<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 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.
Common Stock, $.01 par value 9,173,698 shares outstanding on November
14, 1998 (restated to reflect the
one-for-two reverse split effective
September 4, 1998)
<PAGE>
ELDORADO BANCSHARES, INC.
U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Condition - 3
September 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations 5
For the three and six months ended September 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows - 6
For the six months ended September 30, 1998 and 1997
Notes to the Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operation 10
Item 3. Qualitative and Quantitative Disclosure about Market Risk 28
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELDORADO BANCSHARES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
---------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 205,191 $ 81,030
Federal funds sold 40,000
---------------- ------------
Total cash and cash equivalents 205,191 121,030
Available-for-sale investment securities 102,250 67,295
Mortgage loans held for sale 169,282 96,230
Loans and leases, net of unearned income 514,405 519,048
Less allowance for loan and lease loss (8,126) (9,395)
---------------- ------------
Loans, net 675,561 605,883
Loan and servicing sale receivable 3,855 1,247
Premises and equipment, net 9,686 11,232
Real estate acquired through foreclosure, net 1,321 2,740
Intangibles arising from acquisitions, net 64,386 66,769
Accrued interest receivable and other assets 28,094 26,159
---------------- ------------
Total assets $ 1,090,344 $ 902,355
---------------- ------------
---------------- ------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
ELDORADO BANCSHARES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (CONTINUED)
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998 DECEMBER 31,
(UNAUDITED) 1997
---------------- -------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Deposits:
Demand:
Non-interest bearing 267,555 289,344
Interest bearing 101,742 97,416
Savings:
Regular 208,505 98,465
Money market 89,607 98,189
Time:
Under $100,000 153,948 99,713
$100,000 or more 117,826 82,076
---------------- -------------
Total deposits 939,183 765,203
Federal funds purchased 4,612 2,050
Due to related parties
Accrued expenses and other liabilities 18,336 12,172
Mandatory convertible debentures 405 537
Subordinated debentures 27,657 27,657
---------------- -------------
Total liabilities 990,193 807,619
Shareholders' equity:
Preferred stock, $.01 par value, 1,500,000 shares
authorized, 116,593 issued and outstanding at
September 30, 1998 11,659 11,659
Special common stock, $.01 par value, 9,651,600
shares authorized, 2,412,859 issued and outstanding
at September 30, 1998 92 24
Common stock, $.01 par value, 50,000,000
shares authorized, 6,760,840 issued and
outstanding at a September 30, 1998 68
Additional paid-in capital 83,946 83,946
Retained earnings 5,081 524
Unearned compensation (1,132) (1,509)
Accumulated other comprehensive income (loss) 505 24
---------------- -------------
Total shareholders' equity 100,151 94,736
---------------- -------------
Total liabilities and shareholders' equity 1,090,344 902,355
---------------- -------------
---------------- -------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
ELDORADO BANCSHARES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- ------------------------------------
1998 1997 1998 1997
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Interest and fee income on loans 14,854 13,527 46,342 28,990
Income from lease finance receivables 1,870 942 4,452 3,110
Interest and dividend income on securities 1,317 1,927 3,236 3,620
Interest income on federal funds sold 1,325 410 1,645 1,124
---------------- ---------------- ----------------- -----------------
Total interest and fee income 19,366 16,806 55,675 36,844
Interest on deposits 7,442 5,631 18,992 13,005
Interest on federal funds purchased 262 86 1,159 233
Interest on subordinated notes 830 836 2,488 1,070
---------------- ---------------- ----------------- -----------------
Total interest expense 8,534 6,553 22,639 14,308
Net interest income 10,832 10,253 33,036 22,536
Provision for loan and lease losses 700 358 2,622 1,087
Net interest income after provision
for loan and lease losses 10,132 9,895 30,414 21,449
Service charges on deposit accounts 782 830 2,563 1,490
Gain on sale of mortgage loans 4,336 2,457 12,049 7,664
Other non-interest income 1,244 7 3,112 977
---------------- ---------------- ----------------- -----------------
Total non-interest income 6,362 3,294 17,724 10,131
Salaries and employee benefits 5,509 4,471 15,966 11,121
Expenses of premises & fixed assets 1,933 1,889 5,437 4,380
Amortization of intangibles 975 826 2,714 1,386
Other non-interest expense 4,180 3,612 12,958 10,835
---------------- ---------------- ----------------- -----------------
Total non-interest expense 12,597 10,798 37,075 27,722
Income before taxes and other 3,897 2,391 11,063 3,858
Applicable income taxes 1,806 1,318 5,549 2,230
---------------- ---------------- ----------------- -----------------
Net income $ 2,091 $ 1,073 $ 5,514 $ 1,628
---------------- ---------------- ----------------- -----------------
---------------- ---------------- ----------------- -----------------
Net income available to common $ 1,771 $ 750 $ 4,558 $ 1,220
Earnings per share (basic) $ 0.19 $ 0.08 $ 0.50 $ 0.18
Earnings per share (dilutive) $ 0.18 $ 0.08 $ 0.46 $ 0.17
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
ELDORADO BANCSHARES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
1998 1997
------------------- --------------------
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,514 $ 1,628
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan and lease losses 2,622 1,176
(Gain) loss on sale of investment securities 9
Gain on sale of mortgage loans 1,250,523 (5,013)
(Gain) loss on sale of premises and equipment (10) 15
Loss on sale of real estate owned 303 55
Depreciation and amortization 4,267 2,676
Accretion/amortization related to securities (896) 246
Mortgage loans originated for sale (1,306,103) (627,993)
Proceeds from sales of loans and servicing (10,767) 634,061
Equity in loss of real estate joint venture 250
Decrease (increase) in servicing sale receivable (1,241) (46,009)
Other, net 3,391 (10,190)
----------- ---------
Net (used in) provided by operating activities (52,397) (49,089)
INVESTING ACTIVITIES:
Decrease in interest bearing deposits with other financial institutions
Purchase of investment securities (123,733) (17,016)
Proceeds from sales and maturities of investment securities 90,117 49,724
Loans/Leases originated for portfolio net of principal repayment (6,149) (10,584)
Purchase of premises and equipment (1,217) (722)
Proceeds from sale of premises and equipment 1,220 12
Proceeds from sales of real estate acquired through foreclosure 1,818 2,824
Capital expenditures for other real estate owned (3,064)
Purchase of Eldorado Bank, net of cash received (46,477)
----------- ---------
Net cash (used in) provided by investing activities (37,944) (25,303)
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
ELDORADO BANCSHARES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
1998 1997
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
FINANCING ACTIVITIES
Net increase in deposits 173,980 75,439
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 25,224
Payment of dividends (433) (408)
Repayment of notes payable (4,500)
Net increase (decrease) in other borrowings 2,430 (6,120)
--------------- --------------
Net cash provided by financing activities 175,977 146,955
INCREASE IN CASH AND CASH EQUIVALENTS 85,636 72,563
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 121,030 46,222
--------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 206,666 $ 118,785
--------------- --------------
--------------- --------------
Supplemental disclosures of cash flow information:
Cash paid for Interest on deposits 12,432 10,221
Cash paid for Income taxes 1,610 895
</TABLE>
See notes to condensed consolidated financial statements.
