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 March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from.......................................
to.............................................
Commission File No. 33-8743
ORANGE NATIONAL BANCORP
(Exact Name of Registrant as Specified in Charter)
1201 East Katella Avenue
Orange, California 92867
California (714) 771-4000 33-0190684
(State of Incorporation) (Address and Telephone Number (I.R.S. Employer
of Principal Executive Offices) 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 1,987,996 shares of common stock outstanding as of
April 30, 1998.
ORANGE NATIONAL BANCORP
QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 1998
TABLE OF CONTENTS
PART I . FINANCIAL STATEMENTS
Item 1. Financial statements
Consolidated Balance Sheets as of March 31, 1998 (unaudited)
and December 31, 1997 3
Consolidated Statements of Earnings for the
Three Months Ended March 31, 1998 and 1997 (unaudited) 4
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 1998 and 1997 (unaudited) 5
Consolidated Statements of Stockholders' Equity for the
Three Months Ended March 31, 1998 and 1997 (unaudited) 6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 (unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submissions of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
ORANGE NATIONAL BANCORP
CONSOLIDATED BALANCE SHEETS
March 31, 1998 (unaudited) and December 31, 1997
Mar 31 Dec 31
1998 1997
(unaudited) (audited)
(dollars in thousands)
Assets
Cash and cash equivalents $ 76,347 $ 81,147
Securities
Held-to-maturity securities (fair value of
$7,599 in 1998 and $8,972 in 1997) 7,650 9,037
Available-for-sale securities 6,146 9,146
Loans, net of allowance for credit losses of
$1,553 in 1998 and $1,581 in 1997 138,376 131,189
Premises and equipment, net 5,402 5,057
Other real estate owned, net - 126
Accrued interest receivable 872 985
Cash value of life insurance 4,858 4,808
Other assets 884 784
$240,535 $242,279
Liabilities
Deposits $216,828 $218,792
Accrued interest payable and other liabilities 2,043 1,901
Total liabilities 218,871 220,693
Commitments and Contingencies - -
Stockholders' Equity
Common stock, no par value or stated value;
authorized 20,000,000 shares; issued and
outstanding 1,987,996 in 1998 and 1,970,046 in 1997 7,970 7,864
Retained earnings 13,746 13,778
Unrealized (loss) on available-for-sale securities, net (52) (56)
Total stockholders' equity 21,664 21,586
$240,535 $242,279
See Notes to Consolidated Financial Statements.
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, 1998 and 1997 (unaudited)
1998 1997
(in thousands,
except per share data)
Interest Income
Loans $3,345 $2,976
Securities 245 565
Federal funds sold 569 242
Total interest income 4,159 3,783
Interest Expense, deposits 881 771
Net interest income 3,278 3,012
Provision for Credit Losses - 35
Net interest income after provision for credit losses 3,278 2,977
Other Income 871 1,153
Other Expenses 3,093 2,989
Earnings before income taxes 1,056 1,141
Provision for Income Taxes 396 452
Net earnings $ 660 $ 689
Basic earnings per share $ 0.33 $ 0.35
Weighted average number of common shares
outstanding (in thousands) 1,976 1,955
Diluted earnings per share $ 0.32 $ 0.35
Weighted average number of common shares outstanding
and diluted potential common shares (in thousands) 2,043 1,984
See Notes to Consolidated Financial Statements.
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, 1998 and 1997 (unaudited)
1998 1997
(dollars in thousands)
Net earnings $660 $689
Other comprehensive income
Unrealized gains (losses) on
available-for-sale securities, net of tax 4 (94)
Comprehensive income $664 $595
See Notes to Consolidated Financial Statements.
