8% 2.6% 10.2% 37.3%
<FN>
(1) Includes collateralized mortgage obligations in the one-year to
five-year maturities based on the average expected lives.
</FN>
The Company had available-for-sale securities of $40.6 million
recorded at market value as of December 31, 1998. The available-for-
sale securities consist of collateralized mortgage obligations and
medium-term government agency notes. The Company also had held-to-
maturity securities of $17.6 million recorded at amortized cost as of
December 31, 1998. The held-to-maturity securities are collateralized
mortgage obligations that may be repaid without penalties. The value
of these securities is subject to fluctuation based upon current long-
term interest rates.
The Company had $144.4 million of interest-earning assets and $127.2
million of interest-bearing demand and savings deposits as of December
31, 1998 that are able to reprice overnight.
The estimated effect on net interest income for a 10% decrease from
prevailing interest rates over a one-year period would be a decline of
approximately $0.9 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company follow
on pages F-1 to F-25. The Independent Auditor's Report is set
forth on Page F-1.
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 Company and
subsidiary are included in this Form 10-K. Page number
references follow:
Independent auditor's report F-1
Consolidated balance sheets as of December 31, 1998 and 1997 F-2
Consolidated statements of earnings for the three years ended
December 31, 1998 F-3
Consolidated statements of comprehensive income for the three
years ended December 31, 1998 F-4
Consolidated statements of stockholders' equity for the three
years ended December 31, 1998 F-5
Consolidated statements of cash flows for the three years ended
December 31, 1998 F-6
Notes to consolidated financial statements F-7 to F-25
Schedules
All schedules are omitted as the information is not
required, is not material, or is otherwise furnished.
Exhibits
See Index to exhibits at Page 33 of this Form 10-K
Reports on Form 8-K
The Company did not file reports on Form 8-K during the
quarter ended December 31, 1998.
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: /s/ KENNETH J. COSGROVE Date: MARCH 17, 1999
Kenneth J. Cosgrove, President
and Chief Executive Officer
By: /s/ ROBERT W. CREIGHTON Date: MARCH 17, 1999
Robert W. Creighton, Secretary
and Chief Financial Officer
By: /s/ JERRO M. OTSUKI Date: MARCH 17, 1999
Jerro M. Otsuki, Vice President
and Controller
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
ORANGE NATIONAL BANCORP
/s/ MICHAEL W. ABDALLA MARCH 17, 1999
Michael W. Abdalla Date
Director
/s/ MICHAEL J. CHRISTIANSON MARCH 17, 1999
Michael J. Christianson Date
Director
/s/ KENNETH J. COSGROVE MARCH 17, 1999
Kenneth J. Cosgrove Date
Director
/s/ ROBERT W. CREIGHTON MARCH 17, 1999
Robert W. Creighton Date
Director
Charles R. Foulger Date
Director
/s/ GERALD R. HOLTE MARCH 17, 1999
Gerald R. Holte Date
Director
/s/ JAMES E. MAHONEY MARCH 17, 1999
James E. Mahoney Date
Director
/s/ WAYNE F. MILLER MARCH 17, 1999
Wayne F. Miller Date
Director
/s/ SAN E. VACCARO MARCH 17, 1999
San E. Vaccaro Date
Director
INDEX TO EXHIBITS
Exhibit No.
3.1 Registrant's Articles of Incorporation - filed as exhibit 3 to
the Registrant's Registration Statement on Form S-4, File No.
33-8743, and are hereby incorporated by reference.
3.2 Registrant's Bylaws - filed as exhibit 3.1 to the Registrant's
Registration Statement on Form S-1, File No. 33-13162, are
hereby incorporated by reference.
10.1 Material contracts of the Bank were each filed as exhibits 10,
10.1, 10.3, 10.4, and 10.5 to the Registrant's Registration
Statement on Form S-4, File No. 33-8743, and are hereby
incorporated by reference. Material contracts of the Bank were
each filed as exhibits 10.6 through 10.22 to the Registrant's
1997 Annual Report on Form 10-K, File No. 33-8743, and are
hereby incorporated by reference.
21 Subsidiary of the Registrant - Orange National Bank, a
National Banking Association.
23 Consent of Independent Accountants, page 34.
27 Financial Data Schedule, page 21.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors
Orange National Bancorp
Orange, California
We hereby consent to the incorporation of our report dated January
22, 1999, except for the last paragraph of Note 10, as to which the
date is February 11, 1999, included in this Form 10-K in the previously
filed Registration Statement of Orange National Bancorp on Form S-8
(No. 333-44741 and No. 0-15365).
McGLADREY & PULLEN, LLP
Anaheim, California
March 17, 1999
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Orange National Bancorp
Orange, California
We have audited the accompanying consolidated balance sheets of Orange
National Bancorp and subsidiary as of December 31, 1998 and 1997, and
the related consolidated statements of earnings, comprehensive income,
stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Orange National Bancorp and subsidiary as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Anaheim, California
January 22, 1999, except for the last paragraph of Note 10 as to which
the date is February 11, 1999.
