UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from.......................................
to.............................................
Commission File No. 33-8743
ORANGE NATIONAL BANCORP
(Exact Name of Registrant as Specified in Charter)
1201 East Katella Avenue
Orange, California 92867
California (714) 771-4000 33-0190684
(State of Incorporation) (Address and Telephone Number (I.R.S. Employer
of Principal Executive Offices) ID. No.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X
No
APPLICABLE ONLY TO CORPORATE ISSUERS
The Registrant had 1,993,788 shares of common stock outstanding as of
July 27, 1998.
ORANGE NATIONAL BANCORP
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1998
TABLE OF CONTENTS
PART I . FINANCIAL STATEMENTS
Item 1. Financial statements
Consolidated Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997 3
Consolidated Statements of Earnings for the Three and Six
Months Ended June 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Comprehensive Income for the Three
And Six Months Ended June 30, 1998 and 1997 (unaudited) 5
Consolidated Statements of Stockholders' Equity for the
Three Months Ended June 30, 1998 and 1997 (unaudited) 6
Consolidated Statements of Stockholders' Equity for the
Six Months Ended June 30, 1998 and 1997 (unaudited) 7
Consolidated Statements of Cash Flows for the Three and Six
Months Ended March 31, 1998 and 1997 (unaudited) 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submissions of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
ORANGE NATIONAL BANCORP
CONSOLIDATED BALANCE SHEETS
June 30, 1998 (unaudited) and December 31, 1997
Jun 30 Dec 31
1998 1997
(unaudited) (audited)
(dollars in thousands)
Assets
Cash and cash equivalents $ 85,952 $ 81,147
Securities
Held-to-maturity securities (fair value
of $6,245 in 1998 and $8,972 in 1997) 6,280 9,037
Available-for-sale securities 6,900 9,146
Loans, net of allowance for credit losses
of $1,567 in 1998 and $1,581 in 1997 137,360 131,189
Premises and equipment, net 5,657 5,057
Other real estate owned, net 31 126
Accrued interest receivable 951 985
Cash value of life insurance 4,922 4,808
Other assets 1,029 784
$249,082 $242,279
Liabilities
Deposits $224,989 $218,792
Accrued interest payable and other liabilities 1,705 1,901
Total liabilities 226,694 220,693
Commitments and Contingencies - -
Stockholders' Equity
Common stock, no par value or stated value;
authorized 20,000,000 shares; issued and
outstanding 1,992,763 in 1998 and 1,970,046 in 1997 8,012 7,864
Retained earnings 14,408 13,778
Unrealized (loss) on available-for-sale
securities, net (32) (56)
Total stockholders' equity 22,388 21,586
$249,082 $242,279
See Notes to Consolidated Financial Statements.
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF EARNINGS
Three and Six Months Ended June 30, 1998 and 1997 (unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(in thousands, except per share data)
Interest Income
Loans $3,617 $3,238 $6,962 $6,214
Securities 196 424 441 989
Federal funds sold 790 300 1,359 542
Total interest income 4,603 3,962 8,762 7,745
Interest Expense, deposits 1,033 817 1,915 1,588
Net interest income 3,570 3,145 6,847 6,157
Provision for Credit Losses 20 40 20 75
Net interest income after
provision for credit losses 3,550 3,105 6,827 6,082
Other Income 888 1,161 1,760 2,314
Other Expenses 3,004 3,005 6,097 5,994
Earnings before income taxes 1,434 1,261 2,490 2,402
Provision for Income Taxes 573 501 969 953
Net earnings $ 861 $ 760 $1,521 $1,449
Basic earnings per share $ 0.44 $ 0.39 $ 0.77 $ 0.74
Weighted average number of common
shares outstanding (in thousands) 1,991 1,961 1,983 1,958
Diluted earnings per share $ 0.42 $ 0.38 $ 0.74 $ 0.73
Weighted average number of common
shares outstanding and diluted
potential common shares (in thousands) 2,063 1,986 2,053 1,985
See Notes to Consolidated Financial Statements.
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Six Months Ended June 30, 1998 and 1997 (unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(dollars in thousands)
Net earnings $861 $760 $1,521 $1,449
Other comprehensive income
Net change in unrealized gains on
available-for-sale securities,
net of tax 20 96 24 2
Comprehensive income $881 $856 $1,545 $1,451
See Notes to Consolidated Financial Statements.
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended June 30, 1998 and 1997 (unaudited)
Unrealized
Gain (Loss)
Available-
Common Stock Retained For-Sale
Shares Amount Earnings Securities Total
(in thousands, except per share data)
Balance, March 31, 1998 1,988 $7,970 $13,746 $(52) $21,664
Net earnings - - 861 - 861
Cash dividend
paid ($.10 per share) - - (199) - (199)
Exercise of stock options 5 42 - - 42
Net change in unrealized (loss)
on available-for-sale
securities - - - 20 20
Balance, June 30, 1998 1,993 $8,012 $14,408 $(32) $22,388
Balance, March 31, 1997 1,961 $7,751 $11,661 $(217) $19,195
Net earnings - - 760 - 760
Net change in unrealized (loss)
on available-for-sale
securities - - - 96 96
Balance, June 30, 1997 1,961 $7,751 $12,421 $(121) $20,051
See Notes to Consolidated Financial Statements.
