<PAGE>
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, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from.......................................
to.............................................
Commission File No. 33-8743
ORANGE NATIONAL BANCORP
(Exact Name of Registrant as Specified in Charter)
1201 East Katella Avenue
Orange, California 92867
California (714) 771-4000 33-0190684
(State of Incorporation) (Address and Telephone Number (I.R.S. Employer
of Principal Executive Offices) Identification No.)
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 2,000,171 shares of common stock outstanding as of
April 28, 1999.
<PAGE>
<TABLE>
ORANGE NATIONAL BANCORP
QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 1999
TABLE OF CONTENTS
<S> <C>
PART I . FINANCIAL STATEMENTS
Item 1. Financial statements
Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998 3
Consolidated Statements of Earnings for the
Three Months Ended March 31, 1999 and 1998 (unaudited) 4
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 1999 and 1998 (unaudited) 5
Consolidated Statements of Stockholders' Equity for the
Three Months Ended March 31, 1999 and 1998 (unaudited) 6
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 (unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
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
</TABLE>
<PAGE>
<TABLE>
ORANGE NATIONAL BANCORP
CONSOLIDATED BALANCE SHEETS
March 31, 1999 (unaudited) and December 31, 1998
<CAPTION>
Mar 31 Dec 31
1999 1998
(unaudited) (audited)
(dollars in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents $ 54,986 $ 74,931
Securities
Held-to-maturity securities (fair value
of $15,933 in 1999 and $17,691 in 1998) 15,901 17,640
Available-for-sale securities 52,270 40,649
Loans, net of allowance for credit losses
of $1,596 in 1999 and $1,524 in 1998 143,112 140,140
Premises and equipment, net 5,503 5,438
Other real estate owned, net 94 -
Accrued interest receivable 1,099 1,212
Cash value of life insurance 5,071 5,021
Other assets 1,018 831
$279,054 $285,862
Liabilities
Deposits $252,960 $260,334
Accrued interest payable and other liabilities 1,939 1,805
Total liabilities 254,899 262,139
Commitments and Contingencies - -
Stockholders' Equity
Common stock, no par value or stated value;
authorized 20,000,000 shares; issued and
outstanding 2,000,171 in 1999
and 1,996,788 in 1998 8,081 8,036
Retained earnings 16,170 15,718
Unrealized (loss) on
available-for-sale securities, net (96) (31)
Total stockholders' equity 24,155 23,723
$279,054 $285,862
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended March 31, 1999 and 1998 (unaudited)
<CAPTION>
1999 1998
(in thousands,
except per share data)
<S> <C> <C>
Interest Income
Loans $3,297 $3,345
Securities 910 245
Federal funds sold 457 569
Total interest income 4,664 4,159
Interest Expense, deposits 1,033 881
Net interest income 3,631 3,278
Provision for Credit Losses 70 -
Net interest income after
provision for credit losses 3,561 3,278
Other Income 706 871
Other Expenses 3,031 3,093
Earnings before income taxes 1,236 1,056
Provision for Income Taxes 484 396
Net earnings $ 752 $ 660
Basic earnings per share $ 0.38 $ 0.33
Weighted average number of common shares
outstanding (in thousands) 1,999 1,976
Diluted earnings per share $ 0.37 $ 0.32
Weighted average number of common shares outstanding
and diluted potential common shares (in thousands) 2,040 2,043
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, 1999 and 1998 (unaudited)
<CAPTION>
1999 1998
(dollars in thousands)
<S> <C> <C>
Net earnings $752 $660
Other comprehensive income:
Unrealized gains (losses) on
available-for-sale securities (120) (1)
Reclassification adjustment
for losses included in net earnings - -
Reclassification adjustment
for losses included in net earnings
for securities transferred 8 8
Other comprehensive income (loss)
before income taxes (112) 7
Provision for income taxes 47 (3)
Other comprehensive income (loss) (65) 4
Comprehensive income $687 $664
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three Months Ended March 31, 1999 and 1998 (unaudited)
<CAPTION>
Accumulated
ted
Other
Comprehensive
Common Stock Retained Income
Shares Amount Earnings (Loss) Total
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
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
Other comprehensive income - - - 4 4
Balance, March 31, 1998 1,988 $7,970 $13,746 $(52) $21,664
