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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
FOR THE FISCAL YEAR ENDED DECEMBER 31, COMMISSION FILE NUMBER 2-76555
1998
</TABLE>
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ELDORADO BANCSHARES, INC.
(Exact name of small business issuer in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0720548
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization No.)
24012 CALLE DE LA PLATA, SUITE 340, LAGUNA 92653
HILLS, CA
(Address of principal executive offices) (Zip Code)
</TABLE>
Issuer's telephone number, including area code: (949) 699-4344
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Securities registered pursuant to Section 12 (b) of the Exchange Act:
None
Securities registered pursuant to Section 12 (g) of the Exchange Act:
Common Stock, par value $.01 per share
------------------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K contained in this form, and no disclosure will be contained,
to the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
There were 12,037,271 shares of Common Stock outstanding at March 30, 1999.
The aggregate market value of Common Stock held by non-affiliates at March 30,
1998 was approximately $5,847,000 upon the last known trade of $10.75 per share
on March 30, 1999.
Documents incorporated by reference: Part III of this Form 10-K
incorporates by reference portions of the Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Annual Meeting of
Shareholders to be held on June 3, 1999.
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business..................................................................................... 3
Item 2. Properties................................................................................... 37
Item 3. Legal Proceedings............................................................................ 38
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 38
Item 4A. Executive Officers........................................................................... 39
PART II
Item 5. Market for Issuer's Common Stock and Related Stockholder Matters............................. 41
Item 6. Selected Financial Data...................................................................... 42
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 44
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 61
Item 8. Financial Statements......................................................................... 65
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 65
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 65
Item 11. Executive Compensation....................................................................... 65
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 65
Item 13. Certain Relationships and Related Transactions............................................... 65
PART IV
Item 14. Exhibits and Reports on 8-K.................................................................. 66
Signatures................................................................................................. 68
</TABLE>
1
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[Page Intentionally Left Blank]
2
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PREAMBLE
THIS ANNUAL REPORT CONTAINS OR INCORPORATES BY REFERENCE CERTAIN
FORWARD-LOOKING STATEMENTS BY THE COMPANY (AS DEFINED HEREIN) REGARDING ITS
FUTURE PLANS, OPERATIONS AND PROSPECTS, WHICH INVOLVE RISKS AND UNCERTAINTIES.
THOSE FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN, AND ACTUAL RESULTS
MAY DIFFER FROM THE COMPANY'S EXPECTATIONS. RISK FACTORS THAT COULD AFFECT
CURRENT AND FUTURE PERFORMANCE INCLUDE BUT ARE NOT LIMITED TO THE FOLLOWING: (I)
ADVERSE CHANGES IN ASSET QUALITY AND THE RESULTING CREDIT RISK-RELATED LOSSES
AND EXPENSE; (II) ADVERSE CHANGES IN THE ECONOMY OF CALIFORNIA, THE COMPANY'S
PRIMARY MARKET, WHICH COULD FURTHER ACCENTUATE CREDIT-RELATED LOSSES AND
EXPENSES; (III) ADVERSE CHANGES IN THE LOCAL REAL ESTATE MARKET THAT CAN ALSO
NEGATIVELY AFFECT CREDIT RISK, AS MOST OF THE COMPANY'S LOANS ARE CONCENTRATED
IN CALIFORNIA AND A SUBSTANTIAL PORTION OF THOSE LOANS HAVE REAL ESTATE AS
PRIMARY AND SECONDARY COLLATERAL; (IV) THE CONSEQUENCES OF CONTINUED BANK
ACQUISITIONS AND MERGERS IN THE COMPANY'S MARKET, RESULTING IN FEWER BUT MUCH
LARGER AND FINANCIALLY STRONGER COMPETITORS WHICH COULD INCREASE TO THE
COMPANY'S DETRIMENT, COMPETITION FOR FINANCIAL SERVICES; (V) FLUCTUATIONS IN
MARKET RATES AND PRICES, WHICH CAN NEGATIVELY AFFECT THE COMPANY'S NET INTEREST
MARGIN, ASSET VALUATIONS AND EXPENSE EXPECTATIONS; AND (VI) CHANGES IN
REGULATORY REQUIREMENTS OF FEDERAL AND STATE AGENCIES APPLICABLE TO BANK HOLDING
COMPANIES AND BANKS, WHICH CHANGES COULD HAVE A MATERIAL ADVERSE EFFECT ON THE
COMPANY'S FUTURE OPERATING RESULTS.
PART I
ITEM 1. BUSINESS
OVERVIEW
On January 22, 1999, the Company (sometimes referred to herein as
"Eldorado") completed the acquisition of Antelope Valley Bank. In connection
with the acquisition, the Company issued to the shareholders of Antelope Valley
Bank approximately 2.8 million shares of common stock. The acquisition was
treated for accounting purposes as a pooling of interests. Accordingly, the
financial information contained in Item 1 treats the acquisition of Antelope
Valley Bank as if it had been completed prior to the periods presented herein.
Through its two operating subsidiaries, Eldorado Bank and Antelope Valley
Bank (collectively referred to herein as the "Banks"), the Company offers a
broad range of commercial banking products and services to small and
medium-sized businesses and retail customers from 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."
3
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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 "--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 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.
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. See "Supervision and Regulation--Capital Adequacy
Requirements."
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.
4
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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, including the asset size of the
acquired bank as of the end of the quarter immediately preceding the
acquisition:
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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
5
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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.
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
Item 7. 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
6
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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
----------------------------------------------------------------------------
COMMERCIAL REAL ESTATE
------------------------------------
NON-SBA SBA COMMERCIAL TOTAL
----------------- ---------------- ----------------- -----------------
INDUSTRY AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ----------------------------------- -------- ------- ------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Services........................... $ 31,453 30.0% $33,913 36.2% $ 40,043 29.3% $105,409 31.4%
Wholesale and retail trade......... 14,363 13.6% 26,596 28.4% 15,147 11.1% 56,106 16.7%
Finance, insurance and real
estate........................... 34,575 32.9% 1,904 2.0% 14,327 10.5% 50,806 15.1%
Manufacturing...................... 7,689 7.3% 22,118 23.6% 16,439 12.0% 46,246 13.8%
Mining and construction............ 5,315 5.0% 5,461 5.9% 3,380 2.5% 14,156 4.2%
Other and unclassified............. 11,839 11.2% 3,664 3.9% 47,447 34.6% 62,950 18.8%
-------- ------- ------- ------- -------- ------- -------- -------
$105,234 100.0% $93,656 100.0% $136,783 100.0% $335,673 100.0%
-------- ------- ------- ------- -------- ------- -------- -------
-------- ------- ------- ------- -------- ------- -------- -------
</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
7
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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 Item 7. 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
8
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Company's Sacramento branch. The Company is actively seeking, however, to
cross-sell those services to customers of its Southern California branches.
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.
9
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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
-----------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1998 1998 1998 1998 1997
------------ ------------- -------- --------- ------------
(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>
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 Item 7. 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 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
10
<PAGE>
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. 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, 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
11
<PAGE>
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.
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>
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.
12
<PAGE>
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 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
------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31,
1998 1998 1998 1998 1997
------------ ------------- -------- --------- ------------
(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.
13
<PAGE>
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 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
14
<PAGE>
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.
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
15
<PAGE>
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 Item 7. 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
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 Banks 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.
16
<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
17
<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
19
<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.
20
<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.
21
<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.
22
<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
------------------------
SUPERVISORY
SUBGROUP
------------------------
A B C
-- -- --
<S> <C> <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
------------------------
SUPERVISORY
SUBGROUP
------------------------
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
23
<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.
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.
24
<PAGE>
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.
25
<PAGE>
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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RISK FACTORS
INVESTING IN THE COMMON STOCK WILL PROVIDE SHAREHOLDERS 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. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING
FACTORS AS WELL AS OTHER INFORMATION CONTAINED IN THIS ANNUAL REPORT 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."
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 Item 7. 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 Item
7. 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
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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.
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
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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
earnings would become necessary to reflect the fact that such goodwill is not
recoverable. Although as of the date of this Annual Report, 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 Item 7. 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
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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 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 Annual Report, 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
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(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 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 Item 7. 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
35
<PAGE>
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 Item 7. 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."
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS
Our directors, executive officers and principal shareholders, together with
their affiliates, beneficially own 50.4% of the shares of the voting common
stock outstanding at December 31, 1998. 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.
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 a
public 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 Antelope acquisition, we had Tier 1 Capital of
$79.2 million.