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 30, 1998 and 1997 (unaudited)
Unrealized
Gain (Loss)
Available-
Common Stock Retained For-Sale
Shares Amount Earnings Securities Total
(in thousands, except per share data)
Balance, December 31, 1997 1,970 $7,864 $13,778 $(56) $21,586
Net earnings - - 1,521 - 1,521
Cash dividend
paid ($.45 per share) - - (891) - (891)
Exercise of stock options 23 148 - - 148
Net change in unrealized (loss)
on available-for-sale
securities - - - 24 24
Balance, June 30, 1998 1,993 $8,012 $14,408 $(32) $22,388
Balance, December 31, 1996 1,953 $7,676 $11,403 $(123) $18,956
Net earnings - - 1,449 - 1,449
Cash dividend
paid ($.22 per share) - - (431) - (431)
Exercise of stock options 8 75 - - 75
Net change in unrealized (loss)
on available-for-sale
securities - - - 2 2
Balance, June 30, 1997 1,961 $7,751 $12,421 $(121) $20,051
See Notes to Consolidated Financial Statements.
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three and Six Months Ended June 30, 1998 and 1997 (unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(dollars in thousands)
Cash Flows from
Operating Activities
Net earnings $ 861 $ 760 $ 1,521 $ 1,449
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization 133 133 247 270
Provision for credit losses 20 40 20 75
(Gain) on sale of loans (211) (383) (385) (791)
Proceeds from loan sales 3,211 5,954 5,782 10,059
Origination of loans held for sale (3,000) (5,571) (5,396) (9,268)
(Increase) in other assets (233) (53) (206) (101)
Gain on cash value of
life insurance (75) (55) (135) (101)
(Decrease) increase in
other liabilities (338) 337 (197) 348
Net cash provided by
operating activities 368 1,162 1,251 1,940
Cash Flows from Investing Activities
Proceeds from sales and
maturities of securities 1,383 10,289 5,770 18,559
Purchase of securities (727) - (727) -
Net decrease (increase) in loans 965 (12,803) (6,223) (14,490)
Proceeds from sale of
other real estate owned - 981 126 1,058
Purchase of life insurance - (885) - (885)
Purchases of premises and equipment (388) (144) (847) (270)
Net cash provided by
(used in) investing activities 1,233 (2,562) (1,901) 3,972
Cash Flows from Financing Activities
Net increase (decrease) in deposits 8,161 2,074 6,198 (1,785)
Proceeds from exercise of
stock options 42 - 148 75
Dividends paid (199) - (891) (431)
Net cash provided by
(used in) financing activities 8,004 2,074 5,455 (2,141)
Increase in
cash and cash equivalents 9,605 674 4,805 3,771
Cash and cash equivalents
at beginning of period 76,347 49,533 81,147 46,436
Cash and cash equivalents
at end of period $85,952 $50,207 $85,952 $50,207
Supplemental Cash Flow Information
Cash payments for:
Interest $1,036 $835 $1,911 $1,583
Income taxes $ 748 $768 $ 898 $ 843
Non-cash investing activities:
Loans to finance
the sale of real estate $ - $395 $ - $1,077
Loans foreclosed on by the Company $ 31 $ 71 $ 31 $ 145
See Notes to Consolidated Financial Statements.
ORANGE NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of Orange
National Bancorp ("Company") and its wholly-owned subsidiary, Orange
National Bank ("Bank").
The consolidated balance sheet (unaudited) as of June 30, 1998, and
the related consolidated statements (unaudited) of earnings,
comprehensive income, stockholders' equity and cash flows for the three
and six months ended June 30, 1998 and 1997, have been prepared in
accordance with generally accepted accounting principles and the rules
and regulations of the Securities and Exchange Commission. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary have been made to present fairly the
financial position, results of operations and cash flows as of and for
the three and six months ended June 30, 1998.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's December 31, 1997, annual report on Form 10-K. The operating
results for the three and six months ended June 30, 1998, are not
necessarily indicative of the operating results for all of 1998.
Note 2. Other income and expense
Other income and expense for the three and six months ended June 30
consisted of the following:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(dollars in thousands)
Other income
Service charges on deposit accounts $362 $ 400 $ 746 $ 807
Fees for other customer services 208 182 407 354
Gain on sale of loans 211 383 385 791
Increase in cash value
of life insurance 75 55 135 101
Other 32 141 87 261
$888 $1,161 $1,760 $2,314
Other expense
Salaries, wages
and employee benefits $1,477 $1,504 $2,996 $3,016
Occupancy 331 283 676 567
Data processing 237 235 467 459
Furniture and equipment 175 168 347 359
Promotion 171 204 356 404
Legal and professional services 242 197 476 406
Stationery and supplies 85 56 153 114
Telephone and postage 90 104 216 198
Other real estate owned 1 26 6 76
Other 195 228 404 395
$3,004 $3,005 $6,097 $5,994
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This filing contains forward-looking statements, which involve risks
and uncertainties. The Company's actual future results may differ
significantly from the results discussed in the forward-looking
statements. Factors that might cause a difference include, but are not
limited to, interest rates, particularly the spread between loan rates
and deposit rates, loan demand, deposit withdrawals, the effect of the
Southern California economy and real estate values, and other general
business risks.
