<PAGE> 1
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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO 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 (I.R.S. Employer Identification
incorporation or organization) Number)
17752 EAST SEVENTEENTH STREET, TUSTIN, CALIFORNIA 92680
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 798-1100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
COMMON STOCK, NO PAR VALUE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /x/ No / /
The aggregate market value of the voting stock held by nonaffiliates of
the registrant based upon the closing sale price of its Common Stock on the
American Stock Exchange on February 6, 1997, was approximately $64,350,000.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 the Form l0-K or any amendment to this
Form 10-K. / /
The number of shares of Common Stock outstanding as of March 3, 1997:
3,811,746
1
<PAGE> 2
ELDORADO BANCORP 1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Business
General 3
Competition 4
Selected Statistical Financial Data 5
Distribution of Assets, Liabilities and Shareholders' Equity;
Interest Rates and Interest Differential 5
Investment Portfolio 9
Loan Portfolio 9
Summary of Loan Loss Experience 12
Deposits 14
Return on Equity and Assets 15
Supervision and Regulation 15
Effects of Governmental Monetary Policies and Recent Legislation 22
Current Accounting Pronouncements 24
Employees 24
Item 2. Properties 24
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Shareholders 26
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 27
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Highlights of Financial Performance 29
Net Interest Income and Margin 29
Provision for Possible Credit Losses 30
Other Income 31
Operating Expense 31
Asset Growth and Mix 31
Deposit Growth and Mix 32
Capital Management 32
Liquidity and Interest Sensitivity 33
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 63
PART III
Item 10. Directors and Executive Officers of the Registrant 64
Item 11. Management Remuneration 70
Item 12. Security Ownership of Certain Beneficial Owners and Management 79
Item 13. Certain Relationships and Related Transactions 80
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 81
</TABLE>
2
<PAGE> 3
ITEM 1. BUSINESS
GENERAL
The Company
Eldorado Bancorp (the "Company") 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. The Company'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 the Company.
The Company has no subsidiary or affiliated business other than the
Bank. The Company has not entered into any of the permitted non-banking
activities. On December 24, 1996 the Company entered into an Agreement and Plan
of Merger with Commerce Security Bancorp, Inc. providing for the acquisition of
100 percent of the outstanding shares of the Company in exchange for the right
to receive $23.00 cash for each share tendered.
Unless otherwise indicated, all information herein is as of December
31, 1996.
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 twelve 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 60 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 with and into the Bank in April 1982. The Bank's expansion into San
Bernardino occurred with the acquisition of American Security Bank in August
1980. In March 1988 the Company acquired American Merchant Bank, which was then
merged into the Bank in May 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 in October 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 banking office in that city and two branch
banking offices in San Juan Capistrano and Monarch Beach. The Bank consolidated
its two branch banking offices in San Clemente into the former Mariners Bank
branch banking offices. In September 1996, the bank expanded into Los Angeles
County with the opening of a de novo branch banking office in the Long Beach
Community Hospital in the City of Long Beach, which is approximately 30 miles
south of Los Angeles.
3
<PAGE> 4
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, Los Angeles, 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 real estate loans and consumer loans, Small Business
Administration-guaranteed loans, corporate cash management services,
international banking services 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 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.
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. The opening of
the de novo branch banking office within the Long Beach Community Hospital
reflects a current strategy of targeting captive markets, e.g. medical
professionals, with relatively low cost facilities as compared to a traditional
branch banking office. The Long Beach office is a full service branch banking
office contained in approximately 400
4
<PAGE> 5
square feet and staffed by a full-time equivalent of 3 personnel. The branch
offers an automated teller machine and night drop services.
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.
SELECTED STATISTICAL FINANCIAL DATA
Distribution of Assets, Liabilities and Shareholders' 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-bearing assets
and the resultant yields, and the dollar amounts of interest expense and average
interest-bearing liabilities,
5
<PAGE> 6
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,
----------------------------------------------------------------------------------------
1996 1995 1994
----------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------
(Dollar in thousands, interest and rates on taxable equivalent basis)(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-Earning Assets:
Investment securities $103,052 $ 6,202 6.02% $ 86,012 $ 5,438 6.32 % $ 75,592 $ 3,774 4.99%
Federal funds sold 19,455 1,033 5.31 14,347 846 5.90 22,467 905 4.03
Other earning assets 716 88 12.2 978 122 12.4 1,754 227 12.94
9 8
Loans (2) 221,486 21,911 9.89 183,087 18,605 10.1 177,111 16,183 9.14
6
---------------------------- --------------------------- --------------------------
Total interest-earning assets 344,709 29,234 8.48% 284,424 25,011 8.79 % 276,924 21,089 7.62%
Total non interest-earning assets 47,065 34,305 36,641
-------- -------- --------
Total average assets $391,774 $318,729 $313,565
======== ======== ========
Average Liabilities and
Shareholders' Equity
Interest-Bearing Liabilities:
Savings, NOW and money
market $152,644 $ 3,034 1.94% $141,397 $ 2,875 2.03 % $160,695 $ 3,103 1.93%
Time deposits of $100,000 or
more 35,355 1,900 5.37 24,350 1,211 4.97 23,040 725 3.15
Other deposits 49,248 2,471 5.02 29,618 1,457 4.92 24,885 782 3.14
Short-term borrowings 2,204 121 5.49 5,052 280 5.54 361 16 4.43
---------------------------- --------------------------- --------------------------
Total average interest-
bearing liabilities 239,451 7,526 3.14% 200,418 5,823 2.91 % 208,981 4.626 2.21%
Non Interest-Bearing Liabilities
and Shareholders' Equity:
Demand deposits 103,420 83,290 73,915
Other liabilities 4,213 3,584 2,110
Shareholders' equity 44,690 31,437 28,559
-------- -------- --------
Total average liabilities and
shareholders' equity $391,774 $318,729 $313,565
======== ======== ========
Net Interest Income (3) $ 21,708 $ 19,188 $16,463
-------- -------- -------
Net Yield on Interest-Earning Assets 5.34 % 5.88 % 5.41%
Net Interest Margin 6.30 % 6.75 % 5.94%
---- ---- ----
</TABLE>
(1) Total interest income includes the effects of taxable-equivalent
adjustments, using tax rates which approximate 41 percent for 1996,
1995 and 1994.
(2) Net of unearned income.
(3) Net interest margin is net interest income divided by average total
interest-earning assets.
6
<PAGE> 7
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, 1996 Year Ended December 31, 1995
over over
Year Ended December 31, 1995 Year Ended December 31, 1994
---------------------------------------- -----------------------------------------
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 $1,077 $ (313) $ 764 $520 $1,144 $1,664
Federal funds sold 301 (114) 187 (327) 268 (59)
Other earning assets (33) (1) (34) (100) (5) (105)
Loans 3,902 (596) 3,306 546 1,876 2,422
---------------------------------------- -----------------------------------------
Total interest income $5,247 $(1,024) $4,223 $639 $3,283 $3,922
Interest-Bearing Liabilities:
Savings, NOW and money market 230 (71) 159 (374) 146 (228)
Time deposits of $100,000 or more 547 142 689 41 445 486
Other deposits 966 48 1,014 149 526 675
Short-term borrowings (158) (1) (159) 208 56 264
---------------------------------------- -----------------------------------------
Total interest expense 1,585 118 1,703 24 1,173 1,197
---------------------------------------- -----------------------------------------
Interest differential or net interest
income $3,662 $(1,142) $2,520 $ 615 $2,110 $2,752
======================================== =========================================
</TABLE>
The following table shows the interest sensitivity gaps for the cumulative gap
for the periods sown as of December 31, 1996:
<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 $ 28,400 $ -- $ -- $ --
Securities available-for-sale 24,081 42,726 26,499 2,613
Securities held-to-maturity -- -- 3,999 4,083
Loans and lease financing 100,102 67,099 39,086 17,617
--------- --------- --------- ---------
Total $ 152,583 $ 109,825 $ 69,584 $ 24,313
Interest-Bearing Liabilities:
Savings, NOW and money market 156,857 -- -- --
Time deposits 40,996 33,387 10,750 --
Short-term borrowings 2,188 -- -- --
--------- --------- --------- ---------
Total $ 200,041 $ 33,387 $ 10,750 $ --
Cumulative interest rate sensitivity gap ($ 47,458) $ 28,980 $ 87,814 $ 112,127
Cumulative interest rate sensitivity gap
to total assets (11.7)% 7.1% 21.6% 27.6%
</TABLE>
7
<PAGE> 8
Investment Portfolio
The following table summarizes the components of investment securities
at December 31 of each year indicated:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1996 1995 1994
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 $89,083 $89,172 $76,436 $76,892 $76,948 $76,410
State and political subdivisions 983 985 1,195 1,202 290 295
Corporate debt 1,811 1,844 4,327 4,431 7,389 7,281
Mortgage-backed 3,185 3,276 3,907 4,024 2,055 2,121
Other 628 642 31 31 --- ---
----------------------------------------------------------------------------
Total $95,690 $95,919 $86,896 $86,580 $86,682 $86,107
============================================================================
Securities held-to-maturity:
U.S. Treasury and agency $ 6,992 $ 6,939 $ 5,998 $ 6,051 $ --- $ ---
State and political subdivisions 589 630 587 645 586 567
Corporate debt 501 505 502 516 --- ---
----------------------------------------------------------------------------
Total $ 8,082 $ 8,074 $ 7,087 $ 7,212 $586 $562
============================================================================
</TABLE>
The following table summarizes the maturities of securities and the
weighted average yields at December 31, 1996:
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------
(In Thousands)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <S> <C>
Securities available-for-sale:
U.S. Treasury and agency $65,171 5.75% $23,000 6.01 % $1,002 7.12 % $ --- --- %
State and political subdivisions 117 7.38 586 6.52 282 6.29 1,230 8.85
Corporate debt 807 8.16 1,037 9.50 --- --- --- ---
Mortgage-backed 70 9.40 1,876 7.50 99 9.59 --- ---
Other 642 2.60 --- --- --- --- --- ---
------------------ ------------------- ------------------ ------------------
Total $66,807 5.76% $26,499 6.26 % $1,383 7.13 % $1,230 8.85 %
================== =================== ================== ==================
Securities held-to-maturity:
U.S. Treasury and agency $ --- --- $ 3,498 6 .01 % $3,494 7.29 % $ --- ---
State and political subdivisions --- --- --- --- 589 8.00 --- ---
Corporate debt --- --- 501 8.15 --- --- --- ---
------------------ ------------------- ------------------ ------------------
Total $ --- --- $ 3,999 6.28 % $4,083 7.39 % $ --- ---
================== =================== ================== ==================
</TABLE>
8
<PAGE> 9
Also included in securities available-for-sale at December 31, 1996 are
perpetual equity securities totaling $642,000 with insignificant dividend yield.
Loan Portfolio
Types of Loans. 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,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans:
Commercial, secured and unsecured $ 101,798 $ 94,548 $ 66,987 $ 67,723 $ 74,603
Interim construction 14,464 19,219 4,789 13,039 21,595
Real estate 77,570 88,097 78,607 80,088 90,985
Installment 27,623 26,553 18,945 17,961 21,374
Credit card 1,864 1,791 1,298 1,357 1,456
Lease financing 668 876 1,286 2,716 3,515
Less: Unearned income (83) (127) (38) (419) (739)
---------------------------------------------------------------------
Total $223,904 $ 229,957 $ 171,874 $ 182,465 $ 212,789
=====================================================================
</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, 1996:
<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 $ 75,948 $17,752 $ 8,098 $101,798
Interim construction 10,791 2,522 1,151 14,464
Real estate 57,872 13,527 6,171 77,570
Installment 20,609 4,817 2,197 27,623
Credit card 1,864 --- --- 1,864
Lease financing 200 468 --- 668
Less: Unearned income (83) --- --- (83)
--------------------------------------------------------------
Total $167,201 $39,086 $17,617 $223,904
==============================================================
</TABLE>
<TABLE>
<CAPTION>
Maturing
-------------------------------------------
Within One After One
Year Year Total
-------------------------------------------
<S> <C> <C> <C>
Loans with predetermined interest rates $ 26,465 $48,757 $ 75,222
Loans with floating or adjustable interest rates 140,736 7,946 148,682
-------------------------------------------
Total $167,201 $56,703 $223,904
===========================================
</TABLE>
9
<PAGE> 10
Risk Elements. Nonaccrual, Past Due and Restructured Loans. The following table
summarizes the loans for which the accrual of interest has been discontinued and
loans more that 90 days past due and still accruing interest at December 31 of
each year indicated:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $4,661 $5,818 $3,161 $2,092 $2,927
Loans more than 90 days past due 11 380 246 56 361
--------------------------------------------------------------
Total nonperforming loans $4,672 $6,198 $3,407 $2,148 $3,288
==============================================================
</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 $343,000, $172,000, $144,000, $108,000,
and $103,000 for 1996, 1995, 1994, 1993, and 1992 respectively.
Troubled Debt Restructurings
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Troubled debt restructurings $3,425 $1,531 $7,069 $ 1,432 $ ---
</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 $496 thousand for the year ended December 31, 1996. Under
the restructured terms, recorded interest income amounted to $316 thousand for
the year ended December 31, 1996.
Risk Elements. Potential Problem Loans. Potential problem loans are accounted
for under 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, 1996,
total nonaccrual loans of
10
<PAGE> 11
$3,425,000 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, 1996:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------------
Allowance Allowance
Recorded for Possible Recorded for Possible
Investment Credit Losses Investment Credit Losses
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Impaired loans requiring an allowance
for possible credit losses $4,060,000 $449,000 $5,077,000 $1,985,000
Impaired loans not requiring an allowance
for possible credit losses --- --- 741,000 ---
--------------------------------------------------------------
$4,060,000 $449,000 $5,818,000 $1,985,000
==============================================================
</TABLE>
11
<PAGE> 12
Risk Elements. Loan Concentrations.