7
<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 "Company")
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 September 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 September 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. Diluted earnings per share is
computed by dividing net income less dividends paid to preferred shareholders
plus the income impact of diluted securities by the common shares outstanding
plus diluted common stock equivalents by using the treasury stock method.
At September 30, 1998, the Company had outstanding common stock
purchase warrants entitling the holders to purchase a total of 2,241,217
shares of common stock and stock options entitling the holder to purchase a
total of 350,213 shares of common stock. Lacking an active market for its
shares, the Company assumed a weighted average per share price in computing
the diluted impact of the outstanding warrants and options of $8.00 for the
three and nine months ended September 30, 1998.
At September 30, 1997, the Company had outstanding common stock
purchase warrants entitling the holders to purchase a total of 2,241,217
shares of common stock. There were granted but no exercisable stock options
outstanding at September 30, 1997. 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 $12.00 for the
three and nine months ended September 30, 1997.
8
<PAGE>
The weighted average number of common shares used to compute basic
earnings per share were 9,173,699 and 9,385,790 for the three months ended
September 30, 1998 and 1997, respectively and 9,173,699 and 6,776,556 for the
nine months ended September 30, 1998 and 1997, respectively. The fully diluted
average number of common shares used to compute dilutive earnings per share were
9,963,371 and 9,830,298 for the three months ended September 30, 1998 and 1997,
respectively and 9,963,371 and 9,830,298 for the nine months ended September 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:
9
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- ------------------------------------
1998 1997 1998 1997
---------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income $ 2,091 $ 1,073 $ 5,514 $ 1,628
Comprehensive income 564 128 505 152
---------------- --------------- ---------------- ----------------
Total comprehensive income $ 2,655 $ 1,201 $ 6,019 $ 1,780
---------------- -------------- ---------------- ----------------
</TABLE>
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 "Company") 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 for the nine months ended September 30, 1998 and
1997 are 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 earlier
part of this decade.
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.
10
<PAGE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
OVERVIEW
To the extent that the following discussion relates to the operating
results of the Company during the nine months ended September 30, 1997, it
includes the results of only four months 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 nine months
ended September 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 $5.5 million for the nine months ended
September 30, 1998. This represents an increase of $3.9 million, or 238.70%,
over net income of $1.6 million for the nine months ended September 30, 1997.
Basic net income per share for the nine months ended September 30, 1998 was
$.50 compared to $.18 for the nine months ended September 30, 1997. Diluted
net income per share for the nine months ended September 30, 1998 was $.46
compared to $.17 for the nine months ended September 30, 1997. Excluding the
amortization of goodwill and other intangibles, basic and diluted earnings
per share for the nine months ended September 30, 1998 were $.79 and $.73,
respectively, compared to $.38 and $.36 for the same period of 1997. The
Company's return on average assets was .74% and a return on average common
equity was 7.60% for the nine months ended September 30, 1998, as compared to
.34% and 3.37%, respectively, for the nine months ended September 30, 1997.
Excluding the amortization of goodwill and other intangibles, return on
average assets was 1.11% and return on average common equity was 11.34% for
the nine months ended September 30, 1998, as compared to .63% and 6.23%,
respectively, for the nine months ended September 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
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 provision 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.
The increase in net income for the nine months ended September 30,
1998, compared to the same nine month period of 1997 was the result of an
increases in both interest income and non-interest income. The increase in
interest income was the result of an increase in the level of interest
earning assets. The increase in the level of earning assets was due in part
to the assets purchased in the acquisition of Eldorado which are included for
the full nine months ended September 30, 1998 and only four months of the
nine months ended September 30, 1997. The increase in non-interest income was
a result of an increase in the volume of mortgage loans originated and sold
and an increase in service charges and fees.
The increase in revenue was partially offset by increases in
interest expense, the provision for loan losses, and other operating
expenses. The increase in interest expense was the result of both a greater
volume and cost of average interest paying liabilities. The increase in the
volume of interest bearing liabilities assets was affected by the Eldorado
acquisition. The increase in the cost of average interest bearing liabilities
reflects a greater reliance on other borrowed funds. The increase in the
provision for credit losses reflects the greater volume of loans. The
increase in non-interest expenses was due in part to the cost of operating
the additional branch facilities acquired in the Eldorado purchase.
Non-interest expense was also affected by increased commission expense
reflecting the increased volume of mortgage loan origination
NET INTEREST INCOME AND NET INTEREST MARGIN
For the nine months ended September 30, 1998, the Company generated
net interest income of $33.0 million. This represented an increase of $10.5
million, or 46.59%, over net interest income of $22.5 million for the nine
months ended September 30, 1997. The net yield on earning assets decreased to
5.54% for the nine months ended September 30, 1998, compared to a net yield
of 5.68% for the same period last year.
Total interest income was $55.7 million for the nine months ended
September 30, 1998. This represented an increase of $18.8 million, or 51.11%,
over total interest income of $36.8 million for the nine months ended
11
<PAGE>
September 30, 1997. The increase in total interest income was primarily the
result of an increase in the average earning assets for the most recent nine
month period. Average earning assets were $797.4 million for the nine months
ended September 30, 1998. This represented an increase of $267.2 million, or
50.39%, over average earning assets of $530.2 million, for the nine months
ended September 30, 1997. The yield on total earning assets increased to
9.34% for the nine months ended September 30, 1998, compared to an average
yield of 9.29% for the nine months ended September 30, 1997. The increase in
the yield on earning assets resulted as a greater percentage of earning
assets were allocated to loans.