Results of Operations
Total interest income was $4.6 million in the second quarter of
1998, an increase of $0.6 million or 16.2% from the $4.0 million in the
second quarter of 1997. Total interest income was $8.8 million in the
first half of 1998, an increase of $1.1 million or 13.1% from the $7.7
million in first half of 1997. The average interest-earning assets
were $213.4 million in the second quarter of 1998, an increase of $33.0
million or 18.3% from the $180.4 million in the second quarter of 1997.
The average interest-earning assets were $204.9 million in the first
half of 1998, an increase of $26.4 million or 14.8% from the $178.5
million in the first half of 1997. The average yield on interest-
earning assets was 8.6% in the second quarter of 1998, a decrease of
0.2% from the 8.8% in the second quarter of 1997. The average yield on
interest-earning assets was 8.6% in the first half of 1998, a decrease
of 0.1% from the 8.7% in the first half of 1997. The increase in
interest income in the second quarter and the first half of 1998 as
compared to the similar periods in 1997 resulted from a higher level of
interest-earning assets in spite of slightly lower interest rates.
Interest income on loans was $3.6 million in the second quarter of
1998, an increase of $0.4 million or 11.7% from the $3.2 million in the
second quarter of 1997. Interest income on loans was $7.0 million in
the first half of 1998, an increase of $0.8 million or 12.0% from the
$6.2 million in the first half of 1997. The increase in interest
income on loans in the second quarter and first half of 1998 as
compared to the similar periods in 1997 resulted from (1) the increase
in the average size of the loan portfolio, (2) the slightly lower long-
term interest rates during 1998, and (3) the payoff and full collection
of all past-due principal and delinquent interest of a nonaccrual loan
in 1998. The average size of the loan portfolio was $141.5 million in
the second quarter of 1998, an increase of $11.3 million or 8.7% from
the $130.2 million in the second quarter of 1997. The average size of
the loan portfolio was $139.5 million in the first half of 1998, an
increase of $14.0 million or 11.1% from the $125.5 million in the first
half of 1997. The yield on the loan portfolio was 10.2% in the second
quarter of 1998, an increase of 0.2% from the 10.0% in the second
quarter of 1997. The yield on the loan portfolio was 10.0% in the
first half of 1998, an increase of 0.1% from the 9.9% in the first half
of 1997. The increase in the average size of the loan portfolio
resulted from sustained loan fundings throughout 1997 and the first six
months of 1998. The yield on loans moves with changes in the prime
rate as approximately 70% of the loan portfolio are based on variable
rates.
Interest income on securities was $0.2 million in the second quarter
of 1998, a decrease of $0.2 million or 53.8% from the $0.4 million in
the second quarter of 1997. Interest income on securities was $0.4
million in the first half of 1998, a decrease of $0.6 million or 55.4%
from the $1.0 million in the first half of 1997. The decrease in
interest income on securities in the second quarter and first half of
1998 as compared to the similar periods in 1997 resulted from the
decrease in the average size of the investment securities portfolio.
The average securities portfolio was $13.4 million in the second
quarter of 1998, a decrease of $14.6 million or 52.2% from the $28.0
million in the second quarter of 1997. The average securities
portfolio was $15.1 million in the first half of 1998, a decrease of
$17.3 million or 53.3% from the $32.4 million in the first half of
1997. The yield on securities was 5.9% in the second quarter of 1998,
a decrease of 0.2% from the 6.1% in the second quarter of 1997. The
yield on securities was 5.8% in the first half of 1998, a decrease of
0.3% from the 6.1% in the first half of 1997. The decrease in the size
and yield of the investment securities portfolio resulted from several
higher yielding bonds being called throughout 1997 and the first six
months of 1998.
Interest income on federal funds sold was $0.8 million in the second
quarter of 1998, an increase of $0.5 million or 163.3% from the $0.3
million in the second quarter of 1997. Interest income on federal
funds sold was $1.4 million in the first half of 1998, an increase of
$0.9 million or 150.7% from the $0.5 million in the first half of 1997.
The increase in interest income on federal funds sold during the first
half of 1998 as compared to the similar period of 1997 resulted from
the large increase in the average size of federal funds sold and a
higher yield in 1998. The average balance of federal funds sold was
$58.5 million in the second quarter of 1998, an increase of $36.4
million or 164.2% from the $22.1 million in the second quarter of 1997.
The average balance of federal funds sold was $50.3 million in the
first half of 1998, an increase of $29.7 million or 144.2% from the
$20.6 million in the first half of 1997. The yield on federal funds
sold was 5.4% in the second quarter of both 1998 and 1997. The yield
on federal funds sold was 5.4% in the first half of 1998, an increase
of 0.1% from the 5.3% in the first half of 1997. The increase in the
federal funds sold resulted from excess funds not being invested in
investment securities throughout 1997 and into the first half of 1998
due to the extremely flat yield curve.
