-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U03XsSR7EjKLoSKYri89ur4uCByFeZT/1n7ONTi8PHdZUPuzEpYMj3jp/JlSziWe dKSmV3k8YOibScYhpNcRdA== 0000706343-97-000003.txt : 19970328 0000706343-97-000003.hdr.sgml : 19970328 ACCESSION NUMBER: 0000706343-97-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELTA NATIONAL BANCORP CENTRAL INDEX KEY: 0000706343 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 942839814 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 002-79261 FILM NUMBER: 97564521 BUSINESS ADDRESS: STREET 1: 611 N MAIN ST CITY: MANTECA STATE: CA ZIP: 95336-3740 BUSINESS PHONE: 2098244052 MAIL ADDRESS: STREET 1: 611 NORTH MAIN STREET CITY: MANTECA STATE: CA ZIP: 95336 10-K 1 FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 [ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 2-79261 DELTA NATIONAL BANCORP (Exact name of registrant as specified in its charter) California 94-2839814 (State of incorporation or organization) (IRS Employer Identification No.) 611 North Main Street, Manteca, California 95336-3740 (Address of principal executive offices) (Zip code) (209) 824-4050 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant: Aggregate Market Value of Date Market Value Non-Affiliate Stock Holdings December 31,1996 $26.00/Share $ 9,796,332 Indicate the number of shares outstanding of each of the registrant's classes of common stock as of December 31, 1996: Common Stock, no par value - 376,782 shares. FORM 10-K CROSS REFERENCE INDEX - -------------------------------------------------------------------------------- Part I Page - -------------------------------------------------------------------------------- Item 1. Business Financial Review 8-20 Selected Statistical Information 4, 9-23 Description of Business 5-7 Item 2. Properties 21 Item 3. Legal Proceedings 21 Item 4. Submission of Matters to a vote of security holders 22 - -------------------------------------------------------------------------------- Part II Page - -------------------------------------------------------------------------------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 4, 22 Item 6. Selected Financial Data 4, 21-22 Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations 8-20 Item 8. Financial Statements and Supplementary Data Delta National Bancorp and Subsidiaries - Consolidated Financial Statements 23-27 Notes to Consolidated Financial Statements 28-43 Independent Auditors' Report 44 Selected Statistical Information 4, 9-22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 45 - -------------------------------------------------------------------------------- Part III Page - -------------------------------------------------------------------------------- Item 10. Directors and Executive Officers of the Registrant 45-46 Item 11. Executive Compensation 47-48 Item 12. Security Ownership of Certain Beneficial Owners and Management 48 Item 13. Certain Relationships and Related Transactions 49 - -------------------------------------------------------------------------------- Part IV Page - -------------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 50 (a) (1) Financial Statements (See Item 8 for a listing of all financial statements (2) Financial Statement Schedules All schedules normally required by Form 10-K are omitted since they either are not applicable or the required information is shown in the financial statements and notes thereto. (3) Exhibits (b) No reports on Form 8-K have been filed during the fourth quarter of the last year.
- -------------------------------------------------------------------------------------------------------------------------- FIVE YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION - -------------------------------------------------------------------------------------------------------------------------- Year Ended December 31: - -------------------------------------------------------------------------------------------------------------------------- (Amounts in thousands) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- Summary of Operations Interest income ......................................... $ 8,022 $ 7,865 $ 6,612 $ 6,560 $ 7,385 Interest expense ........................................ 2,738 3,019 2,310 2,280 2,892 - -------------------------------------------------------------------------------------------------------------------------- Net interest income .................................... 5,284 4,846 4,302 4,280 4,493 Provision for loan losses ............................... 185 624 192 642 465 - -------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses.. 5,099 4,223 4,110 3,638 4,028 Non-interest income ..................................... 1,300 675 692 906 1,142 Non-interest expense .................................... 4,506 3,485 3,442 3,239 3,328 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes .............................. 1,893 1,412 1,360 1,305 1,842 Income taxes ........................................ 765 552 539 514 720 Net Earnings ............................................ $ 1,128 $ 860 $ 821 $ 791 $ 1,122 - -------------------------------------------------------------------------------------------------------------------------- Earnings per share Net income per share ................................ $ 2.99 $ 2.28 $ 2.18 $ 2.10 $ 2.98 Cash dividends per share ............................ .70 .70 .70 .70 .70 - -------------------------------------------------------------------------------------------------------------------------- At Year End Cash and due from banks ................................. $ 5,728 $ 4,381 $ 3,349 $ 5,987 $ 4,496 Investment securities ................................... 25,778 33,278 33,028 29,425 28,833 Federal funds sold ...................................... 7,600 7,600 2,800 4,300 3900 Loans, net .............................................. 49,394 46,520 47,044 42,598 47,057 Other assets ............................................ 3,525 3,145 2,968 3,252 2,626 - -------------------------------------------------------------------------------------------------------------------------- Total assets ............................................ $ 92,025 $ 94,924 $ 89,189 $ 85,562 $ 86,912 - -------------------------------------------------------------------------------------------------------------------------- Demand deposits ......................................... $ 29,612 $ 29,893 $ 28,329 $ 30,866 $ 31,114 Time and savings deposits ............................... 51,441 54,946 51,892 45,962 47,223 Other liabilities ....................................... 365 314 221 135 530 Stockholders' equity .................................... 10,607 9,771 8,747 8,599 8,045 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities & stockholders' Equity ................ $ 92,025 $ 94,924 $ 89,189 $ 85,562 $ 86,912 - -------------------------------------------------------------------------------------------------------------------------- Selected Ratios (1) Return on equity ........................................ 10.28% 8.73% 9.18% 9.43% 15.44% Return on assets ........................................ 1.21% .93% .94% .93% 1.34% Equity-to-assets ........................................ 11.76% 10.69% 10.19% 9.86% 8.68% Capital Ratios Leverage ratio .......................................... 11.23% 10.02% 9.92% 9.65% 8.90% Risk based capital Tier I ratio ........................................ 18.50% 16.88% 14.49% 13.43% 11.70% Total capital ratio ................................. 19.76% 18.14% 15.47% 14.22% 13.13% Average Balances Total assets ............................................ $ 93,269 $ 92,197 $ 87,812 $ 85,075 $ 83,739 Earning assets .......................................... 86,129 85,566 80,977 77,315 76,774 Loans ................................................... 49,664 47,806 45,480 46,798 46,952 Total deposits .......................................... 81,559 81,579 78,305 76,132 75,881 Stockholders' equity .................................... 10,971 9,852 8,945 8,385 7,266 Common Share and Stockholder Data Market price, end of year ............................... $ 26.00 $ 21.00 $ 16.75 $ 16.00 $ 15.00 Book value, end of year ................................. 28.15 25.93 23.22 22.82 21.34 Common dividends ........................................ 263,747 263,747 263,747 263,747 263,747 Dividend payout ratio ................................... 23.39% 30.67% 32.11% 33.32% 23.51% Average common shares outstanding ....................... 376,782 376,782 376,782 376,782 376,782 - -------------------------------------------------------------------------------------------------------------------------- (1) Ratios are based on average balances
DESCRIPTION OF BUSINESS BUSINESS Delta National Bancorp (the "Company") is a single bank holding company, registered under the Bank Holding Company Act of 1956. The Company was incorporated under the laws of the State of California on December 21, 1981. The Company's principal office is located at 611 N. Main Street, Manteca, California. The Company owns all of the capital stock of its subsidiary, Delta National Bank (the "Bank"). The Company was organized at the direction of the Board of Directors for the purpose of becoming a bank holding company pursuant to a Plan of Reorganization and Agreement of a Merger which was consummated on June 27, 1983, following receipt of the required regulatory and shareholder approval. On that date, (1) Delta National Bank was merged into the New Delta National Bank, (an "interim" California Banking Corporation organized as a wholly-owned subsidiary of the Company for the purpose of facilitating the formation of the Company), (2) the name of the New Delta National Bank was changed to "Delta National Bank" , and (3) the stockholders of the Bank (with the exception of those stockholders who perfected their rights as deserting stockholders) became stockholders of the Company. The Bank was organized in 1973 as a national banking association under the name First National Bank of Riverbank; its present name was adopted in 1975 when the Bank moved its headquarters location from Riverbank, California to Manteca, California. At the present time, the Bank operates four branches serving the communities of Manteca, Riverbank, Denair and Modesto, California. The service area of the Bank is located in the heart of California's Central Valley. The entire region consists of rich, flat farmland that benefits from a long growing season. The Bank has grown over the years, which is a direct result from the growth in the valley, both in employment and new construction, which has come from a prosperous agriculture industry. Through its branches, the Bank provides a wide range of commercial banking services to individuals and small and medium-sized businesses. Services include those traditionally offered by commercial banks, such as checking and savings accounts, commercial, real estate, personal, home improvement, automobile and other installment and term loans, travelers' checks, safe deposit boxes, escrow services, collection services, computer payroll and accounting services, night depository facilities, and wire transfers. The Bank does not have a trust department; however, the Bank will make arrangements with its correspondent institution to provide trust services, investment and international banking services. Competition: The banking business in California, especially in the market areas served by the Bank, is highly competitive. The Bank competes for loans and deposits with other commercial banks, savings and loan associations, finance companies, money market funds, and credit unions for deposit and loan business. Further, large commercial banks have greater lending limits than the Bank and perform certain other functions, including trust services, which the Bank does not offer directly. In competing for banking business, including deposits and other related activities, the Bank employs personal contact, localized advertising, interest rate competition and availability of specialized services in order to meet the needs of various types of customers. The Bank's loan portfolio consists of both secured and unsecured loans with a significant portion either real estate secured or real estate related. The latest available information indicates there were approximately 128 banking offices including the Bank's four offices operating throughout San Joaquin and Stanislaus county. The banking offices held approximately five billion in deposits of which approximately 81 million were held by the Bank. The Bank's deposit market share varies within the communities served by its offices ranging from 2% in Modesto, 15% in Manteca, 100% in Riverbank, and 100% in Denair. Supervision, Regulation and Government Policies: The Bank as a National Banking Association, is subject to primary supervision, examination and regulation by the Comptroller of the Currency. It is also a member of the Federal Reserve System and as such, is subject to applicable provisions of the Federal Reserve Act and regulations issued thereunder. