\<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 March 31, 1999
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 340, 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 14,391,227 shares outstanding on May 14, 1999
1
<PAGE>
ELDORADO BANCSHARES, INC.
U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Condition - 3
March 31, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations 5
For the three months ended March 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows - 6
For the three months ended March 31, 1999 and 1998
Notes to the Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Part II - Other Financial Information
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELDORADO BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
-------------- ----------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 99,726 $ 124,403
Federal funds sold 24,150 19,300
Investment securities available-for-sale 221,552 250,463
----------- -----------
Cash and investments 345,428 394,166
Loans and leases 651,605 642,071
Mortgage loans held for sale 168,174 248,833
Allowance for loan and lease losses (9,184) (9,160)
----------- -----------
Net loans 810,595 881,744
Servicing sale receivable 1,553 1,182
Premises and equipment 12,051 12,383
Other real estate owned 1,123 1,583
Goodwill and other intangibles 66,600 67,378
Other assets 37,855 39,114
----------- -----------
Total assets $ 1,275,205 $ 1,397,550
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
ELDORADO BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION (CONTINUED)
MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
------------ ---------------
(In thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing deposits $ 304,927 $ 313,891
Interest bearing deposits 792,908 907,596
----------- -----------
Total deposits 1,097,835 1,221,487
Federal funds purchased 5,544 5,900
Notes payable to related parties 270 338
Subordinated debentures 27,657 27,657
Accrued expenses and other liabilities 24,464 22,685
----------- -----------
Total liabilities 1,155,770 1,278,067
Preferred stock $.01 par value, 1,500,000 shares
authorized, 116,593 issued and outstanding at
March 31, 1999 11,659 11,659
Common stock and additional paid in capital
$.01 par value 35,000,000 shares authorized,
12,036,457 issued and outstanding as of March 31, 1999 88,413 87,613
Retained earnings 21,667 20,591
Unearned compensation (1,681) (1,006)
Accumulated other comprehensive income (loss) (623) 626
----------- -----------
Total shareholders' equity 119,435 119,483
----------- -----------
Total liabilities and shareholders' equity $ 1,275,205 $ 1,397,550
----------- -----------
----------- -----------
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
ELDORADO BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
------------ ------------
(In thousands,except per
share amounts)
<S> <C> <C>
Interest and fee income on loans $16,221 $18,060
Income from lease finance receivables 2,320 1,153
Interest and dividend income on securities 3,379 1,460
Interest income on Federal funds sold 274 285
------- -------
Total interest and fee income 22,194 20,958
Interest on deposits
Interest bearing demand 378 484
Money market 967 999
Savings 3,373 1,601
Time 2,817 2,915
Interest on debentures 813 828
Interest on Federal funds purchased 365 450
------- -------
Total interest expense 8,713 7,277
Net interest income 13,481 13,681
Provision for loan and lease losses 780 1,192
------- -------
Net interest income after provision for loan and lease losses 12,701 12,489
Service charges on deposit accounts 1,625 1,663
Gain on sale of loans 3,120 2,527
SBA servicing 596 622
Other non-interest income 1,111 856
------- -------
Total non-interest income 6,452 5,668
Salaries and employee benefits 7,871 6,202
Expenses of premises and fixed assets 2,093 1,957
Amortization of goodwill and other intangibles 1,024 874
Other non-interest expense 5,089 5,037
------- -------
Total non-interest expense 16,077 14,070
------- -------
Income before taxes 3,076 4,087
Income tax provision 1,684 1,947
------- -------
Net income $ 1,392 $ 2,140
------- -------
------- -------
Preferred dividends $ 316 $ 316
Net income available to common $ 1,076 $ 1,824
Earnings per share (basic) $ 0.09 $ 0.15
Earnings per share (diluted) $ 0.09 $ 0.15
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
ELDORADO BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
-------------- ---------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 1,392 $ 2,140
Adjustments to reconcile net income to net cash
Provided by operating activities:
Provision for loan and lease losses 780 1,192
Provision for loss on other real estate owned 35 --
Depreciation and amortization 1,658 1,436
Accretion of premium/discount on investments 257 (659)
(Gain) loss on sale of investment securities (264) 30
Loss on sale of real estate owned 34 325
Mortgage loans originated for sale (374,440) (396,302)
Proceeds from sales of loans and servicing 458,219 311,375
Gain on sale of loans and servicing (3,120) (2,527)
Net effect of changes in:
Deferred loan origination fees 594 --
Loan and servicing sales receivable (371) (1,554)
Accrued interest and other assets 1,138 1,730
Accrued expenses and other liabilities 1,779 2,961
--------- ---------
Net cash provided by (used in) operating activities 87,691 (79,853)
INVESTING ACTIVITIES:
Proceeds from sale of real estate owned 391 1,120
Loans/Leases originated for portfolio net of principal repayments (10,884) (3,207)
Purchases of investment securities (51,882) (16,569)
Maturities/Sales of investment securities 77,623 20,894
Paydowns on investment securities 1,928 2,365
Purchases of premises and equipment (302) (299)
--------- ---------
Net cash provided by investing activities 16,874 4,304
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE>
ELDORADO BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
-------------- ---------------
(In thousands)
<S> <C> <C>
FINANCING ACTIVITIES:
Net effect of changes in:
Noninterest bearing deposits $ (8,964) $ 1,190
Interest bearing deposits (114,688) 65,897
Other borrowings (424) 44,789
Payment of dividends (316) (316)
--------- ---------
Net cash (used in) provided by financing activities (124,392) 111,560
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (19,827) 36,011
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 143,703 145,819
--------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 123,876 $ 181,830
--------- ---------
--------- ---------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 8,713 $ 7,277
Income Taxes $ 165 $ 485
</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
This quarterly report contains or incorporates by reference certain
forward-looking statements by the Company. 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 1998 financial information to conform to the presentation
used in 1999. Results for the period ending March 31, 1999 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, 1998 and in particular the footnotes to the audited financial
statements included therewith.
On January 22, 1999, the Company completed the acquisition of
Antelope Valley Bank. In connection with the acquisition, the Company issued
to the shareholders of Antelope Valley Bank approximately 2.8 million shares
of common stock. The acquisition was treated for accounting purposes as a
pooling of interests. Accordingly, the financial information for prior
periods contained herein has been restated to reflect the combined entities
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 reliability 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 number of common shares outstanding at March 31, 1999 was
12,036,457. 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 gives
effect to all potential issuances of common stock that would have caused basic
earnings per share to be lower, as if the issuances had already occurred.