ORANGE NATIONAL BANCORP
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
(dollars in thousands)
Assets
Cash and cash equivalents (Note 2) $ 74,931 $ 81,147
Securities (Note 3):
Held-to-maturity securities
(fair value of $17,691 in 1998
and $8,972 in 1997) 17,640 9,037
Available-for-sale securities 40,649 9,146
Loans, net of allowance for
credit losses of $1,524 in 1998
and $1,581 in 1997 (Notes 4, 5 and 12) 140,140 131,189
Premises and equipment, net (Note 6) 5,438 5,057
Other real estate owned, net (Note 5) - 126
Accrued interest receivable 1,212 985
Cash value of life insurance 5,021 4,808
Other assets (Note 8) 831 784
Total assets $285,862 $242,279
Liabilities
Deposits (Note 7) $260,334 $218,792
Accrued interest payable and other liabilities 1,805 1,901
Total liabilities 262,139 220,693
Commitments and Contingencies (Notes 10 and 11) - -
Stockholders' Equity (Notes 10, 11 and 13)
Common stock, no par value or stated value;
authorized 20,000,000 shares; issued and
outstanding 1,996,788 in 1998
and 1,970,046 in 1997 8,036 7,864
Retained earnings 15,718 13,778
Accumulated other comprehensive income (loss) (31) (56)
Total stockholders' equity 23,723 21,586
Total liabilities and stockholders' equity $285,862 $242,279
<FN>
See Notes to Consolidated Financial Statements.
</FN>
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
(in thousands, except per share data)
Interest Income:
Loans $14,633 $13,686 $11,712
Securities 1,602 1,573 2,627
Federal funds sold 2,881 1,598 1,555
Total interest income 19,116 16,857 15,894
Interest Expense, deposits 4,165 3,353 3,519
Net interest income 14,951 13,504 12,375
Provision for Credit Losses (Note 5) 100 140 205
Net interest income after
provision for credit losses 14,851 13,364 12,170
Other Income (Note 9) 2,783 3,707 2,713
Other Expenses (Notes 9 and 10) 12,157 11,776 11,547
Earnings before income taxes 5,477 5,295 3,336
Provision for Income Taxes (Note 8) 2,147 2,097 1,135
Net earnings (Note 11) $ 3,330 $ 3,198 $ 2,201
Basic earnings per share $ 1.67 $ 1.63 $ 1.13
Weighted average number of common
shares outstanding (in thousands) 1,989 1,961 1,944
Diluted earnings per share $ 1.64 $ 1.60 $ 1.13
Weighted average number of common
shares and diluted potential
common shares (in thousands) 2,036 2,000 1,951
<FN>
See Notes to Consolidated Financial Statements.
</FN>
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
(dollars in thousands)
Net earnings $3,330 $3,198 $2,201
Other comprehensive income:
Unrealized gains (losses) on
available-for-sale securities 10 68 (21)
Reclassification adjustment
for losses included in net earnings - 9 24
Reclassification adjustment
for losses included in net earnings
for securities transferred 35 40 73
Other comprehensive income
before income taxes 45 117 76
Provision for income taxes 20 50 30
Other comprehensive income 25 67 46
Comprehensive income $3,355 $3,265 $2,247
<FN>
See Notes to Consolidated Financial Statements.
</FN>
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
Accumulated
Other
Comprehensive
Common Stock Retained Income
Shares Amount Earnings (Loss) Total
(in thousands, except per share data)
Balance, December 31, 1995 1,934 $7,510 $9,920 $(169) $17,261
Net earnings - - 2,201 - 2,201
Cash dividend paid
($.37 per share) - - (718) - (718)
Exercise of stock options 19 166 - - 166
Other comprehensive income - - - 46 46
Balance, December 31, 1996 1,953 7,676 11,403 (123) 18,956
Net earnings - - 3,198 - 3,198
Cash dividend paid
($.42 per share) - - (823) - (823)
Exercise of stock options 17 188 - - 188
Other comprehensive income - - - 67 67
Balance, December 31, 1997 1,970 7,864 13,778 (56) 21,586
Net earnings - - 3,330 - 3,330
Cash dividend paid
($.70 per share) - - (1,390) - (1,390)
Exercise of stock options 27 172 - - 172
Other comprehensive income - - - 25 25
Balance, December 31, 1998 1,997 $8,036 $15,718 $(31) $23,723
<FN>
See Notes to Consolidated Financial Statements.
