-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MafE3MoFRS5Ci9y5rN+DYQ3Tq3SAiLsWRWexma8A+9oJMAp/JWXgSAagqiuLpgyP dHwSIi4hENbZp7xtftqYAg== 0000801443-98-000005.txt : 19980803 0000801443-98-000005.hdr.sgml : 19980803 ACCESSION NUMBER: 0000801443-98-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980731 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORANGE NATIONAL BANCORP CENTRAL INDEX KEY: 0000801443 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 330190684 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15365 FILM NUMBER: 98674727 BUSINESS ADDRESS: STREET 1: 1201 E KATELLA AVE CITY: ORANGE STATE: CA ZIP: 92667 BUSINESS PHONE: 7147714000 MAIL ADDRESS: STREET 1: P O BOX 6040 STREET 2: P O BOX 6040 CITY: ORANGE STATE: CA ZIP: 92613-6040 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from....................................... to............................................. Commission File No. 33-8743 ORANGE NATIONAL BANCORP (Exact Name of Registrant as Specified in Charter) 1201 East Katella Avenue Orange, California 92867 California (714) 771-4000 33-0190684 (State of Incorporation) (Address and Telephone Number (I.R.S. Employer of Principal Executive Offices) ID. No.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS The Registrant had 1,993,788 shares of common stock outstanding as of July 27, 1998. ORANGE NATIONAL BANCORP QUARTERLY REPORT ON FORM 10-Q JUNE 30, 1998 TABLE OF CONTENTS PART I . FINANCIAL STATEMENTS Item 1. Financial statements Consolidated Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997 3 Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 1998 and 1997 (unaudited) 4 Consolidated Statements of Comprehensive Income for the Three And Six Months Ended June 30, 1998 and 1997 (unaudited) 5 Consolidated Statements of Stockholders' Equity for the Three Months Ended June 30, 1998 and 1997 (unaudited) 6 Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30, 1998 and 1997 (unaudited) 7 Consolidated Statements of Cash Flows for the Three and Six Months Ended March 31, 1998 and 1997 (unaudited) 8 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submissions of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20 SIGNATURES 21 ORANGE NATIONAL BANCORP CONSOLIDATED BALANCE SHEETS June 30, 1998 (unaudited) and December 31, 1997 Jun 30 Dec 31 1998 1997 (unaudited) (audited) (dollars in thousands) Assets Cash and cash equivalents $ 85,952 $ 81,147 Securities Held-to-maturity securities (fair value of $6,245 in 1998 and $8,972 in 1997) 6,280 9,037 Available-for-sale securities 6,900 9,146 Loans, net of allowance for credit losses of $1,567 in 1998 and $1,581 in 1997 137,360 131,189 Premises and equipment, net 5,657 5,057 Other real estate owned, net 31 126 Accrued interest receivable 951 985 Cash value of life insurance 4,922 4,808 Other assets 1,029 784 $249,082 $242,279 Liabilities Deposits $224,989 $218,792 Accrued interest payable and other liabilities 1,705 1,901 Total liabilities 226,694 220,693 Commitments and Contingencies - - Stockholders' Equity Common stock, no par value or stated value; authorized 20,000,000 shares; issued and outstanding 1,992,763 in 1998 and 1,970,046 in 1997 8,012 7,864 Retained earnings 14,408 13,778 Unrealized (loss) on available-for-sale securities, net (32) (56) Total stockholders' equity 22,388 21,586 $249,082 $242,279 See Notes to Consolidated Financial Statements. ORANGE NATIONAL BANCORP CONSOLIDATED STATEMENTS OF EARNINGS Three and Six Months Ended June 30, 1998 and 1997 (unaudited) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (in thousands, except per share data) Interest Income Loans $3,617 $3,238 $6,962 $6,214 Securities 196 424 441 989 Federal funds sold 790 300 1,359 542 Total interest income 4,603 3,962 8,762 7,745 Interest Expense, deposits 1,033 817 1,915 1,588 Net interest income 3,570 3,145 6,847 6,157 Provision for Credit Losses 20 40 20 75 Net interest income after provision for credit losses 3,550 3,105 6,827 6,082 Other Income 888 1,161 1,760 2,314 Other Expenses 3,004 3,005 6,097 5,994 Earnings before income taxes 1,434 1,261 2,490 2,402 Provision for Income Taxes 573 501 969 953 Net earnings $ 861 $ 760 $1,521 $1,449 Basic earnings per share $ 0.44 $ 0.39 $ 0.77 $ 0.74 Weighted average number of common shares outstanding (in thousands) 1,991 1,961 1,983 1,958 Diluted earnings per share $ 0.42 $ 0.38 $ 0.74 $ 0.73 Weighted average number of common shares outstanding and diluted potential common shares (in thousands) 2,063 1,986 2,053 1,985 See Notes to Consolidated Financial Statements. ORANGE NATIONAL BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three and Six Months Ended June 30, 1998 and 1997 (unaudited) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (dollars in thousands) Net earnings $861 $760 $1,521 $1,449 Other comprehensive income Net change in unrealized gains on available-for-sale securities, net of tax 20 96 24 2 Comprehensive income $881 $856 $1,545 $1,451 See Notes to Consolidated Financial Statements. ORANGE NATIONAL BANCORP CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Three Months Ended June 30, 1998 and 1997 (unaudited) Unrealized Gain (Loss) Available- Common Stock Retained For-Sale Shares Amount Earnings Securities Total (in thousands, except per share data) Balance, March 31, 1998 1,988 $7,970 $13,746 $(52) $21,664 Net earnings - - 861 - 861 Cash dividend paid ($.10 per share) - - (199) - (199) Exercise of stock options 5 42 - - 42 Net change in unrealized (loss) on available-for-sale securities - - - 20 20 Balance, June 30, 1998 1,993 $8,012 $14,408 $(32) $22,388 Balance, March 31, 1997 1,961 $7,751 $11,661 $(217) $19,195 Net earnings - - 760 - 760 Net change in unrealized (loss) on available-for-sale securities - - - 96 96 Balance, June 30, 1997 1,961 $7,751 $12,421 $(121) $20,051 See Notes to Consolidated Financial Statements. ORANGE NATIONAL BANCORP CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Six