Balance, December 31, 1998 1,997 $8,036 $15,718 $(31) $23,723
Net earnings - - 752 - 752
Cash dividend paid
($.15 per share) - - (300) - (300)
Exercise of stock options 3 45 - - 45
Other comprehensive income - - - (65) (65)
Balance, March 31, 1999 2,000 $8,081 $16,170 $(96) $24,155
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
ORANGE NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 and 1998 (unaudited)
<CAPTION>
1999 1998
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net earnings $ 752 $ 660
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 154 114
Provision for credit losses 70 -
(Gain) on sale of loans (50) (174)
Proceeds from loan sales 1,033 2,571
Origination of loans held for sale (983) (2,397)
(Increase) decrease in other assets (14) 28
Gain on cash value of life insurance (60) (59)
Increase in other liabilities 140 141
Net cash provided by operating activities 1,042 884
Cash Flows from Investing Activities
Proceeds from maturities of
held-to-maturity securities 1,739 1,386
Proceeds from maturities of
available-for-sale securities 9,303 3,001
Purchases of available-for-sale securities (21,045) -
Net increase in loans made to customers (3,137) (7,188)
Proceeds from sale of other real estate owned - 126
Purchases of bank premises and equipment (218) (459)
Net cash (used in) investing activities (13,358) (3,134)
Cash Flows from Financing Activities
Net (decrease) in deposits (7,374) (1,964)
Proceeds from exercise of stock options 45 106
Dividends paid (300) (692)
Net cash (used in) financing activities (7,629) (2,550)
(Decrease) in cash and cash equivalents (19,945) (4,800)
Cash and cash equivalents at beginning of period 74,931 81,147
Cash and cash equivalents at end of period $54,986 $76,347
Supplemental Cash Flow Information
Cash payments for:
Interest $1,048 $875
Income taxes $ - $150
Non-cash investing activities:
Loans to finance the sale of other real estate owned $ - $ -
Loans foreclosed on by the Company $ 94 $ -
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
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, 1999, and
the related consolidated statements (unaudited) of earnings,
comprehensive income, stockholders' equity and cash flows for the three
months ended March 31, 1999 and 1998, 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, 1999.
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, 1998, annual report on Form 10-K. The operating
results for the three months ended March 31, 1999, are not necessarily
indicative of the operating results for all of 1999.
Note 2. Other income and expense
<TABLE>
Other income for the three months ended March 31 consisted of the
following:
<CAPTION>
1999 1998
(dollars in thousands)
<S> <C> <C>
Service charges on deposit accounts $363 $384
Fees for other customer services 194 199
Gain on sale of loans 50 174
Increase in cash value of life insurance 60 59
Other 39 55
$706 $871
Other expense for the three months ended March 31 consisted of the
following:
Salaries, wages and employee benefits $1,526 $1,520
Occupancy expense 315 345
Data processing expense 249 230
Furniture and equipment expense 196 172
Promotion expense 128 185
Legal and professional services 196 233
Stationery and supplies 51 68
Telephone and postage 115 126
Other real estate owned - 6
Other 255 208
$3,031 $3,093
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
Certain statements in this filing, including without limitation
statements containing the words "believes," "anticipates," "intends,"
"expects," "proforma," and words of similar import, constitute forward-
looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company to be
materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Such factors include, among other, the following: general economic
conditions in the Company's market areas; variances in interest rates;
changes in or amendments to regulatory authorities' capital
requirements or other regulations applicable to the Company; increased
competition for loans and deposits; and other factors referred to
elsewhere in this filing. Given these uncertainties, shareholders are
cautioned not to place undue reliance on forward-looking statements.
The Company disclaims any obligation to update such factors which are
not considered to be material or to publicly announce the result of any
revisions to any of the forward-looking statements included herein
which are not considered to be material to reflect future events or
developments.