Interest and fees on loans and income from lease finance receivables
totaled $50.8 million for the nine months ended September 30, 1998. This
represented an increase of $18.7 million, or 58.24%, compared to total loans
and lease income of $32.1 million for the nine months ended September 30,
1997. The increase in loan and lease income was the result of greater average
balances for the first nine months of 1998 compared to the same period last
year. Loans and leases averaged $684.8 million for the nine months ended
September 30, 1998. This represented an increase of $262.9 million, or
62.31%, greater than average loans and leases of $421.9 million for the nine
months ended September 30, 1997. The yield on loans and leases decreased to
9.34% for the first nine months of 1998, compared to an average yield of
10.17% for the same nine months of 1997. The increase in average balances was
affected by the Eldorado acquisition. The decrease in yields reflects in part
an increased price competition for earning assets for the most recent nine
month period.
Interest expense totaled $22.6 million for the nine months ended
September 30, 1998. This represented an increase of $8.3 million, or 58.23%,
over total interest expense of $14.3 million for the nine months ended
September 30, 1997. The increase in interest expense is the result of both an
increased volume and cost of average interest paying liabilities. Average
interest bearing liabilities were $625.7 million for the nine months ended
September 30, 1998. This represented an increase of $218.2 million, or
53.54%, over average interest bearing liabilities of $407.6 million for the
nine months ended September 30, 1997. The cost of average interest bearing
liabilities was 4.84% for the nine months ended September 30, 1998, compared
to an average cost of 4.69% for the same nine month period in 1997.
The increase in average interest bearing liabilities was primarily
the result of increased average interest bearing deposits. Interest bearing
deposits averaged $387.9 million for the nine months ended September 30,
1998. This represented an increase of $193.6 million, or 49.93%, compared to
average interest bearing deposits of $387.9 million for the nine months ended
September 30, 1997. The cost of average interest bearing deposits decreased
to 4.37% for the nine months ended September 30, 1998, compared to an average
cost of 4.48% for the same nine month period last year. The decrease in the
average cost of interest bearing deposits was primarily the result of a
decrease in the cost of average time deposits. The average cost of time
deposits decreased to 4.83% for the nine months ended September 30, 1998,
compared to an average cost of 5.56% for the same period last year.
Other interest bearing liabilities averaged $44.2 million. This
represented an increase of $24.5 million, or 124.7 % over average other
interest bearing liabilities of $19.7 million for the nine months ended
September 30, 1997. The average cost of other interest bearing liabilities
increased to 11.03% for the nine months ended September 30, 1998, compared to
an average cost of 8.85% for the nine months ended September 30, 1997. The
increase in the average balance and cost of borrowings is attributable to the
subordinated debentures issued to fund a portion of the Eldorado Acquisition.
12
<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>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
1998 1997
--------------------------------------------------- ----------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME OR YIELD OR AVERAGE INCOME OR YIELD OR
BALANCE EXPENSE COST BALANCE EXPENSE COST
-------------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans and leases (1) $ 684,828 $ 50,794 9.92% $ 421,920 $ 32,100 10.17%
Investment securities (2) 71,030 3,236 6.09% 80,223 3,620 6.03%
Federal funds sold 41,498 1,645 5.30% 28,032 1,124 5.36%
-------------- ----------- --------- ----------- ----------- ---------
Total interest earning assets 797,356 55,675 9.34% 530,175 36,844 9.29%
Non earning assets
Cash and deposits with banks 77,858 49,198
Other assets 100,419 58,259
-------------- -----------
Total assets 975,633 637,632
-------------- -----------
-------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand $ 99,294 $ 1,174 1.58% $ 57,417 $ 909 2.12%
Money market 92,680 2,660 3.84% 56,764 1,377 3.24%
Savings 161,072 6,901 5.73% 107,297 3,804 4.74%
Time 228,473 8,257 4.83% 166,394 6,915 5.56%
-------------- ----------- --------- ----------- ----------- ---------
Total interest bearing deposits 581,519 18,992 4.37% 387,872 13,005 4.48%
-
Short term borrowing 15,967 1,159 9.70% 8,419 233 3.70%
Long term debt 28,252 2,488 11.77% 11,261 1,070 12.70%
-------------- ----------- --------- ----------- ----------- ---------
Total interest bearing liabilities 625,738 22,639 4.84% 407,552 14,308 4.69%
Non-interest bearing liabilities:
Demand deposits 237,106 157,780
Other liabilities 16,041 7,796
-------------- -----------
Total liabilities 878,885 573,128
Shareholders' equity 96,748 64,504
-------------- -----------
Total liabilities and
shareholders' equity 975,633 637,632
-------------- -----------
-------------- -----------
Net interest income 33,036 22,536
----------- -----------
----------- -----------
Net yield on interest earning assets 5.54% 5.68%
--------- ---------
--------- ---------
</TABLE>
- -----------
(1) Loan fees of $3.5 million and $2.0 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.
13
<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>
NINE MONTHS ENDED SEPTEMBER 30,
1998 COMPARED TO 1997
---------------------
NET RATE VOLUME MIX
CHANGE ---- ------ ---
------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Loans and leases ............... $ 18,694 $ (806) $ 20,001 $(501)
Investment securities .......... (384) 35 (415) (4)
Federal funds sold ............. 521 (13) 540 (6)
Other earning assets ........... -- -- -- --
Total interest income ..... 18,831 (784) 20,126 (511)
Interest expense:
Interest-bearing demand ........ 265 (230) 663 (168)
Money market ................... 1,284 253 871 160
Savings ........................ 3,097 793 1,906 397
Time ........................... 1,341 (902) 2,580 (337)
Short-term borrowing ........... 926 378 209 (339)
Long-term debt ................. 1,418 (57) 1,558 (83)
Total interest expense .... 8,331 235 7,787 308
Net interest income ............... $ 10,500 $(1,019) $ 12,339 $(819)
</TABLE>
PROVISION FOR LOAN AND LEASE LOSSES
The Company maintains an allowance for potential credit losses. A
provision for credit losses is charged to the Company's earnings sufficient
to maintain the allowance for credit losses at a level determined adequate by
the Bank's management. The provision for credit losses totaled $2.6 million
for the nine months ended September 30, 1998. This represented an increase of
$1.5 million, or 141.21%, over the provision for credit losses of $1.1
million for the nine months ended September 30, 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."