36
<PAGE>
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 Annual Report,
approximately 2,131,000 shares of common stock, or 17.7% of the shares of common
stock, are not subject to any resale restrictions under the Securities Act, and
approximately 9,913,000 shares of common stock, or 82.4% of the shares of common
stock, are available for resale under Rule 144 or Rule 145. Subject to certain
contractual restrictions described elsewhere in this Annual Report (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
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. 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.
ITEM 2. 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 was $2.6 million for the year ended December
31, 1998. For additional information regarding the
37
<PAGE>
Company's lease obligations, see Note 17 to the 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.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this Annual Report, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By written consent of the holders of a majority of shares of the Company's
voting common stock, the Agreement and Plan of Merger dated September 16, 1998,
and re-executed on September 22, 1998, concerning the acquisition of Antelope
Valley Bank was approved and adopted. Effective October 24, 1998, 6,062,747
votes were cast in favor of the approval and adoption of the Agreement and the
transactions contemplated thereby.
38
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS
The following table sets forth 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
</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.
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
39
<PAGE>
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 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
40
<PAGE>
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.
PART II
ITEM 5. MARKET FOR ISSUER'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET FOR ISSUER'S COMMON STOCK
Trading in the common stock has been extremely limited 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 $10 and $12 per share, respectively. On March 30, 1999, the last
reported sale price of the common stock was $10.75. 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 30, 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.
HOLDERS OF COMMON STOCK
As of March 30, 1999, there were approximately 1,051 holders of record of
Common Stock.
41
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto,
appearing elsewhere in this Annual Report, and the information set forth under
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations. As described elsewhere in this Annual Report, due to 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. The selected historical
financial data as of and for the five years ended December 31, 1998 are derived
from the Company's Consolidated Financial Statements which have been audited by
independent public accountants and does not give affect to the acquisition of
Antelope Valley Bank which occurred on January 22, 1997.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF CONSOLIDATED FINANCIAL OPERATIONS
Net interest income before provision for possible loan and
lease loss............................................... $ 43,374 $ 32,881 $ 11,708 $ 2,817 $ 2,861
Provision for possible loan and lease loss................. 4,272 1,495 515 295 583
--------- --------- --------- --------- ---------
Net interest income after provision for possible loan and
lease
loss..................................................... 39,102 31,386 11,193 2,522 2,278
Noninterest income......................................... 21,555 14,904 4,899 696 666
Noninterest expenses
Amortization of goodwill and intangibles................. 3,550 2,514 268 -- --
Carrying costs and losses on OREO........................ 190 382 288 531 222
Provision for recourse obligations....................... -- 2,021 -- -- --
Other noninterest expense................................ 47,537 34,771 14,714 3,760 3,711
--------- --------- --------- --------- ---------
Total noninterest expense.............................. 51,277 39,688 15,270 4,291 3,933
--------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary item... 9,380 6,602 822 (1,073) (989)
Income tax benefit (provision)............................. (5,428) (3,612) 1,503 443 --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item.................... 3,952 2,990 2,325 (630) (989)
Extraordinary item(1)...................................... -- -- 625 --
--------- --------- --------- --------- ---------
Net income (loss).......................................... 3,952 2,990 2,325 (5) (989)
Preferred dividends........................................ 1,282 731 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) available to common...................... $ 2,670 $ 2,259 $ 2,325 $ (5) $ (989)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
PER SHARE DATA(2):
Weighted average shares outstanding
Basic.................................................... 9,173,699 7,406,062 2,650,386 134,099 26,864
Diluted.................................................. 9,652,155 8,634,651 2,650,386 134,099 26,864
Basic:
Income (loss) before extraordinary item.................... $ 0.29 $ 0.31 $ 0.88 $ (4.70) $ (36.82)
Extraordinary item......................................... -- -- -- 4.66 --
--------- --------- --------- --------- ---------
Net income (loss) per share................................ $ 0.29 $ 0.31 $ 0.88 $ (0.04) $ (36.82)
Net income (loss) per share, excluding goodwill
amortization(3).......................................... $ 0.68 $ 0.64 $ 0.98 $ (0.04) $ (36.82)
Diluted:
Income (loss) before extraordinary item.................... $ 0.28 $ 0.26 $ 0.88 $ (4.70) $ (36.82)
Extraordinary item......................................... -- -- -- 4.66 --
--------- --------- --------- --------- ---------
Net income (loss) per share................................ $ 0.28 $ 0.26 $ 0.88 $ (0.04) $ (36.82)
Net income (loss) per share, excluding goodwill
amortization(3).......................................... $ 0.64 $ 0.55 $ 0.98 $ (0.04) $ (36.82)
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED FINANCIAL POSITION
Total assets............................................... $1,185,850 $ 902,355 $ 437,060 $ 55,905 $ 57,686
Loans and leases, net...................................... 754,285 605,883 320,958 38,338 45,492
Goodwill and other intangibles............................. 63,727 66,769 10,736 -- --
Deposits................................................... 1,033,738 765,203 383,031 51,431 55,876
Long-term debt............................................. 27,657 27,657 537 537 1,894
Common shareholders' equity................................ 86,481 83,077 40,772 3,541 (948)
Shareholders' equity (deficit)............................. 98,140 94,736 40,772 3,541 (948)
Average assets............................................. 1,006,473 706,327 241,866 56,995 61,312
Average earning assets..................................... 830,985 571,091 198,720 50,329 53,873
Average common equity...................................... 85,378 65,539 20,698 (81) (572)
PER SHARE DATA(2):
Common shares outstanding.................................. 9,173,699 9,173,699 4,848,715 447,734 26,864
Diluted common shares outstanding.......................... 9,652,155 9,652,238 4,848,715 447,734 26,864
Book value per share....................................... $ 9.43 $ 9.06 $ 8.41 $ 7.91 $ (35.39)
Diluted book value per share............................... 8.96 8.61 8.41 7.91 (35.39)
Tangible book value per share.............................. 2.48 1.78 6.19 7.91 (35.39)
Diluted tangible book value per share...................... 2.36 1.69 6.19 7.91 (35.39)
SELECTED PERFORMANCE RATIOS
Return on average assets................................... 0.39% 0.42% 0.96% (0.01)% (1.61)%
Return on average assets, excluding goodwill
amortization(3).......................................... 0.75 0.78 1.07 (0.01) (1.61)
Return on average common equity............................ 3.13 3.45 11.23 nm(4) nm(4)
Return on average common equity, excluding goodwill
amortization(3).......................................... 7.29 7.28 12.53 nm(4) nm(4)
Net yield on interest earning assets....................... 5.22 5.76 5.89 5.60 5.31
Net interest income to average assets...................... 4.31 4.66 4.84 4.94 4.67
Efficiency ratio(4)........................................ 73.21 72.77 88.60 107.03 105.22
SELECTED ASSET QUALITY RATIOS(5)
Nonperforming assets to total portfolio loans and leases
and OREO................................................. 2.18% 3.95% 4.73% 7.50% 7.93%
Nonperforming assets to total assets....................... 0.95 2.30 2.89 5.42 6.55
Allowance for loan and lease losses to portfolio loans and
leases................................................... 1.41 1.80 1.96 1.64 1.77
Allowance for loan and lease losses to nonperforming loans
and leases............................................... 75.01 52.18 57.31 39.44 32.95
Net charge-offs to average portfolio loans and leases...... 1.24 0.29 0.26 1.13 1.25
SELECTED CAPITAL RATIOS
Tier 1 Leverage Ratio...................................... 5.96% 6.59% 6.98% 6.25% nm%(5)
Tier 1 Risk-Weighted Ratio................................. 8.22 8.85 9.22 8.67 nm(5)
Total Risk-Weighted Ratio.................................. 9.19 10.18 10.64 11.24 nm(5)
Average common equity to average assets.................... 8.48 9.28 8.56 nm(5) nm(5)
</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 Annual Report, 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 Item
1. Business--Supervision and Regulation.
43
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Prior to September 1995, the predecessor to the Company, SDN Bancorp, Inc.,
owned a single bank, San Dieguito National Bank ("San Dieguito"), with
approximately $56.0 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 $779.0 million. The Company completed its largest
acquisition--Eldorado Bancorp and its subsidiary bank, Eldorado Bank--in June
1997, which increased the Company's by approximately $404.0 million. The Liberty
acquisition was completed on March 31, 1996, and the CSB acquisition was
completed as of September 1, 1996. See Item 1. 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
Consolidated Financial Statements and the Consolidated Financial Statements and
the notes 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
level of nonperforming assets and related overhead costs was partly attributable
to adverse economic conditions, including declining real estate values, that
California experienced during the early to mid-1990s. See Item
1. 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. On January 22, 1999, the Company completed the
acquisition of Antelope Valley Bank. In connection with the acquisition, the
Company issued to the shareholders of Antelope Valley Bank approximately 2.8
million shares of common stock. The acquisition was treated for accounting
purposes as a pooling of interests. As the acquisition was completed after
December 31, 1998, the financial information contained within this report does
not reflect the acquisition of Antelope Valley Bank (with the exception of Item
1. Business).
Contained within this report are various measures of financial performance
that have been calculated excluding the amortization of goodwill and
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 the 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. See Item 1. Business--Risk Factors.