Results of Operations
Total interest income was $4.7 million in the three months ended
March 31, 1999, an increase of $0.5 million or 12.1% from the $4.2
million in three months ended March 31, 1998. The average interest-
earning assets were $241.3 million in the first quarter of 1999, an
increase of $44.9 million, or 22.9% from the $196.4 million in the
first quarter of 1998. The average yield was 7.7% in the first quarter
of 1999, a decrease of 0.8% from the 8.5% in the first quarter of 1998.
The increase in interest income in the first quarter of 1999 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 both the three months
ended March 31, 1999 and 1998. This resulted although the average size
of the loan portfolio increased and long-term interest rates decreased
during the first quarter of 1999 as compared to the first quarter of
1998. The average loan portfolio was $142.3 million in the first
quarter of 1999, an increase of $4.8 million or 3.5% from the $137.5
million in the first quarter of 1998. The yield on the loan portfolio
was 9.3% in first quarter of 1999, a decrease of 0.4% from the 9.7% in
the first quarter of 1998. The increase in the average size of the
loan portfolio resulted from increased loan fundings throughout 1998
and into the first quarter of 1999. The yield on loans moves with
changes in the prime rate as approximately 65% of the loan portfolio
are based on variable rates.
Interest income on securities was $0.9 million in the three months
ended March 31, 1999, an increase of $0.7 million or 271.4% from the
$0.2 million in the three months ended March 31, 1998. The increase in
interest income on securities in the first quarter of 1999 resulted
from the sharp increase in the average size of the investment
securities portfolio. The average balance of securities was $59.3
million in the first quarter of 1999, an increase of $42.4 million or
251.2% from the $16.9 million in the first quarter of 1998. The yield
on securities was 6.1% in the first quarter of 1999, an increase of
0.3% from the 5.8% in the first quarter of 1998. The increase in the
size and yield of the investment securities portfolio resulted from the
purchase of several higher yielding bonds throughout the latter half of
1998 and into the first quarter of 1999.
Interest income on federal funds sold was $0.5 million in the three
months ended March 31, 1999, a decrease of $0.1 million or 19.7% from
the $0.6 million in the three months ended March 31, 1998. The
decrease in interest income on federal funds sold resulted from a
decrease in the average size of federal funds sold and a lower yield in
the first quarter of 1999. The average balance of federal funds sold
was $39.8 million in the first quarter of 1999, a decrease of $2.2
million or 5.4% from the $42.0 million in the first quarter of 1998.
The yield on federal funds sold was 4.6% in the first quarter of 1999,
a decrease of 0.8% from the 5.4% in the first quarter of 1998. The
decrease in the federal funds sold resulted from excess funds being
invested in investment securities throughout the latter half of 1998
and into the first quarter of 1999.
<PAGE>
Interest expense was $1.0 million in the three months ended March
31, 1999, an increase of $0.1 million or 17.3% from the $0.9 million in
the three months ended March 31, 1998. 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 $155.0 million in the first quarter of 1999, an increase
of $29.7 million or 23.7% from the $125.3 million in the first quarter
of 1998. The average rate paid on interest-bearing deposits was 2.7%
in the first quarter of 1999, a decrease of 0.1% from the 2.8% in the
first quarter of 1998. The increase in the deposit base reflects an
increase in the overall prosperity of the customer base.
The provision for credit losses was $70,000 for the three months
ended March 31, 1999. A provision for credit losses was not deemed
necessary in the three months ended March 31, 1998. The increased
provision for credit losses in the first quarter of 1999 from the first
quarter of 1998 reflects a larger loan portfolio with a higher quality
resulting from an improved local economy in Orange County. The Company
continued to experience recoveries in the first quarter of 1999 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 1999
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 $0.7 million in the three months ended March 31,
1999, a decrease of $0.2 million or 19.0% from the $0.9 million in the
three months ended March 31, 1998. The decrease in other income in the
first quarter of 1999 resulted from decreased gains on lower sales
volume of SBA loans as compared to the first quarter of 1998. The gain
on sale of SBA loans was $0.1 million in the first quarter of 1999, a
decrease of $0.1 million from the $0.2 million in the first quarter of
1998.
Other expenses were $3.0 million in the three months ended March 31,
1999, a decrease of $0.1 million or 2.0% from the $3.1 million in the
three months ended March 31, 1998. The decrease in other expense in
the first quarter of 1999 resulted from lower promotional and
professional costs incurred.