</FN>
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
(dollars in thousands)
Cash Flows from Operating Activities
Net earnings $ 3,330 $ 3,198 $ 2,201
Adjustments to reconcile
net earnings to net cash
provided by operating activities:
Depreciation and amortization 553 504 537
Provision for credit losses 100 140 205
Deferred income taxes (benefits) 88 (111) (78)
(Gain) on sale of loans (654) (1,374) (560)
Provision for losses on
other real estate owned - 11 160
Proceeds from loan sales 10,553 19,264 5,984
Origination of loans held for sale (9,898) (17,890) (5,424)
(Increase) decrease in other assets (382) 374 (615)
Gain on cash value of life insurance (213) (219) (183)
Increase (decrease) in other liabilities (96) 376 435
Net cash provided by operating activities 3,381 4,273 2,662
Cash Flows from Investing Activities
Proceeds from maturities of
held-to-maturity securities 5,529 1,909 1,542
Purchase of held-to-maturity securities (14,132) - -
Proceeds from sales and maturities of
available-for-sale securities 23,667 19,986 36,565
Purchase of available-for-sale securities (55,125) - (38,482)
Net increase in loans made to customers (9,084) (11,460) (7,274)
Purchase of life insurance policies - (872) -
Proceeds from sale of
other real estate owned 158 1,431 1,396
Purchases of bank premises and equipment (934) (349) (223)
Net cash provided by (used in)
investing activities (49,921) 10,645 (6,476)
Cash Flows from Financing Activities
Net increase in deposits 41,542 20,428 9,372
Proceeds from exercise of stock options 172 188 166
Dividends paid (1,390) (823) (718)
Net cash provided by
financing activities 40,324 19,793 8,820
Increase (decrease) in
cash and cash equivalents (6,216) 34,711 5,006
Cash and cash equivalents
at beginning of year 81,147 46,436 41,430
Cash and cash equivalents
at end of year $74,931 $81,147 $46,436
<FN>
See Notes to Consolidated Financial Statements.
</FN>
Note 1. Summary of Significant Accounting Policies
Principles of consolidation and basis of presentation
The consolidated financial statements include the accounts of Orange
National Bancorp and its wholly-owned subsidiary Orange National Bank
("Bank"). These entities are collectively referred to herein as the
Company. The Bank provides a full range of banking services to its
commercial and consumer customers through six branches located in
Orange County, California. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and cash equivalents
The Company includes cash on hand, cash due from banks, time
deposits and federal funds sold in its definition of cash and cash
equivalents for purposes of balance sheet presentation and reporting
the statement of cash flows.
Held-to-maturity securities
Securities classified as held-to-maturity are those debt securities
the Company has both the intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs or changes
in general economic conditions. These securities are carried at cost
adjusted for amortization of premiums and accretion of discounts,
computed using the interest method over their contractual lives. The
sale of a security within three months of its maturity date or after at
least 85% of the principal outstanding has been collected is considered
a maturity for purposes of classification and disclosure.
Available-for-sale securities
Securities classified as available-for-sale are those debt
securities that the Company intends to hold for an indefinite period of
time, but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors,
including significant movements in interest rates, changes in the
maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors.
Securities available-for-sale are carried at fair value. Unrealized
gains or losses, net of the related deferred tax effect, are reported
as comprehensive income. Realized gains or losses, computed using the
cost of the specific securities sold, are included in earnings.
Securities transfers
Transfers of debt securities into the held-to-maturity
classification from the available-for-sale classification are made at
fair value on the date of transfer. The unrealized holding gains or
losses on the date of transfer are retained as a separate component of
stockholders' equity and in the carrying value of the held-to-maturity
securities. Such amounts are amortized over the remaining contractual
lives of the securities using the interest method.
Loans
Loans are stated at the amount of unpaid principal reduced by
undisbursed loan funds, unearned loan fees and allowance for credit
losses. Interest on loans is accrued as earned using the simple-
interest method on principal amounts outstanding, only if deemed
collectible. Loan origination and commitment fees together with
certain direct loan origination costs are deferred, and the net
deferral amount is amortized as an adjustment to the yield on loans
over their contractual lives. Collateral is obtained on substantially
all loans. Such collateral is primarily first trust deeds on property.
The accrual of interest on loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due, generally at 90 days past due. When an interest
accrual is discontinued, all unpaid accrued interest is reversed.
Generally, interest income is not subsequently recognized until all
principal and interest amounts are received, and future principal and
interest payments are expected to be collected.
A loan is considered impaired when, in management's opinion, it is
probable the creditor will be unable to collect all contractual
principal and interest payments due in accordance with the terms of the
loan agreement. Impaired loans are measured based on the present value
of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is
collateral dependent. The amount of impairment, if any, and any
subsequent changes are included in the allowance for credit losses.
Allowance for credit losses
The allowance for credit losses is established through a provision
for credit losses charged to expense. Loans are charged against the
allowance for credit losses when management believes that
collectibility of the principal is unlikely. The allowance is an
amount that management believes will be adequate to absorb estimated
losses on existing loans that may become uncollectible, based on
evaluation of the collectibility of loans and prior loan loss
experience. This evaluation also takes into consideration such factors
as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current
economic conditions that may affect the borrower's ability to pay.
While management uses the best information available to make its
evaluation, future adjustments to the allowance may be necessary if
there are significant changes in economic or other conditions. In
addition, the Office of the Comptroller of the Currency, as an integral
part of their examination process, periodically reviews the Company's
allowance for credit losses, and may require the Company to make
additions to the allowance based on their judgment about information
available to them at the time of their examinations.
Sale of loans
The Company sells the guaranteed portion of small business
administration loans in the secondary market to provide funds for
additional lending and to generate servicing income. Under such
agreements, the Company continues to service the loans and the buyer
receives the principal collected together with interest. Loans held
for sale are valued at the lower of cost or market value.