Summary of Loan Loss Experience
Allowance and Provision for Possible Credit Losses. The following table shows
the activity and the balances of the allowance for possible credit losses for
and at the end of the years indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1996 1995 1994 1993 1992
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for possible credit losses:
Balance at beginning of period $6,265 $5,564 $4,740 $3,530 $3,757
Actual charge-offs:
Commercial 197 342 570 502 574
Interim construction --- --- --- 590 741
Credit cards 44 36 36 35 66
Consumer 198 165 151 98 494
Real estate 1,532 763 720 1,277 142
Direct lease financing 5 5 97 32 60
----------------------------------------------------------------------
Total charge-offs 1,976 1,311 1,574 2,534 2,077
Less recoveries:
Commercial 80 156 118 27 54
Interim construction --- --- --- 11 ---
Credit cards 10 9 13 21 5
Consumer 86 49 30 106 50
Real estate 47 225 --- --- ---
Direct lease financing 7 --- 8 3 6
----------------------------------------------------------------------
Total recoveries 230 439 169 168 115
----------------------------------------------------------------------
Net loans charged off 1,746 872 1,405 2,366 1,962
Provision for credit losses 153 756 2,006 3,576 1,735
Changes incident to acquisitions --- 817 223 --- ---
----------------------------------------------------------------------
Balance at end of period $4,672 $6,265 $5,564 $4,740 $3,530
======================================================================
Ratios:
Net loans charged off to average
loans 0.79% 0.47% 0.79% 1.22% 0.84%
Allowance for credit losses to total
gross loans 2.09% 2.72% 3.24% 2.60% 1.66%
Net loans charged off to allowance
for credit losses 37.37% 13.92% 25.25% 49.92% 55.58%
Net loans charged off to provision
for credit losses 1,141.18% 115.34% 70.04% 66.16% 113.08%
Allowance for credit losses to non-
performing loans 100.24% 101.08% 163.31% 220.07% 107.36%
</TABLE>
12
<PAGE> 13
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.
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.
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
13
<PAGE> 14
incurred within the categories of loans set forth in the following table:
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
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 $2,126 45.5% $2,117 33.8% $2,281 39.0% $2,164 37.1% $1,715 35.1%
Interim Construction 304 6.5% 280 4.5% 310 2.8% 325 7.1% 440 10.1%
Real estate 1,616 34.6% 3,274 52.3% 2,597 45.7% 1,780 43.9% 1,091 42.8%
Installment 575 12.3% 500 8.0% 271 11.0% 334 9.8% 245 10.0%
Credit card 37 0.8% 64 1.0% 52 0.8% 101 0.8% 11 0.7%
Lease financing 14 0.3% 30 0.4% 53 0.7% 36 1.3% 28 1.3%
----------------------------------------------------------------------------------------------------
Total $4,672 100.0% $6,265 100.0% $5,564 100.0% $4,740 100.0% $3,530 100.0%
====================================================================================================
</TABLE>
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 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, 1996 the Bank had other real estate owned
of approximately $394,000 consisting primarily of an unimproved commercial lot.
Deposits
The average amount of deposits is summarized for each year indicated
below:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1996 1995 1994
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 $ 54,224 1.02% $ 45,443 1.03% $ 45,813 1.01%
Savings and money market 98,420 2.52 95,955 2.51 114,882 2.30
Time 84,603 5.17 53,968 4.94 47,925 3.14
----------------------------------------------------------------------------
Total interest-bearing deposits 237,247 3.12 195,366 2.84 208,620 2.21
Noninterest-bearing deposits 103,420 --- 83,290 --- 73,915 ---
----------------------------------------------------------------------------
Total average deposits $ 340,667 2.17% $ 278,656 1.99% $ 282,535 1.63%
============================================================================
</TABLE>
14
<PAGE> 15
Maturities of domestic time certificates of deposit of $100,000 or more
at December 31, 1996 are:
<TABLE>
<S> <C>
Three months or less .......................$18,153
Over three months through six months........ 4,883
Over six through twelve months ............. 9,765
Over twelve months ......................... 4,550
-------
$37,351
========
</TABLE>
Return on Average Equity and Average Assets
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Percentage of net earnings to:
Average total assets 1.42% 1.41% 0.82%
Average shareholders' equity 12.49% 14.33% 8.95%
Percentage of cash dividends declared
to net earnings 25.04% 21.31% 17.25%
Percentage of average shareholders'
Equity to average total assets 11.41% 9.86% 9.11%
</TABLE>
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, 1996 the Company had a ratio of qualifying total capital to risk-weighted
assets of 16.73%, of which 15.47% was in the form of Tier 1 Capital.
Additionally, the Federal Reserve
15
<PAGE> 16
Board established a minimum leverage ratio of 3%. At December 31, 1996, the
Company's leverage ratio was 9.99%. For a more complete description of the
Federal Reserve Board's risk-based and leverage capital guidelines, see "Item 1.
Business - Supervision and Regulation - Capital Adequacy Guidelines."
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.
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.
16
<PAGE> 17
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. 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.
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, 1996, the Bank had a
ratio of total qualifying capital to risk-weighted assets of 15.56%, of which
14.30% 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, 1996, the Bank's leverage
ratio was 9.53%. For a more complete description of the FDIC's risk-based
capital regulations, see "Item 1. Business - Supervision and Regulation -
Capital Adequacy Guidelines".
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
17
<PAGE> 18
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.
<TABLE>
<CAPTION>
Minimum Eldorado Eldorado Bank
Regulatory Bancorp
-------------------------------------------
<S> <C> <C> <C>
Tier I Leverage Ratio................................. 3.00% 9.99% 9.53%
Tier I Risk-based Ratio............................... 4.00% 15.47% 14.30%
Total Risk-based Ratio................................ 8.00% 16.73% 15.56%
</TABLE>
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 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, 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
18
<PAGE> 19
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
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. Rules
published by the FDIC set forth certain types of activities that the FDIC 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
19
<PAGE> 20
expressly provided by FDICIA to the imposition of national bank standards in the
area of insurance underwriting activities include, under certain circumstances,
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 FDIC rules 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 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. 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.
Standards for Safety and Soundness. FDICIA required each federal banking agency
to 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 and earnings levels;
and (iii) employee compensation, fees and benefits. The Federal Reserve Board
and the FDIC published interagency safety and soundness standards effective
August 1995. 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 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
20
<PAGE> 21
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 - 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 require depository
institutions to establish and maintain written internal real estate lending
policies. These 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 the lowest
premiums and the weakest institutions paying the highest premiums. The
risk-related premium schedule is established quarterly by the FDIC.
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 - 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.
Section 104 of the FDICIA provided 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, the deposit insurance
assessment rates were reduced. Institutions deemed to have the highest risk pay
up to $0.27 for every $100 of deposits annually while those deemed to have the
least risk pay no insurance premium. Under the risk-related premium schedule,
the Bank's annual assessment rate during 1996 was zero and paid only the minimum
semi-annual premium of $1,000.
On September 30, 1996 The Deposit Insurance Funds Act was enacted that
provides for a new Financing Corporation (FICO) assessment for BIF members not
tied to the FDIC risk classification. The FICO BIF annual rate is $0.01296 per
$100 in BIF insured deposits effective January 1, 1997.
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
21
<PAGE> 22
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, 1996, the Bank had $9,020,000 legally available
for the payment of cash dividends.
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 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
22
<PAGE> 23
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.
Interstate Banking
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.
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."
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
23
<PAGE> 24
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 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.
On December 24, 1996 the Company entered into the Agreement and Plan of
Merger with Commerce Security Bancorp, Inc. providing for the acquisition of 100
percent of the outstanding shares of the Company in exchange for the right to
receive $23.00 cash for each share tendered.
CURRENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No.125 (SFAS 125), "Accounting for Transfer
and Servicing of Financial Assets and Extinguishment of Liabilities". SFAS 125
addresses the accounting for all types of securitization transactions,
securities lending and repurchase agreements, collateralized borrowing
arrangements and other transactions involving the transfer of financial assets.
SFAS 125 distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS 125 is generally effective for
transactions that occur after December 31, 1996, and it is to be applied
prospectively. SFAS 125 will require the allocation of the total cost of
mortgage loans sold to the mortgage loans sold (servicing released),
interest-only and retained certificates and servicing rights based on their
relative fair values. Under SFAS 125 the interest-only and retained certificates
and servicing rights are assessed for impairment based upon the fair value of
those rights. The pronouncement also requires the additional disclosure about
the interest-only and retained certificates in securitizations and the
accounting for these assets at fair value in accordance with Statement of
Financial Accounting Standards No.115. Management believes the adoption of SFAS
125 on January 1, 1997 will not have a material impact on the Company's
operations.
EMPLOYEES
At December 31, 1996 the Bank had approximately 96 full-time and 74
part-time employees, none of whom was represented by a union or collective
bargaining group or agent. Management believes that its relations with its
employees are satisfactory.
ITEM 2. PROPERTIES
The Company'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.
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 approximately $335,000,
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
24
<PAGE> 25
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 lease
with a ten year term commencing December 1984. The annual rent in 1996 was
approximately $95,000 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.
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.
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 second floor is leased
by the Bank as office space to several tenants.
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, 1996 with an annual rental rate of approximately $42,000.
25
<PAGE> 26
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.
The Long Beach Community branch banking offices is located on the
premises of the Long Beach Community Hospital located at 1720 Termino Avenue,
Long Beach, California subject to an occupancy agreement for a period of five
years commencing September 1, 1996. No rental amount is payable under the
occupancy agreement.
The Bank leases its administrative office facility located at 19100 Von
Karman Avenue, Suite 550 in Irvine, California near the Orange County Airport.
The current lease provides for approximately 12,400 square feet and commenced on
February 1, 1996 for a period of sixteen months expiring June 30, 1997.
Reference is made to Note 12 to the Consolidated Financial Statements
for further information regarding these leases.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings in which the Company 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 the Company or its operations or
properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No reportable events.
26
<PAGE> 27
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the American Stock Exchange
under the symbol "ELB" There were approximately 850 shareholders of record at
December 31, 1996.
The following table shows the range of prices reported to the Company for the
quarters ended:
<TABLE>
<CAPTION>
1996 1995
High Low High Low
<S> <C> <C> <C> <C>
March 31, $16.125 $13.875 $11.000 $10.125
June 30, 15.625 14.625 13.000 10.000
September 30, 20.375 14.875 15.500 11.750
December 31, 22.375 18.500 16.875 14.000
</TABLE>
It is The Company's policy to retain most of its earnings in order to
increase its equity and thereby support continued growth and expansion, however,
the Company declared dividends of $0.37 per share during 1996. The Company
declared its first quarterly cash dividend on November 3, 1986.
27
<PAGE> 28
ITEM 6. SELECTED FINANCIAL DATA
ELDORADO BANCORP AND SUBSIDIARY
FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATIONAL DATA
Net interest income $ 21,653 $ 19,152 $ 16,408 $ 15,893 $ 18,058
Provision for possible credit losses 153 756 2,006 3,576 1,735
Other income 4,372 4,021 4,848 4,979 4,830
Operating expenses 16,401 14,752 14,936 20,141 16,563
Net earnings (loss) 5,580 4,504 2,556 (1,727) 2,758
Net earnings (loss) per common share (2) 1.43 1.36 0.84 (0.57) 0.91
Cash dividends per share 0.37 0.32 0.16 0.08 0.32
Weighted average shares outstanding (2) 3,912,993 3,312,924 3,029,327 3,026,590 3,031,104
Stock dividends -- 10% -- -- --
BALANCE SHEET DATA
Assets $ 406,761 $ 383,186 $ 304,022 $ 323,287 $ 340,782 (1)
Net loans and direct lease financing 219,232 223,692 166,310 177,725 209,259
Deposits 353,404 333,278 271,326 292,799 309,132
Shareholders' equity 46,944 42,373 29,094 27,289 29,210 (1)
Book value per share(2) 12.39 11.35 10.55 9.92 10.64 (1)
FINANCIAL RATIOS
Return on average assets 1.42% 1.41% 0.82% (0.53)% 0.79%
Return on average shareholders' equity 12.5 14.3 9.0 (6.2) 9.8
Total capital to assets at year end 11.5 11.1 9.6 8.4 8.6
Average loans and leases to deposits 65.0 67.6 63.3 65.5 73.1
</TABLE>
(1) Adjusted for retroactive implementation of change in accounting for
income taxes.
(2) Retroactively adjusted for all stock dividends.
28
<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HIGHLIGHTS OF FINANCIAL PERFORMANCE
Eldorado Bancorp reported record net earnings of $5.6 million for 1996
compared to net earnings of $4.5 million and $2.6 million for 1995 and 1994,
respectively. On a per share basis, 1996 recorded net earnings of $1.43 compared
to $1.36 in 1995 and $0.84 in 1994. Total assets increased $23.6 million to
$406.8 million at year-end 1996 from $383.2 million at year-end 1995.
The increase in 1996 net earnings over 1995 levels was primarily due to
a significantly higher volume of earning assets during the 1996 period as a
result of the acquisition of Mariners Bank in the fourth quarter of 1995 and
secondarily due to lower provisions for loan and lease losses. The increased
earnings from these factors were partially offset by a narrowing in the net
interest margin and higher non-interest expense.
The increase in 1995 earnings over 1994 levels was due to wider net
interest margins, lower provisions to the allowance for possible credit losses
and lower non-interest expense.
The two key performance ratios - return on average assets and return on
average equity - were 1.42 percent and 12.49 percent, respectively, for 1996.
The return on average assets for 1995 and 1994 were 1.41 percent and 0.82
percent, respectively. The return on average shareholders' equity for 1995 was
14.33 percent and for 1994 was 8.95 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.
