<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 2-76555
------------------------
ELDORADO BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0720548
(State or other jurisdiction of (I.R.S. Employer or
incorporation or organization) Identification No.)
24012 CALLE DE LA PLATA, SUITE 150,
LAGUNA HILLS, CALIFORNIA 92653
(Address of principal executive offices) (Zip Code)
(949) 699-4344
(Issuer's telephone number)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Common Stock, $.01 par value 9,173,698 shares outstanding on August 14,
1998 (restated to reflect the one-for-two
reverse split effective September 4, 1998)
</TABLE>
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- --------------------------------------------------------------------------------
<PAGE>
ELDORADO BANCSHARES, INC.
U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Part I--Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Condition--June 30, 1998 and December 31, 1997.................... 3
Condensed Consolidated Statements of Operations For the three and six months ended June 30, 1998 and
1997.................................................................................................. 4
Condensed Consolidated Statements of Cash Flows--For the six months ended June 30, 1998 and 1997....... 5
Notes to the Condensed Consolidated Financial Statements............................................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation........................................ 9
Item 3. Qualitative and Quantitative Disclosure about Market Risk........................................ 29
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELDORADO BANCSHARES, INC.
(FORMERLY KNOWN AS COMMERCE SECURITY BANCORP, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ -------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks............................................................... $ 160,245 $ 81,030
Federal funds sold.................................................................... -- 40,000
------------ -------------
Total cash and cash equivalents..................................................... 160,245 121,030
Available-for-sale investment securities.............................................. 61,054 67,295
Mortgage loans held for sale.......................................................... 187,603 96,230
Loans and leases, net of unearned income.............................................. 508,694 519,048
Less allowance for loan and lease loss................................................ (7,820) (9,395)
------------ -------------
Loans, net.......................................................................... 688,477 605,883
Loan and servicing sale receivable.................................................... 4,655 1,247
Premises and equipment, net........................................................... 9,539 11,232
Real estate acquired through foreclosure, net......................................... 1,499 2,740
Intangibles arising from acquisitions, net............................................ 65,078 66,769
Accrued interest receivable and other assets.......................................... 32,763 26,159
------------ -------------
Total assets........................................................................ 1,023,310 902,355
------------ -------------
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand:
Non-interest bearing.............................................................. 256,166 289,344
Interest bearing.................................................................. 99,166 97,416
Savings:
Regular........................................................................... 190,350 98,465
Money market...................................................................... 87,898 98,189
Time:
Under $100,000.................................................................... 141,751 99,713
$100,000 or more.................................................................. 101,271 82,076
------------ -------------
Total deposits.................................................................. 876,602 765,203
Federal funds purchased............................................................... 3,374 2,050
Due to related parties................................................................ 473 --
Accrued expenses and other liabilities................................................ 17,513 12,172
Mandatory convertible debentures...................................................... -- 537
Subordinated debentures............................................................... 27,657 27,657
------------ -------------
Total liabilities............................................................... 925,619 807,619
Shareholders' equity:
Preferred stock, $.01 par value, 1,500,000 shares authorized, 116,593 issued and
outstanding at June 30, 1998...................................................... 11,659 11,659
Special common stock, $.01 par value, 9,651,600 shares authorized, 2,412,859 issued
and outstanding at June 30, 1998.................................................. 24 24
Common stock, $.01 par value, 50,000,000 shares authorized, 6,760,840 issued and
outstanding at a June 30, 1998.................................................... 68 68
Additional paid-in capital.......................................................... 83,946 83,946
Retained earnings................................................................... 3,311 524
Unearned compensation............................................................... (1,258) (1,509)
Accumulated other comprehensive income (loss)....................................... (59) 24
------------ -------------
Total shareholders' equity............................................................ 97,691 94,736
------------ -------------
Total liabilities and shareholders' equity............................................ $1,023,310 $ 902,355
------------ -------------
------------ -------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
ELDORADO BANCSHARES, INC.
(FORMERLY KNOWN AS COMMERCE SECURITY BANCORP, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
3 MONTHS ENDED JUNE 6 MONTHS ENDED JUNE
30, 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Interest and fee income on loans...................................... $ 16,041 $ 8,768 $ 31,253 $ 15,463
Income from lease finance receivables................................. 1,429 988 2,582 2,168
Interest and dividend income on securities............................ 932 1,099 1,919 1,693
Interest income on Federal funds sold................................. 235 425 320 673
--------- --------- --------- ---------
Total interest and fee income....................................... 18,637 11,280 36,074 19,997
Interest on deposits.................................................. 6,437 4,219 11,550 7,372
Interest on Federal funds purchased................................... 211 10 662 107
Interest on subordinated notes........................................ 830 218 1,658 233
--------- --------- --------- ---------
Total interest expense.............................................. 7,478 4,447 13,870 7,712
--------- --------- --------- ---------
Net interest income................................................... 11,159 6,833 22,204 12,285
Provision for loan and lease losses................................... 1,000 308 1,922 715
--------- --------- --------- ---------
Net interest income after provision for loan and lease losses......... 10,159 6,525 20,282 11,570
Service charges on deposit accounts................................... 887 394 1,780 652
Gain on sale of mortgage loans........................................ 4,186 1,595 6,710 3,452
Other non-interest income............................................. 1,666 712 2,871 1,885
--------- --------- --------- ---------
Total non-interest income........................................... 6,739 2,701 11,361 5,989
Salaries and employee benefits........................................ 5,609 3,629 10,457 6,650
Expenses of premises & fixed assets................................... 1,795 1,321 3,504 2,491
Amortization of intangibles........................................... 975 494 1,739 705
Other non-interest expense............................................ 4,818 3,491 8,777 6,246
--------- --------- --------- ---------
Total non-interest expense.......................................... 13,197 8,935 24,477 16,092
--------- --------- --------- ---------
Income before taxes and other......................................... 3,701 291 7,166 1,467
Applicable income taxes............................................... 1,965 170 3,743 912
--------- --------- --------- ---------
Net income............................................................ $ 1,736 $ 121 $ 3,423 $ 555
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income available to common........................................ $ 1,416 $ 36 $ 2,787 $ 470
Earnings per share (basic)............................................ $ 0.16 $ 0.01 $ 0.30 $ 0.08
Earnings per share (dilutive)......................................... $ 0.14 $ 0.01 $ 0.27 $ 0.08
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
ELDORADO BANCSHARES, INC.
(FORMERLY KNOWN AS COMMERCE SECURITY BANCORP, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................................ $ 3,423 $ 555
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Provision for loan and lease losses................................................. 1,922 715
Provision for loss on real estate acquired through foreclosure...................... -- 116
Gain on sale of mortgage loans...................................................... (6,710) (3,452)
(Gain) loss on sale of premises and equipment....................................... -- 16
Loss on sale of real estate owned................................................... 284 29
Depreciation and amortization....................................................... 1,359 540
Amortization of goodwill............................................................ 1,406 705
Accretion/amortization related to securities........................................ (281) 2
Amortization of deferred compensation............................................... 252 --
Provision for deferred taxes........................................................ 2,103 412
Mortgage loans originated for sale.................................................. (754,377) (361,127)
Proceeds from sales of loans and servicing.......................................... 767,791 363,476
Equity in loss of real estate joint venture......................................... -- 306
Decrease (increase) in servicing sale receivable.................................... (3,408) 1,625
Decrease (increase) in loans held for sale.......................................... (91,373) 993
Other, net.......................................................................... (4,035) (1,009)
----------- -----------
Net (used in) provided by operating activities........................................ (81,644) 3,902
INVESTING ACTIVITIES:
Decrease in interest bearing deposits with other financial institutions............... -- 338
Purchase of investment securities..................................................... (43,236) (17,016)
Proceeds from maturities of investment securities..................................... 6,244 --
Proceeds from sales of investment securities.......................................... 43,434 15,707
Loans/Leases originated for portfolio net of principal repayment...................... 139 (5,198)
Purchase of premises and equipment.................................................... (546) (220)
Proceeds from sale of premises and equipment.......................................... 1,211 9
Proceeds from sales of real estate acquired through foreclosure....................... 1,591 2,139
Capital expenditures for other real estate owned...................................... -- (1,405)
Purchase of Eldorado Bank, net of cash received....................................... -- (61,299)
----------- -----------
Net cash (used in) provided by investing activities................................... 8,837 (66,945)
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
ELDORADO BANCSHARES, INC.
(FORMERLY KNOWN AS COMMERCE SECURITY BANCORP, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits.............................................................. 111,399 50,309
Issuance of subordinated debentures................................................... -- 27,657
Issuance of preferred stock preferred stock........................................... -- 11,659
Issuance of common stock.............................................................. -- 18,004
Issuance of special common stock...................................................... -- 23,212
Payment of dividends.................................................................. (636) (85)
Redemption of mandatory convertible debentures........................................ (537) (4,500)
Repayment of notes payable............................................................ (68) --
Proceeds from issuance of notes payable to related parties............................ 540 --
Net increase in other borrowings...................................................... 1,324 8,009
----------- -----------
Net cash provided by financing activities............................................. 112,022 134,265
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS................................................. 39,215 71,222
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................ 121,030 46,222
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.............................................. $ 160,245 $ 117,444
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid for Interest on deposits.................................................. $ 12,432 $ 7,521
Cash paid for Income taxes.......................................................... 1,640 500
Supplemental disclosures of non-cash investing activities:
Real estate acquired through foreclosure............................................ 634 1,379
Supplemental disclosures of non-cash financing activities
Issuance of restricted stock -- 2,012
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. The accompanying
financial information for Eldorado Bancshares, Inc. ("ELBI" or the "registrant")
has been prepared in accordance with the Securities and Exchange Commission
rules and regulations for quarterly reporting and therefore does not necessarily
include all information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles.
