<PAGE> 1
FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-31905, effective 10/26/93
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
(Fee Required)
For the fiscal year ended DECEMBER 31, 1995
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
(Fee Required)
For the transition period from to
Commission File Number 1-9709
ELDORADO BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3642383
(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
17752 EAST SEVENTEENTH STREET TUSTIN, CALIFORNIA 92680
(Address of principal executive offices)
Registrant's telephone number, including area code 714 798-1100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class which Registered
COMMON AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all report 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.
/X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or in any amendment to this Form 10-K.
/ / Yes
As of February 29, 1996, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was approximately $44,727,300.
3,763,280 shares of Common Stock were outstanding at February 29, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of 1995 Annual Report to Shareholders Parts II & IV
Definitive Proxy Statement dated March 29, 1996 Part III
1
<PAGE> 2
PART I
Item 1. BUSINESS
Eldorado Bancorp (the "Company" or "EB") is a California corporation organized
in January, 1981 and registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended. EB's primary asset is the capital stock of
Eldorado Bank (the "Bank"), and the business of the Bank is carried on as a
wholly-owned subsidiary of EB.
EB has no subsidiary or affiliated business other than the Bank. EB may, in the
future, however, consider acquiring or establishing businesses engaged in
non-banking activities as permitted under Federal Reserve Board regulations. EB
has not as yet established any specific plans to enter into any of the permitted
non-banking activities and neither EB nor the Bank is involved in any
negotiations for the acquisition of any such business.
Unless otherwise indicated, all information herein is as of December 31, 1995.
The Bank
The Bank was incorporated under the laws of the State of California on February
3, 1972, and was licensed by the California State Banking Department and
commenced operations as a California state chartered bank on May 1, 1972. The
Bank's accounts are insured by the Federal Deposit Insurance Corporation
("FDIC"). The Bank is not a member of the Federal Reserve System. The Bank
currently operates a total of eleven banking offices in Southern California.
The Bank's original banking and its headquarters office is located in Tustin,
California, approximately 35 miles south of Los Angeles. The Bank also operates
one banking office in Laguna Hills, California, a residential community in
southern Orange County approximately 50 miles south of Los Angeles, one banking
office in San Bernardino, which is located approximately 59 miles east of Los
Angeles, and one banking office each in Indio and Palm Desert, which are located
approximately 115 miles east of Los Angeles. The Bank's expansion into the Indio
and Palm Desert area was accomplished through the merger of the Bank of Indio, a
California state chartered bank, with and into the Bank in April, 1982. The
Bank's expansion into San Bernardino occurred with the acquisition of American
Security Bank on August 29, 1980. On March 3, 1988 the Company acquired American
Merchant Bank, which was then merged into the Bank on May 23, 1988. This further
broadened the Bank's base in Orange County with the addition of offices in the
cities of Orange, Huntington Beach and Newport Beach. In 1992, the Bank
relocated the Newport Beach branch to a nearby office in the Orange County
Airport community in Irvine. The Bank further expanded into South Orange County
with the acquisition of Bank of San Clemente on October 4, 1991. This
acquisition included two branches in San Clemente, which is located
approximately 65 miles south of Los Angeles. On October 20, 1995, the bank
acquired all the voting shares of Mariners Bancorp. Mariners Bancorp and its
wholly-owned subsidiary, Mariners Bank, were merged with and into Eldorado Bank.
Mariners Bank was headquartered in San Clemente, California and operated its
head office in that city and two branch banking offices in San Juan Capistrano
and Monarch Beach. Eldorado Bank consolidated its two branch banking offices in
San Clemente into the former Mariners Bank branch banking offices.
Services Provided by Eldorado Bank
The Bank's organization and operations have been designed to meet the banking
needs of individuals and small to medium-sized businesses located in the areas
of Orange, San Bernardino and Riverside counties of California, in which the
Bank conducts its operations. The Bank's commitment to provide convenience
banking and a complete range of personalized services is evidenced by early
evening hours and Saturday banking hours at some locations, drive-up facilities
and automatic teller machines at its banking offices, innovative professional
programs, and departmentalized service centers.
The Bank offers a full range of commercial banking services including the
acceptance of checking and savings deposits, the making of commercial loans,
various types of consumer loans and real estate loans, and provision of safe
deposit, collection, travelers' checks, notary public and other customary
non-deposit banking services. The Bank also provides lease financing of
automobiles and other equipment. The Bank is a card issuing bank for MasterCard
and Visa and
2
<PAGE> 3
merchant depository for MasterCard and Visa drafts, enabling merchants to
deposit both types of drafts with the Bank. The Bank also offers special
services to senior citizens, who constitute an important segment of the
population in the Bank's service area.
Deposits of Eldorado Bank
As of December 31, 1995, the Bank had 9,192 accounts representing approximately
$99,770,000 in total demand deposits with an average balance of $10,854 and
14,241 accounts representing approximately $233,508,000 in savings and time
deposits with an average savings account balance of $7,399, an average NOW
account balance of $10,947, an average money market account balance of $30,798
and an average time account balance of $26,629. Of the total deposits at
December 31, 1995, $8,958,000 were municipal and other governmental deposits,
comprised of demand, savings and time deposits, and $32,092,000 (including
$7,500,000 of municipal and governmental deposits) were in the form of
certificates of deposit in denominations equal to or greater than $100,000.
During the twelve months ended December 31, 1995, including the deposits
acquired in the acquisition of Mariners Bancorp, total demand deposits increased
approximately $20,423,000 (25.7%) and total savings, NOW, money market and time
deposits increased approximately $41,529,000 (21.6%) representing a $11,924,000
increase in savings, NOW and money market deposits and a $29,605,000 increase in
time deposits.
The Bank is not dependent on a single or a few customers for its deposits, most
of which are obtained from individuals and small to medium-sized businesses.
This results in relatively small average deposit balances, which makes the Bank
less subject to adverse effects from the loss of a substantial depositor. At
December 31, 1995, no individual, corporate or public depositor accounted for as
much as 5.0% of the Bank's total deposits and the accounts of the five largest
depositors represented only 5.0% of total deposits.
3
<PAGE> 4
Distribution of Assets, Liabilities and Stockholders' Equity: Interest Rates and
Interest Differential
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-bearings assets and the
resultant yields, and the dollar amounts of interest expense and average
interest-bearing liabilities, expressed in both dollars and rates. Nonaccrual
loans are included in the calculation of the average balances of loans, and
interest not accrued is excluded:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------------------------------
1995 1994 1993
-------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollar in thousands, interest and rates on taxable equivalent basis) (1)
Assets
Interest-Earning Assets:
Investment securities $ 86,012 $ 5,438 6.32% $ 75,592 $ 3,774 4.99% $44,905 $ 2,737 6.10%
Federal funds sold 14,347 846 5.90 22,467 905 4.03 46,441 1,385 2.98
Other earning assets 978 122 12.48 1,754 227 12.94 2,655 309 11.64
Loans (2) 183,087 18,605 10.16 177,111 16,183 9.14 191,182 17,265 9.03
-------------------------- ---------------------------- -----------------------------
Total interest-earning assets 284,424 25,011 8.79% 276,924 21,089 7.62% 285,183 21,696 7.61%
Total non interest-earning assets 34,305 36,641 41,449
-------- -------- --------
Total assets $318,729 $313,565 $326,632
======== ======== ========
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities:
Savings, NOW and money market $141,397 $ 2,875 2.03% $160,695 $ 3,103 1.93% $166,876 $ 3,669 2.20%
Time deposits of $100,000 or more 24,350 1,211 4.97 23,040 725 3.15 28,584 1,252 4.38
Other deposits 29,618 1,457 4.92 24,885 782 3.14 31,608 738 2.33
Short-term borrowings 5,052 280 5.54 361 16 4.43 1,056 27 2.56
-------------------------- ---------------------------- -----------------------------
Total interest-bearing
liabilities 200,418 5,823 2.91% 208,981 4,626 2.21% 228,124 5,686 2.49%
Non Interest-Bearing Liabilities and
Shareholders' Equity:
Demand deposits 83,290 73,915 68,865
Other liabilities 3,584 2,110 1,672
Shareholders' equity 31,437 28,559 27,971
-------- -------- --------
Total liabilities and
shareholders' equity $318,729 $313,565 $326,632
======== ======== ========
Net Interest Income (3) $19,188 $16,463 $16,010
======= ======= =======
Net Yield on Interest-Earning Assets 5.88% 5.41% 5.12%
Net Interest Margin 6.75% 5.94% 5.62%
===== ===== =====
</TABLE>
(1) Total interest income includes the effects of taxable-equivalent
adjustments, using tax rates which approximate 41 percent for 1995 and
1994 and 39 percent for 1993.
(2) Net of unearned income.
(3) Net interest margin is net interest income divided by average total
interest-earning assets.
4
<PAGE> 5
The year-to-year change in interest associated with interest-earning assets and
interest-bearing liabilities are attributable to changes in volume and rate. The
increase or decrease resulting from these changes are summarized as follows:
<TABLE>
<CAPTION>
(Fully Taxable Equivalent)
-------------------------------------------------------------------------
Year Ended December 31, 1995 Year Ended December 31, 1994
over over
Year Ended December 31, 1994 Year Ended December 31, 1993
---------------------------------- ---------------------------------
Increase (Decrease) Due to Change Increase (Decrease) Due to Change
in: in:
Volume Rate Change Volume Rate Change
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Investment securities $ 520 $1,144 $1,664 $ 1,870 $(833) $ 1,037
Federal funds sold (327) 268 (59) (715) 235 (480)
Other earning assets (100) (5) (105) (105) 23 (82)
Loans 546 1,876 2,422 (1,271) 189 (1,082)
--------------------------------- ---------------------------------
Total interest income $ 639 $3,283 3,922 $ (221) $(386) (607)
Interest-Bearing Liabilities:
Savings, NOW and money market (374) 146 (228) (136) (430) (566)
Time deposits of $100,000 or more 41 445 486 (243) (284) (527)
Other deposits 149 526 675 (157) 201 44
Short-term borrowings 208 56 264 (18) 7 (11)
--------------------------------- ---------------------------------
Total interest expense 24 1,173 1,197 (554) (506) (1,060)
--------------------------------- ---------------------------------
Interest differential or net interest
income $ 615 $2,110 $2,725 $ 333 $ 120 $ 453
================================= =================================
</TABLE>
5
<PAGE> 6
Securities Portfolio
The following table summarizes the components of securities at December 31 of
each year indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1995 1994 1993
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
-------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury and agency $76,436 $76,892 $76,948 $76,410 $ --- $ ---
State and political subdivisions 1,195 1,202 290 295 --- ---
Corporate debt 4,327 4,431 7,389 7,281 --- ---
Mortgage-backed 3,907 4,024 2,055 2,121 --- ---
Other 31 31 --- --- --- ---
-------------------------------------------------------------------------------
Total $86,896 $86,580 $86,682 $86,107 $ --- $ ---
===============================================================================
Securities held-to-maturity:
U.S. Treasury and agency $ 5,998 $ 6,051 $ --- $ --- $44,222 $44,730
State and political subdivisions 587 645 586 562 1,195 1,222
Corporate debt 502 516 --- --- 8,380 8,757
Mortgage-backed --- --- --- --- 4,589 4,862
Other --- --- --- --- 3,515 3,509
-------------------------------------------------------------------------------
Total $ 7,087 $ 7,212 $ 586 $ 562 $61,901 $63,080
===============================================================================
</TABLE>
The following table summarizes the maturities of securities and the weighted
average yields at December 31, 1995:
<TABLE>
<CAPTION>
December 31, 1995
-------------------------------------------------------------------------
After One but After Five but
Within One Within Five Within Ten After Ten
Year Years Years Years
Amount Yield Amount Yield Amount Yield Amount Yield
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury and agency $61,576 6.13% $13,186 6.57% $2,130 7.64% $ --- ---%
State and political subdivisions 96 8.20 819 6.91 --- --- 287 6.54
Corporate debt 2,527 7.45 1,904 8.92 --- --- --- ---
Mortgage-backed 180 8.00 2,052 7.26 427 9.87 1,365 9.07
Other 31 --- --- --- --- --- --- ---
-------------- --------------- --------------- ---------------
Total $64,410 6.19% $17,961 6.91% $2,557 8.01% $1,652 8.63%
============== =============== =============== ===============
Securities held-to-maturity:
U.S. Treasury and agency $ --- --- $ 3,498 6.22% $2,500 7.51% $ --- ---
State and political subdivisions --- --- --- --- 587 8.00 --- ---
Corporate debt --- --- --- --- 502 8.15 --- ---
Mortgage-backed --- --- --- --- --- --- --- ---
Other --- --- --- --- --- --- --- ---
-------------- --------------- --------------- ---------------
Total $ --- --- $ 3,498 6.22% $3,589 7.68% $ --- ---
============== =============== =============== ===============
</TABLE>
6
<PAGE> 7
Also included in securities available-for-sale are perpetual equity securities
totaling $31,000 with insignificant dividend yield.
Loan Portfolio
The following table summarizes the components of total gross loans outstanding
in each category at December 31 of each year indicated:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
---------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans:
Commercial, secured and unsecured $ 94,548 $ 66,987 $ 67,723 $ 74,603 $ 83,937
Interim construction 18,219 4,789 13,039 21,595 28,770
Real estate 88,097 78,607 80,088 90,985 98,373
Installment 26,553 18,945 17,961 21,374 28,229
Credit card 1,791 1,298 1,357 1,456 1,491
Lease financing 876 1,286 2,716 3,515 3,853
Less: Unearned income (127) (38) (419) (739) (1,208)
---------------------------------------------------------
Total $229,957 $171,874 $182,465 $212,789 $243,445
=========================================================
</TABLE>
Maturities and Sensitivity to Changes in Interest Rates
The following table shows the maturities of loans and their sensitivities to
changes in interest rates at December 31, 1995.
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------
Within One One to Five After Five
Year Years Years Total
---------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Loans:
Commercial, secured and unsecured $ 70,920 $16,287 $ 7,341 $ 94,548
Interim construction 13,666 3,138 1,415 18,219
Real estate 66,081 15,176 6,840 88,097
Installment 19,917 4,574 2,062 26,553
Credit card 1,791 --- --- 1,791
Lease financing 268 268 340 876
Less: Unearned income (127) --- --- (127)
---------------------------------------------------
Total $172,516 $39,443 $17,998 $229,957
===================================================
</TABLE>
<TABLE>
<CAPTION>
Maturing
----------------------------------
Within One After One
Year Year Total
----------------------------------
<S> <C> <C> <C>
Loans with predetermined interest rates $ 26,590 $47,646 $ 74,236
Loans with floating or adjustable interest rates 145,926 9,795 155,721
----------------------------------
Total $172,516 $57,441 $229,957
==================================
</TABLE>
7
<PAGE> 8
Loan Portfolio - Nonperforming Loans
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1995 1994 1993 1992 1991
--------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $5,818 $3,161 $2,092 $2,927 $8,364
Loans more than 90 days past due 380 246 56 361 349
--------------------------------------------------
Total nonperforming loans $6,198 $3,407 $2,148 $3,288 $8,713
==================================================
</TABLE>
Ordinarily, the accrual of interest ceases when no payment of interest or
principal has been made for 90 days or if the Bank has reason to believe that
continued payment of interest and principal is unlikely. Accrued interest, if
any, is reversed at the time such loans are placed on nonaccrual status. If
these loans had been current throughout their terms, interest and fees on loans
would have increased by approximately $172,000, $144,000, $108,000, $103,000,
and $166,000, for 1995, 1994, 1993, 1992, and 1991 respectively.
Effective January 1, 1995, the Bank adopted the provisions of the Financial
Accounting Standards Board's Statements of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan, as amended by No. 118
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. SFAS 114 requires loans to be measured for impairment when it is
probable that all amounts, including principal and interest, will not be
collected in accordance with the contractual terms of the loan agreement.
Generally, the Bank evaluates a loan for impairment when it is placed on
nonaccrual status At December 31, 1995, total nonaccrual loans of $5.8 million
were considered impaired in accordance with SFAS 114. The following is a summary
of impaired loans and the related allowance for possible credit losses at
December 31, 1995:
<TABLE>
<CAPTION>
Allowance
Recorded for Possible
Investment Credit Losses
---------------------------
<S> <C> <C>
Impaired loans requiring an allowance
for possible credit losses $5,077,000 $1,985,000
Impaired loans not requiring an allowance
for possible credit losses 741,000 ---
===========================
$5,818,000 $1,985,000
===========================
</TABLE>
Troubled Debt Restructurings
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1995 1994 1993 1992 1991
--------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Troubled debt restructuring $1,531 $7,069 $1,431 $ -- $ --
</TABLE>
Troubled debt restructurings consist primarily of loans for which the interest
rate was reduced or the payment provisions were modified because of the
inability of the borrower to service the obligation under the original terms of
the agreements. Income is accrued at the lower effective rate provided the
borrower is current under the revised terms and conditions of the agreements.
Under the original terms of the restructured loans, interest earned would have
totaled approximately $235 thousand for the year ended December 31, 1995. Under
the restructured terms, recorded interest income amounted to $187 thousand for
the year ended December 31, 1995.
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<PAGE> 9
Allowance and Provision for Possible Credit Losses
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for possible credit losses:
Balance at beginning of period $5,564 $4,740 $3,530 $3,757 $2,656
Actual charge-offs:
Commercial 342 570 502 574 406
Interim construction --- --- 590 741 ---
Credit cards 36 36 35 66 48
Consumer 165 151 98 494 307
Real estate 763 720 1,277 142 ---
Direct lease financing 5 97 32 60 21
-----------------------------------------------------------------
Total charge-offs 1,311 1,574 2,534 2,077 782
Less recoveries:
Commercial 156 118 27 54 61
Interim construction --- --- 11 --- ---
Credit cards 9 13 21 5 8
Consumer 49 30 106 50 60
Real estate 225 --- --- --- ---
Direct lease financing --- 8 3 6 ---
-----------------------------------------------------------------
Total recoveries 439 169 168 115 129
-----------------------------------------------------------------
Net loans charged off 872 1,405 2,366 1,962 653
Provision for credit losses 756 2,006 3,576 1,735 1,159
Changes incident to acquisitions 817 223 --- --- ---
-----------------------------------------------------------------
Balance at end of period $6,265 $5,564 $4,740 $3,530 $3,757
=================================================================
Ratios:
Net loans charged off to average
loans 0.47% 0.79% 1.22% 0.84% 0.30%
Allowance for credit losses to total
gross loans 2.72% 3.24% 2.60% 1.66% 1.54%
Net loans charged off to allowance
for credit losses 13.92% 25.25% 49.92% 55.58% 17.38%
Net loans charged off to provision
for credit losses 115.34% 70.04% 66.16% 113.08% 56.34%
Allowance for credit losses to
non-performing loans 101.08% 163.31% 220.07% 107.36% 43.12%
</TABLE>
The allowance for possible credit losses is established by a provision for
possible credit losses charged against current period income. Loans and leases
are charged against the allowance for possible credit losses when management
believes that the collectibility of principal is unlikely. The allowance is an
amount that management believes will be adequate to absorb losses inherent in
existing loans, leases and commitments to extend credit, based on the
evaluations of the collectibility and prior loss experience of loans, leases and
commitments to extend credit. The evaluations take into consideration such
factors as changes in the nature and volume of the portfolio, overall portfolio
quality; loan concentrations; specific problem loans, leases and commitments;
and current and anticipated economic conditions that may affect the borrowers'
ability to pay.
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<PAGE> 10
Management believes that the allowance for possible credit losses is adequate.
While management uses available information to recognize losses on loans and
leases, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, both Federal and state regulators, as an
integral part of their examination process, periodically review the Bank's
allowance for possible credit losses and may recommend additions based upon
their evaluation of the portfolio at the time of their examination.
The risk of nonpayment of loans is an inherent feature of the banking business.
That risk varies with the type and purpose of the loan, the collateral which is
utilized to secure payment, and ultimately, the credit worthiness of the
borrower. In order to minimize this credit risk, the Bank has established
lending limits for each of its officers having lending authority, in each case
based upon the officer's experience level and prior performance. Whenever a
proposed loan by itself, or when aggregated with outstanding extensions of
credit to the same borrower, exceeds the officer's lending limits, the loan must
be approved by the Bank's Chairman, President or Executive Vice President/Chief
Credit Officer or by the Bank's loan committee, depending upon the dollar amount
involved. The loan committee is comprised of two directors and four members of
the Bank's senior management. In addition, each loan officer has primary
responsibilities to conduct credit documentation reviews of all loans made by
that officer.
Furthermore, the Bank also maintains a program of periodic review of all
existing loans and employs a specialist who reviews loans over a certain dollar
amount and grades these loans based upon the dollar amount and credit worthiness
using a grading system. Loans are graded from "one" to "eight" depending on
credit quality, with "grade one" representing a prime loan with a definite and
reliable repayment program based upon liquid collateral with adequate margin or
supported by a strong up-to-date financial statement. Problem or substandard
loans identified in the review process are scheduled for remedial action, and
where appropriate, allowances are established for such loans. Periodically, an
outside loan review consultant further reviews loans for credit quality.
Additionally, the Bank is examined regularly by the FDIC and California State
Banking Department at which time a further review of loans is conducted.
The problem or substandard loans identified in the review process are largely
due to a decline in local real estate values during the past several years.
