<PAGE>
As filed with the Securities and Exchange Commission on March 12, 1999
Registration No. 333-61589
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
ELDORADO BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 6022 33-0720548
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
24012 CALLE DE LA PLATA, SUITE 340
LAGUNA HILLS, CA 92653
(949) 699-4344
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
------------------------------
ROBERT P. KELLER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ELDORADO BANCSHARES, INC.
24012 CALLE DE LA PLATA, SUITE 340
LAGUNA HILLS, CA 92653
(949) 699-4344
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
MICHAEL K. KREBS, ESQUIRE VINCENT J. PISANO, ESQUIRE
NUTTER MCCLENNEN & FISH, LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
ONE INTERNATIONAL PLACE 919 THIRD AVENUE
BOSTON, MA 02110 NEW YORK, NY 10022
TELEPHONE: (617) 439-2000 TELEPHONE: (212) 735-3000
FACSIMILE: (617) 973-9748 FACSIMILE: (212) 735-2000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If the Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED (1) SHARE(2) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common stock (par value $.01 per share)..... 2,798,900 $12.50 $34,986,250 $9,726(3)
</TABLE>
(1) Includes up to 365,000 shares of common stock that the Underwriters may
require the Company to sell solely to cover over-allotment, if any.
(2) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(a) under the Securities Act of 1933, as amended.
(3) $13,750 previously paid.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED MARCH 12, 1999
2,433,900 SHARES
[LOGO]
COMMON STOCK
---------------------
We are offering 2,174,000 shares of common stock and some of our
shareholders are offering 259,900 shares of common stock. We expect the public
offering price to be between $10.50 and $12.50 per share. We will not receive
any proceeds from the sale of common stock by the selling stockholders.
Our common stock is traded on the Nasdaq National Market under the symbol
"ELBI." The last reported sale price for the common stock on March 11, 1999 was
$11.25 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 10.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------ ------------------
<S> <C> <C>
Public offering price..................................... $ $
Underwriting discount..................................... $ $
Proceeds, before expenses, to Eldorado.................... $ $
Proceeds to the selling stockholders...................... $ $
</TABLE>
The underwriters also may purchase from us up to an additional 365,000
shares at the public offering price, less the underwriting discount, within 30
days from the date of this prospectus, to cover over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
We expect that the shares of common stock will be ready for delivery in New
York, New York on or about , 1999.
------------------------
KEEFE, BRUYETTE & WOODS, INC.
----------------
The date of this prospectus is , 1999
<PAGE>
[MAP DEPICTING THE LOCATION OF EACH OF ELDORADO'S OFFICES]
You should rely only on the information contained in this prospectus. We
have not authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. We are not, and the underwriters are not, making an offer to
sell these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus
is accurate as of the date on the front cover of this prospectus only. Our
business, financial condition, results of operations and prospects may have
changed since that date.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 10
The Company................................................................................................ 19
Use of Proceeds............................................................................................ 19
Recent Developments........................................................................................ 20
Capitalization............................................................................................. 21
Price Range of Common Stock and Dividend Policy............................................................ 22
Business................................................................................................... 23
Supplemental Selected Financial Data....................................................................... 38
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 40
Supervision and Regulation................................................................................. 61
Management................................................................................................. 73
Principal and Selling Shareholders......................................................................... 86
Certain Transactions....................................................................................... 90
Description of Capital Stock............................................................................... 93
Shares Eligible for Future Sale............................................................................ 97
Underwriting............................................................................................... 99
Legal Matters.............................................................................................. 101
Experts.................................................................................................... 101
Where You Can Find More Information........................................................................ 101
Index to Financial Statements.............................................................................. F-1
</TABLE>
------------------------
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions, including, among other things:
- adverse changes in our loan and lease portfolios and the resulting credit
risk-related losses and expenses;
- adverse changes in the economy of the Southern California region, our
primary market, that could further increase credit-related losses and
expenses;
- adverse changes in the Southern California real estate market that could
also negatively affect credit risk, as most of our commercial loans are
made to borrowers concentrated in Southern California and a substantial
portion of those loans have real estate as primary or secondary
collateral;
- the consequences of continued bank acquisitions and mergers in our market,
resulting in fewer but much larger and financially stronger competitors,
which could increase competition for financial services to our detriment;
- fluctuations in market rates and prices, which could negatively affect our
net interest margin, asset valuations and expense expectations; and
- changes in regulatory requirements of federal and state agencies
applicable to bank holding companies and banks such as Eldorado and its
banking subsidiaries, Eldorado Bank and Antelope Valley Bank.
We undertake no obligation to publicly update or otherwise revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this prospectus might not occur.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU.
YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL STATEMENTS AND
RELATED NOTES, BEFORE MAKING A DECISION TO INVEST IN THE COMMON STOCK. THE TERMS
"ELDORADO," "COMPANY," "WE" AND "OUR" AS USED IN THIS PROSPECTUS REFER TO
"ELDORADO BANCSHARES, INC." AND ITS SUBSIDIARIES AS A CONSOLIDATED ENTITY,
EXCEPT WHERE IT IS MADE CLEAR THAT SUCH TERM MEANS ONLY THE PARENT COMPANY.
ALSO, SOMETIMES WE REFER TO OUR TWO BANKING SUBSIDIARIES, ELDORADO BANK AND
ANTELOPE VALLEY BANK, COLLECTIVELY AS THE "BANKS."
UNLESS WE INDICATE OTHERWISE, ALL SHARE, PER SHARE AND FINANCIAL INFORMATION
IN THIS PROSPECTUS
- ASSUMES A PUBLIC OFFERING PRICE OF $11.50 PER SHARE,
- GIVES EFFECT TO THE ONE-FOR-TWO REVERSE STOCK SPLIT OF OUR COMMON STOCK
EFFECTIVE ON SEPTEMBER 4, 1998,
- DOES NOT GIVE EFFECT TO THE USE OF PROCEEDS OF THE OFFERING, INCLUDING THE
REDEMPTION OF ALL OF THE OUTSTANDING SHARES OF 11% SERIES B PREFERRED
STOCK, AND
- ASSUMES NO EXERCISE OF THE UNDERWRITERS' OPTION TO PURCHASE ADDITIONAL
SHARES OF COMMON STOCK FROM US.
ABOUT ELDORADO BANCSHARES, INC.
Eldorado is a bank holding company. Through our two operating subsidiaries,
Eldorado Bank and Antelope Valley Bank, we offer a broad range of commercial
banking products and services to business and retail customers. Our 25 full
service offices are located primarily in Southern California and the Sacramento
area of Northern California. Eldorado Bank also operates eight loan production
offices, four of which are located in California and four of which are located
in other western states. We augment our traditional banking products and
services with specialized products, including Small Business Administration
("SBA") loans, residential mortgage loans originated for resale into the
secondary market, equipment leases to small and medium-sized businesses and
automobile loans. Eldorado's only significant assets are the shares of stock of
Eldorado Bank and Antelope Valley Bank.
Eldorado Bank and Antelope Valley Bank are incorporated under the laws of
the State of California and are licensed by the California Department of
Financial Institutions. Eldorado Bank is a member of the Federal Reserve System.
Antelope Valley Bank is not and therefore is regulated at the federal level by
the Federal Deposit Insurance Corporation ("FDIC"). The deposits of both Banks
are insured up to applicable limits by the FDIC.
OUR PRODUCTS AND SERVICES
We market our products and services through four divisions:
- COMMUNITY BANKING DIVISION -- focusing primarily on small and medium-sized
businesses located in our California markets. Products include commercial,
consumer and real estate loans, and a broad range of deposit products and
other non-deposit banking services.
- MORTGAGE BANKING DIVISION -- originating residential mortgage loans in
California, Arizona, Nevada, Oregon and Washington through eight loan
production offices and a network of wholesale brokers for sale in the
secondary market.
- EQUIPMENT LEASING DIVISION -- generating equipment leases primarily
through wholesale brokers located throughout the United States, servicing
those leases and from time to time selling blocks of leases to other
institutions.
4
<PAGE>
- AUTOMOBILE LENDING DIVISION -- purchasing loans to finance the acquisition
of new and used automobiles originated through approximately 60 automobile
dealers located in Southern California.
OUR STRATEGY
Our strategic plan has been and continues to be the establishment and
enhancement of an attractive community banking franchise. The key elements of
our plan are to acquire community banks primarily, but not exclusively, in and
around our Southern California base, to improve core profitability and to
maintain a strong balance sheet. Since 1995, we have acquired four community
banks with combined assets of approximately $1 billion. See "Recent
Developments" and "Business -- Prior Acquisitions."
BUILDING AND ENHANCING AN ATTRACTIVE COMMUNITY BANKING FRANCHISE. We
are continually engaged in the identification and evaluation of potential
acquisitions of community banks in California. We focus primarily on
community banks that have underperformed relative to their peers but have
strong lending franchises, niche business lines or low cost deposits that
would complement our existing operations and branch network and also provide
opportunities for cost savings through branch overlap or back-office
consolidation. Consistent with this strategy, on January 22, 1999, we
completed the acquisition of Antelope Valley Bank. See "Recent
Developments."
IMPROVING CORE PROFITABILITY. Our strategy to increase profitability is
based on
- increasing the sources and volume of fee income, including fees derived
from originating and servicing SBA loans, selling and servicing equipment
leases, and originating and selling residential mortgage loans,
- expanding and diversifying our base of relatively low cost funds,
- utilizing our asset generation capability to increase the volume of
commercial loans and leases that we retain in our portfolio, particularly
SBA loans, equipment leases and commercial loans to our small business
customers, and
- actively seeking to improve operating efficiencies.
MAINTAINING A STRONG BALANCE SHEET. We seek to maintain a strong
balance sheet by managing the risk of credit-related losses and by striving
to maintain a capital base sufficient to support our strategic plan. We seek
to improve the asset quality of the banks we acquire by implementing
underwriting standards in the acquired banks' loan and lease origination
programs that place greater emphasis on cash flow than collateral coverage
as the primary source of loan repayment. To maintain a capital base
sufficient to support our existing businesses and to permit us to continue
to expand through acquisitions, our objective is to meet the "well
capitalized" regulatory standards. See "Supervision and Regulation --
Capital Adequacy Requirements." Giving effect to the offering and the use of
proceeds therefrom, our Tier 1 and Total Risk-Weighted Ratios would have
been 9.96% and 10.97%, respectively, and our Tier 1 Leverage Ratio would
have been 7.24% at December 31, 1998.
OUR HISTORY
Prior to September 1995, Eldorado's predecessor, SDN Bancorp, Inc. ("SDN"),
owned a single bank which had approximately $56 million in assets and which was
categorized as "critically undercapitalized" by federal regulators. In September
1995, SDN was recapitalized by Dartmouth Capital Group, L.P. ("DCG"), a bank
holding company organized by Robert P. Keller, Eldorado's President and Chief
Executive Officer. Following that recapitalization, Mr. Keller assumed control
of SDN, installed new management and began implementing policies to improve
asset quality and operating performance. DCG is controlled by Mr. Keller and a
majority of Eldorado's directors. See "Management" and "Principal and Selling
Shareholders." Upon the completion of the offering, DCG will continue to be
Eldorado's largest
5
<PAGE>
shareholder, owning 13.4% of the outstanding common stock, and DCG and its
affiliates will own, in the aggregate, 37.5% of the outstanding common stock.
See "Risk Factors -- Control by directors, executive officers and principal
shareholders."
Since DCG acquired control of Eldorado, the size and scope of our business
and operations have changed substantially as a consequence of our four
acquisitions. With the exception of the recent acquisition of Antelope Valley
Bank, each of our acquisitions has been accounted for using the purchase method
of accounting. Accordingly, the operating results of each such acquired company
are included in our financial statements only from the date of acquisition. As a
result of those acquisitions and the accounting treatment therefor, our
historical operating results prior to June 30, 1997 are of limited relevance in
evaluating our historical financial performance and predicting our future
operating results.
PURPOSE OF OFFERING
The principal reason for the offering is to create an active trading market
for our common stock. We believe that the existence of such a market will
increase our ability to complete acquisitions on a stock-for-stock basis.
Although we expect to continue to consider cash acquisitions, we believe that
the boards of directors and shareholders of many prospective acquisition
candidates prefer stock acquisitions because the shareholders who receive stock
are allowed to retain an equity interest in the combined company and to defer
recognition of federal income tax. We can provide no assurance, however, that an
active trading market for our common stock will develop after the offering or
that, even if such a market does develop, we will be able to acquire or will
determine that it is in our best interests to acquire businesses in stock-for-
stock transactions.
RECENT ACQUISITION
On January 22, 1999, we completed the acquisition of Antelope Valley Bank,
headquartered in Lancaster, California. In connection with the acquisition,
Eldorado issued approximately 2.8 million shares of common stock to Antelope's
shareholders. Antelope operates eight full service branches, of which five are
located in Los Angeles County, two in Kern County and one in San Bernardino
County. As of December 31, 1998, Antelope had total assets of $211.7 million. We
believe that Antelope's strong capital position, significant market presence in
the Antelope Valley area of California and niche consumer lending products are
consistent with our strategy of building and enhancing an attractive community
banking franchise. Because of Antelope's strong name recognition in its local
market, we intend to operate Antelope as a separate subsidiary for the
foreseeable future. The acquisition of Antelope was accounted for as a pooling
of interests. See "Recent Developments."
The financial information presented in this prospectus treats the
acquisition of Antelope Valley Bank as if it had been completed prior to the
periods presented herein and should be read in conjunction with our Supplemental
Consolidated Financial Statements and Notes thereto included elsewhere in this
prospectus.
OUR ADDRESS
Our principal executive offices are located at 24012 Calle de la Plata,
Suite 340, Laguna Hills, California 92653. Our telephone number is (949)
699-4344. In August 1998, we changed our name from Commerce Security Bancorp,
Inc. to Eldorado Bancshares, Inc.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by
Eldorado...................... 2,174,000 shares(1)
Common stock offered by the
selling shareholders.......... 259,900 shares
Total....................... 2,433,900 shares
Common stock to be outstanding
after the offering............ 14,278,382 shares(2)
Use of proceeds................. Net proceeds to Eldorado from the offering are currently
estimated to be approximately $23.3 million. We will use
- $12.0 million to redeem all of our outstanding shares of
11% Series B Preferred Stock with an aggregate liquidation
value of $11.7 million,
- $338,000 to repay indebtedness to DCG, and
- the balance for general corporate purposes including
investment in our banking subsidiaries, which will
enable them to increase our interest-earning assets. See
"Use of Proceeds" and "Certain Transactions."
We are also considering using some of the net proceeds
from the offering to purchase a portion of the 11 3/4%
Subordinated Capital Income Securities, Series A issued by
our subsidiary, CSBI Capital Trust I (the "Capital
Securities"), out of the $27.7 million currently
outstanding. We cannot guarantee, however, that we will be
able to purchase or determine that it is in our best
interests to purchase any or all of the Capital
Securities.
Nasdaq National Market Symbol... "ELBI"
</TABLE>
- ------------------------
(1) Eldorado has granted the underwriters a 30-day option to purchase up to an
additional 365,000 shares of common stock. See "Underwriting."
(2) Does not include
(a) an aggregate of 2,241,216 shares of common stock issuable upon
conversion of outstanding common stock warrants, and
(b) approximately 1,054,442 shares of common stock to be reserved for
issuance under our 1997 Stock Option Plan upon completion of the
offering, pursuant to which options to purchase approximately 699,200
shares will be outstanding with an average exercise price of
approximately $11.11 per share.
See "Capitalization," "Management" and "Shares Eligible for Future Sale."
7
<PAGE>
SUPPLEMENTAL SUMMARY FINANCIAL DATA
The following supplemental summary financial data of Eldorado is derived
from the Supplemental Selected Financial Data appearing elsewhere in this
prospectus, and should be read in conjunction with the Consolidated Financial
Statements and the Supplemental Consolidated Financial Statements of Eldorado
and the Notes thereto and the information set forth under "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The supplemental summary financial information presented in the
following table includes financial information of Antelope Valley Bank as if its
acquisition had been completed at the beginning of the earliest period
presented. As described elsewhere in this prospectus, because of the three
acquisitions that Eldorado completed between September 1995 and June 30, 1997,
which were accounted for under the purchase method of accounting, our historical
operating results prior to June 30, 1997 are of limited relevance in evaluating
our historical financial performance and predicting our future operating
results.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
SUMMARY OF CONSOLIDATED INCOME
Net interest income before provision for
loan and lease losses................. $ 54,373 $ 42,764 $ 19,774
Provision for loan and lease losses..... 5,552 2,549 1,215
----------- ---------- ----------
Net interest income after provision for
loan and lease losses................. 48,821 40,215 18,559
Noninterest income...................... 25,888 19,129 9,416
Noninterest expenses
Amortization of goodwill and
intangibles......................... 3,996 2,881 268
Carrying costs and losses on OREO..... 219 395 293
Provision for recourse obligation..... -- 2,021 --
Other noninterest expense............. 59,062 45,103 23,368
----------- ---------- ----------
Total noninterest expense........... 63,277 50,400 23,929
----------- ---------- ----------
Income before income tax................ 11,432 8,944 4,046
Income tax provision (benefit).......... 6,018 4,034 (373)
----------- ---------- ----------
Net income.............................. 5,414 4,910 4,419
Preferred dividends..................... 1,282 731 --
----------- ---------- ----------
Net income available to common
shareholders.......................... $ 4,132 $ 4,179 $ 4,419
----------- ---------- ----------
----------- ---------- ----------
Comprehensive income.................... $ 5,896 $ 4,954 $ 4,169
----------- ---------- ----------
----------- ---------- ----------
Per share data (1):
Weighted Average shares outstanding
Basic................................. 11,955,313 10,188,177 5,432,001
Diluted............................... 12,433,770 11,416,266 5,432,001
Basic:
Net income per share.................... $ 0.35 $ 0.41 $ 0.81
Net income per share, excluding goodwill
amortization (2)...................... $ 0.68 $ 0.69 $ 0.86
Diluted:
Net income per share.................... $ 0.33 $ 0.37 $ 0.81
Net income per share, excluding goodwill
amortization (2)...................... $ 0.65 $ 0.62 $ 0.86
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------
1998 1997 1996
----------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
SUMMARY OF CONSOLIDATED FINANCIAL
POSITION
Total assets............................ $ 1,397,550 $1,092,014 $ 584,270
Loans and leases, net................... 881,744 722,010 414,692
Goodwill and other intangibles.......... 67,378 70,903 10,736
Deposits................................ 1,221,487 933,070 510,661
Long-term debt.......................... 27,657 27,657 537
Common shareholders' equity............. 107,874 102,757 58,495
Shareholders' equity.................... 119,533 114,416 58,495
Average assets.......................... 1,206,489 886,605 381,042
Average earning assets.................. 1,005,460 726,262 320,639
Average common equity................... 106,050 83,890 37,582
Per share data (1):
Common shares outstanding............... 11,955,313 11,955,313 7,630,330
Diluted common shares outstanding....... 12,433,770 12,433,853 7,630,330
Book value per share.................... $ 9.02 $ 8.60 $ 7.67
Diluted book value per share............ 8.68 8.26 7.67
Tangible book value per share........... 3.39 2.66 6.26
Diluted tangible book value per share... 3.26 2.56 6.26
SELECTED PERFORMANCE RATIOS
Return on average assets................ 0.45% 0.55% 1.16%
Return on average assets, excluding
goodwill amortization (2)............. 0.78 0.88 1.23
Return on average common equity......... 3.90 4.98 11.76
Return on average common equity,
excluding goodwill amortization (2)... 7.66 8.42 12.47
Net yield on interest earning assets.... 5.41 5.89 6.17
Efficiency ratio (3).................... 73.59 72.87 80.05
Net interest income before provision for
loan and lease losses to average
assets................................ 4.51 4.82 5.19
SELECTED ASSET QUALITY RATIOS (4)
Nonperforming assets to total portfolio
loans and leases and OREO............. 1.90% 3.40% 4.38%
Nonperforming assets to total assets.... 0.89 2.03 2.77
Allowance for loan and lease losses to
portfolio loans and leases............ 1.40 1.69 1.79
Allowance for loan and lease losses to
nonperforming loans and losses........
Net charge-offs to average portfolio
loans and leases...................... 1.15 0.39 0.48
SELECTED CAPITAL RATIOS (4)
Tier 1 Leverage Ratio................... 6.37% 6.91% 8.30%
Tier 1 Risk-Weighted Ratio.............. 8.76 9.30 10.97
Total Risk-Weighted Ratio............... 9.78 10.60 12.35
Average common equity to average
assets................................ 8.79 9.46 9.86
</TABLE>
- ------------------------
(1) Share and per share amounts have been retroactively restated to reflect (i)
a one-for-two reverse split of Eldorado common stock effective September 4,
1998 and (ii) changes in the presentation of earnings per share.
(2) Excludes the amortization of goodwill and other intangibles. Although such
presentation is not defined by GAAP, management believes it to be beneficial
to gaining an understanding of Eldorado's financial performance in
comparison to its peer group.
(3) As used in this prospectus, the term efficiency ratio means noninterest
expense--excluding amortization of goodwill and other intangibles, losses
and carrying costs of OREO and provision for recourse obligations--as a
percentage of total revenue less interest expense. Our definition of
efficiency ratio may not be comparable to that used by other banking
companies.
(4) Selected Asset Quality Ratios and Selected Capital Ratios are period end
ratios, except for net charge-offs to average portfolio loans and leases,
average common equity to average assets and the Tier 1 Leverage Ratio. The
average ratios are based on daily average balances for the indicated
periods. The Tier 1 Leverage Ratio is based on the average daily balances
for the three-month period ended as of the indicated date. Portfolio loans
and leases are exclusive of residential mortgage loans held for sale. For
information relating to Eldorado's regulatory capital requirements, see
"Supervision and Regulation."
9
<PAGE>
RISK FACTORS
INVESTING IN THE COMMON STOCK WILL PROVIDE YOU WITH AN EQUITY OWNERSHIP
INTEREST IN ELDORADO. AS AN ELDORADO SHAREHOLDER, YOU WILL BE SUBJECT TO RISKS
INHERENT IN OUR BUSINESS. THE VALUE OF YOUR INVESTMENT MAY INCREASE OR DECREASE
AND COULD RESULT IN A LOSS. THE COMMON STOCK OFFERED BY THIS PROSPECTUS DOES NOT
CONSTITUTE A DEPOSIT OR OTHER OBLIGATION OF A BANK AND IS NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY OTHER GOVERNMENTAL AGENCY.
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AS WELL AS OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES OF THE COMMON
STOCK.
EFFECT OF RECENT ACQUISITIONS--OUR HISTORICAL OPERATING RESULTS MAY BE OF
LIMITED USE TO YOU IN
EVALUATING OUR HISTORICAL PERFORMANCE AND PREDICTING OUR FUTURE RESULTS
Since September 1995, when Dartmouth Capital Group, L.P. ("DCG") acquired
control of SDN Bancorp, Inc., Eldorado's predecessor, our operations have
changed substantially. During the past three years, we have acquired four banks
with combined assets of approximately $1 billion. The acquisition of Eldorado
Bancorp in June 1997, itself, nearly doubled our assets. With the exception of
the recent Antelope Valley Bank acquisition, we used the purchase method of
accounting for each of our three other acquisitions. Therefore, the operating
results of each of those acquired companies are included in our financial
statements only from the date of acquisition. Because of our recent acquisitions
and our use of the purchase method of accounting, our historical operating
results before June 30, 1997 are of limited relevance in evaluating our
historical financial performance and predicting our future operating results.
RISKS RELATED TO GROWTH STRATEGY--FAILURE TO INTEGRATE ACQUISITIONS SUCCESSFULLY
COULD HAVE A NEGATIVE EFFECT ON OUR BUSINESS
Since September 1995, we have experienced rapid growth through acquisitions.
An important element of our business strategy continues to involve active and
substantial efforts to acquire or combine with additional financial institutions
that would complement our existing businesses. We can provide no assurance,
however, that we will be able to identify additional suitable acquisition
targets or complete any acquisitions.
If we are able to identify and complete future acquisitions, our ability to
successfully integrate into our operations any acquired businesses, including
our recent acquisition of Antelope Valley Bank, depends on our ability to
- monitor operations,
- control costs,
- maintain positive customer relations,
- maintain regulatory compliance, and
- attract, assimilate and retain additional qualified personnel.
If we fail to achieve any of those objectives in an efficient and timely
manner, we may experience interruptions and dislocations in our business. Any of
these problems could harm our existing operations, including our ability to
retain the customers of the acquired businesses, operate any acquired business
profitably or otherwise implement our growth strategy. In addition, those types
of concerns may cause our federal or state banking regulators to require us to
delay or forgo any proposed acquisition until those problems have been addressed
to their satisfaction.
Another risk associated with our growth strategy includes the possibility
that there exists or could exist liabilities assumed in connection with an
acquisition, including the presence of any liabilities unknown to Eldorado when
it acquired the company, that may adversely affect our business.
Our failure to manage our acquisition strategy effectively could have a
negative effect on our business.
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WE ARE DEPENDENT UPON THE CONTRIBUTIONS OF OUR KEY MANAGEMENT PERSONNEL
Our future success depends, in large part, upon the continuing contributions
of our key management personnel. Three of our executive officers have been with
Eldorado for less than a year. The loss of services of one or more key employees
could have a material adverse effect on us.
Our future success is also dependent upon our continuing ability to attract
and retain other highly qualified personnel. Competition for such employees
among financial institutions in California is intense. Any inability to attract
and retain additional key personnel could harm our business. We can provide no
assurance that we will be able to retain any of our key officers and employees
or attract and retain qualified personnel in the future.
Mr. Keller, Eldorado's President and Chief Executive Officer, has an
employment agreement which expires on September 30, 2000. The agreement will
automatically extend for another year unless Mr. Keller or Eldorado gives notice
at least one year prior to the expiration date of the agreement. In addition,
Eldorado is the beneficiary of a key-man life insurance policy on Mr. Keller
with a benefit of approximately $1.3 million. Certain members of our senior
management also have employment or severance agreements with us. See
"--Employment contracts, change in control provisions and employee severance
compensation," "Executive Compensation--Keller Agreement" and "Executive
Compensation--Other Executive Employment Agreements."
CONCENTRATION OF BUSINESS IN CALIFORNIA--A DOWNTURN IN THE CALIFORNIA ECONOMY OR
A SIGNIFICANT NATURAL DISASTER IN CALIFORNIA MAY ADVERSELY AFFECT OUR BUSINESS
CALIFORNIA ECONOMY. Substantially all of our business is located in
California, with a particular concentration in Southern California. As a result,
our financial condition and operating results are subject to changes in economic
conditions in that region. In the early to mid-1990s, California experienced a
significant and prolonged downturn in its economy, which adversely affected
financial institutions, including Eldorado and its predecessors. Although the
general economy in California has recovered from that prolonged recession, we
remain subject to changes in economic conditions in that region. We can provide
no assurance that conditions in the California economy will not deteriorate in
the future and that such deterioration will not have a material adverse effect
on us.
Among other factors, the California economy may be adversely affected by
prolonged weakness in one or more of the Asian economies to which California
exports a substantial amount of products and services. For the nine months ended
September 30, 1998, exports to foreign countries totaled $80.0 billion or
approximately 10% of California's Gross State Product, reflecting a 6.1% decline
from $85.2 million for the comparable period in 1997. California, with its
greater dependence on Asian trade and investment, is more at risk from Asia's
economic problems than the rest of the United States. For the first three
quarters of 1998, exports to Asian countries totaled $41.3 billion and
represented 51.6% of California's total exports, reflecting an 18.7% decrease
from $50.8 billion for the same period in 1997. There can be no assurance that
the State's economy will not be adversely affected by prolonged weakness in one
or more of the Asian economies.
CALIFORNIA CLIMATE AND GEOLOGY. A substantial portion of our assets consists
of loans secured by real estate in California. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Historically,
California has experienced, on occasion, significant natural disasters,
including earthquakes, brush fires and, recently, certain significant weather
abnormalities, including flooding and coastal errosion, attributable to the
weather phenomena known as "El Nino" and "La Nina." The availability of
insurance for losses from such catastrophes is limited. The occurrence of one or
more of those circumstances could impair the value of the collateral for our
real estate secured loans and have a material adverse effect on us.
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CONCENTRATION IN SBA LENDING--CHANGES IN SBA REGULATIONS COULD REDUCE OUR SBA
LOAN ORIGINATIONS AND REVENUES, WHICH ARE SIGNIFICANT
We make a significant percentage of our loans and derive a significant
percentage of our revenue under the loan programs of the U.S. Small Business
Administration (the "SBA"). Our revenue from SBA loan programs constituted
approximately 12.4% of our total interest and noninterest income for the year
ended December 31, 1998.
In recent years, Congress has considered proposals that would substantially
reduce
- the scope of various SBA programs,
- the level of SBA funding, and
- the attractiveness of the programs that the SBA may offer to both
borrowers and lenders.
If Congress enacts any such type of proposal, our SBA loan originations and our
revenues from originating and servicing such loans could be significantly
reduced. See "Supervision and Regulation--Effect of Governmental Policies and
Legislation--Reliance on SBA Programs."
RELIANCE ON POTENTIALLY VOLATILE TITLE AND ESCROW DEPOSITS TO FUND SHORT-TERM
ASSETS
We fund loans and leases primarily through the deposits of our customers and
various lines of credit. Among these deposits are deposits provided by title or
escrow companies. We consider such deposits to be volatile because the deposit
amounts increase and decrease significantly throughout the course of any given
period. Title and escrow deposits tend to increase significantly at the end of a
month, when real estate closings tend to occur. Such deposits are also subject
to seasonal fluctuations, tending to decrease during those seasons when the
volume of residential real estate transactions is lower. Only a limited number
of our customers control such deposits. As a result, the decision by any one
depositor to withdraw its funds could have a significant immediate effect on our
total deposits at any given time.
As a consequence of their potential volatility, we utilize title and escrow
deposits solely to fund short-term assets, including mostly residential
mortgages held for sale, which are generally sold within 30 days after such
mortgage loans are funded. We believe that we have adequate alternative sources
of liquidity, such as borrowings from the Federal Home Loan Bank of San
Francisco and other lines of credit, to offset any significant fluctuations in
or the complete withdrawal of our title and escrow deposits. We can provide no
assurance, however, that any alternative funding sources will be available at a
reasonable cost if and when needed. If we cannot obtain any necessary
replacement funding on reasonable terms, our business could be harmed. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CHANGES IN INTEREST RATES MAY ADVERSELY AFFECT OUR BUSINESS
CHANGES IN NET INTEREST INCOME. Our profitability is significantly dependent
on our net interest income. Net interest income is the difference between our
interest income on interest-earning assets, such as loans and leases, and our
interest expense on interest-bearing liabilities, such as deposits. Therefore,
any change in general market interest rates, whether as a result of changes in
the monetary policies of the Federal Reserve or otherwise, can have a
significant effect on our net interest income. Our assets and liabilities may
react differently to changes in overall market rates or conditions because there
may be mismatches between the repricing or maturity characteristics of our
assets and liabilities. As a result, changes in interest rates can affect our
net interest income in either a positive or a negative way.
CHANGES IN THE YIELD CURVE. Changes in the difference between short and
long-term interest rates (commonly known as the "yield curve") may also harm our
business. For example, we use short-term deposits and borrowings to fund
mortgage loans held by Eldorado during the mortgage warehouse period (the period
between the origination of such mortgage loans and their sale into the secondary
market). Such short-term deposits and borrowings yield short-term rates. The
mortgage loans, however, generally yield long-term rates. If the difference
between short-term and long-term interest rates shrinks or disappears, we would
earn less interest income during the mortgage warehouse period.
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EFFECT OF CHANGING INTEREST RATES ON MORTGAGE ORIGINATION VOLUME. Changes in
interest rates can also have other significant effects on our mortgage banking
business. In periods of rising interest rates (as occurred during 1994),
financial institutions such as Eldorado typically originate fewer mortgage
loans. In that case, our mortgage banking income may decline. In periods of
declining interest rates (as occurred during 1998), mortgage loan originations
typically increase, particularly those due to refinancings of existing
mortgages. Other effects of fluctuations in interest rates include the
following:
- changes in the revenue received by Eldorado from the sale of mortgage
loans if there is a change in interest rates between the time the interest
rate on the mortgage loan is set and the time we sell the loan, and
- changes in the revenue received by Eldorado from the sale of mortgage
servicing rights to third parties. For example, in periods of declining
interest rates, sales of servicing rights related to higher interest rate
loans may be less profitable because of the increased risk of prepayment
than sales of servicing rights related to lower interest rate loans.
HEDGING RISKS. We retain some risk from changing interest rates until we
sell a mortgage loan, because our purchase and sale commitments are based on
estimates of loan closings (which are sensitive to interest rate changes). In
addition, because the instruments we use to lessen or hedge interest rate risk
may not respond to changes in interest rates to the same degree as the mortgage
loan pipeline being hedged, some interest rate risks remain even in a fully
hedged portfolio. For example, during the fiscal quarter ended December 31,
1998, Eldorado incurred a loss of $1.1 million on hedging activities primarily
because of an unexpected change in the correlation between the value of the
mortgage loans in our pipeline and mortgage-backed securities used for hedging.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET
There is intense competition in California and elsewhere in the United
States for banking customers. We experience competition for deposits from many
sources, including credit unions, insurance companies and money market and other
mutual funds, as well as other commercial banks and savings institutions. We
compete for loans and leases primarily with other commercial banks, mortgage
companies, commercial finance companies and savings institutions. In addition,
our Automobile Lending Division competes with the financial services affiliates
of the major automobile manufacturers. Recently, certain out-of-state financial
institutions have entered the California market, which has also increased
competition. Many of our competitors have greater financial strength, marketing
capability and name recognition than we do, and operate on a statewide or
nationwide basis. In addition, recent developments in technology and mass
marketing have permitted larger companies to market loans more aggressively to
our small business customers. Such advantages may give our competitors
opportunities to realize greater efficiencies and economies of scale than we
can. We can provide no assurance that we will be able to compete effectively
against such competition.
Federal legislation enacted in August 1998 eased membership limits on credit
unions, which previously were permitted to serve only members that shared a
single, common bond. We expect that such legislation will increase the ability
of credit unions to compete with community banks, such as Eldorado Bank and
Antelope Valley Bank, for both deposits and loans.
WE CANNOT BE CERTAIN THAT THE VALUE OF THE GOODWILL RECOGNIZED IN ACQUISITIONS
WILL BE REALIZED
As of December 31, 1998, we had total assets of approximately $1.4 billion,
of which $67.4 million, or 4.8% of total assets and 56.4% of shareholders'
equity, was goodwill. The goodwill was recognized in our three acquisitions that
were accounted for using the purchase method of accounting. Our ratios of
tangible common equity to assets, 3.0%, and tangible total equity to assets,
3.9%, at that date were substantially below the average ratios for commercial
banks in our peer group.
We can provide no assurance that the value of our goodwill will ever be
realized. We monitor the effect that certain events and circumstances may have
that would indicate that all or a portion of the carrying amount of goodwill may
no longer be recoverable. In such circumstances, an additional charge to
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earnings would become necessary to reflect the fact that such goodwill is not
recoverable. Although as of the date of this prospectus, we did not consider the
goodwill on our balance sheet to be impaired, we can provide no assurance that
it will remain so. Any future determination requiring the write-off of a
significant portion of unamortized goodwill could adversely affect Eldorado.
PRIOR LOSSES AT PREDECESSOR SUBSIDIARY BANKS
Prior to June 30, 1997, we conducted our banking operations through four
separate bank subsidiaries: Commerce Security Bank, Eldorado Bank, Liberty
National Bank and San Dieguito National Bank. Within the relatively recent past,
high levels of nonperforming assets, a reliance on high-cost brokered deposits
and excessive overhead costs, among other factors, adversely affected Commerce
Security, Liberty and San Dieguito. Adverse economic conditions in California,
including declining real estate values during the early to mid-1990s, were
partly to blame for such problems. Liberty incurred net losses of $1.3 million
in 1994 and $1.5 million in 1993; San Dieguito incurred net losses of $1.1
million in 1995, $1.0 million in 1994 and $2.0 million in 1993; and Commerce
Security, which we acquired on September 1, 1996, incurred net losses of
$371,000 for the three months ended March 31, 1997 and $447,000 for the three
months ended December 31, 1996.
As a result of management's efforts, together with an improved California
economy, we believe that substantial progress has been made toward improving our
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." We can provide no assurance, however, that
the operating problems experienced by our prior subsidiaries will not adversely
affect Eldorado in the future.
SUPERVISION AND REGULATION--OUR BANKS OPERATE IN A HIGHLY REGULATED ENVIRONMENT
Eldorado and the Banks operate in a highly regulated environment and are
subject to supervision and examination by various federal and state regulatory
agencies. As a bank holding company, Eldorado is subject to regulation and
supervision primarily by the Federal Reserve. Eldorado Bank and Antelope Valley
Bank, as California-chartered commercial banks, are subject to supervision and
regulation primarily by the California Department of Financial Institutions (the
"DFI"). As a member of the Federal Reserve System, Eldorado Bank is also
regulated by the Federal Reserve. Antelope Valley Bank is not a member of the
Federal Reserve System and therefore is regulated at the federal level by the
FDIC.
Federal and California laws and regulations govern numerous matters,
including
- adequate capital and financial condition,
- permissible types, amounts and terms of extensions of credit and
investments,
- permissible non-banking activities, and
- restrictions on dividend payments.
The federal and state regulators have extensive discretion and power to
prevent or remedy unsafe or unsound practices or violations of law by banks and
bank holding companies. Eldorado and the Banks also undergo periodic
examinations by one or more regulatory agencies. Following such examinations, we
may be required, among other things, to change our asset valuations or the
amounts of required loss allowances or to restrict our operations. Such actions
would result from the regulators' judgments based on information available to
them at the time of their examination. The Banks' operations are also subject to
a wide variety of state and federal consumer protection and similar statues and
regulations. Such federal and state regulatory restrictions limit the manner in
which Eldorado and the Banks may conduct business and obtain financing. Those
laws and regulations can and do change significantly from time to time, and any
such change could adversely affect Eldorado. See "Supervision and Regulation."
Federal and state regulators have the power to impose substantial fines and
other civil and criminal penalties under a variety of circumstances. In October
1998, we discovered, on our own initiative, that, during a two-year period
beginning while Eldorado Bank was operated by prior management, one of its
branches failed to file currency transaction reports under the Bank Secrecy Act
with respect to one of its
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customers that routinely deposits large amounts of currency with Eldorado Bank.
The Bank Secrecy Act authorizes criminal and civil penalties, including fines,
for the failure to file currency transaction reports. We voluntarily reported
such failure to the U.S. Department of Treasury promptly after we became aware
of the matter. We believe the failure to file was inadvertent and therefore
should not result in the imposition of any criminal penalty. As of the date of
this prospectus, we have not received any communication from the Department of
Treasury regarding our report. We do not know at this point what action, if any,
the Department of Treasury will take in this matter.
As a consequence of the poor financial performance of Commerce Security,
Liberty and San Dieguito during the early and mid-1990s and their resulting
weakened financial condition, each was required to enter into a memorandum of
understanding with their respective supervising regulators. Each of those
memoranda was terminated before or at the same time as DCG acquired control of
such bank. Neither Eldorado nor either of the Banks is subject to any memorandum
of understanding or other extraordinary supervisory agreement with any
regulatory authority. Eldorado did make certain commitments to the Federal
Reserve in connection with the acquisition of Eldorado Bancorp, however. Among
other things, those commitments provide that we will not redeem, retire or
repurchase any of our preferred stock, incur any debt or pay any dividend on the
common stock without the prior approval of the Federal Reserve. See "Supervision
and Regulation."
NO PRESENT INTENTION TO PAY DIVIDENDS; RESTRICTIONS ON PAYMENT OF DIVIDENDS BY
THE BANKS TO ELDORADO; PROHIBITION ON DIVIDENDS BY ELDORADO BANK TO ELDORADO
WITHOUT PRIOR REGULATORY APPROVAL
We have never paid cash dividends on our common stock and do not plan on
paying such dividends in the foreseeable future. Our ability to declare a
dividend on the common stock will depend upon, among other things, future
earnings, operating and financial condition, capital requirements, general
business conditions, and receipt of regulatory approvals, if then required.
Eldorado is a legal entity separate and distinct from Eldorado Bank and
Antelope Valley Bank. Substantially all of our revenue and cash flow, including
funds available for the payments of dividends and other operating expenses, is
dependent upon the payment of dividends to Eldorado from the Banks. Dividends
payable by each of the Banks are restricted under California law to
- the lesser of its retained earnings or its net income for the latest three
fiscal years, less dividends previously declared during that period, or
- with the approval of the DFI, the greater of its retained earnings, its
net income for the last fiscal year or its net income for the current
fiscal year.
In connection with the June 1997 acquisition of Eldorado Bancorp, Eldorado
Bank paid a dividend of $14.0 million, which exceeded its net income for the
latest three fiscal years. As a result, Eldorado Bank currently may not pay a
dividend without the prior approval of the DFI. The DFI may, in its discretion,
approve the payment of a dividend as long as the amount does not exceed the
greater of its retained earnings (approximately $9.0 million as of December 31,
1998), its net income for its last fiscal year (approximately $9.3 million for
the year ended December 31, 1998), and its net income for its current fiscal
year. As of December 31, 1998, the maximum dividend that Antelope Valley Bank
could pay without prior DFI approval was $1.5 million.
In addition to California law, under Federal Reserve regulations, Eldorado
Bank may not pay a dividend without prior Federal Reserve approval if
- it would exceed its undivided profits as reported in its most recent
Report of Condition and Income (approximately $9.0 million as of December
31, 1998), or
- the total of all dividends declared in one year exceeds the total of its
net income for that year plus the retained net income for the preceding
two calendar years.
Under the second of those tests, Eldorado Bank is currently prohibited from
paying a dividend without the prior approval of the Federal Reserve. We can
provide no assurance that the DFI and the Federal Reserve
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will approve the payment of any dividend by Eldorado Bank to the Company,
regardless of the amount of Eldorado Bank's earnings. See "Supervision and
Regulation."
NO ASSURANCES AS TO ADEQUACY OF ALLOWANCE FOR LOAN AND LEASE LOSSES
We believe that our allowance for loan and lease losses is maintained at a
level adequate to absorb any inherent losses in our loan and lease portfolio.
Management's estimates are used to determine the allowance that is considered
adequate to absorb losses inherent in the existing loan and lease portfolio.
Management's estimates are based on historical loan loss experience, specific
problem loans and leases, current economic conditions that may affect the
borrower's ability to pay, volume, growth and composition of the loan portfolio,
value of the collateral and other relevant factors. These estimates are
inherently subjective and their accuracy depends on the outcome of future
events. Ultimate losses may differ from current estimates. Depending on changes
in economic, operating and other conditions, including changes in interest
rates, that are generally beyond our control, our actual loan and lease losses
could increase significantly. As a result, such losses could exceed our current
allowance estimates. We can provide no assurance that our allowance is
sufficient to cover actual loan and lease losses should such losses be realized.
In addition, the Federal Reserve and the DFI, as an integral part of their
respective supervisory functions, periodically review our allowance for loan and
lease losses. Such regulatory agencies may require us to increase our provision
for loan and lease losses or to recognize further loan or lease charge-offs,
based upon judgments different from those of management. Any increase in our
allowance required by the Federal Reserve or the DFI could have a negative
effect on Eldorado. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
YEAR 2000 PREPAREDNESS
The Year 2000 issue is a computer programming concern that may adversely
affect our information technology systems, such as our item and data processing
applications, as well as so-called embedded technology, such as microprocessors
that control various functions, such as our security systems and
telecommunication equipment. The phrase "Year 2000 issue" refers to the concern
that certain computer applications will not be able to distinguish dates in the
twentieth and twenty-first centuries. We have developed a plan to identify and
remedy the material Year 2000 issues that directly affect our systems. This plan
also includes procedures to evaluate the preparedness of our key vendors and
significant customers in addressing the Year 2000 issue. We believe that we have
taken reasonable steps to address our internal Year 2000 concerns and to inquire
about the actions that our vendors and customers have taken to identify and
address the Year 2000 issue. We can provide no assurance, however, that the
impact of the Year 2000 problem on Eldorado or on our vendors and customers will
not adversely affect our business. In particular, it will be difficult for us to
implement viable contingency plans for any adverse effect of the Year 2000 issue
on local or national telecommunications systems or on our local electric
utility. Furthermore, Year 2000 problems may turn out to exist in portions of
important computer programs not now suspected, and we can provide no assurance
that Eldorado will not be adversely affected by issues we have yet to identify.
If we fail to adequately address the Year 2000 issue pertaining to our internal
operations or those of our customers and vendors, that failure could adversely
affect our business. See "Management's Discussion and Analysis of Operations and
Financial Condition--Year 2000 Preparedness."
In addition, bank regulatory agencies, as part of their supervisory
function, are assessing and will continue to assess Year 2000 readiness. The
failure of a financial institution, such as Eldorado, to take appropriate steps
to address deficiencies in its Year 2000 project management process may result
in one or more regulatory enforcement actions which could have a material
adverse effect on such institution. These actions may include the imposition of
fines, or result in the delay or denial of regulatory applications which would
have a material adverse effect on our strategic plan to grow by acquisition. See
"--Risks related to growth strategy--Failure to integrate acquisitions
successfully could have a negative effect on our business."
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CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS
Our directors, executive officers and principal shareholders, together with
their affiliates, will beneficially own 55.5% of the shares of the voting common
stock outstanding at the closing of the offering. Upon completion of the
offering and giving effect to a partial distribution of shares of common stock
that DCG will make to its partners prior to the completion of the offering, DCG
will beneficially own 13.4% of the shares of voting common stock then
outstanding. As a result, if such shareholders take a common position, they
could control the outcome of corporate actions requiring shareholder approval,
including the election of directors and the approval of significant corporate
transactions, such as a merger or sale of all or substantially all of our
assets. We can provide no assurance that the investment objectives of such
shareholders will be the same as our other shareholders. See "Management" and
"Principal and Selling Shareholders."
WE HAVE EMPLOYMENT CONTRACTS WITH SOME EXECUTIVE OFFICERS THAT PROVIDE FOR
SEVERANCE COMPENSATION IF THERE IS A CHANGE IN CONTROL AND FOR THE AWARD OF
STOCK COMPENSATION UPON THE ISSUANCE OF COMMON STOCK
We have entered into employment agreements with Mr. Keller and certain other
of our executive officers and severance agreements with certain executive
officers of Eldorado and the Banks. Those agreements provide for severance
payments if their respective employment arrangements are terminated in
connection with a change in control of Eldorado or the Banks. Those provisions
may have the effect of increasing the cost of acquiring Eldorado, thereby
discouraging future attempts to take over Eldorado or reducing the value
available to shareholders in the event of a takeover. See "Executive
Compensation."
Until our Tier 1 Capital (for regulatory purposes) is greater than $125.0
million, we generally are obligated to grant stock compensation to Mr. Keller
whenever we issue additional shares of stock, whether in connection with the
offering, a future acquisition or otherwise, except upon the exercise of stock
options under our 1997 Stock Option Plan (the "Option Plan"). Mr. Keller's
employment agreement provides that he is entitled to receive an award of
restricted stock equal to approximately 3.1% of the shares of common stock or
common stock equivalents issued by us. In addition, until our Tier 1 Capital is
greater than $125.0 million, the number of shares of common stock available for
issuance under the Option Plan will automatically increase by an amount equal to
approximately 6.4% of the additional shares issued by us. Mr. Keller's
employment agreement provides that he is entitled to receive an option to
purchase shares of stock equal to one-half of the increase in the total number
of shares of common stock issuable under the Option Plan. The compensation
expense attributable to the grant of restricted stock to Mr. Keller is recorded
as unearned compensation and is shown as a separate component of shareholders'
equity. Unearned compensation is amortized to expense over a vesting period that
expires in February 2001, when Mr. Keller is age 62. As of December 31, 1998 and
pro forma for the effect of the offering, we had Tier 1 Capital of $90.0
million. See "Executive Compensation."
POSSIBLE FUTURE SALES OF SHARES COULD ADVERSELY AFFECT PREVAILING MARKET PRICES
FOR OUR STOCK
Sales of substantial amounts of common stock in the public market under Rule
144 or Rule 145 of the Securities Act of 1933, as amended (the "Securities
Act"), or otherwise, or the perception that such sales could occur, may
adversely affect prevailing market prices of the common stock. If the prevailing
market prices are affected, those sales could impair our future ability to raise
capital through an offering of our equity securities or to effect acquisitions
using shares of common stock. As of the date of this prospectus, approximately
2,131,000 shares of common stock, or 14.9% of the shares of common stock that
will be outstanding after the offering, are not subject to any resale
restrictions under the Securities Act, and approximately 9,913,000 shares of
common stock, or 69.4% of the shares of common stock that will be outstanding
after the offering, are available for resale under Rule 144 or Rule 145. Subject
to certain contractual restrictions described elsewhere in this prospectus (see
"Shares Eligible for Future Sale"), all of those shares may be sold currently
subject to applicable volume restrictions. In addition, we have entered into
agreements with our principal shareholders and certain other holders of common
stock that
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may entitle these holders to require that we register the resale of their common
stock under certain circumstances.
LIMITED PRIOR MARKET FOR COMMON STOCK AND POSSIBLE VOLATILITY OF STOCK PRICE
Trading in the common stock has been extremely limited prior to the
offering. Eldorado common stock was not quoted on the Nasdaq National Market
until February 1, 1999. Prior to that time, the common stock traded sporadically
on the OTC Bulletin Board. There can be no assurance that an active public
market for the common stock will develop at any time in the future or continue
if such a market develops. If such a public market develops, the market price of
the common stock may be subject to significant fluctuations in response to
numerous factors, including variations in the annual or quarterly financial
results of Eldorado or our competitors, changes by financial research analysts
in their estimates of the earnings of Eldorado or our competitors or the failure
of Eldorado or our competitors to meet such estimates, conditions in the economy
in general or the banking industry in particular, or unfavorable publicity
affecting Eldorado or the industry. In addition, the equity markets have, on
occasion, experienced significant price and volume fluctuations that have
affected the market prices for many companies' securities and have been
unrelated to the operating performance of those companies. Any fluctuation may
adversely affect the prevailing market price of the common stock.
REGULATION OF CHANGES IN CONTROL OF ELDORADO
Any individual, acting alone or with others, who is seeking to acquire 10%
or more of the outstanding common stock must comply with the Change in Bank
Control Act, which requires prior notice to the Federal Reserve for any
acquisition. Any entity that wants to acquire 5% or more of the outstanding
common stock, or otherwise to control Eldorado, may need to obtain the prior
approval of the Federal Reserve under the Bank Holding Company Act of 1956, as
amended. As a result, prospective investors in common stock need to be aware of
and to comply with those requirements, to the extent applicable.
18
<PAGE>
THE COMPANY
Eldorado is a Delaware corporation and registered bank holding company under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"). Through its
two operating subsidiaries, Eldorado Bank and Antelope Valley Bank, the Company
offers commercial banking products and services to small and medium-sized
businesses and retail customers from 25 full service offices located primarily
in Southern California and the Sacramento area of Northern California. Our
products include commercial, consumer and real estate loans, a broad range of
deposit products and other non-deposit banking services. As of December 31,
1998, Eldorado, on a supplemental consolidated basis for the acquisition of
Antelope Valley Bank, had total assets of $1.4 billion, deposits of $1.2 billion
and shareholders' equity of $119.5 million.
The Company's principal place of business is 24012 Calle de la Plata, Suite
340, Laguna Hills, CA 92653; its telephone number at that address is (949)
699-4344.
USE OF PROCEEDS
The net proceeds to Eldorado from the offering (after deducting the
estimated underwriting discounts and commissions and offering expenses) are
estimated to be approximately $23.3 million. Eldorado will not receive any
proceeds from the sale of shares of common stock by the selling shareholders.
With the net proceeds from the offering, Eldorado intends to use
- $12.0 million to redeem all of our outstanding 11% Series B Preferred
Stock with an aggregate liquidation value of $11.7 million, which is held
by two of our principal shareholders,
- $338,000 to repay indebtedness to DCG, and
- the balance for general corporate purposes including investment in the
Banks, which will enable the Banks to increase their interest-earning
assets. See "Certain Transactions."
The Series B Preferred Stock is redeemable, subject to the prior approval of
the Federal Reserve, at our election on the terms disclosed above. Eldorado
expects to obtain the approval of the Federal Reserve for such redemption prior
to the completion of the offering. See "Capitalization" and "Certain
Transactions."
Eldorado is also considering using some of the net proceeds from the
offering to purchase a portion of the 11 3/4% Subordinated Capital Income
Securities, Series A issued by our subsidiary, CSBI Capital Trust I (the
"Capital Securities"), out of the $27.7 million currently outstanding. Eldorado
has had, and expects to continue to have from time to time in the future,
discussions with the holders of the Capital Securities regarding the terms of
such purchase. Eldorado expects that it would be able to negotiate the purchase
of the Capital Securities at a price between 110% to 115% of their liquidation
value, depending on market conditions and other factors. There can be no
assurance, however, that Eldorado will be able to purchase or determine that it
is in its best interests to purchase any or all of the Capital Securities.
19
<PAGE>
RECENT DEVELOPMENTS
ANTELOPE ACQUISITION. On January 22, 1999, Eldorado completed the
acquisition of Antelope Valley Bank (sometimes referred to in this prospectus as
"Antelope"). Headquartered in Lancaster, California (located approximately 50
miles northeast of Los Angeles), Antelope operates eight full service branches.
As of December 31, 1998, Antelope had total assets of $211.7 million and
deposits of $187.7 million. Antelope's total shareholders' equity as of December
31, 1998 was $21.4 million, resulting in a Tier 1 Leverage Ratio of 8.49%, a
Tier 1 Risk-Weighted Ratio of 11.49% and a Total Risk-Weighted Ratio of 12.70%.
Antelope had total gross loans as of December 31, 1998 of $137.4 million, 60.2%
of which were consumer loans, 27.1 % of which were commercial and industrial
loans and 12.7% of which were real estate loans. Antelope's consumer lending
focuses primarily on indirect automobile finance, which constituted
approximately 52.0% of Antelope's total portfolio loans as of December 31, 1998.
Loans to finance the purchase of used automobiles constituted the majority of
Antelope's total automobile loans at December 31, 1998. See "Supplemental
Selected Financial Data" and Eldorado's Supplemental Consolidated Financial
Statements and the Notes related thereto presented elsewhere in this prospectus.
Antelope's branches have a significant market share of the deposit base in
the communities they serve. According to the most recent FDIC report concerning
branch deposits (June 1998), in four of the communities in which it has branches
(Acton, Frazier Park, Lake Los Angeles and Rosamond), Antelope is the only bank
and has a 100% share of the bank deposit market. In Lancaster and Palmdale, the
two largest markets it serves, Antelope has a market share of 24.4% and 15.0%,
respectively. Antelope's Wrightwood location has a 56.8% share of the deposit
market. Antelope's eighth location in Quartz Hill is a new branch that opened
for operation in June 1998. Eldorado intends to operate Antelope as a separate
subsidiary for the foreseeable future because of Antelope's strong name
recognition and customer acceptance in its local market, although Eldorado has
consolidated substantially all of Antelope's administrative functions with those
of Eldorado Bank.
In connection with the Antelope acquisition, Eldorado issued approximately
2,780,000 shares of common stock to Antelope shareholders, based upon a fixed
exchange ratio of 3.625 shares of common stock for each share of Antelope common
stock. The Antelope acquisition was treated for accounting purposes as a pooling
of interests. The Company expects that during the quarter ending March 31, 1999
it will recognize approximately $800,000 of expenses, net of taxes, related to
the Antelope acquisition, including investment banking and professional fees and
severance costs.
NAME CHANGE AND REVERSE STOCK SPLIT. On August 28, 1998, Eldorado changed
its name from Commerce Security Bancorp, Inc. to Eldorado Bancshares, Inc. and
declared a one-for-two reverse stock split of the common stock effective
September 4, 1998.
20
<PAGE>
CAPITALIZATION
Presented below is a table showing Eldorado's capitalization and regulatory
capital ratios as of December 31, 1998. The column labeled "As Adjusted" gives
effect to the acquisition of Antelope as well as changes to the common stock
that will occur upon completion of the offering (see footnotes (1) and (2)
below). In addition, the column labeled "Pro Forma As Adjusted" gives effect to
(a) the sale by Eldorado of 2,174,000 shares of common stock offered hereby
(assuming a public offering price of $11.50 per share), less underwriting
discounts and other estimated offering expenses and (b) the use of $12.0 million
to redeem all of the outstanding shares of 11% Series B Preferred Stock with an
aggregate liquidation value of $11.7 million.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
AS PRO FORMA AS
ADJUSTED(1)(2) ADJUSTED(1)(2)
---------------- ----------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Subordinated Debentures(3)......................................................... $ 27,657 $ 27,657
Shareholders' equity:
Preferred stock, Series B; 116,600 shares authorized, 116,593 shares issued and
outstanding, as adjusted, and none issued and outstanding, pro forma as
adjusted....................................................................... 11,659 --
Preferred stock, undesignated series; 1,383,400 shares authorized, none issued
and outstanding, and 1,500,000 authorized, none issued and outstanding, pro
forma as adjusted.............................................................. -- --
Common stock, par value $.01; 35,000,000 shares authorized, 11,109,445 shares
issued and outstanding, as adjusted, and 14,278,382 shares issued and
outstanding, pro forma as adjusted............................................. 111 133
Non-voting common stock, par value $.01; 15,000,000 shares authorized, 927,826
shares issued and outstanding, as adjusted, and 5,000,000 shares authorized,
none issued and outstanding, pro forma as adjusted............................. 9 9
Additional paid-in capital....................................................... 88,532 112,533
Retained earnings(4)............................................................. 20,591 19,791
Unearned compensation(5)......................................................... (1,995) (2,767)
Accumulated other comprehensive income........................................... 626 626
-------- --------
Total shareholders' equity..................................................... 119,533 130,325
-------- --------
Total capitalization......................................................... $ 147,190 $ 157,982
-------- --------
-------- --------
Capital ratios:
Tier 1 Leverage Ratio............................................................ 6.37% 7.24%
Tier 1 Risk-Weighted Ratio....................................................... 8.76 9.96
Total Risk-Weighted Ratio........................................................ 9.78 10.97
</TABLE>
- ------------------------
(1) Gives effect to the issuance of approximately 2,777,500 shares of common
stock issued in connection with the acquisition of Antelope on January 22,
1999. See "Recent Developments."
(2) As reflected in Eldorado's Supplemental Consolidated Financial Statements,
as of December 31, 1998 the common stock was divided into several classes
consisting of (i) Special Common Stock, having a liquidation preference of
$9.62 per share, (ii) voting common stock (designated as "Class B Common
Stock"), and (iii) non-voting common stock (designated as "Class C Common
Stock"). The holders of the Special Common Stock and Eldorado have agreed
that immediately prior to the completion of the offering, the Special Common
Stock will be converted into voting common stock. At such time, the common
stock of Eldorado will consist solely of voting common stock (offered
hereby) and non-voting common stock. The non-voting common stock is and will
be held solely by two of Eldorado's principal shareholders, which for
regulatory reasons under the BHC Act do not wish to own more than 9.9% of
the voting common stock. Subject to compliance with applicable BHC Act
provisions, the non-voting common stock may be converted into voting common
stock at the election of the holder. With the exception of voting rights,
voting common stock and non-voting common stock are identical in all
respects. See "Principal and Selling Shareholders," "Certain Transactions"
and "Description of Capital Stock."
(3) Subordinated Debentures consist solely of 11 3/4% Junior Subordinated
Debentures issued by Eldorado to CSBI Capital Trust I (the "Trust"), a
subsidiary of Eldorado. The Subordinated Debentures are the sole assets of
the Trust. See "Description of Capital Stock -- Effect of Capital Securities
on Common Stock -- Accounting and Regulatory Treatment."
(4) Reflects the premium paid to redeem the Company's Series B Preferred Stock
and other expenses incurred in this offering net of related tax benefit.
(5) Reflects unearned compensation attributable to the shares of restricted
common stock issued to Mr. Keller, the Company's President and Chief
Executive Officer. The column labeled "As Adjusted" adjusts the unearned
compensation account shown in the Supplemental Consolidated Financial
Statements to reflect the issuance of approximately 86,000 shares of
restricted common stock to Mr. Keller as a consequence of Eldorado's January
22, 1999 acquisition of Antelope Valley Bank. The increase in unearned
compensation shown in the column labeled "Pro Forma As Adjusted" reflects
the issuance of approximately 67,100 additional shares of restricted common
stock to Mr. Keller as a consequence of Eldorado's issuance of common stock
in the offering. See "Executive Compensation."
21
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Trading in the common stock has been extremely limited prior to the offering
and cannot be characterized as amounting to an established public trading
market. Eldorado has been quoted on the Nasdaq National Market since February 1,
1999 under the symbol "ELBI." Since that time, the high and low sales prices for
the common stock were $11 and $12 per share, respectively. On March 11, 1999,
the last reported sale price of the common stock was $11.25. Prior to its
quotation on the Nasdaq National Market, the common stock was registered with
the National Association of Securities Dealers ("NASD") and was traded only
over-the-counter (NASD/CBNK). See "Risk Factors--Limited prior market for common
stock and possible volatility of stock price." As of March 11, 1999, Eldorado
had approximately 1,050 shareholders of record.
Eldorado has not declared or paid a cash dividend on the common stock and
does not currently plan to declare or pay a cash dividend on the common stock in
the foreseeable future. Dividends may be paid only out of legally available
funds as permitted by statute, subject to the discretion of Eldorado's Board of
Directors. See "Risk Factors--No present intention to pay dividends;
Restrictions on payment of dividends by the Banks to Eldorado; Prohibition on
dividends by Eldorado Bank to Eldorado without prior regulatory approval" and
"Supervision and Regulation--Regulatory Restrictions on Distribution to
Shareholders."
Eldorado is a legal entity separate and distinct from the Banks.
Substantially all of Eldorado's revenues and cash flow, including funds
available for the payments of dividends and other operating expenses, will be
paid by dividends to Eldorado from the Banks. There are statutory and regulatory
limitations on the amount of dividends that may be paid to Eldorado by the
Banks. See "Risk Factors--No present intention to pay dividends; Restrictions on
payment of dividends by the Banks to Eldorado; Prohibition on dividends by
Eldorado Bank to Eldorado without prior regulatory approval" and "Supervision
and Regulation--Regulatory Restrictions on Distribution to Shareholders" for a
discussion of the regulatory restrictions on the payment of dividends by the
Banks to Eldorado.
22
<PAGE>
BUSINESS
OVERVIEW
Through its two operating subsidiaries, Eldorado Bank and Antelope Valley
Bank, the Company offers a broad range of commercial banking products and
services to small and medium-sized businesses and retail customers from 25 full
service offices located primarily in Southern California and the Sacramento area
of Northern California. Eldorado Bank also operates eight loan production
offices, four of which are located in California and four of which are located
in other western states. See "-- Market." Our products include commercial,
consumer and real estate loans, a broad range of deposit products and other
non-deposit banking services. In addition, we augment our traditional banking
products and services with specialized products including
- Small Business Administration ("SBA") loans,
- residential mortgage loans originated through eight loan production
offices and a regional network of wholesale brokers for resale into the
secondary market,
- equipment leases to small and medium-sized businesses that are originated
through a national network of wholesale brokers, and
- loans to finance the acquisition of new and used automobiles that are
originated through approximately 60 automobile dealers located in Southern
California.
Eldorado Bank and Antelope Valley Bank are incorporated under the laws of
the State of California and are licensed by the California Department of
Financial Institutions ("DFI"). Eldorado Bank is a member of the Federal Reserve
System. Antelope Valley Bank is not a member, and therefore is regulated at the
federal level by the Federal Deposit Insurance Corporation ("FDIC"). The Banks'
deposits are insured up to applicable limits by the FDIC. See "Supervision and
Regulation."
The financial information presented in this prospectus treats the
acquisition of Antelope Valley Bank as if it had been completed prior to the
periods presented herein and should be read in conjunction with our Supplemental
Consolidated Financial Statements and Notes thereto included elsewhere in this
prospectus.
STRATEGIC PLAN
The key elements of our strategic plan have been and continue to be the
establishment and enhancement of an attractive community banking franchise
through the acquisition of community banks primarily, but not exclusively, in
and around our Southern California base, the improvement of core profitability
and the maintenance of a strong balance sheet. Since 1995, we have acquired four
community banks with combined assets of approximately $1 billion. See "Recent
Developments" and "-- Prior Acquisitions."
BUILDING AND ENHANCING AN ATTRACTIVE COMMUNITY BANKING FRANCHISE. We are
continually engaged in the identification and evaluation of potential
acquisitions of community banks in California. We focus primarily on
community banks that have underperformed relative to their peers but have
strong lending franchises, niche business lines or low cost deposits that
would complement our existing operations and branch network and also provide
opportunities for cost savings through branch overlap and back-office
consolidation. In particular, we seek to acquire and develop both
traditional and non-traditional community banking businesses that provide
opportunities for multiple relationships with our customers. As an integral
part of this strategy, we emphasize building a solid management team through
a combination of senior officers retained from acquired banks and
experienced specialists hired to enhance our competency in various areas,
such as mortgage banking and equipment leasing. Consistent with our
acquisition strategy, we recently completed the acquisition of Antelope
Valley Bank. We routinely review suitable strategic acquisition
opportunities, which if consummated, may
23
<PAGE>
constitute a material acquisition for Eldorado. Discussions at various
stages with respect to such transactions are ongoing as of the date of this
prospectus. Such discussions include one or more proposals as to which
Eldorado is awaiting a response from the board of directors of the potential
transaction partner. Eldorado believes, however, that as of the date of this
prospectus it is not probable that we will enter into an agreement with
respect to any particular transaction. See "Recent Developments."
IMPROVING CORE PROFITABILITY. Our strategy to increase profitability is
premised on (i) increasing the sources and volume of fee income, including
fees derived from originating and servicing SBA loans, selling and servicing
equipment leases, and originating and selling residential mortgage loans,
(ii) expanding and diversifying our base of relatively low cost funds, (iii)
utilizing our asset generation capability to increase the volume of
commercial loans and leases that we retain in our portfolio, particularly
SBA loans, equipment leases and commercial loans to our small business
customers, and (iv) actively seeking to improve operating efficiencies.
MAINTAINING A STRONG BALANCE SHEET. We seek to maintain a strong balance
sheet by managing the risk of credit-related losses and by striving to
maintain a capital base sufficient to support our strategic plan. We seek to
improve the asset quality of the banks we acquire by implementing
underwriting standards in the acquired banks' loan and lease origination
programs that place greater emphasis on cash flow than collateral coverage
as the primary source of repayment on its loans. See "-- Underwriting and
Credit Administration," below. To maintain a capital base sufficient to
support our existing businesses and to permit us to continue to expand
through acquisitions, our objective is to meet the "well capitalized"
regulatory standards. Giving effect to the offering, at December 31, 1998,
we would have been well capitalized for regulatory purposes, with Tier 1 and
Total Risk-Weighted Ratios (as defined herein) of 9.96% and 10.97% and a
Tier 1 Leverage Ratio (as defined herein) of 7.24%. See "Supervision and
Regulation -- Capital Adequacy Requirements."
The principal reason for the offering is to create an active trading market
for our common stock. We believe that the existence of such a market will
increase our ability to complete acquisitions on a stock-for-stock basis.
Although we expect to continue to consider cash acquisitions, we believe that
the boards of directors and shareholders of many prospective acquisition
candidates prefer stock acquisitions, because the shareholders who receive stock
are allowed to retain an equity interest in the combined company and to defer
recognition of federal income tax. We can provide no assurance, however, that an
active trading market for our common stock will develop after the offering or
that, even if such a market does develop, we will be able to acquire or will
determine that it is in our best interests to acquire businesses in stock-for-
stock transactions.
PRIOR ACQUISITIONS
Prior to September 1995, the Company's predecessor, SDN Bancorp, Inc.
("SDN"), owned a single bank -- San Dieguito National Bank ("San Dieguito") --
which had $56 million in assets. San Dieguito was then categorized as
"critically undercapitalized" by federal regulators. In September 1995, SDN and
San Dieguito were recapitalized by Dartmouth Capital Group, L.P. ("DCG"), a bank
holding company organized by Mr. Keller. Following that recapitalization, Mr.
Keller assumed control of the Company, installed new management and began
implementing policies to improve asset quality and operating performance.
Since September 1995, Eldorado has acquired four banks in California with
combined assets of approximately $1 billion. The following table summarizes
certain data regarding those acquisitions,
24
<PAGE>
including the asset size of the acquired bank as of the end of the quarter
immediately preceding the acquisition:
<TABLE>
<CAPTION>
PRINCIPAL COUNTY
ACQUIRED BANK ACQUISITION DATE OF ACQUIRED BANK ASSETS ACQUIRED
- ----------------------------------------------------------- --------------------- ---------------- ---------------
<S> <C> <C> <C>
(IN MILLIONS)
Liberty National Bank...................................... March 31, 1996 Orange $ 146
Commerce Security Bank..................................... September 1, 1996 Sacramento 229
Eldorado Bank.............................................. June 6, 1997 Orange 404
Antelope Valley Bank....................................... January 22, 1999 Los Angeles 212
</TABLE>
Other than the Antelope transaction, each acquisition was accounted for
using the purchase method of accounting for business combinations. Therefore,
the operating results of those banks are reflected in our financial statements
only from the date of acquisition. Consequently, our historical operating
results prior to June 1997 are of limited relevance in evaluating our historical
financial performance or predicting our future operating results.
Within the relatively recent past, Commerce Security Bank ("CSB"), Liberty
National Bank ("Liberty") and San Dieguito were adversely affected by a variety
of factors, including high levels of nonperforming assets, reliance on high-cost
brokered deposits and excessive overhead costs. The high levels of nonperforming
assets and related overhead costs were partly attributable to adverse economic
conditions, including declining real estate values, that California experienced
during the early to mid-1990s. See "Risk Factors -- Prior losses at predecessor
subsidiary banks." As a consequence of their poor financial performance, each of
Liberty, San Dieguito and CSB was required to enter into a memorandum of
understanding with its supervising regulators. Those memoranda of understanding
were subsequently terminated contemporaneously with or, in Liberty's case, prior
to Mr. Keller's assumption of managerial control. See "Risk Factors --
Supervision and regulation -- Our banks operate in a highly regulated
environment."
Following each acquisition, we implemented various elements of the strategic
plan described above. See "-- Strategic Plan." As a result of those efforts,
together with a favorable economic climate in California, our ratio of
nonperforming assets to total assets improved from 2.8% at December 31, 1996 (on
a pro forma basis giving effect to the acquisition of Eldorado Bancorp) to 0.9%
at December 31, 1998, and our efficiency ratio decreased from 80.0% for the
twelve months ended December 31, 1996 to 73.6% for the twelve months ended
December 31, 1998. Additionally, we were able to reduce reliance on high-cost
brokered deposits by utilizing excess liquidity at Eldorado Bank to fund loans
and leases generated by the other subsidiary banks.
Effective June 30, 1997, the Company consolidated into Eldorado Bank the
respective operations of CSB, Liberty and San Dieguito, although Eldorado Bank
continues to operate under the name "Commerce Security Bank" in the Sacramento
area because of another bank's competing claim to the tradename "Eldorado Bank."
See "-- Market."
MARKET
Eldorado operates primarily in Southern California and the Sacramento area
of Northern California. Our executive office is located in Laguna Hills, a
residential community in southern Orange County, approximately 50 miles south of
Los Angeles. Eldorado currently operates a total of 24 full-service banking
offices in Southern California, covering a geographic market ranging from the
north coastal area of San Diego County in the south, to Kern County and the
northern border of Los Angeles County in the north, and to San Bernardino and
Riverside Counties in the east. The counties of Orange, Los Angeles, San
Bernardino and Riverside are located in the Los Angeles-Riverside-Orange County
Metropolitan Statistical Area ("MSA"), which is the second most populous MSA in
the United States, with a population of 15.5 million in 1996, according to the
most currently available estimate published by the U.S. Bureau of the Census.
Eldorado also operates a mortgage loan production office in San Diego,
California.
25
<PAGE>
In Northern California, Eldorado operates one full-service banking office,
located in Sacramento, and three mortgage loan production offices located in
Sacramento, Stockton and Walnut Creek. Sacramento, the capital of California, is
located in the Sacramento MSA, which had a population of 1.5 million in 1996,
according to an estimate published by the U.S. Bureau of the Census. Eldorado
also operates one SBA loan production office in Orinda, California, which is
located east of San Francisco.
Outside of California, Eldorado currently has mortgage loan production
offices in Bellevue, Washington; Las Vegas, Nevada; Phoenix, Arizona and
Portland, Oregon.
PRODUCTS AND SERVICES
The Company markets its products and services through four divisions:
- COMMUNITY BANKING DIVISION -- focusing primarily on small and medium-sized
businesses located in the Company's California markets. Products include
commercial, consumer and real estate loans (with a particular emphasis on
the origination and servicing of SBA loans), and a broad range of deposit
products and other non-deposit banking services.
- MORTGAGE BANKING DIVISION -- originating residential mortgage loans in
California, Arizona, Nevada and Oregon through eight loan production
offices and a network of wholesale brokers for sale in the secondary
market.
- EQUIPMENT LEASING DIVISION -- generating equipment leases primarily
through wholesale brokers located throughout the United States, servicing
those leases and from time to time selling blocks of leases to other
institutions.
- AUTOMOBILE LENDING DIVISION -- purchasing loans to finance the purchase of
new and used automobiles originated by approximately 60 automobile dealers
located in Southern California.
The Company's marketing strategy seeks to exploit cross-selling opportunities by
emphasizing the complementary nature of its products and services, particularly
for small to medium-sized businesses, which the Company defines as businesses
with annual revenue up to $50 million. The Company is also seeking to improve
operating efficiencies among its divisions by establishing lease and mortgage
loan offices in several of the locations previously used exclusively as branches
or loan production offices. In addition, the Company plans to house SBA loan
production officers in several of its established mortgage origination offices.
Each of the Company's divisions is described in more detail below.
COMMUNITY BANKING DIVISION. The Community Banking Division provides a broad
range of banking products and services to small and medium-sized businesses and
retail customers, including commercial, real estate and consumer loans, checking
and savings products and non-depository services.
At December 31, 1998, management estimates that approximately 80% of the
Company's loans and leases held for investment were loans to businesses. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." For regulatory and financial reporting purposes, the Company
categorizes commercial loans that are secured in whole or part by real estate as
commercial real estate loans. Consequently, at December 31, 1998, commercial
real estate loans constituted 30.4% of the Company's loans and leases held for
investment. The Company believes such categorization overstates the Company's
emphasis on real estate lending, because, for example, all SBA loans are secured
by real estate and thus categorized as commercial real estate loans. The
following table sets forth the distribution as of December 31, 1998 of the
Company's SBA loans, other commercial real estate loans and commercial loans
26
<PAGE>
not secured by real estate based upon the Standard Industry Classification, or
SIC codes, provided by the Company's borrowers:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL REAL ESTATE
-----------------------------------------------
NON-SBA SBA COMMERCIAL TOTAL
----------------------- ---------------------- ----------------------- ----------
INDUSTRY AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT
- ------------------------------------ ---------- ----------- --------- ----------- ---------- ----------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Services............................ $ 31,453 30.0% $ 33,913 36.2% $ 40,043 29.3% $ 105,409
Wholesale and retail trade.......... 14,363 13.6% 26,596 28.4% 15,147 11.1% 56,106
Finance, insurance and real
estate............................ 34,575 32.9% 1,904 2.0% 14,327 10.5% 50,806
Manufacturing....................... 7,689 7.3% 22,118 23.6% 16,439 12.0% 46,246
Mining and construction............. 5,315 5.0% 5,461 5.9% 3,380 2.5% 14,156
Other and unclassified.............. 11,839 11.2% 3,664 3.9% 47,447 34.6% 62,950
---------- ----- --------- ----- ---------- ----- ----------
$ 105,234 100.0% $ 93,656 100.0% $ 136,783 100.0% $ 335,673
---------- ----- --------- ----- ---------- ----- ----------
---------- ----- --------- ----- ---------- ----- ----------
<CAPTION>
<S> <C>
INDUSTRY PERCENT
- ------------------------------------ -----------
<S> <C>
Services............................ 31.4%
Wholesale and retail trade.......... 16.7%
Finance, insurance and real
estate............................ 15.1%
Manufacturing....................... 13.8%
Mining and construction............. 4.2%
Other and unclassified.............. 18.8%
-----
100.0%
-----
-----
</TABLE>
The origination and servicing of SBA loans are important elements of the
Community Banking Division's business. For the year ended December 31, 1998, the
Company originated $51.9 million of SBA loans. Revenue attributable to the
Company's SBA lending activities was $14.4 million for the year ended December
31, 1998, constituting 12.4% of its total interest and noninterest income for
that period. In the Company's experience, the volume of SBA loan originations
generally is less in the first quarter of the year and higher in the fourth
quarter.
The Company originates two types of loans under SBA programs. The majority
of SBA loans that the Company originates are guaranteed by the United States
Government to the extent of 75% to 90% of the principal and interest due on such
loans ("SBA 7(a)" loans). The Company also originates SBA loans in which the
Company takes a first trust deed (a senior security position which is generally
sold by the Company) and another unrelated entity assumes a second trust deed (a
subordinated security position) that is guaranteed by the SBA ("SBA 504" loans).
Generally, the Company sells the government guaranteed portion of the SBA 7(a)
loans to participants in the secondary market and retains servicing
responsibilities and the unguaranteed portion of the loans. The government
guaranteed portion of the SBA 7(a) loans are sold at a premium, a portion of
which is immediately recognized as income. The balance of the premium,
representing estimated servicing fees, is treated as a yield adjustment on the
portion of the SBA 7(a) loan retained by the Company and is capitalized and
recognized as income over the estimated life of the loan. The Company had a
total of $93.7 million of SBA loans in its portfolio at December 31, 1998,
comprised of $69.2 million of the unguaranteed portions of the SBA 7(a) loans
being serviced by the Company and $24.5 million of SBA 504 loans. The total SBA
7(a) loan portfolio serviced by the Company at December 31, 1998 was $250.0
million, all of which had been originated by the Company.
Since 1994, Eldorado Bank has qualified as a "Preferred Lender" under the
SBA's programs, allowing it to originate SBA loans based on its own underwriting
decisions and without prior approval of the SBA. The Company believes that its
status as a Preferred Lender gives it a competitive advantage relative to other
non-Preferred SBA originators by allowing the Company to process such loans on
an expedited basis. For the SBA's fiscal year ended September 30, 1998, the
Company originated $16.2 million, or approximately 60% of its SBA 7(a) loans,
within the SBA district consisting of the counties of Orange, Riverside and San
Bernardino. For that period, the Company produced the 6th greatest dollar volume
of SBA loans in that district by all SBA lenders and the 3rd largest dollar
volume of SBA 7(a) loans produced in that district by SBA originating banks. By
comparison, the leading nonbank and bank SBA lenders headquartered in that
district originated $65.0 million and $29.9 million of SBA 7(a) loans,
respectively, which the Company believes reflects the fragmented and highly
competitive market for SBA loans in Southern
27
<PAGE>
California. The Company believes that all of the leading SBA originators in the
Company's principal market are Preferred Lenders.
Historically, the Company has made SBA loans primarily to businesses located
in California through origination from its Southern California branches as well
as from the Company's SBA loan production office located in Orinda, California.
Subject to receipt of SBA approval, which the Company expects will be received,
the Company intends to expand its SBA market area during the next 12 months by
hiring SBA loan originators based in or near Phoenix, Arizona; Portland, Oregon
and Bellevue, Washington. The Company intends to place those originators in the
Company's existing loan production facilities for the Mortgage Banking Division
located in those areas.
With respect to deposit products and related services, the Company believes
the Community Banking Division has a competitive advantage as a result of
certain deposit accounting services that were developed at CSB specifically for
title and escrow companies. As a result of those services, which include
specialized sub-accounting, reconciliation and reporting features, a significant
percentage of the Company's deposit liabilities are obtained from title and
escrow companies (collectively, "Title and Escrow Deposits"). For the year ended
December 31, 1998, Title and Escrow Deposits averaged $187.0 million,
representing 18.2% of the Company's total average deposits for that period.
Actual balances of Title and Escrow Deposits tend to vary widely during a month,
with the highest balances usually occurring at the end of the month when
residential real estate closings are generally scheduled to occur. Title and
Escrow Deposits are also subject to seasonal fluctuations, tending to decrease
during those seasons when the volume of residential real estate transactions is
lower. Title and Escrow Deposits at December 31, 1998 totaled $278.7 million,
constituting 22.8% of the Company's total deposits at that date. One company
controlled Title and Escrow Deposits that represented 15.2% of the Company's
total average deposits for the year ended December 31, 1998 and 20.2% of the
Company's total deposits at December 31, 1998.
The Company considers Title and Escrow Deposits to be volatile because of
the fluctuation in deposit amounts and the concentration of control over those
deposits with a limited number of customers. The Company believes, however, that
its relationships with its principal Title and Escrow Deposit customers and its
specialized deposit services partially mitigate the risk that such customers may
terminate or significantly reduce their deposits with the Company. See "Risk
Factors -- Reliance on potentially volatile title and escrow deposits to fund
short-term assets." As a consequence of that potential volatility, the Company
utilizes Title and Escrow Deposits solely to fund short-term assets, primarily
consisting of residential mortgage loans held for sale, which are generally sold
within 30 days after such mortgage loans are funded. See "-- Products and
Services -- Mortgage Banking Division." If a substantial portion of the Title
and Escrow Deposits were withdrawn suddenly, the Company believes that it has
sufficient alternative sources of liquidity to fund its mortgage pipeline during
a transition period. To reduce its concentration of Title and Escrow Deposits,
since December 31, 1998, the Company has generally limited the balance of Title
and Escrow Deposits that it will permit any one depositor to maintain to
approximately $100 million. See "Risk Factors -- Reliance on potentially
volatile title and escrow deposits to fund short-term assets" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's expertise in servicing Title and Escrow Deposits has also
enabled it to attract deposits from homeowners' associations, property managers
and similar customers. The services provided to those customers include (i)
lockbox deposit arrangements, (ii) sub-account reconciliation and reporting,
(iii) electronic payment and remittance processing through the Automated
Clearing House or ACH Network and (iv) electronic balance reporting. Those
specialized payment handling systems also complement the Company's other
traditional cash management products.
Historically, the relationships with Title and Escrow Deposit customers, as
well as the relationships with other deposit customers utilizing the Company's
sub-accounting systems, have been managed by the Company's Sacramento branch.
The Company is actively seeking, however, to cross-sell those services to
customers of its Southern California branches.
28
<PAGE>
MORTGAGE BANKING DIVISION. The Company entered the mortgage banking
business upon the acquisition of CSB in September 1996. CSB had been engaged in
the mortgage business since 1988. The Company originates and sells first and
second lien mortgage loans secured by single family residences. As a matter of
normal practice, the Company sells to the secondary market all of the mortgage
loans that it originates. The Mortgage Banking Division's operating results can
be and have been affected materially by changes in interest rates, and in the
levels of new home construction and existing home sales. See "Risk Factors --
Changes in interest rates may adversely affect our business."
The Company originates mortgage loans through two primary sources: (i) the
wholesale market, which represents loans generated through a network of mortgage
brokers approved by the Company, and (ii) the retail market, which represents
loans generated by eight loan production offices staffed with commission-based
loan officers who solicit loans directly from real estate brokers and home
builders and on personal referral. All loans originated from those two sources
are underwritten and closed by the Company. For the year ended December 31,
1998, approximately 88% of the Company's residential mortgage loans were
originated on a wholesale basis, and during that period, the top ten brokers
generated 34.8% of such loans.
The Company originates primarily fixed-rate mortgage loan products under a
variety of programs including (i) conventional fixed-rate mortgage loans under
programs offered by the Federal Home Loan Mortgage Corporation ("Freddie Mac")
or the Federal National Mortgage Association ("Fannie Mae"), (ii) so-called
"nonconforming" mortgage loans that do not meet Freddie Mac or Fannie Mae
criteria, including "jumbo loans" that exceed the maximum principal amount under
those programs, which the Company underwrites to satisfy the individual
guidelines of the private investors to which those loans are sold in the
ordinary course, and (iii) mortgage loans insured by the Federal Housing
Administration ("FHA loans") and mortgage loans guaranteed by the Veterans
Administration ("VA loans"). FHA loans and VA loans are underwritten to enable
them to be pooled as loans offered by the Government National Mortgage
Association ("Ginnie Mae loans"). In addition, beginning in 1998 the Company
extended its range of products to include certain types of subprime loans (which
are sometimes referred to as "B" grade loans). During the three months ended
December 31, 1998, subprime loans constituted less than 1.0% of all mortgage
loans originated by the Company during that period. The Company is evaluating
the extent to which it wants to devote resources to the subprime product. The
Company does not expect that subprime loans will constitute more than 5% of its
total mortgage loan origination volume.
The following table sets forth the volume of mortgages funded by the Company
during the last five consecutive fiscal quarters ended December 31, 1998.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1998 1998 1998 1998 1997
------------ ------------- ---------- ---------- ------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Purchase financing:
Conforming................................. $ 64,750 $ 65,258 $ 46,677 $ 34,753 $ 29,460
Jumbo...................................... 27,759 62,380 51,518 32,413 27,621
FHA........................................ 46,488 74,523 93,402 61,992 69,379
VA......................................... 21,120 24,465 30,635 18,525 21,135
------------ ------------- ---------- ---------- ------------
Total.................................... 160,117 226,626 222,232 147,683 147,595
Refinancing:
Conforming................................. 224,260 109,171 100,742 120,269 39,450
Jumbo...................................... 59,433 96,092 87,543 73,593 46,765
FHA........................................ 51,653 16,357 22,366 28,575 11,823
VA......................................... 45,371 12,107 16,565 26,182 15,549
------------ ------------- ---------- ---------- ------------
Total.................................... 380,717 233,727 227,216 248,619 113,587
------------ ------------- ---------- ---------- ------------
Total originations..................... $ 540,834 $ 460,353 $ 449,448 $ 396,302 $ 261,182
------------ ------------- ---------- ---------- ------------
------------ ------------- ---------- ---------- ------------
</TABLE>
29
<PAGE>
The Company has historically sold conforming Freddie Mac and Fannie Mae
loans under private sale agreements to conduits such as Countrywide Home Loans.
FHA and VA loans that the Company originates either are sold individually to
private conduits or are bundled and sold as Ginnie Mae loans to private
investors. In addition, since July 1998, the Company has been approved to sell
Ginnie Mae-eligible loans directly to Freddie Mac and Fannie Mae.
The Company also sells the right to service such mortgage loans, which
includes the collection and remittance of principal and interest payments. Such
servicing rights either are sold to the purchaser of the loan or, in the case of
Ginnie Mae loans, from time to time are aggregated and sold in bulk at least
quarterly, which the Company believes increases the value of those servicing
rights. The purchasers of mortgage loans or servicing rights do not have
recourse against the Company for the payment defaults of the borrowers, except
for (i) customary recourse if the borrower fails to make the first payment due
under the loan and (ii) recourse obligations that were incurred in connection
with CSB's bulk sales of servicing for VA loans that were effected prior to the
Company's acquisition of CSB. Such recourse exposure for VA loans expired in
November 1998. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Company relies on various short-term funding sources, including Title
and Escrow Deposits and lines of credit with various financial institution, to
provide liquidity to its Mortgage Banking Division between the time when the
Division originates a mortgage loan and the time when such loan is sold in the
secondary market. See "-- Products and Services -- Community Banking Division"
and "Risk Factors -- Reliance on potentially volatile title and escrow deposits
to fund short-term assets."
"Forward commitments" and "put options" on mortgage-backed securities are
used to reduce or hedge interest rate risk on a portion of loans held for sale
and on certain loans anticipated to fund. Forward commitments to sell and put
options on mortgage-backed securities that hedge anticipated loan funding are
off-balance sheet items and not reflected in the Company's Supplemental
Consolidated Statement of Financial Condition. The aggregate outstanding
"forward commitments" and "put options" at December 31, 1998 were $94.0 million
and $76.0 million. It should be noted, however, that because those instruments
may not respond to changes in interest rates to the same degree as the mortgage
loan pipeline being hedged, some interest rate risks remain even in a fully
hedged portfolio. For example, during the quarter ended December 31, 1998,
Eldorado incurred a loss of $1.1 million on hedging activities primarily because
of an unexpected change in the correlation between the value of the mortgage
loans in its pipeline and mortgage-backed securities used for hedging. See "Risk
Factors -- Changes in interest rates may adversely affect our business."
Although the Mortgage Banking Division historically provided a substantial
amount of CSB's earnings, the Division generated losses during each month of
1996 and during nine out of 12 months of 1997. Since the Company acquired CSB in
September 1996, the Company has undertaken a variety of measures to improve the
Division's operating results, including the renegotiation of the terms under
which the Company sells loans to the secondary market, the packaging of Ginnie
Mae loans, the elimination of certain recourse liability in connection with the
sale of VA loan servicing rights, and the achievement of various operational
efficiencies. In addition, the Company has made several managerial changes at
the Mortgage Banking Division, the most significant of which was the February
1998 hiring of William D. Rast to serve as its Executive Vice President and head
of the Division. Mr. Rast has approximately 21 years of experience in mortgage
banking, including four years as President and Chief Operating Officer of
Hamilton Financial Services Corp., a financial services company that focused
primarily on mortgage lending, and 10 years with First California Mortgage,
where his last position was Senior Vice President responsible for retail and
wholesale production. See "Management." Since joining the Company, Mr. Rast and
his management team have overseen the implementation of several initiatives
designed to improve the Mortgage Banking Division's operations. Among other
things, the Company has (i) enhanced the Mortgage Banking Division's network of
brokers by adding additional brokers with whom Mr. Rast previously had developed
relationships and terminating those brokers who were not reliable sources of
originations,
30
<PAGE>
and (ii) actively managed the duration of time between the Company's funding of
a mortgage loan and the time when that loan may be sold into the secondary
market.