Months Ended June 30, 1998 and 1997 (unaudited) Unrealized Gain (Loss) Available- Common Stock Retained For-Sale Shares Amount Earnings Securities Total (in thousands, except per share data) Balance, December 31, 1997 1,970 $7,864 $13,778 $(56) $21,586 Net earnings - - 1,521 - 1,521 Cash dividend paid ($.45 per share) - - (891) - (891) Exercise of stock options 23 148 - - 148 Net change in unrealized (loss) on available-for-sale securities - - - 24 24 Balance, June 30, 1998 1,993 $8,012 $14,408 $(32) $22,388 Balance, December 31, 1996 1,953 $7,676 $11,403 $(123) $18,956 Net earnings - - 1,449 - 1,449 Cash dividend paid ($.22 per share) - - (431) - (431) Exercise of stock options 8 75 - - 75 Net change in unrealized (loss) on available-for-sale securities - - - 2 2 Balance, June 30, 1997 1,961 $7,751 $12,421 $(121) $20,051 See Notes to Consolidated Financial Statements. ORANGE NATIONAL BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS Three and Six Months Ended June 30, 1998 and 1997 (unaudited) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (dollars in thousands) Cash Flows from Operating Activities Net earnings $ 861 $ 760 $ 1,521 $ 1,449 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 133 133 247 270 Provision for credit losses 20 40 20 75 (Gain) on sale of loans (211) (383) (385) (791) Proceeds from loan sales 3,211 5,954 5,782 10,059 Origination of loans held for sale (3,000) (5,571) (5,396) (9,268) (Increase) in other assets (233) (53) (206) (101) Gain on cash value of life insurance (75) (55) (135) (101) (Decrease) increase in other liabilities (338) 337 (197) 348 Net cash provided by operating activities 368 1,162 1,251 1,940 Cash Flows from Investing Activities Proceeds from sales and maturities of securities 1,383 10,289 5,770 18,559 Purchase of securities (727) - (727) - Net decrease (increase) in loans 965 (12,803) (6,223) (14,490) Proceeds from sale of other real estate owned - 981 126 1,058 Purchase of life insurance - (885) - (885) Purchases of premises and equipment (388) (144) (847) (270) Net cash provided by (used in) investing activities 1,233 (2,562) (1,901) 3,972 Cash Flows from Financing Activities Net increase (decrease) in deposits 8,161 2,074 6,198 (1,785) Proceeds from exercise of stock options 42 - 148 75 Dividends paid (199) - (891) (431) Net cash provided by (used in) financing activities 8,004 2,074 5,455 (2,141) Increase in cash and cash equivalents 9,605 674 4,805 3,771 Cash and cash equivalents at beginning of period 76,347 49,533 81,147 46,436 Cash and cash equivalents at end of period $85,952 $50,207 $85,952 $50,207 Supplemental Cash Flow Information Cash payments for: Interest $1,036 $835 $1,911 $1,583 Income taxes $ 748 $768 $ 898 $ 843 Non-cash investing activities: Loans to finance the sale of real estate $ - $395 $ - $1,077 Loans foreclosed on by the Company $ 31 $ 71 $ 31 $ 145 See Notes to Consolidated Financial Statements. ORANGE NATIONAL BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation The consolidated financial statements include the accounts of Orange National Bancorp ("Company") and its wholly-owned subsidiary, Orange National Bank ("Bank"). The consolidated balance sheet (unaudited) as of June 30, 1998, and the related consolidated statements (unaudited) of earnings, comprehensive income, stockholders' equity and cash flows for the three and six months ended June 30, 1998 and 1997, have been prepared in accordance with generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary have been made to present fairly the financial position, results of operations and cash flows as of and for the three and six months ended June 30, 1998. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's December 31, 1997, annual report on Form 10-K. The operating results for the three and six months ended June 30, 1998, are not necessarily indicative of the operating results for all of 1998. Note 2. Other income and expense Other income and expense for the three and six months ended June 30 consisted of the following: Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (dollars in thousands) Other income Service charges on deposit accounts $362 $ 400 $ 746 $ 807 Fees for other customer services 208 182 407 354 Gain on sale of loans 211 383 385 791 Increase in cash value of life insurance 75 55 135 101 Other 32 141 87 261 $888 $1,161 $1,760 $2,314 Other expense Salaries, wages and employee benefits $1,477 $1,504 $2,996 $3,016 Occupancy 331 283 676 567 Data processing 237 235 467 459 Furniture and equipment 175 168 347 359 Promotion 171 204 356 404 Legal and professional services 242 197 476 406 Stationery and supplies 85 56 153 114 Telephone and postage 90 104 216 198 Other real estate owned 1 26 6 76 Other 195 228 404 395 $3,004 $3,005 $6,097 $5,994 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This filing contains forward-looking statements, which involve risks and uncertainties. The Company's actual future results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause a difference include, but are not limited to, interest rates, particularly the spread between loan rates and deposit rates, loan demand, deposit withdrawals, the effect of the Southern California economy and real estate values, and other general business risks. Results of Operations Total interest income was $4.6 million in the second quarter of 1998, an increase of $0.6 million or 16.2% from the $4.0 million in the second quarter of 1997. Total interest income was $8.8 million in the first half of 1998, an increase of $1.1 million or 13.1% from the $7.7 million in first half of 1997. The average interest-earning assets were $213.4 million in the second quarter of 1998, an increase of $33.0 million or 18.3% from the $180.4 million in the second quarter of 1997. The average interest-earning assets were $204.9 million in the first half of 1998, an increase of $26.4 million or 14.8% from the $178.5 million in the first half