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation to the maximum extent provided by law. The Bank is also subject to applicable provisions of California laws, insofar as they do not conflict with or are not preempted by Federal banking law. Various requirements and restrictions under the laws of the United States and the State of California affect the operations of the Bank. Federal statutes and regulations relate to many aspects of the Bank's operations, including reserves against deposits, interest rates payable on loans, investments, mergers and acquisitions, borrowings, dividends, location of branch offices, and capital levels. In addition, from time to time, legislation is proposed which has the effect of increasing the cost of doing business, limiting permissible activities or affecting the competitive balance between banks and other financial institutions. Changes in rates by the FDIC for deposit insurance will also effect the cost of business. Risk-adjusted capital guidelines were issued by bank regulatory authorities early in 1989. These guidelines assign risk weighting to assets and off-balance sheet items and place increased emphasis on common equity. The guidelines currently require a minimum Tier I (core) capital ratio of 4% and a total risk weighted capital ratio of 8% in order for an institution to be classified as adequately capitalized. Institutions which maintain a Tier I ratio of 6% and total capital ratio of 10% are defined as well capitalized. The Bank's Tier I and total risk-weighted ratios at December 31, 1996 were 18.50% and 19.76%, respectively. In addition to the risk weighted ratios, the highest rated banks are required to maintain a minimum leverage ratio of 3%. All other banks are expected to maintain higher leverage ratios, to be determined on an individual basis. This ratio is defined as Tier I capital to average total assets for the most recent quarter. The Bank's leverage ratio at December 31, 1996 was 11.23%. In September, 1995, FDICIA 305 was implemented and requires the banking agencies to revise their risk based capital standards to ensure that those standards take adequate account of interest rate risk. This rule amends the capital standards to specify that the banking agencies will include in their evaluations of capital adequacy an assessment of the exposure to declines in the economic value of the bank's capital due to changes in interest rates. A bank may be required to hold additional capital for interest rate risk if it has a significant exposure or a weak interest rate risk management process. To date, the final rule does not codify a measurement framework for assessing the level of a bank's interest rate risk exposure nor does it specify a level of exposure above which a bank will be required to hold more capital. The Bank is currently exempt from certain reporting of interest rate risk but is prudently managing its interest rate risk through risk management practices which include risk measurement, risk management and risk control. In 1993, federal bank regulatory agencies issued a statement imposing certain limitations in the inclusion of net deferred tax assets calculated under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109") in regulatory capital. Deferred tax assets that are dependent on future taxable income or the institution's tax planning strategies may only be counted as a component of Tier I capital to the extent they do not exceed the lesser of: (1) 10% of Tier 1 capital, or (2) the amount of such benefits which may be realized based on one year's projected earnings. The Company adopted FAS 109 on January 1, 1993 at which time this regulation became applicable in determination of its capital ratios. The effect of this new standard on income tax expense for the year ended December 31, 1993 was not material. The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), enacted on December 19, 1991 in connection with the recapitalization of the Banks Insurance Fund ("BIF"), required the FDIC to set semi-annual assessment rates at levels sufficient to increase the BIF's reserve ratio to a designated level within a prescribed period of time. In August, 1995, the FDIC announced that, effective June 1, 1995, it had significantly reduced the deposit insurance premiums paid by most banks. Under the new rate structure, the best-rated institutions insured by the BIF pay 4 cents per $100 of domestic deposits, down from the prior rate of 23 cents per $100. The weakest institutions continue to pay 31 cents per $100 of domestic deposits depending on their risk classification. This risk classification is based on an institution's capital group and supervisory subgroup assignments. The FDIC has assigned the Bank the lowest premium possible. In January, 1996, the FDIC further reduced the deposit insurance premiums paid by most banks. Under the new rate structure for the BIF, assessment rates were lowered by four cents per $100 of domestic deposits. Given the four cent reduction, the highest-rated institutions will pay the statutory annual minimum of $2,000 for FDIC insurance. Rates for all other institutions were reduced by four cents per $100 as well, leaving a premium range of 3-27 cents per $100, instead of the previous 4-31 cents per $100. Effective December 31, 1993, the Bank adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". These securities are classified into one of three categories: held-to-maturity, available-for-sale or trading. Held-to-maturity securities are measured at amortized cost and available-for-sale securities are measured at fair value. Unrealized holding gains and losses for available-for-sale securities are excluded from earnings and reported as a net amount in a separate component of stockholders' equity until realized. Risk-based and leverage capital ratios will not reflect the impact of unrealized gains or losses on securities available-for-sale as a result of the regulatory and industry concerns about the potential for volatility in regulatory capital ratios. In May 1993, the Financial Accounting Standards Board (FASB) issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures". These statements, which were effective January 1, 1995, requires that impaired loans, as defined, be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Bank adopted and implemented SFAS No. 114 and SFAS No. 118, as of January 1, 1995. Employees: The number of persons employed by the registrant is 63, as of December 31, 1996. Economic Conditions and Governmental Monetary Policies: The Bank continues to service the two counties in which all of the branches are located and has slightly extended into one or more adjacent counties. The economic conditions within the service area of the Bank has improved significantly over the past year or more. Unemployment has been reduced and many companies have relocated to the central valley spurring peripheral business activity. The Bank continues to participate in the affordable housing market as well as agricultural lending. The State of California, in general, has shown economic growth having adapted to the military cutbacks and provided solutions to the exodus of many large companies. State revenues appear to be adequate to sustain the upcoming budget process. The national economy appears to be stable with some growth anticipated. Interest rates are expected to be manageable with only slight adjustments during the year. The Bank has successfully positioned itself to minimize interest rate risk by basing the majority of its assets and liabilities on a variable rate program. Given the volatility of all segments of the economy, the bank has developed a strategic plan that responds quickly to unforeseen events. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL REVIEW PERFORMANCE SUMMARY The following discussion is intended to provide information to facilitate the understanding and assessment of significant changes in trends related to the financial condition of Delta National Bancorp ("the Company") and its results of operations. It should be read in conjunction with the audited financial statements and footnotes appearing elsewhere in this report. At December 31, 1996, the Company's total assets were $92,025,115, net loans amounted to $49,394,123, stockholders' equity was $10,607,355 and the allowance for loan losses was $1,082,278. This compares to total assets of $94,924,333, net loans of $46,519,819, stockholders' equity of $9,771,029 and allowance for loan losses of $1,219,304 at December 31, 1995. Total assets decreased 3.05% which was primarily due to a decrease in the securities portfolio of 22.54%. Although net loans increased 6.18%, total deposits decreased 4.46%, particularly in the regular savings category. Net income for 1996 amounted to $1,127,600 or $2.99 per share, as compared with $859,877 or $2.28 per share earned in 1995. This represents a 3l.14% increase in 1996 over 1995. A significant portion of the increase in net income was due to increased interest income earned on commercial and real estate loans and a decrease in interest expense. Non-interest income also increased in 1996 and was primarily due to an increase in income from other real estate owned, other repossessed assets and mortgage department fees. Earnings as measured by return on assets increased to 1.21% in 1996, compared to .93% in the prior year. Return on equity approximated 10.28% in 1996, compared to 8.73% in 1995. The increase in the return on equity is primarily due to a substantial increase in the net income for 1996. The increase in net income was attributed to a significant increase in non-interest income of 92.73% over 1995. In addition, the provision to loan losses for 1996 decreased 70.27% over 1995. Non-accrual loans at year end amounted to $329,609, down from $1,694,556 at December 31, 1995. One loan makes up the major portion of the non-accrual loans in 1996. Two loans made up the major portion of the non-accrual loans in 1995, one of which was transferred to other repossessed assets and the other was transferred to OREO in 1996. At December 31, 1996, other real estate owned ("OREO") (net of the valuation allowance) totaled $500,000, compared with OREO of $560,600 at December 31, 1995. Restructured loans, loans outstanding whose original terms have been modified, totaled $1,131,184 at December 31, 1996, which consisted of one real estate loan. Restructured loans were $1,146,080 at December 31, 1995 and consisted of the same loan as in 1996. Although there was a decrease in the provision for loan losses, net charge-offs increased in 1996. The provision for loan losses was $185,540, down from $624,014 for 1995. Net loans charged-off amounted to $322,566 in 1996 versus $4,132 in 1995. The increase in net loans charged-off for 1996 is primarily due to two loans, one which was partially charged-off at the time of repossession and transferred to other repossessed assets and another loan which was partially charged-off at foreclosure and transferred to OREO. Net interest income and net interest margin in 1996 were $5,284,428 and 6.13%, respectively, compared to $4,846,567 and 5.66%, respectively, for 1995. Net interest income increased approximately 9% in 1996. The increase was primarily due to increased interest income on commercial and real estate loans and a decrease in interest expense on deposits. Interest expense decreased 9.29% due to lower rates on deposits and decreased interest bearing balances. Non-interest income amounted to $1,300,295 in 1996, compared to $674,677 in 1995. Income related to service charges on deposits increased $24,080. Income related to foreclosed assets which consists of otherreal estate owned and other repossessed assets increased $491,520. Other income which included mortgage department fee income increased $110,018. Total non-interest income increased 92.73% over the same period in 1995. Operating expenses amounted to $4,506,583 in 1996, compared to $3,485,353 in 1995. This represents a 29.30% increase. FDIC assessments decreased $88,446 in 1996 while salaries, wages, and employee benefits increased due to normal operating expenditures and a contribution in 1996 to the employee profit sharing plan. Other increases in operating expenses were due to additions made to the valuation allowance for other real estate owned and expenses for other repossessed assets that were not made in 1995. EARNINGS PERFORMANCE Distribution of Average Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differential: The following table sets forth consolidated average daily balances of each principal category of assets, liabilities and stockholders' equity, interest on interest earning assets, and interest on interest bearing liabilities, and the average yields earned or rates paid thereon for the years ended December 31, 1996, 1995 and 1994. The table also shows the net interest earnings and the net yield on average earning assets. Averages were computed based upon daily balances.
- ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Interest Average Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ (In Thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate - ----------------------------------------------------------------------------------------------------------------------------------- Earning Assets: Deposits with other inst institutions .................. $ 268 $ 13 -- $ 1 $ -- -- $ -- $ -- -- Investment Securities: (5) U. S. treasury ............ 37 -- -- 1,638 68 4.15% 2,797 119 4.25% U. S. government agency ... 29,186 1,798 6.16% 25,612 1,676 6.54% 18,170 944 5.20% Obligations of states and political subdivisions (2). 1,047 59 5.64% 2,536 118 4.65% 4,082 176 4.31% Corporate bonds ........... 337 16 4.75% 2,919 135 4.62% 4,730 238 5.03% Other ..................... 94 3 3.19% 55 3 5.45% 55 2 3.64% Federal funds sold ............ 5,496 301 5.48% 4,999 301 6.02% 5,663 243 4.29% Loans-interest & fees (1)(4)... 49,664 5,832 11.74% 47,806 5,564 11.64% 45,480 4,890 10.75% - ----------------------------------------------------------------------------------------------------------------------------------- Total Earning Assets ...... $86,129 $8,022 9.31% $85,566 $7,865 9.19% $80,977 $ 6,612 8.17% - ----------------------------------------------------------------------------------------------------------------------------------- Cash and due from banks ........... 3,770 3,972 4,400 Premises and equipment ............ 1,227 695 513 Other Assets ...................... 2,143 1,964 1,922 ------- ------- ------- Total Assets .................. $93,269 $92,197 $87,812 ------- ------- ------- Deposits: Non-interest bearing .......... $13,987 $ -- -- $12,786 $ -- -- $12,072 $ -- -- Interest bearing .............. 67,572 2,738 4.05% 68,793 3,019 4.39% 66,233 2,310 3.49% - ----------------------------------------------------------------------------------------------------------------------------------- Total Deposits ................ $81,559 $2,738 3.36% $81,579 $3,019 3.70% $78,305 $ 2,310 2.95% - ----------------------------------------------------------------------------------------------------------------------------------- Other liabilities ................. 739 766 562 Stockholders' equity .............. 10,971 9,852 8,945 ------- ------- ------- Total liabilities and stockholders' equity .......... $93,269 $92,197 $87,812 ------- ------- ------- As a percentage of earning assets: Interest and fee income ........... $8,022 9.31% $7,865 9.19% $ 6,612 8.17% Interest expense .................. 2,738 3.18% 3,019 3.53% 2,310 2.85% ------ ------ ------ ------ ------- ------ Net interest income/net interest margin (3) ............... $5,284 6.13% $4,846 5.66% $ 4,302 5.32% ------ ------ ------ ------ ------- ------ - ----------------------------------------------------------------------------------------------------------------------------------- (1) Loan interest includes loan fees of $627,619, $431,406, and $472,036 in 1996, 1995, and 1994, respectively. (2) Tax exempt interest income includes $24,000, $48,000, and $65,000 in 1996, 1995, and 1994, respectively to adjust to a fully taxable equivalent basis using the Federal statutory rate of 34%. (3) Net interest margin is computed by dividing net interest income by total average earning assets. (4) Non-accruing loans not yet charged off are included in the loan balance. (5) Average available-for-sale securities totaled $11,850,000, $17,650,000,and $17,422,000 in 1996, 1995 and 1994,respectively. Average held-to-maturity securities totaled $18,757,000, $15,055,000, and $12,357,000 in 1996, 1995, and 1994, respectively.