The Company believes that those initiatives, combined with a favorable
refinancing market in 1998, have substantially improved the Mortgage Banking
Division's performance. For the year ended December 31, 1998, the Mortgage
Banking Division originated $1.8 billion of mortgage loans as compared to $889.2
million for the year ended December 31, 1997. The Division's pre-tax
profitability -- measured by the Company as revenue less direct expenses and the
cost of funds provided by the Community Banking Division and other sources --
increased by $5.7 million to $3.1 million for the year ended December 31, 1998
from a loss of $2.6 million for the year ended December 31, 1997. The Company
has also used the increase in mortgage origination volume to manage its level of
earning assets by increasing from time to time the duration that it will hold
mortgage loans prior to selling such loans into the secondary market. Although
the Company believes that it has hedged such mortgage loans to substantially
mitigate the interest rate risk associated with the longer holding period, some
interest rate risk remains. See "Risk Factors -- Changes in interest rates may
adversely affect our business."
During the next 12 months, the Mortgage Banking Division intends to continue
to improve its origination capability by, among other things, (i) further
refining its network of wholesale brokers, (ii) more actively cross-selling its
products to the Company's retail customers, and (iii) enhancing the automation
of the application and approval process including the implementation of
electronic application and delivery systems. The Company expects that the
Mortgage Banking Division's cross-selling efforts will focus primarily on
developing relationships with internal and external referral sources in the
Company's Southern California market. Among other things, the Mortgage Banking
Division intends to place mortgage loan officers in the Company's branches.
Beginning in 1998, mortgage loan officers were placed in its branches in
Carlsbad (San Diego County), Huntington Beach (Orange County) and San Bernardino
(San Bernardino County).
EQUIPMENT LEASING DIVISION. The Company entered the leasing business upon
the acquisition of CSB in September 1996. CSB had been engaged in leasing since
1990, focusing primarily on acquiring leases of equipment to small businesses
with an average lease size of less than $50,000. Currently, the production of
new leases is derived primarily from the wholesale sector through a network of
brokers located throughout the United States, although a majority of the
Equipment Leasing Division's leases are made to borrowers located in the
mid-western and western states. The Company makes no consumer leases and leases
automobiles and other vehicles only to businesses. The Company seeks to limit
the residual risk with respect to the collateral it leases by purchasing leases
that permit the lessee to acquire the equipment for a nominal purchase price at
the end of the lease term or by stipulating that the originating broker will
retain the residual risk. The Banks' largest concentration of leases to a single
borrower (and related interests) at December 31, 1998 amounted to $342,000.
Historically, the Company has generally retained for investment the majority of
leases that it purchases, although in 1997, the Company sold $24.8 million of
leases to other banks while retaining the right to service those leases. The
Company expects to conduct similar sales of leases in the future to avoid an
excess concentration of leases as a percentage of total portfolio loans and
leases. The Company currently expects that its lease portfolio will not
materially exceed 15% of the Company's portfolio loans and leases.
31
<PAGE>
At December 31, 1998, the Company held $88.9 million of leases for
investment. The following table sets forth the collateral concentrations of the
Company's leases at December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C> <C> <C> <C> <C>
Electronic data processing................................................. 28.3%
Transportation............................................................. 12.9
Materials handling......................................................... 6.2
Machine tools.............................................................. 6.1
Garment cleaning........................................................... 4.6
Manufacturing.............................................................. 4.6
Agriculture................................................................ 4.2
Printing................................................................... 4.1
Restaurant................................................................. 3.5
Other(1)................................................................... 25.5
-----
Total................................................................ 100.0%
-----
-----
</TABLE>
- ------------------------
(1) No category of collateral concentration included in Other is in excess of
2.3%.
Following the CSB acquisition, the Company made a strategic decision to
increase the resources devoted to the Equipment Leasing Division. Among other
things, the Company has centralized the underwriting decisions for leases,
thereby eliminating the salesperson's involvement in the underwriting decision.
In addition, the Company has also increased the aggregate volume and average
size of the Company's leases and diversified the type and location of the
underlying lease collateral, partly as a result of hiring full-time sales
representatives located in or near Boston, Massachusetts; Dallas, Texas and
Carlsbad, California.
The Company believes that those initiatives have substantially improved the
Equipment Leasing Division's performance. For the year ended December 31, 1998,
the Company originated $69.3 million of leases with an average lease size of
$37,700, as compared to $32.2 million of leases with an average lease size of
$24,700 for the year ended December 31, 1997. The Division's pre-tax
profitability -- measured by the Company as revenue (excluding gain on sale of
leases) less direct expenses and the cost of funds provided by the Community
Banking Division and other sources -- increased by $1.0 million to $1.9 million
for the year ended December 31, 1998 from $882,000 for the year ended December
31, 1997.
During the next 12 months, the Equipment Leasing Division intends to
continue to increase its origination volume by focusing on improving the overall
quality of the Company's network of wholesale brokers and by expanding the
number of full-time representatives. In February 1999, the Company hired Ronald
Wagner as Executive Vice President for the Equipment Leasing Division. Mr.
Wagner has approximately 20 years of experience in the leasing business,
including most recently as Senior Vice President in charge of production for
Imperial Business Credit, Inc., a subsidiary of Imperial Credit Industries,
Inc., a publicly traded financial services company. See "Management."
AUTOMOBILE LENDING DIVISION. In January 1999, the Company expanded its
indirect automobile lending activity with its acquisition of Antelope Valley
Bank. Antelope generates interest-earning assets primarily through the
origination of indirect automobile loans (also known as dealer loans). Dealer
loans are originated by automobile dealers and sold to the Company at a discount
to the note rate. The present value of the difference between the discounted
rate to the Company and the note rate is paid to the dealer and capitalized and
amortized by the Company over the effective life of the loan using a formula
that approximates the interest method. Antelope has been active in the
origination of dealer loans since 1980.
Following the Antelope acquisition, the Company consolidated the dealer loan
programs of Eldorado Bank with the existing structure at Antelope. The Company
generates dealer loans through approximately 60 dealers spread throughout
Southern California with a concentration in north Los Angeles County. Fifteen of
those dealers accounted for approximately 80% of the loans funded by the Company
during the
32
<PAGE>
year ended December 31, 1998, with the largest single relationship accounting
for approximately 21.6% of such loans. The average length of the Company's
relationship with such 15 dealers is approximately eight years and ranges from
two to 17 years. Dealer relationships are evaluated by management from time to
time to assess the level and pattern of losses on the dealer loans originated by
a dealer and to examine the current financial information and credit reports of
the dealers themselves.
Each loan received from a dealer is individually underwritten by the Company
using a methodology developed by Antelope, which includes the review of an
applicant's credit report and confirmation of information provided in the
financing application. The average dealer loan amount purchased by the Company
is approximately $13,000, and the majority of such loans were originated to
finance the purchase of used automobiles. The finance market for new automobile
loans is very competitive with the largest competitors being the finance
affiliates of major automobile manufacturers, including Ford Motor Credit,
General Motors Acceptance Corp., and Chrysler Financial. At December 31, 1998,
the Company held $104.0 million of dealer loans, constituting 11.5% of the
Company's gross portfolio loans and leases.
The following table sets forth the volume of dealer loans funded by the
Company during the last five fiscal quarters ended December 31, 1998.
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1998 1998 1998 1998 1997
------------ ------------- --------- ----------- ------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans funded:
Amount funded............................... $ 13,699 $ 13,924 $ 13,082 $ 11,194 $ 12,069
Number
Used...................................... 534 606 567 538 508
New....................................... 359 331 312 254 292
------------ ------------- --------- ----------- ------------
Total................................... 893 937 879 792 800
Total amount outstanding...................... $ 103,978 $ 100,444 $ 95,242 $ 90,949 $ 87,636
Total delinquencies........................... 1,408 1,200 789 849 967
Net charge-offs............................... 192 192 209 216 138
Delinquencies to total amount outstanding..... 1.35% 1.19% 0.83% 0.93% 1.10%
Net charge-offs (annualized) to total amount
outstanding................................. 0.74% 0.76% 0.88% 0.95% 0.63%
</TABLE>
During the next 12 months, the Automobile Lending Division intends to
continue to increase its origination volume by developing additional dealer
relationships further south into Los Angeles and Orange Counties where,
according to the California Motor Vehicle Dealers Association, there are
approximately 370 automobile dealership franchises.
UNDERWRITING AND CREDIT ADMINISTRATION
UNDERWRITING. Although the Banks accept applications for various types of
commercial and consumer loans at all of their branches, all loans are subject to
centralized underwriting and processing, with the exception of commercial loans
less than $100,000. Residential mortgage loans may also be approved for sale
into the secondary market at one of two loan production offices in Northern
California.
Eldorado Bank generally does not make individual loans larger than $8.0
million, although its applicable legal lending limit is substantially higher
(for secured loans, 25% of Eldorado Bank's equity plus its allowance for loan
and lease losses, or $21.5 million at December 31, 1998). Lending authorities
range from $2,500 to $100,000 for most loan officers and from $250,000 to
$300,000 for regional vice presidents. Authorization limits for such officers
are set by Eldorado Bank's Chief Credit Officer based upon area of
responsibility and prior lending experience and are ratified by the Eldorado
Bank Board of Directors. The
33
<PAGE>
head of the Commercial Banking Division has commercial lending authority of
$500,000, while the head of the Community Banking Division has commercial
authority of $250,000 and SBA authority of $1.0 million. Eldorado Bank's Chief
Credit Officer has the authority to approve loans up to $1.0 million. Loans in
excess of $1.0 million but less than $2.0 million must be approved by Eldorado
Bank's Chief Credit Officer and Eldorado Bank's President, and loans in excess
of $2.0 million but less than $4.0 million must also be approved by an Officer
Loan Committee, of which the Chief Credit Officer and Eldorado Bank's President
are members. Loans in excess of $4.0 million but less than $8.0 million must
also be approved by the Loan Committee of Eldorado Bank's Board of Directors,
and loans in excess of $8.0 million must also be approved by the Board of
Directors of Eldorado Bank. As of December 31, 1998, 37 borrowers had total
obligations (including loans to related interests) to Eldorado Bank in excess of
$2.0 million, representing $81.7 million or 15.8% of Eldorado Bank's total
portfolio loans and leases at that date. At December 31, 1998, the Company's
largest concentration of loans to a single borrower (and related interests)
totaled $6.8 million. As of the date of this prospectus, all outstanding loans
in excess of $2.0 million are performing and are secured primarily by real
estate located in Southern California.
Antelope generally does not make individual loans larger than $1.0 million,
although its applicable legal lending limit is substantially higher (for secured
loans, 25% of Antelope's equity plus its allowance for loan and lease losses, or
$5.8 million at December 31, 1998). Lending authorities for senior loan officers
at Antelope range from $2,500 to $100,000. Authorization limits for such
officers are set by Antelope's Chief Credit Officer based upon area of
responsibility and prior lending experience and are ratified by the Antelope
Board of Directors. The Company's President, who also serves as Antelope's
Chairman and Chief Executive Officer, has the authority to approve loans up to
$500,000, and Antelope's President and its Chief Credit Officer each have the
authority to approve loans up to $100,000 individually and jointly up to
$300,000. Loans in excess of $500,000 must be approved by the Antelope Board of
Directors. As of December 31, 1998, Antelope's 10 largest borrowing
relationships had total obligations (including loans to related interests) to
Antelope representing $14.5 million or 10.6% of Antelope's total loans and
leases at that date. At December 31, 1998, Antelope's largest concentration of
loans to a single borrower (and related interests) totaled $3.5 million. As of
the date of this prospectus, all outstanding loans to Antelope's 10 largest
borrowers are performing and are secured primarily by real estate located in
Southern California.
The Company's commercial loans are generally underwritten in the Company's
primary market area on the basis of the borrower's ability to service such debt
from income. As a general practice, the Company takes as collateral a lien on
any available real estate, equipment or other assets and obtains a personal
guaranty. Working capital loans are primarily collateralized by short-term
assets and term loans are primarily collateralized by long-term assets.
In addition to commercial loans secured by real estate, the Company makes
commercial mortgage loans to finance the purchase of owner-occupied real
property, which generally consists of real estate on which structures have
already been completed. The Company's commercial mortgage loans are secured by
first liens on real estate, typically have variable interest rates and
generallly amortize over a 20-year period with balloon payments due at the end
of five years. In underwriting commercial mortgage loans, consideration is given
to the property's operating history, future operating projections, current and
projected occupancy, location and physical condition. The underwriting analysis
also includes credit checks, appraisals and a review of the financial condition
of the borrower.
The Company makes loans to finance the construction of residential
properties, the majority of which are owner-occupied and, to a limited extent,
owner-occupied nonresidential properties. Construction loans generally are
secured by first liens on real estate. The Company conducts periodic
inspections, either directly or through an agent, prior to approval of periodic
draws on these loans. Underwriting guidelines similar to those described above
are also used in the Company's construction lending activities.
34
<PAGE>
Consumer loans made by the Company include home improvement loans,
automobile loans, recreational vehicle loans, boat loans, personal loans
(collateralized and uncollateralized) and deposit account collateralized loans.
The terms of these loans typically range from 12 to 84 months and vary based
upon the nature of collateral and size of loan.
The head of the Equipment Leasing Division has authority to approve leases
up to $150,000 and two other officers have authorization levels of $75,000 and
$50,000, respectively. Leases in excess of $150,000 must also be approved by the
Company's Chief Credit Officer. The Company generally does not make leases in
excess of $150,000, and since the Company's acquisition of CSB, the Company has
not made a lease in excess of $500,000.
Senior officers of the Mortgage Banking Division have authority to approve
funding of residential loans for sale into the secondary market up to $2.0
million. Residential loans in excess of $2.0 million are subject to the same
approval criteria required for commercial loans.
CREDIT ADMINISTRATION AND NONPERFORMING ASSETS. The Company has several
procedures in place to assist it in maintaining the overall quality of its loan
and lease portfolio, as described below. There can be no assurance, however,
that the Company's loan and lease portfolio will not become subject to
increasing pressures from deteriorating borrower credit due to general economic
conditions.
With the exception of the Equipment Leasing Division, which administers and
collects the leases that it services, the Company has a centralized Credit
Administration Department. The Department is responsible for supervising the
Company's loan review function and its Special Asset Group, which focuses
exclusively on the collection or other resolution of nonaccrual loans and OREO.
The Company's loan review function evaluates additional loans that are potential
problem loans as to risk exposure in determining the adequacy of the allowance
for loan losses. The Company obtains updated appraisals from time to time on
loans secured by real estate, particularly those categorized as nonperforming
loans and potential problem loans. In instances where updated appraisals reflect
reduced collateral values, an evaluation of the borrower's overall financial
condition is made to determine the need, if any, for possible writedowns or
appropriate additions to the allowance for loan losses.
The Company generally places a loan on nonaccrual status and ceases accruing
interest when loan payment performance is deemed unsatisfactory. All loans past
due 90 days, however, are placed on nonaccrual status, unless the loan is both
well-secured and in the process of collection or renewal. Cash payments received
while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection.
The Company is sometimes required to revise a loan's interest rate or
repayment terms in a troubled debt restructuring. A loan is considered a
restructured loan if, as a result of the borrower's financial condition, the
Company has elected to modify it by accepting below market terms either by
granting an interest rate concession or deferring principal or interest payments
or both. In order for a restructured loan to be eligible to be reclassified as a
fully performing loan, the following must be satisfied: (i) the borrower must
generally have been current in meeting the restructured terms for at least six
consecutive month and (ii) the restructured loan must have an interest rate and
other features that are at least equivalent to market terms. Inevitably, not all
restructured loans will be viable as restructured, and it may be necessary for
the Company to make further concessions or to transfer the loan to nonaccrual
status or OREO. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The Company records OREO at fair value at the time
of acquisition, less estimated costs of sale.
COMPETITION
There is intense competition in California and elsewhere in the United
States in attracting and retaining deposit accounts, and in making loans to
small businesses and other borrowers. The primary factors in the competition for
deposits are interest rates, personalized services, the quality and range of
35
<PAGE>
financial services, convenience of office locations and office hours. The
Company competes for deposits primarily with other commercial banks, savings
institutions, credit unions, money market funds and other investment
alternatives. The primary factors in the competition for loans are interest
rates, loan origination fees, the quality and range of lending services and
personalized services. The Company competes for loans, primarily with other
commercial banks, savings institutions, mortgage banking firms, credit unions
and other financial intermediaries. In addition, our Automobile Lending Division
competes with the financial services affiliates of the major automobile
manufacturers. The Company faces competition for deposits and loans throughout
its market areas not only from local institutions but also from out-of-state
financial intermediaries that have opened loan production offices or that
solicit deposits in its market areas. Many of the financial intermediaries
operating in the Company's market areas offer certain services, such as trust
and investment services, that the Company does not offer directly. Additionally,
as a consequence of recent bank acquisitions and mergers in the Company's market
- -- including the mergers of BankAmerica Corporation and Wells Fargo & Company
with NationsBank Corporation and Norwest Corporation, respectively -- many of
the Company's competitors have greater financial and marketing resources and
name recognition than the Company and have statewide or nationwide operations
that may give them opportunities to realize greater efficiencies and economies
of scale than the Company. Moreover, recent developments in technology and mass
marketing have permitted larger institutions to market loans more aggressively
to small business borrowers.
Federal legislation enacted in August 1998 eased membership limits on credit
unions, which previously were permitted to serve only members that shared a
single, common bond. Specifically, the legislation provides that
occupation-based credit unions may serve unrelated companies as long as such
companies have fewer than 3,000 employees. The Company expects that such
legislation will increase the ability of credit unions to compete with community
banks, such as the Banks, for both deposits and loans.
The Company competes principally on the basis of personalized attention and
special services that it provides its customers, principally individuals and
small to medium-sized businesses. Its marketing activity focuses primarily on
promotional activities by and referrals from the Banks' officers, directors and
employees. Most of the Company's offices offer extended weekday banking hours
and some branches offer Saturday banking hours. The Company also operates
drive-up banking facilities at 12 of its branches and provides a variety of
personalized services. In addition, the Company operates 24-hour automatic
teller machines ("ATMs") at 24 of its locations and is a member of Instant
Teller network and Plus System network, which link bank ATMs nationwide.
EMPLOYEES
The Company had approximately 662 full-time equivalent employees as of
December 31, 1998, of whom 69 were officers who held titles at the Company or
the Bank of Vice President or above. The Company believes that its employee
relations are satisfactory. See, however, "Risk Factors -- We are dependent on
the contributions of our key management personnel." None of the Company's
employees is represented by a union or covered under a collective bargaining
agreement.
PROPERTIES
The Company's executive office is located in Laguna Hills, California, where
it leases a site that is physically contiguous to one of Eldorado Bank's
branches. Eldorado Bank is headquartered on a site owned by it in Tustin,
California, and Antelope Valley Bank is headquartered on a site owned by it in
Lancaster, California.
In addition to the Banks' headquarters and the Laguna Hills location, the
Company owns 10 of its branch offices, one of which is subject to a ground
lease, and leases the remaining 12 offices. The Company also leases several
locations for various administrative offices associated with the Mortgage
Banking Division and the Equipment Leasing Division. The Company's aggregate
rental expense under such leases
36
<PAGE>
was $2.6 million for the year ended December 31, 1998. For additional
information regarding the Company's lease obligations, see Note 17 to the
Supplemental Consolidated Financial Statements. At December 31, 1998, the net
book value of the property and leasehold improvements of the offices of the
Company amounted to $12.4 million. The Company's properties that are not leased
are owned free and clear of any mortgages. The Company believes that all of its
properties are appropriately maintained and are suitable for their respective
present needs and operations.
LEGAL PROCEEDINGS
As of the date of this prospectus, no litigation is pending against the
Company itself. Eldorado Bank is the defendant in an action filed in 1994 by a
former officer of CSB's Stockton, California loan production office, alleging
wrongful termination, breach of contract, defamation and various other causes of
action. A central element of the employee's claim is that CSB terminated him in
retaliation for his reporting of alleged violations of consumer lending laws
committed by another employee of CSB's Stockton office. The Company's position
is that the former employee's claims are without merit and that CSB terminated
him because it reasonably believed he had acted insubordinately by retaliating
against a subordinate who had complained of the former employee's conduct. In
October 1997, a jury awarded the former employee $3.8 million in damages,
including $2.0 million in punitive damages. The trial court subsequently reduced
the award to $2.0 million, including $500,000 in punitive damages, and Eldorado
Bank recorded a purchase accounting adjustment for the CSB acquisition in an
amount equal to the reduced judgment. Both the Company and its former employee
have filed appeals, with the former employee seeking to have the total amount of
the jury's punitive damage award reinstated. Interest accrues on the judgment at
the statutory rate of 10% and as of December 31, 1998 the judgment, including
interest, was equal to $2.6 million. There can be no assurance, however, that
the Company will not incur additional expense in connection with such matter or
that an adverse outcome in the appeal will not have a material adverse effect on
the Company's results of operations.
The Company is from time to time subject to various legal actions (in
addition to those described above) that are considered to be part of its normal
course of business. Management, after consultation with legal counsel, does not
believe that the ultimate liability, if any, arising from those other actions
will have a material adverse effect on the financial position or results of
operations of the Company.
37
<PAGE>
SUPPLEMENTAL SELECTED FINANCIAL DATA
Supplemental selected financial data as of and for the five years ended
December 31, 1998 are derived from, and should be read in conjunction with, the
Company's Supplemental Consolidated Financial Statements appearing elsewhere in
this prospectus, which have been audited by the Company's independent
accountants. The acquisition of Antelope Valley Bank was treated for accounting
purposes as a pooling of interests, and therefore, the financial information
presented in the table below treats the acquisition as if it had been completed
at the beginning of the earliest period presented. The following supplemental
selected financial data should also be read in conjunction with the Supplemental
Consolidated Financial Statements of Eldorado and the Notes thereto, appearing
elsewhere in this prospectus, and the information set forth under
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." As described elsewhere in this prospectus,
because of the three acquisitions that the Company completed between September
1995 and June 30, 1997, which were accounted for using the purchase method of
accounting, the Company's historical operating results prior to June 30, 1997
are of limited relevance in evaluating the Company's historical financial
performance and predicting the Company's future operating results.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
------------ ------------ ----------- ----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF CONSOLIDATED INCOME
Net interest income before provision for loan and lease
losses................................................ $ 54,373 $ 42,764 $ 19,774 $ 10,969 $ 10,679
Provision for loan and lease losses..................... 5,552 2,549 1,215 1,335 1,443
------------ ------------ ----------- ----------- -----------
Net interest income after provision for loan and lease
losses................................................ 48,821 40,215 18,559 9,634 9,236
Noninterest income...................................... 25,888 19,129 9,416 4,805 4,286
Noninterest expenses
Amortization of goodwill and intangibles.............. 3,996 2,881 268 -- --
Carrying costs and losses on OREO..................... 219 395 293 -- --
Provision for recourse obligation..................... -- 2,021 -- -- --
Other noninterest expense............................. 59,062 45,103 23,368 13,142 12,435
------------ ------------ ----------- ----------- -----------
Total noninterest expense........................... 63,277 50,400 23,929 13,142 12,435
------------ ------------ ----------- ----------- -----------
Income before income tax and extraordinary item......... 11,432 8,944 4,046 1,297 1,087
Income tax provision (benefit).......................... 6,018 4,034 (373) 277 607
------------ ------------ ----------- ----------- -----------
Income before extraordinary item........................ 5,414 4,910 4,419 1,020 480
Extraordinary item (1).................................. -- -- -- 625 --
------------ ------------ ----------- ----------- -----------
Net income.............................................. 5,414 4,910 4,419 1,645 480
Preferred dividends..................................... 1,282 731 -- -- --
------------ ------------ ----------- ----------- -----------
Net income available to common shareholders............. $ 4,132 $ 4,179 $ 4,419 $ 1,645 $ 480
------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
Comprehensive income.................................... $ 5,896 $ 4,954 $ 4,169 $ 2,129 $ 346
------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
Per share data (2):
Weighted Average shares outstanding
Basic................................................. 11,955,313 10,188,177 5,432,001 2,915,714 2,808,479
Diluted............................................... 12,433,770 11,416,266 5,432,001 2,915,714 2,808,479
Basic:
Income before extraordinary item........................ $ 0.35 $ 0.41 $ 0.81 $ 0.35 $ 0.17
Extraordinary item...................................... -- -- -- 0.21 --
------------ ------------ ----------- ----------- -----------
Net income per share.................................... $ 0.35 $ 0.41 $ 0.81 $ 0.56 $ 0.17
Net income per share, excluding goodwill
amortization (3)...................................... $ 0.68 $ 0.69 $ 0.86 $ 0.56 $ 0.17
Diluted:
Net income before extraordinary item.................... $ 0.33 $ 0.37 $ 0.81 $ 0.35 $ 0.17
Extraordinary item...................................... -- -- -- 0.21 --
Net income per share.................................... $ 0.33 $ 0.37 $ 0.81 $ 0.56 $ 0.17
Net income per share, excluding goodwill
amortization (3)...................................... $ 0.65 $ 0.62 $ 0.86 $ 0.56 $ 0.17
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF CONSOLIDATED FINANCIAL POSITION
Total assets............................................ $ 1,397,550 $ 1,092,014 $ 584,270 $ 187,065 $ 187,974
Loans and leases, net................................... 881,744 722,010 414,692 123,724 131,266
Goodwill and other intangibles.......................... 67,378 70,903 10,736 -- --
Deposits................................................ 1,221,487 933,070 510,661 165,138 171,074
Long-term debt.......................................... 27,657 27,657 537 537 1,219
Common shareholders' equity............................. 107,874 102,757 58,495 19,440 12,817
Shareholders' equity.................................... 119,533 114,416 58,495 19,440 12,817
Average assets.......................................... 1,206,489 886,605 381,042 187,900 188,635
Average earning assets.................................. 1,005,460 726,262 320,639 165,731 165,960
Average common equity................................... 106,050 83,890 37,582 14,615 12,591
Per share data (2):
Common shares outstanding............................... 11,955,313 11,955,313 7,630,330 3,229,349 2,808,479
Diluted common shares outstanding....................... 12,433,770 12,433,853 7,630,330 3,229,349 2,808,479
Book value per share.................................... $ 9.02 $ 8.60 $ 7.67 $ 6.02 $ 4.56
Diluted book value per share............................ 8.68 8.26 7.67 6.02 4.56
Tangible book value per share........................... 3.39 2.66 6.26 6.02 4.56
Diluted tangible book value per share................... 3.26 2.56 6.26 6.02 4.56
SELECTED PERFORMANCE RATIOS
Return on average assets................................ 0.45% 0.55% 1.16% 0.88% 0.25%
Return on average assets, excluding goodwill
amortization(3)....................................... 0.78 0.88 1.23 0.88 0.25
Return on average common equity......................... 3.90 4.98 11.76 11.26 3.81
Return on average common equity, excluding goodwill
amortization(3)....................................... 7.66 8.42 12.47 11.26 3.81
Net yield on interest earning assets.................... 5.41 5.89 6.17 6.62 6.43
Efficiency ratio (4).................................... 73.59 72.87 80.05 83.31 83.09
Net interest income before provision for loan and lease
losses to average assets.............................. 4.51 4.82 5.19 5.84 5.66
SELECTED ASSET QUALITY RATIOS (5)
Nonperforming assets to total portfolio loans and leases
and OREO.............................................. 1.90% 3.40% 4.38% 4.45% 5.52%
Nonperforming assets to total assets.................... 0.89 2.03 2.77 3.19 4.13
Allowance for loan and lease losses to portfolio loans
and leases............................................ 1.40 1.69 1.79 1.57 1.35
Allowance for loan and lease losses to nonperforming
loans and leases......................................
Net charge-offs to average portfolio loans and leases... 1.15 0.39 0.48 0.89 1.07
SELECTED CAPITAL RATIOS (5)
Tier 1 Leverage Ratio................................... 6.37% 6.91% 8.30% 10.35% 6.79%
Tier 1 Risk-Weighted Ratio.............................. 8.76 9.30 10.97 14.11 8.81
Total Risk-Weighted Ratio............................... 9.78 10.60 12.35 15.91 9.44
Average common equity to average assets................. 8.79 9.46 9.86 7.78 6.67
</TABLE>
- --------------------------
(1) Forgiveness of indebtedness net of $443,000 income tax benefit.
(2) Share and per share amounts have been retroactively restated to reflect (i)
a one-for-two reverse split of Eldorado common stock effective September 4,
1998 and (ii) changes in the presentation of earnings per share.
(3) Excludes the amortization of goodwill and other intangibles. Although such
presentation is not defined by GAAP, management believes it to be beneficial
to gaining an understanding of Eldorado's financial performance in
comparison to its peer group.
(4) As used in this prospectus, the term efficiency ratio means noninterest
expense -- excluding amortization of goodwill and other intangibles, losses
and carrying costs of OREO and provision for recourse obligations -- as a
percentage of total revenue less interest expense. Our definition of
efficiency ratio may not be comparable to that used by other banking
companies.
(5) Selected Asset Quality Ratios and Selected Capital Ratios are period end
ratios, except for net charge-offs to average portfolio loans and leases,
average common equity to average assets and the Tier 1 Leverage Ratio. The
average ratios are based on daily average balances for the indicated
periods. The Tier 1 Leverage Ratio is based on the average daily balances
for the three-month period ended as of the indicated date. Portfolio loans
and leases are exclusive of residential mortgage loans held for sale. For
information relating to Eldorado's regulatory capital requirements, see
"Supervision and Regulation."
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
On January 22, 1999, the Company completed the acquisition of Antelope
Valley Bank. In connection with the acquisition, the Company issued to the
shareholders of Antelope Valley Bank approximately 2.8 million shares of common
stock. See "Recent Developments." The acquisition was treated for accounting
purposes as a pooling of interests. Accordingly, the financial information
contained in this section treats the acquisition of Antelope Valley Bank as if
it had been completed prior to the periods presented herein, and should be read
in conjunction with the Supplemental Consolidated Financial Statements of the
Company and the Notes thereto included in this prospectus.
Prior to September 1995, the predecessor to the Company, SDN Bancorp, Inc.,
owned a single bank, San Dieguito National Bank ("San Dieguito"), with
approximately $56 million in assets, that was categorized as "critically
undercapitalized" by federal regulators. In September 1995, the Company was
recapitalized by DCG, a limited partnership controlled by Mr. Keller and a
majority of the other directors of the Company. Between September 1995 and June
30, 1998, the Company acquired three banks -- Liberty National Bank ("Liberty"),
Commerce Security Bank ("CSB") and Eldorado Bank -- increasing the Company's
tangible assets by $779 million. The Company completed its largest acquisition
- -- Eldorado Bancorp and its subsidiary bank, Eldorado Bank -- in June 1997,
which increased the Company's assets by approximately $404 million. The Liberty
acquisition was completed as of March 31, 1996, and the CSB acquisition was
completed as of September 1, 1996. See "Business -- Prior Acquisitions." Each of
those acquisitions was accounted for using the purchase method of accounting for
business combinations, and therefore the operating results of those banks are
reflected in the Company's financial statements only from the date of
acquisition. Consequently, the period-to-period comparisons in this section are
significantly affected by the timing of those acquisitions. For historical
financial information concerning the Company, see the Company's Supplemental
Consolidated Financial Statements and Consolidated Financial Statements and the
Notes related thereto.
Within the recent past, CSB, Liberty and San Dieguito were adversely
affected by a variety of factors, including high levels of nonperforming assets,
reliance on high-cost brokered deposits and excessive overhead costs. The high
levels of nonperforming assets and related overhead costs were partly
attributable to adverse economic conditions, including declining real estate
values, that California experienced during the early to mid-1990s. See "Business
- -- Prior Acquisitions."
Effective June 30, 1997, the Company merged San Dieguito, Liberty, CSB and
Eldorado Bank into a single bank, which is known as Eldorado Bank. The Company
owns 100% of Eldorado Bank, which now is one of the Company's two banking
subsidiaries, the other being Antelope Valley Bank.
Contained within this prospectus are various measures of financial
performance that have been calculated excluding the amortization of intangibles.
These measures are identified as "excluding goodwill amortization" and have been
provided to assist the reader in evaluating the core performance of the Company.
This presentation is not defined by Generally Accepted Accounting Principles
("GAAP"), but management believes it to be beneficial to gaining an
understanding of the Company's financial performance in comparison to its peer
group.
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not specifically limited to, changes in regulatory climate,
shifts in the interest rate environment, changes in economic conditions of
various markets the Company serves, as well as the other risks detailed in this
section and in "Risk Factors" above.
40
<PAGE>
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Company had net income of $5.4 million for the year ended December 31,
1998, an increase of $504,000 or 10.3%, compared to net income of $4.9 million
for the year ended December 31, 1997. The increase in net income is due to an
increase in net interest income and noninterest income of $11.6 million and $6.8
million, respectively, partially offset by increased provision for loan and
lease losses, noninterest expense and income taxes of $3.0 million, $12.9
million and $2.0 million, respectively. Basic net income per share in 1998 was
$0.35 compared to $0.41 in 1997, while diluted net income per share in 1998 was
$0.33 per share compared to $0.37 in 1997. Excluding the amortization of
goodwill and other intangibles, basic and diluted earnings per share for the
year ended December 31, 1998 were $0.68 and $0.65 respectively, as compared to
$0.69 and $0.62 for the year ended December 31, 1997. The Company's return on
average assets was .45% and its return on average common equity was 3.90% for
the year ended December 31, 1998, as compared to .55% and 4.98%, respectively,
for the year ended December 31, 1997. Excluding the amortization of goodwill and
other intangibles, return on average assets was .78% and return on average
common equity was 7.66% for the year ended December 31, 1998, as compared to
.88% and 8.42%, respectively, for the year ended December 31, 1997.
The Company had net income of $4.9 million for the year ended December 31,
1997, an increase of $491,000, or 10.0%, compared to net income of $4.4 million
for the year ended December 31, 1996. The increase in net income is due to an
increase in net interest income, noninterest income and tax benefit of $23.0
million and $9.7 million, respectively, partially offset by increased provision
for loan and lease losses, noninterest expense and income taxes of $1.3 million,
$26.5 million and $4.4 million, respectively. Basic net income per share in 1997
was $0.41 per share compared to $0.81 in 1996, while diluted net income per
share in 1997 was $0.37 compared to $0.81 in 1996. Excluding the amortization of
goodwill and other intangibles, basic and diluted earnings per share for the
year ended December 31, 1997 were $0.69 and $0.62, respectively, as compared to
$0.86 and $0.86 for the year ended December 31, 1996. The Company's return on
average assets was .55% and its return on average common equity was 4.98% for
the year ended December 31, 1997. For the year ended December 31, 1996, the
Company's return on average assets was 1.16% and its return on average common
equity was 12.47%. Excluding the amortization of goodwill and other intangibles,
return on average assets was .88% and return on average common equity was 8.42%
for the year ended December 31, 1997, as compared to 1.23% and 12.47%,
respectively, for the year ended December 31, 1996.
RESULTS OF OPERATIONS
NET INTEREST INCOME AND NET INTEREST MARGIN
Net interest income, the difference between the interest generated from
interest-earning assets and the interest paid for interest-bearing liabilities,
continues to be the Company's primary source of revenue. The Company's net
interest income increased $11.6 million in 1998 due to an increase of $22.2
million in interest income partially offset by increased interest expense of
$10.6 million. Increased interest income was primarily the result of the higher
volume of earning assets that was partially offset by decreased yields on
earning assets. The average yield on interest-earning assets declined to 8.9% in
1998 from 9.2% in 1997. The decrease was due to a reduction in yields on
marketable securities, a decline in the prime lending rate in the fourth quarter
of 1998 and increased price competition for loans throughout the year. Interest
expense increased as a result of the increased volume of interest-bearing
liabilities and an increase in the average cost of interest-bearing liabilities
to 4.4% in 1998 from 4.3% in 1997. The increase in the cost of average
interest-bearing liabilities primarily reflects greater price competition for
deposits, particularly for high balance accounts such as Title and Escrow
Deposits. See "Business--Products and Services-- Community Banking Division." As
a result of those factors, the net yield on earning assets declined to 5.4% in
1998 from 5.9% in 1997.
The Company's net interest income increased $23.0 million in 1997 due to an
increase of $36.7 million in interest income partially offset by increased
interest expense of $13.7 million. Interest income and interest expense
increased primarily due to an increase in interest earning assets and
liabilities acquired in
41
<PAGE>
the acquisition of Eldorado Bancorp. Increased interest income was partially
offset by decreased yields on earning assets. The average yield on
interest-earning assets declined to 9.2% in 1997 from 9.4% in 1996. Interest
expense increased because of the increase in interest bearing liabilities and an
increase in the average cost of interest-bearing liabilities from 4.3% in 1997
to 4.1% in 1996. As a result of those factors, the net yield on earning assets
declined to 5.9% in 1997 from 6.1% in 1996
Loan fee income increased $1.4 million to $4.5 million in 1998 from $3.1
million in 1997. Loan fee income increased $1.6 to $3.1 million in 1997 from
$1.5 in 1996. Those increases are primarily attributable to the fees earned on
the sale of SBA loans into the secondary market. See "Business--Products and
Services--Community Banking Division."
The following table presents, for the periods indicated, the distribution of
average assets, liabilities and shareholders' equity, as well as the total
dollar amounts of interest income from average interest-bearing assets and the
resultant yields, and the dollar amounts of interest expense and resultant cost
expressed in both dollars and rates. Nonaccrual loans are included in the
calculation of the average loans while nonaccrued interest thereon is excluded
from the computation of rates earned.
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997 DECEMBER 31, 1996
DECEMBER 31, 1998 -------------------------- -----------------
----------------------------- INTEREST INTEREST
INTEREST AVERAGE INCOME AVERAGE INCOME
AVERAGE INCOME OR YIELD OR AVERAGE OR YIELD OR AVERAGE OR
BALANCE EXPENSE COST BALANCE EXPENSE COST BALANCE EXPENSE
----------- ----------------- -------- -------- -------- -------- --------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans and leases(1)........................... $ 805,636 $77,843 9.66% $572,422 $57,638 10.07% $236,324 $25,149
Investment securities (2)..................... 132,881 7,790 5.86 119,971 7,330 6.11 56,629 3,484
Federal funds sold............................ 65,213 3,319 5.09 32,556 1,737 5.34 26,059 1,358
Interest-bearing deposits with financial
institutions................................ 1,730 99 5.72 2,672 154 5.76 3,045 168
----------- --------- -------- -------- -------- --------
Total interest-earning assets............. 1,005,460 89,051 8.86 727,621 66,859 9.19 322,057 30,159
Other assets
Cash and demand deposits with banks........... 88,513 77,691 23,965
Other assets.................................. 112,516 81,293 35,020
----------- -------- --------
Total assets.................................... 1,206,489 886,605 381,042
----------- -------- --------
----------- -------- --------
Interest-bearing liabilities:
Deposits
Interest-bearing demand..................... 134,979 1,964 1.46 98,188 1,612 1.64 44,663 876
Money market................................ 116,283 4,001 3.44 90,600 2,839 3.13 36,478 922
Savings..................................... 202,971 11,169 5.50 126,356 5,496 4.35 43,108 1,429
Time........................................ 286,147 13,428 4.69 214,087 11,677 5.45 125,561 7,084
----------- --------- -------- -------- -------- --------
Total interest-bearing deposits........... 740,380 30,562 4.13 529,231 21,624 4.09 249,810 10,311
Short-term borrowing.......................... 13,808 806 5.84 12,478 563 4.51 423 13
Long-term debt................................ 27,657 3,310 11.97 15,982 1,908 11.94 537 61
----------- --------- -------- -------- -------- --------
Total interest-bearing liabilities.......... 781,845 34,678 4.44 557,691 24,095 4.32 250,770 10,385
----------- -------- --------
Non interest-bearing liabilities:
Demand deposits............................. 288,377 227,629 86,380
Other liabilities........................... 18,558 10,815 6,310
----------- -------- --------
Total liabilities........................... 1,088,780 796,135 343,460
Shareholders' equity............................ 117,709 90,470 37,582
----------- -------- --------
Total liabilities and
shareholders' equity.......................... $ 1,206,489 $886,605 $381,042
----------- --------- -------- -------- -------- --------
----------- -------- --------
Net interest income............................. $54,373 $42,764 $19,774
--------- -------- --------
--------- -------- --------
Net yield on interest-earning assets............ 5.41% 5.88%
<CAPTION>
<S> <C>
AVERAGE
YIELD OR
COST
--------
<S> <C>
Interest-earning assets
Loans and leases(1)........................... 10.64%
Investment securities (2)..................... 6.15
Federal funds sold............................ 5.21
Interest-bearing deposits with financial
institutions................................ 5.52
Total interest-earning assets............. 9.36
Other assets
Cash and demand deposits with banks...........
Other assets..................................
Total assets....................................
Interest-bearing liabilities:
Deposits
Interest-bearing demand..................... 1.96
Money market................................ 2.53
Savings..................................... 3.31
Time........................................ 5.64
Total interest-bearing deposits........... 4.13
Short-term borrowing.......................... 3.07
Long-term debt................................ 11.36
Total interest-bearing liabilities.......... 4.14
Non interest-bearing liabilities:
Demand deposits.............................
Other liabilities...........................
Total liabilities...........................
Shareholders' equity............................
Total liabilities and
shareholders' equity..........................
Net interest income.............................
Net yield on interest-earning assets............ 6.14%
</TABLE>
- ------------------------------
(1) Loan fees of $4.5 million, $3.1 million and $1.5 million are included in the
computations for 1998, 1997 and 1996, respectively.
(2) Yields are calculated on historical cost and exclude the impact of the
unrealized gain (loss) on available for sale securities.
42
<PAGE>
The following table sets forth changes in interest income and interest
expense on the basis of allocation to changes in rates and changes in volume of
the various components. Changes due to a combination of rate and volume are
presented under the column titled "Mix." Nonaccrual loans are included in total
loans outstanding while nonaccrued interest thereon is excluded from the
computation of rates earned.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
-------------------------------------------- --------------------------------------------
NET CHANGE RATE VOLUME MIX NET CHANGE RATE VOLUME MIX
----------- --------- --------- --------- ----------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans and leases.............. $ 20,205 ($ 2,329) $ 23,483 ($949) $ 32,489 ($ 1,353) $ 35,767 ($ 1,925)
Investment securities......... 459 (298) 789 (32) 3,846 (24) 3,897 (27)
Federal funds sold............ 1,582 (80) 1,742 (80) 379 32 339 8
Other earning assets.......... (55 ) (1) (54) -- (14 ) 7 (21) --
----------- --------- --------- --------- ----------- --------- --------- ---------
Total interest income..... 22,192 (2,707) 25,960 (1,061) 36,700 (1,338) 39,982 (1,944)
Interest expense:
Interest bearing demand....... 352 (183) 604 (69) 736 (143) 1,050 (171)
Money market.................. 1,162 278 805 79 1,917 221 1,368 328
Savings....................... 5,673 1,457 3,332 884 4,067 446 2,760 861
Time.......................... 1,751 (1,631) 3,930 (548) 4,593 (235) 4,995 (167)
Short-term borrowing.......... 243 165 60 18 550 6 370 174
Long-term debt................ 1,402 5 1,394 3 1,847 3 1,754 90
----------- --------- --------- --------- ----------- --------- --------- ---------
Total interest expense.... 10,583 91 10,125 367 13,710 298 12,297 1,115
----------- --------- --------- --------- ----------- --------- --------- ---------
Net interest income............. $ 11,609 ($ 2,798) $ 15,835 ($ 1,428) $ 22,990 ($ 1,636) $ 27,685 ($ 3,059)
----------- --------- --------- --------- ----------- --------- --------- ---------
----------- --------- --------- --------- ----------- --------- --------- ---------
</TABLE>
PROVISION FOR LOAN AND LEASE LOSSES
During 1998, the Company charged a total of $5.6 million against operations
to increase its allowance for loan and lease losses, as compared to $2.5 million
in 1997. The increase in the provision for loan and lease losses primarily
resulted from an increase in net charge-offs attributable to the inclusion of a
full year of operations of the former Eldorado Bancorp as compared to a partial
year in 1997. The increase in the provision in 1998 is also attributable to a
94.9% increase in the ratio of net charge-offs to average portfolio loans and
leases to 0.76% for 1998 from 0.39% for 1997. That increase primarily resulted
from the charge-off of two loans having an aggregate principal balance of $2.1
million. Those loans, which were acquired in the CSB and Eldorado Bancorp
acquisitions, were performing in accordance with their terms as of December 31,
1997; however, in early 1998 the Company became aware of a deterioration in the
borrowers' financial condition that, as dictated by the Company's internal
guidelines, necessitated the charge-offs. The increase in the ratio of net
charge-offs to average portfolio loans and leases also reflects an increase in
equipment leases as percentage of total portfolio loans and leases. At December
31, 1998, leases constituted 13.6% of total portfolio loans and leases as
compared to 6.3% at December 31, 1997. See "--Financial Condition--Allowance for
Loan and Lease Losses."
The provision for loan and lease losses for 1997 was $2.5 million compared
to $1.2 million during 1996. The increase is primarily attributable to the
increase in net charge-offs as a result of the acquisition of Eldorado Bancorp
in June 1997. The increase in net charge-offs more than offset a decline in the
ratio of net charge-offs to average portfolio loans and leases to 0.39% for 1997
from 0.48% for 1996.
NONINTEREST INCOME
Noninterest income increased by $6.8 million, or 35.3%, to $25.9 million in
1998 from $19.1 million in 1997. The increase was primarily due to income
derived from the Mortgage Banking Division and, to a
43
<PAGE>
lesser extent, the result of the inclusion of a full year of operations for
Eldorado Bancorp in 1998 as compared to the inclusion of only a partial year in
1997. The gain on sale of mortgage loans increased by $5.1 million, or 74.2%, to
$12.0 million in 1998 from $6.9 million 1997 as a result of the increase in
mortgage loan originations and sales. See "Business."
Noninterest income increased by $9.7 million, or 50.8%, to $19.1 million in
1997 from $9.4 in 1996. The increase was primarily due to income derived from
the Mortgage Banking Division, to a lesser extent, to the inclusion of a partial
year of operations for Eldorado Bancorp. The gain on sale of mortgage loans
increased by $5.2 million, or 298.8%, to $6.9 million in 1997 from $1.7 million
in 1996 as a result of the increase in mortgage loan originations and sales.
The following table presents for the periods the major categories of
noninterest income:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Service charges on deposit accounts........................... $ 6,456 $ 5,562 $ 2,984
Gain on sale of mortgage loans................................ 11,994 6,887 1,727
SBA loan servicing............................................ 2,539 2,353 1,519
Other income.................................................. 4,899 4,327 3,186
--------- --------- ---------
Total noninterest income.................................. $ 25,888 $ 19,129 $ 9,416
--------- --------- ---------
--------- --------- ---------
</TABLE>
NONINTEREST EXPENSES
Noninterest expense increased by $12.9 million, or 25.6%, to $63.3 million
in 1998 from $50.4 million in 1997. The increase in expense is largely
attributable to variable expenses incurred related to increased loan origination
volumes in the Mortgage Banking Division and also in part to the expenses
associated with the acquired operations of Eldorado Bancorp for the full year in
1998 compared to only the partial year in 1997. Also included in this increase
is the amortization of goodwill, which for 1998 was $4.0 million compared to
$2.9 in 1997.
Noninterest expense increased by $26.5 million to $50.4 million in 1997 from
$23.9 million in 1996. The increase in expense is largely attributable to the
expenses associated with the acquired operations of Eldorado Bancorp, which was
acquired in June 1997. Expenses increased in the categories of salaries and
employee benefits by $10.0 million, occupancy and equipment by $3.2 million and
other noninterest expenses by $13.3 million. Included in this increase is a
provision for recourse obligations of $2.0 million only in 1997 and the
amortization of goodwill, which increased by $2.6 million, or 90.7%, to $2.9
million in 1997 from $268,000 in 1996. The increase in noninterest expense in
1998 was partially offset by a decrease in the provision for mortgage recourse
obligations, for which none was made in 1998 or 1996. The recourse obligations
were incurred in connection with CSB's bulk sales of loan servicing rights for
VA Loans, which sales were effected prior to the Company's acquisition of CSB.
The efficiency ratio, which measures the percentage of net revenue that is
paid as noninterest expenses, increased to 73.6% for 1998 from 73.0% in 1997
which was an improvement from 80.0% for 1996. The decrease in the efficiency
ratio since 1996, which indicates increased operating efficiency as a smaller
portion of net revenue is used for the cost of operations, primarily resulted
from cost savings gained in integrating the banks we acquired in 1996 and 1997.
For purposes of this prospectus, the Company's efficiency ratio is defined as
noninterest expense--excluding the amortization of goodwill and other
intangibles, losses and carrying costs of OREO and nonrecurring provisions for
recourse obligations--as a percentage of total revenue less interest expense.
The Company's definition of efficiency ratio may not be comparable to that used
by other banking companies.
44
<PAGE>
The following table presents for the periods indicated the major categories
of noninterest expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits............................... $ 27,600 $ 20,990 $ 10,976
Non-staff expenses:
Occupancy and equipment.................................... 8,423 7,012 3,776
Professional, regulatory and other services................ 1,983 1,710 1,116
Legal...................................................... 1,527 1,530 530
Insurance.................................................. 811 729 447
Losses and carrying cost of OREO........................... 219 395 293
Provision for recourse obligation.......................... -- 2,021 --
Amortization of goodwill and other intangibles............. 3,996 2,881 268
Other...................................................... 18,718 13,132 6,523
--------- --------- ---------
Total non-staff expense.................................. 35,677 29,410 12,953
--------- --------- ---------
Total noninterest expense.............................. $ 63,277 $ 50,400 $ 23,929
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company expects that during the quarter ending March 31, 1999 it will
recognize approximately $800,000 of expenses, net of taxes, related to the
Antelope acquisition, including investment banking and professional fees and
severance costs.
PROVISION FOR INCOME TAXES
The Company's tax provision increased by $2.0 million, or 49.2%, to $6.0
million in 1998 from $4.0 million in 1997. This increase in taxes resulted from
higher pre-tax earnings in 1998 of $11.4 million compared to $8.9 million in
1997. The Company's effective tax rate for 1998 (52.6%) is higher than the
applicable statutory rate (42.0%) because goodwill amortization is a charge to
earnings for financial statement purposes and is not deductible for federal
income tax purposes.
The Company recorded a tax provision on continuing operations totaling $4.0
million in 1997 compared to a net benefit of $373,000 in 1996. The benefit in
1996 resulted from the release of the valuation allowance which had previously
been provided against the Company's federal and state deferred tax assets. That
valuation allowance had been provided against the Company's net operating loss
carry forwards and other tax attributes. However, the Company's operating
results adequately supported the realizability of the deferred tax assets at
December 31, 1997 and 1996 and therefore the valuation allowance was no longer
required. Of the $2.0 million total allowance which was released in 1996,
approximately $413,000 was utilized to offset tax expense related to 1996
operating income.
FINANCIAL CONDITION
Total assets of the Company at December 31, 1998 were $1.4 billion, an
increase of $305.5 million, or 28.0%, compared to total assets of $1.1 billion
at December 31, 1997. The increase in total assets since December 31, 1997 is
primarily due to an increase in earning assets and cash that was funded by an
increase in the Company's deposit liabilities. Total earning assets of the
Company at December 31, 1998 increased $280.2 million, or 31.3%, to $1.2 billion
compared to total earning assets of $894.3 million at December 31, 1997. The
increase in total earnings assets since December 31, 1997 is primarily due to an
increase in mortgage loans held for sale and investment securities. Cash at
December 31, 1998 was $122.5 million, an increase of $23.1 million, or 23.3%,
from $99.4 million at December 31, 1997. The increase in cash is due primarily
to the increased liquidity demands attributable to the increase in deposit
liabilities that increased $288.4 million, or 30.9%, to $1.2 billion at December
31, 1998 from $933.1 million at December 31, 1997.
45
<PAGE>
LOANS AND LEASES
Total loans and leases of the Company at December 31, 1998 were $881.7
million, an increase of $159.7 million, or 22.1%, from $722.0 million at
December 31, 1997. The increase in mortgage loans held for sale is primarily
responsible for the increase in total loans and leases. Included in total loans
and leases at December 31, 1998 are $248.8 million of mortgage loans held for
sale that increased $152.6 million, or 158.9%, from $96.2 million at December
31, 1997.
Portfolio loans and leases increased by $6.3 million, or 1.0%, to $654.1
million at December 31, 1998, from $647.8 million at December 31, 1997. The
increase in portfolio loans and leases is primarily attributable to an increase
of $48.1 million, or 117.7%, in equipment leases as well as an increase of $14.5
million, or 10.6%, in installment loans to individuals that resulted primarily
from growth in Antelope Valley Bank's automobile lending. The increases in those
lending categories were nearly offset, however, by declines in the volume of
most categories of commercial loans. The Company experienced the greatest
reduction in commercial real estate loans, which decreased by $36.3 million, or
15.4%, to $198.9 million at December 31, 1998, from $235.2 million at December
31, 1997. The decrease in commercial loans is primarily attributable to
competitive pricing pressures, as many borrowers elected to refinance their
loans at lower rates offered by competing lenders.
The following table sets forth the amount of loans and leases outstanding
for the Company at the end of each of the years indicated, according to type of
loan, inclusive of mortgage loans held for sale. The Company has no foreign
loans or energy-related loans as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial........................................... $ 136,783 $ 151,839 $ 79,505 $ 48,361 $ 53,471
Real estate-commercial............................... 198,890 235,244 86,397 -- --
Real estate-construction............................. 46,717 36,332 19,638 2,435 3,663
Real estate-mortgage................................. 31,717 46,995 53,917 26,248 28,992
Installment loans to individuals..................... 151,127 136,587 78,874 53,666 51,465
Lease financing...................................... 88,875 40,819 46,498 -- --
---------- ---------- ---------- ---------- ----------
Subtotal (portfolio loans and leases)........... 654,109 647,816 364,829 130,710 137,591
Loans and leases held for sale....................... 248,833 96,230 64,917 -- --
---------- ---------- ---------- ---------- ----------
Total........................................... 902,942 744,046 429,746 130,710 137,591
Less:Allowance for loan and lease losses............. 9,160 10,923 6,526 2,049 1,859
Unearned discount............................... 8,531 8,206 6,152 4,943 4,447
Deferred loan fees.............................. 3,507 2,907 2,376 (6) 19
---------- ---------- ---------- ---------- ----------
Net loans and leases................................. $ 881,744 $ 722,010 $ 414,692 $ 123,724 $ 131,266
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The following table shows the amounts of certain categories of loans
outstanding as of December 31, 1998, which, based on remaining scheduled
repayments of principal, were due in one year or less, more than one year
through five years, and more than five years. Demand or other loans having no
stated
46
<PAGE>
maturity and no stated schedule of repayments are reported as due in one year or
less. Residential mortgage loans held for sale are recorded as due after five
years.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------
<S> <C> <C>
COMMERCIAL REAL ESTATE
----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Aggregate maturities of loans and leases which are due:
Within one year....................................................................... $ 67,625 $ 60,924
After one year but within five years:
Interest rates are floating or adjustable............................................. 36,938 46,652
Interest rates are fixed or predetermined............................................. 15,102 39,807
After five years:
Interest rates are floating or adjustable............................................. 11,801 93,728
Interest rates are fixed or predetermined............................................. 5,317 285,046
----------- -----------
$ 136,783 $ 526,157
----------- -----------
----------- -----------
</TABLE>
47
<PAGE>
NONPERFORMING ASSETS
The following table summarizes the loans and leases for which the accrual of
interest has been discontinued and loans and leases more than 90 days past due
and still accruing interest, including those loans and leases that have been
restructured:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1998 1998 1998 1998 1997
------------ ------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Non-accrual loans and leases, not
restructured................................ $ 5,667 $ 7,427 $ 7,933 $ 6,319 $ 11,050
Accruing loans and leases past due 90 days or
more........................................ 1,019 2,478 1,330 1,563 5,071
Restructured loans and leases................. 4,196 4,804 4,993 4,802 3,255
------------ ------------- --------- ----------- ------------
Total nonperforming loans and leases
("NPLs").................................... 10,882 14,709 14,256 12,684 19,376
Other real estate owned ("OREO").............. 1,583 1,379 1,519 1,639 2,760
------------ ------------- --------- ----------- ------------
Total nonperforming assets ("NPAs")......... $ 12,465 $ 16,088 $ 15,775 $ 14,323 $ 22,136
------------ ------------- --------- ----------- ------------
------------ ------------- --------- ----------- ------------
NPLs to total portfolio
loans and leases (1)........................ 1.7% 2.3% 2.2% 2.0% 3.0%
NPAs to total portfolio loans and leases and
OREO (1).................................... 1.9% 2.5% 2.5% 2.2% 3.4%
NPAs to total assets.......................... 0.9% 1.2% 1.3% 1.2% 2.0%
</TABLE>
- ------------------------
(1) Excludes residential mortgages held for sale.
The Company's impaired loans pursuant to Statement of Financial Accounting
Standards ("SFAS") 118 are loans that are nonaccrual and those that have been
restructured. Loans aggregating $9.8 million at December 31, 1998 were
designated as impaired in accordance with SFAS 114 as amended by SFAS 118. The
Company's impaired loans are all collateral dependent, and as such the method
used to measure the amount of impairment on these loans is to compare the loan
amount to the fair value of collateral. In calculating the allowance for loan
and lease losses that was required under the Company's internal guidelines,
management determined that a minimun of $1.3 million should be included in the
allowance at December 31, 1998 because of the risk to the loan and lease
portfolio represented by impaired loans. At December 31, 1997, loans aggregating
$14.6 million were designated as impaired and management determined that a
minimum of $1.7 million should be included in the allowance because of the risk
to the loan and lease portfolio represented by such impaired loans. For 1998,
additional gross interest income of $1.1 million would have been recorded on
impaired loans, and for 1997 additional gross interest income of $2.1 million
would have been recorded on impaired loans, in each case had the loans been
current. No accrued but unpaid interest income on such loans was in fact
included in the Company's net income during 1998 or 1997.
At December 31, 1998, the Company had OREO properties with an aggregate
carrying value of $1.6 million. During 1998, properties with a total carrying
value of $881,000 were added to OREO, properties with a total carrying value of
$1.7 million were sold and OREO properties were written down by approximately
$353,000. At December 31, 1997, the Company had OREO properties with an
aggregate carrying value of $2.7 million. During 1997, properties with a total
carrying value of $4.2 million were added to OREO, of which $481,000 was
acquired in the acquisition of Eldorado Bancorp and $3.7 million was acquired as
a result of foreclosures. OREO properties with a total carrying value of $5.7
million were sold and properties were written down by approximately $1.1 million
during 1997.
48
<PAGE>
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses was $9.2 million, or 1.4% of gross
portfolio loans and leases at December 31, 1998, compared to $10.9 million or
1.7% of gross portfolio loans and leases, at December 31, 1997, and $6.5
million, or 1.8% of gross portfolio loans and leases, at December 31, 1996.
The decrease in the allowance for loan and lease losses at December 31, 1998
as compared to December 31, 1997 reflects a reduction in nonperforming loans and
leases. Nonperforming loans and leases totaled $10.9 million, or 1.7% of total
portfolio loans and leases, at December 31, 1998, as compared to $19.4 million,
or 3.0% of total portfolio loans and leases, at December 31, 1997. The decrease
in nonperforming loans and leases in 1998 was primarily the result of the volume
of net loans and leases charged to the allowance for loan and lease losses in
1998. Charged off loans and leases, net of recoveries, totaled $7.3 million for
1998, representing an increase of $5.1 million, or 228.3%, from $2.2 million for
1997. The increase in net charge-offs primarily resulted from the charge-off of
two loans acquired in prior acquisitions and the increase in equipment leases as
a percentage of total portfolio loans and leases, as described elsewhere in this
prospectus. See "--Results of Operations--Provision for Loan and Lease Losses."
The increase in the allowance for loan and lease losses at December 31, 1997 as
compared to December 31, 1996 reflects the acquisition of the $4.1 allowance of
Eldorado Bancorp in June 1997.
49
<PAGE>
The table below summarizes average loans and leases outstanding, gross
portfolio loans and leases, nonperforming loans and leases and changes in the
allowance for loan and lease losses arising from loan and lease losses and
additions to the allowance from provisions charged to operating expense:
<TABLE>
<CAPTION>
AS OF AND FOR THE FISCAL QUARTER ENDED
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1998 1998 1998 1998 1997
------------ ------------- ---------- ---------- ------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average portfolio loans and leases (1)....... $ 638,743 $ 632,190 $ 630,821 $ 637,989 $ 629,123
Gross portfolio loans and leases (1)......... 654,109 652,523 641,075 648,114 647,816
Nonperforming loans and leases............... 10,882 14,709 14,256 12,684 19,376
Allowance for loan and lease losses:
Balance at beginning of period............. $ 9,789 $ 9,399 $ 9,331 $ 10,923 $ 10,719
Loans charged off during period:
Commercial............................... 806 306 536 2,455 172
Leases................................... 1,695 253 166 167 646
Real Estate.............................. 407 133 710 64 258
Installment.............................. 538 426 509 495 514
------------ ------------- ---------- ---------- ------------
Total.................................. 3,446 1,118 1,921 3,181 1,590
Recoveries during period:
Commercial............................... 507 217 465 31 231
Leases................................... 3 -- 22 16 4
Real Estate.............................. 9 31 11 143 514
Installment.............................. 178 290 221 207 367
------------ ------------- ---------- ---------- ------------
Total.................................. 697 538 719 397 1,116
------------ ------------- ---------- ---------- ------------
Net loans charged off during period.......... 2,749 580 1,202 2,784 474
Additions charged to operations.............. 2,120 970 1,270 1,192 678
------------ ------------- ---------- ---------- ------------
Balance at end of period..................... $ 9,160 $ 9,789 $ 9,399 $ 9,331 $ 10,923
------------ ------------- ---------- ---------- ------------
------------ ------------- ---------- ---------- ------------
Selected ratios:
Net charge-offs to average portfolio
loans and leases....................... 1.72% 0.37% 0.76% 1.75% 0.30%
Provision to average portfolio loans and
leases................................. 1.33 0.61 0.81 0.75 0.43
Allowance to gross portfolio loans and
leases................................. 1.40 1.50 1.47 1.44 1.69
Allowance to nonperforming loans and
leases................................. 84.18 66.55 65.93 73.57 56.37
</TABLE>
- ------------------------
(1) Excludes residential mortgages held for sale.
Net charge-offs increased during the quarter ended December 31, 1998
primarily as a result of an increase of $1.4 million in equipment lease
charge-offs. Net charge-offs increased in the quarter ended March 31, 1998
primarily as a result of the charge-off of two loans acquired in prior
acquisitions, as described elsewhere in this prospectus. See "--Results of
Operations--Provision for Loan and Lease Losses."
50
<PAGE>
The following table indicates management's allocation of the allowance for
each of the following years:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
-------------------- -------------------- --------------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allocated amount:
Commercial, financial and agricultural........... $ 4,323 47.2% $ 799 7.3% $ 980 15.0%
Real estate and construction..................... 1,992 21.7% 1,864 17.1% 1,680 25.7%
Consumer......................................... 2,836 31.0% 2,130 19.5% 1,831 28.1%
Unallocated...................................... 9 0.1% 6,130 56.1% 2,035 31.2%
--------- --------- --------- --------- --------- ---------
$ 9,160 100.0% $ 10,923 100.0% $ 6,526 100.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
In allocating the Company's allowance for loan and lease losses, management
has considered the credit risk in the various loan categories in its portfolio.
As such, the allocations of the allowance for loan and lease losses are based
upon the average aggregate historical net loan losses experienced by each of its
current or acquired subsidiary banks. While the Company has made a reasonable
effort to allocate the allowance to specific categories of loans, management
believes that any allocation of the allowance for loan and lease losses into
loan categories lends an appearance of exactness which does not exist, in that
the allowance for loan and lease losses is utilized as a single unallocated
allowance available for losses on all types of loans and leases, and actual
losses in loan categories may vary from the amounts allocated to such
categories.
INVESTMENT SECURITIES
Total investments of the Company at December 31, 1998 were $271.6 million,
an increase of $121.3 million, or 80.8%, compared to $150.3 million at December
31, 1997. Investment securities increased largely due to funds provided by an
increase in the Company's deposit liabilities. The investment portfolio
primarily consists of U.S. Treasury and U.S. government agencies, state and
municipal securities and mortgage-backed securities that are categorized as
available-for-sale and totaled $250.5 million, or 92.2% of the total portfolio,
at December 31, 1998. The investments of the Company also include Federal funds
sold and interest bearing deposits in other financial institutions that were
$19.3 million and $1.8 million, or 7.1% and 0.7% of the total portfolio, at
December 31, 1998, respectively.
At December 31, 1998, all of the Company's investment securities were
classified as available-for-sale. The amortized cost and estimated market value
of the Company's investments at December 31, 1998 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
<S> <C> <C> <C> <C>
GROSS UNREALIZED ESTIMATED
AMORTIZED -------------------- MARKET
COST GAINS LOSSES VALUE
---------- --------- --------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury........................................................ $ 42,753 $ 673 $ -- $ 43,426
U.S. Government agencies............................................. 109,136 53 (357) 108,832
Mortgage-backed securities........................................... 36,392 173 -- 36,565
Collateralized mortgage obligations.................................. 8,885 20 (108) 8,797
Municipal bonds...................................................... 18,418 696 (50) 19,064
Corporate bonds...................................................... 31,714 145 (109) 31,750
Commercial paper..................................................... 1,995 -- (4) 1,991
Equity securities.................................................... 38 -- -- 38
---------- --------- --------- ----------
Total.............................................................. $ 249,331 $ 1,760 ($ 628) $ 250,463
---------- --------- --------- ----------
---------- --------- --------- ----------
</TABLE>
51
<PAGE>
The following tables show the maturities of investment securities at
December 31, 1998, and the weighted average yields of such securities:
<TABLE>
<CAPTION>
AFTER ONE YEAR AFTER FIVE YEARS
WITHIN ONE BUT WITHIN FIVE BUT WITHIN TEN AFTER TEN
YEAR YEARS YEARS YEARS
---------------------- ----------------------- ---------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
--------- ----- ---------- ----- --------- ----- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasuries........................... $ -- -- $ 43,426 5.50% $ -- -- $ --
U.S. Agencies............................. 23,147 5.14% 65,127 5.37% 20,558 5.85% --
Mortgage-backed securities................ -- -- -- -- 3,508 6.30% 33,057
Collateralized mortgage obligations....... -- -- 751 6.67% 660 7.93% 7,386
Municipal bonds........................... 141 6.25% 1,422 6.69% 1,401 6.16% 16,100
Corporate bonds........................... -- -- -- -- 26,500 5.93% 5,250
Commercial paper.......................... 1,991 5.14% -- -- -- -- --
Equity securities......................... 38 -- -- -- -- -- --
--------- ---------- --------- ---------
Total................................... $ 25,317 5.14% $ 110,726 5.44% $ 52,627 5.96% $ 61,793
--------- ---------- --------- ---------
--------- ---------- --------- ---------
<CAPTION>
<S> <C>
YIELD
-----
<S> <C>
Securities available for sale:
U.S. Treasuries........................... --
U.S. Agencies............................. --
Mortgage-backed securities................ 6.33%
Collateralized mortgage obligations....... 8.44%
Municipal bonds........................... 4.97%
Corporate bonds........................... 5.52%
Commercial paper.......................... --
Equity securities......................... --
Total................................... 6.16%
</TABLE>
Additional information concerning investment securities is provided in the
notes to the accompanying financial statements.
DEPOSITS
Total deposits were $1.2 billion at December 31, 1998, an increase of $288.4
million, or 30.9%, compared to $933.1 million at December 31, 1997. The increase
in total deposits since December 31, 1997 is primarily attributable to an
increase in savings deposits of $199.0 million, or 168.2%. Noninterest-bearing
demand accounts were $313.9 million, or 25.7% of total deposits, at December 31,
1998. Interest-bearing deposits are comprised of interest-bearing demand
accounts, regular savings accounts, money market accounts, time deposits of
under $100,000 and time deposits of $100,000 or more which were $154.9 million,
$317.3 million, $119.8 million, $198.4 million and $117.2 million, respectively,
or 12.7%, 26.0%, 9.8%, 16.3% and 9.6% of total deposits, respectively, at
December 31, 1998. The increase in savings deposits at December 31, 1998
compared to December 31, 1997 is primarily attributable to an increase in Title
and Escrow Deposits. See "Business--Products and Services--Community Banking
Division."
The following table shows the average balance and average rate paid on the
categories of deposits for each of years indicated:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------------ ----------- ---------- ----------- ---------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand.................... $ 288,377 0.00% $ 227,629 0.00% $ 86,380 0.00%
Interest-bearing demand....................... 134,979 1.46 98,188 1.64 44,663 1.96
Money market.................................. 116,283 3.44 90,600 3.13 36,478 2.53
Savings....................................... 202,971 5.50 126,356 4.35 43,108 3.31
Time.......................................... 286,147 4.69 214,087 5.45 125,561 5.64
------------ ---------- ----------
Total..................................... $ 1,028,757 2.97% $ 756,860 2.86% $ 336,190 3.07%
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
A significant amount of the Company's interest-bearing deposits are Title
and Escrow Deposit customers that generally do not deposit with the Company
until mortgage funding occurs, which is typically a month-end event. See "Risk
Factors--Reliance on potentially volatile title and escrow deposits to fund
short-term assets" and "Business--Products and Services--Community Banking
Division."
52
<PAGE>
The following table shows the maturities of time certificates of deposits of
$100,000, or more at December 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
(IN THOUSANDS)
-----------------
<S> <C>
Due in three months or less.................................................................... $ 45,208
Due in over three months through six months.................................................... 44,051
Due in over six months through twelve months................................................... 24,386
Due in over twelve months...................................................................... 3,520
--------
Total........................................................................................ $ 117,165
--------
--------
</TABLE>
BORROWINGS
Borrowings of the Company increased to $33.9 million at December 31, 1998,
an increase of $3.7 million, or 12.1%, from $30.2 million at December 31, 1997.
The increase in borrowings was primarily due to an increase in Federal funds
purchased that was $5.9 million at December 31, 1998, an increase of $3.9
million, or 187.8%, compared to $2.1 million at December 31, 1997.
CAPITAL RESOURCES
Current regulatory capital standards generally require banks and holding
companies to maintain a ratio of "core" or "Tier 1" capital (consisting
principally of common equity) to adjusted total assets ("Tier 1 Leverage Ratio")
of at least 3%, a ratio of Tier 1 Capital to risk-weighted assets of at least 4%
("Tier 1 Risk-Weighted Ratio"), and a ratio of total capital (which includes
Tier 1 capital plus certain forms of subordinated debt, a portion of the
allowance for loan and lease losses and preferred stock) to risk-weighted assets
("Total Risk-Weighted Ratio") of at least 8%. Risk-weighted assets are
calculated by multiplying the balance in each category of assets according to a
risk factor which ranges from zero for cash assets and certain government
obligations to 100% for some types of loans and adding the products together.
See "Supervision and Regulation--Capital Adequacy Requirements."
The Company and Eldorado Bank were adequately capitalized and Antelope
Valley Bank was well capitalized at December 31, 1998 for federal regulatory
purposes. As of December 31, 1998, the Company and its subsidiary banks had a
Tier 1 Leverage Ratio, Tier 1 Risk-Weighted Ratio, and Total Risk-Weighted Ratio
as follows:
<TABLE>
<CAPTION>
COMPANY ELDORADO ANTELOPE
----------- ----------- -----------
<S> <C> <C> <C>
Tier 1 Leverage Ratio......................................... 6.37% 6.01% 8.49%
Tier 1 Risk Weighted Ratio.................................... 8.76 8.29 11.47
Total Risk Weighted Ratio..................................... 9.78 9.26 12.70
</TABLE>
LIQUIDITY
The Company relies on deposits as its principal source of funds and,
therefore, must be in a position to service depositors' needs as they arise.
Management attempts to maintain a loan-to-deposit ratio of not greater than 80%
and a liquidity ratio (liquid assets--including cash and due from banks, Federal
funds sold and investment securities--to total deposits) of approximately 20%.
The average loan-to-deposit ratio was 78.3% in 1998, 75.6% in 1997 and 70.3% in
1996. The average liquidity ratio was 27.9% in 1998, 30.4% in 1997 and 31.7% in
1996. At December 31, 1998, the Company's loan-to-deposit ratio was 73.9% and
the liquidity ratio was 32.3%. While fluctuations in the balances of a few large
depositors cause temporary increases and decreases in liquidity from time to
time, the Company has not experienced difficulty in dealing with such
fluctuations from existing liquidity sources.
Should the level of liquid assets (primary liquidity) not meet the liquidity
needs of the Company, the Company could employ other available sources of liquid
assets (secondary liquidity), including the
53
<PAGE>
purchase of Federal funds, sale of securities under agreements to repurchase,
sale of loans, window borrowing from the Federal Reserve Bank and, to a lesser
extent, borrowings from the Federal Home Loan Bank of San Francisco ("FHLB"),
could be employed. The Company has relied primarily upon the purchase of Federal
funds and the sale of securities under agreements to repurchase for secondary
sources of liquidity. At December 31, 1998 the Company had approximately $17
million of unused borrowing capacity for FHLB advances. In order to borrow from
the Federal Reserve, the Company would be required to physically deliver to the
Federal Reserve collateral consisting of marketable Government securities. At
December 31, 1998, the Company has no such collateral at the Federal Reserve. At
December 31, 1998, the Company had unpledged collateral that it could deliver to
the Federal Reserve sufficient to support up to $107 million of window
borrowings.
YEAR 2000 PREPAREDNESS
The Year 2000 issue is a computer programming concern that may affect many
electronic processing systems. Until relatively recently, in order to minimize
the length of data fields, most computer programs eliminated the first two
digits of the year. This problem could affect computers leaving them unable to
distinguish dates in the twentieth and twenty-first centuries. For example,
date-sensitive calculations that treat "00" as the year 1900, rather than 2000.
Secondly, years that end in "00" are not leap years, except for an anomaly in
the year 2000. This anomaly could result in miscalculations when processing
critical date-sensitive information relating to periods after December 31, 1999.
The Year 2000 issue may adversely affect the Company's information
technology systems, such as its item and data processing applications. The Year
2000 issue also may affect so-called embedded technology, such as
microprocessors that control some of the Company's security systems and
telecommunication equipment.
The Company has determined that certain of its computer software
applications will need to be modified or replaced in order to maintain their
functionality as the year 2000 approaches. In response, a plan has been
developed that provides for the assessment of its material internal systems,
programs and data processing applications as well as those provided to the Banks
by third-party vendors. The Company expects that system conversions and testing
will be completed in all material respects prior to June 30, 1999. Based upon
the Company's evaluation of its Year 2000 preparedness, management does not
expect that the Year 2000 issue as it relates to information systems and
embedded technology that are within the Company's direct control will have a
material adverse effect on the Company's business, financial condition or
results of operations. However, Year 2000 problems may turn out to exist in
portions of computer programs not now suspected, and there can be no assurance
that the Company will not be adversely affected by this problem.
Ultimately, the potential impact of the Year 2000 issue will depend not only
on the corrective measures the Company undertakes, but also on the way in which
the Year 2000 issue is addressed by governmental agencies, businesses and other
entities who provide data to, or receive data from the Banks or whose financial
condition or operational capability is important to the Company such as
significant suppliers or customers. The Company has initiated communications
with significant customers and vendors to evaluate the the status of efforts by
those third parties' to remediate their own Year 2000 issues; however, it is not
possible, at present, to determine the financial effect on the Company if a
significant customer's and/or vendor's remediation efforts are not completed in
a timely manner. The vendors to which the Community Banking Divisions of
Eldorado Bank and Antelope Valley Bank have outsourced their data and item
processing have received "satisfactory" ratings in 1998 from the Federal
Financial Institutions Examination Council ("FFIEC") (the umbrella organization
of federal bank regulators) with respect to the status of those vendors'
preparedness for the Year 2000 issue.
In addition, because the Company's day-to-day operations are heavily
dependent on its ability to communicate information throughout its network of
branches and loan production offices, the Company
54
<PAGE>
would be particularly susceptible to any possible effects that the Year 2000
issue has on local and national communications systems, including without
limitation, telephone and data lines, because of the difficulty in implementing
viable contingency plans. Any interruption or malfunction of such systems could
have a material adverse effect on the Company.
Furthermore, bank regulatory agencies, as part of their supervisory
function, have recently issued guidance under which they are assessing and will
assess Year 2000 readiness. The failure of a financial institution, such as the
Company, to take appropriate steps to address deficiencies in its Year 2000
project management process may result in one or more regulatory enforcement
actions which could have a material adverse effect on such institution. Such
actions may include the imposition of civil money penalties, or result in the
delay or denial of regulatory applications. In the latest joint examination of
the Banks by the Federal Reserve and the DFI, the Banks received "satisfactory"
ratings with respect to their Year 2000 plans and levels of preparedness.
The Company's noninterest expense for 1998 included $397,000 in direct costs
associated with the Year 2000 issue. The Company estimates its total costs
accrued during the year ending December 31, 1999 will be less than $500,000, and
none of those costs are expected to materially affect the Company's results of
operations in any one reporting period. In light of the complexity of the Year
2000 problem and its potential effect on both the Company and third parties that
interact with the Company, however, there can be no assurance that the Company's
costs associated with the Year 2000 issue will be as estimated. The Company does
not intend to obtain insurance against any Year 2000 risks.
ECONOMIC CONSIDERATIONS
CALIFORNIA ECONOMY
The financial condition of the Company has been, and is expected to continue
to be, affected primarily by overall general economic conditions and the real
estate market in California. The commercial banking and automotive lending
activity of the Company concentrates on serving the needs of small and
medium-size businesses, professionals and individuals located primarily in
Southern California. The residential mortgage origination activity is centered
in California and four other surrounding states, and originations of small
equipment leases are done throughout the country with a concentration in
California.
Although the general economy in Southern California has recovered
substantially from the prolonged recession that had adversely affected the
ability of certain borrowers to satisfy their obligations to the Company, the
Company's financial condition and operating results are subject to changes in
economic conditions in that region. Moreover, there can be no assurance that
conditions will not deteriorate in the future and that such deterioration will
not have a material adverse effect on the Company's financial condition or
results of operations.
In 1998, California's Gross State Product ("GSP") approached $1.1 trillion
and is expected to exceed $1.1 trillion in 1999. For the nine months ended
September 30, 1998, exports to foreign countries totaled $80.0 billion or
approximately 10% of the State's GSP, reflecting a 6.1% decline from $85.2
million for the comparable period in 1997. California, with its greater
dependence on Asian trade and investment, is more at risk from Asia's economic
problems than the rest of the United States. For the first three quarters of
1998, exports to Asian countries totaled $41.3 billion and represented 51.6% of
California's total exports reflecting a decrease of 18.7% from $50.8 billion for
the same period in 1997. Despite this significant drop in export to Asian
countries, California's total exports only decreased by 6.1% for the first three
quarters of 1998 compared to 1997 primarily as a result of an increase in
growing exports to Mexico, Canada, Australia and Western Europe. There can be no
assurance that the State's economy will not be adversely affected by prolonged
weakness in one or more of the Asian economies. Weaker Asian demand for products
and services could potentially result in job losses, primarily in the high-tech
manufacturing, engineering, travel and entertainment industries. The Los Angeles
area is among the most vulnerable regions in California with its relatively
heavy concentration of high-tech, engineering and entertainment
55
<PAGE>
firms. There can be no assurance that a deterioration of economic conditions in
California as a result of Asia's economic problems will not have a material
adverse effect on the Company's business, financial condition or result of
operations.
In addition, a substantial portion of the Company's assets consist of loans
secured by real estate in Southern California with a lesser concentration in
Northern California. Historically, these areas have experienced on occasion
significant natural disasters, including earthquakes, brush fires and, recently,
certain significant weather abnormalities, including flooding and coastal
erosion, attributable to the weather phenomena known as "El Nino" and "La Nina."
The availability of insurance for losses from such catastrophes is limited. The
occurrence of one or more of those circumstances could impair the value of the
collateral for the Company's real estate secured loans and have a material
adverse effect on the Company.
INFLATION
The majority of the Company's assets and liabilities are monetary items held
by the Company, the dollar value of which is not affected by inflation. Only a
small portion of total assets is in premises and equipment. The lower inflation
rate of recent years did not have the positive impact on the Company that was
felt in many other industries. The small fixed asset investment of the Company
minimizes any material misstatement of asset values and depreciation expenses
which may result from fluctuating market values due to inflation. A higher
inflation rate, however, may increase operating expenses or have other adverse
effects on borrowers of the Company, making collection more difficult for the
Company. Rates of interest paid or charged generally rise if the marketplace
believes inflation rates will increase. See "Risk Factors-- Changes in interest
rates may adversely affect our business."
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 130, "Reporting
Comprehensive Income." This Statement requires all enterprises to report
comprehensive income as a measure of overall performance. Comprehensive income
is the change to equity (net assets) of a business during a period. For the
Company, this new standard is effective for 1998 and did not have a material
impact on the Company's financial statements.
In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement will change the way public
companies report information about segments of their business in their annual
financial statements and require them to report selected segment information in
their quarterly reports issued to shareholders. Companies will be required to
disclose segment data based upon how management makes decisions about allocating
resources to segments and measuring performance. For the Company, this new
standard is effective for 1998 and did not have a material impact on the
Company's financial statements.
In February 1998, the FASB issued SFAS 132, "Employer's Disclosures about
Pensions and other Post-Retirement Benefits." This Statement standardizes the
disclosure requirements for pensions and other post-retirement benefits to the
extent practicable. For the Company, this new standard is effective for 1998 and
did not have a material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For the Company, this new
standard is effective in 2000 and is not to be applied retroactively to
financial statements of prior periods. The impact of this Statement, if any, is
yet to be determined.
56
<PAGE>
In October 1998, the FASB issued SFAS 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." This Statement establishes accounting and
reporting standards for securitization of mortgage loans. For the Company, this
new standard is effective in 1999, and the impact of this Statement, if any, is
yet to be determined.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market prices and rates, foreign currency exchange rates,
commodity prices and equity prices. The Company's market risk arises primarily
from interest rate risk inherent in its lending and deposit taking activities.
To that end, management actively monitors and manages its interest rate risk
exposure. The Company does not have any market risk sensitive instruments
entered into for trading purposes. The Company seeks to manage 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. It should be noted,
however, that because hedging instruments may not respond to changes in interest
rates to the same degree as the assets or liabilities being hedged, some
interest rate risks remain even in a fully hedged portfolio. For example, during
the quarter ended December 31, 1998, Eldorado incurred a loss of $1.1 million on
hedging activities primarily because of an unexpected change in the correlation
between the value of the mortgage loans in its pipeline and mortgage-backed
securities used for hedging. See "Risk Factors -- Changes in interest rates may
adversely affect our business."
When appropriate, management may utilize off balance sheet instruments such
as interest rate floors, caps and swaps to hedge its interest rate position. A
Board of Directors approved hedging policy statement governs use of these
instruments. As of December 31, 1998, the Company had not utilized any interest
rate swaps or other such financial derivatives to alter its interest rate risk
profile.
One way to measure the impact that future changes in interest rates will
have on net interest income is through a cumulative gap measure. The gap
represents the net position of assets and liabilities subject to repricing in
specified time periods. Generally, a liability sensitive gap position indicates
that there would be a net positive impact on the net interest margin of the
Company for the period measured in a declining interest rate environment since
the Company's liabilities would reprice to lower market rates before its assets
would. A net negative impact would result from an increasing interest rate
environment. Conversely, an asset sensitive gap indicates that there would be a
net positive impact on the net interest margin in a rising interest rate
environment since the Company's assets would reprice to higher market interest
rates before its liabilities would.
The table below sets forth the distribution of repricing opportunities of
the Company's interest-earning assets and interest-bearing liabilities, the
interest rate sensitivity gap (i.e., interest rate sensitive assets less
interest rate sensitive liabilities), cumulative interest-earning assets and
interest-bearing liabilities, the cumulative interest rate sensitivity gap, the
ratio of cumulative interest-earning assets to cumulative interest-bearing
liabilities and the cumulative gap as a percentage of total assets and total
interest-earning assets as of December 31, 1998. The table also sets forth the
time periods during which interest-earning assets and interest-bearing
liabilities will mature or may reprice in accordance with their contractual
terms. The interest rate relationships between the repriceable assets and
repriceable liabilities are not necessarily constant and may be affected by many
factors, including the behavior of customers in response to changes in interest
rates. This table should, therefore, be used only as a guide as to the possible
effect changes in interest rates might have on the net margins of the Company.
57
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------------------------------
AMOUNTS MATURING OR REPRICING IN
--------------------------------------------------
OVER 3
MONTHS OVER 1
3 MONTHS TO 12 YEAR TO OVER NON-
OR LESS MONTHS 5 YEARS 5 YEARS SENSITIVE TOTAL
----------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks............ -- -- -- -- $ 122,540 $ 122,540
Federal funds sold................. 19,300 -- -- -- -- 19,300
Federal funds sold................. 1,278 585 -- -- -- 1,863
Investment securities.............. 5,155 24,300 114,459 106,511 38 250,463
Loans and leases................... 322,264 83,764 187,445 60,636 -- 654,109
Loans held for sale................ 248,833 -- -- -- -- 248,833
Other assets....................... -- -- -- -- 100,442 100,442
----------- ---------- ---------- ---------- ---------- ----------
Total assets....................... $ 596,830 $ 108,649 $ 301,904 $ 167,147 $ 223,020 $1,397,550
----------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ----------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Non-interest bearing demand
deposits......................... -- -- -- -- $ 313,891 $ 313,891
Savings deposits................... 592,069 -- -- -- -- 592,069
Time certificates of deposit....... 117,237 183,277 15,013 -- -- 315,527
Short term debt.................... 5,967 203 -- -- -- 6,170
Long term debt..................... -- -- 68 27,657 -- 27,725
Other liabilities.................. -- -- -- -- 22,635 22,635
Shareholders' equity............... -- -- -- -- 119,533 119,533
----------- ---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity........................... $ 715,273 $ 183,480 $ 15,081 $ 27,657 $ 456,059 $1,397,550
----------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ----------
Period Gap......................... (118,443) (74,831) 286,823 139,490 (233,039)
Cumulative interest earning
assets........................... 596,830 705,479 1,007,383 1,174,530
Cumulative interest bearing
liabilities...................... 715,273 898,753 913,834 941,491
Cumulative Gap..................... (118,443) (193,274) 93,549 233,039
Cumulative assets to liabilities... 0.83 0.78 1.10 1.25
Cumulative Gap as a percent of:
Total assets..................... (8.48)% (13.83)% 6.69% 16.67%
Interest earning assets.......... (10.08)% (16.46)% 7.96% 19.84%
</TABLE>
At December 31, 1998, the Company had $705.5 million in assets and $898.8
million in liabilities repricing within one year. This means that $193.3 million
more in interest rate sensitive liabilities than interest rate sensitive assets
will change to the then current rate (changes occur due to the instruments being
at a variable rate or because the maturity of the instrument requires its
replacement at the then current rate). The ratio of interest earning assets to
interest bearing liabilities maturing or repricing within one year at December
31, 1998 is .78 and management tries to maintain this ratio as close to 1.00 as
possible while remaining in a range between .80 and 1.20. Interest expense is
likely to be affected to a greater extent than interest income for any changes
in interest rates within one year from December 31, 1998. If rates were to fall
during this period, interest expense would decline by a greater amount than
interest income and net income would increase. Conversely, if rates were to
rise, the reverse would apply.
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
58
<PAGE>
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 in various interest rate environments. Based upon
the Company's interest rate shock simulations, net interest income is expected
to decline approximately 5.8% with a 200 basis point instantaneous increase to
interest rates and decline approximately 1.7% with a 200 basis point
instantaneous decrease in rates. Management has a target of minimizing the
decline in net interest income to no more than 10% given a 200 basis point
instantaneous decrease in rates.
The preceding sensitivity analysis does not represent a forecast and should
not be relied upon as being indicative of expected operating results. These
hypothetical estimates are based upon numerous assumptions including: the nature
and timing of interest rate levels including the yield curve shape, prepayments
on loans and securities, changes in deposit levels, pricing decisions on loans
and deposits, reinvestment/ replacement of asset and liability cashflows and
others. While assumptions are developed based upon current economic and local
market conditions, the Company cannot make any assurances as to the predictive
nature of these assumptions including how customer preferences or competitor
influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to: prepayment/refinancing levels
likely deviating from those assumed, the varying impact of interest rate change
caps or floors on adjustable rate loans, depositor early withdrawals and product
preference changes, and other internal/external variables. Furthermore, the
sensitivity analysis does not reflect actions that management might take in
responding to or anticipating changes in interest rates.
Management has taken several steps to reduce the positive gap of the Company
by lengthening the maturities in its investment portfolio and originating more
fixed rate assets that mature or reprice in balance with its interest bearing
liabilities. Management will continue to maintain a balance between its interest
earning assets and interest bearing liabilities in order to minimize the impact
on net interest income due to changes in market rates.