of 1997. The average yield on interest- earning assets was 8.6% in the second quarter of 1998, a decrease of 0.2% from the 8.8% in the second quarter of 1997. The average yield on interest-earning assets was 8.6% in the first half of 1998, a decrease of 0.1% from the 8.7% in the first half of 1997. The increase in interest income in the second quarter and the first half of 1998 as compared to the similar periods in 1997 resulted from a higher level of interest-earning assets in spite of slightly lower interest rates. Interest income on loans was $3.6 million in the second quarter of 1998, an increase of $0.4 million or 11.7% from the $3.2 million in the second quarter of 1997. Interest income on loans was $7.0 million in the first half of 1998, an increase of $0.8 million or 12.0% from the $6.2 million in the first half of 1997. The increase in interest income on loans in the second quarter and first half of 1998 as compared to the similar periods in 1997 resulted from (1) the increase in the average size of the loan portfolio, (2) the slightly lower long- term interest rates during 1998, and (3) the payoff and full collection of all past-due principal and delinquent interest of a nonaccrual loan in 1998. The average size of the loan portfolio was $141.5 million in the second quarter of 1998, an increase of $11.3 million or 8.7% from the $130.2 million in the second quarter of 1997. The average size of the loan portfolio was $139.5 million in the first half of 1998, an increase of $14.0 million or 11.1% from the $125.5 million in the first half of 1997. The yield on the loan portfolio was 10.2% in the second quarter of 1998, an increase of 0.2% from the 10.0% in the second quarter of 1997. The yield on the loan portfolio was 10.0% in the first half of 1998, an increase of 0.1% from the 9.9% in the first half of 1997. The increase in the average size of the loan portfolio resulted from sustained loan fundings throughout 1997 and the first six months of 1998. The yield on loans moves with changes in the prime rate as approximately 70% of the loan portfolio are based on variable rates. Interest income on securities was $0.2 million in the second quarter of 1998, a decrease of $0.2 million or 53.8% from the $0.4 million in the second quarter of 1997. Interest income on securities was $0.4 million in the first half of 1998, a decrease of $0.6 million or 55.4% from the $1.0 million in the first half of 1997. The decrease in interest income on securities in the second quarter and first half of 1998 as compared to the similar periods in 1997 resulted from the decrease in the average size of the investment securities portfolio. The average securities portfolio was $13.4 million in the second quarter of 1998, a decrease of $14.6 million or 52.2% from the $28.0 million in the second quarter of 1997. The average securities portfolio was $15.1 million in the first half of 1998, a decrease of $17.3 million or 53.3% from the $32.4 million in the first half of 1997. The yield on securities was 5.9% in the second quarter of 1998, a decrease of 0.2% from the 6.1% in the second quarter of 1997. The yield on securities was 5.8% in the first half of 1998, a decrease of 0.3% from the 6.1% in the first half of 1997. The decrease in the size and yield of the investment securities portfolio resulted from several higher yielding bonds being called throughout 1997 and the first six months of 1998. Interest income on federal funds sold was $0.8 million in the second quarter of 1998, an increase of $0.5 million or 163.3% from the $0.3 million in the second quarter of 1997. Interest income on federal funds sold was $1.4 million in the first half of 1998, an increase of $0.9 million or 150.7% from the $0.5 million in the first half of 1997. The increase in interest income on federal funds sold during the first half of 1998 as compared to the similar period of 1997 resulted from the large increase in the average size of federal funds sold and a higher yield in 1998. The average balance of federal funds sold was $58.5 million in the second quarter of 1998, an increase of $36.4 million or 164.2% from the $22.1 million in the second quarter of 1997. The average balance of federal funds sold was $50.3 million in the first half of 1998, an increase of $29.7 million or 144.2% from the $20.6 million in the first half of 1997. The yield on federal funds sold was 5.4% in the second quarter of both 1998 and 1997. The yield on federal funds sold was 5.4% in the first half of 1998, an increase of 0.1% from the 5.3% in the first half of 1997. The increase in the federal funds sold resulted from excess funds not being invested in investment securities throughout 1997 and into the first half of 1998 due to the extremely flat yield curve. Interest expense was $1.0 million in the second quarter of 1998, an increase of $0.2 million or 26.4% from the $0.8 million in the second quarter of 1997. Interest expense was $1.9 million in the first half of 1998, an increase of $0.3 million or 20.7% from the $1.6 million in the first half of 1997. The increase in interest expense resulted from a larger average interest-bearing deposit base, particularly the certificates of deposit, and a slight increase in deposit rates. The average interest-bearing deposits were $138.9 million in the second quarter of 1998, an increase of $16.1 million or 13.1% from the $122.8 million in the second quarter of 1997. The average interest-bearing deposits were $132.2 million in the first half of 1998, an increase of $11.7 million or 9.7% from the $120.5 million in the first half of 1997. The average rate paid on interest-bearing deposits was 3.0% in the second quarter of 1998, an increase of 0.3% over the 2.7% in the second quarter of 1997. The average rate paid on interest-bearing deposits was 2.9% in the first half of 1998, an increase of 0.3% from the 2.6% in the first half of 1997. The increase in the deposit base reflects an overall