Net Interest Income: The Company's operating results depend primarily on net interest income. A primary factor affecting the level of net interest income is the Company's interest rate margin between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities as well as the difference between the relative amounts of average interest-earning assets and interest-bearing liabilities. Net interest income increased 9% to $5,284,428 for the year ended December 31, 1996, compared to $4,846,567 in 1995 and $4,301,578 in 1994. Net interest income increased primarily due to increased income on commercial and real estate loans and a decrease in interest expense on deposits. Interest expense decreased 9.29% over 1995 which was primarily due to lower interest rates and falling interest bearing deposit balances. Net interest margin increased to 6.13% for 1996 from 5.66% for 1995, and 5.32% in 1994. The increase in income is a result of sound lending and investing practices, cost control methods and prudent management decisions. Changes in the Company's net interest income are a function of both changes in rates and changes in volumes of interest-earning assets and interest-bearing liabilities. The following table summarizes the changes in net interest income for the major categories of interest-earning assets and interest-bearing liabilities for 1996 and 1995. The total change is segmented into the change attributable to variations in volume (changes in volume multiplied by old rate) and the change attributable to variations in interest rates (changes in rates multiplied by old volume). Changes not solely attributable to volume or rate have been allocated to volume. Non-accrual loans are included in average loans used to compute this table. - -------------------------------------------------------------------------------- 1996 Over 1995 1995 Over 1994 (In Thousands) Volume Rate Total Volume Rate Total - -------------------------------------------------------------------------------- Increase/(Decrease) in: Loans, net of unearned income and deferred loan fees..... $ 177 $ 90 $ 267 $ 225 $ 450 $ 675 Interest-bearing deposits placed with banks............ 65 (52) 13 -- -- -- Taxable securities........... (46) (30) (76) 200 354 554 Tax-exempt securities (1).... (61) 14 (47) (45) 12 (33) Federal funds sold .......... 30 (30) 0 (29) 86 57 - -------------------------------------------------------------------------------- Total interest income ... $ 165 $ (8) $ 157 $ 351 $ 902 $1,253 - -------------------------------------------------------------------------------- Total interest bearing deposits .................... $ (54) $(227) $(281) $ 89 $ 619 $ 708 ------------------------------------------------------------------------------- Total interest expense .. $ (54) $(227) $(281) $ 89 $ 619 $ 708 - -------------------------------------------------------------------------------- Changes in net interest income ...................... $ 219 $ 219 $ 438 $ 262 $ 283 $ 545 - -------------------------------------------------------------------------------- (1) Interest income is reflected on a fully tax equivalent basis. Provision for Loan Losses: The provision for loan losses totaled $185,540 for 1996, compared to $624,014 for 1995 and $191,750 in 1994. The provision for loan losses reflects management's on-going evaluation of the risk inherent in the loan portfolio, which includes consideration of numerous factors, such as economic conditions, relative risks in the loan portfolio, loan loss experience and review and monitoring of individual loans for identification and resolution of potential problems. Non-Interest Income: Non-interest income amounted to $1,300,295 for 1996, up 92.73% from $674,677 for 1995 and $692,648 in 1994. Service charges on deposits increased approximately 4.95% in 1996. Total non-interest income increased due to increased income on other real estate owned and other repossessed assets as well as an increase in mortgage department fee income. Included in 1995 income is a pre-tax gain on the sale of one OREO property. The following represents a breakdown of non-interest income for 1996, 1995 and 1994: - -------------------------------------------------------------------------------- (In Thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Service charges on deposit accounts ....... $ 510,753 $ 486,673 $ 516,347 Income OREO ............................... 61,262 26,655 -- Income on other repo assets ............... 456,913 -- -- Mortgage department fee income ............ 107,090 25,252 28,774 Gain on sale of OREO ...................... 5,674 26,128 -- Gain on sale of fixed assets .............. 8,960 -- 2,912 Other income .............................. 149,643 109,969 144,615 - -------------------------------------------------------------------------------- Total ................................. $1,300,295 $ 674,677 $ 692,648 - -------------------------------------------------------------------------------- Non-Interest Expense: Non-interest expense amounted to $4,506,583 in 1996, compared to $3,485,353 in 1995 and $3,442,079 in 1994. FDIC assessments decreased 68.50% in 1996 due to reduced BIF assessments. Professional fees decreased 12.61%. Salaries and wages increased due to normal operating expenditures. Employee benefits expense increased in 1996 over 1995 due to a contribution of $150,000 that was made to the employee profit sharing plan. A $100,000 contribution was made to the plan in 1995. Total operating expenses increased 29.30% over the same period in 1995. Other increases in operating expenses were due to additions made to the valuation allowance for other real estate owned and expenses relating to other repossessed assets that were not made in 1995. - -------------------------------------------------------------------------------- (In Thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Salaries and wages ...................... $1,839,069 $1,589,306 $1,502,791 Employee benefits ....................... 378,472 307,076 222,797 Occupancy and equipment ................. 749,379 673,222 586,905 Stationary and supplies ................. 87,595 84,328 91,022 Professional fees ....................... 135,567 155,132 137,757 FDIC assessments ........................ 40,671 129,117 207,213 Other operating ......................... 575,985 447,284 392,452 Writedown of OREO ....................... 112,560 37,923 261,544 OREO expenses ........................... 23,589 29,184 39,598 Other repo assets expense ............... 550,274 -- -- Loss on sale of fixed assets ............ -- 15,781 -- Loss on sale of other repo assets ....... 13,422 -- -- Loss on sale of OREO .................... -- -- -- Loss on sale of available-for-sale security ................................ -- 17,000 -- - -------------------------------------------------------------------------------- Total ............................... $4,506,583 $3,485,353 $3,442,079 - -------------------------------------------------------------------------------- INCOME TAXES For the year ended December 31, 1996, the Company filed a consolidated Federal income tax return and State return. At December 31, 1996, the Company had a $397,000 net deferred tax asset. Income tax expense reflects rates on earnings before income taxes of 40.42% and 39.1% for the two years ended December 31, 1996 and 1995, respectively. ASSET LIABILITY MANAGEMENT Liquidity: For the Company, as with most commercial banking institutions, liquidity is the ability to roll over substantial amounts of maturing liabilities and to acquire new liabilities at levels consistent with management's financial targets. During 1996, the Company continued to maintain a high level of liquidity. Highly liquid assets consisting of cash, deposits placed with banks, federal funds sold and securities available-for-sale averaged approximately $21,384,000 or 22.93% of average total assets as compared with approximately $26,622,000 or 28.9% of average total assets for 1995. At year end, the Bank had a liquidity ratio of 20.44%. Interest Rate Sensitivity Management: The primary objectives of the asset liability management process are to provide a stable net interest margin, generate net interest income to meet the Company's earnings objectives and manage balance sheet risks. These risks include liquidity risk, capital adequacy and overall interest rate risk inherent in the Company's balance sheet. In order to manage its interest rate sensitivity, the Company has adopted policies which attempt to limit the change in pre-tax net interest income assuming various interest rate scenarios. This is accomplished by adjusting the repricing characteristics of the Company's assets and liabilities as interest rates change. The Company's Asset Liability Committee chooses strategies in conformance with its policies to achieve an appropriate trade off between interest rate sensitivity and the volatility of pre-tax net interest income and net interest margin. The following table sets out the maturity and rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities as of December 31, 1996. The cumulative interest sensitivity gap ("gap") as reflected in the table represents the difference between interest-earning assets and interest-bearing liabilities maturing or repricing, whichever is earlier, at a given point in time and is not necessarily indicative of the position on other dates.
- ---------------------------------------------------------------------------------------------------------------- 0 - 30 31 - 90 3 - 6 6 - 12 1 - 5 5 (In Thousands) Days Days Months Months Years Years Total - ---------------------------------------------------------------------------------------------------------------- Earning Assets: Fed funds sold ................ $ 7,600 $ -- $ -- $ -- $ -- $ -- $ 7,600 Deposit accounts with other banks ................... 676 -- -- -- -- -- 676 Securities: (3) (6) U. S. government agencies .................. -- 14,857 10,275 -- -- 22 25,154 Municipals ................ -- -- -- -- -- 390 390 Loans: (1) Commercial - fixed ........ 49 1,043 1,500 1,807 2,333 330 7,062 Commercial - variable (2).. 14,318 -- -- -- -- -- 14,318 Real estate - fixed ....... 198 120 390 640 549 50 1,947 Real estate - variable .... 25,618 -- -- -- -- -- 25,618 Installment (4) ........... 42 18 62 94 1,029 -- 1,245 - ---------------------------------------------------------------------------------------------------------------- Total loans ................... $40,225 $ 1,181 $ 1,952 $ 2,541 $ 3,911 $ 380 $50,190 - ---------------------------------------------------------------------------------------------------------------- Total assets .................. $48,501 $16,038 $12,227 $ 2,541 $ 3,911 $ 792 $84,010 - ---------------------------------------------------------------------------------------------------------------- Source of Funds: Deposits Interest-bearing demand deposits ........... $12,909 -- -- -- -- -- $12,909 Time deposits greater than $ 100,000.................. 3,507 3,490 4,967 5,974 3,969 -- 21,907 Time deposits less than $ 100,000.................. 1,716 1,923 6,437 2,228 959 -- 13,263 Passbook time deposits - variable ................ 5,423 -- -- -- -- -- 5,423 Savings (5) ............... -- 9,091 -- -- -- -- 9,091 - ---------------------------------------------------------------------------------------------------------------- Total deposits ................ $23,555 $14,504 $11,404 $ 8,202 $ 4,928 $ -- $62,593 - ---------------------------------------------------------------------------------------------------------------- Total liabilities ............. $23,555 $14,504 $11,404 $ 8,202 $ 4,928 $ -- $62,593 - ---------------------------------------------------------------------------------------------------------------- Gap ........................... $24,946 $ 1,534 $ 823 $(5,661) $(1,017) $ 792 $21,417 - ---------------------------------------------------------------------------------------------------------------- Cumulative interest sensitivity gap ............... $24,946 $26,480 $27,303 $21,642 $20,625 $21,417 $21,417 - ---------------------------------------------------------------------------------------------------------------- (1) Non-accruing loans not yet charged off are included in the loan balance. (2) Overdrafts are not included in the loan balance. (3) Securities are stated at amortized cost. (4) Credit Cards are not included in the loan balance. (5) IRA's and Christmas Club accounts are not included in the balance. (6) FRB and other stock is not included in the balance.
The gap is considered positive when the amount of interest rate sensitive assets which reprice over a given time period exceeds the amount of interest rate sensitive liabilities which reprice over the same time period and is considered negative when the reverse is true. During a period of rising interest rates, a positive gap tends to result in increased net interest income while a negative gap would have an adverse affect on net interest income. As illustrated by the table, the Company maintained a positive gap at December 31, 1996. The Company, therefore, was asset sensitive and was positioned for increased net interest income given a rise in interest rates in 1996. The degree of positive gap is not so large that a significant detrimental impact would result from stable or declining interest rates. BALANCE SHEET ANALYSIS Cash and Due from Banks: Average cash and due from banks for the year ended December 31, 1996 was $3,770,428, down 5.1% from the prior year average of $3,972,362 due to increased loan activity and lower cash balance requirements. Securities: The fair value of available-for-sale securities totaled $10,349,542 at December 31, 1996, as compared to $12,926,352 at the end of 1995, with balances averaging approximately $11,850,000 and $17,650,000, respectively. The decrease in available-for-sale securities was primarily due to investments that matured during the year. All but one of the new securities purchased in 1996 were placed in the held-to-maturity category due to the Banks intent to hold these funds until they mature. As of December 31, 1996, available-for-sale securities made up 40% of the securities portfolio. The majority of these securities are variable rate at 98% of the securities portfolio and 2% are fixed rate. One available-for-sale security was sold in 1995 resulting in a loss of $17,000. The Company's short-term investments, consisting of securities available-for-sale and federal funds sold averaged approximately $17,346,000 for 1996, compared to approximately $22,649,000 for 1995. These investments amounted to $17,949,542 at year-end 1996, compared to $20,526,352 for 1995. In 1996, the securities portfolio consisted primarily of U.S. government agency securities. In 1996, federal funds sold averaged approximately $5,496,000 as compared to approximately $4,999,000 in 1995. The amortized cost of held-to-maturity securities totaled $15,428,286 in 1996, compared to $20,351,537 in 1995. The following table shows the amortized cost (book value) of the Company's portfolio of available-for-sale and held-to-maturity securities for the periods ending 1996 and 1995: - -------------------------------------------------------------------------------- At December 31, (In Thousands) 1996 1995 - -------------------------------------------------------------------------------- Available-for-sale: U. S. government agencies ...................... $ 9,725,856 $12,188,734 States & political subdivisions ................ 389,776 605,656 Corporate bonds and other ...................... 204,350 55,350 - -------------------------------------------------------------------------------- Total ...................................... $10,319,982 $12,849,740 - -------------------------------------------------------------------------------- Held-to-maturity: U. S. government agencies ...................... $15,428,286 $18,252,276 States & political subdivisions ................ -- 695,578 Corporate bonds and other ...................... -- 1,403,683 - -------------------------------------------------------------------------------- Total ...................................... $15,428,286 $20,351,537 - -------------------------------------------------------------------------------- The following tables show the amortized cost (book value) and maturities of securities at December 31, 1996 and the weighted average yields (1).
- --------------------------------------------------------------------------------------------------------------- Securities/Maturities - December 31, 1996 --------------------------------------------------------------------------------------- After 1 but After 5 but Within 1 year Within 5 Years Within 10 Years After 10 Years --------------------------------------------------------------------------------------- Amount Yield Amount Yield Amount Yield Amount Yield - --------------------------------------------------------------------------------------------------------------- Available-for-sale: (3) U.S. government agencies .......... $ 607,055 5.79% $ 919,202 6.52% $ 8,199,599 6.65% $ -- -- States & political subdivisions (2) .. -- -- -- -- -- -- 389,776 13.50% - --------------------------------------------------------------------------------------------------------------- Total ......... $ 607,055 5.79% $ 919,202 6.52% $ 8,199,599 6.65% $ 389,776 13.50% - --------------------------------------------------------------------------------------------------------------- Held-to-maturity: U.S. government agencies .......... $ 23,020 8.14% $ 3,171,817 8.00% $10,642,289 7.35% $ 1,591,160 7.57% States & political subdivisions (2) .. -- -- -- -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------- Total ......... $ 23,020 8.14% $ 3,171,817 8.00% $10,642,289 7.35% $ 1,591,160 7.57% - --------------------------------------------------------------------------------------------------------------- (1) Yields are calculated on a tax equivalent basis using the Federal statutory rate of 34%. (2) There were no securities which exceeded 10% of stockholders' equity. (3) Federal Reserve and other stock not included in balance.