NON-INTEREST INCOME
Non-interest income totaled $17.7 million for the nine months ended
September 30, 1998. This represented an increase of $9.3 million, or 110.0%,
over non-interest income of $8.4 million for the nine months ended September
30, 1997. The increase in non-interest income for the first nine months of
1998 was primarily the result of income related to operations acquired in the
Eldorado Acquisition, and increased earnings from the Bank's mortgage
operations.
Income from service charges on deposit accounts totaled $2.6 million
for the nine months ended September 30, 1998. This represented an increase of
$1.1 million, or 72.01%, compared to service charges on deposit accounts of
$1.5 million for the nine months ended September 31, 1997. Gains on the sale
of mortgage loans totaled $12.0 million for the nine months ended September
30, 1998. This represented an increase of $7.2 million, or 147.36%, over a
gain on the sale of mortgage loans of $4.9 million for the nine months ended
September 30, 1997.
The following table presents for the periods indicated the major
categories of non-interest income:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Service charges on deposit accounts ......... $2,563 $1,490
Gains on sale of mortgage loans ............. 12,049 4,871
SBA loan servicing .......................... 1,886 1,581
Other income ................................ 1,226 498
Total non-interest income ................ $17,724 $8,440
</TABLE>
14
<PAGE>
NON-INTEREST EXPENSES
Non-interest 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.
Total non-interest expense was $37.1 million for the nine months
ended September 30, 1998. This represented an increase of $9.4 million, or
33.74%, over total non-interest expense of $27.7 million for the nine months
ended September 30, 1997. For the most part, the increase is attributable to
the added personnel, facilities and general administrative overhead resulting
from the Eldorado Acquisition.
Salaries and employee benefits totaled $15.9 million for the nine
months ended September 30, 1998. This represented an increase of $4.8
million, or 43.57%, over salaries and employee benefits of $11.1 million for
the first nine months of 1997. The increase in salaries and employee benefit
expense is due in part to the Eldorado Acquisition and as a result of
increased commission expense paid for mortgage loan origination. Occupancy
and equipment expense totaled $5.4 million for the nine months ended
September 30, 1998. This represented an increase of $1.1 million, or 24.13%,
over occupancy and equipment expense of $4.4 million for the nine months
ended September 30, 1997. The increase primarily reflects the increase in the
number of facilities that resulted from the Eldorado Acquisition. The
amortization of intangibles totaled $2.7 million for the nine months ended
September 30, 1998. This represented an increase of $1.3 million, or 95.82%,
over an amortization expense of $1.4 million for the nine months ended
September 30, 1997. The increase in amortization expense is the result of the
Eldorado Acquisition.
The Company's efficiency ratio decreased to 73.04% for the nine
months ended September 30, 1998, compared to a ratio of 84.86% for the same
period last year. The decrease in the ratio indicates that a smaller portion
of the Company's net revenue was paid as operating expenses for 1998 compared
to 1997. Annualized operating expenses as a percent of average assets totaled
5.07% for the nine months ended September 30, 1998, compared to an annualized
ratio of 5.80% for the same period last year. The decrease in the ratio
indicates that Company is managing greater levels of average assets at a
lower total cost for 1998 compared to last year.
The following table presents for the periods indicated the major
categories of non-interest expense:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Salaries and employee benefits ........................ $15,966 $11,121
Non-staff expenses
Occupancy and equipment ............................ 5,437 4,380
Amortization of intangibles ........................ 2,714 1,386
Loan expense, including carrying cost for OREO ..... 1,095 714
Other .............................................. 11,863 10,121
Total non-interest expense .................... $37,075 $27,722
</TABLE>
PROVISION FOR INCOME TAXES
For the nine months ended September 30, 1998, the Company expensed
to earnings a provision for income taxes of $5.5 million. This represented an
increase of $3.3 million, or 148.83%, over the provision for income taxes of
$2.2 million for the nine months ended September 31, 1998. The Company's
effective tax rate (50.16%) 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.
15
<PAGE>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
OVERVIEW
For the quarter ended September 30, 1998, the Company generated net
income of $2.1 million. This represented an increase of $1.0 million, or
94.87%, over net income of $1.0 million for the quarter ended September 30,
1997. Basic net income per share for the quarter ended September 30, 1998 was
$0.19 compared to $0.08 per share for the quarter ended September 30, 1997.
Diluted net income per share for the quarter ended September 30, 1998 was
$0.18, compared to diluted net income per share of $0.08 for the quarter
ended September 30, 1997. Excluding the amortization of goodwill and other
intangibles, basic and diluted net income per share for the quarter ended
September 30, 1998 were $0.30 and $0.28, respectively, compared to $0.17 and
$0.16 for the quarter ended September 30, 1997. The Company's return on
average assets was .80%, and its return on average common equity was 8.44%
for the quarter ended September 30, 1997. For the same quarter last year, the
Company generated a return on average assets of .47%, and a return on average
common equity of 4.45%. The return on average assets excluding goodwill
amortization was 1.18 % and return on average common equity excluding
goodwill amortization was 12.37% for the quarter ended September 30, 1998, as
compared to returns of .84% and 7.88%, respectively, for the quarter ended
September 30, 1997.
RESULTS OF OPERATIONS
The increase in net income for the quarter ended September 30, 1998,
compared to the same quarter last year, was primarily the result of increased
non-interest income. The increase in non-interest income was principally the
result of increased gains on the sale of mortgage loans. The increase in net
income for the quarter ended September 30, 1998 compared to 1997 was also the
result of an increase in net interest income. Increased interest income
resulting from a higher volume of average earnings assets more than offset
increased interest expense that resulted from both a greater average volume
and a higher average cost of interest bearing liabilities. Increases in net
interest income and non-interest income were partially offset by increases in
the provision for credit losses and increases in non-interest expense.
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income totaled $10.8 million for the quarter ended
September 30, 1998. This represented an increase of $500,000, or 4.85%, over
net interest income of $10.3 million for the quarter ended September 30,
1997. The net yield on earning assets decreased to 4.90% for the quarter
ended September 30, 1998, compared to a net yield of 5.51% for the quarter
ended September 30, 1997. The increase in net interest for the most recent
quarter was primarily the result in an increase in the volume of average
earning assets.