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 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) $21,586
Net earnings - - 660 - 660
Cash dividend paid ($.35 per share) - - (692) - (692)
Exercise of stock options 18 106 - - 106
Net change in unrealized (loss)
on available-for-sale
securities - - - 4 4
Balance, March 31, 1998 1,988 $7,970 $13,746 $(52) $21,664
Balance, December 31, 1996 1,953 $7,676 $11,403 $(123) $18,956
Net earnings - - 689 - 689
Cash dividend paid ($.22 per share) - - (431) - (431)
Exercise of stock options 8 75 - - 75
Net change in unrealized (loss)
on available-for-sale
securities - - - (94) (94)
Balance, March 31, 1997 1,961 $7,751 $11,661 $(217) $19,195
See Notes to Consolidated Financial Statements.
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 and 1997 (unaudited)
1998 1997
(dollars in thousands)
Cash Flows from Operating Activities
Net earnings $ 660 $ 689
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 114 137
Provision for credit losses - 35
(Gain) on sale of loans (174) (408)
Proceeds from loan sales 2,571 4,105
Origination of loans held for sale (2,397) (3,697)
(Increase) decrease in other assets 28 (48)
Gain on cash value of life insurance (59) (46)
Increase in other liabilities 141 11
Net cash provided by operating activities 884 778
Cash Flows from Investing Activities
Proceeds from maturities of held-to-maturity securities 1,386 271
Proceeds from sales and maturities of
available-for-sale securities 3,001 8,000
Net increase in loans made to customers (7,188) (1,687)
Proceeds from sale of other real estate owned 126 77
Purchases of bank premises and equipment (459) (126)
Net cash provided by (used in) investing activities (3,134) 6,535
Cash Flows from Financing Activities
Net (decrease) in deposits (1,964) (3,860)
Proceeds from exercise of stock options 106 75
Dividends paid (692) (431)
Net cash (used in) financing activities (2,550) (4,216)
Increase (decrease) in cash and cash equivalents (4,800) 3,097
Cash and cash equivalents at beginning of period 81,147 46,436
Cash and cash equivalents at end of period $76,347 $49,533
Supplemental Cash Flow Information
Cash payments for:
Interest $875 $748
Income taxes $150 $ 75
Non-cash investing activities:
Loans to finance the sale of other real estate owned $ - $682
Loans foreclosed on by the Company $ - $ 74
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 March 31, 1998, and
the related consolidated statements (unaudited) of earnings,
comprehensive income, stockholders' equity and cash flows for the three
months ended March 31, 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 months ended March 31, 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 months ended March 31, 1998, are not necessarily
indicative of the operating results for all of 1998.
Note 2. Other income and expense
Other income for the three months ended March 31 consisted of the following:
1998 1997
(dollars in thousands)
Service charges on deposit accounts $384 $ 407
Fees for other customer services 199 173
Gain on sale of loans 174 408
Increase in cash value of life insurance 59 46
Other 55 119
$871 $1,153
Other expense for the three months ended March 31 consisted of the following:
1998 1997
(dollars in thousands)
Salaries, wages and employee benefits $1,520 $1,511
Occupancy expense 345 284
Data processing expense 230 224
Furniture and equipment expense 172 192
Promotion expense 185 200
Legal and professional services 233 210
Stationery and supplies 68 58
Telephone and postage 126 94
Other real estate owned 6 50
Other 208 166
$3,093 $2,989
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 $4.2 million in the three months ended
March 31, 1998, an increase of $0.4 million or 9.9% from the $3.8
million in three months ended March 31, 1997. The average interest-
earning assets were $196.4 million in the first quarter of 1998, an
increase of $19.7 million, or 11.2% from the $176.7 million in the
first quarter of 1997. The average yield was 8.5% in the first quarter
of 1998, a decrease of 0.1% from the 8.6% in the first quarter of 1997.
The increase in interest income in the first quarter of 1998 resulted
from a higher level of interest-earning assets in spite of slightly
lower interest rates.
Interest income on loans was $3.3 million in the three months ended
March 31, 1998, an increase of $0.3 million or 12.4% from the $3.0
million in the three months ended March 31, 1997. The increase in the
first quarter of 1998 resulted from the increase in the average size of
the loan portfolio, in spite of lower long-term interest rates during
the first quarter of 1998 as compared to the first quarter of 1997.