Interest expense was $1.0 million in the second quarter of 1998, an
increase of $0.2 million or 26.4% from the $0.8 million in the second
quarter of 1997. Interest expense was $1.9 million in the first half
of 1998, an increase of $0.3 million or 20.7% from the $1.6 million in
the first half of 1997. The increase in interest expense resulted from
a larger average interest-bearing deposit base, particularly the
certificates of deposit, and a slight increase in deposit rates. The
average interest-bearing deposits were $138.9 million in the second
quarter of 1998, an increase of $16.1 million or 13.1% from the $122.8
million in the second quarter of 1997. The average interest-bearing
deposits were $132.2 million in the first half of 1998, an increase of
$11.7 million or 9.7% from the $120.5 million in the first half of
1997. The average rate paid on interest-bearing deposits was 3.0% in
the second quarter of 1998, an increase of 0.3% over the 2.7% in the
second quarter of 1997. The average rate paid on interest-bearing
deposits was 2.9% in the first half of 1998, an increase of 0.3% from
the 2.6% in the first half of 1997. The increase in the deposit base
reflects an overall prosperity of the customer base resulting from an
improved economy.
The provision for credit losses was $20,000 in the second quarter of
1998, a decrease of $20,000 from the $40,000 in the second quarter of
1997. The provision for loan losses was $20,000 in the first half of
1998, an increase of $55,000 from the $75,000 in the first half of
1997. The decrease in the provision for credit losses during the first
half of 1998 as compared to the first half of 1997 reflects a higher
quality loan portfolio resulting from an improved local economy in
Orange County. The Company continued to experience recoveries in the
first half of 1998 on amounts previously charged-off. These recoveries
offset the need for additional provision. Management believes that
the current allowance for credit losses is adequate to provide for
potential losses in the portfolio. The current local economic outlook
is promising for the remainder of 1998. However, an assurance cannot
be made as to its realization and, accordingly, future provisions for
credit losses cannot be estimated at this time. While management is
optimistic about the future, the effects of current economic conditions
on the collectibility of loans cannot be predicted with absolute
certainty and its effects on future profitability cannot be determined.
Other income was $0.9 million in the second quarter of 1998, a
decrease of $0.3 million or 23.5% from the $1.2 million in the second
quarter of 1997. Other income was $1.8 million in the first half of
1998, a decrease of $0.5 million or 24.0% from the $2.3 million in the
first half of 1997. The decrease in other income during the first half
of 1998 primarily resulted from decreased gains on lower volume of SBA
loans sold as compared to the similar period of 1997. The gain on sale
of SBA loans was $0.2 million in the second quarter of 1998, a decrease
of $0.2 million or 44.8% from the $0.4 million in the second quarter of
1997. The gain on sale of SBA loans was $0.4 million in the first half
of 1998, a decrease of $0.4 million or 51.3% from the $0.8 million in
the first half of 1997.
Other expenses were $3.0 million in the second quarter of both 1998
and 1997. Other expenses were $6.1 million in the first half of 1998,
an increase of $0.1 million or 1.7% from the $6.0 million in the first
half of 1997. The increase in other expense in the first six months of
1998 resulted from the relocation costs associated with moving a branch
office and consolidating several administrative offices.
The provision for income taxes was $0.6 million in the second
quarter of 1998, an increase of $0.1 million or 14.4% from the $0.5
million in the second quarter of 1997. The provision for income taxes
was $1.0 million in the first half of both 1998 and 1997. The increase
in the provision for income taxes in the second quarter of 1998 results
from larger pretax earnings in the second quarter of 1998 as compared
to the second quarter of 1997.
Net earnings were $861,000 in the second quarter of 1998, an
increase of $101,000 or 13.4% from the $760,000 in the second quarter
of 1997. Net earnings were $1,521,000 in the first half of 1998, an
increase of $72,000 or 5.0% from the $1,449,000 in the first half of
1997.
Financial Condition
The Company experienced growth during the six months ended June 30,
1998. Total assets were $249.1 million as of June 30, 1998, an
increase of $6.8 million or 2.8% from the $242.3 million as of December
31, 1997.
Total interest-earning assets were $213.5 million as of June 30,
1998, an increase of $13.5 million or 6.7% from the $200.0 million as
of December 31, 1997. The growth resulted in larger federal funds sold
and a larger loan portfolio in spite of a decrease in the securities
portfolio. The Company continues to focus its efforts on originating
quality loans. The new loans originated in the first six months of
1998 were funded primarily from the maturities of investment securities
and increased deposits.
The investment securities portfolio was $13.2 million as of June 30,
1998, a decrease of $5.0 million or 27.5% from the $18.2 million as of
December 31, 1997. The decrease in the first six months of 1998
resulted from the maturity of investment securities primarily called
prior to maturity date. The Company became a member of the Federal
Home Loan Bank of San Francisco ("FHLB") during the second quarter of
1998, an investment of $0.7 million. The Company did not purchase any
other investment securities throughout 1997 and into the first half of
1998 due to the extremely flat yield curve. Thus, funds that may have
been used to purchase investment securities in the past were maintained
in federal funds sold. The Company believes securities are the best
available investment after its liquidity needs are met through cash,
cash due from banks and federal funds sold. Generally, mortgage-backed
securities are classified as held-to-maturity and U.S. Government
Agency securities are classified as available-for-sale. The market
values increased slightly in the first six months of 1998 resulting
from a slight decrease in short-term and long-term interest rates.