Loan Composition: The loan portfolio totaled $49,394,123 at December 31, 1996 with a 6.18% increase over $46,519,819 in 1995. There was a shift from commercial loans to real estate construction and mortgage loans. Real estate construction increased approximately 46% over the same period in 1995. Consumer loans continue to decline due to recessionary influences and competition. The composition of the Bank's loan portfolio as of December 31, is as follows: - -------------------------------------------------------------------------------- Percentage Percentage of Total of Total 1996 Loans 1995 Loans - -------------------------------------------------------------------------------- Commercial, financial and agricultural................ $ 21,428,989 42.16% $ 22,755,013 47.30% Real Estate - construction.. 13,404,461 26.37% 9,175,475 19.10% Real Estate - mortgage ..... 14,160,539 27.86% 14,090,502 29.30% Installment loans to individuals ................ 1,837,465 3.61% 2,073,749 4.30% - -------------------------------------------------------------------------------- $ 50,831,454 100.00% $ 48,094,739 100.00% Unearned discount ........ (61,208) (80,189) Allowance for possible loan losses .............. (1,082,278) (1,219,304) Deferred loan fees ....... (293,845) (275,427) - -------------------------------------------------------------------------------- Loans, net (l) ....... $ 49,394,123 $46,519,819 - -------------------------------------------------------------------------------- (1) There were no lease financing or foreign loans Loan maturities as of December 31, 1996 are as follows:
- -------------------------------------------------------------------------------------------------------------------- RE RE Comc'l Comc'l Const. Const. Other Other Total Fixed Variable Fixed Variable Fixed Variable - -------------------------------------------------------------------------------------------------------------------- One year or less ........... $25,086,302 $ 4,446,973 $ 5,705,311 $ 553,626 $ 9,941,309 $ 1,566,918 $ 2,872,165 After one year through five years .......... 21,376,837 2,333,327 6,234,807 - 2,909,526 1,560,338 8,338,839 After five years .......... 4,368,315 330,291 2,378,280 - - 50,056 1,609,688 - -------------------------------------------------------------------------------------------------------------------- Total ...... $50,831,454 $ 7,110,591 $14,318,398 $ 553,626 $12,850,835 $ 3,177,312 $12,820,692 - --------------------------------------------------------------------------------------------------------------------
The Bank's customers are primarily located in Stanislaus County and San Joaquin County. Approximately 54% of the Bank's loans are for real estate and construction and approximately 42% of the Bank's loans are for general commercial uses including professional, retail, agricultural and small business. Generally real estate loans are secured by real property and commercial and other loans are secured by funds on deposit, business or personal assets. Repayment is generally expected from the proceeds of the sales of property for real estate construction loans, and from cash flows of the borrower for other loans. Neither the Bank or the regulators have placed any limitations on the composition of the Bank's loan portfolio. There were no concentrations of loans exceeding 10% of total loans which were not otherwise disclosed as a category of loans in the above table. Unsecured loans are not a significant portion of the loan portfolio depicted in the above table. There were no other interest bearing assets at the end of the period. The Bank has collateral management policies in place so that collateral lending of all types is on a basis which it believes is consistent with regulatory lending standards. Valuation analyses are utilized to take into consideration the potentially adverse economic conditions under which liquidation of collateral could occur. It is generally the Bank's policy to fully collateralize all loans with loan-to-value ratios determined on an individual loan basis taking into account the financial stability of each borrower and the value and type of the collateral. Allowance for Loan Losses: The provision for loan losses is based upon management's evaluation of the adequacy of the existing allowance for loans outstanding. These evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific loan problems and current economic conditions that may affect the borrower's ability to repay. The allowance for loan losses is increased by provisions charged to expense and reduced by loan charge-offs net of recoveries. Early recognition of problem credits is critical to avoid shortages in the allowance. The allowance for loan losses totaled $1,082,278 or 2.13% of total gross loans at December 31, 1996, compared to $1,219,304 or 2.54% at December 31, 1995 and $599,422 or 1.25% at December 31, 1994. The increase in the allowance in 1995 was primarily a response to the state of the dairy industry at that time which had somewhat deteriorated. One dairy loan in particular accounted for a significant portion of the increase to the allowance in 1995 over 1994. As of December 31, 1996, the allowance reflects the inherent risk in each component of the portfolio in addition to a sizeable allocation for a commercial retail center that is experiencing difficulty in leases and cash flow. The provision for loan losses is a product of the Bank's allowance for loan loss methodology that reflects the potential losses in the loan portfolio. The Bank's conservative lending philosophy allows this provision to be quite manageable. Loans totaling $488,608 were charged off during the period and $166,042 was collected in recoveries. Loans charged off totaled $112,366 in 1995 and $563,719 in 1994, while recoveries totaled $108,234 and $163,848, respectively. As a percent of average loans outstanding during the year, net loans charged off were .65% in 1996, .009% in 1995, and .88% in 1994. The following table summarizes the loan loss experience of the Company for 1996, 1995, and 1994: - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Balance at January 1 .............. $1,219,304 $ 599,422 $ 807,543 Charge Offs: Commercial, financial and agricultural .................. (324,340) -- (357,634) Real Estate - construction .... (61,638) -- -- Real Estate - mortgage ........ (48,696) -- (163,896) Installment loans to individuals ................... (53,934) (112,366) ( 42,189) - -------------------------------------------------------------------------------- Total Charge Offs ...... (488,608) (112,366) (563,719) - -------------------------------------------------------------------------------- Recoveries: Commercial, financial and agricultural .................. -- 1,390 3,448 Real Estate - construction .... 123,139 80,425 80,436 Real Estate - mortgage ........ 2,000 2,200 60,292 Installment loans to individuals.................... 40,903 24,219 19,672 - -------------------------------------------------------------------------------- Total Recoveries ....... 166,042 108,234 163,848 - -------------------------------------------------------------------------------- Net charge offs ................... (322,566) ( 4,132) (399,871) Additions charged to operations ... 185,540 624,014 191,750 - -------------------------------------------------------------------------------- Balance at December 31, ........... $1,082,278 $1,219,304 $ 599,422 - -------------------------------------------------------------------------------- Ratio of net charge-offs during period to average loans outstanding ....................... .650% .009% .879% - -------------------------------------------------------------------------------- The following table sets forth the allocation for loan losses to each loan category and the percentage of each loan category to total loans for the past two years. The allocation of the allowance for loan losses should not be interpreted as an indication that charge-offs will occur in these amounts or that the allocation indicates future charge-off trends. Furthermore, the portion allocated to each loan category is not the total amount available for future losses that might occur within such categories. - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- Percentage Percentage of Loans of Loans in each in each Category to Category to Total Total Allowance Loans Allowance Loans - -------------------------------------------------------------------------------- Commercial, financial and agricultural ............... $ 276,128 42.16% $ 599,783 47.30% Real Estate - construction . 258,633 26.37% 262,944 19.10% Real Estate - mortgage ..... 509,594 27.86% 313,455 29.30% Installment loans to individuals ................ 37,923 3.61% 43,122 4.30% Unallocated ................ - - - - - -------------------------------------------------------------------------------- Total Reserves ......... $1,082,278 100.00% $1,219,304 100.00% - -------------------------------------------------------------------------------- Total loans classified for regulatory purposes as loss, doubtful, substandard, or special mention (including non-accrual loans and troubled debt restructuring) at December 31, 1996 and 1995 were $3,945,378 and $9,189,084, respectively. Of the total classified, one of the loans was classified as doubtful at the end of 1996 totalling $71,634 and none were classified as doubtful at the end of 1995. Management is not aware of any other material credit which there is serious doubt regarding the ability to repay other than those reflected in classified loans and in the allowance for possible loan losses. Impaired Loans: Impaired loans, as defined, are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Impaired loans totaled $1,460,793 at December 31, 1996 and $2,840,637 at year end 1995, of which $1,131,184 and $1,146,080, respectively are the result of a troubled debt restructuring. The average investment in impaired loans during 1996 was approximately $1,850,000, compared to $1,572,000 in 1995. The total allowance for loan losses relating to these loans was $281,345 and $334,981, respectively, for 1996 and 1995. Total cash collected on impaired loans during 1996 approximated $710,800, compared to $78,800 in 1995. In 1996, $602,600 was credited to the principal balance outstanding and $108,200 was recognized as interest income. In 1995, $6,300 was credited to the principal balance outstanding, and $72,500 was recognized as interest income. Interest income that would have been recognized on impaired loans was approximately $205,000 and $210,000 for the years ended December 31, 1996 and 1995, respectively. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Amounts due according to the contractual terms include both principal and interest. The Company has determined that the definition of impaired loans will include any loans placed on non-accrual status and any loans which have had a modification of terms under troubled debt restructuring. Loans in the amount of $300,000 or more will be evaluated individually. Large groups of smaller-balance homogenous loans, under $300,000, will be evaluated on a composite basis using historical data, such as average recovery period and average amount recovered, along with a composite rate of interest as a means of measuring for impairment. Loans that are not evaluated individually will be grouped together by similar risk characteristics. The following categories will be grouped together: Agricultural, Commercial, Real Estate Construction, Residential Real Estate, Consumer, and Commercial Real Estate loans. Loan impairment is measured by estimating the present value of expected future cash flows discounted at the loan's effective interest rate, its observable market price, or the fair value of collateral if the loan is collateral dependent. When it has been substantiated that a loss is evident and should be recognized, the impaired loan will be charged off. The recorded investment in these loans and the valuation allowance for loan losses related to loan impairment are as follows: - -------------------------------------------------------------------------------- Recorded Investment 1996 1995 - -------------------------------------------------------------------------------- Principal amount of impaired loans ................. $1,460,793 $2,840,637 Accrued Interest ................................... 4,068 267 Deferred loan costs ................................ 231 1,408 - -------------------------------------------------------------------------------- 1,465,092 2,842,312 Less valuation allowance ........................... 281,345 334,981 - -------------------------------------------------------------------------------- Total carrying value ............................... $1,183,747 $2,507,331 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Valuation Allowance 1996 1995 - -------------------------------------------------------------------------------- Valuation allowance at beginning of period .......... $ 334,981 $ - Net charges to operations for impairment ............ 307,911 334,981 Direct write-downs .................................. (361,547) - Recoveries .......................................... -- - - -------------------------------------------------------------------------------- Valuation allowance at end of period ................ $ 281,345 $ 334,981 - -------------------------------------------------------------------------------- Non-Accrual Loans, Restructured Loans and Real Estate Owned: Information regarding non-accrual loans, past due loans and restructured loans is presented below. - -------------------------------------------------------------------------------- At December 31, 1996 1995 - -------------------------------------------------------------------------------- Non-accrual loans: Commercial loans ......................... $ -- $1,200,342 Real estate loans ........................ 