Management believes that it has adequately provided an allowance to cover
estimated losses in the credit portfolio. Significant further deterioration in
California real estate values could materially impact future operating results,
liquidity or capital resources.
Nonaccrual Loans
Under the Bank's guidelines, it will discontinue the accrual of interest on a
loan that is 90 days past due or if management determines that the interest will
be uncollectible.
On December 31, 1995 the Bank had loans of approximately $5.8 million on which
the accrual of interest had been discontinued. This amount was comprised of
approximately $5.6 million of real estate secured loans, $100 thousand of
commercial unsecured loans, and $100 thousand of consumer related loans.
Other Real Estate Owned
The Bank sometimes acquires real estate properties in satisfaction of loan
receivables through foreclosure or other means. The Bank accounts for these
properties pursuant to Statement of Position 92-3 Accounting for Foreclosed
Assets (SOP 92-3) which presumes that foreclosed assets are held for sale and
not for the production of income. Accordingly, the real estate properties are
carried at fair value less estimated costs to sell. The Bank determines fair
value based upon appraisals near the date of foreclosure. These appraisals are
periodically updated and subsequent write-downs of value may be recognized in
the event of declining fair values.
On December 31, 1995 the Bank had other real estate owned of approximately $2.0
million consisting of a retail center, a single family residence, two unimproved
commercial lots, and three other smaller-value properties.
10
<PAGE> 11
Allocation of Allowance for Possible Credit Losses
The Bank has allocated the allowance for credit losses according to the amount
deemed to be reasonably necessary to provide for the possibility of losses being
incurred within the categories of loans set forth in the following table:
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Secured and
Unsecured $2,117 33.8% $2,281 39.0% $2,164 37.1% $1,715 35.1% $1,296 34.5%
Interim Construction 280 4.5% 310 2.8% 325 7.1% 440 10.1% 443 11.8%
Real estate 3,274 52.3% 2,597 45.7% 1,780 43.9% 1,091 42.8% 1,518 40.4%
Installment 500 8.0% 271 11.0% 334 9.8% 245 10.0% 428 11.4%
Credit card 64 1.0% 52 0.8% 101 0.8% 11 0.7% 23 0.6%
Lease financing 30 0.4% 53 0.7% 36 1.3% 28 1.3% 49 1.3%
----------------------------------------------------------------------------------------------------
Total $6,265 100.0% $5,564 100.0% $4,740 100.0% $3,530 100.0% $3,757 100.0%
====================================================================================================
</TABLE>
11
<PAGE> 12
Deposits
The average amount of deposits is summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1995 1994 1993
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
--------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
In Domestic Offices:
Interest-bearing demand $ 45,443 1.03% $ 45,813 1.01% $ 45,702 1.94%
Savings and money market 95,955 2.51 114,882 2.30 121,174 2.30
Time 53,968 4.94 47,925 3.14 60,192 3.30
--------------------------------------------------------------------
Total interest-bearing deposits 195,366 2.84 208,620 2.21 227,068 2.49
Noninterest-bearing deposits 83,290 --- 73,915 --- 68,865 ---
--------------------------------------------------------------------
Total average deposits $278,656 1.99% $282,535 1.63% $295,933 1.91%
====================================================================
</TABLE>
Maturities of domestic time certificates of deposit of $100,000 or more are:
<TABLE>
<S> <C>
Three months or less............................................. $11,306
Over three months through six months............................. 5,628
Over six through twelve months................................... 11,257
Over twelve months............................................... 3,901
-------
$32,092
=======
</TABLE>
Return on Average Equity and Average Assets
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------
1994 1993 1992
---------------------------------
Percentage of Net Earnings (Loss) To:
<S> <C> <C> <C>
Average Total Assets 1.41% 0.82% (0.53)%
Average Shareholders' Equity 14.33% 8.95% (6.17)%
Percentage of Cash Dividends Declared
to Net Earnings 21.31% 17.25% N/A
Percentage of Average Shareholders'
Equity to Average Total Assets 9.86% 9.11% 8.56 %
</TABLE>
GAP Table
One way to measure the impact that future change 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 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 interest 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.
12
<PAGE> 13
The following table shows the interest sensitivity gaps for the cumulative gap
for the periods shown as of December 31, 1995:
<TABLE>
<CAPTION>
--------------------------------------------------------
After Three After One
Months But Year But
Within Three Within One Within Five After Five
Months Year Years Years
--------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold $ 9,700 $ -- $ -- $ --
Securities 11,975 52,435 21,459 7,798
Loans and lease financing 105,863 66,653 39,443 17,998
-------- -------- ------- -------
Total 127,538 119,088 60,902 25,796
Interest-Bearing Liabilities:
Savings, NOW and money market 157,882 -- -- --
Time deposits 26,558 39,667 9,401 --
Short-term borrowings 3,772 -- -- --
-------- -------- ------- -------
Total 188,212 39,667 9,401 --
Cumulative interest rate sensitivity gap $(60,674) $ 18,747 $70,248 $96,044
Cumulative interest rate sensitivity gap to
total assets (15.8)% 4.9% 18.3% 25.1%
======== ======== ======= =======
</TABLE>
Competition
The Bank faces substantial competition for deposits and loans throughout its
market areas. The primary factors in competing for deposits are interest rates,
personalized services, the quality and range of financial services, convenience
of office locations and office hours. Competition for deposits comes primarily
from other commercial banks, savings institutions, credit unions, money market
funds and other investment alternatives. The primary factors in competing for
loans are interest rates, loan origination fees, the quality and range of
lending services and personalized services. Competition for loans comes
primarily from other commercial banks, savings institutions, mortgage banking
firms, credit unions and other financial intermediaries. The Bank faces
competition for deposits and loans throughout its market areas not only from
local institutions but also from out-of-state financial intermediaries which
have opened loan production offices or which solicit deposits in its market
areas. Many of the financial intermediaries operating in the Bank's market areas
offer certain services, such as trust, investment and international banking
services, which the Bank does not offer directly. Additionally, banks with
larger capitalization and financial intermediaries not subject to bank
regulatory restrictions have larger lending limits and are thereby able to serve
the needs of larger customers.
The Bank competes principally on the basis of personalized attention and special
services which it provides its customers, principally individuals and small to
medium size businesses and by promotional activities of the Bank's officers,
directors, employees and shareholders. Most of the Bank's offices offer extended
weekday banking hours and some branches offer Saturday banking hours. The Bank
also operates drive-up banking facilities at seven of its branches and provides
a variety of personalized services. In addition, the Bank operates 24-hour
automatic teller machines (ATM) at nine of its locations and is a member of
Instant Teller network and Plus System network, which link bank ATMs nationwide.
The Bank has also increased the range of services which it provides in order to
meet the expanding banking requirements of its customers. In 1985, the Bank
established a Small Business Administration department.
For customers whose loan demands exceeds the Bank's lending limits, the Bank has
attempted in the past, and intends to continue in the future, to arrange for
such loans on a participation basis with correspondent banks. The Bank also
assists customers requiring other services, such as trust services not offered
by the Bank, by obtaining such services from trust companies and correspondent
banks.
13
<PAGE> 14
Supervision and Regulation
The Company
The Company, as a registered bank holding company, is subject to regulation
under the Bank Holding Company Act ("BHC Act"). The Company is required to file
with the Federal Reserve Board quarterly and annual reports and such additional
information as the Federal Reserve Board may require pursuant to the BHC Act.
The Federal Reserve Board may conduct examinations of the Company and its
subsidiaries.
The Federal Reserve Board may require that the Company terminate an activity or
control of certain subsidiaries when the Federal Reserve Board believes the
activity or control constitutes a serious risk to the financial safety,
soundness or stability of any of its banking subsidiaries and is inconsistent
with sound banking principles or the purposes of the BHC Act or the Financial
Institutions Supervisory Act of 1966, as amended. The Federal Reserve Board also
has the authority to regulate provisions of certain bank holding company debt,
including authority to impose interest ceilings and reserve requirements on such
debt. Under certain circumstances, the Company must file written notice and
obtain approval from the Federal Reserve Board prior to purchasing or redeeming
its equity securities.
Under the BHC Act and regulations adopted by the Federal Reserve Board, a bank
holding company and its nonbanking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. Further, the Company is required by
the Federal Reserve Board to maintain certain levels of capital. The Federal
Reserve Board's risk-based capital guidelines establish a minimum level of
qualifying total capital to risk-weighted assets of 8.00% (of which at least
4.00% should be in the form of Tier 1 Capital). The regulations set forth
minimum requirements, and the Federal Reserve Board has reserved the right to
require that companies maintain higher capital ratios. As of December 31, 1995,
the Company had a ratio of qualifying total capital to risk-weighted assets of
14.5%, of which 13.2% was in the form of Tier 1 Capital. Additionally, the
Federal Reserve Board established a minimum leverage ratio of 3%. At December
31, 1995, the Company's leverage ratio was 9.6%. For a more complete description
of the Federal Reserve Board's risk-based and leverage capital guidelines, see
"Item 1. Business - Effect of Governmental Policies and Recent Legislation -
Capital Adequacy Guidelines."
<TABLE>
<CAPTION>
Minimum Eldorado Eldorado Bank
Regulatory Bancorp
---------------------------------------
<S> <C> <C> <C>
Tier I Leverage Ratio ............... 3.00 9.60% 9.50
Tier I Risk-based Ratio ............. 4.00 13.20% 13.10
Total Risk-based Ratio .............. 8.00 14.50% 14.40
</TABLE>
The Company is required to obtain the prior approval of the Federal Reserve
Board for the acquisition of more than 5% of the outstanding shares of any class
of voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve Board is also required
for the merger or consolidation of the Company and another bank holding company.
The Company is prohibited by the BHC Act, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, the Company may, subject to the prior
approval of the Federal Reserve Board, engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making any such determination, the Federal Reserve
Board is required to consider whether the performance of such activities by the
Company or an affiliate can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve Board is also empowered to differentiate
between activities commenced de novo and activities commenced by acquisition, in
whole or in part, of a going concern and is generally prohibited from approving
an application by a bank holding company to acquire voting shares of any
commercial bank in another state unless such acquisition is specifically
authorized by the laws of such other state.
14
<PAGE> 15
The Company is also a bank holding company within the meaning of Section 3700 of
the California Financial Code. As such the Company and its subsidiary are
subject to examination by, and may be required to file reports with, the
California State Banking Department.
Finally, the Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended, including but not limited to,
filing annual, quarterly, and other current reports with the Securities and
Exchange Commission.
The Bank
The Bank, as a California state-chartered bank, is subject to primary
supervision, periodic examination and regulation by the California
Superintendent of Banks (the "Superintendent") and the FDIC. If, as a result of
an examination of a bank, the FDIC should determine that the financial
condition, capital resources, asset quality, earnings prospects, management,
liquidity, or other aspects of the Bank's operations are unsatisfactory or that
the Bank or its management is violating or has violated any law or regulation,
various remedies are available to the FDIC. Such remedies include the power to
enjoin "unsafe and unsound" practices, to require affirmative action to correct
any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in
capital, to restrict the growth of the bank, to assess civil monetary penalties,
to remove officers and directors and ultimately to terminate a bank's deposit
insurance, which for a California state-chartered bank would result in a
revocation of the bank's charter. The Superintendent has many of the same
remedial powers. The Bank has never been the subject of any such actions by the
FDIC or the Superintendent.
The FDIC conducted an examination of the Bank in the first quarter of 1993. As a
result of the examination, the Bank entered into a Memorandum of Understanding
(the "MOU") with the FDIC. The MOU provided that the Bank would: (a) maintain
management acceptable to the FDIC which shall include a chief executive officer
and a senior lending officer qualified to restore the Bank to a sound condition;
(b) eliminate from its books certain assets classified "loss" as identified in
the examination; (c) reduce other criticized assets to specific levels at
various dates through July 27, 1994; (d) maintain Tier 1 Capital in such an
amount as to equal or exceed 7.0% of the Bank's adjusted Part 325 total assets
(as defined in FDIC regulations); (e) revise or adopt and implement several
plans and policies including (1) a written three-year strategic plan for the
Bank; (2) a plan to control overhead and other expenses and restore the Bank's
profitability; (3) written lending and collection policies to provide effective
guidance and control over the Bank's lending function, specifically appraisal
policies and Small Business Administration-guaranteed lending policies; (4)
written liquidity and funds management policy; (5) policy for the operation of
the Bank in such a manner as to provide adequate internal routine and control
policies consistent with safe and sound banking practices; (f) review the
adequacy of the allowance for loan losses and establish a comprehensive policy
for determining the adequacy of the allowance; (g) eliminate and/or correct
specified violations of law and take all necessary steps to ensure future
compliance with all applicable laws and regulations; (h) not pay dividends in
any amount except with the prior written consent of the FDIC; (i) perform a risk
segmentation analysis to identify concentrations of credit and reduce any
segment deemed an undue concentration in relation to capital; (j) file FDIC
Consolidated Reports of Condition and Income which accurately reflect the
financial condition of the Bank; and (k) furnish quarterly written progress
reports to the FDIC and the Superintendent of Banks of the State of California
detailing the form and manner of any actions taken to secure compliance with the
MOU.
Management implemented policies and procedures and achieved the quantitative
goals which satisfied the provisions of the MOU. On May 3, 1995, the FDIC
removed the MOU based upon the results of its most recent examination.
The Bank is insured by the FDIC, which currently insures deposits of each member
bank to a maximum of $100,000 per depositor. For this protection, each bank pays
a quarterly statutory assessment and is subject to the rules and regulations of
the FDIC. See "Item 1. Business - Effect of Governmental Policies and Recent
Legislation - Federal Deposit Insurance Corporation Improvement Act of 1991 -
Deposit Insurance." Although the Bank is not a member of the Federal Reserve
System, it is nevertheless subject to certain regulations of the Federal Reserve
Board.
Various requirements and restrictions under the laws of the State of California
and the United States affect the operations of the Bank. See "Item 1. Business -
Effect of Governmental Policies and Recent Legislation." State and federal
statutes and regulations relate to many aspects of the Bank's operations,
including reserves against deposits, interest rates payable on deposits, loans,
investments, mergers and acquisitions, borrowings, dividends, locations of
branch offices and capital requirements.
15
<PAGE> 16
The FDIC's statement of policy on risk-based capital requires that banks
maintain a ratio of qualifying total capital to risk-weighted assets of not less
than 8.00% (at least 4.00% of which should be in the form of Tier 1 Capital).
The regulations set forth minimum requirements, and the FDIC has reserved the
right to require that banks maintain higher capital ratios. Among other rights,
the FDIC's regulations provide that capital requirements may be enforced by the
issuance of a directive. As of December 31, 1995, the Bank had a ratio of total
qualifying capital to risk-weighted assets of 14.4%, of which 13.1% was in the
form of Tier 1 Capital. The FDIC's capital adequacy regulations also require
that banks maintain a minimum leverage standard of 3% Tier 1 Capital to total
assets for the most highly rated banks. The regulations set forth minimum
requirements, and the FDIC has reserved the right to require that banks maintain
higher ratios. As of December 31, 1995, the Bank's leverage ratio was 9.5%. For
a more complete description of the FDIC's risk-based capital regulations, see
"Item 1. Business - Effect of Governmental Policies and Recent Legislation -
Capital Adequacy Guidelines" and see "Item 1. Business - Effect of Governmental
Policies and Recent Legislation - Federal Deposit Insurance Corporation
Improvement Act of 1991 - Prompt Corrective Action."
Restrictions on Transfers of Funds to the Company by the Bank
The Company is a legal entity separate and distinct from the Bank. At present,
substantially all of the Company's revenues, and cash flow including funds
available for the payments of dividends and other operating expenses, are paid
by dividends to the Company from the Bank.
There are statutory and regulatory limitations on the amount of dividends which
may be paid to the Company by the Bank. California law restricts the amount
available for cash dividends by state-chartered banks to the lesser of retained
earnings or a bank's net income for its last three fiscal years (less any
distributions to shareholders made during such period). In the event a bank has
no retained earnings or net income for its last three fiscal years, cash
dividends may be paid in an amount not exceeding the net income for such bank's
last preceding fiscal year only after obtaining the prior approval of the
Superintendent. At December 31, 1995, the Bank had $4,026,000 legally available
for the payment of cash dividends.
Under the prompt corrective action rules of FDICIA, no depository institution,
such as the Bank, may issue a dividend or pay a management fee if it would cause
the institution to become undercapitalized. Additionally, undercapitalized
institutions are subject to restrictions on dividends and management fees, as
well as other automatic actions. Other supervisory actions may be taken against
institutions that are significantly undercapitalized, as well as
undercapitalized institutions that fail to submit an acceptable capital
restoration plan as required by law or that fail in any material respect to
implement an accepted plan.
The FDIC also has authority to prohibit the Bank from engaging in what, in the
FDIC's opinion, constitutes an unsafe or unsound practice in conducting its
business. It is possible, depending upon the financial condition of the bank in
question and other factors, that the FDIC could assert that the payment of
dividends or other payments might, under some circumstances, be such an unsafe
or unsound practice. Further, the FDIC and the Federal Reserve Board have
established guidelines with respect to the maintenance of appropriate levels of
capital by banks or bank holding companies under their jurisdiction. Compliance
with the standards set forth in such guidelines could limit the amount of
dividends which the Bank or the Company may pay.
The Bank is subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, the Company or other affiliates, the purchase of or investment in
stock or other securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of the Company or other affiliates. Such
restrictions prevent the Company and such other affiliates from borrowing from
the Bank unless the loans are secured by marketable obligations of designated
amounts. Further, such secured loans and investments by the Bank to the Company
or to any other affiliate are limited to 10% of the Bank's capital and surplus
(as defined by federal regulations) and such secured loans and investments are
limited, in the aggregate, to 20% of the Bank's capital and surplus (as defined
by federal regulations). California law also imposes certain restrictions with
respect to transactions involving the Company and other controlling persons of
the Bank.
Compliance with Environmental Regulation
Management of the Company and its subsidiary is unaware of any material effect
upon the Company's and the Bank's capital expenditures, earnings or competitive
position as a result of compliance with federal, state and local provisions
16
<PAGE> 17
which have been enacted or adopted regulating the discharge of material into the
local environment or otherwise relating to the protection of the environment.
Based on current federal, state and local environmental laws and regulations,
the Company does not intend to make any material capital expenditures for
environmental control facilities for either the remainder of its current fiscal
year or its succeeding fiscal year.
Effects of Governmental Monetary Policies and Recent Legislation
Government Fiscal and Monetary Policies
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Bank on its deposits and its
other borrowings and the interest rate received by the Bank on loans extended to
its customers and securities held in the Bank's portfolio comprise a major
portion of the Company's earnings. These rates are highly sensitive to many
factors that are beyond the control of the Bank. Accordingly, the earnings and
growth of the Company are subject to the influence of domestic and foreign
economic conditions, including inflation, recession and unemployment.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
The Federal Reserve Board implements national monetary policies (with objectives
such as curbing inflation and combating recession) by its open-market operations
in United States Government securities, by adjusting the required level of
reserves for financial institutions subject to its reserve requirements and by
varying the discount rates applicable to borrowings by depository institutions.
The actions of the Federal Reserve Board in these areas influence the growth of
bank loans, investments and deposits and also affect interest rates charged on
loans and paid on deposits. The nature and impact of any future changes in
monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing the
cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial
institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in the US Congress, in the California
legislature and before various bank regulatory and other professional agencies.
The likelihood of any major changes and the impact such changes might have on
the Company are impossible to predict. Certain of the potentially significant
changes which have been enacted, and proposals which have been made recently,
are discussed below.
Federal Deposit Insurance Corporation Improvement Act of 1991
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA") was enacted into law. Set forth below is a summary of certain
provisions of that law and actual and proposed enabling regulations.
Prompt Corrective Action
The prompt corrective action provisions of FDICIA provide for certain mandatory
and discretionary actions by the appropriate federal banking regulatory agency,
determined mostly by an institution's ranking within the following five capital
measures: "well capitalized," "adequately capitalized, "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." The federal
banking agencies have promulgated substantially uniform regulations implementing
these provisions of FDICIA, effective December 19, 1992. Under these
regulations, a bank would be deemed (i) "well capitalized" if it has (a) a total
risk-based capital ratio of 10% or greater, (b) a Tier 1 risk-based capital
ratio of 6% or greater, (c) a leverage ratio of 5% or greater and (d) is not
subject to any written agreement, order or capital directive to meet and
maintain a specific capital level; (ii) "adequately capitalized" if it has (a) a
total risk-based capital ratio of 8% or greater, (b) a Tier 1 risk-based capital
ratio of 4% or greater, (c) a leverage ratio of 4% or greater (or a leverage
ratio of 3% or greater for banks with a CAMEL 1 composite rating) and (d) does
not meet the definition of a well capitalized bank; (iii) "undercapitalized" if
it has (a) a total risk-based capital ratio of less than 8%, (b) a Tier 1
risk-based capital ratio of less than 4% or (c) a leverage ratio of less than 4%
(or a leverage ratio of less than 3% for banks with a CAMEL 1 composite rating);
(iv) "significantly undercapitalized" if it has (a) a total risk-based capital
ratio of less than 6%, (b) a Tier 1 risk-based capital ratio of less than 3% or
(c) a leverage ratio of less than 3%; and (v) "critically undercapitalized" if
it has a ratio of tangible equity to total assets equal to or less than 2%. The
federal banking agencies may also, under certain circumstances, reclassify a
"well capitalized" institution as "adequately capitalized" or require an
"adequately capitalized" or "undercapitalized" institution to comply with
supervisory actions as if it were in the next lower
17
<PAGE> 18
category. The agencies may take such action upon a showing that an institution
is in an unsafe or unsound condition or is engaged in an unsafe or unsound
practice (including failure to correct certain unsatisfactory examination
ratings).