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Company generated net income of $4.0 million for the year ended December
31, 1998. This represents an increase of $962,000, or 32.17%, compared to net
income of $3.0 million for the year ended
44
<PAGE>
December 31, 1997. The increase in net income was the result of an increase in
net interest income and non-interest income of $10.5 million and $6.7 million,
respectively. The increase in revenue was partially offset by increases in the
provision for credit losses, non-interest expenses and income taxes of $2.8
million, $11.6 million and $1.8 million, respectively. Basic net income per
share was $0.29 for the year ended December 31, 1998, compared to $0.31 per
share for the year ended December 31, 1997. Diluted net income per share was
$0.28 for the year ended December 31, 1998, compared to $0.26 per share for the
year ended December 31, 1997. Excluding the amortization of goodwill and
intangibles, basic and diluted earnings per share for the year ended December
31, 1998 were $0.68 and $0.64 respectively, as compared to $0.64 and $0.55 for
the year ended December 31, 1997. The Company's return on average assets was
0.39%, and its return on average equity was 3.13% for the year ended December
31, 1998, compared to a return on average assets of 0.42% and a return on
average equity of 3.45% for the year ended December 31, 1997. Excluding the
amortization of goodwill and other intangibles, the return on average assets was
0.75% and the return on average common equity was 7.29% for the year ended
December 31, 1998, as compared to 0.78% and 7.28%, respectively, for the year
ended December 31, 1997.
The Company reported net income of $3.0 million for the year ended December
31, 1997. This represented an increase of $665,000, or 28.60%, compared to net
income of $2.3 million for the year ended December 31, 1996. The increase in net
income was due to an increase in net interest income and noninterest income of
$21.2 million and $10.0 million, respectively. The increase in revenue was
partially offset by increased provision for loan and lease losses, noninterest
expense and income taxes of $980,000, $24.4 million and $5.1 million,
respectively. Basic net income per share for 1997 was $0.31 per share compared
to $0.88 for 1996. Diluted net income per share for 1997 was $0.26 compared to
$0.88 in 1996. Excluding the amortization of goodwill and other intangibles,
basic and diluted earnings per share for the year ended December 31, 1997 were
$0.64 and $0.55, respectively, as compared to $0.98 and $0.98 for the year ended
December 31, 1996. The Company's return on average assets was 0.42% and its
return on average common equity was 3.45% for the year ended December 31, 1997.
For the year ended December 31, 1996, the Company's return on average assets was
0.96% and its return on average common equity was 11.23%. Excluding the
amortization of goodwill and other intangibles, return on average assets was
.78% and return on average common equity was 7.28% for the year ended December
31, 1997, as compared to 1.07% and 12.53%, 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 totaled $43.4 million for 1998. This represented an increase of
$10.5 million, 31.91%, over net interest income of $32.9 million for 1997. The
increase was due to an increase of $21.0 million in interest income partially
offset by an increase of $10.5 million in interest expense. The increases in
interest income and interest expense were primarily due to the increases in
earning assets and interest bearing liabilities that resulted from the
acquisition in June 1997 of Eldorado Bancorp and its sole banking subsidiary,
Eldorado Bank (the "Eldorado Acquisition").
The net interest margin is net interest income expressed as a percent of
average earning assets. The increase in net interest income that resulted from a
greater volume of earning assets for 1998 was partially offset by a decrease in
the net interest margin. The net interest margin decreased to 5.22% for 1998,
compared to 5.76% for 1997. The decrease in the net interest margin for 1998 was
the result of a lower yield on average earning assets and a higher cost of
average interest bearing liabilities. The yield on average earning assets
declined to 8.96% for 1998, compared to 9.37% for 1997. The decrease was due to
reductions in the prime lending rate in the fourth quarter of 1998 and increased
price competition for loans throughout the year. The cost of average interest
bearing liabilities increased to 4.74% for 1998,
45
<PAGE>
compared to 4.64% for 1997. The increase in the cost of average interest bearing
liabilities primarily reflects greater price competition for deposits.
The Company's net interest income totaled $32.9 million for 1997. This
represented an increase of $21.2 million, or 180.84%, over net interest income
of $11.7 million for 1996. The increase for 1997 was the result of a $34.1
million increase in total interest income, partially offset by a $13.0 million
increase in the cost of average interest bearing liabilities. Total interest
income and interest expense increased primarily due to an increase in interest
earning assets and interest bearing liabilities resulting from the Eldorado
Acquisition. The net interest margin decreased to 5.76% for 1997, compared to
5.89% for 1996. The decrease in the net interest margin was primarily the result
of a decrease in the yield on earning assets to 9.37% for 1997, from a yield of
9.74% for 1996.
Loan fee income totaled $4.3 million for 1998. The represented an increase
of $1.4 million, or 48.28%, over loan fee income of $2.9 million for 1997. Loan
fee income increased $1.7, or 141.67%, for 1997, from a total of $1.2 million
for 1996. The increases for both 1998 and 1997 were primarily attributable to
the fees earned on the sale of SBA loans into the secondary market. See Item
1. Business--Products and Services--Community Banking Division.
46
<PAGE>
The following table presents, for the periods indicated, the distribution of
average assets, liabilities and shareholders' equity, as well as the total
dollar amounts of interest income from average interest-bearing assets and the
resultant yields, and the dollar amounts of interest expense and resultant cost
expressed in both dollars and rates. Nonaccrual loans are included in the
calculation of average loans while nonaccrued interest thereon is excluded from
the computation of rates earned.
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------- ----------------------------------- ----------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST
AVERAGE INCOME OR YIELD OR AVERAGE INCOME OR YIELD OR AVERAGE INCOME OR
BALANCE EXPENSE COST BALANCE EXPENSE COST BALANCE EXPENSE
--------- ----------- ----------- --------- ----------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans and leases(1)...... $ 682,894 $ 65,984 9.66% $ 464,788 $ 47,230 10.16% $ 146,743 $ 16,383
Investment
securities(2).......... 96,543 5,881 6.09 82,450 4,979 6.04 32,886 1,968
Federal funds sold....... 51,548 2,622 5.09 23,853 1,286 5.39 17,837 934
Other earning assets..... -- -- -- -- -- -- 1,254 67
--------- ----------- --------- ----------- --------- -----------
Total
interest-earning
assets............. 830,985 74,487 8.96 571,091 53,495 9.37 198,720 19,352
Non-earning assets:
Cash and demand deposits
with banks............. 73,568 64,934 14,611
Other assets............. 101,920 70,302 28,535
--------- --------- ---------
Total assets......... 1,006,473 706,327 241,866
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Deposits
Interest-bearing
demand............... 100,309 1,660 1.65 68,824 1,325 1.93 24,464 686
Money market........... 94,029 3,504 3.73 68,943 2,336 3.39 18,135 493
Savings................ 181,110 10,794 5.96 106,956 5,117 4.78 28,917 1,150
Time................... 239,445 11,039 4.61 170,809 9,365 5.48 91,987 5,241
--------- ----------- --------- ----------- --------- -----------
Total
interest-bearing
deposits........... 614,893 26,997 4.39 415,532 18,143 4.37 163,503 7,570
Short-term borrowing..... 13,808 806 5.84 12,478 563 4.51 418 13
Long-term debt........... 27,657 3,310 11.97 15,982 1,908 11.94 537 61
--------- ----------- --------- ----------- --------- -----------
Total
interest-bearing
liabilities........ 656,358 31,113 4.74 443,992 20,614 4.64 164,458 7,644
Noninterest-bearing
liabilities:
Demand deposits........ 236,784 181,481 52,273
Other liabilities...... 16,294 8,735 4,437
--------- --------- ---------
Total liabilities.... 909,436 634,208 221,168
Shareholders' equity..... 97,037 72,119 20,698
--------- --------- ---------
Total liabilities and
shareholders' equity... $1,006,473 $ 706,327 $ 241,866
--------- ----------- --------- ----------- --------- -----------
--------- --------- ---------
Net interest income...... $ 43,374 $ 32,881 $ 11,708
----------- ----------- -----------
----------- ----------- -----------
Net yield on interest-
earning assets......... 5.22% 5.76%
<CAPTION>
AVERAGE
YIELD OR
COST
-----------
<S> <C>
ASSETS
Interest-earning assets:
Loans and leases(1)...... 11.16%
Investment
securities(2).......... 5.98
Federal funds sold....... 5.24
Other earning assets..... 5.34
Total
interest-earning
assets............. 9.74
Non-earning assets:
Cash and demand deposits
with banks.............