Net interest income on a fully taxable equivalent basis increased $2.5
million, or 13 percent, to $21.7 million from $19.2 million in 1995 and compares
to $16.5 million in 1994. Total interest income for 1996 increased $4.2 million
from 1995 levels primarily due to a significantly higher average volume of
earning assets offset by lower yields on earning assets. The increase in the
volume of earning assets was due to the assets acquired in the Mariners Bank
merger in the fourth quarter of 1995. Total interest expense increased $1.7
million due similarly to an increase in the average volume of deposits from the
Mariners Bank merger. A significantly greater increase in the interest on
earnings assets than the increase in the interest expense, therefore, resulted
in higher net interest income of $2.5 million.
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 earned on variable rate loans 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
29
<PAGE> 30
rapid growth in earning assets than funding liabilities further increased net
interest income by $615 thousand resulting in a total increase of $2.7 million.
The net interest margin narrowed to 6.30 percent in 1996 from 6.75
percent in 1995 and was 5.94 percent in 1994. The yield on earning assets in
1996 decreased 31 basis points while the cost of interest-bearing liabilities
increased 23 basis points. This narrowing of the net interest margin was largely
offset by a larger percentage of noninterest-bearing liabilities used to fund
earning assets, resulting in the total cost of funds increasing only 13 basis
points. 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 noninterest-bearing
liabilities funding earning assets, resulting in the total cost of funds
increasing only 38 basis points.
PROVISION FOR POSSIBLE CREDIT LOSSES
The 1996 provision for loan and lease losses was $153 thousand compared
to $756 thousand in 1995 and $2.0 million in 1994. Net loans and leases charged
totaled $1.7 million in 1996 compared to $872 thousand and $1.4 million in 1995
and 1994, respectively. The increase in net charge -offs in 1996 was largely due
to a charge off of $1.5 million on one particular loan and secondarily due to
lower recoveries of loans previously charged off. Specific allowances had been
established in the loans charged off in 1996, therefore, no additional
provisions were required to maintain the adequacy of the allowance for possible
credit losses.
Total delinquent loans were 2.8 percent of total loans at year-end 1996
compared to 4.7 percent and 3.2 percent at year-ends 1995 and 1994,
respectively. Non-accrual loans at year-end 1996, which are included in the
delinquency figure, were $4.7 million, consisting primarily of commercial real
estate loans, compared to $6.4 million a year earlier and $3.2 million at year
end 1994. The decrease in non-accrual loans, and the corresponding decrease in
the delinquency ratio, is primarily due to the large charge-off and continued
resolution of problem credits.
The following table shows certain ratios relating to the Company's loan
loss experience, allowance and provision for possible credit losses for and at
the end of the year indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1996 1995
---- ----
<S> <C> <C>
Ratios:
Net loans charged off to average 0.79% 0.47%
loans
Allowance for credit losses to total
gross loans 2.09% 2.72%
Net loans charged off to allowance
for credit losses 37.37% 13.92%
Net loans charged off to provision
for credit losses 1,141.18% 115.34%
Allowance for credit losses to non-
performing loans 100.24% 101.08%
</TABLE>
30
<PAGE> 31
The allowance for possible credit losses decreased to $4.7 million at
December 31, 1996 from $6.3 million at year-end 1995, resulting in an allowance
for possible credit losses of 2.1 percent of total loans and leases compared to
2.7 percent at year-end 1995. 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. The reduction in
the allowance as a percent of loans despite the increase in charge-offs during
1996 is consistent with the charge off of loans having specific allowances in
the adequacy determination methodology.
OTHER INCOME
Other income totaled $4.4 million in 1996 compared to $4.0 million and
$4.8 million in 1995 and 1994, respectively. Service charges on deposit accounts
increased in 1996 as compared to the prior year due to a higher volume of
accounts. Bankcard discounts declined to $168 thousand for 1996 from $405
thousand for 1995 due to management's decision to outsource the function in
which revenues are now received net of costs. Additionally, other miscellaneous
income was higher in 1996 compared to 1995.
OPERATING EXPENSE
Operating expenses increased in 1996 to $16.4 million from $14.8
million in 1995. Salaries increased to $5.4 million in 1996 from $4.6 million in
1995 primarily due to additional employees resulting from the Mariners Bank
acquisition. Employee benefits declined in 1996 to $2.1 million from $2.4
million the prior year due to lower levels of incentive compensation. Occupancy
expense increased to $1.7 million from $1.4 million due to the additional
branches from the Mariners Bank acquisition and increases in the rental expense
in several of the other facilities offset by the elimination of the expense from
the two branches closed and consolidated into the three former Mariners Bank
branches. Furniture and equipment expense likewise increased from $900 thousand
to $1.1 million. Other miscellaneous expenses increased to $6.0 million in 1996
from $5.1 million in 1995.
Operating expenses declined 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 preexisting lease
put back into use for Company operations.
ASSET GROWTH AND MIX
Average total assets during 1996 were $392 million, an increase of $73
million, or 23 percent, over 1995 average total assets of $318 million. Average
loans and leases comprised 55 percent of average total assets in 1996 compared
to 58 percent in 1995. The average composition of the loan portfolio was 43
percent commercial loans, 36 percent real estate loans, 8 percent interim
construction financing, and 13 percent
31
<PAGE> 32
installment loans. The 1995 loan mix was 41 percent commercial, 43 percent real
estate, 3 percent interim construction, and 12 percent installment. Average
direct lease financing was less than 1 percent of average total assets in 1996
and 1995. Management has emphasized a strategy to better diversify the Company's
loan portfolio in 1996 by increasing relationship commercial business with less
emphasis on growth in real estate loans. The Company retained nearly all of its
new SBA loan production during 1996 and 1995, whereas in past years, SBA loan
production had been sold.
Securities available-for-sale and held-to-maturity were 26 percent of
average total assets in 1996 compared to 27 percent in 1995. At year end 1996,
92 percent of the investment securities portfolio was classified as available
for sale. Average federal funds sold were 5 percent of average total assets in
1995 and 1994. Higher reserve balances were required to be maintained at the
Federal Reserve Bank due to the growth in demand deposit balances.
Other real estate owned (OREO) averaged $1.0 million in 1996 compared
to $2.0 million in 1995. At December 31, 1995, OREO totaled $394 thousand,
compared to $2.0 million a year earlier.
DEPOSIT GROWTH AND MIX
During 1996, average total deposits were $341 million, an increase of
$62 million over average deposits of $279 million in 1995. Interest-bearing
deposits represented 70 percent of average total deposits in 1996 and 1995. The
average composition of deposits in 1996 was 30 percent demand deposits, 45
percent savings and money market deposits and 25 percent time deposits. This
compares to a 1995 deposit mix of 30 percent demand, 51 percent savings and
money market and 19 percent time deposits.
CAPITAL MANAGEMENT
During 1996, shareholders' equity averaged $44.7 million or 11.4
percent of average total assets compared to $31.4 million or 9.9 percent of
average total assets in 1995. On December 31, 1996 and 1995, shareholders'
equity was 11.5 percent and 11.1 percent of total assets, respectively. The
increase in the average capital ratio for 1996 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
$0.37 per share in 1996 totaling $1.4 million. In 1995, dividends of $0.32 per
share totaling $960 thousand were declared and paid.
Risk-based capital guidelines issued by the Federal Reserve Board (FRB)
for bank holding companies establish an analytical framework 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, 1996, the Company exceeded the Tier 1
risk-based capital requirements with a ratio of 15.47 percent and a total
risk-based capital ratio of 16.73 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
32
<PAGE> 33
intangibles and other items which were deducted to arrive at Tier 1 capital). At
December 31, 1996, the Company's leverage ratio was 9.99 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, 1996, the Bank had a Tier 1 risk-based capital
ratio of 14.30 percent, a combined Tier 1 and Tier 2 ratio of 15.56 percent and
a leverage ratio of 9.53 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,
1996, the principal source of asset liquidity consisted of $34.1 million in cash
and demand balances due from banks and federal funds sold of $28.4 million
totaling $62.5 million, compared to a total of $41.9 million in these same
assets a year earlier. Other sources included $95.9 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 total approximately $10.0 million at year-end 1996.
Also, in the past the Company has issued commercial paper to generate liquidity
at the holding company level, however, during 1996 and 1995, 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. The Company does not utilize any interest rate swaps
or other financial derivatives to alter its interest rate risk profile.
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
33
<PAGE> 34
rate environment since the Company's assets would reprice to higher 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 $124,489 $152,583 $226,042 $262,408
Total liabilities repricing 172,711 200,041 211,171 233,428
--------------------------------------------------
Cumulative repricing gap $(48,222) $ 47,458 $ 14,871 $ 28,980
Cumulative gap/Assets (11.9)% (11.7)% 3.6% 7.1%
</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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 35
Consolidated Balance Sheets at December 31, 1996 and 1995 36
Consolidated Statements of Income for each of the Years
in the Three-Year Period Ended December 31, 1996 37
Consolidated Statements of Shareholders' Equity for each of the Years
in the Three-Year Period Ended December 31, 1996 38
Consolidated Statements of Cash Flows for each of the Years
in the Three-Year Period Ended December 31, 1996 39
Notes to Consolidated Financial Statements 41
</TABLE>
All supplemental schedules are omitted as inapplicable or because the
required information is included in the financial statements or notes thereto.
34
<PAGE> 35
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, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1996. 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 audits 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, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1996 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, 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 5, 1997
35
<PAGE> 36
ELDORADO BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 34,101,000 $ 32,233,000
Federal funds sold 28,400,000 9,700,000
Securities available-for-sale, at fair value 95,919,000 86,580,000
Securities held-to-maturity -- approximate fair value
of $8,074,000 in 1996 and $7,212,000 in 1995 8,082,000 7,087,000
Loans and direct lease financing 223,904,000 229,957,000
Less allowance for possible credit losses 4,672,000 6,265,000
------------ ------------
Net loans and direct lease financing 219,232,000 223,692,000
------------ ------------
Premises and equipment, net 8,139,000 8,598,000
Other real estate owned, net 394,000 1,965,000
Goodwill, net 6,027,000 6,438,000
Other assets 6,467,000 6,893,000
------------ ------------
$406,761,000 $383,186,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Demand, non-interest bearing $111,414,000 $ 99,770,000
Savings and money market 156,857,000 157,822,000
Time certificates under $100,000 47,782,000 43,534,000
Time certificates of $100,000 or more 37,351,000 32,092,000
-------------- ------------
Total deposits 353,404,000 333,278,000
------------- ------------
Federal funds purchased 2,188,000 3,772,000
Other liabilities 4,225,000 3,763,000
-------------- ------------
Total liabilities 359,817,000 340,813,000
------------- ------------
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 3,810,756 shares
in 1996 and 3,733,822 in 1995 32,448,000 31,798,000
Net unrealized gain (loss) on securities
available-for-sale 138,000 400,000
Retained earnings 14,358,000 10,175,000
------------- ------------
Total shareholders' equity 46,944,000 42,373,000
------------- ------------
$406,761,000 $383,186,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 37
ELDORADO BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans, including fees $ 21,902,000 $ 18,592,000 $ 16,170,000
Securities 6,156,000 5,415,000 3,721,000
Federal funds sold 1,033,000 846,000 905,000
Direct lease financing 88,000 122,000 227,000
Interest bearing deposits with banks -- -- 11,000
------------ ------------ ------------
Total interest income 29,179,000 24,975,000 21,034,000
------------ ------------ ------------
Interest expense:
Savings and money market 3,034,000 2,875,000 3,103,000
Time certificates under $100,000 2,471,000 1,457,000 782,000
Time certificates of $100,000 or
more 1,900,000 1,211,000 725,000
Other 121,000 280,000 16,000
------------ ------------ ------------
Total interest expense 7,526,000 5,823,000 4,626,000
------------ ------------ ------------
Net interest income 21,653,000 19,152,000 16,408,000
Provision for possible credit losses 153,000 756,000 2,006,000
------------ ------------ ------------
Net interest income after
provision for possible
credit losses 21,500,000 18,396,000 14,402,000
------------ ------------ ------------
Other income:
Service charges on deposit accounts 2,311,000 2,203,000 2,222,000
Bank card discounts 168,000 405,000 882,000
Loan servicing income 829,000 848,000 875,000
Net gain (loss) on sales of securities 2,000 48,000 (131,000)
Other 1,062,000 517,000 1,060,000
------------ ------------ ------------
Total other income 4,372,000 4,021,000 4,848,000
------------ ------------ ------------
Operating expenses:
Salaries 5,401,000 4,644,000 4,518,000
Employee benefits 2,055,000 2,369,000 1,791,000
Occupancy 1,719,000 1,380,000 1,865,000
Furniture and equipment 1,117,000 916,000 832,000
Other real estate owned 72,000 330,000 388,000
Other 6,037,000 5,113,000 5,542,000
------------ ------------ ------------
Total operating expenses 16,401,000 14,752,000 14,936,000
------------ ------------ ------------
Earnings before income taxes 9,471,000 7,665,000 4,314,000
Income taxes 3,891,000 3,161,000 1,758,000
------------ ------------ ------------
Net earnings $ 5,580,000 $ 4,504,000 $ 2,556,000
============ ============ ============
Primary earnings per share $ 1.43 $ 1.36 $ 0.84
------------ ------------ ------------
Weighted average number of shares used
in per share calculation 3,912,993 3,312,924 3,029,327
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE> 38
ELDORADO BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS)
ON SECURITIES TOTAL
COMMON STOCK AVAILABLE- RETAINED SHAREHOLDERS'
SHARES AMOUNT FOR-SALE EARNINGS EQUITY
------ ----- --------------- -------- -------------
<S> <C> <C> <C> <C> <C>
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
--------- ----------- ----------- ------------ -----------
Cash dividends declared
($0.37) per share --- --- --- (1,397,000) (1,397,000)
Stock options exercised 76,934 650,000 --- --- 650,000
Change in net unrealized gain
on securities
available-for-sale --- --- (262,000) --- (262,000)
Net earnings --- --- --- 5,580,000 5,580,000
--------- ----------- ----------- ----------- ----------
BALANCE, DECEMBER 31, 1996 3,810,756 $32,448,000 $ 138,000 $14,358,000 $46,944,000
---------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE> 39
ELDORADO BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED 1996, 1995 AND 1994
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,580,000 $ 4,504,000 $ 2,556,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,039,000 556,000 998,000
Amortization of intangible assets 634,000 186,000 110,000
Provision for possible credit losses 153,000 756,000 2,006,000
Provision for possible losses on
other real estate owned --- 249,000 118,000
(Gain) loss on sales of premises and equipment (6,00) (10,000) 8,000
Gain on sales of SBA loans (158,000) (17,000) (279,000)
(Gain) loss on sale of other real estate owned (148,000) (60,000) (36,000)
(Gain) loss on sales of securities
available-for-sale (2,000) (48,000) 131,000
Amortization of deferred income, discounts
and fees (307,000) (65,000) (438,000)
Loan fees collected 799,000 510,000 508,000
(Increase) decrease in other assets (413,000) (2,089,000) 1,550,000
(Increase) decrease in deferred income taxes 638,000 (158,000) (90,000)
Increase in other liabilities 462,000 1,001,000 478,000
------------- ------------- ------------
Net cash provided by operating activities 8,271,000 5,315,000 7,620,000
------------- ------------- ------------
Cash flows from investing activities:
Proceeds from maturity of securities
available-for-sale 62,568,000 95,347,000 71,448,000
Proceeds from sales of securities
available-for-sale 3,166,000 3,069,000 3,948,000
Proceeds from the call of securities held-to-maturity 2,500,000 --- ---
Purchase of securities available-for-sale (75,567,000) (85,423,000) (100,405,000)
Purchase of securities held-to-maturity (3,492,000) (6,501,000) (586,000)
Net (increase) decrease in interest
bearing deposits with banks --- --- 594,000
Proceeds from sale of loans --- 1,732,000 6,720,000
Increase in commercial loans held for sale --- --- (8,352,000)
Purchase of loans --- --- (11,665,000)
Net (increase) decrease in loans and leases 4,141,000 (5,536,000) 21,004,000
Purchase of premises and equipment (546,000) (793,000) (1,147,000)
Proceeds from sales of premises and equipment 15,000 9,000 14,000
Proceeds from sales of other real estate owned 1,717,000 1,928,000 4,908,000
Net cash received in purchase of Mariners Bank --- 3,407,000 ---
------------ ------------- -------------
Net cash provided by (used in) investing
activities $ (5,498,000) $ 7,239,000 $ (13,519,000)
------------- ------------ --------------
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE> 40
ELDORADO BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $ 20,126,000 $ (5,126,000) $(21,473,000)
Net increase (decrease) in federal funds purchased (1,584,000) 2,742,000 (75,000)
Dividends paid (1,397,000) (960,000) (441,000)
Proceeds from stock options exercised 650,000 62,000 35,000
Cost of stock issuance -- (289,000) --
------------ ------------ ------------
Net cash used in financing activities 17,795,000 (3,571,000) (21,954,000)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 20,568,000 8,983,000 (27,853,000)
Cash and cash equivalents at beginning of year 41,933,000 32,950,000 60,803,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 62,501,000 $ 41,933,000 $ 32,950,000
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for --
Interest $ 7,552,000 $ 5,589,000 $ 4,653,000
Income taxes, net 3,142,000 2,871,000 2,986,000
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 165,000 2,526,000 1,071,000
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.