Provision for income taxes was $0.5 million in the three months
ended March 31, 1999, an increase of $0.1 million or 22.2% from the
$0.4 million in the three months ended March 31, 1998. The increase
results from higher pretax earnings in the first quarter of 1999 as
compared to the first quarter of 1998.
Net earnings were $752,000 in the three months ended March 31, 1999,
an increase of $92,000 or 13.9% from the $660,000 in the three months
ended March 31, 1998.
Financial Condition
The Company experienced a slight decrease in assets during the three
months ended March 31, 1999. Total assets were $279.1 million as of
March 31, 1999, a decrease of $6.8 million or 2.4% from the $285.9
million as of December 31, 1998.
Total interest-earning assets were $252.2 million as of March 31,
1999, a decrease of $3.5 million or 1.8% from the $255.7 million as of
December 31, 1998. The decrease resulted from an outflow of federal
funds sold for deposit withdrawals. The Company purchased investment
securities due to favorable interest rate conditions. The Company also
continues to focus its efforts on originating quality loans.
The investment securities portfolio was $68.2 million as of March
31, 1999, an increase of $9.9 million or 17.0% from the $58.3 million
as of December 31, 1998. The increase in the first quarter of 1999
resulted from the continued purchasing of investment securities that
began during the second quarter of 1998. 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. The
market values decreased slightly in the first quarter of 1999 resulting
from a slight increase in short-term and long-term interest rates.
<PAGE>
The loan portfolio was $144.7 million as of March 31, 1999, an
increase of $3.0 million or 2.2% from the $141.7 million as of December
31, 1998. The increase in the first quarter of 1999 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 $253.0 million as of March 31, 1999, a decrease
of $7.3 million or 2.8% from the $260.3 million as of December 31,
1998. The decrease in deposits in the first quarter of 1999 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 56.6% and 53.8% as of March 31, 1999
and December 31, 1998, 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 29.9% and 39.1% as of March 31, 1999 and
December 31, 1998, respectively. The decrease of the liquid asset
ratio resulted from a larger decrease in liquid assets, primarily to
fund the purchase of investment securities, 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 $61.4 million as of March 31,
1999. Liquidity can also be obtained through federal funds purchased
from correspondent banks and/or direct borrowings from the Federal
Reserve Bank. The Company has a Federal Funds borrowing line of $10.0
million. The Company has a borrowing capacity of $14.5 million with
the FHLB.
Management believes the Bank has sufficient liquidity to meet its
loan commitments, deposit withdrawals and operating costs.
<PAGE>
Investment Securities Portfolio
<TABLE>
There are no securities from a single issuer, other than securities
of the U.S. Government, Agencies and corporations, whose aggregate
market value is greater than 10% of stockholders' equity. The Bank
does not invest in derivative financial instruments. The Bank
purchases mortgage-backed securities of investment grade only. The
following schedule presents the Bank's investment securities portfolio:
<CAPTION>
March 31, 1999 December 31, 1998
Amortized Market Amortized Market
Cost Value Cost Value
(dollars in thousands)
<S> <C> <C> <C> <C>
Held-to-maturity
Mortgage-backed securities $15,901 $15,933 $17,640 $17,691
Available-for-sale
U.S. Government Agency Securities $25,050 $25,031 $14,503 $14,512
Mortgage-backed securities 26,426 26,318 25,241 25,226
Other 921 921 911 911
$52,397 $52,270 $40,655 $40,649
Total $68,298 $68,203 $58,295 $58,340
</TABLE>
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 65.3%, 26.9%, and 7.7%, respectively, of the Bank's loan portfolio
as of March 31, 1999. 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 65% of the loan portfolio as
of March 31, 1999.
The Bank had standby letters of credit of $0.5 million and
commitments to extend credit of $24.3 million as of March 31, 1999.
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.