Other assets.............
Total assets.........
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing
liabilities:
Deposits
Interest-bearing
demand............... 2.80
Money market........... 2.72
Savings................ 3.98
Time................... 5.70
Total
interest-bearing
deposits........... 4.63
Short-term borrowing..... 3.11
Long-term debt........... 11.36
Total
interest-bearing
liabilities........ 4.65
Noninterest-bearing
liabilities:
Demand deposits........
Other liabilities......
Total liabilities....
Shareholders' equity.....
Total liabilities and
shareholders' equity...
Net interest income......
Net yield on interest-
earning assets......... 5.89%
</TABLE>
- ------------------------------
(1) Loan fees of $4.3 million, $2.9 million, and $1.2 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) available for sale securities.
47
<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,
------------------------------------------------------------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
-------------------------------------------- --------------------------------------------
NET NET
CHANGE RATE VOLUME MIX CHANGE RATE VOLUME MIX
----------- --------- --------- --------- ----------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans and leases..................... $ 18,754 $ (2,320) $ 22,163 $ (1,089) $ 30,847 $ (1,472) $ 35,507 $ (3,188)
Investment securities................ 902 44 851 7 3,011 18 2,966 27
Federal funds sold................... 1,336 (73) 1,493 (84) 352 28 315 9
Other earning assets................. -- -- -- -- (67) -- (67) --
----------- --------- --------- --------- ----------- --------- --------- ---------
Total interest income............ 20,992 (2,349) 24,507 (1,166) 34,143 (1,426) 38,721 (3,152)
Interest Expense:
Interest-bearing demand.............. 335 (186) 606 (85) 639 (215) 1,244 (390)
Money market......................... 1,168 233 850 85 1,843 121 1,381 341
Savings.............................. 5,677 1,257 3,548 872 3,967 233 3,104 630
Time................................. 1,674 (1,490) 3,763 (599) 4,124 (198) 4,491 (169)
Short-term borrowing................. 243 165 60 18 550 (12) 703 (141)
Long-term debt....................... 1,402 5 1,394 3 1,847 3 1,754 90
----------- --------- --------- --------- ----------- --------- --------- ---------
Total interest expense........... 10,499 (16) 10,221 294 12,970 (68) 12,677 361
----------- --------- --------- --------- ----------- --------- --------- ---------
Net interest income.................... $ 10,493 $ (2,333) $ 14,286 $ (1,460) $ 21,173 $ (1,358) $ 26,044 $ (3,513)
----------- --------- --------- --------- ----------- --------- --------- ---------
----------- --------- --------- --------- ----------- --------- --------- ---------
</TABLE>
NONINTEREST INCOME
Noninterest income totaled $21.6 million for 1998. This represented an
increase of $6.7 million, or 44.63%, over nononterest income of $14.9 million
for 1997. The increase in noninterest income was primarily the result of
increased income resulting from the origination and sale of mortgage loans. The
gain on sale of mortgage loans totaled $12.0 million for 1998, representing an
increase of $5.1 million, or 74.15%, over a gain on sale of $6.9 million for
1997. The increase in noninterest income was also impacted by the increase in
service charges and fees on deposit accounts resulting from the Eldorado
Acquisition. See Item 1. Business.
Noninterest income totaled $14.9 million for 1997. This represented an
increase of $10.0 million, or 204.23%, over noninterest income of $4.9 million
for 1996. The increase in noninterest income for 1997 compared to 1996 was the
result of increases in the gain on sale of mortgage loans and increased service
charges and other deposit fees resulting from the Eldorado Acquisition.
The following table presents for the periods the major categories of
noninterest income:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service charges on deposit accounts............... $ 3,350 $ 2,675 $ 760
Gains on sale of mortgage loans................... 11,994 6,887 1,727
SBA loan servicing................................ 2,539 2,353 1,519
Other income...................................... 3,672 2,989 893
--------- --------- ---------
Total noninterest income.................... $ 21,555 $ 14,904 $ 4,899
--------- --------- ---------
--------- --------- ---------
</TABLE>
48
<PAGE>
NONINTEREST EXPENSES
Noninterest expense totaled $51.3 million for 1998. This represented an
increase of $11.6 million, or 29.20%, over total noninterest expense of $39.7
million for 1997. The increase in noninterest expense for 1998 was primarily the
result of increases in salaries and related expenses. Salaries and related
expenses totaled $21.9 million for 1998. This represented an increase of $5.7
million, or 35.32%, over total salaries and related expenses of $16.2 million
for 1997. The increase in salaries and related expenses was largely attributable
to variable expenses relating to increased loan origination volumes for the
Mortgage Banking Division. Salaries and related expenses was also affected by
the acquired operations of Eldorado Bancorp for the full year in 1998 compared
to only the partial year in 1997. Occupancy and equipment expense totaled $7.3
million for 1998. This represents an increase of $1.4 million, or 23.09%, over
occupancy and equipment expense of $5.9 million for 1997. The increase in
noninterest expense was also affected by the increase in goodwill and
intangibles that resulted from the Eldorado Acquisition. The amortization of
goodwill and intangibles totaled $3.5 million for 1998. This represented an
increase of $1.0 million, or 41.21%, over the amortization expense of $2.5
million for 1997.
Noninterest expense totaled $39.7 million for 1997. This represented an
increase of $24.4 million, or 159.91%, over noninterest income of $15.3 million
for 1996. The increase in noninterest expense for 1997 compared to 1996 was the
result of increased salary expense associated with the origination and sale of
mortgage loans, and increases in most expense categories resulting from the
Eldorado Acquisition. Salaries and related expenses totaled $16.2 million for
1997. This represented an increase of $9.4 million, or 137.27%, over total
salaries and related expenses of $6.8 million for 1996. Occupancy and equipment
expenses for 1997 increased $3.2 million, or 118.60%, compared to a total
expense of $2.7 million for 1996. The amortization of goodwill and intangibles
for 1997 increased $2.2 million, or 838.06%, from a total of $268,000 for 1996.
Operating expenses for 1997 were also affected by a charge to earnings of $2.0
million to provide for recourse obligations relating to mortgage loans
purchased.
The efficiency ratio measures the percentage of net revenue that is paid as
noninterest expenses. The Company's efficiency ratio increased to 73.21% for
1998, from 72.77% for 1997 and 88.60% for 1996. The increase in the efficiency
ratio indicates decreased operating efficiency as a larger portion of net
revenue is used for the cost of operations. For purposes of this Annual Report,
the 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.
Noninterest expenses as a percent of average assets provided a measure of
the Company's ability to control noninterest expenses in relation to the asset
size of the Company. Noninterest expense as a percent of average assets
decreased to 5.09% for 1998, compared to ratios of 5.62% for 1997, and 6.31% for
1996. The decrease in the level of noninterest expenses as a percent of average
assets indicates that the Company is managing a greater level of assets with a
proportionately lower level of operating expenses.
49
<PAGE>
The following table presents for the periods indicated the major categories
of noninterest expense:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits................... $ 21,884 $ 16,172 $ 6,816
Non-staff expenses
Occupancy and equipment........................ 7,335 5,959 2,726
Professional, regulatory and other services.... 1,274 1,230 733
Legal.......................................... 1,346 1,437 453
Insurance...................................... 675 637 262
Losses and carrying costs of OREO.............. 190 382 288
Provision for recourse obligation.............. -- 2,021 --
Amortization of goodwill and other
intangibles.................................. 3,550 2,514 268
Other.......................................... 15,023 9,336 3,724
--------- --------- ---------
Total non-staff expense...................... 29,393 23,516 8,454
--------- --------- ---------
Total noninterest expense.................. $ 51,277 $ 39,688 $ 15,270
--------- --------- ---------
--------- --------- ---------
</TABLE>
PROVISION FOR INCOME TAXES
The Company's income tax provision totaled $5.4 million for 1998. This
represents an increase of $1.8 million, or 50.32%, over an income tax provision
of $3.6 million for 1997. The increase in tax provision resulted from higher
pre-tax earnings for 1998 compared to 1997. The Company's effective tax rate for
1998 of 57.87% 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 $3.6
million in 1997 compared to a net benefit of $1.5 million 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, with the additional $1.5 million representing the
aforementioned net benefit.