Total interest and fee income was $19.4 million for the quarter
ended September 30, 1998. This represented an increase of $2.6 million, or
15.23%, over total interest and fee income of $16.8 million for the quarter
ended September 30, 1997. The increase in total interest and fee income was
the result of an increased volume of average earning assets. Earning assets
averaged $877.4 million for the quarter ended September 30, 1998. This
represented an increase of $138.5 million, or 18.75%, over average earning
assets of $738.8 million for the quarter ended September 30, 1997. The yield
on average earning assets decreased to 8.76% for the quarter ended September
30, 1998, compared to an average yield of 9.05% for the quarter ended
September 30, 1997. The decrease in the yield on average earning assets
reflects in part an increased price competition for earning assets for the
most recent quarter.
Interest and fees on loans and leases totaled $16.7 million for the
quarter ended September 30, 1998. This represented an increase of $2.3
million, or 15.59%, over interest and fees on loans and leases of $14.5
million for the quarter ended September 30, 1997. The increase and loan and
lease income was the result of an increase in the average volume of loans and
leases for the most recent quarter. Average loans and leases increased
$105,088, or 18.11%, to $685.5 million for the quarter ended September 30,
1998, from $580.4 million for the quarter ended
16
<PAGE>
September 30, 1997. The yield on loans decreased to 9.68% for the quarter
ended September 30, 1998, compared to an average yield of 9.89% for the same
quarter last year.
Interest expense totaled $8.5 million for the quarter ended
September 30, 1998. This represented an increase of $2.0 million, or 30.23%,
over total interest expense of $6.5 million for the quarter ended September
30, 1997. The increase in interest expense reflects an increase in both the
volume and costs of average interest bearing liabilities for the most recent
quarter. Average interest bearing liabilities were $687.0 million for the
quarter ended September 30, 1998. This represented an increase of $125.6
million, or 21.93%, over average interest bearing liabilities of $563.5
million for the quarter ended September 30, 1998. The cost of average
interest bearing liabilities increased to 4.93% for the quarter ended
September 30, 1998, from an average cost of 4.61% for the same quarter last
year. The increase in average interest bearing liabilities was the result of
increases in savings deposits, time deposits and other borrowed funds.
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 SEPTEMBER 30,
---------------------------------------------------------------------------------------
1998 1997
---------------------------------------------- ---------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME OR YIELD OR AVERAGE INCOME OR YIELD OR
BALANCE EXPENSE COST BALANCE EXPENSE COST
--------------- --------------- ----------- --------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans and leases (1) $ 685,491 16,724 9.68% 580,403 14,469 9.89%
Investment securities (2) 92,601 1,317 5.64% 128,816 1,927 5.93%
Federal funds sold 99,261 1,325 5.30% 29,601 451 6.04%
--------------- ------------- ----------- --------------- ------------ ------------
Total interest earning assets 877,353 19,366 8.76% 738,820 16,847 9.05%
Non earning assets
Cash and deposits with banks 73,520 66,590
Other assets 89,625 99,377
--------------- ---------------
Total assets 1,040,498 904,787
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand $ 100,128 341 1.35% 90,498 371 1.63%
Money market 89,825 921 4.07% 97,369 823 3.35%
Savings 198,100 3,169 6.35% 141,065 1,666 4.69%
Time 267,209 3,011 4.47% 200,752 2,771 5.48%
--------------- ------------- ----------- --------------- ------------ ------------
Total interest bearing deposits 655,262 7,442 4.51% 529,684 5,631 4.22%
Short term borrowing 4,102 262 25.34% 5,581 86 6.11%
Long term debt 27,657 830 11.91% 28,194 836 11.76%
--------------- ------------- ----------- --------------- ------------ ------------
Total interest bearing liabilities 687,021 8,534 4.93% 563,459 6,553 4.61%
Non-interest bearing liabilities:
Demand deposits 235,176 236,297
Other liabilities 19,181 8,657
-------------- --------------
Total liabilities 941,378 808,413
Shareholders' equity 99,120 96,374
-------------- --------------
Total liabilities and
shareholders' equity 1,040,498 904,787
============== =============
Net interest income 10,832 10,294
============ ============
Net yield on interest earning assets 4.90% 5.53%
=========== ============
</TABLE>
- -----------
(1) Loan fees of $1.2 million and $617,000 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.
17
<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 SEPTEMBER 30,
1998 COMPARED TO 1997
---------------------
NET
CHANGE RATE VOLUME MIX
------ ---- ------ ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income:
Loans and leases ................. $ 2,255 $(308) $ 2,620 $ (57)
Investment securities ............ (610) (95) (542) 27
Federal funds sold ............... 874 (56) 1,063 (138)
Total interest income ....... 2,519 (459) 3,141 (163)
Interest expense:
Interest-bearing demand .......... (30) (63) 39 (7)
Money market ..................... 98 175 (64) (13)
Savings .......................... 1,503 591 674 239
Time ............................. 240 (509) 917 (167)
Short-term borrowing ............. 136 254 (44) (74)
Long-term debt ................... (7) 9 (16) 0
Total interest expense ...... 1,940 457 1,506 (22)
Net interest income ................. $ 579 (916) 1,635 (141)
</TABLE>
PROVISION FOR LOAN AND LEASE LOSSES
For the quarter ended September 30, 1998, the company charged to
earnings a provision for loan losses of $700,000. This represented an
increase of $342,000, or 95.53%, over the provision for loan losses of
$358,000 for the quarter ended September 30, 1997. 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.
NON-INTEREST INCOME
Non-interest income totaled $6.4 million for the quarter ended
September 30, 1998. This represented an increase of $3.3 million, or 93.14%,
over non-interest income of $3.3 million for the quarter ended September 30,
1997. The increase in non-interest income was primarily the result of
increased gains on the sale of mortgage loans. Gain on the sale of mortgage
loans was $4.3 million for the quarter ended September 30, 1998. This
represented an increase of $1.9 million, or 76.48%, over gains on sales of
mortgage loans of $2.5 million for the quarter ended September 30, 1997.
For the quarter ended September 30, 1997, the Company reversed
income of $786,000 relating to the re-purchase of loans for which gains had
been recognized earlier in that year. The reversal of the gains previously
recognized contributed to the $184,000 charge to other income for the quarter.