<PAGE>
Loan Portfolio Composition
<TABLE>
The composition of the Bank's loan portfolio (all domestic) is
presented in the following table:
<CAPTION>
Mar 31 Dec 31
1999 1998
(dollars in thousands)
<S> <C> <C>
Dollars
Real estate
Commercial $ 89,660 $ 86,049
Construction 5,512 5,074
Commercial and industrial 39,129 40,217
Loans to individuals 11,178 11,180
Other 201 241
Total 145,680 142,761
Unearned net loan fees and premiums (972) (1,097)
Allowance for credit losses (1,596) (1,524)
Total, net $143,112 $140,140
Percentages
Real estate
Commercial 61.5% 60.3%
Construction 3.8 3.6
Commercial and industrial 26.9 28.2
Loans to individuals 7.7 7.8
Other 0.1 0.1
Total 100.0% 100.0%
</TABLE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Mar 31 Dec 31
1999 1998
(dollars in thousands)
<S> <C> <C>
Loans on nonaccrual status $1,827 $1,631
Loans past due 90 days or more and
still accruing interest 39 76
Total $1,866 $1,707
</TABLE>
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 $857,000.
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, 1999 and December 31, 1998.
<PAGE>
<TABLE>
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:
<CAPTION>
1999 1998
(dollars in thousands)
<S> <C> <C>
Average gross loans $143,307 $138,391
Total gross loans at end of period $145,680 $140,925
Allowance for credit losses:
Balance, beginning of period $1,524 $1,581
Charge-offs (2) (40)
Recoveries 4 12
Net (charge-offs) recoveries 2 (28)
Provisions charged to operations 70 -
Balance, end of period $1,596 $1,553
Net (charge-offs) recoveries during the period to
average gross loans outstanding during year 0.01% (0.02%)
</TABLE>
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 $94.3 million, interest-bearing NOW and money market
deposit accounts of $113.2 million, time deposits of $33.1 million, and
savings accounts of $12.4 million as of March 31, 1999.
<PAGE>
The Company had interest-bearing deposits of 62.7% and 61.7% of
total deposits as of March 31, 1999 and December 31, 1998,
respectively. While the Bank does not experience material repeated
seasonal fluctuations in deposit levels, the Bank's relative growth in
deposits and loans may be affected by seasonal and economic changes,
which, in turn, may impact liquidity. Management believes it has
sufficient liquidity to meet loan commitments and deposit demands.
<TABLE>
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:
<CAPTION>
MMDA Total
Demand and NOW Savings Time Deposits
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
March 31, 1999
Average balance $90,374 $109,125 $12,731 $33,180 $245,410
Percent of total 36.8% 44.5% 5.2% 13.5% 100.0%
Average interest
rate paid 0.0% 2.2% 2.0% 4.4% 1.7%
December 31, 1998
Average balance $84,499 $103,142 $12,186 $28,088 $227,915
Percent of total 37.1% 45.3% 5.3% 12.3% 100.0%
Average interest
rate paid 0.0% 2.4% 2.0% 5.0% 1.8%
</TABLE>
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 debt
securities portfolio. 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, 1999.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
March 31, 1999
Total capital
(to risk-weighted assets) $25,017 13.9% $14,400 8.0% $18,000 10.0%
Tier 1 capital
(to risk-weighted assets) 23,421 13.0% 7,200 4.0% 10,800 6.0%
Tier 1 capital
(to average assets) 23,421 8.7% 11,186 4.0% 13,983 5.0%
December 31, 1998
Total capital
(to risk-weighted assets) $24,484 13.7% $14,314 8.0% $17,893 10.0%
Tier 1 capital
(to risk-weighted assets) 22,960 12.8% 7,157 4.0% 10,736 6.0%
Tier 1 capital
(to average assets) 22,960 8.4% 10,942 4.0% 13,678 5.0%
</TABLE>
Management believes that the Bank is properly and adequately
capitalized, as evidenced by these ratios as of March 31, 1999. 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.