Insured institutions are subject to certain incremental supervisory restraints
based on their actual or imputed ranking within the five capital categories. All
institutions are prohibited from making a capital distribution or paying
management fees to controlling persons if, after such transaction, the
institution would be undercapitalized. All undercapitalized institutions,
including significantly and critically undercapitalized institutions, are
required to file a capital restoration plan with their appropriate federal
banking regulator, undergo close monitoring of the condition of the bank and are
subject to restrictions on operations, including prohibitions on asset growth,
branching, acquisitions and engaging in new lines of business, without prior
regulatory approval. Also, as of December 19, 1993, Federal Reserve Bank
advances to such institutions (and institutions with a CAMEL 5 composite rating)
for more than 60 days will be generally restricted. In order to receive
regulatory approval of the required capital restoration plan, a company
controlling such undercapitalized institution will be required to guarantee its
subsidiary's compliance with the capital restoration plan, up to an amount equal
to the lesser of 5% of the subsidiary bank's assets or the amount of the capital
deficiency when the bank first failed to comply with such plan.
Significantly or critically undercapitalized institutions and undercapitalized
institutions which fail to submit or implement an acceptable capital restoration
plan are subject to one or more of the following additional regulatory actions
(one or more of which is mandatory): (i) forced sale of shares and, where
grounds exist for conservatorship or receivership, a forced merger; (ii)
restrictions on affiliate transactions; (iii) limitations on interest rates paid
on deposits; (iv) restrictions on asset growth or required shrinkage; (v)
alteration or curtailment of activities determined by the regulators to pose
excessive risk to the institution; (vi) replacement of directors or senior
executive officers, subject to certain grandfather provisions; (vii) prohibition
on acceptance of correspondent bank deposits; (viii) restrictions on capital
distributions by the holding companies of such institutions; (ix) forced
divestiture of an institution's subsidiaries or divestiture by a bank holding
company of an institution or a financially troubled nonbanking affiliate; or (x)
other actions as determined by the regulators. Additionally, such institutions
may not pay bonuses or provide raises to senior officers without the prior
written approval of the appropriate federal regulator. The applicable federal
regulator is required to impose a forced sale of share or merger, restrictions
on affiliate transactions and restrictions on rates paid on deposits, unless it
determines that such actions would not further an institution's capital
improvement.
FDICIA and its enabling regulations provide for further restrictions applicable
solely to critically undercapitalized institutions, including at a minimum,
prohibitions on the following activities without the prior written consent of
the Federal Deposit Insurance Corporation ("FDIC"): (i) entering into material
transactions other than in the usual course of business; (ii) extending credit
for highly leveraged transactions; (iii) amending an institution's charter or
bylaws; (iv) making a material change in accounting methods; (v) engaging in
certain transactions with affiliates; (vi) paying excessive compensation or
bonuses; or (vii) paying rates on new or renewed liabilities significantly in
excess or market rates. Additionally, 60 days after becoming critically
undercapitalized, an institution may not make payment of interest or principal
on subordinated debt without the permission of the FDIC and its primary federal
regulator (this provision is waived until 1996 for certain grandfathered
subordinated debt).
FDICIA requires the appointment of a receiver or conservator no later than 90
days after an institution becomes critically undercapitalized, unless an
institution's primary regulator and the FDIC determine that another action would
result in a smaller loss to the deposit insurance fund. If such an institution
is not placed into receivership and remains critically undercapitalized, on
average, during the calendar quarter beginning 270 days after it first became
critically undercapitalized, it would generally be required to be placed into
receivership. FDICIA would not require such action only if the institution
exhibits certain specific signs of recovery and receives a certification of
viability from the head of its primary regulatory agency and the Chairperson of
the FDIC.
Limitations on Activities of Insured State Banks
FDICIA provides generally that, effective December 19, 1992, insured state banks
and their subsidiaries may only engage as principal in types of activities that
are permissible for national banks. FDICIA provides for a general exception
(other than for insurance underwriting activities) if a bank is in compliance
with applicable capital standards and the FDIC determines that an activity would
pose no significant risk to the deposit insurance fund. Proposed rules published
by the FDIC on January 29, 1993 set forth certain types of activities that the
FDIC would deem, in advance, to not represent such a risk, including certain
credit guarantee activities, activities closely related to banking, and certain
securities underwriting activities conducted through subsidiaries. Certain
exceptions expressly provided by FDICIA to the imposition of national bank
standards in the area of insurance underwriting activities include, under
certain circumstances,
18
<PAGE> 19
underwriting of title insurance, savings bank life insurance (for banks in
certain states) and continuation of insurance provided prior to enactment of
FDICIA if such insurance was reinsured by the Federal Crop Insurance
Corporation. Also, state banks may, under certain circumstances, continue to
offer and provide types of insurance to residents and businesses of a state if
such insurance was offered within that state prior to FDICIA.
Other rules proposed by the FDIC on January 29, 1993 would flatly prohibit
direct investment in commercial ventures (non-financial services) by state
banks. In cases where activities of state banks require the prior consent of the
FDIC, the proposed regulations provide that a bank remain adequately capitalized
after deducting from capital its investment in a subsidiary or department in
which such activities would be conducted. The FDIC's consent would be further
conditioned on conducting such activities in an independent "bona fide
subsidiary" or an independent "department," which would subject the bank to
affiliate transaction fairness rules and limits on total lending exposure to
such units.
Other provisions of FDICIA provide that, effective December 19, 1991, insured
state banks may not, directly or indirectly, acquire or retain any equity
investment (including common and preferred stock, partnership interests and most
equity interests in real estate) of a type, or in an amount, that is not
permissible for national banks. Impermissible equity investments must be
divested as quickly as prudently possible, but in no event later than December
19, 1996. Exceptions provided by FDICIA to imposition of national bank standards
include investments in majority owned subsidiaries which conduct permissible
activities and in other depository institutions (with certain parameters), and
limited investments in qualified (low income) housing projects and in insurance
companies which provide director's, officer's and trustee's liability coverage
or bankers' blanket bond group coverage for other insured depository
institutions (or companies which reinsure such policies). FDICIA also permits,
under certain circumstances, the retention by state banks of exchange-listed
stock and shares of registered investment companies held prior to enactment of
FDICIA. The Company does not believe that the application of these rules will
have a material effect on its operations or financial condition.
Standards for Safety and Soundness
FDICIA requires that each federal banking agency promulgate regulations setting
forth certain safety and soundness standards for insured depository institutions
and, in some cases, their holding companies in three main areas: (i) operations
and management (including information systems, internal controls and audits,
loan documentation, credit underwriting, interest rate risk and asset growth);
(ii) asset quality, earnings levels and stock market valuation (for public banks
or holding companies); and (iii) employee compensation, fees and benefits.
Institutions or holding companies failing to meet the prescribed standards will
be required to submit a plan to correct any deficiencies. FDICIA provides for
certain mandatory and discretionary sanctions for failing to submit or implement
such a plan, including asset growth limits, capital directives and deposit
interest rate ceilings.
Brokered Deposits
During 1992 the FDIC adopted regulations pursuant to FDICIA which, effective
June 16, 1992, govern the receipt of brokered deposits. Under the new
regulations, brokered deposits include any deposit obtained from or through a
deposit broker (as defined), and include deposits, however obtained, of
institutions that offer rates "significantly higher" than those in the market
area. An institution may only accept brokered deposits if it is (i) "well
capitalized" or (ii) "adequately capitalized" and receives a waiver from the
FDIC. "Adequately capitalized" institutions that receive waivers to accept
brokered deposits are, however, subject to certain limits on the maximum rates
which they may pay on such deposits. "Undercapitalized" institutions may not
accept brokered deposits, nor may they offer deposit instruments yielding in
excess of 75 basis points over prevailing yields offered on comparable
instruments in the relevant market area. Also, FDICIA provides that the FDIC
shall not, in most circumstances, provide deposit insurance coverage on a
"pass-through" basis for certain employee benefit plans to institutions
prohibited from accepting brokered deposits. The definitions of "well
capitalized," "adequately capitalized" and "undercapitalized" for purposes of
the brokered deposit regulations generally conform with the definitions of those
terms adopted by the FDIC for purposes of implementing the prompt corrective
action provisions of FDICIA. See "Item 1. Business - Effect of Governmental
Policies and Recent Legislation - Federal Deposit Insurance Corporation
Improvement Act of 1991 - Prompt Corrective Action."
Real Estate Lending Standards
Pursuant to authority contained in FDICIA, the federal banking agencies have
adopted final regulations which, effective March 19,1993, require depository
institutions to establish and maintain written internal real estate lending
policies. These
19
<PAGE> 20
policies must be consistent with safe and sound banking practices and be
appropriate for the size and nature of the institution involved. Additionally,
they must be established by each institution only after it has considered the
Interagency Guidelines for Real Estate Lending Policies, which are made a part
of the final regulations. The regulations require that certain specific
standards be addressed relating to loan portfolio diversification standards,
prudent underwriting standards (including loan-to-value limits), loan
administration procedures, and documentation, approval and reporting
requirements. Each institution's lending policies must be reviewed and approved
by the institution's board of directors at least once a year. Finally, each
institution is expected to monitor conditions in its real estate market to
ensure that its lending policies are appropriate for current market conditions.
The regulations do not set forth specific loan-to-value limits, but the
Interagency Guidelines do provide certain limits which should not be exceeded
except under limited circumstances.
Deposit Insurance Assessments
On January 1, 1993, the FDIC began implementing a risk-related premium schedule
for all insured depository institutions which results in the assessment of
deposit insurance premiums based on certain capital and supervisory measures,
with the strongest institutions paying premiums of $0.23 for every $100 of
deposits and the weakest institutions paying up to $0.31 for every $100 of
deposits. The risk-related premium schedule was implemented during 1993; the
permanent system was implemented starting January 1, 1994.
Under the risk-related premium schedule, the FDIC, on a semiannual basis,
assigns each institution to one of three capital groups, "well capitalized,"
"adequately capitalized" or "undercapitalized," in each case generally
conforming to the definitions of these terms adopted by the FDIC for purposes of
implementing the prompt corrective action provisions of FDICIA. See "Item 1.
Business - Effect of Governmental Policies and Recent Legislation - Federal
Deposit Insurance Corporation Improvement Act of 1991 - Prompt Corrective
Action." The FDIC further assigns each institution to one of three subgroups
within a capital group corresponding to the judgment of the FDIC and state
supervisor of its strength based on supervisory evaluation, including
examination reports, statistical analysis and other information relevant to
gauging the risk posed by the institution. Institutions deemed to have the
highest risk pay up to $.31 for every $100 of deposits annually while those
deemed to have the least risk pay $0.23 for every $100 of deposits annually.
Under the risk-related premium schedule, the Bank's annual assessment rate for
the first six months of 1995 was $0.26 for every $100 of deposits.
Section 104 of the FDICIA provides for certain assessment rates for
recapitalizing the Bank Insurance Fund ("BIF Fund") by establishing target
reserve ratios for the BIF Fund to achieve reserves totaling $1.25 for every
$100 of insured deposits within a 15 year period. During 1995 the BIF Fund
reached $1.25 in reserves for every $100, and accordingly, has reduced the
deposit insurance assessment rates. Based upon the FDIC's assessment rate
schedule and the Bank's risk-related premium group assignment, the Bank's
deposit assessment rate declined from $0.26 to $0.04 for every $100 in insured
deposits for the last six months of 1995. Based upon the FDIC's new assessment
rate schedule and the Bank's risk classification of well capitalized, the Bank
will be required to pay the minimum semi-annual premium of $1,000 for 1996.
Interstate Banking
In September 1986, California adopted an interstate banking law. This law allows
California banks and bank holding companies to be acquired by banking
organizations in other states on a "reciprocal" basis (i.e. provided the
Superintendent determines that the other state's laws permit California banking
organizations to acquire banking organizations in that state on substantially
the same terms and conditions applicable to banking organizations solely within
that state). The first stage, which became effective July 1, 1987, allowed
acquisitions on a "reciprocal" basis within a region of 11 states (Alaska,
Arizona, Colorado, Hawaii, Idaho, Nevada, New Mexico, Oregon, Texas, Utah and
Washington). The second stage, which became effective January 1, 1991, allowed
interstate acquisitions on a national "reciprocal" basis. With regard to any
interstate banking, the Justice Department issued merger guidelines in April
1992. On the basis of the revised criteria, the Department has challenged
several proposed transactions involving institutions that compete directly in
the same market(s). In contrast to the Justice Department, the Federal Reserve
has recently shown a greater inclination to consider factors that contribute to
the safety and soundness of the banking system, or which contribute positively
to the "convenience and needs" of the affected communities. To the extent these
two Federal Agencies apply different (and at times incompatible) analysis to
assess the competitive effects of proposed bank in thrift mergers and
acquisitions, federal anti-trust objections must be considered in connection
with any interstate acquisition.
20
<PAGE> 21
Banks contemplating acquisitions must comply with the competitive standards of
either the Bank Holding Company Act ("BHCA"), the Change in Bank Control Act
("CBA") or the Bank Merger Act ("BMA"). The crucial test under each Act is
whether the proposed acquisition will "result in a monopoly" or will
"substantially" lessen competition in the relevant geographic market. Both the
BHCA and the BMA preclude granting regulatory approval for any transaction that
will result in a monopoly or where the furtherance of a plan to create a
monopoly. However, where a proposed transaction is likely to cause a substantial
reduction in competition, or tends to create a monopoly or otherwise restrain
trade, both Acts permit the granting of regulatory approval if the applicable
regulator finds that the perceived anti-competitive effects of the proposed
transaction "are clearly outweighed in the public interest by the probable
effect of the transaction on the convenience and needs of the community to be
served."
On September 13, 1994, the Senate passed the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, which eliminated many current restrictions to
interstate banking and branching.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act") was signed into law on September 29, 1994. When fully
effective, the Riegle-Neal Act will significantly relax or eliminate many of the
current restrictions on interstate banking. Effective September 29, 1995, the
Riegle-Neal Act permits a bank holding company to acquire banks in states other
than its "home state", even if applicable state law would not permit that
acquisition. Such acquisitions would continue to require Board approval and
would remain subject to certain state laws.
Effective June 1, 1997, the Riegle-Neal Act will permit interstate mergers of
banks, thereby allowing a single, merged bank to operate branches in multiple
states. The Riegle-Neal Act allows each state to adopt legislation to "opt-out"
of these interstate merger provisions. Conversely, the Riegle-Neal Act permits
states to "opt in" to the merger, provisions of Act prior to their stated
effective date, to permit interstate mergers in that state prior to June 1,
1997.
The Company has no present intent to acquire any non-California institution or
to open or establish branches outside of California. The Riegle-Neal Act may
have the effect of increasing competition by facilitating entry into the
California banking market by out of state banks and bank holding companies.
Capital Adequacy Guidelines
The Federal Reserve Board and the FDIC have issued guidelines to implement
risk-based capital requirements. The guidelines establish a systematic
analytical framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations, takes off-balance
sheet items into account in assuring capital adequacy, and minimizes
disincentives to holding liquid, low-risk assets. Under these guidelines, assets
and credit equivalent amounts of off-balance sheet items, such as letters of
credit and outstanding loan commitments are assigned to one of several risk
categories, which range from 0% for risk-free assets, such as cash and certain
US government securities, to 100% for relatively high-risk assets, such as loans
and investments in fixed assets, premises and other real estate owned. The
aggregated dollar amount of each category is then multiplied by the risk weight
associated with that category. The resulting weighted values from each of the
risk categories are then added together to determine the total risk-weighted
assets. The guidelines require a minimum ratio of qualifying total capital to
risk-weighted assets of 8.00% (of which at least 4.00% must consist of Tier 1
Capital).
Tier 1 Capital consists primarily of common stock, related surplus, retained
earnings and certain perpetual preferred stocks, less goodwill. Allowances for
loan losses qualify only as supplementary capital and then only to the extent of
1.25% of total risk-weighted assets. Other elements of supplementary capital,
which is limited overall to 100% of Tier 1 Capital, include qualifying perpetual
preferred stock, hybrid capital instruments and mandatory convertible debt
securities, and subordinated debt and intermediate-term preferred stock.
The Federal Reserve Board and the FDIC also, effective December 31, 1990,
adopted a minimum leverage ratio of Tier 1 Capital to total assets of 3% for the
highest ranked banks. The leverage ratio is only a minimum. Institutions
experiencing or anticipating significant growth or those with other than minimum
risk profiles will be expected to maintain capital well above the minimum
levels.
In view of the Company's minimal level of off-balance sheet items, the
guidelines have not had a materially adverse effect on the Company to date.
Under the so-called "prompt corrective action" provisions of FDICIA and the
regulations promulgated thereunder, the Bank will be considered "adequately
capitalized" if it has a ratio of qualifying total capital to
21
<PAGE> 22
risk-weighted assets of 4.00%, Tier 1 Capital to risk-weighted assets of 4.00%
and a leverage ratio of 4.00% or greater. To be considered "well capitalized"
the Bank must have a ratio of qualifying total capital to risk-weighted assets
of 10.00%, Tier 1 Capital to risk-weighted assets of 6.00% and a leverage ratio
of 5.00% or greater as well as not be subject to any order or directive. Under
certain circumstances, the FDIC may require an "adequately capitalized"
institution to comply with certain mandatory or discretionary supervisory
actions as if the Bank were undercapitalized. See "Item 1. Business - Effect of
Governmental Policies and Recent Legislation - Federal Deposit Insurance
Corporation Improvement Act of 1991 - Prompt Corrective Action."
Current Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS 121 requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or circumstances indicate the carrying
amount of an asset may not be recoverable. However, SFAS 121 does not apply to
financial instruments, core deposit intangibles, mortgage and other servicing
rights or deferred tax assets. SFAS 121 is effective for fiscal years beginning
after December 15, 1995. The Company does not expect the adoption of the
statement on January 1, 1996 to have a material impact on the financial
statements.
In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122
(SFAS 122), "Accounting for Mortgage Servicing Rights", an amendment to
Statement of Financial Accounting Standards No. 65. SFAS 122 requires an
institution that purchases or originates mortgage loans and sells or securitizes
those loans with servicing rights retained to allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. In addition,
institutions are required to assess impairment of the capitalized mortgage
servicing portfolio based on the fair value of those rights on a
stratum-by-stratum basis with any impairment recognized through a valuation
allowance for each impaired stratum. Capitalized mortgage servicing rights are
to be stratified based upon one or more of the predominate risk characteristics
of the underlying loans such as loan type, size, note rate, date of origination,
term and/or geographic location. SFAS 122 is effective for fiscal years
beginning after December 15, 1995. Management believes that the adoption of SFAS
122 will not have a material impact on the Company's operation.
In November 1995 the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation", (SFAS 123). This statement
establishes financial accounting standards for stock-based employee compensation
plans. SFAS 123 permits the Company to choose either a new fair value based
method or the current APB Opinion 25 intrinsic value based method of accounting
for its stock-based compensation arrangements. SFAS 123 requires proforma
disclosures of net earnings and earnings per share computed as if the fair value
based method had been applied in financial statements of companies that continue
to follow current practice in accounting for such arrangements under Opinion 25.
SFAS 123 applies to all stock-based employee compensation plans in which an
employer grants shares of its stock or other equity instruments to employees
except for employee stock ownership plans. SFAS 123 also applies to plans in
which the employer incurs liabilities to employees in amounts based on the price
of the employer's stock, i.e., stock option plans, stock purchase plans,
restricted stock plans, and stock appreciation rights. The statement also
specifies the accounting for transactions in which a company issues stock
options or other equity instruments for services provided by nonemployees or to
acquire goods or services from outside suppliers or vendors. The recognition
provision of SFAS 123 for companies choosing to adopt the new fair value based
method of accounting for stock-based compensation arrangements may be adopted
immediately and will apply to all transactions entered into in fiscal years that
begin after December 15, 1995. The disclosure provisions of SFAS 123 are
effective for fiscal years beginning after December 15, however disclosure of
the proforma net earnings and earnings per share, as if the fair value method of
accounting for stock-based compensation had been elected, is required for all
awards granted in fiscal years beginning after December 31, 1994. The Company
will continue to account for stock-based compensation under APB Opinion 25 and,
as a result, SFAS 123 will not have a material impact on the Company's
operations.
22
<PAGE> 23
Employees
At December 31, 1995 the Bank had approximately 105 full-time and 64 part-time
employees.
Item 2. PROPERTIES
EB's offices are located at the Bank's main banking offices which is located at
Seventeenth Street and Prospect Avenue, Tustin, California. That office is in a
9,600 square foot building which was constructed to the Bank's specifications in
1974. In 1982 the Bank exercised its option to purchase the building for a cash
purchase price of $460,000.