At March 31, 1999, 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
8
<PAGE>
purchase a total of 536,300 shares of common stock. The Company's stock was
listed on NASDAQ as of February 1, 1999. The Company estimated an average
trading price per share of $11.00 in computing the diluted impact of the
outstanding warrants and options for the three months ended March 31, 1999.
The weighted average number of common shares used to compute basic
earnings per share were 12,015,428 and 11,950,429 for the quarter ended March
31, 1999 and 1998, respectively. The average number of common shares used to
compute diluted earnings per share was 12,333,657 and 12,451,710 for the
quarter ended March 31, 1999 and 1998, respectively.
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. The Company's total comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Net income $ 1,392 $2,140
Other comprehensive income (loss) (623) 626
------- ------
Total comprehensive income $ 769 $2,766
------- ------
------- ------
</TABLE>
OPERATING SEGMENTS
The Company has determined that its reportable segments are the
operations pertaining to mortgage banking ("Mortgage") and the operations
pertaining to commercial and consumer banking ("Commercial and Consumer").
Commercial and Consumer includes the operations of the Company's equipment
leasing division. The segment labeled "Other" primarily consists of the
Company's administrative function which is responsible for investment and
borrowing activities and other administrative services. The financial results of
the Company's operating segments are presented on an accrual basis. There are no
significant differences among the accounting policies of the segments as
compared to the Company's consolidated financial statements. The Company
evaluates the performance of its segments based on net interest income,
non-interest income, net income and total assets. Funds are allocated as needed
from Commercial Banking to Mortgage at a rate comparable to the federal funds
rate.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
----------------------------------------------------------------------------
MORTGAGE COMMERCIAL AND CONSUMER OTHER TOTAL
------------ ---------------------------- -------------- ----------------
<S> <C> <C> <C> <C>
Interest income $ 3,044 $ 16,184 $ 2,966 $ 22,194
Interest expense -- 7,003 1,710 8,713
Internal allocation of funds (2,415) 4,492 (2,077) --
--------- -------- --------- ----------
Net interest income (expense) 629 13,673 (821) 13,481
Provision for loan and lease losses -- 780 -- 780
Non-interest income 2,793 3,224 435 6,452
Non-interest expense 3,534 8,864 3,679 16,077
--------- -------- --------- ----------
Net income (loss) before taxes (112) 7,253 (4,065) 3,076
Provision (benefit) for income taxes (47) 3,056 (1,325) 1,684
--------- -------- --------- ----------
Net income (loss) $ (65) $ 4,197 $ (2,740) $ 1,392
--------- -------- --------- ----------
--------- -------- --------- ----------
Segment assets $ 176,953 $757,235 $ 341,017 $1,275,205
--------- -------- --------- ----------
--------- -------- --------- ----------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
-----------------------------------------------------------------------------
MORTGAGE COMMERCIAL AND CONSUMER OTHER TOTAL
------------ --------------------------- -------------- ----------------
<S> <C> <C> <C> <C>
Interest income $ 2,971 $ 16,922 $ 1,065 $ 20,958
Interest expense -- 5,999 1,278 7,277
Internal allocation of funds (2,620) 3,235 (615) --
--------- -------- --------- ----------
Net interest income (expense) 351 14,158 (828) 13,681
Provision for loan and lease losses -- 1,192 -- 1,192
Non-interest income 2,502 2,985 181 5,668
Non-interest expense 2,081 8,349 3,640 14,070
--------- -------- --------- ----------
Net income (loss) before taxes 772 7,602 (4,287) 4,087
Provision (benefit) for income taxes 324 3,101 (1,478) 1,947
--------- -------- --------- ----------
Net income (loss) $ 448 $ 4,501 $ (2,809) $ 2,140
--------- -------- --------- ----------
--------- -------- --------- ----------
Segment assets $ 211,023 $712,160 $ 285,739 $1,208,922
--------- -------- --------- ----------
--------- -------- --------- ----------
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
This information should be read in conjunction with the consolidated
financial statements and the notes thereto of Eldorado Bancshares Inc. ("ELBI"
or the "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, 1998 contained in the 1998 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, 1998, including without limitation those sections entitled
Supervision and Regulation, Capital Resources and Liquidity.
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.
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. At that time, San Dieguito was categorized
as "critically undercapitalized" by federal regulators. In September 1995, SDN
and San Dieguito were recapitalized by Dartmouth Capital Group, L.P. ("DCG"), a
bank holding company organized by Mr. Keller. Following the recapitalization,
Mr. Keller assumed control of the Company, installed new management and began
implementing policies and improve the Company's asset quality and operating
performance.
Since September 1995, Eldorado has acquired four banks in California
with combined assets of approximately $1.0 billion. The following table
summarizes certain data regarding those acquisitions, including the assets size
of the acquired bank as of the end of the quarter immediately preceding the
acquisition.
<TABLE>
<CAPTION>
PRINCIPAL COUNTY ASSETS
ACQUIRED BANK ACQUISITION DATE OF ACQUIRED BANK ACQUIRED
- ------------- ------------------------------- ------------------------ -----------------
(IN MILLIONS)
<S> <C> <C> <C>
Liberty National Bank March 31, 1996 Orange $146
Commerce Security Bank September 30, 1996 Sacramento 229
Eldorado Bank June 6, 1997 Orange 404
Antelope Valley Bank January 22, 1999 Los Angeles 212
</TABLE>
Other than the Antelope transaction, each acquisition was accounted
for using the purchase method of accounting for business combinations.
Effective June 30, 1997, the Company consolidated into Eldorado Bank the
respective operations of San Dieguito, Liberty National Bank and Commerce
Security Bank. Antelope Valley Bank continues to operate as a separate
subsidiary of the Company.
Through its two operating subsidiaries, Eldorado Bank and Antelope
Valley Bank (collectively referred to as the "Banks"), the Company offers a
broad range of commercial banking products and services to small and
medium-sized businesses and retail customers from 24 full service offices
located primarily in Southern California and the Sacramento area of Northern
California. Eldorado also operates
11
<PAGE>
eight loan production offices, four of which are located in California and four
of which are located in other western states.