prosperity of the customer base resulting from an improved economy. The provision for credit losses was $20,000 in the second quarter of 1998, a decrease of $20,000 from the $40,000 in the second quarter of 1997. The provision for loan losses was $20,000 in the first half of 1998, an increase of $55,000 from the $75,000 in the first half of 1997. The decrease in the provision for credit losses during the first half of 1998 as compared to the first half of 1997 reflects a higher quality loan portfolio resulting from an improved local economy in Orange County. The Company continued to experience recoveries in the first half of 1998 on amounts previously charged-off. These recoveries offset the need for additional provision. Management believes that the current allowance for credit losses is adequate to provide for potential losses in the portfolio. The current local economic outlook is promising for the remainder of 1998. However, an assurance cannot be made as to its realization and, accordingly, future provisions for credit losses cannot be estimated at this time. While management is optimistic about the future, the effects of current economic conditions on the collectibility of loans cannot be predicted with absolute certainty and its effects on future profitability cannot be determined. Other income was $0.9 million in the second quarter of 1998, a decrease of $0.3 million or 23.5% from the $1.2 million in the second quarter of 1997. Other income was $1.8 million in the first half of 1998, a decrease of $0.5 million or 24.0% from the $2.3 million in the first half of 1997. The decrease in other income during the first half of 1998 primarily resulted from decreased gains on lower volume of SBA loans sold as compared to the similar period of 1997. The gain on sale of SBA loans was $0.2 million in the second quarter of 1998, a decrease of $0.2 million or 44.8% from the $0.4 million in the second quarter of 1997. The gain on sale of SBA loans was $0.4 million in the first half of 1998, a decrease of $0.4 million or 51.3% from the $0.8 million in the first half of 1997. Other expenses were $3.0 million in the second quarter of both 1998 and 1997. Other expenses were $6.1 million in the first half of 1998, an increase of $0.1 million or 1.7% from the $6.0 million in the first half of 1997. The increase in other expense in the first six months of 1998 resulted from the relocation costs associated with moving a branch office and consolidating several administrative offices. The provision for income taxes was $0.6 million in the second quarter of 1998, an increase of $0.1 million or 14.4% from the $0.5 million in the second quarter of 1997. The provision for income taxes was $1.0 million in the first half of both 1998 and 1997. The increase in the provision for income taxes in the second quarter of 1998 results from larger pretax earnings in the second quarter of 1998 as compared to the second quarter of 1997. Net earnings were $861,000 in the second quarter of 1998, an increase of $101,000 or 13.4% from the $760,000 in the second quarter of 1997. Net earnings were $1,521,000 in the first half of 1998, an increase of $72,000 or 5.0% from the $1,449,000 in the first half of 1997. Financial Condition The Company experienced growth during the six months ended June 30, 1998. Total assets were $249.1 million as of June 30, 1998, an increase of $6.8 million or 2.8% from the $242.3 million as of December 31, 1997. Total interest-earning assets were $213.5 million as of June 30, 1998, an increase of $13.5 million or 6.7% from the $200.0 million as of December 31, 1997. The growth resulted in larger federal funds sold and a larger loan portfolio in spite of a decrease in the securities portfolio. The Company continues to focus its efforts on originating quality loans. The new loans originated in the first six months of 1998 were funded primarily from the maturities of investment securities and increased deposits. The investment securities portfolio was $13.2 million as of June 30, 1998, a decrease of $5.0 million or 27.5% from the $18.2 million as of December 31, 1997. The decrease in the first six months of 1998 resulted from the maturity of investment securities primarily called prior to maturity date. The Company became a member of the Federal Home Loan Bank of San Francisco ("FHLB") during the second quarter of 1998, an investment of $0.7 million. The Company did not purchase any other investment securities throughout 1997 and into the first half of 1998 due to the extremely flat yield curve. Thus, funds that may have been used to purchase investment securities in the past were maintained in federal funds sold. The Company believes securities are the best available investment after its liquidity needs are met through cash, cash due from banks and federal funds sold. Generally, mortgage-backed securities are classified as held-to-maturity and U.S. Government Agency securities are classified as available-for-sale. The market values increased slightly in the first six months of 1998 resulting from a slight decrease in short-term and long-term interest rates. The loan portfolio was $137.4 million as of June 30, 1998, an increase of $6.2 million or 4.7% from the $131.2 million as of December 31, 1997. The increase in the first six months of 1998 resulted from continued loan demand, primarily SBA lending on commercial real estate. The quality of the loan portfolio continues to improve resulting from a healthier Orange County economy. Total deposits were $225.6 million as of June 30, 1998, an increase of $6.8 million or 3.1% from the $218.8 million as of December 31, 1997. The increase in the first six months of 1998 reflects an improving economic climate amongst the large customers of the Bank and the increase in new customers of the Bank. Liquidity The Company maintains substantial liquid and other short-term assets to meet the funding of loan demand, deposit withdrawals