18
<PAGE>
The following table presents for the periods indicated the major
categories of non-interest income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Service charges on deposit accounts ............. $782 $830
Gains on sale of mortgage loans ................. 4,336 2,457
SBA loan servicing .............................. 620 191
Other income .................................... 624 (184)
Total non-interest income .................... $6,362 $3,294
</TABLE>
NON-INTEREST EXPENSES
Total non-interest expense was $12.6 million for the quarter ended
September 30, 1998. This represented an increase of $1.8 million, or 16.66%,
over total non-interest expense of $10.8 million for the quarter ended
September 30, 1997. Increased salaries and employee benefits contributed to
the increases in non-interest expense. Salaries and related benefits totaled
$5.5 million for the quarter ended September 30, 1998. This represented an
increase of $1.0 million, or 23.22%, over total salaries and related benefits
of $4.5 million for the quarter ended September 30, 1997. An increase in the
commissions paid for mortgage origination contributed to the increase in
salaries and related benefits for the most recent quarter.
Non-interest expenses measured as a percent of net revenue decreased
to 73.26% for the quarter ended September 30, 1998, compared to a ratio of
79.71% for the quarter ended September 30, 1997. The decrease in the ratio
indicates that the Company paid a lower portion of net revenue as
non-interest expense for the most recent quarter. Non-interest expense as a
percent on average assets increased to 4.84% for the quarter ended September
30, 1998, compared to a ratio of 4.77% for the same period last year.
The following table presents for the periods indicated the major
categories of non-interest expense:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Salaries and employee benefits ................... $5,509 $4,471
Non-staff expenses
Occupancy and equipment ....................... 1,933 1,889
Amortization of intangibles ................... 975 826
Other non-interest expenses ................... 4,180 3,612
Total non-interest expense ............... $12,597 $10,798
</TABLE>
PROVISION FOR INCOME TAXES
The provision for income taxes was $1.8 for the quarter ended
September 30, 1998. This represented an increase of $488,000, or 37.03%, over
a provision for income taxes of $1.3 million for the quarter ended September
30, 1997. The effective tax rate for the quarter ended September 30, 1998 was
46.34%, compared to an effective tax rate of 55.12% for the quarter ended
September 30, 1997.
19
<PAGE>
FINANCIAL CONDITION
At September 30, 1998, the Company reported total assets of $1.1
billion. This represented an increase of $188.0 million, or 20.83%, over
total assets of $902.4 million at September 30, 1997. The increase in assets
was the result of increased loans, cash and due from banks, and investment
securities. Total earning assets were $777.8 million at September 30, 1998.
This represented an increase of $64.6 million, or 9.06%, compared to total
earning assets of $713.2 million at September 30, 1997. The increase in
earning assets was the result of increased loans and investment securities.
LOANS AND LEASES
Net loans totaled $675.6 million at September 30, 1998. This
represented an increase of $69.7 million, or 11.50%, over net loans of $605.9
million at September 30, 1997. The increase in net loans was the result of
increased mortgage loans held for sale. Mortgage loans held for sale totaled
$169.3 million at September 30, 1998. This represented an increase of $73.1
million, or 75.91%, over mortgage loans held for sale of $96.2 million at
September 30, 1997.
Excluding those loans held for sale, at September 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. 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,
SEPTEMBER 30, -----------
1998 1997 1996 1995
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial .................................. $96,981 $115,919 $47,772 $16,188
Real estate-commercial ...................... 210,824 235,244 86,397 --
Real estate-construction .................... 28,414 35,617 18,812 599
Real estate-mortgage ........................ 22,395 32,132 41,650 15,710
Installment loans to individuals ............ 81,898 62,323 22,512 6,525
Lease financing ............................. 77,737 40,819 46,498 --
Subtotal (portfolio loans) ............... 518,249 522,054 263,641 39,022
Loans and leases held for sale .............. 169,282 96,230 64,917 --
Total ................................. 687,531 618,284 328,558 39,022
Less: allowance for loan and lease losses ... (8,126) (9,395) (5,156) (639)
Deferred loan and lease fees ................ (3,844) (3,006) (2,444) (45)
Net loans and leases ........................ $675,561 $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.
20
<PAGE>
The following table shows the amounts of certain categories of loans
outstanding as of September 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>
SEPTEMBER 30, 1998
------------------
COMMERCIAL REAL ESTATE
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Aggregate maturities of loans and leases
which are due:
Within one year ....................... $38,880 $45,243
After one year but within five years:
Interest rates are floating or
adjustable ......................... 35,330 50,895
Interest rates are fixed or
predetermined ...................... 5,590 37,015
After 5 years:
Interest rates are floating or
adjustable ......................... 12,090 272,012
Interest rates are fixed or
predetermined ...................... 5,090 37,015
Total .............................. $96,981 $430,915
</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>
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1998 1998 1998 1997 1997
---- ---- ---- ---- ----
(DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and leases, not
restructured .......................... $7,338 $7,712 $6,049 $10,589 $9,101
Accruing loans and leases past due 90
days or more .......................... 2,198 1,136 1,377 4,638 1,244
Restructured loans and leases ............ 3,944 4,133 3,892 2,779 5,661
Total nonperforming loans and leases
("NPLs") ............................ 13,480 12,981 11,318 18,006 16,006
Other real estate owned ("OREO") ......... 1,321 1,499 1,539 2,740 3,433
Total nonperforming assets ("NPAs") ... $14,801 $14,482 $12,857 $20,746 $19,439
Selected ratios:
NPLs to total portfolio loans and
leases(1) .......................... 2.9% 2.5% 2.2% 3.5% 3.2%
NPAs to total portfolio loans and
leases and OREO(1) ................. 2.9 2.8 2.5 4.0 3.8
NPAs to total assets .................. 1.4 1.4 1.3 2.3 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 $180,000 for the nine months ended September 30, 1998 on
nonperforming loans if such loans had been current in accordance with their
original terms. Interest income recorded on nonperforming loans for the six
months ended September 30, 1998 was approximately $115,000.
Loans aggregating $11.6 million at September 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
21
<PAGE>
guidelines, management determined that a minimum of $2.1 million should be
included in the allowance at September 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 September 30, 1998 as to which there was serious
doubt as to the ability of the borrower to comply with present loan repayment
terms.