SUBSEQUENT EVENT
In April 1999, in an underwriting managed by Keefe, Bruyette & Woods
Inc., the Company completed the public offering of an aggregate of 2,286,400
shares of Common Stock. The net proceeds to the Company were equal to $21.3
million. The company used $12.0 million to redeem all of its outstanding 11%
Series B Preferred Stock with an aggregate liquidation value of $11.7 million.
In addition, the company repaid indebtedness in the amount of $338,000 to one of
its principal shareholders, DCG. The remaining net proceeds of the offering will
be used for general purposes, including investment in the Banks, which will
enable the Banks to increase their interest-earning assets.
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
OVERVIEW
The Company generated net income of $1.4 million for the quarter ended
March 31, 1999. This represents a decrease of $738,000, or 34.7%, over net
income of $2.1 million for the quarter ended March 31, 1998. The decrease in net
income resulted primarily from an increase in non-interest expense partially
offset by an increase in non-interest income and a reduction in the provision
for loan and lease losses. Contributing to the increase in operating expenses
was the costs associated with the acquisition of Antelope Valley Bank.
The table below summarizes basic and diluted earnings per share data:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------------------------
1999 1998
---- ----
BASIC DILUTED BASIC DILUTED
----- ------- ----- -------
<S> <C> <C> <C> <C>
Earnings per share $0.090 $0.087 $0.151 $0.147
Earnings per share, excluding
costs associated with Antelope
Valley Bank acquisition $0.144 $0.140 $0.151 $0.147
Earnings per share, excluding
goodwill amortization $0.175 $0.170 $0.224 $0.218
Earnings per share, excluding
goodwill amortization costs
associated with Antelope
Valley Bank acquisition $0.229 $0.223 $0.224 $0.218
</TABLE>
For the quarter ended March 31, 1999, the Company generated a return on
average assets of 0.44%, compared to a return of 0.79% for the quarter ended
March 31, 1998. The Company generated a return on average equity of 4.68% for
the quarter ended March 31, 1999, compared to a return of 7.49% for the quarter
ended March 31, 1998.
RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income, the difference between the interest income
generated from interest-earning assets and the interest paid for
interest-bearing liabilities, continues to be the Company's primary source of
revenue. The Company's net interest income totaled $13.5 million for the quarter
ended March 31, 1999. This represented a decrease of $200,000, or 1.5%, from net
interest income of $13.7 million for the quarter ended March 31, 1998. The
decrease resulted as the $1.4 million increase in total interest expense was
greater than the $1.2 million increase in total interest income. The increase in
interest expense was the result of an increase in the level of interest bearing
liabilities partially offset by a decrease in the average cost of interest
bearing liabilities. The increase in total interest income was the result of an
increase in average earning assets partially offset by a decrease in the yield
on average earning assets.
12
<PAGE>
The net interest margin is equal to the net interest income for the
quarter, annualized and then expressed as a percent of average earning assets.
The Company's net interest margin decreased to 4.95% for the quarter ended March
31, 1999, compared to 6.24% for the quarter ended March 31, 1998. The decrease
in the net interest margin was a result of a decrease in the yield on earning
assets combined with a smaller decrease in the cost of interest bearing
liabilities.
For the quarter ended March 31, 1999, the Company generated total
interest income of $22.2 million, on average earning assets of $1.1 billion
resulting in an average yield of 8.15%. This compares to total interest income
of $21.0 million, on average earning assets of $889.0 million resulting in an
average yield of 9.56% for the quarter ended March 31, 1998. The $1.2 million,
or 5.9%, increase in total interest income resulted as the increase in average
earning assets was proportionately greater than the decrease in the yield on
average earning assets. A 75 basis point decrease in the prime lending rate in
the fourth quarter of 1998 and a greater concentration of earning assets
allocated to the mortgage loans held for sale, which typically have lower
yields, contributed to the decrease in the yield on average earning assets for
the most recent quarter.
For the quarter ended March 31, 1999, the Company's interest expense
totaled $8.7 million, on average interest bearing liabilities of $855.1 million,
for an average cost of 4.13%. This compares to total interest expense of $7.3
million, from average interest bearing liabilities of $678.8 million, for an
average cost of 4.35% for the quarter ended March 31, 1998. The increase in the
average interest bearing liabilities was the result of greater reliance on time
deposits and title company related savings deposits for the most recent quarter.
13
<PAGE>
The following table presents, for the periods indicated, the
distribution of average assets, liabilities and shareholders' equity, as well as
the total dollar amounts of interest income from average interest-bearing assets
and the resultant yields, and the dollar amounts of interest expense and
resultant cost expressed in both dollars and rates. Nonaccrual loans are
included in the calculation of the average loans while nonaccrued interest
thereon is excluded from the computation of rates earned.
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------------------------------
1999 1998
---------------------------------------- ---------------------------------------
Interest Average Interest Average
Average Income or Yield or Average Income or Yield or
Balance Expense Cost Balance Expense Cost
----------- ----------- ------------ ------------ ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans and leases (1) $828,564 $18,541 9.08% $767,505 $19,213 10.15%
Investment securities (2) 246,703 3,379 5.55 100,249 1,460 5.91
Federal funds sold 29,252 274 3.80 21,209 285 5.45
----------- ----------- ------------ ------------
Total interest-earning assets 1,104,519 22,194 8.15 888,963 20,958 9.56
Non-earning assets:
Cash and demand deposits with banks 60,364 95,498
Other assets 111,036 115,984
----------- ------------
Total assets 1,275,919 1,100,445
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing liabilities:
Deposits
Interest-bearing demand 144,689 378 1.06 130,214 484 1.51
Money market 122,899 967 3.19 117,581 999 3.45
Savings 223,079 3,373 6.13 137,037 1,601 4.74
Time 302,849 2,817 3.77 232,527 2,915 5.08
----------- ----------- ------------ ------------
Total interest-bearing deposits 793,516 7,535 3.85 617,359 5,999 3.94
Short-term borrowing 33,926 365 4.36 33,736 450 5.41
Long-term debt 27,657 813 11.92 27,657 828 12.14
----------- ----------- ------------ ------------
Total interest-bearing liabilities 855,099 8,713 4.13 678,752 7,277 4.35
Noninterest-bearing liabilities:
Demand deposits 279,711 287,901
Other liabilities 20,561 18,484
----------- ------------
Total liabilities 1,155,371 985,137
Shareholders' equity 120,548 115,308
----------- ------------
Total liabilities and shareholders' equity $1,275,919 $1,100,445
----------- ----------- ------------ ------------
----------- ------------
Net interest income $13,481 $13,681
----------- ------------
Net yield on interest-earning assets 4.95% 6.24%
</TABLE>
- ------------------------------------------
(1) Loan fees of $912,000 and $1.5 million are included in the computations for
1999 and 1998, respectively.