The interim financial data is unaudited; however, in the opinion of management,
the interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the interim
periods. Certain reclassifications have been made in the 1997 financial
information to conform to the presentation used in 1998. Results for the period
ending June 30, 1998 are not necessarily indicative of results which may be
expected for any other interim period or for the year as a whole. The
information contained in this report should be read in conjunction with the
Annual Report of ELBI on Form 10-K for the year ended December 31, 1997 and in
particular the footnotes to the audited financial statements included therewith.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Company encounters two significant
types of risk: economic and regulatory. Economic risk is comprised of three
components--interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature and reprice at different speeds, or on a different basis,
than its interest-bearing assets. Credit risk is the risk of default on the
Company's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk results from
changes in the value of assets and liabilities which may impact, favorably or
unfavorably, the realizability of those assets and liabilities.
The Company is subject to the regulations of various governmental agencies.
These regulations can and do change significantly from period to period. The
Company is also subject to periodic examinations by the regulatory agencies,
which may subject it to changes in asset valuations, in amounts of required loss
allowances and in operating restrictions resulting from the regulators'
judgments based on information available to them at the time of their
examination.
EARNINGS PER COMMON SHARE
The actual number of common shares outstanding at June 30, 1998 was
9,173,699. Basic earnings per share is computed by dividing net income less
dividends paid to preferred shareholders by the weighted average number of
common shares outstanding during the period. Dilutive earnings per share is
computed by dividing net income less dividends paid to preferred shareholders
plus the income impact of dilutive securities by the common shares outstanding
plus dilutive common stock equivalents by using the treasury stock method.
At June 30, 1998, the Company had outstanding common stock purchase warrants
entitling the holders to purchase a total of 2,241,216 shares of common stock
and stock options entitling the holder to purchase a total of 494,300 shares if
common stock. Lacking an active market for its shares, the Company assumed a
weighted average per share price in computing the dilutive impact of the
outstanding warrants and options of $16.00 and $9.62 for the three and six
months ended June 30, 1998 and 1997, respectively.
7
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The weighted average number of common shares used to compute basic earnings
per share were 9,173,698 and 6,043,616 for the three months ended June 30, 1998
and 1997, respectively and 9,173,698 and 5,449,466 for the six months ended June
30, 1998 and 1997, respectively. The fully diluted average number of common
shares used to compute dilutive earnings per share were 10,294,675 and 6,043,616
for the three months ended June 30, 1998 and 1997, respectively and 10,294,675
and 5,449,466 for the six months ended June 30, 1998 and 1997, respectively. Net
income was not adjusted in the calculation of dilutive earnings per share.
COMPREHENSIVE INCOME
Effective January 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This statement
requires that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
income by their nature in an annual financial statement. For example, other
comprehensive income may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified, as required. The Company's
total comprehensive income were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income................................................. $ 1,736 $ 121 $ 3,423 $ 555
Other comprehensive income (loss).......................... (109) 160 (83) 152
--------- --------- --------- ---------
Total comprehensive income................................. $ 1,627 $ 281 $ 3,340 $ 707
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
This information should be read in conjunction with the consolidated
financial statements and the notes thereto of Eldorado Bancshares Inc. ("ELBI"
or the "registrant") included in Item 1 of this Quarterly Report and the audited
consolidated financial statements and notes thereto and Management Discussion
and Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1997 contained in the 1997 Annual Report of ELBI on Form 10-K.
Except for the historical information contained herein, the following
discussion contains forward looking statements that involve risks and
uncertainties. ELBI's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not specifically limited to, changes in regulatory climate,
shifts in interest rate environment, change in economic conditions of various
markets ELBI serves, as well as the other risks detailed in this section, and in
the sections entitled Results of Operations, Capital Resources and Liquidity and
Interest Sensitivity, and those discussed in ELBI's Form 10-K for the year ended
December 31, 1997, including without limitation those sections entitled
Supervision and Regulation, Capital Resources and Liquidity.
Prior to September 1995, the predecessor to the Company, SDN Bancorp, Inc.,
owned a single bank, San Dieguito National Bank ("San Dieguito"), with
approximately $56 million in assets that was categorized as "critically
undercapitalized" by federal regulators. In September 1995, the Company was
recapitalized by DCG, a limited partnership controlled by Mr. Keller and a
majority of the other directors of the Company. Between September 1995 and June
30, 1997, the Company acquired three banks - Liberty National Bank ("Liberty"),
Commerce Security Bank ("CSB") and Eldorado Bank - increasing the Company's
tangible assets by $779 million. The Company completed its most recent
acquisition - Eldorado Bancorp and its subsidiary bank Eldorado Bank (the
"Eldorado Acquisition") - in June 1997, which increased the Company's assets by
approximately $404 million. The Liberty acquisition was completed as of March
31, 1996, and the CSB acquisition was completed as of September 1, 1996. Each of
those acquisitions was accounted for using the purchase method of accounting for
business combinations, and therefore the operating results of those banks are
reflected in the Company's financial statements only from the date of
acquisition. Consequently, the period-to-period comparisons in this section are
significantly affected by the timing of those acquisitions.
Within the recent past, CSB, Eldorado Bank, Liberty and San Dieguito were
adversely affected by a variety of factors, including high levels of
nonperforming assets, reliance on high-cost brokered deposits and excessive
overhead costs. The high levels of nonperforming assets and related overhead
costs were partly attributable to adverse economic conditions, including
declining real estate values, that California experienced during the early to
mid-1990s.
Effective June 30, 1997, the Company merged San Dieguito, Liberty, CSB and
Eldorado Bank into a single bank (the "Bank"), which is known as Eldorado Bank.
The Company owns 100% of the Bank, which now is the Company's only banking
subsidiary and its principal asset.
Contained within this document are various measures of financial performance
that have been calculated excluding the amortization of intangibles. These
measures are identified as "excluding goodwill amortization" and have been
provided to assist the reader in evaluating the core performance of the Company.
This presentation is not defined by Generally Accepted Accounting Principles
("GAAP"), but management believes it to be beneficial to gaining an
understanding of the Company's financial performance in comparison to its peer
group.
9
<PAGE>
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
OVERVIEW
To the extent that the following discussion relates to the operating results
of the Company during the six months ended June 30, 1997, it includes the
results of only one month of operations of Eldorado Bank. In most of the
Company's income and expense categories and with respect to the Company's net
income, the increases in the amounts reported for six months ended June 30, 1998
compared to the same period of 1997 resulted from the Eldorado Acquisition.
Other significant factors affecting the Company's results of operations and
financial condition are described in the applicable sections below.
The Company had net income of $3.4 million for the six months ended June 30,
1998 compared to net income of $555,000 for six months ended June 30, 1997.
Basic net income per share for the six months ended June 30, 1998 was $.30
compared to $.08 for the six months ended June 30, 1997, while diluted net
income per share for the six months ended June 30, 1998 was $.27 compared to
$.08 for the six months ended June 30, 1997. Excluding the amortization of
goodwill and other intangibles, basic and diluted earnings per share for the six
months ended June 30, 1998 were $.49 and $.44, respectively, as compared to $.22
and $.22 for the same period of 1997. The Company's return on average assets was
.73% and its return on average common equity was 6.69% for the six months ended
June 30, 1998, as compared to .22% and 2.02%, respectively, for the six months
ended June 30, 1997. Excluding the amortization of goodwill and other
intangibles, return on average assets was 1.10% and return on average common
equity was 10.86% for the six months ended June 30, 1998, as compared to .51%
and 5.06%, respectively, for the six months ended June 30, 1997.
RESULTS OF OPERATIONS
The Company's results of operations depend primarily on the Bank's net
interest income, which is the difference between interest and dividend income on
interest-earning assets and interest expense on interest-bearing liabilities.
The Bank's interest-earning assets consist primarily of loans, mortgage-backed
securities and investment securities, while its interest-bearing liabilities are
deposits and borrowings. The Company's results of operations are also affected
by the Bank's provisions for loan and lease losses, resulting from management's
assessment of the adequacy of the Bank's allowance for loan and lease losses,
the level of its other income, including fee income from the origination of
mortgage loans, the level of its other expenses, such as compensation and
employee benefits, occupancy costs, expenses associated with the administration
of problem assets, and income taxes.
Compared to the prior year results, the improvement in the Company's net
income for the six months ended June 30, 1998 stems primarily from a combination
of increased net interest income of approximately $9.9 million and noninterest
income of approximately $5.4 million, partially offset by an increased loan and
lease loss provision of $1.2 million, noninterest expense of approximately $8.4
million and provision for taxes of $2.8 million. The improvement in 1998
earnings is primarily attributable to the earnings of Eldorado Bank in 1998 that
were not included in earnings for 1997 and partly attributable to an improvement
in earnings related to the Bank's mortgage banking operations.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income was approximately $22.2 million for the six months ended
June 30, 1998, an increase of $9.9 million over the $12.3 million for the same
period in 1997. An increase in interest income to $36.1 million for the six
months ended June 30, 1998 from $20.0 million for the same period in 1997,
partially offset by increased interest expense of $13.9 million for the six
months ended June 30, 1998 from $7.7 million for the same period in 1997
contributed to this earnings improvement. The increase in net interest income in
1998 is primarily attributable to the Eldorado Acquisition.
10
<PAGE>
Loans and leases, the largest component of earning assets, increased to an
average balance of $688.9 million for the six months ended June 30, 1998 from
$349.9 million for the six months ended June 30, 1997, with an average yield of
9.9% and 10.2%, respectively. The increase in the volume of loans and leases was
primarily attributable to the Eldorado Acquisition. Investments in securities
and Federal funds sold declined to an average of $72.2 million for the six
months ended June 30, 1998 from an average of $80.5 million for the six months
ended June 30, 1997, with an average yield of 6.3% and 5.9%, respectively. The
yield on earning assets was 9.6% for the six months ended June 30, 1998 compared
to 9.4% for the same period in 1997, primarily as a result of the increase in
loans and leases as a proportion of total interest- earning assets to 90.5% for
the six months ended June 30, 1998 as compared to 81.3% for the same period in
1997, which more than offset the decline in the average yield on loans and
leases.