FINANCIAL CONDITION
The Company reported total assets of $1.2 billion at December 31, 1998. This
represented an increase of $283.5 million, or 31.42%, from total assets of
$902.4 million at December 31, 1997. The increase in total assets for 1998 was
primarily was allocated to cash and due from banks, investments, mortgage loans
held for sale and other assets. The increase in cash and due from banks and
investments reflects an increase in liquid assets relative to the increase in
deposits. The increase in mortgage loans available for sale reflects the volume
of mortgage loans originated in December of 1998 compared to origination volumes
at the end of 1997. The increase in assets was primarily funded by increased
savings and time deposits and accrued interest and other liabilities.
LOANS AND LEASES
Net loans and leases of the Company at December 31, 1998 were $754.3
million. This represented an increase of $148.4 million, or 24.49%, over net
loans and leases of $605.9 million at December 31, 1997. The increase was the
result of an increase in mortgage loans held for sale that totaled $248.8
million at
50
<PAGE>
December 31, 1998. This represented an increase of $152.6 million, or 158.58%,
over mortgage loans held for sale of $96.2 million at December 31, 1997. The
Company originates mortgages for sale as whole loans. The amount of time between
origination, sale and settlement remains relatively constant. However, the
volume of mortgage loans originated in December of 1998 compared to December of
1997 has increased significantly resulting in the increase in balance of
mortgage loans held for sale at December 31, 1998.
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>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial............................................. $ 99,589 $ 115,919 $ 47,772 $ 16,188 $ 18,936
Real estate-commercial................................. 198,890 235,244 86,397 -- --
Real estate-construction............................... 44,858 35,617 18,812 599 1,170
Real-estate-mortgage................................... 16,173 32,132 41,650 15,710 18,060
Installment loans to individuals....................... 68,344 62,323 22,512 6,525 8,201
Lease financing........................................ 88,875 40,819 46,498 -- --
---------- ---------- ---------- --------- ---------
Subtotal (portfolio loans and leases).............. 516,729 522,054 263,641 39,022 46,367
---------- ---------- ---------- --------- ---------
Loans and leases held for sale......................... 248,833 96,230 64,917 -- --
---------- ---------- ---------- --------- ---------
Total.............................................. 765,562 618,284 328,558 39,022 46,367
Less: Allowance for loan and lease losses.............. (7,304) (9,395) (5,156) (639) (821)
Deferred loan fees................................. (3,973) (3,006) (2,444) (45) (54)
---------- ---------- ---------- --------- ---------
Net loans and leases................................... $ 754,285 $ 605,883 $ 320,958 $ 38,338 $ 45,492
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</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 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
------------------------
COMMERCIAL REAL ESTATE
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Aggregate maturities of loans and leases which are due:
Within one year......................................................................... $ 59,248 $ 56,889
After one year but within five years:
Interest rates are floating or adjustable............................................. 25,747 45,106
Interest rates are fixed or predetermined............................................. 5,585 30,966
After five years:
Interest rates are floating or adjustable............................................. 4,725 92,251
Interest rates are fixed or predetermined............................................. 4,284 283,542
----------- -----------
Total............................................................................... $ 99,589 $ 508,754
----------- -----------
----------- -----------
</TABLE>
NONPERFORMING ASSETS
The following table shows the total aggregate principal amount of nonaccrual
and other nonperforming loans (accruing loans on which interest or principal is
past due 90 days or more) as of the end of each of the past two years. The
Company's impaired loans pursuant to SFAS 118 are loans that are nonaccrual
51
<PAGE>
and those that have been restructured. For the twelve months ended December 31,
1998, additional gross interest income of $529,000 would have been recorded on
impaired loans, and for calendar year 1997 additional gross interest income of
$1.0 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 as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and leases, not restructured................ $ 5,611 $ 10,589 $ 5,483 $ 1,492 $ 616
Accruing loans and leases past due 90 day or more............ 790 4,638 1,314 46 826
Restructured loans and leases................................ 3,336 2,779 2,200 82 1,050
--------- --------- --------- --------- ---------
Total nonperforming loans and leases ("NPLs")............ 9,737 18,006 8,997 1,620 2,492
Other real estate owned ("OREO")............................. 1,545 2,740 3,635 1,411 1,288
--------- --------- --------- --------- ---------
Total nonperforming assets ("NPAs")...................... $ 11,282 $ 20,746 $ 12,632 $ 3,031 $ 3,780
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Selected ratios:
NPLs to total portfolio loans and leases(1)................ 1.9% 3.5% 3.4% 4.2% 5.4%
NPAs to total portfolio loans and leases and OREO(1)....... 2.2 4.0 4.7 7.5 7.9
NPAs to total assets....................................... 1.0 2.3 2.9 5.4 6.6
</TABLE>
- ------------------------
(1) Excludes residential mortgages held for sale.
Loans aggregating $8.9 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 $1.2 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 $13.4
million were designated as impaired and management determined that a minimum of
$1.6 should be included in the allowance because of the risk to the loan and
lease portfolio represented by such impaired loans.
At December 31, 1998, the Company had OREO properties with an aggregate
carrying value of $1.5 million. During 1998, properties with a total carrying
value of $763,000 were added to OREO, properties with a total carrying value of
$2.0 million were sold and OREO properties were written down by approximately
$318,000. 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 $4.1 million were added to OREO, of which $481,000 was
acquired in the Eldorado Acquisition and $3.6 million was acquired as a result
of foreclosures. OREO properties with a total carrying value of $3.9 million
were sold and properties were written down by approximately $1.1 million during
1997.
ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses was $7.3 million at December 31,
1998. This represents a decrease of $2.1 million, or 22.26%, from the allowance
for loan and lease losses of $9.4 million at December 31, 1997. As a percent of
portfolio loans, the allowance for loan and lease losses decreased to 1.41% at
December 31, 1998, compared to a ratio of 1.80% at December 31, 1997. The
decrease in the allowance for credit losses at December 31, 1998 reflects a
reduction in nonperforming loans at December 31, 1998 compared to December 31,
1997.
52
<PAGE>
Nonperforming loans totaled $9.7 million at December 31, 1998. This
represents a decrease of $8.3 million, or 45.92%, from nonperforming loans of
$18.0 million at December 31, 1997. The decrease in nonperforming loans and
leases for 1998 was primarily the result of the volume of net loans and leases
charged to the allowance for loan and lease losses during for 1998. Charged off
loans and leases, net of recoveries totaled $6.4 million for 1998. This
represented an increase of $5.0 million, or 377.70%, over net loans and leases
charged to the reserves of $1.3 million for 1997. The provision for loan and
lease losses totaled $4.3 million for 1998. This represented an increase of $2.8
million, or 185.75%, over the provision of loan and lease losses of $1.5 million
for 1997.
The allowance for loan and lease losses totaled $9.4 million at December 31,
1997. This represented an increase of $4.2 million, or 82.21%, over the
allowance for loan and lease losses of $5.2 million at December 31, 1996. As a
percent of portfolio loans, the allowance for loan and lease losses decreased to
1.80% at December 31, 1997, compared to 1.96% of portfolio loans at December 31,
1996. The increase in the allowance for loan and lease losses at December 31,
1997 compared to December 31, 1996 was primarily the result of the $4.1 million
allowance acquired from Eldorado Bank. Net loans and leases charged to the
allowance totaled of $1.3 million for 1997, represented an increase of $952,000,
or 250.53%, over net loans charged to the allowance of $380,000 for 1996. The
provision to loan losses for totaled $1.5 million for 1997, representing an
increase of $980,000, or 190.29%, over the provision for loan and lease losses
of $515,000 for 1996.