(2) Yields are calculated on historical cost and exclude the impact of the
unrealized gain (loss) available for sale securities.
14
<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>
For the Three Months Ended March 31,
----------------------------------------------------------
1999 Compared to 1998
----------------------------------------------------------
Net
Change Rate Volume Mix
------------ ------------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C>
Interest Income:
Loans and leases $(672) $(2,038) $1,528 $(162)
Investment securities 1,919 (87) 2,133 (127)
Federal funds sold (11) (86) 108 (33)
------- ------- ------ -----
Total interest income 1,236 (2,212) 3,769 (322)
Interest Expense:
Interest-bearing demand (106) (144) 54 (16)
Money market (32) (74) 45 (3)
Savings 1,772 471 1,005 296
Time (98) (752) 882 (227)
Short-term borrowing (85) (87) 3 --
Long-term debt (15) (15) -- --
------- ------- ------ -----
Total interest expense 1,436 (601) 1,988 48
------- ------- ------ -----
Net interest income $(200) $(1,611) $1,781 $(370)
------- ------- ------ -----
------- ------- ------ -----
</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 for each
Bank. The provision for credit losses totaled $780,000 for the quarter ended
March 31, 1999. This represents a decrease of $412,000, or 34.6%, from the
provision for loan and lease losses of $1.2 million for the quarter ended March
31, 1998. For the quarter ended March 31, 1999, the Company charged to its
allowance for loan and leases losses a total of $756,000. This represented a
decrease of $2.0 million, or 72.8%, from net loans and leases charged to the
reserves of $2.8 million for the quarter ended March 31, 1998.
NON-INTEREST INCOME
Non-interest income totaled $6.5 million for the quarter ended March
31, 1999. This represents an increase of $790,000, or 14.0%, over non-interest
income of $5.7 million for the quarter ended March 31, 1998. The increase in
non-interest income was primarily the result of an increase in the gain on sale
of loans. The gain on the sale of loans increased $593,000, or 23.5%, to $3.1
million for the quarter ended March 31, 1999, from $2.5 million for the quarter
ended March 31, 1998. The increase in the gain on sale of loans primarily
reflects an increase in the volume of mortgage loans sold. Other non-interest
income increased by $255,000, or 29.8%, to $1.1 million for the quarter ended
March 31, 1999. The increase in other non-interest income is attributable to
gains recognized on the sale of available-for-sale investment securities.
15
<PAGE>
The following table presents for the periods indicated the major
categories of non-interest income:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---------- -----------
(In thousands)
<S> <C> <C>
Service charges on deposit accounts $1,625 $1,663
Gains on sale of mortgage loans 3,120 2,527
SBA loan servicing 596 622
Other income 1,111 856
------ ------
Total non-interest income $6,452 $5,668
------ ------
------ ------
</TABLE>
NON-INTEREST EXPENSE
Non-interest expense totaled $16.1 million for the quarter ended March
31, 1999. This represents an increase of $2.0 million, or 14.2%, from total
non-interest expenses of $14.1 million for the quarter ended March 31, 1998.
Contributing to the increase in non-interest expense was approximately $815,000
in costs resulting from the acquisition of Antelope Valley Bank. These costs
primarily reflect severance, legal and other professional expenses associated
with the acquisition. Excluding the expenses related to the acquisition,
non-interest expenses totaled $15.3 million, representing an increase of $1.2
million, or 8.4%, over total non-interest expense for the first quarter of 1998.
The Company's efficiency ratio, operating expenses less goodwill
divided by net revenue, was 75.5% for the quarter ended March 31, 1999,
compared to a ratio of 68.3% for the quarter ended March 31, 1998. Excluding
the costs associated with the acquisition, the Company's efficiency ratio
totaled 71.4% for the most recent quarter. A proportionately greater increase
in non-interest expenses, primarily expenses for salaries and employee
benefits, than the increase in net revenue, resulted in the increase in the
efficiency ratio for the first quarter of this year.
Salaries and employee benefits totaled $7.9 million for the quarter
ended March 31, 1999. This represents an increase of $1.7 million, or 26.9%,
over salaries and employee benefits of $6.2 million for the quarter ended
March 31, 1998. The increase is primarily the result of increased commissions
and variable compensation paid for the origination of mortgage loans. Also
included as salaries and employee benefits for the quarter ended March 31,
1999, is approximately $270,000 of severance expenses resulting from the
acquisition of Antelope Valley Bank.
The following table presents for the periods indicated the major
categories of non-interest expense:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
Salaries and employee benefits $7,871 $6,202
Non-staff expense
Occupancy and equipment 2,093 1,957
Amortization of intangibles 1,024 874
Professional services 1,565 1,034
Loan expense, including carrying cost for OREO 343 315
Advertising and charitable contributions 227 177
Other 2,954 3,511
------- -------
Total non-interest expense $16,077 $14,070
======= =======
</TABLE>
16
<PAGE>
PROVISION FOR INCOME TAXES
For the quarter ended March 31, 1999, the Company recorded a provision
for income taxes of $1.7 million, compared to a provision of $1.9 million for
the quarter ended March 31, 1998. The Company's effective tax rate (54.7%) 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.
FINANCIAL CONDITION
At March 31, 1999, the Company had total assets of $1.3 billion. This
represents a decrease of $122.0 million, or 8.8%, from total assets of $1.4
billion at December 31, 1998. The decrease in total assets primarily reflects
reductions in mortgage loans held for sale, investment securities and cash and
due from banks.
LOANS AND LEASES
Net loans and leases totaled $810.6 million at March 31, 1999. This
represented a decrease of $71.1 million, or 8.1%, from net loans of $881.7
million at December 31, 1998. The decrease in net loans was the result of a
decrease in mortgage loans held for sale of $80.7 million, or 32.4%, to
$168.2 million at March 31, 1999, from $248.8 million at December 31, 1998.