40
<PAGE> 41
ELDORADO BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(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 year. Actual results could differ
significantly from those estimates.
BUSINESS
The Company has no subsidiary or affiliated business other than the
Bank. The Company has not entered into any of the permitted non-banking
activities. On December 24, 1996 the Company entered into an Agreement and Plan
of Merger with Commerce Security Bancorp, Inc. providing for the acquisition of
100 percent of the outstanding shares of the Company in exchange for the right
to receive $23.00 cash for each share tendered.
The Bank provides a full range of banking services to individual and
corporate customers throughout Orange, Los Angeles, 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 of
Debt and Equity Securities" ("SFAS 115"). 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 value. Previously, the investment securities were
carried at cost, adjusted for the accretion of discounts and amortization of
premiums.
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 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
41
<PAGE> 42
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
shareholders' equity, net of the tax effect. The designation of securities is
made by management at the time of acquisition.
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 uncollectable.
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 judgment 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, 1996 and 1995, net deferred
loan fees (costs) of $(132,000) and $222,000, 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
42
<PAGE> 43
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
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 judgment about
information available to them at the time of their examination.
43
<PAGE> 44
OTHER REAL ESTATE OWNED
Other real estate owned consists of real estate acquired in settlement
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 and 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.
44
<PAGE> 45
EARNINGS PER SHARE
Earnings per share of common stock are based upon the weighted average
number of common shares, which include common stock and dilutive common stock
equivalent shares ("CSE") outstanding during each period, after giving
retroactive effect to stock dividends, including the 10 percent stock dividend
declared in November 1995.
The calculations of earnings per share of common stock are as follows
for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------
1996 1995 1994
---------------------------------------------------------------------------
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net earnings $ 5,580 $ 5,580 $ 4,504 $ 4,504 $ 2,556 $ 2,556
========== ========== ========== ========== ========== ==========
Weighted average common
shares outstanding 3,771,719 3,771,719 3,165,363 3,165,363 3,029,327 3,029,327
Dilutive CSE on stock options 141,274 179,878 147,630 179,637 -- --
---------- ---------- ---------- ---------- ---------- ----------
Weighted average number of
shares 3,912,993 3,951,602 3,312,993 3,345,000 3,029,327 3,029,327
========== ========== ========== ========== ========== ==========
Net earnings per share $ 1.43 $ 1.41 $ 1.36 $ 1.35 $ 0.84 $ 0.84
========== ========== ========== ========== ========== ==========
</TABLE>
RECLASSIFICATIONS
Certain items in prior periods have been reclassified to conform to
the current presentation.
CURRENT ACCOUNTING PRONOUNCEMENTS
Prior to January 1, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock- Based Compensation" (SFAS
123), which permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant. Alternatively, SFAS
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the fair-
value-based method defined in SFAS 123 had been applied. The Company has elected
to continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS 123. See Note (9) of the Notes to
Consolidated Financial Statements for the pro forma net income and pro forma
earnings per share disclosures.
In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No.125 (SFAS 125), "Accounting for Transfer
and Servicing of Financial Assets and Extinguishment of Liabilities". SFAS 125
addresses the accounting for all types of securitization transactions,
securities lending and repurchase agreements, collateralized borrowing
arrangements and other transactions involving the transfer of financial assets.
SFAS 125 distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS 125 is generally effective for
transactions that occur after December 31, 1996, and it is to be applied
prospectively. SFAS 125 will requires the allocation of the total
45
<PAGE> 46
cost of mortgage loans sold to the mortgage loans sold (servicing released),
interest-only and retained certificates and servicing rights based on their
relative fair values. Under SFAS 125 the interest-only and retained certificates
and servicing rights are assessed for impairment based upon the fair value of
those rights. The pronouncement also requires the additional disclosure about
the interest-only and retained certificates in securitizations and the
accounting for these assets at fair value in accordance with Statement of
Financial Accounting Standards No.115. Management believes the adoption of SFAS
125 on January 1, 1997 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.
<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 $8,026,000 were maintained to satisfy Federal regulatory
requirements at December 31, 1996.
46
<PAGE> 47
(4) SECURITIES
A summary of securities follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
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 $89,083,000 $168,000 $ 79,000 $89,172,000
Obligations of states and political
subdivisions 983,000 3,000 1,000 985,000
Corporate debt securities 1,811,000 33,000 --- 1,844,000
Mortgage backed securities 3,185,000 95,000 4,000 3,276,000
Other 628,000 14,000 --- 642,000
----------- -------- -------- -----------
$95,690,000 $313,000 $ 84,000 $95,919,000
----------- -------- -------- -----------
Held-To-Maturity Securities:
U.S. government corporation and agencies $ 6,992,000 $ 1,000 $ 54,000 $ 6,939,000
Obligations of states and political
subdivisions 589,000 41,000 --- 630,000
Corporate debt securities 501,000 4,000 --- 505,000
----------- -------- ------- -----------
$ 8,082,000 $ 46,000 $54,000 $ 8,074,000
=========== ========= ======= ===========
</TABLE>
<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>
At December 31, 1996, securities with a carrying value of $6,433,000 were
pledged to secure public deposits or for other purposes required by law.
47
<PAGE> 48
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 $66,718,000 $66,807,000
Due after one year through five years 26,441,000 26,499,000
Due after five years through ten years 1,376,000 1,383,000
Due after ten years 1,155,000 1,230,000
----------- -----------
$95,690,000 $95,919,000
=========== ===========
Held-To-Maturity Securities At Cost:
Due after one year through five years $ 3,999,000 $ 3,959,000
Due after five through ten years 4,083,000 4,115,000
----------- -----------
$ 8,082,000 $ 8,074,000
=========== ===========
</TABLE>
Proceeds from sales of securities available-for-sale during 1996, 1995
and 1994 were $3,166,000, $3,069,000 and $3,948,000, respectively. The Bank
experienced gross gains on sales of securities available-for-sale of $2,000 in
1996 and $50,000 in 1995. A gross loss of $2,000 was realized on sales in 1995.
Proceeds from the call of securities held-to-maturity during 1996 were
$2,500,000 as a result of mandatory early calls of the securities.
(5) LOANS AND DIRECT LEASE FINANCING
A summary of loans and direct lease financing follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commercial -- unsecured $ 49,946,000 $ 41,831,000
Commercial -- secured 51,852,000 52,717,000
Interim construction 14,464,000 18,219,000
Real estate 77,570,000 88,097,000
Installment 27,623,000 26,553,000
Lease financing 668,000 876,000
Credit cards and other 1,864,000 1,791,000
Less unearned income, discounts
and fees (83,000) (127,000)
------------- -------------
$ 223,904,000 $ 229,957,000
============= =============
</TABLE>
The Bank serviced loans for others totaling $79,075,000 and
$89,908,000 at December 31, 1996 and 1995, 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
48
<PAGE> 49
debtors' ability to honor their contracts is dependent upon the real estate
markets in Orange, Los Angeles, 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:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance outstanding, beginning of year $ 855,000 $ 2,251,000
Loans granted during year 143,000 265,000
Repayments during year (150,000) (1,661,000)
----------- -----------
Balance outstanding, end of year $ 848,000 $ 855,000
=========== ===========
</TABLE>
At December 31, 1996, 1995 and 1994, the Bank had loans of
approximately $4,661,000, $5,818,000, and $3,161,000 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 $343,000, $172,000, and $144,000 for 1996, 1995 and 1994,
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 $3,425,000 and $1,531,000 at December 31, 1996 and 1995, respectively. Under
the original terms of the loans, interest earned would have totaled $496,000 and
$235,000 for the year ended December 31, 1996 and 1995, respectively. The
recorded interest income amounted to $316,000 and $187,000 for 1996 and 1995,
respectively.
The following is a summary of impaired loans and the related allowance
for possible credit losses at December 31:
<TABLE>
<CAPTION>
1996 1995
--------------------------------- -------------------------------------
Allowance Allowance
Recorded For Possible Recorded For Possible
Investment Credit Losses Investment Investment
------------ ------------- ---------- -------------
<S> <C> <C> <C> <C>
Impaired loans requiring an
allowance for possible credit $4,060,000 $449,000 $5,077,000 $1,985,000
losses
Impaired loans not requiring an
allowance for possible credit --- --- 741,000 ---
losses
---------- -------- ---------- ----------
$4,060,000 $449,000 $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, 1996.
49
<PAGE> 50
(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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 6,265,000 $ 5,564,000 $ 4,740,000
Credits charged-off (1,976,000) (1,311,000) (1,574,000)
Recoveries on credits
previously charged-off 230,000 439,000 169,000
----------- ------------ ------------
Net charge-offs 1,746,000 (872,000) (1,405,000)
Increase in allowance for
possible credit losses
through acquisition --- 817,000 223,000
Provision for possible
credit losses 153,000 756,000 2,006,000
----------- ------------- ------------
Balance at end of year $ 4,672,000 $ 6,265,000 $ 5,564,000
=========== =========== ===========
</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, 1996.
A summary of activity in the valuation allowance on other real estate
owned follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 721,000 $ 407,000 $ 3,220,000
Increase to valuation allowance
through acquisition -- 167,000 --
Additions to valuation allowance
charged to operations -- 249,000 118,000
Recognized losses on other real
estate owned charged against
the allowance (604,000) (102,000) (2,931,000)
----------- ----------- -----------
Balance at end of year $ 117,000 $ 721,000 $ 407,000
=========== =========== ===========
</TABLE>
50
<PAGE> 51
(7) PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 2,467,000 $ 2,467,000
Buildings 5,586,000 5,443,000
Furniture, fixtures and equipment 5,056,000 4,720,000
Leasehold improvements 2,347,000 2,289,000
Leasehold interests 732,000 732,000
----------- -----------
16,188,000 15,651,000
Less accumulated depreciation and
amortization 8,049,000 7,053,000
----------- -----------
$ 8,139,000 $ 8,598,000
=========== ===========
</TABLE>
(8) INCOME TAXES
The components of income taxes (benefit) are as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
1996
Federal $ 2,311,000 $ 539,000 $ 2,850,000
State 942,000 99,000 1,041,000
----------- ----------- -----------
$ 3,253,000 $ 638,000 $ 3,891,000
=========== =========== ===========
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
=========== =========== ===========
</TABLE>
Income taxes differed from the expected Federal statutory rate as follows:
<TABLE>
<CAPTION>
1996 1995 1994
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Expected income taxes $3,220,000 34.0 $2,606,000 34.0 $1,467,000 34.0
State franchise taxes, net of
Federal income tax benefit 687,000 7.3 576,000 7.5 325,000 7.5
Other income not subject to tax 10,000 0.1 (48,000) (0.6) (50,000) (1.2)
Other (26,000) (0.3) 27,000 0.3 16,000 0.4
------------- ---- ---------- ---- ---------- ----
$3,891,000 41.1 $3,161,000 41.2 $1,758,000 40.7
========== ==== ========== ==== ========== ====
</TABLE>
51
<PAGE> 52
Included in other liabilities at December 31, 1996 and 1995 is current
income taxes payable of $258,000 and $148,000, respectively.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Loans, due to allowance for
possible credit losses $ 685,000 $ 1,281,000
Other real estate owned 53,000 352,000
Investment securities 10,000 10,000
State taxes 353,000 262,000
Accrued compensation 336,000 274,000
Net operating losses 159,000 208,000
Other 340,000 233,000
----------- -----------
1,936,000 2,620,000
----------- -----------
Deferred tax liabilities:
Premises and equipment (1,083,000) (1,172,000)
Deferred loan origination fees and costs (200,000) (144,000)
Purchase accounting adjustments (400,000) (479,000)
Securities valuation allowance (97,000) (284,000)
Other (117,000) (51,000
----------- -----------
(1,897,000) (2,130,000)
----------- -----------
Net deferred tax asset $ 39,000 $ 490,000
=========== ===========
</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, 1996 and
1995, there was no valuation allowance against deferred tax assets. Deferred tax
assets as of December 31, 1996 and 1995 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.