The following table sets forth the distribution of the expected maturities
of the Company's interest-earning assets and interest-bearing liabilities as
well as the fair value of these instruments. Expected maturities are based on
contractual payments without effect being given for the estimated effect of
59
<PAGE>
prepayments. Savings accounts and interest-bearing transaction accounts, which
have no stated maturity, are included in the one year or less maturity category.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------------------------------------------------------------
EXPECTED MATURITY
------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
--------- --------- --------- --------- --------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold........... $ 19,300 -- -- -- -- -- $ 19,300 $ 19,300
Weighted average rate (%).. 4.75 -- -- -- -- -- 4.75
Investment securities........ $ 27,143 $ 23,180 $ 55,939 $ 11,163 $ 20,443 $ 114,458 $ 252,326 $ 252,326
Weighted average rate (%).. 5.29 5.54 5.37 5.37 5.56 6.07 5.71
Fixed rate loans............. $ 74,218 $ 54,564 $ 62,294 $ 70,785 $ 38,378 $ 62,228 $ 362,467 $ 357,798
Weighted average rate (%).. 10.09 10.81 10.62 10.28 9.31 8.87 10.04
Variable rate loans.......... $ 98,359 $ 22,554 $ 23,596 $ 19,993 $ 19,910 $ 107,230 $ 291,642 $ 294,310
Weighted average rate (%).. 8.95 9.17 9.36 9.04 8.86 9.46 9.19
Loans held for sale.......... $ 248,833 -- -- -- -- -- $ 248,833 $ 251,321
Weighted average rate (%).. 7.25 -- -- -- -- -- 7.25
--------- --------- --------- --------- --------- ----------- ---------- ----------
Total interest-earning
assets..................... $ 467,853 $ 100,298 $ 141,829 $ 101,941 $ 78,731 $ 283,916 $1,174,568 $1,175,055
--------- --------- --------- --------- --------- ----------- ---------- ----------
--------- --------- --------- --------- --------- ----------- ---------- ----------
Savings deposits............. $ 592,069 -- -- -- -- -- $ 592,069 $ 587,001
Weighted average rate (%).. 3.78 -- -- -- -- -- 3.78
Time deposits................ $ 300,365 $ 12,547 $ 1,574 $ 335 $ 706 -- $ 315,527 $ 315,802
Weighted average rate (%).. 5.07 5.09 5.54 5.20 5.38 -- 5.08
Subordinated debentures...... -- -- -- -- -- $ 27,657 $ 27,657 $ 27,657
Weighted average rate (%).. -- -- -- -- -- 11.75 11.75
Federal funds purchased...... $ 5,900 -- -- -- -- -- $ 5,900 $ 5,900
Weighted average rate (%).. 3.06 -- -- -- -- -- 3.06
Other borrowings............. $ 270 $ 68 -- -- -- -- $ 338 $ 338
Weighted average rate (%).. 10.50 10.50 -- -- -- -- 10.50
--------- --------- --------- --------- --------- ----------- ---------- ----------
Total interest-bearing
liabilities................ $ 898,604 $ 12,615 $ 1,574 $ 335 $ 706 $ 27,657 $ 941,491 $ 936,698
--------- --------- --------- --------- --------- ----------- ---------- ----------
--------- --------- --------- --------- --------- ----------- ---------- ----------
</TABLE>
60
<PAGE>
SUPERVISION AND REGULATION
OVERVIEW
The Company is a registered bank holding company under the BHC Act, and it
is subject to regulation, supervision and periodic examination by the Board of
Governors of the Federal Reserve System (the "Federal Reserve").
As California state-licensed banks, the Banks are subject to regulation,
supervision and periodic examination by the DFI. Eldorado Bank also is subject
to regulation, supervision and periodic examination by the Federal Reserve,
because it is a member of the Federal Reserve System; Antelope Valley Bank is
not, and therefore is subject to regulation, supervision and periodic
examination at the federal level by the FDIC. The Banks' deposits are insured by
the FDIC to the maximum amount permitted by law, which is currently $100,000 per
depositor in most cases. The regulations of the DFI, Federal Reserve and FDIC
govern most aspects of the Banks' business and operations, including but not
limited to, the scope of their business, their investments, their reserves
against deposits, the nature and amount of collateral for certain loans, the
timing of availability of deposited funds, the issuance of securities, the
payment of dividends, bank expansion and bank activities, including real estate
development and insurance activities.
The federal and state banking agencies have broad enforcement powers over
the Company and the Banks, including the power to impose substantial fines and
other civil and criminal penalties, to terminate deposit insurance and to
appoint a conservator or receiver for a bank under a variety of circumstances.
LIMITATIONS ON BANK HOLDING COMPANY ACTIVITIES
With certain limited exceptions, the BHC Act requires every bank holding
company to obtain the prior approval of the Federal Reserve before undertaking
any of the following activities: (i) acquiring direct or indirect ownership or
control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of any class of voting
shares (unless it already owns or controls the majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank or bank holding
company; or (iii) merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or consolidation
that would have a substantially anti-competitive result, unless the
anti-competitive effects of the proposed transaction are clearly outweighed in
the public interest by the probable effect of the transaction in meeting the
convenience and needs of the community to be served. The Federal Reserve also
considers financial and managerial factors, as well as compliance with the
Community Reinvestment Act of 1977 (the "CRA"), in reviewing proposed
acquisitions or mergers.
With certain exceptions, the BHC Act also prohibits a bank holding company
from acquiring or retaining direct or indirect ownership or control of voting
securities or assets of any company that is not a bank or bank holding company,
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks or providing services for its
subsidiaries. The principal exceptions to those prohibitions involve certain
non-bank activities, which, by statute or by Federal Reserve regulation or
order, have been identified as activities closely related to the business of
banking or of managing or controlling banks. In making that determination, the
Federal Reserve considers whether the performance of such activities by a bank
holding company can be expected to produce benefits to the public such as
greater convenience, increased competition or gains in efficiency, that can be
expected to outweigh the risks of possible adverse effects such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.
Furthermore, under the BHC Act, a bank subsidiary of a bank holding company
is prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
For example, in general, the Banks may not condition the extension of credit to
a
61
<PAGE>
customer upon the customer obtaining other services from the Company or any of
its other subsidiaries or upon the customer promising not to obtain services
from a competitor.
CAPITAL ADEQUACY REQUIREMENTS
The Company and the Banks are subject to regulations governing capital
adequacy, which incorporate both risk-based and leverage capital requirements.
Those risk-based and leverage capital guidelines set total capital requirements
and define capital in terms of "core capital elements," or Tier 1 capital, and
"supplementary capital elements," or Tier 2 capital. The sum of an institution's
Tier 1 capital and its Tier 2 capital is the institution's "qualifying" total
capital for purposes of determining capital adequacy. Banks and bank holding
companies are required to maintain a minimum ratio of qualifying total capital
to risk-weighted assets of 8%, at least one-half of which must be in the form of
Tier 1 capital. In order to determine an asset's risk weight, the asset is
multiplied by the applicable risk weight percentage assigned by the federal
regulators to that asset.
The Federal Reserve and the FDIC have established a minimum leverage ratio
of Tier 1 capital to total assets (the "Tier 1 Leverage Ratio") of 3% for bank
holding companies and banks that have received the highest composite regulatory
rating and for bank holding companies and member banks that have implemented the
Federal Reserve's risk-based capital measure for market risk. All other bank
holding companies and banks are required to maintain a Tier 1 Leverage Ratio of
at least 4%. Banking organizations with supervisory, financial, operational, and
managerial weaknesses, as well as organizations experiencing significant growth,
are expected to maintain capital ratios above the minimum levels. If the Company
or one of the Banks fails to maintain the required capital levels, its primary
federal regulator may issue a capital directive to require an increase in
capital levels.
The Federal Reserve's and the FDIC's risk-based capital standards require
the Company and the Bank to take adequate account of concentrations of credit
and the risks of non-traditional activities. Concentrations of credit refers to
situations where a lender has a relatively large proportion of loans involving
one borrower, industry, location, collateral or loan type. Non-traditional
activities are considered those that have not customarily been part of the
banking business but that start to be conducted as a result of developments in,
for example, technology or financial markets. Institutions with high or
inordinate levels of risk are required to operate with higher minimum capital
ratios. The Federal Reserve and the FDIC also review an institution's management
of concentrations of credit risk for adequacy and consistency with safety and
soundness standards regarding internal controls, credit underwriting or other
operational and managerial areas.
The Federal Reserve's risk-based capital regulations also include standards
for evaluating a member bank's exposure to economic declines based upon interest
rate risk. Interest rate risk is the exposure of a bank's current and future
earnings and equity capital arising from adverse movements in interest rates.
While interest rate risk is inherent in a bank's role as financial intermediary,
it introduces volatility to a bank's earnings and to the economic value of a
bank. The Federal Reserve will consider the institution's historical financial
performance and its earnings exposure to interest rate movements, as well as
qualitative factors such as the adequacy of the institution's internal interest
rate risk management. The Federal Reserve and the other banking agencies have
elected not to pursue a standardized measure and explicit capital charge for
interest rate risk.
In certain circumstances, the federal regulators may determine that the
capital ratios for a bank must be maintained at levels that are higher than the
minimum levels required by guidelines or regulations. In particular, bank
holding companies and banks contemplating significant expansion proposals are
expected to maintain capital levels significantly above the minimum levels
required by the guidelines. Neither the Company nor either of the Banks has been
advised by any bank regulatory agency that it must maintain a specific Tier 1
Leverage Ratio in excess of the minimum levels specified in the capital
guidelines, although in connection with the application to the Federal Reserve
for approval to complete the acquisition of
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<PAGE>
Eldorado Bancorp, the Company was required to have a pro forma Tier 1 Leverage
Ratio of 6.0%, a Total Risk-Weighted Ratio of 10.0% and a Tier 1 Risk-Weighted
Ratio of 6.0% as of the end of the quarter preceding the closing of that
acquisition. In addition, in connection with the acquisition of Eldorado
Bancorp, the Company also agreed not to incur any debt without the prior
approval of the Federal Reserve.
REGULATORY RESTRICTIONS ON DISTRIBUTIONS TO SHAREHOLDERS
STOCK REDEMPTIONS. Bank holding companies, such as the Company, are
required to give the Federal Reserve notice of any purchase or redemption of
their outstanding equity securities if the gross consideration for the purchase
or redemption, when combined with the net consideration paid for all such
purchases or redemptions during the preceding 12 months, is equal to 10% or more
of the bank holding company's consolidated net worth. The Federal Reserve may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, Federal Reserve order, directive, or any condition imposed by, or
written agreement with, the Federal Reserve. A bank holding company whose
capital ratios exceed the thresholds for "well capitalized" banks on a
consolidated basis is exempt from the foregoing requirement if it (i) will
remain well-capitalized following the purchase or redemption, (ii) is
well-managed and (iii) is not the subject of any unresolved supervisory issues.
In connection with the acquisition of the Eldorado Bancorp, the Company agreed
that it will not redeem, retire or repurchase any of its preferred stock without
the prior approval of the Federal Reserve.
DIVIDENDS. Federal Reserve policies declare that a bank holding company
should not pay cash dividends on its common stock unless its net income is
sufficient to fund fully each dividend, and its prospective rate of earnings
retention after the payment of such dividend appears consistent with its capital
needs, asset quality and overall financial condition. In connection with the
acquisition of Eldorado Bancorp, the Company agreed that it will not pay
dividends on common stock without the prior approval of the Federal Reserve.
The Company is a legal entity separate and distinct from each of the Banks.
Substantially all of the Company's revenues and cash flow, including funds
available for the payment of dividends and other operating expenses, consists of
dividends paid to the Company by the Banks. There are statutory and regulatory
limitations on the amount of dividends that may be paid to the Company by the
Banks. Dividends payable by each of the Banks are restricted under California
law to the lesser of that Bank's retained earnings, or that Bank's net income
for the latest three fiscal years, less distributions previously declared by
that Bank during that period, or, with the approval of the DFI, to the greater
of the retained earnings of that Bank, the net income of that Bank for its last
fiscal year or the net income of that Bank for its current fiscal year. In
connection with the acquisition of Eldorado Bancorp, Eldorado Bank paid a
dividend of $14 million, which exceeded Eldorado Bank's net income for the
latest three fiscal years. As a result, Eldorado Bank will require the approval
of the DFI with respect to the payment of any dividend and in no event may
Eldorado Bank pay dividends in excess of the greater of Eldorado Bank's retained
earnings, the net income of Eldorado Bank for its last fiscal year and the net
income of Eldorado Bank for its current fiscal year. No such dividend was paid
in connection with the acquisition of Antelope Valley Bank.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
generally prohibits depository institutions from making capital distributions
(including payment of dividends), or paying any management fee to its holding
company if the depository institution would thereafter be "undercapitalized" for
regulatory purposes.
In addition, Federal Reserve regulations limit the payment of dividends by
Eldorado Bank as a state member bank. Under Federal Reserve regulations,
dividends may not be paid unless both undivided profits and earnings limitations
have been met. First, no dividend may be paid if it would result in a withdrawal
of
63
<PAGE>
capital or exceed the bank's undivided profits as reported in its most recent
Report of Condition and Income, without the prior approval of the Federal
Reserve and two-thirds of the shareholders of each class of stock outstanding.
Second, a state member bank may not pay a dividend without the prior approval of
the Federal Reserve if the total of all dividends declared in one year exceeds
the total of net income for that year, plus its retained net income for the
preceding two calendar years.
The payment of dividends on capital stock by the Company and the Banks may
be limited by other factors, including applicable regulatory capital
requirements and broad enforcement powers of the federal regulatory agencies.
Each of the Federal Reserve, the FDIC and the DFI have broad authority to
prohibit the Company and the Banks from engaging in practices that the banking
agency considers to be unsafe or unsound, including the payment of dividends
under certain circumstances.
The regulations and restrictions on payment of dividends may limit the
Company's ability to obtain funds from the Banks for its cash needs, including
funds for payment of interest and operating expenses and dividends.
TRANSACTIONS WITH AFFILIATES
The Banks are subject to restrictions under federal law that limit certain
transactions with the Company, each other and the Company's banking and
non-banking affiliates, including extensions of credit, investments or asset
purchases. Extensions of credit and certain other "covered" transactions by any
member bank with any one affiliate are limited in amount to 10% of such bank's
capital stock and surplus and with its affiliates, in the aggregate, are limited
in amount to 20% of capital stock and surplus and loans and other extensions of
credit must be fully secured in accordance with applicable regulations. Federal
law also provides that covered transactions with affiliates must be made on
substantially the same terms and under substantially the same circumstances as,
and, in the case of credit transactions, following credit underwriting
procedures that are no less stringent than, those prevailing at the time for
comparable transactions involving other non-affiliated companies, or, in the
absence of comparable transactions, on terms and under circumstances, including
credit standards, that in good faith would be offered to, or would apply to,
non-affiliates. The purchase of low quality assets from affiliates is generally
prohibited.
CROSS-GUARANTEE AND HOLDING COMPANY LIABILITY
Any FDIC-insured depository institution may be liable for any loss incurred
by the FDIC, or any loss that the FDIC reasonably anticipates incurring, in
connection with (i) the default of any commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution in danger of default. Any
obligation or liability owed by a subsidiary depository institution to its
parent company is subordinate to the subsidiary institution's cross-guarantee
liability to the FDIC. As of the date of this prospectus, the Banks are the
Company's only insured depository institution subsidiaries.
Federal Reserve policy requires bank holding companies to serve as a source
of financial strength to their subsidiary banks by standing ready to use
available resources to provide adequate capital funds to subsidiary banks during
periods of financial stress or adversity.
In the event of a bank holding company's bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code, the trustee will be deemed to have assumed, and is
required to cure immediately, any deficit under any commitment by the debtor to
any of the federal banking agencies to maintain the capital of an insured
depository institution, and any claim for a subsequent breach of such obligation
will generally have priority over most other unsecured claims.
64
<PAGE>
PROMPT CORRECTIVE ACTION PROVISIONS
FDICIA amended the Federal Deposit Insurance Act ("FDIA") to establish a
format for closer monitoring of insured depository institutions and to enable
prompt corrective action by regulators when an institution begins to experience
financial difficulty. The general thrust of those provisions is to impose
greater scrutiny and more restrictions on institutions as they have decreasing
levels of capitalization. FDICIA establishes five capital categories: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Under the regulations, a
"well capitalized" institution has a ratio of total capital to total
risk-weighted assets ("Total Risk-Weighted Ratio") of at least 10.0%, a ratio of
Tier 1 capital to total risk-weighted assets ("Tier 1 Risk-Weighted Ratio") of
at least 6.0%, a Tier 1 Leverage Ratio of at least 5.0% and is not subject to
any written order, agreement or directive; an "adequately capitalized"
institution has a Total Risk-Weighted Ratio of at least 8.0%, a Tier 1
Risk-Weighted Ratio of at least 4.0% and a Tier 1 Leverage Ratio of at least
4.0% (or 3.0% if the institution has received the highest regulatory rating and
is not experiencing significant growth), but does not otherwise qualify as "well
capitalized." An "undercapitalized" institution fails to meet one of the three
minimum capital requirements for "adequately capitalized" banks. A
"significantly undercapitalized" institution has a Total Risk-Weighted Ratio of
less than 6.0%, a Tier 1 Risk-Weighted Ratio of less than 3.0% and/or a Tier 1
Leverage Ratio of less than 3.0%. A "critically undercapitalized" institution
has a ratio of tangible equity to assets of 2.0% or less. Under certain
circumstances, a "well capitalized," "adequately capitalized" or
"undercapitalized" institution may be required to comply with supervisory
actions as if the institution was in the next lowest capital category.
Undercapitalized depository institutions are subject to restrictions on
borrowing from the Federal Reserve. In addition, undercapitalized depository
institutions are subject to growth and activity limitations and are required to
submit "acceptable" capital restoration plans. The federal banking agencies may
not accept a capital plan without determining, among other things, that the plan
is based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital and may require guarantees from the depository
institution's holding company, if any. If a depository institution fails to
submit an acceptable plan, it is treated as if it is significantly
undercapitalized and ultimately may be placed into conservatorship or
receivership.
Significantly undercapitalized depository institutions may be subject to a
number of additional requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, more stringent
requirements to reduce total assets, cessation of receipt of deposits from
correspondent banks, prohibitions on dividends to the holding company and
requirements that the holding company divest its bank subsidiary, in certain
instances. Subject to certain exceptions, critically undercapitalized depository
institutions must have a conservator or receiver appointed for them within a
certain period after becoming critically undercapitalized.
SAFETY AND SOUNDNESS STANDARDS
The federal banking agencies have issued "safety and soundness" standards
for banks. The standards, which were issued in the form of guidelines rather
than regulations, relate to internal controls, information systems, internal
audit systems, loan underwriting and documentation, compensation, interest rate
exposure, asset growth, compensation, fees and benefits. Examiners assign a
formal supervisory rating to the adequacy of an institution's risk management
processes, including its internal controls. In general, the standards are
designed to assist the federal banking agencies in identifying and addressing
problems at insured depository institutions before capital becomes impaired. If
an institution fails to meet these standards, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit an acceptable compliance plan may result in enforcement proceedings.
65
<PAGE>
LIMITATIONS ON BROKERED DEPOSIT TAKING
FDICIA provides that a bank may not accept, renew or roll over brokered
deposits unless (i) it is "well capitalized" or (ii) it is adequately
capitalized and receives a waiver from the FDIC permitting it to accept brokered
deposits. FDIC regulations define brokered deposits to include any deposit
obtained, directly or indirectly, from any person engaged in the business of
placing deposits with, or selling interests in deposits of, an insured
depository institution, as well as any deposit obtained by a depository
institution that is not "well capitalized" for regulatory purposes by offering
rates significantly higher (generally more than 75 basis points) than the
prevailing interest rates offered by depository institutions in such
institution's normal market area. In addition, FDICIA provides that institutions
that are ineligible to accept brokered deposits are ineligible for pass-through
deposit insurance for employee benefit plan deposits.
PREMIUMS FOR DEPOSIT INSURANCE
As previously stated, the Banks' deposits are insured by the FDIC to the
maximum amount permitted by law, which is currently $100,000 per depositor in
most cases. FDIC insurance premiums are assessed on a risk-based system, meaning
that the amount of a depositary institution's premium depends on its risk
classification. To arrive at a depository institution's risk-based assessment,
the FDIC places it in one of nine risk categories using a two-step process based
first on capital ratios and then on relevant supervisory information. Each
institution is assigned to one of three capital categories: "well capitalized,"
"adequately capitalized," or "undercapitalized." A well capitalized institution
is one that has a Total Risk-Weighted Ratio of at least 10.0%, a Tier 1
Risk-Weighted Ratio of at least 6.0% and a Tier 1 Leverage Ratio of at least
5.0%. An adequately capitalized institution has at least an Total Risk-Weighted
Ratio of at least 8.0%, a Tier 1 Risk-Weighted Ratio of at least 4.0% and a Tier
1 Leverage Ratio of at least 4.0%. An undercapitalized institution is one that
does not meet either of the above definitions. The FDIC also assigns each
institution to one of three supervisory subgroups based on an evaluation of the
risk posed by the institution (group "A" institutions being perceived to present
the least risk and group "C" institutions being perceived to present the
greatest risk). The FDIC makes this evaluation based on examinations by the
institution's primary federal or state regulator, statistical analyses of
financial statements, and other information relevant to gauging the risk posed
by the institution. Those supervisory evaluations modify premium rates within
each of the three capital groups, resulting in a matrix of nine separate
assessment categories.
In September 1996, legislation was enacted to recapitalize the FDIC's
Savings Association Insurance Fund to provide for the payment of certain future
obligations of the Fund and, ultimately, to merge the Fund and its counterpart,
the Bank Insurance Fund, into a single insurance fund called the Deposit
Insurance Fund. The deposits of Eldorado Bank, Liberty National Bank and San
Dieguito National Bank were insured by the Bank Insurance Fund; the deposits of
Commerce Security Bank were insured by the Savings Association Insurance Fund.
Since the merger of Eldorado Bank, Liberty, San Dieguito and Commerce Security,
the deposits of Eldorado Bank have been insured by the Savings Association
Insurance Fund and the Bank Insurance Fund generally in proportion to the
pre-combination allocation of deposits among those banks.
Under the legislation, each depository institution whose deposits are
insured by the Savings Association Insurance Fund (with limited exceptions) was
required to pay a one-time "special assessment" into Savings Association
Insurance Fund in the amount of approximately $.66 for each $100 of deposits
that the institution had as of a given measurement date. The special assessment
was intended to cause, and has caused, Savings Association Insurance Fund's
assets to reach the targeted "reserve ratio" of 1.25% of insured deposits. As a
consequence, the FDIC has been able to reduce the normal, periodic deposit
insurance premiums charged to Savings Association Insurance Fund-insured
institutions to levels consistent with those charged to Bank Insurance
Fund-insured institutions. For well capitalized and well managed institutions,
those rates can be as low as a statutory minimum of $2,000 per year.
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<PAGE>
Under the legislation, however, the FDIC is obligated to levy ongoing
special assessments on all insured institutions in order to pay debt service on
certain bonds issued in connection with the resolution of financially troubled
savings associations prior to 1989. Through 1999, institutions insured through
the Savings Association Insurance Fund will pay those special assessments at an
annual rate five times that paid by institutions insured through the Bank
Insurance Fund. While the precise rate will vary from period to period,
initially the rate for institutions insured through the Savings Association
Insurance Fund will be $.064 per $100 of deposits and the rate for institutions
insured through the Bank Insurance Fund will be $.0128 per $100 of deposits.
Beginning in January 2000, the rates paid by institutions insured by each fund
will be equalized. Unlike the one-time special assessment discussed above, it is
expected that those ongoing special assessments will be recorded as expenses
during the period for which they are assessed.
The current deposit assessment matrices for insured depository institutions,
are as follows (in cents per $100 of deposits):
<TABLE>
<CAPTION>
BANK INSURANCE FUND
ASSESSMENT SCHEDULE
-----------------------
<S> <C> <C>
SUPERVISORY SUBGROUP
-----------------------
<CAPTION>
A B C
-- -- --
<S> <C> <C>
MEETS NUMERICAL STANDARDS FOR:
Well capitalized........................ --(a) 3 10
Adequately capitalized.................. 3 10 24
Undercapitalized........................ 10 24 27
</TABLE>
<TABLE>
<CAPTION>
SAIF ASSESSMENT SCHEDULE
------------------------
<S> <C> <C> <C>
SUPERVISORY SUBGROUP
------------------------
<CAPTION>
A B C
-- -- --
<S> <C> <C> <C>
MEETS NUMERICAL STANDARDS FOR:
Well capitalized........................ --(a) 3 17
Adequately capitalized.................. 3 10 24
Undercapitalized........................ 10 24 27
</TABLE>
- ------------------------
(a) Subject to a statutory minimum annual assessment of $2,000.
For purposes of the assessment of deposit insurance premiums for the
six-month period ending June 30, 1999, Eldorado Bank will be assessed as an
adequately capitalized bank and Antelope Valley Bank will be assessed as a well
capitalized bank. FDIC regulations prohibit disclosure of the "supervisory
subgroup" to which an insured institution is assigned. Eldorado Bank's insurance
assessment paid during the year ended December 31, 1998 was $354,000, and
Antelope's insurance assessment paid during the year ended December 31, 1998 was
$22,000.
RESTRICTIONS ON CHANGES OF CONTROL
Subject to certain limited exceptions, no company (as defined in the BHC
Act) or individual can acquire control of a bank holding company, such as the
Company, without the prior approval or non-disapproval, as the case may be, of
the Federal Reserve. Prior approval of the Federal Reserve would be required for
an acquisition of control of the Company by a "company" as defined in the BHC
Act. In general, Federal Reserve regulations provide that "control" means the
power to vote 25% or more of any class of voting stock, the power to control in
any manner the election of a majority of the board of directors
67
<PAGE>
or the power to exercise, directly or indirectly, a controlling influence over
management or policies as determined by the Federal Reserve. As part of such
acquisition, the company would be required to register as a bank holding company
(if not already so registered) and have its business activities limited to those
activities that the Federal Reserve determines to be so closely related to
banking as to be a proper incident thereof. See "-- Limitations on Bank Holding
Company Activities." Federal Reserve regulations also provide that there is a
presumption that any company that owns less than 5% of any class of voting
securities of a bank holding company does not have control over that company.
Any individual (or group of individuals acting in concert) who intends to
acquire control of a bank holding company, such as the Company, generally must
give 60 days prior notice to the Federal Reserve under regulations promulgated
pursuant to the Change in Bank Control Act of 1978. Control for the purpose of
those regulations is presumed to exist if, among other things, an individual
owns, controls or has the power to vote 25% or more of a class of voting stock
of the bank or bank holding company, or an individual owns, controls or has the
power to vote 10% or more of a class of voting stock of the bank or bank company
and (i) the company's shares are registered pursuant to Section 12 of the
Exchange Act, or (ii) such person would be the largest shareholder of the
institution. The statute and underlying regulations authorize the Federal
Reserve to disapprove the proposed transaction based on the evaluation of
certain specified factors, including, without limitation, competition,
management and financial condition. Upon the completion of the Offering, the
common stock will be registered under Section 12 of the Exchange Act.
Under California law, any individual, entity or group that intends to
acquire direct or indirect control of a bank organized under California law must
obtain the prior approval of the Commissioner of Financial Institutions for the
State of California. "Control" for purposes of California law means the power to
vote 25% or more of any class of voting securities or the power to direct or
cause the direction of management and policies in any manner.
CONSUMER PROTECTION LAWS AND REGULATIONS
OVERVIEW. In recent years, the bank regulatory agencies have focused
greater attention on compliance with consumer protection laws and their
implementing regulations. Examination and enforcement have become more intense
in nature, and insured institutions have been advised to monitor carefully
compliance with various consumer protection laws and their implementing
regulations. The Bank is subject to many federal consumer protection statutes
and regulations including, but not limited to, the Community Reinvestment Act,
the Truth in Lending Act, the Fair Housing Act, the Equal Credit Opportunity
Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure
Act. Due to heightened regulatory concern related to compliance with those acts,
the Banks may incur additional compliance costs or be required to expend
additional funds for investments in its local community. In addition, the
federal regulators will take into account the compliance record of the Banks in
evaluating the adequacy of their management in connection with applications for
mergers and acquisitions. An adverse compliance rating can result in a material
delay or denial of such an application. As a result of the relatively high
volume of residential mortgage loans and applications processed by Eldorado
Bank's Mortgage Division, the Bank may have greater exposure to consumer
protection compliance issues than many of its peer group banks. As part of its
ongoing compliance program, the Bank has outsourced its internal audit of the
Mortgage Division to a consulting firm.
THE COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act is intended
to encourage insured depository institutions, while operating safely and
soundly, to help meet the credit needs of their communities. The act
specifically directs the federal regulatory agencies, in examining insured
depository institutions, to assess their record of helping to meet the credit
needs of their entire community, including low- and moderate-income
neighborhoods, consistent with safe and sound banking practices. It further
requires the agencies to take a financial institution's record of meeting its
community's credit needs into account when evaluating applications for, among
other things, domestic branches, consummating mergers or acquisitions, or
holding company formations.
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The bank regulatory agencies use the assessment factors from the Community
Reinvestment Act to rate financial institutions. The ratings range from a high
of "outstanding" to a low of "substantial noncompliance." Eldorado Bank received
a satisfactory CRA rating in its 1998 examination. Antelope Valley Bank was
examined most recently in 1995 and received a satisfactory CRA rating.
THE EQUAL CREDIT OPPORTUNITY ACT. The Equal Credit Opportunity Act
prohibits discrimination against an applicant in any credit transaction, whether
for consumer or business purposes, on the basis of race, color, religion,
national origin, sex, marital status, age (except in limited circumstances),
receipt of income from public assistance programs or good faith exercise of any
rights under the Consumer Credit Protection Act. In addition to prohibiting
outright discrimination on any of the impermissible bases listed above, an
effects test has been applied to determine whether a violation of the act has
occurred. This means that if a creditor's actions have had the effect of
discriminating, the creditor may be held liable -- even when there is no intent
to discriminate. In addition to actual damages, the Equal Credit Opportunity Act
permits regulatory agencies to take enforcement actions and provides for
punitive damages of up to $10,000 in individual lawsuits and up to the lesser of
$500,000 or 1.0% of the creditor's net worth in class action suits. Successful
complainants may also be entitled to an award of court costs and attorneys'
fees.
THE FAIR HOUSING ACT. The Fair Housing Act regulates many of the Banks'
lending practices, including making it unlawful for any lender to discriminate
in its housing-related lending activities against any person because of race,
color, religion, national origin, sex, handicap or familial status. The Fair
Housing Act is broadly written and has been broadly interpreted by the courts. A
number of lending practices have been found to be, or may be considered, illegal
under the Fair Housing Act, including some that are not specifically mentioned
in the act itself. Among those practices that have been found to be, or may be
considered, illegal under the Fair Housing Act are the following: declining a
loan for the purposes of racial discrimination; making excessively low
appraisals of property based on racial considerations; pressuring, discouraging,
or denying applications for credit on a prohibited basis; using excessively
burdensome qualification standards for the purpose or with the effect of denying
housing to minority applicants; imposing on minority loan applicants more
onerous interest rates or other terms, conditions, or requirements; and racial
steering, or deliberately guiding potential purchasers to or away from certain
areas because of race.
The Fair Housing Act allows a person who believes that he or she has been
discriminated against to file a complaint with the Department of Housing and
Urban Development. Aggrieved persons also may initiate a civil action. In
addition, the Fair Housing Act permits the Attorney General of the United States
to commence a civil action if the Attorney General of the United States has
reasonable cause to believe that a person has been discriminated against in
violation of the Fair Housing Act. Penalties for violation of the Fair Housing
Act include actual damages suffered by the aggrieved person and injunctive or
other equitable relief. The courts also may assess civil penalties.
THE TRUTH IN LENDING ACT. The Truth in Lending Act is designed to ensure
that credit terms are disclosed in a meaningful way so that consumers may
compare credit terms more readily and knowledgeably. As a result of the act, all
creditors must use the same credit terminology and expressions of rates, the
annual percentage rate, the finance charge, the amount financed, the total of
payments and the payment schedule.
Violations of the Truth in Lending Act may result in regulatory sanctions
and in the imposition of both civil and, in the case of willful violations,
criminal penalties. Further, under certain circumstances, the Truth in Lending
Act and Federal Reserve Regulation Z provide a consumer with a right of
rescission, which relieves the consumer of the obligation to pay amounts to the
creditor or to a third party in connection with the offending transaction,
including finance charges, application fee, commitment fees, title search fees
and appraisal fees.
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The Truth in Lending Act requirements are complex and even inadvertent
noncompliance could result in civil liability or other penalties. In recent
years, a significant number of individual claims and purported consumer class
action claims have been commenced against a number of financial institutions,
their subsidiaries, and other mortgage lending companies, seeking civil
statutory and actual damages and rescission under the act, as well as remedies
for alleged violations of various state unfair trade practices acts and
restitution for unjust enrichment with respect to mortgage loan transactions.
THE HOME MORTGAGE DISCLOSURE ACT. The Home Mortgage Disclosure Act grew out
of public concern over credit shortages in certain urban neighborhoods. One
purpose of the Home Mortgage Disclosure Act is to provide public information
that will help show whether financial institutions are serving the housing
credit needs of the neighborhoods and communities in which they are located. The
Home Mortgage Disclosure Act also includes a "fair lending" aspect that requires
the collection and disclosure of data about applicant and borrower
characteristics as a way of identifying possible discriminatory lending patterns
and enforcing anti-discrimination statutes. The Home Mortgage Disclosure Act
requires institutions to report data regarding applications for loans for the
purchase or improvement of one-to-four family and multifamily dwellings, as well
as information concerning originations and purchases of such loans. Federal bank
regulators rely, in part, upon data provided under the Home Mortgage Disclosure
Act to determine whether depository institutions engage in discriminatory
lending practices.
Compliance with the Home Mortgage Disclosure Act and implementing
regulations is enforced by the appropriate federal banking agency, or in some
cases, by the Department of Housing and Urban Development. Administrative
sanctions, including civil money penalties, may be imposed by supervisory
agencies for violations. The Home Mortgage Disclosure Act requires depository
institutions to compile and disclose certain information with respect to
mortgage loans, including the census tract, income level, racial characteristics
and gender of the borrower or potential borrower. That data may have a material
effect on the regulators' assessment of an institution, particularly in
connection with an institution's application to enter into a merger or to
acquire one or more branches.
THE REAL ESTATE SETTLEMENT PROCEDURES ACT. The Real Estate Settlement
Procedures Act requires lenders to provide borrowers with disclosures regarding
the nature and cost of real estate settlements. It also prohibits certain
abusive practices, such as kickbacks, and places limitations on the amount of
escrow accounts. Violations of the Real Estate Settlement Procedures Act may
result in imposition of penalties, including (1) civil liability equal to three
times the amount of any charge paid for the settlement services or civil
liability of up to $1,000 per claimant, depending on the violation; (2) awards
of court costs and attorneys' fees; and (3) fines of not more than $10,000 or
imprisonment for not more than one year, or both. A significant number of
individual claims and purported consumer class action claims have been commenced
against financial institutions and other mortgage lending companies alleging
violations of the escrow account rules and seeking civil damages, court costs
and attorneys' fees.
CERTAIN OTHER ASPECTS OF FEDERAL AND STATE LAW
The Banks are also subject to federal and state statutory and regulatory
provisions covering, among other things, security procedures, currency and
foreign transactions reporting, insider transactions, management interlocks,
loan interest rate limitations, electronic funds transfers, funds availability
and truth-in-savings disclosures.
FEDERAL SECURITIES LAWS
The common stock is registered under Section 12(g) of the Exchange Act, and
the Company is obligated to file periodic reports with the Securities and
Exchange Commission pursuant to Section 13(a) of the Exchange Act and is subject
to the other informational requirements of the Exchange Act, including the
obligation to file proxy statements and other information with the Commission.
See "Where You Can Find More Information."
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INTERSTATE BANKING AND BRANCHING
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act") regulates at the federal level the interstate
activities of banks and bank holding companies and establishes a framework for
nationwide interstate banking and branching. In order to implement certain
provisions of the Interstate Banking Act, California enacted the Caldera,
Weggeland, and Killea California Interstate Banking and Branching Act of 1995.
The Interstate Banking Act permits a bank that is located in one state and
that does not already have a branch office in a second state to establish a
branch office in the second state, subject to that state's laws, by (i)
acquisition of, or merger with, a bank located in the second state, (ii)
acquisition of a branch office of a bank in the second state or (iii)
establishment of a DE NOVO branch office in the second state. By means of the
Caldera Weggeland act, the State of California permits out of state banks to
establish California branch offices only by acquisition of, or merger with, a
California bank that has been in existence for at least five years. The Caldera
Weggeland act expressly prohibits an out-of-state bank that does not already
have a California branch office from (i) purchasing a branch office of a
California bank or (ii) establishing a California branch office on a DE NOVO
basis.
The Interstate Banking Act also permits an adequately capitalized and
adequately managed bank holding company to acquire banks located in any state,
provided that following the acquisition, the acquiror will not control more than
10.0% of deposits held by insured depository institutions nationwide or 30.0% of
deposits held by insured depository institutions in any one state, provided
further that if the state bank supervisor of the state in which the acquiror
will hold in excess of 30.0% of deposits approves the acquisition, the
acquisition will not be prohibited. The Caldera Weggeland act authorizes the
California Commissioner of Financial Institutions to approve an interstate
acquisition in which the acquiror would control more than 30.0% of deposits held
by insured financial institutions in California if the Commissioner finds that
the transaction is consistent with public convenience and advantage in
California.
The Interstate Banking Act authorizes banks to establish agency
relationships between subsidiaries of a bank holding company. The Caldera
Weggeland act is more expansive in that it permits California banks, with the
approval of the Commissioner, to establish agency relationships with both
affiliated and unaffiliated FDIC-insured banks and savings associations.
As a result of the Interstate Banking Act and the Caldera Weggeland Act, the
Company and the Banks face competition from out-of-state financial institutions
in addition to competition from in-state institutions. It is not possible to
evaluate, however, what specific effect or, if any, the Interstate Banking Act
and the Caldera Weggeland Act have had or will have on the Company or the
competitive environment in which it operates.
EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION
GENERAL. Banking is a business that depends on rate differentials. In
general, the difference between the interest rate paid by one of the Banks on
its deposits and its other borrowings and the interest rate received by that
Bank on loans extended to its customers and securities held in its portfolio
comprise the major portion of the Company's earnings. These rates are highly
sensitive to many factors that are beyond the control of the Company.
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
Federal Reserve. The Federal Reserve can and does implement national monetary
policies (with objectives such as curbing inflation and combating recession) by
its open-market operations in United States Government securities, by its
control of the discount rates applicable to
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borrowings by depository institutions and by adjusting the required level of
reserves for financial institutions subject to its reserve requirements. The
actions of the Federal Reserve in these areas influence the growth of bank
loans, investments and deposits and also affect interest rates charged on loans
and paid on deposits. As demonstrated in the past, the Federal Reserve's
policies regarding interest rates have a significant effect on the operating
results of commercial banks and are expected to continue to do so in the future.
The nature and effect of any future changes in monetary policies is not
predictable.
From time to time, legislation is enacted that 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 frequently are made in Congress, in the California legislature and
before various bank regulatory and other professional agencies. For example,
legislation was introduced in Congress that would repeal the current statutory
restrictions on affiliations between commercial banks and securities firms.
Under the proposed legislation, bank holding companies would be allowed to
control both a commercial bank and a securities affiliate, which could engage in
the full range of investment banking activities, including corporate
underwriting. The likelihood of any major legislative changes and the effect
such changes might have on the Company are impossible to predict.
RELIANCE ON SBA PROGRAMS. A significant portion of Eldorado Bank business
consists of originating and servicing loans under the programs of the U.S. Small
Business Administration. See "Business -- Products and Services -- Community
Banking Division." Significant cuts in or other adverse changes to Small
Business Administration programs would likely have a material adverse effect on
the Company. See "Risk Factors -- Concentration in SBA lending -- Changes in SBA
regulations could reduce our SBA loan originations and revenues, which are
significant."
In 1995, Congress passed the Small Business Lending Enhancement Act of 1995.
The act reduced the amount of the subsidy to borrowers inherent in the Small
Business Administration's guaranty of loans under its various programs, thus
causing the Small Business Administration to increase the fees it charges for
its guarantee. The actual payments by the Small Business Administration on its
guaranties plus the cost of program administration have historically exceeded
the aggregate guarantee fees collected by the Small Business Administration. At
the same time, however, by reducing the per-loan subsidy by an amount greater
than the reduction in the Small Business Administration's budget, the 1995 act
sought to increase the total number and dollar amount of loans that the Small
Business Adminstration would guarantee. While management has not discerned a
material decrease in the number or quality of borrowers seeking Small Business
Administration loans as a result of the increase in the guarantee fees charged
to borrowers, it is possible that such a decrease will occur over the long term.
In addition, there can be no assurance that the Small Business Administration
will not be discontinued in its entirety in the foreseeable future.
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MANAGEMENT
The following table sets forth the directors of the Company and the
executive officers of the Company and Eldorado Bank.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --------- ------------------------------------------------------------------
<S> <C> <C>
Robert P. Keller.................... 60 President, Chief Executive Officer and Director
John L. Gordon...................... 48 Executive Vice President, Treasurer and Chief Financial Officer
Catherine C. Clampitt............... 37 Executive Vice President--SBA Lending
Gary A. Green....................... 40 Executive Vice President--Commercial Lending
Richard Korsgaard................... 57 Executive Vice President--Construction Loan Division and CRA
Officer
Henry T. McCaffrey.................. 46 Executive Vice President and Chief Credit Officer
William D. Rast..................... 51 Executive Vice President--Mortgage Banking Division
Paul F. Rodeno...................... 43 Executive Vice President--Operations
Ronald L. Wagner.................... 52 Executive Vice President--Equipment Leasing Division
Curt A. Christianssen............... 38 Senior Vice President
Ernest J. Boch...................... 71 Director
James A. Conroy..................... 38 Director
Edward A. Fox....................... 62 Chairman of the Board of Directors
Charles E. Hugel.................... 70 Director
Mitchell A. Johnson................. 56 Director
K. Thomas Kemp...................... 57 Director
Jefferson W. Kirby.................. 36 Director
John B. Pettway..................... 36 Director
Henry T. Wilson..................... 38 Director
Paul R. Wood........................ 45 Director
</TABLE>
ROBERT P. KELLER has served as President and Chief Executive Officer of the
Company and its predecessor since September 1995. Mr. Keller also has served as
Chairman, President and Chief Executive Officer of Eldorado Bank since June
1997, when Commerce Security Bank, Liberty National Bank, San Dieguito National
Bank and Eldorado Bank were consolidated via mergers into Eldorado Bank, and Mr.
Keller served in those same capacities at each of those institutions during the
period between their acquisition by the Company and their consolidation into
Eldorado Bank. Mr. Keller has served as Chairman, President and Chief Executive
Officer of Antelope Valley Bank since its acquisition by the Company on January
22, 1999. From 1994 to 1995, Mr. Keller was President and Chief Executive
Officer of Independent Bancorp of Arizona, Inc., a Nasdaq-listed bank holding
company with assets of $1.8 billion, which was acquired by Norwest Corporation
in February 1995. From October 1991 to June 1994, Mr. Keller served as President
and Chief Executive Officer of New Dartmouth Bank, a privately-owned financial
institution with assets of $1.7 billion, located in Manchester, New Hampshire,
which was acquired by Shawmut National Corporation in 1994. From 1989 to 1991,
he served as Chief Operating Officer of Dartmouth Bancorp, Inc., also located in
Manchester, New Hampshire. During 1988 and 1989, Mr. Keller served as Executive
Vice President and Chief Operating Officer of American Federal Bank in Dallas,
Texas, which was created through the merger of 12 independent thrifts under the
Southwest Plan. Prior to 1988, he served for 13 years as an officer of Indian
Head Banks Inc. of New Hampshire (acquired by the Fleet/Norstar Group Inc. in
1988), most recently as Executive Vice President and Chief Financial/
Administrative Officer. Mr. Keller also serves on the boards of directors of
Haverford Industries, LLC, Pennichuck Corporation and White Mountains Holdings,
Inc. Mr. Keller serves as the President, Chief Executive Officer and a director
of Dartmouth Capital Group, Inc. ("DCG General Partner"), the sole general
partner of DCG.
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JOHN L. GORDON has served, since August 3, 1998, as Executive Vice
President, Chief Financial Officer and Treasurer of Eldorado Bank and Senior
Vice President, Chief Financial Officer and Treasurer of the Company. Mr. Gordon
has served as Chief Financial Officer and Treasurer of Antelope Valley Bank
since its acquisition by the Company on January 22, 1999. From 1993 to 1998, Mr.
Gordon served as Senior Vice President and Director of Finance and Accounting
for Citizens Business Bank, a $1.4 billion financial institution, and its
holding company, CVB Financial Corporation of Ontario, California. From 1985 to
1993, he served as Senior Vice President and Chief Financial Officer of Mid City
Bank, N.A. Mr. Gordon has also served as the Treasurer of the DCG General
Partner since August 3, 1998.
CATHERINE C. CLAMPITT is the Executive Vice President of Eldorado Bank
responsible for its SBA lending programs. Ms. Clampitt has been responsible for
the Company's SBA lending since March 1997, when the Company's predecessor
acquired Liberty National Bank ("Liberty"). For four years prior to that
acquisition, Ms. Clampitt was responsible for Liberty's SBA lending programs.
Ms. Clampitt is a member of Board of Directors of the National Association of
Government Guaranteed Lenders, Inc., an SBA lending trade association.
GARY A. GREEN is Eldorado Bank's Executive Vice President responsible for
its non-SBA commercial lending fucntion. Mr. Green joined Eldorado Bank in 1989
as a commercial loan officer. From 1994 to 1997, Mr. Green served as a Regional
Vice President, and in 1998, was named head of Eldorado Bank's non-SBA
commercial lending function.
RICHARD KORSGAARD is Eldorado Bank's Executive Vice President responsible
for its Construction Loan Division. Mr. Korsgaard also serves as Eldorado Bank's
CRA Officer. Mr. Korsgaard served as Executive Vice President/Construction
Lending Division and Director of Eldorado Bank and as a director of Eldorado
Bancorp from October 1995 until June 1997 when Eldorado was acquired by the
Company. From June 1982 to October 1995, Mr. Korsgaard served as President,
Chief Executive Officer and Director of Mariners Bank, a $75 million community
bank headquartered in San Clemente, California. Mariners Bank was acquired by
Eldorado Bancorp in October 1995.
HENRY T. MCCAFFREY has served as Executive Vice President and Chief Credit
Officer of Eldorado Bank since October 1998. From 1982 to 1998, Mr. McCaffrey
served as Senior Vice President of Union Bank of California. There he acted as
manager of the centralized underwriting group for Union Bank's Commercial
Banking Units in Los Angeles, Orange County and San Diego.
WILLIAM D. RAST is the Bank's Executive Vice President responsible for its
Mortgage Division. Mr. Rast was hired by Eldorado Bank in February 1998. From
February 1996 to February 1998, Mr. Rast served as the Chief Executive Officer
of Case Compactors, a small waste management company and was also the Managing
Director of Hamilton Pacific, a firm that specializes in relocating businesses
to China. From May 1992 to May 1996, Mr. Rast served as President and Chief
Operating Officer of Hamilton Financial Services Corp., a financial services
company primarily focused in mortgage banking. Prior to 1992, Mr. Rast was
employed for 10 years by First California Mortgage, a 33 office mortgage company
closing $2.5 billion in loans annually, with his last position being Senior Vice
President responsible for retail and wholesale production.
PAUL F. RODENO is Eldorado Bank's Executive Vice President in charge of its
retail branch system, retail product departments and Eldorado Bank's marketing
programs. From October 1995 to June 1997, when San Dieguito National Bank was
merged into Eldorado Bank, Mr. Rodeno served as its Executive Vice President and
Chief Operating Officer. Mr. Rodeno served as Executive Vice President/Loan
Administration of San Dieguito National Bank from July 1986 until September
1995, when San Dieguito was acquired by the Company's predecessor. Prior to
joining San Dieguito, Mr. Rodeno was a commercial loan officer for First
Interstate Bank.
RONALD L. WAGNER has served as the Executive Vice President of Eldorado
Bank's Leasing Division since January 1999. From November 1995 to January 1999,
Mr. Wagner served as a Senior Vice President
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of Imperial Business Credit, Inc., where he was responsible for sales and
marketing leases to small to medium size businesses until March 1998.
Thereafter, he assumed responsibility for four of the company's loan production
offices. From April 1985 to November 1997, Mr. Wagner was President of Business
Credit Services Group, Inc., an independent lessor specializing in the lower
middle market on a lessee direct basis.
CURT A. CHRISTIANSSEN has served as an executive officer of the Company
since March 1996. Mr. Christianssen is currently responsible for the Company's
Corporate Development function, which includes evaluating and helping to plan
acquisitions and other strategic transactions. From March 1996 to July 1998, Mr.
Christiansen served as Treasurer and Chief Financial Officer of the Company and
Eldorado Bank. He served as Chief Financial Officer of Liberty from October 1993
until its acquisition in March 1996 by the Company's predecessor. From October
1991 to April 1993, Mr. Christianssen served as an Executive Vice President and
Chief Financial/Administrative Officer of Olympic National Bank. Previously, Mr.
Christianssen was with the Resolution Trust Company as a Vice President
responsible for general accounting and data processing for Gibraltar Savings and
Loan Association, a $15 billion institution, and as the Chief Financial Officer
for the receiver for Unity Savings and Loan Association.
ERNEST J. BOCH has been Chairman and Chief Executive Officer of Subaru of
New England, Inc. since 1970. He is also the majority owner of Boch Oldsmobile,
Toyota and Mitsubishi of Norwood as well as founder of Boch Broadcasting
Corporation. Mr. Boch is also a director of the DCG General Partner.
JAMES A. CONROY has been associated since 1990 with Olympus Partners, a
private equity firm, and since December 1993, Mr. Conroy has acted as a general
partner of Olympus Growth Fund II, L.P., which is a principal shareholder of the
Company, Olympus Executive Fund, L.P. and other funds affiliated with Olympus
Partners. Prior to 1990, Mr. Conroy was a management consultant with Bain &
Company. Mr. Conroy serves on the board of directors of Frontier Vision
Partners, L.P.
EDWARD A. FOX was elected the non-executive Chairman of the Board of
Directors of the Company on September 1, 1998. He is also currently the
non-executive Chairman of SLM Holding Corp. in Reston, Virginia, the parent of
Sallie Mae. From 1990 to his retirement in 1994, Mr. Fox served as Dean of the
Amos Tuck School of Business at Dartmouth College in Hanover, New Hampshire.
Prior to 1990, Mr. Fox was founding President and Chief Executive Officer of the
Student Loan Marketing Association (Sallie Mae). Mr. Fox currently serves as a
director of Delphi Financial Corp., Greenwich Capital Management Corp. and New
England Life Insurance Company. Mr. Fox is also a director of the DCG General
Partner.
CHARLES E. HUGEL served as Chairman and Chief Executive Officer of
Combustion Engineering, Inc. in Stamford, Connecticut from 1982 to 1990. Prior
to joining Combustion Engineering, Inc., he spent 30 years with AT&T, most
recently as an Executive Vice President. Mr. Hugel also served as a director of
Nabisco, Inc. and its corporate successor, RJR/Nabisco, Inc., from 1978 to 1986.
Mr. Hugel presently serves on the board of directors of Pitney-Bowes, Inc. Mr.
Hugel is also a director of the DCG General Partner.
MITCHELL A. JOHNSON is the President of MAJ Capital Management, Inc., which
he organized in August 1994 after retiring from Sallie Mae in June 1994. Mr.
Johnson joined Sallie Mae in 1973 and served as its Senior Vice President,
Corporate Finance from 1987 until his retirement. Mr. Johnson was the first
President and a founding member of the Washington Association of Money Managers.
In addition, Mr. Johnson was a trustee of the District of Columbia Retirement
Board. Currently, Mr. Johnson serves as trustee of the Citizen Investment Trust,
a mutual fund company, and as a director of the Federal Agricultural Mortgage
Corporation (Farmer Mac) and Whitestone Capital Group, Inc.
K. THOMAS KEMP has served as President and Chief Executive Officer of Fund
American Enterprises Holdings, Inc. (formerly Fireman's Fund Corporation) since
October 1997. From January 1991 to October 1997, Mr. Kemp served as Executive
Vice President of Fund American. Mr. Kemp also has served as Chairman and Chief
Executive Officer of White Mountains Holdings, Inc. since March 1997. From
October 1994 to March 1997, Mr. Kemp served as President and Chief Executive
Officer of White
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Mountains. Mr. Kemp serves on the boards of directors of Fund American, White
Mountains, Financial Security Assurance, Ltd., Main Street America Holdings
Inc., Murray Lawrence (Bermuda), Ltd. and Haverford Industries, LLC. Mr. Kemp is
also a director of the DCG General Partner.
JEFFERSON W. KIRBY has been employed by Alleghany Corporation since 1992 and
was appointed Vice President in 1994. From 1987 to 1990, he was employed by
Bankers Trust Company, and from 1990 to 1992, he was employed by BT Securities
Corp., each an affiliate of Bankers Trust New York Corporation. Mr. Kirby also
is a director of Alleghany Asset Management, Inc., Connecticut Surety
Corporation, The Covenant Group, Inc. and The F.M. Kirby Foundation, Inc., a
charitable organization, and a trustee of Lafayette College and the Peck School.
Mr. Kirby is also a director of the DCG General Partner.
JOHN B. PETTWAY is the Manager of The Haverford Group, LLC, an investment
company located in Park City, Utah, and has also served as the Chief Financial
Officer for High Plains Investments, LLC since October 1998. Mr. Pettway served
as the Chief Financial Officer for both Haverford Industries, LLC and Byrne &
sons, l.p., from July 1995 to October 1998. From June 1993 to June 1995, Mr.
Pettway served as the Chief Financial Officer of Cirque Properties, LC. Prior to
June 1993, Mr. Pettway was a practicing attorney at the firm of Adams &
Associates in Alexandria, Virginia. Mr. Pettway serves as director of Haverford
Industries, LLC and American Direct Business Insurance Agency, Inc. Mr. Pettway
is also a director of the DCG General Partner.
HENRY T. WILSON is the Managing Director of Northwood Ventures LLC and
Northwood Capital Partners LLC, private equity investment firms based in
Syosset, New York, with whom he has been associated since 1991. From 1989 to
1991, Mr. Wilson was a Vice President in the investment banking division of
Merrill Lynch & Co. He serves on the boards of directors of Alliance National,
Inc. and the Lion Brewery, Inc. Mr. Wilson is also a director of the DCG General
Partner.
PAUL R. WOOD has served since January 1993 as Vice President of Madison
Dearborn Partners, Inc., a venture capital firm and the general partner of
Madison Dearborn Capital Partners II, L.P., a principal shareholder of the
Company. Mr. Wood was employed by First Chicago Venture Capital from August 1983
to January 1993, and the venture capital unit of Continental Illinois Bank from
January 1978 to August 1983. Mr. Wood serves on the boards of directors of Hines
Horticulture, Inc., Intercontinental Art, Inc. and Woods Equipment Company.
Each of the members of the Board of Directors is generally elected at the
Company's Annual Meeting of Shareholders to serve until the next Annual Meeting
or until his successor is duly qualified and elected. Pursuant to the agreement
providing for the Madison Dearborn and Olympus investments in connection with
the acquisition of Eldorado Bancorp, the Company generally is obligated to
nominate designees of Madison Dearborn and Olympus for election to the Company's
Board of Directors. Nominees of each of Madison Dearborn (Paul R. Wood) and
Olympus (James A Conroy) have been nominated and elected, and currently serve on
the Company's Board of Directors. See "Management" and "Principal and Selling
Shareholders."
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The members of the Company's Audit Committee are Jefferson
W. Kirby (Chairman), Edward A. Fox and K. Thomas Kemp. The Audit Committee
functions include reviewing the financial statements of the Company and its
subsidiaries and the scope of the annual audit by the Company's independent
certified public accountant and appointing the independent certified public
accountant on an annual basis. The Committee also monitors the Company's
internal financial and accounting controls.
COMPENSATION COMMITTEE. The members of the Company's Compensation Committee
are K. Thomas Kemp (Chairman), Edward A. Fox and Charles E. Hugel. The
Compensation Committee reviews
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and makes recommendations to the Board of Directors on matters concerning the
salaries and other employee benefits for the Company's officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Kemp is the Chairman and Chief Executive Officer of White Mountain
Holdings, Inc., of which Mr. Keller is a member of the Board of Directors.
DIRECTOR COMPENSATION
The directors of the Company have not received any compensation for serving
on the Board of Directors or any committee or attending meetings thereof. The
Board of Directors expects to approve the payment of compensation to
non-executive directors beginning July 1, 1999. The Company is currently
reviewing the director compensation levels of banks and bank holding companies
in its peer group. All directors receive reimbursement of reasonable expenses
incurred in attending Board and committee meetings and otherwise carrying out
their duties.
77
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation
received for the three fiscal years ended December 31, 1998 by the Chief
Executive Officer and the five other most highly compensated executive officers
of the Company (the "named executive officers"). All cash compensation was paid
to the named executive officers by the Company.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL AWARDS
COMPENSATION --------------------------
------------------------------------ RESTRICTED SECURITIES
NAME AND BASE STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARDS($) OPTIONS COMPENSATION($)
- ---------------------------------- ------------ --------- ----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Robert P. Keller.................. 1998 300,000 -- -- -- 5,000(1)
President and Chief 1997 275,000 -- 1,654,241(2) 364,300 4,750
Executive Officer 1996 185,240 -- 203,788(3) -- 1,316
John L. Gordon.................... 1998(4) 54,167 -- -- 15,000 --
Executive Vice President, 1997 -- -- -- -- --
Eldorado Bank 1996 -- -- -- -- --
Chief Financial Officer
Catherine C. Clampitt............. 1998(5) 420,278 -- -- 5,000 5,000(1)
Executive Vice President 1997(6) 216,370 -- -- -- 12,250
Eldorado Bank 1996(7) 89,699 -- -- -- 9,694
SBA Lending
Richard Korsgaard................. 1998 126,200 -- -- -- 9,966(8)
Executive Vice President 1997(9) 124,417 7,212 -- -- 9,908
Eldorado Bank 1996 -- -- -- -- --
Construction Lending
William D. Rast................... 1998(10) 155,823 -- -- 5,000 2,028(11)
Executive Vice President 1997 -- -- -- -- --
Eldorado Bank 1996 -- -- -- -- --
Mortgage Division
Curt A. Christianssen............. 1998 130,000 -- -- 5,000 3,900(1)
Senior Vice President 1997 114,167 -- -- 25,000 4,750
Director Corporate 1996(12) 76,875 -- -- 2,316
Development
</TABLE>
- ------------------------
(1) Consists of an award under the Company's 401(k) retirement plan.
(2) Based upon 187,982 shares issued at an estimated market value of $8.80 per
share. See "Price Range of common stock and Dividend Policy." If dividends
are paid on the common stock, Mr. Keller will receive dividends on his
restricted stock. See "--Keller Employment Agreement--Restricted Stock
Awards" for a discussion of both vesting and transferability restrictions.
(3) Based upon 25,796 shares issued at an estimated market value of $7.90 per
share. See "Price Range of common stock and Dividend Policy." If dividends
are paid on the common stock, Mr. Keller will receive dividends on his
restricted stock. See "--Keller Employment Agreement--Restricted Stock
Awards" for a discussion of both vesting and transferability restrictions.
(4) For the period August 3, 1998 to December 31, 1998. Mr. Gordon's current
base salary is $130,000.
(5) Includes base pay of $59,000 and commissions of $361,278.
(6) Includes base pay of $51,501 and commissions of $164,869.
(7) For the period April 1, 1996 to December 31, 1996.
(8) Includes an award under the Company's 401(k) retirement plan of $3,966 and
an auto allowance of $6,000.
78
<PAGE>
(9) For the period June 6, 1997 to December 31, 1997. Includes base pay of
$72,917 and commissions of $51,500.
(10) For the period February 10, 1998 to December 31, 1998. Mr. Rast's current
base salary is $175,000, in addition to which he receives incentive
compensation based upon the performance of the Mortgage Division.
(11) Consists of reimbursement for a payment for temporary housing.
(12) For the period April 1, 1996 to December 31, 1996.
KELLER EMPLOYMENT AGREEMENT
CAPACITY AND TERM. In July 1996, the Company entered into an employment
agreement with Mr. Keller that was effective retroactive as of October 1, 1995.
The Company has agreed to employ Mr. Keller as the Company's senior most
executive officer, to nominate Mr. Keller to serve as a director of the Company
and to cause Mr. Keller to be elected as a director of each of the Company's
subsidiaries that is a depository institution or otherwise a "significant
subsidiary," as defined under SEC regulations. Mr. Keller's employment agreement
has a three-year term, ending on September 30, 2000, and will be renewed
automatically for successive one-year periods unless either the Company or Mr.
Keller gives the other notice at least one year prior to the end of the term or
any extension thereof.
BASE SALARY. Mr. Keller's base salary currently is $300,000. Mr. Keller's
base salary under the employment agreement depends upon the Company's
consolidated assets. For purposes of Mr. Keller's employment agreement, the
Company's consolidated assets are calculated as of the end of each of the
Company's fiscal quarters and are equal to the Company's average consolidated
assets for the six month period then ended calculated on a daily basis in
accordance with GAAP ("Average Consolidated Assets"), except that if the
Company's consolidated assets as of the end of a fiscal quarter vary by more
than 20 percent from the Average Consolidated Assets for the two consecutive
quarters ended as of that date, the Company's consolidated assets as of that
date are used for purposes of determining any adjustment to Mr. Keller's salary.
If, subsequent to an increase in Mr. Keller's base salary, the amount of Average
Consolidated Assets as of the end of any fiscal quarter is less than the most
recently applied asset threshold for determining Mr. Keller's salary, Mr.
Keller's base salary will be decreased, effective as of the beginning of the
quarter next following the measurement date, in accordance with the salary
schedule described above. The Company expects that as of March 31, 1999, the
Company's Average Consolidated Assets will exceed $1.2 billion, and Mr. Keller's
base salary will become $350,000. If the Company's Average Consolidated Assets
exceed $1.8 billion, Mr. Keller may request that the Compensation Committee of
the Company's Board of Directors (the "Committee") consider and make a
recommendation to the Company's Board of Directors whether it is appropriate to
increase his annual salary. Mr. Keller's base salary, as so determined, is
hereinafter referred to as his "Base Salary."
RESTRICTED STOCK AWARDS. Mr. Keller's employment agreement generally
obligates the Company to issue shares of restricted common stock (the
"Restricted Stock") to Mr. Keller whenever, during the term of the agreement,
the Company issues common stock or a Common Stock Equivalent (as defined in the
employment agreement), including shares of common stock issued in the CSB and
Eldorado Bancorp acquisitions. Pursuant to his employment agreement, Mr. Keller
will no longer be eligible to receive additional shares of Restricted Stock at
such time as the Company has Tier 1 capital in excess of $125.0 million. See
"Supervision and Regulation" for a definition of of Tier 1 capital. On a pro
forma basis giving effect to the offering, the Company had Tier 1 capital of
$90.0 million at December 31, 1998. In addition, Mr. Keller will not be entitled
to receive any Restricted Stock as a consequence of the sale of common stock or
a Common Stock Equivalent to DCG or director qualifying shares to any director
of a subsidiary of the Company or the award of employee stock options or the
issuance of common stock upon the exercise thereof.
79
<PAGE>
For so long as he is eligible, the number of shares of Restricted Stock that
will be issued to Mr. Keller will be equal to 3% of the sum of (x) the number of
shares of common stock then to be issued by the Company or, in the case of the
issuance of a Common Stock Equivalent, the number of shares of common stock that
such Common Stock Equivalent may be converted into or exchanged for, and (y) the
number of shares of Restricted Stock to be issued to Mr. Keller at that time. In
connection with the acquisition of Antelope, Mr. Keller received approximately
86,000 shares of Restricted Stock. Upon completion of the offering, Mr. Keller
will receive approximately 67,100 additional shares of Restricted Stock.
Subject only to restrictions on transferability and forfeiture conditions
described below, Mr. Keller will have all the rights of a shareholder with
respect to the Restricted Stock, including, without limitation, the right to
vote the Restricted Stock and to receive any dividend or other distribution with
respect thereto. Prior to the end of Restricted Period (described below), Mr.
Keller may not sell, assign, transfer, pledge, hypothecate or otherwise encumber
or transfer the Restricted Stock, except as permitted by the Compensation
Committee. If Mr. Keller's employment under the employment agreement is
terminated for cause (as defined in the employment agreement) prior to the end
of the Restricted Period, or if Mr. Keller resigns from the Company during the
Restricted Period without the consent of the Board of Directors of the Company,
any Restricted Stock then outstanding will be forfeited to the Company without
any payment to Mr. Keller.
In general, the "Restricted Period" will expire upon the earliest to occur
of the following events: (a) a Change in Control (as defined in Mr. Keller's
employment agreement) of the Company; (b) Mr. Keller's retirement from the
Company after attaining age 62; (c) the effective date of Mr. Keller's
resignation from the Company with the consent of the Board of Directors; (d) the
effective date of the expiration of Mr. Keller's employment agreement pursuant
to notice of non-renewal given by the Company; (e) the effective date of Mr.
Keller's termination of his employment agreement for cause (as defined in the
agreement); (f) the effective date of the termination of Mr. Keller's employment
by the Company due to a "disability" (as defined in the employment agreement);
or (g) Mr. Keller's death. In the case of Restricted Stock that is issued to Mr.
Keller as a consequence of the Company's issuance of a Common Stock Equivalent,
the Restricted Period will terminate on the later of (x) the date on which such
Common Stock Equivalent first becomes convertible into or exchangeable for
shares of common stock and (y) the earliest to occur of the events specified in
the immediately preceding sentence. If any Common Stock Equivalent is redeemed
in whole or in part by the Company prior to the date such Common Stock
Equivalent is convertible into or exchangeable for shares of common stock, upon
such redemption there shall be forfeited to the Company, without any payment to
Mr. Keller, a PRO RATA portion of the shares of Restricted Stock issued as a
consequence of the Company's sale of such Common Stock Equivalent.
STOCK OPTION AWARDS. As provided in Mr. Keller's employment agreement, the
Company's Board of Directors has adopted the 1997 Stock Option Plan (the "Option
Plan") pursuant to which the Board of Directors or the Committee has granted
stock options to Mr. Keller and others.
Pursuant to Mr. Keller's employment agreement, promptly following the
adoption of the Option Plan, the Company granted to Mr. Keller an option
exercisable for a number of shares of common stock equal to 50.0% of the shares
in the Option Pool (as defined herein). Mr. Keller's employment agreement
further provides that if the Company increases the number of shares in the
Option Pool, the Company will promptly grant to Mr. Keller an option exercisable
for a number of shares of common stock equal to 50.0% of the amount such
increase. See "--1997 Stock Option Plan" for a discussion of the extent to which
the number of shares of common stock in the Options Pool will increase
automatically. In connection with the acquisition of Antelope, Mr. Keller
received an option to purchase approximately 91,400 shares of common stock. Upon
the completion of the offering, the Option Pool will increase by approximately
143,000 shares of common stock, and Mr. Keller will receive an additional option
to purchase an aggregate of approximately 71,500 shares of common stock.
80
<PAGE>
Mr. Keller's employment agreement also specifies that the exercise price,
vesting schedule and other terms of any stock option granted to him under the
Option Plan will be substantially similar to the terms of any other
contemporaneously granted stock option under the Option Plan, except that any
stock option granted to Mr. Keller will (a) not have an exercise price less than
the fair market value of the common stock at the time of grant; (b) to the
extent the stock option has an escalating exercise price or a fixed exercise
price with a premium over the then fair market value of the common stock,
reflect an annual percentage increase of not greater than the then current yield
to maturity of the most recently auctioned 5-year U.S. Treasury Notes; (c) vest
over a period of not more than four years from the date of grant; (d) provide
that if Mr. Keller's employment is terminated by the Company other than for
cause (as defined Mr. Keller's employment agreement), the stock option will
continue to be exercisable until such date as it would have expired if Mr.
Keller had continued to be employed by the Company; and (e) provide that upon a
Change in Control of the Company (as defined in Mr. Keller's employment
agreement), any stock option then outstanding will become fully exercisable. See
"-- 1997 Stock Option Plan" for a discussion of the exercise price and vesting
schedule structure of Mr. Keller's options.
SUPPLEMENTAL RETIREMENT PROGRAM. Mr. Keller's employment agreement
obligates the Company to provide supplemental retirement benefits through a
nonqualified, unfunded arrangement equal up to 35% of Mr. Keller's average base
salary after seven years of service. The supplemental retirement benefit accrues
and vests annually at the rate of 5% per year. The supplemental retirement
benefit will be paid monthly for ten years commencing upon (a) the later of Mr.
Keller's retirement date or age 65 or (b) Mr. Keller's death, whichever occurs
first. Any retirement benefits remaining unpaid at Mr. Keller's death will be
paid to his designated beneficiary.
BENEFITS UPON TERMINATION. Mr. Keller's employment agreement provides that
if his employment is terminated by the Company without cause or by him due to a
material change in the nature or scope of his responsibilities or duties, or a
material breach by the Company of the employment agreement, the Company
generally will be obligated to pay Mr. Keller his Base Salary for the remainder
of the term of his employment agreement or 18 months, whichever is greater.
During such period, the Company also would be obligated to continue certain
employee benefits, such as life, health, accident and disability insurance
coverage, which Mr. Keller was receiving immediately preceding his termination.
In addition, upon the events described above, Mr. Keller's supplemental
retirement benefits would become fully vested, and all options granted to Mr.
Keller to purchase common stock will become fully vested and exercisable.
If Mr. Keller's employment is terminated by the Company because Mr. Keller
becomes disabled (as defined in the employment agreement), Mr. Keller will be
entitled to receive not less than 50% of his then Base Salary until age 65. In
addition, all of his options to purchase common stock will immediately become
fully vested and exercisable.
If Mr. Keller's employment agreement expires following a notice of
non-renewal given by the Company, Mr. Keller would be entitled to the
continuance for a period of six months of his Base Salary and the employee
benefits that Mr. Keller was receiving immediately prior to such termination.
Payments to which Mr. Keller would be entitled upon termination will be
reduced by amounts earned by Mr. Keller for services provided to another party
after such termination. Mr. Keller would have no duty, however, to mitigate such
payments by seeking to provide services to another party. Mr. Keller's
employment agreement also provides that under certain circumstances involving a
change in control, the amount of benefits provided under his employment
agreement would be reduced if, after applying the excise tax provisions to the
payments under the Internal Revenue Code of 1986, as amended, the net economic
benefit to Mr. Keller would be increased by effecting such a reduction.
Mr. Keller's employment agreement provides that a "change in control" will
include the authorization of certain business combinations by the Company's
Board of Directors. In general, a business combination involving the Company
will not be deemed to be a change in control if the Company's shareholders own
at least one-third of the resulting entity and at least half of the directors of
the resulting entity are persons
81
<PAGE>
who were directors of the Company at the time the parties entered into the
definitive agreement providing for the business combination.
OTHER EXECUTIVE EMPLOYMENT AGREEMENTS
The Company also has entered into employment agreements with Catherine C.
Clampitt, Executive Vice President, Richard Korsgaard, Executive Vice President
and William D. Rast, Executive Vice President.
Ms. Clampitt is employed by Eldorado Bank as Executive Vice President
pursuant to a one year employment agreement, renewable annually (the "Clampitt
Agreement"), entered into in July 1997. The Clampitt Agreement establishes a
monthly base salary of approximately $5,000 per month, plus commissions based
upon the volume of SBA 7(a) loan originations and fees generated by the sale of
portions of SBA 504 loans. See "Business -- Products and Services." In the event
Ms. Clampitt either is terminated by Eldorado Bank without cause or terminates
the Clampitt Agreement for good reason (as defined in the Clampitt Agreement)
following a change in control of the Company or Eldorado Bank, she will be
entitled to receive a termination payment in an amount equal to 12 months pay,
inclusive of commissions, for the prior 12 months of her employment. The
Clampitt Agreement may not be terminated by an acquisition or dissolution of
Eldorado Bank or the Company except in the event that proceedings for the
liquidation of the Company or Eldorado Bank are commenced by regulatory
authorities, in which case the Clampitt Agreement, and all rights and benefits
thereunder, would be terminated.
Mr. Korsgaard is employed by Eldorado Bank as Executive Vice President
pursuant to a three-year employment agreement that expires October 19, 2001 (the
"Korsgaard Agreement") and that will be renewed automatically for successive
one-year periods unless either Eldorado Bank or Mr. Korsgaard gives the other
notice at least one year prior to the end of the term or any extension thereof.
The Korsgaard Agreement establishes a minimum base salary of $132,200. In the
event Mr. Korsgaard is terminated by Eldorado Bank or any successor to Eldorado
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 Eldorado Bank or the Company
except in the event that proceedings for the liquidation of the Company or
Eldorado 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 Eldorado Bank for 15 years commencing upon
his reaching age 65 or his death or disability, whichever first occurs.
Mr. Rast's employment agreement with Eldorado Bank provides for an annual
salary of $175,000 and bonus payments if the Mortgage Banking Division's income
is greater than $2.0 million. The bonus payment will be $50,000 if the
Division's net income is greater than $2.0 million but not greater than $3.0
million, and the bonus will increase by $50,000 for each $1 million by which the
Division's income exceeds $2.0 million up to a maximum bonus of $250,000.
The Company or the Bank has entered into Severance Agreements (each a
"Severance Agreement") with Messrs. Gordon, Rast and Christianssen concerning
the ramifications of a change in control of the Company on the continued
employment of each such officer. As used in the Severance Agreement, the term
"change in control" has the same definition as in the Option Plan. Pursuant to
and as detailed further in each Severance Agreement, if the terms of an
officer's employment are significantly altered to the detriment of that officer
within two years following a change in control, and the officer provides the
requisite notice to Eldorado Bank or alternatively, if Eldorado Bank terminates
the officer without cause within two years following a change in control, then
the officer is entitled to a lump sum payment equal to one year's salary, less
applicable taxes and withholdings. A precondition to such payment is the
execution by the officer of a general release and confidentiality agreement.
82
<PAGE>
1997 STOCK OPTION PLAN
GENERAL. Pursuant to the Option Plan, the Company's Board of Directors or
the Compensation Committee (the "Committee") may grant stock options to Mr.
Keller and other officers of the Company or any of its subsidiaries, as well as
to any director of any subidiary. The Option Plan provides only for the issuance
of so-called "nonqualified" stock options (as compared to incentive stock
options). Upon completion of the offering, approximately 1,054,400 shares of
common stock will be reserved for issuance under the Option Plan, and options to
purchase approximately 699,216 shares will be outstanding with an average
exercise price of approximately $11.11 per share.
OPTION POOL. The maximum number of shares as to which options may be
granted is referred to as the "Option Pool." Upon completion of the offering,
the Option Pool will consist of approximately 1,054,400 shares of common stock.
Until such time as the Company has Tier 1 Capital of $125.0 million or more, if
the Company issues any additional common stock or common stock equivalents, the
number of shares in the Option Pool automatically increases such that the number
of shares in the Option Pool will be equal to 6% of the sum of (i) the shares of
common stock (and common stock equivalents) issued and outstanding immediately
following such issuance and (ii) the number of shares in the Option Pool. On a
pro forma basis giving effect to the offering, the Company had Tier 1 Capital of
$90.0 million at December 31, 1998.
EXERCISE PRICE STRUCTURE. The Option Plan authorizes the Committee to set
the exercise price for each option grant. In the case of option grants to Mr.
Keller, each portion of his award will have a separate, fixed exercise price as
such portion vests over time. The exercise price for each separate tranche will
increase progressively based upon a semi-annual compounding of a "base rate"
using the five-year U. S. Treasury rate in effect at the date of grant. See, for
example, "-- Option Grants in Last Fiscal Year."
VESTING SCHEDULE AND DURATION. The options granted to date, and any future
grants, unless the Committee otherwise decides, will vest over four years, in
half-year increments, with the first portion vesting on the 18-month anniversary
of the date of grant. The Option Plan provides that unless the Committee
otherwise determines, the options will have a six-year term, expiring on the
sixth anniversary of the date of grant.
ACCELERATION EVENT--EFFECT ON VESTING.
MR. KELLER. Mr. Keller's options will become fully vested in connection
with a change in control, which is defined in the Option Plan consistent with
the definition of a change in control contained in Mr. Keller's employment
agreement. In addition, Mr. Keller's options become fully-vested if the Company
terminates his employment agreement without cause or if he terminates the
agreement for cause. Mr. Keller's options also become fully-vested if he dies or
becomes permanently disabled.
OTHER OPTION HOLDERS. For all other option holders, the Option Plan
provides for a "double trigger," unless the Committee otherwise specifies at the
time it awards the option. Under the double trigger approach, the option would
become fully vested if the option holder is actually or constructively
terminated without cause during a two-year period following a change in control.
83
<PAGE>
AGGREGATED FISCAL YEAR-END OPTION VALUES
The following table shows certain information concerning the aggregate
number of unexercised options to purchase common stock held by the named
executive officers as of December 31, 1998. No options were exercised by the
named executive officers during 1998.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT
OPTIONS AT DECEMBER 31, 1998
DECEMBER 31, 1998 ------------------------
--------------------- EXERCISABLE/
EXERCISABLE/ UNEXERCISABLE
UNEXERCISABLE
<S> <C> <C>
Robert P. Keller.............................................. 25,792/338,508(1) 60,874/$329,402(2)
President and Chief
Executive Officer
John L. Gordon................................................ 0/15,000(1) 0/$0(2)
Executive Vice President, Eldorado Bank
Catherine C. Clampitt......................................... 0/5,000(1) 0/$0(2)
Executive Vice President, Eldorado Bank
William Rast.................................................. 0/5,000(1) 0/$0(2)
Executive Vice President, Eldorado Bank
Curt A. Christianssen......................................... 4,167/25,833(1) 6,172/$10,940(2)
Senior Vice President
</TABLE>
- ------------------------
(1) For information on the vesting schedule and exercise price per share see
"--Option Grants in Last Fiscal Year."
(2) Because of the lack of an active trading market in the common stock, such
calculation assumes a common stock value of $12.00 per share. See "Price
Range of Common Stock and Dividend Policy."
84
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains a summary of the grants of stock options made
during the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED
RATE OF
% OF TOTAL STOCK PRICE
NUMBER OF OPTIONS APPRECIATION
SECURITIES GRANTED TO FOR OPTION
UNDERLYING EMPLOYEES EXERCISE TERM (1)
OPTIONS IN FISCAL PRICE EXPIRATION -----------
NAME GRANTED YEAR ($/SH) (2) DATE 5% ($)
- --------------------------------------------------- ----------- --------------- ------------- ----------- -----------
John L. Gordon..................................... 15,000 9.7% 13.36 /2,500 8/01/04 7,942
Executive Vice President, Eldorado Bank 13.72 /2,500 7,042
14.10 /2,500 6,092
14.46 /2,500 5,192
14.86 /2,500 4,192
15.24 /2,500 3,242
Catherine C. Clampitt.............................. 5,000 3.2% 13.04 /833 12/31/03 2,533
Executive Vice President, Eldorado Bank 13.38 /833 2,250
13.76 /833 1,934
14.14 /833 1,617
14.54 /833 1,284
14.94 /835 953
William Rast....................................... 5,000 3.2% 13.36 /833 6/28/04 2,646
Executive Vice President, Eldorado Bank 13.72 /833 2,346
14.10 /833 2,030
14.46 /833 1,730
14.86 /833 1,397
15.24 /835 1,083
Curt A. Christianssen.............................. 5,000 3.2% 13.04 /833 12/31/03 2,533
Senior Vice President 13.38 /833 2,250
13.76 /833 1,934
14.14 /833 1,617
14.54 /833 1,284
14.94 /835 953
<CAPTION>
<S> <C>
NAME 10% ($)
- --------------------------------------------------- ---------
John L. Gordon..................................... 21,253
Executive Vice President, Eldorado Bank 20,353
19,403
18,503
17,503
16,553
Catherine C. Clampitt.............................. 6,846
Executive Vice President, Eldorado Bank 6,563
6,246
5,930
5,597
5,276
William Rast....................................... 7,081
Executive Vice President, Eldorado Bank 6,782
6,465
6,165
5,832
5,529
Curt A. Christianssen.............................. 6,846
Senior Vice President 6,563
6,246
5,930
5,597
5,276
</TABLE>
- ------------------------
(1) The potential realizable value of options granted to the named executive
officers is based upon the market value of the common stock on the date of
grant as determined by the Compensation Committee of the Company's Board of
Directors on the various dates of grant.
(2) Absent a change in control of the Company, as defined in the Option Plan,
each tranche of option shares will vest over four years, in half-year
increments, with the first portion vesting on the 18-month anniversary of
the date of grant. Upon a change in control, the exercisability of the
option is accelerated to such date. Following a change in control, the
exercise price with respect to any option shares exercised prior to their
original vesting date shall equal the exercise price for those option shares
that had a scheduled vesting date that was on or next preceding such
exercise date.
OTHER BENEFIT PLANS
The Company's executive officers are also entitled to short-term disability,
life, medical and dental insurance and to participate in the Company's 401(k)
retirement plan.
85
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of March 11, 1999
regarding (i) persons who are beneficial owners of more than 5% of the
outstanding equity securities of the Company, (ii) each director and each named
executive officer of the Company, (iii) all of the directors and executive
officers as a group and (iv) the selling shareholders.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED SHARES OF COMMON STOCK
PRIOR TO THE OFFERING, NUMBER OF BENEFICIALLY OWNED UPON
AS ADJUSTED(1) SHARES TO COMPLETION OF OFFERING(1)
------------------------------- BE ---------------------------
COMMON SOLD IN COMMON
STOCK PERCENTAGE(2) OFFERING STOCK PERCENTAGE(3)
-------------- --------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
PRINCIPAL SHAREHOLDERS, DIRECTORS AND
NAMED EXECUTIVE OFFICERS
Dartmouth Capital Group, L.P.
Dartmouth Capital Group, Inc.(4)....... 1,909,636 15.9% -- 1,909,636 13.4%
Ernest J. Boch(4)(5)..................... 1,574,014 13.1% -- 1,574,014 11.0%
Director
Madison Dearborn Capital
Partners II, L.P.(6)................... 1,442,907 11.8% -- 1,442,907 10.0%
Olympus Growth Fund II, L.P.
Olympus Executive Fund, L.P.(7)........ 1,442,907 11.8% -- 1,442,907 10.0%
Robert P. Keller(4)(8)................... 456,817 3.8% -- 523,928 3.6%
Director, President and Chief
Executive Officer
John J. Byrne(4)(9)...................... 290,597 2.4% -- 290,597 2.0%
James A. Conroy(10)...................... 1,442,907 11.8% -- 1,442,907 10.0%
Director
Mitchell A. Johnson(11).................. 64,691 * -- 64,691 *
Director
Edward A. Fox(4)(12)..................... 297,248 2.5% -- 297,248 2.1%
Chairman
Jefferson W. Kirby(4)(13)................ 279,500 2.3% -- 279,500 2.0%
Director
Charles E. Hugel(4)(14).................. 214,662 1.8% -- 214,662 1.5%
Director
K. Thomas Kemp(4)(15).................... 29,730 * -- 29,730 *
Director
John B. Pettway(4)....................... -- * -- -- *
Director
Henry T. Wilson(4)(16)................... 258,870 2.2% -- 258,870 1.8%
Director
Paul R. Wood(17)......................... 1,442,907 11.8% -- 1,442,907 10.0%
Director
John L. Gordon........................... 1,025 * -- 1,025 *
Executive Vice President
</TABLE>
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<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED SHARES OF COMMON STOCK
PRIOR TO THE OFFERING, NUMBER OF BENEFICIALLY OWNED UPON
AS ADJUSTED(1) SHARES TO COMPLETION OF OFFERING(1)
------------------------------- BE ---------------------------
COMMON SOLD IN COMMON
STOCK PERCENTAGE(2) OFFERING STOCK PERCENTAGE(3)
-------------- --------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Catherine C. Clampitt.................... 300 * -- 300 *
Executive Vice President
SBA Lending Division
William D. Rast.......................... -- * -- -- *
Executive Vice President
Mortgage Division
Richard Korsgaard........................ -- * -- -- *
Executive Vice President
Construction Loan Division and
CRA Officer
Curt A. Christianssen(18)................ 4,666 * -- 4,666 *
Senior Vice President
All directors and executive officers as a
group (19 persons). See notes (4), (8),
(9) (10), (11), (12), (13), (14), (15),
(16), (17), (18) and (19).............. 6,067,716 48.7% -- 6,134,826 41.7%
SELLING SHAREHOLDERS
John J. F. Sherrerd(20).................. 209,500 1.7% 209,500 -- *
MFA-MASTERS
Limited Partnership(21)................ 80,400 * 50,400 30,000 *
</TABLE>
- ------------------------
* Less than 1%
(1) Gives effect to a distribution by DCG to its partners of 1,099,981 shares
of common stock that will occur immediately prior to the completion of the
offering. Assumes the conversion of the Special Common Stock, non-voting
common stock and warrants exercisable within 60 days from March 11, 1999
into shares of voting common stock. The Special Common Stock will be
converted into voting common stock immediately prior to the completion of
the offering. See "Certain Transactions" and "Description of Capital
Stock."
(2) Based on an aggregate of 12,037,271 shares of common stock outstanding as
of March 11, 1999.
(3) Based on an aggregate of 14,278,382 shares of common stock outstanding,
including 12,037,271 shares outstanding as of March 11, 1999 and 2,174,000
shares of common stock to be issued in the offering.
(4) Each of Messrs. Boch, Byrne, Fox, Hugel, Keller, Kemp, Kirby, Sherrerd,
Wilson and George Wyper is a principal beneficial owner of the DCG General
Partner or an affiliate of such an owner. Pursuant to the terms of a
shareholder agreement, each is entitled to designate a director of the DCG
General Partner. With the exception of Mr. Byrne, who has designated Mr.
Pettway, and Mr. Sherrerd and Mr. Wyper, each of whom has not exercised his
designation rights, each of the aforementioned principal beneficial owners
of the DCG General Partner serves as a director thereof. As the sole
general partner of DCG, the DCG General Partner exercises sole control over
the voting and disposition of 1,900,636 shares of common stock held of
record by DCG. The DCG General Partner also holds 9,000 shares directly.
DCG and the DCG General Partner each have a business address c/o Eldorado
Bancshares, Inc., 24012 Calle de la Plata, Suite 340, Laguna Hills, CA
92653.
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(5) Such number of shares does not include 650,575 shares of voting common
stock owned indirectly by Mr. Boch as an investor in DCG, with respect to
which he disclaims beneficial ownership. Mr. Boch's address is Subaru of
New England, Inc., 95 Morse Street, Norwood, MA 02062.
(6) Includes (i) 815,516 shares of voting common stock, (ii) 463,913 shares of
non-voting common stock that are convertible into voting common stock and
(iii) 163,478 shares issuable upon the exercise of a common stock warrant
(assuming the fair market value of the common stock on the date of exercise
equals $11.50 per share). The maximum number of shares for which the
foregoing warrant could be exercised, if the market value of the common
stock increased to (or above) $24.00 per share, is 599,167. Shares of
non-voting common stock are convertible into shares of voting common stock
at the election of the holder provided that following such conversion, the
holder will beneficially own no more than 9.9% of the total shares of
voting common stock outstanding. Similarly, the shares of common stock
issuable upon exercise of the warrant may only be exercisable into shares
of voting common stock if the percentage ownership of Madison Dearborn
Capital Partners II, L.P. ("Madison Dearborn") of all outstanding voting
securities of the Company would not exceed 9.9%. Otherwise, such warrant is
exercisable for shares of non-voting common stock. See "Description of
Capital Stock" and "Certain Transactions." Madison Dearborn's sole general
partner is Madison Dearborn Partners II, L.P., whose sole general partner
is Madison Dearborn Partners, Inc. Several individuals, including Paul R.
Wood, a director of the Company, may be deemed to be the beneficial owner
of all of the securities owned by Madison Dearborn. Madison Dearborn's
address is Three First National Plaza, Suite 3900, Chicago, IL 60602.
(7) Includes (i) 815,516 shares of voting common stock, (ii) 463,913 shares of
non-voting common stock that are convertible into voting common stock and
(iii) 163,478 shares issuable upon the exercise of a common stock warrant
(assuming the fair market value of the common stock on the date of exercise
equals $11.50 per share). The maximum number of shares for which the
foregoing warrant could be exercised, if the market value of the common
stock increased to (or above) $24.00 per share, is 599,167. Shares of
non-voting common stock are convertible into shares of voting common stock
at the election of the holder provided that following such conversion, the
holder will beneficially own no more than 9.9% of the total shares of
voting common stock outstanding. The shares of common stock issuable upon
exercise of the warrant may only be exercisable into shares of voting
common stock if Olympus' percentage ownership of all outstanding voting
securities of the Company would not exceed 9.9%. Otherwise, such warrant is
exercisable for shares of non-voting common stock. See "Description of
Capital Stock" and "Certain Transactions." Presentation has been combined
for Olympus Growth Fund II, L.P. and Olympus Executive Fund, L.P.