The average loan portfolio was $137.5 million in the first quarter of
1998, an increase of $16.6 million or 13.7% from the $120.9 million in
the first quarter of 1997. The yield on the loan portfolio was 9.7% in
first quarter of 1998, a decrease of 0.1% from the 9.8% in the first
quarter of 1997. The increase in the average size of the loan
portfolio resulted from increased loan fundings throughout 1997 and
into the first quarter of 1998. The yield on loans moves with changes
in the prime rate as approximately 71% of the loan portfolio are based
on variable rates.
Interest income on securities was $0.3 million in the three months
ended March 31, 1998, a decrease of $0.3 million or 56.5% from the $0.6
million in the three months ended March 31, 1997. The decrease in
interest income on securities in the first quarter of 1998 resulted
from the decrease in the average size of the investment securities
portfolio. The average balance of securities was $16.9 million in the
first quarter of 1998, a decrease of $19.9 million or 54.7% from the
$36.8 million in the first quarter of 1997. The yield on securities
was 5.8% in the first quarter of 1998, a decrease of 0.3% from the 6.1%
in the first quarter 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 into the first quarter
of 1998.
Interest income on federal funds sold was $0.6 million in the three
months ended March 31, 1998, an increase of $0.3 million or 134.9% from
the $0.3 million in the three months ended March 31, 1997. The
increase in interest income on federal funds sold resulted from an
increase in the average size of federal funds sold and a higher yield
in the first quarter of 1998. The average balance of federal funds
sold was $42.0 million in the first quarter of 1998, an increase of
$23.0 million or 120.7% from the $19.0 million in the first quarter of
1997. The yield on federal funds sold was 5.4% in the first quarter of
1998, an increase of 0.3% from the 5.1% in the first quarter 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 quarter of 1998 due to the extremely flat yield curve.
Interest expense was $0.9 million in the three months ended March
31, 1998, an increase of $0.1 million or 14.4% from the $0.8 million in
the three months ended March 31, 1997. The increase in interest
expense resulted from a larger average interest-bearing deposit base
and a slight increase in deposit rates. The average interest-bearing
deposits were $125.4 million in the first quarter of 1998, an increase
of $7.3 million or 6.2% from the $118.1 million in the first quarter of
1997. The average rate paid on interest-bearing deposits was 2.8% in
the first quarter of 1998, an increase of 0.2% over the 2.6% in the
first quarter of 1997. The increase in the deposit base reflects an
increase in the overall prosperity of the customer base.
A provision for credit losses was not deemed necessary for the three
months ended March 31, 1998. The provision for credit losses was
$35,000 in the three months ended March 31, 1997. The decreased
provision for credit losses in the first quarter of 1998 from the first
quarter of 1997 reflect a higher quality loan portfolio resulting from
an improved local economy in Orange County. The Company continued to
experience sizable recoveries in the first quarter 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 for the remainder of 1998
is promising. 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 three months ended March 31,
1998, a decrease of $0.3 million or 24.5% from the $1.2 million in the
three months ended March 31, 1997. The decrease in other income in the
first quarter of 1998 resulted from decreased gains on lower sales
volume of SBA loans as compared to the first quarter of 1997. The gain
on sale of SBA loans was $0.2 million in the first quarter of 1998, a
decrease of $0.2 million from the $0.4 million in the first quarter of
1997.
Other expenses were $3.1 million in the three months ended March 31,
1998, an increase of $0.1 million or 3.5% from the $3.0 million in the
three months ended March 31, 1997. The increase in other expense in
the first quarter of 1998 resulted from the relocation costs associated
with moving a branch office and consolidating several administrative
offices.
Provision for income taxes was $0.4 million in the three months
ended March 31, 1998, a decrease of $0.1 million or 12.4% from the $0.5
million in the three months ended March 31, 1997. The decrease results
from lower pretax earnings in the first quarter of 1998 as compared to
the first quarter of 1997.