52
<PAGE> 53
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,
1996 follows:
<TABLE>
<CAPTION>
AVAILABLE PRICE
FOR GRANT OUTSTANDING PER SHARE
--------- ----------- ---------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 154,742 169,760 $ 7.13-14.880
Options granted (112,150) 112,150 8.13-12.250
Options exercised -- (4,473) 8.13- 8.630
Options canceled 15,687 (15,687) 8.13-14.880
Options expired under
1980 plan (15,400) (15,400) 8.13-14.880
Options expired under
1982 plan (13,500) (13,500) 8.13-14.880
-------- -------- -------------
BALANCE AT DECEMBER 31, 1994 29,379 232,850 $ 7.13-14.880
Shares authorized under the
1995 plan 130,000 -- --
10% stock dividend 25,708 19,037 --
Options granted (150,130) 150,130 10.00-14.090
Options exercised -- (7,380) 8.13-11.000
Options canceled 35,080 (35,080) 8.13-14.900
Options expired under
1980 plan (220) (220) 14.550
-------- -------- --------------
BALANCE AT DECEMBER 31, 1995 69,817 359,337 $ 6.48-14.090
Options granted (11,550) 11,550 15.125
Options exercised -- (76,934) 7.39-13.180
Options canceled 2,770 (2,770) 7.39-15.125
-------- -------- --------------
BALANCE AT DECEMBER 31, 1996 61,037 291,183 $ 7.39-15.125
======== ======== ==============
</TABLE>
At December 31, 1996 138,957 options were exercisable at prices ranging
from $7.39 to $15.125 per share and there were 61,037 shares available for grant
under the Plans. The per share weighted-average fair value of stock options
granted during 1996 and 1995 was $2.72 and $2.46 on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: 1996 - expected dividend yield 3.0%, risk-free interest rate of
5.53%, an expected life of 4 years and expected volatility of 20 percent; 1995
expected dividend yield 3.4%, risk-free interest rate of 6.27%, an expected life
of 4 years and expected volatility of 20 percent.
53
<PAGE> 54
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS 123, the
Company's net earnings would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net earnings:
As reported $5,580,000 $4,504,000
Pro forma 5,507,000 4,437,000
Primary earnings per share:
As reported $ 1.43 $ 1.36
Pro forma 1.41 1.34
</TABLE>
Pro forma net earnings reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net earnings amounts presented
above because compensation cost is reflected over the options' vesting period of
5 years and compensation cost for options granted prior to January 1, 1995 is
not considered.
(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 $120,000, $200,000, and $60,000 for
1996, 1995 and 1994, 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 $95,000, $60,000, and $24,000 for 1996,
1995 and 1994, respectively.
The Company has an employment agreement with certain executive
officers covering an approximate three year period. This agreement 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, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Service cost of benefits earned during the year $ 43,000 $ 42,000
Interest costs of projected benefit obligation 67,000 58,000
Amortization of net loss -- 11,000
Net amortization and deferral 23,000 23,000
-------- --------
$133,000 $134,000
======== ========
</TABLE>
54
<PAGE> 55
The funded status of the plan at December 31, 1996 and 1995 was as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Actuarial present value of
vested benefit obligation $ 879,000 $ 831,000
========= =========
Accumulated and projected benefit obligation $ 879,000 $ 831,000
Plan assets at fair value -- --
--------- ---------
Projected benefit obligation
in excess of plan assets 879,000 831,000
Unrecognized net (loss) gain (55,000) (93,000)
Unrecognized prior service cost (34,000) (57,000)
--------- ---------
Accrued pension and retirement cost included
in accompanying financial statements 790,000 681,000
Additional minimum liability 89,000 150,000
--------- ---------
Required minimum liability $ 879,000 $ 831,000
========= =========
</TABLE>
The projected benefit obligation was determined using a
weighted-average assumed discount rate of 7.50 per cent and 7.00 percent for the
years ended December 31, 1996 and 1995, respectively.
(11) OTHER EXPENSES
A summary of other operating expenses follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Data processing $1,413,000 $1,307,000 $1,269,000
Assessment and processing fees 70,000 412,000 811,000
Legal 318,000 284,000 170,000
Marketing 535,000 500,000 264,000
Merchant discounts 2,000 131,000 437,000
Customer service 300,000 202,000 172,000
Other 3,399,000 2,277,000 2,419,000
---------- ---------- ----------
$6,037,000 $5,113,000 $5,542,000
========== ========== ==========
</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 1996, 1995, and 1994, 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 1996, 1995 and 1994 under this lease was approximately
$108,000 each year.
55
<PAGE> 56
Future minimum rental payments and rental income receivable under
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
RENTAL SUBLEASE NET
EXPENSE INCOME EXPENSE
------- ------ -------
<S> <C> <C> <C>
1997 907,000 188,000 719,000
1998 744,000 161,000 583,000
1999 751,000 108,000 643,000
2000 655,000 108,000 547,000
Thereafter 4,503,000 549,000 3,954,000
---------- ---------- ----------
$7,560,000 $1,114,000 $6,446,000
========== ========== ==========
</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, 1996 and 1995, the
Bank had outstanding commitments to extend credit of approximately $83,987,000
and $77,209,000, respectively, of which $953,000 and $1,808,000, respectively,
related to commercial 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 "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
56
<PAGE> 57
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, 1996, the Bank's leverage ratio was 9.53%, Tier 1
risk-based ratio was 14.30% and total risk-based ratio was 15.56%. At December
31, 1996 the Bank is in the "well-capitalized" category.
The Bank's actual capital amounts and ratios, in addition to amounts required to
be categorized as adequately- capitalized and well-capitalized are shown in the
following table:
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
-------------------------- -------------------------------------------------
Amount Ratio Amount Ratio
----------- ------- ----------- ------------------------------
<S> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $40,683,000 15.56% $21,031,000 [greater than or equal to]8.0%
Tier 1 Capital
(to Risk Weighted Assets) $37,397,000 14.30% $10,516,000 [greater than or equal to]4.0%
Tier 1 Capital
(to Average Assets) $37,397,000 9.53% $15,699,000 [greater than or equal to]4.0%
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets) $36,826,000 14.36% $20,519,000 [greater than or equal to]8.0%
Tier 1 Capital
(to Risk Weighted Assets) $33,582,000 13.09% $10,260,000 [greater than or equal to]4.0%
Tier 1 Capital
(to Average Assets) $33,582,000 9.47% $14,185,000 [greater than or equal to]4.0%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
-----------------------------------------------
Amount Ratio
---------- -------------------------------
<S> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) 26,289,000 [greater than or equal to]10.0%
Tier 1 Capital
(to Risk Weighted Assets) 15,773,000 [greater than or equal to] 6.0%
Tier 1 Capital
(to Average Assets) 19,623,000 [greater than or equal to] 5.0%
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets) 25,649,000 [greater than or equal to]10.0%
Tier 1 Capital
(to Risk Weighted Assets) 15,389,000 [greater than or equal to] 6.0%
Tier 1 Capital
(to Average Assets) 12,731,000 [greater than or equal to] 5.0%
</TABLE>
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, 1996, the
Bank is permitted to make loans of approximately $3,245,000 to the Company.
57
<PAGE> 58
(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.
58
<PAGE> 59
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>
(In Thousands)
1996 1995
---- ----
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short-term investments $62,501 $ 62,501 $ 41,933 $41,933
Securities available-for-sale 95,919 95,919 86,580 86,580
Securities held-to-maturity 8,082 8,074 7,087 7,212
Loans and direct lease financing, net 219,232 217,568 233,692 222,111
Financial liabilities:
Deposits $353,404 $353,616 $333,278 $333,477
Federal funds purchased 2,188 2,188 3,772 3,772
Unrecognized financial instruments:
Commitments to extend credits --- $ (39) --- $ (14)
Standby letters of credit --- (1) --- ---
</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 Company's entire holdings of a particular
financial instrument. Because no markets exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
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 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 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.
59
<PAGE> 60
(15) CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Following are condensed balance sheets for Eldorado Bancorp only as of
December 31, 1996 and 1995, and condensed statements of earnings and cash flows
for each of the years in the three-year period ended December 31, 1996.
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 1996 1995
- - -------------------------- ---- ----
<S> <C> <C>
Assets
Cash $ 1,835,000 $ 774,000
Securities available-for-sale 35,000 26,000
Investment in subsidiary 45,016,000 42,067,000
Other assets 64,000 94,000
--------------- ---------------
$46,950,000 $42,961,000
=============== ===============
Liabilities and shareholders' equity
Accrued expenses $ 6,000 $ 588,000
--------------- -------------
Shareholders' equity
Preferred stock --- ---
Common stock 32,448,000 31,798,000
Net unrealized gain (loss) on securities
available-for-sale 138,000 400,000
Retained earnings 14,358,000 10,175,000
----------- -----------
Total shareholders' equity 46,944,000 42,373,000
----------- -----------
$46,950,000 $42,961,000
=========== ===========
</TABLE>
STATEMENT OF EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Other income $ 2,000 $ 3,000 $ ---
Other expenses 222,000 253,000 (119,000)
Income tax benefit 82,000 116,000 37,000
------------- ------------ ------------
(138,000) (134,000) (82,000)
Equity in earnings of subsidiary 5,718,000 4,638,000 2,638,000
----------- ----------- -----------
Net earnings $5,580,000 $4,504,000 $2,556,000
========== ========== ==========
</TABLE>
60
<PAGE> 61
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 5,580,000 $ 4,504,000 $ 2,556,000
Adjustments to reconcile net earnings (loss)
to net cash from operating activities:
Depreciation and amortization 25,000 37,000 13,000
Gains on sales of securities
available-for-sale, net (2,000) (3,000) --
Equity in earnings of subsidiary (5,718,000) (4,638,000) (2,638,000)
Changes in assets and liabilities:
(Increase) decrease in other assets (17,000) (6,000) 23,000
Increase (decrease) in accrued expenses (582,000) 299,000 --
----------- ----------- -----------
Net cash provided by (used in) operating
activities (698,000) 193,000 (46,000)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of securities 6,000 8,000 --
Dividends received from subsidiary 2,500,000 1,290,000 545,000
Purchase of equipment -- (42,000) --
----------- ----------- -----------
Net cash provided by investing activities 2,506,000 1,256,000 545,000
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from stock options exercised 650,000 62,000 35,000
Dividends paid ($0.37, $0.32, and $0.16 per
share, respectively) (1,397,000) (960,000) (441,000
----------- ----------- -----------
Net cash used in financing activities (747,000) (898,000) (406,000)
----------- ----------- -----------
Net increase in cash 1,061,000 551,000 93,000
Cash at beginning of year 774,000 223,000 130,000
----------- ----------- -----------
Cash at end of year $ 1,835,000 $ 774,000 $ 223,000
=========== =========== ===========
</TABLE>
61
<PAGE> 62
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31 June 30 Sept. 30 Dec. 31
----------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
1996
Total interest income $7,354 $7,132 $7,311 $7,382
Net interest income 5,465 5,231 5,451 5,506
Provision for possible credit losses 152 --- 1 ---
Earnings before income taxes 2,225 2,354 2,365 2,527
Net earnings 1,310 1,384 1,389 1,497
Net earnings per common share $0.34 $0.36 $0.35 $0.38
Market price per share:
High bid $16.125 $15.625 $20.375 $22.375
Low bid 13.875 14.625 14.875 18.500
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 $0.39
Net earnings per common share $0.29 $0.34 $0.36 $0.37
Market price per share:
High bid $11.000 $13.000 $15.500 $16.875
Low bid 10.125 10.000 11.750 14.000
</TABLE>
AGREEMENT AND PLAN OF MERGER
On December 24, 1996 the Company entered into an Agreement and Plan of
Merger ("Merger Agreement") with Commerce Security Bancorp, Inc. (CSBI) that
provides for CSBI to acquire 100 percent of the outstanding shares of the
Company by means of a cash merger in which each Company share will be converted
into the right to receive cash in the amount of $23.00. The proposed merger
requires certain regulatory approvals and the approval of the principal terms of
the Merger Agreement by the holders of a majority of the outstanding shares of
common stock of the Company, in addition to the satisfaction of other
conditions.
One condition to the Agreement was that the Company enter into a stock
option agreement with CSBI dated December 24, 1996 ("Stock Option Agreement").
The Company has granted to CSBI an option to purchase up to 468,200 shares of
Company common stock (representing approximately 11 percent of the issued and
outstanding shares of Company common stock after taking into account the shares
of common stock issuable upon exercise of the option) at an exercise price of
$22.00 per share. The option is exercisable only if CSBI becomes entitled to
certain rights provided by the Merger Agreement related to the termination of
the Merger Agreement. Once the option becomes exercisable, it will terminate
upon the earliest to occur of: (i) the exercise of the option in full or (ii)
twelve (12) months following the termination of the Merger Agreement, or such
earlier date as the holder of the option realizes net profits from the option of
$1,000,000.