The Bank's Laguna Hills banking and administrative office is located in Laguna
Hills, California, near the intersection of Interstate 5 and El Toro Road. The
Bank occupies approximately 10,000 square feet of the building under a
thirty-year lease which commenced on April 10, 1981. The Bank has three ten-year
renewal options under this lease. The annual rent is $280,032, subject to
adjustment every fifth year during the term of the lease and any renewal period
in proportion to the increase in the applicable Consumer Price Index occurring
subsequent to the commencement of the lease term, except that during the initial
15 years of the lease, such rental increase may not exceed 25 percent of the
rent applicable during the immediately preceding five years and 37.5 percent
thereafter.
The Bank has one office located in San Bernardino, California. This office was
acquired as part of the acquisition of American Security Bank on August 29,
1980. This office is located at 250 "G" Street in San Bernardino, California.
This is a two story, free standing building built in 1974 with approximately
11,546 square feet of space. This building is held in fee, not subject to any
deed of trust, mortgage or other substantial encumbrance.
The Bank's Indio office is located at 81-701 Highway 111 in Indio, California in
a 8,000 square foot facility which was constructed to Bank of Indio's
specifications in 1980. The Bank occupies the facility under a ground lease with
a fifteen year term and holds an option to renew the lease for an additional
fifteen year term. The annual rent in 1995 was approximately $91,000 and is
subject to annual cost of living increases.
The Bank's Palm Desert office is located at 73-301 Highway 111 in Palm Desert,
California in a 7,800 square foot building. Ownership of this building was
acquired by the Bank as part of its acquisition of Bank of Indio.
The Bank's Orange office is located near the intersection of Chapman Avenue and
Highway 55 in the City of Orange, California in a 9,804 square foot, two story,
free-standing building built in 1980. The office was acquired as part of the
acquisition of American Merchant Bank in 1988. This building is held in fee, not
subject to any deed of trust, mortgage or other substantial encumbrance.
The Bank's Huntington Beach office is located at 16902 Bolsa Chica Road in
Huntington Beach, California in a 12,246 square foot, two story building built
in 1981. The office was acquired as part of the acquisition of American Merchant
Bank in 1988 and is held in fee, not subject to any deed of trust, mortgage or
other substantial encumbrance. The second floor is leased as multi-tenant office
space.
The Bank's Newport/Irvine office is located at the intersection of Von Karman
Avenue and Campus Drive, two blocks from the John Wayne International Airport in
a modern ten story multi-tenant office building built in 1988 and known locally
as the Atrium. The Bank occupies 4,145 square feet on space under a five year
lease with three five (5) year renewal options subject to adjustment based upon
market value at renewal. The aggregate rent payments in 1995 were approximately
$72,000.
In October 1995, the Bank consolidated its San Clemente Main office, located at
300 South El Camino Real, San Clemente, and its North San Clemente office,
located at 629 Camino de los Mares, San Clemente, into the offices acquired in
the Bank's acquisition of Mariners Bank. The branch banking leases on both
branches had expired during 1995 and were extended through December 1995, at
which time they were allowed to expire without renewal.
The Bank's branch banking offices in San Clemente, San Juan Capistrano and
Monarch Beach were acquired in the acquisition of Mariners Bancorp, which was
completed on October 20, 1995.
23
<PAGE> 24
The San Clemente office is located at 115 Calle de Industrias, San Clemente,
California, in a two-story free standing building consisting of approximately
12,000 square feet. The Bank owns the building subject to an assignment of a
ground lease that commenced August 1, 1979 for a term of 25 years with three (3)
five-year options to renew. The rental rate is approximately $70,000 per year
and is subject to increases each five years based upon the change in the CPI.
The Bank's branch banking office occupies approximately 6,000 square feet on the
ground floor.
The San Juan Capistrano branch banking office is a 2,000 square feet retail
suite at 32221 Camino Capistrano, Suite B101, San Juan Capistrano, California.
The Bank occupies the space subject to a one year lease agreement commencing
August 1, 1995 with an annual rental rate of approximately $42,000.
The Monarch Beach branch banking office is located at 24034 Camino Del Avion,
Dana Point, California in a free-standing single-story building consisting of
approximately 4,200 square feet. The Bank occupies the facility subject to a
lease dated April 2, 1990 for a period of ten years. The current annual rent is
approximately $122,000.
In October 1994, the Bank entered into a sublease agreement with WTC Financial
and World Title Company for its Administrative offices in Irvine near the Orange
County Airport. The sublease provides for approximately 12,400 square feet and
commenced on January 14, 1995 for a period of approximately nine years. On June
15, 1995, the California Department of Insurance (the "Insurance Department")
placed World Title Company into receivership. The Master Lease was frozen by
court order. The Bank suspended rental payments under its sublease agreement
(although accruals at the existing rental rate were continued). On November 27,
1995, the Master Lease was terminated by agreement between the Insurance
Department, as receiver, and the landlord and past rents receivable under the
sublease agreement were assigned to the landlord. The Bank is currently
negotiating a new lease and settlement of past rents with the landlord.
Reference is made to Note 12 to the Consolidated Financial Statements
incorporated herein for further information regarding these leases.
Item 3. LEGAL PROCEEDINGS
There are no pending legal proceedings in which EB or the Bank is a party or to
which any of their respective properties are subject other than ordinary routine
litigation incidental to the Bank's business, the outcome of which is not
expected to be material to EB or its operations or properties.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
24
<PAGE> 25
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Information relating to the market for and market prices of EB's Common Stock
and the number of shareholders of record of EB is set forth in the 1995 Annual
Report to Shareholders (the "Annual Report") and that information is
incorporated herein by reference.
It is EB's policy to retain most of its earnings in order to increase its equity
and thereby support continued growth and expansion, however, EB declared
dividends of $0.32 per share during 1995. EB declared its first quarterly cash
dividend on November 3, 1986. On August 15, 1990 the board of directors approved
the purchase of its own common shares from time to time in the open market
within applicable legal restrictions.
Item 6. SELECTED FINANCIAL DATA
The information under the caption "Financial Highlights" contained on page 1 in
the 1995 Annual Report to Shareholders is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained on pages 5 to 8 within
the 1995 Annual Report to Shareholders is incorporated herein by reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of EB and the Independent Auditors' Report
thereon are contained on pages 9 to 24. The quarterly financial data follows:
QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31 June 30 Sept. 30 Dec. 31
----------------------------------------------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
1995
Total Interest income $5,644 $5,923 6,043 $7,365
Net interest income 4,405 4,557 4,601 5,589
Provision for possible credit losses 302 301 152 1
Earnings before income taxes 1,497 1,767 2,038 2,363
Net earnings 882 1,035 1,196 1,391
Net earnings per common share 0.29 0.34 0.36 0.37
1994
Total interest income 5,041 5,015 5,436 5,534
Net interest income 3,876 3,880 4,291 4,353
Provision for possible credit losses 652 751 302 301
Earnings before income taxes 843 858 1,297 1,316
Net earnings 503 511 768 774
Net earnings per common share 0.17 0.17 0.25 0.25
</TABLE>
25
<PAGE> 26
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item. 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning the directors of EB, see "Election of Directors"
contained within EB's definitive proxy statement dated March 29, 1996 ("Proxy
Statement"), which information is incorporated herein by reference. Information
regarding the executive officers of EB follows.
Executive Officers of Registrant
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
J. B. Crowell 62 President, Chief Executive Officer and Director
Raymond E. Dellerba 48 Executive Vice President
David R. Brown 36 Executive Vice President and Chief Financial Officer
</TABLE>
Set forth below is certain information regarding the Company's executive
officers.
J. B. Crowell Mr. Crowell is, and for more than the past five years
has been, President and Chief Executive Officer of
the Company. Mr. Crowell also has been Chief
Executive Officer of the Bank since its inception in
1972. In addition, Mr. Crowell was President of the
Bank from 1972 to February 16, 1993, when he was
appointed Chairman of the Bank.
Raymond E. Dellerba Mr. Dellerba is, and since February 1993 has been,
the President and Chief Operating Officer of the
Bank. In April 1993 Mr. Dellerba was appointed
Executive Vice President of the Company. From
December 1990 until his employment by the Bank, Mr.
Dellerba was President of CommerceBank, and became
President of its parent, CommerceBancorp, beginning
in January 1992. Mr. Dellerba also served as a
director of CommerceBank and CommerceBancorp,
beginning in March 1989. In August 1994,
approximately 18 months after Mr. Dellerba terminated
his employment with CommerceBank, CommerceBancorp
filed a petition in bankruptcy following the closing
of CommerceBank by the FDIC in July 1994.
David R. Brown Mr. Brown is an Executive Vice President and the
Chief Financial Officer of the Company and has been
since 1987. Mr. Brown has held these same positions
with the Company's wholly-owned subsidiary, Eldorado
Bank. Mr. Brown previously was the Vice President and
Controller for the Bank, joining in 1986.
Item 11. MANAGEMENT REMUNERATION
For information concerning management remuneration, see "Executive Compensation"
within the Proxy Statement, which information is incorporated herein by
reference.
26
<PAGE> 27
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information concerning security ownership of certain beneficial owners and
management, see "Voting Securities and Principal Shareholders" and "Election of
Directors" within EB's Proxy Statement, which information is incorporated herein
by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning related party transactions, see "Certain
Transactions" within the Proxy Statement, which information is incorporated
herein by reference.
27
<PAGE> 28
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The financial statements of EB and subsidiary and the Independent Auditors'
Report thereon included in the 1995 Annual Report to Shareholders are
incorporated herein by reference. Page number references follow.
<TABLE>
<CAPTION>
Annual Report
Page 10-K Page
---- ---------
<S> <C> <C>
Eldorado Bancorp and Subsidiary:
Independent Auditors' Report 9 48
Consolidated Balance Sheets at December 31, 1995 and 1994 10 49
Consolidated Statements of Operations for each of the Years
in the Three-Year Period Ended December 31, 1995 11 50
Consolidated Statements of Shareholders' Equity for each of the Years
in the Three-Year Period Ended December 31, 1995 12 51
Consolidated Statements of Cash Flows for each of the Years
in the Three-Year Period Ended December 31, 1995 13-14 52-53
Notes to Consolidated Financial Statements 15-24 54-71
</TABLE>
Schedules
All schedules are omitted as the information is not required, is not material or
is otherwise furnished.
Exhibits
See Index to Exhibits at Page 31 of this Form 10-K.
Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of the
year ended December 31, 1995.
28
<PAGE> 29
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes any one of J. B.
Crowell and George H. Wells, individually, as attorney-in-fact, to sign in his
behalf and in each capacity stated below, and to file, all amendments and/or
supplements to the Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 29th day of March,
1996.
ELDORADO BANCORP
(Registrant)
/s/ J. B. Crowell
--------------------------------
J. B. Crowell, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 29, 1996.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ J. B. Crowell Director
- -------------------------------------
J. B. Crowell
/s/ George H. Wells Chairman of the Board and Director
- -------------------------------------
George H. Wells
/s/ Raymond E. Dellerba Director
- -------------------------------------
Raymond E. Dellerba
/s/ Lynne Pierson Doti Director
- -------------------------------------
Lynne Pierson Doti
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Rolf J. Engen Director
- -------------------------------------
Rolf J. Engen
/s/ Warren Finley Director
- -------------------------------------
Warren Finley
/s/ Michael B. Burns Director
- -------------------------------------
Michael B. Burns
/s/ Donald E. Sodaro Director
- -------------------------------------
Donald E. Sodaro
/s/ Warren Fix Director
- -------------------------------------
Warren Fix
/s/ Julia Di Giovanni Director
- -------------------------------------
Julia Di Giovanni
/s/ Richard Korsgaard Director
- -------------------------------------
Richard Korsgaard
/s/ David R. Brown Executive Vice President and
- ------------------------------------- Chief Financial Officer
David R. Brown
</TABLE>
30
<PAGE> 31
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Document Page
- -------- ----
Number
- ------
<S> <C> <C>
03.1 Articles of Incorporation of Registrant and Certificate of
Amendment (R-1)
03.2 Bylaws of Registrant (R-1)
04.1 Specimen Common Stock Certificate for Registrant (R-1)
04.2 Eldorado Bank Subordinated Capital Note Agreement and Letter of
Consent to Noteholder as to Dividends (R-1)
10.1 Eldorado Bank's Qualified Stock Option Plan (R-1)
10.2 Eldorado Bank - 1980 Stock Option Plan (R-1)
10.3 Eldorado Bank - Stock Bonus Plan As Amended (R-6)
10.4 Eldorado Bank - Stock Purchase Plan and Trust As Amended (R-1)
10.5 Eldorado Bank - Tustin Branch Office Lease (R-1)
10.7 Eldorado Bank - Laguna Hills Branch Office Lease (R-1)
10.9 Amendment to 1980 Stock Option Plan (R-2)
10.10 Eldorado Bancorp - Nonqualified Stock Option Plan - 1982 (R-3)
10.11 Eldorado Bank - Indio Branch Office Lease (R-4)
10.13 Eldorado Bank Pre-Tax Savings and Profit Sharing Trust (R-5)
10.14 Eldorado Bank - North San Bernardino Branch Office Sublease (R-7)
10.16 Eldorado Bank - Corona Lease (R-8)
10.17 Eldorado Bancorp - 1989 Stock Option Plan (R-8)
10.18 Eldorado Bank - Escrow Office Lease (R-9)
10.19 Eldorado Bank - San Clemente Main Office Lease (R-10)
10.20 Eldorado Bank - North San Clemente Office Lease (R-10)
10.21 Eldorado Bank - Administrative Office Lease (R-10)
13 Eldorado Bancorp's 1995 Annual Report to Shareholders
21 Subsidiary of Registrant - Eldorado Bank, a California banking
corporation, all of the capital stock of which is owned by
Registrant, is the only subsidiary of the Registrant.
23 Consent of Independent Auditors 74
27 Financial Data Schedule 75
99 Definitive Proxy Statement of Eldorado Bancorp dated March 29,
1996 (R-11)
</TABLE>
31
<PAGE> 32
(R-1) Filed as an Exhibit to the Registrant's Registration Statement (File
No. 2-71499) filed on March 31, 1981, which exhibit is incorporated
herein by this reference.
(R-2) Filed as Exhibit 1.3 to Post-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form S-8 (File No. 2-73352)
which exhibit is incorporated herein by this reference.
(R-3) Filed as Exhibit 10.10 to the Registrant's Report on Form 10-K for the
year ended December 31, 1982, which exhibit is incorporated herein by
this reference.
(R-4) Filed as an Exhibit to the Registrant's Report on Form 10-K for the
year ended December 31, 1983, which exhibit is incorporated herein by
this reference.
(R-5) Filed as Exhibit 10.13 to the Registrant's Report on Form 10-K for the
year ended December 31, 1984, which exhibit is incorporated herein by
this reference.
(R-6) Filed as Exhibit 10.3 to the Registrant's Report on Form 10-K for the
year ended December 31, 1985, which exhibit is incorporated herein by
this reference.
(R-7) Filed as Exhibit 10.14 to the Registrant's Report on Form 10-K for the
year ended December 31, 1986, which exhibit is incorporated herein by
this reference.
(R-8) Filed as Exhibit 10.16 and 10.17 to the Registrant's Report on Form
10-K for the year ended December 31,1989, which exhibit is incorporated
herein by this reference.
(R-9) Filed as Exhibit 10.18 to the Registrant's Report on Form 10-K for the
year ended December 31, 1990, which exhibit is incorporated herein by
this reference.
(R-10) Filed as Exhibit 10.19 and 10.20 to the Registrant's Report on Form
10-K for the year ended December 31, 1991, which exhibits are
incorporated herein by this reference.
(R-11) Filed as Definitive Proxy Statement on Schedule 14A on April 1, 1996.
(1) Portions of the Company's 1995 Annual Report to Shareholders have been
incorporated herein by reference. Except for those portions expressly
incorporated herein by reference, the Company's 1995 Annual Report to
Shareholders shall not be deemed to be "filed" with the Commission or
otherwise subject to the liability of Section 18 of the Securities
Exchange Act of 1934, as amended.
32
<PAGE> 1
EXHIBIT 13
1995 ANNUAL REPORT
<PAGE> 2
COMPANY DESCRIPTION
Eldorado Bancorp, through its wholly-owned subsidiary, Eldorado Bank,
serves the financial needs of its customers in the fastest growing areas of
Southern California.
One of the largest independent banks headquartered in Orange County, it
operates through 11 strategic locations in Orange, Riverside and San Bernardino
counties. Eldorado Bank has targeted small- to medium-sized businesses and
consumer and professional markets. The emphasis is on providing commercial and
professional loan and deposit products, SBA loans and construction financing
with the highest quality of service excellence.
The common shares of Eldorado Bancorp are listed on the American Stock
Exchange (ASE) and traded under the symbol ELB.
ELDORADO BANCORP FINANCIAL HIGHLIGHTS
(Dollars in thousands, except share data) Years ended December 31,
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONAL DATA
Net interest income $ 19,152 $ 16,408 $ 15,893 $ 18,058 $ 15,580
Provision for possible credit losses 756 2,006 3,576 1,735 1,159
Other income 4,021 4,848 4,979 4,830 3,970
Operating expenses 14,752 14,936 20,141 16,563 13,974
Net earnings (loss) 4,504 2,556 (1,727) 2,758 2,480(1)
Net earnings (loss) per common share(2) 1.36 0.84 (0.57) 0.91 0.83(1)(3)
Cash dividends per share 0.32 0.16 0.08 .32 .32
Weighted average shares outstanding(2) 3,312,924 3,029,327 3,026,590 3,031,104 3,004,914
Stock dividends 10% -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Assets $ 383,186 $ 304,022 $ 323,287 $ 340,782(1) $ 355,352
Net loans and direct lease financing 223,692 166,310 177,725 209,259 239,688
Deposits 333,278 271,326 292,799 309,132 324,366
Shareholders' equity 42,373 29,094 27,289 29,210(1) 27,337(1)
Book value per share(2) 11.35 10.55 9.92 10.64(1) 10.06(1)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Return on average assets 1.41% 0.82% (0.53%) 0.79% 0.82%(1)
Return on beginning shareholders' equity 15.5 9.4 (5.9) 10.1 9.5(1)
Total capital to assets at year end 11.1 9.6 8.4 8.6 7.7(1)
Average loans and leases to deposits 67.6 63.3 65.5 73.1 78.5
</TABLE>
(1)Adjusted for retroactive implementation of change in accounting for income
taxes.
(2)Retroactively adjusted for all stock dividends.
(3)Earnings per share before cumulative effect of accounting change was $0.91.
1
<PAGE> 3
MANAGEMENT'S MESSAGE
To Our Shareholders:
The year 1995 was one of record achievements for Eldorado Bancorp, reflecting
the continued improvement in the California economy and a continuation of the
momentum generated from operations during 1994. The California economic recovery
accelerated and its growth outpaced the nation in several economic indicators.
The banking industry benefited from this growth, recording record profits.
Some of Eldorado Bancorp's many achievements included:
- Net earnings at a new record
- A new high for the common stock
- Good asset quality
- Strong net interest margins
- Successful acquisition of Mariners Bank
As a result of the Bank's 1995 performance, it received Super Premier
Performing status by the authoritative Findley Reports on California Banking.
While the Bank often has been selected a Premier Performing Bank with an A
Quality Rating (14 times in the past), this was the first time Eldorado Bank
achieved this new lofty status. The rating is based on an analysis and
evaluation of all the Bank's operations. We join a select group of 32 banks in
California with a Super Premier Performing rating.
In last year's annual report, we said that Eldorado Bancorp was well
positioned for future growth and to add value to each shareholder's investment.
During 1995, the market capitalization of the Company increased from $27 million
to more than $55 million, a new record. Cost control and other efficiency
measurement ratios were very favorable during the year. Reflecting the Company's
excellent performance, the price per share of common stock increased 65 percent
during the year as it reached a new high.
OPERATING RESULTS
With the Company's operating achievements, net earnings increased 76
percent to $4.5 million, or $1.36 per share, from the $2.6 million, or 84 cents
per share, reported for 1994. A major contributor to the increase in net
earnings was a $1.3 million reduction in the provision for possible credit
losses. This reduction was made possible by the continued improvement in asset
quality and the strength of our loan portfolio with a loan loss reserve at 2.7
percent of loans.
Also contributing to the year's performance were the maintenance of strong
net interest margins, tight control of costs and increased loan demand.
The Bank's operating indices showed continued improvement and exceeded bank
averages both nationally and in California. The Bank's return on average assets
was 1.41 percent. This compares with a return on assets of 1.19 percent
nationally and 1.35 percent in California for the latest reporting period
through the third quarter. Eldorado Bancorp's return on beginning equity totaled
15.5 percent, up from 9.3 percent in 1994.
The Company's financial condition is solid. Total shareholders' equity
increased to $42.4 million from $29.1 million, primarily a result of the
acquisition of Mariners Bancorp and the addition from net earnings. The
equity-to-asset ratio was 11.1 percent at December 31, 1995 compared with 9.6
percent at December 31, 1994, well ahead of the national average. The Company's
capital position and financial strength give us flexibility for future growth,
both internal and through acquisitions.
GROWTH THROUGH ACQUISITION
During the fourth quarter, Mariners Bancorp was merged with and into
Eldorado Bank. One share of Eldorado Bancorp common stock and $6.46 cash was
issued for each Mariners Bancorp share. A total of 630,276 shares of Eldorado
Bancorp common stock was issued in the transaction, which was valued at
approximately $13.3 million. Mariners Bancorp, with total assets of $75 million,
conducted banking business from three offices in San Clemente, San Juan
Capistrano and Monarch Beach (Dana Point) in south Orange County where Eldorado
Bank is now the leading independent bank.