Gains and losses on sales of loans are calculated on a predetermined
formula in compliance with Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities" ("SFAS 125") based on the difference
between the selling price and the cost of the loans sold. Any inherent
risk of loss on loans is transferred to the buyer at the date of sale
on the portion of the loan sold. However, the Company maintains the
risk on the portion retained.
The Company has issued various representations and warranties
associated with the sale of loans. These representations and
warranties may require the Company to repurchase loans for a period of
90 days after the date of sale as defined per the applicable sales
agreement. The Company did not experience losses during the years
ended December 31, 1998, 1997 and 1996 regarding these representations
and warranties.
Premises and equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the following estimated useful lives:
Buildings and leasehold improvements - 4 to 28 years; furniture and
equipment - 3 to 10 years. Improvements to leased property are
amortized over the lesser of the term of the lease or life of the
improvements.
Other real estate owned
Other real estate owned ("OREO") represents properties acquired
through foreclosure or other proceedings. OREO is held for sale and is
recorded at the lower of the carrying amounts of the related loans or
the estimated fair value of the properties less estimated costs of
disposal. Any write-down to estimated fair value less cost to sell at
the time of transfer to OREO is charged to the allowance for credit
losses. Properties are evaluated regularly by management with any
further reductions of the carrying amount to the estimated fair value
less estimated costs to dispose charged to the reserve for OREO losses
as necessary. Depreciation is recorded on each OREO after such
properties have been owned for one year. Depreciation and additions to
or reductions from valuation allowances are recorded in income.
Income taxes
Deferred taxes are provided on an asset and liability method whereby
deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards, and deferred tax
liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts
of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when management determines that it is
more likely than not that some portion or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date
of enactment.
Stock-based compensation
The Company has adopted Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 establishes financial accounting and reporting standards for stock-
based compensation plans. The Company has elected to continue
accounting for stock-based employee compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," ("APB No. 25") and related Interpretations, as
SFAS 123 permits, and to follow the pro forma net earnings, pro forma
earnings per share, and stock-based compensation plan disclosure
requirements set forth in SFAS 123.
Earnings per share
The Company is required to present basic and diluted earnings per
share amounts. Diluted per share amounts assume the conversion,
exercise or issuance of all potential common instruments unless the
effect is to reduce a loss or increase the earnings per common share
from continuing operations. The weighted-average shares outstanding
used to compute dilutive earnings per share include incremental shares
from stock options of 46,708; 38,365; and 7,658; for the years ended
December 31, 1998, 1997 and 1996, respectively.
Current accounting development
In June 1998, FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company does not invest in derivative
instruments nor engage in hedging activities.
Note 2. Cash and cash equivalents
Cash and cash equivalents consisted of the following as of December
31:
1998 1997
(dollars in thousands)
Cash on hand $ 1,264 $ 1,827
Cash due from banks 16,277 27,820
Federal funds sold 57,390 51,500
$74,931 $81,147
The Company maintains amounts due from banks that exceed federally
insured limits. The Company has not experienced any losses in such
accounts. In addition, federal funds sold were placed with two
financial institutions.
The Company is required to maintain a reserve balance in cash or on
deposit with the Federal Reserve Bank. The required and actual reserve
balances maintained were $742,000 and $1,248,000 as of December 31,
1998, respectively.
Note 3. Securities
Carrying amounts and fair values of held-to-maturity securities are
summarized as follows as of December 31:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(dollars in thousands)
1998
Mortgage-backed securities $17,640 $ 76 $(25) $17,691
1997
Mortgage-backed securities $ 9,037 $ - $(65) $ 8,972
Securities pledged as collateral on public deposits and treasury,
tax and loan payments had a carrying amount of $5,999,000 and
$5,748,000 at December 31, 1998 and 1997, respectively.
Carrying amounts and fair values of available-for-sale securities
are summarized as follows as of December 31:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(dollars in thousands)
1998
U.S. Treasury securities
and obligations
of other U.S. Government
corporations and agencies $14,503 $12 $( 3) $14,512
Mortgage-backed securities 25,241 48 (63) 25,226
Other 911 - - 911
$40,655 $60 $(66) $40,649
1997
U.S. Treasury securities
and obligations
of other U.S. Government
corporations and agencies $8,992 $11 $(27) $8,976
Other 170 - - 170
$9,162 $11 $(27) $9,146
The amortized cost and fair value of investment securities by
contractual maturities as of December 31, 1998 are shown below.
Maturities may differ from contractual maturities in mortgage-backed
securities because the mortgages underlying the securities may be
called or prepaid without any penalties. Therefore, maturity dates for
these securities are not included in the following maturity summary:
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
(dollars in thousands)
Due in one year or less $ - $ - $ 9,003 $ 9,000
Due after one year
through five years - - 5,500 5,512
Mortgage-backed securities 17,640 17,691 25,241 25,226
Other - - 911 911
$17,640 $17,691 $40,655 $40,649
Available-for-sale securities of $14,002,000 and $20,999,000 were
sold resulting in gross realized (losses) of $(9,000) and $(24,000) in
1997 and 1996, respectively. The Company did not sell available-for-
sale securities in 1998.