and maturities, and operating costs. The Company currently meets its funding needs from its deposit base, and cash flow from operations, loan sales, maturities of investment securities and loan principal reductions. The loan-to-deposit ratio was 60.9% and 60.0% as of June 30, 1998 and December 31, 1997, respectively. The slight increase in this ratio resulted as the loans increased at a higher rate than the deposits. The ratio of liquid assets (cash, cash due from banks, federal funds sold, and investment securities with maturities of one year or less) to demand deposits was 47.7% and 44.5% as of June 30, 1998 and December 31, 1997, respectively. The increase of the liquid asset ratio resulted from a combined increase in liquid assets and a decrease in demand deposits. The Company has a relatively stable and significant base of core deposits. Thus, the Company has not used brokered deposits and avoids using other wholesale, highly rate-sensitive, short-term funds. Other funding sources available to the Company include reduction of its federal funds sold, sale of its available-for-sale securities, increasing deposits, and borrowing from its established credit resources. The Company may borrow funds under securities sold with agreements to repurchase such securities that have not been pledged. The Company had unpledged securities of $8.2 million as of June 30, 1998. The Company established a borrowing capacity of $14.5 million with the FHLB during the second quarter of 1998. The Company would need to pledge certain defined collateral, consisting of loans and/or securities, with the FHLB prior to borrowing. Liquidity can also be obtained through federal funds purchased from correspondent banks and/or direct borrowings from the Federal Reserve Bank. The Company currently has unused Federal Funds borrowing lines of $8.0 million with various banks. Management believes the Bank has sufficient liquidity to meet its loan commitments, deposit withdrawals and operating costs. Loan Portfolio A major part of the Bank's objective is serving the credit needs of customers in Orange County and surrounding areas. Credit decisions are based upon the judgement of the Bank's lending personnel and Loan Committee. The legal lending limit to each customer is restricted to a percentage of the Bank's total capital, the exact percentage depends on the nature of the particular loan and the collateral involved. Credit risk is inherent to any loan portfolio and it is the management of this risk, which defines the quality of the portfolio. The Bank has a policy to obtain collateral for loans under most circumstances. The Bank has a highly diversified portfolio, a solid underwriting process, a loan review program and an active loan service function which management believes serves to minimize the possibility of material loss in the loan portfolio. The three broad categories in which the Bank has directed virtually all of its lending activities are (a) real estate loans, (b) commercial loans, and (c) loans to individuals. These three categories accounted for 57.6%, 33.8%, and 8.3%, respectively, of the Bank's loan portfolio as of June 30, 1998. Commercial real estate loans are originated for terms of up to 25 years. The Bank's commercial loans are primarily funded to small- and medium-sized businesses for terms ranging from 30 days to 5 years. Consumer installment loans are for a maximum term of 48 months on unsecured loans and for a term of the depreciable life of tangible property used as collateral on secured loans. Variable interest rate loans comprise 69.8% of the loan portfolio as of June 30, 1998. The Bank had standby letters of credit of $0.4 million and commitments to extend credit of $22.3 million as of June 30, 1998. The Bank presently has sufficient liquidity to fund all loan commitments. A loan is impaired when it is probable the creditor will be unable to collect all contractual principal and interest payments due in accordance with terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for credit losses. Loan Portfolio Composition The composition of the Bank's loan portfolio (all domestic) is presented in the following table: Jun 30 Dec 31 1998 1997 (dollars in thousands) Dollars Real estate Commercial $ 78,826 $ 78,534 Construction 1,871 118 Commercial and industrial 47,265 44,301 Loans to individuals 11,656 10,586 Other 409 122 Total 140,027 133,661 Unearned net loan fees and premiums (1,100) (891) Allowance for credit losses (1,567) (1,581) Total, net $137,360 $131,189 Percentages Real estate Commercial 56.3% 58.8% Construction 1.3 0.1 Commercial and industrial 33.8 33.1 Loans to individuals 8.3 7.9 Other 0.3 0.1 Total 100.0% 100.0% Credit Risk Management The Bank manages its loan portfolio through a process designed to assure acceptable quality of loans entering the portfolio and to bring any potential losses or potential defaults in existing loans to the attention of the appropriate management personnel. Each lending officer has primary responsibility to conduct credit and documentation reviews of the loans for which he is assigned. The Bank's Senior Vice President and Senior Credit Officer are responsible for general supervision of the loan portfolio and adherence by the loan officers to the loan policies of the Bank. The Bank currently engages an outside consulting firm to periodically review the loan portfolio to provide suggested risk rating of selected loans. Bank management reviews the suggested ratings along with all other available information to properly monitor the loan portfolio, including all loan evaluations made during periodic examinations by the OCC. In accordance with the Bank's loan policies, management presents a written report to the Bank's Board of Directors at its monthly meeting. The Directors review the delinquency report listing of all loans 30 days or more past due and the watch list report including loans having increased credit risk, both