Following the merger, leases on the Eldorado Bank offices in San Clemente
were not renewed and operations were merged into the former offices of Mariners
Bank. The consolidation of branches and staff will enable Eldorado Bank to
realize substantial economies of scale from the acquisition. These cost
reductions will be evident starting in 1996.
EARNING ASSETS
The Bank's highest earning asset and primary contributor to earnings is its
loan portfolio. During 1995, the Bank experienced stronger loan demand,
reflecting the improved economy and resulting in growth in the portfolio. The
three loan hubs established in 1994 -- Newport/Irvine, Tustin and Palm Desert --
improved efficiency and hastened the process of handling loan applications for
all of the Bank's retail offices.
Emphasis continues to be placed on increasing the commercial loan segment
which accounted for 41.1 percent of the loan portfolio at December 31, 1995. A
commercial loan hub will be established this year in our Huntington Beach office
in addition to the San Clemente loan hub formed after the acquisition.
EARNING ASSETS AT 12/31/95
<TABLE>
<S> <C>
Federal Funds Sold 3%
Securities 28%
Consumer Loans 9%
Commercial Loans 28%
Real Estate Loans 32%
</TABLE>
2
<PAGE> 4
The Small Business Administration (SBA) Loan Department was an active profit
center during the year, concentrating on business and professional lending. In
past years, the Bank has often sold the portion guaranteed by the SBA to an
investor, providing the Bank with greater liquidity. During 1995, the Bank chose
to retain the guaranteed portion in its own portfolio.
The acquisition of Mariners Bancorp increased the percentage of residential
construction loans in the portfolio. That bank had developed a niche for
construction loans along the Orange County coast, with additional loans in the
exclusive Coto de Caza residential community. The Mariners' acquisition brought
to Eldorado Bank a professional staff with expertise in single-family
residential construction loans with 12- to 18-month maturities.
The quality of the loan portfolio is strong as net charge-offs for 1995
total $872,000, or .38 percent of loans outstanding. Non-performing loans were
2.70 percent of total loans at year-end 1995.
Another excellent performance was obtained from the investment securities
portfolio which showed a strong increase in income over 1994. The market value
of the securities portfolio exceeded its cost by approximately $809,000 at
December 31, 1995.
DIVIDEND INCREASED
During 1995, four regular quarterly cash dividends of 8 cents per share
were paid, for a total of 32 cents per share. On November 15, 1995, the Board of
Directors declared a 10 percent stock dividend paid December 26, 1995 to
shareholders of record on November 28, 1995. At the same meeting, the Board
declared a regular quarterly dividend of 8 cents per share which was paid
January 10, 1996, to shareholders of record on December 27, 1995. The cash
dividend, which was paid after the stock dividend, represented a 10 percent
increase and reflected the excellent performance by the Company.
REGULATORY DEVELOPMENTS
The Bank Insurance Fund surpassed its required ratio of 1.25 percent of
bank insured deposits during 1995. As a result, the Federal Deposit Insurance
Corporation (FDIC) substantially reduced the average deposit assessment
premiums. During 1995, Eldorado Bank's insurance premiums were reduced and
starting in 1996, we will be among the select group of California banks paying
the statutory annual minimum of $2,000, or a zero assessment rate.
The year 1995 saw considerable legislative action in Washington and
Sacramento and a continuation of that activity is expected in 1996. Of
significance was the approval of legislation requiring out-of-state institutions
that do not already own a California bank to buy a whole bank that has been in
existence for at least five years. Your bank management was instrumental in the
inclusion of this provision which helps maintain the value of a bank's branch
system.
Several issues raised in 1995 will be addressed in 1996, both in California
and Washington. These include regulatory relief, repeal of the Glass-Steagall
act, eventual merger of the Saving Associations Insurance Fund into the Bank
Insurance Fund and elimination of the Savings and Loan charter. Your management
is active in the banking organizations that provide input to elected officials
on behalf of the industry. We continually strive to achieve legislation that is
beneficial to Eldorado Bank, as government regulations cost banks 15 to 20
percent of total expenses.
OUTLOOK
In 1996, the Bank will continue to build on its strengths while expanding
into selected new areas. We are focused on further increasing revenue growth
through investments in new lines of business including international banking and
mortgage banking, as well as an expanded branch banking network.
The board of directors continues to look at mergers and acquisitions in
Orange County and the surrounding counties as a means to enhance the value of
each shareholder's investment. In addition, we continue to seek opportunities
for further growth.
Looking to 1996, we believe the economy will continue to improve. Home
prices have stabilized and some predict increases in the price of resale homes
during 1996. Business activity is on the increase and we anticipate an increase
in loan growth for the year.
We remain committed to the growth and prosperity of Eldorado Bancorp. The
Company's performance continues to improve and we look forward to greater
achievements in 1996 and beyond, as we strive to increase the long-term value of
each shareholder's investment.
On behalf of the Board of Directors, we thank all our shareholders,
customers, advisory boards and employees for enabling these achievements to take
place with their continued dedication and support.
Sincerely,
/s/ J.B. Crowell
J.B. Crowell
President and Chief Executive Officer
Eldorado Bancorp
/s/ George H. Wells
George H. Wells
Chairman of the Board
Eldorado Bancorp
February 26, 1996
3
<PAGE> 5
PRESIDENT'S REPORT
Eldorado Bancorp, through its subsidiary Eldorado Bank, is committed to superior
performance in our targeted marketplaces. The Board of Directors and executive
management have positioned the Bank for growth through both acquisitions and
internal loan and deposit generation on a profitable basis. The role of
acquisitions cannot be downplayed. Eldorado Bank achieved meaningful asset
growth under the Chairman and Chief Executive Officer's guidance through five
previous acquisitions, with complementary earning assets expanding our
geographic coverage in Orange, Riverside and San Bernardino counties. The Bank
will continue to consider acquisitions that advance our strategic plan and
dovetail with our expertise to enhance shareholder value on a more rapid basis
than internally generated growth.
During 1995 the Bank focused on its core business of commercial lending to
small and medium sized companies. In order to maintain our high level of
customer satisfaction as well as respond to our customers' changing and ongoing
financial requirements, we introduced additional products and services that have
augmented our customer relationships.
VALUE-ADDED BUSINESS BANKING
In the area of cash management, we introduced EB BusinessLink, an
electronic PC-based product that gives our business customers direct access to
their banking accounts for time savings, security and accuracy. EB BusinessLink
enables our customers to conduct check reconciliation, balance inquiries, wire
transfers, and review statements and cleared checks from the comfort and
convenience of their own business locations.
For the benefit of the staffs of our commercial and professional customers,
we developed packaged accounts specifically for employees, offering direct
deposit and special enhancements to loan rates. By serving the entire business
relationship in as many ways as possible, we aim to both increase our customers'
satisfaction and diversify the Bank's areas of business.
With the shift to a global economy, the requirements of full service
banking have expanded. In response we established an International Banking
Department. Our professional staff offers letters of credit, foreign
collections, bankers acceptance financing, export financing programs,
international money transfers and foreign exchange. These international
specialists also serve as liaisons for our customers, providing one-on-one
assistance and introductions to resources at the World Trade Center Association
of Orange County, the U.S. Commerce Department, Import Export Bank, and many
others. To introduce our services to the business communities we serve, Eldorado
Bank will hold educational seminars throughout 1996.
Eldorado Bank's Small Business Administration Department continued to prove
itself in the marketplace as a leading provider of government guaranteed loans
in Orange and surrounding counties. These loans are often more suitable for some
businesses than conventional financing due to the terms available. For business
expansion, commercial real estate purchase, or other approved uses, SBA loans
offer another option to our customers and strong income to the Bank with limited
risk. For all commercial lending needs we provide quick, efficient and
centralized loan servicing for our customers through five commercial hubs
located throughout our market areas.
A TRUE "COMMUNITY" BANK
For the individuals and professionals we serve, Eldorado Bank builds real
value into our customer relationships through a local office network and
tailored products. Eleven retail offices provide convenience and automated
service as well as personal interaction with our Bank employees. Also, Eldorado
bankers are always available to conduct banking at customer locations.
Our custom home construction financing program provides customers with
critical funding and generates substantial revenue opportunities for the Bank.
This area is headed by Executive Vice President Richard Korsgaard who also
oversees the newly created Mortgage Banking Division. This division will provide
full service mortgage banking, and will be in full operation by spring 1996.
To expand our presence and better meet customers' requirements, Eldorado
Bank will open express mini-branches during 1996. These non-grocery store, full
service offices will be built where "captive" markets need prompt and complete
banking services at their work location. The mini-branches will offer the full
range of Eldorado products as well as ATMs and night depository for businesses,
and will have staff on hand during business hours for loan applications, new
accounts and other services. Our first mini-branch will be located in a large
hospital in Long Beach, serving the doctors, hospital staff and close proximity
community.
FUTURE STRATEGY
We will selectively expand through acquisitions and mini-branches, while
always delivering added value to our diverse customer base of manufacturers,
industrial companies, wholesalers, distributors, consumers and professionals. By
pursuing new areas of business and enhancing current products, we will create
fully integrated relationships with our customers, supported by seamless
interfacing among all areas of Eldorado Bank. Our growing presence in Orange,
Riverside and San Bernardino counties is a direct result of providing the
highest standard in financial products and service excellence in each community
we serve.
Our longevity as an independent bank in Southern California can be traced
to our careful yet flexible management, our proactive response to the
marketplace's demands, and our ability to stay focused on delivering shareholder
value year in and year out. By identifying our customers' needs and developing
the products and services to meet those needs to the fullest extent, Eldorado
Bank will continue its excellent performance for shareholders, employees, and
customers alike.
/s/ Raymond E. Dellerba
- -------------------------------------
Raymond E. Dellerba
President and Chief Operating Officer
Eldorado Bank
4
<PAGE> 6
ELDORADO BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HIGHLIGHTS OF FINANCIAL PERFORMANCE
As the California economy continued its recovery, Eldorado Bancorp
reported record net earnings of $4.5 million for 1995 compared to net earnings
of $2.6 million for 1994 and a net loss of $1.7 million reported for 1993. On a
per share basis, 1995 recorded net earnings of $1.36 compared to $0.84 in 1994
and net loss of $0.57 in 1993. Total assets climbed $79.2 million to $383.2
million at year-end 1995 from $304.0 million at year-end 1994, reflecting the
successful completion of the acquisition of Mariners Bancorp during the year.
The increase in 1995 earnings over 1994 levels was due to wider net
interest margins, lower provisions for possible credit losses and lower
non-interest expense.
The 1994 earnings improvements over 1993 was largely due to
significantly lower write-downs of other real estate owned and lower provisions
for possible credit losses. Also contributing to the improved earnings was a
reduction in non-interest expenses and widened net interest margins.
The 1993 loss was due to significant write-downs of other real estate
owned and increased provisions for possible credit losses. These factors
negatively impacting earnings were partially offset by higher levels of other
income and declines in other operating expenses.
The two key performance ratios -- return on average assets and return
on average equity -- were 1.41 percent and 14.32 percent, respectively, for
1995. The return on average assets for 1994 and 1993 were 0.82 percent and
(0.53) percent, respectively. The return on average shareholders' equity for
1994 was 8.95 percent and for 1993 was (6.17) percent.
NET INTEREST INCOME AND MARGIN
Net interest income is the amount by which the interest earned on loans
and other investments exceeds the interest paid on deposits and other sources
of funds. Net interest income, for the purposes of this analysis, is adjusted
to a "fully taxable equivalent" basis to recognize the yield equivalent of the
income tax savings on certain tax advantaged investments, such as interest on
municipal securities, which make year-to-year comparisons more meaningful.
Additionally, the analysis includes deferred loan fees collected and amortized
into interest income as an adjustment to the yield of such loans.
The following table presents historical trends in net interest income
and its components;
(Fully Taxable Equivalent, in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------
<S> <C> <C> <C>
Total interest income $24,975 $21,034 $21,579
Total interest expense 5,823 4,626 5,686
- ---------------------------------------------------------------
Net interest income 19,152 16,408 15,893
Tax equivalent adjustment to
interest income 36 55 117
- ---------------------------------------------------------------
$19,188 $16,463 $16,000
===============================================================
</TABLE>
Net interest income on a fully taxable equivalent basis increased $2.7
million, or 17 percent, to $19.2 million from $16.5 million in 1994 and
compares to $16.0 million in 1993. The increase in 1995 is largely attributable
to significantly higher yields on earning assets combined with a higher volume
of earning assets and lower volumes of interest-bearing deposits partially
offset by moderately higher cost of funds. Even excluding the effects of the
Mariners Bancorp acquisition, the Company experienced loan growth in 1995, a
reversal of a three-year trend; however, deposit runoff continued, albeit at a
slower rate than in recent years. The loan growth reflects improvement in the
local economy while the deposit runoff reflects continued movement of funds out
of the banking industry into higher yielding investment alternatives.
The 1994 increase in net interest income over 1993 levels is
attributable to lower cost of funds and lower volumes of deposits partially
offset by a lower volume of earning assets. The Company experienced declines in
loan and deposit balances in 1994. The lower loan volumes were due to borrowers
paying down their bank debt and fewer qualified borrowers capable of satisfying
the Bank's underwriting criteria during the recessionary environment, while the
lower deposit volumes were due to competing investment products with
significantly higher yields. Consequently, the Bank experienced lower levels of
earnings assets.
The following table shows the level of net interest income by
presenting the volume of earning assets and the yields earned on them, less the
volume of interest-bearing liabilities and the rates paid on them:
5
<PAGE> 7
<TABLE>
<CAPTION>
(In Thousands)
1995 1994 1993
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings assets $284,424 8.79% $276,924 7.62% $285,283 7.61%
Interest bearing
liabilities 200,418 2.91 208,981 2.21 228,124 2.49
Interest-free sources
used to fund earning
assets 84,006 -- 67,943 -- 57,059 --
- ------------------------------------------------------------------------------
$284,424 2.04 $267,924 1.67 $285,183 1.99
6.75% 5.95% 5.62%
==============================================================================
</TABLE>
The net interest margin widened to 6.75 percent in 1995 from 5.95 percent in
1994 and 5.62 percent in 1993. The yield on earning assets in 1995 increased
117 basis points while the cost of interest-bearing liabilities increased 70
basis points. The net interest margin was widened further by a larger
percentage of non-interest-bearing liabilities used to fund earning assets,
resulting in the total cost of funds increasing only 38 basis points.
The rate and volume components associated with earning assets and
interest-bearing liabilities are further separated in the table below to
analyze the year-to-year changes attributable to the rate and volume components
of net interest income:
<TABLE>
<CAPTION>
(Fully Taxable Equivalent, In Thousands)
1995
CHANGE RATE VOLUME
<S> <C> <C> <C>
Total interest income $ 3,922 $3,283 $ 639
Total interest expense 1,197 1,173 24
- ---------------------------------------------------------------
Net interest income $ 2,725 $2,110 $ 615
=================================== ======== =========
</TABLE>
<TABLE>
<CAPTION>
1994
CHANGE RATE VOLUME
<S> <C> <C> <C>
Total interest income $ (607) $ (386) $(221)
Total interest expense (1,060) (506) (554)
- ---------------------------------------------------------------
Net interest income $ 453 $ 120 $ 333
===============================================================
</TABLE>
Total interest income for 1995 increased $3.9 million from 1994 levels
primarily due to significantly higher yields on earning assets, and
secondarily, due to a higher volume of earning assets. This increase in earning
asset yield for 1995 was due to a higher average rate in 1995 that a
substantial portion of the Company's loans are tied and favorable repricing of
a significant portion of the Company's relatively short-term investment
portfolio during the year. Total interest expense increased $1.2 million due
similarly to an increase in the cost of fund rates and a very slight increase
in funding sources. A significantly greater increase in the yield on earnings
assets than the increase in the cost of funds, therefore, resulted in higher
net interest income of $2.1 million while the more rapid growth in earning
assets than funding liabilities further increased net interest income by $614
thousand resulting in a total increase of $2.7 million.
Total interest income for 1994 decreased $607 thousand from 1993 due to
a lower yield on earning assets combined with a lower volume of earning assets.
The decline in earning assets was attributable to an outflow of funding
deposits during the year. The yield on earning assets declined despite upward
repricing of loans due to a lower relative volume of higher yielding loan
balances compared to investment securities. Total interest expense declined
$1.1 million in 1994 from 1993 due to a 33 basis point decline in the cost rate
of funding deposits and due to the lower volume of deposits. The combination
of the declines in deposit volume and the cost of funds, only partially offset
by lower levels of earnings assets and related yields, resulted in an increase
in net interest income of $453 thousands.
PROVISION FOR POSSIBLE CREDIT LOSSES
The 1995 provision for loan and lease losses was $756 thousand compared
to $2.0 million in 1994 and $3.6 million in 1993. Net loans and leases charged
off (less recoveries of loans previously charged off) totaled $872 thousand in
1995 compared to $1.4 million and $2.4 million in 1994 and 1993, respectively.
The reduction in net charge offs in 1995 was due to higher recoveries of loans
previously charged off combined with lower losses in the Company's real estate
loan portfolio compared to the previous two years.
Total delinquent loans were 4.7 percent of total loans at year-end 1995
compared to 3.2 percent and 1.5 percent at year-ends 1994 and 1993,
respectively. Nonaccrual loans at year-end 1995, which are included in the
delinquency figure, were $6.4 million, consisting primarily of commercial real
estate loans, compared to $3.2 million a year earlier and $2.1 million at year
end 1993. The increase in non-accrual loans, and the corresponding increase in
the delinquency ratio, is primarily due to a borrower related to a $3.4 million
real estate loan experiencing difficulty in making its contractual payments
under the terms of its loan agreement late in the fourth quarter of 1995. The
Company is currently evaluating its position with respect to the loan, and as
there exists some likelihood that the Bank may experience some loss upon the
ultimate disposition of the loan, management has established a specific
allowance for the possible loss.
The allowance for possible credit losses increased to $6.3 million at
December 31, 1995 from $5.6 million at year-end 1994, resulting in an allowance
of 2.7 percent of total loans and leases compared to 3.2 percent at year-end
1994. The allowance for possible credit losses is established based upon an
analysis providing specific allowances for loans that management has identified
to have potential loss and general allowances for unidentified losses inherent
in the portfolio. The general allowance is determined by segmenting the
portfolio by risk rating and loan type with allowances established based upon
historical losses in each portfolio segment. Additionally, consideration is
given to loan type concentrations in the portfolio and the current and
anticipated economic environment.
OTHER INCOME
Other income totaled $4.0 million in 1995 compared to $4.8
6
<PAGE> 8
million and $5.0 million in 1994 and 1993, respectively. Service charges on
deposit accounts were nearly flat in 1995 as compared to the prior year.
Bankcard discounts declined to $405 thousand for 1995 from $822 thousand for
1994 due to management's decision to outsource the function in order to reduce
the costs related to providing the service. Gains on sales of Small Business
Administration-guaranteed (SBA) loans were down sharply to $17 thousand compared
to $279 thousand and $1.4 million in 1994 and 1993, respectively, due to
management's decision to retain the loans in the portfolio rather than sell the
loans. Additionally, other miscellaneous income was lower in 1995 compared to
1994.
OPERATING EXPENSE
Operating expenses declined further in 1995 to $14.8 from $14.9 million in
1994. Salaries increased slightly to $4.6 million during the 1995 year compared
to $4.5 million in 1994, reflecting the addition of several new departments and
product offerings - accounts receivable financing and international banking - in
addition to the acquisition of Mariners Bancorp in October 1995. Employee
benefits increased to $2.4 million in 1995 compared to $1.8 million in 1994
primarily due to higher levels of incentive compensation. Occupancy expense
decreased due to the consolidation of administrative offices and the $264
thousand recapture of a reserve for remaining net costs of a pre-existing lease
put back into use for Company operations. Additionally, other expenses declined
$429 thousand largely due to declines in deposit insurance expense as a result
of a reduction in the Bank's assessment rate.
Operating expenses declined $5.2 million to $14.9 million in 1994 compared
to $20.1 million in 1993. This sharp decrease was primarily due to greatly
reduced write-downs of foreclosed real estate (other real estate owned or OREO)
in 1994. OREO expenses and write-downs were $388 thousand in 1994 compared to an
unusually high $4.6 million in 1993 necessary to recognize declining real estate
values in the Bank's market area. Additionally, salaries and other employee
benefit expenses decreased $1.4 million in 1994 due to the re-engineering of
Bank operations, and related downsizing of staffing, including the outsourcing
of the data processing function mid-year 1993. Partially offsetting these
expense decreases was an increase in occupancy expense and furniture and
equipment expense. Occupancy expense was $258 thousand higher in 1994 compared
to 1993, however, the 1994 expense included a one-time charge of $350 thousand
related to the recognition of remaining net costs of a pre-existing lease no
longer used for Bank operations. Other miscellaneous expenses in 1994 were
nearly level with the prior year.