Average interest-bearing liabilities increased 83.7% to $594.5 million for
the six months ended June 30, 1998 from $323.7 million for the same period in
1997 primarily as a result of the Eldorado Acquisition. The cost of these funds
decreased to 4.7% for the six months ended June 30, 1998 compared to 4.8% for
the same period in 1997. Average interest-bearing deposits increased to $544.0
million for the six months ended June 30, 1998 from $315.8 million for the same
period in 1997. The average rate paid on these deposits decreased to 4.3% during
the six months ended June 30, 1998 compared to 4.7% during the same period in
1997. The decrease in the cost of deposits is attributable to a decrease in
rates paid on certificates of deposit that decreased to 5.1% for the six months
ended June 30, 1998 compared to 5.7% for the same period in 1997, and a decrease
in rates paid on interest bearing transaction accounts and savings accounts that
in the aggregate was 3.8% for the six months ended June 30, 1998 compared to
3.9% for the same period in 1997. The decrease in the cost of deposits also
reflects a change in the mix of deposit liabilities as a result of the Eldorado
Acquisition, with increases in average interest bearing demand deposits and
money market deposits of 156.1% and 147.3%, respectively, compared to the same
period of 1997.
The average balance for all borrowings increased to $50.4 million for the
six months ended June 30, 1998 from $7.9 million for the same period in 1997.
The average cost of these borrowings was 9.3% for the six months ended June 30,
1998 compared to 8.7% for the same period in 1997. The increase in the average
balance and cost of borrowings is attributable to Federal funds purchased and
the subordinated debentures issued to fund a portion of the Eldorado
Acquisition. Federal funds purchased averaged $22.2 million with an average rate
of 5.9% for the six months ended June 30, 1998 compared to $3.7 million with an
average rate of 5.9% for the same period in 1997. Other debt, including the
subordinated debentures, averaged $28.2 million at an average rate of 12.0% for
six months ended June 30, 1998 compared to $4.2 million at 11.2% for the same
period in 1997.
As a result of the foregoing factors, the average net yield on earning
assets increased to 5.9% for the six months ended June 30, 1998 compared to 5.8%
for the same period in 1997.
11
<PAGE>
The following table presents, for the periods indicated, the distribution of
average assets, liabilities and shareholders' equity, as well as the total
dollar amounts of interest income from average interest-bearing assets and the
resultant yields, and the dollar amounts of interest expense and resultant cost
expressed in both dollars and rates. Nonaccrual loans are included in the
calculation of the average loans while nonaccrued interest thereon is excluded
from the computation of rates earned.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
1998 1997
----------------------------------- -----------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME OR YIELD OR AVERAGE INCOME OR YIELD OR
BALANCE EXPENSE COST BALANCE EXPENSE COST
--------- ----------- ----------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans and leases(1).......................... $ 688,998 $ 33,835 9.90% $ 349,927 $ 17,631 10.16%
Investment Securities(2)..................... 60,065 1,919 6.44 55,592 1,693 6.14
Federal funds sold........................... 12,138 320 5.32 24,935 673 5.44
--------- ----------- --------- -----------
Total interest-earning assets:........... 761,201 36,074 9.56 430,454 19,352 9.37
Non-earning assets:
Cash and demand deposits with banks........ 80,063 40,357
Other assets............................... 101,399 28,369
--------- ---------
Total assets............................. 942,663 499,180
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits
Interest-bearing demand.................... 98,871 833 1.70 39,973 539 2.72
Money market............................... 94,132 1,740 3.73 36,755 507 2.78
Savings.................................... 142,251 3,732 5.29 90,132 2,138 4.78
Time....................................... 208,782 5,245 5.07 148,930 4,188 5.67
--------- ----------- --------- -----------
Total interest-bearing deposits.......... 544,036 11,550 4.28 315,790 7,372 4.71
Short-term borrowing......................... 22,233 647 5.87 3,658 107 5.90
Long-term debt............................... 28,196 1,673 11.97 4,204 233 11.18
--------- ----------- --------- -----------
Total interest-bearing liabilities....... 594,465 13,870 4.71 323,652 7,712 4.81
Noninterest-bearing liabilities:
Demand deposits.............................. 238,086 117,835
Other liabilities............................ 14,445 9,295
--------- ---------
Total liabilities........................ 846,996 450,782
Shareholders' equity........................... 95,667 48,398
--------- ---------
Total liabilities and shareholders' equity..... $ 942,663 $ 499,180
--------- ----------- --------- -----------
--------- ---------
Net interest income............................ $ 22,204 $ 12,285
----------- -----------
----------- -----------
Net yield on interest-earning assets........... 5.88 5.76
</TABLE>
- --------------------------
(1) Loan fees of $2.3 million and $1.4 million are included in the computations
for 1998 and 1997, respectively.
(2) Yields are calculated on historical cost and exclude the impact of the
unrealized gain (loss) on available for sale securities.
12
<PAGE>
The following table sets forth changes in interest income and interest
expense attributable to changes in rates and changes in volume of the various
components. Changes due to a combination of rate and volume are presented under
the column titled "Mix." Nonaccrual loans are included in total loans
outstanding while nonaccrued interest thereon is excluded from the computation
of rates earned.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 COMPARED TO 1997
------------------------------------------
NET
CHANGE RATE VOLUME MIX
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Loans and leases.................................... $ 16,204 $ (447) $ 17,083 $ (432)
Investment securities............................... 226 83 136 7
Federal funds sold.................................. (353) (16) (345) 8
Other earning assets................................ -- -- -- --
--------- --------- --------- ---------
Total interest income............................. 16,077 (380) 16,874 (417)
Interest expense:
Interest-bearing demand............................. 294 (202) 794 (298)
Money market........................................ 1,233 172 791 270
Savings............................................. 1,594 227 1,236 131
Time................................................ 1,057 (447) 1,683 (179)
Short-term borrowing................................ 540 (1) 543 (2)
Long-term debt...................................... 1,440 17 1,300 123
--------- --------- --------- ---------
Total interest expense............................ 6,158 (234) 6,347 45
--------- --------- --------- ---------
Net interest income................................... $ 9,919 $ (146) $ 10,527 $ (462)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
PROVISION FOR LOAN AND LEASE LOSSES
During the six months ended June 30, 1998, a total of $1.9 million was
charged against operations and added to the allowance for loan and lease losses,
as compared to $715,000 for the same period in 1997. The increased provision is
primarily attributable to the increase in the loan portfolio due to the Eldorado
Acquisition and to partially offset the loans charged off against the allowance
discussed below. See "--Financial Condition."
NONINTEREST INCOME
Noninterest income for the six months ended June 30, 1998 was $11.4 million
compared to $6.0 million for the same period in 1997. Noninterest income related
to operations acquired in the Eldorado Acquisition that was not included in
income for the same period in 1997 and increased earnings from the Bank's
mortgage operations are primarily responsible for this improvement in
noninterest income. Income from service charges on deposit accounts increased to
$1.8 million for the six months ended June 30, 1998 compared to $652,000 for the
same period in 1997 and other noninterest income increased to $2.9 million for
the six months ended June 30, 1998 compared to $1.9 million for the same period
in 1997, both of which changes are primarily attributable to the Eldorado
Acquisition. Gains on sales of mortgage loans increased to $6.7 million for the
six months ended June 30, 1998, as compared to $3.5 million for the same period
in 1997. Income from the servicing of SBA loans increased to $1.3 million for
the six months ended June 30, 1998 as compared to $959,000 for the same period
in 1997. Such increase is primarily attributable to an increase in the SBA
servicing portfolio due to the Eldorado Acquisition.
13
<PAGE>
The following table presents for the periods indicated the major categories
of noninterest income:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Service charges on deposit accounts..................................... $ 1,780 $ 652
Gains on sale of mortgage loans......................................... 6,710 3,452
SBA loan servicing...................................................... 1,265 959
Other income............................................................ 1,606 926
--------- ---------
Total noninterest income.............................................. $ 11,361 $ 5,989
--------- ---------
--------- ---------
</TABLE>
NONINTEREST EXPENSES
Noninterest expenses are the costs, other than interest expense, associated
with providing banking and financial services to customers and conducting the
affairs of the Bank. Also included are the costs of carrying and administering
the OREO portfolio (as defined below) as well as the costs associated with
problem assets, which include nonperforming and restructured loans. "OREO," or
"other real estate owned," consists of real estate acquired through foreclosure
or by acceptance of a deed in lieu of foreclosure.
Noninterest expense for the six months ended June 30, 1998 was $24.5
million, an increase of $8.4 million for the same period in 1997. Salaries and
employee benefits increased to $10.5 million for the six months ended June 30,
1998 from $6.7 million for the same period in 1997, which increase is
attributable to the added personnel from the Eldorado Acquisition and an
increase in mortgage-related commissions as a result of an increase in the
volume of mortgage loan originations. Occupancy and equipment expense increased
to $3.5 million for the six months ended June 30, 1998 from $2.5 million for the
six months ended June 30, 1997 and represents the additional cost for
facilities, equipment for branches and related operational expenses attributable
to the Eldorado Acquisition. Other noninterest expenses increased to $8.8
million for the six months ended June 30, 1998 from $6.2 million for six months
ended June 30, 1997, primarily attributable to the Eldorado Acquisition. The
increase in other noninterest expense was partially offset by a decrease in the
provision for mortgage recourse obligations for which none was made during the
six months ended June 30, 1998 compared to $905,000 for the six months ended
June 30, 1997. Also included in noninterest expense for the six months ended
June 30, 1998 is amortization of goodwill and other intangibles of $1.7 million
compared to $705,000 for the same period last year. The increase is primarily
attributable to the Eldorado Acquisition. The Company's efficiency ratio was
66.53% for the six months ended June 30, 1998 as compared to 77.93% for the same
period of 1997. For purposes of this Prospectus, the efficiency ratio is defined
as noninterest expense--excluding amortization of goodwill and other
intangibles, losses and carrying costs of OREO and nonrecurring provisions for
recourse obligations--as a percentage of total revenue.