Excluding mortgage loans held for sale, total loans and leases increased to
$663.1 million at March 31, 1999. This represents an increase of $9.0
million, or 1.4%, over a total of $654.1 million at December 31, 1998. The
decrease in mortgage loans held for sale was primarily the result of
anticipated seasonal fluctuations in the demand for the origination of
mortgage loans. By comparison, mortgage loans held for sale totaled $181.3
million at March 31, 1998.
Excluding the mortgage loans held for sale, at March 31, 1999, the four
largest lending categories were: (i) commercial real estate loans, (ii)
commercial loans, (iii) loans to individuals and (iv) lease financings. 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>
March 31, December 31,
------------- ---------------------------------------------
1999 1998 1997 1996
------------- ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Commercial $137,241 $136,783 $151,839 $79,505
Real estate-commercial 196,408 198,890 235,244 86,397
Real estate-construction 52,073 46,717 36,332 19,638
Real-estate-mortgage 19,491 31,717 46,995 53,917
Installment loans to individuals 166,101 151,127 136,587 78,874
Lease financing 91,755 88,875 40,819 46,498
--------- --------- --------- ---------
Subtotal (portfolio loans and leases) 663,069 654,109 647,816 364,829
Loans and leases held for sale 168,174 248,833 96,230 64,917
--------- --------- --------- ---------
Total 831,243 902,942 744,046 429,746
Less: allowance for loan and lease losses (9,184) (9,160) (10,923) (6,526)
Unearned discount (8,050) (8,531) (8,206) (6,152)
Deferred loan fees (3,414) (3,507) (2,907) (2,376)
--------- --------- --------- ---------
Net loans and leases $810,595 $881,744 $722,010 $414,692
--------- --------- --------- ---------
--------- --------- --------- ---------
</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
17
<PAGE>
loans are secured by real estate and thus categorized as commercial real estate
loans. As of March 31, 1999 SBA loans totaled $87.8 million.
The following table shows the amounts of certain categories of loans
outstanding as of March 31, 1999, 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>
March 31, 1999
----------------------------
Commercial Real Estate
------------ ------------
(In thousands)
<S> <C> <C>
Aggregate maturities of loans and leases which are due:
Within one year $ 68,181 $ 67,658
After one year but within five years:
Interest rates are floating or adjustable 39,048 27,316
Interest rates are fixed or predetermined 15,813 53,468
After five years:
Interest rates are floating or adjustable 11,152 30,705
Interest rates are fixed or predetermined 3,047 256,999
------------ ------------
Total $137,241 $436,146
------------ ------------
------------ ------------
</TABLE>
NONPERFORMING ASSETS
The following table shows the total aggregate principal amount of
nonaccrual and other nonperforming loans (accruing loans on which interest or
principal is past due 90 days or more) as of the end of the five most recent
fiscal quarters ended March 31, 1999.
<TABLE>
<CAPTION>
March 31, December 31, September 30, June 30, March 31,
1999 1998 1998 1998 1998
------------ ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and leases, not restructured $ 7,670 $ 5,667 $ 7,427 $ 7,933 $ 6,319
Accruing loans and leases past due 90 day or more 398 1,019 2,478 1,330 1,563
Restructured loans and leases 5,167 4,196 4,804 4,993 4,802
------------ ------------ ------------ ------------ ------------
Total nonperforming loans and leases
("NPLs") 13,235 10,882 14,709 14,256 12,684
Other real estate owned ("OREO") 1,123 1,583 1,379 1,519 1,639
------------ ------------ ------------ ------------ ------------
Total nonperforming assets ("NPAs") $ 14,358 $ 12,465 $ 16,088 $ 15,775 $ 14,323
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Selected ratios:
NPLs to total portfolio loans and leases (1) 2.0% 1.7% 2.3% 2.2% 2.0%
NPAs to total portfolio loans and leases
and OREO (1) 2.2 1.9 2.5 2.5 2.2
NPAs to total assets 1.1 0.9 1.2 1.3 1.2
</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.
For the quarters ended March 31, 1999 and 1998, additional gross interest income
of $311,000 and $270,000, respectively would have been recorded on impaired
loans, in each case had the loans been
18
<PAGE>
current. No accrued but unpaid income on such loans was in fact included in
the Company's net income as of March 31, 1999 and 1998.
The Company's impaired loans pursuant to SFAS 114 as amended by SFAS
118 are loans that are nonaccrual and those that have been restructured. Loans
aggregating $12.8 million at March 31, 1999 were designated as impaired. The
Company's impaired loans are all collateral dependent, and as such, the method
used to measure the amount of impairment on these loans is to compare the loan
amount to the fair value of collateral. In calculating the allowance for loan
and lease losses that was required under the Company's internal guidelines,
management determined that a minimum of $1.6 million should be included in the
allowance at March 31, 1999 because of the risk to the loan and lease portfolio
represented by such impaired loans. At December 31, 1998, loans aggregating $9.8
million were designated as impaired and management determined that a minimum of
$1.3 million should be included in the allowance because of the risk to the
loans 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 March 31, 1999 for which there was a serious doubt as to
the ability of the borrower to comply with present loan repayment terms.
At March 31, 1999 the Company had OREO properties with an aggregate
carrying value of $1.1 million. This represents a decrease of $460,000, or
29.1%, from OREO of $1.6 million at December 31, 1998. During the quarter ended
March 31, 1999, properties with a total carrying value of $425,000 were sold
resulting in a loss of $34,000.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses was $9.2 million at March 31,
1999. This represents a decrease of $24,000, or 0.3%, from the allowance for
loan and leases losses at December 31, 1998. As a percent of portfolio loans,
the allowance for loan and lease losses remained constant at 1.4% from December
31, 1998 to March 31, 1999.