At September 30, 1998, the Company had OREO properties with an
aggregate carrying value of $1.3 million. This represented a decrease of
$1.4 million, or 51.79%, from OREO of $2.7 million at December 31, 1997.
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
September 30, 1998, the Company's allowance constituted over 217% of the
benchmark amount suggested by the federal banking agencies' policy statement
as compared with 250% at December 31, 1997.
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 September 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 $8.1 million, or
1.58% of net portfolio loans (i.e., excluding residential mortgages held for
sale) at September 30, 1998. The allowance for loan losses was $9.4 million, or
1.80% of net portfolio loans at December 31, 1997. For the nine months ended
September 30, 1998, the provision for loan and lease losses was $2.6 million
compared to a provision of $1.1 million for the nine months ended September 30,
1997. For the nine months ended September 30, 1998, loan and lease charge-offs
were $4.9 million and recoveries were $1.0 million. For the nine months ended
September 30, 1997, loan and lease charge-offs of $1.3 million and recoveries of
$225,000. Annualized net charge-offs as a percentage of average portfolio loans
were 1.02% for the nine months ended September 30, 1998 as compared to .31% for
the comparable period in 1997. The increase in annualized net charge-offs is
primarily attributable to the charge-off during the quarter ended March 31, 1998
of two loans with an aggregate principal balance of $2.1 million. The Company
22
<PAGE>
acquired those loans in the CSB acquisition, and although the loans were
performing in accordance with their terms as of September 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.
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,
---------------------------------------
SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1998 1998 1998 1997 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average portfolio loans and leases(1) . $507,604 $510,650 $518,670 $512,969 $505,602
Gross portfolio loans and leases(1) ... 518,250 512,350 520,884 522,054 506,625
Nonperforming loans and leases ........ 13,480 12,981 11,318 18,006 16,006
Allowance for loan and lease losses:
Balance at beginning of period ..... 7,820 7,892 9,395 9,249 9,242
Balance acquired during the period . -- -- -- -- --
Loans charged off during period
Commercial ...................... 215 520 2,296 142 11
Leases .......................... 253 166 167 646 140
Real estate ..................... 710 64 258 188
Installment ..................... 274 184 98 132 156
Total ......................... 692 1,580 2,625 1,178 495
Recoveries during period
Commercial ...................... 215 461 20 223 100
Leases .......................... 22 16 4 27
Real estate ..................... 11 143 514 1
Installment ..................... 82 14 21 175 16
Total ......................... 298 508 200 916 144
Net loans and leases charged off
during period .................. 394 1,072 2,425 262 351
Provisions for loan and lease
losses .......................... 700 1,000 922 408 358
Balance at end of period ........ $8,126 $7,820 $7,892 $9,395 $9,249
Selected ratios:
Net charge-offs to average
portfolio loans and leases
(annualized) .................... .04% .84% 1.87% .20% .28%
Provision for loan and lease
losses to average portfolio
loans and leases (annualized) ... .68 .78 .71 .32 .28
Allowance at end of period to
gross portfolio loans and
leases .......................... 1.58 1.53 1.52 1.80 1.83
Allowance as a percentage of
nonperforming loans and leases .. 70.23 60.24 69.73 52.18 57.78
</TABLE>
- -----------
(1) Excludes residential mortgages held for sale.
23
<PAGE>
The following table indicates management's allocation of the allowance
as of the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1998 1997
---- ----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Allocated amount:
Commercial, financial and agricultural. $861 10.6% $723 7.7%
Real estate and construction .......... 1,381 17.0 1,503 16.0
Consumer .............................. 658 8.1 432 4.6
Unallocated ........................... 5,225 64.3 6,736 71.7
Total ............................ $8,126 100.0% $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 September 30, 1998 were $102.3 million. This
represents an increase of $35.0 million, or 51.94%, over total investments of
$67.3 million at December 31, 1997. At September 30, 1998, the investment
portfolio primarily consisted of U.S. treasury and agency securities and
mortgage-backed securities.
The following table presents the amortized cost of securities and
their approximate fair values at September 30, 1998:
<TABLE>
<CAPTION>
SEPTEMBER 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 ............... $42,777 $788 $43,565
U.S. Government Agencies .... 20,132 -- 20,132
Mortgage-backed securities .. 38,407 146 35,514
Total .................. $101,316 $40 $102,250
</TABLE>
24
<PAGE>
The following table shows the maturities of investment securities at
September 30, 1998 and the weighted average yields of such securities:
<TABLE>
<CAPTION>
WITHIN ONE YEAR AFTER ONE YEAR BUT AFTER FIVE YEARS BUT AFTER TEN YEARS
--------------- WITHIN FIVE YEARS WITHIN 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 ............ -- --% $43,565 6.10% -- --% -- --%
U.S. Government agencies ... 10,037 6.21 10,095 5.45 -- -- -- --
Mortgage backed
securities ............... -- -- 3,198 6.88 9,830 6.71 25,486 6.92
Equity securities .......... 38 -- -- -- -- -- -- --
Total investment
portfolio .............. $10,075 6.21% $56,858 6.00% $9,830 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 September 30, 1998, the weighted average life
of the Bank's fixed-rate MBS portfolio was 2.8 years.
Additional information concerning investment securities is provided
in the notes to the accompanying consolidated financial statements.
DEPOSITS
At September 30, 1998, the Company reported total deposits were
$939.2 million. This represented an increase of $174.0 million, or 22.74%,
over total deposits of $765.2 million at December 31, 1997. The increase in
deposits was the result of increases in savings and time deposits, partially
offset by decreases in non-interest bearing demand deposits, and money market
balances. In April 1998, the Company placed $18.3 million of wholesale
certificates of deposits through financial intermediaries.
Total non-interest bearing demand deposits were $267.6 million at
September 30, 1998. This represented a decrease of $21.8 million, or 7.53%,
from total non-interest bearing demand deposits of $289.3 million at December
31, 1997. The decrease in non-interest bearing demand deposits primarily
reflects normal seasonal fluctuations in commercial demand deposits. Title
and Escrow Deposits averaged $182.0 million, representing 19.9% of the
Company's average total deposits for the quarter ended September 30, 1998.
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 approximately 14.0% of the Company's average Title and
Escrow Deposits for the nine months ended September 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."