14
<PAGE>
The following table presents for the periods indicated the major categories
of noninterest expense:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Salaries and employee benefits......................................... $ 10,457 $ 6,650
Non-staff expenses
Occupancy and equipment.............................................. 3,504 2,491
Professional, regulatory and other services.......................... 749 335
Legal................................................................ 603 527
Insurance............................................................ 266 287
Losses and carrying costs of OREO.................................... 408 241
Provision for recourse obligation.................................... -- 905
Amortization of goodwill and other intangibles....................... 1,739 705
Data and item processing costs....................................... 1,805 688
Customer service expenses............................................ 1,011 488
Other................................................................ 3,935 2,775
--------- ---------
Total non-staff expense............................................ 14,020 9,442
--------- ---------
Total noninterest expense........................................ $ 24,477 $ 16,092
--------- ---------
--------- ---------
</TABLE>
PROVISION FOR INCOME TAXES
As a result of increased earnings for the six months ended June 30, 1998, a
provision for income taxes of $3.7 million was made compared to a $912,000
provision made for the same period in 1997. The Company's effective tax rate
(52.2%) is higher than the applicable statutory rate (42.0%), primarily because
the goodwill amortization is a charge to earnings for financial statement
purposes and is not deductible for federal income tax purposes.
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
OVERVIEW
To the extent that the following discussion relates to the operating results
of the Company during the three months ended June 30, 1997, it includes the
results of only one month of operations of Eldorado Bank. In most of the
Company's income and expense categories and with respect to the Company's net
income, the increases in the amounts reported for three months ended June 30,
1998 compared to the same period of 1997 resulted from the Eldorado Acquisition.
Other significant factors affecting the Company's results of operations and
financial condition are described in the applicable sections below.
For the three months ended June 30, 1998, ELBI had net income of $1.7
million compared to net income of $121,000 for the same period in 1997. Basic
net income per share for the three months ended June 30, 1998 was $0.16 per
share compared to $0.01 for the three months ended June 30, 1997, while diluted
net income per share for the three months ended June 30, 1998 was $0.14 compared
to $0.01 for the three months ended June 30, 1997. Excluding the amortization of
goodwill and other intangibles, basic and diluted earnings per share for the
three months ended June 30, 1998 were $0.260 and $0.23, respectively, compared
to $0.10 and $0.10 for the same period in 1997. The Company's return on average
assets was .71% and its return on average common equity was 6.74% for the three
months ended June 30, 1998 as compared to .08% and .27%, respectively, for the
three months ended June 30, 1997. Return on average assets excluding goodwill
amortization was 1.11% and return on average common equity excluding
15
<PAGE>
goodwill amortization was 11.38% for the three months ended June 30, 1998, as
compared to .43% and 4.04%, respectively, for the three months ended June 30,
1997.
RESULTS OF OPERATIONS
The Company's results of operations depend primarily on the Bank's net
interest income, which is the difference between interest and dividend income on
interest-earning assets and interest expense on interest-bearing liabilities.
The Bank's interest-earning assets consist primarily of loans, mortgage-backed
securities and investment securities, while its interest-bearing liabilities are
deposits and borrowings. The Company's results of operations are also affected
by the Bank's provisions for loan and lease losses, resulting from management's
assessment of the adequacy of the Bank's allowance for loan and lease losses,
the level of its other income, including fee income from the origination of
mortgage loans, the level of its other expenses, such as compensation and
employee benefits, occupancy costs, expenses associated with the administration
of problem assets, and income taxes.
Compared to the prior year results, the improvements stem from a combination
of increased net interest income of approximately $4.3 million and non-interest
income of approximately $4.0 million, partially offset by increased loan loss
provision of $692,000, non-interest expense of approximately $4.3 million and
provision for taxes of $1.8 million. The improvement in 1998 earnings is
primarily attributable to the earnings of Eldorado in 1998 that were not
included in earnings for 1997 and partly attributable to an improvement in
earnings related to the Bank's mortgage banking operations.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income was approximately $11.1 million for the three months
ended June 30, 1998, an increase of $4.3 million over the $6.8 million for the
same period in 1997. An increase in interest income to $18.6 million for the
three months ended June 30, 1998 from $11.3 million for the same period in 1997,
partially offset by increased interest expense of $7.5 million for the three
months ended June 30, 1998 from $4.4 million for the same period in 1997
contributed to this earnings improvement.
Loans and leases, the largest component of earning assets, increased to an
average balance of $719.1 million for the three months ended June 30, 1998 from
$382.2 million for the three months ended June 30, 1997, with an average yield
of 9.7% and 10.2%, respectively. Investments in securities and Federal funds
sold declined to an average of $72.6 million for the three months ended June 30,
1998 from an average of $103.8 million for the three months ended June 30, 1997,
with an average yield of 6.4% and 5.9%, respectively. The yield on earning
assets was 9.4% and 9.3% for the three month periods ended June 30, 1998 and
1997.
Interest-bearing liabilities increased to an average of $630.1 million for
the three months ended June 30, 1998 from $373.1 million for the same period in
1997. The cost of these funds was 4.8% for the three months ended June 30, 1998
and 1997 with a decrease in the cost of deposits and borrowings being offset by
a shift in the mix of funding liabilities. The increase in average balances is
primarily attributable to an increase in deposits with borrowings also
contributing to the increase. Average interest-bearing deposits increased to
$590.5 million for the three months ended June 30, 1998 from $364.5 million for
the same period in 1997. The average rate paid on these deposits decreased to
4.4% during the three months ended June 30, 1998 compared to 4.6% during the
same period in 1997. The decrease in the cost of deposits is attributable to a
decrease in rates paid on certificates of deposit that decreased to 5.1% for the
three months ended June 30, 1998 compared to 5.5% for the same period in 1997,
and a decrease in rates paid on interest bearing transaction accounts and
savings accounts that in the aggregate was 3.9% for the three months ended June
30, 1998 compared to 4.0% for the same period in 1997.
The average balance for all borrowings increased to $39.6 million for the
three months ended June 30, 1998 from $8.5 million for the same period in 1997.
The average cost of these borrowings was 10.6% for
16
<PAGE>
the three months ended June 30, 1998 compared to 10.8% for the same period in
1997. The increase in the average balance and cost of borrowings is attributable
to Federal funds purchased and the subordinated debentures issued to fund the
Eldorado Acquisition. Federal funds purchased averaged $11.4 million with an
average rate of 6.9% for the three months ended June 30, 1998 compared to
$674,000 with an average rate of 6.0% for the same period in 1997. Other debt,
including the subordinated debentures, averaged $28.2 million at an average rate
of 12.0% for the three months ended June 30, 1998 compared to $7.8 million at
11.2% for the same period in 1997.
As a result of the foregoing factors, the average net yield on earning
assets increased to 5.7% for the three months ended June 30, 1998 compared to
5.6% for the same period in 1997.
17
<PAGE>
The following table presents, for the periods indicated, the distribution of
average assets, liabilities and shareholders' equity, as well as the total
dollar amounts of interest income from average interest-bearing assets and the
resultant yields, and the dollar amounts of interest expense and resultant cost
expressed in both dollars and rates. Nonaccrual loans are included in the
calculation of the average loans while nonaccrued interest thereon is excluded
from the computation of rates earned.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME OR YIELD OR AVERAGE INCOME OR YIELD OR
BALANCE EXPENSE COST BALANCE EXPENSE COST
---------- ----------- ----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans and leases (1)........................ $ 719,144 $ 17,470 9.74% $ 382,212 $ 9,756 10.24%
Investment Securities (2)................... 55,294 932 6.76 73,418 1,099 6.00
Federal funds sold.......................... 17,340 235 5.44 30,373 425 5.61
---------- ----------- ---------- -----------
Total interest-earning assets:.......... 791,778 18,637 9.44 486,003 11,280 9.31
Non-earning assets:
Cash and demand deposits with banks....... 80,859 50,060
Other assets................................ 105,297 37,507
---------- ----------
Total assets............................ 977,934 573,570
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits
Interest-bearing demand................... 100,217 425 1.70 47,134 291 2.48
Money market.............................. 93,160 866 3.73 46,632 380 3.27
Savings................................... 167,673 2,228 5.33 118,642 1,459 4.93
Time...................................... 229,495 2,918 5.10 152,141 2,089 5.51
---------- ----------- ---------- -----------
Total interest-bearing deposits......... 590,545 6,437 4.37 364,549 4,219 4.64
Short-term borrowing...................... 11,388 197 6.94 674 10 5.95
Long-term debt............................ 28,197 844 11.87 7,831 218 11.17
---------- ----------- ---------- -----------
Total interest-bearing liabilities...... 630,130 7,478 4.76 373,054 4,447 4.78
Noninterest-bearing liabilities:
Demand deposits............................. 235,662 134,210
Other liabilities........................... 16,193 10,576
---------- ----------
Total liabilities....................... 881,985 517,840
Shareholders' equity.......................... 95,949 55,730
---------- ----------
Total liabilities and shareholders' equity.... $ 977,934 $ 573,570
---------- ----------- ---------- -----------
---------- ----------
Net interest income........................... $ 11,159 $ 6,833
----------- -----------
----------- -----------
Net yield on interest-earning assets.......... 5.65 5.64
</TABLE>
- ------------------------
(1) Loan fees of $1.8 million and $1.2 million are included in the computations
for 1998 and 1997, respectively.