62
<PAGE> 63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
63
<PAGE> 64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Shares of Common
Stock of the
Director Company Principal
of the Owned as of Occupation
Company March 3, 1997 Percent and Business
Name and Positions Age Since (1)(2) of Class Experience
------------------ --- ----- --------------- -------- ----------
<S> <C> <C> <C> <C> <C>
Michael B. Burns 56 1982 52,375 1.4% Mr. Burns is, and for
Director of the more than the past five
Company and a Director years has been, owner
of the Bank and President of Fiesta
Ford Lincoln-Mercury
(auto dealership).
J.B. Crowell 63 1981 291,946(3) 7.6% Mr. Crowell is, and for
President, Chief more than the past five
Executive Officer and years has been, President
Director of the and Chief Executive
Company and Chairman Officer of the Company.
and Chief Executive Mr. Crowell also has
Officer and a Director of been Chief Executive
the Bank 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 49 1993 51,057 1.3% Mr. Dellerba is, and
Executive Vice President since February 1993 has
and Director of the been, the President and
Company and President Chief Operating Officer
and Chief Operating of the Bank. In April
Officer and a Director of 1993 Mr. Dellerba was
the Bank appointed Executive Vice
President of the
Company. From
December 1990 until his
employment by the Bank,
Mr. Dellerba was
</TABLE>
64
<PAGE> 65
<TABLE>
<CAPTION>
Shares of Common
Stock of the
Director Company Principal
of the Owned as of Occupation
Company March 3, 1997 Percent and Business
Name and Positions Age Since (1)(2) of Class Experience
------------------ --- ----- ------ -------- ----------
<S> <C> <C> <C> <C> <C>
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
CommerceBancorp and
CommerceBank, CommerceBancorp
filed a petition in
bankruptcy following the
closing of CommerceBank by
the FDIC in July 1994.
Julia M. DiGiovanni 77 1995 115,254 3.0% Mrs. DiGiovanni was elected
Director of the Company to the Boards of Directors of
and a Director of the the Company and the Bank
Bank following the acquisition, by
merger, of Mariners Bancorp
and Mariners Bank by Eldorado
Bank on October 20, 1995,
pursuant to the terms of the
Merger Agreement between the
Company and Mariners Bancorp.
Mrs. DiGiovanni served on the
Board of Directors of
Mariners Bancorp and Mariners
Bank from
</TABLE>
65
<PAGE> 66
<TABLE>
<CAPTION>
Shares of Common
Stock of the
Director Company Principal
of the Owned as of Occupation
Company March 3, 1997 Percent and Business
Name and Positions Age Since (1)(2) of Class Experience
------------------ --- ----- ------ -------- ----------
<S> <C> <C> <C> <C> <C>
1991 until October 1995, and
is now, and for more than the
past five years has been, a
private investor and an
officer, director and
shareholder of Cal-Coast
Security, Inc., and a director
of Cal-Coast Alarm, Inc.,
privately owned companies, the
principal businesses of which
are commercial and residential
security and alarms.
Lynne Pierson Doti 49 1993 12,540 * Dr. Pierson Doti is, and for
Director of the more than the past five years
Company and a Director has been, a Professor of
of the Bank Economics at Chapman
University, in Orange,
California. Dr. Pierson Doti
is an author of three books
and numerous articles on
banking.
Rolf J. Engen 67 1981 74,061 1.9% Mr. Engen is, and for more
Director of the than the past five years has
Company and a Director been, owner and President of
of the Bank Rolf J. Engen, Inc. (private
investments).
Warren Finley 65 1981 49,218 1.3% Mr. Finley is, and for more
Director of the than the past five years has
Company and a Director been, an attorney engaged in
and Assistant Secretary the private practice of law.
of the Bank
</TABLE>
66
<PAGE> 67
<TABLE>
<CAPTION>
Shares of Common
Stock of the
Director Company Principal
of the Owned as of Occupation
Company March 3, 1997 Percent and Business
Name and Positions Age Since (1)(2) of Class Experience
------------------ --- ----- ------ -------- ----------
<S> <C> <C> <C> <C> <C>
Warren D. Fix 58 1994 13,640 * Mr. Fix is, and since 1995
Director of the has been, Executive Vice
Company and a President and a director of
Director of the Bank Candlewood Hotel Company,
Inc. From 1992 to 1995 Mr.
fix was a partner in the
Contrarian Group, a private
investment and management
company. From 1964 to 1988 he
was employed by the Irvine
Company where most recently
he served as Senior Vice
President and Chief Financial
Officer. Mr. Fix also serves
as a director of Alexander
Haagen Properties, Inc.
Richard Korsgaard 55 1995 48,926 1.3% Mr. Korsgaard is, and since
Executive Vice President October 1995 has been, an
of the Bank and a Executive Vice President of
Director of the Eldorado Bank and, pursuant
Company and a Director to the Merger Agreement
of the Bank between the Company and
Mariners Bancorp, was elected
as a member of the Boards of
Directors of the Company and
the Bank following the
acquisition, by merger, of
Mariners Bancorp and Mariners
Bank by Eldorado Bank on
October 20, 1995. For more
than the five years prior to
his
</TABLE>
67
<PAGE> 68
<TABLE>
<CAPTION>
Shares of Common
Stock of the
Director Company Principal
of the Owned as of Occupation
Company March 3, 1997 Percent and Business
Name and Positions Age Since (1)(2) of Class Experience
------------------ --- ----- ------ -------- ----------
<S> <C> <C> <C> <C> <C>
employment with the Bank, Mr.
Korsgaard held the position
of President, Chief Executive
Officer and Director of
Mariners Bank, and President
and Director of Mariners
Bancorp, and in 1991 was
appointed Chief Executive
Officer of Mariners Bancorp.
Donald E. Sodaro 63 1993 50,086 1.3% Mr. Sodaro is, and since 1989
Vice Chairman of the has been, owner of Hanford
Board of Directors of Hotels, Inc. (formerly The
the Company and a Accord Group, Inc.), a hotel
Director of the Bank operating an asset management
company. For more than five
years prior thereto, Mr.
Sodaro was President and
Chief Executive Officer of
Sixpence Inns, Inc., which he
founded in 1970.
George H. Wells 62 1981 121,233 3.2% Mr. Wells is a private
Chairman of the Board investor. For more than five
of Directors of the years prior to August 1987,
Company and a Director Mr. Wells held various
of the Bank executive positions with
Technology Marketing
Incorporated, a publicly
owned computer development
services and software
company, including Chairman,
President, Treasurer and
Chief Financial Officer.
</TABLE>
68
<PAGE> 69
__________________
* Less than 1%
(1) Except as otherwise noted below, the persons named in the table have
sole voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws where
applicable. All shares are owned of record and beneficially except as
otherwise indicated.
(2) Includes shares which each of the directors has the right to purchase
under stock options during the 60- day period ending on May 2, 1997, as
follows: Burns -- 13,640 shares; Crowell -- 22,440 shares; Dellerba --
9,900 shares; Doti -- 9,240 shares; Engen -- 13,640 shares; Finley --
13,640 shares; Fix -- 9,240 shares; DiGiovanni -- 2,400 shares;
Korsgaard -- 2,200 shares; Sodaro -- 13,640 shares; and Wells -- 13,640
shares.
(3) The number of shares beneficially owned by Mr. Crowell includes 26,948
shares held in Mr. Crowell's account by the Company's Employee Stock
Ownership Plans and 2,866 shares held by his spouse as custodian for
their children.
Executive Officers of Registrant
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
J. B. Crowell 63 President, Chief Executive Officer and Director
Raymond E. Dellerba 49 Executive Vice President
David R. Brown 37 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.
69
<PAGE> 70
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
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information regarding the compensation
received for the three fiscal years ended December 31, 1996 by the Chief
Executive Officer and the other executive officers of the Company or the Bank
(the "Named Officers"). All compensation was paid to the Named Officers by the
Bank.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------------- -----------------------------
Awards Payouts
------------- --------------
Long-Term
Stock Options Incentive Plan All Other
Name and Principal Position Year Salary($) Bonus($)(1) (Shares) Payments(2) Compensation(3)
- - --------------------------- ---- --------- ----------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
J.B. Crowell 1996 $200,000 $ 60,000 0 $ 57,500 $ 18,695
President and Chief 1995 200,000 80,000 6,000 17,500 18,505
Executive Officer 1994 200,000 35,000 15,000 0 15,165
of Company & Chairman
and Chief Executive
Officer of Bank
Raymond E. Dellerba 1996 162,000 77,000 0 57,500 9,656
Executive Vice 1995 150,000 110,000 15,000 17,500 11,746
President of Company 1994 150,000 35,000 20,000 0 2,875
and President and Chief
Operating Officer of Bank
David R. Brown 1996 118,000 45,000 0 29,525 16,639
Executive Vice 1995 107,455 65,000 11,000 7,025 18,188
President and Chief 1994 99,151 14,050 6,000 0 10,108
Financial Officer of
Company & Bank
John J. McCauley 1996 125,000 45,000 0 29,225 9,063
Executive Vice 1995 125,000 65,000 7,000 6,275 11,080
President of Bank 1994 105,906 36,235(4) ,000 0 4,640
William J. Lewis 1996 118,000 45,000 0 26,300 9,063
Executive Vice President 1995 110,000 65,000 7,000 3,800 400
and Chief Credit Officer of 1994 52,131 7,600 7,500 N/A N/A
the Bank
Richard Korsgaard(5) 1996 125,000 45,000 0 3,750 6,958
Executive Vice President 1995 23,638 7,500 5,000 0 1,933
of the Bank 1994 N/A N/A N/A N/A N/A
</TABLE>
70
<PAGE> 71
(1) Following the end of each fiscal year, the Management and Incentive
Committee of the Board of Directors of the Bank determines the bonuses,
if any, to be awarded to Mr. Crowell and Mr. Dellerba, the amounts of
which are subject to approval by the full Board of Directors of the
Bank, and the cash bonuses to be awarded to the other Named Officers
under the Bank's Officers' Incentive Plan (the "Officers' Incentive
Plan"), in each case based on the Bank's performance in such fiscal
year. Mr. Crowell and Mr. Dellerba do not participate in the Officers'
Incentive Plan. Amounts shown in this column are the portion of the
bonuses awarded that either are paid on a current basis to the Named
Officers or are contributed to a deferred compensation plan for the
accounts of the Named Officers. Bonuses awarded and paid on a current
basis for 1996 were as follows: Mr. Crowell: $60,000; Mr. Dellerba:
$55,000; Mr. Brown: $31,000; Mr. McCauley: $31,000; Mr. Lewis: $31,000;
and Mr. Korsgaard: $31,000. Bonuses contributed to the Deferred
Compensation Plan for the account of the Named Officers in 1996 were:
Mr. Dellerba: $22,000; Mr. Brown: $14,000; Mr. McCauley: $14,000; Mr.
Lewis: $14,000; and Mr. Korsgaard: $14,000. Amounts contributed to the
Deferred Compensation Plan vest based on the duration of the
executive's employment with the Bank, at a rate of 10% per annum for
each year that the executive has been employed with the Bank. As a
result, once an executive had been employed with the Bank for ten
years, 100% of the bonuses contributed to the Deferred Compensation
Plan for his account in prior years and in the current year would be
fully vested.
(2) In certain instances, payment of a portion of the bonuses awarded for a
particular year is made contingent upon attainment by the bank of
earnings goals and the continued employment of the participant over the
next two succeeding fiscal years. The contingent portion of such
bonuses is not included in the Compensation Table as part of annual
compensation for the year for which the contingent award is made.
Instead, the contingent bonus award is shown as a "long-term incentive
plan payment for the year in which the contingency is satisfied and a
payment is made to the Named Officer.
For 1996 the Bank will award the following contingent bonuses which are
not shown in the Compensation Table, because they will be paid in 97
and 98, as indicated, but only if the Plan remains in effect and the
named participants remain employed by the Bank over the next two fiscal
years: Mr. Crowell: $30,000 for 1997 and $30,000 for 1998; Mr.
Dellerba: $27,500 for 1997 and $27,500 for 1998; Messrs. Brown,
McCauley, Lewis and Korsgaard: $15,500 to each for 1997 and $15,500 to
each for 1998.
Contingent bonuses, awarded for the Bank's 1995 performance, were paid
to the Named Officers for 1996 and will be paid for 1997, as follows:
Messrs. Crowell and Dellerba: $40,000 to each for 1996 and $40,000 to
each for 1997; Messrs. Brown, McCauley and Lewis: $22,500 to each for
1996 and $22,500 to each for 1997; Mr. Korsgaard: $3,750 for 1996 and
$3,750 for 1997.
Contingent bonuses, awarded for the Bank's 1994 performance, were paid
to the Named Officers for 1995 and 1996 as a result of the achievement
of 1995 and 1996 earnings goals as follows: Messrs. Crowell and
Dellerba: $17,500 for 1995 and $17,500 for 1996; Mr. Brown: $7,025 for
1995 and $7,025 for 1996; Messrs. McCauley and Lewis: $3,800 to each
for 1995 and $3,800 to each for 1996.
No such contingent bonuses were awarded for 1993, and as a result,
there were no long term incentive plan payments in 1994.