19
<PAGE>
The table below summarizes average loans and leases outstanding, gross
portfolio loans and leases, nonperforming loans and leases and changes in the
allowance for possible loan and lease losses and additions to the allowance from
provisions charged to operating expense:
<TABLE>
<CAPTION>
` As of and for the Fiscal Quarter Ended
-------------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
1999 1998 1998 1998 1998
----------- ------------ ----------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Average loans and leases outstanding (1) $651,070 $638,743 $632,190 $630,821 $637,989
Gross portfolio loans and leases (1) 663,069 654,109 652,523 641,075 648,114
Nonperforming loans and leases 13,235 10,882 14,709 14,256 12,684
Allowance for loan and lease losses:
Balance at beginning of period $9,160 $9,789 $9,399 $9,331 $10,923
Loans charged off during period
Commercial 33 806 306 536 2,455
Leases 633 1,695 253 166 167
Real estate 330 407 133 710 64
Installment 681 538 426 509 495
-------- -------- -------- -------- --------
Total 1,677 3,446 1,118 1,921 3,181
Recoveries during period
Commercial 126 507 217 465 31
Leases 90 3 -- 22 16
Real estate 418 9 31 11 143
Installment 287 178 290 221 207
-------- -------- -------- -------- --------
Total 921 697 538 719 397
-------- -------- -------- -------- --------
Net loans charged off during period 756 2,749 580 1,202 2,784
Provision for loan and lease losses 780 2,120 970 1,270 1,192
-------- -------- -------- -------- --------
Balance at end of period $9,184 $9,160 $9,789 $9,399 $9,331
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Selected ratios:
Net charge-offs to average loans and
leases (annualized) 0.47% 1.72% 0.37% 0.76% 1.75%
Provision for loan and lease losses to
average loans and leases 0.49 1.33 0.61 0.81 0.75
Allowance at end of period to gross
portfolio loans and leases outstanding
at end of period 1.39 1.40 1.50 1.47 1.44
Allowance as percentage of nonperforming
loans and leases 69.39 84.18 66.55 65.93 73.57
</TABLE>
- -----------------------------------------------
(1) Excludes residential mortgages held for sale.
20
<PAGE>
The following table indicates management's allocation of the allowance
as of the dates indicated:
<TABLE>
<CAPTION>
March 31,
--------------------------------------------
1999 1998
-------------------- --------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Allocated amount:
Commercial, financial and $4,335 47.2% $ 681 7.3%
agricultural
Real estate and construction 1,993 21.7 1,596 17.1
Consumer 2,847 31.0 1,820 19.5
Unallocated 9 0.1 5,235 56.1
-------- --------- -------- --------
Total $9,184 100.0% $9,331 100.0%
-------- --------- -------- --------
-------- --------- -------- --------
</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. 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
Investment securities totaled $221.6 million at March 31, 1999. This
represents a decrease of $28.9 million, or 11.5%, over total investment
securities of $250.5 million at December 31, 1998. The decrease in investment
securities primarily reflects the decrease in interest bearing deposits between
the two periods. The investment portfolio primarily consists of bonds and notes
issued by the U.S. Treasury and U.S. government agencies, state and municipal
securities agencies, and mortgage-backed securities. At March 31, 1999 and 1998,
all of the Company's investments were classified as available-for-sale. The
amortized costs and estimated market values of the Company's investment
securities at March 31, 1999 were as follows:
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gain Loss Value
------------ ------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury $ 14,494 $ 65 $ (11) $ 14,548
U.S. Government Agencies 116,423 54 (850) 115,627
State and municipal securities 32,612 514 (288) 32,838
Mortgage-backed securities 59,064 17 (580) 58,501
Corporate bonds and equities 38 - - 38
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Total $222,631 $650 $(1,729) $221,552
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
</TABLE>
21
<PAGE>
The following table shows the maturities of investment securities at
March 31, 1999, and the weighted average yields of such securities:
<TABLE>
<CAPTION>
After One Year but After Five Years
Within One Year Within Five Years but Within Ten Years After Ten Years
--------------------- --------------------- --------------------- --------------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------- --------- ---------- --------- ---------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasuries -- -- $14,548 5.36% -- -- -- --
U.S. Government agencies $25,254 5.39% 70,122 5.61 $14,405 5.98% $5,846 5.85%
State and municipal bonds 285 7.58 1,094 5.93 4,272 4.42 27,187 4.76
Mortgage-backed securities -- -- 3,138 6.34 -- -- 55,363 6.47
Corporate debt and other -- -- -- -- 38 5.93 -- --
------- ------- ------- -------
Total investment portfolio $25,539 5.41% $88,902 5.60% $18,715 5.62% $88,396 5.90%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
DEPOSITS
Total deposits were $1.1 billion at March 31, 1999. This represents a
decrease of $123.7 million, or 10.1%, from total deposits of $1.2 billion at
December 31, 1998. The decrease was primarily attributable to a decrease in
interest bearing deposits. Interest bearing deposits totaled $792.9 million at
March 31, 1999, representing a decrease of $114.7 million, or 12.6%. The
decrease in interest bearing deposits reflects a decrease in the Company's
reliance on time deposits and savings deposits pertaining to title companies.
Non-interest bearing deposits totaled $304.9 million at March 31, 1999. This
represents a decrease of $9.0 million, or 2.9%, from total non-interest bearing
deposits of $313.9 million at December 31, 1998. The decrease in non-interest
bearing deposits primarily reflects lower title company deposits at March 31,
1999.
The following table shows the average balances and weighted average
rate paid on the categories of deposits:
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------------
1999 1998
---------------------------- -----------------------------
Average Average Average Average
Balance Rate Balance Rate
------------ ------------ ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Noninterest-bearing demand $ 279,711 -- $287,901 --
Interest-bearing demand 144,689 1.06% 130,214 1.51%
Money market 122,899 3.19 117,581 3.45
Savings 223,079 6.13 137,037 4.74
Time 302,849 3.77 232,527 5.08
---------- --------
Total $1,073,227 2.85% $905,260 2.69%
---------- --------
---------- --------
</TABLE>
The following table shows the maturities of time certificates of deposits of
$100,000 or more at March 31, 1999:
<TABLE>
<CAPTION>
March 31, 1999
----------------
(In thousands)
<S> <C>
Due in three months or less $ 65,818
Due in over three months through six months 24,271
Due in over six months through twelve months 15,164
Due in over twelve months 2,664
----------------
Total $107,917
----------------
----------------
</TABLE>
22
<PAGE>
BORROWINGS
Other borrowed funds totaled $33.5 million at March 31, 1999. This
represents a decrease of $424,000, or 1.3%, from total borrowed funds of $33.9
million at December 31, 1998. The decrease was primarily the result of lower
federal funds purchased at March 31, 1999 compared to December 31, 1998.