25
<PAGE>
The following table presents the daily average balances and weighted
average rates paid on interest-bearing deposits for the nine months ended
September 30, 1998 and 1997, respectively below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
---- ----
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-interest-bearing demand ....... $237,106 0.00% 157,780 0.00%
Interest-bearing demand ........... 99,294 1.58 57,417 2.12
Money market ...................... 92,680 3.84 56,764 3.24
Savings ........................... 161,072 5.73 107,297 4.74
Time .............................. 228,473 4.83 166,394 5.56
Total ....................... $818,625 3.10% $545,652 3.19%
</TABLE>
The following table shows the maturities of time certificates of
deposits of $100,000 or more at September 30, 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------
(IN THOUSANDS)
<S> <C>
Due in three months or less .......................... $45,573
Due in over three months through six months .......... 26,123
Due in over six months through twelve months ......... 42,292
Due in over twelve months ............................ 3,838
Total .......................................... $117,826
</TABLE>
BORROWINGS
Borrowings of the Company totaled $51.0 million at September 30,
1998. This represented an increase $8.6 million, or 20.26%, over borrowings
of $42.2 million at December 31, 1997. This increase in borrowings was
primarily due to an increase in Federal funds purchased, which increased to
$4.6 million at September 30, 1998 from $2.1 million at December 31, 1997.
The 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 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 at September 30, 1998
for federal regulatory purposes. At September 30, 1998, both the Company and
the Bank had Tier 1 Leverage Ratios of 6.48%, Tier 1 Risk-Weighted Ratios of
9.32% and Total Risk-Weighted Ratios of 10.52%.
26
<PAGE>
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 83.66% for the nine months ended
September 30, 1998. This represents an increase from an average loan to
deposit ratio of 77.32% for the nine months ended September 30, 1997. The
average liquidity ratio was 23.36% for the nine months ended September 30,
1998, compared to an average liquidity ratio of 28.86% for the nine months
ended September 30, 1997. 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, 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 September 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
September 30, 1998, the Company has no such collateral at the Federal Reserve.
INFLATION
The majority of the Company's assets and liabilities are monetary
items held by the Bank, 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.
27
<PAGE>
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 nine months ended September 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 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 September 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 September
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 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.
28
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 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 ......................... $-- $-- $-- $-- $ 205,191 $205,191
Federal funds sold .............................. -- -- -- -- -- --
Investment securities ........................... -- 10,037 53,660 38,515 38 102,250
Loans and leases ................................ 308,765 44,141 129,251 39,994 -- 522,151
Loans held for sale ............................. 169,282 -- -- -- -- 169,282
Other assets(2) ................................. -- -- -- -- 91,470 91,470
Total assets .............................. $ 478,047 $ 54,178 $182,911 $78,547 $296,661 $1,090,344
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest-bearing demand deposits ............ $-- $-- $-- $-- $267,555 $267,555
Interest-bearing demand, money market and savings 399,854 -- -- -- -- 399,854
Time certificates of deposit .................... 86,258 174,584 10,721 211 -- 271,774
Short-term debt ................................. 4,612 -- -- -- -- 4,612
Long-term debt .................................. -- -- 405 27,657 -- 28,062
Other liabilities ............................... -- -- -- -- 18,336 18,336
Shareholders' equity ............................ -- -- -- -- 100,151 100,151
Total liabilities and shareholders' equity $ 490,724 $174,584 $ 11,126 $27,868 $386,042 $1,090,344
Period Gap ...................................... $ (12,677) $(120,406) $171,785 $50,679 $(89,381)
Cumulative Gap .................................. (12,677) (133,083) 38,702 89,381
Cumulative Gap as a percent of:
Total assets ................................. (1.16)% (12.21)% 3.55% 8.20%
</TABLE>
- --------
(1) Assets or liabilities which are not interest rate sensitive.
(2) Allowance for possible loan losses of $8.1 million as of September 30, 1998
is included in other assets.
At September 30, 1998, the Company had $532.2 million of assets and
$665.3 million of liabilities repricing within one year. Therefore, $133.1
million more in interest rate sensitive liabilities than interest rate 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). 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 cash flows and others. While assumptions are developed based upon
current economic and local
29
<PAGE>
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.
The Company and Bank's operations are significantly dependent on a
number of data processing systems. Failure to anticipate and resolve
potential problems associated with the ability of these systems to process
transactions and information into the year 2000 could have a serious impact
on the Company's operations. This could increase the level of operating
losses and its liability for improperly processed transactions.
In addition, a number of the Bank's customers have operations that
are dependent on their data processing systems. The potential that some or
all of these customers will not properly prepare their systems for the
problems associated with the year 2000 could affect their ability to repay
their loans with the Bank and as a consequence adversely affect the quality
of the Company's loan portfolio. The Company's primary source of funds are
from its customers' deposits. Many of these customers' operations are
dependent on their data processing systems. Any adverse affects resulting
from the year 2000 could impact the level of these customers' deposits, which
in turn could impact the Company's liquidity.
The Company relies primarily on outside vendors to provide its data
processing. The Company's management has obtained from each a written copy of
their plans to address solutions to potential problems resulting from the
year 2000. The Company closely monitors each applicable vendor's progress
toward those solutions. In addition, the Company's management is conducting
third party tests of all the software and hardware used by the Bank to ensure
that these systems will operate beyond the year 2000. The Company's
management will correct or replace all data sensitive equipment and software
that is determined not to be Year 2000 complaint by the second quarter of
1999. The Company has developed a Year 2000 Contingency Plan. In the event
the contingency plan is invoked, contingency plan team members will
participate in the execution of the plan, ensuring business operations may
continue.
The Company has identified all its borrowers for which the year 2000
may pose a significant credit risk. Each of these borrowers has been
contacted and their operations analyzed in an effort to quantify the
potential risks in Company's loan portfolio that might arise as a result of
year 2000. The Company's management has also developed liquidity contingency
plans to provide for potential decreases in funding sources that might arise
as a result of the year 2000. The Company's Management has projected that the
total cost of preparing for the year 2000 is $500,000.
30
<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.
ELDORADO BANCSHARES, INC.
DATE: November 16, 1998 Robert P. Keller /s/
------------------------------------------
Robert P. Keller
President and Chief Executive Officer
DATE: November 16, 1998 John L. Gordon /s/
-----------------------------------------
John L. Gordon
Senior Vice President and Chief Financial Officer
31
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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0
11,659
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