(2) Yields are calculated on historical cost and exclude the impact of the
unrealized gain (loss) on available for sale securities.
18
<PAGE>
The following table sets forth changes in interest income and interest
expense attributable to changes in rates and changes in volume of the various
components. Changes due to a combination of rate and volume are presented under
the column titled "Mix." Nonaccrual loans are included in total loans
outstanding while nonaccrued interest thereon is excluded from the computation
of rates earned.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED
TO 1997
------------------------------------------
NET
CHANGE RATE VOLUME MIX
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Loans and leases........................................................... $ 7,714 $ (470) $ 8,600 $ (416)
Investment securities...................................................... (167) 138 (271) (34)
Federal funds sold......................................................... (190) (12) (182) 4
--------- --------- --------- ---------
Total interest income.................................................. 7,357 (344) 8,147 (446)
Interest expense:
Interest-bearing demand.................................................... 134 (91) 328 (103)
Money market............................................................... 486 53 379 54
Savings.................................................................... 769 117 603 49
Time....................................................................... 829 (155) 1,062 (78)
Short-term borrowing....................................................... 187 2 159 26
Long-term debt............................................................. 626 17 552 57
--------- --------- --------- ---------
Total interest expense................................................. 3,031 (57) 3,083 5
--------- --------- --------- ---------
Net interest income........................................................ $ 4,326 $ (287) $ 5,064 $ (451)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses is an expense charged against
operating income and added to the allowance for loan and lease losses.
Management of the Bank continues to carefully monitor the allowance for loan and
lease losses in relation to the size of the Bank's loan and lease portfolio and
known risks or problem loans and leases. During the three months ended June 30,
1998, a total of $1.0 million was charged against operations and added to the
allowance for loan and lease losses which compares to $308,000 for the same
period in 1997. The increased provision is primarily attributable to the
increase in the loan portfolio due to the Eldorado Acquisition and to increase
the allowance due to the loans charged off against the allowance discussed
above.
NON-INTEREST INCOME
Non-interest income for the three months ended June 30, 1998 was $6.7
million compared to $2.7 million for the same period in 1997. Non-interest
income related to operations acquired in the Eldorado Acquisition that was not
included in income for the same period in 1997 and increased earnings from the
Bank's mortgage operations are primarily responsible for this improvement in
non-interest income. Income from service charges on deposit accounts increased
to $887,000 for the three months ended June 30, 1998 compared to $394,000 for
the same period in 1997 and other non-interest income increased to $1.7 million
for the three months ended June 30, 1998 compared to $749,000 for the same
period in 1997 both of which are primarily attributable to the Eldorado
Acquisition. Gains on the sale of mortgage loans increased to $4.2 million for
the six months ended June 30, 1998 compared to $1.6 million for the same period
in 1997.
19
<PAGE>
The following table presents for the periods indicated the major categories
of noninterest income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Service charges on deposit accounts........................................ $ 887 $ 394
Gains on sale of mortgage loans............................................ 4,186 1,595
SBA loan servicing......................................................... 644 162
Other income............................................................... 1,022 550
--------- ---------
Total noninterest income................................................. $ 6,739 $ 2,701
--------- ---------
--------- ---------
</TABLE>
NON-INTEREST EXPENSES
Non-interest expense for the three months ended June 30, 1998 was
approximately $13.2 million, an increase of $4.3 million from $8.9 million for
the same period in 1997. Salaries and employee benefits increased to $5.6
million for the three months ended June 30, 1998 from $3.6 million for the same
period in 1997, which increase is attributable to the added personnel from the
Eldorado Acquisition and an increase in mortgage related commissions. Occupancy
and equipment expense increased to $1.8 million for the three months ended June
30, 1998 from $1.3 million for the three months ended June 30, 1997 and
represents the additional cost for facilities and equipment for branches and
related operations attributable to the Eldorado Acquisition. Other non-interest
expenses increased to $4.8 million for the three months ended June 30, 1998 from
$3.5 million for three months ended June 30, 1997 which is primarily
attributable to the Eldorado Acquisition. Also included in non-interest expense
for the three months ended June 30, 1998 is amortization of goodwill and other
intangibles of $975,000 compared to $494,000 for the same period last year which
is primarily attributable to the Eldorado Acquisition.
The following table presents for the periods indicated the major categories
of noninterest expense:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Salaries and employee benefits........................................... $ 5,609 $ 3,629
Non-staff expenses
Occupancy and equipment................................................ 1,795 1,321
Professional, regulatory and other services............................ 736 173
Legal.................................................................. 407 288
Insurance.............................................................. 70 97
Losses and carrying costs of OREO...................................... 39 157
Provision for recourse obligation...................................... -- 710
Amortization of goodwill and other intangibles......................... 975 494
Data and item processing costs......................................... 1,107 796
Customer service expenses.............................................. 548 282
Other.................................................................. 1,911 988
Total non-staff expense.............................................. 7,588 5,306
--------- ---------
Total noninterest expense.......................................... $ 13,197 $ 8,935
--------- ---------
--------- ---------
</TABLE>
PROVISION FOR INCOME TAXES
As a result of the earnings for the three months ended June 30, 1998, a
provision for income taxes of $2.0 million was made compared to a $170,000
provision made for the same period in 1997. The effective
20
<PAGE>
tax rate was 53.1% and 58.4% for the three months ended June 30, 1998 and 1997,
respectively. The effective tax rate was higher than the statutory rate of 42.0%
primarily because the goodwill amortization is a charge to earnings for
financial statement purposes and is not deductible for federal income tax
purposes.
FINANCIAL CONDITION
Total assets of the Company at June 30, 1998 were $1.0 billion compared to
total assets of $902.4 million at December 31, 1997. The increase in total
assets since December 31, 1997 is primarily attributable to the increase in
mortgage loans held for sale that increased $91.4 million, or 95.0%, to $187.6
million at June 30, 1998 from $96.2 million at December 31, 1997. Total
interest-earning assets of the Company at June 30, 1998 were $761.0 million
compared to total earning assets of $725.6 million at December 31, 1997. Earning
assets increased primarily due to the increase in mortgage loans held for sale,
partially offset by a decrease in portfolio loans and investments.
LOANS AND LEASES
Total gross loans and leases at June 30, 1998 were $700.0 million, including
$187.6 million of mortgage loans held for sale, compared to $618.3 million and
$96.2 million, respectively, at December 31, 1997. Excluding those loans held
for sale, at June 30, 1998, the four largest lending categories were: (i)
commercial real estate loans, (ii) commercial loans, (iii) loans to individuals
and (iv) residential mortgage loans, including land and construction loans.
Those categories accounted for $221.5 million, $103.9 million, $65.5 million and
$63.2 million, or approximately 43.2%, 20.3%, 12.8% and 12.3%, respectively, of
total gross loans and leases at June 30, 1998. Leases made to finance equipment
for small and medium-sized businesses accounted for $58.3 million, or
approximately 11.4% of total gross loans and leases held for investment, at June
30, 1998.
The following table sets forth the amount of loans and leases outstanding
for the Company as of the dates indicated, according to type of loan, inclusive
of mortgage loans held for sale. The Company has no foreign loans or energy-
related loans.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------------------
1998 1997 1996 1995
---------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial..................................................... $ 103,900 $ 115,919 $ 47,772 $ 16,188
Real estate-commercial......................................... 221,451 235,244 86,397 --
Real estate-construction....................................... 27,154 35,617 18,812 599
Real estate-mortgage........................................... 36,077 32,132 41,650 15,710
Installment loans to individuals............................... 65,456 62,323 22,512 6,525
Lease financing................................................ 58,312 40,819 46,498 --
---------- ---------- ------------ ----------
Subtotal (portfolio loans)................................... 512,350 522,054 263,641 39,022
---------- ---------- ------------ ----------
Loans and leases held for sale................................. 187,603 96,230 64,917 --
---------- ---------- ------------ ----------
Total...................................................... 699,953 618,284 328,558 39,022
Less: allowance for loan and lease losses...................... (7,820) (9,395) (5,156) (639)
Deferred loan and lease fees................................... (3,656) (3,006) (2,444) (45)
---------- ---------- ------------ ----------
Net loans and leases........................................... $ 688,477 $ 605,883 $ 320,958 $ 38,338
---------- ---------- ------------ ----------
---------- ---------- ------------ ----------
</TABLE>
For regulatory and financial reporting purposes, the Company categorizes
commercial loans that are secured in whole or part by real estate as commercial
real estate loans. The Company believes such categorization overstates the
Company's emphasis on real estate lending, because, for example, all SBA loans
are secured by real estate and thus categorized as commercial real estate loans.
21
<PAGE>
The following table shows the amounts of certain categories of loans
outstanding as of June 30, 1998, which, based on remaining scheduled repayments
of principal, were due in one year or less, more than one year through five
years, and more than five years. Demand or other loans having no stated maturity
and no stated schedule of repayments are reported as due in one year or less.
Residential mortgage loans held for sale are reported as due after five years.
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------
COMMERCIAL REAL ESTATE
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Aggregate maturities of loans and leases which are due:
Within one year................................................... $ 41,654 $ 49,587
After one year but within five years:
Interest rates are floating or adjustable......................... 37,851 55,781
Interest rates are fixed or predetermined......................... 5,989 28,222
After 5 years:
Interest rates are floating or adjustable......................... 12,953 298,126
Interest rates are fixed or predetermined......................... 5,453 40,569
----------- -----------
Total........................................................... $ 103,900 $ 472,285
----------- -----------
----------- -----------
</TABLE>
NONPERFORMING ASSETS
The following table summarizes nonperforming assets as of the end of the
five most recent fiscal quarters ended June 30, 1998.