delinquency and other factors, over the rest of the portfolio. Additionally, the Directors review a monthly report including all loans originated during the prior month. The Bank maintains an allowance for credit losses to provide for potential losses in the loan portfolio. Additions to the allowance for credit losses are either charged to operations in the form of a provision for possible credit losses, or recovered from loans previously charged-off. All loans that are judged to be uncollectible are charged against the allowance. The allowance for credit losses is maintained at a level determined by management to be adequate, based on the performance of loans in the Bank's portfolio, evaluation of collateral for such loans, the prospects or worth of the prospective borrowers or guarantors, and such other factors which, in the Bank's judgement, deserve consideration in the estimation of possible losses. The allowance for credit losses is established and maintained after analyzing loans identified by management with certain unfavorable features affixing a risk of loss attributable to each loan. An inherent risk of loss in accordance with industry standards and economic conditions is then allocated to specific loan pools and to the remainder of the portfolio on an aggregate basis. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic or other conditions. In addition, the OCC periodically reviews the Company's allowance for credit losses as an integral part of their normal recurring examination process, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations. The following table presents loans on nonaccrual status or contractually past due 90 days or more as to interest or principal payments and still accruing interest: Jun 30 Dec 31 1998 1997 (dollars in thousands) Loans on nonaccrual status $1,574 $2,447 Loans past due 90 days or more and still accruing interest 21 660 Total $1,595 $3,107 Loans are generally placed on nonaccrual status when principal or interest payments are past due 90 days or more. Certain loans are placed on nonaccrual status earlier if there is reasonable doubt as to the collectibility of interest or principal. Loans that are in the renewal process, have sufficient collateral, or are in the process of collection continue to accrue interest. Had the loans on nonaccrual status paid according to their original terms, the gross interest income to date on such loans would have been approximately $618,000. Management does not have knowledge of any additional loans not disclosed in this section as nonaccrual, past due, or troubled debt restructuring that may be potential problem loans. The Bank has no loans to foreign borrowers. The collateral value of certain nonaccrual loans are large enough that management believes all principal and interest will be collected on those loans and therefore do not meet the definition of impaired. A loan is impaired when it is probable the creditor will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are valued primarily at the fair value of the underlying collateral. There were no loan concentrations to individual borrowers exceeding 10% of the total loan portfolio and no other interest-bearing assets that would be required to be in the paragraphs above, if such assets were classified as loans as of June 30, 1998 and December 31, 1997. The following table presents loans outstanding, the activity of the allowance for credit losses, and pertinent ratios during the three and six months ended and as of June 30: Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 (dollars in thousands) Average gross loans $142,564 $130,939 $140,489 $126,300 Total gross loans at end of period $140,027 $136,674 $140,027 $136,674 Allowance for credit losses: Balance, beginning of period $1,553 $1,414 $1,581 $1,369 Charge-offs (16) (2) (56) (5) Recoveries 10 28 22 41 Net (charge-offs) recoveries (6) 26 (34) 36 Provisions charged to operations 20 40 20 75 Balance, end of period $1,567 $1,480 $1,567 $1,480 Net (charge-offs) recoveries during the period to average gross loans outstanding during period (0.00%) 0.02% (0.02%) 0.03% Included in the Bank's allocation of its allowance for credit losses are specific reserves on certain identified loans and general reserves for unknown potential losses. Management classifies loans through its internal loan review system that is supplemented by an independent third party reviewer and review of loans from its regulators. None of these classifications indicate trends or uncertainties, which will materially impact future operating results, liquidity, or capital resources. The allowance provides for the potential adverse effects of current economic conditions. However, the full effects of the economy on the loan portfolio cannot be predicted with any certainty. Any loans which management doubts the ability of borrowers to comply with loan repayment terms are provided for in the allowance. Summary of Deposits Deposits are currently the Bank's sole source of funds. The Bank can obtain additional funds when needed to meet occasional declines in deposits or other short-term liquidity needs through the overnight purchase of federal funds and other borrowing facilities. However, the Bank does not currently use these sources of funds. Generally, the Bank has funds in excess of its needs for deposit withdrawals and other short-term liquidity. The Bank regularly sells such excess funds as federal funds sold to other financial institutions. The Bank's deposits are attracted primarily from commercial enterprises and individuals. The Bank also attracts some deposits from municipalities and other government agencies. The Bank does not have foreign deposits, brokered deposits or variable rate fixed-term deposits, nor does the Bank currently expect to obtain future funding through these types of deposits. The Bank had noninterest-bearing demand deposits of $83.1 million, interest-bearing Negotiable Orders of