329,609 494,214 Consumer loans ........................... -- -- - -------------------------------------------------------------------------------- Total non-accrual loans .............. $ 329,609 $1,694,556 - -------------------------------------------------------------------------------- Loans past due 90 days or more still accruing interest ...................... -- -- - -------------------------------------------------------------------------------- Troubled debt restructuring .................. $1,131,184 $1,146,080 - -------------------------------------------------------------------------------- Non-accrual loans at year-end amounted to $329,609, down from $1,694,556 at December 31, 1995. One real estate loan makes up the major portion of the non-accrual loans. Gross interest income that would have been recorded for non-accrual loans if loans had been current in accordance with original terms and had been outstanding throughout the period or since origination for 1996 and 1995 was $55,425 and $115,869, respectively. There was no interest income included in net income for the period for non-accrual loans. There were no loans past due 90 days or more which were still accruing interest. Management is constantly aware of the need for maintaining high credit standards. The Company is not involved in foreign lending and is not engaged in high yield, high risk loans. A loan is placed on non-accrual status when either principal or interest is in default for 90 days more, or when external factors indicate that payment in full of principal and interest appears unlikely unless the loan is well secured and in the process of collection. When a loan is placed on non-accrual status, all interest previously accrued but uncollected shall be reversed against the appropriate income account. In most cases, if the loan is rated substandard or better, payments shall be applied to interest first and then principal provided no loss is anticipated. If a loss is anticipated, all payments shall be applied to principal first and then interest. When one loan of a customer is placed on non-accrual status, related borrowings will be evaluated as to whether they should also be placed on non-accrual status. Non-accrual loans will be restored to an accruing status when principal and interest is no longer past due and unpaid, or the loan otherwise becomes well secured and in the process of collection. A troubled debt restructuring occurs when the Bank, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not ordinarily consider. Troubled debt restructuring can occur in a variety of forms, such as transferring assets in a full or partial settlement of the debt, issuing debt, or modifying terms including reducing the stated interest rate, extending maturity dates, reducing the face amount or maturity of the debt, or reducing accrued interest. Restructured loans totaled $1,131,184 at December 31, 1996 and $1,146,080 at December 31, 1995. All restructured loans were current as to principal and interest. Foreclosed real estate owned includes real estate properties acquired through, or in lieu of, foreclosure are to be sold and are initially recorded at the lower of carrying amount or fair value less cost to sell at the date of foreclosure. After foreclosure, valuations are periodically performed by management. Any subsequent revisions in estimates of fair value less cost to sell are reported as adjustments to the carrying amount of the real estate provided that the adjusted carrying amount does not exceed the original carrying amount at the date of foreclosure. Revenue and expenses from operations and changes in the valuation allowance are included in other operating expenses. Total foreclosed real estate was $784,193 at December 31, 1996, compared to total foreclosed real estate of $856,167 at December 31, 1995. At the end of 1996, this consisted of two properties, one of which represents bare land. The second property is a condominium complex consisting of eight units which were completed and placed in service as rental units by the Bank. The valuation allowance at the end of 1996 totaled $284,193 and $295,567 in 1995. FUNDING SOURCES Deposits: Total deposits amounted to $81,052,506 at December 31, 1996, compared to $84,839,377 at the end of 1995, a decrease of 4.5%. Average deposits during the year were approximately $81,559,000 and $81,579,000, respectively, for 1996 and 1995. Non-interest bearing demand deposits averaged approximately $13,987,000 in 1996, compared to $12,786,000 in 1995. Interest bearing deposits averaged approximately $67,572,000 in 1996, a decrease of 1.8%, or $1,221,000 from the average for 1995. - -------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------- Average Average Average Average Balance Rate Balance Rate - -------------------------------------------------------------------------------- Interest bearing deposits Checking accounts .... $14,186,109 1.88% $14,368,972 2.12% Savings .............. 18,142,195 4.24% 21,271,869 3.91% Time deposits (1) .... 35,243,466 4.13% 33,152,076 5.59% Non-interest bearing deposits.. 13,987,382 12,786,029 - -------------------------------------------------------------------------------- (1) Included at December 31, 1996 are $21,906,825 in time certificates of $100,000 or more, of which $6,997,212 matures in 3 months or less, $4,967,265 matures in 3 to 6 months, $5,973,745 matures in 6 to 12 months, and $3,968,603 matures in more than 12 months. Other Borrowings: There were no other borrowings as of December 31, 1996 or December 31, 1995. Capital: Retained earnings from operations has been the primary source of new capital for the Company. As of December 31, 1996, stockholders' equity was $10,607,355, compared to $9,771,029 at year-end 1995. Risk-adjusted capital guidelines, issued by bank regulatory agencies, assign risk weighting to assets and off-balance sheet items and place increased emphasis on common equity. The guidelines require adequately capitalized institutions to maintain a Tier I (core) capital ratio of 4% and a combined Tier I and Tier II capital ratio of 8%. Institutions whose Tier I and total capital ratios meet or exceed 6% and 10%, respectively, are deemed to be well capitalized. For the Company, Tier I capital consists of common stockholders' equity. In addition to the risk-weighted ratios, all banks are expected to maintain leverage ratios, to be determined on an individual basis, but not below a minimum of 3%. This ratio is defined as Tier I capital to average total assets for the most recent quarter. At December 31, 1996, the Company exceeded its capital requirements. Based on the guidelines, the Bank's Tier I and combined Tier I and Tier II risk-weighted ratios at December 31, 1996 were as follows: - -------------------------------------------------------------------------------- Minimum 1996 1995 1994 - -------------------------------------------------------------------------------- Risk Based Capital Ratio 8.00% 19.76% 18.14% 15.47% Tier I Ratio 4.00% 18.50% 16.88% 14.49% Leverage Ratio 3.00% 11.23% 10.02% 9.92% - -------------------------------------------------------------------------------- SELECTED STATISTICAL INFORMATION FINANCIAL RATIOS The following table shows key financial ratios for the Company for 1996, 1995 and 1994: - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Net income as a percentage of: Average stockholders' equity .................... 10.28% 8.73% 9.18% Average total assets ............................ 1.21% .93% .94% Average earning assets .......................... 1.31% 1.01% 1.01% Stockholders' equity at year-end as a percentage of: Total assets at year-end ........................ 11.53% 10.29% 9.81% Net loans at year-end ........................... 21.47% 21.00% 18.60% Total deposits at year-end ...................... 13.09% 11.52% 10.90% Average stockholders' equity as a percentage of: Average assets .................................. 11.76% 10.69% 10.19% Average loans ................................... 22.09% 20.61% 19.67% Average deposits ................................ 13.45% 12.08% 11.42% - -------------------------------------------------------------------------------- PROPERTIES Manteca Branch - In 1981 the Bank acquired the property located at 611 North Main Street in Manteca, California, for $308,000. The Company's headquarters and administrative offices are also located there. The property consists of 2.4 acres and a building of approximately 13,000 square feet. On December 31, 1987, the property was transferred to the Company. Under the terms of the lease which expires in January, 1998, the Bank pays the Company $2,000 per month. Riverbank Branch - In 1996, the Bank leased the facility located at 3300 Santa Fe in Riverbank, California. Under the terms of the lease which expires in April, 1997, the Bank pays $3,000 per month. Land was purchased by the Bank in 1995 for the purpose of building a new Riverbank facility. The facility is projected to be open by the end of 1997 or beginning of 1998. Denair Branch - The Bank currently leases the facility located at 4701 Main Street, Denair, California. Under the terms of the lease the Bank currently pays $3,100 per month. The lease expires in July, 1998 with the option of renewing until 2003 and then again until the year 2008. Modesto Branch - The Bank currently leases the facility located at 1901 McHenry Ave, Modesto, California. Under the terms of the lease the Bank currently pays $1,721 per month. The lease expires in the year 2000 with one ten year option available. LEGAL PROCEEDINGS Except for minor and usual collection litigation there are no pending claims against the Company, or its subsidiary which in counsel's reasonable opinion will result in a substantial loss. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed with A. G. Edwards, Inc. The Company's stock is not listed with the National Association of Securities Dealers automated quotations system. There has been a limited trading market in the stock. The following table states the high and low sales prices of the Company's stock for all quarters in 1996 and 1995: - -------------------------------------------------------------------------------- 1996 1995 High Low High Low - -------------------------------------------------------------------------------- First Quarter ........ $ 35.00 $ 26.00 $ 17.50 $ 16.50 Second Quarter ........ 28.00 26.00 17.00 16.75 Third Quarter ......... 26.00 23.00 19.50 19.00 Fourth Quarter ........ 27.00 26.00 21.00 19.50 - -------------------------------------------------------------------------------- There can be no assurance that an established public market for the common stock will develop and the Company presently has no intention to seek the listing of the common stock on any Securities Exchange or quotation on the NASDAQ inter dealer quotation system, in the foreseeable future. As of December, 1996, the Company had approximately 315 holders of record of Delta National Bancorp Stock. The stockholders of the Company will be entitled to receive dividends when and as declared. The following table shows the dividends declared and paid by the Company for the years 1996, 1995 and 1994: - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Cash Dividends Paid .................... $ 263,747 $ 263,747 $ 263,747 Dividend payout ratio .................. 23.39% 30.67% 32.11% Book value at year end ................. $ 28.15 $ 25.93 $ 23.22 Market price/book value at year end .... 92.35% 80.99% 72.13% - -------------------------------------------------------------------------------- DELTA NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, ASSETS 1996 1995 ----------- ----------- Cash and due from banks ...................... $ 5,052,387 $ 4,330,351 Interest-bearing deposits in bank ............ 676,115 51,043 Federal funds sold ........................... 7,600,000 7,600,000 ----------- ----------- Total cash and cash equivalents (notes A13 and B) ..... 13,328,502 11,981,394 Securities available-for-sale(notes A4 and C). 10,349,542 12,926,352 Securities held-to-maturity(notes A3 and C) .. 15,428,286 20,351,537 Loans, net (notes A5, A6, and D) ............. 49,394,123 46,519,819 Property and equipment (notes A7 and E) ...... 1,719,682 1,342,500 Interest receivable and other assets (notes A8, F, G and K)........................ 1,804,980 1,802,731 ----------- ----------- $92,025,115 $94,924,333 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Demand - non interest-bearing ............ $16,702,725 $15,980,639 Demand - interest-bearing ................ 12,908,637 13,912,667 Regular savings .......................... 16,271,723 19,375,825 Time, under $100,000 (note H) ............ 13,262,596 10,710,398 Time, $100,000 and over (note H) ......... 21,906,825 24,859,848 ----------- ----------- Total deposits .................... 81,052,506 84,839,377 Accrued interest and other liabilities ....... 365,254 313,927 ----------- ----------- Total liabilities ................. 81,417,760 85,153,304 Stockholders' equity Common stock, no par value Authorized - 5,000,000 shares Issued and outstanding-376,782 shares.. 3,531,886 3,531,886 Retained earnings ........................ 7,058,211 6,194,358 Net unrealized appreciation on securities available-for-sale, net of tax of $12,302 and $31,827 at December 31, 1996 and 1995, respectively (note C) ........... 17,258 44,785 ----------- ----------- Total stockholders' equity ........ 10,607,355 9,771,029 ----------- ----------- $92,025,115 $94,924,333 =========== =========== The accompanying notes are an integral part of these statements. DELTA NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS Year ended December 31, 1996 1995 1994 ---------- ---------- ---------- Interest income Interest and fees on loans ........... $5,831,747 $5,564,417 $4,889,682 Securities available-for-sale ........ 728,848 1,023,444 1,004,370 Securities held-to-maturity .......... 1,148,438 976,537 474,260 Federal funds sold ................... 300,689 300,467 243,408 Interest-bearing deposits in banks ... 12,934 215 50 ---------- ---------- ---------- Total interest income ............. 8,022,656 7,865,080 6,611,770 Interest expense on deposits (note J) ... 2,738,228 3,018,513 2,310,192 ---------- ---------- ---------- Net interest income ............... 5,284,428 4,846,567 4,301,578 Provision for loan losses ............... 185,540 624,014 191,750 ---------- ---------- ---------- Net interest income after provision for loan losses ....... 5,098,888 4,222,553 4,109,828 Other income Service charges on deposits .......... 510,753 486,673 516,347 Foreclosed assets (note F) ........... 518,175 26,655 -- Other ................................ 271,367 161,349 176,301 ---------- ---------- ---------- 1,300,295 674,677 692,648 ---------- ---------- ---------- Other expenses Salaries and wages ................... 1,839,069 1,589,306 1,502,791 Employee benefits .................... 378,472 307,076 222,797 Occupancy and equipment .............. 749,379 673,222 586,905 Foreclosed assets (note F) ........... 686,423 67,107 29,198 Stationery and supplies .............. 87,595 84,328 91,022 Professional fees .................... 135,567 155,132 137,757 FDIC assessments ..................... 40,671 129,117 207,213 Other operating ...................... 589,407 480,065 664,396 ---------- ---------- ---------- 4,506,583 3,485,353 3,442,079 ---------- ---------- ---------- Earnings before income taxes ...... 1,892,600 1,411,877 1,360,397 Income taxes (notes A9 and K) ........... 765,000 552,000 539,000 ---------- ---------- ---------- NET EARNINGS ...................... $1,127,600 $ 859,877 $ 821,397 ========== ========== ========== Net earnings per share (note A11) ....... $ 2.99 $ 2.28 $ 2.18 ========== ========== ========== The accompanying notes are an integral part of these statements. DELTA NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Three years ended December 31, 1996
Net change in available- Common stock Retained for-sale Shares Amount earnings securities Total Balances at January 1, 1994 ....... 376,782 $ 3,531,886 $ 5,040,578 $ 26,243 $ 8,598,707 Cash dividends paid ($.70 per share) . -- -- (263,747) -- (263,747) Net changes in unrealized depreciation on available-for-sale securities ............ -- -- -- (408,822) (408,822) Net earnings ............. -- -- 821,397 -- 821,397 ------------ ------------ ------------ ------------ ------------ Balances at December 31, 1994 ..... 376,782 3,531,886 5,598,228 (382,579) 8,747,535 Cash dividends paid ($.70 per share) . -- -- (263,747) -- (263,747) Net changes in unrealized appreciation on available-for-sale securities ............ -- -- -- 427,364 427,364 Net earnings ............. -- -- 859,877 -- 859,877 ------------ ------------ ------------ ------------ ------------ Balances at December 31, 1995 ..... 376,782 3,531,886 6,194,358 44,785 9,771,029 Cash dividends paid ($.70 per share) . -- -- (263,747) -- (263,747) Net changes in unrealized appreciation on available-for-sale securities ............ -- -- -- (27,527) (27,527) Net earnings ............. -- -- 1,127,600 -- 1,127,600 ------------ ------------ ------------ ------------ ------------ Balances at December 31, 1996 ..... 376,782 $ 3,531,886 $ 7,058,211 $ 17,258 $ 10,607,355 ============ ============ ============ ============ ============