(collectively, "Olympus"), as the general partners of the limited
partnerships (OGF II, L.P. and OEF, L.P., respectively) are under common
control. Several individuals, including James A. Conroy, a director of the
Company, may be deemed to be the beneficial owner of all of the securities
owned by Olympus. Olympus's address is Metro Center, One Station Place,
Stamford, CT 06902.
(8) Includes (i) 70,503 shares of common stock, (ii) 299,807 shares of
restricted stock issued to Mr. Keller prior to the offering and an
additional 67,111 shares of restricted stock issued to Mr. Keller as a
result of the offering pursuant to the terms of his employment agreement,
and (iii) 86,507 shares of voting common stock subject to employee stock
options exercisable within 60 days. Such number of shares does not include
90,511 shares of voting common stock owned indirectly by Mr. Keller as an
investor in DCG, with respect to which he disclaims beneficial ownership.
(9) Such number of shares does not include 126,475 shares of voting common
stock owned indirectly by Mr. Byrne as an investor in DCG, with respect to
which he disclaims beneficial ownership. Mr. Byrne's business address is
700 Bitner Street, Park City, UT 84098.
(10) Consists entirely of securities held by Olympus. See Note 7 of this table,
above. Mr. Conroy, indirectly through one or more companies, exercises
joint voting and dispositive control over the shares of common stock owned
of record by Olympus; however, he disclaims beneficial ownership of such
shares.
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(11) Mr. Johnson is an investor in DCG and such number of shares does not
include 28,013 shares of voting common stock owned indirectly by Mr.
Johnson as an investor in DCG, with respect to which he disclaims
beneficial ownership.
(12) Such number of shares does not include 115,394 shares of voting common
stock owned indirectly by Mr. Fox as an investor in DCG, with respect to
which he disclaims beneficial ownership.
(13) Such number of shares does not include 134,211 shares of voting common
stock owned indirectly by Mr. Kirby as an investor in DCG, with respect to
which he disclaims beneficial ownership.
(14) Shares beneficially owned by Mr. Hugel are held of record by the Hugel
Family Limited Partnership. Mr. Hugel has sole voting and dispositive power
with respect to the shares. Such number of shares does not include 80,796
shares of voting common stock owned indirectly by the Hugel Family Limited
Partnership as an investor in DCG, with respect to which it disclaims
beneficial ownership.
(15) Such number of shares does not include 15,625 shares of voting common stock
owned indirectly by Mr. Kemp as an investor in DCG, with respect to which
he disclaims beneficial ownership.
(16) Includes (i) 206,406 shares and 51,564 shares of voting common stock held
by Northwood Ventures LLC ("Northwood Ventures") and Northwood Capital
Partners LLC ("Northwood Capital"), respectively, of which Mr. Wilson is a
Managing Director and (ii) 900 shares held by Mr. Wilson directly. Mr.
Wilson disclaims beneficial ownership of common stock held by Northwood
Ventures and Northwood Capital. Such number of shares does not include (i)
81,431 shares and 20,409 shares of voting common stock owned indirectly by
Northwood Ventures and Northwood Capital, respectively, and (ii) 1,823
shares held by Mr. Wilson in directly, as investors in DCG, with respect to
which Northwood Ventures, Northwood Capital and Mr. Wilson disclaim
beneficial ownership.
(17) Consists entirely of securities held by Madison Dearborn. See Note 6 of
this table, above. Madison Dearborn's sole general partner is Madison
Dearborn Capital Partners II, whose sole general partner is Madison
Dearborn Partners, Inc. Mr. Wood is an executive officer of Madison
Dearborn Partners, Inc., however, he disclaims beneficial ownership of all
such shares.
(18) Includes (i) 500 shares of common stock and (ii) 4,166 shares of voting
common stock subject to employee stock options exercisable within 60 days.
(19) Includes 417,180 shares of common stock purchasable upon the exercise of
warrants or options that are currently exercisable or may be exercisable
within 60 days of the date of this prospectus.
(20) Mr. Sherrerd is a shareholder of the DCG General Partner and an investor in
DCG. Such number does not include 71,556 shares of voting common stock
owned indirectly by Mr. Sherrerd as an investor in DCG, with respect to
which he disclaims beneficial ownership. Mr. Sherrerd has elected not to
exercise his director designation rights as a shareholder of the DCG
General Partner. Mr. Sherrerd's business address is Sherrerd & Company, One
Tower Bridge, West Conshohocken, PA 09428.
(21) MFA-MASTERS Limited Partnership is an investor in DCG. Such number does not
include 138,662 shares of voting common stock owned by MFA-MASTERS as an
investor in DCG, with respect to which it disclaims beneficial ownership.
MFA-MASTERS' business address is One Liberty Square, Boston, MA 02109.
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CERTAIN TRANSACTIONS
TRANSACTIONS WITH CERTAIN SHAREHOLDERS
LOAN FROM DCG TO THE COMPANY. On March 27, 1998, DCG loaned to the Company
$540,000, substantially all of which was used by the Company for the redemption
on that date of certain subordinated debentures originally issued by the
Company's predecessor, SDN. The promissory note evidencing the loan (the "DCG
Note") is repayable in eight quarterly installments commencing June 30, 1998 and
bears interest at a fixed rate of 10.5%, which was equal to Eldorado Bank's
prime rate plus 2.0% at the time of the DCG Note. The DCG Note is prepayable at
any time without penalty. The Company intends to repay the DCG Note in full,
using proceeds of the offering, contemporaneously with the closing of the
offering.
REDEMPTION OF SERIES B PREFERRED STOCK. On June 6, 1997, as part of the
financing for the acquisition of Eldorado Bancorp, the Company issued shares of
11% Series B Preferred Stock, $100 liquidation value per share (the "Series B
Preferred Stock"), having an aggregate liquidation amount of $11,659,300. All of
the outstanding Series B Preferred Stock is currently held by two of the
Company's principal sharehholders (Madison Dearborn and Olympus) in
substantially equal proportions. See "Principal and Selling Shareholders."
The Series B Preferred Stock is redeemable pursuant to its terms at the
Company's option, at a redemption price of 103% of its liquidation amount, plus
accrued and unpaid dividends, or a total of $12,009,079 plus accrued and unpaid
dividends. Using proceeds of the offering, the Company intends to redeem all of
the outstanding Series B Preferred Stock contemporaneously with the closing of
the offering. The redemption of the Series B Preferred Stock is subject to the
prior approval of the Federal Reserve. The Company expects to obtain the
approval of the Federal Reserve for such redemption prior to the completion of
the offering.
CONVERSION OF SPECIAL COMMON STOCK. Most of the common stock held by
Madison Dearborn and Olympus prior to the offering is designated as "Special
Common Stock" under the Company's Certificate of Incorporation and is currently
entitled to a liquidation preference of $9.62 per share over the other common
stock. See "Descriptions of Capital Stock." Madison Dearborn and Olympus have
agreed with the Company to convert all of their Special Common Stock into common
stock prior to the closing of the offering.
AMENDMENT OF SHAREHOLDER AGREEMENT. The Company is a party to a Shareholder
Agreement, dated June 6, 1997 (the "Shareholder Agreement"), among itself,
Madison Dearborn, Olympus, DCG and certain shareholders of the DCG General
Partner. The Shareholder Agreement creates various rights in favor of, and
obligations on, its parties with respect to their direct and indirect
investments in the Company.
Immediately prior to completion of the offering, the parties to the
Shareholder Agreement intend to amend the Shareholder Agreement, eliminating
most of its operative provisions. The material provisions that will remain in
effect will provide as follows: (i) unless and until both Madison Dearborn and
Olympus hold 9.9% or less of the common stock (treating any common stock
equivalents that they hold as fully exercised), DCG may not transfer any common
stock or distribute any common stock to DCG's partners if, as a result of that
transfer or distribution, DCG would hold fewer shares of common stock than
either Madison Dearborn or Olympus; (ii) neither Madison Dearborn nor Olympus
will transfer any of its common stock (or warrants exercisable for common stock)
without the prior approval of the Federal Reserve unless certain exceptions
apply (which generally are intended to ensure that the transferee is not
acquiring a substantial ownership interest in the Company without the approval
of the Federal Reserve); and (iii) DCG will not sell any of its shares of common
stock during a limited period before or after certain
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registered offerings of the shares of common stock held by Madison Dearborn and
Olympus. See "Description of Capital Stock -- Registration Rights."
NOMINATION OF DIRECTORS UNDER SECURITIES AGREEMENT. Pursuant to the
agreement providing for the Madison Dearborn and Olympus investments in
connection with the acquisition of Eldorado Bancorp, the Company generally is
obligated to nominate designees of Madison Dearborn and Olympus for election to
the Company's Board of Directors. Nominees of each of Madison Dearborn (Paul R.
Wood) and Olympus (James A Conroy) have been nominated and elected, and
currently serve on the Company's Board of Directors. See "Management" and
"Principal and Selling Shareholders." The Company's obligation will terminate
when the amount of Company securities held by the applicable shareholder falls
below certain pre-designated levels.
FUNDING FOR ELDORADO ACQUISITION. Approximately $94.8 million of cash was
necessary to pay the cash consideration to holders of Eldorado Bancorp common
stock and stock options and acquisition-related expenses incurred by the
Company.
In conjunction with the financing of the acquisition of Eldorado Bancorp,
certain directors of the Company and other investors in DCG agreed to purchase
up to approximately $14.9 million of common stock at a price of $9.62 per share,
less a 1% commitment fee, to fund a portion of the acquisition. Approximately
$8.5 million of this commitment was invested by such investors with 886,558
shares of common stock issued to them at the $9.62 per share price (less a 1%
commitment fee). Of those shares, the following numbers of shares were purchased
by persons who were then directors of the Company, nominees to become directors
of the Company, or affiliates of the Company: (i) Ernest J. Boch (550,914
shares), Edward A. Fox (25,048 shares), Charles E. Hugel (8,713 shares), Robert
P. Keller (5,957 shares), K. Thomas Kemp (5,730 shares), each of whom was a
director of the Company in December 1996; (ii) Byrne & sons, l.p. (55,897
shares); (iii) Northwood Ventures LLC and Northwood Capital Partners LLC (a
total of 17,820 shares); and (iv) Mitchell A. Johnson (45,841 shares). John B.
Pettway and Henry T. Wilson are directors of the Company and in December 1996
were directors of the DCG General Partner. Mr. Pettway is the Chief Financial
Officer of Byrne & sons, l.p., and Mr. Wilson is a Managing Director of
Northwood Ventures LLC and Northwood Capital Partners LLC. Mr. Johnson became a
director of the Company in 1997 contemporaneously with the closing of the
acquisition. See "Principal and Selling Shareholders."
DCG purchased 506,122 of those shares of common stock for aggregate
consideration, net of a 1% commitment fee, of $4,419,793, of which $4.3 million
initially was made in the form of a loan to the Company in December 1996 to fund
an escrow account that would have been forfeited to Eldorado Bancorp if the
Company were unable to consummate its acquisition financing. Peter H. Paulsen,
then a director of the Company, loaned $200,000 to the Company on the same terms
as DCG. That $4.5 million was converted to shares of common stock upon the
consummation of the acquisition at a purchase price of $8.80 per share less the
1% commitment fee, and the interest on such loan (included in the purchase price
stated above) was converted to common stock at a purchase price of $9.62 per
share less the 1% commitment fee, which was the same price at which the
remaining shares of common stock and the Special Common Stock were sold by the
Company to fund the acquisition.
The Company also sold a total of 2,412,859 shares of Special Common Stock to
DCG, Madison Dearborn and Olympus at a gross purchase price of $9.62 per share,
representing an aggregate payment, net of a 1% commitment fee, of $22,984,570.
Neither Madison Dearborn nor Olympus is an affiliate of the other, and prior to
their investment in the Company, neither was an affiliate of the Company or DCG.
The Special Common Stock acquired by DCG, Madison Dearborn and Olympus had a
liquidation preference if, in the case of a liquidation or a change in control
of the Company, the distribution per share of common stock is less than $9.62.
DCG subsequently transferred its shares of Special Common Stock to Madison
Dearborn and Olympus. The Special Common Stock will be converted to common
stock, and the foregoing liquidation preference will be eliminated prior to the
closing of the offering.
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CSBI Capital Trust I (the "Trust"), a special purpose trust formed by the
Company, issued a total of 27,657 of its 11 3/4% Subordinated Capital Income
Securities, Series A, $1,000 initial liquidation amount per security (the
"Capital Securities"), to DCG, Madison Dearborn and Olympus for an aggregate
cash payment, net of a 1% commitment fee, of $27,386,368. The Trust in turn
invested the proceeds of the Capital Securities in a Subordinated Debenture
issued by the Company. DCG, Madison Dearborn and Olympus all subsequently sold
their Capital Securities to a group of unrelated third parties.
The Company issued a total of 116,593 shares of Series B Preferred Stock to
DCG, Madison Dearborn and Olympus for an aggregate amount of $11,545,210, net of
a 1% commitment fee. DCG subsequently sold all of its shares of Series B
Preferred Stock to Madison Dearborn and Olympus.
In connection with the purchase of the Series B Preferred Stock, each of
Madison Dearborn, Olympus and DCG purchased a common stock warrant
(collectively, the "Investor Warrants") that entitles the holder to purchase
shares of common stock at an exercise price of $9.62 per share. An aggregate of
2,000,000 shares of common stock are subject to the Investor Warrants; however,
the Investor Warrants must be exercised on a cashless basis. As a result,
assuming a fair market value for the common stock equal to $11.50 per share on
the date of exercise, the Investor Warrants would be exercisable for an
aggregate of approximately 326,960 shares. The Investor Warrants expire on June
6, 2007. The aggregate purchase price of the Investor Warrants was $40,000. DCG
subsequently sold its Investor Warrants to Madison Dearborn and Olympus.
LIBERTY ACQUISITION. As of March 27, 1996, DCG invested approximately $13.4
million in SDN to fund SDN's acquisition of Liberty. In exchange, SDN issued
1,696,202 shares of common stock at a price of $7.90 per share. In addition, SDN
issued a total of 19,850 shares of common stock to accredited investors
contemporaneously with the Liberty acquisition in exchange for cash or services
at a price of $10.37 per share.
CSB ACQUISITION. As of August 28, 1996, DCG invested approximately $14.5
million in SDN to fund the Company's acquisition of CSB. In exchange for that
investment, SDN issued 1,832,388 shares of common stock at a price per share of
$7.90.
OTHER MATTERS
Some of the executive officers of the Banks and their immediate families, as
well as the companies with which such directors and executive officers are
associated, are customers of, and have had banking transactions with one or both
of the Banks in the ordinary course of the Banks' business, and the Banks expect
to have such ordinary banking transactions with such persons in the future. In
the Company's opinion, all loans and commitments to lend included in such
transactions were made in compliance with applicable laws on substantially the
same terms, including interest rates and collateral, as those prevailing for
comparable transactions with other persons of similar creditworthiness and did
not involve more than a normal risk of collectibility or present other
unfavorable features. Although the Banks do not have any limits on the aggregate
amount it would be willing to lend to directors and officers as a group, loans
to individual directors and officers must comply with the Bank's lending
policies and statutory lending limits. There were no loans to executive officers
or directors of the Company at December 31, 1998.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the common stock and the Preferred
Stock of the Company does not purport to be complete and is subject to, and is
qualified in its entirety by, the provisions of the Company's Certificate of
Incorporation.
COMMON STOCK
GENERAL. As of the closing of the offering, the common stock of the Company
will consist of two classes, each having a par value of $.01 per share: voting
common stock and non-voting common stock. Upon completion of the offering, there
will be 35,000,000 shares of voting common stock authorized and 14,278,382
shares outstanding and 5,000,000 shares of non-voting common stock authorized
and no shares outstanding. All of the shares being offered pursuant to this
prospectus are shares of voting common stock. With the exception of voting
rights, the powers, preferences and rights of each of the classes of common
stock are identical, as summarized below.
DIVIDENDS. Except as limited by any series of Preferred Stock that may
hereafter be issued, the Company may pay dividends on the voting common stock
and the non-voting common stock as declared from time to time by its Board of
Directors out of funds legally available therefor. With certain exceptions, a
Delaware corporation (such as the Company) may pay dividends only out of (i) its
surplus (as defined under the Delaware General Corporation Law ("DGCL")), or
(ii) if there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or the preceding year. The Company's principal source
of cash flow for the payment of dividends will be dividends from the Banks,
which are subject to substantial regulatory restrictions on the payment of
dividends. See "Risk Factors -- No present intention to pay dividends;
Restrictions on payment of dividends by the Banks to Eldorado; Prohibition on
dividends by Eldorado Bank to Eldorado without prior regulatory approval" and
"Supervision and Regulation."
VOTING RIGHTS. Except as may be provided with respect to any series of
Preferred Stock that may be issued after the date of this prospectus, the
holders of the voting common stock possess exclusive voting rights. The
non-voting common stock is not entitled to vote in any matter, excepting only
amendments to the Company's Certificate of Incorporation adversely affecting the
rights of the non-voting common stock. Each holder of voting common stock is
entitled to one vote for each share held on all matters voted upon by
shareholders. Shareholders are not permitted to cumulate votes in elections of
directors. Action by the holders of voting common stock may be taken by written
consent only if the matter to be voted upon has been approved by the Board of
Directors.
LIQUIDATION. Subject to any prior rights that may be granted to the holders
of any shares of Preferred Stock that may be outstanding as of the applicable
time, in the event of any liquidation, dissolution or winding up of the Company,
the holders of the common stock would be entitled to receive, after payment of
all debts and liabilities of the Company, all assets of the Company that are
available for distribution. See "-- Effect of Capital Securities on Common
Stock."
CONVERSION. Non-voting common stock is convertible at any time at the
election of the holder into voting common stock, except that at no time may a
holder of non-voting common stock convert such shares into voting common stock
if such conversion of shares would result in such holder beneficially owning
more that 9.9% of the voting common stock then outstanding.
PROPOSED RECLASSIFICATION. As reflected in the Company's Supplemental
Consolidated Financial Statements and Consolidated Financial Statements, as of
December 31, 1998, the common stock was divided into several classes consisting
of (i) Special Common Stock, having a liquidation preference of $9.62 per share,
a portion of which consisted of Voting Special Common Stock and a portion of
which consisted of Non-voting Special Common Stock, (ii) voting common stock
(designated as "Class B Common Stock"), and (iii) non-voting common stock
(designated as "Class C Common Stock"). Madison Dearborn and Olympus, as the
holders of the Special Common Stock, and the Company have agreed that
immediately prior to the completion of the offering, the Special Common Stock
will be converted into
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Class B Common Stock, and the common stock will then be consolidated into two
classes, consisting of the voting common stock offered hereby and non-voting
common stock. See "Certain Transactions" and "Capitalization."
PREFERRED STOCK
SERIES B PREFERRED STOCK. The Company currently has 116,593 shares of
Series B Preferred Stock outstanding, which are held by two of the Company's
principal shareholders. See "Principal and Selling Shareholders." The Company
has agreed to redeem the Series B Preferred Stock upon completion of the
offering. See "Use of Proceeds."
OTHER SERIES OF PREFERRED STOCK. Upon completion of the offering, there
will be 1,500,000 shares of Preferred Stock authorized, of which no shares will
be outstanding. The Company's Board of Directors has the authority to determine
the powers, rights and preferences of any other series of Preferred Stock issued
by the Company without the approval of the holders of common stock, at the time
of the issuance, which may include, among other things, rights in liquidation,
rights to participating dividends, voting rights and rights to convert to common
stock.
The rights, preferences, privileges, and restrictions or qualifications of
different series of Preferred Stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions, and other matters. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to holders of common stock or could adversely affect the rights and
powers, including voting rights, of holders of common stock.
The existence of the Preferred Stock, and the power of the Board of
Directors to set its terms and issue a series of Preferred Stock at any time
without shareholder approval, could have certain anti-takeover effects. These
effects include that of making the Company a less attractive target for a
"hostile" takeover bid, discouraging the making of a merger proposal or
rendering it more difficult either to assume control of the Company through the
acquisition of a large block of common stock or to remove incumbent management,
even if such actions could be beneficial to the shareholders of the Company.
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the DGCL which, with certain
exceptions, prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any "interested" shareholder for a period of
three years following the date that such shareholder became an interested
shareholder, unless: (i) prior to such date, the Board of Directors of the
corporation approved either the business combination or the transaction that
resulted in the shareholder becoming an interested shareholder, (ii) upon
consummation of the transaction that resulted in the shareholder becoming an
interested shareholder, the interested shareholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and officers and
(b) by employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer, or (iii) on or after such date, the
business combination is approved by the Board of Directors and authorized at an
annual or special meeting of shareholders by the affirmative vote of at least
66 2/3% of the outstanding voting stock that is not owned by the interested
shareholder. An "interested" shareholder is defined as any person that is (a)
the owner of 15% or more of the outstanding voting stock of the corporation or
(b) an affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested shareholder.
REGISTRATION RIGHTS
The Company has agreed to register under the Securities Act, the resale
under certain circumstances, of shares of common stock held by DCG, Madison
Dearborn, Olympus, certain directors and other
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<PAGE>
shareholders. The various registration rights agreements generally obligate the
Company to effect one or more such registrations at the request of DCG, Madison
Dearborn or Olympus or to permit those shareholders and the other beneficiaries
of those agreements to include their shares, subject to certain limitations, in
one or more registrations initiated by the Company. The Company has generally
agreed to bear all fees and expenses incurred by it in connection with any
registration, as well as the fees and expenses of one counsel for the selling
shareholders. The Company has also agreed to indemnify the selling shareholders
against certain liabilities in connection with any registration of the common
stock, including liabilities under the Securities Act.
EFFECT OF CAPITAL SECURITIES ON COMMON STOCK
GENERAL. In connection with the acquisition of Eldorado Bancorp, CSBI
Capital Trust I, a subsidiary of the Company (the "Trust"), issued to third
parties an aggregate principal amount of $27.7 million in 11 3/4% Subordinated
Capital Income Securities, Series A (the "Capital Securities"), which represent
undivided beneficial ownership interests in the assets of the Trust. The sole
asset of the Trust is $27.7 million of 11 3/4% Junior Subordinated Debentures
(the "Subordinated Debentures") issued by the Company to the Trust. The terms of
the Subordinated Debentures and the Capital Securities are materially the same,
and payments to the Trust under the Subordinated Debentures are passed through
the Trust to the holders of the Capital Securities. In addition to its
obligations under the Subordinated Debentures, the Company has also guaranteed
certain payments on the Capital Securities to the extent the Trust has funds
available therefor.
ACCOUNTING AND REGULATORY TREATMENT. For financial reporting purposes, the
Trust is treated as a subsidiary of the Company, and accordingly, the accounts
of the Trust are included in the Supplemental Consolidated Financial Statements
and the Consolidated Financial Statements of the Company. The Capital Securities
are presented as a liability on supplemental consolidated balance sheet and the
consolidated balance sheet of the Company as a separate line item under the
caption "Subordinated Debentures" and disclosure about the Capital Securities
and the Subordinated Debentures are included in the notes to the consolidated
financial statements. For financial reporting purposes, the Company records
distributions payable on the Capital Securities as an interest expense in its
consolidated statements of income.
Under current Federal Reserve regulations, the Capital Securities are
treated as Tier 1 capital of the Company for regulatory capital purposes. See
"Supervision and Regulation."
LIQUIDATION PREFERENCE RELATIVE TO COMMON STOCK. In the event of any
liquidation, dissolution or winding up of the Company, the holders of the
Capital Securities are entitled to receive payment prior to the holders of the
common stock.
DISTRIBUTIONS PAYABLE ON CAPITAL SECURITIES. Interest is payable by the
Company on the Subordinated Debentures (and, in turn, distributions are payable
by the Trust on the Capital Securities) on a quarterly basis at an annual rate
of 11 3/4%. The Company has the right to defer payment of interest on the
Subordinated Debentures for a period not to exceed 20 consecutive quarterly
periods. As a consequence of any such extension, quarterly distributions on the
Capital Securities will be deferred by the Trust for such period. During any
such deferral period, the Company may not, among other things, declare or pay
any dividend or distribution on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock,
including, without limitation, the common stock.
REDEMPTION. The Capital Securities will be redeemed upon the redemption of
the Subordinated Debentures. The Subordinated Debentures are redeemable at the
option of the Company after June 6, 2007 at a redemption premium initially equal
to 105.875% of the liquidation amount of the securities (the principal amount
plus accrued and unpaid interest) and declining over 10 years ratably to 100%
thereof. In addition, upon the occurrence of a Regulatory Capital Event (a
regulatory shift affecting the Company's ability to treat the Capital Securities
as Tier 1 Capital), a Tax Event (a regulatory shift affecting the
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<PAGE>
Company's ability, among other things, to deduct interest payable on the
Subordinated Debentures) or an Investment Company Event (a regulatory shift
whereby the Trust would be required to be treated as an investment company under
the Investment Company Act), the Company would be required to repurchase the
Subordinated Debentures at the greater of their principal amount or the present
value of their principal amount plus scheduled interest payments for their
remaining life and the premium payable pursuant option redemption thereof.
96
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 14,278,382 shares of
common stock outstanding, and 2,940,433 shares of common stock issuable upon the
exercise of outstanding warrants and options. Of the shares outstanding upon
completion of the offering, a total of approximately 4,999,000 shares, including
the shares sold pursuant to the offering, will be freely tradeable without
restriction under the Securities Act, except for any shares purchased by an
"affiliate" (as that term is defined in Rule 144) of the Company, which shares
will be subject to the resale limitations of Rule 144 of the Securities Act. The
remaining shares outstanding upon the completion of the offering may be resold
publicly only upon registration under the Securities Act or in compliance with
an exemption from the registration requirements of the Securities Act, including
the exemption provided by Rule 144 or Rule 145. In connection with the January
22, 1999 acquisition of Antelope Valley Bank, those individuals who were
directors, executive officers or principal shareholders of Antelope at the time
of the acquisition have agreed not to sell shares of common stock until the date
on which the Company publishes its results of operations for the three months
ending March 31, 1999. Those individuals received an aggregate of approximately
855,000 shares of the Company's common stock in the Antelope acquisition. In
addition, those individuals will be subject to the resale limitations of Rule
145 until January 22, 2000. Beginning June 6, 1999, an additional 673,000 shares
of common stock that were issued in connection with the June 1997 acquisition of
Eldorado Bancorp will become freely tradeable without restriction under the
Securities Act.
Included in the amount of shares of common stock issuable upon the exercise
of outstanding warrants and options are 2,241,216 shares of common stock
purchasable upon the exercise of outstanding warrants, which shares upon
exercise will constitute restricted securities within the meaning of Rule 144
and will be eligible for sale in the open market subject to the applicable
requirements of Rule 144 described below. The warrants will be automatically
exercised if the market value (as defined) is greater than $24.00. In addition,
the warrants will be automatically exercised upon the later of (a) completion of
a "qualified offering" (as defined) or (b) the first business day on which the
market value equals or exceeds $19.24. As defined in the warrants, the "market
value" of the common stock will be equal to the average closing price for the
preceding 30 days on the Nasdaq National Market or, if then applicable, the
principal national securities exchange on which the common stock is traded. A
"qualified offering" is defined in the warrants as a firm-commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act covering the offer and sale of common stock to the
public at an offering price per share (prior to any underwriting discount or
commission) of at least $19.62 in which either (x) the aggregate offering price
of shares sold by the Company is not less than $25 million, or (y) the aggregate
offering price of all shares sold in the offering, including those sold by the
Company and those sold by other stockholders is not less than $30 million of
which the aggregate offering price of shares sold by the Company is not less
than $20 million. See "Certain Transactions" for a description of other
limitations on the exercise of those warrants. Two of the Company's principal
shareholders (Madison Dearborn and Olympus) are entitled to cause the Company to
register under the Securities Act the resale of up to 2,000,000 shares of common
stock purchasable upon the exercise of two of those warrants. See "Description
of Capital Stock -- Registration Rights."
Upon completion of the offering, there will be 699,216 shares of common
stock issuable upon the exercise of outstanding options under the Company's
Option Plan and 355,226 additional shares of common stock reserved for future
award or grant under such plan. See "Executive Compensation -- 1997 Stock Option
Plan." The Company has filed a registration statement on Form S-8 to register
shares of common stock for issuance under the Option Plan. Common stock issued
pursuant to such registration statement upon exercise of outstanding vested
options granted pursuant to the Option Plan, other than common stock issued to
affiliates of the Company, is available for immediate resale in the open market.
In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which restricted securities were acquired from
the Company and the date on which they were acquired
97
<PAGE>
from an affiliate, then the holder of such restricted securities (including an
affiliate) is entitled to sell that number of shares within any three-month
period that does not exceed the greater of (i) one percent of the then
outstanding shares of the common stock or (ii) the average weekly reported
volume of trading of the common stock during the four calendar weeks preceding
such sales. Sales under Rule 144 also are subject to certain requirements
pertaining to the manner of such sales, notices of such sales and the
availability of current public information concerning the Company. Any shares
not constituting restricted securities sold by affiliates must be sold in
accordance with the foregoing volume limitations and other requirements but
without regard to the one year holding period. Under Rule 144(k), if a period of
at least two years has elapsed from the later of the date on which restricted
securities were acquired from the Company and the date on which they were
acquired from an affiliate, a holder of such restricted securities who is not an
affiliate at the time of the sale and has not been an affiliate for at least
three months prior to the sale would be entitled to sell the shares immediately
and without regard to the volume limitations and other conditions described
above. As of the date of this prospectus, all of the shares of common stock that
are restricted securities under Rule 144 will have been held for more than one
year. In addition, affiliates of a company acquired by the Company are subject
for one year to the resale limitations of Rule 145, including the volume
limitations of Rule 144 described above as well as certain requirements
pertaining to the manner of sale and the availability of current public
information concerning the Company. See "Risk Factors -- Possible future sale of
shares could adversely affect prevailing market prices for our stock."
The Company, its directors, executive officers and principal shareholders
have agreed that they will not offer, sell, contract to sell, pledge, grant any
option for the sale of, or otherwise dispose or cause the disposition of any
shares of common stock, or securities convertible into or exchangeable or
exercisable for such shares, for a period of 180 days after the date of this
prospectus without the prior written consent of Keefe, Bruyette & Woods, Inc.,
except for (i) in the case of the Company, the grant of options under the Option
Plan or in connection with acquisitions, and (ii) in the case of directors,
executive officers and the Principal Shareholders and certain other
shareholders, the exercise of common stock warrants and management stock options
pursuant to the Option Plan and shares of common stock disposed of as bona fide
gifts or for estate planning purposes, subject in each case to any remaining
portion of the 180-day period applying to shares so issued or transferred. In
evaluating any request for a waiver of the 180-day lock-up period, Keefe,
Bruyette & Woods, Inc. will consider, in accordance with their customary
practice, all relevant facts and circumstances at the time of the request,
including, without limitation, the recent trading market for the common stock,
the size of the request and, with respect to a request by the Company to issue
additional equity securities, the purpose of such an issuance.
Sales of substantial amounts of common stock by existing shareholders could
have an adverse effect on the prevailing market price of the common stock. No
predictions can be made as to the effect, if any, that market sales of shares by
existing shareholders or the availability of such shares for future sales will
have on the market price of shares of common stock prevailing from time to time.
98
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Purchase Agreement among the
Company, the selling shareholders and Keefe, Bruyette & Woods, Inc. as
representative (the "Representative"), on behalf of the Underwriters, the
Underwriters named below have severally agreed to purchase from the Company and
the selling shareholders, the following respective numbers of shares of common
stock at the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Keefe, Bruyette & Woods, Inc...................................................................
-----------------
Total.................................................................................... 2,433,900
-----------------
-----------------
</TABLE>
The Purchase Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters will purchase
all such shares of the common stock if any of such shares are purchased. The
Underwriters are obligated to take and pay for all of the shares of common stock
offered hereby (other than those covered by the over-allotment option described
below) if any are taken.
The Company has been advised by the Representative of the Underwriters that
the Underwriters propose to offer such shares of common stock to the public at
the public offering price set forth on the cover page of this prospectus and to
certain dealers at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain other dealers. After the initial public
offering, the offering price and other selling terms may be changed by the
Representative of the Underwriters.
Pursuant to the Purchase Agreement, the Company has granted to the
Underwriters an option, exercisable not later than 30 days after the date of
this prospectus, to purchase up to 365,000 additional shares of common stock at
the public offering price, less the underwriting discounts and commissions set
forth on the cover page of this prospectus, solely to cover over-allotments. To
the extent that the Underwriters exercise such option, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to the total number of shares in
such table, and the Company will be obligated, pursuant to the option, to sell
such shares to the Underwriters.
The Company and each of its directors, executive officers and principal
shareholders have agreed with the Representative not to sell or otherwise
dispose of any shares of common stock, or any securities convertible into or
exercisable or exchangeable for shares of common stock, for a period of 180 days
after the date of this prospectus without the prior written consent of the
Representative, except for: (i) in the case of the Company, the grant of options
or restricted stock under management compensation arrangements or in connection
with acquisitions and (ii) in the case of such holders, the exercise of common
stock warrants and management stock options pursuant to the Option Plan and
shares of common stock disposed of as bona fide gifts or for estate planning
purposes, subject, in each case, to any remaining portion of the 180-day period
applying to any shares so issued or transferred.
The Representative has advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
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<PAGE>
The Company and the selling shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
Until the distribution of the common stock is completed, rules of the SEC
may limit the ability of the Underwriters and certain selling group members to
bid for and purchase the common stock. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize the
price of the common stock. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the common stock.
If the Underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell a greater aggregate number of
shares of common stock than is set forth on the cover page of this prospectus,
the Underwriters may reduce the short position by purchasing shares of common
stock in the open market. The Underwriters may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase common stock in the open
market to reduce the selling group members' short position or to stabilize the
price of the common stock, they may reclaim the amount of the selling concession
from the selling group members who sold those shares of common stock as part of
the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor the Representative makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
the Company nor the Representative makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Underwriters and dealers may engage in passive market making
transactions in the shares of common stock in accordance with Rule 103 of
Regulation M promulgated by the SEC. In general, a passive market maker may not
bid for, or purchase, shares of common stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
common stock during a specified two month prior period, or 200 shares, whichever
is greater. A passive market maker must identify passive market making bids as
such on the Nasdaq electronic inter-dealer reporting system. Passive market
making may stabilize or maintain the market price of the common stock above
independent market levels. Underwriters and dealers are not required to engage
in passive market making and may end passive market making activities at any
time.
Trading in the common stock has been extremely limited prior to the offering
and cannot be characterized as amounting to an established public trading
market. Eldorado has been quoted on the Nasdaq National Market since February 1,
1999 under the symbol "ELBI." Prior to the offering, there has been no public
market for the common stock. Consequently, the public offering price for the
common stock will be determined by negotiations between the Company and the
Representative of the Underwriters. Among the factors to be considered in
determining the public offering price of the common stock will be the prevailing
market for the common stock and general economic conditions, the market
capitalizations, trading histories and stages of development of other traded
companies that the Company and the Representative believe to be comparable to
the Company, the results of operations of the Company in recent periods, the
current financial position of the Company, estimates of the business potential
of the Company and the present state of the Company's development and the
availability for sale in the market of a significant number of shares of common
stock. Additionally, consideration will be given to the general
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<PAGE>
status of the securities market, the market conditions for new issues of
securities and the demand for securities of comparable companies at the time the
offering is made.
LEGAL MATTERS
Certain legal matters, including the validity of the common stock, have been
passed upon for the Company by Nutter, McClennen & Fish, LLP, Boston,
Massachusetts, and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom
LLP, New York, New York. Michael K. Krebs, the Secretary of the Company, is a
partner of Nutter, McClennen & Fish, LLP.
EXPERTS
The supplemental consolidated financial statements and consolidated
financial statements of Eldorado Bancshares, Inc. (formerly known as Commerce
Security Bancorp, Inc.) as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 (File No.
333-61589) under the Securities Act and the rules and regulations promulgated
thereunder with respect to the common stock offered hereby. This prospectus
omits certain information contained in the registration statement or in any
amendments to the registration statement, and you should look at the
registration statement and the exhibits and schedules thereto for further
information with respect to Eldorado and the common stock offered hereby.
Statements contained in this prospectus concerning the provisions or contents of
any contract, agreement or any other document are not necessarily complete with
respect to each such contract, agreement or document filed as an exhibit to the
registration statement, and reference is made to the exhibit for a more complete
description of the matters involved.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any materials that we file at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. We file information electronically with
the SEC. The SEC maintains an Internet site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the SEC. The address of the SEC's Internet site is http://
www.sec.gov.
The Company furnishes its stockholders with annual reports containing
audited consolidated financial statements and an opinion thereon expressed by an
independent public accounting firm.
101
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
- ----------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Supplemental Audited Financial Statements
Report of Independent Accountants........................................................................ F-2
Supplemental Consolidated Statement of Condition as of December 31, 1998 and 1997........................ F-3
Supplemental Consolidated Statement of Income for the Years ended December 31, 1998, 1997 and 1996....... F-5
Supplemental Consolidated Statement of Shareholders' Equity for the Years ended December 31, 1998, 1997
and 1996............................................................................................... F-7
Supplemental Consolidated Statement of Cash Flows for the Years ended December 31, 1998, 1997 and 1996... F-8
Notes to Supplemental Consolidated Financial Statements -- December 31, 1998, 1997 and 1996.............. F-10
Audited Financial Statements
Report of Independent Accountants........................................................................ F-45
Consolidated Statement of Condition as of December 31, 1998 and 1997..................................... F-46
Consolidated Statement of Income for the Years ended December 31, 1998, 1997 and 1996.................... F-48
Consolidated Statement of Shareholders' Equity for the Years ended December 31, 1998, 1997 and 1996...... F-50
Consolidated Statement of Cash Flows for the Years ended December 31, 1998, 1997 and 1996................ F-51
Notes to Consolidated Financial Statements -- December 31, 1998, 1997 and 1996........................... F-53
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Eldorado Bancshares, Inc.
We have audited the accompanying supplemental consolidated statement of
condition of Eldorado Bancshares, Inc. (formerly Commerce Security Bancorp,
Inc.) and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the
related supplemental consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. These supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental 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
misstatements. 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.
The supplemental consolidated financial statements give retroactive effect to
the acquisition of Antelope Valley Bank by Eldorado Bancshares, Inc., which has
been accounted for as a pooling-of-interests as described in Note 1 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation. However, they will become the historical
consolidated financial statements of Eldorado Bancshares, Inc. and subsidiaries
after financial statements covering the date of consummation of the business
combination are issued.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Eldorado Bancshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
/s/ PricewaterhouseCoopers LLP
Los Angeles, CA
March 1, 1999
F-2
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks....................................... $ 122,540,000 $ 99,477,000
Federal funds sold............................................ 19,300,000 44,380,000
Interest bearing deposits in other financial institutions..... 1,863,000 1,962,000
Available-for-sale investment securities...................... 250,463,000 103,936,000
Mortgage loans held for sale.................................. 248,833,000 96,230,000
Loans and leases, net......................................... 632,911,000 625,780,000
Premise and equipment, net.................................... 12,383,000 13,759,000
Real estate acquired through foreclosure, net................. 1,583,000 2,760,000
Intangibles arising from acquisition, net..................... 67,378,000 70,903,000
Accrued interest receivable and other assets.................. 40,296,000 32,827,000
-------------- --------------
Total assets.............................................. $1,397,550,000 $1,092,014,000
-------------- --------------
-------------- --------------
</TABLE>
See notes to supplemental consolidated financial statements.
F-3
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CONDITION (CONTINUED)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand:
Non-interest bearing...................................... $ 313,891,000 $ 338,200,000
Interest bearing.......................................... 154,948,000 129,717,000
Savings:
Regular................................................... 317,285,000 118,307,000
Money market.............................................. 119,836,000 119,410,000
Time:
Under $100,000............................................ 198,362,000 135,475,000
$100,000 or more.......................................... 117,165,000 91,961,000
-------------- --------------
Total deposits.......................................... 1,221,487,000 933,070,000
Federal funds purchased....................................... 5,900,000 2,050,000
Due to related parties........................................ 338,000 --
Subordinated debentures....................................... 27,657,000 27,657,000
Mandatory convertible debentures.............................. -- 537,000
Accrued expenses and other liabilities........................ 22,635,000 14,284,000
-------------- --------------
Total liabilities....................................... 1,278,017,000 977,598,000
Shareholders' equity:
Preferred stock, $.01 par value, 1,500,000 shares
authorized; 116,593 issued and outstanding at December 31,
1998 and 1997............................................. 11,659,000 11,659,000
Special common stock, $.01 par value, 9,651,600 shares
authorized, 2,412,859 issued and outstanding at December
31, 1998 and 4,825,718 at 1997............................ 24,000 48,000
Common stock, $.01 par value, 35,000,000 shares authorized;
9,542,454 issued and outstanding at December 31, 1998 and
19,084,909 at December 31, 1997........................... 96,000 191,000
Additional paid-in capital.................................. 87,543,000 87,424,000
Retained earnings........................................... 20,591,000 16,459,000
Unearned compensation....................................... (1,006,000) (1,509,000)
Accumulated other comprehensive income...................... 626,000 144,000
-------------- --------------
Total shareholders' equity.............................. 119,533,000 114,416,000
-------------- --------------
Total liabilities and shareholders' equity.............. $1,397,550,000 $1,092,014,000
-------------- --------------
-------------- --------------
</TABLE>
See notes to supplemental consolidated financial statements.
F-4
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans.................................. $ 71,182,000 $ 53,511,000 $ 23,548,000
Income from lease finance receivables....................... 6,661,000 4,127,000 1,601,000
Interest and dividend on securities......................... 7,790,000 7,330,000 3,484,000
Interest on Federal funds sold.............................. 3,319,000 1,737,000 1,358,000
Interest on deposits with other financial institutions...... 99,000 154,000 168,000
------------ ------------ ------------
Total interest income..................................... 89,051,000 66,859,000 30,159,000
Interest expense:
Interest bearing demand..................................... 1,964,000 1,612,000 876,000
Money market................................................ 4,001,000 2,839,000 922,000
Savings..................................................... 11,169,000 5,496,000 1,429,000
Time........................................................ 13,428,000 11,677,000 7,084,000
Debentures.................................................. 3,310,000 1,908,000 74,000
Federal funds purchased..................................... 806,000 563,000 --
------------ ------------ ------------
Total interest expense.................................... 34,678,000 24,095,000 10,385,000
------------ ------------ ------------
Net interest income....................................... 54,373,000 42,764,000 19,774,000
Provision for loan and lease losses........................... 5,552,000 2,549,000 1,215,000
------------ ------------ ------------
Net interest income after provision for loan and lease
losses.................................................... 48,821,000 40,215,000 18,559,000
Non-interest income:
Service charges on deposit accounts......................... 6,456,000 5,562,000 2,984,000
Gain on sale of mortgage loans.............................. 11,994,000 6,887,000 1,727,000
SBA loan servicing.......................................... 2,539,000 2,353,000 1,519,000
Other income................................................ 4,899,000 4,327,000 3,186,000
------------ ------------ ------------
Total non-interest income................................. 25,888,000 19,129,000 9,416,000
Non-interest expense:
Salaries and employee benefits.............................. 27,600,000 20,990,000 10,976,000
Occupancy and equipment..................................... 8,423,000 7,012,000 3,776,000
Professional, regulatory and other services................. 1,983,000 1,710,000 1,116,000
Legal....................................................... 1,527,000 1,530,000 530,000
Insurance................................................... 811,000 729,000 447,000
Losses and carrying cost of OREO............................ 219,000 395,000 293,000
Provision for recourse obligation........................... -- 2,021,000 --
Amortization of goodwill and other intangibles.............. 3,996,000 2,881,000 268,000
Other....................................................... 18,718,000 13,132,000 6,523,000
------------ ------------ ------------
Total non-interest expense................................ 63,277,000 50,400,000 23,929,000
------------ ------------ ------------
Income before taxes........................................... 11,432,000 8,944,000 4,046,000
Income tax benefit (provision)................................ (6,018,000) (4,034,000) 373,000
------------ ------------ ------------
Net income.................................................... $ 5,414,000 $ 4,910,000 $ 4,419,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to supplemental consolidated financial statements.
F-5
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income available to common shareholders................... $4,132,000 $4,179,000 $4,419,000
Earnings per share (basic).................................... $0.35 $0.21 $0.41
Earnings per share (diluted).................................. $0.33 $0.18 $0.41
</TABLE>
See notes to supplemental consolidated financial statements.
F-6
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
SPECIAL COMMON STOCK CLASS B COMMON STOCK
PREFERRED STOCK ---------------------------------- ---------------------
------------------------ ADDITIONAL
NUMBER OF PREFERRED NUMBER OF COMMON PAID-IN NUMBER OF COMMON
SHARES STOCK SHARES STOCK CAPITAL SHARES STOCK
----------- ----------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........ -- -- -- -- -- 6,458,697 $ 65,000
Fractional share adjustment......... -- -- -- -- -- 34 --
Cash dividend on fractional shares.. -- -- -- -- -- -- --
Issuance of common stock--Liberty... -- -- -- -- -- 3,432,105 34,000
Issuance of common stock--
Commerce.......................... -- -- -- -- -- 5,369,824 54,000
Comprehensive income:
Unrealized gain on securities
available for sale, net of
tax............................. -- -- -- -- -- -- --
Net income........................ -- -- -- -- -- -- --
Total comprehensive income
----------- ----------- ---------- --------- ----------- ---------- ---------
Balance at December 31, 1996........ -- -- -- -- -- 15,260,660 $ 153,000
Issuance of preferred stock--
Eldorado.......................... 116,593 11,659,000
Issuance of common stock--
Eldorado.......................... -- -- 4,825,718 48,000 23,164,000 3,820,875 38,000
Issuance of restricted stock........ 427,556 4,000
Compensation expense................
Cancellation of shares--Paulsen..... -- -- -- -- -- (424,182) (4,000)
Comprehensive income:
Unrealized gain on securities
available for sale, net of
tax............................. -- -- -- -- -- -- --
Net income........................ -- -- -- -- -- -- --
Total comprehensive income
Preferred dividends................. -- -- -- -- -- -- --
----------- ----------- ---------- --------- ----------- ---------- ---------
Balance at December 31, 1997........ 116,593 $11,659,000 4,825,718 $ 48,000 $23,164,000 19,084,909 $ 191,000
Stock split (1 for 2)............... -- -- (2,412,859) (24,000) 24,000 (9,542,455) (95,000)
Compensation expense................ -- -- -- -- -- -- --
Comprehensive income:
Unrealized gain on securities
available for sale, net of
tax............................. -- -- -- -- -- -- --
Net income........................ -- -- -- -- -- -- --
Total comprehensive income........
Preferred dividends -- -- -- -- -- -- --
----------- ----------- ---------- --------- ----------- ---------- ---------
Balance at December 31, 1998........ 116,593 $11,659,000 2,412,859 $ 24,000 $23,188,000 9,542,454 $ 96,000
----------- ----------- ---------- --------- ----------- ---------- ---------
----------- ----------- ---------- --------- ----------- ---------- ---------
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER RETAINED
PAID-IN UNEARNED COMPREHENSIVE EARNINGS
CAPITAL COMPENSATION INCOME (DEFICIT) TOTAL
----------- ------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995........ $11,162,000 -- $ 350,000 $ 7,863,000 $ 19,440,000
Fractional share adjustment......... -- -- -- -- --
Cash dividend on fractional shares.. -- -- (3,000) (3,000)
Issuance of common stock--Liberty... 13,373,000 -- -- 13,407,000
Issuance of common stock--
Commerce.......................... 21,428,000 -- -- 21,482,000
Comprehensive income:
Unrealized gain on securities
available for sale, net of
tax............................. -- (250,000) -- (250,000)
Net income........................ -- -- -- 4,419,000 4,419,000
------------
Total comprehensive income 4,169,000
----------- ------------- -------------- ----------- ------------
Balance at December 31, 1996........ $45,963,000 -- $ 100,000 $12,279,000 $ 58,495,000
Issuance of preferred stock--
Eldorado.......................... 11,659,000
Issuance of common stock--
Eldorado.......................... 17,966,000 41,216,000
Issuance of restricted stock........ 2,008,000 (2,012,000) --
Compensation expense................ 503,000 503,000
Cancellation of shares--Paulsen..... (1,677,000) (1,681,000)
Comprehensive income:
Unrealized gain on securities
available for sale, net of
tax............................. -- 44,000 -- 44,000
Net income........................ -- -- 4,910,000 4,910,000
------------
Total comprehensive income 4,954,000
Preferred dividends................. -- -- (730,000) (730,000)
----------- ------------- -------------- ----------- ------------
Balance at December 31, 1997........ $64,260,000 ($1,509,000) $ 144,000 $16,459,000 $114,416,000
Stock split (1 for 2)............... 95,000 -- -- -- --
Compensation expense................ -- 503,000 503,000
Comprehensive income:
Unrealized gain on securities
available for sale, net of
tax............................. -- 482,000 -- 482,000
Net income........................ -- -- 5,414,000 5,414,000
------------
Total comprehensive income........ 5,896,000
Preferred dividends -- -- (1,282,000) (1,282,000)
----------- ------------- -------------- ----------- ------------
Balance at December 31, 1998........ $64,355,000 ($1,006,000) $ 626,000 $20,591,000 $119,533,000
----------- ------------- -------------- ----------- ------------
----------- ------------- -------------- ----------- ------------
</TABLE>
See notes to supplemental consolidated financial statements.
F-7
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss)............................................. $ 5,414,000 $ 4,910,000 $ 4,419,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for loan and lease losses......................... 5,552,000 2,549,000 1,215,000
Provision for loss on real estate acquired through
foreclosure............................................... -- 176,000 402,000
Gain on sale of mortgage loans.............................. (11,994,000) (6,887,000) (1,727,000)
(Gain) loss on sale of premises and equipment............... (30,000) 11,000 (517,000)
(Gain) loss on sale of real estate owned.................... 339,000 42,000 (113,000)
(Gain) loss on sale of securities, net...................... (472,000) (205,000) (23,000)
Depreciation and amortization............................... 2,529,000 2,527,000 1,238,000
Amortization of goodwill and other intangibles.............. 3,996,000 2,881,000 178,000
Accretion/amortization related to securities, net........... (302,000) 1,086,000 (284,000)
Increase in unearned discount............................... 326,000 2,054,000 1,209,000
Amortization of deferred compensation....................... 503,000 503,000 --
Amortization of deferred loan fees and costs................ (601,000) (1,178,000) (92,000)
Accretion of mortgage servicing asset....................... -- 32,000 --
Provision (benefit) of deferred taxes....................... 1,469,000 1,998,000 (1,653,000)
Mortgage loans originated for sale.......................... (1,694,334,000) (889,175,000) (242,339,000)
Proceeds from sales of loans and servicing.................. 1,720,607,000 898,729,000 262,219,000
Increase in loans held for sale............................. (152,603,000) (31,313,000) (47,769,000)
Other, net.................................................. (1,453,000) 1,480,000 (8,800,000)
--------------- -------------- --------------
Net cash used in operating activities..................... (121,054,000) (9,780,000) (32,437,000)
Investing Activities:
Decrease in interest bearing deposits with other financial
institutions................................................ 99,000 1,127,000 (137,000)
Purchases of investment securities............................ (285,716,000) (77,401,000) (45,060,000)
Proceeds from maturities of investment securities............. 26,391,000 62,627,000 59,846,000
Proceeds from the sales of investment securities.............. 114,233,000 67,823,000 7,983,000
Loans/leases originated for portfolio, net of principal
repayment................................................... (27,351,000) (54,875,000) (39,683,000)
Purchases of premises and equipment........................... (2,378,000) (2,279,000) (1,052,000)
Proceeds from sale of premises and equipment.................. 1,255,000 98,000 924,000
Proceeds from sale of real estate acquired through
foreclosure................................................. 1,719,000 5,779,000 4,592,000
Capital expenditures for other real estate owned.............. -- (26,000) (2,256,000)
Purchase of Liberty National Bank, net of cash received....... -- -- 7,283,000
Purchase of Commerce Security Bank, net of cash received...... -- -- 53,175,000
Purchase of Eldorado Bank, net of cash received............... -- (61,299,000) --
--------------- -------------- --------------
Net cash (used in) provided by investing activities....... (171,748,000) (58,426,000) 45,615,000
</TABLE>
See notes to supplemental consolidated financial statements.
F-8
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Financing Activities:
Net increase (decrease) in deposits......................... 288,416,000 79,473,000 (8,454,000)
Issuance of subordinated debentures......................... -- 27,657,000 --
Issuance of preferred stock................................. -- 11,659,000 --
Issuance of common stock.................................... -- 18,004,000 34,889,000
Issuance of special common stock............................ -- 23,212,000 --
Payment of preferred dividends.............................. (1,282,000) (730,000) --
Cash dividends.............................................. -- -- (3,000)
Cash dividends.............................................. (537,000) -- --
Repayment of notes payable to shareholder................... (202,000) -- --
Proceeds from issuance of notes payable to related
parties................................................... 540,000 -- 4,500,000
Net increase (decrease) in other borrowings................. 3,850,000 (10,986,000) --
------------- ------------- -------------
Net cash (used in) provided by financing activities....... 290,785,000 148,289,000 30,932,000
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents.......... (2,017,000) 80,083,000 44,110,000
Cash and cash equivalents at beginning of period.............. 143,857,000 63,774,000 19,664,000
------------- ------------- -------------
Cash and cash equivalents at end of period.................... $ 141,840,000 $ 143,857,000 $ 63,774,000
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid for interest...................................... 36,182,000 24,549,000 10,165,000
Cash paid for income taxes.................................. 4,054,000 2,230,000 1,389,000
Supplemental disclosures of non-cash investing activities:
Loans transferred to foreclosed real estate................. 763,000 3,677,000 2,777,000
Transfer of securities from held to maturity to available
for sale (Note 4)......................................... -- 15,004,000 --
Supplemental disclosures of non-cash financing activities:
Issuance of restricted stock................................ -- 2,012,000 --
</TABLE>
See notes to supplemental consolidated financial statements.
F-9
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
Eldorado Bancshares, Inc. (formerly Commerce Security Bancorp, Inc.), a
Delaware corporation and bank holding company, and its wholly-owned subsidiaries
Eldorado Bank, Antelope Valley Bank and CSBI Capital Trust I are included in the
accompanying supplemental consolidated financial statements and are collectively
referred to as the "Company". Eldorado Bank and the Antelope Valley Bank are
collectively referred to as the "Banks." Significant intercompany transactions
and accounts have been eliminated.
Prior to June 1997 and the acquisition of Eldorado Bank, the Company had
three subsidiaries, Commerce Security Bank (CSB), Liberty National Bank (LNB),
and San Dieguito National Bank (SDNB). On June 30, 1997, the Company merged the
then existing three subsidiaries into the newly acquired Eldorado Bank. On
January 22, 1999, the Company completed the acquisition of Antelope Valley Bank.
Following those transactions, the organizational structure consists of the
Company and its two wholly owned banking subsidiaries, Eldorado Bank and
Antelope Valley Bank (sometimes referred to collectively as the "Banks").
The Company has accounted for the Antelope Valley Bank acquisition using the
pooling of interests method of accounting for business combinations. The
Supplemental Consolidated Financial Statements have been prepared as if the
Company had acquired Antelope Valley Bank at the beginning of the earliest
period presented.
BUSINESS
The Banks offer a broad range of commercial banking services primarily in
Southern California and in the Sacramento area of Northern California, catering
especially to small business. The Banks offer commercial, real estate, consumer,
Small Business Administration-guaranteed loans as well as checking and savings
deposits, corporate cash management, international banking services, safe
deposit boxes, collection, traveler's checks, notary public and other customary
non-deposit banking services.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Company encounters two significant
types of risk: economic and regulatory. Economic risk is comprised of three
components--interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature and reprice at different speeds, or on a different basis,
than its interest-bearing assets. Credit risk is the risk of default on the
Company's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk results from
changes in the value of assets and liabilities which may affect, favorably or
unfavorably, the realizability of those assets and liabilities.
The Company is subject to the regulations of various governmental agencies.
These regulations can and do change significantly from period to period. The
Company is also subject to periodic examinations by the regulatory agencies,
which may subject it to changes in asset valuations, in amounts of required loss
allowances and in operating restrictions resulting from the regulators'
judgments based on information available to them at the time of their
examination.
F-10
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 130, "Reporting Comprehensive
Income" (SFAS 130). This Statement provides that all enterprises report
comprehensive income as a measure of overall performance. Comprehensive income
is the change to equity (net assets) of a business during a period. The Company
implemented this standard in 1998.
In June 1997 the FASB issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement changed the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to shareholders. Companies are required to
disclose segment data based upon how management makes decisions about allocating
resources to segments and measuring performance. The company implemented this
standard in 1998.
In February 1998 the FASB issued SFAS 132, "Employer's Disclosures about
Pensions and other Post-Retirement Benefits." This Statement standardizes the
disclosure requirements for pensions and other post-retirement benefits to the
extent practicable. The Company implemented this standard in 1998.
In June 1998 the FASB issued SFAS 133, "Accounting for Derivative
instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or as liabilities in the statement of financial
position and measure those instruments at fair value. For the Company, this new
standard is effective in 2000 and is not to be applied retroactively to
financial statements of prior periods. The impact of this Statement, if any, is
yet to be determined.
In October 1998, the FASB issued SFAS 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held For Sale by
a Mortgage Banking Enterprise." This Statement establishes accounting and
reporting standards for securitization of mortgage loans. For the Company, this
new standard is effective in 1999, and the impact of this Statement, if any, is
yet to be determined.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks and federal funds
sold. Generally, Federal funds sold are sold for one-day periods.
INVESTMENT SECURITIES
The Company has classified its investment securities as held-to-maturity and
available-for-sale. No trading portfolio is maintained. Investment securities
are segregated in accordance with management's intention regarding their
retention.
Investment securities classified as held-to-maturity are carried at cost,
adjusted for the amortization of premiums and the accretion of discounts.
Premiums and discounts are amortized and accreted to operations using the
straight line method, which management believes approximates the interest
method. Management has the intent and ability to hold these assets as long-term
investments until their expected
F-11
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
maturities. Under certain circumstances, including the significant deterioration
of the issuer's credit worthiness or a significant change in tax-exempt status
or statutory or regulatory requirements, securities classified as
held-to-maturity may be sold or transferred to another classification.
Investment securities classified as available-for-sale may be held for
indefinite periods of time and may be sold to implement the Company's
asset/liability management strategies and in response to changes in interest
rates and/or prepayment risk and similar factors. These securities are recorded
at estimated fair value. Unrealized gains and losses are reported as other
comprehensive income in the supplemental consolidated statement of shareholders'
equity, net of income taxes.
Gains and losses on investment securities are determined on the specific
identification method and are included in other income.
LOANS HELD FOR SALE
Loans held for sale consists of mortgage loans carried at lower of cost or
fair value on an aggregate basis.
LOANS AND LEASES
Loans are stated at principal amounts outstanding, net of unearned income,
including discounts and fees. Interest income on discounted loans, such as those
generated by the Automobile Lending Division, is recognized under a method that
approximates interest calculated using the interest method. Net deferred fees
and costs are generally deferred and amortized into interest income over the
contractual life of the related loans as a yield adjustment. Direct financing
leases, which include estimated residual values of leased equipment, are carried
net of unearned income. Income from these leases is recognized on a basis which
produces a level yield on the outstanding net investment in the lease. The
production of new leases comes exclusively from the wholesale sector through a
network of brokers. The Company services these leases and, beginning in 1997,
sells blocks of leases from time to time to other institutions. Leases held for
resale are carried at the lower of cost or estimated fair value on an aggregate
basis. Gains and losses on the sale of leases are recognized upon delivery based
on the difference between selling price and carrying value.
NON-ACCRUAL / IMPAIRED LOANS
When payment of principal or interest on a loan is delinquent for 90 days,
or earlier in some cases, the loan is placed on nonaccrual status, unless the
loan is in the process of collection and the underlying collateral fully
supports the carrying value of the loan. When a loan is placed on nonaccrual
status, interest accrued during the period prior to the judgment of
uncollectibility is charged to operations. Generally, any payments received on
nonaccrual loans are applied first to outstanding loan amounts and next to the
recovery of charged-off loan amounts. Any excess is treated as recovery of lost
interest.
SFAS 114 requires that impaired loans be measured based on the present value
of expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. When the measure of the impaired loan is less than
the recorded balance of the loan, the impairment is recorded through a valuation
allowance included in the allowance for loan and lease losses.
F-12
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The Company considers all loans impaired when it is probable that both
interest and principal will not be collected in accordance with the contractual
terms of the agreement. All loans that are ninety days or more past due, or have
been restructured to provide a reduction in the interest rate or a deferral of
interest or principal are automatically included in this category.
ALLOWANCE FOR ESTIMATED LOAN AND LEASE LOSSES
A provision for estimated loan and lease losses is charged to expense when,
in the opinion of management, such losses are inherent in the portfolio. The
allowance is increased by provisions charged to expense, increased for
recoveries of loans previously charged-off, and reduced by charge-offs. Loans
and leases are charged-off when management believes that the collectibility of
the principal is unlikely. Management's estimates are used to determine the
allowance that is considered adequate to absorb losses inherent in the existing
loan and lease portfolio. These estimates are inherently subjective and their
accuracy depends on the outcome of future events. Ultimate losses may differ
from current estimates. Management's estimates are based on historical loan loss
experience, specific problem loans and leases, current economic conditions that
may impact the borrower's ability to pay, volume, growth and composition of the
loan portfolio, value of the collateral and other relevant factors.
MORTGAGE BANKING ACTIVITIES
The Company originates and sells residential mortgage loans to a variety of
secondary market investors, including the Federal Home Loan Mortgage Corporation
(FHLMC or Freddie Mac), the Federal National Mortgage Association (FNMA or
Fannie Mae) and others. The Company has an arrangement with the Government
National Mortgage Association (GNMA or Ginnie Mae) whereby loans originated by
the Company are securitized by GNMA and sold to others. Gains and losses on the
sale of mortgage loans are recognized upon delivery based on the difference
between the selling price and the carrying value of the related mortgage loans
sold. Deferred origination fees and expenses are recognized at the time of sale
in the determination of the gain or loss. The Company sells the servicing for
such loans to either the purchaser of the loans or to a third party. The Company
recognizes the gain or loss on servicing sold when all risks and rewards of
ownership have transferred.
Mortgage loans held for sale are stated at the lower of cost or market as
determined by the outstanding commitments from investors or current investor
yield requirements calculated on an aggregate loan basis. Valuation adjustments
are charged against noninterest income.
Forward commitments to sell and put options on mortgage-backed securities
are used to reduce interest rate risk on a portion of loans held for sale and
anticipated loan fundings. The resulting gains and losses on forward commitments
are deferred and included in the carrying values of loans held for sale.
Premiums on put options are capitalized and amortized over the option period.
The Company expects that, in general, gains and losses on forward commitments
and put options deferred against loans held for sale will approximately offset
equivalent amounts of unrecognized gains and losses on the related loans.
Forward commitments to sell and put options on mortgage-backed securities that
hedge anticipated loan fundings are not reflected in the supplemental
consolidated statement of financial condition. Gains and losses on these
instruments are not recognized until the actual sale of the loans held for sale.
In 1996, the Company sold its portfolio of loan servicing and no longer services
mortgage loans for others.
F-13
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
SBA LENDING
The Company is qualified as a "Preferred Lender" under the SBA programs,
allowing it to originate SBA loans based on its own underwriting decisions and
without prior approval of the SBA. The Company sells the government guaranteed
portion of the SBA loans at a premium, a portion of which is immediately
recognized as income. The remaining portion of the premium, representing the
estimated normal servicing fee retained by the Company, is capitalized and
recognized as income over the estimated life of the loan.
LOAN SERVICING RIGHTS
Loan servicing rights are accounted for under the provisions of SFAS 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which became effective January 1, 1997. SFAS 125 superseded
SFAS 122, "Accounting for Mortgage Servicing Rights," but did not significantly
change the methodology used to account for servicing rights. The servicing
rights currently capitalized, included in other assets, are the result of
servicing rights retained on sold SBA loans and are being amortized in
proportion to and over the period of estimated servicing income. Management
stratifies servicing rights based on origination period and interest rate and
evaluates the recoverability in relation to the impact of actual and anticipated
loan portfolio prepayment, foreclosure, and delinquency experience. The Company
did not have a valuation allowance associated with the servicing rights
portfolio as of December 31, 1998 and 1997.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation on furniture, fixtures and equipment is computed
using the straight-line method over the estimated useful lives, which range from
two to fifteen years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the improvements or the
remaining lease term, whichever is shorter. Expenditures for betterments or
major repairs are capitalized and those for ordinary repairs and maintenance are
charged to operations as incurred.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired in settlement of loans is recorded at the lower of the
unpaid balance of the loan at settlement date or the fair value less estimated
costs to sell. A valuation allowance is established to reflect declines in value
subsequent to foreclosure, if any, below the new basis. Required developmental
costs associated with foreclosed property under construction are capitalized and
considered in determining the fair value of the property. Operating expenses of
such properties, net of related income, and gains and losses on their
disposition are included in other non-interest expenses.
INTANGIBLES ARISING FROM ACQUISITIONS
The Company has paid amounts in excess of fair value for three branches of
Wells Fargo Bank and for CSB's, LNB's, and Eldorado's core deposits and tangible
assets. Such amounts are being amortized by systematic charges to income
(primarily for periods from 10 to 25 years) over a period which is no greater
than the estimated remaining life of the assets acquired or not to exceed the
estimated average remaining
F-14
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
life of the existing deposit base assumed. The Company periodically reviews
intangibles to assess recoverability and an impairment is recognized in
operations if a permanent loss of value occurs.
FEDERAL AND STATE TAXES
The Company provides for income taxes under the provisions of SFAS 109,
"Accounting for Income Taxes." Under the liability method which is prescribed by
SFAS 109, a deferred tax asset and/or liability is computed for both the
expected future impact of differences between the financial statement and tax
bases of assets and liabilities, and for the expected future tax benefit to be
derived from tax loss and tax credit carryforwards. SFAS 109 also requires the
establishment of a valuation allowance, if necessary, to reflect the likelihood
of the realization of deferred tax assets. The effect of tax rate changes will
be reflected in income in the period such changes are enacted.
Deferred income taxes are provided by applying the statutory tax rates in
effect at the balance sheet date to temporary differences between the book basis
and the tax basis of assets and liabilities. The resulting deferred tax assets
and liabilities are adjusted to reflect changes in tax laws or rates.
STOCK-BASED COMPENSATION
On January 1, 1997, the Company adopted SFAS 123, "Accounting for
Stock-Based Compensation", 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 Accounting Principles Board (APB) Opinion 25 and provide pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants 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 25, which requires compensation expense be recorded on the date of grant
only if the current market price of the underlying stock exceeds the exercise
price, and provide the pro forma disclosure provisions of SFAS 123. See Note 13
of the notes to supplemental consolidated financial statements for the pro forma
net income and pro forma earnings per share disclosures.
F-15
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PER SHARE DATA
All earnings per share amounts reflect the implementation of SFAS 128,
"Earnings per Share." The weighted average number of common shares outstanding
for basic and diluted earnings per share computations are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
NUMERATOR:
Net income............................................................ $ 5,414,000 $ 4,910,000 $ 4,419,000
Less: preferred stock dividend........................................ (1,282,000) (730,000) --
------------- ------------- ------------
Net income applicable to common shares (Basic)........................ 4,132,000 4,180,000 4,419,000
Effect of dilutive securities......................................... -- -- --
------------- ------------- ------------
Net income (Dilutive)................................................. $ 4,132,000 $ 4,180,000 $ 4,419,000
------------- ------------- ------------
------------- ------------- ------------
DENOMINATOR:
Weighted average common shares outstanding (Basic).................... 11,955,313 20,376,355 10,864,003
Dilutive options and warrants......................................... 478,457 2,456,177 --
------------- ------------- ------------
Weighted average common stock outstanding (Dilutive).................. 12,433,770 22,832,532 10,864,003
------------- ------------- ------------
------------- ------------- ------------
EARNINGS PER SHARE:
Basic:
Net income.......................................................... $ 0.35 $ 0.21 $ 0.41
------------- ------------- ------------
------------- ------------- ------------
Dilutive:
Net income.......................................................... $ 0.33 $ 0.18 $ 0.41
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities and
disclosures in the consolidated financial statements. Actual results could
differ from those estimates.
NOTE 2--ACQUISITIONS AND 1996 REORGANIZATION:
A key element of the Company's strategic plan includes building
profitability through acquisitions of community banks principally, but not
exclusively, in and around its Southern California base, including banks that
have underperformed relative to their peers but have strong lending franchises,
niche business lines or low cost deposits that would complement its existing
operations and branch network and also provide opportunities for cost savings
through branch overlap and back-office consolidation. Since September 1995, the
Company has completed four acquisitions, increasing the Company's assets by
approximately $1 billion, including the acquisition, completed on January 22,
1999, of Antelope Valley
F-16
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2--ACQUISITIONS AND 1996 REORGANIZATION: (CONTINUED)
Bank, in a transaction accounted for as a pooling of interests. In connection
with the acquisition, the Company issued approximately 2,777,000 shares of
common stock. As of December 31, 1998, Antelope had total assets of $211.7
million.
On June 6, 1997, the Company acquired Eldorado Bancorp ("Eldorado") and its
bank subsidiary, Eldorado Bank, a community bank based in Tustin, California
with approximately $400 million in total assets (collectively with the financing
related thereto, the "Eldorado Acquisition"). Effective June 30, 1997, the
Company consolidated via mergers (collectively, the "Bank Mergers") into
Eldorado Bank the respective operations of its other subsidiaries--LNB, SDNB,
and CSB.
On March 31, 1996, the Company's predecessor, SDN Bancorp, Inc. ("SDN"),
completed its acquisition of LNB (the "Liberty Acquisition") for approximately
$15.1 million in cash. LNB had total assets of approximately $150 million as of
the acquisition date.
As of September 1, 1996, the Company completed the plan of reorganization
(the "1996 Reorganization") contemplated by the Agreement and Plan of
Reorganization dated April 23, 1996 (the "Commerce Agreement") between SDN and
CSB. As part of the 1996 Reorganization, SDN became a subsidiary of the Company,
effective August 31, 1996, in a transaction in which SDN shareholders received
shares of the Company's common stock in exchange for all of the outstanding
shares of SDN common stock. As of September 1, 1996, the Company completed the
acquisition of CSB (the "Commerce Acquisition") in which the Company acquired
all of the outstanding shares of CSB. Pursuant to the Commerce Agreement,
holders of CSB common stock received approximately $14.1 million and a total of
1,543,691 shares of Company common stock. CSB had total assets of approximately
$220 million at September 1, 1996.
Effective June 6, 1997, the Company completed the Eldorado Acquisition. The
Acquisition was effected pursuant to an Agreement and Plan of Merger entered
into between the Company and Eldorado on December 24, 1996 (the "Acquisition
Agreement"). Pursuant to the Acquisition Agreement, the Company acquired 100% of
the outstanding stock of Eldorado for cash consideration of $23.00 per share.
Contemporaneously with the Acquisition, each Eldorado stock option that had not
previously been exercised (collectively, the "Eldorado Options") was canceled in
return for payment by Eldorado of the difference between the $23.00 price per
share and the exercise price thereof. The aggregate consideration paid to
holders of Eldorado common stock and Eldorado Options (net of the tax benefit
arising out of the Eldorado Options) was approximately $90.3 million. Eldorado
had total assets of approximately $400 million at June 6, 1997.
The Liberty, Commerce, and Eldorado Acquisition's were accounted for using
the purchase method of accounting in accordance with APB Opinion 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 LNB, CSB, and Eldorado from the date of acquisition.
Intangibles arising from the transactions totaled approximately $3.8 million in
the Liberty Acquisition, $7.2 million in the Commerce Acquisition and
approximately $50.2 million in the Eldorado Acquisition. Certain preacquistion
contingency reserves were established as of the acquisition dates that are
subject to adjustment during the "allocation period" in accordance with SFAS 38
"Accounting for Preacquisition Contingencies." The fair value of CSB has been
adjusted to reflect the resolution of these contingencies established relating
to certain litigation, writedowns of real estate owned and a settlement with the
principal shareholder of CSB.
F-17
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2--ACQUISITIONS AND 1996 REORGANIZATION: (CONTINUED)
The following table sets forth selected pro forma combined financial
information of SDN, LNB, CSB, Eldorado and Antelope for the years ended December
31, 1997 and 1996. The pro forma operating data reflects the effect of the
Liberty Acquisition, the Commerce Acquisition and the Eldorado Acquisition, for
periods prior to acquisition, as if each was consummated at the beginning of the
period presented. The pro forma results are not necessarily indicative of the
results that would have occurred had such acquisitions actually occurred as of
such dates, nor are they necessarily indicative of the results of future
operations.
<TABLE>
<CAPTION>
PRO FORMA COMBINED FOR
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Interest income............................................... $79,012,000 $71,683,000
Interest expense.............................................. 28,663,000 27,224,000
----------- -----------
Net interest income........................................... 50,349,000 44,459,000
Provision for loan and lease losses........................... 2,549,000 1,858,000
----------- -----------
Net interest income after provision for loan and lease
losses...................................................... 47,800,000 42,601,000
Non-interest income........................................... 20,892,000 19,473,000
Non-interest expense.......................................... 59,119,000 62,167,000
----------- -----------
Income (loss) before taxes.................................... 9,573,000 (93,000)
Income tax (benefit) provision................................ 4,563,000 (1,101,000)
----------- -----------
Net income.................................................... $ 5,010,000 $ 1,008,000
----------- -----------
----------- -----------
</TABLE>
NOTE 3--CASH AND DUE FROM BANKS:
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. Included in cash and due from banks in the consolidated statement
of financial condition are restricted amounts aggregating $1,714,000 and
$2,088,000 at December 31, 1998 and 1997, respectively.
F-18
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 4--INVESTMENT SECURITIES:
At December 31, 1998 and 1997, the Company's investment portfolio is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------------- MARKET
COST GAINS LOSSES VALUE
-------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasuries...................................... $ 42,753,000 $ 673,000 $ -- $ 43,426,000
U.S. Agencies........................................ 109,136,000 53,000 (357,000) 108,832,000
Mortgage-backed securities........................... 36,392,000 173,000 -- 36,565,000
Collateralized mortgage obligations.................. 8,885,000 20,000 (108,000) 8,797,000
Municipal bonds...................................... 18,418,000 696,000 (50,000) 19,064,000
Corporate bonds...................................... 31,714,000 145,000 (109,000) 31,750,000
Commercial paper..................................... 1,995,000 -- (4,000) 1,991,000
Equity securities.................................... 38,000 -- -- 38,000
-------------- ------------ ----------- --------------
Total................................................ $ 249,331,000 $ 1,760,000 ($ 628,000) $ 250,463,000
-------------- ------------ ----------- --------------
-------------- ------------ ----------- --------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ----------------------- MARKET
COST GAINS LOSSES VALUE
--------------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasuries....................................... $ 22,425,000 $ 55,000 $ -- $ 22,480,000
U.S. Agencies......................................... 35,098,000 97,000 (229,000) 34,966,000
Mortgage-backed securities............................ 30,725,000 -- (9,000) 30,716,000
Municipal bonds....................................... 14,404,000 336,000 (4,000) 14,736,000
Corporate bonds....................................... 1,000,000 -- -- 1,000,000
Equity securities..................................... 38,000 -- -- 38,000
--------------- ---------- ----------- --------------
Total................................................. $ 103,690,000 $ 488,000 ($ 242,000) $ 103,936,000
--------------- ---------- ----------- --------------
--------------- ---------- ----------- --------------
</TABLE>
Amortized cost and estimated market value of debt securities at December 31,
1998, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less...................................... $ 25,245,000 $ 25,317,000
Due after one year through five years........................ 110,243,000 110,726,000
Due after five years through ten years....................... 52,538,000 52,627,000
Due after ten years.......................................... 61,305,000 61,793,000
-------------- --------------
$ 249,331,000 $ 250,463,000
-------------- --------------
-------------- --------------
</TABLE>
For purposes of the maturity table, mortgage-backed securities, which are
not due at a single maturity date, have been allocated over maturity groupings
based on the weighted-average contractual maturities of
F-19
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 4--INVESTMENT SECURITIES: (CONTINUED)
the underlying collateral. The mortgage-backed securities may mature earlier
than their weighted-average contractual maturities because of principal
prepayments.
Investment securities with an amortized cost of $32,710,000 and $20,081,000
and an estimated market value of $32,778,000 and $22,408,000 at December 31,
1998 and 1997, respectively, were pledged to secure public deposits and for
other purposes required or permitted by law.
Proceeds from sales and maturities of debt securities during 1998, 1997, and
1996 were $140,624,000, $130,450,000, and $67,829,000, respectively. Gross gains
of $476,000, $341,000, and $37,000 were realized on those transactions. Gross
losses on sales totaled $4,000, $136,000, and $18,000 for 1998, 1997, and 1996,
respectively.
NOTE 5--LOANS AND LEASES:
The loan and lease portfolio consists of the various types of loans and
leases that are classified as held to maturity and available for sale. These
loans and leases by major type are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Commercial real estate....................................... $ 198,890,000 $ 235,244,000
Residential real estate...................................... 280,550,000 143,225,000
Real estate construction..................................... 31,904,000 31,366,000
Consumer..................................................... 151,127,000 136,587,000
Commercial................................................... 136,783,000 151,839,000
Land......................................................... 14,813,000 4,966,000
Direct financing leases...................................... 88,875,000 40,819,000
-------------- --------------
Total...................................................... 902,942,000 744,046,000
Less:
Allowance for loan and lease losses........................ 9,160,000 10,923,000
Unearned discount.......................................... 8,531,000 8,206,000
Deferred loan fees......................................... 3,508,000 2,907,000
-------------- --------------
Net loans and leases......................................... $ 881,743,000 $ 722,010,000
-------------- --------------
-------------- --------------
</TABLE>
The components of the Bank's direct financing lease receivable are
summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------- -----------
<S> <C> <C>
Future minimum lease payments..................... $ 104,604,000 $46,797,000
Residuals......................................... 699,000 796,000
Initial direct costs.............................. 4,384,000 1,363,000
Unearned income................................... (20,812,000) (8,137,000)
------------- -----------
Total......................................... $ 88,875,000 $40,819,000
------------- -----------
------------- -----------
</TABLE>
F-20
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 5--LOANS AND LEASES: (CONTINUED)
An analysis of the activity in the allowance for loan and lease losses is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year.................... $ 10,923,000 $ 6,526,000 $ 2,049,000
Balance acquired................................ -- 4,076,000 4,382,000
Provision for loan and lease losses............. 5,552,000 2,549,000 1,215,000
Loans charged off............................... (9,666,000) (4,168,000) (1,920,000)
Loan recoveries................................. 2,351,000 1,940,000 800,000
------------- ------------- -------------
Balance at end of year.......................... $ 9,160,000 $ 10,923,000 $ 6,526,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
At December 31, 1998, future minimum lease payments receivable are as
follows:
<TABLE>
<S> <C>
1999.......................................................... $ 36,274,000
2000.......................................................... 30,570,000
2001.......................................................... 21,380,000
2002.......................................................... 12,406,000
2003.......................................................... 3,974,000
Thereafter.................................................... 0
------------
Total......................................................... $104,604,000
------------
------------
</TABLE>
There are no contingent rental payments included in income for the year ended
December 31, 1998.
In the ordinary course of business, Antelope Valley Bank has granted loans
to certain directors and the companies with which they are associated. All such
loans and commitments to lend were made under terms that are consistent with the
Company's normal lending policies.
A summary of directors' loan activity is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Beginning balance................................................. $ 1,873,000 $ 2,486,000
New loans made, including renewals................................ 451,000 356,000
Repayments........................................................ (399,000) (969,000)
------------ ------------
Ending balance.................................................... $ 1,925,000 $ 1,873,000
------------ ------------
------------ ------------
</TABLE>
As of December 31, 1998 and 1997, there were undisbursed lines of credit of
$810,000 and $545,000, respectively, to directors.
The following table represents information relating to nonperforming and
past due loans:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Nonaccrual, not restructured.................................. $ 5,667,000 $11,050,000 $ 5,567,000
90 days or more past due, not on nonaccrual................... 1,019,000 5,071,000 1,804,000
Restructured loans............................................ 4,196,000 3,255,000 3,490,000
----------- ----------- -----------
Total....................................................... $10,882,000 $19,376,000 $10,861,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-21
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
At December 31, 1998, 1997 and 1996 loans aggregating $9,833,000,
$14,623,000 and $8,978,000, respectively, have been designated as impaired. The
total allowance for loan losses related to these loans was $1,302,000,
$1,736,000 and $850,000 at December 31, 1998, 1997 and 1996, respectively.
The average balance of impaired loans during 1998, 1997 and 1996 was
$11,199,000, $11,869,000 and $6,635,000, respectively. The Company is not
committed to lending additional funds to debtors whose loans have been modified.
With respect to the above nonperforming loans, the following table presents
interest income actually earned and additional interest income that would have
been earned under the original terms of the loans:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Non-accrual loans:
Income recognized......................... $ 139,000 $ -- $ --
Income foregone........................... 472,000 980,000 474,000
Restructured loans:
Income recognized......................... 288,000 336,000 148,000
Income foregone........................... 610,000 1,127,000 676,000
</TABLE>
NOTE 6--MORTGAGE BANKING ACTIVITIES:
The Bank originates and sells residential mortgage loans to secondary market
investors subject to certain recourse provisions. At December 31, 1998 and 1997,
the Bank had sold loans with recourse with an unpaid principal balance of
$84,194,000 and $86,568,000, respectively. The Bank had recorded a reserve of
$397,000 and $1,076,000, in connection with such sales at December 31, 1998 and
1997, respectively. During 1998 and 1997, the Bank added to this reserve $-0-
and $2,021,000, respectively, and charged off $679,000 and $1,645,000,
respectively to this account related to these repurchase obligations. In
management's opinion, these reserves are adequate to absorb losses inherent in
the outstanding recourse obligations.
NOTE 7--REAL ESTATE ACQUIRED THROUGH FORECLOSURE:
An analysis of the activity in the allowance for losses on real estate
acquired through foreclosure as of December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance at the beginning of year............. $ 452,000 $ 485,000 $ 320,000
Balance acquired............................. -- -- 576,000
Provision charged to expense................. -- 176,000 72,000
Balances related to properties sold.......... -- (209,000) (483,000)
--------- --------- ---------
Balance at the end of year................... $ 452,000 $ 452,000 $ 485,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-22
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 8 --PREMISES AND EQUIPMENT:
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Land............................................. $ 2,547,000 $ 3,046,000
Buildings........................................ 7,534,000 8,124,000
Furniture, fixtures and equipment................ 14,918,000 15,791,000
Leasehold improvements........................... 5,053,000 5,095,000
Leasehold interests.............................. 732,000 732,000
----------- -----------
30,784,000 32,788,000
Less: Accumulated depreciation and
amortization................................... (18,401,000) (19,029,000)
----------- -----------
Premises and equipment, net...................... $12,383,000 $13,759,000
----------- -----------
----------- -----------
</TABLE>
Depreciation and amortization of premises and equipment included in
operating expense amounted to $2,529,000, $2,527,000, and $1,238,000 in 1998,
1997 and 1996, respectively.
NOTE 9--DEPOSITS:
A summary of deposits is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
-------------- ------------
<S> <C> <C>
Noninterest bearing:
Checking.................................................... $ 247,452,000 $254,854,000
Bank controlled............................................. 6,219,000 6,391,000
Title and escrow............................................ 60,220,000 76,670,000
Custodial................................................... -- 285,000
-------------- ------------
313,891,000 338,200,000
Interest bearing:
Savings..................................................... 317,285,000 118,307,000
NOW and Super NOW........................................... 154,948,000 129,717,000
Money market................................................ 119,836,000 119,410,000
Certificates of deposit $100,000 or greater................. 117,165,000 91,961,0000
Other certificates.......................................... 198,362,000 135,475,000
-------------- ------------
907,596,000 594,870,000
-------------- ------------
Total deposits................................................ $1,221,487,000 $933,070,000
-------------- ------------
-------------- ------------
</TABLE>
F-23
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 9--DEPOSITS: (CONTINUED)
A summary of certificates of deposit maturities at December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
1999.......................................................................... $ 300,363,000
2000.......................................................................... 12,547,000
2001.......................................................................... 1,575,000
2002.......................................................................... 335,000
2003.......................................................................... 707,000
Thereafter.................................................................... --
--------------
$ 315,527,000
--------------
--------------
</TABLE>
Interest expense for certificates of deposit in amounts of $100,000 or more
was $6,540,000, $5,213,000, and $1,063,000 for the years ended December 31,
1998, 1997, and 1996, respectively.
NOTE 10--BORROWINGS:
MANDATORY CONVERTIBLE DEBENTURES
Contemporaneously with the Bank Mergers on June 30, 1997, the Company
assumed certain obligations of its subsidiary SDN Bancorp. Among these
obligations were mandatory convertible debentures that totaled approximately
$537,000. The debentures were mandatorily convertible at March 30, 1998 into the
Company's common stock, at a rate equal to the lower of: (i) $52.50 per share
(subject to certain anti-dilutive adjustments and the power of the Company's
Board of Directors to reduce the conversion price), or (ii) the then current
fair market value per share of the Company's common stock. At the Company's
option, the debentures were redeemed on March 27, 1998 at 100% of par. The
Company funded the redemption of the debentures by entering into a note payable
with Dartmouth Capital Group, L.P. which matures on March 31, 2000. The note
bears interest at 10.5% annually, with principal and interest payments payable
in quarterly installments. At December 31, 1998, the outstanding principal
balance on the note was $338,000.
SUBORDINATED DEBENTURES
In June 1997, CSBI Capital Trust I (the "subsidiary trust"), issued
$27,657,000 of 11 3/4% Trust Originated Preferred Securities (the "preferred
securities"). In connection with the subsidiary trust's issuance of the
preferred securities, the Company issued to the subsidiary trust $27,657,000
principal amount of its 11 3/4% subordinated debentures, due June 6, 2027 (the
"subordinated debentures"). The sole assets of the subsidiary trust are and will
be the subordinated debentures. The Company's obligation under the subordinated
debentures and related agreements, taken together, constitute a firm and
unconditional guarantee by the Company of the subsidiary trust's obligation
under the preferred securities.
F-24
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 11--INCOME TAXES:
The components of the income tax provisions (benefits) for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 3,902,000 $ 2,240,000 $ 851,000
State............................................ 647,000 1,024,000 396,000
------------ ------------ -------------
Total current provision (benefit)................ 4,549,000 3,264,000 1,247,000
Deferred:
Federal.......................................... 768,000 746,000 (1,386,000)
State............................................ 701,000 24,000 (234,000)
------------ ------------ -------------
Total deferred provision (benefit)............... 1,469,000 770,000 (1,620,000)
------------ ------------ -------------
Total income tax provision (benefit)............. $ 6,018,000 $ 4,034,000 $ (373,000)
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The amount of deferred tax assets (liabilities) resulting from each type of
temporary difference are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
FHLB stock dividends............................. $ (363,000) $ (216,000)
Depreciation..................................... (445,000) (605,000)
Bad debt reserve recapture....................... (1,212,000) (1,860,000)
Deferred loan costs.............................. (919,000) (599,000)
State taxes...................................... 143,000 (56,000)
Deferred lease acquisition cost.................. (1,966,000) (611,000)
Core deposits.................................... (502,000) (525,000)
Other............................................ (285,000) (137,000)
---------- ----------
Total deferred tax liabilities................... (5,549,000) (4,609,000)
---------- ----------
Deferred tax assets:
Provision for loan losses........................ 3,168,000 4,468,000
Accrued expenses................................. 453,000 181,000
Other reserves................................... 156,000 248,000
Real estate acquired through foreclosure......... 161,000 143,000
NOL carryforward................................. 938,000 1,363,000
General business credit.......................... -- 77,000
AMT credit....................................... -- 104,000
Salary continuation payable...................... 1,220,000 794,000
Restricted stock................................. 451,000 226,000
Accrued Legal.................................... 1,121,000 1,134,000
Refinance reserve................................ 190,000 341,000
Other............................................ 643,000 145,000
---------- ----------
Total deferred tax assets........................ 8,501,000 9,224,000
---------- ----------
Net deferred tax asset............................. $2,952,000 $4,615,000
---------- ----------
---------- ----------
</TABLE>
F-25
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 11--INCOME TAXES: (CONTINUED)
As of December 31, 1998 and 1997, no valuation allowance was established
against the recorded net deferred tax asset as, in management's opinion, it is
more likely than not that such asset will be realized.
The income tax provisions (benefits) varied from the federal statutory rate
of 34% for 1998, 1997 and 1996, for the following reasons:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal expected tax rate.................. 34.0% 34.0% 34.0%
Increase in income taxes resulting from:
State franchise tax (net of federal benefit)....... 7.8 8.2 7.6
Goodwill........................................... 9.0 7.7 3.8
Other.............................................. 1.8 (4.8) (5.3)
--- --- ---------
Effective tax rate................................... 52.6 45.1 40.1
Release of valuation allowance....................... -- -- (49.3)
--- --- ---------
Total effective tax rate............................. 52.6% 45.1% (9.2)%
--- --- ---------
--- --- ---------
</TABLE>
At December 31, 1998 the Bank had federal net operating loss carryforwards
of approximately $2,505,000, which expire in the years 2009 through 2011 and
California net operating loss carryforwards of approximately $799,000 which will
expire in the years 1999 through 2001.