ASSET GROWTH AND MIX
Average total assets during 1995 were $318 million, an increase of $6
million, or 2 percent, over 1994 average total assets of $312 million. Average
loans and leases comprised 58 percent of average total assets in 1995 compared
to 57 percent in 1994. The average composition of the loan portfolio was 41
percent commercial loans, 43 percent real estate loans, 3 percent interim
construction financing, and 12 percent installment loans. The 1994 loan mix was
40 percent commercial, 39 percent real estate, 9 percent interim construction,
and 11 percent installment. Average direct lease financing was less than 1
percent of average total assets in 1995 and 1994. Management has emphasized a
strategy to better diversify the Company's loan portfolio in 1995 by increasing
relationship commercial business with less emphasis on growth in real estate
loans. While the volume of both loan categories increased in 1995, reversing a
downward trend experienced for the past three years, the acquisition of Mariners
Bancorp in October 1995, with its significantly heavier concentration of real
estate related credit, resulted in greater growth in the real estate segment
than the commercial segment. The Company retained nearly all of its new SBA loan
production during 1995, whereas in past years, SBA loan production had been
sold.
Securities available for sale were 27 percent of average total assets in
1995 compared to 24 percent in 1994. At year end 1995, 92 percent of the
investment securities portfolio was classified as available for sale. Average
federal funds sold were 5 percent and 7 percent of average total assets in 1995
and 1994, respectively. The relative decline in generally lower-yielding federal
funds sold in 1995, therefore, represents a deployment of earning assets
primarily into higher-yielding investment securities and secondarily into loans.
Other real estate owned (OREO) averaged $2.0 million in 1995 compared to
$3.6 million in 1994. At December 31, 1995, OREO totaled $2.0 million, compared
to $973 thousand a year earlier.
DEPOSIT GROWTH AND MIX
During 1995, average total deposits were $279 million, a decrease of $4
million under average deposits of $283 million in 1994. Interest-bearing
deposits represented 70 percent and 74 percent of average total deposits in 1995
and 1994, respectively. The average composition of deposits in 1995 was 30
percent demand deposits, 51 percent savings and money market deposits and 19
percent time deposits. This compares to a 1994 deposit mix of 26 percent demand,
53 percent savings and money market and 21 percent time deposits. The growth in
non-interest-bearing deposits reflects the Company's emphasis on developing
its commercial relationship customer base.
CAPITAL MANAGEMENT
During 1995, shareholders' equity averaged $31.4 million or 9.9 percent of
average total assets compared to $28.6 million or 9.2 percent of average total
assets in 1994. On December 31, 1995 and 1994, shareholders' equity was 11.1
percent and 9.6 percent of total assets, respectively. The increase in the
capital ratio for 1995 was due to growth in retained earnings and the issuance
of common shares in partial consideration of the Mariners Bancorp acquisition.
The Company declared and paid cash dividends of $0.32 per share in 1995 totaling
$960 thousand. In 1994, dividends of $0.16 per share totaling $441 thousand were
declared and paid.
Risk-based capital guidelines issued by the Federal Reserve Board (FRB) for
bank holding companies establish an analytical framework
7
<PAGE> 9
that makes regulatory capital requirements sensitive to the risk profile of a
banking organization's balance sheet. The guidelines provide for risk-based
capital standards requiring banking institutions to have minimum total
regulatory capital equivalent to 8 percent of assets and off-balance sheet
exposures, weighted by risk. At least half of the required capital must be Tier
1 capital, which consists of core capital elements including common
stockholders' equity and retained earnings. At December 31, 1995, the Company
exceeded the Tier 1 risk-based capital requirements with a ratio of 13.2 percent
and a total risk-based capital ratio of 14.5 percent. To supplement the
risk-based capital guidelines, the FRB established a minimum leverage ratio
guideline of 3 percent. The leverage ratio consists of Tier 1 capital divided by
total assets (excluding intangibles and other items which were deducted to
arrive at Tier 1 capital). At December 31, 1995, the Company's leverage ratio
was 9.6 percent.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991,
a "well capitalized" bank must have a Tier 1 risk-based capital ratio of at
least 6 percent, a combined Tier 1 and Tier 2 ratio of at least 10 percent and a
leverage ratio of at least 5 percent (and not be subject to a capital directive
order). At December 31, 1995, the Bank had a Tier 1 risk-based capital ratio of
13.1 percent, a combined Tier 1 and Tier 2 ratio of 14.4 percent and a leverage
ratio of 9.5 percent.
LIQUIDITY AND INTEREST SENSITIVITY
The primary objectives of the Company's asset and liability management
strategy are the maintenance of adequate liquidity and effective management of
interest rate risk. Liquidity management attempts to match sources and uses of
funds in order to meet the requirements of customers for loans and deposit
withdrawals. Interest rate risk management seeks to maintain a stable growth
of income and manage the risk associated with changes in interest rates.
The Company maintains short-term sources of funds to meet periodic
increases in loan demand and deposit withdrawals and maturities. At December
31, 1995, the principal source of asset liquidity consisted of $32.2 million in
cash and demand balances due from banks and federal funds sold of $9.7 million
totaling $41.9 million, compared to a total of $33.0 million in these same
assets a year earlier. Other sources included $86.6 million in securities
available for sale.
The Company has an established facility to borrow federal funds from
other banks in excess of $24 million. Additionally, there is a strong secondary
market providing for the sale of the government guaranteed portion of the
Company's SBA loans that totaled approximately $9.5 million at year-end 1995.
Also, in the past the Company has issued commercial paper to generate liquidity
at the holding company level, however, during 1995 and 1994, the Company sold
no commercial paper. Furthermore, substantially all of the installment loans and
leases require regular installment payments, providing a steady flow of cash
funds.
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.
One way to measure the impact that future change 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 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 interest 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 high market interest
rates before its liabilities would. The following table shows the Company's
assets and liabilities and the cumulative gap for the periods shown:
<TABLE>
<CAPTION>
(In thousands)
1 MONTH 3 MONTHS 6 MONTHS 1 YEAR
------- -------- -------- ------
<S> <C> <C> <C> <C>
Total assets repricing $116,239 $131,440 $201,066 $252,132
Total liabilities repricing 170,501 188,196 201,409 227,835
- -------------------------------------------------------------------------------
Cumulative repricing gap $(54,262) $(56,756) $ (343) $ 24,297
Cumulative gap/Assets (14.2)% (14.8)% (0.1)% 6.3%
</TABLE>
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.
8
<PAGE> 10
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Eldorado Bancorp:
We have audited the consolidated balance sheets of Eldorado Bancorp and
subsidiary (the "Company") as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eldorado Bancorp and
subsidiary at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's Statements
of Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities in 1994 and No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures in 1995.
KPMG PEAT MARWICK LLP
Orange County, California
February 6, 1996
9
<PAGE> 11
ELDORADO BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1995 & 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 32,233,000 $ 23,950,000
Federal funds sold 9,700,000 9,000,000
Securities available-for-sale 86,580,000 86,107,000
Securities held-to-maturity -- approximate market value of $7,212,000 in 1995
and $562,000 in 1994 7,087,000 586,000
SBA loans held for sale -- 3,274,000
Loans and direct lease financing 229,957,000 171,874,000
Less allowance for possible credit losses 6,265,000 5,564,000
- --------------------------------------------------------------------------------------------------------------------
Net loans and direct lease financing 223,692,000 166,310,000
- --------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 8,598,000 7,433,000
Other real estate owned, net 1,965,000 973,000
Other assets 13,331,000 6,389,000
- --------------------------------------------------------------------------------------------------------------------
$383,186,000 $304,022,000
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Demand, non-interest bearing $ 99,770,000 $ 79,347,000
Savings and money market 157,882,000 145,958,000
Time certificates under $100,000 43,534,000 23,102,000
Time certificates of $100,000 or more 32,092,000 22,919,000
- --------------------------------------------------------------------------------------------------------------------
Total deposits 333,278,000 271,326,000
- --------------------------------------------------------------------------------------------------------------------
Federal funds purchased 3,772,000 1,030,000
Other liabilities 3,763,000 2,572,000
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 340,813,000 274,928,000
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 12)
- --------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, no par value, authorized
5,000,000 shares, none issued -- --
Common stock, no par value; authorized 12,500,000
shares, issued and outstanding 3,733,822 shares
in 1995 and 2,756,728 in 1994 31,798,000 17,462,000
Net unrealized gain (loss) on securities available-for-sale 400,000 (345,000)
Retained earnings 10,175,000 11,977,000
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 42,373,000 29,094,000
- --------------------------------------------------------------------------------------------------------------------
$383,186,000 $304,022,000
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE> 12
ELDORADO BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1995, 1994 & 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans, including fees $18,592,000 $16,170,000 $17,245,000
Securities 5,415,000 3,721,000 2,629,000
Federal funds sold 846,000 905,000 1,385,000
Direct lease financing 122,000 227,000 309,000
Interest bearing deposits with banks -- 11,000 11,000
----------- ----------- -----------
Total interest income 24,975,000 21,034,000 21,579,000
----------- ----------- -----------
Interest expense:
Savings and money market 2,875,000 3,103,000 3,669,000
Time certificates under $100,000 1,457,000 782,000 738,000
Time certificates of $100,000 or more 1,211,000 725,000 1,252,000
Other 280,000 16,000 27,000
----------- ----------- -----------
Total interest expense 5,823,000 4,626,000 5,686,000
----------- ----------- -----------
Net interest income 19,152,000 16,408,000 15,893,000
Provision for possible credit losses 756,000 2,006,000 3,576,000
----------- ----------- -----------
Net interest income after
provision for possible
credit losses 18,396,000 14,402,000 12,317,000
----------- ----------- -----------
Other income:
Services charge on deposit accounts 2,203,000 2,222,000 1,865,000
Escrow fees -- -- 122,000
Bank card discounts 405,000 882,000 752,000
Gain on sales of SBA loans 17,000 279,000 1,433,000
Loan servicing income 848,000 875,000 283,000
New gain (loss) on sales and write-down
of securities, net 48,000 (131,000) (81,000)
Other 500,000 781,000 605,000
----------- ----------- -----------
Total other income 4,021,000 4,848,000 4,979,000
----------- ----------- -----------
Operating expenses:
Salaries 4,644,000 4,518,000 5,905,000
Employee benefits 2,369,000 1,791,000 1,827,000
Occupancy 1,380,000 1,865,000 1,607,000
Furniture and equipment 916,000 832,000 692,000
Other real estate owned 330,000 388,000 4,620,000
Other 5,113,000 5,542,000 5,490,000
----------- ----------- -----------
Total operating expenses 14,752,000 14,936,000 20,141,000
----------- ----------- -----------
Earnings (loss) before income taxes 7,665,000 4,314,000 (2,845,000)
----------- ----------- -----------
Income taxes (benefit) 3,161,000 1,758,000 (1,118,000)
----------- ----------- -----------
Net earnings (loss) $ 4,504,000 $ 2,556,000 $(1,727,000)
=========== =========== ===========
Net earnings (loss) per common share $ 1.36 $ 0.84 $(0.57)
----------- ----------- -----------
Weighted average number of shares
used in per share calculation 3,312,924 3,029,327 3,026,590
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE> 13
ELDORADO BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1995, 1994 & 1993
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) Total
Common Stock on Securities Retained Shareholders'
Shares Amount Available-for-sale Earnings Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 2,745,634 $17,400,000 -- $11,810,000 $29,210,000
- ---------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared
($0.08 per share) -- -- -- (221,000) (221,000)
Stock options exercised 12,621 86,000 -- -- 86,000
Stock repurchase
and cancelled (6,000) (59,000) -- -- (59,000)
Net loss -- -- -- (1,727,000) (1,727,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 2,752,255 17,427,000 -- 9,862,000 27,289,000
- ---------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain on
securities available-for-sale
as of January 1, 1994 -- -- $1,179,000 -- 1,179,000
Cash dividends declared
($0.16) per share) -- -- -- (441,000) (441,000)
Stock options exercised 4,473 35,000 -- -- 35,000
Change in net unrealized gain
on securities available-for-sale -- -- (1,524,000) -- (1,524,000)
Net earnings -- -- 2,556,000 2,556,000
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 2,756,728 17,462,000 (345,000) 11,977,000 29,094,000
- ---------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared
($0.32) per share -- -- -- (960,000) (960,000)
Stock options exercised 7,380 62,000 -- -- 62,000
Common stock issued 630,276 8,928,000 -- -- 8,928,000
10% common stock dividend 339,438 5,346,000 -- (5,346,000) --
Change in net unrealized gain
on securities available-for-sale -- -- 745,000 -- 745,000
Net earnings -- -- 4,504,000 4,504,000
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 3,733,822 $31,798,000 $ 400,000 $10,175,000 $42,373,000
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 14
ELDORADO BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended 1995, 1994 & 1993
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 4,504,000 $ 2,556,000 $(1,727,000)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 556,000 998,000 879,000
Amortization of intangible assets 186,000 110,000 169,000
Provision for possible credit losses 756,000 2,006,000 3,576,000
Provision for possible losses on
other real estate owned 249,000 118,000 4,270,000
(Gain) loss on sales of premises and equipment (10,000) 8,000 (22,000)
Gain on sales of SBA loans (17,000) (279,000) (1,433,000)
(Gain) loss on sale of other real estate owned (60,000) (36,000) 26,000
(Gain) loss on sales of securities available-for-sale (48,000) 131,000 81,000
Amortization of deferred income, discounts and fees (65,000) (438,000) (496,000)
Loan fees collected 510,000 508,000 191,000
(Increase) decrease in other assets (2,089,000) 1,550,000 (511,000)
Increase in deferred income taxes (158,000) (90,000) (776,000)
Increase in other liabilities 1,001,000 478,000 54,000
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,315,000 7,620,000 4,281,000
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturity of securities available-for-sale 95,347,000 71,448,000 18,996,000
Proceeds from sales of securities available-for-sale 3,069,000 3,948,000 9,350,000
Purchase of securities available-for-sale (85,423,000) (100,405,000) --
Purchase of securities held-to-maturity (6,501,000) (586,000) --
Purchase of investment securities -- -- (47,025,000)
Net (increase) decrease in interest
bearing deposits with banks -- 594,000 (396,000)
Proceeds from sale of loans 1,732,000 6,720,000 13,190,000
Increase in commercial loans held for sale -- (8,352,000) (11,326,000)
Purchase of loans -- (11,665,000) --
Net (increase) decrease in loans and leases (5,536,000) 21,004,000 24,108,000
Purchase of premises and equipment (793,000) (1,147,000) (1,122,000)
Proceeds from sales of premises and equipment 9,000 14,000 140,000
Proceeds from sales of other real estate owned 1,928,000 4,908,000 2,904,000
Capital expenditures for other real estate owned -- -- --
Net cash received for purchase of Mariners Bank 3,407,000 -- --
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities $ 7,239,000 $(13,519,000) $ 8,501,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 15
ELDORADO BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 1995, 1994 & 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net decrease in deposits $(5,126,000) $(21,473,000) $(16,333,000
Net increase (decrease) in federal funds purchased 2,742,000 (75,000) 1,105,000
Dividends paid (960,000) (441,000) (221,000)
Proceeds from stock options exercised 62,000 35,000 86,000
Cost of stock issuance (289,000) -- --
Repurchase of common stock -- -- (59,000)
----------- ------------ ------------
Net cash used in financing activities (3,571,000) (21,954,000) (15,422,000)
----------- ------------ ------------
Increase (decrease) in cash and cash equivalents 8,983,000 (27,853,000) (2,640,000)
Cash and cash equivalents at beginning of year 32,950,000 60,803,000 63,443,000
----------- ------------ ------------
Cash and cash equivalents at end of year $41,933,000 $ 32,950,000 $ 60,803,000
=========== ============ ============
Supplemental disclosures of cash flow information:
Cash paid for --
Interest $ 5,589,000 $ 4,653,000 $ 5,890,000
Income taxes, net 2,871,000 2,986,000 465,000
Supplemental disclosures of noncash investing and
financing activities:
Dividends accrued and paid in subsequent years 299,000 -- --
Transfer of loans to other real estate owned 2,526,000 1,071,000 3,697,000
Transfer of investment securities to
securities available-for-sale -- 61,901,000 --
The Company purchased all of the capital stock
of Mariners Bancorp for $4,301,000 cash,
including direct cost and 630,276 common
shares of Eldorado Bancorp, valued at
$9,217,000 less cost of issuing the stock.
In connection with the purchase, assets
acquired and liabilities assumed were as
follows:
Fair value of assets acquired 75,615,000 -- --
Fair value of liabilities assumed 67,608,000 -- --
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 16
ELDORADO BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1995, 1994 & 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Eldorado
Bancorp (the "Company") and its wholly owned subsidiary, Eldorado Bank (the
"Bank"). All intercompany balances and transactions have been eliminated in
consolidation. Eldorado Bancorp has no significant assets or liabilities other
than its investment in the Bank.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and prevailing practices within the
banking industry. In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ significantly from those
estimates.
BUSINESS
The Bank provides a full range of banking services to individual and
corporate customers throughout Orange, Riverside and San Bernardino Counties.
The Bank is subject to competition from other financial institutions. The Bank
is also subject to the regulations of certain federal and state agencies and
undergoes periodic examination by those regulatory authorities.
SECURITIES
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires that investments be
classified as "held-to-maturity", "available-for-sale" or "trading securities".
The statement defines investments in securities as "held-to-maturity" based upon
a positive intent and ability to hold those securities to maturity. Investments
held-to-maturity are to be reported at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of selling them
in the near term are classified as "trading securities" and are to be reported
at fair value, with unrealized gains and losses included in operations. Equity
and debt securities not classified as "held-to-maturity" or "trading securities"
are classified as "available-for-sale" and are recorded at fair value, with
unrealized gains and losses excluded from operations and reported as a separate
component of stockholders' equity, net of the tax effect.
SFAS 115 was required to be adopted by the Company in 1994. Accordingly,
the Company reclassified its entire investment security portfolio as of January
1, 1994 as securities available-for-sale which were adjusted to reflect fair
market value. Previously, the investment securities were carried at cost,
adjusted for the accretion of discounts and amortization of premiums.
The designation of securities is made by management at the time of
acquisition. The Company has purchased securities "held-to-maturity" since the
implementation of SFAS 115.
LOANS AND DIRECT LEASE FINANCING
Loans are reported at the principal amount outstanding, net of unearned
income. Interest on loans is computed by methods which generally result in level
rates of return on principal amounts outstanding. Interest accruals are
discontinued when, in the opinion of management, it is deemed uncollectible.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. The accrual of interest on loans is discontinued when
reasonable doubt exists as to the full, timely collection of interest or
principal and, generally, when a loan becomes contractually past-due by 90 days
or more with respect to principal or interest. The accrual of interest may be
continued on a loan contractually past-due 90 days or more with respect to
interest or principal if the Company is in the process of collection, and
collection of principal and interest is deemed probable.
When a loan is placed on nonaccrual status, all interest previously accrued
but not collected is reversed against current period income. Income on such
loans is then recognized only to the extent that cash is received and where the
future collection of principal is probable. Accruals are resumed on loans only
when they are brought fully current with respect to interest and principal and
when, in the judgement of management, the loan is estimated to be fully
collectible.
A loan is classified as a restructured loan when certain modifications,
such as the reduction of interest rates to below market or forgiveness or
deferral of principal payments, are made to contractual terms due to a
borrower's financial condition. Certain restructured loan agreements call for
additional interest or principal to be paid on a deferred or contingent basis.
The Bank has direct financing leases under which it purchases automobiles
and equipment which are in turn leased to its customers. Direct financing leases
are recorded at the sum of the aggregate lease rentals receivable and the
estimated residual value of the equipment, net of unearned income. The related
unearned income is deferred and amortized into income so as to produce a level
rate of return.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and direct costs associated with lending are netted
and amortized to interest income as an adjustment to the yield over the
respective lives of the loans using a method that approximates the level-yield
method over the period to maturity. At December 31, 1995 and 1994, net deferred
loan fees of $222,000 and $153,000, respectively, are included in loans.
SALES OF LOANS
The Bank has realized gains from the sale of the guaranteed portion of
"Small Business Administration" loans. Gains or losses are recognized upon
completion of the sale (net of related commissions paid that are directly
attributable to the sale) and are based on the difference between the net sales
proceeds and the relative fair value of the portion of the loan sold versus the
portion of the loan retained. Loans held for sale are carried at the lower of
cost or estimated market value.
ALLOWANCE FOR POSSIBLE CREDIT LOSSES
The allowance for possible credit losses is established through a
15
<PAGE> 17
provision for possible credit losses charged to expense. Loans and leases are
charged against the allowance for possible credit losses when management
believes that the collectibility of principal is unlikely. The allowance is an
amount that management believes will be adequate to absorb losses inherent in
existing loans, leases and commitments to extend credit, based on the
evaluations of the collectibility and prior loss experience of loans, leases and
commitments to extend credit. The evaluations take into consideration such
factors as changes in the nature and volume of the portfolio; overall portfolio
quality; loan concentrations; specific problem loans, leases and commitments;
and current and anticipated economic conditions that may affect the borrowers'
ability to pay.
Effective January 1, 1995, the Company adopted the Financial Accounting
Standard's Board Statement of Financial Accounting Standards No. 114 (SFAS 114),
"Accounting by Creditors for Impairment of a Loan", as amended by SFAS 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures". SFAS 114 requires loans to be measured for impairment when it is
probable that all amounts, including principal and interest, will not be
collected in accordance with the contractual terms of the loan agreement. The
amount of impairment and any subsequent changes are recorded through the
provision for possible credit losses as an adjustment to the allowance for
possible credit losses. SFAS 114 applies to all loans, whether collateralized or
uncollateralized, except for large groups of smaller-balance homogenous loans
that are collectively evaluated for impairment, loans that are measured at fair
value or at the lower of cost or fair value, leases, and debt securities. In
addition, it usually applies to loans that are restructured in a troubled debt
restructuring involving a modification of terms. However, such loans
restructured prior to the effective date of SFAS 114 that are performing in
accordance with their restructured terms are not considered impaired under SFAS
114.