Net earnings were $660,000 in the three months ended March 31, 1998,
a decrease of $29,000 or 4.3% from the $689,000 in the three months
ended March 31, 1997.
Financial Condition
The Company experienced a slight decrease in assets during the three
months ended March 31, 1998. Total assets were $240.5 million as of
March 31, 1998, a decrease of $1.8 million or 0.7% from the $242.3
million as of December 31, 1997.
Total interest-earning assets were $207.5 million as of March 31,
1998, an increase of $7.5 million or 4.1% from the $200.0 million as of
December 31, 1997. The growth resulted from an increase in the loan
portfolio. The Company continues to focus its efforts on originating
quality loans. The new loans originated in the first quarter of 1998
were funded primarily from the maturities of investment securities and
federal funds sold.
The investment securities portfolio was $13.8 million as of March
31, 1998, a decrease of $4.4 million or 24.1% from the $18.2 million as
of December 31, 1997. The decrease in the first quarter of 1998
resulted from the maturity of investment securities. The Company did
not purchase investment securities throughout 1997 and into the first
quarter of 1998 due to the extremely flat yield curve. Thus funds that
in the past might have been used to purchase investment securities were
kept 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. Treasury
and Government Agency securities are classified as available-for-sale.
The market values decreased slightly in the first quarter of 1998
resulting from a slight increase in short-term and long-term interest
rates.
The loan portfolio was $138.4 million as of March 31, 1998, an
increase of $7.2 million or 5.5% from the $131.2 million as of December
31, 1997. The increase in the first quarter of 1998 resulted from
increased 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 $216.8 million as of March 31, 1998, a decrease
of $2.0 million or 0.9% from the $218.8 million as of December 31,
1997. The decrease in deposits in the first quarter of 1998 reflects a
historical cycle of slightly lower first quarter balances maintained by
large depositors.
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 63.8% and 60.0% as of March 31, 1998
and December 31, 1997, respectively. The increase in this ratio
resulted from the increase in loans and the decrease in the deposit
base. 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 42.9% and 44.5% as of March 31, 1998 and
December 31, 1997, respectively. The decrease of the liquid asset
ratio resulted from a larger decrease in liquid assets than the
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 $8.9 million as of March 31,
1998. Liquidity can also be obtained through federal funds purchased
from correspondent banks and/or direct borrowings from the Federal
Reserve Bank. The Company has established Federal Funds borrowing
lines with various banks up to $3.0 million. The Company has yet to
use these facilities. The Company is currently negotiating with an
additional borrowing source.
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 general areas in which the Bank has directed virtually all
of its lending activities are (a) real estate loans, (b) commercial
loans, and (c) loans to individuals. These three categories accounted
for 57.9%, 33.9%, and 8.1%, respectively, of the Bank's loan portfolio
as of March 31, 1998. 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. Commercial real
estate loans are originated for terms of up to 25 years.
Variable interest rate loans comprise 71% of the loan portfolio as
of March 31, 1998.
The Bank had standby letters of credit of $0.5 million and
commitments to extend credit of $23.0 million as of March 31, 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:
Mar 31 Dec 31
1998 1997
(dollars in thousands)
Dollars
Real estate
Commercial $ 81,334 $ 78,534
Construction 236 118
Commercial and industrial 47,814 44,301
Loans to individuals 11,352 10,586
Other 189 122
Total 140,925 133,661
Unearned net loan fees and premiums (996) (891)
Allowance for credit losses (1,553) (1,581)
Total, net $138,376 $131,189
Percentages
Real estate
Commercial 57.7% 58.8%
Construction 0.2 0.1
Commercial and industrial 33.9 33.1
Loans to individuals 8.1 7.9
Other 0.1 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 loan 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:
Mar 31 Dec 31
1998 1997
(dollars in thousands)
Loans on nonaccrual status $2,636 $2,447
Loans past due 90 days or more and
still accruing interest 7 660
Total $2,643 $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 $840,000.