Use of these NOLs are subject to limitations imposed by the Internal Revenue
Code Section 382, which restrict the use of NOLs in the event of a change in
ownership. These limitations are not expected to impact the Company's ability to
utilize these NOLs.
NOTE 12--SHAREHOLDERS' EQUITY:
LIBERTY ACQUISITION
As of March 27, 1996, Dartmouth Capital Group, L.P. ("Partnership" or
"DCG"), SDN's principal shareholder, invested approximately $13.4 million in SDN
to fund the Liberty Acquisition. In exchange for that investment, SDN issued a
total of 3,392,405 additional shares of SDN common stock at a price per share of
$3.95, SDN's book value per share as of December 31, 1995. At the Partnership's
direction, SDN issued 1,764,000 of those shares of common stock, in the
aggregate, to certain limited partners of the Partnership (the "Direct Holders")
and the remaining 1,628,405 shares of common stock directly to the Partnership.
A total of 38,300 shares were issued to investment bankers involved in the
Liberty Acquisition and an additional 1,400 shares were issued to the directors
of Liberty at a price of $5.185 per share.
1996 REORGANIZATION
As of September 1, 1996, the Company completed the 1996 Reorganization
contemplated by the Commerce Agreement between SDN and CSB. As part of the 1996
Reorganization, SDN became a subsidiary of the Company, effective August 31,
1996, in a transaction in which SDN shareholders received shares of the
Company's common stock in exchange for all of the outstanding shares of SDN
common stock.
F-26
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12--SHAREHOLDERS' EQUITY: (CONTINUED)
COMMERCE ACQUISITION
Prior to August 31, 1996, the Partnership invested approximately $14.5
million in SDN to fund the Commerce Acquisition. In exchange for that
investment, SDN issued a total of 3,664,776 additional shares of SDN common
stock at a price per share of $3.95 pursuant to a subscription agreement entered
into in March 1996. At the Partnership's direction, SDN issued 1,080,000 of
those shares of common stock, in the aggregate, to certain limited Direct
Holders and the remaining 2,584,776 shares of common stock directly to the
Partnership. A total of 161,357 additional shares were issued to other direct
investors who invested in conjunction with the Commerce Acquisition and
investment bankers involved in the Commerce Acquisition.
Holders of SDN common stock were issued one share of Company common stock
for each share held in SDN. A total of 4,327,606 shares of SDN common stock were
outstanding prior to the 1996 Reorganization and the Commerce Acquisition.
Holders of CSB common stock were issued 1,527,540 shares of Company common stock
and received cash of approximately $14.1 million. An additional 58,212 shares of
the Company's common stock and cash of approximately $346,000 are held in escrow
pending final resolution of the SAIF recapitalization. As a result of
legislation that recapitalized the SAIF, passed on September 30, 1996, the stock
and cash escrows were distributed, with approximately $96,000 disbursed in cash
and 16,151 common shares distributed.
ELDORADO ACQUISITION.
Approximately $94.8 million of cash was necessary to pay the cash
consideration to holders of Eldorado common stock and Eldorado stock options and
Eldorado Acquisition-related expenses incurred by the Company, of which $14.0
million was funded from Eldorado's excess capital and $80.3 million was raised
through the Company's sale, effective June 6, 1997, of Class B Common Stock,
Special Common Stock, a Junior Subordinated Debenture (and, indirectly, Series A
Capital Securities), Series B Preferred Stock and common stock warrants, as
described below.
CLASS B COMMON STOCK. In conjunction with the Eldorado Acquisition
financing, the 9,697,430 shares of Company common stock, $.01 par value per
share, outstanding immediately prior to the closing of the Eldorado Acquisition
were redesignated as "Class B Common Stock," and the Company issued 4,248,431
additional shares of Class B Common Stock to various accredited investors for
consideration, net of a 1% commitment fee, of $17,735,115.
DCG, the Company's largest shareholder, purchased 1,012,244 of those shares
of Class B Common Stock for aggregate consideration, net of a 1% commitment fee,
of $4,419,793, of which $4.3 million initially was made in the form of a loan to
the Company in December 1996 to fund an escrow account that would have been
forfeited to Eldorado if the Company were unable to consummate the Acquisition
financing. Peter H. Paulsen, a director of the Company, loaned $200,000 to the
Company on the same terms as DCG. That $4.5 million was converted to shares of
Class B Common Stock upon the consummation of the Acquisition at a purchase
price of $4.40 per share less the 1% commitment fee which was the same price at
which the remaining shares of common stock and the Special Common Stock were
sold by the Company to fund the acquisition.
SPECIAL COMMON STOCK. The Company sold a total of 4,825,718 shares of
Special Common Stock, $.01 par value per share (the "Special Common"), to DCG,
Madison Dearborn Capital Partners II, L.P.,
F-27
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12--SHAREHOLDERS' EQUITY: (CONTINUED)
("MDP"), Olympus Growth Fund II, L.P., ("Olympus I"), and Olympus Executive
Fund, L.P., ("Olympus II" and collectively with Olympus I, "Olympus") at a gross
purchase price of $4.81 per share, representing an aggregate payment, net of a
1% commitment fee, of $22,984,570. Neither MDP nor Olympus is an affiliate of
the other, and prior to their investment in the Company, neither was an
affiliate of the Company or DCG.
The Special Common Stock will be entitled to a liquidation preference over
the Class B Common Stock if, in the case of a liquidation or a change in control
of the Company the distribution per share of Common Stock is less than $4.81.
With the exception of 927,826 shares of Non-Voting Special Common Stock issued
to each of MDP and Olympus, the Special Common Stock will have one vote per
share and will vote as a class with the Class B Common Stock. The Voting Special
Common and the Class B Common Stock are hereinafter sometimes referred to as the
"Voting Common Stock."
SUBORDINATED DEBENTURE AND SERIES A CAPITAL SECURITIES. CSBI Capital Trust
I (the "Trust"), a special purpose trust formed by the Company, issued a total
of 27,657 shares of 11 3/4% Series A Capital Securities, $1,000 initial
liquidation value per share (the "Series A Securities"), to DCG, MDP and Olympus
for an aggregate cash payment, net of a 1% commitment fee, of $27,386,368. The
Trust in turn invested the proceeds of the Series A Securities in a Junior
Subordinated Debenture issued by the Company.
SERIES B PREFERRED STOCK. The Company issued a total of 116,593 shares of
11.0% Series B Preferred Stock, $100 liquidation value per share (the "Series B
Preferred"), to DCG, MDP and Olympus for an aggregate amount of $11,545,210, net
of a 1% commitment fee.
COMMON STOCK WARRANTS. In connection with the purchase of the Series B
Preferred Stock, each of MDP, Olympus and DCG purchased a common stock warrant
(collectively, the "Investor Warrants") that entitles the holder to purchase
shares of Class B Common Stock at an exercise price of $4.81 per share. An
aggregate of 4,000,000 shares of Class B Common Stock are subject to the
Investor Warrants. The Investor Warrants expire on June 6, 2007. The aggregate
purchase price of the Investor Warrants was $40,000.
The Company also issued common stock warrants (collectively, the "Shattan
Warrants") to The Shattan Group, LLC (and certain of its affiliates), which
acted as the Company's placement agent for the sale of securities to MDP and
Olympus. The Shattan Warrants, which were issued as of June 6, 1997 and July 15,
1997, respectively, entitle the holders thereof to purchase an aggregate of
482,433 shares of Class B Common Stock at an exercise price of $4.81 per share
and expire on June 6, 2002 and July 15, 2002, respectively. The aggregate
purchase price of the Shattan Warrants was $4,824.
CANCELLATION OF COMMON STOCK
In October 1997, the Company settled litigation that it had brought against
the former majority shareholder of CSB, and certain other directors and officers
of CSB arising out of the Company's acquisition of CSB in September 1996. As
part of that settlement, the Company canceled 424,182 shares of Class B Common
Stock that was recorded as a purchase price adjustment.
REVERSE STOCK SPLIT
Effective September 4, 1998, the Company declared a 1-for-2 reverse stock
split of its common stock.
F-28
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12--SHAREHOLDERS' EQUITY: (CONTINUED)
CONVERSION OF SPECIAL COMMON STOCK
The Supplemental Consolidated Financial Statements reflect that as of
December 31, 1998 the Company's common stock was divided into several classes
consisting of (i) Special Common Stock, having a liquidation preference of $9.62
per share, a portion of which consisted of Voting Special Common Stock and a
portion of which consisted of Non-voting Special Common Stock, (ii) voting
common stock (designated as "Class B Common Stock"), and (iii) non-voting common
stock (designated as "Class C Common Stock"). The holders of the Special Common
Stock and the Company have agreed that immediately prior to the completion of a
public offering of common stock, the Special Common Stock will be converted into
voting common stock. At such time, the common stock will consist solely of
voting common stock and non-voting common stock.
NOTE 13--EMPLOYEE BENEFIT PLANS:
401(K) RETIREMENT PLAN
The Company has retirement plans under Section 401(k) of the Internal
Revenue Code. All employees of the Company are eligible to participate in the
401(k) plan if they are twenty-one years of age or older and have completed six
months of service. Under the plan, eligible employees are able to contribute up
to 15% 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
$484,000, $391,000 and $75,000 for 1998, 1997 and 1996, respectively.
DEFINED BENEFIT PENSION COSTS
The Company has employment agreements with specified executive officers that
provide for fixed monthly benefit payments, payable in 180 equal installments
from the death or retirement of the executive. These employment agreements were
acquired in conjunction with the acquisitions of Eldorado Bancorp and Antelope
Valley Bank and the Company had no such plans prior to 1997. Following is
information about the Company's pension cost and obligations for 1998 and 1997.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
<S> <C> <C>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Service cost of benefits earned during the year....................... $ 351,000 $ 360,000
Interest costs of projected benefit obligation........................ 160,000 127,000
Recognized net actuarial loss......................................... 13,000 --
Net amortization and deferral......................................... 11,000 23,000
---------- ----------
$ 535,000 $ 510,000
---------- ----------
---------- ----------
</TABLE>
F-29
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13--EMPLOYEE BENEFIT PLANS: (CONTINUED)
An analysis of the activity in the projected benefit obligation is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Benefit obligation at the beginning of the year...... $ 2,147,000 $ 1,572,000
Service cost......................................... 351,000 363,000
Interest cost........................................ 160,000 127,000
Actuarial loss/(gain)................................ 69,000 85,000
Benefits paid........................................ (51,000) --
------------- -------------
Benefit obligation at the end of the year............ $ 2,676,000 $ 2,147,000
------------- -------------
------------- -------------
</TABLE>
An analysis of the funded status of the plan is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Actuarial present value of vested benefit
obligation......................................... $ 2,676,000 $ 2,147,000
------------- -------------
------------- -------------
Accumulated and projected benefit obligation......... $ 2,676,000 $ 2,147,000
Plan assets at fair value............................ -- --
------------- -------------
Projected benefit obligation in excess of plan
assets............................................. 2,676,000 2,147,000
Unrecognized net (loss) gain......................... (42,000) (115,000)
Unrecognized prior service cost...................... -- (12,000)
------------- -------------
Accrued pension and retirement cost included in
accompanying consolidated financial statements..... 2,634,000 2,021,000
Additional minimum liability......................... 42,000 126,000
------------- -------------
Required minimum liability........................... $ 2,676,000 $ 2,147,000
------------- -------------
------------- -------------
</TABLE>
The projected benefit obligation was determined using weighted-average
assumed discount rates ranging from 6% to 7% for 1998 and 1997. The benefit
obligation is paid using Company assets upon the executive officers' death or
retirement.
RESTRICTED STOCK PLAN
During 1997, the Company's shareholders approved the adoption of a
Restricted Stock Plan, providing for the issuance of common stock to the
Company's current president, subject to restrictions on sale or transfer. The
restrictions on sale or transfer expire over a period of four years which
coincides with the president's retirement. Under this plan 427,556 restricted
shares were issued with a market value of $2,012,000. This amount was recorded
as unearned compensation and is shown as a separate component of shareholders'
equity. Unearned compensation is being amortized to expense over the four-year
vesting period with expense of $503,000, and $503,000 recorded for 1998 and
1997, respectively.
Whenever, during the term of employment of the Company's current president,
the Company issues common stock or a common stock equivalent, the Company's
president will be entitled to receive
F-30
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13--EMPLOYEE BENEFIT PLANS: (CONTINUED)
additional shares of restricted stock. The number of shares of restricted stock
that will be issued to the Company's president will be equal to 3% of the sum of
(x) the number of shares of common stock then to be issued by the Company or, in
the case of the issuance of a common stock equivalent, the number of shares of
common stock that such common stock equivalent may be converted into or
exchanged for, and (y) the number of shares of restricted stock to be issued to
the Company's president at that time. In connection with the acquisition of
Antelope Valley Bank, the Company's president received approximately 86,000
shares of restricted stock with a market value of $989,000. The amount will be
recorded as unearned compensation during the year ending December 31, 1999 and
will be amortized to expense during the two-year vesting period.
STOCK OPTION PLAN
In January 1997, the Company adopted the Option Plan pursuant to which the
Company's Board of Directors or the Compensation Committee (the "Committee") may
grant stock options to directors and certain officers of the Company or any of
its subsidiaries. As of December 31, 1998, there were approximately 728,600
shares of Class B Common Stock subject to the Option Plan. The Option Plan
provides only for the issuance of so-called "nonqualified" stock options (as
compared to incentive stock options). The options granted will vest over four
years, in half-year increments, with the first portion vesting on the 18-month
anniversary of the date of grant. The Option Plan provides that unless the
Committee otherwise determines, the options will have a six-year term, expiring
on the sixth anniversary of the date of grant.
A summary of transactions in the Option Plan for the two years ended
December 31, 1998 follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
AVAILABLE NUMBER OF EXERCISE PRICE
FOR GRANT SHARES PER SHARE
---------- ----------- -----------------
<S> <C> <C> <C>
Balance at December 31, 1996........................ -- -- --
Options granted................................... 339,300 389,300 $ 10.97
---------- ----------- ------
Balance at December 31, 1997........................ 339,300 389,300 10.97
Options granted................................... (161,000) 161,000 14.12
Options cancelled................................. 50,000 (50,000) 13.97
---------- ----------- ------
Balance at December 31, 1998........................ 228,300 500,300 $ 11.69
---------- ----------- ------
---------- ----------- ------
</TABLE>
At December 31, 1998 29,959 shares were exercisable at prices ranging from
$9.64 to $10.52 per share. These shares had a weighted average remaining
contractual life of 4 years and a weighted average exercise price of $9.76.
The maximum number of shares as to which options may be granted under the
Option Plan is sometimes referred to as the "Option Pool." Until such time as
the Company has Tier 1 Capital of $125.0 million or more, if the Company issues
any additional common stock or common stock equivalents, the number of shares in
the Option Pool automatically increases such that the number of shares in the
Option Pool will be equal to 6% of the sum of (i) the shares of common stock
(and common stock equivalents) issued and outstanding immediately following such
issuance and (ii) the number of shares in the Option Pool. As a consequence of
the Company's issuance of common stock in the acquisition of Antelope Valley
F-31
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13--EMPLOYEE BENEFIT PLANS: (CONTINUED)
Bank, the number of shares in the Option Pool increased by approximately 182,800
to approximately 911,400. On a pro forma basis giving effect to the acquisition
of Antelope Valley Bank, the Company had Tier 1 capital of $79.6 million at
December 31, 1998.
The Company applies APB Opinion 25 in accounting for its Options Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the supplemental consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under the methodology prescribed under SFAS 123, the Company's net
earnings and earnings per share for 1998 and 1997 would have been reduced to the
pro forma amounts indicated below. The per share weighted-average fair value of
the stock options granted during 1998 and 1997 was $3.36 and $2.46,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: expected dividend yield 0.0%, risk-free interest rate of 5.0%, an
expected life of 6 years and expected volatility of 20%.
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net earnings:
As reported..................................................... $ 5,414,000 $ 4,910,000
Pro forma....................................................... $ 5,198,000 $ 4,354,000
Basic earnings per share:
As reported..................................................... $ 0.35 $ 0.21
Pro forma....................................................... 0.33 0.18
Diluted earnings per share:
As reported..................................................... $ 0.33 $ 0.18
Pro forma....................................................... 0.31 0.16
</TABLE>
NOTE 14--CAPITAL ADEQUACY:
The Bank is subject to various regulatory capital requirements established
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Banks must meet specific
capital guidelines that involve quantitative measures of the Banks' assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Banks' capital amounts and classifications are also
subject to qualitative judgment by the regulators about components, risk
weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the
Banks meets all capital adequacy requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Department of
Financial Institutions (DFI) categorized the Eldorado Bank as adequately
capitalized and Antelope Valley Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as adequately
F-32
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 14--CAPITAL ADEQUACY: (CONTINUED)
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Banks'
categories.
The Banks' actual capital amounts and ratios are presented in the table
below (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------------- --------------------------------------------
MINIMUM CAPITAL MINIMUM CAPITAL
ACTUAL ADEQUACY ACTUAL ADEQUACY
-------------------- ---------------------- -------------------- ----------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
--------- --------- ----- --------- --------- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 Capital:
ELBI............................... 8.76% $ 79,185 4.0% $ 36,158 9.30% $ 71,063 4.0% $ 30,565
EB................................. 8.29 62,329 4.0 30,074 8.91 55,886 4.0 25,089
Antelope........................... 11.47 17,370 4.0 6,058 11.42 15,463 4.0 5,416
Leverage Capital:
ELBI............................... 6.37% $ 79,185 3.0% $ 37,293 6.91% $ 71,063 3.0% $ 30,852
EB................................. 6.01 62,329 3.0 31,113 6.64 55,886 3.0 25,250
Antelope........................... 8.49 17,370 3.0 6,138 8.34 15,463 3.0 5,562
Total Capital:
ELBI............................... 9.78% $ 88,345 8.0% $ 72,266 10.60% $ 81,004 8.0% $ 61,135
EB................................. 9.26 69,633 8.0 60,158 10.16 63,749 8.0 50,196
Antelope........................... 12.70 19,226 8.0 12,111 12.55 16,990 8.0 10,830
</TABLE>
NOTE 15--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
In the ordinary course of business, the Company enters into various types of
transactions which involve financial instruments with off-balance sheet risk.
These financial instruments include commitments to extend credit and sell loans,
standby letters of credit, forward commitments to sell mortgage-backed
securities and put options to sell mortgage-backed securities and are not
reflected in the accompanying consolidated statement of financial condition.
These financial instruments carry various degrees of credit and market risk.
Credit risk is defined as the possibility that a loss may occur from the failure
of another party to perform according to the terms of the contract. Market risk
is the possibility that future changes in market prices will make a financial
instrument less valuable. Management does not anticipate that the settlement of
these financial instruments will have a material adverse effect on the Company's
financial position or results of operations.
F-33
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: (CONTINUED)
The contract or notional amounts of those instruments reflect the extent of
the Company's involvement in particular classes of financial instruments. The
following is a summary of the notional amounts of various off-balance sheet
financial instruments entered into by the Company:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Commitments to extend credit................................. $ 240,666,000 $ 182,030,000
Standby letters of credit.................................... $ 3,047,000 $ 2,842,000
Put options to sell mortgage-backed securities............... $ 76,000,000 $ 10,000,000
Forward commitments to sell mortgage-backed securities....... $ 94,000,000 $ 26,000,000
</TABLE>
The Company is principally engaged in providing commercial loans and leases
with interest rates that fluctuate with the various market indices and
variable-rate real estate loans. These loans are primarily funded through
short-term demand deposits and certificates of deposit with fixed rates. The
contractual amounts of commitments to extend credit, standby and commercial
letters of credit represent the amount of credit risk. Since many of the
commitments and letters of credit are expected to expire without being drawn,
the contractual amounts do not necessarily represent future cash requirements.
Commitments to extend credit are agreements to lend to a customer as long as
there are no violations of any conditions established in the contract. The
Company evaluates the creditworthiness of each customer. The amount of
collateral obtained, if deemed necessary by the Company upon the extension of
credit, is based upon management's evaluation. Collateral varies, but may
include securities, accounts receivable, inventory, personal property,
equipment, income property, commercial and residential property. Commitments
generally have fixed expiration dates or other terminal clauses and may require
the payment of fees. The Company experiences interest rate risk on commitments
to extend credit which are at fixed rates. There were no fixed rate commitments
at December 31, 1998 or 1997.
Standby letters of credit are written conditional commitments issued by the
Company to guarantee the performance of a customer to a third party, generally
in the production of goods and services or under contractual commitments in the
financial market. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company uses the same underwriting policies as if a loan were made.
Eldorado Bank's policy is to hedge a portion of its mortgage loans held for
sale and its commitments to originate mortgage loans against interest rate risk
with forward commitments to sell, or put options on, mortgage-backed securities.
Forward commitments are contracts for delayed delivery of securities in which
Eldorado Bank agrees to make delivery at a specified future date of a specified
security, at a specified price or yield. Put options convey to Eldorado Bank the
right, but not the obligation, to sell the securities at a contractually
specified price. Risks arise from the possible inability of counterparties to
meet the terms of their contracts and from movements in securities' values and
interest rates. Eldorado Bank tries to minimize these risks by dealing with only
primary brokers and maintaining correlation with the asset or commitment being
hedged. Eldorado Bank monitors its exposure through the use of valuation models
provided by a financial advisory service. The unrealized losses on open forward
contracts to sell mortgage-backed securities were $108,000 and $44,000 as of
December 31, 1998 and 1997, respectively. There were no unrealized losses on
open put options to sell mortgage-backed securities as of December 31, 1998 and
1997.
F-34
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: (CONTINUED)
Commitments to sell loans are agreements to sell loans originated by
Eldorado Bank to investors. These commitments may be optional or mandatory.
Under an optional commitment, a commitment fee is paid and Eldorado Bank carries
no risk in excess of the loss of such fee in the event that Eldorado Bank is
unable to deliver the loans into the commitment. Mandatory commitments may
entail possible financial risk to Eldorado Bank if it is unable to deliver the
loans in sufficient quantity or at sufficient rates for commitments which are at
a fixed rate. There were commitments of $94,000,000 and $26,000,000 at December
31, 1998 and 1997. At December 31, 1998 the commitments were a combination of
fixed and adjustable rate loans with coupons ranging from 5.5% to 7.00% and with
settlement dates ranging from January 14, 1999 to February 22, 1999. Eldorado
Bank had closed loans at December 31, 1998 of $43,287,000 with which to satisfy
those commitments and a pipeline of unclosed loans of $89,732,000 that, in
management's opinion, will be sufficient to fulfill the balance of the
commitment.
NOTE 16--DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
Fair values for each class of financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------------- ------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Federal funds sold..................... 141,840,000 141,840,000 143,857,000 143,857,000
Investment securities........................... 252,326,000 252,326,000 105,898,000 105,898,000
Loans and leases receivable..................... 644,188,000 643,577,000 638,181,000 645,796,000
Mortgage loans held for sale.................... 248,833,000 251,321,000 96,230,000 97,192,000
Financial Liabilities:
Deposits........................................ 1,221,487,000 1,206,745,000 933,070,000 919,743,000
Federal funds purchased......................... 5,900,000 5,900,000 2,050,000 2,050,000
Note payable to related parties................. 338,000 338,000 -- --
Mandatory convertible debentures................ -- -- 537,000 537,000
Subordinated debentures......................... 27,657,000 27,657,000 27,657,000 27,657,000
</TABLE>
CASH AND FEDERAL FUNDS SOLD
For cash and Federal funds sold the carrying amount is a reasonable estimate
of fair value.
INVESTMENT SECURITIES
All investment securities are marketable and have an easily determined
market value. Market quotes are used in determining the fair value.
LOANS AND LEASES RECEIVABLE
Loans were broken into fixed and variable rate loans for this analysis. The
credit risk component of the fair value analysis is assumed to be approximated
by the loan and lease loss reserve. A separate analysis is conducted on the
adequacy for the allowance for loan and lease losses and should be a reasonable
proxy for this credit risk component.
F-35
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 16--DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)
Fixed rate commercial and consumer loans are valued using a discounted cash
flow model that assumes a prepayment rate of 10% and a discount rate of prime
plus 50 basis points. These commercial and consumer loans were grouped into
categories and the weighted average maturity and rate were used in computing the
future cash flows. Leases are regularly sold into the secondary market and on
average have sold at a premium of approximately 3%. To determine the fair value
of leases, this potential sale premium was discounted to par to account for the
delinquent leases that would not garner the same sale premium. Fixed rate
residential mortgage loans were valued at par realizing that any premiums
attributable to the performing portfolio would be offset by discounts in the
delinquent portion of the portfolio.
Variable rate loans were broken down by loan type and evaluated based upon
the current weighted average rate of the loans in comparison to current market
conditions. Premiums of up to 2% were applied to those groups of loans that had
higher than market rates while loans at or below market were discounted.
MORTGAGE LOANS HELD FOR SALE
Loans held for sale are valued at a premium of 1%. These loans consist of
residential mortgage loans and are largely a fixed rate product. The premium
used approximates the gain that would be recognized on the sale of these loans,
discounted for hedging and sales costs.
DEPOSITS
Deposits consist of both non-interest and interest bearing accounts. Each
type of account has been valued differently as described below.
Non-interest bearing demand--Core non-interest bearing deposits are a
premium account for commercial banks and as such have been valued with a factor
of .95. Non-core type accounts such as title company deposits and custodial
accounts have been valued at par due to their temporary and volatile nature.
Interest bearing demand, savings and money market accounts--These accounts
are all priced competitively in the marketplace and are low cost funds for the
Bank. As such, these deposits have also been ascribed as premium accounts and
valued with a factor of .99.
Certificates of deposit--Certificates of deposit accounts ("CD") were marked
to market utilizing current CD rates compared to rates being paid. CDs were
grouped based upon their remaining maturities and the weighted average maturity
and rates were grouped based upon their remaining maturities and the weighted
average maturity and rates were utilized in the analysis. Current rates for CDs
were determined utilizing the Treasury rates for comparable maturities less 25
basis points.
Generally, rates currently being paid are higher than current market rates
which results in these accounts having a lower fair value.
BORROWINGS
Federal funds purchased are over-night investments and the carrying value is
a reasonable estimate of fair value. For subordinated debentures, having been
recently priced at the issuance in 1997, the carrying value is a reasonable
estimate of fair value.
F-36
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 16--DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)
NOTE PAYABLE TO RELATED PARTIES
The note payable to related parties has a maturity of 15 months and is
stated at cost.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
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 credit worthiness of the counterparties. The fair value of
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. The fair value of commitments to
extend credit and standby letters of credit is not material.
Forward Commitments to Sell Mortgage-Backed Securities--Fair value is based
on quoted prices for financial instruments with identical or similar terms. The
fair value of forward commitments to sell mortgage-backed securities is not
material.
Put Options to Sell Mortgage-Backed Securities--Fair value is derived from
active exchange quotations. The fair value of put options to sell
mortgage-backed securities is not material.
NOTE 17--COMMITMENTS AND CONTINGENCIES:
LITIGATION
As of December 31, 1998, no litigation was pending against the Company
itself. Eldorado Bank is the defendant in an action filed in 1994 by a former
CSB loan production officer alleging wrongful termination, breach of contract,
defamation and various other causes of action. In October 1997, a jury awarded
the former employee $3.8 million in damages, including $2.0 million in punitive
damages. The trial court subsequently reduced the award to $2.0 million,
including $500,000 in punitive damages. In conjunction with this initial
judgment, the Bank recorded a reserve for the full amount of the judgment. Both
the Company and its former employee have filed appeals, with the former employee
seeking to have the total amount of the jury's punitive damage award reinstated.
Interest accrues on the judgment at the statutory rate of 10% and as of December
31, 1998 the judgment, including interest, was equal to $2.6 million. There can
be no assurance, however, that the Company will not incur additional expense in
connection with such matter or that an adverse outcome in the appeal will not
have a material adverse effect on the Company's results of operations.
The Company is from time to time subject to various legal actions (in
addition to that described above) which are considered to be part of its normal
course of business. Management, after consultation with legal counsel, does not
believe that the ultimate liability, if any, arising from those other actions
will have a materially adverse effect on the financial position or results of
operations of the Company.
F-37
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 17--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
A summary of noncancellable future operating lease commitments at December
31, 1998 is as follows:
<TABLE>
<S> <C>
1999........................................................... $ 2,670,000
2000........................................................... 2,499,000
2001........................................................... 1,851,000
2002........................................................... 1,461,000
2003........................................................... 1,328,000
Thereafter..................................................... 3,613,000
--------------
$ 13,422,000
--------------
--------------
</TABLE>
It is expected that in the normal course of business, expiring leases will
be renewed or replaced.
Rent expense under all noncancellable operating lease obligations aggregated
$2,636,000, $2,389,000 and $1,190,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
DIVIDEND RESTRICTIONS
Federal Reserve policies declare that a bank holding company may not pay
cash dividends on its common stock unless its net income is sufficient to fund
fully such dividend, and its prospective rate of earnings retention after the
payment of such dividend appears consistent with its capital needs, asset
quality and overall financial condition. In connection with the Eldorado
Acquisition, the Company agreed that it will not pay dividends on common stock
without the prior approval of the Federal Reserve.
The Company is a legal entity separate and distinct from the Banks.
Substantially all of the Company's revenues and cash flow, including funds
available for the payments of dividends and other operating expenses, consists
of dividends paid to the Company by the Banks. There are statutory and
regulatory limitations on the amount of dividends which may be paid to the
Company by the Banks. Dividends payable by each of the Banks is restricted under
California law to the lesser of the Bank's retained earnings, or the Bank's net
income for the latest three fiscal years, less dividends previously declared
during that period, or, with the approval of the DFI, to the greater of the
retained earnings of the Bank, the net income of the Bank for its last fiscal
year or the net income of the Bank for its current fiscal year. In connection
with the Eldorado Acquisition, Eldorado Bank paid a dividend of $14 million,
which exceeded the Bank's net income for the previous three fiscal years. As a
result, Eldorado Bank must obtain the approval of the DFI with respect to the
payment of any dividend up to the greater of Eldorado Bank's retained earnings,
the net income of Eldorado Bank for its last fiscal year and the net income of
the Bank for its current fiscal year. In no event can Eldorado Bank issue a
dividend in excess of such amounts.
Federal Reserve regulations also limit the payment of dividends by a state
member bank such as Eldorado Bank. Under Federal Reserve regulations, dividends
may not be paid unless both undivided profits and earnings limitations have been
met. First, no dividend may be paid if it would result in a withdrawal of
capital or exceed the bank's undivided profits as reported in its most recent
Report of Condition and Income, without the prior approval of the Federal
Reserve and two-thirds of the shareholders of each class of stock outstanding.
Second, a state member bank may not pay a dividend without the prior written
approval of the Federal Reserve if the total of all dividends declared in one
year exceeds the total of net income for that year plus its retained net income
for the preceding two calendar years.
F-38
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 17--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The payment of dividends on capital stock by the Company and the Banks may
also be limited by other factors, including applicable regulatory capital
requirements and broad enforcement powers of the federal regulatory agencies.
Both the Federal Reserve and the DFI have broad authority to prohibit the
Company and the Banks from engaging in practices which the banking agency
considers to be unsafe or unsound. It is possible, depending upon the financial
condition of the Banks or the Company and other factors, that the applicable
regulator may assert that the payment of dividends or other payments by one or
both of the Banks or the Company is an unsafe or unsound practice and,
therefore, implement corrective action to address such a practice. Among other
things, Federal Reserve policies forbid the payment by bank subsidiaries to
their parent companies of management fees which are unreasonable in amount or
exceed the fair market value of the services rendered and tax sharing payments
which do not reflect the taxes actually due and payable.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
"undercapitalized" for regulatory purposes. Those regulations and restrictions
may limit the Company's ability to obtain funds from the Banks for its cash
needs, including funds for payment of interest and operating expenses and
dividends.
NOTE 18--OPERATING SEGMENTS:
The Company has determined that its reportable segments are the operations
pertaining to mortgage banking ("Mortgage") and the operations pertaining to
commercial and consumer banking ("Commercial and Consumer"). Commercial and
Consumer includes the operations of the Company's equipment leasing division.
The segment labeled "Other" primarily consists of the Company's administrative
function which is responsible for investment and borrowing activities and other
administrative services. The financial results of the Company's operating
segments are presented on an accrual basis. There are no significant differences
among the accounting policies of the segments as compared to the Company's
consolidated financial statements. The Company evaluates the performance of its
segments based on net interest income, non-interest income, net income and total
assets. Funds are allocated as needed from Commercial Banking to Mortgage at a
rate comparable to the prime rate less 2.25%.
F-39
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 18--OPERATING SEGMENTS: (CONTINUED)
The tables below present information about the Company's operating segments
as of or for the years ended December 31, 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------
MORTGAGE COMMERCIAL AND CONSUMER OTHER TOTAL
-------------- ------------------------- -------------- ----------------
<S> <C> <C> <C> <C>
Interest income.................... $ 13,820,000 $ 66,728,000 $ 8,503,000 $ 89,051,000
Interest expense................... 6,000 28,667,000 6,005,000 34,678,000
Internal allocation of funds....... (11,802,000) 17,648,000 (5,846,000) --
-------------- ------------- -------------- ----------------
Net interest income.............. 2,012,000 55,709,000 (3,348,000) 54,373,000
Provision for loan and lease
loss............................. -- 5,552,000 -- 5,552,000
Non-interest income................ 12,225,000 12,336,000 1,327,000 25,888,000
Depreciation and amortization...... 401,000 1,816,000 4,308,000 6,525,000
Other non-interest expense......... 10,783,000 32,931,000 13,038,000 56,752,000
-------------- ------------- -------------- ----------------
Net income before taxes............ 3,053,000 27,746,000 (19,367,000) 11,432,000
Provision for income taxes......... 1,282,000 11,382,000 (6,646,000) 6,018,000
-------------- ------------- -------------- ----------------
Net income after taxes............. $ 1,771,000 $ 16,364,000 $ (12,721,000) $ 5,414,000
-------------- ------------- -------------- ----------------
-------------- ------------- -------------- ----------------
Segment assets..................... $ 256,240,000 $ 736,931,000 $ 404,379,000 $ 1,397,550,000
-------------- ------------- -------------- ----------------
-------------- ------------- -------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------------
MORTGAGE COMMERCIAL AND CONSUMER OTHER TOTAL
-------------- ------------------------- -------------- ----------------
<S> <C> <C> <C> <C>
Interest income.................... $ 6,588,000 $ 57,782,000 $ 2,489,000 $ 66,859,000
Interest expense................... 5,000 21,589,000 2,501,000 24,095,000
Internal allocation of funds....... (5,349,000) 7,245,000 (1,896,000) --
-------------- ------------- -------------- ----------------
Net interest income.............. 1,234,000 43,438,000 (1,908,000) 42,764,000
Provision for loan and lease
loss............................. -- 2,549,000 -- 2,549,000
Non-interest income................ 5,031,000 10,866,000 3,232,000 19,129,000
Depreciation and amortization...... 408,000 1,915,000 3,085,000 5,408,000
Other non-interest expense......... 8,418,000 27,666,000 8,908,000 44,992,000
-------------- ------------- -------------- ----------------
Net income before taxes............ (2,561,000) 22,174,000 (10,669,000) 8,944,000
Provision for income taxes......... (1,076,000) 8,648,000 (3,538,000) 4,034,000
-------------- ------------- -------------- ----------------
Net income after taxes............. $ (1,485,000) $ 13,526,000 $ (7,131,000) $ 4,910,000
-------------- ------------- -------------- ----------------
-------------- ------------- -------------- ----------------
Segment assets..................... $ 119,550,000 $ 710,653,000 $ 261,811,000 $ 1,092,014,000
-------------- ------------- -------------- ----------------
-------------- ------------- -------------- ----------------
</TABLE>
F-40
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 18--OPERATING SEGMENTS: (CONTINUED)
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------------
MORTGAGE COMMERCIAL AND CONSUMER OTHER TOTAL
------------- ------------------------- ------------- --------------
<S> <C> <C> <C> <C>
Interest income......................... $ 1,646,000 $ 27,654,000 $ 859,000 $ 30,159,000
Interest expense........................ 11,000 10,139,000 235,000 10,385,000
Internal allocation of funds............ (1,081,000) 1,827,000 (746,000) --
------------- ------------- ------------- --------------
Net interest income................... 554,000 19,342,000 (122,000) 19,774,000
Provision for loan and lease loss....... -- 1,245,000 (30,000) 1,215,000
Non-interest income..................... 1,785,000 7,229,000 402,000 9,416,000
Depreciation and amortization........... 123,000 883,000 500,000 1,506,000
Other non-interest expense.............. 2,830,000 16,877,000 2,716,000 22,423,000
------------- ------------- ------------- --------------
Net income before taxes................. (614,000) 7,566,000 (2,906,000) 4,046,000
Provision for income taxes.............. (258,000) 1,193,000 (1,308,000) (373,000)
------------- ------------- ------------- --------------
Net income after taxes.................. $ (356,000) $ 6,373,000 $ (1,598,000) $ 4,419,000
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Segment assets.......................... $ 88,127,000 $ 396,778,000 $ 99,365,000 $ 584,270,000
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
F-41
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 19--SUPPLEMENTAL CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY:
The following are condensed unconsolidated financial statements of Eldorado
Bancshares, Inc.
SUPPLEMENTAL CONDENSED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Assets
Cash and due from banks........................................ $ 122,000 $ 262,000 $ 4,644,000
Investments.................................................... 38,000 38,000 408,000
Investment in subsidiary....................................... 100,897,000 99,569,000 57,340,000
Goodwill and other intangibles................................. 47,662,000 49,756,000 429,000
Receivables and other assets................................... 178,000 176,000 210,000
-------------- -------------- -------------
Total Assets..................................................... $ 148,897,000 $ 143,691,000 $ 63,031,000
-------------- -------------- -------------
-------------- -------------- -------------
Liabilities and Shareholders' Equity
Guaranteed preferred beneficial interest in the Company's
junior subordinated debentures............................... $ 28,513,000 $ 28,513,000 $ --
Accrued expenses............................................... 513,000 225,000 --
Mandatory convertible debentures............................... -- 537,000 --
Due to subsidiary.............................................. -- -- 36,000
Notes payable to related parties............................... 338,000 -- 4,500,000
-------------- -------------- -------------
Total liabilities................................................ 29,364,000 29,275,000 4,536,000
-------------- -------------- -------------
Shareholders' equity
Preferred stock................................................ 11,659,000 11,659,000 --
Common stock................................................... 120,000 239,000 153,000
Additional paid-in-capital..................................... 87,543,000 87,424,000 45,963,000
Retained earnings (deficit).................................... 20,591,000 16,459,000 12,279,000)
Unearned compensation.......................................... (1,006,000) (1,509,000) --
Unrealized gain on investments, net of tax..................... 626,000 144,000 100,000
-------------- -------------- -------------
Total shareholders' equity....................................... 119,533,000 114,416,000 58,495,000
-------------- -------------- -------------
Total liabilities and shareholders' equity....................... $ 148,897,000 $ 143,691,000 $ 63,031,000
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
F-42
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 19--SUPPLEMENTAL CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY:
(CONTINUED)
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Income:
Dividend from Bank................................................... $ 3,800,000 $ 1,700,000 $ --
Interest income...................................................... 102,000 51,000 8,000
Non-interest income.................................................. 49,000 866,000 154,000
------------- ------------ ------------
Total Income......................................................... 3,951,000 2,617,000 162,000
Expenses:
Interest expense..................................................... 3,450,000 1,959,000 --
Amortization of goodwill and intangibles............................. 2,574,000 1,537,000 6,000
Non-interest expense................................................. 1,481,000 1,453,000 156,000
------------- ------------ ------------
Total expense........................................................ 7,505,000 4,949,000 162,000
Loss before taxes and equity in undistributed earnings of subsidiary... (3,554,000) (2,332,000) --
Income tax benefit..................................................... 2,010,000 1,161,000 --
------------- ------------ ------------
Loss before equity in undistributed earnings of subsidiary............. (1,544,000) (1,171,000) --
Equity in undistributed earnings of subsidiary......................... 6,958,000 6,081,000 4,419,000
------------- ------------ ------------
Net income........................................................... $ 5,414,000 $ 4,910,000 $ 4,419,000
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
F-43
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 19--SUPPLEMENTAL CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY:
(CONTINUED)
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Operating activities:
Net income......................................... $ 5,414,000 $ 4,910,000 $ 4,419,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Equity in earnings of subsidiary................. (10,758,000) (7,781,000) (4,419,000)
Accretion/amortization related to securities..... -- -- 1,000
Dividends from subsidiary........................ 3,800,000 1,700,000 --
Loss on sale of securities, net.................. -- 7,000 --
Amortization of goodwill and other intangibles... 2,574,000 1,537,000 --
Amortization of compensation expense............. 503,000 503,000 --
Income taxes..................................... 15,000 109,000 --
(Increase) decrease in other assets.............. (497,000) 163,000 (639,000)
Increase (decrease) in other liabilities......... 291,000 (443,000) 35,000
-------------- -------------- --------------
Net cash (used in) provided by operating
activities......................................... 1,342,000 705,000 (603,000)
-------------- -------------- --------------
Investing activities:
Purchase of investment securities.................. -- -- (409,000)
Purchase of CSB.................................... -- -- (20,327,000)
Purchase of SDN Bancorp............................ -- -- (21,008,000)
Merger of SDN Bancorp, net of cash received........ -- 22,000 --
Purchase of Eldorado, net of cash received......... -- (80,815,000) --
Maturities/Sales of investment securities.......... -- 404,000 --
-------------- -------------- --------------
Net cash used in investing activities................ -- (80,389,000) (41,744,000)
-------------- -------------- --------------
Financing activities:
Issuance of capital securities..................... -- 27,657,000 --
Issuance of preferred stock........................ -- 11,659,000 --
Issuance of Class B common stock................... -- 18,004,000 42,491,000
Redemption of mandatory convertible debentures..... (538,000) -- --
Net proceeds from issuance of notes payable........ 338,000 -- 4,500,000
Issuance of special common stock................... -- 23,212,000 --
Payment of dividends............................... (1,282,000) (730,000) --
Other borrowings................................... -- (4,500,000) --
-------------- -------------- --------------
Net cash provided by financing activities............ (1,482,000) 75,302,000 46,991,000
-------------- -------------- --------------
Net increase (decrease) in cash...................... (140,000) (4,382,000) 4,644,000
Cash at beginning of year............................ 262,000 4,644,000 --
-------------- -------------- --------------
Cash at end of year.................................. $ 122,000 $ 262,000 $ 4,644,000
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Eldorado Bancshares, Inc.
In our opinion, the accompanying consolidated statement of condition and the
related consolidated statements of income, of shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Eldorado Bancshares, Inc. (formerly Commerce Security Bancorp, Inc.) and its
subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Los Angeles, CA
March 1, 1999
F-45
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks........................................ $ 109,280,000 $ 81,030,000
Federal funds sold............................................. -- 40,000,000
Available-for-sale investment securities....................... 213,399,000 67,295,000
Mortgage loans held for sale................................... 248,833,000 96,230,000
Loans and leases, net.......................................... 505,452,000 509,653,000
Premises and equipment, net.................................... 9,632,000 11,232,000
Real estate acquired through foreclosure, net.................. 1,545,000 2,740,000
Intangibles arising from acquisitions, net..................... 63,727,000 66,769,000
Accrued interest receivable and other assets................... 33,982,000 27,406,000
--------------- -------------
Total assets............................................... $ 1,185,850,000 $ 902,355,000
--------------- -------------
--------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-46
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CONDITION (CONTINUED)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand:
Non-interest bearing...................................... $ 259,185,000 $ 289,344,000
Interest bearing.......................................... 114,102,000 97,416,000
Savings:
Regular................................................... 294,549,000 98,465,000
Money market.............................................. 98,151,000 98,189,000
Time:
Under $100,000............................................ 161,976,000 99,713,000
$100,000 or more.......................................... 105,775,000 82,076,000
--------------- -------------
Total deposits.......................................... 1,033,738,000 765,203,000
Federal funds purchased....................................... 5,900,000 2,050,000
Note payable to related parties............................... 338,000 --
Accrued expenses and other liabilities........................ 20,077,000 12,172,000
Mandatory convertible debentures.............................. -- 537,000
Subordinated debentures....................................... 27,657,000 27,657,000
--------------- -------------
Total liabilities....................................... 1,087,710,000 807,619,000
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 1,500,000 shares
authorized, 116,593 issued and outstanding at December 31,
1998 and 1997............................................. 11,659,000 11,659,000
Special common stock, $.01 par value, 9,651,600 shares
authorized, 2,412,859 issued and outstanding at December
31, 1998 and 4,825,718 at December 31, 1997............... 24,000 48,000
Class B common stock, $.01 par value, 35,000,000 shares
authorized; 6,760,839 issued and outstanding at December
31, 1998 and 13,521,679 December 31, 1997................. 68,000 135,000
Additional paid-in capital.................................. 83,946,000 83,855,000
Retained earnings........................................... 3,194,000 524,000
Unearned compensation....................................... (1,006,000) (1,509,000)
Accumulated other comprehensive income...................... 255,000 24,000
--------------- -------------
Total shareholders' equity.............................. 98,140,000 94,736,000
--------------- -------------
Total liabilities and shareholders' equity.............. $ 1,185,850,000 $ 902,355,000
--------------- -------------
--------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-47
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans.......................... $ 59,323,000 $ 43,103,000 $ 14,782,000
Income from lease finance receivables............... 6,661,000 4,127,000 1,601,000
Interest and dividends on securities................ 5,881,000 4,979,000 1,968,000
Interest on Federal funds sold...................... 2,622,000 1,286,000 934,000
Interest on deposits with other financial
institutions...................................... -- -- 67,000
------------- ------------- -------------
Total interest income............................. 74,487,000 53,495,000 19,352,000
Interest expense:
Interest bearing demand............................. 1,660,000 1,325,000 686,000
Money market........................................ 3,504,000 2,336,000 493,000
Savings............................................. 10,794,000 5,117,000 1,150,000
Time................................................ 11,039,000 9,365,000 5,241,000
Debentures.......................................... 3,310,000 1,908,000 74,000
Federal funds purchased............................. 806,000 563,000 --
------------- ------------- -------------
Total interest expense............................ 31,113,000 20,614,000 7,644,000
------------- ------------- -------------
Net interest income............................... 43,374,000 32,881,000 11,708,000
Provision for loan and lease losses................... 4,272,000 1,495,000 515,000
------------- ------------- -------------
Net interest income after provision for loan and
lease losses...................................... 39,102,000 31,386,000 11,193,000
Non-interest income:
Service charges on deposit accounts................. 3,350,000 2,675,000 2,911,000
Gain on sale of mortgage loans...................... 11,994,000 6,887,000 1,727,000
Other income........................................ 6,211,000 5,342,000 261,000
------------- ------------- -------------
Total non-interest income......................... 21,555,000 14,904,000 4,899,000
Non-interest expense:
Salaries and employee benefits...................... 21,884,000 16,172,000 6,816,000
Occupancy and equipment............................. 7,335,000 5,959,000 2,726,000
Professional, regulatory and other services......... 1,274,000 1,230,000 733,000
Legal............................................... 1,346,000 1,437,000 453,000
Insurance........................................... 675,000 637,000 262,000
Losses and carrying cost of OREO.................... 190,000 382,000 288,000
Provision for recourse obligation................... -- 2,021,000 --
Amortization of goodwill and other intangibles...... 3,550,000 2,514,000 268,000
Other............................................... 15,023,000 9,336,000 3,724,000
------------- ------------- -------------
Total non-interest expense........................ 51,277,000 39,688,000 15,270,000
------------- ------------- -------------
Income before taxes................................... 9,380,000 6,602,000 822,000
Income tax (provision) benefit........................ (5,428,000) (3,612,000) 1,503,000
------------- ------------- -------------
Net income........................................ $ 3,952,000 $ 2,990,000 $ 2,325,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-48
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income available to common shareholders................... $2,670,000 $2,260,000 $2,325,000
Earnings per share (basic).................................... $0.29 $0.15 $0.44
Earnings per share (diluted).................................. $0.28 $0.13 $0.44
</TABLE>
See notes to consolidated financial statements.
F-49
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
SPECIAL COMMON STOCK CLASS B COMMON STOCK
PREFERRED STOCK ---------------------------------- ----------------------------------
------------------------ ADDITIONAL ADDITIONAL
NUMBER OF PREFERRED NUMBER OF COMMON PAID-IN NUMBER OF COMMON PAID-IN
SHARES STOCK SHARES STOCK CAPITAL SHARES STOCK CAPITAL
----------- ----------- ---------- --------- ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.... -- -- -- -- -- 895,467 9,000 7,593,000
Fractional share adjustment..... -- -- -- -- -- 34 -- --
Issuance of common stock--
Liberty....................... -- -- -- -- -- 3,432,105 34,000 13,373,000
Issuance of common stock--
Commerce...................... -- -- -- -- -- 5,369,824 54,000 21,428,000
Comprehensive income:
Unrealized gain on securities
available for sale, net of
tax......................... -- -- -- -- -- -- -- --
Net income.................... -- -- -- -- -- -- -- --
Total comprehensive income....
----------- ----------- ---------- --------- ----------- ---------- --------- -----------
Balance at December 31, 1996.... -- -- -- -- -- 9,697,430 97,000 42,394,000
Issuance of preferred stock--
Eldorado...................... 116,593 11,659,000 -- -- -- -- -- --
Issuance of common stock--
Eldorado...................... -- -- 4,825,718 48,000 23,164,000 3,820,875 38,000 17,966,000
Restricted stock issuance....... -- -- -- -- -- 427,556 4,000 2,008,000
Compensation expense............ -- -- -- -- -- -- -- --
Cancellation of shares.......... -- -- -- -- -- (424,182) (4,000) (1,677,000)
Comprehensive income:
Unrealized gain on securities
available for sale, net of
tax......................... -- -- -- -- -- -- -- --
Net income.................... -- -- -- -- -- -- -- --
Total comprehensive income....
Preferred dividends............. -- -- -- -- -- -- -- --
----------- ----------- ---------- --------- ----------- ---------- --------- -----------
Balance at December 31, 1997.... 116,593 11,659,000 4,825,718 48,000 23,164,000 13,521,679 135,000 60,691,000
Stock split (1 for 2)........... -- -- (2,412,859) (24,000) 24,000 (6,760,840) (67,000) 67,000
Compensation expense............ -- -- -- -- -- -- -- --
Comprehensive income:
Unrealized gain on securities
available for sale, net of
tax......................... -- -- -- -- -- -- -- --
Net income.................... -- -- -- -- -- -- -- --
Total comprehensive income....
Preferred Dividends............. -- -- -- -- -- -- -- --
----------- ----------- ---------- --------- ----------- ---------- --------- -----------
Balance at December 31, 1998.... 116,593 $11,659,000 2,412,859 $ 24,000 $23,188,000 6,760,839 $ 68,000 $60,758,000
----------- ----------- ---------- --------- ----------- ---------- --------- -----------
----------- ----------- ---------- --------- ----------- ---------- --------- -----------
<CAPTION>
ACCUMULATED
RETAINED OTHER
EARNINGS UNEARNED COMPREHENSIVE
(DEFICIT) COMPENSATION INCOME TOTAL
----------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.... (4,061,000) -- -- 3,541,000
Fractional share adjustment..... -- -- --
Issuance of common stock--
Liberty....................... -- -- -- 13,407,000
Issuance of common stock--
Commerce...................... -- -- -- 21,482,000
Comprehensive income:
Unrealized gain on securities
available for sale, net of
tax......................... -- -- 17,000 17,000
Net income.................... 2,325,000 -- -- 2,325,000
-----------
Total comprehensive income.... 2,342,000
----------- ------------- -------------- -----------
Balance at December 31, 1996.... (1,736,000) 17,000 40,772,000
Issuance of preferred stock--
Eldorado...................... -- -- -- 11,659,000
Issuance of common stock--
Eldorado...................... -- -- -- 41,216,000
Restricted stock issuance....... -- (2,012,000) -- --
Compensation expense............ 503,000 -- 503,000
Cancellation of shares.......... -- -- -- (1,681,000)
Comprehensive income:
Unrealized gain on securities
available for sale, net of
tax......................... -- -- 7,000 7,000
Net income.................... 2,990,000 -- -- 2,990,000
-----------
Total comprehensive income.... 2,997,000
Preferred dividends............. (730,000) -- -- (730,000)
----------- ------------- -------------- -----------
Balance at December 31, 1997.... 524,000 (1,509,000) 24,000 94,736,000
Stock split (1 for 2)........... -- -- -- --
Compensation expense............ -- 503,000 -- 503,000
Comprehensive income:
Unrealized gain on securities
available for sale, net of
tax......................... -- -- 231,000 231,000
Net income.................... 3,952,000 -- -- 3,952,000
-----------
Total comprehensive income.... 4,183,000
Preferred Dividends............. (1,282,000) -- -- (1,282,000)
----------- ------------- -------------- -----------
Balance at December 31, 1998.... $ 3,194,000 ($1,006,000) $ 255,000 $98,140,000
----------- ------------- -------------- -----------
----------- ------------- -------------- -----------
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss)............................................. $ 3,952,000 $ 2,990,000 $ 2,325,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for loan and lease losses......................... 4,272,000 1,495,000 515,000
Provision for loss on real estate acquired through
foreclosure............................................... -- 176,000 72,000
Gain on sale of mortgage loans.............................. (11,994,000) (6,887,000) (1,727,000)
Loss on sale of premises and equipment...................... (9,000) 11,000 85,000
(Gain) loss on sale of real estate owned.................... 318,000 45,000 (135,000)
Net gain on sale of securities.............................. (472,000) (221,000) --
Depreciation and amortization............................... 2,100,000 1,702,000 642,000
Amortization of goodwill and other intangibles.............. 3,550,000 2,514,000 178,000
Accretion/amortization related to securities, net........... (780,000) 1,103,000 (252,000)
Amortization of deferred compensation....................... 503,000 503,000 --
Amortization of deferred loan fees and costs................ (967,000) (1,209,000) (109,000)
Accretion of mortgage servicing asset....................... -- 32,000 --
Provision (benefit) of deferred taxes....................... 1,814,000 2,087,000 (1,503,000)
Mortgage loans originated for sale.......................... (1,694,334,000) (889,175,000) (242,339,000)
Proceeds from sales of loans and servicing.................. 1,720,607,000 898,729,000 262,219,000
Increase in loans held for sale............................. (152,603,000) (31,313,000) (47,769,000)
Other, net.................................................. (1,208,000) 5,840,000 (6,919,000)
--------------- -------------- --------------
Net cash used in operating activities..................... (125,251,000) (11,578,000) (34,717,000)
--------------- -------------- --------------
Investing Activities:
Decrease in interest bearing deposits with other financial
institutions.............................................. -- 338,000 1,241,000
Purchases of investment securities.......................... (253,179,000) (44,594,000) (32,445,000)
Proceeds from sales/maturities of investment securities..... 108,556,000 110,403,000 56,627,000
Loans/leases originated for portfolio, net of principal
repayment................................................. (13,930,000) (29,149,000) (29,022,000)
Purchases of premises and equipment......................... (1,711,000) (1,337,000) (860,000)
Proceeds from sale of premises and equipment................ 1,220,000 98,000 56,000
Proceeds from sale of real estate acquired through
foreclosure............................................... 1,641,000 3,901,000 4,188,000
Capital expenditures for other real estate owned............ -- (26,000) (2,256,000)
Purchase of Liberty National Bank, net of cash received..... -- -- 7,283,000
Purchase of Commerce Security Bank, net of cash received.... -- -- 53,175,000
Purchase of Eldorado Bank, net of cash received............. -- (61,299,000) --
--------------- -------------- --------------
Net cash (used in) provided by investing activities....... (157,403,000) (21,665,000) 57,987,000
--------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-51
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Financing Activities:
Net increase (decrease) in deposits.............. 268,535,000 39,235,000 (22,377,000)
Issuance of subordinated debentures.............. -- 27,657,000 --
Issuance of preferred stock...................... -- 11,659,000 --
Issuance of common stock......................... -- 18,004,000 34,889,000
Issuance of special common stock................. -- 23,212,000 --
Payment of preferred dividends................... (1,282,000) (730,000) --
Redemption of mandatory convertible debentures... (537,000) -- --
Repayment of notes payable to shareholder........ (202,000) -- --
Proceeds from issuance of notes payable to
related parties................................ 540,000 -- 4,500,000
Net increase (decrease) in other borrowings...... 3,850,000 (10,986,000) --
------------- ------------- -------------
Net cash (used in) provided by financing
activities................................... 270,904,000 108,051,000 17,012,000
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents...................................... (11,750,000) 74,808,000 40,282,000
Cash and cash equivalents at beginning of period... 121,030,000 46,222,000 5,940,000
------------- ------------- -------------
Cash and cash equivalents at end of period......... $ 109,280,000 $ 121,030,000 $ 46,222,000
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid for interest........................... $ 32,395,000 $ 21,114,000 $ 7,744,000
Cash paid for income taxes....................... 3,310,000 1,525,000 --
Supplemental disclosures of non-cash investing
activities:
Loans transferred to foreclosed real estate...... 763,000 3,483,000 2,526,000
Transfer of securities from held to maturity to
available for sale............................. -- 15,004,000 --
Supplemental disclosures of non-cash financing
activities:
Issuance of restricted stock..................... -- 2,012,000 --
</TABLE>
See notes to consolidated financial statements.
F-52
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
Eldorado Bancshares, Inc. (formerly Commerce Security Bancorp, Inc.), a
Delaware corporation and bank holding company, and its wholly-owned subsidiaries
Eldorado Bank and CSBI Capital Trust I are included in the accompanying
consolidated financial statements and are collectively referred to as the
"Company" or the "Bank". Significant intercompany transactions and accounts have
been eliminated.
Prior to June 1997 and the acquisition of Eldorado Bank, the Company had
three subsidiaries, Commerce Security Bank (CSB), Liberty National Bank (LNB),
and San Dieguito National Bank (SDNB). On June 30, 1997, the Company merged the
then existing three subsidiaries into the newly acquired Eldorado Bank.
Following those transactions, the organizational structure consists of Company
and its one wholly owned banking subsidiary, Eldorado Bank.
BUSINESS
The Bank offers a broad range of commercial banking services primarily in
Southern California and in the Sacramento area of Northern California, catering
especially to small business. The Bank offers commercial, real estate, consumer,
Small Business Administration-guaranteed loans as well as checking and savings
deposits, corporate cash management, international banking services, safe
deposit boxes, collection, traveler's checks, notary public and other customary
non-deposit banking services.
RISKS AND UNCERTAINTIES
In the normal course of its business, the Company encounters two significant
types of risk: economic and regulatory. Economic risk is comprised of three
components--interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature and reprice at different speeds, or on a different basis,
than its interest-bearing assets. Credit risk is the risk of default on the
Company's loan portfolio that results from the borrower's inability or
unwillingness to make contractually required payments. Market risk results from
changes in the value of assets and liabilities which may affect, favorably or
unfavorably, the realizability of those assets and liabilities.
The Company is subject to the regulations of various governmental agencies.
These regulations can and do change significantly from period to period. The
Company is also subject to periodic examinations by the regulatory agencies,
which may subject it to changes in asset valuations, in amounts of required loss
allowances and in operating restrictions resulting from the regulators'
judgments based on information available to them at the time of their
examination.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 130, "Reporting Comprehensive
Income" (SFAS 130). This Statement provides that all enterprises report
comprehensive income as a measure of overall performance. Comprehensive income
is the change to equity (net assets) of a business during a period. The
Statement includes the guidelines for the calculations and required
presentations. The Company implemented this standard in 1998.
In June 1997 the FASB issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement changed the way public
companies report information about segments of
F-53
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
their business in their annual financial statements and requires them to report
selected segment information in their quarterly reports issued to shareholders.
Companies are required to disclose segment data based upon how management makes
decisions about allocating resources to segments and measuring performance. The
Company implemented this standard in 1998.
In February 1998 the FASB issued SFAS 132, "Employer's Disclosures about
Pensions and other Post-Retirement Benefits." This Statement standardizes the
disclosure requirements for pensions and other post-retirement benefits to the
extent practicable. The Company implemented this standard in 1998.
In June 1998 the FASB issued SFAS 133, "Accounting for Derivative
instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or as liabilities in the statement of financial
position and measure those instruments at fair value. For the Company, this new
standard is effective January 1, 2000 and is not to be applied retroactively to
financial statements of prior periods. The impact of this Statement, if any, is
yet to be determined.
In October 1998, the FASB issued SFAS 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held For Sale by
a Mortgage Banking Enterprise." This Statement establishes accounting and
reporting standards for securitization of mortgage loans. For the Company, this
new standard is effective January 1, 1999. The impact of this Statement, if any,
is yet to be determined.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks and federal funds
sold. Generally, federal funds sold are sold for one-day periods.
INVESTMENT SECURITIES
The Company has classified its investment securities as held-to-maturity and
available-for-sale. No trading portfolio is maintained. Investment securities
are segregated in accordance with management's intention regarding their
retention.
Investment securities classified as held-to-maturity are carried at cost,
adjusted for the amortization of premiums and the accretion of discounts.
Premiums and discounts are amortized and accreted to operations using the
straight line method, which management believes approximates the interest
method. Management has the intent and ability to hold these assets as long-term
investments until their expected maturities. Under certain circumstances,
including the significant deterioration of the issuer's credit worthiness or a
significant change in tax-exempt status or statutory or regulatory requirements,
securities classified as held-to-maturity may be sold or transferred to another
classification.
Investment securities classified as available-for-sale may be held for
indefinite periods of time and may be sold to implement the Company's
asset/liability management strategies and in response to changes in interest
rates and/or prepayment risk and similar factors. These securities are recorded
at estimated fair value. Unrealized gains and losses are reported as other
comprehensive income in the consolidated statement of shareholders' equity, net
of income taxes.
F-54
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Gains and losses on investment securities are determined on the specific
identification method and are included in other income.
LOANS HELD FOR SALE
Loans held for sale consists of mortgage loans carried at lower of cost or
fair value on an aggregate basis.
LOANS AND LEASES
Loans are stated at principal amounts outstanding, net of unearned income,
including discounts and fees. Net deferred fees and costs are generally deferred
and amortized into interest income over the contractual life of the related
loans as a yield adjustment. Direct financing leases, which include estimated
residual values of leased equipment, are carried net of unearned income. Income
from these leases is recognized on a basis which produces a level yield on the
outstanding net investment in the lease. The production of new leases comes
exclusively from the wholesale sector through a network of brokers. The Company
services these leases and, beginning in 1997, sells blocks of leases from time
to time to other institutions. Leases held for resale are carried at the lower
of cost or estimated fair value on an aggregate basis. Gains and losses on the
sale of leases are recognized upon delivery based on the difference between
selling price and carrying value.
NON-ACCRUAL / IMPAIRED LOANS
When payment of principal or interest on a loan is delinquent for 90 days,
or earlier in some cases, the loan is placed on nonaccrual status, unless the
loan is in the process of collection and the underlying collateral fully
supports the carrying value of the loan. When a loan is placed on nonaccrual
status, interest accrued during the period prior to the judgment of
uncollectibility is charged to operations. Generally, any payments received on
nonaccrual loans are applied first to outstanding loan amounts and next to the
recovery of charged-off loan amounts. Any excess is treated as recovery of lost
interest.
SFAS 114 requires that impaired loans be measured based on the present value
of expected future cash flows discounted at the loan's effective interest rate,
the loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. When the measure of the impaired loan is less than
the recorded balance of the loan, the impairment is recorded through a valuation
allowance included in the allowance for loan and lease losses.
The Company considers all loans impaired when it is probable that both
interest and principal will not be collected in accordance with the contractual
terms of the agreement. All loans that are ninety days or more past due, or have
been restructured to provide a reduction in the interest rate or a deferral of
interest or principal are automatically included in this category.
ALLOWANCE FOR ESTIMATED LOAN AND LEASE LOSSES
A provision for estimated loan and lease losses is charged to expense when,
in the opinion of management, such losses are inherent in the portfolio. The
allowance is increased by provisions charged to expense, increased for
recoveries of loans previously charged-off, and reduced by charge-offs. Loans
and leases are charged-off when management believes that the collectibility of
the principal is unlikely.
F-55
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Management's estimates are used to determine the allowance that is considered
adequate to absorb losses inherent in the existing loan and lease portfolio.
These estimates are inherently subjective and their accuracy depends on the
outcome of future events. Ultimate losses may differ from current estimates.
Management's estimates are based on historical loan loss experience, specific
problem loans and leases, current economic conditions that may impact the
borrower's ability to pay, volume, growth and composition of the loan portfolio,
value of the collateral and other relevant factors.
MORTGAGE BANKING ACTIVITIES
The Company originates and sells residential mortgage loans to a variety of
secondary market investors, including the Federal Home Loan Mortgage Corporation
(FHLMC or Freddie Mac), the Federal National Mortgage Association (FNMA or
Fannie Mae) and others. The Company has an arrangement with the Government
National Mortgage Association (GNMA or Ginnie Mae) whereby loans originated by
the Company are securitized by GNMA and sold to others. Gains and losses on the
sale of mortgage loans are recognized upon delivery based on the difference
between the selling price and the carrying value of the related mortgage loans
sold. Deferred origination fees and expenses are recognized at the time of sale
in the determination of the gain or loss. The Company sells the servicing for
such loans to either the purchaser of the loans or to a third party. The Company
recognizes the gain or loss on servicing sold when all risks and rewards of
ownership have transferred.
Mortgage loans held for sale are stated at the lower of cost or market as
determined by the outstanding commitments from investors or current investor
yield requirements calculated on an aggregate loan basis. Valuation adjustments
are charged against noninterest income.
Forward commitments to sell and put options on mortgage-backed securities
are used to reduce interest rate risk on a portion of loans held for sale and
anticipated loan fundings. The resulting gains and losses on forward commitments
are deferred and included in the carrying values of loans held for sale.
Premiums on put options are capitalized and amortized over the option period.
The Company expects that, in general, gains and losses on forward commitments
and put options deferred against loans held for sale will approximately offset
equivalent amounts of unrecognized gains and losses on the related loans.
Forward commitments to sell and put options on mortgage-backed securities that
hedge anticipated loan fundings are not reflected in the consolidated statement
of financial condition. Gains and losses on these instruments are not recognized
until the actual sale of the loans held for sale. In 1996, the Company sold its
portfolio of loan servicing and no longer services mortgage loans for others.
SBA LENDING
The Company is qualified as a "Preferred Lender" under the SBA programs,
allowing it to originate SBA loans based on its own underwriting decisions and
without prior approval of the SBA. The Company sells the government guaranteed
portion of the SBA loans at a premium, a portion of which is immediately
recognized as income. The remaining portion of the premium, representing the
estimated normal servicing fee retained by the Company, is capitalized and
recognized as income over the estimated life of the loan.
F-56
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
LOAN SERVICING RIGHTS
Loan servicing rights are accounted for under the provisions of SFAS 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which became effective January 1, 1997. SFAS 125 superseded
SFAS 122, "Accounting for Mortgage Servicing Rights," but did not significantly
change the methodology used to account for servicing rights. The servicing
rights currently capitalized, included in other assets, are the result of
servicing rights retained on sold SBA loans and are being amortized in
proportion to and over the period of estimated servicing income. Management
stratifies servicing rights based on origination period and interest rate and
evaluates the recoverability in relation to the impact of actual and anticipated
loan portfolio prepayment, foreclosure, and delinquency experience. The Company
did not have a valuation allowance associated with the servicing rights
portfolio as of December 31, 1998 and 1997.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation on furniture, fixtures and equipment is computed
using the straight-line method over the estimated useful lives, which range from
two to fifteen years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the improvements or the
remaining lease term, whichever is shorter. Expenditures for betterments or
major repairs are capitalized and those for ordinary repairs and maintenance are
charged to operations as incurred.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired in settlement of loans is recorded at the lower of the
unpaid balance of the loan at settlement date or the fair value less estimated
costs to sell. A valuation allowance is established to reflect declines in value
subsequent to foreclosure, if any, below the new basis. Required developmental
costs associated with foreclosed property under construction are capitalized and
considered in determining the fair value of the property. Operating expenses of
such properties, net of related income, and gains and losses on their
disposition are included in other non-interest expenses.
INTANGIBLES ARISING FROM ACQUISITIONS
The Company has paid amounts in excess of fair value for CSB's, LNB's, and
Eldorado's core deposits and tangible assets. Such amounts are being amortized
by systematic charges to income (primarily for periods from 10 to 25 years) over
a period which is no greater than the estimated remaining life of the assets
acquired or not to exceed the estimated average remaining life of the existing
deposit base assumed. The Company periodically reviews intangibles to assess
recoverability and an impairment is recognized in operations if a permanent loss
of value occurs.
FEDERAL AND STATE TAXES
The Company provides for income taxes under the provisions of SFAS 109,
"Accounting for Income Taxes." Under the liability method which is prescribed by
SFAS 109, a deferred tax asset and/or liability is computed for both the
expected future impact of differences between the financial statement and tax
bases of assets and liabilities, and for the expected future tax benefit to be
derived from tax loss and tax credit
F-57
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
carryforwards. SFAS 109 also requires the establishment of a valuation
allowance, if necessary, to reflect the likelihood of the realization of
deferred tax assets. The effect of tax rate changes will be reflected in income
in the period such changes are enacted.
Deferred income taxes are provided by applying the statutory tax rates in
effect at the balance sheet date to temporary differences between the book basis
and the tax basis of assets and liabilities. The resulting deferred tax assets
and liabilities are adjusted to reflect changes in tax laws or rates.
STOCK-BASED COMPENSATION
On January 1, 1997, the Company adopted SFAS 123, "Accounting for
Stock-Based Compensation", 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 Accounting Principles Board (APB) Opinion 25 and provide pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants 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 25, which requires compensation expense be recorded on the date of grant
only if the current market price of the underlying stock exceeds the exercise
price, and provide the pro forma disclosure provisions of SFAS 123. See Note 13
of the Notes to Consolidated Statements for the pro forma net income and pro
forma earnings per share disclosures.
F-58
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PER SHARE DATA
All earnings per share amounts reflect the implementation of SFAS 128,
"Earnings per Share." The weighted average number of common shares outstanding
for basic and diluted earnings per share computations are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
NUMERATOR:
Net income............................................................ $ 3,952,000 $ 2,990,000 $ 2,325,000
Less: preferred stock dividend........................................ (1,282,000) (730,000) --
------------- ------------- ------------
Net income applicable to common shares (Basic)........................ 2,670,000 2,260,000 2,325,000
Effect of dilutive securities......................................... -- -- --
------------- ------------- ------------
Net income (Dilutive)................................................. $ 2,670,000 $ 2,260,000 $ 2,325,000
------------- ------------- ------------
------------- ------------- ------------
DENOMINATOR:
Weighted average common shares outstanding (Basic).................... 9,173,699 14,813,125 5,300,773
Dilutive options and warrants......................................... 478,457 2,456,177 --
------------- ------------- ------------
Weighted average common stock outstanding (Dilutive).................. 9,652,156 17,269,302 5,300,773
------------- ------------- ------------
------------- ------------- ------------
EARNINGS PER SHARE:
Basic:
Net income.......................................................... $ 0.29 $ 0.15 $ 0.44
------------- ------------- ------------
------------- ------------- ------------
Dilutive:
Net income.......................................................... $ 0.28 $ 0.13 $ 0.44
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities and
disclosures in the consolidated financial statements. Actual results could
differ from those estimates.
NOTE 2--ACQUISITIONS AND 1996 REORGANIZATION:
A key element of the Company's strategic plan includes building
profitability through acquisitions of community banks principally, but not
exclusively, in and around its Southern California base, including banks that
have underperformed relative to their peers but have strong lending franchises,
niche business lines or low cost deposits that would complement our existing
operations and branch network and also provide opportunities for cost savings
through branch overlap and back-office consolidation. From September 1995 to
December 31, 1998, the Company completed three acquisitions, increasing the
Company's assets by over $840 million, including the acquisition, completed on
June 6, 1997, of Eldorado
F-59
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2--ACQUISITIONS AND 1996 REORGANIZATION: (CONTINUED)
Bancorp ("Eldorado") and its bank subsidiary, Eldorado Bank, a community bank
based in Tustin, California with approximately $400 million in total assets
(collectively with the financing related thereto, the "Eldorado Acquisition").
Effective June 30, 1997, the Company consolidated via mergers (collectively, the
"Bank Mergers") into Eldorado Bank the respective operations of its other
subsidiaries--LNB, SDNB, and CSB.
On March 31, 1996, the Company's predecessor, SDN Bancorp, Inc. ("SDN")
completed its acquisition of LNB (the "Liberty Acquisition") for approximately
$15.1 million in cash. LNB had total assets of approximately $150 million as of
the acquisition date.
As of September 1, 1996, the Company completed the plan of reorganization
(the "1996 Reorganization") contemplated by the Agreement and Plan of
Reorganization dated April 23, 1996 (the "Agreement") between SDN and CSB. As
part of the 1996 Reorganization, SDN became a subsidiary of the Company,
effective August 31, 1996, in a transaction in which SDN shareholders received
shares of the Company's common stock in exchange for all of the outstanding
shares of SDN common stock. As of September 1, 1996, the Company completed the
acquisition of CSB (the "Commerce Acquisition") in which the Company acquired
all of the outstanding shares of CSB. Pursuant to the Agreement, holders of CSB
common stock received approximately $14.1 million and a total of 1,543,691
shares of the Company. CSB had total assets of approximately $220 million at
September 1, 1996.
Effective June 6, 1997, the Company completed the Eldorado Acquisition. The
Acquisition was effected pursuant to an Agreement and Plan of Merger entered
into between the Company and Eldorado on December 24, 1996 (the "Acquisition
Agreement"). Pursuant to the Acquisition Agreement, the Company acquired 100% of
the outstanding stock of Eldorado for cash consideration of $23.00 per share.
Contemporaneously with the Acquisition, each Eldorado stock option that had not
previously been exercised (collectively, the "Eldorado Options") was canceled in
return for payment by Eldorado of the difference between the $23.00 price per
share and the exercise price thereof. The aggregate consideration paid to
holders of Eldorado common stock and Eldorado Options (net of the tax benefit
arising out of the Eldorado Options) was approximately $90.3 million. Eldorado
had total assets of approximately $400 million at June 6, 1997.
The Liberty, Commerce, and Eldorado Acquisition's were accounted for using
the purchase method of accounting in accordance with APB Opinion 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 LNB, CSB, and Eldorado from the date of acquisition.
Intangibles arising from the transactions totaled approximately $3.8 million in
the Liberty Acquisition, $7.2 million in the Commerce Acquisition and
approximately $50.2 million in the Eldorado Acquisition. Certain preacquistion
contingency reserves were established as of the acquisition dates that are
subject to adjustment during the "allocation period" in accordance with SFAS 38
"Accounting for Preacquisition Contingencies." The fair value of CSB has been
adjusted to reflect the resolution of these contingencies established relating
to certain litigation, writedowns of real estate owned and a settlement with the
principal shareholder of CSB.
F-60
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 2--ACQUISITIONS AND 1996 REORGANIZATION: (CONTINUED)
The following table sets forth selected pro forma combined financial
information of SDN, LNB, CSB, and Eldorado for the years ended December 31, 1997
and 1996. The pro forma operating data reflects the effect of the Liberty
Acquisition, the Commerce Acquisition and the Eldorado Acquisition, for periods
prior to acquisition, as if each was consummated at the beginning of the period
presented. The pro forma results are not necessarily indicative of the results
that would have occurred had such acquisitions actually occurred as of such
dates, nor are they necessarily indicative of the results of future operations.
<TABLE>
<CAPTION>
PRO FORMA COMBINED FOR
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Interest Income.................................................... $ 65,648,000 $ 60,876,000
Interest Expense................................................... 25,182,000 24,483,000
------------- -------------
Net interest income................................................ 40,466,000 36,393,000
Provision for loan and lease losses................................ 1,495,000 1,158,000
------------- -------------
Net interest income after provision for loan and lease losses...... 38,971,000 35,235,000
Non-interest income................................................ 16,667,000 14,956,000
Non-interest expense............................................... 48,407,000 53,508,000
------------- -------------
Income (loss) before taxes......................................... 7,231,000 (3,317,000)
Income tax (benefit) provision..................................... 4,141,000 (2,231,000)
------------- -------------
Net income (loss).................................................. $ 3,090,000 $ (1,086,000)
------------- -------------
------------- -------------
</TABLE>
Effective January 22, 1999, the Company completed its acquisition of
Antelope Valley Bank (see Note 20).
NOTE 3--CASH AND DUE FROM BANKS:
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. Included in cash and due from banks in the consolidated statement
of financial condition are restricted amounts aggregating $788,000 and
$1,779,000 at December 31, 1998 and 1997, respectively.
F-61
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 4--INVESTMENT SECURITIES:
At December 31, 1998 and 1997, the Company's investment portfolio is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED ------------------------- MARKET
COST GAINS LOSSES VALUE
-------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury........................................ $ 42,753,000 $ 673,000 $ -- $ 43,426,000
U.S. Government agencies............................. 98,282,000 32,000 (356,000) 97,958,000
State and municipal securities....................... 4,495,000 -- (48,000) 4,447,000
Mortgage-backed securities........................... 35,621,000 159,000 -- 35,780,000
Corporate bonds...................................... 31,752,000 145,000 (109,000) 31,788,000
-------------- ------------ ----------- --------------
Total................................................ $ 212,903,000 $ 1,009,000 $ (513,000) $ 213,399,000
-------------- ------------ ----------- --------------
-------------- ------------ ----------- --------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED -------------------- MARKET
COST GAINS LOSSES VALUE
------------- --------- --------- -------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury................................................. $ 21,415,000 $ 51,000 $ -- $ 21,466,000
U.S. Government agencies...................................... 13,460,000 -- -- 13,460,000
State and municipal securities................................ 615,000 -- -- 615,000
Mortgage-backed securities.................................... 30,725,000 -- (9,000) 30,716,000
Corporate bonds............................................... 1,038,000 -- -- 1,038,000
------------- --------- --------- -------------
Total......................................................... $ 67,253,000 $ 51,000 $ (9,000) $ 67,295,000
------------- --------- --------- -------------
------------- --------- --------- -------------
</TABLE>
Amortized cost and estimated market value of debt securities at December 31,
1998, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
-------------- --------------
<S> <C> <C>
Due in one year or less...................................... $ 20,099,000 $ 20,125,000
Due after one year through five years........................ 106,119,000 106,550,000
Due after five years through ten years....................... 44,746,000 44,755,000
Due after ten years.......................................... 41,939,000 41,969,000
-------------- --------------
Subtotal................................................. $ 212,903,000 $ 213,399,000
-------------- --------------
-------------- --------------
</TABLE>
For purposes of the maturity table, mortgage-backed securities, which are
not due at a single maturity date, have been allocated over maturity groupings
based on the weighted-average contractual maturities of the underlying
collateral. The mortgage-backed securities may mature earlier than their
weighted-average contractual maturities because of principal prepayments.
F-62
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 4--INVESTMENT SECURITIES: (CONTINUED)
Investment securities with an amortized cost of $24,339,000 and $15,019,000
and an estimated market value of $24,496,000 and $15,035,000 at December 31,
1998 and 1997, respectively, were pledged to secure public deposits and for
other purposes required or permitted by law.
Proceeds from sales and maturities of debt securities during 1998, 1997, and
1996 were $108,556,000, $110,403,000, and $56,627,000, respectively. Gross gains
of $476,000, $308,000, and $-0- were realized on those transactions. Gross
losses on sales totaled $4,000, $87,000, and $4,000 for 1998, 1997, and 1996,
respectively.
NOTE 5--LOANS AND LEASES:
The loan and lease portfolio consists of the various types of loans and
leases that are classified as held to maturity and available for sale. These
loans and leases by major type are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Commercial real estate....................................... $ 198,890,000 $ 235,244,000
Residential real estate...................................... 265,006,000 128,362,000
Real estate construction..................................... 30,045,000 30,651,000
Consumer..................................................... 68,344,000 62,323,000
Commercial................................................... 99,589,000 115,919,000
Land......................................................... 14,813,000 4,966,000
Direct financing leases...................................... 88,875,000 40,819,000
-------------- --------------
765,562,000 618,284,000
Less:
Allowance for loan and lease losses........................ (7,304,000) (9,395,000)
Deferred loan fees and costs............................... (3,973,000) (3,006,000)
-------------- --------------
Loans and leases, net........................................ $ 754,285,000 $ 605,883,000
-------------- --------------
-------------- --------------
</TABLE>
The components of the Bank's direct financing lease receivable are
summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Future minimum lease payments..................... $ 104,604,000 $ 46,797,000
Residuals......................................... 699,000 796,000
Initial direct costs.............................. 4,384,000 1,363,000
Unearned income................................... (20,812,000) (8,137,000)
------------- -------------
Total......................................... $ 88,875,000 $ 40,819,000
------------- -------------
------------- -------------
</TABLE>
F-63
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 5--LOANS AND LEASES: (CONTINUED)
An analysis of the activity in the allowance for loan and lease losses is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year............. $ 9,395,000 $ 5,156,000 $ 639,000
Balance acquired......................... -- 4,076,000 4,382,000
Provision for loan and lease losses...... 4,272,000 1,495,000 515,000
Loans charged off........................ (7,897,000) (2,503,000) (650,000)
Loan recoveries.......................... 1,534,000 1,171,000 270,000
------------- ------------- -------------
Balance at end of year................... $ 7,304,000 $ 9,395,000 $ 5,156,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
At December 31, 1998, future minimum lease payments receivable are as
follows:
<TABLE>
<S> <C>
1999.......................................................... $ 36,274,000
2000.......................................................... 30,570,000
2001.......................................................... 21,380,000
2002.......................................................... 12,406,000
2003.......................................................... 3,974,000
Thereafter.................................................... --
-------------
Total......................................................... $ 104,604,000
-------------
-------------
</TABLE>
There are no contingent rental payments included in income for the year ended
December 31, 1998.
As of December 31, 1998 and 1997 there were no loans outstanding to
directors, officers or entities with which each of these individuals are
associated, which in aggregate exceed $60,000 per individual. In the opinion of
management, all transactions entered into between the Bank and such related
parties have been and are in the ordinary course of business, and made on the
same terms and conditions consistent with the Bank's general lending policies
for similar transactions with unaffiliated persons.
The following table represents information relating to nonperforming and
past due loans:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Nonaccrual, not restructured........... $ 5,611,000 $ 10,589,000 $ 5,483,000
90 days or more past due, not on
nonaccrual........................... 790,000 4,638,000 1,314,000
Restructured loans..................... 3,336,000 2,779,000 2,200,000
------------- ------------- -------------
Total.................................. $ 9,737,000 $ 18,006,000 $ 8,997,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-64
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
At December 31, 1998 and 1997, loans aggregating $8,947,000 and $13,368,000,
respectively, have been designated as impaired. The total allowance for loan
losses related to these loans was $1,196,000 and $1,585,000 at December 31, 1998
and 1997, respectively.
The average balance of impaired loans during 1998 and 1997 was $10,129,000
and $10,594,000, respectively. The Company is not committed to lending
additional funds to debtors whose loans have been modified.
With respect to the above nonperforming loans, the following table presents
interest income actually earned and additional interest income that would have
been earned under the original terms of the loans:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Non-accrual loans:
Income recognized........................... $ 107,000 $ -- $ --
Income foregone............................. 434,000 980,000 474,000
Restructured loans:
Income recognized........................... 243,000 250,000 38,000
Income foregone............................. 95,000 49,000 5,000
</TABLE>
NOTE 6--MORTGAGE BANKING ACTIVITIES:
The Bank originates and sells residential mortgage loans to secondary market
investors subject to certain recourse provisions. At December 31, 1998 and 1997,
the Bank had sold loans with recourse with an unpaid principal balance of
$84,194,000 and $86,568,000, respectively. The Bank had recorded a reserve of
$397,000 and $1,076,000, in connection with such sales at December 31, 1998 and
1997, respectively. During 1998 and 1997, the Bank added to this reserve $-0-
and $2,021,000, respectively, and charged off $679,000 and $1,645,000,
respectively to this account related to these repurchase obligations. In
management's opinion, these reserves are adequate to absorb losses inherent in
the outstanding recourse obligations.
NOTE 7--REAL ESTATE ACQUIRED THROUGH FORECLOSURE:
An analysis of the activity in the allowance for losses on real estate
acquired through foreclosure as of December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance at the beginning of year............ $ 452,000 $ 485,000 $ 320,000
Balance acquired............................ -- -- 576,000
Provision charged to expense................ -- 176,000 72,000
Balances related to properties sold......... -- (209,000) (483,000)
--------- --------- ---------
Balance at the end of year.................. $ 452,000 $ 452,000 $ 485,000
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-65
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 8 --PREMISES AND EQUIPMENT:
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Land............................................. $ 2,041,000 $ 2,671,000
Buildings........................................ 5,267,000 6,161,000
Furniture, fixtures and equipment................ 11,759,000 12,822,000
Leasehold improvements........................... 4,958,000 5,007,000
Leasehold interests.............................. 732,000 732,000
----------- -----------
24,757,000 27,393,000
Less: Accumulated depreciation and
amortization................................... (15,125,000) (16,161,000)
----------- -----------
Premises and equipment, net...................... $ 9,632,000 $11,232,000
----------- -----------
----------- -----------
</TABLE>
Depreciation and amortization of premises and equipment included in
operating expense amounted to $2,100,000, $1,702,000, and $642,000 in 1998, 1997
and 1996, respectively.
NOTE 9--DEPOSITS:
A summary of deposits is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
Noninterest bearing:
Checking..................................... $ 192,746,000 $ 205,998,000
Bank controlled.............................. 6,219,000 6,391,000
Title and escrow............................. 60,220,000 76,670,000
Custodial.................................... -- 285,000
--------------- -------------
259,185,000 289,344,000
Interest bearing:
Savings...................................... 294,549,000 98,465,000
NOW and Super NOW............................ 114,102,000 97,416,000
Money market................................. 98,151,000 98,189,000
Certificates of deposit $100,000 or
greater.................................... 105,775,000 82,076,000
Other certificates........................... 161,976,000 99,713,000
--------------- -------------
774,553,000 475,859,000
--------------- -------------
Total deposits................................. $ 1,033,738,000 $ 765,203,000
--------------- -------------
--------------- -------------
</TABLE>
F-66
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 9--DEPOSITS: (CONTINUED)
A summary of certificates of deposit maturities at December 31, 1998:
<TABLE>
<S> <C>
1999.......................................................... $ 259,851,000
2000.......................................................... 6,828,000
2001.......................................................... 880,000
2002.......................................................... 105,000
2003.......................................................... 87,000
Thereafter.................................................... --
-------------
$ 267,751,000
-------------
-------------
</TABLE>
Interest expense for certificates of deposit in amounts of $100,000 or more
was $5,987,000, $4,710,000, and $677,000 for the years ended December 31, 1998,
1997, and 1996, respectively.
NOTE 10--BORROWINGS:
MANDATORY CONVERTIBLE DEBENTURES
In conjunction with the Bank Mergers on June 30, 1997, the Company assumed
certain obligations of its subsidiary SDN Bancorp. Among these obligations were
mandatory convertible debentures that totaled approximately $537,000. The
debentures were mandatorily convertible at March 30, 1998 into the Company's
common stock, at a rate equal to the lower of: (i) $52.50 per share (subject to
certain anti-dilutive adjustments and the power of the Company's Board of
Directors to reduce the conversion price), or (ii) the then current fair market
value per share of the Company's common stock. At the Company's option, the
debentures were redeemed on March 27, 1998 at 100% of par. The Company funded
the redemption of the debentures by entering into a note payable with Dartmouth
Capital Group, L.P. which matures on March 31, 2000. The note bears interest at
10.5% annually, with principal and interest payments payable in quarterly
installments. At December 31, 1998, the outstanding principal balance on the
note was $338,000.
SUBORDINATED DEBENTURES
In June 1997, CSBI Capital Trust I (the "subsidiary trust"), issued
$27,657,000 of 11 3/4% Trust Originated Preferred Securities (the "preferred
securities"). In connection with the subsidiary trust's issuance of the
preferred securities, the Company issued to the subsidiary trust $27,657,000
principal amount of its 11 3/4% subordinated debentures, due June 6, 2027 (the
"subordinated debentures"). The sole assets of the subsidiary trust are and will
be the subordinated debentures. The Company's obligation under the subordinated
debentures and related agreements, taken together, constitute a firm and
unconditional guarantee by the Company of the subsidiary trust's obligation
under the preferred securities.