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1998 1998 1997 1997 1997
--------- ----------- ------------ ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and leases, not restructured..... $ 7,712 $ 6,049 $ 10,589 $ 9,101 $ 10,211
Accruing loans and leases past due 90 days or
more............................................ 1,136 1,377 4,638 1,244 59
Restructured loans and leases..................... 4,133 3,892 2,779 5,661 5,798
--------- ----------- ------------ ------------- ---------
Total nonperforming loans and leases ("NPLs")... 12,981 11,318 18,006 16,006 16,068
Other real estate owned ("OREO").................. 1,499 1,539 2,740 3,433 2,811
--------- ----------- ------------ ------------- ---------
Total nonperforming assets ("NPAs")............. $ 14,482 $ 12,857 $ 20,746 $ 19,439 $ 18,879
--------- ----------- ------------ ------------- ---------
--------- ----------- ------------ ------------- ---------
Selected ratios:
NPLs to total portfolio loans and leases(1)..... 2.5% 2.2% 3.5% 3.2% 3.2%
NPAs to total portfolio loans and leases and
OREO(1)....................................... 2.8 2.5 4.0 3.8 3.8
NPAs to total assets............................ 1.4 1.3 2.3 2.1 2.1
</TABLE>
- ------------------------
(1) Excludes residential mortgages held for sale.
The Company's current policy is to stop accruing interest on loans which are
past due as to principal or interest 90 days or more, except in circumstances
where the loan is well-secured and in the process of collection. When a loan is
placed on nonaccrual, previously accrued and unpaid interest is generally
reversed out of income.
The Company would have recorded additional interest income of approximately
$402,000 for the six months ended June 30, 1998 on nonperforming loans if such
loans had been current in accordance with
22
<PAGE>
their original terms. Interest income recorded on nonperforming loans for the
six months ended June 30, 1998 was approximately $120,000.
Loans aggregating $11.8 million at June 30, 1998 have been designated as
impaired in accordance with SFAS 114 as amended by SFAS 118. The Company's
impaired loans are all collateral dependent, and as such the method used to
measure the amount of impairment on these loans is to compare the loan amount to
the fair value of collateral. In calculating the allowance for loan and lease
losses that was required under the Company's internal guidelines, management
determined that a minimum of $2.1 million should be included in the allowance at
June 30, 1998 because of the risk to the loan and lease portfolio represented by
such impaired loans.
Management is not aware of any loan that had not been placed on nonaccrual
status as of June 30, 1998 as to which there was serious doubt as to the ability
of the borrower to comply with present loan repayment terms.
At June 30, 1998, the Company had OREO properties with an aggregate carrying
value of $1.5 million. During the six months ended June 30, 1998, properties
with a total carrying value of $634,000 were added to OREO, and properties with
a total carrying value of $1.9 million were sold and properties were written
down by approximately $284,000. Management believes that all of the Company's
OREO properties are recorded at amounts that are equal to or less than the
market value based on current independent appraisals reduced by estimated
selling costs.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses represents the amounts which have
been set aside for the specific purpose of absorbing losses which may occur in
the Bank's loan and lease portfolio. The provision for loan and lease losses is
an expense charged against operating income and added to the allowance for loan
and lease losses.
In determining the adequacy of the allowance for loan and lease losses,
management considers such factors as historical loan loss experience, known
problem loans, evaluations made by regulatory agencies and the Company's outside
loan reviewer, growth and composition of the loan portfolio, the estimated value
of collateral, assessment of economic conditions and other appropriate data to
identify the risks in the portfolio. In determining the amount of the allowance,
a specific allowance amount is assigned to those loans with identified special
risks, and the remaining loan portfolio is reviewed by category and assigned an
allowance percentage for inherent losses. The allocation process does not
necessarily measure anticipated future credit losses; rather, it reflects
management's assessment at a certain date of perceived credit risk exposure and
the impact of current and anticipated economic conditions, which may or may not
result in future credit losses. While management believes the allowance to be
adequate, it should be noted that it is based on estimates, and ultimate losses
may vary from such estimates if future conditions differ materially from the
assumptions used in making the evaluation.
The Federal Reserve and the DFI, as an integral part of their respective
supervisory functions, periodically review the Company's allowance for loan and
lease losses. Such regulatory agencies may require the Company to increase its
provision for loan and lease losses or to recognize further loan charge-offs,
based upon judgments different from those of management.
In December 1993, the federal banking agencies issued an inter-agency policy
statement on the allowance for loan and lease losses which, among other things,
establishes certain benchmark ratios of loan loss reserves to classified assets.
The benchmark set forth by such policy statement is the sum of (i) assets
classified loss; (ii) 50% of assets classified doubtful; (iii) 15% of assets
classified substandard; and (iv) estimated credit losses on other assets over
the upcoming 12 months. At June 30, 1998, the Company's allowance constituted
over 218% of the benchmark amount suggested by the federal banking agencies'
policy statement as compared with 250% at December 31, 1997.
23
<PAGE>
The Company's lending is concentrated in Southern California, which has in
the recent past experienced adverse economic conditions, including declining
real estate values. Those factors have adversely affected borrowers' ability to
repay loans. Although management believes the level of the allowance as of June
30, 1998 is adequate to absorb losses inherent in the loan portfolio, a decline
in the local economy may result in increased losses that cannot reasonably be
predicted at this date. The possibility of increased costs of collection,
nonaccrual of interest on those which are or may be placed on nonaccrual, and
further charge-offs could also have an adverse impact on the Company's financial
condition in the future.
The Company's allowance for loan and lease losses was $7.8 million, or 1.5%
of net portfolio loans (i.e., excluding residential mortgages held for sale) at
June 30, 1998 compared to $9.4 million, or 1.8% of net portfolio loans at
December 31, 1997. During the six months ended June 30, 1998, the provision for
loan and lease losses was $1.9 million, or .75% (annualized) of average
portfolio loans for the six months ended June 30, 1998, as compared to $715,000,
or .48% (annualized) of average portfolio loans for the comparable period in
1997. Loan and lease charge-offs were $4.2 million and recoveries were $708,000
for the six months ended June 30, 1998 as compared to loan and lease charge-offs
of $816,000 and recoveries of $111,000 for the comparable period in 1997.
Annualized net charge-offs as a percentage of average portfolio loans were 1.36%
for the six months ended June 30, 1998 as compared to .48% for the comparable
period in 1997. The increase in annualized net charge-offs is primarily
attributable to the charge-off during the three months ended March 31, 1998 of
two loans with an aggregate principal balance of $2.1 million. The Company
acquired those loans in the CSB acquisition, and although the loans were
performing in accordance with their terms as of June 30, 1998, the Company
became aware in early 1998 of a deterioration in the borrowers' financial
condition. Consistent with regulatory guidelines, the Company's internal credit
administration standards dictated that the loans should be charged off as a
result of the decline in the borrowers' creditworthiness.
24
<PAGE>
The table below summarizes average portfolio loans and leases outstanding,
gross portfolio loans and leases, nonperforming loans and leases and changes in
the allowance for possible loan and lease losses arising from loan and lease
losses and additions to the allowance from provisions charged to operating
expense as of and for the five most recent fiscal quarters ended June 30, 1998:
<TABLE>
<CAPTION>
AS OF AND FOR THE FISCAL QUARTER ENDED,
---------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1998 1998 1997 1997 1997
---------- ---------- ------------ ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average portfolio loans and leases(1).......... $ 510,650 $ 518,670 $ 512,969 $ 505,602 $ 327,266
Gross portfolio loans and leases(1)............ 512,350 520,884 522,054 506,625 500,670
Nonperforming loans and leases................. 12,981 11,318 18,006 16,006 16,068
Allowance for loan and lease losses:
Balance at beginning of period............... 7,892 9,395 9,249 9,242 5,249
Balance acquired during the period........... -- -- -- -- 4,076
Loans charged off during period
Commercial................................. 520 2,296 142 11 185
Leases..................................... 166 167 646 140 192
Real estate................................ 710 64 258 188 83
Installment................................ 184 98 132 156 44
---------- ---------- ------------ ------------- ----------
Total.................................... 1,580 2,625 1,178 495 504
Recoveries during period
Commercial................................. 461 20 223 100 85
Leases..................................... 22 16 4 27 --
Real estate................................ 11 143 514 1 --
Installment................................ 14 21 175 16 28
---------- ---------- ------------ ------------- ----------
Total.................................... 508 200 916 144 113
Net loans and leases charged off during
period................................... 1,072 2,425 262 351 391
Provisions for loan and lease losses....... 1,000 922 408 358 308
---------- ---------- ------------ ------------- ----------
Balance at end of period................. $ 7,820 $ 7,892 $ 9,395 $ 9,249 $ 9,242
---------- ---------- ------------ ------------- ----------
---------- ---------- ------------ ------------- ----------
Selected ratios:
Net charge-offs to average portfolio loans
and leases (annualized).................... .84% 1.87% .20% .28% .48%
Provision for loan and lease losses to
average portfolio loans and leases
(annualized)............................... .78 .71 .32 .28 .38
Allowance at end of period to gross portfolio
loans and leases........................... 1.53 1.52 1.80 1.83 1.85
Allowance as a percentage of nonperforming
loans and leases........................... 60.24 69.73 52.18 57.78 57.52
</TABLE>
- ------------------------
(1) Excludes residential mortgages held for sale.
25
<PAGE>
The following table indicates management's allocation of the allowance as of
the dates indicated:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------
1998 1997
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Allocated amount:
Commercial, financial and agricultural................ $ 827 10.6% $ 709 7.7%
Real estate and construction.......................... 1,329 17.0 1,482 16.0
Consumer.............................................. 633 8.1 421 4.6
Unallocated........................................... 5,030 64.3 6,630 71.7
--------- ----- --------- -----
Total............................................... $ 7,820 100.0% $ 9,242 100.0%
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
In allocating the Company's allowance for possible loan and leases losses,
management has considered the credit risk in the various loan categories in its
portfolio. As such, the allocation of the allowance for possible loan and lease
losses is based primarily upon the average aggregate historical net loan losses
experienced in each of the acquired subsidiary banks. While the Company has made
a reasonable effort to allocate the allowance to specific categories of loans,
management believes that any allocation of the allowance for possible loan and
lease losses into loan categories lends an appearance of exactness which does
not exist, in that the allowance for possible loan and lease losses is utilized
as a single unallocated allowance available for losses on all types of loans and
leases, and actual losses in loan categories may vary from the amounts allocated
to such categories.