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 its subsidiary banks were well capitalized at March 31,
1999 for federal regulatory purposes. At March 31, 1999, the Company and
subsidiary banks had a leverage ratio, Tier 1 risk weighted ratio and total
risk-weighted capital ratio as follows:
<TABLE>
<CAPTION>
Antelope
ELDORADO BANK VALLEY BANK COMPANY
------------- ----------- -------
<S> <C> <C> <C>
Leverage Ratio 6.43% 8.06% 6.65%
Tier I - Risk Based 9.67% 10.88% 9.82%
Total Risk Based (Tier 1 and Tier 2) 10.75% 12.14% 10.93%
</TABLE>
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 77.2% for the quarter ended March 31, 1999.
This represents a decrease from an average loan to deposit ratio of 84.8% for
the quarter ended March 31, 1998. The average liquidity ratio was 31.3% for the
quarter ended March 31, 1999, compared to an average liquidity ratio of 24.0%
for the quarter ended March 31, 1998. 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 utilized. 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
March 31, 1999, the Company had $100.0 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 March 31, 1999, the Company
has no such collateral at the Federal Reserve.
YEAR 2000 PREPAREDNESS
The Year 2000 issue is a computer programming concern that may affect
many electronic processing systems. Until relatively recently, in order to
minimize the length of data fields, most computer programs eliminated the first
two digits of the year. This problem could affect computers leaving them unable
to distinguish dates in the twentieth and twenty-first centuries. For example,
date-sensitive
23
<PAGE>
calculations that treat "00" as the year 1900, rather than 2000. Secondly, years
that end in "00" are not leap years, except for an anomaly in the year 2000.
This anomaly could result in miscalculations when processing critical
date-sensitive information relating to periods after December 31, 1999.
The Year 2000 issue may adversely affect the Company's information
technology systems, such as its item and data processing applications. The Year
2000 issue also may affect so-called embedded technology, such as
microprocessors that control some of the Company's security systems and
telecommunication equipment.
The Company has determined that a few of its computer software
applications will need to be modified or replaced in order to maintain their
functionality as the year 2000 approaches. In response, a plan has been
developed that provides for the assessment of its material internal systems,
programs and data processing applications as well as those provided to the Bank
by third-party vendors. The Company expects that system conversions and testing
will be completed by June 30, 1999. Based upon the Company's evaluation of its
Year 2000 preparedness, management does not expect that the Year 2000 issue as
it relates to information systems and embedded technology that are within the
Company's direct control will have a material adverse effect on the Company's
business, financial condition or results of operations. However, Year 2000
problems may turn out to exist in portions of computer programs not now
suspected, and there can be no assurance that the Company will not be adversely
affected by this problem.
Ultimately, the potential impact of the Year 2000 issue will depend not
only on the corrective measures the Company undertakes, but also on the way in
which the Year 2000 issue is addressed by governmental agencies, businesses and
other entities who provide data to, or receive data from the Bank or whose
financial condition or operational capability is important to the Company such
as significant suppliers or customers. Communications with significant customers
and vendors have been initiated to determine the extent of risk created by those
third parties' failure to remediate their own Year 2000 issues; however, it is
not possible, at present, to determine the financial effect if a significant
customer's and/or vendor's remediation efforts are not completed in a timely
manner.
In addition, because the Company's day-to-day operations are heavily
dependent on its ability to communicate information throughout its network of
branches and loan production offices, the Company would be particularly
susceptible to any possible effects that the Year 2000 issue has on local and
national communications systems, including without limitation, telephone and
data lines, because of the difficulty in implementing viable contingency plans.
Any interruption or malfunction of such systems could have a material adverse
effect on the Company.
Furthermore, bank regulatory agencies, as part of their supervisory
function, have recently issued guidance under which they are assessing and will
assess Year 2000 readiness. The failure of a financial institution, such as the
Company, to take appropriate steps to address deficiencies in its Year 2000
project management process may result in one or more regulatory enforcement
actions which could have a material adverse effect on such institution. Such
actions may include the imposition of civil money penalties, or result in the
delay or denial of regulatory applications.
From January 1, 1998 through March 31, 1999, the Company has
incurred $325,000 addressing Year 2000 issues. The Company estimates its
total costs through December 31, 1999 will be less than $500,000, and none of
those costs are expected to materially affect the Company's results of
operations in any one reporting period. In light of the complexity of the
Year 2000 problem and its potential effect on both the Company and third
parties that interact with the Company, however, there can be no assurance
that the Company's costs associated with the Year 2000 issue will be as
estimated. The Company does not intend to obtain insurance against any Year
2000 risks.
24
<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 quarter ended March 31, 1999. 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 March 31, 1999, 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 March 31, 1999. 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.
25
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------------------------------------------------------
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 $ -- $ -- $ -- $ -- $ 99,726 $ 99,726
Federal funds sold 24,150 -- -- -- -- 24,150
Investment securities 1,391 24,148 88,902 107,073 38 221,552
Loans and leases 305,024 61,981 167,329 117,271 -- 651,605
Loans held for sale 168,174 -- -- -- -- 168,174
Other assets (2) -- -- -- -- 109,998 109,998
--------- -------- -------- -------- --------- ---------
Total assets 498,739 86,129 256,231 224,344 209,762 1,275,205
--------- -------- -------- -------- --------- ---------
--------- -------- -------- -------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand
deposits -- -- -- -- 304,927 304,927
Interest-bearing demand,
money market and savings 501,406 -- -- -- -- 501,406
Time certificates of deposit 139,279 139,599 11,508 1,116 -- 291,502
Short term debt 5,544 270 -- -- -- 5,814
Long term debt -- -- -- 27,657 -- 27,657
Other liabilities -- -- -- -- 24,464 24,464
Shareholders' equity -- -- -- -- 119,435 119,435
--------- -------- -------- -------- --------- ----------
Total liabilities &
shareholders' equity $646,229 $139,869 $11,508 $28,773 $448,826 $1,275,205
--------- -------- -------- -------- --------- ----------
--------- -------- -------- -------- --------- ----------
Period Gap (147,490) (53,740) 244,723 195,571 (239,064)
Cumulative interest earning
assets 498,739 584,868 841,099 1,065,443
Cumulative interest earning
liabilities 646,229 786,098 797,606 826,379
Cumulative Gap (147,490) (201,230) 43,493 239,064
Cumulative interest earning
assets to cumulative interest
bearing liabilities 0.77 0.74 1.05 1.29
Cumulative gap as a percent of:
Total assets -11.57% -15.78% 3.41% 18.75%
Interest earning assets -13.84% -18.89% 4.08% 22.44%
</TABLE>
- ---------------------------------------
(1) Assets or liabilities which are not interest rate-sensitive.