F-67
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 11--INCOME TAXES:
The components of the income tax provisions (benefits) for the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 3,238,000 $ 1,934,000 $ (38,000)
State............................................ 376,000 819,000 5,000
------------ ------------ -------------
Total current provision (benefit)................ 3,614,000 2,753,000 (33,000)
Deferred:
Federal.......................................... 1,044,000 835,000 (1,276,000)
State............................................ 770,000 24,000 (194,000)
------------ ------------ -------------
Total deferred provision (benefit)............... 1,814,000 859,000 (1,470,000)
------------ ------------ -------------
Total income tax provision (benefit)............. $ 5,428,000 $ 3,612,000 $ (1,503,000)
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The amount of deferred tax assets (liabilities) resulting from each type of
temporary difference are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
FHLB stock dividends............................. $ (363,000) $ (216,000)
Depreciation..................................... (446,000) (575,000)
Bad debt reserve recapture....................... (1,212,000) (1,860,000)
Deferred loan costs.............................. (595,000) (462,000)
State taxes...................................... 190,000 (17,000)
Deferred lease acquisition cost.................. (1,966,000) (611,000)
Core deposits.................................... (502,000) (525,000)
Other............................................ -- (45,000)
---------- ----------
Total deferred tax liabilities................... (4,894,000) (4,311,000)
---------- ----------
Deferred tax assets:
Provision for loan losses........................ $2,778,000 $4,216,000
Accrued expenses................................. 453,000 181,000
Other reserves................................... 156,000 248,000
Real estate acquired through foreclosure......... 161,000 143,000
NOL carryforward................................. 938,000 1,363,000
General business credit.......................... -- 77,000
AMT credit....................................... -- 104,000
Salary continuation payable...................... 517,000 375,000
Restricted stock................................. 451,000 226,000
Accrued Legal.................................... 1,121,000 1,134,000
Refinance reserve................................ 190,000 341,000
Other............................................ 412,000 --
---------- ----------
Total deferred tax assets........................ 7,177,000 8,408,000
---------- ----------
Net deferred tax asset............................. $2,283,000 $4,097,000
---------- ----------
---------- ----------
</TABLE>
F-68
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 11--INCOME TAXES: (CONTINUED)
As of December 31, 1998 and 1997, no valuation allowance was established
against the recorded net deferred tax asset as, in management's opinion, it is
more likely than not that such asset will be realized.
The income tax provisions (benefits) varied from the federal statutory rate
of 34% for 1998, 1997 and 1996, for the following reasons:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal expected tax rate....................... 34.0% 34.0% 34.0%
Increase in income taxes resulting from:
State franchise tax (net of federal benefit)............ 7.9 8.4 7.5
Goodwill................................................ 10.8 10.5 18.9
Other................................................... 5.2 1.8 (0.4)
--- --- ---------
Effective tax rate........................................ 57.9 54.7 60.0
Release of valuation allowance............................ -- -- (242.8)
--- --- ---------
Total effective tax rate.................................. 57.9% 54.7% (182.8)%
--- --- ---------
--- --- ---------
</TABLE>
At December 31, 1998 the Bank had federal net operating loss carryforwards
of approximately $2,505,000, which expire in the years 2009 through 2011 and
California net operating loss carryforwards of approximately $799,000 which will
expire in the years 1999 through 2001.
Use of these NOLs are subject to limitations imposed by the Internal Revenue
Code Section 382, which restrict the use of NOLs in the event of a change in
ownership. These limitations are not expected to impact the Company's ability to
utilize these NOLs.
NOTE 12--SHAREHOLDERS' EQUITY:
LIBERTY ACQUISITION
As of March 27, 1996, Dartmouth Capital Group, L.P. ("Partnership" or
"DCG"), SDN's principal shareholder, invested approximately $13.4 million in SDN
to fund the Liberty Acquisition. In exchange for that investment, SDN issued a
total of 3,392,405 additional shares of SDN common stock at a price per share of
$3.95, SDN's book value per share as of December 31, 1995. At the Partnership's
direction, SDN issued 1,764,000 of those shares of common stock, in the
aggregate, to certain limited partners of the Partnership (the "Direct Holders")
and the remaining 1,628,405 shares of common stock directly to the Partnership.
A total of 38,300 shares were issued to investment bankers involved in the
Liberty Acquisition and an additional 1,400 shares were issued to the directors
of Liberty at a price of $5.185 per share.
1996 REORGANIZATION
As of September 1, 1996, the Company completed the 1996 Reorganization
contemplated by the Agreement between SDN and CSB. As part of the 1996
Reorganization, SDN became a subsidiary of the Company, effective August 31,
1996, in a transaction in which SDN shareholders received shares of the
Company's common stock in exchange for all of the outstanding shares of SDN
common stock.
F-69
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12--SHAREHOLDERS' EQUITY: (CONTINUED)
COMMERCE ACQUISITION
Prior to August 31, 1996, the Partnership invested approximately $14.5
million in SDN to fund the Commerce Acquisition. In exchange for that
investment, SDN issued a total of 3,664,776 additional shares of SDN common
stock at a price per share of $3.95 pursuant to a subscription agreement entered
into in March 1996. At the Partnership's direction, SDN issued 1,080,000 of
those shares of common stock, in the aggregate, to certain limited Direct
Holders and the remaining 2,584,776 shares of common stock directly to the
Partnership. A total of 161,357 additional shares were issued to other direct
investors who invested in conjunction with the Commerce Acquisition and
investment bankers involved in the Commerce Acquisition.
Holders of SDN common stock were issued one share of Company common stock
for each share held in SDN. A total of 4,327,606 shares of SDN common stock were
outstanding prior to the 1996 Reorganization and the Commerce Acquisition.
Holders of CSB common stock were issued 1,527,540 shares of Company common stock
and received cash of approximately $14.1 million. An additional 58,212 shares of
the Company's common stock and cash of approximately $346,000 are held in escrow
pending final resolution of the SAIF recapitalization. As a result of
legislation that recapitalized the SAIF, passed on September 30, 1996, the stock
and cash escrows were distributed, with approximately $96,000 disbursed in cash
and 16,151 common shares distributed.
ELDORADO ACQUISITION.
Approximately $94.8 million of cash was necessary to pay the cash
consideration to holders of Eldorado common stock and Eldorado stock options and
Eldorado Acquisition-related expenses incurred by the Company, of which $14.0
million was funded from Eldorado's excess capital and $80.3 million was raised
through the Company's sale, effective June 6, 1997, of Class B Common Stock,
Special Common Stock, a Junior Subordinated Debenture (and, indirectly, Series A
Capital Securities), Series B Preferred Stock and common stock warrants, as
described below.
CLASS B COMMON STOCK. In conjunction with the Eldorado Acquisition
financing, the 9,697,430 shares of Company common stock, $.01 par value per
share, outstanding immediately prior to the closing of the Eldorado Acquisition
were redesignated as "Class B Common Stock," and the Company issued 4,248,431
additional shares of Class B Common Stock to various accredited investors for
consideration, net of a 1% commitment fee, of $17,735,115.
DCG, the Company's largest shareholder, purchased 1,012,244 of those shares
of Class B Common Stock for aggregate consideration, net of a 1% commitment fee,
of $4,419,793, of which $4.3 million initially was made in the form of a loan to
the Company in December 1996 to fund an escrow account that would have been
forfeited to Eldorado if the Company were unable to consummate the Acquisition
financing. Peter H. Paulsen, a director of the Company, loaned $200,000 to the
Company on the same terms as DCG. That $4.5 million was converted to shares of
Class B Common Stock upon the consummation of the Acquisition at a purchase
price of $4.40 per share less the 1% commitment fee, which was the same price at
which the remaining shares of common stock and the Special Common Stock were
sold by the Company to fund the acquisition.
SPECIAL COMMON STOCK. The Company sold a total of 4,825,718 shares of
Special Common Stock, $.01 par value per share (the "Special Common"), to DCG,
Madison Dearborn Capital Partners II, L.P.,
F-70
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 12--SHAREHOLDERS' EQUITY: (CONTINUED)
("MDP"), Olympus Growth Fund II, L.P., ("Olympus I"), and Olympus Executive
Fund, L.P., ("Olympus II" and collectively with Olympus I, "Olympus") at a gross
purchase price of $4.81 per share, representing an aggregate payment, net of a
1% commitment fee, of $22,984,570. Neither MDP nor Olympus is an affiliate of
the other, and prior to their investment in the Company, neither was an
affiliate of the Company or DCG.
The Special Common Stock will be entitled to a liquidation preference over
the Class B Common Stock if, in the case of a liquidation or a change in control
of the Company the distribution per share of Common Stock is less than $4.81.
With the exception of 927,826 shares of Non-Voting Special Common Stock issued
to each of MDP and Olympus, the Special Common Stock will have one vote per
share and will vote as a class with the Class B Common Stock. The Voting Special
Common and the Class B Common Stock are hereinafter sometimes referred to as the
"Voting Common Stock."
SUBORDINATED DEBENTURE AND SERIES A CAPITAL SECURITIES. CSBI Capital Trust
I (the "Trust"), a special purpose trust formed by the Company, issued a total
of 27,657 shares of 11 3/4% Series A Capital Securities, $1,000 initial
liquidation value per share (the "Series A Securities"), to DCG, MDP and Olympus
for an aggregate cash payment, net of a 1% commitment fee, of $27,386,368. The
Trust in turn invested the proceeds of the Series A Securities in a Junior
Subordinated Debenture issued by the Company.
SERIES B PREFERRED STOCK. The Company issued a total of 116,593 shares of
11.0% Series B Preferred Stock, $100 liquidation value per share (the "Series B
Preferred"), to DCG, MDP and Olympus for an aggregate amount of $11,545,210, net
of a 1% commitment fee.
COMMON STOCK WARRANTS. In connection with the purchase of the Series B
Preferred Stock, each of MDP, Olympus and DCG purchased a common stock warrant
(collectively, the "Investor Warrants") that entitles the holder to purchase
shares of Class B Common Stock at an exercise price of $4.81 per share. An
aggregate of 4,000,000 shares of Class B Common Stock are subject to the
Investor Warrants. The Investor Warrants expire on June 6, 2007. The aggregate
purchase price of the Investor Warrants was $40,000.
The Company also issued common stock warrants (collectively, the "Shattan
Warrants") to The Shattan Group, LLC (and certain affiliates), which acted as
the Company's placement agent for the sale of securities to MDP and Olympus. The
Shattan Warrants, which were issued as of June 6, 1997 and July 15, 1997,
respectively, entitle the holders thereof to purchase an aggregate of 482,433
shares of Class B Common Stock at an exercise price of $4.81 per share and
expire on June 6, 2002 and July 15, 2002, respectively. The aggregate purchase
price of the Shattan Warrants was $4,824.
CANCELLATION OF COMMON STOCK
In October 1997, the Company settled litigation that it had brought against
the former majority shareholder of CSB, and certain other directors and officers
of CSB arising out of the Company's acquisition of CSB in September 1996. As
part of that settlement, the Company canceled 424,182 shares of Class B Common
Stock that was recorded as a purchase price adjustment.
REVERSE STOCK SPLIT
Effective September 4, 1998, the Company declared a 1-for-2 reverse stock
split of its common stock.
F-71
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13--EMPLOYEE BENEFIT PLANS:
401(K) RETIREMENT PLAN
The Company has a retirement plan under Section 401(k) of the Internal
Revenue Code. All employees of the Company are eligible to participate in the
401(k) plan if they are twenty-one years of age or older and have completed six
months of service. Under the plan, eligible employees are able to contribute up
to 15% 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 $391,000
for 1998 and $310,000 for 1997.
DEFINED BENEFIT PENSION PLAN
The Company has employment agreements with two executive officers that
provides for a defined benefit pension plan. Under the terms of the employment
agreements, a fixed monthly benefit is payable in 180 equal installments upon
reaching age 65. These employment agreements were acquired in conjunction with
the Eldorado acquisition and the Company had no such plans prior to 1997. The
defined benefit pension plan includes the following pension costs for the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
<S> <C> <C>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Service cost of benefits earned during the year....................... $ 31,568 $ 43,342
Interest costs of projected benefit obligation........................ 72,228 66,815
Recognized net actuarial loss......................................... 13,469 --
Net amortization and deferral......................................... 11,499 23,000
---------- ----------
$ 128,764 $ 133,157
---------- ----------
---------- ----------
</TABLE>
An analysis of the activity in the projected benefit obligation is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Benefit obligation at the beginning of the year...... $ 1,073,749 $ 879,000
Service cost......................................... 31,568 43,342
Interest cost........................................ 72,228 66,815
Actuarial loss/(gain)................................ 68,696 84,592
Benefits paid........................................ (50,917) --
------------ ------------
Benefit obligation at the end of the year............ $ 1,195,324 $ 1,073,749
------------ ------------
------------ ------------
</TABLE>
F-72
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13--EMPLOYEE BENEFIT PLANS: (CONTINUED)
An analysis of the funded status of the plan is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Actuarial present value of vested benefit
obligation......................................... $ 1,195,324 $ 1,073,749
----------- -----------
----------- -----------
Accumulated and projected benefit obligation......... $ 1,195,324 $ 1,073,749
Plan assets at fair value............................ -- --
----------- -----------
Projected benefit obligation in excess of plan
assets............................................. 1,195,324 1,073,749
Unrecognized net (loss) gain......................... (42,284) (114,917)
Unrecognized prior service cost...................... -- (11,499)
----------- -----------
Accrued pension and retirement cost included in
accompanying consolidated financial statements..... 1,153,040 947,333
Additional minimum liability......................... 42,284 126,416
----------- -----------
Required minimum liability........................... $ 1,195,324 $ 1,073,749
----------- -----------
----------- -----------
</TABLE>
The projected benefit obligation was determined using a weighted-average
assumed discount rate of 6.00% for the year ended December 31, 1998 and 7.00%
for the year ended December 31, 1997. The benefit obligation is paid using
Company assets upon the executive officers' death or retirement.
RESTRICTED STOCK PLAN
During 1997, the Company's shareholders approved the adoption of a
Restricted Stock Plan, providing for the issuance of common stock to the
Company's current president, subject to restrictions on sale or transfer. The
restrictions on sale or transfer expire over a period of four years which
coincides with the president's retirement. Under this plan 213,778 restricted
shares were issued with a market value of $2,012,000. This amount was recorded
as unearned compensation and is shown as a separate component of shareholders'
equity. Unearned compensation is being amortized to expense over the four year
vesting period with expense of $503,000, and $503,000 recorded for 1998 and
1997, respectively.
Whenever, during the term of employment of the Company's current president,
the Company issues common stock or a common stock equivalent, the Company's
president will be entitled to receive additional shares of restricted stock. The
number of shares of restricted stock that will be issued to the Company's
president will be equal to 3% of the sum of (x) the number of shares of common
stock then to be issued by the Company or, in the case of the issuance of a
common stock equivalent, the number of shares of common stock that such common
stock equivalent may be converted into or exchanged for, and (y) the number of
shares of restricted stock to be issued to the Company's president at that time.
STOCK OPTION PLAN
In January 1997, the Company adopted the Option Plan pursuant to which the
Company's Board of Directors or the Compensation Committee (the "Committee") may
grant stock options to directors and certain officers of the Company or any of
its subsidiaries. There are currently 728,600 shares of Class B Common Stock
subject to the Option Plan. The Option Plan provides only for the issuance of
so-called
F-73
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13--EMPLOYEE BENEFIT PLANS: (CONTINUED)
"nonqualified" stock options (as compared to incentive stock options). The
options granted will vest over four years, in half-year increments, with the
first portion vesting on the 18-month anniversary of the date of grant. The
Option Plan provides that unless the Committee otherwise determines, the options
will have a six-year term, expiring on the sixth anniversary of the date of
grant.
A summary of transactions in the Option Plan for the two years ended
December 31, 1998 follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
AVAILABLE NUMBER OF EXERCISE PRICE
FOR GRANT SHARES PER SHARE
---------- ----------- -----------------
<S> <C> <C> <C>
Balance at December 31, 1996........................ -- -- --
Options granted................................... 339,300 389,300 $ 10.97
---------- ----------- ------
Balance at December 31, 1997........................ 339,300 389,300 10.97
Options granted................................... (161,000) 161,000 14.12
Options cancelled................................. 50,000 (50,000) 13.97
---------- ----------- ------
Balance at December 31, 1998........................ 228,300 500,300 $ 11.69
---------- ----------- ------
---------- ----------- ------
</TABLE>
At December 31, 1998 29,959 shares were exercisable at prices ranging from
$9.64 to $10.52 per share. These shares had a weighted average remaining
contractual life of 4 years and a weighted average exercise price of $9.76.
The maximum number of shares as to which options may be granted under the
Option Plan is sometimes referred to as the "Option Pool." Until such time as
the Company has Tier 1 Capital of $125.0 million or more, if the Company issues
any additional common stock or common stock equivalents, the number of shares in
the Option Pool automatically increases such that the number of shares in the
Option Pool will be equal to 6% of the sum of (i) the shares of common stock
(and common stock equivalents) issued and outstanding immediately following such
issuance and (ii) the number of shares in the Option Pool. The Company had Tier
1 capital of $79.6 million at December 31, 1998.
The Company applies APB Opinion 25 in accounting for its Options Plan, and
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under the
methodology prescribed under SFAS 123, the Company's net earnings and earnings
per share for 1998 and 1997 would have been reduced to the pro forma amounts
indicated below. The per share weighted-average fair value of the stock options
granted during 1998 and 1997 was $3.36 and $2.46, respectively. The fair value
of each option grant is estimated on the date of grant using the Black-Scholes
F-74
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13--EMPLOYEE BENEFIT PLANS: (CONTINUED)
option-pricing model with the following assumptions: expected dividend yield
0.0%, risk-free interest rate of 5.0%, an expected life of 6 years and expected
volatility of 20%.
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net earnings:
As reported..................................................... $ 3,952,000 $ 2,990,000
Pro forma....................................................... 3,736,000 2,434,000
Basic earnings per share:
As reported..................................................... $ 0.29 $ 0.15
Pro forma....................................................... 0.27 0.11
Diluted earnings per share:
As reported..................................................... $ 0.28 $ 0.13
Pro forma....................................................... 0.25 0.09
</TABLE>
NOTE 14--CAPITAL ADEQUACY:
The Bank is subject to various regulatory capital requirements established
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgment by the regulators about components, risk
weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Department of
Financial Institutions (DFI) categorized the Bank as adequately capitalized
under the regulatory framework for prompt corrective action. To be categorized
as adequately capitalized the Bank must maintain minimum total risk-based, Tier
1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
F-75
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 14--CAPITAL ADEQUACY: (CONTINUED)
The Bank's actual capital amounts and ratios are presented in the table
below (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------------------------- --------------------------------------------
MINIMUM CAPITAL MINIMUM CAPITAL
ACTUAL ADEQUACY ACTUAL ADEQUACY
---------------------- ---------------------- -------------------- ----------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
----- --------- ----- --------- --------- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 Capital:
ELBI................................ 8.22% $ 61,815 4.0% $ 30,080 8.85% $ 55,600 4.0% $ 25,129
EB.................................. 8.29 62,329 4.0 30,074 8.91 55,886 4.0 25,089
Leverage Capital:
ELBI................................ 5.96% $ 61,815 3.0% $ 31,115 6.59% $ 55,600 3.0% $ 25,311
EB.................................. 6.01 62,329 3.0 31,113 6.64 55,886 3.0 25,250
Total Capital:
ELBI................................ 9.19% $ 69,119 8.0% $ 60,169 10.18% $ 64,014 8.0% $ 50,306
EB.................................. 9.26 69,633 8.0 60,158 10.16 63,749 8.0 50,196
</TABLE>
NOTE 15--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK:
In the ordinary course of business, the Company enters into various types of
transactions which involve financial instruments with off-balance sheet risk.
These financial instruments include commitments to extend credit and sell loans,
standby letters of credit, forward commitments to sell mortgage-backed
securities and put options to sell mortgage-backed securities and are not
reflected in the accompanying consolidated statement of financial condition.
These financial instruments carry various degrees of credit and market risk.
Credit risk is defined as the possibility that a loss may occur from the failure
of another party to perform according to the terms of the contract. Market risk
is the possibility that future changes in market prices will make a financial
instrument less valuable. Management does not anticipate that the settlement of
these financial instruments will have a material adverse effect on the Company's
financial position or results of operations.
The contract or notional amounts of those instruments reflect the extent of
the Company's involvement in particular classes of financial instruments. The
following is a summary of the notional amounts of various off-balance sheet
financial instruments entered into by the Company:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Commitments to extend credit................................. $ 230,314,000 $ 173,801,000
Standby letters of credit.................................... $ 2,545,000 $ 2,028,000
Put options to sell mortgage-backed securities............... $ 76,000,000 $ 10,000,000
Forward commitments to sell mortgage-backed securities....... $ 94,000,000 $ 26,000,000
</TABLE>
The Company is principally engaged in providing commercial loans and leases
with interest rates that fluctuate with the various market indices and
variable-rate real estate loans. These loans are primarily
F-76
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 15--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: (CONTINUED)
funded through short-term demand deposits and certificates of deposit with fixed
rates. The contractual amounts of commitments to extend credit, standby and
commercial letters of credit represent the amount of credit risk. Since many of
the commitments and letters of credit are expected to expire without being
drawn, the contractual amounts do not necessarily represent future cash
requirements.
Commitments to extend credit are agreements to lend to a customer as long as
there are no violations of any conditions established in the contract. The
Company evaluates the creditworthiness of each customer. The amount of
collateral obtained, if deemed necessary by the Company upon the extension of
credit, is based upon management's evaluation. Collateral varies, but may
include securities, accounts receivable, inventory, personal property,
equipment, income property, commercial and residential property. Commitments
generally have fixed expiration dates or other terminal clauses and may require
the payment of fees. The Company experiences interest rate risk on commitments
to extend credit which are at fixed rates. There were no fixed rate commitments
at December 31, 1998 or 1997.
Standby letters of credit are written conditional commitments issued by the
Company to guarantee the performance of a customer to a third party, generally
in the production of goods and services or under contractual commitments in the
financial market. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Bank uses the same underwriting policies as if a loan were made.
The Bank's policy is to hedge a portion of its loans held for sale and its
commitments to originate loans against interest rate risk with forward
commitments to sell, or put options on, mortgage-backed securities. Forward
commitments are contracts for delayed delivery of securities in which the Bank
agrees to make delivery at a specified future date of a specified security, at a
specified price or yield. Put options convey to the Bank the right, but not the
obligation, to sell the securities at a contractually specified price. Risks
arise from the possible inability of counterparties to meet the terms of their
contracts and from movements in securities' values and interest rates. The Bank
tries to minimize these risks by dealing with only primary brokers and
maintaining correlation with the asset or commitment being hedged. The Bank
monitors its exposure through the use of valuation models provided by a
financial advisory service. The unrealized losses on open forward contracts to
sell mortgage-backed securities were $108,000 and $44,000 as of December 31,
1998 and 1997, respectively. There were no unrealized losses on open put options
to sell mortgage-backed securities as of December 31, 1998 and 1997.
Commitments to sell loans are agreements to sell loans originated by the
Bank to investors. These commitments may be optional or mandatory. Under an
optional commitment, a commitment fee is paid and the Bank carries no risk in
excess of the loss of such fee in the event that the Bank is unable to deliver
the loans into the commitment. Mandatory commitments may entail possible
financial risk to the Bank if it is unable to deliver the loans in sufficient
quantity or at sufficient rates for commitments which are at a fixed rate. There
were commitments of $94,000,000 and $26,000,000 at December 31, 1998 and 1997.
At December 31, 1998 the commitments were a combination of fixed and adjustable
rate loans with coupons ranging from 5.5% to 7.00% and with settlement dates
ranging from January 14, 1999 to February 22, 1999. The Bank had closed loans at
December 31, 1998 of $43,287,000 with which to satisfy those commitments and a
pipeline of unclosed loans of $89,732,000 that, in management's opinion, will be
sufficient to fulfill the balance of the commitment.
F-77
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 16--DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
Fair values for each class of financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------- ---------------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Federal funds sold........... $ 109,280,000 $ 109,280,000 $ 121,030,000 $ 121,030,000
Investment securities................. 213,399,000 213,399,000 67,295,000 67,295,000
Loans and leases receivable........... 516,729,000 513,331,000 522,054,000 527,736,000
Mortgage loans held for sale.......... 248,833,000 251,321,000 96,230,000 97,192,000
Financial Liabilities:
Deposits.............................. $ 1,033,738,000 1,018,963,000 $ 765,203,000 $ 751,799,000
Federal funds purchased............... 5,900,000 5,900,000 2,050,000 2,050,000
Note payable to related parties....... 338,000 338,000 -- --
Mandatory convertible debentures...... -- -- 537,000 537,000
Subordinated debentures............... 27,657,000 27,657,000 27,657,000 27,657,000
</TABLE>
CASH AND FEDERAL FUNDS SOLD
For cash and Federal funds sold the carrying amount is a reasonable estimate
of fair value.
INVESTMENT SECURITIES
All investment securities are marketable and have an easily determined
market value. Market quotes are used in determining the fair value.
LOANS AND LEASES RECEIVABLE
Loans were broken into fixed and variable rate loans for this analysis. The
credit risk component of the fair value analysis is assumed to be approximated
by the loan and lease loss reserve. A separate analysis is conducted on the
adequacy for the allowance for loan and lease losses and should be a reasonable
proxy for this credit risk component.
Fixed rate commercial and consumer loans are valued using a discounted cash
flow model that assumes a prepayment rate of 10% and a discount rate of prime
plus 50 basis points. These commercial and consumer loans were grouped into
categories and the weighted average maturity and rate were used in computing the
future cash flows. Leases are regularly sold into the secondary market and on
average have sold at a premium of approximately 3%. To determine the fair value
of leases, this potential sale premium was discounted to par to account for the
delinquent leases that would not garner the same sale premium. Fixed rate
residential mortgage loans were valued at par realizing that any premiums
attributable to the performing portfolio would be offset by discounts in the
delinquent portion of the portfolio.
Variable rate loans were broken down by loan type and evaluated based upon
the current weighted average rate of the loans in comparison to current market
conditions. Premiums of up to 2% were applied to those groups of loans that had
higher than market rates while loans at or below market were discounted.
F-78
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 16--DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)
MORTGAGE LOANS HELD FOR SALE
Loans held for sale are valued at a premium of 1%. These loans consist of
residential mortgage loans and are largely a fixed rate product. The premium
used approximates the gain that would be recognized on the sale of these loans,
discounted for hedging and sales costs.
DEPOSITS
Deposits consist of both non-interest and interest bearing accounts. Each
type of account has been valued differently as described below.
Non-interest bearing demand--Core non-interest bearing deposits are a
premium account for commercial banks and as such have been valued with a factor
of .95. Non-core type accounts such as title company deposits and custodial
accounts have been valued at par due to their temporary and volatile nature.
Interest bearing demand, savings and money market accounts--These accounts
are all priced competitively in the marketplace and are low cost funds for the
Bank. As such, these deposits have also been ascribed as premium accounts and
valued with a factor of .99.
Certificates of deposit--Certificates of deposit accounts ("CD") were marked
to market utilizing current CD rates compared to rates being paid. CDs were
grouped based upon their remaining maturities and the weighted average maturity
and rates were grouped based upon their remaining maturities and the weighted
average maturity and rates were utilized in the analysis. Current rates for CDs
were determined utilizing the Treasury rates for comparable maturities less 25
basis points.
Generally, rates currently being paid are higher than current market rates
which results in these accounts having a lower fair value.
BORROWINGS
Federal funds purchased are over-night investments and the carrying value is
a reasonable estimate of fair value. For subordinated debentures, having been
recently priced at the issuance in 1997, the carrying value is a reasonable
estimate of fair value.
NOTE PAYABLE TO RELATED PARTIES
The note payable to related parties has a maturity of 15 months and is
stated at cost.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
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 credit worthiness of the counterparties. The fair value of
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. The fair value of commitments to
extend credit and standby letters of credit is not material.
F-79
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 16--DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)
Forward Commitments to Sell Mortgage-Backed Securities--Fair value is based
on quoted prices for financial instruments with identical or similar terms. The
fair value of forward commitments to sell mortgage-backed securities is not
material.
Put Options to Sell Mortgage-Backed Securities--Fair value is derived from
active exchange quotations. The fair value of put options to sell
mortgage-backed securities is not material.
NOTE 17--COMMITMENTS AND CONTINGENCIES:
LITIGATION
As of December 31, 1998, no litigation was pending against the Company
itself. Eldorado Bank is the defendant in an action filed in 1994 by a former
CSB loan production officer alleging wrongful termination, breach of contract,
defamation and various other causes of action. In October 1997, a jury awarded
the former employee $3.8 million in damages, including $2.0 million in punitive
damages. The trial court subsequently reduced the award to $2.0 million,
including $500,000 in punitive damages. In conjunction with this initial
judgment, the Bank recorded a reserve for the full amount of the judgment. Both
the Company and its former employee have filed appeals, with the former employee
seeking to have the total amount of the jury's punitive damage award reinstated.
Interest accrues on the judgment at the statutory rate of 10% and as of December
31, 1998 the judgment, including interest, was equal to $2.6 million. There can
be no assurance, however, that the Company will not incur additional expense in
connection with such matter or that an adverse outcome in the appeal will not
have a material adverse effect on the Company's results of operations.
The Company is from time to time subject to various legal actions (in
addition to that described above) which are considered to be part of its normal
course of business. Management, after consultation with legal counsel, does not
believe that the ultimate liability, if any, arising from those other actions
will have a materially adverse effect on the financial position or results of
operations of the Company.
A summary of noncancellable future operating lease commitments at December
31, 1998 is as follows:
<TABLE>
<S> <C>
1999........................................................... $ 2,575,000
2000........................................................... 2,434,000
2001........................................................... 1,806,000
2002........................................................... 1,431,000
2003........................................................... 1,322,000
Thereafter..................................................... 3,613,000
-------------
$ 13,181,000
-------------
-------------
</TABLE>
It is expected that in the normal course of business, expiring leases will
be renewed or replaced.
Rent expense under all noncancellable operating lease obligations aggregated
$2,554,000, $2,302,000 and $1,101,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
F-80
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 17--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
DIVIDEND RESTRICTIONS
Federal Reserve policies declare that a bank holding company may not pay
cash dividends on its common stock unless its net income is sufficient to fund
fully such dividend, and its prospective rate of earnings retention after the
payment of such dividend appears consistent with its capital needs, asset
quality and overall financial condition. In connection with the Eldorado
Acquisition, the Company agreed that it will not pay dividends on common stock
without the prior approval of the Federal Reserve.
The Company is a legal entity separate and distinct from the Bank.
Substantially all of the Company's revenues and cash flow, including funds
available for the payments of dividends and other operating expenses, consists
of dividends paid to the Company by the Bank. There are statutory and regulatory
limitations on the amount of dividends which may be paid to the Company by the
Bank. Dividends payable by the Bank are restricted under California law to the
lesser of the Bank's retained earnings, or the Bank's net income for the latest
three fiscal years, less dividends previously declared during that period, or,
with the approval of the DFI, to the greater of the retained earnings of the
Bank, the net income of the Bank for its last fiscal year or the net income of
the Bank for its current fiscal year. In connection with the Eldorado
Acquisition, Eldorado Bank paid a dividend of $14 million, which exceeded the
Bank's net income for the previous three fiscal years. As a result, the Bank
must obtain the approval of the DFI with respect to the payment of any dividend
up to the greater of the Bank's retained earnings, the net income of the Bank
for its last fiscal year and the net income of the Bank for its current fiscal
year. In no event can the Bank issue a dividend in excess of such amounts.
Federal Reserve regulations also limit the payment of dividends by a state
member bank. Under Federal Reserve regulations, dividends may not be paid unless
both undivided profits and earnings limitations have been met. First, no
dividend may be paid if it would result in a withdrawal of capital or exceed the
bank's undivided profits as reported in its most recent Report of Condition and
Income, without the prior approval of the Federal Reserve and two-thirds of the
shareholders of each class of stock outstanding. Second, a state member bank may
not pay a dividend without the prior written approval of the Federal Reserve if
the total of all dividends declared in one year exceeds the total of net income
for that year plus its retained net income for the preceding two calendar years.
The payment of dividends on capital stock by the Company and the Bank may
also be limited by other factors, including applicable regulatory capital
requirements and broad enforcement powers of the federal regulatory agencies.
Both the Federal Reserve and the DFI have broad authority to prohibit the
Company and the Bank from engaging in practices which the banking agency
considers to be unsafe or unsound. It is possible, depending upon the financial
condition of the Bank or the Company and other factors, that the applicable
regulator may assert that the payment of dividends or other payments by the Bank
or the Company is an unsafe or unsound practice and, therefore, implement
corrective action to address such a practice. Among other things, Federal
Reserve policies forbid the payment by bank subsidiaries to their parent
companies of management fees which are unreasonable in amount or exceed the fair
market value of the services rendered and tax sharing payments which do not
reflect the taxes actually due and payable.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
"undercapitalized" for regulatory purposes. Those regulations and restrictions
may limit the Company's
F-81
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 17--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
ability to obtain funds from the Bank for its cash needs, including funds for
payment of interest and operating expenses and dividends.
NOTE 18--OPERATING SEGMENTS:
The Company has determined that its reportable segments are the operations
pertaining to mortgage banking ("Mortgage") and the operations pertaining to
commercial and consumer banking ("Commercial and Consumer"). Commercial and
Consumer includes the operations of the Company's equipment leasing division.
The segment labeled "Other" primarily consists of the Company's administrative
function which is responsible for investment and borrowing activities and other
administrative services. The financial results of the Company's operating
segments are presented on an accrual basis. There are no significant differences
among the accounting policies of the segments as compared to the Company's
consolidated financial statements. The Company evaluates the performance of its
segments based on net interest income, non-interest income, net income and total
assets. Funds are allocated as needed from Commercial Banking to Mortgage at a
rate comparable to the prime rate less 2.25%.
F-82
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 18--OPERATING SEGMENTS: (CONTINUED)
The tables below present information about the Company's operating segments
as of or for the years ended December 31, 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------------
MORTGAGE COMMERCIAL AND CONSUMER OTHER TOTAL
-------------- ------------------------- -------------- ----------------
<S> <C> <C> <C> <C>
Interest income.................... $ 13,820,000 $ 52,164,000 $ 8,503,000 $ 74,487,000
Interest expense................... 6,000 25,102,000 6,005,000 31,113,000
Internal allocation of funds....... (11,802,000) 17,648,000 (5,846,000) --
-------------- ------------- -------------- ----------------
Net interest income.............. 2,012,000 44,710,000 (3,348,000) 43,374,000
Provision for loan and lease
loss............................. -- 4,272,000 -- 4,272,000
Non-interest income................ 12,225,000 8,003,000 1,327,000 21,555,000
Depreciation and amortization...... 401,000 941,000 4,308,000 5,650,000
Other non-interest expense......... 10,783,000 21,806,000 13,038,000 45,627,000
-------------- ------------- -------------- ----------------
Net income before taxes............ 3,053,000 25,694,000 (19,367,000) 9,380,000
Provision for income taxes......... 1,282,000 10,792,000 (6,646,000) 5,428,000
-------------- ------------- -------------- ----------------
Net income after taxes............. $ 1,771,000 $ 14,902,000 $ (12,721,000) $ 3,952,000
-------------- ------------- -------------- ----------------
-------------- ------------- -------------- ----------------
Segment assets..................... $ 256,240,000 $ 525,231,000 $ 404,379,000 $ 1,185,850,000
-------------- ------------- -------------- ----------------
-------------- ------------- -------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------
MORTGAGE COMMERCIAL AND CONSUMER OTHER TOTAL
-------------- ------------------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest income...................... $ 6,588,000 $ 44,418,000 $ 2,489,000 $ 53,495,000
Interest expense..................... 5,000 18,108,000 2,501,000 20,614,000
Internal allocation of funds......... (5,349,000) 7,245,000 (1,896,000) --
-------------- ------------- -------------- --------------
Net interest income................ 1,234,000 33,555,000 (1,908,000) 32,881,000
Provision for loan and lease loss.... -- 1,495,000 -- 1,495,000
Non-interest income.................. 5,031,000 6,641,000 3,232,000 14,904,000
Depreciation and amortization........ 408,000 723,000 3,085,000 4,216,000
Other non-interest expense........... 8,418,000 18,146,000 8,908,000 35,472,000
-------------- ------------- -------------- --------------
Net income before taxes.............. (2,561,000) 19,832,000 (10,669,000) 6,602,000
Provision for income taxes........... (1,076,000) 8,226,000 (3,538,000) 3,612,000
-------------- ------------- -------------- --------------
Net income after taxes............... $ (1,485,000) $ 11,606,000 $ (7,131,000) $ 2,990,000
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
Segment assets....................... $ 119,550,000 $ 520,994,000 $ 261,811,000 $ 902,355,000
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
</TABLE>
F-83
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 18--OPERATING SEGMENTS: (CONTINUED)
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------------
MORTGAGE COMMERCIAL AND CONSUMER OTHER TOTAL
------------- ------------------------- ------------- --------------
<S> <C> <C> <C> <C>
Interest income......................... $ 1,646,000 $ 16,847,000 $ 859,000 $ 19,352,000
Interest expense........................ 11,000 7,398,000 235,000 7,644,000
Internal allocation of funds............ (1,081,000) 1,827,000 (746,000) --
------------- ------------- ------------- --------------
Net interest income................... 554,000 11,276,000 (122,000) 11,708,000
Provision for loan and lease loss....... -- 545,000 (30,000) 515,000
Non-interest income..................... 1,785,000 2,712,000 402,000 4,899,000
Depreciation and amortization........... 123,000 287,000 500,000 910,000
Other non-interest expense.............. 2,830,000 8,814,000 2,716,000 14,360,000
------------- ------------- ------------- --------------
Net income before taxes................. (614,000) 4,342,000 (2,906,000) 822,000
Provision for income taxes.............. (258,000) 63,000 (1,308,000) (1,503,000)
------------- ------------- ------------- --------------
Net income after taxes.................. $ (356,000) $ 4,279,000 $ (1,598,000) $ 2,325,000
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Segment assets.......................... $ 88,127,000 $ 249,568,000 $ 99,365,000 $ 437,060,000
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
F-84
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 19--CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY:
The following are condensed unconsolidated financial statements of Eldorado
Bancshares, Inc..
CONDENSED STATEMENT OF CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Assets
Cash and due from banks........................................ $ 122,000 $ 262,000 $ 4,644,000
Investments.................................................... 38,000 38,000 408,000
Investment in subsidiary....................................... 79,504,000 73,779,000 39,617,000
Goodwill and other intangibles................................. 47,662,000 49,756,000 429,000
Receivables and other assets................................... 178,000 176,000 210,000
-------------- -------------- -------------
Total Assets..................................................... $ 127,504,000 $ 124,011,000 $ 45,308,000
-------------- -------------- -------------
-------------- -------------- -------------
Liabilities and Shareholders' Equity
Guaranteed preferred beneficial interest in the Company's
junior subordinated debentures............................... $ 28,513,000 $ 28,513,000 $ --
Accrued expenses............................................... 513,000 225,000 --
Mandatory convertible debentures............................... -- 537,000 --
Due to subsidiary.............................................. -- -- 36,000
Notes payable to related parties............................... 338,000 -- 4,500,000
-------------- -------------- -------------
Total liabilities................................................ 29,364,000 29,275,000 4,536,000
-------------- -------------- -------------
Shareholders' equity
Preferred stock................................................ 11,659,000 11,659,000 --
Common stock................................................... 92,000 183,000 97,000
Additional paid-in-capital..................................... 83,946,000 83,855,000 42,394,000
Retained earnings (deficit).................................... 3,194,000 524,000 (1,736,000)
Unearned compensation.......................................... (1,006,000) (1,509,000) --
Unrealized gain on investments, net of tax..................... 255,000 24,000 17,000
-------------- -------------- -------------
Total shareholders' equity....................................... 98,140,000 94,736,000 40,772,000
-------------- -------------- -------------
Total liabilities and shareholders' equity....................... $ 127,504,000 $ 124,011,000 $ 45,308,000
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
F-85
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 19--CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY: (CONTINUED)
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Income:
Dividend from Bank................................................... $ 3,800,000 $ 1,700,000 $ --
Interest income...................................................... 102,000 51,000 8,000
Non-interest income.................................................. 49,000 866,000 154,000
------------- ------------ ------------
Total Income......................................................... 3,951,000 2,617,000 162,000
Expenses:
Interest expense..................................................... 3,450,000 1,959,000 --
Amortization of goodwill and intangibles............................. 2,574,000 1,537,000 6,000
Non-interest expense................................................. 1,481,000 1,453,000 156,000
------------- ------------ ------------
Total expense........................................................ 7,505,000 4,949,000 162,000
Loss before taxes and equity in undistributed earnings of subsidiary... (3,554,000) (2,332,000) --
Income tax benefit..................................................... 2,010,000 1,161,000 --
------------- ------------ ------------
Loss before equity in undistributed earnings of subsidiary............. (1,544,000) (1,171,000) --
Equity in undistributed earnings of subsidiary......................... 5,496,000 4,161,000 2,325,000
------------- ------------ ------------
Net income........................................................... $ 3,952,000 $ 2,990,000 $ 2,325,000
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
F-86
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 19--CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY: (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income......................................... $3,952,000 $ 2,990,000 $ 2,325,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Equity in earnings of subsidiary................. (9,296,000) (5,861,000) (2,325,000)
Accretion/amortization related to securities..... -- -- 1,000
Dividends from subsidiary........................ 3,800,000 1,700,000 --
Loss on sale of securities, net.................. -- 7,000 --
Amortization of goodwill and other intangibles... 2,574,000 1,537,000 --
Amortization of compensation expense............. 503,000 503,000 --
Income taxes..................................... 15,000 109,000 --
(Increase) decrease in other assets.............. (497,000) 163,000 (639,000)
Increase (decrease) in other liabilities......... 291,000 (443,000) 35,000
---------- ----------- -----------
Net cash (used in) provided by operating
activities......................................... 1,342,000 705,000 (603,000)
---------- ----------- -----------
Investing activities:
Purchase of investment securities.................. -- -- (409,000)
Purchase of CSB.................................... -- -- (20,327,000)
Purchase of SDN Bancorp............................ -- -- (21,008,000)
Merger of SDN Bancorp, net of cash received........ -- 22,000 --
Purchase of Eldorado, net of cash received......... -- (80,815,000) --
Maturities/Sales of investment securities.......... -- 404,000 --
---------- ----------- -----------
Net cash used in investing activities................ -- (80,389,000) (41,744,000)
---------- ----------- -----------
Financing activities:
Issuance of capital securities..................... -- 27,657,000 --
Issuance of preferred stock........................ -- 11,659,000 --
Issuance of Class B common stock................... -- 18,004,000 42,491,000
Redemption of mandatory convertible debentures..... (538,000) -- --
Net proceeds from issuance of notes payable........ 338,000 -- 4,500,000
Issuance of special common stock................... -- 23,212,000 --
Payment of dividends............................... (1,282,000) (730,000) --
Other borrowings................................... -- (4,500,000) --
---------- ----------- -----------
Net cash provided by financing activities............ (1,482,000) 75,302,000 46,991,000
---------- ----------- -----------
Net increase (decrease) in cash...................... (140,000) (4,382,000) 4,644,000
Cash at beginning of year............................ 262,000 4,644,000 --
---------- ----------- -----------
Cash at end of year.................................. $ 122,000 $ 262,000 $ 4,644,000
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
F-87
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 20--SUBSEQUENT EVENTS:
Effective January 22, 1999, the Company completed the acquisition of
Antelope Valley Bank ("Antelope"). The acquisition of Antelope was effected
pursuant to an Agreement and Plan of Merger entered into between the Company and
Antelope on September 22, 1998 (the "Acquisition Agreement"). At December 31,
1998, Antelope had assets of $211,700,000, deposits of $187,749,000 and
shareholders' equity of $21,393,000. The Company issued 2,777,543 shares of
Class B common stock to complete the merger with Antelope.
The Antelope Acquisition was accounted for using the pooling of interest
method of accounting in accordance with APB Opinion 16, "Business Combinations."
Accordingly, the assets, liabilities and shareholders' equity of Antelope will
be recorded on the books of the Company at their values as reported on the books
of Antelope immediately prior to the consummation of the merger. No goodwill
will be created in the merger with Antelope.
The following table sets forth selected pro forma combined financial
information of the Company and Antelope for the years ended December 31, 1998
and 1997. The pro forma operating data reflects the effect of the Antelope
Acquisition as if it was consummated on January 1, 1997. The pro forma results
are not necessarily indicative of the results that would have occurred had the
acquisition actually occurred as of such date, nor are they necessarily
indicative of the results of future operations.
<TABLE>
<CAPTION>
PRO FORMA COMBINED FOR
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
-------------------------------------------
ELDORADO ANTELOPE COMBINED
------------- ------------- -------------
<S> <C> <C> <C>
Net interest income................................................. $ 43,374,000 $ 10,999,000 $ 54,373,000
Provision for loan and lease losses................................. 4,272,000 1,280,000 5,552,000
Net income before taxes............................................. 9,380,000 2,052,000 11,432,000
Net income.......................................................... 3,952,000 1,462,000 5,414,000
Basic earnings per share............................................ $0.29 $0.53 $0.35
Diluted earnings per share.......................................... $0.28 $0.53 $0.33
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED FOR
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
------------------------------------------
ELDORADO ANTELOPE COMBINED
------------- ------------ -------------
<S> <C> <C> <C>
Net interest income.................................................. $ 32,881,000 $ 9,883,000 $ 42,764,000
Provision for loan and lease losses.................................. 1,495,000 1,054,000 2,549,000
Net income before taxes.............................................. 6,602,000 2,342,000 8,944,000
Net income........................................................... 2,990,000 1,920,000 4,910,000
Basic earnings per share............................................. $0.31 $0.69 $0.41
Diluted earnings per share........................................... $0.26 $0.69 $0.37
</TABLE>
F-88
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,433,900 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
KEEFE, BRUYETTE & WOODS, INC.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the Securities and Exchange Commission registration fee and the NASD
filing fee.
<TABLE>
<S> <C>
SEC registration fee.............................................................. $ 13,570
NASD filing fee................................................................... 5,100
Blue Sky fees and expenses........................................................ 10,000
Nasdaq listing fee................................................................ 17,500
Printing and engraving expenses................................................... 200,000
Legal fees and expenses........................................................... 450,000
Accounting fees and expenses...................................................... 100,000
Transfer agent and registrar fees................................................. 25,000
Miscellaneous..................................................................... 25,000
---------
Total......................................................................... $ 846,170
---------
---------
</TABLE>
The Company will bear all of the foregoing fees and expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Delaware corporation. Reference is made to Section 145 of
the Delaware General Corporation Law, as amended, which provides that a
corporation may indemnify any person who was or is a party to or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceedings, had no
reasonable cause to believe his conduct was unlawful. Section 145 further
provides that a corporation similarly may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Delaware Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite an adjudication of
liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
The Company's Certificate of Incorporation provides that the Company's
directors shall not be liable to the Company or its shareholders for monetary
damages for any breach of fiduciary duty as a director, except to the extent
that exculpation from liability is not permitted under the Delaware General
II-1
<PAGE>
Corporation Law. The provision does not eliminate liability of a director for
any act or omission occurring prior to the date on which the provision became
effective.
The Company maintains an indemnification insurance policy covering all
directors and officers of the Company and its subsidiaries.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Described below are sales and other issuances of equity securities by the
Company during the past three years that were not registered under Section 5 of
the Securities Act of 1933, as amended (the "Securities Act"). The share data
presented below have been adjusted to give effect to the 1-for-2 reverse split
effective in September 1998.
1999
KELLER RESTRICTED STOCK. In January 1999, the Company issued a total of
approximately 86,000 shares of common stock to Robert P. Keller, President and
Chief Executive Officer of the Company, pursuant to the terms of Mr. Keller's
employment agreement with the Company. The Company's issuance of those shares
was exempt from registration under the Securities Act by virtue of Regulation D
thereunder and/or Section 4(2) thereof.
1997
FUNDING FOR ELDORADO ACQUISITION. Approximately $94.8 million of cash was
necessary to pay the cash consideration to holders of Eldorado Bancorp common
stock and stock options and Eldorado Bancorp acquisition-related expenses
incurred by the Company. Of that amount, $14.0 million was funded from Eldorado
Bancorp's excess capital through a dividend by Eldorado Bank and $80.3 million
was raised through the Company's sale, effective June 6, 1997, of common stock,
a Junior Subordinated Debenture (and, indirectly, 11 3/4% Subordinated Capital
Income Securities, Series A, Series B Preferred Stock and common stock warrants,
as described below. The issuance of such securities was exempt from registration
under the Securities Act by virtue of Regulation D thereunder and/or Section
4(2) thereof.
COMMON STOCK. In conjunction with the Eldorado Bancorp acquisition
financing, the Company issued 2,124,215 additional shares of common stock to
various accredited investors for consideration, net of a 1% commitment fee, of
$17,833,115. Of those shares, 903,902 were sold to persons who, at the time of
issuance, were directors of the Company, affiliates of directors or nominees to
become directors. See "Certain Transactions."
DCG purchased 506,122 of those shares of common stock for aggregate
consideration, net of a 1% commitment fee, of $4,419,793, of which $4.3 million
initially was made in the form of a loan to the Company in December 1996 to fund
an escrow account that would have been forfeited to Eldorado if the Company were
unable to consummate the Eldorado Bancorp acquisition financing. Peter H.
Paulsen, then a director of the Company, loaned $200,000 to the Company on the
same terms as DCG. That $4.5 million was converted to shares of common stock
upon the consummation of the Eldorado Bancorp acquisition at a purchase price of
$8.80 per share less the 1% commitment fee, and the interest on such loan was
converted to common stock at a purchase price of $9.62 per share less the 1%
commitment fee, which was the same price at which the remaining shares of common
stock and the Special Common Stock were sold by the Company to fund the Eldorado
Bancorp acquisition.
The Company also sold a total of 2,412,859 shares of common stock to DCG,
Madison Dearborn and Olympus at a gross purchase price of $9.62 per share,
representing an aggregate payment, net of a 1% commitment fee, of $22,984,570.
Neither Madison Dearborn nor Olympus is an affiliate of the other, and prior to
their investment in the Company, neither was an affiliate of the Company or DCG.
The common stock acquired by DCG, Madison Dearborn and Olympus had a liquidation
preference if, in the case of a liquidation or a change in control of the
Company, the distribution per share of common stock is less than $9.62, which
liquidation preference will be eliminated prior to the closing of the offering.
II-2
<PAGE>
SUBORDINATED DEBENTURE AND CAPITAL SECURITIES. CSBI Capital Trust I (the
"Trust"), a special purpose trust formed by the Company, issued a total of
27,657 of its 11 3/4% Subordinated Capital Income Securities, Series A, $1,000
initial liquidation amount per security (the "Capital Securities"), to DCG,
Madison Dearborn and Olympus for an aggregate cash payment, net of a 1%
commitment fee, of $27,386,368. The Trust in turn invested the proceeds of the
Capital Securities in a Subordinated Debenture issued by the Company.
SERIES B PREFERRED STOCK. The Company issued a total of 116,593 shares of
11% Series B Preferred Stock, $100 liquidation value per share (the "Series B
Preferred"), to DCG, Madison Dearborn and Olympus for an aggregate amount of
$11,545,210, net of a 1% commitment fee.
COMMON STOCK WARRANTS. In connection with the purchase of the Series B
Preferred, each of Madison Dearborn, Olympus and DCG purchased a common stock
warrant (collectively, the "Investor Warrants") that entitles the holder to
purchase shares of common stock at an exercise price of $9.62 per share. An
aggregate of 2,000,000 shares of common stock are subject to the Investor
Warrants. The Investor Warrants expire on June 6, 2007. The aggregate purchase
price of the Investor Warrants was $40,000.
The Company also issued common stock warrants (collectively, the "Shattan
Warrants") to The Shattan Group, LLC, which acted as the Company's placement
agent for the sale of securities to Madison Dearborn and Olympus. The Shattan
Warrants, which were issued as of June 6, 1997 and July 15, 1997, respectively,
entitle the holders thereof to purchase an aggregate of 241,216 shares of common
stock at an exercise price of $9.62 per share and expire on June 6, 2002 and
July 15, 2002, respectively. The aggregate purchase price of the Shattan
Warrants was $4,824.
KELLER RESTRICTED STOCK. During the year ended December 31, 1997, the
Company issued a total of 187,982 shares of common stock to Robert P. Keller,
President and Chief Executive Officer of the Company, pursuant to the terms of
the Mr. Keller's employment agreement with the Company. This issuance is in
addition to 25,796 shares under the same agreement related to activity in 1996
and reflected in 1997. The Company's issuance of those shares was exempt from
registration under the Securities Act by virtue of Regulation D thereunder
and/or Section 4(2) thereof.
1996
As of March 27, 1996, DCG invested approximately $13.4 million in the
Company's predecessor, SDN Bancorp, Inc. ("SDN") to fund SDN's acquisition of
Liberty National Bank ("Liberty"). In exchange, SDN issued 1,696,202 shares of
common stock at a price of $7.90 per share. In addition, SDN issued a total of
19,850 shares of common stock to accredited investors contemporaneously with the
Liberty acquisition in exchange for cash or services at a price of $10.37 per
share. The issuance of such securities was exempt from registration under the
Securities Act by virtue of Regulation D thereunder and Section 4(2) thereof.
As of August 28, 1996, DCG invested approximately $14.5 million in SDN to
fund the Company's acquisition of Commerce Security Bank ("CSB"). In exchange
for that investment, SDN issued 1,832,388 at a price per share of $7.90. The
issuance of such shares was exempt from registration under the Securities Act by
virtue of Regulation D thereunder or Section 4(2) thereof.
As of September 1, 1996, the Company effected a reorganization with SDN and
CSB pursuant to which holders of SDN common stock received for no additional
consideration one share of common stock for each share of SDN common stock then
outstanding and CSB shareholders received an aggregate of 771,846 shares of
common stock. The issuance of such shares was exempt from registration under the
Securities Act by virtue of Section 3(a)(10) thereof, as confirmed by a staff
no-action letter dated July 12, 1996.
Contemporaneously with the SDN and CSB reorganization, the Company issued a
total of 80,679 shares of common stock to accredited investors in exchange for
cash or services rendered in connection with that reorganization. The price per
share of common stock ranged from $7.90 to $10.25. The issuance of such shares
was exempt from registration under the Securities Act by virtue of Regulation D
thereunder or Section 4(2) thereof.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
(A) EXHIBITS.
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- --------- ----------------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
+1.1 Form of Underwriting Agreement
2.1 Agreement and Plan of Merger dated September 16, 1998 by and between the Company and Antelope
Valley Bank (incorporated by reference to the Company's Current Report on Form 8-K filed with
the Commission on September 22, 1998)
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to the Company's
Current Report on Form 8-K/A filed with the Commission on July 11, 1997)
3.2 Certificate of Amendment to Certificate of Incorporation (incorporated by reference to the
Company's Registration Statement in Form S-4 (File no. 333-65683))
+3.3 Form of Amended and Restated Certificate of Incorporation (to be filed with the Delaware
Secretary of State prior to the completion of the offering covered by this Registration
Statement)
3.4 By-laws of the Company (incorporated by reference to the Company's September 30, 1996 Quarterly
Report on Form 10-Q)
4.1 Form of Specimen Stock Certificate (incorporated by reference to the Company's Form 8-A filed
with the Commission on January 29, 1999)
+5 Opinion of Nutter, McClennen & Fish, LLP
10.1 1997 Stock Option Plan (incorporated by reference to the Company's Registration Statement on
Form S-8 (File no. 333-50835))
10.2 Amended and Restated Declaration of Trust of CSBI Capital Trust I (incorporated by reference to
the Company's Current Report on Form 8-K/A filed with the Commission on July 11, 1997)
10.3 Indenture between the Company and Wilmington Trust Company, dated as of July 15, 1997
(incorporated by reference to the Company's Current Report on Form 8-K filed with the
Commission on August 7, 1997)
10.4 Form of Junior Subordinated Debenture (incorporated by reference to the Company's Registration
Statement on Form S-4 (File no. 333-51179))
10.5 Form of Series A Capital Securities Guarantee (incorporated by reference to the Company's
Registration Statement on Form S-4 (File no. 333-51179))
10.6 Form of Subordinated Capital Income Security, Series A (incorporated by reference to the
Company's Registration Statement on Form S-4 (File no. 333-51179))
10.7 Employment Agreement by and between the Company and Robert P. Keller (incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1996)
+10.8 Employment Agreement by and between Eldorado Bank and Catherine C. Clampitt
+10.9 Employment Agreement by and between Eldorado Bank and Richard Korsgaard
+10.10 Amendment Number One to Employment Agreement by and between Eldorado Bank and Richard Korsgaard
+10.11 Employment Agreement by and between Eldorado Bank and William Rast
+10.12 Form of Severance Agreement between the Company and certain executive officers
+10.13 Form of Amended and Restated Series B Warrant held by Madison Dearborn and Olympus
+21 Subsidiaries of the Registrant
+23.1 Consent of PricewaterhouseCoopers LLP
+23.2 Consent of Nutter, McClennen & Fish, LLP (contained in Exhibit 5)
*24 Power of Attorney (contained in the signature page to this Registration Statement)
+27 Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
+ Filed herewith.
II-4
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
None
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A under the Securities Act and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Laguna Hills, State of California, on the 11th day of March, 1999.
ELDORADO BANCSHARES, INC.
BY: /S/ ROBERT P. KELLER
-----------------------------------------
Robert P. Keller
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
/s/ ROBERT P. KELLER President, Chief Executive
- ------------------------------ Officer and Director March 11, 1999
Robert P. Keller
* Chief Financial Officer and
- ------------------------------ Treasurer March 11, 1999
John L. Gordon
* Director
- ------------------------------ March 11, 1999
Ernest J. Boch
* Director
- ------------------------------ March 11, 1999
James A. Conroy
Director
- ------------------------------
Edward A. Fox
* Director
- ------------------------------ March 11, 1999
Charles E. Hugel
* Director
- ------------------------------ March 11, 1999
Mitchell A. Johnson
* Director
- ------------------------------ March 11, 1999
K. Thomas Kemp
Director
- ------------------------------
Jefferson W. Kirby
Director
- ------------------------------
John B. Pettway
* Director
- ------------------------------ March 11, 1999
Henry T. Wilson
* Director
- ------------------------------ March 11, 1999
Paul R. Wood
</TABLE>
<TABLE>
<S> <C> <C>
*By: /s/ ROBERT P. KELLER
- ------------------------------ March 11, 1999
Robert P. Keller
ATTORNEY-IN-FACT
</TABLE>
Powers of Attorney have been filed
with this Registration Statement.
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT DESCRIPTION PAGE NO.
- --------- ----------------------------------------------------------------------------------------------- -----------------
<C> <S> <C>
+1.1 Form of Underwriting Agreement
2.1 Agreement and Plan of Merger dated September 16, 1998 by and between the Company and Antelope
Valley Bank (incorporated by reference to the Company's Current Report on Form 8-K filed with
the Commission on September 22, 1998)
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to the Company's
Current Report on Form 8-K/A filed with the Commission on July 11, 1997)
3.2 Certificate of Amendment to Certificate of Incorporation (incorporated by reference to the
Company's Registration Statement in Form S-4 (File no. 333-65683))
+3.3 Form of Amended and Restated Certificate of Incorporation (to be filed with the Delaware
Secretary of State prior to the completion of the offering covered by this Registration
Statement)
3.4 By-laws of the Company (incorporated by reference to the Company's September 30, 1996 Quarterly
Report on Form 10-Q)
4.1 Form of Specimen Stock Certificate (incorporated by reference to the Company's Form 8-A filed
with the Commission on January 29, 1999)
+5 Opinion of Nutter, McClennen & Fish, LLP
10.1 1997 Stock Option Plan (incorporated by reference to the Company's Registration Statement on
Form S-8 (File no. 333-50835))
10.2 Amended and Restated Declaration of Trust of CSBI Capital Trust I (incorporated by reference to
the Company's Current Report on Form 8-K/A filed with the Commission on July 11, 1997)
10.3 Indenture between the Company and Wilmington Trust Company, dated as of July 15, 1997
(incorporated by reference to the Company's Current Report on Form 8-K filed with the
Commission on August 7, 1997)
10.4 Form of Junior Subordinated Debenture (incorporated by reference to the Company's Registration
Statement on Form S-4 (File no. 333-51179))
10.5 Form of Series A Capital Securities Guarantee (incorporated by reference to the Company's
Registration Statement on Form S-4 (File no. 333-51179))
10.6 Form of Subordinated Capital Income Security, Series A (incorporated by reference to the
Company's Registration Statement on Form S-4 (File no. 333-51179))
10.7 Employment Agreement by and between the Company and Robert P. Keller (incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the Quarter Ended September 30, 1996)
+10.8 Employment Agreement by and between Eldorado Bank and Catherine C. Clampitt
+10.9 Employment Agreement by and between Eldorado Bank and Richard Korsgaard
+10.10 Amendment Number One to Employment Agreement by and between Eldorado Bank and Richard Korsgaard
+10.11 Employment Agreement by and between Eldorado Bank and William Rast
+10.12 Form of Severance Agreement between the Company and certain executive officers
+10.13 Form of Amended and Restated Series B Warrant held by Madison Dearborn and Olympus
+21 Subsidiaries of the Registrant
+23.1 Consent of PricewaterhouseCoopers LLP
+23.2 Consent of Nutter, McClennen & Fish, LLP (contained in Exhibit 5)
*24 Power of Attorney (contained in the signature page to this Registration Statement)
+27 Financial Data Schedule
</TABLE>
- ------------------------
* Previously filed.
+ Filed herewith.
<PAGE>
EXHIBIT 1.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ELDORADO BANCSHARES, INC.
(a Delaware corporation)
[_____________] Shares of Common Stock
PURCHASE AGREEMENT
Dated: March [ ], 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PURCHASE AGREEMENT................................................................................................1
SECTION 1. Representations and Warranties.........................................................2
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY..........................................2
(i) Compliance with Registration Requirements.....................................2
(ii) Independent Accountants.......................................................3
(iii) Financial Statements..........................................................3
(iv) No Material Adverse Change in Business........................................4
(v) Good Standing of the Company..................................................4
(vi) Good Standing of Subsidiaries.................................................4
(vii) Capitalization................................................................5
(viii) Authorization of Agreement....................................................5
(ix) Authorization and Description of Securities...................................5
(x) Absence of Defaults and Conflicts.............................................6
(xi) Absence of Labor Dispute......................................................6
(xii) Absence of Proceedings........................................................6
(xiii) Accuracy of Exhibits..........................................................7
(xiv) Possession of Intellectual Property...........................................7
(xv) Absence of Further Requirements...............................................7
(xvi) Possession of Licenses and Permits............................................7
(xvii) Compliance with Applicable Laws...............................................8
(xviii) Title to Property.............................................................8
(xix) Warrants, Options and Other Rights............................................8
(xx) Compliance with Cuba Act......................................................8
(xxi) Investment Company Act........................................................8
(xxii) Environmental Laws............................................................8
(xxiii) Registration Rights...........................................................9
(xxiv) Tax Matters...................................................................9
(xxv) Insurance.....................................................................9
(xxvi) Accounting Controls...........................................................9
(xxvii) Fees.........................................................................10
(xxviii)Lock-up Agreements............................................................10
(xxix) Use of Prospectus............................................................10
(b) REPRESENTATIONS, WARRANTIES AND COVENANTS BY THE SELLING SHAREHOLDERS.................10
(i) Accurate Disclosure..........................................................10
(ii) Authorization of Agreements..................................................11
(iii) Good and Marketable Title....................................................11
(iv) Due Execution of Power of Attorney and Custody Agreement.....................11
(v) Absence of Manipulation......................................................12
(vi) Absence of Further Requirements..............................................12
(vii) Certificates Suitable for Transfer...........................................12
(viii) No Association with NASD.....................................................12
</TABLE>
<PAGE>
<TABLE>
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(c) OFFICER'S CERTIFICATES................................................................13
SECTION 2. Sale and Delivery to Underwriters; Closing............................................13
(a) INITIAL SECURITIES....................................................................13
(b) OPTION SECURITIES.....................................................................13
(c) PAYMENT...............................................................................14
(d) DENOMINATIONS; REGISTRATION...........................................................14
SECTION 3. Covenants of the Company..............................................................14
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS........................15
(b) FILING OF AMENDMENTS..................................................................15
(c) DELIVERY OF REGISTRATION STATEMENTS...................................................15
(d) DELIVERY OF PROSPECTUSES..............................................................15
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS.............................................16
(f) BLUE SKY QUALIFICATIONS...............................................................16
(g) RULE 158..............................................................................16
(h) USE OF PROCEEDS.......................................................................17
(i) LISTING...............................................................................17
(j) RESTRICTION ON SALE OF SECURITIES.....................................................17
(k) REPORTING REQUIREMENTS................................................................17
(l) COMPLIANCE WITH RULE 463..............................................................17
(m) COMPLIANCE WITH CUBA ACT..............................................................17
SECTION 4. Payment of Expenses...................................................................18
(a) EXPENSES..............................................................................18
(b) EXPENSES OF THE SELLING SHAREHOLDERS..................................................18
(c) TERMINATION OF AGREEMENT..............................................................18
(d) ALLOCATION OF EXPENSES................................................................18
SECTION 5. Conditions of Underwriters' Obligations...............................................18
(a) EFFECTIVENESS OF REGISTRATION STATEMENT...............................................19
(b) OPINION OF COUNSEL FOR COMPANY........................................................19
(c) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS.......................................19
(d) OPINION OF COUNSEL FOR UNDERWRITERS...................................................19
(e) OFFICERS' CERTIFICATE.................................................................19
(f) CERTIFICATE OF SELLING SHAREHOLDERS...................................................20
(g) ACCOUNTANT'S COMFORT LETTER...........................................................20
(h) BRING-DOWN COMFORT LETTER.............................................................20
(i) APPROVAL OF LISTING...................................................................20
(j) NO OBJECTION..........................................................................20
(k) LOCK-UP AGREEMENTS....................................................................20
(l) CONDITIONS TO PURCHASE OF OPTION SECURITIES...........................................20
(i) Officers' Certificate........................................................21
(ii) Opinion of Counsel of the Company............................................21
(iii) Opinion of Counsel for Underwriters..........................................21
(iv) Bring-down Comfort Letter....................................................21
(m) ADDITIONAL DOCUMENTS..................................................................21
(n) TERMINATION OF AGREEMENT..............................................................21
</TABLE>
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(o) CONFIRMATION LETTERS..................................................................22
SECTION 6. Indemnification.......................................................................22
(a) INDEMNIFICATION OF UNDERWRITERS.......................................................22
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS AND SELLING SHAREHOLDERS...........23
(c) ACTIONS AGAINST PARTIES; NOTIFICATION.................................................23
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE....................................24
(e) OTHER AGREEMENTS WITH RESPECT TO INDEMNIFICATION......................................24
SECTION 7. Contribution..........................................................................24
SECTION 8. Representations, Warranties and Agreements to Survive Delivery........................26
SECTION 9. Termination of Agreement..............................................................26
(a) TERMINATION; GENERAL..................................................................26
(b) LIABILITIES...........................................................................26
SECTION 10. Default by One or More of the Underwriters............................................26
SECTION 11. Default by one or more of the Selling Shareholders or the Company.....................27
SECTION 12. Notices...............................................................................28
SECTION 13. Parties...............................................................................28
SECTION 14. GOVERNING LAW AND TIME................................................................28
SECTION 15. Effect of Headings....................................................................28
SCHEDULE A.........................................................................................Sch A-1
SCHEDULE B.........................................................................................Sch B-1
SCHEDULE C.........................................................................................Sch C-1
SCHEDULE D.........................................................................................Sch D-1
Exhibit A..............................................................................................A-1
Exhibit B..............................................................................................B-1
Exhibit C..............................................................................................C-1
</TABLE>
<PAGE>
ELDORADO BANCSHARES, INC.
(a Delaware corporation)
[___________] Shares of Common Stock
(Par Value $0.01 Per Share)
PURCHASE AGREEMENT
March [ ], 1999
KEEFE , BRUYETTE & WOODS, INC.
as Representative of the several Underwriters
c/o Keefe, Bruyette & Woods, Inc.
Two World Trade Center
New York, New York 10048
Ladies and Gentlemen:
Eldorado Bancshares, Inc., a Delaware corporation (the "Company"),
and the persons listed in Schedule B hereto (the "Selling Shareholders"),
confirm their respective agreements with Keefe, Bruyette & Woods, Inc.
("KBW") and each of the other Underwriters named in Schedule A hereto
(collectively, the "Underwriters", which term shall also include any
underwriter substituted as hereinafter provided in Section 10 hereof), for
whom KBW is acting as representative (in such capacity, the "Representative"),
with respect to (i) the sale by the Company and the Selling Shareholders,
acting severally and not jointly, and the purchase by the Underwriters,
acting severally and not jointly, of the respective numbers of shares of
Common Stock, par value $0.01 per share, of the Company ("Common Stock") set
forth in Schedules A and B hereto and (ii) the grant by the Company to the
Underwriters, acting severally and not jointly, of the option described in
Section 2(b) hereof to purchase all or any part of [__________] additional
shares of Common Stock to cover over-allotments, if any. The aforesaid
[__________] shares of Common Stock (the "Initial Securities") to be
purchased by the Underwriters and all or any part of the [_________] shares
of Common Stock subject to the option described in Section 2(b) hereof (the
"Option Securities") are hereinafter called, collectively, the "Securities".
The Company and the Selling Shareholders understand that the
Underwriters propose to
<PAGE>
make a public offering of the Securities as soon as the Representative deems
advisable after this Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (No. 333-61589)
covering the registration of the Securities under the Securities Act of 1933,
as amended (the "1933 Act"), including the related preliminary prospectus or
prospectuses. Promptly after execution and delivery of this Agreement, the
Company will either (i) prepare and file a prospectus in accordance with the
provisions of Rule 430A ("Rule 430A") of the rules and regulations of the
Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b)
of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the
Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act
Regulations, prepare and file a term sheet (a "Term Sheet") in accordance
with the provisions of Rule 434 and Rule 424(b). The information included in
such prospectus or in such Term Sheet, as the case may be, that was omitted
from such registration statement at the time it became effective but that is
deemed to be part of such registration statement at the time it became
effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule
430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to
as "Rule 434 Information." Each prospectus used before such registration
statement became effective, and any prospectus that omitted, as applicable,
the Rule 430A Information or the Rule 434 Information, that was used after
such effectiveness and prior to the execution and delivery of this Agreement,
is herein called a "preliminary prospectus." Such registration statement,
including the exhibits thereto and schedules thereto at the time it became
effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement."
Any registration statement filed pursuant to Rule 462(b) of the 1933 Act
Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final prospectus in the
form first furnished to the Underwriters for use in connection with the
offering of the Securities is herein called the "Prospectus." If Rule 434 is
relied on, the term "Prospectus" shall refer to the preliminary prospectus
dated March __, 1999 together with the Term Sheet and all references in this
Agreement to the date of the Prospectus shall mean the date of the Term
Sheet. For purposes of this Agreement, all references to the Registration
Statement, any preliminary prospectus, the Prospectus or any Term Sheet or
any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each Underwriter,
as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the
<PAGE>
1933 Act and no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has
been issued under the 1933 Act and no proceedings for that purpose
have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the
part of the Commission for additional information has been complied
with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement,
the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. Neither the
Prospectus nor any amendments or supplements thereto, at the time the
Prospectus or any such amendment or supplement was issued and at the
Closing Time (and, if any Option Securities are purchased, at the Date
of Delivery), included or will include an untrue statement of a
material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434
is used, the Company will comply with the requirements of Rule 434 and
the Prospectus shall not be "materially different", as such term is
used in Rule 434, from the prospectus included in the Registration
Statement at the time it became effective. The representations and
warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in
reliance upon and in conformity with information furnished to the
Company in writing by any Underwriter through KBW expressly for use in
the Registration Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied as to form when so filed in all material respects with the
1933 Act Regulations and each preliminary prospectus and the Prospectus
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) INDEPENDENT ACCOUNTANTS. To the Company's knowledge, the
accountants who certified (A) the supplemental consolidated financial
statements of the Company and its subsidiaries and supporting
schedules, and (B) the consolidated financial statements of the Company
and its subsidiaries, in each case included in the Registration
Statement are independent public accountants as required by the 1933
Act and the 1933 Act Regulations.
(iii) FINANCIAL STATEMENTS. The supplemental consolidated
financial statements of the Company and its subsidiaries included in
the Registration Statement
<PAGE>
and the Prospectus, together with the related schedules and notes,
present fairly the financial position of the Company and its
consolidated subsidiaries at the dates indicated and the statement of
operations, shareholders' equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis
throughout the periods involved, except as may be stated in the
related notes thereto. The consolidated financial statements of the
Company and its subsidiaries included in the Registration Statement
and the Prospectus, together with the related schedules and notes,
present fairly the financial position of, the Company and its
consolidated subsidiaries at the dates indicated and the statement of
operations, shareholders' equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with GAAP applied on a
consistent basis throughout the periods involved, except as may be
stated in the related notes thereto. The supporting schedules included
in the Registration Statement present fairly in accordance with GAAP
the information required to be stated therein. The selected financial
data and the summary financial information included in the Prospectus
present fairly the information shown therein and have been compiled on
a basis consistent with that of the audited financial statements
included in the Registration Statement.
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business
(a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Company or any of its subsidiaries, other than
those in the ordinary course of business, which are material with
respect to the Company and any of its subsidiaries considered as one
enterprise, and (C) there has been no dividend or distribution of any
kind declared, paid or made by the Company on any class of its capital
stock, except for scheduled dividend payments on the Company's Series B
Preferred Stock.
(v) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing
under the laws of the State of Delaware and has the corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform
its obligations under this Agreement; and the Company is duly qualified
as a foreign corporation to transact business and is in good standing
in each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure or failures so to qualify
or to be in good standing would not, individually or in the aggregate,
result in a Material Adverse Effect; and the Company is duly registered
as a bank holding company under the
<PAGE>
Bank Holding Company Act of 1956, as amended.
(vi) GOOD STANDING OF SUBSIDIARIES. Eldorado Bank and Antelope
Valley Bank (each, a "Subsidiary") have been duly organized and are
each validly existing as a corporation in good standing under the laws
of the State of California, have corporate or banking power and
authority to own, lease and operate their properties and to conduct
their businesses as described in the Prospectus and are duly qualified
as a foreign corporation to transact business and are in good standing
in each jurisdiction in which such qualification is required, whether
by reason of the ownership or leasing of property or the conduct of
business, except where the failure or failures so to qualify or to be
in good standing would not, individually or in the aggregate, result in
a Material Adverse Effect; each Subsidiary is duly licensed in the
State of California by the California State Department of Financial
Institutions; except as otherwise disclosed in the Registration
Statement, all of the issued and outstanding capital stock of each
Subsidiary has been duly authorized and validly issued, is fully paid
and non-assessable and is owned directly by the Company, free and clear
of any security interest, mortgage, pledge, lien, encumbrance, claim or
equity; none of the outstanding shares of capital stock of each
Subsidiary was issued in violation of the preemptive or similar rights
of any securityholder of such Subsidiary. The only subsidiaries of the
Company are the subsidiaries listed on Exhibit 21 to the Registration
Statement. Except for the shares of capital stock of each Subsidiary
and common securities of CSBI Capital Trust I, in each case owned by
the Company, neither the Company nor the Subsidiaries owns any shares
of stock or any other equity securities of any corporation or has any
equity interest in any firm, partnership, association or other entity,
except as described in the Prospectus.
(vii) CAPITALIZATION. The authorized, issued and outstanding
capital stock of the Company at the Closing Time will be as set forth
in the Prospectus in the column entitled "As Adjusted" under the
caption "Capitalization" (except for subsequent issuances, if any,
pursuant to this Agreement, pursuant to reservations, agreements or
employee benefit plans referred to in the Prospectus or pursuant to the
exercise of convertible securities or options referred to in the
Prospectus). The shares of issued and outstanding capital stock,
including the Securities to be purchased by the Underwriters from the
Selling Shareholders, have been duly authorized and validly issued and
are fully paid and non-assessable; none of the outstanding shares of
capital stock, including the Securities to be purchased by the
Underwriters from the Selling Shareholders, was issued in violation of
the preemptive or other similar rights of any securityholder of the
Company.
(viii) AUTHORIZATION OF AGREEMENT. This Agreement has been
duly authorized, executed and delivered by the Company.
(ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The
Securities to be purchased by the Underwriters from the Company have
been duly authorized for issuance and sale to the Underwriters pursuant
to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set
<PAGE>
forth herein, will be validly issued and fully paid and non-assessable;
the Common Stock conforms in all material respects to all statements
relating thereto contained in the Prospectus and such description
conforms in all material respects to the rights set forth in the
instruments defining the same; no holder of the Securities will be
subject to personal liability solely by reason of being such a holder;
and the issuance of the Securities is not subject to the preemptive or
other similar rights of any securityholder of the Company.
(x) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company nor
any of its subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, lease or other agreement
or instrument to which the Company or the any of its subsidiaries is a
party or by which it or any of them may be bound, or to which any of
the property or assets of the Company or the subsidiaries is subject
(collectively, the "Agreements and Instruments") except for such
defaults that would not, individually or in the aggregate, result in a
Material Adverse Effect; and the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated
herein and in the Registration Statement (including the issuance and
sale of the Securities and the use of the proceeds from the sale of the
Securities as described in the Prospectus under the caption "Use of
Proceeds") and compliance by the Company with its obligations hereunder
have been duly authorized by all necessary corporate action and do not
and will not, whether with or without the giving of notice or passage
of time or both, conflict with or constitute a breach of, or a default
or Repayment Event (as defined below) under, give rise to any right of
termination under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or the
any of its subsidiaries pursuant to, any of the Agreements and
Instruments (except for such conflicts, breaches or defaults or
Repayment Events or liens, charges or encumbrances that would not,
individually or in the aggregate, result in a Material Adverse Effect),
nor will such action result in any violation of the provisions of any
applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic
or foreign, having jurisdiction over the Company or the any of its
subsidiaries or any of their assets, properties or operations, except
for such violations that would not, individually or in the aggregate,
result in a Material Adverse Effect nor will such action result in any
violation of the provision of the charter or by-laws of the Company or
any of its Subsidiaries. As used herein, a "Repayment Event" means any
event or condition which gives the holder of any note, debenture or
other evidence of indebtedness (or any person acting on such holder's
behalf) the right to require the repurchase, redemption or repayment of
all or a portion of such indebtedness by the Company or any of its
subsidiaries.
(xi) ABSENCE OF LABOR DISPUTE. No labor dispute with the
employees of the Company or the Subsidiary exists or, to the knowledge
of the Company, is threatened.
(xii) ABSENCE OF PROCEEDINGS. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic
<PAGE>
or foreign, now pending, or, to the knowledge of the Company,
threatened, against or affecting the Company or the Subsidiaries,
which is required to be disclosed in the Registration Statement (other
than as disclosed therein), or which would reasonably be expected to
result in a Material Adverse Effect, or which would reasonably be
expected to materially and adversely affect the consummation of the
transactions contemplated in this Agreement or the performance by the
Company of its obligations hereunder. The aggregate of all pending
legal or governmental proceedings to which the Company or the
Subsidiaries are a party or of which any of their respective property
or assets is the subject which are not described in the Registration
Statement, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
(xiii) ACCURACY OF EXHIBITS. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits thereto which
have not been so described or filed as required.
(xiv) POSSESSION OF INTELLECTUAL PROPERTY. The Company and the
Subsidiaries own or possess, or can acquire on reasonable terms,
adequate patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property") material
to the business of the Company and the Subsidiaries now operated by
them, and except as otherwise disclosed in the Prospectus neither the
Company nor the Subsidiaries have received any written notice or is
otherwise aware of any infringement of or conflict with asserted rights
of others with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or
inadequate to protect the interest of the Company or the Subsidiaries
therein, and which infringement or conflict (if the subject of any
unfavorable decision, ruling or finding) or invalidity or inadequacy,
individually or in the aggregate, would result in a Material Adverse
Effect.
(xv) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities hereunder or the consummation of the
transactions contemplated by this Agreement, except such as have been
already obtained or as may be required under the 1933 Act or the 1933
Act Regulations or state securities laws.
(xvi) POSSESSION OF LICENSES AND PERMITS. The Company and the
Subsidiaries possess such certificates, authorities, permits, licenses,
approvals, consents and other authorizations (collectively,
"Governmental Licenses") issued by the appropriate federal, state,
local or foreign regulatory agencies or bodies necessary to conduct the
business
<PAGE>
now operated by them except for such Governmental Licenses the absence
of which would not result in a Material Adverse Effect; the Company
and the Subsidiary are in compliance with the terms and conditions of
all such Governmental Licenses, except where the failure so to comply
would not, individually or in the aggregate, have a Material Adverse
Effect; all of the Governmental Licenses are valid and in full force
and effect, except when the invalidity of such Governmental Licenses
or the failure of such Governmental Licenses to be in full force and
effect would not have a Material Adverse Effect; and neither the
Company nor the Subsidiaries have received any notice of proceedings
relating to the revocation or modification of any such Governmental
Licenses which, individually or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a Material
Adverse Effect.
(xvii) COMPLIANCE WITH APPLICABLE LAWS. Except as set forth in
the Prospectus, the Company and each of its subsidiaries is in
compliance in all material respects with all applicable laws, statutes,
ordinances, rules or regulations, the violation of which, individually
or in the aggregate, would be reasonably expected to have a Material
Adverse Effect.
(xviii) TITLE TO PROPERTY. Each of the Company and the
Subsidiaries have good and marketable title to all properties (real and
personal) owned by the Company or the Subsidiaries, free and clear of
all mortgages, pledges, liens, security interests, claims, restrictions
or encumbrances of any kind except such as (a) are described in the
Prospectus or (b) do not result in a Material Adverse Effect; and all
of the leases and subleases material to the business of the Company and
the Subsidiaries, considered as one enterprise, and under which the
Company or the Subsidiaries holds properties described in the
Prospectus, are in full force and effect, and neither the Company nor
the Subsidiaries has any notice of any material claim of any sort that
has been asserted by anyone adverse to the rights of the Company or the
Subsidiaries under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or the Subsidiaries
to the continued possession of the leased or subleased premises under
any such lease or sublease that could reasonably be expected to result
in a Material Adverse Effect.
(xix) WARRANTS, OPTIONS AND OTHER RIGHTS. Except as disclosed
in the Prospectus, there are no outstanding options, warrants or other
rights calling for the issuance of, and no commitments, plans or
arrangements to issue, any shares of capital stock of the Company or
the Subsidiaries or any security convertible into or exchangeable for
capital stock of the Company or the Subsidiaries.
(xx) COMPLIANCE WITH CUBA ACT. The Company has complied with,
and is and will be in compliance with, the provisions of that certain
Florida act relating to disclosure of doing business with Cuba,
codified as Section 517.075 of the Florida statutes, and the rules and
regulations thereunder (collectively, the "Cuba Act") or is exempt
therefrom.
<PAGE>
(xxi) INVESTMENT COMPANY ACT. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the
Prospectus will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended (the "1940 Act").
(xxii) ENVIRONMENTAL LAWS. Except as described in the
Registration Statement or except as would not, individually or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor the Subsidiary is in violation of any federal, state, local or
foreign statute, law, rule, regulation, ordinance, code, policy or rule
of common law or any judicial or administrative interpretation thereof,
including any judicial or administrative order, consent, decree or
judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or
threatened release of chemicals, pollutants, contaminants, wastes,
toxic substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of Hazardous Materials (collectively, "Environmental
Laws"), (B) the Company and the Subsidiary have all permits,
authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or, threatened, administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens,
notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or the Subsidiary
and (D) there are no events or circumstances that might reasonably be
expected to form the basis of an order for clean-up or remediation, or
an action, suit or proceeding by any private party or governmental body
or agency, against or affecting the Company or the Subsidiary relating
to Hazardous Materials or any Environmental Laws.
(xxiii) REGISTRATION RIGHTS. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act except for such rights as
disclosed in the Registration Statement or that have been duly waived.
(xxiv) TAX MATTERS. The Company and the Subsidiary have timely
filed all federal, state, local and foreign tax returns that are
required to be filed or have duly requested extensions thereof and have
timely paid all taxes required to be paid by any of them and any
related assessments, fines or penalties, except for any such tax,
assessment, fine or penalty that is being contested in good faith and
by appropriate proceedings; and adequate charges, accruals and reserves
have been provided for in the financial statements referred to in
Section 1(a)(iii) above in respect of all federal, state, local and
foreign taxes for all periods as to which the tax liability of the
Company or the Subsidiary has not been finally determined or remains
open to examination by applicable taxing authorities.
(xxv) INSURANCE. The Company and the Subsidiary carry or are
entitled to the
<PAGE>
benefits of insurance in such amounts and covering such risks as is
generally maintained by companies of established repute engaged in the
same or similar business, and all such insurance is in full force and
effect.
(xxvi) ACCOUNTING CONTROLS. The Company and the Subsidiary
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance
with management's general and specific authorizations; (ii)
transactions are recorded as necessary to permit the preparation of
financial statements in conformity with GAAP and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorizations; and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(xxvii) FEES. Other than as contemplated by this Agreement and
except as disclosed in the Registration Statement, there is no broker,
finder or other party that is entitled to receive from the Company or
the Subsidiary any brokerage or finder's fee or any other fee,
commission or payment as a result of the transactions contemplated by
this Agreement.
(xxviii) LOCK-UP AGREEMENTS. The Company has obtained and
delivered to the Representative the agreements of the persons and
entities named in Schedule D hereto to the effect that each such person
and entity will not, for a period of 180 days from the date hereof and
except as otherwise provided therein, without the prior written consent
of KBW directly or indirectly, (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant for the sale of,
or otherwise dispose of or transfer any shares of the Common Stock or
any securities convertible into or exchangeable or exercisable for
Common Stock or file or cause to be filed any registration statement
under the 1933 Act with respect to any of the foregoing or (ii) enter
into any swap or any other agreement or any transaction that transfers,
in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock, whether any such swap or transaction
is to be settled by delivery of Common Stock or other securities, in
cash or otherwise except for the exercise of Common Stock warrants and
management stock options pursuant to the 1997 Stock Option Plan (as
described in the Registration Statement) and shares of Common Stock
disposed of as bona fide gifts or for estate planning purposes, subject
in each case, to any remaining portion of the 180-day period applying
to any shares so issued or transferred.
(xxix) USE OF PROSPECTUS. The Company has not distributed and,
prior to the later to occur of (i) the Closing Time and (ii) completion
of the distribution of the Securities, will not distribute any
prospectus (as such term is defined in the 1933 Act and the 1933 Act
Regulations) in connection with the offering and sale of the Securities
other than the Registration Statement, any preliminary prospectus, the
Prospectus or other materials, if any, permitted by the 1933 Act or by
the 1933 Act Regulations and approved
<PAGE>
by the Representative.
(b) REPRESENTATIONS, WARRANTIES AND COVENANTS BY THE SELLING
SHAREHOLDERS. Each Selling Shareholder severally represents and warrants to each
Underwriter as of the date hereof and as of the Closing Time, and agrees with
each Underwriter, as follows:
(i) ACCURATE DISCLOSURE. To the knowledge of such Selling
Shareholder, the representations and warranties of the Company
contained in Section 1(a) hereof are true and correct; such Selling
Shareholder has reviewed and is familiar with the Prospectus and to the
knowledge of such Selling Shareholder neither the Prospectus nor any
amendments or supplements thereto includes any untrue statement of a
material fact regarding such Selling Shareholder or omits to state a
material fact necessary in order to make the statements regarding the
Selling Shareholder, in the light of the circumstances under which they
were made, not misleading.
(ii) AUTHORIZATION OF AGREEMENTS. Each Selling Shareholder has
the full right, power and authority to enter into this Agreement and a
Power of Attorney and Custody Agreement (the "Power of Attorney and
Custody Agreement") and to sell, transfer and deliver the Securities to
be sold by such Selling Shareholder hereunder. The execution and
delivery of this Agreement and the Power of Attorney and Custody
Agreement and the sale and delivery of the Securities to be sold by
such Selling Shareholder and the consummation of the transactions
contemplated herein and under the Power of Attorney and Custody
Agreement and compliance by such Selling Shareholder with its
obligations hereunder and under the Power of Attorney and Custody
Agreement have been duly authorized by such Selling Shareholder and do
not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default under, or result in the creation or imposition of any tax,
lien, charge or encumbrance upon the Securities to be sold by such
Selling Shareholder or any property or assets of such Selling
Shareholder pursuant to any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, license, lease or other
agreement or instrument to which such Selling Shareholder is a party or
by which such Selling Shareholder may be bound, or to which any of the
property or assets of such Selling Shareholder is subject that would,
in any way, affect the sale of the Securities, nor will such action
result in any violation of the provisions of the charter or by-laws or
other organizational instrument of such Selling Shareholder, if
applicable, or any applicable treaty, law, statute, rule, regulation,
judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over
such Selling Shareholder or any of its properties that would, in any
way, affect the sale of the Securities.
(iii) GOOD AND MARKETABLE TITLE. Such Selling Shareholder has
and will at the Closing Time have good and marketable title to the
Securities to be sold by such Selling Shareholder hereunder, free and
clear of any security interest, mortgage, pledge,
<PAGE>
lien, charge, claim, equity or encumbrance of any kind, other than
pursuant to this Agreement; and upon delivery of such Securities and
payment of the purchase price therefor as herein contemplated, each of
the Underwriters will receive good and marketable title to the
Securities purchased by it from such Selling Shareholder, free and
clear of any security interest, mortgage, pledge, lien, charge, claim,
equity or encumbrance of any kind.
(iv) DUE EXECUTION OF POWER OF ATTORNEY AND CUSTODY AGREEMENT.
Such Selling Shareholder has duly executed and delivered, in the form
heretofore furnished to the Representative, the Power of Attorney and
Custody Agreement with Robert P. Keller and John L. Gordon, or any of
them, as attorneys-in-fact (the "Attorneys-in-Fact") and Nutter,
McClennen & Fish, LLP, as custodian (the "Custodian"); the Custodian is
authorized to deliver the Securities to be sold by such Selling
Shareholder hereunder and to accept payment therefor; and each
Attorney-in-Fact is authorized to execute and deliver this Agreement
and the certificate referred to in Section 5(f) or that may be required
pursuant to Section(s) 5(l) and 5(m) on behalf of such Selling
Shareholder, to sell, assign and transfer to the Underwriters the
Securities to be sold by such Selling Shareholder hereunder, to
determine the purchase price to be paid by the Underwriters to such
Selling Shareholder, as provided in Section 2(a) hereof, to authorize
the delivery of the Securities to be sold by such Selling Shareholder
hereunder, to accept payment therefor, and otherwise to act on behalf
of such Selling Shareholder in connection with this Agreement.