Withdrawal Accounts ("NOW") and Money Market Deposit Accounts ("MMDA") of $98.6 million, time deposits of $30.7 million, and savings accounts of $12.6 million as of June 30, 1998. The Company had interest-bearing deposits of 63.1% and 60.8% of total deposits as of June 30, 1998 and December 31, 1997, respectively. While the Bank does not experience material seasonal fluctuations in deposit levels, the Bank's relative growth in deposits and loans and level of liquidity may be affected by seasonal and economic changes of its customers. Management believes it has sufficient liquidity to fund loan commitments, deposit demands and operating costs. The following table presents the Bank's average balances of deposits, as a percentage of average total deposits and average interest paid by category for the first six months of 1998 and for the year 1997: MMDA Total Demand and NOW Savings Time Deposits (dollars in thousands) June 30, 1998 Average balance $81,843 $94,524 $11,792 $25,864 $214,023 Percent of total 38.2% 44.2% 5.5% 12.1% 100.0% Average interest rate paid 0.0% 2.4% 2.0% 5.1% 1.8% December 31, 1997 Average balance $76,444 $91,931 $11,485 $19,423 $199,283 Percent of total 38.4% 46.1% 5.8% 9.7% 100.0% Average interest rate paid 0.0% 2.3% 2.0% 5.0% 1.7% Capital Management Capital management requires that sufficient capital be maintained for anticipated growth and to provide depositors assurance that their funds are on deposit with a solvent institution. The Bank is subject to various regulatory capital requirements. The Bank must meet specific capital guidelines that involve certain measurements of the Bank's assets and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification of these assets and certain off-balance sheet items are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Tier 1 capital for the Bank under the regulations is defined as stockholders' equity before any unrealized gains or losses on its available-for-sale securities portfolio, less defined portions of intangible assets. Total capital is defined as Tier 1 capital plus the allowance for credit losses, subject to certain limitations. The table below presents the Bank's actual capital ratios, the minimum capital required for adequacy purposes and to be categorized as "well capitalized" for the capital ratios of total risk-based, Tier 1 risk-based and Tier 1 leverage. The Bank's capital ratios exceeded the "well capitalized" threshold prescribed in the rules of its principal federal regulator as of June 30, 1998. To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio (dollars in thousands) June 30, 1998 Total capital (to risk-weighted assets) $23,107 13.6% $13,593 8.0% $16,991 10.0% Tier 1 capital (to risk-weighted assets) 21,540 12.7% 6,796 4.0% 10,195 6.0% Tier 1 capital (to average assets) 21,540 8.9% 9,728 4.0% 12,159 5.0% December 31, 1997 Total capital (to risk-weighted assets) $22,563 13.9% $12,962 8.0% $16,202 10.0% Tier 1 capital (to risk-weighted assets) 20,982 13.0% 6,481 4.0% 9,721 6.0% Tier 1 capital (to average assets) 20,982 9.0% 9,368 4.0% 11,710 5.0% Management believes that the Bank is properly and adequately capitalized, as evidenced by these ratios as of June 30, 1998. The most recent notification from the Office of the Comptroller of the Currency categorized the Bank as "well capitalized" as of June 30, 1997 under the regulatory framework for prompt corrective action. Interest Rate Sensitivity The Company uses asset liability management on its balance sheet to minimize the exposure of interest rate movements on its net interest income. The principal function of asset liability management is to manage the interest rate risk in the balance sheet by maintaining a proper balance, match and mix between rate-sensitive interest-earning assets and rate-sensitive interest-bearing liabilities. The term "rate-sensitive" refers to those assets and liabilities that are "sensitive" to fluctuations in interest rates. When interest rates fluctuate, earnings may be affected in many ways as the interest rates of assets and liabilities change at different times or by different amounts. The Company minimizes its interest rate risk in the balance sheet by emphasizing the origination of variable interest rate loans that have the ability to reprice overnight and maintaining a high balance of federal funds sold to offset the deposits that may potentially reprice overnight. A repricing gap is the difference between total interest-earning assets and total interest-bearing liabilities available for repricing during a given time interval. A positive repricing gap exists when total interest-earning assets exceed total interest-bearing liabilities within a repricing period and a negative repricing gap exists when total interest-bearing liabilities are in excess of interest-earning assets within a repricing period. Generally, a positive repricing gap increases net interest income in a rising rate environment and decreases net interest income in a falling rate environment. A positive repricing gap may increase net interest income in a falling rate environment depending on the amount of the excess repricing gap and extent of the drop in interest rates. A negative repricing gap tends to increase net interest income in a falling rate environment and decrease net interest income in a rising rate environment. The net interest income of the Company will benefit from a rising rate environment based on the positive repricing gap. The following table presents the repricing periods for interest- earning assets and interest-bearing liabilities and the related repricing gaps as of June 30, 1998: After one Due within Due within but within After 0-3 months 4-12 months five years five years Total (dollars in thousands) Interest-earning assets (1) $160,877 $ 8,025 $26,774 $19,483 $215,159 Interest-bearing liabilities 133,786 5,599 2,497 - 141,882 Repricing gap 27,091 2,426 24,277 19,483 73,277 Cumulative repricing