(2) Allowance for possible loan losses of $9.2 Million as of March 31, 1999 is
included in other assets.
26
<PAGE>
At March 31, 1999, the Company had $584.9 million of assets and $786.1
million of liabilities repricing within one year. Therefore, $201.2 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 cashflows and others. While assumptions are developed based upon
current economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including how
customer preferences or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ because of prepayment and refinancing
levels likely deviating from those assumed, the varying impact of interest rate
change caps or floors on adjustable rate loans, depositor withdrawals and
product preference changes, and other internal and external variables.
Furthermore, the sensitivity analysis does not reflect actions that management
might take in responding to or anticipating changes in interest rates.
Management has taken several steps to reduce the positive gap of the
Company by lengthening the maturities in its investment portfolio and
originating more fixed-rate assets that mature or reprice in balance with its
interest bearing liabilities. Management will continue to maintain a balance
between its interest earning assets and interest bearing liabilities in order to
minimize the impact on net interest income due to changes in market rates.
27
<PAGE>
PART II - OTHER FINANCIAL INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Eldorado Bank was a defendant in an action initiated in 1994 by several
employees who alleged, among other things, that a subsidiary of the Company
wrongfully terminated their employment in connection with its 1994 closure of
the Stockton, California office. Their complaint alleged, among other things,
that Eldorado Bank terminatd their employment as a result of their having
reported violations of consumer lending laws committed by another employee of
the Stockton office and sought compensatory and punitive damages. Eldorado Bank
settled such claim with the plaintiffs in January 1999 without admitting any
liability.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 22, 1999, the Company issued 86,029 shares of Common Stock
to Robert P. Keller, President and Chief Executive Officer of the Company,
pursuant to the terms of Mr. Keller's employment agreement with the Company. The
Company's issuance of those shares was exempt from registration under the
Securities Act by virtue of Regulation D thereunder and/or Section 4(2) thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 28, 1999, pursuant to stockholder action by written
consent in lieu of special meeting, the stockholders of the Company voted to
authorize the amendment of the company's Certificate of Incorporation,
contingent upon the completion of the offering described below, to eliminate
the Series B Preferred Stock, the Voting Special Common Stock and the
Non-Voting Special Common Stock and to redesignate the Class B Common Stock
as "Common Stock" and the Class C Common Stock as the "Non-Voting Common
Stock." An aggregate of 6,148,873 shares (a majority of the Common Stock
outstanding) was voted in favor of the amendment. As such stockholder vote
was taken by written consent, no shares were voted against the amendment or
withheld from voting.
ITEM 5. OTHER INFORMATION
On April 12, 1999, in an underwritten offering managed by Keefe,
Bruyette & Woods Inc., a total of 1,909,900 shares of Common Stock, including
259,900 shares sold by selling shareholders, were sold to the public at a price
of $10.00 per share. The price received by the Company and the selling
shareholders net of the underwriting discount was $9.30 per share. Concurrently
with the underwritten offering, the Company sold 350,000 shares of Common Stock
to several of its directors and principal shareholders at a price of $9.30 per
share. On April 30, 1999, Keefe, Bruyette & Woods Inc. exercised its over
allotment option to purchase 286,400 shares at the public offering price of $10
per share less the underwriting discount.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
EXHIBIT NO. EXHIBIT
- ----------- -------
3.1 Amended and Restated Certificate of Incorporation (filed as
Exhibit 3.3 to the Company's Registration Statement on Form S-1
(file no. 333-61589) and incorporated by reference herein)
3.2 By-laws of the Company (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1996 and incorporated by reference herein)
27 Financial Data Schedule
28
<PAGE>
REPORTS ON FORM 8-K:
REPORT ON FORM 8-K DATED JANUARY 29, 1999 (AS AMENDED MARCH 29, 1999):
this filing related to the completion of the acquisition of Antelope Valley Bank
by the Company and included disclosure under Items 2 and 7. Financial statements
filed included audited financial statements for Antelope Valley Bank as of
December 31, 1998 and 1997 and for each of the years in the three-year period
ended December 31, 1998 and unaudited pro forma combined condensed financial
information of the Company and Antelope Valley Bank.
REPORT ON FORM 8-K DATED APRIL 21, 1999: this fining included as an
exhibit the Amended and Restated Shareholder Agreement by and among Eldorado
Bancshares, Inc. and certain of its principal shareholders executed by the
parties on April 6, 1999.
29
<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: May 14, 1999 Robert P. Keller /s/
-------------------------------------------------
Robert P. Keller
President and Chief Executive Officer
DATE: May 14, 1999 John L. Gordon /s/
-------------------------------------------------
John L. Gordon
Senior Vice President and Chief Financial Officer
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 99,726
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 24,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 221,552
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 819,779
<ALLOWANCE> (9,184)
<TOTAL-ASSETS> 1,275,205
<DEPOSITS> 1,097,835
<SHORT-TERM> 5,814
<LIABILITIES-OTHER> 24,464
<LONG-TERM> 27,657
0
11,659
<COMMON> 88,413
<OTHER-SE> 19,363
<TOTAL-LIABILITIES-AND-EQUITY> 1,275,205
<INTEREST-LOAN> 18,541
<INTEREST-INVEST> 3,379
<INTEREST-OTHER> 274
<INTEREST-TOTAL> 22,194
<INTEREST-DEPOSIT> 7,535
<INTEREST-EXPENSE> 8,713
<INTEREST-INCOME-NET> 13,481
<LOAN-LOSSES> 780
<SECURITIES-GAINS> 264
<EXPENSE-OTHER> 16,077
<INCOME-PRETAX> 3,076
<INCOME-PRE-EXTRAORDINARY> 3,076
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,392
<EPS-PRIMARY> 0.090
<EPS-DILUTED> 0.087
<YIELD-ACTUAL> 4.95
<LOANS-NON> 7,670
<LOANS-PAST> 398
<LOANS-TROUBLED> 5,167
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,160
<CHARGE-OFFS> 1,677
<RECOVERIES> 921
<ALLOWANCE-CLOSE> 9,184
<ALLOWANCE-DOMESTIC> 9,184
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 9
</TABLE>