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 March 31, 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
months ended and as of March 31:
1998 1997
(dollars in thousands)
Average gross loans $138,391 $131,077
Total gross loans at end of period $140,925 $133,661
Allowance for credit losses:
Balance, beginning of period $1,581 $1,369
Charge-offs (40) (3)
Recoveries 12 13
Net (charge-offs) recoveries (28) 10
Provisions charged to operations - 35
Balance, end of period $1,553 $1,414
Net (charge-offs) recoveries during the period to
average gross loans outstanding during year (0.02%) 0.01%
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. 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 sells such excess funds as federal funds sold to other financial
institutions.
The Bank's deposits are attracted primarily from individuals and
commercial enterprises. The Bank also attracts some deposits from
municipalities and other government agencies. The Bank does not have
foreign deposits, brokered deposits or variable rate fixed-term
deposits. The Bank does not expect to obtain future deposits through
the use of brokered deposits. The Bank had noninterest-bearing demand
deposits of $85.0 million, interest-bearing NOW and money market
deposit accounts of $94.8 million, time deposits of $24.6 million, and
savings accounts of $12.4 million as of March 31, 1998.
The Company had interest-bearing deposits of 60.8% of total deposits
as of both March 31, 1998 and December 31, 1997. While the Bank does
not experience material repeated seasonal fluctuations in deposit
levels, the Bank's relative growth in deposits and loans may be
affected by seasonal and economic changes, which, in turn, may impact
liquidity. Management believes it has sufficient liquidity to meet
loan commitments and deposit demands.
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 three months ended March 31 and for
the year ended December 31:
MMDA Total
Demand and NOW Saving Time Deposits
(dollars in thousands)
March 31, 1998
Average balance $82,673 $90,250 $11,750 $23,353 $208,026
Percent of total 39.7% 43.4% 5.7% 11.2% 100.0%
Average interest rate paid 0.0% 2.3% 2.0% 5.0% 1.7%
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 March
31, 1998.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
March 31, 1998
Total capital
(to risk-weighted assets) $22,513 13.4% $13,428 8.0% $16,785 10.0%
Tier 1 capital
(to risk-weighted assets) 20,957 12.5% 6,714 4.0% 10,071 6.0%
Tier 1 capital
(to average assets) 20,957 9.1% 9,247 4.0% 11,559 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 March 31, 1998. The
most recent notification from the Office of the Comptroller of the
Currency categorized the Bank as "well capitalized" as of June 30, 1997
under the regulatory framework for prompt corrective action.
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 March 31, 1998:
After one
Due within Due within but within After
0-3 months 4-12 months five years five years
(dollars in thousands)
Interest-earning assets (1) $158,963 $ 4,586 $25,065 $18,881
Interest-bearing liabilities 124,665 5,685 1,400 -
Repricing gap 34,298 (1,099) 23,665 18,881
Cumulative repricing gap $ 34,298 $33,199 $56,864 $75,745
Cumulative gap as a
percent of earning assets 16.5% 16.0% 27.4% 36.5%
(1) Includes collateralized mortgage obligations in the one-year to
five-year maturities based on the average expected lives.
The Company had $156.0 million of interest-earning assets and $103.1
million of interest-bearing demand and savings deposits as of March 31,
1998 that are able to reprice overnight.
The Company had available-for-sale securities of $6.1 million
recorded at market value as of March 31, 1998. The available-for-sale
securities consist of U.S. government agency medium-term notes. The
Company also had held-to-maturity securities at amortized cost of $7.7
million as of March 31, 1998. The held-to-maturity securities are
collateralized mortgage obligations that may be repaid without
penalties. The value of these securities is subject to fluctuation
based upon current 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
None
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: MAY 4, 1998
Kenneth J. Cosgrove, President
and Chief Executive Officer
By: /s/ ROBERT W. CREIGHTON Date: MAY 4, 1998
Robert W. Creighton, Secretary
and Chief Financial Officer
By: /s/ JERRO M. OTSUKI Date: MAY 4, 1998
Jerro M. Otsuki, Vice President
and Controller
10
6
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