The accompanying notes are an integral part of this statement. DELTA NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31,
1996 1995 1994 ------------ -------------- ------------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net earnings ............................... $ 1,127,600 $ 859,877 $ 821,397 Adjustments to reconcile net earnings to net cash provided by operating activities (Gain) loss on sale of assets ...... (1,211) 6,654 (2,914) Provision for loan losses .......... 185,540 624,014 191,750 Provision for depreciation and amortization ..................... 580,717 467,219 340,759 Provision for losses on foreclosed real estate ...................... 112,560 37,923 261,544 Decrease (increase) in interest receivable and other assets ...... 278,913 (548,317) 407,577 Increase in interest payable and other liabilities .... 51,327 93,199 85,875 ------------ ------------ ------------ Net cash provided by operating activities ....... 2,335,446 1,540,569 2,105,988 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from sales of securities available-for-sale ...................... -- 483,000 -- Proceeds from calls and maturities of securities available-for-sale ........... 3,898,366 8,485,510 2,547,296 Proceeds from calls and maturities of securities held-to-maturity ............. 6,573,515 4,253,496 6,529,093 Purchase of securities available-for-sale .. (1,383,320) -- (6,257,374) Purchase of securities held-to-maturity .... (1,982,717) (12,984,116) (7,230,577) Net increase in loans ...................... (3,908,991) (100,233) (5,012,193) Purchase of property and equipment ......... (622,576) (707,079) (280,859) Proceeds from sale of property and equipment ............................... 20,800 9,850 16,000 Proceeds from sale of foreclosed assets .... 467,203 496,613 316,293 ------------ ------------ ------------ Net cash provided by (used in) investing activities ....... 3,062,280 (62,959) (9,372,321) ------------ ------------ ------------
DELTA NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED Year ended December 31,
1996 1995 1994 ------------- ------------ ------------- Cash flows from financing activities: Net (decrease) increase in demand deposit and savings accounts ...................... (3,386,046) 3,125,241 3,233,049 Net (decrease) increase in time deposits ...... (400,825) 1,493,375 159,377 Cash dividends ................................ (263,747) (263,747) (263,747) ------------ ------------ ------------ Net cash (used in) provided by financing activities ............. (4,050,618) 4,354,869 3,128,679 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents .............................. 1,347,108 5,832,479 (4,137,654) Cash and cash equivalents at beginning of year .......................... 11,981,394 6,148,915 10,286,569 ------------ ------------ ------------ Cash and cash equivalents at end of year ................................ $ 13,328,502 $ 11,981,394 $ 6,148,915 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest ................................. $ 2,808,700 $ 2,970,959 $ 2,251,309 Income taxes ............................. $ 857,600 $ 982,000 $ 188,000
Noncash investing and financing activities: The Bank foreclosed on loans with balances of $849,147 and $375,051 in 1996 and 1994, respectively. No loans were foreclosed upon during 1995. During 1996, the Bank recognized a decrease in the unrealized gain on available-for-sale securities of $47,052. As a result, the deferred tax asset was increased by $19,525 and equity was reduced by $27,527. During 1995, the Bank recognized an increase in the unrealized gain on available-for-sale securities of $730,537. As a result, the deferred tax asset was decreased by $303,173 and equity was increased by $427,364. During 1994, the Bank recognized a decrease in the unrealized gain on available-for-sale securities of $698,841. As a result, the deferred tax asset was increased by $290,019 and equity was reduced by $408,822. The accompanying notes are an integral part of these statements. DELTA NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Delta National Bancorp (the Company) was incorporated under the laws of the State of California on December 21, 1981 for the purpose of serving as a bank holding company under the Bank Holding Company Act of 1956. The Company's wholly-owned subsidiary, Delta National Bank (the Bank), operates as a commercial bank in the cities of Manteca, Riverbank, Denair and Modesto, California. Through its branches the Bank provides traditional commercial banking services to individuals and small and medium-sized businesses located in the California Central Valley. The accounting and reporting policies of the Company and the Bank conform with generally accepted accounting principles and general practice within the banking industry. In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates. A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows. 1. Consolidation The consolidated financial statements of the Company include the accounts of the Company and the Bank. Significant intercompany transactions and amounts have been eliminated. 2. Fair values of financial instruments The financial statements include various estimated fair value information as required by Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial Instruments." Such information, which pertains to the Bank's financial instruments, is based on the requirements set forth in SFAS No. 107 and does not purport to represent the aggregate net fair value of the Bank. Further, the fair value estimates are based on various assumptions, methodologies and subjective considerations, which vary widely among different financial institutions and which are subject to change. Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets' fair values. Securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Securities purchased under repurchase agreements are carried at the contract price. Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Off-balance-sheet instruments: Fair values for the Bank's off-balance-sheet instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the credit standing of the counterparties. Deposit liabilities: The fair values estimated for demand deposits (interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of the aggregate expected monthly maturities on time deposits. The carrying amount of accrued interest payable approximates its fair value. Short-term borrowings: The carrying amounts of borrowings under repurchase agreements and other short term borrowings approximate their fair values. 3. Securities held-to-maturity Bonds, notes and debentures for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income over the period to maturity. 4. Securities available-for-sale Available-for-sale securities consist of bonds, notes and debentures not classified as trading securities or held-to-maturity securities. Unrealized holding gains and losses, net of tax, are reported as a net amount in a separate component of stockholders' equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. The amortization of premiums and accretion of discounts are recognized as adjustments to interest income over the period to maturity. 5. Loans Loans are reported at the principal amount outstanding, net of unearned income, deferred loan fees, and the allowance for loan losses. Unearned discounts on installment loans are recognized as income over the terms of the loans. Interest on other loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding. Loan fees net of certain direct costs of origination, which represent an adjustment to interest yield, are deferred and amortized over the contractual term of the loan. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 6. Allowance for loan losses The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans and commitments to extend credit, based on evaluations of collectibility and prior loss experience of loans and commitments to extend credit. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific problem loans, commitments, and current economic conditions that may affect the borrowers' ability to pay. The Bank adopted SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan--Income Recognition and Disclosures," as of January 1, 1995. SFAS No. 114 requires that impaired loans, as defined, be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Bank considers a loan impaired when it is probable that all amounts of principal and interest due, according to the contractual terms of the loan agreement, will not be collected, which is the same criteria used for the transfer of loans to non-accrual status. Interest income is recognized on impaired loans in the same manner as non-accrual loans. 7. Property and equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Leasehold improvements are amortized over the lives of the improvements or the terms of the related leases, whichever is shorter. The straight-line method of depreciation is followed for financial reporting purposes, but accelerated methods are used for tax purposes. Deferred income taxes have been provided for the resulting depreciation differences. 8. Foreclosed real estate Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at the lower of carrying amount or fair value less cost to sell at the date of foreclosure. After foreclosure, valuations are periodically performed by management. Any subsequent revisions in estimates of fair value less cost to sell are reported as adjustments to the carrying amount of the real estate provided that the adjusted carrying amount does not exceed the original carrying amount at the date of foreclosure. Revenue and expenses from operations and changes in the valuation allowance are included in other operating expenses. 9. Income taxes Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 10. Long-lived assets and intangibles The Bank adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," as of January 1, 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles that are used in operations be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets might not be recoverable. The financial impact of this pronouncement was not material. 11. Earnings per share Earnings per share amounts are computed on the basis of the weighted average number of shares outstanding during each year. The weighted average number of shares outstanding for 1996, 1995 and 1994 was 376,782. 12. Stock based compensation In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based Compensation." This Statement requires entities to disclose the fair value of their employee stock options, but permits entities to continue to account for employee stock options under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Bank has determined that it will continue to use the method prescribed by APB Opinion No. 25, which recognizes compensation cost to the extent of the difference between the quoted market price of the stock at the date of grant and the amount an employee must pay to acquire the stock. The Bank grants stock options to employees with an exercise price greater than or equal to the quoted market price of the stock at the date of grant. Accordingly, no compensation cost is recognized for stock option grants. Disclosure requirements in accordance with SFAS No. 123 are included at Note M. 13. Cash and cash equivalents For purposes of the statement of cash flows, the Bank considers due from banks, interest-bearing deposits in banks and federal funds sold for one-day periods to be cash equivalents. 14. Reclassifications Certain reclassifications have been made to the 1995 and 1994 financial statements to conform to the 1996 presentation. 15. New accounting pronouncement In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement provides accounting and reporting standards for transfers of financial assets and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial assets and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The Bank will adopt this Statement as of January 1, 1997 and has made no assessment of the potential impact of adopting SFAS No. 125 at this time. NOTE B - CASH AND DEPOSITS Cash and due from banks includes balances with the Federal Reserve and other correspondent banks. The Bank is required to maintain specified reserves by the Federal Reserve Bank. The average reserve requirements are based on a percentage of the Bank's deposit liabilities. in addition, the Federal Reserve requires the Bank to maintain a certain minimum balance at all times. NOTE C - SECURITIES Amortized cost and estimated fair values of debt securities as of December 31, 1996 are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available-for-sale securities: Obligations of other U.S. government agencies.... $ 9,725,856 $ 91 $ (105,130) $ 9,620,817 Obligations of states and political subdivisions. 389,776 134,599 -- 524,375 Other ................... 204,350 -- -- 204,350 ----------- ----------- ----------- ----------- Total ................... $10,319,982 $ 134,690 $ (105,130) $10,349,542 =========== =========== =========== =========== Held-to-maturity securities: Obligation of other U.S. government agencies.... $15,428,286 $ 141,729 $ (29,535) $15,540,480 =========== =========== =========== =========== The amortized cost and estimated fair value of debt securities at December 31, 1996, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Estimated Amortized Fair Cost Value Available-for-sale securities: Due in one year or less .................. $ 499,890 $ 499,375 Due after ten years ...................... 389,776 524,376 Not due at a single date ................. 9,430,316 9,325,791 ----------- ----------- $10,319,982 $10,349,542 =========== =========== Held-to-maturity securities: Not due at a single date ................. $15,428,286 $15,540,480 =========== =========== As of December 31, 1996, approximately 65% of the Bank's securities portfolio consisted of Small Business Administration Guaranteed Loan Pool Certificates. Credit risk related to such securities is greater than that of U.S. Treasuries. Investment securities with a carrying value of $18,630,980 and a fair value of $18,708,595 at December 31, 1996 were pledged to secure public deposits as required or permitted by law. Pledged securities at December 31, 1995 had a carrying value of $10,802,942 and a fair value of $10,943,601. NOTE C - SECURITIES - CONTINUED Amortized cost and estimated fair values of debt securities as of December 31, 1995 are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available-for-sale securities: Obligations of other U.S. government agencies ... $12,188,734 $ 14,960 $ (80,692) $12,123,002 Obligations of states and political subdivisions. 605,656 142,415 (71) 748,000 Corporate bonds and othe. 55,350 -- -- 55,350 ----------- ----------- ----------- ----------- Total ................... $12,849,740 $ 157,375 $ (80,763) $12,926,352 =========== =========== =========== =========== Held-to-maturity securities: Obligation of other U.S. government agencies.... $18,252,276 $ 145,215 $ (2,931) $18,394,560 Obligation of states and political subdivisions. 