<PAGE>
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 "Year 2000 issue" results from the fact that many computer
programs use only two digits to represent a year, such as "98" to
represent "1998," which means that in the Year 2000 such programs could
incorrectly treat the Year 2000 as the year 1900. This issue has grown
in importance as the use of computers and microchips has become more
pervasive throughout the economy, and interdependencies between systems
have multiplied. The issue must be recognized as a business problem,
rather than simply a computer problem, because of the way its effects
could ripple through the economy. The Year 2000 issue could materially
and adversely affect the Company either directly or indirectly. This
could happen if any of its critical computer systems or equipment
containing embedded logic fail, if the local infrastructure (electric
power, phone system, or water system) fails, if its significant vendors
are adversely impacted, or if its borrowers or depositors are adversely
impacted by their internal systems or those of their customers or
suppliers. Failure of the Company to complete testing and renovation
of its critical systems on a timely basis could have a material adverse
effect on the Company's financial condition and results of operations,
as could Year 2000 problems faced by others with whom the Company does
business.
Federal banking regulators have responsibility for supervision and
examination of banks to determine whether each institution has an
effective plan for identifying, renovating, testing and implementing
solutions for Year 2000 processing and coordinating Year 2000
processing capabilities with its customers, vendors and payment system
partners. Bank examiners are also required to assess the soundness of
a bank's internal controls and to identify whether further corrective
action may be necessary to assure an appropriate level of attention to
Year 2000 processing capabilities.
The Company has a written plan to address its risks associated with
the impact of the Year 2000. The plan directs the Company's Year 2000
compliance efforts under the framework of a five-step program mandated
by the Federal Financial Institutions Examination Council ("FFIEC").
The FFIEC's five-step program consists of five phases: awareness,
assessment, renovation, validation and implementation. In the
awareness phase, which the Company has completed, the Year 2000 problem
is defined and executive level support for the necessary resources to
prepare the Company for Year 2000 compliance is obtained. In the
assessment phase, which the Company has also completed, the size and
complexity of the problem and details of the effort necessary to
address the Year 2000 issues are assessed. Although the awareness and
assessment phases are completed, the Company continues to evaluate new
issues as they arise. In the renovation phase, which the Company has
substantially completed, the required incremental changes to hardware
and software components are installed. In the validation phase, which
the Company has also substantially completed the initial phase, the
hardware and software components are tested. In the implementation
phase, changes to hardware and components are brought on line and re-
testing of such changes are completed. The implementation phase is
currently 80% complete, with an expected completion in April 1999.
<PAGE>
The Company is using both internal and external resources to
identify, correct or reprogram, and test its systems for Year 2000
compliance. The Company has identified 25 vendor or software
applications which management believes are material to its operations.
Based on information received from its vendors and testing results, the
Company believes that substantially all material applications of its
operations are Year 2000 compliant as of March 31, 1999. The Company
has not identified any material applications that the Company does not
believe are fully Year 2000 compliant as of March 31, 1999.
The Company is also making efforts to ensure that its customers,
particularly its significant customers, are aware of the Year 2000
problem. The Company has either sent Year 2000 correspondence to, or
met personally with its significant deposit and loan customers. A
customer of the Company is deemed significant if the customer possesses
either of the following characteristics: (1) total indebtedness to the
Company of $500,000 or more, or (2) an average ledger deposit balance
greater than $500,000.
The Company has amended its credit authorization documentation to
include consideration of the Year 2000 problem. The Company assesses
its significant customer's Year 2000 readiness and assigns the customer
an assessment of "low," "medium" or "high" risk. Risk evaluation of
the Company's significant customers was completed in September 1998.
The Company evaluates any depositor or lending customer determined to
have a high or medium risk on an ongoing basis. Currently, 2% of loan
customers are considered high risk and are being monitored closely for
progress. Substantially all deposit customers are either low risk or
compliant, the exception being those loan customers considered high
risk.
It is impossible to quantify the total potential cost of Year 2000
problems or to determine the Company's worst-case scenario in the event
the Company's Year 2000 remediation efforts or the efforts of those
with whom it does business are not successful, due to the wide range of
possible issues and large number of variables involved. In order to
deal with the uncertainty associated with the Year 2000 problem, the
Company has developed a contingency plan to address the possibility
that efforts to mitigate the Year 2000 risk are not successful either
in whole or part. These plans include but are not limited to manual
processing of information for critical information technology systems
and having increased cash on hand. The contingency plan will be
validated, after which the appropriate implementation training will be
scheduled.