The loan portfolio was $137.4 million as of June 30, 1998, an
increase of $6.2 million or 4.7% from the $131.2 million as of December
31, 1997. The increase in the first six months of 1998 resulted from
continued loan demand, primarily SBA lending on commercial real estate.
The quality of the loan portfolio continues to improve resulting from a
healthier Orange County economy.
Total deposits were $225.6 million as of June 30, 1998, an increase
of $6.8 million or 3.1% from the $218.8 million as of December 31,
1997. The increase in the first six months of 1998 reflects an
improving economic climate amongst the large customers of the Bank and
the increase in new customers of the Bank.
Liquidity
The Company maintains substantial liquid and other short-term assets
to meet the funding of loan demand, deposit withdrawals and maturities,
and operating costs. The Company currently meets its funding needs
from its deposit base, and cash flow from operations, loan sales,
maturities of investment securities and loan principal reductions.
The loan-to-deposit ratio was 60.9% and 60.0% as of June 30, 1998
and December 31, 1997, respectively. The slight increase in this ratio
resulted as the loans increased at a higher rate than the deposits.
The ratio of liquid assets (cash, cash due from banks, federal funds
sold, and investment securities with maturities of one year or less) to
demand deposits was 47.7% and 44.5% as of June 30, 1998 and December
31, 1997, respectively. The increase of the liquid asset ratio
resulted from a combined increase in liquid assets and a decrease in
demand deposits.
The Company has a relatively stable and significant base of core
deposits. Thus, the Company has not used brokered deposits and avoids
using other wholesale, highly rate-sensitive, short-term funds. Other
funding sources available to the Company include reduction of its
federal funds sold, sale of its available-for-sale securities,
increasing deposits, and borrowing from its established credit
resources. The Company may borrow funds under securities sold with
agreements to repurchase such securities that have not been pledged.
The Company had unpledged securities of $8.2 million as of June 30,
1998. The Company established a borrowing capacity of $14.5 million
with the FHLB during the second quarter of 1998. The Company would
need to pledge certain defined collateral, consisting of loans and/or
securities, with the FHLB prior to borrowing. Liquidity can also be
obtained through federal funds purchased from correspondent banks
and/or direct borrowings from the Federal Reserve Bank. The Company
currently has unused Federal Funds borrowing lines of $8.0 million with
various banks.
Management believes the Bank has sufficient liquidity to meet its
loan commitments, deposit withdrawals and operating costs.
Loan Portfolio
A major part of the Bank's objective is serving the credit needs of
customers in Orange County and surrounding areas. Credit decisions are
based upon the judgement of the Bank's lending personnel and Loan
Committee. The legal lending limit to each customer is restricted to a
percentage of the Bank's total capital, the exact percentage depends on
the nature of the particular loan and the collateral involved. Credit
risk is inherent to any loan portfolio and it is the management of this
risk, which defines the quality of the portfolio. The Bank has a
policy to obtain collateral for loans under most circumstances. The
Bank has a highly diversified portfolio, a solid underwriting process,
a loan review program and an active loan service function which
management believes serves to minimize the possibility of material loss
in the loan portfolio.
The three broad categories in which the Bank has directed virtually
all of its lending activities are (a) real estate loans, (b) commercial
loans, and (c) loans to individuals. These three categories accounted
for 57.6%, 33.8%, and 8.3%, respectively, of the Bank's loan portfolio
as of June 30, 1998. Commercial real estate loans are originated for
terms of up to 25 years. The Bank's commercial loans are primarily
funded to small- and medium-sized businesses for terms ranging from 30
days to 5 years. Consumer installment loans are for a maximum term of
48 months on unsecured loans and for a term of the depreciable life of
tangible property used as collateral on secured loans.
Variable interest rate loans comprise 69.8% of the loan portfolio as
of June 30, 1998.
The Bank had standby letters of credit of $0.4 million and
commitments to extend credit of $22.3 million as of June 30, 1998. The
Bank presently has sufficient liquidity to fund all loan commitments.
A loan is impaired when it is probable the creditor will be unable
to collect all contractual principal and interest payments due in
accordance with terms of the loan agreement. Impaired loans are
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. The amount of
impairment, if any, and any subsequent changes are included in the
allowance for credit losses.
Loan Portfolio Composition
The composition of the Bank's loan portfolio (all domestic) is
presented in the following table:
Jun 30 Dec 31
1998 1997
(dollars in thousands)
Dollars
Real estate
Commercial $ 78,826 $ 78,534
Construction 1,871 118
Commercial and industrial 47,265 44,301
Loans to individuals 11,656 10,586
Other 409 122
Total 140,027 133,661
Unearned net loan fees and premiums (1,100) (891)
Allowance for credit losses (1,567) (1,581)
Total, net $137,360 $131,189
Percentages
Real estate
Commercial 56.3% 58.8%
Construction 1.3 0.1
Commercial and industrial 33.8 33.1
Loans to individuals 8.3 7.9
Other 0.3 0.1
Total 100.0% 100.0%
Credit Risk Management
The Bank manages its loan portfolio through a process designed to
assure acceptable quality of loans entering the portfolio and to bring
any potential losses or potential defaults in existing loans to the
attention of the appropriate management personnel. Each lending
officer has primary responsibility to conduct credit and documentation
reviews of the loans for which he is assigned. The Bank's Senior Vice
President and Senior Credit Officer are responsible for general
supervision of the loan portfolio and adherence by the loan officers to
the loan policies of the Bank. The Bank currently engages an outside
consulting firm to periodically review the loan portfolio to provide
suggested risk rating of selected loans. Bank management reviews the
suggested ratings along with all other available information to
properly monitor the loan portfolio, including all loan evaluations
made during periodic examinations by the OCC.