(3) All Other Compensation for 1996, 1995 and 1994 is comprised of (i)
amounts contributed to the Company's Stock Bonus Plan and to the
Company's 401(k) Plan (the "401k Plan") in 1996, 1995 or
71
<PAGE> 72
1994 for the account of the Named Officers, and (ii) earnings on
contributions made to the Company's Deferred Compensation Plan (the
"Deferred Compensation Plan") for the accounts of the Named Officers,
as follows: Mr. Crowell: $3,750, $3,750 and $3,750 contributed in the
401k Plan in 1996, 1995 and 1994, respectively, and $14,945, $14,755
and $11,415 of earnings in 1996, 1995 and 1994, respectively, on
amounts contributed to the Deferred Compensation Plan for his account
in years prior to 1993 (Mr. Crowell's participation in the Deferred
Compensation Plan ceased in 1993 and Mr. Crowell does not participate
in the Stock Bonus Plan); Mr. Dellerba: $4,127, $7,996 and $1,000
contributed to the Stock Bonus Plan, and $3,750, $3,750 and $1,875
contributed to the 401k Plan, in 1996, 1995 and 1994, respectively, and
$1,779 of earnings on amounts in the Deferred Compensation Plan in
1996; Mr. Brown: $4,126, $7,189 and $1,200 contributed to the Stock
Bonus Plan in 1996, 1995 and 1994, respectively, and $2,906, $2,688 and
$2,478 contributed to the 401k Plan, and $9,605, $8,313 and $6,430 of
earnings on amounts in the Deferred Compensation Plan, in 1996, 1995
and 1994, respectively; Mr. McCauley: $4,127, $7,781 and $1,400
contributed to the Stock Bonus Plan, and $3,750, $3,300 and $3,240
contributed to the 401k Plan, in 1996, 1995, and 1994, respectively,
and $1,186 of earnings on amounts in the Deferred Compensation Plan in
1996; Mr. Korsgaard: $3,645 and $1,333 contributed to the Stock Bonus
Plan and $3,133 and $600 contributed to the 401k Plan, in 1996 and
1995, respectively; and Mr. Lewis: $4,127 contributed to the Stock
Bonus Plan, $3,750 contributed to the 401k Plan, and $1,186 of earnings
on amounts in the Deferred Compensation Plan, in 1996; Mr. Lewis was
not eligible to participate in these plans in 1995 or 1994.
(4) Mr. McCauley's bonus for 1994 includes commissions paid by the Bank to
him in connection with the production of SBA loans, as follows: $23,685
in 1994. Effective September 1, 1994, this commission program was
discontinued and Mr. McCauley became a participant in the Officers'
Incentive Plan.
(5) Mr. Korsgaard was first employed by the Bank, and was designated as an
Executive Officer, in October 1995. As a result, Mr. Korsgaard received
no compensation in the years prior to 1995.
OPTION GRANTS
There were no option grants in fiscal year 1996 to the Named Officers.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information on option exercises in fiscal
1996 by the Named Officers and the value of the unexercised options held by the
Named Officers as of December 31, 1996.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options
Shares Acquired Value Options at December 31, 1996 at December 31, 1996
Name On Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable(1)
- - ---- ----------- ------------ ----------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
J.B. Crowell ....................... 13,200 $100,800 19,140 10,560 $167,025 $104,100
Raymond E. Dellerba ................ 36,200 361,445 5,500 18,800 51,147 189,673
David R. Brown ..................... 5,500 41,313 10,120 8,580 97,850 89,400
John J. McCauley ................... -0- -0- 14,300 8,800 113,475 85,775
William J. Lewis ................... -0- -0- 8,470 7,480 86,075 81,550
Richard Korsgaard .................. -0- -0- 2,200 3,300 30,000 45,000
</TABLE>
__________________
(1) The average of the high and low prices of the Company's common stock on
December 31, 1996 on the American Stock Exchange was $22.125.
72
<PAGE> 73
EMPLOYMENT AGREEMENTS
Mr. Crowell is employed as Chairman and Chief Executive Officer of the
Bank under an Employment Agreement that was entered into in 1993 and was amended
in February 1996 to extend the term of the Agreement from December 31, 1996 to
June 15, 1998 (the "Crowell Agreement"). The Crowell Agreement establishes a
minimum annual base salary of $200,000 for all services to be rendered by Mr.
Crowell to the Company and the Bank, including in his capacity as a member of
the Board of Directors of the Company and the Bank. In addition, Mr. Crowell is
entitled to earn a bonus, for each fiscal year that he is employed, the amount
of which will be determined according to a formula based on the net income of
the Bank or other measures of Bank performance for that year. If Mr. Crowell is
terminated by the Company or the Bank without cause, he would become entitled to
receive a lump sum payment equal to the lesser of twelve months' salary or the
balance of the salary payments that would otherwise have been made during the
remaining term of the Crowell Agreement (a "termination payment"). In the event
of a merger or reorganization where the Company or the Bank is not the surviving
party or more than fifty percent of the stock of the Company or the Bank is
converted into cash or securities, or a sale of all or substantially all of the
assets of the Company or the Bank, or the dissolution or liquidation of the
Company or the Bank (collectively, a "reorganization"), the Crowell Agreement
will be binding on the surviving entity in such reorganization; however, all
outstanding options granted to Mr. Crowell will vest immediately. If Mr.
Crowell's employment is terminated subsequent to a reorganization and prior to
the end of the term of his Employment Agreement, the surviving entity in such
reorganization must pay Mr. Crowell $200,000 per year for the lesser of one year
or to age 65, but in either event not less than the termination payment payable
to Mr. Crowell discussed above. Notwithstanding the foregoing, in the event that
proceedings for the liquidation of the Company or the Bank are commenced by
regulatory authorities, the Crowell Agreement will be terminated and Mr. Crowell
will be entitled to receive an amount equal to the termination payment discussed
above.
A salary continuation program also has been established for Mr. Crowell
under which Mr. Crowell (or, in the event of his death, his heirs) will receive
$94,000 per year from the Bank for 15 years following his reaching age 65 or his
death or disability, whichever first occurs.
Mr. Dellerba is employed by the Bank as President and Chief Operating
Officer pursuant to an employment agreement that was entered into in 1993 and
was amended in December 1995 (the "Dellerba Agreement"). The Dellerba Agreement,
as amended, provides for Mr. Dellerba to receive a minimum annual salary of
$162,000 beginning March 1, 1996, for all services rendered by Mr. Dellerba to
the Company and the Bank, including in his capacity as a member of the Board of
Directors of the Company and the Bank. Mr. Dellerba is also entitled to earn an
annual bonus, the amount of which will be determined according to a formula
based on the Bank's earnings or other measures of Bank performance. The Dellerba
Agreement, as amended, is for an initial term of three years ending December
1998. The term automatically extends each year for one additional year, unless
either party gives written notice of non-renewal, in which case the Dellerba
Agreement will terminate on December 31 of the second calendar year following
the calendar year in which such written notice was given. However, the Bank has
the right to terminate the Dellerba Agreement at any time prior to its
expiration, with or without cause. If Mr. Dellerba's employment is terminated by
the Bank without cause, he will be entitled to receive a termination payment
equal to one year's annual base salary then in effect. In the event of a
reorganization, the Dellerba Agreement is binding on the surviving entity in the
reorganization; however, if following a reorganization, but prior to the
expiration of Dellerba Agreement, Mr. Dellerba's employment is terminated, or he
elects to terminate his employment due to the taking by the surviving entity of
any of certain actions, specified in the Dellerba Agreement, that adversely
affects his compensation or his conditions of employment, Mr. Dellerba would be
entitled to receive a lump sum payment equal to one year of his base salary then
in effect. Notwithstanding the foregoing, in the event that proceedings for the
liquidation of the Company or the Bank are commenced by regulatory authorities,
the
73
<PAGE> 74
Dellerba Agreement will be terminated, and Mr. Dellerba would be entitled to
receive an amount equal to the lesser of six months' base salary at the
then-applicable rate, or the remaining balance payable to Mr. Dellerba under the
Dellerba Employment Agreement.
Mr. Brown, Mr. McCauley and Mr. Lewis are presently employed with the
Bank pursuant to Employment Agreements (the "Brown Agreement", the "McCauley
Agreement", and the "Lewis Agreement", respectively), that were approved by the
Bank's Board of Directors in December 1995. The Brown Agreement provides for a
minimum annual base salary of $118,000, beginning March 1, 1996; the McCauley
Agreement provides for a minimum annual base salary of $125,000; and the Lewis
Agreement provides for a minimum annual base salary of $118,000 beginning March
1, 1996. These Employment Agreements also provide that Messrs. Brown, McCauley
and Lewis will be entitled to earn annual bonuses pursuant to the Officers'
Incentive Plan. The initial term of each of these Employment Agreements is three
years. Each year, the three year term will automatically be extended for an
additional year, unless either of the parties to any such Employment Agreement
gives written notice of non-renewal to the other, in which event the term of the
Employment Agreement would end on December 31 of the second calendar year
following the calendar year in which such written notice was given. However, the
Bank has the right to terminate any of these Employment Agreements at any time
prior to their expiration, with or without cause. If the Bank terminates any
such Employment Agreement without cause, the terminated officer will be entitled
to receive a termination payment equal to six months of his base salary then in
effect. In the event of a reorganization of the Bank, the Brown, McCauley and
Lewis Agreements will be binding on the surviving entity in such reorganization.
If, however, any of them is terminated without cause following a reorganization,
or any of them elects to terminate his employment because the surviving entity
has taken any of certain actions, specified in their Employment Agreements, that
adversely affect his compensation or conditions of employment, he would become
entitled to receive a termination payment equal to one year's base salary then
in effect. Notwithstanding the foregoing, in the event that proceedings for the
liquidation of the Company or the Bank are commenced by regulatory authorities,
the Brown, McCauley and Lewis Agreements would be terminated by the Bank, in
which case Messrs. Brown, McCauley and Lewis would each become entitled to
receive an amount equal to the lesser of six months base salary at the
then-applicable rate, or the remaining balance payable to Messrs. Brown,
McCauley and Lewis under the Brown, McCauley and Lewis Agreements, respectively.
Mr. Korsgaard is employed by the Bank as Executive Vice President
pursuant to a three year employment agreement (the "Korsgaard Agreement") that
became effective October 20, 1995, following consummation of the acquisition of
Mariners Bancorp/Mariners Bank. The Korsgaard Agreement establishes a minimum
base salary of $125,000. In addition, Mr. Korsgaard is entitled to receive an
annual bonus pursuant to the Officers' Incentive Plan. In the event Mr.
Korsgaard is terminated by the Bank or any successor to the Bank without cause,
he is entitled to receive a termination payment in an amount equal to the
greater of the balance payable under the Korsgaard Agreement or twelve months of
his then current base salary. The Korsgaard Agreement may not be terminated by
an acquisition or dissolution of the Bank or the Company except in the event
that proceedings for the liquidation of the Company or the Bank are commenced by
regulatory authorities, in which case the Korsgaard Agreement, and all rights
and benefits thereunder, would be terminated.
A salary continuation program has been established for Mr. Korsgaard,
under which Mr. Korsgaard (or, in the event of his death, his heirs) will
receive $65,000 per year from the Bank for 15 years following his reaching age
65 or his death or disability, whichever first occurs.
74
<PAGE> 75
COMPENSATION OF DIRECTORS
Each non-employee director, other than the Chairman of the Board,
receives monthly director's fees of $1,100 and $200 for each committee meeting
attended, up to an aggregate of $2,300 per month. The Chairman of the Board of
Directors of the Company receives fees of $2,300 per month and is entitled to
the use of a Company-owned automobile.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Management and Incentive Committee of the Bank, which functions as
a compensation committee, is comprised of four directors, Rolf J. Engen, Lynne
Pierson Doti, Warren Fix and Donald E. Sodaro. [The members of the Management
Incentive Committee are selected by the Chairman of the Board of Directors of
the Bank, who is J. B. Crowell, the Chief Executive Officer of the Company and
the Bank. However, Mr. Crowell does not participate in the deliberations or
voting by the Committee.]
REPORT OF MANAGEMENT AND INCENTIVE COMMITTEE
The Management and Incentive Committee is a standing committee of the
Board of Directors of the Bank. The Management and Incentive Committee is
responsible for evaluating and approving compensation policies and programs for
the Bank, which employs all of the Company's executive officers, and for making
determinations regarding the compensation of the Company's executive officers,
subject to review by the full Board of Directors. In fiscal 1996 the members of
the Management and Incentive Committee were Messrs.
Engen, Fix, Sodaro and Dr. Pierson Doti.
The following report is submitted by the members of the Management and
Incentive Committee (the "Committee"), with respect to the executive
compensation policies established by the Committee and approved by the Board of
Directors of the Bank.
In establishing, and also evaluating the effectiveness of, compensation
programs for executive officers, as well as other employees of the Bank, the
Committee is guided by four basic principles:
* The Company and the Bank must be able to attract and retain
highly-qualified and experienced banking professionals with
proven performance records.
* Bonus compensation for executive officers should be tied to
the Bank's performance and financial condition, measured in
terms of the Bank's profitability, return-on-equity,
return-on-assets, and asset quality.
* The financial interests of the Company's senior executives
should be aligned with the financial interests of the
shareholders, primarily through stock option grants and other
equity-based compensation programs which reward executives for
improvements in operating results and in the market
performance of the Company's common stock.
Attracting and Retaining Executives and Other Key Employees. There is
substantial competition among banks and other financial institutions and service
organizations for qualified banking professionals. In order to retain executives
and other key employees, and to attract additional well-qualified banking
professionals when
75
<PAGE> 76
the need arises, the Company strives to offer salaries and health care,
retirement and other employee benefit programs to its executives and other key
employees which are competitive with those offered by other financial
institutions and service organizations in California. In establishing salaries
for executive officers, the Committee reviews (i) the historical performance of
the executives, and (ii) available information regarding prevailing salaries and
compensation programs at banks and other financial organizations which are
comparable, in terms of asset size, capitalization and performance, to the
Company. Another factor which is considered in establishing salaries of
executive officers is the cost of living in Southern California where the
Company operates, as such cost generally is higher than in other parts of the
country.
In order to attract and retain highly-qualified banking professionals
in the face of competition for their services from other financial institutions,
the Committee believes that it is sometimes prudent, if not necessary, to enter
into multi-year employment contracts with senior executives. The Committee
believes that such contracts benefit the Company because, among other things,
they operate to preclude competing financial institutions from seeking to hire
away valued executives from the Company. In order to mitigate potential adverse
consequences to the Bank of multi-year contracts, the Company utilizes
performance-based compensation programs to provide incentives to such executives
for extraordinary efforts that contribute to improved operating results for the
Company. In addition, the contracts contain provisions that permit the Company
to terminate an executive's employment, at any time, without cause, subject to
the payment of a severance benefit equal to between six and twelve months'
salary.