As required by SFAS 114, the Company generally measures impairment based
upon the present value of the loan's expected future cash flows, except where
foreclosure or liquidation is probable or when the primary source of repayment
is provided by real estate collateral. In these circumstances, impairment is
measured based upon the fair value of the collateral. In addition, in certain
rare circumstances, impairment may be based on the loan's observable fair value.
Generally, the Company evaluates a loan for impairment in accordance with
SFAS 114 when it is placed on nonaccrual status. Adopting SFAS 114 did not
affect the Company's charge-off policy.
The adoption of SFAS 114 did not have a material effect on the Company's
financial position or results of operations.
Management believes that the allowance for possible credit losses is
adequate. While management uses available information to recognize losses on
loans and leases, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, both federal and state regulators,
as an integral part of their examination process, periodically review the
Company's allowance for possible credit losses. These agencies may require the
Company to recognize additions to the allowance based on their judgement about
information available to them at the time of their examination.
OTHER REAL ESTATE OWNED
Other real estate owned consists of real estate acquired insettlement of
loans. Other real estate owned is carried at the lower of cost or estimated fair
value less selling costs. The recognition of gains and losses on the sale of
real estate is dependent upon various factors relating to the nature of the
property sold, the terms of the sale and the future involvement of the Company.
Real estate acquired in settlement of loans are recorded at the lower of
the unpaid balance of the loan at the settlement date or fair value less selling
costs of the collateral. Subsequently, valuation allowances for estimated losses
are provided against income if the carrying value of real estate exceeds
estimated fair value less selling costs. Legal fees and direct costs, including
foreclosure, appraisal and other related costs, are expensed as incurred. While
management uses available information to provide for losses on real estate,
future additions to the allowance may be necessary based on future economic
conditions. In addition, the regulatory agencies periodically review the
allowance for real estate losses and such agencies may require the Company to
recognize additions to the allowance based on information and factors not
available to management.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation
and amortization which is charged to expense on a straight-line basis over the
estimated useful lives of the assets, from 3 to 30 years, or, in the case of
leasehold improvements, over the terms of the leases if shorter than the
estimated useful lives.
INTANGIBLE ASSETS
The Company has classified as goodwill the cost in excess of fair value of
the net assets (including tax attributes) of businesses acquired in purchase
transactions. Goodwill is being amortized on a straight-line method over fifteen
years. The Company periodically reviews goodwill to assess recoverability from
projected, undiscounted net cash flows of the related business unit, and
impairments would be recognized in operating results if a permanent diminution
in value were to occur.
Core deposit intangibles represents the intangible value of depositor
relationships resulting from deposits assumed in acquisitions an d is amortized
over their useful economic life, not to exceed ten years.
INCOME TAXES
Income taxes are accounted for under the asset and liability method of
accounting. Under the asset and liability method, deferred income taxes are
recognized for the expected future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and federal funds sold. Generally, federal funds are
purchased and sold for one-day periods.
16
<PAGE> 18
EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share are based on the weighted average number
of shares outstanding after giving retroactive effect to stock dividends,
including the 10% stock dividend declared in November 1995. Stock options have
been included as common stock equivalents in 1995 but have been excluded from
the computation for 1994 and 1993, as their effect is immaterial.
RECLASSIFICATIONS
Certain items in prior periods have been reclassified to conform to the
current presentation.
CURRENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS 121 requires the long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or circumstances indicate the carrying
amount of an asset may not be recoverable. However, SFAS 121 does not apply to
financial instruments, core deposit intangibles, mortgage and other servicing
rights or deferred tax assets. SFAS 121 is effective for fiscal years beginning
after December 15, 1995. The Company does not expect the adoption of the
statement on January 1, 1996 to have a material impact on the financial
statements.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122 (SFAS 122), "Accounting for Mortgage Servicing Rights," an amendment to
Statement of Financial Accounting Standards No. 65. SFAS 122 requires an
institution that purchases or originates mortgage loans and sells or securitizes
those loans with servicing rights retained to allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. In addition,
institutions are required to assess impairment of the capitalized mortgage
servicing portfolio based on the fair value of those rights on a
stratum-by-stratum basis with any impairment recognized through a valuation
allowance for each impaired stratum. Capitalized mortgage servicing rights are
to be stratified based upon one or more of the predominate risk characteristics
of the underlying loans such as loan type, size, note rate, date of origination,
term and/or geographic location. SFAS 122 is effective for fiscal years
beginning after December 15, 1995. Management believes that the adoption of SFAS
122 will not have a material impact on the Company's operations.
In November 1995 the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS 123). This
statement establishes financial accounting standards for stock-based employee
compensation plans. SFAS 123 permits the Company to choose either a new fair
value based method or the current APB Opinion 25 intrinsic value based method of
accounting for its stock-based compensation arrangements. SFAS 123 requires
proforma disclosures of net earnings and earnings per share computed as if the
fair value based method had been applied in financial statements of companies
that continue to follow current practice in accounting for such arrangements
under Opinion 25. SFAS 123 applies to all stock-based employee compensation
plans in which an employer grants shares of its stock or other equity
instruments to employees except for employee stock ownership plans. SFAS 123
also applies to plans inwhich the employer incurs liabilities to employees in
amounts based on the price of the employer's stock, i.e., stock option plans,
stock purchase plans, restricted stock plans, and stock appreciation rights. The
statement also specifies the accounting for transactions in which a company
issues stock options or other equity instruments for services provided by
nonemployees or to acquire goods or services from outside suppliers or vendors.
The recognition provision of SFAS 123 for companies choosing to adopt the new
fair value based method of accounting for stock-based compensation arrangements
may be adopted immediately and will apply to all transactions entered into in
fiscal years that begin after December 15, 1995. The disclosure provisions of
SFAS 123 are effective for fiscal years that begin after December 15, 1995. The
disclosure provisions of SFAS 123 are effective for fiscal years beginning after
December 15, however disclosure of the proforma net earnings and earnings per
share, as if the fair value method of accounting for stock-based compensation
had been elected, is required for all awards granted in fiscal years beginning
after December 31, 1994. The Company will continue to account for stock-based
compensation under APB Opinion 25 and, as a result, SFAS 123 will not have a
material impact on the Company's operations.
(2) ACQUISITION OF MARINERS BANK
On October 20, 1995, the Company acquired 100% of the outstanding common
stock of Mariners Bancorp ("Mariners") for $4,072,000 in cash and the issuance
of 630,276 common shares of Eldorado Bancorp, valued at $14.625 per share.
Mariners had total assets of approximately $75,263,000. The acquisition was
accounted for using the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations". Under this
method of accounting, the purchase price was allocated to the assets acquired
and deposits and liabilities assumed based on their fair values as of the
acquisition date. The consolidated financial statements include the operations
of Mariners from the date of the acquisition. Goodwill and core deposit
intangibles arising from the transaction totaled approximately $7,007,000.
Goodwill of $5, 511,000 is being amortized over fifteen years on a straight-line
basis. Core deposit intangible of $1,496,000 is being amortized over its useful
economic life of ten years.
The following table sets forth selected unaudited pro forma combined
financial information of the Company and Mariners for the years ended December
31, 1995 and 1994. The pro forma operating data reflects the effect of the
acquisition of Mariners as if it was consummated at the beginning of each year
presented. The pro forma results are not necessarily indicative of the results
that would have occurred had the acquisition been in effect for the full years
presented, nor are they necessarily indicative of the results of future
operations.
17
<PAGE> 19
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1994
- ------------------------------------------------------------------
<S> <C> <C>
Interest income $30,444,000 $27,262,000
Interest expense 7,109,000 6,019,000
- ------------------------------------------------------------------
Net interest income 23,335,000 21,243,000
Provision for possible credit losses 926,000 2,188,000
- ------------------------------------------------------------------
Net interest income after provision
for possible credit losses 22,409,000 19,055,000
Other income 5,121,000 6,479,000
Operating expenses 18,894,000 20,886,000
- ------------------------------------------------------------------
Earnings before income taxes 8,636,000 4,648,000
Income taxes 3,578,000 1,873,000
==================================================================
Net earnings $ 5,058,000 $ 2,775,000
==================================================================
Earnings per share $1.36 $0.75
==================================================================
</TABLE>
(3) RESTRICTED CASH BALANCES
Aggregate reserves (in the form of deposits with the Federal Reserve Bank)
approximating $7,105,000 were maintained to satisfy Federal regulatory
requirements at December 31, 1995.
(4) SECURITIES
A summary of securities follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-For-Sale Securities:
U.S. Treasury securities and obligations
of other U.S. government corporations
and agencies $76,436,000 $462,000 $ 6,000 $76,892,000
Obligations of states and political
subdivisions 1,195,000 8,000 1,000 1,202,000
Corporate debt securities 4,327,000 107,000 3,000 4,431,000
Mortgage backed securities 3,907,000 119,000 2,000 4,024,000
Other 31,000 -- -- 31,000
- ------------------------------------------------------------------------------------------------------
$85,896,000 $696,000 $12,000 $86,580,000
- ------------------------------------------------------------------------------------------------------
Held-To-Maturity Securities:
U.S. government corporation and agencies $ 5,998,000 $ 54,000 $ 1,000 $ 6,051,000
Obligations of states and political
subdivisions 587,000 58,000 -- 645,000
Corporate debt securities 502,000 14,000 -- 516,000
- ------------------------------------------------------------------------------------------------------
$ 7,087,000 $126,000 $ 1,000 $ 7,212,000
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-For-Sale Securities:
U.S. Treasury securities and obligations
of other U.S. government corporations
and agencies $76,948,000 $ 986,000 $1,524,000 $76,410,000
Obligations of states and political
subdivisions 290,000 5,000 -- 295,000
Corporate debt securities 7,389,000 10,000 118,000 7,281,000
Mortgage backed securities 2,055,000 66,000 -- 2,121,000
- ------------------------------------------------------------------------------------------------------
$86,682,000 $1,067,000 $1,642,000 $86,107,000
- ------------------------------------------------------------------------------------------------------
Held-To-Maturity Securities:
Obligations of states and political
subdivisions $ 586,000 -- $ 24,000 $ 562,000
======================================================================================================
</TABLE>
At December 31, 1995, securities with a carrying value of $13,794,000 were
pledged to secure public deposits or for other purposes required by law.
Maturities of securities are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
- ---------------------------------------------------------------------------
<S> <C> <C>
Available-For-Sale Securities:
Due in one year or less $64,250,000 $64,410,000
Due after one year through five years 17,665,000 17,961,000
Due after five years through ten years 2,414,000 2,557,000
Due after ten years 1,567,000 1,652,000
- ---------------------------------------------------------------------------
$85,896,000 $86,580,000
===========================================================================
Held-To-Maturity Securities At Cost:
Due after one year through five years $ 3,498,000 $ 3,514,000
Due after five through ten years 3,589,000 3,698,000
- ---------------------------------------------------------------------------
$ 7,087,000 $ 7,212,000
===========================================================================
</TABLE>
Proceeds from sales of securities available-for-sale during 1995, 1994 and
1993 were $3,069,000, $3,948,000 and $9,350,000, respectively. The Bank
experienced gross losses on sales of securities available-for-sale of $2,000 in
1995, and $131,000 in 1994. A gross gain of $50,000 and $49,000 was realized on
sales in 1995 and 1993 respectively. Gross losses and writedowns of $130,000
were recognized in 1993.
(5) LOANS AND DIRECT LEASE FINANCING
A summary of loans and direct lease financing follows:
<TABLE>
<CAPTION>
1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C>
Commercial -- unsecured $ 41,831,000 $ 33,435,000
Commercial -- secured 52,717,000 33,552,000
Interim construction 18,219,000 4,789,000
Real estate 88,097,000 78,607,000
Installment 26,553,000 18,945,000
Lease financing 876,000 1,286,000
Credit cards and other 1,791,000 1,298,000
Less unearned income, discounts
and fees (127,000) (38,000)
- ---------------------------------------------------------------------------
$229,957,000 $171,874,000
===========================================================================
</TABLE>
The Bank serviced loans for others totaling $89,908,000 and $88,656,000 at
December 31, 1995 and 1994, respectively.
The Company grants construction, commercial and consumer loans to customers
throughout the Southern California area. Although the Company has a diversified
loan portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the real estate markets in Orange, Riverside and San
Bernardino counties of California.
In the ordinary course of business, the Bank has granted loans to certain
related parties and their affiliates. These loans are made under terms which are
consistent with the Bank's normal lending policies. A summary of activity with
respect to these loans follows:
18
<PAGE> 20
<TABLE>
<CAPTION>
1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C>
Balance outstanding, beginning of year $ 2,251,000 $ 4,547,000
Loans granted during year 265,000 --
Repayments during year (1,661,000) (2,296,000)
- -----------------------------------------------------------------------------
Balance outstanding, end of year $ 855,000 $ 2,251,000
=============================================================================
</TABLE>
At December 31, 1995, 1994 and 1993, the Bank had loans of
approximately $5,818,000, $3,161,000, and $2,092,000 respectively, on which the
accrual of interest had been discontinued. If these loans had been current
throughout their terms, interest and fees on loans would have increased by
approximately $172,000, $144,000, and $108,000 for 1995, 1994 and 1993,
respectively.
Loans restructured, prior to January 1, 1995, the effective date of
SFAS 114, and performing within the terms of the restructured agreement
amounted to $1,531,000 and $7,069,000 at December 31, 1995 and 1994,
respectively. Under the original terms of the loans, interest earned would have
totaled $235,000 and $980,000 for the year ended December 31, 1995 and 1994,
respectively. The recorded interest income amounted to $187,000 and $841,000
for 1995 and 1994, respectively.
The following is a summary of impaired loans and the related allowance
for possible credit losses at December 31, 1995:
<TABLE>
<CAPTION>
ALLOWANCE
RECORDED FOR POSSIBLE
INVESTMENT CREDIT LOSSES
- -------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans requiring an
allowance for possible credit losses $5,077,000 $1,985,000
Impaired loans not requiring an
allowance for possible credit losses 741,000 --
- -------------------------------------------------------------------------------
$5,818,000 $1,985,000
===============================================================================
</TABLE>
The Company's policy for recognizing interest income on impaired loans
is the same as the policy applied to nonaccrual loans prior to the adoption of
SFAS 114. When the collectibility of principal on a loan is in doubt, all
payments received are applied as a reduction to principal. There was no
interest income recognized on impaired loans for the year ended December 31,
1995.
(6) ALLOWANCES FOR POSSIBLE CREDIT LOSSES AND OTHER REAL ESTATE OWNED
A summary of activity in the allowance for possible credit losses
follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 5,564,000 $ 4,740,000 $ 3,530,000
Credits charged-off (1,311,000) (1,574,000) (2,534,000)
Recoveries on credits
previously charged-off 439,000 169,000 168,000
- ------------------------------------------------------------------------------
Net charge-offs (872,000) (1,405,000) (2,366,000)
Increase in allowance for
possible credit losses
through acquisition 817,000 223,000 --
Provision for possible
credit losses 756,000 2,006,000 3,576,000
- -------------------------------------------------------------------------------
Balance at end of year $ 6,265,000 $ 5,564,000 $ 4,740,000
===============================================================================
</TABLE>
The determination of the allowance for possible credit losses requires
the use of certain significant estimates by Management in relation to the
ultimate repayment of loans. These amounts could differ materially in the near
term from the amounts assumed in arriving at the allowance for possible loan
losses in December 31, 1995.
A summary of activity in the valuation allowance on other real estate
owned follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 407,000 $ 3,220,000 $ 28,000
Increase to valuation allowance
through acquisition 167,000 -- --
Additions to valuation allowance
charged to operations 249,000 118,000 4,270,000
Recognized losses on other real
estate owned charged against
the allowance (102,000) (2,931,000) (1,078,000)
- -------------------------------------------------------------------------------
Balance at end of year $ 721,000 $ 407,000 $ 3,220,000
===============================================================================
</TABLE>
(7) PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Land $ 2,467,000 $ 2,467,000
Buildings 5,443,000 5,095,000
Furniture, fixtures and equipment 4,720,000 3,746,000
Leasehold improvements 2,289,000 1,596,000
Leasehold interests 732,000 732,000
- -------------------------------------------------------------------------------
15,651,000 13,636,000
Less accumulated depreciation and
amortization 7,053,000 6,203,000
- -------------------------------------------------------------------------------
$ 8,598,000 $ 7,433,000
===============================================================================
</TABLE>
(8) INCOME TAXES
The components of income taxes (benefit) are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1995
Federal $2,531,000 $(145,000) $ 2,386,000
State 788,000 (13,000) 775,000
- -------------------------------------------------------------------------------
$3,319,000 $(158,000) $ 3,161,000
===============================================================================
1994
Federal $1,512,000 $(252,000) $ 1,260,000
State 336,000 162,000 498,000
- -------------------------------------------------------------------------------
$1,848,000 $ (90,000) $ 1,758,000
===============================================================================
1993
Federal $ (344,000) $(523,000) $ (867,000)
State 2,000 (253,000) (251,000)
- -------------------------------------------------------------------------------
$ (342,000) $(776,000) $(1,118,000)
===============================================================================
</TABLE>
Income taxes (benefit) differed from the expected Federal statutory
rate as follows:
<TABLE>
<CAPTION>
1995 1994 1993
AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected income taxes (benefit) $2,606,000 34.0 $1,467,000 34.0 $ (967,000) (34.0)
State franchise taxes, net of
Federal income tax benefit 576,000 7.5 325,000 7.5 (166,000) (5.8)
Other income not subject to tax (48,000) (0.6) (50,000) (1.2) (75,000) (2.6)
Other 27,000 0.3 16,000 0.4 90,000 3.1
- ----------------------------------------------------------------------------------------------------
$3,161,000 41.2 $1,758,000 40.7 $(1,118,000) (39.3)
====================================================================================================
</TABLE>
19
<PAGE> 21
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Loans, due to allowance for
possible credit losses $1,281,000 $1,250,000
Other real estate owned 339,000 197,000
Investment securities 10,000 10,000
Securities valuation allowance -- 230,000
State taxes 262,000 112,000
Accrued compensation 256,000 171,000
Net operating losses 218,000 257,000
Other 215,000 143,000
---------- ----------
2,581,000 2,370,000
---------- ----------
Deferred tax liabilities:
Premises and equipment (950,000) (1,170,000)
Deferred loan origination fees and costs (136,000) (50,000)
Purchase accounting adjustments (479,000) --
Securities valuation allowance (284,000) --
Other (193,000) (100,000)
---------- ----------
(2,042,000) (1,320,000)
---------- ----------
Net deferred tax asset $ 539,000 $1,050,000
========== ==========
</TABLE>
In determining the possible future realization of deferred tax assets, the
Company takes future taxable income from the following sources into account:
(a) the reversal of taxable temporary differences; (b) future
operations exclusive of reversing temporary differences; (c) tax planning
strategies that, if necessary, would be implemented to accelerate taxable
income into years in which net operating losses might otherwise expire. As of
December 31, 1995 and 1994, there was no valuation allowance against deferred
tax assets. Deferred tax assets as of December 31, 1995 and 1994 have been
recognized to the extent of the expected reversal of taxable temporary
differences and the amount of Federal income tax paid in the carryback period
which would be recoverable through the carryback of net operating losses.
Certain factors beyond management's control can effect future levels of
earnings and no assurance can be given that sufficient earnings will be
generated to fully realize the recorded tax benefits. Management believes,
however, that the remaining temporary differences will reverse during periods
in which the Company generates net taxable earnings.
(9) STOCK OPTION PLANS
A stock option plan approved by the shareholders in 1989 ("1989 Plan")
provides that incentive stock options and nonqualified options covering an
aggregate of 145,200 shares (after giving retroactive effect for stock
dividends) of the Company's unissued common stock may be granted to salaried
officers, key employees or directors at prices no less than the fair market
value of such shares at dates of grant. Options granted may be exercised at a
rate of 20% per year and expire five years from the date the options are
granted.
A stock option plan approved by the shareholders in 1992 ("1992 Plan")
provides that incentive stock options and nonqualified options covering an
aggregate of 154,000 shares (after giving retroactive effect for stock
dividends) of the Company's unissued common stock may be granted to salaried
officers, key employees or directors at prices no less than the fair market
value of such shares at dates of grant. Options granted may be exercised at a
rate of 20% per year and expire five years from the date the options are
granted.
A stock option plan approved by the shareholders in 1995 ("1995 Plan")
provides that options covering an aggregate of 143,000 shares (after giving
retroactive effect for stock dividends) of the Company's unissued common stock
may be granted to salaried officers, key employees or directors at prices no
less than the fair market value of such shares at dates of grant. Options
granted may be exercised at a rate of 20% per year and expire five years from
the date the options are granted.