53
<PAGE>
The table below summarizes average loans outstanding, gross portfolio loans,
nonperforming loans and changes in the allowance for possible loan and lease
losses arising from loan and lease losses and additions to the allowance from
provisions charged to operating expense:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average loans and leases outstanding(1)................ $ 682,894 $ 464,788 $ 146,743 $ 42,272 $ 46,979
Gross portfolio loans and leases(1).................... 516,729 522,054 263,641 39,022 46,367
Nonperforming loans and leases......................... 9,737 18,006 8,997 1,620 2,492
Allowance for loan and lease losses:
Balance at beginning of period..................... $ 9,395 $ 5,156 $ 639 $ 821 $ 823
Balance acquired during period..................... -- 4,076 4,382 -- --
Loans charged off during period
Commercial....................................... 3,815 467 430 258 532
Leases........................................... 2,282 1,092 -- -- --
Real estate...................................... 1,306 610 144 115 25
Installment...................................... 494 334 76 329 114
---------- ---------- ---------- --------- ---------
Total.......................................... 7,897 2,503 650 702 671
Recoveries during period
Commercial....................................... 1,200 397 103 121 33
Leases........................................... 41 33 -- -- --
Real estate...................................... 194 517 61 2 --
Installment...................................... 99 224 106 102 53
---------- ---------- ---------- --------- ---------
Total.......................................... 1,534 1,171 270 225 86
---------- ---------- ---------- --------- ---------
Net loans charged off during period.............. 6,363 1,332 380 477 585
Provision for loan and lease losses.............. 4,272 1,495 515 295 583
---------- ---------- ---------- --------- ---------
Balance at end of period....................... $ 7,304 $ 9,395 $ 5,156 $ 639 $ 821
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Selected ratios:
Net charge-offs to average loans and leases
(annualized)....................................... 0.93% 0.29% 0.26% 1.13% 1.25%
Provision for loan and lease losses to average
loans.............................................. 0.63 0.32 0.35 0.70 1.24
Allowance at end of period to gross portfolio loans
and leases outstanding at end of period............ 1.41 1.80 1.96 1.64 1.77
Allowance as percentage of nonperforming loans and
leases............................................. 75.01 52.18 57.31 39.44 32.95
</TABLE>
- ------------------------
(1) Excludes residential mortgages held for sale.
The following table indicates management's allocation of the allowance for
each of the following years:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allocated amount:
Commercial, financial and
agricultural......................... $ 4,323 59.2% $ 799 8.5% $ 980 19.0%
Real estate and construction........... 1,992 27.3 1,864 19.8 1,680 32.6
Consumer............................... 980 13.4 602 6.4 461 8.9
Unallocated............................ 9 0.1 6,130 65.2 2,035 39.5
--------- --------- --------- --------- --------- ---------
Total................................ $ 7,304 100.0% $ 9,395 100.0% $ 5,156 100.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
54
<PAGE>
In allocating the Company's allowance for possible 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 possible loan and lease
losses are based upon the average aggregate historical net loan losses
experienced in each of the acquired subsidiary banks. While the Company has made
a reasonable effort to allocate the allowance to specific categories of loans,
management believes that any allocation of the allowance for possible loan and
lease losses into loan categories lends an appearance of exactness which does
not exist, in that the allowance for possible loan and lease losses is utilized
as a single unallocated allowance available for losses on all types of loans and
leases, and actual losses in loan categories may vary from the amounts allocated
to such categories.
INVESTMENT SECURITIES
Total investments of the Company at December 31, 1998 were $213.4 million.
This represents an increase of $146.1 million, or 217.11%, over total
investments of $67.3 million at December 31, 1997. The increase in investment
securities primarily reflects the increase in the Company's deposits between the
two year ends. The investment portfolio primarily consists of U.S. Treasury and
U.S. government agencies, state and municipal securities and mortgage-backed
securities. 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
------------------------------------------
GROSS UNREALIZED ESTIMATED
AMORTIZED -------------------- MARKET
COST GAIN LOSS VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury............................................ $ 42,753 $ 673 $ -- $ 43,426
U.S. Government Agencies................................. 98,282 32 (356) 97,958
State and municipal securities........................... 4,495 -- (48) 4,447
Mortgage-backed securities............................... 35,621 159 -- 35,780
Corporate bonds and equities............................. 31,752 145 (109) 31,788
--------- --------- --------- ---------
Total.................................................. $ 212,903 $ 1,009 $ (513) $ 213,399
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
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
BUT WITHIN FIVE BUT WITHIN TEN
WITHIN ONE YEAR YEARS YEARS AFTER TEN YEARS
---------------------- ---------------------- ---------------------- ----------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
--------- ----- --------- ----- --------- ----- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasuries.............. $ -- --% $ 43,426 5.50% $ -- --% $ -- --%
U.S. Government agencies..... 20,125 5.02 63,124 5.35 14,709 5.86 -- --
State and municipal bonds.... -- -- -- -- -- -- 4,447 4.15
Mortgage-backed securities... -- -- -- -- 3,508 6.30 32,272 6.29
Corporate debt and other..... -- -- -- -- 26,538 5.93 5,250 5.52
--------- --------- --------- ---------
Total investment
portfolio................ $ 20,125 5.02% $ 106,550 5.41% $ 44,755 5.94% $ 41,969 5.97%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Additional information concerning investment securities is provided in the
notes to the accompanying financial statements.
55
<PAGE>
DEPOSITS
Total deposits were $1.0 billion at December 31, 1998. This represents an
increase of $268.5 million, or 35.09%, over total deposit of $765.2 million at
December 31, 1997. The increase in deposits was primarily attributable to
increased savings and time deposits. Savings deposits totaled $294.5 million at
December 31, 1998. This represents an increase of $196.1 million, or 199.14%,
over savings deposits of $98.5 million at December 31, 1997. The increase in
savings deposits for 1998 primarily represents increased title and escrow
deposits. Total time deposits were $267.8 million at December 31, 1998. This
represents an increase of $86.0 million, or 47.29%, over time deposits of $181.8
million at December 31, 1997. See Item 1. Business--Products and Services.
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
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand............. $ 236,784 --% $ 181,481 --% $ 52,273 --%
Interest-bearing demand................ 100,309 1.65 68,824 1.93 24,464 2.80
Money market........................... 94,029 3.73 68,943 3.39 18,135 2.72
Savings................................ 181,110 5.96 106,956 4.78 28,917 3.98
Time................................... 239,445 4.61 170,809 5.48 91,987 5.70
--------- --------- ---------
Total................................ $ 851,677 3.17% $ 597,013 3.04% $ 215,776 3.51%
--------- --------- ---------
--------- --------- ---------
</TABLE>
A significant amount of the Company's interest-bearing deposits are
generated from title and escrow companies that customarily do not deposit funds
with the Bank until mortgage funding occurs, which is typically a month-end
event. See Item 1. Business--Risk Factors--Reliance on Certain Funding Sources
and "Products and Services--Community Banking Division."
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................................................ $ 38,492
Due in over three months through six months................................ 41,807
Due in over six months through twelve months............................... 22,665
Due in over twelve months.................................................. 2,811
--------
Total.................................................................... $ 105,775
--------
--------
</TABLE>
BORROWINGS
Other borrowed funds totaled $33.9 million at December 31, 1998. This
represents an increase of $3.7 million, or 12.07%, from borrowed funds of $30.2
million at December 31, 1997. The increase in borrowings was primarily due an
increase in federal funds purchased.
56
<PAGE>
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 that ranges from zero for cash assets and certain government
obligations to 100% for some types of loans and adding the products together.
See Item 1. Business--Supervision and Regulation--Capital Adequacy
Requirements.
The Company and Eldorado Bank were adequately capitalized at December 31,
1998 for federal regulatory purposes. As of December 31, 1998, the Company and
its subsidiary bank had a leverage ratio, Tier 1 risk-weighted capital ratio,
and total risk-weighted capital ratio as follows:
<TABLE>
<CAPTION>
COMPANY ELDORADO
----------- -----------
<S> <C> <C>
Leverage ratio.......................................................... 5.96% 6.01%
Tier 1 risk weighted ratio.............................................. 8.22 8.29
Total risk weighted ratio............................................... 9.19 9.26
</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 approximately 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 80.18% for 1998, 77.85% for 1997 and
68.01% for 1996. The average liquidity ratio was 26.03% for 1998, 28.68% for
1997 and 30.28% for 1996. At December 31, 1998, the Company's loan-to-deposit
ratio was 73.67% and the liquidity ratio was 31.21%. While fluctuations in the
balances of a few large depositors cause temporary increases and decreases in
liquidity from time to time, the Company has not experienced difficulty in
dealing with such fluctuations from existing liquidity sources.