INVESTMENT SECURITIES
The Bank maintains a portion of its assets in investment securities to
balance risk and to ensure liquidity. See "--Liquidity."
Total investments at June 30, 1998 were $61.1 million compared to $107.3
million at December 31, 1997. Investments decreased primarily to provide
liquidity to fund increased mortgage origination activity. At June 30, 1998, the
investment portfolio primarily consisted of U.S. treasury and agency securities
and mortgage-backed securities. Both of those categories of investment
securities are classified as available-for-sale and totaled $21.1 million and
$40.0 million, respectively, or 34.5% and 65.5% of total investments,
respectively.
The following table presents the amortized cost of securities and their
approximate fair values at June 30, 1998:
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAIN LOSS VALUE
----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury............................... $ 15,998 $ 7 $ -- $ 16,005
U.S. Government Agencies.................... 5,000 -- (3) 4,997
Mortgage-backed securities.................. 40,115 33 (134) 40,014
Corporate bonds and equities................ 38 -- -- 38
----------- --- ----- -----------
Total..................................... $ 61,151 $ 40 $ (137) $ 61,054
----------- --- ----- -----------
----------- --- ----- -----------
</TABLE>
26
<PAGE>
The following table show the maturities of investment securities at June 30,
1998 and the weighted average yields of such securities:
<TABLE>
<CAPTION>
AFTER ONE YEAR BUT AFTER FIVE YEAR BUT
WITHIN ONE YEAR
WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
---------------------- ---------------------- ---------------------- ----------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- ----- --------- ----- --------- ----- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasuries................ $ 6,005 5.86% $ 10,000 5.50% -- -- % -- -- %
U.S. Government agencies....... -- -- 4,997 6.31 -- -- -- --
Mortgage backed securities..... -- -- 3,948 6.88 10,580 6.71 25,486 6.92
Equity securities.............. 38 -- -- -- -- -- -- --
--------- --------- --------- ---------
Total investment portfolio... $ 6,043 5.86% $ 18,945 6.00% $ 10,580 6.71% $ 25,486 6.92%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
There are certain inherent risks associated with mortgage-backed securities
("MBS") including volatility, credit risk, interest rate risk and average life
extension risk. The Company's MBS portfolio has limited credit risk as the MBS
portfolio contains only U.S. Government agency obligations that carry the
highest ratings by nationally recognized statistical rating organizations. MBS
price volatility is similar to U.S. Government or corporate bond obligations, in
that as interest rates increase the value of the MBS decreases and, conversely,
as interest rates decrease the value of the MBS increases. In addition, the
interest rate risk associated with MBS can be exacerbated by extension or
prepayment risk, particularly with respect to fixed-rate instruments. With
fixed-rate MBS, as interest rates move upward, the probability of the average
life extending increases as a result of prepayments generally slowing on the
underlying collateral of the MBS. With the extension of average life in a rising
rate environment, the Bank would own a security that has a below market yield
for a longer period of time than was previously anticipated which also affects
the market price negatively. If interest rates were to decline, the weighted
average life of the fixed-rate MBS portfolio would shorten, prepayments would
rise and the market value would increase. At June 30, 1998, the weighted average
life of the Bank's fixed-rate MBS portfolio was 3.3 years.
Additional information concerning investment securities is provided in the
notes to the accompanying consolidated financial statements.
DEPOSITS
Total deposits were $876.6 million at June 30, 1998 compared to $765.2
million at December 31, 1997. An increase in regular savings deposits,
certificates of deposits and interest bearing transaction accounts, partially
offset by decreases in noninterest bearing demand deposits and money market
accounts, contributed to the increase in total deposits. The increase in
deposits reflects the Company's attempt to increase funding sources required to
fund the increase in mortgage lending activity. In April 1998, the Company
placed $18.3 million of wholesale certificates of deposits through financial
intermediaries. Total noninterest bearing demand deposits were $256.2 million,
or approximately 29.2% of total deposits, at June 30, 1998 compared to $289.3
million, or approximately 37.8% of total deposits, at December 31, 1997.
Interest-bearing deposits were $620.4 million, or approximately 70.8% of total
deposits, at June 30, 1998 compared to $475.9 million, or approximately 62.2% of
total deposits, at December 31, 1997.
A significant amount of the Company's interest-bearing deposits are
generated from title and escrow companies ("Title and Escrow Deposits"). For the
six months ended June 30, 1998, Title and Escrow Deposits averaged $116.9
million, representing 15.0% of the Company's average total deposits for that
period. For the six months ended June 30, 1998, average Title and Escrow
Deposits were 19.9% of average noninterest demand deposits and 48.9% of average
savings deposits. Actual balances of Title and Escrow Deposits tend to vary
widely during a month, with the highest balances usually occurring at the end of
the month when residential real estate closings are generally scheduled to
occur. One company controlled
27
<PAGE>
11.7% of the Company's average Title and Escrow Deposits for the six months
ended June 30, 1998 and 14.5% of the Company's total deposits at June 30, 1998.
The Company considers Title and Escrow Deposits to be volatile because of
the fluctuation in deposit amounts and the concentration of control over those
deposits with a limited number of customers, even though the Company believes
that its relationships with its principal Title and Escrow Deposit customers and
its specialized deposit services partially mitigate the risk that such customers
may terminate or significantly reduce their deposits with the Company. As a
consequence of that potential volatility, the Company utilizes Title and Escrow
Deposits solely to fund short-term assets, primarily consisting of residential
mortgages held for sale, which are generally sold within 30 days after such
mortgage loans are funded. If a substantial portion of the Title and Escrow
Deposit were withdrawn suddenly, the Company believes that it has sufficient
alternative sources of liquidity to fund its mortgage pipeline during a
transition period. See "--Liquidity."
The following table presents the daily average balances and weighted average
rates paid on interest-bearing deposits for the six months ended June 30, 1998
and 1997, respectively below.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
1998 1997
----------------------- -----------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest-bearing demand........................ $ 238,086 0.00% $ 117,835 0.00%
Interest-bearing demand........................... 98,871 1.70 39,973 2.72
Money market...................................... 94,132 3.73 36,755 2.78
Savings........................................... 142,251 5.29 90,132 4.78
Time.............................................. 208,782 5.07 148,930 5.67
---------- ----------
Total......................................... $ 782,122 2.98% $ 433,625 3.43%
---------- ----------
---------- ----------
</TABLE>
The following table shows the maturities of time certificates of deposits of
$100,000 or more at June 30, 1998:
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------
(IN THOUSANDS)
<S> <C>
Due in three months or less................................................... $ 39,968
Due in over three months through six months................................... 21,712
Due in over six months through twelve months.................................. 35,151
Due in over twelve months..................................................... 4,440
--------------
Total....................................................................... $ 101,271
--------------
--------------
</TABLE>
BORROWINGS
Borrowings of the Company increased to $31.5 million at June 30, 1998 from
$30.2 million at December 31, 1997. This increase in borrowings was primarily
due to an increase in Federal funds purchased, which increased to $3.4 million
at June 30, 1998 from $2.1 million at December 31, 1997. Those additional
borrowings were undertaken primarily to fund increased mortgage origination
volume.
CAPITAL RESOURCES
Current regulatory capital standards generally require banks and holding
companies to maintain a ratio of "core" or "Tier 1" capital (consisting
principally of common equity) to adjusted total assets ("Tier 1 Leverage Ratio")
of at least 3%, a ratio of Tier 1 Capital to risk-weighted assets of at least 4%
("Tier 1 Risk-Weighted Ratio"), and a ratio of total capital (which includes
Tier 1 capital plus certain
28
<PAGE>
forms of subordinated debt, a portion of the allowance for loan and lease losses
and preferred stock) to risk-weighted assets ("Total Risk-Weighted Ratio") of at
least 8%. Risk-weighted assets are calculated by multiplying the balance in each
category of assets according to a risk factor which ranges from zero for cash
assets and certain government obligations to 100% for some types of loans and
adding the products together.
The Company and the Bank were well capitalized June 30, 1998 for federal
regulatory purposes. As of June 30, 1998, both the Company and the Bank had Tier
1 Leverage Ratios of 6.6%, Tier 1 Risk-Weighted Ratios of 8.9% and Total
Risk-Weighted Ratios of 10.0%.
LIQUIDITY
The Company relies on deposits as its principal source of funds and,
therefore, must be in a position to service depositors' needs as they arise.
Management attempts to maintain a loan-to-deposit ratio of not greater than 80%
and a liquidity ratio (liquid assets, including cash and due from banks, Federal
funds sold and investment securities, to deposits) of approximately 20%. The
average loan-to-deposit ratio was 88% for the six months ended June 30, 1998,
78% in 1997, 68% in 1996 and 78% in 1995. The average liquidity ratio was 19%
for the six months ended June 30, 1998, 29% in 1997, 30% in 1996 and 22% in
1995. At June 30, 1998, the Company's loan-to-deposit ratio was 69% and the
liquidity ratio was 20.8%. While fluctuations in the balances of a few large
depositors cause temporary increases and decreases in liquidity from time to
time, the Company has not experienced difficulty in dealing with such
fluctuations from existing liquidity sources.