Note 4. Loans
The Company's loan portfolio consisted of the following as of
December 31:
1998 1997
(dollars in thousands)
Real estate loans
Construction $ 5,074 $ 118
Commercial 86,049 78,534
91,123 78,652
Commercial and industrial loans 40,217 44,301
Loans to individuals 11,180 10,586
Other 241 122
142,761 133,661
Deduct
Unearned net loan fees and premiums (1,097) (891)
Allowance for credit losses (1,524) (1,581)
$140,140 $131,189
Impaired loans
Information about impaired loans is as follows as of and for the
years ended December 31:
1998 1997
(dollars in thousands)
Impaired loans requiring a related allowance
for credit losses $ 877 $1,067
Impaired loans not requiring a related allowance
for credit losses 554 249
Total impaired loans $1,431 $1,316
Related allowance for loan losses $ 224 $ 278
Average balance (based on month-end balances) $1,644 $1,201
Interest income recognized $ 161 $ 125
The Company is not committed to lend additional funds to debtors
whose loans have been modified due to impairment.
The Company had nonaccrual loans of $1,631,000 and $2,447,000 as of
December 31, 1998 and 1997, respectively. Interest income that would
have been earned on such nonaccrual loans had such loans performed
according to their loan terms would have been $382,000, $325,000, and
$492,000 (earnings per share effect of $0.19, $0.17, and $0.25) in
1998, 1997 and 1996, respectively. Management estimates that certain
nonaccrual loans, which are not classified as impaired, will ultimately
be collected in full in accordance with the original terms.
Loans serviced
The Company services loans for others totaling $57,875,000 and
$64,764,000 as of December 31, 1998 and 1997, respectively, which are
not included in the accompanying consolidated balance sheets.
Loan concentration
The Company grants commercial, residential and consumer loans to
customers, substantially all of whom are middle-market businesses or
residents. The Company's business is concentrated primarily in Orange
County, California, and its loan portfolio includes a significant
credit exposure to the real estate industry and local economy of this
area. Real estate loans accounted for approximately 64% of total loans
as of December 31, 1998. Substantially all of these loans are secured
by first liens with an initial loan to value ratio of generally less
than 75%.
Note 5. Allowance for Credit Losses and Reserve for Other Real Estate
Owned
Activity of the allowance for credit losses is as follows:
1998 1997 1996
(dollars in thousands)
Balance, beginning $1,581 $1,369 $1,513
Provision for credit losses 100 140 205
Recoveries of amounts charged off 42 138 38
Amounts charged off (199) (66) (387)
Balance, ending $1,524 $1,581 $1,369
Activity of the reserve for other real estate owned is as follows:
1998 1997 1996
(dollars in thousands)
Balance, beginning $ 17 $252 $301
Provision for losses on
other real estate owned - 11 160
Disposal of other real estate owned (17) (246) (209)
Balance, ending $ - $ 17 $252
Note 6. Premises and Equipment, net
Premises and equipment are summarized as follows as of December 31:
1998 1997
(dollars in thousands)
Land $1,100 $1,100
Buildings and leasehold improvements 4,982 4,531
Furniture and equipment 3,904 3,449
9,986 9,080
Less accumulated depreciation and amortization 4,548 4,023
$5,438 $5,057
Note 7. Deposits
Deposits are summarized as follows as of December 31:
1998 1997
(dollars in thousands)
Noninterest-bearing demand $ 99,875 $ 93,169
Interest-bearing:
Demand 113,895 91,282
Savings 13,266 11,622
Time certificates of deposit of $100,000 or more 19,092 12,087
Other time 14,206 10,632
Total deposits $260,334 $218,792
Substantially all certificates of deposit as of December 31, 1998
mature within one year. The Company had five customers with an
aggregate deposit of $43,048,000 as of December 31, 1998.
Note 8. Income Taxes
The cumulative tax effects of the primary temporary differences are
summarized as follows as of December 31:
1998 1997
(dollars in thousands)
Deferred tax assets:
Credit loss allowances $ 386 $ 407
Deferred compensation accruals 346 278
Interest accruals 24 95
Acquired net operating loss carryforward 80 85
Unrealized loss on available-for-sale securities 18 38
Other real estate allowance - 7
State income taxes 187 204
Total deferred tax assets 1,041 1,114
Deferred tax liability, premises and equipment 731 696
Net deferred tax assets $ 310 $ 418
The Company did not record a valuation allowance on deferred tax
assets in excess of deferred tax liabilities at December 31, 1998 and
1997, as management believes that the net deferred tax assets, as of
December 31, 1998 and 1997, are more likely than not to be realized.