In accordance with the practice of offering multi-year contracts to
retain the services of senior executives, in 1993 the Bank entered into a
multi-year employment agreement with J.B. Crowell, who has served as the Bank's
Chief Executive Officer since the founding of the Bank in 1972, and amended that
agreement in February 1996, primarily to extend the term of that agreement to
June 15, 1998. Under that employment agreement, Mr. Crowell's base annual salary
is $200,000, the amount of which was determined based on prevailing salaries
being paid by financial institutions in Southern California to chief executives
with experience comparable to Mr. Crowell's, Mr. Crowell's long tenure with the
Bank and the continuity and stability of management that Mr. Crowell's retention
as Chief Executive Officer provides to both the Company and the Bank.
Since February 1993 Raymond E. Dellerba has been employed by the Bank
as its President and Chief Operating Officer under a multi-year employment
agreement, which was amended in December 1995, and which is consistent, in its
terms and operation, with the employment agreements that the Bank has with other
executives. The annual salary established for Mr. Dellerba was based on a review
of prevailing compensation rates in Southern California for banking executives
with Mr. Dellerba's experience.
Performance-Based Compensation. The Committee believes that a senior
executive's annual bonus compensation should be made dependent on the Bank's
profitability and performance measured against annual performance goals
established for the Bank by the Board of Directors. As a result, an Officers'
Incentive Plan has been established under which the annual compensation, in
excess of annual salaries, that is payable to the Named Officers, other than Mr.
Crowell and Mr. Dellerba, is made dependent on the achievement by the Bank of
annual profitability and other performance goals. In addition, although Mr.
Crowell and Mr. Dellerba do not participate in that Plan, the Committee's policy
is to award compensation to them, in excess of their annual salary, if the Bank
achieves or exceeds the annual performance goals established under the Officers'
Incentive Plan.
The Committee has identified several performance factors which affect a
bank's profitability and long term performance, including asset growth, the
quality of the Bank's assets, which consist primarily of loans, and the volume
and mix of deposits which affect the Bank's net interest margin or "spread."
Annual
76
<PAGE> 77
performance goals in each of these areas, as well as goals for profitability,
measured in terms of net earnings, return on equity and return on assets, are
established and weighted, in terms of their importance to the Bank's performance
and financial condition, and if the performance goals are achieved or exceeded,
a percentage of the Bank's earnings in excess of the minimum earnings goal
established for the year is set aside as a pool from which bonuses are paid.
Generally, the more senior the position held by an executive, the greater the
allocation that is made to him or her because, generally, his or her performance
has a greater impact on the Bank's performance.
As a result of the Committee's policy to award bonus compensation to
executive officers when the Bank achieves or exceeds annual performance goals
and the performance-based bonus programs that have been adopted to implement
that policy, executive compensation generally will be higher in those years in
which the Bank achieves or exceeds annual performance goals. On the other hand,
in years in which the Bank has experienced lower than anticipated profit growth,
bonuses and, as a result, total executive compensation tend to be lower. In
1995, cash and deferred bonuses, together with contingent incentives the payment
of which is dependent on the Bank's performance in 1996 and 1997, were awarded
by action of the Committee to Messrs. Crowell and Dellerba based on the Bank's
performance in 1995 and on bonus formulas in their employment agreements. Cash
and deferred bonuses, and contingent incentives, also were awarded to the other
executive officers under the Officers' Incentive Plan as a result of the Bank's
performance in 1995.
Stock Options and Equity-Based Programs. In order to align the
financial interests of senior executives and other key employees with those of
the shareholders, the Company grants stock options to its senior executives and
other key employees on a periodic basis and makes contributions, for the account
of its officers and other employees, to an Employee Stock Ownership Plan (the
"ESOP"). Stock option grants reward senior executives and other key employees
for performance that results in improved market performance of the Company's
stock, which directly benefits all shareholders. Moreover, generally, options
become exercisable in cumulative annual installments, usually over a five-year
period. The Committee believes that this feature of the option grants not only
provides an incentive for senior executives to remain in the employ of the
Company or the Bank, but also makes longer term growth in share prices important
for the executives who receive stock options.
Rolf J. Engen
Donald E. Sodaro
Warren Fix
Lynne Pierson Doti
77
<PAGE> 78
COMPANY PERFORMANCE
The following graph shows a five-year comparison of cumulative total
returns for the Company, the S&P 500 composite index and two peer group indices
published by SNL Securities, L.P. and Montgomery Securities.
COMPARISON OF CUMULATIVE TOTAL RETURN
(ELDORADO BANCORP, S&P 500, PEER GROUPS)
[GRAPHIC GOES HERE]
Source: SNL Securities
The total cumulative return on investment (change in the period-end
stock price plus reinvested dividends) for each of the periods for the Company,
the S&P Composite and the peer group companies is based on the stock price or
composite index at the end of fiscal 1991.
The graph above compares the performance of the Company with that of
(i) the S&P 500 Composite Index; (ii) an index, published by SNL Securities,
which is made up of 13 banks and bank holding companies, including the Company,
that are based and conduct business entirely or primarily in Southern
California; and (iii) an index of banks listed in the Montgomery Securities
Western Bank Monitor, made up of 10 banks and bank holding companies, including
the Company, that are based and conduct business entirely or primarily in Los
Angeles and Southern California.
78
<PAGE> 79
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
The shares of common stock constitute the only outstanding class of
voting securities of the Company. Only the shareholders of the Company of record
as of the close of business on March 3, 1997 (the "record date"), will be
entitled to vote at the meeting or any adjournment or postponement thereof. As
of March 3, 1997, 3,811,746 shares of common stock outstanding and entitled to
vote. A majority of the outstanding shares must be present, either in person or
represented by proxy, at the Annual Meeting to satisfy the quorum requirements
of California law. Each shareholder is entitled to one vote for each share held
as of the record date, except that shareholders may, on compliance with certain
requirements of applicable California law, cumulate their votes for election of
directors (see "Election of Directors").
PRINCIPAL SHAREHOLDERS
Set forth below is certain information regarding the beneficial
ownership of the Company's common stock, as of March 3, 1997, by each person who
was known by the Company to own more than 5% of the outstanding shares of common
stock of the Company, by each executive officer of the Company named in the
Compensation Table and by all directors and executive officers as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNER(1) OF CLASS
---------------- ------------------- --------
<S> <C> <C>
J.B. Crowell 291,946(2)(3) 7.6%
1371 Treasure Lane
Santa Ana, CA 92705
Raymond E. Dellerba 51,057(4) 1.3%
Richard Korsgaard 48,926(5) 1.3%
David R. Brown 21,112(6) *
John J. McCauley 18,519(7) *
William J. Lewis 8,865(8) *
All Directors and 928,832(9) 23.4%
Executive Officers of
the Company as a Group
(14 in number)
</TABLE>
__________________
* Less than 1%
(1) Except as otherwise noted below, the persons named in the table have
sole voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws where
applicable. All shares are owned of record and beneficially except as
otherwise indicated.
79
<PAGE> 80
(2) Includes 22,440 shares which may be purchased on exercise of options
during the 60-day period ending May 2, 1997; and 26,948 shares held in
Mr. Crowell's account by the Company's Employee Stock Ownership Plans.
(3) Includes 2,866 shares which are held by Mrs. Crowell as custodian for
their children, as to which Mr. Crowell may have shared voting and/or
investment power.
(4) Includes 9,900 shares which may be purchased on exercise of stock
options during the 60-day period ending May 2, 1997; and 1,107 shares
held in Mr. Dellerba's account by the Company's Employee Stock
Ownership Plans.
(5) Includes 2,200 shares which may be purchased on exercise of stock
options during the 60-day period ending May 2, 1997; and 284 shares
held in Mr. Korsgaard's account by the Company's Employee Stock
Ownership Plans.
(6) Includes 11,439 shares which may be purchased on exercise of stock
options during the 60-day period ending May 2, 1997; and 3,672 shares
held in Mr. Brown's account by the Company's Employee Stock Ownership
Plans.
(7) Includes 15,840 shares which may be purchased on exercise of stock
options during the 60-day period ending May 2, 1997; and 1,115 shares
held in Mr. McCauley's account by the Company's Employee Stock
Ownership Plans.
(8) Includes 8,470 shares which may be purchased on exercise of stock
options during the 60-day period ending May 2, 1997; and 211 shares
held in Mr. Lewis' account by the Company's Employee Stock Ownership
Plans.
(9) Includes an aggregate of 159,369 shares of common stock which may be
purchased on exercise of stock options during the 60-day period ending
May 2, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
The Bank has had, and expects to have in the future, banking
transactions in the ordinary course of its business with directors, principal
shareholders and their associates on substantially the same terms, including
interest rates and collateral securing the loans, as those prevailing at the
same time for comparable transactions with unaffiliated persons, and which do
not involve more than the normal risk of collectibility, nor present other
unfavorable features. The largest aggregate amount of loans which the Bank had
outstanding to directors of the Bank and their associates during the year ended
December 31, 1996 was $1,183,173, which represented 2.6% of the Bank's equity
capital at the time such loans were outstanding and includes $295,817 of unused
borrowing capacity under lines of credit established by the Bank.
80
<PAGE> 81
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statement Schedules
All financial statement schedules are omitted as the information is not
applicable, is not material or is otherwise furnished in the body of this Form
10-K.
Exhibits
See Index to Exhibits at Page 84 of this Form 10-K.
Reports on Form 8-K
The Company filed a current report on Form 8-K on January 2, 1997 reporting on
the Agreement and Plan of Merger between Commerce Security Bancorp, Inc. and
Eldorado Bancorp.
Based upon its review of the copies of reporting forms furnished to the Company,
or written representations that no annual Form 5 reports were required, the
Company believes that all filing requirements under Section 16(a) of the
Securities Exchange Act of 1934 applicable to its directors, officers and any
persons holding ten percent or more of the Company's Common Stock with respect
to the Company's fiscal year ended December 31, 1996, were satisfied, with the
exception that one transaction report was not filed by Mr. Crowell for a
transaction occurring in December 1995 and an annual report on Form 5 with
respect to this transaction, which should have been filed in 1996, was not filed
until January 1997.
KPMG Peat Marwick LLP was selected by the Board of Directors as the Company's
independent public accountants for the fiscal year ended December 31, 1996. The
Company has not yet selected auditors for the fiscal year ending December 31,
1997. It is anticipated that a representative of KPMG Peat Marwick LLP will
attend the meeting, will have an opportunity to make a statement and will be
available to respond to appropriate questions.
81
<PAGE> 82
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 19th day of March,
1997.
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 19, 1997.
Signature Title
--------- -----
/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
82
<PAGE> 83
/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
83
<PAGE> 84
INDEX TO EXHIBITS
Document Page
Number ----
- - ------
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)
84
<PAGE> 85
INDEX TO EXHIBITS
Document Page
Number ----
- - ------
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)
10.22 Agreement and Plan of Merger dated as of December 24, 1996,
between Commerce Security Bancorp, Inc. ("CSBI") and Eldorado
Bancorp ("Eldorado"), together with Form of Agreement of
Merger to be entered into by Eldorado, CSBI and SDN Bancorp,
Inc., a wholly-owned subsidiary of CSBI, to consummate the
Merger.
(R11)
10.23 Stock Option Agreement dated as of December 24, 1996, between
CSBI and Eldorado.
(R-12)
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 87
27 Financial Data Schedule 88
85
<PAGE> 86
(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 Exhibit 2.1 to the Registrant's Report on Form 8-K on January
2, 1997, which exhibit is incorporated herein.
(R-12) Filed as Exhibit 4.1 to the Registrant's Report on Form 8-K on January
2, 1997, which exhibit is incorporated herein.
86
<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, 033-60893, 2-73352, 33-31416, 33-46375 and 33-49482) on Form S-8 of
Eldorado Bancorp of our report dated February 5, 1997, relating to the
consolidated balance sheets of Eldorado Bancorp and subsidiary (the "Company")
as of December 31, 1996 and 1995, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996, which report appears in the
December 31, 1996, annual report on Form 10-K of Eldorado Bancorp.
Our report on the consolidated financial statements of the Company, dated
February 5, 1997, contains an explanatory paragraph that states that the
Company changed its method of accounting for investments in debt and equity
securities to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," in 1994, 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, 20, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 34,101
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 28,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 95,919
<INVESTMENTS-CARRYING> 8,082
<INVESTMENTS-MARKET> 8,074
<LOANS> 223,904
<ALLOWANCE> 4,672
<TOTAL-ASSETS> 406,761
<DEPOSITS> 353,404
<SHORT-TERM> 2,188
<LIABILITIES-OTHER> 4,225
<LONG-TERM> 0
0
0
<COMMON> 32,448
<OTHER-SE> 14,496
<TOTAL-LIABILITIES-AND-EQUITY> 406,761
<INTEREST-LOAN> 21,902
<INTEREST-INVEST> 6,156
<INTEREST-OTHER> 1,121
<INTEREST-TOTAL> 29,179
<INTEREST-DEPOSIT> 7,405
<INTEREST-EXPENSE> 7,526
<INTEREST-INCOME-NET> 21,653
<LOAN-LOSSES> 153
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 16,401
<INCOME-PRETAX> 9,471
<INCOME-PRE-EXTRAORDINARY> 9,471
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,580
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.43
<YIELD-ACTUAL> 8.48
<LOANS-NON> 4,661
<LOANS-PAST> 11
<LOANS-TROUBLED> 3,425
<LOANS-PROBLEM> 4,060
<ALLOWANCE-OPEN> 6,265
<CHARGE-OFFS> 1,976
<RECOVERIES> 230
<ALLOWANCE-CLOSE> 4,672
<ALLOWANCE-DOMESTIC> 4,672
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,672
</TABLE>