695,578 -- (1,918) 693,660 Corporate bonds and other 1,403,683 -- (7,981) 1,395,702 ----------- ----------- ----------- ----------- Total ................... $20,351,537 $ 145,215 $ (12,830) $20,483,922 =========== =========== =========== =========== Proceeds from sales of available-for-sale securities were approximately $483,000 in 1995. Gross losses of $17,000 were realized on these sales. NOTE D - LOANS The composition of the Bank's loan portfolio at December 31, is as follows: 1996 1995 ------------ ------------ Commercial, financial and agricultural ..................... $ 21,428,989 $ 22,755,013 Real estate - construction ............. 13,404,461 9,175,475 Real estate - mortgage ................. 14,160,539 14,090,502 Installment ............................ 1,837,465 2,073,749 ------------ ------------ 50,831,454 48,094,739 Unearned discount ...................... (61,208) (80,189) Allowance for loan losses .............. (1,082,278) (1,219,304) Deferred loan fees ..................... (293,845) (275,427) ------------ ------------ Loans, net ......................... $ 49,394,123 $ 46,519,819 ============ ============ Non-performing assets are loans which are not accruing interest and real estate acquired through foreclosure. At December 31, 1996 and 1995, non-performing assets amounted to $1,113,802 and $2,550,723, respectively. NOTE D - LOANS - CONTINUED Changes in the allowance for loan losses for the years ended December 31, are summarized as follows: 1996 1995 1994 ----------- ----------- ----------- Balance at January 1, ............. $ 1,219,304 $ 599,422 $ 807,543 Provision charged to operations ... 185,540 624,014 191,750 Recoveries of loans previously charged off ..................... 166,042 108,234 163,848 Loans charged off ................. (488,608) (112,366) (563,719) ----------- ----------- ----------- Balance at December 31, ........... $ 1,082,278 $ 1,219,304 $ 599,422 =========== =========== =========== Impaired loans aggregated approximately $1,461,000 and $2,841,000 at December 31, 1996 and 1995, respectively. Of these amounts, approximately $1,131,000 and $1,146,000 were the result of a troubled debt restructuring as of December 31, 1996 and 1995, respectively. The average investment in impaired loans during 1996 and 1995 was approximately $1,850,000 and $1,572,000, respectively. Total cash collected on impaired loans during 1996 approximated $710,800, of which $602,600 was credited to the principal balance outstanding, and $108,200 was recognized as interest income. Total cash collected on impaired loans during 1995 approximated $78,800, of which $6,300 was credited to the principal balance outstanding, and $72,500 was recognized as interest income. Interest income that would have been recognized on impaired loans was approximately $205,000 and $210,000 for the years ended December 31, 1996 and 1995, respectively. Changes in the allowance for loan losses related to impaired loans for the years ended December 31, are summarized below. This allowance is included in the overall allowance for loan losses summarized above. As SFAS No. 114 was adopted on January 1, 1995, there was no allowance for loan losses related to impaired loans in 1994. 1996 1995 --------- --------- Balance at January 1, ............................. $ 334,981 $ -- Provision charged to operations ................... 307,911 334,981 Recoveries of loans previously charged off ........ -- -- Loans charged off ................................. (361,547) -- --------- --------- Balance at December 31, ........................... $ 281,345 $ 334,981 ========= ========= The Bank's customers are primarily located in Stanislaus County and San Joaquin County. Approximately 54% of the Bank's loans are for real estate and construction and approximately 42% of the Bank's loans are for general commercial uses including professional, retail, agricultural and small business. Agricultural loans make up approximately 25% of the Bank's loan portfolio. Generally, real estate loans are secured by real property and commercial and other loans are secured by funds on deposit, business or personal assets. Repayment is generally expected from the proceeds of the sales of property for real estate construction loans, and from cash flows of the borrower for other loans. NOTE E - PROPERTY AND EQUIPMENT Property and equipment, stated at cost, consists of the following at December 31: 1996 1995 ---------- ---------- Land ................................. $ 636,117 $ 636,117 Building and improvements ............ 444,475 444,475 Furniture, fixtures and equipment .... 2,266,476 1,704,532 Leasehold improvements ............... 143,428 143,428 Automobiles .......................... 38,912 64,042 Construction in progress ............. 76,368 46,238 ---------- ---------- 3,605,776 3,038,832 Less accumulated depreciation and amortization ....................... 1,886,094 1,696,332 ---------- ---------- $1,719,682 $1,342,500 ========== ========== Depreciation expense on property and equipment was $233,554, $241,353 and $231,468 in 1996, 1995 and 1994, respectively. During 1995, the Bank purchased land and prepared for the construction of a branch in the town of Riverbank, California. NOTE F - ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS Accrued interest receivable and other assets at December 31, are as follows: 1996 1995 ---------- ---------- Interest income receivable - investments ......... $ 347,987 $ 464,509 Interest and fee income receivable - loans ....... 379,324 327,622 Deferred income tax asset ........................ 397,000 450,000 Foreclosed real estate, net ...................... 500,000 560,600 Other ............................................ 180,669 -- ---------- ---------- $1,804,980 $1,802,731 ========== ========== In May 1996, the Bank foreclosed on a loan which was collateralized by dairy cattle. The Bank earned revenues from the sale of milk and incurred expenses relating to dairy operations until the cattle were sold in December 1996. NOTE G - FORECLOSED REAL ESTATE Changes in the allowance for losses for foreclosed real estate for the years ended December 31, are as follows: 1996 1995 1994 --------- --------- ---------- Balance at January 1, ................. $ 295,567 $ 257,644 $ -- Provision charged to operations ....... 112,560 37,923 261,544 Charge-offs, net of recoveries ........ (123,934) -- (3,900) --------- --------- --------- Balance at December 31, ............... $ 284,193 $ 295,567 $ 257,644 ========= ========= ========= NOTE H - TIME DEPOSITS At December 31, 1996, the scheduled maturities of certificates of deposit are as follows: 1997 $30,241,378 1998 3,912,544 1999 637,782 2000 58,987 2001 318,730 ----------- $35,169,421 NOTE I - EMPLOYEE BENEFIT PLANS Under the terms of the employee profit-sharing plan, a portion of the Bank's profits, determined annually by the Board of Directors, will be set aside and maintained in a trust fund for the benefit of qualified employees. Contributions to the plan, included in employee benefits on the statements of earnings, were $150,000 and $100,000 in 1996 and 1995, respectively. No contribution was made to the plan for 1994. During 1995, the Bank adopted a defined contribution 401(k) plan (the Plan). The Plan is available to all employees who are at least 18 years of age and who have worked a minimum of six months for the Bank. Eligible employees who elect to participate, may choose to contribute to the Plan, up to 10% of their compensation for the plan year. The Bank may also elect to make matching contributions to the Plan. The Bank did not make any matching contributions to the Plan in 1996 or 1995. NOTE J - INTEREST EXPENSE ON DEPOSITS Interest expense on deposits was comprised of the following for the years ended December 31: 1996 1995 1994 ---------- ---------- ---------- Demand deposits and regular savings ..... $ 847,054 $1,209,711 $ 755,796 Time deposits less than $100,000 ........ 634,295 522,539 559,932 Time deposits greater than $100,000 ..... 1,256,879 1,286,263 994,464 ---------- ---------- ---------- $2,738,228 $3,018,513 $2,310,192 ========== ========== ========== NOTE K - INCOME TAXES The provision for income taxes for the years ended December 31, consists of the following: 1996 1995 1994 --------- --------- ---------- Current: Federal ......... $ 487,000 $ 632,000 $ 429,000 State ........... 205,000 241,000 167,000 --------- --------- --------- 692,000 873,000 596,000 --------- --------- --------- Deferred: Federal ......... 62,000 (240,000) (55,000) State ........... 11,000 (81,000) (2,000) --------- --------- --------- 73,000 (321,000) (57,000) --------- --------- --------- $ 765,000 $ 552,000 $ 539,000 ========= ========= ========= NOTE K - INCOME TAXES - CONTINUED A reconciliation of income taxes computed at the federal statutory rate and the provision for income taxes for the years ended December 31, are as follows: 1996 1995 1994 --------- --------- --------- Income taxes at statutory rates ......... $ 643,000 $ 480,000 $ 463,000 Reduction for tax exempt interest ....... (42,000) (38,000) (53,000) State income taxes, net of federal income tax benefit .................... 142,000 106,000 103,000 Other ................................... 22,000 4,000 26,000 --------- --------- --------- $ 765,000 $ 552,000 $ 539,000 ========= ========= ========= The tax effect of temporary differences giving rise to the Bank's deferred income tax asset at December 31, is as follows: 1996 1995 Deferred tax assets: Allowance for loan losses .......................... $ 265,000 $ 318,000 Foreclosed real estate ............................. 134,000 142,000 State income taxes ................................. 70,000 80,000 --------- --------- 469,000 540,000 --------- --------- Deferred tax liabilities: Depreciation on property and equipment ............. (52,000) (52,000) Unrealized gain on available-for-sale securities ... (12,000) (32,000) Accretion on investment securities ................. (8,000) (6,000) --------- --------- (72,000) (90,000) --------- --------- Deferred income tax asset (included in other assets on the balance sheet) ....................... $ 397,000 $ 450,000 ========= ========= NOTE L - COMMITMENTS AND CONTINGENCIES The Company leases the Riverbank, Denair, and Modesto facilities under operating leases with initial terms expiring in 1996, 1998 and 2000, respectively. At December 31, 1996 the future minimum rental payments under operating leases are as follows: Year ending December 31, 1997 $ 92,337 1998 69,857 1999 42,357 2000 20,657 2001 3,443 Thereafter - --------------- $ 228,651 Rent expense under operating leases was $92,337, $88,705 and $86,973 for the years ended December 31, 1996, 1995 and 1994, respectively. NOTE M - STOCK OPTION PLAN During 1996, the Company's Board of Directors approved a fixed stock option plan accounted for under APB Opinion No. 25 and related Interpretations. The plan allows the Company to grant incentive and non-qualified stock options to key employees and directors for up to 113,035 shares of common stock. The options have a term of ten years when issued and vest immediately. The exercise price of each option is greater than or equal to the fair market value of the Company's stock on the date of grant. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below. For those options that are non-qualified stock options for income tax purposes, the pro forma net earnings reflect the Company's estimated future tax deduction upon exercise of the options. 1996 Net earnings As reported $ 1,127,600 Pro forma $ 729,821 Earnings per share As reported $ 2.99 Pro forma $ 1.94 The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants in 1996: dividend yield of 2.7 percent a year; expected volatility of 20 percent; risk-free interest rates of 6.8 percent; and expected life of 10 years. A summary of the status of the Company's fixed stock option plan for the year ended December 31, 1996 is presented below. Weighted Average Exercise Shares Price Outstanding at January 1, 1996 - $ - Granted 80,355 $ 27.22 Outstanding at December 31, 1996 80,355 $ 27.22 Options exercisable at December 31, 1996 80,355 $ 27.22 Weighted-average fair value of options granted during the year $7.85 The following information applies to options outstanding at December 31, 1996: Number outstanding 80,355 Range of exercise prices $26.00 - $28.60 Weighted-average exercise price $27.22 Weighted-average remaining contractual life 9.5 years NOTE N - FINANCIAL INSTRUMENTS The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Contract Amount Financial instruments whose contract amounts represent credit risk: Undisbursed loan commitments $ 8,389,438 Visa/Mastercard lines 1,535,872 Standby letters of credit 226,324 ---------------- $ 10,151,634 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. All of the Bank's commitments are variable rate with no caps or floors. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The following table provides summary information on the fair value of financial instruments at December 31, 1996: Carrying Estimated Amount Fair Value Financial assets: Cash and cash equivalents $ 13,328,502 $ 13,328,502 Securities available-for-sale 10,349,542 10,349,542 Securities held-to-maturity 15,428,286 15,540,480 Loans receivable 50,831,454 50,640,589 Accrued interest receivable 727,311 727,311 Financial liabilities: Deposits (81,051,046) (81,094,126) Accrued interest payable (129,978) (129,978) Off-balance-sheet liabilities: Commitments and letters of credit - (210,000) NOTE N - FINANCIAL INSTRUMENTS - CONTINUED The following table provides summary information on the fair value of financial instruments at December 31, 1995: Carrying Estimated Amount Fair value Financial assets: Cash and cash equivalents $ 11,981,394 $ 11,981,394 Securities available-for-sale 12,926,352 12,926,352 Securities held-to-maturity 20,351,537 20,483,922 Loans receivable 48,094,739 47,877,723 Accrued interest receivable 814,267 814,267 Financial liabilities: Deposits (84,839,377) (84,854,153) Accrued interest payable (199,188) (199,188) Off-balance-sheet liabilities: Commitments and letter of credit - (157,000) The carrying amounts include $329,609 and $1,694,556 of non-accrual loans (loans that are not accruing interest) at December 31, 1996 and 1995, respectively. Management has determined that primarily because of the uncertainty and the difficulty of predicting the timing of such cash flows excessive amounts of time and money would be incurred to estimate the fair values of nonperforming assets. The following aggregate information is provided about the contractual provisions of these assets at December 31: 1996 1995 --------------- ---------------- Aggregate carrying amount $ 329,609 $ 1,694,556 Effective rate 11.5% 11.25% Average term to maturity 13 months 19 months NOTE O - RELATED-PARTY TRANSACTIONS The Bank, in the ordinary course of business, makes loans and receives deposits from its directors and stockholders. As of December 31, 1996 and 1995 such loans amounted to $63,067 and $39,700, respectively. In management's opinion, these transactions were on substantially the same terms as comparable transactions with other customers of the Bank. During 1996, $132,033 was paid to related parties in connection with the operation of the Bank's foreclosed assets. NOTE P - REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measure of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. NOTE P - REGULATORY MATTERS - CONTINUED Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's actual capital amounts and ratios are presented in the following table.