The provision for income taxes consisted of the following:
1998 1997 1996
(dollars in thousands)
Current tax expense $2,059 $2,208 $1,213
Deferred tax expense (benefit) 88 (111) (78)
$2,147 $2,097 $1,135
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income as follows:
1998 1997 1996
(dollars in thousands)
Computed "expected" tax expense $1,917 $1,853 $1,168
Increase (decrease) in
income taxes resulting from:
State income taxes, net of
federal tax benefit 378 397 249
Change in valuation allowance - - (165)
Cash value of life insurance (82) (97) (85)
Other (66) (56) (32)
$2,147 $2,097 $1,135
Note 9. Other income and expense
Other income consisted of the following:
1998 1997 1996
(dollars in thousands)
Service charges on deposit accounts $1,194 $1,262 $1,169
Fees for other customer services 367 593 616
Gain on sale of loans 654 1,374 560
Increase in cash value of life insurance 254 219 183
Other (Note 3) 314 259 185
$2,783 $3,707 $2,713
Other expense consisted of the following:
1998 1997 1996
(dollars in thousands)
Salaries, wages and employee benefits $ 6,138 $ 6,259 $ 6,098
Occupancy expense (Note 10) 1,330 1,134 1,153
Data processing expense (Note 10) 977 888 928
Furniture and equipment expense 754 704 633
Promotion expense 485 459 429
Legal and professional services 603 518 627
Insurance 260 241 182
Stationery and supplies 266 216 249
Telephone and postage 405 405 383
Other real estate owned (Note 5) 17 94 217
Other 922 858 648
$12,157 $11,776 $11,547
Note 10. Commitments, Contingencies and Subsequent Event
Litigation
In the normal course of business, the Company is involved with
various legal proceedings. In the opinion of management, any liability
resulting from such proceedings would not have a material adverse
effect on the consolidated financial statements.
Financial instruments with off-balance sheet risk
The Company is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. They involve, to varying
degrees, elements of credit risk in addition to the amounts recognized
on the consolidated balance sheets. Such financial instruments are
recorded on the consolidated balance sheet upon funding.
The Company's exposure to credit loss in the event of nonperformance
by the other parties to the financial instrument for these commitments
is represented by the contractual amounts of those instruments. The
Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
The Company's exposure to off-balance sheet risk as of December 31
is summarized as follows:
1998 1997
(dollars in thousands)
Commitments to extend credit $23,928 $25,087
Standby letters of credit 472 347
$24,400 $25,434
Commitments to extend credit
Commitments to extend credit are agreements to lend to a customer
provided that all conditions established in the contract have been met.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's creditworthiness
on a case-by-case basis. If deemed necessary upon extension of credit,
the amount of collateral obtained is based on management's credit
evaluation of the counterparty. Collateral held varies, but may
include accounts receivable, inventory, property and equipment, and
income-producing commercial properties. The Company had undisbursed
loan funds of $19,006,000 and $20,516,000 as of December 31, 1998 and
1997, respectively.
Standby letters of credit
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers. Collateral held varies as specified above and
is required in instances that the Company deems necessary.
Substantially all of the standby letters of credit were collateralized
at December 31, 1998.
Lease commitments
The Company leases certain branch facilities and equipment from
nonaffiliates under operating leases expiring at various dates through
December 2007. The following is a schedule of future minimum rental
payments under these leases:
Amount
(dollars in thousands)
1999 $ 688
2000 697
2001 704
2002 718
2003 612
Thereafter 1,684
$5,103
Rent expense under these leases and other month-to-month leases for
the years ended December 31, 1998, 1997 and 1996, was $915,000,
$824,000 and $790,000, respectively.
Data processing commitment
The Company has an existing contract with a data processing center
to provide computer services through March 2001. The Company is
subject to a penalty amount equal to 25% of the amounts that would have
been paid to the center for the remainder of the contract term, should
the Company terminate the contract prior to the expiration date. The
expense under this contract for the years ended December 31, 1998, 1997
and 1996 was $977,000, $888,000 and $927,000, respectively.
Subsequent event
In January 1999, the Company declared a $0.15 per share dividend to
stockholders of record as of the close of business on February 11,
1999, payable on March 1, 1999.
Note 11. Employee Benefit Plans
Stock Option Plans
The Company maintains two compensatory incentive stock option plans
in which options to purchase shares of the Company's common stock are
granted at the Board of Directors' discretion to directors, certain
management and other key personnel. The 1993 and 1997 Plans are
authorized to grant a maximum of 193,106 shares and 414,250 shares of
the Company's common stock, respectively. Purchase prices associated
with the options are based on the fair market value of the Company's
stock at the time the option is granted. The options, if not
exercised, will expire 5 to 10 years from the date they were granted.