In accordance with the Bank's loan policies, management presents a
written report to the Bank's Board of Directors at its monthly meeting.
The Directors review the delinquency report listing of all loans 30
days or more past due and the watch list report including loans having
increased credit risk, both delinquency and other factors, over the
rest of the portfolio. Additionally, the Directors review a monthly
report including all loans originated during the prior month.
The Bank maintains an allowance for credit losses to provide for
potential losses in the loan portfolio. Additions to the allowance for
credit losses are either charged to operations in the form of a
provision for possible credit losses, or recovered from loans
previously charged-off. All loans that are judged to be uncollectible
are charged against the allowance. The allowance for credit losses is
maintained at a level determined by management to be adequate, based on
the performance of loans in the Bank's portfolio, evaluation of
collateral for such loans, the prospects or worth of the prospective
borrowers or guarantors, and such other factors which, in the Bank's
judgement, deserve consideration in the estimation of possible losses.
The allowance for credit losses is established and maintained after
analyzing loans identified by management with certain unfavorable
features affixing a risk of loss attributable to each loan. An
inherent risk of loss in accordance with industry standards and
economic conditions is then allocated to specific loan pools and to the
remainder of the portfolio on an aggregate basis. While management
uses the best information available to make its evaluation, future
adjustments to the allowance may be necessary if there are significant
changes in economic or other conditions. In addition, the OCC
periodically reviews the Company's allowance for credit losses as an
integral part of their normal recurring examination process, and may
require the Company to make additions to the allowance based on their
judgment about information available to them at the time of their
examinations.
The following table presents loans on nonaccrual status or
contractually past due 90 days or more as to interest or principal
payments and still accruing interest:
Jun 30 Dec 31
1998 1997
(dollars in thousands)
Loans on nonaccrual status $1,574 $2,447
Loans past due 90 days or more and
still accruing interest 21 660
Total $1,595 $3,107
Loans are generally placed on nonaccrual status when principal or
interest payments are past due 90 days or more. Certain loans are
placed on nonaccrual status earlier if there is reasonable doubt as to
the collectibility of interest or principal. Loans that are in the
renewal process, have sufficient collateral, or are in the process of
collection continue to accrue interest.
Had the loans on nonaccrual status paid according to their original
terms, the gross interest income to date on such loans would have been
approximately $618,000.
Management does not have knowledge of any additional loans not
disclosed in this section as nonaccrual, past due, or troubled debt
restructuring that may be potential problem loans. The Bank has no
loans to foreign borrowers. The collateral value of certain nonaccrual
loans are large enough that management believes all principal and
interest will be collected on those loans and therefore do not meet the
definition of impaired. A loan is impaired when it is probable the
creditor will be unable to collect all contractual principal and
interest payments due in accordance with the terms of the loan
agreement. Impaired loans are valued primarily at the fair value of
the underlying collateral.
There were no loan concentrations to individual borrowers exceeding
10% of the total loan portfolio and no other interest-bearing assets
that would be required to be in the paragraphs above, if such assets
were classified as loans as of June 30, 1998 and December 31, 1997.
The following table presents loans outstanding, the activity of the
allowance for credit losses, and pertinent ratios during the three and
six months ended and as of June 30:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(dollars in thousands)
Average gross loans $142,564 $130,939 $140,489 $126,300
Total gross loans
at end of period $140,027 $136,674 $140,027 $136,674
Allowance for credit losses:
Balance, beginning of period $1,553 $1,414 $1,581 $1,369
Charge-offs (16) (2) (56) (5)
Recoveries 10 28 22 41
Net (charge-offs) recoveries (6) 26 (34) 36
Provisions charged to operations 20 40 20 75
Balance, end of period $1,567 $1,480 $1,567 $1,480
Net (charge-offs) recoveries
during the period to average
gross loans outstanding
during period (0.00%) 0.02% (0.02%) 0.03%
Included in the Bank's allocation of its allowance for credit losses
are specific reserves on certain identified loans and general reserves
for unknown potential losses. Management classifies loans through its
internal loan review system that is supplemented by an independent
third party reviewer and review of loans from its regulators. None of
these classifications indicate trends or uncertainties, which will
materially impact future operating results, liquidity, or capital
resources. The allowance provides for the potential adverse effects of
current economic conditions. However, the full effects of the economy
on the loan portfolio cannot be predicted with any certainty. Any
loans which management doubts the ability of borrowers to comply with
loan repayment terms are provided for in the allowance.
Summary of Deposits
Deposits are currently the Bank's sole source of funds. The Bank
can obtain additional funds when needed to meet occasional declines in
deposits or other short-term liquidity needs through the overnight
purchase of federal funds and other borrowing facilities. However,
the Bank does not currently use these sources of funds. Generally,
the Bank has funds in excess of its needs for deposit withdrawals and
other short-term liquidity. The Bank regularly sells such excess funds
as federal funds sold to other financial institutions.