(v) ABSENCE OF MANIPULATION. Such Selling Shareholder has not
taken, and will not take, directly or indirectly, any action which is
designed to or which has constituted or which might reasonably be
expected to cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
of the Securities.
(vi) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
consent, approval, authorization, order, registration, qualification or
decree of, any court or governmental authority or agency, domestic or
foreign, is necessary or required for the performance by each Selling
Shareholder of its obligations hereunder or in the Power of Attorney
and Custody Agreement, or in connection with the sale and delivery of
the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except such as may have previously been
made or obtained or as may be required under the 1933 Act or the 1933
Act Regulations or state securities laws.
delivery of Common Stock or such other securities, in cash or otherwise except
for the exercise of Common Stock warrants and management stock option pursuant
to the 1997 Stock Option Plan (as described in the Registration Statement) and
shares of Common Stock disposed of as bona fide gifts, subject, in each case, to
any remaining portion of the 180-day period applying to any shares so issued or
transferred. The foregoing sentence shall not apply to the Securities to be sold
hereunder.
<PAGE>
(vii) CERTIFICATES SUITABLE FOR TRANSFER. Certificates for all
of the Securities to be sold by such Selling Shareholder pursuant to
this Agreement, in suitable form for transfer by delivery or
accompanied by duly executed instruments of transfer or assignment in
blank with signatures guaranteed, have been placed in custody with the
Custodian with irrevocable conditional instructions to deliver such
Securities to the Underwriters pursuant to this Agreement.
(viii) NO ASSOCIATION WITH NASD. Except as previously
disclosed in writing to counsel for the Underwriters, neither such
Selling Shareholder nor any of such Selling Shareholder's affiliates
directly, or indirectly through one or more intermediaries, controls,
or is controlled by, or is under common control with, or has any other
association with (within the meaning of Article I, Section 1(m) of the
By-laws of the National Association of Securities Dealers, Inc.), any
member firm of the National Association of Securities Dealers, Inc.
(the "NASD").
(c) OFFICER'S CERTIFICATES. Any certificate signed by any officer of
the Company or the Subsidiary delivered to the Representative or to counsel
for the Underwriters shall be deemed a representation and warranty by the
Company to each Underwriter as to the matters covered thereby; and any
certificate signed by or on behalf of any Selling Shareholder as such and
delivered to the Representative or to counsel for the Underwriters pursuant
to the terms of this Agreement shall be deemed a representation and warranty
by such Selling Shareholder to the Underwriters as to the matters covered
thereby.
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein
set forth, each of the Company and each Selling Shareholder, severally and
not jointly, agrees to sell to each Underwriter, severally and not jointly,
and each Underwriter, severally and not jointly, agrees to purchase from the
Company and each Selling Shareholder, at the price per share set forth in
Schedule C, that proportion of the number of Initial Securities set forth in
Schedule B opposite the name of the Company or such Selling Shareholder, as
the case may be, which the number of Initial Securities set forth in Schedule
A opposite the name of such Underwriter, plus any additional number of
Initial Securities which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 10 hereof, bears to the total number of
Initial Securities, subject, in each case, to such adjustments among the
Underwriters as the Representative in its sole discretion shall make to
eliminate any sales or purchases of fractional securities.
(b) OPTION SECURITIES. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters, severally
and not jointly, to purchase, in addition to the Initial Securities, the amount
of Option Securities set forth opposite the name of the Company on Schedule B at
the price per share set forth in Schedule C, less an amount per share equal to
any dividends or distributions declared by the Company and payable on the
Initial Securities but not payable on the Option Securities. The option hereby
granted will expire 30 days after the date
<PAGE>
hereof and may be exercised in whole or in part from time to time only for the
purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Initial Securities upon notice by the
Representative to the Company setting forth the aggregate number of Option
Securities as to which the several Underwriters are then exercising the option
and the time and date of payment and delivery for such Option Securities. Any
such time and date of delivery (a "Date of Delivery") shall be determined by the
Representative, but shall not be later than seven full business days after the
exercise of said option, nor in any event prior to the Closing Time, as
hereinafter defined. If the option is exercised as to all or any portion of the
Option Securities, then each of the Underwriters, acting severally and not
jointly, will purchase from the Company (a) that proportion of the total number
of Option Securities then being purchased from the Company that the number of
Initial Securities set forth in Schedule A opposite the name of such Underwriter
bears to the total number of Initial Securities and (b) any additional number of
Option Securities which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 10 hereof, subject, in each case, to such
adjustments as the Representative in its sole discretion shall make to
eliminate any sales or purchases of fractional shares.
(c) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York
10022 or at such other place as shall be agreed upon by the Representative and
the Company and the Selling Shareholders, at 9:00 A.M. (Eastern time) on the
third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given
day) business day after the date hereof (unless postponed in accordance with the
provisions of Section 10), or such other time not later than ten business days
after such date as shall be agreed upon by the Representative and the Company
and the Selling Shareholders (such time and date of payment and delivery being
herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representative to the Company.
Payment shall be made to the Company and each of the Selling
Shareholders by wire transfer of immediately available funds to bank accounts
designated by the Company and the Custodian pursuant to each Selling
Shareholder's Power of Attorney and Custody Agreement, as the case may be,
against delivery to the Representative for the respective accounts of the
Underwriters of certificates for the Securities to be purchased by them. It is
understood that each Underwriter has authorized the Representative, for its
account, to accept delivery of, receipt for, and make payment of the purchase
price for, the Initial Securities and the Option Securities, if any, which it
has agreed to purchase. KBW, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the Initial Securities or the Option Securities, if any, to be
purchased by any Underwriter whose
<PAGE>
funds have not been received by the Closing Time or the relevant Date of
Delivery, as the case may be, but such payment shall not relieve such
Underwriter from its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial
Securities and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representative may request in writing at least
one full business day before the Closing Time or the relevant Date of Delivery,
as the case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representative in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION
REQUESTS. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify
the Representative immediately, (i) when any post-effective amendment
to the Registration Statement shall become effective, or any supplement
to the Prospectus or any amended Prospectus shall have been filed, (ii)
of the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration
Statement or any amendment or supplement to the Prospectus or for
additional information, and (iv) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any
preliminary prospectus, or of the suspension of the qualification of
the Securities for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes.
The Company will promptly effect the filings necessary pursuant to Rule
424(b) and will take such steps as shall be reasonably necessary to
ascertain promptly whether the form of prospectus transmitted for
filing under Rule 424(b) was received for filing by the Commission and,
in the event that it was not, it will promptly file such prospectus.
The Company will make every reasonable effort to prevent the issuance
of any stop order after obtaining knowledge of such proposed action
and, if any stop order is issued, to obtain the lifting thereof at the
earliest possible moment.
(b) FILING OF AMENDMENTS. The Company will give the
Representative notice of its intention to file or prepare any
amendment to the Registration Statement (including any filing under
Rule 462(b)), any Term Sheet or any amendment, supplement or revision
to either the prospectus included in the Registration Statement at the
time it became effective or to the Prospectus, will furnish the
Representative with copies of any such documents a reasonable amount
of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representative or
counsel for the Underwriters shall object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has
furnished or will deliver to the Representative and counsel for the
Underwriters, without charge, signed
<PAGE>
copies of the Registration Statement as originally filed and of each
amendment thereto (including exhibits filed therewith or incorporated
by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to the Representative,
without charge, a conformed copy of the Registration Statement as
originally filed and of each amendment thereto (without exhibits) for
each of the Underwriters. The copies of the Registration Statement and
each amendment thereto furnished to the Underwriters will be identical
to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to
each Underwriter, without charge, as many copies of each preliminary
prospectus as such Underwriter reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the
1933 Act. The Company will furnish to each Underwriter, without charge,
during the period when the Prospectus is required to be delivered under
the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"),
such number of copies of the Prospectus (as amended or supplemented) as
such Underwriter may reasonably request. The Prospectus and any
amendments or supplements thereto furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company
will comply with the 1933 Act and the 1933 Act Regulations so as to
permit the completion of the distribution of the Securities as
contemplated in this Agreement and in the Prospectus. If at any time
when a prospectus is required by the 1933 Act to be delivered in
connection with sales of the Securities, any event shall occur or
condition shall exist as a result of which it is necessary, in the
opinion of counsel for the Underwriters or for the Company, to amend
the Registration Statement or amend or supplement the Prospectus in
order that the Prospectus will not include any untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or
if it shall be necessary, in the opinion of such counsel, at any such
time to amend the Registration Statement or amend or supplement the
Prospectus in order to comply with the requirements of the 1933 Act or
the 1933 Act Regulations, the Company will promptly prepare and file
with the Commission, subject to Section 3(b), such amendment or
supplement as may be necessary to correct such statement or omission or
to make the Registration Statement or the Prospectus comply with such
requirements, and the Company will furnish to the Underwriters such
number of copies of such amendment or supplement as the Underwriters
may reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best
efforts, in cooperation with the Underwriters, to qualify the
Securities for offering and sale under the applicable securities laws
of such states and other jurisdictions (domestic or foreign) as the
Representative may designate and to maintain such qualifications in
effect for a period of not less than one year from the later of the
effective date of the Registration
<PAGE>
Statement and any Rule 462(b) Registration Statement; PROVIDED,
HOWEVER, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation or
as a dealer in securities in any jurisdiction in which it is not so
qualified or to subject itself to taxation in respect of doing business
in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the
Company will file such statements and reports as may be required by the
laws of such jurisdiction to continue such qualification in effect for
a period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
(g) RULE 158. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated
by, the last paragraph of Section 11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified
in the Prospectus under "Use of Proceeds".
(i) LISTING. The Company will use its best efforts to effect
and maintain the quotation of the Securities on the Nasdaq National
Market and will file with the Nasdaq National Market all documents and
notices required by the Nasdaq National Market of companies that have
securities that are traded in the over-the-counter market and
quotations for which are reported by the Nasdaq National Market.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 180
days from the date of the Prospectus, the Company will not, without the
prior written consent of KBW, (i) directly or indirectly, offer,
pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any
shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or file or cause to be
filed any registration statement under the 1933 Act with respect to any
of the foregoing or (ii) enter into any swap or any other agreement or
any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not
apply to (A) the Securities to be sold hereunder, (B) any shares of
Common Stock issued by the Company upon the exercise of warrants and
stock options pursuant to the 1997 Stock Option Plan (as described in
the Registration Statement), or (C) shares of Common Stock disposed of
as bona fide gifts, subject, in the case of clauses (B) and (C) to any
remaining portion of the 180-day period referred to in this Section
3(j) applying to any shares so issued or transferred.
<PAGE>
(k) REPORTING REQUIREMENTS. The Company, during the period
when the Prospectus is required to be delivered under the 1933 Act or
the 1934 Act, will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by
the 1934 Act and the rules and regulations of the Commission
thereunder.
(l) COMPLIANCE WITH RULE 463. The Company will report the use
of proceeds as may be required pursuant to Rule 463 of the 1933 Act
Regulations.
(m) COMPLIANCE WITH CUBA ACT. In accordance with the Cuba Act
and without limitation to the provisions of Sections 6 and 7 hereof,
the Company agrees to indemnify and hold harmless each Underwriter from
and against any and all loss, liability, claim, damage and expense
whatsoever (including fees and disbursements of counsel), as incurred,
arising out of any violation by the Company of the Cuba Act.
SECTION 4. PAYMENT OF EXPENSES. (ai EXPENSES. The Company will pay or
cause to be paid all expenses incident to the performance of its obligations
under this Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp, capital
or other duties payable upon the sale, issuance or delivery of the Securities to
the Underwriters, (iv) the fees and disbursements of the Company's counsel,
accountants and other advisors (excluding the Underwriters), (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the fees and
disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectus and any amendments
or supplements thereto, (vii) the preparation, printing and delivery to the
Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii)
the fees and expenses of any transfer agent or registrar for the Securities,
(ix) the filing fees incident to, and the fees and disbursements of counsel to
the Underwriters in connection with, the review by the NASD of the terms of the
sale of the Securities and (x) the fees and expenses incurred in connection with
the inclusion of the Securities in the Nasdaq National Market.
(b) EXPENSES OF THE SELLING SHAREHOLDERS. The Selling Shareholders,
severally but not jointly, will pay all expenses incident to the performance of
their respective obligations under, and the consummation of the transactions
contemplated by this Agreement, including any stamp duties, capital duties and
stock transfer taxes, if any, payable upon the sale of the Securities to the
Underwriters, and their transfer between the Underwriters pursuant to an
agreement between such Underwriters, except that the Company will pay the fees
and disbursements of the
<PAGE>
Custodian.
(c) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
Representative in accordance with the provisions of Section 5, Section 9(a)(i)
or Section 11 hereof, the Company shall reimburse the Underwriters for all of
their out-of-pocket expenses, including the fees and disbursements of counsel
for the Underwriters.
(d) ALLOCATION OF EXPENSES. The provisions of this Section shall not
affect and, as between the Underwriters, on the one hand, and the Company and/or
the Selling Shareholders, on the other hand, shall not be affected by, any
agreement that the Company and/or the Selling Shareholders may make for the
sharing of such costs and expenses.
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company and the Selling Shareholders
contained in Section 1 hereof or in certificates of any officer of the Company
or any Subsidiary of the Company or on behalf of any Selling Shareholder
delivered pursuant to the provisions hereof, to the performance by the Company
and the Selling Shareholders of their respective covenants and other obligations
hereunder, and to the following further conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, shall have
become effective and at Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued
under the 1933 Act or proceedings therefor initiated or threatened by
the Commission, and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of counsel to the Underwriters. A prospectus containing
the Rule 430A Information shall have been filed with the Commission in
accordance with Rule 424(b) (or a post-effective amendment providing
such information shall have been filed and declared effective in
accordance with the requirements of Rule 430A) or, if the Company has
elected to rely upon Rule 434, a Term Sheet shall have been filed with
the Commission in accordance with Rule 424(b).
(b) OPINION OF COUNSEL FOR COMPANY. At Closing Time, the
Representative shall have received the favorable opinion, dated as of
Closing Time, of Nutter, McClennen & Fish, LLP, counsel for the
Company, in form and substance satisfactory to counsel for the
Underwriters, together with signed or reproduced copies of such letter
for each of the other Underwriters substantially to the effect set
forth in Exhibit A hereto and to such further effect as counsel to the
Underwriters may reasonably request.
(c) OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS. At
Closing Time, the Representative shall have received the favorable
opinion, dated as of Closing Time, of Nutter, McClennen & Fish, LLP,
counsel for the Selling Shareholders, in form and substance
satisfactory to counsel for the Underwriters, together with signed or
reproduced copies of such letter for each of the other Underwriters
substantially to the effect set forth
<PAGE>
in Exhibit B hereto and to such further effect as counsel to the
Underwriters may reasonably request.
(d) OPINION OF COUNSEL FOR UNDERWRITERS. At Closing Time, the
Representative shall have received the favorable opinion, dated as of
Closing Time, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for
the Underwriters, together with signed or reproduced copies of such
letter for each of the other Underwriters in form and substance
satisfactory to the Underwriters.
(e) OFFICERS' CERTIFICATE. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of
which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in
the ordinary course of business, and the Representative shall have
received a certificate of the President or a Vice President of the
Company and of the chief financial or chief accounting officer of the
Company, dated as of Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same
force and effect as though expressly made at and as of Closing Time,
(iii) the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to
Closing Time, and (iv) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or are contemplated by the
Commission.
(f) CERTIFICATE OF SELLING SHAREHOLDERS. At Closing Time, the
Representative shall have received a certificate of an
Attorney-in-Fact on behalf of each Selling Shareholder, dated as of
Closing Time, to the effect that (i) the representations and warranties
of each Selling Shareholder contained in Section 1(b) hereof are true
and correct in all respects with the same force and effect as though
expressly made at and as of Closing Time and (ii) each Selling
Shareholder has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied under this
Agreement at or prior to Closing Time.
(g) ACCOUNTANT'S COMFORT LETTER. At the time of the execution
of this Agreement, the Representative shall have received a letter
dated such date, in form and substance satisfactory to the
Representative, together with signed or reproduced copies of such
letter for each of the other Underwriters containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters from Pricewaterhouse Coopers LLP with respect
to the consolidated and supplemental consolidated financial statements
of the Company and its subsidiaries and certain financial information
contained in the Registration Statement and the Prospectus.
<PAGE>
(h) BRING-DOWN COMFORT LETTER. At Closing Time, the
Representative shall have received from PricewaterhouseCoopers LLP, a
letter, dated as of Closing Time, in form and substance satisfactory to
the Representative, to the effect that they reaffirm the statements
made in the letter furnished by them, pursuant to subsection (g) of
this Section, except that the specified date referred to shall be a
date not more than three business days prior to Closing Time.
(i) APPROVAL OF LISTING. At Closing Time, the Securities shall
have been approved for inclusion in the Nasdaq National Market, subject
only to official notice of issuance.
(j) NO OBJECTION. The NASD shall have confirmed that it has
not raised any objection with respect to the fairness and
reasonableness of the underwriting terms and arrangements.
(k) LOCK-UP AGREEMENTS. At the date of this Agreement, the
Representative shall have received an agreement substantially in the
form of Exhibit C hereto signed by the persons listed on Schedule D
hereto.
(l) CONDITIONS TO PURCHASE OF OPTION SECURITIES. In the event
that the Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the Option Securities, the
representations and warranties of the Company and the Selling
Shareholders contained herein and the statements in any certificates
furnished by the Company and the Subsidiary and the Selling
Shareholders shall be true and correct as of each Date of Delivery and,
at the relevant Date of Delivery, and the Representative shall have
received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company
and of the chief financial or chief accounting officer of the
Company confirming that the certificate delivered at the
Closing Time pursuant to Section 5(e) hereof remains true and
correct as of such Date of Delivery.
(ii) OPINION OF COUNSEL OF THE COMPANY. The favorable opinion
of Nutter, McClennen & Fish, LLP, counsel for the Company, in
form and substance satisfactory to counsel for the
Underwriters, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by
Section 5(b) hereof.
(iii) OPINION OF COUNSEL FOR UNDERWRITERS. The favorable
opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel
for the Underwriters, dated such Date of Delivery, relating to
the Option Securities to be purchased on such Date of Delivery
and otherwise to the same effect as the opinion required by
Section 5(d) hereof.
<PAGE>
(iv) BRING-DOWN COMFORT LETTER. A letter from
PricewaterhouseCoopers LLP in form and substance satisfactory
to the Representatives and dated such Date of Delivery,
substantially in the same form and substance as the letter
furnished by them to the Representative pursuant to Section
5(g) hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more
than five days prior to such Date of Delivery.
(m) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of
Delivery counsel for the Underwriters shall have been furnished with
such documents and opinions as they may reasonably require for the
purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated, or in order to evidence the accuracy
of any of the representations or warranties, or the fulfillment of any
of the conditions, herein contained; and all proceedings taken by the
Company and the Selling Shareholders in connection with the issuance
and sale of the Securities as herein contemplated shall be satisfactory
in form and substance to the Representative and counsel for the
Underwriters.
(n) TERMINATION OF AGREEMENT. If any condition specified in
this Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the
purchase of Option Securities on a Date of Delivery which is after the
Closing Time, the obligations of the several Underwriters to purchase
the relevant Option Securities, may be terminated by the
Representative by notice to the Company and the Selling Shareholders
at any time at or prior to the Closing Time or such Date of Delivery,
as the case may be, and such termination shall be without liability of
any party to any other party except as provided in Section 4 and except
that Sections 1, 3(m), 6, 7 and 8 shall survive any such termination
and remain in full force and effect.
(o) CONFIRMATION LETTERS. At the Closing Time, the
Representative shall have received letters, in form and substance
acceptable to the Representative in its sole discretion, from each
Selling Shareholder confirming the effectiveness of the
powers-of-attorney executed by such Selling Shareholder and ratifying
all actions previously taken by the Attorneys-in-Fact in connection
with this Agreement.
SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF UNDERWRITERS. The Company and the Selling
Shareholders, jointly and severally, agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or
<PAGE>
necessary to make the statements therein not misleading or arising out
of any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided
that (subject to Section 6(d) below) any such settlement is effected
with the written consent of the Company and the Selling Shareholders;
and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by KBW),
reasonably incurred in investigating, preparing or defending against
any litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever based
upon any such untrue statement or omission, or any such alleged untrue
statement or omission, to the extent that any such expense is not paid
under clauses (i) or (ii) above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through KBW expressly for use in the Registration Statement (or any
amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto); and PROVIDED, FURTHER, HOWEVER, that the
Company shall not be liable to any indemnified party with respect to any
preliminary prospectus (or supplement thereto) if the Prospectus corrected any
such untrue statement or omission, was delivered to such indemnified party
(sufficiently in advance of the Closing Date and in sufficient quantity to allow
for distribution by the Closing Date) and such indemnified party failed to
furnish a copy of the applicable Prospectus in contravention of a requirement of
applicable law at or prior to the written confirmation of the sale of Securities
to the applicable purchaser; and PROVIDED, FURTHER, that the liability of each
Selling Shareholder pursuant to this Section 6(a) shall not exceed the product
of the number of Shares sold by such Selling Stockholder and the purchase price
for the Shares paid by the Underwriters as set forth on Schedule C.
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS AND SELLING
SHAREHOLDERS. Each Underwriter severally agrees to indemnify and hold harmless
the Company, its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and each Selling
Shareholder and each person, if any, who controls any Selling Shareholder
<PAGE>
within the meaning of Section 15 of the 1993 Act or Section 20 of the 1934 Act
against any and all loss, liability, claim, damage and expense described in the
indemnity contained in subsection (a) of this Section, as incurred, but only
with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information, if applicable,
or any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such Underwriter through KBW expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the Prospectus (or any amendment or supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by KBW, and, in the case of
parties indemnified pursuant to Section 6(b) above, counsel to the indemnified
parties shall be selected by the Company. An indemnifying party may participate
at its own expense in the defense of any such action; PROVIDED, HOWEVER, that
counsel to the indemnifying party shall not (except with the consent of the
indemnified party) also be counsel to the indemnified party. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances. No indemnifying party shall, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which indemnification or
contribution could be sought under this Section 6 or Section 7 hereof (whether
or not the indemnified parties are actual or potential parties thereto), unless
such settlement, compromise or consent (i) includes an unconditional release of
each indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel to which the indemnified
party is entitled under Section 6(a) or 6(b) as the case may be, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of
<PAGE>
such settlement.
(e) OTHER AGREEMENTS WITH RESPECT TO INDEMNIFICATION. The provisions of
this Section shall not affect any agreement among the Company and the Selling
Shareholders with respect to indemnification.
SECTION 7. CONTRIBUTION. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other hand from
the offering of the Securities pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and the
Selling Shareholders on the one hand and of the Underwriters on the other hand
in connection with the statements or omissions which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company and the Selling
Shareholders on the one hand and the Underwriters on the other hand in
connection with the offering of the Securities pursuant to this Agreement shall
be deemed to be in the same respective proportions as the total proceeds (net of
underwriting discount) from the offering of the Securities pursuant to this
Agreement (before deducting expenses) received by the Company and the Selling
Shareholders and the total underwriting discount received by the Underwriters,
in each case as set forth on the cover of the Prospectus, or, if Rule 434 is
used, the corresponding location on the Term Sheet bear to the aggregate initial
public offering price of the Securities as set forth on such cover.
The relative fault of the Company and the Selling Shareholders on the
one hand and the Underwriters on the other hand shall be determined by reference
to, among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Selling Shareholders or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 7
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based
<PAGE>
upon any such untrue or alleged untrue statement or omission or alleged omission
(subject to the limitations set forth in Section 6(c)).
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission and no Selling
Shareholder shall be required to contribute more than the product of the number
of Shares sold by such Selling Shareholder and the purchase price for the Shares
paid by the Underwriters as set on Schedule C.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company or any
Selling Shareholder within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company or
such Selling Shareholder, as the case may be. The Underwriters' respective
obligations to contribute pursuant to this Section 7 are several in proportion
to the number of Initial Securities set forth opposite their respective names in
Schedule A hereto and not joint.
The provisions of this Section shall not affect any agreement among the
Company and the Selling Shareholders with respect to contribution.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or the Subsidiary or the
Selling Shareholders submitted pursuant hereto, shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf of
any Underwriter or controlling person, or by or on behalf of the Company or the
Selling Shareholders, and shall survive delivery of the Securities to the
Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The Representative may terminate this
Agreement, by notice to the Company and the Selling Shareholders, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and the Subsidiary considered as one enterprise, whether or not arising
in the ordinary course of
<PAGE>
business, or (ii) if there has occurred any material adverse change in the
financial markets in the United States or the international financial markets,
any outbreak of hostilities or escalation thereof or other calamity or crisis or
any change or development involving a prospective change in national or
international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the Representative,
impracticable to market the Securities or to enforce contracts for the sale of
the Securities, or (iii) if trading in any securities of the Company has been
suspended or limited by the Commission or the Nasdaq National Market, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or limited, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices have
been required, by any of said exchanges or by such system or by order of the
Commission, the NASD or any other governmental authority, or (iv) if a banking
moratorium has been declared by either Federal, New York or California
authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 3(m), 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representative shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representative shall not have
completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the Underwriters to purchase, and of the
Company to sell, the Option Securities to be purchased and sold on such
Date of Delivery shall terminate without liability on the part of any
non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a
<PAGE>
termination of the obligation of the Underwriters to purchase and the Company to
sell the relevant Option Securities, as the case may be, either the (i)
Representatives or (ii) the Company and any Selling Shareholder shall have the
right to postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 10.
SECTION 11. DEFAULT BY ONE OR MORE OF THE SELLING SHAREHOLDERS OR THE
COMPANY. (a) If a Selling Shareholder shall fail at Closing Time to sell and
deliver the number of Securities which such Selling Shareholder or Selling
Shareholders are obligated to sell hereunder, and the remaining Selling
Shareholders do not exercise the right hereby granted to increase, pro rata or
otherwise, the number of Securities to be sold by them hereunder to the total
number to be sold by all Selling Shareholders as set forth in Schedule B hereto,
then the Underwriters may, at option of the Representative, by notice from the
Representative to the Company and the non-defaulting Selling Shareholders,
either (a) terminate this Agreement without any liability on the fault of any
non-defaulting party except that the provisions of Sections 1, 3(m), 4, 6, 7 and
8 shall remain in full force and effect or (b) elect to purchase the Securities
which the non-defaulting Selling Shareholders and the Company have agreed to
sell hereunder. No action taken pursuant to this Section 11 shall relieve any
Selling Shareholder so defaulting from liability, if any, in respect of such
default.
In the event of a default by any Selling Shareholder as referred to in
this Section 11, each of the Representative, the Company and the non-defaulting
Selling Shareholders shall have the right to postpone Closing Time for a period
not exceeding seven days in order to effect any required change in the
Registration Statement or Prospectus or in any other documents or arrangements.
(b) If the Company shall fail at Closing Time or at the Date of
Delivery to sell the number of Securities that it is obligated to sell
hereunder, then this Agreement shall terminate without any liability on the part
of any non-defaulting party; PROVIDED, HOWEVER, that the provisions of Sections
1, 3(m), 4, 6, 7 and 8 shall remain in full force and effect. No action taken
pursuant to this Section shall relieve the Company from liability, if any, in
respect of such default.
SECTION 12. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representative at c/o Keefe, Bruyette &
Woods, Inc., Two World Trade Center, New York, New York 10048, attention of
Peter J. Wirth; notices to the Company shall be directed to it at Eldorado
Bancshares, Inc., 24012 Calle de la Plata, Suite 150, Laguna Hills, CA 92653,
attention of Robert P. Keller; and notices to the Selling Shareholders shall be
directed to Hugh A.
O'Reilly, Nutter, McLennen & Fish LLP, One International Place, Boston, MA
02110-2699.
SECTION 13. PARTIES. This Agreement shall each inure to the benefit of
and be binding
<PAGE>
upon the Underwriters, the Company and the Selling Shareholders and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the Underwriters, the Company and the Selling Shareholders and their
respective successors and the controlling persons and officers and directors
referred to in Sections 6 and 7 and their heirs and legal representatives, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision herein contained. This Agreement and all conditions and
provisions hereof are intended to be for the sole and exclusive benefit of the
Underwriters, the Company and the Selling Shareholders and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Securities from any Underwriter shall be deemed to
be a successor by reason merely of such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS
OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. EFFECT OF HEADINGS. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and the Attorney-in-Fact for
the Selling Shareholders a counterpart hereof, whereupon this instrument, along
with all counterparts, will become a binding agreement among the Underwriters,
the Company and the Selling Shareholders in accordance with its terms.
Very truly yours,
ELDORADO BANCSHARES, INC.
By:__________
Name: Robert P. Keller
Title: President and Chief Executive Officer
ATTORNEY-IN-FACT, on behalf of the Selling
Shareholders named in Schedule B hereto
By:__________
Name: [ ]
As Attorney-in-Fact acting on behalf of the Selling
Shareholders named in Schedule B hereto
CONFIRMED AND ACCEPTED, as of the date first above written:
KEEFE, BRUYETTE & WOODS, INC.
By: KEEFE, BRUYETTE & WOODS, INC.
By _________________________________________
Authorized Signatory
For themselves and as Representative of the other Underwriters named in
Schedule A hereto.
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Name of Underwriter Number of
Initial
Securities
----------
<S> <C>
Keefe, Bruyette & Woods, Inc......................................
_______
_______
Total............................................................. _______
_______
</TABLE>
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of Initial Maximum Number of Option
Securities to be Sold Securities to be Sold
--------------------- ------------------------
<S> <C> <C>
Total....................................
</TABLE>
<PAGE>
SCHEDULE C
ELDORADO BANCSHARES, INC.
[________________] Shares of Common Stock
(Par Value $0.01 Per Share)
1.The initial public offering price per share for the Securities, determined as
provided in said Section 2, shall be
$[_________________].
2.The purchase price per share for the Securities to be paid by the several
Underwriters shall be [$___________], being an amount equal to the initial
public offering price set forth above less [$___________] per share; provided
that the purchase price per share for any Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be
reduced by an amount per share equal to any dividends or distributions declared
by the Company and payable on the Initial Securities but not payable on the
Option Securities.
<PAGE>
SCHEDULE D
[ ]
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Company is duly registered as a bank holding company under
the Bank Holding Company Act of 1956, as amended. The activities of each the
Subsidiary are permitted to subsidiaries of a bank holding company.
(iv) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each of the following states: [ ]
(v) The authorized, issued and outstanding capital stock of the
Company at the Closing Time will be as set forth in the Prospectus in the
column entitled "As Adjusted" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to the Purchase Agreement or pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or options
referred to in the Prospectus); the shares of issued and outstanding capital
stock of the Company, including the Securities to be purchased by the
Underwriters from the Selling Shareholders, have been duly authorized and
validly issued and are fully paid and non-assessable; and none of the
outstanding shares of capital stock of the Company, including the Securities to
be purchased by the Underwriters from the Selling Shareholders, was issued in
violation of the preemptive or other similar rights of any securityholder of
the Company.
(vi) The Securities to be purchased by the Underwriters from the
Company have been duly authorized and, when issued and delivered by the Company
pursuant to the Purchase Agreement against payment of the consideration set
forth in the Purchase Agreement, will be validly issued and fully paid and
non-assessable and no holder of the Securities is or will be subject to
personal liability by reason of being such a holder. The Common Stock conforms
in all material respects to all statements relating thereto contained in the
Prospectus and such description conforms in all material respects to the rights
set forth in the instruments defining the same.
<PAGE>
(vii) The issuance and sale of the Securities by the Company and the
sale of the Securities by the Selling Shareholders is not subject to the
preemptive or to our knowledge other similar rights of any securityholder of the
Company.
(viii) Each of Eldorado Bank ("Eldorado Bank") and Antelope Valley Bank
("AVB") has been duly organized and is validly existing and in good standing
under the laws of the State of California, has full authority to conduct
operations as a California state bank, has corporate power and authority to own,
lease and operate its properties and to conduct its business as described in the
Prospectus and, in the case of Eldorado Bank, is duly qualified as a foreign
corporation to transact business and is in good standing in [ ], and, in the
case of AVB is duly qualified as a foreign corporation to transact business and
is in good standing in [ ]. Each of Eldorado Bank and AUB is duly licensed in
the State of California by the California State Department of Financial
Institutions. Except as otherwise disclosed in the Prospectus, all of the issued
and outstanding capital stock of Eldorado Bank and AVB has been duly authorized
and validly issued, is fully paid and non-assessable and, to our knowledge, is
owned directly by the Company, free and clear of any security interest,
mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding
shares of capital stock of Eldorado Bank Eldorado was issued in violation of the
preemptive or similar rights of any securityholder of or AUB Bank or AVB. To our
knowledge, the Company does not have any subsidiaries other than the Eldorado
Bank AVB or CSBI Capital Trust I.
(ix) Except as disclosed in or specifically contemplated by the
Prospectus, to our knowledge, there are no outstanding options, warrants or
other rights calling for the issuance of, and no commitments, obligations, plans
or arrangements to issue, any shares of capital stock of the Company, Eldorado
Bank or AVB or any security convertible into or exchangeable for capital stock
of the Company, Eldorado Bank or AVB .
(x) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(xi) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the Prospectus pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b); and, to our knowledge, no stop order
suspending the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no proceedings for
that purpose have been instituted or are pending or threatened by the
Commission.
(xii) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434 Information,
as applicable, the Prospectus, and each amendment or supplement to the
Registration Statement and Prospectus, as of their respective effective or issue
dates (other than the financial statements and supporting schedules
<PAGE>
and other financial or statistical data included therein or omitted therefrom,
as to which we express no opinion) complied as to form in all material respects
with the applicable requirements of the 1933 Act and the 1933 Act Regulations.
(xiii) If Rule 434 has been relied upon, the Prospectus was not
"materially different," as such term is used in Rule 434, from the prospectus
included in the Registration Statement at the time it became effective.
(xiv) The form of certificate used to evidence the Common Stock
complies in all material respects with the requirements of Delaware law, with
any applicable requirements of the articles of incorporation and by-laws of the
Company and the requirements of the Nasdaq National Market.
(xv) To our knowledge, there is not pending or threatened any action,
suit, proceeding, inquiry or investigation, to which the Company or the Bank is
a party, or to which the property or assets of the Company or the Bank is
subject, before or brought by any court or governmental agency or body, domestic
or foreign, that is required to be described in the Prospectus that is not
described as required; and all pending legal or governmental proceedings of
which we are aware to which the Company or the Bank is a party or that affect
any of their respective properties or assets that are not described in the
Prospectus, including ordinary routine litigation incidental to the business,
could not reasonably be expected to result in a Material Adverse Effect.
(xvi) The information in the Prospectus under ["Risk Factors -
Supervision and Regulation," "Risk Factors - No Present Intention to Pay
Dividends; Prohibition on Dividends by the Bank to the Company Without Prior
Regulatory Approval," "Risk Factors - Possible Future Sales of Shares," "Risk
Factors - Regulation of Control," "Use of Proceeds," "Business - Litigation,"
"Management - Stock Option Plan," "Supervision and Regulation" and "Description
of Capital Stock" and in the Registration Statement under Items 14 and 15, to
the extent that such information constitutes summaries of law (including,
without limitation, statutes and regulations), the Company's certificate of
incorporation and bylaws, documents or legal proceedings, or legal conclusions,
has been reviewed by us and such summaries present fairly in all material
respects the matters referred to therein.
(xvii) All descriptions in the Registration Statement of contracts and
other documents to which the Company or the Bank are a party are fair summaries
in all material respects.
(xviii) To our knowledge, there are no franchises, contracts,
indentures, mortgages, loan agreements, notes, leases or other instruments
required to be described or referred to in the Registration Statement or to be
filed as exhibits thereto other than those described or referred to therein or
filed or incorporated by reference as exhibits thereto, and the descriptions
thereof or references thereto are fair summaries in all material respects.
(xix) No filing with, or authorization, approval, consent, license,
order, registration,
<PAGE>
qualification or decree of, any court or governmental authority or agency,
domestic or foreign (other than under the 1933 Act and the 1934 Act and the
applicable regulations, which have been obtained, or as may be required under
the securities or blue sky laws of the various states, as to which we express no
opinion) is necessary or required in connection with the due authorization,
execution and delivery of the Purchase Agreement or the consummation of the
transactions contemplated thereby.
(xx) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase Agreement
and in the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities by the
Company as described in the Prospectus under the caption "Use Of Proceeds") and
compliance by the Company with its obligations under the Purchase Agreement do
not and will not, whether with or without the giving of notice or lapse of time
or both, conflict with or constitute a breach of, or a default or Repayment
Event (as defined in Section 1(a)(x) of the Purchase Agreement) under, give rise
to any right of termination under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company or
the Bank pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or any other agreement or instrument of which we
are aware to which the Company or the Bank is a party or by which it or any of
them may be bound, or to which any of the property or assets of the Company or
the Bank is subject (except for such Repayment Events conflicts, breaches or
defaults or liens, charges or encumbrances that would not, individually or in
the aggregate, have a Material Adverse Effect), nor will such action result in
any violation of the provisions of the charter or by-laws of the Company or the
Bank, or any applicable law, statute, rule, regulation, or to our knowledge any
judgment, order, writ or decree of any government, governmental instrumentality
or court, domestic or foreign, having jurisdiction over the Company or the Bank
or any of their respective properties, assets or operations.
(xxi) Except as described in the Registration Statement or expressly
waived to our knowledge, there are no persons with registration rights or other
similar rights to have any securities registered pursuant to the Registration
Statement.
(xxii) The Company is not, and upon the issuance and sale of the
Securities as contemplated in the Purchase Agreement and the application of the
net proceeds therefrom as described in the Prospectus will not be, an
"investment company" or an entity "controlled" by an "investment company," as
such terms are defined in the 1940 Act.
We have participated in conferences with officers and other
representatives of the Company, representatives of the independent public
accountants for the Company and with your representatives at which time the
contents of the Registration Statement, the Prospectus and related matters were
discussed. Although we have not independently verified, and are not passing upon
and do not assume any responsibility for, the accuracy, completeness or fairness
of the statements contained in the Registration Statement and the Prospectus
(except to the extent set forth in subparagraphs (xv), (xvi), (xvii) and (xviii)
above), we advise you that, on the basis of the foregoing (relying as to facts
upon which determinations of materiality are made to a
<PAGE>
large extent upon the officers and other representatives of the Company and its
independent public accountants), we have no reason to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information at the time such Registration Statement or any such amendment became
effective contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus or any amendment or
supplement thereto, as of its date and as of the date hereof, contained or
contains any untrue statement of a material fact or omitted or omits any
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading (it being understood
that we express no view or opinion with respect to the reports of experts
pertaining to (i) the financial statements and schedules contained therein,
including the notes thereto and the auditors' report thereon, (ii) other
financial or statistical data, and (iii) the exhibits thereto contained in the
Registration Statement or the Prospectus).
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
<PAGE>
Exhibit B
FORM OF OPINION OF COUNSEL FOR THE SELLING SHAREHOLDERS
TO BE DELIVERED PURSUANT TO SECTION 5(c)
(i) No filing with, or consent, approval, authorization, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign, (other than the issuance of the order
of the Commission declaring the Registration Statement effective, the
registration of the class of Common Stock under the 1934 Act and such
authorizations, approvals or consents as may be necessary under state securities
laws, as to which we express no opinion) is necessary or required to be obtained
by the Selling Shareholders for the performance by each Selling Shareholder of
its obligations under the Purchase Agreement or in the Power of Attorney and
Custody Agreement, or in connection with the offer, sale or delivery of the
Securities.
(ii) Each Power of Attorney and Custody Agreement has been duly
executed and delivered by the respective Selling Shareholders named therein and
constitutes the legal, valid and binding agreement of such Selling Shareholder.
(iii) The Purchase Agreement has been duly authorized, executed and
delivered by or on behalf of each Selling Shareholder.
(iv) Each Attorney-in-Fact has been duly authorized by the Selling
Shareholders to deliver the Securities on behalf of the Selling Shareholders in
accordance with the terms of the Purchase Agreement.
(v) The execution, delivery and performance of the Purchase Agreement
and the Power of Attorney and Custody Agreement and the sale and delivery of the
Securities and the consummation of the transactions contemplated in the Purchase
Agreement and in the Registration Statement and compliance by each Selling
Shareholder with its obligations under the Purchase Agreement have been duly
authorized by all necessary action on the part of each Selling Shareholder and
do not and will not (a) result in a breach or violation of any statute, rule or
regulation or, to our knowledge, any order of any court or governmental
authority, in each case applicable to or having jurisdiction over the Selling
Shareholder, (b) to our knowledge, whether with or without the giving of notice
or passage of time or both, conflict with or constitute a breach of, or default
under or result in the creation or imposition of any tax, lien, charge or
encumbrance upon the Securities of any Selling Shareholder pursuant to, any
contract, indenture, mortgage, deed of trust, loan or credit agreement, note,
license, lease or other instrument or agreement to which such Selling
Shareholder is a party or by which it may be bound, or to which any of the
Securities of such Selling Shareholder may be subject, other than any such
conflict, breach or default which would not have a material adverse effect on
the ability of the Selling Shareholder to perform its obligations under the
Purchase Agreement, including, without limitation, the Selling Shareholder's
obligations with respect to the sale and
<PAGE>
delivery of the Securities, or (c) result in any violation of the provisions of
the charter or by-laws or other governing documents of any Selling Shareholder,
if applicable.
(vi) Upon physical delivery to Keefe, Bruyette & Woods, Inc., as
representative of the several underwriters (the "Buyer") in the state of New
York of the securities identified on Schedule I to such opinion (the "Secondary
Securities") registered in its name, the Buyer will acquire the Secondary
Securities free of any adverse claims (within the meaning of Section 8-102(a)(1)
of the New York Uniform Commercial Code).
<PAGE>
[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER SHAREHOLDER
PURSUANT TO SECTION 5(K)]
Exhibit C
[____________], 1998
KEEFE , BRUYETTE & WOODS, INC.
as Representative of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Keefe, Bruyette & Woods, Inc.
Two World Trade Center
New York, New York 10048
Re: PROPOSED PUBLIC OFFERING BY ELDORADO BANCSHARES, INC.
Ladies and Gentlemen:
The undersigned, a shareholder [and an officer and/or director] of
Eldorado Bancshares, Inc., a Delaware corporation (the "Company"),
understands that Keefe, Bruyette & Woods, Inc. ("KBW") proposes to enter
into a Purchase Agreement (the "Purchase Agreement") with the Company and
the Selling Shareholders providing for the public offering of shares (the
"Securities") of the Company's common stock, par value $0.01 per share (the
"Common Stock"). In recognition of the benefit that such an offering will
confer upon the undersigned as a shareholder [and an officer and/or director]
of the Company, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the undersigned agrees
with each underwriter to be named in the Purchase Agreement that, during a
period of 180 days from the date of the Purchase Agreement, the undersigned
will not, without the prior written consent of KBW, directly or indirectly,
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant for the sale of, or otherwise dispose of or transfer any shares
of Common Stock or any securities convertible into or exchangeable or
exercisable for Common Stock, whether now owned or hereafter acquired by the
undersigned or with respect to which the undersigned has or hereafter
acquires the power of disposition, or file or cause to be filed any
registration statement under the Securities Act of 1933, as amended, with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction is to be settled by delivery of Common
Stock or other securities, in cash or otherwise, except for the exercise of
Common Stock warrants and management stock options pursuant to the 1997
Stock Option Plan and shares of Common Stock disposed of as bona fide gifts
or for estate planning purposes, subject in each case, to any remaining
portion of the 180-day period applying to any shares so issued or
transferred, provided that, in the case of any shares of Common Stock
disposed of by way of bona fide gift or for estate planning purposes, the
transfer or shall obtain the agreement in writing of the transferee in form
and substance reasonably satisfactory to KBW, that such transferee will
comply with the restrictions on transfer set forth herein for any remaining
portion of the 180-day period applying to such shares.
Very truly yours,
Signature:
Print Name:
<PAGE>
Exhibit 3.3
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ELDORADO BANCSHARES, INC.
The undersigned, Robert P. Keller and Michael K. Krebs, do hereby
certify:
A. They are the duly elected and acting President and Secretary,
respectively, of Eldorado Bancshares, Inc., a Delaware corporation (the
"Corporation").
B. The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State on May 10, 1996, and the name under which the
Corporation was originally incorporated is SC Acquisition Corp.
C. The Certificate of Incorporation of the Corporation has previously
been amended on several occasions to change, among other matters, the name of
the Corporation initially to Commerce Security Bancorp, Inc. and subsequently to
Eldorado Bancshares, Inc.
D. The Certificate of Incorporation, as previously amended, is further
amended and restated to read in full as follows:
FIRST: The name of the Corporation is Eldorado Bancshares, Inc.
SECOND: The address of the registered office of the Corporation in the
State of Delaware is at Corporation Trust Center, 1209 Orange Street,
Wilmington, County of New Castle, Delaware 19801. The name of its registered
agent at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "Corporation Law").
FOURTH: The total number of shares of all classes and series of stock
that the Corporation shall have authority to issue is as follows:
<TABLE>
<CAPTION>
PAR VALUE NUMBER AUTHORIZED
--------- -----------------
<S> <C> <C>
Common Stock $.01 35,000,000
Non-Voting Common Stock $.01 5,000,000
Preferred Stock $.01 1,500,000
</TABLE>
The following is a statement of the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, in respect of each class of
capital stock of the Corporation.
<PAGE>
A. COMMON STOCK AND NON-VOTING COMMON STOCK.
1. GENERAL. The voting, dividend and liquidation rights of the holders
of the Common Stock and the Non-Voting Common Stock are subject to and qualified
by the rights of the holders of the Preferred Stock of any series, including as
may be designated by the Board of Directors upon any issuance of the Preferred
Stock of any series. The powers, preferences and rights of, and the
qualifications, limitations and restrictions of, the Non-Voting Common Stock
shall in all respects be identical to those of the Common Stock except with
respect to voting rights, as provided in Section 2(b) of this Part A.
2. VOTING.
(a) COMMON STOCK VOTING RIGHTS. Except as otherwise required
by applicable law, holders of the Common Stock are entitled, at all meetings of
stockholders and with respect to all written actions in lieu of meetings, to one
vote for each share of Common Stock held, and the holders of all Common Stock
shall vote together as a single class. At any meeting held for the purpose of
voting on any matter on which, pursuant to the Corporation Law, the holders of
the Common Stock shall have a right to vote, the presence in person or by proxy
of the holders of a majority of the shares of Common Stock then entitled to vote
shall constitute a quorum of the Common Stock.
(b) NON-VOTING COMMON STOCK VOTING RIGHTS. Except as otherwise
required by law, the holders of the outstanding shares of Non-Voting Common
Stock shall not be entitled to vote on any matter; PROVIDED, HOWEVER, that
without the affirmative vote of the holders of a majority of the outstanding
shares of the Non-Voting Common Stock, no provision of the Certificate of
Incorporation of the Corporation shall be amended, altered or repealed in any
manner that would (i) alter or change the powers, preferences or rights of the
holders of the outstanding shares of Non-Voting Common Stock so as to affect
them adversely, or (ii) delete or amend in any manner this Section 2(b).
3. DIVIDENDS. Dividends may be declared on the then-outstanding Common
Stock and the then-outstanding Non-Voting Common Stock, on a pari passu basis,
from funds lawfully available therefor as and when determined by the Board of
Directors, and subject to any preferential dividend rights of any
then-outstanding Preferred Stock. No dividends shall be declared or paid on the
Common Stock unless they shall be declared or paid, as applicable, in equal
per-share amounts on the Non-Voting Common Stock, and vice versa.
4. STOCK SPLITS AND STOCK DIVIDENDS. The Corporation shall not in any
manner subdivide (by stock split, stock dividend or otherwise) or combine (by
reverse stock split, stock dividend or otherwise) the outstanding Common Stock
unless the outstanding shares of the Non-Voting Common Stock shall be
proportionately subdivided or combined, and vice versa. All such subdivisions
and combinations shall be payable only in Common Stock to the holders of Common
Stock, and in Non-Voting Common Stock to the holders of Non-Voting Common Stock.
However, if the Corporation creates any additional class of common stock, it may
not issue any such stock, or any options, warrants or other rights to acquire or
that
<PAGE>
convert into such stock, to holders of any class of common stock unless it also
issues an equal amount per share to holders of all classes of common stock.
5. CONVERSION OF NON-VOTING COMMON STOCK.
(a) CONVERSION. Any share of Non-Voting Common Stock may be
converted, at the election of the holder thereof, into one share of Common Stock
at any time; PROVIDED, HOWEVER, that no holder of Non-Voting Common Stock may so
convert his, her or its shares of Non-Voting Common Stock if and to the extent
that such holder would thereby beneficially own more than 9.9% of the Common
Stock unless and until such holder has delivered to the Secretary of the
Corporation an opinion or memorandum of counsel or other reasonably satisfactory
evidence that such holder may beneficially own more than 9.9% of the Common
Stock and may acquire such shares in accordance with the Bank Holding Company
Act of 1956, as amended. To convert any shares of Non-Voting Common Stock into
shares of Common Stock, the holder thereof shall surrender the certificate or
certificates for such shares at the office of the transfer agent for the
Non-Voting Common Stock (or at the principal office of the Corporation if the
Corporation serves as its own transfer agent), together with written notice that
such holder elects to convert all or any number of the shares of the Non-Voting
Common Stock represented by such certificate or certificates. Such notice shall
state such holder's name or the names of the nominees in which such holder
wishes the certificate or certificates for shares of Common Stock to be issued.
If required by the Corporation, certificates surrendered for conversion shall be
endorsed or accompanied by a written instrument or instruments of transfer in
form satisfactory to the Corporation, duly executed by the registered holder or
his, her or its attorney duly authorized in writing. Such conversion shall be
effective on the date (the "Surrender Date") of receipt of such certificates and
notice by the transfer agent (or by the Corporation if the Corporation serves as
its own transfer agent). The Corporation shall, as soon as practicable after the
Surrender Date, issue and deliver at such office to such holder of Non-Voting
Common Stock, or to his, her or its nominees, a certificate or certificates for
the number of shares of Common Stock to which such holder shall be entitled,
together with cash in lieu of any fraction of a share. The Corporation shall, at
all times when shares of Non-Voting Common Stock (or securities convertible into
Non-Voting Common Stock) shall be outstanding, reserve and keep available out of
its authorized but unissued stock, for the purpose of effecting the conversion
of the Non-Voting Common Stock, such number of its duly authorized shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding Non-Voting Common Stock and all securities convertible into
Non-Voting Common Stock.
(b) EFFECT OF CONVERSION OF NON-VOTING COMMON STOCK. All
shares of Non-Voting Common Stock which shall have been surrendered for
conversion as herein provided shall no longer be deemed to be outstanding and
shall automatically be cancelled and cease to exist, and all rights with respect
to such shares shall immediately cease and terminate on the Surrender Date,
except only the right of the holders thereof as holders of the shares of Common
Stock into which such shares of Non-Voting Common Stock have been converted and
the right to payment of any declared but unpaid dividends on such Non-Voting
Common Stock; PROVIDED, HOWEVER, that the foregoing shall not derogate from the
rights of the holders of such converted shares to exercise their rights as
holders of the Common Stock into which
<PAGE>
the applicable shares of Non-Voting Common Stock have been converted at all
times from and after the Surrender Date, whether or not certificates evidencing
such shares of Common Stock have been issued. Any shares of Non-Voting Common
Stock so converted shall be retired and cancelled and shall not be reissued, and
the Corporation shall from time to time take such appropriate action as may be
necessary to reduce the number of shares of authorized Non-Voting Common Stock
accordingly. At such time as there remain no outstanding shares of Non-Voting
Common Stock, the Corporation shall amend its Certificate of Incorporation to
remove therefrom those provisions that relate exclusively to Non-Voting Common
Stock.
6. LIQUIDATION. Upon the dissolution or liquidation of the Corporation,
whether voluntary or involuntary, holders of the Common Stock and the Non-Voting
Common Stock shall be entitled, on a pari passu basis, to receive all assets of
the Corporation available for distribution to its stockholders, subject to any
preferential rights of any then-outstanding Preferred Stock. In the event the
assets to be distributed to the holders of the Common Stock and the Non-Voting
Common Stock pursuant to this Section 6 consist, in whole or in part, of assets
other than cash ("Non-Cash Assets"), the distributions to all holders of Common
Stock and Non-Voting Common Stock shall be of the same proportion of cash to
Non-Cash Assets (or, in the event that holders shall be entitled to elect
whether to receive cash or Non-Cash Assets, or to elect among various categories
of Non-Cash Assets, the holders of all Common Stock and Non-Voting Common Stock
shall have rights of election proportionate to the amount per share that each is
entitled to receive pursuant to this Section 6).
B. PREFERRED STOCK.
Preferred Stock may be issued from time to time in one or more series,
each such series to have such powers, preferences and rights as stated or
expressed in the resolution or resolutions providing for the issue of such
series adopted by the Board of Directors of the Corporation as hereinafter
provided. Any shares of Preferred Stock which may be redeemed, purchased,
acquired or converted into shares of Common Stock by the Corporation may not be
reissued except as otherwise provided by law or in the resolution or resolutions
providing for the issue of such series of Preferred Stock. Except as otherwise
required by law, different series of Preferred Stock shall not be construed to
constitute different classes of shares for the purposes of voting by classes
unless expressly provided.
Authority is hereby granted to the Board of Directors from time to time
to issue the Preferred Stock in one or more series, and in connection with the
creation of any such series, by resolution or resolutions providing for the
issue of the shares thereof, to determine and fix such voting powers, full or
limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including without limitation thereof, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be stated and expressed in such resolutions, all to the full extent now or
hereafter permitted by the Corporation Law. Without limiting the generality of
the foregoing, except as otherwise provided herein or in the resolutions
providing for the issuance of any other series of Preferred Stock, the
resolutions
<PAGE>
providing for issuance of any series of Preferred Stock may provide that such
series shall be superior or rank equally or be junior to the Preferred Stock of
any other series to the extent permitted by law. Except as otherwise provided
herein or in the resolutions providing for the issuance of any series of
Preferred Stock, no vote of the holders of any then-outstanding Preferred Stock,
the Common Stock or the Non-Voting Common Stock shall be a prerequisite to the
issuance of any shares of any series of the Preferred Stock authorized by and
complying with the conditions of the Certificate of Incorporation.
* * *
All shares of Class B Common Stock of the Corporation outstanding
immediately prior to the effectiveness of this Amended and Restated Certificate
of Incorporation are reclassified and redesignated as shares of Common Stock.
All shares of Class C Common Stock of the Corporation outstanding immediately
prior to the effectiveness of this Amended and Restated Certificate of
Incorporation are reclassified and redesignated as shares of Non-Voting Common
Stock.
* * *
FIFTH: The Corporation is to have perpetual existence.
SIXTH: The Board of Directors is expressly authorized to exercise all
powers granted to the directors by law, except to the extent such powers are
limited or denied herein or in the By-laws of the Corporation. In furtherance of
such powers, the Board of Directors shall have the right to make, alter or
repeal the By-laws of the Corporation, except that any By-law adopted by the
stockholders may be altered or repealed only by the stockholders if such By-law
so provides.
SEVENTH: Elections of directors need not be by written ballot unless
the By-laws of the Corporation shall so provide.
EIGHTH: No director shall be personally liable to the Corporation or
its stockholders for monetary damages for any breach of fiduciary duty by such
director as a director, except to the extent that such exculpation from
liability is not permitted under the Corporation Law as the same now exists or
as may be hereafter amended. This provision shall not eliminate the liability of
a director for any act or omission occurring prior to the date on which this
provision becomes effective. No amendment to or repeal of this Article Eighth
shall apply to or have any effect on the liability or alleged liability of any
director of the Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal.
NINTH: If and for so long as the Corporation shall have a class of
stock registered pursuant to the provisions of the Securities Exchange Act of
1934, as amended, any action by the stockholders of such class must be taken at
an annual or special meeting of stockholders, and may not be taken by written
consent, unless the action to be taken by written consent has
<PAGE>
been approved or declared advisable in a resolution adopted by the Corporation's
Board of Directors.
TENTH: If any provision (or part thereof) of this Amended and Restated
Certificate of Incorporation is held to be invalid or not legally enforceable
for any reason, such invalidity shall not affect the validity and enforceability
of the remaining provisions (or parts thereof), all of which are inserted
conditionally on their being valid in law. In the event of any such invalidity
or unenforceability, this Amended and Restated Certificate of Incorporation
shall be construed as if such invalid provision (or part thereof) had not been
inserted; PROVIDED, HOWEVER, that if any provision is declared to be
unenforceable because it is determined to be overbroad, then, to the extent
possible, in lieu of deletion such provision shall be modified to the minimum
extent necessary to render such provision enforceable.
ELEVENTH: Except as otherwise provided herein, the Corporation reserves
the right to amend, alter, change or repeal any provision contained in this
Amended and Restated Certificate of Incorporation in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders herein are
conferred subject to this reservation.
E. The foregoing Amended and Restated Certificate of Incorporation has
been approved by the Board of Directors of the Corporation.
F. The foregoing Amended and Restated Certificate of Incorporation was
approved by the written consent of the holders of a majority of the outstanding
shares of Common Stock, and by the holders of a majority of the outstanding
shares of each class of stock entitled to vote thereon as a separate class, in
accordance with Sections 228, 242, and 245 of the Corporation Law.
* * *
IN WITNESS WHEREOF, Eldorado Bancshares, Inc. has caused this Amended
and Restated Certificate of Incorporation to be signed by Robert P. Keller, its
President, and attested by Michael K. Krebs, its Secretary, this day of
, 1999.
ELDORADO BANCSHARES, INC.
By:
-----------------------------------
Robert P. Keller
President
ATTEST:
<PAGE>
By:
---------------------------
Michael K. Krebs
Secretary
<PAGE>
EXHIBIT 5
NUTTER, MCCLENNEN & FISH, LLP
ATTORNEYS AT LAW
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110-2699
March 9, 1999
22309-8
Eldorado Bancshares, Inc.
24012 Calle de la Plata, Suite 340
Laguna Hills, CA 92653
Ladies/Gentlemen:
Reference is made to the Registration Statement on Form S-1 (File No.
333-61589) (the "Registration Statement"), and the Prospectus constituting Part
I thereof (the "Prospectus"), which Eldorado Bancshares, Inc., a Delaware
corporation (the "Company"), has filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to 3,298,900 shares of the Company's voting common stock, $.01 par
value (the "Common Stock"), consisting of (i) 2,608,700 shares of Common Stock
to be sold by the Company, (ii) 259,900 shares of Common Stock to be sold by
certain selling stockholders and (iii) 430,300 shares to be sold by the Company
if Keefe, Bruyette & Woods, Inc. and Lehman Brothers, as representatives of the
underwriters to be named in the Prospectus, exercise in full an over-allotment
option.
We have acted as counsel for the Company in connection with the
Registration Statement. We have examined original or certified copies of the
Certificate of Incorporation of the Company and all amendments thereto, the
Company's By-laws, the corporate records of the Company to the date hereof,
certificates of public officials and such other documents, records and materials
as we have deemed necessary in connection with this opinion letter.
Based upon the foregoing and in reliance upon information from time to
time furnished to us by the officers, directors and agents of the Company, we
are of the opinion that:
1. The shares of Common Stock, when issued and sold by the Company upon the
terms described in the Registration Statement, will be duly and validly
issued, fully paid and non-assessable; and
2. The shares of Common Stock to be sold by the selling stockholders have been
duly and validly issued and are fully paid and non-assessable.
<PAGE>
We understand that this opinion letter is to be used in connection with
the Registration Statement, as finally amended, and hereby consent to the filing
of this opinion letter with and as part of the Registration Statement as so
amended, and to the reference to our firm in the Prospectus under the heading
"Legal Matters." It is understood that this opinion is to be used in connection
with the offer and sale of the aforesaid shares only while said Registration
Statement is effective and so amended and as it may be amended from time to time
as contemplated by Section 10(a)(3) of the Securities Act.
Very truly yours,
/s/ Nutter, McClennen & Fish, LLP
NUTTER, McCLENNEN & FISH, LLP
<PAGE>
Exhibit 10.8
ELDORADO BANK
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made effective July 1, 1997 between
ELDORADO BANK ("Bank"), having a principal place of business at 24012 Calle
de la Plata, Suite 150, Laguna Hills, California 92653, and CATHERINE C.
CLAMPITT, ("Employee"), whose residence is 200 Paris Lane, #316, Newport
Beach, California 92663.
WITNESSETH
WHEREAS, Bank is a state bank duly organized, validly existing, and in
good standing under the laws of the State of California, with power to own
property and carry on its business as it is now being conducted;
WHEREAS, Bank desires to continue to avail itself of the skill,
knowledge and experience of Employee in order to insure the successful
management of its business; and
WHEREAS, the parties hereto desire to specify the terms of Employee's
continued employment by Bank;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, it is agreed that from and after July 1, 1997 (the "Effective Date"),
the following terms and conditions shall apply to Employee's employment.
AGREEMENT
A. TERM OF EMPLOYMENT
1. Term. The term of Employee's employment by Employer pursuant to this
Agreement shall be for a period commencing on the date of this Agreement and
terminating as follows:
(a) During the period December 1 through December 31 of each calendar year
hereafter, commencing with calendar year 1997, either party may give
written notice to the other party that this Agreement shall terminate on
December 31 of the first calendar year following the calendar year in
which such written notice is given; subject, however, to prior
termination of this Agreement as permitted by law or as hereinafter
provided.
(b) Where used herein, "Term" shall refer to the entire period of employment
by Employee by Bank hereunder, whether for the period provided above, or
whether terminated earlier.
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B. DUTIES OF EMPLOYEE
1. Duties. Subject to the powers by law vested in the Board of
Directors of Bank, Employee shall perform the duties of Small Business
Administration ("SBA") Department Manager of Bank, and such other duties as
the Bank shall reasonably designate consistent with such position. In that
capacity, Employee is primarily responsible for managing all facets of the
SBA Loan Department, including but not limited to, marketing, packaging,
closing and disbursements.
During the Term, Employee shall perform the services herein contemplated
to be performed by Employee faithfully, diligently and to the best of
Employee's ability, consistent with the highest standard of the banking
industry and in compliance with all applicable laws, Bank's Articles of
Association and Bylaws and Bank's policies, as modified from time to time,
and communicated to Employee.
The precise services to be performed by Employee may be extended or
curtailed, from time to time, at the discretion of the Chief Executive
Officer of Bank, without resulting in a recission of this Agreement, provided
such services shall at all times be of the nature customarily performed by
the SBA Department Manager of a Bank and shall not require relocation to an
office outside Orange County, California or to an office more than 25 miles
from the Bank's executive offices.
2. Conflicts of Interests. Except as permitted by the prior written
consent of the Chief Executive Officer of Bank, Employee shall devote
Employee's entire productive time, ability and attention to the business of
Bank during the term and normal business hours, and Employee shall not
directly or indirectly render any services of a business, commercial or
professional nature to any person, firm or corporation whether for
compensation or otherwise, which are in conflict with Bank's interest.
C. COMPENSATION
1, Base Salary. For Employee's services hereunder, Bank shall pay or
cause to be paid as base salary to Employee not less than the amount of Four
Thousand Nine Hundred Sixteen Dollars and Sixty-Eight Cents ($4,916.68) per
month during the Term, beginning with the Effective Date. Said salary shall
be paid in equal pro rata, semi-monthly installments in conformity with
Bank's normal payroll period. Employee's base salary shall be subject to
review annually with any increases to be at sole discretion of the Bank.
2. Commissions. During the Term, Employee shall be entitled to
commissions determined in accordance with the July 1, 1997 commission
schedule attached as Exhibit "A" to this Agreement.
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3. Equity. In the event any stock option, stock appreciation right, stock
bonus, employee stock ownership or other plan or program is implemented under
which senior officers of the Bank are eligible to receive stock options,
stock appreciation rights, equity interests or other rights or similar
benefits respecting the Bank or its parent company (an "Equity Plan").
Employee shall be considered for participation in any such Equity Plan on
terms no less favorable than those made available generally to other senior
officers of the Bank.
D. BENEFITS
1. Vacation and Sick Pay. Employee shall be entitled to vacation and sick
pay during the Term, in accordance with Bank's Personnel Policy. Vacation
earned, but not taken, may be accumulated in accordance with Bank's Personnel
Policy.
2. Group Medical and Life Insurance Benefits. During the Term, Bank shall
provide for medical, dental, vision, accident, disability and life insurance
benefits to Employee in accordance with Bank's standard employee benefits.
3. Automobile Expense Reimbursement. Employee shall maintain a log of
automobile usage for business purposes and submit number of miles driven on
an expense report, once each month, to be reimbursed at the current rate per
mile in accordance with Bank policy.
4. Automobile Telephone Reimbursement. Employee shall be reimbursed on a
monthly basis for automobile telephone charges directly related to Bank
business.
5. Other Expenses. Employee shall be reimbursed for cellular phone charges
directly related to Bank's business and for all costs of maintaining a fax
machine at Employee's home. Employee shall also be reimbursed for travel,
entertainment and other reasonable business expenses incurred in connection
with the performance of her duties, subject to the Bank's expense
reimbursement policy and the presentation of reasonable documentation for
such expenses in accordance with IRS guidelines.
E. TERMINATION
1. Termination by the Board of Directors. Employee is an officer of Bank,
appointed by the Board of Directors. Under this Agreement, Employee serves at
the pleasure of the Board of Directors and is subject to dismissal by the
Board at any time, without further obligation or liability to Employee, other
than as provided herein.
In the event Bank elects to dismiss Employee without cause and terminate
this Agreement, upon Employee's execution and delivery to Bank of an original
Waiver and Release Agreement (attached as exhibit "B" hereto), and not more
than ten (10) days after the later of the termination of Employee's
employment in accordance with this Section E.1. and the date Bank received
the Waiver and Release Agreement, Employee shall be entitled to a severance
payment equal to twelve (12) months pay in an amount equal to her gross
compensation, inclusive of
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<PAGE>
bonus and commissions, for the prior twelve (12) months and such other sums
as are provided for under Section E.5.
In the event the Bank elects to dismiss Employee for cause, Employee
shall not be entitled to receive compensation or other benefits for any
period after termination for cause. For the purposes of this Agreement,
"Cause" shall mean Employee (i) has been adjudged guilty of a felony or a
misdemeanor involving moral turpitude by a court of competent jurisdiction;
(ii) has committed any act which would cause termination of coverage under
the Bank's Banker's Blanket Bond as to Employee (as distinguished from
termination of coverage as to the Bank as a whole); (iii) was involved in
criminal misfeasance or willful misconduct in the performance of her duties;
or (iv) has intentionally breached this Agreement or Bank's Code of Ethics,
as communicated generally to the Bank's employee in writing.
2. Action by Supervisory Authority. This Agreement shall terminate
immediately without further liability or obligation to Employee or Bank:
(a) If Bank is closed or taken over by the State Banking Department
or other supervisory authority, including the Federal Reserve Board; or
(b) If such supervisory authority should exercise its cease and
desist powers to remove Employee from office.
3. Merger or Transfer of Assets. This Agreement shall not be terminated
due to: (a) a merger where Bank is not the surviving corporation; (b) a
consolidation; or (c) a transfer of all or substantially all of the assets of
Bank.
4. Termination by Employee. Employee may terminate her employment with
Bank, and this Agreement, upon sixty (60) days written notice of termination
to Bank.
5. Effect of Termination. In the event of the termination of Employee or
this Agreement prior to the completion of the Term for any of the reasons
specified in this Paragraph E, Employee shall be entitled to the salary
earned by Employee prior to the Effective Date of Termination, as determined
by the Chief Executive Officer of Bank, computed pro rata up to and including
that date, and accrued but unused vacation time (to the extent accumulated in
accordance with Paragraph D.I.) Employee shall be entitled to no further
compensation for services rendered after the Effective Date of Termination
other than pursuant to Paragraphs E.1. and E.6. Employee shall receive
commissions for SBA loans submitted by Bank to the SBA and/or approved by the
Bank for submission to the SBA prior to the Effective Date of Termination.
Such commissions will be paid as previously outlined in Paragraph C.2.
6. Change in Control Compensation. In the event (a) a Change of Control
has occurred, Good Reason exists and Employee gives written notice to the
Bank within one-hundred eighty (180) days after the occurrence of such Good
Reason that Employee is terminating her employment with the Bank for Good
Reason, and provided the Employee has delivered to Bank
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<PAGE>
a Waiver and Release Agreement (attached as exhibit "B" hereto), Employee
shall be entitled to a severance payment equal to twelve (12) months pay in
an amount equal to her gross compensation, inclusive bonus and commissions,
for the prior twelve (12) months and such other sums as are provided for
under Section E.5. The Severance Payment will be paid not more than ten (10)
days after the later of the termination of Employee's employment in accordance
with this paragraph 6 and the date Bank receives the Waiver and Release
Agreement. Each Change of Control shall give Employee a separate right to
give the notice set forth in the first sentence of this paragraph 6.
"Change of Control" shall mean (i) any transaction or series of
related transactions as a result of which Commerce Security Bancorp, Inc. or
Bank does not immediately thereafter own at least fifty percent (50%) of the
combined voting power of the outstanding securities of the Bank; (ii) a sale
of all or substantially all of the assets of the Bank to an entity of which
less than fifty percent (50%) of the combined voting power of the outstanding
securities are owned by Commerce Security Bancorp, Inc. or Bank; (iii) any
consolidation or merger of Commerce Security Bancorp, Inc. or Bank, as a
result of which consolidation or merger the shareholders of Commerce Security
Bancorp, Inc. or Bank immediately prior thereto own less than fifty percent
(50%) of the combined voting power of the outstanding securities of the
surviving or resulting entity immediately thereafter; or (iv) a sale by
shareholders of fifty percent (50%) of the combined voting power of the
outstanding securities of the Bank or Commerce Security Bancorp, Inc.
"Good Reason" shall mean the occurrence of Employee (i) being
delegated or assigned duties by the Board of Directors ("Board") or the
Chief Executive Officer of Bank which are materially inconsistent with the
position and status of SBA Department Manager of Bank, (ii) having had
removed by the Board or the Chief Executive Officer of Bank such authority,
responsibility and resources which are necessary to carry out the duties of
SBA Department Manager of Bank, (iii) having a substantial and adverse
alteration in the nature, status, or prestige of Employee's responsibilities
due to the action of the Board or the Chief Executive Officer of Bank, which
is verifiable by tangible evidence, including any material increase in
Employee's work requirements, or material decrease in staff or resources
allocated to the SBA Department (except decreases resulting from general
economic conditions or governmental action affecting demand for SBA loans
generally); (iv) being relocated to an office more than twenty-five (25)
miles from the Bank's executive offices or outside of Orange County,
California.
F. GENERAL PROVISION
1. Trade Secrets and Confidentiality. Employee will have access to and
become acquainted with what Employee and bank acknowledge are trade secrets,
to wit, knowledge or
5
<PAGE>
data concerning Bank, including its operations, it business, its customers,
and its customers' financial condition, their financial needs, and methods of
doing business. Employee shall not disclose any of the aforesaid trade
secrets, directly or indirectly, or use them in any way, except as required
in the course of Employee's employment with Bank.
Employee understands and agrees (a) that she will maintain all
proprietary and confidential information of the Bank as proprietary and
confidential at all times during and after her employment, (b) that she will
not disclose or communicate such information to any third party or make use
of it on her own behalf or on behalf of any third party, and (c) upon her
termination, that she will deliver all tangible forms or media which she may
have containing such information to the Bank. For purposes of this paragraph
F.1., "information" includes trade secrets, records, practices, letters,
plans, drawings, computer programs and data, technical data, financial and any
other business data the disclosure of which might reasonably be considered
contrary to the interest of the Bank.
2. Covenant Not to Interfere. Employee hereby covenants and agrees that
she will not now, or for a period of one (1) year after termination, solicit
employees of the Bank for employment by herself of any other person. After
termination of employment, Employee is not, however, restricted from being
employed by or engaged in a competing business.
3. Return of Documents. Employee expressly agrees that all manuals,
documents, files, reports, studies, instruments or other materials used
and/or developed by Employee during her employment with Bank are solely the
property of Bank, and that Employee has no right, title or interest therein.
Upon termination of Employee's employment, Employee or Employee's
representative shall promptly deliver possession of all of said property to
Bank in good condition.
4. Notices. Any notice, request, demand or other communication required
or permitted hereunder shall be deemed to be properly given when personally
served in writing, when deposited in the United States mail, postage prepaid,
or when communicated to a public telegraph company for transmittal, addressed
to the party at the address appearing at the beginning of this Agreement.
Either party may change its/her address by written notice in accordance with
this paragraph.
5. Benefit of Agreement. This Agreement shall inure to the benefit of
and be binding upon the parties hereto and their respective executors,
administrators, successors and assigns.
6. IRC Provisions. Notwithstanding anything in this Agreement to the
contrary, if any portion of the payment pursuant to paragraphs E.1 and E.6.,
combined with any other payments or benefits, is either non-deductible or
subject to an excise tax under Internal Revenue Code Sections 280G or 4999,
respectively, the payment shall be reduced to the extent necessary to make
such sections inapplicable.
6
<PAGE>
7. Mitigation. Employee shall have no obligation to mitigate damages
based upon Employee's termination pursuant to paragraphs E.1. and E.6. above,
and any payment shall not be reduced as a result of Employee obtaining other
employment within twelve (12) months of Employee's termination.
8. Applicable Law. Except to the extent governed by the laws of the
United States, this Agreement is to be governed by and construed under the
laws of the State of California.
9. Captions and Paragraph Headings. Captions and paragraph headings used
herein are for convenience only and are not a part of this Agreement and
shall not be used in construing it.
10. Invalid Provisions. Should any provision of this Agreement for any
reason be declared invalid, void, or unenforceable by a court of competent
jurisdiction, the validity and binding effect of any remaining portion should
not be affected, and the remaining portions of this Agreement shall remain in
full force and effect as if this Agreement had been executed with said
provision eliminated.
11. Entire Agreement. This Agreement contains the entire agreement of
the parties. It supersedes any and all other agreements, either oral or in
writing, between the parties hereto with respect to the employment of
Employee by Bank. Each party to this Agreement acknowledges that no
representations, inducements, promises, or agreements, oral or otherwise,
have been made by any party, or anyone acting on behalf of any party, which
are not embodied herein, and that no other agreement, statement or promise
not contained in this Agreement shall be valid or binding. This Agreement may
not be modified or amended by oral agreement, but only by an agreement in
writing signed by the Chief Executive Officer of the Bank and Employee.
12. Arbitration. If any dispute, controversy or claim arises out of or
relates to this contract, the parties agree first to try to settle the
dispute by mediation under the Rules of Judicial Arbitration & Mediation
Services (JAMS) before resorting to arbitration. Thereafter, any dispute,
controversy or claim not resolved by mediation shall be settled by binding
arbitration in accordance with the Rules of JAMS, and judgment upon the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction
thereof.
(a) The arbitrator shall determine which is the prevailing party
and shall include in the award that party's actual attorneys' fees and
costs.
(b) As soon as practicable after selection of the arbitrator, the
arbitrator or his or her designated representatives shall determine a
reasonable estimate of anticipated fees and costs of the arbitrator, and
render a statement to each party setting forth that party's pro rata share
of said fees and costs. Thereafter, each party shall, within ten (10) days
of receipt of said statement, deposit said sum with arbitrator. Failure of
any party to make such a deposit shall result in a forfeiture
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<PAGE>
by the non-depositing party of the right to prosecute or defend
the claim which is the subject of the arbitration, but shall not
otherwise serve to abate, stay or suspend the arbitration proceedings.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ELDORADO BANK CATHERINE C. CLAMPITT
By: /s/ Robert P. Keller By: /s/ Catherine C. Clampitt
------------------------- --------------------------------
Date: November 10, 1997 Date: 11/1/97
----------------------- ------------------------------
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<PAGE>
EXHIBIT A
ELDORADO BANK
SBA DEPARTMENT MANAGER COMMISSION STRUCTURE
Effective July 1, 1997
Commissions on SBA 7a loans are on a 75% guarantee or greater equivalent
basis. (Example: $1,000,000 loan at 60% guarantee - the guaranteed portion,
or $600,000, is divided by 75% to arrive at an equivalent loan amount of
$800,000.) SBA Loan Commissions are paid semi-monthly, through the payroll
process, after the SBA loan has been booked and is fully funded.
SBA 7a COMMISSION STRUCTURE
- 1% commission for all indexed loans based on 1% or more over the Wall
Street Journal prime rate.
- 1/2% commission for all loans that are at prime to 3/4% over prime.
- 3/4% commission for all loans with "cap" terms and an interest rate
of at least prime + 1%.
- If a loan is referred by another bank employee, the commission is
reduced by 1/4 point (25 basis points).
- loans handled by other SBA officers, which have been referred by the
department manager, generate a commission of 30 basis points to the
department manager.
- all other 7a loans produced by the SBA Department generate a
commission of 20 basis points to the department manager.
504 LOANS COMMISSION STRUCTURE
In this case, there will be a first and second trust deed. The first will be
sold off for par or premium and Eldorado Bank will charge fees. The
department manager's commission is based on the total premium and fees
collected by Eldorado Bank, less the SBA fee of 50 basis points and other
waived "out of pocket" fees.
- When the total premium and fees collected net 300 basis points or
more and the department manager referred the loan, the department
manager receives a commission of 50% of the total premium and fees
collected plus an additional 20%, as the department manager.
<PAGE>
- When the total premium and fees collected nets less the 300 basis points,
Eldorado Bank always receives 90 basis points and, if the department
manager referred the loan, 50% of the remainder is paid to the department
manager as the referring employee and 20% as the department manager.
- In either case, if the department manager is not the referring employee,
a 20% commission is paid to the department manager, as outlined above.
The negotiated program with the secondary market source for 504 loans
includes a bonus payable at the end of the year when certain dollar
targets are met. In this case, the department manager receives 20% of the
bonus.
COMMISSIONS ON LOANS REFERRED TO OTHER FINANCIAL INSTITUTIONS
There will be times when a loan, of any type, is brought into Eldorado Bank
by the SBA Department and is declined by the Bank. The SBA Department may
elect to refer this loan to another lending institution for funding and the
lending institution will generally pay a referral fee.
If the department manager is the referring employee, the department manager
receives 40% of what is collected as the referring employee and 10% as the
department manager. If the department manager is not the referring employee,
the department manager receives 10% of what is collected.
<PAGE>
EXHIBIT B
WAIVER AND RELEASE AGREEMENT
This Waiver and Release Agreement (the "Waiver Agreement") is entered
into by and among Catherine C. Clampitt ("Employee"), Eldorado Bank ("Bank"),
Commerce Security Bancorp, Inc., a California corporation, and their
officers, directors, employees, agents, affiliates and subsidiaries
(collectively, the "Company"). Terms not otherwise defined herein shall have
the meanings ascribed to such terms in the Agreement (as hereafter defined).
RECITALS
A. Employee and Bank have entered into an Employment Agreement effective
July 1, 1997 (the "Agreement").
B. A condition precedent to certain of Company's obligations under the
Agreement is the execution of this Waiver Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained, and for other good and valuable consideration,
the receipt and adequacy of which are hereby acknowledged, the parties,
intending to be legally bound, agree and covenant as follows:
RELEASE
In consideration for the execution of the Agreement, and the agreements
set forth therein, Employee agrees unconditionally and forever to release and
discharge the Company and its affiliated business entities, their respective
officers, directors, employees, representatives, attorneys, agents and
assigns from any and all claims, actions, causes of action, demands, rights
or damages of any kind or nature which Employee may now have, or ever have,
whether known or unknown, including any claims, causes of action or demands
of any nature arising out of or in any way relating to Employee's employment
with, or separation from, the Company on or before the date of execution of
this Waiver Agreement.
This release specifically includes, but is not limited to, any claims for
discrimination and/or violation of any statutes, rules, regulations or
ordinances, whether federal, state or local, including, but not limited to,
Title VII of the Civil Rights Act of 1964, as amended, age claims under the
Age Discrimination in Employment Act of 1967, as amended by the Older Workers
Benefits Protection Act of 1990, the Employee Retirement Income Security Act
of 1974, as amended, the California Fair Employment and Housing Act, the
California Labor Code, the Equal Pay Act, the Americans With Disabilities
Act, the Rehabilitation Act of 1973, the Racketeer Influenced and Corrupt
Organizations Act, the Financial Reform Recovery and Enforcement Act of 1989,
and/or Section 1981 of Title 42 of the United States Code.
Employee further agrees knowingly to waive the provisions and protections
of Section 1542 of the California Civil Code, which reads:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which, if known by him, must have materially affected his settlement with the
debtor.
REPRESENTATIONS OF EMPLOYEE
Employee represents and agrees that, prior to the execution of this
Waiver Agreement, Employee has had the opportunity to discuss the terms of
this Waiver Agreement with legal counsel of Employee's choosing.
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Employee affirms that no promise or inducement was made to cause
Employee to enter into this Waiver Agreement other than the execution of the
Agreement and the inducements provided therein. Employee further confirms
that Employee has not relied upon any other statement or representation by
anyone other than what is in this Waiver Agreement as a basis for Employee's
agreement.
MISCELLANEOUS
Except for the Agreement, this Waiver Agreement sets forth the entire
agreement between Employee and the Company, and shall be binding upon both
party's heirs, representatives and successors. This Waiver Agreement shall be
construed under the laws of the State of California, both procedurally and
substantively. Any and all disputes or claims arising out of, or in any way
related to, Employee's employment with, or separation from, the Company, as
well as any and all disputes or claims arising out of, or in any related to,
this Waiver Agreement, including, without limitation, fraud in the inducement
of this Waiver Agreement, or relating to the general validity or
enforceability of this Waiver Agreement, shall be submitted to final and
binding arbitration before an arbitrator of the American Arbitration
Association in Orange County, in accordance with the rules of that body, and
the prevailing party shall be entitled to reasonable costs and attorneys'
fees. Judgment on the award rendered by the arbitrator may be entered in any
court having jurisdiction thereof. If any portion of this Waiver Agreement is
found to be illegal or unenforceable, such action shall not affect the
validity or enforceability of the remaining paragraphs or subparagraphs of
this Waiver Agreement.
Employee acknowledges that Employee has been advised that Employee has
twenty-one (21) days to consider this settlement, and that Employee was
informed that Employee has the right to consult with counsel regarding this
Waiver Agreement. To the extent Employee has taken less than twenty-one (21)
days to consider this Waiver Agreement, Employee acknowledges that Employee
has had sufficient time to consider the Waiver Agreement and to consult with
counsel, and that Employee does not desire additional time.
This Waiver Agreement is revocable by Employee for a period of seven (7)
days following Employee's execution of this Waiver Agreement. The revocation
by Employee of this Waiver Agreement must be in writing, must specifically
revoke this Waiver Agreement and must be received by the Company prior to the
eight (8th) day following the execution of this Waiver Agreement by Employee.
This Waiver Agreement becomes effective, enforceable and irrevocable on the
eighth (8th) day following Employee's execution of the Waiver Agreement.
The undersigned agrees to the terms of this Waiver Agreement and
voluntarily enters into it with the intent to be bound hereby.
Dated: ____________________, 199___ ____________________________________
CATHERINE C. CLAMPITT
Dated: ____________________, 199___ ELDORADO BANK
By: _____________________________
Name: _____________________________
Title: _____________________________
Dated: ____________________, 199___ COMMERCE SECURITY BANCORP, INC.
By: _____________________________
Name: _____________________________
Title: _____________________________
2
<PAGE>
Exhibit 10.9
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 20th day of October, 1995, between Eldorado Bank
(hereinafter referred to as the "Employer"), and Richard Korsgaard,
(hereinafter referred to as the "Executive").
WITNESSETH:
WHEREAS, Employer on this date has consummated the acquisition of
Mariners Bankcorp and Mariners Bank pursuant to an Agreement and Plan of
Reorganization dated May 22, 1995;
WHEREAS, Executive was President and Chief Executive Officer of Mariners
Bancorp and Mariners Bank and had an Employment Agreement dated July 1, 1991;
WHEREAS Employer and Executive desire to terminate the Employment
Agreement dated July 1, 1991 and replace such Employment Agreement with this
Agreement;
WHEREAS, Employer is desirous of employing Executive in the capacity
hereinafter stated, and Executive is desirous of entering into the employ of
Employer in such capacity, for the period and on the terms and conditions
set forth herein;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and conditions herein contained the parties hereto, intending to be
legally bound, do hereby agree as follows:
1. EMPLOYMENT
Employer hereby employs Executive as an Executive Vice President with the
responsibilities set forth in the job description attached hereto, and
Executive accepts the duties that are set forth in the job description
attached and accepts all other duties described herein, and agrees to
discharge the same faithfully and to the best of his ability and consistent
with the highest and best standards of the banking industry, in accordance
with the policies of the Board as established, and in compliance with all
laws and the Employer's Articles, Bylaws, Policies and Procedures. Executive
shall devote his full business time and
<PAGE>
attention to the business and affairs of Employer to which he may be elected
or appointed and shall perform the duties thereof to the best of his ability.
Except as permitted by the prior written consent of the Chief Executive
Officer or the Board of Directors, Executive shall not directly or indirectly
render any services of a business, commercial or professional nature to any
other person, firm or corporation, whether for compensation or otherwise,
which are in conflict with Employer's interests. Executive shall perform such
other duties as shall be from time to time prescribed by the Chief Executive
Officer, President or the Board of Directors of Employer.
2. TERM
Employer hereby employs Executive and Executive hereby accepts
employment with Employer for the period of three (3) years (the "Term"),
commencing with the date of this Agreement, subject, however, to prior
termination of this Agreement as hereinafter provided. Where used herein,
"Term" shall refer to the entire period of employment of Executive by
Employer, whether for the period provided above, or whether terminated
earlier as hereinafter provided, or extended by mutual agreement in writing
by the Employer and Executive.
3. COMPENSATION
In consideration for all services to be rendered by Executive to
Employer, Employer agrees to pay Executive a starting base salary of one
hundred twenty-five thousand dollars ($125,000) per year, commencing at the
date of this Agreement. The Board of Directors may increase the base salary
based on Executive's performance and Employer's performance and
profitability. Such salary increases shall be within the sole discretion of
the Board of Directors. In addition, Executive may receive incentive
compensation as the Chief Executive Officer or the Board of Directors, in its
sole discretion, shall determine. Executive's salary shall be paid monthly or
semi-monthly, depending on the policy of Employer. Employer shall deduct
therefrom all taxes which may be required to be deducted or withheld under
any provision of the law (including, but not limited to, social
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<PAGE>
security payments and income tax withholding) now in effect or which may
become effective anytime during the term of this Agreement.
Executive shall be entitled to participate in any and all other employee
benefits and plans that may be developed and adopted by the Employer and in
which all or substantially all of the employees of Employer are eligible to
participate.
4. REIMBURSEMENT
Employer agrees to provide Executive a monthly car allowance of six
hundred ($600) dollars. All costs of such automobile, including operation,
maintenance, and insurance, shall be borne by Executive.
Employer further agrees to reimburse Executive for all ordinary and
necessary expenses incurred by Executive on behalf of Employer, including
entertainment, meals and travel expenses. Executive shall provide to Employer
records substantiating the business purpose of such expenses. Any costs
incurred by Executive for conventions, meetings and seminars will be
reimbursed as well as special social entertainment expenses, provided the
Chief Executive Officer or President of Employer approves such.
Employer agrees to pay the monthly member dues for Executive's membership
at the Pacific Golf and Country Club.
5. INSURANCE
Employer agrees to provide Executive with Employer's standard health and
life insurance benefits which is now or may hereinafter be in effect for
those persons who are Executive Vice Presidents of Employer.
6. VACATION
Executive shall be entitled to accrue up to four (4) weeks vacation
during each year of the Term with at least two (2) weeks to be taken in a
consecutive period. Vacation benefits shall not accrue above four weeks at
any time. The Board of Directors at its discretion may waive the provision
with respect to unused vacation time.
3
<PAGE>
7. TERMINATION
Employer shall have the right to terminate this Agreement for any of the
following reasons by serving written notice upon Executive:
(a) Willful misconduct or criminal misfeasance in the performance of
Executive's duties and obligations as Executive Vice President;
(b) Illegal conduct, constituting a crime involving moral turpitude,
illegal conduct, or conviction of a felony, or any conduct detrimental
to the interest of Employer;
(c) Physical or mental disability rendering Executive incapable of
performing his duties for a consecutive period of 360 days, or by
death;
(d) Determination by Employer's Board of Directors that the continued
employment of Executive is detrimental to the best interest of
Employer, or for any reason whatsoever as determined by Employer's
Board of Directors and in the sole and absolute discretion of
Employer's Board of Directors.
In the event this Agreement is terminated for any of the reasons specified
in the paragraphs (a), (b), or (c) above, Executive will be paid one months's
salary calculated as of the date of Executive's termination, plus any pay in
lieu of vacation accrued to, but not taken as of the date of termination.
Such termination pay shall be considered to be in full and complete
satisfaction of any and all rights which Executive may enjoy under the terms
of this Agreement other than rights, if any, to exercise any of the stock
options vested prior to such termination. The insurance benefits provided
herein shall be extended at Employer's sole cost for thirty (30) days
following the date of termination.