To be well capitalized under For capital prompt corrective Actual Adequacy purposes: action provisions: Amount Ratio Amount Ratio Amount Ratio As of December 31, 1996: Total Capital (to Risk greater than greater than Weighted Assets) .... $10,936,000 19.75% $ 4,429,500 or equal to 8.0% $ 5,536,900 or equal to 10.0% Tier I Capital (to Risk greater than greater than Weighted Assets) .... $10,239,000 18.49% $ 2,214,800 or equal to 4.0% $ 3,322,100 or equal to 6.0% Tier I Capital (to greater than greater than Average Assets) ..... $10,239,000 11.23% $ 3,647,000 or equal to 4.0% $ 4,558,800 or equal to 5.0%
NOTE Q - CONDENSED FINANCIAL DATA The following is the condensed financial data for Delta National Bancorp (parent company only): BALANCE SHEETS December 31, ASSETS 1996 1995 ----------- ----------- Cash ............................................... $ 76,408 $ 42,426 Investment in subsidiary ........................... 10,239,942 9,399,721 Property and equipment, net ........................ 273,747 284,097 ----------- ----------- $10,590,097 $ 9,726,244 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities ........................................ $ -- $ -- Stockholders' equity ............................... 10,590,097 9,726,244 ----------- ----------- $10,590,097 $ 9,726,244 =========== =========== NOTE Q - CONDENSED FINANCIAL DATA - CONTINUED STATEMENTS OF EARNINGS Year ended December 31, 1996 1995 1994 ---------- ---------- ---------- Income Interest .............................. $ 1,233 $ 943 $ 2,487 Rent .................................. 86,226 83,698 74,800 Other ................................. 240 475 315 ---------- ---------- ---------- 87,699 85,116 77,602 ---------- ---------- ---------- Expenses General and administrative ............ 73,270 31,049 28,513 Depreciation .......................... 10,350 10,350 10,350 ---------- ---------- ---------- 83,620 41,399 38,863 ---------- ---------- ---------- Earnings before income taxes and equity in earnings of subsidiary ...................... 4,079 43,717 38,739 Income tax expense ...................... 1,700 18,000 16,000 ---------- ---------- ---------- 2,379 25,717 22,739 Equity in earnings of Delta National Bank ................... 1,125,221 834,160 798,658 ---------- ---------- ---------- NET EARNINGS ............................ $1,127,600 $ 859,877 $ 821,397 ========== ========== ========== NOTE Q - CONDENSED FINANCIAL DATA - CONTINUED STATEMENTS OF CASH FLOWS Year ended December 31,
1996 1995 1994 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents Cash flows from operating activities: Net earnings ................................. $ 1,127,600 $ 859,877 $ 821,397 Adjustment to reconcile net earnings to net cash provided by operating activities Provision for depreciation and amortization ........................... 10,350 10,350 10,350 (Decrease) increase in accrued expenses and other liabilities .................. -- (55,546) 16,179 Undistributed earnings of subsidiary ..... (1,125,221) (834,160) (798,658) ----------- ----------- ----------- Net cash provided by (used in) operating activities ................. 12,729 (19,479) 49,268 Cash flows from investing activities: Cash dividends from subsidiary ............... 285,000 290,000 87,500 ----------- ----------- ----------- Net cash provided by investing activities ................. 285,000 290,000 87,500 Cash flows from financing activities: Cash dividends ............................... (263,747) (263,747) (263,747) ----------- ----------- ----------- Net cash used in financing activities .. (263,747) (263,747) (263,747) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents ............................. 33,982 6,774 (126,979) Cash and cash equivalents at beginning of year .... 42,426 35,652 162,631 ----------- ----------- ----------- Cash and cash equivalents at end of year .......... $ 76,408 $ 42,426 $ 35,652 =========== =========== ===========
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Delta National Bancorp We have audited the accompanying consolidated balance sheets of Delta National Bancorp and Subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Delta National Bancorp and Subsidiary as of December 31, 1996 and 1995, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Grant Thornton, LLP Stockton, California January 27, 1997 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosures during the fiscal years ending December 31, 1996 and 1995. DIRECTORS & EXECUTIVE COMPENSATION Identification of directors: The names of each director of the Company and certain information about them, is set forth below: - -------------------------------------------------------------------------------- Director Director Age Principal Occupation Since - -------------------------------------------------------------------------------- Andrew J. Rossi 65 President and Chief Executive 1973 Officer - Delta National Bank (Executive Officer) President - A. Rossi, Inc. Jack Dozier 81 Attorney - Atherton & Dozier 1976 Joseph A. Freitas 70 Secretary to the Board 1973 Public Relations-Delta National Bank - Retired 1991 Theodore Poulos 69 Chairman of the Board - Delta National Bank 1973 Public Relations - Delta National Bank President - Manteca Drug, Inc. - Retired 1994 Toinette Rossi 39 Vice President & Manager 1994 Delta National Bank (Executive Officer) - -------------------------------------------------------------------------------- Each of the directors has been engaged in his/her principal occupation set forth above during the past five years. Identification of executive officers: The names of each executive officer of the Company not already listed in the table above and certain information about them, is set forth below: - -------------------------------------------------------------------------------- Executive Principal Occupations Period Officer Age with Delta National Bank Served - -------------------------------------------------------------------------------- Warren E. Wegge 48 Executive Vice President 1994 Senior Vice President/Credit Administrator 1991 Vice President/Corporate Banking Officer 1988 Chad B. Meyer 43 Senior Vice President/Credit Administrator 1994 Vice President/Corporate Banking Officer 1991 Ronald P. Dalben 40 Vice President (Investment Officer & Appraiser) 1987 Various other positions 1980 Barbara Jordan 55 Vice President/Operations 1992 Assistant Vice President/Operations 1990 Various other positions 1983 Eileen Pastenieks 35 Vice President/Accounting 1994 Assistant Vice President/Note Dept. 1993 Operations Officer 1990 - -------------------------------------------------------------------------------- Family relationships: Except for Andrew Rossi and Toinette Rossi, who are related to each other, there are no other family relationships between any other director or executive officer of the Company. Directorships: The following individuals hold other directorships as indicated below: - -------------------------------------------------------------------------------- DIRECTOR/EXECUTIVE OFFICER OTHER DIRECTORSHIPS HELD - -------------------------------------------------------------------------------- Theodore Poulos Doctors Hospital of Manteca Virotest, PLC Manteca District Ambulance Joseph A. Freitas Manteca Boys & Girls Club Jack C. Dozier Cal Cedar Products Duraflame, Inc. Rylock Ltd. Cal Mills - -------------------------------------------------------------------------------- Involvement in certain legal proceedings: None of the directors or executive officers named above have been involved in certain legal proceedings. EXECUTIVE COMPENSATION Director Compensation Table: The following table sets forth information concerning compensation for Directors in 1996. (See "Summary Compensation Table" for additional information on Executive Officers) - -------------------------------------------------------------------------------- Annual BCORP Bank Director Director Committee Name Fees Fees Fees (1) Other (2) - -------------------------------------------------------------------------------- Andrew J. Rossi ...........$ 5,800 $ -- $ -- $ -- Jack Dozier ............... 5,800 7,200 -- -- Joseph A. Freitas ......... 5,800 7,200 -- -- Theodore Poulos ........... 5,800 7,200 15,600 25,800 Toinette Rossi ............ 5,800 -- -- -- - -------------------------------------------------------------------------------- (1) Finance Committee Annual Fee (2) Salary from Bank $24,000 for Public Relations and Past Due Meetings $1,800 Summary Compensation Table: The following table shows, as to the Chief Executive Officer and each of the four other most highly compensated executive officers, information concerning compensation for services to the Company in all capacities. (Also see "Director Compensation Table")
- -------------------------------------------------------------------------------------------------- Club or Name and Organization Profit Principal Bonus ($) Automobile Membership Sharing Plan Position Year Salary ($) (1) Use Fees (2) - -------------------------------------------------------------------------------------------------- Andrew J. Rossi ..... 1996 $127,627 $ 45,000 $ 2,255 $ 2,262 $ 36,656 President and Chief 1995 112,000 10,000 1,500 2,300 13,944 Executive Officer 1994 100,000 -- -- -- 4,081 1993 88,860 10,000 -- -- 3,897 Warren E. Wegge ..... 1996 $ 84,194 $ 21,000 $ -- $ -- $ 23,108 Executive Officer 1995 78,000 13,500 -- -- 9,680 1994 65,460 2,500 -- -- 2,397 1993 60,660 7,595 2,200 Chad B. Meyer ....... 1996 $ 64,341 $ 13,000 $ -- $ -- $ 11,793 Senior Vice 1995 62,400 6,750 -- -- 6,086 President/Credit 1994 60,000 1,000 -- -- 775 Administrator 1993 53,400 4,716 -- -- 603 Toinette Rossi ...... 1996 $ 61,690 $ 14,495 $ -- $ -- $ 28,552 Vice President & 1995 60,000 5,316 -- -- 9,577 Manager 1994 57,600 1,822 -- -- 3,970 1993 54,780 1,480 -- -- 3,913 - -------------------------------------------------------------------------------------------------- (1) 1996 Bonuses were actually paid in 1996 for services rendered in 1996 (2) Profit Sharing
During 1996, the Company's Board of Directors approved a fixed stock option plan. The plan allows the Company to grant incentive and non-qualifed stock options to key employees and directors for up to 113,035 shares of common stock. The options have a term of ten years when issued and vest immediately. The exercise price of each option is greater than or equal to the fair market value of the Company's stock on the date of grant. The following table represents the options granted in the last fiscal year:
- ------------------------------------------------------------------------------------------------------------ Individual Grants Potential Realizable Value ---------------------------------------------------------------------------------------- No. of Percentage Exercise Grant Date Options of Total Price Expiration Present Name Granted Options ($/sh) Date 5% ($) 10% ($) Value - ------------------------------------------------------------------------------------------------------------ Andrew Rossi (1) 37,679 46.9% $ 28.00 03/18/06 $1,107,763 $1,160,513 $1,055,012 Theodore Poulos 15,437 19.3% 26.00 03/18/06 421,430 441,498 401,362 Jack Dozier 6,051 7.5% 26.00 03/18/06 165,192 173,059 157,326 Toinette Rossi 3,151 3.9% 26.00 03/18/06 86,022 90,119 81,926 Joseph Freitas 13,037 16.2% 26.00 03/18/06 355,910 372,858 338,962 Warren Wegge 5,000 6.2% 26.00 03/18/06 136,500 143,000 130,000 - ------------------------------------------------------------------------------------------------------------ Total 80,355 100% - ------------------------------------------------------------------------------------------------------------ (1) Excercise price is 110% of FV because ownership is greater than 10%. If Andrew is granted options under the incentive plan the term is 5 years, not 10 years.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF MANAGEMENT The following table sets forth as of December 31, 1996 information relating to the beneficial owners of the Company's Common Stock by each person known by the Company to be the beneficial owner of more than five percent (5%) of the outstanding shares of Common Stock. - -------------------------------------------------------------------------------- Total Shares Percent of Name Address Owned Class - -------------------------------------------------------------------------------- Andrew J. Rossi 611 North Main St. 94,704 25.14% Manteca, CA 95336 The Cede & Co. (Nominee of the P. O. Box 222 22,694 6.02% Depository Trust Company) New York, New York 10041 - -------------------------------------------------------------------------------- Common Stock Ownership of Directors and Executive Officers: The following table reflects shares of Common Stock beneficially owned by each director of the Company, each of the executive officers named in the Summary Compensation Table appearing elsewhere herein, and by all directors and executive officers as a group, as of December 31, 1996. - -------------------------------------------------------------------------------- Direct Indirect Total Approx. Shares Shares Shares Percent. Name Position Owned Owned Owned Owned - -------------------------------------------------------------------------------- Jack C. Dozier ........Director 5,190 -- 5,190 1.38% Joseph A. Freitas .....Director 11,566 -- 11,566 3.07% Theodore Poulos .......Chairman of the Board/Director 12,100 1,142 13,242 3.52% Andrew J. Rossi (1) ...President & CEO/Director 75,539 19,165 94,704 25.14% Toinette Rossi ........V.P. & Manager/ Director 3,296 -- 3,296 less than 1% Warren E. Wegge .......Executive Vice President 130 -- 130 less than 1% Ronald P. Dalben ......Vice President 100 -- 100 less than 1% - -------------------------------------------------------------------------------- All directors and executive officers as a group: 128,228 34.03% - -------------------------------------------------------------------------------- (1) Indirect 5.09% of class Direct 20.05% of class CERTAIN RELATIONSHIPS & RELATED PARTIES In 1996, the Bank renewed an extension of credit to Joseph A. Freitas, Director of the Company, in the amount of $13,055. As of December 31, 1996, the principal balance owing was $6,635. This loan bears interest at the a fixed rate of 7.75% and is due to mature on April 21, 1997. The loan is collateralized by a certificate of deposit. In addition, the Bank funded a secured loan of $30,000 at a fixed rate of 8%. As of December 31, 1996, the principal balance owing was $29,293. The loan matures April 3, 1997. In 1996, the bank funded a loan to Melissa Braun, granddaughter of Joseph Freitas, Director of the Company, in the amount of $10,000. The loan has a fixed rate of 8% and is secured by a certificate of deposit. The balance owing at December 31, 1996 was $9,552 and is scheduled to mature July 2, 1997. In 1994, the Bank funded an unsecured loan to Linda Abeldt, daughter of Joseph Freitas, Director of the Company, in the amount of $12,000. In 1995, the Bank funded an additional unsecured loan in the amount of $9,000. The two loans bear interest at a fixed rate of 7% and 10%, respectively. As of December 31, 1996, the principal balance owing was $5,550 and $6,386, respectively on the two loans. The loans are scheduled to mature on January 25, 1999 and March 22, 2000, respectively. In 1991, the Bank extended credit to Valerie Salas, daughter of Andrew Rossi, President, Chief Executive Officer and Director of the Company, and sister of Toinette Rossi, Vice President/Manager and Director of the Company, in the amount of $16,595. At December 31, 1996, the principal balance owing was $4,263. The loan is unsecured and bears interest at a fixed rate of 13%. The loan matures on April 23, 1997. In 1996, the Bank renewed an unsecured line of credit to John Rossi, son of Andrew Rossi, President, Chief Executive Officer and Director of the Company, and brother of Toinette Rossi, Vice President/Manager and Director of the Company, in the amount of $303,250. On December 31, 1996, there was no principal balance owed. This loan bears interest at the Bank's reference rate plus 2.5% and is scheduled to mature on November 27, 1997. John Rossi is also a guarantor on a small installment loan with a current balance of $1,388. The rate on this loan is fixed at l4.75% and is scheduled to mature March 14, 1997. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K (a) 1. Financial Statements: Delta National Bancorp and Subsidiary See Item 8 for a listing of all financial statements. 2. Financial Statement Schedules Additional Supplementary Data not included in this section have been omitted because the information required has been included in the financial statements or notes thereto or are not applicable or not required. 3. Exhibits Registrant's Articles of Incorporation and Bylaws are furnished by way of incorporation by reference to Exhibit 3 to registrant's registration statement on Form S-14, as filed under the Securities Act of 1933 on Sept. 10, 1982 and declared effective on Oct. 8, 1982. Plan of Reorganization and Agreement of Merger is furnished by reference to registrant's Form S-14 as filed under the Securities Act of 1933 on September 10, 1982 and declared effective on October 8, 1982. (b) Reports on Form 8-K The registrant did not file any reports on Form 8-K during the ended December 31, 1996. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DELTA NATIONAL BANCORP (Registrant) By: /s/ Andrew Rossi President and Chief Executive Officer/Director March 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the indicated capacities, on March 14, 1997. /s/ Andrew Rossi /s/ Theodore Poulos Andrew Rossi Theodore Poulos President and Chairman of the Board Chief Executive Officer and Director and Director (Principal Executive Officer) /s/ Joseph Freitas /s/ Eileen Pastenieks Joseph Freitas Eileen Pastenieks Secretary of the Board and Staff Vice President/ Director Accounting (Principal Accounting Officer) /s/ Warren Wegge /s/ Toinette Rossi Warren Wegge Toinette Rossi Executive Vice President Vice President and Manager and (Principal Financial Officer) Director EX-27 2 FDS 12 MONTHS ENDED DECEMBER 31, 1996
9 1000 12-MOS DEC-31-1996 DEC-31-1996 5052 676 7600 0 10350 15428 15540 50831 1082 92025 81053 0 365 0 0 0 3532 7058 92025 5832 1877 301 8023 2738 2738 5284 186 0 4507 1893 0 0 0 1128 2.99 2.99 9.61 330 0 1131 3945 1219 489 166 1082 1082 0 0
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