Other pertinent information relating to the Plans follow:
1998 1997 1996
Under option, beginning of year 207,625 48,500 62,600
Granted 45,900 176,500 5,000
Exercised (26,742) (17,375) (19,100)
Under option, end of year 226,783 207,625 48,500
Options exercisable, end of year 200,967 174,775 48,500
Available to grant, end of year 314,856 360,756 123,006
Weighted average price under option,
end of year $19.69 $16.25 $6.32
Weighted average price of options
exercisable, end of year $19.31 $16.12 $6.32
Weighted average price of options
granted, during the year $27.50 $17.96 $9.92
Weighted average price of options
exercised, during the year $6.43 $5.87 $8.67
Additional option information by Plan at December 31, 1998 is as
follows:
Weighted
Average
Exercise
Price Range Outstanding Exercisable Price
1993 Plan $ 5.79 1,050 - $ 5.79
1993 Plan $ 9.92 - $13.75 8,833 7,000 $11.58
1997 Plan $17.72 - $23.50 171,000 162,667 $18.10
1997 Plan $24.12 - $29.00 45,900 31,300 $27.50
226,783 200,967
The Company applies APB No. 25 and related Interpretations in
accounting for its Plans. Accordingly, no compensation cost has been
recognized. The Company has not issued any options to nonemployees.
The Company's reported and pro forma net earnings and earnings per
share are presented below. The pro forma amounts deduct the estimated
compensation cost for the Company's stock option Plan based on the fair
value at the grant dates for awards under this Plan and with the
provisions of SFAS 123:
1998 1997 1996
(dollars in thousands, except per share data)
Net earnings As reported $3,330 $3,198 $2,201
Pro forma 3,165 2,691 2,195
Basic earnings per share As reported $1.67 $1.63 $1.13
Pro forma 1.59 1.37 1.12
Diluted earnings per share As reported $1.64 $1.60 $1.13
Pro forma 1.55 1.35 1.12
The pro forma compensation cost for the fair value of the stock
options granted was estimated using the Black-Scholes model. The
assumptions used in the model by year are as follows:
1998 1997 1996
Expected volatility 12% to 31% 15% to 20% 12% to 15%
Dividends as a percentage
of stock price 2.6% 1.8% 2.8%
Expected lives in years 4 4 4
Risk-free interest rates 4.5% 5.5% 5.4%
Weighted average fair value
per share of stock options granted $4.65 $4.69 $2.13
Salary deferral 401(k) plan
The Company has a salary deferral 401(k) plan for all employees who
have completed one year of service. The Bank contributed discretionary
matching funds of $102,000 to the Plan in 1998, 1997 and 1996,
respectively.
Contingency contract
The Company has contingency contracts with its Chief Executive
Officer and Chief Financial Officer. The contract provides for a
monthly payment of $13,000 over 179 months in the event that the
Company experiences a merger, acquisition, or other act wherein they
are not retained in similar positions with the surviving Company.
Note 12. Loans and Other Transactions with Related Parties
Stockholders of the Company, and officers and directors, including
their families and companies of whom they are principal owners, are
considered to be related parties. These related parties were loan
customers of, and had other transactions with, the Company in the
ordinary course of business. In management's opinion, these loans and
transactions were on the same terms as those for comparable loans and
transactions with nonrelated parties. The activity in such loans is as
follows:
1998 1997
(dollars in thousands)
Balance, beginning $2,479 $2,906
New loans 850 774
Repayments (1,126) (1,201)
Balance, ending $2,203 $2,479
None of these loans are classified, past due, nonaccrual, or
restructured to provide a reduction or deferral of interest or
principal because of deterioration in the financial position of the
borrower.
Note 13. Regulatory Capital Requirements
The subsidiary Bank is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve qualitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital to average assets (as defined). Management believes that the
Bank meets all capital adequacy requirements to which it is subject as
of December 31, 1998.
As of June 30, 1997, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based, Tier I leverage ratios as
set forth in the table. There are no conditions or events occurring
since that management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are presented in the
following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $24,484 13.7% $14,314 8.0% $17,893 10.0%
Tier I Capital
(to Risk Weighted Assets) 22,960 12.8% 7,157 4.0% 10,736 6.0%
Tier I Capital
(to Average Assets) 22,960 8.4% 10,942 4.0% 13,678 5.0%
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $22,563 13.9% $12,962 8.0% $16,202 10.0%
Tier I Capital
(to Risk Weighted Assets) 20,982 13.0% 6,481 4.0% 9,721 6.0%
Tier I Capital
(to Average Assets) 20,982 9.0% 9,368 4.0% 11,710 5.0%
The Company's capital amounts and ratios are substantially the same
as the amounts presented above.
Note 14. Consolidated Statements of Cash Flows Information
1998 1997 1996
(dollars in thousands)
Supplemental Cash Flow Information
Cash payments for
Interest $4,142 $3,318 $3,573
Income taxes $2,484 $2,113 $1,100
Non-cash investing activities
Loans originated by the Company to finance
the sale of other real estate owned $ - $1,023 $ 100
Loans foreclosed on by the Company $ 32 $ 145 $ 902
Note 15. Fair Values of Financial Instruments
The fair values of the Company's financial instruments are as
follows as of December 31:
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
(dollars in thousands)
Financial Assets
Cash and cash equivalents $ 74,931 $ 74,931 $ 81,147 $ 81,147
Securities 58,289 58,340 18,183 18,118
Loans, net 140,140 141,453 131,189 130,711
Accrued interest receivable 1,212 1,212 985 985
Financial Liabilities, deposits 260,334 260,222 218,792 218,700
Management uses its best judgment in estimating the fair value of
the Company's financial instruments; however, there are inherent
weaknesses in any estimation technique. Therefore, for substantially
all financial instruments, the fair value estimates presented herein
are not necessarily indicative of the amounts the Company could have
realized in a sales transaction at either December 31, 1998 or 1997.