The Company incurred and expensed $0.1 million of Year 2000 costs
through March 31, 1999. These Year 2000-related costs have been funded
from the continuing operations of the Company. These costs were
approximately 7% of the Company's information systems budget. The
Company currently estimates its costs to complete its Year 2000
compliance at approximately $0.3 million. This estimate includes the
cost of purchasing hardware and software licenses, the cost of the time
of internal staff and the cost of consultants. Testing is not expected
to add significant incremental costs.
Current Accounting Developments
In June 1998, FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company does not invest in derivative
instruments nor engage in hedging activities.
Management does not believe the application of the Statement to
transactions of the Bank that have been typical in the past will
materially affect the Bank's financial position and results of
operations.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
The Company uses asset liability management on its balance sheet to
minimize the exposure of interest rate movements on its net interest
income. The principal function of asset liability management is to
manage the interest rate risk in the balance sheet by maintaining a
proper balance, match and mix between rate-sensitive interest-earning
assets and rate-sensitive interest-bearing liabilities. The term
"rate-sensitive" refers to those assets and liabilities that are
"sensitive" to fluctuations in interest rates. When interest rates
fluctuate, earnings may be affected in many ways as the interest rates
of assets and liabilities change at different times or by different
amounts.
The Company minimizes its interest rate risk in the balance sheet by
emphasizing the origination of variable interest rate loans that have
the ability to reprice overnight and maintaining a high 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.
<TABLE>
The following table presents the repricing periods for interest-
earning assets and interest-bearing liabilities and the related
repricing gaps as of March 31, 1999:
<CAPTION>
After one
Due within Due within but within After
0-3 months 4-12 months five years five years
(dollars in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets (1) $133,978 $22,197 $65,987 $31,818
Interest-bearing liabilities 149,048 8,315 1,374 -
Repricing gap (15,070) 13,882 64,613 31,818
Cumulative repricing gap $(15,070) $(1,188) $63,425 $95,243
Cumulative gap as a
percent of earning assets (5.9)% (0.5)% 25.0% 37.5%
<FN>
(1) Includes collateralized mortgage obligations in the one-year to
five-year maturities based on the average expected lives.
</FN>
</TABLE>
The Company had $130.0 million of interest-earning assets and $125.7
million of interest-bearing demand and savings deposits as of March 31,
1999 that are able to reprice overnight.
The estimated effect on net interest income for a 10% decrease from
prevailing interest rates over a one-year period would be a decline of
approximately $0.9 million.
<PAGE>
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
<PAGE>
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: APRIL 29, 1999
Kenneth J. Cosgrove, President
and Chief Executive Officer
By: /s/ ROBERT W. CREIGHTON Date: APRIL 28, 1999
Robert W. Creighton, Secretary
and Chief Financial Officer
By: /s/ JERRO M. OTSUKI Date: APRIL 28, 1999
Jerro M. Otsuki, Vice President
and Controller
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000801443
<NAME> ORANGE NATIONAL BANCORP
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 13886
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 41100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52270
<INVESTMENTS-CARRYING> 15901
<INVESTMENTS-MARKET> 15933
<LOANS> 143112
<ALLOWANCE> 1596
<TOTAL-ASSETS> 279054
<DEPOSITS> 252960
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1939
<LONG-TERM> 0
0
0
<COMMON> 8081
<OTHER-SE> 16074
<TOTAL-LIABILITIES-AND-EQUITY> 279054
<INTEREST-LOAN> 3297
<INTEREST-INVEST> 910
<INTEREST-OTHER> 457
<INTEREST-TOTAL> 4664
<INTEREST-DEPOSIT> 1033
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 3631
<LOAN-LOSSES> 70
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3031
<INCOME-PRETAX> 1236
<INCOME-PRE-EXTRAORDINARY> 1236
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 752
<EPS-PRIMARY> .38
<EPS-DILUTED> .37
<YIELD-ACTUAL> 7.73
<LOANS-NON> 1827
<LOANS-PAST> 0
<LOANS-TROUBLED> 153
<LOANS-PROBLEM> 581
<ALLOWANCE-OPEN> 1524
<CHARGE-OFFS> 2
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 1596
<ALLOWANCE-DOMESTIC> 1596
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