gap $ 27,091 $29,517 $53,794 $73,277 Cumulative gap as a percent of earning assets 12.6% 13.7% 25.0% 34.1% (1) Includes collateralized mortgage obligations in the one-year to five-year maturities based on the average expected lives. The Company had interest-earning assets of $160.4 million and interest-bearing demand and savings deposits of $111.0 million as of June 30, 1998 that are able to reprice overnight. The Company had available-for-sale securities of $6.9 million recorded at market value as of June 30, 1998. The available-for-sale securities consist primarily of U.S. government agency medium-term notes. The Company also had held-to-maturity securities at amortized cost of $6.3 million as of June 30, 1998. The held-to-maturity securities are collateralized mortgage obligations that may be repaid without penalties. The value of these securities is subject to fluctuation based upon current medium-term and long-term interest rates. The estimated effect on net interest income for a 10% decrease from prevailing interest rates over a one-year period would be a decline of approximately $1.0 million. Off-Balance Sheet Analysis The contractual amounts associated with certain financial transactions are not recorded as assets or liabilities on the balance sheet. Off-balance sheet treatment is generally considered appropriate either where exchange of the underlying asset or liability has not occurred or is not assured, or where contractual amounts are used solely to determine cash flows to be exchanged. The Company's off- balance sheet financial instruments consist of commitments to extend credit and standby letters of credit. A majority of these commitments are written with variable interest rates. Impact of Inflation and Changing Prices The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services. In the current interest rate environment, the liquidity and the maturity structure of the Company's assets and liabilities are critical to the maintenance of acceptable performance levels. Year 2000 Issue The Company is currently conducting a comprehensive review of its computer, including third-party vendors, and environmental systems to identify the systems that could be affected by the "Year 2000" issue and is developing an implementation and monitoring plan to resolve the issue. The Year 2000 is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the vendor programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company presently believes that, with modifications to existing vendor software and upgrading to new software packages, the Year 2000 problem will not pose significant operational problems for the Company's computer systems as so modified and converted. The Company is also actively monitoring the Year 2000 progress of its third-party data processing vendor. The Company also believes the costs of these modifications and upgrading will not have a material adverse impact on its results of operations. However, if such modifications and upgrades are not completed timely, the Year 2000 may have a material impact on the operations of the Company. Effect of FASB Statements In June 1997, FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires a publicly-held entity to disclose financial and descriptive information about all of its operating segments. SFAS 131 will require disclosure of net earnings or loss, certain specific revenue and expense items, and assets for each segment presented and disclosure of a reconciliation of this information with the corresponding amounts recognized in the financial statements of the entity. SFAS 131 will also require disclosure of other pertinent segment information, including the products and services provided by its operating segments and the method by which the operating segments were determined. SFAS 131 is effective for years beginning after December 15, 1997 and will require comparative information of earlier years presented to be restated. The Company has not determined if the adoption of SFAS 131 will require it to report segment information. Management does not believe the application of this Statement to transactions of the Company that have been typical in the past will materially affect the Company's financial position and results of operations. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS FOR VOTE OF SECURITIES HOLDERS A. The Annual Meeting of Stockholders was held on May 18, 1998. B. The Stockholders elected the following Directors for a one-year term during the Annual Meeting: Michael W. Abdalla Michael J. Christianson Kenneth J. Cosgrove Robert W. Creighton Charles R. Foulger Gerald R. Holte James E. Mahoney Wayne F. Miller San E. Vaccaro All votes, including those by proxy, resulted in the election of all management nominees. Additionally, there was no solicitation in opposition to management's nominees. C. The Stockholders ratified the appointment of McGladrey & Pullen, LLP as independent public accountants for the Company and its subsidiary Bank for the year 1998 by a vote of 1,157,042 for and none against the ratification during the Annual Meeting. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None Signatures Pursuant to the requirements of Section 13 or 25(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ORANGE NATIONAL BANCORP By: /s/ KENNETH J. COSGROVE Date: JULY 30, 1998 Kenneth J. Cosgrove, President and Chief Executive Officer By: /s/ ROBERT W. CREIGHTON Date: JULY 30, 1998 Robert W. Creighton, Secretary and Chief Financial Officer By: /s/ JERRO M. OTSUKI Date: JULY 30, 1998 Jerro M. Otsuki, Vice President and Controller 10 28 EX-27 2
9 0000801443 ORANGE NATIONAL BANCORP 1000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 22892 0 63060 0 6900 6280 6245 138927 1567 249082 224989 0 1705 0 0 0 8012 14376 249082 6962 441 1359 8762 1915 1915 6847 20 0 6097 2490 2490 0 0 1521 0.77 0.74 8.60 1574 995 395 1008 1581 56 22 1567 1567 0 0
-----END PRIVACY-ENHANCED MESSAGE-----