The estimated fair value amounts for 1998 and 1997 have been measured
as of their respective year ends, and have not been reevaluated or
updated for purposes of these consolidated financial statements
subsequent to those respective dates. As such, the estimated fair
values of these financial instruments subsequent to the respective
reporting dates may be different than the amounts reported at each
year-end.
The information in this Note should not be interpreted as an
estimate of the fair value of the entire Company since a fair value
calculation is only required for a limited portion of the Company's
assets and liabilities. This disclosure of fair value amounts does not
include the fair values of any intangibles, including core deposit
intangibles or mortgage servicing rights. Due to the wide range of
valuation techniques, assumptions used and the degree of subjectivity
used in making the estimate, comparisons between the Company's
disclosures and those of other banks may not be meaningful.
The Company used the following methods and assumptions in estimating
the fair value of its financial instruments:
Cash and cash equivalents
The carrying amounts for cash held, due from banks, interest bearing
deposits and federal funds sold approximate their fair values.
Securities
Fair values for securities are based on quoted market prices when
available. For certain mortgage-backed securities, the Company
utilizes a broker to determine fair value. This broker obtains
estimates of fair value from up to three pricing services that estimate
fair value through a mapping process to other mortgage pools adjusted
for interest rate, maturity, etc. There is no guarantee that the
prices obtained for these methods can be realized upon ultimate sale of
such securities.
Loans
The carrying values of variable-rate loans that reprice frequently
and that have not experienced significant changes in credit risk
approximate their fair values. At December 31, 1998 and 1997, variable
rate loans comprised approximately 64% and 72%, respectively, of the
loan portfolio. Fair values for all other loans are estimated based on
discounted cash flows, using interest rates currently being offered for
loans with similar terms to borrowers with similar credit quality.
Prepayments prior to the repricing date are not expected to be
significant. Loans are expected to be held-to-maturity and any
unrealized gains or losses are not expected to be realized.
Off-balance sheet instruments
Fair values for off-balance sheet instruments (guarantees, letters
of credit and lending commitments) are based on quoted fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit
standing.
Deposit liabilities
Fair values for savings and demand deposits equal their carrying
amounts. The carrying amounts for variable-rate money market accounts
approximate their fair values. Fair values for fixed-rate certificates
of deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregate expected monthly maturities on time deposits.
Early withdrawals of fixed-rate certificates of deposit are not
expected to be significant.
Accrued interest receivable and payable
The fair values of both accrued interest receivable and payable
approximate their carrying amounts.
Commitments
The estimated fair value of fee income on letters of credit at
December 31, 1998 and 1997 is insignificant.
Interest rate risk
The Company assumes interest rate risk (the risk that general
interest rate levels will change) as a result of its normal operations.
As a result, fair value of the Company's financial instruments will
change when interest rate levels change and that change may be either
favorable or unfavorable to the Company. Management attempts to match
maturities of assets and liabilities to the extent believed necessary
to minimize interest rate risk. However, borrowers with fixed rate
obligations are less likely to prepay in a rising rate environment and
more likely to prepay in a falling rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw
funds before maturity in a rising rate environment and less likely to
do so in a falling rate environment. Management monitors rates and
maturities of assets and liabilities and attempts to minimize interest
rate risk by adjusting terms of new loans and deposits and by investing
in securities with terms that mitigate the Company's overall interest
rate risk.
Note 16. Parent Company Only Condensed Statements
Condensed Balance Sheets
1998 1997
(dollars in thousands)
Assets
Cash $ 616 $ 482
Investment in subsidiary 22,929 20,926
Other assets 178 178
$23,723 $21,586
Stockholders' Equity $23,723 $21,586
1998 1997 1996
(dollars in thousands)
Condensed Statements of Earnings
and Comprehensive Income
Operating income, dividends from subsidiary $1,390 $ 823 $ 718
Expenses, professional fees (38) (39) (40)
Earnings before equity
in undistributed earnings
of subsidiary 1,352 784 678
Equity in undistributed
earnings of subsidiary 1,978 2,414 1,523
Net earnings 3,330 3,198 2,201
Other comprehensive income from subsidiary 25 67 46
Comprehensive income $3,355 $3,265 $2,247
Condensed Statements of Cash Flows
Cash Flows from Operating Activities
Net earnings $3,330 $3,198 $2,201
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Equity in undistributed
earnings of subsidiary (1,978) (2,414) (1,523)
Net cash provided by
operating activities 1,352 784 678
Cash Flows from Financing Activities
Proceeds from exercise of stock options 172 188 166
Dividends paid (1,390) (823) (718)
Net cash (used in)
financing activities (1,218) (635) (552)
Increase in cash and cash equivalents 134 149 126
Cash and cash equivalents
Beginning 482 333 207
Ending $ 616 $ 482 $ 333