Should the level of liquid assets (primary liquidity) not meet the liquidity
needs of the Company, other available sources of liquid assets (secondary
liquidity), including the purchase of Federal funds, sale of securities under
agreements to repurchase, sale of loans, window borrowing from the Federal
Reserve Bank and, to a lesser extent, borrowings from the FHLB, could be
employed. The Company has relied primarily upon the purchase of Federal funds
and the sale of securities under agreements to repurchase for secondary sources
of liquidity. At June 30, 1998, the Company had $17.0 million of unused
borrowing capacity under FHLB advances. In order to borrow from the Federal
Reserve, the Company would be required to physically deliver to the Federal
Reserve collateral consisting of marketable Government securities. At June 30,
1998, the Company has no such collateral at the Federal Reserve. The Company
believes that it could deliver to the Federal Reserve collateral sufficient to
support up to $19.0 million of window borrowings.
INFLATION
The majority of the Company's assets and liabilities are monetary items held
by the Banks, and only a small portion of total assets is in premises and
equipment. The lower inflation rate of recent years did not have the positive
impact on the Bank that was felt in many other industries. The small fixed asset
investment of the Company minimizes any material misstatement of asset values
and depreciation expenses which may result from fluctuating market values due to
inflation. A higher inflation rate, however, may increase operating expenses or
have other adverse effects on borrowers of the Bank, making collection more
difficult for the Bank. Rates of interest paid or charged generally rise if the
marketplace believes inflation rates will increase.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
In Management's opinion there has not been a material change in the
Company's market risk profile during the six months ended June 30, 1998. Market
risk is the risk of loss in a financial instrument arising from adverse changes
in market prices and rates, foreign currency exchange rates, commodity prices
and equity prices. The Company's market risk arises primarily from interest rate
risk inherent in its lending and deposit taking activities. To that end,
management actively monitors and manages its interest rate risk
29
<PAGE>
exposure. The Company does not have any market risk sensitive instruments
acquired for trading purposes. The Company manages its interest rate sensitivity
by matching the repricing opportunities on its earning assets to those on its
funding liabilities. Management uses various asset/liability strategies to
manage the repricing characteristics of its assets and liabilities to ensure
that exposure to interest rate fluctuations is limited within Company guidelines
of acceptable levels of risk-taking. Hedging strategies, including the terms and
pricing of loans and deposits, and managing the deployment of its securities are
used to reduce mismatches in interest rate repricing opportunities of portfolio
assets and their funding sources.
When appropriate, management may utilize off balance sheet instruments such
as interest rate floors, caps and swaps to hedge its interest rate position. A
Board of Directors approved hedging policy statement governs use of these
instruments. As of June 30, 1998, the Company had not utilized any interest rate
swap or other such financial derivative to alter its interest rate risk profile.
One way to measure the impact that future changes in interest rates will
have on net interest income is through a cumulative gap measure. The gap
represents the net position of assets and liabilities subject to repricing in
specified time periods. Generally, a liability sensitive gap position indicates
that there would be a net positive impact on the net interest margin of the
Company for the period measured in a declining interest rate environment since
the Company's liabilities would reprice to lower market rates before its assets
would. A net negative impact would result from an increasing interest rate
environment. Conversely, an asset sensitive gap indicates that there would be a
net positive impact on the net interest margin in a rising interest rate
environment since the Company's assets would reprice to higher market interest
rates before its liabilities would, while a net negative impact would result
from a declining rate environment.
The following table sets forth the distribution of repricing opportunities
of the Company's interest-earning assets and interest-bearing liabilities, the
interest rate sensitivity gap (i.e., interest rate sensitive assets less
interest rate sensitive liabilities), cumulative interest-earning assets and
interest-bearing liabilities, the cumulative interest rate sensitivity gap, the
ratio of cumulative interest-earning assets to cumulative interest-bearing
liabilities and the cumulative gap as a percentage of total assets and total
interest-earning assets as of June 30, 1998. The table also sets forth the time
periods during which interest-earning assets and interest-bearing liabilities
will mature or may reprice in accordance with their contractual terms. The
interest rate relationships between the repriceable assets and repriceable
liabilities are not necessarily constant and may be affected by many factors,
including the behavior of customers in response to changes
30
<PAGE>
in interest rates. This table should, therefore, be used only as a guide as to
the possible effect changes in interest rates might have on the net margins of
the Company.
<TABLE>
<CAPTION>
JUNE 30, 1998
AMOUNTS MATURING OR REPRICING IN
----------------------------------------------------------
OVER 3
MONTHS OVER 1
3 MONTHS TO 12 YEAR TO OVER NON-
OR LESS MONTHS 5 YEARS 5 YEARS SENSITIVE(1) TOTAL
---------- ---------- ---------- --------- ----------- ------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks................ $ -- $ -- $ -- $ -- $ 160,245 $ 160,245
Federal funds sold..................... -- -- -- -- -- --
Investment securities.................. 6,005 -- 18,945 36,066 38 61,054
Loans and leases....................... 319,130 43,356 90,113 59,751 -- 512,350
Loans held for sale.................... 187,603 -- -- -- -- 187,603
Other assets(2)........................ -- -- -- -- 102,058 102,058
---------- ---------- ---------- --------- ----------- ------------
Total assets....................... $ 512,738 $ 43,356 $ 109,058 $ 95,817 $ 262,341 $ 1,023,310
---------- ---------- ---------- --------- ----------- ------------
---------- ---------- ---------- --------- ----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing demand deposits.... $ -- $ -- $ -- $ -- $ 256,166 $ 256,166
Interest-bearing demand, money market
and savings.......................... 377,414 -- -- -- -- 377,414
Time certificates of deposit........... 89,955 136,844 16,136 87 -- 243,022
Short-term debt........................ 3,374 -- -- -- -- 3,374
Long-term debt......................... -- -- 473 27,657 -- 28,130
Other liabilities...................... -- -- -- -- 17,510 17,510
Shareholders' equity................... -- -- -- -- 97,694 97,694
---------- ---------- ---------- --------- ----------- ------------
Total liabilities and shareholders'
equity........................... $ 470,743 $ 136,844 $ 16,609 $ 27,744 $ 371,370 $ 1,023,310
---------- ---------- ---------- --------- ----------- ------------
---------- ---------- ---------- --------- ----------- ------------
Period Gap............................. $ 41,995 $ (93,488) $ 92,449 $ 68,073 $ (109,029)
Cumulative interest-earning
assets............................... 512,738 556,094 665,152 760,969
Cumulative interest-bearing
liabilities.......................... 470,743 607,587 624,196 651,940
Cumulative Gap......................... 41,995 (51,493) 40,956 109,029
Cumulative interest-earning assets to
cumulative interest-bearing
liabilities.......................... 1.09 0.92 1.07 1.17
Cumulative Gap as a percent of:
Total assets......................... 4.10% (5.03)% 4.00% 10.65%
Interest-earning assets.............. 5.52 (6.77) 5.38 14.33
</TABLE>
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(1) Assets or liabilities which are not interest rate sensitive.
(2) Allowance for possible loan losses of $7.8 million as of June 30, 1998 is
included in other assets.
At June 30, 1998, the Company had $556.1 million in assets and $607.6
million in liabilities repricing within one year. Therefore, $51.5 million more
in interest rate sensitive liabilities than interest rate
31
<PAGE>
sensitive assets will change to the then current rate (changes occur due to the
instruments being at a variable rate or because the maturity of the instrument
requires its replacement at the then current rate). The ratio of interest
earning assets to interest bearing liabilities maturing or repricing within one
year at June 30, 1998 was .92, and management tries to maintain this ratio as
close to 1.0 as possible while remaining in a range between .80 and 1.20.
Interest expense is likely to be affected to a greater extent than interest
income for any change in interest rates within one year from June 30, 1998. If
rates were to fall during this period, interest expense would decline by a
greater amount than interest income and net income would increase. Conversely,
if rates were to rise, the reverse would apply, and the Company's net income
would decrease.
Since interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously, a cumulative gap analysis alone cannot be
used to evaluate the Company's interest rate sensitivity position. To supplement
traditional gap analysis, the Company performs simulation modeling to estimate
the potential effects of changing interest rates. The process allows the Company
to explore the complex relationships within the gap over time and various
interest rate environments. Based upon the Company's interest rate shock
simulations, net interest income is expected to decrease approximately 1.5% with
a 200 basis point instantaneous increase to interest rates and increase
approximately 1.3% with a 200 basis point instantaneous decrease in rates.
Management has a target of minimizing the decline in net interest income to no
more than 4.0% given a 200 basis point instantaneous decrease in rates.
The preceding sensitivity analysis does not represent a forecast and should
not be relied upon as being indicative of expected operating results. These
hypothetical estimates are based upon numerous assumptions, including the nature
and timing of interest rate levels including the shape of the yield curve
prepayments on loans and securities, changes in deposit levels, pricing
decisions on loans and deposits, reinvestment and replacement of asset and
liability cashflows and others. While assumptions are developed based upon
current economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including how
customer preferences or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ because of prepayment and refinancing
levels likely deviating from those assumed, the varying impact of interest rate
change caps or floors on adjustable rate loans, depositor withdrawals and
product preference changes, and other internal and external variables.
Furthermore, the sensitivity analysis does not reflect actions that management
might take in responding to or anticipating changes in interest rates.
Management has taken several steps to reduce the positive gap of the Company
by lengthening the maturities in its investment portfolio and originating more
fixed-rate assets that mature or reprice in balance with its interest bearing
liabilities. Management will continue to maintain a balance between its interest
earning assets and interest bearing liabilities in order to minimize the impact
on net interest income due to changes in market rates.
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<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
U.S. SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
SIGNATURES
Pursuant to the requirements of the U.S. Securities Exchange Act of 1934,
ELBI has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
<TABLE>
<S> <C>
ELDORADO BANCSHARES, INC.
DATE: October 13, 1998 /s/ ROBERT P. KELLER
------------------------------------------
Robert P. Keller
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DATE: October 13, 1998 /s/ JOHN L. GORDON
------------------------------------------
John L. Gordon
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
</TABLE>
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