The Bank's deposits are attracted primarily from commercial
enterprises and individuals. The Bank also attracts some deposits from
municipalities and other government agencies. The Bank does not have
foreign deposits, brokered deposits or variable rate fixed-term
deposits, nor does the Bank currently expect to obtain future funding
through these types of deposits. The Bank had noninterest-bearing
demand deposits of $83.1 million, interest-bearing Negotiable Orders of
Withdrawal Accounts ("NOW") and Money Market Deposit Accounts ("MMDA")
of $98.6 million, time deposits of $30.7 million, and savings accounts
of $12.6 million as of June 30, 1998.
The Company had interest-bearing deposits of 63.1% and 60.8% of
total deposits as of June 30, 1998 and December 31, 1997, respectively.
While the Bank does not experience material seasonal fluctuations in
deposit levels, the Bank's relative growth in deposits and loans and
level of liquidity may be affected by seasonal and economic changes of
its customers. Management believes it has sufficient liquidity to fund
loan commitments, deposit demands and operating costs.
The following table presents the Bank's average balances of
deposits, as a percentage of average total deposits and average
interest paid by category for the first six months of 1998 and for the
year 1997:
MMDA Total
Demand and NOW Savings Time Deposits
(dollars in thousands)
June 30, 1998
Average balance $81,843 $94,524 $11,792 $25,864 $214,023
Percent of total 38.2% 44.2% 5.5% 12.1% 100.0%
Average interest
rate paid 0.0% 2.4% 2.0% 5.1% 1.8%
December 31, 1997
Average balance $76,444 $91,931 $11,485 $19,423 $199,283
Percent of total 38.4% 46.1% 5.8% 9.7% 100.0%
Average interest
rate paid 0.0% 2.3% 2.0% 5.0% 1.7%
Capital Management
Capital management requires that sufficient capital be maintained
for anticipated growth and to provide depositors assurance that their
funds are on deposit with a solvent institution. The Bank is subject
to various regulatory capital requirements. The Bank must meet
specific capital guidelines that involve certain measurements of the
Bank's assets and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification of these assets and certain off-balance sheet items are
also subject to qualitative judgments by the regulators about
components, risk weightings and other factors. Tier 1 capital for the
Bank under the regulations is defined as stockholders' equity before
any unrealized gains or losses on its available-for-sale securities
portfolio, less defined portions of intangible assets. Total capital
is defined as Tier 1 capital plus the allowance for credit losses,
subject to certain limitations. The table below presents the Bank's
actual capital ratios, the minimum capital required for adequacy
purposes and to be categorized as "well capitalized" for the capital
ratios of total risk-based, Tier 1 risk-based and Tier 1 leverage. The
Bank's capital ratios exceeded the "well capitalized" threshold
prescribed in the rules of its principal federal regulator as of June
30, 1998.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
June 30, 1998
Total capital
(to risk-weighted
assets) $23,107 13.6% $13,593 8.0% $16,991 10.0%
Tier 1 capital
(to risk-weighted
assets) 21,540 12.7% 6,796 4.0% 10,195 6.0%
Tier 1 capital
(to average assets) 21,540 8.9% 9,728 4.0% 12,159 5.0%
December 31, 1997
Total capital
(to risk-weighted
assets) $22,563 13.9% $12,962 8.0% $16,202 10.0%
Tier 1 capital
(to risk-weighted
assets) 20,982 13.0% 6,481 4.0% 9,721 6.0%
Tier 1 capital
(to average assets) 20,982 9.0% 9,368 4.0% 11,710 5.0%
Management believes that the Bank is properly and adequately
capitalized, as evidenced by these ratios as of June 30, 1998. The
most recent notification from the Office of the Comptroller of the
Currency categorized the Bank as "well capitalized" as of June 30, 1997
under the regulatory framework for prompt corrective action.
Interest Rate Sensitivity
The Company uses asset liability management on its balance sheet to
minimize the exposure of interest rate movements on its net interest
income. The principal function of asset liability management is to
manage the interest rate risk in the balance sheet by maintaining a
proper balance, match and mix between rate-sensitive interest-earning
assets and rate-sensitive interest-bearing liabilities. The term
"rate-sensitive" refers to those assets and liabilities that are
"sensitive" to fluctuations in interest rates. When interest rates
fluctuate, earnings may be affected in many ways as the interest rates
of assets and liabilities change at different times or by different
amounts.
The Company minimizes its interest rate risk in the balance sheet by
emphasizing the origination of variable interest rate loans that have
the ability to reprice overnight and maintaining a high balance of
federal funds sold to offset the deposits that may potentially reprice
overnight.
A repricing gap is the difference between total interest-earning
assets and total interest-bearing liabilities available for repricing
during a given time interval. A positive repricing gap exists when
total interest-earning assets exceed total interest-bearing liabilities
within a repricing period and a negative repricing gap exists when
total interest-bearing liabilities are in excess of interest-earning
assets within a repricing period.
Generally, a positive repricing gap increases net interest income in
a rising rate environment and decreases net interest income in a
falling rate environment. A positive repricing gap may increase net
interest income in a falling rate environment depending on the amount
of the excess repricing gap and extent of the drop in interest rates.