Should the level of liquid assets (primary liquidity) not meet the liquidity
needs of the Company, other available sources of liquid assets (secondary
liquidity), including the purchase of Federal funds, sale of securities under
agreements to repurchase, sale of loans, window borrowing from the Federal
Reserve Bank and, to a lesser extent, borrowings from the FHLB, could be
employed. The Company has relied primarily upon the purchase of Federal funds
and the sale of securities under agreements to repurchase for secondary sources
of liquidity. At December 31, 1998 the Company had approximately $17.0 million
of unused borrowing capacity under FHLB advances. In order to borrow from the
Federal Reserve, the Company would be required to physically deliver to the
Federal Reserve collateral consisting of marketable Government securities. At
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 $107.0 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
57
<PAGE>
an anomaly in the year 2000. This anomaly could result in miscalculations when
processing critical date-sensitive information relating to periods after
December 31, 1999.
The Year 2000 issue may adversely affect the Company's information
technology systems, such as its item and data processing applications. The Year
2000 issue also may affect so-called embedded technology, such as
microprocessors that control some of the Company's security systems and
telecommunication equipment.
The Company has determined that a few of its computer software applications
will need to be modified or replaced in order to maintain their functionality as
the year 2000 approaches. In response, a plan has been developed that provides
for the assessment of its material internal systems, programs and data
processing applications as well as those provided to the Bank by third-party
vendors. The Company expects that system conversions and testing will be
completed prior to December 31, 1999. Based upon the Company's evaluation of its
Year 2000 preparedness, management does not expect that the Year 2000 issue as
it relates to information systems and embedded technology that are within the
Company's direct control will have a material adverse effect on the Company's
business, financial condition or results of operations. However, Year 2000
problems may turn out to exist in portions of computer programs not now
suspected, and there can be no assurance that the Company will not be adversely
affected by this problem.
Ultimately, the potential impact of the Year 2000 issue will depend not only
on the corrective measures the Company undertakes, but also on the way in which
the Year 2000 issue is addressed by governmental agencies, businesses and other
entities who provide data to, or receive data from the Bank or whose financial
condition or operational capability is important to the Company such as
significant suppliers or customers. Communications with significant customers
and vendors have been initiated to determine the extent of risk created by those
third parties' failure to remediate their own Year 2000 issues; however, it is
not possible, at present, to determine the financial effect if a significant
customer's and/or vendor's remediation efforts are not completed in a timely
manner. The vendors to which the Community Banking Division has outsourced its
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 that
vendor's 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 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 difficultly 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 Bank by the Federal Reserve and the DFI, the Bank received a "satisfactory"
rating with respect to its Year 2000 plan and level of preparedness.
The Company's noninterest expense for 1998 included $226,411 in direct costs
associated with the Year 2000 issue. The Company estimates its total costs
during the period from January 1, 1999 through December 31, 1999 will be less
than $500,000, and none of those costs are expected to materially affect the
Company's results of operations in any one reporting period. In light of the
complexity of the Year 2000 problem and its potential effect on both the Company
and third parties that interact with the Company, however, there can be no
assurance that the Company's costs associated with the Year 2000 issue will be
as estimated. The Company does not intend to obtain insurance against any Year
2000 risks.
58
<PAGE>
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 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
59
<PAGE>
paid or charged generally rise if the marketplace believes inflation rates will
increase. See Item 1. Business--Risk Factors--Potential Impact of Changes in
Interest Rates.
ACCOUNTING CHANGES
In June 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 130, "Reporting Comprehensive
Income" (SFAS 130). 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. The
Statement includes the guidelines for the calculations and required
presentations. 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 the first quarter 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 for the first quarter in 1999 and the impact of this
Statement, if any, is yet to be determined.
60
<PAGE>
ITEM 7A. 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 manages its interest rate
sensitivity by matching the repricing opportunities on its earning assets to
those on its funding liabilities. Management uses various asset/liability
strategies to manage the repricing characteristics of its assets and liabilities
to ensure that exposure to interest rate fluctuations is limited within Company
guidelines of acceptable levels of risk-taking. Hedging strategies, including
the terms and pricing of loans and deposits, and managing the deployment of its
securities are used to reduce mismatches in interest rate repricing
opportunities of portfolio assets and their funding sources.
When appropriate, management may utilize off balance sheet instruments such
as interest rate floors, caps and swaps to hedge its interest rate position. A
Board of Directors approved hedging policy statement governs use of these
instruments. As of 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 on the following page 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
61
<PAGE>
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------------
AMOUNTS MATURING OR REPRICING IN
-------------------------------------------
OVER 3 OVER 1
3 MONTHS MONTHS TO YEAR TO OVER NON-
OR LESS 12 MONTHS 5 YEARS 5 YEARS SENSITIVE(1) TOTAL
--------- ---------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks................. $ -- $ -- $ -- $ -- $ 109,280 $ 109,280
Federal funds sold...................... -- -- -- -- -- --
Investment securities................... -- 20,125 106,550 86,686 38 213,399
Loans and leases........................ 290,378 72,276 97,704 56,371 -- 516,729
Loans held for sale..................... 248,833 -- -- -- -- 248,833
Other assets (2)........................ -- -- -- -- 97,609 97,609
--------- ---------- --------- --------- ----------- -----------
Total assets.......................... 539,211 92,401 204,254 143,057 206,927 1,185,850
--------- ---------- --------- --------- ----------- -----------
--------- ---------- --------- --------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest bearing demand deposits.... -- -- -- -- 259,185 259,185
Interest-bearing demand, money market
and savings........................... 506,802 -- -- -- -- 506,802
Time certificates of deposit............ 98,249 161,751 7,751 -- -- 267,751
Short term debt......................... 5,967 203 -- -- -- 6,170
Long term debt.......................... -- -- 68 27,657 -- 27,725
Other liabilities....................... -- -- -- -- 20,077 20,077
Shareholders' equity.................... -- -- -- -- 98,140 98,140
--------- ---------- --------- --------- ----------- -----------
Total liabilities & shareholders'
equity.............................. $ 611,018 $ 161,954 $ 7,819 $ 27,657 $ 377,402 $ 1,185,850
--------- ---------- --------- --------- ----------- -----------
--------- ---------- --------- --------- ----------- -----------
Period Gap.............................. $ (71,807) $ (69,553) $ 196,435 $ 115,400 $(170,475)
Cumulative interest earning assets...... 539,211 631,612 835,866 978,923
Cumulative interest earning
liabilities........................... 611,018 772,972 780,791 808,448
Cumulative Gap.......................... (71,807) (141,360) 55,075 170,475
Cumulative interest earning assets
to cumulative interest
bearing liabilities................... 0.88 0.82 1.07 1.21
Cumulative gap as a percent of:
Total assets.......................... (6.06)% (11.92)% 4.64% 14.37%
Interest earning assets............... (7.34)% (14.44)% 5.63% 17.41%
</TABLE>
- --------------------------
(1) Assets or liabilities which are not interest rate-sensitive.
(2) Allowance for possible loan losses of $7.3 million as of December 31, 1998
is included in other assets.
62
<PAGE>
At December 31, 1998, the Company had $631.6 million in assets and $773.0
million in liabilities repricing within one year. This means that $141.4 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 0.82. Management tries to maintain this ratio as close to zero as
possible while remaining in a range between 0.80 and 1.20. Interest income is
likely to be affected to a greater extent than interest expense for any changes
in interest rates within one year from December 31, 1998. If rates were to fall
during this period, interest income would increase by a greater amount than
interest expense 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 position. To supplement
traditional gap analysis, the Company performs simulation modeling to estimate
the potential effects of changing interest rates. The process allows the Company
to explore the complex relationships within the gap over time and various
interest rate environments. Based upon the Company's interest rate shock
simulations net interest income is expected to decline approximately 5.8% with a
200 basis point instantaneous increase to interest rates and increase
approximately 5.8% 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.