A summary of transactions in the Plans for the three years ended December
31, 1995 follows:
<TABLE>
<CAPTION>
AVAILABLE PRICE
FOR GRANT OUTSTANDING PER SHARE
<S> <C> <C> <C>
Balance at December 31, 1992 183,285 153,838 $5.82-14.88
Options granted (83,000) 83,000 7.13-10.00
Options exercised -- (12,621) 6.82- 8.38
Options cancelled 54,457 (54,457) 6.82-14.13
------- ------- -----------
Balance at December 31, 1993 154,742 169,760 $7.13-14.88
Options granted (112,150) 112,150 8.13-12.25
Options exercised -- (4,473) 8.13- 8.63
Options cancelled 15,687 (15,687) 8.13-14.88
Options expired under
1980 plan (15,400) (15,400) 8.13-14.88
Options expired under
1982 plan (13,500) (13,500) 8.13-14.88
------- ------- -----------
Balance at December 31, 1994 29,379 232,850 $7.13-14.88
Shares authorized under the
1995 plan 130,000 -- --
10% stock dividend 25,708 19,037 --
Options granted (150,130) 150,130 10.00-14.09
Options exercised -- (7,380) 8.13-11.00
Options cancelled 35,080 (35,080) 8.13-14.90
Options expired under
1980 plan (220) (220) 14.55
------- ------- -----------
Balance at December 31, 1995 69,817 359,337 $6.48-14.09
======= ======= ===========
</TABLE>
At December 31, 1995, 144,461 options were exercisable at prices ranging
from $6.48 to $14.09 per share.
(10) EMPLOYEE BENEFIT PLANS
The Company has a stock bonus plan covering substantially all employees who
satisfy the age and length of service requirements. Under the terms of the
plan, the Company contributes to a trust fund such amounts (not to exceed 15%
of compensation) as determined annually by the Board of Directors. The
Company's contribution was approximately $200,000, $60,000 and $0 for 1995,
1994 and 1993, respectively.
The Company has a pretax savings and profit sharing plan under Section 401(k)
of the Internal Revenue Code. The employees of the Company are eligible to
participate in the 401(k) profit sharing plan if they are twenty-one years of
age or older and have completed 500 hours of service. Under the plan, eligible
employees are able to contribute up to 10% of their compensation (some
limitations apply to highly compensated employees). Company contributions are
discretionary and are determined annually by the Board of Directors. The
Company's contribution was approximately $60,000, $24,000 and $75,000 for 1995,
1994 and 1993, respectively.
The Company has an employment agreement with certain executive officers
covering an approximate three year period. This agreement
20
<PAGE> 22
contains an incentive compensation provision which provides for payment, in
addition to regular salary, of an amount based upon Company earnings (adjusted
for certain transactions) in excess of a stated return on equity. The agreement
also provides for a defined benefit pension plan that includes the following
pension costs for the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Service cost of benefits earned during the year $ 42,000 $25,000
Interest costs of projected benefit obligation 58,000 38,000
Amortization of net loss 11,000 7,000
Net amortization and deferral 23,000 23,000
- -------------------------------------------------------------------------------
$134,000 $93,000
===============================================================================
</TABLE>
The funded status of the plan at December 31, 1995 and 1994 was as follows:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Actual present value of
vested benefit obligation $831,000 $496,000
===============================================================================
Accumulated and projected benefit obligation $831,000 $496,000
Plan assets at fair value - -
- -------------------------------------------------------------------------------
Projected benefit obligation
in excess of plan assets 831,000 496,000
Unrecognized net (loss) gain (93,000) 9,000
Unrecognized prior service cost (57,000) (80,000)
- -------------------------------------------------------------------------------
Accrued pension and retirement cost included
in accompanying financial statements 681,000 425,000
Additional minimum liability 150,000 71,000
- -------------------------------------------------------------------------------
Required minimum liability $831,000 $496,000
===============================================================================
</TABLE>
The projected benefit obligation was determined using a weighted-average
assumed discount rate of 7.00 per cent and 9.00 percent for the years ended
December 31, 1995 and 1994, respectively.
(11) OTHER EXPENSES
A summary of other operating expenses follows:
<TABLE>
<CAPTION>
1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Data processing $1,307,000 $1,269,000 $1,296,000
Assessment and processing fees 412,000 811,000 800,000
Legal 284,000 170,000 244,000
Marketing 500,000 264,000 276,000
Merchant discounts 131,000 437,000 394,000
Customer service 202,000 172,000 174,000
Other 2,277,000 2,419,000 2,306,000
- -------------------------------------------------------------------------------
$5,113,000 $5,542,000 $5,490,000
===============================================================================
</TABLE>
(12) COMMITMENTS AND CONTINGENCIES
The Company leases facilities from nonaffiliated parties under operating
leases expiring at various dates through April 2011. A majority of the leases
contain renewal options covering periods ranging from one to thirty years.
Certain leases for bank premises provide for the payment by the lessee of
property taxes, insurance premiums, cost of maintenance and other items. Total
rental expense before sublease rental income amounted to approximately
$1,092,000, $918,000 and $957,000 in 1995, 1994 and 1993, respectively.
In connection with the 1986 sale of its North San Bernardino branch, the
Company subleased the facilities to the nonaffiliated purchaser under a lease
which expires in February 2006, with one renewal option for five years. Rental
income for 1995, 1994 and 1993 under this lease was approximately $108,000 each
year.
Future minimum rental payments and rental income receivable under
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING RENTAL SUBLEASE NET
DECEMBER 31 EXPENSE INCOME EXPENSE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 958,000 213,000 745,000
1997 866,000 188,000 678,000
1998 778,000 161,000 617,000
1999 785,000 108,000 677,000
2000 689,000 108,000 581,000
Thereafter 4,175,000 549,000 3,626,000
- -------------------------------------------------------------------------------
$8,251,000 $1,327,000 $6,924,000
===============================================================================
</TABLE>
In the normal course of business, the Bank makes various commitments and
incurs certain contingent liabilities which are not reflected in the
accompanying consolidated financial statements. These commitments and
contingencies include various guarantees, commitments to extend credit and
standby and commercial letters of credit. At December 31, 1995 and 1994, the
Bank had outstanding commitments to extend credit of approximately $77,209,000
and $41,351,000, respectively, of which $1,808,000 and $3,112,000, respectively,
related to standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Standby
letters of credit and financial guarantees written are conditional commitments
issued by the Bank to guarantee the performance of a customer to a third party.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan facilities
to customers. The Bank evaluates each customer's credit-worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the counter-party. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and income-producing commercial
properties.
REGULATORY MATTERS
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991. Regulations implementing
the prompt corrective action provisions of FDICIA became effective on December
19, 1992. In addition to the prompt corrective action requirements, FDICIA
includes significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the Federal regulatory agencies,
increased reporting requirements for insured institutions and new regulations
concerning internal controls, accounting and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized", "adequately capitalized", "undercapitalized",
"significantly undercapitalized" and
<PAGE> 23
"critically undercapitalized". Institutions categorized as "under capitalized"
or worse are subject to certain restrictions, including the requirement to file
a capital plan with its primary Federal regulator, prohibitions on the payment
of dividends and management fees, restrictions on executive compensation and
increased supervisory monitoring, among other things. Other restrictions may
be imposed on the institution by the FDIC, including requirements to raise
additional capital, sell assets or sell the entire institution.
To be considered "adequately capitalized", an institution must generally
have a leverage ratio of at least 4%, a Tier 1 risk-based capital ratio of at
least 4% and a total risk-based capital ratio of at least 8%. An institution is
deemed to be "critically undercapitalized" if it has a tangible equity ratio of
2% or less.
At December 31, 1995, the Bank's leverage ratio was 9.47%, Tier 1
risk-based ratio was 13.09% and total risk-based ratio was 14.35% (unaudited).
At December 31, 1995 the Bank is in the "well-capitalized" category.
At periodic intervals, both the FDIC and the state banking regulators
routinely examine the Company's financial statements as part of their legally
prescribed oversight of the banking industry. As a result of an examination,
the Company entered into an informal agreement (the "Agreement") with the FDIC
in 1993. The Agreement contains certain restrictions on the Company's
operations such as requirements for the Company to reduce the level of
classified assets, maintain an adequate loan loss reserve and minimum capital
levels, revise written plans and policies and comply with additional periodic
reporting requirements, as well as a requirement for regulatory approval of
dividends. Management has implemented policies and procedures and has achieved
the quantitative goals which satisfy the provisions of the Agreement. On May
3, 1995, the FDIC removed the Agreement based upon the results of its most
recent examination.
LITIGATION
The Company is party to various lawsuits which have arisen in the normal
course of its business. In the opinion of management, based upon the advice of
the Company's legal counsel, the disposition of all pending litigation will not
have a material adverse effect on the Company's consolidated financial
statements.
(13) FEDERAL RESERVE ACT
Section 23A of the Federal Reserve Act restricts the Bank from making
loans or advances to the Company in excess of 10% of its capital stock and
surplus. Each loan or extension of credit to the Company must be secured at
the time of transaction by collateral having a market value of 100% or 130%,
depending on the collateral, of the amount funded. At December 31, 1995, the
Bank is permitted to make loans of approximately $3,180,000 to the Company.
(14) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates,
methods, and assumptions are set forth below for the Bank's financial
instruments.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
the value:
CASH AND SHORT-TERM INVESTMENTS
For cash and short-term investments, the carrying amount is a reasonable
estimate of fair value.
SECURITIES
The fair value of the securities is estimated based on bid prices published
in financial sources or bid quotations received from securities dealers.
LOAN RECEIVABLES
Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair value of loans is calculated by discounting
estimated future cash flows using current rates that similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and money market
deposits is the amount payable on demand at the reporting date. The fair value
of certificates of deposit is based on the discounted value of contractual cash
flows using market rates.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair value of
guarantees and letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date.
<TABLE>
<CAPTION>
1995 1994
- --------------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short-term investments $ 41,933 $ 41,933 $ 32,950 $ 32,950
Securities available-for-sale 86,580 86,580 86,107 86,107
Securities held-to-maturity 7,087 7,212 586 562
Commercial loans held for sale - - 3,274 3,470
Loans and direct lease financing, net 233,692 222,111 166,310 165,058
- --------------------------------------------------------------------------------------------
Financial liabilities:
Deposits $333,278 $333,477 $271,326 $288,723
Federal funds purchased 3,772 3,772 1,030 1,030
- --------------------------------------------------------------------------------------------
Unrecognized financial instruments:
Commitments to extend credits - $ (14) - $ (79)
Standby letters of credit - - - -
- --------------------------------------------------------------------------------------------
</TABLE>
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect a premium or discount that could result from offering
for sale at one time the Bank's entire holdings of a particular financial
instrument. Because no markets exists for a significant portion of the Bank's
financial instruments, fair value estimates are based on judgements regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgement and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the
22
<PAGE> 24
estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets or liabilities include the property, plant,
equipment, and goodwill. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
(15) CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Following are condensed balance sheets for Eldorado Bancorp only as of
December 31, 1995 and 1994, and condensed statements of earnings and cash flows
for each of the years in the three-year period ended December 31, 1995.
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994 1995 1994
- --------------------------------------------------------------------
<S> <C> <C>
Assets
Cash $ 774,000 $ 223,000
Securities available-for-sale 26,000 25,000
Investment in subsidiary 42,067,000 28,760,000
Other assets 94,000 86,000
- --------------------------------------------------------------------
$42,961,000 $29,094,000
====================================================================
Liabilities and shareholders' equity
Accrued expenses $ 588,000 $ -
- --------------------------------------------------------------------
Shareholders' equity
Preferred stock - -
Common stock 31,798,000 17,462,000
Net unrealized gain (loss) on
securities available-for-sale 400,000 (345,000)
Retained earnings 10,175,000 11,977,000
- --------------------------------------------------------------------
Total shareholders' equity 42,373,000 29,094,000
- --------------------------------------------------------------------
$42,961,000 $29,094,000
====================================================================
</TABLE>
<PAGE> 25
STATEMENT OF EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other income $ 3,000 $ -- $ 1,000
Other expenses 253,000 (119,000) (125,000)
Income tax benefit 116,000 37,000 55,000
- ---------------------------------------------------------------------------------------------------------
(134,000) (82,000) (69,000)
Equity in earnings (loss) of subsidiary 4,638,000 2,638,000 (1,658,000)
- ---------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 4,504,000 $ 2,556,000 $(1,727,000)
=========================================================================================================
</TABLE>
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 4,504,000 $ 2,556,000 $(1,727,000)
Adjustments to reconcile net earnings (loss)
to net cash from operating activities:
Depreciation and amortization 37,000 13,000 13,000
Gains on sales of securities
available-for-sale, net (3,000) -- --
Equity in (earnings) loss of subsidiary (4,638,000) (2,638,000) 1,658,000
Changes in assets and liabilities:
(Increase) decrease in other assets (6,000) 23,000 --
Increase (decrease) in accrued expenses 299,000 -- (220,000)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 193,000 (46,000) (276,000)
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of securities
available-for-sale 8,000 -- --
Dividends received from subsidiary 1,290,000 545,000 320,000
Purchase of equipment (42,000) -- --
- ---------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 1,256,000 545,000 320,000
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from stock options exercised 62,000 35,000 86,000
Dividends paid ($0.32, $0.16, and
$0.08 per share, respectively) (960,000) (441,000) (221,000)
Repurchase of common stock -- -- (59,000)
- ---------------------------------------------------------------------------------------------------------
Net cash used in financing activities (898,000) (406,000) (194,000)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 551,000 93,000 (150,000)
Cash at beginning of year 223,000 130,000 280,000
- ---------------------------------------------------------------------------------------------------------
Cash at end of year $ 774,000 $ 223,000 $ 130,000
=========================================================================================================
</TABLE>
<PAGE> 26
<TABLE>
BOARD OF DIRECTORS
<S> <C> <C> <C> <C>
Burns, Michael B. +Dellerba, Raymond E. +Engen, Rolf J. Fix, Warren D. +Wells, George H.
+Crowell J.B. DiGiovanni, Julia M. Finley, Warren Korsgaard, Richard Chairman of the Board
President Doti, Lynne Pierson Assistant Secretary of the +Sodaro, Donald E.
Chief Executive Officer Board +Member of Executive
Committee
</TABLE>
<TABLE>
ADVISORY BOARD
<S> <C> <C>
ORANGE COUNTY Hon, Barry Webb, Clifton
ADVISORY BOARD President, Hon Development Senior Vice President
Bair, Herb Landauer Associates, Inc.,
Real Estate Appraiser Hull, Larry, Jr. Real Estate Investment
Retired Larco Advisors, Inc. Counselors
Baron, Rudy, C.P.A. Madole, Milt Wood, James L.
Baron Accountancy Madole & Associates Chairman of the Board
J.L. Wood Optical Systems
Carr, Col. Gerald P. Morris, Frank
Skylab III Astronaut Architect, Investment Yeaman, Betty
Senior Consultant, Developer Community Representative
Applied Research, Inc.
Phillips, David J. SOUTH COUNTY
Casey, Robert E., M.D. President, David J. Phillips ADVISORY BOARD
Retired Buick-Pontiac-Mazda
Arsenault, Robert
Day, Gary Reilly, Philip J. Gallant/Charger Publications, Inc.
President Former President
GDR Contractors, Inc. Mission Viejo Co. Berger, Dwayne
Retired
DeVries, Jack Chou, Lydia
Dairy Farmer Ryan, Douglas B., D.D.S. Owner, Pach & Company
Retired
Schmid, Don W. Demetrescu, Mihai C., Ph.D.
Fernald, John M., M.D. BFI Constructors, Inc. Lasergraphics, Inc.
Retired
Schwab, Hon. Philip E. Finigan, Harry
Finley, Wendell W. Superior Court Judge Money Mailer of Orange Coast
C.P.A., Retired Retired
Fleming, James, Ph.D.
Garrison, John Scudder, Mark F. Superintendent, CUSD
RAGCO Inc. President
Alliance Investment Group Holiday, Craig and Carol
Hall, Robert Holiday Consulting
Bridgemark Corporation Smith, George
President Majerick, Nancy
Hayes, Charles TAB Communication Coast Property Management
President
OCB Reprographics, Inc. Stellar, Anthony, M.D. Marcus, Alan, M.D.
South Orange County
Holthe, Maureen J. Threshie, R. David, Jr. Endocrinology
Travel Consultant Publisher, Orange County
Register
</TABLE>
<TABLE>
<S> <C>
McCanne, Don, M.D. Foster, John
President
Moffatt, William, M.D. Foster & Gardner
Nichols, Robert F., Jr. Hunt, Tom
Nichols & Andrews City Councilman
City of Indio
Quigley, Michael
Quigley Insurance Services, Inc. Kaufman, Frances
Travel Consultant
Small, Wayne Newporter Travel
Renwes Sales
Jacoy, Alex
Van Dam, Theodore, M.D. General Manager
Eldorado Polo Club
Wax, Robert E., M.D.
Peterson, Les, C.P.A.
Wiles, Gary Peterson, Slater & Butvidas
Carl's Jr. Restaurants Accountancy Corporation
Winton, Margaret T. Shuster, Michael
National Confectionery
RIVERSIDE COUNTY Brands
ADVISORY BOARD
Slater, John T., Jr., P.A.
Alf, Walter Peterson, Slater & Butvidas
Partner Accountancy Corporation
Nutritional Food Products
SAN BERNARDINO COUNTY
Barta, Don ADVISORY BOARD
President
Sun & Citrus, Inc. Dunfee, Jude
Chief Financial Officer
Druehl, Bradley Sunrise Building Corporation
President & Chief Executive
Officer, Sfingi & Hannon Gunn, Mark
Insurance Services Attorney-at-Law
Fisher, Craig, M.D. Heywood, Hal
President
Fitzhenry, Jim Western Empire Industries
Manager
Fitzhenry Funeral Home
</TABLE>
STOCK MARKET INFORMATION
The common stock of Eldorado Bancorp is traded on the American Stock Exchange
(ASE) under the symbol ELB. The Company had 896 shareholders of record as of
December 31, 1995. The following table shows the range of prices reported to the
Company for the periods indicated.
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C> <C> <C>
First Quarter 11 10 1/8 8 3/8 6 3/4
Second Quarter 13 10 10 1/2 7 1/2
Third Quarter 15 1/2 11 3/4 12 1/2 9 3/4
Fourth Quarter 14 16 7/8 10 3/8 9 3/4
</TABLE>
FORM 10-K REPORTS
A copy of the Company's Form 10-K report filed with the Securities and Exchange
Commission for the 1995 fiscal year can be obtained by writing to:
Corporate Secretary's Office
Eldorado Bancorp
17752 E. 17th Street
Tustin, CA 92680
TRANSFER AGENT AND REGISTRAR INDEPENDENT AUDITORS
First Interstate Bank KPMG Peat Marwick LLP
Los Angeles, CA Orange County, CA
ANNUAL MEETING
April 17, 1996 at 9:00 a.m. at the Sheraton Newport Hotel, located at 4545
MacArthur Boulevard, Newport Beach, California.
In Memorium
The Board of Directors, Officers and Staff of Eldorado Bank would like to
express their sorrow at the loss of the following individuals, who passed away
in 1995 and early 1996:
Andrew J. Sfingi
Director, Eldorado Bank and Eldorado Bancorp
Walter R. Schmid
Founding Chairman of the Board, Eldorado Bank
William Moses, Sr.
Founding Eldorado Bank Advisory Board Member
Paul Wickman
Founding Eldorado Bank Advisory Board Member
Each individual has been an important part of the Bank's success throughout the
years. They, and the leadership they have always provided, will be missed.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Eldorado Bancorp:
We consent to incorporation by reference in the registration statements (Nos.
333-00091, 2-73352, 33-31416, 33-46375 and 33-49482) on Form S-8 of Eldorado
Bancorp of our report dated February 6, 1996, relating to the consolidated
balance sheets of Eldorado Bancorp and subsidiary (the "Company") as of December
31, 1995 and 1994, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1995, which report appears in the December 31, 1995,
annual report on Form 10-K of Eldorado Bancorp.
Our report on the consolidated financial statements of the Company, dated
February 6, 1996, contains an explanatory paragraph that states that the
Company adopted the provisions of the Financial Accounting Standards Board's
Statements of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities in 1994 and No. 114, Accounting by
Creditors for Impairment of a Loan as amended by No. 118, Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures in 1995.
KPMG Peat Marwick LLP
Orange County, California
March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 32,233
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 86,580
<INVESTMENTS-CARRYING> 7,087
<INVESTMENTS-MARKET> 7,212
<LOANS> 229,957
<ALLOWANCE> 6,265
<TOTAL-ASSETS> 383,186
<DEPOSITS> 333,278
<SHORT-TERM> 3,772
<LIABILITIES-OTHER> 3,763
<LONG-TERM> 0
0
0
<COMMON> 31,798
<OTHER-SE> 10,575
<TOTAL-LIABILITIES-AND-EQUITY> 383,186
<INTEREST-LOAN> 18,592
<INTEREST-INVEST> 5,415
<INTEREST-OTHER> 968
<INTEREST-TOTAL> 24,975
<INTEREST-DEPOSIT> 5,543
<INTEREST-EXPENSE> 5,823
<INTEREST-INCOME-NET> 19,152
<LOAN-LOSSES> 756
<SECURITIES-GAINS> 48
<EXPENSE-OTHER> 14,752
<INCOME-PRETAX> 7,665
<INCOME-PRE-EXTRAORDINARY> 7,665
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,504
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 6.75
<LOANS-NON> 5,818
<LOANS-PAST> 380
<LOANS-TROUBLED> 1,531
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,564
<CHARGE-OFFS> 1,311
<RECOVERIES> 439
<ALLOWANCE-CLOSE> 6,265
<ALLOWANCE-DOMESTIC> 6,265
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