A negative repricing gap tends to increase net interest income in a
falling rate environment and decrease net interest income in a rising
rate environment. The net interest income of the Company will benefit
from a rising rate environment based on the positive repricing gap.
The following table presents the repricing periods for interest-
earning assets and interest-bearing liabilities and the related
repricing gaps as of June 30, 1998:
After one
Due within Due within but within After
0-3 months 4-12 months five years five
years Total
(dollars in
thousands)
Interest-earning
assets (1) $160,877 $ 8,025 $26,774 $19,483 $215,159
Interest-bearing
liabilities 133,786 5,599 2,497 - 141,882
Repricing gap 27,091 2,426 24,277 19,483 73,277
Cumulative
repricing gap $ 27,091 $29,517 $53,794 $73,277
Cumulative gap
as a percent of
earning assets 12.6% 13.7% 25.0% 34.1%
(1) Includes collateralized mortgage obligations in the one-year to
five-year maturities based on the average expected lives.
The Company had interest-earning assets of $160.4 million and
interest-bearing demand and savings deposits of $111.0 million as of
June 30, 1998 that are able to reprice overnight.
The Company had available-for-sale securities of $6.9 million
recorded at market value as of June 30, 1998. The available-for-sale
securities consist primarily of U.S. government agency medium-term
notes. The Company also had held-to-maturity securities at amortized
cost of $6.3 million as of June 30, 1998. The held-to-maturity
securities are collateralized mortgage obligations that may be repaid
without penalties. The value of these securities is subject to
fluctuation based upon current medium-term and long-term interest
rates.
The estimated effect on net interest income for a 10% decrease from
prevailing interest rates over a one-year period would be a decline of
approximately $1.0 million.
Off-Balance Sheet Analysis
The contractual amounts associated with certain financial
transactions are not recorded as assets or liabilities on the balance
sheet. Off-balance sheet treatment is generally considered appropriate
either where exchange of the underlying asset or liability has not
occurred or is not assured, or where contractual amounts are used
solely to determine cash flows to be exchanged. The Company's off-
balance sheet financial instruments consist of commitments to extend
credit and standby letters of credit. A majority of these commitments
are written with variable interest rates.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in
the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a
result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services.
In the current interest rate environment, the liquidity and the
maturity structure of the Company's assets and liabilities are critical
to the maintenance of acceptable performance levels.
Year 2000 Issue
The Company is currently conducting a comprehensive review of its
computer, including third-party vendors, and environmental systems to
identify the systems that could be affected by the "Year 2000" issue
and is developing an implementation and monitoring plan to resolve the
issue. The Year 2000 is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Any
of the vendor programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company
presently believes that, with modifications to existing vendor software
and upgrading to new software packages, the Year 2000 problem will not
pose significant operational problems for the Company's computer
systems as so modified and converted. The Company is also actively
monitoring the Year 2000 progress of its third-party data processing
vendor. The Company also believes the costs of these modifications and
upgrading will not have a material adverse impact on its results of
operations. However, if such modifications and upgrades are not
completed timely, the Year 2000 may have a material impact on the
operations of the Company.
Effect of FASB Statements
In June 1997, FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 requires a publicly-held
entity to disclose financial and descriptive information about all of
its operating segments. SFAS 131 will require disclosure of net
earnings or loss, certain specific revenue and expense items, and
assets for each segment presented and disclosure of a reconciliation of
this information with the corresponding amounts recognized in the
financial statements of the entity. SFAS 131 will also require
disclosure of other pertinent segment information, including the
products and services provided by its operating segments and the method
by which the operating segments were determined. SFAS 131 is effective
for years beginning after December 15, 1997 and will require
comparative information of earlier years presented to be restated. The
Company has not determined if the adoption of SFAS 131 will require it
to report segment information.
Management does not believe the application of this Statement to
transactions of the Company that have been typical in the past will
materially affect the Company's financial position and results of
operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS FOR VOTE OF SECURITIES HOLDERS
A. The Annual Meeting of Stockholders was held on May 18,
1998.
B. The Stockholders elected the following Directors for a
one-year term during the Annual Meeting:
Michael W. Abdalla
Michael J. Christianson
Kenneth J. Cosgrove
Robert W. Creighton
Charles R. Foulger
Gerald R. Holte
James E. Mahoney
Wayne F. Miller
San E. Vaccaro
All votes, including those by proxy, resulted in the
election of all management nominees. Additionally,
there was no solicitation in opposition to management's
nominees.
C. The Stockholders ratified the appointment of McGladrey &
Pullen, LLP as independent public accountants for the
Company and its subsidiary Bank for the year 1998 by a
vote of 1,157,042 for and none against the ratification
during the Annual Meeting.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
Signatures
Pursuant to the requirements of Section 13 or 25(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ORANGE NATIONAL BANCORP
By: /s/ KENNETH J. COSGROVE Date: JULY 30, 1998
Kenneth J. Cosgrove, President
and Chief Executive Officer
By: /s/ ROBERT W. CREIGHTON Date: JULY 30, 1998
Robert W. Creighton, Secretary
and Chief Financial Officer
By: /s/ JERRO M. OTSUKI Date: JULY 30, 1998
Jerro M. Otsuki, Vice President
and Controller
10
28
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<NAME> ORANGE NATIONAL BANCORP
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