In the event this Agreement is terminated for any reasons specified in
paragraph (d), above, Executive shall be entitled to termination pay in the
amount of the greater of the balance payable under this Agreement or twelve
(12) months of the Executive's then current base salary per year at the date
of termination. Such termination pay shall be paid in a lump sum and shall be
considered to be in full and complete satisfaction of any and all rights
which Executive may enjoy under the terms of this Agreement.
4
<PAGE>
Where termination is pursuant to paragraph (d), above, any pay in lieu of
vacation accrued to, but not taken as of the date of termination, will be
deemed included in the termination pay. In such case, the insurance benefits
provided herein shall be extended at Employer's sole cost for six (6) months
following the date of termination.
Executive shall give sixty (60) days prior notice, in writing, to employer
in the event Executive resigns or voluntarily terminates employment.
8. ACQUISITION OR DISSOLUTION OF EMPLOYER
This Agreement shall not be terminated by the voluntary or involuntary
dissolution of Employer. Notwithstanding the foregoing, in the event
proceedings for liquidation or Employer are commenced by regulatory
authorities, this Agreement and all rights and benefits hereunder shall
terminate.
9. INDEMNIFICATION
To the extent permitted by law, Employer shall indemnify Executive who was
or is a party or is threatened to be made a party in any action brought by a
third party against the Executive (whether or not Employer is joined as a
party defendant) against expenses, judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with said action if
Executive acted in good faith and in a manner Executive reasonably believed
to be in the best interest of the Employer (and with respect to a criminal
proceeding if Executive had no reasonable cause to believe his conduct was
unlawful), provided that the alleged conduct of Executive arose out of and
was within the course and scope of his employment as an officer or employee
of Employer.
10. RETURN OF DOCUMENTS
Executive expressly agrees that all manuals, documents, files, reports,
studies, instruments or other materials used or developed by Executive during
the Term are solely the property of Employer, and Executive has no right,
title or interest therein. Upon termination of this Agreement, Executive or
Executive's
5
<PAGE>
representatives shall promptly deliver possession of all of said property to
Employer in good condition.
11. NOTICES
Any notice, request, or demand, or other communication required or
permitted hereunder shall be deemed to be properly given when personally
served in writing, when deposited in the U.S. mail, postage prepaid, or when
communicated to a public telegraph company for transmittal, addressed to the
party at the address given at the beginning of this Agreement or at any other
address as Employer or Executive may designate to the other in writing.
12. BENEFIT OF AGREEMENT
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective executors, administrators, successors and
assigns.
13. APPLICABLE LAW
This Agreement is to be governed by and construed under the laws of the
State of California.
14. CAPTIONS AND PARAGRAPH HEADINGS
Captions and paragraph headings used herein are for convenience only and
are not a part of this Agreement and shall not be used in construing it.
15. INVALID PROVISIONS
Should any provisions of this Agreement for any reason be declared
invalid, void, or unenforceable by a court of competent jurisdiction, the
validity and binding effect of any remaining portion shall not be affected
and the remaining portions of this Agreement shall remain in full force and
effect as if this Agreement had been executed with said provisions eliminated.
16. ENTIRE AGREEMENT
This Agreement with the exception of the Executive Salary Continuation
Agreement dated as of even date herewith contains the entire agreement of the
parties and it supersedes any and all other
6
<PAGE>
agreements, either oral or in writing, between the parties hereto with
respect to the employment of Executive by Employer. Each party to this
Agreement acknowledges that no representations, inducements, promises, or
agreements, oral or otherwise, have been made by any party, or anyone acting
on behalf of any party, which are not embodied herein, and that no other
agreement, statement, or promise not contained in this Agreement shall be
valid or binding with the exception of the Executive Salary Continuation
Agreement. This Agreement may not be modified or amended by oral agreement,
but only by an agreement in writing signed by Employer and Executive. Upon
the execution of this Agreement, all other agreements regarding the
employment of Executive with Mariners Bancorp and Mariners Bank, with the
exception of the Executive Salary Continuation Agreement dated as of even
date herewith, shall terminate and Employer shall have no liability.
17. CONFIDENTIALITY
This Agreement is to be held confidential. Breach of such
confidentiality by Executive will be subject to termination under the
provisions of 7(a) of this Agreement.
18. ARBITRATION
All claims, disputes and other matters in question arising out of or
relating to this Agreement or the breach or interpretation thereof, other
than those matters which are to be determined by the Employer in its sole and
absolute discretion, shall be resolved by binding arbitration before a
representative member, selected by the mutual agreement of the parties, of
the Judicial Arbitration and Mediation Services, Inc. ("JAMS"), presently
located in Santa Ana, California. In the event JAMS is unable or unwilling to
conduct the arbitration provided for under the terms of this Paragraph, or
has discontinued its business, the parties agree that a representative
member, selected by the mutual agreement of the parties, of the American
Arbitration Association ("AAA"), presently located in Orange County,
California, shall conduct the binding arbitration referred to in this
Paragraph. Notice of the demand for arbitration shall be filed in writing
with the other party to this Agreement and with JAMS (or AAA, if necessary).
In no event shall
7
<PAGE>
the demand for arbitration be made after the date when institution of legal
or equitable proceedings based on such claim, dispute or other matter in
question would be barred by the applicable statute of limitations. The
arbitration shall be subject to such rules of procedure used or established
by JAMS, or if there are none, the rules of procedure used or established by
AAA. Any award-rendered by JAMS or AAA shall be final and binding upon the
parties, and as applicable, their respective heirs, beneficiaries, legal
representatives, agents, successors and assigns, and may be entered in any
court having jurisdiction thereof. The obligation of the parties to arbitrate
pursuant to this clause shall be specifically enforceable in accordance with,
and shall be conducted consistently with, the provisions of Title 9 of Part 3
of the California Code of Civil Procedure. Any arbitration hereunder shall be
conducted in Orange County, California, unless otherwise agreed to by the
parties.
19. LEGAL COSTS
If either party commences an action against the other party arising out
of or in connection with this Agreement, the prevailing party shall be
entitled to have and recover from the losing party reasonable attorney's fees
and costs of suit.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ELDORADO BANK
By /s/ David R. Brown
--------------------------
By /s/ Richard Korsgaard
--------------------------
8
<PAGE>
ELDORADO BANK
JOB DESCRIPTION
Name: Richard Korsgaard Department: Real Estate
Job Title: Executive Vice President/Real Job Status: Exempt
Estate Dept. Job Code:
Date: May, 1995 Supervises: 2-VP/Loan Officers
Reports to: Ray Dellerha, President & COO 1-Loan Processor
- -------------------------------------------------------------------------------
JOB SUMMARY: Directs, plans, manages, monitors, controls, staffs and
supervises the activities and operations of Eldorado Bank's Real Estate
Department (interim construction and non-relationship mini-perms). Ensures
profitability and productivity in the department while maintaining highest
quality assets, developing new business and providing quality customer
service. Works in conjunction with Retail Managers at San Clemente, San Juan
Capistrano and Monarch Beach offices to develop new business, retain customer
relationships and ensure the highest level of customer service.
NATURE AND SCOPE: The position oversees the activities of the Real Estate
Department; interim construction and mini-pers. Develops and implements sales
strategies and programs geared toward the enhancement of the department's
loan portfolio and development of long-lasting customer relationships.
Provides guidance and assistance to the department by developing and
interpreting policies and procedures, establishing goals and objectives in
conjunction with Executive Management, setting performance standards and
ensuring attainment of these performance goals.
1. Management of Real Estate Department
2. Quality and Profitability of RE Loan Portfolio
3. Development and Implementation of Sales Strategies
4. Business Development
5. Staffing, Training and Communications
6. Compliance/CRA
7. Control of Non-Interest Expense
8. Membership in Bank Committees and Outside Organizations/Groups
DUTIES AND RESPONSIBILITIES:
1. Management of Real Estate Department
* Directly supervises the activities of the department to ensure
current level of business is maintained and, through sales efforts,
loan portfolio is expanded.
* Delivers highest level of customer service to customers and branches.
* Ensures Bank's underwriting standards are met and credits are
prepared and documents in accordance with bank policies and procedures.
* Participates in the presentation of loan packages to Loan Committee.
* Utilizes central credit department to prepare preliminary analyses of
customer's financial statements and for new and renewal credit
write-ups. RE Loan Officers may assist in preparation of credit
write-ups for more complex credits or if there are significant changes
in the financial condition on a renewal.
* Maintains support relationship with Retail Managers in San Clemente,
San Juan Capistrano and Monarch Beach offices assisting in their efforts
to maintain existing and generate new deposit and consumer loan
relationships.
2. Quality and Profitability of Real Estate Loan Portfolio
* Regularly revises real estate loan portfolio and identifies problem
credits.
* Reviews delinquency list and assists in efforts to ensure delinquencies
are controlled through sustained follow-up efforts.
* Approves and rejects loans within lending authority and recommends
approval of loans over lending authority.
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3. Development and Implementation of Sales Strategies
*Establishes and implements Sales Strategies to increase the real
estate loan portfolio while ensuring the highest level of asset
quality.
*Ensures the Bank's real estate products and services are
competitive and meet the customer's needs.
*With Executive Management, sets sales goals for Real Estate
Department and Loan Officers.
*Reviews, monitors sales performance and trends to ensure the
achievement of established goals.
4. Business Development
*Develops new business by calling on prospective customers in
targeted businesses. Monitors business development efforts of the
department and the loan officers to ensure that targeted markets
are being penetrated by sales efforts.
*Identifies core business relationships with established customer
groups and creates business development programs to expand Real
Estate Department activities.
*Develops and maintains relationships with the community,
customers and coordinates with loan officers in making business
development calls.
*Uses ACT software to follow leads and organize business
development efforts.
5. Staffing, Training and Communication
*Formally reviews and evaluates performance of direct reports at
least annually and conducts counseling, as necessary.
*Establishes department goals and performance standards; ensures
they are communicated to staff and are attained.
*Ensures accurate job descriptions are established and reviewed
with staff.
*Ensures the development of staff through cross training and
developmental seminars and classes.
*Conducts employment interviews and staffs department with top
performers.
6. Compliance/CRA
*Ensures that Real Estate Department is in compliance with all
federal/state laws and regulations, and bank policies and
procedures.
*Works with regulatory agencies, auditors and examiners and
responds to exceptions.
*Participates in civic and community activities to enhance the
Bank's visibility and image in the community and reinforce the
Bank's commitment to CRA.
7. Control of Non-Interest Expense
*Makes concerted effort to control and ultimately reduce
department's operating expenses.
*Promotes greater productivity and efficiency by continually
evaluating how the department operates.
*Coordinates with executive management in strategic planning and
budgeting process of department and bank.
7. Memberships in Bank Committees and Outside Organizations/Groups
*Member of bank's Board of Directors.
*Attends monthly Executive Committee and Board of Director
meetings.
*Member of the bank's Executive & Bankwide Management groups.
*
*
*
ACCOUNTABILITIES/GOALS:
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ESTIMATE OF ALLOCATION OF TIME: Weekly Monthly
Management of Real Estate Department
Quality and Profitability of RE Loan Portfolio
Development and Implementation of Sales Strategies
Business Development
Staffing, Training and Communications
Compliance/CRA
Control of Non-Interest Expense
Membership in Bank Committees and Outside
Organizations/Groups
Total
JOB SPECIFICATIONS:
EDUCATION, KNOWLEDGE AND SKILLS REQUIRED:
1. Bachelors degree in Management/Finance or related experience,
plus 10-15 years extensive experience in management and/or
supervisory capacity.
2. Extensive experience in all areas of lending with specific
expertise in real estate lending, including interim
construction and mini-perms.
3. Strong management, organizational, sales/marketing,
interpersonal, communication, analytical, problem-solving,
negotiation skills. Flexible, results-oriented with a strong
sense of urgency.
4. Proven track record of managing a high quality real estate loan
portfolio.
5. Computer literate with knowledge of Excel, Word and financial
analysis softwares.
I acknowledge receipt of this job description. I understand that the nature
and scope of my duties and responsibilities, as well as Eldorado Bank's
expectations, are more comprehensive than what is incorporated in this document.
Richard Korsgaard 10/20/98
- --------------------------- ------------------
Signature of Employee Date
Elaine P. Crouch 10/98
- --------------------------- -------------------
Human Resources Date
Job Description Next Review Date:
---------------------------
<PAGE>
Exhibit 10.10
AMENDMENT NUMBER ONE
TO EMPLOYMENT AGREEMENT
This AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT (this "Amendment") is
entered into as of this 20th day of October, 1998, among ELDORADO BANK (the
"Employer") and RICHARD KORSGAARD (the "Employee").
R E C I T A L S
A. Employer and Employee have entered into an Employment Agreement
effective October 20, 1995 (the "Original Employment Agreement").
B. Employer and Employee desire to amend the Original Employment
Agreement as hereinafter provided.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby amend the
Original Employment Agreement as follows:
Section 1. EMPLOYMENT. The Original Employment Agreement stipulates that the
Employer hereby employs Employee as an Executive Vice President with the
responsibilities set forth in the job description attached hereto (dated May,
1995.) Employer and Employee desire to update this job description to one dated
October, 1998, attached hereto.
Section 2. TERM. The TERM section of the Original Employment Agreement shall be
deleted in its entirety and replaced with:
TERM. The Employer hereby employs Employee, and Employee hereby accepts
employment, on the terms and conditions hereinafter provided for a period of
three (3) years beginning on October 20, 1998 and ending October 19, 2001 (the
"Initial Term"). This Agreement shall be deemed to be extended automatically for
successive one (1) year periods following the expiration of the Initial Term
unless either the Employer or Employee, by written notice to the other given at
least one (1) year prior to the expiration of the Initial Term or any extension
thereof, as the case may be, notifies the other party of its intent not to
extend this Agreement.
Section 3. COMPENSATION. The Original Employment Agreement stipulates that the
Employer agrees to pay Executive a base salary of one hundred twenty-five
thousand dollars ($125,000) per year. This shall be amended to "pay Employee a
base salary of one hundred thirty-two thousand two hundred dollars ($132,200)
per year effective the date of this AMENDMENT NUMBER ONE TO EMPLOYMENT
AGREEMENT.
Section 4. REIMBURSEMENT. The REIMBURSEMENT section of the Original Employment
Agreement shall be deleted in its entirety and replaced with:
REIMBURSEMENT. Employer agrees to reimburse Employee for all ordinary
and necessary business-related expenses incurred by Employee on behalf of
Employer, including entertainment, meals, business-related mileage and travel
expenses. Employee shall provide to Employer records substantiating the business
purpose of
1
<PAGE>
such expenses. Any costs incurred by Employee for conventions, meetings and
seminars will be reimbursed as well a special social entertainment expenses,
provided the Chief Executive Officer or President of Employer approves such.
Employer agrees to pay the monthly member dues for Employee's
membership at the Pacific Golf and Country Club.
Section 7. TERMINATION. The TERMINATION section of the Original Employment
Agreement shall be deleted in its entirety and replaced with:
TERMINATION. Employer shall have the right to terminate this Agreement
for any of the following reasons by serving written notice upon Employee:
(a) Willful misconduct or criminal misfeasance in the performance of
Employee's duties and obligations as Executive Vice President;
(b) Illegal conduct, constituting a crime involving moral turpitude,
illegal conduct, or conviction of a felony, or any conduct
detrimental to the interest of Employer;
(c) Physical or mental disability rendering Employee incapable of
performing his normal and customary duties for a consecutive period
of 180 days, or by death. In determining whether Employee is
disabled, the Employer may rely upon the written statement provided
by a licensed physician acceptable to the Employer. Employee shall
allow examination from time to time by any licensed physician
selected by the Employer and agreed to by Employee;
(d) Determination by Employer's Board of Directors that the continued
employment of Employee is detrimental to the best interest of
Employer, or for any reason, as determined by Employer's Board of
Directors and in the sole and absolute discretion of Employer's
Board of Directors.
In the event this Agreement is terminated for any of the reasons
specified in the paragraphs (a), (b), or (c) above, Employee will be paid one
month's salary calculated as of the date of Employee's termination, plus any pay
in lieu of vacation accrued to, but not taken as of the date of termination.
Such termination pay shall be considered to be in full and complete satisfaction
of any and all rights which Employee may enjoy under the terms of this Agreement
other than rights, if any, to exercise any of the stock options vested prior to
such termination. All employee benefits provided by the Employer shall cease
upon termination of Officer's employment.
In the event this Agreement is terminated for any reasons specified in
paragraph (d), above, Employee shall be entitled to termination pay in the
amount of twelve (12) months of the Employee's then current base salary per year
at the date of termination. Such termination pay shall be paid in a lump sum and
shall be considered to be in full and complete satisfaction of any and all
rights which Employee may enjoy under the terms of this Agreement.
Where termination is pursuant to paragraph (d), above, any pay in lieu
of vacation accrued to, but not taken as of the date of termination, will be
deemed included in the termination pay. In such case, if the Employee elects
under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") to
continue to receive any benefits thereunder, the Employer shall reimburse
Employee for the amount of such Employee's COBRA payments for the first six (6)
months after such termination.
Employee shall give sixty (60) days prior notice, in writing, to
Employer in the event Employee resigns or voluntarily terminates employment.
Section 10. RETURN OF DOCUMENTS. The RETURN OF DOCUMENTS section of the Original
Employment Agreement shall be deleted in its entirely and replaced with:
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PROPRIETARY INFORMATION. Employee understands and agrees (a) that
Employee will maintain all proprietary and confidential information of the
Employer as proprietary and confidential at all times during and after his
employment, (b) that Employee will not disclose or communicate such information
to any third party or make use of it on his own behalf or on behalf of any third
party, and (c) upon his termination, that Employee will promptly deliver all
tangible forms or media which Employee may have containing such information to
the Employer. For purposes of this Paragraph 6, "information" includes trade
secrets and all non-public records, manuals, documents, files, reports, studies,
instruments, practices, letters, plans, drawings, computer programs and data,
technical data, financial and other business data pertaining to the Employer,
its parent companies or subsidiaries, or any of its affiliates, customers,
vendors or other persons associated with the Employer. Employee acknowledges and
further agrees that the disclosure of such information would be a material
breach of this Agreement for which the Employer shall be entitled to any
remedies available to it in law or in equity.
COVENANT NOT TO DISRUPT BUSINESS. Employee hereby covenants and agrees
that he will not now, or for a period of one (1) year after the effective date
of Employee's termination of employment, disrupt, damage, impair or interfere
with the business of the Employer, whether by way of interfering with or
soliciting its employees, or disrupting its relationships with customers,
representatives, vendors, brokers or otherwise. After termination of employment,
Employee is not, however, restricted from being employed by or engaged in a
competing business.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first above written.
/s/ Richard Korsgaard
---------------------------
Richard Korsgaard
ELDORADO BANK
By: /s/ Robert Keller
------------------------
Its: Chairman & CEO
-----------------------
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JOB DESCRIPTION
---------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NAME: RICHARD KORSGAARD DEPARTMENT: CONSTRUCTION LENDING DIVISION
JOB TITLE: EXECUTIVE VICE PRESIDENT JOB STATUS: EXEMPT
DATE: OCTOBER, 1998 DIRECT REPORTS: VP/ LOAN OFFICERS
REPORTS TO: ROBERT KELLER, CHAIRMAN & CEO AVP/CONSTRUCTION DISBURSE.
ADMIN. ASSISTANT
VP/CRA/FAIR LENDING OFFICER
</TABLE>
JOB SUMMARY: Directs, plans, manages, monitors, controls, staffs and supervises
the activities and operations of the Construction Lending Division of Eldorado
Bank, including both Southern and Northern California and the Construction Loan
Disbursement Department. Ensures profitability and productivity of this division
while maintaining highest quality assets, developing new business and providing
quality customer service. Oversees activities of Bank's CRA Officer and ensures
that the Bank is in compliance with all CRA related rules, guidelines, laws and
regulations.
NATURE AND SCOPE: The position oversees the activities of the bankwide
Construction Lending Division. Develops and implements sales strategies and
programs geared toward the enhancement of the Construction Lending Division's
loan portfolio and development of long-lasting customer relationships. Provides
guidance and assistance to the division by developing and interpreting policies
and procedures, establishing goals and objectives, in conjunction with Executive
Management, setting performance standards and ensuring attainment of these
performance goals. Oversees CRA for the Bank.
1. Management of Construction Lending Division
2. Quality and Profitability of Construction Loan Portfolio
3. Development and Implementation of Sales Strategies
4. Business Development
5. Staffing, Training and Communications
6. Compliance/Oversees CRA Officer for Bank
7. Control of Non-Interest Expense
8. Membership in Bank Committees and Outside Organizations/Groups
DUTIES AND RESPONSIBILITIES:
1. Management of Construction Lending Division
* Directly supervises the activities of the Construction Lending
Division to ensure current level of business is maintained and,
through sales efforts, loan portfolio is expanded.
* Delivers highest level of customer service to customers, branches,
departments and divisions.
* Ensures Bank's underwriting standards are met and credits are
prepared and documented in accordance with bank policies and
procedures.
* Participates in the presentation of loan packages to Loan Committee.
* Utilizes Central Credit Department to prepare preliminary analyses
of customer's financial statements and for new and renewal credit
write-ups. Construction Loan Officers may assist in preparation of
credit write-ups for more complex credits or if there are
significant changes in the financial condition on a renewal.
* Oversees the activities of the Construction Loan Disbursement
Department to ensure that policies and procedures are in place and
are followed and maintained.
2. Quality and Profitability of Construction Loan Portfolio
* Regularly reviews loan portfolio and identifies problem credits.
* Reviews delinquency list and assists in efforts to ensure
delinquencies are controlled through sustained follow-up efforts.
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<PAGE>
* Approves and rejects loans within lending authority and recommends
approval of loans over lending authority.
3. Development and Implementation of Sales Strategies
* Establishes and implements Sales Strategies to (1) increase the
construction loan portfolio while ensuring the highest level of
asset quality and (2) attain and surpass construction loan
generation goals.
* Ensures the Bank's construction loan products/services are
competitive and meet the customer's needs.
* Sets sales goals for Construction Loan Officers.
* Reviews, monitors sales performance and trends to ensure the
achievement of established goals.
4. Business Development
* Develops new business by calling on prospective customers in
targeted businesses. Monitors business development efforts of the
division and the loan officers to ensure that targeted markets are
being penetrated by sales efforts.
* Identifies core business relationships with established customer
groups and creates business development programs to expand
Construction Lending activities.
* Uses ACT software to follow leads and organize business development
efforts.
* Develops and maintains relationships with the community, customers
and coordinates with loan officers in making business development
calls.
5. Staffing, Training and Communication
* Formally reviews and evaluates performance of direct reports at
least annually and conducts counseling, as necessary.
* Establishes department goals and performance standards; ensures they
are communicated to staff and are attained.
* Working with the Human Resources Department, ensures accurate job
descriptions are established and reviewed with staff.
* Ensures the development of staff through cross training and
developmental seminars and classes.
* Conducts employment interviews and staffs department with top
performers.
6. Compliance/Oversees CRA Officer for Bank
* Ensures that Eldorado Bank and the Construction Loan Division is in
compliance with all federal/state laws and regulations, and bank
policies and procedures.
* Works with regulatory agencies, auditors and examiners and responds
to exceptions.
* Participates in civic and community activities to enhance the Bank's
visibility and image in the community and reinforce the Bank's
commitment to CRA.
* Oversees the Bank's CRA Program and reports to management and the
Board on its implementation. Recommends ways to improve CRA
performance to the CRA Committee.
* Reviews, evaluates and recommends community development loans and
investments to management and the board.
7. Control of Non-Interest Expense
* Makes concerted effort to control and ultimately reduce department's
operating expenses.
* Promotes productivity and efficiency by continually evaluating how
department operates.
* Coordinates with executive management in strategic planning and
budgeting process of the construction loan division and the bank.
8. Memberships in Bank Committees and Outside Organizations/Groups
* Member of Loan and CRA Committees.
* Member of the Bank's Senior Management group and attends monthly
Senior Management meetings.
* Member of San Clemente Hospital/Medical Center Board of Trustees.
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JOB SPECIFICATIONS:
1. Bachelors degree in Management/Finance or related experience, plus 10-15
years extensive experience in management and/or supervisory capacity.
2. Extensive experience in all areas of lending, with specific expertise in
construction and real estate lending.
3. Strong management, organizational, sales/marketing, interpersonal,
communication, analytical, problem- solving and negotiation skills.
Flexible, results-oriented with a strong sense of urgency.
4. Proven track record of managing a high quality loan portfolio.
5. Computer literate; knowledge of Excel, Word and financial analysis
softwares.
I acknowledge receipt of this job description. I understand that the nature and
scope of my duties and responsibilities, as well as Eldorado Bank's
expectations, are more comprehensive than what is incorporated in this document.
Richard Korsgaard 10/20/98
- --------------------------------- --------------
Signature of Employee Date
E. Crouch 10/98
- --------------------------------- --------------
Human Resources Date
<PAGE>
Exhibit 10.11
February 9, 1998
William D. Rast
45 Verissimo Drive
Novato, California 94947
Dear Bill,
Eldorado Bank is pleased to offer you the position of Executive Vice
President/Mortgage Banking Division reporting to Robert Keller, Chairman and
Chief Executive Officer. The terms and conditions of your employment are as
follows:
Title: Executive Vice President/Mortgage Banking Division
Commerce Security Bank, a division of Eldorado Bank
Base Salary: $14,583.34 per month
Bonus
Eligibility: Payable based on annual (calendar year) net income of
Mortgage Banking Division:
<TABLE>
<CAPTION>
Net Income* Bonus Payment
----------- -------------
<S> <C>
$2,000,000 -0-
Over $2,000,000 $ 50,000
Over $3,000,000 $100,000
Over $4,000,000 $150,000
Over $5,000,000 $200,000
Over $6,000,000 $250,000
</TABLE>
If earned, payable after completion of Bank's annual
audited financial statements. No bonus is earned or is
payable unless you are actively employed as of the bonus
payment date. Therefore, should your employment terminate
for any reason prior to the bonus payment date, you have
not earned any bonus for the prior calendar year. Any
bonus payment will be pro-rated between net income levels
and bonus payment amounts based on actual net income
performance. Your bonus eligibility may be changed in the
future at the discretion of the Bank.
*Net Income Adjustments:
- plus legal costs associated with Ruemmler, et al
cases and any expenses associated with old VA/No-bid
recourse loans net of taxes;
- cost of funds will be equal to Eldorado Bank's cost
to fund warehouse line-now fed funds rate plus 1 1.4%;
- inter-company charges, i.e. HR, Accounting, MIS, etc.
will be charged to the division in accordance with
Eldorado Bank's policies, and
- taxes will be calculated at statutory rates.
<PAGE>
ELDORADO BANK
Stock Option: Option grant requires full holding company board
approval and recommendations become effective at 1/1
and 7/1 only. Will recommend approval of option to
purchase 10,0000 shares of Commerce Security Bankcorp,
Inc. at next regular holding company board meeting, under
the same terms and conditions as other senior officers.
Severance
Agreement: Executive Severance Agreement under the same terms and
conditions as others in Senior Management.
Business Expense
Reimbursement: Reimbursed for travel, entertainment and other reasonable
business expenses incurred in connection with the
performance of job duties, subject to the Bank's expense
reimbursement policy and the presentation of reasonable
documentation for such expenses in accordance with IRS
guidelines. Business mileage reimbursement in accordance
with normal company policy. Cellular phone expenses
reimbursed for business-related calls and charges.
Vacation: 13.33 hours accrual per month; accrual cap-320 hours
and once cap reached, no further accrual until you use
vacation to fall below the cap. Accrual begins the first
day of the month following completion of 90 days
employment.
Medical
Insurance: Coverage effective March 1, 1998. Company currently
pays approximately 66 2/3% of premiums, including
dependent coverage.
Dental and Vision
Insurances: Coverages effective on the first day of the month
following completion of 90 days employment. Company
currently pays approximately 66 2/3% of premiums,
including dependent coverage.
Life Insurance: Coverage effective on the first day of the month
following completion of 90 days employment. Company
currently pays for 2X base salary to a maximum of
$150,000. Spousal coverage is $10,000. Buy-up options
available and are paid by employee.
Long Term
Disability: Coverage effective on the first day of the month
following completion of 90 days employment. Company
currently pays for LTD group coverage; current policy
terms include 180 day elimination period and 60% base
paid to maximum benefit of $6,000 per month to age 65.
Buy-up option available; 70% of base to maximum of
$12,000 per month to age 65 and is paid by employee.
AD&D: Coverage effective on the first day of the month
following completion of 90 days employment. Company
currently pays for $50,000 in coverage. Buy-up options
available for employee/spouse and are paid by employee.
Section 125: Eligible to participate on the first day of the month
following completion or 90 days employment. Company
currently offers a flex plan which includes premiums,
unreimbursed medical and child care deductions on a
pre-tax basis. The current Administrator, Colonial Life
Insurance Company, also offers optional insurance plans
such as accident, cancer and long term disability
insurances on a pre-tax basis.
<PAGE>
ELDORADO BANK
401(k) Eligible to participate on the first day of the month
following the completion of six (6) months employment.
Current employer match to $.50 per $1.00, up to 6% of
earnings, and is deposited into the plan on a semi-monthly
basis. Vesting schedule is 20% per year of employment.
Date of
Employment: Tuesday, February 10, 1998
Your employment at Eldorado Bank is for an unspecified term and is to
continue only at the mutual will of both you and the Bank. This means that
either you or the Bank may terminate your employement at will at any time,
with or without cause or price. This at-will aspect of your employment, which
includes the right of the Bank to demote, transfer, discipline or modify
compensation and benefits with or without cause or notice, may not be modified,
amended or rescinded except by an individual written agreement to the
contrary signed by both you and the Bank's Chief Executive Officer.
To the fullest extent allowed by law, you and the Bank agree that any
controversy, claim or dispute relating to or existing out of your employment
or the termination of your employment will be submitted to final and binding
arbitration in accordance with the National Rules for the Resolution of
Employment Disputes of the American Arbitration Association as the exclusive
remedy for such controversy, claims or dispute. This includes, without
limitation any and all claims of wrongful termination, employment
discrimination (whether under Title VII of the Civil Rights Act of 1964, the
California Act Employment and Housing Act, or any other statute), and/or any
other causes of action. Not covered by this agreement to arbitrate are claims
for workers' compensation and unemployment insurance. Judgment on the earned
issued by the arbitrator may be entered in any court having jurisdiction
thereof.
This letter and the terms and conditions of employment contained herein
supersede and replace any prior negotiations, underwritings or discussions
between you and the Bank regarding your employment. You will be required to
observe the Bank's personnel and business policies and procedures as they are
in effect from time to time.
I look forward to the opportunity of working with you. If you have any
questions, please do not hesitate to contact me at (714) 699-4344 x228.
Sincerely,
/s/ Robert P. Keller
- -----------------------
Robert P. Keller
Chairman & Chief Executive
Please sign and return the attached copy of this letter indicating your
acceptance of the terms and conditions as presented.
Offer of Employment Accepted: /s/ William D. Rast
----------------------------------------------
(Signature)
Date: 2-9-98
-----------------
<PAGE>
Exhibit 10.12
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT ("Agreement") is made and entered into as of
the ___ day of ________ , 1998, by and among ELDORADO BANK, a California banking
corporation (the "Bank"), and ____________, the ______[office]_____ of the Bank
("Officer").
R E C I T A L S :
A. WHEREAS, the Bank is a wholly owned subsidiary of Commerce
Security Bancorp, Inc., a Delaware corporation (the "Company");
B. WHEREAS, Officer is the _____[office]_____ and a
current employee of the Bank; and
C. WHEREAS, it is deemed to be in the best interest of the Bank
and the Company to take appropriate steps to provide severance arrangements
under certain circumstances to certain officers who remain employees of the
Bank;
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is agreed as
follows:
1. Definitions. For purposes of this Agreement, the following
terms when used in this Agreement shall have the meanings set forth below:
(a) "Cause" shall mean Officer, after the date of this
Agreement, (i) has been convicted by a court of competent jurisdiction
of any criminal offense involving dishonesty, breach of trust or
misappropriation, or has entered a plea of nolo contendere to such an
offense; or (ii) has committed an act of fraud, embezzlement, theft, or
any act which would cause termination of coverage under the Bank's
Banker's Blanket Bond as to Officer (as distinguished from termination
of coverage as to the Bank as a whole); or (iii) has committed a
willful violation of the Bank's Code of Conduct or any law, rule or
regulation governing the operation of the Bank or any of its affiliates
or the insurance of deposits held by the Bank (A) which is a felony or
misdemeanor, or (B) which the Board of Directors of the Bank determines
in good faith will likely have or has had a material adverse effect on
the business, interests or reputation of the Bank or any of its
affiliates; or (iv) has committed a willful and unauthorized disclosure
of material confidential information regarding the Bank or any of its
subsidiaries or affiliates, which disclosure the Board of Directors of
the Company determines in good faith will likely have or has had a
material adverse effect on the Bank or any of its subsidiaries or
affiliates.
<PAGE>
(b) "Change of Control" shall mean any transaction or series
of related transactions as a result of which
(i) the Company consummates a reorganization, merger or
consolidation of the Company, or sale or other disposition of
all or substantially all of the assets of the Company (each a
"Business Combination"), in each case unless immediately
following the consummation of such Business Combination all of
the following conditions are satisfied: (x) Persons, who,
immediately prior to such Business Combination, were the
beneficial owners of the voting securities entitled to vote
generally in the election of directors of the Company (the
"Outstanding Voting Securities"), beneficially own (within the
meaning of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended, the "1934 Act"), directly or
indirectly, more than one-third (1/3) of, respectively, the
then outstanding shares of common stock and the combined
voting power of the then Outstanding Voting Securities
entitled to vote generally in the election of directors, as
the case may be, of the entity (the "Resulting Entity")
resulting from such Business Combination (including, without
limitation, an entity which as a result of such transaction
owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries);
(y) no Person (other than any limited partner of Dartmouth
Capital Group, L.P. or shareholder of Dartmouth Capital Group,
Inc., any employee benefit plan (or related trust) of the
Company or the Resulting Entity) beneficially owns (within the
meaning of Rule 13d-3), directly or indirectly, more than
twenty percent (20.0%) of, respectively, the then outstanding
shares of common stock of the Resulting Entity or the combined
voting power of the then Outstanding Voting Securities of the
Resulting Entity, except to the extent that such Person's
beneficial ownership of the Company immediately prior to the
Business Combination exceeded such threshold; and (z) at least
one-half (1/2) of the members of the board of directors of the
Resulting Entity were members of the Board of Directors of the
Company at the time the Company's Board of Directors
authorized the Company to enter into the definitive agreement
providing for such Business Combination; or
(ii) any Person (other than a limited partner of
Dartmouth Capital Group, L.P. or a shareholder of Dartmouth
Capital Group, Inc.) acquires beneficial ownership (within the
meaning of Rule 13d-3) of more than twenty percent (20.0%) of
the combined voting power (calculated as provided in Rule
13d-3 in the case of rights to acquire securities) of the then
Outstanding Voting Securities of the Company; provided,
however, that for purposes of this clause, the following
acquisitions shall not constitute a Change of Control: (x) any
acquisition directly from the Company, (y) any acquisition by
the Company and (z) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company
or any entity controlled by the Company.
2
<PAGE>
(c) "Disability of Officer" shall mean if Officer is Disabled
and such disability continues for a period of any six (6) months out of
a one (1) year period. "Disabled" shall mean Officer's inability,
through physical or mental illness or other cause, to perform normal
and customary duties which Officer is required to perform for the Bank.
In determining whether Officer is Disabled, the Bank may rely upon the
written statement provided by a licensed physician acceptable to the
Bank. Officer shall allow examination from time to time by any licensed
physician selected by the Bank and agreed to by Officer. All such
examinations will be conducted within a reasonable time period.
(d) "Good Reason" shall mean the occurrence of Officer (i)
being delegated or assigned duties by the Board of Directors (the
"Board") of the Bank or the Chief Executive Officer of the Bank by a
communication in writing which are substantially inconsistent with the
position and status held by Officer immediately prior to the effective
date of the Change of Control; or (ii) having had removed by the Board
or the Chief Executive Officer by a communication in writing such
authority and responsibility which is necessary to carry out the duties
of the position held by Officer immediately prior to the effective date
of the Change of Control; or (iii) having a substantial and adverse
alteration in the nature, status, or prestige of Officer's
responsibilities due to the action of the Board or the Chief Executive
Officer, which is verifiable by tangible evidence; or (iv) being
relocated to an office more than twenty-five (25) miles from the
location of the Bank's executive offices as in effect immediately prior
to the effective date of the Change of Control; or (v) having his or
her base compensation reduced by ten percent (10%) or more from such
base compensation in effect on the date immediately preceding the
effective date of the Change of Control. In addition, without limiting
the scope of the immediately preceding sentence, any action by the Bank
which would constitute a termination without cause within the meaning
of the Company's 1997 Stock Option Plan shall also constitute "Good
Reason" for purposes of this Agreement.
(e) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which definition shall include a "person" within the
meaning of Section 13(d)(3) of the Exchange Act.
(f) "Without Cause" shall mean any termination of Officer by
the Bank except for a termination (i) for Cause, (ii) as a result of
the death of Officer, or (iii) as a result of the Disability of
Officer.
2. Severance Payment.
(a) Except as provided in Section 2(b), if (i) Good Reason
exists within two
3
<PAGE>
(2) years following a Change of Control, and Officer gives written
notice to the Bank within ninety (90) days after the occurrence of such
Good Reason that Officer is terminating his or her employment with the
Bank for Good Reason, or (ii) the Bank terminates Officer Without Cause
within two (2) years following a Change of Control, and, in either
event, provided that Officer has delivered to Bank a General Release
and Confidentiality Agreement in the form of Exhibit "A" attached
hereto (the "Waiver and Release"), the Bank will pay Officer in a lump
sum an amount (the "Severance Payment") equal to twelve (12) times
Officer's base monthly salary as in effect either at the time of
termination or, if greater, immediately prior to the effective date of
the Change of Control. The Severance Payment shall be reduced by
required deductions for applicable taxes and other withholdings and for
any outstanding obligations owed by Officer to the Bank that are then
due and payable, which deductions and withholdings are specifically
authorized by Officer. The Severance Payment shall be in addition to
any sums to which Officer would be entitled without signing the Waiver
and Release. The Severance Payment will be paid not more than five (5)
calendar days after the "Effective Date" of the Waiver and Release as
provided therein. Each Change of Control and each Good Reason following
a Change of Control shall give Officer a separate right to give the
notice set forth in the first sentence of this paragraph 2.
(b) Notwithstanding any other provision of this Agreement, the
bank shall have no obligations to make the Severance Payment if such
Severance Payment is prohibited by applicable federal or state law,
including without limitation Part 359 of the regulations of the Federal
Deposit Insurance Corporation (12 CFR ss. 359 et seq.) or any successor
provision.
3. IRC Provisions. Notwithstanding any other provision of this
Agreement, in the event it is determined by the Bank in its reasonable
discretion that the payment of the Severance Amount to Officer would be
nondeductible by the Bank for federal income tax purposes because of Section
280G of the Internal Revenue Code of 1986, as amended (the "Code"), the
Severance Payment shall be reduced to an amount which maximizes the Severance
Payment without causing any portion of the same to be nondeductible by the Bank
because of Section 280G of the Code. Any such reduction shall be applied to the
Severance Payment or the other amounts due to Officer in such manner as Officer
may reasonably specify within thirty (30) days following notice from the Bank of
the need for such reduction or, if Officer fails to so specify timely, as
determined by the Bank.
4. Employee Benefits. All employee benefits provided by the Bank shall
cease upon termination of Officer's employment, whether for Good Reason, Without
Cause, or for any other reason, and the Bank shall have no further
responsibility with respect thereto after such termination; provided, however,
that nothing contained in this Agreement shall affect any right Officer may have
pursuant to the Federal entitlement to continued group health care coverage as
provided in the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA")
or any successor legislation or comparable state law; and provided further that
if
4
<PAGE>
Officer is entitled to receive a Severance Payment pursuant to paragraph 2
hereof, and if Officer elects under COBRA to continue to receive any benefits
thereunder, the Bank shall reimburse Officer for the amount of such Officer's
COBRA payments for the first six months after such termination.
5. Term. The term of this Agreement shall be a rolling twelve (12)
months, with the Bank being able to terminate the Agreement upon twelve (12)
months prior written notice to the Officer; provided, however, that if a Change
of Control has occurred, no such termination shall be effective prior to the
ninetieth (90th) day after the second (2nd) anniversary of the Change of
Control.
6. Employment "At Will". Neither this Agreement nor the Severance
Payment payable hereunder shall be deemed to limit, replace or otherwise affect
the "at will" nature of Officer's employment with the Bank. Officer's employment
with the Bank continues to be for an unspecified term and may be terminated at
will at any time with or without cause or notice by either the Bank or Officer.
This at-will relationship cannot be changed absent an express intent as set
forth in an individualized written employment contract signed by both Officer
and the Chief Executive Officer of the Bank.
7. Arbitration. (a) It is the intention and agreement of the parties
hereto that no dispute, disagreement, claim or controversy (collectively a
"Controversy") arising in connection with this Agreement, Officer's employment
or the termination of that employment, be subject to civil litigation or other
judicial process (other than to compel compliance with this paragraph or to
enforce an award issued as a result of a proceeding hereunder). Therefore, to
the fullest extent allowed by law, any Controversy arising out of or relating to
this Agreement, the breach of this Agreement, the facts and circumstances
preceding the execution of this Agreement, the interpretation of any provision
of this Agreement, Officer's employment or the termination of that employment,
which cannot be resolved through agreement of the parties, shall be settled by
means of binding arbitration conducted in accordance with the procedures set
forth in paragraph 9 of the Waiver and Release. The matters subject to binding
arbitration shall include, but not be limited to, any Controversy regarding
wrongful termination, employment discrimination, and harassment of any kind, and
shall include statutory claims arising under laws such as Title VII of the Civil
Rights Act, the Age Discrimination in Employment Act, and the California Fair
Employment and Housing Act.
8. Mitigation. Officer shall have no obligation to mitigate damages
based upon Officer's termination pursuant to paragraph 2 above, and the
Severance Payment shall not be reduced as a result of Officer obtaining other
employment within twelve (12) months of Officer's termination.
9. Confidentiality. Officer understands and agrees (a) that Officer
will maintain all proprietary and confidential information of the Bank as
proprietary and confidential at all times during and after his/her
employment, (b) that Officer will not disclose or communicate such
5
<PAGE>
information to any third party or make use of it on his/her own behalf or on
behalf of any third party, and (c) upon his/her termination, that Officer will
deliver all tangible forms or media which Officer may have containing such
information to the Bank. For purposes of this Paragraph 9, "information"
includes trade secrets and all non-public records, practices, letters, plans,
drawings, computer programs and data, technical data, financial and other
business data pertaining to the Bank or any of its affiliates, customers,
vendors or other persons associated with the Bank. Officer acknowledges and
further agrees that the disclosure of such information would be a material
breach of this Agreement for which the Bank shall be entitled to any remedies
available to it in law or in equity.
10. Covenant Not to Disrupt Business. Officer hereby covenants and agrees
that he or she will not now, or for a period of one (1) year after the effective
date of Officer's termination of employment, whether or not following a Change
of Control, disrupt, damage, impair or interfere with the business of the Bank,
whether by way of interfering with or soliciting its employees, or disrupting
its relationships with customers, loan packagers, representatives, vendors,
brokers or otherwise. After termination of employment, Officer is not, however,
restricted from being employed by or engaged in a competing business.
11. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which,
together, shall constitute one and the same instrument.
12. Partial Invalidity. Any provision of this Agreement which shall prove
to be invalid, void or illegal shall in no way affect, impair or invalidate any
other provision hereof, and such other provisions shall remain in full force and
effect.
13. Time. Time is of the essence with respect to the performance of every
provision of this Agreement.
14. Governing Law. The terms and provisions of this Agreement shall be
governed and construed pursuant to the laws of the State of California except to
the extent governed by Federal law.
15. Construction. Headings at the beginning of each paragraph are solely
for the convenience of the parties and are not a part of this Agreement.
Whenever required by the context of this Agreement, the singular shall include
the plural and the masculine shall include the feminine and vice versa. This
Agreement shall not be construed as if it had been prepared by one of the
parties, but rather as if both parties had prepared the same. Unless otherwise
indicated, all references to paragraphs are to this Agreement. The exhibit
referred to in this Agreement is attached and incorporated by this reference.
16. Integration. This Agreement represents the entire and integrated
agreement between the Bank and Officer regarding the subject matter hereof and
supersedes all prior
6
<PAGE>
negotiations, representations or agreements, either written or oral. If the
Officer receives a severance payment pursuant to this Agreement, the Officer
shall not be eligible to receive any severance benefit under the Company's
Severance Pay Plan or any successor plan. Not withstanding the immediately
preceding sentence, if Officer is subject to a "Covered Termination" (as defined
in the Company's Severance Pay Plan), in circumstances not involving a change of
control, Officer shall be eligible to receive severance benefits if and to the
extent provided in the Company's Severance Pay Plan.
17. Successors and Assigns. The terms, covenants and conditions herein
contained shall be binding upon and shall inure to the benefit of the heirs,
successors and assigns of the parties hereto.
18. No Waiver. No waiver by either party of any breach or default
hereunder shall be deemed a waiver of any other breach or default, and no delay
or forbearance by either party hereunder in enforcing any of its rights or
remedies shall be deemed a waiver of any such rights or remedies, unless such
waiver is embodied in a writing signed by the authorized representative of the
party to be bound.
IN WITNESS WHEREOF, this Agreement has been executed effective on the
day and year hereinabove set forth.
"BANK" ELDORADO BANK
By:________________________
Its:_________________
"OFFICER"
___________________________
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<PAGE>
EXHIBIT "A"
GENERAL RELEASE AND CONFIDENTIALITY AGREEMENT
This General Release and Confidentiality Agreement ("Waiver and
Release"), including a release of severance pay claims, is entered into this
____ day of ______, 199_, by and between ________________ ("Officer") and
Eldorado Bank (the "Bank").
1. Within five (5) calendar days of the "Effective Date" of this Waiver
and Release, as defined in Paragraph 4 below, and assuming Officer is otherwise
eligible for benefits under the terms of his/her Severance Agreement, dated
___________ __, 1998 ("Agreement"), the Bank agrees to pay Officer the Severance
Payment as provided in Paragraph 2 of the Agreement. The Severance Payment shall
be in addition to any sums to which Officer would be entitled without signing
this Waiver and Release.
2. In consideration of such Severance Payment and the promises
contained in this Waiver and Release, Officer, for himself/herself and for
his/her heirs, executors, administrators, successors and assigns (the
"Releasors"), hereby waives, releases and forever discharges the Bank and its
officers, directors, employees, agents, insurers, underwriters, subsidiaries,
parents, holding companies (including, but not limited to, Commerce Security
Bancorp, Inc.), affiliates (including, but not limited to, Dartmouth Capital
Group, L.P. and Dartmouth Capital Group, Inc.), successors and assigns (the
"Releasees") from, and agrees to the extent permitted by law not in any manner
to institute, prosecute or pursue, any and all complaints, charges, claims,
obligations, demands, suits, costs, losses, liabilities, damages, actions or
causes of action of any nature whatsoever, whether in law or in equity, known or
unknown, suspected or claimed, which Releasors, or any of them, have or may have
against the Releasees, or any of them, concerning any matter, cause or thing,
including without limitation, any claim related to or arising out of (a)
Officer's employment with the Bank or the cessation of that employment; (b) any
common law or statutory tort; (e) any federal, state, or governmental
constitution, statute, regulation or ordinance, including, without limitation,
Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment
Act, the Employee Retirement Income Security Act of 1974, as amended, the
California Fair Employment and Housing Act, the California Labor Code, the Equal
Pay Act, the Americans With Disabilities Act, the Rehabilitation Act of 1973,
the Racketeer Influenced and Corrupt Organizations Act, the Financial Reform
Recovery and Enforcement Act of 1989, and/or Section 1981 of Title 42 of the
United States Code; and (d) any agreement, oral or written, express or implied,
between Officer and the Bank, including any employment agreement. This Waiver
and Release does not waive rights or claims that may arise after the date this
Waiver and Release is executed by Officer.
3. As further consideration and inducement for this Waiver and Release,
it is understood and agreed that the Releasors' general release herein extends
to all known and unknown claims and that Releasors waive and release any and all
rights under Section 1542 of
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<PAGE>
the California Civil Code or any analogous state, local or federal law, statute,
rule, order or regulation. CALIFORNIA CIVIL CODE SECTION 1542 READS AS FOLLOWS:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE
TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
4. Officer acknowledges and agrees that (a) he/she has been given a
period of at least twenty-one (21) calendar days to consider this Waiver and
Release and whether or not to sign it, and (b) for a period of seven (7)
calendar days after he/she signs this Waiver and Release, he/she has the right
to revoke it. This Waiver and Release shall not become effective or be
enforceable until such seven (7) calendar day revocation period has expired,
such expiration date being referred to herein as the "Effective Date".
5. Officer executes this Waiver and Release voluntarily without
reliance on any representation by the Bank other than that set forth in this
Waiver and Release. Officer acknowledges that he/she has read and understands
the provisions of the release set forth in Paragraphs 2 and 3 of this Waiver and
Release. The Bank advises Officer to consult with an attorney before executing
this Waiver and Release, and to consider all of its provisions carefully before
signing it.
6. Officer understands and agrees (a) that he/she will maintain all
proprietary and confidential information of the Bank as proprietary and
confidential at all times during and after his/her employment, (b) that he/she
will not disclose or communicate such information to any third party or make use
of it on his/her own behalf or on behalf of any third party, and (c) upon
his/her termination, that he/she will deliver all tangible forms or media which
he/she may have containing such information to the Bank. For purposes of this
Paragraph 6, "information" includes trade secrets and all non-public records,
practices, letters, plans, drawings, computer programs and data, technical data,
financial and other business data pertaining to the Bank or any of its
affiliates, customers, vendors or other persons associated with the Bank.
Officer acknowledges and further agrees that the disclosure of such information
would be a material breach of this Waiver and Release for which the Bank shall
be entitled to recover payments made under this Waiver and Release in addition
to other remedies in law and in equity.
7. This Waiver and Release does not constitute, and shall not be
admissible as evidence of, an admission by the Bank as to any fact or matter.
8. Officer hereby covenants and agrees that he/she will not now, or for
a period of one (1) year after the Effective Date, disrupt, damage, impair or
interfere with the business of the Bank, whether by way of interfering with or
soliciting its employees, or disrupting its
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<PAGE>
relationships with customers, loan packagers, representatives, vendors, brokers
or otherwise. After termination of employment, Officer is not, however,
restricted from being employed by or engaged in a competing business.
9. (a) Agreement to Arbitrate. It is the intention and agreement of the
Bank and Officer that no dispute, disagreement, claim or controversy
(collectively a "Controversy") arising in connection with this Waiver
and Release or the Agreement, Officer's employment or the termination
of that employment, be subject to civil litigation or other judicial
process (other than to compel compliance with this paragraph or to
enforce an award issued as a result of a proceeding hereunder).
Therefore, to the fullest extent allowed by law, any Controversy
arising out of or relating to this Waiver and Release or the Agreement,
the breach of this Waiver and Release or the Agreement, the facts and
circumstances preceding the execution of this Waiver and Release or the
Agreement, the interpretation of any provision of this Waiver and
Release or the Agreement, Officer's employment or the termination of
that employment, which cannot be resolved through agreement of the
Releasors and Releasees, shall be settled in accordance with the
procedures set forth in this paragraph 9. This shall include, but not
be limited to, any Controversy regarding wrongful termination,
employment discrimination, and harassment of any kind, and shall
include statutory claims arising under laws such as Title VII] of the
Civil Rights Act, the Age Discrimination in Employment Act, and the
California Fair Employment and Housing Act.
(b) Notice of Intent to Arbitrate. Any Releasee or Releasor
("Claimant") desiring to invoke the procedures of this paragraph shall
give written notice to the other of Claimant's intent to institute the
procedures herein provided. Such notice of Controversy shall identify
each and every claim asserted by Claimant, the party involved in the
Controversy, and whether the Controversy is directed against the Bank.
The notice shall further state the nature of the relief sought.
(c) Binding Resolution. The parties agree to resolve the
matter in Controversy by final and binding arbitration according to the
National Rules for the Resolution of Employment Disputes ("Rules") of
the American Arbitration Association ("AAA").
(d) Enforcement of Dispute/Resolution. Any party may seek to
compel the other to comply with this arbitration provision by petition
to any court of general jurisdiction. In the case of a judgment on an
arbitrator's award, any party may seek to have the arbitrator's award
entered by any court having jurisdiction thereof.
(e) Fees and Costs. The parties agree that the fees and costs
incurred for the Arbitrator shall be assessed equally to Officer and
the Bank. Each party shall bear its own attorneys' fees and costs in
connection with its own representation.
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<PAGE>
(f) Alternate Mediation/Arbitration Service. In the event AAA
is not in business at the time this dispute resolution procedure is
initiated, the parties agree to select an alternative arbitration
service in the place of AAA. The Rules of Practice and Procedure to be
followed shall be those of the successor arbitration service. In the
event the parties are unable to agree on an alternative arbitration
service within thirty (30) days of the initiation of this dispute
resolution procedure, then either party may petition the Superior Court
of Orange County to appoint a retired judge to serve as arbitrator
pursuant to the AAA's Rules in effect at the time AAA ceased doing
business.
IN WITNESS WHEREOF, this GENERAL RELEASE AND CONFIDENTIALITY AGREEMENT
has been executed on the day and year hereinabove set forth.
"OFFICER"
Dated: ________________________ _________________________
On _____[Date]_____, before me personally appeared [Officer],
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person who is named in the foregoing GENERAL RELEASE AND
CONFIDENTIALITY AGREEMENT and acknowledged to me that he executed the same, and
that by his signature [Officer] duly executed the GENERAL RELEASE AND
CONFIDENTIALITY AGREEMENT.
---------------------------
Notary Public
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<PAGE>
Exhibit 10.13
EXECUTION VERSION (WARRANT)
VOID AFTER 5:00 P.M. PACIFIC TIME, ON JUNE 6, 2007
FORM OF
AMENDED AND RESTATED SERIES B WARRANT
HELD BY MADISON DEARBORN AND OLYMPUS
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE
SECURITIES LAWS OF ANY STATE IN RELIANCE ON EXEMPTIONS THEREFROM AND, THEREFORE,
MAY NOT BE RESOLD UNLESS REGISTERED UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THIS WARRANT HAS
BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR SALE IN CONNECTION
WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE ACT.
ELDORADO BANCSHARES, INC.
Common Stock Purchase Warrant
Expiring June 6, 2007
No. W-1
ELDORADO BANCSHARES, INC., a Delaware corporation (the "Company"), for
value received, hereby certifies that________________, or its registered assigns
(the "Holder"), is entitled to purchase from the Company One Million (1,000,000)
duly authorized, validly issued, fully paid and nonassessable shares ("Warrant
Shares") of the Company's Class B Common Stock, $.01 par value per share (the
"Class B Common Stock"), or the Company's Class C Common Stock, $.01 par value
per share (the "Class C Common Stock"), as determined pursuant to Section 1.2,
at the purchase price per share of $9.62, as such price may be adjusted from
time to time pursuant to Section 7 hereof (the "Exercise Price"), at any time or
from time to time from the date hereof and up to and until 5:00 P.M., Pacific
time, on June 6, 2007 or such later date determined in accordance with Section 9
hereof (the "Expiration Date"), all subject to the terms and conditions and
adjustments set forth below in this Amended and Restated Series B Warrant (this
"Warrant").
This Warrant constitutes an amendment and restatement of one or more
of the Series B Warrants originally issued by Commerce Security Bancorp, Inc.
(n/k/a/ Eldorado Bancshares, Inc.) pursuant to the Securities Purchase Agreement
dated February 13, 1997 by and between the Company and its subsidiaries and
Madison Dearborn Capital Partners II, L.P., Olympus Growth Fund II, L.P. and
Olympus Executive Fund, L.P. (as amended, and together with certain other
agreements and instruments contemplated thereby, the "Securities Purchase
Agreement"). Reference is hereby made to the Securities Purchase Agreement for
additional terms and provisions thereof affecting the Company and the holders of
the Warrants. The Company will provide a copy of the Securities Purchase
Agreement to the Holder upon request. As used herein,
<PAGE>
EXECUTION VERSION (WARRANT)
"Common Stock" shall refer to all classes of the Company's common stock and the
term "Junior Common Stock" shall refer to the Class B Common Stock and the Class
C Common Stock, collectively.
1. EXERCISE OF WARRANT.
1.1 Subject to the terms and conditions hereof, this Warrant may be
exercised in whole or in part at any time or from time to time from the date
hereof and up to and until the Expiration Date, or, if such date is a day on
which federal or state chartered banking institutions located in the State of
California are authorized by law to close, then on the next succeeding day which
shall not be such a day, by presentation and surrender to the Company at its
principal office, of this Warrant and the purchase form annexed hereto as
EXHIBIT A properly completed and duly executed and accompanied by payment, in
the manner provided herein, of an amount (the "Exercise Payment") equal to the
then-current Exercise Price multiplied by the number of Warrant Shares specified
in such form. The Exercise Payment may be made by (x) delivery to the Company of
shares of Series A Capital Securities having an aggregate Redemption Value (as
defined herein) equal to the Exercise Payment, accompanied by a stock power
endorsed in blank, or (y) delivery to the Company of shares of Series B
Preferred Stock or Series E Preferred Stock having an aggregate Redemption Value
equal to the Exercise Payment, accompanied by a stock power endorsed in blank,
or (z) any combination of the consideration specified in clauses (x) and (y) of
this sentence having an aggregate value as provided herein equal to the Exercise
Payment. Notwithstanding the immediately preceding sentence, at the option of
the Holder, this Warrant may be exercised by conversion into a number of shares
of Junior Common Stock equal to (x) the number of Warrant Shares minus (y) a
number of shares of Junior Common Stock having a Market Value equal to the
Exercise Payment (a "Cashless Exercise"). The Exercise Payment may not be made
in cash. If the Warrant is exercised for less than the total number of shares
evidenced by the Warrant, the Company shall, promptly after presentation of the
Warrant upon such exercise, execute and deliver a new warrant, dated the date
hereof, evidencing the rights of the Holder to purchase the balance of the
Warrant Shares purchasable hereunder upon the same terms and conditions herein
set forth. Upon and as of receipt by the Company of a properly completed and
duly executed purchase form accompanied by payment as herein provided, the
Holder shall be deemed to be the holder of record of the shares of Junior Common
Stock issuable upon such exercise, notwithstanding that the stock transfer books
of the Company shall then be closed or that certificates representing such
shares of Junior Common Stock shall not then actually be delivered to the
Holder. Certificates representing the shares so purchased shall be delivered to
the Holder within ten (10) business days after exercise. The issuance of
certificates for shares of Junior Common Stock upon exercise of this Warrant
shall be made without charge to the Holder for any issuance tax in respect
thereof or other cost incurred by the Company in connection with such exercise
and the related issuance of shares of Warrant Shares.
1.2 The Warrant Shares issuable upon the exercise of this Warrant
shall be either shares of Class B Common Stock or shares of Class C Common
Stock, or any combination thereof, at the sole election of the Holder; PROVIDED,
HOWEVER, that the Holder may not elect to exercise the Warrant for shares of
Class B Common Stock if and to the extent that the issuance
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<PAGE>
EXECUTION VERSION (WARRANT)
of the same would result in the Holder owning more than 9.9% of the Company's
pro forma Voting Securities (as defined herein) outstanding following such
exercise; and PROVIDED, FURTHER, that at any time that the Holder owns more than
9.9% of the outstanding Voting Securities, any exercise of this Warrant, in
whole or in part, shall be solely for Class C Common Stock. Notwithstanding the
immediately preceding sentence, this Warrant may be exercised for shares of
Class B Common Stock that would result in the Holder owning more than 9.9% of
the outstanding Voting Securities, provided that at the time of such exercise,
such Holder has delivered to the Secretary of the Corporation an opinion or
memorandum of counsel, in form and substance reasonably satisfactory to the
Company, or other reasonably satisfactory evidence that such Holder may
beneficially own more than 9.9% of the outstanding Voting Securities of the
Company and will acquire such shares in accordance with the Bank Holding Company
Act of 1956. As used herein, "Voting Securities" shall mean the pro forma number
of shares of capital stock of the Company entitled to vote in an election of the
directors of the Company as of the time of the exercise of the Warrant, giving
effect to the exercise of the Warrant to the extent proposed but not giving
effect to the exercise of any other outstanding common stock equivalents held by
the Holder or by any other person. The Holder shall indicate on the purchase
form delivered to the Company in connection with such exercise the class of
Junior Common Stock that the Holder elects to receive upon such exercise.
2. RESERVATION OF SHARES.
The Company shall, at all times from the date of original issuance of the
Warrant until its expiration, reserve for issuance and delivery upon exercise of
the Warrant the number of Warrant Shares as shall be required for issuance and
delivery upon exercise of the Warrant. All Warrant Shares, upon issuance, shall
be validly authorized, issued and outstanding shares, fully paid and
nonassessable, and free of all liens, encumbrances and (except as otherwise
provided herein) restrictions thereon. The Company shall take all such actions
as may be necessary to assure that all Warrant Shares may be so issued without
violation of any applicable law or governmental regulation or any requirements
of any domestic securities exchange upon which shares of Warrant Shares may be
listed (except for official notice of issuance which shall be immediately
delivered by the Company upon each such issuance). The Company shall not take
any action which would cause the number of authorized but unissued shares of
Warrant Shares to be less than the number of such shares required to be reserved
hereunder for issuance upon exercise of the Warrant.
3. FRACTIONAL SHARES.
If the exercise of the Warrant would otherwise result in the issuance of a
fraction of a share, the Company shall instead of issuing any fractional shares
or scrip representing fractional shares pay to the Holder an amount in cash
equal to such fraction multiplied by the Market Value (determined in accordance
with Section 4 below) of a share of Junior Common Stock.
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<PAGE>
EXECUTION VERSION (WARRANT)
4. MARKET VALUE OF JUNIOR COMMON STOCK; REDEMPTION VALUE OF PREFERRED
STOCK.
(a) For purposes of this Agreement, except as provided in Sections 6.2 and
6.3,
(x) if the Class B Common Stock is publicly traded, the Market Value
of the Junior Common Stock shall equal an amount per share of Class B
Common Stock equal to the average closing price for the thirty (30) trading
days immediately preceding the date of exercise as reported (i) on the
principal national securities exchange on which the Class B Common Stock is
traded or (ii) if the Class B Common Stock is not traded on a national
exchange, on The Nasdaq National Market System ("Nasdaq"); or
(y) if the Class B Common Stock is not so quoted on Nasdaq or listed
on a national securities exchange, the Market Value of the Junior Common
Stock shall be an amount (which shall be equal for the Class B Common Stock
and the Class C Common Stock) mutually agreed upon by the Company and the
Holder, or, if the Company and the Holder are unable to agree, by a
nationally recognized investment banking firm selected by the Holder and
consented to by the Company, such consent not to be unreasonably withheld.
Any fees or expenses incurred in connection with the retention of an
investment banking firm pursuant to this Section 4(a)(y) shall be split
equally between the Holder and the Company.
(b) For purposes of this Agreement, the "Redemption Value" of the Series A
Capital Securities shall equal the Redemption Amount thereof (as defined in the
Declaration of Trust governing such Securities) as of the exercise date, giving
effect to any Principal Adjustment (as so defined) occurring prior to the
exercise date, and the Redemption Value of each of the Series B Preferred Stock
and the Series E Preferred Stock shall equal the Redemption Price (as defined in
the Company's Amended and Restated Certificate of Incorporation) per share
thereof were such share to be redeemed on the exercise date.
5. NO RIGHTS AS STOCKHOLDER.
This Warrant shall not entitle the Holder to any rights as stockholder of
the Company, either at law or in equity. The rights of the Holder are limited to
those expressed in this Warrant or in the Securities Purchase Agreement or
otherwise provided to the Holder by law.
6. EVENTS COMPELLING IMMEDIATE EXERCISE OF WARRANT.
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<PAGE>
EXECUTION VERSION (WARRANT)
6.1 This Warrant shall be automatically exercised at its then
applicable Exercise Price upon the later of (i) the date of the consummation of
any Qualified Offering (as defined herein) or (ii) the first business day
following the second anniversary of the date of original issuance of the Warrant
on which the Market Value of the Junior Common Stock is at least 200% of the
then applicable Initial Share Price (as defined herein). In the event the
Warrant is exercised pursuant to this Section 6, the Holder may elect a form of
Exercise Payment permitted under Section 1 hereof; PROVIDED, HOWEVER, that if
the Holder does not make such an election within ten (10) business days
following written notice by the Company that the warrant is being automatically
exercised pursuant to this Section 6, the Company may cause a Cashless Exercise
of such Holder's Warrant. A "Qualified Offering" shall mean a firm-commitment
underwritten public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offer and sale of
Class B Common Stock to the public at an offering price per share (prior to any
underwriting discount or commission) of at least 200% of the then-applicable
Initial Share Price (as defined herein) in which either (x) the aggregate
offering price of shares sold by the Company is not less than $25 million, or
(y) the aggregate offering price of all shares sold in the offering, including
those sold by the Company and those sold by other stockholders is not less than
$30 million of which the aggregate offering price of shares sold by the Company
is not less than $20 million. The "Initial Share Price" shall equal $9.62 per
share (as adjusted for any stock split, stock dividends or other similar
distributions to the holders of Class B Common Stock).
6.2 This Warrant shall be automatically exercised, in a Cashless
Exercise at its then applicable Exercise Price, upon the first business day on
which it is determined that the Market Value of the Junior Common Stock is equal
to or greater than $12.00 per share, as adjusted for any stock splits, stock
dividends or similar distributions to the holders of the Junior Common Stock
having a record date prior to the date of exercise of the Warrant. For purposes
determining the number of shares of Junior Common Stock to be issued to the
holder in the event of a an exercise effected under this Section 6.2, the Market
Value of the Junior Common Stock will be deemed to equal $12.00 per share
(adjusted as aforesaid).
6.3 This Warrant shall be automatically exercised, in a Cashless
Exercise at its then applicable Exercise Price, in the event that, at any time
following the fifth anniversary of the date of original issuance of this
Warrant, one or more of the Series A Capital securities, the Series B Preferred
Stock or the Series E Preferred Stock shall be converted into Common Stock, such
automatic exercise of this Warrant to be effective contemporaneously with such
conversion. For purposes of determining the number of shares of Junior Common
Stock to be issued to the holder in the event of an exercise effected under this
Section 6.3, the Market Value of the Junior Common Stock will be deemed to equal
$6.00 per share (adjusted for any stock splits, stock dividends or similar
distributions to the holders of the Junior Common Stock having a record date
prior to the date of exercise of the Warrant).
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<PAGE>
EXECUTION VERSION (WARRANT)
7. PRICES OF WARRANT SHARES; EFFECT OF DIVIDENDS ON COMMON STOCK.
7.1 The number of shares of Junior Common Stock for which this Warrant
may be exercised and the Exercise Price therefor shall be subject to adjustment
as follows:
(a) If the Company is recapitalized through the subdivision or
combination of its outstanding shares of Junior Common Stock into a larger
or smaller number of shares, the number of shares of Junior Common Stock
for which this Warrant may be exercised shall be increased or reduced, as
of the record date for such recapitalization, in the same proportion as the
increase or decrease in the outstanding shares of Junior Common Stock, and
the Exercise Price shall be adjusted so that the aggregate amount payable
for the purchase of all Warrant Shares issuable hereunder immediately after
the record date for such recapitalization shall equal the aggregate amount
so payable immediately before such record date.
(b) If the Company declares a dividend on Junior Common Stock, or
makes a distribution to holders of Junior Common Stock, and such dividend
or distribution is payable or made in Junior Common Stock or securities
convertible into or exchangeable for Junior Common Stock, or rights to
purchase Junior Common Stock or securities convertible into or exchangeable
for Junior Common Stock, the number of shares of Junior Common Stock for
which this Warrant may be exercised shall be increased, as of the record
date for determining which holders of Junior Common Stock shall be entitled
to receive such dividend or distribution, in proportion to the increase in
the number of outstanding shares (and shares of Junior Common Stock
issuable upon conversion of all such securities convertible into Junior
Common Stock) of Junior Common Stock as a result of such dividend or
distribution, and the Exercise Price shall be adjusted so that the
aggregate amount payable for the purchase of all the Warrant Shares
issuable hereunder immediately after the record date for such dividend or
distribution shall equal the aggregate amount so payable immediately before
such record date.
(c) If the Company declares a dividend on Junior Common Stock (other
than a dividend covered by subsection (b) above, or a dividend or other
distribution payable in cash covered by Section 7.6 below) or distributes
to holders of its Junior Common Stock, other than as part of its
dissolution or liquidation or the winding up of its affairs, any shares of
its stock, any evidence of indebtedness or any cash or other of its assets
(other than Junior Common Stock or securities convertible into or
exchangeable for Junior Common Stock) (an "Alternative Distribution"), the
Exercise Price shall be reduced by an amount equal to the value of the
Alternative Distribution per share of Junior Common Stock as determined in
good faith by the Company's Board of Directors based upon a written opinion
from a nationally recognized investment banking firm, selected by the
Holder, and taking into account, among other relevant factors, whether the
Holder acquired any Purchase Rights (as defined herein) with respect to
such dividend or distribution pursuant to the terms hereof. The selection
of such investment banking firm
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<PAGE>
EXECUTION VERSION (WARRANT)
shall be consented to by the Company, which consent shall not be
unreasonably withheld, and such investment banking firm's fees and expenses
shall be paid by the Company. The Company shall provide the Holder with
written notice concerning an Alternative Distribution at least ten (10)
business days prior to the record date therefor.
(d) In case the Company shall, at any time or from time to time
following the date hereof, issue or agree to issue by warrants, convertible
securities, stock options or otherwise, any of its Common Stock or Other
Securities (as defined herein), including treasury shares, (other than any
shares issued in contemplation of the Securities Purchase Agreement), for a
consideration per share less than the Exercise Price per share in effect
immediately prior to the time of such issue or sale, then forthwith upon
such issue or sale, or agreement to issue or sell, said Exercise Price
shall be reduced to a price (calculated to the nearest cent) determined by
dividing (x) an amount equal to (A) the product obtained by multiplying the
number of shares of the Common Stock outstanding (or then deemed to be
outstanding as herein provided) immediately prior to such issue by the
Exercise Price in effect at such time plus (B) the consideration received
by the Company upon such issue by (y) the number of shares of the Common
Stock outstanding (or then deemed to be outstanding as herein provided)
immediately after such issue. Whenever the Exercise Price is adjusted as
provided in this Section 7(d), the aggregate number of shares of Junior
Common Stock that the holder of this Warrant shall thereafter be entitled
to purchase at such adjusted Exercise Price shall be increased to the
number of shares determined by multiplying the number of shares of Junior
Common Stock issuable upon exercise of this Warrant immediately prior to
such adjustment by the Exercise Price in effect immediately prior to such
adjustment, and dividing the product so obtained by such adjusted Exercise
Price. For the purposes of this Section 7(d), the number of shares of
Common Stock deemed to be outstanding at any given time shall exclude
shares in the treasury of the Company but shall include all shares issuable
or to become issuable under any agreements, warrants (including this
Warrant), convertible securities, stock options, similar rights or
otherwise (hereinafter in this Section 7(d) referred to as "Options"). The
Board of Directors of the Company shall make a reasonable determination of
the fair value of the amount of consideration other than money received by
the Company upon the issue by it of any of its securities. Such Board
shall, in case any Common Stock or Options for the purchase thereof are
issued with other stock, securities or assets of the Company, determine
what part of the consideration received therefor is applicable to the issue
of the Common Stock or Options for the purchase thereof. If, as provided
herein, the Exercise Price is adjusted as a consequence of the Company's
issuance of Options, no further adjustment of the Exercise Price shall be
made upon the subsequent issuance of Common Stock upon the exercise of such
Options. To the extent that Options expire without having been exercised,
the Exercise Price computed upon their issuance, and any subsequent
adjustments based thereon, shall, upon such expiration, be recomputed to
take into account only the shares of Common Stock actually issued upon the
exercise of such Options. In any such recomputation, the consideration
applicable to the shares of Common Stock issued shall be the aggregate
consideration which was received by the Company upon the
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<PAGE>
EXECUTION VERSION (WARRANT)
issuance of such Options, whether or not exercised, plus the additional
consideration actually received by the Company upon the exercise thereof.
No recomputation shall have the effect of increasing the Exercise Price by
an amount in excess of the adjustment thereof made in respect of the
issuance of the expired Options. No adjustment shall be made pursuant to
this Section 7(d) for the issuance by the Company of (x) any securities
issued pursuant to executive compensation arrangements the terms of which
are disclosed in Disclosure Schedule 5.2(m)(18) to the Securities Purchase
Agreement, or (y) any securities that may be issued upon the conversion of
the mandatorily convertible debentures of SDN Bancorp, Inc. disclosed on
Disclosure Schedule 5.2(b) to the Securities Purchase Agreement.
(e) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease in the Exercise Price of
at least one percent; provided, however, that any adjustments which by
reason of this Section 7.1(e) are not required to be made immediately shall
be carried forward and taken into account at the time of exercise of this
Warrant or any subsequent adjustment in the Exercise Price which, singly or
in combination with any adjustment carried forward, is required to be made
under this Section 7.
(f) If the event as a result of which an adjustment is made under
paragraph (a), (b), (c) or (d) above does not occur, then any adjustments
in the Exercise Price or number of shares issuable pursuant to this Warrant
that were made in accordance with such paragraphs (a), (b), (c) or (d)
shall be adjusted to the Exercise Price and number of shares as were in
effect immediately prior to the record date for such event.
7.2 If at any time or from time to time there is a capital
reorganization of the Junior Common Stock (other than a recapitalization,
subdivision, combination, reclassification or other change of the Junior Common
Stock provided for in Section 7.1) or merger or consolidation of the Company
with or into another corporation, or the sale of all or substantially all of the
Company's properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the Holder shall thereafter be entitled to receive, upon exercise of the
Warrant, the number of shares of stock or other securities or property of the
Company, resulting from such reorganization, merger or consolidation or sale, to
which a holder of Junior Common Stock, or other securities deliverable upon the
exercise of this Warrant, would have been entitled on such reorganization,
merger, consolidation, or sale. In any such case, appropriate adjustments shall
be made in the application of the provisions of this Section 7 (including
adjustment of the Exercise Price then in effect and number of shares purchasable
upon exercise of the Warrant) which shall be applicable after such events;
provided, however, that any such adjustments shall be made so as to ensure that
the provisions of this Section 7 applicable after such events shall be as
equivalent as may be practicable to the provisions of this Section 7 applicable
before such events. In the event of any such reorganization, merger,
consolidation or sale, the corporation formed by such consolidation or merger or
the corporation which shall have acquired the assets of the Company shall
execute and deliver a supplement hereto to the foregoing effect. If, as
aforesaid, the Holder would be entitled
-8-
<PAGE>
EXECUTION VERSION (WARRANT)
to receive property upon exercise of this Warrant and such property consists, in
whole or in part, of cash in excess of the Exercise Price, the Holder may, at
the Holder's option, exercise this Warrant without making payment of the
Exercise Price and, in such case, the Company or its successor shall, upon
distribution to the Holder, consider the Exercise Price to have been paid in
full and, in making settlement to the Holder, shall deduct an amount equal to
the Exercise Price from the amount payable to the Holder.
7.3 If the Company shall, at any time before the expiration of this
Warrant, dissolve, liquidate or wind up its affairs, the Holder shall have the
right to exercise this Warrant. Upon such exercise the Holder shall have the
right to receive, in lieu of the shares of Junior Common Stock of the Company
that the Holder otherwise would have been entitled to receive, the same kind and
amount of assets as would have been issued, distributed or paid to the Holder
upon any such dissolution, liquidation or winding up with respect to such shares
of Junior Common Stock of the Company had the Holder been the holder of record
of such shares of Junior Common Stock receivable upon exercise of this Warrant
on the date for determining those entitled to receive any such distribution. If
any such dissolution, liquidation or winding up will result in any cash
distribution in excess of the Exercise Price, the Holder may, at the Holder's
option, exercise this Warrant without making payment of the Exercise Price and,
in such case, the Company shall, upon distribution to the Holder, consider the
Exercise Price to have been paid in full and, in making settlement to the
Holder, shall deduct an amount equal to the Exercise Price from the amount
payable to the Holder per share of Junior Common Stock. For purposes of this
Section 7.3, the sale of all or substantially all of the assets of the Company
and distribution of the proceeds thereof to the Company's shareholders shall be
deemed a liquidation.
7.4 The Company shall retain a firm of independent public accountants
of nationally recognized standing (who may be any such firm regularly employed
by the Company) to make any computation required under this Section 7, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of any computation made under this Section 7.
7.5 Whenever the number of Warrant Shares or the Exercise Price shall
be adjusted as required by the provisions of this Section 7, the Company
promptly shall file in the custody of its Secretary or an Assistant Secretary,
at its principal office, and furnish to each Holder hereof a certificate
prepared in accordance with Section 7.4 hereof, showing the adjusted number of
Warrant Shares and the Exercise Price and setting forth in reasonable detail the
circumstances requiring the adjustment.
7.6 If the Company declares a dividend or other distribution on the
Common Stock payable in cash prior to the earlier of the Expiration Date or the
exercise of this Warrant in full, the Company shall pay to the holder hereof, in
cash and contemporaneously with the payment of such dividend to the holders of
the Common Stock, an amount equal to the amount of such dividend per share of
Common Stock multiplied by the number of Warrant Shares then covered by this
Warrant as though such shares had been issued and outstanding in the name of the
holder as of the record date applicable to such dividend.
-9-
<PAGE>
EXECUTION VERSION (WARRANT)
7.7 If an event occurs which is similar in nature to the events
described in this Section 7, but is not expressly covered hereby, the Board of
Directors of the Company shall make or arrange for an equitable adjustment to
the number of Warrant Shares and the Exercise Price.
8. PURCHASE RIGHTS.
If at any time the Company grants, issues or sells any options, convertible
securities or rights to purchase stock, warrants, securities or other property
pro rata to the record Holders of Junior Common Stock (the "Purchase Rights"),
then the Holder of this Warrant shall be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which such
Holder could have acquired if such Holder had held the number of shares of
Warrant Shares acquirable upon complete exercise of this Warrant immediately
before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of which the
record holders of Junior Common Stock are to be determined for the grant, issue
or sale of such Purchase Rights; provided that (a) if the Purchase Rights
involve Common Stock that constitutes Voting Securities, the Company shall make
available to the Holder of this Warrant, at such Holder's request, Purchase
Rights for Class C Common Stock, except that, if and to the extent that the
Holder would not be permitted to exercise this Warrant for Class B Common Stock
pursuant to Section 1.2, the Company shall grant, issue or sell to the Holder
only Purchase Rights relating to Class C Common Stock; and (b) if the Purchase
Rights involve Voting Securities other than Common Stock, the Company shall use
its best efforts to make available to the Holder of this Warrant, at such
Holder's request, Purchase Rights involving non-voting securities (except where
such securities are entitled to voting rights pursuant to applicable laws) which
are otherwise identical to the Purchase Rights involving voting securities and
which non-voting securities are convertible or exchangeable into such voting
securities on the same terms as the Company's Class C Common Stock is
convertible into the Company's Class B Common Stock.
9. COVENANTS OF THE HOLDER.
The Holder covenants and agrees that, notwithstanding anything to the
contrary contained herein, this Warrant may not be exercised at any time that,
or to the extent that, immediately following such exercise the Holder would
beneficially own equity securities of the Company, of any class(es), which
securities would in the aggregate constitute in excess of 24.9% of the Fully
Diluted Equity (as hereinafter defined) of the Company, unless and until such
Holder has delivered to the Secretary of the Company an opinion or memorandum of
counsel, in form and substance reasonably satisfactory to the Company, or other
reasonably satisfactory evidence that such Holder may beneficially own more than
24.9% of the Fully Diluted Equity of the Company and will acquire such shares in
accordance with the Bank Holding Company Act of 1956. The expiration of this
Warrant shall be extended by an amount of time equal to that during which this
Warrant may not be exercised pursuant to this Section 9. As used herein, the
"Fully Diluted Equity" of the Company shall mean the Company's equity
immediately following the Acquisition
-10-
<PAGE>
EXECUTION VERSION (WARRANT)
(as defined in the Securities Purchase Agreement) as calculated by the Federal
Reserve Bank of San Francisco or the staff of the Board of Governors of the
Federal Reserve System.
10. NOTICES TO HOLDER.
So long as this Warrant shall be outstanding, (a) if the Company shall
propose to pay any dividends or make any distribution upon the Class B Common
Stock or (b) if the Company shall offer generally to the holders of Junior
Common Stock the right to subscribe to or purchase any shares of any class of
Junior Common Stock or securities convertible into Junior Common Stock or any
other similar rights or (c) if there shall be any (or any vote regarding any)
proposed capital reorganization of the Company in which the Company is not the
surviving entity, recapitalization of the capital stock of the company,
consolidation or merger of the Company with or into another corporation, sale,
lease or other transfer of all or substantially all of the property and assets
of the Company, or voluntary or involuntary dissolution, liquidation or winding
up of the Company, then in such event, the Company shall cause to be deposited
with an nationally recognized air courier, addressed to the Holder hereof at the
address appearing on the records of the Company at least 60 days prior to the
relevant date described below (or the longest period as is reasonably possible
if 60 days is not reasonably possible, but in no event less than 30 days), a
notice containing a description of the proposed action and stating the date or
expected date on which a record of the Company's stockholders is to be taken for
the purpose of any such dividend, distribution of rights, or such
reclassification, reorganization, consolidation, merger, conveyance, lease or
transfer, dissolution, liquidation or winding up is to take place and the date
or expected date, if any is to be fixed, as of which the holders of Junior
Common Stock of record shall be entitled to exchange their shares of Junior
Common Stock for securities or other property deliverable upon such event.
-11-
<PAGE>
EXECUTION VERSION (WARRANT)
11. RESTRICTIONS ON TRANSFER.
This Warrant, the Warrant Shares and any other securities received pursuant
to this Warrant ("Other Securities") may be subject to restrictions on
transferability provided by United States federal securities laws, if
applicable. This Warrant, the Warrant Shares or Other Securities may also be
subject to restrictions on transferability under applicable state or other
jurisdiction's securities or "blue sky" laws. Until and unless this Warrant, the
Warrant Shares or Other Securities have been registered under the Securities
Act, the Holder shall, if requested by the Company prior to a proposed transfer
by the Holder, provide to the Company an opinion of counsel reasonably
satisfactory to the Company, to the effect that (i) the Warrant, the Warrant
Shares or Other Securities may be transferred without such registration and (ii)
the transfer will not violate any applicable state or other jurisdiction's
securities or "blue sky" laws. An opinion delivered pursuant to this Section by
the law firm of Kirkland & Ellis, in form and substance reasonably satisfactory
to the Company, will be acceptable to the Company. Subject to (i) the transfer
conditions described in this Section 11 and (ii) compliance with the terms of
Section 3 of the Shareholder Agreement dated June 6, 1997, this Warrant and all
rights hereunder are freely transferable, in whole or in part, without
restriction by the Company or charge to the Holder, upon surrender of this
Warrant to the Company.
12. GOVERNING LAW.
This Warrant shall be governed by, and construed in accordance with, the
laws of the State of Delaware without regard to the conflict of laws provisions
thereof.
13. COMPANY BOOKS.
The Company shall not close its books against the transfer of this Warrant
or of any share of Warrant Shares issued or issuable upon the exercise of this
Warrant in any manner which interferes with the timely exercise of this Warrant.
The Company shall from time to time as may be necessary use its best efforts to
assure that the par value per share of the unissued Warrant Shares acquirable
upon exercise of this Warrant is at all times equal to or less than the Exercise
Price then in effect.
14. REGULATORY FILINGS.
Upon the Holder's reasonable request from time to time, the Company shall
assist and cooperate with the Holder in connection with any required
governmental filings such Holder is require to make or any governmental
approvals such Holder must obtain prior to or in connection with any exercise of
this Warrant (including, without limitation, making any filings required to be
made by the Company).
15. CONDITIONAL EXERCISE.
-12-
<PAGE>
EXECUTION VERSION (WARRANT)
Notwithstanding any other provision hereof, if an exercise of any portion
of this Warrant is to be made in connection with a registered public offering or
the reorganization, merger, consolidation or sale of the Company (as described
in Section 7.2), the exercise of any portion of this Warrant may, at the
election of the Holder, be conditioned upon the consummation of the public
offering or the reorganization, merger, consolidation or sale of the Company, in
which case such exercise shall not be deemed to be effective until the
consummation of such transaction.
IN WITNESS WHEREOF, the Company has executed this Agreement as of the 12th
day of January, 1999.
ELDORADO BANCSHARES, INC.
By:
----------------------------------
[CORPORATE
SEAL]
-13-
<PAGE>
EXECUTION VERSION (WARRANT)
Exhibit A
To Warrant
ELECTION TO PURCHASE
Subject to the condition set forth in Section 15 of this Warrant, and
consistent with the limitations set forth in Section 1.2 of this Warrant, the
undersigned hereby irrevocably elects to exercise this Warrant and to purchase
shares of Eldorado Bancshares, Inc. CLASS B Common Stock and shares of
Eldorado Bancshares, Inc. CLASS C Common Stock issuable upon the exercise of
this Warrant, and requests that certificates for such shares shall be issued in
the name of:
- -------------------------------------------------------------------------------
(Name)
- -------------------------------------------------------------------------------
(Address)
- -------------------------------------------------------------------------------
(United States Social Security or other taxpayer
identifying number, if applicable)
and, if different from above, be delivered to:
- -------------------------------------------------------------------------------
(Name)
- -------------------------------------------------------------------------------
(Address)
and, if the number of Warrant Shares so purchased are not all of the Warrant
Shares issuable upon exercise of this Warrant, that a Warrant to purchase the
balance of such Warrant Shares be registered in the name of, and delivered to,
the undersigned at the address stated below.
Dated:__________________, _____
Name of Registered Owner:
------------------------------------------------------
- -------------------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
- -------------------------------------------------------------------------------
Signature:
---------------------------------------------------------------------
-14-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Antelope Valley Bank
Eldorado Bank
CSBI Capital Trust I
Antelope Valley Bank and Eldorado Bank are organized under the laws of
the State of California, and CSBI Capital Trust I is organized under the laws of
the State of Delaware. Eldorado Bank conducts business in certain markets under
the name Commerce Security Bank.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 1, 1999,
relating to the supplemental consolidated financial statements of Eldorado
Bancshares, Inc. (the "Company") and of our report dated March 1, 1999
relating to the consolidated financial statements of the Company, which
appear in such Prospectus. We also consent to the references to us under the
headings "Experts" and "Supplemental Selected Financial Data" in such
Prospectus. However, it should be noted that PricewaterhouseCoopers LLP has
not prepared or certified such "Supplemental Selected Financial Data."
/s/ PricewaterhouseCoopers LLP
- --------------------------------
PricewaterhouseCoopers LLP
Los Angeles, California
March 11, 1999
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 122,540 99,477 44,554
<INT-BEARING-DEPOSITS> 1,863 1,962 3,089
<FED-FUNDS-SOLD> 19,300 44,380 19,220
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 250,463 103,936 39,423
<INVESTMENTS-CARRYING> 0 0 20,025
<INVESTMENTS-MARKET> 0 0 19,910
<LOANS> 902,942 744,046 429,746
<ALLOWANCE> 9,160 10,923 6,526
<TOTAL-ASSETS> 1,397,550 1,092,014 584,270
<DEPOSITS> 1,221,487 933,070 510,661
<SHORT-TERM> 5,900 2,050 4,500
<LIABILITIES-OTHER> 22,635 14,284 10,077
<LONG-TERM> 27,995 28,194 537
0 0 0
11,659 11,659 0
<COMMON> 120 239 153
<OTHER-SE> 108,139 102,518 58,342
<TOTAL-LIABILITIES-AND-EQUITY> 1,397,550 1,092,014 584,270
<INTEREST-LOAN> 77,843 57,638 25,149
<INTEREST-INVEST> 11,208 9,221 5,010
<INTEREST-OTHER> 0 0 0
<INTEREST-TOTAL> 89,051 66,859 30,159
<INTEREST-DEPOSIT> 30,562 21,624 10,311
<INTEREST-EXPENSE> 34,678 24,095 10,385
<INTEREST-INCOME-NET> 54,373 42,764 19,774
<LOAN-LOSSES> 5,552 2,549 1,215
<SECURITIES-GAINS> 0 0 0
<EXPENSE-OTHER> 63,277 50,400 23,929
<INCOME-PRETAX> 11,432 8,944 4,046
<INCOME-PRE-EXTRAORDINARY> 5,414 4,910 4,419
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 5,414 4,910 4,419
<EPS-PRIMARY> .35 .41 .81
<EPS-DILUTED> .33 .37 .81
<YIELD-ACTUAL> 5.41 5.88 6.14
<LOANS-NON> 5,667 11,050 5,567
<LOANS-PAST> 1,019 5,071 1,804
<LOANS-TROUBLED> 4,196 3,255 3,490
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 10,923 6,526 2,049
<CHARGE-OFFS> 9,666 4,168 1,920
<RECOVERIES> 2,351 1,940 800
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