63
<PAGE>
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
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>
Investment Securities................. $ 20,125 $ 22,830 $ 55,574 $ 9,950 $ 18,196 $ 86,724 $ 213,399 $ 213,399
Weighted average rate (%)........... 5.02 5.49 5.36 5.28 5.51 5.95 5.59
Fixed Rate Loans...................... $ 61,192 $ 39,170 $ 35,542 $ 31,928 $ 29,639 $ 57,964 $ 255,435 $ 249,452
Weighted average rate (%)........... 9.86 11.09 10.65 10.31 9.47 8.84 9.94
Variable Rate Loans................... $ 89,595 $ 19,182 $ 19,249 $ 16,947 $ 17,643 $ 98,678 $ 261,294 $ 263,879
Weighted average rate (%)........... 8.82 9.03 9.23 8.89 8.70 9.46 9.10
Loans held for sale................... $ 248,833 -- -- -- -- -- $ 248,833 $ 251,321
Weighted average rate (%)........... 7.25 -- -- -- -- -- 7.25
--------- --------- --------- --------- --------- ----------- --------- -----------
Total interest earning assets......... $ 419,745 $ 81,182 $ 110,365 $ 58,825 $ 65,478 $ 243,366 $ 978,961 $ 978,051
--------- --------- --------- --------- --------- ----------- --------- -----------
--------- --------- --------- --------- --------- ----------- --------- -----------
Interest bearing demand, money market
and savings......................... $ 506,802 -- -- -- -- -- $ 506,802 $ 501,734
Weighted average rate (%)........... 4.25 -- -- -- -- -- 4.25
Time deposits......................... $ 259,851 $ 6,828 $ 880 $ 105 $ 87 -- $ 267,751 $ 267,992
Weighted average rate (%)........... 5.13 5.62 5.76 4.92 6.10 -- 5.15
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.... $ 266,021 $ 6,896 $ 880 $ 105 $ 87 $ 27,657 $ 301,646 $ 301,887
--------- --------- --------- --------- --------- ----------- --------- -----------
--------- --------- --------- --------- --------- ----------- --------- -----------
</TABLE>
64
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS PAGE NO.
- -------------------------------------------------------------------------------------------------------- -------------
<S> <C>
Report of Independent Accountants....................................................................... F-1
Consolidated Statement of Condition
as of December 31, 1998 and 1997...................................................................... F-2
Consolidated Statement of Income
for the Years ended December 31, 1998, 1997 and 1996.................................................. F-4
Consolidated Statement of Shareholders' Equity
for the Years ended December 31, 1998, 1997 and 1996.................................................. F-6
Consolidated Statement of Cash Flows
for the Years ended December 31, 1998, 1997 and 1996.................................................. F-7
Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996............................. F-9
</TABLE>
All financial schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this Item will be contained in the Company's
Proxy Statement which the Company intends to file within 120 days following the
end of the Company"s fiscal year ended December 31, 1998 and such information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this Item will be contained in the Company's
Proxy Statement which the Company intends to file within 120 days following the
end of the Company's fiscal year ended December 31, 1998 and such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item will be contained in the Company's
Proxy Statement which the Company intends to file within 120 days following the
end of the Company's fiscal year ended December 31, 1998 and such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item will be contained in the Company's
Proxy Statement which the Company intends to file within 120 days following the
end of the Company's fiscal year ended December 31, 1998 and such information is
incorporated herein by reference.
65
<PAGE>
PART IV
ITEM 14. EXHIBITS AND REPORTS ON 8-K
(a) Exhibit Index
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger dated December 24, 1996 between Commerce Security
Bancorp, Inc. (the "Company") and Eldorado Bancorp ("Eldorado") (filed as Exhibit
2.1 to the Company's Current Report on Form 8-K dated December 24, 1996 and
incorporated by reference herein)
2.2 Stock Option Agreement dated December 24, 1996 between the Company and Eldorado
(filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated December 24,
1996 and incorporated by reference herein)
3.1 Certificate of Incorporation (filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended September 30, 1996 and incorporated by
reference herein)
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))
3.5 Bylaws of the Company, (filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1996 and incorporated by reference
herein)
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)
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
(incorporated by reference to the Company's Registration Statement on Form S-1 (File
no. 333-61589))
10.9 Employment Agreement by and between Eldorado Bank and Richard Korsgaard
(incorporated by reference to the Company's Registration Statement on Form S-1 (File
no. 333-61589))
10.10 Amendment Number One to Employment Agreement by and between Eldorado Bank and
Richard Korsgaard (incorporated by reference to the Company's Registration Statement
on Form S-1 (File no. 333-61589))
10.11 Employment Agreement by and between Eldorado Bank and William Rast (incorporated by
reference to the Company's Registration Statement on Form S-1 (File no. 333-61589))
</TABLE>
66
<PAGE>
<TABLE>
<C> <S>
10.12 Form of Severance Agreement between the Company and certain executive officers
(incorporated by reference to the Company's Registration Statement on Form S-1 (File
no. 333-61589))
10.13 Form of Amended and Restated Series B Warrant held by Madison Dearborn and Olympus
(incorporated by reference to the Company's Registration Statement on Form S-1 (File
no. 333-61589))
21. Subsidiaries of the Registrant (filed as Exhibit 21 to the Company's Registration
Statement on Form S-1 (File no. 333-61589))
23.1 Consent of PricewaterhouseCoopers LLP (filed herewith)
27 Financial Data Schedule
</TABLE>
- ------------------------
* Denotes Executive Compensation Plan or Arrangement
(b) Reports on Form 8-K.
1) None.
67
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the issuer has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
COMMERCE SECURITY BANCORP, INC.
Date: March 31, 1999 By: /s/ ROBERT P. KELLER
-----------------------------------------
Robert P. Keller
PRESIDENT, CHIEF EXECUTIVE OFFICER
Date: March 31, 1999 By: /s/ JOHN L. GORDON
-----------------------------------------
John L. Gordon
SENIOR VICE PRESIDENT
Date: March 31, 1999 By: /s/ ERNEST J. BOCH
-----------------------------------------
Ernest J. Boch
Date: March 31, 1999 By: /s/ JAMES A. CONROY
-----------------------------------------
James A. Conroy
Date: March 31, 1999 By: /s/ EDWARD A. FOX
-----------------------------------------
Edward A. Fox
Date: March 31, 1999 By: /s/ CHARLES E. HUGEL
-----------------------------------------
Charles E. Hugel
Date: March 31, 1999 By: /s/ MITCHELL A. JOHNSON
-----------------------------------------
Mitchell A. Johnson
Date: March 31, 1999 By: /s/ K. THOMAS KEMP
-----------------------------------------
K. Thomas Kemp
Date: March 31, 1999 By: /s/ JEFFERSON W. KIRBY
-----------------------------------------
Jefferson W. Kirby
</TABLE>
68
<PAGE>
<TABLE>
<S> <C> <C>
Date: March 31, 1999 By: /s/ JOHN B. PETTWAY
-----------------------------------------
John B. Pettway
Date: March 31, 1999 By: /s/ HENRY T. WILSON
-----------------------------------------
Henry T. Wilson
Date: March 31, 1999 By: /s/ PAUL R. WOOD
-----------------------------------------
Paul R. Wood
</TABLE>
69
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Eldorado Bancshares, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index 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 each of the three years in the period
ended December 31, 1998 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-1
<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-2
<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-3
<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-4
<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-5
<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-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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,
--------------------
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-28
<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 "nonqualified" stock options (as compared to incentive stock options).
The options granted will vest over
F-29
<PAGE>
ELDORADO BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
NOTE 13--EMPLOYEE BENEFIT PLANS: (CONTINUED)
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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-50835) of Eldorado Bancshares, Inc. (formerly
Commerce Security Bancorp, Inc.) of our report dated March 1, 1999 appearing
on page F-1 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Los Angeles, California
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 109,280
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 213,399
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 761,589
<ALLOWANCE> 7,304
<TOTAL-ASSETS> 1,185,850
<DEPOSITS> 1,033,738
<SHORT-TERM> 6,238
<LIABILITIES-OTHER> 20,077
<LONG-TERM> 27,657
0
11,659
<COMMON> 84,038
<OTHER-SE> 2,443
<TOTAL-LIABILITIES-AND-EQUITY> 1,185,850
<INTEREST-LOAN> 65,984
<INTEREST-INVEST> 8,503
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 74,487
<INTEREST-DEPOSIT> 26,997
<INTEREST-EXPENSE> 31,113
<INTEREST-INCOME-NET> 43,374
<LOAN-LOSSES> 4,272
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 51,277
<INCOME-PRETAX> 9,380
<INCOME-PRE-EXTRAORDINARY> 3,952
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,952
<EPS-PRIMARY> .29
<EPS-DILUTED> .28
<YIELD-ACTUAL> 5.28
<LOANS-NON> 5,611
<LOANS-PAST> 790
<LOANS-TROUBLED> 3,336
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,395
<CHARGE-OFFS> 7,987
<RECOVERIES> 1,534
<ALLOWANCE-CLOSE> 7,304
<ALLOWANCE-DOMESTIC> 7,304
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
